East Asia can regain its economic dynamism, and return to a position of global competitive eminence, but only if it adopts a new approach centered on four key areas, according to a new World Bank study. The book,
Can East Asia Compete? Innovation for Global Markets, argues that continued economic recovery and sustained rapid growth of the middle and high income countries of East Asia will depend on:
- Building innovation capability;
- Strengthening market institutions and business services;
- Harnessing information and communications technologies to the fullest; and
One of the book's authors, Dr. Shahid Yusuf, commented, "For many of East Asia's leading economies, the early decades of the 21st Century will be remembered as the time when innovation rather than capital or labor became the principal driver of growth. And the most dynamic countries will be those best able to mobilize the power of technology. However, as the study emphasizes, building innovative capability is a daunting task. It calls for institutional changes and a mix of macroeconomic and sectoral policies. East Asian countries start from a position of strength: they have an adequate supply of resources, the manufacturing skills, the educational and research infrastructure, and the base of financial and business services. Most are increasingly open and competitive economies. Now they need to go the extra mile and become highly innovative economies as well."
As Deepak Bhattasali, chief of the Economic Unit and Lead Economist of the World Bank Office Beijing said, "The new World Bank study draws on many examples from China to support its findings. At the same time, it has powerful lessons for China, especially as the country intensifies its adjustment to greater integration with the global economy in the wake of WTO-accession. With the growth of the labor force and physical capital expected to slow in the years ahead, China's ability to maintain a blistering pace of economic growth will depend essentially on increases in productivity. The challenge is not so much to maintain its competitiveness as the low-cost manufacturing center of the global economy as to move up the value change and leverage its size and resources to generate even larger dynamic gains. In many senses, China's post-WTO openness will allow it to benchmark its institutions and performance to the best global standards, which will help promote the kind of increases in productivity that are needed. Equally, however, its ability to scale-up to the global economy from its vast internal market offers it significant advantages over its East Asian neighbors. This is one reason for concerns expressed in the region about the "China threat". However, China will need to address several weakly-developed nodes in its own economy before it could be considered to be a comprehensive threat to the economic fortunes of its neighbors. It is equally important to realize that China is also emerging as a major destination for exports. Therefore, if countries in East Asia want to compete, they will need to compete against China for some markets but also with each other for a share of China's growing market".
The study finds that East Asia needs to progress in the following areas:
Innovation: The study says that an environment stimulating innovation will be based on sustained spending on research and development (R&D) by public and private entities in a competitive and open setting. Such an environment, in turn, maximizes the incentives for existing firms and new entrants to innovate and commercialize the more promising findings. Innovation can be promoted by networking among firms, a process that is more likely and more fruitful when many producers agglomerate in urban clusters.
The most effective clusters, the study finds, are ones where a few core activities, such as electronics, biotechnology, apparel, and software, are powerfully reinforced by suppliers of inputs and business services such as financiers, lawyers, marketing specialists, and accountants. Successful clusters rely on policies supporting openness which encourage many-stranded linkages with other clusters worldwide. In other words, product and process innovation is a function not just of investment in R&D but also of the clustering of networked firms in a competitive and open policy environment.
Financial sector and business services: A significant share of future growth in East Asia should derive from the expansion of services both traditional as well as newly created ones; from gains in the efficiency levels of the services sector, which currently lag far behind those of the advanced countries; and from closer interaction between services and manufacturing. A strong services sector facilitates industrial development. Some of the most successful innovation commercially is at the intersection of services and manufacturing activities, especially in information and communication technologies (ICT) and the medical sciences, but also in the automotive sectors and the apparel industry. Throughout much of East Asia, the future dynamism of services depends on policy reforms that stimulate competition, enhance the quality of regulation, and deepen technical and managerial skills.
Information and Communications Technology: is integral to innovation-led growth in three respects. First, ICT is a field where a huge amount of innovation is occurring, and is likely to continue. Second, by greatly facilitating communication, collaboration, and competition, ICT has enhanced the productivity of research globally while at the same time multiplying the pathways for the diffusion of technology. Third, the fusion of ICT with key business services whether it is finance, marketing, or logistics will enhance the future efficiency and competitiveness of these subsectors, depending in large part on the ability to leverage ICT.
Openness: An innovative and competitive economy draws a good part of its energy from openness. This is the theme that runs through the study, especially on the benefits that accrue from measures that increase openness without compromising stability. In the East Asian context, openness is synonymous with trade and capital flows. For close to three decades these, together with resource mobilization, have served as the drivers of growth in the region. Now, as development shifts to a higher plane, growth fed more by innovation will continue to derive its strength from closer regional and global integration by way of increased trade, FDI, technology flows and the circulation of knowledge workers.
Recent research on which the study draws, suggests that such integration of the middle and high income economies in East Asia provides the spur of wider markets, greater competition, and faster dissemination of technology but more than that, the resulting policy coordination enhances macroeconomic stability, further strengthening the incentives for accumulating knowledge with a long-run payoff.
Can East Asia Compete: Innovation for Global Markets is a key component of the East Asia Prospects Study, which began with a 1999 proposal by Japan for the World Bank to examine the future directions of economic change in East Asia, with emphasis on how the approaches to development in the region might evolve in the early 21st century. The Bank responded by assembling a team to work closely with a select international panel of Asian scholars to define a broad ranging study to ascertain the directions of change and to suggest policies for East Asian economies that would sustain their past growth momentum within a changing and more competitive globalizing environment. The study is a follow-up to the earlier "East Asian Miracle" Project of the early 1990s, but designed to be on a larger scale, with a substantial research component, a forward-looking perspective that aims to remain relevant to policymakers beyond 2010. The main report is expected in early 2003.
The report, "Can East Asia Compete?" is available by ordering on the World Bank's website,
(china.org.cn October 9, 2002)