Southeast Asian Cities Critical to the AEC

November 27, 2015International Organizationsby East Asia Forum

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Sustainable urbanization is key to a successful AEC.

As the Association of Southeast Asian Nations (ASEAN) takes steps toward implementing the ASEAN Economic Community (AEC) by the end of 2015, they should be cognisant that the paths towards economic integration and sustainable urbanisation are closely intertwined. Southeast Asian cities will play a critical role in the unfolding of the AEC.

ASEAN represents an economically dynamic region. Between 1970 and 2013, ASEAN’s gross domestic product (GDP) grew over tenfold — from US$129 billion to US$1.39 trillion. The founding countries of ASEAN rapidly grew during the 1970s and 1980s after opening their economies to external trade and foreign direct investment. In recent years, economic growth has picked up in the other ASEAN member countries.

However, the economic role of cities in ASEAN is not as well-known as ASEAN’s economic potential. UN-Habitat (the UN Human Settlements Programme) estimates that 47 percent of the region’s population live in cities and towns, and produce 80 percent of Southeast Asian GDP. This underscores the higher economic productivity of city-based secondary and tertiary activities.

Southeast Asian cities are bound to perform an expanding role in the future of the regional economy if the AEC is successfully implemented. A 2014 report by the McKinsey Global Institute analysed the ways in which Southeast Asia could address its productivity challenges and find new catalysts for economic growth in the future. Looking toward ASEAN’s economic prospects, the study proposed three paths to prosperity that could contribute 19–42 percent of the region’s GDP by 2030. Two of these relate directly to the expanding role of cities.

First, ASEAN should ‘capture a greater share of global flows’. This entails increasing exports within and outside the AEC’s regional trading block. It also involves expanding the region’s manufacturing base, especially as multinational companies look for new production sites – that often are well-serviced urban centres – in the wake of rising labour costs, such as in China.

Second, ASEAN should ride the urbanisation wave. Since the middle of the 20th century, Southeast Asia has witnessed phenomenal levels of urbanisation. From 1950–2014, urban populations in Southeast Asia grew from 26 million to 294 million — a tremendous increase of more than 1000 percent.

ASEAN already has an urban ‘consuming class’ of approximately 81 million households, according to the McKinsey report. This ‘consuming class’ is likely to double in size by 2030. This striking rise in the urban power of consumption will have impacts at multiple levels, including by increasing demand for consumable goods and services, and for developed land. However, it will also cause an irreversible change in land use — from agriculture and forests to urban built-up areas — leading to concerns about food security, biodiversity, and ecological systems. In addition, it is likely that the expanding ‘consuming class’ will spur demand for private vehicles, increasing greenhouse gas emissions.

Although urbanisation in Southeast Asia is positively correlated with economic growth, not everyone living in cities has benefited from this phenomenon. Urban income inequality is on the rise in Southeast Asia and the percentage of urban people under the poverty line varies from 1 percent in Malaysia to 10 percent in Laos. Poverty and rising inequality in urban Southeast Asia indicate a lack of policies focused on confronting these challenges.

Urban poverty and inequality give rise to urban informality, such as informal employment and informal settlements (slums). In 2011, the urban informal employment level was 42 percent in Thailand, 68 percent in Vietnam and 72 percent in Indonesia. During 1990–2012, the urban slum population in Southeast Asia increased from 69 million to 80 million.

Tackling poverty, inequality, and informality will require urban policymakers to provide secure land tenure, low-income housing, and access to basic services such as safe drinking water, sanitation, solid waste collection, education, health, energy and transport. National and urban local governments in the ASEAN region will need to develop policy instruments to redistribute national income to those who have not benefited from the economic growth of cities. Until this happens, urban poverty, inequality and informality will pose formidable challenges to ASEAN policymakers.

Additionally, ASEAN should not ignore the effects of economic integration on urbanisation. Creating ‘a single market and production base’ under the AEC has the potential to alter the spatial and economic landscape of human settlements in Southeast Asia.

In particular, the free flow of goods and services will directly relate to governance and sustainable urbanisation. The movement of goods across borders without tariffs is likely to flood domestic markets across the region with cheaper imports. This will displace local manufacturing bases, which are generally located in urban centres. Local innovation and entrepreneurship, which are often based in cities and towns, will have to compete with multinational corporations at the regional and global levels — with low chances of success.

It is unclear how national and local governments will protect local entrepreneurs, enterprises, and businesses. Leaving them to the mercy of market forces has potentially negative implications for sustainable urbanisation and urban development.

The AEC service packages include construction, waste management, and water supply — all of direct relevance to urban centres. The construction industry is mostly private in Southeast Asia, while waste management and water supply are largely public-sector services in the region, although this is changing toward privatisation in many places.

If the processes of private-sector-led construction, waste management and water supply systems are not managed and governed properly — especially by urban local governments, which often have poor administrative, technical and financial capacities — these may result in serious social and environmental consequences at the local levels.

As the AEC prepares to launch at the end of 2015, how ASEAN member countries manage the process of sustainable urbanisation will prove central to the functioning of the AEC in the future.

How will the AEC affect ASEAN urbanisation? is republished with permission from East Asia Forum

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