Asean economy cannot afford business as usual

Over the decades, Asean has enjoyed relatively high growth. Overall GDP contracted by 3.2 percent in 2020 but the economy quickly rebounded by 3.4 percent in the year after. By 2022, Asean’s collective GDP stood at $3.6 trillion, surpassing its pre-pandemic level and allowing it to retain its position as the world’s fifth-largest economy. Foreign direct investment (FDI) inflows to the region reached a historic high at almost $225 billion, and Asean’s trade value exceeded the size of its economy at $3.8 trillion in the same year.In the post-pandemic world, it becomes clear that the polycrisis is here to stay, from climate-related catastrophes, a prolonged war in Ukraine, to escalating supply chain and technology bifurcation given the strategic United States-China rivalry. As uncertainties abound, businesses are refraining from investing in productivity-enhancing measures while governments are facing fiscal and political constraints in undertaking bold reforms toward longer-term growth and competitiveness.Global economic restructuring driven by technological progress, sustainability imperatives, and the derisking agenda requires Asean to go beyond “business as usual” to survive and thrive.

This article does not propose the creation of yet another framework or strategy, but rather renewed efforts to boost the region’s productivity in a few key areas.

First, the region needs to improve its infrastructure and connectivity. A high-cost economy with poor infrastructure and connectivity will yield suboptimal outputs. Strengthening digital connectivity should be a priority, but physical infrastructure and connectivity also require attention in most of the region. The Asean connectivity agenda must be geared toward supporting market integration and supply chain development.

Second, Asean should promote and facilitate services sector development. Long perceived as less productive due to their low value-added and nontradability, services now account for the largest sector FDI destination and source of employment in the region. Digitally enabled intermediate services comprise the biggest increase in services trade, many of which are utilized as intermediate inputs. Services, especially digitally enabled services, are a new growth driver that will boost productivity and competitiveness across economic sectors.

Third, Asean can foster institutional and regulatory interoperability, including alignment between national policy and practice and regional commitments, reducing the costs of cross-border transactions. Enforcement can be strengthened with an effective stakeholder feedback mechanism, results-based monitoring, and stronger political will.Fourth and directly linked to total factor productivity, Asean should leverage innovation and technology to boost productivity. Asean needs to mainstream innovation and technology across areas of cooperation, not as a standalone agenda. Initiatives to derisk innovation, promote research and development, technology application, and address the skills gap should be encouraged. Asean should also improve skills mobility in science, engineering, and technologies, including artificial intelligence.

Lastly, we must invest in our people. In the coming decades, the region’s demographic dividends will decline as more countries face aging populations and shrinking labor markets. Greater inclusion of women, youth, rural populations, and the differently abled in the region’s labor force is needed. That workforce also needs to be equipped with good health, high quality, and market-informed training and education, and given access to competitive labor markets and social protection.

The need for reskilling has become more urgent post-pandemic, as companies accelerate the use of digital technologies and AI adoption. To address the skills gap in the region, skills mobility needs to be better facilitated and calibrated to minimize labor market mismatches. Investment in skills development and training should be redoubled to meet evolving demand.

Asean is formulating its post-2025 economic agenda in a markedly different global and regional landscape. Its economies can no longer compete based on resource endowments or low-cost labor alone. New growth drivers are needed to produce and compete in higher value-added goods and services.

Stepping up regional efforts to boost productivity will not be easy but “business as usual” is not an option for securing Asean’s economic future. The Jakarta Post/Asia News Network

Julia Tijaja is an associate senior fellow at the ISEAS-Yusof Ishak Institute. Denis Hew is a senior research fellow at the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy, National University of Singapore. The original article was published by ISEAS-Yusof Ishak Institute as an ASEANFocus+ article on Fulcrum blogsite.

The Philippine Daily Inquirer is a member of the Asia News Network, an alliance of 22 media titles in the region.