East Asia's Success Creates Next Wave Of Challenges At Home

September 18, 2006

Singapore, September 18, 2006 – East Asia – a region that has transformed itself since the financial crisis of the 1990s 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 – first with global markets and then within 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, almost everyone in developing East Asia will be living in a middle-income country in a few years,” said Dr Kharas. “But the development challenge at the middle-income level is considerably more complex and countries need to adapt their strategies.”

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 both domestically and to the outside world so that economic growth continues and social cohesion is strengthened.”

The report analyzes the forces that have transformed East Asia and concludes that the economic landscape today is quite different because of the effects of economies of scale.  These have driven East Asia’s continuing success and have led to intra-regional trade patterns responding to sophisticated regional production networks, 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,” said Dr Kharas. “The old Asia relied on the famous flying geese analogy that saw mature industries move to low-wage countries. The new Asia is more innovative and networked – it’s characterized by a very competitive business environment that encourages new products and processes and a labor force able to absorb new ideas.”

The report argues that the rewards from knowledge-based economic growth can be concentrated, geographically and socially, and public policies are needed to spread the benefits more evenly.   For the growing number of middle income countries in the region, it says a focus is needed on improved management of small and mid-sized cities, broader access to social services and greater transparency and accountability in national and local governments.

It emphasizes the need for clean governments prepared to tackle these issues.  This is now underway in many countries in the region which have embarked on a transition from a mode of governance based on the ‘rule of man’ to one based on the ‘rule of law’ or as the Chinese say, from renzhi to fazhi.