Drivers of Economic Catch-up in Asia: A Study of ASEAN Countries with Comparative Views of China and India.

Date01 April 2022
AuthorVu, Khuong

This paper conducts a comprehensive examination of the sources of economic growth and catch-up of ASEAN countries since the Asian Financial Crisis, with comparative views of China and India. The study employs different decomposition frameworks to gain insights into the drivers of the Association's economic performance over the 1997-2017 period. Three findings are most notable. First, all ten member states, except for Brunei, recorded a strong catch-up performance, with labour productivity being the leading driver in most countries. Second, the drivers of labour productivity catch-up exhibit some distinctive patterns among countries, which depend on the level of income and economic structure. Third, in all decomposition analyses, ASEAN countries are well below China and India across sources of growth, which tends to suggest that countries in the grouping could improve their performance by enhancing market integration and policy coordination. Although the long-term prospect of ASEAN is bright, the COVID-19 pandemic and the recent military coup in Myanmar have indicated that the road to future prosperity of the region is expected to face formidable challenges.

Keywords: Economic growth, catch-up, structural change, productivity, ASEAN.

Article received: May 2021; revised: February 2022; accepted: April 2022

  1. Introduction

    The phenomenal success of East Asian countries in terms of economic growth in the second half of the twentieth century has brought to the fore an economic development model, which was coined the "East Asian Miracle" by the World Bank (1993). (1) While the model has been widely praised by academics and development experts, it does not go without blunt criticism. On the one hand, many studies, including Page (1994) and Stiglitz (2001), offer inspiring lessons from the East Asian Miracle (EAM) model, which range from getting the fundamentals right to fostering capital accumulation and human capital development to promoting exports and structural change. On the other hand, Krugman (1994), with reference to the work by Young (1992, 1994) and Kim and Lau (1994), contended that the East Asian Miracle was largely attributed to "perspiration" (mobilization of input factors) rather than "inspiration" (improvement of total factor productivity). Based on this analysis, Krugman pessimistically predicted that "from the perspective of the year of 2010, current projections of Asian supremacy extrapolated from recent trends may well look almost as silly as 1960s-vintage forecasts of Soviet industrial supremacy did from the perspective of the Brezhnev years (2) " (Krugman 1994).

    Although the EAM model is no longer a hot debate today, it is still important to better understand this growth model. With this motivation, this paper conducts an in-depth analysis of the economic performance of the ten ASEAN economies: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, over the period from 1997 to 2017.

    The study aims to address the following three research questions. First, how did ASEAN countries perform in the global dynamics of economic catch-up during 1997-2017? Second, what are the drivers and draggers of ASEAN economies' economic growth and catch-up during this twenty-year period? Finally, what are the policy insights that are important for developing countries in their efforts to promote economic growth and catch up?

    In addressing the three research questions above, this study also provides insights into the validity and robustness of the EAM model. As the Asian Financial Crisis (AFC), which erupted in 1997, severely affected Asian economies even several years later, the results from this study provide evidence of whether the EAM model remains valid for the post-crisis period. At the same time, the vast diversity of the ten ASEAN economies in various dimensions, including the level of economic development, religious belief, population size, and political settings, would help determine whether the EAM model is robust to country characteristics.

    The remainder of this paper is organized as follows. The next section provides a snapshot of the economic indicators of the ten ASEAN countries. The third section presents the catch-up performance and its primary drivers for each member state. The subsequent section analyses the sources of labour productivity growth and catch-up performance using the growth accounting and industry origin approaches, respectively. The final section summarizes the results and concludes with a brief discussion of policy implications. There are three appendices at the end of the paper. Appendix 1 describes the frameworks for decomposing the sources of per capita income and labour productivity growth, while Appendix 2 introduces the frameworks for quantifying the sources of per capita income and labour productivity catchup performance. Appendix 3 elaborates on the data sets used for this study.

  2. ASEAN Economy in a Snapshot

    The ASEAN economy stands out with three distinctive features. First, the region, which is home to more than 650 million people, or 8.6 per cent of the world's population (Table 1), is a large and vibrant economy. In terms of GDP, ASEAN is larger than Japan in PPP$ (8,565 billion vs. 5,485 billion) and India in US$ (2,969 billion vs. 2,726.3 billion). The ten member countries, however, vary largely on the level of economic development, ranging from Myanmar and Cambodia, which are among the world's poorest countries, to Singapore and Brunei, which have high levels of per capita income comparable to that of the US. In addition, during the 1997-2017 period, ASEAN's economy as a whole grew faster than the world average (5.1 per cent vs. 3.6 per cent), with its lower-income countries (Cambodia, Laos, Myanmar, the Philippines, and Vietnam) exhibiting stronger performance (Table 1).

    Second, countries in the grouping have made significant reform efforts to embrace global megatrends, such as globalization and the information and communication technology (ICT) revolution, to promote economic growth. In fact, ASEAN countries rank impressively in terms of the key measures of openness and ICT penetration indicators (3) (Table 2). Furthermore, it is interesting to note that the least developed member nations are exhibiting inspiring examples of turning mishaps and disadvantages into commitment and advantages in building prosperity as in the case of Laos (Bird and Hill 2010).

    Besides, with their strategic location between two rising economic giants, China and India, ASEAN countries possess a strategic advantage that positions them to reap the most from the rise of Asia in the coming decades (Vu 2020).

    Third, ASEAN nations have made impressive progress in narrowing their income gap in recent decades. In fact, as shown in Figure 1, the coefficient of variation (CV) (4) of per capita income consistently declined since 1993, with the exception of 1998 when the region was in turmoil due to the Asian Financial Crisis that struck the year before.

  3. Economic Catch-up Performance and Its Primary Drivers

    This section examines the performance of ASEAN nations in the global dynamics of economic catch-up over the 1997-2017 period. The section then quantifies two primary drivers of the catch-up performance for each economy: labour productivity growth and employment-to-population rate.

    3.1 Economic Catch-up Performance

    Using the US income level as a benchmark, one can assess the catch-up performance of a given country during a period by examining how much the country's income has changed over this phase relative to the US income. One simple measure to capture these dynamics is the catch-up performance index (CUPI) described below (Vu 2020): (5)

    [Please download the PDF to view the mathematical expression] (1)

    where is the catch-up performance index of country i over the period [0, T]; [Please download the PDF to view the mathematical expression] is relative per capita income measured in purchasing power parity (PPP) dollars at constant prices of country i in year t, in comparison to the US [Please download the PDF to view the mathematical expression].

    By [Please download the PDF to view the mathematical expression] definition, if country i is catching up or forging ahead, its relative income improves, [Please download the PDF to view the mathematical expression] > [Please download the PDF to view the mathematical expression], which means [Please download the PDF to view the mathematical expression] >0. Conversely, if country i is falling behind, its relative income gap with the US deteriorates, [Please download the PDF to view the mathematical expression], which means [Please download the PDF to view the mathematical expression] <0. That is, the sign and magnitude of the CUPI index provide a meaningful measure to assess the catch-up performance of a given country in terms of per capita income over the period under investigation. It is worth noting that the index can be roughly interpreted as the per capita growth difference between the country in question and the US.

    The catch-up performance captured by the index for the ten ASEAN countries is reported in Table 3. For comparison, the results for China and India are also reported. The following findings stand out in Table 3.

    First, all ASEAN countries, with the exception of Brunei, recorded a strong economic catch-up performance over 1997-2017, with their CUPI ranging from 1.2 for Malaysia to 7.2 for Myanmar. Brunei is the worst performer not only among member states but also worldwide, falling into the 170th place in the global ranking. (6)

    Second, the four least developed ASEAN countries--Myanmar, Cambodia, Laos, and Vietnam--are among the world's top twenty performers in the global ranking by CUPI. In addition, the convergence among ASEAN countries in terms of relative per capita income (US = 100) over 1997-2017 is solid. In fact, the coefficient of variation (CV) of their relative...

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