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From The World Bank - Public Disclosure Authorized - 39986
An East Asian Renaissance: Ideas for Economic Growth
Indermit Gill and Homi Kharas

Complete Report as one file (3.7m pdf)
East Asia – a region that has transformed itself since the financial crisis of the 90s by creating more competitive and innovative economies – must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success.

Report by chapters:
Overview (657k pdf)
An economic renaissance is unfolding in the region. Just as the renaissance in Europe was a period of intellectual discovery that produced new ideas and economic development, innovation is getting similar attention in East Asia. The pace of change in trade and finance, ideas and technology, urban development, household finances, and demands on the public sector is breathtaking. If current growth trends prevail, by 2030 East Asia will be as large in terms of the world economy (43 percent) as it was in 1820, around the time that it began a long decline in global importance.
Ch. 1: Growth, Gravity, and Friction (340k pdf)
In a high-performing region such as East Asia, it is perhaps easier to think of what is not a potential pitfall. Fiscal prudence is now almost a habit, and is likely to remain one. Competitive exchange rates are seen by countries in the region as an important building block of economic policies to sustain growth, as is low inflation. Financial sector pitfalls have been faced and, by and large, recognized and accounted for by most countries in East Asia. Labor market flexibility was long recognized as necessary, and remains a policy priority. High saving rates are still ingrained in household and corporate behavior. The list of the region’s strengths is long. Latin America’s prospects in the early 1970s as its countries entered middle- income were similarly bright, but many Latin American economies have since disappointed. This report emphasizes three potential pitfalls—listless cities, conflictive societies, and corrupt governments—that East Asia should take care to avoid.
Ch. 2: Trade (635k pdf)
For the last four decades, trade has been the engine of economic growth for most of East Asia. In the 1960s, Japan emerged as the region’s first major exporter, and was followed in the 1970s by a second generation of countries (Hong Kong [China], Korea, Singapore, Taiwan [China]), in the 1980s by a third generation (Indonesia, Malaysia, Thailand, Philippines), and in the 1990s by a fourth generation (China, Vietnam). While unilateral liberalizations by individual countries helped initiate export- led development in the region, the increasing economic integration of East Asia (EA) has been an important factor in sustaining the region’s growth.
Ch. 3: Innovation (715 pdf)
The generation, diffusion, absorption, and application of new technology, knowledge or ideas is widely acknowledged to be a crucial driver of economic growth and development. Modern growth theory stresses the importance of overcoming “idea gaps” relative to “object gaps” in the process of development, that is, of overcoming barriers to the productive absorption of available ideas versus overcoming gaps in the availability of objects such as factories or raw materials. Investments in innovation carried out by forward- looking firms are at the heart of new theories of endogenous economic growth developed over the last couple of decades. This chapter looks at innovation in East Asia, including the diverse innovation activities pursued, problems faced, and innovation outcomes achieved in economies at very different levels of development, as well as, finally, some lessons learnt about policies and institutions found to be helpful in fostering innovation.
Ch. 4: Finances (755k pdf)
The financial structure underpinning rapid economic growth and trade in East Asia broke in 1997-98. The massive economic dislocation and loss of market value by firms underlined the necessity of developing a more robust regional financial architecture to support trade and investment. Whereas prior to the crisis one could say that the focus of attention was on mobilizing finance, since the crisis the focus has shifted to the efficiency of resource allocation, the diversification of supply, and the reduction of systemic risk. The structure of the financial system has become more important. At the same time, because of the considerable integration of financial markets, both globally and within the region, policy makers have recognized that stability depends not just on each country’s efforts and financial structures, but also on how the financial links between countries operate.88 This chapter looks at how the structure of finance in the regio n is changing and considers the remaining challenges to a system that can support the kind of trade and innovation that is necessary for continued rapid growth in the middle-income and rich countries of the region.
Ch. 5: Cities (475k pdf)
5.1 Scale economies, cities, and economic growth In the most compelling formulations of modern growth theory, new ideas and the benefits of human capital are shared with others who are nearby and equipped to take adva ntage of them (e.g., Lucas, 1988 and Romer, 1990). In the aggregate, these externalities or knowledge spillovers allow economies to defy the law of diminishing returns : bigger, richer economies can continue to grow faster than smaller, poorer ones. Geography is almost always important in determining who—besides those who create or possess them—benefits from these ideas and skills. Put another way, spillovers of knowledge tend to decline with distance, both within and across countries. These phenomena therefore both encourage people to live in close proximity to one another to become wealthier, and firms in an industry to locate close to each other and become more innovative and competitive. The result is the growth of towns and cities.
Ch. 6: Cohesion (275k pdf)
In reviewing East Asia’s development experience since the 1990s from an equity perspective, the following facts stand out.
· Absolute poverty—in terms of both the percentage and the absolute number of poor people—in the region has declined dramatically since the 1990s.
· Reduction of income poverty has also been accompanied by progress in overall human development indicators for the countries in the region.
· However, looking beyond extreme poverty, a large proportion of the region’s population continues to subsist at fairly low levels of living.
· Inequality of income or consumption has increased significantly since the 1990s, and most of it is driven by the increase in inequality within countries.
· Even where relative inequalities do not show a trend, absolute disparities have been growing rapidly.
· Two fault lines of inequality within countries are of particular concern: (i) the urbanrural divide and (ii) the regional/ethnic divide. These divisions are apparent in both the income and non- income indicators of welfare.
· Vulnerability as the ex-ante risk of falling into poverty is emerging as a growing concern in the region.

Ch. 7: Corruption (90k pdf)
Corruption in East Asia poses an apparent paradox. In some countries in East Asia, high levels of corruption have coexisted for extended periods with rapid economic growth and development. Clearly, this runs against the conventional wisdom that corruption impedes economic and social progress. The chapter will explore the various hypotheses put forward to explain this paradox and will assess their empirical bases. It will investigate the characteristics of corruption in East Asia and the extent to which the autocratic mode of governance that characterized many East Asian countries in the postwar period may have enabled an East Asian model of corruption which was less damaging to growth and development.


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East Asia's New Success Model Presents Next Wave of Challenges at Home

Singapore, September 18, 2006 — East Asia – a region that has transformed itself since the financial crisis of the 90s by creating more competitive and innovative economies – must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success, a new World Bank report has found.

An East Asian Renaissance: Ideas for Growth by a World Bank team led by Chief Economist for East Asia & Pacific, Dr Homi Kharas and Economic Adviser, Dr Indermit Gill is the first comprehensive analysis of the new forces and challenges at play in the region since the Bank's seminal report of 1993, The East Asian Miracle.

Launched in a conference edition today at the World Bank-IMF annual meetings in Singapore, the report shows that having successfully undergone two waves of integration since the Asian financial crisis – first with global markets and then with the region itself – East Asia now needs to move to a third integration, this one at the domestic level.

"As a result of the growth spurred by global and regional integration, unprecedented economic progress has been made in East Asia," said Dr. Kharas. "In a few years, almost everyone in developing East Asia will be living in a middle-income country. The development challenge at the middle-income level is considerably more complex."

The report argues that regional flows of goods, finance and technology are helping even smaller East Asian countries reap the benefits of economies of scale and that this regional integration must be encouraged. But it also points out that these measures have to be supported by actions at the domestic level to ease the stresses and strains that rapid economic growth leaves in its wake. Foremost in this agenda is the need to build vibrant cities, cohesive societies and clean governments.

"Cities are at the core of a development strategy based on international integration, investment and innovation," said Dr Gill. "East Asia is witnessing the largest rural-to-urban shift of population in history. Two million new urban dwellers are expected in East Asian cities every month for the next 20 years. This will mean planning for and building dynamic, connected cities that are linked to the outside world so that economic growth continues and social cohesion is strengthened."

The report analyses the forces that have transformed East Asia since the early 1990s and concludes that a new economic paradigm has been at work in the region over the last 10 years. This new landscape emphasizes the importance of economies of scale to East Asia's continuing success and highlights more sophisticated intra-regional trade patterns, greater focus on higher skill and technology products, rapid uptake of innovation and healthier banking and credit structures.

"What's going on now in East Asia is something quite new – a renaissance," says Dr Kharas. "The old Asia relied on the famous flying geese analogy that saw lead industries move to low-wage countries. The new Asia is more self-reliant, innovative and networked – it's characterized by a very competitive business environment that encourages innovation and a labor force able to absorb new ideas."

To address the new challenges the region now faces, the report suggests that for low-income economies, the basic principles of openness, macroeconomic stability and stronger investment in human and physical capital continue to offer the most promising path to progress. For the growing number of middle income countries in the region, it says a shift is needed from just exploiting comparative advantage to also exploiting economies of scale. This means prioritizing regional agreements to enlarge markets, strengthening education and developing skilled labor forces, and building robust macroeconomic environments.

To reinvest the economic returns that accompany fast growth, the report emphasizes the need for clean governments prepared to tackle the centralized corruption that continues to constrain development in some East Asian countries. Over the past 20 years, the efforts of civil society organizations have brought about major improvements in political rights and civil liberties. This has also helped bring about aggressive anti-corruption programs across the region.

Dr Kharas said the region would gradually see further moves from the traditional modes of governance based on the 'rule of man' to the more modern 'rule of law' or as the Chines say, from renzhi to fazhi.

"If East Asian policymakers succeed in meeting this next wave of challenges, within a generation they can eliminate poverty and lead their countries into the ranks of prosperous, developed nations of the world," Dr Kharas said.

The full text of the study and related materials will be available to the public on the World Wide Web immediately after the embargo expires at:

Journalists are encouraged to use this url in their reports.