China's productivity leaves its neighbours gasping

China's productivity leaves its neighbours gasping

ECONOMIC growth is strong, stockmarkets are booming and foreign investment has been pouring in to South-East Asia. But how far is the region merely riding in the slipstream of its bigger neighbour, China, whose economy is soaring?

Some multinationals are consciously adopting a “China plus one” strategy, siting a second plant in one of the ten countries of ASEAN, the Association of South-East Asian Nations, to hedge against things' going wrong in China.

The ASEAN countries and their 560m people should aim to be more than a backstop—if only because many investors may decide, sooner or later, they no longer need one.

Others are going to be more and more tempted by India as their “plus one”, given the recent acceleration in its growth rate and the size of its potential market.

A new report from the International Labour Organisation (ILO) highlights one of South-East Asia’s biggest weaknesses: mediocre productivity growth.

In 2000 China’s workers were about 26% less productive than ASEAN’s. By 2005 the Chinese had become 5% more productive. The gap is set to widen: Chinese productivity has been growing at about 6.6% a year, more than double ASEAN’s 2.9%.

Indian workers are still some way behind—their productivity was 27% less than ASEAN workers’ in 2005. But they are catching up too. The ILO puts their recent productivity growth at 4.4%.

Productivity is a slippery concept, especially when one is attempting general conclusions about such a mixed bunch as the ASEAN countries. Singapore, the region’s perennial outperformer, has higher output per worker than even Japan, while Cambodia’s productivity is less than half of India’s. The ILO notes that China’s productivity boom has coincided with surging enrolments at its secondary schools and universities. Enrolments have grown in ASEAN too, but not as fast.

Another potential cause of South-East Asia’s mediocre productivity growth is its lack of innovation. According to Pichit Likitkijsomboon, an economist at Thammasat University in Bangkok, Thailand spends only 0.25% of GDP on research and development each year, way behind the 1.23% that China spends. Save for Singapore, which has poured money into science and technology, ASEAN’s research spending is feeble. Even Malaysia, which fancies itself as a high-tech hub, spends only 0.69% of GDP, while in Indonesia it is a piffling 0.05%.

In the year ASEAN celebrates its 40th birthday, the short-term economic outlook is rosy. But the long term looks murky. The region must transform itself into a genuine, half-billion-strong single market, and boost education and innovation. Otherwise it risks becoming a low-skill, low-wage backwater, an overlooked collection of dots in the corner of the map of Asia.

source from : www.economist.com