By Purvi Agarwal

Abstract 

ASEAN’s economic landscape is undergoing a significant transformation; the evolution is often credited to hurdles such as the Asian Financial Crisis of 1997-98, exposing systemic vulnerabilities. The focus on economic growth and integration is driven by digitalisation and the resilience of micro, small, and medium-sized enterprises (MSMEs). This article is set to explore the same phenomenon, the interplay between ASEAN’s economy, the rise of digital technologies, and the crucial role of MSMEs, particularly in the context of the Asian Financial Crisis.

Introduction and Background 

The Association of Southeast Asian Nations (ASEAN) has seen rapid advancement since its formation in 1967, with the core aim of promoting economic growth in Southeast Asia. Despite ASEAN’s shift in focus from economic cooperation to political and security issues, there was and still remains a need to address economic integration and consolidation of its political and security gains while also preparing for future challenges and opportunities. Subsequently, the ASEAN Free Trade Area January 1992, aimed to eliminate tariff barriers in SEA with a view to integrate the ASEAN economies into a single production base and creating a regional market of 500 million people. While this initiative has had its fair share of success, there are concerns about the partnership spirit within ASEAN, where some member states prioritise their own interests over collective economic gains, leading to jockeying for selfish advantages. In the midst of this turmoil, Southeast Asia has emerged as one of the fastest-growing e-commerce markets globally, with estimates of a $1 trillion digital economy, while internet usage has also doubled since 2016 in six key Southeast Asian nations. This encompasses Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam, where platforms like Shopee, Lazada, Tokopedia, and Grab have revolutionized the way consumers shop and interact with companies. This article critically explores how the swift growth of the digital economy — especially e-commerce — presents both prospects and obstacles for ASEAN’s aim of enhanced regional integration. This paper aims to examine how national interests, regional collaboration frameworks, and the expansion of digital markets interact, to determine if the digital surge can enhance economic unity or worsen current disparities within ASEAN. 

Impact of the Asian Financial Crisis

In the latter half of the 20th century, Asia’s economy surged, notably through the four Asian Tigers—Singapore, South Korea, Hong Kong, and Taiwan—transforming from low-income to high-income advanced economies in just a few decades. This phenomenon, the East Asian Miracle, however, was met with significant hurdles over the years, one such being the Asian Financial Crisis (AFC) 1997-98. The financial crisis originated in Thailand following the announcement of the Thai Baht’s flotation on July 2, 1997, meaning that the government allowed the currency’s value to be determined by market forces rather than fixing it against the US dollar. This rapidly spread throughout and beyond the ASEAN Region, culminating in a financial crisis, while Thailand continued to experience significant inflows of private capital stemming from loans for investments, particularly in the real estate sector. Owing to this, it has been suggested that these countries may have become unintended victims of their own success. At its core, the issue stemmed from systemic financial imbalances driven by excessive borrowing and speculative investments that inflated asset bubbles. Additionally, weaknesses such as maturity mismatches in borrowing and lending, currency mismatches that exposed economies to foreign exchange risk, and an overreliance on short-term capital inflows increased vulnerability to sudden capital flight. However, the banking sector’s inability to accurately assess risk was further exacerbated by Thailand’s prolonged phase of rapid economic expansion, often referred to as the “Golden Era,”  during which credit regulations failed to incorporate a comprehensive evaluation of different risk factors. 

A regional economic crisis also results in decreased demand for migrant workers, hurting countries that rely on the overseas labour market for employment of their surplus labour. Understandably, service sector workers were more adversely affected, and therefore, countries with a higher workforce in that sector bear more burdens. In Thailand, the unemployment rate surged from 1.5% in 1997 to 5.0% in 1998. In Indonesia, the service sector’s contribution to GDP declined from 40% in 1996 to 35% in 1998. The challenge in drawing lessons from this crisis lies in isolating the effects to a single economy. Factors may originate from one or multiple countries and can have either specific impacts or a broader, more generic effect. It is very evident that all sectors of the economy and people from all tax brackets were impacted, but the measure of their effect and its wavelengths is hard to determine. This is depicted by GDP shrinkages in 1998 ranging from nearly 14% in Indonesia to 0.5% in the Philippines, and the Asian Development Bank describing this debacle as national rather than local in character. This reflects both the depth of financial contagion and the varying institutional resilience and macroeconomic fundamentals between the two states Many households lost their savings due to banking failures and market declines, forcing reliance on informal credit. This reduced government revenues and necessitated both domestic fiscal interventions and external financial assistance, notably from international institutions such as the International Monetary Fund (IMF) and the World Bank, to recapitalise and stabilise financial institutions. Fixed-income groups were most negatively affected as their salaries could not keep up with nearly 60% inflation, ranging from civil servants to factory workers. In Indonesia, necessary commodities such as gasoline, rice, and fertiliser were subsidised, leading to moderate inflation. Money supply grew by 53% in 1997 and by 63% in 1998 signaling a breakdown of monetary control as authorities attempted to inject liquidity to stabilise financial institutions, but inadvertently fuelled inflationary pressures. 

A report by ADB clearly indicates the financial turmoil in Asian countries, particularly Southeast Asia, causing significant economic disruption, particularly in Indonesia and the Lao PDR. In Indonesia, inflation was around 10% in 1996, rose to 20% in 1997, and skyrocketed to nearly 80% in 1998. In South Korea, inflation remained stable at around 5% or lower from 1996 to 1998. In Lao PDR, inflation was approximately 10% in 1996, increased to around 50% in 1997, and surged further to nearly 100% in 1998, the highest in the chart. In Malaysia, Thailand, and the Philippines, inflation remained relatively low, below 10%, throughout all three years. 

(Figure1.1) Inflation in Indonesia, South Korea, Lao PDR, Malaysia, Philippines and Thailand

Source: Asian Development Bank, 1999

Understanding ASEAN’s economy and the interplay of digitalisation

As established before, digitalisation and e-commerce mechanisms are upcoming, promising solutions and proponents of the Southeast Asian economy. Digitalisation and e-commerce can facilitate smoother trade and economic integration, and create a Unified Market by leveraging digital platforms. Additionally, it opens up new channels for businesses to access broader markets, especially for small and medium-sized enterprises (SMEs), which may struggle to compete in traditional markets. Most importantly, digitalisation and online shopping can equip ASEAN countries with the tools and frameworks necessary to adapt and prepare for future challenges. 

Indonesia, Thailand, and Malaysia, as key exporters of raw materials, have historically relied on manufacturing, agriculture, and natural resources. After the 1998 Asian financial crisis, nations like Vietnam and Cambodia shifted toward market-oriented economies, focusing on attracting FDI, diversifying their economies, strengthening financial institutions, and improving governance. Rapid urbanisation, a burgeoning middle class, and the widespread use of smartphones and internet services all contributed to Southeast Asia’s digital revolution in the 2010s. By 2020, over 70% of people in nations like Singapore, Malaysia, and Thailand had internet access, and the COVID-19 pandemic forced many businesses to adapt to digital platforms. In this regard, it is forecasted that the region’s internet economy will reach $300 billion by 2025. Studies indicate Southeast Asia’s digital economy is experiencing rapid growth, projected to reach $100 billion in revenue in 2023, reflecting a compound annual growth rate (CAGR) of 27% since 2021. A broader ecosystem of governments, policymakers, businesses, and NGOs also began to play a critical role in promoting digital inclusion and participation. For instance, Singapore’s Smart Nation initiative leverages data, IoT, and digital technologies to enhance government services, healthcare, and business competitiveness. 

In addition to swift digital adoption, it is clear that digitalisation serves as a driver for regional economic integration by reducing transaction costs and facilitating cross-border trade activities. Regional initiatives, like the ASEAN Digital Masterplan 2025, illustrate how coordinated digital regulations, better interoperability of digital payment systems, and upgraded digital infrastructure together support the unhindered flow of goods, services, and data. This not only speeds up SME involvement in intra-ASEAN commerce but also strengthens the bloc’s goal of creating a unified, integrated digital economy. 

MSMES as the economic backbone of ASEAN 

Micro, small, and medium-sized enterprises (MSMEs) are vital to ASEAN’s economic and social development, driving value-added activities, innovation, job creation, and inclusive growth across urban and rural areas. As the backbone of ASEAN, they support sustainable economic growth and help narrow development gaps. ASEAN has 70 million MSMEs, representing 97.2% to 99.9% of all establishments. MSMEs contribute 85% to employment, 44.8% to GDP, and 18% to national exports, with micro-enterprises often comprising the largest share. In ASEAN, collaboration on SMEs began in 1995 and fostering SME development became one of the priority areas with respect to policy focus and resources. 

The ASEAN SME Agencies Working Group (SMEWG), which comprises representatives from SME Agencies in AMS, was formed to formulate policies, programs, and activities on SME development. Subsequently renamed to the ASEAN Coordinating Committee on Micro, Small and Medium Enterprises (ACCMSME), this committee advocated the need to expand the composition of the committee to include representatives from other areas besides the MSME agencies. MSME development in ASEAN is guided by the ASEAN Strategic Action Plan for SME Development 2016–2025 (SAP SMED 2025), launched at the 27th ASEAN Summit in November 2015. This ten-year plan aims to enhance ASEAN cooperation in a competitive economic landscape and supports MSME growth through a vision of creating globally competitive, innovative enterprises by 2025. Furthermore, the ASEAN SME Academy provides online training tools and resources for MSMEs on courses focused on access to financial products, regional and international markets, information and advisory services, and technology and innovation. There is also the ASEAN Regional SME Policy Network, which strengthens the work of the OECD and the ASEAN Secretariat to support, monitor, and assist in capacity building and open policy dialogues on good practices among the ASEAN countries. 

The Path Forward for ASEAN: Balancing Digital Growth and Economic Stability

ASEAN’s digital economy is set to expand through ongoing technological adoption, urbanisation, and rising internet penetration. This growth will require businesses to adapt to evolving consumer behaviours, with e-commerce continuing to be a key driver. Large investments in both physical and digital infrastructure, especially in logistics, will be crucial to supporting this expansion. As financing shifts, businesses, especially small firms, must prioritise sustainable models and operational efficiency over rapid growth, exploring new revenue streams in the process. Closing the digital divide will also be essential, requiring collaboration between governments and the private sector to enhance digital literacy and access. Emerging industries like fintech, edtech, and healthtech are expected to grow, offering new opportunities for investment and innovation. Companies will also need to navigate a changing regulatory environment that balances consumer protection with fostering innovation, making a strong understanding of these regulations critical for sustained growth.

Historically, the International Monetary Fund (IMF) provided substantial support in ASEAN’s economic recovery, disbursing a substantial amount, with more than two-thirds allocated to Indonesia, Korea, and Thailand—three of the most affected nations. However, the crisis underscored the importance of building self-reliant, regionally integrated economic structures to manage vulnerabilities stemming from rapid growth and investor confidence shifts. China’s “swing bailout” phenomenon has increased its regional influence, which, at times, challenges the U.S. dollar’s dominance and prompts some ASEAN countries to explore alternative currencies for trade and investment. Lastly, despite the critical role of MSMEs in the ASEAN economy, they face structural and operational barriers, such as supply chain limitations, inadequate infrastructure, and complex bureaucratic processes. India, while negotiating a comprehensive Free Trade Agreement (FTA) covering goods and services with ASEAN, withdrew from the Regional Comprehensive Economic Partnership (RCEP), citing concerns over Chinese trade practices. This cautious approach reflects apprehensions about the potential influx of Chinese goods, which could impact ASEAN’s MSME-heavy market.

About the author: Purvi Agarwal is pursuing a B.A. (HONS) in Diplomacy and Foreign Policy at Jindal School of International Affairs, O.P. Jindal Global University. She is a research associate at the Centre for Analytical Research and Engagement and a Research Assistant at the Jindal Global Centre for G20 Studies. She has worked with ABP Network, NDTV, and the Europe India Centre for Business and Industry. Her interests include Foreign Policy, East and South Asian Studies, European Studies, and Sustainability. She is proficient in Hindi and English, with certifications in German and Japanese.

Image Source: ASEAN Economic Outlook 2023