Asean — Asia’s 3rd growth engine

As Asean celebrates its 50th anniversary since its foundation in 1967, it has established a track record of considerable success as a political grouping of nations that has built peace and stability in South-East Asia.

This political success is increasingly being augmented by its growing global importance as a major economic region of the world economy.

Less than twenty years ago, at the turn of the century, the total size of Asean’s gross domestic product (GDP) was only 13% that of Japan’s GDP.

Just 17 years later, Asean’s GDP has risen to around 56% of the size of Japanese GDP. According to IHS Markit forecasts, Asean’s regional GDP is projected to surpass that of Japan by 2025.

Asean’s total GDP amounted to US$2.6 trillion (RM11.13 trillion) in 2016, already larger than Indian GDP which was US$2.3 trillion in the same year.

By the end of 2017, Asean GDP is also forecast to become larger than the GDP of the UK, reflecting both the sustained rapid growth of the Asean region as well as the significant depreciation of the British pound following the Brexit referendum decision to leave the European Union.

This represents a tremendous transformation underway in the Asia-Pacific economic landscape, as Asean joins China and India to become one of the Asia-Pacific region’s three main growth engines for the next two decades.

There are a number of drivers that have contributed to Asean’s economic success.

Firstly, Asean has benefitted from the economic ascendancy of China. Asean’s exports to China have grown from US$22 billion in 2000 to US$134 billion by 2015, helping to support rapid overall growth in Asean’s key export sectors. Meanwhile, total Chinese tourism visits to Asean have risen from 2.3 million visitors in 2000 to 18.6 million visits in 2015, creating an important driving force for the growth of Asean’s tourism industry, and accounting for an estimated 17% of total international tourism visits to Asean.

Secondly, the internal Asean market has also grown very rapidly, with intra-Asean trade having to become an important growth driver due to sustained rapid economic growth of the region. Asean countries accounted for 26% of Asean’s total exports in 2015, with the creation of the Asean free trade area and elimination of tariffs on goods for the first six Asean members having been implemented since January 2010.

This has accelerated export growth among the Asean countries, and trade liberalisation is continuing as the other four Asean countries reduce their tariffs on intra-Asean trade, creating a pan-Asean free trade area.

Thirdly, Asean has also become a global leader in pursuing trade liberalisation, both through internal trade liberalisation initiatives for trade in services through the Asean Economic Community agreement, as well as free trade agreements (FTAs) with other key trading partners.

Asean’s current FTA network includes China, India, Japan, Australia, New Zealand, South Korea and India.

Fourthly, Asean governments have pursued an extensive agenda of macro-economic reforms and strengthening financial markets regulation since the East Asian crisis.

A number of Asean governments have reduced fiscal deficits and government debt to GDP ratios, strengthened financial supervision and increased banking system prudential capital ratios.

The Chiang Mai Initiative, agreed in 2000 in the aftermath of the East Asian financial crisis, has also created a regional mechanism for cooperation among the Asean countries plus China, Japan and South Korea for financial crisis prevention and resolution, initially built around a network of bilateral currency swaps.

Sixth, the Asean region is becoming an increasingly attractive hub for manufacturing production, with large foreign direct inflows into manufacturing sectors such as electronics, textiles and garments, auto production and food processing.

The size of the Asean domestic market of 625 million persons is creating a large, fast-growing internal market for manufactures, while relatively low manufacturing wage costs in Asean frontier market economies have also driven the growth of competitive manufacturing export hubs in South- East Asia.

The near-term economic outlook for the Asean region remains positive, with a number of Asean countries forecast to maintain average GDP growth rates of over 6% per year between 2017 and 2020, including Vietnam, the Philippines, Myanmar, Laos and Cambodia.

Indonesia, which accounts for around 40% of Asean’s total GDP, is also forecast to sustain robust economic expansion at a pace of around 5% per year over the 2017-2020 period.

In Thailand, the pace of economic growth is expected to average slightly over 3% per year in the period until 2020, helped by rapid growth in tourism and strong infrastructure spending plans for a wide range of major transportation projects.

Meanwhile Malaysia’s economy has shown a tremendous economic rebound in the first-half of 2017. GDP growth for the first-quarter of 2017 was up 5.6% year-on-year, showing a strong positive momentum compared to the pace of economic growth in 2016. In the first six months of 2017, exports rose by 21% compared to the same period a year ago, with exports of manufactures up 19.1% year-on-year.

Malaysian GDP growth is expected to average around 5% per year over the 2017-2020 period, boosted by strong investment in infrastructure and sustained consumer spending growth.

Asean’s economic role in Asia Pacific as well as the world economy looks set to be in the ascendancy over the next two decades. This will give increasing geopolitical influence to the Asean region, as its relative economic weight in the global economy continues to increase.

  • Rajiv Biswas is the Asia-Pacific chief economist for IHS Markit.