High income hopes fading for some Southeast Asian nations: economists
JOKO “Jokowi” Widodo, when he took the oath of office in 2019 to start his second term as Indonesian president, vowed that the average income of Indonesians would more than triple by the middle of the century, pushing the country into the ranks of modestly high income economies such as Poland and Chile.
Indonesia’s neighbours set similar goals in recent years too.
In October 2019, Thai Prime Minister Prayut Chan-o-cha set 2036 as the target for the kingdom’s gross domestic product (GDP) per capita to reach at least $12,700, the amount the World Bank fixed for joining the ranks of the rich.
Last year, Malaysia brought forward its plans to take its place among the “developed” countries by the middle of this decade.
But as regional economies count the cost of the Covid-19 pandemic, which has shuttered schools and offices as well as entire sectors such as tourism for up to two years, those aspirations are in disarray.
Soaring food and energy prices in the short term as well as upended supply chains and emergencies linked to climate change mean that exports and cheap labour will not be enough to drive the economic growth needed in the coming years.
“The scars left behind by Covid-19 are being hit by further shocks: war and climate change,” economist Alicia Garcia Herrero said in response
to a question from The Straits Times during a recent online panel discussion hosted by the Asean +3 Macroeconomic Research Office (AMRO).
“We are looking at shock after shock,” she added.
AMRO has said that regional economies will struggle to make up for ground lost during the pandemic amid shortages of skilled labour and as cash-strapped governments rein in spending.
“Scarring is a major concern,” Hoe Ee Khor, AMRO’s chief economist, said during his presentation. “The longer the pandemic
lasts, the greater the chance the scarring will be more extensive and more permanent.”
The Asian Development Bank (ADB) recently said that while Indonesia will see growth rates return to pre-pandemic days, at five per cent this year and 5.3 per cent next year, Southeast Asia’s largest economy is still growing too slowly to meet Jokowi’s goal.
Indonesia needs to register growth of nearly six per cent a year between now and 2040. Annual GDP growth averaged 5 per cent during the four years to 2019.
The country will need to
double down on education and health services to boost productivity, Chatib Basri, Indonesia’s former finance minister, said in response to a question from ST during the online panel discussion.
“It has been two years of children not regularly attending school. We don’t know the quality of the labour market,” said Chatib. “Every country in Asia – not just Indonesia – will need to catch up.”
Malaysia’s GDP growth is expected to nearly double from last year to six per cent in 2022 before slowing to 5.3 per cent in 2023, the ADB said earlier this month. Thailand will register three per cent growth during the 12 months to December and 4.5 per cent in 2023.
If Malaysia’s GDP grows consistently at about six per cent in the coming years – something that has not happened in two decades – it would eke out a spot in the ranks of high income countries alongside Panama and Costa Rica by 2025.
But rising prices of most staples, including cooking oil and wheat that have doubled since the beginning of 2020, are expected to fan inflation throughout the region.
Economists expect this will trigger more spending on subsidies as countries like Indonesia dip into windfall earnings from palm oil, coal and nickel exports to cap the price of fuel and provide cash handouts to the poor rather than make investments in education and healthcare.
Political instability may also deter investment, economists warn.
Malaysia’s high income ambitions date back to 2009 when Najib Razak was prime minister. After he was ousted in 2018, his successor, Mahathir Mohamad, pushed the deadline to 2030 only to have the current incumbent, Ismail Sabri Yaakob, the country’s fourth prime minister in as many years, to bring the deadline forward to the middle of the decade.
“Covid-19 has certainly delayed progress in achieving those goals,” said Khoon Goh,
ANZ’s Singapore-based chief economist.
“And now with the high commodity prices and global uncertainty, it could make it harder to reach those goals.”
To be sure, the emerging markets in Southeast Asia may meet their goals. China may relax its travel restrictions, unleashing the region’s biggest source of holidaymakers.
New trade pacts such as the Regional Comprehensive Economic Partnership may woo investment. E-commerce – expected to be worth $1 trillion a year in ASEAN by the end of the decade – could help drive growth.
But economists warn these are uncertain. As China doubles down on its lockdowns in its biggest cities including Shanghai, for example, a wave of Chinese holidaymakers is for now off the cards.
Of course, getting rich is only part of the story. As in the case of Singapore, South Korea and Taiwan, entering the ranks of high income economies yields outsized global standing, said Roland Rajah, lead economist at Sydney-based Lowy Institute.
“Most of South-east Asia had done very well over the last few decades,” he said.
“Now with Covid-19 and other global shocks, the region’s growth and development have taken another serious hit – one that I expect to have long-lasting implications.”