High confidence in Asean

ASEAN is the region to be in, again, in 2013. After an estimated growth of 5.2 per cent in 2012, we forecast that Asean gross domestic product (on a purchasing power parity-weighted basis) will grow 5.3 per cent in 2013, outpacing the International Monetary Fund's global growth estimate of 3.6 per cent.

We expect Indonesia, the Philippines and Malaysia to match or exceed their 10-year average rates. More is also expected from Myanmar in 2013, which has made international headlines for implementing reforms, allowing it to reconnect with the world.

Confidence is high in Asean, both domestically and among foreign investors. The region attracted 7.6 per cent of global foreign direct investment in 2011, versus 4.3 per cent in 2006. Since 2000, following the crippling Asian financial crisis, Asean growth has exceeded global growth by an average of 1.5 percentage points. Can the region keep running at this pace?

Nothing runs in a straight line. Business cycles still exist. But Asean certainly still has much more room to grow and catch up with the world, despite the world-beating growth rates registered over the past decade.

The region is not yet at the stage where factors for growth have become complicated. At the most basic level, the continued urbanisation process will help to drive "easy" growth. This is the economics of agglomeration. Urbanisation helps to improve the overall well-being of an individual by improving access to services and housing. This can boost productivity and consumption.

Urbanisation helps to increase efficiency as distances are shortened. This lowers costs for businesses, and for governments to provide infrastructure and necessities. Jobs and labour supply are concentrated rather than dispersed. The benefits of this agglomeration, for both individuals and firms, are reflected in the fact that growth is concentrated in cities, even if the city is small in size relative to the whole country.

For example, Jakarta accounts for about 17 per cent of Indonesia's GDP but only 0.04 per cent of its land mass and 4.2 per cent of its population.

Urbanisation is typically associated with growing wealth. How well urbanisation is planned and implemented, however, can affect the benefits accrued from the process. Factors like agriculture productivity levels also play a part in determining how much overall per-capita GDP increases as a result of urbanisation.

Improper urbanisation can result in diseconomies. Indeed, when we think of cities, negative connotations such as congestion and pollution come to mind. The fault does not lie with urbanisation, but rather with the way it is carried out. Urbanisation usually facilitates economic growth. And given the relatively low levels of urbanisation across Asean, the law of diminishing returns is unlikely to come significantly into play yet.

Urbanisation and economic growth tend to go hand-in-hand, although there have been cases where urbanisation is not accompanied by economic growth. In our study, we assume that urbanisation efforts are successful in raising economic well-being.

We categorise the 10 economies within the Asean bloc into three tiers of urbanisation. Tier 3 includes Cambodia, Vietnam, Myanmar, Thailand and Laos; Tier 2 includes the Philippines and Indonesia; and Tier 1 includes Malaysia, Brunei and Singapore. Assuming that Tier-3 countries reach the current Tier 2 urbanisation rate (50 per cent), and Tier 2 countries reach the current Tier 1 rate (75 per cent), we found that Asean's GDP per capita could almost triple to US$10,290 (RM31,914) from US$3,509 in 2011, on the back of successful urbanisation.

Urbanisation is likely to grow at a slower pace than the overall economy, but per-capita GDP typically rises at an exponential rate as urbanisation increases. There is much more for rural Asean to achieve.

According to the World Bank, the world passed the 50 per cent urbanisation mark in 2007. Six Asean member countries have not yet passed this point (as of 2012): Cambodia, Laos, Myanmar, the Philippines, Thailand and Vietnam. Indonesia just crossed the mid-point, at 51.4 per cent. Singapore, Malaysia and Brunei are largely urbanised. The region as a whole still has low hurdles to cross to sustain growth.

These low hurdles to growth are also evident in the per-capita GDP of Asean countries. Only two countries, Singapore and Brunei, exceeded the global level of US$10,000 in 2011 (using World Bank data).

Malaysia was nearly on par, but Thailand, which ranked next, was only at about half the global level. At this level of development, simple improvements to factors of production should suffice.

According to the World Economic Forum Global Competitiveness Report 2012-2013, Cambodia and Vietnam are still at the most basic stage of economic development - the factor-driven stage. Myanmar and Laos are not included in the report, but would likely fall into the same category. Brunei and the Philippines are in the transition stage to becoming efficiency-driven economies, and Thailand and Indonesia are in the efficiency-driven stage.

At the earlier stages of development, adoption of existing technology and practices, investment in infrastructure, and provision of a basic institutional framework and health and education facilities should help to drive growth. Within Asean, only Singapore is considered to be in the innovation-driven stage of economic development, while Malaysia is in transition from efficiency-driven to innovation-driven. Hence, the region still has plenty of room for "easy" growth.

While we have highlighted the growth potential of the Asean region, this growth is not to be taken for granted. The right mix of fundamentals, policy and confidence is needed.

At the moment, the region enjoys a good mix of these ingredients. Confidence is high, particularly in the context of the current weak global environment. Fundamentals are good, and policies have been supportive of growth. But nothing is constant, and policies will need to stay relevant and forward-looking in order to achieve strong and sustainable growth.

Edward Lee is head of Southeast Asia Research at Standard Chartered Bank