AS ASEAN opens its 51st year, leaders face a major question: How to maintain the growth and rising standards of living enjoyed in Asean's first 50 years. In those first 50 years, Asean became the world's fifth largest economy based on strong fundamentals: regional peace, the world's third largest workforce and globally competitive wages. Those strengths attracted investment and fostered job creation. However, fundamental changes in the paradigm of global competitiveness and the nature of work are afoot. The advantage of low labour costs is being eroded by technological advances such as machine learning, 3D printing, big data analytics, and connectivity between humans and machines. There are Chinese clothing manufacturers opening factories manned by robots (and some human supervisors) in Arkansas - much closer to US markets than competitors in Asean. Automation is not limited to manufacturing - Amazon and Alibaba have launched cashier-free stores. About four of every five Wall Street firms have already implemented, or plan to use, some form of artificial intelligence (AI), and some law firms are automating client name checking and document drafting.
For Asean to realise its vision of shared prosperity, it needs to boost its innovative industries. It needs to get "E-FIT" - improving its education, finance, infrastructure and technology - and transform its workforce into the world's third largest "thinkforce".
The transformation from workforce to thinkforce starts with education. Asean needs to continue to improve its compulsory education (ie, up to 15 years old). In the Organisation for Economic Co-operation and Development's (OECD) Programme for International Student Assessment, Vietnam was No 8 in science and Singapore was No 1 across science, reading and mathematics. Thailand and Indonesia were below the OECD average in all three areas, and other Asean countries were not covered.
The future challenges extend to higher education. In terms of researchers per million of population, Singapore ranks No 6 worldwide, Malaysia No 37, while Indonesia, the Philippines, Thailand and Vietnam rank below 50. Ranking in research foretells levels of innovation. For example, Singapore leads Asean ranking at No 12 in patent applications per million of population, Malaysia next at 40, Brunei at 45, while Cambodia, Indonesia, the Philippines, Laos, Thailand and Vietnam rank below 65.
Even if students do not work in laboratories upon graduation, education in science and mathematics is important to build skills that allow humans to interface with and improve the functions of machines. Those skills include problem solving, critical thinking, interpretation, openness towards new ideas and the willingness to challenge old ideas. Education that strengthens communication and relationship skills will also be needed.
Improving on all those fronts will require greater investments in education - private and public, for-profit and charitable - and in every stage of a child's life, from early childhood development to compulsory education and higher education. It also requires opening up the playing field for new, innovating parties to participate and to new modes of individualised learning taking advantage of mobile technology.
The financial industry is not only one of the largest employers of skilled workers, its development also mobilises capital and funds long-term investments. While Asean's savings rates are generally high, most savings remain in cash, bank deposits or property. Capital markets (stocks, bonds and money markets) are critical to channel national savings into long-term productive investments. These include physical infrastructure (such as transport and communications), social infrastructure (such as schools and hospitals), and funds to grow business and industry, including new ventures.
Asean's capital markets are less mature relative to developed economies. The ratio of floated book value of equity and bonds outstanding to gross domestic product (GDP) - a measure of capital markets maturity - was only 34 per cent in Indonesia, 36 per cent in Vietnam and 65 per cent in the Philippines in 2016. The same ratio was 262 per cent in the US and UK, 282 per cent in Japan and 191 per cent in South Korea.
Long-term planning from the government and concerted, multi-year efforts from both private and public stakeholders are required to speed up capital markets development - establishing benchmark assets, promoting a deep and broad investor base, encouraging issuance, and setting transparent rules and appropriate taxation policies. This will allow Asean to attract capital, support development and enable all aspects of the economy to flourish.
Strengthening intra-region infrastructure and interconnectivity will lower production costs, create a larger market, and encourage inward investments in supply chains. This includes not only ports, rail, roads and power but also telecommunications and data. In 2016, only 40 per cent of Asean's population had Internet access.
Strengthening interconnectivity in Asean is not just about infrastructure. It also requires increasing commitment to remove trade barriers and frictions. Doing so is estimated to increase GDP by 9.3 per cent. This will boost Asean's share of global trade - critical as both total merchandise export and inflow of foreign direct investment peaked in 2014. Asean's progress has been painfully slow in addressing issues such as non-tariff barriers, customs procedures and trade facilitation, standards harmonisation and intellectual property rights protection. Speedier integration across the region is needed to stay competitive and create 21st century jobs.
Innovation and the digital economy are driven by research and technological breakthroughs. However, Asean's gross expenditure on research and development as a percentage of GDP is low. In 2016, Singapore ranked 15th with 2.2 per cent, Malaysia 29th with 1.3 per cent, while Indonesia, the Philippines, Thailand and Vietnam ranked below 50. On a value basis, these six Asean countries are spending just one-quarter of what South Korea (ranked second) does.
Another measure to consider is new venture funding (including angel, venture capital and corporate venture capital funding). In 2017, funding for Singapore grew more than three times to reach US$7.7 billion. The rest of Asean, however, received only US$6 billion, which is less than Israel, which has just one per cent of Asean's population. Venture funding also contributes to company and job formation. Today, Israel has the third most companies listed on the tech-focused Nasdaq stock exchange after the US and China.
Asean has the drive and the pools of talent to be a global centre for innovation. To realise that goal, the region must continue to strengthen policies to encourage new investment, whether domestically or by foreign companies. Singapore has been a pioneer in fostering innovation including ecosystems that catalyse inter-relationships among global technology companies, local education and research institutions, and government resources and incentives. The need for other Asean countries to make progress in those areas is compelling.
Asean made exceptional progress in its first 50 years, but it must become an innovation centre and equip its people as a thinkforce to compete effectively in the digital economy. By becoming E-FIT - improving education, developing financial markets to mobilise long-term capital, building inter-connectivity and investing in technology and research and technology - Asean can fulfil its growth potential and become a leading source of global innovation in the next decade.
- The writer is chairman of the EU-Asean Business Council, the primary voice for European businesses in Asean. Singapore is hosting the 24th Asean Economic Ministers' Retreat from March 1-3