'The worst crime for a risk manager will be to be caught asleep at the wheel’

What do you know about the Association of Southeast Asian Nations (ASEAN) Economic Community (AEC)? If you are like most people, not a lot; and what you do know is probably linked to a particular date: 31 December 2015. This is the day that the AEC officially comes into existence, but it is only part of a longer process of transforming the economies of ASEAN’s 10 member states into a single market and production base.

What does this mean in the real world? Well, it certainly does not mean that everything in South-East Asia will immediately become different. When I spoke with Deloitte’s AEC agenda leader Jeff Pirie recently, he told me that he talked to people on a daily basis who thought the world was going to change on 1 January 2016. Pirie says it is clear that “the level of awareness and intimacy with [the AEC] among the business community is not what it should be”. “Isn’t it stunning that this tectonic shift is going on and everyone’s wondering what it is all about?” he asked me. “I had one conversation with a services association where [its members] asked me when liberalisation was going to happen. In fact, five rounds of negotiations have already taken place,resulting in eight packages of liberalisation.”

In short, the leaders of ASEAN’s 10 member states (Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam) have agreed to transform their economies into a single market and production base. Pirie says the AEC is commonly defined as a single production market that is “competitive and very much integrated with the world economy”, which he concedes is a nebulous concept. “It should make economies that are close to each other more connected, but that does not mean they will become one or uniform,” he explains. “If you hold yourself up to the bar of a single and uniform market, I can’t think of one market in the world where you could say that.” A widespread view, he says, is that everybody involved is aligned to and clear about a single ideal. “However, I think this is unrealistic. Different players all have a different perspective on the end goal and they will certainly be tactical about how they get there. So, I believe the implementation will morph and change over time. It will be organic.”

I was speaking to Pirie in relation to a Deloitte report that reviews how and at which point work for the AEC started, where the AEC is heading and why it is happening. The ABC of AEC: To 2015 and Beyond examines what is seen as a uniquely South-East Asian approach to multilateralism and charts the progress of the integration progress so far. It also explains that the AEC does not seek to establish a uniform ASEAN marketplace or implement uniform economic policies regionally. “Instead, the AEC translates diversity (often hailed as ASEAN’s weakness) as a strength,” the report states. “With integration, ASEAN’s variety becomes attractive to global investors, combining as it does the capital and skills of its more economically mature member countries (such as Singapore) with the competitive costs and abundant labour and resources of its developing ones (such as Myanmar).”

The report states that the potential gains from implementing the AEC are enormous: “In numeric terms, conservative estimates (in time and in effects) by academics show more than 5.3% gains above base-line growth within a five-year period. But more than that, the AEC has the potential to move South-East Asia on to a higher and more sustainable growth path.” Last but not least, the report predicts that integration will give South-East Asia a bigger role within the economies of Asia-Pacific and a louder voice at the table when negotiating with the large economic powers. “It holds the key to forging a long-term strategy for shared prosperity among ASEAN’s members,” it concludes.

Pirie’s advice for Asia’s risk professionals is to keep a close eye on the integration process. “The worst crime will be to be caught asleep at the wheel,” he says. “Saying that, if you are informed, you analyse and you conclude that there’s no change in direction required, that’s fine, as it’s not going to affect everybody equally or in a profound way.” One thing is for sure, Asia-Pacific’s risk managers must be alert to AEC integration and how increased competition may be the top challenge to arise from it.