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We’ve entered the Asian Century and there is no turning back

In the nineteenth century, the world was Europeanized. In the twentieth century, it was Americanized. Now, it is being Asianized – and much faster than you may think.

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Asia’s rise has been swift. Home to more than half of the world’s population, the region has climbed from low- to middle-income status within a single generation. By 2040, it is likely to generate more than 50% of world GDP, and could account for nearly 40% of global consumption.

New McKinsey Global Institute research shows the extent to which the global center of gravity is shifting toward Asia.

Today, the region has an increasing global share of trade, capital, people, knowledge, transport, culture, and resources.

Of the eight types of global cross-border flows, only waste is flowing in the opposite direction, reflecting the decision by China and other Asian countries to reduce imports of garbage from developed countries.

Asia now accounts for around one-third of global trade in goods, up from about a quarter ten years ago. Over roughly the same period, its share of global airline travelers has risen from 33% to 40%, and its share of capital flows has increased from 13% to 23%.

Those flows have fueled growth in Asia’s cities. The region is home to 21 of the world’s 30 largest, and four of the ten most visited.

Image: McKinsey & Company

And some of Asia’s lesser-known cities are now also on investors’ radar. In Yangon, Myanmar’s commercial capital, greenfield foreign direct investment (FDI) in knowledge-intensive sectors totaled $2.6 billion in 2017, up from virtually zero in 2007.

Similarly, Bekasi, a smaller city near Jakarta, has emerged as the Detroit of Indonesia – the center of Indonesia’s automotive and motorcycle industry. Over the last decade, FDI in the city’s manufacturing industry has grown at an average rate of 29% per year. And Hyderabad – which generated over 1,400 patents in 2017 – is quickly catching up with India’s Silicon Valley, Bangalore.

But it’s not only external flows being channeled into Asia. Dynamic intraregional networks are also driving progress.

Around 60% of Asian countries’ total trade in goods occurs within the region, facilitated by increasingly integrated Asian supply chains. Intraregional funding and investment flows are also increasing, with more than 70% of Asian startup funding coming from within the region. Flows of people – 74% of travel within Asia is undertaken by Asians – help to integrate the region as well.

What makes these flows work is Asia’s diversity. In fact, there are at least four “Asias,” each at a different stage of economic development, playing a unique role in the region’s global rise.

The first Asia comprises China, the region’s anchor economy, which provides a connectivity and innovation platform to its neighbors. In 2013-17, the country accounted for 35% of Asia’s total outward FDI, with about one-quarter of that investment going to other Asian economies. Reflecting its rapidly growing innovation capacity, China accounted for 44% of the world’s patent applications in 2017.

The second grouping – “Advanced Asia” – also provides technology and capital. With total outward FDI of $1 trillion, these countries accounted for 54% of total regional FDI outflows in 2013-17. South Korea alone provided 33% of all FDI flows to Vietnam. Japan accounted for 35% of Myanmar’s FDI inflows, and 17% of the Philippines’.

Then there is “Emerging Asia,” which comprises a relatively diverse group of small emerging economies that provide not only labor, but also growth potential, owing to rising productivity and consumption. These economies are deeply integrated with their regional neighbors: their average share of intraregional flows of goods, capital, and people is 79%, the highest of the four Asias.

By contrast, the fourth grouping – “Frontier Asia and India” – has the lowest average share of intraregional flows, amounting to just 31%. But this figure –…

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Assessing the economic impacts of COVID-19 on ASEAN countries

All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent.

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Author: Jayant Menon, ISEAS–Yusof Ishak Institute

The COVID-19 pandemic is first and foremost a human tragedy. Measures introduced to deal with the pandemic could save lives but are having wide-ranging economic effects and inducing economic contagion.

There are already studies estimating the economic impact of the virus. But greater focus is needed on the transmission mechanisms of the economic contagion and in critiquing how assessments of the economic impacts are made, concentrating on the ASEAN region.

The effects of COVID-19 are hitting ASEAN economies at a time when other risk factors, such as a global growth slowdown, were already rising.

COVID-19 is disrupting tourism and travel, supply chains and labour supply

Uncertainty is driving negative sentiment. This all affects trade, investment and output, which in turn affects growth. Tourism and business travel, as well as related industries, especially airlines and hotels, were the first to be affected. And the conditions are worsening as more countries go into shutdown.

The supply disruptions emanating mostly from China will reverberate throughout the value chain and disrupt production. Since China is the regional hub and accounts for 12 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.

The negative effects of quarantine arrangements on labour supply could also be high depending on duration and sector. Manufacturing has been hit harder than service industries, where telecommuting and other technological aids limit the fall in productivity.

All these disruptions will lead to sharp declines in domestic demand. And their impact on economic growth will further propagate these disruptions. This compounding effect can magnify and extend short-run effects into the long run.

The highest economic cost could come from the intangibles

The effects of negative sentiment about growth and general uncertainty — which is already affecting financial markets — will feed into reduced investment, consumption and growth in the long run.

Rolling recessions around the world now appear inevitable, despite the stimulus measures being contemplated. If so, there will be sharp increases in unemployment and poverty. Some degree of decoupling from China, or de-globalisation in general, may also be a permanent reminder of this pandemic.

Among ASEAN countries, Singapore, Malaysia and Thailand are heavily integrated in regional supply chains and will be the most affected by a reduction in demand for the goods produced within them. Indonesia and the Philippines have been increasing supply chain engagement and will also not be immune.

Vietnam is the only new ASEAN member integrated into supply chains with China and is already suffering severe supply disruptions.

Given time, supply-side adjustments will alter trade and investment patterns. The main adjustment will involve relocating certain activities along the supply chain from China to ASEAN countries. Although the pandemic will disrupt the relocation phase, ASEAN countries can benefit from the new investments, mitigating overall negative impacts.

Thailand is probably the most tourism dependent Asean country

All ASEAN countries are dependent on tourism flows but Thailand is probably the most dependent. Cambodia and Laos receive most of their investment and aid from China, and a marked growth slowdown in China will affect them the most.

The Philippines and Mekong countries have large overseas foreign worker populations and restrictions on their movement or employment prospects as COVID-19 spreads will affect sending and receiving countries. Brunei and Malaysia are net oil exporters and the price war indirectly induced by the pandemic will hit them hard. Others will benefit from lower oil prices, as will the struggling transport sector.

In measuring the impacts of COVID-19, it is important to separate its marginal impact from observed outcomes. This is important because the remedy may vary depending on the cause of the disruption. This requires an analytical framework that can measure deviations from a baseline scenario that incorporates pre-existing trends. A model-based analysis, rather than casual empiricism, is required to reduce the problem.

Even before the outbreak, risks of a global growth slowdown were rising

The restructuring of regional supply chains had started, driven initially by rising wages in China and accelerated by the US–China trade war. While COVID-19 may further hasten the pace and extent of the restructuring, it is only partly responsible for what may happen. It would be misleading to attribute all of the current disruption to COVID-19. Had the trade war not preceded it, COVID-19 may have resulted in greater disruption to supply chains.

Any assessment of impacts must recognise that the spread of COVID-19 is unpredictable, and so too the response by governments. It is difficult to estimate the impacts of a shock that is uncertain in itself. This reiterates the need for rigorous modelling and scenario analyses. The current trend points to risks rising, often accelerating, as with previous epidemics. This uncertainty underscores the need for caution in assessing, and regular recalibration in producing assessments.

Jayant Menon is a Visiting Senior Fellow in the Regional Economic Studies Programme at the ISEAS–Yusof Ishak Institute, Singapore.

A version of this article first appeared in ISEAS Commentary.

This article is part of an EAF special feature series on the novel coronavirus crisis and its impact.

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Coronavirus’ economic impact in East and Southeast Asia

The ASEAN+3 Macroeconomic Research Office (AMRO) estimates that the COVID-19 epidemic could deduct as much as half a percentage point from the economic growth of some regional economies in 2020.

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As the number of coronavirus cases continues to rise around the world, there are deep concerns over the potential economic impact of the virus.

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Trade War Incentive Schemes flourishing in ASEAN

Countries such as Thailand, the Philippines, Malaysia, and Indonesia have unveiled an array of incentive packages to entice businesses affected by the US-China trade war.

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Governments across ASEAN have been unveiling an array of incentive packages to entice businesses affected by the US-China trade war.

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