Prior to the Asian financial crisis, south-east Asia was the dynamo of Asian growth. The region attracted a surge of investment, while incomes and GDP soared. But the boom ground to a sudden halt in 1997 as the region’s currencies collapsed and the financial crisis bit into once-vibrant economies.
Since then, while the region’s economies have recovered, the frantic pace of growth that once characterized south-east Asia has not returned, and the axes of growth have shifted north and west, to China and India. The concrete skeletons of half-finished skyscrapers abandoned during the crisis that continue to dot the skylines of capital cities across the region are constant reminders that south-east Asia’s economic miracle now refers to the past, not the present.
Today, south-east Asia is not just eclipsed by its larger and more powerful neighbours, it is heavily dependent on exports to China and also vying with it to attract foreign investment. The long-term challenge for policymakers is whether the countries within the region can transition to more high-value models of growth and make the rare leap out of the ‘middle-income trap’ to become ‘high-income’ economies.
NO LONGER UNSTOPPABLE
In the years after the Asian financial crisis, countries have found it difficult to return to the levels of dynamism that generated three decades of expansion – an average of nearly 8% annually – and made them the fastest growing worldwide. From 2004 to 2009, GDP growth rates for the Asean (Association of South-East Asian Nations) region came in at an average of 4.9%.
Some economies, most notably Vietnam, have continued to see strong economic growth; the nation’s economy expanded at an average rate of 7.4% over the same period, having attracted foreign investment with its cheap labour and in spite of obstacles such as poor infrastructure and red tape. But it has faced persistent currency and inflation problems that continue to hinder its development.
Investors are also being put off by issues such as corruption and graft. In Transparency International’s 2010 survey of corruption perception, the Philippines ranked 134th – it was 40th in 1997; Vietnam came as 116th against 43rd 13 years before; Thailand fell to 78th from 39th; Malaysia 56th from 32nd; and Indonesia 110th from 46th.
Political risk remains an issue, although investors seem to have become inured to this of late in their quest for high-yielding currencies, snapping up the Philippine peso, Singapore dollar and Thai baht assets.
Private investment has also dropped within the region. For example, according to the World Bank, that tumbled from over a third of Malaysian GDP in the 1990s to less than a tenth today.
RESOURCE ADVANTAGE
Nevertheless, the abundance of natural resources that helped spur initial development within Asean has remained a comparative advantage.
This allows Asean to benefit from buoyant growth in China, making it the superpower’s fourth-largest trading partner as demand from China sucks up supplies of coal and palm oil. Companies such as Rio Tinto predicted last year that this insatiable appetite would rise sharply in the next 15 years. Demand is then likely to be driven by India, according to its chief executive Tom Albanese.
“The real benefit for south-east Asia is they are able to catch investments from China in the resource space,” says Wai Ho Leong, senior regional economist at Barclays Capital and previously a policy adviser at the Singaporean Ministry of Trade and Industry.
CHINA DEPENDENCE
In the short-term, increasing Chinese trade with and investment in south-east Asia has benefited the region.
Investment by the Chinese state and private companies has come in different forms but has been channelled predominantly into resources.
China Investment Corp, the country’s sovereign wealth fund, loaned $1.9 billion to Indonesia’s Bumi Resources, the biggest exporter of thermal coal in Asia, in 2009. In Laos, Aluminum Corp of China, also known as Chinalco, and the Laotian government have agreed to develop mineral resources together. Chinese companies are also conducting oil and gas surveys in Myanmar, with China expected to become the biggest buyer of the country’s gas when a pipeline is completed in 2013.
Infrastructure projects intended to foster links include a high-speed rail line from China to Thailand. And last year Asean signed free trade agreements with India, China and South Korea in a move towards plans targeting economic integration by 2015.
The free trade agreement between Asean and China came into force in January 2010. It left Chinese tariffs on Asean products at 0.1% on average, compared to 9.8% on goods from the rest of the world.
But data on trade between China and Asean is inconsistent. According to China’s General Administration of Customs, trade between Asean and China in 2010 surged 37.5% to $292.8 billion from 2009. It claims that Chinese imports from Asean jumped 44.8% to $154.6 billion, and reports a deficit of $16.3 billion. However, Asean statistics show a deficit with China of $15 billion in 2008–09, which has expanded significantly since 2000.
As China’s economic success transforms the country into a value-added economy with a growing middle class, it has yielded another source of growth for Asean, as rising wages prompt manufacturers to shift factories to south-east Asia.
Clothing manufacturers Esprit Holdings, Fast Retailing, makers of the Uniqlo brand, and Top Form International, which makes bras for US designer Calvin Klein, have all announced plans to shift substantial portions of their production process away from China in the coming years, with south-east Asia the most likely destination, while electronics manufacturers Intel, Foxconn and Compal have all opened facilities in Vietnam in recent years. Victor Fung, chairman of Li and Fung, the world’s largest sourcing company, also recently revealed that many of his customers had requested that products be sourced from cheaper Asian markets given rising production costs in China.
The jobs moving out of China are at the lower end of the manufacturing process, with companies drawn mainly by the allure of reduced costs for companies.
Wages are increasing at a faster rate in China than elsewhere in much of south-east Asia, while the government has stated that boosting domestic demand is a key policy priority over the next five years and beyond.
In addition to attracting manufacturers priced out of the Chinese market, increased consumption in China is also likely to fuel demand for products from Asean.
But south-east Asia’s increasing trade and investment dependency on China means that it is increasingly vulnerable should the Chinese economy slow. This is especially pertinent for countries such as Thailand – last year China replaced the US as the top destination for its exports.
In addition, while exports have helped to spur growth, they have also exacerbated the wealth gap. A recent UN Development Programme report warned that the wealth gap remained a problem across many economies in the region, notably Vietnam, and noted that while per-capita income had risen more than fivefold from 1970 to 2010, Malaysia and Thailand were still far from becoming developed countries.
BOOSTING DOMESTIC DEMAND
To their credit, policymakers across the region recognize this, and, like their counterparts in Beijing, are also grappling with the dilemma of the export-dependent model and spurring domestic consumption as an alternative.
Korn Chatikavanij, Thailand’s finance minister, acknowledges that the nation’s GDP growth is likely to slow further, predicting real GDP growth of 4.5% in 2011, but stresses the government is now increasingly concerned with the quality rather than the quantity of growth. “Lower growth is not necessarily bad,” he tells Emerging Markets. “You see many economies trying to control what’s perceived to be an overheating economy in order for their growth to be more sustainable. That’s good news.”
Asean policymakers are also focusing on expanding the role of the service sector. Singapore, which has the highest ratio of trade in services relative to GDP in the region, is seen as having made most progress in this respect, having liberalized its economy and expanded in financial services, retail and tourism.
Malaysia has also made meaningful moves in this direction, providing fiscal and tax incentives for projects in potential areas of growth such as tourism, healthcare and education. Prime minister Najib Razak has targeted the country’s already significant service sector as the engine of Malaysia’s growth by 2020.
The service sector in other nations in the region, such as the Philippines, Laos, Indonesia and Vietnam, is much less developed, but policymakers, to a greater or lesser degree, have also announced plans to boost service sector output as a proportion of GDP.
“One only hopes the coming to fruition of the different free trade agreements within Asean and the three giants up north should start to push governments in the region to open up services,” says Barclays Capital’s Wai Ho Leong.
“It’s typically when services grow that you’ll see faster rates of wage growth. If [an economy is] lopsided, that tends to limit the trickle-down effect from export orders into household income.”
SOLID FOUNDATIONS
In addition, while headline growth rates have slowed, it is important not to overlook the fact that important structural improvements to the region’s economies have been made since 1997.
The banking system has been strengthened, while the huge sums of corporate, individual and government debt that caused the crisis have been drastically reduced. The current account deficits that forced policymakers to keep rates high in the mid-1990s have been replaced by steady surpluses, with central banks flush with reserves, while currencies in the region are also at all-time highs.
Provided that governments are willing to use these reserves to effect structural rebalancing and to lessen the region’s dependency on exports, south-east Asia’s long-term prospects remain relatively bright.
Further liberalization could help, with privatization back on the agenda in most of the region, particularly in Vietnam, Indonesia, the Philippines, Indonesia and Malaysia.
TOO SOON TO CELEBRATE
Nevertheless, with the heady days of the 1990s now a distant memory and the region facing a myriad of challenges and policy hurdles, most economists remain cautious about its future growth prospects despite recent positive developments.
“There are some encouraging signs, but it’s a bit too big a jump to conclude that south-east Asia is going to roar again,” says Hak Bin Chua, senior economist at Bank of America Merrill Lynch. “There’s still a big question mark.”