Productivity in most Southeast Asian nations remains at “worryingly low levels” and unless the region builds a more competitive manufacturing sector, it could miss out on opportunities to gain more production from multinational corporations, according to a new report from global consulting firm McKinsey & Company.
The report titled “three paths to sustained economic growth in Southeast Asia” said that despite rapid growth and relative stability in Southeast Asia since 2000, the region faces some “pitfalls” on its current trajectory with low productivity being at the top of concerns.
The Association of Southeast Asian Nations, or ASEAN, a group of 10-member nations —Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam— has lower labor costs than China, however this advantage is undermined by the region’s low productivity, the report said.
“Although productivity has been rising in recent decades, much of this progress was driven by a broad shift of labor from agriculture into more efficient sectors, rather than improvements within sectors,” according to the report.
Southeast Asia faces “urgent priorities” in addressing its needs in infrastructure, housing, and education. Existing gaps and shortfalls could constrain the region’s potential without the right set of catalysts to boost growth in the approaching decades, the report said.
Despite the challenges that Southeast Asia faces it can find new catalysts for growth by capitalizing on three global mega-trends: the ongoing expansion of cross-border trade, unprecedented urbanization, and deploying multiple disruptive technologies, according to the report.
Chart courtesy of McKinsey & Company
In order to capture a greater share of global trade flows Southeast Asia needs to tackle restrictions on foreign investment, develop a more competitive manufacturing sector, and to build critical foundations — such as infrastructure, logistics, and workforce skills, the report said.
According to the McKinsey report, the “booming” cities of Southeast Asia account for over 65% of regional GDP today, with over 90 million citizens expected relocate to urban areas by 2030 — a shift that will support continued growth of the consuming class — which may double to 263 million households by 2030 and would make the region a “pivotal market” for future companies in number of industries.
The report outlined five key technologies — mobile Internet, big data, the Internet of Things, the automation of knowledge work, and cloud technology — which could modernize sectors across Southeast Asia and thus drive “major productivity improvements”.
The size of the potential reward and the urgency of managing associated risks highlights why these three measures should be a key focus of regional policy discussions — and businesses need to embed them into their strategic planning — those that move fast to capitalize such opportunities could secure advantages that would last for decades ahead, according to the report.
These three key areas highlighted in the report could bring immediate economic impact while placing Southeast Asia on a faster and more sustainable trajectory, the report concluded.
Read the full report from McKinsey – “Three paths to sustained economic growth in Southeast Asia”
Source: McKinsey & Company
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