Is Southeast Asia Still Too Dependent on U.S. Growth? Claire Innes Asia-Pacific Group Global Insight

Is Southeast Asia Still Too Dependent on U.S. Growth? Claire Innes Asia-Pacific Group Global Insight

Agenda Southeast Asia s growth model A shift to domestic demand-led Growth? The development of an intra-regional market? Future rebalancing: generating internal demand

Southeast Asia s Growth Model Inflows of FDI coincided with a period of aggressive liberalization in Southeast Asia Multinational Enterprises and the fragmentation of vertical supply chains Asia: low-cost, efficient production and assembly centre Goods exported to mature consumer markets

A Shift to Domestic Demand-Led Growth? Post-Asian 1997-98, policies to stimulate domestic demand implemented The case of Thailand: Thaksinomics However, net exports driver of growth and recovery since Asian financial crisis

A Shift to Domestic Demand-Led Growth? 150 Thailand: Contribution of Demand Components to GDP Growth (% of total) 100 50 0 1973-1983 1983-1993 1993-2003 -50 Domestic Demand Government Consumption Net Exports Imports of Goods and Services Private Consumption Gross Domestic Fixed Capital Formation Exports of Goods and Services

A Shift to Domestic Demand-Led Growth? Collapse in investment; recovery but levels still below pre-crisis peaks Structural problems inhibit domestic demand growth Imbalance reflected in region s recurring external surpluses

Emergence of an Intra-regional market? 50 45 40 35 30 25 20 15 10 5 AFTA Total Trade by Destination (% of World) 0 1980 1985 1990 1995 2000 2004 U.S. Japan Asia Europe

Emergence of an Intra-regional market? Preferential trading agreements have existed in ASEAN since 1977 1990 CEPT agreement implemented aimed at creating an ASEAN Free Trade Area The Noodle Bowl of bilateral trade agreements However, inter-afta trade growth is still modest Growth dynamism is in trade with East Asia, especially Greater China

China, lodestone of a new regional market? 60 50 40 30 20 10 Direction of Total Manufacturing Trade AFTA (% of total) 0 1992 1996 2003 East Asia Japan Dev.East Asia Greater China AFTA NAFTA EU

China, lodestone of a new regional market? Share of Parts and Components in Manufacturing Exports (% of total) 70 60 50 40 30 20 10 0 1992 1996 2003 AFTA Indonesia Malaysia Philippines Singapore Thailand Series7

China, lodestone of a new regional market? Contribution of Parts and Components to Manufacturing Export Growth 1993-2003 (% of total) 80 70 60 50 40 30 20 10 0 East Asia Japan AFTA Indonesia Malaysia Philippines Singapore Thailand US Europe

China, lodestone of a new regional market? 70 60 50 40 30 20 10 Direction of Parts and Components Exports from AFTA (% of total) 0 1992 1996 2003 East Asia Japan Dev. East Asia Greater China AFTA NAFTA EU

External Market Dependence Increases Final Goods Trade/ Parts and Components Trade (% total 2003) 60 50 40 30 20 10 0 Final P&C Final P&C Final P&C Final P&C AFTA Developing East Asia NAFTA EU

External Market Dependence Increases Intra-regional trade growth in Asia is being driven by intensifying vertical specialization Production sharing has increased dependence on external markets Market driven integration: formal regional frameworks have had little impact on trade flows Region s stake in unfettered access to U.S and E.U markets and the multilateral system is accentuated

Future Rebalancing Generating internal demand: Cultivation of consumer majorities in Southeast Asian economies Capturing dynamics of emerging India and China through the evolution of a deeper and more inclusive Asian Free Trade Area Policymakers laying foundations, ASEAN+3 framework, AFTAC, embryonic Asian monetary fund Political dissonance and economic diversity remain key obstacles

Thank You Claire Innes Asia-Pacific Research Manager E-mail: claire.innes@globalinsight.com

The Premier Forum on the Direction of the Global Economy