Originally published in Advancing ASEAN in the Digital Age Book, 14 November 2017.
Transformational Technologies Are Taking Off: Can ASEAN Benefit?
The world is seeing an unusual confluence of multiple technologies reaching take off points almost simultaneously. Clichés such as “game changing” and “disruption” do not do full justice to the dramatic effects that these technologies will have on virtually every aspect of our lives. In this article, we will focus on what these changes mean for ASEAN’s economies and how well ASEAN is likely to cope with such monumental challenges as well as opportunities.
An array of new technologies emerging
There are several major technology trends which are important. There are technologies that will affect our physical world including nanotechnology, advanced materials, renewable energy such as solar and wind, 3D printing and automation. Then there are biological technologies with genome mapping and tissue engineering being the most prominent. Then there are digital technologies such as fintech (including blockchain) as well as social-mobility-analytics-cloud computing – and, of course, the internet of things (IOT).
These technologies are diverse but share a few features. First, the rate of technological change and adoption is rapid. All three – physical, biological and digital – are deeply interrelated: that means that the various technologies benefit from each other, feeding off and reinforcing each other to produce an unprecedented rate of change that looks like changing the landscape so thoroughly that some observers have taken to labelling them collectively as the fourth industrial revolution. Second, the economic potential is sizeable. Third, there is also a high risk of economic disruption or dislocation.
We could be in an era similar to the early 20th century when the confluence of electricity, the internal combustion engine and new manufacturing processes unleashed many decades of economic growth.
The economic gains could be massive
We could be in an era similar to the early 20th century when the confluence of electricity, the internal combustion engine and new manufacturing processes unleashed many decades of economic growth. Here are some likely broad economic implications:
First, we should see higher economic growth as a result of two forces:
- A pickup in investment: The high returns promised by these new technologies will spur a new wave of investment. So transformational are these emerging technologies that much of the existing capital stock will become obsolete and will need to be replaced. This higher investment will add to demand and raise economic growth.
- Accelerating productivity growth will also improve economic growth: Automation and robotics will result in greater efficiency as more output is generated with the same amounts of inputs. The IOT will also spur productivity gains as interconnected smart devices lead to time savings for the users. E-commerce and fintech platforms will also allow consumers to purchase goods and services without being physically present and would likely cut out the middlemen. Once artificial intelligence (AI) is integrated with the other technologies, smart factories, warehouses and even devices will learn from their surroundings and become more efficient the more they are used. And this is only the beginning!
Second, the structure of competitiveness could change:
- We could see more re-shoring, or the return of manufacturing back to developed countries: Automation and the use of AI could well raise productivity in developed economies so high that their unit labour costs fall sufficiently to make domestic manufacturing more viable compared to relocating manufacturing to economies with low labour costs.
- There could be a greater premium on scale favouring countries with large populations: It cannot be a coincidence that the biggest winners from recent technological advances have been the likes of Apple, Facebook, Google and Amazon from the United States as well as Alibaba, Tencent and Baidu from China. The ability to reach massive scale quickly by having easy access to a huge market seems to be becoming more important.
- Capacity to leapfrog could help less developed economies: The new technologies offer the laggards in economic development the scope to leapfrog ahead of others. In India and Africa, for example, mobile technology has helped spawn advances in finance which are promoting financial inclusion and new payments platforms.
Third, employment patterns will also evolve in different directions:
There is much talk about the destruction of jobs as a result of these technological changes given the automation potential and the possibility that robots, for instance, could perform better at many occupations than human beings.
It is indeed true that automation, robotics and AI could displace a large number of jobs, not limited to blue-collar factory jobs but even white-collar professional jobs such as accounting and the back offices of financial services. Furthermore, rising industries such as e-commerce, fintech and SMAC are proving to be less labour-intensive than traditional manufacturing sector. Even the manufacturing jobs of the future will likely require less menial workers to put parts together and more knowledge workers to operate and troubleshoot automated assembly lines. The labour market will likely see significant disruptions as these emerging technological trends take root.
Still, this is not the entire story. There are several reasons why the impact on employment may not be as malign as some of the alarmist reports claim:
Technology comes with overhead costs which create new kinds of jobs: For example, how many analysts forecast the massive expansion of the cyber security industry when the internet emerged? The fact is that all new technologies come with side effects and spillovers that need to be managed. Recall how the advent of the motor car resulted in the growth suburbs, a whole new industry of support services such as traffic lights and traffic management and promoted industries such as local tourism. Indeed, by raising economic growth and expanding the scope of business opportunities in so many unpredictable ways, the demand for employment as a whole will rise. More efficient ways of doing things in areas as diverse as manufacturing and legal services, opens the way for higher salaries for the specialists and so higher demand as they spend more. With less of their time taken up by mundane tasks, they will be able to be more creative as well.
What will determine who the winners and losers are?
One thing is clear – we are entering a period tumultuous change which will bring opportunities as well as dislocation. It strikes us that two factors will determine which countries will do better out of this period than others.
The first determinant is resilience to shocks. In a period of dislocation, economies will have to deal with greater volatility and more frequent stresses or even outright shocks. Countries need to be able to absorb these shocks and bounce back. For that they need to be diverse, have a strong capacity for policy responses and ensure that their fundamentals especially financial structures are strong.
The second determinant is the flexibility to adjust to competitiveness challenges and the dislocations that will be caused at the industry level. How strong is the bottom up capacity to adjust to these changes and will the top down policy and regulatory structures impede or facilitate such adjustments?
This analysis suggests that the benefits of economic change might be uneven across ASEAN. Most ASEAN economies have actually improved their economic resilience since the Asian crisis of the late 1990s. The divergent performances could come from differing levels of flexibility:
- Thailand and Malaysia, for instance, have shown a capacity for bottom up entrepreneurial ingenuity in adjusting to challenges and exploiting new opportunities, despite some challenges.
- Singapore has demonstrated a tremendous capacity for top down mobilisation of resources for development but may not be as strong in terms of the entrepreneurial flair that is so critical in determining successful adaptation to this new world.
- Indonesia offers tremendous scale economies which will attract many of the global giants that are emerging from the fourth industrial revolution. Its business eco-system may, however, not be as friendly as it needs to be for companies to innovate and compete. The good news is that President Joko Widodo’s administration appears to understand this and is reforming regulations steadily.
- Viet Nam and the Philippines are similar in some respects to Indonesia – their large populations offer scaling opportunities but their business environments need to see more regulatory reforms.
Overall, we think that the ASEAN region can address impediments to successful adaptation to the new economy and has the potential to emerge as a great node of growth and dynamism in the world economy.
About Manu Bhaskaran
Manu Bhaskaran is an Advisor of CIMB ASEAN Research Institute (CARI). He is a Partner of the Centennial Group, a strategic advisory firm headquartered in Washington DC and, as Founding CEO of its Singapore subsidiary Centennial Asia Advisors, he coordinates the Asian business of the Group which provides in-depth analysis of Asian macro trends for investment institutions, government agencies and companies with interests in Asia, leveraging off his more than 30 years of studying Asia.