| 3. | The Long-Term Prospects for the Asian Economy, and Issues to Be Resolved |
The high growth of the Asianeconomy up to the time of the currency crisis waslauded as the "East Asian miracle," andAsia became the focus of attention as the world'sgrowth center. However, the Asian currency andfinancial crisis has given rise to cautious viewsabout the future prospects of the Asian economy.
By implementing measures such asthe reform of the financial and corporate sector,and reviving its economic and financial systems,is it possible that the Asian economy will be ableto sustain once again the high growth rates itachieved prior to the crisis?
(1) Strength of Asia's economicfundamentals
The strength of the fundamentalsof the Asian economy, which supported high growthover the past 30 years (e.g. the high saving ratioand continuous investment in education), hasbasically remained unchanged since the Asiancurrency crisis. By overcoming the vulnerabilityin the financial and corporate sectors that wasrevealed by the currency crisis, resourceallocation should be made more efficient, and itmakes possible to utilize the strength of thefundamentals more effectively.
The Asian economy's biggeststrength is its high saving ratio. In all casesexcept the Philippines and Taiwan, the domesticsaving ratio ((GDP total consumption) / GDP)in Asian countries exceeds 30% - the highest levelin the world, including the industrializedcountries. (However, as a result of the currencycrisis, the saving ratio in Indonesia fell to 24%in 1998.) The ratios in Malaysia and China exceed40%, and in Singapore the ratio is over 50%. Inthe nine Asian economies (4 ASEAN countries, theNIEs, China), the average saving ratio is 37%,almost double the world average of 21%.
Asia's extremely high saving ratiohas been attained over the past 40 years or so,and reveals the intention of the people of theregion to raise their future living standards. In1960, for example, the average saving ratio in thenine Asian economies was 19%, which was slightlylower than in Latin America (21%), and slightlyhigher than in Africa (17%).
Nevertheless, a high saving ratiodoes not necessarily guarantee a high growth rate.In order to use the high saving ratio foreffective investment, it is first necessary totake steps such as the reform of the financial andcorporate sectors and the upgrading of theindustrial structure. With regard to investment ineducation, there is an urgent need to improvehigher education in order to educate science,engineering, and managerial personnel; revisionsin line with the upgrading of the industrialstructure are essential.
(2) The IT revolution and theAsian economies
Owing to the existence of theInternet, which permits speedy, low-cost,wide-ranging communication, the IT revolution isexpected to have a major impact on the existingways of business and production, and indeed on oursociety and economy as a whole. In view of this,when examining the long-term outlook for the Asianeconomy, it is one of the important points toassess the kind of impact the IT revolution willhave on the Asian economy, and whether Asia canmake effective use of the advantages offered bythe IT revolution.
(a) Development ofcommunications infrastructure
For Asia to take advantage of theIT revolution, it is essential to resolve theproblem of underdeveloped communicationsinfrastructure. A particularly important issue isthe development of the communicationsinfrastructure in rural areas, where the ratio oftelephone installation is low relative to urbanareas, and another factor that has been identifiedis that disparities between countries in terms oftheir communications infrastructure are growingwider. It is essential to reduce these disparitiesbetween countries and provinces.
On the other hand mobilecommunications through the use of cellular phonesare spreading rapidly in Asia, as networks arerelatively easy to construct compared with thosefor fixed-line telephones, and deregulation isfuelling competition. It is forecast that cellularphones will be widely used as terminals for theInternet, raising the possibility that the spreadof cellular-phone would resolve the bottleneck tothe spread of the Internet.
In part because of the problem ofcommunications infrastructure, the degree ofdiffusion of the Internet in Asia remains lowrelative to the industrialized countries, but withthe rapid decline in prices of Internet terminalssuch as personal computers, the number of usershas increased rapidly in recent years. To takeChina as an example, the number of Internet userstotaled 8.9 million at the end of 1999, which wasmore than four times the number a year earlier,and is projected to exceed 20 million in the year2000. Low-priced Internet terminals that are easyto use at home are expected to come into morewidespread use in the future.
(b) The economic impact of theIT revolution
It is said that continuousinvestment in education and relatively equaldistribution of income were factors that havebrought about high growth in Asia. These factorsshould also be beneficial for Asia amid the spreadof the Internet. To ensure that advantage, it willbe necessary to increase computer literacy anddevelop human resources by such means as improvingschool education and professional training.
In addition, the IT revolutionwill increase the volume, speed, and scope oftransactions of all kinds, and enable informationto be transmitted and reproduced instantly,enabling the efficiency of resource allocation tobe greatly enhanced. This should make it possibleto put the soundness and potential of Asia'seconomic fundamentals to more effective use.
IT makes possible the rapid andinexpensive transfer of knowledge, and thereforewe believe that it would enable developingcountries to benefit as "latecomers",and make it easier for them to catch up with theindustrialized countries. Its use in fields suchas education and health hold particularly greatpromise. In addition, e-commerce - both businessto business and business to consumer - will bringgreat change to the existing shape of business,and the further deepening of business activityboth within the region and with other regionsthrough open networks may create new businessopportunities for Asian companies.
(c) Dealing with risksassociated with the IT revolution
On the other hand it has beenpointed out that the IT revolution will give riseto new risks in such areas as the security oftransactions, the stability of financial andeconomic systems, and consumer protection. In viewof this, it is important to provide soundenvironment like making rules. Particularlyimportant is the fact that without a resolution ofthe problems in the financial and corporatesectors that were revealed by the recent currencyand financial crisis, for example the lack ofmodernity and transparency in management, theprogress of the IT revolution could poseconsiderable danger. For example there is the riskthat if erroneous information were to leak intomarkets it could be reproduced and propagatedinstantaneously; it is essential that transparencybe enhanced by such means as ensuring thedisclosure of accurate corporate information.
(3) The catch-up growth patternof Asian economies
Empirical analyses of the growthpattern of Asian economies, particularly those ofthe NIEs, show that these economies achieved highgrowth through inputs of resources such as capitaland labor, and that the raising of productionefficiency (increase in total factor productivity)at a macro level did not make a particularly largecontribution to economic growth. They alsoquestion whether it will be possible to sustainhigh growth based on this input-dependent growthpattern.
This assertion has aroused avariety of counterarguments, including against theempirical analyses that provide the grounds forit. The most important point is whether or not -despite the fact that East Asia has hithertofollowed this input-dependent growth pattern -this means that the East Asian economy will beunable to sustain high growth in the future.
One important point to note whendebating this issue is this input-dependent growthpattern is a phenomenon that generally occurs inthe initial stages of industrialization, forexample in Japan before World War II and in theUnited States and other countries in the secondhalf of the 19th century; it is certainly notpeculiar to Asia. This is because when developingcountries are catching up with industrializedcountries, the propagation of technologies playsan important role, and much of this transfer oftechnologies takes place in the form of thetransfer of technologies embodied in capital, orin other words the introduction of more advancedcapital goods. Generally, countries whose levelsof technologies, educations, and industrialinfrastructures are lower than in theindustrialized countries are able to achievehigher growth than the industrialized countries,owing to the dissemination of technology, theraising of their educational levels, and thedevelopment of their industrial infrastructure.
There is major gap between thelevels of technology, education, and industrialinfrastructure in ASEAN and China, and those inthe industrialized countries. Accordingly, even ifthese countries continue their previousinput-dependent growth pattern, we believe therehas been scope for them to sustain high growththrough the dissemination of technology, theraising of their educational levels, and thedevelopment of their industrial infrastructure.
On the other hand the gap betweenthe NIEs and the industrialized countries in termsof the levels of technology, education, andindustrial infrastructure have been narrowedconsiderably and the pace of growth in thosecountries may ease gradually. Indeed, anexamination of the average growth rate of the NIEsevery ten years since 1960 shows that their growthrates are falling gradually, except in the case ofSingapore, which maintained high growth throughthe 1990s. For example in the Republic of Korea,the growth rate accelerated from the 7% levelduring the 1960s to the 9% level in the 1970s, butsubsequently slowed gradually to the 8% level inthe 1980s, and to the 5% level in the 1990s.
(4) Transformation to aproductivity driven growth pattern
For the NIEs and ASEAN countriesto maintain relatively high growth, they musttransform from an input-dependent growth patternto a productivity driven growth pattern ofindustrialized countries. The means of doing thatinclude increasing investment in research andtechnology development, nurturing science,engineering, and managerial human resources, andfostering supporting industries by such means asestablishing policies for small and medium-sizedenterprises (SMEs).
However, the fact that the economyof the Soviet Union failed in its attempt totransform to a productivity driven growth pattern,in spite of large-scale investment in research andtechnology development and human-resourcedevelopment, suggests that although theaccumulation of human capital is a condition for atransformation of growth pattern, it is not asufficient condition in itself.
Professor Schumpeter placedemphasis on technological innovation as thedriving force of the development of capitalisteconomies, but the most important aspect ofProfessor Schumpeter's innovation theory is theexistence of entrepreneurs with the ability totake up profitable business opportunities and theboldness to take risk, as well as theinstitutional framework to make those businessactivities possible, including competitivemarkets. Given factors such as the strength of theentrepreneurial spirit in Asia and the dynamicchange that has occurred in the industrialstructure in Asia hitherto (discussed below), itshould be possible for Asian economies totransform their growth patterns from aninput-dependent type to a productivity driven typeby strengthening market functions by reforming thefinancial and corporate sectors, and byformulating measures such as those referred toabove.
(5) Intraregional linkage ofthe upgrading of industrial structures
Another important point to notewhen debating the growth potential of the Asianeconomy is the dynamic upgrading of the industrialstructure in Asian countries, and itsintraregional linkages.
In the course of their growth,Asian countries have been carrying out dynamicchange in their industrial structures. That is tosay there has been a shift from primary tosecondary industry and then to tertiary industry,and within manufacturing industry a shift fromlabor-intensive industries to capital-intensiveindustries, and further to technology-intensiveindustries. Moreover, this structural change hasbeen occurring at a very rapid pace. In addition,this upgrading has not been confined to withinsingle countries; existing industries with acomparative advantage have been transferring fromone country to the next after a certain time lag.We believe that it is this continuous upgrading ofindustrial structures and the way in which it hashappened in a chain within the region that havebrought about the sustained high growth that Asiahas achieved for more than 30 years.
Even though growth in one countrymay have become difficult because of rises inwages or exchange rates, it has been able totransform its industrial structure bystrengthening trading and investment relationshipswith neighboring countries, and that has furtherfostered the growth of those neighboringcountries. This demonstrates that Asia as a regionhas the ability to change its industrial structurein accordance with changes in comparativeadvantage.
Japanese corporations have playeda major role in this process of linked upgradingof the industrial structure. In the 1990s thesales of Japanese corporations in the Asian regiongrew sharply. Partly because they requestedsubcontracting companies to set up operations inAsia, an increase was seen in the proportion ofJapanese corporations' imports of manufacturinginputs accounted for by the countries of theregion. This demonstrates the progress made in thebuilding of cross-border procurement, production,and sales networks within Asia.
(6) Response to change in thecomparative advantage
The comparative advantage in Asiais changing significantly as a result of factorssuch as market entry by latecomer low-wagecountries. Given these circumstances, for Asiancountries to maintain high growth it is essentialfor each of them to make ceaseless efforts tochange its own industrial and export structure,and it is essential that, through these efforts,they transform their growth patterns from aninput-dependent to a productivity driven type.However, it has been pointed out that one of thefactors behind the recent currency crisis was thatsome aspects of Asian countries' efforts toupgrade their industrial structures in response tochanges in comparative advantage were inadequate.
An example is provided by theproportion of the value added by the manufacturingsector in Thailand - where the currency crisisstarted - accounted for by industries such as foodand textiles. This fell from 66% in 1965 to 43% in1995, but was nevertheless high next to Indonesia(47%) and the Philippines (44%). This lags inmaking a transformation in the industrialstructure, and is believed to have lowered theconfidence of foreign investors.
It has been pointed out thatforeign direct investment played a major role infostering this upgrading of industrial structures.With regard to the ratio of foreign investment togross fixed capital formation in the countries ofEast Asia, the ratios in Singapore and Malaysiaare very high, and the rate in China has beenrising in recent years, whereas in Thailand theratio has remained at a relatively low level,particularly in the 1990s. In 1996, for example,the ratio was 22% in Singapore, 14% in China, and12% in Malaysia, but only 3% in Thailand.
Meanwhile the speed of structuraladjustment in manufacturing industry has been thehighest in Singapore and Malaysia. This isillustrated by the proportion of manufacturingindustry accounted for by machinery and similarindustries, which is 62% in Singapore and 40% inMalaysia; it took only five years for this ratioto rise from 30% to 40% in the case of Singapore,and only four years in Malaysia. It appears thatpositive policies to attract foreign investmenthave accelerated the speed at which industrialstructures have been upgraded. In contrast, theratio of machinery and similar industries inThailand reached 30% in 1992, but remained at 33%in 1996. Considering this fact, since the currencycrisis the Thai government has made active effortsto attract an inflow of foreign investment,including by substantially easing regulations onforeign direct investment. In order to utilizeforeign direct investment to further the upgradingof the industrial structure, it is necessary toenhance the domestic capacity to absorb suchinvestment, including by developing humanresources and supporting industries.
(7) Construction of industrynetwork within the Asian region
What will be important to Asiancountries if they are to make ongoing progresswith the upgrading of their industrial structures,including through the introduction of foreigninvestment, is to shift from the formation ofexporting and manufacturing areas based on cheapand abundant labor, to the formation ofconcentrations of companies and industries basedon an independent technological base.
Japanese and other foreigncompanies have a major role to play in thedevelopment of domestic industries in Asiancountries. By transferring technologies to localindustries and sharing technologies with them,foreign companies can convert the relevanttechnologies to ones that are adapted to thedifficult environments in developing countries. Aspart of this process of sharing and developingtechnologies within the Asian region, Japanesecompanies should seek out new possibilities forthe 21st century; some Japanese companies arealready making moves of this kind.
It is essential for Asiancountries to develop supporting industries thatwill have the fundamental technologies required byindustry, but supporting industries are composedof SMEs that have functional specialty and thedivision of labor. Considering this fact, webelieve that it is essential that Asian countriesformulate effective SME policies. It is incumbentupon Japan to give active support to such effortsbeing made by Asian countries by providingtechnical assistance, for example through theassignment of experts, based on its own experiencein areas such as SME policy. Close attention mustbe paid to the fact that the Taiwanese economy,which is characterized by the existence offlexible networks of highly specialized SMEs, wasthe least affected one by the Asian currency andfinancial crisis.
It is also necessary for Asiancountries to take active steps to attract foreignSMEs that have the advanced processingcapabilities that are needed in those countries.The interaction and fusion of overseas anddomestic SMEs will encourage technology transfersand the regionalization of technology at the SMElevel.
In view of the economic scale ofAsian countries and the increasing levels ofspecialization and technologies, it is limited initself to cover all necessary industrialtechnologies independently in each country.Accordingly, the approach to be adopted must beone in which while an independent technology baseis established to a certain extent in eachnational industrial framework, an accumulation oftechnology is formed within an intraregionalcomplementary industrial-technology networkencompassing the entire Asian region. As statedabove, Japanese and other Asian companies havebegun to build cross-border procurement,production, and sales networks within Asia in linewith this thinking.
The Asian currency crisis promptedAsian countries to strengthen their ability tochange their industrial structures, including bydrastically easing regulations on inward foreigndirect investment and developing supportingindustries. Therefore, it is expected that thechain reaction through which industrial structuresare upgraded within the region will spread stillfurther.
Based upon the examinationdescribed above, we believe that growth rates inthe Asian economy will decline gradually, but thatas a result of steps such as ongoing efforts toshift industrial structures in accordance withchanges in the comparative advantage, relativelyhigh growth rates may be maintained.
4. The Deepeningof Interdependence in the Asian Economy
The pattern of trade in 1997 often Asian economies (4 ASEAN countries, the NIEs,China, and Japan) shows that 46% of exports and50% of imports were intraregional (under theimpact of the currency crisis, in 1998 thesefigures were 41% and 52% respectively, while in1980 they were 32% and 32%). With respect toforeign direct investment, in China's case 67% wasfrom within the region (1998). As a result of thechain of upgradings of industrial structures inthe Asian region, very close trading andinvestment relationships have arisen, and this iscreating a value-chain structure of trade andinvestment within the region.
It is forecast that highereconomic growth than in other regions will bemaintained in Asia, and that the expansion of theregional market will continue. It is also expectedthat as a result of the progress of free-tradeagreements such as for the ASEAN Free Trade Area (AFTA),the degree of intraregional dependence in Asiawill increase still further in the future.
The factors that led to the rapidspread throughout Asia of the currency crisis thatbegan in Thailand were the very high degree ofdependence on trade of Asian countries, thesubstantial impact of exchange-rate fluctuationson the economies of Asian countries, and the factthat the interdependence of the economies of Asiancountries has become very strong owing to therapid expansion of trade and investment betweenthe countries of the region in recent years. Owingto the interdependence in trade and investment,the economic contraction caused by the currencyand financial crisis created negative feedbackthat expanded in a cumulative manner through theregion. On the other hand the present economicrecovery in Asia is proceeding more rapidly thanexpected because the economic interdependence inthe region now appears to be having the oppositeeffect of creating positive feedback in theprocess of recovery.
The increase in interdependence inAsia in recent years shows that theindustrialization of Asian countries has beenshifting from the stage in which exporting andmanufacturing bases moved from one country toanother like billiard balls in response to wageincreases into a new stage in which there isvertical and then horizontal division of labor,based upon the expansion of Asian countries'domestic markets or the formation ofindustrial-technology networks.
The Asian economy has attained ahigh level of interdependence, not seen before inthe region, and economic and social unity is beingstrengthened.