Catalog

Skills shortages in four Asian countries

Skills shortages appear across developing Asia, and feature certain common drivers, such as globalization and technological progress. Nevertheless, there are also important differences. To see a more accurate picture of the challenges facing each country, it is helpful to look at experiences at this level. This section explores those of four regional countries—PRC, India, Malaysia, and Thailand. The PRC and India have been selected for closer scrutiny on the basis of their global and regional economic importance as well as their phenomenal growth and rapid integration into the world economy. Malaysia and Thailand offer examples of middle-income economies that are endeavoring to move further up the value chain.

People's Republic of China

Perhaps more than any other country, the PRC epitomizes developing Asia's skills crisis. Explosive economic growth, accompanied by rapid structural transformation and industrial technological upgrading, has fueled an unrelenting demand for skills. Demand for new services has added to this pressure. For example, income growth has led to surging demand for medical services, creating an acute shortage of doctors. According to The Economist (2007), the PRC had only around 4,000 general practitioners in 2007, but the Government's urban health care plan requires no less than 160,000. A burgeoning demand for legal services, financial services, and leisure is driving the demand for skilled professionals in those areas.

Blistering expansion of the corporate sector has been behind soaring investment, seen in factories, machines, and equipment, and in the professionals and specialists required to run them. The ability to compete successfully in markets abroad and to provide shareholder value requires that businesses, whether domestic or foreign owned, in the PRC meet demanding production, logistical, safety, and corporate governance standards, which requires a large pool of higher- and middle-level staff.

While the root cause of the PRC's skills crisis lies in the leap in demand for skills, the education system has failed to keep pace. The system's main problem has been one of failing to produce the right kind of graduates rather than too few of them. For example, in 2005, 3.1 million students graduated from its universities, compared with only 1.3 million in the US. In the same year, the PRC produced nearly 10 times as many engineering graduates as the US—over 600,000 versus only 70,000. One would expect this flow of graduates to be adding to the large stock of young professionals (9.6 million in 2003) with significant work experience. The catch is that only a small share of this seemingly abundant "talent pool" is, indeed, talented enough.

The McKinsey Global Institute (2005) provides an in-depth look at this failure of quality. According to its study, fewer than 10% of graduates who are candidates for jobs at foreign multinational companies have the right skills and qualifications to work there. Poor English is the main shortcoming, but others, such as engineering graduates who are well versed in theory but unequipped with practical problem-solving skills, is another. This matters not only for multinationals themselves but also now for the growing number of domestic companies that are trying to emulate and compete with multinationals and that harbor ambitions to become world-class companies.

The combination of the sheer scale of the PRC's skills crisis and its largely structural nature suggests that it may constrain corporate ambitions for years to come. Skyrocketing demand for professional and managerial skills is likely to test the skills-producing capacity of even a world-class education system, and building such a system—or even a responsive one—is inevitably a long-term process for the PRC. In the meantime, the country's attempt to plug its skills gap using foreign workers is likely to have spillover effects, exacerbating skills shortages elsewhere in Asia. (Policy options for the four countries, and developing Asia generally, are given in the section Easing the bottleneck, below.)

India

Many of the same structural factors that are causing skills shortages in the PRC are also seen in this country: India's skills gap is a by-product of its economic success; of corporate governance changes (particularly the growing role of the private sector); and of globalization (especially foreign demand for ICT services).

But India's skills gap is also different. For one, it is expecting a demographic dividend whereas PRC is facing aging problems of richworld proportions. In addition, some (admittedly tiny) segments of the Indian education system are better equipped to produce world-class professional workers. Networks for top establishments such as the Indian Institute of Management and the Indian Institute of Technology turn out world-class managerial and technological professionals that are in high demand both in India and abroad. Although there is a huge gulf between these two bodies and Indian universities in general, where the relevance and quality of education are still poor—and indeed, India's skills and labor shortage problems can be traced back to failures in the delivery of adequate primary schooling—the country has the advantage of hands-on experience of designing institutions and curricula that meet the changing needs of the market.

India's success in training a pool of able, qualified engineers and managers with English-language skills has helped position India's ICT and business process outsourcing (BPO) industries as global leaders. The National Association of Software and Service Companies (NASSCOM) and McKinsey estimate that in 2005 the country accounted for 28% of ICT and BPO skilled workers among 28 low-cost countries with significant potential in the two industries. But to maintain its edge, India will require a 2.3 million-strong ICT and BPO workforce by 2010. Current projections suggest a likely deficit of 500,000 such workers, foreshadowing a possible contraction in global market share (NASSCOM-McKinsey 2005).

Though India has a few glittering, world-class education institutions, it also has many more higher education establishments that fail to equip students with the skills demanded by the market. Only 25% of engineering graduates and 10–15% of general graduates have the skills and qualifications for working in the ICT and BPO industries (NASSCOMMcKinsey 2005). From a microeconomic perspective, the skills gap matters because it may slow or prevent Indian ICT and BPO firms from moving into higher value-added segments and activities; from a macroeconomic perspective, it suggests that these two industries will be unable to keep up their frenetic pace of expansion. Ironically, they account for a much larger share of GDP (4.5%) than of the total labor force (0.15%) (ADB 2007a), yet it may well be constraints in the labor market that hold them back.

Malaysia and Thailand

Malaysia and Thailand are more advanced along the economic development curve than the PRC and India: they have higher income and productivity levels, and have already completed important phases of the transition to modern industrial and services economies. Equally, their pace of growth is more sedate. Yet the two Southeast Asian nations also suffer from skills shortages, partly because competition from cheaper locations (including the two giants) is compelling them to move further up the industrial technological ladder and into modern services activities. An important factor in their skills gaps is that neither country has invested adequately to ensure that education is relevant.

In Malaysia, the constraint is as much quantity as quality. Given its relatively small population and labor force, Malaysia has quite a large and complex economy. But it has been unable to supply skills to keep pace with demand because graduate numbers are low, and even among these people, few have the right blend of skills. Udomsaph and Zeufack (2006) observe that the enrollment and completion rate for higher education in Malaysia is substantially lower than in countries at similar income levels. The same study found that a university education brought about a 25% increase in hourly wages relative to a high school education, which is far higher than the wage premium in industrial countries. In another study, Thangavelu and Hu (2006) note that Malaysian graduates tend to have weak skills in precisely those areas most needed by the type of knowledgebased economy to which Malaysia is directing its efforts to becoming.

Thailand does not suffer from this quantitative graduate shortfall. In fact, the tertiary education completion rate is slightly above the norm for countries at similar income levels. But there, too, serious quality problems mean that a large number of university graduates does not translate into an adequate supply of managerial and technical workers. According to Udomsaph and Zeufack (2006), no less than 60% of managers in Thailand rate the English language skills of their local professional workforce as poor, and 41% do so for ICT skills. Despite quality gaps, as in Malaysia university graduates can still command large wage premiums. The same study finds that university education led to a 35% increase in hourly wages relative to a high school education.

The tertiary education systems of both these middle-income countries have done a poor job at producing graduates with relevant skills. The experiences of both show that while structural change and technological progress can lead to skills shortages, causation can also be in the opposite direction. The experiences of Ireland in successfully addressing the skills gap in the context of large FDI inflows may be particularly relevant for these two countries (Box 2.2.1).