Economic Outlook for Southeast Asia, China and India 2016 – OECD

Economic Outlook for Southeast Asia, China and India 2016 ENHANCING REGIONAL TIES

In a portable format, this overview provides the key messages from the 2016 edition of the Economic Outlook for Southeast Asia, China and India.

Contents

Outlook for 2015-20

Regional integration in ASEAN and Emerging Asia

Structural policy prospects in Emerging Asia

The annual Economic Outlook for Southeast Asia, China and India examines Asia’s regional economic growth, development and regional integration process. It focuses on the economic conditions of Association of Southeast Asian Nations (ASEAN) member countries: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Viet Nam. It also addresses relevant economic issues in the People’s Republic of China and India to fully reflect economic developments in the region.

The 2016 edition of the Outlook focuses on the importance that regional integration has had in Emerging Asia and sets out issues deserving of greater attention in strengthening future co-operation. In particular, it provides an overview of progress made in integration and discusses the importance of developing institutional capacities for achieving regional goals, the potential for co-operation in the use of renewable energy and the development of a more international private sector.

The Economic Outlook for Southeast Asia, China and India 2016 includes three main parts, each highlighting a particular dimension of recent economic developments in the region:

• the regional economic monitor, depicting the near-term and medium-term economic outlook andmacroeconomic challenges in the region

• threechaptersonregionalintegration,thespecialthematicfocusofthisedition.

• structuralpolicycountrynotes.

This edition of the Outlook is the result of policy dialogue and consultation at the regional level, at the 4th OECD-AMRO-ADB Joint Asian Regional Roundtable on Near-term Macroeconomic and Medium-term Structural Policy Challenges, held in Tokyo, Japan, in May 2015. Like other regional economic outlooks produced by the OECD Development Centre, the report was prepared in collaboration with regional partners; UNESCAP and the Asian Development Bank Institute (ADBI) contributed to the 2016 edition. The Outlook also benefited from discussions with the ASEAN Secretariat.

The full report is available on OECD iLibrary: www.oecd.org/dev/economic-outlook-for-southeast-asia-china-and-india-23101113.htm.

OVERVIEW

1Economic outlook for SouthEaSt aSia, china and india 2016: Enhancing rEgional tiES © oEcd 2015

Overview: Promoting growth through structural reform and regional integration

Key messagesOutlook and general assessment

• RealgrowthinEmergingAsia(SoutheastAsia,ChinaandIndia)willexperiencemildmoderationin2015,at6.5%,andisprojectedtomoderategraduallyoverthemedium-term(2016-20)toanaverageof6.2%annually.GrowthinChinawillcontinuetoslowwhilegrowthinIndiapicksuptooneofthehighestlevelsintheregion.GrowthintheASEAN(AssociationofSoutheastAsianNations)regionwillbesimilarandisprojectedtoaverage4.6%in2015and5.2%over2016-20,ledbygrowthinthePhilippinesandVietNamamongtheASEAN-5andtheCLM(Cambodia,LaoPDRandMyanmar)countries.Privateconsumptionwillbealargecontributortooverallgrowth,whileexportswillcontributelessthanduringmostofthepriordecade.

• Theregionwillhavetocopewithpotentialexternalanddomesticriskstosustainitsgrowthmomentum.TheslowdowninChina’seconomywillcontinuetoaffectthegrowthprospectsoftherestoftheregionasexportdemanddropsandinvestmentflowsdecline,thoughcountriesvaryintheir levelofexposuretotheserisks.TheprospectofUnitedStatesmonetarynormalisation,beginninginthenearfuture,isexpectedtohaverelativelymoremildimpactsontheregion,butmayalsobeacauseforconcerninsomecases.MuchofEmergingAsiahasseenslowingproductivitygrowthsincetheglobalfinancialcrisis.Thistrendwillneedtobereversedforgrowthtopickup.

Special focus for 2016 edition: Enhancing regional ties

• RegionalintegrationeffortshaveintensifiedatvaryinglevelsovertheyearstoimplementtheregionalintegrationinitiativesofASEAN,ASEAN+3andASEAN+6.Currenteffortsarestillnotenoughtoachieveintegrationtargetsdespiteimportantandpositiveachievements.Inparticular,ASEANcountriesneedtotakeactivestepstorealiseasingleeconomicmarketby2015andbeyond,andmakeadditionalefforts,including: i)co-ordinatingbetweenregionalinitiativesandnationalagendas,andregionalandsub-regionalinitiatives,avoidingduplicationandmovinginthesamedirection; ii)reducingdisparitiesintheregionbysupportingthefurtherdevelopmentoftheCLMcountries; iii) moving towardsa “GlobalASEAN” that is integrated in theglobaleconomyandstronger tieswith theASEAN+3andASEAN+6 frameworks; and iv) strengtheningmonitoringcapacitythroughbetterindicatorsandpeerlearningtomaketheregionalagendamoreeffective.

• Addressingimportantpolicyareasinthe2016-25integrationagendathatwerenotaddressedadequatelyinpre-2015agendas,iscritical.Thisparticularlypertainstotheissuesofgreengrowthandrenewableenergyandprivatesectordevelopment.First,theregionshouldtapintoitsconsiderablepotentialinrenewableenergytomeetgrowingdemand.Tariffsandnon-economicbarriersslowintegration and impede opportunities for improved efficiency in the renewable energy sector.HydropowerfromtheMekongRiver,forexample,isprogressingandremainsapromisingsourceoffuturegeneratingcapacitytobeexportedthroughouttheregion.Second,greenfieldinvestmentshave declined, in particular, in themanufacturing sector andmergers and acquisitions (M&A)investmenthasbeenlimitedtospecificsectorsandspecificcountriesintheregion.LocalbusinesscantakeadvantageofthechangesrelatedtotheASEANEconomicCommunityandexpandtheiroperationsacrossASEAN,transformingtoberealregionalentitiesor“ASEANenterprises”.

Structural policy country notes

• WhilethestructuralpolicyprioritiesforEmergingAsiacountriesarehighlydiverse,manyofthesecountrieshavesetgoalsforimprovinginclusiveandsustainabledevelopment,recognisingtheneedforhigh-qualitygrowth.FormulatingnewdevelopmentstrategieswillrequireadoptingacomprehensivepackageofreformsforSMEs,finance,infrastructure,labourmarket,environmentalpolicy and in the agriculture, education, social security and tourism sectors. Overall, theimplementationofdevelopmentplansinEmergingAsianeedstoimprove.

32 Economic outlook for SouthEaSt aSia, china and india 2016: Enhancing rEgional tiES © oEcd 2015 Economic outlook for SouthEaSt aSia, china and india 2016: Enhancing rEgional tiES © oEcd 2015

Outlook for 2015-20

GrowthintheEmergingAsiaregion(SoutheastAsia,ChinaandIndia)showsmildmoderationbutwillremainrobustatanaveragerateof6.5%realgrossdomesticproduct(GDP)growthin2015.Inthemediumterm,growthintheregionisprojectedtoaverage6.2% per year over 2016-20, according to the most recent Medium-Term ProjectionFrameworkforthiseditionoftheOutlook(MPF-2016)(Table1).Thisisnoticeablybelowthe7%rateofgrowthover2011-13,duemainlytoChina’sslowinggrowth.Thegrowthslowdown in Chinawill also place downward pressure on growth in the rest of theregion.The tenASEANcountries togetherareprojected togrowat4.6% in2015withanannualaveragerateof5.2%over2016-20.Ingeneral,theSoutheastAsiaregionwillmaintainafavourablegrowthperformanceinthemediumterm.

Table1. Real GDP growth of ASEAN, China and IndiaAnnualpercentagechange

Country 2014 2015 2016 2016-20 (average) 2011-13 (average)

ASEAN-5

Indonesia 5.0 4.7 5.2 5.5 6.2

Malaysia 6.0 4.6 4.6 5.0 5.2

Philippines 6.1 5.9 6.0 5.7 5.9

Thailand 0.9 2.7 3.1 3.6 3.2

Viet Nam 6.0 6.4 5.9 6.0 5.6

Brunei Darussalam and Singapore

Brunei Darussalam -2.3 -1.4 0.5 1.8 0.9

Singapore 2.9 2.1 2.4 2.6 4.1

CLM countries

Cambodia 7.0 7.0 7.1 7.3 7.3

Lao PDR 7.4 6.9 7.0 7.3 8.1

Myanmar 7.7 8.2 8.2 8.3 6.9

China and India

China 7.3 6.8 6.5 6.0 8.2

India 7.3 7.2 7.3 7.3 5.5

Average of ASEAN 10 countries 4.6 4.6 4.9 5.2 5.4

Average of Emerging Asia 6.7 6.5 6.4 6.2 7.0

Note:Thecut-offdateofdatais2November2015.WeightedaveragesareusedforASEANandEmergingAsia.TheresultsofChina,IndiaandIndonesia(2015and2016projections)arebasedontheOECD Economic Outlook 98.Source:OECDDevelopmentCentre,MPF-2016(Medium-TermProjectionFramework).FormoreinformationonMPF,pleaseseewww.oecd.org/dev/asiapacific/mpf.

Growth prospects in Emerging Asia

ThePhilippines andVietNamareprojected to show robust growthat anannualaverage rate of around 6% over 2016-20.Viet Nam’s growth has been led by a rapidacceleration of fixed investment, strong foreign direct investment (FDI) inflows androbust consumption. Together, these components account for most of overall realgrowth,asnetexportshaverestrainedoverallgrowthduetostrongimports.Ingeneral,theprivatesector’sperformancehasimproved,withstrongretailsalesgrowth,althoughstructuraladjustmentsinthestate-ownedenterpriseandbankingsectorswillweighongrowthsomewhat.ThePhilippineshasbenefittedfromstrongmomentumindomesticdemand, buoyed by growing remittances. The Philippines is also benefitting from asignificantimprovementinitsattractivenessasanFDIdestination.Growthprospectsreflectthecountries’improvedmacroeconomicfundamentalsandtheirplanstodevelopinfrastructure. However, risks remain as job creation and the business environmentneedtobeimproved.

ovErviEw: Promoting growth through Structural rEform and rEgional intEgration


Indonesia,SoutheastAsia’s largesteconomy,hasexperiencedmildmoderation initsrealgrowthwithbothdomesticandexternaldemandslowingto5.5%inthemediumterm.Privateconsumptionhasexpandedmoderately.Thegovernmenthasattemptedtoboostinvestmentbydoublingtheinfrastructurebudgetfor2015,butexecutionhasbeendelayed.WhiletheIndonesiancurrencyhasdepreciatedconsiderably,partlyduetofallingcommodityprices,exportgrowthhasbeenveryweakonthebackofstagnantexternaldemand.EconomicgrowthinMalaysiaweakenedduringthefirsthalfof2015.TheweaknesswascausedbydeterioratingexternaldemandasaresultoftheeconomicslowdowninChina,itsmajortradingpartner,andbythepersistenceoflowinternationaloilpricesinthefirsthalfoftheyear.However,theringgit’sdepreciationmaysupportnon-commodityexportsinthefuture.

WhilepoliticalturmoilhadalargenegativeimpactongrowthinThailandin2014,thecountryexperiencedmodestGDPgrowthof2.7%in2015.Whileexportsremainweak,therecoveryintouristarrivalsthatbeganinthesummerof2014andcontinuedinto2015isapromisingsign.However,thetransitionprocesstodemocracymustbemonitoredcarefullytoensurethatitdoesnotleadtomacroeconomicinstability.Thailand’sgrowthperformanceinthemediumtermshouldimprovegraduallyfromthatofrecentyears.

GrowthperformanceinBruneiDarussalamandSingaporeisprojectedtoimproveconsiderablyoverthemediumtermdespitetherecentinternationaloilpriceshockandweakerthanexpectedglobalgrowthcomparedtothepastfewyears.RisingoilpriceswillallowBrunei Darussalamtorecordpositivegrowth.Labourshortagesandslowingproductivity growth will keep Singapore’s real growth noticeably below the pace of2003-07. Singapore’s weak performance is largely attributable to slowing domesticdemand.Whileservice-sectorgrowthhasdeclinedcompared to2014, it continues topropupoverallgrowth,particularlyduetostrongcontributionsfromfinance,insuranceandbusinessservices.

GrowthintheCLMcountries(Cambodia,LaoPDRandMyanmar)isprojectedtoleadthatof theASEANregion,with realGDPgrowthratesofmore than7%over2016-20.Recoveryoftheagriculturalsectoranddevelopmentofthetourismsectorandindustrywill underpin real growth inCambodia andLao PDR. Growth inMyanmar,which isnowthefastestintheregion,shouldcontinuetoaccelerateasFDIcontinuestoriseandas economic reforms spur theprivate sector’s rapiddevelopment. Prospects in thesecountries,however,willdependonmaintainingadequatecontrolofrapidlyrisingcreditand,especiallyinMyanmar,onsustainingthemomentumofeconomicreforms.

ThegrowthprospectsofChinaandIndiaareexpectedtodifferfrompastpatternsastheyfacedifferentinternalconditions.China’seconomyslowswhileIndia’sgrowthremainsrobustoverthemediumterm.ContinuedinvestmentininfrastructureinChinaishelpingtosupportoverallinvestment,thoughthisstimulusisunsustainableinthelongerterm.Growthisslippingelsewhereasadjustmentsareunderwayinmanufacturingtomanagelongstandingchallengesfromexcesscapacity.India,ontheotherhand, isseeing increased investment rates, thanks to public infrastructure development andprivate investmentmotivatedby improvements inthebusinessenvironment, thoughpassingsomekeystructural reforms isprovingdifficult. Privateconsumption isalsoincreasing, thanks in part to higher wages and improved benefits for public sectoremployees. Domestic financial risks remain potential barriers to continued growthinIndia,particularlylargenon-performingloansandthehighleverageratiosofsomefirms.



Keypointsoftheeconomicoutlookandassessmentareasfollows:

• RealgrowthinEmergingAsiawillexperiencemildmoderationin2015,averaging6.5%,and isprojectedtomoderategraduallyover themedium-term(2016-20) to6.2%annually.GrowthinChinawillcontinuetoslowwhilegrowthinIndiapicksuptooneofthehighestratesintheregion.GrowthintheASEANregionwillbesimilar and is projected to average 4.6% in 2015 and 5.2% over 2016-20, led bygrowthofthePhilippinesandVietNamamongASEAN-5andtheCLMcountries.Privateconsumptionwillbea largecontributortooverallgrowth,whileexportswillcontributelessthanduringmostofthepriordecade.

• ChinaandmostoftheASEAN-5countrieswillcontinuetorecordcurrentaccountsurpluses, although at a lower level relative to GDP than during 2003-07. ThisnarrowingreflectstheincreasedimportanceofconsumptionrelativetoinvestmentindrivingrealGDPgrowth.TheCLMcountrieswillcontinuetoruncurrentaccountdeficits,andIndia’sdeficitwillincreasemodestly.

• FiscalbalancesinrelationtoGDPareprojectedtoremainstable.Sustainingsoundfiscalpositionswhilemeetingdevelopmentneedswilldependonthesuccessoffurtherreformstostrengthenbudgetplanningandimplementationandtoimprovetheeffectivenessoftaxadministration.Recentsubsidyreformsinsomecountrieswillcontributepositivelytotheirfiscalpositions.

The region will have to cope with potential external and domestic risks to sustain growth momentum

• Theslowdown in China’s economywill continue toaffect thegrowthprospectsof the restof the regionasexportdemanddropsand investment flowsdecline.Countriesvaryintheirlevelofexposuretotheserisks.

• The prospect of US monetary normalisation, beginning in the near future, isexpected tohave relativelymoremild impactson the region,butmayalsobeacauseforconcerninsomecases.

•Much of Emerging Asia has seen slowing productivity growth since the globalfinancialcrisis.Thistrendwillneedtobereversedforgrowthtopickup.

• Growth in the regioncouldbenefit fromopportunitiesarising fromtheongoingcreation of the ASEAN Economic Community and other regional integration initiatives, suchasASEAN+3andASEAN+6.Furtheraccelerationof the regionalintegration process would be key (see the thematic focus of this Outlook inChapters2-5foramoredetaileddiscussion).

The impact of China’s slowdown on the region could be observed through various channels

• ExportsaretheprimarychannelthroughwhichtheeffectsofChina’sslowdownare being transmitted to theASEAN region.Merchandise exports toChina as ashareofGDPvaryconsiderablyamongtheASEANcountries,rangingfromabout12% forMalaysia and 6-8% for Singapore, Thailand andVietNam to as little as3% for Indonesia and the Philippines. The exports ofmany ASEAN-5 countriesare integratedwithChina throughregionalproductionchains.Asa result, theiraggregateratiosofexportstoChinawithrespecttoGDPsomewhatoverstatetheirsensitivitytoChina’sslowdownfortworelatedreasons.First,theproductsexportedtoChinafrommanyASEAN-5countriesmakeintensiveuseofpartsimportedfromJapan,KoreaandotherAsiancountries.Second,manyexportsoftheASEAN-5andASEANcountriestoChinaareusedtoproduceexportsthatgotootherregions,notfordomesticfinaluse.Nevertheless,sensitivityisstillsubstantialandgreatest,forinstance,forMalaysia,SingaporeandThailand.



•FDI is another potential source of exposure of the ASEAN region to China’sslowdown. FDI inflows from China into a number of ASEAN countries haveincreased rapidly since 2009 and have become an important overall source offoreigninvestment,particularlyinMalaysiaandThailand.

• The financial repercussions of China’s slowdown may also impact domesticfinancial marketsinASEANcountriesandcouldcomplicatetheirmacroeconomicmanagement.

• China’sslowdownmayalsoaggravatecapital outflowsfromtheASEANregionasmonetarypolicyintheUnitedStatesistightened.IncreasingfinanciallinksamongASEANcountriesandChinamayalsoincreasetheriskofspilloversfromfinancialmarketfluctuationswithinChinatofinancialmarketswithinASEAN.

TheChinaslowdowncouldbeprimarilyademandshocktoASEANcountriesthatcan, inprinciple,beat leastpartiallymitigatedbydomesticmacroeconomicpolicies.MostASEANcountrieshave some room formonetary and fiscal stimulus to supportgrowthinthenearterm.Overthelongerterm,China’sslowdownandtheconditionsaccompanyingitarelikelytoaffectthe structure of output in many ASEAN countries.RisingwagesinChinahavecreatedincentivestoshifttheproductionoflabour-intensiveproducts,suchastextiles,tolowerincomecountriesinAsiaandotherregions.

The impact of US monetary normalisation will be moderate, though it raises risks

Monetarytightening intheUnitedStateswillexertupwardpressureondomesticinterestratesanddownwardpressureoncurrenciesvis-à-vis theUSdollaracrosstheworld, including inEmergingAsia.Therise inUSshort-term interest rateswillplaceupwardpressureonshort-term interest rates inEmergingAsia.The rise indomesticinterestratesinEmergingAsiacountrieswilltendtoslowrealGDPgrowthinthenearterm, while currency depreciation will tend to stimulate exports and real growth.TheriseinUSinterestratesisalsolikelytoslowfurtherfinancialcapitalinflowsintoAsianemergingmarketsastheirreturnadvantageoverUSassetsarediminishedandinternational investors reduce theweight of riskier emerging-market assets in theirportfolios. Reduced capital inflowsmay lead to further shocks to domestic financialmarkets through increased uncertainty, higher risk premiums and other channels.However, disruptions are more likely in countries where uncertainties about futureeconomicprospectsarecomparativelyhighand/orwhereseriousimbalancesinexternalfinances or indomestic financialmarkets exist. Countrieswithmoredeveloped anddeepfinancialmarketsshouldbeatlessriskthanthosewithlessdevelopedmarkets.

• TherearegoodreasonstoexpectthatUSmonetarytighteningwillnothavesuchdisruptiveeffectsonEmergingAsia.The tighteninghasbeenanticipatedand isunlikelytosurprisemarkets,unlessitturnsouttobesignificantlylargerthantheincreaseof25basispointsnowexpected.Thecriteriadeterminingthetimingoftheraterisearealsowidelyunderstood.Long-termUSinterestratesmaywellrisesomewhataspolicyratesincrease,butprobablybyconsiderablylessinitiallythanoccurredduringthe2013tapertantrum.

• These considerations suggest that the onset of USmonetary tightening ismostlikelytodepresscapitalinflowstotheASEANregionmoderately,butshouldnotleadtowidespreadreversalsorothermajordisruptions.Bothshort-andlong-terminterestratesarelikelytorisesomewhatand,unlessoffsetbydomesticmonetaryeasing,arelikelytoproducesomedownwardpressureonrealgrowthinthenearterm.ThiswillprobablybelessthanthatresultingfromthegrowthslowdowninChina.



•A simulation of the impact of the USmonetary normalisation with a dynamicstochastic general equilibrium (DSGE)model indicates thathigher interest ratesin ASEAN-5 countries decreases domestic investment, though net exports willincreaseintheshortrununderafrictionlessmodelsetting.TheneteffectonGDPofthesechangeswillbenegative.Accordingtotheresultsofthesimulation,suchanoutcomewouldlowertheGDPoftheASEAN-5asawholebyasmuchas0.56%.TheimpactontheASEAN-5islikelytobemuchgreater,at0.68%ofGDP,iftheUStighteningweretoleadtoincreasesinUSlong-terminterestratesthatarelargerandfasterthanthoseduringthe2013tapertantrum(Figure1).

Figure1.Impact of US monetary normalisation on GDP growth in ASEAN-5, 2015-17

Percentage(annualaverage)%

-0.8

-0.7

-0.6

-0.5

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-0.1

0 Scenario 1 Scenario 2

Note:ImpactsareestimatedbyDSGEapproach.Twoscenariosforthespeedofquantitativeeasing(QE)taperingareused.Inscenario1,weassumethatQEtaperinggraduallystartsat2015Q4andcompletesatlate2018whentheUSrealinterestratereachesthehistoricalaverageof3.75%.Inscenario2,weconsiderfasterQEtapering:namely,theUSrealinterestratereaches3.75%at2017Q3.Source:OECDDevelopmentCentreestimate.12http://dx.doi.org/10.1787/888933309313

Productivity growth slows in Emerging Asia

TheEmergingAsia regionwill face thechallengeofslowingproductivitygrowth.ThesetrendsshowingaslowdownofgrowthinGDPandproductivityareevidentevenfrombeforetheglobalfinancialcrisis(Figure2).Attheaggregatelevel,potentialGDPdeclinesinASEANeconomies,ChinaandIndiaaftertheglobalfinancialcrisisoflate2000s.Thedeclineinproductivityisoneofthefactorscontributingtotheslowdown.However,theextentofslowdowndiffersacrosscountriesandsectors.

Slowingproductivitygrowth in thepost-crisisperiodhasnotbeenspreadevenlyacross all sectors of the Emerging Asia economies, with some areasmore seriouslyaffectedthanothers(Figure3).Thefinancialsectorsinparticularofmostofthelargesteconomiesintheregion(ASEAN-5,Singapore,ChinaandIndia)havebeenaffected.Withtheexceptionof IndiaandChina, theproductivityof financialactivities relative toacountry’s average productivity has fallen between the periods before and after 2007.Construction sector productivity similarly has grown relatively slowly, except in thePhilippines.Relativelypoorgrowthrateshavealsobeenseeninagriculture,hunting,forestryandfishing,andincommunity,socialandpersonalservicesinmostcountries.Themanufacturingsectorsofseveralcountries,ontheotherhand,havebeenrelativelyresilient.Manufacturers’productivitygrowthhasexceededthenationalaveragegrowthratesoftheregion’slargesteightcountrieswiththeexceptionofIndonesiaandChina.Resultsinotherkeysectorshavebeenmixed.



Figure2.Potential GDP in Emerging Asian countries Logarithmofannualpotentialgrowth

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A. ASEAN countries B. ASEAN, China and India

Before crisis Full sample

Note:PotentialoutputwasestimatedbyDSGEapproach.Source:OECDDevelopmentCentreestimate.12http://dx.doi.org/10.1787/888933309323

Figure3.Relative labour productivity by selected sectors in Emerging Asia Logarithmofrelativelabourproductivitygrowth

India

China

Singapore

Viet Nam

Thailand

Philippines

Malaysia

Indonesia

Finance, real estate and business activities Manufacturing

India

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Singapore

Viet Nam

Thailand

Philippines

Malaysia

Indonesia

Construction

India

China

Singapore

Viet Nam

Thailand

Philippines

Malaysia

Indonesia

-0.4 -0.2 0 0.2-0.1 0 0.1 -0.2 -0.1 0 0.1 0.2 0.3

Note:Thesenumbersaredifferencesofrelativelabourproductivitybetween“before2007”and“after2007”.Itispositivewhenthesectorproductivitygrowsfasterthanothersectorswithineachcountryandnegativewhenthesectorproductivitygrowsmoreslowlythanothersectors.Source:OECDDevelopmentCentreestimate.12http://dx.doi.org/10.1787/888933309331

Improvements in productivity are essential to drive continued economic growthin Emerging Asia’s wealthier economies. While their GDP growth rates have beenimpressive,manyemergingeconomiesaroundtheworldhaveseenslowingorstalledrates of growth as they have approached the levels of high-income countries. Thisso-called “middle-income trap” results from the difficulties faced by economies intransitioning from previous growth strategies – such as those based on structuraltransformation, demographic change and factor accumulation, which naturally facelimitations–tomoresustainableproductivity-drivengrowthandthedevelopmentoftechnologicallyintensiveeconomies.



EstimatesbytheOECDDevelopmentCentreshowthateveninthebest-casescenario,itwilltakesometimeforEmergingAsia’smiddle-incomecountriestoreachhigh-incomestatus(Figure4).Malaysiaisexpectedtobethefirsttojointhisgroupin2021,followedbyChina in2028.Reachingthisstatus isexpectedto take longer forThailand (2035),Indonesia(2043)andthePhilippines(2048).TheseestimatesplaceVietNamandIndialast amongcurrentmiddle-incomecountries inEmergingAsia to leave this group in2054and2055,respectively.

Figure4.Updated best-case scenario simulation of estimated time required for middle-income countries in Emerging Asia to become high-income countries

Years0 5 10 15 20 25 30 35 40 45

India

Viet Nam

Philippines

Indonesia

Thailand

China

Malaysia in 2021

in 2028

in 2035

in 2043

in 2048

in 2054

in 2055

Note:BasedonWorldBankcriteriaforclassifyingeconomies,high-incomecountriesaredefinedashavinggrossnationalincome(GNI)percapitaabove12376in2014.Growth,consumerpriceindex(CPI)andexchangerateprospectsinthissimulationareinlinewithMPF-2014.PopulationprojectionsarebasedonUnitedNationsdata.UpdatedfromtheoriginalestimateintheEconomic Outlook for Southeast Asia, China and India 2014.Source:OECDDevelopmentCentre’ssimulation,basedonMPF-2016.12http://dx.doi.org/10.1787/888933309340


Emerging Asia’s progress in regional integration has been mixed

Regional integration in Emerging Asia is progressingwithin various frameworkssincethe1980s,graduallyexpandingingeographicscopeanddepthofissuesaddressed.Attempts at regional economic integration in Asia started almost four decades agowiththecountriesinSoutheastAsialeadingtheway.Variousframeworksforregionalintegration,includingthoseassociatedwithASEAN,ASEAN+3andASEAN+6havebeenusedtobuildco-operativesolutionstoarangeof issuesofsharedconcern.ASEAN+3integration initiatives have been pursued in different areas, particularly in finance,tourism,agricultureandforestry,energy,minerals,theenvironmentandsocialwelfare.ASEAN+6 leaders stated their commitment to continue co-operation in many areassuchastrade, investment, finance,environmentandenergy,education,globalhealthissues,disastermanagementandconnectivity.Morerecently,progresshasbeenmadeintradeandinvestment,andtheRegionalComprehensiveEconomicPartnership(RCEP)currentlyundernegotiationisstrengtheningeconomictiesintheregion.

TheestablishmentoftheASEANEconomicCommunityisseenasamajormilestone.Progressmadeandremainingchallengesindeepeningregionalintegrationvaryacrosskey policy areas (Table 2): trade in goods; trade in services; investment and capital



market liberalisation; competition and consumer protection; intellectual property;infrastructureandconnectivity;small-andmedium-sizedenterprises;food,agricultureand forestry; tourism; human and social development; and the Initiative for ASEANIntegration(IAI).

Table2.Summary: Assessment of progress in integration in key policy areas

Policy area Assessment of progress

Trade in goods Intra-regional tariffs are falling and intra-regional trade is increasing, trade agreements are being made, and trade facilitation is improving, but non-tariff measures remain a challenge.

Trade in services Progress in facilitating services trade has been uneven, and deeper reforms are needed in some countries.

Investment and capital market liberalisation

Liberalisation has been uneven by country and sector, and investors remain concerned by high costs of doing business, weak intra-ASEAN banking facilities, though the Chiang Mai Initiative Multilateralisation and Asian Bond Market Initiative are promoting regional stability and financial integration.

Competition and consumer protection

ASEAN members are sharing best practices, but work remains to be done on policy harmonisation and the establishment of regional-level initiatives.

Intellectual property (IP) Co-operation between IP offices has improved and work is being done to further develop local capacities.

Infrastructure and connectivity Slow progress is being made on road, rail and maritime connectivity, and institutional barriers are being addressed gradually.

Small- and medium-sized enterprises (SMEs)

Several major programmes offer support to SMEs in operating domestically or internationally, but access to finance and technology is a challenge for these firms in some countries.

Food, agriculture and forestry Regional frameworks are improving food security, but more could be done to protect fisheries, forestry and wildlife.

Tourism Co-operation is progressing on tourism promotion, the establishment of common standards and visa facilitation.

Human and social development Education system harmonisation and collaborative research initiatives have been established, and co-operation through broader regional frameworks is progressing.

Initiative for ASEAN Integration (IAI) A large number of projects are planned under the IAI, though implementation rates are low.

Thegreatestimprovementsin tradehavebeenthroughthereductionoftariffs,whichhashelpedtoboostintra-regionaltrade.Overall,intra-regionaltariffshavefallenrapidlyoverthelastdecade(to just0.04%amongtheadvancedASEANeconomiesand1.33%amongCLMVcountries in2014),and intra-regional trade increasedfrom17%in1990to24%in2014,indicatingtheregion’sgreateropenness.Whilesignificantprogresshasbeenmadeonreducingtariffs,thepresenceofnon-tariffmeasures(NTMs)continuestoinhibitthefreeflowofgoods.TradefacilitationhasimprovedlargelyduetostreamlinedcustomsproceduresthroughMutualRecognitionArrangements (MRAs).Progresshasbeenmade inharmonising standardsparticularly in theautomotive, electronics andcosmeticssectors,butsomecountrieslagbehind.FreetradeagreementsbetweentheASEAN+6 countrieshave facilitateda growth in tradeamong these countries,whichshouldbenefitfurtherfromtheRCEPagreementcurrentlybeingnegotiated.

While trade in services plays an increasingly important role in the economiesof Emerging Asia in general, more gradual progress has been made in facilitatingsuch trade. Reforms such as the ASEAN Framework Agreement on Services (AFAS)and sectoral MRAs have made only limited progress. MRAs are most advanced inengineeringandarchitectureandeventhenfallshortofrequirementsfortheASEANEconomicCommunity(AEC).Regulatoryandlegislativereforms,suchastolabourlawsandprofessionalregulations,wouldbeneededtoimplementMRAsinsomecountries.

Since the implementation of the ASEAN Investment Agreement in 1998, ASEANhasbeencommittedtostrengtheningitsinvestmentregime.Whileprogresshasbeenmade,establishingtheregionasasingleinvestmentmarketisnoteasy.Liberalisationrates under the ACIA (ASEAN Comprehensive Investment Agreement) indicate thatthe relatively less developed ASEAN countries tend to be more open to investment



in agriculture and mining while other ASEAN members tend to be more open tomanufacturing.Theregion’shighcostsofdoingbusinessarestillanotherconcernforinvestorsinASEAN.Intra-ASEANbankingfacilitiesremainweak,whichisaparticularconcern for cross-border trade and investment. Reforms are underway through theimplementation of the ASEAN Banking Integration Framework, and multilateralcurrencyswaparrangementsareinplacetoprovideliquidityintimesofneed.Regionalstabilityandfinancial integrationarebeingimprovedthroughtheChiangMaiInitiativeMultilateralisation(CMIM)andAsianBondMarketInitiative(ABMI),establishedbytheASEAN+3framework.ReformstothestructureoftheCMIMandincreasedmonitoringaremakingthearrangementmoreusefultotheregion.

Competition policy – as a key component of establishing a competitive economicregion–exists topreventanti-competitiveagreementssuchascartelsandcollusion,abusesofdominantpositionsthroughpredatoryorexclusivedealings,andmergersoracquisitions that substantially reduce competition. ASEAN has taken a co-operativeapproach to addressing these problems. ASEAN members have sought to shareexperience andbest practice through theASEANExpertsGrouponCompetition andthedevelopmentof regionalguidelinesoncompetitionpolicy.Althoughnon-binding,theseguidelinesserveasabenchmarkformemberstoassesstheirprogress.Currently,challengesremainasmembershavealongwaytogountiltheeventualharmonisationofcompetitionpolicies.Somecountriescontinuetograntfavourabletreatmenttostate-ownedenterprises,therebyunderminingcompetition.Consumerprotectioninitiativesataregionallevelhavemainlytakentheformofinformationsharing,capacitybuildingand awareness raising programmes.While the enforcement of consumer protectionlegislationhasbeenquiteweak, recent effortshavebeenmadeat strengthening thecapacityofpractitionersintheregion.

ASEAN members have adopted a more flexible approach to co-operation inintellectual property (IP)since1995withthesigningoftheASEANFrameworkAgreementon Intellectual Property Cooperation. Co-operation between IP offices has improved.The legalandpolicy infrastructureofASEANcountries thatwish toaccede toglobalIPagreements isbeingdeveloped.Developinglocalcapacityonpatentandtrademarkregistrationandenforcement isalso important.PatentLibraries, theASEANIPPortalandASEANTMviewarenewtoolsthatprovideeasyaccesstoinformationonpatents,IPlegislationandtrademarks,respectively.

Progress is beingmade in implementing theMaster Plan onASEANConnectivity(MPAC),whichlaysoutthekeystrategiesandessentialactionsrequiredtoconnecttheregionthroughenhancedphysical infrastructure,effective institutionsandprocessesand empowered people. Road infrastructure is being developed through the ASEANHighwayNetworkProgramme.Theworstquality roadsarebeingeliminated inmostcountries.However,moreremainstobedonetoupgraderoadstoahigh-qualitylevel.TheSingapore-KunmingRailLink,along-runningprojecttoenhancerailconnectivity,remains stalled in several places. Only the Thailand-Cambodia link is scheduled forcompletion in2015.Thepaceof improvingmaritimeconnectivity isalsoslowdue tolargeinfrastructuregapsbetweencountriesandcontinuinguseofrestrictivepolicies.To reduce institutional barriers, facilitation agreements have been signed for goods,transportandaviation.However, theystillawaitratification inmanymemberstates.TheformationofaSingleAviationMarkethasbeenprogressingslowly.ThesigningofPassengerAirServicesagreementswiththirdpartiespriortotheformationofasingledomesticmarketputsASEANcarriersatadisadvantage.



TheAECBlueprintcallsforequitableeconomicdevelopmenttoreduceinequalitiesbothwithin and betweenmember states. A key component of reducing inequalitieswithincountriesisstrengtheningsmall- and medium-sized enterprises(SMEs)astheyaccountforalmostallenterprisesandemploymentinASEANmemberstates.Severalmajor programmes have been conducted to assist SMEswith access to information,support services and training. Facilitation services are provided in most membercountriesbutvaryinthetypeofservicesprovided.MalaysiaandSingaporeofferfullyfledged one-stop services while Thailand and Viet Nam offer amore limited range.Support servicesareprovidedbymembers toassistSMEs integrate intoglobalvaluechains.However,thoseprovidedbyCLMcountriestendtosufferfrombudgetshortfallsandcanlackeffectiveco-ordination.Accesstofinanceappearstobemoreofaprobleminsomememberstatesthaninothers.Thisislargelyduetothelackofawell-developedregulatoryframework,creditriskguaranteesandcentralbureausforcreditinformation.Largegapsalsoremainbetweenmemberstatesonpoliciestopromotetechnologyandtechnologytransfer,assomecountriesareattempting tocreate technologynetworksby linkinguniversities, researchanddevelopment (R&D) labs, incubatorservicesandgovernmentagencies.

Whileprogressisbeingmadeinimprovingfood securityandindevelopingfisheries andforestrysectors,regionalco-operationinmanagingthemanysharedchallengesintheseareashasbeenlimited.Regional frameworksforco-operationonfoodsecurity,suchastheASEANIntegratedFoodSecurityFramework,arehelpingtoreducerisksinperiodsofcrisesand improve foodsupplyover the longer term.Although the regionco-operated in developing the fisheries industry, fisheries management will needto address overfishing, illegal fishing, and safety and quality standards. Regionalco-operation to implement international agreements to protect forestry andwildlifeexists,andregionalagreementshavealsobeenestablished,butcouldbemoreeffective.

Tourism isafast-growingsectorinmostASEANcountries,withsignificantpotentialtoactasadriverofgrowthandsourceofjobcreation.Regionalinitiatives,whichhavebeensuccessful insomeareas,haveroomformorescope, thoughmoreworkwillbeneededinintegratingairtravelanddevelopingthegrowingecotourismmarket.Regionaltourismpromotion,agreementsontourism-relatedlabourandqualitystandards,andvisafacilitationarehelpingtoupgradethetourismsectorinASEANandfacilitatetravel.Ecotourism is being developed in the region and remains promising, with regionalco-operationprogressingundertheASEANEcotourismStrategicPlan.

The ASEAN Socio-Cultural Community implements specific initiatives onaddressing the development gaps in education, health and social protection thoughregionalco-operation.Regionalinitiativesarebeingpursuedtointegrateandharmoniseeducation systems andpromote collaborative research. Regional co-operation is alsobeingusedtopromoteentrepreneurship.ASEAN+3and+6co-operationareprovidingadditional platforms for addressing regional concerns in education,where quality islimited,andpovertymanagement,amongotherfields.Sharedplansforrespondingtopublichealthissuesandnaturaldisastershavebeendeveloped.

The Initiative for ASEAN Integration (IAI) was launched in 2000 to narrow thedevelopment gaps betweenASEAN-6 andCLMV. It is guided by the IAIWork Plan II(2009-2015) that comprises 245 projects and 182 action lines. TheAEC component ofthe IAI has the largest number of action lines, but overall progress and the level ofimplementationareverylow.PolicyareasaddressedintheIAIappeartobeunevenlydistributed. The goods area for example has 9 projects for 19 action lineswhile theservicesareahas15projectsforonly4actionlines.Mostprojectswithinservicesare



focusedontrainingintourismpromotionandmanagement.Inthecompetitiveeconomicpillarmostactionlinesaredevotedtoinfrastructuredevelopmentwithalargenumberofprojectsfocusingontraininginmaritimeandroadsafety.Afewtrainingcourseswereheldoncompetitionpolicydraftingprocedures,consumerprotectionandintellectualpropertysystems,butnoprojectswereassignedtotaxationande-commerce.Ahandfulofworkshopshavebeenheldonfoodsafetyanddisastermanagement.

Despite progress, post-2015 integration agenda must address remaining challenges

Strengthening regional ties – accelerating the economic community initiatives –is one of the best strategic responses to a changing global environment. Work hasintensified at varying levels over the years to implement the regional integrationinitiativesofASEAN,ASEAN+3andASEAN+6.Current efforts are stillnot enough toachieveintegrationtargetsdespiteimportantandpositiveachievements.Countriesintheregionneed to takeactivesteps to realiseasingleeconomicmarketby2015andbeyond,andmakeadditionalefforts,including:

• Co-ordinating between regional initiatives and national agendas, and regional and sub-regional initiatives,avoidingduplicationandmovinginthesamedirection;

• Reducing disparities in theregionbysupporting the furtherdevelopmentof theCLMcountries;

•Movingtowardsa“GlobalASEAN”integrationintheglobaleconomyandstronger ties with the ASEAN+3 and ASEAN+6 frameworks;

• Strengtheningmonitoring capacity–which iscurrentlystillweak– tomaketheregionalagendamoreeffective;

• Addressingimportantpolicyareasinthe2016-25agendathatwerenotaddressedadequately in pre-2015 agendas, particularly the issues of green growth and renewable energyand private sector development.

Stronger institutional capacities would facilitate further integration

Institutional capacities at national and regional levels are critical elements inachievingintegrationgoals.Manyofthechallengesfacedduetoinsufficientcapacitiescan be addressed by carefully aligning planning and implementation at variousorganisational levels. In particular, incorporating national-level expertise in regionalplanningprocesses,holding regular consultationsbetween regionalandsub-regionalinitiatives,addressingunderdevelopmentintheCLMcountries,andbettermonitoringandco-operationonimplementation,suchasthroughpeerlearning,offerbenefits.

More can be done in aligning national, regional and sub-regional planning

Thealignmentofregionalintegrationplansandnationalmedium-termdevelopmentplans can be used to signal national commitment to regional goals, such as thoseexpressed in theAEC. In general, national and regional targets in SoutheastAsiadonottypicallyalign,thoughthisvariesaccordingtothecountryandsectorconsidered(Figure5).LoosepatternsinalignmentarevisiblebetweennationalplansandtheAECBlueprint.SomepolicyareasaresimilarbutshowlittleoverlapwithAECtargetsandnationalplansfortheimplementationofspecificregionalintegrationgoals.AgreaterdegreeofalignmentwithaspectsoftheAECBlueprintisseenwhendomesticpolicyiscentralto implementation,andinthepromotionofSMEs,priority integrationsectorsandother industriesexplicitlycoveredby theBlueprint.Nationalplansoften includegoalsbeyondthoseoftheAEC,suchasanemphasisonsustainabledevelopment,whichmaycomplicatetheachievementofregionalgoals.



Figure5.Alignment of national and regional targets in ASEAN

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Strongly aligned Weakly aligned Non-aligned Inconsistent

Notes:Thecoverageand targetsof recentnationalplansofeightASEANmembers (excludingSingaporeandBruneiDarussalam,whichdonotproducecomparabledevelopmentplans)arecomparedwiththetargetsoftheAECBlueprint,groupedinto19policyareasasintheAECScorecard.NationaltargetswerecomparedagainsteachcategoryanddefinedaseitherhavingStronglyaligned(i.e.sharingatleastpartofanexplicittargetintheBlueprint),Weaklyaligned(i.e.addressingapolicyareaidentifiedintheBlueprintinawayconsistentwiththelatter’stargets)orpotentiallyInconsistent(i.e.explicitlyorpotentiallycontradictorytooneormoretargetsintheBlueprint).CaseswherenationalplansweresilentonapolicyareaidentifiedintheBlueprintweredefinedasNon-aligned and left blank. Themention of theAECas a target overallwas added as a 20th category ofevaluation.Source:OECDDevelopmentCentre.12http://dx.doi.org/10.1787/888933309359

Thesetrendssuggestareaswherefutureimprovementscouldbemadetofacilitatethedevelopmentofmoremutuallysupportivetargetsatthenationalandregionallevels.Theyalsoshowthatplannersarewillingtopaysomeattentiontoregionalintegrationasagoal,andtonationalperformancetoreachthisgoal.Improvementscouldthereforebemadeindesigningregionalframeworksthatfacilitatedeeperco-operationinthedesignandimplementationofintegrationplans.

SeveralnationalplansplaceastrongfocusonissueseithernotintheBlueprintorpotentiallyconflictingwithit,suchasthepursuitofenvironmentalgoals.Adivergenceis also apparent in the tendency of national plans to place a stronger emphasis onintegration with the global economy than with ASEAN economies. While this maybe a lower priority for the region, theAECBlueprint also calls for integration in theglobaleconomy.BuildingtheASEANEconomicCommunityasaprioritygoaldoesnotfeatureprominentlyasanexplicittargetinmanynationalplans.ThenationalplansofCambodia,LaoPDRandMyanmarshowbetteralignmentwithregionaltargets.ThismayresultpartlyfromthestraightforwardabilityofCLMcountriestoincorporateregionalintegration targets into their national plans due to their lower level of developmentandslowerAECimplementation.Ingeneral,considerablealignmentwasoftenfoundinpolicyareaswheretheimplementationofAECtargetshasbeenlaggingthemostbehindplannedtimelines.

Deeper co-operation at the regional level can improve the alignment of regionaland national planning and the effectiveness of regional efforts, beginning with thedesignoftargets forregional integration.Forthegreatest impactonnational targets,thetechnicalandcountry-specificexpertiseofnationalofficialsshouldbeutilisedtoa greater extent in setting regional targets and plans for achieving them. EconomicofficersandplanningstaffcouldbemoredeeplyinvolvedinhelpingtosetfuturegoalsfortheASEANEconomicCommunity.Thiswouldharnessnationalexpertise,improve



capacitiesandprovideinsightintowhatisdesirableandachievableatthenationallevel.Itisalsolikelytobemoreeffectivethaneffortstoimprovenationalplanners’familiaritywithandappreciationofAECgoals.

In addition to fostering productive alignment of national and regional plans,regionalandsmallerareaswithinASEANandneighbouringcountrieshaveestablishedalternativemeansofworkingtogetherthroughsub-regionalinstitutionsandinitiativesthat can help to support ASEAN-wide integration. These sub-regional institutions–suchastheGreaterMekongSubregion(GMS),BruneiDarussalam-Indonesia-Malaysia-PhilippinesEastASEANGrowthArea (BIMP-EAGA), the Indonesia-Malaysia-SingaporeGrowthTriangle (IMSGT)andthe Indonesia-Malaysia-ThailandGrowthTriangle (IMT-GT)–encompassallASEANmemberstatesasparticipants.Primarilyconcernedwithconnectivity, though also addressing other policy areas, these groupings of nationaland sub-national governments have the potential to spur growth, particularly inunderdevelopedregions,andtosupporttheachievementofAECgoals.

Sub-regional initiatives havehad some success in identifying andpromoting thedevelopmentofkeyeconomicareas,but theystill facedifficulties inachievingmanyof their goals. A lack of clear comparative advantages or sufficient opportunities foreconomic co-operation may create challenges, but institutional constraints are themainissueforsub-regionalgroupingsinSoutheastAsia.Itisimportanttoaddresstheseconstraints, as sub-regional efforts can directly contribute to regional connectivityprojects and to strengthening integrationmore generally. In addition, these project-driven, bottom-up initiatives can prove constructive complements to ASEAN-wideintegrationefforts.

Changescouldbemadeinthewaysub-regionalinitiativesandASEANinstitutionsrelate to one another to improve co-ordination. Further work is needed to addressareasofunnecessaryoverlapandpossiblesynergies indeepeningintegrationthroughtheAECBlueprintorthedesignofpost-2015ASEANtargets.Deeperco-operationcouldbeachieved through the replacementofadhocco-ordinationeffortswith regularisedmechanisms at the regional, sub-regional and in-country level. Thismay include thecreationofadditionalministry-level focalpointsorperiodicconsultationmeetingsonrecentdevelopmentsbetweenrepresentativesoftheASEANandthesub-regionalgroups.

Management of development gaps is important in facilitating integration

Development gaps among ASEAN members create additional barriers to theimplementationofuniformtargetsandapproaches.ThesearebeingaddressedwiththehelpofregionalandexternalpartnersthroughtheInitiativeforASEANIntegrationandotheraidprogrammes.TheIAIWorkPlanII2009-15includedprojectsandactionlinesinseveralareas,suchasinfrastructure,humanresources,informationandcommunicationtechnology(ICT),tourism,povertyandregionaleconomicintegration.TheaimwastonarrowvariousdevelopmentgapswithinASEANandaddressdevelopmentchallenges,particularly in Cambodia, Lao PDR, Myanmar and Viet Nam. Based on the numberandscaleof IAIprojects,astrongemphasishasbeenplacedoncivilservicecapacitybuilding.WhiletherearelargegapsinhumandevelopmentandpovertyratesamongASEANmembers,andthegapshaveimplicationsforthelower-incomeeconomiesandtheirabilitytoparticipateintheAEC,theseissueshavelargelybeenleftoutoftheIAI.

Both bilateral and multilateral external donors have been involved in financingdevelopment initiatives in the less-developed ASEAN member countries through theIAIaswell,thoughtheyhavebeenmoreactiveoutsideofthisframeworkparticularlyinre-engagingrecentlywithMyanmar.OfficialdevelopmentassistancehasbeenasignificantsourceofdevelopmentfinancetotheCLMcountries,evenifitisdeclininginimportance.



ASEAN is now developing the post-2015 IAI Work Plan III. This provides anopportunity to rethink how the IAI can facilitate integration of the region’s leastdevelopedmembersandsupportthenarrowingofdevelopmentgapsacrossandwithinmembercountries.Given thescaleofchallenges faced,co-operation inplanningwillneed to continue to include ASEAN’s dialogue partners and other donorswhile alsoacknowledging the priorities and capacities of the CLMV countries in receiving thisassistance.Synchronisationandco-ordinationarecrucialamongregionalprogrammesand initiatives, bilateral assistance programmes for the CLMV countries and othersub-regionalinitiativestoavoidcontradictionorduplication.Co-ordinatingbodiessuchastheIAITaskForceandIAIDevelopmentCooperationForum(IDCF)couldbecriticaltoolsinthesedesignandimplementationefforts.

Improved monitoring through better indicators and peer learning can help in implementing regional plans

With somany initiatives to implement by 2015 and beyond, a strongmonitoringmechanismmustbeputinplaceatbothnationalandregionallevels.Atthenationallevel,akeychallengeistoensurethatregionalintegrationcommitmentsareeffectivelytransformedon the ground.This requires establishing effectivemonitoring systems,whichmaybechallenging intheregionduetocapacity limitations.Existingregionalframeworks can be better used to improvemonitoring capacity. Yet, improved dataandindicatorsofregionalintegrationarealsoneeded.Likewise,regularpeerdialogueandpeerlearningcouldbeusedtohelpmakeuseofnationalcapacitiesandmotivateadditionalefforts.

Co-operationwithpartnersoutsideofASEANhasbeenusefulinaddressingsharedareasofconcernthatextendbeyondthetenmemberstates,suchasfinancialstability,trade and investment promotion, and environmental and disaster riskmanagement.Thesepartners,particularlytheparticipantsintheASEAN+3andASEAN+6frameworks,offer additional institutional and financial capacities for facilitating regionalco-operation.TheEastAsiaSummit(EAS)participantsrepresentanevengreaterpooloftechnical,financialandothercapacitiesonwhichtodraw.Theadditionalinstitutionalcapacities of these larger economies could be called upon to strengthenmonitoringforregional integration,particularlyoftheASEAN+1FreeTradeAreas(FTAs)andtheRegionalComprehensiveEconomicPartnershipthatmaysoonsupersedethem.Existingmonitoring tools, such as the ASEAN+3 Macroeconomic Research Office (AMRO) orcollectivemonitoringofEASenergyefficiencygoals,mayprovideusefulexamples.

Reliableindicatorsarefundamentallyneededformonitoring,evaluationandanalysis,and knowledge sharing to proceed. Indicators on integration have been relativelyunderdevelopedintheregion.Thesystematicmeasurementanddisseminationoftheresults of regional integration are central to the peermonitoring process. Indicatorscould be based on regular evaluations of the integration process and its outcomes.Furtherworkisneededtomakeregionalintegrationindicatorsintoatrulyeffectivepartofamonitoringsystem.

One way to enhance regional monitoring of the AEC is through regular policydialogueandpeerlearning/peerreviewamongofficialsengagedwithintegration.Whilelegalandrules-basedmechanismshavegenerallyhadlimitedscopeinanyframeworkfor regional integration in Asia, clear rules andmeasures that participants agree tofollowarerequiredtomaintaincredibilityandavoidunnecessarydisputes.Peerreviewpromotesco-operationbyallowingpolicydialogue,promotingtransparency,facilitatingcapacitybuildingandencouragingcompliance.Thisexerciseshouldallowcountriestoshare informationanddiscusskeypolicy issues.Policydialogueandpeer revieware



flexibleinform,andcouldbetailoredtotheneedsofmembercountriesandavailablecapacities. Peer learningandpeer reviewcanbechallenging to implement,however.Theyworkbestwhenmemberssharemutualtrust,arecommittedtotransparencyandhaveaccesstosufficientanalyticalandadministrativecapacities,andwhenparticipantsandevaluatorsareseenaslegitimatebyallinvolved.

Regional co-operation in renewable energy holds promise

Importantpolicyareasinthe2016-25agendathatwerenotaddressedadequatelyinpre-2015agendaswillbetheareasofgreengrowthandrenewableenergy,andprivatesector development.While Emerging Asia has achieved remarkable economic growthin recent decades, the region’s high economic growth also has been associated withserious environmental problems. Among the various aspects of regional integration,marketintegrationmayhavereceivedtoomuchattentionattheexpenseofotherissues.Toredirectthecurrentdevelopmentpatterntodeliversharedwell-beingandimprovedequitywithoutexceedingecologicallimits,itisnecessarytorebalanceregionalintegrationinEastAsiafromitsfocusoneconomicintegrationtobroadersustainabilityobjectives.

Increaseduseofrenewablesourcesofenergy,includingthroughenhancedregionalco-operation ingeneration,willneedtobeacentralcomponentofanygreengrowthstrategythatalignsmultipleeconomicandenvironmentalpriorities.Theregionshouldtherefore tap into its considerable potential in renewable energy to meet growingdemand.Tariffsandnon-economicbarriersslowintegrationandimpedeopportunitiesforimprovedefficiency.HydropowerfromtheMekongRiverisprogressingandremainsapromisingsourceoffuturegeneratingcapacitytobeexportedthroughouttheregion,thoughenvironmentalchallengeswillneedtobeaddressedandco-operativesolutionsfoundtocross-borderconcerns.

Renewable energy is likely to play a large role in Emerging Asia’s future development

Theregioncanexperienceaneconomicdevelopmentboostthroughtheresponsibleexploitationof its large renewable energy resources. In someASEANcountries, suchasCambodia,LaoPDR,Myanmar,IndonesiaandthePhilippines,thelowrateofaccesstoelectricity isamajordevelopmentchallenge.Evenamongpopulationswithaccesstoelectricity,consumptionpercapitaissignificantlylowerthantheOECDaverageinmostcountries intheregion.Between2009and2030,totalelectricitydemandacrossASEAN is expected to increase by around 2 300TWh.Meeting such a huge demandwithoutdevastatingenvironmentalconsequencesrequiresthelarge-scaleutilisationofrenewableenergyforpowergeneration.

The total renewableelectricitypotentialof theASEAN-5plusSingaporehasbeenestimatedtoexceedthetotalelectricitydemandoftheASEANregionin2009byafactorof1.8.Themajorityofthishugerenewablepotentialhasbeenuntapped.Hydropowerand geothermal resources are relatively well exploited in the region, but otherrenewable sources, such aswind, solar and biomass, are almost untouched. AmongBruneiDarussalamandtheCLM,Cambodia,LaoPDRandMyanmarareendowedwithmajorpotentialinrenewableenergy,notablyhydropowerandwind.Inparticular,thepotentialofwindpowerinLaoPDRandhydropowerinMyanmarareverystrong.Currenthydropowergenerationexploitsonlyafractionofthishugepotential.

Regionalbarriersplayasignificantroleinconstrainingthedevelopmentofrenewableenergy sources. Regional economic integration, including the liberalisation of tradein renewable technologies, and regional co-operation on innovation and technologytransferscanplayakeyroleinpromotingrenewableenergyintheregion.EffectivetariffsonproductsrelatedtorenewableenergyarestillconsiderableintheASEAN-5,Singapore,



Chinaand India.Regionaleconomic integration in the formof tariff removal for thesecountriesisexpectedtohaveapositiveimpactonpromotingrenewableenergy.Additionaladministrative,technical/infrastructureandfinancingbarriersalsoposeconstraints.

An estimate of the impact of regional economic integration on reducing importtariffsonexportsofrenewableenergyequipmentandcomponentsfurther illustratesthe potential for increased trade (Figure 6). Promoting regional trade in renewableenergytechnologiescouldhelptotapintoEastAsia’shugerenewableenergypotential.

Figure6.Total impact of regional integration/co-operation on exports of renewable energy products in ASEAN-5, Singapore, China and India

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Source:OECDDevelopmentCentreestimate,basedonMoinuddinandBhattacharya(2013),“TowardsanIntegratedRenewableEnergyMarketintheEASRegion:RenewableEnergyEquipmentTrade,MarketBarriersandDrivers”.12http://dx.doi.org/10.1787/888933309366

Co-operation can boost hydropower development

ThecountriesoftheMekongRiverBasinareendowedwithabundanthydropowerresources. In Lao PDR in particular, hydropower is a vital resource for pursuingeconomicdevelopmentanduniversalelectricityaccess.Atthesametime,thecountry’shydropowergenerationcapacityismuchgreaterthandomesticdemandforelectricity,and electricity exports are amajor source of foreign currency for Lao PDR. Lao PDRis the region’s largest electricity exporter, while Thailand and Viet Nam are majorelectricityimporters.Cambodiaalsoimportsalargequantityofelectricitydespiteitsrichhydropowerpotential.

Although11mainstreamdamsareexpectedtoprovideeconomicbenefitsforboththeexportersandtheimportersofhydropower,thereareseriousenvironmentalconcerns,suchaschangingwater flowpatterns, lossofsoilnutrientsandreduction incapturefisheries. A holistic approach to capture the food-energy-water nexus is necessarygiventhetrade-offsbetweentheeconomicbenefitsfromhydropowergenerationandits negative impact on the livelihoods of downstream countries through damage toecosystems.Forinstance,assessingtheeconomic,environmentalandsocialimpactofhydropowerdevelopmentfindsthattheeconomicbenefitswillfalltoLaoPDRandthenegativeexternalitiesonfoodsecurity(e.g.throughtheimpactoncapturefisheries)willmostlyfalltotheotherthreecountries.



Conflictsinvolvingthenationalinterestsofneighbouringcountriescanposeseriouschallenges,butatthesametimetransboundarywaterissues,likethoseinthiscase,cancatalyseregionalco-operation.Forexample,thealternativedamslocatedinMekong’stributaries, not in mainstream Mekong, hold tremendous economic potential as doapplying innovativesystemssuchaspartial in-channeldiversion thatdonot requiredamsacrosstheriverchannel’sfullbreadth.

Regional co-operation for the common management of transboundary waterresourceshasthepotentialtoachievewin-winbenefitsforallcountriesinvolvedalongthe river. An integrated approach, fully reflecting the water-food-energy nexus andeffectiveregionalinstitutions,iscriticalforripariancountries’developmentobjectivesand environmental sustainability. However, barriers currently impede progress onregional co-operation. Enhanced governance capacities, for instance through theMekongRiverCommission,areneededtoenablewin-winco-operation.

The private sector in Emerging Asia is expanding regionally and globally, though significant constraints remain

As in the case of renewable energy, issues related to private sector developmentwerenotappropriatelyaddressedinthepre-2015agenda,thoughtheprivatesectorisplayinganincreasingroleintheregion.BusinessgrowthinSoutheastAsia,ChinaandIndiahasbeensupportedbyFDIinflowstotheregion.

While Emerging Asia’s FDI inflows are growing, greenfield investments are declining, particularly in the manufacturing sector

WhileoverallFDIinflowshaveincreasedintheregion,greenfieldinvestmentsdisplayaworrisometrend.GreenfieldinvestmentstotheregionhavebeendecliningsincetheLehman shock in 2008 (Figure 7). Detailed country data show that almost all ASEANcountriesexperiencedadeclineinthemostrecentperiod,from2012to2014,ingreenfieldinvestmentsfromaroundtheworld.TheexceptionisMyanmar,whichbeganlong-awaitedpoliticalandeconomicreformsin2011andhasrecentlyattractedmoreinvestments.

Figure7.World aggregate investment in Emerging Asia, 2003-14

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OECDmember countrieshavebeenmajor investors inASEANcountriesbut theysignificantlyreducedtheirgreenfieldinvestmentsafterthe2008Lehmanshock.ASEANhadquickly increased itsowngreenfield investments from2006-08,but intra-ASEANinvestments have decreased since then, falling below ASEAN investments to Chinaand theOECDcountriesduring the2012-14period (Figure8). Intra-ASEANgreenfieldinvestmentswerealsodivertedfromASEANcountriestoChina;HongKong,ChinaandOECDcountriesaftertheLehmanshock.

The manufacturing sector received the highest share of greenfield investmentinmost of the region’s countries,while the services sector dominates in Cambodia,Myanmar and Hong Kong, China. Other sectors that received significant shares ofgreenfield investment include extraction, power, construction, ICT infrastructure,salesandmarketing,andbankingandfinance.Themajorityofintra-ASEANgreenfieldinvestmentshavegonetothemanufacturing,constructionandpowersectors.Withinthemanufacturing sector, the categories receivingmost investmentwere chemicals,foodandtobacco,coal,oilandnaturalgas,andmetals.Intra-ASEANinvestmentinnewmanufacturing facilitieshasdeclined sharplyafter a sizeable jump inoutflows fromThailand,MalaysiaandSingapore.Thegrowthofmanufacturing,whichisabackboneoftheeconomyandthecentreofthebusinesscommunity,playsanimportantroleinthedevelopmentofanation.ASEANfirms’decliningwithin-regiongreenfieldinvestmentsinthemanufacturingsectormustbecarefullyinvestigatedbypolicymakers.

Figure8.ASEAN aggregate greenfield investment by region, 2003-14

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Source:OECDDevelopmentCentrecalculationsbasedonthefDiMarketsdataset(2015).12http://dx.doi.org/10.1787/888933309386

M&A deals have been limited to specific countries and sectors in the region

Mergersandacquisitions (M&A)areanother componentof FDIandan importantactivityforbusinessexpansionorpenetrationintonewmarketsandproductionbases.AsanM&Ainvestor,ASEANislargerthantheothercountries(HongKong,China;China;andIndia).Whileintra-ASEANinvestmentsmakeupthebiggestpartofM&A,ASEANcountriesshowbalancedM&Ainvestmentstovariousregionsoftheworld.HongKong,China is particularly active in theChineseM&Amarket. TheM&Aactivities of both



Chinaand Indiaare relatively small given the large sizeof their economies, and theOECDcountriesarethelargestM&Adestinationforbothofthem.Morethantwo-thirdsofIndia’sM&AinvestmentgoestoOECDcountries.

ThemajorM&Adestinations ofASEANmember countries are other countries inASEAN;theOECD;China;andHongKong,China.SingaporeandMalaysiahavedominatedASEAN’sM&A investments for thepastdecade,with themajority flowing toASEANorOECDcountries.TheM&AactivitiesofThailand,thePhilippinesandIndonesiaarerelativelylimited,whiletheactivitiesofnewASEANmemberssuchasVietNam,BruneiDarussalamandCambodiaarelowerstill.TheM&AdealsmadebytheadvancedASEANeconomieshavebeenconductedmainlyinthemanufacturingandservicessectors.Thelargestintra-ASEANM&Adealshavemostlyinvolvedtheregion’sadvancedeconomiesandhavetargetedfirmsinavarietyofmanufacturingsub-sectors,includingfoodandbeverage,consumerproducts,automobilecomponentsandmaterials(Table3).

Table3.Top 20 intra-ASEAN M&A investments in the manufacturing sector, 2004-13

No. YearHome

countryHost

country Industry Acquirer Target

1 2012 Thailand Singapore Food and beverage Thai Beverage PCL Fraser & Neave Ltd

2 2007 Singapore Malaysia Food and beverage Wilmar International Ltd PPB Oil Palms Bhd

3 2013 Singapore Indonesia Automobiles and components Gallant Venture Ltd Indomobil Sukses Internasional

4 2012 Thailand Singapore Metals and mining PTT Mining Ltd Sakari Resources Ltd

5 2013 Singapore Indonesia Automobiles and components Gallant Venture Ltd Indomobil Sukses Internasional

6 2007 Singapore Indonesia Paper and forest products Investor Group LonSum

7 2011 Thailand Indonesia Chemicals SCG Chemicals Co Ltd Chandra Asri Petrochemical

8 2007 Singapore Malaysia Food and beverage Wilmar International Ltd PGEO Group Sdn Bhd

9 2012 Singapore Malaysia Chemicals Reliance Global Holdings Pte BP Chemicals(Malaysia)Sdn Bhd

10 2010 Thailand Malaysia Containers and packaging Investor Group Malaya Glass Products Sdn Bhd

11 2010 Singapore Indonesia Food and beverage Asia Pacific Breweries Ltd Multi Bintang Indonesia Tbk PT

12 2004 Singapore Malaysia Food and beverage PPB Group Bhd FFM Bhd

13 2008 Thailand Indonesia Consumer products Central Agromina PT Charoen Pokphand Indonesia PT

14 2005 Philippines Singapore Food and beverage NutriAsia Pacific Ltd Del Monte Pacific Ltd

15 2012 Thailand Indonesia Metals and mining Electricity Generating PCL Manambang Muara Enim Coal Mine

16 2012 Indonesia Viet Nam Construction materials Semen Gresik (Persero) Tbk PT Thang Long Cement JSC

17 2012 Singapore Malaysia Health-care equipment and supplies Aspion Sdn Bhd Adventa Bhd

18 2011 Thailand Indonesia Construction materials SCG Building Materials Co Ltd Keramika Indonesia Assosiasi

19 2008 Thailand Malaysia Chemicals PTT Chemical PCL Cognis Oleochemicals(M)Sdn Bhd

20 2006 Philippines Singapore Food and beverage NutriAsia Pacific Ltd Del Monte Pacific Ltd

Source:OECDDevelopmentCentrecalculationsbasedontheThomsonReutersM&Adatabase(2014),http://thomsonreuters.com/en/products-services/financial/company-data/deals-and-league-tables.html.

Reaping the benefits of regional integration

TheASEANEconomicCommunityisexpectedtoenhancecross-borderproductionlinkages furtherand localbusinessesmustbe ready forupcomingchallenges.At thesametime,theycantakeadvantageofthechangesandexpandtheiroperationsacrossASEAN,transformingintorealregionalentitiesor“ASEANenterprises”.Aconservativemindset amongst local firms, particularly SMEs, could result in a narrow focus juston domestic markets. Local firms often lack access to information about market



characteristics and potential customers. Moreover, many small firms have limitedabilitytouseexistingdatatodevelopbusinessstrategies.Regionalsolutionstothesechallengeswillstrengthentheprivatesector’sroleanddeepenintegration.


The medium-term development plans of Emerging Asia countries show a clearunderstandingofthecentralconcernsfacingtheseeconomies(Table4).Relativelymoreadvanced countries have set goals for improving productivity and promoting morebalancedgrowthessentialforachievinghigh-incomestatus.Theplansoflower-incomeEmergingAsia economies tend to prioritise targetsmore fundamental to supportingdevelopment.Mostincludetargetsontopicsincludinghealthandsocialdevelopment,equitablegrowth,environmentalprotection,anddemocracyandgoodgovernance.

Table4.Medium-term development plans of Southeast Asia, China and India

Country Period Theme/Vision

ASEAN-5

Indonesia 2015-19 Build a foundation for sustained acceleration in subsequent years, in addition to serving the basic needs of society

Malaysia 2011-15 Charting development towards a high-income nation

Philippines 2011-16 Pursuit of inclusive growth

Thailand 2012-16 A happy society with equity, fairness and resilience under the philosophy of a sufficiency economy

Viet Nam 2011-20 A modern, industrialised country by 2020


Brunei Darussalam 2012-17 Knowledge and innovation to enhance productivity and economic growth

Singapore 2010-20 Highly skilled people, innovative economy, distinctive global city

CLM

Cambodia 2014-18 For growth, employment, equity and efficiency to reach the status of an upper-middle-income country

Lao PDR 2011-15 Socio-economic development, industrialisation and modernisation towards the year 2020

Myanmar 2012-15 Development of industry, balanced development, improvements in education, health and living standards, and improved statistical capacities

China and India

China 2011-15 Addressing rising inequality and creating an environment for more sustainable growth

India 2012-17 Faster, more inclusive and sustainable growth

Source:CompiledbyOECDDevelopmentCentrebasedonnationalsources.

Structural reforms need to be strengthened further

Improved competitiveness is necessary for Emerging Asia economies to benefitfromtheopportunitiespresentedbydeeperregional integrationandintegrationwiththeglobaleconomy.Atthesametime,developmentwillneedtoprovidewidelysharedbenefitsandproduceminimalnegativeimpactontheenvironment.WhilethestructuralpolicyprioritiesforEmergingAsiacountriesarehighlydiverse,manyofthesecountrieshave set goals for improving inclusive and sustainable development, recognising theneedforhigh-qualitygrowthandimprovedqualityoflife(Table5).Topicstobeaddressedincluderuraldevelopment,socialprogrammes,promotingFDI,andtaxation.Education



andinfrastructurearecommonareasofconcern,withless-developedcountriesintheregionseekingtoprovidethebasicfoundationsforgrowthandtoaddresstroublesomebottlenecks,andhigher-incomeeconomieslookingtoestablishtheconditionsformoreknowledge-baseddevelopmentinthefuture.(Foramoredetaileddiscussion,pleaseseetheStructuralpolicycountrynotesinChapter6oftheOutlook.)

Table5.Medium-term policy challenges and responses in Emerging Asia

Country Topics Policy focus

ASEAN-5

Indonesia InfrastructureSocial securityFood security

Build infrastructure for maritime connectivityReform the national social security systemImprove food security

Malaysia

SMEsEducationUrban green growth

Raise SME productivityUpgrade education to meet industry needsPromote urban green growth

Philippines

Job creationInfrastructureDisaster risk management

Encourage faster job creationStrengthen infrastructure and the transport sectorImprove disaster risk management

Thailand Macroeconomic performanceTourism

Use macroeconomic policies to revive growthStrengthen sustainable tourism

Viet Nam InfrastructureSOEsJob creation

Improve infrastructure to support growthReform and restructure SOEsPromote job creation and productivity growth


Brunei Darussalam FDIPrivate sectorPublic finance

Encourage foreign direct investment inflowsReform the business sector to promote diversificationReform public finance

Singapore Ageing populationInfrastructure (land use)

Strengthen labour market and social policies for ageing populationLeverage data to build a smart, energy-efficient city

CLM

Cambodia Education (TVET)Tourism

Improve competitiveness by strengthening TVET (technical vocational education and training)Address complex challenges in developing tourism

Lao PDR Natural resourcesSMEsTourism

Manage the natural resource boom Foster SME developmentPromote travel and tourism

Myanmar AgricultureEducationFinance

Upgrade and modernise agricultureDevelop human capitalFinance development

China and India

China EnvironmentEducation and skillsRural development

Strengthen environmental regulations to improve quality of growthUpgrade human capital to facilitate transition to a higher value-added economyBoost rural development to ensure robust growth of incomes

India Financial educationEducation

Strengthen financial education initiativesEnhance education access and quality

Source:OECDDevelopmentCentre.



Outlook country notes discuss key structural policy challenges

ASEAN-5

Key challenges: Indonesia

• Maritime infrastructure:TheGovernmentofIndonesiahasemphasisedmaritimedevelopmentaspartofitsPendulumNusantarainitiativeorglobalmaritimeaxis,whichseekstofullyutilisethemaritimepowerofferedbythecountry’spositionasanarchipelago.SuperiorportfacilitiesarebeingdevelopedsuchastheTarahanCoalPortinSouthSumatraandtheKalibaruPortinNorthJakarta.However,greaterattentionisrequiredonconnectingexistingportsandhubstologisticsnetworksandindustrialzones.TheKalibaruPort,forexample,wasbuiltsevenkilometresaway fromtheTanjungPriokPort,meaning that itwilluse thesamecongestedroadstotransportcargo.Inadditiontothedevelopmentofphysicalinfrastructureandconnectionsto internationalshipping lines,administrativebarriers totradewill also need to be addressed. Thiswill require greater co-ordination betweenrelevantministries, increaseduseofcomputerisedfacilitiesacrossallportsandimprovementsintheIndonesianNationalSingleWindow.

• Social security: The goal of achieving universal health coverage by 2019 iscomplicatedbythedifficultyofincorporatingthelargenumberofinformalworkersintothesystem.Accordingtothegovernment’sSocialSecurityAgency(BPJS),53%ofthepopulationisregisteredinitsprogramme.Beyondexpandingmembership,thegovernmentfacesaseriousfinancialissue.FinancingreformsareneededfortheBPJS,which isexpected to facean increasingdeficitover themediumterm.Whileformalsectorworkersarethemainpriority,aprogrammeexpansionaimstoreach1.3millionnewinformal-sectorparticipantsin2015.Thedomesticfinancialmarketrequiresadequatecapacitytoabsorbandproductivelydistributethelargesupplyoffunds.

• Food security: Nutrition and access to food are improving in Indonesia, thoughfoodisincreasinglyimported.Indonesia’scurrentaccountdeficitinrecentyearsispartlyattributabletoanincreasedtradedeficitinfoodandliveanimals.Nationalstrategiestoimprovefoodself-sufficiencyfocusonimprovingthequality,resilienceand productivity of food production through investment in irrigation and otherareas.Toattainthesegoals,thegovernmentintendstodevelopandimprovetheirrigationsystemandreducelandconversionby600000hectares.Inaddition,thegovernmentintendstorehabilitate1.75millionhectaresofdeterioratingirrigationinfrastructureandtoestablish132000hectaresofswampirrigationnetworkstobalanceeconomic,environmentalandsustainabilityconcerns.Reducingtherisksposedbynaturaldisastersandfurtherlimitingexposuretomalnutritionremainimportantgoals.

Key challenges: Malaysia

• SME productivity:Malaysiacontinuestohavestronggrowthprospectsandaimstoreachhigh-incomecountrystatusby2020.Achievingthiswillrequirefurthergains in productivity, though broader development goals, such as promotinginclusiveandsustainablegrowth,arealsopriorities.ThroughtheSMEMasterplan,theGovernmentofMalaysiahassettargetsforanincreasedrolebySMEsinthecountry’seconomy,at41%ofGDP,62%ofemploymentand25%ofexportsby2020.Toboostproductivity, thegovernment isprovidingassistancetoSMEstoaccessfinance,exporting,businessdevelopmentandtechnicalexpertise.Workertrainingprogrammes have been established to address skill gaps, including technical



and managerial skills, through skills development centres, a SME@universityprogrammetailoredforSMEChiefExecutiveOfficers,aSMEuniversityinternshipprogramme, and a SME mentoring programme. As all of these programmesare not always used by SMEs, improving awareness of and usefulness of theseprogrammes iskey.SMEsarealsoheldbackbyunder-investment in innovationandnewtechnology,particularlyICT.Financingandtrainingprogrammesshouldbedesignedtopromoteandfacilitatetechnologicalupgradingbythesefirms.

• Education: Thegovernment’seducationplanhassetambitioustargetsforimprovingaccess to quality education throughout the country. Dropout rates tend to behigherinruralareasandamongpoorandmarginalisedstudents,despitefocusedeffortstoimproveliteracyandotheraspectsofbasiceducationintheseareas.Thegovernmenthasattempted tonarrow theurban-ruralachievementgap throughprogrammes such as the District Transformation Programme, the Orang AsliEducation Transformation Plan and the Inclusive Education Programme, thoughfurthereffortsare requiredonmonitoringachievementsandqualityassurance.Recentpolicieshavesoughttoincreasethenumberofteachersemployedandtolower student-teacher ratios. Improvements in teacher training and assessmentof qualifications to ensure teacher quality are needed over and above financialinducementsforexcellence.Asitis,teachersinMalaysiaarerelativelywellpaidwitharatioofteacherpaytoGDPpercapitaof3.9comparedtotheOECDmembercountriesrangeofbetween1.5and2.0.Creatingaknowledge-basedeconomywillrequirefurtherdevelopmentofhighereducationinsciencesandgreaternumbersof researchers, along with training programmes that help students enter theworkforce.

• Urban green growth:Greengrowthisfeaturedinthe Eleventh Malaysia Plan 2016-2020through targets to: i) reduce greenhouse gas emissions intensity by up to 40%comparedto2005levelsby2020;andii)placeatleast17%ofterrestrialinlandwaterareasand10%ofcoastalandmarineareasundernationalprotection.PromotinggreengrowthinMalaysia’sgrowingurbanareasbyaddressingissuessuchasairpollutionwillbeacrucial componentof thecountry’s sustainabledevelopment.TheIskandarSmartCityProjectoffersanopportunitytotesttheimplementationofthesegreentargetsforcitiesintheareasoftransport,greentourism,landuse,ICT,safetyandsecurity, infrastructureandassetmanagement,heritageandculture,andcreativearts.Challengesexistinbalancingeconomicexpansion–particularlyincreased investment in industry – with environmental goals. Infrastructuredevelopmentwillalsoneedtobeacceleratedtopromoteinvestmentandtoeasetrafficcongestion.

Key challenges: Philippines

• Job creation: Despite the economy’s strong growth rates, job creation has beenslowinthePhilippines,posingchallengesforcontinuedandinclusivegrowthinacountrywithanexpandingworking-agepopulation.Unemploymenthasremainedhigher than other ASEAN-5 countries at above 7%. Labour force participationremainslowwitharound40%ofthoseaged15oroldereitherunemployedoroutof theworkforce. The job situationmay be evenworse as underemployment iscommonamongthoseemployed.In2013,11.3%ofthetotalworkforcereportedlyworkedlessthan40hoursperweekbutwouldhavepreferredtoworkmore.SMEsholdpromiseforhelpingtodrivegrowth,employment,localcapacitydevelopmentandprovideresilienceagainstvolatileexternalfluctuations.However,SMEsfaceserious constraints that must be overcome including access to finance, skills,informationgapsandmaintainingproductquality.Thefoodprocessingindustry,



asakeycomponentofthemanufacturingsector,holdsgreatpotentialasasourceof jobcreation.Yet, todevelop the industry furtherand improvemarketaccess,policiesshouldfocusonenhancingstandards,rationalisingrulesanddevelopinghumancapital.

• Infrastructure: Infrastructuredevelopment isapriorityforthegovernmentwithinfrastructure expenditure set to increase considerably. While infrastructureexpenditurewasonlyabout1.7%ofGDPin2010,thegovernmentplanstoexpanditto4%in2015and5%by2016.Low-qualityportsandalackofpavedroadsconstraincompetitiveness,thoughimprovementsarebeingmade.Considerableinvestmenthas gone into port development in the past few years. Over 2010-12, 128 newdomesticportsand16internationalportswereerected.Bytheendof2009,22portsintheStrongRepublicNauticalHighway(SRNH)networkhadbeenconstructedorupgraded for roll-on/roll-off (RORO)operation.Public-privatepartnerships (PPPs)offer ameans of financing and improving the efficiency of some infrastructureprojects.Theestablishmentof thePublic-PrivatePartnershipCenter in2010andthelegalandregulatoryframeworkforPPPshavemadethePhilippinesasuitablesettingforPPPprojects.Furtherworkcouldbedonetopreventdelaysinawardingprojects,bettermanagethedivisionofpublicandprivatesectorrisks,clarifythedisputesettlementmechanism,anddifferentiatebetweennationaland regionalresponsibilities.

• Disaster risk management: ThePhilippinesishighlyexposedtotheriskofnaturaldisasters,whichcanhaveseriousconsequencesfor livesandlivelihoods.Strongandeffectivedisasterrisk-managementtoolsarethereforeessentialforpromotingstablegrowthanddevelopment. Progresshasbeenmade recently indevelopingcomprehensivepreparednessand responsestrategies, and in strengthening riskmitigationandriskfinancingcapacities.In2005,thePhilippinesadoptedtheHyogo Framework for Action 2005-15, which served as a guideline for reducing disasterrisk andvulnerability tonaturalhazards. In 2009, the Senate of the Philippinesratified the ASEAN Agreement on Disaster Management and Emergency Response (AADMER),whichbindsASEANmemberstatestopromotingregionalco-operation,collaborating in reducing disaster losses and intensifying joint emergencyresponses. After TyphoonYolanda, theReconstruction Assistance on Yolanda (RAY)wasadopted.Newtechnologiesandtoolsforanticipatingdisastersandprovidingearlywarningarealsobeingadopted.Forexample,thePhilippinesrecentlyjoined16othercountriesinadoptingtheIntegratedServicesDigitalBroadcast-Terrestrial(ISDB-T) systemthat facilitates the transmissionofearlywarningsignals in theeventofanaturaldisaster.Remotesensing technology isbeingused toproducedetailed,high-resolutionthree-dimensionalfloodhazardmapsthatcanbeusedtopredicthowstormsurgeswillaffectlocalcommunities.

Key challenges: Thailand

• Macroeconomic performance: Economicperformance inThailandhasslippedasthecountryhasgonethroughaperiodofpolitical instability.Withtherejectionof thedraft constitution inSeptember2015and the resultingdelayofelections,politicaluncertaintylookssettocontinueforsometime.Annualgrowthwas0.9%in2014,althoughitpickedupinthefirsttwoquartersof2015,to3.0%inQ1and2.8%inQ2.Theslowdownwasfeltacrosstheeconomy,withafewexceptionsintheservicesandutilities sectors; forexample,growth reached6.6% in financialintermediation and 3.8% in education in 2014. Household debt has been risingquickly,fromaround40%ofGDPin2003to80%currently.Theburdenofthisheavydebtratio,oneofthehighestamongSoutheastAsiancountries,mayhinderprivate



consumption.TheBankofThailandcutinterestratesfrom2%to1.5%inanefforttoboostgrowth.Asecondrecentstimuluspackage,valuedatTHB206billionor1.6%ofThaiGDP,isapromisingoptiontorevivegrowth.ThepackageincludesassistancetoSMEsintheformoftaxcutsandloanguaranteeswhilenewlyregisteredstart-upcompaniesintargetedindustries,suchasfoodprocessingandhightech,willenjoyafive-yeartaxholiday.Todate,thepackageappearstohavehadsomesuccessinboostingbusinesssentimentastheThaibenchmarkstockindexhitathree-weekhighimmediatelyaftertheannouncement.

• Tourism: Although visitor arrivals declined in 2014, Thailand’s sizeable tourismsector has proven to be relatively resilient during the current slowdown and isexpectedtocontributetofuturegrowthoverthelongerterm.TheThaigovernmenthas recognised the importance of tourism in its 11th National Economic and Social Development Plan (2012-2016).Theplanenvisagesrehabilitatingandincreasingthequalityoftouristattractionstoimprovemarketdemand.SpecialattentionhasbeenfocusedonpromotingThaiculturethroughthe“DiscoverThainess2015”tourismcampaign. Priorities for ensuring the sustainability of the sector should includeaddressing the leakageof tourism-related revenuesoutside thecountryand thecommunity-levelandenvironmental impactsof tourism.Todevelopsustainabletourism, the government has established the Designated Area for SustainableTourism Administration. This Administration is tasked to work with localauthoritiesandcommunitiesandtopromotebestpracticesintheareasofhumancapital,accesstofinanceandknowledgemanagement.Regionalintegrationoffersopportunitiestoimprovethequalityofservicesinthesectorandtopromotetravelcollectively.TheASEANcountrieshavesoughttoensurethatregionalintegrationboosts tourism through initiatives such as the ASEAN Mutual RecognitionArrangementonTourismProfessionalsthatestablishescommonstandardsfor32job titles.Othermeasures include theASEANTourismQualificationsEquivalentMatrix as a reference for the industry and the ASEAN Tourism ProfessionalRegistrationSystem.

Key challenges: Viet Nam

• Infrastructure:AsignificantinfrastructuregapisexpectedtoariseasVietNam’sgrowthcontinuesandfinancingwillbeachallenge.Recentrestructuringofpublicinvestmenttoimprovetheefficiencyof investmentallocationandtostrengthenmonitoringandassessmentframeworkshavehelpedtolayabetterfoundationforfutureinfrastructureinvestment.ThelegalframeworkhasbeeninstitutionalisedthroughtheLawonPublicInvestmentthatseekstoimprovetheeffectivenessofpublicinvestmentmanagement;andtheLawonEnterprisestoregulatetheuseofstatecapitalinmanufacturingandbusinessactivitiesatenterprises.DomesticandforeignprivateinvestorsarebeingencouragedtoparticipateinpilotPPPprojectsthrough ameasure adopted in 2010 that establishes regulations for PPPs. MorecouldalsobedonetomobiliseprivatesavingsinVietNam,forexamplethroughtheissuanceofgovernment-guaranteedbondsforinfrastructuredevelopment.

• SOEs: The reformofVietNam’s state-owned enterprises (SOEs)will be anotherimportantchallengeto improvecompetitionandcompetitiveness.ReformshavebeengradualandhavemainlybeencarriedoutthroughthetransformationofSOEsintojointstockcompaniesandthroughmergersandconsolidation.Sincereformsbegan,VietNamhasmergedandconsolidated877SOEsanddissolved313while92have gonebankrupt.Thishas reduced thenumberof SOEs and the rangeofsectors where they operate, while reinforcing the largest of these enterprises.Since2012,marketprincipleshavehadagreaterinfluenceindirectingSOEsdue



totheimplementaionofkeymeasurestoimposecommonbusinessrulesforSOEsand private enterprises. These rules aim at clearly defining accountability andsupervision requirements, promoting equal treatment for small shareholders inmajority state-owned enterprises, ensuring adequate information disclosure bySOEs,andenhancingthecapacityandaccountabilityofboardmembersofSOEs.Despite these efforts, challenges remain as SOEs retain preferential access tofinance, state budget capital, land and other resources. Further reforms shouldseek to ensure that SOEs compete fairly with the private sector and that SOEperformanceismonitoredandevaluated.Forexample,theagencyresponsibleforthestateownershipfunctionofSOEsmustbeindependentfromtheagencythatimplementstheSOEmanagementfunctionandthemarketregulationfunction.

• Job creation:UnemploymentinVietNamhasbeenlowdespitealargeincreaseinthesizeofthelabourforcebroughtonbypopulationgrowth.Labourproductivityhasremainedrelativelylow,however,asaresultofthelowqualityofhumanandphysical capital, the small scale of production and misallocation of resources.FDIand theexpansionofexportproductionhavebeenpursued todrivegrowthandboostproductivity,butadditionalattentionshouldalsobepaidtoimprovingefficiencyinSMEs.Anyefforttoimproveemploymentprospectsandproductivityis complicated by the large informal sector. As of 2012, nearly 80% of the totalworkforcewasemployedintheinformalsector.Topromotejobgrowth,VietNamhasallowedemployersintheinformalsectortoavoidpayingvalue-addedtaxes,and social security and welfare contributions. The country needs to strike abalance between job creation and job improvement by encouraging businessesin the informal sector to formalise through initiatives suchas taxholidays, taxreductionsorcreditsubsidies.


Key challenges: Brunei Darussalam

• FDI: Dependence on the oil and gas sector, which accounts for most of BruneiDarussalam’s GDP, exports and government revenues, has allowed the countryto reach the high-income level but leaves it highly vulnerable to energy pricefluctuations. While national savings are large, FDI offers access to technology,managerialexperienceandinternationalmarkets.However,thehighconcentrationof economicactivity in theoil andgas sectorand ingovernmenthas resulted inhigh unemployment which reached 9.3% in 2011. While oil and gas contributesapproximatelytwo-thirdstototalGDP,itonlyaccountsfor3.3%oftotalemployment.Thechallengingbusinessenvironmentmaydiscourage investment innon-energysectors. For example, starting and running businesses, registering property,inadequatephysicalinfrastructureandweakintellectualpropertyprotectionposedifficulties.NewmeasuresareunderwaytoattractinvestmentbypromotingR&DandICTuse.TheBruneiResearchIncentiveScheme(BRISc)isacost-sharinggrantprogrammewhere70%ofR&Dfundingcanbeobtainedfromthegovernment.Thegovernment has also upgraded ICT infrastructurewith fibre-to-the-home (FTTH)broadbandservices.

• Private sector development: Astrongerprivate sector in generalwouldpromotethe economic diversification process, and several services sectors stand out aspotentialareasofgrowth.Theseincludefinancialandbusinessservices,tourism,Halalproducts, logistics, ICTandoilandgasdownstreamactivities.Apart fromidentifyingthespecificsectorstobepromoted,themainchallengewillbetocomeup with effective execution plans to realise desired objectives. Administrative



burdenswillneedtobelessenedtofacilitategrowth.RecentimprovementsincludethereplacementoftheMiscellaneousLicencewiththeBusinessLicenceinJanuary2015,whichreducdesthedaysrequiredforapproval.Itmayalsobeappropriatetorethinksourcesofpublicfinance,thecompositionofexpenditureanduseofPPPsininfrastructuredevelopment.

• Public finance:Thecountry’spublicfinancesareenviableinmanyrespectsasthegovernmenthashighrevenues,largesurpluses,lowdebtrelativetoGDP,largegrossnationalsavingsandlargefiscalbuffers.Howeveralmost90%oftotalrevenueisreceivedfromtheoilandgassector.BruneiDarussalamshouldensurethelargeannualbudgetsurplusesare investedproductively,perhaps ineducationtohelpdiversifytheeconomyandtoincreasepotentialoutput.GreateruseofPPPscouldincreasespendingefficiencyandcontributetothedevelopmentofvarioussectors,includingconstruction,businessservicesandfinancialservices.

Key challenges: Singapore

• Ageing population:Inhigh-incomeSingapore,improvementstothequalityoflifeareparticularlyimportant.Withanageingpopulation,morewillneedtobedoneto improve the employability of the elderly and to improve social programmes.Effortshavebeenmadetoencourageolderworkerstoreturntotheworkforceandtocreateincentivesforemployerstohirethem.OnesuchincentiveistheSpecialEmploymentCredit (SEC) introduced in 2011 that grants a subsidy to employerswhohireSingaporeanemployeesover50yearsofage.TheTripartiteCommitteeonEmployabilityofOlderWorkers(TriCom)hasbeenworkingsince2005tosupportthe employability of older workers by promoting job redesign, re-employmentandpublic communication to promote positive perceptions of olderworkers.Atthesame time,health-careprogrammes for theelderlyarebeingexpandedandinvestments in health care generally are increasing. The Pioneer GenerationPackage has increased health subsidies for the elderly and the government hasexpandedfacilitiessuchashospitalbedsandnursinghomecapacity.

• Infrastructure:Improvementsinenergyefficiencywillbeanimportantcomponentof improved sustainability in Singapore. The Housing and Development Board(HDB)istakingstepstodevelopmoreenergy-efficienthousingandcommunitiesandtousesensorstocreatea“smartenvironment”.ASmartHDBTownFrameworkhas been developed to guide the use of technology in developing sustainablesolutions.Forexample,HDBisencouragingtheuseofcomputersimulationsanddata analytics to guide its planning process. Improved data collection can helpinachievingefficiencies,thoughitwillbeimportanttoensurethatsecurityandprivacyremainprotectedaswell.Singaporecouldconsiderharmonisingnationalprivacy legislationwithOECDguidelines,which representa consensusonbasicprinciplesthatcanbebuiltintoexistingnationallegislation.

CLM

Key challenges: Cambodia

• Education:Thedevelopmentofhumancapitalandexpansionofsectorswiththepotentialtodrivegrowthareimportantchallenges.TheCambodiantechnicalandvocational educationand training (TVET) systemhas traditionallybeenusedaseitheranalternativetohighereducationortoaddressunemploymentamongyouthandworkersaffectedbyeconomic restructuring. Increasingly,TVET isnowalsobeingusedasatooltosupportthedevelopmentofaknowledge-basedeconomy.



Strengthening the system, particularly to help students and workers developadvancedskills,requiresabroadsetoforganisationalreforms.TVETprogrammesshouldseekbroaderinputfromstakeholdersandsourcesoffunding,improvethequalityof curricula, teachingandevaluation, considerdevelopingpublic-privatepartnerships,andimproveaccesstoqualityandrelevantlearningopportunities.Recent reforms have sought to address these challenges. The CambodianQualificationsFramework (CQF)has introducedCompetencyBasedTraininganddevelopedalabourmarketinformationandmanagementsystem.However,greateremphasisisneededonimplementingthesesystemsanddevelopingthecapacityofstafftoworkwithinthem.

• Tourism:Cambodiapossessesnaturalandculturalassetsthatmakeitanattractivetouristdestinationandisdrawingan increasingnumberofvisitors.However, theunderdevelopmentofinfrastructureandgapsinworkerandmanagerialskillsposesignificant constraints to further development. The sector is not well connectedto the restof theCambodianeconomy, relying largelyon imports. Strengtheningconnectionswithlocalsupplierswouldhelptoimprovegainsfromthesectorandtobenefitthepoor.Themanagementoftouristsitesiscomplicatedbytheoverlappingresponsibilitiesofmultiplegovernmentministries.Forexample,templesareunderthe responsibility of theMinistry ofCulture andFineArts, andeco sitesmaybeunder the Ministry of Environment or the Ministry of Agriculture, Fishery andForestrywhilesomeothersitesaremanagedbytheMinistryofCultureandReligiousAffairs.Thisfragmentationalsomakesthemuch-neededdiversificationoftourismdestinationsmore complex.Regional solutions, particularly inpromoting specificregions and facilitating travel (such as through theASEAN single visa initiative),couldbebeneficial.

Key challenges: Lao PDR

• Natural resources:Significantcontributionstogrowthhavebeenmadebynaturalresources,primarilyhydropowerandmining,butdependenceontheseresourcesposeaariskofDutchdiseaseandvolatilegrowth.Duetostrongappreciationofthecurrency,thegrowthofnon-resourcesectorssuchasmanufacturingandagriculturehas been slow. Sustained growth that creates jobs requires a broader-basedeconomy. Policy priorities for responsiblemanagement of the natural resourcesboomincludediversificationoftheeconomybyencouragingFDIinnon-resourcesectorsandcreatingamorefavourablebusinessenvironment.Theimprovementoffiscalandmonetarypolicymanagementisrequiredformacroeconomicstability,particularly inusing revenues fromnatural resources for long-termsavingsandinvestment. As the country faces large budget deficits and high external debt,it is important to balance the budget, reduce external borrowing, ensure rapidrepaymentofdebtandestablishafundforfutureexpenditure.

• SMEs: ThedevelopmentofSMEsisacriticalcomponentofeconomicdiversificationandplaysanimportantroleingeneratingemployment,incomeandnewtechnologyfor long-termdevelopment.A lackofaccess to financeandaskillsshortageareamongthetopconcernsofSMEsinLaoPDR.DomesticandinternationalcompetitionandrelativelyhighenergypricesinthecountryarealsoconcernsforSMEs.Severallawsandregulationshavebeen issued insupportofprivate-sectordevelopmentincludingtheBusinessLawandtheLawonPromotionandManagementofForeignDirect Investment. However, supporting decrees and the regulatory frameworkrequiredtoimplementthenewmeasuresremainlacking.Inaddition,morecanbedonetoeaseadministrativeburdens,improveaccesstocreditandtechnologyandfacilitateexports.



• Tourism: WhiletourismhasexpandedrapidlyinLaoPDR,ithasthepotentialforgreater growth by expanding arrivals from non-neighbouring countries and byincreasing spending per visitor. Improved transportation infrastructure linkingcitiesandtouristdestinationsandimprovedinternationalconnectivityareneeded.Skillshortagesandtheneedforstandardsandqualificationshavebeenrecognisedwiththeestablishmentof theLaoNational InstituteofTourismandHospitality,though implementing ASEAN standards will take additional efforts. Futureplanningforthesectorshouldconsiderhowpublic-privatecollaboration,perhapsin destination marketing, could be useful to attract higher-spending touristsfromawiderrangeofcountries.Thegovernmenthasrecognisedthepotentialofecotourismandcommunity-basedtourisminexpandingthesectorandinfuellingpro-poor growth.However, careful attention shouldbeplacedonprotecting thecountry’sculturalandenvironmentalresourcesasanydeclineinbiodiversityandnaturalresourcesislikelytoharmthepromotionofecotourism.

Key challenges: Myanmar

• Agriculture:AgricultureinMyanmarispredominantlysmall-scaleandsubsistence-based,with54%offarmslessthan2hectares,4.3%between8and20hectaresandonly0.3% larger than20hectares.However, thesector retainsgreatpotential tobeamajorcontributortoexport-ledgrowth.Thoughrecentreformsallowfarmerstouse their landascollateral insecuring loans (throughLandUseCertificates),accesstofinanceandfinancialservicesisgenerallypoorandactsasaconstraintto increasing investment in the sector. TheMyanmar Agriculture DevelopmentBankdoesprovideseasonalandsomelonger-termloansbutfacesseriousfundingconstraints due in part to interest rate limits. The improvement of farmers’knowledgeandskills,alongwithresearchanddevelopment,willalsobecentraltoraisingfarmingproductivity.Expandingagriculturalexportsmayrequirereformsof constraining institutional factors, for example by better defining overlappingresponsibilitiesofministriesandbyexpanding limitedresources forhealthandsafety inspections. Consideration of alternative organisational and marketingstrategiesmayalsobeneeded.

• Education: Improvements in the formal education system and other trainingprogrammeswillbeneededtopreparemoreofMyanmar’sworkersforjobsinthemodernmanufacturingandservicesindustriesthatwillexpandwiththecountry’sgrowth.Whilebasic levelsof educationare fairlyhigh for the country’s incomelevel, access to education and quality of higher education need improvement.Reviews of selection criteria for teacher-training programmes and of incentivesfor teachers may help to attract better-qualified andmoremotivated teachers.TVETcanplayaroleinarmingworkerswiththeskillsdemandedbyemployers,particularlyintheuseoftechnology.However,itisimportantforTVETsystemstobedesignedbyengagingwithemployers,unions,studentsandteachersfamiliarwiththeworkplace.Labourexchangeofficesandworkertrainingprogrammesarehelping tobridge skill gaps to improveproductivity, though thedevelopmentoftraining strategies is complicatedby the involvementofmanyministries in thepolicy-makingprocess.TheNationalEducationCommitteeco-ordinateseducationdecisionmaking,butanother11ministriesareresponsibleforvariousaspectsoftheeducationsystem.ReformsareunderwaythroughtheComprehensiveEducationSectorReviewinitiatedin2012todevelopastrategicplanfortheeducationsector.

• SME financing: Given a history of underinvestment, growth and developmentdependonincreasedinvestment.TheliftingofsanctionsandMyanmar’sincreasedopennesstotheworldcanbeexpectedtoleadtoanincreaseinforeigninvestment



anddevelopmentassistance,buttheseexternalsourcesoffinancing,alongwithremittances,areexpectedtobelessimportantthandomesticsourcesoffinancing.Reforms will be needed to maximise these domestic sources. Governmentrevenues are insufficient as a result of the tax structure and difficulties in taxcollection.Collectioncouldbeimprovedandburdensonbusinessreducedthroughadministrativereformstotaxadministrationsuchasaswitchtoself-assessments.Thefinancialsystemremainsatanearlystageofdevelopment,butwillbecriticalin mobilising financial resources for development. At present, formal financialinstitutionsarelargelyconfinedtothecommercialbanksbuttheirscopeislimited,andformalfinancialmarketsarenearlynon-existent.Inthenearterm,regulatoryconstraintswillneedtobeadjustedtoimprovefirms’accesstofinance.Regulatoryrestrictionsonthebankingsectorhavebeenrelaxedsomewhat,suchasthoseoninterestrates,butworkneedstobedoneinimportantareas,includingestablishingacreditbureau,whichiscurrentlyunderway.

China and India

Key challenges: China

• Environment:Rapidgrowthwith laxpollution regulationhasbeenaccompaniedbyseriousenvironmentaldegradationinChina.Recognitionoftheenvironmental,humanandeconomiccostshasledtoreforms.Measurestakenrecentlytoimproveair quality are having an impact in reducing urban air pollution. For example,the average PM 2.5 (particulate matter less than 2.5 microns in diameter thatcanlodgeinthelungs)concentrationintenpollutedChineseregionsdeclinedby11.9%in2014.OtherrecentreformsincludeanEnvironmentalTaxLaw,releasedfor discussion in June 2015, that proposes fines for air, water, noise andwastepolluters, though there are several exceptions. Recent reforms also extend theliabilityofpersonsresponsibleforenvironmentaldamagetobeyondtheirtermandretirement. Improved inspectionofwaterpollutionhasbeen introducedaspartoftheWaterPollutionPreventionandControlLaw.Theinspectionidentifiedthecitiesandtownsthatmetnationalstandardsandsincethenthegovernmenthasannouncedthatwaterqualitywillbeincorporatedintheindicatorsusedtoassesslocalgovernmentofficials.

• Human capital:ImprovementsinhumancapitalwilltakeonadditionalimportanceasChinaseekstodevelopinnovativeandknowledge-basedindustries.Jobseekers–eventhosewithhigherlevelsofeducation–donotcurrentlyhaveskillsmatchingmarketdemand. For example, soft skills suchasmanagement, communicationsandnegotiationamongstotherswerefoundtobethemostimportantfornewjobsbutarenotacquiredathighereducationinstitutions.Recognisingthatvocationaleducation offers a means of improving skills, the government is investing inexpandedworkplace-basedtraining.Reformsaffectingtheautonomyandfocusofuniversitieshavealsohelpedprovideopportunitiesfordeepercollaborationwiththe private sector. National Technology Transfer Centres (NTTCs), for example,actasintermediariesbetweenuniversityandindustrytodiffuseinventions;andwithgreaterautonomy,NTTCstaffareabletomarketpatentedtechnologytherebyincreasingtheutilisationrateofuniversity-developedpatents.Newprogrammesto train and attract world-class researchers and other highly skilled workersarehelping to address theneed for further innovation.TheNational Medium-and Long-term Talent Development Plan (2010-2020)isarecentcomprehensiveinitiativetoattractandretainhighlyskilledindividualsinsixbroadareas(politicalleadersandofficials,businessentrepreneurs, technicalprofessionals,highlyskilled industrystaff,skilledworkersinagricultureandruralareas,andskilledsocialworkers).


32 Economic outlook for SouthEaSt aSia, china and india 2016: Enhancing rEgional tiES © oEcd 2015

• Rural development: Rural areas have not seen the same development as urbanareas in China, although the income gap has narrowed somewhat. Higherrural productivity is critical for narrowing the urban-rural income gap, thoughtemporaryincomesupportsmayalsobeneededinsomecases.Labourproductivityinagriculturewillneedtobe improvedthroughmechanisationandinvestment.Assistanceinaccesstofinanceandinfacilitatingthereallocationoflandarelayingthe groundwork formaking these productivity improvements. A recent attemptinthisdirection isthe July2015 issuanceoftheGuidingOpiniononBuildinganAgriculturalCreditGuaranteeSystemwithBudgetarySupport.Underthisschemebackedbytheprovincialgovernments,atleast70%ofguaranteedloanswouldgotocropfarmerswithsufficientscale.Topreservelandfertilityoverthelongrun,unsustainablepracticessuchastheoveruseofchemicalfertiliserswillneedtobechanged. The government could encourage the use of new technology, improvefarmereducationandreducesubsidiesforfertilisers.

Key challenges: India

• Financial inclusion:Fastandinclusivedevelopmentwillrequirestrongerfinancialeducationinitiativesandimprovedaccesstoandqualityofeducationingeneral.Financial access has been a policy priority for India, but financial educationprogrammeswillalsobeneededtoensurethatpeopleareawareoftheservicesavailable and sufficiently informed about the opportunities and risks to makeresponsibledecisionsaboutpersonalandbusinessfinance.Theareasofneedhavebeenstudiedthroughthe2014FinancialLiteracyandInclusionSurvey,whichfoundthat respondentswere comfortablewith concepts such as division and interestonloans,hadmoderateknowledgeofinflation,riskversusreturn,diversificationandsimpleinterest,andwereleastknowledgeableaboutthetimevalueofmoneyand compound interest. TheNational Strategy for Financial Educationhas beendevelopedtoguideeffortsbyschools,communityoutreachworkersandfinancialsectorrepresentativesinthisfield.

• Education:HigherqualityandmoreaccessibleeducationgenerallyisimportantinacountrylikeIndiawithayoungpopulation.Enrolmentinprimaryschoolsinruralareasandtheirresultshaveimprovedconsiderablyintherecentpast.Over98%ofchildrenwerefoundtobeenrolledinprimaryschoolin2012.Eveninruralareas,enrolmentlevelsareover96%forthe6-14yearagegroup.Lesschangehasbeenseenatthesecondaryandtertiarylevels,wheremorestudentswillneedtodevelopskillsbeyondbasicliteracyandnumeracy.Unevenaccesstoeducationbyregion,genderandsocio-economicbackgroundacrossalllevelsofschoolingwillneedtobeaddressed,possiblythroughtheuseofnewdiversitymeasuresandincentives.Efforts to improve thequality of education should focuson teacherquality andupgradingschoolfacilities.


In a portable format, this overview provides the key messages from the 2016 edition of the Economic Outlook for Southeast Asia, China and India.

Contents

Outlook for 2015-20



The annual Economic Outlook for Southeast Asia, China and India examines Asia’s regional economic growth, development and regional integration process. It focuses on the economic conditions of Association of Southeast Asian Nations (ASEAN) member countries: Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Viet Nam. It also addresses relevant economic issues in the People’s Republic of China and India to fully reflect economic developments in the region.

The 2016 edition of the Outlook focuses on the importance that regional integration has had in Emerging Asia and sets out issues deserving of greater attention in strengthening future co-operation. In particular, it provides an overview of progress made in integration and discusses the importance of developing institutional capacities for achieving regional goals, the potential for co-operation in the use of renewable energy and the development of a more international private sector.

The Economic Outlook for Southeast Asia, China and India 2016 includes three main parts, each highlighting a particular dimension of recent economic developments in the region:

• the regional economic monitor, depicting the near-term and medium-term economic outlook andmacroeconomic challenges in the region

• threechaptersonregionalintegration,thespecialthematicfocusofthisedition.

• structuralpolicycountrynotes.

This edition of the Outlook is the result of policy dialogue and consultation at the regional level, at the 4th OECD-AMRO-ADB Joint Asian Regional Roundtable on Near-term Macroeconomic and Medium-term Structural Policy Challenges, held in Tokyo, Japan, in May 2015. Like other regional economic outlooks produced by the OECD Development Centre, the report was prepared in collaboration with regional partners; UNESCAP and the Asian Development Bank Institute (ADBI) contributed to the 2016 edition. The Outlook also benefited from discussions with the ASEAN Secretariat.

The full report is available on OECD iLibrary: www.oecd.org/dev/economic-outlook-for-southeast-asia-china-and-india-23101113.htm.

Economic Outlook for Southeast Asia, China and India 2016 – OECD

Documents

Transcript of Economic Outlook for Southeast Asia, China and India 2016 – OECD