A short history of southeast Asia

The history of Southeast Asia has been characterized as interaction between regional players and foreign powers. Though 11 countries currently make up the region, the history of each country is intertwined with all the others. For instance, the Malay empires of Srivijaya and Malacca covered modern day Indonesia, Malaysia, and Singapore while the Burmese, Thai, and Khmer peoples governed much of Indochina. At the same time, opportunities and threats from the east and the west shaped the direction of Southeast Asia. The history of the countries within the region only started to develop independently of each other after European colonialization was at full steam between the 17th and the 20th century.

Introduction

Evidences suggest that the earliest non-aboriginal Southeast Asians came from southern China and were Austronesian speakers. Contemporary research by anthropologists, linguists (and archaeologists suggests that the inhabitants of the Malay Archipelago migrated from southern China to islands of the Philippines around 2,500 BC and later spread to modern day Malaysia and Indonesia.

The earliest population of Southeast Asia was animist before Hinduism and Buddhism were exported from the Indian subcontinent. Islam arrived mostly through Indian Muslims and later dominated much of the archipelago around the 13th century while Christianity came along when European colonization started around the 16th century. During the classical age, the existence of Southeast Asia had been known to the Greeks. The Greek astronomer Ptolemy in his Geographia named the Malay Peninsula as Aurea Chersonesus (Golden Peninsula) while Java was called Labadius. Labadius was probably a corruption of Sanskrit Yavadvipa which refers to the same island. An ancient Hindu text may have earlier referred to Southeast Asia as Suvarnabhumi which means land of gold.

The region has been an important source of spices and this was one of the reasons European explorers were attracted to the Far East. During the colonization period, states of the region became important assets to the British, the Dutch and the French. British Malaya for instance was the world’s largest producer of tin and rubber while the Dutch East Indies was the source of Dutch’s wealth.

During the 1990s, Southeast Asia emerged as the fastest growing economy in the world. Its successes have caused some to call Southeast Asia an economic miracle and Singapore one of the "Four Asian Tigers". Though the Asian Financial Crisis struck in the late 1990s and left many crippled, the economy of the region has started to pick up again at a more sustainable rate as demand from the United States and People’s Republic of China soar.

Ancient and classical kingdoms

Southeast Asia has been inhabited since prehistoric times. The communities in the region evolved to form complex cultures with varying degrees of influence from India and China.

The ancient kingdoms can be grouped into two distinct categories. The first is agrarian kingdoms. Agrarian kingdoms had agriculture as the main economic activity. Most agrarian states were located in mainland Southeast Asia. Examples are the Ayutthaya Kingdom, based on the Chao Phraya River delta and the Khmer Empire on the Tonle Sap. The second type is maritime states. Maritime states were dependent on sea trade. Malacca and Srivijaya were maritime states.

A succession of trading systems dominated the trade between China and India. First, goods were shipped through Funan to the Isthmus of Kra, portaged across the narrow, and then transhipped for India and points west. Around the sixth century, BC merchants began sailing to Srivijaya where goods were transhipped directly. The limits of technology and contrary winds during parts of the year made it difficult for the ships of the time to proceed directly from the Indian Ocean to the South China Sea. The third system involved direct trade between the Indian and Chinese coasts.

Very little is known about Southeast Asian religious beliefs and practices before the advent of Indian merchants and religious influences from the second century BC onwards. Prior to the 13th century, Buddhism and Hinduism were the main religions in Southeast Asia.

The first dominant power to arise in the archipelago was Srivijaya in Sumatra. From the fifth century BC, the capital, Palembang, became a major seaport and functioned as an entrepot on the Spice Route between India and China. Srivijaya was also a notable center of Vajrayana Buddhist learning and influence. Srivijaya’s wealth and influence faded when changes in nautical technology in the tenth century CE enabled Chinese and Indian merchants to ship cargo directly between their countries and also enabled the Chola state in southern India to carry out a series of destructive attacks on Srivijaya’s possessions, ending Palembang’s entrepot function.

In the Philippines, the Laguna Copperplate Inscription dating from 900 BC relates a granted debt from a Maharlika caste nobleman named Namwaran who lived in the Manila area. This document shows strong Srivijayan influence, and mentions a leader of Medan, Sumatra.

Java was dominated by a kaleidoscope of competing agrarian kingdoms including the Sailendras, Mataram,Singosari, and finally Majapahit.

European colonization

Europeans first came to Southeast Asia in the sixteenth century. It was the lure of trade that brought Europeans to Southeast Asia while missionaries also tagged along the ships as they hoped to spread Christianity into the region.

Portugal was the first European power to establish a bridgehead into the lucrative Southeast Asia trade route with the conquest of the Sultanate of Malacca in 1511. The Netherlands and Spain followed and soon superseded Portugal as the main European powers in the region. The Dutch took over Malacca from the Portuguese in 1641 while Spain began to colonize the Philippines (named after Phillip II of Spain) from 1560s. Acting through the Dutch East India Company, the Dutch established the city of Batavia (now Jakarta) as a base for trading and expansion into the other parts of Java and the surrounding territory.

Britain, in the form of the British East India Company, came relatively late onto the scene. Starting with Penang, the British began to expand their Southeast Asian empire. They also temporarily possessed Dutch territories during the Napoleonic Wars, In 1819 Stamford Raffles established Singapore as a key trading post for Britain in their rivalry with the Dutch. However, their rivalry cooled in 1824 when an Anglo-Dutch treaty demarcated their respective interests in Southeast Asia. From the 1850s onwards, the pace of colonization shifted to a significantly higher gear.

This phenomenon, denoted New Imperialism, saw the conquest of nearly all Southeast Asian territories by the colonial powers. The Dutch East India Company and British East India Company were dissolved by their respective governments, who took over the direct administration of the colonies. Only Thailand was spared the experience of foreign rule, although, Thailand itself was also greatly affected by the power politics of the Western powers.

By 1913, the British occupied Burma, Malaya and the Borneo territories, the French controlled Indochina, the Dutch ruled the Netherlands East Indies while Portugal managed to hold on to Portuguese Timor. In the Philippines, Filipino revolutionaries declared independence from Spain in 1898 but was handed over to the United States despite protests as a result of the Spanish-American War.

Colonial rule had a profound effect on Southeast Asia. While the colonial powers profited much from the region’s vast resources and large market, colonial rule did develop the region to a varying extent. Commercial agriculture, mining and an export based economy developed rapidly during this period. Increased labor demand resulted in mass immigration, especially from British India and China, which brought about massive demographic change. The institutions for a modern nation state like a state bureaucracy, courts of law, print media and to a smaller extent, modern education, sowed the seeds of the fledgling nationalist movements in the colonial territories. In the inter-war years, these nationalist movements grew and often clashed with the colonial authorities when they demanded self-determination.

Japanese colonization

During World War II, the region was invaded by the Japanese Imperial Army and included in the Greater East Asia Co-Prosperity Sphere. Thailand was the only country to maintain a nominal independence by making a political and military alliance with the Empire of Japan.

Decolonization

With the rejuvenated nationalist movements in wait, the Europeans returned to a very different Southeast Asia after World War II. Indonesia declared independence in 17 August 1945 and subsequently fought a bitter war against the returning Dutch; the Philippines were granted independence in 1946. Burma secured their independence from Britain in 1948, and the French were driven from Indochina in 1954 after a bitterly fought war against the Vietnamese nationalists. The newly-established United Nations provided a forum both for nationalist demands and for the newly demanded independent nations.

During the Cold War, countering the threat of communism was a major theme in the decolonization process. After suppressing the communist insurrection during the Malayan Emergency from 1948 to 1960, Britain granted independence to Malaya and later, Singapore, Sabah and Sarawak in 1957 and 1963 respectively within the framework of the Federation of Malaysia. In one of the most bloody single incidents of violence in Cold War Southeast Asia, General Suharto seized power in Indonesia in 1965 and initiated a massacre of approximately 500,000 alleged members of the Indonesian Communist Party (PKI).

The United States intervention against communist forces in Indochina during a conflict commonly referred to in the United States as the Vietnam War meant that Vietnam, Laos and Cambodia had to go through a prolonged and protracted war in their route to independence.

In 1975, Portuguese rule ended in East Timor. However, independence was short-lived as Indonesia annexed the territory soon after. Finally, Britain ended its protectorate of the Sultanate of Brunei in 1984, marking the end of European rule in Southeast Asia.

Contemporary Southeast Asia

Modern Southeast Asia has been characterized by high economic growth by most countries and closer regional integration. Indonesia, Malaysia, the Philippines, Singapore and Thailand have traditionally experienced high growth and are commonly recognized as the more developed countries of the region. As of late, Vietnam too had been experiencing an economic boom. However, Myanmar, Cambodia, Laos and the newly independent East Timor are still lagging economically.

On August 8, 1967, Association of Southeast Asian Nations (ASEAN) was founded by Thailand, Indonesia, Malaysia, Singapore, and the Philippines. Since Cambodian admission into the union in 1999, East Timor is the only Southeast Asian country that is not part of ASEAN, although plans are under way for eventual membership. The association aims to enhance cooperation among Southeast Asian community. ASEAN Free Trade Area has been established to encourage greater trade among ASEAN members. ASEAN has also been a front runner in greater integration of Asia-Pacific region through East Asia Summits.

Top of Form

Skip main navigation

Client Service

Client Service

Capabilities & Solutions

McKinsey Advanced Data & Analytics

McKinsey Digital

McKinsey Implementation

McKinsey Recovery & Transformation Services

McKinsey Solutions

Industry Practices

Advanced Electronics

Aerospace and Defense

Automotive & Assembly

Chemicals

Consumer Packaged Goods

Electric Power & Natural Gas

Financial Services

Healthcare Systems & Services

High Tech

Infrastructure

Media & Entertainment

Metals & Mining

Oil & Gas

Paper & Forest Products

Pharmaceuticals & Medical Products

Private Equity & Principal Investors

Public Sector

Retail

Semiconductors

Social Sector

Telecommunications

Travel, Transport & Logistics

Functional Practices

Business Technology

Corporate Finance

Marketing & Sales

Operations

Organization

Risk

Strategy

Sustainability & Resource Productivity

Insights & Publications

Insights & Publications

Featured

Rethinking bank risk in emerging markets

Recent Articles

Getting the CMO and CIO to work as partners

Unleashing the value of advanced analytics in insurance

Digitizing oil and gas production

Explore

Insights & Publications

Visit McKinsey Global Institute

Visit McKinsey Quarterly

About Us

About Us

Our people

History

Our values

Alumni

Alumni

Visit Alumni Center site

Careers

Careers

Our work

Our people and values

Your growth at McKinsey

Your career

Join us

FAQs

Global Locations

Global Locations

Africa

Asia

Europe & Middle East

North America

Pacific

South America

Search

Register

Log in

Close it

Log in

Apply to McKinsey

Start a new application to McKinsey, retrieve your draft application(s) or access or update your

online account.

Online application

To ensure the security of your profile information, please re-enter your password.

Please log in to print or download this article.

E-mail

Forgot your password?Password

Log in

Don’t have an account? Register here.

Please create an account to print or download this article.

Register to get full access to our articles and reports, including those by McKinsey Quarterly and the

McKinsey Global Institute, and to subscribe to our newsletters and e-mail alerts.

Register

Access Insights & Publications

Gain full access to articles and reports, including those by McKinsey Quarterly and the McKinsey

Global Institute, and subscribe to our newsletters and e-mail alerts.

Insights & Publications

Close it

Forgot your password?

Sorry, something went wrong and we cannot reset your password right now. Please try again later.

Please enter the e-mail address you use to sign into your account.

E-mail

Reset passw ord

Thank you.

If your e-mail address is associated with an account in our system, we have sent you instructions on

how to reset your password.

Close

Insights & Publications

Latest thinking

Industries

Advanced Industries

Consumer & Retail

Energy, Resources & Materials

Financial Services

Health Systems & Services

High Tech, Telecoms & Internet

Pharmaceuticals & Medical Products

Private Equity & Principal Investors

Public Sector

Social Sector

Travel, Transport & Logistics

Functions

Business Technology

Corporate Finance

Marketing & Sales

Operations

Organization

Risk Management

Strategy

Sustainability

Regions

Americas

Asia-Pacific

China

Europe

India

Middle East & Africa

Themes

Big Data & Advanced Analytics

Digital Enterprise

Employment & Growth

Global Capital Markets

Leading in the 21st Century

Long-term Capitalism

Urbanization

Winning in Emerging Markets

Women in the Economy

Youth Employment

Article

Understanding ASEAN: Seven things you need to know

Southeast Asia is one of the world’s fastest-growing markets—and one of the least well known.

May 2014 | byVinayak HV, Fraser Thompson, and Oliver Tonby

China remains the Goliath of emerging markets, with every fluctuation in its GDP making headlines

around the globe. But investors and multinationals are increasingly turning their gaze southward to

the ten dynamic markets that make up the Association of Southeast Asian Nations (ASEAN). Founded

in 1967, ASEAN today encompasses Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the

Philippines, Singapore, Thailand, and Vietnam—economies at vastly different stages of development

but all sharing immense growth potential. ASEAN is a major global hub of manufacturing and trade,

as well as one of the fastest-growing consumer markets in the world. As the region seeks to deepen

its ties and capture an even greater share of global trade, its economic profile is rising—and it is

crucial for those outside the region to understand its complexities and contradictions. The seven

insights below offer a snapshot of one of the world’s most diverse, fast-moving, and competitive

regions.

Video

7 Things you need to know about ASEAN

The ten member states of the Association of Southeast Asian Nations collectively comprise the

seventh-largest economy in the world. Here are some critical facts.

Play video

1. Together, ASEAN’s ten member states form an economic powerhouse.

If ASEAN were a single country, it would already be the seventh-largest economy in the world, with a

combined GDP of $2.4 trillion in 2013 (Exhibit 1). It is projected to rank as the fourth-largest

economy by 2050.1 1. Based on forecasts by IHS.

Labor-force expansion and productivity improvements drive GDP growth—and ASEAN is making

impressive strides in both areas. Home to more than 600 million people, it has a larger population

than the European Union or North America. ASEAN has the third-largest labor force in the world,

behind China and India; its youthful population is producing a demographic dividend. Perhaps most

important, almost 60 percent of total growth since 1990 has come from productivity gains, as

sectors such as manufacturing, retail, telecommunications, and transportation grow more efficient.

Exhibit 1

ASEAN is one of the largest economic zones in the world; growth has been rapid and relatively stable

since 2000.

Enlarge

To capitalize on these trends, however, the region must develop its human capital and workforce

skills. In Indonesia and Myanmar alone, we project an undersupply of 9 million skilled and 13 million

semiskilled workers by 2030.2 2. For further details, see the McKinsey Global Institute’s reports The

archipelago economy: Unleashing Indonesia's potential, September 2012, and Myanmar’s moment:

Unique opportunities, major challenges, June 2013.

2. ASEAN is not a monolithic market.

ASEAN is a diverse group. Indonesia represents almost 40 percent of the region’s economic output

and is a member of the G20, while Myanmar, emerging from decades of isolation, is still a frontier

market working to build its institutions. GDP per capita in Singapore, for instance, is more than 30

times higher than in Laos and more than 50 times higher than in Cambodia and Myanmar; in fact, it

even surpasses that of mature economies such as Canada and the United States. The standard

deviation in average incomes among ASEAN countries is more than seven times that of EU member

states. That diversity extends to culture, language, and religion. Indonesia, for example, is almost 90

percent Muslim, while the Philippines is more than 80 percent Roman Catholic, and Thailand is more

than 95 percent Buddhist. Although ASEAN is becoming more integrated, investors should be aware

of local preferences and cultural sensitivities; they cannot rely on a one-size-fits-all strategy across

such widely varying markets.

3. Macroeconomic stability has provided a platform for growth.

Memories of the 1997 Asian financial crisis linger, leading many outsiders to expect that volatility

comes with the territory. But the region proved to be remarkably resilient in the aftermath of the

2008 global financial crisis, and today it is in a much stronger fiscal position: government debt is

under 50 percent of GDP—far lower than the 90 percent share in the United Kingdom or 105 percent

in the United States.

Most of the region has held steady so far, despite concern about the effect on emerging markets of

the potential end of quantitative easing by the US Federal Reserve. In fact, ASEAN has experienced

much lower volatility in economic growth since 2000 than the European Union. Savings levels have

also remained fairly steady since 2005, at about a third of GDP, albeit with large differences between

high-saving economies, such as Brunei, Malaysia, and Singapore, and low-saving economies, such as

Cambodia, Laos, and the Philippines.

4. ASEAN is a growing hub of consumer demand.

ASEAN has dramatically outpaced the rest of the world on growth in GDP per capita since the late

1970s. Income growth has remained strong since 2000, with average annual real gains of more than

5 percent. Some member nations have grown at a torrid pace: Vietnam, for example, took just 11

years (from 1995 to 2006) to double its per capita GDP from $1,300 to $2,600. Extreme poverty is

rapidly receding. In 2000, 14 percent of the region’s population was below the international poverty

line of $1.25 a day (calculated in purchasing-power-parity terms), but by 2013, that share had fallen

to just 3 percent.

Already some 67 million households in ASEAN states are part of the “consuming class,” with incomes

exceeding the level at which they can begin to make significant discretionary purchases (Exhibit 2).3

3. Defined as households with more than $7,500 in annual income (in purchasing-power-parity

terms). That number could almost double to 125 million households by 2025, making ASEAN a

pivotal consumer market of the future. There is no typical ASEAN consumer, but some broad trends

have emerged: a greater focus on leisure activities, a growing preference for modern retail formats,

and increasing brand awareness (Indonesian consumers, for example, are exceptionally loyal to their

favorite brands).4 4. Arief Budiman et al., The new Indonesian consumer, December 2012,

csi.mckinsey.com.

Exhibit 2

The number of consuming households in ASEAN is expected to almost double by 2025.

Enlarge

Urbanization and consumer growth move in tandem, and ASEAN’s cities are booming. Today, 22

percent of ASEAN’s population lives in cities of more than 200,000 inhabitants—and these urban

areas account for more than 54 percent of the region’s GDP. An additional 54 million people are

expected to move to cities by 2025. Interestingly, the region’s midsize cities have outpaced its

megacities in economic growth. Nearly 40 percent of ASEAN’s GDP growth through 2025 is expected

to come from 142 cities with populations between 200,000 and 5 million.

ASEAN consumers are increasingly moving online, with mobile penetration of 110 percent and

Internet penetration of 25 percent across the region. Its member states make up the world’s second-

largest community of Facebook users, behind only the United States. But there are vast differences

in adoption. Hyperconnected Singapore has the fourth-highest smartphone penetration in the

world, and almost 75 percent of its population is online. By contrast, only 1 percent of Myanmar has

access to the Internet. Indonesia, with the world’s fourth-largest population, is rapidly becoming a

digital nation; it already has 282 million mobile subscriptions and is expected to have 100 million

Internet users by 2016.

5. ASEAN is well positioned in global trade flows.

ASEAN is the fourth-largest exporting region in the world, trailing only the European Union, North

America, and China/Hong Kong. It accounts for 7 percent of global exports—and as its member

states have developed more sophisticated manufacturing capabilities, their exports have diversified.

Vietnam specializes in textiles and apparel, while Singapore and Malaysia are leading exporters of

electronics. Thailand has joined the ranks of leading vehicle and automotive-parts exporters. Other

ASEAN members have built export industries around natural resources. Indonesia is the world’s

largest producer and exporter of palm oil, the largest exporter of coal, and the second-largest

producer of cocoa and tin. While Myanmar is just beginning to open its economy, it has large

reserves of oil, gas, and precious minerals. In addition to exporting manufactured and agricultural

products, the Philippines has established a thriving business-process-outsourcing industry. China, a

competitor, has become a customer. In fact, it is now the most important export market for

Malaysia and Singapore. But demand from the United States, Europe, and Japan continues to propel

growth.5 5. “Ten of Asia’s most dynamic export processing zones that you’ve never heard of,” Asia

Briefing, April 24, 2014, asiabriefing.com.

Export-processing zones, once dominated by China, have been established across ASEAN. The Batam

Free Trade Zone (Singapore–Indonesia), the Southern Regional Industrial Estate (Thailand), the

Tanjung Emas Export Processing Zone (Indonesia), the Port Klang Free Zone (Malaysia), the Thilawa

Special Economic Zone (Myanmar), and the Tan Thuan Export Processing Zone (Vietnam) are all

expected to propel export growth.

The region sits at the crossroads of many global flows. Singapore is currently the fourth-highest-

ranked country in the McKinsey Global Institute’s Connectedness Index, which tracks inflows and

outflows of goods, services, finance, and people, as well as the underlying flows of data and

communication that enable all types of cross-border exchanges.6 6. For further details, see the full

McKinsey Global Institute report, Global flows in a digital age: How trade, finance, people, and data

connect the world economy, April 2014. Malaysia (18th) and Thailand (36th) also rank among the

top 50 most connected countries. ASEAN is well positioned to benefit from growth in all these global

flows. By 2025, more than half of the world’s consuming class will live within a five-hour flight of

Myanmar.

6. Intraregional trade could significantly deepen with implementation of the ASEAN Economic

Community, but there are hurdles.

Some 25 percent of the region’s exports of goods go to other ASEAN partners, a share that has

remained roughly constant since 2003. While this is less than half the share of intraregional trade

seen in the North American Free Trade Agreement countries of Canada, Mexico, and the United

States and in the European Union, the total value is climbing rapidly as the region develops stronger

cross-border supply chains.

Intraregional trade in goods—along with other types of cross-border flows—is likely to increase with

implementation of the ASEAN Economic Community integration plan, which aims to allow the freer

movement of goods, services, skilled labor, and capital. Progress has been uneven, however. While

tariffs on goods are now close to zero in many sectors among the original six member states (Brunei,

Indonesia, Malaysia, the Philippines, Singapore, and Thailand), progress on liberalization of services

and investment has been slower, and nontariff barriers remain a stumbling block to freer trade.

While deeper integration among its member states remains a work in progress, ASEAN has forged

free-trade agreements elsewhere with partners that include Australia, China, India, Japan, New

Zealand, and South Korea. It is also party to the Regional Comprehensive Economic Partnership

trade negotiations that would form a megatrading bloc comprising more than three billion people, a

combined GDP of about $21 trillion, and some 30 percent of world trade.

7. ASEAN is home to many globally competitive companies.

In 2006, ASEAN was home to the headquarters of 49 companies in the Forbes Global 2000. By 2013,

that number had risen to 74. ASEAN includes 227 of the world’s companies with more than $1 billion

in revenues, or 3 percent of the world’s total (Exhibit 3). Singapore is a standout, ranking fifth in the

world for corporate-headquarters density and first for foreign subsidiaries.7 7. Headquarters density

is the ratio of the revenue of all large companies (defined as those with revenue of $1 billion or

more) headquartered in a given country to that country’s GDP in 2010. For further details, see the

full McKinsey Global Institute report, Urban world: The shifting global business landscape, October

2013.

Exhibit 3

ASEAN is home to 227 of the world’s largest companies; combined, it would be the seventh-largest

host of such companies.

Enlarge

Consistent with this growth, foreign direct investment in ASEAN has boomed, surpassing its precrisis

levels. In fact, the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted

more foreign direct investment than China ($128 billion versus $117 billion) in 2013.8 8. Based on

data from Bank of America Merrill Lynch. In addition to attracting multinationals, ASEAN has become

a launching pad for new companies; the region now accounts for 38 percent of Asia’s market for

initial public offerings.

Despite their distinct cultures, histories, and languages, the ten member states of ASEAN share a

focus on jobs and prosperity. Household purchasing power is rising, transforming the region into the

next frontier of consumer growth. Maintaining the current trajectory will require enormous

investment in infrastructure and human-capital development—a challenge for any emerging region

but a necessary step toward ASEAN’s goal of becoming globally competitive in a wide range of

industries. The ASEAN Economic Community offers an opportunity to create a seamless regional

market and production base. If its implementation is successful, ASEAN could prove to be a case in

which the whole actually does exceed the sum of its parts.

About the authors

Vinayak HV is a principal in McKinsey’s Singapore office, where Oliver Tonby is a director, and Fraser

Thompson is a senior fellow of the McKinsey Global Institute.

http://www.mckinsey.com/insights/public_sector/understanding_asean_seven_things_you_need_t

o_know