ASEAN's continued prosperity depends on integration

The three main challenges that the Association of Southeast Asian Nations bloc will face post-pandemic－digitalization, supply chains and human capital－have been widely discussed, and each has been emphasized in the ASEAN Comprehensive Recovery Framework and its implementation plan.

Undoubtedly, ASEAN's continued prosperity requires proper management of its evolution during the new normal. But what needs to be emphasized is that digital technology adoption, supply chain resilience and skills development are going to be even more integrated in the post-pandemic world, and thus will require a coordinated development strategy.

We know that digitalization has accelerated due to the pandemic, which has forced us to push the limits of digital technology, and we are learning more about its efficiency and effectiveness. There is also large investment geared toward making digital interaction more seamless. The constantly improving efficacy of digital technology in performing economic transactions will make it an indispensable tool. In particular, digitalization will feature heavily in supply chains, which are undergoing profound transformation.

The COVID-19 pandemic has forced many businesses to rethink their supply chains. In the short term, they have had to adjust to disruptions in the flow of goods and people due to domestic lockdowns and border closures. This also forced them to look for ways to increase supply chain resilience. Businesses have three options in this regard－consolidation, diversification and reshoring.

Consolidation is done to try to keep suppliers close to production bases, by sourcing inputs locally, for example. Diversification consists of finding multiple sources of inputs, either domestically or in new countries. Finally, reshoring is returning economic activity back to the home base. Digital technology will play a key role in each of these options.

In particular, technology can be labor-saving, since tasks done by humans can now be automated and done by computers. There is less reason for multinationals to seek low-wage countries for cost savings. Instead, they can invest in technological upgrading. At the same time, technology also creates dispersion forces, so that more economic activity can be coordinated at a distance. With seamless communication, it is not necessary for production to take place in the same location, but it can be dispersed across multiple places.

For ASEAN, maintaining the vitality of supply chains is necessary, so it needs to pay attention to its reorganization. After all, ASEAN's economic growth has been driven by forming strong international production linkages within the bloc and with East Asia. But supply chains in the digital age will look a lot different. In particular, due to the greater role of digital technology in supply chains, digital infrastructure and skills development become essential for supply chain vitality.

As the type of economic activity and related technology changes, so does demand for corresponding skills. In the past few decades, much of ASEAN's growth relied on foreign investment in labor-intensive manufacturing sectors, which easily complemented the type of skills the region's workers could offer. However, technological development has outpaced the upgrading of skill development, so many ASEAN workers do not possess the skills needed in the new jobs.

As demand for workers that complement digitalization grows, their wages will rise faster than the wages of those without such skills. In response to rising wages, individuals would normally acquire the skills that are in high demand, and this increasing supply would check the rise in wages while also enabling more people to benefit from digitalization. But the ability of workers to respond to signals from the market will largely depend on their access to the skills development system.

ASEAN policymakers need to think of digitalization, supply chain resilience and skills development within an integrated recovery and growth strategy. Digital technology offers opportunities for ASEAN countries to revitalize their traditional sectors like agriculture and manufacturing, and enhance productivity of micro, small and medium-sized enterprises.

But to take full advantage, businesses need to access a global market by plugging into supply chains and engaging a skilled workforce. Likewise, a resilient supply chain is necessary for ASEAN's continued growth.

The author is an economist at the Economic Research Institute for ASEAN and East Asia.