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Tuesday, November 14, 2017, 14:33
Investors eye youth dividend
By David Ho in Hong Kong
Tuesday, November 14, 2017, 14:33 By David Ho in Hong Kong

Young and increasingly urbanized workforce set to sustain ASEAN’s economic development

Students attend a lecture at a law college in Hanoi on Oct 31 last year. ASEAN countries such as Vietnam need to take a page from the Chinese growth story and put their economic development on a more sustainable track. (GREGOR FISCHER / DPA)

In the end, it is all about the people. In ASEAN, a relatively young and increasingly urbanized population may be the key to sustained economic development. 

The Association of Southeast Asian Nations (ASEAN), the 10-nation grouping that is emerging as a powerful economic force and a key trade partner with China, is basing most of its expectations for growth on a relatively young population that is migrating into cities. 

These young people are not moving into the giant metropolitan centers, like Jakarta or Manila, but are piling into second-tier cities, like Bandung and Surabaya in Indonesia or Cebu and Davao in the Philippines. 

About 22 percent of ASEAN’s 600-million-plus population live in cities of 200,000 people or more. These urban areas account for about 54 percent of ASEAN’s GDP, according to a report by global management consulting firm McKinsey & Company. Another 54 million people will be moving to cities by 2025.

Interestingly, smaller cities are growing faster than the largest urban centers. Almost 40 percent of ASEAN’s GDP growth through 2025 is expected to come from 142 cities with populations ranging from 200,000 to 5 million.

As the regional bloc marks its 50th year, the question facing its leaders is how to maintain momentum and ensure sustainable economic growth.

“Fifty years ago, ASEAN was formed with the theme of joint political stability for the initial five founding countries. Since then, ASEAN’s priorities have shifted to economics,” said Patrick Ip, managing director of the China-ASEAN Investment Cooperation Fund, the largest private equity fund focused on the ASEAN region. 

“Clearly, the development differences and GDP gaps make ASEAN a very mixed basket,” Ip said. 

“One thing they all have in common is very rich human capital. They boast a young workforce that is eager to learn, adaptable and is heavy in consumption.”

ASEAN economies are showing robust expansion, with the Philippines leading the way at 6.9 percent GDP growth in 2016, Myanmar at 6.5 percent and Vietnam at 6.2 percent. Nearby Indonesia is clocking 5 percent growth, and the Malaysian economy grew 4.2 percent in 2016 despite weakness in energy prices. 

Collectively, this makes ASEAN the fastest-growing region compared to other parts of the world, like Latin America or the European Union.

“The ASEAN economies are both consumption and export based. With a young demography, they will and should follow in China’s footsteps toward a new economy. Thus, the next big boom would be things like fintech and other disruptive innovations,” said Ip. 

ASEAN’s consumers are making their presence felt online. Mobile penetration of 110 percent and Internet penetration of 25 percent across the region has facilitated the emergence of the second-largest community of Facebook users, just behind the United States.

ASEAN has also emerged as a key partner for China, while China is, in turn, powering ASEAN growth. 

“ASEAN has become a major destination for Chinese enterprises to invest. Bilateral investment between China and ASEAN reached over US$160 billion by the end of May 2016,” said Neil Wang, global partner and China managing director of consultancy firm Frost & Sullivan. 

“After 26 years of mutual cooperation, China has become the largest trading partner of ASEAN. ASEAN, on the other hand, is China’s third-largest trading partner. In the face of the new international economic situation, China-ASEAN is trying to expand bilateral trade and bilateral investment.

“China is looking for opportunities in challenges,” said Wang. 

“China has advocated globalization as a model of win-win cooperation. They have consistently advocated the establishment of an open, transparent and mutually beneficial and win-win regional free trade instead of engaging in an exclusive and fragmented individual circle.”

It is not just the Chinese State sector that is driving ASEAN growth. The private sector is emerging as an increasingly important player. The investments have been restricted to certain industries, but growth is visible. 

“Purely private Chinese companies making these investments are still mostly in manufacturing, garments and electronics, since ASEAN has taken over more of the manufacturing role that China used to do,” said Winnie Tsui, an economist at the Hong Kong Trade Development Council. 

Tsui believes that already healthy trade levels will continue to grow. Chinese companies, she said, “have been steadily producing more products of quality and actually moving a lot of the manufacturing to ASEAN”.

All of this is good news for ASEAN and for Chinese traders and investors. But for ASEAN to take a page from the Chinese growth story and put its economic development on a more sustainable track, it will have to address a number of issues — many of which were on the agenda as ASEAN leaders gathered in Manila.

The Philippines, as 2017 chair of the regional body, is hosting the 31st ASEAN Summit and related meetings, which began on Nov 10 and continue until Nov 14.

Not far from the top of the list of issues is corruption. A number of ASEAN members fared poorly in Transparency International’s Corruption Perceptions Index 2016. 

A second concern is a rather uneven distribution of wealth and growth dividends. “In certain ASEAN countries, the rich get richer while the poor get poorer. This could lead to political instability, especially with the rise of populism in the area, and stunt economic growth,” said Ip at the China-ASEAN Investment Cooperation Fund. 

A third concern is the need for various ASEAN members to move up the industrial value chain. A lot of the countries in the region rely on exports for growth as opposed to building stronger manufacturing industries, more domestic demand or encouraging innovation. 

“Moving up the value chain and diversifying is going to require education, tech, infrastructure and the right workforce. All these factors are strongly interlinked,” said Ip, and all these factors may be addressed in mid-tier urban centers. 

A fourth issue that has to be addressed, he said, is the need to build a stronger legal framework. A fifth is the importance of creating a level playing field for all businesses. 

“Certain sectors are dominated by family businesses in certain countries. With this monopoly by big corporations and established businesses, there is very little room for the newcomers and young entrepreneurs, which also stops innovations from surfacing,” Ip said. 

Addressing these concerns at the regional level may be challenging, particularly as it will require the 10 members to work together and even reach out to partners like China. 

“Coordinated dialogue at a regional level is also necessary to ensure that the opportunities presented by an integrated economy, connectivity, sector cooperation and dynamism are maximized through the ASEAN Economic Community, enabling freer movement of goods, services, investment, skilled labor and capital,” said Lee Minsoo, a senior economist at the Asian Development Bank. 

Ip is fairly optimistic about the progress ASEAN has made and the potential for the region to continue growing and developing. 

“ASEAN has seen amazing growth through turbulent times in the half-century since its formation,” Ip said. “They could experience continuous growth for the next 50 years but there are certain issues that they need to iron out first.”


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