The report, released today in Tokyo, states that while before, resource inputs were the principal sources of past growth, the future in East Asia rests on the emergence of an environment that promotes innovation. In particular, the research points out that 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 the 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, the report urges, 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.

World Bank President James D. Wolfensohn, who was in Tokyo to launch the report, commented, “Unless East Asia moves toward a technological, rather than a factor-intensive, mode of production, it will experience slower growth in the 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.” He continued, “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 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. 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.

Commented Former Vice Minister of Finance for International Affairs Mr. Haruhiko Kuroda, “While 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. I hope that 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:

• retaining the strengths of the past — macroeconomic and political stability, openness to trade, high savings and investment rates and human capital development;

• overcoming the weaknesses of the present — financial fragility, corporate governance, regulatory oversight, legal framework, exchange rate management, and social protection; and

• developing/strengthening innovative capabilities to meet the challenges of the future.

The study discusses the various policy measures needed for this transformation, and focuses on: economic conditions in the region; national reforms to overcome existing weaknesses; cooperation as a means to strengthen the regional economy; and initiatives needed to foster the capacity for innovation.

The report notes that a number of interrelated developments at the 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 once protected domestic markets. At the regional level, the economic performance and relationship of Japan with neighboring countries, and the Chinese economy's emergence as a competitor and a promising market are two important factors shaping the economic landscape. World Bank Economic Adviser and main author of the report Mr. Shahid Yusuf, added: “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.”

Looking Forward: Ten Policy Messages

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 Ten Policy Messages that all the East Asian economies can subscribe to as they chart their courses into the twenty-first century.

Macroeconomic Policies

1. 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.

“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 areas—such as trade and financial regulation — where mutual interests are strong enough to overcome the barriers to coordination and harmonization,” said Mr. Yusuf.

Institutional policies

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 government or business groups will need to relinquish attempts to direct the flow of resources from banks.

5. Deregulating markets so as to promote competition will help narrow the technology gap in services such as finance and retailing between 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 financial reform and strengthen of corporate governance.

Policies to enhance innovation

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. Dynamic clusters depend upon policies supporting openness, public goods such as training, physical infrastructure and cultural amenities.

9. Incentives, such as tax concessions, assurance of intellectual property rights, stock option schemes for new start-ups, seed money from 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.

“This transition from factor-intensive to productivity-driven growth, and from imitative to innovative growth is undoubtedly going to be bumpy. Implementation will be difficult,” concluded Mr. Wolfensohn. “And yet, the opportunities are there. East Asian countries are already starting from a position of strength – with the 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. East Asia is poised for another major step forward. It will be fascinating to see the extent to which the vision is transformed into reality.”

(china.org.cn January 16, 2003)