Southeast Asia's Wounded Tigers

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Thai employees working on the assembly line at a Toyota factory in Samutprakarn province, Thailand, in an undated photo. (STR/AFP/Getty Images)

What differentiates developing ASEAN nations from the rest of the region is a weak domestic economy. Private consumption expenditure as a component of GDP has barely budged since at least 1990. This would not necessarily be a negative factor if it were overshadowed by growth in state expenditure and capital formation through investments, as has happened in China and India. However, these indicators have also lagged across Southeast Asia, with the exception of Vietnam, a newcomer to liberalization.

It’s true that in the larger economies of Malaysia, Thailand, and the Philippines, exports have grown and made significant contributions to their GDP growth over the period. It’s also true that in the Philippines, Cambodia, Indonesia, and Vietnam, remittances from migrant workers have become an important revenue source and driver of domestic demand. But these trends only emphasize the troubling reality that developing ASEAN nations are struggling to create their own wealth within their respective boundaries.

In the long term, no country in the region is yet competitive enough to generate robust, sustainable growth without the spoils from their industrial neighbors and the West. This is a factor of their failure to innovate and create globally competitive domestic industries. While China has foreign investments and exports to thank for its growth, it used its newfound wealth to invest in knowledge and manufacturing technology, creating not just a virtuous cycle of job creation and more investments, but also national champions—companies that are taking on global giants. In India, it’s not the state but an enterprising private sector—encouraged by favorable demographics and an economy that’s opening up—that’s giving birth to the same virtuous cycle and homegrown multinationals. How many innovators and global companies from Southeast Asia can you name?

The problem is it may already be too late for developing ASEAN countries to attract the kind of foreign investments that will help them benefit from technology transfer. Multinationals that have the technology are putting it to use in China, investing only in the region to diversify geographic risk. Private investments, meanwhile, are constrained by capital limitations and a general lack of entrepreneurial spirit: companies are not borrowing, and banks are not lending. As a percentage of GDP, domestic credit from the banking sector in developing ASEAN nations, apart from Vietnam and Cambodia, is lower than 1995 levels. Domestic capital markets, an alternative funding source, are shallow: stock markets are small, bond markets even more so.

This situation isn’t likely to change soon. The Asian crisis of 1997 has forced both banks and investors to be conservative in lending and borrowing, and governments’ inclination to build up their foreign reserves has no doubt misallocated capital away from job-creating and industry-building initiatives. In other words, as developing ASEAN nations rebuilt themselves from their own crisis, they lost sight of the long term, in the process losing competitiveness to aggressive neighbors. This current crisis, as it washes on their shores, should challenge the region to reassess its vision for the future, perhaps towards a domestic economy able to dictate its own fate.

Abe de Ramos, an Associate Fellow of the Asia Society, is a Hong Kong-based financial editor and a former policy analyst at the CFA Institute’s Center for Financial Market Integrity.