Asian Economies Will Remain Resilient

During the 2014–18 period, 12 Asian economies are expected to grow at nearly 7% per annum, according to the findings of a recently concluded study.

Titled Economic Outlook for Southeast Asia, China and India 2014: Beyond the Middle-Income Trap, the study concludes that these economies will remain resilient over the next five years, riding on increasing domestic demand.

The report, published by the Organisation for Economic Co-operation and Development (OECD), covers Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand (ASEAN-6); Cambodia, Lao People’s Democratic Republic or Laos, Myanmar and Vietnam (CLMV); in addition to China and India.

The study projects an overall annual growth of 6.9% in the medium term, lower than the 8.6% seen from 2000–07. It attributes the slower growth rate—compared to the years before the global financial crisis—to the moderate expected growth in China and India.

Domestic Demand Will Be Up

According to the study, domestic demand will drive growth in the region. Wages and private consumption will continue to rise. Government policies too, will play a critical role in promoting private consumption. Governments will continue to invest in infrastructure spending, while private-public partnership projects will play a greater role in the sector.

The average real GDP growth rate among countries in Southeast Asia is expected to be 5.4% per annum. Indonesia will lead with projected annual growth of 6%, followed by the Philippines with 5.8%. These two countries will benefit from strong growth in domestic demand, as well as major investment in infrastructure and the implementation of structural economic reforms. Similarly, thanks to increasing domestic demand, real GDP in Malaysia and Thailand is poised to grow annually by 5.1% and 4.9% respectively. Singapore, which already enjoys a strong economy, is estimated to see a growth rate of 3%.

Laos is projected to grow annually by 7.7%, while Cambodia and Myanmar will be close to 7%. In Vietnam, annual growth is likely to be 6% during 2014–18, as against 7.6% from 2000–07. This is due to slower expected demand from advanced economies and weak macroeconomic management policies.

Between 2000 and 2007, China’s economy grew at a blistering pace, recording an annual real GDP growth of 10.5%. By 2012, the rate moderated to 7.7%, and is projected to remain so over the medium term. In comparison, India’s growth rate is expected to be lower, at 5.9% (7.1% in 2000–07). India’s growth has declined to 3.7% in 2012, but may go up to 6.1% in 2018.

Foreign Investment on the Rise

The study makes note of the increasing focus on ‘quality of growth’ in countries like Thailand, the Philippines, Indonesia, and Cambodia. It also acknowledges that the climate for foreign investment has improved in Cambodia and Myanmar.

The region is also likely to see strong FDI inflows. While most ASEAN-6 countries may retain current account surpluses, the CLMV countries will suffer from a current account deficit. Fiscal deficits will be lower in most countries.

China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam are poised to join the list of high-income countries, provided they can sustain their rapid growth. Malaysia (2020) is set to reach that goal the fastest, while India is only likely to attain high-income country status in 2059.

Need to Cross Hurdles

Even as the economic outlook looks robust, these countries must overcome several challenges that threaten to block further progress. The study suggests that the ASEAN-6 economies should improve their capacity to provide education and job skills, and that member countries should aspire to a regional common market by 2015.

While Malaysia has displayed resilience amid global uncertainty, there is a need to address several structural challenges such as a narrow tax base with unsatisfactory tax compliance standards. Further, SMEs in the country suffer from low productivity and the quality of education is another area of concern. Similarly, teaching standards and the national curriculum in Thailand require a review. Thailand’s agriculture sector can benefit from modernization, but there is a lack of awareness regarding the benefits of adopting an environmentally sustainable economy.

Like Malaysia and Thailand, Indonesia can benefit from reforms in the education sector. Its social protection provisions, too, may need a relook. Indonesia and the Philippines are vulnerable to natural disasters; efforts to contain future damage will have a positive impact on these economies. Investment in manufacturing and services can boost Brunei’s economy, and reduce dependency on the oil and gas sector. Unlike its neighbors, Singapore enjoys a more advanced stage of economic development. However, an ageing population is a key hurdle in its march towards sustainable growth.

In India and Indonesia, capital inflows have been inadequate. Current account deficits in these two populous countries are significantly high. India has experienced strong growth in sectors such as information and communications technology (ICT). However, in recent years, high inflation and rising fiscal and current account deficits have caused widespread concern.

China is looking to rebalance its growth model, with domestic consumption as the key driver. A rising middle class should ensure increased spending on education and healthcare, appliances, and vehicles. Sustainable growth in consumption, however, will require institutional reforms and the streamlining of administrative efficiency. In the past, the Chinese economy was highly dependent on exports of manufactured goods, while making significant progress in enhancing productivity.

In the CLMV countries, sustainable development of natural resources and agriculture is a challenge, while in Vietnam, public and private enterprises lack a level playing field and there is a need to urgently reform the country’s monetary policy framework. Indicators reveal comparative weaknesses in insolvency regimes in Indonesia, the Philippines, and Vietnam. Intellectual property rights, protection of minority shareholders, corporate governance, labor market efficiency, corruption and red tape are concerns in several countries.

Investment in Human Capital, R&D

The OECD study notes the efforts made by China, India, Malaysia, Thailand, and the Philippines to develop their innovation capabilities. It emphasizes the need to invest in promoting research and development (R&D), strengthening educational institutions, and imparting vocational skills. It calls for a strong link among universities, research institutions, and industries.

The study recommends strengthening of banks and other financial institutions, in addition to the development of capital markets. Providing small and medium enterprises (SMEs) with easier access to financing, stimulating the services sector, enhancing productivity, and the greater use of technology are among other growth measures listed in the report.

To sustain development beyond the middle-income trap, the regions need to shift away from growth that is driven primarily by factor accumulation. They should make substantial changes in economic structures and build institutional capacity in human capital.

The study identifies common challenges that confront all 12 Asian economies, while pointing out country-specific concerns. It makes recommendations to overcome these hurdles and boost growth. The study concludes that regional initiatives will contribute to sustained national development in these countries, simultaneously taking them closer to the goal of becoming high-income advanced economies.