Will East Asia buy World Bank's model?

Will East Asia buy World Bank's model?

Yang Razali Kassim, The Straits Times, Asia News Network, Singapore

Speaking at the World Economic Forum summit in Kuala Lumpur
last week, Prime Minister Goh Chok Tong veered from the well-
trodden path. He threw up two posers about Southeast Asia's
future.

The region must push ahead with deeper economic integration.
That's the best way to face the rising economic challenge from
China. But in the medium term, should ASEAN work to become an
ASEAN Economic Community, not unlike the European Economic
Community of the 1950s?

In the longer term, should it remain a free association of
independent states, or evolve into a politically-unified entity
like the European Union?

These are bold questions. They have never been raised publicly
before by any ASEAN leader. If they are meant to provoke some
deep thinking, it is of the kind Goh described as "alternative
futures" for ASEAN.

Goh should have gone further. Thinking about alternative
futures is needed for East Asia as well. Significantly, this has
been going on, even at the policy level, since the great flux of
1997.

East Asia's two core components -- Northeast and Southeast
Asia -- are still reeling from the after-shocks of the financial
crisis that began in Thailand that year. The crisis may have
abated. But in its wake, serious questions have emerged about the
development model long used by East Asia.

South Korea, Thailand, Malaysia and Indonesia have been among
those hardest hit by the recent turmoil. They are recovering to
varying degrees. But their faith in the current economic model
has taken a severe beating.

The Asian crisis was the first blow to confidence in this
model. The second is the decline of Japan as an economic
powerhouse for East Asia. To rub salt into the wound, the rise of
China presents the region with proof that growth need not depend
solely on foreign capital.

One distinguishing feature of the East Asian economic model --
some call it EAEM -- is its high dependence on the external
economy. Its key strategy is to secure growth through foreign
direct investment (FDI) and exports.

Playing mobilizer of these resources is the state. This model
was so successful until the early 1990s that the World Bank and
the IMF lauded it. In a 1994 study, the World Bank extolled it as
a model for others.

But the Asian crisis three years later deeply embarrassed the
multilateral bodies. What the crisis has exposed are the dangers
of East Asia being too dependent on FDI. Another dangerous
dependency is that on the state for economic initiative,
especially with a weak government, and has led to crony
capitalism.

The upshot: A number of analysts have declared the EAEM
"defunct". One leading proponent of the "end of the EAEM" school
is Morgan Stanley's Daniel Lian in Singapore. Defunct or not, at
least two countries have openly questioned the continued
relevance of this model for themselves.

Thailand is one of the first countries in ASEAN to move away
from the "single-track" EAEM. Prime Minister Thaksin Shinawatra
calls his the "two-track EAEM".

In this alternative model, the role of FDI is lessened, though
not debunked. More reliance is placed on domestic demand and
local entrepreneurship, including small and medium-sized
enterprises to spur growth. The Thai model is not unlike South
Korea's. In fact, the Korean model of self-reliance has proven so
successful that Seoul was first to recover from the Asian crisis.

The other country to revise its EAEM model is Malaysia.
Recently, Prime Minister Mahathir Mohamad declared a new-look
"Look East" policy -- switching from Japan to South Korea. The
Malaysian version, currently being engineered by Dr Mahathir, is
leaning towards the Korean-like emphasis on domestic capacity,
including a return to agribusiness as an engine.

It is against this backdrop that the World Bank emerged on
Wednesday with a book on how East Asia should recapture its lost
glory. Entitled, Can East Asia compete? Innovation for global
Markets, the book is written by Shahid Yusuf and Simon J. Evenett
and takes an optimistic view of East Asia's future.

The authors believe East Asia can regain its competitive edge.
But they say that to do so, it must take the path of innovation
and open up, not retreat. The three engines for innovation are
seen as research and development, financial and business services
and information and communications technology.

Two things, however, strike me about the proposal. The first
is how tilted this innovation-driven model is towards the higher-
income East Asian economies such as Japan, Korea, Taiwan,
Singapore and also Malaysia and Thailand.

Relatively less attention is given to the lower-income East
Asian economies such as Indonesia or the Philippines, although
China unavoidably takes center stage.

The second is how much the authors avoid suggesting that they
want to throw the East Asian model completely out of the window.
Words such as "defunct" or "dead" cannot be found to describe the
current East Asian model.

When I asked the lead author, Shahid, whether he regards the
East Asian model as discredited, he was coy, but colorful.

"It's not discredited. Many of the parts of the model are
still relevant. But we are rebuilding the ship on the high seas.
We are adapting it to the times," he said.

Call it what you will. But some dissatisfaction with the
current strategy is inevitable and detectable.

In one section, the authors refer to how faith in the East
Asian model has been undermined by two things -- the Asian crisis
and the declining attractiveness of the Japanese approach to
organizing and managing the economy.

In a foreword, two of the World Bank's top officials give
their view on the declining faith in the current East Asian
model: "As is becoming increasingly apparent, an investment-led,
state-directed approach that derives much of the demand pull from
exports of manufacturers may not yield the impetus as it did in
the past..." they say. "For most ... the answer to their economic
ambitions is likely to lie in more complex and variegated
approaches."

At the core, East Asia's unhappiness is about the seeming lack
of control over its own destiny arising from the current model.
Amid the fundamental questioning, the bank does not want to be
caught flat-footed again.

The innovation-driven model it is offering is not the first
word, nor will it be the last on the desired economic paradigm
for the future.

Will the World Bank's idea shape the debate now raging about
East Asia's alternative futures. Or will it be ignored by an
increasingly restive region?