Asianews December 13- 19,2013

December 13-19, 2013

SPECIAL AEC ISSUE

Southeast Asia

casts its net wider for economic integration

AFP PHOTO

| December 13-19, 2013

December 13-19, 2013

Contents Two years to AEC

Huge challenges ahead AFP

Cambodia

Challenges and potential AFP

Indonesia

Handicaps to overcome

| December 13-19, 2013

December 13-19, 2013

Contents Malaysia

Doubts and caution AFP

Laos

Little and big fish AFP

Myanmar

Getting ready for the major league

Thailand

Community ‘a process, not an event'

December 13-19, 2013

Contents AFP

Vietnam

Bold reforms needed AFP

>>DATEBOOK

Philippines

AEC, what's that?

Happenings around Asia

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AEC SPECIAL REPORT

| December 13-19, 2013 HOANG DINH NAM/AFP PHOTO

HUGE CHALLENGES AHEAD Kavi Chongkittavorn Bangkok

AEC SPECIAL REPORT

| December 13-19, 2013

TANG CHHIN SOTHY/AFP PHOTO WORKERS DECORATE AN ASEAN LOGO IN FRONT OF THE PEACE PALACE BUILDING IN PHNOM PENH IN NOVEMBER 2012 WHEN CAMBODIA HOSTED THE ANNUAL SUMMIT.

AEC SPECIAL REPORT

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AFP PHOTO / POOL / KHAM A VIETNAMESE POLICEWOMAN DIRECTS TRAFFIC AT NOI BAI AIRPORT IN HANOI ON OCT 27, 2010, DURING THAT YEAR'S SUMMIT.

AEC SPECIAL REPORT

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THAI RESCUE WORKERS PARTICIPATE IN THE ASEAN REGIONAL FORUM (ARF) DISASTER RELIEF EXERCISE (DIREX) IN 2013.

AEC SPECIAL REPORT

| December 13-19, 2013

THAI SOLDIERS PARTICIPATE IN THE ASEAN REGIONAL FORUM (ARF) DISASTER RELIEF EXERCISE (DIREX) IN 2013.

AEC SPECIAL REPORT

| December 13-19, 2013 FYROL ANWAR/AFP

W

hen Asean leaders gathered at a posh hotel in Singapore in 1992, they knew the time had come to get their act together to accelerate the grouping’s economic integration and compete with the rest of the world.

They agreed to the establishment of the Asean Free Trade Area among the six members after years of foot-dragging.

But the members’ different levels of economic development and progress made this scheme unattractive at first.

Nonetheless, the leaders decided to move ahead knowing fully well that forming a single production base for the grouping was the way to go in a globalised economy.

The free trade zone within Asean, the leaders envisioned, would take time to materialise so the first time frame was set for 2020. This was later revised to 2010.

As time passed by—with a new regional environment emerging after the collapse of the Berlin Wall and the relationship between the former Indochina and Asean countries was no longer adversarial—Myanmar, formerly Burma, also wanted to join Asean. Under

IN THIS FILE PHOTO TAKEN IN OCTOBER 2010, A MAN WALKS TOWARD THE FINANCIAL BUSINESS DISTRICT IN SINGAPORE BLANKETED WITH HAZE, A RECURRING PROBLEM IN SOUTHEAST ASIA..

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AEC SPECIAL REPORT a new peaceful environment came cooperation among all countries in Southeast Asia.

From 1995-1999, Asean added four new members, fulfilling the founding fathers’ dream of having all 10 countries under one roof.

In 2007, Asean adopted the blueprint of the Asean Economic Community (AEC), Asean Political and Security Community (APSC) and Asean Socio-Cultural Community (ASCC). These three pillars are key components of the Asean Community (AC).

IMPLEMENTATION OF BLUEPRINT

At the Asean Summit in Brunei Darussalam in October 2013, Asean leaders expressed satisfaction over the health of Asean’s overall economy. Against the weak global economy, Asean economic growth last year was 5.6 per cent with total direct foreign investments of US$108.2 billion coupled with a total volume of

trade worth $2.47 trillion.

To sustain such an impressive level of economic growth, continued economic integration is needed.

By the end of September 2013, Asean has implemented 279 measures related to AEC or a score card of 79.9 per cent. There has been progress in the implementation of the Asean Single Window, custom integration and the process of harmonising standards and conformance procedure.

Asean leaders also acknowledged that there are still areas that member countries need to do more in terms of facilitating trade and investment and reducing barriers. Under Brunei’s chairmanship, special effort has been given to financial literacy among the members. In addition, member countries still have to ratify agreements and ensure full compliance in order to accelerate economic integration further. There

is also a need for amendments or enactment of domestic laws that would align with the region’s regulations and frameworks.

For the time being, Asean members have paid most of their attention to AEC. However, without sufficient progress in the political/security and socio-cultural pillars, the economic integration in Asean would be further delayed.

Out of 667 actions under the AC roadmap, 345 of them fall under ASCC. A report on the mid-term review released in October 2013 showed that while overall assessment was positive, there were areas that member countries need further political will, especially those related to social justice and rights. .Some Asean members still do not share information on this issue.

The implementation of political and security pillar has been uneven. Asean members have done generally well on external relations with the 10 dialogue

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AEC SPECIAL REPORT partners. Now there are 75 ambassadors from non-Asean countries and organisations accredited to the Jakarta-based Asean Secretariat and 37 Asean Committees in third countries.

The US, China, Japan and Australia have established their permanent representative offices for Asean in Jakarta. India will soon set up a similar mission. Signatories of the Treaty of Amity and Cooperation have increased to 32.

In 2011, Asean has been instrumental in bringing in major powers to take part in the leadersonly forum known as East Asia Summit comprising leaders from 18 countries: Asean, China, Japan, South Korea, India, Australia, New Zealand, US and Russia.

Truth be told, at least 32 out of 143 action plans as of July 2013 that have not been implemented

by Asean members belong to the security cooperation that involves conflict management and prevention. Other common

security schemes such as peacekeeping and quick response to crisis remain untouched. These are considered sensitive issues as they involve sovereignty and go against the principle of non-interference.

BALANCING ACT

When Asean leaders agreed in November 2011 to begin the negotiation on the Regional Comprehensive Economic Cooperation (RCEP), it was spurred by various economic developments in the region and shifts of relations among major economic powers.

Asean realises that the maintenance of economic growth in Asean must be linked to broader economic communities both near and far. The grouping views the Trans-Pacific Partnership (TPP)— the US-led trading block—as a powerful external factor that could dilute the leading role of Asean.

As a precautionary measure,

Asean then proposed the Aseanled RCEP to mitigate possible implications from the fast-moving TPP. So far, the RCEP negotiation has gone through two rounds in Bandar Seri Begawan and Brisbane. Representatives from 16 East Asian countries have agreed to the 2015 deadline for the framework’s conclusion.

This time frame is pivotal as it would provide further impetus in deepening economic integration within Asean.

The main RCEP objective is to achieve a comprehensive, high-quality and mutually beneficial economic partnership among the members. In more ways than one, the RCEP negotiation is very mindful of the TPP and its objectives.

Asean leaders also want to make the RCEP a distinctive regional joint effort. Due to the different economic development among member countries, the RCEP will take into consideration provisions

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AEC SPECIAL REPORT on special and differential treatment to least-developed members like Laos, Cambodia, Myanmar and Vietnam. TPP does not have these provisions.

Given the current tension among the three East Asian economic giants—China, Japan and South Korea—over their territorial disputes, future RCEP negotiation is in jeopardy. In the past, economic matters were given priority and were immune to political interference.

That is no longer true today.

The China-Japan tension over overlapping claims in Diaoyu or Senkaku Island has already caused great concern within the region. Asean leaders fear that this longstanding conflict would affect economic integration in broader East Asia. Asean has maintained excellent relations with both countries without choosing either side. However, both China and Japan are pressuring individual members of Asean to display

bias toward them over specific issues such as maritime security cooperation and air defence zone.

MYANMAR AND THE ASEAN CHAIR

According to Myanmar’s Than Than Lin, under Myanmar’s chairmanship, Asean will give priority to technical cooperation and capacity building.

She reiterated that these measures will help new Asean members integrate with Southeast and East Asian economies. It is also hoped that in the long run, RCEP would be a highlevel FTA in terms of trade and investment liberalisation. In other words, RCEP should be attractive and efficient enough to compete with TPP. At the moment, it is too premature to predict the nature of RCEP’s final framework but suffice it to say, the future comprehensive cooperation must be focused on Asean as well as East Asian characteristic

especially the vast production networks that help to strengthen the economic interdependence within the region.

Asean economists believed that RCEP will eventually replace the current Asean free trade agreements with various dialogue partners. As such, it would serve as a role model for regional economic integration among countries at different level of development.

Implementation of RCEP will also contribute to global free trade.

Myanmar took up the Asean chair after 17 years of joining the grouping in 1997.

To ensure the success of its first chairmanship, Naypyidaw adopted a comprehensive slogan to signal what the chair plans to work for the rest of 2014.

“Moving forwards in unity towards a peaceful and prosperous community” is the theme which Myanmar believes would shape the grouping’s agenda. The

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AEC SPECIAL REPORT chair has made clear that as a new Asean member, its focus would be on capacity-building in all relevant areas, in particular efforts to integrate with AEC and other business practices.

Naypyidaw has also paid special attention to the development of small- and medium-sized enterprises (SMEs) inside the country. A new legislation on SMEs is pending in the National Assembly and the Ministry of Industry has recently established a SME Development Centre.

According to Dr Ei Shwe Sin Tun of the Ministry of Industry’s SME Department, SMEs registered in the country represented 92 per cent of enterprises, which in turn contributed 80 per cent of the gross domestic product.

Officials working on the economic agenda are also discussing further reforms in the areas of competition as well as industrial policies. Several capacity-building seminars on intellectual property rights and consumer production have been held in Naypyidaw

in the past several months.

ASEAN POST-2015 VISION

As the deadline of the Asean Community approaches, leaders must display their leadership to ensure that the blueprint detailing action plans in the three pillars—economic, political and security, social and cultural— are fully implemented.

Without political will, measures related to sensitive economic areas such as services and investment will remain “sensitive” and “untouchable”.

Further actions in political and security as well social and cultural fields would require similar decisiveness from Asean leaders, especially areas related to the enhancement of civil and political rights and democratisation.

Furthermore, there is an urgent need to adopt a comprehensive campaign to inform private and public sectors on the outcome of economic integration. All stakeholders must understand

changes that are taking place and affect their environment.

When Malaysia chairs Asean in 2015, the leaders must also take up new agendas that go beyond 2015.

For Asean to remain competitive and relevant to the international community, it must adopt new strategies that encompass effective measures bridging development gaps among member countries, promote economic integration world-wide as well as ability to form common positions on key global issues. These measures include the strengthening of the Asean Secretariat, promoting compliance of all agreements, facilitating faster decision makingprocess while maintaining consensus among members and forging larger mandate for the role of the Asean Secretary General and its good office.

Engagement with major powers, especially the US, China, India, Japan and Russia, will remain the top priority of Asean external relations.

| December 13-19, 2013

AEC SPECIAL REPORT With increased economic interdependence with these countries, Asean centrality is also at risk. In times of crisis, Asean would find itself in limbo to stay united with common positions and policies. In the past, Asean was able to balance its relations overall with major dialogue partners without difficulties.

However, growing tensions among key dialogue partners like China, the US and Japan have already impacted on broader cooperation within various Asean-led frameworks, especially schemes related to economic integration in East Asia. Asean needs to map out a comprehensive strategy to deal with the increased volatile external environment.

In confronting crises, Asean has responded collectively well during the financial crisis in

1997, the pandemic in 2003, the Indian Ocean tsunami in 2004 and Cyclone Nargis in 2008. However, calamities and human losses suffered by Filipinos due to Supertyphoon Haiyan in November 2013 showed the inadequacies of Asean decision-makers and organisations to respond to disaster and humanitarian crises.

Two years ago, the Asean Coordination Centre for Humanitarian Aid was set up to respond to these new threats but its role is still limited. So far, existing Asean institutions can only monitor and coordinate work among members. In response to the Philippine disaster, Asean Secretary General Le Luong Minh managed to activate his mandate without any further delay as coordinator of humanitarian aid.

It is imperative that Asean in

the near future agrees on the socalled principle of automaticity to facilitate the role of the Asean Secretary General and his good office. This principle could further be broadened to cover the whole gamut of crisis confronting Asean.

As such, the leaders—as well as concerned authorities—would be able to respond quickly and effectively to emerging threats that require high-level decisions for sustainable actions and policy options. At this juncture, Asean senior officials are responsible for the leaders’ agenda.

Finally, given the changing power dynamics in the region and a multipolar world, Asean cannot rest on its laurels. There are many crossroads ahead. Asean will carry diplomatic weight only when it can maintain its centrality and act collectively and proactively both in time of progress and crisis. ¬

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AEC SPECIAL REPORT

CAMBODIA

CHALLENGES AND POTENTIAL Serath Nguon Rasmei Kampuchea Phnom Penh CAMBODIAN SMALL AND MEDIUM-SIZED ENTERPRISES FACE MAJOR HURDLES TO INTEGRATE THEMSELVES INTO THE UPCOMING AEC.

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AEC SPECIAL REPORT

M SOK SIPHANNA, ADVISER TO THE ROYAL GOVERNMENT OF CAMBODIA.

illions of eyes are focused on how Asean is going to realise its goal in establishing the Asean Economic Community (AEC) by 2015.

Cambodia, one of the poorer members of the 10-country grouping, is optimistic that the kingdom will be ready to join the economic community. It sees AEC as an opportunity to boost economic growth even though there are challenges ahead for its small and medium-sized enterprises (SMEs).

“Even if Cambodia is a young country in the association, it has been committed to regional integration, especially the formation of AEC,” said Sok Siphanna, an adviser to the Royal Government of Cambodia.

”

Some of experts, economists, and politicians noted that Cambodia would die, when Cambodia became a member of Asean, but of course it did not die. And it continued its efforts to become a member of WTO then. As a result, it didn’t die. It has progressed well and the country has been recognised worldwide in terms of its development, so why does Cambodia need to be worried again when it integrates to the AEC?

”

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AEC SPECIAL REPORT As the deadline approaches, he said “Cambodia is ready".

Siphanna, former secretary of state of Commerce and a key person in Cambodia’s accession to the World Trade Organisation, noted that AEC is not the first time Cambodia is integrating to a regional and global market.

“The country has tried to open itself since 1993, and now Cambodia is already open for regional and global integration. It has accumulated experience on how to open the country since it became a member of Asean in 1999, and the WTO later,” he said.

“The policies are already in place. Therefore, Cambodia can meet the requirements for AEC.” He is optimistic that Cambodia will benefit from the community. “AEC will bring more foreign investors, technology, knowledge and expand the country's market share.”

“Before, foreign investors hesitated to come to Cambodia because of the small market, but now they recognise Cambodia’s potential thanks to the booming Asean market."

“It no longer only has 15 million people.

It will soon have 600 million people and Cambodia will become one of the 10 gates to this 600-million-population market,” he said.

CONCERN

Cambodia is the youngest Asean nation to become a full member of this regional geo-politic and economic organisation in April 1999, after having been an observer for nearly four years.

Although it’s already a full member, Cambodia still can’t rival older members in terms of economic strength, trade volume, human resources, technology, and infrastructure, among others.

The country is faced with the formidable challenge of accomplishing the objectives of AEC including setting up a single market and production base to pave the way for a highly competitive economic region.

Most of Cambodia's production chains are dependent on SMEs, except the garments and textiles industries.

Meng Saktheara, director general of the Ministry of Industry, Mines and Energy, said: “Skills, technology, capital and marketing are all concerns of Cambodian companies, especially the SMEs.” The ministry has launched projects with development partners, including the Asian Development Bank, Japan International Cooperation Agency, Korea International

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AEC SPECIAL REPORT Cooperation Agency, United Nations Industrial Development Organisation and other partners to provide capacity building for SMEs, Saktheara noted.

Oknha Te Taing Por, president of the Federation of Association for Small and Medium Enterprises of Cambodia concurred that SMEs are concerned over how a regional economic community will impact on their businesses.

There are some 400,000 SMEs in Cambodia, and more than 90 per cent of them are in need of help from the government, he said.

Ly Chheng, director of Ly Chheng Food Production, meanwhile noted that Cambodia's imported products may have a niche market.

“It’s difficult for Cambodia to compete with Thailand, Vietnam and China in terms of products, because they have price advantage and edge in packaging, technology and marketing,” Chheng said.

“For Cambodia, it has to recognise that it’s not Thailand or Vietnam. It started from zero as Cambodia was completely destroyed by Khmer Rouge. It started its rehabilitation with an almost empty economy,” Chheng said.

Siphana, on the other hand, said SMEs need to expand their production capacity, and develop themselves to become industrial giants.

PROGRESS

Some experts, economists, and politicians earlier warned that Cambodia would die once it becomes a member of Asean. This is the same warning that many are issuing today as AEC looms in the horizon.

Siphana, however, said there is no reason for Cambodians to worry. “Cambodia didn’t die after joining Asean. In fact, it has progressed well and recognised worldwide for its development, so why worry?” Siphana asked.

Since Cambodia has opened its economy 15 years ago, many international hotels, restaurants, fastfood joints and malls have been operated by locals, he pointed out.

Cambodia’s engineering sector has also taken big strides and now has capability to undertake big construction projects.

“In addition, more and more foreign companies flock to the country. For example, Japan has poured hefty investment here,” he said.

“Don’t worry, it will not die. It will adapt to the new environment and realise economic growth step by step."

“We just need to find our weak points and fix them," he said. ¬

AEC SPECIAL REPORT

| December 13-19, 2013

AFP

INDONESIA

HANDICAPS TO OVERCOME

AEC SPECIAL REPORT

| December 13-19, 2013

| December 13-19, 2013

AEC SPECIAL REPORT Kornelius Purba, Ati Nurbaiti, Vincent Lingga, Dwi Atmanta The Jakarta Post Jakarta

U

nless Indonesia gets its act together soon, it will not be fully ready for the Asean Economic Community (AEC) in 2015. If so, it is likely that we will see a repetition of what happened when the China-Asean Free Trade Agreement (Caftan) came into force in 2010 with the Indonesian Chamber of Commerce and Industry calling for a postponement of implementation.

Fearing huge domestic losses, then Industry Minister Fahmi Idris announced his intentions to ask President Susilo Bambang Yudhoyono to consider delaying the implementation of the free trade agreement (FTA).

Fahmi insisted that the FTA— which was expected to open up various sectors in both markets (China and Asean) through the gradual reduction of import duty tariffs—would bring Indonesia more harm than good, given China’s superiority over Indonesia in terms of competitiveness.

With regards to the AEC, Indonesia has already succeeded

in getting it launched at the end of 2015, instead of at the beginning of the year. But looking at Indonesia’s progress, it is likely that another postponement will be called for.

Indonesia, with its huge market of 250 million makes it the largest economy in the region. However, local sentiments are such that it is also the least able to compete, judging from the state of its own manufacturing sector, and therefore will have the most to lose under the AEC. Even its most lucrative sectors, i.e. textiles, garments, electronics and automotive, will face fierce competition from other Asian states because of the number of jobs these sectors generate.

It does not help that xenophobia will grow as Indonesia will soon enter an election year. We are already seeing this trend among foreign companies. We have not seen any election candidates exploiting AEC as a threat to the Indonesian economy, but the issue will soon be too tempting for them to ignore.

Poor preparation for the AEC is a reflection of the lack of political

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AEC SPECIAL REPORT leadership by the government.

Yudhoyono has repeatedly reiterated the need for the country to prepare for AEC. But his words have not been translated into action, and in Indonesia, the AEC remains an alien concept while time is running out.

The media, which should know better, is lukewarm at best in its efforts to promote the idea. This is unfortunate, because the media is a key player in helping prepare the country for the AEC. Eventually the nation will no longer be able to ignore the issue.

But when the time comes, can an unprepared Indonesia open up its economy to be a part of AEC?

A LONG WAY TO GO BEFORE THE REMOVAL OF NON-TARIFF BARRIERS Local businessmen fear that other Asean markets will edge their businesses out, while analysts are pessimistic about a full launch of AEC. An ill-prepared Indonesia, they say, will likely drag the entire regional community down once AEC is

implemented. These are some of the factors showing that Indonesia has much work to do before it can be considered prepared for AEC: — Indonesian businesses still bear the highest logistics costs and credit interest rates in the region, and this has weakened its competitiveness against other member states.

— The most that can be said about Indonesia’s preparedness for AEC are “low-hanging fruit” such as tariff reduction. Bigger building blocks—non-tariff barriers like quality standards and customs clearance procedures—are still “under construction”. A single market and production platform like AEC would demand more than just the removal of import tariffs.

The removal of non-tariff barriers like technical and safety standards, different customs-clearance procedures, transit transport system, rules of origin and conformity assessment practices, is undoubtedly challenging and complex. They require institutional capacity building in each country.

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AEC SPECIAL REPORT

TRADE BETWEEN INDONESIA AND OTHER ASEAN MEMBERS (JANUARY-JULY 2013, IN –THOUSAND US$) NO COUNTRY

TOTAL TRADE 013 2012

EXPORT 2013 2012

IMPORT 2013 2012

TRADE BALANCE 2013 2012

1

Singapore

24,712,831.8

25,297,120.1

9,644,347.3

9,732,266.8

15,068,484.4

15,564,853.4

-5,424,137.1

-5,832,586.6

2

Malaysia

14,166,384.4

13,317,809.3

6,178,849.1

6,793,974.0

7,987,535.3

6,523,835.3

-1,808,686.2

270,138.8

3

Thailand

10,544,583.4 10,737,548.6

3,744,419.9

3,805,840.0

6,800,163.5

6,931,708.6

-3,055,743.6

-3,125,868.7

4

Brunei Darussalam 349,963.8

398,642.4

82,761.2

50,582.1

267,202.7

348,060.3

-184,441.5

-297,478.2

5

Vietnam

2,900,904.5

2,834,180.0

1,320,872.1

1,288,901,8

1,580,032.4

1,545,278.2

-259,160.3

-256,376.5

6

Laos

7,977.3

21,902.1

3,352.0

1,887.6

4,625.3

3,024.5

-1,273.3

15,853.0

7

Phillipine

2,684,853.7

2,591,621.6

2,217,357.2

2,113,899.2

467,496.5

477,722.4

1,749,860.7

1,636,176.7

8

Myanmar

412,538.3

251,950.6

360,288.4

203,038.9

52,249.9

48,911.7

308,038.5

154,127.2

9

Cambodia

185,383.5

173,851.0

175,490.7

168,843.9

9,892.8

5,007.2

165,598.0

163,836.7

(Source: Ministry of Trade, Indonesia)

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AEC SPECIAL REPORT

Another example of how illprepared Indonesia is can be seen in the time it takes for inbound containers to get clearance at the Tanjung Priok port in Jakarta which handles twothirds of the country’s external trade: despite the introduction of a “single window” to simplify the processing of all shipping documents and import-export clearances, it still takes the containers about 10 days.

A simplified procedure for exporters to obtain a Certificate of Origin (CO) for their products is needed for businesses to enjoy the zero-tariff facility already implemented under the FTA. However, in Indonesia, bureaucracy often stands in the way as issuing of the CO is still under the jurisdiction of the trade ministry, leaving the zero-tariff facility underutilised.

Recent data showed that only 30 per cent of Indonesia’s exports

to other Asean members have made use of the zero-tariff.

Benefits such as zero-tariff barriers would be pointless if technical and assessment standards, customs procedures, and rules for product registration and labelling are not streamlined.

Rather, they may even incur higher distribution costs.

Another challenge to AEC is creating a level playing field in the region to ensure customer protection, quality of goods, alignment of local standards to international standards, so that there is mutual recognition of the arrangements made between states.

EDUCATION, LANGUAGE AND ENFORCEMENT

Some of the areas found wanting in Indonesia, especially in the context of AEC, are education, languageskills and enforcement.

While AEC is expected to open up more opportunities, and see more rapid movement of professionals between member states, many Indonesians may find themselves unqualified to join the flow.

National statistics show that out of the 121 million-strong workforce, over 7 million, or 5.8 per cent are unemployed.

Many of those without jobs are unskilled and uneducated, but some of them are degree holders.

The Asean University Network, which was started in 1995, saw student exchanges, scholarships and credit transfers offered between universities in the region. Indonesia’s public tertiary institutions of higher learning, such as the University of Indonesia, Gadjah Mada University in Yogyakarta, Airlangga University in Surabaya, and the Bandung Institute of Technology are

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AEC SPECIAL REPORT

still lagging behind the top 50 universities in Asia and therefore not attracting many foreign students.

That said, the Bali government seems to be the only one actively engaging in preparations for the AEC—at least in the area of hospitality.

Its governor Made Mangku Pastika has already notified locals to be ready to compete with various nationalities for jobs (on the island province).

“The (provincial) government cannot, and will not, stop the inflow of professionals from other Asean countries into Bali,” Pastika told university students.

As Bali depends heavily on tourism, the Udayana University requires its graduates to have a score of at least 400 in their Test of English as a Foreign Language (Toefl), while all tour guides are encouraged to be certified.

NUMBER OF INDONESIANS WORKING IN OTHER ASEAN MEMBER COUNTRIES IN 2012 COUNTRY

2012

Singapore

228,875

Malaysia

1,049,325

Brunei

46,848

Cambodia

n/a

Laos

n/a

Myanmar

n/a

Philippines

n/a

Thailand

1,549

Vietnam

516

Source: Indonesian National Labour Placement and Protection Agency

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AEC SPECIAL REPORT

LACK OF CONFIDENCE IS A HANDICAP Febbylia Danita who works in a fashion retail outlet in Denpasar, Bali, says that in terms of skill, Indonesians are as competitive as their counterparts in the region. But their main handicap, says the 30-year-old, is their lack of confidence.

Senior nurse Siti Komariah says that poor command of English and inability to “think critically� lends to this low self-confidence.

Another obstacle, particularly in the nursing industry, says Siti, is the lack of specialist training platforms.

The number of nursing academies offering diploma programmes have increased with the number of hospitals in the country. With these diplomas, graduates are able to work as

paramedics, if not as nurses.

However, she notes, they do not qualify regionally.

Singapore and the Philippines require their nurses to have at least bachelor degrees.

Furthermore, only the major universities in Indonesia offer courses for nursing specialties.

She hopes that the nursing law which has been drafted will be passed ahead of AEC 2015, as all agreements made between member countries on the facilitated entry of professionals will be based on the regulations of the individual host countries.

Nevertheless, of the informed, many are looking forward the open doors AEC will provide them.

Abdul Mukti Syaubari, formerly an Indonesian who now holds a Malaysian passport, says that he would like to start a business in his

hometown in Sumatra. For now, being a Malaysian citizen makes it difficult for him to obtain a visa for a long stay in Indonesia, let alone start a business. But a borderless Asean community, he says, would enable him to fulfil his dream.

ASEAN AS A PEOPLE CENTRED-COMMUNITY: TOO GOOD TO BE TRUE?

Thanks in part to the booming aviation industry, in particular low-cost carriers, millions of people in Southeast Asia can now afford to travel within the region.

The cities of Southeast Asia are connected to each by only a few hours by flight, a journey that was considered a luxury a few decades ago.

The Soekarno-Hatta airport in Jakarta clearly shows that the rapid movement of citizens across

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AEC SPECIAL REPORT

the region, and other Indonesian cities are quickly catching up.

Besides affordable air travel, technology has connected people like never before. This has opened up avenues for sharing ideas, building mutual trust and even enforced international solidarity for a common cause.

It is also worth noting that the region is also seeing a middle class that is growing at an unprecedented pace.

Much has been done to bring together the Asean nations.

For example, regular forums like the Asean Ministerial Meeting on Youth, the Asean Committee on Women, the Asean Education Ministers Meeting, Asean Foundation programmes; or in the field of sports—the Southeast Asian (SEA) Games and Asean Football Federation Cup.

The SEA Games is perhaps the most prominent event. Hosted bi-annually by Asean member countries in alphabetical order, the joint sports event has motivated the organising of other smaller-scale sports events and competitions, particularly in football.

Nevertheless, Asean as a community needs more than just regular routine events. It has to find other common grounds that will make the grouping relevant.

Non-governmental organisations and groups representing civil society play a leading role in the search for unifying causes.

Take for example the Asean Civil Society Conference, which usually gathers representatives of NGOs from across Asean member states ahead of the annual regional leaders meeting.

Having been held nine

times, the conference is deemed a “genuine” forum where the concerns of the region’s civil society groups are brought to the attention of the relevant heads of state. During the conference participants take part in a series of plenary sessions and workshops to discuss various regional issues and draft a “People’s Statement” that they will address to Asean leaders.

But the conference has never been free from attempts by the host government to intervene.

The eighth conference in Phnom Penh last year saw the host Cambodian government and other Asean governments support a rival event called the Asean People’s Forum, as proven in the transfer of 30 Laotian delegates to the breakaway event.

To make matters worse, the management of the

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AEC SPECIAL REPORT

hotel where the Asean Civil Society Conference was held threatened to cut the power if the conference organisers went ahead with their plan to hold a workshop on human rights issues in Myanmar.

The latest conference in Bandar Seri Begawan, Brunei, in April was also marred by an unfortunate incident.

Indonesian representative Yuyun Wahyuningrum was banned from addressing delegates at the event on the Asean vision on human rights, because she had earlier publicly criticised the Brunei government.

What appalled Yuyun and her fellow human rights workers was

the fact that the initiative came not from the Brunei government, but the organising committee, which was made up of local civil society organisations.

This “self-censorship” should not come as a surprise given the different norms and values in each member state.

Incidents that tainted the last two Asean people’s conference have only showed that the grouping has much work to do, so that these issues will not become a hindrance in establishing a people-centred Asean community envisioned in the Declaration of Asean Concord (Bali Concord II) in 2003.

In a wider perspective, the regional group’s commitment to democratic norms and protection of human rights enshrined in the Asean Charter in 2008 remains a question that has not been adequately addressed.

Indeed Asean comprises nations that are diverse in how they view citizens’ freedom and human rights. However, it is safe to say that until all the member states can see eye-to-eye on this issue, among others, Asean will remain an elite-centred organisation where those in places of authority or advantage will feel free to impose their will on the people. ¬

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AEC SPECIAL REPORT

MALAYSIA

DOUBTS AND CAUTION Bunn Nagara Kuala Lumpur

S

ince the Asean Economic Community (AEC) is currently foremost in the development of the Asean Community’s three pillars, and that the Asean Community in general is supposed to be achieved by 2015, the AEC can expect to be watched closely in the months ahead. It is also likely to be taken as a measure of the progress and prospects of the Asean Community as a whole. However, popular perceptions so far are not as positive as they ought to be.

Independent media and business circles have signalled their scepticism if not cynicism of expectations that the AEC can be achieved by 2015. This situation is as prevalent in Malaysia as it is elsewhere in Asean.

The general pessimism is not without reason, but it should also avoid discouraging continued efforts to expedite establishment of the Asean Community. If the prospects of abiding by the 2015 deadline do not seem bright, that should be even greater reason to

redouble such efforts.

At the same time, policymakers and others with inputs or interests in the process should identify and acknowledge the reasons why these prospects do not seem so bright. They should then rectify or resolve those problems to facilitate timely realisation of the AEC. At the same time, the Asean Community’s political-security and socio-economic pillars should not be held up just because AEC happens to be delayed. Each pillar should be independent

AEC SPECIAL REPORT

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THE STAR ACCOUNTING FOR UP TO 97 PER CENT OF MALAYSIA’S OUTPUT, SMES ARE THE CORNERSTONE OF THE COUNTRY’S ECONOMY AND SHOULD BE GIVEN DUE RECOGNITION. AN AEC OF PROMISE IS ALSO ONE WITH PROMISING SMES.

AEC SPECIAL REPORT

| December 13-19, 2013

ACCOUNTING FOR UP TO 97 PER CENT OF MALAYSIA’S OUTPUT, SMES ARE THE CORNERSTONE OF THE COUNTRY’S ECONOMY AND SHOULD BE GIVEN DUE RECOGNITION. AN AEC OF PROMISE IS ALSO ONE WITH PROMISING SMES.

| December 13-19, 2013

AEC SPECIAL REPORT enough of the others to forge ahead wherever possible.

Among policy researchers a general optimism may be observed, with some even saying that there are good reasons for optimism. If that sense of expectant hope is less than justified however, it may be that the AEC policy research community needs to be geared more closely to the regional “street� or that a disconnect between them and policymakers persists.

A significant problem is the lack of connectivity between the key players: government, industry, academia, media and civil society groups.

To a degree, the public and private sectors tend to blame each other for delays and bottlenecks. No side is blameless, and it takes both contributing actively as well as cooperating imaginatively for success. A realistic outlook is essential

from the outset, and this would include an honest assessment of any obstacles and weak spots.

In late October this year, the Group Managing Director and CEO of CIMB Group, Nazir Razak, expressed serious doubts that AEC would

be established by the end of 2015 as planned.

Speaking at the World Capital Markets Symposium in Kuala Lumpur, the brother of Malaysian Prime Minister Najib Razak was sceptical that Asean would achieve a single

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AEC SPECIAL REPORT production base with free movement of capital, investments, skilled labour and goods and services within another 27 months.

Among other challenges, he noted that Asean had yet to establish the master plan and banking framework for AEC. Nazir also observed that the Asean Secretariat still lacked the necessary legal framework and infrastructure for AEC. Evidently, the available indications are that AEC is behind schedule.

Nonetheless, Nazir prefers to maintain the 2015 deadline while cautioning that there should be no more unrealistic projections or expectations.

As a senior corporate figure in the region, he is more concerned with Asean realities and possibilities than with political spin

or rhetoric. He was also expressing the hard-nosed concerns of the business world, adding that unrealistic expectations can backfire by damaging the integrity and credibility of community building itself.

At the government level however, a similar sense of urgency seems absent. There are reports that while Asean generally looks to Indonesia to show regional leadership on AEC, the government of Asean’s biggest economy had only lately realised the enormity of the task. Furthermore, the Indonesian corporate sector is looking to the country’s 2014 election to determine a new president, who—enjoying both national approval

and regional consensus— would spearhead the drive for AEC. But given AEC’s 2015 deadline, that only spells delay and dismay.

NEED FOR CLEAR PLANS

One outstanding need is for Asean to articulate a clear trajectory to 2015 and beyond. For example, is the goal of AEC a common market, a customs union or something else? In coming after the EU, with all its known challenges and flaws, the Asean Community should take care in avoiding the same mistakes. A sound perspective of the 2015 challenge also helps: it should be understood that AEC was never meant to be “completed” by 2015, but fundamental aspects of it should at least be in place by then to enable a steady evolution thereafter.

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AEC SPECIAL REPORT PROMISING SMES PROMISE A SUCCESSFUL AEC Small and medium enterprises (SMEs) are also the prime cornerstone of national economies in the region. In Malaysia they account for up to 97 per cent of output.

SMEs therefore need due recognition as such, with efforts to promote their interests and status.

An AEC of promise is also one with promising SMEs. Singapore and Malaysia have welldeveloped SMEs and are in turn well-developed economies in Asean.

Much still remains to be done in several sectors.

The automotive sector for example is plagued with policy anomalies that add up to obstacles and challenges. It has been said that little has

been achieved in this sector other than tariff removals. Other industries such as foodstuffs, palm oil and timber also lack policy coordination and harmonisation.

Specific timelines to serve as milestones are still undeveloped or non-existent.

Among Asean member states in general, a crucial sense of regionalism is also lacking. Individual countries still seem disproportionately concerned with national interests relative to other Asean countries. Two key points should be remembered by all: a better realisation of AEC will benefit all countries, regardless of whether some countries benefit more than others; and a weak or unfulfilled AEC

will hurt all countries, whatever the degree of harm suffered by each.

Another problem is that the region’s private sector remains underdeveloped in policy terms, with little relation to plans, programmes and projects in the public sphere. They compare unfavourably with their counterparts in Japan, Europe and North America which are more pro-active in providing inputs for policy. The business sector in Asean countries needs to provide more in terms of thinking, proposals and advice to policymaking circles at national and regional levels.

Also lacking in this region are technical and professional inputs from the private to the public

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AEC SPECIAL REPORT sector with seamless consistency. Institutions like the Asean Chamber of Commerce and Industry should step up and offer more suggestions. This lack is compounded by a general shortage of resources. For example, better funding for the Asean Secretariat would help. But since individual national contributions are uniform, improving the Secretariat’s cash flow and reserves is likely to remain a serious challenge.

In a state-centric Asean, much has of course been done at government-togovernment level. This however contrasts sharply with the still minimal role of the private sector in helping to shape policy.

Nonetheless, private sector tie-ups in the region do show promise in developing regional

production networks and can be developed further. Due cognizance should be taken of these realities to avoid further difficulties while maximising opportunities.

Other concerns that need addressing include production moving up the technology ladder, providing a clear costbenefit analysis of deeper regionalisation that evidently favours it, the growth of China that makes it both more complementary and competitive, and getting all sectors fully on board AEC. With those in place, the other two pillars of the Asean Community would also be better assured.

Cultivating greater involvement by business as well as civil society groups has become a prime requirement. More

than before in Asean’s history, involving more non-state actors should now be a high priority.

It does not mean the role of governments has diminished, but it does mean that Asean must be equated with a community of nations founded on the commonalities of their people. As a contemporary reality, this befits the current evolution of Asean in a highly competitive world.

The AEC may not be developing as quickly as it should or as smoothly as it could, but the fact of its development is certain and its direction is unquestioned. Since there is always room for improvement, it is then for all parties in the Asean nations to contribute to the

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AEC SPECIAL REPORT process. Instead of carping or petty, cynical criticism, concerned groups and individuals should do their part in ensuring AEC’s timely realisation. Once in its formative stages it would be easier to shape and ameliorate, whereas continual self-doubt and endless questioning will only make it a perpetual nonentity.

Certain steps have already been taken to establish Asean capital market integration, for example. In early October, it was announced that Thailand’s Securities and Exchange Commission, Malaysia’s Securities Commission and the Monetary Authority of Singapore signed a Memorandum of Understanding to set up

an Asean CIS (Collective Investment Schemes) framework. Once in operation from early 2014, investors in the three countries would have a broader menu of investment choices. From this collaboration of these original Asean members, others may join in as and when they are ready to help the process evolve.

Such efforts, although slower and later than they could or should have been, are at least careful and steady. As considered measures taken with the consent of all the stakeholders at each stage, they are at least less hobbled by glitches than they might otherwise have been.

In practice, that means ensuring minimal or zero imperfections in operation

for swifter growth and development. As soon as other Asean countries have the capacity to join the process, they can get on board very quickly.

Already, a set of common standards has been established for cross-border offering of Asean CIS. A certain professional standard for fund managers has also been set, with a sense of industry best practices. The process helps professionalism, competitiveness and ultimately the health of investments. With such efforts, development of AEC and of the Asean Community generally becomes assured.

Other, perhaps more modest, measures that are people-centred can also facilitate

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AEC SPECIAL REPORT establishment of the Asean Community in general and AEC in particular. The purpose is to promote a sense of “Asean ownership” by Asean nationals when they travel between member nations. Several years ago Indonesia proposed a privileged travel document between Asean countries for Asean officials, and Thailand experimented with Asean Lanes at airport immigration counters, but the response in both cases was discouraging. The time may now be right to revisit such efforts, given the clearer direction afforded by the Asean Charter and the push to establish the Asean

Community in two years.

Such goals as Asean connectivity, integration and community cannot succeed without better people-to-people exchanges and crossborder bonding. That means agreeing to, permitting, encouraging and assisting in Asean community building efforts by non-state actors. Asean officials need enough faith in their fellow citizens to make Asean less officious by making it more people-friendly. Once community building by people becomes a powerful reality, it can contribute immensely to inter-state functions.

Asean itself may remain

an inter-state body, but its growth and development as a community with a distinct Asean identity can be realised only with greater participation by the people of Asean. As it has defined itself, Asean is after all an “association of Southeast Asian nations”, not of governments.

Nations are composed of a broad range of private groups and individuals, not just official government bodies.

If Asean governments are still not fully cognizant of the power and capacity of their people to build a strong, healthy and vibrant Asean Community, the sooner they realise it the better for all. ¬

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AEC SPECIAL REPORT

LITTLE AND BIG FISH

UNDER THE ASEAN OPEN SKIES POLICY, LAO AIRLINES WILL FACE INCREASED COMPETITION ON INTERNATIONAL ROUTES WITH OTHER AIRLINES.

AFP

LAOS

| December 13-19, 2013

AEC SPECIAL REPORT SOMSACK PONGKHAO Vientiane Times Vientiane

C

ut off from the ocean by the Annamite Range with rolling mountains that stretch as far as the eye can see, life has always happened at a languid pace in Laos.

While stunningly beautiful, the mountainous terrain means going anywhere or moving anything takes time, but populated by a friendly, easy going people nobody really seems to be in a great rush.

The country is often viewed by outsiders as some kind of rural Shangri-la that time passed by, but as Asia becomes the engine of global growth the pace of life is quickening, even in rural Laos. China’s unquenchable demand for resources has seen the seeds of growth spread south. The road networks are rolling out as rubber and banana farms proliferate, while mobile and television signal is expanding rapidly and with it outside cultural influences are spreading north.

Looming on the horizon is the next big change, with the Asean Economic Community (AEC) coming into force at the end of 2015, in a little over two years' time.

Ostensibly the onset of AEC will bring into being a single market and production base, enabling a free flow of goods and services throughout the entire region.

Some pundits are skeptical that such a monumental

change can actually take place in 2015, given the political considerations and all the vested interests at stake, but whilst it may happen a bit slower than that change will come nonetheless.

Political considerations aside, it is obvious that intraregional trade will continue to gather a momentum of its own. The question for Laos is how to extract the maximum benefits and not let opportunities pass it by.

CONNECTING ASEAN

With increased revenues flowing from hydropower projects and the mining sector in recent years, the Lao government is determined to see the country become a land bridge between Thailand, Vietnam and China.

It is investing large sums of money to upgrade major transport routes including its sections of the Asean highway network and other strategic roads, aiming to facilitate greater regional trade and reap the flow of benefits from that.

It is also connected to the Asean power grid via Nam Thuen II- Roi Et and Thuen Hinboun-ThakekSakhon Nakhon. More connections are set to follow, feeding electricity into the regional grid from Hongsa, Nabong, Xe Pian, Xe Namnoy and Xayaburi.

Numerous big dam projects are in the pipeline and even more are under study. The government has given the go ahead for a Malaysian company to invest in a US$5-billion rail project to link Savannakhet with the Vietnamese border, over a distance of 220km.

AEC SPECIAL REPORT

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KHAMPHAN LATSAMOUTH TRUCKS QUEUE AT THE LAO BAO BORDER GATE TO VIETNAM ALONG ROUTE NO 9 FROM SAVANNAKHET. THE BORDERS ARE GETTING BUSIER AS FREIGHT TRAFFIC THROUGH LAOS CONTINUES TO INCREASE. EXTRACTING BENEFITS FROM PASSING TRADE IS A PRIORITY FOR POLICYMAKERS.

AEC SPECIAL REPORT

| December 13-19, 2013

KHAMPHAN LATSAMOUTH THE LAO GOVERNMENT HOPES TO STOKE THE FIRE OF INDUSTRY BY OFFERING GENEROUS INCENTIVES TO MANUFACTURERS WILLING TO SET UP OPERATIONS IN LAOS. THE CHALLENGE WILL BE SOURCING SKILLED LABOUR TO STAFF THE PLANTS.

AEC SPECIAL REPORT

| December 13-19, 2013

MARKO MIKKONEN SLEEPY LITTLE LAOS IS WAKING UP. THE COUNTRY’S ECONOMY HAS BEEN GROWING AT AN AVERAGE OF AROUND 8 PER CENT OVER THE PAST DECADE OR SO. HOWEVER SUCH RAPID GROWTH IN A SMALL ECONOMY BRINGS WINNERS AND LOSERS AND THE COUNTRY NEEDS TO DIVERSIFY IF IT DOESN’T WANT TO FALL VICTIM TO THE RESOURCE CURSE.

AEC SPECIAL REPORT

| December 13-19, 2013

KHAMPHAN LATSAMOUTH THE GARMENT SECTOR PROVIDES EMPLOYMENT FOR LARGE NUMBERS OF WOMEN FROM RURAL COMMUNITIES WHO SEND THE MONEY BACK TO THEIR FAMILIES. LAOS CURRENTLY ENJOYS PRIVILEGED ACCESS TO EUROPEAN AND NORTH AMERICAN MARKETS DUE TO ITS LEAST DEVELOPED COUNTRY STATUS, THE MAIN REASON IT IS ATTRACTIVE TO FOREIGN FIRMS.

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AEC SPECIAL REPORT

It is also determined to push ahead with the US$7billion rail link from Vientiane to the Chinese border to form the Asean-China rail link, a monumental engineering feat. For a country with a national GDP of just $10 billion, the Lao government is definitely thinking big when it comes to integration.

But the question for Laos is how to extract maximum value from the increasing trade and build the domestic industry base. This conundrum is something the Lao government is well aware of. It is moving actively to establish special economic zones at strategic locations to attract more trade, investment and industry.

The government has now approved nine special economic zones along the Mekong opposite major highways in neighbouring Thailand and one in Luang Namtha bordering China.

Numerous large companies have expressed interest in setting up operations in Laos of late. Japanese camera manufacturers Nikon recently concluded an agreement to set up an assembly factory at the Savanh-Seno industrial zone, while global giant Coca-Cola will open a bottling plant in Laos.

Given the numerous investment incentives on offer, including generous concessions, tax holidays and cheap labour costs, Laos stands poised to entice some manufacturers to relocate from Thailand,

given the recent minimum wage increase and problems with low lying industrial estates.

This is of course the idea of the single market. It allows larger manufacturers to create new efficiencies by leveraging lower wage costs in less developed countries, vertically integrating region-wide supply chains which might include a factory in one of the CLMV countries, assembly or value adding in Thailand or Malaysia and customer service and marketing in the English-speaking Philippines.

The potential benefits it offers larger businesses aiming to establish regional operations are immediately evident; what it will mean for the thousands upon thousands of smaller businesses, many of them family operations, is another question altogether.

THE LITTLE FISH

Back in Vientiane, a Lao fish farmer gazes across the Mekong from where he farms tilapia. His is a relatively simple life and he makes a modest living feeding his fish but a growing number of illegal farms operated by immigrants on the Nam Ngum river to the north are making things more difficult.

Already facing cost pressures, fishermen are wondering what will happen if full scale competition floods in from Thailand as well. In the gulf of Thailand they also breed Asian bass

AEC SPECIAL REPORT or pa kapong, which is a cannibalistic species that will eat its smaller kin. Many Lao people fear that with the onset of AEC, business may become a case of "pa ngai kin ba noy pa soi kin pa xeo", the big fish eating the smaller ones.

Large numbers of pork and chicken farms in and around Vientiane look over to neighbouring Nong Khai with similar concerns. Profit margins for livestock and poultry breeders are already tight due to oversupply and Vientiane meat markets are reportedly afflicted by distortions, with pork and chicken being shipped over the border at Savannakhet before being trucked to Vientiane for sale in the capital.

Phouvong Phongphansay heads the Lao Chicken Farmers’ Group. He is very concerned that when the borders are fully opened, many local egg producers and broiler farms may go bankrupt, unable to compete with Thai operators who have more business experience, greater cost efficiencies and economies of scale.

Banks in Thailand and Vietnam charge about 3-5 per cent interest annually on loans issued to farmers, Phouvong explained, but banks in Laos impose a rate of 13-15 percent per annum, meaning Lao farmers cannot afford to borrow or expand.

Meanwhile Thai chicken and pork conglomerate CP has already established a presence in Laos,

| December 13-19, 2013

operating under a model where farmers build only the pigsties and chicken sheds and the company provides brood stock and guaranteed markets for the pigs, broiler chickens and eggs produced. The contracted farmers will make less money than an independent operation would but their lack of access to finance makes it an attractive option for some.

Lack of access to finance is reported to be one of the main market barriers faced by local SMEs which now make up a very significant proportion of the Lao economy, experiencing considerable growth since the early 1990s when reforms commenced under the New Economic Mechanism started to take effect.

However detailed data for this sector of the economy is lacking. A 1995 study found that the number of SMEs was expanding at around 10 per cent per annum, while the latest comprehensive economic census was undertaken back in 2006.

It found that about 127,000 enterprises were in operation, of which 93 per cent were microenterprises with fewer than five employees.

Numbers are likely to be higher now, but nevertheless, the study illustrates the fact that the vast majority of SMEs in Laos remain largely family operations and that the country still lacks a real manufacturing base.

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FAMILY BUSINESS

Only a small proportion of business-operating households engage paid employees, at around 15 per cent, with the majority either self employed or relying on unpaid family labour. Despite the fact that Laos has a number of large garment factories, average employment in the manufacturing sector was still only 4.3 persons per enterprise at the time of the study.

President of the Lao Young Entrepreneurs Association Valy Vetsaphong admits that most small businesses in Laos are likely to face more challenges than opportunities when AEC comes into force.

She says the country’s production base is simply too small while poor infrastructure and lack of education remains significant impediments to growth.

Majority of business operators have no formal training and learn pretty much everything from their families. Most operators are concerned largely with day-to-day operations rather than long term planning, and rely on methods passed down from previous generations.

“We do business whilst learning from our mistakes,” Valy says, admitting that most people aren’t ready for competition. Many Lao businesses will cease trading immediately if their ventures are not profitable, while “Chinese and Vietnamese traders will spare no efforts

| December 13-19, 2013

to stay in business despite not turning a profit”.

Culturally speaking, many immigrant traders appear to have a more hardnosed attitude to business than most Lao people do. Commercial roads in Vientiane such as Rue Dong Palane are covered with confetti and dancing dragons during Chinese and Vietnamese New Year celebrations, giving some indication of the extent to which foreign businesses already dominate commercial trade in the capital.

With the advent of AEC though, Thais are likely to be among the first to take increasing advantage of emerging business opportunities, with cultural and language similarities likely to give them advantages over other prospective operators.

It begs the question as to how local businesses will fare when the doors are flung fully open, but the extent to which small traders will lose out no one really knows for sure. Associate professor Phouphet Kyophilavong from the National University of Laos' Faculty of Economics and Business Management admitted recently that it will probably take 10 years before Laos sees concrete benefits from trade liberalisation and WTO membership as it gradually becomes more attractive to foreign investment.

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THE-LONG-TERM VIEW

Lao government policymakers though, are adamant that integration is the best and perhaps only option for the country over the longer term. They point to previous growth under the new policy of renovation as proof poverty can be alleviated.

The Ministry of Industry and Commerce statistics show that foreign investment in Laos stood at barely $51 million in the early 2000s, but the figure had ballooned to $2.9 billion in 2012, with more revenues starting to flow from big mining and hydropower projects.

In the early 2000s, trade volume was only about $865 million including exports of $324 million, but the figure more than quadrupled to $4 billion in 2012 including exports of $1.6 billion. Meanwhile tourist arrivals blossomed from a mere 100,000 arrivals in 2000 to more than 3 million visitors last year.

Over the same period, average income per capita grew from a little over $300 in 2000, to almost $1,400 in 2013 as the Lao population hit 6.5 million people. They are considerable numbers. “This growth was made possible

because of integration,” stresses Deputy Director General of the MIC’s Foreign Trade Policy Department Saysana Sayakone.

The Ministry of Industry and Commerce is also heading the efforts to mitigate the negative effects of integration on SMEs, providing management training and facilitating access to markets and finance. As part of its threepronged strategy, the ministry has established a dedicated fund for SMEs which will provide low interest loans to eligible businesses.

It will not be available for everyone though and the size of the funding pool is not clear.

“Not all SME operators will have access to the loans, only those whose business proposals are poised to be profitable and convince the fund’s executive board,” Saysana said.

THE BIGGER FISH

Sectors traditionally dominated by state-owned enterprises like telecommunications, aviation, cement, and oil and gas should fare better under integration than SMEs due to their prominent position in the market and well-established connections. However, they too will be subject

AEC SPECIAL REPORT to greater competition from outside interests looking to expand their operations to Laos.

Thailand’s oil and gas conglomerate PTT Plc recently announced plans to spend 2.45 billion baht ($76 million) to expand its retail oil business before AEC takes effect. Laos is among the countries where it has expansion plans, attractive due to its proximity to existing depots in Issaan and its rapidly growing vehicle fleet. Fuel consumption in Laos is increasing faster than GDP, at 8-9 per-cent per year.

Almost 1 billion litres of fuel is imported to Laos annually, of which around 250 million litres is imported by the Lao State Fuel Enterprise. Deputy Director Phayboun Phomphaphi admits they will have to partner with other regional companies to enhance financial capacity and remain competitive.

Thailand’s PTT envisions 60 sites in Laos, up from the current 20. It also plans 45 petrol stations in Cambodia, up from 15 at present, 60 pumps in Myanmar, up from one, and 135 in the Philippines, up from 50.

In contrast to PTT, Lao State Fuel doesn’t have any regional expansion plans and will concentrate on shoring up its share of the domestic market first. “Of course, we will improve our services and study how we can deal with market liberalisation,” Phayboun said.

The cement industry is another that will face increased competition and given the myriad of

| December 13-19, 2013

road construction and hydropower projects being planned it is a very attractive market indeed, one which domestic interests would be keen to protect.

Lao Cement Company has traditionally enjoyed a monopoly with import restrictions in place but will now have to face competition from Siam Cement among others, which also has regional expansion plans.

“If we can keep our costs competitive we are confident that we can continue to dominate the Lao market,” asserts company director Thongpon Kingkhamphet, who doesn’t fear market liberalisation.

Domestic demand still exceeds current supply in Laos, which can produce only 1.5-1.6 million tonnes per annum while the demand stands at 1.8-2 million tonnes per year and is growing between 10 and 20 per cent annually.

Vangvieng Cement Plants I and II currently produce 240,000 tonnes and 80,000 tonnes per annum respectively. A much larger third plant is scheduled to commence operations next year, with a capacity of around 1 million tonnes per annum.

One of the main challenges for Lao Cement is fluctuations of the price of coal imported from neighbouring countries. Soon this will no longer be the case as the enterprise is planning coal mining operations in nearby Hinheup and Feuang districts, which are currently undergoing feasibility studies.

Meanwhile under the Asean open skies policy,

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AEC SPECIAL REPORT

Lao Airlines will face increased competition on international routes, with Bangkok Airways, Air Asia and other airlines having already opened flights to Laos. However the surge in business travel is opening up more opportunities as well.

Lao Airlines plans to open more direct flights not only to Asean countries but also to China, Korea and Japan as part of preparations for AEC. It just commenced daily flights between Vientiane and Incheon, South Korea at the end of last month, up from three times a week due to rising demand. The airline also announced recently that it will reopen direct flights from Vientiane to Phnom Penh after previously cancelling the route back in 2008. In 2015, Lao Airlines plans to buy two more Airbus A321s to grow its aircraft fleet.

Of all the larger enterprises in Laos, perhaps it is the producer of the national lager which is best poised to benefit from regional integration and the new markets it will offer. Known throughout the world to be one of the best beers in Asia, Beerlao will sell very well in neighbouring countries if prohibitive taxes are removed.

In anticipation of AEC, Lao Brewery Company has already opened agencies in Thailand, Singapore, Myanmar, Cambodia and Vietnam.

They are yet to open in Brunei, Indonesia and Malaysia, those being Muslim countries.

Beerlao aside though, most state enterprises and many domestically focused SMEs will be primarily concerned with preserving their Lao market interests as AEC looms large on the horizon.

SHORING UP REVENUES

In addition to pressure on local enterprises, government regulators will also have to deal with a significant hit to revenues when tariffs are reduced or abolished.

This will be a particular problem for Laos and the other newer members of Asean, those being Cambodia, Myanmar and Vietnam. Large sections of their populations remain impoverished and exist largely outside the cash economy, meaning they have much smaller tax bases from which to draw and yet greater need for infrastructure.

This has been recognised by Asean and CLMV countries will be granted special dispensation, with some tariffs allowed to remain in place until 2018, allowing regulators and businesses more time to adjust.

For its part, Laos has already reduced tariff rates to zero for 79 per cent of all products

AEC SPECIAL REPORT

listed under the region-wide Common Effective Preferential Tariff (CEPT). By 2015, some 8,879 listed products will have zero tariffs, but an extension until 2018 has been granted for 326 products for which it is considered necessary.

In addition, tariffs of up to 5 per cent will be allowed to remain in place for 266 products listed in the sensitive category, those being mostly agricultural commodities. Under the CEPT, there is also a general exemption category for products considered of national strategic or cultural value. Laos has nominated 87 product categories for exemption, with tariffs of between 5 and 40 per cent to apply as per usual.

The Lao government is also in the process of implementing a value added tax in order to compensate for the lost tariff revenues, VAT being the most widely used consumption tax both in OECD countries and other Asean nations as well.

This will pose problems in terms of collection as rather than being levied at the border as a single fee it applies to every product transaction.

Naturally this will be very difficult to implement in a country where many businesses exist in the informal economy, not even having bank accounts let alone accurate bookkeeping records.

| December 13-19, 2013

However, there are revenue leakage problems at the borders and the structure of the VAT may entice more businesses to declare their business transactions. Unlike a sales tax, VAT is only levied on the value-added component in the supply chain, with businesses eligible for a refund on the component they paid at purchase once they sell the goods.

Depending on their sales volumes and the level at which the VAT is set, it should entice more businesses to join the formal economy.

In Vietnam, for instance, when turnover tax was replaced by VAT, tax revenue grew from around 11 per cent of GDP to more than 17 per cent in the matter of a couple of years, but it has a larger manufacturing base.

Drawing more small businesses into the formal economy has other advantages. It will drive them to keep modern accounting systems which will allow for better business planning and greater competitiveness over time.

BARRIERS TO BROADENING

However the country must still do more to broaden its industry base for the smaller businesses to supply. Among the most common

AEC SPECIAL REPORT

complaints have been the long delays at customs processing, up to 10 days reportedly, and also the rising cost of electricity.

Laos has made significant progress towards the implementation of its national single window, scheduled to commence operations in 2014, forming part of the Asean Single Window which alongside tariff reductions, is the central plank of reforms to facilitate the free flow of goods and create the common market.

Meanwhile, with Laos aiming to become the ‘battery of Asean’, local manufacturers are frustrated about the high cost of domestic electricity. This is largely because, to date, most hydropower projects are foreign-funded and power purchase agreements concluded with outside investors dictating the price of electricity, which is something the country needs to address.

However, Laos cannot afford to rely solely on trying to attract more manufacturing. According to the World Bank’s Investment Climate Assessment 2011, labour productivity is lower than most comparator countries. Meanwhile some estimates suggest the country could face a labour shortage of up to 500,000 workers by 2015, mostly in the agriculture and garment sectors.

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Director General of the National Economic Research Institute, Dr Leeber Leebouapao warns that while the country has a shortage of labourers, most of the management level positions may go to more highly qualified graduates from other countries if the education system is not rapidly improved.

Concerted efforts are being made in this regard. Private institutes have been prohibited from opening new tertiary courses until standards are improved while young people are being encouraged to undertake vocational training to fill the skills shortage instead.

According to the World Bank, relying on labour intensive export industries may constrain the diversification required to ensure more equitable growth. Last year, the ADB warned that whilst developing Asia has reduced poverty faster than any other region in the world, it has come with rising inequality.

This is in contrast to the ‘growth with equity’ story that marked the transformation of the newly industrialised economies in the 1960s and 70s and more recent trends in Latin America.

If left unchecked it could undermine the momentum for economic growth and the quality of life for all Asians, according to the bank.

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A QUESTION OF TIME

Many observers believe that AEC is a very ambitious project that will take longer to implement than the time frame set out, even with political will from all member countries. Reducing tariffs is only the first step and addressing pervasive non-tariff barriers will be much more difficult, while assessing progress is hard due to bureaucratic opacity and the vagaries of the scorecard system.

Charged with overseeing the transition to a $1.8 trillion common market, the Asean Secretariat had a paltry budget of around $15 million in 2011, and a professional staff of just 200 or so. The fact that it is equally funded by the 10 member states limits the Secretariat budget to the financial capacity of the weakest members like Laos.

Despite repeated urging to reform the funding structure, national leaders have been reticent

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to do so. Add to this the fact that AEC has already been put back by a year due to complications with visas and concerns over issues like drug trafficking, it appears that it may take some time to fully implement and the changes to really come into effect.

With its small economy, relative isolation and the enduring reality that things happen a little slower in Laos, the country should be sheltered from the most dramatic changes that will come with the inception of AEC, at least at first anyway.

The question for Laos, like the other newer members, will be whether it can learn from the regional experience and ready itself in time; whether it can use its abundant natural assets wisely, diversify its economy and spread the benefits of rapid growth among the wider population or whether the money will flow to the big fish alone while small farmers are left watching the trucks rumble past and local businesses floundering. ÂŹ

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AEC SPECIAL REPORT YE AUNG THU/ AFP PHOTO

MYANMAR

GETTING READY FOR THE MAJOR LEAGUE Nyeinchan Win and Thet Mon Htun Eleven Media

O

f all the uphill battles Myanmar expects to face in the near future, surely one of the steepest will be meeting expectations to increase its Gross Domestic Product (GDP) by the time the Asean Economic Community (AEC) is launched in 2015.

The government is working hard to establish the necessary fundamentals and framework to achieve this goal. As one of the least developed countries

Yangon

in the region, however, Myanmar continues to be plagued by disunity and lack of cooperation between government ministries and public and private sectors.

According to a recent survey, Myanmar possesses the lowest per capita GDP among the10member Asean bloc, at US$875 (Ks 850,753), while Singapore tops the group at $50,130.

Malaysia, Thailand, Indonesia, and the

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Marko Mikkonen/ AFP SLEEPY LITTLE LAOS IS WAKING UP. THE COUNTRY’S ECONOMY HAS BEEN GROWING AT AN AVERAGE OF AROUND 8 PER CENT OVER THE PAST DECADE OR SO. HOWEVER SUCH RAPID GROWTH IN A SMALL ECONOMY BRINGS WINNERS AND LOSERS AND THE COUNTRY NEEDS TO DIVERSIFY IF IT DOESN’T WANT TO FALL VICTIM TO THE RESOURCE CURSE.

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AFP

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Philippines are the mid-ranking countries, with GDPs of $9,941, $5,116, $3,563, and $2,341 respectively. Vietnam and Laos, at $1,403 and $1,279 respectively, still score higher for GDP than Cambodia and Myanmar.

Since President Thein Sein’s quasi-civilian administration took office in 2011, the country’s political environment has seen many liberal changes.

These changes have prompted Western nations to lift economic sanctions and provide support through financial aid, thus helping Myanmar rebuild as a democratic nation and strengthening its ability to participate in AEC. However, basic sectors such as health, education, social services and the economy continue to struggle. These and other challenges have raised the question of whether the country is truly ready to join the big club.

ECONOMIC REFORM: A WORK IN PROGRESS Officials from every department and ministry have worked hard to prepare for membership in the regional cooperation. There have been workshops and economic forums and work committees established to address AECrelevant issues. The Ministry of National Planning and Economic Development has facilitated AECtype actions such as economic blueprints on such themes as Single Market and Production Base, Free Flow of Goods, Investment Capital, and Skilled Labour.

Last November, the government passed the new, more flexible Foreign Investment Law. In April, it began floating the official currency. A stock exchange is now being implemented and should be running by 2015. Many macro and micro investment laws have been amended. On the ground,

missing infrastructure, and energy and water supply deficiencies are being addressed with the help of foreign countries. China, India, and Southeast Asian countries like Thailand, Cambodia, and Vietnam are being targeted as key trading partners, with special economic zones (SEZ) and deep-sea ports as part of the strategy. Aiming to reach Cambodian and Vietnamese borders, Myanmar and Thailand are working closely to develop the Dawei SEZ and Deep Sea Port, which will eventually include a highway system and express railways to encourage trade. The Thilawa SEZ and Sea Port, located in Myanmar’s commercial hub of Yangon, is expected to usher in the country’s dawn of industrialisation.

The Kyaukpyu SEZ and Deep Sea Port will be a centre of outsourcing to China and India.

In June, Myanmar hosted the World Economic Forum on East Asia for the first time. The

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event’s impact was enormously positive, prompting multinational corporations from the US, Europe and Asia to invest in Myanmar.

THE PUBLIC: CHANGING A NATIONAL MINDSET

Although it seems that Myanmar is making progress, in real terms very little has been done effectively because of the country’s financial and trade deficit.

“Lack of collaboration is the biggest issue in our country. Every sector has to work together with a good mindset. Collaboration is needed between the government and private sector, between private and public; and between the public and the government,” said Myo Thet, vice president of the Union of Myanmar Federation of Chamber of Commerce and Industry (UMFCCI).

If the government doesn’t wish to cooperate with the public for the sake of the country’s business,

it will still be hard to participate in AEC by 2015, he told Eleven Media.

Economists point out that most of the country’s businesses are still run by cronies while others lack transparency in financial transactions, taxation, and revenues. The most important thing that has to change, they say, is the people’s mindset.

A small percentage of the country’s population believes that AEC is all about free trade. They are unaware of the grouping’s other functions, despite the government’s efforts to raise awareness on AEC. In some ways, AEC awareness is class-based. Naturally, business people are aware of it, but even this knowledge is not in-depth.

Most confuse AEC with the Asean Free Trade Agreement.

“People in towns and cities apart from Yangon have less awareness about the Asean community.

Many local business people are afraid of AEC. They assume it will

threaten them, as multinational corporations will enter our country with better quality goods and more reasonable prices,” said Kyaw Lin Oo, coordinator of the Myanmar People’s Forum.

As one high government official told Eleven Media: “Actually, we are not ready for the AEC; we are just pretending to be ready. The percentage of people participating [in awareness forums], including both public and private sectors, is very low.”

BOOSTING SKILLS TRAINING AND TECHNOLOGICAL KNOW-HOW

Economic analyst Geoffrey Hoffman said Myanmar should be more successful, given its rich natural resources, but mismanagement has driven the country into poverty.

“Centralisation and monopolising of the country’s businesses are other factors,” he said, adding

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that the country needs to boost capacity building, human resources development, skills training, and education. On the other hand, he says, Myanmar could increase its technological knowhow through joint ventures with foreign entrepreneurs. For instance, adopting the BOT system (BuildOperate-Transfer) would be very useful for a country like Myanmar.

“We will get technology assistance and skills. That’s crucial for us. If we barred those foreign investments due to fear of their influence in our market, then the market wouldn’t be taken seriously in the long run,” said Than Htut, deputy director general in the Foreign Economic Relations department of the Ministry of National Planning and Economic Development.

The new foreign investment law is said to be liberal for foreign trade, permitting a fair percentage of joint

ventures depending on the nature of the business. It relaxes taxation and allows other incentives for foreign investment. Local economists and officials say the law is a win-win for both locals and foreigners.

International investors prefer doing business in countries with strong intellectual property rights (IPR) laws. Myanmar and other countries with “least developed” status recently received an extension from the World Trade Organisation on international standard requirements for TradeRelated Aspects of Intellectual Property Rights (TRIPS). The deadline was extended to June 2021 from July 1 this year, according to the Myanmar Times.

TRADE VOLUMES: BECOMING A GLOBAL PLAYER

During the 2012-13 fiscal year, total trade volume for Myanmar was $18.42 billion. Of that figure,

the import volume was $9.34 billion and export accounted for $9.08 billion. This year, Myanmar has so far earned $5.68 billion from exports, up from $4.69 billion during the same period last year. Strong agricultural and industrial exports are among the key factors behind the surge.

During the first half of this fiscal year, the country earned more than $2 billion from exporting industrial products, $1 billion from agricultural goods, $1 billion from mineral exports, $360 million from timber and wood products, $270 million from marine products and $5 million from animal products.

Currently, Myanmar is drafting a national strategy to boost exports and build its competitive advantage.

“The national export strategy should comply with our national all-round plan. This is an important step towards the mainstreaming of trade and the country’s national

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development plans,” said Deputy Minister for Commerce Pwint San. The new government strategy prioritises export goods such as rice, beans, marine and wood products.

Tourism, too, has been mentioned as a prioritised service, and rubber cultivation is seen as having good prospects. The country currently relies on a few key export products, such as rubber, beans and grains.

While the strategy aims to develop priority sectors, it will also explore the growth potential for new and existing products.

These steps are in line with the government’s objective of supporting traditional export sectors, such as agriculture, while promoting export diversification.

The strategy also aims at improving small- and medium-sized enterprises (SMEs), providing them access to finance, trade information, export facilitation and logistics.

As a developing country,

Myanmar’s national economy depends heavily on its export earnings.

“We can achieve greater export earnings and also greater employment opportunities if we can export value-added products. We need to find new export markets.

But in order to achieve this goal, we need to become more competitive,” said Win Aung, president of the Union of Myanmar Federation of Chambers of Commerce and Industry (UMFCCI).

TOURISM PROMOTION— PREPARING FOR THE DELUGE

Implementation of AEC will undoubtedly provide a boost for Myanmar’s tourism industry.

An agreement between regional partners to provide free entry visas is sure to draw more tourists. Even the government’s changing policies in the past two years have contributed to

the increase in tourist arrivals.

“Myanmar is now working to relax more of its visa regulations for tourists. The Asean free visa system will be implemented by the end of this year,” Tourism Minister Htay Aung noted.

Myanmar has recently signed an agreement with most of the region’s countries, including Indonesia, the Philippines, Vietnam and Thailand, to provide free entry visas in order to boost tourism development.

As a new source of wealth, tourism is seen as a critical sector for poverty reduction and job creation in Myanmar.

During June’s World Economic Forum on East Asia held in Naypyidaw, the government announced its first master plan to promote sustainable tourism.

Whatever Myanmar’s charms as an unblemished “final frontier” for tourism,

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changes seem inevitable with the growing numbers. The government projects 7.5 million tourist arrivals per year by 2020.

According to a tourism ministry report, last year’s tourist arrivals stood at 1 million for the first time, and tourism revenue accounted for $700 million.

“Last year, about 1.06 million foreign tourists visited the country. The number of tourists visiting the country in the first eight months of this year passed the one million mark— an increase of 58 per cent. The country expected 1.8 million to 2 million tourists to visit this year,” Vice President Sai Mauk Kham told the media on World Tourism Day on September 27.

READY OR NOT, HERE COMES AEC

It doesn’t matter whether Asean countries are ready or not: AEC will be introduced in 2015.

“Myanmar is getting ready for this opportunity because the country has been left behind for half a century,” an official from the Ministry of National Planning and Economic Development said, adding that the economic community will have a major impact on every sector and will boost Myanmar's development.

Myo Thet, vice president of the UMFCCI, says Myanmar is preparing for a 360-degree turn once AEC is launched.

“We are taking two chairmanships concerning the AEC: the Asean Business Advisory Council and the East Asia Business Council.

The former will be chaired

by UMFCCI president Win Aung,” he said.

Myo Thet said Myanmar has scheduled to convene many Asean summits,

forums and meetings since the Asean chairmanship was transferred last month.

Being part of AEC will create much needed opportunities for investors and employees alike. Myanmar is a country that has badly suffered from “brain drain”, with her nationals scattering to many countries in Southeast Asia, especially Thailand, Singapore and Malaysia. Some live abroad to further their studies, while others have left—legally or illegally—in search of better employment opportunities.

Advocates of the grouping say AEC hopes to create an atmosphere in where all employees will get equal opportunities with standard wages and no discrimination.

It also expects to terminate the cross-border scourge of human trafficking. ¬

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AEC SPECIAL REPORT PHILIPPINES

AEC,WHAT'S THAT? Michelle V. Remo Philippine Daily Inquirer Manila AFP FILIPINO FARMERS ARE AMONG THOSE THAT WILL BE AFFECTED BY INTEGRATION IF THE AGRICULTURE SECTOR CONTINUES TO BE ILL-EQUIPPED.

T

he envisioned Asean Economic Community (AEC) is supposed to be fully operational in two years , but awareness of the implications of regional integration is not widespread among Southeast Asians.

In the Philippines, average citizens outside the agriculture and trade sectors have not heard of it or have not bothered understanding what it is.

“No, I don’t know what that means,” said a 59-year-old mother of two who works as a part-time marketing agent in the country’s

metropolis when asked whether she knows what Asean integration is.

The lack of awareness is the reason proponents are urging governments to embark on a promotional campaign.

But on the opposite end of the spectrum, some Filipinos working in sectors expected to be significantly affected

by AEC are fully aware of it and have no qualms expressing their reservations.

The Philippine Maize Federation Inc. (PHILMAIZE), a nonprofit organisation of corn producers in the country, acknowledges

| December 13-19, 2013

AEC SPECIAL REPORT the benefit of a bigger market that will result from integration.

However, the group said Filipino corn farmers would not be able to take advantage of the bigger market—and will even be prone to income losses—if government support for their sector remains lacking.

PHILMAIZE president Roger Navarro said in an interview that the Philippines’ Department of Agriculture has an ongoing programme that provides technical assistance to the country’s corn farmers to help boost their production. He said corn farmers appreciated the support, which was enough to allow them to continue serving local demand.

However, he said, much bigger investments were needed for their sector to be competitive against counterparts from other Southeast Asian countries.

“The problem is that governments are talking among

IN AN INTEGRATED ECONOMIC COMMUNITY, PHILIPPINE BRANDS LIKE JOLLIBEE WILL HAVE MORE CHANCES TO DO BUSINESS OVERSEAS.

themselves in pursuing integration without consulting the affected people, including corn farmers, on what we need in order to be prepared for it,” Navarro said.

He said corn farmers in the country sorely lack post-production facilities. Corn farmers continue to be ill-equipped for a much tougher competition environment that will materialise once Asean economies integrate, Navarro stressed.

Also, he said, there was a lack of enabling government policies to boost their competitiveness.

For instance, Navarro said, farmers in the country have difficulty accessing credit.

While loans are necessary to finance needed investments in agriculture, Navarro said, banks are reluctant to lend to farmers.

The Philippines actually has the Agriculture Credit Reform Act that requires banks to allocate a certain portion of their resources for lending to the agriculture sector. The law imposes fines on banks that will fail to comply.

However, Navarro said, the problem with the law is that banks can easily afford the fines and regulators allow them to simply continue paying the penalties. As such, he said, the objective of making credit easily accessible to farmers has so far not been achieved.

“We need government policies that will truly help farmers get the financing they need,” he said.

Another example of the lack of enabling policies,

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AEC SPECIAL REPORT AFP FARMERS BEG THE PHILIPPINE GOVERNMENT FOR MORE FINANCIAL SUPPORT.

he said, is the country’s unfavourable tax environment.

Navarro said corn farmers were developing the so-called “rice corn”, which can serve as an alternative for rice as a staple. Rice corn is corn that resembles rice after undergoing a certain mechanical process.

Navarro said PHILMAIZE intends to launch the rice corn soon, but its success is challenged this early by the Bureau of Internal Revenue (BIR). Rice corn, unlike other agricultural products, shall be subjected to the 12-per-cent value-added tax (VAT), he noted.

This is because according to the country’s tax rules, only agricultural products that have not undergone mechanical processes are exempted from the VAT. Because mechanical processes give “added value” to an agriculture product, it becomes subjected to the tax.

“We are innovating because we want to contribute to efforts to increase supply of rice in the country. However, the BIR is

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AEC SPECIAL REPORT AFP SOME OF THE PHILIPPINES' HOMEGROWN BRANDS LIKE SAN MIGUEL ARE FINDING MARKETS OVERSEAS.

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AEC SPECIAL REPORT

poised to impose tax and such is not helpful,” Navarro said.

He said if the government was sincere in helping the agriculture sector be more competitive, supportive tax and other policies should be in place.

Meantime, the Samahang Industriya ng Agrikultura (organisation of agriculture industries) declared that the Philippine agriculture sector is not yet prepared for Asean integration— and said the government should acknowledge it.

The organisation, more commonly referred to as SINAG and operates as an umbrella entity of various agricultural groups, said integration should be delayed until sufficient investments and appropriate government assistance were given to the agriculture sector.

SINAG includes as members groups engaged in agribusiness,

grains, hog raising, fertiliser and pesticide making, and vegetable growing, among others.

Rosendo So, chair of SINAG, said it was unwise for the government to simply agree to calls from the international community to fully embrace liberalisation without first doing its homework.

So said the Philippines’ farm sector lacks post-harvest facilities, while the country’s backyard industry does not have sufficient slaughterhouses.

He also said there was lack of investments in farm-tomarket roads and irrigation.

“If Asean integration pushes through at the current state of the country’s agriculture sector, many people will lose employment and sources of incomes,” So said.

He said before the government thinks of participating in regional integration initiatives, it must first pour

the necessary investments in the agriculture sector.

The Philippine Chamber of Commerce and Industry (PCCI), one of the most influential business groups in the country, shares the view that Asean integration could bring trouble to some of the country’s small industries that are not fit yet for a tougher competition environment.

Philip Romualdez, PCCI vice president for industries, said that without any government assistance, some industries could suffer shutdowns, leading to job losses. Under this scenario, he said, the Philippines, instead of meeting the objective of reducing poverty incidence at a significant pace, moves further away from the goal.

“If concerned sectors do not get proper assistance, they would be confronted with challenges that they may not be able to

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AEC SPECIAL REPORT

surmount,” Romualdez said.

“This is exactly what we want to avoid—job displacement—considering that the biggest concern of this country right now is how to alleviate poverty,” he adds.

PCCI said it is not opposed to the idea of integrating Asean economies and acknowledges that the plan has merits. But for the group, industries that are still unprepared for an environment of borderless trade should be getting all the assistance they need in order to develop and become competitive. And the assistance, PCCI said, is urgent.

“To help small industries prepare for Asean integration, there should be investments in capacity building, training, technology, and innovation.

There is a lot of work to do because 2015 is just two years away,” Romualdez said.

He added that the

government should play a major role in developing the country’s industries.

PARTICIPATION A MUST

Dr Linda Medalla, a senior research fellow at the staterun Philippine Institute for Development Studies, on the other hand, said a member country would be placing itself at a big disadvantage if it would not be part of the AEC. “Just imagine Asean integration without the Philippines,” Medalla said.

She said the Philippines, or any Asean member country for that matter, would be substantially left behind in terms of investments, jobs, economic output and income if it would exclude itself from AEC. While its neighbours would be enjoying the benefits of free flow of foreign investments, the non-participating country

would most likely be left out in investment-making decisions of multinational companies eyeing the huge Asean market.

With this backdrop, she said, being part of AEC is a must.

“The fact that they are grouped together, Asean member countries achieve a greater voice and increase their value as an investment destination,” Medalla said.

Medalla noted that although Asean integration has its disadvantages, it benefits member countries on a net basis.

“Countries should not fear integration. On the contrary, they should welcome it and look forward to its benefits,” she said.

“With integration, Philippine food products like Oishi and Jack & Jill [brands of junk food] and Belo beauty products, for instance, will have a much wider market and a much bigger number of customers,” she said.

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AEC SPECIAL REPORT

Medalla said in an environment of free flowing investments, a country that is part of the AEC will enjoy benefits of improved infrastructure, increased employment, and SME development through training by multinational companies, etc.

DOUBTS OVER THE EU MODEL

Meantime, the crisis confronting the euro zone has led some to question the prudence of integrating Asean economies. It is unavoidable that the crisis in Europe elicits fear that Asean countries may face the same problems members of the European Union currently deal with once they integrate.

Proponents, however, say the blueprint for AEC is quite different from that of the EU. The very basic difference is the amount of sovereignty countries give up for integration.

While the EU created supranational institutions—such as the EU Council and Parliament for decision making, EU Commission for monitoring, and EU Court of Justice for dispute settlement— to facilitate the operation of member countries as one unit, AEC will not have those. Instead, government regulators in each member country will continue to fully perform their functions.

Moreover, while EU member countries operate under a legal framework that helps ensure observance of laws governing integration, AEC has much flexibility. Decision-making in AEC will be done always in accordance with the principles of consultation and consensus among member-countries.

DOUBTS, FEARS

There are also doubts on

whether the vision for an integrated economic community will indeed be realised in 2015 given that several industries across Asean member countries appear to still be unprepared.

The Asian Development Bank (ADB), which backs Asean integration, said a fully functioning AEC will not happen in 2015.

“It is becoming very clear that the 2015 self-imposed deadline is unlikely to be met,” ADB’s Menon said.

In his view, considering the rate of progress of member countries in meeting the prerequisites of integration, AEC will be realised sometime between 2020 and 2025.

“The 2015 deadline is unachievable. An interim phase of transition to full integration may happen in 2020, and full integration may be realised in 2025,” Menon said.

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ASEAN SCORECARD

Asean Secretariat, the body tasked to monitor progress toward and help facilitate integration of member economies, said regional integration is not something that happens at a snap of a finger.

Rather, it said, integration is a gradual process of fulfilling the various prerequisites stated in the blueprint for AEC. Although Asean countries are not yet “fully integrated”— and may miss the target of full integration by 2015—they have, nonetheless, started the process of integration by having achieved some of the requirements for realising AEC, the Asean Secretariat said in a report on its latest scorecard for Asean integration.

Nonetheless, the Asean Secretariat said member countries have been delayed

in the implementation of a still significant number of requirements to realise AEC. The report, “Asean Economic Community Scorecard”, shows that the region as of the end of 2011 has achieved 67.5 per cent of the targets set. It said Asean member countries completed 187 out of the 277 measures due as of the end of 2011.

“This shortfall mainly results from the delays in ratification of signed Asean-wide agreements and their alignment into national domestic laws as well as delays in implementation of specific initiatives,” the Asean Secretariat said in the report.

ADB’s Menon said the delays indicate that Asean member countries lack the will to implement AEC. Although all the countries have acknowledged the benefits of AEC, he said governments have yet to fully

back their words with actions.

“It seems governments have to be convinced that what they signed up for is worth implementing,” he added.

Menon said the delays in the implementation of the prerequisites to the AEC may also be blamed on lack of proper communication of the objectives of the integration.

He said if Asean member countries truly believe in the benefits of integration, their governments, and perhaps supportive private-sector entities, may embark on a public awareness campaign on the AEC. Proponents of AEC say a lot of income growth opportunities are in store for Asean member countries once they integrate.

The challenge for the countries, they say, is to move out of their respective comfort zones and take the plunge. ¬

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AEC SPECIAL REPORT

THAILAND

COMMUNITY

‘A PROCESS, NOT AN EVENT’ Supalak Ganjanakhundee The Nation Bangkok

AEC SPECIAL REPORT

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The Nation IN AN INTEGRATED ECONOMY, THE TASTE FOR THAI COFFEE WILL GO BEYOND BORDERS.

AEC SPECIAL REPORT

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The Nation THAI COFFEE SHOPS LIKE THIS ONE MAY NO LONGER BE UNIQUE TO THAILAND AS THEY BRANCH OUT TO OTHER COUNTRIES UNDER AEC.

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AEC SPECIAL REPORT

W

hen the clock ticks at 00.01 on Dec 31, 2015, the Association of Southeast Asian Nations (Asean) will officially turn into a community, but 600 million people will see nothing dramatically change in their normal lives. They can celebrate New Year as usual. No flood of goods and people from other Asean members to their markets and homes.

“Community is a process not an event. We would see things change and evolve continuously, but we don’t know where and when it would end,” said Thai Foreign Ministry’s director of Asean Affairs Arthayudh Srisamoot.

Asean members have the ambition to liberalise and integrate their economies by promoting free movement of goods, investment, service and manpower by the end of 2015. Tariffs and nontariff barriers are being reduced and will be eliminated eventually.

In Thailand these days, nearly all schools are decorated with the Asean flag and national flags of 10 Asean members to remind the public that the country is on its way to becoming part of an integrated community.

The AEC could be many things in people’s perception. It might be opportunity as well as risk for their business. It could be hope for prosperity as well as fear over the loss of jobs to competitors from other members.

“Look at the bright side, the single market and production base that AEC tries to create is expected to expand the small and medium-sized markets in individual members to a bigger one with a combined 600 million population. Its size is bigger than European Union and half the Chinese market. Thai businesses were told that their markets are no longer just 65 million population, but it will be 600 million in the next three years. The single market makes a logical economy of

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A E C S C O R E C A R D 2 0 0 8 -2 0 1 3

Note: The table indicates the tasks done to liberalise the economy towards the 2015 community integration.

Source: Asean

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TRADING ACROSS BORDERS IN ASEAN

Source: World Bank (2012)

AEC SPECIAL REPORT

scale. It’s set to reduce business cost and create a multiplier effect to economies of the regional grouping,” Arthayudh said.

ZERO TARIFF

Trade liberalisation in Asean has begun long ago since the beginning of 1990s when the group agreed to create the Asean Free Trade Area (AFTA) in 1992 to eliminate import tariff among them.

The majority of Asean members such as Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand have already eliminated tariff down to zero for 99.5 per cent of their import items since 2010. The rest is expected to bring the import duty down to 0 per cent by 2015.

Low import duty within Asean has some good side effect to trade with countries outside Asean, as it puts pressure on trade with outsiders to have low tariff in order to be competitive, according to Arthayudh.

As Asean puts its tariffs down, Japan and China have taken the move to cut tariffs aggressively.

| December 13-19, 2013

“A major task that Asean has to do now is to eliminate non-tariff barriers among the members. Non-tariff barriers could be seen in many forms such as complex trade regulations, sanitary and hygiene measures. These barriers highly cost business and investment. If the Asean single market could eliminate all or at least minimise the non-tariff barriers, the cost for doing business in this region will be reduced and become competitive,” Arthayudh said.

However, there is good news for trading with Asean as cost of export and import per container is not relatively high, when compared to other countries or trade bloc. The cost of trading in Asean is close to that in the countries of North America Free Trade Agreement (Nafta), according to a World Bank survey.

INVESTMENT, TRADE FACILITATION

The Asean single market is poised to lure foreign investment to flock to the region. The investors will enjoy more

AEC SPECIAL REPORT

accessibility to other nine markets.

Japanese automobile producers in Thailand will significantly benefit from AEC by taking Thailand as a bridge to sell more cars to other Asean member countries freely.

In practice, the Asean single market has not yet functioned well enough as intra-Asean economic transaction is quite low.

Former Asean Secretary General Surin Pitsuwan said: “The trade and investment among members of other regional grouping such as European Union or Nafta is relatively high compared to the intra-Asean one. The EU and Nafta trade and invest among themselves much more than with outsiders, perhaps as much as 80 per cent of total trade, while Asean members trade only accounts for one-fourth of total trade.”

Of the US$2.3 trillion of Asean’s total trade volume, only 25 per cent is traded among the 10 members. IntraAsean investment makes up of only 23

| December 13-19, 2013

per cent of a total $114 billion foreign direct investment in the region.

But Arthayudh argued: “The share of 25 per cent of the Asean’s total trade was a dramatic improvement, when compared to only 13 per cent since Asean began its free trade agreement in 1992.”

The intra-Asean trade has showed a positive trend as it grew continuously.

Thailand, for example, has traded with Asean more than the world’s big three markets: United States, Europe and Japan. “Asean is our biggest trade partner now, while each of the big three markets accounts for only 10 per cent of Thailand's total foreign trade,” he said.

“While the US economy is in crisis and the EU is also in crunch, we have Asean market to substitute,” he said.

“But we are not saying that the intraAsean trade and investment will increase at the expense of other regional and global trade,” he said. “I mean the volume of our trade with other markets outside Asean is still high, but the proportion

AEC SPECIAL REPORT

of trade in Asean is increasing.”

Asean is looking for ways to increase trade among them by making attempts to boost trade in service sector, Arthayudh noted: “Liberalisation in the sector is an uphill task.”

NO STRONG COMMITMENT

With only a 25-per-cent share of total trade of the entire group and 23 per cent of intra-Asean investment, it is pretty clear that the figure shows no strong sense of economic community.

Readiness, development gaps, protectionism and some technical problems are reasons for such low economic transaction within Asean.

Former Malaysian Prime Minister Mahathir Mohamad pointed out that none of the Asean members except Singapore is “really ready for economic integration into the AEC”.

“European Union, which is an inspiration for Asean integration, has

| December 13-19, 2013

a very long history in building community, but failed due to inequality," he said. Asean is urged to learn from the European model and avoid such failure, he suggested.

Aside from barriers to adopting a single currency market, there are many other problems to integration.

Singaporean Prime Minister Lee Hsien Loong, whose country is regarded as the most ready member, said: “The poor countries might need to bite the bullet if the group really wants to deepen the integration.”

There are differences among Asean members in terms of economic development, policy and strategy. The gap between rich and poor members is very wide. Singapore’s GDP per capita is $50,130 while it is only $879 in Cambodia and $875 in Myanmar respectively. Even among countries in mid rank, gaps extremely vary. GDP per capita in Malaysia is $9,941, Thailand $5,116, Indonesia $3,563, the Philippines $2,341, Vietnam $1,403 and Laos $1,279. This might lead to Asean being an unequal community.

AEC SPECIAL REPORT

RELAXATION FOR POOR MEMBERS

Many countries heavily depend on import duties as their national revenue and tariff elimination might cause economic difficulties for them.

Mahathir suggested relaxation for poor Asean members such as Cambodia, Laos and Myanmar, giving them more time and conditions to adjust their economies before integration.

Indeed, Asean is well aware of the difference and development gap from the beginning. Only six original members of the group cut their tariff for all products, except sensitive and highly sensitive to 0 per cent since 2010. The rest like Cambodia, Laos, Myanmar and Vietnam which joined the group later would cut their import duties to 0 per cent in 2015.

“Being a less developed country is not necessarily equivalent to being at a disadvantaged. The new members of Asean also have their comparative advantage for economic development and competitiveness. Their stage of

| December 13-19, 2013

development might be far behind some members, but they are rich and abundant in natural resource as well as cheap labour,” said Thai Foreign Ministry’s Director of Asean Affairs Arthayudh.

Some least developed countries like Cambodia, Laos and Myanmar also enjoy trade privileges from developed markets in Western countries and Japan.

On top of that, they also obtain abundant international assistance from developed countries and international organisations.

The World Bank and International Financial Cooperation in their latest survey on Doing Business ranked Myanmar 82nd out of 189 economies for investment environment. Yet despite the poor ranking, foreign investors are flocking to Myanmar as the new economic frontier these days.

“However, that should not be an excuse for doing nothing to improve and develop the economies among Asean members. The AEC score card 2008-2013

AEC SPECIAL REPORT

suggested that the group has done the task to liberalise its economy towards integration, and 79.7 per cent of all tasks needed to be done. That is not good enough,” said former Asean chief Surin.

“Asean members have ratified 75 per cent of agreements to form the community. It needs to do more to implement them in order to push forward integration,” he said.

MORE THRESHOLDS

“The members of Asean have agreed upon many things to liberalise their economies and integrate into the community, but it seems many national governments have no strong commitment to enforce them,” said Arthayudh.

Echoing Surin, he said non-tariff barrier is one of the major obstacles for liberalisation and integration. Countries have complex and complicated rules and regulations that bar the free flow of economic activities. While eliminating tariffs, many countries are putting

| December 13-19, 2013

some non-tariff barrier and obstacles into trade and investment regimes.

Previously, foreign investors could carry capital and knowhow to invest in Indonesia easily, but now they are required to move all of their supply chains into the country, according to an observer.

Many additional regulations are now being created such as health and environment protection. “You are required to have many certifications from various agencies to get a license to set up a factory,” a Thai investor said.

Many countries tended to create barriers to protect their local businesses.

While agreeing to allow seven professions to move freely to work among member countries in accordance with the economic community blueprint, many countries still have regulations that reserve certain professions for their nationals.

Basically Indonesia and Thailand agreed to allow medical doctors

AEC SPECIAL REPORT

from Asean countries to work, but Indonesia has a regulation to reserve this profession only for Indonesian nationals, while Thailand requires doctors to pass an examination in Thai language to get a license.

Thailand also has a long list of occupations, including engineers, reserved only for Thais.

Many Asean agreements contradict domestic laws and regulations, but countries have not yet amended these rules to comply with such agreements.

Law, regulations and procedures themselves are barriers for economic liberalisation. Some of them are too complicated to follow. Only 15 per cent of Thai exporters and importers that trade in Asean under the free trade scheme with zero per cent tariff really benefit from the duty free regime, while the rest don’t utilise the scheme as they cannot follow complicated paper works and procedures, according to Arthayudh.

| December 13-19, 2013

“To utilise free trade, you have to fill up the complicated form ‘D’ and you have to prove that your products are genuine Asean goods,” he said. “Perhaps paying the five or seven per cent import duties would be cheaper than wasting time and resources to fill this form in order to get zero tariff,” he said.

Form D is a certification paper for import tax reduction under the Common Effective Preferential Tariff of the Asean Free Trade Area.

Asean countries have no common standard for their products. Some products meet Thai standards, but fail to meet Singaporean standards or vice versa. Traders find it very difficult to classify their products according to the tariff nomenclature as countries use different descriptions.

Brown sugar from Thailand may be classified differently in other countries, although all members adopt the same harmonisation of custom system.

AEC SPECIAL REPORT

Another problem for Asean to transform into an economic community is information. The Asean Secretariat has a lot of information through papers, reports and documents, but the problem is that nobody knows where they are kept and how people could access them.

In fact, useful information for doing business such as economic data, law and regulations are not available. Different agencies in the same country might even provide different information for the same matter.

Too many complicated regulations and the lack of standard and information could obstruct trade and service transaction. A World Bank survey recently indicated that countries in Asean require long procedures and several documents for imports and exports.

Thailand requires at least five documents and 14 days to process exports and five documents and 13 days for imports. Singapore requires four documents and only

| December 13-19, 2013

five days for export processing and four documents and four days for imports. Small countries like Laos have long procedures for both, requiring 10 documents and 26 days.

These kinds of problems and barriers have been raised many times during Asean meetings. Blueprints, action plans and countless of academic papers have addressed these obstacles but they remain as national governments lack the commitment to implement them.

Critics always say that Asean members have agreed to liberalise and integrate their economies out of fear that they cannot compete with other members. The financial sector in Thailand, for example, is liberalised in principle, but it is not easy for foreign financiers to enter.

The reason behind such fear is readiness. Sometimes the private sector would claim that they are not ready to compete with other

| December 13-19, 2013

AEC SPECIAL REPORT

countries. Sometimes they say the governments enter into agreements without consulting them.

Arthayudh dismissed such allegations noting that state officials and private sectors have channels of communication for all matters. He stressed that officials and negotiators consult with private sectors, academics and experts every time they have to negotiate with Asean members for any agreements. “We can say we are not ready for some time, but we have to set the date when we will get ready,� he said, noting that protection would never make the domestic industry grow. The automobile sector in some countries have been under state protection for two or three decades, but as a result they have never become competitive, he said.

SMES INVEST ONLY AT HOME

Thai economy is generated by some 3 million business enterprises. Among them only 20,000 are big firms, the rest are small and medium-sized enterprises (SMEs).

Unfortunately, they are doing business only at home and are afraid of extending their reach to foreign countries even within the Asean region.

They used to go overseas in the 1980s, but many of them failed due to many factors such as the financial crisis, lack of experience and ability to do business outside their home turf.

The situation is worrisome for Thai policymakers since this will likely stand in the way of the Asean economic community.

Thai businesses are insular and focus their business only domestically.

They also lack support from concerned authorities in terms of

AEC SPECIAL REPORT

guidance, information and financial access, according to Arthayudh. “Unlike businessmen in our neighbours such as Vietnam, the Thai business community pays attention only to the home market, while our neighbours are talking about global markets and investing in foreign countries,� he said.

A recent survey by the Thai Commercial Bank’s Economic Intelligence Centre found that nearly 60 per cent of Thai SMEs have less understanding about AEC. Of the enterprises that understand AEC, 57 per cent see positive prospects and more than 85 per cent claim they could adjust their business for the integration.

Of the surveyed firms with less understanding of the AEC, 45 per cent see no impact of AEC on their business, thus they see no need to make adjustments.

Generally, Thai SMEs look

| December 13-19, 2013

at the positive side of AEC and regard economic integration as good for their businesses.

SMEs in the agriculture sector are more optimistic about AEC than those in other sectors.

A total of 53 per cent expect that the economic community could pave the way for their farm products to enter the Asean market.

SMEs in the retail trade sector are mostly worried about their future after economic integration, with 25 per cent fearing they would lose market share to competitors from other Asean countries.

Thai SMEs have reformed to adjust their business to survive in AEC. Some of them have begun developing their products, improving management ability and looking for cheap materials in a bid to sharpen their competitive edge.

Only five per cent of SMEs in Thailand have investments in

AEC SPECIAL REPORT

foreign countries and most of them are in Laos and Myanmar. About 17 per cent plan to invest overseas, mostly in neighbouring Cambodia, Laos, Myanmar and Vietnam where Thais are more familiar with the business environment.

A majority of the SMEs that have no interest in investing abroad said they find it too risky and they also lack experience, information or capital.

Pravit C. Pong, chief executive officer of Black Canyon (Thailand) is among the SMEs looking at the bright prospect of Asean integration.

He plans to expand his coffee business to other Asean countries.

Black Canyon offers franchises for its brand, with 50 shops in nearly all Asean countries, except Brunei and Vietnam.

Pravit said he would change the business model by opening their own Black Canyon branches in

| December 13-19, 2013

Asean countries. The first phase would cover five branches in Indonesia and two in Myanmar.

Next year, Pravit said he would tag along with big petroleum firm PTT to open coffee shops in oil company PTT ‘s gas stations in Asean countries beginning with Laos, and later Cambodia and the Philippines where PTT has business.

“We don’t want to grow only at home and we regard the world as our market. I have my target to see growth in revenue from foreign branches which now accounts for only 10 per cent of total revenue,” he said.

Thais know their coffee but they mostly go for home-made or instant. Foreign brands such as Starbucks have successfully established themselves among the new generation not only in Thailand but in other countries in Asean.

“I fear nobody whether foreign

| December 13-19, 2013

AEC SPECIAL REPORT

or native brands, I think we have reached the position that we are competitive enough to face the challenges in the community,� he said.

Among Asean countries, Thailand is strong in the food and beverage industry.

If the government has consistent policies to support SMEs in this sector they would have good prospects, he said.

A survey by the Siam Commercial Bank suggested that Thai SMEs with no capacity to trade and invest directly in other Asean countries should consider border trade with immediate neighbours like Laos, Cambodia and Myanmar.

The survey found that 12 per cent of Thai SMEs are doing border trade

with Laos and Myanmar, and 11 per cent plan to trade across the border in the next three years when Asean becomes an economic community.

BORDER TRADE

Border trade makes up only three to five per cent of Thailand’s total foreign trade but it has good prospects with average annual growth of 20 per cent.

Some 80 per cent of trade transactions between Thailand and its neighbours are conducted through border trade with land, rather than in international trade via port or airport.

The border trade could play a significant role to bring goods, services and people to come together and truly make it an authentic integrated economic community. ÂŹ

AEC SPECIAL REPORT

| December 13-19, 2013

AFP

VIETNAM

BOLD REFORMS NEEDED Phuong Ha Vu Viet Nam News Ha Noi

AEC SPECIAL REPORT

| December 13-19, 2013

| December 13-19, 2013

AEC SPECIAL REPORT

T

he realisation of the Asean Economic Community (AEC) by 2015 will allow the free flow of goods, services, skilled labour and investment, and a market that encompasses over 600 million people and US$2 trillion in production. For a country in transition like Vietnam, participation in AEC is gilded with golden opportunities, but also fraught with risks.

Vietnam has since put in place a number of measures and is gearing up well for regional competition.

The business community, as well as academics and other individuals are under pressure to institute reforms and increase competitiveness ahead of AEC.

PROGRESS SO FAR The Asean Blueprint drawn out in 2007 targets four objectives: a single market and production base, a highly competitive economic region, equitable economic development, and integration with the global economy. Within these areas, it identifies 17 core elements and 176 priority actions within a strategic schedule of four implementation periods (2008-09, 201011, 2012-13, 2014-15).

According to the latest report by the Ministry of Industry and Trade (MoIT), Vietnam has accomplished 84.8 per cent of these elements from 2008 to July 2013, ranking the country fourth in the bloc

so far. Asean as a whole has implemented 79.7 per cent.

So far, Vietnam has reduced import duties to 0-5 per cent on more than 10,000 tariff lines, or 98.86 per cent of the tariff schedule, in accordance with the Asean Trade in Goods Agreement (ATIGA) from 2008. While it is significant progress, Vietnam still has to catch up with Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand, which cut tariffs to as low as zero per cent on 99.65 per cent of trade imported from Asean countries since 2010.

According to Industry and Trade Minister Vu Huy Hoang, Vietnam prioritises its commitment to eliminate non-tariff barriers and enhance trade cooperation, in order to accomplish the

| December 13-19, 2013

ninth and 10th packages under the Asean Framework Agreement on Services (AFAS), and to collaborate with other Asean member countries to implement agreements in the Asean Agreement on the Movement of Natural Persons (MNP), the Asean Comprehensive Investment Agreement (ACIA) and related agreements.

Once implemented, AEC is expected to raise Asean real incomes by US$69.4 billion, or 5.3 per cent over the 2004 baseline income, and raise Vietnam’s real income by $2.4 billion, or 2.8 per cent over the 2004 baseline income.

These benefits could grow as the domestic economy matures and evolves to make economic integration even more productive.

HARD CHALLENGES AHEAD Nevertheless, Vietnam still has many tough issues to tackle before it can be considered fully prepared.

One of these issues, saidVo Tri Thanh, Deputy Head of Central Institute for Economic Management (CIEM), is negotiating tariff reductions for taking oil and petroleum items from the General Exclusion List.

“Even though participation in the experimental Programme on Selfrecognition of Origin is not compulsory at this stage, the target of implementing such a mechanism by 2015 necessitates enormous preparation attempts,” Thanh said.

He adds that another

concern is the lack of utilisation of the Asean Free Trade Area (AFTA) and the Common Effective Preferential Tariff (CEPT) treatment. Usage of Form D (Certificate of Origin) remains low (below 20 per cent, but has increased from 8 per cent in 2007). Reasons for this varies, such as lack of information about the existance of the facility, and also many Vietnammade products failed to meet domestic standards.

Parallel to the benefits to be gained from trade agreements including tariff reductions, economists expect the continuous increase in Vietnam’s imports from other Asean states to affect the country’s trade deficit with Asean.

| December 13-19, 2013

TABLE 1: VIETNAM'S TRADE WITH ASEAN (US$ BILLION) 2008 VALUE

2009

2010

% OF TOTAL

VALUE

% OF TOTAL

VALUE

2011

2012

2013 (9 MTHS)

% OF TOTAL

VALUE

% OF TOTAL

VALUE

% OF TOTAL

VALUE

% OF TOTAL 14.25

EXPORT TO ASEAN

10.20

16.30

8.60

15.20

10.36

14.34

13.58

14.01

17.10

14.92

13.72

IMPORT FROM ASEAN

19.50

24.20

13.40

19.50

16.41

19.34

20.70

19.39

20.76

18.24

15.85 16.46

TOTAL

29.70

20.70

22.00

17.50

26.77

17.04

34.28

16.83

37.86

16.57 29.57

15.35

Source: General Statistics Office, Vietnam Customs, author's' calculation.

An increase in imports will also put a greater burden on domestic producers, even in sectors that Vietnam has been comparatively competitive in, such as agriculture, textiles and leather.

It will also mean that some markets will need to diversify

in order to lessen their dependence on imports.

Vietnam now has to tackle tariff reduction policies in industries, which are sensitive to consumer surplus, such as agriculture, beverages and tobacco, and mining and oil.

| December 13-19, 2013

WEAK LOGISTICS

Vietnam’s readiness to open its logistics market to foreign players is still doubted. Over the past decade, the logistics market has recorded annual double-digit growth, according to Vietnam Logistics Business Association (VLA) estimates. In 2012, some 10 million TEU (twenty-foot equivalent) units went through all ports in Vietnam, including more than 400,000 tonnes of air freight. On average, the market saw a growth rate of 10-15 per cent per year, which although is higher than other regional markets, is still not competitive enough.

The International Logistics Performance Index 2012 compiled by the World Bank ranked Vietnam 53rd with a score of three for its logistics performance (see Table 2&3).

Additionally, joint ventures now

account for a small part of over 1,000 companies participating in Vietnam’s logistics market, but the cargo proportion handled by foreign players is much higher than local firms.

Do Dang Tan, chairman of STC Logistics Co. in the northern city of Hai Phong, one of three biggest logistics hubs in the country, describes this as a “cake which foreign investors have taken 90 per cent (of )”. He added that local companies are struggling to hold on to the 10 per cent left for the domestic market.

Local companies in this sector are facing a bottleneck situation which involves timeconsuming customs clearance procedures, tax regulations, limited investment capital, high costs, technological application for governance, and

the quality of human resources.

“This will mean low competitiveness and an inability to tap the sector's growth potential if the country fails to build a more transparent and effective market mechanism,” Tan said.

VLA statistics show that logistic costs accounted for up to 20-24 per cent of Vietnam’s GDP, nearly double the cost in Indonesia and Malaysia and triple that in Singapore. The cargo capacity of Kuala Lumpur International Airport in Malaysia, for example, more than tripled the combination of Noi Bai and Tan Son Nhat airports in Vietnam.

“Time is running out for Vietnamese logistics companies to consolidate their position in the domestic and regional markets,” VLA Chairman Do Xuan Quang warned.

| December 13-19, 2013

TABLE 2: INTERNATIONAL LOGISTICS PERFORMANCE INDEX (LPI) 2012 - ASEAN MEMBERS LPI RANK

LPI RANK

R A N LOWER UPPER K BOUND BOUND SCORE

LOWER BOUND

% OF UPPER HIGHEST BOUND PERFORMER

LOGISTICS QUALITY & INT’L INFRA CUSTOMS STRUCTURE SHIPMENTS COMPETENCE

TRACKING AND TRACING

R A N K

SCORE

SCORE

R A N K

SCORE

R A N K

SCORE

R A N K

SCORE

R A N K

TIMELINESS

SCORE

SINGAPORE

1

1

2

4.13

4.06

4.19

100.00

1

4.10

2

4.15

2

3.99

6

4.07

6

4.07

1

4.39

MALAYSIA

29

25

31

3.49

3.40

3.59

79.80

29

3.28

27

3.43

26

3.40

30

3.45

28

3.54

28

3.86

THAILAND

38

35

46

3.18

3.07

3.28

69.60

42

2.96

44

3.08

35

3.21

49

2.98

45

3.18

39

3.63

PHILIPPINES

52

37

67

3.02

2.85

3.20

64.80

67

2.63

62

2.80

56

2.97

39

3.14

39

3.30

69

3.30

VIETNAM

53

37

72

3.00

2.81

3.20

64.10

63

2.65

72

2.68

39

3.14

82

2.68

47

3.16

38

3.64

INDONESIA

59

46

76

2.94

2.78

3.11

62.20

75

2.53

85

2.54

57

2.97

62

2.85

52

3.12

42

3.61

CAMBODIA

101

62

142

2.56

2.23

2.89

50.00

108

2.30 128

2.20

101

2.61

103

2.50

78

2.77

104

2.95

LAO PDR

109

69

145

2.50

2.16

2.84

48.00

93

2.38 106

2.40

123

2.40

104

2.49

111

2.49

118

2.82

MYANMAR

129

90

148

2.37

2.10

2.64

43.80

122

2.24 133

2.10

116

2.47

110

2.42

129

2.34

140

2.59

Source: World Bank "Connecting to Compete: Trade Logistics in the Global Economy" 2012

| December 13-19, 2013

AEC SPECIAL REPORT

TABLE 3: VIETNAM'S LOGISTICS PERFORMANCE INDEX 2007-2012 2007 INDICATORS

RANK

2010

2012

SCORE

RANK

SCORE

RANK

SCORE

LPI

53

2.89

53

2.96

53

3

CUSTOMS

37

2.89

53

2.68

63

2.65

INFRASTRUCTURE

60

2.5

66

2.56

72

2.68

INTERNATIONAL SHIPMENTS

47

3

58

3.04

39

3.14

LOGISTICS QUALITY AND COMPETENCE

56

2.8

51

2.89

82

2.68

TRACKING AND TRACING

53

2.9

55

3.1

47

3.16

TIMELINESS

65

3.22

76

3.44

38

3.64

Source: World Bank "Connecting to Compete: Trade Logistics in the Global Economy" 2007-2010-2012

| December 13-19, 2013

AEC SPECIAL REPORT LIMITED LABOUR FORCE

In terms of labour, industry insiders and national officials agree that the gains will be far greater than the losses. But if Vietnam is not prepared, those gains could be less than projected.

Under AEC, skilled workers and members of seven professions—doctors, dentists, nurses, engineers, architects, accountants and surveyors— is expected to be able to move freely within the region.

Deputy Minister of Education and Training Bui Van Ga said international integration in education gave Vietnam a chance to mobilise resources and experience from outside the country, to develop resources in the country.

Le Quang Trung, deputy director of the Ministry of Labour, Invalids and Social Affairs' employment bureau,

said that skilled locals would be given more options, while the arrival of foreign workers would provide many more opportunities in trade, investment and employment, and new knowledge and advanced technology to help raise the quality of the domestic labour force.

However, there is still a shortage of such highly skilled labourers, and lack of language skills will also eventually pose problems.

A report by the Economist Intelligence Unit last June concluded that Vietnam’s higher education landscape needed to be put into context in terms of demographic and economic imperitives that affect the labour market. It needs be reformed for the country to reach its full potential. (See table 4) There have been calls for reforms by the education ministry, but not much has been

done—in particular in terms of preparation for AEC by the education sector. A survey by the press among universities in Ho Chi Minh City showed that many participants did not have a clear knowledge of AEC. Another poll conducted among various academic and training institutions showed that they have not been informed to prepare for the implementation of AEC. Poor command of the English language and lack of soft skills including presentation, teamwork and the ability to think critically were some problems Vietnam still needs to overcome, said the Navigos Search and Manpower Vietnam.

Because of this, even university graduates like Nguyen Hai Nam, who holds a degree in nuclear engineering, are struggling to find a job in a multinational companies.

| December 13-19, 2013

AEC SPECIAL REPORT

TABLE 4: EMPLOYED POPUL ATION BY QUALIFICATIONS, 2011 (Q2) (%) DEMOGRAPHICS GROUP

TOTAL

NO QUALIFICATIONS

SHORT TERM TRAINING

ENTIRE COUNTRY

100.0

84.8

3.7

MALE

100.0

83.1

FEMALE

100.0

URBAN RURAL

VACATIONAL SCHOOL

COLLEGE

UNIVERSITY AND OVER

3.7

1.7

6.1

5.6

3.4

1.2

6.7

86.6

1.7

4.0

2.3

5.4

100.0

68.9

6.5

6.0

2.9

15.8

100.0

91.0

2.7

2.8

1.3

2.3

Source: Economist Intelligence Unit "Skilled Labour Shortfalls in Indonesia, the Philippines, Thailand, and Vietnam. A custom research report for the Bristish Council" June 2012

INTROSPECTION

These challenges point to chronic weaknesses in the regime, and shows how crucial it is for Vietnam to move forward more aggresively with its longdelayed institutional reform plans—that is to improve the country’s competitiveness and reinforce market-oriented

mechanisms and transparency.

Vietnam has been calling for a postponement of lowered tariffs for certain products, after the official launch of AEC on Dec 31, 2015, due to lack of preparedness and confidence in its ability to compete—such as in the automobile sector.

“In a free-tax zone, if Vietnam

fails to build an auxiliary industry which is strong enough to keep automobile manufacturers here, they will pack up and move to Indonesia or Thailand where the automobile auxiliary industries are already very advanced. In my opinion, Vietnam must be able to supply 60-80 per cent of parts and devices for the domestic

| December 13-19, 2013

AEC SPECIAL REPORT automobile industry, or the sector will die,” said VCCI’s Loc. Vietnam’s electronics industry is also facing the same issues.

Although the deadline for tax cuts on electronics is still years away, some assembly lines, such as Sony Vietnam, have left the country for its neighbours.

“The question is how to reposition Vietnam as the ‘door’ for other members of the community. The only way to ensure our competitiveness is to hasten the restructuring of the available systems,” said Nguyen Hoang Hai, chairman of the Vietnam Association of Financial Investors (VAFI).

Professor Tran Dinh Thien who directs the Vietnam Economic Institute said the country needs a new national growth model where the economy is driven by domestic input and not by imports.

This would probably mean reallocating finances and manpower, which will not be easy, he said.

However, he warned, if Vietnam keeps delaying the process, issues causing the “bottleneck” will “harden” and cause serious consequences on the economy.

Others defended that the delay was due to a critical shortage of financial resources in wake of a state budget facing deficit, as well as failure to break deadlocks in business communities.

To deal with capital shortage, industry insiders suggest that restructuring state-owned enterprises must be the focus, as they hold 60 per cent of total social capital (or 900,000 dong/ US$42.7 billion), contributing 33 per cent to economic growth and 30 per cent to the state budget.

Pham Chi Lan, a former government advisor, said that in the meantime the private sector should play a core role in national economic development.

“The state should withdraw capital from its business bodies and change their role from direct control to supporting the whole

economy. This will encourage private groups to participate, which is key in setting up an effective growth model,” said Loc. The VCCI and the Ministry of Planning and Investment have proposed two measures to support the process. First, the government should set up a body to manage state assets and capital, which is responsible for the restructuring programme. Second, the Vietnam Competition Administration Department should be given independent power. It is hard to produce fair assessments if this department is positioned as both a market member and a watchdog.

The government also has to keep tabs on the domestic markets and help bring out their full potential.

"If Vietnam restructures its economy and renovates the growth model, I believe that the country will be at an advantage when it integrates into AEC in 2015," said Nguyen Hong Son, Rector of the VNU University of Economics and Business. ¬

| December 13-19, 2013

AEC SPECIAL REPORT

PHU HUYNH, LABOUR ECONOMIST, ILO ASIA-PACIFIC: VIETNAM FACES SIGNIFICANT GAPS IN TERMS OF JOB QUALITY AND HUMAN RESOURCES. 1. What are the problems with Vietnam’s labour market structure regarding AEC entry?

A majority of jobs are poor quality with low earnings and productivity. About half of our country’s workers are still employed in agriculture, more than three out of five workers are informally employed and more than four out of five workers have no technical training or qualifications.

2. What is Vietnam’s standing in the regional labour market? Are we ready to compete?

In comparison to its Asean neighbours, Vietnam faces significant gaps in terms of job quality and human resources. In terms of labour productivity, for example, the level in Vietnam is eight times lower than in Singapore and four times lower than in Malaysia 500,000 400,000 300,000 200,000 100,000 Singapore

Malaysia

Thailand

Indonesia

Philippines

Viet Nam

0 Cambodia

TABLE 5: LABOUR PRODUCTIVITY (CONSTANT 1990 US$) IN SELECTED ASEAN COUNTRIES, 2012

Source: ILO: Key Indicators of the Labour Market, 7th edition (Geneva).

AEC SPECIAL REPORT

| December 13-19, 2013

3. What do you think about the potential mobility of inflow and outflow in Vietnam as the country joins the AEC? Which will dominate? What are the consequences?

There were an estimated 222,000 Vietnamese working abroad within Asean in 2010, with less than 22,000 ASEAN migrants working in Vietnam.

Given wage and demographic variance across the region, AEC will likely intensify these trends, so the trend of greater outflow than inflow from Vietnam will continue.

4. How should authorities and members of the domestic labour market prepare to take advantage of the opportunities brought by the AEC—or face any challenges?

The AEC has initially identified the free flow of labour in only a limited number of skilled occupations: architects, engineers, surveyors, medical doctors, dentists, nurses, accountants and tourism professionals.

However, these occupations account for less than 2 per cent of Vietnam’s workforce.

Thus, it is critical that Vietnam actively engage in multilateral mechanisms and efforts to strengthen the regional certification and mutual recognition of these other skills and professions.

Domestically, the country will need to prioritise investment in its education and training system to ensure that it has a competent and skilled workforce ready to benefit from AEC.

AEC SPECIAL REPORT

HONG KONG

FREESPACE FESTIVAL 2013 A celebration of culture, music and life in a wide open space. This year’s festival will feature additional attractions in the form of new media, literature and a series of cultural workshops.

Also not to be missed, the Grassfest—where visitors can enjoy games and art exhibitions all in appreciation of good ol’ green grass.

Where: West Kowloon Cultural District When: December 14-15

| December 13-19, 2013

| December 13-19, 2013

AEC SPECIAL REPORT

SINGAPORE

ST. JEROME’S LANEWAY FESTIVAL 2014 Singapore’s much talked-about outdoor indie music festival is back to kick-start the new year with a bang, this year featuring international acts such as Chvrches, Unknown Mortal Orchestra, Jamie XX and The Jezabels.

Where: The Meadow, Gardens by the Bay, 18 Marina Gardens Drive When: Jan 25, 2014

AEC SPECIAL REPORT

| December 13-19, 2013

| December 13-19, 2013

AEC SPECIAL REPORT

CHVRCHES

| December 13-19, 2013

AEC SPECIAL REPORT

UNKNOWN MORTAL ORCHESTRA

AEC SPECIAL REPORT

| December 13-19, 2013

BANGKOK

CONCERT IN THE PARK Late afternoon picnics are made more pleasant with soothing music by the Bangkok Symphony Orchestra which will play in various parks around the city for the 21st season running.

Where: Parks around Bangkok When: December 2013 (15,22,29), January 2014 (12,19,26) and February 2014 (2,9) Info: http://bangkoksymphony.org/

| December 13-19, 2013

AEC SPECIAL REPORT

TOKYO

HAUNTED TOKYO TOURS Whether you believe in ghosts or not, this tour which visits the spookiest sites around the city is sure to raise goosebumps. Each tour lasts between two and three hours, and visitors can choose from a variety of different tours such as the Ghosts and Goblins of Old Tokyo tour, Blood of Samurai tour, or the Demons of the Red Light District tour, or even custom-make a tour to suit their spooky preferences. Each tour costs 3,000 yen (US$ 29.46) and reservations are made online.

Where: Eeriest parts of Tokyo Info: http://www.hauntedtokyotours.com/

AEC SPECIAL REPORT

| December 13-19, 2013

AEC SPECIAL REPORT

| December 13-19, 2013

AEC SPECIAL REPORT

| December 13-19, 2013

TOKYO

TOKYO TOWER FIRST SUNRISE Tokyo Tower will once again open up its Special Observatory to 80 early-birds to catch the first sunrise of the year from a 250-metre vantage point. Tickets will be issued from as early as 4am.

The Main Observatory will also be open to the public to catch a glimpse of the first dawn in 2014.

Commemorative medals will also be given to the first few visitors on the day.

Where: Tokyo Tower, 4-2-8 Shiba-Koen, Minato-ku, Tokyo When: Jan 1, 2014 (from 6am to 10am) Admission: Special Observatory: 1,420 yen (US$ 13.94), Main Observatory: 820 yen (US$ 8.05)

| December 13-19, 2013