The Emerging Northeast–Southeast Asia Divide and Policy Implications

Since the outbreak of the Asian financial crisis in mid-1997, the gulf between the Northeast Asian economies and Southeast Asian economies has widened as measured by GDP growth rates and size, direct and portfolio investment flows, stock market capitalisation and trading turnover, as well as foreign exchange reserves. The growing divide between the two regions can be explained by four factors, namely: political-risk differentials; different paces in economic restructuring and financial reforms; China’s allure in post-WTO entry; and the technological gap between the two regions. To recapture competitiveness, the Southeast Asian economies need to pursue the following policy responses with some urgency: re-establish a more stable political environment; accelerate market-oriented reforms and liberalisation; and fine tune incentives to attract foreign investment.