Southeast Asia's Wounded Tigers
by Abe de Ramos
Originally published in the Far Eastern Economic Review, January 20, 2009
As the extent of the US-led financial crisis unfolds globally, developing Southeast Asian countries are finding themselves in the position of suffering the collateral damage. While not directly hit by the liquidity crunch like their larger and wealthier neighbors, they’re also not immune to the slowdown, being part of the chain that supplies goods to consumers in the West who are now crimping on their spending. Indeed, the crisis highlights how developing economies in the Association of Southeast Asian Nations (ASEAN) are being reduced to a fringe role in the global economic landscape, and how they’re facing the hard truth that they won’t be able to regain the “tiger economy” status they once held without building a stronger domestic base.
On the surface, it seems as though the region will ride out the crisis relatively well. After all, the first economies to go into recession are those whose financial and industrial sectors are directly linked to the fortunes of the West. The liquidity crunch in Wall Street has weakened the financial hubs of Hong Kong and Singapore, while falling consumer confidence is hurting many Japanese companies reliant on exports to the United States and Europe. Projected declines in GDP growth rates for developing ASEAN nations this year also seem to be less severe than in China, the factory of the world, as well as Taiwan, Korea, and India, which generate substantial revenues from exports of goods, services, and technological expertise.
But the region is far from well and good. Being in the middle of the supply chain East Asia has created in the last 20 years—in which a computer is designed in Japan or Taiwan, its components made in Malaysia, Thailand, or Indonesia, then assembled in China—developing ASEAN nations are seeing a mild slowdown now only because of the lag effect. The question is how quickly and how well it can recover when the full impact of the global slump finally hits home.
In the near term, countries like the Philippines and Vietnam have little leeway to boost domestic economic activity in order to offset falling external demand. With the crisis proving deeper than expected, Asian governments may need to provide stimulus packages and pursue easier monetary policies. However, most are already overstretched, with negative fiscal balances unsupported by a narrow tax base, and made worse by fiscal leakage through corruption. Those with the borrowing capacity such as Thailand and Malaysia can raise funds, but for much higher costs given the lack of liquidity and greater perception of risk.
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.