Asia Economy

Will the ASEAN Economic Community be a bang or a bust?

What's the potential of the AEC?
What's the potential of the AEC?
Don't expect a 'big bang' from the AEC: Mizuho
Don't expect a 'big bang' from the AEC: Mizuho
AEC will benefit big economies, and small ones: StanChart
AEC will benefit big economies, and small ones: StanChart

The ASEAN Economic Community (AEC) will come into effect Thursday and holds immense potential for the region. However, the full-scale of implementation is far from complete.

The initiative rests on four pillars: integrate the region into a single market and production base; turn Southeast Asian into a highly competitive region; ensure equitable development across ASEAN and to fully integrate ASEAN into the global economy.

A key point of the AEC is it envisages free trade in goods and services, investment liberalization and the free flow of skilled labor.

The Association of Southeast Asian Nations (ASEAN) comprises of ten member nations, forming the world's third largest population with 622 million people in 2014. The combined 2014 GDP of ASEAN countries makes it the 7th largest economy in the world worth $2.6 trillion, according to the ASEAN Statistics.

Unlike the European Union, the AEC aspires for economic and financial integration without a monetary union or political integration.

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The implementation of the AEC is the ASEAN's most ambitious undertaking, and will boost the region's GDP by 5 percent by 2030, with Singapore benefitting the most as a percentage of GDP growth, said HSBC Global Research in a November report.

However, Joseph Incalcaterra, Asia-Pacific economist at HSBC Global Research, wants to make it clear that "the AEC represents an important new chapter rather than inflection point."

Similarly, a Mizuho Bank note cautions against expecting a "big bang" from the roll-out of the AEC.

The boost to growth should be felt over the next decade as measures are gradually implemented through the AEC Blueprint 2025, which maps out how the bloc will continue working towards an integrated economy from 2015 to 2025.

But one timely impact is the ASEAN Single Window, a regional initiative to expedite cargo clearance, notes Incalcaterra.

This initiative has already been established by many ASEAN countries and will help to facilitate the trade of goods.

ASEAN leaders at the 27th ASEAN Summit.
Rasid Mohd | LightRocket | Getty Images)

"The free trade in goods is largely a fait accompli, and the free flow of skilled labor [remains] complicated due to political concerns, which leads us to believe that the liberalization of services and investment are the most important parts of the AEC and can bring about the most tangible economic benefits," said Incalcaterra.

On the 2015 OECD Services Trade Restrictiveness Index, ASEAN is seen as fairly closed in terms of services, particularly Indonesia which had one of the lowest scores.

HSBC notes that Indonesia's closed services sector is a "largely structural issue in Indonesia [and] serves as a significant impediment to the country's broader reform efforts" adding that this is why Indonesia will not stand to gain much from the AEC.

The integration of services trade will benefit Singapore the most with its high value-add finance and insurance industry, followed by the Philippines and Malaysia, said HSBC.

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On the investment liberalization front, Rahul Bajoria, regional economist at Barclays Capital said he expects "rapidly growing economies such as Vietnam, Indonesia and Philippines to gain the most in terms of investments."

In addition, more mature economies such as Malaysia and Singapore could see more corporate investments, "which they will leverage by deploying capital within the region," said Bajoria to CNBC.

Financial integration and capital account liberalization will help to facilitate economic rebalancing within ASEAN, towards the AEC's goal of equitable development, said HSBC.

However, this coordinated approach might be hard to reach because without political integration, the ASEAN has a much weaker institutional framework to ensure that commitments are met.

HSBC adds that the ASEAN Secretariat that acts as the main authority of the bloc and implements projects has limited powers and only a tiny budget of $17 million as of 2014.

Therefore, improvements need to be made not only to the AEC but to ASEAN as a whole, before the region can see stronger integration and benefit from it.

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