Economic Development in South East Asia - Term Paper Example

? Economic Development in South East Asia s s The economic outlay of South East Asia reveals diverse yet unifying similarities regarding policy issues, socio-political background, and development strategy. A sound grasp of globalization demands itemized analysis of the region in question in view of its socio-economic and political identity, from the relevant past to the foreseeable future. Sweeping generalizations of the economic status of the Asian economy have blurred this indispensable perspective, especially for the South East Asia region. The purpose of this paper is to bring to the fore the real economic state of the South East Asian economy, cast against a crucial history, a vivid present, and an imminent future. Keywords: Foreign Direct Investment (FDI), Export Processing Zones (EPZs) TABLE OF CONTENTS TABLE OF CONTENTS 2 Economic Development in South East Asia 1. INTRODUCTION A. South East Asia’s Economic Landscape The South East Asian economy exhibits a distinct peculiarity. This marks out the theme of many economic researches on the region (Sundaram, 2002). Firstly, there is a need to dissociate South East Asia from the larger East Asian region economically. The emerging world economic powerhouses consisting of the Indo-China axis are not part of the South East Asia, as many people mistakenly assume. South East Asia adheres to an entirely different economic environment, which calls for less generalized view of its economic identity. In regard to this special aspect, this paper seeks to present a definitive examination of the region’s economic climate. According to an influential World Bank study of 1993, South East Asia is full of dissimilarities in its economic structures. In addition, the region has a notably lower economic might in comparison to its East Asian counterparts. Independent assessment of the prevalent economic aspects behind this colossal discrepancy in the economic strides by the Asian nations is of concern to both local and international stakeholders. In a world of broadening economic, political, and cultural perspectives, comprehensive exposure of the economic markers of the region will provide a major boost in its perceived significance in the global marketplace, where economic boarders continue to dissolve (World Bank, 1993). Globalized economic structures have far-reaching repercussions on the economic scene. Major changes in economic climates, even within apparently localized but powerful economic structures, show profound impacts in the global economic system (Sundaram, 2002). For instance, the East Asian economy has heavy impact on the state of the South East Asian economy. Research is necessary to highlight the possible correlation or causal relationship between the South East Asian economy and the larger world economy. Information of this nature will be indispensable to both local and international investors. In addition, the information will also help the local governance systems secure their positions more strategically to weather the adverse storms of global trade. Consequently, the economies can reap the immense benefits that modern globalized marketplaces offer. The purpose of this paper is to study the South East Asia economic climate and discuss the characteristic features, benefits, and disadvantages the economic structure exhibits. A study of South East Asia economies needs to take into account the political and social background of each of the countries. The fresh perspective will be a welcome drift from the numerous misleading misconceptions suggesting that the economies of the region have sweeping commonalities. Recent studies reveal that the regions are characteristically distinct in the way they deal with issues of economic significance (Steven et al., 1997). Government policy, international strategy, and focus areas for the economic growth vary from country to country. This paper seeks to address the following: An astute understanding of the growth in the economies of the region and the structural changes that perpetuate their reform is necessary. Consideration is in order on the long-term impacts of the region’s economic and political reforms. Policy concerns in the economy are of paramount importance to the health of any economy. This paper tries to address the pressing need to put policy issues into perspective, in a less generalized manner, which helps us to decipher market undercurrents of the region more determinably. This paper also explores the historical impact on the economic and social dynamisms in South East Asia. B. Industries to Boost Economy Major drivers of the positive reform in the South East Asian economies are attributable to the industrial sector (World Bank, 1993). Following concerns about the region’s industrial policy, autonomous political systems are working to change the policies in concerted efforts to revamp the economy. The policy change will improve efficiency and effectiveness of the industrial sector, with a broader mandate of sustaining the region’s economic growth. Towards this end, the region’s governments are working to improve physical infrastructure, smooth lining governance, and enhancing foreign investment. A drift towards capitalism will work in favor of the industrial sector of the South East Asian economies (Sundaram, 2002). Economic autonomy has given foreign investors more leeway to run viable industrial enterprises. Foreign investments pump unprecedented amounts of money into the South East Asian economy. The policy inducement in the sector has won attention for the region from world-dominating economic influences in the West. In an increasingly globalised economy, the relevance of this region to global business deserves augmented regard. C. Advantages The South East Asian economies have demonstrated a potential for growth through international trade. Nations such as Malaysia have successfully implemented effective e-governance programs. Conservative outlook on economic policy is slowly dissipating to give way to a more pragmatic view, which is in tandem with international best practice (World Bank, 1993). Generally, the South East Asia economies are high-growth economies responsive to industrial and economic changes on the global scene. For international speculators, the region offers a rare incentive to international business community through foreign direct investment. Government interventions to policy issues in the industrial sector have so far been effective. D. Disadvantages The lack of financial might and independence by the region significantly raises its vulnerability to changes in the external economic wellbeing. Of particular concern is the influence of currency trends and financial health of the neighboring East Asian economies (Sundaram, 2002). Another concern in the region is on the policy-making prerogative by the government. Many international players express their discomfort with the government policies regulating international trade (Sundaram, 2002). The consensus is that the region should do more to liberalize its markets and develop socio-economic policies. Policy change should focus on attaining greater sustainability of a growing South East Asian economy. 2. BACKGROUND A. Constituent Countries of South East Asia South East Asia consists of Philippines, Malaysia, Singapore, Thailand, Cambodia, Vietnam, Myanmar (formerly Burma), Laos, Brunei, Indonesia, and East Timor (Steven et al., 1997). The region is of relevance in consideration of the economic progress and influence of its regional neighbors. For instance, China and Japan pose profound influences on export relations in these countries, which in turn affect the economic state of the region. The ways the countries react to dynamisms of the external market vary greatly. Consequently, a detailed study is necessary to fully grasp and appreciate the significance of the region in shaping regional and international trade behavior in the entire Asian region. B. The Dragon The four Asian tigers also share the name of the Asian dragons. They are four countries made up of Singapore, South Korea, Hong Kong, and Taiwan (World Bank, 1993). The countries had exceptional economic growth and industrialization in the years ranging from the early sixties to the nineties. The Tigers became economic powerhouses at the turn of the twenty first century. Hong Kong and Singapore are financial centers of international repute. South Korea and Taiwan are technological giants. Of the Asian dragons, only Singapore belongs to the South East Asia. C. Historical Background of South East Asia i. Governance systems Many economic researchers see the South East Asian governments as largely authoritarian, and lacking in capacity to articulate developmental agendas (Sundaram, 2002). The Asian governments continually face accusations of perpetuating narrow interests of the political ruling class. What remains a surprise was the governments’ fundamental role in implementing reforms that expose the promising growth potential of the region by encouraging FDI. ii. Colonial History South East Asia shares a diverse yet unifying colonial history, subject to the specific colonial masters in each country. Some South East Asian countries had liberal colonial regimes whereas others were under repressive colonialists (Wilson, 2009). The US and the British were principally liberal in their rule whereas the French, Spanish, Portuguese, and Dutch took a less liberal colonial stance (Wilson, 2009). Liberal colonial establishments respected civil liberties, political participation, and access to economic and educational opportunities while their suppressive counterparts restricted these fundamental freedoms for their subjects. Nationalist movements resulted from the tyrannical colonial rule, and the colonies slowly began to regain their independence. The educated indigenous elite pioneered the movements, and later transitioned into the clout of leadership that ran the immediate post-colonial eras. By 1965, all of the south East Asian nations were independent because of relentless efforts by the leaders of the radical nationalist movements (Wilson, 2009). The seventies marked the birth of new political and social systems for the South East Asian nations, and symbolized the beginning of landmark economic progress for most of the region. 3. SIGNIFICANCE In the past, many economic analysts have made the sweeping and misleading assumption that Asia exhibits comparable economic structures (Sundaram, 2002). Recent studies prove that this standpoint is a biased dislocation from the reality on the ground. Most countries in the South East Asia region show a differing approach to issues of economic significance. The policy issues upon which South East Asian nations cast their economic systems differ broadly (Sundaram, 2002). In this view, studies are necessary to put forth a representative, empirical, and objective state of the economic reality of South East Asia. 4. RESEARCH FINDINGS A. Tourism Industry i. Weather and climate The tropical weather of the South East Asian countries poses numerous challenges to the labor force in the affected regions. Tropical climate is notorious for its many crippling maladies such as malaria epidemics. The diseases have a double impact of decreased economic productivity and a weightier government burden in terms of health costs (Steven et al., 1997). Stakeholders cannot afford to underestimate the significance and the impact of these challenges, given the level of competition and aptitude required to retain an edge in globalized market conditions. The same factors may inhibit foreign business ventures into the region, which directly affect the level of foreign direct investment. In addition, the tropical climate is a perpetual bother, given the pestilent rainfall and inauspiciously high temperatures. Climatic degradation issues remain a major challenge for the Asian economies. Experts estimate that South East Asia suffers disproportionately high negative impact from climate degradation, at twice the global average (ADB, 2009). Policy recommendations suggest distribution of the responsibility of averting the vice among regional partners. So far, only well to do economies have taken noticeable steps to roll back the specter of a worsening climate. International support and technology transfer are extra measures stakeholders hope will aid in mitigating the vice (ADB, 2009). ii. Local employment The tourism industry provides a rich source of employment opportunities for the local citizenry of South East Asia. Thousands of people in the mostly populous Asian economies earn a decent living working in many facets of the tourism industry (Binh, 2005). Several tour companies have come up to fulfill the need to transport the tourist to attraction spots or accommodation establishments. Several others make a living in offering local cuisine to the foreign tourists to the region. iii. US investments in the hotel industry South East Asia has a vibrant tourism industry, which experiences an uninterrupted stream of tourists from all over the globe. The region enjoys many physical, cultural, and historical endowments that offer magnificent tourist sites. Countries such as Vietnam have launched aggressive tourist promotion drives aimed at attracting western investors to the country (Binh, 2005). The move also aims at boosting tourist numbers from the North American region. Many western tourists seem to visit the East Asian countries and overlook the potential offered by the South East Asian countries. The hotel industry, especially outside of the major urban centers, needs serious improvement to be globally competitive. The move to attract American investors will stir tourist interest in the region and enable easier access to scenic upcountry scenic views found in the region. B. Manufacturing Industry i. Products Over 75% of the workforce in the export processing zones worldwide comes from East Asia and South East Asia (Steven et al., 1997). Manufacturing exports from EPZs account for nearly 75% of the total manufacturing exports in Malaysia. Export processing zones offer a number of benefits, key among which is the cushioning of the designated export sector against local market turbulences. Export processing zones also provide greater focus in processing export-related commodities. In addition, the specialist manufacturing zones address broader social issues such as unemployment (Steven et al., 1997). Of note is the fact that the export processing zones enjoy privileges such as special tax conditions, faster customs clearance, and lesser government interference. South East Asia manufactures of a wide range of products. For instance, Malaysia has built a thriving electronics manufacture industry since the 70s. The revolution in the manufacturing in the Malaysian case came with the need for the United States to outsource the more labor-intensive segments of its electronics manufacturing business to more cost effective markets. Intel also made history-changing investments in the country in 1972, turning Malaysia into a global competitor in the electronics trade industry (Steven et al., 1997). Generally, the Asian manufacturing industry relies heavily on imported technology. As a result, the nations have developed many diplomatic trade associations with overseas partners. To maintain the relationships, the governments have passed policies favorable to foreign investors in many segments of the manufacturing industry. Malaysia in particular is seeking to enhance technological content in foreign manufacturing. A popular World Bank report, describes the Indonesian industrial policy as incoherent (World Bank, 1993). On another front, in Singapore, a whopping 70% of the industries are foreign owned (Sundaram, 2002). The manufacturing industry in the country has made huge large leaps in technological advancements. The industrial strategy in Singapore focuses on the establishment of appropriate physical infrastructure and effective human resource. Many of the indigenous manufacturing concerns purpose to supplement the thriving foreign industrial investment in the South Asian economy. Dramatic changes are visible in the manufacturing sector between the seventies and nineties (Steven et al., 1997). In the early post-colonial era, most exports consisted of primary products and labor-intensive products such as rice, textiles, and rubber. However, by the nineties a major part of the export market consisted of skill-intensive and capital-intensive products such as electronics. By mid-nineties electronics accounted for a fifth of the Malaysian exports. ii. Localization South East Asian specialized manufacturing industry is not much localized in terms of ownership and financing. The fact that the respective governments have employed the FDI strategy to develop the industry underlay this trend (Steven et al., 1997). The mission to advance a technology-intensive manufacturing industry rode on attracting foreign technology firms into the South East Asian economies. The countries already had affordable workers and the necessary political will to attract the interest of overseas technology firms. iii. Cost of production Economic experts commend the South East Asian for its insight into the intrinsic nature of international trade. Many western countries, despite being pioneers of international trade, fail to appreciate the impact of tariffs and import taxes on capital or technology-intensive manufacturing concerns. Some products require the importation of up to 85% of the product content, and even small tariff impositions could effectively wipe out any monetary benefits of the product in the brutal global marketplace (Steven et al., 1997). The reduction and sometimes elimination of the import tariff goes a long way in reducing the cost of production of the import commodities. Coupled with cheaper labor, South East Asian countries stand in the prime position to reap the benefits that come with international trade in globalized economic climates. iv. Logistics Many South East Asian countries have put considerable amount of resources to developing transport and manufacturing infrastructure (Steven et al., 1997). With the right combination of logistical facilities, policies, and political will, growth in trade for the countries could be unprecedented. The populous nations also enjoy plentiful supply of cheap labor. Many Western manufacturing concerns are facing crippling limitations in their competitiveness because of high labor costs. South East Asia's strategically position helps it advantage from this drawback. v. Financing Over the past couple of decades, South East Asian economies have attracted high levels of foreign direct investment. The external sources of funding have ensured the continued success of the region's manufacturing enterprises over the years. In addition, sound fiscal policies and frugal spending cultures by the region's governments have helped create pools of monetary reserves. The savings can finance future economically viable projects to grow the blooming Asian economies further (Steven et al., 1997). vi. Labor One of the major advantages the Asian countries enjoy at the expense of their Western competitors is the availability of cheap labor for their manufacturing industries (Steven et al., 1997). With the added benefit of an entrenched schooling culture, the availability of skilled labor for its manufacturing ventures offers a huge incentive to foreign investors. Labor is one of the major reasons why foreign firms have chosen to outsource some of the labor-intensive manufacturing processes to Asian nations. On another note, the labor sector in Singapore is moving from being labor-intensive to being capital-intensive (Sundaram, 2002). 5. DISCUSSION During the sixties, the South East Asian economies grew at unprecedented high rates in comparison to comparable economies in the world. Several reasons were set forth to explain the rapid growth (Steven et al., 1997). One of the reasons given was high literacy levels and the low-income levels in the countries at the start of the period. The analysts’ argument was that the countries had more catching up to do before reaching the development levels of their economic peers. The other reason for the high economic growth for the period is associated with the policies prevalent during the period, which were in favor of sustainable economic growth. The changes in the demographic landscape preceding the World War II was also in favor of the economic rise of the region (Steven et al., 1997). Some economists also hold that geographic and structural conditions at the time were favorable to the economic boom in the South East Asian economies. More conspicuous was the fact that South East Asian countries were more open to a laissez faire market trends (Steven et al., 1997). Liberalization measures included the furtherance of free markets, promotion of labor-intensive manufacturing industries, better convertibility of local currencies, and maintenance of stable economic climates. In addition, more economically potent countries employed measures such as the establishment of EPZs, duty exemption programs, and financial incentive schemes in favor of foreign trade. One observation in view of the high growth in the Asian economy is explainable by a simple causal relationship. Poorer countries have a greater growth potential than better-developed economies (Steven et al., 1997). An underlying theme for this economic growth phenomenon is the supply in skilled work force. The explanation comes with the observation that Sub-Saharan Africa countries were faring worse at the beginning of the same period in history. As such, they should have experienced better growth rates over the period, which never happened (Steven et al., 1997). A peculiar trend is noticeable when comparing resource-rich nations with the rest of the South East Asian countries. Countries with natural resources recorded, on average, lower growth rates than their counterparts with fewer natural resources to back their economic progress. The trend was common even among the high-growth countries in the region such as Malaysia and Indonesia, and elsewhere in the world in places like Mexico, Nigeria, Venezuela, and a number of other countries (Steven et al., 1997). Possible explanations put forth point to poor utilization of resources and lack of a global perspective on the competitiveness of the manufacturing industry. Some analysts argue that poor demand for primary products, coupled with slow uptake of technological innovation may have exacerbated the slow growth rates in the sector. 6. IMPLICATIONS A. Benefits i. Globalization The implications of the measures taken by the South East Asian economies during the momentous time in history had lasting repercussions. Countries with high growth in the past stand better chances of instigating more economic growth in future. However, the growth is at a more restrained rate in comparison to the giant economic strides of the past (Steven et al., 1997). ii. Geographical impacts A few South Asian countries face the highly limiting geographical predicament of being landlocked. Landlocked countries face unprecedented costs of exporting goods (Steven et al., 1997). Air transport is prohibitively high to be a viable option for most goods. These conditions seriously curb the ability by some of these nations to compete equitably with many global competitors. The best option is usually manufacture for domestic consumption or export to the immediate neighbors. Generally, a country's ability to have a coastline at its disposal hugely determines the magnitude of its international trade (Steven et al., 1997). iii. Promising economic prospects Government savings in the South East Asia was the highest recorded anywhere in the world. South East Asian countries have a saving culture unparalleled by their Western counterparts. The lower spending and higher levels of saving will add to the pool of resources that the South East Asian countries will use in funding development projects in all sectors that are paramount to the advancement of their respective economies (Steven et al., 1997). B. Cons i. Risk The foreign direct investment is a major part of the economies of the South East Asian countries. Consequently, the level of control the government has over the economic drivers of the region is significantly reduced (Sundaram, 2002). The foreign direct investment also puts the governments at odds to deal with the globalized economy using indigenous means. ii. Government Corruption and Resistance to Reform Corruption scandals within the government litter South East Asia’s remote and recent history. Indonesia, though one of the South East Asia success stories according to the World Bank report (1993), takes the top position in this list for lack of integrity and fairness (Digal, 2010). Colombia, Vietnam, and Philippines follow close by. The political class in these countries has pushed aside public interest amid their hypocritical claims of belief in pursuit of goals for common good to service ulterior selfish interests. Corruption is associated with a number of vices, key among which is its ability to stand in the way of progress. Corruption also puts off foreign investment interests, and makes the government more obstructive to change (Digal, 2010). However, Singapore stands as a guiding example of the direction of other South East Asian countries as it enjoys low levels of corruption, comparable to Australia and Hong Kong. 7. RECOMMENDATIONS The current economic climate requires change in strategy to brave the new challenges, most of which are because of globalization. More flexibility is called for in the political landscapes. Markets should be more liberal and the internal conditions more favorable to foreign investment interests (Steven et al., 1997). 8. CONCLUSIONS A. South East Asia to Compete Globally South East Asia is borrowing a lot from established authorities in international trade, and taking the challenges in its stride. The current policies in the South East Asian economies now acknowledge the immense benefits for international competitiveness that come with liberalized markets. Openness in trade perspectives will open the markets to more pertinent technologies, broader markets, and proven trade management practices (Steven et al., 1997, pg 10). In studies on the reliability and efficiency of the Asian markets, the South East Asian nations demonstrate the ability to fare competitively with comparable economies in the Latin America (Steven et al., 1997). The index takes into account the effectiveness of the judicial systems, the level of corruption by the government, government bureaucracy, and business risk among other factors. In view of these studies, South East Asian countries offer incredible incentives to global investment giants. B. Developing Niche Local export-oriented manufacturing firms in South East Asia have embraced the challenges of global trade unreservedly. As a result, the export manufacturing industry is developing rapidly amidst the global challenges facing the sector. Local manufacturing enterprises are aggressive in production of customer-oriented products for their foreign clientele (Steven et al., 1997). The region’s openness in dealing with foreign markets put them in pinnacle position to adjust to new technological changes, enhance their manufacturing knowledge, and articulate their product marketing strategies abroad. Domestic–oriented manufacturing enterprises perform dismally in comparison to export-oriented manufacturing firms in the region. C. South East Asia Slow Rise The South East Asia nations lagged behind economically due to failure to keep up with global technological developments. Agricultural based economies are solely accountable for the muted growth in the South East Asian economies. With the few exceptions of city-states like Singapore, most of the South East Asian economies are agricultural based, which is a low growth economic sector, considering its primary nature (Steven et al., 1997). Unless much of the south East Asian economies transit to manufacturing economic concerns, their global prospects will remain modest and restricted. According to Steven et al. (1997), high growth South East Asian countries such as Singapore, Thailand, Malaysia, and Indonesia reported an average growth of over 5% over the mid sixties to the early nineties. The growth rates were one of a kind in history, and other world economies paled in comparison. However, some of the South East Asia economies recorded average or below average growth rates (Steven et al., 1997). The combination of factors is one of the reasons behind the slow growth for the region as a whole. South East Asian economies are less coherent than many economic analysts suggest (Sundaram, 2002). The economies bear particular autonomy in both their policy issues and economic structures. Global business researchers need to appreciate this aspect to reap the full benefits that the regional market offers to both indigenous and international business community. The World Bank touts South East Asia as a practical model for economies that seek successful late development. The region’s industrial development policy puts weighs heavily on the encouragement of direct foreign investment (World Bank, 1993). Technological challenges, coupled with global protectionism and the increasing competitiveness in global marketplaces may underwhelm the rate of development in the South East Asian markets (Steven et al., 1997). The combination of factors will lower the growth potential of South East Asia regarding its export market for industrial commodities. References ADB. (2009). Asian Development Outlook. Rebalancing Asia's Growth. Asian Development Bank. Manila. Binh V. (2005). Vietnam Tourism Industry. www.business-in-asia.com. Retrieved on December 23, 2011 from http://www.business-in-asia.com/vietnam_tourism.html Digal, S. (2010). Corruption is a cancer to the countries of South-East Asia. AsiaNews. Retrieved on December 23, 2011 from http://m.asianews.it/news/17847?!=en Steven R, Jeffrey S, Jong-Wha L. (1997). Economic Growth in Asia. Asian Development Bank. Manila. Sundaram, J. (2002). State and Market in Economic Development: Southeast Asian industrial Policy in comparative East Asian perspective. Department of Applied Economics. University of Malaya. Wilson, C. (2009). Colonialism and Nationalism in South East Asia. North Illinois University. Retrieved on December 23, 2011 from http://seasite.niu.edu/crossroads/wilson/colonialism.htm World Bank. (1993). The East Asian Miracle: Economic Growth and Public Policy. New York: Oxford University Press. Read More