Intra-Southeast Asian Income Convergence

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I. Introduction Southeast Asia comprises 10 states -- Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. The Association of Southeast Asian Nations (ASEAN) serves as the primary mechanism for co-operation among those countries. ASEAN was formed on 8 August 1967 following the signing of the Bangkok Declaration. Its founding members are Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei joined the grouping on 8 January 1984, followed by Vietnam on 28 July 1995. The association will not be complete without the inclusion of all Southeast Asian countries. In this connection, Myanmar and Laos joined the grouping on 23 July 1997 and Cambodia followed on 30 April 1999, meaning that ASEAN has become a truly pan-regional organization as was originally envisioned. For the past 30 years, the Association of Southeast Asian Nations has successfully promoted international co-operation in Southeast Asia. ASEAN has promoted regional peace and stability, as best exemplified by its key role in ending the Cambodian civil war in 1991, and there is an extensive amount of mutual consultation and dialogue among the leaders and officials of the member states. Peace and stability have paved the way for rapid economic growth throughout the region. Discrete diplomacy, consensus and non-interference have been the cornerstones of the ASEAN approach.(1) ASEAN also maintains dialogue and good relations with other countries in the Asia-Pacific region and beyond. In fact, ASEAN is often held up as a model for effective regional political co-operation among developing countries. The challenge for ASEAN now is to duplicate its political success in the sphere of economic cooperation, where it has had much less success so far. According to Yeung, Perdikis and Kerr (1999) and Tan (1996), ASEAN's achievements in the area of regional economic co-operation have been uneven and modest at best. The long-running success of the European Union (ELI) and the more recent success of the North American Free Trade Area (NAFTA) suggests that regional economic co-operation may entail significant benefits. Furthermore, as the EU's experience clearly illustrates, economic co-operation can significantly reinforce political co-operation and vice versa. Hence the consolidation of the EU as a genuine community of nations owes as much to political co-operation as to economic co-operation. Similarly, we can expect economic co-operation to further cement the already strong political cooperation among ASEAN states and thereby contribute to the emergence of a genuine community of nations in Southeast Asia. Such a community will help foster peace, stability and prosperity in the region, as the EU has done in Western Europe. Compared to the EU, ASEAN is larger and geographically more disparate. For example, Indonesia, the Philippines and part of Malaysia are insular regions cut off from the continental portion of Southeast Asia. Altogether, the ASEAN countries have a land area of close to 4.5 million square kilometers and a population of around 500 million. The combined GDP of the region amounted to a substantial US$1,282 billion in purchasing power parity terms in 1997. This suggests that ASEAN as a whole is economically large enough to make economic co-operation and integration worthwhile and mutually beneficial for its member states. In this article, we examine trends in intra-Southeast Asian income convergence, a key determinant of the prospects greater economic cooperation and integration among the region's countries in the long run. The benefits from economic integration are greater for countries that have similar levels of income level and economic development.(2) Such countries tend to trade and invest more with each other. The underlying reason is that countries with similar income levels have more similar consumption patterns than countries with different income levels, resulting in large intra-industry trade flows. …