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The Rise of ASEAN as One Single Market

By Soo Earn Keoy, Deloitte

The establishment of the ASEAN Economic Community (AEC) in 2015 marks a major milestone in the regional economic integration agenda. This makes ASEAN a single market and production base allowing free movement of goods, services, investment, skilled labour and freer flow of capital.

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Sweet spots

Ranked currently as the world’s seventh largest economy valued at more than US$2.6 trillion, ASEAN could become the world’s fourth largest economy by 2030. With a population of 625 million people, ASEAN has a median age of 29, making it one of the youngest populations in the world.

By 2030, this median age will be just 34 which will see the labour force in ASEAN expanding by around 1.7 per cent, adding 28 million new workers a year for many more years ahead. ASEAN’s economic growth will continue to be driven by its growing labour force, supported by improved productivity. This huge market presents opportunities for businesses to capitalise.

As ASEAN comprises mostly developing countries that have yet to adopt proven technologies used in developed economies, the openness to trade can help spur adoption of technology and innovation and drive productivity growth.

The rich natural resources in ASEAN play an important role in sustaining a wide range of economic activities and livelihoods – ASEAN grows 90 per cent of the world’s crude palm oil, 70 per cent of all natural rubber and a quarter of the world’s rice. It also produces 6.4 per cent of the world’s natural gas and 7.4 per cent of its coal. The availability of these natural resources will continue to drive and sustain the economic growth for the region. 

Economic integration and cooperation

In pursuit of strong global connection, ASEAN and its member nations have built extensive trade agreements that facilitate future economic growth and integrate the region into the global economy.

The Regional Comprehensive Economic Partnership (RCEP), driven by ASEAN, is one such initiative. RCEP’s objective is to enhance economic integration and cooperation among ASEAN member nations and its existing free trade agreements (FTAs) with key partners, namely Australia, China, India, Japan, New Zealand and South Korea.

The RCEP will expand the intra-regional trade volume in the Asia region and become a mega-bloc made up of potentially 48 per cent of the world’s population, with 30 per cent GDP, with some 29 per cent on trade and 20 per cent on foreign direct investment flows. This will also promote investment, technology, know-how transfer and skill flows.

Additionally, a region-wide FTA will help untangle the “noodle bowl problem” arising from multiple FTAs that currently exist in East Asia. It will also improve the competitiveness of the ASEAN region for trade and investment, assuming maximum liberalisation and facilitation of goods, services, investment and technology flows, growing infrastructure connectivity investments and domestic structural adjustment reforms. In addition, it will foster the regional cooperative spirit and contribute to regional peace, stability and resilience.

The Trans-Pacific Partnership (TPP) agreement is another major trade initiative affecting selected member nations of ASEAN. The TPP aims to enhance economic integration in the Asia-Pacific region by further liberalising trade and investment. It gathers 12 Pacific Rim countries, namely Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam, representing US$26 trillion of combined GDP and 41 per cent of the global GDP in 2015. The TPP is led by the United States and, contrary to the RCEP, it does not include India and China. By creating an environment more conducive to foreign investment, the TPP could pave the way for greater foreign investment (particularly in oil and gas sector), and stimulate greater capital flows.

With a large young population, rich natural resources, AEC and other trade agreements, coupled with its strategic location, ASEAN is poised for long-term economic growth.

Growth engines

ASEAN will continue to tap into its rich natural resources to drive economic growth. However, rather than exporting natural resources in its raw form, ASEAN member nations will seek to capture more value-add locally by processing these natural resources into semi-finished or finished goods prior to being exported to the rest of the world.

With more processing and manufacturing in the region, ASEAN is expected to become the next manufacturing hub for the world. The region currently accounts for only 4.3 per cent of global manufacturing output. With AEC, businesses are starting to adjust their manufacturing strategy to serve the region by seeking economies of scale and greater specialisation. With TPP and RCEP, more manufacturing facilities are expected to be established in ASEAN to serve the global market. 

Some manufacturing plants located in North Asia have already moved to ASEAN to gain access to cheaper skilled labour to manage their production cost. Given the ability to have one production base in one ASEAN member nation to serve the larger ASEAN market, businesses are seriously considering ASEAN as a possible destination to have their additional or alternative production facility. These trends are expected to continue.

With the expected economic growth, middle-income population is projected to grow exponentially. The aspirations of the burgeoning middle class will drive the demand for more and better quality consumer products and services. With rising standards of living and growing affluence, expectations will also move beyond basic healthcare needs to demands for non-critical healthcare services.

Support engines

ASEAN has slightly more than 50 per cent of its citizens living in urban areas. Some 28 per cent of its citizens live in cities that have more than 100,000 people. Almost half of its population still live in rural areas that have poor primary infrastructure, weak transport and communication network making accessibility a challenge. However, the region is seeing rapid urbanisation, the people have better jobs and there is increasing wealth in the cities. More investments in infrastructure will be crucial to facilitate the urbanisation of the ASEAN developing economies.

The existing infrastructure in ASEAN is not adequate to support the current and expected economic growth. Significant investments in power plants, rails, roads, ports, airports, water treatment plants, telecommunications, etc, totalling more than US$1.1 trillion over the next 10 years will be required to generate the power, provide water, build physical and virtual connectivity, and manage waste, to support the economic growth.

However, this rapid economic growth will mean increasing pressures on natural resources and bring along environmental issues, such as air, water and land pollution, transboundary haze pollution, and depletion of national resources. Governments of the ASEAN member nations have faced, and will continue to face, huge challenges in keeping a delicate balance between delivering economic growth and ensuring environmental sustainability. Investments into solutions that can deliver sustainable development or minimise the damage to natural resources and the environment will be another key focus.

With the region getting more integrated, ASEAN member nations’ financial systems will need to be upgraded to facilitate trade and capital flows among member nations as well as with other trading partners. Financial institutions in some ASEAN member nations may consolidate to become bigger in order to compete with international and regional financial institutions. 

Education and training are critical to ensure the workforce has the necessary skills and expertise to contribute productively to the economy. Investing in education that can be accessed by a diverse population with different language and religion can be a huge challenge.

ASEAN’s cultural diversity and heritage provide enormous potential for increased tourism. However, further investments in tourism-related infrastructure is needed to ensure an enjoyable and memorable experience.

As ASEAN member nations collaborate with one another as well as with other countries to achieve greater economic cooperation and integration, we are slowly but surely seeing ASEAN emerging as the next key exciting investment destination.

By understanding ASEAN and appreciating its diversity, businesses will be able to build their global manufacturing hub in ASEAN, gain access to the markets within ASEAN and its key trading partners, and participate in its unprecedented growth over the next decade.

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W11 1QQ, UK