New Asian growth dynamics in the context of globalization
Frans A. van der Zee1
TNO, Innovation Policy group
June 2006
This paper appeared as part of a SPRU-TNO-Fraunhofer led-project entitled ‘Towards
Knowledge-based Societies. ICT for Growth and Cohesion in a Global Knowledgebased Economy: Lessons from East Asian Growth Areas’ commissioned by the
European Commission, IPTS, Seville.
1
The author expresses his great gratitude to Michael C. Gutomo Putra (Erasmus University Rotterdam) for
assistance and relentless data retrieval, without whose support this report would have looked significantly
different.
1. Introduction
“The centre of gravity of the world economy seems to be shifting towards South East Asia. Japan leads in
certain high technologies and so do Korea, Taiwan and Singapore. The huge Chinese market demonstrates
an enormous momentum and creates new opportunities and India is likely to follow suit. Other countries in
the area try to benefit from this development. Investments in the area are growing very rapidly and business
prospects are very attractive.” European Trend Chart on Innovation, 2005
The recent rise of China and India on the world economic stage has attracted strong interest
from academia, the media and last but not least Western policymakers. Some see the rise of
the two Asian giants and the Asian region as a threat: a threat to employment and income in
the developed world, a threat to comfortable life and a final blow to the Western welfare state
(arguably a now forgone ideal). Others, European and American companies first and
foremost, see the newly developing Asian markets predominantly as a challenge, as an
opportunity not to be missed. Indeed, the sizes of the Chinese and Indian market with
populations of 1.3 and 1.1 billion people respectively offer enormous potential, not only in
terms of sales of goods and services, but also in terms of abundant and cheap human
resources and rapidly increasing knowledge capabilities. Outsourcing and captive offshoring
to Asia are increasingly popular nowadays. Equally so, the time that outsourcing was mainly
concerned with low-skilled manufactures and production under strict licensing agreements
and other Original Equipment Manufacturing (OEM) modes of production has long gone.
Nowadays high-skill software services are being outsourced as easily as the production of
high-tech computer parts. Even top-class R&D facilities go eastward nowadays. The build-up
of global networks of production, engineering, design and R&D has taken on another
dimension. Innovation offshoring is increasingly fashionable; yet with it come fears of job
losses and even loss of vital economic functions in the Western developed countries. What is
new about Asian growth, and what changes do we observe within Asia as a result of the rise
of the ‘new’ China and India? Is there something to be learnt from the other, still more
advanced Asian countries, more immediately under threat than Europe and America?
As Asia is becoming less dependent on Western technological supremacy, the question arises
to what extent the Asian-based knowledge societies compare to their Western counterparts.
And finally: do strong growth, increasing impact on world trade, size and huge potential of
the ‘new’ industrial leaders mean that the centre of gravity in the world is indeed shifting
from the US and Europe to Asia, with China and India as its new central focus?
1
Focusing on and defining ‘newness’
Understanding the nature of ‘new’ forms of growth dynamics in the countries of the Eastern
and Southern Asian region in the context of the global knowledge-based economy is the main
aim of this report. The new impetus for growth has emerged in a rapidly changing and
increasingly global economic and political context. New international opportunities
associated with the maturation of new technologies appear to have changed the dynamics and
speed of the game, with Asia and the world having to adapt to new realities, and rapidly so.
Adaptation includes the reorientation and repositioning of countries and policies, and of firms
and their strategies. Not only do we observe a shift to new forms of competition, of
collaboration with competition, and a trend towards global production and value networks in
which MNCs and SMEs actively seek partnerships, but we also see important changes in the
build-up of domestic knowledge bases and innovation capabilities at large, towards ‘truly’
knowledge-based societies. The newness of recent Asian growth in international respects is
characterized – and ‘nurtured’ – by important if not fundamental changes in:
• The global contextual base – opening up, sourcing and recomposed global value
networks
• The technology base – death of distance and convergence of technologies and markets
across national systems of innovation
• The geographic base – new centres of gravity and increasing intra-regional
interdependence
• The political economy base – the rise of competitive Asian MNCs and collaboration with
states and academia
• The policy base – strategic repositioning among the countries of concern.
These overlap closely with the combined internal and external dynamics summarised in WP
8. In WP 3 we focus primarily on the ‘external’ dynamics of change, in the roles of intercountry growth and networks, trade and FDI – the context of globalization. Later WPs,
including the country studies, will focus to a greater extent on ‘internal’ dynamics and the
policy dimensions.
The structure of this report for WP 3 is as follows. Section 2 highlights the archetypal
catching-up development model followed by most East Asian countries, except for India, and
its major drivers. Section 3 discusses a number of distinct developments in the contemporary
2
global context that enabled and fortified current Asian growth efforts. Section 4 focuses on
Asia’s increasing intra-regional interdependence, brought about not only by intra-regional
trade and Foreign Direct Investment (FDI), but also by a trend towards increased Asian
regionalism as exemplified by various Preferential Trade Agreements (PTAs); it also raises a
number of questions and concerns with respect to the sustainability of growth. Section 5
concludes.
2. Past and present – getting the geese to fly
Exports, industrialization and increasing technological development are and have been
prominent drivers of Asian growth. They are the motors behind a successful development
model of catching up that, originally set by Japan in the 1950s, has been followed by most
East Asian economies, including, most recently, China.2 This catching-up took a three-phase
development pattern with export promotion and industrialization as its core ingredients, the
first phase involving the exports of labour-intensive, low-capital-cost goods (e.g. shoes,
clothing, toys), the second phase involving the development of heavy industry exports (e.g.
steel), and the third and most advanced phase involving developing the capacity to innovate
high value-added, state-of-the-art complex technologies that can compete with those of
advanced countries (Kash et al. 2004: 784).
The only significant exception to this archetypal three-phase development pattern is India.
After the end of the ‘Licence Raj’ (investment, industrial and import licensing) period in
1991, which also did away with public sector monopolies in many sectors, India’s first
development phase did not involve exports of traditional labour-intensive manufactured
goods but instead software and IT-enabled services (ibid.). Another difference with the East
Asian nations’ growth experience is that India’s growth in economic terms is predominantly
domestically led, even if its exports in some domains are among the leading in the world. In
this sense, its current growth path still resembles the now discarded development model of
import-substitution policies, by relying on domestic resource mobilization and domestic
firms, encouraging FDI only in higher-technology activities (Wei 2005: 727).
The dominant Asian development model of catching-up is usually described as the ‘flying
geese’ model (Kojima 2000; Tho 2003; Tourk 2004), with Japan as leading mother goose
2
This includes the NIE-4 Singapore, Hong Kong, Taiwan and South Korea in the 1960s and 1970s, followed by
other NIEs Malaysia, Thailand, Indonesia, Philippines and Vietnam in the 1980s and later.
3
setting the stage for development, followed by other countries in the Asian region. The flying
geese explanation takes a time perspective and is in its essence about the evolution and
migration of economic activities, with leaders moving on to a next stage of industrialization
and complexity, driven by changing (predominantly factor endowment-based) comparative
advantages, and followers taking over the less advanced and less complex production
activities. The model is half-true and half-misleading, and in this project we have implicitly
tended to focus on the more misleading aspects. If the model is pictured as countries waiting
for the flock to pass overhead, whereupon the new industrializing country can be lifted up
into it, it has validity in the sense of ‘pathfinding’, but it seriously underestimates the effort
taken to launch one’s own development path. Both stories emerge in this project on new
dynamics of Asian growth – the borrowed ‘vision’ of the trajectories to follow, especially in
technological terms, is key to identifying the best path, but the resources required to pursue
such a vision on the part of each country or region in turn testify to the second aspect. The
model in its traditional sense applies better at the regional level, as for instance studied in WP
4.1 for the regions within China, than across national boundaries, unless this second and more
potent dimension of local effort is properly taken into account.
Even in such modified form, the flying geese model and the three-stages-of-development
pattern are of course highly stylised representations of what happened and is still happening
today. Differences between countries have existed and continue to exist. This is true for
factor endowments and initial socio-economic conditions, but it also applies to the difference
in export-oriented development strategies, with sometimes highly differentiated microstrategies between countries, ranging from a strong emphasis on large enterprise (chaebol) in
Korea,
FDI-triggered
industrial
development
in
Malaysia,
and
SME-dominant
industrialization in Taiwan (Ahn 2001). Differences in development strategies at the same
time reflect differences in the perceived role of the state in actively stimulating, reforming
and acting in the economic arena. As Uchida and Cook (2005: 702) put it, “(c)ompetitive
advantage in the context of East Asian economies [can be] viewed as the outcome of two
opposing approaches, the market friendly versus the market stimulating ...” In both
approaches, however, essential conditions for successful export-oriented development are
economic stability, predictable business environments along with sound macroeconomic
management, including domestic price stability, high savings, and a realistic exchange rate
(Ahn 2001).
4
Technology has played an important role in catching up. The earlier Tiger economies3 such
as South Korea and Singapore have been very effective in breaking with traditional patterns
of technological development. Radical innovations in the globally fast-growing sectors of
ICTs and electronics - in which they specialized – and an element of deliberately or not
‘picking the right winners’ have played an important role. Since the 1970s, investment and
R&D efforts, as well as infrastructural development, training and technology inputs, have all
been focused on the electronics and telecommunications industry (Hobday 1995). Hobday
(1996: 80) and others have argued that innovation in South-East Asia has been central to its
export success.
By taking the ‘advantages of relative backwardness’ and utilizing well-established
technologies from advanced economies, the Asian nations were able quite effectively to catch
up with others (Gerschenkron 1962; Ahn 2001; Hobday 2003).4 Their achievements in export
performance in the 1980s and 1990s were greatly facilitated by the composition of their
exports and imports, both of which were heavily related to the fastest-growing sectors of the
world economy and of world trade (Freeman 1998).
Initial catching-up by the ‘old’ Tiger economies was not a spontaneous process associated
with latecoming, nor the inevitable outcome of market forces in a liberal export-oriented
economy, though. Behind this dynamic technological development was a complex and
successful mix of human capital, education, R&D and other innovation stimuli, which
represent much of the local effort supplied, combined with a strong lead role for either the
state (e.g. Singapore, Korea) or the business sector (e.g. Taiwan, Hong Kong), and a key role
for MNCs and FDI. European and American MNCs and global business growth have been
instrumental in creating the needed growth impetus, especially at the outset (Reynolds 2001).
Foreign MNCs have played an important role in the process of technology diffusion and
knowledge transfer, by foreign direct investment (FDI), and by actively involving domestic
firms (SMEs) in their supply-side value networks. Transfer of technology and the
involvement of foreign staff (providing management skills) combined with local labour (on3
In this report the term ‘Tigers’ refers to Singapore, Hong Kong, South Korea and Taiwan, or what is
commonly denominated the NIE-4 (NIE are New Industrializing Economies). The Tiger is the national animal
of China, along with the Dragon and the Panda, the Tiger being the unofficial symbol. However, China is most
commonly referred to as Dragon , a use going back to Chinese mythology. Interestingly, tigers have always
been an eternal rival to the dragon; various artworks depict a dragon and tiger fighting an epic battle. A wellused Chinese idiom to describe equal rivals (often in sports nowadays) is “Dragon versus Tiger”. Source:
www.wikipedia.org.
4
As Gerschenkron (1962) already contended, the starting position of each latecomer economy and its specific
conditions of ‘backwardness’ generally differ; each has to plot its own distinctive path of development.
5
the-job learning) have helped to increase overall productivity. Foreign companies, MNCs
first of all, continue to play a crucial and dominant role in development.
As the catching-up experience of the ‘Tigers’ revealed as ‘latecomers’ on the world economic
stage, the importance of state influence in forcing and ‘engineering’ entry into export markets
and high technology sectors should not be underestimated (Mathews 2002). Different models
of state involvement have applied and continue to apply, as Wong (2005) for instance makes
clear, often in a unique mix of state planning and capitalism and going beyond what in most
liberal Western market economies would be perceived as the proper role of the state.5
Illustrative of the difference in development models is the way in which Hong Kong and
Singapore have developed. While both countries adopted an open economy policy
emphasizing free trade, comparatively free movement of capital, welcoming foreign
investment in export-oriented manufacturing, and providing a business-friendly environment
(macroeconomic stability, law and order, efficient government services), the state played a
much more pervasive role in Singapore than in laissez-faire Hong Kong (see Wong 2005a
and WP 4.4).
3. Asian growth within a changing global context
The current, most recent episode in Asian growth resembles preceding episodes – starting off
with Japan, and followed by the four Asian Tigers – in that external drivers, most notably
trade and FDI have been crucial. The major difference lies in the current enabling global
context and the future potential of the ‘new’ countries. This future potential manifests itself in
the size, weight and potential compared to their predecessors and the world at large: China
and India, with each about 20% of the world population, matter. But to what extent have
changes in the enabling global context been responsible for the rise of the Asian region? The
buzzword that perhaps best captures the period from the early 1990s up to now is increasing
globalization. Behind this we can identify a number of economic, technical and political
changes that together make up the global context. Without the pretence of being exhaustive,
we will discuss five distinct developments that enabled, formed and shaped the newest Asian
‘miracle’ as we observe it today:
5
(i)
worldwide trade liberalization and opening up,
(ii)
‘death of distance’ and convergence of technologies and markets,
Law and order, defence, policies aimed at correcting market failures, income redistribution, and the like.
6
(iii)
increased global competition and importance of innovation and knowledge,
(iv)
global sourcing, fragmentation and recomposition of the value chains, and
(v)
changing roles and strategies of firms and states.
Figure 3.1 Global exports in manufactures, by destination: 1985 and 2003 compared
Exp o r t s o f manuf act ur es
( shar es)
Exp o r t s o f manuf act ur es
( ab so l ut e val ues)
4000
100%
90%
3500
80%
3000
70%
2500
60%
50%
2000
40%
1500
30%
1000
20%
500
10%
0%
0
1985
2003
T O DE V E LOP E D
1985
2003
T O NI E s and CHI NA
COUNT RI E S
1985
1985
2003
2003
T O D E V E LOP E D
T O OT HE R
1985
COUN T R I E S
DE V E LOP I NG
f r om NI E s & Chi na
f r om ot her devel opi ng c ount r i es
1985
2003
T O OT H E R
DE V E LOP I NG
C OU NT RI E S
COUNT RI E S
f r om dev el oped c ount r i es
2003
T O N I E s and C HI N A
f r om dev el oped c ount r i es
f r om N I E s & Chi na
f r om ot her dev el opi ng c ount r i es
Source: UNCTAD (2005a)
3.1 Globalization, trade liberalization and opening up
Globalization is defined as the process of economic integration with resources becoming
more mobile and economies increasingly interdependent, and financial markets becoming
increasingly international (OECD 2005c). Growing international trade during the 1990s was
the first manifestation of this trend towards globalization. East and South-East Asia have
played a key role in the development of global trade. The huge changes both in size and
destination of trade flows between 1985 and 2003, as shown in Figure 3.1, illustrate the
shifting global perspectives in this period. While we see a huge increase in exports
everywhere, the bulk of global exports still originates in and goes to developed countries (see
left-hand panel of Figure 3.1). But the rising influence of China and the Tigers (Korea,
Taiwan, Singapore, Hong Kong) is easily seen. What catches the eye is that overall exports
from these ‘Asian five’ to the (other) developing countries equal their exports to developed
countries in value. On top of this, we observe a strong increase in Asian intra-regional trade,
here shown as exports between the ‘Asian five’.
7
How the size and direction of international trade flows have changed in less than two decades
becomes even more clear when we compare relative developments as measured by shares in
export destination. As can be observed from Figure 3.1, the rise in export share of the ‘Asian
five’ in trade to developing countries and especially between themselves has been explosive.
The share of the other developing countries in global trade has roughly doubled. Despite the
massive growth of exports between developed countries, their relative share in global trade
has decreased. This decline is most marked in exports to the Asian five, from almost 80% in
1985 down to 45% in 2003.
Over time medium- and high-technology products have become of increasing absolute and
relative importance in global trade. Contrary to what one might expect, the lead of (advanced)
developing countries over developed ones is most evident and highest in the high technology
segment, as Figure 3.2 reveals.
Figure 3.2: Export patterns by technology intensity, 1980-2003
Annual growth rates of exports by developed and developing regions (1980-2003)
Developed countries
Developing Countries
East Asian Tigers
South Asia
25%
20%
15%
10%
5%
0%
Primary products
Resource based
products
Low technology
Medium
technology
High technology
ICT products
Source: Lall and Kraemer-Mbula (2005)
The rise in global trade went hand in hand with a trend to global liberalization and opening
up in trade and investment. Successive global trade rounds, culminating in the 1986 Uruguay
Round, the subsequent GATT, GATS and TRIPS Agreements6 of April 1994 and the
establishment of WTO in 1995, guaranteed a further lowering of trade barriers and increased
access in various markets segments in the developing and developed countries. While the
process of global trade liberalization is a gradual one, involving complex rounds of
negotiations, the trend towards even greater trade liberalization has not been dropped. An
important milestone was no doubt China’s accession to the WTO in November 2001,
6
GATT: General Agreement on Tariffs and Trade; GATS: General Agreement on Trade in Services; TRIPS:
Trade-Related Aspects of Intellectual Property Rights.
8
followed by Taiwan in January 2002.7 Decisive, apart from WTO accession itself, were the
preceding ten years in the run-up to accession. These not only meant a time of hard
bargaining at the global political level, but also gave a new impetus and direction to Chinese
industries in preparing for change. One of the effects of China’s WTO membership is
increased progress in investment and trade liberalization, enabling MNCs and others to seize
even more fully their competitive advantages.
3.2 Globalization, ‘death of distance’ and convergence of technologies and markets
As a result of important technological developments and economy-wide innovations in ICTs,
communication and computing costs have dropped significantly since the late 1980s, to such
an extent that we can nowadays speak of the death of distance in communication and
information transmission. There is a transformation not just in prices (which has a longer
history) but also in types of communication, New forms of communication (e.g. the Internet;
wireless communication anytime, anywhere; IP telephoning and video-conferencing)
emerged and rapidly became popular, leading to new forms of (electronic) business, enabling
new ways of distributing goods, services and information, and facilitating just-in-time
manufacturing and delivery (see WP 5).
Figure 3.3: Declining international transport and communications costs, 1920-1990
Index of International Transport and Communications Costs
100
90
Air transport
80
70
Trans-Atlant ic phone
60
Sat ellit e
50
Sea Freight
40
30
20
10
1990
1980
1970
1960
1950
1940
1930
1920
0
Source: Lall and Kraemer-Mbula (2005)
National and international transport costs decreased markedly as well, not only because of the
mass-introduction of innovative forms of transport (e.g. containerisation and inter-modal
transport), but also because of important improvements in inland infrastructure (ports as well
7
India, Singapore, South-Korea, Hong Kong and Japan being members since 1 January 1995.
9
as road, railway and waterway networks) and changes in prevailing business models (e.g.
passenger airliners).
As a result the world has become a much smaller place – an increasingly ‘flat world’, even to
such an extent that reductions in trade costs and increases in trade efficiency may have had
even a more powerful effect on trade than trade liberalization itself (Engman 2005). The
shrinking of economic distance has opened up new opportunities that were not there before.
The transfer of technical and institutional knowhow between distant economies has become
easier than ever before (e.g. Saxenian 2005). Until recently successful business models have
become the subject of new competition and are increasingly being overthrown. The decrease
in communication costs and the growing possibilities of the Internet (broadband) hugely
facilitated the rise in the sourcing and offshoring of manufacturing and services.
The rise of the digital economy has opened up new opportunities for reorganizing supply
chains – ‘reconfiguring’ them into proper ‘value networks’ – by decomposing older chains
and greatly broadening and overlaying them. It has also led to the emergence of whole ‘new’
sectors (here the ICT production sector). Digitalization as a new element in our societies can
be held responsible for a significant lowering of transaction costs, with a vast potential still of
further improving the efficiency of economic activity.
What is observed nowadays is a shift away from the early focus on ICT production (of both
ICTs itself and ICTs embodied in various equipment and machinery) towards use of ICTs,
including the ‘e-paradigm’ in the provisioning of goods and services (B2B, B2C, B2G).
These constitute key aspects of the new patterns of convergence in ‘value networks’ as
outlined in WP 5, with a complexity of interactions, where these are becoming of the manyto-many kind as the number of sectors involved diversifies rapidly. They have international
implications, that we emphasize here.
.3.3 Globalization, increased competition and the importance of innovation and knowledge
With increasing globalization, the premium associated with knowledge and learning, and
with innovation and R&D, has significantly increased. In many markets the combined effect
of opening up, lower trade barriers, decreasing communication and transport costs is global
competition rather than national (or regional) competition nowadays. In this global
competitive game, information, speed and innovation capacity are more than ever before
important assets. Staying competitive not only means investing in production capacity
10
(equipment, machinery), but also in knowledge and innovation capacity (human capital). The
modern adage ‘invest in knowledge and innovation’ applies to both firms and countries,
albeit in different forms. For countries, it means investing in education, public R&D and
creating the conditions for successful national innovation systems (NIS) in which firms, R&D
institutions and universities can interact and cross-fertilize each other in systemic ways. For
firms, it implies investing in R&D and training, but equally so attracting high-quality human
capital and buying knowledge through patents as well as mergers and acquisitions (M&As)
and strategic alliances, most often international, where necessary.
The build-up of innovation capability is crucial to knowledge-creating activities, next to
perhaps less demanding knowledge-using activities (Bell and Pavitt 1993). Part of such
knowledge-creating activity is the use of complex technologies. Mastering complex
technologies and the capability to carry out technological innovation(s) is an increasingly
vital element in the game of global competition in high-value goods and services (Kash et al.
2004).8
Globalization also means increased competition for talent. Human capital is a necessary and
vital element in the production of knowledge and strengthening innovation capability. While
competition for labour among firms still continues and predominantly will continue to take
place at (sub-)national level, competition in the high-skilled upper segment of the labour
market has become more and more global. Globalization, opening up and market
liberalization have considerably widened the scope of both firms and people. Increased global
competition in goods and services along with trends in global outsourcing and offshoring
have stimulated the flow of human capital worldwide. High education has been turned into a
global business, with many young Asian students leaving their home countries to be educated
elsewhere, predominantly in the US and, to a lesser extent, Europe. China and India are the
biggest ‘exporters’ of students, accounting for 10% and 4%, respectively, of all those
studying abroad (The Economist 2005: 16).
8
Defined as those technologies that cannot be adequately understood by an individual so that the technology can
be communicated across time and distance for precise reproduction (Kash et al. 2004: 778). One of the essential
requirements for migrating from simple to complex technologies is the capacity to integrate and synthesize
previously separate bodies of knowledge. Note the difference from high-technology goods, defined as goods
having a significant R&D intensity, measured by R&D expenditure as a share of total production or added
value.
11
3.4 Globalization, sourcing and the recomposition of value networks
Another manifestation of globalization is the growing sourcing trend, with Asia being a
popular destination, together with fragmentation in production and decomposition of the
traditional value chains and their recomposition into value networks. Firms are globally
outsourcing, while specializing in core competencies, which allow them to increase
productivity and capture economic rents. Sourcing implies that firms contract out (parts of
their) production to other firms (i.e. outsourcing) or to other production locations within the
firm itself (i.e. in-sourcing), either domestically or abroad. In the latter case we speak of
offshoring. Offshoring can occur either within the firm or between firms (OECD 2006:
Figure 4). Despite their recent popularity, sourcing and offshoring are not new. In the 1970s
and 1980s a form of offshore outsourcing known as original equipment manufacturing
(OEM), was already common in the electronics industry, with East Asia as a popular offshore
destination (Taiwan, Hong Kong and Korea).9 What is new are two phenomena: the recent
take-off of offshore outsourcing and international in-sourcing in services, and – partly
associated – the emergence of global production platforms and global value networks (see
section 3.5). The recent rise in the offshoring of services covers a broad range of activities
including engineering, software development, IT-enabled services, logistics, distribution and
other tasks requiring high-skilled labour (OECD 2005a, 2006; Erber and Sayed-Ahmed
2005). It also includes business process outsourcing (BPO) with intra-business processes like
support and development being outsourced.
Figure 3.4: Sourcing and offshoring terminology
CONTROL
LOCATION
BETWEEN FIRMS
(OUTSOURCING)
NATIONAL
INTERNATIONAL
Domestic
Outsourcing
International
Outsourcing
OFFSHORING
WITHIN FIRMS
(INSOURCING)
Domestic
Supply
International
Insourcing
WITHIN COUNTRIES
BETWEEN COUNTRIES
Source: OECD, 2006
9
In original equipment manufacture (OEM) a finished product is made to the exact specification of the buyer or
the outsourcing company. Technological transfer takes place only to the extent required to manufacture. The
buyer company then imposes its brand and distributes the product as its own. Indeed Asia’s leadership in ICT
hardware production has much to do with offshore outsourcing, e.g. by PC makers such as Dell, Compaq, IBM
and HP.
12
New products, ICTs being a prime example, have opened up vast opportunities for the
sourcing of production. Equally important enabling factors for sourcing are new ways of
communicating (Internet, videoconferencing) and delivery (B2B, B2C). A crucial enabling
factor behind the recent sourcing trend is increased fragmentation of production. Recent
technological
developments,
resulting
in
the
previously
discussed
decrease
in
communication, computing and transport costs have enabled firms further to fragment and
divide their production processes into increasingly smaller sub-processes. Exploiting
economies of scale and focusing on core competencies are important motives behind
fragmentation, amongst others (OECD 2005a: 9). At the same time, the decomposition of the
supply chains into a number of self-contained parts (activities/production processes as well as
products) has also increased the use of services, such as R&D, engineering, communication,
transport, distribution and financial services. Trade in parts and components and the use of
third-party logistics (3PL) such as customs clearance and freight forwarding, have boomed
recently (OECD 2005a; UNCTAD 2005).10
Lower production costs are an important driver behind sourcing, especially in offshoring. To
take the example of IT services, reported cost savings of offshoring amount up to 40%. In
2004 US companies alone saved approximately US$11 billion by outsourcing to India (Erber
and Sayed-Ahmed 2005: 102). Yet the evidence is not all-conclusive. Other surveys indicate
more mixed results, with some companies even losing from offshore outsourcing (OECD
2006).
Offshoring has also become a main concern in the Western developed world. Calculations
show that the number of jobs that could potentially be affected through offshoring is
substantial. According to recent OECD (2006) estimates, 18.1% of total employment in the
US and 19.2% in the EU-15 could be affected (upper limit). Many if not most of these
potentially affected jobs are professional or high-skilled jobs.
3.5 Globalization and the changing roles of firms and governments
Along with an increasing trend towards outsourcing and offshoring, and fragmentation in
production, the world is also witnessing the rise of global and regional production networks
and global value networks. Production activities are increasingly carried out in different parts
10
Manufacturing and services have become increasingly intertwined, and it is increasingly difficult to categorize
firms as strictly manufacturers or service providers, especially where digital goods (e.g. software) are
concerned.
13
in the world, involving complex patterns of specialization in production, assembly,
communication, transport, distribution and marketing.
There are also signs that the value network configuration as a whole is gradually changing,
with MNCs being part of a complex system of partnerships, being linked together not by
ownership, but rather by shared information and a common strategy (OECD 2005a). In these
global value networks, SMEs are increasingly inserting themselves and becoming global
players themselves, forming strategic alliances and being less dependent on one single
leading firm. OECD data indicate that SMEs already contribute between 25% and 35% of the
world’s manufacturing exports. Strategic partnerships and the forming of global value
networks are important examples of the trend towards collaboration with competition – join
them if you can’t beat them.
The complex, transnational character inherent in global production and value networks
necessarily implies a growing importance of organization and coordination. Of particular
interest is the role of leading firms that govern many of the networks and enforce the
governing rules by which local producers – often microenterprises and SMEs – in the
networks operate. The influence of these network coordinators, usually global leading firms,
is huge and has major impacts on access to markets, acquisition of capabilities, distribution of
gains and the possibilities for governments to intervene and support (Schmitz 2006). MNCs
are the classic example of network governors and continue to play this role, particularly in socalled producer-driven chains (OECD 2005a). Producer-driven chains often manufacture
complex goods such as semiconductor chips or automobiles, significantly controlling both
backward (raw materials, components) and forward linkages (distribution and retailing).
Buyer-driven value networks on the other hand, however, operate more and more in
competitive global and regional production networks situated in various locations around the
world, and firms often being smaller than in producer-driven chains. Buyer-driven chains
arise mostly in labour-intensive industries, ranging from apparel, footwear, toys and wood
furniture, generally with a large manufacturer with a well-known brand name, a large
marketing firm or a large retailer playing the role of leading firm. Services ranging from
communication, transport, distribution and financial services and third-party logistics (3PL),
take on an increasingly critical role in international trade.
However both of these hierarchical forms of chain linkage are tending to recompose
themselves in more interdependent value networks, with two-way or multi-way flows of
14
knowledge and other resources, including those beyond national boundaries. This does not
appear to be simply dependent on the kind of sector involved, but the changing nature of
technological and economic circumstances. For instance, Taiwan’s position in regard to some
of its high-tech developments, such as TFT-LCD screens, is very different from the
centralized hub developed for microprocessors by Intel.
In this increasingly global context, the role of national states is changing as well. This in
particular holds for the way in which states can intervene in domestic markets and influence
the course of direction. On the one hand, states have an increasing role in establishing and
strengthening the knowledge economy and its four functional pillars innovation, education,
ICTs and the (underlying) economic and institutional regime (Dahlman and Utz 2005, see
WP 6 here). On the other hand, however, it appears that the room for proactive trade and
industrial policies to manage greater trade integration has been much reduced compared to
preceding periods (UNCTAD 2005a: 43). Active targeting support to infant or nascent
industries as was done by, for example, Korea during its economic catch-up to create
domestic forward and backward linkages would be less feasible nowadays. What is more and
more being done nowadays in terms of policy support is the use of tax instruments, for
example, to stimulate the participation in international production networks (ibid.).
Globalization implies governments being even more careful in trade and other policy
responses.
4. What is new about Asian growth – emerging trends and new directions
4.1 New centres of gravity and increasing intra-regional interdependence
One of the intriguing questions that accompanies the recent rise of China and India is how
and to what extent this has changed, and is going to change, established positions, both within
the Asian region and between Asia and the world. Part of the answer has already been given:
global export patterns have markedly changed over the last two decades, the rise of China and
the four Tigers having had an important economic, i.e. trade, impact on developed countries,
and even more so on developing countries. East Asian global exports expanded during 19852001 at an annual rate of almost 5 percentage points above the world trade average (Ng and
Yeats 2003: 5). Trade has been stimulated by changes in the global enabling context, such as
the overall decline in transport and communication costs, improvements in domestic
infrastructure and trade facilitation and opening up (see section 3 above), but has also been
15
stimulated by ‘Asian’ institutional innovations, such as special export processing zones,
bonded industrial warehouses and duty drawback schemes (ADB 2006: 271). Asia’s rise in
global trade has gone hand in hand with a rise in intraregional Asian trade (see Tables 4.1 and
4.2) and has led to a process of ‘natural’ trade integration in the East and South Asia region.
Closer examination of the development of Asian exports and export destinations over time
reveals a number of additional insights (see Table 4.1).
Table 4.1: Country exports and export destinations: development over time (%)
DESTINATION (% OF TOTAL EXPORT)
EXPORTER
COUNTRY
YEAR
TOTAL
EXPORT
(bn US$)
CHINA
INDIA
S.
KOREA
SINGAPORE
TAIWAN
JAPAN
ASEAN
minus
SINGAPORE
HONG
KONG
EU-15
NAFTA
REST
OF THE
WORLD
China
1989
1995
1998
2001
2004
52.9
148.8
183.7
266.7
593.2
-
0.3
0.5
0.6
0.7
1.0
0.8
4.5
3.4
4.7
4.7
3.2
2.4
2.1
2.2
2.1
0.6
2.1
2.1
1.9
2.3
15.9
19.1
15.9
16.9
12.4
2.9
4.6
3.9
4.8
5.1
41.4
24.2
21.1
17.4
17.0
9.7
12.9
15.3
15.4
16.8
9.2
17.7
22.2
22.3
23.3
16.1
12.0
13.4
13.7
15.2
India
1989
1995
1998
2001
2004
15.8
30.5
33.7
45.2
75.4
0.9
0.9
1.5
3.4
5.5
-
1.8
1.3
1.0
2.2
1.2
2.3
2.6
1.7
2.2
4.5
0.8
0.8
1.0
1.0
0.8
13.5
7.0
5.1
4.4
2.5
2.3
5.1
3.7
5.0
5.4
5.2
6.0
5.6
4.6
4.7
29.8
27.0
26.8
23.7
21.2
29.1
18.5
22.8
23.2
18.5
14.2
30.8
30.7
30.2
35.6
S. Korea
1989
1995
1998
2001
2004
60.5
125.4
132.7
149.8
253.1
n/a
7.3
9.0
12.1
19.7
0.7
0.9
1.3
0.9
1.4
-
2.5
5.3
3.1
2.7
2.2
2.1
3.1
3.9
3.9
3.9
21.8
13.6
9.2
11.0
8.6
3.9
8.9
8.5
8.3
7.3
5.5
8.5
7.0
6.3
7.2
13.1
12.4
13.8
13.1
13.3
37.2
21.5
19.6
23.7
19.5
13.2
18.5
24.6
17.9
17.0
Singapore
1989
1995
1998
2001
2004
44.8
118.2
109.9
121.7
179.5
2.7
2.3
3.7
4.4
8.6
2.1
1.6
2.2
2.3
2.3
1.9
2.7
2.3
3.9
4.1
-
3.0
4.1
4.3
5.1
4.6
8.6
7.8
6.6
7.7
6.4
21.9
28.8
23.9
27.0
21.5
6.3
8.6
8.4
8.9
9.8
14.1
13.4
15.9
13.4
13.7
24.3
18.9
20.9
16.3
13.8
15.2
11.8
11.8
11.1
15.0
Japan
1989
1995
1998
2001
2004
274.6
443.0
388.0
403.4
565.5
3.1
5.0
5.2
7.7
13.1
0.7
0.6
0.6
0.5
0.5
6.0
7.1
4.0
6.3
7.8
3.4
5.2
3.8
3.6
3.2
5.6
6.5
6.6
6.0
7.4
-
6.2
12.4
8.2
9.8
9.7
4.2
6.3
5.8
5.8
6.3
19.2
15.9
18.5
16.0
15.0
37.4
29.7
33.6
33.1
25.0
14.3
11.5
13.7
11.3
12.0
Hong Kong
1989
1995
1998
2001
2004
73.1
173.5
173.7
189.8
259.3
25.7
33.3
34.5
36.9
44.0
0.4
0.5
0.4
0.6
0.8
2.6
1.6
1.0
1.8
2.2
3.0
2.8
2.3
2.0
2.2
3.7
2.7
2.5
2.4
2.4
6.2
6.1
5.3
5.9
5.3
3.8
4.0
3.3
3.8
4.0
-
16.6
15.0
15.8
14.5
13.4
27.7
23.6
25.4
24.5
18.5
10.4
10.4
9.6
7.6
7.2
Source: Own calculations, based on IMF Direction of Trade Statistics Yearbook (vol. 1996 and 2005)
That China plays an increasingly strong locomotive role in global and Asian trade cannot be
denied. How its role in trade has evolved over the last decade is a matter of interpretation and
perception, depending on the eyes of the beholder. The Chinese perspective on what has
happened will no doubt differ markedly from the developed country perspective. And within
16
the group of developed countries, a clear distinction should be made between NAFTA and
the EU on the one hand and Japan on the other. The same is true for the NIE-4 and other
Asian economies. From a Chinese perspective, as Table 4.1 clearly shows, the real export rise
to NAFTA and the EU and NAFTA in terms of market share was already accomplished in the
1990s. The end of the 1990s signify a stabilization of its export shares to the Western
developed countries. But underneath, vigorous growth occurred, with a more than tripling of
overall exports in the period 1998-2004 alone. From an EU and US perspective, trade
developments did look even more explosive, given the fact that their growth path was very
different (see Annex 1 for the same table, but in US$ terms, which gives a very different
picture).
Large bilateral trade deficits with the US and most EU member states occurred; it is not
without reason that China’s export boost is sometimes dubbed as the ‘relocation of deficits’.
Japan is a case in itself: the current growth revival of Japan is in large part due to China, with
Japanese exports to China steadily rising since 1989, but rapidly so during the last three
years, by a factor of 1.7. China’s exports to Japan in terms of overall share have, however,
steadily decreased.
From a Chinese perspective, the world – and less so Asia – has become its stage. In 2004 the
share of Chinese exports with destination Asia, including Hong Kong and Japan, accounted
for almost 43%, against the EU and NAFTA with 40%. In 1989, these figures were 65% and
19%, respectively. This relative concentration according to destinations make China an easy
target for third-country protectionist measures, however, as Li (2005: 90) points out. Even if
these relative figures may be delusory because of the role of Hong Kong as re-exporter,
China’s leap forward in world trade is beyond question.
From an Asian perspective, China’s rise has definitely meant stronger intra-regional trade
interdependence. All other Asian countries show a strong growth in their export shares with
China. Korea’s export share with China more than doubled in less than 10 years and is now
almost 20%. While intra-regional trade dependence has risen, it has so in a biased way. This
is not to say that China’s share of world trade rise by nearly five percentage points in the
period 1990-2002 and an even stronger rise since has not eroded the position of regional
exporters in third country markets, as Weiss (2005: 55) remarks. By 2000 all Asian
economies faced some form of ‘threat’, defined as a relative or absolute loss of market share
elsewhere. Yet the countries with the least sophisticated export structures such as Malaysia,
17
Thailand and the Philippines faced the most direct threat (absolute loss). The ‘reverse threat’
where countries gained relative to China appeared modest in all cases.
The emergence of China as the number one trade power in the region has markedly changed
its role, both within Asia and in the old Triad of US-Europe-Japan. The relative importance
of China as a destination for regional exports has significantly increased since the mid-1980s,
and accelerated since 1995. In the late 1990s one important explanatory factor was China’s
maintenance of a stable fixed exchange rate, in the face of major devaluations in other Asian
currencies during the Asian crisis. The combination of a strong currency and strong growth
appears to have contributed to the re-orientation of Asian regional trade (Ng and Yeats 2003).
NAFTA and Japan experienced the largest competitive losses in East Asian markets, and this
trend has not stopped but rather accelerated over the last three years.
What about India’s role? India’s merchandise exports (pointedly excluding services) in
absolute terms appear small even if compared with Singapore and Hong Kong. Its mark on
South-West and South-East Asian trade is far less distinct than that of China. What is
interesting is that India’s exports appear far more diversified in terms of end destination:
almost 36% going to other parts in the world than the developed countries, China and the four
Tigers. By the same token, India appears less well integrated within the East and South Asian
region. Although its trade share with China has risen, its exports to NAFTA and the EU are
far more important, with 6% against 19% and 21%, respectively. India appears not to be
linked to any particular trade bloc. Over the years India has become more diversified in terms
of export destinations, with trade to the developed countries taking a decreasing share in
overall exports and its export share with Japan even declining substantially, in 2004
accounting for only 2.5%, down from 13.5% in 1989. India’s trade with Singapore and
ASEAN has doubled since 1989. India’s real export contribution lies outside the scope of
merchandise exports. Its export boom has so far primarily been confined to software and ITenabled services. The measurement of trade in services and software is still in an infant stage,
however. Publicly available WTO data on trade in services has only been started since the
last decade, with time-series on a highly aggregate level and without distinguishing export
destinations. When transport and travel services are subtracted, India’s commercial services
exports, primarily consisting of information technology services, grew from slightly over
US$ 2 billion in 1996 to a staggering US$ 28.5 billion in 2004 (WTO International Trade
Statistics).
18
4.2 Increasing intra-regional trade and investment in East and South Asia
As Table 4.2 shows, intra-regional trade as a share of East Asia’s total trade has risen from
35% in 1980 to 54% in 2003, which is comparable to NAFTA’s intra-regional trade, but less
than the intra-EU trade share. However, when measured in terms of intra-regional trade
intensity, thereby more aptly controlling for a region’s relative size in world trade, we see
that the Asian economies are on comparably high levels as NAFTA, with some but little
difference between the different Asian country groupings.
Table 4.2: Intra-regional trade shares and trade intensities: a comparison between
different world regions
INTRA-REGIONAL TRADE SHAREa
REGIONS
East Asia-15, including Japanc
Emerging East Asia-14c
NIE-4
ASEAN-10c
NAFTA
European Union-15
1980
1985
1990
1995
2000
2001
2002
2003
34,7
21,6
7,7
18,0
33,8
52,4
40,2
29,1
10,7
20,3
38,7
52,5
45,6
36,4
14,3
18,9
37,9
58,6
55,5
43,7
18,1
24,1
43,2
56,8
54,0
43,4
16,4
25,7
48,7
62,2
55,4
45,6
17,5
24,1
49,0
62,1
57,3
47,5
17,1
24,4
48,3
62,4
54,0
44,1
16,1
24,0
46,0
64,4
INTRA-REGIONAL TRADE INTENSITY INDEXb
REGIONS
East Asia-15, including Japanc
Emerging East Asia-14c
NIE-4
ASEAN-10c
NAFTA
European Union-15
1980
1985
1990
1995
2000
2001
2002
2003
2,5
2,9
2,0
4,8
2,1
1,4
2,4
3,2
2,1
5,7
2,0
1,5
2,5
3,2
2,1
4,4
2,1
1,5
2,3
2,7
2,0
3,7
2,4
1,6
2,2
2,4
1,7
4,1
2,2
1,7
2,5
2,8
2,1
4,1
2,3
1,7
2,5
2,8
2,1
4,2
2,4
1,7
2,2
2,3
2,0
4,1
2,5
1,7
Source: Kawai, 2005.
a
The intra-regional trade share is defined as Xii / {(Xi.+X.i ) / 2} where Xii represent exports of region
i to region i, Xi. represents total exports of region i to the world, and X.i represents total exports of the
world to region i.
b
The trade intensity index is defined as [ Xii / {(Xi.+X.i ) / 2}] / [{(Xi.+X.i ) / 2} / X..] where Xii
represent exports of region i to region i, Xi. represents total exports of region i to the world, and X.i
represents total exports of the world to region i, X.. represents total world exports.
c
East Asia-15 includes Emerging East Asia-14 and Japan. Emerging East Asia-14 includes the Asian
NIEs (Hong Kong, Korea, Singapore and Taiwan), nine ASEAN members (Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand and Vietnam) and China. ASEAN-10
includes Singapore.
d
Computation is based on exporting countries' export data, except for Taiwan where importers'
import data are used when necessary.
A major driver of intra-Asian market-driven trade integration is increased intra-industry
trade, most importantly generated by MNCs (Kawai 2005: 31). East Asian trade integration
has gone hand in hand with major FDI flows, contributing to an even more pronounced
19
integration effect. An important share of this mutually reinforcing FDI-trade nexus, as Kawai
(2005: 32) points out, has come from firms in the major developed economies, with the US,
Japan and the EU accounting for 16%, 12% and 11%, respectively, of cumulative FDI
inflows in East Asia11 over the period 1990-2002. US firms have been particularly active in
the NIEs, most importantly in Singapore and Taiwan, whilst EU and Japanese firms have
been most active in both NIEs (14% and 15%) and ASEAN (22% and 18% respectively).
Asian NIE firms, however, lead the FDI inflows in ASEAN (in particular Indonesia,
Malaysia, Vietnam) with 24%. Almost half of FDI inflows into China have come from Hong
Kong (33%), Taiwan (7.5%), Korea (5%) and tax havens like the British Virgin Islands,
Cayman Islands and Western Samoa, against 10% by the US, almost 8% by Japan, and 6%
by the EU (OECD 2005: 35; Kawai 2005: 33). While there are indications of increasing
interdependence between East Asia and India (Asher and Sen 2005), there is no evidence of
an economy-wide FDI-trade nexus in India. Most Indian FDI went to services, electronic and
computer industries (Sharma 2003; Wei 2005). Although detailed data FDI inflows to India
by individual countries are not available, FDI approvals suggest that Korea, China, Japan and
Singapore are significantly investing in India. Portfolio investment from foreign institutional
investors accounted for US$ 60bn by the end of 2004 (Asher and Sen 2005: 17).
4.3 Selected new directions and trends in Asian development
With the emergence of China and India as major low-cost and increasingly high-tech
exporters in the Asian region, a ‘natural’ process of refocusing and repositioning is occurring
throughout the Asian region, East and South-East Asia in particular. Refocusing should not
only be seen as a reaction to the rise of China and India. Other factors, including the East
Asian financial crisis,12 have also mattered in the changing of course and direction. An
important part of this refocusing and repositioning is the outcome of sheer market forces, and
the consequence of global and regional relocation of economic activity and associated
investment, including the reconfiguration of supply chains (sourcing, offshoring) and
associated investment, by MNCs and (increasingly) SMEs. However, the role of the state in
this change of course and direction should not be ignored. Although strong differences
between countries exist and generalizations are hard to make, we observe an active and
deliberate interventionist role by most Asian governments in our sample, with strategic
11
Asian NIEs, ASEAN and China.
The Asian crisis indeed made Singapore and Hong Kong adopt a policy of upgrading exports by encouraging
production of high-technology products (Ng and Yeats 2003: 58-9).
12
20
choices being made in the search for new strengths and opportunities, not only by reforming
education and S&T systems and promoting informatization strategies, but also through active
support of certain industries and a preference for technology-led development. ‘Picking
winners’ – although not new in the Asian context – has taken on new dimensions, especially
where it comes to the support of new technologies, with the clear risk of misidentifying and
supporting the ‘wrong’ emerging technologies.
Increasing focus on high-tech, value-added, knowledge and innovation
Most literature on East Asian industrial development and technological upgrading has
emphasized the idea of catching up through the ‘capture’ of technologies and strategic
innovation where countries gradually move up, from ‘duplicative imitation’ via ‘creative
imitation’ to ‘innovation’ stages of development (e.g. Kim 1997). The early stage of
economic development in South-East Asia was not radical or R&D-based, but instead
incremental and driven by the needs of competitive manufacturing. Innovation was of the
continuous
improvement
variety,
including
technical
process
innovations
and
organizational/managerial innovations (Hobday 1996). To date, the more advanced Asian
economies seem to have passed that stage and instead are moving on to or are already at the
frontier of technological development. But India and China follow suit. Chinese development
in particular shows a unique capacity for leapfrogging while shifting from previous
specialization in labour-intensive production of low-priced products to production of higher
quality than in the rest of South and East Asia (Kondo 2004). Other countries like Korea also
exhibit successful examples of leapfrogging, e.g. in CDMA mobile phones, D-RAMs and
automobiles (Lee and Lim 2001). The capacity for leapfrogging is strongly enhanced by the
trends of globalization and the overall decrease in communication, computing and transport
costs, amongst others. But science and technology, and creativity, are vital, especially in
path-creating and stage-skipping forms of leapfrogging.
East Asia’s production and trade pattern shows an increasingly large share of skill- and
technology-intensive manufactured goods. We try to capture this in Table 4.3 by using data
on ‘high-tech exports’ as defined by OECD sector, though the OECD definition is itself very
misleading, as many of its ‘high-tech sectors’ incorporate large elements of low-tech
production (and exports) (von Tunzelmann and Acha 2005). China’s rise as exporter of hightech manufactures is nevertheless undeniable, with a doubling in share since 1998, and
21
already almost comparable to the more advanced countries in the region.13 However, such
development paths cannot be generalized to India with its lower level of infrastructure and
rigid commodity markets (Sharma 2003: 436). India’s role as high-tech exporter of
manufactured goods is limited and has not increased over time. Yet as an exporter of software
and IT-enabled services, its rising star is similar to that of China (see above and WP 4.5 on
India).
Table 4.3: High-technology exports as percentage of manufactured exports
COUNTRY
China
India
South Korea
Singapore
Taiwan
Hong Kong
Japan
1995
1998
2000
2002
2004
12.9
5.1
29.3
61.5
30.5
21.8
25.7
16.9
4.6
28.1
62.6
35.7
23.0
23.8
20.6
5.0
38.1
63.6
41.0
26.4
24.7
26.6
6.0
35.6
60.4
38.8
31.3
21.7
32.3
35.9
58.8
35.2
36.8
20.2
Source: Own calculations based on WTO International Trade Statistics.
Notes: high-technology exports defined as products with high R&D intensity, comprising
pharmaceuticals and office and telecom equipment (electronic data processing and office equipment,
telecommunications equipment, integrated circuits and electronic components, automotive products).
Today, Asia’s five leading exporting countries (China, South Korea, Taiwan, Singapore and
Malaysia) account for more than one-fourth of world electronics manufacturing output (Ernst
2006: 30). Intra-regional exports of electrical machinery – comprising microcircuits and
office machinery and equipment – accounted for one-fifth of total value of product exports in
2001, doubling since 1995 (Ng and Yeats 2003: 45), with China taking a strong lead. By
2004 China’s exports of parts of office machinery (SITC 7599) had risen by a factor of 8
since 1995; parts of telecom equipment (SITC 7649) 5.5 times; printed circuits and parts
(SITC 7722) 12 times; peripheral control units (SITC 7525) 25 times; and high-level
microeconomic circuits (SITC 7764) 26 times, with a quadrupling since 2001. Similar but
slightly less explosive developments are found in electronic power machinery (3.5 times),
radiotelephonic equipment (7 times), sound recorders (6 times), to mention but a few. Annex
2 provides a detailed overview of the net trade development developments in high-tech office
and telecom equipment segment. In other business domains, like textiles, export
developments have also been fierce, with a doubling or tripling within the period 1995-2004.
13
It should be noted though that the intra-Asian trade in parts and components might have an inflating effect on
these figures. This partly becomes clear when we look at the net trade, i.e. exports minus imports, in parts and
components (see Annex 2).
22
Changing but leading roles of foreign and domestic MNCs
Firms, most importantly MNCs, are a critical driver behind the increasingly high-skill and
high-tech content of Asian production and exports. Asia is the number one sourcing
destination of the world and responsible for a considerable part of the ongoing global
relocation of economic activities. The emergence of global production networks in Asia as
well as the rise of a high-skill, high-tech services industry (see discussion to follow) are
important manifestations of this drive towards further globalization.
Foreign MNCs and increasingly also foreign SMEs find their way to Asia, with low costs
(labour, economies of scale), potential market size (demand), availability of skilled personnel
and presence (‘being there’) among the main motives. But domestic Asian companies led by
MNCs increasingly started looking and investing westward, to both developed (EU and the
US) and developing countries (South America, Africa). In 2003, of the top 50 non-financial
developing country MNCs ranked by foreign assets, 39 were of Asian origin, the majority
being based in the NIEs, with Hong Kong, Singapore, Taiwan and Korea accounting for 10,
9, 8 and 3 MNCs, and China and India accounting for 5 and 1, respectively (UNCTAD 2005).
For example, Hong Kong’s Hutchinson Whampoa ranks number one in the world in terms of
number of foreign affiliates (UNCTAD 2004 data). Domestic Asian MNCs increasingly take
on leading and integrative roles in global supply chains, as key drivers of new global
corporate structures.
On the whole, a global trend of establishing overseas R&D outposts, of international mergers
and acquisitions (M&A) and of forming strategic alliances can be observed since the 1990s.
This trend equally applies to domestic Asian MNCs, partly also a reaction to technology
licensing getting more difficult (Lee and Lim 2001: 476). Foreign firms continue to be
important, however. This is particularly true for a country like Singapore (see below), but
also for China. In China, foreign-controlled companies dominate exports by accounting for
55% of all overseas sales; the foreign share in the domestic market is considerably less,
accounting for 13%. Foreign dominance is especially big in the electronics and telecoms
industry with an export share of almost 85%, in plastics (70%), electrical equipment (almost
60%) and leather products (more than 50%). Only in the garment and textiles industry are
private domestic companies leading in exports (OECD 2005). There is no sign that foreign
involvement will come to a stop. On the contrary, future inward flows of FDI are expected to
shift from the efficiency-seeking kind, producing for foreign markets, towards the marketseeking kind hitherto closed to foreign competition and in service sectors such as finance
23
(Dullien 2005). Overall, the private sector – foreign and domestic companies taken together –
has become the main driver of growth in productivity and new jobs. Output by privately
controlled companies now represents almost 60% of business sector value-added, with the
share of the state-controlled sector steadily decreasing (OECD 2005: 80-1).
Global and regional production networks
An important underlying determinant of the aforementioned FDI-trade nexus in East Asia is
the recent trend of establishing global and regional production networks and supply chains by
MNCs, also known as international production sharing (Kawai 2005; Ng and Yeats 2003; see
also section 3). The establishment of these supply chain networks – to catch two terms in one
– has not only stimulated vertical intra-industry trade in parts, components, semi-finished and
finished products in the East Asian region, but also stimulated engagement with trade itself.
As Ng and Yeats (2003: 56) observe, trade in parts and components nowadays plays a key
role in the formulation of strategic trade policy, often serving as a means of penetrating
markets for high-tech, high-skill products. Trade in parts and components has grown steadily
and accounts for over one-quarter of all East Asian intra-trade in manufactured trade.
Production sharing often involves specialized (often) labour-intensive activities within
vertically integrated international manufacturing activities. The inter-country division of
labour observed in such production networks is that low labour-cost countries usually
function as hosts for assembly, being large importers of parts and components, whereas the
more advanced high labour-cost countries serve as ‘hubs’ of production sharing operations,
being large exporters of the very same parts and components. Since the mid-1990s Japan has
played a central role as ‘hub’ of production sharing operations in East Asia. By 2001, Japan
was the base of about one-third, worth US$ 39 bn, of all regional exports of components for
assembly. Over 70% of Indonesia’s regional imports of components originated from Japan,
and corresponding shares for Korea, the Philippines, and Taiwan exceeded 50%. Indonesia,
Malaysia, the Philippines, and increasingly China thus functioned as major assembly
platforms for electronic semiconductors, valves, tuners and other components. By 2001 China
was already the second largest regional importer of parts and components, behind Hong
Kong.
Trade in parts and components has played a key role in the formulation of trade policy in the
region, with trade in components often seen as a first step towards penetrating markets for
high-technology and high-skill products (Ng and Yeats 2003: 56). China, for example, has
24
strongly encouraged the imports of parts and components by providing tariff exemptions and
other benefits. Latest developments in the trade of parts and components indicate that China
is moving up the value ladder and that the share of domestic value-added in China’s
processing exports, especially in electronics, is on the rise, in particular those traded between
different foreign affiliates located in China (Lemoine and Ünal-Kesenci 2004). One of the
drivers behind this trend is the recent massive offshoring of chip design away from developed
countries to leading Asian electronics countries, including China.
Leading high-skill services industries
Offshore outsourcing and international in-sourcing of services is a relatively new
development, covering a broad range of activities including engineering, software
development, IT-enabled services, logistics, distribution and other tasks requiring highskilled labour (see section 3). In Asia, and in particular India and China, the current global
offshoring trend has been instrumental in the emergence of a high-skill, high-tech and highvalue-added services industry. An important part of global services offshoring concerns the
outsourcing of whole business processes (e.g. support and development), so-called business
process outsourcing (BPO). In 2004 India business process offshore outsourcing (BPOO)
services accounted for $3.6 billion in revenues, employing 245,000 people. Most of them live
in and around cities like Bangalore, Mumbai and New Delhi (UNCTAD 2005c: 16). This is
explored further in WP 4.5 and the Special Study SS2. Key factors in making offshoreoutsourcing decisions include costs, available skills, and patent regimes in host countries, as
well as a host of other factors, including physical and IT infrastructure, legal and security
issues, time zone differences, distance, culture and language (e.g. Rao 2004). Evidence
indicates that international sourcing of IT-enabled services is growing rapidly worldwide,
with India emerging as number one supplier (OECD 2005b). One of the main factors that
makes India more favourable than other countries, including China, is the pool of workers
that are fluent in English (Rao 2004: 19). In terms of costs and skills, India is still the
favourite destination for offshore outsourcing, followed by China and Malaysia (AT Kearney
2004; McKinsey Global Institute 2005). But once it comes to combining intellectual property
protection, culture adaptability, infrastructure and country risk, Singapore tops the list and
ranks way above other Asian countries (AT Kearney 2004: 10).
The outsourcing and offshoring trend also applies to R&D and design activities and can be
observed in a variety of sectors, including electronics and ICTs, food, pharmaceuticals and
25
other business domains. In India, to take an important example, foreign MNCs were already
active in R&D in the 1970s. In 1986 Texas Instruments established a software support and
design facility for its semiconductor business in Bangalore, the first centre in its kind in India,
soon followed by Astra (biopharmaceuticals, 1987), and in the 1990s Motorola
(telecommunications software), Microsoft (computer operating systems), STMicroelectronics
(semiconductor design), Daimler-Benz (avionics) and Pfizer (biometrics) (UNCTAD 2005:
167). Nowadays more than 100 of the Fortune 500 companies have an R&D centre in India,
accounting for a significant proportion of FDI. East Asian firms have been less inclined to set
up such centres in India (Asher and Sen 2005: 16). Another example is Taiwan: Taiwanese IT
firms have now scaled down their local operations and handed over parts, or all, of their
manufacturing functions to offshore sites in China with its significant pool of low-cost R&D
personnel. R&D activities in Taiwan nowadays focus more on product development, new
process technology and hardware, whilst its R&D in mainland China is manufacturing R&D,
software, and basic research (Chen 2004).
In electronics and ICT design massive relocation to (non-Japan) Asia is under way. Taiwan
has emerged as a primary new location for chip design followed by Korea, with rapid growth
in China, India, Singapore and Malaysia (Ernst 2005: 52). Asia is the fastest-growing market
for electronic design automation tools, growing 36% in the first quarter of 2004, against only
5% in North America, 4% in Europe, and 2% in Japan. The attractiveness of East Asia,
especially China, as a new location for chip design stems from a combination of factors,
including the low wages for skilled labour, policy incentives in the form of tax rebates,
proximity to providers of design and engineering support services and a rising number of
end-users in Asia itself (UNCTAD 2005a: 67-8). What has greatly enhanced the sourcing of
design activities is the recent adoption of modular design methodology (an approach
pioneered in the automobile industry two decades ago) which has facilitated the re-use of
design building blocks, and thus the reintegration and geographical dispersion of design
teams to multiple locations with different, yet complementary, specialization profiles.
Towards a knowledge-based economy - strategic repositioning within the Asian region
Policies and markets are more than ever before intricately related. Where markets for
products and factors of production globalize, policies necessarily have to adapt. Policy
differentiation and competition between countries can be instrumental in strengthening
industrial competitiveness, yet with the lurking danger of a counterproductive race to the
26
bottom. It could hence be beneficial for countries to cooperate and to establish alliances and
common institutions for supranational governance. What is currently observed in the Asian
region is indeed an increasing trend towards collaboration plus competition between
countries. Where firms increasingly seek global partnerships and form flexible value
networks (see section 3), states look for closer cooperation and integration through
Preferential Trade Agreements (PTAs) and other forms of inter-country cooperation, e.g. in
global fora such as the G-20. At the same time, they also deliberately seek to create firstmover advantages and help finding attractive market niches by differentiating and renewing
their policies relative to other countries.
Provoked by the East Asian financial crisis and the rise of China and India, most countries in
the region started to rethink and readjust their development strategies in the late 1990s. The
more advanced Asian economies, especially, recognised that it would be difficult to outcompete the new Asian giants on labour costs and economies of scale, and realised that their
manufacturing industries were under threat, particularly the low-skill low-technology parts.
Since the late 1990s the NIEs and Japan have been strategically repositioning themselves, by
embracing strategies to stimulate the knowledge economy, to facilitate a change towards high
value-added products and services and migrating ‘upstream’, and to promote a more balanced
and fuller integration into the global and regional economy. In most countries, these reforms
are well under way.
What is striking is the strong emphasis on technology in forging ahead. While almost all
Asian countries view science and technology as vital to achieving economic and political
objectives, this is especially true for South Korea, China, Japan and India (Kang and Segal
2006; Suttmeier 2005). Technological development is largely driven by techno-nationalist
government policy, with a desire by the Asian nations to free themselves from dependence on
Western technologies. What is striking is that a large share of new efforts in science are
devoted to outer frontiers where the West has no clear dominant lead; in sectors where
Western companies reign, locally-owned initiatives have been actively promoted (Kang and
Segal 2006).
What we observe in the region is a variety of repositioning initiatives. In terms of measurable
progress, a clear split still exists between China and India on the one hand and the more
advanced economies on the other. The latter are progressing fast and are already well ahead
of others, catching up rapidly with the Western developed economies. An important policy
27
focus in the more advanced Asian economies, including Japan, is on improving the
interaction between the research system and the business sector, on strengthening Intellectual
Property Rights (IPR) regimes, on boosting Science & Technology (S&T) performance and
on supporting creativity. China and India are also making progress, but policy reform tasks
here are much wider and more embracing, and include improving enrolment rates in
secondary schools, enrolment rates and quality in tertiary education, and increasing
expenditures on the performance of the S&T system at large, apart from other challenges in
strengthening economic fundamentals and underlying economic and institutional regimes.
The potential of better targeting and streamlining existing policy instruments, as well as
joined-up policy potential in existing – sometimes unintendedly chaotic – policy mixes seems
evident here.
The case of Singapore is instructive and illustrative for the policy efforts of the more
advanced Asian countries. It is discussed here in somewhat more depth as a major example of
successful readjustment within a limited time frame (see also WP 4.4). Where the
Singaporean state continues its active role in formulating industrial and technology policies,
it has recently reinvented its own model. Singapore has been successfully able to implement
a strategy of becoming a hub of technological change, as evidenced by the large number of
IT, financial services, biomedical, pharmaceutical and food-processing multinational
corporations that have set up R&D units, attracted by world-class research facilities
(UNCTAD 2005: 295). As UNESCAP (2006: 118) observes, an important element of
Singapore’s strategy is to collaborate with China and India rather than compete with them –
most importantly by investing and/or buying shares.
4.4 Growing interdependence and the rebalancing of global power
Increased intra-regional trade, FDI and other financial flows have led to a ‘natural’ process of
rising economic interdependence and integration in the East Asian region. China has become
an economic superpower and is – as the region’s new locomotive – gradually taking over
Japan’s leading economic role. So far China’s rise has evolved as a dynamic but positive-sum
game for the East Asian region. This is not to say that the necessary process of adjustments
and refocusing has been without pain. Yet the NIE-4 and Japan have so far been able to
actively redefine their roles and have sought new ways to withstand the fierce competition
from China and other low-cost producers in the region. The position of India, in terms of
growth and potential China’s equal, is a very different one, at least from an Asian trade
28
integration perspective. While India’s trade and direct investment flows with ASEAN and
China have definitely risen since 1995, its importance in relative (share) and absolute (US$)
terms is still minor, and its trade pattern in terms of export destinations very diversified. In
terms of economic interdependence, India is a still a relative outsider to the East Asian club
of countries.
In addition to this ‘natural’ process of growing economic interdependence, the Asian region
has witnessed a strong rise in Preferential Trade Agreements (PTAs) (Tourk 2004; Kawai
2005; Srinivasan 2004). By 2005, 27 of such agreements had been notified to WTO, another
46 non-notified agreements had been agreed and a further 42 were under negotiation (ADB
2006: 276). In a search for closer and deeper regional integration and cooperation and as a
response to the 1997/98 financial crisis and changing economic realities, many East Asian
governments pursued the formation of such PTAs, mostly in the form of bilateral or subregional ‘free’ trade agreements.14 The main motive for this move towards further integration
has been economic, unlike other existing forms of economic regionalism, such as the EU and
NAFTA, which primarily started out as political projects (Tourk 2004). East Asian
policymakers increasingly believe that they need to secure a bigger market in order to exploit
scale economies and dynamic efficiency gains and that PTAs are instrumental in achieving
this (Kawai 2005). What is interesting in this proliferation of PTAs is the apparent underlying
game for power and hegemony between Japan and China, and to a certain extent also India.
In response to an economic partnership agreement (EPA) between Japan and Singapore in
2002, for example, China started negotiations on a free trade agreement (FTA) with ASEAN.
Japan subsequently started negotiations with ASEAN to conclude an EPA, while at the same
time embarking in bilateral negotiations with other Asian nations. In 2003, AFTA (the
ASEAN Free Trade Area) proclaimed itself the establishment of an ASEAN economic union
by 2020.
As Kawai (2005: 40) points out, there have been domino and bandwagon effects among
Japan, China and Korea in their competitive drive for regional FTAs/EPAs with ASEAN. In
the mean time, China has also proposed an FTA among China, Japan and Korea. A regionwide FTA including ASEAN and China, Japan and Korea (ASEAN+3) has also been
14
Apart from establishing PTAs, the East Asian economies have also embarked on initiatives for intra-regional
financial arrangements, including a regional support facility through the 2000 Chiang Mai Initiative; the
establishment of processes for regional economic surveillance and policy dialogue (e.g. the ASEAN+3
Economic Review and Policy Dialogue); and the development of Asian bond markets, including the
establishment of the Asian Bond Fund (ABF) in 2003, and other initiatives (Kawai 2005).
29
mentioned. The drive toward regional and bilateral trade agreements is not limited though to
East Asia, but includes also other countries, including the EU and the US. India has so far
predominantly sought PTAs with neighbouring South Asian nations, including Bhutan, Nepal
and Sri Lanka in the late 1990s and Afghanistan, Thailand and Singapore in 2003 and 2005,
respectively. A PTA between India and ASEAN is under negotiation (ADB 2006).
The advantage of bilateralism over multilateralism lies in its speed and scope. Yet whether
PTAs would indeed promote further intra-regional trade is at least subject of debate. The
experience of ASEAN shows that more internal trade need not be the outcome.15 Srinivasan
(2004) goes further by arguing that “many such agreements, though called ‘free’ trade
agreements, have little to do with free trade” and instead are incompatible with WTO
multilateralism. The rules of origin for preferential treatment are generally very complex and
enhance protectionism. A further proliferation therefore could obstruct rather than promote
global trade. That is, unless action is taking to ensure that trade preferences of these
arrangements are extended to all members of WTO on an MFN basis within a certain period
of time (Srinivasan 2004: 632). The fact is that China is actively promoting an East Asian
Free Trade Area. Yet with the US and the EU still being important markets, an Asian FTA
without these two would not be a ‘commendable idea’ as Kawai (2005: 49) puts it. Kawai
sees three other possible impediments to deepening economic integration and advancing
economic regionalism:
(i)
concern about conflict with global economic systems governed by the WTO and
the IMF;
(ii)
diversity and heterogeneity in economic and social development in East Asia
itself, and
(iii)
lack of political consensus and mutual trust.
The global role of China and India in international organizations and global fora has no doubt
increased, and will continue to grow, as will their leadership role among developing
countries. However, the question of how this global shift in economic and political powers
will evolve further has not been resolved as yet.
That the current (quasi-)unilateral world order, under the economic and military hegemony of
the US, is under threat is clear. China is already now challenging US ‘soft power’ – in what
15
A reason could be that the margin of preferences offered by tariff concessions has been too small to
compensate firms for complying with the necessary rules of origin (ADB 2006: 74).
30
Kurlantzick (2005: 28) aptly summarizes as “the combination of economic vitality, cultural
pull, trade and diplomacy, that as much as military force, has made the US the pre-eminent
force in the world”. Yet how, when and even whether this transformation into a de facto new
multipolar order – whatever its benefits – will occur is far less clear. Some foresee the
emergence of four substantial poles of power in global governance, notably the US, China,
India and Europe, by 2025-2030 at the latest (Humphrey and Messner 2006).
The increasing ability and power of China and India to set the rules of the game is also visible
in the technical and economic realm, by the influencing and setting of global standards and
by organizing and coordinating global and regional value networks (Schmitz 2006). The
ability to set global standards applies not only to new technical and user standards for new
generation devices or infrastructures, such as mobile phones, wireless communications or the
Internet, but also to Intellectual Property Rights policies and their enforcement.
Technological capability and market size play obviously a big role in establishing dominant
standards. Taking on a lead role in the coordination of global value networks means voice
and control over access to markets and intellectual property, acquisition of capabilities and a
central role in the distribution of gains. There are indeed signs that especially China has
embarked on a ‘techno-nationalistic’ quest for technological leadership and independence,
the promotion of its own wireless communications standard WAPI (Wireless Authentication
and Privacy Infrastructure) being a notable example (e.g. Suttmeier 2005), as are new
standards in 3rd generation mobile phones and Radio Frequency Identification. Both the
setting and influencing of global standards and the coordination of global value networks
could have great implications, both for the generation of income and wealth in other parts of
the world, including the Western developed countries, and for the direction of technological
development itself. In the economic realm, similar considerations apply, most importantly in
the capacity to affect key foreign exchange rates with the dollar as prime example (see
section 4.5).
4.5 The sustainability of Asian growth
Asia’s rise holds the promise of increasing incomes, wealth and prosperity for all and an
influential role as a superpower on the global stage. But what do we know about this future?
Can current growth levels really be sustained over a longer period of time? And what about
today? The current distribution of growth in Asia is such that disparities in income and
wealth between urban and rural regions and between households are on the rise rather than
31
declining. And this is not to mention the environmental and social by-products of growth,
ranging from excessive environmental degradation and the inefficient use of vital nonrenewable resources to increasing unemployment among the young and the low-skilled, and a
concomitant widening social gap. This section unavoidably returns to the domestic scene
within the countries of concern, albeit in a globalizing context. We pass over aspects that are
exogenous to international circumstances, such as demographic trends, to focus on those
intertwined with global events.
While human resources are vital for confidently facing the future, so is the availability of
energy, metals, other commodities and even water. The rise of China and India – in terms of
industrial growth and living standards – has already led to a substantial and increasing global
demand for various natural resources. China’s imports of fuels and mining products have
increased more than eight-fold since 1995, and almost tripled since 2002(!). For India a
similar development applies, with a tripling in the period 1995-2004, and a near-doubling
since 2002. India now imports as much fuel and mining products as China did only a few
years ago. China now is on comparable absolute import levels as Japan only two years ago.
China’s import demand and export growth have been so great that they even led to shortages
in global shipping capacity (Kaplinsky 2006). China’s import of metals have increased
substantially, not only because many of its exports are metal-based, but also because of
important investment in metals-intensive domestic infrastructure. Energy imports, in
particular oil, have soared explosively. Driven by strengthening demand and concerns on
future supply, oil prices have doubled over the past four years from US$24.50 per barrel in
2001 via US$55.00 in 2005 (UNESCAP 2006:5) to almost US$70 in 2006, and have
exacerbated global imbalances (IMF 2006: 91). China has grown increasingly dependent on
energy imports, consuming on a daily basis 6.5 million barrels a day, of which less than 4
million barrels are produced domestically. India, also currently a net energy importer, is
expected to import almost three-quarters of its oil and gas needs by 2010. Almost half of
India’s trade deficit is already due to oil imports, yet the country’s high development requires
rapid growth in the energy sector (Asif and Muneer 2006: 16-18). It is no surprise therefore
that China and India have lately become very active in global search efforts for securing their
future energy and other resource needs. China’s appetite for raw materials, for instance, has
led to important investments in commodity production of steel, iron, agriculture and forestry
in Brazil and oil in Venezuela already, with another – unconfirmed but reported – US$50bn
to be invested in Latin American road and port infrastructure (Gottschalk 2006).
32
At the same time, current resource use is not as technically efficient as it could be, and
neither is the rate of recycling, especially in China. This, but more importantly the strong
rising overall production and consumption levels throughout Asia, has caused a strong rise in
pollution and environmental damage, with the region rapidly becoming the largest global
source of greenhouse gas emissions (Asian Development Bank 2005: ix). China alone
accounts for 12% of the world’s total carbon dioxide emissions, second only to the US.
Meanwhile India doubled its per capita emissions from 0.5 metric tons in 1980 to 1.2 metric
tons in 2002, making it responsible for almost 5% and growing fast (UNDP 2005: 289-91).
These figures may not seem as alarming relative to sheer population size, nevertheless the
pace and its seemingly unstoppable character deserve utmost caution for that very reason.
Environmental problems and climate change may have a wide range of impacts for East
Asian region due to its geographical and economic diversity, ranging from flooding, bad
harvests to increases in health-care costs. The poor are most likely to be most vulnerable to
environmental hazard (World Bank 2006: 66-7), health-care costs associated with the effects
of pollution being a major and increasing burden (ADB 2005: ix).
The human face of growth and especially of growing inequality are of increasing concern,
and could even imperil growth itself. A number of Asian countries are experiencing
increasing inequality in tandem with high growth, including India and China, as well as the
middle-income developing economies of South Korea and Thailand. This trend is relatively
new. Until the late 1990s, Asia had managed to retain a significant degree of equity along
with income growth (UNESCAP 2006; UNDP 2005), but not any longer (Van der Zee and
Gutomo Putra 2006). In 2001, 20% of the population in China consumed 50% of all
consumption. Combined with a Gini index of 45%, inequality in China has risen to top levels
in the Asian region (UNDP 2005: 270-3), even if poverty levels have been drastically
reduced. Although figures for India are less extreme, they are also up from 41% in 1990
(World Bank 1995: 220) to just over 43% in 1999 (UNDP 2005: 272).
Growing inequality can also be observed in the rise of unemployment and underemployment,
with the latter – reflecting workers that work less than full time or are under-utilized because
jobs are not available – being even more widespread. Underemployment affects current as
well as future income through adverse effects on career development prospects (UNESCAP
2006). With current growth being largely the result of increased labour productivity, adequate
employment creation falters. Official statistics concur in the increasing, and in some countries
more than doubling, unemployment rate. China’s unemployment rate rose from 2.9% in 1995
33
to 4.2% in 2004. South Korea observed an increase from 2.0% in 1995 to 3.7% in 2004;
Singapore from 2.7% to 5.4%; and Taiwan from 1.8% to 5.0% (ILO 2006). While these
official figures are still low by international comparison, they are evidence that growth has
not been enjoyed equitably, and they probably skim the surface of the real problems (see also
WP 6). The effects go well beyond having a job; it may lead to marginalization, alienation,
and frustration of the masses, and stir social unrest which in itself is a threat to growth. Even
more discomforting is the increasing youth unemployment rate, with East Asia experiencing
a rise from 6.5% in 1994 to 7.5% in 2004, and South Asia up from 8.7% to 10.8%
(UNESCAP 2006: 175-6). Youth unemployment bears the cost of excluding young people
from participating in economic, social and political life. For the employed, things appear not
always that rosy either. China’s vast supply of cheap labour and huge market potential
(UNCTAD 2005b: 111) seriously disrupts the ability of other export economies in the region
to raise their wages (Felipe and Lim 2006: 43).
Growing social and economic disparities are even more obvious from an urban-rural
perspective. Residents of rural and urban areas in one country may face totally different
standards of living. In most countries, notably China, India and Thailand, the income gap has
a significant urban-rural bias with income differences having increased during the 1990s
(UNESCAP 2006: 21-2). Rural areas often lag behind their urban counterparts in physical
infrastructure (roads, waterways, (air)ports and ICTs) and education and health opportunities.
In China child mortality levels in urban areas average about one-third of those in rural areas.
Under-five mortality rates range from 8 per 1000 live births in Shanghai and Beijing
(comparable to the United States) to 60 in the poorest province of Guizhou (UNDP 2005: 63).
At the global level Asia’s rise has increasing consequences. These are not only felt by
growing relative scarcity of energy and commodities and a downward pressure on economic
growth in other parts of the world, but also by the adverse impact of Asia’s growth on global
pollution and global warming. Another unintended by-product of Asia’s rise and, at the same
time, potential ‘time bomb’ under Asia’s growth is the growing financial global external
imbalances problem. While its origin (and cause) dates back to 1996 with the US becoming
the world’s largest net debtor and running unprecedented current account deficits (over US$
800bn or 6.4% of GDP in 2005 (IMF 2006)), this has only been possible by a matching of
surpluses from other economies, most notably China. IMF (2006) and the World Bank
(2006a) have recently expressed strong concerns about the potential effects of the global
imbalances problem, with a clear need for the Asian region to take a more proactive role in
34
managing and containing the risks associated with them, and a better balancing between
externally and domestically led growth. This problem is getting more acute as China’s and
Asia’s further integration into the global economy has made it more rather than less
dependent on external markets and resources, with external shocks having a potentially
strong effect on China’s macroeconomic stability and that of the Asian region.
5. Conclusions
This WP has explored the ‘external’ dimensions of new growth dynamics in East and South
Asia. These are twofold, and interconnected. The first concerns the relationships within the
region itself, and particularly the impact of the emergence of China and India on the rest of
the region. The second is the wider issue of the region’s relationships with the ‘rest of the
world’, including the EU and US.
The interconnectedness of these two concerns comes about because the rise of China and
India as new centres of gravity in the Asian region is unprecedented. While so far driven by
global exports and increasingly strong domestic demand, China’s and India’s current strength
only marginally reflects what is still to come, as the proverbial tip of the iceberg. Their
potential in terms of domestic market size and scale and their power as major pools and
engines of future knowledge, not to mention their growing ability to set the future economic,
technical and political rules of the game, could indeed entail a marked shift in the distribution
of global economic and political power, and is probably already doing so.
This most recent episode in Asian growth history raises a number of intriguing questions and
captures prisoner-like dilemmas. These not only apply to the ‘outside’ world, including the
EU and America, but also to countries within Asia itself. They equally apply to the future
position of Japan as part of the ‘old’ Triad, as well as the Triad as such, and determine to a
large extent the possible course, direction and degrees of freedom of other Asian nations.
These nowadays find themselves in an increasingly tightened squeeze by their low-cost and
increasingly high-tech neighbours, as do other low-income economies, some of them being
already squeezed out not only of final markets (e.g. apparel and textiles), but also of resourceinput markets (energy) and (potentially) global capital markets. Answers to these questions
and predicaments can only be given if we understand the nature and the causes of the current
growth experience.
35
What is new about current Asian growth? We have identified a number of distinctly new
features in international dimensions of Asian growth that make the current growth experience
fundamentally different from that of the 1950s (Japan), 1960s (NIE-4: Singapore, Hong
Kong, Taiwan and South Korea) and the 1970s and 1980s (other NIEs including Thailand,
Indonesia, Malaysia and Vietnam). Perhaps most important are the changes in the enabling
global economic and political context. We have argued that globalization, stimulated by trade
liberalization and opening up (FDI) and dramatic decreases in communication and transport
costs along with new means of communication and delivery (Internet, video- and
teleconferencing, B2B and B2C), have made the world a smaller, ‘flatter’ and more
interdependent place. At the same time, and as a result, competition has become fiercer,
changing into a global rather than a national game, with a strong premium on complex
knowledge and innovation capabilities. Prevailing technical possibilities for redefining and
reconfiguring existing production processes and supply chains have increased markedly, and
traditional distinctions between tradeables and non-tradeables have become more and more
blurred. New unexpected combinations and opportunities in production and supply-chain
management have emerged, along with new extremely competitive business models. The
world has witnessed the emergence of global and regional production and value networks
previously unheard of. Outsourcing, offshoring and the relocation of (parts of) production
from Western developed economies to Asia and elsewhere have become an everyday reality.
R&D, design and other high-skill services industries are increasingly globalized. That the
roles of governments and firms have changed in this vastly changing context goes almost
without saying.
China and India have embarked on a development path towards strengthening the domestic
knowledge base and increasing domestic innovation capability. But other more advanced
Asian economies appear to have well understood the message signalled by China and India
and have embarked on even more proactive and aggressive strategies towards true
knowledge-based societies. With Japan and Singapore in the lead, and Taiwan and Korea
following at close distance, the more advanced Asian economies thus increasingly focus on
high-tech, knowledge and innovation, creativity, and conquering new and existing high
value-added niches in global markets. In measurable terms, the increase in innovation
capability in terms of R&D inputs (R&D expenditure, number of R&D researchers) and
outputs (journal articles and patents granted) is impressive in all more advanced Asian
economies (Cheung and Lin 2004; Van der Zee and Gutomo Putra 2006). The end of this
36
strategic repositioning within the Asian region appears not to be in sight as yet. What strikes
the eye is the speed, concentrated effort and determination with which the technologically
leading Asian nations have embraced their new roles. One evident example is the ability of
Singapore to position itself as a major hub for MNCs in the region, despite its significantly
higher labour and location costs. So far the Asian nations have been able to strike a balance
between the need to refocus and reposition, and continuing ‘old’ and familiar industrial lines
of activity. Here the capacity to cooperate in intra-regional partnerships and proactive
decision-making by firms and governments appears to play a role, i.e. the capacity to reinvent
and to the capacity to join, if you can’t beat them.
That Asia has played an important and increasingly eminent part in the trend towards further
globalization cannot be denied. Yet, we also observe a trend towards increasing intra-regional
trade and rising (Asian and foreign) investment in the region, along with a strong rise in
Preferential Trade Agreements (PTAs) and other forms of intra-regional cooperation.
Development models of China and India differ strongly, however, in the sense that China and
the other East and South-East Asian nations, including Japan, have developed a strong intraregional trade and investment focus (‘regionalisation’), while actively striving for further
trade integration through the forming of PTAs at the same time (‘regionalism’) (Evans et al.
2006).
India is less proactive in concluding bilateral trade agreements and lags behind China in
opening up to global trade, although there are indications of an acceleration lately (The
Economist 2006). Whether Asian regionalisation and regionalism is to the benefit of the
world in the medium and longer term is not clear as yet. Nor is what the proliferation of
PTAs means for unilateralism. Moreover, China and India, and Asia as a whole, appear to
reveal a clear preference for technological independence and show an increasing ability to set
technical rules and standards. Again, this raises questions on the course of global economic
and technological development.
The optimistic view is that Asia’s inclusion in the global economy offers potential
opportunities and benefits for all, and that the overall pie may be bigger than before, even if
there will be clear losers and winners in this positive-sum game. The pessimistic view is more
sceptical and worries about the distribution of the pie rather than its size. That the future rules
of the game could be set in different way, literally away from the current ruling Washington
consensus, is a key element in these worries. And to take the pessimistic argument even
37
further, yet from another angle: there might be limits to global growth, if not in the natural
resource sense then certainly in the social ‘Hirschian’ sense (Hirsch 1976).
Yet the road towards the future for the Asian region need not be paved with gold. Future
concerns, ranging from soaring scarcity of energy and other raw materials, growing domestic
economic and social disparities and demographic change, not to mention environmental
degradation, are all lurking threats to current and future growth.
38
Annex 1. Exporters and major export destinations over time (absolute values)
DESTINATION (US$ BILLION)
EXPORTER
COUNTRY
YEAR
TOTAL
EXPORT
(bn US$)
CHINA
INDIA
S.
KOREA
SINGA
-PORE
TAIWAN
JAPAN
ASEAN
minus
SINGAPORE
HONG
KONG
EU-15
NAFTA
REST
OF THE
WORLD
China
1989
1995
1998
2001
2004
52.9
148.8
183.7
266.7
593.2
-
0.2
0.8
1.0
1.9
5.9
0.4
6.7
6.3
12.5
27.8
1.7
3.5
3.9
5.8
12.7
0.3
3.1
3.9
5.0
13.5
8.4
28.5
29.2
45.1
73.5
1.5
6.9
7.1
12.8
30.2
21.9
36.0
38.8
46.5
100.9
5.1
19.1
28.2
41.0
99.9
4.9
26.3
40.8
59.6
138.3
8.5
17.9
24.6
36.5
90.4
India
1989
1995
1998
2001
2004
15.8
30.5
33.7
45.2
75.4
0.1
0.3
0.5
1.5
4.2
-
0.3
0.4
0.3
1.0
0.9
0.4
0.8
0.6
1.0
3.4
0.1
0.3
0.3
0.4
0.6
2.1
2.1
1.7
2.0
1.9
0.4
1.6
1.3
2.3
4.1
0.8
1.8
1.9
2.1
3.6
4.7
8.2
9.0
10.7
16.0
4.6
5.6
7.7
10.5
14.0
2.3
9.4
10.3
13.6
26.8
S. Korea
1989
1995
1998
2001
2004
60.5
125.4
132.7
149.8
253.1
n/a
9.2
12.0
18.2
49.8
0.5
1.1
1.7
1.4
3.6
-
1.5
6.7
4.1
4.1
5.7
1.3
3.9
5.1
5.8
9.8
13.2
17.1
12.3
16.5
21.7
2.3
11.2
11.3
12.4
18.4
3.4
10.6
9.3
9.5
18.1
7.9
15.5
18.3
19.7
33.7
22.5
26.9
26.0
35.5
49.4
8.0
23.1
32.7
26.8
42.9
Singapore
1989
1995
1998
2001
2004
44.8
118.2
109.9
121.7
179.5
1.2
2.8
4.1
5.3
15.4
0.9
1.9
2.4
2.7
4.2
0.9
3.2
2.6
4.7
7.4
-
1.3
4.8
4.7
6.3
8.3
3.8
9.2
7.2
9.3
11.6
9.8
34.1
26.3
32.8
38.7
2.8
10.1
9.2
10.8
17.6
6.3
15.8
17.4
16.3
24.6
10.9
22.3
23.0
19.9
24.7
6.8
13.9
12.9
13.5
27.0
Japan
1989
1995
1998
2001
2004
274.6
443.0
388.0
403.4
565.5
8.5
21.9
20.2
30.9
73.9
2.0
2.5
2.4
1.9
3.0
16.5
31.3
15.4
25.3
44.2
9.2
23.0
14.8
14.7
18.0
15.3
29.0
25.6
24.3
42.0
-
17.0
54.9
31.9
39.6
55.0
11.5
27.8
22.5
23.3
35.4
52.7
70.4
71.7
64.5
84.6
102.6
131.4
130.3
133.4
141.4
39.3
50.8
53.3
45.6
67.8
Hong Kong
1989
1995
1998
2001
2004
73.1
173.5
173.7
189.8
259.3
18.8
57.9
59.8
70.1
114.2
0.3
0.8
0.7
1.2
2.1
1.9
2.8
1.8
3.3
5.7
2.2
4.9
4.0
3.8
5.6
2.7
4.6
4.4
4.5
6.3
4.5
10.6
9.1
11.3
13.8
2.8
7.0
5.8
7.2
10.4
-
12.1
26.0
27.4
27.5
34.7
20.2
40.9
44.1
46.5
48.0
7.6
18.1
16.7
14.5
18.5
Source: IMF Direction of Trade Statistics Yearbook 1996 and 2005.
Explanation: EU-15 comprises Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, United Kingdom.
ASEAN minus Singapore comprises Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, Philippines, Thailand, Vietnam.
NAFTA comprises Canada, Mexico, United States.
39
Annex 2. Net exports of selected high technology items (US$ million)
COUNTRY
ITEMS
1995
1998
2000
2002
2004
China
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
1,945
793
-2,583
5,954
3,293
-5,945
7,780
7,095
-15,804
19,134
17,867
-27,890
57,469
43,870
-58,271
India
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
-182
-214
-338
-702
-380
-315
-1,208
-581
-439
-1,274
-1,975
-522
South Korea
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
1,397
5,818
9,535
3,452
4,994
6,805
11,922
8,534
4,218
10,958
15,240
-1,591
15,657
30,195
1,385
Singapore
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
15,782
3,763
-2,992
17,258
2,082
1,042
14,436
1,396
3,880
11,947
1,220
5,285
12,145
694
10,706
Taiwan
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
13,718
4,275
-5,274
16,769
1,829
-4,892
18,999
2,148
-1,973
15,504
3,891
-3,497
13,345
6,340
216
Hong Kong
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
838
-2,117
-4,883
-170
-1,321
-4,907
-1,939
-1,124
-6,240
298
-376
-5,347
1,436
2,858
-10,377
Japan
Electronic data processing and office equipment
Telecommunications equipment
Integrated circuits and electronic components
21,179
19,167
28,587
16,637
14,240
17,605
7,658
17,046
22,608
3,612
12,668
15,660
-1,272
19,797
19,561
Source: Own calculations based on WTO International Trade Statistics.
Note: net exports defined as exports – imports. Data refer to ‘office and telecom equipment’ as major
data category minus the sub-category ‘automotive products’.
40
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