East Asia' s next wave of challenges is at home, says world bank report

June 8, 2007

BEIJING, June 8, 2007 - The World Bank held a seminar here today to highlight the findings of its new study, An East Asian Renaissance: Ideas for Growth -- a comprehensive analysis of the new economic and social forces and challenges at play in the region.

The report finds that, 10 years since the financial crisis, East Asia has transformed itself by creating more competitive and innovative economies but now, it must turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success.

Co-authors Dr. Homi Kharas, Visiting Fellow at the Brookings Institution (and formerly the Bank's Chief Economist for East Asia & Pacific) and Dr. Indermit Gill, the World Bank's Acting Chief Economist for East Asia & Pacific have been in Bangkok, Kuala Lumpur, Jakarta, Manila and Hanoi, and will also travel to Tokyo after Beijing to discuss the report's findings with regional agencies, think-tanks and media.

Commenting on the report, Secretary-General of ASEAN, Dr. Ong Keng Yong said: "Among other things, 'renaissance' implies innovative application of culture, learning, and skills. This is happening in an unprecedented way in East Asia. It has brought about profound consequences for the region and for the world. Is the change sustainable or transient? The trends and analysis in this book provide vital clues."

"The report is highly relevant for China.  Not only is the country at the heart of the changing production networks in East Asia, domestically the policy priorities have shifted to sustainability of growth, ensuring equitable development, management of cities, and performance of government" said Dr. Bert Hofman,  World Bank Lead Economist for China, and chair of the seminar.

Now in its final published format, 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 so that they are not squeezed between their high-income, high-tech neighbors and low-income, low-wage competitors."

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. The need to build vibrant cities, cohesive societies and clean governments is fundamental to this approach.

"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.

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