Asia Global Institute

Investing in the Next Generation

Tuesday, November 3, 2015

Investing in the Next Generation

Andrew Sheng, Distinguished Fellow of Asia Global Institute, says China, India and Malaysia need to invest in their people in order to realize their growth plans.

This week, under beautiful clear blue skies in Beijing, the Chinese Communist Party held its fifth plenum to discuss the 13th five-year plan for the period 2016-2020. It's considered a critical five years in which China seeks to break through the middle-income barrier and gain advanced country status (an income per capita of more US$13,000) by 2020-2024.

By coincidence, India has its own 12th five-year plan (2012-2016), but Prime Minister Narendra Modi abolished the old Planning Commission and replaced it with the National Institute for Transforming India, a think tank for the Indian government. The institute is different from the Planning Commission in that it comprises members from the regional governments, so that it has good feedback from the states on developmental issues.

In China, each province and city has its own five-year plan that fits into national planning indicators, coordinated through the National Development and Reform Commission, a powerful arm of the State Council.

Malaysia will also be launching its 11th five-year plan (2016-2020) to transform the nation into advanced country status by 2020.

The mainland's 13th five-year plan will have huge implications for the global economy because China today accounts for roughly one third of global growth. Thus, any slowdown in Chinese growth would impact on commodity prices and global trade, particularly for the emerging-market commodity producers.

There are suggestions that the Chinese planners are shifting the target gross domestic product growth rate to around 6-7 per cent per annum, rather than the average of 8 per cent achieved during the current 12th five-year plan. If so, during this period, the Indian economy is likely to grow faster than the Chinese economy, although its current scale is still smaller.

All three countries share a trio of common policy challenges.

The first is that rapid urbanization will be both an opportunity and a challenge. With Asian urbanization moving past the point of 50 per cent of population, urban centers can either become smart cities of innovation and creativity, or slums that pollute, congest and waste energy and resources.

The second is the rapid rise of the service sector, also creating half the value added and certainly the fastest areas in job creation. How to improve the quality of service-sector job creation is a major challenge.

The third is the serious attention that all three countries are paying towards innovation as a driver of growth. McKinsey has just produced an eye-opening report on innovation in China, suggesting that the Chinese have comparative advantages in two out of four areas of innovation, namely the customer-focused and efficiency-driven aspects. On the other hand, considerable catch-up is needed in science-based and engineering-based innovation compared with advanced economies like Japan and Germany. McKinsey estimated that properly nurtured innovation could contribute up to 2-3 per cent to China's GDP growth by 2025, equivalent to 35-50 per cent of total GDP growth.

Using a different approach and instead of looking for development in the traditional sectors of agriculture, industry and services, the National Institute for Transforming India recognised that the common element that can kick-start growth in India is innovation and entrepreneurship. In order to produce up to 115 million non-farm jobs in the next decade, and recognising that planners cannot pick the winners for India, the institute sought to uplift the entrepreneurship and innovation game. Their expert group produced a so-called "Aim (Atal Innovation Mission) pyramid," which identifies a short-, medium- and long-term framework to boost innovation and entrepreneurship.

At the top of the pyramid, there are quick wins such as competition with prizes for innovative ideas and start-ups; encouraging companies to use universities for research and development; improving business incubators; and fostering a national entrepreneurship and innovation movement. In the middle and over the next 5-7 years, the report suggests using digital platforms to encourage innovation, reforming the educational system to encourage creativity and upskilling workers, improving the ease of doing business, and strengthening intellectual property rights.

The long game involves generational changes to the cultural biases against entrepreneurship, embedding entrepreneurship within the government's economic and social programmes, and fostering a culture of coordination and collaboration between government and entrepreneurs, including tying entrepreneurship with the social inclusion agenda.

The Indian experiment is refreshing because it draws the expertise from the market to drive innovation and entrepreneurship, recognising that public servants and academics do not have first-hand experience in actually making business work.

The common challenge that India, China and Malaysia face is that rural people who move to the cities do not possess the knowledge and skills for innovation and entrepreneurship that city dwellers have from living in packed conditions. More often than not, the rural-urban divide defines the inequality in wealth. You cannot expect a rice farmer to become an internet start-up overnight. Hence, changing the culture of farming into a culture of innovation and entrepreneurship is a generational change. It cannot be done overnight.

Even cities do not find it that easy to innovate and change.

Although Hong Kong does not have a tradition of five-year planning, it accepts that as part of China, the special administrative region must learn to thrive within the framework of China's plans. The government knows that Hong Kong's competitive future depends on its ability to lift the game in science and technology, but so far it has not been possible to get the proposed innovation bureau established. Plans are only as good as their implementation.

In the 20th century, the development mindset was all about investments in hardware. But in the 21st century, advancement is largely in software, because software is all about the quality of people and the quality in people. The old way of development was investment in things, but the new economy is about investing in people. If you want a family to succeed, do you invest in the house or the children?

If you want the nation to succeed, invest in the next generation.

This article first appeared in the South China Morning Post on October 30, 2015 as If China, India and Malaysia want to meet their five-year plan goals, they must invest in their people

The views expressed in this article are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.


Andrew Sheng

Member, Asia Global Institute

Andrew Sheng


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