June 6, 2016
- ASEAN achievements: A success story since the GFC turmoil
- China and India: Regional partner-rivals
Analysis & Outlook of ASEAN and Regional Economic Growth
The World Economic Forum on ASEAN that was held recently on 1-2 June in Kuala Lampur induced a series of key and up-to-date discussions that have both regional and global implications. How can we assess the performance of ASEAN economies since the AEC Blueprint of 2007? Did the global financial crisis (GFC) impede their growth strategies? What impact can China and India (the two regional powerhouses) have, both currently and in the next decade, on members of the ASEAN community in light of their current economic health ? The following two articules endeavour to address these matters.
On 1-2 June, the World Economic Forum on the Association of Southeast Asian Nations (ASEAN) was held in Kuala Lampur, putting forward the impressive economic dynamics that the organisation’s ten member countries have been exhibiting. Under the theme of «Shaping the ASEAN Agenda for Inclusion and Growth», the regional event was launched with the view of tackling a series of key questions that will underpin the future of the 10-trading bloc nations: How can technology enhance regional productivity? How can the social protection system be strengthened to accompany demographic shifts? Can stability be promoted through efficient governance? How can reforms be accelerated to build regional resilience?
Bringing up answers to all these questions portrays well the roadmap that leaders and policy makers of the region will closely follow to achieve their targetted inclusive growth in the next decade (see also AED Blueprint 025). An acute glance at figures confirms indeed the right track of the macroregional strategy and can surely comfort the forecasts. In 2014, the AEC was the seventh largest economy in the world and the third in Asia. The ASEAN economy weighted US$ 2.6 trillion in 2014 with a GDP per capita that almost doubled in seven years  from US$ 2343 in 2007 to US$ 4135 in 2014. The AEC achieved such staggering numbers mainly through Intra-ASEAN trade parternships that constitute 24% of the community’s major trading partnerships – the largest share followed by China second major trading partner with a total share of 14%.
By 2025, ASEAN aims to consolidate its succesful inclusive model by enhancing ever-stronger interdependence among its member countries. Its master plan for the next decade incorporates significant developments in terms of logistics and infrastructure  including highways, airports and rail links, power grids and gas pipelines. The figure below shows an estimated need in infrastructure investment in Indonesia, Malaysia, The Philippines and Thailand of US$ 550 billion. Information and Communications Technologies (ICT) feature among the ASEAN’s top priorities as well. While substantial progress has been achieved in filling the digital gap, reaching pervasive connectivity is pivotal to enable an acceleration of trade, investments and entrepreneurship. This also includes development in the fintech sector through a prioritisation of banking services (mainly mobile banking) and financial solutions.
The highly integrated and cohesive economic model that ASEAN aims to develop relies heavily on financial sector integration. The AEC blueprint vision for 2025 encompasses the three (classic yet indispensable) strategic objectives – namely financial integration, financial inclusion, and financial stability – and three crosscutting areas: Capital Account Liberalisation, Payment and Settlement Systems and Capacity Building. The overall strategy will be supported by a further liberalisation of financial services, a deeper penetration of the insurance market (ASEAN Insurance Integration Framework (AIIF), a robust financial market infrastructure (that is safe, cost-efficient and more connected), and the delivery of financial products and services to a wider community that is under-served. Financial stability will be ensured through the continuous strengthening of regional infrastructure, particularly in times of regional stress.
With such a clear vision, well-defined achievable goals and comforting results, the ASEAN member countries are well set to rival its two main regional competitors, namely China and India. Yet, with closer scrutiny of the economic health of these two regional forces, one can also wonder whether the slowdown in the Chinese economy will benefit the ASEAN community or will it instead serve as a shock transmitter. how about their relationship with India? What do the figures tell about their respective growth forecasts?
Source: US-ASEAN Business Council
 Reference: http://www.asean.org/wp-content/uploads/images/2015/November/aec-page/AEC-2015-Progress-and-Key-Achievements.pdf
 For more, see the ASEAN Highway Network and the Singapore Kunming Rail Link (SKRL)
When looking at the slowdown of the global trade trend, China is often pointed at as either a source or key transmitter of shocks. But is China really to blame first for the current economic fall ? A working paper recently published by the IMF attempts to explain the causes behind the deceleration of the Chinese economy and its potential contagion effect.
China has been part of the World Trade Organisation since 2001 and has thereafter launched its staggering economic dynamics by importing capital and intermediate goods from its trading partners in order to manufacture export-finished products across the globe. However, as it can be seen in the figure below, the world real GDP growth (in percent change) continued to slowly decline since its last modest peak in 2010. Since the first quarter of 2015, weak commodity prices have significantly impacted commodity-producing countries and emerging markets, effectively causing the global exports to plummet – especially in China, which is customarily known as the « world factory ». Hence, considering the correlation relationship, as the demand from China’s importers declines, China’s exports will decline subsquently. This also causes China’s imports to fall as well as the exports of its regional trading partners.
Source: International Monetary Fund
Taking into consideration China’s large share of global exports and the country’s pivotal role in global value chains, it is therefore expected to see the structural change in China’s import demand composition conveying shocks to the global trade. The IMF authors explain that :
« Since exports and investment are in general more import intensive than consumption, any compositional shift in import demand could change the level of import demand. Structural changes include external rebalancing (from export-driven to domestic demand driven-growth), internal rebalancing (from investment-based to consumptionoriented growth), and on-shoring (substituting imported goods by domestically-produced goods) ».
In that particular sense, Chinese trade balance’s drivers and dynamics can constitute a potential threat to ASEAN. As mentioned earlier, China is the second major trading partner of the ASEAN and features in the organisation’s top five foreign direct investors with 7% of its total FDI preceded by Japan and the US with 10% share for each.
In addition to the trade balance structural changes, analysts worry about the non-performing debt problem and restructuring of State Owned Enterprises that Beijing is additionally facing. All these facts put together, China lurks in the background leaving way to another major regional competitor: India.
The most recent GDP figures show that India outstripped China during the first quarter of this year reaching a growth rate of 7.9% versus 6.7%. But according to the same figure, the growth tendency reversed since the last quarter of 2014. Throughout 2015, India outpaced China by an average growth rate of about 0,45%. In the beginning of 2016, the gap was approximately 0.4% and reached about 1.2% by the end of its first quarter.
Many factors explain this change. Two years after Minister Narendra Modi held the primature office, commentators put forward the recovered hope and trust in the established reforms creating a positive sentiment within business leaders and investors particularly and the Indian population broadly. The main improvements were actually witnessed in terms of infrastructure, significant agricultural development, and improved public finances that enabled important investments to be channeled towards urgent sectors such as education and health services.
As a world economic force henceforth, there is a higher need for the existing ASEAN-India cooperation to be further explored. According to the Indian Ministry of External Affairs, ASEAN constitutes India’s fourth largest trading partner. The annual trade registered an average growth of 22% per annum between 2001 and 2011-12 and reached approximately US$ 76.53 billion in 2014-15 according to the same source. Since 2000, ASEAN investments in India accounted for approximately 12.5% of investment flows while FDI outflows from India to ASEAN member countries were about US$ 38.672 billion between April 2007 and March 2015. On 1 July 2015, the ASEAN-India Agreements on Trade in Service and Investments entered into force, enabling the full establishement of the ASEAN-India Free Trade Area.
The economic stature that India currently enjoys should be perceived as a historical opportunity for the ASEAN community to raise its macroeconomic performances and achieve the inclusive growth model portrayed in the AEC Blueprint 2025. Trusting the figures and most up-to-date forecasts, South-East Asian economies are set to grow at 5% annually until 2020, exceeding the global growth of 3.52% per annum. A plethora of lessons can be drawn from such regional successful experiences. The emerging economic forces are counterbalancing the conventional growth models through a more comprehensive, cohesive, inclusive and people-oriented models. In less than a decade, impressive positive shifts were acknowledged at socioeconomic spheres comforting the pertinency of the strategic policy choices. If only such substantial and ripe experience could inspire policy makers and business leaders elsewhere on the globe, perhaps inequalities can be -hopefully- reduced in a period as fast as the one that permitted ASEAN countries to integrate the world top ten economies.