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capitalize on the IT revolution. Again, the cost of information is a cost of production like
any other and its reduction is no different from a reduction in the price of, say, oil.
Furthermore, there are good reasons to believe that information costs are quite high in
Asia, as best evidenced by a relative lack of corporate transparency, making lower
information costs all the more beneficial for the region.6
A point worth emphasizing here is that East Asian economies should focus their
investment in areas that yield the highest tangible returns, which is the application of
existing technology for local needs, especially in the manufacturing sector. There is no
need for East Asian economies to compete with each other to create their own Silicon
Valleys. At the present, they would do better to focus on localizing and adapting the
software and technology developed in Silicon Valley, which enjoys huge advantages in
terms of network effects as well as availability of an innovative workforce and venture
capital.7 There are as just as many risks of making “white elephant” investments in the
New Economy as in the Old Economy. The main point here is not that East Asia is
incapable of its own Silicon Valleys; rather, why waste scarce resources on investments
with uncertain payoffs when there are alternative investments with large, certain
payoffs?
Returning to the lack of corporate transparency discussed earlier, and combining it with
the quality of investments we just talked about, naturally brings us to the issue of
corporate governance. With at least some justification, poor corporate governance is
widely held to have been a key catalyst in precipitating the Asian crisis. 8 By the same
token, improving corporate governance, or the way companies are managed, is central
to preventing another crisis and, more generally, improving the performance of East
Asian companies.9 While it is neither feasible nor desirable for the region to have an
American-style market for corporate control, there is certainly room for improving the
quality of East Asian management, which needs to become less family-based and more
market-oriented.
Again, the essence of the IT revolution is to make information, including information
about companies, more available and less costly to the man in the street. Lack of corporate
transparency, with all its negative implications for corporate governance, ultimately boils
down to privileged access to information for the well-connected few and lack of access
to information for the not-so-well-connected majority. In an age where information is
increasingly available to all, it is only natural to expect the hitherto disadvantaged
majority to demand their rights. For example, minority shareholders will no longer sit
silently when insiders abuse and manipulate information for their own benefit. In this
way, the New Economy will enhance the quality of corporate governance throughout the
region in the long run.
Related to the issue of improving corporate governance is the issue of public sector
governance.10 Many governments throughout the region, even in the more advanced
economies, lack the confidence and trust of the general public. In some instances, though
certainly not all, the introduction of e-services may reduce the scope for undesirable
behavior among government officials. Furthermore, by promoting the development of
stock markets and bond markets through online trading, the IT revolution can help to
weaken the region™s over-dependence on banks, which all too often channeled resources
toward favored borrowers at the government™s behest. Therefore, in the long run, the



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New Economy will help to break up the unhealthy aspects of the relationship between
the region™s governments, corporate sectors and financial systems.
The potential benefit of the IT revolution for improving the quality of the region™s
financial services points to a more general potential benefit “ that of improving the
productivity in the service sector as a whole. As we can see in Table 2, services account
for a large share of GDP in East Asian economies. The shift away from other sectors
toward the service sector is especially evident in the richer regional countries. For
example, Hong Kong, which has experienced a massive hollowing out of its manufactur-
ing base to China, now has a tiny manufacturing sector and derives around 85% of its
output from services. To illustrate the potential benefits of IT for services, according to
Lehman Brothers, a transfer between bank accounts costs $1.27 if done by a bank teller,
27 cents via a cash machine, but only 1 cent over the Internet.




No Panacea
As we have seen in the preceding section, the New Economy does indeed offer enormous
economic opportunities for East Asia. Unfortunately, focusing solely on potential
benefits, however big they may be, often leads us to unrealistic expectations. And so it
is with the New Economy and East Asia. That is, its strongest advocates tout the IT
revolution as a solution to everything under the sun “ from poverty and malnutrition to
war and conflict. Granted, the IT revolution will clearly bring about big benefits for
mankind, but we must be realistic about its limitations as well.
In this connection, IT™s true believers often bring up India as an example of how a poor
country can leapfrog the Industrial Age and move straight into the Post-Industrial Age.11
India™s example is especially relevant for the poorer East Asian countries outside Japan
and the NIEs. No doubt India has done well for herself in exporting software and allied
services as well as IT-enabled back-office work, and the country has become a global
powerhouse in certain niches. So one might be tempted to argue that despite its
traditional lack of international competitiveness in manufacturing, India has managed to
achieve such competitiveness in services thanks to the New Economy™s technological
advances and that the country is on its way to becoming the next tiger.
If only the New Economy were that powerful! In the first place, India remains a very poor
country by any measure and it is too early to tell whether India™s ascent from its Hindu
rate of growth will be sustained. Second, although it is untrue that the IT revolution has,
as some critics argue, had only minimal impact on India™s noticeably better economic
performance in recent years, it would be equally implausible to attribute all or most of the
improvement to the country™s booming IT sector. In other words, IT™s impact on the
Indian economy extends well beyond the pristine premises of, say, Infosys, but it is
simply nowhere big enough to carry the entire economy to a higher level. Third, it may
be difficult for poor East Asian countries such as Indonesia, Vietnam or the Philippines
to replicate the experience of India, with its millions of English speakers and abundant
supply of engineers and other scientific personnel.12




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Opportunities and Challenges of the New Economy for East Asia 327


Another important area that often generates unrealistic expectations of IT is poverty
reduction. One of the most impressive achievements of the East Asian miracle was a
remarkable reduction in the proportion of the population living below the poverty line
throughout the region. Nevertheless, hundreds of millions of East Asians still live in
grinding poverty, especially outside Japan and the NIEs. The Asian crisis has made
matters substantially worse, undoing decades of hard-earned progress in countries such
as Indonesia and Thailand.
There are several ways in which IT can help East Asia in its fight against poverty, but
they all ultimately relate to the essence of the New Economy “ the availability of more
information at lower cost.13 The poor, who usually suffer from the poorest access to
information (and in fact this is a big source of their poverty), stand to gain the most from
the greater supply of information brought about by IT. For example, IT can provide East
Asia™s small farmers access to valuable timely market information such as the price of
inputs and outputs, weather forecasts, and income-maximizing crop mix. IT can also
improve the access of the rural poor to education through distance learning and access
to health care by training rural health workers. In either case, the end result will be higher
productivity and incomes. This matters because agriculture remains a significant part of
the national economy in many countries, especially the poorer ones, as Table 2 clearly
shows. Furthermore, as Figure 7 indicates, agriculture™s share of the workforce is
typically bigger than its share of GDP, which means that boosting agricultural produc-
tivity matters a lot for reducing poverty.



Figure 7. Agriculture™s share of GDP and workforce, selected East Asian countries


50
45
40
35
30
25
20
15
10
5
0
Japan Korea Philippines Thailand Malaysia

Share of GDP Share of Workforce


Source: World Development Indicators 2001



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However, despite its potential to contribute toward poverty reduction in East Asia, IT
by itself cannot do the job. For example, small farmers who gain greater access to
information will not be able to make good use of this information if they cannot get their
products to markets on time due to poor roads and storage facilities. Or, an artisan who
finds new overseas customers through the Internet will find his ability to deliver his
products severely constrained by the lack of adequate ports and airports. East Asian
economies will not be able to unlock the promise of IT as an anti-poverty tool unless they
have good physical infrastructure and other necessary complements.14
This brings us to a more fundamental point. All the talk about using IT to leapfrog, bypass
and so forth is not merely illusory; it is downright dangerous. Such talk makes us lose
sight of the fact that the New Economy does not at all change the fundamental ingredients
of economic growth. As we just saw, the New Economy™s advent renders good physical
infrastructure more, not less, important. And so it is with human infrastructure. East Asia
would do well to stick to things that have served it well during the course of its economic
miracle “ sound macroeconomic policies, openness to foreign technology, an outward-
looking, export-oriented development strategy, focus on education, and rapid accumu-
lation of physical capital. The New Economy will not allow countries to leapfrog sound
economic policies.15
In fact, it is precisely such policies that will maximize the benefits of IT as well as allow
IT to take hold in the first place. That is, good policies will not only enable East Asian
countries to realize the potential benefits of IT for their economies, it will also accelerate
their entry into the digital age. Of course, those policies are desirable for their own sake,
but in the New Economy their benefits will go even further. For example, investments in
education yield higher returns because IT enables exports of labor-intensive back-office
services. At the same time, a strong policy toward the environment will promote domestic
and foreign investment in the necessary physical infrastructure for IT, such as an
efficient telecom sector. A specific example of a simple but useful IT-enabling policy is
to liberalize imports of computer hardware and software, which will sharply bring down
their prices and thus accelerate the spread of IT.




Pre-Conditions
Just as there are clear limits to what IT can do, it is also worth remembering that the IT
revolution will not arrive throughout East Asia automatically. That is, East Asian
economies must work hard to fulfill some basic pre-conditions if they are to enjoy the
substantial potential benefits of the New Economy.16 It is not sensible to discuss the
implications of the New Economy for East Asia when it is far from certain whether all the
region™s economies will experience it in a meaningful way in the first place. Some
countries already appear to be doing better than others in terms of creating an appropriate
enabling environment for the New Economy. Such an environment requires above all the
widespread availability and low cost of the basic hardware of the New Economy “
computers and access to telecommunications. As we can see in Table 5, the countries




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Opportunities and Challenges of the New Economy for East Asia 329


Table 5. IT diffusion in East Asia, various indicators

Country 1 2 3 4 5
China 7 0.02 74 184 7
Japan 272 11.03 494 214 214
Korea 150 4.22 467 345 378
(South)
Taiwan 178 16.71 543 372 206
Hong Kong 310 20.09 584 538 362
Singapore 344 13.45 465 525 244
Indonesia 11 0.11 27 60 4.3
Philippines 16 0.21 32 68 6.7
Thailand 33 0.03 82 116 13.2
Malaysia 78 1.93 205 146 69

Source: World Competitiveness Yearbook 2000, Yearbook of World Electronics Data 2000
(Elsevier), and World Telecommunications Indicators (International Telecommunications Union)
Note: 1 = Computers per 1,000, 2 = Internet hosts per 1,000, 3 = Telephone lines per 1,000, 4
= Secure servers per million, 5 = Internet users per 1,000




of the region vary widely in terms of IT diffusion and hence readiness for the New
Economy.
The foundation for the IT revolution and the New Economy is undoubtedly the
telecommunications sector. Quite simply, a country that does not have an efficient and
well-functioning telecom sector will find itself at the wrong end of the emerging
international digital divide.17 We cannot emphasize enough the central importance of
telecom in IT. So much so that ICT, or information and communication technology, is
increasingly replacing IT in the jargon to emphasize the convergence of information
technology and telecommunication technology in the New Economy. Those of us living
in richer countries have a tendency to take affordable and reliable telecom services for
granted but, unfortunately, this is not the case in poorer countries.
Therefore, telecom liberalization has to be the point of departure for any East Asian
country that wants to join the New Economy. Again, this is especially relevant for the
region™s poorer countries, where access to telecom services is often limited. Most
available evidence indicates that liberalization tends to improve both the quality and
quantity of telecom services, as well as encourages more investments. 18 Although
bringing in the private sector has not always been successful, liberalization generally
does involve a bigger role for the private sector.19 A sound regulatory framework that
promotes competition is required in order to promote efficiency and innovation as
opposed to a private monopoly merely replacing a public one. In East Asia, as elsewhere,
governments™ reluctance to liberalize owes to the fact that public telecom monopolies are
a major source of revenues. However, such shortsightedness, costly for the economy as
a whole to begin with, will be all the more so in the New Economy.



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330 Park


Figure 8. Gap in IT diffusion between Japan/NIEs and rest of East Asia, 1998

600


500


400


300


200


100


0
PCs per 1,000 Telephone lines per 1,000

Japan/NIEs Rest of East Asia


Source: Yearbook of World Electronics Data 2000 (Elsevier) and World Telecommunications
Indicators (International Telecommunications Union)




The need for telecom liberalization is particularly urgent in the poorer countries of the
region. This is because, as Figure 8 clearly shows, there is a clear digital divide between
East Asia™s richer economies “ Japan and the NIEs “ on one hand and the rest of the region
on the other. The former are much better equipped to survive and thrive in the New
Economy than the latter. Consumers and firms in Japan and the NIEs by and large already
have good access to IT hardware such as telecom services and computers unlike in the
rest of the region where access is much more limited. Indicators of IT diffusion other than
the availability of telephone lines and computers also indicate an unmistakable IT divide
between Japan and the NIEs as opposed to the rest of the region. For example, the number
of Internet hosts per 1,000 in 1998 reached 13.1 in the former but only 0.39 in the latter.
Similarly, the number of secure servers per million in 2001 reached 65 in the former but
only 1.4 in the latter.
The digital divide between the richer and poorer countries of the region has clear
implications for their readiness to use IT in economic activity. The potential of e-
commerce to promote economic efficiency and consumer welfare will go unrealized
unless there is the necessary hardware in place. This is true for both B2B e-commerce and
B2C e-commerce. For example, buyers who do not have access to the Internet cannot buy


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Opportunities and Challenges of the New Economy for East Asia 331


Figure 9. Percentage of online shoppers, 2002

16

14

12

10

8

6

4

2

0
Percentage of Total Populaiton

Korea Taiwan Singapore Malaysia Thailand Indonesia


Source: TNS Global E-Commerce Report (2002)




online even when this might be more convenient and less costly. Figure 9 clearly
illustrates this gap between the two groups of countries. Notice that the percentage of
population that shops online depends not only on the percentage of Internet users who
buy online but, more fundamentally, the percentage of the total population that are
Internet users. The low percentage of online shoppers in Singapore and Taiwan helps
to illustrate another significant point “ even in the region™s rich countries: e-commerce
has a long way to go until maturity. Even in Korea, which has embraced e-commerce with
more enthusiasm, B2B e-commerce amounted to less than US$1.5 billion, or less than 2%
of total B2B commerce, in 2000. In other words, while the necessary IT physical
infrastructure is largely already in place in those countries, companies and consumers
have yet to widely use it in their everyday economic activities.
Given such disparity in terms of IT hardware between Japan and NIEs on one hand and
the rest of East Asia on the other, it is not surprising that the majority of IT-related
success stories are concentrated in the former. For example, in Singapore, the IT industry
has become an integral and dynamic part of the local economy. By 2002, total annual
revenues from the IT industry had reached about US$18 billion, which represents close
to one-fifth of GDP. Figure 10 shows the composition of those revenues. An interesting
characteristic of Figure 10 is that in Singapore, more so than in Japan and the other NIEs,



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332 Park


Figure 10. Composition of Singapore™s IT revenues, 2002


35

30

25

20

15

10

5

0
Share of Each Category

Hardware Software Telecom Services
IT Services Content Activities

Source: Infocomm Development Authority (2003)




software also plays a big role in the IT industry, so there is a rough balance between
hardware and software. Creative Technology, which is a private sector company
specializing in the production of sound cards for PCs, is the best-known example of
Singaporean success in the software sector. In fact, Creative Technology has become
one of the world™s leading and most widely recognized brands in sound cards. This
success is all the more remarkable in view of the limited role of the private sector in the

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