Many developing economies face daunting financial constraints as they strive to move up the income and development ladder. In particular, developing economies need high levels of investment over prolonged periods of time to lift potential growth, and move up the income ladder. Starting from low bases, there is a need to accumulate capital rapidly, upskill labor, and take measures to boost productivity. Only then can developing economies maintain growth momentum, and stand a realistic chance of escaping the low- and middle-income traps. Currently, many developing economies are trying to sustain the growth catch-up process, cope with technological disruptions in transitioning to the “new economy”, and use available policy tools to manage headwinds from rising protectionist tendencies in trade and technology.
However, as discussed in the ASEAN+3 Regional Economic Outlook 2019, developing countries face two major constraints – the savings gap and the foreign exchange gap – in financing the infrastructure and connectivity needed to enhance growth and move up the development ladder. With growth headwinds making it more difficult to accumulate private sector savings and public sector fiscal reserves, and countries needing to ramp up investments to get ready for the “new economy”, the savings gap is a key issue to address. With export competitiveness challenged by the combination of rapid technological shifts and high(er)-income countries being more well-positioned, developing economies’ forex earnings via exports have come under greater uncertainty.
The emerging market economies (EMEs) within the ASEAN+3 region have done well. Integration into the global economy via trade has underpinned virtually all ASEAN+3 economies’ growth and development in the past decades. For large and small developing economies alike, exporting goods to meet external demand has helped to overcome constraints imposed by the size of their domestic markets given their low incomes, enabling them to reap economies of scale, establish and gain export competitiveness, and bring in much-needed FDI and foreign exchange earnings to import capital goods. Moreover, the inward FDI has brought technology transfer and positive spillovers to the wider economy. The implications for ASEAN+3 EMEs’ financial constraints have been profound: such rapid growth, technological improvement, and plug-in to regional and global trade have meant a healthy build-up of financial resources and buffers against external funding shocks. This is indeed one of the key reasons the region emerged the Global Financial Crisis resilient and is now in a position to address longer-term structural challenges – such as transitioning to the “new economy” successfully. This is particularly stark because just a decade earlier, the Asian Financial Crisis had laid bare the biting nature of financial constraints on EMEs – not only in a fundamental way in terms of the need to pay for investments and imports, but also in the sense of being vulnerable to the vagaries of global financial markets and often flighty capital flows.
However, manifested outcomes may understate the stiffness of the challenge which lies ahead for ASEAN+3 economies. We know that EMEs in the region have had one foot on the brake pedal as far as investment is concerned – investment tanked after the Asian Financial Crisis, and until today, has never quite recovered to levels it ought to be. Post-AFC, both public and private investments collapsed – as governments, banks, and corporates focus on repairing and strengthening their balance sheets to ensure that such a crisis would never happen again. ASEAN countries’ policymakers, in particular, have been very mindful of the foreign exchange constraints and have worked hard to build up their foreign reserves as a form of self-insurance against the risk of balance of payments crises. This has led to significant underspending on essential hard infrastructures, which are critical for enhancing the growth potential of the economies. It has also led to underinvestment in soft infrastructure – research and development, expertise, skills and other forms of human capital, enabling policies and regulatory frameworks for newly-created types of economic and financial activities and to facilitate seamless cross-border transactions, intellectual property rights protection – critical enablers which have become even more important in the new digital economy. At the same time, on the trade front, it is possible that as cross-border value chains become reconfigured in the “new economy”, some regional EMEs’ may run wider current account deficits. Yet, as the capital flows volatility and financial market turbulence over the past two years highlight, countries still need to be very mindful of the risk of being “punished” should global financial conditions tighten sharply and risk aversion turns against emerging markets leading to massive capital outflows.
Regional collaboration needs to be accelerated and deepened. With the financial resources which ASEAN+3 economies have built up collectively, the complementarities of the economies in terms of levels of development and natural endowments, and the growth opportunities of the developing economies, there is tremendous synergy for the region to mobilize these resources for intra-regional FDI and cross-border financing. Alongside this, the regional financial safety net (RFSN) centered around the Chiang Mai Initiative Multilateralization (CMIM), needs to be reviewed and strengthened continuously. Its policy design, operational flexibility, and in the longer term, even its size – as ASEAN+3’s economic weight and financial sectors grow rapidly – all these need to keep up with changes in conditions over time. Finally, the region remains open to the global marketplace. As the US-China trade conflict heats up, it is worthwhile reminding ourselves that ultimately, it is growth that allows economies, whether advanced or emerging, to accumulate resources to address financial constraints on long-term development and resilience.