This year’s New Year revelry will have a special resonance for Asean’s 600 million people. On Dec 31, the grouping is set to create the Asean Econo mic Community. The AEC will oblige the 10 member nations to create a single market, akin to the European Union. The aim is to have a free flow of services, investment, labour and capital.
The latest addition to the alphabet soup of regional groupings has immense prospects. Asean was created in 1967 partly as a bulwark against communism in this region. The cold war ended 25 years ago, but Asean’s economic integration is yet to be fully realised.
The AEC should seek inspiration from the life of Sinnathamby Rajaratnam, one of Asean’s founding fathers. Rajaratnam was born 100 years ago in the northern part of Ceylon (now Sri Lanka). His family settled in British Malaya, where his father was a minor executive in a rubber estate. Rajaratnam studied law in London in the 1940s. World War II prevented him from completing his studies. He returned to British Malaya, which then included Singapore, and worked as a journalist before entering politics.
Rajaratnam had a titanic drive and immersed himself in Malaya’s independence struggle. When Singapore suddenly split from Malaysia in 1965, he became the city state’s minister of foreign affairs. He later rose to be deputy prime minister. On the 100th anniversary of his birth, as well as Singapore’s 50th anniversary as an independent country, Rajaratnam provides three vital lessons for AEC.
Free trade is the only way. During Asean’s inception, most Third World countries were pursuing import substitution industrialisation (ISI). In the 1960s, over 95% of the consumer goods in Peru, Brazil and Mexico were supplied domestically. India had an average tariff rate of over 600% at one point during a dark era known as the Licence Raj.
By the sharpest of contrasts, the Asean countries adopted low tariffs. Rajaratnam was a trenchant advocate of free trade. He encouraged Asean to pursue free trade agreements, when such arrangements were derided. That resulted in Indonesia, Thailand and Malaysia becoming the workshop of the world. They exploited their comparative advantage to pursue export-oriented liberalisation. Malaysia’s GDP per capita has grown 30-fold since 1967, while India’s has grown just 15-fold.
AEC is the culmination of Rajaratnam’s early vision for free trade. There is a long list of items that would be subject to the AEC’s tariff-free regime. Intra-Asean trade is just 25% of total trade in the region, but this figure will rise. A unified market for goods and services is upon us.
Rajaratnam believed in developing human capital. Rajaratnam may have been the only Singaporean cabinet minister without a degree, but he was the most erudite. His conversations were littered with allusions to the classics. As labour minister in the late 1960s, he helped set Singapore on a path to developing a disciplined and productive labour force.
In 1966, more than half of Singaporean workers had absolutely no formal education. Today, Singapore has universal secondary education. Over a sixth of people have a university degree. The country has two universities that are ranked among the 100 best universities in the world. The divergence with India is striking. In India, only 40% of the population have secondary education. Despite having 1.3 billion people, not a single Indian university has been ranked as one of the world’s 100 best universities.
Asean’s economic outperformance may have been driven by superior development of its human capital. Since 1967, Asean economies have grown at an average of 6%, which is faster than any other regional grouping.
Rajaratnam embraced diversity long before its importance was recognised. His family’s prospects were allied to the British Empire’s cosmopolitanism. The British Empire opened up employment opportunities for ambitious and talented people like Rajaratnam’s father. He was born into a Hindu family and married a Hungarian Christian named Piroska Feher, whom he met in London. When Rajaratnam authored Singapore’s national pledge in 1966, he committed the citizens to work together despite racial and religious differences.
Asean was built on the bedrock of non- interference in the domestic affairs of member states. Its members have enjoyed harmony despite including Catholic-majority Philippines, Buddhist Thailand and Muslim- dominated Indonesia. As AEC emerges, consensual decisions will be vital to accommodate diversity.
Investors in emerging markets have been besotted and burnt by the BRIC nations of Brazil, Russia, India and China. Asean, a region that embraced capitalism before the BRICs, is on the brink of a renewal. Investors would ignore AEC at their peril.
Nirgunan Tiruchelvam is director, research at Religare Capital Markets.
This article appeared in the City & Country of Issue 709 (Dec 28) of The Edge Singapore.