The Covid-19 pandemic has delivered an unexpected blow to all economies in the region, exposing underlying and pre-existing structural flaws in each country. The multiple waves that have hit Southeast Asia have seen often-times haphazard horizontal coordination as governments struggled to balance public health and economic priorities. This crisis has revealed several fundamental weaknesses in Southeast Asia’s economies: inadequately resourced public healthcare systems, poorly managed lockdowns, and politically driven policy decisions. With marked country-to-country variation in pandemic outcomes, the question is what the region’s countries can and should be doing as they consider a post-pandemic future.
Despite having vastly different political histories and cultural lineages, almost all the countries of Southeast Asia have one thing in common. Most chose to embark on their own version of largely similar export-oriented economic development. Throughout the 1980s and 1990s, these countries adopted a predominantly East Asian industrialist model, in combination with a big government approach. Prior to the Asian financial crisis of 1997, the economies of Southeast Asia expanded rapidly, with an average GDP growth rate across the region of 6.74 per cent in the 1990s according to the World Bank.
Some countries underwent rapid modernisation, primarily Malaysia, Singapore, Thailand, and Brunei, while others would take a decade or more to catch up, such as Indonesia, the Philippines, and then more recently Vietnam, Cambodia, Laos, and Myanmar. The thrill of experiencing growth, “new money”, and the infrastructure boom alongside it, however, was not necessarily matched by the development of the strong and stable institutions required to govern efficiently.
With the exception of Timor-Leste, most countries in the region are classified as “not free” by Freedom House, and either have been or still are ruled by dominant parties couched within semi-authoritarian regimes. In fact, the freedom scores of most countries in the region declined after Covid-19 hit. Indonesia’s leadership initially championed good governance, but even this has regressed somewhat. Research indicates that democratic countries tend to practice better governing standards, which could explain why institutions are not as robust as they ought to be within the region.
Within such a context of either unstable or weak democracies (Thailand, Malaysia, the Philippines) or excessively strong states (Cambodia and Myanmar), efficient resource allocation towards high-level productivity has been challenging, to say the least. Rentier economics, patronage, and cronyism predominate across the region. Singapore may have escaped the problem of endemic bureaucratic corruption by adopting a highly technocratic model and paying its senior politicians and bureaucrats well, which it can afford to do.
In the 2016 crony-capitalism index constructed by The Economist, Malaysia ranked second in the world, with the Philippines third, Singapore fourth, Indonesia seventh, and Thailand twelfth. Strategic industries such as telecoms, natural resources, real estate, construction, and defence were found to be most vulnerable to exploitation. We need strong, stable, and independent institutions to prevent the capture of state resources by those who will use them for their own benefit.
Southeast Asia has experienced tremendous economic growth over the last three decades primarily due to its cheap labour, access to raw materials, and more recently thanks to greater economic integration. Yet such growth has taken place in spite of corrosive trends that have eaten away at the fundamentals required to truly leap up the value chain.
The future is not all bleak, though.
The first reason for this is that investors’ increasing emphasis on environmental, social, and governance issues and the global push towards sustainability have prompted countries to start re-examining their regulatory environments. These are positive trends, but governments and companies cannot hope to ride the sustainability wave without corresponding institutional reforms. For example, moving away from fossil fuels towards hydropower could wreak disastrous environmental and social impacts in poorly governed Southeast Asia. We need to ask how the construction of new dams in Laos will affect indigenous and community land. And what will happen to hydrocarbon-dependent countries such as Brunei, Malaysia, and Indonesia if the global economy decarbonises?
The second reason is that better governance is a realistic ambition for the region. Multilateral trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) contain multiple provisions for domestic reform on issues ranging from labour to procurement and state-owned enterprises (SOEs) that member countries would be obliged to adopt.
Adopting these, alongside the corresponding domestic reforms, provides a strong basis upon which enterprise can begin to flourish through more productive and competitive means. Southeast Asian economies, especially in a post-pandemic world, may well continue on their export-oriented path. As economic integration deepens, it is imperative that countries take seriously the need to overhaul their internal regulatory systems towards strong economic governance, establishing open governments that practice transparency and accountability, and access to information by default. Investments from abroad must also adhere closely to domestic rules within such an open and transparent environment — which is not necessarily the case for some foreign investments, such as from China, as detailed in the recent Belt and Road Initiative Monitor research project from the Institute for Democracy and Economic Affairs.
Moving up the value chain towards growth and development in the next few decades and breaking out of the “middle-income trap” will require not only institutional reforms but decisive, ambitious governments. Many Southeast Asian economies would benefit from reducing the role of the government in the economy, curbing their dependence on SOEs, pushing for greater public procurement transparency, and implementing competition laws to reduce the hold of monopolies and cartels.
Each country will have to finely balance these efforts towards an open economy while still maintaining a sufficient buffer to provide social protection for the poorest communities. Reducing state corruption and patronage would lead to less wastage of public funds, while institutional strengthening would allow funds to reach their intended targets and also reduce inflationary pressure. Fiscal discipline is crucial for the long-term sustainability of such efforts.
The third reason for cautious optimism is that Southeast Asia has always been a region of countries well placed geographically to trade. Such dynamic regional economic exchanges will continue, despite the disruptions of the pandemic. To fully capitalise on our connections to global markets, we need to embark on profound economic governance reforms that strengthen our domestic institutions, laws, and regulatory frameworks while simultaneously liberalising our economies. This will boost our growth prospects, protect those who are currently falling through the cracks, and better prepare our economies and our people for future challenges and crises.
The author thanks IDEAS researchers Imran Shamsunahar and Low Zhen Ting for their input and assistance.
Can the crisis produced by the pandemic provide a political impetus for reform?
Throughout Southeast Asia, we have seen evidence of how the pandemic showed up pre-existing structural weaknesses and flaws in our political economies. Among these are indeed the vested interests and strong protectionist sentiments that were already deeply embedded within the systems of many Southeast Asian countries.
In such a climate, we need to position reform squarely on post-pandemic recovery. If our political economies were revealed to be not as shock-proof as we thought, then this is the perfect time to galvanise support in cross-partisan sectors with the message that economic resilience lies precisely in the strengthening of institutions. Open and competitive markets will allow struggling micro and small enterprises to compete more fairly.
We need to embrace every opportunity to encourage this, taking advantage of such moments of crisis to do so. Political, business, and bureaucratic elites may have interests to protect, but they too can be incentivised by the prospect of improved growth and distribution outcomes, which ultimately benefit them and their businesses, too.
This is where independent think tanks, civil society groups, and private sector associations need to step in and make a strong case for reforms that they (and we) believe will bring positive change for our respective countries in the long run. A big “sell” would be to ensure our economies do not fall victim to yet another public health (or environmental) crisis in the near future.
What is the role of regional trade agreements in driving domestic reform?
One of the arguments against the ratification of RCEP and CPTPP is that we should not rely on multilateral agreements to drive domestic economic or institutional reforms. According to this line of thinking, national governments should therefore be able to conduct these reforms from within, at their own pace, and without the need for any external instrument. While reforms should certainly be encouraged to emerge domestically, they are highly unlikely to take place due to a slate of factors including those spelled out in my original article, such as weak institutions, rentier economics, patronage, and cronyism.
As to the question of whether multilateral agreements such as RCEP and CPTPP can truly drive these reforms, the answer is that they offer the strongest and most likely framework for reforms to take place. It is untrue that these trade agreements are limited; in fact, the CPTPP exemplifies the deep reforms that would be required of member countries.
This is especially the case for SOEs, public procurement, and labour, for which domestic reforms have lagged so far behind within Southeast Asian economies and are in dire need of structural change if the economies are to truly transform. The desired outcome would be that these reforms incentivise local actors — both political and bureaucratic elites — to address the main systemic challenges facing our political economies, which then have the potential to emerge as stronger economies in a post-pandemic future.