Speech by Prime Minister Lee Hsien Loong at the 3rd Asean Business and Investment Forum on 11 December 2005, Shangri La Hotel, Kuala Lumpur, Malaysia - Moving Asean Forward: Sustaining Momentum

Moving ASEAN Forward: Sustaining Momentum

Dato Syed Amin Al Jefri, Chairman ASEAN Business Advisory Council

Excellencies and distinguished guests,

Ladies and gentlemen

INTRODUCTION

1. I am happy to join you for the 3rd ASEAN Business and Investment Forum. All of us here this morning - whether academics, businessmen or policy makers - share the common goal of an ASEAN Economic Community. This will create a single economic entity, with an enlarged market of 550 million people, and a free flow of goods, services, investments, skilled labour and capital. Year by year, we have moved closer to this ideal by integrating the diverse economies of ASEAN. But much remains to be done. We must build on the progress we have made, to take ASEAN forward and maximise its potential.

LINKING UP WITH A RISING ASIA

2. This process of ASEAN integration is taking place at a time of sweeping changes in Asia. The rise of China and India is transforming the entire region. China has already overtaken the US as the major trading partner of many Asian countries, including Japan, Korea and several ASEAN economies. India opened up several decades after China - the initial pace of reform was slow, but India has made significant progress in recent years. Combined, these two economic powerhouses will shift the centre of gravity of the world economy towards Asia.

3. The Asian renaissance is not just about China and India. Other parts of Asia are also picking up. Japan, the largest economy in Asia, has emerged from more than a decade of stagnation and is now growing steadily. Korea is remaking itself, and moving into new growth areas like media, entertainment, and IT. Companies and investors around the world are paying attention to what is happening in Asia.

4. ASEAN is strategically located at the crossroads of Asia. We face a fundamental choice - we can either move forward to seize the opportunities opening up in the region, or shrink back at the formidable competition that is emerging. To many investors, ASEAN remains ten isolated, scattered national economies, too small to be worth paying attention to. We must adjust to the new environment, so that ASEAN will not lose competitiveness and drop off from the radar screens of investors. Already, China drew in US$60 billion in foreign investments last year, or about 2.5 times the amount which ASEAN received. On my recent trip to Europe, the businessmen and ministers I met were all eager to hear about China. European businesses are engrossed by the possibilities of the Chinese market. Airbus, for example, has just sold another 150 passenger jets to China, and is considering setting up a plane assembly line in China. More and more companies are also beginning to take notice of India. Elsewhere in the world, regions like the Gulf States and Eastern Europe are also reforming their economies and becoming attractive investment destinations. In order to stay in the game ASEAN must therefore take decisive action. It must link up more closely to its partners. Amongst ourselves, we must integrate our economies more rapidly, so that we can be more competitive as a whole region.

5. To benefit from the dynamism of China and India, ASEAN must complement the growth and economic needs of these two giants. ASEAN needs to adapt to the changing trade and investment patterns of the region, and link itself up to the major centres of economic activity in Asia and beyond. We are now at various stages of negotiating FTAs with other countries in Asia, including China, Japan, and South Korea in Northeast Asia, India and other countries in South Asia, and Australia and New Zealand to the South. At the same time, ASEAN must strengthen its longstanding relations with existing partners like the US and Europe, and establish ties with new partners such as the Middle East and Russia. All these links will enable ASEAN to thrive as a hub in Asia and a key node in the global economic network. They will make ASEAN more attractive as an investment destination for companies and investors who are keen to tap the vibrancy of a region on the move, and want to diversify their exposure to China and India.

ACCELERATING ASEAN INTEGRATION

6. Besides strengthening its cooperation with external partners, ASEAN must also enhance cooperation internally within the group. ASEAN has progressively integrated its economies through initiatives like the ASEAN Free Trade Area (AFTA) and the ASEAN Investment Area (AIA). Despite these efforts, intra-ASEAN trade in the region still only forms around 20% of the total foreign trade of the member countries. This proportion has remained the same for well over a decade. We must do more to enhance the trade and investment linkages between ASEAN countries. ASEAN has already identified eleven priority sectors for accelerated integration, including automotives, electronics, healthcare and tourism. We must follow up these commitments with real and concrete action.

7. Among the peoples of ASEAN, the sense of a common ASEAN identity is already starting to grow. In a recent region-wide survey, six of ten ASEAN's citizens and residents said that they identified with one another. Nearly half of those surveyed, however, agreed that the pace of integration in ASEAN ought to be speeded up.

8. An important step forward in integrating ASEAN is the proposed ASEAN Charter. This ASEAN Summit will set up an Eminent Person's Group (EPG) to guide the formulation of the Charter. This exercise provides a historic opportunity to set a clear and ambitious long-term direction for ASEAN. The EPG should take a strategic view of the changes in the world, and propose how ASEAN should respond to these changes. It should not only set out a vision for ASEAN, but also recommend practical measures to realise this vision. We should thus take this exercise seriously. It will significantly boost ASEAN's credibility,robustness, and international standing.

9. What else can we do to further integrate ASEAN into one economic entity? Let me offer a few suggestions.

10. First, more needs to be done to liberalise economic sectors and remove internal barriers to business and investment in the region. One reason why ASEAN has not been more successful in attracting investments is the relatively high costs of operating in the region. As some foreign investors have indicated, ASEAN currently still operates as ten different economic entities, with different rules and standards, all of which raise transactions costs. Even though there will be political sensitivities, ASEAN must find ways to open up more economic sectors, remove non-tariff barriers and reduce costs for businesses to operate seamlessly across the individual economies. A McKinsey study has estimated that an integrated ASEAN market will boost the region's GDP by 10% and reduce operational costs by one-fifth. Reaping these dividends is therefore an urgent task.

11. An integrated market will enable ASEAN to capitalise on the complementary strengths of each country. MNCs will find it more attractive to diversify their supply chains throughout ASEAN, and leverage on cost differences and comparative advantages of different countries in ASEAN to optimise production. In the automative sector, for example, MNCs like Toyota are already sourcing inputs from various ASEAN countries, and assembling them in Thailand before exporting to overseas markets. With more such integrated supply chains in the region, the label "Made in ASEAN" may in the future become an appropriate description of production activities. In fact, textiles companies from Taiwan and Hong Kong have caught on to this integrated production model, tapping on Philippine fashion designers, Malaysian purchasers, Cambodian yarn, and Vietnamese tailors to create a promising ASEAN fashion hub.

12. Second, we need to enhance regional interconnectivity. Stronger economic integration can only take place if production centres are physically connected within ASEAN, and accessible to the global market through air, land and sea links. Some of this is already happening. There are ongoing major infrastructure projects such as new international airports and sea ports. Plans are underway to develop a transport system that will link Myanmar, Thailand, Cambodia, Laos, Vietnam and China. Further liberalisation of air transport, including through open-skies agreements, will also enhance connectivity within the region. Given the intense global competition for the tourist dollar, ASEAN should step up its efforts to create an integrated air network that will allow member countries to jointly offer more affordable and attractive tour packages to the region.

13. Third, even as we move forward in our integration efforts, we should address the diversity of ASEAN. Not all countries are at similar stages of development. The newer ASEAN member countries need help to catch up and link up with the more developed members. ASEAN has instituted various assistance programmes, including the Initiative for ASEAN Integration (IAI), to narrow the development gap within the region. But the pace of ASEAN integration should not be set by its slowest members. We should instead look for creative and flexible approaches to accelerate integration, while addressing the diversity of the region. One way is for ASEAN countries which are ready to liberalise certain sectors to move ahead first, either bilaterally or as a smaller sub-group, through the "2+X" or "ASEAN-X" approaches. The others can then join in later.

14. We should also strengthen the linkages between the original ASEAN-6 and the new member countries of Cambodia, Laos, Myanmar and Vietnam. Singapore, for example, has just signed a Connectivity Agreement with Vietnam, to strengthen bilateral cooperation in multiple sectors including finance, IT and transport. We believe that such a partnership will not only benefit these two countries, but can also serve as a pathfinder towards greater regional collaboration. The more we open up and link up to one another, the faster the development gap will narrow.

CONCLUSION

15. ASEAN is competing in a tough international race. Quitting is not an option. So we must constantly remind ourselves to stay the course, and keep the end goal clearly in mind. In this race, time is of the essence, as our competitors are maintaining their pace and forging ahead. We have set the target of an ASEAN Economic Community by 2020. We should work together and focus our efforts, and try to bring forward the completion of the current economic initiatives, perhaps to 2015. This would show that we are addressing the challenges we face with the utmost seriousness, and boost investor confidence in the region.