Going By the Numbers of ASEAN

By Phar Kim Beng
Numbers alone cannot tell a full story. The United States (US) has the world’s largest federal debt, yet it is not expected to default. Japan’s national debt is equally damning, at more than 120 per cent of its gross domestic product (GDP). Yet, it too is not expected to collapse.

There are many factors that lie beneath the surface of mere numerals. The same applies to the economies of ASEAN. It is, however, important to look at the numbers of ASEAN, even in the most cursory manner, as this region is now an emerging economy, with active and ongoing attempts to link up with China, Japan, South Korea, India, and the US under what is known as the “ASEAN Plus” framework.

Indeed, ASEAN has enjoyed what is known as the “Long Peace” since its inception in 1967. Interstate violence has dropped by some 97 per cent according to research done by Professor Timo Kivimaki at the University of Copenhagen.

To be sure, the region’s economy has collectively scored some amazing feats. At US$1.8 trillion, ASEAN, if treated like a single country, would have the world’s ninth largest GDP. It is getting ready to create an ASEAN Economic Community (AEC) by 2015, with the aspiration to increase its intra regional trade by another 15 per cent to hit 40 per cent by 2016.

Although it will stop short of creating a European Union (EU) styled economic community, AEC aims to enhance twelve sectors in trade and services. They are in electronics; e-ASEAN; health care; wood-based products; automotive; rubber-based products; textiles; fisheries; air travel; tourism; logistics; and apparels. Not bad for a region once regarded as the “second Balkans” due to its internecine interstate violence.
Having concluded a free trade agreement with China, the China-ASEAN Free Trade Agreement (CAFTA) is effectively the largest free trade agreement in the world.

At 660 million people, the population base of ASEAN is smaller only to that of China and India. Its growth rate over the next five years, according to studies done by the International Monetary Fund (IMF), will be 4.9 per cent; which is two percent higher than the average growth rate of the global economic growth.

Indeed, ASEAN today attracts 3.5 per cent of the world’s Foreign Direct Investment (FDI), and its inward FDI stocks are equal to about a third of its regional GDP. This is reasonably high by world standards (about a third higher than world averages), but not so by the region’s own historical standards i.e. before the Asian Financial Crisis. The latter implies that ASEAN can do more. Why?

To begin with, the ASEAN share of global FDI used to be a third larger in the early 1990s, when its share of world income was lower. Now that its share of world income has increased, it ought to be able to attract higher global FDI.

Unfortunately, ASEAN’s popularity among investors has declined after 2007, reflecting some combination of increased perception of risk, caused by the financial crisis, less expansionary macroeconomic policies, and the region’s somewhat deteriorated rankings in world investment tables, especially World Bank.

Although FDI inflows into ASEAN as a percentage of total world inflows have dropped from their highs of the mid-1990s when ASEAN countries accounted for about eight per cent of world inflows at one stage to the current percentage of less than four, there is no denying that ASEAN has become less attractive especially in relation to China and India.

In 2000, China and India exported 32% less than ASEAN. But in 2006-2010 they had exported 37% more. Invariably, China and India could export more due to the larger inflow of global FDI according to FDI studies done by United Nations Conference on Trade and Development (UNCTAD).

Invariably, China and India both beg the question as to why their FDI share has been generally rising when ASEAN’s has been falling in terms of flows, even years after the Asian Financial Crisis.

A larger part of the answer lies in the incoherence of the ASEAN market – this granted its huge diversity. In fact, according to the World Bank’s “Doing Business,” which ranks countries across the world in terms of various competitiveness related issues, the differences existing in ASEAN could hardly be greater.

In 2007, globally, Singapore is ranked Number 1; Thailand and Malaysia, Numbers 18 and 25, respectively; Vietnam, the Philippines and Indonesia numbers 104, 126 and 135; and Cambodia is number 143 (World Bank, Doing Business in 2007). If ASEAN is to be single market destination, the rankings of each member country have to be more uniformed, especially at the upper tier.

However, ASEAN does have one thing in common that even the EU did not have in its early years: generally a common approach to international commercial policy. In particular, ASEAN countries are committed to macroeconomic stability and outward-oriented approach to trade and investment relations, such as through AEC. It is exploiting AEC with greater sophistication with each passing day, and the financial industry ought to take careful attention of the attendant gains.

In light of the fact that ASEAN’s economic integration is still ‘work in progress’ – especially the AEC – due to the preponderance of non-tariff barriers (NTBs) and transaction cost that resulted from proliferation of fiat currencies in the region – much of the benefits in the financial industry have to be target specific, or, niche driven. This is because ASEAN’s FDI has declined from its historic high in 2002-2006, and is now shifting its attention to China, India and West Asia (i.e. Middle East).

As the regional economy moves from the West to the East, ASEAN has to be on its toes, politically and economically, without which it can lose the centrality of its position in Asia.

Dagong, for example, assesses risk based on a country’s or company’s ability to create wealth, with due attention paid to its fiscal indebtedness. While such a formula may be more conservative and prudent, it does not diminish the value of the country or company.

Secondly, Asian credit ratings are not meant to supplant the West completely. Rather the goal is to provide a vital supplement, especially when the current regime is now in odium. Experimenting with Asian ratings is not an exercise in self-conceit. Rather, it is an endeavour to push the proverbial envelope, which in the long run, would raise the standards of due diligence across the whole industry.

To be sure, the existence of Asian credit ratings cannot transform the international allocation of capital over the short and medium term, especially the manner by which the cost of borrowing is priced. Nor can the international economy be retooled in Asia’s favour. To begin with, US consumers still consume five times more than Indian and Chinese consumers combined.

But given greater confidence in Asian credit ratings, Asian countries and financial authorities do have the means to wean themselves from the West, especially when it is misfiring at various fronts. The key is not to take advantage of the Asia’s trading partners, but to send a shot across the bow, that half of the world’s population is in Asia. Their hard earned money deserves better credit ratings, especially when the West is still fixated to assessing risk in the traditional way.

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