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Reimagining emerging ASEAN: 5 levers to boost economic recovery

McKinsey highlights five growth levers for emerging ASEAN and show how they could boost recovery in countries such as Vietnam and Indonesia

By Oliver Tonby and Kaushik Das

Emerging ASEAN (Indonesia, Malaysia, Philippines, Thailand, and Vietnam) began the crisis at a disadvantage, and COVID-19 exposed and often heightened their challenges. Larger, developed nations generally have the resources and infrastructure to weather the pandemic’s impact. Some emerging ASEAN countries were unable to mount  stimulus programs of the same magnitude to cushion the pandemic’s blow. Forecasts suggest that these countries could take a bigger hit to growth and face greater uncertainty in the coming years.

Recent McKinsey research explores a series of trends that the pandemic has caused or accelerated. Within these trends lie the potential recipe for recovery, but stakeholders must be prepared to reimagine their country’s economy. Five key levers – manufacturing hubs, green infrastructure, investments in digital, talent reskilling, and high-value food industries – could both speed up the economic recovery in these countries and lay the foundation for extended growth.

Emerging ASEAN economies have an opportunity to attract new investment to labor-intensive hubs. Regionalization was already happening faster in Asia than elsewhere – from 2000 to 2017, intraregional trade in Asia quadrupled while global trade grew 2.8 times – and this trend has been accelerated by the pandemic. An additional shift is the inclination of senior global executives to diversify supply chains from China to other Asian countries.

Vietnam is already capitalizing on these trends. It is a popular destination for electronics manufacturing, with companies such as Google and LG locating smartphone manufacturing operations there. The latest McKinsey article on Vietnam shows it is well-positioned to continue attracting foreign direct investment, especially as manufacturers strengthen and diversify their supply chains in response to the pandemic.

Green infrastructure and addressing basic infrastructure gaps represent a significant opportunity for sustainable growth.

Climate action will also be critical over the next decade, and investments in green infrastructure and the transition to a lower-carbon future could spur significant near-term job creation. Near-zero interest rates for the foreseeable future will provide added incentive to make such investments. Across emerging ASEAN markets, gaps also remain in basic infrastructure, such as access to clean water or internet access. While fiscal budgets may be constrained, smart regulation, financial incentives and public sector offtake could encourage consumer and business investment in renewables.

Vietnam is looking to accelerate its journey toward a less carbon-intensive future through a new national plan. This proposal includes a significant scaling back of plans to develop coal plants while expanding renewables to about 25 percent of its energy mix, from 13 percent in the previous version. The country could support investment in this transition through strong incentives and the provision of a detailed grid-capability assessment for a new generation of assets.

The third lever available to governments and businesses is to prepare companies for a digital future.

In the wake of the pandemic, digital technologies moved quickly from a strategic priority to an operational imperative; businesses needed to accommodate remote workers as well as consumers flocking to e-commerce channels. The risk that this sharp transition could leave small and medium enterprises behind could be managed through government support and programs.

A joint report from the Indonesia’s Ministry of Finance and the Asian Development Bank suggest technology transformations could add $2.8 trillion to Indonesia’s economy by 2040. The country’s entertainment industry could benefit from consumer habits acquired during lockdown. In one McKinsey survey, 28 percent of respondents said they streamed more online content than they did before lockdown, and 68 percent said they would continue to watch streamed content once the crisis had passed. This offers a strong incentive for Indonesian producers and distributors to supply more local content.

The fourth lever for growth is making reskilling and redeployment support available at an unprecedented scale to address job disruptions from COVID-19.

Even before the pandemic, business leaders were preparing for the impact of automation and digital technologies on their workforces. The current economic downturn is accelerating job displacement. However, the dramatic shift towards e-commerce could spur demand for more skilled workers in digital fields. Governments in the region can respond to this trend by supporting the supply of reskilling and redeployment services, providing funding for training, and matching supply and demand using data.

In Indonesia, a 2019 McKinsey research on future of work suggests that many more jobs will be created than lost to automation by 2030. Many of the new jobs will require new skills, and it is estimated that the country faces a shortage of around nine million workers with much-needed digital skills between 2015 and 2030. A latest McKinsey article on Indonesia shows that the nation can build from the online-learning efforts and habits developed during the pandemic to teach those new capabilities more broadly and more quickly.

The fifth lever involves building and supporting high-value food industries.

As a result of mass unemployment caused by COVID-19, hundreds of millions of people may be unable to afford enough food. The pandemic has also disrupted food security through loss of income, changing demand patterns, and supply interruptions. Again, smaller businesses may be disproportionately affected by these disruptions as they may not have the resources to outlast them. Emerging ASEAN governments could focus on raising farmers’ productivity to boost the competitiveness of local farm production and expand the agricultural sector into the parts of the value chain closer to the customer, such as processing, packaging, and retail, to allow greater value capture.

As emerging market leaders in ASEAN and elsewhere look to the next phase of the recovery, they have an opportunity to reimagine their countries’ economies. Investing in growth-fueling policies and technologies could position them well in the years to come.

Oliver Tonby is the Chairman of McKinsey’s offices in Asia, while Kaushik Das is the Managing Partner of McKinsey’s offices in Southeast Asia.

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