Southeast Asia Must Embrace Reforms for ‘China Plus One’ to Succeed

The “China plus one” strategy, once hailed as a game-changer for Southeast Asia, is starting to look like just another iteration of the region’s long-standing problems. Governments in Indonesia, Thailand, and Malaysia touted foreign investment as the key to breaking out of the middle-income trap, but they forgot an essential ingredient: domestic reform.

In Thailand, a record number of applications for electric vehicles and electronics projects have failed to translate into meaningful wage growth or industrial progress. Average manufacturing wages have stagnated since mid-2023, while traditional vehicle production plummeted nearly 20% last year. More than half the workforce remains stuck in low-productivity informal jobs.

Indonesia’s situation is even more dire. Despite possessing the scale, resources, and young population that should make it a major winner from supply-chain diversification, business confidence has collapsed. Major business groups report being pressured to invest in “patriotic bonds” and facing land seizures justified by vague environmental claims. A new financial-sector law has undermined central bank independence.

The root of the problem lies not with China itself but with Southeast Asia’s persistent institutional weaknesses. The region’s leaders have repeatedly demonstrated an inability to turn external opportunity into industrial progress at home. Instead of fostering a business-friendly environment and investing in human capital, they seem content to rely on short-term gains from foreign investment, only to watch as local industries struggle to compete.

Thailand’s experience serves as a stark reminder that headlines do not always match reality. While the Board of Investment touted a decade-high number of applications for electric vehicles, electronics, and digital projects, the country’s growth forecasts have been repeatedly revised downwards to a paltry 1.8-2% per annum. This is not the result of external factors but rather the consequence of domestic policy choices that prioritize short-term gains over long-term investment in human capital and infrastructure.

In Indonesia, the situation is even more alarming. Despite its vast resources and young population, the country’s business climate remains hostile to foreign investment. Major companies report being coerced into investing in “patriotic bonds” – a thinly veiled form of state-directed investment that undermines transparency and accountability. A new financial-sector law has further eroded central bank independence, paving the way for more crony capitalism.

Southeast Asia’s growth trajectory will remain stuck in neutral if its governments continue to prioritize short-term gains over long-term reform. Foreign investment will fail to translate into meaningful economic progress if domestic policy choices do not change. The region’s leaders must stop treating the “China plus one” strategy as a silver bullet and start addressing the underlying structural weaknesses that have held back their economies.

This requires more than just cosmetic reforms – it demands fundamental changes in how these countries do business, invest in human capital, and foster a business-friendly environment. As global manufacturers continue to look for new destinations to diversify their supply chains, Southeast Asia’s governments must demonstrate that they are serious about reforming their economies. The alternative is too ghastly to contemplate: another generation of failed promises, lost opportunities, and stagnating growth.