Australia’s next horizon

A young family all balanced precariously on a single scooter weaving in and out of slow moving traffic in any given Southeast Asian city yields an incredible amount of information to me. Two young adults, who have perhaps joined millions of others in migrating from rural areas to urban areas, are on their way to work in newly created and higher paying jobs in the manufacturing sector.

" The promise of ASEAN and how soon it will be realised is being massively underappreciated at this stage."
Glenn Maguire, Former Chief Economist South Asia, ASEAN & Pacific, ANZ

Their young children are perhaps on their way to school, gaining the education that will see them have more prosperous lives and opportunities than their parents. Living in the city this young family would have access to a range of health and social infrastructure that governments would have found prohibitively expensive and surely impossible to deliver in rural areas.

And then when I multiply that young family on that single scooter by a thousand, and then again by a hundred-thousand, I start to grasp the sheer scale of the profound economic transformation already underway in Southeast Asia.

This is the essence of ANZ Research's new report, ASEAN: The Next Horizon, which analyses the Association of South East Asian Nation's journey towards an integrated economic community. Such a community presents an extraordinary opportunity for the ASEAN nations, the region and Australia and New Zealand.

The promise of ASEAN and how soon it will be realised is being massively underappreciated at this stage. ANZ believes Southeast Asia will eventually be as important to Australia and New Zealand as China is today.

There are three key aspects of the considerable ASEAN promise that we focus on in this report. ASEAN's potential as the new factory of Asia; the emergence in the region of the world's new middle class; and the crucial need for critical infrastructure.

The traffic image is one I love to share – particularly Australians who remain overly fixated on the ongoing slowdown in the Chinese economy. Having lived in Tokyo and Hong Kong, I find the ageing of the North Asian economies to be as equally tangible as the youthfulness of Southeast Asia.

Workers are not only growing older in North Asia, they are becoming more expensive. The migration of manufacturing platforms south into the youthful and cheaper South Asian economies seems all but inevitable. More importantly, the commencement of the ASEAN Economic Community (AEC) from December 2015 will be an important multilateral enabler of the drift of factory Asia to the south.

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THE NEW FACTORY OF ASIA

A large, youthful workforce and strategic location are just some of ASEAN's many advantages, which should draw more companies to establish production bases in the region.

Productivity improvements and labour force expansions will drive most of the growth in ASEAN, along with increased trade fragmentation in the region. By fragmentation we mean the process by which multinational companies break up the manufacture of their more elaborate goods into components, leading to a rise in trade of those components, and an extension of global supply chains.

It will also spur foreign direct investment (FDI) as companies seek to further utilise specialised pools of labour across the region.

HOME TO THE WORLD'S NEW MIDDLE-CLASS

A wave of consumption looks set to break across the region, especially in the frontier economies. There will be three key drivers of the ASEAN consuming class.

Demographics: ASEAN's demographic profile will underpin the rise of this large middle income cohort. Indonesia and Vietnam in particular are endowed with young populations that will become more productive as education levels and skills transfers increase.

Urbanisation: Urbanisation is also a powerful factor in middle class formation. Governments are able to more efficiently provide public goods such as education and social services to urbanised populations compared to rural populations and urban populations have better access to job opportunities.

Education: For Asia, the move to middle income status has been achieved by the creation of high volume, low value-added manufacturing workforces. To move into the high income space, these workforces will need to be re-skilled. Skills and technology transfer aligned with foreign direct investment is already enabling this.

INFRASTRUCTURE MUST BE BUILT

A significant infrastructure deficit emerged across Asia after the 1997-98 Asian crisis and this was exacerbated by the global financial crisis a decade later. Investment as a share of GDP has still not returned to pre-1997 levels in most ASEAN economies.

By some estimates, Asia's infrastructure deficit could be as high as $US8 trillion through to 2020. Nonetheless, we are on the cusp of a sweet spot where infrastructure financing and political will for new infrastructure combine to help close this deficit over the coming decade.

There are other propitious factors:

• The demographic endowment that will pull production platforms into ASEAN economies will necessitate closing the infrastructure gap;
• The structural decline in oil prices allowing economies to unwind fuel subsidies and free up between 2.5-3 per cent of GDP for infrastructure spending; and
• The rise of multilateral institutions such as the Asian Infrastructure Investment Bank (AIIB), which would potentially use best practice to build infrastructure in the most efficient way for developing economies.
  
  

The sum of these factors means over the next 10 years, ASEAN has the potential to become one of the world's key manufacturing hubs and an emerging source of consumption for the world. The ASEAN Economic Community (AEC) will help ASEAN realise its potential by removing barriers to trade and investment.

While the AEC's goal of creating a single market and production platform across ASEAN may not be reached this year due to inadequate infrastructure and other impediments, ultimately ANZ Resarch expects the process of economic integration to create economies of scale and lift intra-regional trade. By 2025, we project trade within ASEAN will exceed $US1 trillion in value.

ASEAN will present rich opportunities for Australia and New Zealand, particularly in relation to commodity exports. Agricultural exports should grow strongly for both countries as the standard of living rises in ASEAN and urbanisation accelerates. Australia's hard commodity exports will benefit too, as ASEAN moves to address its infrastructure deficit.

For Singapore too, these developments promise enormous opportunity for the most modern economy and the heart of the region.

In terms of where the key economic opportunities lay ahead, we firmly believe that ASEAN is the next horizon, not just for Singapore, Australian and New Zealand but for businesses and consumers around the world.

Feature photo: View Apart / Shutterstock.com