Governance and the Flow of Capital Across Southeast Asia

By Gita Wirjawan

 This is an excerpt of a report written by Angsana Council Trustee and former Trade Minister of Indonesia, Gita Wirjawan. The full report is published by the Center for Strategic and International Studies and can be found here.

Southeast Asia is one of the most diverse and populous regions in the world. With over 700 million people from 11 different states, the region boasts a rich tapestry of languages, religions, ethnicities, geographies, histories, and political systems (none of which would be categorized as a true liberal democracy). The region’s ability to attract foreign capital varies from country to country and has met with mixed success. In order for Southeast Asian economies to be more attractive to the global market, they need to embrace a new political economy framework that prioritizes financial inclusion, investment attraction, marginal productivity, trade expansion, and political stability, led by talented leaders with strong governance—characteristics often associated with liberal democracies.

Since the beginning of the twentieth century, the global money supply has been growing robustly due to long periods of quantitative easing, especially from the developed world, reaching around $100 trillion. With the exception of China, most of the money supply has not been evenly distributed to every layer of the economy, as much of the liquidity created is trapped in the developed world’s capital market instruments, some of which are inaccessibly sophisticated. This has resulted in a state of rising inequality across the globe, though it is much more pronounced within liberal democracies where the lion’s share of global wealth is ironically kept. Additionally, this money supply has not been adequately circulated to other parts of the world where the return is potentially higher, as many beneficiary countries are perceived to be riskier, and they have not pursued the needed reforms to encourage investments.

A country can increase its money supply by attracting Foreign Direct Investment (FDI). In the case of Southeast Asia, the region exhibits significant variations in GDP, GDP per capita, FDI, and FDI per capita, with Singapore standing out as an outlier.

Figure 1: 2021 FDI (USD, billions), FDI per Capita (USD), and Ease of Doing Business Score and Rank


Despite its small population, Singapore attracts substantial FDI on both a per capita basis and an absolute basis. Singapore’s success is often attributed to its “Ease of Doing Business.” While this indicator is helpful in measuring initial capital formation, it is deemed insufficient in evaluating long-term FDI stability. Other factors, such as competition, education, governance, and political stability, among others, play crucial roles. Among them, “trustworthiness,” linked to the certainty of enforcing rules and regulations, is considered a much more critical indicator of investment attractiveness, as it demonstrates a country’s history and future trajectory in meeting monetary commitments. Singapore’s success in attracting FDI is not due to one single factor but rather a confluence of policies that its neighbors should look to emulate.

Unlike Singapore, other Southeast Asian states face a number of challenges that make it difficult for them to attract FDI. The first challenge is a low level of investment in education. As most ASEAN members are still considered developing countries, education takes a back seat. However, data has shown that investments in education can have a significant impact on the countries’ overall productivity and economic performance. Vietnam has demonstrated that its pursuit of improving education has a positive correlation with its ability to achieve higher FDI per capita, raise marginal productivity, and undertake more economic agreements. 

The second challenge is the inability of member states to foster a competitive business environment within their borders. On average, ASEAN member states register 2 businesses per 1,000 people, compared to Singapore’s 10 and China’s 8.5. A higher number of business registrations is linked to a strong entrepreneurial spirit, efficient government systems, and an abundant supply of monetary capital. The third challenge is a lack of strong leadership and governance. Singapore’s success is attributed to its focus on recruiting and cultivating the best talent based on integrity, competence, and accountability. Other Southeast Asian countries, such as Indonesia, have made progress in fostering talent but face hurdles like patronage-based selections, budgetary limitations, and unequal economic development across regions. Thus, these are the main areas that Southeast Asian states should address to improve their ability to attract FDI long term.

Other activities through which Southeast Asian economies can increase their money supply are borrowing and trading. When it comes to borrowing, a country can borrow internally or externally. Only half of Southeast Asian economies have a money supply (M2)-to-GDP ratio exceeding 100%, indicating ample domestic liquidity, whereas the other half do not have as much wiggle room. The ability to borrow domestically depends on the creditworthiness of the government, whether its credit ratings, sovereign ratings, or fiscal stability. With international borrowing, similar criteria apply; however, geopolitical stability, duration of borrowing, and purpose of borrowing also matter. The last factor is particularly important because it can meaningfully increase the money supply in a country if the government uses the loan on productivity improvements such as building infrastructure, increasing employment, or elevating human capital.

Trading also affects a country’s money supply. A surplus in a state’s trade account is positively correlated with the country’s current account and money supply, and vice versa. Thus, Southeast Asian countries would have a strong incentive to increase their trade account surplus as it would expand their money supply. While one would expect population size and natural resources to dictate a state’s trade balance, in reality, it is not the case in Southeast Asia. Singapore, once again, dwarfs all of its neighbors in terms of trade account balance and trade-to-GDP ratio, despite having a fraction of the population size compared to Indonesia or the Philippines and having almost no natural resources.

Figure 2: Trade Account Balances in Southeast Asia, 2010–2021 (USD, billions)


This again proves that when it comes to attracting monetary capital, liberal democratic values such as the rule of law, transparency, and high human capital matter more than size. This notion is even more salient when considering that trade is not limited to goods and services but also includes the exchange of ideas, which fosters the growth of human and institutional capital, and that, in turn, increases the country’s marginal productivity.

There is reason to be optimistic about Southeast Asia. Despite the region’s challenges in accessing the global money supply compared to developed countries around the world, it does not face similar challenges such as rising income inequality and gridlocked decision-making processes. Thus, there is room and an argument to be made for Southeast Asian economies to adopt a new political economy (emblematic of liberal democracies) that prioritizes financial inclusion, marginal productivity, trade expansion, political stability, transparency, led by talented leaders with strong governance, in order for them to attract global capital. This process will take time and effort, but the potential of Southeast Asia as a fast-growing region is worthy of consideration as a destination for the distribution of global capital.