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ASEAN Integration
			: Issues note for Workshop
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Issues Note for Workshop on ASEAN Integration

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International Monetary Fund
Published Date:
January 2016
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Issues Note for Workshop on ASEAN Integration

Sponsored by the International Monetary Fund, the Ministry of Finance, Malaysia, and the Malaysian Institute for Economic Research

Kuala Lumpur, Malaysia

November 18-19, 2015

ASEAN Economic Integration: Harnessing Benefits and Mitigating Risks

Background

  • ASEAN consists of 10 very heterogeneous emerging and frontier economies with a combined GDP of US$ 2.4 trillion and young populations and growing middle classes.

  • ASEAN countries are very open to trade and investment flows, with trade in 2014 amounting o US$ 2.6 trillion and US$ 620 billion in intra-ASEAN trade (Table 1).

  • ASEAN is a growing destination of foreign direct investment from outside ASEAN and increasingly also from some ASEAN.

  • ASEAN countries have ample supplies of domestic savings but also large investment needs, including in infrastructure.

  • Growing trade, especially with non-ASEAN countries, has long been an engine of growth in the region.

    • Tariffs are low but non-tariff trade barriers (NTTBs), especially on services, are an obstacle to additional real and financial integration within ASEAN,

    • FDI into ASEAN, in the real and financial sectors, has been setting new records.

Table 1.ASEAN Countries: Selected Economic Indicators
IndonesiaMalaysiaPhilippinesSingaporeThailandBrunei DarussalamCambodiaLao P.D.PLMyanmarVietnamASEAN 4/
GDP in 2014 (US$ billions)889338285308405171712631862,518
Population in 2014 (in millions)252.230.699.45.568.70.415.36.951.490.6621
GDP per capita in 2014 (in US$)
Headline3,52411,0492,86256,2875,89641,4601,0811,6931,2282,05112,713
PPP-basis (2014) 1/ 10,03323,8046,66178,95813,88373,2253,1095,0064,7525,37022,480
Poverty in 2012 (percent of population) 1/
Below US$2 per day13.00.214.1n.a.0.6n.a.10.322.4n.a.2.99.1
Below national poverty line11.31.725.2n.a.12.6n.a.17.723.2n.a.17.215.6
Income inequality (Gini coefficient)
200029.737.946.143.442.8n.a.35.532.5n.a.37.638.2
2012 (or latest available year)38.146.243.041.239.4n.a.31.836.2n.a.35.639.0
Growth (in percent)
2011-13 (average)5.95.25.84.73.70.87.38.07.15.65.4
20145.06.06.12.90.9−2.37.07.48.56.04.7
Inflation (in percent period average)
2011-13 (average)5.22.33.64.13.00.23.86.13.811.54.4
20146.43.14.21.01.9−0.23.95.55.94.13.6
Fiscal balance (in percent of GDP)
2011-13 (average)−1.4−3.9−0.27.3−0.217.6−3.3−2.6−2.7−5.10.6
2014−2.1−3.60.93.3−0.82.9−1.3−3.8−2.9−6.1−1.4
Public debt (in percent of GDP)
Public debt in 2010255243974012962504845
Public debt in 2014255536994423462325741
Of which: external debt142117603348142319
Current account balance (in percent of GDP) 2014−3.04.34.419.13.328.3−12.2−27.8−6.14.92
Gross reserves
Level at end-2014 (US$ billions)111.9115.979.5256.9157.13.54.40.86.534.3771
In months of imports8.06.111.17.28.56.33.81.03.52.45.8
Trade openness in 2013 (imports plus exports in goods and services in percent of GDP)
Total trade4513855351132101146114551691306
Intra-ASEAN merchandise trade1035966253069612123349
FDI inflows during 2010-12 (average, in percent of GDP)
Total4.06.21.128.96.40.62.12.81.23.35.7
From within ASEAN 2/0.71.20.32.61.61.00.60.61.1
Portfolio inflows during 2010-12
Total2.69.56.79.35.00.00.22.40.00.43.6
From within ASEAN0.81.60.51.70.60.00.00.20.0−0.20.5
Private credit in 2014
Growth (in percent)139207523117751418.1
Private credit (in percent of GDI35130391311153354411710069.6
Number of banks in 2012 3/119274912430835321047481
Of which: foreign and joint banks241915119145122106235
Sources: IMF, World Economic Outlook, Direction of Trade Statistics, Coordinated Direct Investment Survey, Coordinated Portfolio Investment Survey ; World Bank, World Development Indicators; CEIC Data Co.Ltd; country authorities; Bankscope; and IMF staff calculations.

Constant 2011 international US$, except for Lao and Myanmar data from WEO (nominal PPPGDP/population)

Excluding services.

Data for Vietnam refer to 2011.

Regional average, except in red (regional sum).

Sources: IMF, World Economic Outlook, Direction of Trade Statistics, Coordinated Direct Investment Survey, Coordinated Portfolio Investment Survey ; World Bank, World Development Indicators; CEIC Data Co.Ltd; country authorities; Bankscope; and IMF staff calculations.

Constant 2011 international US$, except for Lao and Myanmar data from WEO (nominal PPPGDP/population)

Excluding services.

Data for Vietnam refer to 2011.

Regional average, except in red (regional sum).

The ASEAN Economic Community (AEC)

  • The AEC will come into being in late 2015. It aims to establish a common market with “free movement of goods, services, investment, skilled labor, and freer flow of capital.”

  • ASEAN follows a gradualist integration strategy. A deliberate pace of integration helps to make the process compatible with countries’ own capabilities and incentives.

Promise of ASEAN integration

  • Despite substantial progress in opening up trade, including in services, trade and financial integration in some ASEAN countries are lagging and financial systems remain protected in several ASEAN countries.

  • Reduction of NTTBs and additional financial liberalization would help accelerate financial deepening and raise capital per worker and output per worker.

  • There are large potential benefits from integrating ASEAN countries’ banking, capital markets, insurance, and other markets in financial services: accelerating financial development can boost real and financial inclusion and spur growth.

  • Financial integration would help create stronger, more resilient financial systems across ASEAN that are better able to diversify risks and absorb shocks.

  • Real and financial integration would go hand in hand with enhanced financial infrastructure, including payments and settlements systems.

Overcoming obstacles to greater integration

  • Significant obstacles must be overcome in order to remove remaining NTTBs and create ASEAN-wide financial markets.

  • Costly fragmentation created by national regulations and standards (e.g. bank supervision, rating agencies, credit bureaus, and securities commissions).

  • Lack of mutual recognition and common disclosure requirements.

  • Important political economy obstacles remain from local vested interests.

  • But ASEAN’s efforts to redouble financial and trade integration could get an important boost from the conclusion of the TPP and bilateral trade deals that increasingly focus on services and other sensitive sectors.

  • The announcement (at the just concluded summit of China, Japan and Korea) that they intend to conclude the RCEP in 2016 should help strengthen incentives throughout ASEAN to move forward with trade and financial integration.

  • Strengthening trade and financial integration is fundamental for the continuing building process of a strong ASEAN community. Financial deepening and a financial infrastructure capable of replacing the present fragmentation of national financial sectors will, over time, aid particularly ASEAN’s less developed economies in the process of regional convergence.

  • Sustainable and inclusive growth are already an important economic policy goal in ASEAN countries. Each country has adopted a number of measures, including structural reforms. But more can be done and this workshop is an opportunity to consider what macro-economic measures and incentives have been particularly useful and what kind of structural reforms may be needed to further promote inclusive growth.

Making integration safer

  • Financial crises and the experience in Europe have made ASEAN countries cautious on financial integration initiatives.

  • Empirically, rapid capital account liberalization (CAL) has typically ended badly.

  • The Euro zone crisis illustrates what can go wrong with poorly-sequenced CAL and premature monetary integration.

  • The Euro zone crisis also underscores the need for strong regional institutions to be set up before financial integration proceeds. Not doing so can be very costly.

The ASEAN way

  • ASEAN’s self-paced, gradual integration strategy is broadly appropriate as it ensures country ownership and incentive compatibility.

  • The “ASEAN Way” results in a multi-year process with countries meeting frequently to discuss progress but moving at their own pace as they strengthen policies, unify regulations and upgrade institutions.

  • But gradualism ought not to become an excuse for inaction or an opportunity for vested interests to block gains from financial integration

Regional and global safety nets

  • In parallel with ASEAN’s own efforts to foster greater integration, there is a need for a parallel effort to strengthen regional and global financial safety nets.

  • Safety nets at the global level (IMF), at the regional level (ASEAN+3, CMIM), and bilateral) ought to be strengthened and coordinated in parallel with the ASEAN financial integration and liberalization process.

ASEAN integration: Institutions and capacity building

  • Strengthening the analytical capacity of regional institutions should go hand in hand with regional economic and financial integration and should become a high-level ASEAN priority. SEACEN’s contribution in knowledge sharing across ASEAN is notable in this regard but greater commitment of ASEAN authorities is needed in this area. In particular,

    • Finance ministers should take an even larger role in driving ASEAN integration to increase intra-ASEAN trade and growth.

    • ASEAN should develop regional rules in areas such as customs, investment, and competition policy so firms can more easily implement regional ASEAN strategies.

    • The ASEAN secretariat should be empowered to actively monitor effective implementation of ASEAN agreements and should engage with the private sector to facilitate discussions among the member states.

  • The IMF is providing significant analytical and policy advice, technical assistance and training to ASEAN countries.

    • The IMF’s Asia Pacific Department (APD) is engaged in bilateral and regional macroeconomic and financial surveillance through Article IV consultations.

    • The Singapore Training Institute (STI), the Technical Assistance Office for Laos and Myanmar (TAOLAM) and the Office in Asia and Pacific (OAP), in collaboration with APD, are providing customized TA and training services to ASEAN countries.

    • The IMF is also cooperating with the ASEAN Secretariat and other regional organizations (for example AMRO).

    • The IMF is working to further exploit the synergies between IMF surveillance and TA and training in its interactions with ASEAN countries and institutions.

Concluding point

  • The AEC offers a timely opportunity to increase real and financial connectivity in ASEAN.

  • Scaling up investments in physical and financial infrastructure should help raise investment, tackle emerging trans-boundary challenges (such as those related to the environment and migration).

  • ASEAN integration can help spur inclusive, sustained and sustainable growth in the region, consistent with the recently adopted Sustainable Development Goals.

Issues for discussion

Workshop participants are encouraged to debate the following issues.

  • Do participants agree that growing trade, foreign direct investment and other financial linkages within ASEAN countries can be important engines of growth in the region?

  • Do they see non-tariff trade barriers (NTTBs), especially on services, and protection of the financial sector as obstacles to real and financial integration within ASEAN?

  • Participants’ views are welcome on the risks and costs of rapid capital account liberalization, premature monetary integration and the need for strong regional institutions to be set up before financial integration proceeds.

  • What are participants’ views on the ASEAN way of self-paced, gradual integration strategy of regional integration and the need for gradualism but also of action to strengthen policies, unify regulations and upgrade institutions.

  • Participants’ views are sought on ways to strengthen regional and global financial safety nets at the global level (IMF), regional level (ASEAN+3, CMIM), and bilateral) and coordinated with ASEAN integration process.

  • Do participants agree that the analytical capacity of regional institutions should be strengthened as regional economic integration proceeds and become a high-level ASEAN priority? In particular, do they agree that:

    • Finance ministers should take a larger role in driving ASEAN integration and empower the Secretariat to become a more effective monitor of ASEAN agreements.

    • ASEAN should develop regional rules in areas such as customs, investment, and competition policy.

  • In the participants’ opinion, what more should the IMF do in the area of capacity development?

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