By Bob Savic, Advisor to Dezan Shira & Associates
As the world emerges from an unprecedented pandemic-induced economic slump, Asia is once again garnering the attention of international investors and multinational corporations in the form of large-scale inflows of portfolio and direct investments into strategic economic sectors.
Unlike the period following the 2008 Global Financial Crisis where the focus on Asian economies was almost exclusively realized by corporate and institutional investors, in the post-pandemic era, governments and inter-government organizations from around the world are also pursuing close economic and political ties with countries across Asia.
While this often involves bilateral and multilateral negotiations over a dizzying array of bilateral and regional trade and investment partnerships, many non-Asian players are invoking imaginative strategic partnerships with their Asian counterparts, while some are erecting barriers between themselves and those Asian governments they consider to be strategic rivals.
Asia’s economic recovery supported by surging FDI in 2021
Inward investment has been increasing into the Asian region since the global record slump in foreign direct investment (FDI) in 2020 (see “Asia leads the global economy out of 2020’s record FDI inflow slump”). This has been particularly driven by aggregate demand which has been bouncing back across the world in 2021 to be fed by imports of competitive and innovative manufactured goods from Asia.
The strength of this international demand has precipitated surging levels of GDP growth in Asia, which is expected to reach about 7.5% in 2021, in contrast to -1.3% in 2020, while the region’s currencies have remained stable even as Asian central banks have generally maintained record low interest rates. Given this benign financial environment alongside stimulative growth prospects, Asia’s external trade and inward investment into the region are expected to expand by 8.3% and 5%-10%, respectively, over 2021, according to the UNCTAD World Investment Report 2021.
A key driver of these positive trends in inward investment can be attributed to Asian governments’ strategic focus on innovation-led growth in previous years. This is in addition to an abundance of local entrepreneurial talent, growing domestic consumer markets and the availability of long-term sources of capital. The result has been a surge in Asian corporate spending on research and development (R&D) exceeding that of its North American counterparts since 2011 – a trend which has increasingly widened over the past ten years.
In turn, this has set the scene for Asia’s business sector to adopt a new paradigm in innovation, much as America’s corporations managed to conjure up in the early to mid 1990s Over 2021 and 2022, the economies of India, East and Southeast Asia, are therefore likely to see global FDI being continually channeled into the region’s high-tech sectors currently benefiting from advanced digital and data technologies and large-scale investments into IT infrastructure.
Different stages of economic development across Asia also mean that global investors will be able to choose from a wide array of high growth sectors, in coming years, ranging from banking and financial services to education and from healthcare provision to artificial intelligence (AI), robotics and 5G. Inward FDI into renewable energy is also expected to gain traction as countries such as China, South Korea and parts of Southeast Asia orientate towards expanding green energy sources.
South Asia’s GDP growth and inward investment set to boom post pandemic
The Asian Development Bank (ADB) has forecast a bullish outlook for the South Asia’s economies over 2021 and 2022. The sub-region, made up of several countries including India, Pakistan, and Bangladesh, is anticipated to see Asia’s highest GDP growth rates of 9.5% and 6.6% over those two years.
India’s economy will be one of the strongest for each of those years, at 11% and 6%, following a -8% plunge in GDP over 2020. The Subcontinent’s economic giant will be eclipsed only by its smallest neighbor, the Maldives. The world-renowned tourist paradise is expected to rebound by around 13% and 14% in each respective year after collapsing -32% in 2020.
On a sector basis, India’s fast-transforming banking and financial services industries are expected to see the bulk of inward FDI as they embrace innovation in key products and services, including next generation investments into digital technologies and AI. However, the resurgence of the pandemic in April of this year, may result in a significant contraction of foreign investment in 2021, similar to the precipitous decline in investment of -24% for 2020. The negative picture may apply equally to Bangladesh and Sri Lanka where UNCTAD reports weak investment commitments are set to persist following 2020’s -87% and -96% falls in FDI amid minimal signs of any recovery.
Inward investment into East Asia ramps up into its innovative industries
According to the ADB, East Asia, constituting China, Hong Kong, South Korea, Taiwan, and Mongolia, will experience the Asia’s second highest growth rates. The sub-region’s expansion is expected to reach 7.4% and 5.1% in 2021 and 2022, heavily influenced by China’s leading growth rates of 8.1% and 5.5% during those respective years. China has already chalked up an outsized 18.3% annual rate of growth in the first quarter of 2021, driven in part by ballooning levels of inward FDI of up to US$45 billion for that period.
Given this economic growth and inward investment environment, the highest levels of inward FDI are likely to enter China’s mobile internet space as the country boasts the highest internet penetration in the world. The country’s fast developing healthcare sector, which is still lags developed world standards of healthcare, is also set to experience significant inward investment, especially in biotechnology and various kinds of online healthcare services. Overall, global FDI into China is expected to remain strong especially as FDI policies, introduced in 2020, to lure and consolidate inward investment come into effect.
Other more advanced East Asian economies, such as Hong Kong, South Korea, and Taiwan, can expect to benefit from inward investment in various forms of direct and indirect support for their ageing working populations including into biopharm and factory automation. This has already been evident in South Korea, where FDI has climbed by 47% reaching US$4.7 billion in the first quarter of 2021. In Hong Kong, inward investment is likely to remain volatile over 2021 and 2022, following several years of political protests and ongoing tensions between China and the US. Still, the special administrative region’s sound regulatory regime, low taxes and access to abundant capital will also serve to mitigate some of the negative effects.
Southeast Asia attracts global investment into regional supply chain platforms
Southeast Asia’s ten economies making up the Association of Southeast Asian Nations (ASEAN), plus East Timor, follow closely behind East Asia’s dynamic economies, with expected growth rates of 4.4% and 5.1% in 2021 and 2022. Vietnam will assume the mantle as the sub-region’s economic dynamo with growth of 6.7% and 7%, edging out Malaysia with 6% and 5.7% expansion. Only Myanmar is anticipated to see significant negative growth rates for that period as it wrestles with internal political instability amid Western economic sanctions.
Although Southeast Asia’s economies are relatively less developed in contrast to most of their East Asian counterparts, alongside a middle class only recently beginning to drive consumption demand, there is growing evidence of global investors channeling more investments into the sub-region, especially its two largest economies – Indonesia and Thailand.
On a sector basis, inward FDI into specific services and technologies such as e-commerce, digital economy, cloud computing, 5G and data center infrastructure is anticipated to expand quickly in 2021 and 2022. As a result, the region is projected to overtake North America as a hub for growing global data by end-2022, while numerous high-tech facilities will be completed by cloud and data center global multinational enterprises over that period
Even so, the extent of international investment into the sub-region will depend on the spread of the pandemic in 2021. To reduce some of its harmful consequences, ASEAN governments have launched substantial public spending programs to expand transportation telecommunications networks, and industrial estates. In 2020, this was realized when the sub-region became the prime global investment destination for ‘announced’ greenfield investments of US$68 billion.
Other factors significantly expanding global investor interest in Southeast Asia has been the conclusion of the Regional Comprehensive Economic Partnership (RCEP) in 2020. The creation of the world’s largest free trade region including all ten ASEAN economies along with China, Japan, South Korea, Australia, and New Zealand, is anticipated to significantly bolster its economies in hosting global investors from Western countries, as a platform in accessing politically problematic growth markets such as China’s (see “UK Exporters’ Use Of Singapore As ASEAN’s Supply Chain Gateway Boosted By New Bilateral Trade Agreement”).
RCEP will also act as a venue for the development of supply chains including those from Japan, as Tokyo pursues a policy of supporting its firms to relocate production out of China into mainly Southeast Asian centers of production.
Central Asia deters global investors amid numerous policy uncertainties
The World Bank’s economic outlook for 2021 and 2022 shows that growth prospects for the five countries of Central Asia is lower than that for the preceding three sub-regions. Nevertheless, growth is expected to be 3.7% and 4.2% for those years. According to the ADB, Kazakhstan, as the sub-region’s largest economy and having a GDP more than double all four other economies combined, is forecast to see the slowest rates of growth at 3.2% and 3.5% for each of those years, while Tajikistan will experience the highest growth rates at 5% and 5.5%.
UNESCAP stated that Central Asia experienced a pronounced contraction in inward foreign investment during 2020, falling by as much as over a third in Kazakhstan. Inward FDI will likely continue at relatively depressed levels due to tightening financial conditions across all countries as inflationary pressures build. This will be further worsened by ongoing economic and financial policy uncertainty and rising social and geopolitical tensions across the sub-region, partly because of the recent complete US troop withdrawal from Afghanistan.
Western governments employ different strategies in cozying up to some Asian countries
Recent efforts by major Western governments in integrating with their Asian counterparts are well documented in Asia Briefing and associated publications. These include the European Union’s (EU) negotiations in agreeing an economic partnership with India (see “The EU And India Launch High Level Talks On Trade And Investment”) similarly with the UK and India (“UK And India Announce New Trade And Investment Deals Ahead Of PMs’ Meeting”).
In Southeast Asia, both Western powers have established bilateral trade agreements with Singapore and Vietnam (see “The UK’s Trade Deal With Vietnam Builds On Hanoi’s Accord With The EU”). The UK is also looking to develop closer ties with other individual Southeast Asian nations including Indonesia (see “UK And Indonesia Promote New Economic Ties”) and Thailand (see “UK And Thailand To Cooperate In New Era Of Smart City Development”), while the EU maintains ongoing free trade agreement negotiations with Indonesia since 2016 and Philippines since 2015, although negotiations with Malaysia, Thailand and Myanmar have stalled in recent years.
The UK is going further still in seeking to conclude agreements with regional sets of East Asian economies such as in the form of the Comprehensive and Progressive Transpacific Partnership (CPTPP) which currently groups Singapore, Vietnam, Malaysia, Brunei and Japan (see “Britain begins attempt to become a European country with an Asia-Pacific economy”). The UK has also ratified economic partnerships with Japan and South Korea, containing some additional provisions on top of the continuing EU agreements the UK inherited with those countries.
For now, the US administration under President Biden is not negotiating new trade agreements with any Asian countries, although existing bilateral accords remain in force with South Korea and Singapore. On a broader global scale, as set out during the recent G7 Meeting in Cornwall UK, President Biden proposed a Build Back Better World (B3W) program. Its main object will be an ambitious US$40 trillion green infrastructure investment program for developing countries considered to have democratic values in common with the US and its allies, although no details have been released on exactly which developing Asian countries would fall within its ambit. The merits of this scheme are discussed in this article (see “What Is The ‘Build Back Better World’ Partnership And How Is It Different From The Belt And Road Initiative?”).
Otherwise, the US Trade Representative office (USTR) generally states that it seeks to enhance bilateral trade and investment relations with the countries of Southeast Asia and oversee negotiation strategies for South and Central Asia.
The most controversial aspects of Western governments’ policies towards Asia arise in their acrimonious relations with China. This is most evident in the EU-China Investment Agreement which appears to have stalled indefinitely, despite an in-principle agreement at the end of 2020. Meantime, ongoing tense political relations between China and the UK have resulted in no expression of interest for holding trade negotiations, despite recent signs of fast-expanding bilateral trade (see “UK Exports To China Resume High Growth Trend In Q1 2021, After Plunging In 2020”).
Some non-EU European states have agreed formal economic ties with China such as Switzerland and Iceland, while Norway is the latest non-EU country to re-energize its bilateral political ties in seeking a trade agreement with the Asian nation (see “Norway And China Strive To Complete Free Trade Agreement Negotiations”).
It goes without saying that China-US negotiations on any kind of formal economic cooperation have completely fallen away. The 2020-2021 “phase one” trade deal agreed between former US President Donald Trump and the Chinese government has been generally considered a failure. Its centerpiece, being the requirement that China purchases US$200 billion worth of specified US exports over those two years, was never likely to be realistically fulfilled by China. Instead, the Biden administration has instituted a de-facto “global decoupling” policy with China in the guise of the 2021 US Strategic Competition Act which raises the risk of a China-US economic strategy becoming literally ‘un-negotiable’ (see “Next Up In Global Decoupling: The US Strategic Competition Act 2021”).
A new era of inter-governmental South-South cooperation for Asia and non-Asian developing world
In contrast to the patchy and uncertain political and economic ties brewing between most Western governments and certain Asian countries, relations between non-Asian developing countries and Asia’s governments seem generally more positive. This last section examines growing cooperation between several non-Asian regions and Asia.
The relative success of some Asian countries in navigating the complexities of globalization, especially by the developing Southeast Asian economies has grabbed the attention of African leaders for some time. During policy debates over structural adjustment reforms in Africa, African ministers have often pointed to the significant role of governmental economic involvement in East Asia. This was in contrast to the “Washington consensus” advocated by the World Bank, International Monetary Fund, and other donor institutions, which pressed for sweeping liberalization and the withdrawal of the state from economic intervention.
Asia’s ability to forge strong public-private partnerships, as noted a former Kenyan Minister of Planning and National Development, “is an experience which has helped Asian countries make tremendous strides in development.” He further went on to say, “Given that our two continents, Africa and Asia, are faced with globalization in an era when pressures for liberalization are strong, we in Africa have a lot to learn from the Asian experience.”
One of the most prominent informal platforms for African inter-regional bridge building with Asia first arose in the New Asian African Strategic Partnership (NAASP). The organization was formed at the 2005 Asian African Summit in Jakarta, Indonesia, where it adopted three pillars: political solidarity, economic cooperation, and socio-cultural relations, within which governments, regional/sub-regional organizations, as well as peoples of Asian and African nations interact.
The 2005 Summit was attended by 106 countries, comprising 54 Asian countries and 52 African countries. It concluded a process whereby political summits would run concurrently with a business summit every four years, while high-level ministerial meetings would be held every two years. Hence, from the outset, it was recognized that Asian-African interaction should be focused on concrete, practical and achievable areas of cooperation.
To be sustainable over the longer term, Asian-African cooperation under NAASP was also to be formalized as a multilateral organization with much discussion centering on the need for an established institution such as ASEAN to take a lead role in formalizing the institution.
According to the United Nations’ Africa Renewal program, because of NAASP, Asia now looms larger in Africa’s field of vision, wherein it quotes Tanzania’s Foreign Affairs Minister stating that, “for historical reasons, we used to pay attention only to Western countries. Now this has changed. We are shifting our eyes to Asia.”
Similarly, the Caribbean Community (CARICOM) made up of 20 Caribbean countries has increasingly eyed Asia as a partner for trade, FDI and other forms of economic cooperation to diversify as part of their post-global pandemic economic recovery efforts. Of particular interest to CARICOM has been Asia’s adoption of the Regional Comprehensive Economic Partnership (RCEP) which marks an alternative means by which Asia is demonstrating strategic global leadership in promoting multilateralism and a rules-based approach to trade. Both are important issues for CARICOM, especially at a time when unilateralism and protectionism appear ascendant.
CARICOM firms operating in the Asian market are also expected to see a potential reduction in transaction costs from the implementation of RCEP, in allowing them to obtain only one certificate of origin and thereby build more efficient supply chains within the Asian region. Although RCEP is a trade agreement rather than a political arrangement, it further strengthens the economic prowess and geopolitical significance of those participating countries on the multilateral stage, which could be to CARICOM’s benefit were it to integrate with RCEP on a collective organizational level rather than in the form of individual Caribbean states.
RCEP might also shape future trade and trading rules within Asia and could serve as a basis for what any future agreement between CARICOM and ASEAN agreement could resemble. In terms of broader future Caribbean-Asian economic relations, therefore, their respective public and private sectors are expected to embrace the possible economic opportunities RCEP might present in terms of trade, FDI, and wider cooperation.
Arguably, the most advanced pivot from non-Asia towards the Asian region, over the last two decades, is mirrored in relations between the countries of the Arabian Gulf and Asia. The key driver in this dynamic situation has been the gravitational economic pull of Asia for the Gulf’s economies. In this context, the Gulf Cooperation Council’s (GCC) total trade with mostly developing Asian countries jumped from US$124 billion in 2000 to US$667 billion in 2018. This surpassed the GCC’s total trade with advanced economies, from US$207 billion to US$527 billion during the same period. The GCC’s trade with China and India, for example, was a mere US$12 billion and US$7 billion in 2000. It jumped to US$140 billion and US$120 billion, respectively, in 2018. The GCC’s trade with just these two countries is now equal to or more than the GCC’s trade bill with the United States and the EU combined.
In 2021 and 2022, this region-to-region relationship can be expected to expand beyond the economic domain to include political and security arrangements resulting in a Gulf-Asia relationship which is broadening into a multilateral framework. Hence, while oil and non-oil trade are still the fulcrum of their association, “strategic” partnerships are fast becoming the norm. In terms of the overlap of Gulf-Asia strategic interests, where the West is no longer the main buyer of oil or trade partner of the region, then it would be less inclined to bear the security burden alone, which it has done for so many decades.
If the East must ensure regional stability and unhindered growth in the future, it will need to stop relying on Western security guarantees and get involved in one form or another. Gulf governments have increasingly recognized this changing state of affairs even before the United States announced its own ‘pivot to Asia’ during the administration of former US President Barack Obama.
Consequently, along with economic diversification, the Gulf countries have also diversified multidimensional aspects of their foreign policies, especially with China, India, Japan, and South Korea. Together with Russia, these changes are in the process of altering the multiple decades-old US-centric security architecture in the Gulf.
The global pivot to Asia is a complex one involving a plethora of multinational corporations and financial institutions, on one level, and national governments alongside formal regional associations of countries on another. In the respect of the former, the flow of trade, direct investment and portfolio capital into Asia is gathering pace with the anticipation that the region will become the principal center of the global economy by the middle of this century.
This trend may, however, be complicated by widening geopolitical rifts between most major Western governments and China, as the region’s largest and most vibrant economy. As an alternative to growing relations with China, Western countries have accelerated their political, institutional, and other integrative relations alongside select Asian governments with whom they consider cooperation can be undertaken based on democratic and other shared values. This is despite most of those Asian governments still maintaining strong connections with China while the practical exercise of democracy among other supposedly common values can be described as questionable at best.
Into this confusing economic and political cocktail, the non-Asian developing world is raising its own institutional and integrative policies in its efforts to fuse with the entire Asian region. Arguably, it is this increasingly apparent rise of South-South inter-government cooperation that may serve to be the final hammer blow which seals the irreversible global pivot to Asia.