East Asia’s economy continues to drive global growth. The region’s success has been powered by its remarkable growth in exports. As a share of GDP, its exports grew from about 20 percent in 1990 to about 32 percent in 2013, with its share being even higher before the global financial crisis. The region’s future success will be linked closely to continued strong external demand. But the global economic recovery is a mixed picture with plenty of uncertainty.
Global demand has weakened since the financial crisis, largely because of recurrent slowdowns in Europe and Japan, the world’s third largest economy, has fallen back into recession. The steady rebound in the U.S. economy is the only bright spot but even that is partly overshadowed by a measure of uncertainty linked to a recent history of political gridlock. And China’s growth is also likely to slow gradually as its shifts toward a more environmentally sustainable, consumption-based growth model.
Despite these uncertainties about the global economy, Southeast Asia remains one of the world’s fastest growing regions, but it must continue to adapt to maintain its success. It’s time for countries to undertake reforms, which in some cases are overdue. They can build greater resilience by enacting fiscal reforms, enhancing export competitiveness and facilitating the movement of labor. In terms of macro-economic policy, it will be important for countries to keep public debt and fiscal deficits under control.
Another important measure is reducing poorly-targeted subsidies to free up revenue for spending in priority areas. For example, the World Bank has voiced concerns about the extent of fuel subsidies and their negative impact on climate change. We have advocated the reduction - and eventual elimination - of those subsidies while providing social protection measures to cushion the impact on the most vulnerable. Malaysia has just announced fuel subsidy cuts aimed at reducing its budget deficit.
Regulatory reform can boost export competitiveness with efficient, low-cost, reliable transport logistics being central to trade. Countries in Southeast Asia generally do better than those in other developing regions in logistics performance, but significant differences exist across the region. The latest Doing Business report illustrates one aspect of this divergence. At one end of the spectrum is Singapore, ranked number one globally out of 189 countries for ease of trade across borders; and towards the bottom is Lao PDR, ranked 156. And while Malaysia and Thailand do relatively well in this regard, Indonesia and the Philippines still face significant challenges.
In several countries, inadequate infrastructure significantly undercuts export competitiveness. While there has been good progress on infrastructure, there is still some way to go. Competitiveness in Myanmar, Lao PDR, and Cambodia is seriously compromised by inadequate infrastructure. For middle-income countries such as Indonesia, the Philippines, and Vietnam – investing in infrastructure will be critical to maintaining future competitiveness.
Comprehensive labor market reform is also crucial to prepare countries and young people to compete globally – a point spelled out in the World Bank’s recent report: East Asia At Work: Employment, Enterprise and Well Being. It specifically urges countries to increase the skills mix to better meet employer demand by investing in life-long learning starting with early childhood education through post-secondary schooling. This is particularly important as countries move into more sophisticated sectors and products. Currently, the demand for skilled workers, especially in middle-income countries, is outpacing their supply.
While the region has made significant progress in expanding access to basic primary and secondary education, large differences remain in the quality of education, as well as the relevance and availability of post-secondary education. It is now time for countries in developing Southeast Asia to move beyond simply providing a basic education package to building the complex skill set required for human capital in a more sophisticated global economy.
These measures will be important in keeping the sub-region on its path of economic success. Just as China’s policymakers try to place its economy on a more sustainable growth path, these reforms will help the countries of developing Southeast Asia navigate the uncertainties that lie ahead for the global economy.