Many regarded Asia as the world’s most dynamic region, one with relatively favorable demographics and potential for economic diversification, while China’s increasingly gargantuan economy and evolving supply chains would inevitably pull along much of the region. China’s own external trade and foreign investment plans strengthened this belief. The country would provide substantial foreign aid, direct investment, and loans from institutions like the China Development Bank and the Export-Import Bank of China, and then in a supposedly more structured way through the Belt and Road Initiative. These efforts would develop transportation and energy infrastructure and provide logistical support for enhanced region and global trade. And agreements like the 15-country Regional Comprehensive Economic Partnership would later advance the rise of a formidable economic bloc.

This, at least, was the widespread perception at the start of the 2010s, reinforced by the relatively rapid recovery of most of the region from the 2008 global financial crisis. But a lot changed over the past decade. The West’s obsession with China and the perceived threat of that country’s rise mean that Group of 7 leaders (and most Western commentators) have not looked in much detail at other Asian emerging markets. Had they done so, they would have observed that some of them were experiencing a more troubling trajectory.

Obviously, output and investment both plummeted during the COVID-19 crisis, and recovery prospects remain uncertain. But the region’s economic dynamism had dimmed even before the pandemic disrupted everything. Although a few relatively small Asian economies (like Vietnam) reported strong goods exports in the pre-pandemic period, many others showed disturbing signs of slowdown and a weaker impetus to diversify.

Consider four emerging-market economies that were widely touted as examples of “Asian success” and had briefly become the darlings of global financial markets: India, Indonesia, Malaysia, and Thailand. Gross domestic product (GDP) growth in each of these countries has decelerated significantly in recent years. In India, annual growth slowed from 8 percent in 2016 to 4 percent in 2019, and even these figures are widely considered to be overestimates because of changes in the calculation process. Thailand’s economy, which was expanding by more than 7 percent per year at the start of the last decade, grew by only 2.3 percent in 2019, while growth in Malaysia declined from 7.4 percent to 4.3 percent over the same period. Only in Indonesia, where growth slipped from 6.2 percent in 2010 to 5 percent in 2019, was the slowdown relatively minor.

One obvious cause of this deceleration was the decline in investment rates. In Malaysia, Indonesia, and Thailand, this reflected a medium-term trend triggered by the 1997-98 East Asian Crisis, after which investment rates collapsed by at least a quarter, from previous highs of close to 40% of GDP to around 30%. In Malaysia, investment fell further during the 2010s, to only 19 percent of GDP by 2019. Investment in India also declined sharply, from 40 percent of GDP in 2010 to 30 percent in 2019. And investment in all of these countries decreased again during the pandemic year of 2020.

COVID-19 aside, why have investment rates come down? After all, these economies were the beneficiaries not only of positive stimuli from China, but also of active interest from global finance. They attracted capital of all kinds: foreign direct investment, portfolio flows, bond financing, and other external commercial borrowing. Why didn’t all of this generate higher investment and growth?

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