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Opportunities and Challenges of the New Economy for East Asia 313

Chapter XVI

Opportunities and
Challenges of the
New Economy for
East Asia
Donghyun Park
Nanyang Technological University, Singapore

The IT revolution has sharply reduced the cost of information and increased its
availability. This revolution is also said to be creating a New Economy in which the
old rules of economics no longer apply. The first part of my paper discusses the economic
impact of the New Economy on East Asia. First, we discuss the potential economic
benefits of the New Economy for the region. We argue that East Asian countries should
focus on applying existing technology to local needs, since doing so promises large
tangible returns, especially in terms of improving the efficiency of the manufacturing
sector, the main engine of the region™s economies. In the long run, the IT revolution will
also raise the quality of corporate governance in the region. Second, we point out that
while the IT revolution may enable East Asian countries to leapfrog some technological
barriers, it does not enable them to leapfrog sound economic policies. Such policies
remain as relevant to good economic performance in the New Economy as they did in
the Old Economy. Furthermore, the potential of IT to accelerate growth and reduce
poverty will be largely unfulfilled in the absence of complementary investments such
as a sound infrastructure for transportation and logistics. Third, East Asian countries
must fulfill certain pre-conditions to make sure that the New Economy takes hold.

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314 Park

Above all, they must liberalize their telecommunication sectors so as to improve the
quantity and quality of telecom services. They should also make the necessary
investments in human resource development to maximize their returns from the IT
revolution. In short, although the New Economy holds out tremendous economic
potential for East Asia, realizing that promise will require a lot of determination and
hard work. The second part of this chapter deals with the implications of the IT
revolution for regional development. Most of the main points raised in the first part of
this chapter apply to the second part and in this sense, the second part is essentially
an application of the first part, which addressed the broader issue of economic
development, to the narrower issue of regional development. East Asian countries
suffer from significant inter-regional economic inequalities and these inequalities
often extend into all other spheres of national life. Such inequalities inevitably
interfere with well-balanced economic development and impose costs on both the
magnet cities and the rest of the country. A more balanced pattern of development is
therefore desirable, and IT can make significant contributions toward this objective.
In particular, by reducing the concentration of information and knowledge in the main
city and disseminating those valuable resources to the rest of the country, IT reduces
the inequality of opportunity that lies at the root of the inter-regional economic
inequality. However, we must be realistic about what IT can do and cannot do in terms
of promoting greater inter-regional equality. IT by itself will not enable poorer regions
and cities to catch up with the main cities, and will facilitate regional development only
if the fundamental ingredients of regional development are in place. Finally, East Asian
economies must fulfill certain pre-conditions, especially greater inter-regional equality
in telecom and other IT infrastructure, to fully realize IT™s potential benefits for
regional development. In the last section of this chapter, we summarize our main points
and provide some concluding thoughts. In addition, we discuss the policy implications
of our analysis for FDI in Asia, along with implications for potential foreign investors,
especially in the telecommunications industry. FDI into IT sectors cannot only be
profitable for the investors, but can also promote the host country™s economic growth.

One of the most fashionable words these days among government officials, academics
and the general public alike throughout Asia is the “New Economy,” which refers to the
economy that is emerging in the midst of the ongoing IT revolution. The IT revolution
refers to the sharp reduction in the cost of finding and communicating information that
has been made possible by the convergence of information and communication technolo-
gies. For this reason, the IT revolution is also known as the ICT revolution. More
convenient and more powerful computing equipment, especially personal computers
(PCs), in combination with better and more affordable telecommunication services, are
jointly driving the IT revolution. Perhaps the most familiar manifestation of this far-
reaching revolution is the Internet, which can literally connect us to the rest of the world
in the comfort of our homes and offices. The IT revolution is giving rise to a new economic
paradigm “ the New Economy.

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Opportunities and Challenges of the New Economy for East Asia 315

The New Economy is structurally different in many ways from the Old Economy. The latter
is based on hardware, whereas software is the defining characteristic of the New
Economy. Value added in the New Economy comes from the creation of new knowledge
rather than the application of existing knowledge, as in the Old Economy. The current
transition from the Old Economy toward the New Economy is therefore a transition from
the industrial age of making and consuming products to the information age of creating
and absorbing knowledge. While the focus of the Old Economy is on transforming raw
materials into goods and services, the focus of the New Economy lies in transforming
intellectual capital into new information and knowledge. For example, transforming iron
and coal into steel is a classical example of the Old Economy in action, whereas creating
new software to process financial data more efficiently fits our mental picture of the New
Economy. In short, intellectual capital, instead of the more traditional factors of produc-
tion such as land, labor and capital, underpin the New Economy.
While there are other forces such as globalization behind the New Economy, its primary
driving engine is the IT revolution. This is because the New Economy is based on creating
and disseminating knowledge and information, and the IT revolution has significantly
reduced the cost of doing so. The ongoing convergence of information technology and
communication technology, which lies at the heart of the IT revolution, is accelerating
the creation and dissemination of knowledge and information. It is worth noting that
knowledge and information are omnipresent but often ignored inputs of production. In
the real world, unlike in the world of textbooks, information is costly, so the IT revolution
represents a supply-side revolution of falling information costs and hence transactions
Specific examples of firm-level efficiency gains due to IT include lower procurement
costs, better supply chain management, and tighter inventory control. According to a
2000 report by Martin Brooks and Zaki Wahhaj at Goldman Sachs, firms™ potential
savings from purchasing over the Internet range from 2% in the coal industry to 40% in
the electronics components industry. They also estimate that doing business online with
suppliers can reduce the cost of making a car by as much as 14%. British Telecom claims
that procuring good and services online will reduce the direct costs of the goods and
services it purchases by 11%. In a comprehensive recent study of the impact of firm-level
information technology investments in a wide range of industries in the U.S. between
1995 and 1997, Kudyba and Diwan (2002) find that IT investment has a substantial
positive impact on firm productivity and, furthermore, this positive impact increases over
time. Although the efficiency gains vary from firm to firm and industry to industry, at least
some firms and industries will realize substantial gains. Figure 1 summarizes the impact
of the IT revolution at the firm level.
As we can see in Figure 2, at a macro level, the lower information and transactions costs
enable the economy to produce more at each price level, resulting in a rightward shift of
the supply curve, and a new equilibrium of lower price levels and higher outputs. The
positive supply shock entails the best of both worlds “ faster economic growth combined
with deflationary pressures.
At a micro level, while creativity, innovation and risk-taking have always been essential
elements of successful entrepreneurship, there is an even greater premium on those
qualities in the New Economy. At the macro level, this means that the most successful

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316 Park

Figure 1. The impact of the IT revolution on firms

IT Revolution

Lower Information and
Transactions Costs

Lower Inventory
Supply Chain
Procurement Control


economies will be those that are most effective at creating new information and
knowledge by taking full advantage of the IT revolution™s information cost savings.
Nimble re-allocation of resources associated with flexible and deregulated markets is vital
for an economy in view of the fast-paced obsolescence of information and hence
technology in the information age. Equally important is human resource development
capable of producing workers who can not only absorb existing knowledge but also
generate new knowledge.
The transformation of manufacturing products into mass-produced, low-margin com-
modities is no longer restricted to low-tech products, but is becoming more evident
further up the technological ladder as well. This trend, which is a consequence of the
globalization of production and economic activity, reinforces the case for a more creative
and innovative workforce and economy, especially in higher-income countries that are
experiencing a hollowing-out of their manufacturing sector. The IT revolution is provid-

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Opportunities and Challenges of the New Economy for East Asia 317

Figure 2. The macro impact of the IT revolution on supply



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