Growing challenges in ASEAN

Three of the key countries in the Association of Southeast Asian Nations (ASEAN) - Malaysia, Thailand and Indonesia - were going through an introspective period due to troubled domestic politics, which cast doubt on whether they could push forward with an economic community.

"The internal political problems in the traditional drivers of ASEAN are serious."
Greg Earl, Ex-Southeast Asia correspondent & Pacific editor

Six months on the bigger challenges may well be outside the group as members wait for China’s latest move in the tussle over South China Sea territory and the implications of the British vote to leave the European Union for other regional groups around the world.

We are currently seeing the first signs of how these external challenges to Asia’s oldest regional group will play out as ASEAN foreign ministers meet in Laos for the first time since the Brexit vote and the Permanent Court of Arbitration ruling, which comprehensively rejected China’s claim on a vast chunk of ocean resources.

With foreign minister Julie Bishop and other country foreign ministers in Laos for an ASEAN annual meeting, the future of the 49-year-old group and the slow moving way it operates will be under scrutiny.

SERIOUS PROBLEMS

The internal political problems in the traditional drivers of ASEAN are serious. Malaysia’s prime minister Najib Razak is facing escalating allegations about corruption involving the national development fund 1MDF.

Thailand’s military rulers are trying to drum up support for a constitutional referendum next month ahead of an election next year. Indonesia’s president Joko Widodo is more focussed on building a majority in his national assembly and domestic economic development than providing a lead to regional economic reforms.

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But the Southeast Asian country philosophy of not interfering in each other’s affairs means these countries have shown a capacity to get on with regional economic reforms while some have faced upheaval or human rights problems at home.

Indeed one of the region’s most-experienced diplomats and now Singapore academic Kishore Mahbubani is optimistic the ten countries can push ahead with the ASEAN Economic Community which they formally started at the beginning of 2016, even if they are divided over how to deal with China’s maritime territory claims.

“ASEAN can take two different positions at the same time and still get things done,” he told the Crawford Australian Leadership Conference at the Australian National University in June.

But Mahbubani conceded in an interview with The Australian Financial Review he still concerned the ten-member group could be split by the pressures it is now facing from the US and China to the point it would be unable to make decisions. He is alarmed China’s tensions with regional nations have spread as far south as Indonesia, which has previously been a more neutral player.

Australia’s just-retired top diplomat Peter Varghese takes a bleaker view, warning while ASEAN is a key part of the region’s diplomatic architecture it would lose its credibility if it failed to maintain a common stand on China’s South China Sea claims.

Varghese drew an interesting loose link between the ability of the ASEAN countries to play a meaningful role in resolving the South China Sea dispute and their ability to manage the reforms needed to sustain economic growth.

“Reform politics is hard everywhere,” says Varghese, who has retired as Department of Foreign Affairs and Trade secretary to become University of Queensland chancellor. ”The Asian growth model is running out of puff.  Unless we can do this, it’s going to be a very different decade ahead.”

Britain’s decision to leave the European Union has mixed implications for ASEAN because while the group has often benchmarked its own integration against the EU, it has taken a much slower and more cautious approach.

The Brexit vote is likely to both reaffirm the slow approach, which often frustrates foreign observers – especially those in business –, but also make some local politicians from ASEAN countries nervous about proposed liberalisation in areas such as easier flow of workers across the region.

The official view from Asian Development Bank chief economist Shang-Jin Wei is while the Brexit vote destabilised Asia's currency and stock markets, its impact on the real economy in the short term will be small.

But noting the common criticism of ASEAN’s slow pace of economic reform, Singapore-based economist Sanchita Basu Das says: “It is on occasions like Brexit one sees the rationale for the cautious approach adopted by ASEAN countries.”

“The Brexit event undermines the regional integration process, especially at a time when the global trading system under the World Trade Organisation has almost stalled, the Trans-Pacific Partnership is hanging in the balance due to the uncertainty of US politics and ASEAN is in a political dispute with China getting impatient with rising economic protectionism in some of the member countries,” says Das, a fellow at the ISEAS-Yusof Ishak Institute.

LOOSE STRUCTURE

ASEAN has a much looser structure than the EU with no regional parliament and no serious talk of a single regional currency.  Indeed, the ASEAN headquarters has about 300 staff in Jakarta compared with about 30,000 EU staff in Brussels.

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There are still plenty of potential bilateral tensions within ASEAN and tensions over the path of integration but, unlike the EU, the Asian institution does not loom large in the imaginations of the region’s people as a source of resentment or economic pain.

There is also no clear protocol for leaving then group which means in the event of a split it is more likely a member would just not turn up to meetings.

In an implicit warning about the progress on the AEC, former ASEAN staff member Termsak Chalermpalanupap says the lesson of Brexit for ASEAN is it cannot be assumed regional cooperation will progress in a linear positive upward direction but instead could be subject to sudden disruption and reversal.

“There is no imminent threat of X-exit in ASEAN for the time being. ASEAN is still considered as useful to all member governments in different ways. But we cannot continue to assume ASEAN is indispensable to every member government in all ways at all times,” he wrote in The Diplomat.

BIGGEST EVER TEST

Dealing with Beijing over the South China Sea may well become the biggest ever test of this principle with virtually all member countries issuing vague, non-committal statements on The Hague court decision suggesting they want to walk both sides of the dispute as long as possible.

Research published by Asialink on expert opinion across the region revealed a broader spread of views about how to negotiate than has typically been the case outside the region.

How this process unfolds is of crucial importance to Australia as ASEAN’s first dialogue partner forty years ago and more recently as a country reliant on ASEAN to give it a leg up into the top level of Asian diplomatic architecture in the East Asian Summit.

Last year the Australian government moved to increase the national focus on Southeast Asia as the third leg of regional – or even global – growth after China and India by encouraging business to focus more on opportunities which could arise from the ASEAN Economic Community.

The Why ASEAN and Why Now? study cites the availability of low cost labour, the growing consumer markets in the emerging middle class and the growing demand for sophisticated services across the region as a source of investment opportunities for Australian companies.

Australia’s low level of business engagement with the Asian countries right on its doorstep came in for some high profile criticism in an earlier study by PwC, Passing us by, which highlighted how Australian companies had more invested in New Zealand than ASEAN which has a population about 150 times larger.

Despite this striking imbalance, two-way trade and investment in the Southeast Asian region has been growing over the past decade during which Australia has completed three bilateral trade deals with member countries and a regional deal.

The stock of Australian direct investment has more than tripled from less than $A10 billion to $A37 billion in 2015. Two-way goods and services trade increased from $A56 billion in 2005 to $A96 billion in 2015.

On the other side of the equation, foreign direct investment from ASEAN businesses into Australia has expanded even faster from under $A10 billion to more than $A40 billion.

These growing links to Australia’s closest Asian neighbours may well come under pressure if the ASEAN countries are distracted from economic growth policies by new external strategic tensions.

Greg Earl is a former Southeast Asia correspondent and Asia Pacific editor for The Australian Financial Review. He is member of the Australia ASEAN Council board. This article is drawn from a presentation to the Asialink Business State of the Nation series of panels this week in Melbourne, Sydney and Brisbane.