where are the southeast asian economies heading? · where are the southeast asian economies...

Where are the Southeast Asian Economies

Heading?

Presentation to Institute of Policy Studies, Colombo,

December 6, 2016

Hal Hill

Australian National University https://crawford.anu.edu.au/people/visitors/hal-hill

Outline

Southeast Asia in the global economy: overview and historical snapshots.

Is Southeast Asia on the rise economically?

The importance of ASEAN.

Good policy? The case of industry policy.

Risks and challenges.

Putting Southeast Asia in global context

The shifting global centre of gravity, economic, political, etc.

20th Century: The Atlantic Century

21st Century: The Asia-Pacific Century

The global economy’s centre of gravity, 1980 – 2049

The global economy’s centre of gravity, 1980 – 2049

Southeast Asian diversity:

Except for generally rapid growth and rising living standards, difficult to generalize!

06-Dec-16 9

2013

Population (in mil.)

GDP (PPP) in bil. USD

GDP/cap (PPP) in

thous. USD Ag. Sector

(%GDP)

Poverty (%

<$2/day) HDI

Freedom in the World Index

Transp. Int. Corruption Index (175 countries)

Doing Business

Index (189 countries)

Brunei 0.4 29 72 0.73 n/a 0.85 Not Free n/a 98

Cambodia 15 45 3.0 33.52 41.22 0.58 Not Free 156 137

Indonesia 245 2312 10 14.43 46.29 0.68 Partly Free 107 120

Lao PDR 6.5 32 4.8 26.51 61.98 0.57 Not Free 145 159

Malaysia 30 671 23 9.31 2.27 0.77 Partly Free 50 6

Myanmar 61 55 1.7 48.35 n/a 0.52 Not Free 156 182

Philippines 98 622 6.5 11.23 41.69 0.66 Partly Free 85 42

Singapore 5.3 412 79 0.03 n/a 0.90 Partly Free 7 1

Thailand 68 934 14 11.98 3.5 0.72 Not Free 85 18

Timor-Leste 1.2 2.4 2.1 18.42 71.03 0.50 Partly Free 133 172

Vietnam 89 460 5.3 18.38 12.43 0.64 Not Free 119 99

Sources: World Dev. Ind. & Worldw. Gov. Ind. (World Bank), Human Dev. Report (UN), ASEAN Stat. Yearbook, Freedom House

Digression: historical snapshots

Until 1940’s, Southeast Asia was ‘south of China, east of India’.

1. 1945: ‘hope’

Wartime devastation, but end of the colonial era in sight.

Indonesia (1945, 1949), Philippines (1946), …. Singapore (1963).

(East Timor, 2002)

Thailand never colonized, but …

2. 1965: ‘gloom’

“Southeast Asia in Turmoil”

Indo China War intensifying. ‘Dominoes’?

Pyongyang-Peking-Hanoi-Phnom Penh-Jakarta axis of ‘NEFO’s’

‘Konfrontasi’

Malaysia-Singapore separate.

Digression: historical snapshots

1995: ‘optimism’ (but …)

End of Cold War; Indo China countries rejoined the mainstream.

‘One Southeast Asia’, towards ASEAN10.

All 6 major economies growing strongly, for the first time.

2015: ‘pragmatism’ (end of ‘exceptionalism’?)

ASEAN Economic Community to commence (but …)

Some stars on the wane (temporarily?): Malaysia, Thailand and the ‘Middle Income Trap’.

Indonesia’s vibrant democracy (but …)

Stronger growth in the laggards, Burma/Myanmar, The Philippines.

Is Southeast Asia on the rise (economically)?

See slides:

Yes: (I) Comparative analyses.

Yes: (II) Rising incomes relative to the ‘frontier’ (proxied by US per capita income).

Yes: (III) Rapidly declining poverty incidence in most countries.

Yes: (IV) Improved social indicators, education, health, etc.

EG, life expectancy, 1970 to current:

Cambodia 40-66 years. Indonesia 53-72. Vietnam 48-77.

Yes: (V) Rising share of global trade, output and population.

How common is rapid sustained growth?

A relatively rare phenomenon – only 13/about 150

countries in last 100 years

China 1961-2010

Hong Kong 1960-1997

Indonesia 1966-1997

Japan 1950-1983

Korea 1960-2001

Malaysia 1967-1997

Singapore 1967-2002

Taiwan 1965-2002

Thailand 1960-1997

Botswana 1960-2009

Brazil 1950-1980

Malta 1963-1994

Oman 1960-1999

Source: Growth Commission Report

14

Incomes relative to the frontier

Poverty headcount ratio at $2 a day (PPP)

(% of population)

0

10

20

30

40

50

60

70

80

90

100

Lao PDR

Indonesia

Cambodia

Philippines

Vietnam

Thailand

Malaysia

Average Years of Total Schooling

0

2

4

6

8

10

12

1970 1990 2010

Cambodia Indonesia Lao People's Democratic Republic Malaysia Myanmar Philippines Singapore Thailand Viet Nam

0

1

2

3

4

5

6

7

8

9

101

95

0

19

53

19

56

19

59

19

62

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

GDP Share Export Share Population Share

But great diversity within Southeast Asia

1. Except for Singapore, not as dynamic as China, NIEs.

2. Around 1970, 3 unusual states: Singapore, Malaysia, Thailand:

‘Always open economies’. Prudent, cautious economic management.

3. Indonesia joined this group from the late 1960s.

4. Vietnam’s ‘Doi Moi’, from plan to market, beginning in the late 1980s.

Cambodia, Laos joined. (note the special case of Cambodia.)

5. Myanmar: ‘The Burmese Way to Socialism’ (and poverty!), 1962-

6. The Philippine puzzle. (a ‘normal’ country in any other region!)

(Digression: economists need to be humble. In the early development economics literature, both Myanmar and The Philippines were expected to be success stories!)

Long-term East Asian economic growth.

Ratio of GDP per capita, 2010/1961:

China 12.4

Korea 15.6

Singapore 12.4

Malaysia 7.9

Thailand 8.2

Indonesia 5.5

Vietnam 5.0

Philippines 2.1

What has Southeast Asia been good at, that other developing countries can learn from?

Illustrative examples:

(a) Managing export-oriented industrialization with FDI; participation in global production networks (S, M, T).

(b) Maintaining sound macroeconomic management (the ASEAN 3; also the Philippines in a complex political setting).

(c) Resilience and recovery from deep crises (I, M, T).

(d) Managing a sudden transition from authoritarian to democratic rule while maintaining growth (I, more recently P).

(e) Achieving rapid transition from plan to market (V).

(f) Achieving high growth after brutal conflict and genocide (C).

(g) Developing moderately effective, outward-looking regional cooperation and integration (ASEAN).

(h) Constructing the world’s best globally-integrated infrastructure (S).

(i) Managing commodity booms (I, M, earlier).

(j) Participating in global services trade; call centres (P).

What has Southeast Asia struggled with, found difficult?

Country illustrations, diversities. Some examples:

(a) Reforming education systems: from quantity to quality.

(b) Preparing for the rapid demographic transition, from Malthus to ZPG; being ‘old before rich’.

(c) ‘Picketty’: rising inequality.

(d)Transitioning from middle to high income, eg, Malaysia, Thailand.

(e) Developing high-quality institutions, including the legal system, the bureaucracy, independent checks on governments.

(f) Environmental management: is ‘grow first, clean up later’ still viable?

‘Yes’: high-quality environments a ‘luxury good’ for poor countries.

‘No’: environmental catastrophe beckons with fundamental changes.

Also, how to ‘manage the commons’ – forests, marine resources, etc.

(g) Developing independent business groups; are the leading business conglomerates ‘rent-seekers or real capitalists’?

The Importance of ASEAN

ASEAN, established in 1967, the most durable regional grouping in the developing world. cf, The Economist, ‘Mercosur, RIP’.

Similar origins to EU: after decades of ignorance, occasional hostilities, wanted to be good neighbours.

But also significant differences:

1. ASEAN didn’t want a ‘Brussels’; its member countries unwilling to cede much authority to the Jakarta Secretariat.

2. Great political diversity within ASEAN:

Only Indonesia and the Philippines reasonably functional democracies.

Same party/group in power for decades in Singapore, Malaysia, Vietnam, Laos, Cambodia, Myanmar, Brunei.

(Thailand at the other extreme – 19 constitutions – and counting – since 1932!)

Understanding ASEAN

3. ASEAN has practised ‘outward-looking regional economic integration’ (Hadi Soesastro).

Not possible to have a common external tariff, ie, preferential/discriminatory trade policy, so often ‘multilateralized’ its internal preferences.

Why?

a) Singapore, <1% of ASEAN population, dominates intra-ASEAN trade)

b) Unlike the EU, most ASEAN trade is extra-regional.

c) About half of intra-ASEAN trade is electronics/global production networks, which has to be free-trade (supported by the ITA/WTO).

See slides.

4. ASEAN won’t have a common currency for the foreseeable future.

It has learnt from the EU!

(see summary comparative table)

Intra-ASEAN Exports and Imports as a

Share of Total Exports and Imports,

1970-2011

0

5

10

15

20

25

30

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0

5

10

15

20

25

30

Export Share (%) Import Share (%)

Sources: UNCTAD, 2009. Handbook of Statistics Online (1970-1989 data), and ARIC Integration Indicators Database

Major Intra-ASEAN Trade Flows (10 major flows in 2006, % of total intra-ASEAN Trade)

Exports to:

From:

Indo Malaysia Phils Sing Thai VN

Indonesia 4.8

Malaysia 13.2 4.5

Singapore 13.2 18.9 2.7 6.0 2.9

Thailand 3.5 4.5

Table: Indicators of Economic Integration

Indicator ASEAN EU NAFTA CER Mercosur

Free trade in goods part yes yes yes part

Free trade in

services

part yes part yes part

Capital mobility (FDI) part yes part yes part

Labour mobility no yes no yes no

Competition law

converging

no yes no yes no

Monetary union no yes no no no

Unified fiscal no part no no no

Good policy?

Southeast Asian case study: Policies for industrial progress, not industry policy.

(Drawing on some work with Dr Archanun Kohpaiboon, Thammasat University)

“We all know what to do, we just don't know how to get re-elected after we've done it. “

Jean Claude-Juncker, President of EU

Motivation

Can governments pick winners? Or do ‘losers’ pick governments?

Industry policy, defined as non-neutral inter-industry (and sometimes inter-firm) incentives is a contested field.

There is general agreement in the literature on factors that underpin rapid economic development.

The contestation centres on whether these general, economy-wide factors are sufficient, or whether in addition there is a role for sector-specific interventions.

Earlier literature on IS v/s EO, etc; largely settled.

Main debate now on whether there is a case for ‘smart’ industry policy in broadly open economies.

Theory provides little guidance.

The arguments for selective industry policy are well known– dynamic externalities; learning by doing; infant industry; extra-market linkages – but they are mainly conceptual.

The empirical evidence, even from the high-growth East Asian economies, is inconclusive. Correlations without causality, etc.

This approach is deductive and inferential, choosing cases of sectoral ‘success’, and the role – if any – of government policies, drawn from several high-growth Southeast Asian economies.

We choose successes since they are more elusive than failure. There are endless ways of getting things wrong!

We also highlight cases within countries of both success and failure, suggesting that an institutionally nuanced approach is necessary.

Contents

1. Motivation

2. The Thai Automotive Industry

3. Malaysian Higher Education

4. The Philippine BPO’s

5. Cambodian Garments

6. Conclusions and Lessons

The Thai Automotive Industry

Thailand has become the auto hub for ASEAN, with rapid growth, rising export orientation and industrial deepening.

A conventional beginning with import substitution: CBU imports banned, high and cascading tariffs on CKD’s, LCRM’s imposed.

Major changes in the global industry underway during the 1980s; rapid growth in emerging economies, many of which were entering into RTA’s. So auto majors needed to select major regional hubs. These had to be efficient, relatively open economies.

The Thai government response was pragmatic; it began to liberalize; did not pursue a national car project. In effect, it was the only feasible location for a SE Asian regional hub in the 1980s. Also, it invested heavily in the Eastern Seaboard, with excellent infrastructure and flourishing industrial zones. It also had a sizeable domestic market as a springboard, particularly in commercial vehicles).

The govt introduced several pragmatic, ‘market-conforming’ import substitution programs.

Started with one-ton diesel engine, when by late 1980s the local market had sufficient economies of scale. Moderate protection in exchange for export targets and rising LC ratios.

Then eco-car project (2007), similar approach.

Major policy features:

i) A consistently (relatively) liberal, stable trade and commercial environment. No national car project!

ii) Policy approach has been pragmatic, market-conforming, consultative. Also contestable market, picking projects, sectors, not individual firms. And always more than one firm involved.

iii) All decisions based on sound economic fundamentals. Avoided great technological leaps; economies of scale could be achieved.

iv) Consistently good timing in policy decision – design or good luck?

But also an incomplete industry policy strategy with high costs:

i) Human capital/skill constraints are becoming more serious, especially as the govt pushes firms into more sophisticated engineering & design tasks, and reflecting historic under-investment in advanced higher education.

ii) Weak local level skill base indicating limited FDI spillovers. Few local suppliers are able to connect to the MNE regional production networks, to meet demanding quality, design, technology standards. Also, few local suppliers have been able to graduate from the earlier LCRM’s, where standards not as demanding and competitive pressures not as strong.

iii) Trade policy: Industry protection remains high, especially for CBU’s, also with cascading tariff structures and hence some very high EPR’s. Thus auto exporters cross-subsidizing markets, to the detriment of Thai consumers, well beyond any plausible infant industry period.

Malaysia and the Internationalization of Higher Education

A country case of considerable success alongside one costly failure, hence the need for institutionally nuanced approaches.

Also the interesting sub-national (Penang) story.

Two major early successes (tropical cash crops, electronics/GPNs).

One major, very costly failure, in heavy industry, especially autos.

Higher education is one of the world’s fastest growing internationally traded services.

Malaysia, historically a state-dominated and rigidly controlled system with ethnic quotas; major sending country; very few foreign students c 1990, now over 100,000.

Now arguably the most successful developing country provider.

Explaining the success.

Pre-conditions: Earlier large investments in the public HE system; open economy and labour market; high standards of livability; a multi-cultural environment, including widespread use of English.

Major reform in 1996, deregulating entry, allowing private sector to establish full campuses, including several major foreign universities.

The government also established reasonably credible accreditation and quality control processes.

Internationally recognized standards and much lower costs resulted in very rapid increases in private students, both domestic and foreign. Though two-way traffic, Malaysian students still go abroad in large numbers.

Though no guarantee that this approach will lift the country’s rankings internationally. Need a different sets of policies for this objective.

Note also additional positive spillovers: (a) enhanced ‘soft power’ from many international graduates; (b) an indirect boost to tourism, etc; and (c) ameliorated non-Bumiputera discontent to some extent.

The Philippine BPO’s

The Philippines has a very mixed record with industry policy, mostly failures. But BPO’s have been a significant success story and, owing to the global technological telecoms revolution, this is a fast-growing, rapidly diversifying sector. The Philippines ranks #2 behind India. Employment now >700,000; negligible 20 years ago; 5% of GDP; annual exports about $12B. Creating ‘quality’ jobs, attractive pay and conditions, spatially footloose. Initially, foreign firms dominated, now increasing numbers of local firms. Seemingly ‘recession proof’, eg, in 2008-09 GFC, growth still strong. Now diversifying into more skill-intensive services.

Explaining the success? Virtually ‘accidental industry policy’. BPO’s were not a key policy target. Main drivers:

i) The global revolution in ICT created many new, internationally traded services through unpackaging.

ii) A comprehensive telecoms liberalization in the Philippines in the 1990s.

iii) A pre-existing Philippine comparative advantage in semi-skilled services, English proficiency, historical US orientation.

Government policy was also supportive, through the PEZA incentives package (which arguably as much about removing distortions anyway).

Why didn’t BPO success spill over to other, related sectors? EG, the GPN’s in electronics (also tourism)? Why does it succeed in an international service network (ie, BPO’s), but not a manufacturing one (GPN’s)?

(a) The minimum wage regulations negatively affect the latter but not the former.

(b) Goods trade is adversely affected by the country’s less efficient logistics and ports; not relevant for BPO’s.

Cambodia: Garments

Cases of success in spite of extremely unfavourable initial conditions, in practically every respect.

Established as a factory activity only in the mid 1990s, with little industrial antecedents, as a result of preferential market access to the EU and US under the MFA.

Resulted in rapid growth; now a significant garment exporter, ranked #12, ahead of more established exporters like Sri Lanka, Thailand, etc.

Now the country’s major merchandise export and manufacturing employer, with transformative labour market effects (employment of more than 400,000 in a non-agricultural workforce of about 3.5M)

Crucially, the growth was maintained after the abolition of the MFA in 2005.

Also, rising export market and product diversification. Moving beyond the early simple CMT model.

Also increased local employment in more skilled occupations.

And assisted in establishing a country ‘export reputation’, especially in footwear; now also increasingly in a range of other manufactures, some related to ‘Thailand +1’ risk diversification.

The key was building effectively on an initial market opportunity, through the adoption of a highly open, business-friendly environment; including establishing export zones compatible with MNE investor preferences, eg, along the Thai border.

Although some concern about the overuse of fiscal incentives.

Conclusions and Lessons

Important to take account of country characteristics and nuances. But several recurring themes, at least 6.

i) Importance of openness: All cases involved export-oriented goods and services, and FDI, technology, human capital flows.

Openness also imposed a discipline on firms, governments, rent-seeking.

ii) Government policies: These were important in various ways. Often, and probably most important, was deregulation, unshackling markets.

In some cases, governments did considerably more, eg, in Malaysia, providing a regulatory framework; in Thailand, pushing MNE’s to adopt the country as a regional export base.

iii) Country strengths, often deeply rooted: These present in most cases, from Angkor Wat to Malaysia’s cultural diversity and Philippine English-language proficiency.

iv) Good luck and timing: Most examples involved governments undertaking promotional/deregulation measures where timing was fortuitous. Or clever governments?

v) The effects of liberalization are difficult to predict: In very few cases did policy-makers (and academics) accurately predict outcomes, ex ante. This reflects the the dynamic benefits of openness, and also the presence in most of the countries of complementary, supportive policies. Crucially also, export success builds a constituency, so cases of backtracking are rare.

vi) Diverse outcomes within countries: There is surprising diversity of within-country outcomes, both over time, across sectors and sub-nationally. Articulating country ‘stylized facts’ therefore needs to take account of this diversity.

Risks?

1. Growing old before growing rich?

2. Another global financial crisis?

3. Inequality: rising or falling?

Demographic ageing 70% Japan 61% Korea 58% Singap.

42% China 41% Thailand 37% Vietnam 35% Sri Lanka

30% Indonesia 27% Myanmar 23% Malaysia 20% India 18% Laos 16% Philipp. 15% Pakistan 6% Timor

Rate in 2050

0%

10%

20%

30%

40%

50%

60%

70%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Population aged 65 and above as proportion of population 15-64

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Working age population as proportion of total

Japan United States Australia China-HK China-Macao Europe Avg.

Korea Mongolia China Singapore Thailand Vietnam Malaysia Myanmar Indonesia

Bhutan India Laos Bangladesh Nepal Cambodia Pakistan Philippines

Demographic dividend

Economic development

0

5,000

10,000

15,000

20,000

25,000

30,000

1950 1960 1970 1980 1990 2000 2010

Singapore Japan Korea Malaysia Thailand China Indonesia Vietnam, India Philippines

1989 Korea universal healthcare 1948 UK universal healthcare 1935 USA social security and welfare 1961 Japan universal pension and healthcare

GD

P p

er c

apit

a (1

99

0 P

PP

)

Ultra-Easy Monetary Policy in Response to GR

GR Fears of dot-com burst (2001) to oil price hike & hurricane Katrina (2005). Fear of “R”ecession (2007), Fed rate fell to 0%-0.25%

Comparable to 1933-40? Fed assets is $4.5 trillion, 5 X the end of 2007

Fed rates (%)

Fed Assets Size

Gross Capital Inflows: Selected Emerging Asia (US$ bill)

GR GR

50

The reversal in global inequality trend

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

30

35

40

45

50

55

60

65

70

75

80

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Pe

r ce

nts

(Gin

i)

Figure 1. Evolution of global inequality : 1910-2010 (various measures)

Historical series Recent period

Inco

me

ratio

Gini Coefficient

Top 10% to bottom 10% income

19891997

2006

1989

1997

2006

2010

2010

P90/P10 quantile ratio

B. Within country inequality : the recent increase in developed countries

51

-3 -2 -1 0 1 2 3 4 5 6

Spain

Ireland

France

Greece

Australia

Korea, Rep.

Denmark

Japan

Luxembourg

Belgium

Canada

Austria

Sweden

Netherlands

United States

Germany

Italy

Norway

United Kingdom

New Zealand

Portugal

Finland

Change in the Gini coefficient : mid 1980s to mid 2000s, developed countries

Percentage pointsSource: OECD Source: Oecd, disposable income per CU

Top (market) incomes in developed countries: a trend reversal

52 Source: Top incomes

0

5

10

15

20

25

30

35

40

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Pe

r ce

nts

Year

Share of top 5% income in total income: 1920-2009, selected developed countries

USA

UK

France

Sweden

Japan

Source: Top incomes

Inequality change in developing countries (excluding LAC)

53 -10 -8 -6 -4 -2 0 2 4 6 8 10

Kenya

Malaysia

Iran, Islamic Rep.

Algeria

Lesotho

Pakistan

Panama

Yemen, Rep.

South Africa

Moldova

Mongolia

Hungary

Madagascar

Slovak Republic

India rural

Tunisia

Morocco

India urban

Tajikistan

Vietnam

Mozambique

Slovenia

Indonesia

Philippines

Albania

China rural

Botswana

Ghana

Kyrgyz Republic

Poland

China urban

Change in the Gini coefficient : mid 1980s to mid 2000s,Other emerging and developing countries

Source: World Bank, Povcal