Is Southeast Asia back on form?

The region is competing better against China and India than the headlines suggest, argues policy wonk.

"Southeast Asia is the comeback kid," says Manu Bhaskaran, senior research fellow at the Institute of Policy Studies in Singapore and a partner at Washington DC-based advisor Centennial Group. Addressing members of the Asia Society in Hong Kong, he says that despite some dire news headlines, the region's political stability and economic restructuring has improved enough to allow it to adapt to competitive challenges from China and India.

"Southeast Asia is not a loser - yet," he says.

Take political risks first. Despite the horrors of the second Bali bombing, Indonesia has been able to isolate terrorist cells, reducing the scale of damage they can achieve. Terrorism will happen anywhere but Indonesian and other regional societies can absorb these shocks.

Indonesia's elections have been peaceable and widely legitimized, and in Indonesia and Malaysia the moderates have consistently defeated Islamists. An important sign of this stability is the failure of riots - much anticipated by the global press - to materialize when Jakarta reduced fuel subsidies. And in Malaysia, Abdullah Badawi is quietly rebuilding institutions such as the judiciary and civil service that were undermined by Mahathir Mohammed for his own political ends.

Bhaskaran is more concerned by Thailand and the Philippines. Thaksin Shinawatra has bungled an ethnic Malay insurgency in the south, blowing up a minor irritant into a running sore that will last a generation. Disgust in the Philippines with the rapacious elite, and that elite's dissatisfaction with Gloria Arroyo, ensures more turmoil, despite her having evaded impeachment for allegedly rigging an election.

The region is showing major positives on the economic front. Cyclically it is benefiting from continuing global GDP growth as an exporter to OECD countries, particularly in the tech sector.

But the real story is restructuring. After the 1997-98 financial crisis and the subsequent tech crash, the region is once again seeing domestic GDP grow and foreign direct investment (FDI) return. "Southeast Asian businesses are competitive and creating new niches," he says.

Southeast Asia has been a winner from China's rise, although individual companies or sectors have been wiped out. FDI to the region has held steady even as China's has grown, and the profitability of Southeast Asian investments is similar to Chinese ones. China's huge current-account surplus with America is mirrored by similarly sized deficits with the rest of Asia, which is shipping raw materials and components to the mainland for final assembly, before goods are exported to America.

As a whole, Southeast Asia has seen new competitive industries arise thanks to political stability and the ability to adjust to the challenges and opportunities of globalization. This is particularly true of its biggest and most important economy, Indonesia, as well as of Malaysia and Singapore, with pockets of success elsewhere. But this assessment takes Southeast Asia as an average; certain countries are really struggling, and all of them still have a long way to go.

Bhaskaran raises two concerns in Southeast Asian economies. First, these countries must respond as China moves up the value chain and produces the components formerly bought from Southeast Asia. Multinational companies' suppliers are already relocating to China.

Second, if liberalization continues in India, it will become a manufacturing competitor at the low end of the scale, in toys and garments for instance, as it already has become in high-end automobile engineering.

Bhaskaran also believes the weak spot in Southeast Asian economies is Indonesia's growing unemployment; lots of idle young men in crowded cities can spell trouble. Corruption is a well-documented concern. The central bank had been too loose with monetary policy and the government was too slow to tackle fuel subsidies, although these failures are being addressed. But the banks have been cleaned up and are starting to lend again, and after years of outflows, FDI is heading back toward positive space, with Philip Morris, British Petroleum and Japanese automobile companies setting up shop.

Other countries are a mixed bag too: Malaysia has no answer to the loss of its manufacturing business to China, but it is finding new oil and gas deposits, and growing its exportable services such as Islamic banking and healthcare. Singapore, after years of imploding property prices and struggling to survive its neighbours' problems, is witnessing a boom in new companies, particularly in construction and in services such as pharmaceuticals, wealth management and oil-related services.

Thailand also has its niches, such as healthcare, auto parts and appliances, and Thaksin has done a good job pumping money into rural areas, although the economy suffers from weak consumption and investment. The Philippines' main economic growth comes from remittances, particularly among its highest earners; its electronics industry has been destroyed, its manufacturing is wasting away and it suffers from high political risk.

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