[ASEAN]The "flywheel effect" of digital economy development in Southeast Asia

Author: Liu Song, researcher at the Centre for ASEAN Country Studies, Peking University

Translated from https://mp.weixin.qq.com/s/QUGh3W7oEQlC8cCGy6Q60A

Southeast Asia: economic recovery and the choice of path

A series of important regional and international meetings - the ASEAN Summit and the East Asia Cooperation Leaders' Series, the Group of Twenty (G20) Leaders' Meeting and the APEC Leaders' Informal Meeting - have been held in Southeast Asia, bringing the world's attention to the region. In addition, with the accession of Timor-Leste, all 11 Southeast Asian countries have become ASEAN countries.

South East Asia has not only shone in the diplomatic and political arena, but also in its economic recovery against the backdrop of the new epidemic, the geopolitical crisis and the global recession. Although the internal and external situation is still tough and the road to recovery is still rocky, there is room for a variety of options in terms of paths, models and breakthroughs, providing many favourable conditions for sustained recovery and development.

The digital economy in Southeast Asia has its own very unique path of development, and the wave of digital life transformation is becoming an important driver of economic recovery in Southeast Asia. According to a recent survey released by Google, Temasek and Bain & Company (the "Google Survey"), Southeast Asia's digital economy has emerged as a unique industry in a global climate of epidemics and geopolitical conflict, with 60 million new digital economy consumers in the region in the last two years alone. The Southeast Asian digital economy market reached US$174 billion in 2021, and is expected to double to US$360 billion by 2025 and grow rapidly to a staggering US$100 billion by 2030. With a total population of around 655 million and a median age of 30.2 years, this huge market gives the impression of a young, but fast-growing young person who is becoming the 'chosen one' to potentially lead a strong economic recovery in South East Asia.

Southeast Asia's digital economy shows the "flywheel effect"

The "flywheel effect" refers to the fact that a gear requires a lot of kinetic energy to overcome resistance at the beginning of its rotation from standstill, but once it is spinning, the strong potential energy generated by the inertia of the endogenous system can sustain itself, and with the addition of external forces, it will spin faster and faster. The development of the digital economy in Southeast Asia follows a similar logic. The core component of this 'flywheel' is the huge market made up of a large and young population. According to Google's research, the six main markets for the Southeast Asian digital economy in 2021 are Singapore, Thailand, Malaysia, Indonesia, Vietnam and the Philippines, which already have 440 million internet users, 80% of whom, or about 350 million, have used the internet for shopping, and the range and depth of use is increasing at a rapid pace.

Despite the size of the digital economy in Southeast Asia, it is lagging behind the US and China by more than a decade. With the proven technology and market models of pioneering regions as references, Southeast Asian countries are taking a different path from the digital economy development process in China and the US, driving the "flywheel" of the digital economy in a way that is more in line with their own characteristics.

Firstly, Southeast Asian governments are actively promoting a multilateral framework for digital economy cooperation, seeking to fully connect with global resource networks. Southeast Asia is a latecomer to the digital economy, with varying levels of digital infrastructure development and economic development across countries. Promoting rapid integration into the global digital economy network at the government level will help countries create more market opportunities and deeper cooperation for local enterprises. For example, Singapore has signed digital economy agreements with New Zealand and Chile in June 2020, Australia in December, South Korea in December 2021 and the United Kingdom in June 2022. Singapore has also been actively engaged in discussions with several countries, including the European Union and India, on digital economy cooperation and standards for the flow of data across borders. Malaysia has set up a dedicated Digital Coordination Committee and signed a Memorandum of Understanding with China on digital telecommunications cooperation in September 2022. Indonesia also started discussions with the EU in June 2022 to improve bilateral cooperation on digital infrastructure and investment. These bilateral and multilateral agreements on the digital economy at the national level have greatly facilitated the ability to coordinate the digital economy in Southeast Asia with the global digital economy market, removing regulatory barriers and trade barriers, and becoming the first major force in the rapid rotation of the "flywheel" of the digital economy in Southeast Asia.

Secondly, Southeast Asian countries have developed their own digital economy strategies and development roadmaps, laying a good foundation for the rapid development of the industry. Unlike the US and Chinese models, Southeast Asia has been able to skip much of the R&D and trial-and-error process. With its huge user base and market potential, Southeast Asia is able to directly import and utilise off-the-shelf technology, capital, as well as business models and data from advanced countries. In this process, strategic planning and industry guidance at government level is particularly important. This plays an important role in facilitating better use of external resources and coordinating the healthy development of the industry. Thailand, for example, has launched six digital economy strategies, including increasing digital infrastructure, promoting digital business, facilitating equal access to social resources, establishing a digital government, enhancing workforce development and strengthening the credibility of digital business. The Indonesian government has also accelerated the process of digital economy development in five areas, including digital infrastructure, developing a digital transformation roadmap, national data centre integration, talent development and digital financial supervision. In addition, the national-level digital development strategies of Southeast Asian countries have been effective. For example, smartphone usage in Southeast Asia has reached nearly 70 per cent, and many rural areas that lack wired network infrastructure have skipped the PC Internet phase and moved directly into the mobile Internet era. A Google survey also suggests that 60% of new digital economy users in Southeast Asia will come from rural areas by 2021, directly "jumping the gun" in terms of internet access.

Governments in Southeast Asia are also actively promoting the digitalisation of payments at a national level. For example, the Central Bank of Indonesia has encouraged major banks and financial institutions to actively promote the digitisation of their systems to improve payment efficiency and payment security. Under the guidance of governments, the six aforementioned Southeast Asian countries have become the fastest growing regions in the world for e-payments, with e-wallet usage growing at over 311% in 2021 and expected to exceed 440 million users by 2025. The online payment industry in Southeast Asia is not yet as dominant as China's with giants like WeChat Pay and Alipay, but it is blossoming. These include e-wallets developed by telecom operators (e.g. Singtel Dash, Gcash, Truemoney, etc.), payment services launched by leading internet companies (e.g. Grabpay, Gopay, Zalopay, etc.), and electronic payment programs launched by banks (e.g. DBS Paylah!, OCBC Pay Anyone, etc.).

Digital economy development strategies developed by governments in Southeast Asia are another important force driving the 'flywheel' by facilitating the integration of resources from within and outside the region at the national level, promoting investment and development of critical digital infrastructure, and ensuring the rapid and orderly development of the digital economy sector.

Finally, governments, businesses, consumers and capital in Southeast Asia are promoting a 'positive growth order' in market development. Unlike the free-for-all development of digital economy pioneer markets such as the US and China, Southeast Asia's digital economy development model has emerged as a "positive growth order" with government guidance, business innovation, consumer acceptance and capital support. Supported by government digital strategies, Southeast Asia's large digital economy market and demographics conducive to high growth have attracted significant international capital, with $25.7 billion in venture capital investment in digital startups in 2021, compared to $9.4 billion in 2020. The epidemic and geopolitical factors have driven global capital to focus more on Southeast Asian markets, with M&A levels already at an all-time high. The influx of capital has contributed to the booming growth of technology companies in the region. According to the findings of Hurun's Global Unicorn List Mid-2022, as of 30 June 2022, there were a total of 28 unicorns in Southeast Asia, including 12 in Singapore, five each in Indonesia and Vietnam, three in the Philippines, two in Thailand and one in Malaysia. The main sectors of these unicorns are all related to the digital economy and are spread across various industries including fintech, e-commerce, gaming and logistics. The online healthcare and online education sectors in Southeast Asia have seen even more rapid growth since the outbreak in 2020, with funding of US$1.1 billion and US$250 million respectively in the first half of 2021. The embrace of the digital economy by consumers in Southeast Asia has also been an important part of this positive growth order, with a young consumer base that is extremely enthusiastic about various digital services. Consumer acceptance has contributed to the dynamism of the digital economy market, increasing the incentive for companies to innovate and attracting significant capital participation, which has ultimately gained the attention of governments and favourable policies.

Digital economy as an engine of economic recovery in Southeast Asia

At present, the global economy is not only facing adverse factors such as the new epidemic and the rise of "anti-globalisation", but also multiple crises in energy, finance and supply chains caused by geopolitical conflicts. According to the "Global Digital Economy White Paper (2022)" released by the China Academy of Information and Communication Technology, the value added of the digital economy in 47 countries around the world will be US$38.1 trillion in 2021, an increase of 15.6% year-on-year, already far exceeding the overall global economic growth rate in the same period.

The growth rate of the digital economy in Southeast Asia is even three times higher than this global value, at 47%. Moreover, as the development of the region's digital economy business model is still in its infancy, the rapid growth rate of users and the potential of the market will make an increasing contribution to the economy in the future. Firstly, the digital economy industry in Southeast Asia is a pull factor for investment in the region. Excellent technology start-ups attract large amounts of investment on the one hand, and generate large returns to capital through their own valuation growth on the other, thus creating a positive incentive for the capital input-output cycle in the social economy. Secondly, the endogenous demand for the development of Southeast Asia's digital economy will lead to the introduction of relevant government support policies and the continuous strengthening of digital infrastructure, laying a better foundation for overall economic development. Thirdly, the new jobs created by innovative digital economy sectors will absorb a large number of jobs, contributing to the balanced development of economic factors and the stability of the overall social structure in the region. Finally, the personalised services and convenience experiences of the digital economy will boost social consumption levels in Southeast Asia, with Google research already showing that digital services have increased consumer willingness to spend by 30%.

While the outlook for the digital economy to lead the recovery in Southeast Asia is very positive, there are still several downsides that affect it. Firstly, as data is at the heart of the digital economy, ASEAN countries need to establish a unified governance mechanism for cross-border data management, thereby ensuring the free flow of data within the region and the regulated and coordinated development of the cross-border digital economy, without which the advantages of a large regional market will be difficult to realise. Secondly, the development of the digital economy requires a stable market with a unified and interconnected platform. The current uneven development of Southeast Asian countries and poor customs trade connections still pose obstacles to the circulation of markets and goods logistics in the region. Furthermore, there is still a serious lack of digital economy infrastructure and talent expertise in Southeast Asia, and many successful technology applications and business models from the US and China cannot be directly replicated in Southeast Asia, requiring continuous exploration and trial and error. Finally, after the current high growth rate of users ends, the digital services market in Southeast Asia will also enter the "red sea" era of price and efficiency, and it will be a great challenge for the industry to balance the negative effects of vicious competition.