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Why Indonesia needs to lead in economic integration



Author: Dionisius Narjoko, ERIA

As the biggest country in Southeast Asia, Indonesia is a natural leader of ASEAN. For decades since the association was established in 1967, Indonesia has played an important role maintaining geopolitical stability in the region. This leadership has recently become more demanding due to border disputes within ASEAN and China’s territorial claims in the South China Sea.

Indonesia also assumes leadership on ASEAN economic matters, albeit, some would argue, not sufficiently actively. Still, at the Bali Summit in 2003, Indonesia was bold enough to introduce the establishment of an ASEAN Economic Community (AEC) by 2020 (later accelerated to 2015) as the central ASEAN objective and, more recently, during the Bali Summit in 2011, putting in place the Regional Economic Comprehensive Economic Partnership (RCEP) by 2015.

But progress toward establishing the AEC has been modest. While there have been some notable achievements, critical targets for laying a robust foundation of a fully integrated and equitable ASEAN are yet to be achieved. With 2015 now just the year after next, time is running out, and the need to address the challenges and obstacles to realising the AEC was acknowledged by ASEAN leaders at their 2012 Phnom Penh meeting.

The RCEP is a new regional trade agreement built upon the ASEAN-centered free-trade agreements (FTAs) involving, all six ASEAN dialogue partners (Japan, China, South Korea, Australia, New Zealand and India). Because of its structure, RCEP is perceived as a new trade bloc that consolidates all of ASEAN’s ‘plus-one’ FTAs, with the objective of creating a broader and deeper engagement with significant improvement over the existing FTAs. This means harmonising the trade and regulatory rules between ASEAN members and their FTA partners and minimising trade-diverting effects.

It is important for ASEAN to make convincing progress in RCEP negotiations, set conveniently to conclude and coincide with the commencement of the AEC in 2015. ASEAN has now arrived at a critical juncture where the AEC’s credibility will require ASEAN to choose the path of bold action to improve the rules governing ASEAN FTAs. This is deeply linked with RCEP’s goals, and while it is not necessary for ASEAN to first complete all of its AEC Blueprint measures to conclude the RCEP, meaningful progress, in at least some of the more difficult areas, like services liberalisation, is important. This is critical for ASEAN if it is to reach the required ASEAN common position vis-à-vis the dialogue partners for RCEP negotiations.

Moreover, deeper intra-ASEAN integration is a prerequisite for a broader East Asian integration led by ASEAN. ASEAN functions as a ‘hub’ with linkages or spokes to countries (the dialogue partners); at the same time, the hub serves as a platform for networks of production involving all countries connected through the hub (or ASEAN).

In short, now is the time for ASEAN to really focus on its economic integration agenda, and Indonesia — as the most influential country in ASEAN — should take a leading role in this.

Given the impending 2015 deadline, Indonesia should focus on issues that are difficult to solve but critical for AEC’s realisation. As a number of studies have suggested, non-tariff measures and services liberalisation stand out.

ASEAN has been successful in tariff elimination but not so in reducing barriers stemming from non-tariff measures. Significant non-tariff barriers applied by ASEAN member states can negate the positive impact of tariff elimination. And dealing with non-tariff measures is even more important, given that some of them can be used for short-term protectionist purposes, especially during downturns.

Services liberalisation, meanwhile, is critical — especially for services needed as inputs for production such as logistics, transport and business services. Probably the biggest challenge for ASEAN in services liberalisation (pursuant to the ASEAN Framework Agreement on Services) is how ASEAN member states can arrive at substantially more open commitments for foreign commercial presence in domestic economy. On this, a more open investment regime is necessary to create incentives for firms to invest across ASEAN countries.

But there are obstacles to Indonesian leadership in ASEAN too. For one, Indonesia faces a number of domestic economic challenges. Issues in infrastructure development, a high dependence on natural resources for generating income, a more rigid labor market, and continuing development gaps between regions within Indonesia are just some of the key concerns. All these are known to have eroded the country’s overall competitiveness in the past decade or so, especially in comparison with other ASEAN countries. These challenges also indicate that the country’s economic structure is (or will be) changing, and will likely still be doing so for many years to come, continuing the process started in the early 2000s.

The best way forward would be for Indonesia to engage both challenges — domestic economic reform and reform of ASEAN leadership — together. Commitment to achieving AEC and RCEP by 2015 will have the effect of instilling discipline at home for implementing the necessary domestic reforms. Even if the 2015 deadlines are not met, a decisive resolution to Indonesia’s domestic issues will benefit the country’s competitiveness, regardless of whether the region is fully integrated. At the same time, improvements to competitiveness will create momentum for increasingly bringing Indonesia into a more integrated region.

Dionisius Narjoko is a researcher at the Economic Research Institute for ASEAN and East Asia.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Indonesia’s choices’.

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Why Indonesia needs to lead in economic integration


ASEAN weathering the COVID-19 typhoon



Vietnam's Prime Minister Nguyen Xuan Phuc addresses a special video conference with leaders of the Association of Southeast Asian Nations (ASEAN), on the coronavirus disease (COVID-19), in Hanoi 14 April, 2020 (Photo:Reuters/Manan Vatsyayana).

Author: Sandra Seno-Alday, Sydney University

The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.


Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.

Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.

Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.

A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.

Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.

Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.

ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.

In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.

This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.

What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.

It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.

Over the longer term, ASEAN is faced with the question of whether it should seriously look…

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Tiger Trade Launches SGX Trading, Meeting Demand from Asian Investors

Access to the Singapore Exchange (SGX) adds to Tiger Brokers’ current menu of stock exchanges, such as the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (NASDAQ), the world’s two largest stock exchanges, as well as the Hong Kong Stock Exchange (HKEX).



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Can Asia maintain growth with an ever ageing population ?

To boost productivity in the future, Asian governments will have to implement well-targeted structural reforms today.



Asia has been the world champion of economic growth for decades, and this year will be no exception. According to the latest International Monetary Fund Regional Economic Outlook(REO), the Asia-Pacific region’s GDP is projected to increase by 5.5% in 2017 and 5.4% in 2018. (more…)

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