ASEAN Economic Community: A General Equilibrium Analysis*

Abstract

The ASEAN Economic Community (AEC) is the largest integration effort attempted in the developing world; if realized, it will create a single market with the free movement of goods, services, foreign direct investment and skilled labor, and freer movement of capital encompassing nearly 600 million people. This study, a first attempt to evaluate the full benefits of the AEC, finds that the project could produce gains similar to those resulting from the European Single Market, amounting to 5.3 percent of the region's income. The benefits could be doubled if, as expected, regional integration also leads to new free trade agreements with key external partners. The whole region will share in these gains. There will be mild trade and investment diversion effects for some other countries, but the world will benefit too. Nevertheless, the AEC poses political challenges: the present study finds that the project will imply significant structural adjustments in several ASEAN economies.Spanning a region of 591 million people and including many rapidly growing economies, the AEC is arguably the most ambitious and sophisticated initiative of its kind, save the European Single Market, and the only project on this scale in the developing world. Much hard work lies ahead: realizing deep integration will require overcoming huge technical and political obstacles. The region's leaders and citizens need to be convinced that the economic benefits make the project worthwhile.This study provides early, comprehensive estimates of the impact of the AEC. We use a computable general equilibrium (CGE) model, as is usual in such work, but, given the scope of the AEC, attempt to model broader effects than other similar studies. Thus, we incorporate several 'new' channels of benefits from integration that have been identified in the literature. First, we take into account multiple policy measures encompassed in the AEC, including the elimination of tariffs and non-tariff measures, trade facilitation, and improvements in the investment climate. Second, we use a model specification that incorporates the implications of multiple product varieties, productivity gains associated with economies of scale, and the heterogeneity of firms in terms of productivity. Third, we explore an important second-order effect of the AEC project, the possibility that regional integration will make it easier to extend ASEAN's 'hub and spoke' network of free trade agreements (FTA) to other external partners.Although the approach is unusually comprehensive (we believe appropriately, given the AEC's ambition), the parameter values that we use to implement it are set conservatively to avoid overstating welfare results. In other words, we try to estimate realistic (and perhaps even lower bound) magnitudes for likely gains. Even so, the results suggest substantial benefits from implementing the AEC, on the order of 5 percent of ASEAN income. Moreover, these benefits should grow over time as the region's economies mature and evolve to make economic integration still more prod...

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