Three paths to sustained economic growth in Southeast Asia

By Jonathan Woetzel, Oliver Tonby, Fraser Thompson, Penny Burtt, and Gillian Lee

By capitalizing on three global trends, Southeast Asia could increase productivity and create billions in economic value by 2030.

The Association of Southeast Asian Nations (ASEAN) encompasses ten countries with a multitude of ethnicities and languages, as well as wide economic disparities. But these nations—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam—are not only tied together by multiple threads of history and culture but also increasingly linked by business networks, trade relationships, migration, and shared resources. Today, almost five decades after ASEAN’s founding, it is pursuing a more ambitious form of economic integration as a tool for achieving broader prosperity and greater global competiveness.

The region has enjoyed remarkable economic progress in recent years; millions have been lifted out of poverty. Viewed as a single entity, ASEAN would rank as the world’s seventh-largest economy. But much of its recent growth has been generated by an expanding labor force and the shift of workers from agriculture to manufacturing. These factors will eventually fade, so there is new urgency for confronting the region’s low levels of productivity. To sustain economic growth, many member states will need to more than double their historical rates of productivity improvement.

A new report from the McKinsey Global Institute, Southeast Asia at the crossroads: Three paths to prosperity, finds that the region can address its productivity challenges and find new catalysts for growth by pursuing the opportunities associated with three global megatrends:

Capturing a greater share of global trade flows. The global economy has become deeply interconnected as huge volumes of goods, services, capital, people, and data move across borders.1 ASEAN is well positioned to capitalize on this phenomenon: it is already the world’s fourth-largest exporting region, strategically located near China, India, and Japan. By 2025, more than half of the world’s consuming class will live within a five-hour flight of Myanmar. The region can build on these strengths in two ways. First, successful implementation of the ASEAN Economic Community integration plan could significantly increase trade and create a single market of 600 million consumers. Second, ASEAN can expand its free-trade agreements and attract additional production from multinationals as labor costs in China continue to rise. Together, these opportunities could create some $280 billion to $625 billion a year in economic value by 2030. To realize this potential, ASEAN will need to tackle restrictions on foreign investment, to develop a more competitive manufacturing sector, and to build critical foundations, such as infrastructure, logistics, and workforce skills.

Riding the urbanization wave. The booming cities of Southeast Asia account for more than 65 percent of the region’s GDP today, and more than 90 million people are expected to move to urban areas by 2030.2 This shift will support the continued growth of the consuming class, which could double, to 263 million households, by 2030. That would make ASEAN a pivotal market of the future for companies in a range of industries. Keeping pace with this growth and creating cities with a high quality of life will demand some $7 trillion of investments in infrastructure, housing, and commercial space. By 2030, the continued growth of cities could have an annual economic impact of some $520 billion to $930 billion.

Deploying disruptive technologies. Five related technologies—the mobile Internet, big data, the Internet of Things, the automation of knowledge work, and cloud technology—could modernize sectors across Southeast Asia and drive major productivity improvements.3 Within many industries, large value is at stake for companies that move quickly to digitize. Disruptive technologies could produce $220 billion to $625 billion in annual economic impact by 2030 if the public and private sectors can build out the necessary Internet backbone infrastructure and address workforce skills.


Global flows, urbanization, and disruptive technologies are already reshaping the region. But they are unlikely to lift it to the next level of economic development without deliberate strategies for capitalizing on them. Given the size of the potential prize and the importance of managing the associated risks, these three forces should be the focus of the region’s policy discussions—and businesses need to embed them in their strategic planning. The countries and companies that move quickly to seize the opportunities could secure advantages that last for decades to come. In all three of these areas, long-term thinking and investment could have an immediate economic impact while placing Southeast Asia on a faster and more sustainable trajectory through 2030.

About the author(s)

Jonathan Woetzel is a director of the McKinsey Global Institute, where Fraser Thompson is a senior fellow; Oliver Tonby is a director in McKinsey’s Singapore office, where Gillian Lee is a consultant; Penny Burtt is director of public affairs and external relations for McKinsey in Asia.

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