Chapter 1
 C
T
The Impeending Establishm
Ement of thet ASEAAN Econnomic
C
Communnity (AECC)
― Progreess in de facto inttegrationn has alreeady beenn realizeddS
Shujiro Uratta
S
Specially Apppointed Feellow, Japann Center forr Economic Research
P
Professor, Waseda
W
Univversity Gradduate Schoool of Asia-Pacific Studiies【Key Poinnts】
 To achieve econom
mic prosperrity in the 21st century anda compette with the rise
r ofChina anda India, membermstattes of the Association ofo Southeastt Asian Nations(ASEAAN) have beeen implemeenting neceessary measu
ures in accoordance withhascheduule that aimss to establis h the ASEAAN Econom
mic Communnity (AEC) by
the endd of 2015. WhileW
measuures such ass elimination of tariffs aare proceeddingsmoothhly, others – such as noon-tariff barrriers – are notn moving forward.
 Trade in
i goods and services, ddirect invesstment, and the mobility
ty of the skilled
and unskilled labo
or force withhin the ASE
EAN region have increaased greatly
y andregionaal economicc integrationn is develop
ping. Once thet non-tariiff barriers areareduced or eliminaated, transp ortation inffrastructuress are develooped, and thhe
AEC iss establishedd, these trennds will inteensify and regionalrecoonomic
integraation will deevelop furthher.
 The Jappanese goveernment cann contributee to the establishment oof the AEC
throughh economicc cooperatioon in variouss areas, starrting with thhe developm
mentof transsportation infrastructurre and humaan resources. In order tto seize thebusinesss opportun
nities that woould be created by the AEC, Japannese compaanies
should not only acctively obtaiin and use local
linformmation, but sshould also
consideer cooperatiing with loccal companiies that are becomingbmmore
compettitive.
Diffference in GDPP Per Capita (USSD)
1993
20000
2013
GDP Per
GDPP PerGDP PerCountryS
Scale
FactorCountryCountry
Scale Factoor
Scalee Factor
Cappita
CapitaCapitaVietnam
1.0 Cam1.0
189
mbodia299
1.0 Cambodia
1,008
Cambodia
1.6
1.3 Laoss
251
321
1.1 Laos
1,646
Laos
1.9
1.5 Viettnam
287
433
1.4 Vietnam
1,911
817
4.3 Indoonesia
2,765
The Philippinees
2.7790
2.6 The PhilippinessIndonesia
4.4 The Philippines
840
1,043
3,475
3.4
3.5 Indonesia
1,969
Thailand11.4 Thaiiland
2,153
5,779
5.7
6.6 Thailand
17.9 Malaysia
44,005
13.4 Malaysia
Malaysia
3,395
10,51410.4
18,08777.6 Brunnei
60.5 Brunei
Brunei
14,681
38,563
38.3
96.7 Singgapore
23,79379.6 Singapore
Singapore
18,302
55,18254.8
Note: No inforrmation is availabble regarding Myannmar, so it is not inncluded in the list.
Source: Worldd Bank, World Development Indicattors online.

JJapan Center for Economic Research, “Assia Research” Report11. Foreword
ASEAN’s goal is to establish the ASEAN Economic Community (AEC) by theend of 2015. The AEC is being created to take advantage of the following key factors: (1) asingle market and production base, (2) a highly competitive economic region, (3) a regionof equitable economic development, and (4) a region fully integrated into the global
economy. With the establishment of the AEC, ASEAN’s presence in East Asia and in theworld will be strengthened and will attract attention from foreign companies as a new place
to run their businesses. With about a year left until the AEC is built, how much are theASEAN economies mutually dependent and integrated? With regard to the AEC, the focus
tends to be on institutional issues such as the elimination of tariffs and non-tariff barriers,
liberalization policies on investments, trade in services, and movement of the people.
However, this report will measure and evaluate the level of integration of the ASEAN
economies based on various statistics and specific cases. Furthermore, it will examine thechallenges for further integration and the business opportunities for foreign investors.
The Japan Center for Economic Research has analyzed strategies for foreigncompanies in ASEAN countries in a report titled “ASEAN Economy and Corporate
Strategies” (2012). It also analyzed the structural problems in ASEAN countries in a report
titled “The ASEAN Economy and the Middle-Income Trap” (2013). This study is part threeof the ASEAN research.
2. Economic conditions of the ASEAN countries
2.1 Economic growth after the 1990s and future economic outlook
In the 1990s, the Philippines and Brunei were the slow-growth economies among
the original six ASEAN members (ASEAN 6),1 with an average annual growth rate at the
2% level. However, the average annual growth rates of Indonesia, Malaysia, Singapore, andThailand were steady at above 4% (table 1). Malaysia and Singapore recorded particularlyrobust growth that exceeded an average annual growth rate of 7%. A factor for high growth
for these countries was the liberalization of both trade and direct investment, which led to alarge expansion in both exports and inward direct investment. The inward direct investment
by multinational companies enabled efficient production and distribution by incorporating
the ASEAN 6 into the production and distribution network (also known as the global
1

Original ASEAN members (ASEAN 6) refers to countries that joined ASEAN from the beginning until the
1980s: Indonesia, Malaysia, the Philippines, Singapore, Thailand (the five countries are founding members of
ASEAN), and Brunei (1984). Countries that joined ASEAN in the 1990s – Vietnam (1995), Myanmar andLaos (1997), and Cambodia (1999) – are referred to as new members.

2 Japan Center for Economic Research “Asia Research” Reportsupply chain) that connects East Asian countries (such as Japan, China, the Republic ofKorea, and Taiwan) with countries such as the United States and Europe. Meanwhile, by
joining this production and distribution network, the ASEAN 6 were able to groweconomically through the expansion of production, employment, and export, and throughthe transfer of technology.
The ASEAN 6 hugely suffered from the Asian Financial Crisis of 1997 and growthof the member states sharply dropped in 1998. However, the economies recovered by 1999
and through the early years of the 21st century – until the Global Financial Crisis of 2008 –they experienced steady growth. Economic growth fell in 2009 due to the Global Financial
Crisis, but it recovered in 2010. The Global Financial Crisis damaged the economy of theUnited States, where the crisis originated, and the economies of Europe to which the crisis
spread. These economic damages brought about a serious recession in Japan as well.
However, compared to the negative effects experienced by the developed countries, theimpact on the ASEAN 6 was relatively minor. The reason for this is not only due to the
expansionary fiscal and monetary policies that the ASEAN 6 took as a response to the crisis,
but also the cautious attitude that the financial institutions and companies took toward
investment before the crisis hit in light of the lessons learned from the Asian Financial
Crisis.
From 2010 to about 2012, the ASEAN 6 recorded high growth due to the recovery
from the Global Financial Crisis of 2008. However, in 2013, the ASEAN 6 adopted
austerity measures to combat the increasing budget deficits and inflation resulting from the
expansionary macroeconomic policy. Due to these policies, the ASEAN 6 saw low
economic growth in 2013. Furthermore, the economies of the ASEAN 6’s major export
destinations, such as China and other developed countries, became stagnant, which led to adecrease in exports and slowed down the economic growth of the ASEAN 6. In addition tothese conditions, economic activity is weakening in Thailand because of political turmoil.
While many of the countries of the ASEAN 6 are experiencing low economic growth, thePhilippines are experiencing high growth due to strong consumption supported byremittances sent by Filipino workers who work overseas.
In comparison to the ASEAN 6, the new members of ASEAN – Cambodia, Laos,
Myanmar, and Vietnam – have had high levels of economic growth since 1990. A factor
that contributed to this high growth is the shift in these countries from socialist planned
economies to market economies in the 1980s. By joining ASEAN in the 1990s, thesecountries opened their economies to foreign business, which greatly expanded their tradeand inward direct investment. The new members of ASEAN were not impacted as much by
the Asian Financial Crisis or the Global Financial Crisis of 2008, and their economies

Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)3

continued to grow. However, since 2010, the economies of the new members of ASEAN
have also become sluggish because of the prolonged economic stagnation in developed
countries and the low economic growth of major trade partners such as China and theASEAN 6.

Table 1 GDP Growth of ASEAN Member States (%)
Estimated Values
Actual Values
199020002000
2010 20112012 2013 2014
2015
Brunei
2.2
1.4
3.4
0.9
-1.8
1.1
1.2
Cambodia
7.4
8.0
7.1
7.3
7.2
7.0
7.3
Indonesia
4.2
5.2
6.5
6.3
5.8
5.3
5.8
Laos
6.2
7.1
7.8
7.9
7.9
7.3
7.4
Malaysia
7.1
4.6
5.2
5.6
4.7
5.7
5.3
Myanmar
7.2
12.0
5.9
7.3
7.5
7.8
7.8
The Philippine
2.9
4.8
3.7
6.8
7.2
6.2
6.4
Singapore
7.1
5.6
6.1
2.5
3.9
3.5
3.9
Thailand
4.5
4.3
0.1
6.5
2.9
1.6
4.5
Vietnam
7.6
6.6
5.9
5.2
5.4
5.5
5.7
Note: Growth between 1990 and 2010 was calculated using the World Bank’s WDI.
Cambodia’s growth is from 1993 to 2000.
Myanmar’s growth (2000 to 2010) was calculated using the ADB Key Indicators.
Values from 2011 to 2015 are from the ADB, Asian Development Outlook 2014 Update.
Note: Values for 2014 and 2015 are estimated values from the ADB.
Table 1 shows the predicted growth values of 2015 as estimated by the AsianDevelopment Bank in 2014. When looking at the countries of ASEAN as a whole, GDP isestimated to increase from 4.6% in 2014 to 5.3% in 2015. Malaysia is the only country
within the ASEAN member states that is estimated to experience a decrease in growth and,for the rest of the nine countries, growth rate is expected to increase.
The driving forces for the increase in ASEAN’s GDP growth rate are Indonesia
and Thailand, which are first and second largest economies in ASEAN. Under a newpresident, Indonesia’s investment environment is expected to improve through reforms. As
a result, inward investment is expected to expand and economy is projected to grow.
Meanwhile, political turmoil in Thailand is expected to calm down, which will restart
public works that had been on hold, and capital investment is expected to expand. These
factors are predicted to result in increased economic growth. The decrease in economic
growth that is estimated for Malaysia is mainly due to the austerity measures implemented
as a response to inflation. Increased investment under stable economic conditions will
4 Japan Center for Economic Research “Asia Research” Reportpreserve momentum for increased economic growth in the rest of the ASEAN countries(except Indonesia, Thailand, and Malaysia). However, downside risk factors include
China’s slowdown in economic growth; Indonesia, Malaysia, Vietnam’s surge in inflation
due to cutting subsidies; and monetary and fiscal austerity measures.
2.2 Diversity in ASEAN economies
Many ASEAN members share a common factor in that compared to othercountries, they have experienced relatively high growth. Meanwhile, ASEAN members aredifferent from each other in various aspects of the economy and there is a diversity of
economies within the ASEAN members (table 2).
Table 2 Basic Economic Indicators for ASEAN, Japan, China, the Republic of Korea, and India (2013)
Population
Area
GDP
GDP per capita(1 million people) (10 thousand square kilometers) (1 billion USD)
(USD)
Brunei0.4
0.5
16.1
38,563
Cambodia
15.1
17.7
15.2
1,008
Indonesia
249.9
181.2
868.3
3,475
Laos
6.8
23.1
11.1
1,646
Malaysia
29.7
32.9
312.4
10,514Myanmar
53.3
65.3
The Philippines
98.4
29.8
272.0
2,765
Singapore
5.4
0.1
297.9
55,182Thailand
67.0
51.1
387.3
5,779
Vietnam
89.7
31.0
171.4
1,911
ASEAN
615.7
432.6
2,351.9
4,182
China
1,357.4938.8
9,240.3
6,807
Japan
127.3
36.5
4,901.5
38,492
Republic of Korea
50.2
9.7
1,304.6
25,977
India
1,252.1
297.3
1,876.8
1,499
World
7,124.5
12,973.4
74,909.8
10,514
Source: World Bank, World Development Indicators online.

Indonesia has the largest population with approximately 250 million people, while
Brunei has the smallest population with approximately 400 thousand people. This is about
1/600th of the population of Indonesia. Beside Indonesia, ASEAN countries with more than
50 million people include the Philippines, Vietnam, Thailand, and Myanmar. On the other
hand, other than Brunei, the countries with a population of 10 million or less are Laos andSingapore. As a reference, the combined population of the ASEAN member states isapproximately 600 million, which is about five times the population of Japan and about
half the population of China or India.
There is also a huge difference in land area among the ASEAN countries. Similar
to population, Indonesia’s land area is overwhelmingly large compared to the other ASEAN
countries. Singapore, a city-state, has the smallest land area, which is about 1/2500th ofChapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)5

Indonesia’s land area. Following Indonesia, Myanmar and Thailand both have large land
areas, but even so, their land area is about a third of Indonesia’s. Similar to Singapore,
Brunei has an extremely small land area. In general, agriculture is a dominant industry incountries with large land areas. The combined land area of ASEAN is about half the size of
China and about 1.5 times that of India.
There are huge differences among ASEAN countries in terms of the size of theireconomies as measured by gross domestic product (GDP) in US dollars. Indonesia has thelargest economy with a GDP of approximately $870 billion. Meanwhile, Laos has thesmallest economy with a GDP of approximately $11 billion, which is about 1/80th ofIndonesia’s GDP.2 Though their GDP is much smaller than Indonesia’s, Thailand, Malaysia,
Singapore and the Philippines follow Indonesia with GDPs ranging from approximately$300 to $400 billion. Cambodia and Brunei have small economies similar to Laos and theGDP of these countries are approximately $15 billion each. The GDP of ASEAN as awhole is approximately $2.35 trillion, which is a quarter of China’s GDP and 1.25 times
India’s GDP.
Large gaps in the GDP per capita of the ASEAN countries can also be seen.
Singapore has the largest GDP per capita with $55,000 (US dollars). This number is higher
than Japan’s GDP per capita by almost $17,000. On the other hand, Cambodia has thelowest GDP per capita within the ASEAN countries with approximately $1,000. The WorldBank classifies countries around the world by GDP per capita into high-income economies($12,616 or more), upper-middle-income economies ($4,086 to $12,615),
lower-middle-income economies ($1,036 to $4,085), and low-income economies ($1,035 orless).3 According to this scale, Singapore and Brunei are high-income economies;
Malaysia and Thailand are upper-middle-income economies; Indonesia, the Philippines,
Vietnam, and Laos are low-middle-income economies; and Cambodia is a low-income
economy. The average GDP per capita of the ASEAN nations is approximately $4,200,
which is much lower than China’s GDP per capita of $6,800; however, it is much higher
than India’s GDP per capita of $1,500.
This huge variation in GDP per capita among the ASEAN nations could createsocial and political instability among the member states. On the other hand, the formationof production networks, which contributed significantly to ASEAN’s high economic
growth, was made possible by wide gaps in wages among ASEAN countries. In the East
Asian production network that includes ASEAN (which will be later analyzed), it is2

Myanmar is not included in the analysis in this section as statistics on Myanmar’s GDP is not among theWorld Development Indicators published by the World Bank.
3
To be exact, not GDP but Gross National Income (GNI) is used.

6 Japan Center for Economic Research “Asia Research” Reportpossible to efficiently produce a product that requires multiple parts by assigning different
parts (which are produced with varying levels of technology) to a country or a region thatcan most efficiently produce that specific part, and gather these parts through trade forassembly. Specifically, parts that require advanced technology to produce are manufactured
in high-income economies that have skilled engineers, while processes such as assemblythat require more basic technology are carried out in low-income economies where there
are abundant low-wage workers. In ASEAN, high-income economies such as Singapore
have many engineers and researchers; therefore, they are assigned the processes ofdevelopment of products and parts, and the formation of business strategies. On the other
hand, countries such as Vietnam – where there are many low-wage workers – are assigned
the process of assembling the final product.
Up until now, the focus has been on the wide differences in GDP per capita
between the ASEAN countries. However, the gaps in GDP and GDP per capita are
decreasing (table 3 and 4). With regard to GDP, the difference between the highest and thelowest was 119 times higher in 1953, but it decreased to 95 times higher in 2000 and only
78 times higher in 2013. The differences in GDP per capita are also shrinking. For instance,
the difference between the highest and the lowest GDP per capita was 97 times higher in
1993, but decreased to 80 times higher in 2000 and only 55 times higher in 2013. The
decrease in the GDP and GDP per capita gaps show that low-income andlower-middle-income economies are catching up to upper-middle-income and high-income
countries in terms of economic development.
Table 3 Difference in GDP (1 billion USD)
1993
2000
2013
CountryGDP
Scale Factor
CountryGDP
Scale Factor
Country
GDP Scale Factor
Laos
1.3
1.0 Laos
1.7
1.0 Laos
11.1
1.0
Cambodia
2.5
1.9 Cambodia
3.7
2.1 Cambodia
15.2
1.4
Brunei
4.1
3.1 Brunei
6.0
3.5 Brunei
16.1
1.4
Vietnam
13.2
9.9 Vietnam
33.6
19.4 Vietnam
171.4
15.4
The Philippines
54.4
40.9 The Philippines
81.0
46.8 The Philippines
272.0
24.4
Singapore
60.6
45.7 Malaysia
93.8
54.2 Singapore
297.9
26.7
Malaysia
66.9
50.4 Singapore
95.8
55.4 Malaysia
312.4
28.0
Thailand
125.0
94.2 Thailand
122.7
70.9 Thailand
387.3
34.8
Indonesia
158.0
119.0 Indonesia
165.0
95.3 Indonesia
868.3
77.9
Note: No information is available regarding Myanmar, so it is not included in the list.
Source: World Bank, World Development Indicators online.

Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)7

Table 4 Difference in GDP Per Capita (USD)
1993
2000
2013
GDP Per
GDP Per
GDP Per
Scale Factor
Scale Factor
Country
Scale Factor
CountryCountry
CapitaCapitaCapitaVietnam189
1.0 Cambodia
299
1.0 Cambodia
1,008
1.0
Cambodia251
1.3 Laos
321
1.1 Laos
1,646
1.6
Laos
287
1.5 Vietnam433
1.4 Vietnam
1,911
1.9
The Philippines
817
4.3 Indonesia
790
2.6 The Philippines
2,765
2.7
Indonesia840
4.4 The Philippines
1,043
3.5 Indonesia
3,475
3.4
Thailand
2,153
11.4 Thailand
1,969
6.6 Thailand
5,779
5.7
Malaysia
3,395
17.9 Malaysia
4,005
13.4 Malaysia
10,514
10.4
Brunei
14,68177.6 Brunei
18,08760.5 Brunei
38,56338.3
Singapore
18,30296.7 Singapore
23,79379.6 Singapore
55,18254.8
Note: No information is available regarding Myanmar, so it is not included in the list.
Source: World Bank, World Development Indicators online.

2.3 The challenges of the ASEAN nations
From an economic perspective, the ASEAN member states have developed
relatively smoothly. But in order to maintain and gain momentum for steady development,
the countries must effectively handle various challenges. The main challenges to the
ASEAN member states will be listed in this section. The challenges for Singapore andBrunei, which are high-income economies, are the maintenance and expansion of economic
dynamism as wages increase and a low birth rate and an aging population both progress.
Singapore and Brunei have to build economic structures and systems that can support the
expansion of social welfare programs, as medical costs and social security costs rise as
their aging populations grow. A key solution for this problem is to improve productivity;
however, it is not easy to increase productivity in economies where the service sector
occupies a large portion of the economic activity.
A shared challenge among Indonesia, Malaysia, the Philippines, Thailand, andVietnam, which are middle-income economies, is to escape the “middle-income trap.” The
expression refers to a situation in which countries are able to grow from low-income to
middle-income level by overcoming poverty issues, but fail to maintain the high growthnecessary to graduate to high-income economies. The term was first used in 2007 in areport by the World Bank titled “An East Asian Renaissance.”4 One important factor thatenabled these countries to develop economically is the integration of these countries into a
production network that was formed by multinational companies. In order to develop theireconomies further and become high-income economies, these countries need to improvetheir roles in the production network from low value-added production to high value-added

4

The Japan Center for Economic Research analyzed the issue of the middle-income trap in the ASEAN
member states in 2013.

8 Japan Center for Economic Research “Asia Research” Reportproduction. The solution for this issue is to train people with a high-level of knowledge andskills.
The biggest challenge for Cambodia, Laos, and Myanmar, who are in the initialstage of development compared to other ASEAN countries, is to participate in the
production network that largely contributes to the countries’ economic growth. At this stage,these countries are starting to participate in the production network with textiles, butparticipation in the production network for machinery industries such as electronic parts islimited. The participation in production networks will increase trade and investment andenable the transfer of technology, which in turn promotes economic growth. Developmentof infrastructure and human resources are also important for participating in production
networks.
Major challenges for the ASEAN member states were discussed in this section by
dividing the ASEAN countries into three groups. But, a common challenge for all countries
must also be addressed. The most serious issue is the rise in domestic income inequality.
Growing income inequality brings about political and social instability and preventssmooth economic activities. At the same time, if countries implement excessive leveling off
of income in order to narrow the gap between the rich and the poor, it can result in low
morale, the emigration of workers out of the country, and an overall decline in economic
activity. These competing factors make income inequality an extremely difficult problem tosolve. Furthermore, there are issues associated with the environment and urban
concentration as the economies develop. The ASEAN Economic Community (AEC) plans
to deal with the various economic issues of the ASEAN member states not on an individual
country level, but as a whole, cooperative unit. The next section reviews the significance of
the AEC.
3. Path to establishing the AEC and its significance3.1 Regional cooperation among the ASEAN member states
In 1967, ASEAN was founded by five Southeast Asian nations: Indonesia,
Malaysia, the Philippines, Singapore, and Thailand. The political motive behind thefounding of ASEAN was to resolve the intra-regional disputes that were erupting at thetime.5 ASEAN contributed to the political stability of the region through dispute resolution,and since 1976, it has actively called for regional economic cooperation among its member
states.6 ASEAN’s initial projects reflected the import substitution policy, an economic
5
6

See Yamakage (2011) on ASEAN.
See Shimizu (2013) on ASEAN’s regional cooperation.
Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)9development strategy that was preferred by many of the ASEAN members at the time.
Specifically, with the aim of achieving economies of scale within the ASEAN region,
schemes such as the ASEAN Industrial Projects (AIP) in 1976, the Preferential Trading
Arrangements (PTA) in 1977, and the ASEAN Industrial Cooperation (AIC) in 1981 were
implemented. AIP facilitated large projects through joint investments from each country,
while the AIC formed projects in which private companies from at least four countries
cooperated in the production of specific industrial products and a preferential tariff wasapplied to these products. PTA was a preferential tariff system targeting AIP and AIC
products and the aim was to endorse AIP and AIC projects. These economic cooperation
projects were implemented with the aim of industrial development within the ASEAN
region; however, the result was inconclusive as conflicts between countries erupted as they
were taking import substitution industrialization policies. Under these conditions, theASEAN Industrial Joint Ventures (AIJV) was implemented in 1983, in which theparticipation conditions were eased. Since there were no changes in countries’ policies ofindustrialization through import substitution, the result was poor.
The joint industrial development projects by the ASEAN member states did not
result in a huge success as expected. However, in light of the lessons learned from theseprojects, joint projects were implemented, including the Brand-to-Brand Complementation(BBC) in 1988, and in 1996, the ASEAN Industrial Cooperation (AICO), an improved andexpanded version of the BBC. The BBC and the AICO brought about a steady success. The
BBC was a scheme in which preferential tariffs lower than the most favored nation tariff,were applied to automobile parts, in order to promote the concentrated production of
automobile parts and the creation of complementary production systems within the ASEAN
region. AICO was a scheme in which the BBC was improved and expanded. Morespecifically, the target areas were expanded to include not only automobiles but also
household appliances, and the conditions of preferential tariffs were eased.
An important agreement that shifted ASEAN’s economic integration into high gear
was the ASEAN Free Trade Area (AFTA) that aimed to expand intra-regional trade. AFTA
entered into force in 1993 and under the Common Effective Preferential Tariff (CEPT)
Agreement, it required that tariff rates levied on applicable products traded within theregion be reduced to 0-5% within 15 years, by 2008. The factors that urged theestablishment of the AFTA were the active development of regional economic integrationworldwide and the rise of the Chinese economy. Since China had been achieving steadyeconomic development since the reform and open policy of 1979, it had attracted a large
number of direct investments from foreign countries, which contributed to its economic
development. The ASEAN member states felt a sense of urgency under these circumstances
10 Japan Center for Economic Research “Asia Research” Reportand promoted market integration through the implementation of the AFTA and anticipateddirect investment from abroad.
After this, in order to compete against China, (which was attracting investors with
their high growth), the intra-regional tariff reduction was advanced ahead of schedule.
Furthermore, since Vietnam, Laos, Myanmar, and Cambodia joined ASEAN, the date forthe tariff elimination was set to be 2010 for the members of the original AFTA and 2015 forthe new members. In 2010, the ASEAN Trade in Goods Agreement (ATIGA) was enteredinto force. This agreement included stipulations that were more comprehensive and detailed
than that of the CEPT Agreement. With the aim of intra-regional expansion of trade inservices and direct investment, the ASEAN Framework Agreement on Services (AFAS)
was signed and entered into force in 1995 and the ASEAN Investment Area (AIA) was
signed and entered into force in 1998.
In 1996, on the 30th anniversary of ASEAN and on the edge of the 21st century, thefirst informal ASEAN summit was held. While the environment surrounding ASEAN waschanging with issues such as the rise of China, a vision plan for 2020 was agreed upon at
the first informal summit. At the second informal ASEAN summit, held in 1997 in the
midst of serious economic downturn caused by the Asian Financial Crisis, the ASEAN
Vision 2020 was adopted. The ASEAN Vision 2020 highlights the importance of economic
integration for regional development. In 1998, the Hanoi Plan of Action (a six-year
timeframe from 1999 to 2004) was adopted. The Hanoi Plan of Action was the first in aseries of action plans for the ASEAN Vision 2020. In the plan, enhancing greater economic
integration was listed as a major item.
3.2 The emergence of the AEC plan and its significanceThe regional economic cooperation among the ASEAN members entered a newstage in the form of the ASEAN Economic Community (AEC), which was outlined in the
Declaration of ASEAN Concord II (Bali Concord II) at the 9th ASEAN Summit held in Bali,
2003.7 The Bali Concord II laid out the establishment of the ASEAN Community by 20208
comprising three pillars: the ASEAN Economic Community (AEC), the ASEAN
Political-Security Community (APSC), and the ASEAN Socio-Cultural Community(ASCC). In 2004, at the 10th ASEAN Summit held in Vientiane, the capital of Laos, theVientiane Action Program was adopted. This action program served as a roadmap forestablishing the ASEAN Community. Actions related to the AEC include the accelerationof the integration process toward a single market and production base, and the integration
7
8

The (First) Declaration of ASEAN Concord was signed in Bali in 1976.
In 2007, the goal of establishing the ASEAN Community was moved up to 2015.
Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)11

of 11 priority sectors (agro-based products, automotives, electronics, etc.) by the end of
2010. The AEC is anticipated to shift ASEAN into a region with a free flow of goods,
services, investments, skills and capital, and to also bring economic prosperity to theregion.
At the 13th ASEAN Summit in 2007, the ASEAN Charter was signed and it
entered into force in 2008. The ASEAN Charter serves as a strong foundation in realizing
the ASEAN Community by providing legal status as a regional institution. It also codifies
the ASEAN goals, rules, and values. At the same summit, leaders adopted the AEC
Blueprint. The AEC Blueprint lays out four pillars (a single market and production base, acompetitive economic region, equitable economic development, and integration into theglobal economy), 17 core elements,9 and 77 measures. The four pillars clarified the aim
and significance of the AEC. Establishing a single market and production base will allow
ASEAN member states to have an advantage over China and India in the competition to
attract the direct investment necessary for economic growth and this will promote
ASEAN’s economic growth. Building a competitive economic region will contribute to
attracting direct investment, and furthermore, encouraging competition between companies
will increase consumer benefits. Achieving equitable economic development is necessary
for not only bringing economic, social, and political stability to the region by reducing thehuge development gap between ASEAN member states that currently exists, but it is also
necessary to push forward economic integration. In terms of integration into the global
economy, it is important to push forward intra-regional and extra-regional integration
simultaneously in order for ASEAN’s economy to flourish as economic activities globalize.
In particular, forming close relationships with other entities within the global production
network will greatly contribute to economic growth.
In order to ensure the implementation of the AEC Blueprint, the ASEAN
Secretariat established a monitoring mechanism in 2008 called the AEC Scorecard toevaluate the progress of various AEC measures in each country. It is reported that theimplementation rate of prioritized AEC deliverables was 82.1% at the end of 2013.
Furthermore, in order to supplement and reinforce the plans for hard infrastructure that wasinsufficient in the AEC Blueprint, the Master Plan on ASEAN Connectivity was adopted at
the 17th ASEAN Summit in 2010. The Master Plan on ASEAN Connectivity aims to
9

The 17 core elements are: a single market and production base (1. Free flow of goods, 2. Free flow of services,
3. Free flow of investment, 4, Freer flow of capital, 5. Free flow of skilled labor, 6. Priority Integration
Sectors, 7. Food, Agriculture, and Forestry); a competitive economic region (1. Competition policy, 2.
Consumer protection, 3. Intellectual property rights, 4. Infrastructure development, 5. Taxation, 6.
E-commerce); equitable economic development (1. SME development, 2. Initiative for ASEAN integration);and integration into the global economy (1. Coherent approach toward external economic relations, 2.
Enhanced participation in global supply networks).

12 Japan Center for Economic Research “Asia Research” Reportstrengthen: (1) physical connectivity, (2) institutional connectivity, and (3)people-to-people connectivity. Specifically, items under (1) physical connectivity include
development of hard infrastructure, such as transportation, information andcommunications technology (ICT), and energy. Items under (2) institutional connectivity
include the development of soft infrastructure, such as trade liberalization and facilitation,
investment and services liberalization and facilitation, regional transportation agreements,
cross-border procedures, and capacity building programs. Lastly, items under (3)people-to-people connectivity include the facilitation of mobility of the people througheducation, culture, and tourism.
Many observers think that establishing the AEC by the end of 2015 is, at this time,
unlikely, but ASEAN’s move toward economic integration will continue after 2015. In
November 2014, at the 25th ASEAN Summit held in Nay Pyi Taw, the capital of Myanmar,
the Nay Pyi Taw Declaration on the ASEAN Community’s Post-2015 Vision wasannounced and agreed upon. The Declaration outlines what AEC should be as well as
challenges facing the ASEAN member states.10 The AEC for 2016-2025 should aim toestablish an integrated and highly cohesive economy, a competitive, innovative anddynamic ASEAN, a resilient, inclusive and people-oriented, people-centered ASEAN,
enhanced sectoral integration and cooperation, and a global ASEAN.
4. Recommendations
About a year remains until the ASEAN Economic Community (AEC) isestablished. Twenty years have passed since ASEAN decided to move toward regional
economic integration under the framework of the ASEAN Free Trade Area (AFTA), which
entered into force at the beginning of the 1990s and aimed to liberalize trade in goods
within the ASEAN region. There were many pessimistic views on the AFTA as the
economic cooperation programs at the ASEAN regional level implemented until then had
ended in failure. Many people thought that the AFTA would also result in no reduction or
elimination of intra-regional tariffs, which were the goals, even though the framework wasbuilt. However, contrary to all expectations, the AFTA not only reduced and eliminatedtariffs ahead of schedule, but also built a framework in which not only goods but also
services, investment, and skilled labor in the ASEAN region would flow freely. The
culmination of these measures is the AEC. This report will review the implementation
10

ASEAN Secretariat<http://www.asean.org/images/pdf/2014_upload/Nay%20Pyi%20Taw%20Declaration%20on%20the%20ASEA
N%20Communitys%20Post%202015%20Vision%20w.annex.pdf>
Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)13status of policies and measures for achieving the AEC and evaluate the level of progress of
ASEAN’s regional economic integration by analyzing the mobility situation in the regionin terms of goods, services, investment, skilled laborers, and unskilled laborers (which are
not included in the AEC). The results show that intra-regional mobility has expanded forgoods, services, investment, skilled laborers, and unskilled laborers. However, there arecases in which intra-regional mobility has not sufficiently developed as some measures
included in the AEC Blueprint (which was created to monitor the progress toward the AEC)
are not being implemented. In light of these results, the following recommendations arepreesnted to the ASEAN member states, the Japanese government, and Japanesecompanies.
ASEAN member states must consistently and swiftly implement the items
included in the AEC Blueprint in order to complete the AEC and achieve the goal of market
integration. Items that are particularly important are the elimination of non-tariff barriers,
the facilitation of trade, the liberalization and facilitation of trade in services andinvestment, the free movement of skilled labor, and the development of transportation
infrastructure.
Currently, the information on ASEAN’s progress as a whole on the AEC Blueprint
is publicly available, but it is important to announce sectoral and country-by-country
progress. Furthermore, it is necessary to swiftly lay out and announce the AEC Post-2015
Vision and a new blueprint that would serve as guidelines of the AEC after 2015. Effective
outlining of an action plan is essential, but in that process, ASEAN should incorporate
requests of the private sector including foreign companies such as Japanese companies.
Moreover, ASEAN should establish a cooperative relationship with international
institutions such as the Asian Development Bank (ADB) and the Economic ResearchInstitute for ASEAN and East Asia (ERIA), and exchange opinions and information withthese organizations.
At the moment, unskilled labor is not included in the AEC Blueprint, but in orderto achieve market integration, it is necessary to secure a high-quality labor force that
includes unskilled laborers. In other words, establishing a sound labor market is essential
and for this reason, it is necessary to outline and put into effect an agreement that is legallybinding with regard to the protection and promotion of rights of immigrant workers that are
currently under discussion.
The Japanese government should take into account not only the importance of
ASEAN’s production base and market, but also its geopolitical importance. Japan should
strengthen the various cooperation measures that are already taking place toward theestablishment of the AEC, which will contribute to the development and the growth of the
14 Japan Center for Economic Research “Asia Research” ReportASEAN economy. Specifically, it is important to cooperate in areas such as thedevelopment of transportation infrastructure and human resources that will be discussed inthis report. The Japanese government is also expected to effectively communicate therequests of the Japanese companies that are actively operating on a large scale in the
ASEAN region to the ASEAN Secretariat and governments of the ASEAN member states,
and to ensure that those requests are being reflected in the policies. Specific measures
include requesting that ASEAN member states clarify whether or not Japanese companies
operating in the ASEAN region would be included in the ASEAN companies that can enjoy
the benefits from the liberalization of trade in services and investment of the AEC. Anothermeasure is to demand that ASEAN member states listen to requests of the Japanesecompanies in creating the new blueprint.
Recommendations for business strategies in the ASEAN region must be made to
Japanese companies. With the establishment of the AEC, ASEAN will gain attraction not
only as a production base but also as a market. Due to this, competition with both foreigncompanies and with local companies within the ASEAN region is expected to intensify. In
order for Japanese companies to effectively operate under these extreme competitiveenvironments, the Japanese companies must be familiar with the new rules under the AEC.
Therefore, it would be useful if Japanese companies obtained latest information throughexchanges with Japanese government agencies such as The Japan External Trade
Organization (JETRO), private financial institutions, and consulting firms, and accurately
communicate the information to their management. Meanwhile, either on their own,
through the Chamber of Commerce and Industry, or through industry associations,Japanese companies should make an active effort in notifying the Japanese government andlocal governments of the ASEAN their requests for improving business environment. It isalso important for Japanese companies to localize in various aspects. For instance, bycooperating with local ASEAN companies that are knowledgeable in the business situationsof the ASEAN member states, Japanese companies are more likely to succeed in the
ASEAN region. Local procurement of human resources will also be an advantage forJapanese companies that are experiencing difficulty in securing workers in Japan due to a
declining birthrate and an aging population. Furthermore, if there are opportunities for local
employees to be promoted, Japanese companies will be able to secure skilled employees.
This will largely contribute to the efficient management of not only the local subsidiaries
but also of the head office in Japan.
References
Asian Development Bank. (October 2014). Asian Development Outlook 2014 Update.

Chapter 1 | Approaching Establishment of the ASEAN Economic Community (AEC)

15

International Monetary Fund. (October 2014). World Economic Outlook: Legacies, Clouds,
Uncertainties.
Japan Center for Economic Research. (2013). The ASEAN Economy and the
Middle-Income Trap.
Shimizu, K. (2013). World Economy and ASEAN Economic Integration. ASEAN
Economic Community and Japan (Koichi Ishikawa, Kazushi Shimizu, Seiya
Sukekawa, Eds.). Bunshindo Publishing Corporation.
World Bank. (October 2014). East Asia and Pacific Update.
Yamakage, S. (2011). Atarashii ASEAN: Chiiki kyodotai to Ajia no chushinsei o mezashite.
Institute of Developing Economies.

16 Japan Center for Economic Research “Asia Research” Report