Business Times Singapore

Asean states have fared well. Now, to continue doing so

Eight Asean emerging economies have achieved rapid and consistent growth that far outstrips their peers, enabling them to narrow the wealth gap with advanced economies, write Kaushik Das and Diaan-Yi Lin in Business Times Singapore.

ASEAN members rank among the world's most dynamic, resilient, and fastest-growing emerging economies. In a time of significant changes in technology, trade and demographics, can they maintain that momentum?

The latest McKinsey Global Institute research on emerging economies examined 71 countries over the last 50 years and found 18 that have achieved rapid and consistent growth that far outstrips their peers. This growth has enabled them to narrow the wealth gap with advanced economies. Eight of them are Asean members.

Indonesia, Malaysia, Singapore and Thailand posted annual per capita GDP growth of 3.5 per cent for all 50 years. Cambodia, Laos, Myanmar, and Vietnam increased their per capita GDP at least 5 per cent a year, on average, between 1996 and 2016.

While Asean countries differ in their economic structure and level of prosperity, we have found two shared traits that the most successful share with the other out-performers: a pro-growth public policy agenda and a competitive domestic economy that produces large globally competitive companies.

The pro-growth agenda begins by increasing productivity, which generates additional wealth, raising consumption and savings, and spurring more productivity. Increased domestic savings - including forced savings in mandatory pension plans - can kick off the cycle by sustaining high investment levels for prolonged periods without relying on more-volatile foreign capital.

Such investment enables companies to adopt technology that lift productivity, creating wealth and lifting per capita GDP. Asean's record for domestic savings is strong, and this has been a key to its success - and potentially a lesson for other economies, both emerging and advanced.

At the same time, however, the grouping's total-factor productivity growth has been close to zero in recent years because of regional and global financial crises. One challenge will be to rekindle productivity growth, at a time when global productivity growth has been tepid, so that Asean can stay on its rapid-growth trajectory in the years to come.

The other insight from our research is the key role of competitive dynamics in outperforming economies and the standout - but often underappreciated - role of large companies with annual revenue of US$500 million. In particular, higher-income Asean members including Singapore have twice as many large firms (per US$1 trillion of GDP) as other emerging economies.

Outperformer economies also tend to have healthy ecosystems of small and medium-sized businesses to supply big firms. Of companies in the top quintile of economic-profit generation among outperformer economies in 2005, only 45 per cent were there a decade later; in advanced economies, 62 per cent stayed in the top quintile.

So much for the past. What does the future hold for Asean countries at a time of changing global and regional trends? These will both challenge Asean countries even as they create opportunities for further growth.

Automation, for example, will boost productivity and improve quality and safety, but it will require new skills and adaptability among workers. Global trade is under fire in a number of countries, even as new trade patterns offer opportunity. Asean countries are close to the epicentre of one of the biggest shifts: the rise of south-south trade. From 1995 to 2016, China's trade with other emerging economies increased 11-fold and trade among non-China emerging markets, six-fold.

Demographics could force countries to deal with slower-growing labour pools and faster growing ranks of older citizens. In Thailand, for instance, 20 per cent of the population will be over 65 by 2030, almost as much as in high-income nations. Meanwhile, many more people will live in cities, which can improve productivity, but will require substantial infrastructure investments.

Going forward, political and business leaders could address these issues by focusing on three opportunities:

  • Digitally-driven productivity to create wealth;
  • A reinvented labour force to work alongside machines or do things machines cannot do; and
  • Infrastructure tailored to the development needs of the 21st century.

Governments, for example, could spur productivity by adopting pro-competitive policies to encourage digital adoption and innovation, including secure data-sharing, and invite foreign investment in digital technologies.


Companies, meanwhile, could create realistic long-term digital strategies.

To prepare for labour-market disruptions brought about by urbanisation and automation, which may create twice as many jobs as it supplants, public officials can focus not only on retraining, but also on inclusion, particularly gender parity. Firms may need to train workers for careers that might cross five or six rapidly changing industries.

Infrastructure is a particularly pressing need for Asean, which includes many countries with large populations far from modern capitals. Several approaches have worked here, including private development and public-private partnerships, but governments and businesses should focus on digital as well as physical infrastructure.

If Asean countries can navigate these changing times successfully, the rewards in terms of continued growth could be significant. Regional GDP could grow from US$4 trillion to US$5 trillion in 15 years, reaching 5 per cent of the global total and continuing South-east Asia's track record as a global leader for dynamic economic growth.

This article appeared first in Business Times Singapore.

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