Achieving medium-term economic goals may be a daunting challenge for ASEAN countries
by Wang Qin
As the COVID-19 pandemic spread at alarming speed, the economic activities in ASEAN member states were disrupted when governments implemented tough containment measures. Since the situation was gradually brought under control in May, these countries have launched work on rebooting the economy and digging a way out of the epidemic.
Considering the grim picture, most governments of ASEAN countries revised their economic projections for 2020. Indonesia trimmed its gross domestic product (GDP) annual growth forecast from an estimated 5.3 percent to 0.4 to 2.3 percent, a speed not seen since 1999. Laos revised its 2020 growth rate from 6.5 percent to 3.3 to 3.6 percent. With projected growth falling to -2 to -0.5 percent from 4.8 percent, Malaysia predicted a contraction for the first time in a decade. The Philippines lowered its GDP growth forecast from 6.5 to 7.5 percent to -0.8 to zero percent, its first contraction in more than 20 years. After repeatedly adjusting growth projections from 2.5 percent to -1 percent and then to -7 percent, Singapore warned residents to brace for the country’s worst economic downturn since its founding. According to the Bank of Thailand, the country’s economy will shrink by 5 to 6 percent this year, down from the previously estimated 2.8 percent growth. Vietnam still believes a 5 percent growth rate is achievable but not its original target of 6.8 percent.
According to recent official statistics, in the first quarter of 2020, Vietnam registered a growth rate of 3.82 percent, Indonesia 2.97 percent, Malaysia 0.7 percent, the Philippines -0.2 percent, Thailand -1.8 percent, and Singapore -2.2 percent.
The COVID-19 outbreak left a severe immediate impact on ASEAN economies, and has far-reaching implications for these countries in the medium term. The world is nowhere near the end of the public health crisis, so the severity of the economic contraction remains uncertain. But it will certainly be more challenging for governments of ASEAN nations to achieve their medium and long-term economic development goals. In the medium term, the process of economic transformation and industrial upgrading in these countries will slow, and the flow of goods, capital and labor in the region will be impeded by the pandemic, restricting participation in value chains at both global and regional levels.
ASEAN member states faces a daunting challenge in achieving their medium-term economic development objectives. After the thriving early decades of the 21st Century, governments in the region designed medium and long-term development plans accordingly. Indonesia aimed to become one of the world’s top ten economies by 2030, with annual GDP growth averaging 6 to 7 percent between 2018 and 2030. After rising from a low-income nation to rank with lower middle-income countries by 2016, Cambodia aspired to become an upper middle-income country by 2030. As early as 2010, Malaysia eyed joining high-income countries by 2020 by reaching per capita gross national income (GNI) of US$15,000. The Philippines set ambitious goals including an average annual GDP growth rate of 7 to 8 percent from 2018 to 2022, becoming an upper middle-income country by 2020, and a per capita GNI of US$5,000 by 2022. Thailand was attempting to increase its per capita GDP to US$10,100 by 2030 from US$8,800 in 2019. Vietnam outlined a three-step plan to become an upper middle-income country with per capita GDP of US$4,500 by 2025 and US$10,000 by 2035 before joining the high-income club by 2045. The raging pandemic, however, disrupted normal economic activities in the ASEAN region and hindered the process of economic restructuring, creating monumental challenges for countries in the region to realize their respective national development goals on schedule.
Over the past two decades, Indonesia has experienced rapid growth that peaked at over 6 percent between 2010 and 2012. With momentum slowing in recent years, the COVID-19 epidemic has made it even more difficult for the largest economy in ASEAN to achieve its economic targets for the next decade. The current per capita GNI of Malaysia exceeds US$10,000, but it still has a way to go to meet the criteria of high-income countries. According to World Bank estimates, the pandemic will slow Malaysia’s climb to a high-income country, which was previously predicted to last until 2024. The Philippines enjoyed an economic jolt in 2012 and has since maintained a growth rate above 6 percent for seven consecutive years. Now due to COVID-19 outbreak, the country will see its first negative economic growth in more than 20 years and major thorns along its road to becoming an upper middle-income country. The Thai public believes that it will take at least three years for the national economy to fully recover from the setback. The Thai government has been pressured to make appropriate adjustments to its national development strategy. Suffering the least among ASEAN member states, Vietnam will still lose much of its previous strong growth momentum, and the country’s prospects to become an upper middle-income country by 2025 no longer look as promising.
Economic transformation and industrial upgrading in ASEAN nations will slow. To maximize opportunities from the Fourth Industrial Revolution (Industry 4.0) and promote the transformation of traditional industries and development of emerging industries, countries in the region have successively introduced strategies and policies related to “Industry 4.0” in recent years. Released at the 35th ASEAN Summit in November 2019, the ASEAN Declaration on Industrial Transformation to Industry 4.0 reaffirmed its member states’ commitments to advance Industry 4.0 through an ASEAN consolidated strategy. After the COVID-19 outbreak, however, many projects supported by Industry 4.0 strategies stalled and fixed-assets investment in most members of the organization slipped substantially or grew only slightly. In the first quarter of 2020, investment of Indonesia and Vietnam in fixed assets increased by 1.47 and 2.2 percent, respectively. Investment in the Eastern Economic Corridor, Thailand’s flagship Industry 4.0 project, fell by nearly 50 percent. A key infrastructure project for Indonesia, the Jakarta-Bandung high-speed railway continued construction amid the epidemic but struggled to make progress due to a shortage of technical staff and raw materials. Construction of Malaysia’s East Coast Rail Link (ECRL) project resumed in July 2019 but quickly came to a standstill because of movement control measures. Currently only part of the project is seeing any action.
Free flow of goods, capital, and labor in the ASEAN region will slow. Creating a single market characterized by free flow of goods, capital, and labor was a primary goal on ASEAN’s regional economic integration agenda. To this end, governments of ASEAN countries have implemented a package of measures such as trade facilitation, reducing tariff and non-tariff barriers, establishing a free and open investment regime, and enhancing the mobility of professionals and skilled workers within the region. As of May 2019, 98.6 percent of ASEAN goods enjoyed zero tariff treatment. Because of the COVID-19 pandemic, ASEAN factor markets have slumped, and intraregional trade and investment has dropped sharply. Although ASEAN’s measures to facilitate mobility eye skilled labor, movement of migrant workers in the region has grown strongly. According to the World Bank report Migrating to Opportunity, ASEAN now has over 7 million migrants from within the region, and intraregional migration is highly concentrated in three major groups of corridors: the Thailand corridor for migration from Cambodia, Laos and Myanmar, the Malaysia corridor for migration from Thailand, Indonesia, Myanmar and Vietnam, and the Singapore corridor for migration from Indonesia. The epidemic outbreak has hindered labor mobility within ASEAN and posed challenges for authorities in host countries to enact containment measures among the migrant population. About 1.2 million Indonesian migrants work in Malaysia. With their labor contracts now invalid, more than 88,700 workers have returned to their home country unemployed. In Singapore, about 94 percent of confirmed COVID-19 cases have been foreign workers, and the country hosts a million-strong foreign labor force.
ASEAN countries’ participation in global value chains (GVCs) and regional production networks will be restricted. An outcome of the evolving international industrial division of labor, GVCs are networks of production around the globe largely led by multinational enterprises (MNEs). Through vertical integration, production outsourcing, and global procurement, MNEs coordinate different phases of the production process that take place in different countries. ASEAN has become an increasingly important link for GVCs. With GVCs and regional industrial chains disrupted by the COVID-19 pandemic, export-oriented businesses in ASEAN countries were badly hit. In Vietnam, assembly plants shut down because import of intermediate goods, primarily semi-finished products and parts, was blocked. The ongoing global public health crisis is highlighting the fragility of the GVCs, and momentum for value chain restructuring led by MNEs will grow in the post-epidemic era. Companies will focus more on security, localization, the institutional environment of host countries, and even political factors influencing relations between major powers. GVC restructuring had already started before the epidemic outbreak, and China-U.S. trade friction has accelerated the process. China is both a major manufacturing powerhouse and the world’s largest consumer market. Although some multinationals are gradually shifting phases of production from China to ASEAN countries, they must still maintain their production and operation bases in China because a considerable portion of intermediate products are produced by MNE-invested enterprises in China or by local companies. So, GVC restructuring is unlikely to finish shortly after the COVID-19 pandemic ends, which may slow the withdrawal of MNE value chains from China.
(About the author Wang Qin holds a PhD in Economics and serves as a professor at the Center for Southeast Asian Studies at Xiamen University.)