ASEAN is change-ready, but risks remain: KPMG Global Survey
Economic diversification underpins the region’s change-readiness, but it needs to raise its level of human capital

Six of the 10 ASEAN countries are among the 50 most change-ready countries in the world with Singapore retaining its position as the world’s most change-ready country. This is according to the latest KPMG Change Readiness Index (CRI). The six countries include the ASEAN-5, namely Singapore, Malaysia, Thailand, Indonesia, and the Philippines; as well as Cambodia.

The CRI ranks 127 countries for their capacity to anticipate, prepare for and manage change, and cultivate the resulting opportunity. These changes may range from immediate economic and political shocks to long-term trends such as the diffusion of new, disruptive technologies, and emerging market growth and competition.

As well as Singapore being the world’s most change-ready country, ASEAN has the best performers across all income groups:

  • Malaysia is the 2nd most change-ready country in the upper-middle income bracket
  • The Philippines and Indonesia are the two most change-ready countries in the lower-middle income bracket
  • Cambodia is the most change-ready among low-income countries.
“The relatively high CRI rankings across ASEAN suggests that the region has ‘gotten its basics right’ – encompassing stable and prudent fiscal policies, including relatively efficient and simple taxation; flexible labour markets; openness to trade and foreign investment; and market-friendly business regulations,” says Tham Sai Choy, Chairman of KPMG’s Asia Pacific region.

Key among these is the region’s macroeconomic and financial stability, particularly in Malaysia (placed 22nd for its macroeconomic framework), Thailand (23rd) and the Philippines (39th). In this area, policies have been effective. Expansionary monetary and fiscal policies after 2008 that raised government debt were subsequently tempered by fiscal adjustments. Several ASEAN economies are further taking advantage of lower oil prices to cut fuel subsidies and responding to declining energy revenue with broad-based taxes like Malaysia’s new Goods and Services Tax.

Beyond macroeconomic policy, ASEAN’s change-readiness is driven by:

  • Its economic openness – led by Singapore, Malaysia and Thailand. Exports drive growth across ASEAN, contributing 78 percent of GDP in the region on average. But at the same time, export-dependence exposes the region’s economies to global uncertainties, including weaker demand in advanced economies.

  • Its economic diversification, with the ASEAN-5 placing within the top 40 countries. Across ASEAN economies, manufacturing and services now contribute a larger share of total value-added than the traditional sectors of agriculture and mining. Such broadening sources of income allows countries in the region to respond faster to changing global demand and to cope better with sector-specific shocks or structural changes. Even within manufacturing, new industries are being developed including automotives and information technologies. 1

  • Its quality of entrepreneurship, with the ASEAN-5 placing within the top 45 countries. In the long run, how firms and entrepreneurs exploit new technologies, ideas and business models to create new products and services is what will sustain economic dynamism, and strengthen change-readiness.

  • The strength of its financial sectors – led by Singapore, Thailand and the Philippines. A sound and well-functioning financial sector plays a central role for economic activities, allowing funds to be channelled to their most productive uses.
ASEAN’s outlook is not without risks, however. Volatile capital flows related to geopolitical tensions cannot be ruled out, nor uncertainty about oil prices and interest rate policies in advanced economies. To defend against these risks, structural reforms in ASEAN need to continue apace. In particular, the region needs to focus on:

  • Raising its level of human capital, particularly in Vietnam, Cambodia and Myanmar. To move up the value chain beyond simple production processes and products, quality higher education and training are key. Today’s globalising economy particularly requires that countries nurture pools of well-educated workers able to perform complex tasks and adapt quickly to their changing environment. Vocational and continuous on-the-job training are also crucial in ensuring fit between worker skills and evolving industry needs.

  • Improving its technological use and infrastructure, especially in Cambodia and Myanmar. The agility with which firms adopt existing technologies to raise their productivity is key to moving up the value chain. For countries at a less advanced stage of technological development, FDI has been found to play a key role. 2

  • Establishing stronger safety nets, most of all in Cambodia, Myanmar and Vietnam. Inclusive growth is strongly correlated with change readiness, and governmental social safety nets in ASEAN countries will aid cohesion and help them respond better to shocks.
“While the CRI may reflect the development gap between the ASEAN-5 and the lower-income CLMV group (Cambodia, Lao PDR, Myanmar, and Vietnam), there is some evidence that integration efforts via the ASEAN Economic Community (AEC) are helping to narrow the gap,” says Tham Sai Choy.

CLMV countries’ share of GDP in ASEAN grew from 3.5 percent in 1990 to about 11 percent in 2014. The deep trade linkages of the CLMV countries with other ASEAN countries measured by direction of trade indicators suggest that regional integration has been an important driver for the development of these countries.3

“We see a bright future for ASEAN as the countries work to raise their overall competitiveness and change-readiness through closer collaboration.”

Determining a country’s change readiness
In assessing capability for change readiness, the CRI measures a country’s capacity along three dimensions:

  • Enterprise capability – the quality of a country’s business environment
  • Government capability – the fiscal, regulatory and security capacity to plan for and manage change
  • People and civil society capability – civil society institutions, inclusiveness of growth, education, health and technology access
The CRI is designed so that users can zoom in on each of the pillars for an in-depth picture of a country’s performance for each capability, gain insights into why some nations perform better than others, and what can be done to close the gap. Because change readiness is complex, an index such as the CRI allows both the public and public sector to break down the complexity and make better policy and investment decisions.
About the Research
The Change Readiness Index (view the online tool) covers 127 countries including the 90 covered in the 2013 CRI plus a combination of additional developed and developing nations. The expanded selection of countries provides greater opportunity for comparison across regions and income levels. The CRI is structured around three pillars (Enterprise capability, Government capability, People & Civil Society capability), that signify a country’s underlying ability to manage change.

Researchers at Oxford Economics gathered primary survey data from 1,270 country experts around the world, which was combined with a rich secondary dataset made up of more than 120 variables, which are clustered into 73 secondary data indicators within the index.

Secondary data sources include, for example, the World Economic Forum, World Bank, Legatum Institute, International Monetary Fund and United Nations. For full details on the pillars, pillar sub-indicators and weighting, primary survey questions, and secondary data sources, go to: kpmg.com/changereadiness-methodology.
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