Southeast Asia plans to spend an estimated $7 trillion over the next 15 years upgrading infrastructure. There's a real risk the money may go to waste.
No one doubts the region needs a serious facelift. From Bangkok's crushing traffic to Manila's crumbling airports to Jakarta's floods to Yangon's power outages, Southeast Asia confronts staggering, and growing, hardware challenges amid the largest urbanization flows humankind has ever seen. Yet an even bigger problem could be the region's software -- the skills, health and education of its work force.
"The missing link is productivity," says Oliver Tonby, a managing partner at McKinsey in Southeast Asia. "To sustain economic growth, many nations will need to more than double their historic rates of productivity improvement."
The contrast to China is instructive. For all the handwringing over rising labor costs on the mainland, China's annual output per manufacturing worker remains a staggering 15 times greater than Vietnam's ($57,100 versus $3,800), four times Indonesia's and more than three times that of Filipinos. Bottom line: Higher wages may not drive as many foreign manufacturers out of China and into Southeast Asia as some have predicted. Why relocate southward only to get less for your money?
Given all the hype about regional integration next year, those numbers should be sobering. On Jan. 1, the Association of Southeast Asian Nations will take its most dramatic step yet toward creating a Europe-like common market for 600 million people. McKinsey reckons that a better-integrated Asean could generate as much as $615 billion in fresh economic value annually by 2030. But it will take many years and considerable political will to unify 10 disparate economies that often compete more than they cooperate, and the progress won't necessarily be linear.
Infrastructure is, of course, vitally important to making Southeast Asia more efficient. As Tonby points out, Asean would be well served by "overcoming some of the fragmentation that has prevented companies, technologies, and services from achieving scale in the past."
But human development -- including aggressive investment in education, training and healthcare -- could be even more critical. Take Indonesia. Southeast Asia's biggest economy often touts its demographic dividend -- 26 percent of its 250 million people are under 15 -- but that's a strength only if Jakarta gives them the tools to compete. "We often brag about how much cheaper we are in terms of labor vis-a-vis that of China and vis-a-vis other parts of the world, but we tend to overlook the fact that we're not as marginally productive as China," says Gita Wirjawan, Indonesia's former trade minister. "We've got to do something about building the soft infrastructure for the purpose of creating a much more marginally productive society."
The same is true in Thailand -- where an inefficient and underfunded education system continues to hold down productivity -- as well as Myanmar, Vietnam, the Philippines and elsewhere. Even as they map out new highways and railroad tracks, Asean governments need to increase investment in education exponentially. As of 2012, for example, Indonesia was spending 3.6 percent of gross domestic product on education, while Malaysia spends 5.9 percent and Thailand 7.6 percent. Those ratios need to be closer to 20 percent in the years ahead.
Governments also must manage urbanization flows to make sure cities are livable, safe and have efficient public transportation. Finally, leaders must champion innovation in the private sector and allow for more public services to be accessed online or via mobile phones. "It's about empowering people," says David Carden, a former U.S. ambassador to Asean. "Without that, we aren't going to get the growth that we need."
True, all this is easier said than done in a region where bureaucracy and corruption too often squander the benefits of rapid growth. But as Southeast Asia becomes one of the greatest construction sites in world history, it must be sure to build up its people, too.
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