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The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong With Capitalism’
The protests roiling Jakarta have raised questions about how this economic star fell from the sky. But it’s not just Indonesia. South-east Asia — including Thailand, Malaysia, the Philippines and Vietnam — is a region of many fading stars.
Once home to the world’s fastest growing economies, it is lately home to the most rapidly declining expectations for economic growth. In the decade from 2010, stock markets in south-east Asia delivered the best returns of any region in the emerging world; over the past year they had the worst returns of any region, emerging or developed.
The big shock is China’s impact on the region. As global manufacturers began to move some production out of China, spooked by geopolitical tensions with the west, a more intrusive state and rising costs, south-east Asia looked poised to gain the most. Many countries in the region already had a strong manufacturing base to build on.
But that shift in investment didn’t materialise in a significant way. Instead, China began exporting its surplus production — to south-east Asia more than to any other region — making it hard for these nations to maintain share even in their home markets. China has over the past 12 months seen a big decline in its trade surplus with the US. It has been matched almost dollar for dollar by an increase with south-east Asia.
The south-east Asian country that has been most resilient is Vietnam. To counter China’s dumping and the drag from US tariffs, it pushed domestic reforms to boost private sector investment and streamline state companies. Next in line was Malaysia, which took at least some steps to maximise its advantages, particularly in data centres. Meanwhile, Thailand, mired in political turmoil, has done little to defend what had been a stable manufacturing base. And Indonesia, under its new President Prabowo Subianto, slipped into a state of denial.
No surprise: the best responses generated the best outcomes. Vietnam is the one south-east Asian stock market still delivering strong returns; Indonesia’s is down the most.
The deflationary China shock is undermining manufacturing region-wide but especially in Indonesia, driving urban workers back to the countryside. Consumption is weakening. Car sales have fallen sharply in the past decade and are now lower by volume than in Malaysia, which has a population one-eighth the size. Investment and construction are growing slowly, so cement sales are falling. And the steps taken by Prabowo are making matters worse.
He talks of raising Indonesia’s growth rate to 8 per cent, a level rarely sustained by any economy outside the Asian export miracles, and by no country since the 2000s. Instead of investing to create good factory jobs, he has pushed welfare programmes, including support for self-sufficient rural co-operatives, which will further encourage deindustrialisation.
This undercurrent of 18th-century agrarian romanticism reinforces the image of a leader drifting out of touch. On a recent trip to Jakarta, longtime insiders told me Prabowo is surrounded by yes men who tell him only what they imagine he wants to hear. Last quarter they reported GDP growth of 5.12 per cent — hardly credible given the weakness in consumption and investment. It was chosen, my sources said, because the digits in 5.12 add up to an auspicious “8”, matching the code number he once wore in the military: 08.
Until recently, Beijing was the master of stage-managed numbers, reporting growth almost exactly on its 5 per cent target every quarter. Lately, Jakarta has taken that dubious title, reporting the world’s least volatile GDP growth.
The question confronting south-east Asia is how to develop when the one proven path to creating jobs in large numbers — manufacturing — is narrowing as factories automate. Even before last year, much of south-east Asia had not been pushing hard enough to move up the development ladder to manufacturing more advanced exports. As a result, productivity growth has been declining this decade regionwide.
A select few nations still have the strengths, such as good ports on busy trade routes and a skilled labour force, to make it in manufacturing. Others need to find new paths: adapt and apply digital innovations to create more service-sector jobs. When commodity prices are booming, use the windfall to diversify into new industries. Above all, keep pushing reform, cutting regulations and meddling by the state. The challenges to development are growing more intense, but that makes it all the more dangerous to follow the Prabowo path and pretend they don’t exist.
