Connected growth: ASEAN and South Asia in 2037

14:37 | 05/10/2017 Cooperation

Two decades ago Asia was in the grip of a broad economic crisis. Through the 1998 Asian financial crisis, regional stock markets lost more than 60% of their value. Already fragile government reserves ran dry. By May 1998, Indonesia’s sovereign rating had fallen to CCC+.

Anna Marrs

This now seems a very long time ago. As2017 draws to a close, let us reflect on the last two decades and envision what the next 20 years could be like. The recovery that followed the Asian financial crisis had been driven largely by domestic policy reforms, demographics in ASEAN and South Asia, and infrastructure investment in China. Corrective measures and market-friendly policies by governments strengthened economic foundations.From 1997-2016, GDP per capita across ASEAN-6 countries had grown by 155%. Indonesia’s sovereign rating is now investment grade.

To sustain growth, economies need to be more connected than they are now. Not just within the national confines, but across borders too. For a region as diverse as ASEAN and South Asia, integration is hardly an easy process though. Within ASEAN alone, the difference between GDP per capita in Singapore and Cambodia is as big as 55 times. There continues to be insufficient infrastructure, inconsistent regulations and trade barriers, and inadequate cybersecurity investments.These deficiencies limit the reach of supply chain networks and growth of the digital ecosystem.

The region is in dire need of infrastructure development. The Asian Development Bank (ADB) estimates that South Asia and Southeast Asia will need at least US$3.6 trillion from 2010 to 2020 in infrastructure investment to meet the needs of the growing populations in the two regions.

Countries are also more focused on building national digital payment systems and identity solutions than enabling cross-border points of connectivity.

To overcome these challenges, governments need to implement the right policiesto encourage physical and digital buildouts that will spur flows of trade, investment, information, and people.

While regional countries recognise the importance of greater connectedness and have taken steps to bridge the infrastructure and digital gap, more can be done.

Over the next 20 years, the region’s economic transformation will be much more fundamental than the change seen over the last 20. Besides favourable demographics, we will see an unprecedented level of infrastructure investment. And not just the obvious infrastructure – bridges, railroads, ports. But, perhaps more excitingly, digital infrastructure. Demographic lift plus physical and digital infrastructure will catapult the region to a new level of productivity and prosperity – if the risks can be managed.

Firstly, physical infrastructure. On the back of China’s Belt and Road initiative, the region is planning to build – and starting to construct – at an unprecedented pace. It is estimated that US$4-8 trillion of cumulative infrastructure investment will flow on the back of BRI over the long term. Although ambition has been there historically, governments are now putting their money and actions where their mouths are. At a recent Philippines investment forum, the finance team set out plans to boost infrastructure investment from 3% to 7% of GDP within President Rodrigo Duterte’s term. When asked about implementation challenges, the Finance Minister quipped that delivery agencies needed to “use it or lose it – but which we mean not their budgets, but their jobs.”

Linked by the ancient Silk Road, the BRI can create a bigger network of markets and new opportunities for ASEAN and South Asia. Trade between Southeast Asia and South Asia grew from US$4 billion in 1990 to US$90 billion in 2013. In the same period, Southeast Asia’s share of South Asian trade rose from 6% to 10%, while South Asia’s portion of Southeast Asian trade doubled to 4%. This modest trend suggests that there’s room for growth.

Secondly, digital infrastructure. When India announced Aadhaar in 2009, few understood that digital identities were clearly the first step in digitising economies. Today, with over 1 billion Indians with Aadhaar digital identities, India has been able to move the unbanked into the banking system en masse, and then digitise payments in one big leap on the back of demonetisation. Other governments have been sending teams to India to study this transformation, believing economic efficiencies and higher tax takes on the back of greater transparency will quickly follow.

If executed right, these efforts willtruly connectASEAN and South Asia by 2037. From manufacturing to payments to delivery, the supply chain will be only a click away. This connectivity will decrease inefficiencies and ultimately cement two decades of strong growth.

But first, risks need to be managed.National tensions – most clearly on the back of BRI between India and China – exist. The ability to move seamlessly across digital and physical spaces can also create security challenges, of both the real and cyber varieties.

Greater competition may ensue too. In the years to 2037, the well-travelled economic development path for emerging markets that once relied on competitive labour costs to thrive will be challenged by innovative technology.

Despite these risks, the rewards will be worth it. Companies positioned to capitalise on the infrastructure and digital booms will thrive. And the economic growth that follows will lift both individuals and countries to new levels of prosperity. Over the past 20 years, the region has gone from crisis to growth hot spot. In the coming two decades, the growth hot spots will connect, creating a brighter and more sustainable future across the region.

Anna Marrs - CEO of Standard Chartered Bank’s ASEAN and South Asia region