The IAOM

Southeast Asia’s globalization outperformers

Cambodia, Vietnam, Malaysia and Singapore stand out for their connectedness.

While few observers would be surprised that Singapore is one of the world’s most globalized countries, it may raise some eyebrows that the city-state’s Southeast Asian neighbors Cambodia, Vietnam and Malaysia also stand out relative to what might be expected of them.

In the latest edition of the annual DHL Global Connectedness Index which we compile, Singapore ranked second overall among 140 countries and territories. The index measures connectedness by the depth, breadth and direction of trade and investment. In terms just of depth, an indicator of how much trade, capital, information and people flow across a country’s borders relative to how much stays inside, Singapore ranked first.

 As one of the world’s most outwardly focused cities and one of Asia’s economic engines, Singapore is a perennial leader in globalization rankings. Yet some of its success comes from attributes that policymakers in other countries cannot duplicate. It is a city-state in a strategic location and has both English and Chinese as official languages. Hong Kong, which ranks second for depth, has the same features.

Depth of connectedness is positively associated with growth, and since the DHL index focuses on aspects of globalization that are generally viewed as beneficial, higher scores are better than lower. For businesses, countries with higher depth scores usually have lower barriers to entry, though they may also present tougher competition. Countries that are rising quickly in the depth rankings can be particularly attractive, as they can represent strong growth opportunities.

That so many outperformers come from Southeast Asia is surprising, especially given the big differences between its four connectedness leaders. Singapore, the smallest in terms of land area and population, has a service-based economy with gross domestic product per capita of $52,888. Its residents are more than 45 times wealthier than those of the poorest of these countries, Cambodia, with GDP per capita of $1,168. Until the middle of last year, when Cambodia was promoted to lower-middle-income status, the four countries each represented a separate category among the World Bank’s four income levels.

So what drives these countries’ impressive depth metrics? In each case, high depth is driven by top ranks in merchandise trade and openness to foreign capital. Their strategic location, near China and close to the world’s most important shipping routes, makes export-driven growth a natural choice for development. An African or Latin American country would not have the same opportunities. The economic diversity within Asia means that these countries have the opportunity to fill all levels of the value chain and reach a wide swath of consumers within their own region.

All of these countries are members of the Association of Southeast Asian Nations, which means they have trade ties with a good part of Asia. In addition to the 640 million people within ASEAN’s 10 members, trade agreements signed by ASEAN have yielded preferred market access to Australia, China, India, Japan, South Korea and New Zealand.

All together, these countries comprise more than half of the world’s population and nearly a third of world GDP. Nevertheless, not all ASEAN countries rank highly for connectedness; while Thailand is also an outperformer, Brunei, Indonesia, the Philippines, Laos and Myanmar are all underperformers. Clearly domestic policy is also a key part of the success stories.

Success stories

Cambodia ranks 44th of 140 countries overall, and 24th on depth in the latest rankings, an improvement of 24 positions since 2005. That is dramatically higher than the ranking we would expect, based on structural characteristics such as population, language, income level and proximity to foreign markets, which would suggest a depth ranking of 99th.

Cambodia has grown rapidly since 1998 on the strength of its garment manufacturing exports. This explains why, despite its position in Southeast Asia, Cambodia’s top export destinations are in North America and Europe. As the country develops and wages rise, it will have to graduate to other types of manufacturing. Cambodia’s geographic position and its institutional links to ASEAN will be a significant advantage as it takes on this challenge.

Vietnam has been on an upward trajectory somewhat longer, but in 1989 it was the poorest country in the world. Since launching its Doi Moi, or “renovation,” reforms in 1986 to scale back restrictions on private enterprise and open the economy to foreign participation, real GDP has more than tripled.

Vietnam’s high depth score has been driven almost entirely by its merchandise trade and inward capital flows. It lies 26th overall, and rose 12 ranks to 54th on depth between 2005 and 2015. Like Cambodia, Vietnam’s economic transformation began with the garment industry, but more recently, its fastest growing export sectors include mobile phones and other consumer electronics.

Malaysia has consistently scored well on the depth of its global connectedness over the past 11 years, ranking 18th in 2005 and 17th in 2015. A country of nearly 30 million, it has the largest population of any country ranked in the top 29 on depth in 2015.

The New Economic Model, introduced by Prime Minister Najib Razak in 2010 and modeled on the successful New Economic Policy of the 1970s, has the goal of more than doubling GDP per capita to 49,500 ringgit ($11,097) by 2020, and despite some recent difficulties, the International Monetary Fund projects that this ambitious goal is more or less on track.

Malaysia has reached a level of diversified exports, led by high-tech manufacturing, but with large exports of mineral fuels and agricultural products as well. Malaysia has also complemented its 13th place rank on trade depth with a strong performance in foreign direct investment, ranking 17th out of 131 on inward FDI flows.

Singapore is, by necessity, a very internationally oriented country, as a city-state with limited natural resources. It has embraced this status, aspiring to globalism from the beginning, with Singapore’s first foreign minister, S. Rajaratnam, calling it a “global city” in 1972, long before the term was popularized.

Singapore went on to implement a multi-pronged approach to globalization, tying together industry-specific strategies, infrastructure development and promotion of inward FDI. Singapore has set itself up as a hub for international trade, but is ranked in the top 10 in terms of capital, information and people as well.

Development chain

While there are structural differences among these economies that could not be duplicated by the others, they have much to learn from each other. As they rise in the development ranks, each can be seen, with some caveats, as an aspiration for the next, with Cambodia learning from Vietnam, Vietnam from Malaysia, and Singapore’s high level of development being a long-term goal for all of them.

For its part, Singapore can continue to be a model for the world, but there is no reason to think that it needs to stop where it is. While its current level of depth is impressive, it still has room to grow. Meanwhile, these impressive outperformers can all stand as role models for other countries in the region and around the world.

Recent concerns about globalization might lead some to conclude that these countries’ high depth rankings constitute a risk more than a strength in an uncertain world, particularly as major players in the West show signs of retraction from the global sphere. Furthermore, a slowdown in China could be a looming danger for these countries.

Nevertheless, a strategy of further deepening remains the most likely policy direction, and also continues to be the best path forward for the foreseeable future. As income levels increase in developing Asia, these countries will have a significant edge, having already established export-based economies and openness to foreign capital.

Even if the West does retreat from globalization, the growing opportunities closer to home could help offset this. While a slowdown in China does remain a significant risk, these fast-growing economies could provide an important alternative for investors looking to diversify while still taking advantage of the region’s economic expansion.

 

By: 

  • Pankaj Ghemawat is Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, Spain. He is also Global Professor of Management and Strategy at New York University’s Stern Business School and head of the school’s Center for the Globalization of Education and Management.
  • Phillip Bastian is an associate research scholar at the center.

Source: Nikkei Asian Review

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