Embracing ASEAN Economic Community 2025: Unlocking Prospects and Overcoming Obstacles in Indonesia

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Imagine businesses of all sizes, effortlessly trading goods and services across ASEAN borders, tapping into diverse markets, and seizing growth opportunities. Picture investors eagerly exploring investment prospects in ASEAN, fueling economic growth and creating job opportunities. Envision entrepreneurs, armed with innovative ideas and regional market access, expanding their businesses and contributing to prosperity. The ASEAN Economic Community (AEC) Blueprint seeks to create such an environment, where businesses of all sizes can thrive and contribute to inclusive development in the region. The AEC Blueprint serves as a roadmap to transform this vision into reality, propelling ASEAN towards a new era of economic integration for inclusive development in the region.

The AEC Blueprint 2025 outlines five reinforcing characteristics for ASEAN’s economic integration, namely: (i) A Highly Integrated and Cohesive Economy; (ii) A Competitive, Innovative, and Dynamic ASEAN; (iii) Enhanced Connectivity and Sectoral Cooperation; (iv) A Resilient, Inclusive, People-Oriented, and People-Centered ASEAN; and (v) A Global ASEAN. These characteristics provide a roadmap for ASEAN’s economic integration efforts, emphasizing the need for integration, competitiveness, innovation, connectivity, inclusivity, resilience, and global engagement (ASEAN, 2015). We are currently two years away from achieving the dream, and as ASEAN continues to evolve as a regional bloc, the AEC Blueprint still presents both opportunities and challenges for member countries, including Indonesia, in its pursuit of greater economic cooperation towards 2025 and beyond. 

Unleashing Underestimated Economic Sector

The AEC Blueprint 2025 presents a plethora of opportunities for Indonesia. In essence, the blueprint creates greater market opportunities for ASEAN members. The integration of ASEAN markets under the AEC framework will hopefully drive Indonesia to improve competitiveness and efficiency for intra-ASEAN trade. This collective effort among ASEAN member countries has the potential to unlock underestimated economic sectors.

The services sector, despite its contribution of over 64.4% to the global GDP (World Bank, 2021b), has often been colloquially referred to as the “Cinderella sector”. This stems from the belief held by economists, industrial relations researchers, and innovation scholars who regard the sector as relatively unproductive compared to other sectors, despite its potential to bring significant value to the economy (Miles & Boden, 2015). In fact, William Baumol went so far as to suggest that the expansion of this low-productivity services sector could potentially hinder economic growth due to limited productivity improvement, potential labor cost savings, and price-inelastic demand (Baumol, 1967). This concept is now known as “Baumol disease”. Interestingly, the services sector’s share in Indonesia’s GDP is relatively high compared to other sectors, contributing 42.8% to its total GDP, highlighting the significant opportunities that can be tapped into for the economies (World Bank, 2021a).

However, Indonesia still faces challenges in its services sector, as indicated by the OECD’s Services Trade Restrictiveness Index. It reveals that Indonesia demonstrates high levels of restrictiveness, particularly in legal services (scoring 0.9), accounting (scoring 0.7), and telecommunication (scoring 0.6), where a score of zero indicates complete openness and a score of one indicates complete closure to foreign services (OECD, 2022). These restrictions can potentially limit the availability of high-quality services and productivity.  Opening up the services market can effectively address these quality issues and provide opportunities for Indonesia to access higher quality services from abroad, and of course benefiting other economic sectors as well. Just like goods, high-quality and efficient services do not necessarily have to be produced domestically. Services trade allows Indonesia to access the immediate benefits of better quality services from abroad which can support other economic sectors.

Enhancing Manufacture, Fisheries and Agriculture Sector

Indonesia, being the ASEAN country with the largest population and GDP, holds other significant opportunities from the AEC Blueprint. The country’s abundant natural resources, particularly in agriculture and fisheries, further amplify its potential for economic gains through the AEC. Despite these favorable demographic and economic factors, recent industrial performance in Indonesia has been subpar. The fisheries and agricultural sectors, in particular, face weak competitiveness within ASEAN. Additionally, Indonesia faces competition from Vietnam in prawns and textiles, as well as from Thailand in the automotive supply chain within ASEAN (Aswicahyono & Soedjito, 2016). To achieve competitiveness within ASEAN, Indonesia must focus on developing a robust manufacturing base and enhancing the quality of its human capital. However, the country is grappling with persistent challenges related to infrastructure, including logistics, energy supply, and transportation, as well as an inefficient bureaucracy and corrupt institutions.

Unfortunately, Indonesia’s Business Freedom Index by The Global Economy had a decline in its value from 71 in 2021 to 67 in 2022, giving Indonesia just 57th in the Business Freedom ranking amongst 175 countries (Global Economy, 2022). In addition to that, Indonesia only ranks 95th on the Corruption Perception Index (Global Economy, 2021), indicating that practices of administrative and political corruption are still high. In order to combat these problems, Indonesia should focus on improving the regulatory environment to enhance business freedom. This may include simplifying and streamlining business regulations, reducing bureaucratic red tape, and enhancing transparency and efficiency in administrative processes. This could help create a more conducive environment for businesses to operate, attract investment, and foster economic growth in strategic sectors like agriculture and fisheries, while also giving strict regulations to mitigate the practice of corruption.

A Shift to Green Economy

The AEC Blueprint 2025 indeed emphasizes the importance of environmental sustainability and the integration of green principles into the economic policies and practices of ASEAN member states; it is specifically stated in the second characteristic of its framework, “A Competitive, Innovative, and Dynamic ASEAN”. This includes efforts to reduce GHG emissions, promote renewable energy, enhance resource efficiency, and address climate change impacts. The Blueprint also encourages the adoption of sustainable production, consumption patterns, and the promotion of sustainable agriculture, forestry, and fisheries practices (ASEAN, 2015). But even so, its implementation to shift to a greener economy is not as good as its vision. In fact, The Regional Comprehensive Economic Partnership (RCEP), the largest economic cooperation initiated by ASEAN countries to accomplish AEC’s visions, does not include a single chapter or regulation about the environmental consideration (CECPHILS, 2023). Provisions of RCEP for reducing tariffs could make non-renewable energies such as fossil fuel cheaper and more accessible to member countries. This may lead to an escalation in their utilization, particularly in Indonesia, which relies heavily on coal production and consumption. In addition, a recent study revealed that if all tariffs were eliminated among RCEP members, it could significantly increase approximately 3.1% in global carbon dioxide emissions from fuel combustion annually. This would effectively double the average annual growth rate of global CO2 emissions observed in the last decade (Tian et al., 2022).

Bright Future for Indonesia and ASEAN 

As ASEAN advances towards the realization of the AEC 2025, Indonesia faces a dual landscape of opportunities and challenges that must be addressed within a limited timeframe of approximately two years. While the AEC 2025 offers prospects for increased economic integration that could benefit Indonesia’s economy, challenges such as the need for structural reforms, increasing competitiveness, and environmental impact mitigation must be effectively navigated. Strategic planning, policy coordination, and stakeholder engagement are crucial for Indonesia to maximize the potential of the AEC 2025 and promote sustainable and inclusive economic growth. This will not only contribute to Indonesia’s prosperity and resilience but also to that of the broader ASEAN region.

 

About Writer

M. Tora Bhanu Pandito is an undergraduate student at the Faculty of Economics and Business of University of Brawijaya. His interests extend beyond the classroom, as he is deeply invested in foreign policy issues, writing research articles, and enhancing the creative economy. He had the privilege of serving as the Head of Creativepreneur for the Student Executive Board, leading several university initiatives aimed at empowering MSMEs and fostering entrepreneurship that promotes sustainable economy. Contact can be made through his email at torapandito@gmail.com.

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