Challenges facing Asian century

We are a part of the Asian continent but oddly enough, Pakistan finds itself growth-wise too far from what is called the rising Asia. Physically we are next-door neighbors of China, the country that leads Asia and India that is striking out its own Asian path but progress-wise Pakistan seems to be located in too distant a continent. And we are just a stone’s throw from the oil-rich Middle East that includes Saudi Arabia, the UAE and Iran but energy-wise Pakistan seems to be embedded in too poor a locale. We need a lot of catching up to do to be able to belong to the real Asia which by 2040, is likely to generate more than 50% of world GDP, and could account for nearly 40% of global consumption. According to Jonathan Woetzel and Jeongmin Seong, Senior Fellow of McKinsey Global Institute (We’ve entered the Asian Century and there is no turning back—published on Oct. 11, 2019 in the World Economic Forum’s Weekly Agenda) today, the region has an increasing global share of trade, capital, people, knowledge, transport, culture, and resources.

Asia now accounts for around one-third of global trade in goods, up from about a quarter ten years ago. Over roughly the same period, its share of global airline travelers has risen from 33% to 40%, and its share of capital flows has increased from 13% to 23%. Those flows have fueled growth in Asia’s cities. The region is home to 21 of the world’s 30 largest, and four of the ten most visited. And some of Asia’s lesser-known cities are now also on investors’ radar. In Yangon, Myanmar’s commercial capital, greenfield foreign direct investment (FDI) in knowledge-intensive sectors totaled $2.6 billion in 2017, up from virtually zero in 2007. Similarly, Bekasi, a smaller city near Jakarta, has emerged as the Detroit of Indonesia – the center of Indonesia’s automotive and motorcycle industry. Over the last decade, FDI in the city’s manufacturing industry has grown at an average rate of 29% per year. And India’s Hyderabad – which generated over 1,400 patents in 2017 – is quickly catching up with India’s Silicon Valley, Bangalore. But it’s not only external flows being channeled into Asia. Dynamic intraregional networks are also driving progress. Around 60% of Asian countries’ total trade in goods occurs within the region, facilitated by increasingly integrated Asian supply chains. Intraregional funding and investment flows are also increasing, with more than 70% of Asian startup funding coming from within the region. Flows of people – 74% of travel within Asia is undertaken by Asians – help to integrate the region as well.

In fact, according to authors there are at least four “Asias,” each at a different stage of economic development, playing a unique role in the region’s global rise. The first Asia comprises China, the region’s anchor economy, which provides a connectivity and innovation platform to its neighbors. In 2013-17, the country accounted for 35% of Asia’s total outward FDI, with about one-quarter of that investment going to other Asian economies. Reflecting its rapidly growing innovation capacity, China accounted for 44% of the world’s patent applications in 2017. The second grouping – “Advanced Asia” – also provides technology and capital. With total outward FDI of $1 trillion, these countries accounted for 54% of total regional FDI outflows in 2013-17. South Korea alone provided 33% of all FDI flows to Vietnam. Japan accounted for 35% of Myanmar’s FDI inflows, and 17% of the Philippines’.

Then there is “Emerging Asia,” which comprises a relatively diverse group of small emerging economies that provide not only labor, but also growth potential, owing to rising productivity and consumption. These economies are deeply integrated with their regional neighbors: their average share of intraregional flows of goods, capital, and people is 79%, the highest of the four Asias. By contrast, the fourth grouping – “Frontier Asia and India” – has the lowest average share of intraregional flows, amounting to just 31%. But this figure – which reflects historic ties to Europe, the Middle East and Africa, and the United States – is set to increase, as these economies, which historically were less integrated, forge closer bonds with their Asian neighbors. This group has a lot to offer, including a relatively young labor force that is capitalizing on the growing Asian import market, and a growing middle class that can serve as a new market for regional exports.

The differences among the four Asias are complementary, making integration a powerful force for progress. For example, as one country’s labor force ages, a country with a younger population fills the gap. The median age of India’s population stood at 27 in 2015, compared to 37 in China and 48 in Japan and is expected to reach just 38 by 2050. Likewise, when wages – and thus manufacturing costs – begin to rise in one country, an economy at an earlier stage of development takes over its low-cost manufacturing activities. From 2014 to 2017, when China’s share of all labor-intensive emerging-economy exports declined from 55% to 52%, Vietnam’s share increased by 2.2 percentage points and Cambodia’s by 0.4 percentage points.

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Over the last three decades, significant gains in workforce size and quality helped Asia to become a hub of global supply chains – and thus to sustain rapid progress toward advanced-economy income levels and living standards. But with workers increasingly unable to meet the demands of the labor market, the region’s remarkable development success could be derailed. According to Lee Jong-Wha Director (How can Asia close its emerging skills gap? Published on 15 Jan, 2016 in WEF’s Weekly Agenda) governments across Asia must devise ways to transform their education and training systems, so that workers acquire the skills they need to boost economic growth and productivity – the key to better jobs and higher wages. Moreover, general education and technical and vocational education and training (TVET) systems need to be restructured. In many Asian countries, formal education is often overly academic or simply low-quality, undermining not only graduates’ employability, but also their capacity to reap the benefits of further TVET. To be effective, secondary and tertiary schools must produce graduates with both soft skills, such as communication and teamwork, and relevant technical skills. As for TVET systems, both their capacity and quality must be improved. As governments improve their capacity for supervision, coordination, and regulation of the TVET system, actual skills training should be shifted to the private sector, thereby transforming the current supply-driven system to one that responds effectively to changing market demand.

To this end, governments should encourage public-private partnerships focused on, for example, identifying the labor market’s unmet needs, setting TVET policy priorities, developing curricula and national standards, training TVET teachers, and implementing cost-sharing mechanisms. Governments must also ensure better access to TVET systems for disadvantaged groups, including children from poor families and rural areas and employees in SMEs and the informal sector. According to Masakazu Toyoda Chairman & CEO, The Institute of Energy Economics, Japan (How can Asia cope with its biggest challenge – energy security? Published in the Agenda Weekly of WEF) developing nations in Asia need to adopt policies that include improving energy efficiency to restrict demand growth, developing domestic resources proactively, diversifying their energy mix and import sources to disperse risks, and preparing for possible energy supply disruptions.

They also need to strike a balance between affordability and environmental sustainability. Affordability means that no country has any choice but to use cheap energy as far as average income levels are low. Environmental sustainability implies that if energy consumption causes a grave environmental problem, it may affect national interests. Given the lock-in effect of energy infrastructure, it is desirable to adopt the best available technology (BAT) for investment. Developing countries can take advantage of successful and unsuccessful experiences in developed countries to plot their own path forward. This means that developing countries may be able to address or avoid problems more efficiently than developed countries did in the past.

—- Written by Muhammad Ziauddin. Published in Pakistan Observer on October 21, 2019.