ASEAN, the Association of Southeast Asian Nations, is taking a bold approach to combat economic uncertainties through a renewed focus on productivity. With its theme for Indonesia’s ASEAN 2023 chairmanship, ASEAN Matters: Epicentrum of Growth, the organization recognizes the need to enhance its economic strength and influence.
Despite the challenges posed by the COVID-19 pandemic, ASEAN has maintained relatively high growth over the years. While the overall GDP contracted by 2.7 percent in 2020, the economy rebounded by 3.4 percent in the following year. By 2022, ASEAN’s collective GDP had surpassed its pre-pandemic level, standing at an impressive US$3.6 trillion and solidifying its position as the world’s fifth-largest economy. Furthermore, Foreign Direct Investment (FDI) inflows reached a historic high of nearly $225 billion, and the value of ASEAN’s trade exceeded the size of its economy at $3.8 trillion.
However, the post-pandemic world is marked by ongoing uncertainties, including climate-related disasters, geopolitical tensions, and supply chain disruptions. In this challenging landscape, businesses are hesitant to invest in productivity-enhancing measures, while governments face fiscal and political constraints when pursuing long-term growth and competitiveness.
To thrive and adapt to global economic restructuring driven by technology, sustainability, and the need for risk diversification, ASEAN must go beyond conventional approaches. One critical area that ASEAN has yet to adequately address is productivity. In the trade-oriented ASEAN Economic Community (AEC), there is currently no official platform to discuss productivity-related issues. This becomes particularly concerning as new initiatives, such as digital transformation and green transitions, risk overshadowing the core agenda of productivity enhancement.
Productivity, broadly defined as the efficiency of an economy in utilizing available resources to produce goods and services, is essential for sustainable economic growth. It is typically measured through factors such as capital productivity, labor productivity, and total factor productivity (TFP), which captures technological progress.
According to the Asian Productivity Organization, ASEAN’s TFP has experienced an average contraction of 0.6 percent annually over the past decade. Additionally, TFP accounted for only 3 percent of ASEAN’s annual economic growth over the past two decades, suggesting limited innovation and research and development capacity among ASEAN countries. This hampers their ability to move up the technological ladder.
As ASEAN economies can no longer rely solely on low labor costs and resource advantages, it is crucial to prioritize efforts in improving productivity to avoid the middle-income trap of stagnant growth and declining competitiveness. While certain barriers to productivity may vary across countries and industries, there are key areas where ASEAN can focus on and foster regional cooperation.
First and foremost, ASEAN needs to enhance infrastructure and connectivity. A high-cost economy with inadequate infrastructure and connectivity will yield sub-optimal outputs. The region must prioritize strengthening digital connectivity while also addressing physical infrastructure and connectivity gaps. The ASEAN connectivity agenda should support market integration and supply chain development.
Secondly, ASEAN should actively promote and facilitate the development of the services sector. While services have traditionally been perceived as less productive due to their low value-added and nontradability, they now serve as the largest destination for Foreign Direct Investment (FDI) and a significant source of employment in the region. Digitally enabled intermediate services, in particular, have seen substantial growth in trade. By fostering the competitiveness of the services sector through infrastructure development, regulatory cooperation, and skills enhancement, ASEAN can unlock the sector’s potential and elevate overall productivity and competitiveness.
Thirdly, ASEAN must focus on fostering institutional and regulatory interoperability. This includes aligning national policies and practices with regional commitments and reducing the costs of cross-border transactions. Strengthening enforcement mechanisms, such as effective stakeholder feedback mechanisms and results-based monitoring, combined with renewed political will, can further ensure the success of these efforts.
Fourthly, ASEAN should prioritize leveraging innovation and technology to boost productivity. To achieve this, ASEAN must mainstream innovation and technology in its cooperation initiatives rather than treating it as a standalone agenda. Encouraging research and development, promoting technology application, and addressing the skills gap are crucial steps. Collaboration between the private sector, public sector, and research community is vital in implementing technology and innovation across various sectors. Furthermore, securing access to technologies, financing, and markets is essential. Additionally, strengthening skills mobility in science, engineering, and artificial intelligence (AI) is of utmost importance.
Lastly, investing in the region’s human capital is critical for long-term growth. As demographic dividends decline and labor markets shrink, it is essential to involve a more inclusive workforce. This includes women, youth, rural populations, and people with disabilities. Equipping the workforce with good health, high-quality training and education, access to competitive labor markets, and social protection is crucial. Given the increased adoption of digital technologies and AI post-pandemic, there is an urgent need to bridge the skills gap. Facilitating skills mobility and investing in skills development and training will be pivotal for meeting the evolving demands of the job market.
ASEAN is at a turning point as it formulates its post-2025 economic agenda in a rapidly changing global and regional landscape. Relying solely on resource endowments and low-cost labor is no longer sufficient. New growth drivers are necessary to produce and compete in higher value-added goods and services. It is therefore crucial to have a renewed conversation about productivity, and ASEAN should consider establishing an agile public-private network on productivity, technology, and innovation. This platform would bring together industry experts, researchers, policymakers, and national productivity agencies to discuss issues and identify potential collaborations.
Implementing these measures does not require starting from scratch. ASEAN can leverage existing initiatives or partner with relevant economies, the private sector, or international partners to accelerate productivity enhancement. Boosting productivity at the regional level will undoubtedly be challenging, but maintaining the status quo is not an option if ASEAN wants to secure its economic future.
Now more than ever, ASEAN recognizes the importance of prioritizing productivity as a means to navigate the prevailing uncertainties and bolster economic growth. By addressing key areas such as infrastructure, services sector development, institutional interoperability, technology and innovation, and human capital investment, ASEAN will be better equipped to overcome challenges and emerge as a stronger and more competitive regional bloc.
