The Rise of Southeast Asia: A New Economic Powerhouse
As Southeast Asia continues to gain prominence in the global economic landscape, recent developments highlight its growing influence. By August 2024, both Indonesia and Thailand expressed interest in joining the Organisation for Economic Co-operation and Development (OECD). Just two months later, ASEAN members Malaysia, Indonesia, Thailand, and Vietnam became partner countries of BRICS. These strategic moves raise crucial questions about ASEAN’s economic evolution, its current role in the global economy, and its future trajectory.
The transformation of ASEAN since its formation in 1967 has been nothing short of remarkable. From a modest combined economy valued at US$24 billion, ASEAN has emerged as the world’s fourth-largest economic bloc by 2024, boasting an estimated gross domestic product (GDP) of US$4.13 trillion. This positions it behind only the United States ($28 trillion), China ($18.5 trillion), and Germany ($4.5 trillion). Such growth reflects broader shifts in global economic governance, where the dominance of developed nations, particularly the G7, has begun to wane since the early 1970s, allowing emerging economies to gain prominence.
Emerging powers like China, India, South Korea, and the nations of Southeast Asia have steadily increased their share across four key metrics: output, trade, value-added manufacturing, and foreign direct investment (FDI). By 2023, ASEAN accounted for 8 percent of global trade, 5 percent of global value-added manufacturing, and attracted 17 percent of global FDI. The bloc has become China’s primary trading partner, Japan’s second largest, South Korea’s third largest, and the fourth largest partner for the United States. This economic transformation is not merely a result of developed countries’ growth rates but is significantly driven by the rapid rise of these emerging economies.
The development within ASEAN has been propelled by structural transformations in industries, technology, and human capital. Improved infrastructure and institutions have played a crucial role in reducing transaction costs, allowing governments in these economies to convert latent advantages into strengths. By capitalizing on latecomer advantages in industrialization and technology, ASEAN countries have positioned themselves favorably in the global market.
However, ASEAN faces two significant structural challenges that could impede its continued growth. The first challenge is the region’s heavy dependence on natural resources. Despite domestic consumption driving 55 percent of ASEAN’s economy and the trade-to-GDP ratio growing from 61 percent in 2000 to 87 percent in 2023, the bloc’s value-added manufacturing to GDP ratio has declined since 2000, averaging just 20 percent in 2023. Alarmingly, 30 percent of ASEAN’s exports remain resource-intensive, with the remainder primarily in labor-intensive sectors. Only a few countries, such as Singapore, Malaysia, and Vietnam, have successfully transitioned their exports to higher value-added categories, highlighting a significant gap in the region’s economic diversification.
The second challenge is the persistent "missing middle" in ASEAN’s medium-sized enterprise landscape. Between 97.2 percent and 99.9 percent of the region’s approximately 70 million firms are classified as micro and small enterprises (MSMEs), a pattern that has remained largely unchanged since 2010. While these enterprises contribute significantly to employment (85 percent), GDP (44.8 percent), and exports (18 percent), the scarcity of medium-sized businesses hampers innovation, productivity, and the creation of middle-class jobs. The Asian Development Bank’s 2021 regional MSME surveys reveal that the proportion of employment provided by MSMEs has declined over the past decade in five of the region’s largest countries, even as the number of MSMEs has increased. This trend underscores the low productivity of these enterprises, which could hinder ASEAN’s overall economic growth.
As ASEAN navigates these challenges, its strategic moves towards joining organizations like the OECD and BRICS signal a desire to enhance its global standing and economic resilience. The region’s ability to adapt to the changing global economic landscape will be crucial in determining its future trajectory. The ongoing evolution of ASEAN not only reflects its growing importance in the global economy but also sets the stage for a more interconnected and dynamic economic future in Southeast Asia.
