The ASEAN Economic Community - Threat or Opportunity?
    Category: Column By : Haryanto T. Budiman Read : 5602 Date : Tuesday, May 05, 2015 - 10:52:16

    The decision to establish an ASEAN Economic Community at a summit meeting in Kuala Lumpur in 1997 was borne from the vision to transform ASEAN nations into a stable, prosperous, and highly competitive region. The plan to achieve this was through a single market and production base with a free flow of goods, services, investment, labor and capital. Since then, some have suggested that Indonesia, being the biggest market in ASEAN, will be the most vulnerable country when the AEC is implemented, as goods and services from other countries in the community will enter without restriction.

    This suggestion is made worse by a common misunderstanding that once AEC is implemented, Indonesia will be completely opened for investment from other ASEAN countries, including the banking sector. Those who commented that the AEC will threaten the existence of the local banks have forgotten that Indonesia adopted an open door policy in the sector in 1998 whereby foreign ownership is allowed up to 99%. Therefore, several major ASEAN banks, including three Singaporean banks and the two biggest Malaysian banks, are already present in Indonesia irrespective of AEC implementation. Due to the relatively small size of banks outside of those already here, plus the high barriers to entry in terms of cost and competitive landscape, it is unlikely that more banks from emerging ASEAN countries will enter the market in Indonesia.

    Rather than debating the impact of AEC on the banking sector, instead we should focus on how to attract investment into the manufacturing sector, which will, arguably, be affected adversely by the free flow of goods, services, investment, labor and capital within the new economic community. Indonesia does not have a robust manufacturing strategy and more than 60% of its export volume is still dominated by commodities. The reliance on imports for raw materials and capital goods is still high. AEC implementation poses an opportunity for Indonesia to attract manufacturing from other ASEAN countries. The facilities will by design be export-oriented and could help improve trade and current account balances. With more open economies in the region, it is not surprising that every ASEAN country will try hard to attract such investment.

    To succeed, Indonesia must create a welcoming environment for investment and several issues must be addressed. The existing labor law might need to be revisited in order to make Indonesia competitive compared with other ASEAN countries; attractive tax incentives could be offered to those companies that are willing to use Indonesia as a major production base; and the licensing process must be further streamlined with strong coordination between the central and regional governments. We simply cannot afford to be complacent as any delay in addressing the shortcomings could result in companies moving their manufacturing facilities to other countries. If that happens, we could become the victim of our own inactions.