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diversity are wide differences in history, culture, geography, population, population density and – not least – political systems.
Nevertheless, there are elements of convergence across ASEAN countries. Integration with the global economy stands out: since the 1980s, all ASEAN countries have liberalised trade and foreign direct investment. Average import-weighted tariffs are around 5% for most ASEAN countries; all except Indonesia, Philippines, Laos and Myanmar have trade-to-GDP ratios of about 100% and well above. In tandem, ASEAN has become a regional production hub for parts and components in global manufacturing supply chains. This has knitted ASEAN and Northeast Asia – including China – in ever-tighter trade and production linkages.
Now turn to the regional economic outlook. The IMF forecasts growth at 5% for the ASEAN-5 this year, in line with growth in the last few years. A slightly stronger post-GFC recovery in advanced economies, particularly in the USA, should give a marginal boost to ASEAN growth through exports.
Storm clouds ahead
But there are storm clouds ahead. First, China’s growth slowdown has implications for ASEAN’s exports of intermediate products in global supply chains, its exports destined for the Chinese domestic market, and Chinese investments in ASEAN.
Second, ASEAN countries have seen a credit explosion as a result of loose monetary policies at home and around the world. Consumer debt has piled up. Asset and property bubbles are getting bigger. Tighter global monetary conditions, especially with “tapering” by the US Federal Reserve and the likelihood of higher interest rates in the West, increase the risk of a mini-crash. Governments will have to bite the political bullet and wean themselves off loose-money policies sooner rather than later.
That said, ASEAN countries are in a much better position to weather global shocks than they were during the Asian financial crisis in 1997. Fiscal and monetary conditions are better, exchange rates are more flexible, there is much less exposure to short-term foreign debt, and bond markets are deeper.
Third, a decade of cheap-money policies and high commodity prices has engendered lazy complacency in emerging markets. ASEAN is no exception. Governments have neglected structural reforms to reduce market distortions. These are now more visible with tighter global monetary conditions and falling commodity prices. Large swathes of markets for land, labour and capital remain unreformed. That is also true of much of the public sector. Liberalisation of international trade and investment has slowed down or stalled. Government red tape plagues the business climate. The World Bank’s Doing Business Index has Vietnam in 99th place, Myanmar bringing up the rear in 182nd place, with Philippines, Indonesia, Cambodia and Laos in between.
ASEAN countries need fresh structural reforms
ASEAN countries need fresh structural reforms not only to cope better with external shocks, but also to take advantage of emerging trends in global supply chains. Multinationals are looking for new investment destinations as China becomes more expensive. If South Asia – India in particular – opens up more to global markets, labour-intensive, export-oriented manufacturing will migrate there. That will present huge 
opportunities for ASEAN countries in the middle of pan-Asian regional production networks, halfway between China and India.
Genuine ASEAN economic integration – the free flow of goods, services, capital and people within the region – would deliver huge gains, not least from deeper integration into global supply chains. That is the logic of the ASEAN Economic Community (AEC). The bulk of intra-regional tariffs have been abolished. Partial progress has been achieved on simplifying and harmonising customs procedures, cross-border infrastructure projects, and opening up ASEAN skies to low-cost airlines. A few sub-regional integration initiatives have made headway, notably the Greater Mekong Sub-Region and Iskandar-Singapore.
But, overall, the AEC is well behind its targets to reduce and abolish non-tariff and regulatory barriers in goods, services and investment. Most restrictions to intra-regional commerce lie here, not in tariffs and quotas “at the border”. Moreover, ASEAN monetary and financial integration is even weaker than it is in trade and investment, so far restricted to modest measures like the Chiang Mai Initiative.
This mixed record reflects the “ASEAN Way” of “loose inter-governmentalism” and “shallow integration”. Incremental progress, not a Utopian leap to EU-style top-down, institution-heavy integration, is probably the best ASEAN can expect given its political realities.
“Second generation” of market reforms needed
Southeast Asia has made substantial economic progress because its governments have liberalised markets, thereby enabling integration into global supply chains. Now a “second generation” of market reforms is needed to cope with external shocks and to take advantage of new regional and global opportunities. This will be politically challenging because it has to go deeper into the thickets of domestic regulatory protectionism. It is primarily a matter for unilateral action by individual countries, but incremental ASEAN cooperation can be a helpful auxiliary.
(The author is Visiting Associate Professor at the Lee Kuan Yew School of Public Policy, NUS. A version of this article came out in The Straits Times recently.)
