The United States may have simply kicked the fiscal cliff—or at least part of it—further down the road, and the eurozone looks no closer to solving its economic problems. But Southeast Asia posted solid economic growth numbers last year. And though risks and uncertainties are inevitable, signs are promising that growth is going to pick up in 2013, thanks in part to a stabilizing China and higher levels of foreign direct investment.

True, Southeast Asia has its fair share of risks and challenges. And its politicians, like politicians everywhere, occasionally succumb to populist measures. But their deep commitment to macroeconomic stability, open trade, business-friendly policies, and regional cooperation has created the foundation for steady growth.

Vikram Nehru
Nehru was a nonresident senior fellow in the Carnegie Asia Program. An expert on development economics, growth, poverty reduction, debt sustainability, governance, and the performance and prospects of East Asia, his research focuses on the economic, political, and strategic issues confronting Asia, particularly Southeast Asia.
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The region’s economies remain among the most attractive destinations for foreign investors who are running out of options in other emerging markets—including India, Brazil, Russia, South Africa, and Turkey. Southeast Asia’s relative political and macroeconomic stability, low debt burdens, integration in East Asian production networks, and open trade and investment policies give it a distinct advantage over other developing regions in the world.

And Southeast Asian countries are reaping the benefits. Their average growth rate exceeded 6 percent in 2012. Indonesia and the Philippines did better than most expected. Thailand appears to have finally recovered from the devastating floods of 2011. And Malaysia enjoyed the benefits of an expansionary election budget.

In the coming year, the global economy may be marginally more helpful. But it will be internal macroeconomic policies and structural reforms in Southeast Asia that will continue to drive growth. The Philippines and Myanmar in particular should see above-average improvements in economic performance. President Benigno S. Aquino III of the Philippines has made an earnest effort to improve economic governance, and it is paying off. And after fifty years of self-imposed isolation, fear, and poverty, Myanmar came in from the cold and rejoined the international community. The country’s new openness to trade and foreign investment should yield significant growth dividends.

But Southeast Asian policymakers should beware complacency. Good times often lead to bad policies. Indeed, rather than taking their foot off the reform accelerator, Southeast Asian leaders should make 2013 the year to implement fundamental reforms. There will be no better time to further improve the policy environment for private investment, make labor markets more flexible, strengthen fiscal and external balances, and increase resilience against economic shocks.

They should also keep an eye on the political front. There will be important developments in the year to come—some potentially positive, others less so.

Myanmar has certainly come a long way. The government released most political prisoners and held a by-election that was swept by Aung San Suu Kyi and the opposition National League for Democracy. It loosened restrictions on free expression and assembly and signed ceasefire agreements with ten ethnic insurgent groups.

But the conflict in Kachin State continues. The government recently launched airstrikes against rebels in the state, representing a dangerous escalation. And a tragic ethnic bloodletting between Rakhine Buddhists and Rohingya Muslims in western Myanmar reopened a deep and festering wound that requires urgent attention and resolution.

Good-faith efforts are under way to engage Myanmar’s remaining ethnic minority states. Longer-lasting peace agreements should pave the way for a broader political resolution before the 2015 elections. In addition, to defuse the underlying tension in Rakhine State, the government is expected to announce measures to clarify the path to citizenship for the Rohingya community.

In the Philippines, President Aquino III signed the Bangsamoro framework agreement with the country’s largest Islamist rebel group—the Moro Islamic Liberation Front. That accord calls for the establishment of Bangsamoro, a new political entity that will replace the Autonomous Region of Muslim Mindanao and pave the way for greater autonomy, increased public investments in health, education, and infrastructure, and higher levels of private investment.

Elsewhere, risks and uncertainties persist. Thailand’s three southern provinces continue to suffer from an insurgency that grew in strength over the past year. It is unclear what the Malaysian general elections, to be held in the first half of 2013, will portend; they may help stabilize the political situation or inject fresh uncertainties. And in Indonesia, the race for the 2014 presidential elections will heat up as a list of viable contenders comes into clearer focus.

Beyond these countries’ borders, two parallel efforts toward trade integration will be vying for traction in 2013—the ASEAN-driven Regional Comprehensive Economic Partnership (RCEP) and the U.S.-driven Trans-Pacific Partnership (TPP). At this point, the TPP is certainly more advanced but faces important challenges before it can come to closure. Discussions on the RCEP have only just begun and also face significant obstacles, but progress could accelerate if agreement on the basic parameters is reached soon.

While both trade agreements can coexist, they not only include a different combination of countries but also represent different philosophies on how economic integration should be achieved.

Meanwhile, tensions in the South China Sea have mounted, with China facing off against Vietnam and the Philippines. Saber rattling has achieved little apart from increasing the risk of conflict. ASEAN’s hapless efforts to lower temperatures only succeeded in raising them. It is important now that under a new chair (Brunei), ASEAN settles its internal differences, agrees quickly on a code of conduct for the South China Sea, and engages China early in the process so that it becomes an important stakeholder in its implementation.

These risks and uncertainties in Southeast Asia will continue in the coming months. But they will have little impact on the overall march toward increased prosperity in the region. The underlying forces driving increased efficiency and global competitiveness—trade, investment, and stability—will be altogether more powerful. Overall, then, the region’s tea leaves read well.