ASEAN needs closer integration and higher productivity: Economists

29 September, 2016
By CK Tan, as appeared in Nikkei Asian Review

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KUALA LUMPUR — Southeast Asian countries may be able to withstand global economic adversity by pulling monetary and fiscal levers, but such policies must be accompanied by reform and deeper integration, Malaysia-based economists said on Thursday.

In a roundtable discussion on growth drivers for the Association of Southeast Asian Nations in a stagnating global economy, economists warned the bloc could be heading into a “difficult” short-term period unless members pursue liberalization and productivity improvements.

“ASEAN integration is the biggest chance to compensate for a slowing economy,” said Munir Majid, who moderated the meeting in Kuala Lumpur, which was attended by representatives from the private sector. The event was organized by the CIMB ASEAN Research Institute and the ASEAN Business Club.

Arup Raha, the chief economist at the research institute, posed questions on how ASEAN could ride out external instability brought on by a slowing Chinese economy and the U.K.’s vote to leave the European Union. Raha, who has worked for financial institutions such as HSBC and Citi, argued that both monetary and fiscal policies may have reached their limits in terms of generating regional growth.

Yeah Kim Leng, a member of the Malaysian central bank’s monetary policy committee and a professor at a local college, disagreed. “Greater measures are needed to squeeze growth from the demand and supply sides” and improve the economy of the bloc, home to more than 600 million people. The challenge, he said, is to find the right policies, such as encouraging greater workforce participation.

On this, Raha concurred, saying countries need to formulate “homegrown remedies,” including incentives for productivity enhancements.

Yeah suggested the bloc could collaborate on infrastructure projects, as the region has a current-account surplus of over $100 billion. In sectors like telecommunications and manufacturing, private-sector players from more mature economies could help less-developed ones spark growth.

He pleaded with governments to not “put up walls” but rather embrace creative initiatives, including the use of disruptive technologies created by startups. These endeavors, he said, are “pro-growth and generate income equality.”

Yeah’s position was shared by Rafael Munoz Moreno, the World Bank’s senior country economist for Malaysia. Moreno said he has no qualms about governments spending on infrastructure to “unlock growth,” but he said they need to carry out reforms at the same time.

Meanwhile, an economist with a Malaysian pension fund urged regional governments to speed up development while demographics are still favorable. “We have about 20 to 30 years to get to the developed status before growth drops,” said Nurhisham Hussein of the Employees Provident Fund, referring to Malaysia, Thailand and Vietnam.

He added that ASEAN is aging more rapidly than developed economies and that, sometime in the next 50 years, the bloc’s population would “peak and start shrinking afterward.”

Nurhisham, too, spoke of fiscal policy as a tool to spur growth, calling on government to consider increasing spending in research and development.

Standard Chartered, in its Global Focus report released on Tuesday, said the current weakening of global economic growth is comparable to that during the Asian financial crisis of the 1990s. Yet, there is “no sense of urgency” on the part of policymakers to boost growth.

The bank did say that a “positive exception” in the global economy is Asia, and that within the region, ASEAN countries are “outperforming.”

Nevertheless, Yeah said both the public and private sectors in ASEAN should lower their growth expectations. He said return on investment used to be as high as around 15% but has fallen to around 8-10%. “Perhaps 5-6% may be enough in the future.”