Young Men Hanging Out in a Street in Jakarta PHOTO: 2015 © Patricia Goodstadt

Asean Labour: Still Cheap But Productivity Lags

As 2016 opens a the Asean Economic Community has a chance to capture a greater share of the global manufacturing. If it succeeds, being more plugged into the global manufacturing chain can bring higher productivity, technology, better standards of living and jobs to its people in the region.

For once, Asean’s diversity could be its strength. As China has succeeded in moving up the value chain, labour costs have risen. China is also shifting emphasis from an export led growth to stimulating internal demand. This presents a window of opportunity for Asean particularly the lower cost countries but together with the more developed countries, a range of skills and costs concentrated in a region that can be very attractive to foreign investors.

The graph below shows the cost comparisons between the larger Asean economies and China on labour costs and productivity. Overall the figures show that while Asean is an attractive lower cost base, there remains a problem with productivity as many countries in Asean, other than Singapore, lag China significantly in manufacturing labour productivity. Singapore is the outlier with a very high cost base but also a higher productivity so that it remains on a daily output/wage competitive with China at least for manufacturing.

On a more positive note, Asean productivity as a whole has been experiencing one of the highest labour productivity growth rates in the world. The average in 2014 for Asean was 4.3 percent, led by Myanmar at 6.1 percent, Indonesia at 5.9 percent and the Philippines at 5.6 percent. However this is partly because economies are playing catchup. These countries still lag countries China significantly.

Large foreign investors into the region such as Japan have been shifting their investment out of China into Asean, but Asean should not rest on its laurels. The Japan External Trade Organisation (JETRO), has more recently in the last survey in 2015, indicated that Japanese companies are slowing in their enthusiasm for Indonesia, Cambodia and Thailand. Companies when surveyed are still expecting to expand but the numbers are now falling to a range of 49–67 percent of respondants saying they are likely to expand, a double digit fall for these countries. Japanese companies remain enthusiastic about expanding into Myanmar however with 76 percent of respondants indicated strong intentions of expanding into Myanmar. Managers surveyed cited increased wages most frequently particularly for Indonesia as a difficulty they faced. And in seven countries, double digit growth in wages was seen year on year on average for Cambodia, Indonesia, Myanmar, Laos and Vietnam.

Even within Asean, Asean businesses are recognising the potential of relocating some of their work back in Asean as about 19 percent of respondants to an American Chamber of Commerce Survey in 2014 indicated they would be doing so.

Improving the quality of labour will take considerable investment and training into the education of workers but would be necessary to ensure sustained growth beyond lower end manufacturing. Otherwise Asean will simply be overtaken by yet cheaper sources of labour elsewhere in the world. The integration of Asean in the Asean Economic Community if it does allow a greater flow of skilled labour across borders can be an aid to helping transfer knowledge and know how intra-Asean, but this can only happen if Asean makes it easy for that layer of workers to work in each others countries as it has largely been only a trickle thus far.

Perhaps one of the easier ways for this to happen would be if at least intra company attachments and transfers are made easy in all Asean countries. This way, companies which run operations across the region eg a company with for example regional headquarters in Singapore but a manufacturing chain across Asean countries or suppliers in countries other than their main factory can easily move workers across borders for short stints of work that would aid this flow of know how. The more developed countries able to meet global standards in manufacturing can help the less developed ones by helping to run training institutes and providing opportunities for on the job training.

Ensuring English is taught across Asean and the standard brought up is also a significant aid to the transfer of knowledge given that many publications for business and science are often in English right across the world.

The greatest flows of labour so far intra Asean have very much been at the unskilled level. For Asean to grow more quickly, labour mobility at a more skilled level needs to be a little more widespread to aid the spread of knowhow. The Mutual Recognition Arrangementsfor select professional groups in Asean are a start but there is a long way to go to promote more skilled labour movement in Asean.

The window of opportunity for Asean is open. The question is will the Asean countries be ready.

This is a slightly amended version of an article first published on AseanToday.

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