Author: Hoe Ee Khor, Chief Economist
For decades, most Southeast Asian economies climbed the income ladder by pursuing a growth strategy based on ramping up investment in export-oriented manufacturing and services, relentlessly upskilling their domestic workforces, and leveraging technological advances.
Today, the ASEAN+3 countries – the ten member states of the Association of Southeast Asian Nations plus China, Japan, and South Korea – can be proud of their accomplishments. The region’s economic transformation has been breathtaking, from its rising per capita income and share of global GDP to its human capital development and rapid ascent of global business competitiveness rankings.
The region has become the “factory of the world,” with highly efficient and cost-effective supply chains. Its success hinges on individual economies benefiting from cost efficiencies by specializing in the production of key components of increasingly complex products, supported by global demand resulting from trade-driven growth. And this growth strategy remains viable today, even as advanced and emerging economies alike shift to the technology-driven “new economy.”
But the ASEAN+3 economies must now continue to pursue catch-up growth, deeper regional integration, and further globalization in a much-changed and far more difficult environment. The COVID-19 pandemic has brought the global economy to a standstill, disrupting supply chains and highlighting the vulnerabilities of a system of interdependent national economies – many of which are set to experience a deep recession this year.
The pandemic has shown that disruption of one critical part of a supply chain can shut down an entire industry or sector. Governments and firms have been alarmed by their high dependence on a few countries for vital supplies of food, medical equipment, and pharmaceutical products, as well as key components of goods that they manufacture and export.
As a result, national policymakers are exploring ways to localize the production of essential goods and services. And countries with large domestic markets will find the argument for greater self-sufficiency especially compelling, potentially sounding the death knell for global supply chains in the post-pandemic world.
Insourcing or regionalizing supply chains would further accelerate the deglobalization trend that started after the 2008 global financial crisis and would cause the global economy to fragment into regional blocs. In response, countries that currently rely on global supply chains would have to restructure their economies to focus more on domestic or regional demand.
The large-scale restructuring implied by such a scenario would result in suboptimal outcomes for all. Production costs would increase, and economies would ironically become more vulnerable to exogenous shocks. For example, a country or region that was hit by a less infectious but deadlier disease than COVID-19 would have greater difficulties rebuilding its productive capacity in a deglobalized world.
Inward-looking economic policies are not the answer. Reducing the vulnerabilities related to global supply chains requires more globalization, not less.
For most consumer and capital goods, apart from a few critical products such as medical supplies, economies can best minimize their dependence on a handful of other countries or suppliers by diversifying their sources of supply and building up adequate reserves. Resilience should become a guiding principle of economic policy, as Singapore’s diversification of its food supplies illustrates.
Similarly, the ASEAN+3 economies demonstrated their adaptability and resilience in the aftermath of the 2008 crisis, by successfully relying on domestic and intra-regional demand to support growth while the US and European economies were severely weakened. As a result, the contribution of external demand to the region’s growth – reflected in the export share of GDP by value added – declined sharply between 2008 and 2015.
However, the trend decline in the ratio of world trade to global GDP after 2008 resulted from a rebalancing of growth, rather than a retreat from globalization, as many have implied. If anything, supply chains for most products lengthened as production locations for various components changed in response to market forces. Within the ASEAN+3 region, production of lower-cost components shifted significantly from more advanced to developing economies, benefiting consumers everywhere.
Furthermore, the globalization of supply chains for services also accelerated during the decade after 2008. Advances in digital technology lowered communication and data-transmission costs, leading to the boom in demand for information technology services and business process outsourcing from which emerging economies such as India and the Philippines have benefited.
Likewise, more affordable air travel fueled a global tourism boom. New technology-driven solutions enabled tourism services to be reorganized into more complex but ultimately more cost-effective supply chains catering to travelers’ individual needs.
It was no fluke that the ASEAN+3 region emerged unscathed from the 2008 crisis. Sound macroeconomic fundamentals, as well as sizeable fiscal and financial-sector buffers, enabled policymakers to lead the region out of the crisis quickly by adopting expansionary measures to boost domestic demand.
A similar response is needed today. Although the COVID-19 crisis has exposed the vulnerabilities of global supply chains and the economies that depend on them, pursuing a strategy of insourcing or localizing production would be devastating for the global economy.
Instead, overcoming supply-chain weaknesses requires enhancing globalization and economic integration, diversifying sources of supply to build resilience, and reforming and strengthening multilateral institutions and multinational forums. These measures will help to ensure that when the next global shock occurs, governments will be equipped to cooperate effectively and resist the lure of protectionism. That would be the best outcome for the global economy, and ASEAN+3 in particular.
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