We are in an era of hegemonic shift, as economic gravity is shifting from West to East. The first wave of this “Asian Miracle” started with the dramatic growth and opening up in economies like Singapore, Hong Kong, South Korea and Taiwan, followed by the rise of China. However, as these industry-heavy, export-driven economies in East Asia are currently slowing down, the rise of Asia will become increasingly depended on other economies. If India, Indonesia and the Philippines can manage their economies’ transformation and leverage their strategic positions, they are well-positioned to become Asia’s next growth engines.
- The IMF forecasts that economic growth will remain buoyant in the coming 5 years in India, Indonesia and the Philippines (well above 6%). In fact, India will be the fastest growing big economy of the world for the next three years.
- The economies of India, Indonesia and the Philippines rely strongly on domestic demand, and less on exports of goods and services compared to their Asian counterparts.
- India, Indonesia and the Philippines all face significant infrastructure gaps. Although their geographies are very different, with Indonesia and the Philippines consisting of a myriad of islands in the Western Pacific while India is a diverse landmass fully bounded by the Indian Ocean, they have some of the world’s longest coastlines and require major upgrades in the quality of their ports.
- India, Indonesia and the Philippines have relatively low debt-to-GDP ratios, with public debt at stable levels since the 2008 financial crisis (although bad debt levels in India’s banking sector are worrying). However, tax bases in Indonesia and India are very low.
- Mortality rates and fertility rates are declining and nearing replacement level in India, Indonesia and to a lesser extent in the Philippines. Their combined 1.7 billion population, a quarter of the world’s population, have a nominal GDP per capita between $1,800 and $3,500 in 2016.
- Narendra Modi, Joko Widodo, and Rodrigo Duterte can all be considered populist leaders.
Connecting the dots
India, Indonesia and the Philippines have striking similarities: they are in the same phase of development, will face similar problems in the near future and can benefit from structural tailwinds. For example, as they are nearing their demographic dividend while being in the lower-middle income range, the growing labor force will accelerate economic growth and free up public resources to invest in the productivity and future welfare of their populace. Furthermore, their large infrastructure gaps in combination with low debt allow these economies to further improve their competitiveness and boost growth. In this sense, their near-term growth trajectories are less complicated compared to a more advanced economy such as China.
Last year we saw that there is increasing momentum for great change and tackling structural problems of these economies. Having strong leaders with powerful mandates, 2017 saw a string of harsh but necessary reforms, which effects will materialize in the coming years. In India, the introduction of the GST and demonetization led to bumpers in GDP growth, but with the effects of these idiosyncratic shocks fading, the reforms of ‘Modinomics’ will modernize India´s economy (for example, India moved up 30 places in last year´s Ease of Doing Business Index). Likewise, Indonesia´s radical tax amnesty program helped the government raise revenues and increase social transfers to boost consumption by the lower-income households. And while the Philippines’ tax reform might soften personal consumption, it will offset its effect on growth by the Philippines’ ambitious fiscal stimulus package called “Build Build Build”.
Although these reforms look similar, they are mostly domestic-oriented. The next development phase of these countries will require a more outward-looking strategy, and this is where these three countries can benefit from cooperation. Increased trade and integration along trade routes in the Western Pacific region will help to develop their export capacity. Furthermore, more economic integration is in line with India’s maritime strategy, while Indonesia and the Philippines will benefit from India’s large and fast-growing consumer market. Besides being natural trading partners in the Pacific region, these economies will also have relatively similar growth trajectories and should simultaneously move up the value chain. Given their low industrial base but rapid digitalization, these economies can collaborate to develop their already advanced service industries. India’s Bangalore, for example, is already a world-leading IT hub, while Jakarta and Manila are important financial hubs in the region. With increasing trade and collaboration, new regional and global service hubs will emerge from India’s Eastern coast and in the Western Pacific. Lastly, because of their sheer numbers, these rising middle class consumers will adopt new lifestyles and reshape global demand. For example, Indian movies, Philippine hospitality or Indonesian cuisine and music will become export products between these countries, thereby becoming new sources of soft power.
As growth is slowing down in Asia’s former growth engines, if only because of their size, India, Indonesia and the Philippines might become Asia’s next “tiger cubs” if they can manage to keep growth afloat.
- Collaborations between the three countries in service industries like IT, media, or hospitality, will provide synergies, and boost the export capacity of these economies.
- India will become a major player in the triangulation strategy of Indonesia and the Philippines, especially in domains like maritime infrastructure projects and the digital economy.