January 27, 2003	Monday	Ziqa’ad 23,1423

East Asia’s future as one of the world’s most dynamic, resilient and interdependent economic region could be realized, if it follows through on an institutional reform agenda and embraces technology and innovation and with it, investments in education and knowledge.

This could breathe new life into the region’s development prospects and speed the transition of a number of countries into the ranks of developed nations. This is the future of innovative growth according to a new World Bank study.

The report states that resource inputs were the principal source of the past growth, the future in East Asia rests on the emergence of an environment that promotes innovation. In particular, the research points out East Asia’s successful model of development, one that yielded three decades of spectacular growth and with that growth, poverty reduction is likely to be less effective in future, with diminishing returns. It cites factors such as Asia’s major exports being transformed into low value-added commodities, and emerging competition both from lower cost producers and from mega-global contract manufacturers as reasons for the diminished effectiveness of the “Asian model.”

The only way forward is that East Asia’s industrializing economies go beyond the imitative phase of development, and into the innovative phase, moving up the product value chain and extending their reach into services, both of which call for a deliberate focus on innovation as the major source of growth.

Unless East Asia moves toward a technological, rather than a factor-intensive, mode of production, it will experience slower growth in future and with that slower growth, diminished chances to bring millions out of poverty, to give millions a chance of a better life, a better education, a better future. It is crucial then, that the countries of East Asia, even as they struggle with the challenges of today’s immediate priorities and pressing concerns, seize the initiative and begin laying the seeds for a more innovative, competitive future.

Innovative East Asia: The future of growth is the main output of a three-year research project, initiated at the request of the government of Japan, on the future direction of economic changes in East Asia, with emphasis on how the approaches to development in the region might evolve in early 21st century. It seeks to identify the choices available to East Asian economies as they attempt to resume and sustain rapid growth in a changing, more competitive, and more integrated world environment.

Underscoring the continued importance of sound policies and good institutions, the study covers a broad agenda that includes regional integration and innovation essential for East Asian countries to maintain their momentum of economic growth. This research will present a new and insightful perspective on study on the development of East Asia, a region that has demonstrated unprecedented economic growth.

According to the research, revival will depend upon:

(1) Retaining the strengths of the past, macroeconomic and political stability, openness to trade, high savings and investment rates and human capital development; (2) Overcoming weaknesses of the present financial fragility, the corporate governance, the regulatory oversight, the legal framework, the exchange rate management, and the social protection and; (3) Developing/strengthening the innovative capabilities to meet the challenges of future.

The study discusses various policy measures needed for this transformation, and focuses on the economic conditions in the region, national reforms to overcome the existing weaknesses, cooperation as a means to strengthen regional economy, and the initiatives which are needed to foster the capacity for innovation. The report notes that a number of inter-related developments at global and regional levels suggest a future quite different from the past. Global integration is increasing, facilitated by freer trade, which is yielding a much more competitive environment and challenging the once protected domestic markets.

At the regional level, the economic performance and the relationship of Japan with the neighbouring countries, and the Chinese economy’s emergence as a competitor and a promising market are two important factors shaping the economic landscape. The technological revolution continues apace, and the organization of production is being transformed by the rise of foreign direct investment and by the emergence of international production networks that bring together component suppliers, assemblers, supply-chain managers, and buyers in dynamic relationships. East Asia must adapt to these changes or run the risk of being left behind.

While the region’s diversity makes a union difficult to achieve in the medium run, countries can derive sizable gains by focusing their attention on area such as trade and financial regulation where mutual interests are strong enough to overcome the barriers to coordination and harmonization.

With the understanding that each country should pursue a different mix of policies appropriate to its income level, institutional development, recent history, and capacity to frame, finance, and implement government policies, the research recommends ‘10 policy messages’ that all East Asian economies can subscribe to as they chart their courses into the twenty-first century.

1. The greater efficiency of public spending and prudent management of debt, including the government’s contingent liabilities.

2. Management of exchange rates so as to maintain a margin of flexibility appropriate for the size and openness of the country.

3. Regional coordination to enhance financial stability, sustain the growth of trade and promote competitiveness.

4. Financial reforms that facilitate the restructuring or re-capitalizing of banks and the building of market and regulatory institutions. Reform of the financial system means that the government or business groups will need to relinquish attempts to direct the flow of resources from the banks.

5. Deregulating markets so as to promote competition will help narrow the technology gap in services such as finance and retailing between the East Asia and the leading Western countries.

6. Measures to make the legal system an effective instrument for protecting rights and enforcing rules will crucially aid the financial reform and strengthen the corporate governance.

7. The quality of tertiary education and the ICT infrastructure will determine the performance of innovation systems that are the springboard of growth.

8. High-tech urban clusters of industries and services as in Tokyo and Kyoto are one of the key ingredients of innovation systems. The dynamic clusters depend upon policies supporting the openness, public goods such as training, physical infrastructure and cultural amenities.

9. Incentives, such as the tax concessions, the assurance of intellectual property rights, the stock option schemes for new start-ups, the seed money from the government can make vital contributions to innovation.

10. Domestic, regional, and global trade and competition policies can help to keep the innovation system in high gear. Without the press of competition, the urge to innovate is almost certain to languish. At the same time, while a robust market system can provide some of the incentives, the government, at times, also has a role to play by being proactive in order to raise and sustain the pace of innovation.

The transition from the factor-intensive to the productivity-driven growth, and from imitative to innovative growth is undoubtedly going to be bumpy. Implementation will be difficult and yet, opportunities are there.