Challenges for Asean

Region needs to build a stronger foundation with a focus on the green economy, new approaches to tourism and a greater commitment to free trade.

Photo © 123rf.com

Over two years after the coronavirus emerged, countries across Asia are slowly beginning to recover. In Southeast Asia, economic growth is projected to pick up to 5.1% this year, from 3.2% in 2021. With 400 million people, or 59% of the population, fully vaccinated, many economies are well on the way to reopening.

But the spread of the Omicron variant continues to cause widespread illness, albeit mild in most cases, that could reduce growth. In China, major lockdowns could have huge economic consequences for the region if authorities cannot bring new outbreaks under control soon.

Now, the Russian invasion of Ukraine threatens the uneven recovery. It comes on top of the economic distress caused by the lingering outbreak, financial tightening in the US, and the pandemic resurgence amid zero-Covid policies in China, economists say.

Shocks emanating from the war and sanctions on Russia are disrupting the supply of commodities. Asian countries that are large importers of fuel, including Thailand, are seeing a decline in real incomes. Countries with heavy debt, notably Laos, and high dependence on exports, such as Malaysia and Vietnam, are susceptible to global financial and growth shocks.

"The succession of shocks means that the growing economic pain of the people will have to face the shrinking financial capacity of their governments," said Aaditya Mattoo, the World Bank's chief economist for East Asia and the Pacific.

The Asian Development Bank (ADB) cautioned that conditions in Southeast Asia remain fragile, and many households continue to experience huge income losses. Some traditional engines of growth such as tourism, transport and personal services are still not expected to recover anytime soon.

The number of people in extreme poverty (those who live on less than US$1.90 per day) in the region rose by 5.4 million in 2020 amid the severe decline in economic activity. In 2021, an estimated 4.7 million more people fell below the extreme poverty line compared with the expected figure without Covid-19 in 2020, the bank said in its recent report, Southeast Asia Rising from the Pandemic.

The pandemic has also resulted in severe labour market disruptions. The International Labour Organization estimates that there were 10.6 million fewer employed workers in the region in 2020 compared to a no-pandemic scenario. Employment losses were particularly hard on women, youth and workers in micro, small and medium-sized enterprises (MSMEs). The employment gap was estimated at 9.3 million in 2021 and is forecast to be 4.1 million this year.

In Indonesia, despite relatively mild economic scarring and significant improvement in 2021, the recession caused a reduction in investment and an increase in the number of poor people and unemployed workers, said the report.

The Philippines, meanwhile, has suffered a massive disruption of its labour market, which could leave an enduring impact. Although the unemployment rate has eased, it remains higher than in 2019 and many people are working fewer hours.

In Cambodia, the traditional sectors that have driven growth -- tourism and hospitality, construction and garments -- have been badly hit. But a large increase in agricultural exports such as bananas, thanks partly to the new free-trade agreements with China and South Korea, and rapid growth in shipments of electrical parts, bicycles and vehicle spare parts offer hope.

People are travelling again, if cautiously, which is good news for countries like Thailand and the Philippines that depend heavily on tourism. Photo © 123rf.com

"The succession of shocks means that the growing economic pain of the people will have to face the shrinking financial capacity of their governments," sats Aaditya Mattoo, World Bank chief economist for East Asia and the Pacific. Photo © WORLD BANK

GREENING SOUTHEAST ASIA

As the economy recovers, building a foundation for a more sustainable future will be a priority. Greening the supply chain, infrastructure and related financing will be keys, according to Indranee Thurai Rajah, Second Minister for National Development and for Finance in Singapore.

"We will need to collectively address disruptions in global supply chains and uphold an open, stable and rules-based trading system," she said at the Southeast Asia Development Symposium (SEADS) 2022 held by the ADB in mid-March.

Integrating green solutions in various stages of the logistics value chain will not only improve productivity but also minimise the region's carbon footprint, she said.

She also stressed the need for green infrastructure to address climate risks. "Infrastructure is and will continue to be an important driver of growth for Southeast Asia. With more adverse weather patterns that threaten low-lying coasts, it's critical for the region to build sustainable and resilient infrastructure. Failure to invest adequately in this area can result in dire economic environmental and social impact."

The ADB has estimated that Southeast Asia needs about $210 billion annually in infrastructure investments to continue its growth momentum, eradicate poverty and respond to climate change.

Public finance alone will not be enough, said Ms Rajah. "Private and institutional resources must be mobilised to bridge this gap."

The financial sector should also channel more capital to environmentally friendly projects and technologies, she pointed out.

Kate Brandt, chief sustainability officer of Google, stressed the importance of technology to unlock green solutions. Gringgo Foundation, for example, developed an app to allow waste workers in Indonesia to track the amount and type of waste that they collect. It has resulted in an 35% improvement in recycling rates.

"This is the decisive decade for action … for committing to a more sustainable way of life," says Kate Brandt, chief sustainability officer of Google. SUPPLIED

The warming climate remains a critical challenge for people at all levels, she added. "This is the decisive decade for action, from governments setting strong natural ambitions to companies embedding sustainability into every aspect of their business, to all of us committing to a more sustainable way of life."

Google has launched a $6-million sustainability seed fund to help non-profit groups in Asia Pacific scale up promising green technologies. It will finance initiatives like improving air quality, preserving water resources and increasing access to renewable energy.

High fossil fuel prices could hasten the switch to renewable energy, while green technologies are becoming more viable, the World Bank observed in its latest East Asia and Pacific Economic Update issued last week.

"The adoption of green production technologies would allow countries to cut carbon emissions and cope with the new energy insecurity without unacceptable cuts in consumption or growth," it said.

But not all current changes will favour green technologies. The bank warned that current high fuel prices could also induce more investment in the production of fossil fuels. "And the war in Ukraine could reduce availability of key inputs in the production of green goods, like palladium and nickel."

The RCEP is "pretty much a work in progress" because many governments are still dealing with implementation challenges, says Albert Park, chief economist with the ADB. Supplied/ADB

NEW TRADE PARADIGM

New trade agreements could also help to rebuild the economy of Southeast Asia, most notably the Regional Comprehensive Economic Partnership (RCEP), which took effect at the beginning of this year.

The RCEP, which groups the 10 Asean countries plus Japan, South Korea, China, Australia and New Zealand, is the world's largest FTA, accounting for 30% of global GDP ($25.8 trillion), 2.3 billion people or 30% of the world's population, and 25% ($12.7 trillion) of the value of global trade of goods and services.

"The RCEP has the potential to strengthen supply chains internally in the region and enhance sustainability as it further enhances regional integration," ADB chief economist Albert Park noted. "The agreement addresses conventional issues related to trade and investment activities with the focus on regulatory coherence to promote a better business environment."

The trade pact, however, is "pretty much a work in progress" because governments are dealing with various implementation issues and "will need time to implement it effectively", he pointed out.

Cyn-Young Park, the ADB's director for regional cooperation and integration, said the RCEP will have greater income effects than the 11-member Comprehensive and Progressive Agreement of Trans-Pacific Partnership (CPTPP), which counts four Asean nations -- Brunei, Malaysia, Singapore and Vietnam -- among its members.

Both pacts offer "quite significant" gains, with the CPTPP adding an estimated $188 billion to world income while the RCEP creates an additional $263 billion, she told the SEADS conference.

"For the CPTPP, the gains flow mainly to East Asian countries including Japan and Malaysia, as well as North American economies. For the RCEP, East Asian economies, namely China, Japan and South Korea, benefit the most."

According to Ms Park, the RCEP would create 2.6 million new jobs, compared to 1.5 million from the CPTPP. "China will lose jobs marginally from the CPTPP but it will gain 1.4 million jobs due to the RCEP," she explained.

Getting people registered on an app is easy but "we must also take steps to ensure that they are equipped to harness the true potential of these digital tools", says Hooi Ling Tan, co-founder of Grab. SUPPLIED

Mexico and Vietnam will experience some significant gains from the CPTPP and Vietnam will see more jobs from the RCEP. Malaysia, Japan and New Zealand will also have smaller but positive gains in employment.

Both pacts reduce trade barriers by as much as one-third in manufacturing sectors. China will gain mostly from reductions in non-trade barriers, but in exchange for reduced barriers to services by Beijing.

"The RCEP offers critical momentum to rebuild the rules-based multilateral global trade system and support economic recovery during the pandemic," Ms Park stressed.

The RCEP is a "living agreement" that has implementation challenges because it involves countries in different development stages, said Donna Gultom, director-general for international trade negotiations at Indonesia's Ministry of Trade.

"Indonesia is now working hard to implement this agreement," said Ms Gultom, a former director of Asean trade negotiations who took part in eight years of RCEP talks.

"We (Asean) would like to have spillover effects to Asean countries. We see opportunities, particularly for Indonesia, to attract new investors to help us grow the economy by making use of this agreement."

"China will lose jobs marginally from the CPTPP but it will gain 1.4 million jobs due to the RCEP," says Cyn-Young Park, director for regional cooperation and integration with the ADB Supplied/ADB

SMALL BUSINESS BOOST

The pandemic has also lent new urgency to changing the way businesses operate, most notably in terms of the shift to digital. The region's smallest businesses in particular need help in this regard, Grab co-founder Hooi Ling Tan said at the SEADS forum.

Grab, for instance, has collaborated with the Singapore government to run virtual training programmes for small food and beverage merchants and hawkers so that they could acquire the skills to operate an online business. Grab also worked with Microsoft to run digital literacy programmes for drivers.

"Grab saw first-hand how the digital transition was challenging for many small businesses," she said. "And the truth is, it is not just about getting them registered on an app or a digital service and then expecting magic to happen on its own right afterward.

"We must also take steps to ensure that they are equipped to harness the true potential of these digital tools. And one way of doing this is to invest in digital literacy and education."

A report from the Tech for Good Institute, a Grab think tank, shows that even though 85% of small business owners recognise that digital platforms are critical for their future success, only 36% actually use them.

"It is thus imperative that governments and the private sector work together to arm individuals and small businesses with the knowledge and tools to thrive online."

Southeast Asia should also use fintech innovations to give MSMEs access to credit, she said, citing a Tech for Good Institute report showing 60% of MSMEs surveyed were unable to get a loan, she added.

"Infrastructure is and will continue to be an important driver of growth for Southeast Asia," says Indranee Thurai Rajah, Second Minister for Finance in Singapore. SUPPLIED

REVITALISING TOURISM

While most regional economies have reopened their borders to international travel, the tourism industry is still reeling from the impacts of the protracted pandemic.

Amid the crisis there are opportunities emerging to rebuild tourism and reimagine cities so they are more sustainable, inclusive and less susceptible to shocks.

The Philippines, for example, is drawing up a six-year tourism development plan to make the industry more resilient against future crises.

"One of the most immediate measures the government is working on is to restore jobs and livelihoods to tourism workers, who lost their jobs due the pandemic," said Tourism Secretary Bernadette Romulo-Puyat.

The pandemic provided the government an opportunity to rethink tourism and to create "future-proofing its tourism industry", she said.

"The new plan must inspire a visitor experience that is richer, deeper, and more authentic while at the same time, more competitive and more Filipino."

To make the industry more competitive, the Department of Tourism has validated more than 70 tourism circuits that offer the best travel products and experiences, including culinary, history, nature, wellness, agriculture and faith-based travel. Another 49 circuits are being developed.

The Philippines needs to create "a visitor experience that is richer, deeper and more authentic while at the same time, more competitive and more Filipino," says Philippine Tourism Secretary Bernadette Romulo-Puyat. SUPPLIED

The government has also fast-tracked the vaccination of tourism workers, with 95% of its target already inoculated. In key destinations like Baguio City, Coron, El Nido, Puerto Princesa, Boracay, Davao City, and Bohol, among others, 100% of tourism workers have been vaccinated, and booster shots are now being given.

Working with the ABB to make tourism more inclusive and resilient, the department is helping MSMEs widen their reach through online marketing, expanding sustainable campaigns, raising skills and product quality.

As well, the plan will increase participation of women and marginalised sectors, promote barrier-free tourism and engage local communities, including indigenous groups. Conservation financing measures for nature-based sites are also being studied.

Visitor management programmes aided by technology will also be developed, while authorities also want to increase the number of internationally recognised heritage sites and include more Philippine sites in Asean nature-based tourism packages, Ms Romulo-Puyat said.

"We see opportunities … to attract new investors to help us grow the economy by making use of (the RCEP)," says Donna Gultom, director-general for international trade negotiations in Indonesia. SUPPLIED

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