By
Carnegie
Endowment
:
Mention Asia and many people immediately think of China and
India, giants that are powering the world economy. But Southeast
Asia, a sub-region of 10 countries that lives in the shadow of its
two large neighbors, is also a thriving trade and economic hub.
At first glance, the countries of Southeast Asia, bound by many
regional trade and political agreements, seem to make no sense
together. After all, the region includes a small, rich, oil kingdom
(Brunei); a post-conflict society (Cambodia); and a wealthy
entrepôt economy (Singapore). In addition, there is an autarkic
country that has been under military rule since 1962 (Myanmar); a
poor, landlocked economy blessed with hydropower and minerals
(Laos); and a populous nation whose growth rates rival China's
(Vietnam), not to mention four diverse middle-income economies that
aspire to join the ranks of advanced countries (Indonesia,
Malaysia, the Philippines, and Thailand). Timor Leste and Papua New
Guinea are not included in our definition of Southeast Asia.
Nevertheless, the countries share a strategic location and
access to plentiful natural resources. Furthermore, their diversity
and increasing integration lie at the heart of the region's rapid
and resilient economic growth. Politically, the region provides
stability in a part of the world that is rapidly reshaping the
global balance of power. As a result, its continued development -
which depends on investments in infrastructure and education, as
well as improvements in business climate - is important for the
rest of the world.
Economic Promise
Southeast Asia's ten countries have a combined GDP of $1.9
trillion (bigger than India); a population of almost 600 million
people (nearly twice that of the United States); and an average
per-capita income near that of China. Over the last decade, the
countries have averaged a growth rate of more than 5 percent per
year. If Southeast Asia were one country, it would be the world's
ninth largest economy. It would also be the most trade-dependent,
with a trade-to-GDP ratio in excess of 150 percent, and one of the
world's consistently good performers.
In the 1970s, several of the region's countries were singled out
for their economic promise. Singapore was deemed an "Asian tiger"
(along with Korea, Hong Kong, and Taiwan), while Indonesia,
Malaysia, the Philippines, and Thailand were dubbed "tiger cubs."
All five countries have since lived up to those names, with
Singapore now a high-income economy and the four cubs all
middle-income economies. The latest member of Southeast Asia's
middle-income group, Vietnam, has adopted China's economic model
and enjoyed similarly explosive growth and poverty reduction,
albeit combined with episodes of overheating.
[Click all to enlarge]
Though the 1997-98 Asian financial crisis briefly stalled their
steady progress, the cubs have averaged an impressive 7 percent
annual growth rate since 2000. And, despite being hit hard by the
Great Recession, the middle-income countries recovered smartly in
2010. In fact, the entire sub-region performed impressively,
growing at over 8 percent, as rapid policy adjustments helped
soften the blows of the crisis and enabled a quick rebound that
also helped the broader global recovery.
Strategic Location, Abundant Resources
In part, Southeast Asia owes its success to geography. The
countries sit astride the Malacca Straits, the world's second
busiest shipping channel (after the English Channel) and second
most popular oil tanker route (after the Straits of Hormuz). Well
over half of the world's merchant fleet capacity uses the channel
each year, and closing the Straits would be highly disruptive and
possibly even catastrophic for world trade.
Shipping Routes Around the Straits
The sub-region is also a cornucopia of natural wealth, replete
with oil, hydro- and geothermal power, various minerals, timber,
rice, palm oil, cocoa, and coffee. Over the centuries, these
resources have attracted traders, colonists, and, most recently,
foreign investors. The resources have also pushed the region into
commodities trading, giving its countries some of the world's
highest trade-to-GDP ratios. Even Myanmar - with its autarkic
policies and the trade sanctions imposed on it by Western countries
- enjoys a ratio of close to 40 percent, thanks to its borders with
China, Thailand, and India.
Southeast Asia's abundant natural resources also provided the
springboard for industrialization in the 1970s and 1980s,
especially in the tiger cubs. These countries adopted the
export-oriented policies of their successful northern neighbors -
Japan, Korea, and Taiwan - helped by trade, finance, and foreign
direct investment from the advanced economies. Additionally, sound
macroeconomic management, relatively open trading systems, high
savings rates, and a rapidly growing, young labor force permitted
high levels of investment and sustained rapid growth for three
decades. Vietnam's industrialization started later, in the 1990s.
Today, all these economies are part of the famed and highly
competitive East Asian production network, along with China.
Southeast Asia's natural resources have also helped its services
sector. Singapore's location in the Malacca Straits has made it the
world's largest transshipment port, strengthening its logistics,
finance, and business services. Meanwhile, the four tiger cubs have
developed a large tourism industry, accounting for the bulk of
Southeast Asia's foreign visitors (67 million in 2010, outstripping
China's 56 million). More recently, exciting new services trends
have emerged there, with Singapore pushing to become a global
biomedical sciences center and Kuala Lumpur, the capital of
Malaysia, establishing itself as a global center of Islamic
finance.
ASEAN's Role
In addition, all 10 Southeast Asian nations belong to the
Association of Southeast Asian Nations ((ASEAN)) - a 45-year-old
regional organization that has promoted economic integration and
aims to create an economic community - a single market for goods,
services, investments, and skilled labor by 2015. While many
observers question the feasibility of this deadline, ASEAN has
already lowered trade tariffs and established a Free Trade Area
among its members. Ironically, trade within ASEAN has grown less
rapidly than ASEAN's trade with China, a trend that the China-ASEAN
free trade agreement, which came into effect in the beginning of
2010, will only accentuate.
Perhaps even more importantly, ASEAN has also played a pivotal
stabilizing role in both the region and the world, confounding
critics who have periodically predicted its imminent demise since
its founding in 1967. Since that time, no war has erupted among its
members, as the organization has mediated conflicts. The
organization has also worked to resolve the dispute over the
resource-rich Spratly Islands, which could block U.S. access to the
Indian Ocean as China, Taiwan, Vietnam, the Philippines, Malaysia,
and Brunei all claim land.
ASEAN's political and economic usefulness has drawn in other
countries. In 1999, China, Japan, and Korea institutionalized their
partnership with ASEAN through ASEAN+3. The expanded group's
successes include a new mechanism for providing liquidity during a
financial crisis (a reaction to the perceived heavy-handedness of
the IMF during the Asian financial crisis) and a pledge to
establish a regional 720,000-ton rice reserve facility after the
2011 international food crisis. Both initiatives are important
building blocks for enhancing the sub-region's economic stability.
And, by including Japan and China, ASEAN+3 has helped lower the
tensions between the two countries.
ASEAN is engaging with even more countries through the East
Asian Summit ((EAS)), first held in 2005, which brings ASEAN+3
together with Australia, India, and New Zealand. This group has
been less successful in introducing concrete initiatives, but both
the United States and Russia have lobbied hard to join the next
summit in October, providing proof of the group's perceived
potential. The United States, in particular, is interested in
Southeast Asia, given its potential to help America maintain access
to the Indian Ocean and serve as a counterweight to China.
Additional reasons include the U.S. role as the sub-region's
largest foreign market and investor, and the pivotal role Indonesia
plays in the global war on terror.
Since Obama took office, the United States has actively
re-engaged with Southeast Asia-in part in response to China's
growing influence in the region and in part due to concerns that
the Spratly Islands dispute could disrupt America's access to the
Indian Ocean. The Southeast Asian nations have welcomed this
re-engagement for varying reasons: some see it as a useful balance
against China; others recognize the legitimate interest of the
United States in ensuring stability in Southeast Asia as it is the
sub-region's largest market and biggest foreign investor.
The United States is also interested in Southeast Asia because
of Indonesia, the world's largest Muslim country and the setting
for several terrorist attacks, some clearly aimed at U.S.
interests. Indonesia has been an important ally of the United
States and Europe in the global war on terror, and the country's
efforts to establish genuine democracy and decentralized government
must continue to deliver economic prosperity, justice, and freedom,
and deprive radical groups of the oxygen of hopelessness,
injustice, and despair. Indonesia's recent successes against
jihadist groups have reduced the scale but not the frequency of
terrorist violence, and such violence could be exported to
potential hotspots in Malaysia and Southern Thailand.
Challenges
Of course, no region is devoid of challenges and risks. For
Southeast Asia, China's emergence in the next two decades as the
world's largest economy poses arguably the biggest challenge. While
this will bring enormous opportunities, it will also bring equally
important risks. As China confronts economic, social,
environmental, and international challenges, Southeast Asia will
undoubtedly be buffeted by any instability that may emerge. Equally
important, Southeast Asian policymakers view China's regional
dominance as a possible security risk, a concern that has been
highlighted by recent incidents near the Spratly Islands.
The tiger cubs' economic development presents another worry. In
the last half-century, few countries have made the transition from
middle- to high-income on the strength of their manufacturing and
services. They must move up the value chain, but competing with the
advanced economies requires many prerequisites: A highly educated
and innovative workforce, a culture of excellence, entrepreneurial
skills, access to finance and infrastructure (needed especially in
Indonesia and the Philippines), and a competitive business
environment. Southeast Asia's middle income economies are gradually
putting these in place, but their efforts will need to be more
vigorous and coordinated if genuine progress is to be achieved.
Looking Ahead
In the next year or two, Southeast Asian economies will face a
bumpy ride as growth slows to a more sustainable 5 percent a year,
not just because the international economic environment is becoming
more sluggish, but also because inflationary pressures in the
sub-region are prompting tighter macroeconomic policies, and
commodity prices have become more volatile.
Just as importantly, Thailand and Malaysia are expected to see
continuing political tensions. The victory of the Pheu Thai Party
in Thailand's general elections last weekend has opened a new phase
of uncertainty there. And Malaysia's national elections, expected
within a year, could bring ethnic and political tensions to the
surface again.
Still, Southeast Asia's overall long-term economic prospects
remain bright. The same forces that fueled growth in the past -
sound macroeconomic management, open trading systems, favorable
demographic trends, and relatively high savings rates - will
re-emerge. Rapid and steady growth in India and China will also
help. Already, the sub-region is proving to be an indispensable
source of energy, raw materials, and parts and components for
China's rapidly growing manufacturing sector, and its production
linkages with India are growing apace.
Most importantly, however, the sub-region's middle-income
economies must move up the value chain to further their economic
prosperity. If they accomplish this, Southeast Asia, now in the
shadow of its two giant neighbors, could well become home to
full-fledged tigers and dragons.
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