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Growth in East Asia's developing countries mainly driven by investment, rather than increased productivity, says World Bank
Peter Starr 3 Apr 2024

Economic challenges faced by developing countries in East Asia and the Pacific risk obscuring the foundations of longer-term growth, according to the World Bank.

In its April economic update for the region, the bank says growth has mainly been driven by investment, rather than increased productivity, over the past decade.

“Now private investment is weak and productivity declining – further inhibiting the incentive to invest,” it says.

The update finds that some less productive companies in the region are starting to “catch up” with more productive ones.

“But the most productive firms in the region are not taking full advantage of new technologies and not seeing the productivity growth of the leading global firms,” it says.

In Indonesia, Malaysia and the Philippines, for example, productivity of the top 5% of digital manufacturers improved by only 31% between 2005 and 2015.

That compares with a 76% increase in productivity for the top 5% of global companies – 2.5 times faster than their Southeast Asian counterparts.

“The sluggishness,” the bank says, “raises concerns about the future growth of all firms.”

Limited technology diffusion

Within East Asia, the most technologically sophisticated firms in developing countries are found to be less advanced than their counterparts in richer countries like South Korea.

The gap is relatively small between the least sophisticated firms in Cambodia, Indonesia and Vietnam and those in Korea.

“But the gap widens as one compares the most sophisticated in these countries,” the bank says.

“In Cambodia and Vietnam, the gap with Korean firms is around twice as large for the most sophisticated 5% of firms, compared to the bottom 5%.”

This shows that “technologies are diffusing more slowly” to developing countries compared with advanced countries.

Such limited technology diffusion, the bank says, can be seen with commonly used technologies.

But “firms use a bundle of technologies, for instance, combining written notes with electronic databases, or manual manufacturing tasks with automated machinery".

Measuring a company’s most advanced technology – whether it uses it frequently or not – shows that differences are smaller between top companies in developing and advanced countries.

For developing countries, the barriers for the most sophisticated companies "are less about accessing advanced technologies and more about effective use”, the bank says.

“There are substantial differences between having a technology and using it.”

Advanced digital technologies – such as data analytics ­– are also diffusing more slowly.

“The average firm in Cambodia, Indonesia and Vietnam is as technologically sophisticated as the average firm in country peers of a similar income.

“However, the most advanced firms in Cambodia and Vietnam are less tech-sophisticated than the most advanced firms in similar income countries,” the bank says.

Gaps in high-speed broadband

The bank notes that high-speed broadband is “unevenly available” both across and within developing countries in the region.

In Asean, average fibre-optic speeds are relatively high in Malaysia, Thailand, the Philippines and Vietnam and low in Cambodia, Indonesia, Laos and Myanmar.

“Productivity growth and adoption of sophisticated technologies require a broad range of skills and high-quality digital infrastructure,” the bank says.

“With only basic mobile broadband and workers with strong foundational skillsGaps , some technologies (such as e-commerce) are relatively straight forward to adopt with off-the-shelf e-commerce websites, that can be bolted onto existing business processes.

“In contrast, modern data technologies (such as data analytics or cloud computing) require high-speed fibre broadband … and the right combination of digital and management skills to embed data-driven decision making within business models."

At the same time, the bank notes wide variations in the availability of data centres to store, share and process data for cloud computing.

Skills shortage

According to the bank, “the right skills to leverage technology productively are not widely available” in the region.

In a World Bank study published last year, it was found that more than half of 10-year-olds in 14 of the region’s 22 middle-income countries could not read and understand an age-appropriate text.

“Countries need to invest in tandem in the more sophisticated skills required for new technology adaptation and innovation. Digital occupations also demand different skills from non-digital jobs.”

But the bank finds that even basic digital skills are not widely available in East Asia and the Pacific.

“Less than a quarter of workers in Cambodia, Mongolia, the Philippines, Thailand, and Vietnam (are) able to use the ‘copy and paste’ function in a document,” it says.

That compares with more than 90% of workers in  South Korea, almost 80% in Malaysia, around 60% in Indonesia and Japan, and around 50% in Singapore.

In a statement, World Bank East Asia and Pacific chief economist Aaditya Mattoo acknowledges that growth in per capita incomes in the region has surpassed that in most other developing economies in recent decades.

But “it has been driven by investment rather than productivity growth”, Mattoo said. “Policy action to unleash competition, improve infrastructure, and reform education could revitalize the region’s economy.”

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