To the list of emerging Asia’s economic powerhouses, add one more: Southeast Asia and its 625 million inhabitants.
Spanning countries as diverse as Vietnam, Indonesia, the Philippines and Singapore, the Association of Southeast Asian Nations (ASEAN) often gets less attention than China and India. But ASEAN is already an economic force to be reckoned with. The GDP of its 10 members now totals more than USD2.5 trillion, about 25 per cent more than India’s. If ASEAN were one economy, it could be the world’s fourth-largest by 2050. Its population is roughly double that of the US and it has attracted investment from companies around the globe.
The AEC builds on decades of incremental work done since ASEAN’s inception in 1967
As we head into 2016, ASEAN’s economic cohesion will receive an extra boost with the formal establishment of the ASEAN Economic Community (AEC). This aims to liberalise the flow of goods, services, capital and, ultimately, skilled labour within the region in a bid to raise its competitiveness and facilitate investment.
The AEC builds on decades of incremental work done since ASEAN’s inception in 1967. Free trade in goods, for example, has already been effectively established. But more needs to be done to remove obstacles that hamper the flow in services and to reduce cross-border financial transaction costs.
If fully implemented, the steps envisaged under the AEC could raise ASEAN’s GDP by 5 per cent by 2030. While there are years of work ahead, a trio of factors should support the region’s long-term growth.
First, it is increasingly attractive as a manufacturing location. China is shifting towards higher-technology manufacturing. This means more traditional, labour-intensive manufacturing that was once based in China is moving to ASEAN nations. ASEAN is already a key manufacturing hub, notably for the electronics and automotive sectors, which have attracted significant foreign investment. The Philippines has become a hub for IT and business process outsourcing. More overseas investment is likely to follow as remaining hurdles to trade and investment are lowered.
Second, consumer power is growing rapidly. In 15 years’ time forecasts suggest that the region will have added another 120 million inhabitants. Consumers are also becoming more affluent. In 2010, per capita GDP was just USD3,000. ASEAN members aim to raise this to more than USD9,000 by 2030. The region is an increasingly important market for everything from cars to shampoo.
Third, ASEAN is home to an established international financial centre, in Singapore. Increasing financial liberalisation could help lower transaction costs and facilitate investment into ASEAN. Countries such as Indonesia and the Philippines could benefit from increased investment into much-needed infrastructure, which is currently still a weak spot.
The countries of Southeast Asia face near-term economic headwinds, but the region’s economic assets, combined with the AEC, will make it ever more important as a location to manufacture in, source from and sell to.
A version of this article appeared in the Financial Times’ Beyondbrics blog on 14 December 2015.