Regional Cooperation, Trade

AEC is due—but what about institutions?

AEC is due—but what about institutions

A pressing policy question facing Association of Southeast Asian Nations (ASEAN) leaders at their summit in April 2015 and beyond is whether the ASEAN Economic Community (AEC) can be sustained without more effective institutions. This article explores the link between achieving the AEC agenda and institutional effectiveness. To remedy the implementation gridlock, it proposes reforms to the leadership and the technical level of ASEAN bodies, prioritization of new institutions, an effective monitoring mechanism, and an empowered ASEAN Secretariat.

AEC implementation gridlock

ASEAN has made notable progress toward achieving the AEC over the last decade or so. Import tariffs have been largely abolished, trade facilitation has become easier, services and investment liberalization has proceeded, and restrictions on capital flows have eased. But a large unfinished agenda remains. Many measures identified in 2007 to support the AEC are still pending, with an overall implementation rate of around 81% as of the end of 2014.

The key challenge to ASEAN is how to untangle the implementation gridlock on critical interventions for achieving the AEC. Some transport facilitation agreements for supporting the free flow of goods and enhancing connectivity remain unenforced, despite having been signed more than a decade ago. Some liberalization efforts have also stalled or been delayed because of the lack of a mechanism for enforcing commitments. A glaring example is the difficulty in committing to higher foreign equity participation for some service sectors to be liberalized. Furthermore, an effective plan to systemically eliminate investment impediments is needed to sustain the momentum of achieving an open and liberal investment regime in ASEAN.

Institutions for regional integration

International experience suggests that effective institutions lie at the heart of successful regional integration efforts. Over time, regional institutions need to evolve to effectively set rules and enforce rules (hard law), spread voluntary best practices (soft law), and monitor the progress of implementing commitments. The process of building a coherent economic community that systematically intertwines heterogeneous economies is complex and difficult. Difficult policy choices, however, are involved in formulating an appropriate institutional architecture geared to regional and national circumstances.

The European Union is famous as an example of a heavy institution-building process, defined by a customs union and a large and powerful secretariat, among other distinctive features. This arose from an arduous political process backed by significant financial and technical resources. Alternatively, one might envisage a more nimble, light institutional process centered on consensus-based decision-making with modest secretariat and resource demands. Under the institution-light heading that defines ASEAN, existing institutions or institutional arrangements can be enhanced to facilitate more effective integration.

Where does ASEAN stand?

To be fair, some progress is visible on the institutional front in ASEAN. In 2007, the ASEAN Charter was signed and transformed ASEAN into a rules-based organization for the first time in 40 years. ASEAN’s institutional framework was strengthened—and with it, new committees and councils emerged (such as the Committee of Permanent Representatives and the ASEAN Economic Community Council) to solidify decision-making on key issues related to the AEC. Efforts to continuously improve regional agreements (like the ongoing discussions to enhance the ASEAN Framework Agreement on Services) are also encouraging.

While ASEAN has developed some institutions to support the AEC process, the full potential of those institutions is not fully utilized and there are gaps in its institutional architecture. The time is ripe for ASEAN to strengthen the institutional or supply-side factors of integration to overcome the implementation gridlock that threatens to undermine the credibility of achieving the AEC.

Reforming ASEAN institutions

So what needs to be done? First, urgent reform is needed of the roles and functions of leadership and the highest decision-making bodies in the AEC, notably the AEC Council and ministerial bodies. Given the complex nature of the AEC (where integration issues cut across different sectors and implementing agencies) it is crucial that a strong coordination mechanism be created for integration efforts, both at the regional and national levels. It is worth revisiting an earlier proposal for a dedicated AEC coordinating minister in each country to address implementation problems related to the AEC in each country. At the regional level, regular joint meetings among key ministerial bodies are also suggested to discuss and make quick decisions on key AEC policy issues. Furthermore the membership of the AEC Council should be structured so that its members do not come mainly from trade (as at present), but also from other key economic sectors like finance, investment, agriculture, transport, infrastructure, and telecommunications.

Second, a review should be conducted of the functions and activities of the plethora of technical level bodies composed of ASEAN officials responsible for implementing the AEC. This review (covering meetings of senior officials, working groups, and committees) should be undertaken with a view to improving the efficiency of business processes for implementing AEC priority activities, reducing duplication of tasks between different bodies, and cutting the numbers of meeting that seem to overwhelm over-stretched government officials from member countries. Each sector has to maintain a lean structure for organizing meetings, perhaps by keeping only the most important bodies where technical discussions and key decisions are made. Part of streamlining, also, is to keep ASEAN meetings more focused, efficient, and effective. It would be useful to review the terms of reference of the various ASEAN bodies and assess whether the current structure is still responsive to the demands of the AEC, especially as some economic sectoral bodies were created more than a decade ago.

Third, ASEAN should prioritize the implementation of key institutions that need to be set up immediately. One such institution would be for the strengthening of a dispute and settlement system in the region. A compliance system where governments and firms can adhere with their obligations under the AEC should also be developed. With strong institutions, the responsibility of implementing and enforcing community decisions will become clear, thus preventing countries from circumventing their obligations and undermining integration initiatives. Strong regulatory reforms are crucial in helping to address market failures and international spillovers, with inevitable consequences for trade flows and investment.

Fourth, an effective monitoring mechanism for the AEC should be created. With so many initiatives to implement by 2015, it is imperative that a strong monitoring mechanism be put in place both at the country and regional levels. In the absence of an effective and well-functioning mechanism to monitor the outcomes, identify issues, and address implementation gaps, the risk of the AEC falling short of achieving its targets by 2015, and even beyond, is high. For one, a strong regional monitoring body is needed to follow through on regional commitments. This should be complemented by an effective in-country monitoring of AEC measures based on actual implementation of integration initiatives.

The establishment of the ASEAN Integration Monitoring Office (AIMO) in 2010, through support from external funding, is a useful start, but this office has to be integrated soon as part of the ASEAN Secretariat structure with its own internal budget. This is critical to sustain the operations of AIMO.

Finally, an empowered ASEAN Secretariat is needed. This is an old issue, but needs to be seriously discussed again because a strong institution for coordinating regional efforts, implementing regional measures, and monitoring regional performance is critical if the AEC is to progress at a higher and deeper level of integration. The ASEAN Secretariat is the only body that can do so, having the institutional memory of ASEAN operations (including knowledge and history of major agreements and protocols) and being fully grounded on the realities in the region.

Recent efforts for the review and implementation of a new salary structure for the secretariat’s staff are encouraging, but insufficient. More radical solutions are needed, including raising the secretariat budget to enable it to perform effectively as a regional institution. There are solutions of course to support a higher budget (e.g., revising membership contributions based on each country’s capacity to pay), but it is now up to member countries to turn those solutions into reality, especially if they are indeed serious about creating their own ASEAN community.

Photo: By Gunawan Kartapranata (Own work) (“ASEAN Flags“). Licensed under Creative Commons Attribution-Share Alike 3.0 Unported via Wikimedia Commons.

Aladdin D. Rillo

About the Author

Aladdin D. Rillo is a senior economist at Asian Development Bank Institute (ADBI).
Ganeshan Wignaraja

About the Author

Ganeshan Wignaraja is Advisor in the Economic Research and Regional Cooperation Department at the Asian Development Bank, and prior to that was Director of Research at Asian Development Bank Institute.

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