How strong is the spillover from the two giants to the ASEAN economies?
Precisely answering this question is a
challenge. Figure 1.2.3 provides the likely reduction in the level of output of the lar...
ger ASEAN economies relative to their baseline forecast in response, during the same year, to PRC and India GDP being 1% lower than their baselines.
The spillover into ASEAN of a GDP shock in the PRC is twice as large as one from India. Absent any other distortion, GDP being 1% less than baseline in the PRC tends to reduce ASEAN’s output by almost 1/3 of a percent from its baseline in the same year. The spillover into ASEAN
from a shock in India is only about 1/6 of the shortfall in India. Looking at the impact on larger ASEAN countries, spillover from the PRC has the largest effect in Malaysia, where it is almost 1/2 as large as in the PRC, followed by Indonesia and Singapore at about 1/3. Spillover from India
into these countries is only 1/2 that from the PRC. In Thailand, a 1% GDP
drop coming from either the PRC or India has a similar impact, causing the Thai GDP to decline by about 1/5 of a percent. The Philippines appears to be the least-integrated country in the group, suffering no
significant spillover from the PRC and only 1/10 of a shock emanating from India.
The magnitude of the spillover can also be used to gauge the implications of a lower growth rate in either of the two giants on
ASEAN’s GDP growth. For example, absent any policy response from
ASEAN authorities, PRC’s growth dropping below its potential would
induce a roughly proportional drop in ASEAN’s growth below its potential. The spillover magnitudes calculated above are the approximate proportionality factor.
To illustrate the median effect of a slowdown in the PRC on ASEAN growth, the likely GDP growth reduction in ASEAN is computed on the assumption that GDP historically grew in the PRC at 10%
annually and in ASEAN at 6%. Growth of 1 percentage point lower than the historical rate in the PRC could, absent any other distortion, reduce ASEAN GDP growth by about 1/4 of a point less than its historical rate. This predicts future growth at less than historical potential. If the future potential growth rate of the PRC declines 2 percentage points to 8% per annum, future potential growth in ASEAN could be 0.5 percentage points lower, or 5.5% per annum. In reality, the PRC economy is not slowing much and ASEAN authorities can take measures to offset the blow. As such, the effect of any slowdown on the ASEAN economies will likely be contained. Spillover from India to ASEAN economies is much smaller, limiting the impact on the region caused by
slower growth in India. In sum, although the two giants are expected to grow more slowly to the forecast horizon, the effect on ASEAN will likely be limited and amenable to mitigation.
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