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Cover Story - AEC: Set in Motion - AEC: Southeast Asia welcomes a new economic dawn

Source: Asia Insurance Review | Dec 2015

With the ASEAN Economic Community (AEC) to be formally launched on 1 January 2016, Asia Insurance Review recaps what an integrated market would mean for insurers and other businesses, and provides a quick list of the interesting dynamics and prospects of the ASEAN region.  The clock is ticking. Are you ready?  
By Ridwan Abbas
 
 
The ASEAN Economic Community (AEC) is the realisation of the region’s end goal of economic integration. It envisions ASEAN as a single market and production base, a highly competitive region with equitable economic development, and fully integrated into the global economy.
 
   Once AEC is realised, ASEAN will be characterised by free movement of goods, services, and investments as well as freer flow of capital and skills. With harmonised trade and investment laws, ASEAN, as a rules-based organisation will be strengthened and become more attractive as a single investment destination. 
 
   It will benefit businesses in ASEAN by providing a conducive environment through transparency, predictability and consistency. This will in turn benefit consumers who will have access to cheaper and wider range of goods and services. 
 
AEC in the making
The move towards a more integrated economic region can be traced back to 1992 when ASEAN leaders mandated the creation of the ASEAN Free Trade Area (AFTA).
 
   Since then, ASEAN leaders have agreed to build on the momentum achieved through the AFTA to broaden regional cooperation. They eventually committed to maximising opportunities for mutually beneficial regional integration and declared the AEC as one of the three pillars of the ASEAN Community, the two other being Political-Security Community and Socio-Cultural Community. 
 
   It eventually led to the AEC Blueprint being signed in 2007, to support the realisation of the economic community. 
 
Opportunities and challenges for insurers
A collective, vibrant and growing ASEAN market is certainly a positive for insurers, given the essential role of insurance in supporting various economic activities. 
 
   In the context of freer flow of goods and services, corporates tend to optimise their insurance programmes and would favour insurers who have strong capabilities in multiple locations as they look to expand in the region. 
 
   Conversely, the movement of corporate customers will likely encourage insurance companies to move with them. 
SMEs particularly from Singapore, Malaysia, Indonesia, Thailand, the Philippines and Vietnam have been making significant regional investments in infrastructure, real estate, manufacturing, services – and have thus been a driving force for increased market openings, say experts. 
 
   As part of the liberalisation process, detariffication measures are likely to be introduced in various markets for motor and fire business, and the MAT (Marine, Aviation and Transport) business will start to receive different treatment from a regulatory perspective. 
 
Impetus to nurture strong home-grown players
On the flip side, the anticipated integration may result in greater correlation between ASEAN nations in terms of business cycles. As such, insurers with revenues concentrated in the region might experience greater volatility. 
 
   The single market would also invariably increase the competitive pressures with the likely influx of more foreign players into Southeast Asia. Nonetheless, this may help prompt ASEAN insurers to improve their efficiencies and standards in order to compete. It could also provide an impetus to nurture strong home-grown players who can develop regionally to take advantage of the AEC. 
 
Journey will begin soon
We have only scratched the surface on the possibilities and challenges that the AEC would present to insurers and other businesses. The answers will only become clearer as the concept of the AEC matures and takes root in the region. 
 
   The road will certainly be a long one as various stakeholders balance the benefits and costs of liberalisation. But the journey will soon begin as ASEAN announces the start of the AEC by 31 December this year. 
 
   As we head forth on the AEC journey, below are some interesting points to note on the social, economic and political dynamism that makes ASEAN such an exciting place to be in right now. 
 
Eight points of note
1) ASEAN diversity
Southeast Asia is a region of different markets, varying economic developments, and diverse cultures, making it one of the most competitive regions in the world today. 
 
   ASEAN is powered by 600 million people, most of whom are young. More than a quarter belong to the 15-29 years age bracket, around 10% are children aged 5 years and below, while only 6% are seniors or 65 years old and above.
 
   Despite deep-rooted cultural differences, the countries share societal and social similarities. As in all social relationships, group consensus is important in all aspects of communication, and discussion takes place to achieve harmony in a collective manner. As a result, individuals identify themselves with groups and families. 
 
   Other similarities within the region include a forward-looking attitude and a willingness to cooperate and seek consensus for the common good – as reflected in the oft-cited “ASEAN Way” which characterises relations amongst member states. 
 
2) AEC goals 
The ASEAN Economic Community is defined by four pillars: (i) creating a single market and production base; (ii) increasing competitiveness; (iii) promoting equitable economic development; and (iv) further integrating ASEAN with the global economy. 
 
   In short, the AEC will transform the ASEAN economy into a region with free movement of goods, services, investment, skilled labour and freer flow of capital. 
 
3) What is the progress on the AEC so far?
Up till June this year, 458 out of 506 measures under the AEC Blueprint have been implemented translating to an implementation rate of 90.5%, according to Dr Bambang Irawan, Assistant Director, Finance Integration Division, ASEAN Secretariat. 
 
   Tariffs on exports of ASEAN-originating products between member states are already near zero, but businesses investing across borders still face non-tariff issues such as complex licensing and land acquisition requirements.
 
   Meanwhile, the ASEAN Framework Agreement on Services eases restrictions on cross-border trade in some 80 sub-sectors, though companies still face various foreign equity restrictions in the different ASEAN states. But where the insurance sector is concerned, majority foreign ownership of insurance companies is possible in most ASEAN countries. 
 
   Labour mobility for skilled workers is another issue. Between 2005 and 2012, ASEAN countries signed mutual recognition arrangements (MRAs) in six sectors - engineering, nursing, architecture, medicine, dentistry and tourism - as well as framework arrangements on MRAs in surveying and accounting to help facilitate cross-border labour mobility. These agreements allow each member country to recognise education and experience, licences and certificates granted in another country.
 
   But implementation in this area has been slow because in practice, existing national legislation and regulations run counter to regional commitments to labour mobility and discourage cross-border movements by professionals.
 
   However, the road to integration is understandably a long one – seeing it took Europe several decades before the vision of a single market materialised. What can be said is that ASEAN is heading down the right path. 
 
4) How important is the services sector in ASEAN, and to what extent has it been liberalised? 
Services form a very important component of ASEAN’s economy and accounts for between 40-70% of Gross National Income. Foreign Direct Investment in the services sector has accounted for more than 50% of total ASEAN FDI. 
 
   Services liberalisation is undertaken through successive rounds of negotiations, with each round resulting in more sectors being liberalised and fewer restrictions for the provision of services across borders. ASEAN is currently undertaking the 6th round of negotiations resulting in the 8th package of commitments. 
 
5) AEC not developed upon the EU model
While the term “economic community” for ASEAN resonates with the European style of integration, ie the European Economic Community, but the similarities end there. 
 
   Since the early days of ASEAN, the sovereignty of nation states and non-interference in domestic matters have been the key principles guiding the organisation. Economic cooperation is envisioned as a gradual process in ASEAN, with long term aspirations, rather than as a mechanism with strict rules that apply, irrespective of the economic nature of member economies and changing global conditions.
 
   There are many areas where ASEAN is different from the EU style of cooperation. For example, the EU is defined as a group of nation-states whose citizens may live, work and study anywhere in the region. However, this is not applicable for ASEAN and is highly unlikely to be accepted anytime in the near future.
 
   Given this background, for ASEAN, a more acceptable definition of community is a region where the leadership class and an increasing number of businesses and ordinary people feel that they share a common identity.
 
6) ASEAN consumer demand on the up
A McKinsey report stated that 67 million households in ASEAN are part of the “consuming class,” with incomes exceeding the level at which they can begin to make significant discretionary purchases. 
 
   It predicts that number could double to 125 million households by 2025, making ASEAN a pivotal consumer market of the future.
 
7) Rapid urbanisation 
The ASEAN region crossed the threshold of having more than 50% of its citizens in urban areas in 2012. And the rate of urbanisation is rapidly growing. 
 
   Some 13% of ASEAN citizens live in the region’s 28 cities that have more than 1 million in population. Another 14% live in 367 settlements of between 100,000 and 1 million people. Many companies today are thinking of ASEAN not from a country perspective, but through the lens of cities, towns and rural areas, with common product, pricing, branding and distribution strategies for different types of settlement.
 
   While many of ASEAN’s rapidly growing cities are not yet familiar to those outside the region, they are expected to become increasingly well-known given their rapid growth and rising wealth. 
 
8) ASEAN is home to many global companies
Another McKinsey report showed that in 2006, ASEAN was home to the headquarters of 49 companies in the Forbes Global 2000. By 2013, that number had risen to 74. ASEAN includes 227 of the world’s companies with more than US$1 billion in revenues, or 3% of the world’s total. Singapore is a standout, ranking fifth in the world for corporate-headquarters density and first for foreign subsidiaries.
 
   Aside from attracting multinationals, ASEAN has also become a launching pad for new companies – with the region now accounting for 38% of IPOs in Asia.
 
AEC in brief
The AEC is defined by a few key 
characteristics – a single market and production base, a highly competitive economic region, a region of equitable economic development and a region fully integrated into the global economy.
The areas of cooperation among ASEAN members include:
• Human resources development and capacity building
• Recognition of professional qualifications
• Closer consultation on macroeconomic and financial policies
• Trade financing measures
• Enhanced infrastructure and communications connectivity
• Development of electronic transactions through e-ASEAN
• Integrating industries across the region to promote regional sourcing
• Enhancing private sector involvement for the building of the AEC
In short, the AEC will transform the ASEAN economy into a region with free movement of goods, services, investment, skilled labour and freer flow of capital. 
 

 

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