ASEAN Competitiveness Report 2010 by Lee Kuan Yew School of Public Policy, National University of Singapore

ASEAN Competitiveness Report ASEAN Competitiveness Report 2010

NATIONAL UNIVERSITY OF SINGAPORE 469C Bukit Timah Road, Oei Tiong Ham Building Singapore 259772 www.lkyspp.nus.edu.sg/ACI

Foreword by

Michael E. Porter

Professor Harvard Business School

Photography by Anthon Kiong

LEE KUAN YEW SCHOOL OF PUBLIC POLICY

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Marn-Heong Wong Rakhi Shankar Ruby Toh Christian Ketels Special Advisor

ASEAN Competitiveness Report

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Foreword by

Michael E. Porter

Professor Harvard Business School

Marn-Heong Wong Rakhi Shankar Ruby Toh Christian Ketels Special Advisor

ASEAN COMPETITIVENESS REPORT

ÂŠ Asia Competitiveness Institute 2011 ISBN: 978-981-08-8429-1 This work is subject to copyright. The work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgement of the source.

ASIA COMPETITIVENESS INSTITUTE The Asia Competitiveness Institute (ACI) is a research centre in the Lee Kuan Yew School of Public Policy, National University of Singapore. ACI aims to become a thought leader on competitiveness in Asia and in doing so influence regional policy-making in this area with the ultimate objective of raising living standards through productivity-driven economic growth. More information on ACI can be obtained from http://www.spp.nus.edu.sg/ACI/home.aspx An appropriate citation for this Report is: Wong, M-H., Shankar, R. and Toh, R., 2011. ASEAN Competitiveness Report 2010, Singapore: Asia Competitiveness Institute.

ACKNOWLEDGEMENTS This Report was prepared by a research team led by Dr Marn-Heong Wong, Assistant Professor at the Lee Kuan Yew School of Public Policy (LKYSPP), National University of Singapore. Dr Christian Ketels, Special Advisor to the ACI and a member of the Harvard Business School faculty at Professor Michael E. Porterâ&#x20AC;&#x2122;s Institute for Strategy and Competitiveness, provided invaluable input on the analytical structure of the Report. The research input and support provided by Ng Kwan Kee and Kiran Safwan Malik of the ACI and LKYSPP at various stages of the project is gratefully acknowledged. We would also like to thank Anthon Kiong for providing the photo on the cover of the Report. All views and opinions in this Report remain the sole responsibility of the authors.

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FOREWORD The Asia Competitiveness Institute (ACI) was created to provide policy-relevant analysis and recommendations on competitiveness in Singapore and the ASEAN region, drawn on rich data and a comprehensive competitiveness framework. The ASEAN Competitiveness Report, following studies on Singapore (2009) and Vietnam (2010), is another important milestone in realizing this vision. On behalf of ACI’s International Advisory Panel, I would like to congratulate the ACI team for this important piece of work. Covering a region of ten countries ranging from poor, landlocked Laos to rich, island city Singapore, the ASEAN Competitiveness Report highlights the importance of regions, or groups of neighboring countries, to competitiveness and economic prosperity at the national level. Regions are important because neighbors are a nation’s most natural trading and investment partners. The region provides accessible markets for local firms, especially important for those with limited international experience. Economic development and prosperity can be greatly enhanced by a healthy neighborhood. National productivity can be greatly enhanced through regional coordination of economic policies. Neighbors almost inevitably affect a country’s reputation and image. Regional economic integration makes all nations more attractive as locations for FDI, and helps countries to gain greater weight in international relations. The ASEAN Competitiveness Report highlights the challenging position that ASEAN finds itself in in 2011. Following the traumatic experience of the Asian financial crisis, the region is now faced with a large and increasingly powerful Chinese economy in the North and a huge Indian economy in the West also making rapid progress. ASEAN has stabilized its position and proven to be quite resilient in the face of the recent global crisis, despite its high dependency on exports. But the region will ultimately need to define its role and competitive strengths at the crossroads of these two emerging economic giants. The Report explores how regional collaboration across the heterogeneous set of ASEAN members can help individual countries to address these challenges. ASEAN can share policy knowledge and spur improvement in areas like capital market infrastructure, human resource development, rule of law, cluster development, and indigenous enterprise development. These are areas where many ASEAN members are suffering from weaknesses but can benefit from some countries that are leaders. ASEAN can enable the strengthening of linkages among related clusters across the region. In clusters such as information technology, there are elements of an “ASEAN production system,” i.e., a set of related clusters in the region that cover different parts of the value chain. In macroeconomic policy, ASEAN has already made some steps towards better policy cooperation through the Chiang Mai initiative covering multilateral currency swaps. In the ASEAN Charter and the plans for an ASEAN Community, the region has outlined ambitious goals. The recommendations contained in this Report are fully consistent with this vision, while offering specific steps for moving forward. However, the Report also highlights the need for ASEAN to be strengthened as an institution in order to have sufficient weight and influence to move from vision to action. Collective action, especially among a group of disparate countries, only occurs if there is strong political will and sufficient institutional capacity to make change happen. Our ambition at ACI is to provide government and private sector leaders with objective data and powerful analysis to enable more informed policy decisions. Whether or not leaders agree with every conclusion or recommendation, my hope is that this first ASEAN Competitiveness Report will achieve this purpose. This Report will become a central part of ACI’s portfolio of activities. We would welcome the guidance, support, and collaboration of the private sector, universities, and government from throughout the region in advancing this agenda.

Michael E. Porter Bishop William Lawrence University Professor, Harvard Business School Chair of the International Advisory Panel, Asia Competitiveness Institute ASEAN COMPETITIVENESS REPORT

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KEY MESSAGES • ASEAN is facing profound changes in the global economic climate with the rise of China and India and weakened economic prospects in major advanced countries. It is also entering a new phase in its cooperation as members move towards building an ASEAN Community by 2015. • ASEAN economies have weathered the global crisis well, but a longer-term competitiveness review highlights the need and scope to substantially raise competitiveness across ASEAN economies and for ASEAN as a whole. • ASEAN’s current prosperity or GDP per capita, which is the outcome of past competitiveness, is behind that of China and much lower than that of world leaders. Its shares of world exports and inward foreign direct investment flows have either fallen or stagnated over the last decade. • ASEAN’s ranking on competitiveness fundamentals, as measured by a wide range of macroeconomic and microeconomic factors, is 57 of 132 countries in 2010. This position has remained relatively unchanged over the last five years. • While the priority issues that each country has to address to raise national competitiveness may differ, this Report has shown that there is much ground for policy learning and action at the regional level. • Collectively, it is imperative for ASEAN to achieve deeper integration in a timely manner to generate new sources of growth and reduce its reliance on traditional export markets in major advanced economies. At the same time, ASEAN should expand its cooperation with external partners, in particular China and India, to tap opportunities offered by their rapid growth. • ASEAN can extract greater gains from its integration efforts by adopting an integrated, multi-pronged ASEAN Competitiveness Agenda that focuses on areas where collaboration creates direct benefits for participants. • To create an attractive environment for local and foreign businesses, it is recommended that ASEAN builds on its relative strengths to intensify cluster development, strengthen capital market infrastructure, nurture local enterprises and step up macroeconomic policy dialogue. ASEAN also needs to urgently address its main weaknesses by promoting administrative regulatory reforms, enhancing human resource development and strengthening the rule of law. • For ASEAN to successfully move from vision to action, its institutional mechanisms and capacity have to be strengthened to enable both the ASEAN Secretariat and member economies to effectively fulfill the tasks required. The political will to adhere to the blueprints for action is also paramount.

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CEP

ABBREVIATIONS

CEPEA CEPT CLMV AANZFTA ACI ACIA

CMIM CPF

Central Provident Fund

Doing Business East Asian Free Trade Area

Asian Development Bank

EAFTA

Asian Development Bank Institute ASEAN Economic Community ASEAN Economic Ministers ASEAN Framework Agreement on Services

EAS

East Asia Summit

EIU

Economist Intelligence Unit

European Union

FDI

Foreign Direct Investment

FTA

Free Trade Agreement

AFTA

ASEAN Free Trade Area

GCI

AIA

ASEAN Investment Area

ADB ADBI AEC AEM AFAS

AIF AMRO ASEAN ASEAN-6 ASEAN+3 ASEAN+6 ASEAN-BAC ASEAN-ISIS

ASEAN-Australia-New Zealand Free Trade Area Asia Competitiveness Institute ASEAN Comprehensive Investment Agreement

Comprehensive Economic Partnership Comprehensive Economic Partnership for East Asia Common Effective Preferential Tariff Cambodia, Laos, Myanmar and Vietnam Chiang Mai Initiative Multilateralization

ASEAN Infrastructure Fund ASEAN+3 Macroeconomic Research Office Association of Southeast Asian Nations Indonesia, Malaysia, Philippines, Singapore, Thailand and Brunei ASEAN, China, Japan, South Korea ASEAN, China, Japan, South Korea, India, Australia, New Zealand ASEAN Business Advisory Council ASEAN Institute of Strategic and International Studies

GDP

Gross Domestic Product

GEM

Gender Empowerment Measure

GNI

Gross National Income

HDI ICT IMF IT LPI NAFTA

Human Development Index Information and Communications Technology International Monetary Fund Information Technology Logistics Performance Index North American Free Trade Agreement

NSW

National Single Window

PPP

Purchasing Power Parity

R&D

Research and Development

Balance of Payments

ROO

Compound Annual Growth Rate

Rules of Origin

SIPI

Social Infrastructure and Political Institutions

ASW

ASEAN Single Window

ATIGA

ASEAN Trade in Goods Agreement

BOP CAGR

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GDI

Global Competitiveness Index Gender-related Development Index

SME

Small and Medium Enterprise

United Nations

UNCTAD UNDP UNESCO

UNU-WIDER US USPTO

United Nations Conference on Trade and Development United Nations Development Program United Nations Educational, Scientific and Cultural Organization World Institute for Development Economics Research of the United Nations University United States US Patent and Trademark Office

World Bank

WDI

World Development Indicators

WEF

World Economic Forum

WGI WHO WTO

Worldwide Governance Indicators World Health Organization World Trade Organization

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Contents Foreword ........................................................................................................................................................................................... iii Key Messages ................................................................................................................................................................................... v Abbreviations .................................................................................................................................................................................. vi Executive Summary ....................................................................................................................................................................... xiv Chapter 1: Introduction ASEAN’s Competitiveness Challenges ........................................................................................................................................ 2 Conceptual Approach of the Report ............................................................................................................................................ 3 Report Outline ................................................................................................................................................................................. 4 Chapter 2: Context for Regional Cooperation Macroeconomic Environment ....................................................................................................................................................... 8 ASEAN .......................................................................................................................................................................................... 8 Recent Macroeconomic Performance ........................................................................................................................................ 8 Macroeconomic Policies and Growth Prospects ....................................................................................................................... 12 The Global Context ...................................................................................................................................................................... 14 Global Economic Outlook .......................................................................................................................................................... 14 Global Rebalancing .................................................................................................................................................................... 15 ASEAN’s Trade and Investment Linkages ............................................................................................................................. 15 ASEAN Cooperation Model .......................................................................................................................................................... 16 Towards an ASEAN Economic Community .......................................................................................................................... 17 Trade and Investment Liberalization and Facilitation ................................................................................................. 18 Enhancing ASEAN Connectivity ................................................................................................................................. 19 ASEAN’s Engagement with Stakeholders .................................................................................................................... 20 ASEAN-plus Initiatives .................................................................................................................................................. 20 Trade and Investment Agreements ................................................................................................................................ 20 Financial Cooperation .................................................................................................................................................. 21 Institutional Framework for Collaboration ................................................................................................................... 22 Summary ............................................................................................................................................................................. 23 Chapter 3: Competitiveness Performance of ASEAN Profile of the ASEAN Region ......................................................................................................................................................... 28 Competitiveness Performance ........................................................................................................................................................ 30 Standard of Living ............................................................................................................................,,,,,,,,,,,,,,............................. 30 Prosperity .................................................................................................................................................................................... 30 Distribution of Prosperity .......................................................................................................................................................... 31 Quality of Life ............................................................................................................................................................................ 32 The Elements of Prosperity ......................................................................................................................................................... 33 Labor Productivity ..................................................................................................................................................................

Labor Mobilization ................................................................................................................................................................

Purchasing Power ....................................................................................................................................................................... 35

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Contents (continued) Intermediate Economic Outcomes ............................................................................................................................................... 36 Exports ........................................................................................................................................................................................... 36 Exports by Clusters .................................................................................................................................................................... 37 Investments ................................................................................................................................................................................... 38 Domestic Gross Fixed Capital Investment .............................................................................................................................. 39 Inward Foreign Direct Investment .......................................................................................................................................... 40 Outward Foreign Direct Investment ....................................................................................................................................... 42 Innovation ..................................................................................................................................................................................... 43 Entrepreneurship .......................................................................................................................................................................... 44 Summary ........................................................................................................................................................................................... 45 Chapter 4: ASEAN Competitiveness Fundamentals Regional Competitiveness ………………………..……………………………………………...................................................................... 50 Macroeconomic Competitiveness ............................................................................................................................................. 50 Microeconomic Competitiveness .............................................................................................................................................. 51 National Competitiveness across ASEAN Countries ............................................................................................................... 58 Brunei ............................................................................................................................................................................................. 58 Cambodia ...................................................................................................................................................................................... 59 Indonesia ........................................................................................................................................................................................ 60 Malaysia ......................................................................................................................................................................................... 61 Philippines ..................................................................................................................................................................................... 63 Singapore ....................................................................................................................................................................................... 64 Thailand ......................................................................................................................................................................................... 65 Vietnam ......................................................................................................................................................................................... 66 Analysis with Additional Competitiveness Indicators .............................................................................................................. 69 Summary ........................................................................................................................................................................................... 73 Chapter 5: Assessment and Policy Recommendations Key Challenges in a Changing Global Context .......................................................................................................................... 78 ASEAN’s Competitiveness Performance ..................................................................................................................................... 78 ASEAN’s Competitiveness Fundamentals .................................................................................................................................. 80 Main Areas of Strengths and Weaknesses ................................................................................................................................ 80 Strengths ..................................................................................................................................................................................... 80 Weaknesses .................................................................................................................................................................................. 81 Prosperity and Competitiveness Fundamentals ...................................................................................................................... 82 ASEAN, China and India .......................................................................................................................................................... 82 Towards an ASEAN Competitiveness Agenda .......................................................................................................................... 83 Building on Strengths .................................................................................................................................................................. 84 Addressing Weaknesses ............................................................................................................................................................... 85 Strengthening Implementation ..................................................................................................................................................... 86 Conclusion ........................................................................................................................................................................................ 86 ASEAN COMPETITIVENESS REPORT

Boxes Box 4.1 Box 4.2 Box 4.3 Box 4.4 Box 4.5

ASEAN-China-India ................................................................................................................................... Laos and Myanmar ....................................................................................................................................... Economic Freedom in ASEAN .................................................................................................................. Ease of Doing Business in ASEAN ............................................................................................................ Logistical Performance in ASEAN ............................................................................................................

55 68 69 71 72

Competitiveness Profile of ASEAN Region 2010 ...................................................................................... Competitiveness Framework: Foundations of Prosperity ......................................................................... Quarterly Real GDP Growth, ASEAN Countries ..................................................................................... Annual Real GDP Growth, ASEAN Countries .......................................................................................... Quarterly Merchandise Exports Growth, ASEAN Countries ................................................................. Unemployment Rates, ASEAN Countries .................................................................................................. Consumer Prices, ASEAN Countries .......................................................................................................... Current Account Balances, ASEAN Countries ......................................................................................... Exchange Rates, ASEAN Countries ............................................................................................................ Policy Rates, ASEAN Countries ................................................................................................................... Fiscal Balances, ASEAN Countries ............................................................................................................... GDP Growth Forecasts, ASEAN Countries .............................................................................................. GDP Growth Rates, Selected Countries/Regions ...................................................................................... World Current Account Balances .................................................................................................................. Share of ASEAN Exports to Selected Countries/Regions ....................................................................... Share of ASEAN Imports from Selected Countries/Regions ................................................................. Share of ASEAN FDI Inflows from Selected Countries/Regions .......................................................... ASEAN Endowments: Natural Resources .................................................................................................. ASEAN Heterogeneity: Ethnicity ................................................................................................................ Trends in Prosperity Growth, ASEAN and Selected Countries .......................................................... Prosperity Level and Growth, ASEAN and Selected Countries .......................................................... GNI Per Capita in 2009, ASEAN Countries, China and India .......................................................... Income Inequality, ASEAN Countries, China and India ..................................................................... Poverty Rates, ASEAN Countries, China and India ............................................................................. Human Development Index, ASEAN Countries, China and India ................................................... Gender-related Indices, ASEAN Countries, China and India ............................................................ Trends in Labor Productivity, ASEAN and Selected Countries ........................................................ Labor Productivity Level and Growth, ASEAN and Selected Countries ......................................... Labor Force Participation Rates, ASEAN and Selected Countries ..................................................... Labor Force Participation Rates, ASEAN countries ............................................................................. Price Comparisons, ASEAN and Selected Countries ............................................................................. World Export Market Shares, ASEAN ..................................................................................................... World Export Market Shares, ASEAN and Selected Countries ........................................................... World Export Market Shares, ASEAN Countries .................................................................................. Exports by Clusters, ASEAN Countries ................................................................................................... Domestic Investment, ASEAN and Selected Countries ........................................................................ Domestic Investment, ASEAN Countries ................................................................................................ FDI Inward Stock, ASEAN and Selected Countries .............................................................................. World Share in FDI Inflows, ASEAN and Selected Countries ............................................................. Inward FDI Performance Index, ASEAN and Selected Countries ......................................................

xvii 3 9 9 10 10 11 11 12 13 13 14 14 15 16 16 17 28 29 30 30 31 32 32 33 33 34 34 35 35 36 37 37 38 38 39 39 40 40 41

Figures Figure A Figure 1.1 Figure 2.1 Figure 2.2 Figure 2.3 Figure 2.4 Figure 2.5 Figure 2.6 Figure 2.7 Figure 2.8 Figure 2.9 Figure 2.10 Figure 2.11 Figure 2.12 Figure 2.13 Figure 2.14 Figure 2.15 Figure 3.1 Figure 3.2 Figure 3.3 Figure 3.4 Figure 3.5 Figure 3.6 Figure 3.7 Figure 3.8 Figure 3.9 Figure 3.10 Figure 3.11 Figure 3.12 Figure 3.13 Figure 3.14 Figure 3.15 Figure 3.16 Figure 3.17 Figure 3.18 Figure 3.19 Figure 3.20 Figure 3.21 Figure 3.22 Figure 3.23

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Figures (continued) Figure 3.24 Figure 3.25 Figure 3.26 Figure 3.27 Figure 3.28 Figure 3.29 Figure 3.30 Figure 3.31 Figure 3.32 Figure 4.1 Figure 4.2 Figure 4.3 Figure 4.4 Figure 4.5 Figure 4.6 Figure 4.7 Figure 4.8 Figure 4.9 Figure 4.10 Figure 4.11 Figure 4.12 Figure 4.13 Figure 4.14 Figure 5.1 Figure 5.2 Figure 5.3

Share of FDI Inflows in ASEAN by Country, Selected Years ............................................................... FDI Outward Stock, ASEAN and Selected Countries .......................................................................... World Share in FDI Outflows, ASEAN and Selected Countries ......................................................... Outward FDI Performance Index, ASEAN and Selected Countries .................................................. Share of Outward FDI Flows from ASEAN by Country, Selected Years ............................................ Patent Filings with USPTO, ASEAN and Selected Countries ............................................................ Number and Growth of Patent Filings with USPTO, ASEAN and Selected Countries ................. Number and Growth of Registered Businesses, ASEAN and Selected Countries ............................ Number and Growth of New Registered Businesses to Total Registered Businesses, ASEAN and Selected Countries ........................................................................................................................................ Competitiveness Profile of ASEAN Region 2010 ................................................................................... Clusters in ASEAN ...................................................................................................................................... Competitiveness of ASEAN-China-India ................................................................................................ Competitiveness Profile of Brunei 2010 .................................................................................................... Competitiveness Profile of Cambodia 2010 ............................................................................................. Competitiveness Profile of Indonesia 2010 .............................................................................................. Competitiveness Profile of Malaysia 2010 ................................................................................................ Competitiveness Profile of Philippines 2010 ............................................................................................ Competitiveness Profile of Singapore 2010 .............................................................................................. Competitiveness Profile of Thailand 2010 ................................................................................................ Competitiveness Profile of Vietnam 2009 ................................................................................................ Economic Freedom in ASEAN Region ..................................................................................................... Doing Business Index for ASEAN Region ............................................................................................... Logistics Performance Index for ASEAN Region .................................................................................... Microeconomic and Macroeconomic Competitiveness across ASEAN Countries .......................... “Competitiveness Gap”: Difference in GDP Per Capita and New GCI Rankings ............................ ASEAN Competitiveness Agenda .............................................................................................................

41 42 42 43 43 44 45 45 46 51 53 55 58 60 61 62 63 64 65 67 70 71 73 80 83 84

Top-Three Areas of Relative Strength within Each ASEAN Country ................................................... Top-Three Areas of Relative Weakness within Each ASEAN Country ................................................. CMIM Contribution Ratio ........................................................................................................................ Changes in Income Classification of ASEAN Countries, 1990-2009 ................................................ Company Sophistication in ASEAN ........................................................................................................ National Business Environment in ASEAN: Supporting and Related Industries ............................ National Business Environment in ASEAN: Context for Strategy and Rivalry ............................... National Business Environment in ASEAN: Demand Conditions .................................................... National Business Environment in ASEAN: Factor Input Conditions ............................................. Top-Five Relative Strengths of ASEAN-China-India ............................................................................ Top-Five Relative Weaknesses of ASEAN-China-India ........................................................................ Selected Comparative Competitiveness Indicators for Laos and Myanmar ....................................... Index of Economic Freedom, ASEAN Countries.................................................................................... Doing Business Index, ASEAN Countries ............................................................................................... Logistics Performance Index, ASEAN Countries ................................................................................... Top-Three Areas of Relative Strength, ASEAN and Member Countries .............................................. Top-Three Areas of Relative Weakness, ASEAN and Member Countries ............................................

xviii xviii 22 31 52 52 53 54 54 56 57 68 70 71 73 81 81

Tables Table A Table B Table 2.1 Table 3.1 Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 4.8 Table 4.9 Table 4.10 Table 4.11 Table 5.1 Table 5.2

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Executive Summary

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EXECUTIVE SUMMARY The Association of Southeast Asian Nations (ASEAN) is facing profound changes in the global economic climate as well as undergoing a new phase in its development towards deeper integration. The global economic environment post2008 crisis is characterized by weakened economic prospects in major advanced countries and the growing economic might of China and India. From five countries coming together to form an association in 1967 primarily to promote peace and stability in the Southeast Asian region, ASEAN has morphed 43 years later into a ten-member organization with a legal personality with the signing of the ASEAN Charter in 2007. Despite the diversity that remains among members in levels of economic development, culture, ethnicity and language, ASEAN has ambitious plans to form an ASEAN Community that is politically cohesive, economically integrated and socially responsible by 2015. What do these economic and institutional changes imply for ASEAN’s medium-term competitiveness? What can ASEAN members do collectively and individually to address key challenges? The ASEAN Competitiveness Report 2010 is the inaugural assessment of the region’s competitiveness by the Asia Competitiveness Institute (ACI) at the Lee Kuan Yew School of Public Policy, National University of Singapore. The Report casts into perspective the dynamics of economic conditions and institutional developments as well as the longer-term economic performance of ASEAN and examines the fundamental competitiveness of the region. The competitiveness analysis is organized based on the conceptual framework developed by Professor Michael Porter of the Harvard Business School and Chairman of ACI’s International Advisory Panel. In recognition of both the varying circumstances across ASEAN economies and ASEAN’s resolve to seek unity in diversity, the analysis is conducted at two levels – overall ASEAN and by individual ASEAN country. The Report seeks to explore ASEAN’s global competitiveness position if it were a single economic entity. It also reviews the competitiveness of each member country to identify areas of strengths and weaknesses that prevail across more of the ASEAN countries that are well suited for policy sharing and common policy action at the regional level. The Report aims to offer suggestions on the direction of policies that can be given emphasis in the ASEAN process. It is also hoped that analysis at the individual country level will assist policy makers in the identification of areas for priority national action.

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Key Challenges for ASEAN With an ever-shifting competitiveness landscape, it is a constant challenge for any economy or region to rethink and formulate policy responses to new circumstances and continually improve its competitiveness. The set of key questions facing ASEAN currently is both at the national and regional levels. ASEAN’s prosperity, measured in terms of GDP per capita, runs the full range from high-income to low-income categories. Since 1997, when the region was hit by the Asian financial crisis, seven of its members in the low- and middleincome groups have failed to move up the next rung of the income ladder. The exception was Vietnam, which moved from low to lower-middle-income status in 2009. What are the policy approaches that can help member countries substantially improve their prosperity and avoid becoming entrenched in a particular stage of development? In the midst of the 2008-2009 global economic crisis, the ASEAN region suffered the largest plunge in growth not seen since the Asian financial crisis, as demand from major developed economies plummeted. This underscored the vulnerability of the export-led growth model pursued by many ASEAN economies. With growth prospects in the major markets of the United States and Europe likely to remain uncertain, what growth strategy should ASEAN pursue in the post-crisis global economy? ASEAN has constructed a detailed roadmap towards an integrated economy by 2015 as a means to enhance its competitiveness and generate new impetus for growth. However, the move to deepen and broaden regional integration is not a smooth ride. The theme for ASEAN in 2010, ‘Towards the ASEAN Community: From Vision to Action’, pinpoints the crux of the problem with ASEAN integration efforts. The vision is bold, but implementation falls short. Does ASEAN need a new approach to identify and engage on policy issues in which regional collaboration can have a unique impact? Is the institutional structure and capacity of ASEAN in line with the tasks it is charged to tackle?

Conceptual Approach The competitiveness analysis in this Report adopts the competitiveness framework developed by Michael Porter. The attractiveness of the Porter framework lies in its malleability to the analysis of any situation by capturing the role of various factors on competitiveness without the need for a priori assumptions. Porter’s approach is particularly useful when faced with a diversity of impact factors with varying importance in determining competitiveness, as in the case of ASEAN. Competitiveness determines the productivity with which a country or region uses its land, labor, capital and other resources. Productivity sets the standard of living through returns on factors of production (wages, rent, etc.) that

a country can sustain. To attain competitiveness and prosperity, it is not the type of industries that a country or region chooses to compete in but how productively it competes in those industries.

rebound in 2010. Factors that may dent ASEAN’s growth prospects include the risk of economic instability as capital inflows to the region surge, as well as soaring food and oil prices in the world.

Competitiveness factors can be grouped under macroeconomic or microeconomic competitiveness. Macroeconomic competitiveness delineates the overall context in which firms operate and create the potential for high productivity. Although these factors do not directly affect the productivity of firms, they are critical in providing support for firm efforts to raise productivity. These factors include the quality of social infrastructure, political institutions and macroeconomic policy. Microeconomic competitiveness identifies operating practices and strategies of firms as well as business inputs, infrastructure, institutions and policies that constitute the environment in which firms compete. All these factors have a direct impact on productivity.

ASEAN cooperation has made steady progress with a goal to create an ASEAN Community by 2015 that will be built on the three pillars of an ASEAN Economic Community (AEC), ASEAN Political-Security Community and ASEAN Socio-Cultural Community. The goal to form an AEC is executed through the AEC Blueprint, which is a comprehensive action plan with clear timelines and targets, and progress in implementation is tracked through an AEC Scorecard. Implementation has fallen behind schedule, as almost 20 percent of deliverables under the AEC Blueprint for 2008-2009 still have not been achieved by October 2010. Measures that have not been implemented mainly involve the ratification of important economic agreements by individual members. The imperatives of deeper regional integration may bring into question the informal and consensual ASEAN Way of working adopted by ASEAN and require greater powers under the Charter to monitor and ensure compliance.

Using this broad framework, the Report makes extensive use of a set of New Global Competitiveness Indices (‘New GCIs’) aggregated at different levels using a methodology developed by Professor Porter and his research team, primarily from raw data collected by the World Economic Forum in its annual Executive Opinion Survey. The indicators are computed and evaluated at both the regional and national levels. The use of a common competitiveness framework and set of parameters for both the regional- and national-level analysis will facilitate consistent interpretation and meaningful cross-national comparison of the indicators.

Summary of Findings Context for Regional Cooperation The ASEAN region has rebounded from the 2008 global economic crisis that had affected economies unevenly. Prompt macroeconomic policy responses, low public debt, resilient domestic demand and a rebound in exports have contributed to the turnaround. Resource-rich ASEAN countries have also benefited from high commodity prices. The global economic recovery process has been characterized by a duality in the post-crisis growth paths of ASEAN and the rest of developing Asia and major advanced economies. The Asian economies, particularly, China and India, are outperforming major advanced economies in economic growth, and this is precipitating changes in the structure of the global economy that would require ASEAN to adjust its own economic structure to enable it to maximize its competitiveness and find complementarities with other high-growth economies in the region. There is a need to reduce export dependence, especially to the developed economies, and develop intra-regional and domestic demand, as a global rebalancing of current accounts is set in motion. The outlook for ASEAN economies is positive, although growth is expected to moderate in 2011 from the sharp

ASEAN has also been expanding its linkages with external partners, with a widening network of free trade agreements, which have been concluded with China, Japan, Korea, Australia and New Zealand, and India to-date. ASEAN is concurrently considering proposals for an East Asian Free Trade Area for ASEAN+3 countries and a Comprehensive Economic Partnership for East Asia involving ASEAN+6 countries. ASEAN also cooperates with the Plus Three partners of China, Japan and South Korea on a number of financial initiatives, the most significant of which is the Chiang Mai Initiative Multilateralization in 2010, which is the multilateralization of a currency swap arrangement established to address short-term liquidity problems among participants and strengthen regional financial stability. Competitiveness Performance of ASEAN ASEAN has several naturally-endowed advantages in building prosperity. It has a relatively large combined market of 592 million people with a combined GDP of US$1.49 trillion in 2009 at current market prices. The region is strategically located at the crossroads of world shipping and air routes within an economically vibrant Asian region, and has abundant natural resources. On the flipside, there are a few fundamental conditions that can potentially disrupt ASEAN’s development. The region is relatively prone to natural disasters such as earthquakes, typhoons and the spread of infectious diseases that result in loss of lives and livelihoods and damage to infrastructural facilities. ASEAN is very heterogeneous in cultures and traditions. These are fault lines that may give rise to potential conflicts. On ASEAN’s economic performance, which reflects the outcomes of its past competitiveness, there is considerable variation across member countries. However, the picture that emerges for ASEAN overall is one of a region that has ASEAN COMPETITIVENESS REPORT

not performed as well post-1997 Asian financial crisis than in the period before the crisis. ASEAN’s prosperity, which is measured by GDP per capita, has been rising at an annual 2.3 percent over the last decade, only slightly above the world average rate. This is in contrast to its prosperity growth that was rising much faster than the world average before the Asian crisis. ASEAN’s GDP per capita in 2009 was $4,739 in constant international dollars adjusted for purchasing power. This was 11 percent that of the United States and 76 percent that of China. ASEAN’s prosperity level was also below the world average by half the amount. This points to ample scope for ASEAN to advance the region’s prosperity. ASEAN’s prosperity is also not evenly spread. Income inequality as measured by the Gini coefficient is relatively high, with five of eight ASEAN countries where data are available posting a Gini coefficient above 0.4. The region also has large pockets of poverty, with four ASEAN countries having about a fifth or more of their population living below the income poverty line. Measures of human development and gender-related development show huge variations across ASEAN countries. ASEAN’s labor productivity, which is one of the underlying factors contributing to prosperity, was relatively low at US$11,114 in 2009. This was less than one-fifth the level of the US, the productivity leader, and between 25 to 30 percent the productivity of Japan and the EU. ASEAN’s labor productivity has not been rising as fast as China’s over the last decade and China has caught up with ASEAN on labor productivity. ASEAN has not recovered its global position in export and inward Foreign Direct Investment (FDI) shares achieved before the Asian financial crisis. ASEAN’s share of world exports of goods and services has remained around the 6 percent mark over the last ten years, compared with a doubling of its world export share in the ten years before the Asian crisis. It has been overtaken by China in world export market share since 2005. ASEAN’s world export market share has increased to 6.2 percent in 2009 from 5.9 percent in 2007 and 2008. However, whether this is the start of a sustained increase remains to be seen. Similarly, ASEAN’s share of world FDI inflows in the last ten years has been below its share before the 1997 crisis. China has overtaken it since 1993. In 2008, ASEAN’s share fell to 2.7 percent but this increased to 3.6 percent in 2009. China’s share of world FDI inflow in 2009 was 8.5 percent. ASEAN is relatively weak on innovation outcomes. The number of ASEAN’s patents filed in the US was just 0.4 percent of total patents filed in 2009, far behind the US (49.5 percent), Japan (19.8 percent) and EU (13.1 percent). ASEAN’s share is similar to India’s but lower than China’s 1.2 percent. In terms of growth rate of patent filing in the US on a per capita basis, ASEAN falls significantly behind China and India over the 1997-2009 period. There is significant room to grow entrepreneurship in ASEAN. Entrepreneurship in ASEAN is not as strong as

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in advanced economies. With the exception of Singapore, business density in ASEAN economies is relatively low. Overall, ASEAN’s business density was 2,505 businesses per million economically active population in 2005 compared with 28,423 in the EU, 23,350 in Japan and 22,035 in the US. The entry rate of new businesses in ASEAN in 2005 was 11.4 percent, with Singapore having the highest entry rate. This compared with 13.1, 10.3 and 4.4 percent in the US, EU and Japan respectively. ASEAN has a dearth of large locally-owned companies. None of ASEAN’s homegrown companies was placed within the top 100 on the Forbes 2010 Global 2000 list, which ranked companies in 62 countries in terms of size based on an equal weighting of sales, profits, assets and market value. In total, 63 homegrown companies from ASEAN were in the Forbes Global 2000 list, with the highest ranked at 196. This was 3.2 percent of the total and compared with 113 (5.7 percent) and 56 (2.8 percent) companies from China and India respectively. Of the 200 top-performing small and midsize companies in the Asia Pacific on Forbes’ 2010 “Best Under a Billion” list with sales between US$5 million and US$1 billion, 16 percent or 32 of them were homegrown companies from ASEAN economies. This compared with 32 percent of companies from China and 19.5 percent of companies from India. ASEAN Competitiveness Fundamentals Based on New GCI data for a constant sample of 132 countries, ASEAN’s overall competitiveness position is 57th (or in the 57th percentile) in 2010. ASEAN’s ranking is computed as the GDP-weighted ranking of eight ASEAN countries for which data are available and excludes Laos and Myanmar. ASEAN’s GDP per capita in 2009, the latest year available, is 79th place. The significant gap between current prosperity and overall competitiveness might point to the potential of current competitiveness fundamentals in raising future prosperity. Assessed over a ten-year period, the region’s competitiveness as measured by the New GCI has improved from being nine places below the global average in 2001 to 13 places above the global average in 2010. This largely reflected progress in the first half of the 2000s, as ASEAN’s competitiveness ranking has hovered around the 57th to 60th percentile mark over the last five years. Throughout the years, ASEAN’s advantage has been more in microeconomic competitiveness fundamentals than macroeconomic competitiveness factors. ASEAN’s global competitiveness in 2010 is three places behind its rank in 2009. This slight deterioration is largely due to a six-rank drop in microeconomic competitiveness to 49th place. Macroeconomic competiveness is little changed at 64th place. At the more disaggregated levels, it is shown that ASEAN has worsened competitiveness rankings across most sub-categories and sub-areas to different extents, except for macroeconomic policy, where ASEAN’s competitiveness has clearly improved between 2009 and 2010 (Figure A).

FIGURE A: Competitiveness Profile of ASEAN Region 2010

GDP pc (79) Micro (49)

National Business Environment (49) Related and Supporting Industries (37) Demand Conditions (56)

Macro (64)

New GCI (57)

Company Operations and Strategy (45) Strategy (44) Org. Practices (48) Internationalization (45)

Social Infrastructure and Pol. Institutions (66)

Macroeconomic Policy (55)

Political Institutions (57) Rule of Law (72)

Quintile Rankings 1 (Top 20%)

Human Development (72)

Context for Strategy and Rivalry (53)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (59) Admin (75)

Logistic (64)

Capital (42)

Comm. (68)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (52)

Comparing across competitiveness categories within ASEAN in 2010, the region’s foremost competitive strength lies in its supporting and related industries and clusters, with strong cluster policy, cluster development and collaboration and local availability of process machinery. Its capital market infrastructure is also relatively strong, particularly in the ease of financing through local equity market, ease of access to loans and venture capital availability. Another area of particular strength for ASEAN is company strategy and operational effectiveness. ASEAN is least competitive in its administrative infrastructure, where urgent attention has to be paid to reducing the time and number of procedures required to start a new business and in improving the efficiency of customs procedures. The other areas of particular weakness are in the macroeconomic competitiveness sub-category of social infrastructure and political institutions. ASEAN’s human development is weak and more effort is needed to lower the incidences of tuberculosis and malaria and raise secondary education enrollment rate. The rule of law within ASEAN also requires strengthening, especially in factors related to the control of corruption and the lowering of business costs of crime and violence. Compared with China and India, ASEAN is ranked behind China by 18 positions on the New GCI 2010, while it is ahead of India by 13 places. ASEAN’s negative gap with China has persisted over the last few years, while its significant positive gap with India has arisen in 2010 mainly as a result of deterioration in India’s competitiveness position from 2009. ASEAN is weaker than China on both micro and macro competitiveness fundamentals, in particular the latter. It has a competitive edge over India in both micro and macro competitiveness fundamentals, although the gap in microeconomic competitiveness is relatively small. Across the eight ASEAN countries where New GCI data are available, there is a broad range of competitiveness,

Worsen + 1 rank to <10% Worsen ≥ 10%

with Singapore among the top ten countries in the sample and Cambodia in the bottom 25 percent. Tables A and B, which place the top three areas of relative strength and top three areas of relative weakness within each country side by side, point to areas that each ASEAN economy could focus attention on to boost national competitiveness, either in consolidating strengths or addressing weaknesses. The tables also highlight that there are several areas of relative strength or relative weakness that are common across a few countries, where the sharing of experiences and action at the collective level would be especially beneficial. Supporting and related industries and clusters is an area of relative strength in five ASEAN countries, while capital market infrastructure and macroeconomic policy are areas of relative strength in three ASEAN countries. Administrative infrastructure and human development are areas of relative weakness in four ASEAN countries, while rule of law and communications infrastructure are weaknesses in three ASEAN countries. An analysis of the competitiveness of Laos and Myanmar based on limited key indicators suggest that both countries share similar areas of relative weakness with other ASEAN countries in human development, rule of law and communications infrastructure. Both countries fare better on macroeconomic policy. Analysis using alternative datasets covering ASEAN’s performance on economic freedom, ease of doing business and logistical efficiency support the assessment using New GCI data that corruption and administrative regulations are major areas of weakness for ASEAN. There is indication that ASEAN’s restrictions on investments might be higher than the assessment in New GCI. On the other hand, alternative indicators give a more positive depiction of infrastructure quality and customs efficiency in ASEAN compared with the New GCI.

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table A: Top-Three Areas of Relative Strength within Each ASEAN Country Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Singapore

Brunei

Malaysia

Administrative Infrastructure

Macroeconomic Policy

Supporting & Related Industries & Clusters

Context for Strategy & Rivalry

Rule of Law

Logistical Infrastructure

Human Development

Indonesia

Philippines

Macroeconomic Policy

Supporting & Related Industries & Clusters

Organization -al Practices

Supporting & Related Industries & Clusters

Context for Strategy & Rivalry

Capital Market Infrastructure

Internationali zation of Firms

Strategy & Operational Effectiveness

Macroeconomic Policy

Capital Market Infrastructure

Political Institutions

Organization -al Practices

Supporting & Related Industries & Clusters

Capital Market Infrastructure

Supporting & Related Industries & Clusters

Political Institutions

Logistical Infrastructure

Assessment and Policy Recommendations Analyzed as a single economic entity, ASEAN’s competitiveness, whether measured by economic outcomes that reflect its past competitiveness or by its positions on fundamental factors that portend its medium-term competitiveness, has not been impressive in recent years. From being a part of Asia’s miracle in the early 1990s, ASEAN in the 2000s has been overshadowed by China and India. Regional prosperity rests on individual countries being competitive and prosperous. This Report has identified areas of strengths for ASEAN economies that should be further consolidated as well as areas of weaknesses that have to be improved. Given the region’s eclectic mix, the priority issues that each country has to address in raising national competitiveness may be quite different. While there are country-specific issues that must be addressed at the national level, the analysis has also shown that there is much ground for policy learning and action at the regional level. Commitments by each country to implement agreed collective actions will also help to boost national competitiveness.

table b: Top-Three Areas of Relative Weakness within Each ASEAN Country Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

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Singapore

! Supporting

Brunei

!Administrative

& Related Industries & Clusters

Infrastructure

! Internationali-

!Internationali -

zation of Firms

! Strategy & Operational Effectiveness

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Malaysia

!Human Development

!Rule of Law

Thailand

& Related Industries & Clusters

Communications ! Infrastructure

Cambodia

ASEAN has in the last few years intensified its efforts towards implementing a wide-ranging collective agenda to achieve deeper integration as a means to raising the region’s competitiveness. It has set a goal to form an AEC by 2015, to reap scale economies in production and to enhance its attractiveness as a consumer market. However, the implementation of measures towards an AEC, which started in 2008, is behind schedule. This raises the question of whether ASEAN can step up to the challenges posed by the external environment and by itself. To make a leap in its competitiveness, ASEAN not only has to carry out existing tasks more effectively but also define new approaches and new tasks. In the post-crisis environment, ASEAN should reduce its reliance on the Western-oriented export-led model as the main driver of its economic growth. ASEAN needs to move towards a new growth model that is driven by intra-ASEAN and intra-Asia demand, as well as domestic demand. The deepening of ASEAN integration to establish a single market and production base will stimulate intra-regional trade, investments and production and generate new sources of growth. At the same time, the high-growth, big economies of China and India also present a source of new demand even as they pose competition for ASEAN with regard to export markets and resources. As ASEAN strives to build a

Thailand

! Political Institutions

! Rule of Law

zation of Firms

!Supporting

Vietnam

! Human Development

Indonesia

Philippines

Vietnam

Cambodia

!Administrative

!Macroeconomic

!Communications

Infrastructure

Policy

Infrastructure

!Administrative

!Human

Infrastructure

Development

!Logistical

!Rule of Law

! Communications Infrastructure

!Logistical

!Human

!Political

Development

Infrastructure

Institutions

Infrastructure

more integrated and competitive region, it is important that growth is achieved through environmentally sustainable and equitable ways and also in parallel with the expansion and deepening of its economic ties with the rest of Asia and beyond. Towards an ASEAN Competitiveness Agenda In the past, ASEAN integration efforts have tended to focus on trade and investment liberalization. Such negotiations over reciprocal market access are typically politically difficult and the extent of market opening achieved is often less than satisfactory. ASEAN could extract greater gains from regional cooperation by placing more emphasis on activities that yield significant cross-border externalities and direct mutual benefits. Given the region’s diversity where a weakness in one country may be a strength in another, ASEAN also provides an important platform for policy learning and the sharing of best practices across a wide range of areas. This Report, by analyzing a multitude of competitiveness factors that span the economic, political and social dimensions, serves to highlight the importance of building competitiveness through an integrated, multi-pronged ASEAN Competitiveness Agenda. Such a Competitiveness Agenda would focus on areas where collaboration creates direct benefits for participants. Several elements of a Competitiveness Agenda that would build on strengths and address weaknesses in ASEAN’s competitiveness fundamentals are illustrated below. Building on Strengths Cluster Development ASEAN’s diversity in endowments and economic development means that it possesses resources and capabilities that practically span the whole production process. Supporting and related industries and clusters has been identified as an area of relative strength for ASEAN, and ASEAN has strong clusters in a number of industries such as information technology, oil and gas products, agricultural products, metal mining and manufacturing, transport and logistics, and business services. ASEAN countries could do more to leverage their mutual strengths and competitive advantages and engage in collaboration to create or strengthen integrated regional value chains of clusters. ASEAN could explore a more coordinated regional approach to the development of clusters. ASEAN has recently unveiled its Master Plan on ASEAN Connectivity, which included the enhancement of physical connectivity as a key element. However, since developing physical infrastructure is both capital and time intensive, the prioritization of infrastructure development to facilitate cluster development could be explored. ASEAN can also move beyond the Southeast Asian region to tap into synergies with its bigger neighbors, China and India, on cluster development to integrate the economies more closely.

Capital Market Infrastructure Capital market infrastructure is a relative strength in a number of ASEAN countries and regional collaboration to integrate the capital market infrastructure within ASEAN as well as with the world would help to build on this strength as well as encourage FDI inflows and promote local enterprise. An improved regional capital market infrastructure would also help to mobilize the high savings in the region. The proposed ASEAN Exchange Linkage, in which the stock exchanges of Malaysia, Singapore and Thailand are proposed to be linked in the second half of 2011 with the Philippines’ stock exchange expected to join the common electronic platform in the first half of 2012, is a welcome initiative in this direction. Local Enterprise Development Another area of relative strength for ASEAN is company operations and strategy. This may reflect mainly the practices of foreign multinational enterprises, which have a substantial presence in ASEAN economies, as there are relatively few top-performing locally-owned companies. Presently, ASEAN has a dearth of large, homegrown firms with no publicly-traded companies among the top 100 in Forbes’ Global 2000 list, although the region’s small and medium enterprises are better represented in Forbes Asia Pacific’s “Best Under a Billion” list. ASEAN could intensify its efforts to nurture local enterprises, including promoting the transfer of management knowledge from foreign to local companies and also facilitating the regionalization and globalization of local companies. A well-implemented Strategic Plan of Action for ASEAN SME Development 2010-2015 will contribute to this objective. Macroeconomic Policy Macroeconomic policy is an area where a few ASEAN countries are particularly strong in while others are relatively weak in and thus can be a prime area for policy learning among members. ASEAN’s macroeconomic policy responses to the 2008 global crisis have involved national strategies, with no coordinated effort at the regional level. Policy coordination would have been extremely difficult given the vast difference in situations in each country. However, the crisis did strengthen regional financial cooperation through expediting implementation of the multilateral currency swap arrangement, Chiang Mai Initiative Multilateralization agreement, by ASEAN and its dialogue partners: China, Japan and Korea (ASEAN+3) to address short-term liquidity difficulties of members. Over the long term, as economies become more interdependent, macroeconomic policy coordination would become increasingly important in ensuring that policy instruments work effectively in promoting economic stability. A step towards greater coordination would be through an enhanced ASEAN+3 Economic Review and Policy Dialogue process.

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Addressing Weaknesses

Strengthening Implementation

Administrative Infrastructure ASEAN’s least competitive area is its administrative infrastructure. Many of the ASEAN countries are particularly weak in their administrative infrastructure due to the time and procedures required to start businesses as well as burdensome customs procedures. Urgent action is required for ASEAN countries to work towards clearlydefined targets in reducing administrative red tape. Such regulatory reforms will also enhance ASEAN’s attractiveness as a business investment destination.

ASEAN does not lack well-defined goals and plans. Its weakness lies in its inability to deliver on provisions in its agreements. ASEAN has to ensure the timely implementation of agreements and decisions within a rulebased framework to maintain its credibility. This requires the strengthening of both institutional mechanisms and capacities and political will.

An important initiative that will reduce administrative requirements in trade is ASEAN’s plan for an ASEAN Single Window for customs clearance that integrates ten National Single Windows of individual member countries. The ASEAN-6 countries (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) have activated their National Single Windows after a two-year delay from the initial schedule, while CLMV countries (Cambodia, Laos, Myanmar and Vietnam) have until 2012 to do so. The ASEAN countries have signed in the second half of 2010 the Memorandum of Understanding on the Implementation of the ASEAN Single Window Pilot Project and the Protocol on Electronic Customs Facilitation (Single Window) to test the infrastructure and procedures. Efforts should be directed to expediting the establishment of the ASEAN Single Window. Human Resource Development ASEAN has very weak competitiveness in basic health and education. Its labor productivity is also relatively low. Although ASEAN has ongoing cooperation in many aspects of human resource development mainly under the social and economic pillars building an ASEAN Community, it could engage in a more urgent and concerted endeavor to raise its human capacity and upgrade the skills of its labor in recognition of its greater weakness in this area. ASEAN could strengthen basic health through the control of infectious diseases in partnership with the World Health Organization and other development agencies and dialogue partners. There is also scope to strengthen the coordination of education and skills development initiatives across various ASEAN bodies, for instance, through the Education and Science and Technology Ministers working together to develop science and technology human resources and promote collaborative research and development in the region. Rule of Law Many of the ASEAN countries received unfavorable assessments for rule of law, particularly on the indicators of corruption and crime. While strengthening the rule of law remains very much the domain of national processes, ASEAN members could engage in information sharing and also contribute to the establishment of certain norms such as transparency in its interactions and policy implementation.

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For forty years, ASEAN has established a norm in its interactions that is based on the ASEAN Way, which emphasizes consultation, consensus and non-interference in internal affairs. This informal and consensual approach has succeeded in maintaining peace and stability in the region, but it might also be a bane to ASEAN achieving greater success in its regional integration efforts. The ASEAN Charter has established a legal and institutional framework for making ASEAN more rules-based, but the organization’s effectiveness in coordinating and executing policies is not going to improve vastly overnight. Various mechanisms to enhance compliance are in place but they have been largely ineffectual. For instance, members have traditionally preferred to resolve their economic disputes through political channels rather than in a more rules-based manner through the 2004 Enhanced Dispute Settlement Mechanism. The AEC Scorecard in its current form requires improvements to strengthen its monitoring function, and the public version of the Scorecard should contain more detailed information by individual country to increase the transparency of the compliance review process. Given the diversity in stages of development and policy priorities across ASEAN countries, ASEAN should strengthen its provisions for and the use of flexible participation arrangements so that members could move at a different pace. The Charter provides for an ASEAN Minus X formula but this is the only formula that is endorsed, and it can only be adopted if there is consensus to do so. ASEAN can also consider adopting another formula - 2 Plus X - that had previously been utilized, and to develop more pilot projects involving participation by countries that are ready, so as to progress initiatives. As the Charter carries no reference at all to sanctions should compliance fail, it leaves to the leaders to decide what action to adopt should there be any breach of principles and objectives. Acknowledgement of the limitations of the Charter necessarily moderates expectations of the ASEAN cooperation process, at least in terms of timeline. The successful implementation of ASEAN’s Roadmap for an ASEAN Community by 2015 also hinges on the ASEAN Secretariat as well as member countries having adequate capacity and tool kits to effectively fulfill the tasks required. Although the Secretariat’s resources and research capabilities have been boosted and less developed members are assisted with capacity building programmes, more needs to be done to upgrade ASEAN’s ability to act institutionally.

Conclusion The assessment of the competitiveness of ASEAN as a whole and its member countries has been conducted against the backdrop of profound changes in the global economic landscape following the 2008 global crisis. Over the last decade, ASEAN’s economic performance has been stable. However, it has not taken big strides unlike in the period before the 1997 Asian financial crisis. ASEAN’s position on competitiveness fundamentals as measured by a wide range of macroeconomic and microeconomic factors is above the world average, but its ranking has remained relatively unchanged over the last five years.

Ultimately, the extent of benefits that ASEAN will reap from deeper regional integration will depend on how willing member countries are in adhering to the blueprints for action. Each member nation needs to have a clear strategic focus on the integration agenda while minimizing ideological socio-political differences in order for ASEAN to move from vision to action.

While individual ASEAN countries vary widely in their competiveness and each country would need to chart its own national agenda for improving competitiveness, the analysis has also revealed areas of common competitive strengths and weaknesses among the member countries. This provides the basis for the development of an ASEAN Competitiveness Agenda with a focus on building on strengths and addressing weaknesses across a range of economic, social and political areas to generate synergistic benefits for the region. ASEAN has already undertaken a broad range of initiatives towards forming an ASEAN Economic Community, but the assessment in this Report serves to further inform a more nuanced approach to boosting regional competitiveness that moves away from a traditional focus on trade and investment liberalization. Suggested elements of an ASEAN Competitiveness Agenda would involve a greater emphasis on building strengths through coordinated cluster development, an integrated capital market infrastructure, the nurturing of local enterprises and enhanced macroeconomic policy coordination. Weaknesses for intensified improvement include raising quality in the areas of administrative infrastructure, healthcare and education and rule of law. The effective execution of plans of action is crucial in delivering results for ASEAN. The imperatives of deeper regional integration may bring into question the ASEAN Way of working and require greater powers under the Charter to monitor and ensure compliance. More also needs to be done to upgrade the capacity of the ASEAN Secretariat and member countries to fulfil their responsibilities. Regardless of current limitations in ASEAN’s institutional framework and mechanisms, ASEAN’s cooperation has moved onto a higher plane and the regional integration process is progressing. As implementation towards an AEC has started only since 2008, any payoffs from measures already implemented are not as yet evident in the data analyzed in this Report, and it will be worthwhile to conduct similar competitiveness analyses on a regular basis to see if ASEAN’s integration efforts have translated into enhanced competitiveness performance.

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ASEAN Competitiveness Report

20 10

Chapter 1

Introduction

ASEAN COMPETITIVENESS REPORT

INTRODUCTION

The Association of Southeast Asian Nations (ASEAN) has evolved remarkably since its inception in 1967. Geopolitically, the group has expanded from five member nations comprising Indonesia, Malaysia, Philippines, Singapore and Thailand to include Brunei (1984), Vietnam (1995), Lao PDR (1997), Myanmar (1997) and Cambodia (1999). From a fragmented group that was ridden with political and ideological conflicts and imbued with narrow nationalistic objectives, ASEAN has emerged as a recognized voice in the global economic and political arena. The region is now the fourth-largest trading entity in the world with a combined population of 592 million and GDP of US$1.49 trillion in 2009 at current market prices. Economic realities have changed dramatically in the past 15 years with the onset of the Asian financial crisis in 1997, the rise of China and India economically and the flare-up of the global financial crisis in late 2008. The post-crisis global economic landscape is characterized by weakened economic prospects in major advanced economies and a heralded shift in global economic power to Asia. ASEAN has set a goal to integrate its members’ economies further and faster as a way to enhance the region’s competitiveness. At the 2003 Summit in Bali, ASEAN Leaders agreed to establish an ASEAN Economic Community (AEC) by 2020. This is one of three pillars that will build an ASEAN Community, the other two being an ASEAN Political-Security Community and an ASEAN Socio-Cultural Community. In 2007, the deadline to realize an AEC was brought forward to 2015, and a comprehensive action plan, the AEC Blueprint, was adopted. The legal framework for ASEAN norms, rules and values is instituted in the ASEAN Charter that was signed in 2007 and came into force the following year. By setting clear targets to be achieved by ASEAN members for the ASEAN Community, the Charter serves as a basis for accountability and compliance. In 2009, ASEAN further adopted the ASEAN Political-Security Community and ASEAN SocioCultural Community Blueprints to achieve an ASEAN Community by 2015. Despite the considerable diversity that remains among member countries, which are at varying levels of economic development and with dissimilar cultures, ethnicities and languages, ASEAN has demonstrated a resolve to negotiate these differences to be one community. In recognition of both ASEAN’s heterogeneity and its ambition to seek unity in diversity, the analysis in this Report is conducted at two levels – overall ASEAN and by individual ASEAN country. A comprehensive review of ASEAN’s competitive position will better enable policy makers to assess the challenges

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the region faces in a world economy that is becoming increasingly complex and interdependent. This Report aims to track a myriad of indicators of ASEAN’s competitiveness over time for the region as a whole as well as for individual member states in an international perspective. It is hoped that this Report adds value to the discourse on ASEAN competitiveness and helps to furnish policy makers with data, analysis and a conceptual framework to evaluate ASEAN’s competitive position and adopt the relevant policy priorities at both the national and regional levels to steer the region towards its vision of increasing prosperity.

ASEAN’s Competitiveness Challenges ASEAN is facing a new era in its development. With a changing global economic environment defining new challenges and the ASEAN Charter outlining new ambitions, a fresh look at the data is needed to examine the key challenges confronting ASEAN in the longer term. The set of key questions facing ASEAN is both at the national and regional levels. ASEAN’s prosperity, measured in terms of GDP per capita, runs the full range from high income (Brunei and Singapore) to low income (Cambodia, Laos and Myanmar). Rapid prosperity growth before the Asian financial crisis propelled two ASEAN economies - Malaysia and Indonesia - up the income ladder. Over the past decade, with the exception of Vietnam, which moved from low to low-middle-income status in 2009, none of the other ASEAN countries has substantially improved prosperity. A key challenge is for each ASEAN country to address the issues that boost competitiveness and propel it further up the ladder of economic development. The ASEAN region has weathered the 2008 global financial crisis well, despite being hard-hit initially due to the intensification of member economies’ export-led growth strategies in the 2000s. ASEAN, along with the rest of Asia, has recovered at a faster and stronger pace than the major advanced economies. Since late 2009, trade has normalized, industrial production has recovered and capital inflows have resumed. Quick countercyclical rescue measures by ASEAN’s policy makers have helped to reduce the impact of the global financial crisis and minimize downside risks to economic growth. Given the turnaround of the ASEAN economies, most countries have reduced or withdrawn stimulus measures. The challenge for ASEAN is to maintain growth momentum in a post-crisis world environment and to move towards a new growth model that rebalances growth away from traditional markets in the West towards newer and more sustainable growth that is driven by intraregional and domestic demand. Deeper regional economic integration is recognized as a potent answer to ASEAN’s challenges of having to generate new impetus for growth and enhance competitiveness. Through closer cooperation, ASEAN countries can leverage on a wide diversity of its resources and development

Figure 1.1 Competitiveness Framework: Foundations of Prosperity

Macroeconomic Competitiveness

Social Infrastructure and Political Institutions Basic Political Human InstituCapacity tions Strategy and Operational Effectiveness

Macroeconomic Policy

Rule of Law

Organizational Practices

Microeconomic Competitiveness

Monetary Policy

Company Operations and Strategy

Cluster Development

Supporting Factor Context for and Demand Related (input) Strategy and Industries Conditions Conditions Rivalry and Clusters

Fiscal Policy

Internationalization of Firms

National Business Environment

Logistical Infrastructure

Communications Infrastructure

Administrative Infrastructure

Capital Market Infrastructure

Innovation Infrastructure

Endowments

Source: Adapted from Porter, M.E., Delgado, M., Ketels, C. and Stern, S. (2008). “Moving to a New Global Competitiveness Index”, in The Global Competitiveness Report 2008-09, World Economic Forum.

Natural Resources

by accelerating the migration of value chain within the region, thereby enhancing the region’s capacity for intraregional production, investment and trade. However, the move towards greater regional integration is not without difficulties. The theme for ASEAN in 2010, ‘Towards the ASEAN Community: From Vision to Action’, pinpoints the crux of the problem with ASEAN integration efforts. The vision is bold, but implementation falls short. Ensuring timely implementation of agreements and decisions within a rules-based framework and strengthened institutional mechanisms is another challenge that ASEAN has to tackle.

Conceptual Approach of the Report The analysis in this Report adopts the competitiveness framework developed by Michael E. Porter, Bishop William Lawrence University Professor, Harvard Business School and Chairman, ACI International Advisory Panel. The attractiveness of the Porter framework lies in its malleability to the analysis of any situation by capturing the role of various factors on competitiveness without the need for a priori assumptions. Porter’s approach is particularly useful when faced with a diversity of impact factors with varying importance in determining competitiveness, as in the case of ASEAN.

Geographical Location

Size

Prosperity

Competitiveness determines the productivity with which a country or region uses its land, labor, capital and other resources. Productivity sets the standard of living through returns on factors of production (wages, rent, etc.) that a country can sustain. What is important to attain competitiveness and prosperity is not the type of industries that a country or region chooses to compete in but how productively it competes in those industries. Competitiveness factors can be grouped under macroeconomic or microeconomic competitiveness. Macroeconomic competitiveness delineates the overall context in which firms operate and create the potential for high productivity. Although these factors do not directly affect the productivity of firms, they are critical in providing support for firm efforts to raise productivity. These factors include the quality of social infrastructure, political institutions and macroeconomic policy. Microeconomic competitiveness identifies operating practices and strategies of firms as well as business inputs, infrastructure, institutions and policies that constitute the environment in which firms compete. All these factors have a direct impact on productivity. Endowment affects prosperity directly through natural resources, geographical location and the size of the home market. Figure 1.1 depicts the schematic diagram of the competitiveness framework and foundations of prosperity.

ASEAN COMPETITIVENESS REPORT

In the macroeconomic area of competitiveness are social infrastructure and political institutions (SIPI) and macroeconomic policy. SIPI is a proxy for the overall stage of economic development. More developed SIPI enable firms to compete on efficiency and innovation while weak SIPI make it necessary for firms to compete on resources or cheap labor. SIPI indicators include basic human capacity (basic health and education), political institutions (decision making and efficiency of policy executives) and rule of law (corruption and efficiency of legal process). Macroeconomic policy comprises monetary and fiscal policy. In the microeconomic area of competitiveness are company operations and strategy, business environment and the state of cluster (agglomeration) development. Data limitations in the independent measurement of cluster variations, however, necessitate the exclusion of the third category in the measurement of microeconomic competitiveness. Firm productivity is affected by its strategies and operational practices, which are measured by the sophistication with which the firm competes, its corporate governance structure and the sophistication of company operations and strategy across countries. Firm productivity is also influenced by the quality of its business environment. The factors that affect business environment quality are depicted by four interrelated dimensions or Porter’s diamond. The diamond comprises the quality of factor (input) conditions, the context of rules in which firms compete, the quality of local demand conditions and the presence of related supporting industries (represented by well-developed clusters). Factor conditions are established by a set of infrastructural conditions faced by a firm, namely, logistical, administrative, communications, capital markets and innovation. For example, physical infrastructure, efficient access to capital, quantity and quality of human resources, and innovation capacity (science and technology) are important factor conditions that determine a firm’s productivity. Using this broad framework, the Report makes extensive use of a set of New Global Competitiveness Indices (‘New GCIs’) aggregated at different levels using a methodology developed by Professor Porter and his research team (Porter et al. 2008), primarily from raw data collected by the World Economic Forum in its annual Executive Opinion Survey. The indicators are computed and evaluated at both the regional and national levels. The use of a common competitiveness framework and set of parameters for both the regional- and national-level analysis will facilitate consistent interpretation and meaningful crossnational comparison of the indicators. This approach would enable an examination of the strengths and weaknesses of ASEAN as a whole and of individual members, and assist in the identification of areas for priority national action as well as for policy sharing and common policy action at the regional level to improve competitiveness.

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The structure of this Report is adapted from Ketels (2009), and the analysis is organized according to the following groups of indicators: • Economic performance that determines the quality of life of individuals as a consequence of fundamentals in the economy. These indicators include prosperity, equality and measures of economic development. • Intermediate economic outcomes that contribute to competitiveness but may not be the ultimate goal of economic policies. Indicators include trade, investment, innovation and entrepreneurship. • Macroeconomic and microeconomic competitiveness that determine the medium-term trends of the preceding economic outcomes identified. Indicators include institutions, macroeconomic policy, business environment, dynamism of clusters and company sophistication.

Report Outline The rest of the Report is organized in four chapters. Chapter 2 presents the macroeconomic and institutional contexts for regional cooperation. The first part discusses the recent macroeconomic performance of individual ASEAN countries as well as the changing global economic context post-global crisis. The second part reviews the state of regional cooperation among member countries and between ASEAN and its external partners, with a focus on economic initiatives. It also assesses the institutional framework for cooperation. Chapter 3 provides a profile of the region and analyzes trends in the competitiveness performance of ASEAN and individual member countries over the last two decades. The ultimate goal of competitiveness, namely, an increase in prosperity or the standard of living of people in the region is assessed using the income measure of GDP per capita as well as measures of the distribution of prosperity and quality of life that relate to poverty reduction, income inequality and human capacity development. A second section examines the main elements of prosperity growth: labor productivity, labor mobilization and purchasing power. The last section assesses the region’s intermediate economic outcomes through indicators such as exports, domestic and foreign investment, innovation and entrepreneurship. ASEAN’s competitiveness performance will be benchmarked against that of the major developed economies of the US, EU and Japan, as well as compared with the performance of China and India. Competitiveness fundamentals that drive the longer-term competitiveness performance of ASEAN and its member countries are evaluated in Chapter 4. Factors in the two building blocks that lay the foundations for competitiveness as identified in Porter’s framework, namely, macroeconomic competitiveness and microeconomic competitiveness, are analyzed. The first part of the chapter assesses the ASEAN

region as a whole on these parameters to identify the relative strengths and weaknesses of ASEAN. This is then put into perspective with respect to China and India. The purpose of this analysis is to provide an understanding of the competitiveness fundamentals of the region, which can then serve to formulate an agenda for regional collaboration. The second part reviews the competitiveness fundamentals of individual member countries to identify specific areas that need to be addressed at the national level. Additional analysis is conducted using indices that are compiled from other data sources in the aspects of economic freedom, ease of doing business and logistical efficiency as a limited means to validating the findings using New GCI data. Chapter 5 gives an overall assessment and puts forth policy recommendations based on the evaluation done in the preceding chapters.

Chapter References ASEAN (2010). ASEANstats, http://www.aseansec.org/22122.htm Ketels, Christian H.M. (2009). State of the Region Report 2009: Boosting the Top of Europe. Porter, Michael E., Mercedes Delgado, Christian Ketels and Scott Stern (2008). â&#x20AC;&#x153;Moving to a New Global Competitiveness Indexâ&#x20AC;?, in The Global Competitiveness Report 2008-2009, World Economic Forum.

ASEAN COMPETITIVENESS REPORT

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20 10

Chapter 2

Context for Regional Cooperation

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CONTEXT FOR REGIONAL COOPERATION Regional cooperation does not happen in a vacuum. It develops and responds to changing world economic and political circumstances and national imperatives. This chapter comprises two main sections. The first describes the macroeconomic environment within ASEAN and the changing global economic context of ASEAN cooperation. The ASEAN region has rebounded from the 2008 global economic crisis that had affected economies unevenly. Postcrisis, the Asian economies, particularly China and India, are outperforming major advanced economies in economic growth, and this is precipitating changes in the structure of the global economy that has consequences for the ASEAN region due to the interdependent nature of ASEAN’s growth model. The second section of this chapter discusses developments in ASEAN and ASEAN-plus cooperation, with a focus on economic initiatives, and assesses if ASEAN’s current cooperation model is adequate for the region to rise collectively to the challenges of a new economic landscape.

Macroeconomic Environment ASEAN Recent Macroeconomic Performance ASEAN has registered fairly strong growth along with the rest of Asia in 2010, buoyed by robustness in the economies of China and India. Although the ASEAN region experienced its largest slowdown in annual growth in 2009 of just 1.2 percent since the Asian financial crisis of 1997-98, quarterly growth figures have shown that affected economies started to register positive growth from the fourth quarter of 2009. Various factors have underpinned the economic turnaround in ASEAN, among which are prompt macroeconomic policy responses, low public debt and resilient domestic demand. Strengthened capital adequacy ratios of banks in ASEAN following the Asian financial crisis also helped to minimize the region’s direct exposure to subprime assets (only about 0.09 percent) resulting in comparatively less pressure on its balance sheets compared with the rest of the world at the onset of the 2008 crisis. GDP Growth Available data show that ASEAN economies have recorded strong growth in 2010, particularly in the first half of the year (Figures 2.1 & 2.2). Although the higher growth rates were partly due to the lower base in 2009 and the stimulus measures implemented by governments, they were also driven by a rebound in global trade and a broad-based

ASIA COMPETITIVENESS INSTITUTE

increase in domestic demand. ASEAN countries were affected to different extents by the global crisis in 2008 and 2009, with the impact more severe on the real economy rather than on the financial sector. Those with greater export orientation were affected more severely. There were also country-specific factors that impacted on macroeconomic performance. Singapore, as the most open economy, was the hardest hit, but it also recovered most rapidly among the ASEAN countries. Singapore emerged from recession in the third quarter of 2009, and registered exceptional growth in the first half of 2010 before its rate of expansion moderated in the second half. The economy was buoyed by a surge in electronics and biomedical manufacturing output and robust growth in finance, tourism and trade-related services amid strong external demand. Its GDP growth for the whole of 2010 reached 14.5 percent, recovering from a contraction of 0.8 percent in 2009. Malaysia, the Philippines and Thailand, which variously registered a sharp contraction or slow expansion in the first three quarters of 2009, posted positive growth from the fourth quarter of 2009. Malaysia’s GDP grew strongly in the first half of 2010 before slowing in the second half as exports cooled amid a weaker global economy and an appreciating local currency. Output in the last two quarters was bolstered by an increase in domestic private final consumption expenditure and investment on the demand side and expansion in the manufacturing and services sectors on the supply side, to give Malaysia a full-year growth of 7.2 percent from negative 1.7 percent in 2009. The Philippines posted strong growth throughout 2010 to record an annual GDP growth rate of 7.3 percent, which was the highest in 34 years. This was significantly up from 1.1 percent in 2009 and was driven by a rebound in international trade and increased government expenditure ahead of the elections in May, as well as buoyant consumer spending for the whole year. Fixed capital investment also contributed significantly to output growth, registering its highest growth rate since 2000, particularly in durable equipment. Thailand’s economy expanded strongly in the first quarter of 2010, but slowed in the second quarter, as the country’s political turmoil during April to May dented growth but by less than expected. An impressive revival in domestic demand contributed nearly all the GDP growth in the first half of 2010. The country slipped into a technical recession with two consecutive quarters of contraction through September with slower exports undermined by an appreciating baht and global economic uncertainties, but quarter-on-quarter growth returned to positive territory in the fourth quarter on the back of solid exports and private consumption. Full-year growth stood at 7.8 percent, rebounding from a contraction of 2.2 percent in 2009.

FIGURE 2.1: Quarterly Real GDP Growth, ASEAN Countries

% change, year on year

Indonesia Malaysia Philippines Singapore Thailand

08Q1 6.2 7.6 3.9 7.8 6.4

08Q2 6.3 6.5 3.7 2.6 5.2

08Q3 6.2 4.9 4.6 -0.2 2.9

08Q4 5.3 0.1 2.8 -2.4 -4.2

09Q1 4.5 -6.2 0.5 -9.0 -7.1

09Q2 4.1 -3.9 1.2 -1.8 -4.9

09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 6.9 4.2 5.4 5.7 6.2 5.8 4.8 -1.2 4.4 10.1 8.9 5.3 7.1 0.2 2.1 7.8 8.2 6.5 1.6 3.8 17.4 19.5 10.5 12.0 3.8 -2.7 5.9 12.0 9.2 6.7

15 10 5 0

07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 -5 Source: EIU; 10Q4 figures are updated from national sources. -10 -15

The less open economy of Indonesia saw GDP growth weakening only slightly between the third quarter of 2008 and the third quarter of 2009, as high commodity prices and resilient domestic demand bolstered growth. GDP growth stayed in positive territory and strengthened from the fourth quarter of 2009 to reach 6.9 percent year-on-year in the fourth quarter of 2010, which was Indonesia’s strongest pace of growth in six years. Full-year growth was 6.1 percent in 2010, up from 4.5 percent in 2009, driven by solid private consumption, an increase in investments and accelerated exports led by commodities. Vietnam’s GDP expanded by 6.8 percent for the whole of 2010, up from 5.3 percent in 2009. Its GDP growth in the fourth quarter of 7.4 percent from a year earlier was the highest reached since February 2008. Vietnam’s strong economic performance in 2010 was supported by the improved global economy as well as residual effect of the massive government stimulus spending in 2009. Manufacturing output rose substantially while the services sector, in particular the hotels and restaurants sub-sector, also expanded at a more rapid pace. For the rest of the ASEAN countries where periodic 2010 GDP growth data are unavailable, Cambodia posted an annual GDP decline of 1.5 percent in 2009 but is estimated to have expanded by 4.1 percent in 2010. The country’s garment exports and tourist arrivals, which were hit by

figure 2.2: Annual Real GDP Growth, ASEAN Countries

the global crisis, have recovered in the first half of 2010 and the government has sought to develop other sources of economic growth, particularly in the agricultural sector. Laos was relatively unaffected by the global downturn and maintained solid growth of 7.6 percent in 2009 on the back of significant increases in mineral production and expansionary government policies. Its GDP growth in 2010 is estimated to be a robust 8.0 percent, supported by higher-than-expected minerals output, new hydropower generation, strong performance in the manufacturing sector and continued growth in earnings from the garment and tourism sectors. Brunei is estimated to register modest growth of 1.0 percent in 2010, after two years of contraction from a decline in the economy’s dominant production of oil and gas. Its growth is premised on a small increase in oil and gas production amid improving global energy demand and higher oil prices, the start of production and exports of methanol at the end of May 2010 and ongoing construction activities to build a port and a power line from Sarawak to Brunei. Myanmar registered an estimated growth of 1.8 percent in 2009 compared with 1.1 percent a year earlier when the economy suffered substantial losses from Cyclone Nargis. 2010 growth is expected to be 3.1 percent, lifted by foreign investment in the hydrocarbon sector, a modest recovery in agriculture, and an increase in election-related public expenditure.

% change, year-on-year

15 10 5 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -5

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

2007 0.2 10.2 6.3 7.8 6.5 3.4 7.1 8.8 4.9 8.5

2008 -1.9 5.0 6.0 7.2 4.7 1.1 3.7 1.5 2.5 6.2

2009 -1.8 -1.5 4.5 7.6 -1.7 1.8 1.1 -0.8 -2.2 5.3

2010 1.0 4.1 6.1 8.0 7.2 3.1 7.3 14.5 7.8 6.8

-10

Source: EIU; 2010 figures for Indonesia, -15 Malaysia, Philippines, Singapore, Thailand and Vietnam are updated from national sources.

ASEAN COMPETITIVENESS REPORT

FIGURE 2.3: Quarterly Merchandise Exports Growth, ASEAN Countries

140

% change, year on year

120 100 80 60 40 20 0 07Q1

07Q2

07Q3

07Q4

08Q1

08Q2

08Q3

08Q4

09Q1

09Q2

09Q3

09Q4

10Q1

10Q2

10Q3

-20 -40

Source: EIU.

-60 Cambodia

Indonesia

Laos

Malaysia

Export Growth The export growth of ASEAN countries affected by the global crisis rebounded strongly from the last quarter of 2009. From double-digit contractions in exports over the first three quarters of 2009, most of the countries registered double-digit export increases in the first half of 2010 of between 34 and 55 percent before moderating in the third quarter (Figure 2.3). The dip in export growth in Vietnam in first quarter 2010 was due to more than $1 billion earned in the first quarter of the previous year from re-exporting gold and also due to reduction in exports of crude oil and coal, Vietnam’s key export products. Vietnam’s exports increased by 35.3 percent in the third quarter. The robust export performance of ASEAN countries was in line with the broader global trade recovery in 2010, which has been described by the World Trade Organization (WTO) as the fastest-ever annual expansion recorded in global commerce in a data series going back to 1950. In September 2010, the WTO revised its forecast for world trade growth in 2010 from 10 to 13.5 percent. While the exports for developed economies are expected to grow by 11.5 percent, the rest of the world is expected to register an export growth of 16.5 percent.

FIGURE 2.4: Unemployment Rates, ASEAN Countries

Myanmar

Philippines

Singapore

Thailand

Vietnam

Unemployment With healthier economic conditions from late 2009, worries over escalating unemployment have diminished. Singapore’s average unemployment rate in 2009 was 3.0 percent, up from 2.25 percent in 2008. Unemployment reached a fiveyear high of 3.3 percent in the third quarter of 2009, but fell to 2.3 percent in fourth quarter 2009, and has been around 2.2 percent in 2010 (Figure 2.4). Malaysia and the Philippines saw slight increases in unemployment in 2009, with the highest quarterly rates of 4.0 and 7.7 percent respectively in first quarter 2009. Malaysia’s unemployment rate declined to 3.2 percent by the third quarter of 2010. The Philippines’ unemployment rate moderated towards the end of 2009 but climbed to 8.0 percent in the second quarter of 2010, before falling to 6.9 percent in the third quarter. Compared with the other ASEAN countries, Thailand’s unemployment rate has been relatively low, at 1.5 percent in 2009 and 1.4 percent in 2008. Vietnam’s unemployment rate has remained relatively stable at 4.6 percent in 2009 from 4.7 percent in 2008. Indonesia, which has the highest unemployment rate between 2006 and 2009 among the ASEAN countries

Average, %

10 8 6 4 2

Note: ‘e’ refers to EIU estimates. Source: EIU.

ASIA COMPETITIVENESS INSTITUTE

0 2006

2007

2008

Indonesia

Malaysia

Myanmar

Singapore

Thailand

Vietnam

2009 Philippines

2010

figure 2.5: Consumer Prices, ASEAN Countries

% change, year-on-year

40 35 30 25 20 15 10 5 0 07Q1

07Q2

07Q3

07Q4

08Q1

08Q2

08Q3

08Q4

09Q1

09Q2

09Q3

09Q4

10Q1

10Q2

10Q3

-5

Source: EIU.

-10

Brunei

Cambodia

Indonesia

Laos

Malaysia

where data are available, saw its unemployment rate dip to 7.41 percent in February 2010 from 8.1 percent in February 2009.

Source: EIU.

Thailand

Vietnam

% of GDP

70 60 48

50 40

37 27

Notes: 1. Figures for Brunei (2008), Cambodia (2008, 2009), Laos (2009) and Myanmar (2007, 2008, 2009) are EIU estimates. ‘e’ refers to EIU estimates for all countries in 2010.

Singapore

Current Account Balance Most of the ASEAN countries have been running current account surpluses over the years, although to different extents. The current account balance of a majority of ASEAN countries deteriorated in 2008 but improved in 2009 (Figure 2.6).

Two countries in particular – Cambodia and Vietnam - saw dramatic price movements over the past few years. Cambodia registered consumer price deflation in the second and third quarters of 2009, in contrast to consumer price increases of over 30 percent in the second quarter of 2008. Prices rose 7 percent in the first quarter of 2010 but moderated in subsequent quarters to register an increase of 4.2 percent

Philippines

over the first nine months of 2010. In the case of Vietnam, inflation moderated from a peak of 27.7 percent in third quarter 2008 to a low of 2.6 percent in third quarter 2009, finishing the year with an inflation rate of 7.0 percent, the lowest rate achieved in six years. However, inflation has been climbing as the economy improves and commodity prices rise. Vietnam has been posting the highest inflation rate in the region in 2010. Inflation was more restrained in the third quarter with policy tightening and a good rice harvest, but prices spiked in the last quarter, increasing 11.75 percent in December from a year earlier on the back of economic expansion, higher food costs and a weaker currency.

Inflation Inflationary pressures that had become a major concern for ASEAN economies in the first half of 2008, started to ease in the third quarter of 2008 with the onset of the economic downturn. Although inflation rates in 2010 have remained below the pre-crisis peaks, they are again fanning concerns as rates have been climbing, stoked by economic recovery, higher food and fuel prices and a surge in capital inflows to the region (Figure 2.5).

Figure 2.6: Current Account Balances, ASEAN Countries

Myanmar

16 18 16

20 10

2 1

3 2

19 18 19 12

3 3

5 5

-0.4 -6 -10 -8 -8.5

-10 -20 Brunei

Cambodia

-10

Indonesia

Laos 2007

Malaysia 2008

2009

Myanmar

Philippines

Singapore

Thailand

-7 -5 -12

Vietnam

2010 e

ASEAN COMPETITIVENESS REPORT

Figure 2.7: Exchange Rates, ASEAN Countries

120

US$ per local currency unit (Jan 2008=100)

115 110 105 100 95 90 85 80

Note: The Brunei dollar is pegged to the Singapore dollar at a 1:1 ratio.

75 70

Source: EIU.

08Q1

08Q2

08Q3

08Q4

09Q1

Indonesia

Laos

Malaysia

Philippines

Singapore

Thailand

Vietnam

Exchange Rates Nominal exchange rates in most ASEAN countries depreciated in late 2008 and early 2009, in concert with the deterioration of current account balances. In general, ASEAN currencies were cushioned against major disruptions in the foreign exchange market due to the region’s low exposure to subprime assets and high foreign exchange reserves. The currencies of most ASEAN countries have been appreciating since the second half of 2009 and into 2010. By the third quarter of 2010, the Indonesian rupiah, Malaysian ringgit, Singapore dollar and Thai baht have exceeded their pre-crisis levels in the first half of 2008, while the Philippine peso has yet to recover its value (Figure 2.7). An exception is the Vietnamese dong, which has been depreciating since early 2008 and has continued on a downtrend. The Vietnamese authorities devalued the dong thrice between November 2009 and August 2010 by about 11 percent against the US dollar. The devaluations were necessitated by the widening spread between the black market exchange rate and the reference rate of Vietnam’s central bank, which was due to the high trade deficits and inflation and the shifting preference for US dollars and gold over local-currency assets. A continuing trend of appreciation of major ASEAN currencies against the US dollar would contribute to correcting the global current account imbalances that exist between the developed and developing countries, although the effect may be moderated by reduced export competitiveness if other currencies in the region do not also appreciate. ASIA COMPETITIVENESS INSTITUTE

09Q3

Cambodia

Brunei runs the largest current account surplus among ASEAN countries, due largely to exports of oil and gas and also to income inflows from assets held abroad. Vietnam has been running a current account deficit arising mainly from its huge trade deficit with China even as it maintains a trade surplus with most of its other trading partners.

09Q2

09Q4

10Q1

10Q2

10Q3

Myanmar

Macroeconomic Policies and Growth Prospects One of the factors contributing to ASEAN’s relatively robust recovery is the prompt countercyclical measures that were implemented by ASEAN’s policy makers with the onset of the global crisis, to reduce its impact and minimize downside risks to economic growth. As ASEAN economies turn around, the governments have scaled down or lifted their stimulus policies. The challenge for ASEAN is to maintain growth momentum after fiscal and monetary stimulus are withdrawn and to develop sustainable sources of growth. Macroeconomic Policies ASEAN’s policy response to the crisis has involved national strategies with an absence of coordination at the regional level. In countries such as Malaysia and Singapore, policy measures have been targeted and comprehensive, rather than piecemeal as in Laos and Myanmar. ASEAN’s monetary authorities had shifted towards a more expansionary policy with the onset of the global crisis, as concerns over soaring inflation in the first half of 2008 dissipated to be replaced by concerns over sagging demand. Between November 2008 and August 2009, central banks in Indonesia, Philippines, Thailand, Malaysia and Vietnam made several reductions in the policy interest rates. Besides rate changes, some of the ASEAN countries also introduced other policy measures to increase the flow of credit. In Indonesia, Malaysia, Philippines and Vietnam, reserve requirements on deposits were reduced to free up capital and boost lending. As shown in Figure 2.8, the central banks have begun a rollback of their expansionary monetary policies with policy rate rises at various points in time since the second half of 2009. Vietnam, which had faced surging inflation rates in the first half of 2008, raised its prime rate to 8 percent in December 2009 to rein in credit growth, as inflationary pressures built again on the back of robust economic growth. The prime rate was further raised to 9 percent in

FIGURE 2.8: Policy Rates, ASEAN Countries

16 Vietnam

Policy interest rates (percent)

Note: Policy interest rates are Bank of Indonesia rate (Indonesia), overnight policy rate (Malaysia), one-day repo rate (Thailand), overnight lending rate or repo rate (Philippines) and prime rate (Vietnam).

Indonesia

8 Philippines

Thailand

Malaysia

2 0 J

Source: Central bank websites.

F M A M J

J A S O N D

F M A M J

2008

Fiscal stimulus policies have also been critical in encouraging economic recovery, particularly since most ASEAN countries do not have automatic stabilizers such as unemployment insurance. In response to the global crisis, ASEAN governments (excluding Brunei) ran budget deficits averaging 4.5 percent of GDP in 2009 in contrast to pre-crisis levels of 2.1 percent in 2007 and 2.3 percent in 2008. The fiscal balance of each ASEAN country is given in Figure 2.9. The stimulus packages have comprised a mix of public spending and tax cuts, with the balance tilted towards higher spending. An exception has been Indonesia, where tax cuts have made up a large component. In line with the regionâ&#x20AC;&#x2122;s pro-growth stance, a number of countries have emphasized infrastructure investments in the stimulus packages, which will benefit growth well beyond the short run.

J A S O N D

F M A M J

2009

November 2010. Malaysia raised its policy interest rate three times between March and end-August 2010, while Thailand raised its policy rate twice in July and August 2010.

FIGURE 2.9: Fiscal Balances, ASEAN Countries

J A S O N

2010

As with monetary stimulus, countries have also begun to withdraw their fiscal stimulus. In Indonesia, government consumption spending fell in the first half of 2010 as the country began to unwind its fiscal stimulus and also because of delays in budget disbursements. In Vietnam, most of the fiscal stimulus expired at the end of 2009. Growth Prospects The outlook for ASEAN economies is positive. Following V-shaped rebounds in 2010, the growth rates of most of the ASEAN economies are forecast to be in the range of 4.5 to 7.0 percent in 2011 and 2012, based on the simple averages of forecasts by the Economist Intelligence Unit, International Monetary Fund and the World Bank (Figure 2.10). Vietnam and Laos, both of which had registered growth rates of above 5 percent even during the crisis, are expected to be among the fastest-growing ASEAN countries over the next two years. Brunei on the other hand, is expected to expand at the slowest rate of just above 1 percent.

% of GDP 31.6

27.9 22.5

10 3.1

-0.7 -0.6 -1.6

-2.9 -2.9

Brunei

Cambodia Indonesia

Laos

-3.0

-3.2 -4.8

-6.3

-10

-20

-0.2 -2.8 -2.8 -3.3

-7.0

Malaysia 2007

2008

-3.5 -4.5

-0.9

1.4 -1.0

-3.9

Myanmar Philippines Singapore

-2.3

-1.1 -4.4

Thailand

-5.4 -7.3

-9.0

Vietnam

2009

Source: EIU.

ASEAN COMPETITIVENESS REPORT

FIGURE 2.10: GDP Growth Forecasts, ASEAN Countries

% change, year-on-year

14 12

Brunei Cambodia Indonesia Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam

10 8

Notes: The figures for 2011 and 2012 in the chart refers to the simple average of growth forecasts from EIU (E), IMF (I) and World Bank (W) for each country. The table provides the forecasts from each source. “–” indicates data not available.

6 4 2

2011f E I W 1.4 1.0 -

2012f E I W 1.2 1.2 -

5.1 6.8 6.0 6.3 6.5 6.5 6.0 6.2 6.2 6.4 6.5 6.5 7.7 7.5 7.5 7.9 7.3 7.5 4.3 5.3 4.8 4.8 5.2 5.7 4.0 5.0

4.4 5.0

5.3 4.5 5.0 5.4 4.5 5.4 4.1 4.5 5.0 5.0 4.4 6.0 4.3 4.0 3.2 5.0 4.3 4.2 6.8 6.8 6.5 7.1 7.0 7.0

Sources: EIU, IMF and World Bank.

-2

2007

2008

2009

2011f

2010

2012f

-4

A risk that may derail ASEAN economies’ growth is the surge in capital inflows to emerging markets in Asia in search of higher returns amidst low interest rates in developed economies. Hot money has driven up prices in the property, stock and bond markets and has raised concern over the buildup and eventual bursting of asset price bubbles. The pressure on ASEAN currencies to appreciate has also prompted countries such as Thailand to stem capital inflows by imposing a 15 percent withholding tax on interest and capital gains earned by foreign investors on domestic bonds. Other countries have not implemented capital controls but are monitoring capital inflows and considering how best to regulate and direct such inflows to ensure financial stability. The quantitative easing by the US has prompted the IMF to issue a warning of currency wars sparking trade wars. Another risk is the buildup of inflationary pressures from rising world food and oil prices. This is in particular a challenge to developing countries, as the need to contain social unrests from rising prices through the provision of subsidies or the lowering of import tariffs would pose a strain on their fiscal sustainability.

Figure 2.11: GDP Growth Rates, Selected Countries/ Regions

Unlike the 1997 Asian crisis, ASEAN economies in the 2008 crisis suffered from a lack of global aggregate demand. Hence, the long-run impact of the 2008 crisis depends not only on corrective measures implemented by ASEAN countries but also on policies adopted by countries ASEAN trades with. The sustainability of growth of ASEAN thus also depends on how well the ASEAN countries can adjust to the changing global economy. The Global Context Global Economic Outlook The global economic recovery process has been characterized by a duality in the post-crisis growth paths of ASEAN and the rest of developing Asia, and major advanced economies. ASEAN overall recorded a slight growth of 1.2 percent in 2009 and robust growth of around 6.6 percent in 2010. China and India maintained strong growth in 2009 and are estimated to have further expanded by 10.0 percent and 8.8 percent in 2010 respectively. ASEAN is forecast to expand by more than 5 percent a year in 2011 and 2012 (based on

% change, year-on-year

10 6.6

6.3

5.6

5.2

3.6 1.2

Note: The figures for 2011 and 2012 refer to the simple average of growth forecasts from EIU (E), IMF (I) and World Bank (W) for each country or region.

2007

2009

2011f

2010

2012f

-5

-10

Sources: EIU, IMF and World Bank.

2008

ASIA COMPETITIVENESS INSTITUTE

ASEAN

China

India

Japan

World

Figure 2.12: World Current Account Balances

2.50

% of world GDP

2.00 1.50 1.00 0.50 0.00 2006

Note: ‘e’ refers to IMF staff estimates. Source: IMF, World Economic Outlook Database, October 2010.

2007

2008

2010e

2009

2011e

2012e

2013e

2014e

-0.50 -1.00 -1.50 -2.00

ASEAN

China

India

a simple average of forecasts by the EIU, IMF and World Bank), while China and India are forecast to continue with their strong performance (Figure 2.11). On the other hand, the developed economies of the US, EU and Japan experienced contractions in 2009, and their recovery has been in the main weak and halting. Economic growth in the major developed countries is likely to remain subdued over the next few years, as the damage to the financial sector and the household balance sheets, sovereign debt woes and lower maneuverability for implementing stimulus policy measures are likely to have long-lasting effects. Global Rebalancing Widening global current account imbalances, which had been an underlying cause of the 2008 global economic turmoil, narrowed during the crisis as world trade plunged and commodity prices fell. The current account deficit of the US in 2009, at 0.7 percent of world GDP, was less than half its level in 2006. Of the surplus-running countries, the oil-exporting countries in the Middle East in particular saw a marked reduction in surplus in 2009 to 0.09 percent of world GDP. China’s surplus also fell, but remained a considerable 0.5 percent of world GDP. ASEAN’s current account surplus, which has been relatively modest, dropped to 0.1 percent of world GDP in 2009 from 0.18 percent before the crisis. With global economic recovery, the current account imbalances are projected to grow again, but are expected to remain lower than before the crisis (Figure 2.12). As the economies with sizeable current account deficits, particularly the US, scale back on spending and imports with expected lower income growth, global rebalancing would require the surplus countries, in particular China, to develop new sources of demand. The current account surpluses sustained by ASEAN and the rest of developing Asia over the last decade have been the outcomes of these countries’ successful outwardlooking export-oriented growth strategies. In the coming years, developing Asia would need to look beyond exports

Japan

United States

Middle East

Rest of the world

to developed markets in the West towards greater intraregional trade and greater domestic consumption and investment. In this regard, it is necessary for governments to provide better social safety nets so that there would be less need for precautionary savings. Improvements in overall living standards as the economies develop would also spur greater consumer demand and help to shift resources toward production for local as well as regional consumers. ASEAN’s Trade and Investment Linkages The region’s trade and investment linkages have been predominantly with countries outside ASEAN, although there have been changes in the relative importance of external partners over time. This underscores the scope for expanding intra-ASEAN trade and investments while at the same time also emphasizes the need for ASEAN to remain open. ASEAN’s trade is mainly in goods (83 percent in 2009) rather than in services. The shares of ASEAN’s merchandise exports to and imports from the US, EU and Japan have been decreasing. From 2002 to 2009, the share of exports to these three destinations has fallen from a combined 42 percent to 31 percent and the share of imports from 42 percent to 32 percent (Figures 2.13 & 2.14). On the other hand, ASEAN’s shares of exports to and imports from China and India have been increasing. In the case of China, the shares have doubled between 2002 and 2009. The changing pattern of ASEAN’s trade can be attributed partly to developments in production networks for manufactured goods in East Asia, where ASEAN countries supplied components for final assembly in China and then export to developed market destinations. In 2009, 34 percent of ASEAN’s exports to China were in parts and components1. Thus, while trade between ASEAN and China has expanded significantly, a considerable share is still tied to final demand from the West.

ASEAN COMPETITIVENESS REPORT

FIGURE 2.13: Share of ASEAN Exports TO Selected COUNTRIES/REGIONS

% 16.0

2002

14.6

11.6

5.1 2.2

22.6

27.9

2004

2006

2008

Source: ASEAN Merchandise Trade Statistics Database; authors’ analysis.

2009

10.1

11.5

9.6

10.1

Japan

24.6

China

In the post-crisis period, ASEAN’s trade ties with China and India are expected to continue to strengthen even as export demand from developed country markets remains weak. The pressure on China to reduce its current account surplus and increase spending would provide an opportunity for growing exports from ASEAN. India’s “Look East” policy, which has seen a resurgence since the 1990s, should also help ASEAN to gain access to India’s market in the long term. ASEAN’s comprehensive economic cooperation agreements with China and India (covered later in this chapter) would also contribute to closer economic linkages. Intra-ASEAN trade has increased in the 2000s, particularly from 2002 onwards although the percentage point increases in intra-ASEAN shares of ASEAN’s total exports and imports have been moderate and have not been sustained from year to year. Intra-ASEAN share of exports (imports) was 22.6 (22.2) in 2002 and averaged 25.5 (24.7) percent between 2003 and 2009. These shares are relatively low compared with the regional blocs of the EU and NAFTA, where the share of intra-regional trade was 65.6 percent and 39.3 percent in 2009 respectively. However, if intra-ASEAN trade share is compared with ASEAN’s share of global world trade, which is around 6 percent, then intra-ASEAN trade

FIGURE 2.14: Share of ASEAN Imports FROM Selected COUNTRIES/REGIONS

3.3

India

30.8

ASEAN

Rest of the world

is four times higher than would be the case if ASEAN countries were randomly distributed countries. To an even greater extent than trade flows, the bulk - over 80 percent - of ASEAN’s foreign direct investment inflows are from outside ASEAN rather than from other ASEAN members (Figure 2.15). The largest share of FDI inflows to ASEAN is from the EU, which accounted for 25 percent of total inflows between 2003 and 2008. This is followed by Japan (15 percent) and the US at a distant third (8 percent). China’s FDI flows have exceeded 1 percent from 2004, and accounted for 2 percent of FDI inflows between 2004 and 2008. Intra-ASEAN share of FDI inflows averaged 13.5 percent between 2003 and 2008.

ASEAN Cooperation Model The context for cooperation among countries in the Southeast Asian region has changed dramatically since ASEAN’s inception in 1967. From an initial imperative to address political and security concerns, the spotlight in the 1990s turned to economic cooperation. A significant milestone was the agreement in 1992 to establish an ASEAN Free Trade Area (AFTA) in 15 years.

% 2002

13.2

12.4

16.1

7.0 1.1

22.2

28.0

2004

2006

2008

Source: ASEAN Merchandise Trade Statistics Database; authors’ analysis.

2009

9.3 US

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10.8 EU

11.4 Japan

13.3 China

1.7

24.3 India

29.1 ASEAN

Rest of the world

FIGURE 2.15: Share of ASEAN FDI Inflows from Selected COUNTRIES/REGIONS

% 2002

-1.2

21.0

17.0

0.5

21.4

41.6

2004

2006

2008

Source: ASEAN Foreign Direct Investment Statistics Database; authors’ analysis.

20.6

5.6

12.7

Japan

ASEAN Leaders further articulated their resolve to forge closer economic integration through the ASEAN Vision 2020 in December 1997, which aspired to transform ASEAN into a stable, prosperous and highly competitive region with equitable economic development, and reduced poverty and socio-economic disparities. The ASEAN Vision was set against the severe fallouts from the 1997 Asian financial crisis and an increasingly competitive global marketplace. Huge regional trading blocs were formed in Europe and North America, and the emerging economies of China and India were posing stronger competition, particularly the former. ASEAN had lost its competitive edge in terms of labor costs and foreign direct investments to China. Investors were largely deterred by subscale, fragmented markets in ASEAN and unnecessary costs resulting from differing product standards across the region. To regain competitiveness, ASEAN needed to make a concerted move towards greater economic integration and at the same time raise workers’ productivity and cut costs across the production value chain. At the 2003 Summit in Bali, ASEAN Leaders declared an ASEAN Economic Community (AEC) to be the goal of regional economic integration by 2020. The AEC would be one of three pillars that would build an ASEAN Community in 2020, the other two being an ASEAN Political-Security Community and an ASEAN Socio-Cultural Community. The AEC would establish ASEAN as a single market and production base characterized by free flow of goods, services, investment, skilled labor and freer flow of capital. In 2007, ASEAN Leaders accelerated the creation of an AEC to 2015 and adopted a comprehensive action plan, the AEC Blueprint, which had clear timelines and targets. They also signed the ASEAN Charter at the Singapore Summit in November to establish ASEAN as a rules-based entity with a legal personality that is separate from its member states. The Charter was ratified by all member countries and entered into force in December 2008.

2.5 0.7

China

18.3

India

39.6

ASEAN

Rest of the world

In 2009, ASEAN further adopted the ASEAN PoliticalSecurity Community and ASEAN Socio-Cultural Community Blueprints towards a shared responsibility for regional security and global integration and to enhance cooperation in human development and narrow the development gap between members. The theme in 2009 was ‘ASEAN Charter for ASEAN Peoples’ and the target was to achieve an ASEAN Community by 2015. Towards an ASEAN Economic Community The AEC as envisaged would comprise four key interrelated and mutually reinforcing characteristics: (i) a single market and production base, (ii) a competitive economic region, (iii) equitable economic development and (iv) integration into the global economy. The AEC Blueprint sets clear targets, actions and timelines for the implementation of various measures from 2008 to 2015. To track progress towards the AEC 2015, a scorecard mechanism was developed to monitor and assess implementation. The plan for an AEC builds on earlier ASEAN initiatives to establish closer cooperation in trade and investment. These building blocks include the ASEAN Free Trade Area (AFTA) (1992), ASEAN Investment Area (AIA) (1998), and the ASEAN Framework Agreement on Services (AFAS) (1995). Through further liberalization and facilitation measures, ASEAN aims to realize a single market and production base in 2015. Accelerated liberalization and integration is identified for 12 goods and services sectors. These are: agro-based products, automotives, electronics, fisheries, rubber-based products, textiles and apparels, wood-based products, healthcare, e-ASEAN, tourism and logistics services. The case for an AEC is evident from several viewpoints. An integrated economic community enjoys economies of scale, lower production and transaction costs, enhanced intra- and extra-regional trade and overall welfare gains. With freer movement for goods, labor and capital among member countries, there would be more efficient allocation ASEAN COMPETITIVENESS REPORT

of factors of production resulting in higher productivity. Labor mobility may also lead to less disparity in wages across member countries and create more opportunities for workers within the region to find jobs. Trade expansion within the region is also a means to foster higher growth in less developed economies in ASEAN and help them to catch up with the more developed economies in the region and reduce the magnitude of poverty in the region. Moreover, an integrated economic and trade bloc with no market and trade barriers and harmonized regulations is more attractive to investors than one that is fragmented. The agglomeration of Southeast Asian nations has a magnified voice, influence and leverage in global economic affairs. Through domestic economic reforms and strengthened political cohesion, the AEC reaps greater common interests for the region while presenting each member with a larger stake in the region’s progress and prosperity. While economic integration would bring undeniable benefits to the region in the longer term, there are shortterm transition costs. Greater external competition may cause some industries that previously enjoyed domestic market protection and subsidies to struggle for survival resulting in business failures and unemployment. Economies with weaker and less transparent economic systems and less advanced institutional, infrastructural and communications systems would need longer execution timelines for integration plans. The road to an AEC would be bumpy, and ASEAN members have to manage the integration process to ease adjustment pains and also to ensure that resistance from entrenched domestic interests does not impede progress. The 2008 global crisis has raised concerns that the regional integration process would be derailed as governments accorded priority to national interests and resorted to protectionist measures to keep local industries afloat and preserve jobs. ASEAN leaders and ministers have been conscious of protectionist threats not only from member countries but also from elsewhere in the world, especially in advanced economies such as the US, since the crisis flared up, and they have consistently taken an anti-protectionism stance in official ASEAN statements and speeches. However, the anti-protectionism line has not been as clear at the individual country level. For instance, Malaysia launched a Buy Malaysian Campaign in January 2009, and Indonesia introduced a buy local policy in March 2009 for the country’s four million civil servants. In May 2010, Indonesia indicated that it was prepared to open up only five of around 30 key airports to ASEAN member carriers by 2015, despite provision under the AEC for an ASEAN Single Aviation Market by 2015. Notwithstanding selected individual country measures, ASEAN overall has not stopped implementing measures towards an AEC over the last three years. However, it is also behind schedule. According to the first AEC Scorecard compiled by the ASEAN Secretariat and published in April 2010, 73.6 percent of measures scheduled for implementation between January 2008 and December

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2009 were implemented by ASEAN member states. Measures that were not implemented mainly involved the ratification of important economic agreements by individual members. Members were urged in that document to step up implementation, ‘to avoid a backlog of unimplemented commitments with the onset of more new commitments and measures … in the years to come.’ In October 2010, the AEC Council noted that almost 20 percent of deliverables under the AEC Blueprint for 2008-2009 still had not been achieved. It was reported that Brunei, Malaysia, Myanmar, Singapore and Vietnam were among those with the highest compliance. Trade and Investment Liberalization and Facilitation In the area of realizing a single market and production base through trade and investment liberalization and facilitation, ASEAN has made the greatest stride in tariff reduction. From 1 January 2010, ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) countries have eliminated all tariffs among members for products in the Inclusion List of the Common Effective Preferential Tariff (CEPT) Scheme for AFTA. Only 0.9 percent of tariff lines remained for products on the Sensitive, Highly Sensitive and General Exclusion Lists. The CLMV countries will eliminate tariffs on all products in the Inclusion List by 2015. ASEAN has also taken significant steps to revise and simplify the Rules of Origin (ROO), which sets the conditions for goods manufactured or produced in ASEAN countries to enjoy preferential tariff concessions when exported to other ASEAN destinations. The next step in the streamlining of ROO procedures is for all member states to implement an ASEAN Self Certification Scheme by 2012. On 1 November 2010, three participating members – Brunei, Malaysia and Singapore – commenced a pilot project to kick-start the self-certification system, under which certified exporters can declare, on a commercial invoice, that their products have satisfied the ASEAN origin criteria and can claim preferential treatment and tariff concessions under the AFTA. This saves documentation delays and costs. Although tariff barriers have been substantially lowered and ROO simplified, considerable work remains for ASEAN in the elimination of non-tariff barriers and trade facilitation. A Trade Facilitation Framework has been adopted by ASEAN, with a Work Programme until 2015 to address systematically non-tariff issues such as customs, trade procedures, standards and conformance and sanitary and phytosanitary measures. A key initiative in trade facilitation is the plan for an ASEAN Single Window (ASW), to expedite customs clearance of goods across the region. A single window provides one entry point for traders to lodge information with government to fulfill all import- or export-related regulatory requirements. The ASEAN Single Window is an environment where ten National Single Windows (NSWs) of individual member countries operate and integrate. It is expected to make

shipment of goods faster by about 40 percent. Although the AEC Blueprint has set 2008 as the latest year for ASEAN-6 countries to operationalize their NSWs, it was only in August 2010 that ASEAN Economic Ministers noted at their meeting that these countries had activated their NSWs. The CLMV countries have until 2012 to set up their respective NSWs and they are undertaking preparatory work to do so. It remains a challenge to work towards timely full implementation of the ASEAN Single Window. ASEAN countries have signed in the second half of 2010 the Memorandum of Understanding on the Implementation of the ASEAN Single Window Pilot Project and the Protocol on Electronic Customs Facilitation (Single Window) to test the infrastructure and procedures. Various provisions related to tariff reduction and facilitation of trade in goods have been consolidated into a single legal instrument: the ASEAN Trade in Goods Agreement (ATIGA) to make it more user-friendly and reduce the transaction time and costs of doing business. The ATIGA was signed in February 2009, but there was a delay in the ratification of the Agreement by all ASEAN member states due to a dispute between Thailand and the Philippines on rice tariffs. The dispute was resolved when the Philippines was allowed to keep its 40 percent tariff on rice imports from ASEAN up to 2014 and reduce it to 35 percent only on 1 January 2015. In return, Thailand, considered a major supplier of rice to the Philippines, would secure a specialaccess arrangement for rice shipments of 367,000 metric tons annually. The ATIGA entered into force in May 2010, and tariff liberalization commitments would be implemented retroactively from 1 January 2010. In the area of services liberalization, ASEAN has concluded the seventh package of services commitments under the ASEAN Framework Agreement on Services (AFAS), where members pledged commitment to allow higher foreign equity ownership in various sectors, such as in business services, education, distribution and maritime transport services. ASEAN also has additional packages of commitments on financial services and air transport. In October 2010, ASEAN Economic Ministers signed the Protocol to Implement the Eighth Package of Commitments for the liberalization of 15 new sub-sectors. The AFAS aims to liberalize 128 service sub-sectors and the latest package brings up the commitments to cover 80 sub-sectors so far. The commitments under the AFAS go beyond the requirements of the WTO. In investment, ASEAN has consolidated its 1998 Framework Agreement on the ASEAN Investment Area and the 1987 ASEAN Investment Guarantee Agreement into the ASEAN Comprehensive Investment Agreement (ACIA). The ACIA is aimed at benefiting both ASEAN and ASEAN-based foreign investors, through provisions for investment liberalization, protection and investment promotion and facilitation. The Agreement was signed in February 2009. According to the AEC Scorecard, some countries had yet to ratify the ACIA and finalize the

reservation list. There were also reports that some countries had proposed many sectors for protected investment, which could impede timely implementation of ACIA. Regulatory reforms are integral to trade and investment facilitation. Of these, it has been suggested that administrative reforms are easier to accomplish and will have substantial positive impact on the AEC. To this end, ASEAN Economic Ministers have agreed to an ASEAN Regulatory Reform Dialogue at the senior economic officialsâ&#x20AC;&#x2122; level in early 2011 to address some of the regulatory issues pertaining to trade facilitation, services liberalization and investment facilitation. Enhancing ASEAN Connectivity The Master Plan on ASEAN Connectivity has been adopted by the ASEAN Leaders at the 17th ASEAN Summit in Hanoi in October 2010. It seeks to enhance physical, institutional and people-to-people connectivity between members to reduce the development gap and enhance competitiveness by improving production and distribution networks in the region. Physical connectivity is a challenge for the region, which calls for the upgrading of existing infrastructure, construction of new infrastructure and new logistics facilities and harmonization of regulatory framework. Seven strategies have been drawn up to establish seamless regional connectivity through a multimodal transport system, enhanced Information and Communications Technology (ICT) infrastructure and a regional energy security framework. Prioritized projects include completion of the ASEAN Highway Network, completion of the Singapore Kunming Rail Link missing links, establishment of an ASEAN Broadband Corridor, and furthering the development of the ASEAN Power Grid Network through the implementation of interconnection projects between Peninsular Malaysia and Sumatra, Indonesia, and West Kalimantan and Sarawak. The infrastructure needs of ASEAN and Asia in general are great. The Asian Development Bank (ADB) and Asian Development Bank Institute (ADBI) estimate that Asian countries would need to invest US$8 trillion in national infrastructure and US$290 billion in regional infrastructure from 2010 to 2020 to achieve pan-Asian connectivity. A variety of internal and external financing sources are needed to address the different financing and technical assistance needs across ASEAN economies. Besides traditional modes of financing from multilateral development banks, bilateral development partners and national governments, innovative infrastructure financing mechanisms are also integral to the Connectivity plan. Connectivity could be financed by innovative mobilization of the regionâ&#x20AC;&#x2122;s large aggregate private savings and foreign exchange reserves with involvement of the private sector particularly in the form of public-private partnerships.

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One financing mechanism being developed is the ASEAN Infrastructure Fund (AIF), which was initiated by ASEAN Finance Ministers in May 2010 on the sidelines of the Asian Development Bank’s annual meeting. The Fund targets to have an initial capital of US$800 million with contributions from ASEAN members and the Plus Three countries of China, Japan and South Korea. The ADB has been requested to support the establishment of the AIF. ASEAN could also tap on other evolving sources of infrastructure financing such as the ADB’s Asian Infrastructure Fund and the China-ASEAN Investment Cooperation Fund announced by China in April 2009, which plans for a total fund of US$10 billion and has raised US$1 billion by April 2010. To encourage the active participation from all stakeholders, a seminar was held in December 2010 in Vietnam to unveil the Master Plan on ASEAN Connectivity to the public. Closer connectivity would also bring its share of problems such as transnational crimes, illegal immigration, environmental degradation and pollution among other cross-border issues and mechanisms to address these are also part of the Master Plan on ASEAN Connectivity. If the required investment in transport, telecommunications and energy infrastructure were made during 2010-2020, developing Asia could enjoy real income gains of about US$13 trillion during that period and beyond (ADB and ADBI 2009). In the context of the need for Asia to rebalance growth post-global crisis, massive infrastructure investments will serve to mobilize the region’s savings and boost regional demand at the same time that they lay the foundations for long-term growth. ASEAN’s Engagement with Stakeholders While the ASEAN Charter recognizes the need to engage other stakeholders in order to achieve its vision of an ASEAN Community by 2015 and be a people-oriented organization, the approach to engagement varies across ASEAN countries from those that are more open to engaging with diverse stakeholders and those that prefer a more managed form of engagement. However, ASEAN has made some progress in its efforts to engage with stakeholders by making it a part of the ASEAN Charter. A list of entities has been identified in an annex of the Charter for engagement. The entities include the ASEAN Inter-Parliamentary Assembly, various ASEAN business organizations, think tanks and academic institutions which are part of the ASEAN-ISIS Network, ASEAN civil society organizations and a few others such as the Working Group for an ASEAN Human Rights Mechanism. While engagement with civil society is more relevant for achievement of ASEAN’s people-centric ASEAN Community as a whole, engagement with the business community is specifically important for achieving an ASEAN Economic Community by 2015. The need to communicate with and to involve stakeholders in the process is mentioned in the AEC Blueprint.

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The main business organization that ASEAN consults for private sector feedback is the ASEAN Business Advisory Council (ASEAN-BAC). The ASEAN-BAC was formed in 2003 and up to three business leaders from each of the ASEAN countries can be nominated to the Council. The ASEAN-BAC holds regular meetings across ASEAN and participates in ASEAN and national level forums. The ASEAN-BAC holds an ASEAN Business and Investment Summit annually on the sidelines of the ASEAN Summit. Since 2009, ASEAN Economic Ministers (AEM) have started to hold Public-Private Sector Policy Dialogues with representatives not only from ASEAN-BAC but also from among the 12 sectors that have been identified for priority integration towards an AEC. The AEM has so far held dialogues with representatives from the textiles, automotive and logistics sectors. In October 2010, the ASEAN Economic Community Council announced that an SME Advisory Board, consisting of the Heads of ASEAN SME Agencies and private sectors representatives, will be established to provide a forum for networking as well as for deliberating and providing inputs on SME-related regional flagship projects and policy matters to the Ministers. ASEAN-plus Initiatives One of the four key pillars of the ASEAN Economic Community is integration into the global economy through free trade agreements (FTAs) and comprehensive economic partnership (CEP) agreements with ASEAN’s dialogue and major trading partners, where ASEAN seeks to maintain “ASEAN Centrality”. ASEAN also cooperates with the Plus Three partners of China, Japan and Korea on a number of financial initiatives. Trade and Investment Agreements In addition to intra-ASEAN trade and investment cooperation, ASEAN has been developing a network of extra-regional economic agreements covering trade in goods, services and investments, which has gained momentum over the last decade starting with China’s proposal for an ASEAN-China Free Trade Area in November 2001. Todate, ASEAN has concluded agreements with China, Japan, Korea, Australia and New Zealand, and India. In 2002, ASEAN and China signed a Framework Agreement for Comprehensive Economic Cooperation for the establishment of the ASEAN-China Free Trade Area. Under this framework, the Agreement on Trade in Goods was signed in 2004, the Agreement on Trade in Services was signed in 2007 and the ASEAN-China Investment Agreement in 2009. The ASEAN-China FTA was fully implemented in January 2010 for ASEAN-6 (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) and China to create the world’s third-largest free trade area, after the EU and NAFTA. The CLMV countries will complete tariff eliminations on most goods by 2015.

The ASEAN-Japan Comprehensive Economic Partnership Agreement entered into force in December 2008, with provisions for tariff eliminations by ASEAN-6 and Japan within ten years and negotiations for services and investment to commence one year from entry into force of the Agreement. In 2005, ASEAN and Korea signed the Framework Agreement on Comprehensive Economic Cooperation, and subsequently, signed four more agreements that form the legal instruments for establishing the ASEAN-Korea Free Trade Area. The ASEAN-Korea Free Trade Area was realized in January 2010 with tariffs eliminated by ASEAN-6 and Korea on more than 90 percent of products. A comprehensive agreement for an ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) was signed in 2009 and came into force in January 2010. This is ASEANâ&#x20AC;&#x2122;s first multi-country FTA and the AANZFTA is considered the most comprehensive FTA agreement ever signed by ASEAN and its dialogue partners. The Agreement covers trade in goods and services, electronic commerce, movement of natural persons, investment, economic cooperation, dispute settlement mechanism and specific provisions on customs procedures, sanitary and phytosanitary measures, standards and technical regulations, intellectual property rights and competition. ASEAN and India signed a Framework Agreement on Comprehensive Economic Cooperation in 2003. Under this framework, the ASEAN-India Agreement on Trade in Goods was signed in 2009 and entered in force in January 2010. As of 1 October 2010, India, Singapore, Malaysia, Thailand, Vietnam, Brunei and Indonesia have implemented the Agreement. ASEAN and India are currently working towards the early conclusion of the ASEAN-India Trade in Services and Investment Agreements. ASEAN Plus Three initiatives, involving the ASEAN countries, China, Japan and Korea have been in progress since December 1997 when the Asian financial crisis underlined the need for greater regional cooperation. ASEAN+3 cooperation is now being pursued in 20 areas. The East Asia Summit (EAS), first held in 2005, arose from a decision of the ASEAN+3 Summit Meeting in November 2004. Since then, the East Asia Summit has been convened annually and includes the ten ASEAN countries, China, Japan, Korea, India, Australia and New Zealand (ASEAN+6). The Leaders of Russia and the United States have been invited to participate in the EAS starting from 2011. ASEAN is concurrently considering the proposal for an East Asian Free Trade Area (EAFTA) for ASEAN+3 countries put forth by China and the proposal for a Comprehensive Economic Partnership for East Asia (CEPEA) involving ASEAN+6 countries as suggested by Japan. Two studies have been conducted by separate teams of experts on these two proposals for further East Asian integration. Four ASEAN Plus Working Groups have been tasked to look

into the recommendations in the studies on the EAFTA and CEPEA in parallel. Two of these Working Groups, on Rules of Origin and Tariff Nomenclature, were ready to engage ASEAN FTA partners in September 2010, while the two Working Groups on Customs Procedures and Economic Cooperation were still in the process of discussions. Financial Cooperation A centerpiece of ASEAN financial cooperation is a currency swap arrangement established jointly with the Plus Three economies of China, Japan and South Korea to address shortterm liquidity problems among participants and strengthen regional financial stability. The Chiang Mai Initiative, which was a bilateral swap network launched in 2000 in response to the 1997 Asian financial crisis, was multilateralized in 2010. The Chiang Mai Initiative Multilateralization (CMIM), which came into effect on 24 March 2010, has a total size of US$120 billion, with 80 percent contributed by the Plus Three countries and 20 percent by ASEAN members. The detailed breakdown in contribution is given in Table 2.1. The size of the reserves pool was initially planned for a minimum of US$80 billion in May 2008, but was enlarged to US$120 billion in February 2009, in the wake of the global financial turmoil. Under the CMIM, a key element is the establishment of an independent regional surveillance unit. The unit, to be located in Singapore, is called the ASEAN+3 Macroeconomic Research Office (AMRO). It will monitor and analyze regional economies with the aims of detecting risks early, implementing remedial actions and contributing to effective decision-making by the CMIM. To further enhance surveillance, ASEAN+3 Finance Ministers also agreed to improve the Economic Review and Policy Dialogue process. Another element of ASEAN+3 financial cooperation is the Asian Bond Markets Initiative, which aims to promote local currency-denominated bond markets and enhance macroeconomic and financial stability. To support the issuance of corporate bonds in the region, a Credit Guarantee and Investment Facility was established in May 2010 as a trust fund of ADB with an initial capital of US$700 million. In addition to the above-mentioned initiatives, the stock exchanges of Malaysia, Singapore and Thailand are slated to be linked in an ASEAN Exchange Linkage that is expected to go live in the second half of 2011. The Philippinesâ&#x20AC;&#x2122; stock exchange is expected to join the common electronic platform in the first half of 2012. This endeavor is expected to provide regional companies with a platform for exposure to global investors. There are plans to initially offer collective investment schemes to non-retail investors by the first half of 2012 and then graduate to complex products by 2013.

ASEAN COMPETITIVENESS REPORT

table 2.1: CMIM Contribution Ratio

Source: ASEAN (2010). The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting, Press Release, May 2, 2010.

Countries China

38.40

Japan

38.40

South Korea

19.20

Brunei

0.03

Cambodia

0.12

Indonesia

4.552

Laos

0.03

Malaysia

4.552

Myanmar

0.06

Philippines

4.552

Singapore

4.552

Thailand

4.552

Vietnam

1.00

Institutional Framework for Collaboration While deeper regional integration would enhance ASEAN’s competitiveness and pave the way for higher rates of growth and wealth creation, the vision of an ASEAN Economic Community cannot be achieved without a concerted effort by ASEAN members towards realizing AEC targets in a timely manner. The extent to which ASEAN will succeed in this undertaking depends on several factors, foremost of which are the political will of member countries as well as the strength of the institutional structure and enforcement mechanism. For forty years since its inception, ASEAN has adopted the ASEAN Way to decision making, which emphasizes consultation, consensus and non-interference in internal affairs. This is an approach that relies on informality and personal relationships and reinforces state sovereignty. ASEAN’s cooperative mechanism of mutual noninterference is supported by an organizational structure that is both decentralized and geographically dispersed. The institutional framework emphasizes maximum participation and control by members and operates on the principle of equal sharing of administrative burden, with rotating stewardship among intergovernmental bodies. Historically, this framework has facilitated political consultation and consensus-building in a hostile security environment and contributed to the prevention of conflict in the region. ASEAN had few legally binding agreements in its earlier years and it was only with the organization’s growing emphasis on economic cooperation from the 1990s that an active period of institutional development followed. The ASEAN Charter, which was signed in November 2007 and entered into force in December 2008, marked a key step in ASEAN’s institutionalization, by providing the organization with a constitutional foundation for the building of an ASEAN Community. The Charter formalizes the ASEAN Summit, which comprises ASEAN Heads of State or Government, as

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Contribution (US$ billion)

the supreme policy-making body of ASEAN. Summit meetings are held twice annually and may be convened as special meetings whenever necessary. This system of regular meetings helps to promote consultations, cooperation, confidence, goodwill and participation among members. Three ASEAN Community Councils are established, which comprise councils related to the three pillars of the ASEAN Community, namely, ASEAN Political-Security Community Council, ASEAN Economic Community Council and ASEAN Socio-Cultural Community Council. Each Council has under its purview the relevant ASEAN Sectoral Ministerial Bodies. An ASEAN Coordinating Council, comprising ASEAN Foreign Ministers, is tasked to assist ASEAN Leaders in preparing for the Summits and coordinate with the ASEAN Community Councils to enhance policy coherence, efficiency and cooperation among them. A Committee of Permanent Representatives to ASEAN is set up to support the work of the ASEAN Community Councils and ASEAN Sectoral Ministerial Bodies, liaise with the ASEAN Secretariat and facilitate ASEAN cooperation with external partners. The Committee is made up of a Permanent Representative with the rank of Ambassador from each member state, who resides in Jakarta. The Secretary-General of ASEAN and the ASEAN Secretariat have an enhanced role in facilitating and monitoring progress in the implementation of ASEAN agreements and decisions. The Secretary-General is appointed by the ASEAN Summit for a non-renewable term of office of five years from among nationals of ASEAN member states based on alphabetical rotation. He is assisted by four Deputy Secretaries-General, two of whom are nominated and the other two from open recruitment. While the Charter has established structures and strengthened institutions and mechanisms, it is not without deficiencies. Critics point to the Charter’s enshrinement of the principles of non-interference in the internal affairs of member states and decision making based on consultation and consensus as an indication that ASEAN’s effectiveness

in implementing agreements might not differ much from its unimpressive past record. They took issue with the Charter allowing a formula for flexible participation to accelerate the implementation of economic commitments only when there is a consensus to do so and its apparent endorsement only of the ASEAN Minus X formula over another formula â&#x20AC;&#x201C; 2 Plus X - that had also previously been utilized. The Charter carries no reference to sanctions should compliance fail and leaves the ASEAN Summit to decide on cases relating to a serious breach of the Charter or non-compliance. This reluctance to specify explicitly penalties for non-compliance signals that ASEAN is not ready to demonstrate the greatest resolve in enforcing compliance. Acknowledgement of the limitations of the Charter necessarily moderates expectations of the ASEAN cooperation process, at least in terms of timeline. To ensure the successful implementation of the AEC Blueprint, the ASEAN Secretariat has been tasked with expanded responsibilities to review and monitor the progress of the AEC and disseminate the information to member countries. Besides the AEC Scorecard, a set of statistical indicators such as an integrated tariff and trade data system is being maintained to monitor and assess the progress of implementation of the various programmes and measures for the AEC. The regular dissemination of accurate information to ASEAN Leaders helps to ensure that any difficulties or bottlenecks in the compliance to the AEC Blueprint can be quickly addressed. To support the expanded role of the ASEAN Secretariat, its research and planning capabilities and resources have been strengthened in recent years. Within member countries, research capabilities and human capital development are being strengthened, while newer members are assisted in establishing the appropriate capacity building programmes. Technical studies or training programmes are conducted on specific issues. Milestones and targets of the AEC Blueprint, translated into national objectives, have been incorporated into the national development plans of individual countries. In this regard, participation from the private sector, dialogue or trading partners and multilateral development agencies such as the ADB and World Bank is particularly important, especially for regional infrastructure projects.

The outlook for ASEAN economies is positive, although growth is expected to moderate in 2011 from the sharp rebound in 2010. Factors that may dent ASEANâ&#x20AC;&#x2122;s growth prospects include the risk of economic instability as capital inflows to the region surge as well as soaring food and oil prices in the world. The changing structure of the global economy with the economic center of gravity shifting from the developed economies of the US, EU and Japan to China and India would require ASEAN to adjust its own economic structure to enable it to maximize its competitiveness and find complementarities with the high-growth economies in the region. There is a need to reduce export dependence, especially to the developed economies, as a global rebalancing of current accounts is set in motion. The ASEAN countries thus need to strengthen regional trade in final goods and domestic demand. ASEAN cooperation has made steady progress with a goal to create an ASEAN Community by 2015 that comprises the three pillars of a political-security community, economic community and socio-cultural community. On the economic front, clear targets and timelines have been set out in the AEC Blueprint but more needs to be done to ensure timely and full implementation of commitments. The imperatives of deeper regional integration may bring into question the ASEAN Way of working and require greater powers under the Charter to monitor and ensure compliance. ASEAN has also deepened its ties with external partners, particularly economies in Asia, through closer trade, investment and financial cooperation, which include the implementation of comprehensive economic partnership agreements and multilateral currency swap arrangements. This places ASEAN in a good position to benefit from opportunities in a growing Asia. Continuing efforts to expand and deepen external economic relations with an approach that maintains ASEAN centrality are equally vital to giving ASEAN a stronger united voice in regional and multilateral forums and fostering its competitiveness in the global supply chain and global markets.

Summary The ASEAN countries weathered the recent global crisis fairly well due to the safeguards adopted during the Asian financial crisis, which insulated them from a shock to the financial sector although the real sector suffered some setbacks particularly in the more export-oriented economies. Expansionary monetary and fiscal policies as well as a rebound in exports contributed to the recovery. The resource rich ASEAN countries also benefited from the high commodity prices.

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Endnotes Authors’ calculations using data from UN Comtrade database.

Chapter References ADB (2010a). Asian Development Outlook 2010: Macroeconomic Management Beyond the Crisis, Mandaluyong City, Philippines: Asian Development Bank. _____________ (2010b). Asian Development Outlook 2010 Update: The Future of Growth in Asia, Mandaluyong City, Philippines: Asian Development Bank. _____________ (2010c). Key Indicators for Asia and the Pacific 2010: The Rise of Asia’s Middle Class, Mandaluyong City, Philippines: Asian Development Bank. _____________ and Asian Development Bank Institute (2009). Infrastructure for a Seamless Asia, Tokyo: Asian Development Bank Institute. AFP (Agence France Presse) (2011). “Indonesia posts 6.1% GDP growth in 2010: official”, February 6, 2011. ASEAN (2009a). “ASEAN Charter for ASEAN Peoples”, Statement by the ASEAN Chairman of the 14th ASEAN Summit, http://www.asean.org/22389.htm. ____________ (2009b). Joint Media Statement of the 41st ASEAN Economic Ministers’ (AEM) Meeting, Bangkok, 13-14 August, 2009. ____________ (2010a). The Joint Ministerial Statement of the 13th ASEAN+3 Finance Ministers’ Meeting, Press Release, May 2, 2010. ____________ (2010b). Master Plan on ASEAN Connectivity, October 2010. ASEAN (2010c). ASEANstats, http://www.aseansec.org/22122.htm ASEAN Secretariat (2008a). ASEAN Economic Community Blueprint, Jakarta: ASEAN Secretariat. _____________ (2008b). The ASEAN Charter, Jakarta: ASEAN Secretariat. _____________ (2009). Roadmap for an ASEAN Community 2009-2015, Jakarta: ASEAN Secretariat. _____________ (2010). FTA Agreements, Jakarta: ASEAN Secretariat, http://www.aseansec.org/Fact%20Sheet/AEC/ AEC-12.pdf _____________ (2010). Charting Progress Towards Regional Economic Integration: ASEAN Economic Community Scorecard, Jakarta: ASEAN Secretariat. Bernama The Malaysian National News Agency (2010). “Mustapa: Changing Trends in Trade Liberalization Negotiations”, October 7, 2010. Borneo Bulletin (2010). “Pilot Project for ASEAN Self-Certification Begins”, November 2, 2010. Cockerham, Geoffrey B. (2010). “Regional Integration in ASEAN: Institutional Design and the ASEAN Way”, East Asia, 27:165–185. Desker, Barry (2008). “Where the Asean Charter Comes Up Short,” The Straits Times, July 18, 2008. Economic and Social Commission for Asia and the Pacific (ESCAP) (2009). Economic and Social Survey of Asia and the Pacific 2009: Addressing Triple Threats to Development, United Nations. Economist Intelligence Unit (EIU) (2007-2010). Online country statistics, www.eiu.com _____________ (2010). “Vietnam: The Trade Account Continues to Post Enormous Deficits,” September 5, 2010, http:// country.eiu.com/article.aspx?articleid=857437070

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Hew, Denis (2007). “Introduction: Brick by Brick - The Building of an Asean Economic Community”, in Hew, D. (ed.), Brick by Brick: The Building of an ASEAN Economic Community, Singapore: ISEAS. International Monetary Fund (IMF) (2010a). World Economic Outlook April 2010: Rebalancing Growth, Washington, DC: International Monetary Fund. ___________ (2010b). World Economic Outlook October 2010: Recovery, Risk and Rebalancing, Washington, DC: International Monetary Fund. Malaysia Department of Statistics, “National Product and Expenditure Accounts Fourth Quarter 2010”, Statistical Release, February 18, 2011. Philippine National Statistical Coordination Board, “Annual GDP Sizzled to its Highest Growth Rate in the Post Marcos Era at 7.3. Percent; Q4 2010 GDP Growth Grew by 7.1 Percent”, Press Release, January 31, 2011. Plummer, Michael G. and Chia Siow Yue (2009). “Introduction”, in Plummer, M. G. and Chia, S.Y. (eds), Realizing the ASEAN Economic Community: A Comprehensive Assessment, Singapore: ISEAS. Pushpanathan, Sundram (2010). “ASEAN’s Readiness in Achieving the ASEAN Economic Community 2015: Prospects and Challenges”, Keynote Address at the ISEAS ASEAN Roundtable 2010, April 29, 2010, http://www.iseas.edu.sg/ aseanstudiescentre/N-ART10-Keynote-29-04-10.pdf. Schwartz, A. and Roland Villinger (2004). “Integrating South-east Asia’s Economies”, McKinsey Quarterly, 1: 36-47. Singapore Ministry of Trade and Industry (2011). “MTI Forecasts GDP Growth of 4.0 to 6.0 Per Cent for 2011 Following Strong Rebound in 2010”, Press Release, February 17, 2011. Thailand Government Media Center (2010). “MOU on Implementation of ASEAN Single Window Pilot Project to be Signed”, October 4, 2010. The Business Times Singapore (2010). “ASEAN Exchange Link to Kick Off in H2 Next Year”, December 1, 2010. Vietnam News and Information Portal (2010). “Vietnam’s GDP Surpasses Target with 6.78% Growth in 2010”, December 30, 2010. World Bank (2011). Global Economic Prospects: Navigating Strong Currents, Volume 2, January 2011, Washington DC: The World Bank. World Trade Organization (WTO) (2010). “Trade Likely to Grow by 13.5% in 2010, WTO Says”, Press Release, September 20, 2010. Xinhua General News Service (2010). “ASEAN Should Put Mechanism in Place to Boost Trade”, November 22, 2010. Yuvejwattana, Suttinee and Shamim Adam (2010). “Slowing Growth May Create ‘Headache’ for Thailand, Malaysia Central Banks”, Bloomberg News, November 19, 2010.

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ASEAN Competitiveness Report

20 10

Chapter 3

Competitiveness Performance of ASEAN

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COMPETITIVENESS PERFORMANCE OF ASEAN

How well has the competitiveness of ASEAN and its member countries translated into economic outcomes? This chapter provides a profile of the region and assesses trends in the region’s competitiveness performance over the last two decades. First, the region’s economic performance is reviewed using indicators that measure prosperity and the distribution of benefits from prosperity, such as GDP per capita, Gini coefficient, poverty level and human development index. Second, prosperity accounting is performed through three measures: labor productivity, labor mobilization and purchasing power. The last section assesses the region’s intermediate economic outcomes through indicators such as exports, domestic and foreign investment, innovation and entrepreneurship. ASEAN’s competitiveness performance will be benchmarked against that of the major developed economies of the US, EU and Japan, as well as compared with the performance of China and India.

Profile of the ASEAN Region ASEAN is home to 592 million people with a combined GDP of US$1.49 trillion in 2009 at current market prices.

figure 3.1: ASEAN Endowments: Natural Resources

Petroleum, Timber, Tin An mony, Zinc, Copper, Tungsten, Lead, Coal, Marble, Limestone, Precious stones, Natural gas, Hydropower

MYANMAR

Tin, Rubber, Natural gas, Tungsten, Tantalum, Timber, Lead, Fish, Gypsum, Lignite, Fluorite, Hydropower Tin, Petroleum Timber, Copper, Iron ore, Natural gas, Bauxite

Source: Central Intelligence Agency (2009). The World Factbook 2009.

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Fish, Deepwater ports

Oil and gas, Timber, Gemstones, Iron ore, Manganese, Phosphates, Hydropower

Put in perspective, ASEAN’s population is half that of China or India (the world’s two most populous nations) and its GDP is about one-fifth that of the US (the world’s largest economy). ASEAN’s labor force excluding Cambodia, Laos and Myanmar was a sizeable 244 million in 2008 and it has been growing at an average rate of 1.7 percent per annum since 2000. The labor force is predominantly youthful given that 28 percent of the population are below 15 years of age and only 5.7 percent are in the post-retirement age group of above 65 years. ASEAN is strategically located in Asia at the crossroads of world shipping and air routes within an economically vibrant region that is bounded by India in the west, China, Japan and Korea in the northeast and Australia and New Zealand in the south. As much as 60 percent of the world’s maritime trade passes through ASEAN waters. This locational advantage is set to increase as Asia grows in economic might through the rise of China and India. ASEAN enjoys close partnerships with countries in the region. With a land area of 4.4 million sq km, ASEAN is rich in a diversity of unique natural resource endowments (Figure 3.1). Eight of the ASEAN member countries (Brunei, Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Thailand and Vietnam) have oil and gas resources with Brunei, Malaysia and Indonesia ranking among the world’s top six liquefied natural gas producers. The region is also well-endowed with minerals, accounting for a substantial share of world trade in tin, copper and nickel (58 percent of world export in refined tin and 16 percent of world export in unrefined copper). A quarter of the world’s forests are in ASEAN, covering some 45 percent of the region’s land area. Rich in biodiversity, the forests contribute significantly to ASEAN’s timber and tourism trade but heavy deforestation has severely affected the region’s forest resources, with as much as a third of the forests in Cambodia, Vietnam and

Timber, Hydropower, Gypsum, Tin, Gold, Gemstones

LAOS

Phosphates, Coal, Manganese, Bauxite, Chromate, Oil and gas, Forests, Hydropower

Timber, Petroleum, Nickel, Cobalt, Silver, Gold, Salt, Copper

PHILIPPINES

THAILAND

VIETNAM

CAMBODIA

BRUNEI MALAYSIA SINGAPORE

INDONESIA

Petroleum, Natural gas, Timber

Petroleum, Tin, Natural gas, Nickel, Timber, Bauxite, Copper, Fer le soils, Coal, Gold, Silver

figure 3.2: ASEAN Heterogeneity: Ethnicity

Khmer 90% Viet 2% Chinese 1% Other 4%

Burman 68% Shan 9% Karen 7% Rakhine 4% Chinese 3% Indian 2% Mon 2% Other 5%

MYANMAR LAOS

VIETNAM

CAMBODIA

Malay 50% Chinese 23% Indigenous 11% Indian 7% Other 8%

Source: Central Intelligence Agency (2009). The World Factbook 2009.

Kinh (Viet) Tay Thai Muong Other

86% 2% 2% 2% 8%

PHILIPPINES THAILAND

Thai 75% Chinese 14% Other 11%

Chinese Malay Indian Other

Lao 55% Khmou 11% Hmong 8% Other 26% (Over 100 minor groups)

BRUNEI MALAYSIA SINGAPORE

77% 14% 8% 1%

Laos being depleted over the last 20 years. With a combined coastal area of about 2.7 million sq km, ASEAN is also an important source for a quarter of the world’s fish supply. While the relatively large combined market, strategic geographic location and abundant natural resources in ASEAN are important positive attributes for building prosperity, a few fundamental conditions within the region pose serious risks of disrupting its development. Natural disasters have become more frequent and severe, and the region is expected to be increasingly vulnerable to disasters in the face of climate change. Disasters such as earthquakes, typhoons, landslides and infectious tropical diseases cause significant losses of lives and livelihoods besides damaging infrastructural facilities. For example, the earthquake measuring 7.9 on the Richter Scale in West Sumatra, Indonesia in 2009 killed over 1,100 people, injured another 3,000 and damaged more than 249,800 structures with an estimated economic loss of US$2.2 billion. There are major public health threats in ASEAN arising from communicable diseases like dengue (ASEAN accounts for 52 percent of the world’s dengue risk) and HIV/AIDS (more than 1.5 million people suffer from HIV/AIDS in ASEAN and over 1.5 percent of the adult population in Cambodia, Myanmar and Thailand are affected by the disease). Extraordinary major disasters in ASEAN include the 2004 tsunami that killed almost 250,000 people in ASEAN with 97 percent of the victims in Indonesia alone. In addition, there are other risks such as piracy and terrorism that are emerging as serious threats to some parts of the region.

Tagalog 28% Cebuano 13% Hocano 9% Bisaya/Bibisaya 8% Hiligaynon Honggo 8% Boikol 6% Waray 3% Other 25% Malay 66% Chinese 11% Indigenous 3% Other 4%

Javanese 41% Sundanese 15% Madurese 3% Minangkabau 3% Betawi 2% Bugis 2% Banjar 2% Other 30%

INDONESIA

managing relations between states. No ASEAN member has gone to war with each other since the inception of the grouping although there are occasional bilateral disputes, and the region has been declared a nuclear weapons-free zone by formal treaty. ASEAN countries share the same geographical zone but they are very heterogeneous in many aspects, resulting in a diverse potpourri of rich cultures and traditions on the one hand and wide social-economic inequalities on the other. In terms of population, Indonesia is the largest country with 228 million people, which is 40 percent of ASEAN’s population. Vietnam is the second most populous country with 86 million people. The country with the smallest population size, Brunei, has 0.4 million people. By reason of the size of its economy, Indonesia alone accounts for about 34 percent of ASEAN’s total GDP and is followed by Thailand (20 percent) and Malaysia (14 percent). Laos is the smallest economy with a GDP share of 0.5 percent. There is also a large diversity of ethnic groups in ASEAN speaking 17 percent of the world’s languages (Figure 3.2). Depending on the relations of national governments with regards to minority ethnic groups, there may be potential sources of conflict arising from differences in ethnic interests, including differences in culture, religion and economic success.

Despite the historical territorial and political conflicts between border nations, the establishment of ASEAN has helped to promote peace and stability in the region through its renunciation of the use or threat of force as a mode of

ASEAN COMPETITIVENESS REPORT

Figure 3.3: Trends in Prosperity Growth, ASEAN and Selected Countries

Annual growth in GDP per capita (%)

0 90

Notes: GDP figures are in PPP terms at constant 2005 international dollar. ASEAN data exclude Myanmar. Source: World Bank (2010a); authors’ analysis.

-5

-10 ASEAN

China

India

Japan

World

-15

Competitiveness Performance

higher than that of the world average (1.5 percent and 1.2 percent respectively). Over the same two periods, ASEAN’s GDP growth rates were 7.1 percent and 3.7 percent CAGR respectively (which compared with 2.7 percent and 3.4 percent CAGR for the world). Consequently, ASEAN’s prosperity, which was rising faster than the world average between 1990 and 1997 at a yearly rate of 5.3 percent, has decelerated over the last decade to an annual 2.3 percent, which was only slightly above the world average of 2.1 percent (Figure 3.3). In contrast, China’s prosperity growth remained vigorous at an annual 10.2 percent and 9.1 percent pre- and post-1997, while India’s prosperity growth improved from 3.4 percent to 5.4 percent over the two periods.

Standard of Living Prosperity The competitiveness of a country or region determines the economic outcomes it achieves. One successful economic outcome is an increase in prosperity of the country or region. The central measure of prosperity used in this Report is Gross Domestic Product (GDP) per capita adjusted for purchasing power parity. This measure is a key determinant of the actual standard of living of a country or region. GDP per capita is determined by both population and output. ASEAN’s population increased at a compound annual growth rate (CAGR) of 1.7 percent in the pre-Asian financial crisis period from 1990-1997 and 1.4 percent CAGR post-Asian crisis from 1997-2009. These rates were

figure 3.4: Prosperity Level and Growth, ASEAN and Selected Countries

ASEAN’s GDP per capita in 2009 stood at $4,739 (PPP at 2005 international dollars). This was about one-tenth that of the United States and half that of the world average

GDP per capita, 2009 (2005 PPP$)

50,000

45,000 40,000 35,000

Japan

30,000

25,000

Notes: GDP figures are in PPP terms at constant 2005 international dollar. Population and GDP growth rate at compound annual growth rate (CAGR). ASEAN data exclude Brunei and Myanmar. Source: World Bank (2010a); authors’ analysis.

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20,000 15,000 World

10,000 ASEAN5

5,000

China

ASEAN

India 4

CLMV 6

Growth of prosperity, 1997-2009 (CAGR %)

figure 3.5: GNI Per Capita in 2009, ASEAN Countries, China and India

US$ current prices (Atlas method) 45,000

High Income

40,000

37220

Upper Middle Income

Low Income

Lower Middle Income

35,000 30,000

27050

25,000 20,000 15,000 Notes: Income classification based on World Bank. Brunei data 10,000 refers to 2006. Myanmar 5,000 data is estimated.

Source: World Bank (2010a).

7230 3760

2940

2230

1790

1040

1010

880

650

India

Vietnam

Laos

Cambodia

600

0 Singapore

Brunei

Malaysia

Thailand

China

Indonesia Philippines

Myanmar

(Figure 3.4). Since 2006, China’s GDP per capita has been higher than ASEAN’s, by 31 percent in 2009. Among the comparator countries, ASEAN’s GDP per capita was only higher than that of India, by 60 percent in 2009. ASEAN’s current prosperity relative to comparator countries points to the need for the region as a whole to exert greater effort to substantially raise the standard of living of its people.

from low income to lower middle income in 2009. With the exception of Singapore and Brunei that are in the high income category, the other ASEAN countries have largely stagnated in prosperity over the past decade (Table 3.1). During this period, China progressed from low income to lower middle income in 1997 while India rose to the same level in 2007.

According to World Bank classification, ASEAN’s prosperity based on Gross National Income (GNI) per capita (Atlas method, US$ at current prices) runs the full range from high income (Brunei and Singapore) to low income (Cambodia, Laos and Myanmar) (Figure 3.5). During the period of rapid prosperity growth in 19901997, two ASEAN economies were pushed up the income ladder. Malaysia progressed from lower middle income to upper middle income in 1992. Indonesia rose from low income to lower middle income in 1993 but slid back to low income in 1998 with the Asian crisis before recovering to lower middle income status in 2003. Vietnam progressed

Distribution of Prosperity The distribution of prosperity generated may be uneven with large differences in the standard of living within the same country or region. To find out how ASEAN is doing on this front, indicators of income inequality and poverty levels are examined below.

table 3.1: Changes in Income Classification of ASEAN Countries, 1990-2009

Note: Countries classified by World Bank wef 1 July each year. Source: World Bank (2010a).

GNI Per Capita (Atlas method, current US$) Low income (L)

Inequality Income inequality in ASEAN appears to be relatively high, with five of eight ASEAN countries having a Gini coefficient above 0.4. Singapore has the highest level of income inequality, followed by the Philippines and Thailand (Figure

1990

1992

1993

1998

2003

2009

<= 610

<= 675

<= 695

<= 760

<= 765

<= 995

Lower middle income (LM)

611-2,465

676-2,695

696-2,785

761-3,030

766-3,035

996-3,945

Upper middle income (UM)

2,466-7,620

2,696-8,355

2,786-8,625

3,031-9,360

3,036-9,385

3,946-12,195

> 7,620

> 8,355

> 8,625

> 9,360

> 9,385

> 12,195

High income (H) Brunei Singapore

Malaysia

Indonesia

Philippines

Thailand

Cambodia

Laos

Myanmar

Vietnam

ASEAN COMPETITIVENESS REPORT

0.50

figure 3.6: Income Inequality, ASEAN Countries, China and India

0.40

Gini coefficient

0.344

0.346

Vietnam

Laos

0.368

0.394

0.403

0.409

Indonesia

Malaysia

ASEAN

0.417

Cambodia

0.420

0.464

0.445

0.469

0.30

Notes: Gini coefficient ranges from 0 (lowest) to 1 (highest inequality). All data refer to year 2004 except for the following: Indonesia: 2005, Laos and Thailand: 2002, Philippines: 2003. According to the latest data available, the Gini coefficient is 0.480 for Singapore in 2010, down from a peak of 0.489 in 2007.

0.20 0.10 0.00 India

Thailand Philippines Singapore

China

Sources: UNU-WIDER World Income Inequality Database (2010) and Singapore Department of Statistics (2011).

3.6). The key reasons often cited for rising income inequality are technological change providing higher returns to talented individuals and more open markets creating greater opportunities for entrepreneurs to leverage their capabilities across larger markets. Inequality is lower in ASEAN than China but higher compared with India. Poverty Poverty shows the extent to which growth generated has failed to reach all echelons of a country’s or region’s population. A common indicator of poverty is the percentage of population below the income poverty line of US$1.25 per day. Four ASEAN countries have about a fifth or more of their population living below the income poverty line, which is higher than China’s 15.9 percent share. Cambodia (40.2 percent) and Laos (44 percent) have a much higher proportion of abject poor than the other ASEAN countries for which data are available; this proportion is comparable to India’s. Thailand (0.4 percent) and Malaysia (0.5 percent) have among the lowest level of poverty in ASEAN (Singapore does not have an official

figure 3.7: Poverty Rates, ASEAN Countries, China and India

Notes: Data are for latest available year from 2000-2007. No data for Singapore, Brunei, Indonesia, and Myanmar. The poverty rates are calculated based on the international poverty line set by the World Bank of US$1.25 per day.

Quality of Life Beyond an income measure, it is as important that a country’s or region’s competitiveness is determined by the broader concept of “quality of life”. The UNDP Human Development Index (HDI) provides the most established attempt to measure such a quality. Based on sub-indices on life expectancy, education and GDP, the latest HDI shows that ASEAN as a whole ranks above India but below China on human development and quality of life. Four ASEAN countries have better levels of human development than China, while eight ASEAN countries rank above India. Among the ASEAN countries, there is a large gap in HDI with Singapore being the most developed and Myanmar the least (Figure 3.8). Gender An average measure of prosperity across an economy can conceal huge differences of access and participation within the society. The Gender-related Development Index (GDI)

Popula on below poverty line (%) 40.2

41.6

44.0

30 21.5

22.6

15.9

Sources: United Nations Development Programme (2009) and World Bank PovcalNet (2010b).

poverty line) (Figure 3.7).

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0.4 Thailand

0.5 Malaysia

China

Vietnam

Philippines

Cambodia

India

Laos

figure 3.8: Human Development Index, ASEAN Countries, China and India

1.0

0.944

0.920

0.9

0.829

0.783

0.8

0.772

0.751

0.748

0.734

0.725

0.7

0.619

0.612

Laos

India

0.6

0.593

0.586

0.5 0.4 0.3

Note: Data is for 2007. The HDI combines indicators of life expectancy, educational attainment and income.

0.2 0.1 0.0

Source: United Nations Development Programme (2009).

Singapore Brunei

Malaysia Thailand

China

and Gender Empowerment Measure (GEM) are two measures of gender disparity. GDI looks at the achievement of women. It computes male and female indices separately, which are then combined in a way that penalizes differences in achievement between men and women. GEM looks at the opportunities for women to participate in the economy and society rather than their capabilities. Brunei has the highest GDI of the ASEAN countries (there is no data for Singapore), followed by Malaysia and Thailand (Figure 3.9). Laos and Cambodia are much weaker than the rest of ASEAN. Singapore has the highest GEM (there is no data for Brunei), followed by Philippines and Vietnam. The majority of ASEAN countries have lower gender disparities than India, but less than half of the ASEAN countries perform better than China on this count. The Elements of Prosperity In an accounting sense, prosperity is the result of three factors: labor productivity (output generated per hour), labor mobilization (work hours per capita population during the

figure 3.9: Gender-Related Indices, ASEAN Countries, China and India Notes: No data on GDI and GEM for Myanmar. No data on GDI for Singapore. No data on GEM for Brunei, Laos and India. GDI includes life expectancy at birth, adult literacy rate, combined gross enrollment ratio in education, and estimated earned income. GEM includes seats in parliament held by women, share of female professional and technical workers, share of female legislators, senior officials and managers, and ratio of estimated female to male earned income.

1.0 0.9

Philippines ASEAN

Indonesia Vietnam

Cambodia Myanmar

year) and price levels (amount of consumption goods that can be bought for one unit of income). Labor productivity reflects how well the region utilizes its resources to produce output. It is driven by employee skills, capital stock and total factor productivity, which are the many factors that influence how well inputs are used. Labor mobilization is attributable to a combination of factors. The demographic profile of the population determines the share of people of working age. The labor participation rate then tracks whether people of working age are actually economically active. Together with another indicator, the unemployment rate, one will be able to tell whether a lower labor participation rate indicates incidents of individuals choosing to abstain from entering the labor force. Price levels are less often used as an indicator of economic performance but can have a major impact on prosperity differences across countries. They are important signs of potential problems in local competition or efficiency of the local economy compared to the export sector.

0.91 0.79

0.8

0.82

0.78

0.77

0.75

0.73

0.72

0.7 0.6

0.54

0.51

0.61

0.56

0.53

0.5

0.55

0.59

0.43

0.41

0.4

0.59

0.3 0.2 0.1 0.0 Brunei

Singapore Malaysia

Thailand

China

Philippines Indonesia Vietnam

Gender-Related Development Index (GDI)

Laos

India

Cambodia

Gender Empowerment Measure (GEM)

Source: United Nations Development Programme (2009).

ASEAN COMPETITIVENESS REPORT

figure 3.10: Trends in Labor Productivity, ASEAN and Selected Countries

70,000

GDP per person employed (1990 US$, PPP)

60,000 50,000 40,000 30,000 20,000

Note: ASEAN refers to all ASEAN countries except Brunei and Laos.

10,000 0

Source: The Conference Board and Groningen Growth and Development Centre (2010).

ASEAN

China

Labor Productivity Labor productivity in ASEAN is relatively low, as is the case with most developing countries. ASEAN’s labor productivity, as measured by GDP per person employed (in 1990 international dollars) was US$11,114 in 2009. This was 17 percent of the level of the world productivity leader, the US, and between 25 and 30 percent of the labor productivity in Japan and EU (Figure 3.10).

India

Japan

US$11,322, has slightly exceeded that of ASEAN. Relative to India, ASEAN’s labor productivity has been around 33.7 percent higher over the last few years. Within ASEAN, Singapore had the highest labor productivity in the region at US$39,863 in 2009. It was also the ASEAN country most adversely affected by the global crisis with productivity falling sharply by 13.3 percent from 2008 to 2009 (Figure 3.11). This compares with smaller declines in Thailand (-4.7 percent), Malaysia (-1.4 percent) and Indonesia (-0.3 percent), and positive but slower productivity growth in the Philippines (0.8 percent), Myanmar (1.3 percent), Cambodia (2.0 percent) and Vietnam (4.4 percent).

Compared with China and India, ASEAN has registered higher labor productivity over the years. However, the productivity gap between ASEAN and China has been narrowing due to labor productivity in the latter rising much faster than the former. Between 1997 and 2007, the compound annual labor productivity growth rate in ASEAN was 3 percent compared with China’s 8.8 percent. Over the 2008 global-crisis period, ASEAN’s labor productivity dipped 0.9 percent while China’s increased 8.5 percent. As a result, in 2009, China’s labor productivity, at

Labor Mobilization Labor mobilization in ASEAN, as indicated by the labor force participation rate by the working age population (15 – 64 years old) in 2009, was below that in China, the

figure 3.11: Labor Productivity Level and Growth, ASEAN and Selected Countries

80,000

GDP per Person Employed, 2009 (1990 US$, PPP)

75,000 70,000 65,000

60,000 55,000 50,000 45,000

Japan

40,000

Singapore EU

35,000 30,000

Malaysia

Note: ASEAN refers to all ASEAN countries except Brunei and Laos. Source: The Conference Board and Groningen Growth and Development Centre (2010); authors’ analysis.

25,000 20,000

Thailand

-16

ASIA COMPETITIVENESS INSTITUTE

-14

-12

-10

-8

-6

ASEAN

-4

15,000

Myanmar

10,000 Indonesia Philippines 5,000 Cambodia 0 -2 0 2 Produc vity Growth, 2008-2009 (%)

India

China

Vietnam 4

figure 3.12: Labor Force Participation Rates, ASEAN and Selected Countries

%, 2009 China

79.8

74.1

Japan

73.1

72.1

ASEAN 60.8

India

Source: International Labor Organization (2010).

US and Japan but higher than that in India (Figure 3.12). ASEAN’s labor force participation rate has declined slightly over the years, from 73.6 percent in 1990 to 72.6 percent in 2000 and 72.1 percent in 2009. Within ASEAN, the labor force participation rate has declined between 2000 and 2009 in all countries except Indonesia and Brunei. In 2009, the countries with the highest labor force participation rates were Cambodia (81.3 percent), Laos (81.0 percent), Thailand and Vietnam (77.4 percent), while the Philippines and Malaysia had the lowest rates at 65.6 percent and 64.7 percent respectively (Figure 3.13). Purchasing Power The standard of living is determined by the amount of products and services that can be purchased for a given amount of income in a particular country. The ratio of PPP conversion factor to market exchange rate provides a measure of price levels between two countries by indicating the number of US dollars needed to buy a similar basket of

figure 3.13: Labor Force Participation Rates, ASEAN countries

80 70

83.6

82.2 81.3

70.1 70.5

goods and services (typically the basket of goods and services that make up the GDP) in each country. If the US is used as a benchmark country (i.e. its ratios are set to one), then a ratio of below one indicates greater affordability due to relatively lower local prices while a ratio above one suggests relatively lower affordability due to higher local prices than the US. If the ratio is decreasing over time, affordability is improving while the reverse is true if it is increasing. Using this yardstick, it can be seen that affordability in ASEAN is relatively high, especially within the CLMV region (Figure 3.14). ASEAN’s affordability is better than that of China and most of the developed countries but worse than India’s. The global crisis from 2008 to 2009 has improved the affordability among ASEAN countries in particular Brunei. Japan’s affordability suffered the most severe impact and deteriorated rapidly during the global crisis.

81.0

69.6 70.3

79.0

74.9 66.5 65.6

65.2 64.7

77.6 77.4

78.6 77.4

Thailand

Vietnam

71.1 70.9

60 50 40 30 20 10

Note: Labor force participation rates from ILO estimates. Source: International Labor Organization (2010).

0 Brunei

Cambodia

Indonesia

Laos

Malaysia 2000

Myanmar

Philippines

Singapore

2009

ASEAN COMPETITIVENESS REPORT

figure 3.14: Price Comparisons, ASEAN and Selected Countries

PPP conversion factor to market exchange rate ra o, 2009

Worsening purchasing 1.6 power 1.4 Japan

1.2

1.0 0.8

Singapore China

Note: Data for Brunei, Cambodia, India and some countries in EU (Belgium, Czech Republic, Hungary, Slovak Republic, Slovenia and Sweden) are estimates for 2009.

Brunei

Philippines

Malaysia

Myanmar Improving purchasing power -30

-28

-26

-24

-22

-20

-18

-16

-14

-12

-10

ASEAN Indonesia Thailand Laos Cambodia India Vietnam

0.6 0.4 0.2 0.0

-8

-6

-4

-2

Growth rate, 2008-2009 (%)

Source: IMF (2010); authors’ analysis.

Intermediate Economic Outcomes A country’s or region’s underlying competitiveness and future prosperity can be measured by indicators of exports, investments, innovation and entrepreneurship. These measures are important enablers of competitiveness, that is, they are the channels through which the business environment can be enhanced. Exports indicate how competitiveness supports current prosperity while investments and innovation provide insights into future prosperity. Entrepreneurship is the mobilization of new combinations of factor inputs for current and future prosperity. Exports A country’s or region’s export market share in the world indicates the extent to which its companies can successfully compete in the world. At the same time, the export market share of a country or region also indicates the exposure of its companies to foreign competition in global markets. This exposure can be an important driver of higher efficiency as it enables learning from operational practices abroad. ASEAN’s annual share of world export of goods and services has been two to three times higher than its share of world GDP over the years, which reflects the region’s dependence on exports as a source of economic growth. However, despite the importance of exports, ASEAN has not made much inroad in increasing its share of world exports in the last

ASIA COMPETITIVENESS INSTITUTE

ten years, as its share has hovered around 6 percent (Figure 3.15). This contrasts with a near doubling of its world export share in the decade before the Asian financial crisis (from 3.2 percent in 1987 to 6.3 percent in 1997). The stagnation has been due to a combination of persistently lower share of services exports after 1997 and ASEAN’s inability to raise its share of world export in goods. The latter factor is particularly significant as ASEAN is predominantly a goods exporter, where goods exports account for an average of 84.5 percent of ASEAN’s total exports between 1999 and 2009. The average share of services in total exports in ASEAN over the last decade at 15.5 percent is lower than the world’s 19.9 percent. It is noted that ASEAN’s world export market share has increased to 6.2 percent in 2009 from 5.9 percent in 2007 and 2008. However, whether this reflects ASEAN economies’ relatively better export performance around the period of global crisis or the start of a sustained increase in export shares remains to be seen. Unlike ASEAN, China has made rapid gains in its share of world exports over the last ten years. 2005 was a milestone year when China overtook ASEAN in world export market share. At the same time, Japan’s world export share dipped below that of ASEAN. India’s export share has been climbing since 2005 but its share remains significantly below that of ASEAN. The EU and US, which dominate the world market in exports, have been losing market shares (Figure 3.16).

figure 3.15: World Export Market Shares, ASEAN

World market share (%)

7 6 5 4

Note: Shares calculated from exports and GDP in US$ at current prices and current exchange rates. Source: UNCTAD (2010); authors’ analysis.

3 2 1 0 90

Goods

Services

Among ASEAN countries, Singapore has the strongest presence in global markets. Its world export market share fell following the Asian crisis to less than 2 percent but has recovered grounds to between 2.1 and 2.2 percent from 2004 to 2009, although this is still somewhat below the 2.3 percent achieved in 1996 (Figure 3.17). The market share of Malaysia, the second-largest exporter from ASEAN, has fallen over the past ten years from 1.4 percent in 2000 to 1.2 percent in 2009. Thailand’s market share has remained relatively unchanged at 1.0 percent, while Indonesia’s market share has returned to around 0.8 percent in the last two years after dipping to 0.7 percent between 2003 and 2007. The Philippines experienced the greatest worsening of position among ASEAN countries after the Asian crisis as its global export share declined from 0.6 percent in 1997 to 0.3 percent in 2009.

figure 3.16: World Export Market Shares, ASEAN and Selected Countries

Total

GDP

CLMV and Brunei have the weakest positions in ASEAN in global export markets. Among these countries, Vietnam has made the greatest gain in world market share over the last ten years. Vietnam’s market share doubled from 0.2 percent in 2000 to 0.4 percent in 2009. Cambodia’s and Myanmar’s global market share has remained at about 0.03 and 0.04 percent respectively. Laos has the lowest share at 0.01 percent. Brunei’s market share has been little changed at around 0.05 percent. Exports by Clusters Proximity of businesses engaged in similar economic activities results in both competitive effects on the one hand that raise the costs of inputs and drive down profits, and beneficial agglomeration effects on the other that attract suppliers, employees and consumers, and create a pool for

Share of world export of goods and services (%)

46 44 42 40 16 14 12 10 8 6 4 2 0

Source: UNCTAD (2010); authors’ analysis.

93 94 ASEAN

96 97 China

99 India

01 EU

03 04 Japan

06 07

ASEAN COMPETITIVENESS REPORT

figure 3.17: World Export Market Shares, ASEAN Countries

2.5

Share of world export of goods and services (%)

2.0

1.5

1.0

0.5

Note: For 2009, data for Brunei, Myanmar and Laos are for goods exports only.

0.0 90

Source: UNCTAD (2010); authorsâ&#x20AC;&#x2122; analysis.

Cambodia

Indonesia

Laos

Malaysia

Myanmar

Philippines

Singapore

Thailand

Vietnam

ASEAN has strong clusters in a number of industries such as information technology (IT), oil and gas products, agricultural products, metal mining and manufacturing,

200,000

Brunei

knowledge and other positive spillovers. Industry-specific agglomeration effects refer to beneficial proximity effects of a narrow set of related economic activities that lead to specialization of specific economic activities within the region. Given the right conditions, these agglomeration forces can be stronger than the competitive effects and make it more attractive for businesses to be situated close to competitors rather than far away from them. Clusters include large companies, small and medium-sized enterprises, partners in the value chain, research and educational institutes, capital providers and other intermediaries.

figure 3.18: Exports by Clusters, ASEAN Countries

transport and logistics, and business services. Oil and gas products are the largest export item for four of the ASEAN countries, namely, Brunei, Indonesia, Myanmar and Vietnam while IT products are the largest export commodity in Malaysia, Philippines, Singapore and Thailand. Apparels are a major export in CLMV (Figure 3.18). Investments Investments, both domestic and inward foreign direct investment (FDI), indicate a locationâ&#x20AC;&#x2122;s attractiveness to local and foreign companies. Outward FDI indicates the ability of local companies to transfer their competitive advantages to foreign locations.

Export value (2007,US$m)

180,000 160,000 140,000 120,000 100,000 80,000

40,000 20,000

ASIA COMPETITIVENESS INSTITUTE

dt s Tr in an in g, sp or Pr ta od nd Lo gis c Bu s sin es sS Ap er pa vic re es la nd Te x le s Co m Pl m as un c ica s o ns Eq ui pt Au to m o ve Fo ot we Fo ar r es Po tP we r od r/P uc ow ts er Ge n Eq ui pt

rP Ag

la nd

Sources: Porter, M.E. and R. Bryden (2010). International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics; Laos and Vietnam: EIU Country Profiles, 2008.

60,000

Note: Export values for Laos refer to 2006.

Brunei Myanmar

Cambodia Philippines

Indonesia Singapore

Laos Thailand

Malaysia Vietnam

figure 3.19: Domestic Investment, ASEAN and Selected Countries

Gross investment in % of GDP

45 40 35 30 25 20 15 10

Source: EIU (2010).

ASEAN

China

ASEAN’s gross fixed capital investment has been high historically, exceeding 30 percent of GDP before the Asian financial crisis (Figure 3.19). However, the onset of the Asian crisis caused the region’s investment rate to plunge precipitously. The rate has started to recover since 2004 to reach 26.2 percent in 2009. The recent global crisis did not seem to affect the investment rate in ASEAN as a whole as the rate has continued rising in 2008 and 2009. While ASEAN’s investment rate was among the highest in the world before 1997, the region’s capital formation fell behind countries such as China and India in the 2000s. In

India

Domestic Gross Fixed Capital Investment Domestic gross fixed capital investment signals companies’ positive assessment of current and future business opportunities in a location. By enhancing a country’s capital stock, capital investment helps to drive labor productivity and also ensures future productivity growth through new technology or production processes embedded in new machines.

figure 3.20: Domestic Investment, ASEAN Countries

Japan

World

particular, the investment rates in China and India climbed significantly in the 2000s. China’s investment rate, at 43.9 percent in 2009, is now the highest among the comparison group of countries. Within ASEAN, Vietnam’s investment as a percent of GDP has been the highest in the region in the 2000s, amounting to 34.5 percent of GDP in 2009 (Figure 3.20). The investment rate in the Philippines, which has been declining in the 2000s, was the second lowest among ASEAN members in 2009, at 14.7 percent. Myanmar had the lowest estimated investment rate of 14.5 percent in 2009. The rates of gross fixed capital formation fell in a number of countries after the Asian financial crisis and in most cases, have not returned to pre-1997 levels. This is particularly so for Malaysia, which experienced a sharp plunge in investment rate after 1997 and has recorded a much lower investment rate since. Malaysia’s investment as a percent of GDP in 2009 was 20.4 percent compared with a peak of 43 percent in 1997. Thailand’s investment rate was on an uptrend in the early 2000s but

Gross investment in % of GDP

45 40 35 30 25

Notes: Data are estimated for the following years for some countries: Brunei (2009), Cambodia (2008, 2009), Myanmar (2006 onwards). Data not available for Laos. Source: EIU (2010).

20 15 10 5 0

Brunei

Cambodia

Indonesia

Malaysia

Philippines

Singapore

Thailand

Vietnam

Myanmar

ASEAN COMPETITIVENESS REPORT

figure 3.21: FDI Inward Stock, ASEAN and Selected Countries

FDI inward stock as % of GDP

50 40 30 20 10 0 90

Source: UNCTAD (2010); authors’ analysis.

ASEAN

China

has been falling from 2005. Singapore’s investment rate was on a downtrend between 1997 and 2005, but started rising thereafter to reach 28.9 percent in 2009. Indonesia was the only ASEAN country to achieve investment rates in 2008 (27.7 percent) and 2009 (31.1 percent) that exceeded pre1997 levels, after experiencing a fall in investment rates between 1997 and 1999. Inward Foreign Direct Investment Inward FDI is an important indicator of a country’s or region’s attractiveness to foreign companies and is driven by factors such as natural resources, domestic market (size and/or growth) and export opportunities arising from the location. The existence of foreign companies in the domestic market helps to enhance competition through rivalry, knowledge inflow, injection of capital and linkages to foreign markets. FDI inflows to ASEAN exceed outward investments from ASEAN, by an average of 2.5 times between 2003 and 2009. This is unlike the EU, which is a net outward investor. The share of FDI inward stock relative to GDP in ASEAN increased markedly after 1997 following a spate of mergers and acquisitions after the Asian financial crisis. In 2009, FDI

figure 3.22: World Share in FDI Inflows, ASEAN and Selected Countries

98 India

00 EU

Japan

World

inward stock as a percentage of GDP is 46 percent, which underlines the importance of foreign investors relative to the size of ASEAN’s economy. In contrast, the share of FDI inward stock relative to GDP in China has been declining since 1997 to 9 percent in 2008. It rose slightly to 10 percent in 2009. The share of India’s FDI inward stock to GDP has been rising rapidly since 2006 to reach 13.3 percent in 2009 (Figure 3.21). As with the rest of the world, net FDI inflows to ASEAN plunged amid the global crisis, shrinking by 33 and 22 percent in 2008 and 2009 respectively. As a share of world total FDI inflows, however, ASEAN’s share recovered from 2.7 percent in 2008 to 3.3 percent in 2009. Over a longer time horizon, ASEAN’s share of total world inward FDI flows in the 2000s has not recovered to the levels achieved before the Asian financial crisis. Due to the volatility in annual FDI inflows, the shares are calculated on a threeyear moving average basis. In the 2000s, ASEAN’s highest share of world FDI inflows was an average of 4.5 percent between 2003 and 2005, in contrast to 8.0 percent between 1994 and 1996 in the 1990s (Figure 3.22). China overtook ASEAN in its share of total world FDI inflows in 1993

Share of world total FDI inflows (%, 3-yr moving average)

50 40 30 20 10

8 6

Source: UNCTAD (2010); authors’ analysis.

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

ASEAN

ASIA COMPETITIVENESS INSTITUTE

China

India

Japan

figure 3.23: Inward FDI Performance Index, ASEAN and Selected Countries

6.0

5.0

4.0

3.0

2.0

Note: The Inward FDI Performance Index is the ratio of a country’s share in global FDI inflows to its share in global GDP. Source: UNCTAD (2010); authors’ analysis.

1.0

0.0 90

ASEAN

96 China

and its share has remained above ASEAN’s since then. In 2009, China received 8.5 percent of world FDI inflows (or a 3-year moving average of 5.8 percent). India’s share of world FDI inflows has increased markedly since 2006. Its share in 2009 of 3.1 percent is similar to ASEAN’s. The EU and US typically receive over half of total world FDI inflows each year, although their shares have dipped below half in 2008 and 2009. An Inward FDI Performance Index has been compiled in accordance with the definition of the UNCTAD Inward FDI Performance Index for ASEAN and comparator countries (UNCTAD 2002). This index is the ratio of a country’s share in global FDI inflows to its share in global GDP. It can be seen that from attracting FDI inflows that were three to four times more than what could be expected from its size in the global economy in the 1990s, ASEAN’s FDI inflows over the last two years have been just in line with its economic size. Meanwhile, China’s Inward FDI Performance Index has fallen below 1 to 0.9 in 2007 and 0.8

figure 3.24: Share of FDI Inflows in ASEAN by Country, Selected Years

India

04 Japan

in 2008 and 2009, which means that its FDI inflows in recent years have been roughly commensurate with its economic size. India’s Inward FDI Performance Index, which has been around 0.5 or below for many years, has risen to 0.8 in 2008 and 1.0 in 2009 (Figure 3.23). Among the ASEAN countries, Singapore receives the largest share of the region’s FDI inflows. Between 2007 and 2009, its share was 40.2 percent, which was somewhat lower than its typical share of nearly 50 or over 50 percent in the 2000s, due to a plunge in its share to 23.1 in 2008. Thailand is the second-largest recipient with 16.4 percent, although it has lost its position twice in recent years to Indonesia. Indonesia has seen robust inflows since 2005 and is the third-largest recipient with 13.2 percent share between 2007 and 2009. This is in contrast to the late 1990s and early 2000s, where Indonesia’s net FDI inflows were negative due partly to huge repayments of intra-company loans by foreign affiliates after the Asian financial crisis.

%, 3-year moving average

7.0 7.3

6.3 21.9

12.2

Vietnam Thailand

16.4

37.6

Singapore Philippines Myanmar

40.2 5.8

Malaysia

53.5

Laos 22.3

4.1 3.6

16.2

Source: UNCTAD (2010); authors’ analysis.

1.6

94-96

10.0

10.9

Indonesia Cambodia

13.2

7.9 -6.3

1.4

01-03

07-09

Brunei

ASEAN COMPETITIVENESS REPORT

figure 3.25: FDI Outward Stock, ASEAN and Selected Countries

FDI outward stock as % of GDP

50 40 30 20 10 0 90

Source: UNCTAD (2010); authors’ analysis.

ASEAN

China

00 EU

Japan

World

Outward FDI serves an important role in providing companies with control over a large part of the value chain. ASEAN’s outward FDI stock relative to its GDP has been increasing steadily since 1993 (Figure 3.25). In 2009, the share was 23.5 percent. The bulk of ASEAN’s outward FDI stock is accounted for by Singapore and to a lesser extent by Malaysia. The outward FDI stocks of China and India are quite low relative to their GDPs, although the shares have been edging up since 2006 to reach 4.9 percent and 6.3 percent in 2009 respectively. ASEAN, China and India all are not significant investors abroad compared with the developed countries. ASEAN’s share of total world FDI outflows peaked at 3.5 percent between 1994 and 1996 and has remained at around 2 percent in recent years (Figure 3.26). China and India have been increasing their shares of world FDI outflows, the former since 2004 and the latter since 2006. Between 2007 and 2009, China and India averaged highs of 2.3 percent and 1.0 percent for the two countries respectively.

Outward Foreign Direct Investment Outward FDI is an important indicator of the ability of local companies to transfer their competitive advantages to foreign locations, thereby exposing them to global competition, foreign markets and access to knowledge.

India

Vietnam’s FDI inflows have been rising steadily in recent years and it obtained a share of 12.2 percent over the last three years. Malaysia has been losing its attractiveness as an investment location to its ASEAN neighbors after the 1997 Asian crisis. From being the second-largest FDI recipient, it was overtaken by Thailand in ASEAN’s FDI share in 1998. Between 2007 and 2009, its share was also smaller than that of Indonesia and Vietnam. The Philippines’ share has averaged around 4 percent in recent years, which is lower than its share of around 6 percent in the mid-1990s. Brunei’s share has been around 2.3 percent between 1995 and 2001 but spiked in 2002 and 2003. Since then, its share has been below 1 percent. Likewise, Myanmar and Laos have been receiving less than 1 percent of total FDI inflows to ASEAN. Cambodia’s share has exceeded 1 percent in recent years (Figure 3.24).

figure 3.26: World Share in FDI Outflows, ASEAN and Selected Countries

Share of world total FDI ou lows (%, 3-yr moving average)

50 40 30 20 3

0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Source: UNCTAD (2010); authors’ analysis.

ASIA COMPETITIVENESS INSTITUTE

ASEAN

China

India

Japan

1 0 05

figure 3.27: Outward FDI Performance Index, ASEAN and Selected Countries

2.5 2.0 1.5 1.0 0.5

0.0 Note: The Outward FDI Performance Index is the ratio of a country’s share in global FDI outflows to its share in global GDP.

ASEAN

China

India

Japan

Source: UNCTAD (2010); authors’ analysis.

The Outward FDI Performance Index, which is the ratio of a country’s outward FDI flows to its share in world GDP according to UNCTAD definition, indicates that relative to the region’s size in the global economy, ASEAN’s outward FDI was 70 percent of what could be expected between 2007 and 2009. For a couple of years from 2004, ASEAN’s outward investment was commensurate with its economic size. Outward investments from China and India, although rising, are still substantially below what can be expected from their economic size (Figure 3.27).

in 2009 (Figure 3.28). The third-largest ASEAN outward investor has been Indonesia from 2004 to 2008, but Thailand took this position in 2009. Innovation A country’s or region’s innovation capacity is an important indicator of its future competitiveness as it contributes to its stock of knowledge, which increases the productive capacities of local companies. Innovation is difficult to measure. Most researchers rely on readily available indicators such as patenting. The US is the most attractive market for patent use and a commonly used measure is the number of patents granted by the US Patent and Trademark Office (USPTO).

Much of the changes in ASEAN’s FDI outflows over time have been due to changes in FDI outflows from Singapore, as it has accounted for 60 to 80 percent of total ASEAN FDI outflows. Singapore’s share was the largest in the six years after the 1997 crisis, averaging 79 percent. Malaysia usually has been the second-largest outward investor from ASEAN with a share of around 20 percent. However, it was the largest ASEAN outward investor in 2008 and 2009, as Singapore registered negative net FDI outflow or reverse investment by residents in 2008 and lower outward FDI

figure 3.28: Share of Outward FDI flows from ASEAN by Country, Selected Years

ASEAN’s patenting is low, accounting for just 0.4 percent of total patents filed in the US in 2009 (or 0.8 percent of patents filed among non-US based institutions). This puts ASEAN on par with India in terms of patenting but behind China (1.2 percent), EU (13.1 percent), Japan (19.8 percent)

%, 3-year moving average 6.4

4.0

10.6

Singapore 29.0

Philippines

53.3 81.5

4.8

Malaysia Laos

1.6

39.5

Indonesia

23.7

Brunei

0.7

Source: UNCTAD (2010); authors’ analysis.

Thailand

14.4

11.6 1.7

15.6

94-96

01-03

07-09

ASEAN COMPETITIVENESS REPORT

figure 3.29: Patent Filings with USPTO, ASEAN and Selected Countries

Source: USPTO (2010); authors’ analysis. ASEAN

China

and the US (49.5 percent) (Figure 3.29). On a per million capita basis (computed as the number of patents per million economically active population), ASEAN has a long way to go to reach the innovative capacity of patenting leaders like the US, Japan and EU. ASEAN also falls significantly behind China and India in the growth rate of patent filing in the US on a per million capita basis (Figure 3.30). Within ASEAN, Singapore continues to dominate in terms of both the absolute number of US patents filed and on a per million capita basis. Singapore filed 493 patents in 2009 or 118.1 patents per million capita, and was ahead of the EU (63.5 patents per million capita), China (2.1) and India (0.9) but behind Japan (344.3) and US (388.5). Malaysia filed 181 patents (9.3 patents per million capita) while Thailand filed 39 patents (0.7 per million capita). The other ASEAN countries play a relatively small role in patenting. There are very few or no record of patenting in the US from CLMV while patenting growth has fallen in the Philippines. Entrepreneurship Entrepreneurship is an important indicator of the effectiveness with which new ideas and technologies are assimilated in a country or region for future prosperity. Advanced economies typically have strong entrepreneurship as indicated by high densities of businesses (defined as the number of registered companies per million economically active population) and high entry rates of new businesses (that is, the number of new registered companies divided by total registered companies). Data for ASEAN’s registered businesses are available for Indonesia, Singapore, Thailand and Vietnam between 2001 and 2005. Taken together, ASEAN’s business density at 2,505 businesses per million economically active population (or per million capita) in 2005, is substantially lower than

ASIA COMPETITIVENESS INSTITUTE

India

Japan

the business densities in the advanced economies (Figure 3.31). This is due to low business densities in Thailand (5,292), Indonesia (1, 608) and Vietnam (892), as Singapore has the highest business density among the comparator countries and region of 29,924 businesses per million capita. Vietnam’s business density is the lowest in ASEAN but it is increasing much more rapidly than the rest of the region at an annual 30.5 percent between 2001 and 2005. In terms of entry rates of new businesses, data are available only for Indonesia, Singapore and Thailand within ASEAN. Based on these three countries, ASEAN’s entry rate of new businesses is 11.4 percent in 2005, which is lower than the US (13.1 percent) but more robust than the entry rates of EU (10.3 percent), Japan (4.4 percent) and India (5.3 percent). The growth of new businesses in ASEAN has been relatively faster than that in the developed economies. Within ASEAN, Singapore has the highest entry rate of new businesses (19.0 percent) followed by Thailand (12.0 percent) and Indonesia (7.8 percent) (Figure 3.32). As a reflection of the overall competitiveness of ASEAN’s locally-owned companies, none of the companies was placed within the top 100 on the Forbes 2010 Global 2000 list, which ranks companies in 62 countries in terms of size based on an equal weighting of sales, profits, assets and market value. Practically all the comparator countries or regions in this Report have homegrown companies that are larger compared with ASEAN. Leading companies in the US took the top four positions with JPMorgan Chase ranked the largest in the world. China’s ICBC was the fifth-largest company in the world. The world’s sixth-largest company on the Forbes list was from the EU, namely, Spain’s Banco Santander. The highest ranking company from Japan was Nippon Telegraph & Tel at 41st position. The highest ranking company in India, Reliance Industries, was ranked 126.

figure 3.30: Number and Growth of Patent Filings with USPTO, ASEAN and Selected Countries

550

Patents per million economically ac ve popula on, 2009

450

US 350 Japan

250

Note: CAGR refers to compound annual growth rate of the number of patents per million economically active population (aged 15 years and above) filed with USPTO. Sources: USPTO (2010) and World Bank (2010a); authors’ analysis.

150

Singapore EU

50 Philippines -5

Thailand ASEAN

Brunei 0

Indonesia 5

China

India

Malaysia 20

Growth of patents per million capita, 1997-2009 (CAGR %)

ASEAN’s topmost ranking company in the Forbes list comes from Thailand, whose largest company, PTT Public Company, was ranked 196. For the other ASEAN countries, Singapore’s highest ranking company, Wilmar International, was placed 230. Malaysia’s CIMB Group Holdings was ranked 493. Indonesia’s Telekom Indonesia was ranked 684 while the largest company in the Philippines, PLDTPhilippine LDT, was ranked 1080. In total, 63 homegrown companies from ASEAN were on the Forbes Global 2000 list, which was 3 percent of the total, compared with 113 and 56 companies from China and India respectively. Of the 200 top-performing small and midsize companies in the Asia Pacific on Forbes’ 2010 “Best Under a Billion” list with sales between US$5 million and US$1 billion, 16 percent or 32 of them were homegrown companies from ASEAN economies. This compared with 32 percent of

figure 3.31: Number and Growth of Registered Businesses, ASEAN and Selected Countries

Notes: CAGR refers to compound annual growth rate of the number of registered businesses per million economically active population (aged 15 years and above). ASEAN refers to Indonesia, Singapore, Thailand and Vietnam only. Source: World Bank (2010a); authors’ analysis.

Summary ASEAN has several naturally-endowed advantages in location, resource abundance and market size, but there are also some fundamental conditions related to disaster and health risks as well cultural and ethnic diversities that potentially can disrupt ASEAN’s development. The analysis of ASEAN’s economic performance over the last two decades, which would reflect the outcomes of its past competitiveness, has shown that while there is considerable variation across countries, ASEAN as a whole has not performed as well in the decade after the 1997 Asian financial crisis compared with the heights the region has attained in the years prior to the crisis. On recent measures

29,923.9

Singapore

3.3%

9.0%

Japan

0.0%

0.9%

Thailand

2.2%

ASEAN

3.5%

Indonesia

2.4%

India

2.8%

973.3

Vietnam

30.5%

892.2

28,423.1 23,350.0 22,034.7 5,292.0 2,504.9 1,607.8

5,000 CAGR %, 2001-2005

companies from China and 19.5 percent of companies from India.

10,000

15,000

20,000

25,000

30,000

35,000

Number of registered businesses per million economically ac ve popula on, 2005

ASEAN COMPETITIVENESS REPORT

figure 3.32: Number and Growth of New Registered Businesses to Total Registered Businesses, ASEAN and Selected Countries Note: CAGR refers to compound annual growth rate in the number of new registered businesses to total registered businesses. ASEAN data refers to Indonesia, Singapore and Thailand only. Source: World Bank (2010a); authors’ analysis.

Singapore

11.4

12.0

ASEAN

19.0

17.5

7.8

13.8

Indonesia

10.3

2.2

4.4

5.3

Japan

5.3

9.7

India 20

CAGR %, 2001 - 2005

ASEAN’s prosperity as measured by GDP per capita is about half of the world average in 2009 and the distribution of prosperity in the region has been uneven. Prosperity in the region has been underpinned by moderately high labor force participation rates and affordable local prices, but the third element of prosperity generation – labor productivity – has been relatively low and not improving as fast as that of China over the last decade. Exports have been an important source of ASEAN’s growth, but ASEAN’s share of world exports has remained relatively unchanged since 1997 and is below the levels achieved just prior to the Asian crisis. China has surpassed ASEAN in world export share since 2005. India’s world share is much below ASEAN’s but its share has been increasing quite rapidly in recent years. The rates of domestic investment in ASEAN fell markedly after the Asian crisis but have been recovering, although these are below the rates recorded prior to the crisis and lower than that in China and India. ASEAN has become less attractive to foreign investors after the Asian crisis amid stiff competition from China and India, as its annual share of world total FDI inflows in the 2000s is half or less than its share in the early to mid-1990s. ASEAN is as yet not a major investor abroad. ASEAN is relatively weak on innovation outcomes as measured by patent filings in the US and there is much room to grow entrepreneurship, in particular, in the nurturing of ASEAN indigenous companies to become larger players of global scale. The findings above point to the pressing need as well as significant scope for ASEAN to achieve more competitive economic outcomes. This would require both solutions ASIA COMPETITIVENESS INSTITUTE

13.1

2.6

of economic outcomes in various dimensions, ASEAN lags significantly behind advanced economies and has been overtaken by China in a few aspects. The region performs better than India, but the latter is catching up.

12.0

8.3

Thailand

Entry Rates (Number of new businesses registered / total businesses registered)

that are tailored to the diverse circumstances of individual ASEAN countries and collective action that derives urgency from the recognition that the region has fared rather unfavorably against the comparison group of advanced and emerging economies post-Asian financial crisis. ASEAN has weathered the 2008 global crisis relatively well, and it has registered an increase in the share of world exports and world FDI inflows in 2009 from 2008, but whether this marks the start of more positive development remains to be seen. It should be noted that the analysis stops at 2008 or 2009 and ASEAN has started its implementation of measures towards an AEC from 2008. To the extent that deeper economic integration is effective and results in positive payoffs, ASEAN is on the way to redressing its relatively lacklustre competitiveness performance in the 2000s and this should be evident in the data in future analysis.

Chapter References Central Intelligence Agency (CIA) (2009). The World Factbook 2009, Washington, DC: Central Intelligence Agency. Cheong, David and Michael Plummer (2009). FDI Effects of ASEAN Integration, MPRA (Munich Personal RePEc Archive) Paper No. 26004. Economist Intelligence Unit (EIU) (2010). Online country statistics, www.eiu.com ____________ (2008). Laos and Vietnam: EIU Country Profiles, 2008. Forbes.com (2010a). The Global 2000. ____________ (2010b). Asiaâ&#x20AC;&#x2122;s Best Under a Billion. International Labor Organization (ILO) (2010). Labor Force Participation Rate, http://kilm.ilo.org/KILMnetBeta/ default2.asp International Monetary Fund (IMF) (2010). World Economic Outlook Database October 2010. Porter, Michael E. and Richard Bryden (2010). International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Singapore Department of Statistics (2011). Key Household Income Trends 2010. The Conference Board and Groningen Growth and Development Centre (2010). The Conference Board Total Economy Database. United Nations Conference on Trade and Development (UNCTAD) (2002). World Investment Report 2002: Transnational Corporations and Export Competitiveness, New York and Geneva: United Nations. _____________ (2010). UNCTADstat, http://unctadstat.unctad.org/ReportFolders/reportFolders.aspx?sCS_referer=&s CS_ChosenLang=en United Nations Development Programme (UNDP) (2009). Human Development Report 2009, United Nations, New York: United Nations Development Programme. United States Patents and Trademark Office (USPTO) (2010). Patent Statistics, http://www.uspto.gov/about/stats/index. jsp United Nations University-World Institute for Development Economic Research (UNU-WIDER) (2010). UNU-WIDER World Income Inequality Database. World Bank (2010a). World Development Indicators. ____________ (2010b). PovcalNet.

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ASEAN Competitiveness Report

20 10

Chapter 4

ASEAN Competitiveness Fundamentals

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ASEAN COMPETITIVENESS FUNDAMENTALS

This chapter analyzes myriad factors that drive the longerterm competitiveness performance of ASEAN and its member countries, which are organized under the two building blocks of macroeconomic competitiveness and microeconomic competitiveness in the Porter framework. The first part of the chapter evaluates the ASEAN region as a whole on these parameters to identify the strengths and weaknesses of ASEAN. This is then put into perspective with respect to China and India. The purpose of this analysis is to provide an understanding of the competitiveness fundamentals of the region that can then serve to formulate an agenda for regional collaboration. The second part provides an assessment of individual member countries to identify specific areas that need to be addressed at the national level. Additional analysis is conducted using alternative sets of competitiveness indices in the aspects of economic freedom, ease of doing business and logistical efficiency as a limited means to validating the findings in the earlier sections.

Regional Competitiveness The competitiveness analysis is organized using the Porter framework and draws on multiple sources of unpublished and published data to assess ASEAN’s competitiveness from various perspectives. In particular, it makes extensive use of a set of competitiveness indices aggregated at different levels using a methodology developed by Professor Porter and his research team (see Porter et al. (2008)), primarily from raw data collected by the World Economic Forum (WEF) in its annual Executive Opinion Survey (see Browne and Geiger (2010))1. The 2010 Survey of business executives was conducted between January and May 2010 for 139 economies. The competitiveness indices also incorporate selected statistical data from the World Bank’s Worldwide Governance Indicators, the World Bank’s Doing Business project, World Health Organization, UNESCO Institute for Statistics, International Telecommunication Union and International Monetary Fund; 2009 data were used where available. Given the diversity in development within the region, there are obvious limitations in comparability, reliability and comprehensiveness of data sources and a caveat is made here in recognition of this fact. It is also noted that data on ASEAN from the WEF’s Executive Opinion Survey are available for only eight of the region’s ten countries, that

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is, excluding Laos and Myanmar. In order to give a more complete picture of overall ASEAN competitiveness, the competitiveness of Laos and Myanmar will be evaluated with a limited set of similar indicators in a later section. ASEAN’s competitiveness profile in 2010 is given in Figure 4.1. The competitiveness ranking for the whole ASEAN region is calculated as a GDP (PPP)-weighted rank of eight ASEAN countries. The competitiveness categories are colour coded to indicate their quintile rankings among a constant sample of 132 countries2, as well as the extent of improvement or deterioration from their rankings in 2009. ASEAN’s position on GDP per capita among the 132 countries is given alongside its ranking on the New Global Competitiveness Index (New GCI). Since GDP per capita is a measure of prosperity or the outcome of competitiveness, and the overall competitiveness index is a measure of competitiveness fundamentals that will impact on future prosperity, the ‘competitiveness gap’ or difference in their rankings would offer some indications of the ability of a region or country in improving or sustaining prosperity in the longer term. ASEAN’s overall competitiveness position in 2010 was 57th globally, which was three places behind its rank in 2009. The slight deterioration in ASEAN’s overall competitiveness over the past year was largely due to a 6-rank drop in microeconomic competitiveness to 49th place. Macroeconomic competiveness was little changed at 64th place. ASEAN’s GDP per capita in 2009, the latest year available, was 79th position. The significant gap between current prosperity and overall competitiveness might point to the potential of current competitiveness fundamentals in raising future prosperity. Macroeconomic Competitiveness Macroeconomic factors, which are heavily influenced by government actions, determine the broad setting in which businesses operate. Although they do not directly affect the productivity of firms, soundness in these factors is necessary to provide a supportive context for firms’ efforts to raise productivity. The macroeconomic competitiveness of countries is assessed in two broad areas: social infrastructure and political institutions and macroeconomic policy. The effectiveness of political institutions, safeguards of property and legal rights and adequate provisions in basic healthcare and education are some basic conditions for economic development. Fiscal and monetary policies affect shortterm fluctuations in economic activity, as well as in the longer term, firms’ ability to operate in an environment of sustainable government financing and low inflation. ASEAN’s macroeconomic competitiveness in 2010 has been better than slightly over half of the countries in the sample. The region has been stronger on macroeconomic policy and clearly weaker on social infrastructure and political

figure 4.1: Competitiveness Profile of ASEAN Region 2010

GDP pc (79) Micro (49)

National Business Environment (49)

Notes: ASEAN’s competitiveness rankings have been computed as the GDP (PPP)-weighted ranks of eight ASEAN countries (excluding Laos and Myanmar). Ranks are based on a constant sample of 132 countries. The rank for GDP pc (GDP per capita) is ASEAN’s position from 2009 data.

Related and Supporting Industries (37)

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (59)

Company Operations and Strategy (45) Strategy (44) Org. Practices (48) Internationalization (45)

Demand Conditions (56)

Macro (64)

New GCI (57)

Social Infrastructure and Pol. Institutions (66)

Macroeconomic Policy (55)

Political Institutions (57) Rule of Law (72)

Quintile Rankings 1 (Top 20%)

Human Development (72)

Context for Strategy and Rivalry (53)

2 3 4 5

Admin (75)

Logistic (64)

Capital (42)

Comm. (68)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (52)

Worsen + 1 rank to <10% Worsen ≥ 10%

institutions. Although ASEAN’s overall macroeconomic competitiveness has remained largely unchanged from 2009, certain aspects have appeared to show a more significant deterioration. This is particularly in the area of political institutions, where there has been a perceived decline in the transparency of economic policymaking, effectiveness of law-making bodies, and lower government effectiveness in reducing poverty and inequality. The rule of law has deteriorated from weaker protection of property rights, less efficient legal framework and higher business costs of crime and violence. Human development has been affected slightly by poorer accessibility of healthcare services. A significant improvement in ASEAN’s macroeconomic stability has served to counter its somewhat weakened position on social infrastructure and political institutions. This has been due largely to an improved inflationary environment, as the region’s budget deficit has increased as a result of fiscal stimulus packages implemented by ASEAN economies during the global crisis. Microeconomic Competitiveness Microeconomic factors directly affect the productivity and innovativeness of firms. Microeconomic competitiveness is determined by the quality of two dimensions: first, the sophistication of company operations and strategies that directly affect the economic value generated from factor inputs, and second, the general business environment that shapes the productivity of company assets and the opportunities in which these can be used productively. The quality of the business environment is in turn determined

by four dimensions, namely, the quality of factor inputs that can be accessed for productive use; the demand conditions in which companies operate; the strength of local clusters that determines the level of positive externalities that can nurture companies; and the context for strategy and rivalry that promotes investment, technology transfer and competition. The quality of microeconomic factors is the outcome of independent decisions made by players in various companies, government agencies and other institutions in the economy. ASEAN’s microeconomic competitiveness is relatively stronger than its macroeconomic competitiveness. In 2010, ASEAN has been ranked above 62 percent of the countries in the sample at 49th position in this dimension. This is a drop of 6 ranks from 2009 and can be largely attributed to a worsening of company operations and strategy and to a smaller extent, to a decline in national business environment. Company operations and strategy has deteriorated mainly as a result of poorer assessments for organizational practices such as the extent of staff training, incentive compensation and willingness to delegate authority. Internationalization of firms has also worsened from poorer breadth of international markets and fewer foreign technology licensing. Some decline in operational strategy has been the result of factors such as customer orientation, firm-level technology absorption and nature of competitive advantage (Table 4.1).

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table 4.1: Company Sophistication in ASEAN Note: Changes in rank are calculated for a constant sample of 132 countries. A negative sign indicates a worsening in rank. Darker green indicates significant advantage gain. Light green indicates moderate advantage gain. Light grey indicates neutral. Darker pink indicates significant advantage loss. Light pink indicates moderate advantage loss.

Company spending on R&D Extent of marke ng Firm-level technology absorp on

40 43 48

-4 -2 -4

-5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

The quality of the business environment in ASEAN has worsened slightly in 2010, reflecting lower rankings across three sub-areas of business environment quality, namely, context for strategy and rivalry, demand conditions and factor input conditions. There has been little change in the ranking of ASEAN’s supporting and related industries, which is the region’s strongest competitiveness sub-area. This may reflect the strong presence of regional production networks in electronics and automotive in the region. Within this sub-area, there has been a slight deterioration in cluster development in 2010 and in other aspects of supporting industries especially in the availability of advanced technology, but this has been balanced by greater local availability of process machinery (Table 4.2). Across ASEAN, strong clusters exist in IT, oil and gas products, agricultural products, metal mining and manufacturing, transport and logistics and business services (Figure 4.2).

table 4.2: National Business Environment in ASEAN: Supporting and Related Industries Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

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Suppor ng and related industries

The region’s context for strategy and rivalry is the next most competitive area, but its ranking is significantly behind that of supporting industries and clusters. In 2010, this aspect has been placed lower as a result of deterioration in assessments in a wide range of individual indicators. The less favorable assessments have been particularly in areas such as FDI rules, antitrust policy and trade barriers (Table 4.3). Demand conditions, typically critical for innovation, have also worsened for ASEAN over the past year. Although there has been significant improvement in buyer sophistication, important drivers to innovation such as government procurement of advanced technology products and ICT promotion have worsened (Table 4.4). There has also been some worsening in ICT laws, regulatory standards and environmental standards.

figure 4.2: Clusters in ASEAN

Oil and Gas Agricultural Products Forest products Apparel Forest products MYANMAR Fishing Apparel LAOS IT Metal Mining & Mfg Automo ve Power Genera on Plas c Oil & Gas Agricultural Products THAILAND Metal Mining & Mfg Tex les & Garments Apparel Footwear Footwear Fishing Transport & Logis cs

CAMBODIA

Plas cs Business Services

Source: Porter, M.E. and R. Bryden (2010). International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics.

Table 4.3: National Business Environment in ASEAN: Context for Strategy and Rivalry

VIETNAM

IT Oil & Gas MALAYSIA Agricultural Products IT Communica ons Equipt Oil & Gas Plas cs Business Services Transport & Logis cs SINGAPORE Communica ons Equipt Oil & Gas Metal Mining & Mfg Agricultural Products Plas cs Coal & Brique es

ASEAN’s national business environment is weakest in factor input conditions, which have worsened in 2010. Of the five dimensions of factor input conditions, capital market infrastructure is the strongest because of less exposure to the sub-prime crisis and the stronger regulatory framework after the Asian financial crisis. However, it has weakened somewhat over the past year due to declines in the protection of minority shareholder interests, soundness of banks and financial market sophistication. The other relatively stronger

IT Metal Mining & Mfg Communica ons Equipt Agricultural Products Automo ve

PHILIPPINES Oil & Gas

BRUNEI Transport & Logis cs Apparel Business Services Jewelry

INDONESIA

factor condition is innovation infrastructure but this aspect has also suffered losses over the past year due to poorer assessments on the quality of management schools and math and science education, as well as brain drain (Table 4.5). ASEAN’s logistical infrastructure has worsened largely from poorer assessments for the quality of domestic transport network. Ratings for air transport infrastructure and the quality of electricity supply have also weakened slightly.

Indicator

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

ASEAN COMPETITIVENESS REPORT

table 4.4: National Business Environment in ASEAN: Demand Conditions

Indicator

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Another dimension in factor input conditions is communications infrastructure. ASEAN’s position in this aspect has been little changed from the previous year. The region is relatively stronger on internet access in schools but weaker in internet users and telephone lines per 100 population.

particularly weak in the time and number of procedures required to start a business. It also has cumbersome customs procedures, which have deteriorated over the past year.

Finally, administrative infrastructure remains one of ASEAN’s weakest factor input conditions and business executives have rated the region’s administrative infrastructure slightly lower in 2010. The region is

Table 4.5: National Business Environment in ASEAN: Factor Input Conditions

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

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ASEAN’s main strengths and weaknesses ASEAN’s overall competitiveness is better than 57 percent of countries in the constant sample in 2010. Assessed over a ten-year period, the region’s competitiveness as measured by the New GCI has improved from being nine places below the ‘global’ (sample) average in 2001 to 13 places above the global average in 2010. This largely reflected progress in the first half of the 2000s, as ASEAN’s competitiveness ranking has hovered around the 57th to 60th percentile mark over the last five years. Throughout the years, ASEAN’s advantage has been more in microeconomic competitiveness fundamentals than macroeconomic competitiveness factors. Comparing across competitiveness categories within ASEAN in 2010, the region’s foremost competitive strength lies in its supporting and related industries and clusters, with strong cluster policy, cluster development and collaboration and local availability of process machinery. Its capital market infrastructure is also relatively strong, particularly in the ease of financing through

box 4.1: ASEAN-China-India

local equity market, ease of access to loans and venture capital availability. Another area of particular strength for ASEAN is company operations and strategy, where ASEAN exhibits competitiveness across the sub-areas of strategy and operational effectiveness, internationalization of firms and organizational practices. ASEAN is least competitive in its administrative infrastructure, where urgent attention has to be paid to reducing the time and number of procedures required to start a new business and in improving the efficiency of customs procedures. The other areas of particular weakness are in the macroeconomic competitiveness subcategory of social infrastructure and political institutions. ASEAN’s human development is weak and more effort is needed to lower the incidences of tuberculosis and malaria and raise secondary education enrollment rate. The rule of law within ASEAN also requires strengthening, especially in factors related to the control of corruption and the lowering of business costs of crime and violence.

ASEAN is less competitive overall compared with China, where it is behind by 18 positions on the New GCI 2010. However, it is more competitive than India, by 13 places. ASEAN’s negative gap with China has persisted over the last few years, while its significant positive gap with India has arisen in 2010 mainly as a result of deterioration in India’s competitiveness position from 2009 (Figure 4.3). ASEAN is ranked behind China on both micro and macro competitiveness fundamentals, particularly the latter. It is less competitive across the two sub-categories of social infrastructure and political institutions and macroeconomic policy under macro competitiveness and the two sub-categories of company operations and strategy and national business environment under micro competitiveness. ASEAN has a competitive edge over India in both micro and macro competitiveness fundamentals, although the gap in microeconomic competitiveness is relatively small. ASEAN does better in both macroeconomic competitiveness sub-categories of social infrastructure and political institutions and macroeconomic policy. Under microeconomic competitiveness, ASEAN is somewhat stronger than India on company operations and strategy but ASEAN and India are overall equally competitiveness in their national business environments.

figure 4.3: Competitiveness of ASEAN-China-India

China 45

New GCI

India

Micro

Macro

New GCI

Micro

Macro

Ranking Gap

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

21 13

-15

-2

-6

-10

-12 -18

-30

-12 -21

2009

2010

2010 Rank ASEAN China India

New GCI 57 39 70

Micro 49 37 53

Macro 64 43 85

(Continued on next page)

ASEAN COMPETITIVENESS REPORT

To facilitate further comparison across sub-areas of competitiveness of ASEAN, China and India, the sub-areas are sorted from best ranked to worst ranked within each region or country to identify their relative strengths and weaknesses. The top five areas of relative strength for ASEAN, China and India are then placed side by side for comparison and discussion. The same is done for areas of relative weakness. These are presented in Tables 4.6 & 4.7.

table 4.6: Top-five Relative Strengths of ASEAN-China-India Note: The rank columns show the ‘global’ rankings of ASEAN, China and India, that is, among 132 countries in the New GCI sample in 2010 in each sub-area. Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

ASEAN Supporting & Related Industries & Clusters Capital Market Infrastructure

Rank

China

Rank

India

Rank

Macroeconomic Policy

Capital Market Infrastructure

Supporting & Related Industries & Clusters

38 48

Strategy & Operational Effectiveness

Demand Conditions

Strategy & Operational Effectiveness

Internationalization of Firms

Strategy & Operational Effectiveness

Innovation Infrastructure

Organizational Practices

Internationalization of Firms

ASEAN, China and India share some common strengths in microeconomic competitiveness fundamentals. These relate to an aspect of national business environment, namely, supporting and related industries and clusters and two aspects of company operations and strategy, namely strategy and operational effectiveness and internationalization of firms. While ASEAN and India are equally competitive in supporting and related industries and clusters, China is clearly more competitive than both. China is more competitive than ASEAN in all the indicators for supporting and related industries and clusters except for availability of latest technologies in which ASEAN is stronger. ASEAN does notably better than India for indicators related to cluster development, namely, extent of cluster policy, extent of collaboration in clusters and state of cluster development. India fares better than ASEAN in local supplier quantity and availability of latest technologies. For company strategy and operational effectiveness and internationalization of firms, China is ahead of ASEAN, which is ahead of India. China does better than ASEAN on the majority of indicators, although there are selected indicators where ASEAN seems to be more competitive. Under strategy and operational effectiveness, China is rated significantly higher on capacity for innovation and company spending on R&D while ASEAN has a greater degree of customer orientation. For internationalization of firms, ASEAN has a significant advantage in greater prevalence of foreign technology licensing but fares worse than China for the extent of regional sales and the breadth of international markets. ASEAN has a slight edge over India for strategy and operational effectiveness in many of the aspects especially extent of marketing and value chain breadth. India does better than ASEAN in firm-level technology absorption and production process sophistication. However, ASEAN does better than India for internationalization of firms particularly with respect to control of international distribution. ASEAN’s other areas of relative strength lie in its capital market infrastructure and organizational practices. Although these are not among the top five areas of relative strength within China, China’s global ranking on capital market infrastructure is comparable with ASEAN’s while it is ahead on organizational practices. ASEAN is rated better than India on organizational practices, but India has better capital market infrastructure than ASEAN particularly in the laws that facilitate lending, regulation of securities exchanges and soundness of banks. ASEAN, however, is better than China and India in ease of access to loans. China’s other relative strengths are in macroeconomic policy and demand conditions, both of which are more competitive than ASEAN. Innovation infrastructure is a relative strength for India and it ranks better in this area than ASEAN (although not as well as China) due to better quality of management schools, quality of scientific research institutions, availability of scientists and engineers and a higher number of utility patents per million population. ASEAN, however, has better tertiary enrollment than both China and India.

(Continued on next page)

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table 4.7: Top-five Relative Weaknesses of ASEAN-China-India Note: The rank columns show the global rankings of ASEAN, China and India, that is, among 132 countries in the New GCI sample in 2010 in each sub-area. Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

ASEAN

Rank

China

Rank

India

Rank

Administrative Infrastructure

Human Development

Macroeconomic Policy

110

Rule of Law

Administrative Infrastructure

108

Human Development

Communications Infrastructure

Human Development

100

Communications Infrastructure

Rule of Law

Communications Infrastructure

Logistical Infrastructure

Context for Strategy & Rivalry

Logistical Infrastructure

ASEAN, China and India all are weak in the macroeconomic area of human development and the microeconomic factor input conditions of administrative and communications infrastructure. Comparatively, China fares better than ASEAN, which is ahead of India, in these three areas. China is stronger in human development on almost all indicators of basic health and education except that ASEAN has lower infant mortality and the quality of healthcare is about the same for both. ASEAN’s human development is better than India’s on all indicators but the gap is wider for infant mortality, primary enrollment and quality of primary education, accessibility and quality of healthcare services and life expectancy. ASEAN and India have the same score for tuberculosis incidence and almost the same for health expenditure. China has better administrative infrastructure than ASEAN with reduced burden of government regulation and customs procedures. However, the number of procedures and the time required to start a business is lower in ASEAN. ASEAN has much better administrative infrastructure compared with India due to a lower number of procedures required to start a business and lower burden of government regulation. The burden of customs procedures and the time required to start a business are about the same in ASEAN and India. The communications infrastructure in China is better than that in ASEAN on the indicators of fixed-line telephone penetration rate, quality of telephone infrastructure and internet access in schools, but ASEAN has higher mobile phone penetration rate. ASEAN has better communications infrastructure than India on all indicators except for the quality of telephone infrastructure. Rule of law is among the five weakest areas of both ASEAN and China but not India, although in terms of global ranking, China is ranked higher than India, which is ahead of ASEAN. ASEAN’s rule of law is weaker than China and India particularly in the impact and business costs of crime and violence, judicial independence and property rights. ASEAN, China and India have similar rankings for control of corruption. Logistical infrastructure is a relatively weak area for both ASEAN and India. Compared with India, ASEAN has better quality of roads, electricity supply and air transport infrastructure, while India is rated higher on the quality of railroad infrastructure. China is more competitive than ASEAN and India on logistical infrastructure. Context for strategy and rivalry is a sub-area of relative weakness for China, although in terms of global ranking, China, ASEAN and India are in similar positions. India is weakest in its macroeconomic policy. ASEAN is ranked higher on macroeconomic policy than India with regard to inflation and fiscal balance but not for government debt, while China is strong on macroeconomic policy. In summary, when analyzed across competitiveness sub-areas, ASEAN is not as competitive as China in many respects. Even for sub-areas that are ASEAN’s relative strengths, ASEAN’s performance is generally not as good as that of China’s. Although ASEAN and China share some common relative weaknesses, China is still more competitive in these sub-areas than ASEAN. On the other hand, ASEAN in stronger than India in a good number of sub-areas but there are a few sub-areas where it is behind India.

ASEAN COMPETITIVENESS REPORT

figure 4.4: Competitiveness Profile of Brunei 2010

GDP pc (5) Micro (61)

National Business Environment (58) Related and Supporting Industries (85) Demand Conditions (52)

Macro (33)

New GCI (40)

Company Operations and Strategy (79) Strategy (81) Org. Practices (47) Internationalization (104)

Social Infrastructure and Pol. Institutions (37)

Macroeconomic Policy (1)

Political Institutions (42) Rule of Law (36)

Quintile Rankings 1 (Top 20%)

Human Development (37)

Context for Strategy and Rivalry (45)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (65) Admin (113)

Logistic (65)

Capital (56)

Comm. (52)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (56)

National Competitiveness across ASEAN Countries Brunei Brunei’s GDP per capita has been maintained at 5th in the world in 2009 and is second highest in ASEAN after Singapore. Brunei retains its overall competitiveness position of 40th in 2010 from the year before. This is despite a slight weakening of its relative positions within both the macroeconomic competitiveness and microeconomic competitiveness categories (Figure 4.4). Brunei’s macroeconomic competitiveness has worsened somewhat in 2010, due to weaker political institutions, particularly in the transparency of government policymaking and freedom of the press. In the rule of law, deterioration in several indicators such as efficiency of the legal framework and property rights have been balanced by a significant improvement in perceived lower business costs of corruption. The rankings of indicators in the human development sub-area have been largely unchanged except for poorer accessibility of healthcare services. Brunei is strong in macroeconomic policy and is ranked tied-one in this category with 17 other countries. Brunei’s microeconomic competitiveness has weakened slightly in 2010. This is mainly attributable to deterioration in the company operations and strategy sub-category. In particular, indicators related to the internationalization of firms, such as breadth of international markets, control of international distribution and extent of regional sales have been rated more poorly.

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Worsen + 1 rank to <10% Worsen ≥ 10%

Brunei’s national business environment has also weakened following deterioration across all sub-areas within this category, especially in demand conditions arising from weaker procurement of advanced technology products, ICT promotion and ICT legislation. Among factor input conditions, Brunei performs relatively well in its communications, capital and innovation infrastructures. Its administrative infrastructure is weak and has worsened in the past year with poorer assessments for customs procedures, government regulation and the ease of starting a new business. Its logistical infrastructure has deteriorated in practically all aspects, such as in the quality of port infrastructure.

Brunei’s main strengths and weaknesses Brunei’s overall competitiveness is above 70 percent of countries in the sample, and it is stronger on macroeconomic competitiveness than microeconomic competitiveness. Brunei’s strength lies particularly in the stability of its macroeconomic environment that has been marked by fiscal sustainability and low inflation. It also has relatively sound social infrastructure and political institutions even though there has been some deterioration in the last year. The strength of its rule of law is reflected in the low business costs of crime and improving control of corruption. Brunei’s strength in human development is due especially to the quality of healthcare services and primary education. In the microeconomic category, Brunei is competitive on indicators related to labor market efficiency within the context for strategy and rivalry sub-area. It is ranked Cambodia Cambodia’s GDP per capita has worsened marginally by one rank in 2009 to 110th in the world. Cambodia’s overall competitiveness position in 2010 is 102nd, which is a fourrank slippage from 2009. This reflects a weakening in both its macroeconomic and microeconomic competitiveness, in particular, the former (Figure 4.5). Cambodia’s macroeconomic competitiveness has worsened as a result of declines in all sub-areas of social infrastructure and political institutions. The quality of political institutions is rated lower on the indicators of transparency of government policymaking, frugality of government spending and impartiality of decisions of government officials. In addition, weakened rankings in the rule of law and in human development have emerged because of higher business costs from corruption, crime and violence and lower quality of primary education and healthcare services respectively. However, macroeconomic policy has improved in 2010 with better control over inflation.

tied-one with seven countries on the lack of rigidity of employment, and also rated well on pay and productivity and cooperation in labor-employer relations. However, within the same sub-area, Brunei is assessed less favorably on the extent of market disruption by state-owned enterprises, and barriers to foreign direct investment. Brunei’s weakest area is its administrative infrastructure, which has deteriorated last year. There is an urgent need to improve the time and procedures required to start a business. Brunei is also weak on the internationalization of firms, especially in the breadth of international markets and extent of regional sales. Another area that requires boosting is supporting and related industries and clusters, which is currently characterized by limited local availability of specialized research and training services and of process machinery, as well as low local supplier quantity. strategy and operational effectiveness has emerged mainly because of poorer innovation capacity, production process sophistication and level of technology absorption. The country has also received poorer ratings for organizational practices such as willingness to delegate authority and staff training, as well as for firm internationalization such as foreign technology licensing and international distribution. The quality of the national business environment has remained largely unchanged from 2009, but among subareas, there has been an improvement in the context for strategy and rivalry, particularly in antitrust policy and FDI rules, as well as in all factor input conditions with the exception of innovation infrastructure.

Cambodia’s microeconomic competitiveness has weakened slightly in 2010 following worsened indicators for company operations and strategy. A decline in company

ASEAN COMPETITIVENESS REPORT

figure 4.5: Competitiveness Profile of Cambodia 2010

GDP pc (110) Micro (95)

National Business Environment (93) Related and Supporting Industries (89) Demand Conditions (86)

New GCI (102)

Company Operations and Strategy (103) Strategy (100)

Org. Practices (92) Internationalization (114)

Social Infrastructure and Pol. Institutions (105)

Macroeconomic Policy (104)

Political Institutions (73) Rule of Law (103)

Quintile Rankings 1 (Top 20%)

Human Development (107)

Context for Strategy and Rivalry (72)

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Macro (112)

2 3 4 5

Factor Input Conditions (105) Admin (99)

Logistic (84)

Capital (96)

Comm. (110)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (113)

Worsen + 1 rank to <10% Worsen ≥ 10%

Cambodia’s main strengths and weaknesses Cambodia’s overall competitiveness is ranked among the bottom 25 percent of 132 countries, so there are many areas where it is weak relative to the world. If competitiveness categories are compared within the country, Cambodia performs better on microeconomic competitiveness than macroeconomic competitiveness, particularly in the quality of the national business environment. In more disaggregated sub-areas, Cambodia is strongest in the context for strategy and rivalry, especially on rules that encourage foreign direct investments, unrestrictive regulations on capital flows and low market disruption from state-owned enterprises. Cambodia is also rated more favorably on its logistical infrastructure, in particular the quality of roads and port infrastructure. Under macroeconomic competitiveness, Cambodia is Indonesia Indonesia’s GDP per capita has improved marginally by one rank in 2009 to 96th in the world. Indonesia’s overall competitiveness position is 64th in 2010, which is 13 places behind that attained in 2009. This is on the back of deterioration in both its microeconomic and macroeconomic competitiveness (Figure 4.6). Indonesia’s macroeconomic competitiveness has worsened as a result of poorer assessments in the sub-category of social infrastructure and political institutions, as its competitiveness position in the sub-category of macroeconomic policy has improved with a lower rate of inflation. The quality of political institutions has weakened with less effective legislative bodies, less transparent government policies, and less government effectiveness in reducing poverty and inequality. A range of indicators have

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relatively strong in its political institutions, especially on the decentralization of economic policymaking. Cambodia is ranked lowest on the internationalization of firms and innovation infrastructure. However, given that the country is in an early stage of economic development, weak company sophistication and the lack of foundations for innovation are probably not of immediate concern. Communications infrastructure is also among the weakest areas, where Cambodia is placed in the bottom five percent of countries on telephone lines, internet users and personal computers per 100 population. Human development is another area of concern, where the incidence of tuberculosis and infant mortality are high and secondary enrollment is low. More attention should also be focused on improving the rule of law, particularly in the control of corruption.

been rated less favorably in relation to rule of law, among which are the business costs of crime and violence, efficiency of the legal framework and the protection of property rights. Human development has been affected by lower quality of healthcare services and primary education. Indonesia’s weaker microeconomic competitiveness has been the result of a worsening of all the sub-areas under company operations and strategy and national business environment. The deterioration in competitiveness on company operations and strategy has been due especially to sharp drops in the ratings on organizational practices such as incentive compensation and delegation of authority, as well as worsened indicators under internationalization of firms, such as extent of regional sales and breadth of international markets.

figure 4.6: Competitiveness Profile of Indonesia 2010

GDP pc (96) Micro (54)

National Business Environment (54) Related and Supporting Industries (37) Demand Conditions (60)

Macro (70)

New GCI (64)

Company Operations and Strategy (49) Strategy (41)

Social Infrastructure and Pol. Institutions (73)

Macroeconomic Policy (65)

Political Institutions (45)

Org. Practices (60) Internationalization (53)

Rule of Law (83)

Quintile Rankings 1 (Top 20%)

Human Development (84)

Context for Strategy and Rivalry (59)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (72) Admin (96)

Logistic (81)

Capital (51)

Comm. (90)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (54)

As for the national business environment, Indonesia’s competitiveness position in the sub-area of context for strategy and rivalry has weakened the most, with poorer assessments on a wide range of indicators that include rules on FDI, prevalence of trade barriers, effectiveness of antitrust policy and efficacy of corporate boards. Factor input conditions have weakened across all but one area of infrastructure, especially in capital market and administrative infrastructure. Only communications infrastructure has improved due to better internet access in schools. Demand conditions has worsened due to reduced government procurement of advanced technology products while industry clusters have deteriorated from lower local supplier quality and quantity.

Indonesia’s main strengths and weaknesses Indonesia’s overall competitiveness is better than slightly half of 132 countries in the sample, and it has greater strength in microeconomic competitiveness than macroeconomic competitiveness factors. Comparing across competitiveness areas within the country, Indonesia is strongest in its supporting and related industries and clusters, particularly on indicators on the extent of cluster policy and collaboration in clusters, as well as the local availability of process machinery. It also performs well in the area of strategy and operational effectiveness, such as value chain breadth, company spending on R&D and capacity for innovation. The country’s political institutions are relatively strong, particularly in the decentralization of economic policymaking and low wastefulness of government spending.

Worsen + 1 rank to <10% Worsen ≥ 10%

Malaysia Malaysia’s GDP per capita has risen by one rank in 2009 to 54th in the world and remains the third highest in ASEAN. Malaysia’s overall competitiveness is 34th position in 2010. This is a gain of four places from improvements in both macroeconomic and microeconomic competitiveness (Figure 4.7). Malaysia’s macroeconomic competitiveness has strengthened from better macroeconomic performance in the control of inflation, as well as improved social infrastructure and political institutions. The gains are particularly in rule of law through lower business costs of crime and corruption and more efficient legal framework. Under political institutions, higher ratings on public trust of politicians and effectiveness of law-making bodies are countered by less favorable assessments on freedom of the press and decentralization of economic policymaking. Indonesia is weak in a few dimensions of factor input conditions. Its weakest area is administrative infrastructure, where it needs to urgently address the time required to start a business, the number of tax payments by businesses and the burden of customs procedures. Its communications infrastructure, although improved from last year, requires substantial strengthening. Indonesia also has to enhance its logistical infrastructure, in particular, the quality of its domestic transport network, port infrastructure and electricity supply. Indonesia’s human development and rule of law are also areas of particular weakness. Attention has to be given in the area of basic health to improving accessibility of healthcare services and lowering the incidence of tuberculosis and malaria. The control of corruption and high irregular payments by firms and increased impact of crime are priority issues to tackle under rule of law.

ASEAN COMPETITIVENESS REPORT

figure 4.7: Competitiveness Profile of Malaysia 2010

GDP pc (54) Micro (22)

National Business Environment (22) Related and Supporting Industries (16) Demand Conditions (28)

Macro (41)

New GCI (34)

Company Operations and Strategy (23) Strategy (25)

Org. Practices (16) Internationalization (20)

Social Infrastructure and Pol. Institutions (42)

Macroeconomic Policy (40)

Political Institutions (38) Rule of Law (47)

Quintile Rankings 1 (Top 20%)

Human Development (47)

Context for Strategy and Rivalry (29)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (23) Admin (26)

Logistic (21)

Capital (12)

Comm. (45)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (25)

Malaysia’s microeconomic competitiveness has improved slightly, with small gains in the company operations and strategy sub-category especially in indicators related to the internationalization of firms and organizational practices, such as control of international distribution, extent of incentive compensation and reliance on professional management.

Worsen + 1 rank to <10% Worsen ≥ 10%

The context for strategy and rivalry has improved with reduced market disruption from state-owned enterprises, enhanced intensity of local competition and lower impact of taxation on incentives to work and invest. Demand conditions, on the other hand, have been affected by lower rankings on the effectiveness of government promotion of ICT, laws relating to ICT and environmental regulation.

The quality of the national business environment has remained largely unchanged overall, but there have been gains and some deterioration across sub-areas. Logistical infrastructure has strengthened with better quality of port infrastructure, and innovation infrastructure has been rated higher on the quality of the educational system, math and science education and management schools. Capital market infrastructure has improved with better regulation of securities exchanges and financing through local equity market. Malaysia’s main strengths and weaknesses Malaysia’s overall competitiveness position is just shy of being in the top 25 percent of countries in the sample, and it possesses clear strength in microeconomic competitiveness. It is comparatively less strong on macroeconomic competitiveness. Malaysia is strong across many aspects in microeconomic competitiveness. It is strongest in supporting and related industries and clusters, which is reflected particularly in the extent of cluster policy, state of cluster development, local availability of process machinery and local supplier quantity. The country is competitive in its capital market infrastructure, especially on the degree to which laws facilitate getting access to credit (where it is ranked 1st in the world), venture capital availability, ease of access to

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loans and financing through local equity market. Malaysia also performs particularly well in the area of organizational practices, such as the extent of incentive compensation and staff training. Malaysia’s weaknesses mainly are in the macroeconomic competitiveness sub-areas of human development and rule of law. More can be done to strengthen basic health and education through lowering the incidence of tuberculosis and malaria and raising secondary enrollment. The rule of law can be strengthened through lowering business costs related to crime and corruption, which are assessed to be relatively high despite improvements in the past year. The area of particular weakness in microeconomic competitiveness is communications infrastructure, where Malaysia is ranked low on telephone lines per 100 population.

figure 4.8: Competitiveness Profile of Philippines 2010

GDP pc (98) Micro (74)

National Business Environment (80) Related and Supporting Industries (55) Demand Conditions (97)

New GCI (89)

Company Operations and Strategy (55) Strategy (57)

Org. Practices (38) Internationalization (64)

Macro (101)

Social Infrastructure and Pol. Institutions (106)

Macroeconomic Policy (42)

Political Institutions (114) Rule of Law (113)

Quintile Rankings 1 (Top 20%)

Human Development (95)

Context for Strategy and Rivalry (70)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (101) Admin (124)

Logistic (118)

Capital (58)

Comm. (88)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (85)

Philippines The Philippines’ GDP per capita has risen by one rank in 2009 to 98th in the world. Its overall competitiveness has improved by eight ranks in 2010 to 89th position, with gains in both macroeconomic and microeconomic competitiveness, in particular, the latter (Figure 4.8). The Philippines’ slight gain in macroeconomic competitiveness reflects an improvement in both sub-categories of social infrastructure and political institutions and macroeconomic policy. The quality of rule of law is perceived to have improved, with lower occurrence of irregular payments by firms, lower impact of organized crime and greater judicial independence, even while political institutions are rated less favorably, such as on the indicator of transparency of government policymaking. The condition of primary education and healthcare has remained little changed. The Philippines’ better performance on macroeconomic policy has been due to its lowering of government debt as a percentage of GDP.

Worsen + 1 rank to <10% Worsen ≥ 10%

Under national business environment, the Philippines has improved on the quality of its supporting and related industries and clusters due to better local availability of process machinery and specialized research and training services. More intense local competition, less distortive effect of taxes and subsidies on competition and more prevalent foreign ownership have contributed to an enhanced context for strategy and rivalry. Demand conditions have strengthened due mainly to greater buyer sophistication. Factor input conditions have improved due mainly to stronger capital market infrastructure that is supported by greater soundness of banks, ease of access to loans and more sophisticated financial markets. Innovation infrastructure has been boosted by vastly lower brain drain. The quality of logistical, communications and administrative infrastructure have not changed substantially from the year before.

The Philippines has made substantial progress in microeconomic competitiveness across all sub-areas in company operations and strategy and national business environment. Its competitive positions on strategy and operational effectiveness, organizational practices and internationalization of firms have improved with substantial gains in ratings on value chain breadth, control of international distribution, prevalence of foreign technology licensing, extent of incentive compensation and extent of marketing.

ASEAN COMPETITIVENESS REPORT

Philippines’ main strengths and weaknesses The Philippines’s overall competitiveness position is below 67 percent of countries in the sample. Although its microeconomic competitiveness is comparatively stronger than its macroeconomic competitiveness, there are a considerable number of areas under both categories that require substantial improvement. Comparing across competitiveness areas within the country, the Philippines’s strongest area is in organizational practices, where all the indicators: the extent of staff training, willingness to delegate authority, extent of incentive compensation and reliance on professional management receive relatively favorable assessment. It is also relatively strong in supporting and related industries and clusters, especially in the local availability of process machinery, local supplier quantity and state of cluster Singapore Singapore has maintained the highest GDP per capita in ASEAN in 2009 at 4th in the world. Singapore’s overall competitiveness has been maintained at 7th position in 2010, with a slight improvement in macroeconomic competitiveness and a slight drop in microeconomic competitiveness (Figure 4.9). Singapore’s macroeconomic competitiveness has improved due to stronger macroeconomic performance as the rate of inflation falls. Its competitive position on social infrastructure and political institutions has remained largely unchanged, although a few indicators have received less favorable assessment, such as decentralization of economic policymaking and freedom of the press.

development. The Philippines also performs better on macroeconomic policy, where its government budget balance and debt are within the core policy ranges. The Philippines’ least competitive area is its administrative infrastructure followed by its logistical infrastructure, both of which are under factor input conditions. It has to substantially improve the quality of its domestic transport network and port infrastructure, as well as reduce the number of procedures required to start a business and the burden of its customs procedures. Political institutions and rule of law are also among the weakest areas for the Philippines. There is an urgent need to raise public trust of politicians, lessen favoritism in decisions of government officials, increase government effectiveness in reducing poverty and inequality, reduce the occurrence of diversion of public funds and lower the business costs of corruption, among others. company operations and strategy and the national business environment. Within company operations and strategy, the sub-areas of strategy and operational effectiveness, organizational practices and internationalization of firms have all lost competitiveness positions. In particular, the ratings on degree of customer orientation, firm-level technology absorption and the extent of regional sales have worsened. Although the quality of the national business environment has not changed much on the whole, there has been deterioration in the competitiveness of supporting and related industries and clusters, particularly local supplier quantity and quality.

Singapore’s microeconomic competitiveness has been affected by slight deteriorations in business opinions on

figure 4.9: Competitiveness Profile of Singapore 2010

GDP pc (4) Micro (3)

National Business Environment (2) Related and Supporting Industries (19) Demand Conditions (4)

Macro (10)

New GCI (7)

Company Operations and Strategy (12) Strategy (15)

Org. Practices (12) Internationalization (16)

Social Infrastructure and Pol. Institutions (7)

Macroeconomic Policy (67)

Political Institutions (4) Rule of Law (3)

Quintile Rankings 1 (Top 20%)

Human Development (28)

Context for Strategy and Rivalry (1)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

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Factor Input Conditions (1) Admin (1)

Logistic (2)

Capital (3)

Comm. (7)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (4)

Worsen + 1 rank to <10% Worsen ≥ 10%

Singapore’s main strengths and weaknesses Singapore is one of the top-ranked countries on overall competitiveness. It is highly competitive in a wide range of areas across microeconomic and macroeconomic competitiveness categories, in particular, the former. Singapore is among the best in the world on the quality of its national business environment. It is ranked first in two sub-areas, namely, factor input conditions and the context for strategy and rivalry. It is strongest in administrative infrastructure under factor input conditions, particularly in the low burden of government regulation, efficient customs procedures and the short time required to start a business. This is followed closely by logistical infrastructure where the country’s airport and port infrastructures are world class. Singapore’s strength in the context for strategy and rivalry is due especially to an efficient labor market with low rigidity of employment, good industrial relations and pay that is linked to productivity, as well as a regulatory environment that is friendly to foreign direct investment and in the strength of investor protection. However, there are a few indicators where Singapore does not do as well, such as in the extent of market disruption from stateowned enterprises and the intensity of local competition. Thailand Thailand’s GDP per capita has fallen by one rank in 2009 to 76th in the world. Thailand’s overall competitiveness has strengthened slightly to 49th position in 2010 from 52nd in 2009, due to enhanced macroeconomic competitiveness. The country’s microeconomic competitiveness has dipped somewhat (Figure 4.10). Thailand’s macroeconomic competitiveness has been boosted by a subdued inflationary environment in the

figure 4.10: Competitiveness Profile of Thailand 2010

Singapore is ranked relatively low in its macroeconomic policy, which stems from its low ranking on government debt. However, this is not a cause for concern, as it reflects the way in which the country’s social security savings plan, the Central Provident Fund (CPF), is treated. CPF contributions are captured as public debt, while the corresponding assets are not taken into account. Similarly, the lower healthcare expenditures that contribute to Singapore’s poorer assessment in human development is less a sign of weakness but more a reflection of the country’s efforts to keep healthcare costs in check and promote a healthy lifestyle among its people. Singapore could do more to enhance its supporting and related industries and clusters, generally on the indicators of local supplier quantity and quality, local availability of specialized research and training services and availability of latest technologies. It could also strengthen its competitiveness position across all subareas in company operations and strategy, particularly the internationalization of firms and strategy and operational effectiveness. These include policies to encourage more domestic firms to take control of international distribution and measures to develop the capacity for indigenous innovation, facilitate firm-level technology adoption and strengthen the degree of customer orientation. macroeconomic policy sub-category, although its fiscal balance has deteriorated. In the social infrastructure and political institutions sub-category, the rule of law has improved slightly, while the quality of political institutions has worsened significantly with lower transparency of government policy making, reduced government effectiveness in reducing poverty and inequality and some loss in public trust in politicians. Thailand’s basic human capacity has been affected by poorer accessibility of healthcare services. GDP pc (76)

Micro (46)

National Business Environment (45) Related and Supporting Industries (34) Demand Conditions (57)

Macro (56)

New GCI (49)

Company Operations and Strategy (45) Strategy (51)

Org. Practices (56) Internationalization (31)

Social Infrastructure and Pol. Institutions (64)

Macroeconomic Policy (18)

Political Institutions (75) Rule of Law (67)

Quintile Rankings 1 (Top 20%)

Human Development (66)

Context for Strategy and Rivalry (50)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (42) Admin (52)

Logistic (35)

Capital (39)

Comm. (53)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (47)

Worsen + 1 rank to <10% Worsen ≥ 10%

ASEAN COMPETITIVENESS REPORT

Thailand’s main strengths and weaknesses Thailand’s overall competitiveness is stronger than 63 percent of countries in the sample. It has comparatively better microeconomic than macroeconomic competitiveness fundamentals. Within microeconomic competitiveness categories, Thailand is strongest in its supporting and related industries and clusters under national business environment, particularly on the extent of cluster policy, extent of collaboration in clusters and local supplier quantity. It also ranks well on the internationalization of firms under company operations and strategy, on indicators such as the breadth of international markets and control of international distribution. Thailand’s macroeconomic policy is also an area of its relative Thailand’s microeconomic competitiveness has weakened slightly due to a less conducive national business environment, while the strength of its company operations and strategy has remained unchanged. In the latter category, there has been a marked improvement in the control of international distribution but a notable drop in the rankings for firm-level technology absorption, company spending on R&D and nature of competitive advantage. Within national business environment, factor input conditions have weakened with lower rankings for capital market, logistics and communications infrastructure. Indicators that have lost competitiveness positions include financial market sophistication, soundness of banks, quality of airport infrastructure and electricity supply, and quality of telephone infrastructure and internet access in schools. The context for strategy and rivalry has worsened with poorer assessments in particular on the indicators of prevalence of trade barriers, effectiveness of antitrust policy, extent of market dominance by business groups and market disruption from state-owned enterprises. Demand conditions have weakened slightly from a deterioration in laws relating to ICT and less stringency on environmental regulations. On the other hand, the strength of supporting and related industries and clusters has improved due to better ratings on the extent of cluster policy, extent of collaboration in clusters and increased local availability of processed machinery. Vietnam Vietnam’s GDP per capita remained at 100th in the world in 2009. Vietnam’s overall competitiveness is 78th position in 2010, which is 4 places behind that in 2009. This is mainly due to a decline in microeconomic competitiveness as well as a slight drop in macroeconomic competitiveness (Figure 4.11). Vietnam’s weakened macroeconomic competitiveness has

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strength, with low inflation rate and modest government debt as a percentage of GDP. Thailand weakest areas are within the sub-category of social infrastructure and political institutions. The lowest-ranked is political institutions, which are weak on a range of indicators such as voice and accountability, decentralization of economic policymaking, transparency of government policymaking, public trust of politicians and government effectiveness in reducing poverty and inequality. The rule of law needs to be strengthened with better protection of property rights, control of corruption and reduction in the business costs of corruption, crime and violence. Human development can be improved through efforts to lower the incidence of tuberculosis and malaria and raise secondary enrollment. been due to some deterioration in business assessment of its social infrastructure and political institutions as there has not been much change in its ranking on macroeconomic policy. The quality of political institutions has been affected by greater wastefulness of government spending, an increase in favoritism in decisions of government officials, and erosion of public trust in politicians, among others. The rule of law has worsened from poorer ratings on the ethical behaviour of firms, business costs of crime and violence, efficiency of the legal framework and protection of property rights. Vietnam’s microeconomic competitiveness has worsened considerably due to weakened capacity for company operations and strategy as well as a less favorable national business environment. All sub-areas within company operations and strategy have lost competitiveness. In particular, strategy and operational effectiveness has been compromised across all the indicators from company spending on R&D, production process sophistication to degree of customer orientation. Organizational practices have been affected by notable declines in the extent of staff training and the extent of incentive compensation. Vietnam’s worsened competitiveness in its national business environment has been due to a decline in its rankings across all sub-areas, especially the context for strategy and rivalry, where there has been a weakening across most of the indicators. The degree of competition has been affected by a perceived increase in market dominance by business groups and market disruption by state-owned enterprises, reduced effectiveness of antitrust policy and greater distortive effect of taxes and subsidies on competition. Inadequate intellectual property protection is also an area of concern. Within factor input conditions, logistical infrastructure has weakened the most, where the quality of road, railroad, port, air transport infrastructures have all been assessed less favorably. Innovation infrastructure has been affected by lower university-industry research collaboration, reduced

figure 4.11: Competitiveness Profile of Vietnam 2010

GDP pc (100) Micro (73)

National Business Environment (73) Related and Supporting Industries (51) Demand Conditions (71)

Macro (89)

New GCI (78)

Company Operations and Strategy (67) Strategy (71)

Org. Practices (74) Internationalization (71)

Social Infrastructure and Pol. Institutions (75)

Macroeconomic Policy (122)

Political Institutions (63) Rule of Law (76)

Quintile Rankings 1 (Top 20%)

Human Development (78)

Context for Strategy and Rivalry (93)

2 3 4 5

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Factor Input Conditions (84) Admin (103)

Logistic (103)

Capital (63)

Comm. (68)

Change in Rank (09-10) Improve ≥ 10% Improve + 1 rank to <10% + 1 or - 1 rank Innov. (86)

quality of math and science education and increased brain drain. Capital market infrastructure has been rated more poorly from reduced protection of minority shareholders’ interests, lower venture capital availability and more difficult access to loans. There has been no change in the position of communications infrastructure and little change in the ranking of administrative infrastructure although the burden of government regulation has increased.

Worsen + 1 rank to <10% Worsen ≥ 10%

from lower ratings on indicators such as government procurement of advanced technology products, and falls in the local availability of specialized research and training services and availability of latest technologies.

Vietnam’s demand conditions and the state of its supporting and related industries and clusters have also deteriorated,

Vietnam’s main strengths and weaknesses Vietnam’s overall competitiveness is below that of 59 percent of countries in the sample. It is stronger in microeconomic competitiveness than macroeconomic competitiveness, but there are areas within each that need to be substantially enhanced relative to the world. Comparing across competitiveness categories within Vietnam, the country is strongest on its supporting and related industries and clusters, especially on factors related to cluster development, that is, the extent of cluster policy, state of cluster development and extent of collaboration in clusters. However, more needs to be done to boost the availability of latest technologies and local availability of specialized research and training services. Vietnam’s capital market infrastructure is also relatively strong, especially in the degree to which laws facilitate getting access to credit, extending domestic credit to the private sector and financing through the local equity market. Political institutions is another area of relative strength, where Vietnam is assessed to be strong in the decentralization of economic policymaking, government effectiveness in reducing poverty and inequality, public

trust of politicians and effectiveness of law-making bodies, although voice and accountability needs to be improved. Vietnam’s weakest area is its macroeconomic policy, where it is challenged to control inflation. Its inflation in 2009, though much below the runaway rate in 2008, has remained high, and is edging up quickly in 2010. The problem of high budget deficit also has to be addressed. Two dimensions under factor input conditions, namely administrative and logistical infrastructure, are also among Vietnam’s weakest areas. Vietnam has to improve on a range of indicators under administrative infrastructure, especially in reducing the burden of government regulation, the time and number of procedures required to start a business and the burden of customs procedures. It also has to strengthen its logistical infrastructure, especially its quality of roads, ports and air transport. Within the context for strategy and rivalry, there are pockets of particular weakness that require attention. These include the prevalence of trade barriers, market disruption from state-owned enterprises, inadequate investor and intellectual property protection, and weak auditing and reporting standards.

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box 4.2: Laos and Myanmar

The data for Laos and Myanmar are quite limited. However, some indicators for which data are available can help to shed light on the competitiveness of Laos and Myanmar in certain areas. Table 4.8 presents indicators for Laos and Myanmar in the categories of macroeconomic policy, social infrastructure and political institutions and factor input conditions. It also gives their relative positions among ASEAN countries as well as their approximate quintile ranking if the two countries were included in the New GCI country sample. On macroeconomic policy indicators, Laos and Myanmar experienced relatively low inflation in 2009 from 2008, which place them in the top and second quintile among New GCI sample countries respectively. Laos’ and Myanmar’s fiscal deficits have widened in 2009, but their levels are lower than 60 and 40 percent of countries respectively. Laos’ government debt is comparatively high and places it in the fourth quintile, while Myanmar is ranked in the third quintile on this indicator. Laos and Myanmar are relatively weak in the sub-area of basic health and education and are placed among the bottom 20 percent of countries on some indicators. Laos performs better than Myanmar in basic health and fares worse on school enrollment rates. In the political institutions and rule of law sub-areas, both Laos and Myanmar receive very unfavorable assessments, in particular the latter, as given by the World Bank’s Worldwide Governance Indicators in the dimensions of voice and accountability, control of corruption and rule of law. The two countries are among the last placed when compared with other ASEAN countries, and are in the bottom quintile of sample countries. On communications infrastructure, Laos and Myanmar fare poorly, as measured by the telephone lines and mobile telephone subscribers per 100 population. The two countries are among the worst performers within ASEAN and are in the bottom quintile of sample countries. The competitiveness profiles of Laos and Myanmar that emerge from this analysis of limited key indicators are that of comparatively uncompetitive economies. Both countries, as with the other ASEAN countries, appear to be stronger on macroeconomic policy than social infrastructure and political institutions under macroeconomic competitiveness. Human development and rule of law have been identified as being among the weakest areas for ASEAN in the New GCI analysis above and the relative positions of Laos and Myanmar on basic health and education and governance indicators reinforce this finding. Likewise, data on Laos and Myanmar support the observation that communications infrastructure is weak across a number of ASEAN countries.

table 4.8: Selected Comparative Competitiveness Indicators for Laos and Myanmar Notes: 1. Data are for 2007 and 2008. 2. Approximate quintile ranking if country were among the countries in the New GCI sample. Sources: Economist Intelligence Unit (EIU), World Health Organization (WHO), World Economic Outlook (WEO), Worldwide Governance Indicators (WGI), World Development Indicators (WDI); authors’ analysis.

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Laos

2008

Myanmar

2009

Posi on in ASEAN 2009

Approx. Quin le Ranking 2009 2

2008

2009

Posi on in ASEAN 2009

Approx. Quin le Ranking 2009 2

Macroeconomic Policy Government Surplus/deficit (% of GDP)

-2.8

-3.3

-3.5

-4.8

Government Debt (% of GDP)

60.0

62.1

48.7

50.8

Infla on (% change per annum)

7.6

0.0

26.8

1.5

Malaria Incidence (per 100,000 popula on) 1

312.5

284.4

675.9

830.2

Tuberculosis Incidence (per 100,000 popula on)

88.0

89.0

404.0

Net Primary Enrollment Rate 1

79.8

82.4

89.8

88.6

Gross Secondary Enrollment Rate 1

44.0

43.9

49.3

52.7

4.8

4.7

0.5

Social Infrastructure and Poli cal Ins tu ons Human Development

Poli cal Ins tu ons Voice and Accountability (percen le rank) Rule of Law Control of Corrup on (percen le rank)

7.2

9.5

1.0

0.0

Rule of Law (percen le rank)

23.0

18.4

4.8

3.8

Mobile Telephone Subscribers (per 100 popula on)

24.3

32.6

0.5

0.7

Telephone Lines (per 100 popula on)

1.6

2.1

1.4

1.6

Factor Input Condi ons1 Communica ons Infrastructure

Analysis with Additional Competitiveness Indicators The competitiveness analysis thus far has relied on New GCI rankings. This section discusses the competitiveness positions of ASEAN and individual member countries based on indices that are compiled for multiple countries from other data sources and using different methodologies. These indices are not directly comparable with New GCI – some are more narrowly focused, while others organize competitiveness categories differently. Nevertheless, their representations of ASEAN countries’ competitiveness in various aspects are useful in serving either to reinforce or qualify the identification of strengths and weaknesses based on New GCI data. Boxes 4.3 to 4.5 analyze ASEAN’s performance on economic freedom, ease of doing business and logistical efficiency respectively.

that corruption and administrative regulations are major areas of weakness for ASEAN. The Economic Freedom Index subcomponent on restrictions on both domestic and foreign investment indicates that ASEAN has relatively high investment barriers, while assessment on FDI restrictions in the New GCI, which are measured differently, are more favorable. Nevertheless, FDI indicators are ranked lower relative to other items within the same sub-area of context for strategy and rivalry in New GCI. Taken together, the data suggest that investment barriers might be another area for ASEAN to monitor more closely. The World Bank’s Logistics Performance Index meanwhile, gives a more positive depiction of infrastructure quality and customs efficiency in ASEAN compared with the New GCI.

In summary, the component measuring corruption in the Index of Economic Freedom compiled by The Wall Street Journal and The Heritage Foundation and subindices on the ease of starting and closing a business in The World Bank’s Ease of Doing Business Index support the earlier assessment

box 4.3: Economic Freedom in ASEAN

The Index of Economic Freedom compiled by The Wall Street Journal and The Heritage Foundation ranks countries on ten components of economic freedom, which are aimed at measuring the extent to which individuals can engage in economic activities in any way they please and resources can move freely, ‘with that freedom both protected by the state and unconstrained by the state.’ Economic freedom has been shown to be positively related to positive social and economic values such as per capita income and economic growth rates. The Index of Economic Freedom covers a broad range of areas similar to the New GCI, but the data used are mainly from different sources and are organized differently. This section assesses ASEAN’s performance across components of economic freedom based on the 2011 Index and 2010 Index that are available for a constant sample of 179 countries. ASEAN’s ranking is constructed as the GDP (PPP)-weighted rankings of nine ASEAN countries (excluding Brunei). Since the 2011 (2010) indices cover primarily data from the second half of 2009 (2008) through to the first half of 2010 (2009), the analysis below will refer to changes in ASEAN’s rankings in 2010 from 2009 to reflect the time period captured in the data. ASEAN is ranked above 47 percent of countries in the sample on overall economic freedom in 2010, which is slightly improved from 2009. ASEAN is weakest on investment freedom, which measures restrictions on both domestic and foreign investments, and business freedom, which captures the ease of starting, operating and closing a business. The other component where ASEAN is placed worse than its overall economic freedom index ranking is freedom from corruption. ASEAN is strongest on government spending, that is, in keeping the level of government expenditure as a percentage of GDP within a reasonable range. Between 2009 and 2010, ASEAN’s largest gain has been in monetary freedom, which combines a measure of price stability with an assessment of price controls (Figure 4.12). ASEAN is assessed to be weaker on economic freedom compared with its position on global competitiveness as given by the New GCI, where the region is ranked above 57 percent of countries. ASEAN is ranked lower on factors under trade freedom, investment freedom and labor freedom compared with similar indicators in the context for strategy and rivalry sub-area under the New GCI. In particular, ASEAN’s ranking on investment freedom is substantially weaker than on indicators of FDI restrictions under the New GCI.

(Continued on next page)

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Restrictions measured under investment freedom include whether there is national treatment and prescreening of foreign investment, transparency of investment laws, restrictions on land ownership, foreign exchange controls and capital controls. ASEAN’s investment freedom has improved slightly by 1 place from 2009 to 2010, which reflects a jump in Malaysia’s rankings, as the positions of the other ASEAN countries, particularly Vietnam, have declined (Table 4.9). Indicators of FDI restrictiveness are grouped under the context for strategy and rivalry in the New GCI. The rankings of ASEAN on business assessments of indicators such as impact of business rules on FDI, prevalence of foreign ownership and restrictions on capital flows comparatively are more favorable. Nevertheless, these indicators are ranked lower relative to other items within the context for strategy and rivalry sub-area, and their ratings have deteriorated between 2009 and 2010. Thus, investment barriers might be another area for ASEAN to monitor more closely. ASEAN’s ranking on freedom from corruption has shown improvement over the last few years but it is still perceived to have more corruption than over 55 percent of countries in the sample. This ranking, which is derived primarily from Transparency International’s Corruption Perceptions Index, reinforces the assessment from indicators on control of corruption and irregular payments by firms from the New GCI, which are among the lowest ranking indicators within the rule of law sub-area.

figure 4.12: Economic Freedom in ASEAN Region

120

107 (+1) 94 (+1)

100

93 (-8)

100 (+4)

85 (+17)

Notes: (a) Business Freedom: Data used in measuring business freedom are from the World Bank’s Doing Business study, which are analyzed in the section below. (b) Labor Freedom: Based on data from World Bank’s Doing Business study, under the Employing Workers topic.

Rank 2011 (Change over 2010) of 179 countries

109 (+1)

90 (+1)

81 (+3)

86 (+8)

69 (-1)

60 40

27 (+4)

20 0 Index of Business Economic Freedom (a) Freedom

Trade Freedom

Fiscal Government Monetary Freedom Spending Freedom

Investment Freedom

Financial Freedom

Property Freedom from Labor Rights Corrup on Freedom (b)

Source: Authors’ analysis based on The Heritage Foundation and The Wall Street Journal (2010, 2011).

table 4.9: Index of Economic Freedom, ASEAN Countries Notes: Numbers in brackets indicate changes in ranks in the 2011 Index of Economic Freedom and sub-indices from 2010 ranks. Only rank changes larger than + 5 (improvement) or -5 (deterioration) are reported. Source: The Heritage Foundation and The Wall Street Journal (2010, 2011); authors’ analysis.

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Index of Economic Freedom

Business Freedom

Trade Freedom

Cambodia

102(5)

161

124

4(6)

Indonesia

116

133(6)

103(-19)

Laos

141

123(-5)

133

53(6)

Myanmar

174

175

112(-7)

Philippines

115(-6)

152

Singapore

Malaysia

Fiscal Government Freedom Spending

Monetary Investment Financial Freedom Freedom Freedom 57(51)

22(5)

123

15(5)

34(39)

146

59(-5)

27(16)

64(-5)

10(6)

9(-7)

Freedom from Property Labor Rights Corrup on Freedom 99

160(9)

106

113(16)

123(11)

159

146(18)

160(-6)

134(-30)

103(29)

55(-8)

35(20)

172(6)

172

176

178

176

77(7)

117

141

128

38(31)

143(11)

Thailand

107

13(10)

136

117

44(7)

Vietnam

139(5)

109

132

101(-5)

77(7)

45(127)

164(-12)

133

164

122

box 4.4: Ease of Doing Business in ASEAN

ASEAN (excluding Myanmar) is rated stronger on ease of doing business than 57 percent of 183 countries in the World Bank’s Doing Business 2011 Report, which is a slight deterioration from the 2010 Report. The World Bank’s Doing Business indicators measure business regulations and the protection of property rights and their effect on businesses, especially small and medium-sized domestic firms. The Ease of Doing Business (DB) Index 2011 is constructed from component indicators of nine Doing Business topics, with the data mainly applicable at June 2010. The region is strongest on trading across borders, which measures the documents required, time and cost to export and import, and protection of investors, such as the extent of disclosure and shareholders’ ability to sue officers and directors for misconduct (Figure 4.13). ASEAN is particularly weak in the ease of starting a business in terms of procedural requirements, time and cost, where it is ranked in the 34th percentile. This is followed by closing a business (44th percentile), that is, the time, cost and outcome of insolvency proceedings. Singapore retains its top position on overall ease of doing business, while Thailand and Malaysia are among the top 12 percent of countries. The overall DB rankings of the other countries are fairly low (Table 4.10). ASEAN’s rankings on DB indicators point to substantial scope for the region to lower the burden of administrative regulations, particularly in relation to starting and closing a business. This is also the message from analysis under the New GCI framework, where administrative infrastructure, which is measured by two component indicators of DB on starting a business among others, is identified as an area of substantial weakness.

figure 4.13: Doing Business Index for ASEAN Region

Trading Across Borders Protec ng Investors

53 (-1)

Dealing in Construc on Permits

66 (-3)

Registering Property

68 (-2)

Ge ng Credit

78 (-3)

Enforcing Contracts

89 (-1)

Paying Taxes

95 (0)

Closing a Business

Source: World Bank (2009, 2010); authors’ analysis.

100 (0) 121 (+2)

Star ng a Business

table 4.10: Doing Business Index, ASEAN Countries

Ease of Doing Business Index Brunei Cambodia

Source: World Bank (2009, 2010a); authors’ analysis.

75 (-2)

OVERALL

Note: ASEAN’s rankings have been computed as GDP (PPP)-weighted ranks of nine ASEAN countries (excluding Myanmar).

Note: Numbers in brackets indicate changes in ranks in the 2011 DB Index and sub-indices from 2010 ranks. Only rank changes larger than + 5 (improvement) or -5 (deterioration) are reported.

Rank 2011 (Change in rank from 2010) of 183 countries

40 (+2)

147

Indonesia

Contracts

Borders

159

142

Business

Taxes

183

117

154

142

98 163

Laos

171

110

170

183

Malaysia

Philippines

148

118

Singapore

Thailand

Vietnam

Property

1 102

128

72 43

Investors

120

170

146

155

115

182

108

152

153

124

Permits

Business

113

132 4

12 173

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box 4.5: Logistical Performance in ASEAN

ASEAN (excluding Brunei) is ranked 53 or in the 62nd percentile on overall logistics performance in 2010, based on the World Bank’s 2010 Logistics Performance Index (LPI). This is a worsened position from the 2007 LPI by 9 places. The LPI is compiled from responses to the LPI Survey of international freight forwarders and is a weighted average of country scores on six key dimensions. The 2010 Survey was conducted in 2009 for 155 countries, but the analysis in this section will be undertaken with reference to a constant sample of 140 countries in 2007 and 2010. ASEAN’s strongest dimension is international shipments, which measures the ease with which competitively priced shipments can be arranged to the country in question. It is ranked around the same positions on the other dimensions, and is weakest on logistics quality and competence, which rates the competence and quality of logistics services such as transport operators and customs brokers. ASEAN’s performance in all six dimensions has declined in 2010 from 2007. The decline is greatest in tracking and tracing of consignments by 15 positions, followed by customs and logistics quality and competence, which fell by 13 ranks (Figure 4.14). The logistics performance of ASEAN countries are highly varied, ranging from Singapore in 2nd position to Myanmar in 122nd place in 2010. Between 2007 and 2010, the logistics performance of Indonesia and Cambodia have deteriorated the most with substantial drops in ranks across nearly all dimensions, while the Philippines has made the largest improvement (Table 4.11). The infrastructure dimension of LPI assesses the quality of trade and transport-related infrastructure such as ports, railroads, roads and information technology and is similar to indicators under the logistical infrastructure and communications infrastructure sub-areas under the New GCI. The quality of ASEAN’s infrastructure is ranked more favorably in the LPI (61st percentile) compared with New GCI, where ASEAN’s logistics and communications infrastructure are ranked in the 52nd and 48th percentile respectively. The LPI and New GCI also give different depictions of the relative competitiveness of infrastructure quality in individual ASEAN country. For instance, there is significant difference between Vietnam’s ranking on infrastructure under LPI (54th percentile) and its position on logistical infrastructure under New GCI (22nd percentile) in 2010. Philippines’ infrastructure is assessed to be better in the 2010 LPI (56th percentile) than with New GCI data, where its logistical infrastructure is ranked in the 11th percentile. Furthermore, while the LPI shows an improvement in the Philippines’ infrastructure from three years ago, the New GCI shows otherwise. For Cambodia, the New GCI indicates that the country has improved its competitive position on logistical and communications infrastructure, while the LPI points to a decline in ranking over three years. The customs dimension of LPI and the indicator on burden of customs procedure within the administrative infrastructure sub-area of the New GCI give vastly different rankings for ASEAN. The LPI assessment is much more positive, placing ASEAN in the 61st percentile on customs efficiency in 2010 compared with 39th percentile on the New GCI customs indicator. However, both data sources suggest that ASEAN’s position on the quality of customs clearance has weakened over the last few years, with declines in Indonesia, Vietnam, Thailand and Malaysia. (Continued on next page)

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Customs

figure 4.14: Logistics Performance Index for ASEAN Region

Rank 2010 (Change in rank from 2007)

ASEAN LPI 53 (-9)

of 140 countries 55

54 (-13)

Infrastructure

Timeliness 54 (-4)

54 (-6) 45

48 (-5)

Note: ASEAN’s rankings have been computed as GDP (PPP)weighted ranks of nine ASEAN countries (excluding Brunei). A negative figure in the bracket indicates a worsening in 2010 rank from the 2007 LPI.

57 (-15)

Tracking and Tracing

Interna onal Shipments

59 (-13)

Sources: World Bank (2007, 2010b); authors’ analysis.

table 4.11: Logistics Performance Index, ASEAN countries Note: Numbers in brackets indicate changes in ranks in the 2010 LPI and subindices from 2007 ranks. Only rank changes larger than + 5 (improvement) or -5 (deterioration) are reported. Source: World Bank (2007, 2010b); authors’ analysis.

Logis cs Quality and Competence

Logis cs Performance Index

Customs

Infrastructure

Interna onal Shipments

Logis cs Quality and Tracking and Competence Tracing

Timeliness

Cambodia Indonesia Laos

110

Malaysia

93 28

Myanmar Philippines

Singapore

Thailand

Vietnam

Summary ASEAN’s competitiveness, as a whole, was ranked at 57th among 132 countries in 2010, based on New GCI data for eight ASEAN countries (excluding Laos and Myanmar). Its position has not changed much over the last five years. ASEAN’s GDP per capita in 2009, the latest year available, was 79th position. The significant gap between current prosperity and overall competitiveness might point to the potential of current competitiveness fundamentals in raising future prosperity. ASEAN’s advantage has been more in microeconomic fundamentals than macroeconomic competitiveness factors. Across competitiveness categories, the region’s relative strengths lie in its related and supporting industries and clusters, its capital market infrastructure and company

6 37 54

operations and strategy. ASEAN’s competitive weaknesses are in its administrative infrastructure, human resource development and rule of law. The strength of competitiveness fundamentals varies widely across ASEAN member countries. Of the eight countries for which New GCI data are available, five of them are ranked in the top half of the 132 countries on overall competitiveness while three are in the bottom half. At the top end, Singapore ranks among the top ten countries in the world, while at the other end, Cambodia places in the bottom 25 percent. Based on an analysis of limited data from other sources for Laos and Myanmar, the competitiveness profiles that emerge are that of comparatively uncompetitive economies. Among more disaggregated competitiveness sub-areas, ASEAN countries share some common relative strengths and weaknesses that provide grounds for collective action. There are also sub-

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areas that are relative strengths in some countries but relative weakness in others. This diversity is conducive to policy learning and the sharing of best practices among ASEAN countries. Alternative datasets covering ASEAN’s performance on economic freedom, ease of doing business and logistical efficiency support the assessment using New GCI data that corruption and administrative regulations are major areas of weaknesses for ASEAN. The alternative indicators are, however, more positive about ASEAN’s infrastructure quality and customs efficiency as compared with the New GCI, but rate ASEAN’s investment restrictions to be more stringent than that given in the New GCI. ASEAN’s competitiveness also needs to be framed within the larger context of competitiveness of the Asian region. The high-growth, big economies of China and India present some competition for ASEAN with regard to export markets

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and resources but also present a source of new demand and benefits from wider regional integration. In terms of competitiveness fundamentals, ASEAN is more competitive than India but less competitive than China. China has a smaller microeconomic than macroeconomic edge over ASEAN, which has an even smaller microeconomic edge over India. Thus, competition is close on microeconomic factors. There is, however, a much larger gap in the competitiveness of macroeconomic factors between ASEAN and China, where the former is lagging behind, and between ASEAN and India, where the former is ahead. ASEAN would need to address a range of competitiveness factors in order to close the gap with China. ASEAN, China and India are all strong in their business environment for supporting and related industries and clusters and greater cooperation in this area may yield mutual benefits.

Endnotes The Global Competitiveness Index compiled by the WEF and published in its annual Global Competitiveness Report is not directly comparable to the New Global Competitiveness Index compiled by Porter et al. Although both approaches use basically the same underlying data, there are some differences in the detailed indicators used, as well as distinct differences in the organization and processing of the data and in the methodology used in deriving the Index.

The competitiveness ranking of ASEAN, individual ASEAN countries, China and India will be analyzed with respect to a constant sample of 132 countries throughout this chapter. This sample will be referred to generally as the global set of countries or the world.

Chapter References ASEAN (2010). ASEANstats, http://www.aseansec.org/22122.htm Browne, Ciara and Thierry Geiger (2010). “The Executive Opinion Survey: The Business Executives’ Insight into Their Operating Environment”, in The Global Competitiveness Report 2010-2011, World Economic Forum. Delgado, Mercedes, Christian Ketels, Michael E. Porter and Scott Stern (2010). Explaining Prosperity Differences Across Countries: The Determinants of National Competitiveness, mimeo. International Monetary Fund (IMF) (2010). World Economic Outlook October 2010: Recovery, Risk and Rebalancing, Washington, DC: International Monetary Fund. Kaufmann, Daniel, Aart Kraay and Massimo Mastruzzi (2010). Worldwide Governance Indicators, http://info.worldbank. org/governance/wgi/index.asp Porter, Michael E., Mercedes Delgado, Christian Ketels and Scott Stern (2008). “Moving to a New Global Competitiveness Index”, in The Global Competitiveness Report 2008-2009, World Economic Forum. Porter, Michael E. and Richard Bryden (2010). International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. The Heritage Foundation and The Wall Street Journal (2010, 2011). The Index of Economic Freedom, Washington DC: The Heritage Foundation and The Wall Street Journal. World Bank (Arvis, Jean-Francois, Monica Alina Mustra, John Panzer , Lauri Ojala and Tapio Naula) (2007). Connecting to Compete: Trade Logistics in the Global Economy, The Logistics Performance Index and Its Indicators, Washington DC: World Bank. World Bank (2009). Doing Business 2010: Reforming through Difficult Times, Washington DC: The World Bank and International Finance Corporation. World Bank (2010a). Doing Business 2011: Making a Difference for Entrepreneurs, Washington DC: The World Bank and International Finance Corporation. World Bank (Arvis, Jean-Francois, Monica Alina Mustra, John Panzer, Lauri Ojala, Ben Shepherd and Daniel Saslavsky) (2010b). Connecting to Compete: Trade Logistics in the Global Economy, The Logistics Performance Index and Its Indicators, Washington DC: The World Bank. World Bank (2010c). World Development Indicators.

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ASEAN Competitiveness Report

Chapter 5

Assessment and Policy Recommendations

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ASSESSMENT AND POLICY RECOMMENDATIONS

The earlier chapters in this Report have covered the changing global and regional environment as well as ASEAN’s competitiveness performance and fundamentals. This chapter provides an overall summary and assessment of ASEAN competitiveness with a focus on developing relevant policy recommendations for ASEAN members to collectively improve regional competitiveness. The first section of this chapter offers an assessment of ASEAN’s competitiveness and the second section suggests elements that ASEAN could address in defining a regionwide Competitiveness Agenda.

Key Challenges in a Changing Global Context The ASEAN region has rebounded fast from the global crisis of 2008-2009, relatively unscathed. The safeguards and sound macroeconomic policies put in place in the region pursuant to the 1997 Asian financial crisis have enabled the ASEAN economies to undertake macroeconomic stimulus measures with relatively low public debt during the recent crisis. However, sustainability of the recovery is important if ASEAN is to continue to grow. In the short term, risks to ASEAN’s economic prospects include the buildup of inflationary pressures and asset bubbles. In the longer term, ASEAN has to formulate a development strategy that addresses cumulated challenges and responds to changing circumstances to generate sustainable growth. The challenges confronting ASEAN are at both the national and regional levels. ASEAN is comprised of a diverse group of countries that runs the full range from high-income to low-income categories. Since 1997, seven of its members in the low- and middle-income groups have failed to move up to the next rung of the income ladder. Each country, in its quest to improve prosperity, would need to tailor solutions to the competitiveness issues that are specific to its national conditions. At the same time, ASEAN members share common concerns and face challenges that are posed by the wider global environment that can be addressed through collective action. The export-led growth strategy has served as a good model for many developing countries, including those in ASEAN, to achieve rapid economic development over the past few decades. The recent global crisis, however, has brought this strategy into question as global demand wanes, huge current account imbalances persist and the possibility of protectionism rears its head. ASEAN now needs to diversify its sources of growth, which would include stimulating

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domestic and regional demand. While ASEAN is expected to retain significant ties with major advanced economies, China and India are becoming increasingly important. ASEAN has established a widening network of free trade and economic partnership agreements with external partners in recent years, including with China and India, where ASEAN seeks to maintain “ASEAN Centrality”. The evolving regional architecture provides opportunities for ASEAN as well as presents challenges and ASEAN needs to maximize its competitiveness as well as develop and deepen complementarities vis-à-vis the emerging Asian powers. At the collective level, ASEAN has entered a new phase in its cooperation with its goal to establish an ASEAN Community by 2015 that comprises the three pillars of a political-security community, economic community and socio-cultural community, with well-defined blueprints. The Blueprint to form an ASEAN Economic Community has been implemented since 2008. If successfully implemented, this will substantially enhance the region’s attractiveness for economic activities. At present, implementation is behind schedule. ASEAN needs to find the political resolve as well as ways to strengthen its institutional mechanisms and capacity to enable both the ASEAN Secretariat and member economies to effectively fulfill the tasks required.

ASEAN’s Competitiveness Performance ASEAN has solid foundations on which to raise its competitiveness. The region has several naturally-endowed advantages in location, resource abundance and market size and it has achieved a sustained period of rapid economic growth in the 1980s and 1990s. However, the analysis of ASEAN’s economic performance over the last two decades, which would reflect the outcomes of its past competitiveness, has shown that while there is considerable variation across countries, ASEAN as a whole has turned in a relatively staid performance post-1997 Asian financial crisis. On recent measures of economic outcomes, ASEAN lags significantly behind advanced economies and has been overtaken by China in a few aspects. The region performs better than India, but the latter is catching up. ASEAN’s prosperity, as measured by GDP per capita, stood at $4,739 in 2009 (PPP at 2005 international dollars) at about half that of the world average. Prior to the Asian financial crisis, ASEAN’s prosperity was rising faster than the world average at a yearly rate of 5.4 percent but this growth rate has decelerated to an annual 2.3 percent over the last decade, which is only slightly above the world average. Within ASEAN, Singapore and Brunei fall under the highincome category while Laos, Cambodia and Myanmar are in the low-income category. The other countries are classified as middle income, with Malaysia in the upper-middle-income bracket and the rest as lower middle income. The distribution of prosperity in the ASEAN region has been uneven. Income inequality is relatively high among ASEAN countries as five of eight members have a Gini coefficient above 0.4. The level of poverty varies across

ASEAN with Cambodia and Laos having high rates of poverty and Thailand and Malaysia having the lowest levels of poverty (Singapore does not have a poverty line). On nonincome measures, there is a wide gap in the quality of human development across ASEAN countries, with Singapore performing well on the Human Development Index and Myanmar rating poorly on this indicator. There are also large differences in the extent of gender-related development and empowerment across ASEAN economies. While ASEAN has moderately high labor force participation rate and affordable local prices, the region has relatively low labor productivity with the exception of Singapore where labor productivity is high. While ASEAN has maintained its edge in labor productivity over India, its edge over China has been steadily eroding with China’s labor productivity now slightly better than that of ASEAN. Exports have thus far been a driving force in ASEAN’s growth with ASEAN being predominantly a goods exporter. Singapore has the strongest presence in world markets with over 2 percent share of world exports while CLMV and Brunei have the weakest positions, although Vietnam has doubled its world share to 0.4 percent over the last ten years. ASEAN has over the years developed strong export clusters in a number of industries such as IT, oil and gas products, agricultural products, metal mining and manufacturing, transport and logistics, and business services. However, ASEAN has not made much progress in raising its share of world exports over the last decade, which has hovered around 6 percent, in contrast to a near doubling of its share of world exports in the decade before the Asian financial crisis. In 2005, ASEAN was overtaken by China in world export market share at the same time that Japan’s share dipped below ASEAN’s. ASEAN’s world export market share has increased to 6.2 percent in 2009 from 5.9 percent in 2007 and 2008. However, whether this is the start of a sustained increase remains to be seen. While domestic investments in ASEAN have been high prior to the Asian financial crisis, exceeding 30 percent of GDP, they fell markedly during the crisis. Although ASEAN’s investment rate has recovered to 26 percent in 2009, the region’s capital formation has fallen below that in China and India. Vietnam and Cambodia are exceptions where domestic investment rates have been increasing over the last two decades. Vietnam has the highest investment rate in the region in the 2000s. ASEAN still has not recovered its share of world total FDI inflows from the decline during the Asian financial crisis, and the region faces stiff competition from China and India in attracting foreign investments. In the 2000s, ASEAN’s highest world share was 4.5 percent between 2003 and 2005, compared with 8.0 percent between 1994 and 1996 in the 1990s. FDI inflows to ASEAN, as with the rest of the world, plunged amid the global crisis, although ASEAN’s share of world total FDI inflows recovered from 2.7 percent in 2008 to 3.3 percent in 2009. From attracting FDI inflows that

were three to four times more than what could be expected from its size in the global economy in the 1990s, ASEAN’s FDI inflows over the last two years has been just in line with its economic size. Singapore has been attracting the most foreign investments, followed by Thailand and Indonesia, while Brunei, Myanmar and Laos have been receiving the lowest shares of total FDI inflows to ASEAN. In terms of outward FDI flows, ASEAN is not a significant investor compared with the developed countries, accounting for around 2 percent of world total FDI outflows. This is similarly the case with China and India, although outward investments from these two countries have been rising. Most of the outward FDI in ASEAN is accounted for by Singapore and Malaysia. ASEAN is relatively weak on innovation outcomes in terms of patent filings in the US, which is way behind that of the developed countries. ASEAN is slightly behind China and ahead of India in the number of patents filed with the US Patent and Trademark Office on a per capita basis, but it falls significantly behind both countries in the growth rate of patent filing per capita between 1997 and 2009. Singapore has by far the highest number of patent filings in the region, followed by Malaysia and Thailand, while the other countries have no or very low levels of patent filings in the US. On the state of entrepreneurship, ASEAN economies have relatively low business densities compared with the advanced economies, except for Singapore. The entry rate of new businesses in ASEAN is comparatively more robust. ASEAN’s companies generally have not been able to grow large on a global scale as homegrown companies account for 3 percent of companies on the 2010 Forbes Global 2000 list, none of which is among the top 100. ASEAN fares better in the performance of its small and medium enterprises, which are better represented in the Forbes 2010 Asia Pacific “Best Under a Billion” list. For ASEAN to improve its prosperity, it is important to maximize the utilization of the resources available to ASEAN such as natural endowments, locational advantages, large labor supply and favorable price levels. The findings suggest that improving labor productivity is very important for the region. Other areas where performance can be improved relate to attracting more foreign investments as well as mobilizing domestic investments, and nurturing entrepreneurship and innovation through local enterprises. Thus far, exports have been the backbone of ASEAN’s growth strategy, and ASEAN needs to increase its world share of exports. The export clusters already developed can be further strengthened and efforts can be directed to raising the export of services.

ASEAN COMPETITIVENESS REPORT

Ranking in Micro Compe veness 100

Vietnam

Thailand

Malaysia

Indonesia

60 80 100

Philippines 120

Cambodia

ASEAN’s Competitiveness Fundamentals The review of ASEAN’s competitiveness performance has pointed to the need as well as significant scope for ASEAN to improve economic outcomes. To assist in the identification of specific areas that ASEAN can focus on to raise competitiveness regionally and nationally, an analysis was conducted in Chapter 4 on ASEAN and its member countries’ global competitiveness positions on a wide array of fundamental factors that affect longer-term competitiveness. ASEAN is ranked 57th among 132 countries on overall competitiveness in 2010, based on New GCI data. ASEAN’s ranking is computed as the GDP (PPP)-weighted ranking of eight ASEAN countries for which data are available and excludes Laos and Myanmar. ASEAN has made good progress in its competitiveness positions in the first half of the 2000s but over the last five years, ASEAN’s competitiveness ranking has lingered around the 57th to 60th percentile mark. Throughout the years, ASEAN has performed much better on microeconomic competitiveness fundamentals than macroeconomic competitiveness factors. The overall competitiveness of the eight New GCI-ranked ASEAN countries varies in a broad range with Singapore placed among the top ten countries and Cambodia in the bottom 25 percent. The competitiveness of Singapore, Malaysia, Brunei, Thailand and Indonesia are in the top half of the 132 countries while Vietnam, Philippines and Cambodia are in the bottom half. Most of the member countries are ranked higher on microeconomic competitiveness fundamentals than macroeconomic fundamentals. It is further observed that microeconomic competitiveness and macroeconomic competitiveness go hand-in-hand. If a country has better microeconomic competitiveness fundamentals relative to other countries,

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ASEAN

Singapore

Brunei

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Ranking in Macro Compe veness

figure 5.1: Microeconomic and Macroeconomic Competitiveness across ASEAN countries

it is likely also to have relatively stronger macroeconomic competitiveness fundamentals. The exception to this is Brunei (Figure 5.1). Main Areas of Strengths and Weaknesses A comparative analysis of individual countries’ main strengths and weaknesses will shed light on the common areas that are contributing to the overall strengths and weaknesses of ASEAN and help to identify the grounds for collective action. To facilitate this comparison, sub-areas of competitiveness are sorted from best ranked to worst ranked within ASEAN and each member country to identify their relative strengths and weaknesses. The top three areas of relative strength in ASEAN and each member country are then placed side by side for comparison and discussion. The same is done for areas of relative weakness. ASEAN countries have been listed in accordance with the World Bank income classification from high income to low income in order to decipher emerging trends as related to income status, if any. It should be noted that an area of relative strength (weakness) within a country can have an absolute ranking that is relatively low (high) among the countries in the New GCI sample and this differentiation will be made where appropriate in the analysis below. Strengths The top strengths for ASEAN are in the sub-areas of supporting and related industries and clusters, capital market infrastructure and strategy and operational effectiveness. ASEAN’s relative competitiveness in microeconomic fundamentals is reflected in the relative strengths of individual member countries, which are predominantly in areas under microeconomic competitiveness although some countries are strong in the subcategory of macroeconomic policy under macroeconomic competitiveness (Table 5.1).

table 5.1: Top-Three Areas of Relative Strength, ASEAN and Member Countries

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

ASEAN

Singapore

Brunei

Malaysia

Administrative Infrastructure

Macroeconomic Policy

Supporting & Related Industries & Clusters

Context for Strategy & Rivalry

Rule of Law

Logistical Infrastructure

Human Development

Thailand

Indonesia

Philippines

Macroeconomic Policy

Supporting & Related Industries & Clusters

Organization -al Practices

Supporting & Related Industries & Clusters

Context for Strategy & Rivalry

Capital Market Infrastructure

Internationali zation of Firms

Strategy & Operational Effectiveness

Macroeconomic Policy

Capital Market Infrastructure

Political Institutions

Organization -al Practices

Supporting & Related Industries & Clusters

Capital Market Infrastructure

Supporting & Related Industries & Clusters

Political Institutions

Logistical Infrastructure

The middle-income economies of Malaysia, Thailand, Indonesia, Philippines and Vietnam share a common relative strength in their national business environment for supporting and related industries and clusters. The countries’ absolute rankings out of 132 countries (or ‘global’ rankings) in this sub-area range from 16 (Malaysia) to 55 (Philippines). While supporting and related industries and clusters is among Singapore’s areas of relative weakness, Singapore’s global ranking in this sub-area is 19. Four of the middle-income members of ASEAN (Malaysia, Thailand, Indonesia and Philippines) also are relatively strong in some aspect of the subcategory of company operations and strategy, whether it is organizational practices, strategy and operational effectiveness or internationalization of firms. The global competitiveness rankings of these countries in

table 5.2: Top-Three Areas of Relative Weakness, ASEAN and Member Countries

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

Strategy & Operational Effectiveness

Capital Market Infrastructure

Supporting and Related Industries and Clusters

Vietnam

Cambodia

company operations and strategy range from 23 (Malaysia) to 55 (Philippines). Again, while this dimension is another area of relative weakness for Singapore, its global ranking is 12. The other notable areas of relative strengths shared by different countries are in the national business environment aspects of context for strategy and rivalry and the factor input condition of capital market infrastructure. ASEAN countries could harness common areas of strengths to build national and regional prosperity. Weaknesses The top three areas of relative weakness for ASEAN are in the sub-areas of administrative infrastructure, rule of law and human development.

ASEAN Rule of Law

Administrative Infrastructure

Human Development

Singapore

Brunei

Malaysia

Thailand

Indonesia

Philippines

Vietnam

Cambodia

Supporting & Related Industries & Clusters

Administrative Infrastructure

Human Development

Political Institutions

Administrative Infrastructure

Macroeconomic Policy

Communications Infrastructure

Internationalization of Firms

Internationali zation of Firms

Rule of Law

Communications Infrastructure

Logistical Infrastructure

Administrative Infrastructure

Human Development

Strategy & Operational Effectiveness

Supporting & Related Industries & Clusters

Human Development

Political Institutions

Logistical Infrastructure

Rule of Law

Communications Infrastructure

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The top areas of relative weakness for the eight ASEAN countries are distributed almost equally between areas related to macroeconomic competitiveness (human development, political institutions, rule of law, macroeconomic policy) and those related to factor input conditions (administrative, communications and logistical infrastructures) in the national business environment. Common areas of relative weakness cut across ASEAN countries in different income brackets from high to low income (Table 5.2). Administrative infrastructure is one of the more frequent areas of relative weakness across ASEAN countries although Singapore is ranked first globally in this sub-area. The four ASEAN countries where administrative infrastructure is among the top three relative weaknesses (Brunei, Indonesia, Philippines and Vietnam) also have poor global rankings in this area, ranging from 96 (Indonesia) to 124 (Philippines) of 132 countries. They generally perform poorly on the indicators for the number of procedures and the time required to start a business. Human development is another common area of relative weakness across ASEAN countries. It is among the top three relative weaknesses in Malaysia, Thailand, Indonesia and Cambodia. The other areas of relative weakness common to two or more member countries are communications infrastructure, rule of law, political institutions, logistical infrastructure and internationalization of firms. Some of these areas are relative weaknesses in some countries but relative strengths in other countries. The limited indicators available for Laos and Myanmar support the general trend of weakness in human development, rule of law and communications infrastructure within the ASEAN region while both countries fare better on macroeconomic policy. Analysis using alternative datasets covering ASEAN’s performance on economic freedom, ease of doing business and logistical efficiency support the assessment using New GCI data that corruption and administrative regulations are major areas of weakness for ASEAN. There is indication that ASEAN’s restrictions on investments might be higher than the assessment in New GCI. On the other hand, alternative indicators give a more positive depiction of infrastructure quality and customs efficiency in ASEAN compared with the New GCI. The common areas of weakness among the ASEAN countries provide common areas of concern for ASEAN that members could improve on through greater cooperation and sharing. The disparity in global competitiveness across the ASEAN countries in some of the sub-areas and indicators provides an opportunity for policy learning from the better-performing members in the corresponding areas. One such area is administrative infrastructure, which is weak in a number of ASEAN countries but where Singapore is rated well.

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Prosperity and Competitiveness Fundamentals The current prosperity of a country or region, as measured by GDP per capita, is the outcome of past competitiveness. At the same time, the strength of current competitiveness fundamentals will impact on future prosperity. The current global position of a country or region in prosperity level relative to its ranking on competitiveness fundamentals, or “competitiveness gap”, may offer some indications of the ability of a country or region to improve or sustain prosperity in the longer term. Where a country’s or region’s global competitiveness ranking leads its GDP per capita ranking (positive gap), this may suggest that it is in a relatively strong position to generate future prosperity. On the other hand, where a country’s or region’s competitiveness ranking lags behind its GDP per capita ranking (negative gap), this may indicate that it is in a weaker position to maintain its relative position on prosperity against other countries. ASEAN’s GDP per capita in 2009 (the latest year available) was 79th position out of 132 countries, which was lower compared with its overall competitiveness position in 2010 of 57th place. This positive gap may point to the potential of current competitiveness fundamentals in raising future prosperity. Across ASEAN countries, Singapore has high global rankings in GDP per capita and competitiveness, which points to the strength of its competitiveness fundamentals in sustaining its global position in prosperity. The other high-income country, Brunei, has a significant negative gap, which may indicate that its prosperity may not be sustainable unless its competitiveness fundamentals are substantially improved. The middle- and low-income ASEAN countries all have positive gaps, which suggests that these countries may achieve higher levels of prosperity in future in line with their competitiveness fundamentals. The gap is smaller for the Philippines and Cambodia and these countries may need to do more to strengthen their competitiveness fundamentals in order to climb higher on the world prosperity ladder (Figure 5.2). ASEAN, China and India ASEAN’s overall competitiveness lies ahead of India but behind that of China. ASEAN is ranked lower than China by 18 positions and higher than India by 13 places on the New GCI 2010. ASEAN’s negative gap with China has persisted over the last few years, while its significant positive gap with India has arisen in 2010 mainly as a result of deterioration in India’s competitiveness position from 2009. China is more competitive than ASEAN on both micro and macro competitiveness fundamentals although its lead is higher on macro factors. When analyzed across sub-areas, ASEAN is not as competitive as China in many respects. Even for sub-areas that are ASEAN’s relative strengths, which are supporting industries and clusters, company strategy and

40 30 20 10

Ca m

m na et

pi ilip Ph

ne s

ia es on In d

nd la ai

al M

-20

ay sia

N EA AS

ei un

Sin

Source: Authors’ analysis based on unpublished data in Delgado et al. (2010); raw data from World Economic Forum, Executive Opinion Survey 2009, 2010.

-10

Ranking gap

figure 5.2: “Competitiveness Gap”: DIFFERENCE IN GDP PER CAPITA AND NEW GCI RANKINGS

-30 -40

operational effectiveness and internationalization of firms, ASEAN’s performance is generally not as good as that of China’s. Although ASEAN and China share common relative weaknesses in human development, administrative infrastructure, communications infrastructure and rule of law, China is still more competitive in these sub-areas than ASEAN. ASEAN, however, is equally competitive with China in the context for strategy and rivalry and can build on its comparative strengths within this sub-area. In general, ASEAN needs to improve its competitiveness fundamentals vis-à-vis China in most categories.

ASEAN has a competitive edge over India in both micro and macro competitiveness fundamentals, although the gap in microeconomic competitiveness is relatively small. ASEAN is stronger than India in the areas of human development, organizational practices, internationalization of firms, logistical, communications and administrative infrastructures. While ASEAN continues to strengthen its competitive position vis-à-vis India in the above areas, it would also need to catch up in the areas of rule of law, capital market and innovation infrastructure.

In the past, ASEAN integration efforts have tended to focus on trade and investment liberalization. Such negotiations over reciprocal market access are typically politically difficult and the extent of market opening achieved is often less than satisfactory. ASEAN could extract greater gains from regional cooperation by placing more emphasis on activities that yield significant cross-border externalities and direct mutual benefits. Given the region’s diversity where strength in one country may be a weakness in another, ASEAN also provides an important platform for policy learning and the sharing of best practices across a wide range of areas.

Towards an ASEAN Competitiveness Agenda Analyzed as a single economic entity, ASEAN’s competitiveness, whether measured by performance or fundamentals, has not been as impressive in recent years as before the 1997 Asian financial crisis, and the region risks being overshadowed by the economic might of China and India. Although individual member countries vary widely in their competitiveness and each has different priority issues to address in enhancing national prosperity, the analysis has shown that there is much ground for policy learning and action at the regional level.

This Report, by analyzing a multitude of competitiveness factors that span the economic, political and social dimensions, serves to highlight the importance of building competitiveness through an integrated, multi-pronged ASEAN Competitiveness Agenda. Such a Competitiveness Agenda will be guided by a few principles:

ASEAN COMPETITIVENESS REPORT

figure 5.3: ASEAN Competitiveness Agenda

ASEAN Integra on Building on Strengths Encouraging Local Enterprises Foster SMEs Boosting Clusters Align regional infrastructure development

Addressing Weaknesses

Integrating Regional Capital Market Infrastructure Mobilize financial resources

Improving Regional Macroeconomic Policy Coordination

Stepping Up Human Resource Development

Enhancing Administrative Infrastructure Expedite the ASEAN Single Window Simplify business procedures

Improve basic health and education Upgrade skills

Improving Rule of Law

Inclusive Growth

Source: Authors’ analysis.

Asia Pacific and Global Integra on

• The first is recognition of the value of regional cooperation in providing synergistic benefits for member countries. ASEAN countries should strive to align their national interests with the interests of ASEAN as a region to maximize collective gains. • The second is commitment to fostering inclusive growth both within and between member countries. Currently the spread of prosperity around the region is uneven with large development gaps. Measures that ensure a more equitable distribution of the benefits of growth are pertinent in minimizing the exposure of the less privileged to external shocks such as escalating food and fuel prices as well as natural disasters. • The third is continuation of ASEAN’s outward orientation and integration with the rest of the Asia Pacific region and the world, given the importance of ASEAN’s external trade and investment linkages and the rise of China and India. The Competitiveness Agenda for ASEAN must leverage ASEAN’s competitive strengths while addressing its competitive weaknesses. The suggested areas of focus for ASEAN are depicted in Figure 5.3, and these include interlinked microeconomic competitiveness areas as well as macroeconomic competitiveness factors that provide the broad setting in which businesses operate. Building on Strengths Cluster Development ASEAN is relatively strong in the competitiveness of its supporting and related industries and clusters. ASEAN has a wide variety of endowments, resources and capabilities that practically span the whole production process. It has developed strong clusters in IT, oil and gas products, agricultural products, metal mining and manufacturing, transport and logistics and business services. IT products

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are the largest export commodity in Malaysia, Philippines, Singapore and Thailand, and apparels are a major export in CLMV. ASEAN can leverage this strength by creating integrated regional value chains of clusters. ASEAN should explore a more coordinated regional development of clusters and supporting and related industries with specialization of specific economic activities within the region. Better cluster development would also foster the growth of local enterprises. Recently, ASEAN unveiled its Master Plan on ASEAN Connectivity, which included the enhancement of physical connectivity as a key element. Since developing physical infrastructure is a capital and time intensive process, it would be judicious for ASEAN to explore the prioritization of infrastructure development in line with cluster development. ASEAN can also seek to tap into synergies with China and India on cluster development to further integrate the Asian economies. Capital Market Infrastructure Capital market infrastructure is a relative strength for ASEAN. Further regional efforts to improve and integrate the capital market infrastructure within ASEAN as well as with the world would help to mobilize the high savings in the region and attract FDI inflows. Active capital markets also encourage the growth of local enterprises. ASEAN has taken a welcome initiative in this direction with the proposed ASEAN Exchange Linkage, in which the stock exchanges of Malaysia, Singapore and Thailand are proposed to be linked in the second half of 2011 with the Philippines’ stock exchange expected to join the common electronic platform in the first half of 2012.

Local Enterprise Development Another area of relative strength for ASEAN is company operations and strategy. This may reflect mainly the practices of foreign multinational enterprises, which have a substantial presence in ASEAN economies, as there are relatively few top-performing locally-owned companies. Presently, ASEAN has a dearth of large, homegrown firms with no publicly-traded companies among the top 100 in Forbes’ Global 2000 list, although the region’s small and medium enterprises are better represented in Forbes Asia Pacific’s “Best Under a Billion” list. ASEAN should thus give more attention to developing its SME sector, as well as grow the size of local companies. ASEAN could intensify its efforts to nurture local enterprises, by promoting the transfer of management knowledge from foreign to local companies and also facilitating the regionalization and globalization of local companies. A well-implemented Strategic Plan of Action for ASEAN SME Development 2010-2015 will contribute to this objective. Macroeconomic Policy Macroeconomic policy is an area where a few ASEAN countries are particularly strong in while others are relatively weak in and thus can be a prime area for policy learning among members. ASEAN’s macroeconomic policy responses to the global crisis have involved national strategies with no coordinated effort at the regional level. Given the diversity of the member countries, policy coordination would have been extremely difficult. However, the crisis did strengthen regional financial cooperation through expediting implementation of the multilateral swap arrangement, the Chiang Mai Initiative Multilateralization agreement among ASEAN, China, Japan and Korea to address short-term liquidity problems in the region. Over the long term, as economies become more interdependent, macroeconomic policy coordination would become increasingly important in ensuring that policy instruments work effectively in promoting economic stability. A step towards greater coordination would be through an enhanced ASEAN+3 Economic Review and Policy Dialogue process. Addressing Weaknesses Enhancing Administrative Infrastructure Administrative infrastructure is ASEAN’s least competitive area. Many of the ASEAN countries are particularly weak in their administrative infrastructure due to burdensome customs procedures as well as the number of procedures and time required to start businesses. To improve ASEAN’s competitiveness and to enhance ASEAN’s attractiveness as a business investment destination, urgent action is required to reduce administrative red tape.

ASEAN-6 countries have activated their National Single Windows after a two-year delay from the initial schedule while the CLMV countries have until 2012 to do so. In the later half of 2010, the ASEAN countries signed the Memorandum of Understanding on the Implementation of the ASEAN Single Window Pilot Project and the Protocol on Electronic Customs Facilitation (Single Window) to test the infrastructure and procedures. The ASEAN Single Window is an ambitious project and remains a challenge. In view of ASEAN’s assessed weakness in administrative infrastructure, it is worth emphasizing the need to expedite this project. Human Resource Development ASEAN has very weak competitiveness in basic health and education. Its labor productivity is also relatively low. ASEAN has ongoing cooperation in many aspects of human resource development with initiatives mainly in the ASEAN Socio-Cultural Community Blueprint as well as ASEAN Economic Community Blueprint that are under the purview of different ASEAN sectoral ministerial bodies, including Health, Labor, Science and Technology and Education Ministers. Much of the human resource development efforts have entailed capacity building, sharing of knowledge and best practices and research activities. In view of its poor competitiveness in these areas, ASEAN could engage in more urgent and concerted endeavor to raise its human capacity and upgrade the skills of its labor. These issues gain even greater significance given the risks faced by ASEAN countries due to natural disasters and pandemic infectious diseases. For example, ASEAN could strengthen basic health through the control of infectious diseases with sustained funding and greater coordination of national and regional initiatives, in partnership with the World Health Organization and other development agencies and dialogue partners. There is also scope to strengthen the coordination of education and skills development initiatives across various ASEAN bodies, for instance, through the Education and Science and Technology Ministers working together to develop science and technology human resources and promote collaborative research and development in the region. Rule of Law Many of the ASEAN countries have received unfavorable assessments for rule of law, particularly on the indicators of corruption and crime. While many of the factors related to rule of law fall under the purview of, and are most effectively addressed at the national level, ASEAN members could engage in information sharing and contribute to the establishment of certain norms such as transparency to create a more favorable regional culture.

ASEAN has undertaken to establish an ASEAN Single Window for customs clearance that integrates ten National Single Windows of individual member countries. The ASEAN COMPETITIVENESS REPORT

Strengthening Implementation ASEAN does not lack well-defined goals and plans. Its weakness lies in its inability to deliver on provisions in its agreements. ASEAN has to ensure the timely implementation of agreements and decisions within a rulebased framework to maintain its credibility. This requires the strengthening of both institutional mechanisms and capacities and political will. For forty years, ASEAN has established a norm in interactions that is based on the ASEAN Way, which emphasizes consultation, consensus and non-interference in internal affairs. This informal and consensual approach has succeeded in maintaining peace and stability in the region, but it might also be a bane to ASEAN achieving greater success in its regional integration efforts. The ASEAN Charter has established a legal and institutional framework for making ASEAN more rules-based, but the organization’s effectiveness in coordinating and executing policies is not going to improve vastly overnight. Various mechanisms to enhance compliance are in place but they have been largely ineffectual. For instance, members have traditionally preferred to resolve their economic disputes through political channels rather than in a more rules-based manner through the 2004 Enhanced Dispute Settlement Mechanism. The AEC Scorecard in its current form requires improvements to strengthen its monitoring function, and the public version of the Scorecard should contain more detailed information by individual country to increase the transparency of the compliance review process. The diversity within ASEAN also requires a flexible mechanism for moving forward since the member countries are at different stages of development and have different priorities thus making it difficult for them to move at the same pace. The Charter provides for an ASEAN Minus X formula but this is the only formula that is endorsed, and it can only be adopted if there is consensus to do so. ASEAN can consider adopting another formula – 2 Plus X – that had previously been utilized, and to develop more pilot projects involving participation by countries that are ready, so as to progress initiatives. The successful implementation of ASEAN’s Roadmap for an ASEAN Community by 2015 also hinges on the ASEAN Secretariat as well as member countries having adequate capacity and tool kits to effectively fulfill the tasks required. Although the Secretariat’s resources and research capabilities have been boosted and less developed members are assisted with capacity building programmes, more needs to be done to upgrade ASEAN’s ability to act institutionally.

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Over the last decade, ASEAN’s economic performance has been stable. However, it has not taken big strides unlike in the period before the 1997 Asian financial crisis. ASEAN’s position on competitiveness fundamentals as measured by a wide range of macroeconomic and microeconomic factors is above the world average, but its ranking has remained relatively unchanged over the last five years. While individual ASEAN countries vary widely in their competiveness and each country would need to chart its own national agenda for improving competitiveness, the analysis has also revealed areas of common competitive strengths and weaknesses among the member countries. This provides the basis for the development of an ASEAN Competitiveness Agenda with a focus on building on strengths and addressing weaknesses across a range of economic, social and political areas to generate synergistic benefits for the region. ASEAN has already undertaken a broad range of initiatives towards an ASEAN Economic Community, but the assessment in this Report serves to further inform a more nuanced approach to boosting regional competitiveness that moves away from a traditional focus on trade and investment liberalization. Suggested elements of an ASEAN Competitiveness Agenda would involve a greater emphasis on building strengths through coordinated cluster development, an integrated capital market infrastructure, the nurturing of local enterprises and enhanced macroeconomic policy coordination. Weaknesses for intensified improvement include raising quality in the areas of administrative infrastructure, healthcare and education and rule of law. The effective execution of plans of action is crucial in delivering results for ASEAN. The imperatives of deeper regional integration may bring into question the ASEAN Way of working and require greater powers under the Charter to monitor and ensure compliance. More also needs to be done to upgrade the capacity of the ASEAN Secretariat and member countries to fulfil their responsibilities. Regardless of current limitations in ASEAN’s institutional framework and mechanisms, ASEAN’s cooperation has moved onto a higher plane and the regional integration process is progressing. As implementation towards an AEC has started only since 2008, any payoffs from measures already implemented are not as yet evident in the data analyzed in this Report, and it will be worthwhile to conduct similar competitiveness analyses on a regular basis to see if ASEAN’s integration efforts have translated into enhanced competitiveness performance. ASEAN has proven itself thus far to be a viable regional grouping worthy of recognition and has established positive relationships with China, India and the rest of the world. Further progress for ASEAN requires continued commitment from the member countries to the vision of an ASEAN Community and a willingness to tackle difficult challenges as the region adapts and prospers in a changing world.

Chapter References Coker, Richard J., Benjamin H. Hunter, James W. Rudge, Marco Liverani and Piya Hanvoravongchai (2011). “Emerging Infectious Diseases in Southeast Asia: Regional Challenges to Control”, Health in Southeast Asia Series Paper 3, Lancet Series on Southeast Asia.

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ASIA COMPETITIVENESS INSTITUTE

ASEAN Competitiveness Report ASEAN Competitiveness Report 2010

NATIONAL UNIVERSITY OF SINGAPORE 469C Bukit Timah Road, Oei Tiong Ham Building Singapore 259772 www.lkyspp.nus.edu.sg/ACI

Foreword by

Michael E. Porter

Professor Harvard Business School

Photography by Anthon Kiong

LEE KUAN YEW SCHOOL OF PUBLIC POLICY

20 10

Marn-Heong Wong Rakhi Shankar Ruby Toh Christian Ketels Special Advisor