After decades in China's shadow, South-East Asia has arrived

South-East Asian nations are set to surpass China as the fastest-growing major economies in Asia

People playing basketball on a street in the Tondo district of Manila, Philippines. AFP
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In his 1901 novel Kim, Rudyard Kipling popularised the term "Great Game", initially coined by British diplomat Arthur Conolly in the mid-19th century. By Great Game, the colonial strategists referred to a century-old struggle between the British and Russian empires for the mastery of Central Asia as part of their efforts to establish spheres of influence from what was then Persia to Afghanistan and India.

Nowadays, South-East Asia is broadly discussed in similar terms by leading strategic thinkers. Take, for instance, American sinologist David Shambaugh’s book Where Great Powers Meet: America and China in South-East Asia. Or think of veteran journalist Sebastian Strangio’s In the Dragon's Shadow: South-East Asia in the Chinese Century. The titles alone say it all.

By and large, in mainstream punditry and media coverage, the whole region tends to be portrayed as, first and foremost, a strategic battlefield, if not a playground, for superpowers. In popular imagination, South-East Asia is either a tropical paradise, thanks to the majestic beaches from Palawan to Phuket and Bali, or a collection of poor, hot megacities with countless slum-dwellers. The writer Elizabeth Pisani memorably lamented the status of Indonesia, the region’s largest nation, as the “biggest invisible thing on Earth”.

Upon closer examination, however, it is clear that South-East Asia is fast emerging as arguably the most dynamic and exciting place in the 21st century. Home to almost 700 million people, and boasting a combined gross domestic product of almost $4 trillion, the region is probably where the future of geopolitical power and technological innovation could be determined. According to an Asian Development Bank (ADB) report, released in September, South-East Asian nations are set to surpass China as the fastest-growing major economies in Asia, for the first time in three decades.

Thanks to its youthful and skilled workforce, and increasingly stable political environment, the region has also emerged as a top investment destination for the likes of Apple, the world’s most valuable company, and Taiwan, the world’s largest chip-maker. Not to mention the region’s great cuisines and immense cultural diversity. As Singaporean Foreign Minister Vivian Balakrishnan recently put it: “Take South-East Asia seriously on our own merits and not just look at us in terms of the great big power competition.”

Long before China became the world’s dominant manufacturing power, thanks to Deng Xiaoping’s economic liberalisation policies, South-East Asia was home to "tiger cub" economies of Thailand, Singapore, Malaysia, Indonesia and the Philippines. Cosmopolitan and well-versed in Anglo-American commercial culture, these countries became a prime destination for tourism as well as foreign investment.

In the mid-1960s, ADB was established in Manila, which managed to beat rivals in North-East Asia (Seoul) and the Middle East (Tehran), thanks to the Philippines’ rapidly growing economy. Meanwhile, Singapore, thanks to its late prime minister, Lee Kuan Yew, managed to reclaim its historical role as a global entrepot. No less than Xiaoping drew inspiration from Singapore’s remarkable success ahead of his historic decision to open up the Asian behemoth to global investment.

Meanwhile, Malaysia, Indonesia and, particularly, Thailand forged ahead with a series of proactive trade and industrial policies, which boosted domestic manufacturing. Japan, then Asia’s economic powerhouse, became a major source of manufacturing investments and sophisticated technology, thus incorporating South-East Asian nations into a global supply chain.

In the Philippines, the fintech industry is expected to reach $44 billion in the coming years

Two major events, however, upended the region’s place in the global economic pecking order.

First, the 1997-98 Asian Financial Crisis hammered Thailand and much of the region’s major economies, severely undermining South-East Asia’s economic momentum. Heavy reliance on real estate and services sectors made regional states particularly vulnerable to financial speculation and oligopolistic practices.

Second, Beijing, still a relatively insulated economy in the 1990s, not only emerged unscathed from the financial mayhem in its neighbourhood, but also managed to press ahead with a broadly successful industrialisation strategy. And just as China began to absorb the bulk of global manufacturing investments, South-East Asian nations began to experience a devastating period of deindustrialisation, which undermined prospects for inclusive development.

Soon, Indonesia, Malaysia and the Philippines ended up as sources of raw materials and precious minerals for China. Although bilateral trade continued to boom, the terms of trade largely favoured an industrialising China. Thus, South-East Asia became the economic "periphery" to Asia’s new economic "core".

To put things into perspective, Indonesia’s GDP per capita was as high as 87 per cent of China's in 2000. Two decades later, it was as low as 37 per cent. In Thailand, the region’s manufacturing hub, the number fell from 164 per cent to 61 per cent over the same period.

In many ways, South-East Asia began to mirror growing inequality between North America and Latin America on the other side of the Pacific Ocean. But after decades of relatively successful integration under the aegis of the Association of South-East Asian Nations, which brought about unprecedented peace and stability across the region, it is now primed to take-off for three major reasons.

To begin with, China is now experiencing a great deceleration, thanks to a combination of structural and geopolitical factors.

Rapidly rising labour costs and extended lockdowns have dissipated China’s competitive edge, making it less pivotal to regional growth dynamics. Just before the pandemic, China accounted for up to one third of global GDP growth, a number that has now fallen to about 25 per cent. Exports as a share of China’s GDP have fallen from above 35 per cent in the 2000s to below 20 per cent today.

On top of this, western nations have begun a process of "decoupling" – or, as US Treasury Secretary Janet Yellen put it, “friend-shoring” – in order to reduce their supply-chain reliance on China amid a prolonged geopolitical showdown. A survey by the US-China Business Council found out that more than half of American companies interviewed either cancelled or delayed investment plans in China.

According to a Bloomberg Intelligence analysis, the West’s tech-industry dependence on China is likely to come down by 20-40 per cent “in most cases” within a decade. With China moving inward, due to geopolitical tensions with the West and a nationalist economic policy at home, investors are looking for alternative destinations, with the likes of Vietnam, Indonesia and Thailand emerging as major candidates.

Second, South-East Asia is experiencing its own digital economy boom, a process accelerated by Covid-19 lockdowns in recent years. In places such as Indonesia, revenue from digital commerce and related industries more than tripled as a share of GDP in recent years. From Indonesia to Singapore, a whole host of “unicorns”, from Gojek to Grab, have transformed the regional economic landscape.

In the Philippines, the fintech industry is expected to reach $44 billion in the coming years, thanks to the transformative capacity of mobile internet and innovations in financial industries. A new generation of western-educated tech titans coupled with a booming middle class will soon turn the region into a global fintech hub. And deeper economic integration will only further accelerate the spread of technology and wealth across South-East Asia.

Finally, the region’s competitive edge over its North-East Asian counterparts is demographics. While China, as in Japan and South Korea, is grappling with a shrinking population, South-East Asian countries such as the Philippines continue to enjoy robust population growth. The median age in a majority of states is below 30 years old. As emerging market gurus such as Ruchir Sharma have argued, demographics have historically been the greatest predictor of long-term growth prospects.

After centuries of living in the shadow of empires and larger civilisations, South-East Asia’s moment of truth may have finally arrived. The 21st century represents a historic opportunity for the region to finally claim its place of pride on the global stage.

Published: October 13, 2022, 9:00 AM