Asean could play a vital role in rebalancing the Asian economy in order to help reduce the region’s reliance on the economic influence of China and India, according to the Asian Development Bank (ADB).
The international organisation in October sharply revised down its 2013 economic growth projection for Asia to 6%, a drop of 0.6 percentage points from its previous projection. The forecast for 2014 was cut by 0.5 points to 6.2%. The main reason was the slowing economic growth in Asia’s two largest economies: China and India.
In China, years of double-digit, export-led growth have given way to a focus on more domestic consumption and sustainability. Under this approach, authorities in Beijing have made it known that annual expansion of around 7% to 7.5% will be acceptable, even desirable. In India, where growth rates have plunged from above 9% to below 5%, the reasons are more complex, and poor economic management by the government is part of the explanation.
Regardless of how the two giants perform in the near term, Asean as a group needs to prepare for a new balance in the region, says Stephen Groff, the ADB’s vice-president for East Asia, Southeast Asia and the Pacific.
China, he said, was in a transition from an export-fuelled economy to a domestic demand-driven one in order to reduce the exposure to the risks of the global market. As the middle-class population grows in the world’s second-largest economy, there’s a golden opportunity for Asean and other Asian countries to export products to serve the surge in consumption demand.
Mr Groff said Asean was making good progress on regional integration through the Asean Economic Community (AEC). The removal of tariffs within the 10 countries is expected to spur more intra-regional trading volume.
According to the ADB’s Asian Development Outlook 2013 released in October, slowing expansion in China and India will pull down the region’s growth slightly. In an update released on Dec 11, it made some small upward revisions, saying Chinese GDP would grow by 7.7% this year, the same as in 2012, while India would grow by 4.8%, down from 5% last year.
However, the Manila-based bank lowered its growth forecast for Southeast Asia amid the political turmoil in Thailand and the devastation from Typhoon Haiyan in the Philippines. It expects the Asean economy to expand by 4.8% this year and 5.2% in 2014.
Mr Groff said that despite some recent hiccups in Indonesia, Asean’s largest economy, the ADB was optimistic that the country would not see a financial crisis.
“Indonesia obviously is an important country in Asean, but it has been facing some challenges recently,” he said.
Many emerging economies have seen big inflows of foreign funds this year because of the US Federal Reserve stimulus programme. Once the Fed begins to scale back that spending, Indonesia could be affected more than most. “Now the country has high foreign borrowing and is facing a current account deficit. But if we think of the role of the group of countries instead of a single market, Asean remains in a strong position to rebalance the economic growth in Asia,” said Mr Groff.
The ADB also holds a positive view of the Philippines’ economy thanks to strong macroeconomic management and good economic team. Foreign borrowing is low, as are interest rates, and the currency is stable. However, the economy is smaller than those of Thailand and Indonesia despite a population of nearly 100 million.
The Greater Mekong sub-region (GMS) countries can have a bigger role in Asean as well, the ADB believes. But the governments of countries such as Vietnam, Laos and Cambodia should encourage their business sectors to complement rather than compete with each other as they shift from agriculture-based to manufacturing-based economies.
Although the ADB is confident that the Chinese government has effective tools to manage its transformation, it is hard to predict whether the Chinese economy will bounce back to grow at the previous high level. But a high growth rate may not be an important factor anymore.
China has already achieved a high level of economic development and urbanisation in a short time. With an urban population of 50%, up from 20% two decades ago, the country now has a larger base of consumers on which to build.
Changyong Rhee, chief economist at the ADB, said that any slowdown in China would have some impact on Asean’s growth, but it would be marginal. ADB data show that a reduction of one percentage point in China’s growth pulled down the weighted average growth rate of Southeast Asia by 0.17 percentage point.
He said urbanisation was set to continue in China, the agriculture sector would shrink further and labour would continue to migrate to manufacturing and the services sector. Thus, the ADB is positive that China can maintain a 7% growth rate over the next decade. The biggest opportunity for an expanded economic contribution comes from the less-developed western part of the country, as it transforms from an economy built on agriculture to one with more manufacturing and services.