ASEAN CompetitivenessReport

2010

LEE KUAN YEW SCHOOL OF PUBLIC POLICYNATIONAL UNIVERSITY OF SINGAPORE469C Bukit Timah Road, Oei Tiong Ham Building Singapore 259772

www.lkyspp.nus.edu.sg/ACI

Foreword by

Michael E. PorterProfessorHarvard Business School

Marn-Heong WongRakhi Shankar

Ruby Toh

Christian Ketels Special Advisor

ASEAN Com

petitiveness Report 2010

Phot

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by A

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ASEAN COMPETITIVENESS REPORT

Foreword by

Michael E. PorterProfessorHarvard Business School

ASEANCompetitivenessReport

2010

Marn-Heong WongRakhi ShankarRuby Toh

Christian Ketels Special Advisor

ii ASIA COMPETITIVENESS INSTITUTE

Asia Competitiveness Institute 2011

ISBN: 978-981-08-8429-1

This work is subject to copyright. The work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgement of the source.

ASIA COMPETITIVENESS INSTITUTE

The Asia Competitiveness Institute (ACI) is a research centre in the Lee Kuan Yew School of Public Policy, National University of Singapore. ACI aims to become a thought leader on competitiveness in Asia and in doing so influence regional policy-making in this area with the ultimate objective of raising living standards through productivity-driven economic growth. More information on ACI can be obtained from http://www.spp.nus.edu.sg/ACI/home.aspx

An appropriate citation for this Report is:Wong, M-H., Shankar, R. and Toh, R., 2011. ASEAN Competitiveness Report 2010, Singapore: Asia Competitiveness Institute.

ACKNOWLEDGEMENTS

This Report was prepared by a research team led by Dr Marn-Heong Wong, Assistant Professor at the Lee Kuan Yew School of Public Policy (LKYSPP), National University of Singapore. Dr Christian Ketels, Special Advisor to the ACI and a member of the Harvard Business School faculty at Professor Michael E. Porters Institute for Strategy and Competitiveness, provided invaluable input on the analytical structure of the Report. The research input and support provided by Ng Kwan Kee and Kiran Safwan Malik of the ACI and LKYSPP at various stages of the project is gratefully acknowledged. We would also like to thank Anthon Kiong for providing the photo on the cover of the Report.

All views and opinions in this Report remain the sole responsibility of the authors.

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The Asia Competitiveness Institute (ACI) was created to provide policy-relevant analysis and recommendations on competitiveness in Singapore and the ASEAN region, drawn on rich data and a comprehensive competitiveness framework. The ASEAN Competitiveness Report, following studies on Singapore (2009) and Vietnam (2010), is another important milestone in realizing this vision. On behalf of ACIs International Advisory Panel, I would like to congratulate the ACI team for this important piece of work.

Covering a region of ten countries ranging from poor, landlocked Laos to rich, island city Singapore, the ASEAN Competitiveness Report highlights the importance of regions, or groups of neighboring countries, to competitiveness and economic prosperity at the national level. Regions are important because neighbors are a nations most natural trading and investment partners. The region provides accessible markets for local firms, especially important for those with limited international experience. Economic development and prosperity can be greatly enhanced by a healthy neighborhood. National productivity can be greatly enhanced through regional coordination of economic policies. Neighbors almost inevitably affect a countrys reputation and image. Regional economic integration makes all nations more attractive as locations for FDI, and helps countries to gain greater weight in international relations.

The ASEAN Competitiveness Report highlights the challenging position that ASEAN finds itself in in 2011. Following the traumatic experience of the Asian financial crisis, the region is now faced with a large and increasingly powerful Chinese economy in the North and a huge Indian economy in the West also making rapid progress. ASEAN has stabilized its position and proven to be quite resilient in the face of the recent global crisis, despite its high dependency on exports. But the region will ultimately need to define its role and competitive strengths at the crossroads of these two emerging economic giants.

The Report explores how regional collaboration across the heterogeneous set of ASEAN members can help individual countries to address these challenges. ASEAN can share policy knowledge and spur improvement in areas like capital market infrastructure, human resource development, rule of law, cluster development, and indigenous enterprise development. These are areas where many ASEAN members are suffering from weaknesses but can benefit from some countries that are leaders. ASEAN can enable the strengthening of linkages among related clusters across the region. In clusters such as information technology, there are elements of an ASEAN production system, i.e., a set of related clusters in the region that cover different parts of the value chain. In macroeconomic policy, ASEAN has already made some steps towards better policy cooperation through the Chiang Mai initiative covering multilateral currency swaps.

In the ASEAN Charter and the plans for an ASEAN Community, the region has outlined ambitious goals. The recommendations contained in this Report are fully consistent with this vision, while offering specific steps for moving forward. However, the Report also highlights the need for ASEAN to be strengthened as an institution in order to have sufficient weight and influence to move from vision to action. Collective action, especially among a group of disparate countries, only occurs if there is strong political will and sufficient institutional capacity to make change happen.

Our ambition at ACI is to provide government and private sector leaders with objective data and powerful analysis to enable more informed policy decisions. Whether or not leaders agree with every conclusion or recommendation, my hope is that this first ASEAN Competitiveness Report will achieve this purpose. This Report will become a central part of ACIs portfolio of activities. We would welcome the guidance, support, and collaboration of the private sector, universities, and government from throughout the region in advancing this agenda.

Michael E. PorterBishop William Lawrence University Professor, Harvard Business SchoolChair of the International Advisory Panel, Asia Competitiveness Institute

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FOREWORD

2010

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ASEAN is facing profound changes in the global economic climate with the rise of China and India and weakened economic prospects in major advanced countries. It is also entering a new phase in its cooperation as members move towards building an ASEAN Community by 2015.

ASEAN economies have weathered the global crisis well, but a longer-term competitiveness review highlights the need and scope to substantially raise competitiveness across ASEAN economies and for ASEAN as a whole.

ASEANs current prosperity or GDP per capita, which is the outcome of past competitiveness, is behind that of China and much lower than that of world leaders. Its shares of world exports and inward foreign direct investment flows have either fallen or stagnated over the last decade.

ASEANs ranking on competitiveness fundamentals, as measured by a wide range of macroeconomic and microeconomic factors, is 57 of 132 countries in 2010. This position has remained relatively unchanged over the last five years.

While the priority issues that each country has to address to raise national competitiveness may differ, this Report has shown that there is much ground for policy learning and action at the regional level.

Collectively, it is imperative for ASEAN to achieve deeper integration in a timely manner to generate new sources of growth and reduce its reliance on traditional export markets in major advanced economies. At the same time, ASEAN should expand its cooperation with external partners, in particular China and India, to tap opportunities offered by their rapid growth.

ASEAN can extract greater gains from its integration efforts by adopting an integrated, multi-pronged ASEAN Competitiveness Agenda that focuses on areas where collaboration creates direct benefits for participants.

To create an attractive environment for local and foreign businesses, it is recommended that ASEAN builds on its relative strengths to intensify cluster development, strengthen capital market infrastructure, nurture local enterprises and step up macroeconomic policy dialogue. ASEAN also needs to urgently address its main weaknesses by promoting administrative regulatory reforms, enhancing human resource development and strengthening the rule of law.

For ASEAN to successfully move from vision to action, its institutional mechanisms and capacity have to be strengthened to enable both the ASEAN Secretariat and member economies to effectively fulfill the tasks required. The political will to adhere to the blueprints for action is also paramount.

ASEANCompetitivenessReport

KEY MESSAGES

2010

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AANZFTA ASEAN-Australia-New Zealand Free Trade Area

ACI Asia Competitiveness Institute

ACIA ASEAN Comprehensive Investment Agreement

ADB Asian Development Bank

ADBI Asian Development Bank Institute

AEC ASEAN Economic Community

AEM ASEAN Economic Ministers

AFAS ASEAN Framework Agreement on Services

AFTA ASEAN Free Trade Area

AIA ASEAN Investment Area

AIF ASEAN Infrastructure Fund

AMROASEAN+3 Macroeconomic Research Office

ASEAN Association of Southeast Asian Nations

ASEAN-6Indonesia, Malaysia, Philippines, Singapore, Thailand and Brunei

ASEAN+3 ASEAN, China, Japan, South Korea

ASEAN+6ASEAN, China, Japan, South Korea, India, Australia, New Zealand

ASEAN-BAC ASEAN Business Advisory Council

ASEAN-ISISASEAN Institute of Strategic and International Studies

ASW ASEAN Single Window

ATIGA ASEAN Trade in Goods Agreement

BOP Balance of Payments

CAGR Compound Annual Growth Rate

CEP Comprehensive Economic Partnership

CEPEA Comprehensive Economic Partnership for East Asia

CEPT Common Effective Preferential Tariff

CLMV Cambodia, Laos, Myanmar and Vietnam

CMIM Chiang Mai Initiative Multilateralization

CPF Central Provident Fund

DB Doing Business

EAFTA East Asian Free Trade Area

EAS East Asia Summit

EIU Economist Intelligence Unit

EU European Union

FDI Foreign Direct Investment

FTA Free Trade Agreement

GCI Global Competitiveness Index

GDI Gender-related Development Index

GDP Gross Domestic Product

GEM Gender Empowerment Measure

GNI Gross National Income

HDI Human Development Index

ICTInformation and Communications Technology

IMF International Monetary Fund

IT Information Technology

LPI Logistics Performance Index

NAFTA North American Free Trade Agreement

NSW National Single Window

PPP Purchasing Power Parity

R&D Research and Development

ROO Rules of Origin

SIPI Social Infrastructure and Political Institutions

ABBREVIATIONS

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SME Small and Medium Enterprise

UN United Nations

UNCTADUnited Nations Conference on Trade and Development

UNDP United Nations Development Program

UNESCOUnited Nations Educational, Scientific and Cultural Organization

UNU-WIDER

World Institute for Development Economics Research of the United Nations University

US United States

USPTO US Patent and Trademark Office

WB World Bank

WDI World Development Indicators

WEF World Economic Forum

WGI Worldwide Governance Indicators

WHO World Health Organization

WTO World Trade Organization

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Contents

Foreword ........................................................................................................................................................................................... iiiKey Messages ................................................................................................................................................................................... vAbbreviations .................................................................................................................................................................................. viExecutive Summary ....................................................................................................................................................................... xiv

Chapter 1: IntroductionASEANs Competitiveness Challenges ........................................................................................................................................ 2Conceptual Approach of the Report ............................................................................................................................................ 3Report Outline ................................................................................................................................................................................. 4

Chapter 2: Context for Regional CooperationMacroeconomic Environment ....................................................................................................................................................... 8

ASEAN .......................................................................................................................................................................................... 8Recent Macroeconomic Performance ........................................................................................................................................ 8Macroeconomic Policies and Growth Prospects ....................................................................................................................... 12

The Global Context ...................................................................................................................................................................... 14Global Economic Outlook .......................................................................................................................................................... 14Global Rebalancing .................................................................................................................................................................... 15ASEANs Trade and Investment Linkages ............................................................................................................................. 15

ASEAN Cooperation Model .......................................................................................................................................................... 16Towards an ASEAN Economic Community .......................................................................................................................... 17

Trade and Investment Liberalization and Facilitation ................................................................................................. 18Enhancing ASEAN Connectivity ................................................................................................................................. 19ASEANs Engagement with Stakeholders .................................................................................................................... 20

ASEAN-plus Initiatives .................................................................................................................................................. 20Trade and Investment Agreements ................................................................................................................................ 20Financial Cooperation .................................................................................................................................................. 21

Institutional Framework for Collaboration ................................................................................................................... 22Summary ............................................................................................................................................................................. 23

Chapter 3: Competitiveness Performance of ASEANProfile of the ASEAN Region ......................................................................................................................................................... 28Competitiveness Performance ........................................................................................................................................................ 30

Standard of Living ............................................................................................................................,,,,,,,,,,,,,,............................. 30Prosperity .................................................................................................................................................................................... 30Distribution of Prosperity .......................................................................................................................................................... 31Quality of Life ............................................................................................................................................................................ 32

The Elements of Prosperity ......................................................................................................................................................... 33Labor Productivity .................................................................................................................................................................. 34Labor Mobilization ................................................................................................................................................................ 34Purchasing Power ....................................................................................................................................................................... 35

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Contents (continued)

Intermediate Economic Outcomes ............................................................................................................................................... 36Exports ........................................................................................................................................................................................... 36

Exports by Clusters .................................................................................................................................................................... 37Investments ................................................................................................................................................................................... 38

Domestic Gross Fixed Capital Investment .............................................................................................................................. 39Inward Foreign Direct Investment .......................................................................................................................................... 40Outward Foreign Direct Investment ....................................................................................................................................... 42

Innovation ..................................................................................................................................................................................... 43Entrepreneurship .......................................................................................................................................................................... 44

Summary ........................................................................................................................................................................................... 45

Chapter 4: ASEAN Competitiveness FundamentalsRegional Competitiveness ........................................................................ 50

Macroeconomic Competitiveness ............................................................................................................................................. 50Microeconomic Competitiveness .............................................................................................................................................. 51

National Competitiveness across ASEAN Countries ............................................................................................................... 58Brunei ............................................................................................................................................................................................. 58Cambodia ...................................................................................................................................................................................... 59Indonesia ........................................................................................................................................................................................ 60Malaysia ......................................................................................................................................................................................... 61Philippines ..................................................................................................................................................................................... 63Singapore ....................................................................................................................................................................................... 64Thailand ......................................................................................................................................................................................... 65Vietnam ......................................................................................................................................................................................... 66

Analysis with Additional Competitiveness Indicators .............................................................................................................. 69Summary ........................................................................................................................................................................................... 73

Chapter 5: Assessment and Policy RecommendationsKey Challenges in a Changing Global Context .......................................................................................................................... 78ASEANs Competitiveness Performance ..................................................................................................................................... 78ASEANs Competitiveness Fundamentals .................................................................................................................................. 80

Main Areas of Strengths and Weaknesses ................................................................................................................................ 80Strengths ..................................................................................................................................................................................... 80Weaknesses .................................................................................................................................................................................. 81

Prosperity and Competitiveness Fundamentals ...................................................................................................................... 82ASEAN, China and India .......................................................................................................................................................... 82

Towards an ASEAN Competitiveness Agenda .......................................................................................................................... 83Building on Strengths .................................................................................................................................................................. 84Addressing Weaknesses ............................................................................................................................................................... 85

Strengthening Implementation ..................................................................................................................................................... 86Conclusion ........................................................................................................................................................................................ 86

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Box 4.1 ASEAN-China-India ................................................................................................................................... 55Box 4.2 Laos and Myanmar ....................................................................................................................................... 68Box 4.3 Economic Freedom in ASEAN .................................................................................................................. 69Box 4.4 Ease of Doing Business in ASEAN ............................................................................................................ 71Box 4.5 Logistical Performance in ASEAN ............................................................................................................ 72

Figure A Competitiveness Profile of ASEAN Region 2010 ...................................................................................... xviiFigure 1.1 Competitiveness Framework: Foundations of Prosperity ......................................................................... 3Figure 2.1 Quarterly Real GDP Growth, ASEAN Countries ..................................................................................... 9Figure 2.2 Annual Real GDP Growth, ASEAN Countries .......................................................................................... 9Figure 2.3 Quarterly Merchandise Exports Growth, ASEAN Countries ................................................................. 10Figure 2.4 Unemployment Rates, ASEAN Countries .................................................................................................. 10Figure 2.5 Consumer Prices, ASEAN Countries .......................................................................................................... 11Figure 2.6 Current Account Balances, ASEAN Countries ......................................................................................... 11Figure 2.7 Exchange Rates, ASEAN Countries ............................................................................................................ 12Figure 2.8 Policy Rates, ASEAN Countries ................................................................................................................... 13Figure 2.9 Fiscal Balances, ASEAN Countries ............................................................................................................... 13Figure 2.10 GDP Growth Forecasts, ASEAN Countries .............................................................................................. 14Figure 2.11 GDP Growth Rates, Selected Countries/Regions ...................................................................................... 14Figure 2.12 World Current Account Balances .................................................................................................................. 15Figure 2.13 Share of ASEAN Exports to Selected Countries/Regions ....................................................................... 16Figure 2.14 Share of ASEAN Imports from Selected Countries/Regions ................................................................. 16Figure 2.15 Share of ASEAN FDI Inflows from Selected Countries/Regions .......................................................... 17Figure 3.1 ASEAN Endowments: Natural Resources .................................................................................................. 28Figure 3.2 ASEAN Heterogeneity: Ethnicity ................................................................................................................ 29Figure 3.3 Trends in Prosperity Growth, ASEAN and Selected Countries .......................................................... 30Figure 3.4 Prosperity Level and Growth, ASEAN and Selected Countries .......................................................... 30Figure 3.5 GNI Per Capita in 2009, ASEAN Countries, China and India .......................................................... 31Figure 3.6 Income Inequality, ASEAN Countries, China and India ..................................................................... 32Figure 3.7 Poverty Rates, ASEAN Countries, China and India ............................................................................. 32Figure 3.8 Human Development Index, ASEAN Countries, China and India ................................................... 33Figure 3.9 Gender-related Indices, ASEAN Countries, China and India ............................................................ 33Figure 3.10 Trends in Labor Productivity, ASEAN and Selected Countries ........................................................ 34Figure 3.11 Labor Productivity Level and Growth, ASEAN and Selected Countries ......................................... 34Figure 3.12 Labor Force Participation Rates, ASEAN and Selected Countries ..................................................... 35Figure 3.13 Labor Force Participation Rates, ASEAN countries ............................................................................. 35Figure 3.14 Price Comparisons, ASEAN and Selected Countries ............................................................................. 36Figure 3.15 World Export Market Shares, ASEAN ..................................................................................................... 37Figure 3.16 World Export Market Shares, ASEAN and Selected Countries ........................................................... 37Figure 3.17 World Export Market Shares, ASEAN Countries .................................................................................. 38Figure 3.18 Exports by Clusters, ASEAN Countries ................................................................................................... 38Figure 3.19 Domestic Investment, ASEAN and Selected Countries ........................................................................ 39Figure 3.20 Domestic Investment, ASEAN Countries ................................................................................................ 39Figure 3.21 FDI Inward Stock, ASEAN and Selected Countries .............................................................................. 40Figure 3.22 World Share in FDI Inflows, ASEAN and Selected Countries ............................................................. 40Figure 3.23 Inward FDI Performance Index, ASEAN and Selected Countries ...................................................... 41

Boxes

Figures

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Figure 3.24 Share of FDI Inflows in ASEAN by Country, Selected Years ............................................................... 41Figure 3.25 FDI Outward Stock, ASEAN and Selected Countries .......................................................................... 42Figure 3.26 World Share in FDI Outflows, ASEAN and Selected Countries ......................................................... 42Figure 3.27 Outward FDI Performance Index, ASEAN and Selected Countries .................................................. 43Figure 3.28 Share of Outward FDI Flows from ASEAN by Country, Selected Years ............................................ 43Figure 3.29 Patent Filings with USPTO, ASEAN and Selected Countries ............................................................ 44Figure 3.30 Number and Growth of Patent Filings with USPTO, ASEAN and Selected Countries ................. 45Figure 3.31 Number and Growth of Registered Businesses, ASEAN and Selected Countries ............................ 45

Figure 3.32 Number and Growth of New Registered Businesses to Total Registered Businesses, ASEAN and Selected Countries ........................................................................................................................................ 46Figure 4.1 Competitiveness Profile of ASEAN Region 2010 ................................................................................... 51Figure 4.2 Clusters in ASEAN ...................................................................................................................................... 53Figure 4.3 Competitiveness of ASEAN-China-India ................................................................................................ 55Figure 4.4 Competitiveness Profile of Brunei 2010 .................................................................................................... 58Figure 4.5 Competitiveness Profile of Cambodia 2010 ............................................................................................. 60Figure 4.6 Competitiveness Profile of Indonesia 2010 .............................................................................................. 61Figure 4.7 Competitiveness Profile of Malaysia 2010 ................................................................................................ 62Figure 4.8 Competitiveness Profile of Philippines 2010 ............................................................................................ 63Figure 4.9 Competitiveness Profile of Singapore 2010 .............................................................................................. 64Figure 4.10 Competitiveness Profile of Thailand 2010 ................................................................................................ 65Figure 4.11 Competitiveness Profile of Vietnam 2009 ................................................................................................ 67Figure 4.12 Economic Freedom in ASEAN Region ..................................................................................................... 70Figure 4.13 Doing Business Index for ASEAN Region ............................................................................................... 71Figure 4.14 Logistics Performance Index for ASEAN Region .................................................................................... 73Figure 5.1 Microeconomic and Macroeconomic Competitiveness across ASEAN Countries .......................... 80Figure 5.2 Competitiveness Gap: Difference in GDP Per Capita and New GCI Rankings ............................ 83Figure 5.3 ASEAN Competitiveness Agenda ............................................................................................................. 84

Table A Top-Three Areas of Relative Strength within Each ASEAN Country ................................................... xviiiTable B Top-Three Areas of Relative Weakness within Each ASEAN Country ................................................. xviiiTable 2.1 CMIM Contribution Ratio ........................................................................................................................ 22Table 3.1 Changes in Income Classification of ASEAN Countries, 1990-2009 ................................................ 31Table 4.1 Company Sophistication in ASEAN ........................................................................................................ 52Table 4.2 National Business Environment in ASEAN: Supporting and Related Industries ............................ 52Table 4.3 National Business Environment in ASEAN: Context for Strategy and Rivalry ............................... 53Table 4.4 National Business Environment in ASEAN: Demand Conditions .................................................... 54Table 4.5 National Business Environment in ASEAN: Factor Input Conditions ............................................. 54Table 4.6 Top-Five Relative Strengths of ASEAN-China-India ............................................................................ 56Table 4.7 Top-Five Relative Weaknesses of ASEAN-China-India ........................................................................ 57Table 4.8 Selected Comparative Competitiveness Indicators for Laos and Myanmar ....................................... 68Table 4.9 Index of Economic Freedom, ASEAN Countries.................................................................................... 70Table 4.10 Doing Business Index, ASEAN Countries ............................................................................................... 71Table 4.11 Logistics Performance Index, ASEAN Countries ................................................................................... 73Table 5.1 Top-Three Areas of Relative Strength, ASEAN and Member Countries .............................................. 81Table 5.2 Top-Three Areas of Relative Weakness, ASEAN and Member Countries ............................................ 81

Figures (continued)

Tables

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Executive Summary

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EXECUTIVE SUMMARY

The Association of Southeast Asian Nations (ASEAN) is facing profound changes in the global economic climate as well as undergoing a new phase in its development towards deeper integration. The global economic environment post-2008 crisis is characterized by weakened economic prospects in major advanced countries and the growing economic might of China and India.

From five countries coming together to form an association in 1967 primarily to promote peace and stability in the Southeast Asian region, ASEAN has morphed 43 years later into a ten-member organization with a legal personality with the signing of the ASEAN Charter in 2007. Despite the diversity that remains among members in levels of economic development, culture, ethnicity and language, ASEAN has ambitious plans to form an ASEAN Community that is politically cohesive, economically integrated and socially responsible by 2015.

What do these economic and institutional changes imply for ASEANs medium-term competitiveness? What can ASEAN members do collectively and individually to address key challenges?

The ASEAN Competitiveness Report 2010 is the inaugural assessment of the regions competitiveness by the Asia Competitiveness Institute (ACI) at the Lee Kuan Yew School of Public Policy, National University of Singapore. The Report casts into perspective the dynamics of economic conditions and institutional developments as well as the longer-term economic performance of ASEAN and examines the fundamental competitiveness of the region.

The competitiveness analysis is organized based on the conceptual framework developed by Professor Michael Porter of the Harvard Business School and Chairman of ACIs International Advisory Panel. In recognition of both the varying circumstances across ASEAN economies and ASEANs resolve to seek unity in diversity, the analysis is conducted at two levels overall ASEAN and by individual ASEAN country. The Report seeks to explore ASEANs global competitiveness position if it were a single economic entity. It also reviews the competitiveness of each member country to identify areas of strengths and weaknesses that prevail across more of the ASEAN countries that are well suited for policy sharing and common policy action at the regional level. The Report aims to offer suggestions on the direction of policies that can be given emphasis in the ASEAN process. It is also hoped that analysis at the individual country level will assist policy makers in the identification of areas for priority national action.

Key Challenges for ASEAN

With an ever-shifting competitiveness landscape, it is a constant challenge for any economy or region to rethink and formulate policy responses to new circumstances and continually improve its competitiveness. The set of key questions facing ASEAN currently is both at the national and regional levels.

ASEANs prosperity, measured in terms of GDP per capita, runs the full range from high-income to low-income categories. Since 1997, when the region was hit by the Asian financial crisis, seven of its members in the low- and middle-income groups have failed to move up the next rung of the income ladder. The exception was Vietnam, which moved from low to lower-middle-income status in 2009. What are the policy approaches that can help member countries substantially improve their prosperity and avoid becoming entrenched in a particular stage of development?

In the midst of the 2008-2009 global economic crisis, the ASEAN region suffered the largest plunge in growth not seen since the Asian financial crisis, as demand from major developed economies plummeted. This underscored the vulnerability of the export-led growth model pursued by many ASEAN economies. With growth prospects in the major markets of the United States and Europe likely to remain uncertain, what growth strategy should ASEAN pursue in the post-crisis global economy?

ASEAN has constructed a detailed roadmap towards an integrated economy by 2015 as a means to enhance its competitiveness and generate new impetus for growth. However, the move to deepen and broaden regional integration is not a smooth ride. The theme for ASEAN in 2010, Towards the ASEAN Community: From Vision to Action, pinpoints the crux of the problem with ASEAN integration efforts. The vision is bold, but implementation falls short. Does ASEAN need a new approach to identify and engage on policy issues in which regional collaboration can have a unique impact? Is the institutional structure and capacity of ASEAN in line with the tasks it is charged to tackle?

Conceptual Approach

The competitiveness analysis in this Report adopts the competitiveness framework developed by Michael Porter. The attractiveness of the Porter framework lies in its malleability to the analysis of any situation by capturing the role of various factors on competitiveness without the need for a priori assumptions. Porters approach is particularly useful when faced with a diversity of impact factors with varying importance in determining competitiveness, as in the case of ASEAN.

Competitiveness determines the productivity with which a country or region uses its land, labor, capital and other resources. Productivity sets the standard of living through returns on factors of production (wages, rent, etc.) that

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a country can sustain. To attain competitiveness and prosperity, it is not the type of industries that a country or region chooses to compete in but how productively it competes in those industries.

Competitiveness factors can be grouped under macroeconomic or microeconomic competitiveness. Macroeconomic competitiveness delineates the overall context in which firms operate and create the potential for high productivity. Although these factors do not directly affect the productivity of firms, they are critical in providing support for firm efforts to raise productivity. These factors include the quality of social infrastructure, political institutions and macroeconomic policy. Microeconomic competitiveness identifies operating practices and strategies of firms as well as business inputs, infrastructure, institutions and policies that constitute the environment in which firms compete. All these factors have a direct impact on productivity.

Using this broad framework, the Report makes extensive use of a set of New Global Competitiveness Indices (New GCIs) aggregated at different levels using a methodology developed by Professor Porter and his research team, primarily from raw data collected by the World Economic Forum in its annual Executive Opinion Survey. The indicators are computed and evaluated at both the regional and national levels. The use of a common competitiveness framework and set of parameters for both the regional- and national-level analysis will facilitate consistent interpretation and meaningful cross-national comparison of the indicators.

Summary of Findings

Context for Regional Cooperation

The ASEAN region has rebounded from the 2008 global economic crisis that had affected economies unevenly. Prompt macroeconomic policy responses, low public debt, resilient domestic demand and a rebound in exports have contributed to the turnaround. Resource-rich ASEAN countries have also benefited from high commodity prices.

The global economic recovery process has been characterized by a duality in the post-crisis growth paths of ASEAN and the rest of developing Asia and major advanced economies. The Asian economies, particularly, China and India, are outperforming major advanced economies in economic growth, and this is precipitating changes in the structure of the global economy that would require ASEAN to adjust its own economic structure to enable it to maximize its competitiveness and find complementarities with other high-growth economies in the region. There is a need to reduce export dependence, especially to the developed economies, and develop intra-regional and domestic demand, as a global rebalancing of current accounts is set in motion.

The outlook for ASEAN economies is positive, although growth is expected to moderate in 2011 from the sharp

rebound in 2010. Factors that may dent ASEANs growth prospects include the risk of economic instability as capital inflows to the region surge, as well as soaring food and oil prices in the world.

ASEAN cooperation has made steady progress with a goal to create an ASEAN Community by 2015 that will be built on the three pillars of an ASEAN Economic Community (AEC), ASEAN Political-Security Community and ASEAN Socio-Cultural Community. The goal to form an AEC is executed through the AEC Blueprint, which is a comprehensive action plan with clear timelines and targets, and progress in implementation is tracked through an AEC Scorecard. Implementation has fallen behind schedule, as almost 20 percent of deliverables under the AEC Blueprint for 2008-2009 still have not been achieved by October 2010. Measures that have not been implemented mainly involve the ratification of important economic agreements by individual members. The imperatives of deeper regional integration may bring into question the informal and consensual ASEAN Way of working adopted by ASEAN and require greater powers under the Charter to monitor and ensure compliance.

ASEAN has also been expanding its linkages with external partners, with a widening network of free trade agreements, which have been concluded with China, Japan, Korea, Australia and New Zealand, and India to-date. ASEAN is concurrently considering proposals for an East Asian Free Trade Area for ASEAN+3 countries and a Comprehensive Economic Partnership for East Asia involving ASEAN+6 countries. ASEAN also cooperates with the Plus Three partners of China, Japan and South Korea on a number of financial initiatives, the most significant of which is the Chiang Mai Initiative Multilateralization in 2010, which is the multilateralization of a currency swap arrangement established to address short-term liquidity problems among participants and strengthen regional financial stability.

Competitiveness Performance of ASEAN

ASEAN has several naturally-endowed advantages in building prosperity. It has a relatively large combined market of 592 million people with a combined GDP of US$1.49 trillion in 2009 at current market prices. The region is strategically located at the crossroads of world shipping and air routes within an economically vibrant Asian region, and has abundant natural resources. On the flipside, there are a few fundamental conditions that can potentially disrupt ASEANs development. The region is relatively prone to natural disasters such as earthquakes, typhoons and the spread of infectious diseases that result in loss of lives and livelihoods and damage to infrastructural facilities. ASEAN is very heterogeneous in cultures and traditions. These are fault lines that may give rise to potential conflicts.

On ASEANs economic performance, which reflects the outcomes of its past competitiveness, there is considerable variation across member countries. However, the picture that emerges for ASEAN overall is one of a region that has

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not performed as well post-1997 Asian financial crisis than in the period before the crisis. ASEANs prosperity, which is measured by GDP per capita, has been rising at an annual 2.3 percent over the last decade, only slightly above the world average rate. This is in contrast to its prosperity growth that was rising much faster than the world average before the Asian crisis. ASEANs GDP per capita in 2009 was $4,739 in constant international dollars adjusted for purchasing power. This was 11 percent that of the United States and 76 percent that of China. ASEANs prosperity level was also below the world average by half the amount. This points to ample scope for ASEAN to advance the regions prosperity.

ASEANs prosperity is also not evenly spread. Income inequality as measured by the Gini coefficient is relatively high, with five of eight ASEAN countries where data are available posting a Gini coefficient above 0.4. The region also has large pockets of poverty, with four ASEAN countries having about a fifth or more of their population living below the income poverty line. Measures of human development and gender-related development show huge variations across ASEAN countries.

ASEANs labor productivity, which is one of the underlying factors contributing to prosperity, was relatively low at US$11,114 in 2009. This was less than one-fifth the level of the US, the productivity leader, and between 25 to 30 percent the productivity of Japan and the EU. ASEANs labor productivity has not been rising as fast as Chinas over the last decade and China has caught up with ASEAN on labor productivity.

ASEAN has not recovered its global position in export and inward Foreign Direct Investment (FDI) shares achieved before the Asian financial crisis. ASEANs share of world exports of goods and services has remained around the 6 percent mark over the last ten years, compared with a doubling of its world export share in the ten years before the Asian crisis. It has been overtaken by China in world export market share since 2005. ASEANs world export market share has increased to 6.2 percent in 2009 from 5.9 percent in 2007 and 2008. However, whether this is the start of a sustained increase remains to be seen. Similarly, ASEANs share of world FDI inflows in the last ten years has been below its share before the 1997 crisis. China has overtaken it since 1993. In 2008, ASEANs share fell to 2.7 percent but this increased to 3.6 percent in 2009. Chinas share of world FDI inflow in 2009 was 8.5 percent.

ASEAN is relatively weak on innovation outcomes. The number of ASEANs patents filed in the US was just 0.4 percent of total patents filed in 2009, far behind the US (49.5 percent), Japan (19.8 percent) and EU (13.1 percent). ASEANs share is similar to Indias but lower than Chinas 1.2 percent. In terms of growth rate of patent filing in the US on a per capita basis, ASEAN falls significantly behind China and India over the 1997-2009 period.

There is significant room to grow entrepreneurship in ASEAN. Entrepreneurship in ASEAN is not as strong as

in advanced economies. With the exception of Singapore, business density in ASEAN economies is relatively low. Overall, ASEANs business density was 2,505 businesses per million economically active population in 2005 compared with 28,423 in the EU, 23,350 in Japan and 22,035 in the US. The entry rate of new businesses in ASEAN in 2005 was 11.4 percent, with Singapore having the highest entry rate. This compared with 13.1, 10.3 and 4.4 percent in the US, EU and Japan respectively.

ASEAN has a dearth of large locally-owned companies. None of ASEANs homegrown companies was placed within the top 100 on the Forbes 2010 Global 2000 list, which ranked companies in 62 countries in terms of size based on an equal weighting of sales, profits, assets and market value. In total, 63 homegrown companies from ASEAN were in the Forbes Global 2000 list, with the highest ranked at 196. This was 3.2 percent of the total and compared with 113 (5.7 percent) and 56 (2.8 percent) companies from China and India respectively. Of the 200 top-performing small and midsize companies in the Asia Pacific on Forbes 2010 Best Under a Billion list with sales between US$5 million and US$1 billion, 16 percent or 32 of them were homegrown companies from ASEAN economies. This compared with 32 percent of companies from China and 19.5 percent of companies from India.

ASEAN Competitiveness Fundamentals

Based on New GCI data for a constant sample of 132 countries, ASEANs overall competitiveness position is 57th (or in the 57th percentile) in 2010. ASEANs ranking is computed as the GDP-weighted ranking of eight ASEAN countries for which data are available and excludes Laos and Myanmar. ASEANs GDP per capita in 2009, the latest year available, is 79th place. The significant gap between current prosperity and overall competitiveness might point to the potential of current competitiveness fundamentals in raising future prosperity.

Assessed over a ten-year period, the regions competitiveness as measured by the New GCI has improved from being nine places below the global average in 2001 to 13 places above the global average in 2010. This largely reflected progress in the first half of the 2000s, as ASEANs competitiveness ranking has hovered around the 57th to 60th percentile mark over the last five years. Throughout the years, ASEANs advantage has been more in microeconomic competitiveness fundamentals than macroeconomic competitiveness factors.

ASEANs global competitiveness in 2010 is three places behind its rank in 2009. This slight deterioration is largely due to a six-rank drop in microeconomic competitiveness to 49th place. Macroeconomic competiveness is little changed at 64th place. At the more disaggregated levels, it is shown that ASEAN has worsened competitiveness rankings across most sub-categories and sub-areas to different extents, except for macroeconomic policy, where ASEANs competitiveness has clearly improved between 2009 and 2010 (Figure A).

ASEAN COMPETITIVENESS REPORT xvii

Comparing across competitiveness categories within ASEAN in 2010, the regions foremost competitive strength lies in its supporting and related industries and clusters, with strong cluster policy, cluster development and collaboration and local availability of process machinery. Its capital market infrastructure is also relatively strong, particularly in the ease of financing through local equity market, ease of access to loans and venture capital availability. Another area of particular strength for ASEAN is company strategy and operational effectiveness.

ASEAN is least competitive in its administrative infrastructure, where urgent attention has to be paid to reducing the time and number of procedures required to start a new business and in improving the efficiency of customs procedures. The other areas of particular weakness are in the macroeconomic competitiveness sub-category of social infrastructure and political institutions. ASEANs human development is weak and more effort is needed to lower the incidences of tuberculosis and malaria and raise secondary education enrollment rate. The rule of law within ASEAN also requires strengthening, especially in factors related to the control of corruption and the lowering of business costs of crime and violence.

Compared with China and India, ASEAN is ranked behind China by 18 positions on the New GCI 2010, while it is ahead of India by 13 places. ASEANs negative gap with China has persisted over the last few years, while its significant positive gap with India has arisen in 2010 mainly as a result of deterioration in Indias competitiveness position from 2009. ASEAN is weaker than China on both micro and macro competitiveness fundamentals, in particular the latter. It has a competitive edge over India in both micro and macro competitiveness fundamentals, although the gap in microeconomic competitiveness is relatively small.

Across the eight ASEAN countries where New GCI data are available, there is a broad range of competitiveness,

with Singapore among the top ten countries in the sample and Cambodia in the bottom 25 percent. Tables A and B, which place the top three areas of relative strength and top three areas of relative weakness within each country side by side, point to areas that each ASEAN economy could focus attention on to boost national competitiveness, either in consolidating strengths or addressing weaknesses. The tables also highlight that there are several areas of relative strength or relative weakness that are common across a few countries, where the sharing of experiences and action at the collective level would be especially beneficial.

Supporting and related industries and clusters is an area of relative strength in five ASEAN countries, while capital market infrastructure and macroeconomic policy are areas of relative strength in three ASEAN countries. Administrative infrastructure and human development are areas of relative weakness in four ASEAN countries, while rule of law and communications infrastructure are weaknesses in three ASEAN countries.

An analysis of the competitiveness of Laos and Myanmar based on limited key indicators suggest that both countries share similar areas of relative weakness with other ASEAN countries in human development, rule of law and communications infrastructure. Both countries fare better on macroeconomic policy.

Analysis using alternative datasets covering ASEANs performance on economic freedom, ease of doing business and logistical efficiency support the assessment using New GCI data that corruption and administrative regulations are major areas of weakness for ASEAN. There is indication that ASEANs restrictions on investments might be higher than the assessment in New GCI. On the other hand, alternative indicators give a more positive depiction of infrastructure quality and customs efficiency in ASEAN compared with the New GCI.

FIGURE A: COMPETITIVENESS PROFIlE OF ASEAN REGION 2010

Source: Authors analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Micro (49)

National Business Environment (49)

Related and Supporting Industries (37)

Demand Conditions(56)

Context for Strategy and Rivalry (53)

Factor Input Conditions (59)

Admin (75) Logistic (64)

Comm. (68) Innov. (52)

Strategy (44)

Org. Practices (48)

Internationali-zation (45)

Capital (42)

Company Operations and Strategy (45)

Social Infrastructure and Pol. Institutions

(66)

Macro (64)

Macroeconomic Policy(55)

Political Institutions (57)

Rule of Law (72)

Human Development (72)

GDP pc (79)

New GCI (57)

Quintile Rankings

Change in Rank (09-10)

1 (Top 20%)

Improve 10%

Improve + 1 rank to

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TABLE A: TOP-THREE AREAS OF RElATIVE STRENGTH WITHIN EACH ASEAN COUNTRY

TABLE B: TOP-THREE AREAS OF RElATIVE WEAKNESS WITHIN EACH ASEAN COUNTRY

Source: Authors analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Source: Authors analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Assessment and Policy Recommendations

Analyzed as a single economic entity, ASEANs competitiveness, whether measured by economic outcomes that reflect its past competitiveness or by its positions on fundamental factors that portend its medium-term competitiveness, has not been impressive in recent years. From being a part of Asias miracle in the early 1990s, ASEAN in the 2000s has been overshadowed by China and India.

Regional prosperity rests on individual countries being competitive and prosperous. This Report has identified areas of strengths for ASEAN economies that should be further consolidated as well as areas of weaknesses that have to be improved. Given the regions eclectic mix, the priority issues that each country has to address in raising national competitiveness may be quite different. While there are country-specific issues that must be addressed at the national level, the analysis has also shown that there is much ground for policy learning and action at the regional level. Commitments by each country to implement agreed collective actions will also help to boost national competitiveness.

ASEAN has in the last few years intensified its efforts towards implementing a wide-ranging collective agenda to achieve deeper integration as a means to raising the regions competitiveness. It has set a goal to form an AEC by 2015, to reap scale economies in production and to enhance its attractiveness as a consumer market. However, the implementation of measures towards an AEC, which started in 2008, is behind schedule. This raises the question of whether ASEAN can step up to the challenges posed by the external environment and by itself. To make a leap in its competitiveness, ASEAN not only has to carry out existing tasks more effectively but also define new approaches and new tasks.

In the post-crisis environment, ASEAN should reduce its reliance on the Western-oriented export-led model as the main driver of its economic growth. ASEAN needs to move towards a new growth model that is driven by intra-ASEAN and intra-Asia demand, as well as domestic demand. The deepening of ASEAN integration to establish a single market and production base will stimulate intra-regional trade, investments and production and generate new sources of growth. At the same time, the high-growth, big economies of China and India also present a source of new demand even as they pose competition for ASEAN with regard to export markets and resources. As ASEAN strives to build a

Singapore Brunei Malaysia Thailand Indonesia Philippines Vietnam Cambodia

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ASEAN COMPETITIVENESS REPORT xix

more integrated and competitive region, it is important that growth is achieved through environmentally sustainable and equitable ways and also in parallel with the expansion and deepening of its economic ties with the rest of Asia and beyond.

Towards an ASEAN Competitiveness Agenda

In the past, ASEAN integration efforts have tended to focus on trade and investment liberalization. Such negotiations over reciprocal market access are typically politically difficult and the extent of market opening achieved is often less than satisfactory. ASEAN could extract greater gains from regional cooperation by placing more emphasis on activities that yield significant cross-border externalities and direct mutual benefits. Given the regions diversity where a weakness in one country may be a strength in another, ASEAN also provides an important platform for policy learning and the sharing of best practices across a wide range of areas.

This Report, by analyzing a multitude of competitiveness factors that span the economic, political and social dimensions, serves to highlight the importance of building competitiveness through an integrated, multi-pronged ASEAN Competitiveness Agenda. Such a Competitiveness Agenda would focus on areas where collaboration creates direct benefits for participants. Several elements of a Competitiveness Agenda that would build on strengths and address weaknesses in ASEANs competitiveness fundamentals are illustrated below.

Building on Strengths

Cluster DevelopmentASEANs diversity in endowments and economic development means that it possesses resources and capabilities that practically span the whole production process. Supporting and related industries and clusters has been identified as an area of relative strength for ASEAN, and ASEAN has strong clusters in a number of industries such as information technology, oil and gas products, agricultural products, metal mining and manufacturing, transport and logistics, and business services. ASEAN countries could do more to leverage their mutual strengths and competitive advantages and engage in collaboration to create or strengthen integrated regional value chains of clusters. ASEAN could explore a more coordinated regional approach to the development of clusters.

ASEAN has recently unveiled its Master Plan on ASEAN Connectivity, which included the enhancement of physical connectivity as a key element. However, since developing physical infrastructure is both capital and time intensive, the prioritization of infrastructure development to facilitate cluster development could be explored. ASEAN can also move beyond the Southeast Asian region to tap into synergies with its bigger neighbors, China and India, on cluster development to integrate the economies more closely.

Capital Market InfrastructureCapital market infrastructure is a relative strength in a number of ASEAN countries and regional collaboration to integrate the capital market infrastructure within ASEAN as well as with the world would help to build on this strength as well as encourage FDI inflows and promote local enterprise. An improved regional capital market infrastructure would also help to mobilize the high savings in the region.

The proposed ASEAN Exchange Linkage, in which the stock exchanges of Malaysia, Singapore and Thailand are proposed to be linked in the second half of 2011 with the Philippines stock exchange expected to join the common electronic platform in the first half of 2012, is a welcome initiative in this direction.

Local Enterprise DevelopmentAnother area of relative strength for ASEAN is company operations and strategy. This may reflect mainly the practices of foreign multinational enterprises, which have a substantial presence in ASEAN economies, as there are relatively few top-performing locally-owned companies. Presently, ASEAN has a dearth of large, homegrown firms with no publicly-traded companies among the top 100 in Forbes Global 2000 list, although the regions small and medium enterprises are better represented in Forbes Asia Pacifics Best Under a Billion list. ASEAN could intensify its efforts to nurture local enterprises, including promoting the transfer of management knowledge from foreign to local companies and also facilitating the regionalization and globalization of local companies. A well-implemented Strategic Plan of Action for ASEAN SME Development 2010-2015 will contribute to this objective.

Macroeconomic PolicyMacroeconomic policy is an area where a few ASEAN countries are particularly strong in while others are relatively weak in and thus can be a prime area for policy learning among members. ASEANs macroeconomic policy responses to the 2008 global crisis have involved national strategies, with no coordinated effort at the regional level. Policy coordination would have been extremely difficult given the vast difference in situations in each country. However, the crisis did strengthen regional financial cooperation through expediting implementation of the multilateral currency swap arrangement, Chiang Mai Initiative Multilateralization agreement, by ASEAN and its dialogue partners: China, Japan and Korea (ASEAN+3) to address short-term liquidity difficulties of members. Over the long term, as economies become more interdependent, macroeconomic policy coordination would become increasingly important in ensuring that policy instruments work effectively in promoting economic stability. A step towards greater coordination would be through an enhanced ASEAN+3 Economic Review and Policy Dialogue process.

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Addressing Weaknesses

Administrative InfrastructureASEANs least competitive area is its administrative infrastructure. Many of the ASEAN countries are particularly weak in their administrative infrastructure due to the time and procedures required to start businesses as well as burdensome customs procedures. Urgent action is required for ASEAN countries to work towards clearly-defined targets in reducing administrative red tape. Such regulatory reforms will also enhance ASEANs attractiveness as a business investment destination.

An important initiative that will reduce administrative requirements in trade is ASEANs plan for an ASEAN Single Window for customs clearance that integrates ten National Single Windows of individual member countries. The ASEAN-6 countries (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) have activated their National Single Windows after a two-year delay from the initial schedule, while CLMV countries (Cambodia, Laos, Myanmar and Vietnam) have until 2012 to do so. The ASEAN countries have signed in the second half of 2010 the Memorandum of Understanding on the Implementation of the ASEAN Single Window Pilot Project and the Protocol on Electronic Customs Facilitation (Single Window) to test the infrastructure and procedures. Efforts should be directed to expediting the establishment of the ASEAN Single Window.

Human Resource DevelopmentASEAN has very weak competitiveness in basic health and education. Its labor productivity is also relatively low. Although ASEAN has ongoing cooperation in many aspects of human resource development mainly under the social and economic pillars building an ASEAN Community, it could engage in a more urgent and concerted endeavor to raise its human capacity and upgrade the skills of its labor in recognition of its greater weakness in this area.

ASEAN could strengthen basic health through the control of infectious diseases in partnership with the World Health Organization and other development agencies and dialogue partners. There is also scope to strengthen the coordination of education and skills development initiatives across various ASEAN bodies, for instance, through the Education and Science and Technology Ministers working together to develop science and technology human resources and promote collaborative research and development in the region.

Rule of LawMany of the ASEAN countries received unfavorable assessments for rule of law, particularly on the indicators of corruption and crime. While strengthening the rule of law remains very much the domain of national processes, ASEAN members could engage in information sharing and also contribute to the establishment of certain norms such as transparency in its interactions and policy implementation.

Strengthening Implementation

ASEAN does not lack well-defined goals and plans. Its weakness lies in its inability to deliver on provisions in its agreements. ASEAN has to ensure the timely implementation of agreements and decisions within a rule-based framework to maintain its credibility. This requires the strengthening of both institutional mechanisms and capacities and political will.

For forty years, ASEAN has established a norm in its interactions that is based on the ASEAN Way, which emphasizes consultation, consensus and non-interference in internal affairs. This informal and consensual approach has succeeded in maintaining peace and stability in the region, but it might also be a bane to ASEAN achieving greater success in its regional integration efforts.

The ASEAN Charter has established a legal and institutional framework for making ASEAN more rules-based, but the organizations effectiveness in coordinating and executing policies is not going to improve vastly overnight. Various mechanisms to enhance compliance are in place but they have been largely ineffectual. For instance, members have traditionally preferred to resolve their economic disputes through political channels rather than in a more rules-based manner through the 2004 Enhanced Dispute Settlement Mechanism. The AEC Scorecard in its current form requires improvements to strengthen its monitoring function, and the public version of the Scorecard should contain more detailed information by individual country to increase the transparency of the compliance review process.

Given the diversity in stages of development and policy priorities across ASEAN countries, ASEAN should strengthen its provisions for and the use of flexible participation arrangements so that members could move at a different pace. The Charter provides for an ASEAN Minus X formula but this is the only formula that is endorsed, and it can only be adopted if there is consensus to do so. ASEAN can also consider adopting another formula - 2 Plus X - that had previously been utilized, and to develop more pilot projects involving participation by countries that are ready, so as to progress initiatives.

As the Charter carries no reference at all to sanctions should compliance fail, it leaves to the leaders to decide what action to adopt should there be any breach of principles and objectives. Acknowledgement of the limitations of the Charter necessarily moderates expectations of the ASEAN cooperation process, at least in terms of timeline.

The successful implementation of ASEANs Roadmap for an ASEAN Community by 2015 also hinges on the ASEAN Secretariat as well as member countries having adequate capacity and tool kits to effectively fulfill the tasks required. Although the Secretariats resources and research capabilities have been boosted and less developed members are assisted with capacity building programmes, more needs to be done to upgrade ASEANs ability to act institutionally.

ASEAN COMPETITIVENESS REPORT xxi

Conclusion

The assessment of the competitiveness of ASEAN as a whole and its member countries has been conducted against the backdrop of profound changes in the global economic landscape following the 2008 global crisis.

Over the last decade, ASEANs economic performance has been stable. However, it has not taken big strides unlike in the period before the 1997 Asian financial crisis. ASEANs position on competitiveness fundamentals as measured by a wide range of macroeconomic and microeconomic factors is above the world average, but its ranking has remained relatively unchanged over the last five years.

While individual ASEAN countries vary widely in their competiveness and each country would need to chart its own national agenda for improving competitiveness, the analysis has also revealed areas of common competitive strengths and weaknesses among the member countries. This provides the basis for the development of an ASEAN Competitiveness Agenda with a focus on building on strengths and addressing weaknesses across a range of economic, social and political areas to generate synergistic benefits for the region. ASEAN has already undertaken a broad range of initiatives towards forming an ASEAN Economic Community, but the assessment in this Report serves to further inform a more nuanced approach to boosting regional competitiveness that moves away from a traditional focus on trade and investment liberalization.

Suggested elements of an ASEAN Competitiveness Agenda would involve a greater emphasis on building strengths through coordinated cluster development, an integrated capital market infrastructure, the nurturing of local enterprises and enhanced macroeconomic policy coordination. Weaknesses for intensified improvement include raising quality in the areas of administrative infrastructure, healthcare and education and rule of law.

The effective execution of plans of action is crucial in delivering results for ASEAN. The imperatives of deeper regional integration may bring into question the ASEAN Way of working and require greater powers under the Charter to monitor and ensure compliance. More also needs to be done to upgrade the capacity of the ASEAN Secretariat and member countries to fulfil their responsibilities.

Regardless of current limitations in ASEANs institutional framework and mechanisms, ASEANs cooperation has moved onto a higher plane and the regional integration process is progressing. As implementation towards an AEC has started only since 2008, any payoffs from measures already implemented are not as yet evident in the data analyzed in this Report, and it will be worthwhile to conduct similar competitiveness analyses on a regular basis to see if ASEANs integration efforts have translated into enhanced competitiveness performance.

Ultimately, the extent of benefits that ASEAN will reap from deeper regional integration will depend on how willing member countries are in adhering to the blueprints for action. Each member nation needs to have a clear strategic focus on the integration agenda while minimizing ideological socio-political differences in order for ASEAN to move from vision to action.

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ASEAN COMPETITIVENESS REPORT 1

Introduction

ASEANCompetitivenessReport

Chapter 1

2010

2 ASIA COMPETITIVENESS INSTITUTE

The Association of Southeast Asian Nations (ASEAN) has evolved remarkably since its inception in 1967. Geopolitically, the group has expanded from five member nations comprising Indonesia, Malaysia, Philippines, Singapore and Thailand to include Brunei (1984), Vietnam (1995), Lao PDR (1997), Myanmar (1997) and Cambodia (1999). From a fragmented group that was ridden with political and ideological conflicts and imbued with narrow nationalistic objectives, ASEAN has emerged as a recognized voice in the global economic and political arena. The region is now the fourth-largest trading entity in the world with a combined population of 592 million and GDP of US$1.49 trillion in 2009 at current market prices.

Economic realities have changed dramatically in the past 15 years with the onset of the Asian financial crisis in 1997, the rise of China and India economically and the flare-up of the global financial crisis in late 2008. The post-crisis global economic landscape is characterized by weakened economic prospects in major advanced economies and a heralded shift in global economic power to Asia.

ASEAN has set a goal to integrate its members economies further and faster as a way to enhance the regions competitiveness. At the 2003 Summit in Bali, ASEAN Leaders agreed to establish an ASEAN Economic Community (AEC) by 2020. This is one of three pillars that will build an ASEAN Community, the other two being an ASEAN Political-Security Community and an ASEAN Socio-Cultural Community. In 2007, the deadline to realize an AEC was brought forward to 2015, and a comprehensive action plan, the AEC Blueprint, was adopted.

The legal framework for ASEAN norms, rules and values is instituted in the ASEAN Charter that was signed in 2007 and came into force the following year. By setting clear targets to be achieved by ASEAN members for the ASEAN Community, the Charter serves as a basis for accountability and compliance. In 2009, ASEAN further adopted the ASEAN Political-Security Community and ASEAN Socio-Cultural Community Blueprints to achieve an ASEAN Community by 2015.

Despite the considerable diversity that remains among member countries, which are at varying levels of economic development and with dissimilar cultures, ethnicities and languages, ASEAN has demonstrated a resolve to negotiate these differences to be one community. In recognition of both ASEANs heterogeneity and its ambition to seek unity in diversity, the analysis in this Report is conducted at two levels overall ASEAN and by individual ASEAN country. A comprehensive review of ASEANs competitive position will better enable policy makers to assess the challenges

the region faces in a world economy that is becoming increasingly complex and interdependent.

This Report aims to track a myriad of indicators of ASEANs competitiveness over time for the region as a whole as well as for individual member states in an international perspective. It is hoped that this Report adds value to the discourse on ASEAN competitiveness and helps to furnish policy makers with data, analysis and a conceptual framework to evaluate ASEANs competitive position and adopt the relevant policy priorities at both the national and regional levels to steer the region towards its vision of increasing prosperity.

ASEANs Competitiveness Challenges

ASEAN is facing a new era in its development. With a changing global economic environment defining new challenges and the ASEAN Charter outlining new ambitions, a fresh look at the data is needed to examine the key challenges confronting ASEAN in the longer term. The set of key questions facing ASEAN is both at the national and regional levels.

ASEANs prosperity, measured in terms of GDP per capita, runs the full range from high income (Brunei and Singapore) to low income (Cambodia, Laos and Myanmar). Rapid prosperity growth before the Asian financial crisis propelled two ASEAN economies - Malaysia and Indonesia - up the income ladder. Over the past decade, with the exception of Vietnam, which moved from low to low-middle-income status in 2009, none of the other ASEAN countries has substantially improved prosperity. A key challenge is for each ASEAN country to address the issues that boost competitiveness and propel it further up the ladder of economic development.

The ASEAN region has weathered the 2008 global financial crisis well, despite being hard-hit initially due to the intensification of member economies export-led growth strategies in the 2000s. ASEAN, along with the rest of Asia, has recovered at a faster and stronger pace than the major advanced economies. Since late 2009, trade has normalized, industrial production has recovered and capital inflows have resumed. Quick countercyclical rescue measures by ASEANs policy makers have helped to reduce the impact of the global financial crisis and minimize downside risks to economic growth. Given the turnaround of the ASEAN economies, most countries have reduced or withdrawn stimulus measures. The challenge for ASEAN is to maintain growth momentum in a post-crisis world environment and to move towards a new growth model that rebalances growth away from traditional markets in the West towards newer and more sustainable growth that is driven by intra-regional and domestic demand.

Deeper regional economic integration is recognized as a potent answer to ASEANs challenges of having to generate new impetus for growth and enhance competitiveness. Through closer cooperation, ASEAN countries can leverage on a wide diversity of its resources and development

INTRODUCTION

ASEAN COMPETITIVENESS REPORT 3

by accelerating the migration of value chain within the region, thereby enhancing the regions capacity for intra-regional production, investment and trade. However, the move towards greater regional integration is not without difficulties. The theme for ASEAN in 2010, Towards the ASEAN Community: From Vision to Action, pinpoints the crux of the problem with ASEAN integration efforts. The vision is bold, but implementation falls short. Ensuring timely implementation of agreements and decisions within a rules-based framework and strengthened institutional mechanisms is another challenge that ASEAN has to tackle.

Conceptual Approach of the Report

The analysis in this Report adopts the competitiveness framework developed by Michael E. Porter, Bishop William Lawrence University Professor, Harvard Business School and Chairman, ACI International Advisory Panel. The attractiveness of the Porter framework lies in its malleability to the analysis of any situation by capturing the role of various factors on competitiveness without the need for a priori assumptions. Porters approach is particularly useful when faced with a diversity of impact factors with varying importance in determining competitiveness, as in the case of ASEAN.

Competitiveness determines the productivity with which a country or region uses its land, labor, capital and other resources. Productivity sets the standard of living through returns on factors of production (wages, rent, etc.) that a country can sustain. What is important to attain competitiveness and prosperity is not the type of industries that a country or region chooses to compete in but how productively it competes in those industries.

Competitiveness factors can be grouped under macroeconomic or microeconomic competitiveness. Macroeconomic competitiveness delineates the overall context in which firms operate and create the potential for high productivity. Although these factors do not directly affect the productivity of firms, they are critical in providing support for firm efforts to raise productivity. These factors include the quality of social infrastructure, political institutions and macroeconomic policy. Microeconomic competitiveness identifies operating practices and strategies of firms as well as business inputs, infrastructure, institutions and policies that constitute the envir