The Promise and Perils of ASEAN’s Economic Growth

By Phar Kim Beng
The strength and robustness of an economy hinges on its ability to recover from recession, if not to avoid it altogether. ASEAN has achieved both.

It has recovered from the Asian Financial Crisis of 1997-1998, and a decade later, has come out unscathed by the global credit crunch. So far, it has avoided the double dip recession in the United States, and is some distance away from being affected by the fiscal and financial problems in European Union.

No bad for a region that was once known in the 1960s as the “second Balkans.” But where are the plaudits coming in, and how does ASEAN really stack up?

Reports by Goldman Sachs in 2011 affirmed that the regional economy of ASEAN is expected to grow by 5.5 per cent this year. Over the next five years, the International Monetary Fund (IMF) anticipates a GDP growth rate of 4.9 % in ASEAN too.

In other words, ASEAN is on a firm economic trajectory. Frederic Neuman, the co-head of research at the Hong Kong Shanghai Bank (HSBC) further attested to ASEAN’s economic potential.

As he wrote: “Two factors are driving ASEAN’s resurgence. First, these economies have finally put their house in order. Countries such as Indonesia and the Philippines are increasingly reaping the economic fruits of hard-earned political stability. Vietnam and Malaysia have started to enact ambitious reform programs of late that should ultimately render their economies a lot more competitive. Even Thailand, long grappling with local political tensions, is at last regaining stability to the visible benefit of its economy. The second big reason for ASEAN’s comeback is that China has moved on. With wages on the Mainland rising by leaps and bounds, Chinese firms that produce everything from toys to shoes and apparel are facing the pressure.”[1]

Dr Surin Pitsuwan, the Secretary General of ASEAN, also noted that Southeast Asia is growing due to its strategic economic geography and deft handling of bad debts. First of all, ASEAN is nestled between India and China. Secondly, it has “dealt with its own scary debt problems over a decade ago.” Invariably, ASEAN has become an attractive alternative amid the global volatility triggered by concerns about how the US and Europe will deal with their debt, as well as whether the US economy will recover quickly from its anticipated economic retrenchment.

“If they are looking for a safer haven, this is it,” he told The Wall Street Journal in an interview in 2011. “The Chinese and the Japanese that are worried will want to look around for better prospects for their investments and this is one of the hopeful regions.” Foreign direct investment into the region jumped 38 per cent to US$75.8 billion in 2010 alone. Much of it into the service sector as international corporations are rushing into the region to target its growing middle class.[2]

There is more economics at work too. Since 1993, the quantum of ASEAN-China trade has grown by some 30times. As China becomes more competitive, it creates room for ASEAN to take advantage of the labour-intensive industries too; hitherto what ASEAN has been known to do. This is because wages matter much more and it is here that China is quickly exiting the playing field, leaving ASEAN increasingly with the home advantage.

Economic stability at home, along with rising production costs in China, will attract investment into Southeast Asia and propel these economies back onto the path of rapid development after a disappointing performance over the past decade.[3]

Indeed, between 2000 and 2011, real wage growth in China averaged over 12 per cent per year, well ahead of countries like Indonesia where wages climbed less than two per cent, and Thailand where they barely rose at all, according to Neumann again.

As a result, average monthly manufacturing wages in China currently stand at over US$400, which is nearly twice the level in Thailand, and far above Indonesia, the Philippines, and Vietnam. Malaysian workers, admittedly, enjoy wages closer to US$700, and the country feels Chinese pressure still more than its neighbours. But Malaysia is rapidly transforming itself through the government’s Economic Transformation Programme (ETP).

That said, while the growth rates of ASEAN are twice that of the developed economy, and are expected to remain the case until 2016 according to data and projections of IMF and the World Bank, they do not necessarily put ASEAN in the clear completely.

Patrick Barta of Asian Wall Street Journal wrote that: “The entire region, though, has a potential Achilles heel in its relatively high inflation rate, with inflation expected to hit five per cent next year according to Goldman Sachs, versus 3.3 per cent across all of Asia. That will complicate policymaking for governments in places like Thailand, which could lower rates significantly to buttress growth in a weakening global economy but may feel constrained about doing so because of fear of exacerbating price pressures further.”[4]

To be sure, Asia’s inflation battle is not even being won at all. Inflation rates are still running well ahead of government targets in China, India, South Korea and elsewhere, even after a nearly 20 per cent drop in oil prices since early May 2011. “Core” inflation, which strips out volatile prices such as those for food and energy, has been creeping higher.

Moreover, low unemployment in the region gives workers more clout when it comes to negotiating wage increases to keep up with rising inflation. But, according to reports by Reuters, “that poses the risk that companies will increase prices to offset higher labour costs, touching off a worrisome wage-price spiral that drives inflation even higher.”[5]

At any rate, in the event inflation rises any further, to put a dent to growth, the governments in ASEAN would have to rely on their considerable reserves to pump and prime the economy.

Unlike the US, Britain and some other “rich” countries that are saddled with trillions of dollars in government debt, Asia’s big economies boast large reserves and small debt burdens. Although aggressive or progressive fiscal interventions do not help ASEAN’s efforts in breaking out of the growth-inflation trap, at the very least it keeps the regional economy growing.

Yet, while growth is good, the member states of ASEAN have to do more to increase their productivity and equity too. Without the latter, the income gap between the haves and have-nots in ASEAN will keep growing, to cause many to be disillusioned with ASEAN regional integration.

  1. Neumann, Frederic (2011) “Resurgence of ASEAN economies”, The Korea Times
  2. ibid
  3. Bellman, Eric (2011) “Asean Chief Paints Region as Safe Haven” The Wall Street Journal
  4. Barta, Patrick (2011) “Can Asean Buck a Global Recession” The Wall Street Journal
  5. “Asia’s Ace In The Hole: Deep Fiscal Pockets” Businessworld

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