Challenges in the ASEAN+3 Region Dr Hoe Ee Khor, Chief Economist - - PowerPoint PPT Presentation

Dr Hoe Ee Khor, Chief Economist Hong Kong University of Science and Technology (HKUST) Institute for Emerging Market Studies (IEMS) – Ernst and Young (EY) Emerging Market Insight Webinar

Global Value Chains: Restructuring and Challenges in the ASEAN+3 Region

September 25, 2020

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Likelihood of bumpy recovery from the COVID-19 pandemic recession Global protectionism vs regional integration Fourth Industrial Revolution (4IR) Rise of Factory Asia – regional supply chain Emergence of Shopper Asia – increasingly large and affluent middle class

As the region recovers from COVID-19, five key trends will shape the evolution

• f GVCs and determine what the region needs for strong medium-term growth.

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Evolving comparative advantage (H-O-R) flying geese model

Source: AMRO staff.

 Maximizing gains from comparative advantage: Heckscher-Ohlin (H-O)  Developing new competitive advantage: Ricardian elements  Development of the Regional Supply Chain

The rise of Factory Asia is a development which has unfolded over decades, but has taken on a twist (or two) in recent years.

Sectoral shifts do not spell the end of the manufacture-for-exports strategy for growth catch-up. Far from it. GVC disruptions matter massively for the region.

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ASEAN+3 Economies: Shares of GDP by Sector (Percent)

Sources: ILO; AMRO staff calculations.

• Advanced ASEAN+3 countries and then upper-middle income ones have gained much from manufacturing-for-

exports growth model.

• Manufacturing’s contributions to growth and jobs are peaking earlier and lower.
• But several countries can still extract a lot more from manufacturing, and need to do well in GVCs.

Labor has shifted from agriculture to manufacturing and services across economies; many services are now geared towards supporting manufacturing.

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10 20 30 40 50 60 70 80 90 100 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 1991 2000 2010 2019 2020 Agriculture Manufacturing Services Others CLMV ASEAN-4 High Income MM KH LA VN ID PH TH MY CN KR JP SG HK BN

ASEAN+3 Economies: Shares of Employment by Sector (Percent of total employment)

Sources: ILO; AMRO staff calculations.

• High-income economies in the region have been deindustrializing and have moved into services.
• In less developed economies, employment in agriculture has been shrinking due to structural transformation.
• Apart from services for end-consumption, many services are now geared towards supporting manufacturing.

Example of services’ importance for manufacturing: Thailand’s automobile sector.

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Services along the Automotive Value Chain Thailand’s Automobile Value Chain

Factory Stage

• Quality Assurance
• Production Management

Service

• Warehousing Services for

intermediate goods

• Sewage water treatment

services

• Repair and maintenance

services of machines and equipment

Delivery and sale stage

• Design of packages
• Packaging Services
• Freight transportation services
• Storage and warehousing

services for finished goods

Post-sale Stage

• Customer Services
• Repair and

Maintenance

Pre-production stage

• Industrial design
• Custom-related services for

imported raw materials

• Storage of raw materials
• Freight transportation

services of raw materials Management and operation-related services: auditing financial accounts; financial services; insurance services, information system management

Sources: Asia-Pacific Economic Cooperation (2015); and AMRO staff. Sources: Asian Development Bank; and AMRO staff calculations. Note: The node size represents the weighted degree of the economy in the network. The arrow thickness is scaled according to the volume of trade in value-added terms. The trade in value-added of “Sale, Maintenance, and Repair of Motor Vehicles and Motorcycles Services” (C19) from ADB Multi-Regional Input-Output Tables is used as a proxy for Service Automotive Exports. Our focus is on Thailand within the ASEAN region. Therefore, Japan, Korea, and China are not included here, although Japan and Korea are important automotive hubs in Asia.

• Domestic value-add of Thai automotive services exports in 2018 was nearly double that of other ASEAN

countries combined. Its production network is most connected with that of Indonesia and Vietnam.

• Services intertwining into manufacturing improves efficiency but also increases vulnerability to GVC disruptions.

• Factory Asia – deeply plugged into GVCs – now increasingly resembles a services hub.
• It is much more involved in value creation through R&D, product designs, and customizing service experiences.
• China becoming a key node in GVCs for services is a prime example.
• Both business and personal services have become more tradable than before.

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China's integration into GVCs for service exports 2000 2018

More broadly, services are becoming a more critical part of global integration: China, a manufacturing powerhouse, is now a key node in GVCs for services.

Sources: Asian Development Bank; and AMRO staff calculations. Note: The node size represents the weighted degree of the economy in the value chain. The node color represents the “community” to which the economy belongs. “Community” is detected using methodology outlined by Blondel and others (2008). The arrow thickness is scaled according to the volume of trade in value-added of service export. Services include all business and personal services.

Regional integration in ASEAN+3 has continued: an important counterweight against more pronounced protectionist tendencies following COVID-19.

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Selected Indicators of Globalization EMEs: Trade and FDI Relative to GDP (Percent of GDP)

Sources: World Trade Organization; United Nations Conference on Trade and Development; Global Trade Alert; and AMRO staff calculations. Sources: The Bank for International Settlements; The World Bank; United Nations Conference on Trade and Development; and AMRO staff calculations. Note: EMEs are Algeria, Argentina, Brazil, Chile, China, Colombia, Czech Republic, Hong Kong, Hungry, India, Indonesia, Israel, Korea, Malaysia, Mexico, Peru, the Philippines, Poland, Russia, Saudi Arabia, Singapore, South Africa, Thailand, Turkey, and United Arab Emirates.

1 2 3 4

2.9 1.8 2010 2019 7.8 3.3 2010 2018 9.6 5.9 2010 2018 1377 2165 2010 2018

International migrant stock World trade Global capital flows New harmful trade interventions

(Growth, % YoY) (Growth, % YoY) (% of GDP) (Number)

• Some signs of deglobalization: interpret carefully: impact of economic downturns and growth rebalancing.
• ASEAN+3 region has a responsibility to be a key counterweight to protectionist tendencies.

COVID-19 will not “undo” GVCs: These have become so intertwined and efficient that pulling out is nonviable. Business models will drive new and high-VA GVCs.

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Source: McKinsey; AMRO staff.

Based on comparative advantage, even as countries develop new strengths and move up value chains. No country can be self-sufficient. Not the US or China. Smaller countries have no chance. Regional groupings may be (seen as) an alternative “solution. But efficiency would be compromised. More likely, further pursuit of competitiveness will lead to formation of newer and higher-VA GVCs.

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Sources: Organization for Economic Co-operation and Development; and AMRO staff calculations. Note: OECD Input Output tables are only available from 2005 to 2015.

ASEAN-4, China, Vietnam: Contribution to GDP Growth, Import-Adjusted Method (Percentage point) ASEAN-4, China, Vietnam: Share of GDP Components, Import-Adjusted Method (Percent)

34.2 11.8 26.1 0.4 27.4 Private consumption (net of imports) Public consumption (net of imports) Investment (net of imports) Changes in inventories (net of imports) Exports (net of imports) 31.8 11.8 31.5 2.1 22.8 33.7 13.0 33.7 0.3 19.4 2005 2011 2015 Sources: Organization for Economic Co-operation and Development; and AMRO staff calculations. Note: OECD Input Output tables are only available from 2005 to 2015. Therefore, 2016-2019 estimates of each component are based on 2015 share. Real GDP growth is actual data.

• GFC and European debt crisis led to collapse in external demand and major growth rebalancing.
• Domestic demand has become a much stronger driver of growth, especially in ASEAN-4, China, and Vietnam.

The region confronts this challenge from a position of strength. Growth catch-up and rebalancing most pronounced among a sub-group: ASEAN-4, China, Vietnam.

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10 20 30 40 50 60 70 80 90 100 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Domestic Consumption Investment Exports

ASEAN-4, China, and Vietnam: Shares of Domestically Manufactured Goods for Domestic Demand and Exports (Percent of total output) ASEAN: Share of Value-Added Exports (Percent)

17 20 35 28 EU US ASEAN+3 RoW 2005 2010 2016 14 15 38 32 13 14 40 33

Sources: Organization for Economic Co-operation and Development; and AMRO staff calculations. Note: OECD Input Output tables are only available from 2005 to 2015. Sources: Organization for Economic Co-operation and Development; and AMRO staff calculations.

• Factory Asia has been very much a broad region-wide phenomenon, not limited to China and ASEAN.
• Besides domestic demand, intra-regional demand has also strengthened markedly within a decade.

While COVID-19 can prove to be a defining crisis, it is important not to lose sight

• f structural elements: Factory Asia has come a long way.

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Gross National Income Per Capita (US dollars)

Source: The World Bank.

• The rise of Factory Asia has enabled the emergence of Shopper Asia.
• ASEAN+3 economies have been highly successful in using the manufacturing-for-exports strategy to

industrialize and move up the production value chain – and just as importantly, climb up the income ladder.

10,000 20,000 30,000 40,000 50,000 60,000 70,000 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Brunei Darussalam Hong Kong Japan Singapore Korea United States

Asian financial crisis Global financial crisis

2,000 4,000 6,000 8,000 10,000 12,000 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 China Indonesia Malaysia Thailand Philippines

Asian financial crisis Global financial crisis

500 1,000 1,500 2,000 2,500 3,000 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 Lao PDR Myanmar Vietnam Cambodia

Asian financial crisis Global financial crisis

Shopper Asia came later, but is now also an important part of the story of the region’s growth catch-up – as well as its prospects for post-COVID recovery.

ASEAN+3 , 42 South Asia, 7 Australia, 1 United States and Canada, 23 Western Europe, 9 Latin America, 8 Eastern Europe, 5 Sub-Saharan Africa, 4 MENA, 3

500 1,000 1,500 2,000 2,500 3,000 3,500 2012 2018 2020 2025 Chinese consumers Other worldwide consumers 2020–25 compound annual growth rate 2% 6%

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China and the Rest of the World: Spending on Luxury Goods (RMB Billions)

Source: McKinsey & Company.

Share of Urban Consumption Growth, 2015-30 (Percent)

Source: McKinsey; AMRO staff calculations.

• China is at the core: Its demand for luxury goods could double in next five years, from RMB 770 billion to

RMB 1.23 trillion – some 40 percent of global market.

• ASEAN+3 region could drive 42 percent of global urban consumption growth by 2030.

A significant part

• f

the Shopper Asia story continues to be about manufacturing, with both regional and global demand being important.

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ASEAN+3: Composition of Tourist Arrivals (Millions of People)

Note: 2019 China’s and Lao PDR’s tourist arrivals by country are estimated given data unavailability. Sources: National authorities; and AMRO staff calculations.

• Tourism involves customizing “new economy” services for Shopper Asia.
• Studies highlight that tourism exhibits extensive linkages with other sectors of economies.
• How long will tourism activities take to recover to pre-COVID levels? Will GVCs remain intact?

But demand for services is growing rapidly, an intriguing case study for the new growth paradigm being tourism.

50 100 150 200 250 300 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ASEAN China (incl. Hong Kong) Japan Korea European Union United States ROW

ASEAN+3

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1

Shipper/

• rigin

2

First-mile transport

3

Port/hub storage/loading

4

Customs/ border

5 6

Inland transport

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Warehouse, contract hub & fulfillment

8

Delivery

9

Customer Customs border

10 11

Port/hub storage/loading Ocean/long- distance transport Degree of automation

Low High

Logistics Value Chain

Source: McKinsey & Company.

• E-commerce was growing rapidly even before the pandemic; has picked up pace since.
• Logistics sector value chain was in the early stages of becoming more automated and efficient.
• Improvements henceforth will focus on resilience and safety, alongside efficiency and speed.

Another case study for GVC upgrading is logistics: the sector will be lifted by growth of e-commerce; increased automation will focus on resilience and safety.

• Use

robots and drones to execute “contactless” tasks along entire value chain

• Further develop cross-border

connectivity to widen options for moving goods

• Speed up adoption of digital

tech to deliver services at different nodes of value chain

• What types of human capital

will be needed to do all this?

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Traditional manufacturing for exports

• Comparative advantage / cost-driven
• GVCs
• Physical goods
• Specialization for cost efficiency
• External demand growth
• Growth catch-up: “orderly” progression
• Primary to manufacturing to services
• Capacity and connectivity
• Labor, capital, technology
• Physical infrastructure
• Competitive advantage and demand drivers
• Production and trade networks
• New Economy: customized goods, services, experiences
• Rebalancing: domestic and final demand in ASEAN+3
• Eclectic growth: Leapfrogging, “disruptions”
• Capacity and connectivity
• Innovation, data analytics, new services
• Greater emphasis on soft infrastructure

New growth paradigm

• Factory Asia serving Shopper

Asia: several sectors will grow briskly

• GVCs are here to stay: need

to extract even more gains and boost resilience to shocks

• Physical infrastructure is key
• Soft

infrastructure becoming more critical

• Safety nets: financial, social

The new economy is therefore about bringing Factory Asia and Shopper Asia together, leveraging on new digital technologies and developing “soft” factors.

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Source: AMRO staff.

Sum-up: GVCs will remain an integral part of the post-COVID global economy: the region must plug deeply into the global production base and marketplace.

Challenging external environment: covid-19 scar(e)s, protectionism, disruptive technology GVC will be reconfigured and evolve because of protectionism and digital technology ASEAN+3 region will do well - highly competitive and has a rapidly growing middle class Region will be more integrated, but will continue to plug more deeply into the GVC.

Thank you.

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