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Southeast Asia after the shocks: Economic growth, but not as we know it

New Lowy Institute research shows the pandemic and Ukraine war have taken a toll, while the benefits from supply chains shifting out of China have so far been limited.

Leisure time with electric motorbikes at Pronosutan paddy field in Kulon Progo regency, Yogyakarta, Indonesia, 26 May (Agung Supriyanto/Xinhua via Getty Images)
Leisure time with electric motorbikes at Pronosutan paddy field in Kulon Progo regency, Yogyakarta, Indonesia, 26 May (Agung Supriyanto/Xinhua via Getty Images)

Southeast Asia’s emerging economies are some of the most successful in the world. Economic recovery from the Covid-19 pandemic and the consequences of Russia’s invasion of Ukraine is well underway, and the region has returned to relatively strong growth.

Nonetheless, it is also clear that the impacts from these shocks have been substantial. While the region has quickly rebounded, economic and developmental progress has been substantially set back and is now expected to proceed more slowly than before. Moreover, ongoing developments in the world economy are rapidly reshaping the region’s outlook for growth and development.

In a new Lowy Institute data snapshot, we assess what the tumultuous events of recent years means for the high-performing emerging economies of Southeast Asia – Cambodia, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

First, the positives. Income per capita is now above pre-Covid levels in all countries, except Thailand. Over the rest of this decade, growth in regional GDP is expected to be around 5% a year – putting it ahead of China at about 4%. India is still expected to do better, with average growth of 6.5%. But keep in mind that per capita incomes across most of these Southeast Asian nations are higher than in India. So, the overall trajectory and gains in living standards in the region are arguably more impressive.

In terms of recent shocks, the region has done reasonably well. Estimates of excess deaths per capita suggest that the region’s performance in containing the overall health impacts of the pandemic was mixed. Some (Malaysia, Thailand, and the Philippines) did better than others (Cambodia, Indonesia, Vietnam). In terms of getting populations vaccinated however, which was key to economic recovery, the region outperformed other middle-income countries. These Southeast Asian nations also did well on the macroeconomic front – rolling out large fiscal packages during the pandemic and weathering the financial pressures from rising global interest rates in more recent years without much incident.

Given tight government budgets, targeted measures to reverse social scars will be needed, lest human development and future workforce productivity be permanently damaged.

Despite these positives, Southeast Asia’s emerging economies suffered significant costs, in some ways worse than other peer economies. Compared to pre-Covid forecasts, the GDP for the region is expected to be almost 13% smaller. The economies of Cambodia and the Philippines about 20% smaller. Only India saw comparable losses, with GDP about 15% smaller. Future growth is also expected to be materially slower compared to before the pandemic, especially in Cambodia, Vietnam, and Malaysia. Only Indonesia is expected to see growth return to roughly its pre-Covid rate. Hence, while Southeast Asia is still rising, that rise has been substantially setback and is now proceeding more slowly.

Progress with broader development goals has also suffered. Poverty rates have continued to decline across the region, thanks to responsive social assistance transfers during the pandemic. However future poverty reduction is expected to be slower than before, reflecting weaker economic growth, reduced job creation, and less budgetary space for social assistance programs. Long school closures during the pandemic coupled with limited digital access mean the region also suffered large learning losses.

Given tight government budgets, targeted measures to reverse these social scars will be needed, lest human development and future workforce productivity be permanently damaged. Lifting low tax revenues in the region is also crucial to allowing much-needed spending in the medium term on key development priorities.

The international environment meanwhile presents a mixed picture. Tepid global recovery and a weaker Chinese economy present difficulties, as does the renewal of acute trade tensions between the United States and China. But Southeast Asia has also been among the primary beneficiaries of the diversification of global supply chains away from China. If protectionism in the United States and elsewhere continues to focus on China, this could present further opportunities.

Optimism on this front should however be tempered. Our analysis finds that these diversification benefits to date have been limited, as China continues to dominate global manufacturing, including as a key source of parts and components within otherwise shifting supply chains. Also notable is that while foreign investors appear to increasingly favour the region over China (and India), total investment flows have nonetheless recently been in decline.

Southeast Asia’s emerging economies have an important opportunity to generate faster growth by attracting and capturing more of the value within shifting global supply chains. To do better, policymakers should focus on not only traditional competitiveness reforms – improving infrastructure, skills, and the business-enabling environment – but also next generation ones to meet the rising demand from multinational firms and trading partners for higher environmental, social and governance standards, especially those related to the clean energy transition.

IPDC Indo-Pacific Development Centre

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