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Southeast Asia’s Economies Can Gain Most by Packaging Ambitious Reforms

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Southeast Asia’s Economies Can Gain Most by Packaging Ambitious Reforms

Southeast Asia’s major economies have made major strides over the last couple of decades. The largest have seen income per capita grow at least three-fold over the past 20 years amid global integration and prudent policymaking.

Vietnam now enjoys an income level that’s 11 times higher than in 2000. Building on such gains to close the region’s gap with high-income countries—an ambition for many seeking to break from the so-called middle-income trap—while challenging, is in reach.

Combining deliberate, ambitious structural overhauls can help the region’s largest economies achieve higher potential economic growth and sustainably attain high income levels. Wide-ranging reforms can build resilience to shocks in the face of uncertainties and help the private sector drive growth.

Chart1

Packaging together broad, economy-wide reforms, spanning areas from regulation and governance to education, is the best way to achieve that goal, our research shows. Our study of output gains derived from structural reforms in advanced economies and emerging markets suggests that countries such as Indonesia, Malaysia, Philippines, Thailand, and Vietnam—the five largest emerging markets out of 10 economies in the Association of Southeast Asian Nations, or ASEAN—could increase long-term real economic output, on average, by 1.5 percent to 2 percent after two years and up to 3 percent after four years following comprehensive and simultaneous economy-wide reform packages.

Packaging ambitious reforms, however, often entails substantial political economy challenges; efforts on consensus building across key stakeholders is needed to facilitate such an approach and help deliver sustainable gains.

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Six countries, four factors

Our analysis aims to help the five of the major ASEAN emerging market economies achieve their goal to join the sixth, Singapore, among the high-income countries in the next two to three decades.

We focus our assessment on four factors: trade and economic openness, economic sophistication, investment and governance conditions, and human development. These are the main broad structural areas to address, though the recommended areas of focus would vary by country.

  • While the six main ASEAN economies are generally more open than the average emerging market in the Group of Twenty, these countries still have more barriers to trade—and are relatively harder to trade with—than the median country in the Organisation for Economic Co-operation and Development, when measured by the Trade Facilitation Performance index. Improving logistics and trade facilitation to make cross-border transactions faster, cheaper, and less uncertain would help the five largest ASEAN emerging market countries boost economic growth. Moreover, as discussed in our Asia-Pacific Regional Economic Outlook in October 2024, addressing the lagging services trade can help maximize pro-competitive gains and technological spillovers, while creating high quality jobs. In fact, the transition to a more services-based economy by emerging markets does not mean that the scope for catching-up with advanced economies’ income levels would be diminished—however, making the most of it requires facilitating the transition to highly productive services.
  • The major ASEAN economies are generally well diversified, though with varying degrees of economic complexity, led by Singapore. Countries on the lower end of this spectrum typically have relatively lower levels for education and labor productivity. Spending more and better on high-quality education, improving the quality of learning, and better matching skills with jobs would help these countries improve productivity and move up the sophistication ladder for the economy at large (rather than just in specific sectors).
  • In terms of investment attractiveness, the largest ASEAN emerging markets tend to lag the median for OECD countries on governance measures such as government effectiveness and regulatory quality. They are, however, ahead of the average emerging market economy in the G20 in this area. ASEAN countries often show weaker logistics performance and higher business regulation—Singapore being, again, an exception. Finally, while domestic credit is relatively ample in the major ASEAN emerging market economies, financial inclusion remains insufficient to support broad-based growth, as reflected in the low share of people with a bank account in some countries. Strengthening governance and anti-corruption efforts, as well as the quality of the infrastructure would also support accountability and business certainty and likely improve investment.
  • On human development, it is striking that all major ASEAN emerging market countries enjoy a demographic advantage relative to benchmarks. In other words, they generally have relatively more people working than dependants (such as children and elderly individuals). Therefore, there is an opportunity to implement reforms now before aging populations increase fiscal burdens such as pensions and healthcare. Another issue is that these countries generally display greater inequality than the OECD average and lower life expectancy, population health and living standards. There is also a greater prevalence of informal work. Closing these gaps would better support inclusive and resilient growth.

Chart2

Reforms to prioritize

What structural areas should ASEAN countries focus on to boost growth in a sustained and inclusive way?

Building on analysis in our 2024 selected issues papers on Indonesia and Philippines, we find that packaging reforms yields better output outcomes than a sequenced, gradual approach.

A major simultaneous reform package improving business and external regulation, governance, and human development could raise output levels by up to 3 percent after four years. The benefits from enacting a single major economic reform would be more modest.

This result highlights that deliberate, ambitious packages of structural reforms can help the major ASEAN emerging market economies achieve higher potential growth and realize their vision of reaching high-income levels in a sustainable way.

Amid a shock-prone global environment, ambitious economy-wide structural reforms can also help build resilience by fostering diversified, broad-based, inclusive growth at the domestic level, and ensuring a credible and robust institutional framework to further unleash private sector-driven growth.

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