Indonesia and The Implementation of

ASEAN Economic Community

International Business Management
Esther Kezia Simanjuntak 3099190

ABSTRACT
Asean Economic Community (AEC) 2015 is a free market realization in
Southeast Asia ,which has been done gradually starting from the ASEAN
Summit in Singapore in 1992. The purpose of establishment of ASEAN
Economic Community (AEC) is to improve economic stability in ASEAN
region and solve economic problems among ASEAN countries. The
consequences of the AEC agreement are the free flow of goods for ASEAN
countries free flow of services, free flow of investment, free flow of skilled
labor, and free capital flows. These things could certainly give positive or
negative effects for the Indonesian economy and also for foreign countries.
It is essential to do SWOT analysis in order to determine the readiness of
Indonesia and preparing strategies correspondingly.
1 Introduction
Conflicts between Southeast Asian countries such as "confrontation" between
Indonesia and Malaysia, territorial claims between Malaysia and the Philippines
concerning Sabah, and the separation of Singapore from the Malaysian federation.
Against this background, Southeast Asian countries recognize the need to establish
realization of cooperation in the form of ASEAN organization. It aims to alleviate
mutual suspicion and build mutual trust, and encourage regional development
cooperation. The establishment of ASEAN began with the holding of five foreign
ministers from Indonesia, Malaysia, the Philippines, Singapore and Thailand. This
meeting took place in Bangkok in August 1967 resulting in the design of the Joint
Decralation, which essentially regulates regional cooperation in the region. On August
8 1967, the ASEAN Declaration was signed or known as the Bangkok declaration by
deputy prime minister and concurrent foreign minister of Malaysia and foreign
ministers from Indonesia. Philippines, Singapore and Thailand. Brunei Darussalam then
joined on 8 January 1984, Vietnam on July 28, 1995, Lao PDR and Myanmar on 23 July
1997 and Cambodia on 30 April 1999. The financial and economic crisis that occurred in
Southeast Asia in 1997-1998 sparked awareness of ASEAN countries on the importance
of enhancing and strengthening intra-regional cooperation. ASEAN Economic
Community is a concept which was adopted in the Declaration of ASEAN Concord II
(Bali Concord II) in Bali in October 2003.

The desire for the purpose of integrating the economy in the ASEAN region seems to
be more and more important therfore ASEAN, at the 12th summit in January 2007
changed the target of AEC 2020 to 2015. The goal is clear, namely to make ASEAN as a
region where goods, services, investments, skilled workers, and capitals can move
freely. The ASEAN Economic Community Blueprint (AEC Blueprint) contains a strategic
work plan in the short, medium and long term. The ASEAN Economic Community
Blueprint (AEC Blueprint) must be implemented by member countries towards the
establishment of ASEAN economic integration in 2015.

2 ASEAN Economic Community 2015

2.1 AEC 2015

The vision of ASEAN is to transform the region of Southeast Asia into a stable,
prosperous, and competitive region supported by balanced economic development,
poverty reduction, and socio-economic disparities between member countries1. The
implementation of AEC at the end of 2015 is the conclusion of more than two decades
of economic integration.

1 ASEAN Vision 2020 www.asean.org

 1992 1998 2003
ASEAN Investment Bali Concord II
ASEAN Free Trade
Area (AIA) Esthablishing 3 Pillars
Area (AFTA) Foreign investors receive
Custom Tariffs are reduced -Economic Community
"national treatment" -Political Security Community
to 0-5% within 15 years
-Social Cultural Community

2015 2009 2007

AEC takes effect in ATIGA ASEAN Trade AEC Blueprint
December 2015 in Goods Agreement

Figure 1 The AEC Map

In favor for establishing AEC, members of ASEAN agreed to carry out ASEAN Free
Trade Area (AFTA), where the custom tariffs are reduced to zero until five percent as
the commitment of single market 2015.
Elements of Economic Community involve:
1) To establish a single market and production base. The goal Is to break down
barriers to trade and investment, and to encourage movement of skilled labors.
2) To develop a competitive economic region, which includes:
a. Elimination non-tariffs barrier (NTB)
b. Reducing transport by developing infrastructure
c. Encouraging innovation and intellectual property rights
3) Achieve an equitable economic development region by supporting business in
countries with less develop economy.
4) To integrate ASEAN to global economy. ASEAN must not be isolated but part of
global economy.

2.2 Role of AEC in Global Economy

If all ASEAN member states join into a single country, it would be the seventh largest
economy in the world and is estimated becoming the fourth largest economy by 2050.
The population of ASEAN is the third largest in the world meaning ASEAN has high
consumer demand, with 67 millions households is part of the consuming part which
could double to 135 millions by 2025. The intra-regional trade within ASEAN is however
less than half than EU which could deepen significantly with the establishment of
ASEAN Economic Community (AEC). ASEAN includes 227 of the worlds companies
with more than 3 billion dollars revenues (3% of the world total) and has
macroeconomic stability that provides platform for growth with the government debt
47% of GDP. In the past five years, the GDP of ASEAN has increased by 5.6% and it is
predicted will remain above 5% during 2015-2020. ASEAN GDP takes account for 5% of
the world GDP, which is half of Japan and two-thirds of Germany. Of all ten members,
Singapore has the highest GDP per capita at US$55,182 US Dollars meanwhile
Indonesia has 14 times smaller, but GDP of Indonesia takes 36% of total GDP of ASEAN
region. This results in reduction of share world GDP for industrial nations such as
Germany and Japan, hence will impact on world economy.

Figure 2 ASEAN GDP (EY, 2015)

3 The Country of Indonesia

3.1 Social Situation

Indonesia has population of 257 million people (2015) and is estimated to keep
increasing to around 315 million by 2035 with current growth rate of 1.14%. There are
17.508 islands in Indonesia, with 5 being large islands (Sumatra, Kalimantan, Sulawesi,
Papua, Java). Having many islands results in high diversification either of culture or
language among people in the country. There are roughly 342 tribes or ethnicities and
742 different languages in Indonesia. The native language of Indonesia is called Bahasa
Indonesia that is spoken by 80% of population. Indonesia is well known as religious
country with 6 religions being officially recognized: Moslem (86%), Christian and
Catholic (8%), Hinduism (3%), Buddhism (1,8%), and Confucianism. This gives a fact
that Indonesia is the country with the highest number of Moslems in the world. Current
life expectancy in Indonesia is 68.89 years with unemployment rate of 8.4% and 17.8%
people live under the poverty line.

It is estimated that by 2020 to 2030, Indonesia will experience the peak of demographic
bonuses. Demographic bonus occurs when the number of working-age or productive
people (people entering the working age of 15 to 64 years). In the projected book of
Indonesia's population from 2010 to 2035, published by the National Development
Planning Agency, BPS (Badan Pusat Statistik) and UNFPA (United Nations Population
Fund). It is known that the population of productive age in 2010 was 66.5%, and in 2016
it reached 67.4%. And the estimated peak in the year 2030 that is equal to 68.1%.

3.2 Economic Situation

Indonesia faced its hardest economical situation in year 1998 due to Asian crisis. In
addition to that, the current president during that time President Soeharto resigned,
which resulted in escalation of the goods price within the nation. Until now Indonesia
has been trying to enhance the growth rate of GDP slowly with current GDP growth
reaches 5.02%(2016) (Badan Pusat Statistik). The latest GDP by PPP (Purchasing Power
Parity) was 861.93 billion $USD in year 2015. Looking from the year 1987 to 1997,
Indonesia was most likely in becoming new emerging country but the Asian crisis gave
big impact to Thailand by the depreciation of its currency resulted in the drop of foreign
investments and assets hence affected Indonesia correspondingly. The Indonesia GDP
then dropped by 13.1% and the unemployment rate increased to 15-20%. The GDP of
the country is contributed by agriculture, service, and industry.
 Figure 3 Indonesia GDP by PPP (EY, 2015)

GDP by Sector
Service Agriculture Industry

43% 44%

13%

Figure 4 GDP Indonesian by Figure 5 Population of each ASEAN States

Sector (CIA World Factbook)
4 Facing AEC 2015
4.1 Indonesia Perspective
As a nation with the highest number of population in ASEAN and largest contributor for
ASEAN GDP, Indonesia will definitely gives big impact towards the success rate of AEC
2015.
4.1.1 SWOT Analysis
STRENGTH
Large population and its favorable
demographic (29,2 years old)
Governments debt is 25% of GDP in
comparison to G8 average 108.6%
(Canada, France, Italy, Germany, Japan,
Russia, UK)3
Reinforced domestic market (30% from
GDP comes from export)
Rich of natural resources and strategic
location (equator belt)
Predicted economic growth above 5%
per year until 20203
OPPORTUNITY
Middle class population will double to
400 million by 2020 (rise in demand for
consumer goods)4
Tariff free trade with other ASEAN
members
Increase number of factories within
country
Free trade agreements between certain
countries (China, Japan, South Korea)
2 Institute of South East Asian Studies
3 IMF
4 McKinsey (7 things to know about ASEAN)
WEAKNESS
Longest custom clearance in
ASEAN Ports (4-7 days)2
Highest restriction of NTBs compare
to rest ASEAN members which adds
30% price of import goods
High language variation
Corruption
Risk of natural disaster
THREATS
Low profit companies and state
companies might be taken out from
competition
Restriction of investments in certain
business field
Decreasing export demand in
energy sector (esp. China and
Japan)
Deficit of current account (more
import than export), hence weaker
local currency (Rupiah IDR)
4.1.2 Opportunities and Challenges

4.1.2.1 Opportunities

a. Economic Integration Benefit

Indonesia's willingness to work together with other ASEAN countries to
establish the ASEAN Economic Community (AEC) in 2015 is based on a belief in
the benefits that will conceptually increase the economic growth of Indonesia
and the ASEAN region. Economic integration in realizing the AEC 2015 through
the opening and establishment of a larger market, the drive for increased
efficiency and competitiveness, and the opening of employment opportunities
in the ASEAN region, will improve the welfare of all countries in the region

b. World Potential Market

The realization of the AEC in 2015 will place ASEAN as the 3rd largest market
area in the world supported by the third largest population (8% of the world's
population) in the world after China and India. In 2008, ASEAN's population
reached 583 million people (ASEAN Economic Community Chartbook, 2009),
with an ever-increasing population growth rate and a majority age at productive
age.

4.1.2.2 Challenges

a. Increase in Export and Import

Competition that occurs not only in the country but the competition with
ASEAN countries and countries outside ASEAN such as China and India. Export
performance during the 2004-2008 period which ranked 4th after Singapore,
Malaysia and Thailand, and the 3rd highest importer after Singapore and
Malaysia is a very serious future because it has resulted in Indonesia deficit trade
balance against some of the ASEAN countries.

b. Inflation Rate
Indonesia's inflation rate is relatively high when compared with other countries
in the ASEAN region. Macro stability is still constrained to increase Indonesia's
competitiveness and the level of Indonesian prosperity is still lower. Indonesia's
largest population in ASEAN is a constraint in income generation.

4.2 Foreign Countries Perspective

For countries outside ASEAN, AEC 2015 opens the door for trading opportunities with
limited tariffs for trade and services and also no tariffs from countries within ASEAN.
Hence, by 2016 foreign investors will get high benefit from AEC. Production lines will be
concentrated to certain ASEAN countries in order to keep the producing cost low and
then the produced goods will be exported to other ASEAN countries (tariff free) as well
as to ASEAN free trade partner countries (China, India, South Korea, Japan). ASEAN
countries could also use the benefit of comparative advantage. By identifying the
strength of each country then splitting the manufacturing process. For instance,
Thailand is one of the automobile centers of Southeast Asia therefore Japan has
already placed their entire auto supply chain into Thailand and at the same time export
from Thailand to other countries. It is also possible to have free trade agreements
between ASEAN and EU and this would increase the GDP growth of 0.23% inside the
EU and in ASEAN for instance 3.66% for Indonesia and 15.27% for Vietnam

5 Comments and Conclusion

AEC 2015 is already ongoing right now and all the participating countries have to be
ready in taking the benefit from it. Has to be admitted that with current situation
Indonesia is not ready fully to face AEC despite all the strengths and comparative
advantage it has. In comparison to several countries in ASEAN, Indonesia does not
show great performance in several aspect. For instance, electric consumption per capita
of Indonesia is 814 kWh, meanwhile for Singapore and Malaysia respectively 8.800 kWh
and 4600 kWh5. This shows on which level currently Indonesia within ASEAN. Low
electricity consumption per capita means that Indonesia does not have enough
industrialization, meanwhile AEC pushes every country to develop its region and
increase the competitiveness of each country. Export ability of Indonesia also hindered
each year. 70% of Indonesia export goods are from energy (oil, gas, coal). Statistic
shows that the demand of energy from Indonesia is getting lowered each year.
Therefore Indonesia cannot rely anymore on exporting only energy.

Indonesia still has a lot of homework that needed to be done in order to gain the full
benefit of AEC. One of current main focus, which is ongoing right now is improving
quality of Indonesian labors by education. Currently Indonesia has scholarship program
for its people who are willing to go abroad for higher degree that has already sent 5000
students abroad each year since 2012. Indonesia hopes that the students will come
back to Indonesia to increase the number of high skilled labor in Indonesia in order to
compete with other labors from countries with highly reputable universities.

Globalization has always pushed every country to open up. This is inevitable and has to
be faced in order to compete with other countries. AEC aims to help ASEAN countries
to be able to compete with main player of global trade (US, EU, Japan). Indonesia has
always been slow in promoting its country. With the push of AEC, it is expected that
Indonesia will give more effort and in the end gain the full benefit of globalization.

5 World Bank
6 Bibliography
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