ASEAN Services Integration Report

Executive Summary

1. This report, prepared by the World Bank with support from the ASEAN Secretariat, takes stock of ASEAN’s achievements in the integration of services markets and identifies the challenges ahead. A previous joint report, the ASEAN Integration Monitoring Report (ASEAN Secretariat and the World Bank, 2013), looked at the overall progress of regional integration in trade in goods, trade facilitation, investment flows, and services. Both the earlier report and other work (ERIA 2012) have identified services integration as one of the most important challenges facing ASEAN. This is true in terms of both the slow progress in achieving the ASEAN Economic Community (AEC) goals regarding services integration, and the broader potential gains that can be obtained from achieving those goals. This report addresses four questions: (a) How have ASEAN countries performed in services and services trade and why are services trade and integration important for ASEAN countries? (b) How open are services markets within ASEAN and to what extent has ASEAN achieved the goal of services integration? (c) What lessons can be derived from past experiences of services sector reforms in ASEAN countries? (d) What constrains services integration and how can the integration process be enhanced?

2. ASEAN economies are aware of the key role that the services sector and services trade can play in their development, and have made services central in their integration agenda. Governments in the region have realized the fundamental role of services for economic growth and job creation, and have embarked on an ambitious regional integration program that is intended to culminate in the free flow of services by 2015. The services integration agenda in the region was first launched through the ASEAN Framework Agreement on Services (AFAS), signed in 1995, three years after the signing of its goods counterpart, the ASEAN Free Trade Area (AFTA). The AEC Blueprint adopted in 2007 provided a bold and more ambitious vision of deep integration, where goods, services, investment, and skilled labor would move freely across the borders of ASEAN countries by 2015. Detailed targets were set for achieving the integration of services markets. The AFAS and the AEC Blueprint provide a valuable framework to foster services trade within the region.

Why are services and services trade important for ASEAN countries and how do they perform?

3. The growing importance of services in the world economy is being driven by strong demand from consumers and producers, and by international trade. As incomes increase, consumers seek a widening range of personal and recreational services or consume more services-intensive products, while producers search for more specialized and sophisticated inputs and professional advice. Parts of these demands are satisfied through international trade, since services have also become exports and tradables in their own right. Increasing fragmentation of production processes in global value chains, along with advances in information and telecommunication technology, including digitization of content, has made it possible for many services activities that used to be thought of as being nontradable to be supplied internationally. Furthermore, backbone services, such as transportation, logistics, telecommunications, and financial services are integral to the working of global value chains, serving as the glue that makes it possible for production activities to be undertaken across multiple countries. International experience suggests that an expansion of services trade is associated with increased per capita incomes and higher productivity.

4. ASEAN economies are no exception to these trends. While their rapid growth over the last four decades was largely fueled by strong manufacturing exports, the services sector and services trade have become increasingly important. On average, services contributed more than 40 percent of total value added in ASEAN Member States in 2010 and accounted for more than 50 percent of total employment. 1 Trade in services has also risen sharply. When trade is measured in terms of value added, the share of services in total exports increases in all ASEAN countries except Indonesia.

5. An analysis of forward linkages of the services sector in this report also shows that services have a key role in ASEAN countries. Services are important inputs to other economic sectors and exports. Indeed, many services, such as finance, transportation, and communication, are “backbone services” that feed into other production processes, so that services trade can help foster competition through access to vital production inputs at lower costs. Forward linkages are the contributions to value added of a particular sector to other sectors in the economy. In ASEAN countries, the four services sectors (electricity, gas, and water; construction; trade and transport services; other private services) contributed between 25 percent (Lao People’s Democratic Republic) and 56 percent (Singapore) of total domestic value added and between 17 percent (Indonesia) and 56 percent (Singapore) of total export value added in 2007. For the more developed ASEAN Member States, Indonesia, Malaysia, the Philippines, Singapore, and Thailand, manufacturing uses services relatively intensely, with services providing about one-third of the value-added contributions of manufacturing. The exception is Indonesia, with a contribution closer to 23 percent. For lower- income ASEAN Member States, that is, Cambodia, Lao PDR, and Vietnam, the share in services in the value added of agriculture as well as energy extraction and minerals is above one-third, reaching almost 47 percent in the case of Lao PDR.

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