2013 Feb 04
February 4, 2013

ASEAN talk: A lot of room to grow

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ASEAN is set to be the region to be situated in in 2013. After an estimated growth of 5.2 percent purchasing power parity (PPP)-weighted basis, we project the region to grow by 5.3 percent in 2013, outpacing the International Monetary Fund’s (IMF) global growth estimate of 3.6 percent. The region is expected to see economies such as Indonesia, the Philippines and Malaysia matching or exceeding their 10-year average rates.

And more is expected from Myanmar in 2013, which has been making international headlines for the right reasons in 2012. Confidence is high, not just domestically but also among foreign investors, where the region attracted 7.6 percent of global foreign direct investment (FDI) in 2011 versus 4.3 percent in 2006. Indeed, since 2000, following the crippling financial crisis, the ASEAN region has outgrown the world by an average of 1.5 PPP. So, can the region keep running at this pace?

Nothing runs in a straight line. Business cycles still exist. But there is certainly still a lot of room to grow. Despite the world-beating growth rates registered over the last decade or so, the region can still achieve more. The region is hardly at the stage where the factors for growth have become complicated. At a most basic level, the continued process of urbanization will help to drive “easy” growth.

This is the economics of agglomeration. Urbanization helps to improve the overall well-being of an individual by improving access to services and housing. This can boost productivity and consumption. Urbanization helps to increase efficiency as distances are shortened. This lowers costs of businesses or for government to provide infrastructure and necessities. Jobs and supply of labor are concentrated rather than dispersed.

The benefits of clustering together, for individuals and firms, are reflected in the growth activity being concentrated in cities, even if the size of the city is small relative to the whole country. For example, Jakarta accounts for about 17 percent of Indonesia’s gross domestic product (GDP) but only constitutes 0.04 percent of the country’s land mass and 4.2 percent of the population.

According to the World Bank, the world passed the 50 percent mark for urbanization in 2007. As of 2012, there are still six countries in ASEAN that have not passed the 50 percent point — Cambodia, Laos, Myanmar, the Philippines, Thailand and Vietnam. Indonesia just crossed the mid-point at 51.4 percent. Singapore, Malaysia and Brunei are largely urbanized. As a region on the whole, we still have some low hurdles that we can cross to keep growth sustained.

Urbanization is typically associated with growing wealth. Measuring this by GDP per capita and using the world’s experience with urbanization as an example, every percentage point increase in urbanization raises GDP per capita by about US$ 500. Granted, every country’s experience will be different. How well urbanization is planned and implemented could affect the benefits accrued to the process. Or the productivity levels of agriculture, for example, could play a part in determining how much GDP per capita can increase relative to urbanization.

In fact, improper urbanization can result in diseconomies. Indeed, nowadays, when we think of a city, negative connotations such as congestion and pollution come to mind. But the fault does not lie with urbanization, but rather the way it is being carried out. Urbanization facilitates economic growth. And, given the relatively low levels of urbanization across ASEAN, the law of diminishing returns is not likely to be in play yet in any significant manner.

The low hurdles to growth can also be seen in the GDP per capita of countries in ASEAN. Compared to the world’s GDP per capita of $10,000 in 2011, only two countries (Singapore and Brunei) exceed this level (using World Bank data). Malaysia is nearly on par (based on 2011 numbers) but the next nearest country, Thailand, is only about half of the world’s GDP per capita.

At this level of growth, simple improvements to factors of production should help to support growth. According to the World Economic Forum Global Competitiveness Report 2012-2013, Cambodia and Vietnam are still at the most basic stage of economic development — the factor-driven stage. Myanmar and Laos are not included in this report, but would likely be categorized as such, too. Brunei and the Philippines are in the transition stage to efficiency-driven and Thailand and Indonesia are in the efficiency-driven stage.

At the earlier stages of development, adoption of existing technology and practices, investing in infrastructure, provision of basic institutional framework, and health and education facilities, should help to drive growth. In the region, only Singapore is considered to be in the stage of economic development that is innovation-driven. Malaysia is in the transition stage from efficiency-driven to innovation-driven. Hence, the region still has a lot of room for “easy” growth.

While this article highlights the growth potential of the region, growth is not granted. A right mix of fundamentals, policies and confidence is needed. At the moment, there is certainly a nice mix of these ingredients. Confidence is high, and even more so if it is seen in the context of the current weak global environment. Fundamentals are good and policies have been supportive of growth. But nothing stays constant and policies will need to stay
relevant and forward looking. –Edward Lee, Jakarta, Jakarta Post

The writer is the head of Standard Chartered’s Southeast Asia economic research team.