Indonesia and The Implementation of ASEAN Economic Community International Business Management Esther Kezia Simanjuntak 3099190 ABSTRACT Asean Economic Community (AEC) 2015 is a free market realization in Southeast Asia,which has been done gradually starting from the ASEAN Summit in Singapore in 1992. The purpose of establishment of ASEAN Economic Community (AEC) is to improve economic stability in ASEAN region and solve economic problems among ASEAN countries. The consequences of the AEC agreement are the free flow of goods for ASEAN countries free flow of services, free flow of investment, free flow of skilled labor, and free capital flows. These things could certainly give positive or negative effects for the Indonesian economy and also for foreign countries. It is essential to do SWOT analysis in order to determine the readiness of Indonesia and preparing strategies correspondingly.
1 Introduction Conflicts between Southeast Asian countries such as "confrontation" between Indonesia and Malaysia, territorial claims between Malaysia and the Philippines concerning Sabah, and the separation of Singapore from the Malaysian federation. Against this background, Southeast Asian countries recognize the need to establish realization of cooperation in the form of ASEAN organization. It aims to alleviate mutual suspicion and build mutual trust, and encourage regional development cooperation. The establishment of ASEAN began with the holding of five foreign ministers from Indonesia, Malaysia, the Philippines, Singapore and Thailand. This meeting took place in Bangkok in August 1967 resulting in the design of the Joint Decralation, which essentially regulates regional cooperation in the region. On August 8 1967, the ASEAN Declaration was signed or known as the Bangkok declaration by deputy prime minister and concurrent foreign minister of Malaysia and foreign ministers from Indonesia. Philippines, Singapore and Thailand. Brunei Darussalam then joined on 8 January 1984, Vietnam on July 28, 1995, Lao PDR and Myanmar on 23 July 1997 and Cambodia on 30 April 1999. The financial and economic crisis that occurred in Southeast Asia in 1997-1998 sparked awareness of ASEAN countries on the importance of enhancing and strengthening intra- regional cooperation. ASEAN Economic Community is a concept which was adopted in the Declaration of ASEAN Concord II (Bali Concord II) in Bali in October 2003. The desire for the purpose of integrating the economy in the ASEAN region seems to be more and more important therfore ASEAN, at the 12th summit in January 2007 changed the target of AEC 2020 to 2015. The goal is clear, namely to make ASEAN as a region where goods, services, investments, skilled workers, and capitals can move freely. The ASEAN Economic Community Blueprint (AEC Blueprint) contains a strategic work plan in the short, medium and long term. The ASEAN Economic Community Blueprint (AEC Blueprint) must be implemented by member countries towards the establishment of ASEAN economic integration in 2015. 2 ASEAN Economic Community 2015 2.1 AEC 2015 The vision of ASEAN is to transform the region of Southeast Asia into a stable, prosperous, and competitive region supported by balanced economic development, poverty reduction, and socio- economic disparities between member countries 1. The implementation of AEC at the end of 2015 is the conclusion of more than two decades of economic integration. 1 ASEAN Vision 2020 www.asean.org
1992 ASEAN Free Trade Area (AFTA) Custom Tariffs are reduced to 0-5% within 15 years 1998 ASEAN Investment Area (AIA) Foreign investors receive "national treatment" 2003 Bali Concord II Esthablishing 3 Pillars - Economic Community - Political Security Community - Social Cultural Community 2015 AEC takes effect in December 2015 2009 ATIGA ASEAN Trade in Goods Agreement 2007 AEC Blueprint Figure 1 The AEC Map In favor for establishing AEC, members of ASEAN agreed to carry out ASEAN Free Trade Area (AFTA), where the custom tariffs are reduced to zero until five percent as the commitment of single market 2015. Elements of Economic Community involve: 1) To establish a single market and production base. The goal Is to break down barriers to trade and investment, and to encourage movement of skilled labors. 2) To develop a competitive economic region, which includes: a. Elimination non- tariffs barrier (NTB) b. Reducing transport by developing infrastructure c. Encouraging innovation and intellectual property rights 3) Achieve an equitable economic development region by supporting business in countries with less develop economy. 4) To integrate ASEAN to global economy. ASEAN must not be isolated but part of global economy. 2.2 Role of AEC in Global Economy If all ASEAN member states join into a single country, it would be the seventh largest economy in the world and is estimated becoming the fourth largest economy by 2050. The population of ASEAN is the third largest in the world meaning ASEAN has high consumer demand, with 67 millions households is part of the consuming part which
could double to 135 millions by 2025. The intra- regional trade within ASEAN is however less than half than EU which could deepen significantly with the establishment of ASEAN Economic Community (AEC). ASEAN includes 227 of the world s companies with more than 3 billion dollars revenues (3% of the world total) and has macroeconomic stability that provides platform for growth with the government debt 47% of GDP. In the past five years, the GDP of ASEAN has increased by 5.6% and it is predicted will remain above 5% during 2015-2020. ASEAN GDP takes account for 5% of the world GDP, which is half of Japan and two- thirds of Germany. Of all ten members, Singapore has the highest GDP per capita at US$55,182 US Dollars meanwhile Indonesia has 14 times smaller, but GDP of Indonesia takes 36% of total GDP of ASEAN region. This results in reduction of share world GDP for industrial nations such as Germany and Japan, hence will impact on world economy. Figure 2 ASEAN GDP (EY, 2015) 3 The Country of Indonesia 3.1 Social Situation Indonesia has population of 257 million people (2015) and is estimated to keep increasing to around 315 million by 2035 with current growth rate of 1.14%. There are 17.508 islands in Indonesia, with 5 being large islands (Sumatra, Kalimantan, Sulawesi, Papua, Java). Having many islands results in high diversification either of culture or language among people in the country. There are roughly 342 tribes or ethnicities and
742 different languages in Indonesia. The native language of Indonesia is called Bahasa Indonesia that is spoken by 80% of population. Indonesia is well known as religious country with 6 religions being officially recognized: Moslem (86%), Christian and Catholic (8%), Hinduism (3%), Buddhism (1,8%), and Confucianism. This gives a fact that Indonesia is the country with the highest number of Moslems in the world. Current life expectancy in Indonesia is 68.89 years with unemployment rate of 8.4% and 17.8% people live under the poverty line. It is estimated that by 2020 to 2030, Indonesia will experience the peak of demographic bonuses. Demographic bonus occurs when the number of working- age or productive people (people entering the working age of 15 to 64 years). In the projected book of Indonesia's population from 2010 to 2035, published by the National Development Planning Agency, BPS (Badan Pusat Statistik) and UNFPA (United Nations Population Fund). It is known that the population of productive age in 2010 was 66.5%, and in 2016 it reached 67.4%. And the estimated peak in the year 2030 that is equal to 68.1%. 3.2 Economic Situation Indonesia faced its hardest economical situation in year 1998 due to Asian crisis. In addition to that, the current president during that time President Soeharto resigned, which resulted in escalation of the goods price within the nation. Until now Indonesia has been trying to enhance the growth rate of GDP slowly with current GDP growth reaches 5.02%(2016) (Badan Pusat Statistik). The latest GDP by PPP (Purchasing Power Parity) was 861.93 billion $USD in year 2015. Looking from the year 1987 to 1997, Indonesia was most likely in becoming new emerging country but the Asian crisis gave big impact to Thailand by the depreciation of its currency resulted in the drop of foreign investments and assets hence affected Indonesia correspondingly. The Indonesia GDP then dropped by 13.1% and the unemployment rate increased to 15-20%. The GDP of the country is contributed by agriculture, service, and industry.
Figure 3 Indonesia GDP by PPP (EY, 2015) GDP by Sector Service Agriculture Industry 43% 44% 13% Figure 4 GDP Indonesian by Sector (CIA World Factbook) Figure 5 Population of each ASEAN States
4 Facing AEC 2015 4.1 Indonesia Perspective As a nation with the highest number of population in ASEAN and largest contributor for ASEAN GDP, Indonesia will definitely gives big impact towards the success rate of AEC 2015. 4.1.1 SWOT Analysis STRENGTH WEAKNESS Large population and its favorable demographic (29,2 years old) Longest custom clearance in ASEAN Ports (4-7 days) 2 Government s debt is 25% of GDP in comparison to G8 average 108.6% (Canada, France, Italy, Germany, Japan, Highest restriction of NTBs compare to rest ASEAN members which adds 30% price of import goods Russia, UK) 3 Reinforced domestic market (30% from High language variation GDP comes from export) Rich of natural resources and strategic Corruption location (equator belt) Predicted economic growth above 5% per year until 2020 3 Risk of natural disaster OPPORTUNITY THREATS Middle class population will double to 400 million by 2020 (rise in demand for consumer goods) 4 Tariff free trade with other ASEAN members Increase number of factories within country Free trade agreements between certain countries (China, Japan, South Korea) Low profit companies and state companies might be taken out from competition Restriction of investments in certain business field Decreasing export demand in energy sector (esp. China and Japan) Deficit of current account (more import than export), hence weaker local currency (Rupiah IDR) 2 Institute of South East Asian Studies 3 IMF 4 McKinsey (7 things to know about ASEAN)
4.1.2 Opportunities and Challenges 4.1.2.1 Opportunities a. Economic Integration Benefit Indonesia's willingness to work together with other ASEAN countries to establish the ASEAN Economic Community (AEC) in 2015 is based on a belief in the benefits that will conceptually increase the economic growth of Indonesia and the ASEAN region. Economic integration in realizing the AEC 2015 through the opening and establishment of a larger market, the drive for increased efficiency and competitiveness, and the opening of employment opportunities in the ASEAN region, will improve the welfare of all countries in the region b. World Potential Market The realization of the AEC in 2015 will place ASEAN as the 3rd largest market area in the world supported by the third largest population (8% of the world's population) in the world after China and India. In 2008, ASEAN's population reached 583 million people (ASEAN Economic Community Chartbook, 2009), with an ever- increasing population growth rate and a majority age at productive age. 4.1.2.2 Challenges a. Increase in Export and Import Competition that occurs not only in the country but the competition with ASEAN countries and countries outside ASEAN such as China and India. Export performance during the 2004-2008 period which ranked 4th after Singapore, Malaysia and Thailand, and the 3rd highest importer after Singapore and Malaysia is a very serious future because it has resulted in Indonesia deficit trade balance against some of the ASEAN countries. b. Inflation Rate Indonesia's inflation rate is relatively high when compared with other countries in the ASEAN region. Macro stability is still constrained to increase Indonesia's competitiveness and the level of Indonesian prosperity is still lower. Indonesia's largest population in ASEAN is a constraint in income generation. 4.2 Foreign Countries Perspective For countries outside ASEAN, AEC 2015 opens the door for trading opportunities with limited tariffs for trade and services and also no tariffs from countries within ASEAN. Hence, by 2016 foreign investors will get high benefit from AEC. Production lines will be concentrated to certain ASEAN countries in order to keep the producing cost low and then the produced goods will be exported to other ASEAN countries (tariff free) as well as to ASEAN free trade partner countries (China, India, South Korea, Japan). ASEAN
countries could also use the benefit of comparative advantage. By identifying the strength of each country then splitting the manufacturing process. For instance, Thailand is one of the automobile centers of Southeast Asia therefore Japan has already placed their entire auto supply chain into Thailand and at the same time export from Thailand to other countries. It is also possible to have free trade agreements between ASEAN and EU and this would increase the GDP growth of 0.23% inside the EU and in ASEAN for instance 3.66% for Indonesia and 15.27% for Vietnam 5 Comments and Conclusion AEC 2015 is already ongoing right now and all the participating countries have to be ready in taking the benefit from it. Has to be admitted that with current situation Indonesia is not ready fully to face AEC despite all the strengths and comparative advantage it has. In comparison to several countries in ASEAN, Indonesia does not show great performance in several aspect. For instance, electric consumption per capita of Indonesia is 814 kwh, meanwhile for Singapore and Malaysia respectively 8.800 kwh and 4600 kwh 5. This shows on which level currently Indonesia within ASEAN. Low electricity consumption per capita means that Indonesia does not have enough industrialization, meanwhile AEC pushes every country to develop its region and increase the competitiveness of each country. Export ability of Indonesia also hindered each year. 70% of Indonesia export goods are from energy (oil, gas, coal). Statistic shows that the demand of energy from Indonesia is getting lowered each year. Therefore Indonesia cannot rely anymore on exporting only energy. Indonesia still has a lot of homework that needed to be done in order to gain the full benefit of AEC. One of current main focus, which is ongoing right now is improving quality of Indonesian labors by education. Currently Indonesia has scholarship program for its people who are willing to go abroad for higher degree that has already sent 5000 students abroad each year since 2012. Indonesia hopes that the students will come back to Indonesia to increase the number of high skilled labor in Indonesia in order to compete with other labors from countries with highly reputable universities. Globalization has always pushed every country to open up. This is inevitable and has to be faced in order to compete with other countries. AEC aims to help ASEAN countries to be able to compete with main player of global trade (US, EU, Japan). Indonesia has always been slow in promoting its country. With the push of AEC, it is expected that Indonesia will give more effort and in the end gain the full benefit of globalization. 5 World Bank
6 Bibliography Badan Koordinasi Penanaman Modal. (n.d.). The Negative Investments List. Retrieved from www.bpkm.go.id Badan Pusat Statistik. (n.d.). Produk Domestik Bruto (PDB). Retrieved from BPS: https://www.bps.go.id/subjek/view/id/11 Bappenas Indonesia. Proyeksi Penduduk Indonesia 2010-2035. Badan Pusat Statistik. Bustami, G. (2009). Menuju ASEAN Economic Community. CIA World Factbook. (n.d.). Indonesia GDP by Sector. Retrieved April 26, 2017, from http://www.indexmundi.com/indonesia/gdp_composition_by_sector.html Dr. Ariawan Gunadi. SH, M. (2016). ASEAN Economic Community Impact for Indonesia. Opinio Juris, 19. EY. (2015). The ASEAN Economic Community. Jakarta: The Embassy of Federal Republic of Germany. McKinsey (Writer). 7 Things to Know About ASEAN [Motion Picture].