Hostage of fortune: Southeast Asia’s development model needs a reboot

Vasuki Shastry is an Associate Fellow in the Asia Pacific program of Chatham House. He was formerly with the IMF, Standard Chartered Bank, and the Singapore central bank. He is the author of Has Asia Lost It? Dynamic Past, Turbulent Future.

It is no exaggeration to say that Southeast Asia has been the single largest beneficiary of globalisation and its twins: trade and investment flows. The disparate collection of high-, middle-, and low-income nations, grouped under the Association of Southeast Asian Nations (ASEAN), has made a virtue out of openness and integration with the global economy. And it has been handsomely rewarded with consistently high rates of economic growth and impressive strides in inclusion and social mobility. Until now.

Today, ASEAN’s combined GDP of US$3 trillion places it in the exalted company of Japan, China, and India in the league table of Asia’s largest economies. Foreign investors, nervous about the outcome of the US–China struggle for supremacy, are increasingly diverting their investment dollars into countries such as Vietnam and Malaysia. The region’s many boosters have proclaimed that a potential Asian century will only be possible with ASEAN’s centrality in driving growth and prosperity.

What could be wrong with this generally positive picture? The pandemic for a start, which has hit the region’s health systems and economies hard. While many countries, Singapore and Vietnam notably, have demonstrated technocratic competence in managing the virus, others have faltered, exposing deep weaknesses in state capacity and governance. Indonesia and the Philippines have stumbled in navigating the lifecycle of virus management, from testing and tracing to therapeutics. Far from ASEAN centrality, the duality in the region today is evident in a group of nations hard-wired for global integration at a time when globalisation is stalling, while simultaneously being poorly coordinated for everything else.

The defiant protests in Myanmar in the face of last year’s coup and the continued youth-led unrest in Thailand are ominous signs that post-pandemic ASEAN will have to contend with a more uncertain future. While rising inequality is not a peculiarly Asian or ASEAN phenomenon, strides in social mobility are reversing. In Vietnam, the United Nations Research Institute for Social Development warned before the pandemic that rising inequality was threatening the country’s continued socio-economic development.

“Young people have fewer opportunities for higher earnings and improved social status than a decade ago. These trends make it harder for Vietnam to meet its commitments to achieve the SDGs [Sustainable Development Goals] and stand in contrast with its past experience of inclusive growth.”

As Singapore’s Prime Minister Lee Hsien Loong noted in April 2020 during the early days of the pandemic, “This crisis will fundamentally change globalisation.” He told ASEAN leaders:

“There will be controls on movement of people across borders. Governments will intervene to prevent over-dependency on other countries for food, medical products, and other essential goods. And on all parties, I fear that there will be diminished confidence that international rules will hold and be respected in a crisis.”

The remarkable aspect of Lee’s intervention is that his speech did not trigger much debate or discussion about ASEAN’s defining economic model, which is hostage to the fortune of continued good tidings and the tailwinds of globalisation, trade, and investment. In the 2020 World Bank ranking of countries based on trade as a percentage of GDP, ASEAN nations are a standout. Malaysia (117 per cent), Thailand (98 per cent), Singapore (321 per cent), and Vietnam (209 per cent) shine in the rankings compared with regional peers such as Indonesia (a paltry 33 per cent) and the Philippines (58 per cent). When the times are good for global integration, as they have been for the past few decades, entrepôt economies such as Singapore and Vietnam have thrived compared with more inward-looking economies such as Indonesia and the Philippines.

However, the region’s overexposure to the global economy comes with costs. The International Monetary Fund (IMF) estimated in its latest World Economic Outlook Update that GDP growth for the ASEAN-5 (Singapore, Indonesia, Malaysia, Thailand, and the Philippines) will have recovered at a modest 3.4 per cent in 2021 and 5.3 per cent in 2022 — compared with a more robust 8.1 per cent and 3.3 per cent for China, and 8.7 per cent and 7.4 per cent for India. In a region intoxicated by high growth rates of the past, the latest IMF data must be sobering news indeed.

The fundamental question is whether ASEAN’s historic approach of “selective opening” can be sustained well into the future. Building on the experience of China, Japan, and South Korea — of partially opening their economies to trade and investment, while walling off other sectors — ASEAN’s economic model is no longer fit for purpose for the following reasons:

Any serious debate on a new ASEAN development model will require a reconfiguration in the design and structure of the economy. As an insurance against probable external shocks from deglobalisation, the region must rebalance economic growth and incentives towards boosting domestic demand and consumption. In short, the region’s entrepôt economies should behave more like Indonesia, where consumption has been the bedrock of economic growth since the Asian financial crisis. Indonesia, for its part, could be more open and receptive to trade and foreign investment. There also must be a fundamental rethinking of the role of the state, which has taken a laissez faire approach in recent years on important issues such as levelling the economic playing field and delivering social mobility to a population that is skewing younger and more anxious about accessing economic opportunity. In its first 55 years as a regional association, ASEAN has been the exception to the rule that developing country economic groupings generally fail because of a lack of cohesion. In its next 50 years, ASEAN and its member states must reform and adapt to remain an exceptional example of inclusive economic growth.

Challenge questions

If countries must refocus on domestic demand, does this make slower growth inevitable?

A reset was underway in global trade patterns and indeed in globalisation long before the pandemic. Countries can no longer rely on the export-oriented growth strategy of the 1960s and 1970s. The pandemic has only sharpened and reshaped policy choices for countries. The focus has shifted from the imperative to exporting your way out, which has been the norm for smaller Southeast Asian nations, to the critical question of how to build domestic self-sufficiency (for key medical supplies, for example) and resilience. It is a fallacy to suggest that countries have an either/or choice in boosting domestic demand and consumption at the expense of trade. The pendulum in China and Southeast Asia swung too far in the direction of the latter and rebalancing in favour of domestic demand is both appropriate and essential.

The transition is going to be painful, but slower growth is not inevitable. The domestic manufacturing base is heavily skewed in the direction of feeding components and sub-components into regional supply chains. This has a positive side in the transfer of innovation and skills. However, companies in the hi-tech sector in Southeast Asia are islands of excellence compared with the rest of industry, which is tied up in monopolies, crony practices, and policy distortions. Establishing a level playing field and allowing new entrepreneurs to flourish will be a driver of growth and economic opportunity.

How essential is governance reform to Southeast Asia’s prospects?
Governance reforms absolutely must form the core of any post-pandemic reform package. In the past, Southeast Asian leaders, like their peers elsewhere, have made anti-corruption campaigns a centrepiece of their reform drives. However, this addresses the symptom while ignoring the cause. Unfashionable issues such as civil service reform, a stronger framework to curb monopolies and rent-seeking, and cleaning up the financial system are much more difficult to achieve. Weak state capacity represents a profound policy failure of governments, and economic rebalancing will not take off unless there is root and branch reform. In the past, governments have sought shelter in high rates of economic growth, which may not be available as an excuse in the future.
Can digital disruption create opportunities for reform and reinvigorating governance?

Significant drivers of domestic growth and economic opportunity include the digitalisation of public services, easier access to e-governance portals, and the establishment of secure digital identities for all citizens. These will create a virtuous ecosystem where the private sector can build a stack of services — in payments, e-commerce, and mobility — that will increase public trust and create new business modes. Some of these shifts are already taking place, but the heavy hand of the state is becoming apparent.

Many governments in Southeast Asia regard digitalisation as a great threat to the political primacy of the state. Democracies and dictatorships alike in the region are pursuing command and control surveillance, mimicking the Great Firewall of China, and sacrificing citizens’ privacy and trust as a result.

It is difficult to imagine pure private sector-driven digital disruption in an environment where the state is suspicious of its citizens and there is a general lack of public trust in big tech platforms. The space for pure start up-driven innovation is shrinking as well-entrenched monopolies in Southeast Asia and elsewhere represent a formidable barrier to entry. The outlook for digital disruption creating fresh opportunities for reform, while necessary, does not present an easy path.

Vasuki Shastry is an Associate Fellow in the Asia Pacific program of Chatham House. He was formerly with the IMF, Standard Chartered Bank, and the Singapore central bank. He is the author of Has Asia Lost It? Dynamic Past, Turbulent Future.