12 ASEAN in the World Economy
- John Hicklin, David Robinson, and Anoop Singh
- Published Date:
- July 1997
Since the economic takeoff of the countries of the Association of South East Asian Nations (ASEAN) began in earnest in the 1970s, their importance in the world economy has increased dramatically (Table 1).1 On current trends, by the turn of the century this group will have more than doubled its share of world output and income since 1975 to reach almost 6 percent, which will approximately match its share of world population. This would give ASEAN an economic weight about halfway between those of Germany and Japan. Over the same period, ASEAN’s share of world trade will have increased three and a half times to about 8 percent, a share corresponding to that of Japan today. ASEAN’s share of total foreign direct investment (FDI) received by developing countries is estimated to average about 25 percent in the 1990s compared with just a trickle in the early 1970s. By the year 2000, these countries are expected to account for over 8 percent of global saving and investment, almost four times their share in 1975. And per capita GDP in purchasing power parity terms will have increased from less than $1,000 to almost $10,000 in just one generation.
|World exports, goods, and services||1.8||2.3||3.2||3.4||4.0||6.1||8.0|
|World imports, goods, and services||2.2||2.6||3.1||3.3||4.2||6.4||8.4|
|FDI inflows to developing countries||4.0||10.6||10.9||19.5||23.0||22.8||26.6|
|(In U.S. dollars based on purchasing power parity)|
|Per capita GDP||582||985||1,966||2,722||4,090||6,298||9,643|
Role of the External Environment
The impressive economic performance of the ASEAN countries is the result of their strong domestic fundamentals in combination with their openness to external trade and capital flows. As in other developing countries, the external environment influences the growth process through two sets of economic forces. The more important set is the stimulants to economic efficiency and productivity growth provided by participation in competitive global markets and the global financial system. These generate the forces of economic catchup or convergence toward the levels of productivity in the most advanced industrial countries. In addition, from a short-run perspective, the world business cycle affects countries’ economic performance through a variety of channels, including changes in trade volumes and prices—especially of primary commodity exports—as well as financial flows and conditions.
Traditionally, the transmission of business cycle influences through trade and commodity prices has tended to generate fluctuations in economic activity in developing countries sympathetic (positively correlated) with those in the industrial countries. This was also the case in the ASEAN countries from 1970 to the mid-1980s, a period characterized by two significant business cycle downturns in the industrial countries that resulted from overheating (aggravated by two major hikes in oil prices) and subsequent policy tightenings (especially in 1980–82) necessary to unwind the inflationary pressures. While the cyclical response of the ASEAN countries to the 1974–75 recession in the industrial countries was some-what muted, the effects on their growth performance of the 1980–82 global recession were particularly serious and protracted. Throughout this period, the ASEAN business cycle was closely and con-temporaneously correlated with that of the industrial countries (Figure 1, top panel) even though individual country performances diverged some-what (Figure 1, bottom panel). Macroeconomic imbalances and subsequent adjustment difficulties in the Philippines have accentuated the business cycle for the group as a whole, but the experience of Indonesia, Malaysia, Thailand, and Singapore broadly mirrors the pattern suggested by aggregate indicators.
Figure 1.Cyclical Pattern of Output Growth in ASEAN and Industrial Countries
Source: World Economic Outlook Database.
Since the mid-1980s, there appears to have been a slight phase-shift introducing a lag of about a year in the ASEAN business cycle relative to that of the industrial countries. More important, the growth differential between ASEAN and the industrial countries has widened significantly in favor of the former, giving the impression that ASEAN’s growth performance has “decoupled” from that of the industrial world. The phase-shift and the widening of the growth differential can be attributed partly to the increasing role of capital inflows in recent years and the tendency of such flows to be inversely correlated with the cycle of interest rates in industrial countries. The growing dynamism in intra-Asian economic interactions—especially between ASEAN and China—has probably contributed to the apparent decoupling as well. Strengthened medium-term fundamentals also seem to be at work, especially in the Philippines.
As in the industrial countries, episodes of rising inflationary pressures have contributed to business cycle fluctuations in the ASEAN countries. Such pressures may stem from a combination of external influences (particularly commodity prices), emerging domestic imbalances, and delayed responses from macroeconomic policies. As a result of such forces, the ASEAN group experienced sharp increases in inflation in the mid-1970s and again in the late 1970s, which on both occasions coincided with deteriorating inflation performance in the industrial countries (Figure 2). Since then, inflation has been better controlled except in the Philippines in the mid-1980s and early 1990s. Nevertheless, the region’s recent strong growth performance compared with the industrial countries has also been associated with the emergence of an inflation differential. This suggests that growth may need to slow somewhat to reduce the risk of more serious overheating, which on past experience could be expected to set the scene for a downturn in the business cycle.2
Figure 2.Inflation in ASEAN and Industrial Countries
Source: World Economic Outlook Database.
ASEAN’s long-term growth performance has resulted in a substantial improvement both in absolute living standards and in the group’s income position relative to the industrial countries, defined in terms of per capita GDP valued at purchasing power parities. Measured in this way, ASEAN’s income level relative to the industrial countries increased from 15 percent in 1970 to 28 percent in 1995. It is projected to increase further to 34 percent in 2000, which would be about twice as high as the projected relative income level in China, and roughly half as much as in the Republic of Korea (Table 2).
|Korea, Rep. of||15.9||20.1||23.8||29.5||40.7||52.5||65.2|
In view of the significant degree of catching up by the ASEAN group so far, how rapid can the convergence process be expected to be in the future, how far will it go, and to what extent does it depend on policies pursued by the ASEAN countries? To examine these questions thoroughly would be a major research effort beyond the scope of this paper. However, for a preliminary assessment it is instructive to compare long-term economic trends in ASEAN with the experience of two other countries where productivity levels and income standards have rapidly converged toward those of the United States and Europe.
The experience of Japan and the Republic of Korea can be broadly considered to conform with the conditional convergence model, which views the convergence process not so much from the perspective of the absolute productivity gap relative to the industrial countries, but rather from the perspective of countries’ own long-term steady-state income level.3 This concept cannot be observed directly, but if countries’ long-term growth fundamentals are strong enough, then their long-term steady-state income levels may well match those of the industrial countries. If the long-term growth fundamentals are weak, then their long-term steady-state income level is lower and they will tend to converge only very slowly, if at all. Interestingly, empirical evidence suggests that the speed with which countries tend to close the gap between their initial and long-term steady-state income levels is about 2 percent a year. While this implies that the convergence process is rather slow, it also suggests that when the fundamentals are strong, which arguably was the case in Japan and the Republic of Korea, early evidence of convergence can be interpreted as an indication of considerable long-term potential for further convergence in accordance with the conditional convergence model. Similar reasoning would seem to provide a good basis for speculating about ASEAN’s long-term convergence prospects.
As shown in Figure 3, which is presented in logarithmic scale to help compare the speed of catchup across countries, the ASEAN countries have so far converged at a slightly slower pace than Japan did until the mid-1980s, by which time Japan had substantially closed its gap relative to the average income level in other industrial countries. ASEAN’s average speed of convergence also seems to be slightly slower than that of the Republic of Korea and China. However, as shown in the lower panel of Figure 3, income trends differ somewhat across the ASEAN countries: the Philippines and Indonesia (except in the 1970s) appear to be following somewhat flatter (slower) convergence paths than Malaysia, Thailand, and especially Singapore. Indeed, Singapore has already converged to match living standards in many industrial countries.
Figure 3.Per Capita GDP
Source: World Economic Outlook Database.
As indicated by the different convergence paths, in the early 1970s both the Republic of Korea and the ASEAN countries lagged behind Japan’s economic development by about 25 years. The Republic of Korea has now reduced that gap to approximately a decade, while the ASEAN group, converging at a slightly slower pace, has narrowed the gap relative to Japan to about two decades. On current trends, if it maintains its current pace of convergence, the average income level in the ASEAN countries will reach the 1995 per capita income level in the Republic of Korea by 2003 and the 1995 per capita income level in Japan by 2010.
What then determines whether the pace of convergence observed so far can be sustained in the future or perhaps even improved upon? Modern growth theory suggests that factors such as the level of education of the labor force, the degree of government intervention and other distortions that affect investment decisions, the intensity of financial repression, and the degree of macroeconomic instability reflected in the rate of inflation and the size of budget deficits have significant effects on a country’s long-run potential and on its rate of growth (see, e.g., Barro and Sala-i-Martin, 1995). The theoretical predictions are supported by a growing body of empirical evidence, which shows that economies with higher levels of education, less distorted investment decisions, less government intervention, and greater macroeconomic stability tend to grow at a faster pace. Openness to foreign trade has long been acknowledged as a key factor in economic development, but recent work has also emphasized the benefits associated with foreign direct investment, in terms of both the pace of technological catchup (see Coe, Helpman, and Hoffmaister, 1994) and the speed of trade integration (see Graham, 1995).
Michael Sarel (Chapter 14 in this volume) points out that both the rate of capital accumulation and the growth in productivity have made significant contributions to the impressive record of the ASEAN countries. Crucial to the rapid capital accumulation has been the doubling of the rate of gross national saving since the early 1970s (Figure 4). This experience mirrors saving trends in Japan and the Republic of Korea, confirming that, while a high saving rate may not be a condition for economic takeoff, it is both a consequence of, and a requirement for, rapid convergence. To sustain the growth process, the ASEAN countries must avoid disincentives to saving and maintain the macroeconomic and structural polices that contribute to steady gains in economic efficiency.
Figure 4.Gross National Saving
Source: World Economic Outlook Database.
Although the parallels between the ASEAN countries and other strong performers in Asia are quite striking, there are also important differences. One of the most apparent is ASEAN’s greater external openness, as reflected in average trade-in-GDP shares that already are several times higher than those of Japan and match those of the Republic of Korea despite the difference in economic development (see Chapter 13 in this volume for a discussion of the structure of ASEAN’s foreign trade). Singapore’s important role as an entrepôt has raised the average measure of openness, but ASEAN’s trade share is very high, even when Singapore is excluded (Table 3). The high degree of trade integration may help raise overall productivity growth since large parts of the economy will be exposed to the benefits of external competition. It also underscores the need to reduce vulnerability to external shocks by maintaining overall macroeconomic and financial stability.
|Inflation (consumer price index (CPI))||85.8||13.0||8.5||7.1|
|Real GDP per capita||2.6||4.6||3.6||5.9|
|Exports (in percent of GDP)||22.5||31.7||42.3||60.1|
|Imports (in percent of GDP)||25.6||33.0||43.0||62.7|
|ASEAN, excl. Singapore|
|Real GDP per capita||2.5||4.5||3.5||5.9|
|Exports (in percent of GDP)||17.3||23.4||29.4||42.4|
|Imports (in percent of GDP)||19.7||23.8||30.2||47.2|
|Real GDP per capita||6.0||5.1||7.5||8.6|
|Exports (in percent of GDP)||3.7||4.9||10.7||19.7|
|Imports (in percent of GDP)||2.9||4.5||10.9||18.9|
|Korea, Rep. of|
|Real GDP per capita||5.6||6.2||6.7||6.6|
|Exports (in percent of GDP)||13.2||27.5||35.9||31.1|
|Imports (in percent of GDP)||22.3||32.5||34.1||32.4|
|Real GDP per capita||9.3||3.7||3.3||2.2|
|Exports (in percent of GDP)||9.1||12.2||12.9||10.3|
|Imports (in percent of GDP)||8.7||11.5||11.1||9.1|
Since the 1970s, the ASEAN economies have dramatically increased their share in world trade. Despite the increased integration with the world economy, these countries have become more resilient to business cycles in industrial countries, with the forces of catchup dominating the cyclical effects. In 1996, the slowdown in the ASEAN region’s rates coincided with a moderation in activity in many industrial countries. While this could point toward a reduced resilience, the correlation is more apparent than real. Although the fall in the industrial country demand for electronic goods seems to have contributed, the slowdown in activity in the ASEAN region, which varied widely across countries, was largely the result of domestic economic conditions and appropriate policy responses to growing signs of overheating. This underscores the importance of safe-guarding domestic macroeconomic stability and minimizing the risks of inflation. To reduce the vulnerability to sudden changes in investor sentiment, it is important to contain external imbalances and reduce the reliance on capital inflows. There is also a need to further reform and strengthen the financial sector.
BarroRobert J. and XavierSala-i-Martin1995Economic Growth (New York: McGraw-Hill).
CoeDavid T.ElhananHelpman and Alexander W.Hoffmaister1994“North-South R & D Spillovers,”Working Paper 94/144 (Washington: International Monetary Fund) (forthcoming in Economic Journal).
GrahamEdward M.1995“Foreign Direct Investment in the World Economy,” in Staff Studies for the World Economic Outlook (Washington: International Monetary Fund).
International Monetary Fund1994World Economic Outlook October 1994: A Survey by the Staff (Washington).
Note: Flemming Larsen is Deputy Director in the IMF’s Research Department; Jahangir Aziz is an Economist in the Research Department. The authors would like to thank Charles Adams, Graham Hacche, and Robert Wescott for helpful comments and suggestions and Toh Kuan for research assistance.
Aggregates for ASEAN are averages weighted on the basis of purchasing power parity for Indonesia, Malaysia, the Philippines, Thailand, and Singapore. The medium-term projections are based on certain technical and policy assumptions and, hence, should be considered indicative of broad trends rather than forecasts of the most likely outcome for specific years.
See International Monetary Fund (1996) for a more detailed analysis of the links between inflation and growth in the world economy in the postwar period.
Conditional convergence is discussed in International Monetary Fund (1994). For a more extensive review of modern growth theory, see Barro and Sala-i-Martin (1995).