The ASEAN Economic Community:Potential Benefits for Myanmar

Michael G. Plummer,Eni Professor of International Economics,

The Johns Hopkins University, SAIS-Bologna, andSenior Fellow, East-West Center

• With the new international economic environment, including regional economic integration initiatives, the prospects for Myanmar’s integration with the global economy have never been better.

• ASEAN has already contributed to the economic reform program in Myanmar—directly, via AFTA and indirectly via example—but the ASEAN Economic Community (AEC) program is more ambitious than any previous initiatives, particularly with respect to behind-the-border measures.

• We estimate that the AEC should lead to a 5.3 percent increase in regional welfare due to elimination of NTBs, lower trade costs, and anticipated increases in FDI. Myanmar is one of the greatest beneficiaries, with welfare expected to rise by 4.4 percent and exports by 66%.

• Additional likely benefits (e.g., free movements of skilled labor, standardization and harmonization, best practices, and greater macro stability) will significantly increase the potential gains.

• All stakeholders will gain, but adjustment costs need to be anticipated and addressed

Main Conclusions

Myanmar in the ASEAN Context• Myanmar has been part of ASEAN and its intra-

regional accords since 1997.• It has emerged as a key, outward-oriented Member

State that has, particularly over the past year, embarked on wide-spread economic reforms consistent with the development stategies of its peers.

• Given its size, location (e.g., as a link between South and Southeast Asia), and potential, it will be an increasingly important player in ASEAN.

• However, many challenges remain:

Myanmar: GDP Growth has been strong, but from a relatively low base (source: ADB)

1950

1952

1954

1956

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

-15

-10

-5

0

5

10

15

20%

Economic Indicators, Selected ASEAN, 2011 (ASEAN Secretariat, UNCTAD)

  IDN Malay Philip Thai Cambo Laos Myanm VN

   

Population, million 237.7 29.0 95.8 67.6 14.5 6.4 60.4 87.8

Land area, thousand sq km 1860.4 330.3 300.0 513.1 181.0 236.8 676.6 331.1

GDP, US$billion 846.8 287.9 224.3 345.8 12.8 8.2 52.8 123.3

GDP per capita US$ 3563 9941 2341 5116 879 1279 875 1403

GDP per capita, ppp-adjusted 4736 15955 4289 8907 2287 2825 1393 3440

Merchandise trade, US$billion 380.9 415.7 111.8 458.9 12.8 4.0 14.9 199.6

Trade/GDP ratio (%) 45.0 144.4 49.8 132.7 100.0 48.8 28.2 161.9

Inward FDI stock, US$billion 173.1 114.6 27.6 139.7 6.9 2.5 9.1 72.8

Inward FDI stock/GDP ratio (%) 20.5 41.1 12.3 40.4 53.4 32.2 16..9 60.3

                 

In particular, gross domestic investment has been relatively low albeit rising in recent years (source: ADB)

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

40

45

50

Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand

Viet Nam

%

Opportunities and Challenges of Reform• The external environment in which Myanmar will be

able to pursue its outward-oriented development strategy has never been better.

• However, extensive economic reforms are necessary in order for Myanmar to achieve its true potential.

• We argue that the AEC and other ASEAN-related initiatives present an excellent framework within which the government can craft these reforms.

Background: ASEAN Economic Integration • I am certain that other speakers will be addressing the

status quo of ASEAN integration, so let me confine myself to a few contextual points.

• Prior to the ASEAN Free-trade Area (AFTA), formal economic cooperation was minimal, with politics being far more important.

• In the 1990s, biggest moves forward were in terms of Enlargement, rather than deep cooperation.

• ASEAN is a group of outward-oriented developing countries with no real political reason to use preferential trading arrangements to boost intra-regional trade and investment.

• The push for a unified market was spurred by a number of factors after the Asian Crisis:

These included:a. The Asian Crisis itselfb. Regionalism in key markets

(“defensive” regionalism”)c. Emergence of China (and, to some

degree, India) as key competitord. Rising import of FDI and

production networkse. Disappointment with progress at

WTOf. Other potential benefits of

integration (e.g., dynamic and policy effects).

g. More recently, need for (and potential benefits of «ASEAN Centrality».

“Open regionalism”, however, continues to be extremely important:

  (US$ million)    1995 2000 2005 2008 2009 2010Brunei 582.76 549.16 289.00 239.20 369.66 629.49

Cambodia 150.70 148.50 381.00 815.18 539.11 782.57

Indonesia 4,346.00 -4,549.98 8,336.00 9,318.12 4,876.77 13,304.31Lao PDR 88.40 34.00 28.00 227.76 318.62 332.59Malaysia 5,815.00 3,787.63 3,965.00 7,248.39 1,381.00 9,155.88Myanmar 317.60 208.00 236.00 975.56 963.30 450.20

Philippines 1,577.00 1,345.00 1,854.00 1,544.00 1,963.01 1,713.00

Singapore 11,502.67 17,217.80 13,929.00 8,588.90 15,279.00 35,520.20Thailand 2,070.04 3,350.25 8,048.00 8,539.47 4,975.57 6,319.71Vietnam 1,780.40 1,289.00 2,021.00 9,579.00 7,600.00 8,000.00

ASEAN TOTAL 28,230.57 23,379.36 39,087.00 47,075.58 38,266.04 76,207.95

Other Asia            

China 37,521.0040,715.00 72,406.00

108,312.00 95,000.00 105,735.00

India 2,151.003,588.00 7,622.00

42,546.00 35,649.00 24,640.00

FDI is also an essential component of success, but performances vary and Myanmar in particular has faced challenges (though looking up 2012+!)

The AEC and Its Potential Benefits• The AEC will improve the propects for sustainable growth and

development in ASEAN and Myanmar by:– Reducing costly border barriers, such as remaining tariff and

non-tariff barriers– Harmonizing and improving rules and regulations, trade

facilitation (including customs), and other behind-the-border areas

– Liberalizing services, particularly key for production networks– Liberalizing and facilitating FDI via ACIA– Benefits of free flow of skilled labor– Contribute to development of financial markets, cross-border

issuances of securities, etc.• In a recent ASEAN Secretariat study (ISEAS Nov. 2009), we

quantified these potential economic benefits (and costs):

• I. Summary CGE Model• We used the GEMAT CGE model based on the most up-to-date data

(GTAP Version 7, Nov. 2008).• Model includes modern features—including heterogeneous firms—

but, of course, has the usual limitations of CGE modeling.• We include tariffs, tariff-equivalent NTBs, services, and changes in

FDI (that we estimate separately).• We include four main scenarios:

– Completion of AFTA by removing all remaining tariffs– AEC Scenario (AFTA, NTBs, trade cost reduction of 5%, FDI)– ASEAN “hub and spoke” scenarios (ASEAN as hub of an

ASEAN+6 agreement; ASEAN as hub of an FTA with EU and US)

Results

Results Summary: Aggregate• 5.3 percent increase in national income above baseline (very large

for such a model: EU Single market much less, for example).• All Member States gain.• Gains in welfare to Myanmar come to 4.4% of GDP. • In large part, this is because Myanmar has higher initial tariff and

non-tariff barriers.• Myanmar exports rise by 2/3 relative to baseline, more than any

ASEAN-6 economy.• Extending the AEC to include regional and US/EU partners leads to

doubling of gains for ASEAN overall and more than that for Myanmar (9.3%).

• This testifies to the logic of keeping the region open, something that is emphasized in the AEC Blueprint.

Additional effects not included in Model• Trade-productivity spillovers excluded• MRAs, other standardization excluded• Trade costs drop (5% ) conservative; could be much larger• Best practices: the project estimates that the competition-policy

related factors alone could raise raise per capita GDP by 28-38 percent over 10 years (using EBA approach).

• Excluded reduction in cost of capital due to enhanced financial development and cross issuances

• Greater efficiency in services should have significant spillovers into other areas (FDI, production networks, trade facilitation)

• Effects of free movement of skilled labor difficult to estimate but no doubt significant

Additional considerations1. AEC should stimulate attraction of production network chains

*This should enhance SME development and be particularly advantageous to least-development economies like Myanmar (and consistent with AEC’s “equitable econ region” goal).

2. ASEAN One Voice, or «ASEAN Centrality», could hold significant benefits.

3. Important to stress that ASEAN Members States need to mitigate effects of structural adjustment on the most vulnerable.

5. CLMV countries will in many ways be affected the most and will need help during implementation, including training and other forms of capacity building, infrastructure, other IAI.

Thank You!