Asia’s economy is growing slower than expected, what do businesses need to do?

According to the World Bank’s (WB) April 1 report, Asian economic growth is forecast to decrease from 5.1% to 4.5% this year, slower than before the pandemic. In particular, China’s economic outlook has decreased from 5.2% to 4.5%, in the context of public debt and the real estate market in this country are facing difficulties. In contrast, total growth of East Asia-Pacific (EAP) economies excluding China is forecast to increase from 4.4 to 4.6%.

Asia's economy is growing slower than expected, what do businesses need to do?
World Bank headquarters in Washington, USA. Photo source: Samuel Corum, Bloomberg.

The three main reasons for the slow growth rate are public debt, trade barriers and lack of policy consistency (according to a WB report). The WB also warned of a number of risks affecting the growth of the EAP economy in the future, including higher than expected interest rates from the US Federal Reserve (FED), as well as barriers to economic growth. trade barrier. In particular, the global economic downturn and increasing geopolitical tensions will also have a major impact on the region’s growth.

Proposing solutions for economies in the East Asia-Pacific region, the World Bank recommends focusing attention on the productivity of businesses in the region. In fact, over the past two decades, average income per capita in the region has grown faster than other developing economies. However, this growth mainly comes from investment capital, not from the labor productivity of businesses.

Why does labor productivity grow slowly?

In many East Asian economies, productivity growth is largely driven by improvements in productive capacity within firms, as in other economies around the world. However, with the current outstanding development of science and technology, the decline in productivity in this area is a paradox. According to the World Bank, solving the problem of motivation and capacity is the key to explaining this paradox.

Specifically, low levels of competition are the main reason for the relatively slow productivity growth of leading companies in the EAP region. Competitive growth often comes from trade and investment openness, thereby increasing the motivation for pioneering companies to innovate and develop. While production tariffs in EAP countries are relatively low, agricultural tariffs and non-tariff measures in production are limiting competition in this region.

On the other hand, the number of startups has decreased significantly over the past decades in the EAP region, especially in the digital sectors. According to the World Bank, top foreign-owned companies have annual productivity growth 5% faster than other companies. Furthermore, competition from foreign or state-owned companies in an industry can create indirect spillover incentives for the development of industry-wide companies in the public or private sector.

As for capacity, building high-quality digital infrastructure is necessary for productivity growth and technology adoption, especially in the context of the 4.0 industrial revolution. In fact, Internet access in this area is extremely easy, promoting the growing e-commerce industry. However, more complex technology industries such as data analysis or cloud computing need high-speed Internet fiber optic cables to work, something that few countries in the region have.

According to the World Bank, access to modern skills and data infrastructure is also growing unevenly in EAP. In 14 of the region’s 22 middle-income countries, more than half of 10-year-olds are unable to read and understand text. Even in developing digital countries such as Cambodia, Philippines, Thailand and Vietnam, nearly 25% of workers do not have basic office computing education.

According to a 2022 World Bank report, more than 50% of innovative businesses in Indonesia, Malaysia, Myanmar, Philippines, Thailand and Vietnam consider the lack of management and leadership skills as a challenge when recruiting workers. new move. Also according to data from the World Bank, medium and high growth companies in EAP are poorly managed compared to companies of the same class in the US.

Asia's economy is growing slower than expected, what do businesses need to do?
Textile and garment production in Vietnam – a bright spot in the Asian economy. Photo source: Maika Elan, Bloomberg.

What policies are needed to increase productivity?

In the report, the World Bank said that policies to promote healthy competition, as well as improve digital infrastructure, should be a top priority for authorities in the East Asia-Pacific region. .

Specifically, reforming goods and services markets can promote competition and boost productivity growth. Although the EAP goods market is relatively open, it is unclear how the removal of tariffs and non-tariff measures could boost domestic competition and equip companies to compete abroad. outside. In particular, the WB used the example of service reform in Vietnam that pushed labor productivity up by more than 3% between 2008 and 2016.

Policies that enhance competition have a greater impact when combined with policies and investments that improve infrastructure. The construction of a fiber optic cable system connecting 12 Philippine provinces has increased e-commerce growth in the country, especially with highly competitive goods. Openness to foreign competition and access to high-speed Internet have helped businesses in the Philippines adopt digital technology twice as often as before the reforms.

In particular, the WB emphasized the factor of improving human capital, and outlined three steps to start improving. The first is to strengthen basic skills for workers, thereby creating an educational foundation for more advanced skills. Next, the World Bank believes that it is necessary to increase investment in higher education, especially education about new technologies. The final step is to increase the capacity of managers already in the workforce. In fact, research on companies in Colombia shows growth in employment, revenue, profits and labor productivity after being provided with management consulting services.

Giving general comments, Mr. Manuela V. Ferro – Vice President of the World Bank for East Asia and the Pacific said: “The AEP region is contributing strongly to world economic growth, even as it faces a more challenging and uncertain global environment, an aging population and the impacts of climate change. Queen”. At the same time, he believes that in order for the region to develop more sustainably, there needs to be “bold policy action” such as open competition, improved infrastructure and possible educational reforms “bring new vitality” for the regional economy.

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