Cabinet Office, Government of Japan

English Home  >  Policies  >  Economic and Fiscal Policy  >  Annual Report on The Asian Economies 2000

Annual Report on The Asian Economies 2000(Provisional Translation)

(SUMMARY)

June 21, 2000

Research Bureau
Economic Planning Agency
Government of Japan


(Note)

1. This report focuses mainly on East Asia and South Asia.

Smaller regions defined in this report, are groups of the following Countries and regions:

Asian NIEs (Asian Newly Industrializing Economies)

Korea, Taiwan, Hong Kong, and Singapore

ASEAN 4

Indonesia, Thailand, Malaysia, and the Philippines,

East Asia

Asian NIEs, ASEAN4, and China

South Asia

India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan

The Pacific regions

Australia, New Zealand

2. The economic forecasts of individual countries are based on the forecasts by the IMF, ADB, and PECC.


Provisional Translation

Annual Report on the Asian Economies 2000
(SUMMARY)

Contents

Chapter 1 Rapid Economic Recovery in East Asia
Summary of Chapter 1
Part 1 Why did East-Asian Economies Recover Faster than Expected?
Part 2 Why did Exports Increase?
Part 3 Did the Capital Flows Make a Change of Direction?
Part 4 Was there any Progress toward Structural Reform?
Chapter 2 Economic Development in Asia in the IT Revolution
Summary of Chapter 2
Part 1 IT Revolution and IT Diffusion in Asia
Part 2 IT Features and Asian Economic Development Patterns
Part 3 Indicator on IT Diffusion in Asia and Potential Development
Part 4 Current Aspects and Problems in IT Strategies Adopted
by Asian Economies
Part 5 Roads to achieving the "Asian New Economy"

<Summary of Chapter 1> Rapid Economic Recovery in East Asia

hy did East-Asian Economies Recover Faster than Expected?]

Early in 1999, East-Asian governments and international organizations anticipated a gradual and modest recovery by regional economies. In reality, however, they have recovered far faster than expected.

The following common driving forces induced this rapid recovery;

1) Increased exports with electrical and electronic equipment as major components,

2) Completed inventory adjustment,

3) Increased private consumption.

Except influence of political instability in Indonesia, the uneven pace of economic recovery is basically attributable to differences in economic structure, such as;

1) Speed of adjustability to external shock,

2) Industrial structure.

[Why did Exports Increase?]

Exports in dollar terms from East Asia as a whole, which had declined sharply in 1998, began recovering at the beginning of 1999 and speeded up growth in the second half of the year. This favorable export performance was a major factor behind the faster-than-expected recovery of East-Asian economies. In particular, strong exports of electrical and electronic equipment and active intraregional trade mainly contributed to export performance. Increasing worldwide demand led by the United States for IT-related equipment and the broad network of production among in East Asian economies may have been behind the export increase.

[Did the Capital Flows Make a Change of Direction?]

After the outbreak of currency and financial crises, currency stabilization and solid source of international liquidity quickly materialized in East Asia thanks to broad international finance cooperation, which helped restore international investors' confidence. This increased the attractiveness of East Asian economies as investment recipients with good potential by means of proper adjustment and structural reform against possible crises. The return of overseas private capital to the region resumed, created a cycle of capital inflow and economic growth that brought the economies into sustainable recovery. Such a resurgence of capital inflow, however, varied among East-Asian economies, reflecting degrees of economic recovery.

Although conflicting opinions on the need for capital control remain, more people now admit its effectiveness in the short-term as a supplementary role. However, such capital control should only be used temporarily.

[Was the Financial System Sufficiently Strengthened?]

To ensure sustainable East-Asian economic growth, it is vital to strengthen the present financial system through ongoing reconstruction programs for the financial sector. Although progress was observed toward more stable financial activities in countries undergoing currency crises, the financial systems of individual economies still remain vulnerable. The problem of decreased bank credit in real term is attributable to weak funding needs on the part of industry. Nevertheless, sustainable economic growth is only feasible with efficient financial intermediation. Since it would be difficult for financial institutions to accommodate loans based on the same credit standard as in the early 1990s, direct financing may play a more important role in the future. Certain progress has been seen in ameliorating the function of Asian securities markets.

[Is a Continuous Move Anticipated toward further Structural Reform?]

No significant progress was seen in structural reform other than that of the financial sector in such countries as Thailand, Indonesia, and Korea, which adopted some of the regulatory measures recommended by the IMF. Although their economies have recovered faster than initially expected, further structural reform is indispensable to ensure stable economic growth. Now is the time to speed up such efforts while economic recovery continues.



Part 1: Why did East-Asian Economies Recover Faster than Expected?

Early in 1999, East-Asian governments and international organizations anticipated a gradual and modest recovery of regional economies. In reality, however, they have recovered far faster than expected.

(Factors Supporting the Rapid Recovery)

Strong export performance was the first major factor spurring the faster-than-expected recovery of East-Asian economies. This was mainly due to increasing worldwide demand for IT-related equipment and to active intraregional trade in the region (Figure 1-1-6) (detailed in Part 2).

The second major factor contributing to economic recovery was completed inventory adjustment. The move toward inventory adjustment began immediately after the outbreak of currency and financial crises due to financial confusion and difficulty in obtaining parts and materials from abroad. This created a sharp decline in both production and inventory. However, as demand began to pick up thanks to the relaxation of fiscal and monetary policies and increased exports, Asian NIEs successfully completed inventory adjustment during the second quarter of 1999. Likewise, in ASEAN4, declining production seemed bottom out in the second half of 1998 and started a resurgence in 1999 with a smaller inventory decline.

The third major factor contributing to economic recovery was increased private consumption. Although unemployment rate still remains higher compared to that before the crisis, an upward trend is no longer seen with the revival of active production. In Korea, where the economy is recovering faster, unemployment rate has begun to drop. The Korean Family Budget Survey shows the propensity to consume in the second half of the 1999 was 3% higher than that of the precrises, reflecting a reversal of straitened consumer spending in 1998.

(Uneven Pace of Economic Recovery)

The pace of recovery in East-Asian economies differs with the country. Among the crisis-hit countries, the Korean economy began to show an upward trend in the fourth quarter of 1998 followed by the Philippines, Malaysia, and Thailand in the first half of 1999, whereas the Indonesian economy began recovering only in the second half of 1999.

The uneven pace of economic recovery is basically attributable to differences in economic structure, such as;

1) Speed of adjustability to external shock,

2) Industrial structure.

The Korean economy may have recovered quickly due to its swifter adjustment to external shock and low vulnerability to a regional vicious circle.

The strong economic recovery in Korea and Malaysia is supported by the export competitiveness of IT-related equipment (Figure 1-1-14).

Recovery of the Indonesian economy was lagged behind the other countries in the region due to a currency crisis coupled with political instability. Lower export benefits from worldwide demand for IT-related equipment may also be a reason.



Part 2: Why did Exports Increase?

(Increased Exports with Electrical and Electronic Equipment as Major Components)

Exports in dollar terms from East Asia as a whole, which had declined sharply in 1998, began recovering at the beginning of 1999, and speeded up its growth in the second half of the year. This favorable export performance was a major factor in the faster-than-expected recovery of East-Asian economies. Looking at such export performance by item, exports of electrical and electronic equipment have grown continuously among NIEs, ASEAN4, and China, greatly contributing to their sharp export increase (Figure 1-2-5 (1)). Increasing worldwide demand mainly led by the United States for IT-related equipment and the up-turn in East-Asian economies are background factors in such export increases (Figure 1-2-6).

(Increasing Importance of Intraregional Trade in East Asia)

Exports in dollar terms from NIEs, ASEAN4, and China decreased in 1998. Looking at their trading partners, this export decline was mainly due to the abrupt shrinkage of the intraregional trading market (Figure 1-2-7).

Decreased exports in the region were due to the insufficient supply of parts and materials caused by the liquidity crunch, in addition to the direct impact of sharp currency depreciation. Such a liquidity crunch was mainly due to tightening monetary policy and cautious lending attitude caused by nonperforming loans (Figure 1-2-8).

Looking at the trading partners of NIEs, exports to Japan and the United States outnumbered those to NIEs, ASEAN countries, and China in 1990, whereas, the order is reversed in 1999. Such a move is said to be due to the broad network in the region for mutual parts supply in the production of electrical home appliances and computers. On the other hand, this implies that a liquidity crunch in one country may react economic shrinking in the region through intraregional trading. Appropriate measures, such as international financial support programs by the IMF and by the New Miyazawa Initiative and economic package adopted by Asian countries, help to the rapid recovery in the region through intraregional trading. The Joint Ministerial Statement of the ASEAN + 3 Financial Ministers Meeting in May 2000, including Swap Arrangement, enhance East Asia Finance Cooperation. This move is an important first step to confirming sustainable economic growth of the region through smooth linkage of capital flow and trade.



Part 3: Did the Capital Flows Make a Change of Direction?

(Return of Funds to Asia)

After the outbreak of the currency and financial crises, currency stabilization and solid source of international liquidity quickly materialized in East Asia thanks to broad international financial cooperation, helping restore international investors' confidence in the region. This increased the attractiveness of the region as investment recipients with good potential, by means of proper adjustment and structural reform against possible crises. The return of overseas private capital into the region was thereby resumed and created a cycle of capital inflow and economic growth that brought the economies into sustainable recovery. The extents of such a resurgence, however, varied among East-Asian economies, reflecting degrees of economic recovery.

Statistics on capital flow published by the Institute of International Finance (IIF) show that international financial support by such international organizations as the IMF, World Bank, Asian Development Bank, or by the New Miyazawa Initiative have helped restore confidence in this area with currency stabilization and solid source of international liquidity. The total net capital flow of the 5 East-Asian economies, including, both in the public and private sectors, amounted to a net outflow of $14.3 billion in 1998, which improved to $2.1 billion in 1999. In 2000, a net inflow of $12.3 billion is anticipated (Table 1-3-1).

Overseas direct investment in Asian countries (inflow) generally scored a sharp decline in 1998, affected by the worst stage of the crisis. Even countries with positive growth such as China, Korea, and Thailand showed significantly lower growth rate compared to the year before. In 1999, when economies began to show an upward trend, direct investment into such Asian NIEs as Korea, Taiwan, and Singapore marked significant increase compared to the year before, while ASEAN countries and China generally recorded a decreased inflow of overseas investments (Table 1-3-6). These different flows of overseas investment may be because they attach more importance to net investment profitability potential rather than to the effect of currency devaluation (Figure 1-3-7).

(Capital Control against Currency and Financial Crises)

Controlling the volatile movement of short-term funds has become the focus of discussion during the recent crises. Although conflicting opinions on the need for capital control remain, more people who saw the success of Malaysia now admit its effectiveness in the short-term as a supplementary role in keeping local banks from being affected by rapid increases of domestic interest rates. However, such capital control should only be used temporarily, because long-term capital control will inevitably inhibit appropriate capital transactions and trigger the loss of investors' confidence.



Part 4: Was there any Progress toward Structural Reform?

(1) Was the Financial System Sufficiently Strengthened?

To ensure sustainable East-Asian economic growth, it is vital to strengthen the present financial system through ongoing reconstruction program for the financial sectors. Although progress was observed toward more stable financial activities in countries undergoing currency crises, the financial systems of individual economies still remain vulnerable.

The problem of decreased real bank credit is attributable to the weak funding needs on the part of industry. Nevertheless, there exists a risk of the inability on the part of financial institutions to satisfy increasing funding needs in the future in view of their deteriorated financial intermediation. Certain progress has been seen in ameliorating the function of Asian securities markets, as direct financing appears to play a more important role.

(Have Nonperforming Loan Problems been Solved?)

Every monetary authority in Asia considers reconstruction of its financial system the top issue and takes initiative to strengthen prudential regulation and supervision (Table 1-4-5). As a result, the nonperforming loan ratio peaked in the second half of 1998 in Korea and Malaysia and in the first half of 1999 in Thailand and the Philippines. These countries have been successful in gradually reducing their nonperforming loan since then, whereas Indonesia still lags far behind (Table 1-4-2).

Huge amounts of public funds have been invested to improve the business performance of financial institutions, particularly commercial banks (Table 1-4-3). Such governmental support ended in the first half of 1999 in Korea and Malaysia, whereas in Thailand and Indonesia, additional support may be considered in the future.

(Why did Bank Credit in Real Term Decrease?)

The problem of decreased bank credit in real term is attributable to the weak funding needs on the part of industry, as refusal of credit by financial institutions is unusual, except in certain countries (Figures 1-4-8,1-4-9). The weak credit demand by industry even after economic recovery is attributable to the following;

1) Investment levels remain low compared to those before the crisis,

2) In line with increasing exports, industries enjoy comfortable cash flows,

3) A bullish climate prevails in stock exchange markets.

Due to the vulnerability of financial sectors in these countries, the risk exists that financial institutions may be unable to satisfy increasing funding needs of industries in the future.

(Have they Successfully Realign the Function of their Securities Markets?)

Wide disequilibrium between demand and supply of funds may reappear when economies enter sustainable recovery thanks to successful restructuring of debts by industries. In such cases, the role of direct finance will become increasingly important, because it accommodates necessary funds for investment without financial intermediary such as banks. Certain progress has been seen in ameliorating the function of East-Asian securities markets.

(2) Is a Continuous Move Anticipated toward further Structural Reform?

(Physical Contents of Structural Economic Reform)

In response to the IMF's credit proposals to Thailand in August 1997, to Indonesia in October 1997, and to Korea in December 1997, these countries have submitted letters of intent. Such letters of intent incorporated articles related to broad structural reform of their organizations, including that of the financial sector, and tightening fiscal and monetary policies in traditional IMF programs.

Key points of structural reform and the ways and means to achieve it differed slightly among the 3 countries. Thailand focused on such issues as free capital movement and public support for small and medium-sized enterprises. To restore the confidence of overseas investors, Indonesia is promoting privatization of public enterprises and rescheduling private-sector debts Korea is improving management efficiency of industries by breaking up chaebols (or conglomerates) and promoting labor market reform and relaxation of overseas capital control (Table 1-4-16).

(Needs for Well-prioritized Economic Structuring Reform)

Although the recent IMF program has been criticized by experts, it may be beneficial because it covers such long-term issues as structural reform. It may have been useful in solving delicate issues of structural reform by exerting external pressure. As IMF follow-up indicates, however, prioritizing structural issues on a long-term basis based on the individual country's status, rather than randomly listing the broad range of issues, is important to implementing reform. The 3 countries have realized greater-than-estimated economic growth despite their lack of success in structural reform issues except for the financial sector. Further structural reform is indispensable to ensure stable economic growth. Now is the time to speed up such efforts while economic recovery continues.


<Summary of Chapter 2> Economic Development in Asia in the IT Revolution

[IT Revolution and IT Diffusion in Asia]

Asian economies owe much of their success to the production of IT equipment. However, the diffusion of IT throughout those economies (IT diffusion) does not depend on hardware production alone. IT services markets, such as the use of cellular phones and the Internet, have grown explosively. The rapid IT diffusion throughout Asia may soon help to achieve the "Asian New Economy."

[IT Features and Asian Economic Development Patterns]

IT has the following unique features;

1) Rapid innovation and inexpensive learning costs,

2) High value of information and intellectual property and significantly high return of investment,

3) Complementarity to organizational restructuring,

4) Expanded network externalities.

IT diffusion in Asia is currently supported by growing exports to developed countries, but it may not be long before growing intra-regional demand supports it. Lagging infrastructures may create a "digital divide" among IT users depending upon their geographical or social positions. IT diffusion increases the value of intangible assets such as knowledge and information. It may benefit economies such as India and the Philippines, which have not necessarily been successful in manufacturing, to promote the development of highly advanced software industries. Future progress in these countries is anticipated.

Asian economies as a whole may realize a "New Asian Miracle" through IT diffusion, but their development may not take the traditional flying geese pattern.

[Indictor on IT Diffusion in Asia and Potential Development]

Although much data exists to explain the mode of action and effectiveness of IT on economies, we have composed indicators using statistical data easily obtainable and convenient for international comparison.

The level of telecommunications infrastructures and proliferation of IT appliances (basic indicator) on which progress in IT diffusion may depend show a relationship between the level of IT diffusion and that of per capita income. Production capacity which is a physical element supporting IT diffusion (output indicator) takes a flying geese pattern. The level of creativity which concerns with potential development of the knowledge industries (knowledge indicator) takes a totally different pattern from that of per capita income or the flying geese pattern.

[Current Aspects and Problems in IT Strategies Adopted by Asian Economies]

In the 1990s, most Asian economies worked to develop telecommunications infrastructures and info-communication industries, regarded IT as indispensable to economic strategy. Their initial IT strategies were to develop a broadband infrastructure by huge public investment. As the potential of the Internet grew more apparent, however, they shifted their strategy toward active use of Internet and entrusted development of telecommunications infrastructures to the private sector. With the spread of the Internet, electronic commerce (EC) has attracted public interest. Their common attention should be focused on:

- Nationwide promotion of IT expertise

- Promotion of deregulation

- Outsourcing of Government IT operation

[Roads to Achieving the "Asian New Economy"]

IT diffusion is quickly progressing in Asia. Furthermore, each economy has high potential, although that potential differs among countries. However, each economy has to cope with the following possible bottlenecks;

1) Shortages of infrastructure and institution, such as telecommunications networks and electronic commerce laws,

2) Shortage of intellectual capital to develop an IT economy,

3) Shortage of risk money supply.



Part 1: IT Revolution and IT Diffusion in Asia

(IT Diffusion in Advanced Countries)

The IT revolution increases intellectual productivity and thereby accelerates economic growth. The availability of advanced high-density communications brings dramatic changes to economies, including enterprises and markets, and greatly influences family life, community relationships, and countries as a whole, promoting the reformation of entire social structures.

The United States is in the process of developing its "New Economy." Labor productivity has been dramatically accelerating and potential growth rates have increased. IT diffusion helped create new business, new jobs, better services, and lower prices. IT diffusion is seen not only in the United States, but also in Japan and in Europe. In these countries, technological developments in diversified telecommunications and sophisticated terminal technologies has emerged.

(IT Diffusion in Asia)

Asian economies owe much of their success to the increased production of IT equipment (Figure 2-1-1), which has been brought about by active demand for IT equipment in major importing countries such as the United States. The IT diffusion in the Asian economies does not depend on hardware production alone. Growing demand for cellular phones and Internet communications services has promoted rapid development of IT service markets (Figure 2-1-3).

The rapid proliferation of cellular phones has been brought about by the technological progress in cost cutting and the alignment of the IT infrastructure in the 1990s. Such alignment was achieved by successive liberalization in mobile communication fields, such as promoting privatization, eliminating entry barriers, loosening foreign ownership, and setting up independent monitoring organizations. The demand for Internet services has mushroomed in Asia (Figure 2-1-5). Fierce competition among Internet service providers has reduced service rates and relatively high incomes and better equipped infrastructures have helped rapidly disseminate the Internet to the NIEs (Figure 2-1-6).

(Prospects of the New Economy in Asia)

Growing IT diffusion in Asia may change the Asian economic structure to one as knowledge-intensive as in the United States, bringing a leap in productivity representing an "Asian New Economy."



Part 2: IT Features and Asian Economic Development Patterns

(Economic Features of IT Revolution in Contrast to Industrialization)

Important IT revolution aspects affecting economic development, advanced industrialization, and international division of labor in Asia include:

- Rapid innovation and inexpensive learning costs

- High value of information and intellectual property and significantly high return of investment

- Complementarity to organizational restructuring

- Expanded network externalities creating a virtuous cycle between IT proliferation and business structure through reduced costs and increased consumption and production

(Future Potential of Diversified IT Diffusion in Asia)

IT diffusion means enormously faster pace of development than that of industrialization. The IT diffusion in Asia is currently supported by growing exports to advanced countries, but it may not be long before growing regional demand will support it.

Lagging infrastructures may create a "digital divide" among IT users depending on their geographical or social positions, which may result in wider regional income gaps.

IT diffusion increases the value of intangible assets such as knowledge and information, and IT services may play an increasingly important role in international trade. IT diffusion may benefit such economies as India and the Philippines with international-class software industries, where manufacture has not really succeeded (Table 2-2-5).

Since the worldwide shortage of capable IT industry human resources may continue in the future, IT education of the public and the establishment of specialized training institutions for high-level IT workers may be good investments for high efficiency in Asia.

(Transformation of Flying-geese Pattern Development Ranking)

Asian economies as a whole may realize a "New Asian Miracle" through IT diffusion, but their development ranking may not take the traditional flying-geese pattern that has been a good leading indicator of potential in a country. With IT, some countries may leap from a capital-intensive economy to a knowledge-intensive economy without traditional industrialization. Whether they take up the economic advantage of IT diffusion over traditional industrialization depends on such elements as infrastructure development stage, IT human resources quality and quantity, cultural and social background including languages, and IT promotion policies and strategies.



Part 3: Indicator on IT Diffusion in Asia and Potential Development

To evaluate the shape and potential of IT diffusion in Asia, we have composed indicator using statistical data easily obtainable and convenient for international comparison (Figure 2-3-1)1. The level of telecommunications infrastructures and proliferation of IT appliances (basic IT indicator) on which the progress of IT diffusion may depend show a relationship between the level of IT diffusion and that of per capita income. Productive capacity which is a physical element supporting IT diffusion (output indicator) takes a flying-geese pattern. The level of creativity which concerns with potential development of the knowledge industries, such as software and content (knowledge indicator) takes a pattern totally different from per capita income level or the flying geese pattern.

(Reference) Composition of IT diffusion indicators

We collected statistics for 12 countries; the NIEs, ASEAN4, China, India, the United States and Japan, possibly related to IT output, basic, and knowledge indicators. Statistical data was normalized and totaled to work out averages. Individual statistics used for this are as follows:

1) IT output indicator - per capita output obtained by dividing total output (Electronic data processing, office equipment, radio communication and radar, telecommunications, consumer audio and video, components) related to information and communication technologies (ICT) stipulated in the OECD "Information Technology Outlook 2000", by national population.

2) IT basic indicator - main telephone line subscription rates, cellular phone dissemination, computer dissemination, comparison ratios of software-spending against hardware spending, the number of internet users, the number of internet hosts, the number of television sets, household proliferation of cable channels, household proliferation of satellite televisions, e-commerce spending, the number of credit cards issued. Telephone charge is also used because it is a factor promoting the demand for IT services.

3) IT knowledge indicator - enrolment ratios symbolizing national education levels, the number of overseas students studying in the United States, the number of applications for patent registration and the number of technicians engaged in technological development, comparative quote worthiness of scientific articles. TOEFL scores are also used, as communication ability in English is indispensable for IT-oriented activities.

Footnote 1: These indicator are composed from limited databases for trials and are for reference only.



Part 4: Current Aspects and Problems in IT Strategies Adopted by Asian Economies

(Current aspects of IT strategies in individual countries)

In the 1990s, most Asian economies worked to develop telecommunications infrastructures and info-communication industries regarded IT as an indispensable in their economic strategies (Table 2-4-1). But some of these economies which were promoting large-scale infrastructure development as a key to their strategies were forced to delay or suspend initial development programs affected by Asian crisis. This possibly widened the infrastructural gap between Asian economies.

Initially, Internet connection was restricted in most of Asia countries, but has gradually opened with the notion that restrictive measures create economic disadvantages. Today, the Internet connection is becoming widespread rapidly. Their initial IT strategies were to develop a broadband infrastructure by huge public investment. As the potential of Internet grew more apparent, however, they shifted their strategies toward active use of Internet and entrusted the development of telecommunications infrastructures to the private sector. With the spread of the Internet, electronic commerce (EC) has attracted public interest, and its market is expected to increase rapidly. The introduction of cyber laws indispensable to EC development is now under way.

(Key Points for Promoting IT Strategies)

In promoting IT strategies, attention should be focused on the following 3 points;

1) Nationwide promotion of IT expertise - installation of Internet and IT literacy training centers in Singapore, Malaysian strategy of promoting a nationwide mastership of IT literacy, IT education and support by the Korean government to minimize the digital divide in the society,

2) Promotion of deregulation - further liberalization and deregulation of national or regional info-communication markets are promoted, following the liberalization and privatization of telecommunication markets in the past,

3) Outsourcing of Government IT operation - IT operation outsourcing to domestic or overseas enterprises by government signifies the direct alliance of public funds and the most advanced technologies of global IT industries. Such as Singapore and Hong Kong have announced outsourcing of IT public services and investment.



Part 5 : Roads to achieving the "Asian New Economy"

(Infrastructure Improvements)

In Asian countries other than the NIEs, the accumulation of social or institutional capital is insufficient to cope with the arrival of the New Economy. Such insufficiency may cause bottlenecks for IT diffusion. The slow dissemination of fixed telecommunications lines in ASEAN countries, China, and India is repeatedly cited as insufficiency of social capital. It is true that deregulation has made infrastructure development feasible under private initiatives with the advance of technological innovation, but countries such as Indonesia, Thailand, and China lag far behind other Asian rivals in deregulation.

Institutional capital such as legal systems governing business transactions or ensuring social safety should be modified to harmonize with IT services, such as e-commerce. Such moves will vary among Asian nations with geography and sectors. Some have already paralleled or outpaced advanced countries, whereas others lag far behind. A knowledge-intensive economy requires institutional improvements in the legal protection of knowledge property rights to avoid interference with liberal creation and interchange of innovative wisdom. Generally, law enforcement with such objectives has not worked smoothly and is limited in effectiveness.

(Accumulation of Knowledge Capital)

Capable human resources with sophisticated knowledge and intelligence are the key to achieving sustainable prosperity in the New Economy. The accumulation of knowledge capital is a vital part of economic growth (Table 2-5-3). Worldwide demand for IT personnel is expected to grow, and insufficient educational investment in Asian countries as shown by the traditionally low percentage of students applying for higher secondary education may seriously hinder the development of such IT human resources. The lack of sufficient management skill in hiring appropriate human resources is another problem the Asian economies face. The higher the required knowledge level, the lower the availability of able human resources in Asia. Technology transfer from abroad should be considered as an effective solution. Active use of overseas private funds and human resources through relaxed overseas capital controls is important in such technology transfer.

(Risk Money Supply)

The development of the Asian economies has been supported mainly by indirect financing. With the arrival of IT diffusion, new business opportunities backed by innovative technologies and management skills will have emerged. The funding needs for such new, risky enterprises with high potential but low liquidity must be met. In view of the capitalization bottleneck due to insufficient domestic venture capitals in Asia, relaxing overseas capital controls should be considered to attract overseas venture capitals from advanced countries seeking to invest, taking into account that their investment motives differ totally from those of traditional foreign direct investment (Table 2-5-6).

Cabinet Office, Government of Japan1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.
Tel: +81-3-5253-2111