Recovery requires coordinated development

Recovery requires coordinated development

The three main challenges Asean will face post-pandemic -- digitalisation, supply chains and human capital -- have been widely discussed. Each of these has been emphasised in the Asean Comprehensive Recovery Framework (ACRF) and its implementation plan. Undoubtedly, Asean's continued prosperity requires proper management of their evolution during the "new normal". But what needs to be emphasised is that digital technology adoption, supply chain resilience and skills development will be even more integrated in the post-pandemic world, and thus require a coordinated development strategy.

The pandemic has forced us to push the limits of digital technology, and we are learning more about its efficiency and effectiveness. There are also large investments geared toward making digital interaction more seamless. The constantly improving efficacy of digital technology in performing economic transactions will make it an indispensable tool. In particular, digitalisation will feature heavily in supply chains, which is itself undergoing a profound transformation.

The Covid-19 pandemic has forced many businesses to rethink their supply chains. In the short term, they had to adjust to the disruptions in the flow of goods and people due to domestic lockdowns and border closures. This also forced them to look for ways to increase supply chain resilience. Businesses have three options in this regard -- consolidation, diversification and reshoring. Consolidation is done to try to keep suppliers close to production bases, for example by sourcing inputs locally. Diversification consists of finding multiple sources of inputs either domestically or in new countries. Finally, reshoring is returning economic activity back to the home base. Digital technology will play a key role in which of these options are preferable to firms.

Consolidation and reshoring are related to the concentration force of technology, while diversification is related to the dispersion force of technology. As Professor Fukunari Kimura, Chief Economist of the Economic Research Institute for Asean and East Asia (ERIA), has explained, concentration is when economic activity gets consolidated. By using technology, firms can perform a lot of activities that normally require outsourcing. In particular, technology can be labour-saving in that tasks done by humans can now be automated and done by computers. There is less reason for multinationals to seek low-wage countries for cost savings. Instead, they can invest in technological upgrading. At the same time, technology also creates dispersion forces so that more economic activity can be coordinated at a distance. With seamless communication, it is not necessary for production to take place in the same location, it can now be dispersed across multiple places.

For Asean, maintaining the vitality of supply chains is necessary, so it needs to pay attention to their reorganisation. After all, Asean's economic growth has been driven by forming strong international production linkages within Asean and with East Asia. But supply chains in the digital age will look a lot different. In particular, due to the greater role of digital technology in supply chains, digital infrastructure and skills development have become vital for supply chain vitality.

As the type of economic activity and related technology change, so does the demand for corresponding skills. In the past few decades, much of Asean's growth relied on foreign investment in labour-intensive manufacturing sectors, which easily complemented the type of skills Asean workers could offer. However, technological development has outpaced the upgrading of our skill development system, so now many Asean workers do not possess the skills needed in the new jobs that are being created. The future of work looks great for workers who possess the right kind of skills. Workers and firms that can harness and complement digital technology will greatly benefit from these trends.

Skills development is not only an enabler of technology adoption and supply chain resilience. Skill acquisition is a decision made by individuals by comparing the cost and benefits of investing in digital skills. Technology adoption and vibrant economic activity will ensure that there are adequate opportunities for the workforce to hone their skills. As demand for workers that complement digitalisation grows, their wages will rise faster than those without such skills. In response to rising wages, individuals would normally acquire the skills that are in high demand; this increasing supply would check the rise in wages while also enabling more people to benefit from digitalisation. But the ability of workers to respond to signals from the market will largely depend on their access to a skills development system. A system needs to be in place to enable workers to inculcate skills that will be highly valued in a digitalised world.

Asean policymakers need to think of digitalisation, supply chain resilience and skills development within an integrated recovery and growth strategy. Digital technology offers opportunities for Asean countries to revitalise their traditional sectors like agriculture and manufacturing and enhance the productivity of the micro, small and medium enterprises (MSMEs). But to take full advantage, businesses need to access a global market by plugging into supply chains and engaging a skilled workforce. Likewise, a resilient supply chain is necessary for Asean's continued growth. It will ensure that Asean consumers can access goods and services at a low cost from everywhere and that Asean firms can engage in the global value chain. But attracting new investment in supply chain activity will require expansion of digital technology and skilled a workforce.


Rashesh Shrestha is Economist, Economic Research Institute for ASEAN and East Asia (ERIA).

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