How India and Southeast Asia can save global growth as US and China stagnate

  • Both China and the United States, the two biggest engines of global economic activity, face severe slowdowns
  • India and the ‘Asean-5’ could emerge as saviours of global growth, thanks to their young, tech-savvy populations and low wages

The global economy has had a pretty good run lately, with 5.5 per cent growth in 2021 after bouncing back from a brief recession two years ago. However, that growth is about to slow dramatically.

There is a Covid-19 pandemic that will not go away. Supply chains are snarled throughout the world. There is a potential military confrontation if Russia invades Ukraine. And now there is the threat of inflation, that insidious destroyer of wealth.

But where will growth come from when the United States and China – two engines of global economic activity for more than a decade – both face serious slowdowns? The US inflation rate is the highest it has been since 1982, when sweatbands were in vogue and Olivia Newton-John’s Physical topped the pop charts.

China’s inflation is on the rise as well and is set to reach a modest, though not insignificant, 1.8 per cent in 2022. Even at that level, it will eat away at dramatically slower growth this year. The International Monetary Fund estimates that the country’s economy will grow only 4.8 per cent in 2022, down roughly 60 per cent from last year’s 8.1 per cent figure.

Signs point to a third potential source of economic activity, however: India and the “Asean-5” of Indonesia, Malaysia, the Philippines, Singapore and Thailand. Collectively, they were the third-largest by GDP in 2020, and the IMF estimates they will be the fastest-growing economies for 2022 and 2023.

India is on track to displace the UK as the fifth-largest economy in the world. With GDP expected to grow at 9 per cent this year and with one of the largest populations in the world, the continental giant could also become a major regional hub of economic activity.

What these countries have going for them are relatively young and increasingly tech-savvy populations and comparatively low wages, both critical to attracting high value-added and increasingly green manufacturing. However, they lack policies to draw the capital required to realise their human and economic potential.

Major infrastructure investment is needed to make this region globally competitive. Much of that could come from international sources. Unfortunately, all but Singapore continue to be weighed down by relatively high perceptions of corruption, according to Transparency International’s latest report.

India is ranked 85th out of 180 countries, for example. That can put a significant brake on increasing foreign direct investment. Despite rising global FDI in 2021, India’s share dropped by 26 per cent from the previous year.

So far, regional economic integration efforts have primarily focused on goods and services, which are generally easier to negotiate and the quickest to see positive economic benefits. They are not sufficient, though, for modernised ports, expanded highways and upgraded energy infrastructure.

The capital-intensive development that will propel India and the five Southeast Asian countries into the next phase of their economic development needs more multilateral investment treaties, more efficient commercial litigation and expanded investor protections.

The US is usually eager to engage on these issues, but domestic politics have swayed affirmative policy away from greater engagement. Washington has still not put any serious economic weight behind its Indo-Pacific shift. All the rhetoric in the world will not change the business environment on the ground, where it matters.

As for China, while it has applied to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, it is focusing on bilateral lending through its Belt and Road Initiative. That has created dangerous levels of debt for some borrowers as lending requirements do not tend to focus on institutional development and actively reducing corruption.

Countries are now realising that they could also lose control of critical infrastructure if economic conditions shift against them, as Sri Lanka has learned. With debt payments mounting, Colombo is already asking for debt relief.

Multilateral lending solutions could help fuel an infrastructure boom. Initiatives such as the Asean Investment Facilitation Framework seek to improve and promote regional investment. It does not, however, have the same effect as more comprehensive bilateral and multilateral investment treaties and it does not include India.

The Regional Comprehensive Economic Partnership, which came into force last month, establishes some international investment standards. It includes the 10 Association of Southeast Asian Nations members as well as Australia, China, India, Japan, New Zealand and South Korea. Two institutions that could also take on a larger role are the Asian Infrastructure Investment Bank, where India is the second-largest shareholder, and the Asian Development Bank.Still, more needs to be done to accelerate foreign investment in India and Southeast Asia. Green energy, electrified transport systems and modern urban infrastructure will all go a long way towards developing a third global engine of growth to complement the US and China.

With concerted political effort, India and the Asean-5 could eventually rival the industrial giants of the 21st century. Not only would their economies benefit, they might also find larger, more lucrative export opportunities as a result. Other major economies could also see improved export markets in this region for their goods as large bases of new consumers develop.

More importantly, a new base of global growth could balance out the shifting whims of market forces, unexpected world health crises and other threats to global prosperity.

Author: Brian P. Klein is a geopolitical and economic strategist and former US diplomat, SCMP

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