January 2016

ASEAN: Some misconceptions about a ‘miracle’

Len Perry, University of Technology, Sydney

INTRODUCTION

The Association of South East Asian Nations, ASEAN, was established in 1967 by founding members: Indonesia, the Philippines, Malaysia, Singapore and Thailand. It was set up as a counter to various internal and external communist movements that had sought to disrupt, destabilise and ultimately topple existing non-communist governments in the region. It was also established to ease and settle quite considerable tensions that then existed between various neighbouring south-east Asian countries. It is easy to forget, for example, that in the 1960s, Indonesia was opposed to the establishment of the Malaysian Federation and, through its policy of ‘konfrontasi’, sought militarily to undermine the fledgling Federation, and that British, Australian and New Zealand troops, among others, were deployed to protect Malaysia’s borders.

In 1984 Brunei joined ASEAN and, with the collapse of the Soviet Union in 1991 and the earlier revolutionary abandonment of Maoist communism in China in the very-late 1970s, the focus of ASEAN increasingly shifted to one of economic integration. During the 1990s Vietnam, then Laos and Myanmar (Burma) and lastly Cambodia joined ASEAN. The fact that Vietnam and Laos are communist one-party states underlines the shift from containing communism to a relatively stronger focus on rapid regional economic development, the achievement of which would in large measure be realised by economic integration.

In 1997, during the first year of the Asian Financial Crisis, ‘The ASEAN 2020 Vision’ was endorsed by ASEAN leaders to mark the 30th anniversary of the establishment of ASEAN. This vision, to come into effect in the year 2020, contained the seeds of a proposal to develop an ‘economic community’. By 2007 ASEAN Economic Community (AEC) blueprints were endorsed to be implemented by 2015, and on 31 December 2015, the Community formally became operative. The AEC is seen as one of three pillars, albeit a major pillar, to general regional integration via the establishment of the ‘ASEAN Community’. The other pillars are the ASEAN Political-Security Community and the ASEAN Socio-Cultural Community. The AEC can be seen as a work in progress and so is currently referred to as AEC2015. The ASEAN Blueprint 2025 gives guidelines and goals for the period 2016 to 2025.

Much enthusiasm has been expressed about the past and the prospects of ASEAN.

Much enthusiasm has been expressed about the past and the prospects of ASEAN in the lead up to the establishment of the AEC. Consider the thoughts of the acclaimed author, academic and former Singaporean diplomat, Kishor Mahbubani who, with co-author Rhoda Severino, notes that the ‘entire Southeast Asian region experienced extraordinary economic growth’ in recent years, second in performance only to China (Mahbubani & Severino 2014). Indeed, in a recent edition of Horizon, Mahbubani (2015) published a paper rather tellingly entitled ‘ASEAN as a living, breathing modern miracle’. In fairness to Mahbubani, the miracle to which he refers is a geopolitical one, but the descriptor ‘miracle’ incorporated into the title of this paper nicely encapsulates the enthusiasm of not only Mahbubani for the ASEAN project, but many other influential commentators as well.

Thus, the world’s largest and most prestigious professional services firm, PwC, has reportedly claimed in its research that ASEAN’s role is ‘central to the success of a host of global and Japanese companies’ and ‘with [ASEAN] growth rates that are threatening to overtake China’s … the allure of the ASEAN market is obvious’ (cited in Fensom 2015). Meanwhile, commentators like Tho (2015) headlined her assessment of ASEAN’s prospects as: ‘Asia’s next global factory’; and Heath (2015) similarly headed his as ‘China set to lose manufacturing crown’, thereby arguing that ASEAN is destined to edge out China to become a new global manufacturing hub. Arguing along similar lines, the research section of Australia’s ANZ bank released a report (see Maguire et al. 2015) that fuelled some of the flames of enthusiasm for ASEAN’s prospects when it was widely and positively reported on its release. The lead author of the report recently commented that, even though Antipodean (Australian and New Zealand) trade with China currently ‘dwarfs’ trade with ASEAN, ‘Already there are signs that ASEAN is assuming much greater importance for the Antipodes in certain industries such as agriculture and overall exports to ASEAN are growing strongly’ (Maguire 2015).

Does ASEAN’s economic performance in the recent past live up to these rather breathless expectations? In the remainder of this article, I consider a range of evidence on growth, living standards, manufacturing output and trade. Overall, it seems there is little to support the claims of a ‘miracle’.

GROWING THE TOTAL ECONOMY

It’s difficult to divine the future. We can be confident that the sun will rise tomorrow, but predicting where an economy will be in five or ten or fifteen years from now is much more difficult. Often a reasonable, though certainly not foolproof, approach to predicting the future is to examine the direction and momentum of change in the past and assess the likelihood of future deviation from some apparent trend.

In this section, I consider economic growth, as measured by the level of the Gross Domestic Product (GDP), which refers to the total market value of all goods and services produced in a nation. As noted above, optimistic commentators believe that ASEAN GDP growth rates ‘are threatening to overtake China’s’ (Fenson 2015). If this is correct, it augurs well for ASEAN, because real GDP growth rates in China averaged over 10 per cent per year between 2000 and 2013 (World Bank 2015). Since the very late 1970s, after Deng Xiaoping came to power, growth in China has produced the largest mass improvement in material living standards in human history. So if ASEAN can match this experience, many more people would benefit as rapidly as most of the population of China has.

Mahbubani (2015) cites the analyses of others when evaluating ASEAN’s growth prospects, noting that the ‘United Overseas Bank recently predicted that the ASEAN economy would surpass that of Japan by 2025. McKinsey has also predicted that ASEAN will be the fourth-largest economy in the world by 2050’. Since the source data are not cited, it not possible to appraise them. However, Mahbubani and Severino (2014) offer a more detailed discussion of the economic performance of ASEAN in an earlier study. They write that over the last five decades:

the entire Southeast Asian region [has] experienced extraordinary economic growth. From 2001 to 2013 alone, ASEAN’s combined GDP rose threefold, reaching $2.4 trillion. If the ASEAN bloc were a country, its growth rate during those years would rank second to China as the highest in Asia.

GDP grew, on average, by 7.5 per cent per year for ASEAN and 12.2 per cent for China between 2000 and 2013.

A threefold increase in GDP implies a compounded annual growth rate of 9.6 per cent. Mahbubani and Severino (2014) express ASEAN GDP in terms of US dollars, and do not state whether these are nominal values (usually referred to as ‘current’ values) or real values (often referred to as ‘constant price’ values or ‘volume’ values). This is important because changes in nominal GDP can be brought about by changes in the prices of goods and services produced as well as changes in the volume (that is, the quantity) of goods and services produced. Changes in real GDP can only be brought about by changes in the volume of goods and services produced. Economists like to focus on real GDP growth, rather than nominal GDP growth, when measuring how well the economy of a country is performing, as it is the volume of production that matters for living standards, not the price. We can be confident then, that at 9.6 per cent per year, Mahbubani and Severino are reporting nominal growth data for the ASEAN economy, but since they do not cite their source of information, we need to look elsewhere to develop matters further.

We can use GDP data published in the Asian Development Bank’s (ADB’s) Key Indicators for Asia and the Pacific 2014 (p. 171) here for comparative purposes (see Table 1). (Data are reported for a slightly different period (2000–2013) than that reported by Mahbubani and Severino (2001–2013), but this minor difference has no significant consequences for the results to be presented.)

The GDP measure presented here is ‘purchasing power parity’ (PPP), also known as ‘current International Dollars’. PPP is a way of standardising the value of GDP for different countries so that more accurate international comparisons can be made. Basically the GDP of different countries is converted into common units of purchasing power, to avoid inaccuracies that arise because the exchange rates of national currencies are volatile (see Vogel 2011).

Table 1 shows that GDP grew, on average, by 7.5 per cent per year for ASEAN and 12.2 per cent for China. ASEAN’s growth is 62 per cent that of China’s growth, as indicated in the far right-hand column of the table. Note that this measure of ASEAN’s GDP growth, at 7.5 per cent, is somewhat lower than the 9.6 per cent implied by Mahbubani and Severino (2014).

Table 1 also records the average annual growth rates for individual ASEAN member countries. It shows that those countries that have more recently joined ASEAN (Cambodia, Laos, Myanmar and Vietnam) have had the highest growth rates, that is, growth rates higher than the overall ASEAN rate.

Since the GDP values in Table 1 are ‘current’ or ‘nominal’ values, some of the growth is attributable to price changes, that is, inflation (in this case, ‘international dollar’ inflation). The impact of inflation will be addressed further below. But for the time being it is important to note that the (international dollar) inflation embedded in these purchasing-power-parity data are identical for each country, so making ranking comparisons such as in Table 1 is not compromised by using these current-price PPP data.

The view of Mahbubani and Severino that ASEAN growth ranked ‘second to China as the highest in Asia’ is not supported by the ADB data. Table 2 compares the growth rate for ASEAN with the growth rates for countries the ADB refers to as (a) Central West Asian, (b) East Asian and (c) South Asian, for the same period as in Table 1. The countries are ranked according to their growth rates and, therefore also, according to their growth rates relative to China’s growth rate.

We see in Table 2 that twelve Asian countries rank ahead of ASEAN and eight countries rank below. Of those that rank below ASEAN, three (Hong Kong, Taiwan and South Korea) are developed or advanced economies. Indeed, Hong Kong has already achieved a higher average material living-standard metric than America (as reflected in its GDP level per capita). These advanced economies can be considered—in many significant respects—to be operating at, or close to, the frontiers of technology. It is generally not possible for these economies to grow at the same pace as developing economies. This is because developing economies can access pre-existing technologies, often ‘at a discount’, without going through the not-inconsiderable expense of developing the technologies in the first place. Thus if we exclude the advanced economies from our list, that means that ASEAN sits among the lowest third of the selection of non-advanced Asian economies identified in Table 2.

This ADB-based ranking assigned to ASEAN sits well below the high ranking assigned in Mahbubani and Severino (2014). Rather than indicating that ASEAN ‘experienced extraordinary economic growth’, the ADB data tell us that ASEAN’s relative performance, for the period under review, has been rather lacklustre.

ENHANCING MATERIAL LIVING STANDARDS

GDP growth is important to the improvement in material living standards, but it is not the only determinant. We need to look at GDP per capita (per person) to better measure how well the average citizen is doing. This measure also has limitations, but it is a good starting point.

Material living standards in ASEAN have, on average, been improving much slower than in China.

Wealthy economies have relatively high levels of GDP per capita, poor countries do not. For example, for every $100 an average American citizen gets to spend, an average citizen in Cambodia gets to spend about $6 (World Bank 2015). Poor countries can become rich by growing their GDP per capita more rapidly than wealthy countries. This is what ASEAN members are trying to do, especially the poorer ones.

Mahbubani and Severino (2014) write that:

Growth and expanding trade have brought tangible benefits for Southeast Asia’s people. In 2012, ASEAN’s GDP per capita reached $3,748, more than double the 2000 figure of $1,172. Over the last ten years, poverty levels across the region have plummeted.

In this instance they do cite their data source, as ASEAN Community in Figures: ACIF 2013, which is produced and published by the ASEAN Secretariat Jakarta (2014). The numbers cited above imply an average annual growth rate of GDP per capita for ASEAN of 10.2 per cent. This figure, however, is generated using data (again) expressed in terms of (nominal) US dollars, and for this reason, it is highly misleading. To get meaningful results we need to calculate the rate of change in real GDP per capita. Neither the ASEAN Secretariat Jakarta (2014) nor the Asian Development Bank’s (ADB’s) Key Indicators for Asia and the Pacific 2014 provide these data directly. Little wonder commentators get confused by these matters.

To rectify this, Table 3 below estimates real per capita GDP growth for ASEAN and its ten member countries, by adjusting the GDP growth data in Table 1 for population growth and (international dollar) price level growth. When these adjustments are made, we see that China’s per capita real growth measures 9.3 per cent per year and ASEAN’s growth is 4 per cent—far lower than the previously mentioned, and misleading, 10.2 per cent per year. These corrected values, in turn, imply that ASEAN’s per capita real growth rate is a mere 43 per cent the value of China’s.

The significance of these results is that material living standards in ASEAN have, on average, been improving much slower than in China. The numbers also suggest that the policy settings in the ASEAN neighbourhood have not been as effective as might otherwise be the case. Policies of economic integration—among others—have been gradually introduced to the region over the years, but the growth numbers discussed here suggest that the results to date are quite tepid. This applies especially to some of the economies of the founding members of ASEAN, notably the Philippines and Malaysia. While Singapore’s growth appears also to be relatively low, it has already achieved high material living standards—as reflected in its relatively high level of international dollar per capita GDP. As was the case with Hong Kong discussed above, it is not possible for highly developed economies to grow at the same pace rapid pace as developing economies.

GROWING MANUFACTURING, GROWING TRADE AND GROWING RICH

East Asian economies in particular have managed to develop rapidly by embracing, by and large, free markets and by globalising; that is, engaging in international trade and specialisation. This gives them access to the world’s best technologies and generally the best ways of doing business. It has typically meant specialising, at least initially, in the production of manufactures and gradually increasing the sophistication of manufacturing processes as labour skills develop, education levels improve and economies of scale are realised. In this regard, it can be instructive to compare the growth of manufacturing output in ASEAN with China. Also, it may be instructive to compare exports of Australian and New Zealand produce to ASEAN versus China, as a rough measure of developments in ASEAN and Chinese demand for the sorts of raw materials (mineral, energy and agricultural) that Australia and New Zealand primarily trade in. These raw materials are often in strong demand in rapidly developing economies.

As mentioned in the introduction, there is a view promoted by some commentators that ASEAN is on a path to eclipsing China as a global exporter, particularly in manufactures. The growth in ASEAN springing from its envisaged exports’ growth will in turn stimulate Antipodean exports to ASEAN, just as China’s expansion in recent decades has stimulated record levels of Antipodean exports to China. However, there is currently little evidence to support this vision.

Australian exports to ASEAN have been trending down since the mid-1990s.

First, ASEAN’s capacity to eclipse China as an exporter of manufactures may be held back, not only due to its own recent history of relatively modest real GDP growth as discussed in the previous sections, but also due to the relatively low overall growth in its collective manufacturing sector. Thus, whereas China experienced an estimated 9.9 per cent annual growth in real manufacturing output between 2000 and 2013, ASEAN’s collective growth was a little over half that, at 5.6 per cent per year (Asian Development Bank 2014b; World Bank 2015). That said, ASEAN’s newer members have grown their manufacturing output, more or less, as strongly as China; and in one case, Myanmar, seemingly much more rapidly than China during the first decade of the new millennium. These newer members of ASEAN—Cambodia, Laos, Myanmar and Vietnam, referred to here as the ASEAN-4—have collectively grown their real manufacturing output by an average of 12.9 per cent annually between 2000 and 2013, clearly exceeding China’s rate of 9.9 per cent per year.

The ASEAN-4 may help to drive a stronger average growth performance for ASEAN as a whole if those ASEAN-4 countries can maintain their high rate of development and become quantitatively more significant contributors to the overall growth of ASEAN. However, the manufacturing sectors in these economies are yet to achieve as large a relative size in their respective economies as that achieved in China. Figure 1 illustrates that none of the ASEAN-4 is even approaching the share of manufacturing in China, and these economies still have some way to go before their power as manufacturing ‘centres’ might be realised.

Figure 1. Manufacturing GDP as a percentage of total GDP, China and ASEAN-4 countries
Sources: World Bank (2015), Asian Development Bank (2014b) and Department of Foreign Affairs and Trade (2015). Note the author has interpolated for in-sample missing observations. The principal source of data here is World Bank (2015). However it does not supply data for Myanmar after 2004. Estimates gleaned from Asian Development Bank (2014b) and Department of Foreign Affairs and Trade (2015) have been applied to extend the data to 2013. Caution needs to be exercised using data estimates for ASEAN-4 countries as their data collecting resources are relatively limited.

The manufacturing sectors of the older ASEAN-member economies—Brunei, Indonesia, Malaysia, The Philippines, Singapore and Thailand; referred to here as the ASEAN—have not achieved strong real growth (at 4.5 per cent per year) between 2000 and 2013, compared to China’s 9.9 per cent. Accompanying these relatively tepid growth rates, has been an overall decline in the proportion of ASEAN-6 total GDP accounted for by the manufacturing sector, as shown in Figure 2. Note that, in the case of Thailand, while Figure 2 indicates that the relative size of the manufacturing GDP exceeds that of China, Thailand’s manufacturing sector’s real growth (of 4.4 per cent per year during 2000–2013) was considerably less than China’s.

Figure 2. Manufacturing GDP as a percentage of total GDP, China and the ASEAN-6
Source: World Bank (2015).

Second, with regard to Antipodean exports being stimulated by ASEAN growth, while we cannot be sure how Antipodean exports to ASEAN will develop in the future, there is little compelling recent evidence confirming that a sustained increase is in train. Figure 3 indicates that, as a fraction of total Australian exports, Australian exports to ASEAN have been trending down since the mid-1990s. And, although there has been a recent kick up in exports to ASEAN during 2014/15, accounting for 11 per cent of total exports, that value is still considerably less than its peak at around 16 per cent in 1994–95. Note that the 2014–15 decline in the proportion of Australian exports to China, shown in Figure 3, has been strongly affected by the sharp drop in commodity (and thus Australian export) prices during this period.

Figure 3. Share of total Australian merchandise exports to ASEAN and China, per cent
Source: Australian Bureau of Statistics (2015, Table 14a).

Turning next to Australia’s Antipodean partner New Zealand, Figure 4 indicates that, as a fraction of the total, New Zealand exports to ASEAN have been virtually trendless since peaking in 2007–08 at 11 per cent. All in all, these data do not suggest a surge in exports to ASEAN is about to develop.

Figure 4. Share of total New Zealand merchandise exports to ASEAN and China, per cent
Source: Statistics New Zealand (2015)

CONCLUSION

There are some enthusiastic but misconceived perceptions about the economic performance of ASEAN. ASEAN’s real GDP growth and real per capita GDP growth have been much less than China’s. Manufacturing sector growth in ASEAN has also been much less than in China. There is little if any evidence that ASEAN is about to take over from China, or indeed is on track to take over. This is not to say that selected ASEAN economies or ASEAN as whole may not set the world alight in the more distant future. For the time being, however, that seems unlikely.

Also, there is little if any evidence that Antipodean economies are about to experience an ASEAN-driven surge in exports similar to the recent boom in Antipodean exports to China. Nevertheless, the ASEAN countries will doubtless continue to provide sizable and important markets for Antipodean exports. It should not be a surprise if, for example, Australia’s declining trend in the proportion of exports going to ASEAN eventually reverses. After all, current Australian exports to ASEAN are comparable to the proportion of total exports that prevailed a quarter of a century ago.

REFERENCES

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Vogel, F.C. 2011, ‘What is a purchasing power parity?’, World Bank [Online], Available: http://siteresources.worldbank.org/ICPINT/Resources/270056-1255977254560/6483625-1338834270350/FVogel_WhatisPurchasingPowerParity.pdf [2016, Jan 20].

World Bank 2015, World Tables, Econdata, Melbourne. Note: Econdata is commercial operation that compiles statistics from local and global statistical agencies and puts those data into a standardised, computer-friendly format. Their services are proprietary. World Bank data can be accessed from the periodical World Tables (various issues) accessible from the World Bank website [Online], Available: http://data.worldbank.org/ [2016, Jan 21].

Len Perry is an academic economist. He was an associate professor with the (then) School of Finance and Economics at University of Technology Sydney before formally retiring. He continues to teach, research and comment on contemporary issues.

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