SOUTHEAST Asia is a coalition of 10 countries, tied together by history, culture and—unfortunately—common geopolitical threats. The Asean Economic Community (AEC) is increasingly linked by business networks, trade relationships and shared resources. Asean is pursuing a more ambitious form of economic integration as a vision to achieve broader regional prosperity and greater global competitiveness. With the attention the Asean integration is getting around the world, Asean stands to reap the benefits of increased trade, production and investment.
Despite its momentum, Asean faces some pitfalls on its current path—and low productivity ranks among them. 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 implementing policies that achieve improvements within sectors. For the Philippines, this trend is so obvious and hampers the much desired inclusive growth. The region has to build a more competitive manufacturing sector also to attract foreign direct investments. Again, for the Philippines, much more focus of government policy has to be on creating the environment for manufacturing through the development of skilled labor, the supply of adequate and competitive power, the harmonization of incentives and policies between the national government and the local government units. Without the latter, it will be difficult to decentralize manufacturing and agri-processing.
However, deeper participation in international and regional trade creates new competitive pressures. While these may be beneficial from a productivity and competitiveness standpoint, they could dislodge current industry leaders (may be to the benefit of the man in the street). Some of the sectors that are likely to experience rapid growth, such as trade and transport, as well as construction, are often associated with vulnerable and informal employment. Given the size of the opportunities and the importance of managing the challenges attached to them, issues like unprecedented urbanization and the advent of multiple disruptive technologies need to be addressed. They will have an impact on productivity, inclusiveness, resilience, agility and connectivity. The countries and companies that move quickly to seize the opportunities could secure advantages that last for decades to come, as the integration process gets deeper and deeper.
The biggest potential for Asean in the near future is capturing a larger share of the world’s trade in goods and services, given the fact that the global China focus is over, as China’s labor costs continue to rise and multinational companies are looking for new production sites. However, the advantage of low-cost labor in a number of Asean countries is undermined by weak output per worker. Turning Asean into a unified powerhouse of manufacturing and trade will require both public and private efforts and the removal of key administrative barriers.
If the region hopes to maximize the benefits of integration, it will need to maintain macroeconomic and political and policy stability, build world-class infrastructure and intensify its focus on work-force skills. It will also require the right set of incentives for investors, removing excessive red tape, loosening foreign-investment restrictions, and establishing an effective government agency for investor facilitation and protection.