ASEAN had a good year in 2012. The regional economies pulled off a decent performance despite a volatile and uncertain global economy. Thailand, the Philippines and Indonesia have just reported strong growth for 2012, while even export-exposed Malaysia has overcome weak global demand to register good growth numbers.
Equity and bond markets have soared as well, as capital floods into the region. Foreign investment applications have surged in Indonesia, Malaysia and Thailand with many global businesses also rushing to Myanmar. Asean is also being wooed by the major powers. The first overseas trip made by US President Barack Obama after his re-election in November was to Southeast Asia. Similarly, Japanese Prime Minister Shinzo Abe also chose Asean countries for his first official trip abroad.
So, 15 years after its devastating 1997 crisis, Asean is finally making a strong comeback as one of the pre-eminent economic dynamos of the world economy. Can this be sustained?
Asean rising as a global production hub
Asean is clearly regaining its position in the 1990s as one of the major destinations for global flows of foreign direct investment (FDI). An Economist Corporate Network survey shows that while China and India still top the preference lists of investment destinations for global corporations, Indonesia, Malaysia, Thailand, Vietnam and Singapore come just after them.
In 2011, FDI into Asean soared by about 26% to US$116.5 billion, a record level. More importantly, Asean’s share of global FDI flows has returned to the high levels of 7% to 9% it enjoyed in the 1990s — its share in 2011 leapt to 7% compared with just 2.3% in 2008, and 1.4% in 2000. The ranking of FDI attractiveness by A T Kearney shows Asean countries surging in the global tables — Indonesia is now ninth in the world from 21st in 2007, Malaysia was ranked 10th in 2012 from 16th in 2007, while Thailand has gone from being unranked to No 16.
This is where Asean’s demographic advantage is demonstrating its power — a young and growing workforce compared with China where the size of the workforce declined for the first time in 2012. The absolute size of China’s working-age population fell by 3.45 million people to 937 million in 2012. Moreover, the 2010 census showed that the population under the age of 14 — the pool of China’s future workers — shrunk to just 16.6% of the population in 2010, from 23% in 2000. Consequently, as labour becomes scarcer, wage growth in China has accelerated, shifting comparative advantage in labour-intensive activities more towards Asean’s labour-abundant economies such as Indonesia. The ratio of Chinese wages to Indonesian wages increased to 3:1 in 2012 from 2:1 in 2005. Not surprisingly, investors are shifting labour-intensive activities to countries such as Vietnam and Cambodia.
Japanese investments into Asean set to rise
Japan, in particular, seems keen to raise its investment profile in Asean again. Faced with a declining population, which makes for a lacklustre domestic market, Japanese companies are looking for new markets. Where these markets are large enough — as in Asean — shifting some production closer to the consumer makes sense, especially when labour and other costs are cheaper. Moreover, Japanese manufacturers are concerned about power shortages and the risk of another major earthquake in Japan and seek to diversify out of home-based production.
Finally, the escalating tensions between China and Japan over the East China Sea territorial disputes have led to anti-Japanese protests, some of which turned violent, with Japanese businesses in China being targeted. This has persuaded more Japanese producers to relocate part of their China-based production abroad, quite often to Southeast Asia.
Some worry that a depreciating yen will upset this potential flow of Japanese investment into the region. This is certainly a valid concern, but we believe that only a much sharper yen devaluation would hurt Asean. First, what matters is not just the yen’s movement against the US dollar, but its average change against all its important trading partners’ currencies, or the yen’s effective exchange rate. Interestingly, despite a roughly 20% devaluation against the US dollar since last October, the effective exchange rate has fallen by just 14%, which brings it to the level it was at in early 2009.
In other words, the yen is still substantially stronger than the levels that prevailed between 2001 and 2008. Second, it is highly unlikely that the yen’s effective exchange depreciation will increase further: The world’s major economic powers have made it clear at the recent G7 and G20 meetings that the limits to their tolerance of yen depreciation are approaching. Japanese policymakers know that further substantial depreciation could provoke a currency war, which will not be good for anyone.
Asean can no longer be ignored as a market
As economic growth in the region — which has roughly 620 million people — accelerates, the size of its consumer market will grow to a scale that global corporations can no longer ignore. In 2012, Japanese automobile makers sold more cars in Asean than in China. Their sales in Asean rose 40% to 2.73 million units last year, exceeding sales in China. The Samsung Economic Research Institute estimates that the size of the consumer market in Asean will exceed that of India, Brazil and Russia by 2015, with the gap between Asean and the rest growing after that. By 2020, there will be 100 million people with middle class spending patterns in Asean and 300 million urban residents whose spending on all kinds of gadgets and appliances will soar.
What can go wrong?
Asean has been here before in the 1990s — booming, the apple of investors’ eyes — only to falter and lose out to other emerging economies following the 1997 crisis, a crisis that was partly brought about by political and policy failures within the region. What could spoil the party?
First, our suspicion is that if anything could throw Asean off track, it will be political convulsions of some kind. In 1997, political weaknesses in countries such as Indonesia and Malaysia helped convert what was a manageable currency shock from the Thai baht’s devaluation into a systemic crisis that set the region back for more than a decade. Tensions in the South China Sea over territories disputed by China, Vietnam and the Philippines could derail the region in the unlikely event of an armed conflict. Domestic political discord and insurgencies still plague Thailand and Myanmar while a potentially game-changing parliamentary election is in the offing in Malaysia.
Second, policy errors that could negate the substantial competitive advantages attracting foreign investors are possible. There are a number of warning signs:
• In the labour market, we have recently seen moves towards raising or introducing minimum wages. A carefully thought-out minimum wage framework could work well, but if the increases in labour costs are excessive, then the growing labour-cost advantage over China could be diminished.
• Some Asean countries continue to be slow in ensuring a conducive business climate. Indonesia and the Philippines rank woefully in the World Bank’s Ease of Doing Business report, for example. Infrastructure bottlenecks add considerably to costs, especially in Indonesia.
• There are also signs of increased nationalism in some economic policies. A cogent policy of incentivising foreign investors to move up the value chain makes sense, but if poorly implemented, it could scare them away. A rash of recent policy changes in Indonesia have raised the concerns of foreign investors there.
The bottom line: Asean’s rise is here to stay
Yes, there are challenges and risks, but two things make us confident about Asean’s sustainability this time. First, its resilience to shocks, both external as well as domestic, has improved dramatically as a result of the reforms put in place since the 1997 crisis. Asean can probably absorb and adjust to risks that materialise. Second, Asean is more plugged into the global network of trade and investment flows than other emerging economies. That acts as a check that prevents policies from going too far wrong. It also nourishes Asean’s economies with technology, talent and ideas. With a bit of luck, the next 10 years will be the Asean decade.
[Manu Baskaran is a columnist at The Edge Singapore.]
This story first appeared in The Edge weekly edition of Feb 25-Mar03, 2013.