Southeast Asia: The Next EU?

Southeast Asia: The Next EU?

Why you should care

Because the global hot spot for economic growth is set to integrate, EU-style. Business will win big and jobs will grow, but the benefits will spread unevenly.

Southeast Asia wants to be the next EU: an integrated economic bloc with free movement of goods, people and capital. Hold the bouts of fascism and threats of secession, please.

They’re calling it the AEC, short for ASEAN Economic Community. (ASEAN stands for Association of Southeast Asian Nations.) The highly anticipated initiative — comprising 10 nations, 600 million people and a total GDP of $2.5 trillion — is scheduled to launch by the end of 2015. Chances are it won’t happen on time. No matter. While bureaucrats dither, private companies are embracing the single-market mentality, forcing governments and others to keep pace.

The region’s economies are blazing. The combined GDP of ASEAN countries rose from $560 billion in 2001 to $2.4 trillion in 2013. And with the economic bloc, ASEAN is expected to tack on 14 million jobs and 7.1 percent growth. That means the middle class has a bright future; it’s predicted to balloon from 24 percent in 2010 to 65 percent in 2030. The question remains whether politicians have the willpower to push forward against nationalistic and protectionist agendas at home.

Economic integration is going to happen whether governments like it or not,

Tony Fernandes, CEO of AirAsia

The private sector is gung-ho. “Economic integration is going to happen whether governments like it or not,” Tony Fernandes, CEO of AirAsia, told Markets Magazine. For AirAsia, Asia’s leading budget airline, and others, like CIMB Group, ASEAN’s largest investment bank, and various American multinationals, regional integration is core to their business culture and model. That means acquiring local players, setting up shop in a host of different hubs, and marketing to less well-off, previously neglected consumers.

Fernandes decided to up AirAsia’s involvement and open a regional headquarters in Jakarta, Indonesia, the big fish of ASEAN markets, in 2013. Now the company has subsidiaries in Indonesia, Malaysia, Thailand and the Philippines. While connecting hubs are key, the essence of the AEC is engaging ASEAN’s 600 million potential customers. Makes sense, then, that “60 percent of [AirAsia’s] destinations are destinations that have never been done before in ASEAN,” Fernandes said in an interview.

CIMB Group, too, with a burst of mergers and acquisitions between 2006 and 2014, has opened operations in 9 ASEAN countries, placing heavy bets on a successful AEC. “I think if anyone is aligned and prepared for AEC, it’s CIMB,” said Nazir Razak, the bank’s chairman. “We have positioned ourselves, at some risk, with the whole ASEAN theme since 2006.”

Americans are jumping aboard, as well: 89 percent of the U.S. businesses operating in the region expect to increase their investment.

Le Luong Minh, the secretary general of ASEAN, claims that almost 80 percent of its integration objectives have been reached, including reducing tariffs to almost nil in all participating nations. Pop the Champagne? Not quite. The remaining goals, which include nontariff trade barriers, free movement of labor and relaxed foreign ownership rules, will be the most difficult, he says.

The reason: nationalist and protectionist fervor of politicians such as Indonesia’s president-elect Joko Widodo. Turns out not everyone will win from AEC’s potential success. Indonesia, for example, is expected to gain only 1.9 million jobs, or 1.3 percent of total employment. Cambodia, on the other hand, will gain almost 10 percent, according to a study conducted by the International Labor Organization. That’s because the AEC will provide a greater benefit to countries that have more highly skilled workers. Inequality will widen.

But for business leaders like Fernandes, it’s a no-brainer: 80 million potential consumers or 600 million potential consumers? Check, please.

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