On ASEAN, Asian Economic Integration, and China

An Interview with SAIS Europe Director Michael Plummer

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Michael Plummer Interview
On ASEAN, Asian Economic Integration, and China : An Interview with SAIS Europe Director Michael Plummer - The Editorial Staff

Abstract

We are proud to introduce our readers to SAIS Europe’s new director with this interview. Michael Plummer, himself a 1982 SAIS graduate, has been the Eni Chair of International Economics at SAIS since 2008 and has taken on the role of SAIS Europe director as the Bologna campus marks its 60th anniversary this year. He is a distinguished economist, who has served as the head of the development division of the Organization for Economic Cooperation and Development (OECD) and editor-in-chief of the Journal of Asian Economics. Prior to SAIS, Plummer was an associate professor at Brandeis University, also serving as the Director of M.A. programs at the university’s Graduate School of International Economics and Finance, now known as the International Business School. (Interview transcript has been condensed and edited for publication)

ASEAN

You’ve written and spoken quite extensively about Asian economic integration. As we kick off 2015, could you give us an outlook as to what you see for the ASEAN Economic Community this year?

To some degree, I would separate what's going on internally within the Association of Southeast Asian Nations (ASEAN) from what's happening with the Regional Comprehensive Economic Partnership (RCEP) and the Trans-Pacific Partnership (TPP), though ASEAN countries are involved in these latter two “mega-regional” arrangements as well. The ASEAN Economic Community (AEC) was something that ASEAN members agreed to strive for beginning in 2003, but it wasn't until 2007 that they came up with a blueprint for action. Originally, the goal for completion was envisioned to be in 2020 but this was then accelerated to 2015. The AEC was developed under four “pillars,” and they set up a process later of checking on how much progress had been made in each of the different areas—the “ASEAN Scorecard”—as they proceeded towards 2015. The AEC was very important internally, in part because ASEAN is such a diverse regional organization and its member countries have been developing so many agreements with external partners, creating a strong need for cohesion. Otherwise, there is the potential for centrifugal forces that might dilute ASEAN integration.

So that was the motivation for it. How likely is it that they'll finish by the end of 2015? That question might depend on what one means by success. My greatest fear - and I've worked on ASEAN a long time - is that next year, when it comes to the point that officials realize they might not have done everything they set out to do, they will redefine success such that they will declare victory regardless of the state of affairs.  Of course, deadlines are necessary, but what's important is to have the continuous process of deepening integration. That's what we saw in the case of European integration. The Single Market was supposed to be completed by the end of 1992, but it wasn't; still, this wasn’t an issue because the process was in place and great progress was being made.  Real sector integration in Europe has been a great success.

So what is important here is reaching the goals?

It's about the goals and the process. Certainly assessing progress is important.  But the way it is being done in ASEAN is problematic in that the Scorecard is a matter of self-assessment and ticking boxes, and as such it isn’t an objective evaluation. One box might be extremely important, one might be very insignificant, and yet they're going to be the same checks. There are better ways of assessing how well the AEC is progressing, and some of my ASEAN colleagues and I have done some empirical work to check.  Indeed there is evidence that a good deal has been done -- though the difficult parts remain.  But what’s important is that the objectives of the AEC should be accomplished.  Now, I know that many experts are skeptical, but they were also skeptical about the European Single Market Programme and the North American Free Trade Agreement (NAFTA), but both of these initiatives were instrumental in deepening regional integration.  

So what kind of benchmarks by the end of 2015 would show progress?

There are many of these.  Trade facilitation indicators, for example, are extremely important in the ASEAN context.  The ASEAN Single Window—which would bring together a series of National Single Windows—in the area of customs is not “sexy” but is an important part of the AEC and should generate significant gains by reducing trade costs and uncertainty.  While the ASEAN countries are late in putting them in place, they are making real progress.  The ASEAN Free-Trade Area is essentially in place already, except for some lingering tariffs in some of the transitional economies like Myanmar, and the region is now tackling non-tariff barriers in earnest – though again much still needs to be done. Free trade in services is not going to be in place by 2015 for a number of reasons, including the fact that doing so will require significant changes in legislation in some countries.  In short, it is going to be a long process but, again, it was the same for Europe; mutual recognition of everything from legal and medical credentials to engineers and architects is no mean feat. It's going to take a completely different mindset. Will it be done by 2020? I don't know; I don't care. What's important is that the process needs to continue.

 

RCEP

What kind of outlook would you give for the Regional  Comprehensive Economic Partnership (RCEP)?

The RCEP and TPP are very much related to each other in that, if the TPP goes through, it will set a fire under the RCEP negotiators to step up the pace.  At present, it has sort of been in a holding pattern; it hasn't made much progress. RCEP has a lot of challenges, in particular, in my view, with India on board:  India is a very large economy with a different mindset relative to East Asia in terms of a trade policy, which is a problem. Its original deadline for completion was also the end of 2015, when 10 out of the 16 negotiating partners are in ASEAN countries who are already scrambling to complete the AEC – and four ASEAN economies are in the final throes of the TPP negotiations.  Even for an optimist like me it’s difficult to see how that could happen!  Is that a problem? Again, I'm not sure it is. The TPP had a big deadline in October 2013 and, of course, it wasn't done. There was another deadline this past November, and it, too, passed without a deal.  Still, an accord may be ready by end-of-spring.  The Transatlantic Trade and Investment Partnership (TTIP) between the EU and US was also supposed to be completed on “one tank of gas” but a deal is far from sight.  Getting it right is really what's important.

If TPP is completed, in my view, it’ll be a whole new ballgame. The TPP is US-led and RCEP has China in it as well as ASEAN.  If the TPP goes through, there will be a strong incentive for China – and ASEAN – to push forward in RCEP, as well as for the EU to make progress on TTIP.  At the recent APEC Summit in China this past November, China focused on the “Free-Trade Area of the Asia-Pacific” (FTAAP) idea, which would be a free-trade area to include all APEC members.  Now, in 2010 at the APEC Summit it was agreed that the target to start negotiations for a FTAAP should be 2020 and it explicitly mentions the TPP and an “Asia track” – now the RCEP – as pathways to the FTAAP.  As my co-author, Peter Petri, and I have stressed in several publications, the economic benefits of TPP and RCEP will be large, but the really big gains happen when the FTAAP is created, that is, when China AND the US are part of the same pact.  Should the TPP go through, it will increase significantly the probability that the FTAAP will be in place.  And the FTAAP would include about 47 percent of global GDP; throw in the EU under TTIP — and the probability that TTIP will happen is also a function of TPP — and the share rises to 73 percent of global GDP that would fall under these mega-regional arrangements.

 

Lessons from European Economic Integration

While we’re on the topic of economic integration, what are your thoughts on the Eurozone and European economic integration?

We have to separate real and financial integration in Europe from monetary integration, because the Single Market Programme has been an unmitigated success, as I noted earlier, whereas monetary union has been much more controversial. The four freedoms haven't been perfect, but the Single Market has gone so far to integrate the economies, and what is quite evident in every study I've looked at, and  from living in Europe for the past decade and a half, is that the effect has been very positive in terms of this real sector integration.

In my view, the challenge facing Europe regarding the euro is often popularly misconstrued. I'll give you an example: I used to take a train every week round trip to Bologna from Orte. Back in those days, the train was scheduled to take 3 hours and 4 minutes to 3 hours and 8 minutes, depending on what time you got it, and it was late maybe 90% of the time. Usually not more than 20 or 30 minutes, but 90% of the time, it was late. Trenitalia, no doubt, got lots and lots of complaints about that and responded. But they do so by extending the schedule to be 3 hours and 48 minutes, giving the train an additional half-hour. Now when I take it the train is usually on time. From a planning point of view, it is better to have a realistic schedule than be late all the time. But wouldn't it have been better to increase productivity and to be on time when it really only should take 3 hours and 4 minutes? The same problem is true for the Euro.  For example, Italy used to be able to increase competitiveness by allowing the value of the lira to fall.  This solved the demand problem by increasing exports and reducing imports, so it was likely better off with its own currency, ceteris paribus. However, adjusting the external price does nothing for productivity, which is necessary to increase the Italian standard of living over the long-term. Rather, an internal devaluation would be far better for Italy. And finding ways of doing this is not difficult in Italy — for example it ranks fairly low in the World Bank’s “ease of doing business” index — but there hasn’t been the political courage to do so.  Like the extended train schedule, a depreciation would be better if no reforms are possible, but reforms are necessary if Italy is to become competitive again.  In short, it is better off with the euro and reforms. Hopefully this is where Prime Minister Renzi will be taking us! Good luck to him.

What lessons can be learned from European economic integration as these trade agreements are being formed and implemented in Asia?

I did some work on the economics of a possible monetary union in Asia in the mid-2000s and the conclusion we came to was, if one uses the same economic tools to assess whether or not East Asia is an economic union using Europe as the yardstick, the region performs quite well, relatively speaking.  The only exception was “institutional convergence” in the area of finance:  Eurozone economies were all developed, and East Asia was quite divergent — of course, it is clear today that Europe also probably needed more institutional convergence!  In any event, I think that the European project has been extremely successful and that the European model has many lessons — both positive and negative — for Asian integration. Frankly, Asian integration also has lessons for European integration; for example, Asian economies tend to be more concerned with best-practices, whereas European integration has focused on national treatment.    

My concern is that in the minds of ASEAN leaders, European integration is being equated with monetary integration. The focus in Asia at present should be on real-sector integration; Europe provides a useful roadmap in this area.  Of course, sequencing is important; countries can move forward only when they are ready.  Was Europe ready for a Single Market when launched? Absolutely. It already had a customs union in place for 20 years or so, and creating a common market made a great deal of sense.  Was it ready for monetary union?  In my view, some countries certainly were, but obviously there were some problems with others!  

 

ASEAN & China

What do you see as ASEAN's end game? Are they positioning themselves to be a financial player alongside the E.U., U.S. and China?

That's an excellent question. In my view, there are economic and political and security endgames. Since the founding of ASEAN, the main concerns were security and political stability. The idea was to come together and jointly address threats to the region; ASEAN was founded in 1967 during the Cultural Revolution in China and the increase in conflict in Vietnam, creating major security challenges in the region.  The first ASEAN Summittook place  in 1975 when communists succeeded in integrating all of Vietnam and the “domino effect” was a major concern.  The region came together to oppose Vietnam’s invasion of Cambodia.  The last thing that ASEAN leaders would like to do is jeopardize this type of cooperation.  In fact, some believed that with the end of the Cold War ASEAN would cease to be important, as the political-security glue that held it together was no longer there. This proved not to be the case, but the political-security dimension of cooperation is still essential.

On the economic side, the endgame regards competitiveness. Competitiveness for ASEAN means integration into the global economy, which is the “fourth pillar” of the AEC, and “competitive economic region” is the “second pillar.” The first pillar, “single market and production base,” is also about competitiveness. The AEC Blueprint and ASEAN leaders talk about “open regionalism,” which is about using ASEAN integration as a means of boosting global competitiveness – not just within the region.  This is, of course, natural for ASEAN, as it does 75 percent of its trade and receives over 80 percent of its Foreign Direct Investment from outside the region.

So economic cooperation in ASEAN is not just about increasing intra-regional trade and investment shares but rather about boosting competitiveness. This distinguishes it from other regions, such as in South Asia or Latin America in the past, in which economic cooperation derived more from political goals than economic ones.  Moreover, it's about competing better with China. In the U.S. and EU, one reads in the media much concern about and criticism of Chinese competition, even leading to what one might call “China bashing.”  Imagine if you were at the same level of economic development and sitting at the back door of China; you’d be even more nervous, wouldn’t you?  So even though ASEAN established one of its first free trade areas with China, and China and ASEAN are very closely involved in regional production chains, ASEAN obviously sees China as a competitor.

 

What do you think makes China competitive with ASEAN?

Why does China appear so much more competitive than the ASEAN economies? Is it political stability? Perhaps. There might be something there, I'm not sure. ASEAN tends to be a politically stable region. It's not particularly stable in Thailand at the moment, but has that had a big effect on business? No. The problems of the Thai economy result from bad policymaking; it's not necessarily the instability. Is it cheap labor? Well, no, since ASEAN only has three least developed economies among its members.  Is it middle income, high income? ASEAN has all of that. Has China done much better in the competitiveness ratings, for example, the World Bank’s ease of doing business rankings? Well, for some ASEAN countries, yes, but for others, no.  

Going through the list of competitiveness-related variables, the big differences stem from the fact that China is an integrated market of 1.4 billion people and ASEAN is a not-yet completely integrated market of 600 million. It's still a huge market — population-wise as big as the EU – but it's not integrated.

And so, what's the economic endgame regarding competitiveness for ASEAN? Economic integration, that is, allowing a regional division of labor which makes it more attractive for welfare-enhancing inflows of Foreign Direct Investment, economies of scale, and the like. Of course, ASEAN cooperation needs to be undertaken pari passu with domestic reforms — a lesson that European countries would have done well to take more seriously.  But in my view, ASEAN economic integration could do a great deal to enhance regional competitiveness, which is why I am so optimistic about the AEC.

China's Global Investments

On the subject of China, how do you view China’s economic investment in Africa and Latin America?

I think that China's greater attention to other regions, especially Africa and Latin America, in terms of investments, building infrastructure, and these sorts of things, tends to be very positive. If anything, it's giving competition to the West, and competition is good. That is, I think it is positive as long as it is market-based. The criticism that the OECD economics would have of China is that some of the infrastructure projects and major investments might include “tied aid”, which by OECD rules would be unacceptable. But China is not part of the OECD, and China doesn't even have a formal aid policy — it calls it "Technical Assistance." Tied aid in the context of loans, for example, can suggest that development assistance is more of a commercial weapon than an instrument of development.

Secondly, one hears a great number of anecdotes regarding the rise of China in these developing regions; I have to say that I haven't looked at the data — to the extent that reliable data exist — but there is a good deal of talk about “land grabs” and other nefarious actions.  I’m not convinced. If China bids on 100 square miles in a certain African country that it would be willing to cultivate and the price is market-based and internationally-accepted legal norms are followed, that should be beneficial for the country in the same way that Foreign Direct Investment tends to be. The popular anecdotes suggest that when China or some other emerging market goes into a developing country, where there are governance problems, a deal can be struck to the detriment of the country — but to the advantage of corrupt officials.  Still, from what I've seen, China has been a far more reasonable global citizen than some of the critics point out.