JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) – Covid-19 has put the biggest test yet on Asean.

With weakened fiscal positions and a stark development gap, Asean integration remains uncertain. With five more years left to its scheduled deadline, can Asean achieve its desired community?

The pandemic has hit Asean countries considerably hard, threatening the region with economic recession. Millions have become unemployed, driving household incomes sharply downward, and gravely impacting consumer spending.

Asean member states are now exploring drastic measures to keep the economy afloat, but figures in 2018 show that several member states have sizeable debt (more than 30 per cent) as a proportion of their gross domestic product, making them particularly vulnerable to external shocks.

Asean deficits ballooned since the global financial crisis in 2008, during which ultra-low interest rates and quantitative easing (QE) in the United States, European Union and Japan triggered hot money flows into Asean.

This rush of capital fuelled an economic boom in Asean, driving property prices and exchange rates sharply upward. Cheap credit also means unprecedented government borrowing, which culminated in today’s fiscal deficits.

Today, Asean currencies are depreciating rapidly, and capital outflow is a serious concern. With limited money in the public coffers, a damning pandemic and a collapsing private sector, some economists are even suggesting that Asean countries should adopt QE too.

Will this race to the hinterlands of debt ever stop? What impact will the incessant printing of money in countries around the world do to the global financial system?

As evident in the US and EU, QE has led to excessively low bond yields, spectacular falls in bank shares and severe income inequality in these countries, the latter of which has led to the rise of populism in Europe and America that we see today.

Income inequality and the development gap within Asean are also worrying trends. Since its founding in 1967, Asean’s efforts to create an economic community have progressed very well on many fronts; tariff barriers coming close to zero through the Asean Trade in Goods Agreement, the 10th and final package of services liberalisation under the Asean Framework Agreement on Services is finally being concluded, and many more.

But Asean is still far from its target. Its non-tariff barriers (NTBs) still hinder intra-regional trade, having spiked from around 2,000 in 2015 to about 9,000 in 2019, and in the absence of a customs union, it is difficult for international investors to treat the region as a single market.

The NTBs stem from the need to protect domestic markets against the full heat of free trade. As Gita Wirjawan, a former Indonesian trade minister, argued in 2015, in opening up a country’s borders to trade, we need to ascertain whether such opening is detrimental or beneficial to our economy.

For example, in 2015, Indonesia’s labour productivity per capita was US$20,000 ($27, 855) on a purchasing power parity basis, compared to Malaysia’s $50,000 and Singapore’s $115,000.

From these numbers alone, we can see the repercussions for Indonesia once the trade gates open fully. This explains why Indonesia is hesitant on full integration despite being one of the founding fathers of Asean and a major proponent of the Asean Economic Community.

And these are legitimate concerns. Ever since Mexico signed on to the North American Free Trade Agreement (NAFTA) with the US and Canada in 1994, it has wiped out family farmers and led to a net loss of 1.9 million jobs in the agricultural sector as a result of competition with the highly subsidised US agricultural industry.

The story of corn in Mexico, a traditional staple of Mexican cuisine, is illustrative. As a result of NAFTA, Mexico’s multi-coloured corns have been replaced by cheaper genetically modified yellow corns from the US flooding the market. Mexico’s story remains a lesson on unbridled free trade agreements.

The latest Doha Round of the World Trade Organisation collapsed because of agricultural subsidies from the US and the European Union. If the champions of free trade cannot relinquish their subsidies, how can they expect other countries to do the same?

Can Asean shed protectionism and prevail as a community in 2025? It has a very strong chance; the following are four key recommendations:

The first is the “sunset law”. Economic nationalism and infant industry protection are similar but vastly different in intent and purpose.

As Asean countries have signed up for economic integration, their protectionism policies are time sensitive. Therefore a “sunset law” is the best policy to enforce a period or milestone framework on their protected industries.

The second recommendation regards investment and financial integration: They should be the main priority, because if the economic destinies of Asean member states are indeed intertwined, it will give Asean integration a more concerted push.

Goods, services and persons will follow suit. Hence the Asean Trading Link must be revived to foster cross-border investments. It is futile to expect integration of an economic community between countries with different economic destinies.

Third, revitalise the Asean Swap Arrangement (ASA). Covid-19 and other pandemics will continue to test Asean’s financial resilience.

But sole reliance on external arrangements such as the Chiang Mai Initiative Multilateralisation will greatly undermine Asean’s own financial cooperation.

Asean should revitalise its swap arrangements considering its combined international reserves position of more than US$900 billion.

At least US$50 billion can be used to set up an emergency fund for Covid-19. The measure of QE should always be seen as a last resort when all else fails.

Fourth, development over integration: Rather than focus solely on textbook economic integration, Asean should focus on facilitating the development road maps for each member state. Thus, the Asean Secretariat can assist member states to shift attention inward into improving their policies and structures.

Particularly under this devastating pandemic, each nation seeks a solid footing before reaching outward for integration.

The writer is executive director of the International Strategy Institute. The Jakarta Post is a member of The Straits Times media partner Asia News Network, an alliance of 24 news media organisations.

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