Speech at the Economic Growth in Southeast Asia: Integration, Sustainability, and Capacity Development

Speech by ADB Vice-President Stephen P. Groff on 28 June 2013 at the Economic Growth in Southeast Asia: Integration, Sustainability, and Capacity Development, co-hosted by WWF USA and George Washington School of International Affairs in the United States

Introduction: Southeast Asia’s recent growth experience

Southeast Asia is undoubtedly one of the most dynamic regions in the world. It’s resilience and growth has continued even through the recent difficult global financial and economic situation. The average GDP growth of the ASEAN 10 in the last five years has ranged from 2.9% for Thailand to 5.9% for Viet Nam and Indonesia.

However, there are substantial gaps in per capita GDP among the Southeast Asian countries. The figure ranges from 2-3 thousand dollars for Lao PDR and Cambodia to a high of 50-60 thousand for Brunei and Singapore. Indonesia and the Philippines come in at 4-5 thousand, Thailand at 8 thousand, and Malaysia at over 16 thousand.

Large disparities can be found not only across Southeast Asian countries, but also within them, as shown by their relatively high Gini coefficients or indices. These high Gini coefficients reflect the large development gaps among various regions of a country, between urban and rural areas, between coastal areas and the hinterlands, and between mainstream populations and ethnic minorities.

Geographic disparity is one issue, but we also have a temporal challenge. While there is no summary statistic yet that would give us a picture of inter-generational equity. However, it is quite clear that in many cases, the welfare of future generations is being sacrificed to support present growth. This is particularly true where growth largely depends on natural resourcebased industries or brings substantial damage to the environment.

The key challenge Southeast Asia is to spread the fruits of growth as widely as possible - between and among countries, among their respective populations, and between generations. Two key drivers can help address this challenge of inclusive growth: integration and sustainability.

Why regional integration?

It is now well recognized that regional cooperation and integration, or RCI as well call it, is an effective means for promoting inclusive growth. It allows the smaller, less developed countries to access larger markets and participate in extensive value chains. Its benefits also often extend to the less developed areas and marginalized populations within countries.

ADB’s charter mandates it to play an active role in regional cooperation in Asia and the Pacific. From the Bank’s perspective, however, RCI is not an end in itself; it is a means to achieve its core objective of poverty reduction. In 2006, ADB adopted a formal Regional Cooperation and Integration Strategy.

ADB has sought to operationalize this strategy to promote inclusive growth by supporting a number of subregional RCI initiatives in Asia and the Pacific. We support three such intiatives in Southeast Asia:

  • First, the GMS (or Greater Mekong Subregion) program - ADB’s showcase subregional initiative, launched 1992. Cambodia; the People’s Republic of China (PRC), particularly the southern provinces of Yunnan and Guangxi; Lao People’s Democratic Republic; Myanmar; Thailand; and Viet Nam participate in this initiative.
  • Second is the IMT-GT (or Indonesia-Malaysia-Thailand Growth Triangle). Formed in 1993 by the governments of the IMT countries, it covers 14 provinces in Southern Thailand, 8 states of Peninsular Malaysia, and 10 provinces of Sumatra, Indonesia.
  • And third, we have BIMP-EAGA (or the Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area) - an initiative established in 1994 covering some of the disadvantaged and marginalized areas in these four countries.

The joint efforts of these countries, supported by ADB and other partners, bolster regional physical connectivity and bring greater opportunities, particularly for the poor, to participate in market activities. Empirical evidence suggests that basic connectivity brings inclusive growth benefits to poor landlocked areas like Savannakhet in Laos, where the development of the GMS East West Economic Corridor can be related to a 35% reduction in poverty.

Along with regional connectivity, trade facilitation measures are being implemented to help countries overcome the challenges of non-tariff barriers and thereby catalyze private sector investment and jobs. Through the resulting deeper regional trade and enhanced cross-border FDI flows, volatility by hot money and other unstable flows is mitigated.

Full economic integration, however, is still something to aspire to. The ASEAN countries have set 2015 as the target year for the establishment of the ASEAN Economic Community (AEC). However, this is generally viewed not as a hard target for full integration, but rather as a milestone year. In essence, it reflects the ASEAN countries’ commitment to regional economic integration, giving them something aspire to and take steps toward. ADB’s support for the subregional groupings helps them act as building blocks of ASEAN integration. III. Emerging sustainability challenges of economic growth

Emerging sustainability challenges of economic growth

I would like to turn now to some critical challenges facing the ASEAN region - namely: food and energy security, inclusive growth, and environmental sustainability.

Emerging issues of food and energy security: First, food and energy security. Rapid economic growth in the region has created a growing middle class with higher disposable incomes and new dietary patterns. The demand for consumable goods is also on the rise. And the energy demand of the region has soared in recent years. In the Greater Mekong Subregion (GMS) alone, electricity demand by 2025 is expected to increase threefold compared to 2010 (from 77,000 megawatts (MW) to 237,000 MW).

Due to the increasing demand for energy and food, as well as domestic and industrial uses, water demand is also rapidly rising. Water management challenges are widespread and of growing concern. It is evident that securing water, food and energy supply will be critical to sustain economic growth and prosperity for the developing countries of Southeast Asia.

Inclusiveness of growth: Second, the region must take on the challenge of inclusive growth. Despite impressive economic growth in the region, millions of people are still entrenched in poverty. The disparity between rich and poor has grown in most countries, and the benefits of development have bypassed many. The vast majority of the poor live in rural areas and are directly dependent on natural resources for their livelihoods. Many are being increasingly marginalized due to land policies. In order to ensure social harmony and genuine prosperity, inequity among and within countries needs to be urgently addressed.

Ensuring Sustainability: Third is the issue of environmental sustainability. The future prosperity of the region is threatened by increasing competition over natural resources, as well as climate change. The region’s rich endowment of natural resources, if managed sustainably and equitably, will provide vital support for the poor’s livelihoods, and also ensure water, food and energy security for all the peoples of Southeast Asia.

Unfortunately, not enough attention has been paid to the region’s declining natural capital. Without action, this decline in both quality and quantity threatens to undermine the gains made these past few decades. In a recent report, the WWF has estimated that in the GMS countries alone, an estimated 10 - 12% of GDP is lost every year through the overexploitation of forests, land, wildlife and fisheries, and through ecosystem pollution. Forest cover loss since 1990 totals 8 million hectares - an area equivalent to almost one third the size of Lao PDR.

It is clear that the region cannot continue to build its economic wealth at the expense of its already scarce natural wealth. To ensure sustainability, it is urgent to alter the current development trajectory. This means reconfiguring governance mechanisms to deliver better returns on natural, human and economic capital. In other words, countries of Southeast Asia need to shift to an environmentally sustainable, or ‘green’ development pathway.

In order to make Green Growth a reality, actions that promote investments in natural capital, improve resource governance, enhance supply chain efficiencies, and utilize publicprivate partnership need to be institutionalized. Let me now briefly touch upon some of ADB’s work in these areas.

Investing in natural capital: ADB is working with its developing member countries to promote inclusive and environmentally sustainable growth through regional integration. Along with like-minded partners such as WWF, we have promoted several regional initiatives with member countries to secure the natural resource capital base.

With assistance from ADB, GMS countries are collectively managing transboundary biodiversity and ecosystem landscapes. We also promote other regional environmental programs, such as the Heart of Borneo and Coral Triangle initiatives, which are helping prevent damage to critical ecosystems from increasing development pressures.

Governance for better resource allocation: Through our regional and national initiatives, ADB is also building the capacity of governments to strengthen environmental management. In the GMS, countries are increasingly adopting multi-sectoral planning mechanisms, as identified in the GMS Strategic Framework (2012-2022). Such mechanisms have enabled institutions to reconcile competing priorities. Cross-sectoral dialogues based on empirical scientific information and economic justification are increasingly becoming new features of policy decisions in the region.

In Myanmar, we are helping strengthen environmental safeguards to cope with flood of new investments in infrastructure development. Through ADB’s GMS Core Environment Program, we working closely with the government to draft new Environmental Impact Assessment procedures and develop environment quality standards.

Enhance supply chain efficiencies: ADB is also providing technical support to member countries to incubate green business models with an objective of creating employment and livelihoods opportunities. Through the Core Environment Program, ADB is helping Thailand, Lao PDR and Viet Nam to establish financing mechanisms that will allow small and medium road freight enterprises to use clean technology, improve logistics and reduce fuel use.

In addition, we are supporting the development of viable SMEs and community-level social enterprise business models to promote inclusive and green supply chains.

Financing and public-private partnership: ADB is leading innovations in climate change and risk financing. As massive investments are required for adaptation, we are intensifying our efforts to leverage external finance. The Climate Public-Private Partnership Fund has been established for this purpose. This $1 billion+ investment vehicle, in which ADB has made an equity investment of $100 million, is set up to mobilize financing both for the public and private sectors. We will be exploring the feasibility of establishing several risk financing mechanisms such as micro-insurance schemes. ADB is increasingly engaging with government and private sector in the region to foster public-private partnership to increase investment in sustainable infrastructure and green technology.

In closing, the story of Southeast Asia has been a story of tremendous growth. Yet not all of the people of Southeast Asia are benefiting from growth. We at ADB believe that deeper regional integration, attention to food and energy security, and a focus on growth that is both inclusive and environmentally sustainable are the keys to spreading the benefits of growth more widely throughout the region. Thank you.