How does South East Asia beat the West in driving global economic growth?

With the Singapore Economic Development Board reporting that factory outputs have increased 3.9% since July, and 21.7% from a year earlier, national economic growth is looking strong.

However, as we approach the end of the year, the global economy is slowing noticeably after a stronger 2010 performance. The impressive 5% global growth in 2010 was only a temporary rebound, and does not seem to have been sustained. Within the global markets, there are marked differences in the levels of growth.

One of the most apparent and significant shifts is in the balance of economic power. For the first time in five centuries, it looks likely that the Western world’s dominance of the world economy will be arrested, whilst Asian economies power ahead to greater growth and development.

Eastern growth remains strong, with ASEAN the most economically successful emerging region in GDP terms since last year. Conversely, Western economies are facing the spectre of a double-dip recession, as the sovereign debt crisis rocks the Eurozone and growth elsewhere slows.

That the Eastern economies are driving growth is hardly a surprise. China looks set to follow the United States, currently the world’s biggest capital market, as an economic superpower. India has started that journey. This has profound effects for South East Asia and the ASEAN nations. Trade growth with China in terms of exports from ASEAN has been rising faster than export volumes to other market trading partners such as Japan, the US and the Eurozone.

This is partly down to the free trade agreement with China that has been in place since 2010 which is not only boosting growth but looks likely to continue to do so as Asian economic integration continues. However, this is not the only factor driving increasing Asian economic dominance.

In the West, there is not only below-trend growth, but also a sovereign debt crisis has led to a loss of both consumer and business confidence and increased market volatility. High unemployment has compounded the loss of consumer confidence meaning that consumption has slowed further still. This contrasts sharply with the situation in Asia where demand is pushing up commodity prices.

Within ASEAN, regional integration is accelerating with internal trade increasing faster than external trade and prosperity coming from increased specialisation and division of labour between ASEAN. An example of this is the success of Iskandar Malaysia economic zone in South Johor, which is benefiting from Singaporean know-how combined with a productive and affordable Malaysian labour force.

However, this also highlights a large issue facing the region. Unlike the Eurozone, where living standards are increasingly harmonized, ASEAN spans a whole spectrum of low to high income nations. If the economic growth rates over the last decade are examined by income type, GDP in low income nations has risen two and a half times as much (9.1%) as the highest (3.6%) and over twice as much as the upper-middle income economies (4.5%). This disparity represents both a challenge and an opportunity.

On the one hand, it suggests that ASEAN will not be able to progress towards EU-style political integration; the absence of a shared economic backdrop prevents this being realistic. On the other, if the region continues to capitalise on the diversity of resources that it offers – affordable labour in some countries and knowledge and skills-based economies in others – through mutual regional linkages rather than internal competition for outside direct investment then there are tremendous opportunities for growth.

Labour costs are rising in China, enabling competitive countries to challenge its position as the world’s factory floor. Rising commodity prices mean that agricultural land will become increasingly profitable, whilst power-hungry emerging nations need fossil fuels, which the region can provide.

Whilst ASEAN’s growth over the next few years will be partially driven by growth in emerging markets, sustainable growth is linked to rising domestic consumption. A growing middle class in Indonesia, Malaysia and Thailand is boosting private expenditure, as income levels rise. As Western demand for exports softens, these countries will go from being a manufacturing base into a lucrative market for durable consumer goods.

The challenge, as the Asian markets become increasingly more sophisticated, is to maintain and build on the foundations of the current growth. Poorer nations that are looking to industrialise need to invest in infrastructure and education.

Middle-income nations need to ensure that they have the high standards of financial management and corporate governance that have made Singapore, for example, one of the most attractive countries in the world in which to do business.

Ensuring there is a skilled pool of world class financial professionals will cement Singapore’s position as a hub for finance and innovation. And all nations need to ensure that there is the transparency and comparability that makes them attractive to investors and facilitates business across national boundaries. 

Mark Billington, ICAEW Regional Director, South East Asia