Tue, 06 May 2003

Part 1 of 2 Economic development strategy in SE Asia

Narongchai Akrasanee, Former Thai Minister of Commerce, Jakarta

The countries in Southeast Asia have to continuously formulate and adjust economic development strategy.

In doing so, we are influenced by at least four groups of issues: Social and economic phenomenon, economic theory, country's experiences, and changing business paradigm.

Making decisions on today's economic development strategy depends on those considerations, plus where we are on the development mode of trade, finance, and technology.

Let's first look at the influence of the social and economic phenomenon. Each of us might have had a different social and economic history. But all of us have experienced Western domination. Those who suffered more have taken more time to join the Western model of market capitalism and democracy.

Now almost all of us have joined the global market capitalism and some form of democracy, depending upon the different concern about security issues in our country.

Each has a different degree of success with market capitalism. Some are skeptical about market capitalism, and are trying to develop own model of economic development.

Recently Asia has gained more economic power, particularly because of China. Thus new economic development model is focusing more and more on inter-Asian economy.

Further, let's look at the strength of economic theory. If we learn economics in the West, we tend to support market capitalism. In market capitalism David Ricardo told us more than 200 years ago that trade should be based on comparative advantage.

This was supported by the works of such economists as Heckscher & Ohlin, Stolper & Samuelson. The theory tells us that trade liberalization through optimal allocation of resources and factor price equalization would be welfare enhancing, even reaching Pareto optimum.

That requires a perfect market, which Edwin Chamberlain and Joan Robinson say does not exist. We liberalized trade and had gained from trade, but often with unfavorable terms of trade. And now Joe Stiglitz, a Nobel Laureate in economics, tells us that it is so because we have "asymmetry of information", meaning because we know less than our trading partners.

On finance we learn from such economists as J.R. Hicks and Harrod/ Domar that capital is the engine of growth. We can only grow as much as capital accumulation allows us to grow. We are encouraged to have domestic saving and to borrow from overseas.

We are encouraged to open our capital account and to liberalize our financial sector. Some of us did, like Thailand and Indonesia in the early 1990s.

It is true our economies grew a lot. But look at what happened in 1997 and 1998. We have now learned that by joining the global financial market we are faced with unfavorable terms of risk.

On technology we learn form Joseph Schumpeter the power of innovation. We learn from Dale Jorgenson about growth due to productivity improvement. We learn that to benefit from productivity driven growth we must have a good system of intellectual property rights.

Now most of us are grappling with this concept. It is not a part of our culture. This is now a necessity, as Paul Krugman said, that we have exhausted our labor and natural resources. To grow we must rely on productivity and creativity, through the development of the Intellectual Property Rights (IPR) system.

Further, one should look at the factor of country's experiences. We have had different experiences with the economic development strategy we adopted. Thailand and Indonesia could claim some success for trade liberalization, but failed at financial liberalization.

Malaysia has done better in both areas. And Singapore has done very well. The Philippines has not opened the capital account as much. Vietnam is experimenting with trade liberalization. So each of us has different views about trade and financial liberalization.

We are told that to really benefit from liberalization we must have: Proper sequencing, practices of good competition policy, practices of good governance, and maintenance of sound macroeconomy. As we could not claim to have all those virtues, the bad experiences some of us had with liberalization was said to be entirely of our own fault. The critics say that there is nothing wrong with the liberalization model.

There is also the influence of the changing business paradigm. As we open up to do business we are constantly confronted with the changing business paradigm initiated by the West. The paradigm has important bearing on our competitiveness. And we continuously have to play the catching-up exercise.

Factors which have influenced business practices the most are transportation and telecommunication technologies. And now computation technology, which is evolving very rapidly, is having the biggest impact on business paradigm. Transportation determined the trading mode ever since the steam -- engined cargo ships started to travel from Europe to Asia in the early 19th century.

Now we have container ocean liners and cargo jumbo jet planes, which contribute towards the ever growing intra-industry trade and specialization. And the continuous advancement of telecommunication technology has transformed commercial transaction into electronic -- thus the emergence of e-commerce in all areas.

At present, behind the changing business paradigm is the rapid progress of computation technology, which is happening so fast that even the Moore's Law has become obsolete. Remember, the Moore's Law says that "At the same cost, computation capability doubles in 18 months". In the last three years computation capability in all categories including processing, storage, and transmission increased many folds. This was happening along with software development and the Internet expansion.

The development of computation technology has created ubiquitous computing (meaning computing everywhere), computational biology, cognitive devices, and e-commerce.

So now the business paradigm is changing from: Economy of scale to economy of speed, mass production to customized production, owning assets to accessing assets, tangible assets to intangible assets and intermediation to e-mediation. This fast changing paradigm prompts Juan Enriguez to threaten us that if we do not change, we will be "caught by our future".

The above article is abridged from the writer's presentation at The Jakarta Post's seminar on Strategy for Indonesia's Economic Development held on April 28.