Topics:   Audit and Risk,Corporate Governance,Strategy

Topics:   Audit and Risk,Corporate Governance,Strategy

October 12, 2018

Snapshot: Evolving Risk Concerns in Asia-Pacific

October 12, 2018

At an expected growth rate of 5.6 percent, Asia-Pacific will account for almost two-thirds of global economic growth during 2018 and 2019. In the age of global supply chains, risks impacting this area will have a critical impact on many organizations—regardless of where they are situated.

The third edition of Evolving Risk Concerns in Asia-Pacific, released on October 11th, flags threats to the region’s physical and human infrastructure as key challenges. These risks are deeply interconnected with ongoing megatrends in the region and part of the larger regional risk landscape.

Understanding the deep connections between specific risks, macro risks, risk trends, and the wider risk landscape can help identify new potential vulnerabilities that businesses must be aware of to avoid getting blindsided.

Inadequacies: The Risk of Critical Infrastructure Shortfall or Failure

Intensifying economic activities, population growth, and ongoing urbanization in Asia will need to be supported by an estimated extra $22.6 trillion investment into infrastructure from 2015 to 2030, according to the Asian Development Bank, highlighting the significant infrastructure gap in the region.

The framing of this issue as a gap, however, belies the fact that threat to the physical infrastructure of Asia-Pacific is not only a quantity but also a quality issue. The general dearth in quality of transportation, energy, and information and communication technology infrastructure has been shown to be a major contributor to increasing cost, lowered productivity, and disruption to the economy and businesses, and it is concentrated in the region’s emerging markets.

Putting this infrastructure issue into the context of ongoing regional megatrends reveals further vulnerabilities. Aside from the growing demands from economic, population, and urbanization growth, the increasing severity of climate change events and our growing cyber-dependency are two key trends that can exacerbate critical infrastructure failure or shortfall.

The vulnerability of infrastructure to climate change can be seen in extreme events’ devastating damage to physical infrastructures and in the depreciation of assets due to slow-burning changes. Accounting for these damages and making future infrastructure more resilient will require substantial planning, effort, and capital: the Asian Development Bank estimates Asian countries will need an extra $3.4 trillion by 2030 for this, which also requires a supportive political climate.

Cities and businesses in Asia-Pacific are also rapidly digitalizing their everyday operations. This growing cyber-dependency has two major implications for infrastructure development. On the one hand, it will lead to a growing demand for information and communication technology infrastructure. On the other, it also means the digital infrastructure of the region’s cities and businesses are progressively under the threat of a systemic breakdown from a cyber-attack.

Help Wanted: The Problem of Talent Shortages

Asia-Pacific’s human infrastructure is faced with growing talent shortages. The problem is already felt by businesses across the region, from advanced economies like Singapore and Hong Kong to emerging markets such as China, India, and Malaysia. In Singapore, for example, 56 percent of employers reported having difficulties filling vacancies.

As with critical infrastructure, talent shortages in Asia-Pacific will be further shaped by ongoing megatrends.

The first is the already aged or rapidly aging population in several economies in the region (Japan, Singapore, Hong Kong, South Korea, and China). In these societies, the labor force and talent pool are expected to shrink significantly in the next 15 years.

The second is continued technological advancements and their applications in the workplace. This has fundamentally changed how work is performed and perceived. New technologies have required new skill sets that are not readily available—for example, data from Mercer show an unmet increase in demand for data scientists and experts in cloud computing, cybersecurity, and artificial intelligence.

Yet unlike critical infrastructures, the interactions between megatrends and their effects on talent shortages in Asia-Pacific will play out in many forms. Consider the application of automation: Automation can play an important role in filling the labor shortage experienced in rapidly aging societies such as Japan, where robots have been increasingly replacing humans in fields like construction and healthcare.

At the same time, automation also exacerbates talent shortages, as the skill sets for its application are not necessarily available. In emerging markets, automation threatens the displacement of millions of low-skilled workers, creating new social imbalances. Within these dynamics, the linchpin is education systems’ capacity to catch up with technological developments and retraining/reskilling programs.

The Bigger Picture: The Evolving Risk Landscape in Asia-Pacific

The threats to Asia-Pacific’s physical and human infrastructure can be contextualized in the wider risk landscape of the region.

For example, global and regional geopolitical shifts have affected infrastructure development efforts, including the complications surrounding the Belt and Road Initiative. While there is little debate over the project’s potential economic value and its contribution to solving the current infrastructure gap, geopolitical considerations from governments across the region present real barriers to cooperation and shared prosperity.

Separately, the rise and persistent presence of populism, nationalism, and “strong state” governance can also limit the mobility of human capital, which can help ease talent shortages.

Similar dynamics are can be seen in the region’s underlying economic fragilities. There is a strong connection between infrastructure development and the increasing debt load countries in the region have been taking on, raising the question of what a sustainable approach is to promoting infrastructure investments. At the same time, solving for talent shortages similarly cannot avoid the question of affordable and accessible education, as well as of reskilling and upskilling programs—thus putting the dogged problem of inequality at center stage.

These observations highlight the deep interconnectedness of specific risks, macro risks and risk trends, and the wider risk landscape. Viewing these issues through this lens reveals new potential vulnerabilities that businesses and governments alike must be aware of to avoid getting blindsided.

Wolfram Hedrich is the Executive Director at Marsh & McLennan Companies’ Asia Pacific Risk Center. Read more on the Asia-Pacific risk environment at the center’s recent Evolving Risk Concerns in Asia-Pacific vol.3 report.