Catalog

Anatomy of a crisis

"Skill" is a nebulous concept and difficult to define tightly. Shah and Burke (2005) propose that "a skill is an ability to perform a productive task at a certain level of competence." Skills are akin to the stock of knowledge and experience necessary to perform a productive task. Persons who lack them may be unable to carry out specific tasks, or will be less productive at them. By definition, skills shortages occur when supply fails to keep pace with demand.

Causes

Developing Asia's rapid income growth has spawned demand for totally new goods and services. As incomes rise, consumers typically seek what they could not afford before—financial and legal services, for example, and better health care. And Asia's deepening integration in the global economy has gone hand in hand with growing sophistication in the goods it produces and then sells abroad (ADB 2007a), which requires a larger pool of skills.

The emerging skills gap is largely a symptom of Asia's economic success. The acute shortage of airline pilots in the PRC, for example, is a direct consequence of the explosive growth in the demand for air travel in that country, itself a function of fast-climbing incomes. Other factors are at play, too, including a steady convergence toward international norms and practices for environmental standards, corporate governance, and financial regulation. This "upgrading" raises the demand for professional managers and specialists.

Supply-side factors are also operative. Above all, most education systems have not geared themselves to emerging needs and are exacerbating mismatches. The region's universities have to do more than produce high numbers of graduates—they have to turn out graduates who can perform the functions and tasks required by rapidly modernizing economies.

Consequences

The immediate symptoms of the skills gap include hard-to-fill vacancies, high staff turnover, and wage inflation, and reflect a natural response when demand for particular skills lags their supply. Take the example of the ICT industry. Firms will compete vigorously to attract and retain scarce systems analysts and software developers. This bids up wages, and ICT professionals can increasingly "hop" between firms for a higher salary. Furthermore, firms may find it increasingly difficult to fill vacant positions, settling for fewer and less-experienced professionals than they need. If this process goes on too long, it may crimp business and investment plans, leading to a fall in productivity, efficiency, and competitiveness at the firm level.

Firms can sometimes get around any shortfall in skills by investing more in local workers and developing skills themselves. For example, when Microsoft outsourced part of its web-based technical support to one of its joint ventures in the PRC, it hired 10 native-English speakers from the US to teach local workers about US e-mail protocol and writing style (McKinsey Global Institute 2005). However, many skills require long periods of more formal education. Nor is it likely that firms in tight markets for skills have any incentive to invest in job-hopping workers.

Although firms are in the front line of the skills shortage, the effects can extend to the economy as a whole. Skills constrictions can retard economic growth in just the same way as weak infrastructure. This is particularly true when they surface in the most dynamic sectors that might, for example, be important sources of foreign exchange (such as ICT in India), or that have important forward linkages to other sectors (such as accountancy, legal services, or airline transportation).

Future trends

Shortages of workers and skills are typical when growth accelerates. In order to meet the strong demand for goods and services at those times, firms may wish to have some workers in reserve, including skilled workers, accentuating the demand. It seems likely that exceptionally robust growth both in developing Asia and in the broader global economy in 2002–2007 exacerbated the situation. Yet there is a significant longterm component to the skills shortages that reflects the fast economic catch-up of the region and its rapid, ongoing structural transformation. In addition, most of Asia's education systems are ill-equipped to meet modern labor force requirements and many of them have for long been identified as possible bottlenecks on growth and economic modernization (ADB 2007b).

Looking ahead, the prospect of a transition toward older populations, which will begin in the PRC within the next few years and which is already well under way in the rest of East Asia, as well as of growing premiums on skills-and knowledge-based activities, suggest that the skills gap could become wider and more costly. Given the long lead times involved, policy makers would do well to consider solutions now.