How Southeast Asia’s Economy Became One of the World’s Best-Kept Secrets

The playwright and Nobel laureate George Bernard Shaw wrote, “There are no secrets better kept than the secrets that everybody guesses.”



Southeast Asia’s nimble economic performance through the global financial crisis years of 2008-09, and again in 2010, has got everyone guessing. Not only did its economies not shrink, but the broad revival that followed — an economic growth of 9.3 percent in 2010, according to the International Monetary Fund — continues to be powerful and durable. Stock market indices in Indonesia, Malaysia, the Philippines and even in political crisis-torn Thailand all recently touched record highs. Indeed, only a quirk of classification prevents Southeast Asia from being considered one of the world’s most attractive economies. Taken as a region, it is stronger than Brazil or Russia, and perhaps second only to China.

Southeast Asia’s economy is immense and vibrant. Its nominal gross domestic product ($1.1 trillion) is comparable to India’s ($1.2 trillion), despite having a population about half the size. Trade barriers have also been lowered by a continuous historical commitment to free trade through regional frameworks created through the Association of Southeast Asian Nations, all of which continue to aspire toward a single market for goods, services and capital.

Economic activity is relatively concentrated, with four countries — Indonesia, Malaysia, Thailand and Singapore — accounting for three-fourths of nominal GDP. While average GDP growth in the past five years has not matched that of China (11.2 percent), it has been consistently stronger than growth in Brazil (4.2 percent) or Russia (4 percent), growing 5.3 percent per year.

This is not to ignore national particularities or historical patterns. Risky political and business environments are also common. There is a stronger variant of this skepticism: It sees Southeast Asia as a regional laggard, with corruption and a low-skilled work force among its chief complaints.

While excesses can be found, the reasons behind Southeast Asian’s recent outperformance are not disappearing soon. Reform, both political and economic, has been the norm since the 1997-98 Asian financial crisis, with countries reducing public debt levels, strengthening currency reserves and applying discipline to fiscal deficits. More importantly, major Southeast Asian economies now possess a much strengthened financial services industry that has clearly withstood the global financial crisis. This underlying system will continue to be the bedrock of even stronger economies.

In particular, the larger Southeast Asian countries have committed themselves to root-and-branch economic reform, promising transparency, market access and economic incentives to local and foreign players. The Indonesian government has recently spent significant political capital launching the Indonesian Economic Development Corridors, targeting infrastructure investments worth $190 billion. Similarly, total investments planned for Malaysia’s Government Transformation Program and Economic Transformation Program are to exceed $50 billion in 2011, while the Singaporean government’s 2009 “resilience” package (some $14.1 billion) included heightened spending on infrastructure, education and health.

But macroeconomic stability without ambitious entrepreneurs is like a tree without fruit. Thankfully, a new generation of Southeast Asian companies, with paradigm-shattering innovations, global ambitions and talented management, is now coming of age. In terms of innovation, Malaysia’s RHB created a low-cost method of attracting deposits. In Indonesia, telecom operator XL Axiata has pioneered intensive demographic micro-segmentation to manage customers over the life cycle of their relationships.

In Thailand, pursuing a consistent and bold strategy, Indorama has become the top global producer of Polyethylene terephthalate (PET), used to make plastic bottles. Back in Malaysia, CIMB, through aggressive yet reasonable acquisitions, has quickly become the fifth-largest bank in Southeast Asia by total assets. These recent achievements follow on consistent outperformance by established players, including dependably superior service from Singapore Airlines or Parkson Holdings’s simple but effective multi-brand retailing business model.

The region has already proved it can create industrial giants. The largest companies in Southeast Asia — SingTel, Malaysia’s Petronas Carigali, Thailand’s PTT and Indonesia’s Astra — have revenues around $30 billion to $50 billion, which compares favorably to similar companies in the BRIC universe and places them squarely among the world’s largest corporations.

Indeed, the global ambition of Petronas has already borne fruit; through a consistent acquisition strategy in the late 1990s, nearly 50 percent of the firm’s revenues now come from outside Malaysia. In recent years, Wilmar International has quickly become the largest global processor of palm oil and Asia Pacific Breweries has elevated Tiger beer into a premium brand that can compete in overseas markets.

These promising performances were partly the result of a wave of deregulation following the Asian financial crisis, which encouraged restructuring and competition among established players. Given the region’s young population — close to 54 percent of Southeast Asians are under 30 years old — and favorable demographics, which will see the working population rise to 278 million in 2015, there is significant potential for new Fortune 500 companies to emerge in Southeast Asia over the next decade. (Presently there are four, compared with China’s 46.)

The result is a region that is unambiguously open for business. Though governments still own controlling stakes in state-owned enterprises, many are focusing instead on being facilitators of the private sector and intervening only to secure a macro-framework for growth. Assessments of public infrastructure in Southeast Asia were scored by the World Economic Forum’s Global Competitiveness Index at 4.35 — a favorable comparison with 4.4 in China and 3.5 in India.

Southeast Asian countries also score well on the World Bank’s Ease of Doing Business Index, with Singapore, Thailand and Malaysia coming 1st, 19th and 21st, respectively. Intellectual property is also reasonably protected in Malaysia and Indonesia, which came 33rd and 58th, respectively, and when it comes to rule of law, Indonesia, Malaysia and Thailand generally perform well in comparison to countries with similar income levels, as the World Justice Project’s 2010 Rule of Law Index noted.

Finally, human development indicators continue their steady improvement. Literacy has always been high, but today record levels of public funding are allocated for higher education, particularly in Malaysia and Indonesia. Malaysia’s education spending as a proportion to GDP exceeds that of top high-income countries like Denmark, Iceland or New Zealand, while Indonesia’s higher education expenditure increased by 20 percent in recent years. The emphasis on higher education is one way in which this boom is different from past ones — more effort is being made to secure the long-term foundations for prosperity.

Maybe there is a good reason why the Southeast Asian economic story has remained a well-kept secret. Companies here, local and global, have — it must be said — quietly made their good profits. In the coming years, others will make that discovery. Industrialists and governments are single-minded in their pursuit to turn it into one of world’s major growth engines. As economic gravity continues eastbound, the region will only increase in importance in the years ahead.

By Vincent Chin partner and managing director of Boston Consulting Group in Kuala Lumpur.