Jan 26, 2013

Thailand - There is a lot of room to grow for Asean members in 2013

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Asean is set to be the region to be situated in again this year. After estimated growth of 5.2 per cent on a PPP-weighted (purchasing power parity) basis, we project the region to expand by 5.3 per cent in 2013, outpacing the International Monetary Fund's global growth estimate of 3.6 per cent.

The region is expected to see economies such as Indonesia, the Philippines and Malaysia matching or exceeding their 10-year average rates. And more is expected from Myanmar, which made international headlines for the right reasons in 2012.

Confidence is high, not just domestically but also among foreign investors, as the region attracted 7.6 per cent of global foreign direct investment in 2011 versus 4.3 per cent in 2006. Indeed, since 2000, after the crippling financial crisis, Asean gross domestic product has outgrown the world's by an average of 1.5 percentage points. So can the region keep running at this pace?

Nothing runs in a straight line. Business cycles still exist. But there is certainly still a lot of room to grow. Despite the world-beating growth rates registered over the past decade or so, Asean can still achieve more. The region is hardly at the stage where the growth factors have become complicated. At the most basic level, urbanisation will help to drive "easy" growth. This is the economics of agglomeration.

Urbanisation helps to improve the overall well-being of an individual by improving access to services and housing.

This can boost productivity and consumption. Urbanisation helps to increase efficiency as distances are shortened. This lowers the cost of doing business, or the cost of the government to provide infrastructure and necessities.

Jobs and labour supply are concentrated rather than dispersed. The benefits of clustering together, for individuals and firms, are reflected in growth activity being concentrated in cities, even if the city is small relative to the whole country. For example, Jakarta accounts for about 17 per cent of Indonesia's GDP but only constitutes 0.04 per cent of the country's landmass and 4.2 per cent of its population.

According to the World Bank, the world passed the halfway mark for urbanisation in 2007. As of 2012, there were still six countries in Asean that had not passed the 50-per-cent point - Cambodia, Laos, Myanmar, the Philippines, Thailand and Vietnam. Indonesia just crossed the midpoint at 51.4 per cent. Singapore, Malaysia and Brunei are largely urbanised. The region on the whole still has some low hurdles to cross to keep growth sustained.

Urbanisation is typically associated with rising wealth. Measuring this by GDP per capita and using the world's experience with urbanisation as an example, every percentage-point increase in urbanisation raises GDP per capita by about US$500 (Bt15,000).

Granted, every country's experience will be different. How well urbanisation is planned and implemented can affect the benefits accrued in the process. Or the productivity levels of agriculture, for example, can play a part in determining how much GDP per capita can increase relative to urbanisation.

In fact, improper urbanisation can result in diseconomies. Indeed, nowadays, when we think of a city, negative connotations such as congestion and pollution come to mind. But the fault does not lie with urbanisation, but rather the way it is being carried out. Urbanisation facilitates economic growth. And given the relatively low levels of urbanisation across Asean, the law of diminishing returns is not likely to be in play yet in any significant manner.

The low hurdles to growth can also be seen in the GDP per capita of countries in Asean. Compared with the world's GDP per capita of $10,000 in 2011, only two Asean countries, Singapore and Brunei, exceed this level using World Bank data. Malaysia is nearly on par based on 2011 numbers but the next-nearest country, Thailand, is only at about half of the world's GDP per capita. At this level, simple improvements to factors of production should help to support growth.

According to the World Econo-mic Forum Global Competitiveness Report 2012-13, Cambodia and Vietnam are still at the most basic stage of economic development - the factor-driven stage. Myanmar and Laos are not included in this report, but would likely be categorised as such too. Brunei and the Philippines are in the transition to efficiency-driven while Thailand and Indonesia are already in the efficiency-driven stage.

In the earlier stages of development, adoption of existing technology and practices, investment in infrastructure, provision of a basic institutional framework, and health and education facilities should help drive growth. In the region, only Singapore is considered to be in the stage of economic development that is innovation-driven. Malaysia is in the transition stage from efficiency- to innovation-driven.

While this article highlights the growth potential of the region, growth cannot be taken for granted. A proper mix of fundamentals, policies and confidence is needed. At the moment, there is certainly a nice mix of these ingredients. Confidence is high, and is even more so amid the weak global environment.

Fundamentals are good and policies have been supportive of growth. But nothing stays constant and policies will need to stay relevant and forward-looking.

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Saigon Business Corporation Pte Ltd (SBC) is incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Strategy, Investment and Management, focusing Health care and Life Science with expertise in ASEAN 's area. We are currently changing the platform of www.yourvietnamexpert.com, if any request, please, contact directly Dr Christian SIODMAK, business strategist, owner and CEO of SBC at christian.siodmak@gmail.com. Many thanks.

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