Trade, foreign direct investment and economic development of Southeast Asia

Abstract The Southeast Asian economies, more particularly the ASEAN‐5 of Indonesia, Malaysia, Philippines, Singapore and Thailand, have been pursuing an increasingly outward‐oriented, export‐led and foreign direct investment‐led development strategy. This has contributed to high growth performance and structural transformation in recent decades, as trade and FDI enable these economies to overcome the constraints of small domestic markets and narrow resource bases; exploit comparative advantage and scale economies; access foreign capital, technology and managerial and marketing expertise. However, there has been some questioning of the sustainability of the Southeast Asian model, particularly in the light of the regional currency and financial crisis that has engulfed the region since July 1997. The crisis has not negated the role of trade and has strengthened the role of FDI. Opening capital accounts and domestic financial systems without putting in place measures to strengthen the latter, including prudential regulations and monitoring and surveillance mechanisms, have exposed these economies to the downside of volatile short‐term capital flows. Measures are being undertaken to remove the weaknesses in the economies revealed by the crisis, resulting in more efficient, transparent and equitable economic systems. Together with some of the fundamentals which contributed to past high growth, these economies will recover their economic dynamism and the economic miracle can resume. Keywords: Southeast AsiaASEANcurrency crisistradeinvestmentdevelopment strategyeconomic miracle