Asian economies are highly open to trade and investment, so it matters a lot when the global environment becomes more volatile and uncertain.
In the coming year, a new administration in the US could be pursuing tariff policies that severely disrupt world trade. Conflicts in Europe and the Middle East are already causing dislocations in supply chains and pushing up energy and raw material costs, and it could get worse. Central bank policy decisions in the US and elsewhere can cause wild swings in local currency values and financial asset prices. Finally, although China’s economy is stabilising, it has lost momentum, so weakening a major source of demand for Asian exporters.
Encouragingly, policymakers realise that the region cannot just sit still in a period of such potential convulsions. Countries in the region are crafting new strategies to mitigate the downside risks, some of which look quite promising.
Singapore leads the way
A good example of such responses is Singapore. This city-state is almost entirely reliant on external demand, foreign investment and inflows of foreign workers and foreign tourists. Yet its economic record shows impressive resilience in the face of the many stresses and strains that have rocked the global environment in recent years. This is because it works hard to anticipate unfavourable trends and then proactively finds ways to secure itself a sound position when troubles come. It is doing the same again now.
The winners will be those countries bold enough to pursue innovative strategies
One approach is to maintain the pace of economic integration wherever possible. That is why Singapore went to great lengths to help ensure the success of major trade agreements such as the Comprehensive and Progressive Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. Other forward-looking countries such as Vietnam and Malaysia have also been keen supporters of such trade agreements.
Despite its small size, Singapore has also taken the lead in popularising the idea of digital economic partnership agreements to facilitate e-commerce across borders – another means of keeping some momentum in globalisation.
The Johor-Singapore special economic zone is likely to bring considerable synergies
Now it is going a step further, in cooperation with its neighbour Malaysia. The two countries have the most open economies in South-East Asia and are negotiating a special economic zone that will straddle their borders, integrating Malaysia’s southern state of Johor more closely with Singapore. There are likely to be considerable synergies. Singapore is short of land, labour and carbon, while its neighbour has abundant resources but needs Singapore’s capital, vibrant ecosystem and connectivity to the rest of the world. If the special economic zone produces good results, it is possible that other parts of Indonesia may also want to join.
Other forms of regional integration are also emerging. Thailand has been promoting cross-border cooperation with its immediate neighbours, which has been successful in energising trade in goods and services as well as flows of capital and labour across the Mekong region, which embraces Myanmar, Thailand, Cambodia, Laos and Vietnam.
These efforts will help create new growth drivers even as the broader global environment might turn more hostile.
Industrial policies
Realising that the old export-led growth model that has served East Asia so well may not work in the new era of protectionism, Indonesia has pulled off a considerable success with its strategy of ‘downstreaming’. This involves nudging investors into adding value to commodities rather than just digging minerals out of the ground and exporting them elsewhere. By banning the export of unprocessed nickel, the Indonesian government has succeeded in bringing in massive foreign investments in nickel processing, batteries and electric vehicles.
Business concentration, supported by infrastructure and incentives, creates economies of scale
A final approach goes further: actively developing superclusters of economic activity. The idea is that by concentrating diverse activities within a given region that policymakers support with extensive infrastructure building and policy incentives, economies of scale and scope are created that enable that region to be much more competitive. Thailand’s Eastern Economic Corridor is one example of such ‘agglomeration’ projects, as is China’s ambitious Greater Bay Area.
The next few years may prove rough going for emerging economies in Asia given the proliferating threats to growth and stability. The relative winners in this era of turbulence will be those countries that are bold enough to pursue innovative strategies and administratively adept enough to implement and refine such new approaches. Singapore, Malaysia and Vietnam rank highly for these capacities.
