Friday, February 5, 2010

ASEAN's Declining Weight in the World Economy

[NOTE: An abridged version of this post appears in the Straits Times today.]

ASEAN has been considered one of the most successful regional groupings in the world since its inception in 1967 to the mid 1990s. Over the period 1980-97, ASEAN achieved higher economic growth than most other regions in the world. However, economic realities dramatically changed in the decade since the onset of the Asian Financial Crisis in 1997 and the emergence of China and India as economic powerhouse in Asia from the mid-1990s. After experiencing a sharp decline in economic performance over 1997-98 as a result of the Asian Financial Crisis, ASEAN as a group did rebound in the ensuing period, but contrary to popular impression, the region had never quite recovered its former competitiveness in the world economy. Not only had ASEAN’s share of world GDP, trade and inward direct foreign investment (DFI) declined between 1997 and 2007, ASEAN’s productivity growth (as measured by the growth of GDP per capita adjusted for inflation and purchasing power parity (PPP)) in the 1997-2007 period had declined both absolutely (when compared to the earlier period of 1980-97) and relatively (when compared to the world average).
Table 1 highlights the declining weight of the group of ten ASEAN countries (ASEAN10) in the global economy in the decade since the Asian financial crisis in 1997. While ASEAN10’s share of the world population increased over 1980-2007, its shares in the world’s GDP, trade and inward DFI all reached their peaks in 1997, and despite some recovery, were still lower in 2007 than in 1997. The most dramatic fall is in ASEAN10’s share of world total inward DFI flows – so much so that ASEAN10’s share of total world inward DFI flows had dropped below its share of world GDP and trade from 1998 onwards, a reversal of the situation before 1997.
It is true that the decline of ASEAN’s weight in the world economy coincided with the rapid rise of China and India. However, even if we net out China and India, ASEAN’s shares of the rest of the world in terms of trade and inward DFI had still not recovered to their peaks in 1997, and only marginally improved in terms of GDP share.
An even more disturbing picture emerges when we examine ASEAN’s competitiveness through the lens of productivity growth (see Table 2). After adjusting for purchasing power parity (PPP) and inflation, the six largest ASEAN countries’ per capita GDP growth in the period 1997-2007 averaged only 2.3% p.a., significantly below the 5.3% p.a. it achieved in the period 1990-97. Even if we discount the sharp drop over 1997-98, ASEAN’s growth in the 1998-2007 period (3.6% p.a.) is still substantially below the average growth it achieved a decade earlier.
More tellingly, the ASEAN6’ average GDP per capita growth performance over 1997-2007 was not only significantly less than that of China (8.7%) and India (5.5%), but had fallen behind the average of the world (2.5%), the group of low income countries (2.9%), lower-middle income countries (5.7%) as well as upper-income countries (3.1%). The only group of countries that grew more slowly than ASEAN6 is the group of high-income countries (2.0%). By 2007, China’s GDP per capita, after PPP adjustment, had already overtaken ASEAN6’s, even though it was only 42% of the latter in 1990.
The global media had rightly highlighted the last decade of the 20th century as the “lost decade” for the largest economy in Asia – Japan. Although less obvious, future economic historians may well refer to the decade after the 1997 Asian Financial Crisis as the lost decade for ASEAN. Yes, ASEAN did recover from the Asian financial crisis and achieved moderate economic growth during that decade. And yes, the rapid rise of the two Asian mega-economies -- China and India -- did contribute to the relative decline of ASEAN in the expanding global economic pie. But the fact remains that ASEAN’s productivity had not kept pace with the rest of the world in the decade of 1997-2007. ASEAN is unlikely to have done better in the recent financial crisis years of 2008-09.
Virtually all economists would agree that the slow pace of economic integration and liberalization among the ASEAN member states has been an important contributing factor in preventing ASEAN from realizing its full economic growth potential. Throughout the last decade, intra-ASEAN trade had been at or below one-quarter of total ASEAN trade, much less than in the case of the European Union (about two-thirds among EU25 and over 40% in NAFTA). As global competition continues to intensify, we can only hope that ASEAN policy makers will make up for lost time by speeding up the economic integration process in the next decade.

Table 1 - ASEAN’s weight in the World Economy
ASEAN10’s Share in: 1980 1990 1997 2000 2007
World Population 8.1% 8.29% 8.43% 8.45% 8.46%
World GDP 2.2% 2.9% 3.9% 3.6% 3.8%
World Trade 3.3% 4.4% 6.5% 6.2% 5.8%
World Inward FDI flows 4.9% 6.2% 7.1% 1.7% 3.3%
World Inward FDI stock 2.6% 3.3% 5.5% 4.6% 3.6%

Table 2 Per Capita Income Growth of ASEAN
Compound Annual Growth Rate of Real GDP per capita (PPP)
1980-1990 1990-1997 1997-2007
ASEAN6 - 5.3 2.3
Low income 0.2 0.6 2.9
Lower middle income 3.2 4.2 5.7
Upper middle income 0.1 -0.6 3.1
High income 2.3 1.7 2.0
World 1.4 1.2 2.5
China 7.7 10.2 8.7
India 3.3 3.4 5.5

Sources for both tables: Wong, P.K. and K.K. Ng (2008), “The Competitiveness of ASEAN after the 1997 Asian Financial Crisis”, LKYSPP-ACI Monograph, December 2008

4 comments:

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