JUST as Asean leaders met in Myanmar’s capital of Nay Pyi Taw together with their partners from China, India, Japan and the United States this past week, the McKinsey Global Institute (MGI), the research arm of management consultancy McKinsey & Co, released a report on South-East Asia titled Southeast Asia at the crossroads: Three paths for prosperity.
The report’s authors say low productivity and low output per worker remain the most serious issues in the region, which is trying to integrate under the Asean Economic Community (AEC) framework.
They say that the factors that buoyed economic progress in the past 20 years such as an expanding workforce and the productivity boost stemming from the shift to manufacturing from agriculture are now fading, with new catalysts needed in the years ahead.
The authors suggest that regional governments and the private sector should take advantage of opportunities from three megatrends - global flows, urbanisation and technology – which are already happening, to address these issues.
“Southeast Asia can address many of these challenges by carving out its own unique opportunities from three global megatrends: expanding cross-border trade, unprecedented urbanisation, and the advent of multiple disruptive technologies,” they say, adding that all three of these megatrends offer avenues for addressing the region’s fundamental productivity challenges.
They say policymakers and business executives will need to think long-term and invest to see an impact while at the same time placing Asean on a faster and more sustainable trajectory through 2030 to emerge alongside China and India as an economic powerhouse.
The report noted that the ability of Asean govermments to raise the living standards of their citizens will be hampered if productivity remain at low levels.
The authors say that the region needs to build a more competitive manufacturing sector or it could miss out on the opportunity to secure more production from multinational corporations.
“The biggest potential for South-East Asia in the near term is capturing a larger share of the world’s trade in goods and services,” they say.
Despite several Asean economies such as Malaysia, Singapore and Thailand being known for their exports-reliant economies, the authors say exports actually play a smaller role than consumption and investment in driving economic growth in the region.
But they believe that intra-Asean trade will deepen and pick up pace with the successful implementation of the AEC while the continuing restructuring of the Chinese economy offers up opportunities for Asean economies to become manufacturing hubs.
However, they point out that turning Asean into a manufacturing and trading hub will require both public and private efforts.
The authors say that Asean governments must also develop their human capital and workforce skills as based on current trends, more than half of all high-skill employment in Cambodia, Indonesia, Laos, the Philippines, Thailand, and Vietnam could be filled by workers with insufficient qualifications by 2025.
“In Indonesia and Myanmar alone, we project an undersupply of nine million skilled and 13 million semi-skilled workers by 2030,” they add.
Inadequate institutional framework
The report also highlighted the need to beef up the Asean Secretariat, an organisation that many see as understaffed, underfunded and woefully inadequate in pushing the regional integration agenda.
“On the policy side, the first step is increasing awareness of Asean and the AEC among the business community and the broader public alike. Focusing on removing a handful of key administrative barriers that are important to businesses could release significant value and go a long way toward illustrating the benefits of integration,” they point out.
Indeed, the MGI report noted that “past evidence on successful integration shows that a strong institution is needed to drive action”. However, the secretariat lacks the resources with a headcount of 300 in 2012 compared with the 34,000-strong staff of the European Union (EU).
According to the Asian Development Bank, the secretariat, which receives equal contributions from all member states to its operational budget, will need more than 1,600 employees if it is to fulfill its mandate.
Given that Asean lacks the deep institutional ties and infrastructure links of the EU, the region cannot hope to make integration work unless changes are made.
Perhaps Malaysia, which takes over as Asean chair next year, can include a restructuring of the Asean Secretariat as part of discussions at the next Asean Summit?
Malaysia, after all, had called for the 10-member grouping to draw up a 10-year post-integration plan as well as conduct a mid-term review during the just concluded 25th Asean Summit.
Prime Minister Datuk Seri Najib Tun Razak explained that the plan and the review was to ensure that the grouping remains relevant, a point that critics will take note of.
Ever closer integration
Despite the wide disparities in economic, political and social indicators, the report’s authors argue that given the right underpinnings and making integration work on the ground, there is no reason why integration cannot happen.
They say that South-East Asia is united by multiple threads of history, culture and common geopolitical concerns. “Today, it is also increasingly tied together by business networks, trade relationships, migration and shared resources,” they add.