Wednesday, September 24, 2014

How Safe Is Southeast Asia?

The current global economic climate offers limited trade and investment options for businesses seeking much-needed growth. The economies of the traditional regional giants (North America and the European Union) have mainly stood still or contracted in the last five years.

Apart from China, which appears to be defying the odds by continuing to exhibit double-digit growth, where else in the world can a company hope to grow its business?

Southeast Asia seems to be the best bet. While contributing a modest 3 percent to world gross domestic product (GDP), the region’s annual growth rate of 9 percent is second to China.

Still, the spectre of the 1997 Asian financial crisis may give many companies pause — how vulnerable is Southeast Asia to similar economic shocks in the future?

Research shows that the Asian crisis was devastating to the regional economy. Southeast Asia’s GDP shrank by over 4 percent in 1997 and contracted a further 30 percent the following year. The region’s economic landscape, however, has changed significantly since then. Data indicates that the current regional trade network is much denser and much more robust than it was 20 years ago.

More Southeast Asian countries are today trading a wider range of products at higher volumes with other countries within the region. These deeper and wider trade ties have contributed to stronger economic relationships, which have effectively made the region more resilient to economic shocks.

This is evidenced by the fact that Southeast Asia’s GDP experienced a milder contraction in the post-2000 period compared to 1998 levels and slowed down but did not contract following the 2008 global financial crisis.

It can certainly be argued that Southeast Asia is a less risky trade and investment destination today than it was before.

In past two decades, Southeast Asia has transformed itself into a region where strong individual economies form a robust trade network. While this is good news for businesses and investors, a closer look at the data reveals evidence that the network is developing a strong core and a weak fringe.

Thailand, Singapore, Indonesia, Malaysia, Vietnam and the Philippines form a clique of the strongest economies comprising the core of the trade network in the region. Brunei, Cambodia, Myanmar, Lao and Timor Leste have fewer regional trade connections and thus occupy the outer fringes of the network.

It’s these countries in the outer fringe that are the most vulnerable to future economic shocks, and it is the emerging two-tier network structure that signals potential future risks for the Southeast Asian region.

Given that Timor Leste and Lao have the fastest growing economies in the region, they can probably be expected to eventually catch up and hopefully join the strong clique at the core of the network.

It would be better, however, for Southeast Asia to be more proactive in treating the emerging network fringe as a regional development opportunity. For starters, the membership process of Timor Leste in Asean can be accelerated so as to allow the country greater access to regional free trade agreements.

The Asian Development Bank and the World Bank must also take the lead in intensifying efforts to develop stronger domestic industries and international businesses among the emerging fringe countries.

The further development of a two- or three-speed Southeast Asia must be averted in order to ensure continued growth and stability in the region. – The Jakarta Post, September 24, 2014.

*Sandra Seno-Alday is a researcher at the Sydney Southeast Asia Centre and a lecturer of international business at the University of Sydney Business School. She will be presenting at the 2014 Asean forum.

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