SINGAPORE: Driven by pro-growth policies and presence of dynamic companies, members of the Association of Southeast Asian Nations (ASEAN) are among the world’s best performing emerging economies, said a report released by the McKinsey Global Institute (MGI) on Thursday (Sep 14).
Nevertheless, the region “cannot rest on its laurels” and will need to address issues, such as income inequality, to maintain its rapid growth momentum.
For the report, MGI, the business and economics research arm of McKinsey & Company, analysed 71 major emerging economies around the world, and identified 18 that show records of stronger and more consistent growth than their peers.
ASEAN accounted for eight of these “outperformers”, the report said.
They include the "long-term outperformers" comprising Indonesia, Malaysia, Singapore and Thailand, which averaged at least 3.5 per cent annual per capita gross domestic product (GD) growth over 50 years.
Cambodia, Laos, Myanmar and Vietnam also made the cut as "recent outperformers" by clocking 5 per cent annual growth over 20 years.
The report noted that the Philippines “did not clear either threshold but its recent rapid growth could lift it to the ranks of outperformers in the future”. Meanwhile, Brunei was not considered for the report due to its size, the report added.
WHAT’S UNDERPINNING GROWTH
On what’s propelling growth in the region marked by highly-diversified economies, authors of the report highlighted two essential elements: Pro-growth policy agendas and the presence of dynamic companies.
The former creates a “virtuous cycle of productivity, income and demand”, according to the report.
“The agenda starts with greater productivity, made possible by accumulating capital and technology. The fruits of improved productivity are then distributed throughout the economy in the form of more jobs and higher wages for workers, lifting more people into the middle class, and in turn supporting higher levels of consumption and savings,” it said.
“Companies reap increased profits, and governments collect higher tax revenue they can use to reinvest and to improve essential infrastructure. Wage growth translates into more disposable income, which boosts personal savings as well as investment and household consumption,” the report added.
The presence of large companies also helps to lift GDP growth and encourage productivity improvements among their smaller peers.
Notably, the report said revenue from these large firms equalled 37 per cent of the GDP in ASEAN countries, compared with 28 per cent among emerging-economy peers.
“These firms are not only large but competitive, as the best-performing companies are subject to fierce competition at home,” it said. “They also support the development of small and medium-size enterprises (SMEs) via purchasing and subcontracting, in which business generated by large firms is directly transmitted to smaller firms.”
However, ASEAN cannot rest on its laurels and to stay ahead, the region will need to address issues, including shifting trade patterns, demographic changes, advancing automation and artificial intelligence, and growing income inequality in some countries.
“The exceptional performance of ASEAN countries won’t come as a surprise to many in the region. The challenge will be to maintain the growth momentum and continue narrowing the per capita GDP gap with high-income countries in changing times marked by rapid technological advances and demographic shifts,” said Mr Oliver Tonby, managing partner and chairman of McKinsey's offices in Asia.
He added: “In particular, a new focus on boosting productivity growth and tackling inequality and gender parity will be important to ensure that ASEAN countries can continue on their path to greater, broad-based prosperity.”
The report urged regional policy makers and business leaders to focus on digitally-driven productivity, a reinvented labour force, and infrastructure development.
“Digital transformation may help address ASEAN’s sluggish total factor productivity growth. However, technology that drives productivity gains will automate tasks now done by people, thus a modernised labour market that also adjusts to the demographic and urbanization trends in the region will be a critical factor in translating productivity gains into higher wages for more people,” said the report.
Meanwhile, infrastructure that is matched to economic development goals is “particularly important” for ASEAN economies where populations are large but densities are low. “Smart public investments can integrate millions of lower-income people into more-efficient business ecosystems,” the report added.
If these improvements can be made, ASEAN could continue to outperform and double its annual collective GDP to about US$5 trillion (about S$6.86 trillion), MGI said.
At that level, ASEAN GDP would represent about 5 per cent of global GDP, it added.
Indonesia, Malaysia, Singapore, and Thailand could account for most of by continuing to expand their economies by 3.8 per cent annually in real terms.
Sustained rapid growth in the rapidly-growing economies – Cambodia, Laos, Myanmar, and Vietnam, as well as the Philippines - could also add US$600 billion to US$1 trillion in total GDP and lift per capita GDP in each country by 50 to 70 per cent.