Bridging the ASEAN Development Divide: A Regional Overview

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I. Introduction Individually and collectively, Southeast Asian countries have set very challenging economic goals. The Ninth Malaysia Plan, for example, targets the country to be a fully developed economy by 2020, eradicating hardcore poverty. This will require over the next few years GDP growth of 6 per cent, higher than recent experience. Collectively the members of ASEAN have committed to economic integration of the region--to establishing the ASEAN Economic Community (AEC). This will require thorough-going and co-ordinated liberalization of markets and harmonization of national rules and regulations. The experience both in the region and in other parts of the world suggests how difficult it is to realize such a goal. This paper examines the context for development in Southeast Asia, highlighting two themes: * Investment: In the short run, investment spending directly supports aggregate demand and growth. In the longer term, investments in infrastructure, in productivity enhancements by businesses, and in the public provision of education and health services determine the potential for growth. This type of spending is also a factor in the ability of firms and individuals to compete in the international marketplace. With the possible exception of Vietnam, across the region, there is simply too little investment to meet national and regional development goals. * Co-operative Norms: Southeast Asia needs to provide both a wider regional market and the policy environment that will allow firms and individuals to participate more fully in international marketplaces. ASEAN as an organization has provided a forum for this, particularly looking towards the formation of the AEC. One aspect of this will be the investment in infrastructure to link hitherto fragmented regional markets. Section II of the paper discusses broadly regional economic performance and policy: growth and the impact on poverty, investment trends, fiscal policy, and inflation. Second III reviews issues related to encouraging higher potential for growth through the provision of infrastructure, higher levels of private investment, supporting education and health, and addressing environment practices. Section IV examines efforts towards regional economic integration, especially the proliferation of trade agreements and the role of international financial institutions in promoting regional cooperation. II. Recent Economic Performance: Growth, Investment, Fiscal Policy, and Inflation II.1 GDP Growth and Poverty Reduction Growth in Southeast Asia in 2006 averaged 5.9 per cent, about one-half percentage point above 2005. (1) This is better than earlier projected. Economies worldwide appear more resilient than thought, facing high oil prices and concerns about sudden changes in international capital or trade flows proved so far unfounded. Only one country, Cambodia, showed significantly lower growth in 2006:6.3 per cent, less than half the 13.1 per cent in 2005. The exceptional growth in 2005 was largely due to strong agriculture sector production, itself a result of unusually good weather, which returned to more normal conditions in the following year. Figure 1 shows the 2006 experience along with average annual growth for the first six years of the decade for most of Southeast Asia. In an arithmetic sense the development divide is being eased as growth rates are generally higher in the less developed countries. Over 2000-2006, the poorer developing countries, (Cambodia, Lao PDR, and Vietnam) saw average annual GDP growth rates ranging from 6.3 per cent to 8.3 per cent, while the remaining developing countries (Indonesia, Malaysia, Philippines, and Thailand) exhibited a range from 4.6 per cent to 5.3 per cent. A growth differential of 2-3 percentage points can make a large difference over a long period of time. However, if one targets the ASEAN milestone year of 2015, when the AEC should be established, while the income differences between the two groups of countries may shrink in relative terms, the development gap will still loom huge. …