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ing further momentum to the shift from manufacturing to services in those countries.
Related to this shift in the composition of output is a shift away from mass production
and toward customization to suit individual preferences. IT-induced reduction of
transactions costs between firms and consumers underlies this trend. At the same time,
IT-induced reduction of transactions costs between firms is promoting the contracting
out or outsourcing of various services to other firms. To the extent that inter-firm
transactions costs dictate the optimal size of the firm, we can expect lower inter-firm
transactions costs to result in a smaller optimal size of the firm. This, in turn, implies
increasingly higher levels of specialization and thus concentration on core competen-
cies, with beneficial effects for efficiency and productivity.
Economic globalization and the IT revolution are complementary in a very fundamental
sense “ they both make markets more competitive than ever before. Economic globaliza-
tion, evident in the sustained growth of international flows of goods and services as well
as capital and labor, is breaking down the barriers that protected domestic firms from
international competition. By subjecting firms to relentless external competitive pres-
sures, globalization is forcing them to shape up or shut down. By the same token, the IT
revolution is making more information about producers and products available to
consumers. Armed with more information, consumers are able to choose more selectively
from a wider range of producers and products. They are better able to find the best value
for their money. The IT revolution thus breaks down consumer ignorance, which protects
firms from competitive pressures just as much as tariffs or barriers to entry. Figure 3
summarizes the impact of the IT revolution on consumer choice and welfare.

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Figure 3. The impact of the IT revolution on consumers

IT Revolution

More Information about
Products and Firms for

More Consumer Choice and More
Consumer Power vis-à-vis Firms

More Competitive Markets/
Lower Prices and Better Quality

Lower information costs for consumers leaves them with more resources available for
consuming goods and services. In other words, some of the time and money consumers
spend searching for goods and services can be re-allocated on goods and services
themselves. If we think of the cost of gathering information as a tax on consumers, the
IT revolution brings about a reduction in this tax. Furthermore, the economy™s higher
productivity (as a result of the IT revolution) will further increase income and raise
demand for goods and services. Therefore, although the primary impact of the IT
revolution is on supply, it will also have a positive impact on demand at the macro level,
as we can see in Figure 4. This positive demand-side impact will further stimulate
economic growth.
E-commerce, which does not require a physical bricks-and-mortar presence, reduces the
set-up costs of entering and doing business. In the process, e-commerce reduces the

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Opportunities and Challenges of the New Economy for East Asia 319

Figure 4. The macro impact of the IT revolution on supply and demand






barriers to entering a market and makes markets more competitive. In short, in the New
Economy, stronger competitive pressures will force firms to become more efficient and
productive over time. Mere survival requires nothing less. We should also note that the
division between the New Economy and the Old Economy is not always a clear-cut one.
Although the New Economy is associated with industries such telecommunications and
telecom equipment, computer hardware and software, biotechnology, and fuel cells and
other alternative energy technology, and the Old Economy with low-tech manufacturing,
even in the most technologically advanced developed countries such as the U.S.,
elements of the two co-exist with each other. In addition, many of the efficiency gains
associated with the IT revolution, in particular the reduction of information costs, are
applicable to the entire spectrum of industries, including those we typically associate
with the Old Economy.
In this chapter, I will focus on the economic impact and implications of the New Economy
for East Asia in the 21st century. East Asia consists of two sub-regions - Northeast Asia
and Southeast Asia. There is a great deal of diversity among the East Asian countries
in terms of economic development and income. They range from Japan and the NIEs (i.e.,
Korea, Taiwan, Hong Kong and Singapore), which are industrialized, high-income
economies at one end, to Myanmar and the Indochina countries at the other end, which
remain among the world™s poorest countries despite recent economic progress. Table 1
shows the population, per capita GDP and per capita GDP in purchasing power parity
terms of selected East Asian countries.
Our focus on economics is not to make light of the social, political, and other effects, of
which there are bound to be many, some of them profound in their own right, but simply

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Table 1. Population and per capita GDP for 2000, selected East Asian economies

Country Population GDP Per Capita, GDP Per Capita,
(millions) US$ PPP, US$
China 1,262 840 3,920
Japan 127 35,620 27,080
Korea (South) 47 8,910 17,300
Taiwan 22 14,000 N.A.
Hong Kong 7 25,920 25,590
Singapore 4 24,740 24,910
Indonesia 210 570 2,830
Vietnam 79 390 2,000
Philippines 76 1,040 4,220
Thailand 61 2,000 6,320
Malaysia 23 3,380 8,330

Source: World development indicators 2001, EIU for Taiwan

to concentrate on my field of expertise as well as to provide a sharper focus to my
reflections on this most important subject. And, as its name suggests, the New Economy
is above all an economic phenomenon. Casual observation alone suggests that the rate
of technological progress in the information technology (IT) field over the past ten years
or so has been absolutely breathtaking. Moore™s Law, according to which the processing
capacity of silicon chips doubles every 18 months, powerfully sums up the speed of
innovation. Although web surfing and e-mailing have now become as much a part of our
daily routines as eating and sleeping, they were little more than fascinating novelties until
quite recently. Microsoft, Cisco and Sun Microsystems, to name just a few, have come
out of nowhere to become among the biggest and most recognized companies in the
world. The New Economy is here, and it is here to stay.
But what are the implications of this New Economy for the global economy? The
extraordinary macroeconomic performance of the U.S., the undisputed standard bearer
of the New Economy with its Silicon Valley, countless dot.coms and venture capitalists,
in recent years has led some economists to proclaim the arrival of an economic nirvana
in which high growth went hand in hand with low inflation. At the other extreme, New
Economy skeptics attribute the remarkable U.S. economy simply to an accidental
convergence of growth-promoting cyclical factors such as the IT investment boom and
inflation-subduing circumstances such as the strong dollar.
At the heart of this heated debate between the supporters and critics of the New Economy
is an empirical issue “ the contribution of IT to productivity. That is to say, theoretical
arguments aside, by how much has the IT revolution helped workers to actually produce
more with a given amount of capital? Whether or not IT enables an economy to achieve
faster growth on a sustainable basis without triggering inflation ultimately depends on
the magnitude of productivity gains.1 Although it is too early to make definitive
judgments,2 the preliminary evidence indicates that IT has clearly led to significant
productivity gains.

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Opportunities and Challenges of the New Economy for East Asia 321

The basic theoretical reason for why IT should promote productivity is intuitively
compelling and clear. As anybody who has searched for books on both hard copy library
catalogues and online library catalogues knows, IT sharply reduces the cost of informa-
tion. And, to repeat, the cost of information is as much of a cost of production as the cost
of oil or steel. In fact, information is perhaps the most important input of all since all
economic transactions require information. To repeat an important example of how IT
boosts efficiency by reducing information costs, it delivers lower procurement costs to
firms by making it easier for them to find the cheapest suppliers and cut down their
transactions costs.3 Now that we have touched upon some general conceptual issues,
we turn our attention first to East Asia.

The Promise of IT
In order to discuss the potential economic benefits of IT for Asia, it is necessary to first
look at the region™s strengths and weaknesses. In terms of regional strengths, a glance
at shops and department stores around the world will reveal that Asia is the manufac-
turing hub of the world. This is particularly true for Japan and the four newly industri-
alized countries of Korea, Taiwan, Hong Kong and Singapore. But it is also true, to a lesser
extent, for Southeast Asia. A noteworthy development in this connection has been the
recent emergence of China as a manufacturing powerhouse, especially for low-tech
goods. Table 2 confirms the importance of manufacturing in the region™s economies
regardless of income level. The only notable exception appears to be Hong Kong.

Table 2. Composition of GDP for selected East Asian economies, 2000

Country Agriculture Manufacturing Services
(%) (%) (%)
China 16 35 33
Japan 1 22 66
Korea (South) 5 31 53
Taiwan 2 26 58
Hong Kong 0 6 85
Singapore 0 26 66
Indonesia 17 26 36
Vietnam 24 18 39
Philippines 16 23 53
Thailand 10 32 49
Malaysia 11 33 44

Source: World development indicators 2001, EIU for Taiwan
Note: The numbers do not add up to 100% because they exclude mining, construction, and utilities.

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Table 3. Electronics output of selected East Asian countries, 1985 and 1998

Country Output in Billions Output in Billions
of US$, of US$,
1985 1998
China 5.6 46.9
Japan 89 196
Korea (South) 6.5 39
Taiwan 56 34
Hong Kong 3.7 8.2
Singapore 4.5 38
Indonesia 0.6 5.2
Philippines 1.1 7.3
Thailand 0.6 14.6
Malaysia 1.9 27
Source: Yearbook of World Electronics Data 2000 (Elsevier)

The region has an especially strong comparative advantage in, and is heavily dependent
upon, manufacturing and exporting electronics products, the hardware of the IT revo-
lution. This is true even to the extent that the global electronics business cycle has a
tangible effect on the economy-wide business cycles of the region™s smaller economies.
Table 3 shows the output of electronics products in selected East Asian countries for
1985 and 1998. For the region as a whole, electronics production reached around US$120
billion in 1985 and over US$420 billion in 1998. As Table 3 clearly shows, not only is the
value of output large, it has grown explosively between these years. It is no exaggeration
to say that East Asia is and will continue to be the world™s electronics factory.4 Therefore,
in the first instance, the IT revolution has had a direct positive impact on East Asia™s
output and exports by boosting the global demand for electronics in general and IT-
related products in particular.
Global output of electronics reached US$482 billion in 1985 and US$1,088 billion in 1998.
In 1985, Japan, the NIEs and other East Asian countries accounted for 18.6%, 4.3% and
2.4%, respectively, of global output. In 1998, the corresponding figures were 18%, 11%
and 10%, respectively. The shares of the NIEs and other East Asian countries have risen
sharply. The share of East Asia as a whole in global output has grown from 25% to almost
40%. Figure 5 illustrates this upward trend.
Table 4 tells us why East Asia dominates the global exports of electronics. Revealed
comparative advantage is a widely used index of a country™s comparative advantage in
international trade. An index greater than one indicates comparative advantage relative
to other countries in the production of a particular good. A higher number suggests a
higher degree of comparative advantage. We can see from Table 4 that most East Asian
countries enjoy comparative advantage in electronics, which explains their strong
positions as electronics exporters in global markets.

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Opportunities and Challenges of the New Economy for East Asia 323

Figure 5. The share of global electronics output for Japan, NIEs and other East Asia,
1985 and 1998






1985 1998

Japan NIES Other East Asia Total East Asia

Source: Yearbook of World Electronics Data 2000 (Elsevier)

Table 4. Revealed comparative advantage in Electronics Exports, 1998

Country Index
China 1.28
Japan 2.53
Korea (South) 1.49
Taiwan 1.52
Hong Kong 0.24
Singapore 1.73
Indonesia 0.54
Philippines 1.24
Thailand 1.34
Malaysia 1.87

Source: Yearbook of World Electronics Data 2000 (Elsevier), WTO (2000)

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Figure 6. Share of Global Electronics Consumption, 1997 (%)








Share of Global Consumption

Japan NIEs Other East Asia Rest of World

Source: Yearbook of World Electronics Data 2000 (Elsevier)

While electronics exports are a major engine of East Asian growth and the IT revolution
has had a strong positive impact on global demand for electronics, East Asia has emerged
as a big market for electronics in its own right. That is, while East Asia exports much of
its electronics output, the region also consumes a substantial share at home and exports
to each other. For example, in 1997, the region accounted for 45% of global output and
32% of global consumption. Figure 6 shows the shares of Japan, NIEs and rest of East
Asia in global electronics consumption for 1997.
Despite a widespread tendency to talk up software and services and a corresponding
tendency to talk down hardware and manufacturing these days, one should not forget
that export-oriented manufacturing was the engine of the Asian miracle and will remain
an important engine of regional growth into the foreseeable future. Fortunately for East
Asia, the potential benefits of IT for manufacturing are large indeed.5 While the region
does enjoy a comparative advantage in manufacturing, this does not mean there is little
room for productivity improvement.
The conventional wisdom in the context of e-commerce or Internet commerce is that
although B2C (business to consumer), with its Amazons, e-Bays and Yahoos, grabs all
the headlines, B2B (business to business) will generate the lion™s share of growth in e-
commerce over the next few years. What this means is that whether through lower
procurement costs, more efficient supply chain management, or more timely inventory
control, East Asian manufacturers stand to gain a productivity windfall if they can

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Opportunities and Challenges of the New Economy for East Asia 325

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