Exclusive: Asean’s path to 2015 revealed

Author: | Published: 30 Nov 2012
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The Asian financial crisis was something of a rude awakening for the fast-expanding Asean [Association of Southeast Asian Nations], prompting stricter capital controls and financial regulation across the region. Asean’s director of finance, industry and infrastructure, Dr. Somsak Pipoppinyo, outlines the lessons the Asean learned from the crisis and what’s next on the Association’s reform agenda

By 1998, the Asian financial crisis was in full flow. The Asean economy had contracted over 30 percent, the region's currencies had sharply depreciated, and levels of inflation and unemployment had spiked.

A July 1997 decision by Thailand's central bank to float the baht, after failing to protect the currency from speculative attack, had triggered a financial and economic collapse that quickly spread to other economies in the region. The crisis was to prompt a steep contraction of regional GDP growth rates, a slew of bankruptcies as companies found themselves overexposed to foreign-currency risk, and ultimately to necessitate costly and politically humiliating IMF-led bailouts in the worst affected countries.

"The crisis underscored the importance of regional policy coordination and cooperation to ensuring financial stability," says Dr Somsak Pipoppinyo. "But although the repercussions were horrendous, it also alerted the governments in the region on the importance of better and sound macroeconomic management and financial stability."

Indeed, the contagion triggered the regional arrangement and establishment of the regional liquidity mechanism , the Chiang Mai Initiative Multilateralisation (CMIM), in cooperation with China, Japan and Korea (Asean+3). The CMIM aims to provide financial support to countries with short-term liquidity needs, and to supplement existing international financing arrangements. Additionally, Asean+3 launched the Asian Bond Markets Initiative (ABMI) to promote regional, local-currency bond markets aiming to reduce exposure to foreign currency debts.

These efforts coupled with closer attention to indicators of economic vulnerabilities, a renewed focus on deregulation and better systemic coordination within its banking and financial sectors, has enabled the Asean to emerge strong.

The Asean is now working towards the establishment of regional economic integration, through the creation of an Asean Economic Community (AEC) by 2015. This will establish Asean as a single market and production base under which there will be freer flow of capital, goods, services, investment, and people throughout the region.

Asean's reform agenda

As the targeted AEC 2015 is drawing closer, Pipoppinyo explains, Asean's economic priorities are to maintain stable growth in the region, and to continue to work towards deeper economic integration. To that end, a number of key initiatives focused on liberalisation and facilitation of trade in goods, services, and investment will be pursued.

Financial sector reforms

"In the finance sector, the importance of looking at the challenges faced by member states amid the weaker external environment cannot be overlooked," says Pipoppinyo. "Member states need to participate actively in the regional finance cooperation initiatives and complement it with national fiscal strength, external balance strength and financial sector strength."

Considering the role of increased financial flows to support trade integration, Pipoppinyo believes the development of financial infrastructure to facilitate financial integration is also crucial.

"Moreover, it is equally important that as integration deepens - and to support equitable growth in Asean - access to finance should be increasingly promoted through such initiatives as financial inclusion," he says.

Trade reforms

Efforts to reduce or eliminate trade and investment restrictions are an important aspect of the AEC's path to economic integration.

"In trade in goods, this entails the elimination of tariffs and non-tariff barriers," says Pipoppinyo. To that end, the Asean has already removed tariffs for over 98% of goods traded within the region. "We expect to see further increase in intra-Asean trade, and much improved production supply linkages among our markets as a result, " says Pipoppinyo.

But, adds Pipoppinyo, since work in this area is not yet completed and there is much to be desired, Asean continues to implement measures aimed at realising free flow of goods across borders, especially in the area of trade facilitation. Key initiatives in this area include the so-called Asean Single Window (ASW) which will integrate and connect the National Single Windows of member states via electronic exchange of cargo clearance data.

Work is also continuing to progressively liberalise trade in services, says Pipoppinyo, particularly in those areas the Asean has identified as priority integration sectors. Member states' commitments in the critical infrastructure services sector have broadened too.

Investment reforms

With regards to investment, aside from improved protection elements in the new Asean Comprehensive Investment Agreement (ACIA), Asean has adopted a single negative list approach on reservation. Efforts to establish more comprehensive provisions for investment protection, including investor-state dispute mechanism, are also underway.

"Asean has balanced focus covering the four pillars of investment liberalisation, protection, promotion and facilitation, with provision for further progressive liberalisation," says Pipoppinyo

Asean Connectivity

Furthermore, in recognition of the important role of connectivity in harnessing the full potential of the region, Asean has adopted the 'Master Plan on Asean Connectivity'. This strategic document aims to enhance connectivity among member states by improving physical connectivity, through enhanced physical infrastructure development, institutional connectivity, through effective institutions, mechanisms and processes, and people-to-people connectivity, by empowering its people. The Plan identified priority projects deemed to have high impact on Asean connectivity including key infrastructure projects.

"Asean is also working to enhance its economic relations with the rest of the world recognising the interconnectedness and interdependence of markets and industries," says Pipoppinyo. Free trade agreements or economic partnership agreements have been negotiated and signed by Asean with its dialogue partners, and discussions are underway with other economic partners.

Clearly, Asean's path to 2015 is far from over. But Pipoppinyo is optimistic the worst is very much over for the region.

"Thanks to the lessons learned from the crisis, extensive efforts were made by the Asean governments to rebuild their economies and restore the financial stability and market confidence in the region," he says. "This enabled the Asean economies to bolster their financial sectors to a level that enabled them to withstand the recent global financial crisis."

"The abovementioned initiatives are by no means complete, but these, to a large extent, pave the way for ASEAN to be a competitive regional economy, that is attractive and suitable for investment," he says.

For more of IFLR's 30th anniversary coverage see http://www.iflr.com/30th-anniversary

See also

Asean's integrated exchange to boost regional liquidity

Investments in ASEAN region Mekong countries and Indonesia perspective

New markets, new rules