Can ASEAN be a global leader?

6 September 2016
ITC News
Speech delivered by ITC Executive Director Arancha González at the ASEAN Business and Investment summit 2016
6 September 2016

Ladies and Gentlemen,

I thank the ASEAN Business Advisory Council and Minister Khemmani Pholsena, Minister of Industry and Commerce of Lao PDR for inviting me to address this ASEAN Business and Investment Summit and to participate in these fascinating set of discussions on the region's economic future. The International Trade Centre (ITC), the joint United Nations and World Trade Organisation body that I head, is committed to the region and to supporting it to grow and develop through trade and increased SME internationalisation.

'One Vision, One Identity, One Community'. This is the motto of ASEAN. It reflects unity, a shared strategy and recognition of interdependence between the ASEAN member states. Underlying this is the notion of responsibility. Not just to each other but responsibility on a global scale. Hence my focus today: Can ASEAN be a global leader? This question will help us to reflect on the almost 50 years to when the bloc's original five members came together.

In 1967, Asia, apart from Japan, was widely thought of as an economic lost cause. The smart money at the time was on Latin America and on Africa's newly independent states. Southeast Asia was beset by superpower rivalries, and the region's incredible diversity of languages, culture, and religions seemed to supply ample tinder for conflict.

Now look at ASEAN today. Taken together, its ten members would constitute the sixth largest economy in the world at market exchange rates, after Germany and about level with France. Since the turn of the century, the bloc's GDP has more than tripled. Growth has not just been healthy; it has been stable - far less volatile than growth rates in the European Union over the past decade and a half. Between 1993 and 2013, ASEAN countries' total trade grew sixfold, from $430 billion to $2.5 trillion, and parts of the region became fixtures in international value chains.

Even more importantly, economic growth has translated into poverty reduction. Poverty rates across ASEAN have halved since 2000. Better still, some of the biggest improvements have come in the group's least developed four countries - Cambodia, Lao PDR, Myanmar, and Vietnam - where the proportion of people living in extreme poverty has fallen by more than two thirds, from 45% to below 16%. Rising prosperity has been accompanied by peace within and among the bloc's members.

ASEAN is in many ways already a global leader- a blueprint of success. For African, Caribbean or Pacific governments looking to pursue economic and political integration, it makes sense to look to Southeast Asia. ASEAN's consensus-based processes encompass countries with varied political systems, high and low per capita income levels, and very different comparative advantages. Its dense network of regional meetings have built institutional and personal ties that foster greater confidence and cooperation on issues from trade and transport to environmental protection and even contentious border disputes.

The ASEAN Economic Community promises to create a single 'home' market and base for production and trade with the rest of the world. ASEAN has already inked trade agreements with China, Japan, India, Korea, Australia and New Zealand. These deals make ASEAN the central hub for the prospective Regional Comprehensive Economic Partnership currently under negotiation among all of these countries.

But there is room for improvement. For instance, intra-ASEAN trade - by which I mean the share of member states' trade that goes elsewhere within the bloc - has in recent years plateaued at around 25%. This is well below the intra-group share registered in NAFTA, let alone within the European Union. To take another example, in most ASEAN countries, manufacturing labour productivity per worker is significantly lower than in China, enough to offset the region's wage advantage. And of course, ASEAN's poorer members in particular face major growth and development challenges.

For ASEAN to lead in the future, proactive policymaking will be critical. Many of the lower-hanging fruits in terms of economic reforms and gains have been harvested.
Consider the AEC (ASEAN Economic Community). Hard though this may be to believe, reducing tariffs is actually the relatively easy part. Non-tariff measures and foreign investment restrictions are much more complicated to deal with. ITC works to shine a spotlight on how companies in developing countries encounter non-tariff measures in their day-do-day operations.

Our business surveys in Cambodia, the Philippines, Indonesia, and Thailand confirm that companies seeking to trade within ASEAN still encounter obstacles related to the mutual recognition of certificates and rules of origin, differing product classifications, and the like. These policies prevent exporters and importers from enjoying the full benefits of regional integration. On the other hand, traders run into even more problems when doing business with countries outside ASEAN, suggesting that intra-group integration has made real progress. These business surveys provide a rich source of evidence based information on how to improve and increase trade in the region.

I suggest that a comprehensive region wide NTM and business survey would be a fundamental input into ASEAN's integration strategy moving forward. This could be coupled with an on-line mechanism for businesses to report NTMs, with governments commitment to address them with clear deadlines. Our experience with similar mechanisms in other countries has proven very helpful. ITC would be pleased to be your partner on this.

Productivity growth is comparable in that it becomes even harder after countries have realised the initial gains from moving people and capital from farms to factories. For ASEAN's lower-income economies, where farming is still a dominant activity, the challenge is two-fold: they must pursue structural transformation while raising productivity across the board in agriculture, manufacturing, and services.

Improvement in productivity will require innovations, investment in skills and training as well as leveraging the power of the digital economy, including e-commerce.

But improving productivity growth and deepening regional economic integration are alone not enough to make ASEAN a global leader. Because it is all too possible for countries to register high overall growth rates without increases in most people's incomes. And it is possible for officials to negotiate deeper trade and investment ties without ensuring that businesses can take advantage of new market access.

I believe that ASEAN today has an opportunity to show the world how to translate integration, trade, and growth into broad-based improvements in the life opportunities and living standards of ordinary people. That is the kind of leadership the globe urgently needs. And it's the kind of leadership ASEAN is working to deliver.

Two groups are central to this inclusive growth agenda: small and medium-sized enterprises (SMEs) and women. Together they encompass the vast majority of our societies. But their economic potential tends to go underutilised, compromising both overall growth and the extent to which its fruits are broadly shared. The good news is that concrete action by policymakers, business, and civil society can change this.

Micro, small and medium-sized firms are nothing less than the missing link to inclusive growth. They account for around 60 to 70% of all jobs in the private sector but they tend to be less productive than large companies, with this productivity gap being the widest in developing countries. Low productivity means lower wages and worse working conditions for much of the workforce. On the flip side, improving SME productivity translates into more and better paying jobs, widely distributed across society. SMEs able to 'internationalize', whether by exporting or importing directly or selling to firms that do, register particularly high productivity, wage, and employment gains. Boosting the international competitiveness of SMEs thus directly contributes to inclusive growth.

Situated at the heart of some of the world's most important production networks and shipping lanes, ASEAN is well placed to be a leader on connecting SMEs to value chains. Region-wide work to open markets, harmonise regulations and lower trade-related costs should be complemented with efforts to equip SMEs with the trade intelligence tools, access to financing, and network contacts they need to link up to potential foreign buyers and suppliers. 'Soft' infrastructure of this kind is an essential part of making sure that firms of all sizes can benefit from investments in 'hard' infrastructure like roads and ports.

Currently, SME performance varies widely across ASEAN. In Thailand, for instance, SMEs account for nearly 30% of all exports, while in Indonesia, the figure is only half as much. ITC's annual SME Competitiveness Outlook sheds light on the constraints holding back SMEs in world markets, and directs policymakers' attention to the areas where reforms would yield the highest impact in a given country. The report looks at firm-level capacities in tandem with strengths and weaknesses in the immediate business environment as well as the broader national policy climate.

An intriguing insight to emerge from the research is that in many Asian countries, including multiple ASEAN members, firm-level determinants of competitiveness are in fact relatively weak, but offset by strong national and immediate business environments. A reverse case is visible in Latin America, where the trade competitiveness of dynamic, adaptable firms is hemmed in by a relatively weak business environment. Many ASEAN governments may thus do well to pay more attention to bolstering firm level capacities. This would involve things like better equipping SMEs to adapt to changing market demands, to use internet communication tools, e-commerce, to build skills, and, crucially, to obtain the international quality certifications that are increasingly a prerequisite for breaking into value chains and accessing consumer markets.

Ensuring that trade policy and trade rules reflect and respond to the realities of MSMEs is critical. And here I salute the Philippines and other members of ASEAN for piloting these discussions in the WTO. ITC was pleased to co-sponsor an event with many ASEAN countries on this issue some weeks ago and I will continue to personally support this discourse and ITC will provide all the necessary fact based intelligence to help you better craft MSME friendly trade rules and regulations.

And now to women, who are of course employed in large numbers by SMEs. Social and legal barriers relegate hundreds of millions of women around the world to marginal roles in the economy. Girls are often less likely than their brothers to be sent to school. Women are significantly less likely to have bank accounts and access to credit, diminishing their ability to start and run businesses. Discriminatory laws in many countries confine women entrepreneurs and employees to low-paying activities.

It is not surprising then that women-owned businesses are underrepresented among firms that trade. ITC business surveys in 20 developing countries suggest that only about 20% of companies that export or import are owned and managed by women. The Philippines, an ASEAN member state for which we have data, is actually a relative outperformer on this: 28% of companies involved in trade were led by women. But even here, there is lots of ground to make up.

Closing the gender gap in economic opportunity would yield enormous dividends for all of us. Estimates are that if women's wages and labour force participation were raised to make them equal to those of men, it would boost global output by over 25 percent. That would be like adding a new United States and China to the world economy. Or perhaps a new ASEAN! In a few days, G-20 leaders will gather in Hangzhou to think about how to "break a new path for growth." I think we have an answer for them!

Empowering women as economic agents is not just a matter of government policy, or of private sector practice, or of shifts in social values. All of us have roles to play. ITC's SheTrades initiative provides a roadmap for concrete action. The initiative seeks to connect one million women entrepreneurs to international market opportunities by 2020. As part of this goal, we have issued a Call to Action that identifies key obstacles holding back women-owned businesses. ASEAN governments, businesses, and civil society can show leadership by making - and meeting - ambitious, verifiable pledges of concrete action. I challenge you all today to be shetrades champions.

So how can this be done in practice? ASEAN governments could promise to fix discriminatory laws, procure more goods and services from enterprises run by women, and support institutions like trade promotion agencies that help women entrepreneurs find new market opportunities. Collecting gender disaggregated data would inform better policies by both governments and the private sector. ASEAN-based companies can commit to adding more women-owned businesses to their supply chains. The region's banks and investors can pledge to ensure that businesses run by women have fair access to the capital they need to grow.

I am happy to report that ASEAN is already moving on both of these crucial fronts. An ASEAN Secretariat paper, in cooperation with UN Women and the Friedrich Ebert Foundation, has already identified ways in which the ASEAN Economic Community might address gender inequality, and proposes a series of targeted actions to increase women's participation in trade-oriented sectors. These range from closing gaps in skills and access to finance, to reforming labour, property, and inheritance laws, and creating childcare systems so that women are not penalised for working. The overlap with the SheTrades Call to Action is more than significant!

On SMEs, the ASEAN Strategic Action Plan for SME Development spells out a detailed ten-year agenda for SMEs to become more productive and internationalise.

ITC is already working in support of these objectives across the ASEAN region. At the request of ASEAN countries, we have developed a project to support the Regional Integration Agenda and the implementation of the Strategic Action Plan for SME Development. If the AEC is about making trade possible, this project will be about making trade happen - by enabling SMEs to reap the full benefits of the ASEAN Economic Community. A separate initiative seeks to strengthen institutional support for women-owned businesses in Indonesia and two other Indian Ocean Rim Association countries.

These initiatives build on ongoing and past work, such as our support for women entrepreneurs in Cambodia's silk sector to improve incomes by improving product quality and connecting to foreign buyers. In Myanmar, we supported the government in developing a national export strategy, and are now implementing projects to bolster tourism and revive its once-dynamic oilseeds sector. Here in Laos we have worked to integrate vulnerable communities into economically inclusive and culturally respectful tourism. The Malaysia External Trade Development Corporation has been a valuable partner in our efforts to help trade promotion agencies around the world provide their clients better value for money. And of course I've already mentioned our business surveys on non-tariff measures and women's involvement in trade.

In closing, I hope I have convinced you - in case you needed convincing - that making the most of the economic promise of SMEs and women is essential for ASEAN to achieve become a 'Community of Opportunities'. And if ASEAN is able to become a model for inclusive growth and broadly shared benefits from trade, it truly will be a global leader for its second half-century.

Thank you