The AEC Has Arrived, But Benefits for Cambodia Are Far Off

Nearly a decade in the making, the Asean Economic Community (AEC) officially launches today. But economists say it will not have an immediate impact on Cambodia, with numerous domestic and regional challenges still standing in the way of closer integration.

“Nothing significant is going to happen for some time yet; the preparations will need to continue for another 10 years before the AEC can be fully realized,” Jayant Menon, lead economist at the Asian Development Bank’s (ADB) regional integration office, said in an interview earlier this month.

Prime Minister Hun Sen, third from right, poses for a photograph with fellow Asean leaders during the 26th Asean Summit in Kuala Lumpur in April. (Reuters)
Prime Minister Hun Sen, third from right, poses for a photograph with fellow Asean leaders during the 26th Asean Summit in Kuala Lumpur in April. (Reuters)

– News Analysis

The AEC aims to integrate Asean’s 10 member countries into the world’s seventh largest economy—home to more than 600 million people.

“The AEC 2015 envisages: a single market and production base, a highly competitive economic region, a region of equitable economic development and a region fully integrated into the global economy,” Asean’s official website says.

“[It] will transform Asean into a region with free movement of goods, services, investment, skilled labor and freer flow of capital.”

But with many of the foundational agreements already in place, December 31 will serve only as a symbolic date as the AEC continues to take shape. At the 27th Asean Summit in Kuala Lumpur last month, the bloc’s leaders acknowledged the longer-term economic, political and social challenges ahead by adopting the AEC Blueprint 2025, which extends the timeframe for integration.

For example, Mr. Menon explained, “While tariffs have fallen as part of the AEC, nontariff and border barriers remain and must still be tackled.” These impediments to trade include country-specific standards and regulations, administrative charges and quantity-control measures.

“Additional constraints to trade can be significantly reduced if Cambodia and individual nations focus on developing their National Single Window [NSW]—and connect it to the Asean Single Window [ASW],” Mr. Menon said. The NSW and ASW systems expedite trade in goods and services by standardizing forms and documents at the national and regional levels.

“Cambodia needs to focus on developing its National Single Window project: a one-stop shop where trade of goods and services can be standardized and therefore expedited,” Mr. Menon said.

Since Cambodia joined the World Trade Organization in 2004, endeavors to liberalize trade by cutting tariffs and subsidies opened the country to new investment opportunities, which Srey Chanthy, a local economist, hopes will be augmented by the AEC.

“Nowhere on Earth is more accessible in terms of trade than Cambodia already is, so I expect the greatest benefits of the AEC to come from FDI [foreign direct investment] opportunities,” he said.

Trade and investment integration agreements signed in the lead- up to the AEC have helped to boost the region’s global influence. Between 2007 and 2014, Asean trade increased by nearly $1 trillion, and the bloc currently accounts for about 11 percent of global FDI inflows.

For Cambodia, the main benefit lies in the potential of the AEC to connect the country to global value chains—especially as developed economies look to shift production to cheaper locales in the region, Mr. Chanthy said.

“Because the market is larger, businesses will need to compete better by hopefully becoming more efficient and innovative in order to attract investment,” he said. “Public systems such as infrastructure, including roads, are also likely to improve as the government seeks to comply with the Asean agreement and attract FDI.”

And while the added pressure of new competition could force smaller and less efficient businesses to fold, and less-skilled labor to lose their jobs, Mr. Chanthy said, there would be at least a six-month lag before the net impact of this competition could be assessed.

“I am particularly worried about how small farmers will compete with more imports,” he said. “But businesses also fear losing their labor to better-paid jobs in Asean, and youth are worried about losing jobs to skilled labor.”

The AEC also seeks to improve the mobility of skilled labor between Asean members, in part by streamlining the issuance of visa and work permits for professionals.

John McGinley, managing partner at Mekong Strategic Partners, noted that many Cambodian businesses and workers mistakenly believe that the AEC will trigger an outflow of both skilled and unskilled labor, such as that experienced by less-developed members of the European Union.

“The AEC has a much more limited approach to labor migration compared to the E.U.,” Mr. McGinley said in an email. “It only permits the flow of labor for eight skilled and specialized sectors being: Engineering, Nursing, Architecture, Medicine, Dentistry, Tourism, Surveying and Accounting.”

And with the scope of mobility for these skilled professions still subject to additional constraints, Mr. McGinley said he did not anticipate a significant impact from greater movement of labor in the immediate future.

“For example, a qualified and practicing Cambodian doctor could not migrate to Thailand and immediately begin practicing medicine,” he said. “In order to qualify they would still need to study medicine in a Thai university, in Thai language, and gain accreditation according to Thai national standards.”

The AEC’s goal for a more liberalized Asean marketplace also includes the “freer flow of capital,” partly by harmonizing financial market regulations.

This is expected to be a particularly challenging ambition given the economic diversity among Asean members, the Organization for Economic Cooperation and Development notes in its “Economic Outlook for Southeast Asia, China and India 2016” report, released last month.

“Access to finance appears to be more of a problem in some member states than others,” the report says. “This is largely due to the lack of a well-developed regulatory framework, credit risk guarantees and central bureaus for credit information.”

The report also emphasizes the wider challenges of aligning the national ambitions and abilities of what is ultimately a two-speed region, with the wealthier “Asean-6” (Singapore, Brunei, Thailand, Malaysia, the Philippines and Indonesia) leading the way, and the poorer CLMV countries (Cambodia, Laos, Burma and Vietnam) trailing behind.

As members face their unique challenges, the ambitions of the AEC are expected to solidify in the coming decade, and the Cambodian government is positioning the country to benefit, said government spokesman Phay Siphan.

“We are making reforms and adding regulations for trade, investment and tax to ensure we comply with Asean’s uniform codes,” Mr. Siphan said. “But mainly, we are preparing businesses and labor to become more competitive in the new environment.”

While greater regional connectivity will be a boon to Cambodia, Mr. Menon of the ADB noted that nothing would unlock the country’s potential more than addressing fundamental shortcomings.

“In Cambodia, the main problem is red tape, corruption, the legal environment and cost of electricity that make it difficult to do business,” he said.

“Cambodia indeed has more time to prepare—it must first overcome basic development challenges.”

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