From The World Bank - Public Disclosure Authorized - 39986
An East Asian Renaissance: Ideas for Economic Growth
Indermit Gill and Homi Kharas
Complete
Report as one file (3.7m pdf)
East Asia – a
region that has transformed itself since the financial crisis of the 90s
by creating more competitive and innovative economies – must now turn
to the urgent domestic challenges of inequality, social cohesion,
corruption and environmental degradation arising from its success.
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Report by chapters:
Overview
(657k pdf)
An economic renaissance is unfolding in the region. Just as the renaissance in Europe was a
period of intellectual discovery that produced new ideas and economic development, innovation
is getting similar attention in East Asia. The pace of change in trade and finance, ideas
and technology, urban development, household finances, and demands on the public sector is
breathtaking. If current growth trends prevail, by 2030 East Asia will be as large in terms of the
world economy (43 percent) as it was in 1820, around the time that it began a long decline in
global importance.
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Ch. 1: Growth,
Gravity, and Friction (340k pdf)
In a high-performing region such as East Asia, it is perhaps easier to think of what is not a
potential pitfall. Fiscal prudence is now almost a habit, and is likely to remain one. Competitive
exchange rates are seen by countries in the region as an important building block of economic
policies to sustain growth, as is low inflation. Financial sector pitfalls have been faced and, by
and large, recognized and accounted for by most countries in East Asia. Labor market flexibility
was long recognized as necessary, and remains a policy priority. High saving rates are still
ingrained in household and corporate behavior. The list of the region’s strengths is long. Latin
America’s prospects in the early 1970s as its countries entered middle- income were similarly
bright, but many Latin American economies have since disappointed. This report emphasizes
three potential pitfalls—listless cities, conflictive societies, and corrupt governments—that East
Asia should take care to avoid.
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Ch. 2: Trade
(635k pdf)
For the last four decades, trade has been the engine of economic growth for most of East Asia. In
the 1960s, Japan emerged as the region’s first major exporter, and was followed in the 1970s by
a second generation of countries (Hong Kong [China], Korea, Singapore, Taiwan [China]), in the
1980s by a third generation (Indonesia, Malaysia, Thailand, Philippines), and in the 1990s by a
fourth generation (China, Vietnam). While unilateral liberalizations by individual countries
helped initiate export- led development in the region, the increasing economic integration of East
Asia (EA) has been an important factor in sustaining the region’s growth.
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Ch. 3: Innovation
(715 pdf)
The generation, diffusion, absorption, and application of new technology, knowledge or ideas is
widely acknowledged to be a crucial driver of economic growth and development. Modern
growth theory stresses the importance of overcoming “idea gaps” relative to “object gaps” in the
process of development, that is, of overcoming barriers to the productive absorption of available
ideas versus overcoming gaps in the availability of objects such as factories or raw materials.
Investments in innovation carried out by forward- looking firms are at the heart of new theories
of endogenous economic growth developed over the last couple of decades. This chapter looks
at innovation in East Asia, including the diverse innovation activities pursued, problems faced,
and innovation outcomes achieved in economies at very different levels of development, as well
as, finally, some lessons learnt about policies and institutions found to be helpful in fostering
innovation.
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Ch. 4: Finances
(755k pdf)
The financial structure underpinning rapid economic growth and trade in East Asia broke in
1997-98. The massive economic dislocation and loss of market value by firms underlined the
necessity of developing a more robust regional financial architecture to support trade and
investment. Whereas prior to the crisis one could say that the focus of attention was on
mobilizing finance, since the crisis the focus has shifted to the efficiency of resource allocation,
the diversification of supply, and the reduction of systemic risk. The structure of the financial
system has become more important. At the same time, because of the considerable integration of
financial markets, both globally and within the region, policy makers have recognized that
stability depends not just on each country’s efforts and financial structures, but also on how the
financial links between countries operate.88 This chapter looks at how the structure of finance in
the regio n is changing and considers the remaining challenges to a system that can support the
kind of trade and innovation that is necessary for continued rapid growth in the middle-income
and rich countries of the region.
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Ch. 5: Cities
(475k pdf)
5.1 Scale economies, cities, and economic growth
In the most compelling formulations of modern growth theory, new ideas and the benefits
of human capital are shared with others who are nearby and equipped to take adva ntage
of them (e.g., Lucas, 1988 and Romer, 1990). In the aggregate, these externalities or
knowledge spillovers allow economies to defy the law of diminishing returns : bigger,
richer economies can continue to grow faster than smaller, poorer ones. Geography is
almost always important in determining who—besides those who create or possess
them—benefits from these ideas and skills. Put another way, spillovers of knowledge
tend to decline with distance, both within and across countries. These phenomena
therefore both encourage people to live in close proximity to one another to become
wealthier, and firms in an industry to locate close to each other and become more
innovative and competitive. The result is the growth of towns and cities.
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Ch. 6: Cohesion
(275k pdf)
In reviewing East Asia’s development experience since the 1990s from an equity
perspective, the following facts stand out.
· Absolute poverty—in terms of both the percentage and the absolute number of poor
people—in the region has declined dramatically since the 1990s.
· Reduction of income poverty has also been accompanied by progress in overall human
development indicators for the countries in the region.
· However, looking beyond extreme poverty, a large proportion of the region’s
population continues to subsist at fairly low levels of living.
· Inequality of income or consumption has increased significantly since the 1990s, and
most of it is driven by the increase in inequality within countries.
· Even where relative inequalities do not show a trend, absolute disparities have been
growing rapidly.
· Two fault lines of inequality within countries are of particular concern: (i) the urbanrural
divide and (ii) the regional/ethnic divide. These divisions are apparent in both the
income and non- income indicators of welfare.
· Vulnerability as the ex-ante risk of falling into poverty is emerging as a growing
concern in the region.
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Ch. 7: Corruption
(90k pdf)
Corruption in East Asia poses an apparent paradox. In some countries in East Asia, high
levels of corruption have coexisted for extended periods with rapid economic growth and
development. Clearly, this runs against the conventional wisdom that corruption
impedes economic and social progress. The chapter will explore the various hypotheses
put forward to explain this paradox and will assess their empirical bases. It will
investigate the characteristics of corruption in East Asia and the extent to which the
autocratic mode of governance that characterized many East Asian countries in the
postwar period may have enabled an East Asian model of corruption which was less
damaging to growth and development.
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EMBARGOED:
Not for news wire transmission, posting on websites, or any other media
use until 10 p.m. EDT, Sunday, September 17, 2006 Washington DC (which
is 10:00 am, Monday, September 18, 2006 local Singapore time, or 2:00
GMT/UTC). See Embargo
Policy for penalties for breaking embargoes.
Contacts:
In Washington: Claudia Gabarain (202) 473 8116
cgabarain@worldbank.org
In Singapore: Elisabeth Mealey (65) 9860 4293
emealey@worldbank.org
Mohamad Al-Arief (65) 8181 5361
malarief@worldbank.org
East Asia's New Success Model Presents
Next Wave of Challenges at Home
Singapore, September 18, 2006 — East Asia – a
region that has transformed itself since the financial crisis of the 90s
by creating more competitive and innovative economies – must now turn
to the urgent domestic challenges of inequality, social cohesion,
corruption and environmental degradation arising from its success, a new
World Bank report has found.
An East Asian Renaissance: Ideas for Growth by a World Bank
team led by Chief Economist for East Asia & Pacific, Dr Homi Kharas
and Economic Adviser, Dr Indermit Gill is the first comprehensive
analysis of the new forces and challenges at play in the region since
the Bank's seminal report of 1993, The East Asian Miracle.
Launched in a conference edition today at the World Bank-IMF
annual meetings in Singapore, the report shows that having successfully
undergone two waves of integration since the Asian financial crisis –
first with global markets and then with the region itself – East Asia
now needs to move to a third integration, this one at the domestic
level.
"As a result of the growth spurred by global and regional
integration, unprecedented economic progress has been made in East
Asia," said Dr. Kharas. "In a few
years, almost everyone in developing East Asia will be living in a
middle-income country. The development challenge at the middle-income
level is considerably more complex."
The report argues that regional flows of goods, finance and
technology are helping even smaller East Asian countries reap the
benefits of economies of scale and that this regional integration must
be encouraged. But it also points out that these measures have to be
supported by actions at the domestic level to ease the stresses and
strains that rapid economic growth leaves in its wake. Foremost in this
agenda is the need to build vibrant cities, cohesive societies and clean
governments.
"Cities are at the core of a development strategy based on
international integration, investment and innovation," said Dr
Gill. "East Asia is witnessing the largest
rural-to-urban shift of population in history. Two million new urban
dwellers are expected in East Asian cities every month for the next 20
years. This will mean planning for and building dynamic, connected
cities that are linked to the outside world so that economic growth
continues and social cohesion is strengthened."
The report analyses the forces that have transformed East Asia since
the early 1990s and concludes that a new economic paradigm has been at
work in the region over the last 10 years. This new landscape emphasizes
the importance of economies of scale to East Asia's continuing success
and highlights more sophisticated intra-regional trade patterns, greater
focus on higher skill and technology products, rapid uptake of
innovation and healthier banking and credit structures.
"What's going on now in East Asia is something quite new –
a renaissance," says Dr Kharas. "The
old Asia relied on the famous flying geese analogy that saw lead
industries move to low-wage countries. The new Asia is more
self-reliant, innovative and networked – it's characterized by a very
competitive business environment that encourages innovation and a labor
force able to absorb new ideas."
To address the new challenges the region now faces, the report
suggests that for low-income economies, the basic principles of
openness, macroeconomic stability and stronger investment in human and
physical capital continue to offer the most promising path to progress.
For the growing number of middle income countries in the region, it says
a shift is needed from just exploiting comparative advantage to also
exploiting economies of scale. This means prioritizing regional
agreements to enlarge markets, strengthening education and developing
skilled labor forces, and building robust macroeconomic environments.
To reinvest the economic returns that accompany fast growth, the
report emphasizes the need for clean governments prepared to tackle the
centralized corruption that continues to constrain development in some
East Asian countries. Over the past 20 years, the efforts of civil
society organizations have brought about major improvements in political
rights and civil liberties. This has also helped bring about aggressive
anti-corruption programs across the region.
Dr Kharas said the region would gradually see further moves from the
traditional modes of governance based on the 'rule of man' to the more
modern 'rule of law' or as the Chines say, from renzhi to fazhi.
"If East Asian policymakers succeed in meeting this next
wave of challenges, within a generation they can eliminate poverty and
lead their countries into the ranks of prosperous, developed nations of
the world," Dr Kharas said.
The full text of
the study and related materials will be available to the public on the
World Wide Web immediately after the embargo expires at:
www.worldbank.org/eap
Journalists are
encouraged to use this url in their reports.
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