Investment and Capital Flows: Implications of the ASEAN Economic Community

One of the objectives of the evolving ASEAN Economic Community (AEC) is to promote free
investment flows and freer capital flows. By deepening economic integration among them,
ASEAN Member Countries can establish a region-wide production base that will attract more
foreign direct investment and strengthen the existing FDI-Trade nexus in East Asia. This will
increase the opportunities for domestic firms to participate in regional and global production
networks. The principal investment cooperation program of the AEC has been the ASEAN
Investment Area which is being expanded to the ASEAN Comprehensive Investment
Agreement (ACIA). The chapter delineates measures to make the ACIA more effective,
examples of which are adoption of a collective approach and common time frame of trade and
investment liberalization; and transferring mode 3 of services (commercial presence) from the
ASEAN Framework Agreement on Services to the ACIA. Meanwhile, because of the risks that
underlie movement of capital flows, it is recommended that regional financial integration give
way to regional financial cooperation. The latter can be an important mechanism to accelerate
the development of national financial systems, particularly through a more effective policy
dialogue and surveillance process. Since greater global financial integration is a desirable long-
term goal, regional financial cooperation can also be geared towards advocating for reform of
the international financial architecture and crafting region-wide tools to manage capital flows.
These will reduce the risks associated with financial integration. With regard to the issue of
optimal sequencing in the process of capital account liberalization, the development of national
financial systems remains to be an important component and prerequisite.