Walking a development tightrope in Southeast Asia

The Asean 4 governments adopt expansionary fiscal measures to spur growth and boost domestic consumption. Crucial to fiscal spending is the issue of how the state should distribute its scarce resources for public infrastructure and populist schemes.
Across Southeast Asia, massive infrastructure projects are being planned and implemented by governments in order to enhance domestic consumption.
In Indonesia, the major drivers of growth are private consumption and government spending, contributing 60 per cent of GDP. This year’s capital expenditure of US$16.2 billion will increase by 15 per cent to $20.3 billion next year, with infrastructure development as the main priority. Indonesia plans to build more power plants, 560 kilometres of roads, 380 kilometres of rail tracks and 15 additional airports.
In the Philippines, where domestic consumption comprises 70 per cent of GDP, the government allotted $8 billion this year to infrastructure spending, which will hit a record high of $9.6 billion next year. In Thailand, a $1.5-billion highway is being constructed, from Bangkok up to the Thai-Myanmar border. The construction of the Bangkok-Nong Khai railway, which will be linked to Laos, will start in January. Over the next ten years, Thailand intends to spend $80 billion for infrastructure and $90 billion to improve connectivity in the Greater Mekong Region.
Malaysia allocated $10 billion this year for public infrastructure, industrial and rural development. The construction of a new MRT line in Kuala Lumpur, estimated to be worth more than $10 billion, has recently started. Next year, the government will spend $16 billion on roads, railways and hospitals.
The accelerated infrastructure spending in the region is expected to boost Asean’s connectivity. The building of roads, seaports, airports and railways will strengthen the Asean Economic Community, facilitating unhampered flow of goods, capital and skilled labour across the region from 2015.
Furthermore, the recent and upcoming infrastructure projects will significantly lower the cost of doing business, improve market accessibility and enhance the competitiveness of Asean countries. According to the World Economic Forum’s 2012 “Global Competitiveness Report”, shoddy infrastructure is still dragging down the investment climate in Indonesia and the Philippines. Analysts say Indonesia, in particular, can easily grow by 7 per cent to 8 per cent if it can improve its infrastructure.
The Asean 4 economies have also adopted populist measures, such as subsidies and cash dole-outs, which are aimed at inducing domestic spending and also boosting the popularity of ruling parties.
Indonesia’s 2013 budget was drafted with populist considerations. Despite calls from economists to scrap the highly popular oil subsidy and a World Bank report that such schemes do not help the poor, fuel subsidies will increase by 36 per cent from $21 billion this year to $29 billion in 2013.
Similarly, Malaysia has allocated $14 billion worth of food and fuel subsidies, taking up 18 per cent of its revenues this year. With a close eye on the forthcoming general election, the Barisan Nasional government announced fiscal sweeteners this year such as educational aid to the ethnic Indian community, $821 million in cash handouts to lower-income households and bonuses to 1.3 million civil servants, as well as special payouts to retired employees amounting to $714 million.
Under the populist rice buying programme, a key electoral pledge of Thai Prime Minister Yingluck Shinawatra’s party, Thailand’s government purchases rice from farmers at Bt15,000 per tonne, against the market rate of Bt9,000 per tonne. The Philippines likewise has its own handout, the Conditional Cash Transfer (CCT) Programme. For this year, there are 3 million poor household beneficiaries of CCT with a budget of $930 million, which will be increased to $1 billion in 2013.
Crucial to public spending is how governments identify their priorities. Clearly, populist “band-aid” measures lead to a paucity of available resources for infrastructure spending. For instance, the Philippines’ infrastructure investment is merely equivalent to 3 per cent of GDP, below the 5 per cent average for the region. Indonesia, meanwhile, is spending more on fuel subsidies (18 per cent of the budget) than infrastructure. Thailand expects to lose $2.6 billion, or one-fifth of its budget deficit this year, from its rice intervention scheme.
Southeast Asian governments adopt populist measures not only to induce domestic consumption but also to strengthen their political/electoral base. These measures are essentially not grounded on economics but on political considerations.
With the declining popularity of Indonesia’s ruling Democrat Party and the legislative and presidential elections in the next two years, it would be difficult for members of the Indonesian parliament to support an unpopular move such as scrapping fuel subsidies. One important political strategy of Malaysian Prime Minister Najib Razak is to use financial handouts to get the electoral support of the Malay-Muslim majority, rural households and the mammoth government workforce.
Thailand’s rice scheme is also intended to buttress the political base of PM Yingluck and her party in the countryside. Far better for them to pursue long-term rural development measures that effectively address the highly politicised urban-rural socio-economic dichotomy in Thailand. In the Philippines, critics of CCT are wary that the programme will be used by local officials to buy votes in the 2013 mid-term polls. While the intention of the government in implementing CCT may be noble, it would be better to channel more funds to its agrarian reform programme, which could sustainably boost farmers’ incomes and productivity.
Given their scarce fiscal resources, Asean governments would do well to reduce or completely stop funding populist “band-aid” measures and focus on long-term state investments that would raise people’s disposable incomes and bring sustainable economic growth and development. In short, governments must walk a tightrope between populism and fiscal discipline.