The growth of China and India has caused significant policy shifts across Asia as countries used to absorbing the attention of Western politicians and investors suddenly find themselves in the shadows, approaching obscurity. About the only thing that now attracts global attention to these countries tends to be of the wrong sort, such as natural disasters and terrorist attacks.

The impact of the two growing markets in the midst of world economy in a downward spiral simply means that competitors will have to pay up dramatically to garner attention from capital providers, let alone actually get any money.

I wrote many moons ago about the growing irrelevance of the Association of Southeast Asian Nations (ASEAN) [1], which has now been echoed by other media after the group failed to find common ground this month against Myanmar. Granted that any group that counts the authoritarian government of Singapore as a democracy has a long way to go on its definition of human rights, the failure to agree on Myanmar was nevertheless a pointer to the bleak future of member countries who have lost the key economic rationale to stay together.

More than India, it is China that has helped to push ASEAN into economic irrelevance, as the country vacuumed up first the lower end of manufacturing and then increasingly absorbed value-added industries. This has left vast swathes of industry in countries like Vietnam and Malaysia completely unviable in the face of competition from the Asian giants.

Lacking the strategic depth required to offer domestic consumption, ASEAN has found member countries’ reliance on exports suddenly poisonous. The dilution of their trade protocols with China helped to diminish tariff protection accorded to key industries such as computer hardware and automobile parts, in turn destroying the growth potential if not the actual existence of many manufacturing plants. That has in turn changed the role of ASEAN from value-added manufacturing to more basic industries, such as the export of agricultural produce, mining and energy.

Central banks around ASEAN have failed to catch on to the need for their domestic markets to account for an increasing portion of economic growth, which would have allowed them to free up their currencies. Instead and thanks mainly to the Asian financial crisis of 10 years ago [2], the region’s currencies are still “managed” to provide competitive advantages for manufacturers in what must count as one of the most futile tasks in the global economy today.

Singapore is an excellent example. Hoping against hope, the country’s central bank zealously guards against any “unnatural” rise in the currency, in order to provide some degree of staying power to its strategic industries including manufacturing. With Singapore’s manufacturers suffering from higher employee costs, a miniscule domestic market and marginal productivity gains relative to China and India, I simply cannot see any of them surviving under open competition. The last point goes to the heart of ASEAN’s current problems.

In the days of yore, that is 10 years ago, ASEAN benefited from significant competitive advantages in the raising of capital. This in turn meant that the region’s producers could easily ramp up capital-intensive industries, which amplified the productivity advantage against China and India. In the years following the Asian financial crisis, capital has flowed freely into first China and then India, effectively neutralizing any advantage that ASEAN used to possess.

The gap between the domestic technological prowess of ASEAN and that of China and India has reversed completely. In India for example, a domestic company, Tata Motors, has announced that it will introduce a car for US$2,500 [3], showing cutting-edge engineering capabilities that will leave the automobile manufacturers in Malaysia gasping for breath should tariff barriers be removed. The protected icons of Malaysian automobile manufacturing such as Proton haven’t designed and developed a single doorframe on their own, let alone a whole car.

The delicious irony of this development is that the same Indian company is reportedly the front-runner to buy the Jaguar and Land Rover units of Ford Motors, showing that it can raise substantial capital at short notice even in the context of the current crisis in credit markets.

Strategic consequences

While the strategic consequences of China’s growth have been most dramatically felt by Taiwan, whose efforts to remain recognized by a motley crew of Pacific islands and South American countries have met exponentially growing obstacles with every year, the same effect is now being felt across the rest of the region.

South Korea has been at great pains to increase the contribution of its services sector and has of late been projecting an image of Seoul as the new financial center for North Asia. This is because a country of 40 million people could simply not hope to both innovate and manufacture competitively against China for the next 20 years. This is why the thinking among South Korean businessmen with respect to North Korea is shaped by the need for access to cheaper manufacturing facilities. That has in turn imposed strictures on what any South Korean government can do and say with respect to the North.

India’s neighbors have it worse. Not one of them is a functioning plural democracy to start with, with the possible exception of Sri Lanka [4]. Even after ignoring the niceties of democracy in Sri Lanka, the decades-long civil war with Tamil separatists appears to have worsened in recent days with the killing of the political chief of the separatists earlier this month seen as causing further bloodshed in coming months. The deadly Tamil Tigers could easily push the country into a sharp recession, more than any changes in textile quotas and the vagaries of the Monsoon on tea exports ever could. Investors looking at returns similar to those of India but with significantly higher political and terrorism risks would obviously choose against Sri Lanka in coming months.

I have already written recently on Pakistan [5]. About the only thing that can be added to that article is that the worst-case scenario of Shaukat Aziz’s departure unfolded on the same day that the article was published. Without his capable direction, I expect the Pakistani economy to slide, with many foreign investors likely to pull out as the political environment worsens. It is of course not the economy that Western countries care about for Pakistan, as I wrote in the above-mentioned article, but the fate of the country’s nuclear weapons. Remove these weapons from the picture and it is unlikely that Pakistan would get any more column space in major Western media than Afghanistan does today.

Nepal and Bangladesh have poor infrastructure to start with, and political turmoil has made matters worse for any turnaround in these countries. The troubles caused by the Marxists and Islamic fundamentalists in these countries [6] have caused many industrialists to flee, despite obvious cost advantages in place. An unstable political environment means that foreign direct investments are increasingly difficult to source. This is how any downward spiral starts, keeping the poor in desperate poverty.

The main, some would say sole, export of these countries is people to staff the factories of India. To be sure, that has caused significant political backlash in India itself, as seen in the recent attacks on illegal Bangladeshi laborers in northeast states. Indian media report that despite these attacks, the flow of people fleeing Bangladesh for the relative economic prosperity of India has only increased in recent weeks. That is because the only thing remaining for people left behind in Bangladesh (and perhaps Nepal) to do is to sit around waiting for the annual flooding of the Ganges.

1. Mid-life crisis for ASEAN Asia Times Online, December 16, 2006.
2. Asia’s scalded cats Asia Times Online, July 7, 2007.
3. This will be the cheapest mass produced car in the world, according the auto industry insiders, although I do question where in India these cars will be driven given the parlous state of the country’s infrastructure.
4. The strict definition of a plural democracy doesn’t work for Sri Lanka given the large number of disenfranchised people in the country’s restive north, as a result of the country’s patently racist constitution.
5. Playing South Asia’s World War III game Asia Times Online, November 17, 2007.
6. The jihadi ate my homework Asia Times Online, February 24, 2007.