What Is ASEAN and Why Is it Important?

Robert Hsu, June 25, 2007

Let's face it -- Asia is a huge continent. In fact, it's the largest and most populous continent in the world. Not surprisingly, the countries in Asia have gotten together to form an economic alliance. This group is called the Association of Southeast Asian Nations, or ASEAN. This economic association has been very successful over the past decade, so let's talk about what makes it so strong.

The Origins of ASEAN

The Association of Southeast Asian Nations (ASEAN) was created back in 1967 by Indonesia, Malaysia, the Philippines and Thailand. The organization was started with support from the United States to contain the spread of communism in Asia. In addition to fending off communism, the group wanted to promote economic growth, social progress and cultural development.

In 1997, 30 years after ASEAN was founded, a financial catastrophe hit Asia. Many Asian currencies and markets collapsed. After the crisis, ASEAN shifted its focus exclusively to economic and trade cooperation. The organization now counts 10 countries as members, and all of these member nations have favorable trade and investment agreements with one another.

The main goal of ASEAN is to eliminate all tariffs and duties among its member nations and create a new regional trading block by 2015. To give you an idea of the size and scope of this trading block, here are the members of ASEAN (listed in order of population size): Indonesia, Philippines, Vietnam, Thailand, Burma, Malaysia, Cambodia, Laos, Singapore and Brunei.

The ASEAN Edge

The economic potential of ASEAN is enormous. Adjusted by purchasing power parity, the group's 10 members make up the world's fifth-largest economy after the U.S., China, Japan, and India -- putting it just ahead of Germany.

The organization is especially impressive when you look at it in terms of economic growth and size. During the past eight years, ASEAN countries as a whole grew an average of nearly 6% per year. That's almost twice the economic growth rate of the United States! There are 570 million people living in ASEAN nations, which is nearly twice the population of the U.S. Over the past nine years, both imports and exports in the region have doubled.

Many people outside of Asia mistakenly lump these different countries together as one place. That's a big misconception. The reality is that -- despite their economic integration -- ASEAN countries have vastly differently cultural, political, social and economic systems.

It would take far too long to explain the differences between all 10 nations, so I'm not even going to try. I'd much rather focus on the economic similarities of these countries because that's what makes their alliance so strong. All ASEAN countries share two common traits: 1) economic dominance by ethnic Chinese minorities, and 2) increasing economic integration with China.

Let's take a look at each similarity and how it contributes to ASEAN's success.

1. The success of ethic Chinese immigrants

Ethnic Chinese living outside of China are a significant economic force to be reckoned with. As a result of large-scale migration off the coast of China, a huge number of ethnic Chinese are scattered around the world (like me!). Nobody knows for sure how many of us there are, but a good guess is probably in the neighborhood of 60 million to 80 million.

A study from a leading consulting firm shows that, as an economic entity, ethnic Chinese living outside of Mainland China generate more wealth than every country in the world except America and Japan. Many of us are thriving, and some are very wealthy.

Millions of ethnic Chinese minorities live in ASEAN countries such as Thailand, Indonesia, Malaysia and the Philippines. Although these Chinese are far outnumbered by natives, their commercial skill, work ethic, family values and emphasis on education allow them to dominate the economy in these countries.

Ethnic Chinese are very proud of their heritage and make a strong effort to pass it down to future generations. Unlike Americans, the Chinese define their national identity largely by ethnicity as opposed to the country where they reside.

Many Chinese living in other countries have developed the capital and expertise to build businesses. The global perspective and entrepreneurial expertise provided by overseas Chinese give their businesses an advantage over companies formed by local entrepreneurs in a region where the re-emergence of private business is still taking shape.

Although ethnic Chinese make up less than 6% of the total population in ASEAN countries, they make up the majority of the upper and middle classes in the region.

In addition, ethnic Chinese-controlled businesses are among the biggest investors in Vietnam and Cambodia. After achieving enormous success in Mainland China over the past 15 years, these investors are seeking to replicate their success in other parts of Southeast Asia. Many of these Chinese entrepreneurs have left China because the Mainland has been increasing its labor costs and environmental regulations, making the industrialized coastal region less attractive. Skilled (and smart) Chinese entrepreneurs have been moving their operations from Eastern China to less-developed countries with huge growth potential, like Vietnam and Cambodia.

2. Increasing economic integration with China

China has one of the world's fastest-growing economies. As a result, many countries in the surrounding region with economic ties to China have flourished.

This increasing economic integration flows both ways: ethnic Chinese-controlled businesses in ASEAN nations are investing in China, and China is supporting its developing neighbors.

The Chinese government in Beijing has a strong interest in ASEAN countries because most of them are rich in natural resources ranging from oil and natural gas to iron ore and lumber. China has generously given huge sums in financial aid to ASEAN nations for spending on infrastructure projects that promote commercial activities with other countries.

Unlike Western nations, whose financial aid often comes with strings attached, China usually doesn't try to influence the policies of recipient nations when handing out money. Chinese financial assistance to ASEAN nations is not completely altruistic -- the country is trying to secure natural resources for its own economic expansion. But this "unconditional giving" often makes China popular among ASEAN rulers, further strengthening economic ties in the East.

This respect between Asian countries places the United States at a disadvantage when trying to do business in the region. Nowadays China does more business with Asia and the European Union than with the United States. Increasing economic interaction between ASEAN countries and north Asian economic powers like China, Japan, South Korea and Taiwan is creating a new regional trading block.

One of the questions people often ask me is what will happen to Asian economies if there's a major economic slowdown here in the U.S. A recession in the U.S. would certainly hurt Asia's economic growth, but increasing intra-Asia trading (and increasing trade between Asia and Europe) will help buffer any damage that may result.

ASEAN Follows China's Lead

It's clear that ASEAN countries, with their ethnic Chinese-dominated economies and newly developed regional trade zone, are well-positioned to benefit from the huge growth taking place in China today. China's successful transition from socialism to a market economy is having a profound effect on ASEAN nations.

In fact, Vietnam has copied many Chinese economic policies, which has transformed the once-struggling country into one of the hottest emerging markets in the world. This dramatic transformation caught Cambodia's attention, and Cambodia now has plans to emulate Vietnam's success. China seems to have started a domino-like effect of success and prosperity in Asia.

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