Globalization and Change in Asia 9781685854553

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Globalization and Change in

Asia

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Published in association with the Pacific Basin Research Center

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Globalization and Change in

Asia edited by

Dennis A. Rondinelli John M. Heffron

b o u l d e r l o n d o n

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Dedicated to John D. Montgomery, founding director of the Pacific Basin Research Center, whose energy, vision, wit, and wisdom continue to inspire the PBRC’s work

Published in the United States of America in 2007 by Lynne Rienner Publishers, Inc. 1800 30th Street, Boulder, Colorado 80301 www.rienner.com and in the United Kingdom by Lynne Rienner Publishers, Inc. 3 Henrietta Street, Covent Garden, London WC2E 8LU © 2007 by Lynne Rienner Publishers, Inc. All rights reserved Library of Congress Cataloging-in-Publication Data Globalization and change in Asia / edited by: Dennis A. Rondinelli and John M. Heffron. p. cm. Includes bibliographical references and index. ISBN-13: 978-1-58826-473-2 (hardcover : alk. paper) ISBN-13: 978-1-58826-497-8 (pbk. : alk. paper) 1. Globalization—Asia. 2. Social change—Asia. 3. Asia—Social conditions. 4. Asia—Economic conditions—1945– 5. Political culture—Asia. I. Rondinelli, Dennis A. II. Heffron, John M. HN652.5.G56 2007 303.48'25—dc22 2006022407 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. Printed and bound in the United States of America The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.48-1992. 5

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Contents

Preface

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1 Adjusting to Globalization: Change and Transformation in Asia

Dennis A. Rondinelli and John M. Heffron

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2 Global Crossroads: A Shared History of Globalization

in the Asia Pacific Region John M. Heffron Part 1

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Economic and Technological Transformation

3 Globalization and the Asian Economic Response

Dennis A. Rondinelli

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4 Regional Economic Integration in East Asia

Kevin G. Cai

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5 Globalizing Asian Business: Dynamics of

Change and Adjustment Henry Wai-chung Yeung

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6 Information Technology and Economic

Development Strategy Sang M. Lee

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7 Adjusting to Globalization Through Skills

Development Strategies Sarosh Kuruvilla

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Contents

Part 2

Political and Social Adaptation

8 Inclusive Governance and Democracy in Asia:

Transitions and Challenges G. Shabbir Cheema

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9 E-Government: Applications of Technology

to Government Services Clay G. Wescott

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10 Mobilizing Social Capital: Community Responses

to Globalization Anirudh Krishna

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11 Social Protection Policies: Making Globalization

Work for All Isabel Ortiz Part 3

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Learning from Experience

12 Sustaining Progress in a Globalizing Society:

Lessons from Asia Dennis A. Rondinelli and John M. Heffron Bibliography The Contributors Index About the Book

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n this book we seek to understand the dynamics of change through which governments, social organizations, and the private sector are adjusting to rapidly changing international trends. We explore the historic interplay of domestic and international political and economic forces in the region, asking whether and how mutually interactive forces, in a period of transition, are serving to alter the pace and characteristics of globalization in the Asia Pacific Rim and in the rest of the world. The research in the book differentiates it from work that has focused on arguments over the merits or dangers of globalization, as well as from studies that have examined globalization as a phenomenological issue. Instead, we explore how adjustments to globalization in Asia have conditioned international trends in the region, suggesting a model of balanced human development that sets the region apart from, and that can serve as an example for, other regions of the world. The contributors to the volume explain how and why governments, social organizations, and private enterprises in Asian countries have responded to globalization. They assess the transformational potential of development policies seeking to adjust to and capture the benefits of globalization, ask how adjustments were initiated and nurtured, and describe how changes to development policies were implemented. We ask if regional characteristics, including the rich geographical and cultural diversity of Asia Pacific, altered the face of globalization as a world phenomenon and what global trends already dominant in the world are reinforced by those particularities and were contravened or refashioned by them. All of the contributors recognize that, although many valuable economic, social, and political changes in Asia can be attributed to globalization, increasing international integration and interdependence have not benefited all Asian countries equally, and some groups of people, especially the poorest, have benefited less than others or not at all. We seek lessons for the future from the experiments and innovations that Asian countries are undervii

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taking to adapt to and shape globalization. We hope that the lessons learned in Asian countries that have been successful in adapting development policy will inform other countries that have been less successful or are still struggling to adapt to and benefit from globalization. This book is one of a series sponsored by the Pacific Basin Research Center (PBRC) at Soka University of America. The founders of Soka University of America created the PBRC in 1991 to integrate social science research with the university’s values of peace, human rights, and the dignity of life. The center’s purpose is to engage scholars from around the world in research focused on policies that contribute to the peaceful pursuit of human development. Over the past decade, the PBRC has sponsored research published in nearly a dozen books and in numerous articles and working papers that contribute to our knowledge of international development policy. Its research has examined “great policies”: policies that transcend conventional boundaries of public decisionmaking and inspire innovation; policies that promote positive human rights; and policies that take into account the role of social capital in human development, the impacts of globalization on national sovereignty, and the challenges of nation building in postconflict societies. The PBRC’s current research explores the historic interplay of domestic and international political and economic forces in the Pacific Basin and how, in a period of transition, mutually interactive forces are altering the pace and characteristics of globalization in the region and in the rest of the world. Research sponsored by the PBRC seeks to understand how and why governments, social organizations, and private enterprises in Asian, North American, and Latin American Pacific Basin countries are responding to globalization, exercising leadership for development, and protecting and modifying cultural traditions that embody human values as development occurs. We are grateful to all of those who contributed to the book and to those whose support made the book possible. We especially appreciate the continuing encouragement of the Board of Trustees of Soka University of America, SUA president Daniel Habuki, and the PBRC Advisory Committee. —Dennis A. Rondinelli, John M. Heffron

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CHAPTER

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Adjusting to Globalization: Change and Transformation in Asia Dennis A. Rondinelli and John M. Heffron

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ew regions of the world have been more profoundly affected by or played so large a role in the current wave of globalization than the Asia Pacific Basin (APB). From Australia to China and India momentous changes have occurred over the past thirty years as the result of the increasing interdependence of Asian countries with each other and with the rest of the world. The political, economic, and social characteristics of all of the APB countries have been deeply influenced by globalization. And many Asian countries, following the Japanese policy of economic development through international trade and investment, are reshaping the trends of globalization around the world. We define globalization broadly as “the movement toward greater interaction, integration, and interdependence among people and organizations across national borders.”1 Although globalization is often discussed simply in economic terms as the increase in international trade and investment, the economic dimension is only one manifestation of greater cross-border interaction that has important political, technological, and social aspects. Globalization is a historical social process, as David Held and Anthony McGrew point out, that “transforms the spatial organization of social relations and transactions, generating transcontinental or interregional networks of interaction and the exercise of power.”2

Globalization in the Twenty-First Century Globalization manifests itself not only through greater economic interdependence, but also through stronger social and political ties among otherwise sovereign states. The development of international laws and expansion of international treaties, growth in the number and influence of international nongovernment organizations, and greater numbers of international transac1

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tions by domestic political organizations all call into question traditional notions of sovereignty itself. Enhanced international interactions and interdependencies have led to the spread of cultural influences and the ability of people living nearly anywhere in the world to communicate with each other. Over the past quarter of a century, many Asian countries adopted outward-oriented trade and investment development policies—some after years of export substitution and national industry protectionism—and experimented with programs to reduce poverty and distribute the benefits of economic growth more widely. Since the late 1980s, economic growth and social progress have been stimulated by scientific and technological advances that have made greater intraregional and international interdependence and integration possible. Indeed, many governments in Asia have embraced global technological advances to increase the efficiency and effectiveness of their own political and administrative procedures and refocused their economic and social development policies on the application and use of technological innovations. In order to respond to the demands of globalization and the international pressures they often bring, governments in the region have become more open and transparent, if not always more democratic. Asian multinational corporations (MNCs) are transforming the economies of their own countries through exports and foreign direct investment (FDI) abroad, and multinational corporations based in North America and Europe are playing a strong role in the economic and social development of Asia. Many governments and private organizations in the region have focused more intensely on educating and training their workforces in order to participate more effectively in global economic activities. Larger numbers of people have moved steadily from employment in subsistence agriculture to work in industry and services, from poverty to middle-class incomes, and from rural to urban lifestyles. Advances in health, education, and social services have spread benefits to more people in Asia than ever before in history.

Globalization’s Impacts in Asia At the same time criticisms of the impacts of globalization abound. In his comprehensive defense of the benefits of globalization, Martin Wolf characterizes the complaints of critics of globalization and of the market forces that drive international economic interaction.3 He inventories the long list of critics’ discontents: that globalization undermines the sovereignty of states and their ability to regulate their national economies and raise and allocate financial resources to public goods and social welfare; that it undermines democracy by increasing the power of unaccountable bureaucrats, corporations, and markets; and that it causes mass destitution and increased

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inequality within and between nations. Critics also contend that globalization is destroying agricultural livelihoods for the poor and depriving them of affordable medicines, lowering real wages and labor standards, and increasing economic insecurity. In addition, antiglobalization groups claim that increased international economic interaction is destroying the environment and permitting global financial markets to cause crises that weaken less advanced economies while enshrining greed as a driving force of human behavior and destroying human cultures. Few observers would deny that although many of the progressive economic, social, and political changes that have occurred in Asia over the past quarter of a century can be attributed to globalization, increasing international integration and interdependence have not benefited all Asian countries equally and some groups of people, especially the poorest, have benefited less or not at all. Walden Bello, a leading critic, contends that globalization is a process controlled by the richer countries in North America and Western Europe to the detriment of the world’s poorer countries.4 He attributes much of the poverty and economic disparity in Asia to the damage caused by the financial crises of the late 1990s and by foreigncapital-intensive, low-wage, export-oriented economic development strategies adopted by Asian governments over the past thirty years. Pointing to regional, urban-rural, and income and class inequalities in many countries in the region, he argues that continued participation in a global trade and investment system dominated by Western countries will bring Asia more rather than less economic and political instability. He contends, along with other critics, that globally oriented economic development policies have relegated many Asian countries to the control of Western-based transnational corporations and that growth driven by globalization is resulting in economic, social, and ecological devastation in the region. An increasing number of studies, however, challenges the claims of globalization’s critics. Many economists conclude that the shift toward competitive market economies and their opening to world trade and investment over the past fifty years benefit not only advanced market economies but also countries in transition from government control to market systems. The Organization for Economic Cooperation and Development (OECD) concludes that countries with market economies open to international trade and investment have achieved double the average growth of others.5 A broad range of studies concludes that the economies of countries that had open markets and participated in international trade and investment have grown faster than those that constrained their domestic markets and limited their participation in international trade. Growth in gross domestic product (GDP) is positively associated with export growth. Growth rates are generally higher for all subgroups—small and large primary goods exporters and small and large manufacturing exporters—in outward-oriented countries.

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Open market economies have higher investment ratios, better macro-economic balance, and stronger private sector roles in economic development than do nonmarket countries. Analyses of the relationship between economic progress and “economic freedom” based on rankings of market characteristics—openness of trade policy, fiscal burden of government, government intervention in the economy, property rights, and others—have found a strong positive correlation between the two sets of indicators. By 1998, countries with high levels of economic freedom had per capita incomes of more than $21,000; those ranked “mostly free” had per capita incomes of $11,000, while those characterized as “mostly unfree” and “repressed” had per capita incomes of only about $2,800. In its 2005 Index of Freedom, the Heritage Foundation/Wall Street Journal survey reported that those countries with the greatest improvements in economic freedom from 1995 to 2003 had average GDP growth rates (4.75 percent) substantially higher than those countries with the smallest improvements (2.68 percent).6 Advocates of globalization argue that open market economies hold benefits for countries at all levels of development. The OECD’s studies indicate that open market economies bring: (1) greater freedom of choice for individuals about what to buy and sell and at what price, where to obtain inputs, where and how to invest, and what skills to acquire; (2) comparative advantages in world trade that allow individuals and businesses to prosper by using their resources to do well compared to others; (3) higher incomes to those employed in jobs producing goods and services for international markets; (4) greater freedom for individuals to engage in specialization and exchange; (5) lower prices and a greater availability of goods and services; (6) opportunities to diversify risks and invest resources where returns are highest; (7) access to capital at the lowest costs; (8) more efficient and productive allocation of resources; (9) greater opportunities for firms to gain access to competitive sources of materials and inputs; and (10) inward transfer of technology and know-how.7 The growth of a global market economy, however, does not confer benefits on all countries automatically nor does it generate benefits with no costs. As with all social processes, globalization has created both new “winners” and new “losers.” Assessments of the impact of the 1997 financial crisis in Asia show that, at least temporarily, globalization had adverse impacts on workers in most Asian countries, altering traditional worker security arrangements such as lifelong employment for workers and managers with the same company, extensive layoffs, and worker displacement. In South Korea, for example, the financial crisis led not only to higher levels of unemployment, greater use of temporary workers, and greater use of outsourcing, but also to greater income inequality.8

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The economic and social indicators assessed in this volume suggest that in spite of these challenges, most countries have made impressive progress during the past thirty years. Noting critics’ claims that for developing countries globalization is a new Western curse, Amartya Sen retorted in the 2002 Ishizaka Lectures that It is, in fact, neither new, nor necessarily Western, nor a curse. Indeed, globalization has, over thousands of years, contributed to the progress of the world, through travel, trade, migration, spread of cultural influences, and dissemination of knowledge and understanding (including that of science and technology). These global interrelations have often been very productive in the advancement of different countries in the world. They have not necessarily taken the form of a spread of Western influence. Indeed historically, the active agents of globalization have often been located very far from the West.9

Sen pointed out that the process of globalization has flowed and ebbed throughout that history; that historically globalization has not been an exclusively or even a predominantly Western, liberal, capitalist phenomenon; the international economic, social, and political interactions have expanded and contracted several times over the past three hundred years: that the current wave of globalization, beginning in the latter half of the twentieth century, was preceded by strong bursts of mercantilist expansion and colonial trade from the sixteenth to the early twentieth centuries, involving a succession of both Western and Eastern hegemons. Although the current wave of globalization is similar in some ways to previous ones, many observers note that it also has some unique features: it is more extensive than past waves of global interaction, it involves deeper and more extensive networks of interaction and these networks are, as Held and McGrew argue, “matched by their relative high intensity, high velocity, and high impact propensity across many facets of social life, from the economic to the environmental.”10 Most of the conditions that Bello describes in Asia clearly existed before the current phase of globalization began and some may be due to the failure of governments in the region to adjust to the requirements of a global economy in transition. Worker-employer relations, for example, in Korea, Japan, Taiwan, and some of the other developing countries in the region, had begun to change well before the financial crisis of the late 1990s and were rapidly accelerated by the economic downturn. The forces of globalization pressured these and other countries to experiment with innovative approaches to finance and governance that obviate some of its harsher features. South Korea and most of the other Asian countries recovered relatively quickly from cyclical economic downturns with assistance from international organizations to improve labor standards, reform constraining

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regulatory regimes, liberalize their economic policies, create new job opportunities, and make corporate and public sector governance structures and procedures more efficient and transparent. Many economists contend that the positive impacts of globalization often outweigh the temporary negative impacts. In a study for the World Bank, David Dollar found that during the 1990s, the trend toward global economic integration helped improve the lives of many people in developing countries, and especially of those in Asian countries.11 Economic growth rates were higher in developing countries than in rich countries for the first time in modern history. From 1981, the number of poor people declined significantly, by more than 375 million, and the share of people living in absolute poverty on less than $1 a day dropped by half over twenty years. Inequality among countries in the global economy stabilized or dropped slightly. Although wage inequality increased overall, economic inequality did not because wage income was still a relatively small part of household income in most developing countries. Dollar found that faster economic growth and poverty reduction were strongest in those developing countries that integrated into the world trade and investment process most rapidly. Dirk Te Velde and Oliver Morrissey, in a study for the Overseas Development Institute of London, found that although the substantial flows of foreign direct investment into East Asian countries did not reduce wage inequality from the late 1980s to the late 1990s, it did raise the wages for both high-skilled and low-skilled workers.12 Although economists debate whether or not and to what degree globalization measured by countries’ trade openness has promoted economic convergence in the current period of globalization, a comprehensive study by S. Dowrick and J. Golley that is critical of previous methods of measuring growth-promoting benefits of trade and that uses alternative measures, confirms that “an increase in trade does, on average, have direct and substantial benefits on economic growth. These effects operate primarily through the rate of productivity growth, with only minor effects operating through the investment channel.”13 They note that trade openness promoted economic convergence between richer and less developed countries during the 1960s and 1970s, but was less beneficial for growth in developing countries exporting primary products during the 1980s and 1990s. They hypothesize that trade promotes growth, in part, by transferring technology and that less developed economies specializing in primary products had less access to technology transfer through trade during the 1980s and 1990s or that many of the less developed economies embraced more open trade without creating appropriate policies and institutions that would allow them to benefit from increased imports and exports. Yet, for nonprimary product exporters, trade helped reduce economic inequalities among countries. Moreover, despite the recognition of both positive and negative impacts

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of globalization, surveys of popular opinion about globalization, democratization, and market liberalization show continuing support among people in Asian developing countries. In the light of continuing criticisms of globalization by some intellectuals, interest group leaders, and public officials, surveys by the Pew Research Center for the People and the Press in eight Asian countries—Vietnam, India, the Philippines, South Korea, Japan, Indonesia, China, and Bangladesh—found that from 72 percent to 98 percent of those surveyed in these countries believed that growing global trade and business ties were good. The lowest approval rating, 72 percent of the people in Japan thought that globalization was good, while the highest percentages approving of globalization were reported in Vietnam (98 percent), South Korea (90 percent), and China (90 percent).14 Although respondents in every developing region of the world in which the surveys were carried out expressed concerns about the apparent lack of good paying jobs, deterioration of working conditions, and gaps between the rich and poor, they tended not to blame such problems on growing global trade and business ties. In the Asian countries surveyed, the majority of respondents took a favorable view of four aspects of globalization: growing trade and business ties, faster communications and travel, the growing availability of foreign culture (movies, TV, and music), and a wider availability of products from around the world. Using World Values Survey data collected in 2002, Russell Dalton and Nhu-Ngoc Ong found strong popular support for both markets and democracy in Asia Pacific Rim countries.15 Strong support for democratic and market values held not only in advanced economies in the region, but also in the newly industrializing countries of South Korea and Taiwan, and in the communist countries of China and Vietnam. They found that strong Asian values of respect for authority did not dilute popular support for democracy, even in countries still under authoritarian rule. In his defense of globalization, Wolf points out that divergences in the economic performance of countries have less to do with globalization than with the differences in the ways governments have fashioned development strategies. He notes that a “large part of the answer is cumulative historical forces that go back centuries.” Wolf contends that inequalities in income and wealth and divergences in economic performance are due to the viscous or virtuous cycles that governments created over decades or centuries. Noting the power of virtuous cycles, he argues: As some countries have grown richer, they have become better able to afford high standards of education, health, and public services. As their citizens have become better informed and more prosperous, they have insisted on higher standards in public life. At a certain point, economic growth has become routine. A positive cycle of reinforcement has then gone from the economy to polity and society, and back again.16

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Governments in other countries, however, failed to address those factors that keep people in poverty. Low standards of living and the exploitation of public resources for individual gain rather than social betterment created conditions of inadequate education, poor infrastructure and services, widespread ill-health, and social disaffection. High levels of corruption and ineffective public policies made it difficult for enterprises to create jobs or for people to save and invest. Corruption undermined trust in public officials and in the soundness of the economy, discouraging both trade and investment. The contributors to this book recognize that globalization has brought both convergence and divergence simultaneously among and within countries in the Asia Pacific Basin. Advanced economies—Japan, Australia, and New Zealand—along with the newly industrialized countries—Singapore, Hong Kong, South Korea, and Taiwan—have reached income levels and developed capacities that place them in a different category than the region’s poorer developing countries such as China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. And even within the more advanced, newly industrialized, and developing countries socioeconomic indicators show both convergence and divergence. Economic gaps, in some cases, have been intensified by differences in access to technology, education and training, and technological capacities and opportunities (i.e., the “digital divide”), and by differences in access to social protection and social capital. Government too, both state and local, continues to respond expediently to progressive and conservative influences, further frustrating stable growth in the region. What seems to differentiate Asian advanced and developing economies and the Asia Pacific Basin from other developing regions of the world has been the relatively rapid and widespread effort of public and private organizations to recognize the importance of globalization and to respond to the potential opportunities and challenges inherent in international interaction. Differences in economic growth and social progress within the Asian countries and between the Asian and Latin American countries in the Pacific Basin, for example, have been attributed to differences in the willingness and ability of governments and the private sector to adjust to the challenges of globalization. Studies by Jose DeGregorio and Jong-Wha Lee for the Asian Development Bank indicate that East Asian countries’ more effective investment in human resources, fertility reduction, institutional development, and economic reform policies allowed them to grow faster during the 1970s and 1980s and to recover from financial crises more rapidly during the 1990s than did Latin American countries. In Latin America, inwardlooking trade policies, high fertility rates, high levels of government consumption, low levels of human resource development, and weak institutions, especially with regard to the rule of law, all contributed to weaker growth than in East Asia.17

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The ability of Asian countries to adjust to globalization created stronger conditions for trade, investment, entrepreneurship, business expansion, and job creation. Similar observations of developing countries in other regions confirm the importance of adjustment. Studies by Dollar and his associates at the World Bank found through firm-level surveys in Asia and Latin America (Bangladesh, Brazil, China, Honduras, India, Nicaragua, Pakistan, and Peru) that firms in countries with poor infrastructure and a weak regulatory regime experienced systematic bottlenecks and delays in doing business.18 They found that integration of countries into the international economy is stronger where the investment climate is sounder and where infrastructure is better developed. Countries with more open economies and stronger investment climates create a better environment for both production and investment.

Exploring Asian Responses to Globalization Through innovation, change, and adaptation, Asian countries have been adjusting to globalization since the late 1970s. This book explores several research questions. How have governments, social organizations, and private enterprises in Asian countries responded to globalization at the end of the twentieth century and the beginning of the twenty-first century? What types of changes have occurred in Asia that facilitated economic, political, technological, and social advances? How have change and adjustment been spawned and nurtured in Asian countries? What have been the political and social impacts of development policies that not only recognized the changing trends of globalization, but helped shape them in the Asia Pacific Rim and in the rest of the world? These questions of innovation, change, and adaptation are not only of historical interest; answers to them continue to intrigue political, business, and social leaders who are concerned with leveraging the opportunities of globalization. The experience of public and private organizations in Asia may hold lessons as well for leaders in other regions of the world where governments and the private sector are still seeking ways to participate more effectively and beneficially in globalization. What lessons for the future do a quarter of a century of adapting to and shaping globalization in Asia offer governments and the private sector in countries that have fallen behind in economic and social development? Can the lessons learned in Asian countries inform development policy in countries that have been less successful or for countries in other parts of the world that are still struggling to adapt to and benefit from globalization? Have regional characteristics, including the rich geographical and cultural diversity of the Asia Pacific Basin, altered the face of globalization as a

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world phenomenon and, if so, which current global trends were either reinforced by those peculiarities or were contravened and refashioned by them? In this volume we explore these fundamental questions and the relationships among them. The ability of governments, social organizations, and private enterprises to adjust to the changing forces of globalization is an enduring issue that will affect the Asia Pacific Basin for years to come. We seek to explore the impacts of globalization in ways that differentiate this book from previous work that merely argued the merits or dangers of globalization. We examine in both contemporary and historical contexts the dynamics of change through which governments, social organizations, and the private sector are adjusting to international forces in the region and, in turn, transforming the process of globalization itself.

Dimensions of Change The contributors to this book examine the current indicators of globalization and the dimensions of change through which Asian countries are adapting to and reshaping international interaction and interdependencies. We place the current situation in historical context, examine the degree of regional and international integration that has resulted from globalization, and explore the changes occurring in the private sector to make businesses in the region more competitive in the world economy. Expanding on Amartya Sen’s observation that globalization is a phenomenon deeply rooted in history, John M. Heffron in Chapter 2 traces the historical antecedents of the current state of globalization in Asia. He notes that not unlike the “silk roads” that flourished in the classical era, bringing into close contact and in many cases erasing distinctions between the peoples and civilizations of the Roman, Hellenistic, Central and East Asian worlds, the trans-Pacific world in the half-millennium of its existence has undergone a similar history of circulated, borrowed, and shared ideas and practices. In Chapter 3, Dennis A. Rondinelli compares indicators of economic, social, political, and technological change that have occurred in the Asia Pacific Rim, highlighting trends in the region from the early 1980s. He identifies the underlying adjustments that allowed public and private organizations to adapt to the demands of globalization and highlights the dimensions of convergence and divergence within the region. He compares the characteristics of economies that have grown to advanced stages during the past quarter-century with those still emerging from poverty. East Asian regional economic integration has continued to evolve from an autonomous process of rising intraregional trade and foreign direct investment flows, primarily driven by market forces, to a deliberate process

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of institutionalized regional economic cooperation initiated by the governments in the region. In Chapter 4, Kevin G. Cai argues that the evolution of regional economic integration reflects the efforts of East Asian states to respond actively to the changing conditions brought about by contemporary globalization. The profound impacts of and the creative adjustments to globalization in the Asia Pacific Basin occurred not only in the public sector, but also in multinational corporations and domestic private firms. In Chapter 5, Henry Wai-chung Yeung points out that accelerated economic globalization has led to the complex interpenetration of private entrepreneurs and professional managers from different parts of the world economy. By engaging in international transactions, these business actors are increasingly enrolled in global networks of production and value-added activities that bring significantly new and innovative knowledge of business operations and strategic management. These two-way adjustments and transformations of globalization processes have been further facilitated by significant improvements in transport and communication technologies. Indeed, one of the most profound changes occurring in the Asia Pacific Basin as a result of globalization is the growing adoption of information and communication technologies to increase access to and improve the quality of public services and to strengthen the competitiveness of business and industry. Sang M. Lee asserts in Chapter 6 that although globalization has greatly helped Asian countries develop their economies through export oriented strategies, the dynamism of globalization is pressuring them to reexamine their competitive strategy of cost leadership. Pointing out that the 1997 Asian financial crisis revealed the true weaknesses of many Asian countries’ economic policies, Lee focuses on one country, Korea, that has made dramatic and successful changes in economic strategies based on information and communication technologies—internal developments with off-setting long-range price benefits. An important dimension on which Asian countries are simultaneously both converging and diverging is in how quickly and effectively governments respond to globalization by upgrading workforce skills. To some degree all governments in the region claim to be enhancing workforce skills, but their capacity and willingness to invest both differ among countries and differentiate those that have benefited strongly from globalization from those that have not. Some countries in the region continue to depend on low-cost, low-skilled workers to attract foreign direct investment and outsourcing, but Sarosh Kuruvilla points out in Chapter 7 that globalization requires Asian developing countries to improve the range and quality of their human resources and the national skill set to continue attracting investment. G. Shabbir Cheema reviews the changes in governance taking place in

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the Asia Pacific Basin as a result of increased international economic and political interaction. He argues in Chapter 8 that globalization promotes democracy and global social awareness in many ways. Communications through the Internet and the media have increased public awareness of human rights violations, including those of women, corruption among government officials, violence, and child abuse. The advances in information and communication technologies and the reduction of transportation costs— two byproducts of globalization—have enabled nonstate actors at the national, regional, and global levels to form alliances against undemocratic policies and practices. In Chapter 9, Clay G. Wescott examines the adoption of e-government in Asia. He defines e-government as the use of information and communication technology (ICT) to enable more efficient, cost-effective, and participatory government, facilitate more convenient government services, allow greater public access to information, and make government more accountable to citizens. Anirudh Krishna, in Chapter 10, postulates that globalization can help promote equitable growth only if national governments follow policies that enable communities in the interior to participate more actively in marketbased activities. He argues that better upward links with the global economy will have to be combined with stronger downward links to interior communities if the benefits from global linkages are not to be captured exclusively by metropolitan elites, thereby worsening inequality and stirring communities to action against globalization and market-led growth. In Chapter 11, Isabel Ortiz explores the changes that are occurring in social protection policies in the Asia Pacific Basin and she assesses their ability to solve complex emerging problems resulting from globalization and economic and social change. Social development and social protection are necessary, Ortiz contends, because the benefits of economic growth do not automatically reach all. She notes that social policies have not been a priority for most Asian governments and, indeed, social protection has been largely neglected or, at best, addressed with inadequate resources.

Learning from Experience Innovation, change, and adaptation will continue to be an imperative for countries seeking benefits from a global economy that is still emerging and transforming. The “winners” and “losers” from globalization will be determined in the future, as in the past, by the willingness and ability of public and private organizations, working in conjunction, to adjust to and actively shape the forces of economic, technological, social, and political interaction. In Chapter 12, Dennis A. Rondinelli and John M. Heffron examine the

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trends in innovation and adjustment that public and private organizations in Asia have adopted over the past two decades or are now experimenting with to respond to the strong pressures of globalization, harness those forces, and shape future globalization trends. Drawing on the studies of all of the contributors to this volume they assess adaptations to globalization, highlight the most important lessons from experience, examine the implications of those lessons for advanced, newly industrializing, and developing countries in the Asia Pacific Basin, and explore their applicability for countries in other regions of the world.

Notes 1. Rondinelli and Cheema, “Reinventing Government for the Twenty-First Century: An Introduction,” in Rondinelli and Cheema (eds.), Reinventing Government for the Twenty-First Century, p. 2. 2. Held and McGrew (eds.), Governing Globalization, pp. 1–21; quote at pp. 2–3. 3. Wolf, Why Globalization Works. 4. See, for example, Bello, “Perspective,” p. 1; and Bello, Deglobalization. 5. Organization for Economic Cooperation and Development. Open Markets Matter. 6. The Heritage Foundation/Wall Street Journal, 2005 Index of Economic Freedom. 7. OECD, Open Markets Matter. 8. Kim and Kim, “Globalization, Financial Crisis and Industrial Relations,” pp. 341–367. 9. Sen, “Globalization: Past and Present,” p. 6. 10. Ibid., p. 3. 11. Dollar, “Globalization, Poverty and Inequality Since 1980.” 12. TeVelde and Morrissey, “Foreign Direct Investment, Skills and Wage Inequality in East Asia.” 13. Dowrick and Golley, “Trade Openness and Growth: Who Benefits?” 14. Pew Global Attitudes Project, “Views of a Changing World.” 15. Dalton and Ong, “Democracy and Markets.” 16. Wolf, Why Globalization Works,” p. 314. 17. De Gregorio and Lee, “Growth and Adjustment in East Asia and Latin America.” 18. Dollar, Hallward-Driemier, and Mengistae, “Investment Climate and International Integration.”

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2

Global Crossroads: A Shared History of Globalization in the Asia Pacific Region John M. Heffron

Sometimes it may be necessary to try to denationalize history in order to internationalize it, that is, to find themes and responses common to a plurality of nations rather than those limited to specific subcategories of humanity.1 —Akira Iriye

T

he Pacific Basin today presents a bewildering picture of integrated, heterogeneous, and proliferating diversity. This diversity—in lan guage and culture, in consumer patterns and preferences, in the productive capacities of individual nations, and over questions of regional identity—is in large part a result of globalization, a process of transnational cultural and economic contact and exchange stretching back, by some accounts, as long as two thousand years ago.2 Over only the last five hundred years (a period marked by dramatic technological advances on all sides and by rising and falling political fortunes) sundry European, US, and Asian powers have contended with one another for cultural and economic ascendancy in the Pacific Basin. Most of these contests have ended in uneasy stalemate, an equilibrium of mutually reinforcing self-interest that has militated against the emergence in the region of a single hegemon. Unlike the North Atlantic economy of the seventeenth and eighteenth centuries forged around a well-defined economic philosophy, mercantilism, and around a single faith, Deism, the forces uniting the Pacific as an international entity have tended to be exceptional. Then as today countries in and around the region were held together less by a common set of principles, economic or otherwise, than by autonomous aspirations for a shared future, and by a sense of collective destiny born of those aspirations. 3 The choices were sometimes stark. “Capitalists, Christians, and Cowboys,” merchants and vicars in the Asia Pacific either coexisted with entrenched Confucian ethics and tightly regulated economies such as China’s or they were marginalized within the incipient Pacific world order.4 15

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This at least was the experience of the many small European and US trade communities that sprung up in and around the Pacific beginning in the sixteenth century—first at Macau, where the Portuguese established a leasehold in 1557, followed by foreign entrepôts at Manila (1571), Canton (1757), Hong Kong (1842), Shanghai (1843), Tokyo (1854), and Honolulu (1898), to mention only the most prominent. These and smaller port towns like them were not merely centers of commercial activity; they were sites of intense cultural synthesis, accommodation, and resistance, all of which processes redounded inescapably on economic relations. Occupying an intermediary status between larger, more self-contained social and economic systems, these entrepôt cities played an important role in the developing economy of the region, serving as buffers but also as “thresholds connecting different cultures”—in the case of Macau, for example, a rich variety of influences from Europe, Africa, India, and Asia. Notwithstanding critical differences in history and custom and in the scope of their territorial ambitions, Europeans and non-Europeans inhabited in many cases a common universe of “largely anonymous transnational practices,” a condition we tend to think of as describing our modern world of integrated communication and information systems, not necessarily the older, more familiar one of antagonistic and competing nation-states.5 In the long course of commerce both with itself and with the outside world—a commerce of people and ideas no less than of material goods and services—mutual adjustment became something of a way of life in the Asia Pacific. The great distances separating the region’s eastern and western shores and the region itself from the Mediterranean West (long before modern high-speed communications was able to obliterate those distances) made cooperation a necessity. From early on in the life of the region globalization came to mean a search for countervailing centers of power and influence that transcended the particularities of any one state or culture. It came to mean the generalization of such traditional Chinese norms as the Middle Kingdom to describe a dynamic center from which a new world—no longer purely US, Asian, or European—would radiate in all directions. The demands of a universal competition for influence in the region gave new life as well (in a radically altered context) to such traditional Western ideas as vacuum domicillium, the belief that even the oldest states and civilizations, being “barbaric,” were ultimately unoccupied zones of potential interaction and mutual influence ripe for exploitation.6 In time, even such terms of opposition as native and barbarian ceased to have meaning outside an international arena composed of independent, increasingly borderless merchants, missionaries, and workers. Racialized forms of opprobrium were common currency, the lingua franca no longer of any single nation or people in the region but of anyone seeking to valorize his or her own culture and traditions in contradistinction to an imagined

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other. “Chinese descriptions of foreigners, emphasizing their bizarre features and outlandish (literary) customs, were as real to the Chinese,” writes a historian of Macau, one of the region’s earliest centers of cosmopolitanism, “as corresponding Western descriptions of the Chinese, equally emphasizing what the respective viewers wished to see and subsuming them under a comprehensive typology.”7 The shared history of the Pacific Basin that this chapter attempts to construct begins with what Geoffrey Gunn has labeled the “Eurasian maritime world system,” a sixteenth-century world “bounded by intersocietal networks that go beyond trade and warfare to include information, technology, and especially hybridization of cultures inside and outside the European and Chinese (Indian and Japanese) core.”8 The more or less simultaneous growth of Italian, Portuguese, Indian, and Chinese maritime trade in the fifteenth and sixteenth centuries transformed Eurasia in the space of two hundred years into a “single zone of intercommunication” in which commercial relations were less competitive in the modern sense of the term than they were “ecumenical,” and in which monopolistic practices would have been discouraged or limited by offsetting policies designed to establish elaborate rules of parity and reciprocity.9 The premodern history of globalization in the Asia Pacific describes an exchange process enforced by strict international controls and by formal codes of diplomatic conduct the purpose of which was nevertheless to guarantee to each commercial community, each state, and each private entrepreneur their fair share of the common wealth. Shared articles of exchange ran the gamut from silk to salt, silver to gold, rice and maize to new skills and technologies. Human labor, goods, and services passed hands rapidly and over large distances despite high protection costs, including the dangers of epidemic disease, piracy, and war. Silver and silk (silver from Spanish America; silk from China and Japan) were especially crucial in determining trade patterns linking Asia, Europe, the Levant, Africa, and across the Atlantic and Pacific Oceans to the Americas. These commercial zones coexisted in what Urs Bitterli defines as a “controlled relationship,” one that made it easier to circumvent problems of distance, cultural difference, anti-Western and anti-Asian bias, and isolation.10 This chapter takes a closer look at some of those controls and with them at instances of shared meaning and purpose, systems of deference that would have softened interstate contacts otherwise characterized by competition and force and, in some cases, as Gunn points out, by “outright rejection.”11 An examination of the tenor and temper of cultural and commercial encounters from the sixteenth century to our own time suggests, as we shall see, a history of the Pacific Basin as an interconnected whole greater than the sum of its parts, a history than can serve to supplement and inform more

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traditional yet no less essential national and local histories. The sources for such a retelling lie in the history of multinational economic institutions in the region, institutions that may start out as mercantile agencies but soon exceed their nation-building ambitions; in political treaties and agreements that maximize the value of interstate commerce and cooperation; in the migration of labor and in naturalization policies that accommodate new forms of citizenship; in educational and cultural exchanges that promote intercultural understanding; in international missionary movements on both sides of the Pacific; and in the rise of nongovernmental humanitarian agencies in the region over the last hundred years. Although the source of broad contacts between classical Roman, AfroEurasian, and Chinese civilizations, the land-based silk roads of the sixth century BCE through the fourteenth century CE are not our focus here. As much as they form the backdrop of our story, it is not until the rise of the international state system in the sixteenth century and, with it, of a sharp distinction between state and nonstate actors, that questions of sovereignty and challenges to sovereignty dominate the discourse. That discourse is important to us because it reveals a new state-building phase of transnationalism that will put the emphasis increasingly on balance and order rather than simply, as in the classical age, on imperial self-aggrandizement. With the early history of US-Chinese relations as a case in point, we examine in this first section some typical cultural tensions and their resolution accompanying the emergence of the region as a zone of international free trade, subject to the rule of law.

Newtonian Economics: Toward a “Harmonious System of Mutual Frustration”12 European travelers to the Far East in the sixteenth and seventeenth centuries—nurtured on the often fantastic descriptions of such earlier sojourners as Marco Polo (1254–1324), Nicoli de Conti (1395–1459), and the Dominican Gaspar da Cruz, whose Treatise on Things Chinese (1569) was probably the most accurate account to date of the manners and customs of the people of south China—were forced, like it or not, to accept China (and by comparison Japan) as Europe’s equal in military, scientific, and cultural attainment. The Chinese with only a fraction of the same knowledge of the West—and with long periods when outmigration was forbidden in Southeast Asia and Asia—concluded quite differently: that Europeans, unable to read and write Chinese and therefore ignorant of Chinese culture, were a backward people; that the natural relations with backward people, as practiced under the Ming Dynasty (1368–1644), were tributary and properly deferential; and that the “feringhi,” a pejorative term for Europeans connot-

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ing barbarism, were dangerous and cunning and would have to be treated if summarily nonetheless with wary and grudging respect. One Chinese mandarin, in the wake of Portuguese incursions, gave voice to the concerns of the Imperial Court: The Feringis are most cruel and crafty. Their arms are superior to those of other foreigners. Some years ago they came to the city of Canton, and the noise of their canon shook the earth. . . . Now if we allow them to come and go and to carry on their trade, it will inevitably lead to fighting and blood shed, and the misfortune of our South may be boundless.13

The incident alluded to here occurred in 1517, when a Portuguese delegation attempted through an unsuccessful show of force to press its demands for a trade concession on the court at Canton. Not until the delegates were willing to observe the ritualistic obeisance demanded by “kotow,” a process of bowing and kneeling before established authority, could they ply their goods.14 Europeans generally remained intractable in the face of such controls and for their insolence were rewarded at times with either death or imprisonment or by protectionist policies designed to exclude them from the rich trade in silk and silver between China and Japan. Commerce might be permitted with the Europeans and concessions granted, but not, writes Bitterli, “as a movement towards free trade based on natural law.” In the Chinese no less than in the Japanese case trade with the Europeans of this early modern period—principally the Portuguese, Spanish, and Dutch—was an expedient means for achieving larger territorial and political ambitions within East Asia itself, China to the south in what would become the Spanish Philippines and Japan to the west where the Korean tributary state was a stepping-stone to the larger prize, China. When in 1557 the Chinese granted the Portuguese a leasehold over the southern port city of Macau it was not their goal, initially at least, to provide greater access to the mainland but instead to restrict it, confining Portuguese trade to coastal areas where their interests would have minimal impact on the interior. Instead the Portuguese were required to fulfill contractual responsibilities in the form of onerous port duties and land taxes that were the modern equivalent of the old tribute system.15 China’s political maneuverings in the region were aimed at defending their territorial prerogatives probably less against European encroachments, which they found they could manage to their benefit, than against the greater threat of Mongolian irredentism in the north. Japan for its part was less distracted by the new foreign presence (the Jesuits in particular) than by its ambitions to become the hegemon of East Asia, at one point in 1592 invading China through Korea with a massive force of 150,000–200,000 men. Whether defensive or offensive in nature, the political machinations of the two major local powers in the region, China and Japan, would gradually

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yield to exogenous centralizing forces, including the incorporation of lucrative if sometimes illicit trade relations between China, Japan, Portugal, Spain, and, somewhat later, Britain and the United States.16 As experience would show, Asians had both less control over and more to gain from such forces than during earlier or subsequent periods of forced isolation. The reopening of the Chinese coast to shipping and to foreign trade by the Kangxi emperor in 1683, after twenty years of closure, is a good case in point. The order closing the coast to trade in 1662 read in part: “All ocean-going junks are to be burned; not an inch of wood is allowed to be in the water.”17 Yet Chinese recovery was rapid and dramatic. By 1685 Chinese shipbuilders had turned out thousands of new junks that now crisscrossed the South China Sea drumming up regional trade and commerce. Robert Marks estimates that by 1700, Chinese junks were carrying as much as 20,000 tons of goods between ports within this new “Chinese-dominated lake” and the markets of Guangdong province. This as compared to a slight 500 tons of exports (generally silk, cotton goods, and tea) carried by European ships from the city of Guangzhou. To be sure, European exports were leaving multiple ports in and around the South China Sea at an exponential rate between 1685 and 1760, but it would not have been at the expense of thriving Chinese and growing Japanese trade factors in the region. Again, parity, reciprocity, and mutual accommodation were the norm, not the mercantile wars that were dominating and defining the Atlantic economy.18 By the end of the eighteenth century, a dispersion of mixed trading communities limned the eastern Pacific Rim counterclockwise from Macao to the Malay Archipelago, where the Dutch East India Company established itself in 1602, to Java, Manila, Tokyo, Shanghai, and Guangzhou, connecting these ports not only with local domestic markets but with burgeoning overseas markets in Europe, Central and South America, and the United States. While China and Japan would continue to pursue, sometimes separately, sometimes conjointly, some semblance of economic independence, even leadership vis-à-vis Western powers in the region, they also found themselves drawn ineluctably into an expanding world market for Asian goods and profits, a market the locus of which had shifted appreciably by the end of the sixteenth century from the Mediterranean to the Pacific Rim. The three greatest factors in this shift were the Spanish conquest of South and Central America, China’s gradual silverization in the fifteenth and sixteenth centuries, and the westward expansion of the United States. Japan too played a role in the early emergence of the global Pacific economy both as a manufacturer of silk and porcelain products and as a source of silver, but its real significance in the coming sericulture revolution would have to wait until the 1920s and 1930s.19 When silver replaced paper money as the medium of exchange and tax-

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ation in China, the largest and most populous nation in the world, what had once been a relatively plentiful but undervalued metal compared to gold became the basis for a silver-based global economy in the Asia Pacific rivaling the Atlantic and creating whole new empires in China, Japan, Spain, and the United States. Spain, from colonial bases in South and Central America, and Japan enriched themselves as the major suppliers to China’s insatiable demand for silver—the silver required to maintain its perennial surplus balance of trade and to fuel its production of raw silk and porcelain, grain and tea as the single largest exporter in the region and by some accounts worldwide. 20 The Dutch and the Portuguese benefited as well, buying and exporting Japanese silver in exchange for cheap Chinese commodities that they then sold dear on the European market. Europe and the United States alike believed that to command the China trade would be to capture global economic primacy, yet any commercial inroads the powers were able to make into the region—Spain in Manila and through the famous Manila Galleon (1565–1815), Portugal in Macau, the United States in Canton and Shanghai, Britain in Hong Kong—had to contend with the centrality of China itself, which bestrode the South Seas and beyond like a colossus. The reality of a Sinocentric world order held together through expanding tribute relations put the lie to calls for a “Spanish Lake” or a “US Lake” to underscore Euro-US dominance of the Pacific.21 Indeed, as Andre Gunder Frank has shown, “the major structural or even institutional changes in the world economy were not due to any diffusion of institutions from Europe,” or the United States for that matter, but to the actions of “all entrepreneurs in intercontinental trade,” struggling equally to make rational use of their resources.22 Such use may have dictated from time to time, as we earlier suggest, the rhetoric of cultural and political superiority—China, Japan, and the United States, for example, each declaring themselves “The Middle Kingdom,” a source of civilization surrounded by barbarians. The reality however was one of mutual adjustment and accommodation, “a harmonious system of mutual frustration” designed to guarantee all factors in the region a fair return on their investment.23 This may not seem to be the hand that was dealt the people of the region (the Chinese, Japanese, Koreans, Indonesians, and Pacific Islanders, for example) by foreign statesmen and their armies but it was the hand they chose to play, neither kowtowing to the merchants and missionaries who followed in their trail nor turning them away. Confucius himself counseled huai-jou, a compound of the characters meaning “to cherish and to soften; appeasement” in foreign relations. “By indulgent treatment of men from a distance, they are brought to resort to [the Emperor] from all quarters. And by kindly cherishing the princes of the States, the whole kingdom is brought to revere him.”24 Although a strategy of coercive benevolence would not have been

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unique to the Chinese (it was also practiced by the United States and Europe toward races they suspected were inferior to them), the Chinese developed it into a diplomatic science, beginning with the works of Chi I, an early Han thinker. Chi I made famous the policy of “three standards and four baits.” The three standards were for the Han emperor to keep good faith (hsin) in his friendly words, and to make the Huns (Hsiung-nu) believe that the Son of Heaven actually loved (ai) their barbarian faces and appearance and took delight in (hao) their barbarian techniques. The five baits were to provide the surrendering barbarians with silk clothing and carriages; delicious foods; entertainment with music, dances, games and female attendants; mansions with a kitchen, granary, garage, and slaves; and to shower them with all kinds of imperial favor and personal attention, so as to spoil their senses (of eye, mouth, ears, and belly) and to win heir hearts.25

This and China’s “loose-rein” policy (“keeping under loose rein without severing the relationship”) dictated relations with barbarians that would have been governed by cautious, pragmatic realism, by a highly developed understanding of the subtleties of power and power relations, and by the need for stylized exchanges that would conceal more than they would reveal each player’s motives.26 To illustrate, in 1844 the United States sent a trade mission to China led by Caleb Cushing, the House representative from Massachusetts, to secure, if possible, the same concessions for US merchants that the British had won at the end of the Opium war in the Anglo-Chinese Nanking Treaty of 1842. The Chinese at that time were forced to open five ports to British trade, residents, and consulates, including the island of Hong Kong, which they ceded to the British. The latter was also granted most-favored-nation status, which meant that it would have first buyer’s rights to any foreign trade in China. Negotiating for the Chinese was the emperor ’s Imperial Commissioner Ch’i-ying. In the end the United States was granted a practically identical set of concessions: five ports, consuls, extraterritoriality provisions (which meant that US citizens living in China could not be tried by Chinese law but only by US law) and most-favored-nation status. Cushing, who had been directed by President Tyler to present his credentials directly to the emperor in Peking, was never allowed to enter mainland China but stayed in Portuguese Macau the entire time.27 Ch’i-ying’s first order of business, according to a report he wrote to the emperor, was to blunt Cushing’s demands to travel to the capital. “Your slave, accompanied by Huang Ent’ung, called on the said envoy in person and told him that regulations of the heavenly Court [i.e., the emperor] had never provided for [going to Peking] and could not be amended; that since he respected and admired His Imperial Majesty, he must humbly obey His

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Edicts and not make obstinate demands.” After receiving some assurance that Cushing would not press this demand, Ch’i-ying could proceed to the envoy’s main purpose, which was to achieve a supplementary treaty that would not only enable the United States to compete with the British for the lucrative China trade, but actually outstrip them: “[Cushing] wanted to emulate and outdo them,” Ch’i-ying memorialized, adding “This is only reasonable.”28 “The best way to deal with barbarians,” the Imperial Commissioner concluded, “is to block their presumption first and then proceed to destroy their schemes.” Ch’i-ying nevertheless reiterated that the goal of their negotiations was peaceful accommodation and the observance of “international convention,” an early acknowledgment of the reality of global interdependence in language that would neither compromise China’s integrity nor surrender control over its economic future.29 Since the said barbarian envoy regarded the treaty as vital, its prompt conclusion was agreed to. It was only necessary to make adjustments to ensure the maintenance of fixed regulations of the Imperial Court and to accord with international convention, justly and without discrimination, thus achieving perpetual amity between China and the outside world, without any compromise to lead us into his trap . . . an exemplifying of our power to harness him.30

The Chinese strategy was to play the European powers off one another by providing them, secretly, the illusion of most-favored-nation status, granting them essentially identical concessions, and maintaining them all, including China herself, in a delicate Newtonian equilibrium. Japan’s own treaty with the United States, signed in 1854, was another paean, in the name of “perfect, permanent, and universal peace,” to the virtues of an international open door, Article IX reading: “It is agreed, that if, at any future day, the government of Japan shall grant to any other nation or nations privileges and advantages which are not herein granted to the United States and the citizens thereof, that these same privileges and advantages shall be granted likewise to the United States and the citizens thereof without any consultation or delay.” That this concession was won by the United States at gun point, Commodore Perry’s black ships parked at Japan’s doorstep, does not alter the fact that the Asia Pacific region was moving ineluctably toward a new world, one governed no longer by the dominance of a single hegemon but by compromise and accommodation between a proliferation of players on an increasingly even playing field.31 It may seem surprising that the interplay of religious values, cultural traditions, and trade and commerce in the region should have had such a leveling effect, especially when one considers the diversity and relative incommensurability of Asian Pacific and Euro-US ideals and practices. Yet

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even in a place like Hawaii, where in the eighteenth and nineteenth centuries the clash of cultures was particularly intense, the conditions for a rapprochement were, as our next example shows, present from the beginning. In a testament to the centripetal powers of globalization, forces of change and accommodation in the islands won out in the end over the natural antagonisms of natives and colonizers. Here too the United States, which might have been expected as the stronger power to play the dominant role, brought to its relations in the Pacific a complex and compromising admixture of recidivist religious values and progressive commercial ones that would ultimately endorse partnership over competition.

Religion, Culture, and Commerce: US Involvement in the Pacific That the United States is at once one of the most insular of countries, weighing each new foreign “entanglement” in the mirror of national selfinterest, and the most outward-looking and expansionist—“Law on her brow and empire in her eyes” in the words of Melville’s “America”—does not strike US citizens, as it often does foreign observers, as a very great contradiction. US exceptionalism has always seemed to resolve the disagreement between the country’s isolationist impulses and its internationalism, its image of itself as a sanctuary of freedom and democracy whose sphere of influence is nevertheless the world. This view of the United States as separate and apart, as exceptional, yet bound in common cause to a higher calling is a hoary one. Its origins lie in the seventeenth-century covenant philosophy of the first Puritans in the Americas, “a special and peculiar bond” that, in religious historian Perry Miller’s words, “lifted the migration out of the ordinary realm of nature [and] provided it with a definite mission.” This sense of mission, once exclusively religious, for reasons spelled out by Perry and other subsequent historians, fed off the growing acquisitive spirit of the age (fed in turn on the Enlightenment belief in progress) to become one of the primal, motive forces of US history itself, a heady combination of missionary zeal, commercial ambition, and cultural nationalism. These three themes of religion, culture, and commerce shed light on the movement of ideas and aspirations, institution building, and human networks that have linked the destinies of the United States and the Asia Pacific over the last one hundred and fifty years.32 In this section we focus on the complementary role of religion and commerce in the opening of the Pacific, examining the colonization of Hawaii and the variety of native Hawaiian responses to westernization as cases of a more general phenomenon throughout Asia and the Pacific. The

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agricultural and commercial development of nineteenth century Hawaii, the inner transformation of the missionary call under the pressure of modernization, and the native Hawaiian response to sacramental and redemptive theology—these and collateral events suggest an ecology of contact, a textured existence in which the lives of natives and strangers were so entangled that where one group’s influence ended and another’s began no one could tell. The story of the relationship between Congregational New England and ancient, traditional Hawaii is one of broad cultural contact and conflict, often of the most violent and uncompromising sort. And yet there is little agreement among historians over the exact nature of those contacts or of their implications for Euroamerican-Hawaiian relations. In the case of Hawaii, the same historians who disagree over the causes of the collapse of the Hawaiian kingdom tend to speak with one voice when it comes to the subject of Hawaii’s subsequent development. To this day they continue to overdraw the process of change in the islands between freedom and oppression, progress and tradition, the prerogatives of a social and economic elite and the presence of a large subordinate class powerless to advance its own interests.33 Eager to identify the victims of oppression, historians have to be all the more careful not to exaggerate the significance of their oppressors, whether the instrument of terror happens to be the end of a gun or Christian virtue. When, as historians, we reify the oppressed, we not only add objectively to their sense of victimization; by attributing “false consciousness” to them (the flip side of reification) we make them co-conspirators in it and, as such, perhaps more degraded than their oppressors could ever make them. Invention and reinvention, “penetration” and mutual adaptation seem to be the rule in class relations, not a bland and endogamous hegemony.34 The same rule applies to our study of cultural contact or, to use a metaphor popularized by the recent Columbian quincentennial, “worlds in collision.” If one is to tell the story of violence and destruction one must also tell the story of continuity of cultural life in a changed environment. One must tell the story of how human beings, in the words of John Dewey, “change the changes around them.”35 In every contact, perhaps the greatest changes are reserved for those who come with the express intent to change a culture, to make it more like their own. The missionary license that Herman Melville complained of in the Sandwich Islands—the extension of the missionary call to political and economic ventures—was repaid not only with native declination and apostasy, but with the loss in faith of what Jonathan Edwards had called “true virtue” and “true liberty,” those dispensations that could only come from a belief in the absolute sovereignty of God and the negation of man, not his moral autonomy or his material prosperity.36 Melville must have had an inkling of the former when he wrote “there is, perhaps, no race upon earth,

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less disposed by nature, to the monitions of Christianity, than the people of the South Sea,” but he could not have foreseen the latter.37 He could not have known what one historian later observed, that the mission industry “relished the savagery they were civilizing,” secretly coveting its apparent lack of formal limits and restraints.38 In the Pacific, native and stranger alike were great empire builders, building their systems not only out of armed might but out of the myths which sustained them—powerful metaphoric theodicies, systems of rationalization and signification for the suffering and evil of the world. 39 Beginning in the late eighteenth century, these people, representing whole systems of thought that were both static and changing, came into direct confrontation with one another. Kama’aina and haole, native and stranger, heathen savage and civilized Christian: While these words of opposition indicate a certain incommensurability in the experiences and way of life of the two cultures, arousing in their turn feelings of pride and degradation, dominance and fear, rational Providence and the power of magic, their differences have never been of the nature of an a priori truth. The words and their meanings are context-driven, constructed in both the pre-contact environment produced by each culture and in the cultural environment produced by contact. As co-inhabitants of the same small islands, the two groups would find themselves bound together in ways that would change them forever and give rise to new and extremely hybrid ways of life, even of empire. Meeting at the threshold of land and sea, on island beaches “that divide the world between here and there, us and them, good and bad, familiar and strange,” the Polynesian native and the Euroamerican outsider, in the words of Gregory Dening, “made deferences to each other and in their deferences they built institutions.”40 The Bible reads: “And God blessed Noah and his sons, and said unto them, Be fruitful, and multiply, and replenish the earth. And the fear of you and the dread of you shall be upon every beast of the earth, and upon every fowl of the air, upon all that moveth upon the earth, and upon all the fishes of the sea; into your hands they are delivered.”41 Whether the authors of the Old Testament meant this statement from Genesis to stand as a blessing or a curse we cannot be sure, but that it could be interpreted as either, and in some cases as both, by Christians and non-Christians alike is a matter of historical record. For the Prudential Committee of the American Board of Commissioners for Foreign Missions in charge of overseeing the first group of missionaries to Hawaii, it was an unmixed blessing, but one that brought with it very definite duties and obligations, a new kind of covenant binding together God’s faithful and the unfaithful in a mutual set of responsibilities. On the missionary side: “You are to aim at nothing short of covering those Islands with fruitful fields, and pleasant dwellings, and schools and churches; of raising up to an elevated state of Christian Civilization; of bringing,

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or preparing the means of bringing, thousands and millions of the present and succeeding generations to the mansions of eternal blessedness.”42 The objects of all this Christian solicitude, the Hawaiian people, felt their own obligations under the new covenant only too well. It would mean reordering their traditional notion of time to take into account its linear passage, its strict division into work and play, sacred and secular time. “To become civilized,” writes Gregory Dening, “the natives had to have an emptiness in their souls that left time for the future.”43 It would mean altering their relationship with nature and with their gods and the objects that represented them, objects that the Hawaiians never knelt down to and worshiped as idols but “as merely signs of the gods who were not seen.”44 These gods were nonetheless always present in every tree and rock, every wind and cloud, crevice and corner. For every human action and condition, the gods had a care, hostile or protective. In what must have seemed a dramatic contrast to their own way of life, the Western stranger was in but not of time, in but not of nature, in but not of body and soul. Christianization would mean giving up everything that had once defined the Hawaiian’s relationship to the universe, nature, and the self, distinctions they rarely made in the first place. Here are the words of the contemporary Hawaiian historian Samuel Kamakau: The Hawaiian people had the reputation of being a pious people who worshiped the god; hospitable, kindly, giving a welcome to strangers, affectionate, generous givers, who always invited strangers to sleep at the house and gave them food and fish without pay, and clothing for those who had little; a people ashamed to trade. This was their character before the coming of the foreigners and of Christianity to Hawaii. Now they are being taught to be closed, stingy, hard-hearted, niggardly, to take pay for what is given and to be selfish. Some are following this teaching, but the larger part are still clinging to the old custom of hospitality.45

In spite of outward appearances, the Hawaiian people would not, could not, completely reconcile themselves to Christian morality or arrange themselves into prim and proper nineteenth-century New England Puritans. Their imperfect Christianization is the most salient feature of missionary life and education in the islands, where, in spite of the introduction of the written word and record-high literacy rates, the Hawaiian people continued to remain poor converts. If they could not be accused of recidivism, backsliding into the ancient forms of worship once dictated by the tabu system, they nevertheless remained enthralled by the ceremonies and rituals that once surrounded it—the feasts and games, dances and general pageantry, the elaborate forms of honor and deference. The children of the missionaries, even when their parents tried to isolate them from the native culture, were also held in its thrall.

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Hawaii was colonized in the nineteenth century not only by competing British and US commercial agents but also by a small but devoted group of New England Protestant missionaries and their descendants, sons and daughters who, forsaking the cloth, took up less tendentious and often more sympathetic relations with the indigenous peoples around them. Throwing in their lot with the disenfranchised and the downtrodden, this younger generation worked hard and sometimes bitterly to achieve what their strict Calvinist upbringing told them would be a better future for all. The objects of all this Christian solicitude often resented it, finding any number of ways to circumvent the coercive benevolence of their brethren. But just as many saw themselves as part of a common crusade for the spiritual and material “uplift” not only of their own race but of humankind in general. One such missionary son, Samuel Chapman Armstrong, found a natural affinity between the pantheism of traditional Hawaiian beliefs and the deism he expressed as a young man, a belief in the manifestation of God in all His works. “They have a conviction from the course of history and the experience of their own lives,” he wrote, “of a God innate in all things. They see Him in nature, in a thousand ways, and so they worship Him in a thousand images and objects: images because of His personality, natural objects because they are from Him and He is in them.”46 The way to Christian morality and civilization, as the Hawaiian missionaries were slow to learn, was not through exhortations from the pulpit but through hard, soul-searing work. In this—the redemptive and characterbuilding nature of work—Armstrong was more like Jonathan Edwards and other hard-line Calvinists than the average Sandwich Island missionary, who viewed work not in ethical Christian but in Marxist terms as the means and relations of production. For the Reverend Richard Williams it was imperative that Hawaiians “have more instruction on the means of production.” The nation, he wrote the board in 1838, “can no longer exist without it. The people cannot support the gospel without it. There cannot be a nation of consistent Christians without industry.” For the Godly mercantilist, the real purpose of labor was to guarantee the high return of goods realized by the merchants of Boston, London, and Paris, who in return supported missionaries and posted governments to stabilize secular dominance in the islands.47 Borrowing from the examples of Lahainaluna and Hilo boarding schools, where the native Hawaiian students were kept in school and in the fields from dawn to dusk, raising crops and reciting the catechism, Armstrong instituted at Hampton a kind of Christian penal colony in which the moral lessons of hard labor combined with conservative Christian values would drive home what he called “the one great lesson of the Hawaiian mission”: the lack of sustained attention to a race only at the beginning of its prospects—weak, vulnerable, and prey to all the blandishments of a corrupt material civilization.48

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Never completely convinced of the superiority of his own race and civilization, Armstrong also failed to see the higher virtues of other races and civilizations. And yet it is perhaps too much to expect Armstrong to have better loved his fellow human beings, when love of God, not humankind, was the central question of his Calvinist faith. “True virtue,” said Edwards, “primarily consists, not in love of any particular Beings, because of their virtue or beauty, nor in gratitude, because they love us; but in a propensity and union of heart to Being simply considered; exciting absolute benevolence . . . to Being in general.” Armstrong may be accused of many things, but he cannot be accused of a lack of virtue in this ultimate sense nor of trying to bend an inscrutable God, as so many others had before him, to the business of social control. As the record shows, he was as changed by his contacts with native Hawaiians as they were by him, even if that only meant reinforcing the religious beliefs he had held all along.49

The Pan-Pacific Idea: INGOs and the Challenge to Sovereignty, the Case of the Institute of Pacific Relations The missionary experience in Hawaii captures in miniature the ambiguities of cultural contact and exchange in the Asia Pacific region where nonstate actors (free-traders and missionary groups in our last two examples) played leading roles in the shaping of interstate and interregional relations. Not however by simply asserting their own prerogatives but by assimilating as well the needs and demands of the various objects of conversion, whether viewed from above as non-Christian heathens or from below as wily and sophisticated mandarin diplomats. The universalizing zeal of the missionary movement in Hawaii and elsewhere in the eighteenth and nineteenth centuries finds a modern counterpart in the remarkable growth and development of international nongovernment organizations (INGOs), multinational corporations, and globe-trotting scholars and students—acolytes for globalization and “collective sovereignty”—active within the region from the end of the nineteenth century to the present.50 In the collectivist atmosphere of the interwar years (1918–1938) there emerged on both sides of the Pacific a loose coalition of academics, journalists, clergyman, public officials, and industrial philanthropists who, eschewing the jingoistic rhetoric of an earlier period of cultural and economic imperialism, advocated for a new kind of cosmopolitan transnationalism, one decidedly anti-imperialist and extragovernmental in its own rhetoric. At the end of World War I, the new, presumably more open world of the Versailles Settlement only further dramatized the failure of government to secure the rights and freedoms of postcolonial peoples. Former colonies around the world found themselves incorporated now within a mandate system of protec-

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torates and free-trade “zones” no less restrictive than under the old imperial system. In the Pacific, efforts such as those of the Washington Conference of 1921–1922 to move beyond bilateralism and to achieve multilateral consensus around trade and security issues foundered on the equally anarchic forces of international Bolshevism, Japanese expansionism, and Chinese nationalism. The defenders of multilateralism after 1925 came increasingly from a third sector of nonofficial, nongovernmental, nonstate actors and agencies, who worked no less hard to achieve the national self-interest—synonymous, many believed after the horrors of World War I, with a world at peace. There is no better example of this new interventionism than the USinspired work of the Institute of Pacific Relations (IPR) founded in Hawaii in 1925. One of its pioneers, Frank Atherton, a successful Hawaiian businessman and Wilsonian democrat, sounded the call for a Pacific “League of Nations” at the institute’s first conference in Honolulu: There must be a growing consciousness of responsibility for the progress and welfare of all nations. Those living in a community have come to recognize that each man has his contribution to make to the whole. . . . Thus it seems logical to maintain that each nation has its contribution to make to the family of nations and each should take an active and constructive part in working out that plan which shall be for the welfare of all.51

This view was shared by Asian and non-Asian internationalists alike. The Pacific Community they envisioned was not centered on any one state or “civilization” in the region, least of all their own. Yet independence and parity, not necessarily interdependence, was the motivating force. For the Meiji reformer and leading internationalist, Katsu Kaishu, writing in the period leading up to the Great War, friendship with foreign nations was essential if Japan was to maintain its independence and avert war itself. “We must understand both them and ourselves well. Once this process is begun, we must not be negligent. If one always thinks that war will occur, war can be avoided; if one forgets the possibility of war, then war will come.” International trade and security was dependent on national preparedness but a preparedness grounded in the realization that “the world is not something to be dominated by one nation.” An international nongovernmental organization of regional experts like the IPR, with members in Australia, Canada, China, Japan, Korea, New Zealand, the Philippines, and the United States, was in the best position, as the interface between official opinion and unofficial expertise in the region, to ensure this.52 The Pacific Community was thus to be a “community of people not states,” according to Tomoko Akami, the historian of the IPR.53 The IPR itself was to be a nongovernmental solution to the obstacles to such a community, obstacles rooted in state-sanctioned race policies like the United States’ Chinese Exclusion Act (1888) or the more recent anti-Japanese

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immigration law of 1923, and in alternative Pan-Asian regional visions like Konoe Fumimaro’s New Order in East Asia (Toa shin chitsujo) or Sun Yatsen’s Great Asianism. The IPR challenged both Eurocentric and Sinocentric worldviews of the period, advocating instead “a community of political equals which are obligated to consult one another about their common political and economic difficulties and policies,” remarked Herbert Croly, the editor of the New Republic.54 Although the United States led the drive for multinational agreements “repudiating expansionism” and, in Croly’s words again, “the predatory politics” of the big powers (the United States, Great Britain, China, and Japan), the IPR was not a tool of US interests in the region.55 Trans-Pacific commerce accounted for less than 14 percent of US foreign trade in 1914; its foreign direct investment only 7 percent of gross national product. Asia failed to attract much American financial interest because of its remoteness, geographically and culturally, because of the ignorance of Americans about Asian cultures, and because of the low per capita income of most Asians. For Americans, Europe, highly developed and seemingly stable, was a far more attractive place in which to invest and a far more lucrative market.56

As late as 1937 the ratio of passengers traveling across the Atlantic as compared to the Pacific was ten to one. While no one nation could be said to dominate trade and commerce in the Pacific, the position of the United States was never so great (in spite of much rhetoric to the contrary) that it could pretend superiority. Moreover, as this chapter has shown, historical developments in the region, whether economic or cultural, would have militated against the dominance for very long of any one power or interest in the Pacific Basin. A strategy of adjustment ruled foreign relations in the region even (or especially) when governments themselves were not up to the task. The IPR and, in the last fifty years or so, a host of other regional, domestic, and international NGOs in the region have played and continue to play a critical role in setting the limits on state autonomy, in bringing issues to the table that transcend the concerns of any one nation (immigration, environment, education and technology, sustainable development, human rights), and in filling the interstices between good government and a thriving civic culture.

Conclusion The large size and diversity of the Pacific Basin has been an important factor in its development, defining the limits no less than the possibilities of

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globalization in the region. This commonplace was only dimly perceived by early travelers to the region, whose initial purpose was to establish exclusive trade relations with one country or another, winning trade concessions and ports-of-call for their own special interests. The Western missionaries that followed in their path came with their own separate but related blinders—to deeply rooted Asian social and religious customs, to traditions of isolationism, and to regional variations in culture and history. To the people living in and around the Pacific, the great ocean was, on the other hand, a thoroughfare for the global market, with the understanding that “this great market” as the Japanese author of a popular geography textbook in the 1900s put it, “cannot function if the ocean is not open to traffic.”57 Roads can transport us only within the boundaries of one nation. Travel abroad requires the acquisition of a passport, and we can travel in a foreign nation only in times of peace. In periods of hostility, interruption of passage is inevitable. Accordingly, only on the open ocean, which is beyond the range of land-based weapons and not covered by international conventions on coastal sovereignty is free passage possible at all times.58

Early Europeans, even when transported to the area on seafaring craft, brought a land-based mentality to a sea-based world. Only because they came to stay, which they did in proliferating trade diaspora communities, were they able eventually to overcome this cultural lag and appreciate the region for its unique geophysical and geopolitical features. Adjustment, change, and accommodation have exerted something of an inertial force on processes of globalization in the region, weathering not only the scramble for empire by competing European, Asian, and US hegemons but the devastating effects of two World Wars and, in our own time, the often violent fluctuation in the region’s and in the world’s market economy. Throughout there has been kept alive an ideology of trade liberalization that, as this chapter shows, pre-dated by at least two hundred years the freetrade policies of the World Trade Organization (WTO), the General Agreements on Tariffs and Trade (GATT), and of regional customs unions like the ASEAN Free Trade Agreement (AFTA), the Asia-Pacific Economic Cooperation (APEC), and the Association of Southeast Asian Nations (ASEAN). Historical trends in the region have militated against the formation of exclusionary trade blocs and will continue to supply the impetus to a Pacific Community larger than the sum of its parts. Herein lies the international importance of the Pacific Basin as a zone of peaceful cooperation. If history is any guide, we can continue to expect to see growing economic interdependence and with it the greater possibility of mutual development among the countries and peoples of the region. Education and its internationalization will continue to be the key to achieving the full fruits of this promise. This is especially the case in

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APEC countries where guest workers can amount to up to 20 percent of a country’s labor force and where uneven educational resources both for skilled and unskilled workers can lead to dangerous trade and labor market imbalances. Without the right educational inputs—not only skills development and upgrading but second-language education and improved cultural awareness—increasing international migration may only exacerbate existing inequalities between winners and losers in the global marketplace, creating as it has in both upper-middle and high income economies a vicious cycle between structural change, new labor demands, and a shortage of the necessary skills to sustain development and innovation.59 Governmental as well as nongovernmental forces, if they are to generate the conditions for peaceful integration of peoples and economies in the region, have an obligation not only to support education at all levels but to ensure the full inclusion of foreign guests and immigrants into the life and culture of their respective societies. Economic success in a healthy economy is a revolving door not a dead end. It involves a greater recognition, as countries in the region have demonstrated time and again in their historic contacts with one another, of the possibilities than of the simple polarities of diversification and change. The Asia Pacific region, as this chapter argues, has a rich heritage of shared struggles and common aspirations to draw upon for that purpose.

Notes 1. Iriye, “The Internationalization of History,” p. 4. 2. See Curtin, Cross-Cultural Trade in World History; Kohl, “The ‘World Economy’ of West Asia in the Third Millennium BC.” 3. See Reid, Charting the Shape of Early Modern Southeast Asia , pp. 4–6. 4. Rosenberg, Spreading the American Dream, p. 40. 5. Geyer and Bright, “World History in a Global Age,” p. 1054. 6. See, for example, Jennings, The Invasion of America: Indians, Colonialism, and the Cant of Conquest, pp. 82, 135, 136. 7. Porter, Macau: The Imaginary City, p. 157. 8. Gunn, First Globalization: The Eurasian Exchange, 1500–1800, pp. 12–13. 9. Curtin, Cross-Cultural Trade, p. 251. 10. Bitterli, Cultures in Conflict: Encounters Between European and NonEuropean Cultures, 1492–1800, p. 134. 11. Gunn, First Globalization, p. 2. 12. Hofstadter, The American Political Tradition and the Men Who Made It, p. 10. 13. Quoted in Bitterli, Cultures in Conflict, p. 137. 14. Ibid., p. 135. 15. Ibid., p. 139. 16. See Cohen, East Asia at the Center: Four Thousand Years of Engagement with the World, pp. 189–196.

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17. Marks, “Maritime Trade and the Agro-Ecology of South China, 1685–1850,” p. 90. 18. Ibid., pp. 91–92. 19. Ma, “The Great Silk Exchange: How the World was Connected and Developed,” pp. 38–69. 20. Gunder Frank, ReOrient: Global Economy in the Asian Age, pp. 117; Flynn and Giraldez, “Spanish Profitability in the Pacific: The Philippines in the Sixteenth and Seventeenth Centuries,” pp. 23–37. 21. This interpretation runs counter, for example, to Coclanis, “Pacific Overtures: The Spanish Lake and the Global Economy, 1500–1800,” and Perry, Facing West: Americans and the Opening of the Pacific, both of whom emphasize the dominance of European powers in the region to the relative neglect of a strong countervailing Asian influence. 22. Gunder Frank, ReOrient, p. 223. 23. The phrase is Hofstader’s in The American Political Tradition. 24. Yang, “Historical Notes on the Chinese World Order,” p. 26. 25. Ibid., pp. 28–29. 26. Ibid., p. 31. 27. “The Cushing Mission: Negotiating the U.S.-China Treaty” (1844), referenced in Swisher, China’s Management of the American Barbarians, pp. 153–158. 28. Ibid., p. 2. 29. Ibid., p. 2. 30. Ibid., p. 3. 31. U.S.-Japan Treaty, 1854 10/17/2001 available at http://docs.lib.duke.edu/ exhibits/usjptreaty/en011g.htm, pp. 1–2. 32. Miller, Errand into the Wilderness, p. 10. 33. Compare, for example, accounts of the downfall of the Hawaiian monarchy with accounts of Hawaii after 1900 in such earlier works as Kuykendall, The Hawaiian Kingdom Vol. 111, 1874–1893; Fuchs, Hawaii Pono: A Social History; and Daws, Shoal of Time, with the more recent accounts in Lilikala Kame’eleihiwa, Native Land and Foreign Desires; Menton and Tamura, A History of Hawaii; and in the writings of the Hawaiian sovereignty movement collected in Trask, He Alo A He Alo: Face to Face. Imperatore makes a similar observation in “The Deposing of the Hawaiian Monarch: The Changing Narrative in Textbooks,” pp. 261–266. See Sahlins, Anahulu: Historical Ethnography, whose “thick description” of the Hawaiian experience collapses the old dichotomies. 34. On this point, see Willis, Learning to Labour, p.171; Giddens, Central Problems in Social Theory: Action, Structure, and Contradiction in Social Analysis; and Scott, Weapons of the Weak: Everyday Forms of Peasant Resistance, pp. xviii, pp. 314–322. 35. Dewey et al., Creative Intelligence: Essays in the Pragmatic Attitude, p. 21. 36. Edwards, “The Nature of True Virtue,” pp. 395–471. 37. Melville, Omoo, p. 500. 38. Dening, “Native and Stranger: The Bound-Together History of Kania’aina and Haole in Polynesia.” 39. Berger, The Sacred Canopy: Elements of a Sociological Theory of Religion, especially Chapter 3. 40. Dening, Islands and Beaches, Discourse on a Silent Land: Marguesas 1774–1880, p. 32. 41. The Holy Bible, Genesis, Chp. 9, Verse 1–2. King James Version. New York: Oxford University Press, n.d.

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42. Miller, “Selected Writings of Hiram Bingham, 1814–1869: Missionary to the Hawaiian Islands,” pp.132–133. 43. Dening, “Native and Stranger.” 44. Kamakau, Ruling Chiefs, p. 202. 45. Ibid., pp. 201–202. 46. Armstrong, “Lessons from the Hawaiian Islands,” Samuel Chapman Armstrong Papers. Hampton University Archives. Box 123. January 1884, p. 205. 47. Tate, “Sandwich Island Missionaries: The First American Point Four Agents, pp. 12–13. For their discussion of the labor ideology of early Hawaiian missionaries and plantation owners, see Beechert, Working in Hawaii, A Labor History, pp. 21–24; Ralston, Grass Huts and Warehouses; and Fuchs, Hawaii Pono: A Social History. 48. See Reverend David Lyman, Diary. October 11, 1836. Lyman House Memorial Museum. Hilo, Hawaii; and Armstrong, “Lessons,” p. 223. 49. Edwards quoted in Lasch, The True and Only Heaven: Progress and Its Critics, p. 249. 50. Rondinelli, “Sovereignty on Line: The Challenges of Transnational Corporations and Information Technology in Asia”; Florini, The Third Force: The Rise of Transnational Civil Society; and Iriye, Global Community: The Role of International Organizations in the Making of the Contemporary World, p. 202. 51. Atherton quoted in Akami, Internationalizing the Pacific: The United States, Japan and the Institute of Pacific Relations in War and Peace, 1919–1945, p. 93. 52. Katsu quoted in Otsuka, “Katsu Kaishu in Bakumatsu and Meiji Politics,” Senior Capstone Project. Soka University of America. Spring 2005, p. 29. 53. Akami, Internationalizing the Pacific, p. 92. 54. Croly quoted in Ibid., p. 39. 55. Iriye, After Imperialism, p. 20; Croly in Akami, Internationalizing the Pacific, p. 39. 56. Perry, Facing West: Americans and the Opening of the Pacific, p. 180. 57. Makiguchi, A Geography of Human Life, p. 93. 58. Ibid. 59. Stahl, “The Impacts of Structural Change on APEC Labour markets and Their Implications for International Labour Migration,” pp. 15–33.

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PART

1

Economic and Technological Transformation

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CHAPTER

3

Globalization and the Asian Economic Response Dennis A. Rondinelli

W

hat accounts for the rapid progress in economic and social development in most of the countries in the Asia Pacific Basin over the past two decades? Explanations abound for the “East Asian Miracle” and for the emergence of the “Asian Tigers.” Economic and political observers continue to debate why and how the most successful APB countries emerged from poverty over the past fifty years to compete with the world’s most advanced economies. Underlying all of the theories has been recognition of the capacity of government and the private sector in many of the APB countries to change, adapt, and innovate. Change and innovation in East and Southeast Asia were driven strongly by globalization, but countries in other regions of the world exposed to the same external forces did not always respond as quickly or as deliberately, and with the same results, as did those in Asia. Although strong differences still exist in the region between developing or emerging market countries and advanced and newly industrialized countries, the hallmark of public policy and private sector strategy in nearly all Asia Pacific Basin countries over the past two decades has been adaptation to changing global forces and innovation to take advantage of and leverage new opportunities. In the process public, private, and social organizations in APB countries have helped to shape worldwide trends in globalization and, through increasing regional cooperation, to achieve mutually beneficial advantages. Economic, political, and social changes in Asia Pacific Basin countries, and most notably in East Asia, have been profound and widespread since the early 1970s and, in the face increasing globalization, have accelerated since the early 1990s. Governments and the private sector in many Asia Pacific Basin countries recognized the emerging opportunities accompanying the rapid globalization of trade and investment, adopted export-oriented economic development policies, strengthened their capacity for manufacturing high-technology products, shifted to high value services, and broadened 39

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educational and vocational training opportunities to create workforces more attuned to the needs of a global economy. Governments in the advanced and newly industrialized countries in Asia, at different times and paces, liberalized their trade and investment laws and “marketized” their economies. At the same time, East Asian countries experimented with programs that reduced poverty and distributed the benefits of economic growth more widely. Since the late 1980s, despite periods of downturn and even a devastating financial crisis in the late 1990s, economic growth has spurred scientific and technological advances that have made possible increasing integration among countries in the region and interaction with other countries around the world. This chapter explores several of the questions posed in Chapter 1 of this volume. How have governments, social organizations, and private enterprises in Asian countries adapted to the latest historical wave of globalization? What types of changes have occurred in Asia that allowed economic, political, technological, and social advances to benefit so many people? What have been the political and social impacts of development policies that not only recognized the changing trends of globalization but helped shape them in their own region and in the rest of the world? This chapter first explores the dimensions of change that have occurred as a result of globalization in the Asia Pacific Basin and then examines four fundamental changes that help explain how governments and the private sector in Asian countries adapted to the challenges and opportunities of globalization. Using the definition of globalization noted in Chapter 1— “the movement toward greater interaction, integration and interdependence among people and organizations across national borders”—it is clear that Asia Pacific Basin countries have engaged in greater cross border economic, political, social, and technological interaction during the past twenty-five years than at any time in the region’s history and more quickly and beneficially than any other region of the world with the possible exceptions of North America and Western Europe.

The Dimensions of Globalization-Induced Change in Asia Change has been the driving force of Asian development since the late 1970s. The Asia Pacific Basin countries examined in this chapter— Australia, China, Hong Kong (SAR), India, Indonesia, Japan, South Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, Thailand, and Vietnam—differ in the pace and extent of societal change that has occurred during the current wave of globalization. All of the countries, however, to a greater or lesser degree have been affected by and, in turn, have influenced the trends in regional and global interdependence.

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Economic Growth and Transformation Although the story of the Asian “economic miracle” is well known, it is useful to recall how widely and deeply the economic landscape in the Asia Pacific Basin has changed since the late 1970s. The economies of nearly all Asia Pacific Basin countries have undergone profound transformation. The ability of APB countries to adjust their macroeconomic, trade, and investment policies has allowed most countries in the region to benefit economically. In their analysis of the competitive forces in East Asian economic growth, Shahid Yusuf and Simon Evenett correctly point out that the middle and higher income APB countries have become more economically competitive by creating an environment for stimulating innovation—through public and private spending on research and development, from networking among firms that promote innovation and efficient use of resources, and by implementing policies supporting clusters of industries such as electronics, computer software, biotechnology, and technological services.1 Rapid and widespread economic growth in these countries came as well from public policies promoting private investments in services that have both generated jobs and revenue and supported the creation of technology industry and service clusters. Mutually reinforcing trends in these areas came together to allow higher and middle income APB countries to develop and use information and communication technologies not only as a source of economic growth but also as a driver of innovation and change. In addition, governments in Asia adopted new economic and trade policies that eased the entry of domestic and foreign firms into expanding market systems, increased competition among private firms and with privatizing public monopolies, strengthened intellectual property protection, and invested in human asset development. Asian countries both benefited from and contributed to globalization by adopting export-oriented development policies. From 1960 to 1989, most East Asian countries grew economically primarily due to factor accumulation. John Page estimates that between 60 and 120 percent of output growth derived from the accumulation of physical and human capital and labor force growth.2 From the 1960s to the late 1980s governments in East Asia generally found ways to improve their macroeconomic management, leading to stronger and more stable macroeconomic performance that attracted private investment. Governments of most countries in the region kept budget deficits in check or at least small enough to finance them without creating economic destabilization. They also found ways of keeping inflation low and reducing the uncertainty and inconsistency that comes with rapid or unpredictable price increases. Many governments also moved from longterm fixed rate regimes to managed floating exchange rates that moved generally parallel to the US dollar. Governments also adopted policies that

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encouraged savings, moved quickly to mitigate economic shocks by increasing public investment, and provided credits or incentives to promote exporting after moving from import substitution. As Table 3.1 indicates, for the region as a whole, between 1981 and 2000 real growth in gross domestic product (GDP) averaged 7.5 percent a year. Between 2001 and 2004, a period of worldwide economic downturn, real GDP growth in East Asia and the Pacific remained at close to 7 percent a year on average. Export market growth in East Asia and the Pacific averaged 6.7 percent a year during the 1980s and 8.3 percent during the 1990s. From 2001 to 2004 it grew, on average, by nearly 5 percent.3 As a result of more than thirty years of policy changes and adjustments, four of the “newly industrializing countries” (NICs)—Hong Kong (SAR), Korea, Singapore, and Taiwan—have joined the International Monetary Fund’s (IMF) list of more advanced economies along with Japan, Australia,

Table 3.1

East Asia and Pacific Comparative Macroeconomic Indicators East Asia and Pacific

Real average annual GDP Growth (percent) 1981–1990 7.3 1991–2000 7.7 2001–2004 6.9 Export market growth (percent) 1981–1990 6.7 1991–2000 8.3 2001–2004 4.8 Export volume (percent) 1981–1990 8.2 1991–2000 11.5 2001–2004 14.5 Fixed investment (percent) 23.2 1981–1990 28.7 1991–2000 36.3 2001–2004 Net inward FDI (US$ billions) 483.2 1995–2003 Net inward portfolio equity inflows (US$ billions) 25.1 1995–2003 Gross market-based capital inflows (US$ billions) 421.0 1995–2003

Europe Latin Middle and America East and Central and North Asia Caribbean Africa

South Asia

SubSaharan Africa

1.6 –1.5 4.3

1.1 3.3 1.3

2.4 3.3 3.9

5.8 5.2 5.7

1.7 2.1 3.1

3.3 5.6 6.6

4.4 9.8 2.9

5.3 7.4 4.9

5.0 7.5 4.3

4.8 7.5 3.6

0.1 1.2 9.3

5.4 8.7 5.1

0.7 5.0 4.2

6.4 11.1 13.1

1.5 4.3 2.0

32.1 24.0 20.9

20.2 20.0 18.2

26.7 21.8 23.3

20.2 21.6 23.3

18.6 17.2 20.0

231.2

530.7

29.4

35.6

69.5

17.8

29.2

1.5

23.1

31.4

335.4

681.3

105.9

56.6

85.7

Source: World Bank, Global Development Finance, 2004.

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and New Zealand. Seven other APB countries—China, India, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam—some of which remain relatively poor, are considered “emerging market countries” whose economic indicators are, nonetheless, often comparatively better than developing countries in other regions of the world. Increasing Trade and Investment From the early 1980s through 2005, export volumes from the Asia Pacific region grew faster than any other region in the world, increasing from 8.5 percent in the 1980s to 14.5 percent from 2000 to 2004. Table 3.1 shows that export market growth increased faster in Asia than in most other regions during the same period. Not only did Asia Pacific Basin countries take advantage of growing world export markets during the 1980s and 1990s, but through increasing regional cooperation began shifting toward a stronger structure of intraregional trade. East Asian and Pacific countries, more than those in any other region of the world, were able to shift the composition of exports to manufacturing, increasing manufacturers’ share of exports from about 50 percent in 1981 to about 85 percent in 2001. By 2002, the East Asia and Pacific region led all other regions of the world in exports of parts and components as a share of total exports, and achieved the highest levels of vertical integration with the global economy in the import content of exports.4 For much of the 1980s and 1990s, due to liberalization and trade expansion policies, East Asian and Pacific countries also led other regions in the share of new products in their export mix, indicating—as the World Bank points out—that these countries “are building dynamic new markets for their existing exports and developing new variations of old products to replenish the product cycle.”5 Moreover, East Asian and Pacific countries moved faster than any other developing region of the world toward increasing intraregional trade reaching, 26.5 percent of intraregional trade as a share of GDP by 2002. East Asian and Pacific developing countries grew not only through exports to each other and to other regions of the world, but from the net inward flow of foreign direct investment. Between 1995 and 2003 alone, net inward foreign direct investment totaled more than $483 billion, net inward portfolio equity flows totaled more than $25 billion, and gross market-based capital inflows were more than $421 billion. Fixed investment (gross domestic investment/GDP) averaged more than 23 percent a year during the 1980s and rose to nearly 29 percent a year during the 1990s, increasing to more than 39 percent in 2004. Gross foreign-exchange reserves in the region increased from $154 billion in 1995 to more than $544 billion in 2004. Workers’ remittances increased from $9.8 billion in 1998 to more than $17.6 billion in 2003. Of course, not all APB countries have reached the same level of econom-

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ic development. By the beginning of the twenty-first century, APB countries could be categorized into three levels of economic development: “advanced countries”—Japan, Australia, and New Zealand had per capita GDPs exceeding $21,000 a year—and “newly industrialized countries”—Hong Kong SAR, Singapore, and Taiwan—had reached similar levels, with South Korea rapidly approaching other advanced economies in the region. (See Table 3.2.) Developing and emerging market APB countries had distinctly lower levels of GDP per capita, but most saw progress in nearly all indicators of economic and social well-being since the late 1970s. Economic growth rates between 1986 and 2005 in APB developing countries substantially exceeded world averages and those of advanced OECD economies. Moreover, macroeconomic policy reforms and market liberalization programs reduced inflation rates substantially from 1996 to 2005 in all APB countries except Indonesia, which continued to suffer from financial downturns and political instability during the period.

Table 3.2

Levels of Economic Development: GDP Per Capita, GDP Growth, and Inflation GDP Per Capita (US$)

Level of Economic Development Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam

Real GDP, Annual % Change

Average Inflation, GDP Deflators

2002

1986–1995

1996–2005a

1986–1995

1996–2005a

26,940 28,260 21,740

3.1 3.1 2.5

1.5 3.7 3.0

1.2 4.1 4.7

–1.3 2.2 2.0

26,910 16,950 24,040 23,400

6.6 8.5 8.8 8.1

3.3 4.7 4.2 4.3

7.8 7.5 2.7 2.7

–1.3 2.7 — 0.3

Average Inflation, Consumer Prices 11.7 1.7 9.4 3.1 8.2 13.6 2.7 2.5

4,580 2,670 3,230 3,540 4,170 7,010 2,300

9.9 5.7 6.8 8.2

8.2 5.9 2.6 4.6

9.5 6.5

3.1 6.2

8.9 4.4

5.6 2.9

Major advanced economies 29,000 World 7,804

2.7 2.6

2.6 2.9

2.9 —

1.3 —

Sources: International Monetary Fund, Economic Outlook, April 2004; UNDP, Human Development Report 2004. Note: a. 2005 forecasted.

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Rising Levels of Innovative Capacity Asia Pacific Basin countries’ ability to adapt to the requirements of globalization are perhaps most clearly reflected in the rising capacity of the advanced and newly industrialized countries to innovate technologically. Perhaps no other trend more starkly explains the divergence between richer and poorer countries in the region. The more advanced and newly industrialized countries, especially, enhanced their capacity to innovate not only in manufacturing and technology development, but also in social and economic policies that supported growth. By 2003, the World Economic Forum ranked Taiwan (2), Japan (5), South Korea (11), Australia (14), New Zealand (19), Singapore (20), and Hong Kong (32), among the world’s countries with the strongest indigenous ability to innovate, scoring higher than many emerging market countries in other regions. Within the APB region, the advanced and newly industrialized countries ranked substantially higher than the emerging market and developing countries, which all ranked below 40. (See Table 3.3.) All of the advanced and newly industrialized economies in Asia also ranked in the top third of countries in the world in technology, with only Malaysia joining the group from among the region’s developing countries. In addition, the World Economic Forum’s assessment of growth competitiveness, another indicator

Table 3.3

World Economic Forum Rankings on Technology, Innovation, and Growth Competitiveness

Country

Growth Competitiveness Rank

Technology Rank

13 7 16

5 9 27

5 14 19

17 21 4 3

32 18 17 2

32 11 20 2

33 48 67 27 61 31 65

63 48 65 26 52 41 68

61 62 63 52 45 40 65

Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing China India Indonesia Malaysia Philippines Thailand Vietnam Source: World Economic Forum, 2003.

Innovation Rank

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of the ability of a country to adapt to globalization requirements, ranked all of the Asia Pacific Basin advanced and newly industrialized countries, along with China, Malaysia, and Thailand in the top half of the eighty countries around the world that it assessed. Australia, Taiwan, and Singapore ranked in the top ten countries in growth competitiveness. Growing innovative capacity, especially in the region’s advanced and newly industrialized countries, is reflected in the number of patent applications filed and in the number of researchers in research and development (R&D) per million people. Korea, Japan, Australia, and New Zealand exceed the world averages in patent applications filed and almost all countries in the region increased their share of high technology exports as a percentage of merchandise exports between 1990 and 2002 (see Table 3.4). The ability of all of the Asian advanced and newly industrialized countries, except Hong Kong, to exceed the world averages in researchers in R&D per million people and to begin gaining on major advanced economies was both a driver of their convergence in the ability to adjust to the challenges of Table 3.4 Technology Exports, Patents, and R&D Researchers

Level of Economic Development Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam Major advanced economies World

High Technology Exports (percentage of merchandise exports) 1990

2002

Patents Granted to Residents (per million people)

Researchers in R&D (per million people)

2000

1990–2001

24 8 4

24 16 10

884 68 145

5,321 3,439 2,197

— 18 40 —

19 32 60 —

6 490 27 —

93 2,880 4,052 —

— 2 1 38 — 21 —

23 5 16 58 65 31 —

5 0 0 — — 3 —

584 157 130 190 156 74 274

8 18

23 21

360 48

3,483 1,096

Source: UNDP, Human Development Report 2004.

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globalization and an indicator of divergence between them and the Asian developing countries.

Adapting to Globalization The impressive economic changes in Asia, especially among East Asian countries, can be explained largely by the willingness and ability of governments and the private sector to adapt and change. Four areas of adaptation, especially, allowed countries in the region to address more effectively the economic challenges and opportunities of globalization: (1) policy changes that liberalized the economies of Asian countries and created more effective trade and investment conditions; (2) the adoption of technology-based development strategies; (3) policies encouraging industrial clustering to attract foreign direct investment and build export capacity in both industrial manufacturing and high technology products and services; and (4) investments in human asset development. These four areas of change, adaptation, and innovation not only have contributed strongly to the advanced and newly industrialized countries’ ability to take advantage of the benefits of globalization, but also created models that less developed countries in the region are seeking to emulate. Policies for Economic Reform and Market Liberalization One of the strongest changes underlying the region’s economic growth has been the willingness and ability of governments and the private sector to make the economic and political reforms required to leverage opportunities offered by globalization. Yusuf describes the importance of the policy reforms in creating conditions for economic growth, noting that “from the early beginnings in the 1960s, and even before this time (if one includes measures introduced by Japan in the 1950s), the East Asian model evolved and differentiated into a number of variants, as countries in the region adopted certain basic measures and tailored them to their own circumstances.” Governments in the region continued to experiment with and adapt these variants “so that the composite East Asian approach to development in the 1990s was a significantly more market-oriented version of the strategy followed in the mid-1980s.”6 Because they had been changing and adapting for more than two decades, East Asian economies were better prepared to liberalize trade and investment and to strengthen the institutions creating a more open business and investment climate as globalization accelerated in the late 1990s and early 2000s. The importance of government’s willingness and ability to create a sound and attractive investment climate—including good infrastructure, skilled low-cost labor, and liberal

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trade and investment policies—in stimulating strong inflows of foreign direct investment is documented by Negesh Kumar’s study of US and Japanese multinational investment in seventy-four developing countries during the 1980s and early 1990s.7 Countries in East Asia and the Pacific created business climates that in most dimensions became more liberal and open and in which it is easier for both domestic and foreign companies to operate. As Table 3.5 shows, on most World Bank indicators of the “ease of doing business,” East Asia and the Pacific, by 2005, compared favorably or exceeded other developing regions of the world in creating a sound business climate. Countries in East Asia and the Pacific, on average, had a smaller informal economy measured by its share of gross national income (GNI) than any other region except high income OECD countries. They required fewer procedures for starting a business than any other developing region, although the duration for creating a new business was slightly longer and the cost slightly higher than South Asia and OECD high income countries. East Asia and Pacific countries had the lowest employment rigidity index of any region in the world and a shorter duration and cost for registering property than any region except the OECD high income countries. Similarly, enforcing contracts required the fewest number of procedures and shortest time period in East Asia of any developing region, although the cost was somewhat higher than in all other regions. The time required to close a business in East Asia was among the shortest in all developing regions and the recovery rate was higher in East Asia and the Pacific than every region except Europe and the OECD high income countries. Although economic progress was slowed temporarily by the financial crisis in the late 1990s, the “shocks” further accelerated policy and institutional reforms. South Korea, for example, in the wake of the financial crisis revamped its policies and programs for attracting foreign direct investment. 8 It increased investment incentives for foreign companies including tax breaks for high tech firms, created teams to help foreign companies resolve labor disputes, and improved vocational schools to train high school graduates in skills needed by foreign investors. The government moved more quickly to make corporate governance reforms in the late 1990s and early 2000s that removed ceilings on foreign ownership, strengthened auditing requirements, began to break up monopolistic chaebols, and imposed new requirements for the appointment of “outside” board members of large corporations. The willingness and ability to adapt and change also differentiated East Asian countries from most of the developing countries in the region. Although China, Malaysia, and India joined later in adopting policy changes for liberalizing their economies, some of the developing countries—Vietnam, Indonesia, the Philippines, and Thailand—have only slowly

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Globalization and the Asian Economic Response Table 3.5

World Bank Ease of Doing Business Indicators East Asia and Pacific

South Asia

24.3

35.7

37.7

8

9

Creating a business, duration in days 52

Factor/ Region Informal economy, % of GNI

Europe Latin Middle and America East Central and and Asia Caribbean Africa

OECD SubHigh Saharan Income Africa Countries

41.5

27.4

42.3

9

11

10

11

6

46

42

70

39

63

25

Creating a business, cost, % of GNI per capita 47.1

45.4

15.5

60.4

51.2

Employment rigidity index

24

42

41

44

38

42

34

Registering property, time in days

51

55

133

56

54

114

34

Creating a business, number of procedures

Registering property, cost, % of property per capita

4.3

5.8

3.0

5.6

6.8

225.2

13.1

16.8

8.0

4.8

Enforcing contracts, number of procedures 27

29

29

35

38

35

19

Enforcing contracts, time in days 316

349

412

462

437

434

229

Enforcing contracts, cost, % of debt 56.9

38.5

17.6

23.3

17.9

42.9

10.7

Closing a business, time in years

3.4

5.1

3.3

3.6

3.8

3.5

1.6

Closing a business, recovery rate, cents on the dollar

30.4

21.4

30.5

26.6

28.6

17.1

72.1

Source: World Bank, Doing Business Website, 2005, available at http://rru.worldbank. org/doingbusiness.

and recently adopted the economic and political changes needed to benefit from globalization. World Bank analysts point out that despite the fact that they were late movers in adopting the changes needed to adjust to globalization, China and India were able to achieve higher levels of economic growth and greater

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interaction in global economic activities at the end of the 1990s and beginning of the twenty-first century because of the economic policy reforms they made gradually during the 1980s and early 1990s.9 China’s growth during the late 1990s and early 2000s was built on the basic property rights reforms adopted during the 1980s that transformed the socialist collective agricultural system into one that allowed farmers to sell for personal gain production in excess of state-set targets through township and village enterprises. The income gained from private sale of agricultural surpluses allowed farmers to invest in small rural enterprises or in goods and services that generated additional income and improved their standards of living. Later, China adopted policy changes encouraging foreign direct investment, first in special economic zones, and later in major industrial centers.10 By 2004, as the World Bank pointed out, “China has created an investment climate in its main cities that would be the envy of many developing countries—and it is not just about wages or exchange rates.”11 The World Bank’s Investment Climate Surveys indicated that in China’s major industrial centers the costs of infrastructure disruptions, crime and regulatory constraints, and the incidence of bribery and contract enforcement difficulties dropped to levels far below those in many other developing countries in Asia and in other parts of the world. Although the government of China still faces challenges in spreading and enforcing those reforms throughout the country, its ability to adapt and change made it possible for its major industrial centers to benefit more strongly from international trade and investment. India started liberalizing its economy in the early 1980s, nearly a decade after most of the East Asian countries, beginning slowly with changes to stimulate exports and eliminate controls on imports. Later it eased foreign technology transfers and rationalized its tax structures. These reforms were followed in the 1990s with policies that made India’s currency convertible, further reduced quotas and tariffs, and eased controls on foreign ownership of property. India opened more sectors to foreign investment and adopted a new competition policy that reduced the government’s approval requirement for large scale foreign investments, intensified efforts to fight corruption, and addressed important infrastructure problems. Although corruption remains a serious problem in many Asia Pacific Basin countries, public interest groups and governments have taken action more frequently over the past decade to combat its most egregious and visible forms. Heads of government in the Philippines, Indonesia, Thailand, Japan, and Korea have been prosecuted and convicted of corruption; some have been removed from political office and the families of others have been jailed.12 Governments of East Asian countries, including Japan, Hong Kong, Korea, and Singapore, have signed the WTO Agreement on Government Procurement to reduce bribery in government contracting and purchasing and have taken steps to enforce anticorruption laws more effectively.

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The economic growth that occurred in APB countries over the past two decades also resulted from policy changes strengthening intraregional and global interactions. Global interconnectedness through trade had been occurring since the 1970s in the export-oriented economies of Japan, Taiwan, Hong Kong, Singapore, and Thailand, and since the 1980s in countries that had previously adopted import-substitution and protectionist development policies. In most of the APB countries, changes in government policies were required to promote both inward and outward foreign direct investment and membership in regional and global trade agreements and organizations, especially for those countries with inward-looking economic development policies that saw globalization initially as a threat rather than an opportunity. By 2003, however, all of the APB countries had increased their trade, investment, and membership in regional and international trade agreements. Yusuf and Evenett point out that “East Asia’s dense and proliferating trading links mirror an equally rich and complex system of relationships binding transnational communities drawn from state bureaucracies, academic institutions, and the large pools of knowledge workers and business people. Networks of nongovernment organizations are also becoming an active part of these communities.”13 By 2006, the results of these changes and adaptations were reflected in the relatively strong profiles of many of the countries in the region in the Index of Economic Freedom and in the World Bank’s governance and ease of doing business indicators (see Table 3.6). Based on scores for trade, fiscal burden, government intervention, monetary policy, foreign investment, banking and finance, wages and prices, property rights and regulation, most advanced and emerging industrial APB countries score high in economic freedom while developing countries score relatively lower. Many of the policy reforms enacted in Asia Pacific Basin countries during the 1990s are reflected in the World Bank’s governance indicators, all of which are considered important for effective participation in global economic interaction (see Table 3.7). By 2004, the advanced and newly industrialized countries in the region reached levels of voice and accountability—indicators of political openness and participation in selecting government representatives—that were generally higher than Asian developing countries. The region had higher average scores than most other developing areas except Latin America and Eastern Europe. Political stability indicators also exceeded those of all developing regions except Latin America. The high ratings of advanced and industrialized countries in the Asia Pacific Basin approximated those in OECD countries, with Singapore rating 100 percent. Again, the levels of government effectiveness differentiated advanced and newly industrializing countries from emerging market and developing countries in the region. Only Malaysia was rated near the more advanced Asian countries in the level of government effectiveness. All

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Table 3.6

Index of Economic Freedom

Country, by Level of Economic Development Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam

World Ranking

Overall Score, 2006

27 9 9

2.26 1.84 1.84

1 45 2 37

1.28 2.63 1.56 2.38

111 121 134 68 98 71 142

3.34 3.49 3.71 2.98 3.23 2.99 3.89

Source: The Heritage Foundation, 2006, available at www.heritage.org/research/features/ index/.

of the advanced and newly industrialized APB countries were rated above the 75 percent level in rule of law and control of corruption, differentiating them from other Asian developing countries, and exceeding the average scores for all other regions of the world except OECD members. Technological Adaptation and Innovation A second set of changes that help explain the Asia Pacific Basin countries’ relatively strong economic progress compared to other developing regions of the world is the continuing pursuit of technological progress and increasing innovative capacity. The advanced and newly industrialized APB countries and, increasingly, the developing and emerging market economies achieved progress by recognizing and adapting to the relentless improvements in information, telecommunications, and transportation technology. These advances not only lowered the costs of international interaction but also created opportunities for the development of new industries and services. Stimulating the electronics industry. In the East Asian countries technolo-

gy-based industrialization began in the 1970s and continuing innovation and adaptation helped position these countries to build export-oriented economies, attract foreign investment, and integrate more deeply into the global economy. The development of the electronics industries in Japan,

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53

Governance Indicators

Level of Economic Development

Voice and Political Government Rule of Accountability Stability Effectiveness Law

Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam Regional averages East Asia South Asia Former Soviet Union Middle East and North Africa Sub-Saharan Africa Latin America and Caribbean Eastern Europe OECD

Control of Corruption

79.3 94.4 97.0

90.3 89.7 95.1

84.5 92.8 95.9

88.7 95.4 96.4

85.1 93.8 99.0

53.5 67.7 65.7 74.2

85.4 60.5 91.9 70.3

88.7 79.4 100.0 82.5

86.6 77.8 93.3 80.9

90.2 66.5 99.5 77.3

10.1 60.6 34.8 42.4 54.0 57.1 10.6

51.4 22.2 12.4 61.6 29.7 62.7 61.1

63.4 54.1 34.0 80.9 55.7 64.9 48.5

51.5 57.2 23.2 69.6 38.1 62.4 44.8

42.3 49.5 6.7 68.0 37.6 53.6 33.0

50.3 29.6 22.7 28.6 31.0 61.2 65.0 91.3

54.6 32.4 31.1 40.1 34.8 51.2 60.5 87.2

50.5 48.1 21.7 49.9 28.9 53.3 57.7 91.6

47.5 42.1 20.4 54.2 30.5 53.2 56.5 91.6

44.4 41.5 16.8 54.7 32.4 54.9 54.7 91.3

Source: World Bank, 2003, available at www.worldbank.org/wbi/governance/govdata.

Korea, Taiwan, Singapore, and Hong Kong during the 1970s and 1980s played a significant role in accelerating economic growth in East Asia and in developing international export markets. Indeed, M. Hobday has argued that the stimulation of the electronics industry by governments and the private sector in East Asian countries was one of the most important innovations in the region’s economic development; not only did it create jobs, but it also created backward and forward linkage demand in other manufacturing sectors.14 As firms in East Asia’s newly industrializing countries became original equipment manufacturers (OEM) for foreign multinational corporations they learned efficient high quality assembly processes and, in the 1990s, were able to develop process engineering and product design skills and to conduct the research and development activities that led to creation of new products under their own brand names. Further innovation and creativity during the 1990s and early years of the twenty-first century allowed many of them to capture

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much more of the value added that had previously gone to foreign multinational corporations by competing directly with international suppliers. Governments in each of the four “Asian Tigers” experimented with different policies and interventions. Korea and Taiwan, with less open economies, focused on strengthening large domestic firms and small, locally owned enterprises, respectively. In the more open economies of Singapore and Hong Kong, government focused on assisting large foreignowned and small local firms as well as working with large multinational corporations. Hobday emphasizes the important roles that governments played in these countries in stimulating the electronics sector. The Korean government heavily supported the growth of large, mostly family-owned, conglomerates (chaebols) while Singapore provided generous subsidies to multinational corporations. In Hong Kong, Taiwan, and Korea, governments created conditions that allowed and encouraged domestic firms to participate in the international OEM subcontracting system. Government policy and company strategies in Korea, Taiwan, and Hong Kong were closely interconnected and that, at least partially, protected the emerging new industries; in Singapore and Hong Kong, however, government policies focused on providing an attractive climate for foreign direct investment. To some degree, Malaysia, Indonesia, Thailand, and the Philippines experimented with variations of the same model by developing electronics assembly capability and process engineering in the 1980s and 1990s, while Vietnam adopted the electronics assembly model in the 1990s and early 2000s. In Malaysia, the government provided incentives and conditions that stimulated exports through subsidies to multinational corporations and, later, as domestic firms developed both engineering and design capabilities and were able to create new products, governments in many of the developing Asian countries provided incentives for joint ventures between domestic companies and MNC subsidiaries. China’s ability to attract foreign investment from the European Union for automobile assembly during the 1990s had similar impacts on its economy. Chinese subsidiaries of EU firms learned high quality assembly, manufacturing efficiency, and technological adaptation that benefited not only foreign investors but also Chinese assembly operations and domestic suppliers.15 Building the ICT sector. Governments and private sector organizations in

the advanced and newly industrialized countries of East and Southeast Asia recognized early in the current period of globalization that the bases of economic and social development were shifting from low cost labor and capital to knowledge and technology. In the most economically successful APB countries governments took the initiative and provided incentives for the private sector to develop manufacturing capabilities in high-tech products and invested heavily in information and communications technology and

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infrastructure. They either found ways of attracting foreign investment in high-technology sectors or developed indigenous capacity for scientific and technological research and development that would allow them to create their own technological innovation capabilities. By the early years of the twenty-first century, access to ICT became a strong resource for more advanced economies in the region—and another factor in the divergence between them and Asian developing countries. All of the advanced and newly industrialized countries in the region had, by 2003, higher levels of telephone and cellular/mobile subscribers per 100 people than the developing and emerging market economies. At the same time, it is clear that at least in terms of mobile access, even in developing APB countries access improved greatly from 1998 to 2003. (See Table 3.8.) Similar trends can be seen in the access of people in APB countries to the Internet. Internet users per 10,000 inhabitants and personal computers per 100 inhabitants in advanced and newly industrialized countries in Asia, by the beginning of the twenty-first century, substantially exceeded world averages (see Table 3.9). Access to the Internet and to personal computers in the more advanced countries in the region also illustrated the strong “digital divide” between them and the developing countries within Asia and the rest of the world.

Table 3.8

Telephone and Mobile Phone Subscribers Total Telephone Subscribers (per 100 inhabitants)

Country, by Level of Economic Development Advanced Japan Australia New Zealand Newly industrialized Hong Kong SAR South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam

Cellular/Mobile Subscribers (thousands)

Cellular/Mobile Subscribers (per 100 inhabitants)

2003

1998

2003

119.49 126.18 106.90

47,307 4,918 790

86,658 14,347 2,599

67.96 71.95 64.82

121.26 116.61 125.84 169.83

3,174 14,018 1,094 4,727

7,241 33,591 3,312 25,089

105.75 69.37 79.56 110.84

42.32 7.10 9.17 62.36 23.29 36.55 8.78

23,863 1,195 1,065 2,200 1,733 1,977 222

269,000 26,154 11,700 11,124 15,201 16,117 2,742

21.40 2.47 5.52 44.20 19.13 26.09 3.37

Source: International Telecommunications Union, 2004.

2003

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Table 3.9

Internet Hosts, Users, and PCs

Country, by Level of Economic Development

Number of Internet Hosts

Advanced Japan 12,962,065 Australia 2,847,763 New Zealand 474,395 Newly industrialized Hong Kong 591,993 South Korea 253,242 Singapore 484,825 Taiwan 2,777,085 Emerging market and developing countries China 160,421 India 86,871 Indonesia 62,036 Malaysia 107,971 Philippines 27,996 Thailand 103,700 Vietnam 340 World

55,124,854

Internet Users (per 10,000 inhabitants)

PCs (per 100 inhabitants)

4,488 4,817 5,262

38.2 56.5 41.4

4,691 6,034 5,043 3,900

42.2 55.1 62.2 39.5

632 175 377 3,453 440 965 430

0.2 0.7 1.2 14.7 2.8 3.9 0.9

1,107

9.91

Source: International Telecommunications Union, 2004.

The importance of developing the ICT sector in Asian countries has not been lost on Asian developing countries, however, and all—to one degree or another—are investing in both production capacity and broader access. Studies of eight Pacific Rim countries—Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand—show that government and private sector investments in information and communication technologies contributed strongly to increasing national productivity and stock market values in all eight countries from 1992 to 2001.16 In addition, some evidence indicates that the spread of new ITC technology helped reduce poverty in developing Asian countries by improving the welfare of rural people, improving education, generating employment, and contributing to economic growth.17 Governments in APB countries have taken different approaches to developing technology- and knowledge-based economies.18 Singapore, for example, invested in attracting foreign transnational corporations with technological capabilities and researchers in R&D. South Korea, on the other hand, invested heavily in strengthening indigenous advanced technology research and development capability, created and supported technology research institutes, supported Korean private industry development of hightech products such as semiconductors and invested in infrastructure that

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would make Internet and ICT access widely available to both businesses and individual citizens. Korean R&D expenditures as a percentage of GNI rival those of more advanced OECD economies. Developing countries in the APB region are now seeking to emulate the more advanced economies. Malaysia’s 1998 Communications and Multimedia Act consolidated numerous inefficient vertical services into four horizontal areas for network facilities, network services, application services, and content-application services, and also promoted voluntary self-regulation codes for ICT companies. The government developed Internet content standards to protect consumers and flexible regulations for Voice over Internet Protocol (VoIP) telephony and third generation (3G) cellular services. In addition, in both the Philippines and China the government drove down the cost of telecommunications access for the poorest populations by extending short messaging services (SMS). Vietnam extended wireless local area networks (WLANS or WiFi) throughout the country and the government of the Philippines extended fee-based multipurpose telecenters based on satellite and other technologies that provide access to remote areas of the country at extremely low prices.19 Expanding the biotechnology and high-tech services sectors. Although research and development in ICT continues to play an important role in economic development of the Asia Pacific Basin, several countries in the region are encouraging broader diffusion of high-technology industries and of technology development and utilization capacity throughout the economy. Singapore, for example, announced a Strategic Economic Plan in 1991 that would coordinate development efforts by focusing on high-priority core industries throughout the city-state. While strengthening its existing core industries, Singapore sought to move up the technological ladder by attracting new core industries in biotechnology, computer peripherals, aerospace, and environmental technology. The government set up a National Biotechnology Program to encourage joint ventures with multinational firms, cooperate through strategic alliances with other countries, and attract investment by international biotechnology companies.20 Singapore greatly strengthened its intellectual property rights laws and invested more than $2 billion in infrastructure and incentives by 2004 to attract foreign biotechnology companies that will create a center of biotechnology and pharmaceutical innovation. Singapore is competing strongly with Malaysia, Taiwan, and China for biotechnology resources. 21 Singapore’s Agency for Science, Technology, and Research, a part of the Economic Development Board, supported the development of a biomedical sciences cluster comprising pharmaceuticals, biotechnology, medical technology, and health care services. The government developed a biomedical research complex, Biopolis, near the National University of Singapore and

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its hospital and the Singapore Science Parks to house multidisciplinary collaborations between academia and industry. Five research institutes were created on bioinformatics, bioprocessing technology, genome research, molecular and cell biology, and bioengineering and nanotechnology. The Biomedical Research Council sponsored international partnerships with Johns Hopkins University School of Medicine, the Korolinska Institute of Sweden, the University of Washington and Nanyang Technological University, and the Massachusetts Institute of Technology. By the early 2000s some governments in Asia also began to see the transformation of North American and Western European economies from manufacturing to high-technology services as a new opportunity for further adapting to globalization trends. In 2004, the government of Taiwan, for example, enacted strong policies to make the development of twelve service sectors more open and competitive.22 The plan aimed at generating employment in and obtaining stronger contributions to gross domestic product from services. The policies focused on integrating financial services laws, regulations, and systems to make Taiwan’s financial industry conditions internationally competitive. The government also forged ahead with policies that would allow the formation of large logistics alliances to create a world class supply chain and that would create an advanced broadband electronic services system. Taiwan will also encourage substantial investment in public health care information networks, internationalization of the education industry, and development of human resources training services. The government will make new investments in the meetings and exhibitions services industry, the design and information services industry, and in engineering consulting, cinema, and resources recycling services industries. Policies for Clustering Knowledge-Based Industries Government and corporate leaders in East Asia also recognized earlier than those in many other developing regions of the world that high-technology enterprises must be located near or have access to knowledge centers that can generate or stimulate innovation and provide a reliable source of skilled workers, technically trained supervisors, scientists, engineers, and managers. They saw that among the most important knowledge-based organizations on which globally oriented businesses depend are R&D laboratories engaged in technology development, colleges and universities providing trained personnel and research capacities, and consultancy organizations that help commercialize technology, develop new products, and help manage international activities more effectively. Globally competitive companies also depend heavily on data-gathering and analysis units and on training and continuing education facilities that can help them become and remain “learning organizations.”

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First in Japan and later in other advanced economies in the region, political and business leaders recognized that new knowledge institutions were needed to foster innovation and knowledge transfer in order to leverage the resources of existing organizations. Despite the large number of firms and government research institutes located in Tsukuba Science City in Japan, for example, strong interaction did not really begin to develop among them until a new knowledge organization, the Tsukuba Advanced Research Alliance, was formed in the early 1990s to encourage collaborative research between Tsukuba University, private research institutes, and national government laboratories.23 Other governments in the region moved to strengthen educational institutions at every level to support their international competitiveness and technological development strategies. The government of Malaysia, for example, planned in its Multimedia Super Corridor heavy investment in multimedia technology to develop “smart schools” that could be equipped with computers, networks, and the latest teaching-learning software. Some governments in Asia sought to emulate Japan’s success in fostering knowledge-based industries and attracting foreign investment in technologically advanced industries by creating industrial clusters. In India, for example, Bangalore’s science complex attracted both foreign and domestic software and computer service industries by its clustering of the Indian government’s most advanced military and space research facilities, a variety of technology educational institutions (including three universities, fourteen engineering colleges, and forty-seven polytechnic schools), the numerous private research facilities that were spun off or located near government research institutes, and the government’s heavy investment in supporting infrastructure such as a free trade zone and advanced telecommunications networks.24 The government of Taiwan planned the Hsinchu science park to be embedded in a strong set of institutions in and around the park for facilitating and accelerating technology diffusion.25 This planned “industrial ecology” included government research, regulatory and coordinating agencies, two nearby universities, strong public-sector research institutes, commercial organizations such as trade and industry associations, along with service organizations, financial institutions, and ready-made industrial buildings. But the success of Hsinchu can also be attributed to its proximity to the Taipei metropolitan area’s diverse set of knowledge institutions, the numerous electronic firms already established in the capital city, and its large pool of skilled labor. Two major highways were constructed between Taipei and Hsinchu to facilitate interactions with institutions located in the capital and to provide easy access to the metropolitan area’s international airport. In order to provide the physical and support infrastructure for technology-based manufacturing enterprises, China, Japan, Korea, and Taiwan began

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creating high technology free trade zones. These zones provided a business climate suited to the needs of firms engaged in international trade that use agile business practices. The zones were organized around high-performance core industrial networks: a hub company and its major suppliers. Those companies locating in the zone received more flexible regulatory treatment and tax incentives as well as expedited customs clearance of imported and exported materials and goods. The zones provided multimodal transport and communications infrastructure systems to facilitate global logistics and production, and just-in-time inventory and production processes. The development of the Pudong New Area in the eastern part of Shanghai was critical in attracting large-scale foreign and domestic investment in China by offering good quality infrastructure and development support. More than forty-four of the world’s top two hundred transnational companies established subsidiaries in Pudong along with nearly 4,000 domestic enterprises by the end of the 1990s. The Jinqiao Export processing zone was reserved for high-technology and export-oriented, nonpolluting industries, and the Wiagaoqiao Free Trade Zone, offered export-processing operations and bonded warehouses as well as a base for oil and gas exploration in the East China Sea. In addition, Shanghai targeted financial services as one of its core industries and developed the Lujiazui Finance and Trade Zone to house Shanghai stock exchanges, securities firms, banks, and financial institutions. Policies for Human Asset Development The ability of governments and the private sector to adapt to the forces of globalization brought social as well as political benefits to countries in the region through poverty reduction, job creation, and improvements in health and social well-being. Policies promoting economic growth and broader distribution of health care, education, skill training, and social safety nets helped reduce poverty and enhance human assets in many APB countries. By the World Bank’s calculations, the number of people in East Asia living in absolute poverty on less than $2 a day dropped from 1.5 billion in 1990 to 618 million in 2005. The number of people living in dire poverty was reduced by nearly 60 percent in less than fifteen years.26 Under-five mortality rates in East Asia and the Pacific dropped from 59 per 1,000 in 1990 to about 42 per 1,000 in 2002, substantially below world rates of 81 per 1,000. Infant mortality rates similarly dropped to 32 per 1,000 live births compared to world averages of 55 per 1,000 live births in 2002. Average years of schooling of adults increased in every Asia Pacific Basin country between 1985 and 2001 (see Table 3.10). Although average years of schooling in APB countries remained four years lower than in the world’s high-income countries, substantial progress could be seen in both

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61

Average Years of Schooling and Gross Enrollment Levels Average Years of Schooling of Adults

Level of Economic Development Advanced Japan Australia New Zealand Newly industrialized Hong Kong South Korea Singapore Taiwan Emerging market and developing countries China India Indonesia Malaysia Philippines Thailand Vietnam Average, East Asia and Pacific region World high income countries average

Gross Enrollment Ratio (%), Secondary Level and Tertiary Level

1985

2001

1985

2001

1985

2001

8.7 10.3 11.5

9.5 10.9 11.7

95.4 80.1 85.2

102.5 153.8 113.2

27.8 27.7 33.1

47.7 64.6 71.7

8.4 8.7 6.1

9.4 10.8 8.6

71.0 91.6 62.0

73.0 94.2 73.4

— 34.0 13.6

25.0 (1995) 82.0 33.7 (1995)

4.9 3.6 4.0 5.5 6.7 5.2 —

6.2 5.1 5.0 6.8 8.2 6.5 —

39.7 37.9 41.3 52.9 64.4 30.5 42.7

66.4 48.5 57.9 69.6 81.9 82.8 69.7

2.9 6.0 — 5.9 24.9 19.0 1.9

12.7 10.6 5.1 26.0 30.4 36.8 10.0

—

6.2

66.4

14.4

—

10.2

—

106.0

—

61.1

Source: UNDP, Human Development Report 2004.

more advanced and developing countries in the region. Gross enrollment ratios increased in all Asian countries at both the secondary and tertiary school levels. Governments in Asia not only adopted stronger educational policies and programs, but also used their economic development strategies to enhance human skills development. Beginning in the 1970s, for example, Singapore’s government used its high-technology industrial development policy to attract domestic and foreign direct investment in technology-intensive, higher value-added export production that created skill-intensive employment and brought advanced technological know-how into the country. 27 Singapore implemented a comprehensive information technology plan—IT 2000—to guide its development as an “intelligent island.” 28 Through a national information infrastructure the government began to link computers and telecommunications equipment in homes, offices, schools, and businesses throughout the country.

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In explicit recognition that “knowledge workers are the key to success of the multimedia/information technology industry,” Malaysia’s Multimedia Super Corridor (MSC) offered foreign firms substantial incentives to employ knowledge workers (people with five or more years’ experience in an approved industry, any university degree or graduate diploma from a technology college, or a masters or higher degree in any discipline) in the region.29 These incentives included full-ownership rights, no limits on the number of foreign knowledge workers a foreign company can hire for their MSC operations, and multiple entry visas for up to five years.

Conclusion Adaptation and change have been the key processes that explain both Asia Pacific Basin countries’ economic and social progress during a period of rapid globalization and the divergence between more advanced and less developed economies in the region. Those countries in which government and the private sector have been most adaptable and innovative have progressed more quickly and grown more rapidly than those that have lagged behind, but all APB countries have made substantial economic, social, political, and technological progress during a period of rapid globalization. APB countries have adjusted their macroeconomic policies to take advantage of global trade and investment and to stimulate economic growth. Many governments in Asia have embraced global technological advances to increase the efficiency and effectiveness of their own political and administrative procedures and refocused their economic and social development policies on the application and use of innovations in telecommunications. Governments in the region have, generally, become more open, transparent, and democratic. They have created conditions within which the private sector could compete with businesses around the world through trade and investment, and the more successful ones have invested in developing the country’s human assets and technological capabilities to leverage opportunities created by globalization. As a result of both public sector’s and the private-sector’s ability to adapt, change, and innovate in most Asia Pacific Basin countries, larger numbers of people have moved steadily from employment in subsistence agriculture to work in industry and services, emerged from poverty to middle class incomes, and transitioned from rural to urban lifestyles. The numbers of people living in extreme poverty, on less than $2 a day, fell dramatically in the Asia Pacific region since the 1980s, and continued to drop in East Asia.30 Two-thirds of East Asia’s poor are now concentrated in China where continued rapid economic growth through 2005 further reduced the number of the absolute poor in the region. Advances in health, education,

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and social services, along with access to information and communications technology, have spread to more people in Asia than ever before in history. The Asia Pacific Basin’s prospects for continued economic growth and social development, and its capacity to benefit from continuing globalization of trade and investment, will depend in the future, as it has in the past, on the ability and willingness of governments, the private sector, and social organizations in the region to adapt, innovate, and change. In a global economy, national economic and social development depends increasingly on external forces over which governments have only partial control, making the internal capacity to adapt and change a key factor in determining whether or not people in Asia will continue to benefit from globalization in the years to come.

Notes 1. Yusuf and Evenett, Can East Asia Compete? Innovation for Global Markets. 2. Page, “The East Asian Miracle and the Latin American Consensus: Can the Twain Ever Meet?” pp. 19–49. 3. World Bank, Global Development Finance, Table B.2, p. 179. 4. World Bank, Global Economic Prospects. 5. Ibid., p. 48. 6. Yusuf, “Remodeling East Asian Development,” pp. 6–26. 7. Kumar, Globalization and the Quality of Foreign Direct Investment. 8. Lowe-Lee, “Economic Trends.” 9. World Bank, World Development Report 2005. 10. Wu, “Economic Reforms in China: The Political Rationale.” 11. Ibid., p. 57. 12. Bhargava and Balongaita, “Challenging Corruption in Asia: Case Studies and a Framework for Action.” 13. Yusuf and Evenett, pp. 25–26. 14. Hobday, “Innovation in Asian Industrialization: A Gerschenkronian Perpective,” pp. 293–314. 15. Zhang and Taylor, “EU Technology Transfer to China: The Automotive Industry as a Case Study.” 16. Feinberg and Tokic, “ITC Investment, GDP and Stock Market Values in Asia Pacific NIC and Developing Countries: Some Preliminary Results.” 17. Quibria, Tschang, and Reyes-Macasaquit, “New Information and Communications Technologies and Poverty: Some Evidence from Developing Asia.” 18. Koustadakapulos, “The Challenge of Technological Development for ASEA: Intraregional and International Cooperation.” 19. Ulrich, Chacko and Sayo, “Asian Forum on Information and Communication Technology Policies and e-Strategies.” 20. See van Elkan, “Singapore’s Development Strategy.” 21. The Economist, “Can Philip Yeo Reinvent Singapore as a Hothouse for Innovation?”

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22. Taiwan New Economy Newsletter, “EY Formulates Action Plan for Service Industry Development.” 23. Swinbanks, “Unique Research Body to Energize Japan’s R&D.” 24. Stremlau, “Dateline Bangalore: Third World Technopolis,” pp. 50–51. 25. Mathews, “A Silicon Valley of the East: Creating Taiwan’s Semiconductor Industry.” 26. World Bank, “East Asia Update.” 27. Ulrich, Chacko, and Sayo, “Asian Forum on Information and Communication Technology Policies and e-Strategies.” 28. Chan and Al-Hawamdeh, “The Development of E-Commerce in Singapore: The Impact of Government Initiatives.” 29. Keat and Phin, “Malaysia’ World Bank, “East Asia Update.” 30. World Bank, “East Asia Update.”

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CHAPTER

4

Regional Economic Integration in East Asia Kevin G. Cai

E

ast Asian regional economic integration has been evolving over the past two decades from an autonomous process of rising intraregional trade and FDI driven primarily by market forces to a deliberate policy of institutionalized economic cooperation by governments in the region. Increasing East Asian cooperation reflects the efforts of governments to respond actively to changing global and regional conditions. Globalization has not only made national economies increasingly integrated through trade, finance, and production, and a growing web of international treaties and institutions, but has also brought fundamental impacts on economic growth, the distribution of income and wealth, patterns of trade and finance, and political institutions. By adopting an export-oriented development strategy, most East Asian economies came to rely heavily on the global economy for their markets, capital, technology, and resources, making the region more susceptible to the negative as well as the positive effects of globalization. Globalization gave rise to regional economic cooperation and protectionism in other parts of the world—in Western Europe and North America, in particular—exerting stronger pressures on East Asian governments to cooperate more closely and to develop a stronger sense of community and common regional destiny. The Asian financial crisis, which was widely believed to be caused by the negative effects of globalization, became a catalyst for East Asian governments to rethink regional economic integration and to move more rapidly toward creating a regional economic grouping on par with the European Union (EU) and the North American Free Trade Agreement (NAFTA). Regional integration is now seen not only as a defensive measure against the challenges of globalization but also as a logical development of increasingly closer economic and other ties among countries in the region. This chapter explores the ongoing evolution of East Asian regional economic integration since the mid-1980s and is organized into four sections. 65

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The first section discusses the increasing regional economic integration in East Asia since the mid-1980s, which until recently was an autonomous process driven primarily by market forces. The second explains how the Asian financial crisis became a catalyst for East Asian governments to reexamine more institutionalized forms of regional cooperation, combining government initiatives with market forces. The third assesses ongoing governmental moves toward institutionalized economic cooperation in East Asia, and the concluding section speculates on the impacts of East Asian economic integration for global economic and trade policies.

Regional Economic Integration Since the Mid-1980s The United States initially encouraged East Asian economic integration during the Cold War as a means of countering communist influence in the region. As US hegemonic power began to decline and the Cold War waned during the 1970s and 1980s, the East Asian political economy was dramatically transformed. By the mid-1980s economic integration in East Asia began to take on new momentum not only among the capitalist economies in the region but also among transition economies such as China and Vietnam. Since then, the economic power of the United States both as a market and as a source of investment for the region has declined at the same time that economic ties among East Asian economies have grown stronger through intraregional trade and investment. The relative decline of US economic power and the ensuing intensification of trade frictions have reduced the importance of the US market for East Asian exports and stimulated intraregional trade. The significant change in the direction of East Asian exports is demonstrated by the statistics in Table 4.1. Between 1985 and 2001, while the exports of East Asia to the US market nearly tripled, the value of intraregional exports among East Asian economies grew by nearly six times. East Asia’s imports during the same period increased 5.6 times while imports from the United States grew by only 3.4 times. This redirection of both exports and imports of East Asian economies was the result of marked growth of intraregional trade combined with the concurrent decline of interregional and US trade. The share of intraregional exports rose from 34.6 percent to 48.7 percent and the share of intraregional imports increased from 40.3 percent to 54.0 percent from 1985 to 2001. The share of East Asian exports to the United States dropped from 32.9 percent to 23.4 percent and the region’s share of imports from the United States declined from 17.4 percent to 14.2 percent. Much of the growth in intraregional trade has been attributed to increased manufacturing and intra-industry transactions resulting from intraregional foreign direct investment. As in trade, US investment dominat-

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67

Changing Distribution of East Asia’s Exports and Imports Between East Asia and the United States, 1985 and 2001 World 1985

Value of exports to (billions $) Share of total exports to (%) Value of imports from (billions $) Share of total imports from (%)

East Asia

United States

2001

1985

2001

1985

2001

367.8 1,525.3 100 100 318.9 1,342.8 100 100

127.3 34.6 128.6 40.3

742.7 48.7 725.3 54.0

121.0 32.9 55.5 17.4

357.0 23.4 190.6 14.2

Source: Calculated from IMF, Direction of Trade Statistics Yearbook, 1992 and 2002 (Washington, DC: International Monetary Fund, 1992 and 2002).

ed FDI inflows during the 1950s and 1960s. Starting in the late 1960s, however, Japan became a major source of FDI and more recently four Asian newly industrializing economies (NIEs)—Hong Kong, Taiwan, South Korea, and Singapore—along with China and several other members of ASEAN have increased their investments in the region. As a result, nearly half the FDI flows in East Asia now originate within the region. Increased intraregional FDI flows have helped to strengthen the economic ties promoting East Asian regional integration. The rapid growth of intraregional FDI since the mid-1980s resulted from changing comparative advantages among East Asian countries and the restructuring of both capital-exporting and capital-importing economies. Through regionalization of manufacturing production, trade, and technology transfer, a new division of labor and multiple commodity chains were established in East Asia based on differences in national resource endowments and levels of development. In this complementary network of economic ties Japan plays a leading role as the major supplier of capital, technology, and advanced products as well as providing a significant market for raw materials and consumer goods. The NIEs have emerged as important bases for industry, finance, and trade, important suppliers of intermediate equipment and products, and major consumers of raw materials. China and ASEAN economies have become major recipients of FDI, suppliers of raw materials, and important markets for manufactured products. According to Edward Lincoln, FDI is more significant than foreign trade in terms of the depth of external ties. Merchandise trade, which is conducted primarily through a limited number of general trading companies, requires relatively little economic intimacy between trading nations and minimum knowledge of foreign cultures or political and social conditions. FDI, through direct management of a subsidiary in another country, however, requires closer personal contacts and a better understanding of local culture, legal, and political systems.1 Consequently, for-

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eign direct investment involves deeper commitment and affords greater influence than trade.2 It is in this sense that increasing FDI flows among East Asian economies brings closer economic integration than investment statistics alone would suggest. Japanese FDI has been central to the region’s increasing integration. Unlike Japanese investment in Third World countries during the 1970s and early 1980s, which was heavily concentrated in natural resource sectors, the expansion of Japanese FDI in East Asia since the mid-1980s has primarily been in manufacturing.3 This resulted in a more complex regional division of labor and increasing regional economic integration centered on Japanese trade and investment. At the same time, Asian NIEs also promoted regional integration by exporting capital to neighboring countries. Facing the challenges of restructuring their economies, Asian NIEs not only welcomed Japanese FDI in more advanced industries and service sectors but moved their own labor- and land-intensive industries offshore through FDI outflows to China and ASEAN economies, thus linking the comparative advantages of these economies to their own. The process of ongoing regional integration in East Asia is quite identical to the historical pattern of “flying geese” development—a pattern of vertical economic integration between Japan at the center and its Northeast Asian neighbors as subordinate economies. This pattern is best exemplified in the cases of Korea and Taiwan. In their upward mobile process of industrialization, both Korea and Taiwan were connected with the Japanese product-cycle phases in this flying geese strategy. Early in their economic growth Korea and Taiwan took over economic activities that were no longer profitable in Japan. This transfer of production began during the colonial era, but has continued ever since. At first it involved agriculture with the establishment of larger units and modernization of rice and sugar production destined for the colonial metropolis. In the mid-1930s, Japan exported industries such as iron, steel, and chemical and electrical generation production to its colonies. In the 1960s and 1970s, South Korea and Taiwan concentrated on textile and consumer-electronic industries that were in decline in both Japan and the United States. In the 1980s, Japanese companies were transferring cars and steel production to South Korea and Taiwan. In the 1990s, production of electronics and other high-tech products moved from Japan to South Korea and Taiwan and, in the process, both economies have become increasingly interdependent with the Japanese economy. Currently, the effects of the flying geese pattern seem to have moved beyond the economic interaction between Japan and South Korea and Taiwan to involve China and Southeast Asian economies with Asian NIEs functioning as a new layer lying between Japan and other East Asian economies. Within this pattern of regional integration, Japan assumes a superior position vis-à-vis its neighboring economies. Indeed, Japan has clearly

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dominated in trade and investment of most economies in East Asia through a pattern of production structures that has vertically integrated other economies with the Japanese economy over time. Japanese companies have located or relocated manufacturing operations throughout East Asia to reduce costs, further domestic economic restructuring, penetrate the market protection policies of other countries, deal with fluctuating exchange rates, and hedge against the possible consequences of regionalist tendencies elsewhere. These investments play a crucial role in linking the Japanese economy and other East Asian economies. Through the relocation of manufacturing production offshore, Japanese investments stimulate a process of industrial restructuring both in Japan and in the recipient economies. More significant, as part of this process, some Japanese industries have not only relocated production abroad, but increased sales back to Japan. Traditionally, Japanese foreign investment in manufacturing was intended to supply either local markets or third markets and not to manufacture products for shipment back to Japan. The ongoing shift has further strengthened the process of East Asian regional integration centered on Japan. In this process, while most major economies in East Asia have huge trade surpluses with the United States and Western Europe, they all have continuous trade deficits with Japan. As a consequence, Japan plays a leading, indeed critical, role in the ongoing economic integration in East Asia and has replaced the United States as the dominant economic power in almost all economic fields in the region. Despite the growing economic ties that accompanied escalating regional trade and FDI flows, economic integration in East Asia has been primarily an autonomous process driven by market forces. Unlike in Europe and (perhaps to a lesser extent) in North America, deliberate efforts at economic cooperation in East Asia have fallen short of establishing a formal regional grouping. Strong political constraints make formal economic integration hard born in East Asia. The enduring political suspicions among East Asian countries arising from political and ideological diversities and bitter memories of past experience create fundamental constraints. Moreover, East Asian economies are still primarily externally oriented in trade and investment. Their rapid economic growth is closely related to their external ties, especially to export markets in North America and Western Europe and to energy and resource supplies from the Middle East, Australia, and the Americas. Although the relative importance of the United States as a market for East Asian goods and services has declined, it nevertheless remains the single most important export market for most East Asian countries. And because of continuing worries about a militarily resurgent Japan and a more assertive China, the region still counts on continued US military presence for regional security and to balance the powers of Japan and China. External economic ties and heavy political and military dependence on external pow-

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ers create additional constraints on creating a formal East Asian regional grouping. Last but not least, the lack of experience in conducting multilateral negotiations and building multilateral institutions combined with a regional cultural orientation emphasizing consensus have not favored multilateralism in East Asia. Although these constraints continue to exist, the Asian financial crisis of 1997–1998, which had the most devastating impacts on the regional economy in fifty years, forced government, business, and academics leaders across East Asia to rethink the issue of regional integration.

The Impact of the Asian Financial Crisis on East Asian Regional Economic Integration The crisis that started in Thailand in July 1997 was originally financial, characterized by sharp depreciation of currencies, plummeting asset values, a deep drop in stock prices, and huge capital outflows. However, it soon deteriorated into a hard-hitting, regionwide economic crisis. The financial shocks were widely seen as the result of immature liberalization of East Asia’s capital markets during a period of rapid globalization. During the 1990s, globalization brought new and diverse forms of international capital flows into the region including FDI, portfolio investment, bank loans, bond lending, derivations (swaps, options, forward transactions, etc.), reinsurance, and other financial instruments. These heavy financial flows from advanced to emerging markets led to profound destabilization in East Asia. The most serious economic crisis since the end of World War II became a major milestone in the East Asian political economy that stimulated widespread rethinking of the need for institutionalized regional economic cooperation. First, although the causes of the Asian financial crisis are now seen as multidimensional and the result of both domestic and global forces, the lack of a regional mechanism for close economic policy coordination and cooperation among East Asian governments is widely cited as a primary cause for the rapid and relatively unfettered spread of the crisis across the region. This bitter experience not only reflected the region’s growing economic interdependence, but also demonstrated how strongly East Asian economies were exposed, and how vulnerable they were to crises originating in neighboring economies. As a consequence, East Asian leaders began to see a more urgent need to create a formal regional mechanism to prevent similar crises in the future and to maintain regional economic growth. It is in this sense that the Asian financial crisis created an imperative for transforming the political economy of East Asia and laid the foundation for current policies promoting regional economic cooperation.4 Second, the financial crisis is widely believed to have resulted from the

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financial liberalization policies that the International Monetary Fund (IMF) and Washington imposed on East Asia in the early 1990s.5 Once the Asian financial crisis struck, IMF-imposed policy prescriptions, encouraged by Washington, were blamed for catastrophic economic and social consequences in hard-hit countries. These Western-enforced policies together with Washington’s strong opposition to the creation of the Asian Monetary Fund, which was proposed early in the crisis by East Asian governments to help bail out their economies and to stop further spread of financial deterioration, strengthened what Richard Higgott calls East Asia’s “resentment” of US dominance. The experience increased the willingness of East Asian governments to explore new vehicles for closer cooperation that would help to weaken US dominance of the region’s political economy.6 Third, the financial crisis intensified the growing dissatisfaction of East Asian governments with the limitations of existing regional institutions— namely the Asia-Pacific Economic Cooperation forum and ASEAN—in defending and promoting East Asian interests. The financial crisis revealed the inability of APEC and ASEAN, with their current structures, to help East Asian states maintain regional economic stability and promote prosperity. Despite the initial high expectations of APEC’s potential to promote the common destiny of its diverse members, the financial crisis revealed its impotence in achieving its own trade liberalization goals. By the mid-1990s the growing division between the Anglo-US and East Asian APEC members over the organization’s direction became more apparent. The former pushed for binding and comprehensive targets for trade liberalization while the latter emphasized trade facilitation and economic and technical cooperation.7 These divisions intensified during the financial crisis of 1997–1998 when East Asian governments discovered that APEC, as it was designed, offered no protection and little assistance in any form.8 Although ASEAN is the most highly organized regional institution in East Asia, given its constituency it could do little to represent East Asian interests. Like the region itself, ASEAN is plagued with internal divisions over a wide range of political, economic, and social issues. The association’s membership expansion during the 1990s to include countries with diverse political and economic systems, levels of economic development, and governmental policy priorities, undermined its coherence and unity. Indonesia’s economic and political decline during the Asian financial crisis also created a leadership gap within ASEAN. More important, an organization with a membership mainly consisting of small states was simply too weak to act as an economic bloc or to exert substantial influence in regional and global affairs. Moreover, ASEAN states, with the exception of Singapore, are basically in economic competition with each other. As such, instead of relying on each other, ASEAN economies depend much more heavily on major regional and global economic powers for markets, tech-

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nology, and capital. All these weaknesses were reflected in ASEAN’s inability as a regional organization to provide any meaningful assistance to its members during the financial crisis. The crisis exposed the need for a more effective strategy for reinvigorating and strengthening ASEAN and to improve its global and regional influence by seeking cooperation with the two strongest regional powers, Japan and China.9 Thus, the Asian financial crisis created a new momentum for East Asian governments to establish a more systematic mechanism for regional cooperation and policy coordination. Consequently, there have been growing calls for and unequivocal moves toward institutionalized economic cooperation that dramatically deviate from the previous policies of governments in the region. By the late 1990s, the Asian financial crisis together with growing economic regionalism in the world economy created stronger external pressures for cooperation among East Asian governments. 10 More than 170 regional trade agreements have been formally notified to GATT and the WTO and more than seventy others are in operation that have not yet been notified.11 The vast majority of WTO members are affiliated with one or more such regional trade agreements.12 Consequently, about 97 percent of total global trade involves countries that are members of at least one regional trading arrangement, compared with 72 percent in 1990.13 Of the three global economic centers, East Asia is the only region that is not yet formally organized into a regional trade agreement group. The expansion of the European Union to include Eastern European countries and the prospect of the enlargement of NAFTA into a Free Trade Area of the Americas has increased pressures on East Asia. Given the heavy dependence of East Asian economies on these two major markets and on outward-oriented development strategies, the intensifying regionalism in Europe and North America causes increasing fear among East Asian governments of the diversion of trade and investment flows. 14 Moreover, the EU and NAFTA not only form themselves into increasingly closed markets but also come to the bargaining table as blocs in multilateral trade negotiations. This frequently leaves East Asian states, as individual negotiators, in a much weaker bargaining position in multilateral trade negotiations. All of these forces bring to an unorganized East Asia a strong sense of exclusion and isolation in global economic competition and a renewed interest in economic cooperation.

The Move Toward Institutionalized Regional Economic Cooperation in East Asia While the idea of forming an East Asian regional economic grouping did not arise until 1990, the discussion of regional cooperation among countries

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in the Asia Pacific began in the mid-1960s. These discussions took place through research studies and periodic meetings in the three most important forums, the Pacific Basin Economic Council (PBEC), the Pacific Trade and Development Conference (PAFTAD), and the Pacific Economic Cooperation Conference (PECC). PBEC was initiated by a group of business leaders in 1967; PAFTAD was established in 1968 by scholars from the major market economies in the Asia Pacific; PECC was established in 1980 with representation from government officials in their private capacities, academics, and business leaders. However, all these forums were nongovernmental institutions. At the time, governments in the region were unwilling to commit themselves to an official regional institution for economic cooperation.15 By the end of the 1980s, however, a new movement for closer regional economic cooperation emerged as the result of changing global, regional, and domestic conditions. Most notably, the intensification of economic regionalism in the world economy exemplified by negotiations on the US-Canadian Free Trade Agreement and the European Community— together with the difficulties in negotiating the Uruguay Round—increased the fear among Asia Pacific government leaders that the global trade regime would break down into rival regional trade blocs if the Uruguay Round negotiations failed. Equally important, the growing economic interdependence in East Asia and the ongoing structural transformation of many Asia Pacific economies made the need for economic liberalization and institutionalized economic cooperation more apparent. China’s adoption of market-oriented domestic and foreign policies and the Soviet Union’s reconciliatory foreign policy under Gorbachev provided a more favorable environment for East Asian governments to embrace the idea of promoting institutionalized economic cooperation. Unlike Europe, where regional cooperation had long been part of its history, Asia Pacific governments lacked the experience of creating any real regional institutions. Consequently, these moves toward institutionalized regional cooperation were a milestone reflected in the creation and rapid development of APEC and the reorientation and expansion of ASEAN. APEC Launched in 1989, APEC is a pan-Pacific institution that links East Asia with Oceania and the Americas. Since its inception, APEC has expanded from twelve to twenty-one member countries, including all of the major Asia Pacific economies (most notably, the United States, Japan, and China) and the most dynamic, fastest growing NIEs. By 2004 APEC had a third of the world’s population (2.6 billion people), a combined GDP of almost $19.3 billion (over 50 percent of world GDP), and 47 percent of total world trade.16 APEC started as an informal dialogue group and in its early years largely focused on exchanges of views and project-based initiatives concerned

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simply with advancing the process of Asia Pacific economic cooperation and promoting a positive conclusion to the Uruguay Round of multilateral trade negotiations. A turning point came in 1993, when US President William Clinton elevated APEC by inviting heads of state and government for an informal summit meeting in Seattle. During the meeting leaders envisioned APEC to be a community of Asia Pacific economies and a flexible forum for promoting regional economic growth. Since then, the annual APEC summit meetings have set the direction and pace of APEC’s development and APEC has become the primary regional organization for facilitating Asia Pacific economic growth, cooperation, trade, and investment. At the 1994 annual session in Bogor, Indonesia, APEC leaders set a goal of free and open trade and investment by 2010 for developed member economies and by 2020 for developing members. In the subsequent annual sessions, APEC leaders reiterated the goal of trade and investment liberalization, while at the same time promoting a wide range of other programs focused on business facilitation, economic and technological cooperation, human resources development, and sustainable and equitable development, with the understanding that liberalization could not be effective unless all APEC members benefited from economic growth. In pursuing its declared objectives, APEC adheres to the principle of “open regionalism,” that is, the promotion of regional economic integration without discrimination against nonmembers. In keeping with its overall philosophy of loose cooperation and open regionalism, APEC has few institutional structures and operates on the basis of nonbinding commitments, open dialogue, and equal respect for the views of all participants. Unlike WTO or other multilateral trade bodies, APEC requires no treaty obligations of its members. Decisions made within APEC are reached by consensus and commitments are undertaken voluntarily. These unique structural and functional features reflect APEC’s efforts to accommodate the diverse economic structures, levels of economic development, political and economic systems, ethnicities and cultures, ideologies, policy objectives, and views on regional cooperation of its members. In this respect APEC differs from such tightly structured regional arrangements as the EU and NAFTA. APEC is the first regional institution that involves all East Asian economies.17 With its vast geographic scope, APEC involves a far larger and more diversified area than any other regional institution. John Ravenhill correctly points out that APEC could actually be seen as a transregional institution, more similar in its institutional structure and decisionmaking procedures to the Asia-Europe Meeting (ASEM) than to the free trade areas.18 Given these features, however, APEC cannot be seen as an exclusively “East Asian” institution. Because of differences in policy objectives between its Anglo-US and East Asian member economies, APEC does not always reflect or represent the interests of East Asia. As previously noted,

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Anglo-US members, particularly, push hard for binding decisions in APEC and focus on the promotion of trade and investment liberalization, whereas East Asian members insist on maintaining the loose and consultative nature of APEC and emphasize trade facilitation and economic and technical cooperation among Asia Pacific economies. Moreover, as the Asian financial crisis demonstrated, the structure of APEC is not designed to help East Asian economies deal with financial or economic shocks.19 APEC’s principle of open regionalism does not provide effective safeguards for East Asian economies against protectionism and regionalism elsewhere, although the idea does help to promote the concepts of global trade and investment liberalization. Under such circumstances, APEC’s weaknesses in promoting East Asian countries’ interests help strengthen their sense of an East Asian community and “the desirability of having their own regional institution beyond the ‘transregional’ APEC.”20 ASEAN In contrast to transregional and loosely structured APEC, ASEAN is narrower in geographical scope and more highly institutionalized. ASEAN was founded in 1967 by the governments of Indonesia, Malaysia, the Philippines, Singapore, and Thailand primarily for political reasons at a time when the region was seriously divided by ideological conflict and war, internal insurgencies, and economic hardship. The governments of these small and weak countries shared a preoccupation with nation building and with their vulnerable strategic position and saw the desirability of organizing in order to maintain their independence and autonomy.21 Despite aligning with the United States and acting as a de facto bulwark against communist expansion in the region during the Cold War, before the mid-1970s ASEAN was basically inactive and received little real attention from the region’s major powers. Significant changes affecting ASEAN occurred only after the withdrawal of US military forces from Vietnam in 1973 and its unification under communist rule in 1975. After 1978, the Vietnamese occupation of Cambodia provided strong political coherence for ASEAN to become increasingly active and influential in the region through its highprofile role in seeking a solution to the Cambodian conflict. By the early 1990s, ASEAN’s external environment was transformed substantially again with the end of the Cold War and the Cambodian conflict. The increasing importance of economics in global politics, growing regionalism, greater competition in the world economy, and increasing economic interdependence in the region pushed ASEAN leaders to reorient the organization and to seek closer economic integration as a single market and production unit. This led in 1992 to the creation, over a decade, of an

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ASEAN Free Trade Area. As scheduled, AFTA had been duly established by 2003 among ASEAN’s original five members and Brunei with new members to be incorporated at a later time—Vietnam in 2006, Laos and Myanmar in 2008, and Cambodia in 2010. The “ASEAN Vision 2020” adopted in 1997 aimed to forge closer regional economic integration in investment, industry, services, finance, agriculture, forestry, energy, transportation and communication, intellectual property, small and medium enterprises, and tourism. Acting as a caucus, ASEAN now plays an important role within APEC. Moreover, ASEAN has institutionalized annual dialogues with major powers on regional economic, political, security, and other issues. By acting as a unified body, ASEAN exercises far greater influence on those issues than its members could achieve individually. As a regional intergovernmental organization, however, ASEAN adopted some important operational principles that distinguish it from most other regional organizations. The principle of mutual respect for sovereignty and noninterference in members’ internal affairs, and the principle of consensusbased decisionmaking, are generally seen as responsible for ASEAN’s survival and achievements so far, but they also impose constraints on the organization’s ability to further deepen cooperation and effectively manage its increasingly complex affairs. Expansion of membership during the 1990s to include Vietnam, Laos, Myanmar, and Cambodia made ASEAN even more diversified in political values and national interests and further complicated its already problematic consensus-based decisionmaking process. These constraints limit ASEAN’s ability to promote stronger regional development and integration.22 Moreover, while ASEAN is quite active and increasingly influential in regional affairs, it is relatively weak as a regional grouping. Although the small ASEAN member countries promote economic integration among themselves, they all adopt similar export-oriented industrialization strategies that are competitive rather than complementary. Largely because of this, ASEAN economies actually have far closer economic ties with more powerful Northeast Asian economies than with their ASEAN partners. The Asian financial crisis demonstrated that ASEAN is not only vulnerable to external shocks but, more important, unable to deal with a crisis of such magnitude by itself. Under such circumstances, it seemed quite logical for ASEAN leaders to rethink the organization’s future by tying its fortunes to the much more powerful economies in Northeast Asia—Japan and China in particular—in the face of increased regionalism in Western Europe and the Americas. Thus, the Asian financial crisis provided a catalyst for ASEAN to institutionalize regional economic cooperation in order to survive. This understanding led to ASEAN’s initiative of hosting a regular annual meeting of East Asian governments through ASEAN Plus Three (APT) and ASEAN

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Plus One (APO) forums. In this way ASEAN helps to reconfigure East Asian politics and regional identity as the basis for broader cooperation. ASEAN Plus Three The idea of forming an East Asian Economic Group (EAEG) was first explicitly proposed by Malaysian Prime Minister Mahathir Mohamad in 1990.23 However, Mahathir’s proposal not only drew strong opposition from the United States, which feared that it might evolve into an exclusive East Asian bloc, but also met with a cold response from other East Asian governments that were not only under US pressure to oppose the idea but were themselves wary of Mahathir’s plan. Despite the failure of the EAEG plan, the idea of an East Asian grouping was revived in the wake of the Asian financial crisis. Because the lack of institutionalized regional policy coordination and cooperation is widely seen as a major cause of the rapid and unchecked spread of such a damaging crisis across the region, East Asian leaders began to realize the urgent need for creating an institution that would allow closer cooperation among the governments in dealing with regional issues of common concern. This understanding led East Asian governments to increase efforts for regional institution building, a policy in sharp contrast to their past official positions regarding formal economic cooperation. The move toward an East Asian grouping is most notably embodied in the processes of the APT forum. According to Douglas Webber, APT is seen as the “in effect” EAEG, and has “gone far beyond” Mahathir’s original proposal.24 Initiated by ASEAN, APT first emerged from the need of ASEAN and three Northeast Asian countries—China, Japan, and South Korea—to prepare for the first ASEM conference in 1996. 25 But very soon, particularly in the wake of the Asian financial crisis, APT evolved into an institutionalized forum of consultation and cooperation between ASEAN and the three Northeast Asian powers over a growing range of regional issues. The APT forum is an annual informal summit meeting (which was first held in 1997) that immediately follows the annual ASEAN summit and together with regular ministerial and other official meetings involves foreign ministers, finance ministers, economic ministers, central bank governors, and senior officials from other ministries and government offices. The East Asian Vision Group (EAVG) and the East Asian Study Group (EASG) were established within APT respectively in 1998 and 2001 “to explore practical ways and means to deepen and expand the existing cooperation” among ASEAN and the three Northeast Asian countries of China, Japan, and South Korea “and prepare concrete measures and, as necessary, action plans for closer cooperation in various areas.”26 Within this process

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of growing regional consultation and cooperation there have been increasing calls for APT to be transformed into an East Asian free trade area (FTA). Most prominent among these proposals was one by former South Korean President Kim Dai-jung at the 2001 APT summit meeting in Brunei. While the enthusiasm for an East Asian grouping such as a free trade area has been mounting in the wake of the Asian financial crisis, there are continuing obstacles that make the creation of such an institution difficult. Among them is opposition from the United States. Washington’s opposition matters not only because the US market, which still absorbed more than 23 percent of East Asian exports in 2004, remains important, but also because the US military presence is widely seen as crucial in maintaining regional security and stability. The small countries implicitly welcome US presence in the region as a means of balancing the powers of China and Japan. US opposition aside, obstacles within the region are even more formidable. Political trust among governments, which is essential for effective regional integration, remains weak because of the lingering historical legacy of Japanese imperialism before and during World War II and worries by government leaders in the smaller states about current Japanese and Chinese influence. Moreover, continuing security issues and territorial disputes are not conducive to strengthening political trust. In addition, the huge gap in the level of economic development among East Asian countries works against effective economic cooperation. East Asian governments have different priorities and pursue diverse economic and social policies. Successful regional integration (ironically, given the fear among smaller states of the dominance of major powers) also hinges on the willingness and capacity of a hegemonic state to assume a leadership role.27 As the most powerful economy in the region, however, Japan seems reluctant to take the lead in creating an East Asian grouping, partly due to its inability to play the role of “consumer of last resort” for the exports of other East Asian economies. Moreover, because cooperation between regional powers is considered crucial for successful regional integration, the lack of cooperation between Japan and China remains an important obstacle to creating an East Asian grouping. Tokyo and Beijing see each other as economic rivals and remain suspicious of each other’s intentions in regional affairs. To some extent, the Sino-Japanese rivalry constitutes the single most intractable obstacle to the formation of a free trade area within the framework of APT. Because of these difficulties, evolving regional cooperation in East Asia through APT has two important features. The first is that regional cooperation has been initiated and led by small players rather than by major powers. Given the complexity of regional politics and the distrust of major powers, initiation of cooperative arrangements by small countries in the region makes it possible for both big and small states to be less suspicious

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of the idea and more willing to become involved, something that might not have happened if the process had been initiated by Japan or China. However, it is important to point out that ASEAN only plays a “quasileadership role” in the process of regional cooperation through APT because of the lack of leadership by the major powers. ASEAN’s role in APT is possible simply because such an arrangement has received tacit consent from both Japan and China whose governments feel that this arrangement serves their respective interests quite well for the time being. If APT is to be transformed into a true regional institution, however, it would be difficult for ASEAN to provide the strong leadership that is usually assumed by major powers given its limited capacity and internal divisions. A second important feature of APT is that while it provides a forum for consultation and cooperation for ASEAN and three Northeast Asian countries, specific dialogues on cooperation are conducted largely through three parallel APO forums, that is, ASEAN Plus China, ASEAN Plus Japan, and ASEAN Plus South Korea. Realizing the constraints that still exist in the region on implementing APT-wide cooperative programs, APT leaders adopted this practical strategy of promoting regional cooperation through APO. As a result, specific cooperative projects are chiefly pursued between ASEAN and three Northeast Asian countries on a bilateral basis within APO. Although cooperation is largely pursued through three parallel APO forums, APT does show its increasing consciousness of distinctively regional concerns and politico-economic practices. APT represents East Asia’s most unequivocal movement toward institutionalized cooperation, involving all major economies in the region with the notable exception of Taiwan.28 Although no consensus has yet been reached within APT on how an East Asian grouping is to be achieved, APT leaders do envision an East Asian Community as a long-term objective. This intention is explicitly expressed in the Chairman’s Statement of the Eighth APT Summit, “Strengthening ASEAN Plus Three Cooperation,” issued on November 29, 2004. In moving toward this goal, APT leaders agreed to convene the first East Asia Summit (EAS) in Malaysia in 2005 and to set up an expert group to conduct a feasibility study on the establishment of an East Asia Free Trade Area (EAFTA).29 Proliferation of Bilateral Free Trade Arrangements in East Asia Largely because of the difficulty of forming a regionwide FTA all at once, East Asian governments seem to be adopting a more pragmatic and incremental approach by first negotiating bilateral FTAs. The result has been the proliferation of bilateral FTAs in the region over the past several years,

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some of which have been concluded (Japan-Singapore in 2002, China– Hong Kong and China-Macao in 2003, and China-ASEAN in 2004) while others are still under negotiation or study (Japan-ASEAN, Japan-Korea, Japan-Thailand, Japan-Philippines, Japan-Malaysia, Korea-ASEAN, KoreaSingapore, and Singapore-Taiwan).30 Particularly significant of these bilateral FTAs are the three parallel free trade initiatives within APO. Because APT is not likely to be transformed into an East Asian FTA any time soon, the creation of FTAs between ASEAN and three Northeast Asian powers—China, Japan, and South Korea—separately through APO is seen as a promising alternative strategy. This approach could not only circumvent the existing hurdles blocking the creation of a regionwide FTA, but could gradually create conditions for an eventual East Asian free trade area. Within this context, China and ASEAN have taken the first most significant steps in moving toward a regional FTA. After three years of negotiation, China and ASEAN formally signed a free trade pact, the Framework Agreement on Comprehensive Economic Cooperation between China and ASEAN, in Vientiane, Laos, in November 2004. According to the agreement, which came into force in January 2005, an FTA will be established between China and the five original ASEAN members plus Brunei by 2010 and the remaining ASEAN members will join the FTA by 2015. After the FTA is established, tariffs will be substantially lowered to from zero to 5 percent on all but a few special commodities and all nontariff barriers will be removed among the FTA participating economies. At the same time, service trade and investment will also be liberalized and measures for trade and investment facilitation will be created. In addition to the removal of tariff and nontariff barriers and the adoption of trade and investment facilitation measures, the China-ASEAN FTA will also serve as a framework for overall economic cooperation between the two sides. The idea is to establish a stronger relationship between China and ASEAN through an FTA allowing closer cooperation in finance, regional development, technological assistance, macroeconomic cooperation, and other issues of common concerns.31 The decision to create a China-ASEAN FTA not only reflects the response of China and ASEAN to the intensifying economic regionalism elsewhere in the world and the impacts of the Asian financial crisis, but also demonstrates the adjustments that are being made in their respective policies toward East Asian integration.32 More important, this is a significant move toward East Asian economic integration in the sense that a free trade pact between China and ASEAN has exerted pressure on Japan and South Korea, thus forcing these two economic powers to consider more seriously the issue of an East Asian regional grouping. It is precisely within this context that as a response to the initiative of a China-ASEAN FTA and China’s growing influence in Southeast Asia, Japan first signed a free trade pact

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with Singapore in early 2002 and quickly moved to conclude a joint declaration with ASEAN on a comprehensive economic partnership during the Phnom Penh Summit in November 2002. Japan signed an agreement with ASEAN in November 2004 to launch negotiations on a Japan-ASEAN FTA similar to the China-ASEAN agreement. This reflected Tokyo’s new policy direction with regard to East Asian regional integration and an FTA with ASEAN. The moves by China and Japan put increasing pressure on South Korea in 2004 to sign an agreement with ASEAN on negotiations for a free trade pact. The China-ASEAN FTA provided a stimulus to creating a regionwide FTA. Although no schedule has been set for the formation of an East Asian FTA, the establishment of three parallel FTAs within the structure of APO, together with other bilateral FTAs, will create more favorable conditions for establishing an East Asia FTA. The bilateral FTAs have also helped signatories achieve their noneconomic policy agendas and provided important opportunities for increased communication among member states through frequent meetings among heads of state, trade officials, and other ministers.

Conclusion Eventually, a regional grouping can help East Asia become a third unified pole in the world economy. Economic integration in East Asia will have major policy implications for the region and beyond. First, the formation of an East Asian economic grouping could reconfigure the balance of economic power in the world economy. Particularly, it may help East Asian countries acquire a stronger bargaining position vis-à-vis Washington and Western Europe on economic issues. Second, if an East Asian grouping such as EFTA were to become a reality, the result would be the emergence of a tripolar world trade system, which would challenge the existing global trade regime embodied in WTO. This restructuring of world trade relationships could affect the trade policies and WTO policies of nation-states. Third, if current movements toward economic integration in East Asia were to lead to the formation of an East Asian Community, it would significantly enhance the geopolitical influence of Asian Pacific countries both within the region and beyond. Clearly, an effective East Asian grouping would inevitably complicate US–East Asia relationships, requiring a rethinking of Washington’s economic and trade policies. Fourth, because the United States has economic disputes with almost all of the countries in the region, an East Asian grouping could intensify these trade conflicts, especially if an East Asian FTA threatened to further divert US exports. C. Fred Bergsten estimates that the United States could immediately lose at least $25 billion of annual exports from discriminatory impacts of an East

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Asian FTA. 33 Finally, although APEC as a pan-Pacific organization is already divided between its Anglo-US and East Asian members with respect to its future direction, the creation of an East Asian economic grouping could further divide and marginalize the organization and directly challenge the efficacy of the APEC policies of nation-states on both sides of the Pacific.

Notes 1. Lincoln, “Japanese Trade and Investment Issues,” pp. 134–135. 2. Unger, “Japan’s Capital Exports: Molding East Asia,” p. 156. 3. Machado, “Japanese Foreign Direct Investment in East Asia,” pp. 46–47. 4. Cai points out this issue when discussing the impact of the Asian financial crisis on Northeast Asia, but it is also relevant to the whole East Asian region. See Cai, “Is a Free Trade Zone Emerging in Northeast Asia in the Wake of the Asian Financial Crisis?” p. 11. 5. See, for example, Long, “The East Asian Crisis: Some Historical Roots.” 6. Cai, “Is a Free Trade Zone Emerging in Northeast Asia?” pp. 18–19. 7. Stubbs, “ASEAN Plus Three: Emerging East Asian Regionalism?” p. 447. 8. For a discussion of APEC’s weaknesses, see Ravenhill, “APEC Adrift: Implications for Economic Regionalism in Asia and the Pacific.” 9. For more discussion of the limitations of APEC and ASEAN, see Webber, “Two Funerals and a Wedding?” pp. 339–372; and Stubbs, “ASEAN Plus Three,” pp. 447–448. 10. For a discussion of the rising economic regionalism in the world economy, see Mansfield and Milner, “The New Wave of Regionalism.” 11. Under Article 24 of GATT, regional preferential trade arrangements are openly permitted, provided certain strict criteria are met and GATT (WTO after 1995) are notified of these preferential trade arrangements. 12. WTO website: www.wto.org/english/tratop_e/region_e.htm (accessed June 21, 2004). 13. Asian Development Bank (ADB), Asian Development Outlook 2002, p. 164. 14. This worry of intensifying regionalism in the world economy is, for example, explicitly expressed in a report submitted by the ASEAN-China Expert Group on Economic Cooperation to their leaders in October 2001, Forging Closer ASEANChina Economic Relations in the Twenty-First Century, p. 4, available at www.aseansec.org/newdata/asean-chi.pdf. 15. For a brief discussion of these earlier efforts for regional economic cooperation in the Asia Pacific, see Ravenhill, “Institutional Evolution at the TransRegional Level: APEC and the Promotion of Liberalisation,” pp. 228–230. 16. APEC’s website, http://www.apecsec.org.sg (accessed 25 June 2004). 17. In this respect, APEC is even more inclusive than the ASEAN Plus Three forum, which emerged much later, as the latter does not include Taiwan. 18. Ravenhill, “Institutional Evolution at the Trans-Regional Level,” p. 227. 19. Ibid., pp. 239–241. 20. Ibid., p. 241. 21. Beeson, “ASEAN: The Challenges of Organisational Reinvention,” p.185.

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22. Ibid., pp. 193–194. 23. The discussion in this section relies heavily on Cai, “The ASEAN-China Free Trade Agreement and East Asian Regional Grouping,” pp. 392–395. 24. Webber, “Two Funerals and a Wedding?” p. 356. 25. For a discussion of ASEM, see Dent, “ASEM and the ‘Cinderella Complex’ of EU-East Asia Economic Relations.” 26. EASG, Final Report of the East Asia Study Group, submitted to ASEAN+3 Summit, Phnom Penh, Cambodia, November 4, 2002, p. 63, available at www.aseansec.org/viewpdf.asp?file=/pdf/easg.pdf. 27. Mattli in Webber, The Logic of Regional Integration: Europe and Beyond, pp. 343–347. 28. Beeson, “ASEAN: The Challenges of Organisational Reinvention,” p. 197. 29. “Strengthening ASEAN+3 Cooperation,” Chairman’s Statement at the 8th ASEAN+3 Summit, Vientiane, November 29, 2004, available at http://www. aseansec.org/16848.htm. For a discussion of this issue, also see Cai, “The ASEANChina Free Trade Agreement,” p. 395. 30. The China-ASEAN FTA is seen as bilateral here, because ASEAN has signed the pact as a unified body. This is also true of the expected Japan-ASEAN FTA and South Korea–ASEAN FTA. 31. “The Framework Agreement on Comprehensive Economic Cooperation between ASEAN and China,” November 29, 2004, available at www.aseansec. org/16647.htm. 32. For political and economic considerations behind China and ASEAN’s decision, see Cai, “The ASEAN-China Free Trade Agreement,” pp. 395–340. 33. Bergsten, “Toward a Free Trade Area of the Asia Pacific.”

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CHAPTER

5

Globalizing Asian Business: Dynamics of Change and Adjustment Henry Wai-chung Yeung

E

conomic globalization has led to increasingly complex relationships among private entrepreneurs and professional managers around the world. 1 In engaging in international transactions business actors embed themselves in global networks of production and value-added activities that bring significant new and innovative knowledge of business operations, strategic management, and financial arrangements. These two-way adjustments that transform home country practices are facilitated by important improvements in transport and communication technologies. During the past thirty years, many Asian economies have undergone dramatic transformations by integrating into the global economy through export-oriented industrialization and the adoption of technology-driven economic development. Domestic firms in these emerging economies are at the critical stage of transition from primarily inward-looking and ethnocentric business orientations and governance structures to those more globally oriented. Recently, many of these domestic Asian firms began growing out of their former roles as service providers, industrial subcontractors, and OEM manufacturers for global corporations, and as national firms protected by their home governments through tariff and nontariff barriers, to become global competitors in their own right. Although family-based ownership and management structures continue to dominate Asian business today, this organizational pattern is not unique to Asia.2 As global competition increases in domestic Asian markets and as Asian firms are compelled to venture into the global marketplace, a two-way process of globalizing Asian business is bringing organizational learning and transformation to some of the region’s most successful corporations. In this chapter, I analyze the emerging challenges and opportunities for Asian corporations in an era of economic globalization. In particular, I examine how business norms and practices are becoming increasingly globalized and are transforming leading Asian firms from locally oriented 85

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domestic operations into international business enterprises.3 I first explain some recent trends in corporate governance and strategic management that shape the way international businesses are changing and then discuss how these new business norms and practices are rapidly diffusing throughout Asia, primarily via the global experience and international education of many Asian business actors. In the second part of the chapter, I examine how the globalization of business knowledge impacts the organization and governance of Asian business firms. In particular, I argue that business can no longer be conducted as usual among leading Asian firms that strategically seek to play a stronger role in the global marketplace. To succeed in the global economy, many Asian firms are beginning to adopt innovative changes in their organizational and corporate governance structures in order to become more competitive and accountable to their stakeholders. This transformation is particularly visible in the aftermath of the 1997 Asian economic crisis.4 Based on over fifty personal interviews conducted with managers and CEOs of leading Asian firms in Hong Kong, Taiwan, and Singapore between 2002 and 2004, and some secondary materials, I explain why these changes and adjustments are deemed necessary and imperative by Asian business leaders and executives. This discussion is followed by an assessment of the effectiveness of these changes and adjustments on corporate performance and the rapid internationalization of Asian firms. In conclusion, I consider some major implications for Asian policymakers and business leaders. In particular, I argue that this phenomenon of “globalizing” Asian business represents only the tip of an iceberg; beneath it lie a large number of Asian firms that remain rather ethnocentric and domestically oriented in their business strategies and operational practices. The rise of China and mainland Chinese firms also complicates the alignment of Asian business practices with global norms and standards. This simultaneous convergence and divergence of business systems in Asia seems to point to an emerging hybrid system in which both elements of the traditional Asian business system and the global system may co-exist.

The Globalization of Business Norms and Practices Contrary to conventional wisdom, globalization entails more than economic transactions across national borders by global corporations.5 Equally important is the cross-border diffusion of business norms and practices that fundamentally shapes the ways firms are organized and managed in a global economy. The globalization of norms and practices does not occur accidentally; different countries and regions in the global economy are often dominated by different modes of economic organization and business systems.6

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Institutional preconditions, path dependency, and behavioral inertia explain why the rapid diffusion of international norms and practices is neither an easy process nor an inevitable outcome of globalization. In this section, I outline some of the most significant trends in strategic management and corporate governance that are now being diffused to Asia. The focus is on the role of social actors, such as business executives and managers, who are becoming globalized by their educational and work experiences and, as a result, have become agents of globalization by embodying norms and practices they have gathered in different parts of the world and by implementing them in their own business organizations. Recent Trends in Strategic Management and Corporate Governance Recent research in business and management studies has clearly pointed to emerging trends in organizing international business activities among global corporations—what Paul DiMaggio has termed “a model of the twentyfirst-century firm.”7 Three of the most significant trends are associated with changing organizational forms, increasing reliance on capital markets and financial institutions for corporate finance, and growing separation between ownership and control. Organizational change. Historically, transnational corporations (TNCs)

have been organized in a hierarchical form that offers parent firms tight management control over both information and knowledge.8 In today’s global economy, tight parent-subsidiary control relationships do not engender the flexibility and adaptability necessary to manage worldwide operations effectively. To promote greater subsidiary initiatives and local competitiveness, TNCs are constantly balancing global integration and local responsiveness.9 Few TNCs today have highly centralized decisionmaking processes and organizational structures. Instead, many TNC subsidiaries are strategic business units (SBUs) that sometimes take charge of entire product lines or market segments in extensive worldwide supply chains. This is a significant organizational change from hierarchy to what Gunnar Hedlund calls heterarchy.10 As global corporations are confronted with the challenges of balancing control and collaboration, many have turned to interorganizational relationships to compete in the global marketplace.11 The engagement in interorganizational relationships results in the emergence of new organizational forms such as strategic alliances, joint ventures, and cooperative networks.12 For many reasons—the effort to drive down costs, to speed up innovation and time to market, and to tap into a firm-specific repertoire of knowledge and technology—TNCs often prefer to cooperate in order to

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compete. In his portrait of the twenty-first-century firm, Walter Powell argues that “firms are coming to resemble a network of treaties because these multi-stranded relationships encourage learning from a broad array of collaborators and promote experimentation with new methods, while at the same time reducing the cost of expensive commitments.”13 Regulatory constraints may also explain the rise of many cross-border alliances and cooperative ventures. Firms that adapt and align their organizational structures to this new global reality of simultaneous competition and cooperation tend to fair much better in their financial performance and market reach. International financing. Globalization has also opened access to interna-

tional capital markets and financial institutions for companies around the world.14 The internationalization of finance is not something very new or surprising.15 The greater reliance of TNCs on international capital markets and financial institutions fundamentally reshapes international business activities. TNCs can now use a variety of sources to finance their projects. Since virtually all TNCs are now listed on one or more national stock exchanges, they are able to raise capital effectively and cheaply by issuing new shares or by selling bonds underwritten by international financial institutions (e.g., investment banks and offshore banks). TNCs can also borrow from syndicates of international banks at attractive rates. As a result, the home countries of TNCs are no longer the exclusive or even the major source of capital to finance their international transactions. Globalization of finance and business makes the role of intermediaries—brokers, financiers, credit-rating agencies, and media reporters—indispensable. Separation of ownership and management. A third factor influencing

business organization and practice in a global economy is the continuing separation of ownership from management, a process that has been taking place in advanced economies since the beginning of the last century.16 The separation of ownership and management and the rise of professional managers have been the hallmark of what Alfred D. Chandler terms “managerial capitalism.”17 The reality of corporate governance around the world, however, is expectedly much messier.18 Globalization has accelerated this historical trend toward greater professionalization and formalization of corporate governance. The stronger role of institutional investors in corporate governance and the internationalization of management education have further encouraged professionalization. As the tasks of managing across borders have become more complex and difficult, the demand for professional and formal corporate governance has increased. Taken together, these three trends in international business norms and practices are both causes and manifestations of globalization. It remains unclear how these new norms and practices will impact Asian firms as they venture into the global marketplace.

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Spatial Diffusion of Business Norms and Practices For any spatial diffusion to take place requires that it be done by “agents.” In the case of international business norms and practices, these agents are likely to be business owners, family members of owners, shareholders, senior executives, government officials, and people in international business and finance.19 In general, there are two primary mechanisms through which international norms and practices can be diffused to Asian firms: engaging with international business actor-networks and gathering knowledge and experience through international education. Actors in different business systems compete with each other through continuous innovations and changes. This iterative process of organizational adoption and change defines the dialectics of globalization because it both creates pressures for the homogenization of business systems and reinforces differences.20 The emergence of Asia as a major global economic power is linked to both the entry of non-Asian firms into Asia and the expansion of Asian firms into non-Asian host economies. This two-way globalization of business between Asia and other regions implies that key actors in Asia are compelled to learn new management and business practices from their competitors, suppliers, customers, and others, and how to compete differently against foreign firms in Asia as well as in their home markets. This process of organizational learning through engaging with international business actor-networks occurs in several ways. First, Asian business actors may appoint non-Asian managers to oversee their operations both in Asia and in host countries outside Asia. These global managers often have strong experience managing transnational operations. Their involvement in leading Asian firms may bring new norms and practices and Asian business actors may also pick up new organizational knowledge and practices in non-Asian host countries. Asian managers can acquire new knowledge and practices through intensive interaction with customers and suppliers in the host countries or from previous employment in foreign firms. Actor-networks are formed between Asian managers or entrepreneurs and their customers, suppliers, and competitors on a global scale, facilitating interpersonal information and knowledge flows leading to organizational adaptation.21 In his sociological study of mainland China’s transitional economy, Douglas Guthrie observes that “contact with foreign firms, via joint ventures, and the feeling of being set adrift by the central government— and thus the need to mimic firms from developed market economies—predict which firms will adopt Western practices.”22 Mainland Chinese firms are increasingly adopting Anglo-US economic and management practices “not for reasons of efficiency but for reasons of legitimacy.”23 Globalizing actor-networks in international finance also represent one of the most influential mechanisms for the diffusion of new business norms. Even proponents of enduring national business systems have recognized this influence:

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The effects of internationalizing financial flows on business-system characteristics could be considerable under certain conditions. If, for instance, most of the leading firms in credit-based financial systems were to raise the bulk of their external finance from international capital markets instead of relying on their usual business partners, this could alter the strategic priorities of these firms and eventually affect the nature of their domestic business system.24

Leaders of many Asian conglomerates recognize the challenges of accessing large scale flows of capital for development projects. Indeed, the goal of securing new forms of financial resources represents one of the most critical factors that lead, directly and indirectly, to adopting international norms and practices. An increasing number of Asian founding entrepreneurs are now seeking capital resources beyond their immediate social and ethnic networks to finance their development objectives. Gordon Wu of Hong Kong’s Hopewell Holdings, for example, spent much of the first half of the 1990s trying to raise capital in financial markets in London, New York, and Tokyo to finance his mega infrastructure projects in China, Indonesia, and Thailand.25 By 1994, his efforts in wooing global investors had finally paid off when he successfully raised US$776 million by spinning off his power plants in Asia into a new company, Consolidated Electric Power Asia.26 By sharing important information and contacts and forming joint ventures, Hong Kong’s Li Ka-shing developed long-term relations with such global investors as Paul Reichmann, Rupert Murdoch, George Soros, and the Bronfman family.27 Reducing the reliance on internal capital within their home economies is attractive for Asian entrepreneurs at a time when investment outlays are becoming significantly larger and financial leveraging is the norm in most competitive industries. To ensure that global financial elites are comfortable with their financial positions and obligations, key actors in Asia are required to follow certain accounting standards and business norms in global capital markets. As early as 1992, for example, Peter Woo—the successor to one of Hong Kong’s most powerful Chinese family conglomerates, the Wharf Group— observed that “there are no friends in finance. The world has changed. They [old style family businesses] need to realize we are in a world market and need an international culture.”28 Having received his MBA from Columbia University and developed his early career at Chase Manhattan Bank, Woo’s attitude toward traditional norms in Asian business is not entirely surprising. The 1997 Asian economic crisis only made the need for changes even more apparent and necessary. Recent empirical studies in financial economics, for instance, have identified significant positive relationships between improved corporate governance (e.g., establishing credible investor protection provisions and appointing external auditors) and lower cost of capital.29 Improvements in corporate governance were particularly welcome in Asian developing economies where family firms thrive and shareholder protection

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and judicial efficiency are clearly inadequate. Leora Klapper and Inessa Love found that good corporate governance matters a lot more in countries with weak shareholder protection and poor judicial efficiency.30 Another important mechanism for diffusing international business norms and practices in Asia is through the education that many key actors received in North America, Western Europe, and Australia. Globalization of business knowledge is linked to the emergence and, perhaps, domination of top business schools located in North America and Western Europe.31 Key actors in Asian family businesses now face the challenge of professionalizing their management and business practices. Other actors in nonfamily businesses are also active in organizational reengineering and management restructuring to prepare for global competition. This process of professionalizing Asian firms occurs when patriarchs in Asian family firms have allowed and encouraged an heir-apparent to be educated in top business schools abroad. Personal contacts and relationships developed by these successors potentially widen the social and geographic scope of family business networks, especially when external nonfamily members (often MBA classmates or former colleagues of sons and nephews) are brought into existing business networks. The return of professionally trained family heirs also represents an important step toward the professionalization of Asian firms. DiMaggio and Powell have termed this process “normative isomorphism” through which “universities and professional training institutions are important centers for the development of organizational norms among professional managers and their staff.”32 When the heir eventually takes over a family business, he or she is likely to adopt a much more open view of the involvement of professionals in the management of a family firm. Well trained in top business schools elsewhere and often equipped with considerable international business and industry experience, these professional managers are key players in an emerging transnational community of business elites who are not only transferable in terms of their managerial skills, but also much more difficult to “control” in traditional Asian ways. Leslie Sklair has coined the term “transnational capitalist” to describe this group of powerful executives.33 As Whitley notes, a general management credential based on an MBA degree gives these professionals more mobility and a general set of skills and competencies that is not always industry specific.34 To sum up, more competent professional managers are being socialized into Asian business and over time they become agents for diffusing international business norms and practices.

Asian Business as Usual? Changing Organization and Governance Among Asian Firms Before I show how Asian firms are adjusting to globalization by adopting innovative changes in their organizational structures and corporate gover-

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nance, let me describe briefly the traditional modes of Asian business. This analysis is imperative because globalization and the rise of the so-called new economy have raised serious questions about the viability of traditional governance and practices in Asian business. As The Economist reported in a special issue on April 29, 2000, “Asia’s tycoons are coming under pressure to adopt a more ‘western’ style of business. The change is gradual, but Asia’s companies have started to shift away from their old patriarchal cultures and towards those prevailing in America or Britain.”35 Two distinctive characteristics of Asian business stand out in this regard. First, the centralization of ownership and control within immediate families of founding entrepreneurs seems to define the corporate governance of most Asian firms. The 1996 figures in Table 5.1 demonstrate the enormous corporate and economic power of founding families and their ownership of public companies in East and Southeast Asia. In all seven stock exchanges, the share of families in total market capitalization varies from 64 percent in Thailand to 96 percent in Singapore. The extent of market capitalization and share of GDP accounted for by the top fifteen families in 1996 is astonishing. It ranges from over 50 percent in total market capitalization in Indonesia, the Philippines, and Thailand, and over 40 percent in GDP share in Hong Kong, Malaysia, the Philippines, and Singapore. Second, financial institutions such as banks play an important role as intermediaries between global finance and Asian firms. The first half of the 1990s was an incredibly fortuitous period for business groups in East and Southeast Asia that sought new sources of capital to finance global expansion. In Table 5.2, it is clear that global flows of capital into Asia increased substantially from an average of US$16 billion during 1977–1982 and 1983–1989 to over US$40 billion during 1990–1994. By 1996, the annual flow exceeded US$110 billion. Although the inflow was temporarily interrupted by the 1997 Asian economic crisis, the amount of capital inflows into Asia in 1998 and 1999 remained comparable to the pre-crisis period. Among the financial institutions intermediating global financial flows in Asia, banks occupied a particularly important position, not least because many of them are Asian family-owned and controlled. Table 5.3 shows that the shares of banks in financial intermediation in Singapore, Taiwan, Indonesia, Malaysia, and Thailand during 1994–1995 were particularly high when compared to their counterparts from the United States and South Korea. Foreign banks were also significant in Hong Kong and Singapore, accounting for 78–80 percent of total assets in the banking sector. In terms of their net interest margins, banks in most of these East and Southeast Asian economies appeared to be highly profitable during the same period. By the late 1980s and the early 1990s, global finance had clearly made a significant inroad into Asia and facilitated the enormous growth and development of its leading business groups.

330 (56.6) 141 (36.9) 178 (70.4) 238 (38.3) 120 (55.6) 221 (83.1) 167 (36.8)

449,258 273,608 91,016 307,179 80,649 153,234 99,828

583 382 253 621 216 266a 454

78 66 89 74 82 96 64

66.7 48.2 71.5 67.2 44.6 55.4 61.6

Share Percentage of Total Owned by Market Families Capital (20% cut-off)

Source: Compiled from Claessens, Djankov, and Lang, 2000, tables 2, 6, and 9. Note: a. Main board listing only.

Hong Kong Taiwan Indonesia Malaysia Philippines Singapore Thailand

Economy

Number of Sample Firms (% of total)

Market Capital (US$ millions)

Total Number of Listed Firms 71.5 45.5 67.3 42.6 46.4 44.8 51.9

Family Control, Weighted by Market Capital 26.2 14.5 40.7 17.3 42.8 19.5 32.2

Total Market Capital by Top 5 Families

34.4 20.1 61.7 28.3 55.1 29.9 53.3

84.2 17.0 21.5 76.2 46.7 48.3 39.3

Total Market Share of Capital by GDP by Top 15 Top 15 Families Families (%)

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Family Ownership of Publicly Listed Firms, and Gross Domestic Project in East and Southeast Asian Economies, 1996

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Table 5.1

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Table 5.2

Global Capital Flows to Emerging Economies, 1977–1999 (annual averages, US$ billions) 1977– 1982

All emerging economies Total net capital flows 30.5 Net foreign direct investment 11.2 Net portfolio investment –10.5 Other (includes bank lending) 29.8 By region Asia 15.8 Western hemisphere 26.3 Other –11.6

1983– 1989

1990– 1994

1995

1996

1997

1998

1999

8.8

120.8

192.0

240.8

173.7

291.2

264.3

13.3 6.5 –11.0

46.2 61.1 13.5

96.0 23.5 72.5

114.9 49.7 76.2

138.2 42.9 –7.3

170.9 15.6 104.7

192.0 27.6 44.7

16.7 –16.6 8.7

40.1 40.8 39.9

95.8 35.7 60.5

110.4 80.5 50.0

13.9 91.1 68.8

90.7 188.4 12.1

96.3 144.5 23.5

Sources: Compiled from Stephen Grenville, “Capital Flows and Crises,” in Gregory W. Noble and John Ravenhill (eds.), The Asian Financial Crisis and the Architecture of Global Finance (Cambridge: Cambridge University Press, 2000), pp. 36–56, table 2.1; and World Bank, Global Development Finance 2000 (Washington, DC: World Bank, 2000), p.188. Note: 1977–1989 figures exclude transitional economies and some Middle Eastern emerging economies. Table 5.3

The Nature of Banks in Selected Asian and Developed Economies, 1994–1995

Economy Hong Kong Singapore Indonesia Malaysia Taiwan Thailand South Korea Japan Germany United States

Bank Share State-Owned in Financial Banks (% of a Intermediation total assets) — 71 91 64 80 75 38 79 77 23

0 0 48 8 57 7 13 0 50c 0

Foreign Banks (% of total assets)

Noninterest Operating Costsb

Net Interest Marginsb

78c 80 4 16 5 7 5 2 4 22

1.5 1.4 2.4 1.6 1.3 1.9 1.7 0.8 1.1 3.7

2.2 1.6 3.3 3.0 2.0 3.7 2.1 1.1 1.4 3.7

Source: Compiled from Mauro F. Guillén, The Limits of Convergence: Globalization and Organizational Change in Argentina, South Korea, and Spain (Princeton, NJ: Princeton University Press, 2001), p.185, table 7.1. Notes: a. Assets as a percentage of the assets of banks and nonbank financial institutions. b. As a percentage of total assets, averaged over the 1990–1994 period. c. Not directly comparable to percentages for other countries.

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Organizational Restructuring Asian firms from outside Japan are becoming increasingly important regional and global players in high-tech sectors such as electronics and telecommunications. This organizational specialization in sectors that demand much greater capital investment, managerial knowledge, and technological competence reflects a move in Asian firms away from serving merely as subcontractors or suppliers for global corporations. Specializing in high-tech sectors also pressures these leading Asian firms to transform themselves from locally oriented national firms to emerging corporate giants that have set their sights on the global arena. At the same time, some Asian firms have also managed to grow out of their former position as ethnocentric firms serving the interest of controlling families. Instead, these globalizing family firms are professionalizing their management and adapting to world-class practices in their respective sectors. My analytical focus is on these two groups—high-tech giants and enlightened family firms. Among those Asian firms specializing in hightech sectors, we can further divide them on the basis of family ownership and control. For example, among family-controlled high-tech firms are Nanya Technology and VIA in semiconductors and chip design (Taiwan), PCCW in telecommunications (Hong Kong), and Samsung Electronics in semiconductors and consumer electronics (South Korea). Among nonfamily-controlled high-tech firms are Acer, BenQ, TSMC, and many more in computers and semiconductors (Taiwan), and Singapore Telecom and Singapore Technologies (Singapore).36 Among those enlightened Asian family firms in diverse business sectors are Hong Kong’s CLP Holdings in the power industry (the Kadoorie family) and OOCL in the shipping industry (the Tung family), and Singapore’s Hong Leong Group in property and hotel development (the Kwek family) and Eu Yang Sang Holdings in traditional Chinese medicine (the Eu family). Because they are competing in regional and global marketplaces, these Asian firms are compelled to adopt and adjust to international norms and practices. This transformation in Asian firms takes place primarily through changes in organizational forms, corporate finance, and corporate governance—a phenomenon mirroring the ongoing trends in the globalization of business norms and practices generally. As John Mathews argues, “globalization creates wholly new kinds of possibilities for small- and mediumsized enterprises to become global players exceedingly rapidly, provided they have the wit and ability to take advantage of the opportunities offered.”37 One of the most visible strategic innovations among these Asian firms is their willingness to take on new organizational forms to compete

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effectively in the global marketplace. Historically, Asian firms were mostly tightly controlled and managed in Oliver Williamson’s classical sense of a hierarchy dominated by the founders and their immediate family members.38 While this centrifugal organizational structure remains widely visible in Asia today, some of my case study firms have clearly moved away from this “one center” model of transnational organization. This trend in the organizational structure of Asian firms not only reflects the need for greater flexibility and adaptability in network forms of business organization, but also serves as a form of organizational leverage for these Asian firms to overcome their initial competitive disadvantage as technological latecomers.39 Analysis of a few of the clearest examples of firms diversifying to accommodate an increasingly global environment are revealing: 1. Acer. Taiwan’s Acer is a prime example of this trend. It has been a pioneer in Asia in its adoption of innovative organizational forms to the extent that it has been able to compete effectively with the top ten PC manufacturers in the world. Stan Shih, Acer’s founder, and Leonard Liu (former CEO) introduced the concept of strategic business units and profit centers as early as 1992 when Acer was facing financial difficulties. Stan Shih recalled in late 1996 that “we bit the bullet and ‘broke’ Acer up into a series of semiautonomous operating entities, allocating market responsibilities to some (called the regional business units, or RBUs) and production and technology responsibilities to others (called the SBUs).”40 This organizational innovation has further strengthened the payoff incentives in Acer Peripherals, an SBU that evolved successfully into an independent brand-name electronics and lifestyle manufacturer, BenQ, in December 2001. In 2001, the Acer Group underwent another round of major reorganization that led to the founding of four independent companies. My interviews with presidents/CEOs in Acer Inc., BenQ, and AU Optronics in mid-2004 confirm that this organizational innovation has substantially benefited the Acer Group as a whole. Today, the Acer Group comprises several heavyweight players in the global computer and electronics industry: (1) Acer Inc., the world’s sixth best-selling brand for PCs and notebooks (US$4.9 billion in sales in 2003); (2) BenQ, the world’s leading manufacturer of computer peripherals (US$3.9 billion in sales in 2003); (3) AU Optronics, the world’s third largest manufacturer of large-size TFT-LCD devices (US$3.1 billion in sales in 2003); and (4) Wistron Corp., Acer’s former PC manufacturing division (US$3.2 billion in sales in 2003). In 2003, the Acer Group had more than 60,000 employees worldwide and generated sales of US$15.6 billion. The 2001 reorganization of Acer into four independent companies can be explained by several interrelated factors. The first and foremost reason can be termed the “industry effect.” As the global PC industry became ever

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more competitive, Acer was unable to sustain its entire in-house production network without allowing its various SBUs to develop new sources of revenues and markets. By spinning its manufacturing operations into Wistron Corp., Acer could focus on its role as a brand-name holder and on how to market the Acer brand of IT products more effectively. Wistron Corp. is able to manufacture for other PC companies, some of which are Acer’s direct competitors. In so doing, Wistron Corp. can widen its revenue base very substantially while exploiting its superior manufacturing expertise. Meanwhile, Acer Inc. no longer has to buy from Wistron Corp. exclusively since the latter is now an independent manufacturing company. Indeed, Acer now also sources its notebooks from Compal and Quanta, two of the world’s largest notebook manufacturers from Taiwan. The decoupling of brand name management and global marketing (Acer Inc.) from manufacturing operations (Wistron Corp.) and peripherals production (BenQ) represents a significant shift in the organizational mind-set among members of the Acer Group. Another reason for the reorganization has to do with the diversification of product lines into new growth areas such as lifestyle products. The incorporation of BenQ in December 2001 is largely explained by its potential to be a major global player in electronics lifestyle products. In fact, BenQ stands for “Bring Enjoyment and Quality to Life.” This shift in strategic focus could not have been achieved within Acer Inc.’s previous organizational framework as Acer has always been associated with IT products, particularly computers. The renaming of Acer Peripherals to BenQ in December 2001 represents a form of organizational reinvention for the Acer Group as a whole to go beyond merely a PC brand and manufacturer to become a major global group specializing in IT and lifestyle products. As the chairman and CEO of BenQ explained to me, BenQ wants to be the Sony and Philips of Taiwan. 2. Samsung. Innovative changes in organizational forms, however, are clearly not only restricted to the Acer Group of companies. We can observe similar innovative organizational changes among family-controlled Asian firms. The family-controlled South Korean electronics giant, Samsung Electronics, has completely shifted from a region-centric management system to product-based global management systems since the late 1990s. Samsung currently has thirteen global business units (GBUs) and the heads of each determine everything, including what and where to produce, where and how to sell those products, and so on. 41 This significant shift is explained by the pressing need to ensure speedy and responsive decisionmaking. Our interviewee said that if sales and production are separated, conflicts between regional heads and production heads may occur and this delays decisions. It is also often the case that responsibility is not clearly distinguishable between regional heads and production heads. For instance, when sales performance is not good, regional heads can attribute it to prob-

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lems with products. In a product-based global management system, this kind of excuse cannot be made. Heads of GBUs have all the authorities and responsibilities. If a regional head sees the market situation of the region negatively and becomes conservative but a head of a GBU sees it positively, the GBU head can bypass the regional head and even establish logistics and market networks in the region by mobilizing his own resources. Such organizational flexibility and GBU initiatives in Samsung today reflect its role as a leading global electronics product company rather than an inward-looking family-controlled Asian firm. 3. OOCL. Another very relevant example is OOCL from Hong Kong— one of the world’s largest integrated international container transportation, logistics, and terminal companies and one of Hong Kong’s most recognized global brands. OOCL pioneered in the global shipping industry by developing an IT platform for managing its global container fleets in the early 1990s when the company was suffering from the worst-ever downturn in the industry. This significant investment in IT infrastructure in a typical Chinese family firm owned and controlled by the Tung family, according to its chairman and CEO, has significantly transformed its organizational capability to compete against global giants from Europe and Asia.42 In 2003, OOCL achieved global sales of US$3.2 billion and profit of US$329 million—an outstanding performance in an industry saddled with overcapacity and cut throat competition. Its IT platform has become the gold standard in the global container shipping industry and this CargoSmart system provides “one of the most advanced portal and integration providers for the ocean container transportation industry. Customers use CargoSmart to help manage their shipments with multiple carriers throughout the shipment cycle. CargoSmart’s shipment management services include tools to let customers plan, process, monitor, and share their shipment information.”43 4. PCCW. In the telecommunications sector, Hong Kong’s PCCW is positioning itself as a major telecom player in the Asian region, with the long-term ambition to venture into the established markets in Europe. Perhaps reflecting its fortuitous founding during the heydays of the dot-com phenomenon, PCCW counts among its strategists a number of people with backgrounds in either investment banking or consulting.44 These agents of diffusion bring with them substantial knowledge and experience in global finance and consulting about the present and future of the telecom industry. Not surprisingly, PCCW is now venturing into the UK’s wireless broadband business while its core business remains in Hong Kong’s fixed lines. International Financial Practices Apart from innovative change in organizational forms, leading Asian firms are also experiencing significant changes in their corporate finance prac-

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tices. As one might expect, many of these leading Asian firms are billiondollar companies and require investment outlays that often approach hundreds of millions. While banks and related financial institutions play a major intermediate role in Asia (see Table 5.3), leading Asian firms are increasingly tapping into global capital markets to finance their domestic and international expansion. This increased reliance on capital markets through share issuing and bond placement represents a significant shift in the mind-set of Asian owners and managers; however, many of them understand the strategic imperative of transparency and professionalism in their corporate governance—a practice that may not be consistent with the predominantly family-oriented nature of their businesses. CLP Holdings from Hong Kong is a good example. Its wide range of investments in power plants in Asia requires access to global capital markets for finance. Its founding family, the Kadoories, is fully cognizant of the need to adhere to best practices in corporate governance and has made every possible effort to ensure their good governance is widely known to investors and stakeholders. On its corporate website, CLP Holdings has one of the most transparent sets of information on corporate governance among all Asian firms I interviewed. 45 My interview with its group managing director and CEO, a former investment banker from Schroders, confirmed this relentless quest for good corporate governance. Despite the 34 percent shareholding by the founding Kadoorie family, there is a clear-cut separation between ownership and management control. In many ways, CLP Holdings is not too different in its corporate governance from many leading family-owned giants in the world today (e.g., News Corp., Ericsson, WalMart, Michelin). An interesting aspect to the relationship between family ownership and corporate finance is that family-owned Asian firms may find family members to be more patient and long-term in their investment horizons. Having family ownership in some firms with very high investment outlays (e.g., in capital-intensive industries such as semiconductors) may prove to be attractive to global investors who are confident in the level of professionalism among family-related senior management. In fact, some global (institutional) investors prefer to invest in high-tech family firms precisely because they trust owner-CEOs much more than professional CEOs.46 Some of my interviewees in Taiwan noted that they have no problems accessing global capital markets and their bond issues have often been well received because they are part of a larger family-owned business group. The personal stake of CEOs who are family members provides sufficient goodwill and trust to entice the venture capital of institutional investors. For example, several member firms of Taiwan’s largest business group, the late Wang Yue-che’s Formosa Plastics, have very good access to global capital markets, thanks to Wang’s reputation as a long-term investor himself. My

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interviews with senior managers of two high-tech firms within his family empire, Nanya Technology Corp. and VIA Technologies, confirmed this phenomenon in corporate finance. As one of Taiwan’s largest memory chip makers, and the world’s fifth largest DRAM supplier in 2004, Nanya Technology Corp. is a highly capital-intensive operation that benefits from substantial intragroup investment. This financial commitment from the Wang family has garnered trust in the international financial community that culminated in its successful public listing in August 2000. The same family-linked financial advantage is also evident in VIA Technologies, Taiwan’s largest semiconductor design company, second only to Intel Inc. worldwide as a supplier of chip sets. As a fabless chip design house and a serious competitor to AMD and Intel, VIA has very strong financial support from the Wang family. Its largest shareholder and chairman, Cher Wang, is the daughter of Wang Yue-che. Together with Wen Chi Chen, president and CEO of VIA, they worked for Intel and Leo Computer before founding VIA Technologies. Professionalization of Management The separation between ownership and control, while occurring among an increasing number of leading Asian firms, is not an inevitable outcome of financial globalization. There are always mixed advantages associated with this separation and corporate success is not guaranteed. What is apparent is that leading Asian firms of both family-controlled and nonfamily-controlled genres are increasingly professionalizing their management in order to compete effectively in the global economy. For those family firms with greater separation between ownership and control (e.g., CLP Holdings from Hong Kong), improved corporate governance comes about through the employment of professional managers who have both a global outlook in their managerial visions and tremendous experience in the respective sectors (e.g., finance). Those family firms in Asia that continue to have family members at the helm are not necessarily laggards.47 Rather, these family firms have consciously chosen to keep to their long-term commitment to the businesses. Meanwhile, they have increasingly professionalized their top management so that not only are the heirs highly qualified professionals (e.g., OOCL’s Chee Chen Tung, PCCW’s Richard Li, VIA Technologies’ Cher Wang, Hong Leong’s Kwek Leng Beng, and Eu Yan Sang’s Richard Eu), but they hire highly competent international managers to compensate for their own deficiencies. Many of the leading Asian firms in my sample (CLP Holdings, PCCW, Eu Yan Sang) have senior executives with good experience in strategic management and corporate finance. Samsung Electronics, for example, has a highly decentralized management system whereby Lee Kun-

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Hee, the chairman and son of the group founder, is mostly involved in major decisions on strategy and investments.48 Expectedly, the large investment outlays in many of these Asian firms and the lack of relevant personal experience among family members explain this tendency toward using professional managers to build links to the global financial community. Moreover, as some of the Asian firms in my sample are emerging as major players in the global market for technology-intensive products, the level of professionalism and expertise in their top management is becoming much stronger than a decade ago. Some of Taiwan’s largest semiconductor firms, for example, are stacked with highly qualified engineers and technologists who have substantial experience in Silicon Valley and other technopoles of the world.49 TSMC, a joint venture between the Taiwan government and Philips from the Netherlands, has now become the world’s largest and most successful dedicated integrated circuits foundry. It has not only pioneered foundry services, an organizational innovation arising from its highly professional founder and CEO Morris Chang, but also outgrown its half-parent Philips in terms of market capitalization. In 2003, TSMC achieved US$6.1 billion in sales and US$41.2 billion in market capitalization (compared to US$36.6 billion in market capitalization for Philips in 2003). Its very high market capitalization clearly reflects the investment preference of the international financial community for an industry leader that has a proven track record in both cutting-edge technology and management expertise. Several other semiconductor firms from Taiwan (e.g., Macronix International, Mosel Vitelic Inc., PROMOS Technologies Inc.), founded by highly entrepreneurial engineers, are no different from their US counterparts in terms of the extent of separation between ownership and control. Their founders and current CEOs are highly respected engineers who previously worked for leading companies in Silicon Valley during the 1970s and the 1980s.50 Although they do not personally own more than a small percentage of their firms, their professional competence in flash memory chip design and manufacturing is undoubtedly first rate. Mosel Vitelic was first founded as MOS in Silicon Valley in 1983 and merged with Vitelic USA in 1991. Macronix became the first Taiwanese firm to be listed in NASDAQ in 1996.

Conclusion While my theoretical and empirical analysis may seemingly point to the convergence of Asian firms in their business norms and practices toward global trends in organizational processes and corporate governance, I conclude with a note of caution. Many of my case examples are leading firms in their respective Asian economies and they are the early movers in the

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globalization of national firms from these economies. Their apparent and ready acceptance of and adjustments to changing global norms and practices may simply reflect their leadership role in their home economies rather than the wholesale change and adjustment among many other firms in the same business system. In many ways, certain elements of business norms and practices in Asia may continue to be highly relevant for international business activities and we should not expect a natural convergence in Asian business toward a predefined global model. In this sense, I agree with Mauro Guillén’s assessment that “countries and organizations do not gravitate toward a supposedly universal model of economic success and organizational form as they attempt to cope with globalization. Rather, the mutual awareness that globalization entails invites them to be different, namely to use their unique economic, political, and social advantages as leverage in the global marketplace.”51 For example, the recent emergence of mainland Chinese corporations in the international arena (e.g., Haier, TCL, and Lenovo) has posed new challenges to the future of Asian firms. While these Chinese transnationals are taking a serious look at their traditional socialist norms and practices in order to match world-class competitors, sufficient evidence suggests that they remain international firms with Chinese socialist characteristics. It is too early to tell if they can be completely transformed into the likes of General Electric, Matsushita, and IBM. To many Asian firms, globalization remains a messy game of continuous adjustments rather than a clearly defined pathway to corporate success in the global marketplace.52 Despite good indications that changes and adjustments in three areas of Asian business are occurring in many leading Asian firms, it must be noted that not all aspects of these changes work themselves out easily or positively in Asia. There remain many obstacles to wholesale change and adjustments in Asian business—what Backman terms “old habits.”53 As more Asian firms are taking up different organizational forms, the more familyoriented firms are struggling with the fear of losing control and thus are often reluctant to fully decentralize their decisionmaking. Meanwhile, the greater reliance on capital markets may result in the dilution of family holdings that, in turn, may not be appealing to some patriarchs and their family members. Several well-known cases of feuds within family businesses in Asia are related to the extent family shareholding can be diluted through public placement. For example, the feud among second-generation siblings of the Yeo family resulted in the end of family control of Yeo Hiap Seng, a leading food and beverage company from Singapore, in July 1995.54 There are indeed limits to the globalization of business norms and practices as locally embedded norms and practices may continue to provide a comfort zone for existing firms in these places. Powell thus concludes that “since few nations possess an identical combination of institutional practices and

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cultural legacies, the diffusion of a new mode of organizing is likely to be uneven and partial through the industrial democracies. Rather than convergence, I suggest that we will see distinctive strengths and weaknesses as national elements either combine with or fail to articulate key elements of the new model.”55 What then are the implications of this study for governments and business firms in Asia? First, it is important to recognize the inherent limits to the globalization of business norms and practices and that it is a gradual process. The cases analyzed in this chapter are leading Asian firms that have been “first-movers” and active participants in globalization tendencies and, unsurprisingly, they are also at the forefront of organizational change and adjustments. However, there are many other firms in Asia that remain firmly rooted and embedded in domestic business norms and practices. I am not arguing that change and adjustments to globalization are impossible for these domestically oriented or embedded firms. Rather, organizational change and adjustments in this large number of firms need to happen gradually through mimesis and other noncoercive processes for them to be effective and long lasting. In this sense, the imposition of structural adjustments by the IMF on the Korean government and its business groups, the chaebols, in the late 1990s was disruptive and ineffective.56 Second, while this chapter has shown that leading Asian firms often experience global norms and practices through their international business activities, many other Asian firms may not enjoy the same level of access. It is imperative for domestic governments and relevant institutions to provide increased opportunities for diffusing and learning these international business norms and practices. Strategic policies that facilitate partnership arrangements between domestic and foreign firms are most welcome. Regular briefings and seminars on organizational innovation and change can also be educational to local firms. These policies should be seen as a means rather than an end to improving the overall corporate performance of national firms. As such, the increasing interaction between domestic and foreign firms in any Asian economy will not only increase the opportunities for local firms to learn from their foreign partners but, equally important, for their foreign partners to learn about existing local practices and legacies. As T. G. Andrews et al. argue in their study of global corporations in Southeast Asia, there is a growing trend toward “cross-vergence” (i.e., hybrid forms) rather than convergence in international business practices in Asia today.57 Third, as much as Asian governments should encourage more business interactions between domestic and foreign firms, they should also put in place some specific regulatory requirements that demand greater adherence to international business norms and practices, particularly among public listed companies. There should be rewards for the adoption of best interna-

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tional practices in corporate governance, corporate finance, and international standards (e.g., ISO certifications). Tax incentives, for example, could be structured to encourage adoption of good accounting practices. In so doing, Asian firms that actively seek to learn and adopt global practices are reasonably compensated for their extra organizational efforts. National stock exchange authorities should also be more vigilant in their listing requirements and monitoring. As these stock exchanges are an important nexus of connecting national firms to the global financial community, they should take an active role in shaping the corporate codes of conduct and governance processes of their member firms. In better preparing their domestic firms for the challenges of globalization, these Asian governments and business communities are more likely to reap the positive benefits of globalization and mitigate possible disadvantages such as financial scandals and corporate scams. Last but not least, regulatory and policy changes will be ineffective if the business community does not take part actively in adjusting to globalization tendencies. The role of business associations is particularly critical in this respect precisely because they often establish and enforce business norms and practices through socialization among their member firms. There are indeed many types of business associations—some organized on the basis of industry types and others of geographical origins. While many business associations are primarily domestic in terms of their interest groups and representations, they can serve very important functions in the globalization of business norms and practices. In particular, these business associations can rethink their changing role in an era of accelerated globalization. How might they better serve the interests of their member firms? Are they still relevant in a global economy that is characterized by much greater linkages among firms on a global scale? These are important questions for the future of Asian firms if they are to be transformed from local businesses into world-class players in a highly competitive global economy.

Notes The empirical materials for this chapter are collected as part of an ongoing research project funded by the National University of Singapore (R-109-000-050-112). The generous information provided by top executives in over fifty leading Asian firms is gratefully acknowledged. I am solely responsible for the opinions expressed in this chapter. 1. Dicken, Global Shift: Reshaping the Global Economic Map in the 21st Century; Peck and Yeung (eds.), Remaking the Global Economy: EconomicGeographical Perspectives. 2. Backman, Asian Eclipse: Exposing the Dark Side of Business in Asia; Richter (ed.), Business Networks in Asia: Promises, Doubts, and Perspectives. 3. See also book-length studies in Yeung and Olds (eds.), Globalization of

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Chinese Business Firms; and Harvie and Lee (eds.), Globalisation and Small and Medium Sized Enterprises in East Asia. 4. Hamlin, The New Asian Corporation: Managing for the Future in PostCrisis Asia; Richter (ed.), The Asian Economic Catharsis: How Asian Firms Bounce Back from Crisis; Richter, Redesigning Asian Business: In the Aftermath of Crisis. 5. Ohmae, The Borderless World. For a contrasting view, see Cameron and Palan, The Imagined Economies of Globalization. 6. Whitley, Divergent Capitalisms; Hall and Soskice (eds.), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage. 7. DiMaggio, “Introduction: Making Sense of the Contemporary Firm and Prefiguring Its Future,” quote at p. 3. 8. See classic studies by Dunning, American Investment in British Manufacturing Industry; Hymer, The International Operations of National Firms: A Study of Foreign Direct Investment; Chandler, Strategy and Structure; Vernon, Sovereignty at Bay. 9. Nohria and Ghoshal, The Differentiated Network: Organizing Multinational Corporations for Value Creation. 10. Hedlund, “The Hypermodern MNC—a Heterarchy?” See a different interpretation in Stark, “Ambiguous Assets for Uncertain Environments: Heterarchy in Postsocialist Firms.” 11. See Sundaramurthy and Lewis, “Control and Collaboration: Paradoxes of Governance.” 12. See Glaister, Husan, and Buckley, Strategic Business Alliances: An Examination of the Core Dimensions. 13. Powell, “The Capitalist Firm in the Twenty-First Century: Emerging Patterns in Western Enterprises,” quote at p. 61. 14. Pain and van Welsum, “Financial Liberalization, Alliance Capitalism and the Changing Structure of Financial Markets.” 15. See Rybczynski, “The Internationalization of Finance and Business,” pp. 14–20. 16. Berle and Means, The Modern Corporation and Private Property. 17. See Chandler, The Visible Hand: The Managerial Revolution in American Business. 18. Shleifer and Vishny, “A Survey of Corporate Governance,” pp. 737–783; Sykes, Capitalism for Tomorrow: Reuniting Ownership and Control. 19. See Yeung, “The Dynamics of Asian Business Systems in a Globalising Era.” 20. Guillén, The Limits of Convergence, quote at p. 228. 21. Giroud, Transnational Corporations, Technology and Economic Development. 22. Guthrie, Dragon in a Three-Piece Suit: The Emergence of Capitalism in China, quote at p. 5. 23. Ibid., p. 6. 24. Whitley, p. 129. 25. Far Eastern Economic Review, 9 December 1993, quote at pp. 71–72. 26. Clifford and Engardio, Meltdown: Asia’s Boom, Bust, and Beyond, quote at p. 58. 27. Olds, Globalization and Urban Change: Capital, Culture and Pacific Rim Mega Projects, quote at p. 119. 28. Quoted in Clifford and Engardio, p. 70. 29. Schmukler and Vesperoni, Globalization and Firms’ Financing Choices:

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Evidence from Emerging Economies; Mitton, “A Cross-firm Analysis of the Impact of Corporate Governance on the East Asian Financial Crisis.” 30. Klapper and Love, Corporate Governance, Investor Protection, and Performance in Emerging Markets. 31. Thrift, “The Rise of Soft Capitalism”; Thrift, “The Globalisation of Business Knowledge”; Wenger, Communities of Practice: Learning, Meaning, and Identity; Wenger, “Communities of Practice and Social Learning Systems”; Berger and Huntington (eds.), Many Globalizations: Cultural Diversity in the Contemporary World. 32. DiMaggio and Powell, “The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields,” quote at p. 152. 33. Sklair, The Transnational Capitalist Class. 34. Whitley, p. 97. 35. http://www.economist.com (accessed on May 3, 2000). 36. As expected, there are many other exemplary Asian firms that could be analyzed in this section (e.g., China’s Haier, TCL, and Lenovo, Hong Kong’s Li and Fung and Hutchison Whampoa, India’s Tata Group and Ispat International, Singapore’s Neptune Orient Line, Fraser & Neave, and SembCorp Industries, South Korea’s Hyundai Automotive Company, and Taiwan’s UMC and Hon Hai Precision Manufacturing). My choice reflects my personal interviews with top executives in all of these chosen Asian firms, my familiarity with the corporate details of their firms, and my conscious efforts to include leading firms from four Asian newly industrialized economies. NIE firms are best examples for the purpose of this chapter as they are more likely to participate significantly in globalization processes and there is considerable evidence that they have made substantial changes and adjustments in their own organizational structures and corporate governance to benefit from globalization tendencies. Japanese firms, however, are not included in this analysis as they are already world-class players that set global business norms and practices in many ways (e.g., quality circles in manufacturing processes and management, just-in-time inventory control systems, and job rotation in human resource management). 37. Mathews, p. 11. 38. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications; Williamson, The Economic Institution of Capitalism. 39. See also Borrus, Ernst, and Haggard (eds.), International Production Networks in Asia: Rivalry or Riches; Amsden and Chu, Beyond Late Development: Taiwan’s Upgrading Policies. 40. Quoted in Mathews, p. 135. 41. Interview with vice president, Seoul, September 1, 2004. 42. Interviewed in Hong Kong, May 22, 2004. 43. http://www.cargosmart.com (accessed on March 3, 2005). 44. Interview with vice president, PCCW Venture, Hong Kong, May 17, 2004. 45. See details at http://www.clpholdings.com (accessed on February 23, 2005). 46. See broader arguments in Sykes, Capitalism for Tomorrow: Reuniting Ownership and Control. 47. My view runs contrary to Backman’s pessimistic assessment of Asian firms. 48. Shin and Jang, Creating First-Mover Advantages: The Case of Samsung Electronics. 49. Hsu and Saxenian, “The Limits of Guanxi Capitalism: Transnational Collaboration Between Taiwan and the USA.”

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50. Interviewed in Taipei, July 5 and 9, 2005. 51. Guillén, p. 3. 52. Malnight, “Globalization of an Ethnocentric Firm: An Evolutionary Perspective.” 53. Backman, Asian Eclipse. 54. http://www.asiaweek.com/asiaweek/95/0728/biz1.html (accessed on March 3, 2005). 55. Powell, p. 67. 56. Mathews, “Fashioning a New Korean Model out of the Crisis: The Rebuilding of Institutional Capabilities.” 57. Andrews, Chompusri, and Baldwin, The Changing Face of Multinationals in Southeast Asia.

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CHAPTER

6

Information Technology and Economic Development Strategy Sang M. Lee

G

lobalization has brought unprecedented growth for most Asian countries that pursued export-oriented economic development strategies. First, Japan became a leading industrial nation through manufacturing excellence after World War II. Then the “Asian Tigers”— Hong Kong, South Korea, Singapore, and Taiwan—achieved rapid economic development with government-supported industrialization and trade policies. Other countries such as Malaysia, Thailand, Indonesia, and Vietnam followed the pattern and, more recently, China and India have made dramatic economic strides. Although Asian countries have used different economic development policies, their primary focus has been “cost leadership” based on their skilled, low-cost labor.1 Cost leadership is, of course, an important competitive advantage, but the dynamic nature of globalization has quickly made it a supportive, not a sufficient, condition for success in international competition. In a globalizing economy, quality, speed, differentiation, and customization have surpassed cost leadership as competitive advantages. The Asian financial crisis of 1997 was a wakeup call for many Asian countries, especially South Korea, Thailand, Malaysia, and Indonesia, exposing the true weakness of their economic policies that focused on government-guaranteed foreign debt to support their conventional export-oriented strategies. Another major factor working against these countries was that China was quickly emerging as a leading manufacturer of consumer and mid-tech industrial products. Thus, the Asian financial crisis became the defining moment for many countries to reexamine and rechart their economic policies. Among all of the countries that implemented reforms, South Korea stands out as the one that made the most drastic and successful change in economic strategies. South Korea was known as an export-oriented manufacturing country that provided low- to medium-price-range consumer and 109

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industrial products. In view of the growing competition from China, South Korea simply could not continue relying on its manufacturing base, and the government picked high value-adding information and communication technology as its new economic strategy. As a result, South Korea quickly emerged as a world leader in ICT development and use. The South Korean economy relies heavily on trade because of its scarcity of natural resources and its wealth of human capital. At the beginning of its industrialization in the 1960s and 1970s, South Korea had plentiful low-cost skilled labor, as do China, India, and Vietnam now, making it a competitive exporter of light and heavy industrial products. However, as the country developed its economy and quality of life, its cost advantage began to evaporate. South Korea’s per capita GNP exceeded $15,000 at the end of 2005 and it can no longer compete with China in the same export markets. To maintain South Korea’s basic economic growth based on exports, it had to move up to knowledge-intensive, high-tech industries. South Korea’s economic transformation from a manufacturer of labor-intensive products to ICT-supported knowledge products was a natural progression in a global economy driven by rapid ICT adoption and diffusion. The strongest engine of South Korea’s ICT development has been the government’s leadership. The South Korean government’s Ministry of Information and Communication (MIC) lists the following factors in the success of South Korea’s ICT development: (1) the government’s policies for ICT infrastructure development; (2) education and promotion of ICT throughout the country to close the digital divide; (3) development of welltrained ICT technicians and core technologists; (4) creation of a constructive competitive environment for ICT businesses; and (5) the concerted public-private partnership (PPP) for technological innovation and diffusion.2 In 1987, the South Korean government initiated e-government programs to establish a national computing backbone and to consolidate key databases. As early as the 1990s, South Koreans were using such online government services as registering births and deaths, finding economic statistics, and downloading various service application forms. The government launched the e-Government Special Committee and drafted the eGovernment Law in early 2001.3 Since then, South Korea has ranked as one of the top e-government countries in the world (ranked 2nd in 2002 by Global e-gov02).4 The South Korean e-government portal (egov.go.kr) contains approximately four thousand types of information for citizens and nearly four hundred different public services. With the world’s best ICT infrastructure, e-government activities in South Korea were constantly upgraded. For example, the South Korean government implemented various systems based on GIS (Geographic Information System), wireless, and mobile technologies for traffic control,

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payment of traffic violation fines and highway tolls, passport applications, and government announcements. In early 2002, the ruling party elected its presidential candidate using e-voting instead of punching paper tickets. It took only fifteen minutes to tabulate the votes and announce the winner. With the superb ICT infrastructure and the eager customers who seek new innovations, e-business has become an important part of South Korea’s economic activities. For example, eBay launched its auction business model in seven Asian countries: Australia, China and Hong Kong, Japan, South Korea, New Zealand, Singapore, and Taiwan. In November 2004 e-BayKorea’s business volume rose to over 70 percent of the total in the seven countries. The e-business volume in South Korea increased rapidly as shown in Table 6.1. As in the United States, B2B (business-to-business) transactions in South Korea account for the dominant share of the total volume, approximately 89 percent in 2003. Total e-business sales approached 20 percent of total business transactions. The manufacturing industry dominates with approximately 80 percent of total transactions through e-business, followed by the wholesale-retail industry (17 percent), construction (4 percent), and logistics and supply chain (2.5 percent).5 With the increased use of mobilebusiness (m-business), especially in the B2C (business-to-consumer) market, the total sales through the cyber shopping mall is increasing at about 14 percent per year.6 South Korea is aggressively moving with the radio frequency identification (RFID) system in conjunction with m-business and this is expected to further accelerate e-business sales. Other important areas of e-business are online banking and stock trading. By September 2004, approximately 26 million people (54 percent of the total population) were registered Internet banking customers at twentyone banks and financial institutions.7 The average number of daily Internet banking transactions stood at 8.9 million in September 2004. The fastest growing e-banking service is m-banking (mobile banking) with about 5 mil-

Table 6.1

E-Business in Korea (US$ billions)

Type

2000

2001

2002

2003 (estimate)

B2B B2C G2B

$52.3 .7 —

$109.0 2.6 7.0

$155.0 5.0 17.0

$197.0 6.0 18.0

57.5 4.5

118.6 9.1

177.0 12.8

221.0 16.7

Total Percentage of total transactions

Source: Data obtained from National Information Agency, April, 2004.

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lion transactions a month. Online stock trades account for approximately 52 percent of total transactions. However, the majority of these transactions were through the Internet rather than m-trade (mobile trade). In addition to all the ICT initiatives of the South Korean government, the most recent Ministry of Information and Communications strategic plan, “IT 839,” seeks to develop eight major new services including Wireless Broadband (WiBro), Digital-Multimedia Broadcasting (DMB), home networks, telemetics for automobiles, radio frequency identification (RFID), wireless Code Division Multiple Access (CDMA), digital TV, and voice over internet protocol (VoIP).8 The South Korean government will also help develop leading-edge infrastructure for Broadband Convergence Network (BCN), the Ubiquitous Sensor Network (USN), and Internet Protocol Version Six (IPv6), and pursue nine new growth areas in WiBro products, digital TV sets, home network service, IT System on Chip (IT SoC), next generation PCs, imbedded software, digital contents, telemetics service, and Ubiquitous Robotic Companion (URC). This chapter describes the background of South Korea’s drastic change in its economic strategy, its previous competitive strategies, and the government’s role in adopting ICT as its new strategic focus. It also discusses South Korea’s unique cultural characteristics that have supported ICT development and diffusion, challenges currently facing South Korean ICT industries, and the outlook for its future.

South Korean Economic Development and ICT Strategy For centuries, South Korea was an enigmatic country known only to its immediate—and unfortunately, ambitious—neighbors: China, Japan, and Russia. Neither strong nor advanced enough to control its own destiny, but occupying a strategic geographic location, South Korea has gone through numerous crises in its history. Japanese colonization for thirty-six years until the end of World War II, the Korean War (1950–1953), and the bumpy road to democratization left the country ill-prepared to face the emerging global age. The Korean War, while tragic and devastating, brought an influx of modern ideas and technologies to South Korea that gave its people a shock and helped them realize how backward their country really was. After the Korean War, South Korea achieved phenomenal economic success in transforming its devastated, mostly agrarian economy into a modern industrial nation. Per capita GNP rose rapidly from $87 in 1962 to $10,307 in 1997, an average annual increase of 8 percent over thirty-five years.9 Starting as one of the poorest nations in the world, South Korea became the twelfth richest country in 1997, a growth record hailed as “The Miracle on the Han River,” making it a leading Asian Tiger.

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With accelerating exports, South Korea emerged as a major manufacturer of such products as consumer electronics, automobiles, semiconductors, container and tanker ships, chemicals, and machine tools. The driver of South Korean economic development was export by the chaebols (the unique Korean form of conglomerate). The octopus style growth of the chaebols was based primarily on government-guaranteed short-term financing by foreign institutions. Eventually, the burden of debt to finance and ever expanding operations in the competitive global economy became overwhelming. 10 The 1997 Asian financial crisis first hit Thailand and Indonesia, then reached South Korea like a tsunami. The IMF helped save the South Korean economy by infusing $57 billion. The 1997 financial crisis was a wakeup call to South Koreans. The South Korean government was forced to boldly restructure the chaebols and banks to wipe all bad loans from their balance sheets. Half of the thirty largest chaebols went bankrupt, including the second largest—Daewoo Corporation. At the same time, rapidly developing China began to emerge as a major manufacturer of consumer and mid-tech products that had been major export items for South Korea. The South Korean government had to reformulate its economic strategies to focus on high-tech industries that could establish their competitive advantage, especially over China. The ICT industry was chosen as the national strategic priority.11 A national strategy implies that it is directly related to national goals and thus targeted for orderly mobilization and allocation of available resources.12 Since 1997, the main engine of South Korea’s recovery from the financial crisis has been ICT. The drastic shock treatment helped South Korean ICT firms emerge as competition-toughened global businesses. The early movement toward e-Korea was the government’s resolve that the country would not make the same mistake with the ICT revolution as it had with the Industrial Revolution in the late 1800s. Many South Koreans still believe that their late entry into the industrial age was the main reason for the country’s backwardness, which led to Japanese colonization.13 South Korea’s primary exports during the 1970s and 1980s were light and heavy industry products such as apparel, shoes, toys, consumer electronics, machine tools, automobiles, and ships.14 With increased global competition in the 1990s, and the South Korean government’s decision to concentrate on high-tech, knowledge-intensive products such as semiconductors, precision goods, and ICT-related equipment, it invested more than $5 billion in ICT infrastructure development from 1996 to 2001.15 It provided 10,400 elementary and high schools with free broadband Internet service; gave free training in Internet use to more than 13 million people (29 percent of the population) including students, teachers, homemakers, and military personnel; and invested $600 million to train 740,000 ICT specialists, including 15,000 doctorate and master degree holders and 88,500 bach-

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elor degree holders. The government also connected 144 major cities through high-speed computer networks; started the world’s first high-speed Internet service using ADSL (Asymmetric Digital Subscriber Line), and implemented CDMA for mobile communication and IMT-2000 (International Mobile Telecommunication). In 1996, South Korea became the first nation in the world to implement CDMA for mobile communication. Since then, South Korea has upgraded its technology to 2.5G and 3G. KT (formerly Korea Telecom), which is now a private firm, has the world’s largest WiFi (Wireless Fidelity) network in the world with thirteen thousand hot spots, public access points such as bus terminals, train stations, subway stations, coffee houses, libraries, and even soccer stadiums. KT plans to double that number in about a year.16 South Korea is in the process of changing its wireless communication technology to Wi-Bro with digital multimedia broadcasting capability. Thus, South Koreans now can use their cellular phones to broadcast over the Internet while using other multimedia services. In South Korea, the mobile handset has evolved into a ubiquitous remote control for daily activities encompassing everything from work-related activities to home life. Clearly, the South Korean government’s ICT strategy played the crucial role in leading the country toward “the pinnacle of the global ICT industry.”17 The so-called IMF period from 1997 to 2000 was a defining moment for the South Korean government and its people. The nation united with a firm resolve to rescue its wrecked economy. The rapid growth of ICT-related industries received the top national priority. ICT industry value added grew from $32.6 billion in 1997 to $58.7 billion in 2001. As a result, the ICT industry’s share of GDP jumped from 8.6 percent in 1997 to 12.7 percent in 2001, the highest among all OECD member countries.18 The growth rate of ICT-related industries out-distanced the GDP growth rate from 1997 to 2000. In 1998, during the height of the financial crisis, GDP recorded a negative 6.7 percent growth rate, while ICT industries grew 20.7 percent. During the next two years, from 1999 to 2000, ICT industries recorded 30.0 percent and 36.5 percent growth rates, respectively. In short, ICT industries contributed significantly to a quick economic recovery since 1997.19 The 1997 financial crisis provided another important impetus to the rapid expansion of South Korean ICT-related industries. The financial crises brought about serious unemployment as many firms were forced to not only curtail recruitment of new employees but also to lay off many young professionals with limited seniority. Many laid-off professionals and fresh university graduates without job opportunities turned their knowledge and creative efforts into venture creation, mostly in the fast-growing ICT field. The share of venture capital invested in ICT-related industries was 31 percent in 1998 but increased to well over 60 percent by 2001.20

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Buoyed by the success of its ICT strategy, the South Korean government developed a comprehensive ICT export program called “e-Silk Road.” The export amount of ICT products grew from $31 billion in 1997 to $51 billion in 2000, representing about 30 percent of the nation’s total exports. Foreign direct investments in the South Korean ICT industry also grew tremendously. In 1997, FDI in ICT-related industries was $0.4 billion and it grew 1,200 percent to $5 billion by 2001, which represents 42.3 percent of the total FDI in South Korea.21 The combination of the government’s huge commitment for the domestic ICT industry development, a rapid increase of ICT export products, and the soaring FDI in the industry helped South Korea build the world’s best ICT infrastructure. Consequently, South Korean ICT industry contributed tremendously to the country’s economic growth.

National ICT Development Strategy South Korea’s strategic transformation from a manufacturing nation of high and medium-high technology products to that of knowledge-intensive industries, especially ICT, was arduous. The government’s strong leadership under the national banner “We were behind in industrialization but we will not be a laggard in ICT development” created the momentum for ICT infrastructure development, a transformation that was even more compelling due to the 1997 financial crisis. Although the national ICT strategy was initially formulated around 1987 by the government, the new knowledge-based global economy forced modification of the previous plans. Table 6.2 summarizes the general framework of South Korea’s ICT strategies since 1996. The detailed plans for the latest strategic plan “Broadband IT Korea Vision 2007” are presented below.22 South Korea’s plan is to create a complete digital economic strategy through the following programs: 1. Digital economy. South Korea’s digital economy programs support small- and medium-sized enterprises (SMEs). Through IT rental methods via application service providers (ASPs), SMEs’ operations will be enhanced by ICT. In South Korea, SMEs represent 99 percent of all business firms. Informatization of SME operations is thus critical for improving their productivity and core competencies. The expected result is broad implementation of Enterprise Resource Planning (ERP) functionality for over one million SMEs through ASPs. Programs will also establish e-business standards. The Ministry of Information and Communication announced the next generation e-business standardization to prepare for the fast emerg-

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Table 6.2

Korea’s Information and Communication Technology Strategy Framework

Time Frame

Strategy and Goal

1996–2000

Informatization Plans 10 major tasks established (e.g., education, administration) High-speed ICT infrastructure and industry Individual implementation plans Cyber Korea 21 Vision and strategy for a knowledge-based nation Goals and processes established ICT infrastructure, new ICT industries, job creation plans, ICT education to induce demand e-Korea Vision 2006 Internet diffusion and performance-centered applications Productivity audit for the citizens, industries, and the government Upgrade ICT infrastructure, world-class ICT industries, improved international collaboration Broadband IT Korea Vision 2007 World-class e-government for service innovation, improved efficiency and transparency Improved national competitiveness through industry informatization Wide area network and strategic development of new ICT growth areas Ubiquitous society

1999–2002

2002–2006

2003–2007

Source: Korean Ministry of Information and Communication, Informatization Annual Report, 2004.

ing new e-business environment and to foster South Korea’s internal e-business market. Based on its superior ICT infrastructure, South Korea has already embarked on developing the de facto e-business standards through ebXML, web service, integration of business processes, collaborative transactions among different industries, new business solutions, and new e-business opportunities development. MIC also established long-term goals to help South Korean SMEs enter the fast changing global e-business market. MIC’s strategy includes the e-Marketplace technology collaboration model with such countries as Singapore, Taiwan, China, and other APEC nations for intercountry B2B. South Korea is taking the leadership role in expanding the global e-Marketplace and hopes to help South Korean SMEs strengthen their competitiveness through increased global sourcing opportunities. In addition, MIC has implemented plans to create a secure online environment where citizens can easily and safely make e-transactions. Thus, MIC has promoted an e-signature program that can support, among others, the Internet shopping mall, doctors’ prescriptions, online auction, e-banking, and stock transactions, through both online and wireless communication media. As a consequence, e-signature users increased dramatically from fifty thousand in 2000 to over nine million in 2004.

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2. Digital welfare society. The South Korean government initiated an e-work program that includes activities to support more effective use of human resources through advanced ICT. The Ministry of Labor (ML) developed online programs to improve job search, skills development, qualification evaluation, quality of work life, and the like. By 2005, more than 820,000 enterprises and 7 million workers joined ML’s online systems such as e-employment, e-training, e-employment-insurance, worknet, and cybertraining. South Korea is going through rapid transitions in social, political, and economic conditions simultaneously. Industrialization, urbanization, informatization, and democratization have dramatically changed the demographics, lifestyle, and work environment. Consequently, there are many new societal problems such as unemployment, handicapped workers, welfare programs for senior citizens, children, women, and rural poverty areas. The South Korean government developed an integrated information system for these welfare programs. South Korea has a diverse and complicated system of production, distribution, and administration of food and drugs, and the safety and security of perishable food and drugs are major concerns of both the government and citizens. Thus, the South Korean government developed a new vision for ICT-supported lifelong health care programs. This vision is one of the 31 major e-government projects implemented in 2003. The government’s Informatization Strategy Plan (ISP) is to complete the integrated information system for food and drugs by 2007. Moreover, rapid urbanization, industrialization, and globalization have brought renewed concerns for healthy living and, in response, the government launched the informatization of environmental services. It is developing ICT-supported systems to prevent, monitor, control, and improve environmental pollution and is using the geographic information systems database (GIS-DB) for pollution control and management of the national park system. 3. Improvement of education and cultural information. The Ministry of Education and Human Resources (MEHR) completed the second stage of its informatization of education program in 2005. Education is the passion of South Korean people. The world-class ICT infrastructure has greatly helped e-learning, especially at the K–12 grade level. Most elementary and secondary schools have one PC for every four or five students and all schools are connected to broadband (20 mbps). Most informatization efforts at the K–12 level focus on improving educational content for high-level thinking such as problem solving and creativity. Teacher education for ICT application is also a major project of MEHR. At the college and university level, the overall university informatization program, e-Campus VISION 2007 (2003–2007), supports e-learning centers, education-research information

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sharing, university administration ERP development, university informatization projects, and healthy cyber culture development. MEHR also developed lifelong education support programs. In addition, the National Education Information System (NEIS) supports more efficient, effective, and transparent administration of all national and local education organizations. The national vision is to achieve the best education achievements among all OECD countries. Programs managed primarily by the Ministry of Culture and Tourism (MCT) involve numerous culture and arts organizations, tourism, sports, libraries, and cultural heritage institutions. Culture and arts informatization is a part of the knowledge-information resource management project that began in 2000, involving dance, music, plays, construction, movies, painting, design, literature, culture policies, and calligraphy, and emphasizing the development of high-quality contents to provide citizens with rich information about culture and arts. Informatization of cultural heritage, culture industries, and the tourism business, which directly affect both national and regional economies, are also important parts of the project. Other related areas include development of sports networks, library information systems, and museum digitalization. 4. E-government road map. The South Korean government’s reform of government administration practices is quite similar to the US e-government’s program for improving internal effectiveness and efficiency. The plan involves twenty-two focused tasks of electronic administration: the entire process of government paperwork; informatization of the financial administration of central and local governments; electronic administration of local governments; electronic audit functions; electronic management of the parliament; integrated judicial and prosecution systems; and informatization of integrated personnel administration. The government is also planning to informatize diplomacy and trade, enable real-time administration of government tasks; share administration information and data; and develop integrated government functions. The South Korean government connected all government agencies and local governments by broadband Internet in 2002 and developed strategies to bring efficiency and transparency to all functions of the government including legislative, judicial, and administrative branches. By 2002, the electronic one-stop service window handled over 4,400 types of citizen services. However, the Internet-based services could not cover the entire spectrum; many functions of the government such as issuing birth certificates, changing addresses, property transactions, and other activities were not integrated. Thus, the government upgraded and expanded government for consumer (G4C) services in 2004 to include national safety management; construction, real estate, and property registration; the national tax service; national welfare information; food and drug information;

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employment and job information; administration audits; the government for business (G4B) one-stop window service; national logistics information; electronic trade services; support service for foreigners; overseas transfer of e-government expertise; and online citizen participation. The South Korean government attempts to sustain the country’s leadership as the most digitalized nation in the world, by providing the direction and support policies for continuous ICT development.23 To adapt to the rapidly changing advances in ICT, the government has led efforts to reform the laws and systems that support rapid transition. By 2004, it enacted or modified more than 270 different laws and rules for informatization and began developing the next generation Broadband Convergence Network (BCN), which integrates communication, broadcasting, and the Internet for ubiquitous multimedia service. The government invested more than $750 million in BCN that, in turn, attracted more than $20 billion in private sector investment for installing the broadband network for all national and local government branches—more than thirty thousand public organizations including ten thousand schools. BCN is a necessary infrastructure for South Korea’s ambitious progress toward a “Ubiquitous Network Society” by 2010. The expected results include u-gov and e-life including e-learning, e-health, and home networking. Perhaps South Korea’s most leading-edge ICT development would be a Ubiquitous Sensor Network for the emerging concept of u-society where computing and communication would be possible anytime, anywhere, for anything, through any medium. Web services represent the technology that supports the Internet-based use of different information systems through global standards such as XML, COAP, WSDL, and UDDI. MIC established a web services expansion and development road map in 2004. The ministry plans to implement web services application in the public sector first and then gradually diffuse the technology to the private sector. 5. U-life. Ubiquitous computing or ubiquitous IT has been discussed for some time. U-ICT includes communicating with a natural interface that allows people to use language, gesture, and other communication tools to facilitate natural human-computer interface and context-aware communication in which U-ICT recognizes the situation and location of the user in providing the service. The context defines “five Ws”: who, what, where, when, and why with the automated capture of live experiences. U-ICT facilitates the capture of real experiences and supports flexible and universal access to those experiences at a later point in time thereby allowing communication at anytime, anywhere, any network, any device, and any service. The South Korean government’s IT839 Strategic Plan encompasses eight major U-ICT services, including mobility (anytime, anywhere), convenient interface (any network, any device), service content (any service),

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and three major infrastructures with Internet-powered support for five new growth areas: u-device diversification, miniaturization, convenient service, content development, and intelligent devices. Based on such development, South Koreans have now moved into u-life where the environment, equipment, materials, and people are integrated seamlessly in a flexible u-network. U-life encompasses a wide range of daily work and other activities. Table 6.3 summarizes some of the most popular u-life-related tasks that are being offered or planned to be offered in South Korea. Another fast-developing area of u-life is home networking. MIC demonstrates a u-life device that can activate rice cookers; monitor the contents in the refrigerator; check the security system; control the lights, temperature, and humidity in the house; and operate the smart toilet, which can send vital health information to the doctor.

Table 6.3

U-Life Service and Tasks

U-Life

Task

e-Health Care

Digital health care WiBro-based health-phone Comprehensive medical network Standard medical database Quality certification for health-medical contents Public parking real-time information service Intelligent family service robots Crime prevention, criminal arrest system Accident of disaster management system Internet-based instruction system E-learning contents module library Senior citizen employment matchmaking E-learning service for rural areas Digital library contents base development E-book software, hardware standardization U-life community service system Systematic citizen opinion collection mechanism E-vote system for policy acceptance Interregional combined work process system IT overseas employment opportunity support RFID equipped merchandise code system Customized tourism planner support system RFID supported cultural heritage information Comprehensive cultural event website BCN based digital interactive system Child care, handicapped care system Senior citizen support systems and robots

e-Medical Service e-Safety Infra e-Accident Prevention e-Learning

e-Info Service e-Participation e-Working Life e-Shopping e-Tourism e-Entertainment e-Care

Offered (O); Planned to be offered (P)

Source: National Computerization Agency, “e-Life Model,” November, 2004.

O P O O O O P O O O O O O P P O O O O O P P P O P O P

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South Korea also leads the world in using personal blogs (web logs) and exchanging information, views, personal observations, and the like. Using an expanded version of personal blogs, the mini homepage, a majority of young people develop their own home pages through available services to present personal information, opinions, diaries, and also create a space to chat with friends. By 2005, this became one of the fastest growing online services in South Korea.

ICT Challenges for South Korea With rapid advances in ICT, several adverse developments such as computer viruses, hacking, spam, invasion of privacy, and unhealthy information present real challenges to the e-knowledge society. The South Korean government has developed “the mid- and long-term information protection strategy” to support the e-knowledge society. For example, the “e-Clean Korea” campaign was launched to establish the healthy etiquette culture. The government is especially concerned about protecting minors and privacy of citizens. South Korea experienced a severe Internet disruption and attack on January 25, 2003. Thus, MIC established the Internet Attack Response Center and developed a proactive preparedness and response system based on online collection and analysis of traffic statistics. Further, the government established the interministry-level National Cyber Terrorism Response System Coordinating Committee in 2003 with representatives from the National Security Council, National Information Agency, MIC, and Ministry of Defense. South Korean’s informatization efforts created a world-class ICT infrastructure. As the use of the Internet exploded, so did the undesirable uses of the technology that could hinder healthy education of children and citizens’ trust in ICT. The South Korean government, through the ICT Ethics Coordination Committee, established policies aimed at prevention of illegal and hazardous information to minors; a healthy etiquette campaign “eClean Korea”; protection of privacy; prevention of and response to spam; information protection technology development; encouragement of e-signature use; and a wireless communication security system. Globalization and digitalization have increased the importance of ICT all over the world. In the Asia Pacific region, South Korea, China, and Japan together have over 23 percent of the world population and 28 percent of the world trade value. Nevertheless, the intertrade value among the three countries represents only about 20 percent of the total trade volume, as compared to more than 60 percent among the EU countries. South Korea’s ICT export value to North East Asian countries reached over $20 billion in

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2003, about 29 percent of the total export of $57.6 billion. Thus, South Korea began to emphasize the need for regional ICT cooperation among the countries in the Asia Pacific area. Japan has been the leader in the electronics industry for some time. However, since the early 1990s, Japan has experienced much difficulty due to its long-term economic depression. Nevertheless, Japan is still the unquestionable world leader in the electronics area, including research and development (R&D), manufacturing excellence, and important technological areas of ICT. Because South Korea’s manufacturing-centered economic structure reached its limits, especially due to China’s recent domination in low- and mid-tech manufacturing, the South Korean government initiated the Asia Pacific Information Infrastructure (APII) that would promote cooperation among the Asia Pacific countries to develop international highspeed ICT infrastructure. Currently, the APII test bed has been established in cooperation with the United States, Singapore, and Japan among the APEC countries. South Korea’s ambition is to leverage its world-class ICT infrastructure to become the leader and hub of ICT-related industries in the Asia Pacific area and beyond. Some of the international cooperation programs currently in place include third generation (3G) mobile communication, IPv6, open source software, digital contents, e-commerce and e-government, network information protection, ICT standardization, the ICT divide among the nations, and training overseas ICT professionals in South Korea.

Conclusion For many centuries, South Korea was a backward country where people were afraid of change. With the rapidly changing world geopolitics, it has gone through several crises in its recent history. Japanese colonization, the Korean War, and the Asian financial crisis shocked South Koreans into facing the reality of the global age. As one of the Asian Tigers, South Korea achieved an economic miracle by focusing on export trade of relatively inexpensive consumer goods and mid-tech products. However, the 1997 Asian financial crisis and the newly emerging China as the “world’s factory” of consumer products forced South Korea to reexamine its strategies to sustain its economic growth. Thus, South Korea focused on ICT as a knowledge-intensive industry to strengthen its competitive advantage over other nations, especially China. The South Korean government invested heavily in building the best human and physical architecture for ICT development. This strategy has brought remarkable and impressive results that have helped South Korea rescue its wrecked economy after the financial crisis of 1997.

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Not only have government policies and innovation driven the changes toward technological superiority, but so too has South Korean culture. South Korean culture has become a driving force behind South Korea’s rapid ICT development and diffusion despite the fact that it played a relatively minor role in scientific or technological developments in the past. Rapid changes occurred as the Internet, wireless, and mobile technologies became important information and communication media. Once South Koreans saw the value of industrialization after the Korean War, they created a new term, “ppali ppali,” which means “quickly and quickly,” a term that represents the new South Korean passion for rapid economic development. The emerging ICT industry became a useful tool to get things done at break-neck speed. Culture has also been an important driver for ICT development in other ways. The Korean language is supported by phonographic symbols, unlike Chinese or Egyptian hieroglyphics. Hangul (the Korean alphabet) has only 24 characters, 10 vowels, and 14 consonants. This linguistic characteristic fits well with modern ICT, especially mobile devices. Ease of use of new ICT in the Korean language has tremendously helped diffuse ICT as a necessary part of South Koreans’ daily life. Also, because of their strong Confucian roots, South Koreans place a great emphasis on the sense of belonging. The basic unit of belonging is the family, based on blood ties, followed by hometown, school, professional, and organizational relationships, and even hobbies. Thus, South Koreans belong to more groups than perhaps any other people in the world. The sense of belonging is usually accentuated by frequent communication and interaction. Advanced ICT has become a convenient means to enrich this social norm by forming numerous communities, blogs, and mini homepages. Because South Korea is a relatively small country with a high population density, most of its citizens live in close proximity in huge apartment complexes. Most construction firms equip these complexes with broadband lines. Thus, economies of scale greatly support rapid ICT diffusion among the majority of South Koreans. They also value word of mouth communication and most enjoy exchanging views about new experiences in their daily lives. Application of modern ICT is a major means of word of mouth communication. The information and knowledge about new ICT spread fast when thousands of families live in the same apartment complex. This means of communication has accelerated the rate of ICT diffusion, especially in forming various e-customer communities. The spillover effects of the world’s best broadband technology infrastructure and its application have been far reaching. Now, South Korea also leads the world in the use of cellular phones, both in the penetration rate and the technology status (3G). The synergistic effect of broadband Internet, mobile devices, and wireless communication technologies has

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changed the way South Koreans live, function, and do business. South Korea has become the hotbed or incubator where any new ICT devices are often market tested before they are introduced in the global economy.24 For example, Microsoft tested MSN Mobile in South Korea in 2003 and then introduced its instant messaging on mobile phones six months later in the United States. Samsung Electronics first tests its new products in the domestic market for about six months and modifies any undesirable features before introducing the products worldwide. Samsung’s spectacular rise to the third largest ICT firm in the world (IBM, $91.3 billion; HewlettPackard, $76.8 billion; Samsung Electric, $54.5 billion in sales) speaks for the success of this practice. Based on solid human and physical ICT infrastructures, and its brand value as an ICT leader, South Korea seeks to become a global ICT hub for traffic, content, and R&D. South Korea hopes to be a hub that produces, stores, and distributes digital content in Asia and throughout the world. It has become not only the incubator of ICT innovations but also the most advanced nation in the world in applying leading-edge technologies such as broadband Internet service, WiBro, 3G mobile communications, u-life, and the like. The ICT industry is now contributing more than 40 percent of South Korea’s total export value and has been the catalyst in elevating the country to the eighth largest economy of the world. The future of South Korean ICT appears to be bright. However, its government and people must chart a new strategy to more effectively channel their world-leading ICT infrastructure toward improving more directly the country’s productivity and quality of life.

Notes 1. Porter, Competition in Global Industries. 2. Lee, “Information and Communication Minister Sang-Chul Lee on Building e-Korea”; Korean Ministry of Information and Communication (KMIC), Minister’s Report: IT Policy Direction for Building IT-led Country. 3. Kim, “Korea Leads e-Government Initiatives.” 4. See www.insidepolitics.org/egov02int.pdf. 5. Data provided by the National Informatization Agency, April 2004. 6. Data provided by the Bureau of Statistics, September 2004. 7. Data provided by the National Informatization Agency, October 2004. 8. Korean Ministry of Information and Communication (KMIC), IT839 Strategy. 9. See www.kusec.or.kr/English/archives/koreainfo/economy/growth. html. 10. Lee, “South Korea: From the Land of Morning Calm to ICT Hotbed.” 11. Cheong, “Korea’s Option for Facing China’s Economic Challenge.” 12. Park, “Korea’s Informatization Strategy.” 13. Sunoo, “Economic Development and Foreign Control in South Korea.

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14. See www.aftak.or.kr/a1_z.html. 15. See www.kusec.or.kr/English/archives/koreainfo/economy/growth.html. 16. News.com, “South Korea’s Digital Dynasty,” June 25, 2004, available at http://news.com.com/South+Koreas+digital+dynasty/2009-001_3-528371.html. 17. Gartner Group, Ubiquitous Network Society: E-Korea Project (May 4, 2002). 18. Korean Information Society and Development Institute, Mid and Long Range Market Prospects of Korean Information and Communication Technology Industry (2001–2005). 19. Kim, ed., Three Years After the IMF Bailout. 20. Korean Information Society and Development Institute, Digital Economy of Korea 2002 (August 2002). 21. Ibid. 22. KMIC, Informatization Annual Report (2004). 23. Fortune, “Broadband Wonderland,” September 20, 2004, 191–198. 24. Lee, “South Korea.”

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CHAPTER

7

Adjusting to Globalization Through Skills Development Strategies Sarosh Kuruvilla

G

lobalization requires developing countries to improve the quality of their human resources. Improving national skills helps to attract foreign direct investment.1 Although developing countries account for a steadily increasing share of world manufacturing (partly driven by lower wages and costs), low-cost competitive advantage is transitory. Sooner or later, developing countries need to “upskill” as other lower cost producers emerge. For example, low-cost production in China spurred skills development initiatives in South Korea, Taiwan, Singapore, and other Asian countries. Improving national human resources is also important given the established relationships between investments in human capital and economic growth.2 Trade theories such as the Hekscher-Ohlin model stress the quality of national human resources as a critical factor in determining comparative advantage.3 Although skill development is clearly a crucial policy issue for developing countries, remarkably little is known about what countries can do to increase national skills quickly. The economic literature correctly stresses the importance of investments in education (at all levels), but skills development also takes place outside the formal educational system, particularly in vocational and professional training institutions and within corporations. Experts, such as A. Singh and A. Zammit, suggest that improving national skills requires a concerted national effort involving multiple institutions, policies, and private-public sector collaborations.4 The aim of this chapter is to describe and analyze the efforts at skills development in Singapore and in India’s booming outsourcing sector. Singapore is an important case because it started its skills development efforts in the early 1980s at a time when outsourcing of manufacturing was just beginning, and it has become one of the best-known examples of a nation that has successfully and continuously upskilled its workforce over the past twenty-five years.5 India, on the other hand, is just beginning to 127

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focus on skills development, stimulated by the growth in outsourcing of high-end services such as software development and business process outsourcing (BPO) of financial and medical research and low-end services such as call centers. This chapter examines the factors that give rise to a national focus on skills development in both countries. It briefly describes the skills development system in Singapore and the initial progress and potential in India’s outsourcing sector. The goal is not so much to describe skills development institutions as it is to use a framework employing concepts of high-skills equilibrium and high-skills ecosystems to assess the capacity of countries to improve skills quickly, as well as the policy options for governments seeking to develop their workforces.6

The Imperative for Skills Development: Singapore and India Singapore’s programs for skills development began in the late 1970s with the emergence of lower cost producers, especially in the electronics sector in Malaysia and the Philippines. Until then Singapore, like South Korea and Taiwan, had adopted an export-oriented industrialization strategy primarily based on comparative advantages in low-cost labor.7 Threatened with lower cost competition, Singapore resolved to attract higher value-added investment by mandating (through the tripartite National Wages Council) double digit wage increases for three years, successfully driving out low-cost investors. Since then Singapore has gradually evolved a highly effective and interlinked system that continually improves skills development. India, on the other hand, has always had a skills surplus for its development needs. With an export-substitution industrialization policy and excellent education institutions, India did not face serious manpower shortages. In fact, given the lack of opportunity within India, many Indians left for the United States in search of advanced degrees and better economic opportunities. As a result, the prevailing wisdom was that India’s problem was not a lack of higher level skills development institutions, but a shortage of primary education. However, the explosive growth of software outsourcing in the early 1990s and business process outsourcing during the early 2000s turned this argument on its head. The data collected by the government on the outsourcing industry is classified into two categories: IT (software services) and ITES-BPO (IT enabled services and business process outsourcing). Although the industry has changed dramatically since 2000 and the distinctions between these two categories have blurred considerably, Tables 7.1 and 7.2 provide some evidence of the significance of the industry in terms of size, contribution to GDP, and exports.

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Adjusting to Globalization Through Skills Development Strategies Table 7.1

129

Indian Outsourcing Market (defined as software services and business process outsourcing), 1997–2003 Share of GDP (%)

Size (US$ billions)

Year

Total

Software Services

BPO

Total

Software Services

BPO

1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004

1.22 1.45 1.87 2.71 2.87 3.09 3.82

0.3 0.72 0.97 1.24 1.81 2.07 2.38 2.64

0.5 0.48 0.63 0.9 0.8 0.71 1.18

5.02 6.01 8.36 12.41 13.71 15.83 19.62

1.859 2.936 4.011 5.539 8.298 9.958 12.314 15.574

0.565 0.93 1.455 2.5 3.6

Source: Data obtained from National Association of Software and Service Companies (NASSCOM), New Delhi, India, available at www.nasscom.in.

Table 7.2 Year 1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004

Indian Outsourcing of Industry Exports, 1996–2004 India Export Earnings (%)

Size (US$ billions)

3.2 4.9 7.6 10.6 13.8 17 20.3 22.3

1.1 1.759 2.6 3.962 6.217 7.647 9.545 12.3

Source: NASSCOM, available at www.nasscom.in/Nasscom/templates/NormalPage. aspx?id=1102.

As these tables indicate, the size of the combined outsourcing industry was $19.6 billion in 2004 and accounted for 21.3 percent of export earnings, while contributing 3.8 percent of GDP. This growth resulted in skill shortages, and estimates suggest that there could be a serious shortfall of about half a million software professionals and employees in the low-end outsourcing sectors by 2009. Further, the growing diversity in the types of outsourced work leads to other shortages as well. In response, for the first time, both state and central governments have turned their attention to the issue of skills enhancement and are working with the private sector to achieve it. The next section describes briefly the steps taken in Singapore and India to develop workforce skills.

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Skills Development Systems in Singapore and India Skills development in Singapore is a “system” because it evolved over the years into a configuration of interrelated policies and institutions all geared toward improving skills in the city-state. In contrast, India’s efforts really do not constitute a system because there is little or no interaction among its components. However, by 2005, India was only starting to reexamine its education and skills policies. Singapore Studies of skills development in Singapore suggest that five key features characterize the system.8 The first is the tight coupling between economic development strategies and skills development policies. The government was able to mold its national human resource policy to provide the skills necessary for each phase of economic development. During the import-substitution industrialization period (1959–1965), the national focus was on improving basic education and developing secondary vocational institutions and polytechnics that not only provided the science, math, and technical education required for economic development, but also met short-term needs for trained technicians. With the adoption of an export-oriented industrialization phase (based on cheap labor and foreign investment) from 1966 to 1973, attracting foreign investment became the government’s main focus. Because foreign investors needed technically trained manpower, the government’s response was to increase the number of technical education institutions and to articulate the “skills and technology transfer model” in which foreign investors were given incentives to participate in technical education. The higher value-added, export-oriented strategy adopted during Phase 3 (1973–1984) required improvements in both general skills (vocational and technical training for occupations such as fitters, electricians, and welders) and specialized skills germane to the industries that were growing as a result of foreign investment. The policy response was threefold: (1) the government established a large “general skills” supplier, the Vocational and Industrial Training Board; (2) the Economic Development Board (EDB) intensified its model of technology transfer for meeting specific skills by inducing foreign companies with subsidies and grants to take the initiative in training; and (3) policymakers reformed the education system, creating a German-like dual channel to funnel high school students into vocational institutions or colleges. The government reformed curricula at the National University of Singapore and created the Nanyang Technological University and two new polytechnics. From the mid-1990s, economic development policies sought to enhance

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creativity among the young and develop entrepreneurial risk-taking behavior. This new focus of economic development moved toward making Singapore a major investment force in the region and responded to industry feedback that although Singapore graduates were analytically sound and could execute well-defined tasks, they were often stymied when problems and instructions were not clear or when they faced situations that demanded innovativeness and creativity. This resulted in revamping the basic education system away from exams to projects that stimulate creativity. The skills and technology transfer model described earlier is the second key characteristic of the Singapore system. It provides significant incentives for foreign investors to establish training centers in collaboration with the state, while guaranteeing them the right to hire the training center graduates. This ensures that foreign investors do not face skill shortages in a tight labor market by giving them some control over the supply of skilled people and incentives such as land, buildings, tax relief, and, in some cases, preferable market access and licensing. Although the government initiated these arrangements with two firms (Rollei of Germany and Tata of India), it expanded the concept to start joint-country institutions. The logic here was that if foreign governments participated with the Singapore government in establishing technical training institutions, more foreign corporations would be comfortable investing in Singapore and, once they came, they would also be induced to participate in training.9 This model of cost sharing with foreign investors and the Singapore government (through the EDB) was successful not only at generating the skills needed in the short run, but also in creating centers of training for transferable skills (or, general human capital) by harnessing foreign firms’ unique expertise. The third characteristic of the Singapore system was the creation of the Skills Development Fund in 1984. Legislation requires employers to contribute 1 percent of the gross salary of all employees earning less than S$1,500 per month to the skills development fund and allowed them to recoup 80 percent of their contribution by requesting training grants for skills development. The training grants are structured to provide training for skills in demand. Firms with training plans covering over 50 percent of the workforce can receive larger grants but companies continuing to use lowskilled workers in low-cost operations are penalized. By 1996, roughly 33 percent of the workforce was receiving training, and corporations were spending 3.6 percent of their payroll on training. Attention to long-term skills development through reform of education policy is the fourth characteristic of the Singapore system. The government has continuously improved the education system to meet Singapore’s human resource needs. In 1979, it introduced the New Education System to improve the quality of Singapore’s primary schools and revamped education policy again in 1990 to increase the creativity in school children by

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changing the structure of examinations and adding project-based methods of evaluation, more research and term papers, and other methods to encourage students to “think outside the box.” The final, and perhaps the most important, characteristic of the Singapore system are the lines of communication and structure of interaction that enable the system to work efficiently. 10 The EDB under the Ministry of Trade and Industry (MTI) became the architect of the technology transfer model. The National Manpower Council (NMC) facilitates interaction among the MTI, the Ministry of Education, and the Ministry of Manpower—the three government ministries that are involved in upskilling—permitting them to coordinate their work while the NMC retains overall responsibility for matching demand for and supply of skills in the economy. The Productivity and Standards Board (PSB) focuses on productivity improvements in industries and firms and points those firms to appropriate skills training institutions. The PSB thus focuses on workers who are already employed, while other institutions (both training and educational) focus on those about to enter or reenter the workforce. Interaction takes place among these ministries through committees.11 Frequent job rotation among leaders of these institutions succeeded in creating a unity of purpose for the system. Further, given Singapore’s tripartite system—management, labor, and government representatives sit on the boards of most public institutions—also provided a channel to keep the training and skills development programs focused and relevant. The strong coordination of administrative departments, the variety of institutions and policies included in the system, and the feedback loops built into the process suggest a national and coordinated effort to improve workforce skills in Singapore. India Skills development in India is not yet a system because there is little connection between policies and institutions and little uniformity of purpose. Basic education in India is the joint responsibility of the central government and the various states, resulting in considerable duplication. Both central and state governments run schools, colleges, and technical institutions. At the highest level, for example, are the six world famous Indian institutes of technology (IIT), which were established by the Ministry of Education. However, most states and the private sector run their own institutes of technology, although not all are of the same quality. And both private and public sectors run colleges, although only the states operate universities. Both central and state governments provide vocational education and a Central Apprenticeship Scheme (modeled on the German system) helps provide trained blue-collar workers for manufacturing. Private institutions also provide a wide range of skills training.

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India has few problems with tertiary education although it faces serious deficits in primary and secondary education. The Ministry of Science and Technology was established in 1971 to formulate science and technology policies and implement, identify, and promote “frontline” research throughout the science and technology infrastructure. The ministry, through its subordinate Department of Science and Technology, also provides funding for domestic institutions and research programs. The Department of Scientific and Industrial Research, a technology transfer organization, and the Department of Biotechnology, which runs developmental laboratories, are the ministry’s other administrative elements. The integration of science and technology planning with national socioeconomic planning is carried out by the Planning Commission. Scientific advisory committees in individual socioeconomic ministries formulate long-term programs and identify applicable technologies for their particular areas of responsibility. Seven other institutions are also involved in human resource development. At the national level, government organizations provide hands-on research and development at the ministries of atomic energy and space, the Council of Scientific and Industrial Research (CSIR), which is a component of the Ministry of Science and Technology, and the Indian Council of Agricultural Research. Organizations that support research and development include the departments or ministries of biotechnology, nonconventional energy sources, ocean development, and science and technology. State government research and development agencies are usually involved with agriculture, animal husbandry, irrigation, public health, and the like, and are part of the national infrastructure. The four other major components are the university system, private research organizations, public-sector research organizations, and foundations. Little evaluation has been done of how all of these policies and institutions are coordinated. The total output of graduates from India’s 253 universities and 13,150 colleges is roughly 2.5 million a year although no national data are available on how many of these graduates find jobs or on how much vocational training is provided by the central government, state governments, and the private sector. In the outsourcing sector, skills shortages loom in several areas. Tables 7.3 and 7.4 provide a general picture of skills shortages based on the projected annual growth rates of the outsourcing industry. These are data based on my estimates as well as estimates from NASSCOM (National Association of Software and Service Companies), the industry association. These tables suggest that shortfalls plague both the high and low ends of the outsourcing industry. In the software export industry, the average intake per year is about 70,000 software engineers and professionals. While the output from engineering schools has increased steadily and numbered about 400,000 in 2004, less than a third of them had information technology

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Table 7.3

Macro HR Issues: Human Resources Supply for Software Services Industry in India

IT service exports Domestic IT services Products and technology services Total demand (2009) Current pool Estimated supply based on current trends Total supply (2009) Shortfall

460,000 520,000 140,000 1,120,000 360,000 525,000 885,000 235,000

Sources: Author’s estimates are based on field research and NASSCOM, available at www.nasscom.in/Nasscom.

Table 7.4

Macro HR Issues: Human Resources Supply for BPO Industry

Total output of graduates from 253 universities and 13,150 colleges (millions) Current employment in BPO industry, 2004 Expected annual intake over next 3 years given 55k, 2004 Some English-speaking ability (30 percent) Effective supply of English-speaking graduates available to work Estimated that about 30 percent of graduates will work in this industry Current average turnover in BPO space Estimated requirement by the year 2009 at CAGR Shortfall by 2009

2.46 250,000 75,000+ 738,000 150,000 50,000 40 percent 1,003,000 250,000

Sources: Author’s estimates based on field research and NASSCOM, available at www.nasscom.in/Nasscom.

qualifications to work in this industry. By 2005, shortages of trained personnel appeared in data warehousing and in several IT-related fields, including IT security and programmers in JAVA, SAP, ERP, J2EE, and C++. On the quality front as well, the number of engineering PhDs, who are critical to the development of the software industry and to engineering education in general, decreased from 675 in 1987 to 375 in 1995. In the lower end BPO industry, there seems to be a quantity problem given shortages in the supply of English-speaking people who can work in call centers, and the industry is complaining about the weak educational infrastructure to produce more English speakers.

Assessing Skills Development Systems How should national skills development systems be assessed? There are no ready-made frameworks or measures for this purpose.

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General and Specific Approaches Generally, it is possible to assess the effectiveness of skills development policies and institutions based on their objectives. Macro data can be useful. Economic growth and foreign direct investment were key variables driving skills reform in Singapore. Among Singapore’s agencies, the EDB prefers to look at economic growth and FDI, while the PSB prefers to focus on productivity increases in the economy. Table 7.5, for example, provides such macro data for Singapore, where it is relatively easier to use this data to assess the effectiveness of skills development given our knowledge of the objectives of policies in Singapore. Similar macro data are less useful in India, where there is no system of skills development and which has a much larger and more diversified economy. Data on skill mismatches may also be useful. Arguably a skills development system is functioning well if there are no shortages or high levels of unemployment. There are always skills mismatches in countries because education systems rarely keep pace with evolving technologies, and it is

Table 7.5

General Macro Indicators in Singapore, Selected Years

Year

GDP Growth Rate

Per Capita GDP at Current Market Prices in Singapore ($)

1965 1970 1975 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

6.6 13.4 4.0 9.7 –1.6 2.3 9.7 11.6 9.6 9.0 7.1 6.5 12.7 11.4 8.0 7.6 8.5 0.1 5.9 9.9

1,567 2,798 5,941 10,394 14,226 14,225 15,487 17,819 19,854 21,812 23,604 24,730 28,105 31,175 33,404 34,928 36,963 35,040 35,958 39,585

Growth Rates of Foreign Direct Investment

Change in Labor Productivity

Literacy Rate 60.2 68.9 76.2 82.3

10.5 21.2 19.5 14.7 21.3 9.4 3.84 10.77 18.86 12.9 11.5 19.2

5.0

9.1 6.4 3.3 1.2 2.2 –2.3 5.8

87.7 88.4 89.1 90.3 90.3 90.8 91.3 91.8 92.2 92.8 93.1

Source: Kuruvilla, Erickson, and Hwang, “An Assessment of the Singapore Skills Development System,” 2002.

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therefore difficult to determine if the data suggest a serious problem with national human resources or just a time lag issue. In a small economy such as Singapore’s, these data are more meaningful, yet still cause problems that can be seen in Table 7.6. The data in Table 7.6 are not easily interpretable given that Singapore was hit by the Asian financial crisis during the period. This is probably why unemployment figures were lower than vacancy rates in 1996 and 1997, but higher in 1998 and 1999. The problem of retrenched older workers who are not capable of being trained also affects these figures. Similar data are not available in India. Whether or not a skills development system is functioning well can also be assessed by evaluating components of the system. That is, if each institution is producing more graduates that meet industry needs, and if each skills development policy is successful in changing the behavior of the firms, institutions, and individuals to which it applies, then one could argue that the system is working well. This of course does not say anything about the synergistic efforts of an entire system, but at least it addresses the efficacy of individual policies and institutions. Data on efficacy of different components in Singapore suggest that the skills development funds work well in increasing corporate training. Educational institutions are producing more and relevant skills and vocational training institutions are steadily increasing their output of graduates, all of whom are being placed in the industry.12 Average levels of productivity growth remain high in Singapore. Measuring the “quality” of education is also a way of assessing the skills development system. One key quality measure focuses on comparative performance of students. A popular one used in the United States is to compare the performance of US students to international students on standardized tests in specific grades or age groups. The International Math and Science study, for example, measures the performance of thirteen-year-olds in math and science across a number of Western and Asian nations.

Table 7.6

Unemployment and Job Vacancies, 1996–2000

Unemployment Year Rate 1996 1997 1998 1999 2000

2.0 1.8 3.2 3.5 3.1

Unemployment Numbers (thousands)

Job Vacancy Rate

Job Vacancies (thousands)

37.3 34.8 62.7 69.5 65.4

4.8 4.4 1.9 2.2 2.8

44.2 42.0 18.3 20.0 27.6

Source: Kuruvilla, Erickson, and Hwang, 2002.

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Singapore students have consistently ranked at the top in studies of both thirteen-year-olds and eighteen-year-olds. Here again there are no data from India because it has not participated in these comparisons, which are only useful for countries that have universal and relatively standardized education, neither of which India has yet achieved. Thus, evaluating individual components provides useful data on efficacy, but linking changes in economic growth rates and productivity changes to overall skills and education improvement is often difficult because data are not available or are problematic for drawing causal inferences. In the Singapore case, however, all of the evidence—the performance of individual components, the macro data on growth and foreign investment, data on skills mismatches, and information on productivity improvement—does paint a consistent picture of workforce skills improvement. This is consistent with Singapore’s stated goals and the objectives of policies and institutions, indicating a strong association between skills improvement and economic performance. However, India does not have very much information on goals and the quality of its programs. Although rough data on quantity (e.g., graduates of institutions) exist or can be collected, little of the outcomes data can be effectively linked to quantity data. However, the emergence of the outsourcing industry (both high and low end) makes it easier to evaluate skills development in this relatively narrow sector of the Indian economy. High-Skills Equilibrium Approach Given the problems with assessments of outcomes noted above, a more useful framework for policymakers in developing countries may be to examine whether their nations have the capacity to generate and improve skills continuously. This approach raises the issue of what are appropriate policies, institutions, and practices and how well they are working, and requires more “systemic” thinking about what is required for success. An approach developed by D. Finegold and D. Soskice focuses on whether or not the institutional conditions for moving into a high-skills equilibrium (HSE) exist.13 The basic underlying tenet of this approach is that countries must have the essential institutional prerequisites enabling them to move to HSE. The concepts can be applied more universally without getting bogged down in the measurement of the efficacy of individual components or institutions. Countries can be compared by whether or not the prerequisites exist. If they do, then those nations can be said to have the potential to move toward high-skills equilibrium. Having the institutional prerequisites does not, of course, guarantee movement into HSE; the skills development institutions also must function effectively as they did in Singapore.

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Finegold and Soskice’s perspective suggests that movement to HSE requires action on behalf of all actors in the system including governments, institutions, firms, and individuals. Individuals, for example, must be willing to invest more in education and training, firms must be constantly motivated to improve employee skills, and governments must reduce skills shortages. Three institutional and market prerequisites are necessary: (1) factors that force organizations to take a long-term outlook (mostly institutions that counter pressures from capital markets to focus on the short term); (2) factors that encourage interfirm cooperation within a competitive environment; and (3) export orientation, or exposure to international competition. Singapore Finegold and Soskice contend that competitive capital markets and shortterm profit goals prevent firms from making longer-term decisions. Although capital markets in Singapore are competitive and exert the same pressures, three other factors encourage a longer-term view of skills development. First, a tight labor market in Singapore forces employers to take a longer-term perspective in employee retention and training. Singapore has been at full employment levels since the mid-1980s and it must import both skilled and unskilled labor. While such tightness could result in considerable turnover (as, for example, it did in the Silicon Valley of California), real turnover rates in Singapore are low and, indeed, declined during the 1990s (see Table 7.7) due to employers’ incentives to retain employees and an institutional and cultural setting that discouraged poaching and job-hopping. Second, labor union activity also encourages job security, and macrolevel tripartite agreements (such as the mechanisms put in place during the Asian financial crisis) limit the ability of firms to layoff and retrench workers freely. In particular, the government plays an important role because its long-term plans are built around a consensus among politicians, civil servants, business, and labor. Thus, long-term planning is not derailed to meet short-term needs. This is one of the benefits of the tripartite structure of Singapore’s industrial relations. Third, individuals also invest in more edu-

Table 7.7 1988 3.9

Turnover Rates in Singapore, 1988–1999

1993

1994

1995

1996

1997

1998

1999

2000

3.2

3.1

3.0

2.8

2.7

2.1

2.2

2.5

Source: Kuruvilla, Erickson, and Hwang, 2002.

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cation and training largely because there is, in Finegold and Soskice’s terms, a well-defined high-status structure of qualifications. Success is measured by qualifications, position, and income and there is a clear return to investment in education. Thus, significant pressures make government, firms, and individuals take a longer-term perspective. With regard to the second prerequisite—the existence of cooperation in a competitive environment—Finegold and Soskice argue that firms need to cooperate in providing training and skills development. Failure to cooperate has serious consequences, notably the fear that some firms will poach employees from others that invest in training, something that is more likely to happen in tight labor markets. Despite a tight labor market in Singapore, cooperation among firms in providing skills training is largely a result of government initiatives. The EDB’s model of technology transfer and skills development brought together firms initially through collaborative training centers organized by the Singaporean and other governments and later through industrywide training centers operated by the government. Through these centers, the private sector provided critical skills training to meet their own needs and the companies providing the training were guaranteed that workers would not, at least in the short run, take their skills elsewhere. The incentives provided to firms to invest in training, and the government’s own willingness to fund or build the administrative apparatus for the delivery of skills to the entire industry, are critical to continued cooperation. In short, government-led strong institutional mechanisms allow firms to cooperate and share information on developing skills for their industry. The Precision Engineering Institute in Singapore, which uses the expertise of many firms to train people for the entire engineering industry, is one such example. Establishing such cooperative links between otherwise competitive firms is only part of the process of achieving high-skills equilibrium (HSE). Firms are generally not in a position to look at occupational needs across sectors as do state manpower planning departments. However, macroinstitutional forums for negotiations between the primary economic actors and government officials (corporatist institutions) enhance the movement toward an HSE. Such corporatist institutions, argue W. Streeck and P. C. Schmitter, are successful at forging a consensus among decisionmakers to shift investment and skills to high-growth sectors and to deal with the pain of firm restructuring.14 Singapore is ideally placed on this dimension given its corporatist arrangement where labor’s links to the ruling political party make it the third partner with government and business. In Singapore, the governing boards of all the major skills development institutions are tripartite in nature, and this corporatist arrangement also devised effective policies for dealing with firm restructuring during the Asian financial crisis. At the firm level as well, internal cooperation for continual innovation

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and change motivate workers to gain new skills. The degree of cooperation internally largely depends on the type of labor-management relations in firms and on the institutional features of the industrial relations system. The government-prescribed enterprise union structure keeps firm-level labormanagement relations cooperative as do industrial relations regulations. Legislation limits the subjects of bargaining (job assignments, promotions, transfers, and layoffs are not negotiable), and administrative rules circumscribe the right to strike. Singapore’s tripartite structure, in which unions have a voice in national decisionmaking, coupled with a consistently high level of economic growth, keeps industrial relations harmonious. The fact that both labor and employers are unified (97 percent of local unions are affiliated with one federation, the National Trade Union Congress [NTUC]), and that there is only one association of employers (the Singapore National Employers Federation [SNEF]), also enhances tripartism. The third critical institutional prerequisite is the degree of exposure to international competition, which acts as an impetus to a high-skill strategy for the government, firms, and individuals. Singapore’s economic development since 1965 has been based on an export-oriented industrialization strategy. The government responds to constant competitive threats from other Asian economies—initially from South Korea, Taiwan, and Hong Kong, and more recently from Malaysia, Philippines, China, and India— and Singapore-based firms are exposed to international competition, making the city-state a good example of P. Katzenstein’s argument that openness of an economy is positively correlated with the development of institutional structures designed to attract high-skill companies.15 If having all of the key prerequisites for the development of high-skills equilibrium is a useful way of assessing skills development systems, then Singapore seems to be a good example of a nation that has the capacity to constantly reach new levels of HSE. India Unlike in Singapore, where skills development takes place throughout the economy, in India it is currently crucial primarily to the outsourcing industry (software services and business process outsourcing [BPO] industries). Table 7.8 provides an indication of the rapid growth in this industry. The Indian outsourcing sector performs very differently from Singapore with respect to the institutional prerequisites for high-skills equilibrium. India’s capital markets have not yet developed competitively to the point that they force actors to focus on short-term results. Stock ownership is dominated by banks and insurance companies that value steady, longterm returns and the mutual fund industry is relatively new. But a nascent venture capital industry dominated by US firms is growing steadily, bring-

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Adjusting to Globalization Through Skills Development Strategies Table 7.8

IT and ITES Industry in India: Market Projections, 2003–2006

Year

Domestic IT Services ($ billions)

Service Exports ($ billions)

ITES (BPO) ($ billions)

Total ($ billions)

2003 2006 2009 2012

2 5 13 29

8 15 28 55

3.6 7 21 64

12 27 62 148

Contribution to GDP Employment (percent) (millions) 3.09 4.8 7 12.3

0.7 1.2 2.4 5

Source: National Association of Software and Service Companies, available at www. nasscom.in/Nasscom/templates/NormalPage.aspx?id=1102.

ing a shorter-term focus on profits. And firms in the BPO sector, given the newness of the industry, also have to think fairly short term, although high rates of turnover (50–60 percent in call centers in voice-based processes, 20–30 percent in nonvoice-based processes, and 15–20 percent in the higher-end software services industry) are forcing firms to take a longer view of investing in employees to improve retention rates. The shortage of manpower referred to in Tables 7.3 and 7.4 also pressures governments and firms to take longer-term views. Several state governments have begun to intervene in the industry. The state of Kerala introduced phonetics into the undergraduate curriculum to increase the number of English-speaking graduates. The state of West Bengal is developing special syllabi to prepare graduates for the BPO industry. NASSCOM, the industry association, is helping universities to increase the quality of their syllabi while exhorting the government to create new institutes of information technology with BPO specializations. On the other hand, there is no institutional basis for job security in this industry. Unlike in Singapore and in India’s manufacturing sector, where job security is guaranteed by union activity and backed by industrial relations legislation that makes layoffs and retrenchments a practical impossibility, the BPO sector is not unionized and does not have the benefit of such protective legislation.16 The newness of the industry and the high salaries paid for entry level call center jobs (Rs. 10,000 per month)—which for college graduates was a salary almost 2.5 times what any other job would pay in 2005—encourage young employees to hop from one call center job to another. Thus, short-term thinking pervades the industry. In the software sector, the shortage of professionals has also encouraged movement among young professionals looking for jobs that will enhance their skills. Salaries in both sectors have grown at the rate of 15 to 20 percent a year. However, by 2005, the high turnover in the industry was beginning to force firms to take a long-term outlook, particularly to control the training

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and recruitment costs that were increasing rapidly due to high turnover. Firms began introducing human resource practices geared to retain employees. They included creating tie-ups with educational institutions that allowed employees to “learn while they earn” at their current jobs, introducing career ladders and growth opportunities within the industry, providing cross-functional training, introducing more incentives tied to tenure, and introducing better general human resource management practices. In sum, both firms and governments began to face pressures to think longer term. With regard to collaboration in a competitive environment, both software and low-end outsourcing industries in India exhibit a remarkable lack of collaboration. Strong competition for employees and poaching is rampant. Some large firms in the call center industry unsuccessfully attempted to reach a no-poaching agreement. NASSCOM began a series of activities to solve some of the industry’s problems and to strengthen collaboration among competing firms, including creating a common certification for BPO training, lobbying the government to open new institutes of technology with BPO specializations, and promoting an industry code on hiring practices, contractual agreements, and salaries that may result in a reduction of turnover by lowering the incentives to job-hop. Finegold and Soskice note that macroinstitutional forums for negotiations between the primary economic actors and government officials enhance the movement toward HSE. While a corporatist (tripartite) structure accomplishes this in Singapore, India has no such parallel arrangement for industrial relations.17 However, the centrality of the outsourcing industry to India’s exports and, consequently, its economic development, has initiated dialogue among NASSCOM, state and central governments, the central and state ministries of education, and the private sector. By 2005, all of the key actors in skills development began to discuss ways the country can help build the industry. NASSCOM, government, and the private sector began interacting regularly to decide on key issues facing the industry, such as bandwidth costs, bandwidth capacity, standards on data security, new legislation, new educational institutions, new training institutions, and ways of improving the reputation of the industry. The third critical institutional prerequisite, exposure to international competition, is clearly present in the Indian outsourcing industry. The industry largely caters to the international market, particularly the United States and the United Kingdom, and the industry accounts for 21 percent of India’s export revenues. At the low end of the industry—in call centers and elementary software—competition is growing from the Philippines, China, and South Africa, and in the high-end sector from Russia, China, Singapore, Israel, Hungary, the Czech Republic, and Romania. In 2005, India still firmly led the market. Although estimates of market share vary dramatically,

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average estimates suggest that India had 60 percent of the business processes outsourced to the third world countries. Thus, Singapore’s system seems to have the institutional prerequisites for attaining a high-skills equilibrium and India’s outsourcing industry in the high end and low end does not. Although some movement has taken place among key actors in India toward developing a longer-term outlook, the industry’s capacity to move into high-skills equilibrium remains weak.

Long-Term Evolution and Sustainability: High-Skills Ecosystems Both Singapore and the center of the outsourcing industry in India (Bangalore) have publicly articulated the long-term vision of becoming a high-skills ecosystem like the Silicon Valley in the United States. Although Singapore and the high-end outsourcing industry in India have (or may develop) all of the institutional prerequisites for attaining HSE, the key question is whether they will be able to create the kind of high-skills ecosystem that is found in the Silicon Valley. The likelihood of achieving these goals can be assessed using D. Finegold’s concept of “high skill ecosystems.”18 Both Finegold and M. Kenney have written about the factors that are important in creating selfsustaining high-skills ecosystems such as those found in the Silicon Valley, Cambridge (UK), and the Boston Corridor.19 Finegold uses a biological analogy to identify factors—a catalyst, fuel or nourishment, a supportive host environment, and a high degree of interdependence for organisms to grow—that create a self-sustaining high-skills ecosystem. Catalysts Key stimulants or catalysts in the growth of Silicon Valley were the surge in US Department of Defense funding in the 1940s and 1950s along with the growth of Hewlett Packard and the links between Stanford and IT industry. Research universities played a vital role in the movement toward HSE. In Asia the catalysts have been different. Singapore’s universities are not similar to Stanford and Berkeley in terms of either fundamental research accomplishments or in incubating new high-tech start-ups. It is unclear whether Singapore’s government-owned educational institutions can become like Stanford or the University of California, since it would require major changes in the way universities are managed and run, particularly in terms of autonomy, academic freedom, research, and teaching. As S. Kuruvilla, C. Erickson, and A. Hwang point out, although government efforts at develop-

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ing the infrastructure for the high-technology industry are surely a “muscular” stimulus, universities also need to provide the “brain” stimuli. Nor is it clear that in India basic research is a driver. By any measure of basic research, India falls short. Government R&D spending is only .084 percent of GDP compared to 1 percent in China and 3 percent in South Korea. In 2001, India had filed only 179 patents, compared to 98,594 by the United States and 266 by China. On the other hand, in 2003, Indian pharmaceutical firms were among the top ten patent filers in the world. However, big firms in India are not research firms, and the culture of entrepreneurship that is the hallmark of universities in Silicon Valley does not yet exist in the IITs in India. Nourishment Finegold observes that in the United States universities turn out thousands of well-educated engineers, scientists, and managers, and synergistic relationships between research universities and surrounding firms that hire their graduates become self-sustaining. This steady intake of human capital is coupled with the availability of financial capital. In California, the venture capital industry played a key role in the development of the Silicon Valley. Founders of the first generation of start-up firms sustained the process by sponsoring the second generation. While Singapore does turn out graduates, it is not clear that they turn out enough. The government planned to boost the number of research scientists from 7,900 in 1986 to 13,000 in 2000. By 2004 the government reported nearly 19,000 professionals in research and development.20 However, it is also clear that much of this demand can only be met through immigration rather than self-generation. Second, Singapore does not have a strong class of venture capitalists. India provides a steady supply of human capital from the IITs and regional institutes of technology, but many of the high-quality graduates do not work in Indian industry. Instead, they migrate to the United States to attend US graduate schools. On the other hand, the links between industry and academic institutions are growing rapidly in the big metropolitan areas. For example, TCS (India’s largest software firm) is closely linked with the computer science department at IIT Kanpur, the M-Tech program at IIT Chennai, and the Mathematical Modeling program at IIT Chennai. IIT Mumbai has research programs financed by Boeing, Honeywell, Microsoft, Sun, and Hitachi. IIT Delhi has an industry-financed applied research center in electronics and another center for biomedical engineering, and the software companies in Bangalore have jointly supported the creation of the Indian Institute of Information Technology to cater to their education and research needs. Thus, industry-academic linkages are growing in India to support this industry, although the IITs do not attract a large number of doctoral candidates and researchers, who prefer to go to the United States instead.

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Similarly, the venture capital industry geared toward seed capital funding in India is weak and lacks expertise in judging the potential of start-ups. There is no supportive environment similar to that in the Silicon Valley, where numerous “business incubators” allow technology experts to meet and work with venture capitalists. The venture capital industry is still in its formative stage in India and is growing mainly with the entry of US venture capital firms. Supportive Environment A critical ingredient for skills development, according to Finegold, is the existence of a supportive environment, including basic infrastructure, transport and communications, science and technology parks, living conditions that are attractive to knowledge workers (cultural and leisure activities, schools, and proximity to others like themselves), and a regulatory regime that supports innovation and risk-taking (flexible regulations regarding working hours, relative ease in starting a business or taking a business public, and fair and reasonable bankruptcy laws). On this dimension, Singapore’s record is mixed. The basic infrastructure is excellent but it is not clear that Singapore does very well in terms of creating a climate that is attractive to knowledge workers or if regulations and social norms encourage risk-taking. A country with a free society and a free press tends to be more attractive to knowledge workers, but Singapore has been known to be rather heavy-handed with those who criticize the government. Further, the encouragement of entrepreneurial abilities requires both supportive legislation (bankruptcy laws) and a society in which failure is tolerated. Again, the extent to which this is true of Singapore is debatable. It is not clear whether a truly innovative environment exists, despite the fact that the government is mandating creativity in schools and college curriculums. Creativity and innovation in business are a function of long-term forces, including freedom of expression, open and free electoral systems, and less intrusive and directive government. In India, deficiencies in the supportive environment could seriously inhibit the growth of self-sustaining high-skills ecosystems. These deficiencies include weak basic infrastructure, such as roads, urban transportation, water, electricity, and even the availability of bandwidth that is essential to the development of the information technology industry. Already, many firms in Bangalore are threatening to leave the city for other places such as Chennai and Mumbai where basic infrastructure is better. The availability of good schools, of which there is a shortage in India, is critical in attracting software professionals and their families. Considerable improvement is needed in educational and skills infrastructure in most Indian states and, although that is beginning, it will clearly

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take time before the conditions exist for a high-skills ecosystem. On the plus side, India is a democracy, and economic liberalization has brought with it a climate where people are beginning to take more risks and to innovate. Interdependence Between Actors in the Region The final element of a high-skills ecosystem is some degree of interdependence between the actors in the region. Finegold alludes to vertical linkages (e.g., Sun Microsystems and its various downstream and upstream business linkages) and horizontal linkages in the Silicon Valley through which firms work together. In Singapore, vertical linkages are strong because a few large state-owned firms (e.g., Temasek) play a significant role in the economy. In India, such vertical linkages are not well developed, although major software firms do create their own BPO arms (Infosys, one of India’s best known software firms has its own BPO arm called Progeon, and IBM has recently bought India’s largest BPO firm Daksh). Both Finegold and S. Barley and G. Kunda emphasize the importance of professional individual networks, citing examples of those in the Silicon Valley for programmers and software professionals.21 In Singapore these professional networks are still weak and in India they have not yet developed, especially in providing an opportunity for people in the industry to keep abreast of technical developments through seminars and other means. In sum, both India and Singapore need to make policy changes to facilitate their progress toward the Silicon Valley model. India needs stronger physical, financial, and educational infrastructures and Singapore must develop a climate that is more suitable for attracting knowledge workers and investments in basic research. High-skills ecosystems provide a useful framework for thinking about the policies needed for successful skills development.

Conclusion This chapter briefly describes the successful case of skills development in Singapore. Clearly the focus on upskilling was necessary for Singapore to compete effectively in the global economy. In India, the emerging focus on skills development in the outsourcing industry is both a consequence of globalization as well as a need for sustaining economic development. Evidence indicates that Singapore’s efforts have been successful on most dimensions. Although there is no standard or benchmark of best practices in national skills development, Singapore may be the only model among developing nations that meets Singh and Zammit’s criteria of a national concerted effort involving both the private and public sectors.22 If imitation

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is an indicator of success, then Singapore’s policies are successful, since its neighbor Malaysia has already adopted several aspects of Singapore’s system, including skills development funds and centralized human resource planning. Although some features of its system are unique, much can be learned from Singapore’s experience about the important principles that can be used by other developing nations. Of particular importance are three major principles—first, the linkage (administratively and conceptually) between economic development and skills development; second, the EDB’s model of technology transfer that takes advantage of the expertise of foreign investors to train local workers; and third, the capacity to induce the private sector to play a key role (in partnership with the government) in the skills training process and in training their own workforces. These three principles are transferable, although the specific institutions that other developing countries design to act on them may be very different, as is seen in India’s emerging outsourcing industry. The concept of high-skills equilibrium can help policymakers judge whether or not their countries possess the right institutional prerequisites and the concept of skills ecosystems offers them a guide to the institutions and linkages that are necessary to develop advanced skills. Unlike in other disciplines, such as macroeconomics, that have models and prescriptions based on theory and developed country experiences, little theory or research is available to guide policymakers in skills improvement. The framework used in this chapter may contribute to that end.

Notes 1. Koike, “Globalization, Competitiveness and Workers’ Skills”; Kuruvilla,” Globalization and Employment Relations: A Framework for Research.” 2. Lucas, “On the Mechanics of Economic Development,” pp. 3–42; Romer, “Increasing Returns and Long Run Growth,” pp. 1002–1036; Solow, “A Contribution to the Theory of Economic Growth,” pp. 65–94; Azariadis and Drazen, “Threshold Externalities in Economic Development,” pp. 501–526. 3. Wood, “Skill, Land, and Trade: A Simple Analytic Framework”; Godfrey, “Introduction,” pp. 3–11. 4. Singh and Zammit, The Global Labor Standards Controversy: Critical Issues for Developing Countries. 5. Kuruvilla, Erickson, and Hwang, “An Assessment of the Singapore Skills Development System: Lessons for Developing Countries,” pp. 1461–1476. 6. Finegold, “Creating Self Sustaining High Skill Ecosystems,” pp. 60–90; Finegold and Soskice, “The Failure of British Training: Analysis and Prescription,” pp. 21–53. 7. Kuruvilla, “Linkages Between Industrialization Strategies and Industrial Relations/Human Resource Policies: Singapore, Malaysia, the Philippines, and India”; Huff, “Patterns in the Economic Development of Singapore.”

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8. Kuruvilla and Chua, “How Do Nations Increase Workforce Skills? Factors Influencing the Success of the Singapore Skills Development System,” pp. 11–49; James, Sung, Green, and Ashton, “The Role of the State in Skill Formation: Evidence from the Republic of Korea, Singapore, and Taiwan,” pp. 82–96. 9. See Kuruvilla, Erickson, and Hwang, “An Assessment of the Singapore Skills Development System” for interesting examples and details. 10. See James, Sung, Green, and Ashton, “The Role of the State in Skill Formation.” 11. Ibid. 12. Kuruvilla, Erickson, and Hwang, “An Assessment of the Singapore Skills Development System.” 13. Finegold and Soskice, “The Failure of British Training.” 14. Streeck and Schmitter, Private Interest Governments: Beyond Market and State. 15. Katzenstein, Small States in World Markets: Industrial Policy in Europe. 16. Frenkel and Kuruvilla, “Logics of Action, Globalization, and Employment Relations Change in China, India, Malaysia, and the Philippines.” 17. Finegold and Soskice, “The Failure of British Training.” 18. Finegold, “Creating Self-Sustaining High Skill Ecosystems.” 19. Kenney, Understanding Silicon Valley: The Anatomy of an Innovative Region. 20. Report on Research and Development, available at www.singstat.gov.sg/ keystats/annual/yos/research.pdf. 21. Barley and Kunda, Gurus, Hired Guns and Warm Bodies: Itinerant Experts in a Knowledge Economy. 22. Singh and Zammit, The Global Labor Standards Controversy.

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8

Inclusive Governance and Democracy in Asia: Transitions and Challenges G. Shabbir Cheema

G

lobalization promotes democracy and social awareness in many ways. The use of modern communications such as the Internet and the media has increased public awareness of human rights violations, corruption among government officials, violence and human security, and child abuse. Advances in information and communication technologies and the reduction of transportation costs—two byproducts of globalization—have enabled nonstate actors at the national, regional, and global levels to form alliances against undemocratic policies and practices. This chapter examines changes in governance policies and practices and the movement toward the democratization of political systems in the Asia Pacific Basin. It briefly describes the evolution of democratic transition processes over the past few decades and the influence of internal and external factors that triggered the transition, especially the phenomenon of globalization, and discusses how the role of the state is changing to cope with globalization’s challenges. It focuses on free, fair, and regular elections as necessary building blocks for democratic transitions; anticorruption strategies in response to global movements to combat corruption and improve transparency in governance; and policies for the separation of executive and legislative powers. It also examines recent policies to promote decentralization through political devolution, the factors influencing their implementation, and changes dealing with the independence of the judiciary, the relationship between globalization and judicial reform, and local level good practices of access to justice.1

Globalization and Democratic Transition In today’s world, governance can no longer be considered as a closed system. The task of the state is to provide a secure and stable domestic social 151

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and economic environment—especially for the poor and other disadvantaged groups—through inclusive governance and democracy in order to adequately benefit from globalization. The process of globalization, in turn, reinforces the voices of the advocates of democratic governance at the local, national, and international levels. One of the most significant changes in the Asia Pacific Basin over the past fifty years has been the democratic transition processes taking place throughout the region. After about three decades of an authoritarian and centrally controlled political system, for example, Indonesia has decisively moved toward a genuinely pluralistic and participatory system. South Korea is now a rapidly consolidating democracy with civil society organizations that actively participate in the political process. The Philippines witnessed “people power” after the demise of the Marcos Regime. Thailand, with a historically centralized political system dominated by bureaucracy, has evolved into a democratic system with intense multiparty competition, systems of checks and balances between the executive and legislative branches, and constitutional provisions to ensure accountability and transparency. Other countries in the region, such as Malaysia, have gradually moved from “guided” democracy to more transparent and accountable systems. Japan and India, the oldest democracies in the region, have maintained their democratic structures, with a short disruption in the democratic process in the 1970s in India. Some countries in East Asia, including China and Vietnam, have been transitioning from socialist economies to market economies. While these countries are governed by a one-party system, economic liberalization policies and rapid globalization have had a positive impact on the public’s access to information and accountability of governments to national and international actors. Both internal and external factors have contributed to the regional spread of democracy. The internal factors include a rapid increase in educational levels and public awareness (South Korea, Malaysia), increased access to information about national and global issues (Thailand, the Philippines), and pressure from the subnational units of government and local communities for greater participation in the political process after lengthy authoritarian regimes (Indonesia, the Philippines, South Korea). Globalization is shaping a new era of interaction and interdependence among nations, economies, and people in the Asia Pacific Basin. Most of the command economies of the past have been transformed into market-oriented economies. Integration is taking place not only in the economic sphere, but also through technology and governance. New technologies are developing rapidly. Knowledge-based industries and skills are growing in importance. The economy is being increasingly integrated through an accelerated pace of trade and investment. Although globalization is not a new

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phenomenon, the present era is resulting in profound and far reaching changes in new markets (globally linked foreign exchange and capital markets), new tools (Internet links and media networks), new actors (the World Trade Organization and networks of global NGOs), and new rules (multilateral agreements on trade and intellectual property). Governments in some Asian countries fear the erosion of state sovereignty, as transnational organizations such as the WTO and the United Nations Commission on Human Rights (UNCHR) play more active roles in mediating issues of national concern and enforcement of international laws. Trade liberalization creates “winners” and “losers,” sometimes generating unemployment in selected industries and producing more inequality among low skills and high skills labor forces. It can also create domestic political instability. Other potential negative consequences of globalization include environmental degradation, the breakdown of indigenous societies, crossborder corruption, the global reach of terrorist and extremist organizations, and crime and narcotics. Despite these constraints, countries within the region recognize the potential opportunities provided by globalization. Even China, with its oneparty system, has engaged in a dialogue with the UN Commission on Human Rights to meet its obligations to the global human rights treaties and convention and reconcile its national human rights legislation with global norms and standards. China also has joined the WTO in order to benefit from the opportunities provided by globalization. The rapid pace of globalization has contributed to the changing role of the state and governance system in the Asia Pacific Basin. There is an increasing shift from control to regulation, with an emphasis on accountability and transparency in countries such as Malaysia and Thailand. This trend has occurred through the revolution in information technology, improved access to global media, the global movement for transparency and accountability, and the increased pressure from below for better access to government services. For example, Transparency International (TI), a Berlin-based INGO, has national chapters in countries that provide a forum for civil society, the private sector, and government functionaries to interact with each other to create public awareness about corruption. The United Nations General Assembly has passed a resolution requesting member states to design and implement strategies to combat corruption. Likewise, the Organization for Economic Development and Cooperation has approved an anticorruption convention, endorsed by member countries, that defines bribery of public officials in developing countries by multinational corporations as a criminal offense. Last but not least, international business wants regulations that are conducive to investment and not state controls that stifle private sector initiatives. The second shift has been in the promotion of partnerships among gov-

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ernment, civil society, and the private sector. The practice in Asia Pacific Basin countries shows that each type of partner has its strengths—the state in providing an economic and legal framework, the private sector in creating jobs that provide income to improve living conditions, and civil society in protecting rights of all citizens and facilitating their participation. Where these organizations work together, as they do in Japan and South Korea, they enhance the capability of society to deal with its economic and social problems. Of particular importance is the role of the civil society, which is increasingly called upon to help ensure the proper accountability of the state, in some cases to serve as an alternative channel for the provision of basic services, and defend the interest of the poor in national and global forums. In practice, countries in the Asia Pacific Basin have followed their own route to democratic transition. For a meaningful transformation to take place in Asia, it must be rooted in the current value systems of the people. Historically, Asian leaders have included those who introduced authoritarian and oppressive governance systems—especially soon after independence—as well as those who introduced inclusive systems. Political structures introduced during the colonial period coexist with traditional structures. Instead of promoting complementarities between the two, politicians sometimes exploit the symbols from religion or culture, especially where modern political structures have not been able to address economic, social, and political problems of the Asian societies.

Organizing Free and Fair Elections Free and fair elections provide the direct participation, choice, and ultimately accountability that translate into a higher degree of inclusion and, consequently, less alienation and cause for violent dissent. A number of factors contributed to the rise of elections in the Asia Pacific Basin in the 1980s and 1990s, including newfound cohesiveness of opposition forces, liberalization by autocratic leaders, information and communication technologies, and pressures from the civil society organizations and the international community. An election is both a process and an event. Over the past decade, several elections took place in the countries of Asia Pacific Basin that indicate their complexities and country peculiarities. The elections also illustrated a number of issues that are commonly faced by democracies during the electoral process: capacity of electoral management bodies, voter registration, voter education, electoral monitoring, constitutional framework, and legislation. In May 1998, Indonesian President Suharto resigned after thirty-two years in power. Amid economic, social, and political upheaval, the successor government pledged a more democratic form of government and initiat-

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ed the transitional process by calling for elections.2 The June 7, 1999, elections were remarkable for several reasons. They were the first competitive elections held in Indonesia since 1955; they featured fairly good electoral organization of a large geographic area (3,000 miles worth) and population in a short amount of time; and they were marked by a high level of participation, both on the part of the electorate and domestic civil society organizations. Voter turnout among Indonesia’s more than 112 million eligible voters was also extremely high—estimated at 92 percent—particularly among women. There were no political party boycotts and there was minimal violence, despite a seven-week delay in announcing the results. The 1999 elections were also noteworthy in that they were organized under a new legal framework that, while complicated, represented an improvement over the previous electoral legislation. Another important innovation of the June 1999 election was the involvement of political parties in its organization. Under the new law, political parties were allowed to organize and receive legal recognition; forty-eight of them did so and presented candidates for the elections. The law allowed and the Election Commission accredited domestic nonpartisan election monitors. An estimated 300,000 Indonesians, mobilized by numerous efforts, including that of the United Nations, observed the polls as nonpartisan election monitors. International observers also participated in the poll. Working in collaboration and with USAID funding, the National Democratic Institute (NDI) and the Carter Center sent one hundred observers from twenty-three countries to observe the polls. Both organizations maintained close coordination and cooperation throughout the election period with other international monitoring entities, including the European Union, the National Citizens’ Movement for Free Elections (NAMFREL), the Asian Network for Free Elections (ANFREL), and others. NDI and the Carter Center also worked with other international organizations to assist the electoral process, including the United Nations Development Programme (UNDP), the International Republican Institute (IRI), the International Foundation for Election Systems (IFES), the Asia Foundation, and the Australian Electoral Commission. In addition, NDI and UNDP operated a joint facilitation center for other international observer groups. The 1999 elections in Indonesia represented a sea change in governance in that country. They were remarkable for the progress Indonesians were able to make in a brief period of time. These elections cemented Indonesia’s transition to democracy and helped build civic participation and confidence in domestic political processes. This was evident in the elections for the National Parliament held in 2004, which by all accounts were considered free and fair and were accepted by parties as legitimate. In September 2004, Indonesia held its first and world’s largest direct presidential election, which was observed by national and international monitors to

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be free, fair, and transparent. The presidential election—in which Susilo Bambang Yudhoyono defeated the incumbent President Megawati Sukarnoputri by a margin of 61 percent to 39 percent—was a milestone in the country’s march to sustainability of an inclusive democracy and good governance. The February 2005 elections in Thailand led to an overwhelming majority for the Thai Rak Thai, the political party led by Thaksin Shinawatra.3 This was the first time in Thai history that a single party won the election outright—376 out of 500 seats in the parliament. Its main rival, the Democratic Party, won 96 seats. It was also the first time that an elected prime minister survived for a complete parliamentary term. The landslide victory has been attributed to Thaksin’s personal popularity and political savvy, rapid economic growth, and his government’s fulfillment of promises made during the 2001 elections dealing with medical care, debt relief for farmers, and microcredit for villagers. The voters who had been used to short-lived governments supported his style of leadership. However, concerns were expressed about the impact of this overwhelming majority and the effect of this leadership style on the consolidation and sustainability of democracy. These concerns included the conflict of interest between Thaksin’s role as prime minister and as head of the wealthiest family of the country, the impact of his business ties on policymaking, the increasing weakness of watchdog agencies, and control over significant segments of the media that led to his overthrow in a military coup in 2006. Despite this setback in Thailand, the quality of the electoral process has considerably improved in many countries of the Asia Pacific Basin. The electoral management bodies have become more proactive and independent of government control (India, Indonesia, Thailand, and the Philippines). Civil society organizations are playing a major role as electoral watchdogs in the Philippines. International monitors are increasingly invited even by previously reluctant governments to observe the fairness of elections. All of the countries have voter registration and education programs and are sometimes assisted by the United Nations, bilateral donors, and international NGOs.

Combating Corruption Corruption negatively affects the quality of democratic process in the Asia Pacific Basin countries. It weakens governance institutions, such as electoral management bodies, parliaments, political parties, and the judiciary. It negatively affects the poor. Despite some recent successes, the magnitude of corruption in the Asia Pacific Rim is such that it calls for concerted local,

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national, and global actions to promote accountability, transparency, and integrity in the political process. The participation of the Asia Pacific Rim countries in the global economy has led to new channels for corruption, which include multinational corporations bribing government officials to secure contracts. One of the most critical governance reforms in the region is to implement long-term strategies to combat corruption and improve integrity in governance in order to remain attractive to foreign investment and, more important, enhance political legitimacy and support of the government among citizens. Some of the recent cases of corruption in high places that made the headlines in the national and international news media show the complexity of the political and economic interests. In India, dot-com journalists conducted a sting operation on the country’s army brass and political leaders. After seeing the hidden camera shots, the president of Bharatiya Janata, the governing party, admitted that he had taken cash from a journalist who had posed as a businessman who wanted help to get a defense contract. The scandal led to the resignation of the president of the ruling party and the country’s defense minister. Political parties in India often raise cash from businessmen, sometimes through black money, which is not reported to the income tax authorities. In the Philippines, the former President Joseph Estrada was arraigned on July 10, 2001, on the charge of “plundering” the country while in office. He was accused of stealing or misusing $76 million during his two-and-ahalf-year presidency. Similar accusations had led to impeachment proceedings against him in 2000. When it appeared that he might survive impeachment, large-scale public demonstrations against him took place and led to the Supreme Court decision that he had lost his legitimacy. The military escorted him from the presidential palace.4 By 2004, Transparency International’s “Corruption Perception Index” showed the magnitude of corruption in the region vis-à-vis the global trends. 5 Six countries—the Philippines, Vietnam, Pakistan, Indonesia, Myanmar, and Bangladesh—ranked among the most corrupt countries in the world. Only New Zealand, Australia, and Singapore ranked among the least corrupt countries. In many cases, bureaucratic corruption and political corruption coexist and reinforce each other. In societies characterized by the concentration of economic and political powers in a few hands, the political and private sector elite are closely linked. In such circumstances, it becomes extremely difficult to ensure the accountability of ruling groups, even though the country might have a democratic structure. Corruption has emerged as a truly global political issue that requires a global response. The driving forces for change include increasing levels of education and political awareness around the world, availability of more

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information, and the proactive role of the media, all of which have forced political leaders to ensure greater accountability for their actions. The end of the Cold War and the wider democratization of developing countries have accelerated government responses to cross-border corruption. Globalization offers new development opportunities, because of rapid movement of capital, people, information, and enterprises from place to place. The emergence of an integrated international economy has also contributed to the perception of corruption as an issue with global ramifications. As a result, some countries have enacted and implemented successful anticorruption policies and programs that contain lessons for other countries. For example in Singapore, the People’s Action Party (PAP) made anticorruption policy one of its priorities in 1959, when it came to power. The government strengthened the powers of the existing Corrupt Practices Investigations Bureau (CPIB) that has reported directly to the prime minister since 1970. The bureau requires government ministries and departments to review their internal processes to reduce incentives for corrupt practices. The government has undertaken several steps to reduce incentives for corruption including increasing wages of civil servants and improving their working conditions, rotating officials, and increasing supervision.6 The case of Singapore shows the significance of an independent commission to combat corruption. In South Korea, the Seoul city government adopted the Integrity Pact (IP), an agreement between it and companies submitting bids that bribes will neither be offered nor accepted in public contracts.7 All bidders for the city’s construction projects, technical services, and procurement are required to sign the pact to fight corruption. During the bidding stage, the IP is explained to bidders and only those who agree with the “Bidders’ Oath to fulfill the IP” are qualified to register their submissions. A related government official also submits “the Principal’s Oath to the IP.” During the contract’s concluding and execution stage, both parties must sign a “special condition for contract.” Provisions are made to protect and reward those reporting inside corruption. The violators of the pact are disqualified by the city for submitting bids, or face termination of contracts. They are banned from bidding for other contracts for six months to two years. The Integrity Pact is being implemented in two stages—the first stage for projects at the head office and project offices and the second stage in the twenty-five autonomous district offices in Seoul. The Philippine Centre for Investigative Journalism (PCIJ) is an independent, nonprofit media agency specializing in investigative journalism. It was founded in 1989 by nine journalists who recognized the need for newspapers and broadcast agencies to go beyond day-to-day reporting. The PCIJ is founded on the belief that the media plays a crucial role in scrutinizing and strengthening democratic institutions and should thus be a catalyst for

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social debate and consensus for public welfare, because well-researched information communicated to citizens leads to informed public opinions and public decisions. The PCIJ aims at providing training for investigative reporting to full-time reporters, freelance journalists, and academics. In addition to training, it uses information technology to optimize research and investigation as well as systematize access to data. It has been conducting ten-day training seminars on “investigating corruption” at both national and regional levels. Because the reports prepared by the centre are well researched and documented, they have contributed to a deeper understanding of issues and thus had an impact. The reports have produced government actions dealing with corruption, public accountability, and environmental protection.

Separation of Executive and Legislative Powers The legislative branch of government performs important functions that include lawmaking, representation, and oversight and are essential to promote and sustain inclusive democracy and good governance. However, the effectiveness of parliaments in most countries in the Asia Pacific Basin continues to be constrained by low levels of interfacing between parliamentarians and constituents, weak internal capacity and resource base, the historical legacy of executive control of the legislative branch, and weak oversight institutions. Oversight of the Executive With the rapid pace of globalization, the Asia Pacific Basin countries had to reexamine their policies dealing with the oversight of the executive by the legislative branch and the separation of powers between the two branches. Oversight by the legislature is aimed at ensuring the executive’s accountability for its actions including money it spends. To perform this function effectively, legislators need adequate constitutional authority, sufficient staff resources to scrutinize programs, and political will to force the executive to make the changes in programs. The oversight function of the parliament is essential for checks and balances and for effective functioning of democracy. In a presidential system, the executive signs the bills that are passed by parliament and thus checks the legislative branch, but parliaments in many Asia Pacific Basin countries find it difficult to check the activities of the executive, usually because of the dominance of one party and the historical legacy of a weak legislative branch. Oversight powers and functions of an effective parliament include the ability to remove the executive, obtain required information from the

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executive, and control the budget. Also important is the committee system to monitor and assess government activities. However, parliaments in many developing countries are too weak to effectively exercise their powers of oversight. Oversight of government income and expenditure policies—“the power of the purse”—is the primary tool for parliamentary oversight. It leads the executive branch to get parliament involved in general spending policy, even before the formulation of budget. To effectively perform its function of oversight of government income and expenditure, parliament should have the powers to approve the budget and review its implementation, access to advance information and analysis about the budget, and mechanisms for parliamentarian committees to hold public hearings. Watchdog institutions responsible to Parliament—auditor-general, ombudsman, human rights institutions, and parliamentary committees— play a central role in the system of checks and balances. The office of the auditor-general should be empowered by the constitution to audit and check proper utilization of funds authorized by the parliament to different ministries and departments. However, in many Asia Pacific Basin countries, the auditors-general have inadequate funds and staff to effectively perform these tasks. Furthermore, the executive branch often ignores the decisions of the legislature’s public accounts committee. While the report of the auditor-general is an important tool for the legislature to ensure accountability and transparency, the effectiveness of this tool depends upon many factors: timely receipt of the independently audited report of the government accounts, presentation of the unbudgeted spending (such as for emergencies) to the legislature at the earliest possible time, the ability of the legislature to elicit the views of experts in public hearings, the role of the public accounts committee in the legislature, and the ability of the legislature to take corrective actions. Enhanced Representation One of the challenges for legislatures in the Asia Pacific Basin is how to increase effective representation of citizens. The ability to effectively represent citizens is constrained by many factors—electoral systems that reward loyalty to the party over service to constituents, institutional weaknesses, inadequate technical capabilities, a lack of democracy within the structures of political parties, inadequate media reporting on the legislature, and inadequate interaction between legislators and constituents. However, the practice of democratic transition in many Asia Pacific Rim countries shows that in most cases landlords, urban entrepreneurs, former senior civil servants, and traditional “political families” get elected (India, the Philippines, and Indonesia). This is a reflection of the inequitable

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nature of asset ownership in the society, which blocks adequate representation of the rural and urban poor, women, and other groups in the legislature. While money plays a major role in electoral process in developing and developed countries alike, the fundamental difference is that, in developing economies, most politicians spend their own personal wealth to get elected because the system of campaign contributions is limited in scope—if not nonexistent. In some countries, such as India, private businesses have begun to make major contributions to mainstream political parties. The countries in the region recognize the need to ensure that different groups are represented in the legislature through special mechanisms. In the case of the Indian Parliament, for example, seats are reserved for scheduled castes. In many countries, seats are reserved for women. Resource constraints are one of the challenges faced by parliamentarians in developing countries in their relationships with constituents. While the executive branches dominate and control resources, legislatures have inadequate information systems and limited or no staff to assist them and act as liaisons with government agencies on behalf of constituents and examine how different legislation affects them (Indonesia and Malaysia). Other measures for constituency outreach include opening the legislature to the public, providing legislators with physical space to interact with constituents, and using specific tools for communication. Parts of parliamentary debates are broadcast or televised in some countries and public galleries are available to observe parliamentary proceedings. To effectively perform their representative roles, parliamentarians require communication and easy access to constituents—including opening constituency offices in the legislature, opening constituency offices in the districts, providing legislative staff, and making available resources for members to travel to their districts to meet with their constituents. In most countries, parliamentarians receive allowances to visit their constituents at frequent intervals. Parliaments use many communication tools to interact with constituents and civil society representatives, such as publication and broadcast of legislative proceedings, committee deliberations and hearing deliberations (India), independent journalistic coverage (the Philippines), parliamentary newsletters, legislative websites, and legislative directories. Public hearings, including formal ones held in the legislature and informal townhall meetings held in the district, provide an opportunity for parliamentarians to hear the view of citizens and experts on important public policy issues. Legislator-constituent outreach is also facilitated by civic education programs aimed at informing the public about the structure, functions, and roles of the government. Finally, civil society organizations play an important role in lobbying legislators for policy reform or representing the needs and demands of the constituents.

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Decentralization Through Political Devolution Asia Pacific Basin countries have also experimented with decentralization policies and programs to promote local partnerships in the context of globalization. Recent good practices of national level decentralization policies and programs point to strengthening democratic governance at the local level. They also highlight key systemic constraints that can impede the implementation of decentralization policies and programs, such as weak financial and administrative capacities of local governments and weaknesses of national level political and legal frameworks. Many forces at the global, national, and local levels drive recent trends toward greater political devolution and transfer of financial authority from the center to regions and local areas. The end of the Cold War and the demise of the former Soviet Union have led to a greater global recognition of the need for political pluralism and devolution of political and financial authority. In the past, political leaders in some Southeast Asian countries, such as Indonesia and Malaysia, used the communist threat as a justification for the centralization of political power. An increase in ethnic conflicts and demand for greater recognition of cultural, religious, and regional traditions focus the debate on political devolution in countries such as India. Also, bilateral donors, multilateral agencies, and nongovernmental organizations are focusing on the centrality of democratic governance including political and financial accountability and transparency in promoting people-centered development. In some cases, this resulted in conditionalities, nudging political regimes to devolve more political power to local and community-based institutions. The rationale of development assistance agencies in supporting decentralized governance included giving responsibility for the provision and management of services to the level of government authority closest to the people, thus enhancing the capacity and legitimacy of these authorities.8 The most critical driving force for political devolution has been the demand of groups and individuals within countries such as Indonesia and the Philippines for greater control over local political processes, greater transparency, better access to services, and more openness in political decisionmaking process. Political awakening, improved infrastructural facilities, and better access to information exerted “pressure from below” to which national political leaders had to respond. In India, the world’s largest democracy, widening popular participation in political decisionmaking has created new opportunities and challenges. Two amendments to India’s constitution in 1992 strengthened local governments. In 1999, about 238,000 local councils were elected across the country. These councils are composed of three million elected representatives, one-third of which are women, and 660,000 come from the hitherto marginalized scheduled castes. These reforms have the potential to bring about

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major systemic changes in the structure of local government.9 In some villages, for example, people are conducting “social audits” of government funds to ensure accountability and transparency. Because one-third of local councilors are women, they are exerting their influence as local leaders and weakening well-entrenched vested interests. Village assemblies called Gram Sabha are more frequently contesting corrupt practices and abuse of power. However, this experiment in greater democracy at the grassroots level is not without its challenges, which stem from resistance by local traditional elite, an increase in local conflicts, and coordination difficulties. Equitable and mutually beneficial partnerships among local government, civil society, the private sector, and community-based groups—are instrumental in exerting pressure from below for the devolution of power and resources and implementing existing decentralization policies and programs. In large metropolitan areas such as Bombay, for example, local government structures can be remote from the day-to-day needs of the people. However, representatives of the metropolitan government and municipal government employees can forge mutually beneficial partnerships with representatives of civil society organizations, the private sector, and community-based organizations. This enables the municipal government to elicit the participation of local citizens in municipal government initiatives. In addition, it provides a mechanism for the other local actors to hold municipal government functionaries accountable to the people. More important, such local-local partnerships and dialogue benefit from potential contributions from each partner and utilize the full complement of human energy in the city.

Judicial Reform and the Global Economy Governments in Asia Pacific Basin countries recognize that in order to participate effectively in the global economy, they must strengthen the rule of law and reform judicial systems to guarantee property rights and the security of foreign investments. Rule of law and effective judicial systems are required to protect civil and political liberties, check the abuse of authority, and to take advantage of opportunities provided by globalization, such as the promotion of foreign investments. Judicial independence is the core of effective judicial systems. A World Bank survey of 3,600 firms in sixty-nine countries, for example, showed that over 70 percent of the respondents considered an unpredictable judiciary to be a major problem in business operations and that there was a correlation between the effectiveness of the judicial system and the level of investment.10 The practice in the Asia Pacific Basin indicates that some progress is being made in promoting the independence of the judiciary and civil society organizations, and community-

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based groups are playing significant roles in improving the access of the poor to justice. An independent judiciary helps create a stable environment for entrepreneurship and ensures that the system of checks and balances within the government work effectively. Increasingly, the judiciary has become involved in transnational illegal activities, which involve cases of terrorism, transnational crime, corruption, trafficking in human beings, drugs, and money laundering. This trend implies the need for greater judicial capacity at the national level and enhanced cooperation globally. In view of this, the United Nations “Convention Against Transnational Organizational Crime” was adopted by the General Assembly of the United Nations at its Millennium Summit in November 2001. This new UN instrument identifies mechanisms through which countries can improve cooperative efforts in areas such as extradition, mutual legal assistance, transfer of proceedings, and joint investigations. It also addresses issues such as victim and witness protection, the protection of legal markets from organized criminal groups, and the provision of technical assistance to developing economies to strengthen their capacities to deal with organized crime. With the rapid pace of globalization and advance of information technology, courts will be increasingly called upon to decide on cases related to e-commerce activities, illegal activities on the Internet, and copyright issues. In countries with more stable political institutions—political parties, parliaments, and electoral commissions—the judiciary is more likely to have more independence vis-à-vis its role as guaranteed by their constitution. Judicial activism in India, the Philippines, and Thailand are examples. Alternative Law Groups (ALGs) in the Philippines seek to promote popular participation in lawmaking, policy formulation, and governmental activities to enhance social and economic progress of the disadvantaged groups.11 They consist of small groups of lawyers, law students, and development practitioners who are interested in protecting the interests of the poor. In many cases, they work in close collaboration with NGOs and grassroots associations. Among the issues that ALGs address are agrarian reforms, violence against women, shelter, and services for the urban poor, illegal logging, and the rights of the indigenous people. They promote and advocate the interests of the poor in the process of lawmaking as well as monitor the implementation of laws. Furthermore, they train paralegals, provide legal assistance and guidance, and negotiate with corporate leaders on behalf of the poor concerning the environmental and labor issues. In the Philippines, those with resources and family connections can get access to justice, while others either turn to local power brokers, pay bribes, or turn to ALGs and related organizations.12 The ALGs have positively contributed to implementation of existing laws and regulations concerning the disadvantaged groups through such

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strategies as paralegal training, community organization, litigation, and outreach through media. By working closely with community-based organizations, they serve as the eyes and ears in the process of implementation of well-intentioned government regulations through pressure from below. The ALGs also use litigation as a last resort and alert the authorities to corrupt practices in the local and national government programs that affect the work of the groups and community-based organizations. The groups use media and press to mobilize public opinion to ensure that government regulations are actually enforced. While there are still serious gaps between the intention of the public policies and regulations in the Philippines, the experience of ALGs suggests that with extremely limited resources these groups “have proven very cost effective at helping their partners raise Philippine law from rhetoric to reality.”13 In India, as in many other developing economies, domestic violence against women is a major social problem. To respond to this problem, amendments have been made to the Indian Penal Code (IPC), the main law describing crime and punishment in the country, and the Criminal Procedure Code (CPC) that describes the procedures for the police and courts and the Indian Evidence Act (IEA). These amendments include Section 306 of the IPC dealing with suicide by women. If a woman commits suicide within seven years of marriage and evidence of cruelty can be shown, the presumption of abetment is provided by Section 113A. Where the death of a woman is caused by burns and/or bodily injury and there was evidence of harassment for dowry, such death “will be called a dowry death and husband/relative shall be deemed to have caused death.”14 Another amendment of the Code provides for a mandatory postmortem where the case involves suicide of a woman within seven years of marriage, where a relative makes a request, or where there are doubts about the cause of death.15 In addition to these amendments to the law, the response of the government agencies to violence against women has also been through community policing initiatives, counseling, all-women police stations, and family courts.

Conclusion Over the past few decades, democratic transition processes have been taking place in Asia Pacific Basin countries. These processes have been influenced by the need to cope with the rapid pace of globalization and pressures from internal forces for greater accountability and transparency. Governments have implemented policies and programs to organize free and fair elections, combat corruption, and institutionalize mechanisms to ensure the separation of powers between the executive and legislative branches and the oversight of the executive branch. The countries have also decentralized

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powers and resources to local governments and undertaken judicial reform to respond to the needs of the global economy and access to justice for the poor. While significant progress has been made in transition to more democratic political systems and rule of law, the direction and pace of change has been affected by such contextual factors as culture and religion, the extent of poverty, civil-military relations, historical legacies, and freedom of media. Although Asia Pacific Basin countries have progressed toward more democratic political systems, two aspects of democratization—combating corruption and implementing decentralization—remain particularly problematic. Corruption remains a strong force undermining democratic transition and the ability of countries in the region to participate effectively in the global economy. Some countries, however, are taking actions to combat corruption. Prevention requires civic education to raise public awareness of their rights and obligations, decent wage compensation for public service, and rewards for good performance. One of the most effective preventive measures is to end corrupt programs and modify laws that have loopholes for corrupt practices. If subsidy programs and price controls are eliminated, the bribes that result from them will also disappear. If a corrupt state-owned organization is privatized, for example, the level of corruption should go down. Yet, it is not always possible or even desirable to end all government social programs and leave them entirely to the market. In such situations, it is essential to repeal or modify relevant laws to eliminate loopholes. While, in general, reforms that increase the competitiveness of the economy can help reduce corruption, privatization in developing countries can itself be a source of corruption and may require reforms that remove rent-seeking incentives after a state enterprise is privatized. Most Asian countries with high levels of corruption have formal statutes that are ineffectively enforced. It is essential to establish independent investigators, prosecutors, and adjudicators who will perform professional duties in an independent fashion. The provision of adequate powers of investigation and prosecution should be consistent with international human rights norms. Other elements of enforcement are the development of channels for effective complaint making or whistle blowing, and the imposition of powerful disincentives that include civil penalties and black listing for the would-be corrupt. Establishing an independent commission is necessary but not sufficient; other institution building measures are essential, including strengthening oversight institutions such as the office of the auditor-general and the office of ombudsman and improving performance and quality of public service through civil service reforms aimed at improving wages and working conditions of civil servants, increasing competitive pressures within the government to lower the bargaining power of individual officials, public awareness of the payers, a merit-based, transparent sys-

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tem of selecting civil servants, and effective monitoring to ensure compliance with the regulations. Combating corruption and enhancing transparency and accountability in governance are widely recognized as essential elements of effective governance to take advantage of opportunities provided by globalization. Experience in the Asia Pacific Basin countries also shows wide variations between stated policies of decentralization and their practice. Many factors influence the design and implementation of decentralization policies and programs. First, the socioeconomic and political conditions and constitutional and legal reforms shape the form and content of decentralization policies and programs, influencing the implementation process. This explains the variations in local government systems in India, the Philippines, and Thailand. Where the national political system is authoritarian, serious impediments to political devolution to local governments remain. Also important are the characteristics of the local power structure and the extent to which the beneficiaries are organized. The politics and progress of decentralization in India provide an interesting example of the impacts of national social and political conditions on political devolution.16 The 72nd and 73rd constitutional amendment bills were passed in the two houses of the Indian Parliament in 1991 and received the assent of the president in 1993. The final act included several features that have laid the foundation for democracy at the grassroots level and an effective multilevel governance system accountable to people—the establishment of village, intermediate, and district level councils called Panchayats, the election of mayors and municipal chairmen, the representation of members of parliament in the local councils in some states, an independent and autonomous election commission to monitor local elections, and the establishment of finance commissions in the states to improve their financial base. Local governments need resources in proportion to their responsibilities. Sometimes centrally created decentralization programs are innovative, but are not linked to established local government systems or sources of local political support. Thus, local organizations continue to function as bureaucratic instruments of the central government. This was the case of the local government system in Indonesia under President Suharto and in the Philippines during the Marcos regime. Decentralization of fiscal authority does not automatically increase the resource base of local authorities. To begin with, the local governments with new authority might lack administrative capacity to increase their resource base because of their inability to evaluate property and improve collection from the existing tax base. Local politicians also tend to be reluctant to levy new taxes, even though these have been authorized, or enforce tax collection, due to their linkages with local groups who might be defaulting. These considerations contradict the

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perception of national level policymakers that decentralization will increase the local resource base. More important, some local jurisdictions have a stagnant local economy—especially in remote rural areas—that limits their capacity to increase locally generated revenue. This situation requires central government intervention to reduce disparities in the resource base of local governments in different parts of the country. The way a local government system works also depends upon historical legacies and traditional authority structures. Colonial rulers in Asia (such as in India, Indonesia, and Malaysia) introduced many new institutions and structures of government and administration at the local level, parallel to traditional authority structures. Over the years, political party structures and representative institutions have been added at multiple levels. One of the challenges is to ensure the mutually reinforcing role of each of these structures to promote participatory local development. For decentralization policies and programs to succeed, central and state governments need to provide policy guidelines and training support to local governments. Where capacity at the central level is weak, too rapid decentralization to local government may not yield positive results. After independence, most states in the Asia Pacific Basin, such as Indonesia and Thailand, inherited weak capacities to perform such functions as the maintenance of law and order, the provision of social services, the creation of legal and judicial systems and processes, and management of natural resources. Some of the central governments themselves lacked capacity to provide technical support to local governments. Human resources were concentrated at the national level. Furthermore, centrifugal forces within many societies threatened the legitimacy of the central authority. The devolution of power and resources and the enactment of new local government legislation provide a framework for the emergence of empowered local governments that are accountable to constituents. Yet, local leadership from government, civil society, and the private sector accounts for variations in performance of different local governments in different parts of the country. In India, an informal coalition of local actors, led by a local NGO, put pressure on the Department of Public Health and Engineering to improve the performance of local projects. In the Philippines, NGOs and community groups have taken the critical initiative to bring about successful reform in service provision. State institutions in the Asia Pacific Basin are under tremendous pressure from national and international organizations to respond to development challenges including increased accountability and transparency in economic and political decisionmaking. As citizens exercise their basic political rights to elect their own governments, a wide variety of values and democratic systems are increasingly becoming the global standards and norms in the political arena and are likely to take hold more extensively in Asia in the future.

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Notes The views expressed in this chapter are those of the author and do not necessarily represent those of the United Nations or its member states. 1. This chapter draws upon Cheema, Building Democratic Institutions: Governance Reforms in Developing Countries. Also see Department for International Development, Eliminating World Poverty: Making Globalization Work for the Poor; UNDP, Human Development Report 1999; Oxfam, Globalization; United Nations Department of Economic and Social Affairs, World Public Sector Report 2001 and World Public Sector Report 2003. 2. International Institute for Democracy and Electoral Assistance, Democracy in Indonesia; UNDP, Elections in Indonesia; Government of Indonesia, Electoral Law of Indonesia. 3. The Economist, March 2005. 4. The NewYork Times, Wednesday, July 11, 2001, p. A.3 5. Transparency International, at www.transparency.org/cpi/2004/cpi2004. en.html#cpi2004. 6. Among others, see UNDP, Corruption and Good Governance; Dininio, Kpundeh, and Leiken, USAID Handbook for Fighting Corruption; UNDP, Corruption and Integrity Improvement Initiatives in Developing Countries. 7. Seoul Metropolitan Government, Integrity Pact; and Seoul Metropolitan Government, Clean and Transpararent. 8. Capital Development Fund, Poverty Reduction, Participation and Local Governance. 9. Sivaramakrishnan, Power to the People? The Politics and Progress of Decentralisation, pp. 3–22. 10. Ibid., p. 4. 11. Golub, “Participatory Justice in the Philippines.” 12. Ibid., p. 202 13. Golub, “Non-Lawyers as Legal Resources for Their Communities.” 14. Elizabeth, “Law Reform to Combat Domestic Violence in India.” 15. Ibid. 16. Sivaramakrishnan, Power to the People.

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9

E-Government: Applications of Technology to Government Services Clay G. Wescott

T

his chapter examines the adoption of e-government in Asia Pacific in recent years. E-government is the use of information and communication technology to enable more efficient, cost-effective, and participatory government, facilitate more convenient government services, allow greater public access to information, and make government more accountable to citizens. These practices reinforce other reforms that are helping countries to better compete in the regional and global economy by strengthening markets and individual choice that in turn promote economic growth and poverty reduction. Weighing against these benefits are the challenges of adopting and enforcing appropriate laws, regulations, and organizational changes, and of financing infrastructure, systems, technical support, and training, while ensuring equitable access and affordability. There are also risks to information security and privacy, the issues and tradeoffs of Internet governance, and open systems. The latter risks, issues and tradeoffs, aren’t addressed here, but are covered elsewhere.1

Factors Driving Adoption of E-Government Asia Pacific countries are widely dispersed on surveys of ICT penetration, including utilization and cost of bandwidth, and use of computers, telephones, and television. For example South Korea is ranked number one in the world in broadband use, with Hong Kong, China, Taipei, and Japan also in the top seven. And yet, other countries in the region are among the least served in the world, with Lao People’s Democratic Republic having only 0.2 bits per inhabitant (bpi) of international bandwidth, and Bangladesh only 0.4 bpi. This compares with around 15 bpi in Iran, and over 2,700 bpi in Hong Kong. This wide dispersion is in part determined by the cost of 171

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access relative to income. Basic monthly Internet access costs range from around US$6 in Iran to $91 in Solomon Islands. In relative terms, Internet access costs range from 0.2 percent of average annual income in Singapore, to nearly two and one-half times in Cambodia.2 In many countries, mobile phones are becoming a key information channel and, here again, the experience is diverse. The Philippines, for example, had 27 mobile subscribers per hundred population (php) in 2003, compared to 1 php in 1995. Indonesia, a comparator country in other respects, had only 9 php in 2003. It is estimated that if this gap in mobile penetration were to continue, the result of this factor alone would be a 1 percent higher long-term growth rate for the Philippines.3 Differential access to ICT is mirrored by wide dispersion in e-government. A recent, global e-government–readiness survey by the United Nations gave high marks to South Korea (5th out of 178 UN member states having a web presence), Singapore (8th), and New Zealand (13th). The Philippines (47th) scored better than Indonesia (85th), and many other regional countries had lower marks, including the five lowest, all Pacific island countries.4 Countries adopt e-government both to move toward regional and global good practices and to reinforce traditional processes. E-government fortifies “good governance” practices such as managerialism, accountability, transparency and freedom of information, rule of law, and combating corruption. These may be stimulated by commitments under international agreements, and by competitive pressures. W. H. Dutton argues that e-government modernizes business processes by enabling more accurate, 24/7 responses to citizen requests, and linking transaction accounts in different agencies.5 This reduces costs and allows harvesting of data from different systems, thus increasing the quality of feedback to managers and policymakers. R. Heeks gives examples across varying jurisdictions and bureaucratic cultures of similar, managerial reforms supported by ICT, including improved effectiveness and efficiency of personnel management, parts procurement, accounting, health care, and claiming unemployment benefits. 6 L. Kaboolian7 and R. Silcock8 describe such managerial improvements linked to ICT as part of a global convergence to a standard reform model. Some theories of organizational change would also seem to apply across regions: for example, the importance of issue networks evolving to winning coalitions for successful ICT adoption.9 In other respects, countries adopt e-government in ways that reinforce traditional bureaucratic structures, cultures, and links from administration to citizens and politics, in some cases making these traditional forms more responsive. On the positive side, I. Holliday10 points out that networks of trust and cooperation in societies with Confucian backgrounds could provide favorable institutional underpinnings for network-based, ICT-enabled

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reforms. A survey from South Korea shows that citizens expressing concerns to public officials online are less restrained by traditional notions of deference to authority figures than in face-to-face interaction, and are more willing to challenge them.11 ICT is also enabling the archiving of “social and cultural memory,” and providing affordable channels for indigenous groups to distribute cultural artifacts.12 On the other hand, A. Salazar,13 A. Ranerup,14 P. Benjamin,15 and D. M. West16 point out that expected benefits are often blocked by traditional bureaucratic forms, technical difficulties, and insufficient attention to the information needs of communities. For example, ICT systems can only fully deliver on their promise if different offices and people are willing to share information, which is often not the case.17 Likewise, introducing ICT may have little influence on deep-rooted bureaucratic traditions. Japanese local government administrations, for example, have much smaller workforces relative to population than in western, developed countries, while having more extensive responsibilities and larger budgets. The reasons have to do with historical factors such as social structure and traditions of voluntarism and contracting out, and not to managerial factors such as a desire for greater workforce efficiency or more extensive use of ICT.18 E-government hasn’t yet been a key factor in increasing political freedom and democratic institutions, although it gives citizens new opportunities to express their views. There have been dramatic examples of ICT enabling mass political action that helped topple regimes in Thailand (1992), Indonesia (1998), and the Philippines (2000). There are also examples in this chapter from nondemocratic countries on how ICT is being used to improve government efficiency and effectiveness, and to better inform and seek feedback from citizens. Indeed, ICT-enabled managerial reforms in Hong Kong in the 1990s were motivated, in part, by a desire of the colonial administration to implant an effective bureaucracy to counter antidemocratic practices in the soon-to-be Special Administrative Region of Hong Kong.19 Yet this doesn’t mean that ICT-enabled managerialism will be a key enabler for political democracy. Democracy will come to countries as a result of many forces, only one of which may be ICT.20

Recent Innovations An examination of indicative e-government innovations helps us to understand why each was adopted, what’s worked, and what hasn’t. Although attribution of results is difficult to prove, there is at least anecdotal evidence of positive results from e-government. In many such cases, while limited benefits were achieved, major improvements will require progress on other fronts. Another type of case is examined where even limited benefits were

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not achieved, and significant resources were wasted. E-government practices tend to reflect existing structures and ongoing reform processes in each country in terms of quality of administration, citizen participation, and extent of corruption. As in developed countries, e-government has not been a primary driver for administrative reform, although it has helped support reform processes. The cases presented fall into five categories according to intended results: citizen participation, efficiency, effectiveness, service integration, and combating corruption. Some cases achieve results under two or more categories. Citizen Participation There are many cases where ICT systems help enable the civic conversation necessary to political democracy. For example, in 2003 the Philippines Center for Investigative Journalism posted on its website a study pointing out extravagant houses and luxury vehicles owned by government officials who can’t explain how they paid for them. There were also numerous applications by officials to change their birth records to delay their retirement, indicating how lucrative their modestly paid positions must be.21 Partly as a result, the Bureau of Internal Revenue (BIR) began investigating over one hundred of its employees for various offenses, and the Office of the Ombudsman filed charges against BIR employees, with assistance from a former senior official of the Hong Kong Independent Commission against Corruption. Although this effort may succeed, it won’t be enough to bring about systemic changes without reforms on other fronts.22 In another example showing the limits of ICT-enabled citizen pressure on government, Indian journalists of Tehelka.com in March 2001 carried out a sting investigation on corruption in the Indian defense and political establishment, where officials were recorded taking bribes on videotape. This led to the resignations of top army and government officials, among them the defense minister, George Fernandes, and the president of the ruling Bharatiya Janata Party (BJP), Bangaru Laxman. During that month, the site clocked over 25 million page views; at other times it averages about 15 million page views a month. The government response was not to indict any of the officials shown to be corrupt in videos, but to target Tehelka with a Commission of Enquiry, tax investigations, and other harassment. However, Tehelka is still in business, and relaunched in 2004 as a weekly print and online newspaper.23 A much-discussed challenge is the “digital divide”—the problem that poor countries, and poor citizens within countries, are not benefiting enough from e-government and related reforms. This is confirmed by most conventional measures,24 prompting the United Nations to call for “universal, accessible, equitable and affordable ICT infrastructure and services.”25

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Although this goal is ambitious, there is some progress being made. In Dhar district of the Indian state of Madhya Pradesh, citizens can get basic information and assistance through an Intranet kiosk linked to the district headquarters on a range of issues such as, for example, broken hand pumps, prevailing agriculture produce auction center rates, and copies of land records. Village committees contract management of the kiosks to local businesspersons, who receive income through fees for services, including obtaining and filing official forms, classified advertisements, and searching through a database for the right match for a prospective bride or groom. However, the full potential of this system has not yet been realized because of challenges such as unreliable power and connectivity, manual backend processes in government agencies, and insufficient revenue to cover the costs of kiosks.26 There are many innovative approaches to increase Internet access to poor citizens. “Radio browsing” is used in Sri Lanka and Philippines, where listeners call or write in their questions, and answers obtained online are broadcast in local languages. 27 The People First Network in Solomon Islands links eighteen solar-powered computers in rural areas by short wave radios with a server connected to an Internet link in the capital city.28 Remote Cambodian villages are linked to the Internet via a WiFi access point mounted to motorbikes that exchange e-mail messages. When villagers have problems, they ask their local teachers who have computers to send e-mails to the governor, who promises to respond. A provincial hospital uses the system for referrals to a hospital in Boston, with digital cameras used for long-distance diagnosis.29 A different form of web-enabled citizen participation helps to better link expatriate specialists with their originating countries. Web-based associations promote the exchange of skills and knowledge, and some have made important contributions to poverty reduction work in their home countries.30 For example, a diaspora site of the Republic of Marshall Islands run by a private, Marshallese individual in Arkansas, www.yokwe.net, has extensive, up-to-date job listings in the public and private sectors, official documents, news articles, and online discussions in Marshallese and English. This provides a useful supplement to the official government site, containing mainly basic, descriptive information.31 One challenge facing many countries is that English is the lingua franca of ICT; there are an estimated 2,200 languages used in Asia, and only 20 percent of Asians can use English. Making e-government widely accessible to citizens requires addressing this challenge. Asian writing systems are varied and far more complex than English, and designing digital fonts for any one of them is a massive challenge. Yet progress is being made. For example, the Urdu language with 60 million speakers in twenty countries uses a character-based, bidirectional, diagonal, nonmonotonic, cursive, context

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sensitive writing system with a significant number of marks (dots and other diacritics). In 2003, after eighteen months of work by a five-person team funded by donor agencies, a character-based font was released that can allow Urdu speakers to use their language in computer applications.32 Efficiency E-government innovations often promise cost savings or increased tax revenue, and there is evidence in the region that this is being achieved in some cases. In Gujarat state, India, in 1998–1999, prepaid cards, electronic weighbridges, video cameras, and computers were installed at ten checkpoints on the state border to improve assessment of road taxes and penalties for overloading of trucks crossing the border, and to reduce corruption. For an investment of Rs 630 million, revenue after three years has increased by Rs 169 million per annum, even after subtracting increases from the presumptive 7 percent increase in traffic. The gains could be much greater if further reductions in corruption could be achieved. According to survey data, 36 percent of truck drivers still pay bribes in return for reduced official charges, and 11 percent have to pay bribes on top of the official charges.33 Efficiency gains can also accrue to citizens in terms of reduced waiting time and less money spent on bribes. The Department of Revenue in Karnataka state, India, has computerized 20 million records of land ownership of 6.7 million farmers, and makes them available at 168 kiosks throughout the state. The investment cost was Rs 185 million, not including software development that was provided at no cost to the state by the central government. Running costs are reportedly covered by a Rs 15 processing fee paid by farmers. According to estimates based on survey data, this has resulted in a time savings by citizens seeking land records worth Rs 66 million per annum, and savings in bribes not paid of Rs 806 million per annum. The system is being expanded to include other information such as ration card holders, pensioners, wholesale market prices and weather information.34 Yet there are many other cases where planned efficiency gains are not realized at all. For example, the Bangladesh National Data Bank (NDB) project was planned to provide a broad range of data and information support to many levels of stakeholders both inside and outside the country. The NDB was to link twelve ministries and divisions with scope for further network connections to the planning cells of all other ministries and divisions. Planning began in 1992, with key investments beginning in 1999 of US$440,000 for the first two years alone. However, the local area network (LAN) was soon nonoperational, no database set up, nor any data storage. The project failed due to lack of technically competent staff at all levels in government agencies, coupled with a politicized procurement process.35

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Procurement difficulties also derailed an attempt to use automated counting machines in the May 2004 Philippine election. In 1997, former President Ramos signed a law authorizing the government to use an automated system beginning with the 1998 national and local elections and onward. After a pilot implementation during the 1998 elections, Mega Pacific eSolutions Inc.—a consortium of several local and foreign firms— won, in 2003, the US$24 million bid to automate the counting of votes for the May 2004 elections. However, an unsuccessful bidder asked the Supreme Court to look at the legality of the bidding, and the court ruled that the process was flawed, and the contract canceled. As a result, manual elections and canvassing had to be used. As in the past, the process was reportedly prone to irregularities, and the release of final results was delayed for six weeks. Effectiveness In addition to efficiency gains, ICT-enabled reforms have yielded other benefits, including faster and more accurate response. For example, in Central Asia a national epidemiology service introduced ICT systems for gathering, processing, storing, and reporting disease and public health data. System components used software packages for registration and analysis of diseases and public health risks. These created a single common system for information on specific diseases and public health risks, with local, regional, and national databases searchable in various ways based on common data. This system has worked effectively since being introduced in 1997, with many benefits. For example, shortly after being introduced, the system uncovered a rise in diphtheria cases. By increasing coverage of the vaccination program and introducing revaccination, coverage levels rose from an average 88 percent to 99 percent by 2000, and diphtheria case levels had returned to their historical norm. Although such responses were possible with the manual system, the new system helped cut the decision time, and reduced vaccination cost through better prioritization, planning, and targeting.36 In a different type of example, the Beijing city government’s website allows visitors to select from categories such as government services, laws and regulations, a news center, links to other government departments, and an e-mail section. The latter asks citizens to “make suggestions about the capital’s development, or criticize work you’re dissatisfied with”; clicking on a link gets the user started on an e-mail to the appropriate office. Alternatively, users can join an electronic forum to get answers to questions such as how to move one’s’ official residence to Beijing in order to work there. The response on the website listed specific regulations and procedures. Although this example shows effective use of ICT to increase gov-

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ernment effectiveness and facilitate certain types of citizen participation, these systems have been closely regulated to prohibit use for mobilizing opposition to dominant elites. Many forms of e-government have emerged in support of the implementation of the 1991 Local Government Code in the Philippines. For example, the multipurpose telecenter project is presently set up in four barangays (villages) in Mindanao, allowing citizens to access a low-cost phone and Internet connection, and helping to ensure coordination among the barangay governments. Another system was built on a series of projects of government, private sector, and civil society. The Sharing Network is an e-government project funded by the government. It responds to Administrative Order 332 calling for all government agencies to connect on the Internet. The City of Naga site has a wider purpose: to inform citizens on budgets, bidding documents, legislation, and procedures. Since many citizens don’t have access to the Internet, the city also provides a hard copy of the Naga City Citizen Charter that contains essential information that’s also on the website on how to access city services.37 Research on a project with some similar features in the Pondicherry district of the Indian state of Tamil Nadu shows that some poor villagers have benefited. Information received through rural telecenters is broadcast on loudspeakers and written on public bulletin boards. As a result citizens have better information on crop prices, prevailing wages, training programs, agricultural and veterinary services, weather forecasts, a secondhand goods market, and insurance schemes. There are also feelings of empowerment reported by women volunteers who staff the telecenters.38 Of course not all citizens benefit, including the poorest and most vulnerable, and the financial prospect for replicating the model is in doubt when the equipment cost is fifty-five times the annual earnings for a poor family. ICT can play an important role in coping with disasters. For example, in the 2004 tsunami, fatality rates were reportedly lower in Indian villages that had ICT penetration. And yet, traditional sources of information are in some cases still the most effective. For example, on December 26, 2004, villagers noticed a curious bubbling and rising of the water in a temple well. Over one thousand villagers came up from the lowlands to watch this, and were all safe when the giant tsunami wave hit. No warning message came through the local telecenter.39 Shirin Madon evaluates 610 telecenters set up by Kerala state, India, in terms of Sen’s notion of enhancing human capabilities, and finds improved motivation of government staff, empowered women and other citizens, and a boost to entrepreneurship.40 Yet, as in many other ICT case studies, the evaluation is built on anecdotal evidence of success and provides little rigorous measurement of performance improvement and citizen empowerment attained, nor the value-for-money achieved by necessary expenditures.

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Service Integration Jurisdictions such as Singapore, Malaysia, and Hong Kong have comprehensive systems where a web-portal or smart card integrates information and services from various government agencies to help citizens and other stakeholders get seamless service without needing to know about the responsible government agency. Users can obtain services across different geographic levels of government within the same functional area and across different functions. As an example of the latter, a citizen can submit a change of address on her driver’s license, and the change is automatically registered with the health, elections, and tax departments, thus avoiding the need for multiple filings. Citizens can also use these portals to make payments and other transactions, obtain a checklist of things to bring when applying for services in-person, find answers to frequently asked questions, and engage the services of relevant commercial enterprises. E-government systems allow the ability to harvest more data from operational systems, thus increasing the quality of feedback to managers and policymakers. For example, since 2001 Rajshahi city, Bangladesh, has been registering births online, linking to a database that can be shared with other public agencies. The Department of Health uses the system to help ensure immunization of all children. The system works in the Bengali language, although it can also generate certificates and reports in English. Before the system was set up, a simple query such as the number of girls registered took a long time to answer. The manual process was also subject to errors, duplications, and inconsistencies. The new system has removed duplication and redundancy from birth/registration and automated searching, sorting, processing, and reporting tasks, and saved time. A combined ID number and bar-coding system has reduced errors. A CD-ROM of the database provides for backup and also allows transfer and reuse of data outside the LAN system. Both registration and immunization rates have increased since the introduction of the system. The direct costs of system development were less than US$20,000, and operational costs are around US$200 per month. The ICT-based system was funded with help from UNICEF.41 New systems also allow direct access to transaction or customer accounts held in different parts of government. For example, Ho Chi Minh City in Vietnam has taken the lead in that country in working to simplify administrative procedures faced by businesses, as a way of promoting investment. A “one-stop shop” for business license applications has been established, allowing businesses to apply once online, and thereby initiate action from all the concerned agencies. These ICT-enabled reforms have inspired simplification of administrative procedures in many other districts and communes throughout the country through “one-stop, one-door” mod-

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els. Citizens benefit by spending less time waiting and traveling, and receiving better information.42 Combating Corruption Many think that e-government can reduce opportunities for corruption. While this is sometimes the case, it can also have no effect at all, or may provide for new corruption opportunities. Enhancing e-government can reduce opportunities for corruption by helping to measure performance better, facilitate outsourcing and contestability of public functions, reduce transaction costs, enforce rules more strongly, reduce discretion, and increase transparency. However, computerization may also provide new sources of corrupt incomes for ICT professionals. New systems may instill fears of getting caught in some staff and restrict their access to sensitive information. Yet the same systems may provide new opportunities to the ICT-savvy. Depending on the integrity of ICT staff, corruption may increase or decrease. In addition, the myth of computer omnipotence may also mean that some managers fail to institute proper controls on computerized systems as they assume that ICT removes the opportunities for corruption. Such lack of controls may be evident to those in a position to take advantage of it. Although ICT advances, like other technological changes, can improve the productivity potential of government organizations, only the managers and staff of these organizations know the actual improvement in productivity. It is in the collective interest of managers that their superiors underestimate the productive potential of these advances in such cases, as organizations may then receive more resources than they need, which can then be used to increase the income or leisure of management or staff. This form of padding, if not corruption, was widely practiced in the centrally planned economies.43 Corruption is rooted in the cultural, political, and economic circumstances of those involved. ICT does little to affect these root causes. It has a potential role, but a limited one that forms only part of a much larger picture. At the national level, one needs political will, public education, ethical watchdog agencies, appropriate incentives for honest officials, and effective punishment for the corrupt ones. At the agency level, combating corruption is most effective when ethical values are part of the core business of an organization, supporting other factors like leadership and customer service to maximize stakeholder interests.44 With these caveats, there are some promising, anecdotal cases. For example, in Seoul, South Korea, the OPEN system helps to create transparency in city administration by preventing delays in the processing of licenses and other government documents. Prior to the introduction of the

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system, applicants often had to pay speed money; now processing is a matter of public record, on the web. If officials are unnecessarily delaying documents, citizens can complain and disciplinary action is taken.45 In another type of example, the Hyderabad (India) Metropolitan Water Supply & Sewerage Board uses its Single Window Cell (SWC) to reduce corruption for new connections. Previously, applications were made to one of 120 section offices, and then forwarded to fourteen other staff before approval, each requiring speed payments. Under the SWC, the application process is centralized in one public place, with applications recorded on computers that are difficult for corrupt officials to alter. Staff is motivated to provide good service with distinctive uniforms, modern offices, and individual computer terminals. The service improvement has been praised extensively in the media, which further improves staff motivation.46

Legal, Regulatory, and Organizational Frameworks Given the exceptional diversity of ICT penetration and other factors in Asia Pacific, each country needs to develop a framework for promoting e-government appropriate to their needs. Each country needs to consider elements of a framework such as leadership, regulation, financing, human resources, organizations, and political acceptability. For successful e-government, countries need to adopt the right policies and practices for their needs, with policy coherence among the different areas, and supporting skills and organizations. Leadership M. Barzelay points out that heads of state and other top officials have a crucial role in putting reforms on the policy agenda and in determining how important reforms are relative to other priorities, with the decisive factors being maximizing political advantage and minimizing political risk.47 For many leaders, the politically opportune time for launching reforms is shortly after forming a government. This principle is true for e-government initiatives as well. Other related success factors observed in e-government initiatives in the region include a capable, sufficiently funded office to oversee implementation, a data collection system to monitor progress and assess impact, benchmarks that are reviewed regularly to ensure relevance for changing needs and technologies, and common IT standards. Consider the story of Vietnam beginning at least as far back as 1993, when a National Information Technology Program was initiated and followed through up to 1999. A government information network was implemented, with considerable application development, training, and aware-

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ness raising. Next, the prime minister approved a Public Administration Reform (PAR) master plan through 2010 comprising seven action programs, one on modernizing state administration with a major role for e-government. The government then made a landmark policy decision in September 2001 for State Administrative Management Computerization (SAMCom), which was a far more comprehensive strategy than the earlier 1993 program. Based on this, the prime minister requested a $45 million ADB policy loan to support action program four (training) and action program seven (state modernization).48 Progress has continued since the high-level leadership commitment was clear, and there was considerable progress at the strategic level to build on, not just some pilot projects. About 120 executive information units have been set up in central and local agencies, and technical system platforms and training standards have been agreed for SAMCom projects. The prime minister’s support has been crucial for keeping momentum on this flagship initiative, while the support of international partners has helped put in place necessary management support structures. Policy, Legislation, and Regulation Countries need to consider a number of other issues to increase ICT access and to ensure success with e-government, including an integrated policy approach, an appropriate level of regulation to ensure affordable ICT access, and an attractive environment for private investment in the sector. A key lesson suggested by the Vietnam example above is the value of an integrated policy approach across government agencies. A lead ICT agency can play a useful role in achieving this.49 For example, the e-Sri Lanka program has four objectives: increasing government effectiveness, empowering rural and disadvantaged groups, developing ICT leadership and skills, and creating ICT employment. The lead agency is the ICT Agency of Sri Lanka, set up under the Information and Communication Technology Act No. 27 of 2003. Working groups are preparing laws on e-transactions, including a scripless securities settlement system for electronic transactions of Treasury bills and bonds, a review of evidence laws to set guidelines on the use of electronic evidence, procedures on data protection, and regulations on privacy, electronic security, and spamming. A new intellectual property act became effective in 2003, complying with the TRIPS (Trade-Related Intellectual Property Rights) Agreement.50 To best promote ICT access, countries need to set an appropriate level of regulation. While all countries need to regulate the ICT sector in some manner, the best regulators do so in the least costly and burdensome way. A good reference point for countries to consider is the General Agreement on Trade in Services (GATS), which twenty-six Asia Pacific countries have

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signed as part of their membership in the WTO. GATS advocates that regulations conform to four fundamentals: nondiscrimination, reasonable regulation, competition safeguards, and transparency. In areas such as regulation of e-commerce, cross-border interoperability is another desirable goal that has proved elusive to date in the region.51 A key determinant of e-government success is the level of competition achieved in telecommunications. The International Telecommunications Union (ITU) reports on levels of competition in twelve Asia Pacific countries based on seven categories.52 The Philippines, South Korea, and Hong Kong have fully competitive markets, including full privatization of the main fixed-line operator. Japan, Singapore, Australia, and New Zealand are fully competitive in six out of seven, Taipei in five out of seven, and India, Indonesia, and Macao in three out of seven. Progress toward competitive markets is typically fostered by a competent ICT regulator to some degree independent from the operators they regulate, and from government policymakers. Some regulators get financing independent from the government budget, and are able to recruit and retain competent staff. They benefit from rules protecting them from political interference and conflict of interest. Although regulatory capture is always a risk, particularly in small, lessdeveloped economies, some Asia Pacific countries have built up effective regulators and highly competitive ICT markets, thus lowering e-access costs and helping to get a critical mass of users. The Philippines, for example, made significant progress in liberalizing its economy in the early 1990s, resulting today in highly competitive providers of mobile cellular and Internet services, and a rapid growth in mobile penetration, as cited earlier. One outcome is that Filipinos send 150 million mobile text messages a day, the most of any country in the world. E-government services are increasingly being made available through both mobile cellular and Internet channels, and the Philippines is the second-ranked middle-income country in the region in e-government based on a recent UN survey.53 On the other hand, fixed-line telephone service in Thailand is provided by a government monopoly, with productivity levels less than half levels in the United States in this sector, long-distance rates among the highest in the region, and related problems across the ICT sector.54 Partly as a result, Thailand is ranked lower than the Philippines in the UN e-government survey, although its per capita GDP is more than twice that of the Philippines. Financing Adequate financing is another requirement for e-government, and there are many ways to achieve it, including support from official donors, private sector, central agencies, user agencies, NGOs, advertising, and fee-based revenue. Starting with donor funds, about 50 percent of bilateral, official

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development assistance (ODA) worldwide for ICT infrastructure has been granted to Asia in recent years, with Japan by far the largest donor, accounting for between 30 and 68 percent of the total between 1990 and 2000. A striking recent trend has been a decline in ODA worldwide, from a high of $1.5 billion in 1992 to $194 million in 2002, because of a trend in the 1990s away from government and toward private investment in and ownership of ICT infrastructure, and a shift in donor priorities toward social programs directly related to poverty reduction.55 There are other forms of donor assistance for ICT, including multilateral support to governments and the private sector. In 2003 global ICT commitments from the World Bank ($417 million), European Bank for Reconstruction and Development ( 151 million), and European Investment Bank ( 63 million) went mainly to private sector investments.56 ICT support by the Asian Development Bank has included a $16.7 million loan and $1.6 million equity investment in 1998 to a cell phone provider, Grameen Phone Ltd., Bangladesh; a $9.5 million loan to Maldives for improving ICT infrastructure and e-service provision in outer islands; a $45 million loan to Vietnam in 2003 supporting public sector reform, with an important focus on e-government; and a number of much smaller, grant-funded national and regional projects to support a range of ICT infrastructure and services.57 These ODA investments play an important catalytic role, providing pilots and institutional reforms that can be scaled up when proven successful.58 Yet ODA finances only a small part of overall requirements. Annual telecommunications investment in the Asia Pacific region is estimated to be close to $36 billion for 2003,59 and government spending on information technology just over $10 billion.60 The main funding is raised by telecommunications companies and governments themselves, with only a small portion financed by ODA. In the next few years, Asia Pacific countries are likely to follow the example of other regions and set up electronic production networks where, for example, information requests, license renewals, tax payments, and e-procurement are outsourced to public and private specialist organizations. For instance, the Hong Kong government web portal is entirely financed and maintained by a private company, thereby reducing the cost and risk to the government.61 Malaysia’s e-Perolehan government procurement system is a build-operate-transfer scheme led by a private company, Commerce Dot Com Sdn Bhd.62 Countries in the region may also want to consider the experience of the US government, where public and private partners share in the savings and revenue coming from privately financed, ICT investments.63 Governments are expected to expand their efforts, like the private sector, in creating ICT-enabled partnerships with suppliers and customers, together finding ways to cut costs, improve quality, and share the benefits.

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Yet adequate financing by itself is no guarantee of success. The absence of relevant ICT knowledge in many government agencies risks either costly mistakes or missed opportunities for dramatic service improvements. For example, an attempt to install a database management and processing system in the Thai revenue department, launched in 1992, failed to deliver due to poorly specified objectives among other issues. The main software vendor defaulted on the contract, and an estimated $56 million in public funds produced minimal benefit.64 Human Resources, Organizational Development, and Political Acceptability ICT mainly benefits citizens who are healthy and literate. At higher levels, ICT and e-government implementation is most effective when appropriate skills and HR systems are developed in government and user organizations to support it. Take the example of Vietnam. Despite the long-term strategic approach and leadership commitment to e-government, it faces considerable challenges in raising skill levels of the labor force to make the strategy work. A recent survey rated Vietnam’s workforce second from the bottom of twelve leading Asian countries in terms of high-tech proficiency. 65 Prospects may improve because of the strong value placed on education by families, government programs to train 50,000 ICT professionals at university level by 2010, and to rapidly expand Internet connections to schools and villages. Organizational factors are also important in making effective use of ICT. In addition to the need for computer literacy and management support, employee involvement in implementation is critical, along with an organizational culture fostering trust, experimentation, teamwork, information sharing, and participation. Appropriate training is also important, but less so than the other, enabling organizational factors. 66 The hierarchical, command-and-control, collectivistic cultures in many governmental organizations in the region may help to explain the slower adaptation of ICT by governments in comparison to private businesses and nongovernmental organizations.67 Other factors slowing down adoption in the region’s public sector include work habits such as the paper trail required for approval processing; concerns about security; confidentiality of information; and resistance to organizational change. To understand how these factors can work together, consider a typical chain of events starting with the purchase of an off-the-shelf software package for, say, a new accounting or document management system. Often the agency finds that the software does not support the way they currently do business. For example, the package may require inter- and intra-agency record sharing that is not presently happening. Current practice may call for

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a paper trail for approval processing, or for paper forms to be filed over the counter—steps that the newly purchased package will not support. Public officials may also lack computer skills. At that point there are two things they can do: They can change the way they do business to accommodate the software, which may mean taking some risks and shaking up important peoples’ roles and responsibilities. Or they can change the software to fit the way they do business, which will slow down the project, risk introducing dangerous bugs into the system, and make upgrading the software to the vendor’s next release difficult because the customizations will need to be torn apart and rewritten to fit with the new version. Private companies are more likely to take the first route, while public organizations too often take the second. Choosing the second route may be appropriate in some cases, but risks delays, higher software costs, and possibly a decision to abandon a project after large expenditures of time and money.68 Another challenge for government ICT initiatives is to ensure political acceptability. The Indian state of Andhra Pradesh is a much publicized example of e-government-enabled reform, led until May 2004 by its twoterm, visionary Chief Minister Naidu.69 Chief Minister Naidu tried to be careful not to antagonize important groups with the reforms. In addition to innovative systems delivering services to rural areas, he worked out an agreement with public unions that no public official would be laid off due to ICT. However, the May 2004 election results demonstrated the political risks of reform, as the chief minister was soundly defeated in his bid for a third term. Rural voters were not impressed by the chief minister’s vision of an IT-enabled state when, during a severe drought, large numbers of farmers were committing suicide in the face of inadequate irrigation and erratic electric power.

Conclusion The e-government experiences in the Asia Pacific region have improved our understanding of what works and what doesn’t, what practices are transferable, and under what conditions. However, rigorous evaluation of reforms is rare, with few scholarly works measuring the performance improvement and citizen empowerment attained, nor the value-for-money achieved by necessary expenditures. Fully cognizant of the methodological challenges, greater investment is needed in more extensive research on how to achieve high performance by the public sector through e-government in Asia Pacific. Such research would lead to better prescriptions and a better return on the considerable investment in reform by governments and international agencies.

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Notes The views expressed in this paper are the author’s own, and do not necessarily represent those of the Asian Development Bank. 1. See, for example, Yong, E-government in Asia, and Gupta, Kumar, and Bhattacharya, Government Online. 2. Cost for twenty hours of Internet access per month in August 2003, in relation to per capita gross national income. International Telecommunications Union, Asia Pacific Telecommunication Indicators 2004, A-18–19. 3. Waverman, Meschi, and Fuss, “The Impact of Telcoms on Economic Growth in Developing Countries.” 4. United Nations, Global E-Government Readiness Report 2004—Towards Access for Opportunity. 5. Dutton, Information and Communication Technologies: Visions and Realities. 6. Heeks, Reinventing Government in the Information Age. 7. Kaboolian, “The New Public Management: Challenging the Boundaries of the Management vs. Administration Debate.” 8. Silcock, “What is E-government?” 9. Peled, “Network, Coalition and Institution: The Politics of Technological Innovation in the Public Sector.” 10. Holliday, “Building E-Government in East and Southeast Asia: Regional Rhetoric and National (In)action.” 11. Lee and Gong, “Overcoming the Confucian Psychological Barrier in Government Cyberspace.” 12. Little, Holmes, and Grieco, “Calling Up Culture—Information Spaces and Information Flows as the Virtual Dynamics of Inclusion and Exclusion.” 13. Salazar, “Evaluating Information Systems for Decentralization: Health Management Reform in Ecuador.” 14. Ranerup, “Internet-Enabled Applications for Local Government Democratization: Contradictions of the Swedish Experience.” 15. Benjamin, “Community Development and Democratization Through Information Technology: Building the New South Africa.” 16. West, “Assessing E-Government: The Internet, Democracy, and Service Delivery by State and Federal Governments.” 17. Landsbergen and Wolken, “Realizing the Promise: Government Information Systems and the Fourth Generation of Information Technology.” 18. Naschold and Daley, “The Interface Management Frontier: Modernizing Local Government. Part Three.” 19. Cheung, “Efficiency as the Rhetoric? Public-sector Reform in Hong Kong Explained.” 20. Kalathil and Boas, Open Networks, Closed Regimes: The Impact of the Internet on Authoritarian Rule. 21. Bacalla, “BIR Officials Delay Retirement by Faking their Birth Records” and “BIR Officials Amass Unexplained Wealth.” 22. Quah, Curbing Corruption in Asia: A Comparative Study of Six Countries. This and other examples draw from Wescott, “E-government in the Asia-Pacific region: Progress and Challenges.” 23. See http://tehelka.com and “MAM Interview with Tehelka CEO & editorin-chief Tarun Tejpal,” May 13, 2004, at www.indiantelevision.com/mam/ interviews/y2k4/tarun_tejpal.htm.

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24. United Nations, Global e-Governance Readiness Report, Table 3. 25. United Nations, Declaration of Principles—the World Summit on the Information Society. 26. “Gyandoot: We have turned the information highway,” at www.gyandoot. net/; Subhash Bhatnagar and Nitesh Vyas, “Gyandoot: Community-Owned Rural Internet Kiosks,” 2000, at www.worldbank.org/publicsector/egov/gyandootcs.htm; and Centre for Electronic Governance (undated), “An Evaluation Of Gyandoot” (draft report), Ahmedabad: Indian Institute of Management, at www.worldbank. org/publicsector/bnpp/Gyandoot.pdf. 27. Maartje Op de Coul, “Kothmale Community Radio—Sri Lanka,” 2003, at www.digitalopportunity.org/article/view/72470. 28. The Solomon Islands People First Network at www.peoplefirst.net.sb/ general/PFnet.htm. 29. Borzo. “It Takes an Internet Village.” 30. Wescott, “Developing the Diaspora.” 31. The official government site was updated in March 2005 for the first time in three years, hopefully a sign that more improvements will follow. See www.rmiembassyus.org/index.htm. 32. S. Hussain, untitled paper prepared for the 12th AMIC Annual Conference: E-Worlds: Governments, Business and Civil Society, Singapore, 2003, at www.LICT4D.asia/fonts/Urdu_Nasta’leeq. 33. Centre for Electronic Governance, Computerized Interstate Check Posts of Gujarat State. 34. Lobo and Balakrishnan, Report Card on Service of Bhoomi Kiosks: An Assessment of Benefits by Users of the Computerized Land Records System in Karnataka; Chawla and Bhatnagar, “Bhoomi: Online Delivery of Land Titles in Karnataka, India.” 35. (Anonymous), eGovernment for Development, Design-Reality Gap Case Study No. 24 The National Data Bank Project: An Expensive Lesson for Bangladesh, 2002, at www.egov4dev.org/ndb.htm. 36. Krasnikova and Heeks, “E-Government for Development.” 37. Alampay et al., Bridging the Information Divide. 38. Kanungo, “On the Emancipatory Role of Rural Information Systems.” 39. The Economist, “Behind the Digital Divide,” March 12, 2005. 40. Madon, “Evaluating the Developmental Impact of E-Governance Initiatives: An Exploratory Framework.” 41. eGovernment for Development, Success/Failure Case Study No.16, Electronic Birth Registration in Rajshahi, Bangladesh, at www.egov4dev.org/ rajshahi.htm#title. 42. Wescott, “Hierarchies, Networks and Local Government in Viet Nam.” 43. Wescott, “E-Government in the Asia-Pacific Region.” 44. Wescott, “E-Government: Supporting Public Sector Reform and Poverty Reduction in the Asia-Pacific Region.” 45. “About OPEN,” at http://opensystem.sit.re.kr/ENGLISH/. 46. Davis, “Corruption in Public Service Delivery: Experience from South Asia’s Water and Sanitation Sector.” 47. Barzelay, “Introduction: The Process Dynamics of Public Management Policymaking.” 48. Wescott, “Improving Public Administration in the Asia-Pacific Region: Lessons, Approaches and Reform Priorities.” 49. Schware, “Information and Communications Technology (ICT) Agencies: Functions, Structures, and Best Operational Practices.”

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50. Commonwealth Law & Technology Workshop for the Asian Region, “Report on the Status of ICT Laws in Sri Lanka.” 51. Satola, Sreenivasan, and Pavlasova, “Benchmarking Regional E-Commerce in Asia and the Pacific and Assessment of Related Regional Initiatives.” 52. ITU, Asia Pacific Telecommunication Indicators 2004, “Local Services, Long Distance, International, Cellular, Xdsl, Separate Regulator, Status of Main Fixed Line Operators,” 15. 53. United Nations, The Report of the Task Force on Financial Mechanisms for ICT for Development. 54. McKinsey, Inc., “Integrating Southeast Asia’s Economies.” 55. Development Assistance Committee, Financing ICTs for Development: Efforts of DAC Members. 56. United Nations, The Report of the Task Force on Financial Mechanisms for ICT for Development. 57. For example, TA6107-REG: Preparing a Pro-Poor Subregional E-Government Project for Providing Basic Service Delivery to Remote Communities in the Pacific for $390,000, approved May 23, 2003; Dong-Soo Pyo, “TOR for Preparing SASEC ICT Development Master Plan,” at www.adb.org/Documents/ Events/2004/SASEC/First_Mtg_ICT/DS_Pyo_Masterplan.pdf. 58. Barbu, Dominguez, and Melody, Information Infrastructure: The World Bank Group’s Experience. 59. ITU, Asia Pacific Telecommunication Indicators 2004, A-15. Amounts are not available for some of the smaller countries. 60. IDC, “Java Heats Up: Open Standards Enabling e-Government,” at www.idc.com.sg/jGovernment/default.asp. 61. See www.info.gov.hk/eindex.htm. 62. ePerolehan, Frequently Asked Questions, 2004, at http://home.eperolehan. com.my/en/support/faq.aspx#1. 63. See www.gsa.gov/shareinsavings. 64. United Nations, World Public Sector Report 2003: E-Government at the Crossroads. 65. Based on a survey of 1,000 foreign businessmen in Asia. Political and Economic Risk Consultancy, Ltd., “The Overall Skill Level of the Labor Force.” 66. Based on survey research in Australia. Power, “The Comparative Importance of Human Resource Management Practices in the Context of Business to Business (B2B) Electronic Commerce.” 67. Some private businesses in the region face similar cultural barriers in adopting new business processes linked to ICT; see Davison and Martinsons, “Empowerment or Enslavement? A Case of Process-Based Organizational Change in Hong Kong.” 68. Wescott, “E-Government in the Asia-Pacific Region.” 69. Government of Andra Pradesh, “Andrapradesh.com: An Odyssey into the Future,” 1002, at www.andhrapradesh.com/.

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10

Mobilizing Social Capital: Community Responses to Globalization Anirudh Krishna

A

s globalization enhances interaction, integration, and interdependence among people and organizations across national borders, it provides new opportunities that communities can exploit to different extents. Communities that are well connected with the processes of cross-border exchange will benefit from globalization; communities that are not well linked with markets and commercial exchange will miss out on these new opportunities and, indeed, may get left behind. The larger the number of communities left behind, the greater will be the disparity in incomes and wealth, and the greater the disparity in opportunities and rewards, the larger the backlash is likely to be against policies promoting globalization. Globalization must be inclusive and its benefits widely spread within a country in order to receive sustained support. Better upward links with the global economy must be combined with stronger downward links with communities in the interior or it is likely that the benefits of globalization will be captured primarily by metropolitan elites, worsening inequality and generating a backlash against globalization. Increasing inequality, especially of late in India and China, and evidence that inequality is growing in other Asian countries, indicate that opposition to globalization may be mounting.1 Already, community actions against globalization are becoming evident in some countries such as the Philippines and Bangladesh.2 Collective actions either for or against globalization can be built on the strength of communities’ social capital. Social capital is a resource, a propensity for mutually beneficial collective action that can be used to support many ends. Social capital can be employed by communities to participate in and obtain benefits from economic growth and globalization, as it has been in the East Asian countries discussed later in this chapter. Alternatively, social capital can be used for protesting and agitating against policies supporting globalization. 191

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How social capital is mobilized in any given situation will depend on the nature of incentives. Where strong links exist that help communities in the interior become active participants in market-led growth, social capital is likely to be used in support of globalization. However, if globalization benefits only a few while excluding or neglecting the many, social capital may serve the opposite objective. In this chapter, I discuss briefly what social capital is, how it can be observed and measured, and the objectives it can help to serve. I present examples from East Asia that show how social capital has helped broaden the base of economic development. Results from my study of sixty village communities in one part of India show that the economic development and participation objectives of communities are better served when social capital is high. However, social capital does not, by itself, determine these results. How and how well social capital is used depends on the nature of linkages between communities and markets. Social capital is a neutral resource that can be directed by communities possessing it toward ends that are good, bad, or indifferent for society. How exactly social capital is employed in any particular situation depends on how communities are linked to their external environment and how their leaders interpret for them the impacts of external forces. Both incentives and leaders shape the use of social capital. Evidence from other parts of Asia points clearly to the strong role that incentives and leaders play in helping communities select their targets for collective action. Where strong channels of access to markets exist, communities employ social capital in the service of market-strengthening and state-supporting activities. Where these channels of access are weak or nonexistent, communities tend to back off and insulate themselves or actively oppose state policies and market expansion. Employing social capital in support of globalization will require national governments to follow policies that enable rural communities to engage more actively in market transactions. Stronger linkages within countries will help sustain stronger linkages outside.

What Can Social Capital Help to Achieve? Social capital is defined as “features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit.”3 Social capital is an asset, a functioning propensity for mutually beneficial collective action, with which different communities are endowed to different extents. Communities possessing large amounts of social capital are able to engage in mutually beneficial cooperation over a wide front. Communities that have low levels of social capital are less capable of organizing themselves effectively for collective action.

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Social capital has both structural and cognitive dimensions. The structural dimension, which includes established roles and social networks, supplemented by rules, procedures, and precedents, facilitates mutually beneficial collective action. The cognitive dimension, which includes shared norms, values, attitudes, and beliefs, predisposes individuals toward mutually beneficial collective action.4 The structural and cognitive dimensions of social capital complement and reinforce each other. Individuals who are predisposed toward mutually beneficial collective action because of norms, values, attitudes, and beliefs are assisted by the availability of networks facilitating collective action. Equally, individuals knit together by social networks will take part more often in mutually beneficial collective action when they are predisposed to do so by shared norms and values. Structural and cognitive elements interact with each other to constitute social capital, and both dimensions must be considered simultaneously while evaluating the level of social capital in any community. Communities with high levels of social capital are likely to obtain larger and more diverse benefits. Robert Putnam et al. shows how the overall quality of governance is better in regions of Italy, for example, where social capital is high.5 Other studies have shown how communities’ welfare, firms’ profitability, participation in democracy, household income, and individual well-being are all improved in communities where social capital is high.6 High social capital contributes positively to the strong economic growth in East Asian countries. Industrial clusters and their associated social networks linking firms and government organizations helped establish synergies and promoted coordinated action in pursuit of faster and more broad-based growth. Peter Evans points out that “from joint business-government deliberation councils to the maze of intermediate organizations and informal policy networks . . . it is social capital built in the interstices between state and society that [helped keep] growth on track in Japan, South Korea, and Taiwan.”7 Norms of trust and clear mutual expectations drove individual members of these networks to take actions that achieved a greater good for all. Without such networks, the coordinated actions required for rapid growth may not have been taken in these countries.8 Networks and linkages that promote synergy among diverse actors have been built at the local and community levels as well as at the national level in those Asian countries experiencing rapid economic growth. In China, for example, synergistic relations between local governments and village and county enterprises stimulated rapid transition to a market-oriented economy. Such networks and linkages have contributed importantly to the rapid growth observed over the past fifteen years, and they offer an important explanation for why growth has been much faster and more broad-based in China than in Russia.9

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Involving more communities in the tasks of stimulating economic growth has required Asian governments to promote more and better linkages to communities in the interior. In South Korea, the New Community (or Saemul Undong) Movement sought to link more closely urban growth centers and rural communities. Investments in this program, which absorbed almost one-half of all government investments through the 1970s, were concentrated on rural roads, income increasing projects, social development, and rural factories. The results of the program were twofold. First, inequality between urban and rural areas was substantially reduced. The rural/urban income ratio, which was 62 percent in 1968, rose rapidly after this movement was launched, and parity was achieved by 1976.10 Second, strengthening linkages and providing new opportunities helped channel rural communities’ social capital into avenues supporting growth. “Adding concrete ties across the state-society boundary to preexisting kin and friendship ties,” as Evans observed, “helped transform traditional ties into developmentally effective social capital.”11 Similarly, in Taiwan, linking rural communities in the interior has been crucial for channeling social capital toward developmentally effective ends. The linkages in this case involve bringing state officials in closer contact with the village communities they serve.12 Growth in the agricultural sector has kept pace with growth in urban areas, and rural communities have been full participants in Taiwan’s economic development.13

Social Capital and Linkages Although social capital has an important role to play in supporting economic growth and globalization, the nature of linkages has a critical influence on how social capital is used. Linking rural communities with markets and opportunities in cities was an important part of the agenda pursued in successful East Asian countries. Unless similar steps are taken in other countries of Asia, community social capital could be used to promote antimarket policies. Evidence shows that communities possessing high social capital have, in some cases, used this resource to support socially undesirable ends. 14 Community groups united by high social capital participated in large numbers, for instance, in killing, maiming, and dispossessing members of other communities during troubled times in Rwanda.15 Members of the Mafia in Sicily use complex networks of social capital to pursue goals that benefit themselves at the cost of society as a whole.16 Social capital is not, therefore, exclusively or always good for society. The type of activities communities use social capital to support depends on their specific objectives, and those objectives are shaped in large part by the

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nature of available physical and human linkages. Incentives from communities’ external environments as interpreted by the community leaders are important in determining which ends will be pursued. Community leaders keep informed about changes taking place outside the community, they liaise on behalf of community members with state officials and market organizations, and they report back to communities about suitable targets for future collective action. Leaders are, therefore, both the agents that communities authorize to select the targets of collective action, and they are the interpreters who inform communities about incentives and opportunities provided by the state and the market. In brief, leaders serve as an essential link between communities and their external environments, mobilizing social capital and directing its use. Leaders have quite a lot to do, therefore, with how communities use social capital in any given case. Sheri Berman cites the example of Weimar, Germany, where high social capital provided an “ideal setting for the rapid rise to power of a skilled totalitarian movement.” Agents sent out by the Nazi party infiltrated and captured leadership positions within community groups united by high social capital. “Without this opportunity to exploit Weimar’s rich associational network . . . the Nazis would not have been able to capture important sectors of the German electorate so quickly and efficiently.”17 Perceptions of inequality were pronounced in Weimar, Germany, and the existing political institutions were incapable of channeling and redressing ordinary people’s grievances. The leaders of community groups interpreted this environment for other members, and they persuaded them to act collectively in support of the Nazi party. High social capital was translated by these leaders into activities that were deleterious for society as a whole—and certainly very damaging to Germany’s links with other countries. Social capital, as John D. Montgomery points out, is by itself “a neutral resource that can serve both moral and immoral ends.”18 Incentives in communities’ external environments as interpreted by their leaders help determine the ends for which social capital is used.

Measuring Social Capital and Assessing Its Effects A practical demonstration of this linkage between social capital and leadership is provided by the results of an investigation I conducted in sixty village communities of north-central India. These village communities, where I conducted field research between 1998 and 2000, are located in five adjoining districts of the state of Rajasthan. They are a diverse mix, including communities that sit astride major roads and others that are relatively hard to access; single-caste-dominant villages as well as villages with mixed caste compositions; and both larger villages and smaller ones.

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A total of 1,898 residents of these villages (average population: 1,254) were selected using random sampling, and they were interviewed using a questionnaire that I developed after first spending eight months living in a few villages of this region. Friends who are villagers in Rajasthan helped form a team of sixteen field investigators, equally men and women, who assisted in administering this questionnaire.19 Our objectives were to determine how much social capital matters for economic development and to examine how communities selected their objectives in practice. It was important, first, to develop a usable and contextually valid measure of social capital. Measuring Social Capital Social capital cannot be observed and measured directly. The cognitive elements of social capital, which have to do with norms, values, attitudes, and beliefs, are particularly difficult to measure. Observable and scaleable proxy measures are needed for measuring social capital in different contexts, and different measures are likely to be more suitable in different societal contexts. Networks, roles, rules, procedures, precedents, norms, values, attitudes, and beliefs vary among people with different patterns of life; thus proxy measures of social capital that are relevant for one set of cultures can be quite irrelevant for others. For example, density of membership in formal associations has been used as a proxy measure for scaling and comparing levels of social capital in the West where formal associations are quite prolific—85 percent of citizens in Sweden, 84 percent in Netherlands, 71 percent in the United States, and 67 percent in West Germany reported membership in at least one such association. However, formal organizations are not so prevalent in developing countries. Only 36 percent of citizens in Mexico, 24 percent in Argentina, 13 percent in India—and even fewer in other developing countries—are members of one or more formally registered organization. Even this low level of associational activity is concentrated for the most part in towns, leaving the mass of rural residents unaffiliated with any formal organization. The scarcity of formal organizations does not mean, however, that social capital is uniformly low. In developing countries, particularly in the rural areas, it is informal rather than formal associations that citizens value most. Much collective action in the sixty villages that I observed in India occurs within mutual support networks that come together and disperse as needed. The only enduring evidence for the presence and efficacy of these networks exists in the cognitive maps that people in these villages carry around in their heads. Neighbors come forward to help neighbors at times of need, and it is known that such help will be offered and accepted. Villagers

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help each other in raising crops, in training children, in combating disease, in any number of tasks that are associated with agrarian life, even though few formally registered associations exist. More than 80 percent of rural residents, 1,522 of 1,898 persons interviewed in Rajasthan for this study, participate regularly in labor-sharing groups, sharing work either in their own fields or for an external employer, and 63 percent stated that they had gotten together with other villagers one or more times in the past year to do something about a community problem. Two-thirds of the respondents said that working in these and other informal networks was associated with feelings of trust for other villagers and 54 percent expected that if some natural calamity were to occur, their entire village would come together and cope jointly with this situation. Detailed field investigations helped to identify local activities that were used for assessing the strength of local networks and norms related to solidarity, reciprocity, and trust. The following six questions, addressing both the structural and the cognitive dimension of social capital, formed part of the survey we administered among residents of these sixty villages: 1. Membership in labor-sharing groups. Are you a member of a labor group in the village, that is, do you work with the same group very often, sharing the work that is done either on your own fields, on some public work, or for some private employer? Responses were coded as 0 for “no” and 1 for “yes.” These responses were aggregated for all individuals interviewed in each surveyed village, thereby measuring the proportion of villagers who participate in such networks. 2. Dealing with crop disease. If a crop disease were to affect the entire standing crop of this village, then who do you think would come forward to deal with this situation? Responses ranged from “Everyone would deal with the problem individually” (scored 1), “Neighbors would help each other” (scored 2), and so on to “The entire village would act together” (scored 5). Individuals’ responses were averaged for each surveyed village. 3. Dealing with natural disasters. At times of severe calamity or distress, villagers often come together to assist each other. Suppose there was some calamity in this village requiring immediate help from government, for example, a flood or fire, who in this village do you think would approach government for help? The range of responses varied as above from “No one” (scored 1) to “The entire village collectively” (scored 5). 4. Trust. Suppose a friend of yours in this village faced the following alternatives, which one would he or she prefer? (1) To own and farm ten units of land entirely by themselves (scored 1); (2) To own and farm twenty-five units of land jointly with one other person (scored 2). Note that the second alternative would give each person access to more land (12.5 units instead of just ten units represented by the first option), but

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they would have to work and share produce interdependently. The question was framed so that the respondent was not making an assessment of his or her own level of trust, but rather of how trusting other people in the village were in general. 5. Solidarity. Is it possible to conceive of village leaders who put aside their own welfare and that of their family to concern themselves mainly with the welfare of village society? Responses ranged from “Such a thing is not possible,” scored 1, to “Such a thing happens quite frequently in this village,” scored 3. 6. Reciprocity. Suppose some children of the village tend to stray from the correct path, for example, they are disrespectful to elders, they disobey their parents, are mischievous, and so on. Who in this village feels it right to correct other people’s children? Four alternatives were posed: “No one,” scored 1; “Only close relatives,” scored 2; “Relatives and neighbors,” scored 3; and “Anyone from the village,” scored 4. Village scores on these six separate items are very closely correlated with each other, and in factor analysis these scores also load highly on a single common factor, indicating that there is a single underlying quality that is related to high scores on the individual items.20 Because they are so closely correlated, village scores on the six separate items were aggregated to form a Social Capital Index. The mean score for villages on this Social Capital Index is 38.8 points (out of a possible 100 points) and standard deviation is 23.6. Eight villages out of 60 have scores of 75 points or more. Balesariya village, with a score of 88 points, leads this list, and Sunderchha (82 points) and Nauwa (74 points) are next. Sema village is last with a score of 13 points. Kundai (21 points), Sare (20 points), and Ghodach (18 points) also have relatively low scores on the Social Capital Index. High social capital manifests itself within these Rajasthan villages in multiple observable acts of cooperation and mutual goodwill, and low social capital is associated with less cooperation and lower expectations. In village Balesariya, which has a high score on the Social Capital Index, trust, reciprocity, and cooperation are clearly in evidence. No walls separate the houses and doors are left open all day. Every household takes its turn every morning and evening in filling the communal trough for animals to drink. Water from an irrigation tank is also distributed by rotation. All households pay a fee to receive water, and this money is used to finance repairs and watchmen’s salaries. Trust and collective goodwill are nowhere nearly as manifest in Kundai, Sare, and Ghodach, where social capital scores are low. People in Ghodach are suspicious of each other, and they are constantly scheming to put each other down. People in Kundai speak guardedly. They are afraid that something they say will be misunderstood by a neighbor. All house-

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holds take water any time they can from the village irrigation tank without any organized control. People in Sare, Kundai, and Ghodach celebrate festivals only among family and close relatives. In Balesariya and Nauwa, where social capital is stronger, the whole village turns out for major community events. In any emergency, villagers borrow money from other villagers, and they return it as quickly as they can—without being charged any interest on the loan. In Ghodach, Sare, and Kundai, on the other hand, people can only turn to the professional moneylender in times of need. Scores on the Social Capital Index are closely aligned to everyday manifestations of trust, goodwill, and reciprocity among villagers. Whether these scores are equally well related to development performance in these villages, however, requires closer examination. Assessing Results An index for assessing development performance in these sixty villages was constructed from four different sets of outcomes that have considerable importance for villagers. Livelihood stability is the first of these four indicators. These villages are located in a semi-arid region, where rainfall is scarce and drought is a frequent occurrence. Villagers are continuously concerned about the availability of food, fodder, and firewood. Although food crops (mostly millets and maize and some wheat) are grown on privately owned land, fodder and fuelwood are collected from common lands, which constitute between one-third and one-half of total village area. Protecting, preserving, and developing these common lands is a collective concern of villagers and their performance in a program of common land development provided one indicator for assessing the relative impact of social capital. A second indicator is related to employment generation. Nearly half of all village households depend for their subsistence on getting wage employment for at least one month each year. Such employment is obtained most usually from some government-sponsored construction work located near their village. The number of days of public works employment per capita averaged over the last five years, therefore, provided a good second outcome indicator. Poverty reduction benefits provided a third indicator. Nearly 45 percent of all villagers have incomes that are below the officially recognized poverty line in this region. Government programs provide assistance to such below-poverty-line households, and poverty grants per capita averaged over the preceding five years constituted a third outcome indicator. Villagers are also concerned about having better education and health facilities and clean drinking water. An index composed of their subjective

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assessments of service quality in these areas constituted the fourth outcome indicator. In analysis, these four separate outcome indicators were found to be quite closely interrelated: villages that performed relatively well on any one outcome indicator also performed comparatively better on the other three indicators. Because they are so closely correlated, I combined the four separate outcome indicators within a single Index of Development Performance. Different bodies of theory were consulted to examine alternative explanations for high development performance scores. The following independent variables were considered in this analysis. Number of Caste Groups measures the number of different caste groups that reside in any village, while Dominant Caste measures the proportion of village households that belong to the most numerous caste group. Differences in the level of infrastructure facilities were examined through the variable Infrastructure, which combines scores for level of facility related to transportation, communications, electrification, and water supply. Another variable, Literacy, was calculated as the sample percentage of persons having five or more years of formal education. Differences in relative need were assessed with the help of two variables: Dryland measures the ratio of rain-fed (unirrigated) cropped area to irrigated cropped area, and Percentage Poor measures the percentage of village households that are poor. The Social Capital Index, described above, was also considered among this list of explanatory variables. Social capital was considered both by itself and in conjunction with some other independent variables. In particular, the interactions of social capital and some leadership variables were considered in order to test for the extent to which leaders influence results. Six different leadership variables were considered for this analysis, corresponding to different types of leaders in these villages.21 Table 10.1 presents the results of regression analysis. Three different models are shown. Model 1 does not include social capital but it tests some other independent variables. Not one of the six separate leadership variables is significant here, and none of the other independent variables is significant either. Only literacy matters. However, the fit of this regression equation is very imperfect. R2 is only 0.12. The F-probability of 0.186 indicates that a regression model consisting of these independent variables is not a good predictor of values of the dependent variable. Model 2 drops most of these nonsignificant independent variables and it adds the Social Capital Index to the equation.22 R2 improves, it now has a value of 0.28, and the Social Capital Index has a significant coefficient, in addition to literacy, which remains significant as before. Model 3 retains all of the variables of Model 2. Additionally, an interaction term was calculated by multiplying together the Social Capital Index with the variable New Village Leaders, which measures the capability of new leadership in each village. 23 These new village leaders are village

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OLS Regressions on Development Performance

Intercept (15.7)

Model 1

Model 2

Model 3

22.4 (24.70)

–60.2** (22.9)

–47.2*

Independent variables Structural variables Dryland Percentage poor Infrastructure Number of castes

0.09 (0.19) 0.79 (3.48) –0.24 (1.77) 0.15 (0.97)

0.61 (3.21)

0.52 (3.24)

1.14* (0.44)

–0.001 (0.05) 0.65* (0.37)

0.002 (0.04) 0.52* (0.24)

–0.14 (0.68) 1.45 (3.89) 0.97 (5.39) 0.25 (4.41) –0.78 (4.82) 0.87 (2.68)

–0.89 (4.9) 1.12 (2.7)

–0.69 (4.77) 0.61 (2.64)

1.10* (0.34)

0.35 (0.36)

60 0.28 0.21 3.39 0.01

0.08*** (0.009) 60 0.43 0.37 6.27 0.0001

Dominant caste Literacy Leadership variables Traditional patrons Panchayat leaders Political party leaders Caste leaders Village council leaders New village leaders Social capital index Interaction (Social capital index * new village leaders) N R2 Adj-R2 F-ratio F-probability

60 0.12 1.56 0.186

Notes: *p < .05 **p < .01 ***p < .001 Standard errors are reported in parentheses. Devindex is the dependent variable.

youth with some education who have come up within the past twenty years and who help other villagers establish contacts with state agencies and market operations. 24 Literacy continues to remain significant. The Social Capital Index loses significance, however, and the interaction term between

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the Social Capital Index and New Village Leaders is revealed to be highly significant. R2 improves further to 0.42, and the F-statistics also improve considerably, indicating that Model 3 fits much better with the data at hand. These results show that social capital and new leaders both matter for development performance, and they matter in interaction with each other. It is the multiplication of these two variables in any village that is critically related to its level of development performance. With the exception of literacy, no other factor matters for economic development performance. This interaction of social capital and leadership is important to bear in mind. Strong new leaders have not been able to achieve very much in villages where social capital is low. Equally, villages with comparatively high social capital levels have achieved relatively poor results when new leaders have been absent or incapable. “Civil society requires political agency,” suggests Michael Walzer.25 Where the appropriate form of leadership is incapable or unavailable, high social capital does not translate into good development results. Where both social capital and leadership capacity are high, communities are able to achieve much better results. Leadership influences, therefore, what communities are able to do with their high social capital. The results communities achieve and the objectives they see fit to target are both influenced by the people who lead those communities. Participation, Protest, and Social Capital Leaders of these village communities have so far largely selected objectives for collective action that promote greater engagement with the state and with markets. Withdrawal or opposition has not been the dominant trend in this region. For example, residents of Balesariya do not utilize their high social capital to protest regularly or stridently against policies that leave them behind. But they have come out in large numbers on occasion in the past. During the eight months that I spent in the vicinity of this village, Balesariyans agitated collectively on two separate occasions. Once they came together to block the national highway for thirty-six hours in protest against the public bus station being moved farther down the road from their village. Another time they marched collectively on the district office of the Irrigation Department, protesting against what they perceived to be an unfair increase in irrigation rates. In addition to promoting greater engagement with the state and markets, high social capital also enables these villagers to protest collectively against commonly shared grievances. Their inability to connect more effectively with growth and globalization might well become such a grievance in the future, especially if their linkages to markets remain weak and other villages forge ahead aggressively, while Balesariya is left behind. Despite its high

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social capital Balesariya has not done well compared to other villages in terms of economic development. The approach road to the village is a muddy path, impossible to negotiate during the three monsoon months. Drinking water is still taken from the community well, and villagers have been mostly unable to benefit from economic growth within the state and country. What residents of Balesariya and other similar villages will do collectively in the future depends to a large extent upon the nature of the opportunities they have for participating in economic development. It will depend also upon how their leaders interpret these opportunities for them. Resignation might be the collective response, especially if older and less aggressive leaders continue to remain in charge. However, younger and less quiescent leaders are waiting impatiently in the wings and will less likely accept peaceably the results of increasing inequality. Results from other villages in this region indicate how leaders have mobilized social capital on occasion to challenge government policies. In Nauwa village, for instance, villagers protested collectively and they refused to let the assistant engineer of the Watershed Development Department leave their village until senior officials intervened and provided a written assurance that water storage structures in upstream villagers would be redesigned and the flow of water to Nauwa’s fields would not be reduced. Communities that are more close-knit and better led mobilize more often and in larger numbers, and they also set the terms for these engagements. The goals they select for these encounters depend on the nature of incentives perceived by community residents and interpreted by their leaders. Cooperation with the state is often the result, but many communities use social capital to mobilize against the state. Residents of Sangawas village, for example, have been at the forefront of demands for the right to better information from government officials. They have mobilized on numerous occasions to demonstrate in front of government buildings, to block major roads, and to petition senior officials in support of these demands. What they want from these collective efforts is more and better information about new development opportunities and new government programs. Because they have been denied access in the past to these opportunities and programs, they have mobilized their stocks of social capital in opposition to the state’s policies.

Conclusion Social capital is an effective resource, but it can be used to take collective actions of very different kinds, as the previous examples from India illustrate. Evidence from other Asian countries also illustrates the variety of

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ways that social capital is employed for collective action. Social capital helped achieve positive ends in the irrigation projects that Norman Uphoff and C. M. Wijayaratna examined in Sri Lanka. An important reason was the role played by leaders—in this case, institutional organizers—who promoted greater integration both within the irrigation network and externally with other government agencies and with markets.26 Building strong links was also important for mobilizing social capital productively in the irrigation systems of Taiwan. Linkages promoting greater integration and complementarity helped foster, as Wai Fung Lam points out, “symbiotic relationships among individuals [and communities] in which each possesses resources that are essential to the well being of the others.”27 Studies undertaken in Indonesia, in the Philippines, and in Bangladesh also indicate how the use and accumulation of social capital improved when communities in remote and interior areas were better linked with markets and the state.28 The availability of beneficial external linkages in these cases motivated communities to mobilize social capital in ways that promoted greater integration with the national economy. Incentives of a different kind, however, can de-link interior communities from the national and international economy. Communities can use their social capital in these cases to block further integration and to oppose globalization. One instance from the state of Karnataka, India, demonstrates how globalization can become a target for well-organized community groups. The Karnataka Rajya Raitha Sangha, the state farmers’ organization, has mobilized its members frequently to protest against policies promoting global exchange. A history of prior mobilization allowed this organization to establish networks of affiliation that facilitated collective protests. In addition, shared norms of village self-sufficiency and decentralized government predispose members to act collectively.29 Social capital is, indeed, quite high within this organization. Because members were convinced, however, that globalization was creating only costs and disadvantages for them they used social capital to oppose globalization. Richard Rose, in his examination of social capital in Russia, also shows how individuals and groups that are socially excluded join in collective action groups that promote further disintegration and fragmentation. 30 Scott’s examination of rural Malaysia also illustrates how subordinate groups that feel unjustly excluded from the benefits of economic and technical change use social capital as a weapon of the weak to protest against these changes.31 Social capital is, therefore, a multipurpose resource that can be used in different situations to promote quite different ends. How social capital is used by any particular group or community depends on how the incentives are structured for them. Building better linkages to markets can improve the incentives for communities to participate in and benefit from globalization rather than resisting it.

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In addition to promoting better links between communities and markets, governments and private organizations seeking to expand the benefits of globalization must build social capital. East Asian countries achieved fast-paced and widely shared economic growth by improving linkages and extending social capital. Countries in other regions seeking to replicate this experience will also need to invest in social capital and strengthen linkages so that communities can more easily participate in economic activities. Investing in social capital is an important public policy objective. However, there is little clarity at present about how exactly social capital can be built. Different views have been expressed on this subject, and the evidence so far remains fragmented and inconclusive. Putnam et al. propose that social capital is accumulated only very slowly and in historical time. “History determines . . . [and] historical turning points . . . have extremely long-lived consequences,”32 they suggest; therefore, public interventions to build social capital may not turn out to be very significant or productive. Other analysts contend, however, that social capital is not a historically fixed endowment and can be built up relatively quickly. They suggest that social capital can be strengthened by enhancing people’s participation in local institutions, developing fair and equitable rules of engagement, and facilitating better information and communication. 33 Firm conclusions about how to build social capital, however, require additional research. Meanwhile, governments and NGOs can enhance participation, promote rule development, and facilitate better communication for their own sake, and if they enhance social capital in the process, it can be seen as a considerable bonus. While ongoing research will help to resolve the question about how best social capital can be built in the short- to medium-term, more attention will need to be given to linkages. Communities that obtain more access to market opportunities through global economic exchange are more likely to use social capital to promote globalization. Countries in Asia that have sustained fast-paced growth have done so by attracting talent and energies from the largest number of communities. Governments in countries that have been successful at economic development have invested heavily in building linkages that enable communities and individuals from even remote rural communities to benefit from globalization. Social capital at the disposal of these interior communities has thereby been made more developmentally effective. The benefits of globalization are likely to be more inclusive and the benefits will be more widely shared where rural and interior communities have access to stronger linkages and economic opportunities. Paradoxical though it may seem, sustaining and strengthening globalization will require investing in building better linkages within countries and not just among them.

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Notes 1. See, for example, Milanovic, “Half a World Away,” at www.worldbank.org/research/inequality/pdf/5countries1.pdf, and Robert H. Wade, “On the Causes of Increasing World Poverty and Inequality, or Why the Mathew Effect Prevails,” pp. 163–188. 2. Reports about such protests are increasingly visible in the international media. Here are a few examples: “In Goro, New Caledonia, a coalition of aboriginal New Caledonians, known as Kanaks, women’s groups, environmentalists, and political parties have collaborated to shut down work at a multinational companies’ open pit nickel mine. The demonstration, which occurred on August 29th, 2002, involved between three and five thousand New Caledonians, an amazing number on an island whose total population is only 160,000” (www.minesandcommunities.org/Action); “They’re no mutineers with guns and bombs but they are just as angry with the government,” the Business World (Philippines) reported on August 8, 2003. “In a recent protest march to the House of Representatives office in Quezon City, a group of farmers, fishermen and peasant groups staged a protest against the government’s trade liberalization policies. Calling themselves the Stop the New Round! Coalition, the group criticized President Gloria Macapagal Arroyo for spearheading globalization efforts”; and, in Bangladesh, community organizations and others “organized protest rallies, processions and demonstration around the country including the capital city venting their wrath against the World Trade Organization (WTO), widely censured as a rich club,” reported BBC Monitoring South Asia, on September 11, 2003. “The largest protest demonstration was held at the foot of the central Shahid Minar in the city, organized by People’s Alliance Against WTO, a platform of local anti-globalization groups. Speakers at the meeting said that the global body had actually widened the gulf between the North and the South rather than improving the poverty situation.” 3. Putnam, “Bowling Alone,” p. 67. Other definitions of social capital have also been provided within the vast and growing literature on this subject. Putnam’s definition is the most widely used, however, and for studying communities’ responses to globalization it is also the most appropriate one. 4. See Krishna and Uphoff, “Mapping and Measuring Social Capital Through Assessment of Collective Action to Conserve and Develop Watersheds in Rajasthan, India”; Uphoff, “Understanding Social Capital: Learning from the Analysis and Experience of Participation.” 5. Putnam et al., Making Democracy Work: Civic Traditions in Modern Italy. 6. There is a vast and growing literature that upholds such expectations of positive results from social capital within diverse domains and different levels of societal aggregation. See, for example, Coleman, “Social Capital in the Creation of Human Capital”; Fernandez, Castilla, and Moore, “Social Capital at Work: Networks and Employment at a Phone Center”; Fukuyama, Trust: The Social Virtues and the Creation of Prosperity; Kenworthy, “Civic Engagement, Social Capital, and Economic Cooperation”; Krishna, “Enhancing Political Participation in Democracies: What Is the Role of Social Capital?”; Meinzen-Dick, Raju, and Gulati, “What Affects Organizational and Collective Action for Managing Resources? Evidence from Canal Irrigation Systems in India”; Narayan and Pritchett,“Cents and Sociability: Household Income and Social Capital in Rural Tanzania”; and Varshney, “Ethnic Conflict and Civil Society: India and Beyond.” 7. Evans, “Government Action, Social Capital and Development: Reviewing the Evidence on Synergy.”

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8. Johnson, “Political Institutions and Economic Performance: The Government-Business Relationship in Japan, South Korea, and Taiwan”; Wade, “Managing Trade: Taiwan and South Korea as Challenges to Economics and Political Science.” 9. Burawoy, “The State and Economic Involution: Russia Through a China Lens.” 10. Kim, “National Policy and Its Impact on Poverty.” 11. Evans, “Government Action, Social Capital and Development,” p. 1122. 12. Lam, “Institutional Design of Public Agencies and Coproduction: A Study of Irrigation Associations in Taiwan.” 13. Amsden, “Taiwan’s Economic History.” 14. Portes and Landolt, “The Downside of Social Capital.” 15. Mamdani, When Victims Become Killers: Colonialism, Nativism and the Genocide in Rwanda; and Uvin, Aiding Violence: The Development Enterprise in Rwanda. 16. Gambetta, The Sicilian Mafia: The Business of Private Protection. 17. Berman, “Civil Society and the Collapse of the Weimar Republic.” 18. Montgomery, “Social Capital as a Policy Resource.” 19. These results are described in more detail in Krishna, Active Social Capital. 20. This set of six activities might not work equally well for observing and measuring social capital appropriately in other developing country contexts. A method for constructing similar indices is presented in Krishna and Shrader, “CrossCultural Measures of Social Capital: A Tool and Results from India and Panama.” 21. These six different types of leaders include traditional patrons, caste leaders, leaders of traditional village councils, elected local government (panchayat) officials, and political party leaders. In addition, one other leader type, new village leaders, was also considered. For details on each type of leader and for an examination of the underlying theoretical literature, see Krishna, Active Social Capital. 22. Alternative formulations of Model 2 were considered using different combinations of variables along with the Social Capital Index. However, the results did not change in terms of which variables achieved significance. The Social Capital Index and Literacy were consistently significant, and none of the other variables was significant. 23. Interactions of the Social Capital Index and each of the other five leadership variables were also separately tested in regression analysis, but these variables did not achieve significance, indicating that it is a particular type of agency that mobilizes the stock of social capital for development purposes in these villages. Collinearity is low to moderate in each of these regression models, as verified by the Condition Index. 24. A longtime observer of village politics described these new leaders to me in the following terms: “They are usually between twenty-five and forty years of age . . . [and] educated to about middle school [level]. They read newspapers, have lowlevel contacts in numerous government offices, and are experienced [in dealing] with the government bureaucracy and with banks, insurance companies, and such like . . . Their caste does not matter. These new leaders can be of any caste, but they must have knowledge, perseverance and ability.” I interviewed nearly 120 such new leaders, and I found they had come up and gained influence mostly within the past two decades. The spread of primary education in rural areas and also expanded interface with state and market agencies had contributed to the rise of these new leaders in villages.

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25. Walzer, “The Concept of Civil Society,” p. 14. 26. Uphoff and Wijayaratna, “Demonstrated Benefits from Social Capital: The Productivity of Farmer Organizations in Gal Oya, Sri Lanka.” 27. Lam, “Institutional Design of Public Agencies and Coproduction,” p. 1051. 28. Grootaert, “Social Capital, Household Welfare and Poverty in Indonesia”; Fox and Gershman, “The World Bank and Social Capital: Lessons from Ten Rural Development Projects in the Philippines and Mexico”; Pargal, Gilligan, and Haq, “Does Social Capital Increase Participation in Voluntary Solid Waste Management? Evidence from Dhaka, Bangladesh.” 29. Udyagiri and Walton, “Global Transformation and Local Counter Movements: The Prospects for Democracy under Neoliberalism.” 30. Rose, “Getting Things Done in an Anti-Modern Society: Social Capital and Networks in Russia.” 31. Scott, Weapons of the Weak: Everyday Forms of Peasant Resistance. 32. Putnam et al., Making Democracy Work, p. 79. 33. See, for example, Krishna, Uphoff, and Esman (eds.), Reasons for Hope: Instructive Experiences in Rural Development; Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action; Uphoff, “Understanding Social Capital.”

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CHAPTER

11

Social Protection Policies: Making Globalization Work for All Isabel Ortiz

A

lthough globalization offers new opportunities to many, 60 percent of the population in the Asia Pacific Basin (primarily in South and Central Asia) still lives below the poverty line. Nearly two billion people are excluded from the benefits of globalization and development. That raises an uncomfortable question: Globalization and development for whom? Social development and social protection are necessary because the benefits of economic growth do not automatically reach all. This chapter addresses this issue by examining the social challenges in Asia and the Pacific, the progress achieved, and the main reform priorities, and analyzes the policy implications for social protection in a globalizing world. I argue that social protection is not only justified from a humanitarian viewpoint; it is an economic need in the Asia Pacific Rim.

Social Challenges in Asia and the Pacific The Asian and Pacific region has half the world’s population—of its total 3.1 billion, 2 billion are poor (60 percent), and 1.3 billion are children and youth (40 percent). Additionally, more than 2 billion live in rural areas and are deprived of adequate access to social services and good employment opportunities. A main development challenge for the region is to achieve sufficient employment-generating growth to secure the inclusion of the poor and the young.1 However, growth alone is not a sufficient condition for generating inclusive societies. Populations, households, and individuals face various risks that can plunge them into poverty; societies have to take steps to reduce their vulnerability and to cope with the effects when shocks occur. Risks may include natural disasters such as the tsunami in 2004; civil conflicts; economic downturns, of which the 1997 Asian financial crisis is the 209

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most recent example; or idiosyncratic household reversals, such as crop failures, unemployment, illness, accident, disability, death, and old age, threatening the future of the household and its members. The poor are exposed to four main types of risk related to the individual lifecycle—economic, environmental, and social or governance-related threats (see Table 11.1). Some risks affect all population groups equally; others have more intense impacts on the poor. The poor are especially vulnerable to risks and are constantly preoccupied with risk-averse and coping strategies to avoid sinking further into poverty. Social risk is a dynamic concept—insecurity means exposure to risks of events that, if they occur, result in further vulnerability.2 While anyone can be vulnerable, the poor and the near poor are particularly at risk since they have fewer assets, reserves, or other opportunities to fall back on. Both the public and the private sectors can provide a variety of formal and informal risk reduction mechanisms. Table 11.1 shows not only the traditional public and private formal arrangements, but also some of the informal strategies for coping with risk. Many rely on community arrangements and women’s support, imposing a clear burden on gender development, and, therefore, are regressive instruments that should not be encouraged. As urbanization and industrialization gradually undermine the effectiveness of traditional and informal protection mechanisms, new public or private systems need to be put in place to reduce risks to the population. Modernization has been accompanied by social mobility, migration, urbanization, and disintegration of family and community networks. Household informal safety nets are no longer adequate—modernization requires the provision of social protection systems for the workforce to ensure higher productivity gains, increased domestic market demand, and economic growth. The Asian population is largely young, rural, and poor, and social protection programs and policies should be formulated to respond to their needs. Since, at present, adequate protection systems are not in place to reduce the impact of shocks from financial, social, or natural disasters on its population, risks will continue to have devastating implications for poverty, inequality, and the prospects of long-term growth. Although most of the poverty in the Asia Pacific region is rural-based, urban poverty is also increasing. Table 11.2 reveals a worrisome trend as the number of poor in South and Central Asia continues to rise. Generally, poverty is feminized. More women than men live in poverty and it is increasingly a condition found among older people. Social class, caste, ethnic, or racial divisions are often intensified by differing poverty levels, and recently arrived immigrants tend to be poorer than others. The Asia Pacific Basin is still experiencing the effects of the demographic explosion. As previously mentioned children and youth (defined internationally as those between the ages of zero and eighteen) comprised

• Maintaining community networks (reciprocal gifts, arranging marriages, religious networks) • Community pressure • Women’s groups • Migration

• Migration • Community action for resource management • Private transfers/extended family support • Assets/savings depletion

• Employment generating private sector investment • Agricultural/livestock insurance, reinsurance, microinsurance • Banking services to the poor, microfinance • Providing training

• Provision of health services • Health, disability, life insurance, and reinsurance • Microinsurance • Old-age pensions

Private Sector Mechanisms

• Promoting good governance, access and antidiscriminatory policies, fight corruption practices • Labor standards • Public information campaigns • Providing security and equal access to public services

• NGOs and CBOs • Good corporate governance securing fair employment opportunities and provision of services regardless of race, gender, age, social status, or political affiliation.

• Disaster preparedness and management; • Agricultural, livestock catastrophe • Agricultural/livestock insurance and insurance and reinsurance subsidies • Environmental policy and infrastructure investment

• Labor market policies (active and passive instruments) to promote employment • Education • Social assistance (e.g., food stamps, allowances) • Micro and area-based schemes, including social funds, microinsurance

• Child protection programs • Public health • Social insurance policy; mandatory insurance for illness, disability, life, old age, maternity • Microinsurance • Social assistance

Notes: Community-based organization (CBO); nongovernmental organization (NGO).

Social/governance • Exclusion, losing social status/capital • Extortion, corruption • Crime, domestic violence, social anomie • Political instability

Environmental • Drought • Flood, rains • Earthquake • Landslides

• Diversified sources of livelihood • Private transfers/extended family support, child labor • Depletion of assets/savings • Reduced consumption of basic goods • Debt • Migration

Risk Reduction Measures Public Sector Mechanisms

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Economic • End of source of livelihood (e.g., crop failure, cattle disease) • Unemployment • Low income • Changes in prices of basic needs • Economic crisis and/or transition

Women as family welfare providers Extended family, community support Hygiene, preventive health Asset/savings depletion Debt

Lifecycle • Hunger, children’s stunted development • Illness/injury/disease (including HIV/AIDS) • Disability • Old age • Death • • • • •

Household or Informal Mechanisms

Risk Assessment

Social Risks: Risk Assessment and Risk Reduction Measures

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Table 11.1

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Table 11.2

Poverty in Asia

Number of people below the $2-a-day poverty line (thousands) East Asia and the Pacific South Asia Central Asia Headcount index (percentage) East Asia and the Pacific South Asia Central Asia

1990

2000

1,094 971 11

873 1,052 30

69 83 20

48 78 60

Source: World Bank, Global Economic Prospects 2004 (Washington, DC: World Bank, 2004).

40 percent of the region’s 3.1 billion people in 2000. That figure is expected to decline slowly to 34 percent by 2015.3 The demographic transition started in Asia with a progressive decrease in the number of infants and a progressive increase in the elderly. However, this has gradually evolved until the major issue Asian countries will face in the coming decade is the predominance of children and young new entrants into the labor market. This has clear implications for education, health, population, child protection, and labor market policies, and for the realization of human potential and the creation of opportunities for self-reliance to transform the vicious cycle of poverty into a virtuous cycle of growth and human development. In contrast to the developed regions and industrialized countries in Asia, people of developing Asia who are over sixty-five years of age comprise only about 5.5 percent of the total population. This percentage is expected to rise gradually to 7.2 percent by 2015 as fertility rates fall and life expectancy increases.4 Older Asians reside primarily in rural areas, but that is expected to decline with increasing urbanization. Policymakers will need to plan for the changing labor market and develop other social assistance and social insurance schemes. The considerable size of the workforce, combined with decreasing fertility rates, indicates that Asian countries will face serious old-age challenges in fifty years. However, old-age policies should be carefully evaluated, with consideration given to the many design options allowed while a population is primarily children and working-age people. In the short term, however, the highest social priorities are addressing the problems of the poor—sustaining their sources of livelihood; ensuring their ability to obtain food, shelter, and clothing; preparing for the consequences of natural disasters; and maintaining the health of the breadwinner—and not, for instance, old-age insurance. Income disparities inhibit economic and social development in most of Asia and the Pacific. In countries where assets and wealth are concentrated

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in the hands of few and the level of poverty is high, domestic markets remain small and depress demand for the products of local industries.5

Effectiveness of Existing Social Policies The experience and history of the Asia Pacific Rim is diverse, and the motivations and approaches for future reform differ from one country to another. All Asian and Pacific developing countries have enacted social policies, but most focus on education (see Table 11.3). Health and social protection have received less attention. Ministries of education, health, labor, social security, and welfare exist in all countries; however, their policies have not always been effective. The high levels of poverty in the region are generally the result of the lack of economic opportunities and weak social services for the poor. Services are limited in coverage, reaching only a portion of the population—more males than females, and often focusing on the wealthiest segments of society instead of the poorest. Insufficient funds are often inappropriately distributed among programs. Progress in Education Access to education in Asia has improved substantially since 1980. The regional adult literacy rate had risen from 61 to 73 percent by 2003. However, female literacy rates were only half the rates for males. In absolute terms, the number of illiterates in the region increased during that period from 647 million to 651 million, and the number of female illiterates rose from 410 million to 422 million. Illiterates, particularly female illiterates, are heavily concentrated in South Asia. Despite its developmental progress, the Asia-Pacific region still accounts for three-fourths of the world’s illiterate. Universal primary education has nearly been achieved in most countries of East and Southeast Asia and the Pacific, and many countries are now increasing the period of compulsory basic education to include primary and lower secondary schooling (nine years). Many South Asian countries continue to invest too little in primary and lower secondary education, with the result that many children, particularly girls, do not have access to schooling. Enrollment rates in higher education have also increased, from 5.3 percent in South Asia in 1985 to 6.5 percent by 2003 and, in East Asia, from 5.4 to 8.9 percent for that period. Yet, these rates are still lower than the demand for higher-level skills experienced in many countries. Increased enrollment rates in basic education mask the fact that poor children—working children, street children, children in remote areas, children from minority groups, and disabled children—are not enrolled. Furthermore, improving the quality of education is essential to

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Table 11.3

Public Expenditure by Function, as Percentage of GDP, 1993–1998

Country Developed regions Developing Asiaa East Asiaa Cambodia China Indonesia Lao PDR Malaysia Philippines Thailand Vietnam South Asiaa Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asiaa Azerbaijan Kazakhstan Kyrgyz Republic Mongolia Tajikistan Turkmenistan Uzbekistan Pacifica Fiji Papua New Guinea Solomon Islands Vanuatu Kiribati Samoa

Health

Education

Social Security Welfare

6.2 2.9 1.2 0.6 2.0 0.6 1.2 1.3 1.7 1.7 0.4 2.1 1.6 3.2 0.6 5.4 1.3 0.9 1.4 3.4 1.2 2.1 2.7 4.3 6.6 3.5 3.3 4.8 2.9 2.6 4.2 2.8 11.6 4.8

5.4 3.9 3.1 2.9 2.3 1.4 2.1 4.9 3.4 4.8 3.0 3.6 2.2 4.1 3.2 6.4 3.2 2.7 3.4 4.0 3.0 4.4 5.3 5.7 2.2 n.a. 7.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a.

9.8 n.a.b 1.0 n.a. n.a. n.a. n.a. 1.4 n.a. 0.8 n.a. 0.8 n.a. n.a. n.a. 1.4 0.3 n.a. n.a. 6.7 7.7 n.a. n.a. 5.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Source: Compiled from World Bank, World Development Indicators (Washington, DC: World Bank 2002). Notes: a. Unweighted averages. b. Not available.

make a difference in the lives of children. Most countries in the region have a continuing problem with quality, manifested by the large number of children who complete basic education but still lack the literacy and numeracy skills necessary to become productive workers.6 Progress in Health, Population, and Nutrition Despite receiving less investment than education, progress in basic health, mother and child health care, population control, and immunization and

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nutrition campaigns has resulted in improved health conditions in the Asia Pacific Basin. Fertility and under-five mortality rates have declined, life expectancy increased, and health status improved. Despite progress in the physical well-being of the population, the region still faces serious challenges. Child mortality rates, particularly in South Asia, are higher than in any other region of the world except Sub-Saharan Africa. Every year more than 7 million children under age five die and almost all of these deaths are preventable. Aggregate trends hide the fact that progress over the last thirty-five years has been fragmentary. There are countries, such as China, Sri Lanka, and Vietnam, that have made dramatic improvements in the health of their populations; other countries, however, have progressed considerably slower. Large pockets of people in ill health remain even within countries that, on average, enjoy good health. Malnutrition is extensive in South Asia. Some countries, such as Pakistan, Cambodia, Laos, Melanesia, and Micronesia, have such high fertility rates that they interfere with sustainable economic growth. With large numbers of children born each year, the ability of these countries to provide minimal health, education, and social protection to them is being overwhelmed. Sick and uneducated children imply a mortgaged future.7 Progress in Social Security and Labor Social security and labor have received the least attention in Asian social policies. Progress in basic social protection issues, such as core labor standards, is slow. Child labor is prevalent in the whole region and bonded labor is reported in several Asian countries.8 Investment in labor services, which would have a large impact in improving productivity, is minimal. Social insurance has often focused on the wealthy elderly instead of health, unemployment, or more attractive products such as microinsurance for the poor. Many poor communities in Asia are vulnerable to natural disasters. All of these vulnerabilities could be minimized with adequate disaster preparedness programs and proper decentralization policies, including labor market policies and programs designed to facilitate employment and promote the efficient operation of labor markets and social insurance programs to cushion the risks associated with unemployment and the life cycle, through health, disability, work injury, life and survivors insurance, and old age pensions. Social assistance and welfare service programs are needed for the most vulnerable groups with no other means of adequate support, including single mothers, the homeless, or the physically or mentally disabled, through interventions such as social services, welfare, food coupons, family allowances, temporary subsidies, and cash transfers. Micro and areabased schemes can address vulnerability at the community level with programs for the informal sector such as microinsurance, social funds, and dis-

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aster preparedness and management. Child protection is needed to ensure the healthy and productive development of the future workforce through early child development, school food programs, streetchildren initiatives, family allowances, and youth programs. Traditionally only informal family and community-based mechanisms dealt with risks and vulnerabilities (see Table 11.4). Private insurance companies have had difficulty providing products that protect effectively against individual labor market risks (such as frictional unemployment or sickness) and against larger catastrophic risks because of problems of adverse selection, moral hazard, as well as because of the low and irregular benefits coming from insuring low-income people. This is why public programs were launched in most Asian countries: work injury has been in place since the 1930s, and some forms of old age pensions, death, disability, sickness, and maternity benefits were developed around the 1950s. In most Asian communist or former communist countries, comprehensive social insurance systems were established under the auspices of the former Soviet Union. However, the effectiveness of most of these programs is limited, due to:9 1. Limited coverage. Most social protection programs, paradoxically, serve only a portion of the formal sector, often the wealthiest segments of society (e.g., civil servants), while the majority of poor in the informal sector remains without protection. 2. Insufficient funds. Developing country governments traditionally invest very little in social sectors and, among them (education, health, and social security), social protection programs get the smaller share. 3. Incorrectly distributed funds. Often most funds go to high-cost programs that benefit few, instead of being invested into low-cost high impact programs that benefit a majority. For instance, social protection expenditures are being absorbed by a few urban programs instead of programs for the vast majority of the poor in rural areas. 4. Inadequate documents. Program-enabling documents are often copied from those used by developed countries and are not appropriate to serve other countries’ needs—for instance, given the large number of children in Asia during the next thirty-five years, and the very limited number of elderly, it should be a priority to invest more in child protection rather than pensions in most countries (except China). Pensions, however, often take priority. 5. Factors restricting access to statutory social protection schemes. Obstacles to participation, such as legal restrictions, administrative bottlenecks, and problems with compliance, restrict who is eligible to receive benefits. Social protection policies should concentrate on serving the majority of the population, addressing the needs of the informal sector clientele by improving their productive labor potential, reducing communities’ exposure to risks, and enhancing household welfare in the region.

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Table 11.4

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Typical Advantages and Disadvantages of Social Protection Service Delivery Mechanisms

Mechanism Public-based local government

Advantages • Responsible for vulnerable groups within local community • Lower program delivery costs due to proximity location • Able to implement programs using existing infrastructure

Public-based central • National consistency and equity government in program access and delivery • Opportunities for redistribution mechanisms from wealthier regions to poorer regions • Able to monitor, evaluate, and compare cost-effectiveness of programs from national perspective • Coordination at national level across sectors (e.g., health, education, housing, labor, and finance) Market-based • Tends to be more efficient mechanisms • Ideal to serve middle and upper income groups—commercial insurance and pension funds, training, job placement agencies, institutional care for the disabled and elderly • Tends to be more sustainable • Political insulation NGOs, charitable institutions

• • • •

Mixed delivery system

•

•

•

Disadvantages • Unable to pool larger area risks (e.g., agricultural) • Poorer regions suffer from lower revenue base and therefore smaller spending base • Untrained and inexperienced staff in policy design, development, monitoring, and evaluation • Less knowledgeable about local circumstances and needs • Takes longer to implement programs • Risk of limited efficiency and governance problems

• Not serving low-income groups given high transaction costs and low returns • Insurance premiums and service costs are not affordable to the poor • As government normally guarantees minimum incomes/ benefits, if companies become financially insolvent the state may have to provide financial support Lower costs • Inconsistent nationally therefore Near vulnerable groups, questionable regarding issues of programs offered based on equity household and community needs • Sporadic funding and Quick and flexible in discontinuous programs, affecting implementation the overall effectiveness of their interventions Uses participatory approaches with vulnerable groups • Limited efficiency and uncoordinated delivery • No consistent evaluation, monitoring, audits, or accountability Uses strengths of each provider; • May be more costly to maintain may be a best option given a involvement of all providers mixed system spreads both the • Can create competition rather than risks and opportunities for success cooperation between service Provides common, consistent set providers of national social protection policies combined with flexible local programs to meet local needs Enables some form of redistribution to occur to balance poorest and wealthiest regions in countries

Source: I. Ortiz, Social Protection in Asia and the Pacific (Manila: ADB, 2001).

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Social Protection Priorities in Asia and the Pacific Improving national social protection systems is important in all regions. However, the motivations for reform and the approaches adopted differ dramatically among countries. In much of the Asia Pacific Basin, the debate is dominated by concerns about reducing poverty, expanding coverage, and identifying financing mechanisms to serve the vast majority of the population, who remain unprotected. In transition economies, adjusting programs and institutions to reduced budgets under a market economy to target the new poor is the priority. Many Latin American reforms are motivated by a desire to insulate social protection systems from political interference. The reform debate in Japan, North America, and Western Europe tends to focus disproportionately on dealing with the costs of aging societies. Country priorities differ substantially and the problems and solutions of one region are not applicable to another.10 The guiding vision should, however, be the same for all countries: to provide social protection to all citizens. Governments have a crucial role to play in achieving economic growth, reducing poverty, enhancing productivity, and creating opportunities for individual self-reliance. In South East Asia, economic growth has led to poverty reduction; however, growth alone does not ensure that all of the poor will benefit. New vulnerable groups have emerged—those unemployed because of economic shifts or downturns, including migrants, new urban residents, and youth. Limited investments in social protection have left many people in precarious conditions. Informal safety nets, once a major source of support, are disappearing with modernization and migration. Child labor is prevalent and the informal sector remains large. The highest priorities for reform are labor market interventions to increase productivity, as well as critical investment in health, child protection, and micro- and area-based approaches to deal with a large informal sector, particularly in countries such as the Philippines where poverty is widespread. Safety nets developed during the Asian financial crisis should be converted into longer-term, formal, and comprehensive social protection systems. In China, state-owned enterprise reform is a pressing issue that will require significant investment in labor markets and social protection because most welfare provision has traditionally come through SOEs and the public service. Labor laws are generally rigid and need to be made flexible. In China, aging will soon become a critical social issue given the “onechild” population policy. In the Mekong area and inner rural China, poverty is also widespread. Social services are in short supply, particularly in poorer regions. Comprehensive and effective social protection systems should be built in parallel with SOE reforms and rural development to ensure enhanced welfare provision. In China, addressing health, old-age care, and pensions is a priority. Comprehensive poverty-reduction programs are needed in the Mekong transition economies.

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Policy Implications: Social Protection in the Twenty-First Century The new century brought profound changes—globalization is shifting trade, capital, technology and information flows, and changing values and social structures. The increased opportunities resulting from access to new ideas, goods, services, and technology are accompanied by increasing risks. Interdependence may lead to economic shocks and downturns and, if effective social policies and safety nets are not in place, countries may experience mounting unemployment, poverty, marginalization, and political conflict. Most of the political opposition to globalization is due to the absence of adequate transitional compensation systems, which makes implementation of reforms very difficult given that vulnerable groups of the population may have to pay the costs of reform in the short term.11 Globalization requires the development of effective social protection systems in both developed and developing countries. A forward-looking development agenda gives social protection a primary role to sustain growth and well-functioning markets. How can we assess social protection requirements in a globalizing world? Social protection strategies will vary from one country to another because of differences in needs, coverage, resources, and institutions. Country preferences will also be influenced by the amount of political support and social consensus that exists to implement reforms. An analysis of five factors—the country’s needs, range of protective coverage, mobilization of resources, quality of institutional arrangements, and the quality of their social indicators—determines the social protection priorities of a country. Determining Country Needs The main objective of a social protection system is to reduce poverty and vulnerability. The notion of social risk management is a dynamic concept that requires thinking beyond the traditional government programs to address people’s most significant risks and vulnerabilities. Social policies should address the needs of the poor, especially improvement of their productive potential for employment and mitigation of risks that keep households in poverty.12 The World Bank’s Poverty Reduction Strategy Papers (PRSP), with their vulnerability and risk profiles, are helpful instruments to determine country-specific social protection needs.13 A vulnerability and risk profile describes major risks to a country’s population, demographic structures, levels of urban-rural population, poverty, literacy, morbidity, employment trends, the size of the formal sector, and any other significant data that may influence the choice of social protection mechanisms. Where population projections show a significant number of children and new entrants into the labor market in the near future, social protection should

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address first the needs of the young.14 Where population growth rates are low or negative, there is a rapidly aging population, and the child and adult dependency ratios are low, social protection systems should address the priorities of the elderly. A country’s social protection needs assessment should prioritize social protection problems based on quantitative evidence to ensure a rational set of development interventions. Expanding Coverage In the poorest Asian countries both the public and the private sectors fail to provide effective social protection. Expanding access to social programs for all citizens should be the main objective of any social protection agenda.15 Coverage gaps also occur because of statutory exclusions and the enactment of programs that do not address the priorities of vulnerable groups. Statutory exclusions result from programs designed for larger enterprises in the formal sector that neglect the informal sector—household workers, daily laborers, farmers, fishermen, and many urban self-employed. The highest priorities for the poor are strengthening their survival prospects and improving incomes, rather than investing scarce resources in social insurance schemes. The poor normally live shorter lives due to hardship— only 5 percent of the Asian and Pacific population is over the age of 65. People in the informal sector who are fortunate enough to live beyond that age do not retire but are likely to remain economically active as long as they can, to support themselves and help their families survive. Efforts to expand coverage should start by addressing the needs of the poor and informal sector clientele: improvement of their productive potential and their employment and income-generating capacity, improvement of family access to health, education, and other social services, and mitigation of risks that keep households in poverty.16 Mobilizing All Possible Resources for Social Protection Existing social protection systems in the Asia Pacific Basin are underbudgeted, receive random funding, or have misdirected benefits. Where allocated public funds are limited and the country needs large public programs they should be focused on those most in need. Social protection programs may be financed through budgetary support, income-related contributions, charitable donations, or a mix of all these. Enforcement of public revenue collection may result in higher tax collections, particularly in countries with young demographic pyramids. Higher tax revenues can in turn support the promotion of comprehensive programs. Contributions and fees can be raised from those with the ability to pay. Care has to be taken on the affordability of services for middle and lower income

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groups. In social insurance programs, accumulated savings or contributions can be invested in financial markets.17 However, most programs, particularly those targeting lower income groups, require a degree of public support. Financing from charitable or aid organizations is discontinuous and does not allow sustainable social protection programs. Such financing may only help to fill the gaps on a temporary basis. Diversification of income sources is desirable to spread risks and ensure the programs’ overall sustainability. Because social protection systems are redistributive, designers of any social protection program should carefully evaluate its distribution impacts to ensure that the vulnerable and poor benefit. Regressive redistribution— for example, systems with public resources that mostly benefit upper income groups—should be avoided. The main objectives of a social protection system are to help vulnerable populations reduce their exposure to risks and to create more equitable societies. Financing social protection systems implies some transfer of resources, either from taxed citizens to those outside the formal sector, or from the working-age generations to younger and older people.18 Innovative Institutional Arrangements: Private-Public Partnerships Most developing countries need to allow flexible and innovative institutional arrangements, bringing all possible development partners together under well-regulated sectoral policies and government oversight to ensure good governance and affordable services. The four main delivery mechanisms are: (1) public-based, since they are normally best to achieve expansion of coverage; (2) market-based, which are normally best for efficient delivery to the formal sector of the economy and upper income groups; (3) NGOs and charitable institutions, which are normally a good choice for targeting very marginal low-income communities; and (4) a mix of these. Each mechanism has important limitations. A summary is presented in Table 11.4. The public sector should not crowd out the potential role of the private sector in delivering social protection for the wealthy. Instead, the public sector should concentrate services on the poor. Decentralization of public programs can improve the effectiveness of social programs by bringing decisionmaking closer to communities. The private sector is often not attracted to lower income groups or remote areas because transaction costs are high and returns are low. Private-public partnerships may help include larger numbers of people in programs of social protection. NGOs should be encouraged to provide social protection programs; however, they often have inadequate and sporadic funding and limited reach, restraining their ability to reduce vulnerability. A mixed delivery system may be best to diversify risks and address social protection priorities.

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Public-private partnerships also have risks and potential drawbacks. Market mechanisms may overcome many of the causes of “government failure” in service delivery; however, there are limits to the private provision of social services. Stories abound of companies entering into monopolistic contracts for service delivery then holding local (and central) governments hostage with fee increases and inefficient services. This means that publicprivate partnerships must be carefully designed and regulated, and potential market failures should be identified. Government intervention is especially important where natural monopolies exist (e.g., a city with only one water source), where private provision is insufficient (e.g., transport services to remote and scarcely populated areas; private companies serving only upper income groups), and where the lack of capital may create an entry barrier to new companies. Market-based schemes have often found servicing lowincome communities economically unattractive, as compared to the higher returns received from servicing higher income groups. The poor have discontinuous income and are more prone to risk, thus the higher transaction costs are not appealing to insurance companies and customers. Efforts should be made by governments to arrange public-private partnerships that offer low-income communities access to social services. Improving the Quality of Social Indicators Unlike economic indicators, which have improved significantly over the past decade, the quality of social data remains low. Poverty and social indicators are calculated differently from country to country; data collections are not reliable and often lack rigorous methodologies.19 Governments must strengthen the caliber of national poverty and social statistics to avoid making policies based on erroneous assumptions. Governments may sometimes hide their limited success in social development by altering poverty lines. Any model or regression using cross-country comparisons should be taken with some degree of skepticism given the poor quality of social data. Standardizing social indicators can make international comparisons more accurate and help governments monitor social progress at the national level.

Conclusion Although globalization can increase the opportunities for growth, it can also raise the risks of future macroeconomic shocks, resulting in unemployment and poverty. Thus, inclusive social policies should be at the forefront of any country’s development agenda. This may impose high short-term costs, but it will benefit everyone in the long run. As UN Secretary General Kofi Annan described it:

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We have to choose between a global market driven only by calculations of short-term profit, and one which has a human face. Between a world which condemns a quarter of the human race to starvation and squalor, and one which offers everyone at least a chance of prosperity, in a healthy environment. Between a selfish free-for-all in which we ignore the fate of the losers, and a future in which the strong and successful accept their responsibilities, showing global vision and leadership.20

So far, social policies and welfare systems have not been a high priority for most policymakers in the Asia Pacific Rim; social protection has been largely neglected or addressed with inadequate resources. For globalization to be accepted it will have to benefit the majority; it will have to be a globalization for all. The economic history of the Asia Pacific Basin shows that its most advanced economies—Japan, Australia, New Zealand, Hong Kong, South Korea, Singapore, and Taipei—built development policies through active public or public-private interventions in medical care, social and housing assistance, minimum retirement levels, and education. Investing in social protection was an essential part of the modernization programs of these wealthier Asian societies at the early stages of their development. Higher levels of social security allowed higher productivity gains in the workforce, expanded domestic demand, and increased economic growth. Social protection is necessary because the benefits of economic growth do not automatically reach all. Inadequate social protection may actually limit economic growth. In children, malnutrition and poverty damage health, cause death, threaten reproduction, and reduce intelligence, and lower productivity imposes a high tax on future economic development. Social protection is not only justified from a humanitarian perspective, it is also an economic necessity in Asia and the Pacific.

Notes 1. Thomas, Wang, Dailami, Dehareshwar, Kaufman, Kishor, and Lopez, The Quality of Growth. 2. Holzmann and Jørgensen, Social Risk Management. 3. United Nations, UN Population Prospects, medium variant projections. 4. East Asia has a more pronounced aging pattern compared to the other three Asian subregions due to the effects of aging in China, where the proportion of the population aged 65 and over is expected to reach 9.3 percent by 2015. 5. Cornia, Inequality, Growth, and Poverty in an Era of Liberalization and Globalization. 6. Asian Development Bank, Regional Policy on Education. 7. Asian Development Bank, Regional Policy for the Health Sector. 8. See ILO yearly World Labour Reports and World Employment Reports 9. Ortiz, Social Protection in Asia and the Pacific. 10. Utting et al., Visible Hands: Taking Responsibility for Social Development; World Bank, World Development Report 2001.

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11. Stiglitz, Globalization and Its Discontents. 12. Attention should be paid to the fact that the most vulnerable populations of a country are usually not reflected in census or household surveys—migrant workers, orphans, homeless, victims of disasters, refugees, nomads, or disabled or marginalized indigenous groups. Additionally, household surveys do not count intrahousehold differences while assets and labor are normally distributed in a different and thus not equal manner between men and women, boys and girls, children and elderly, within the same household. 13. World Bank, Poverty Reduction Sourcebook. 14. Care has to be taken with the assumptions used in projections. Arguments can be easily manipulated by developing models that either magnify or minimize issues (e.g., aging problems are often magnified by taking high scenarios/projections). As a generic rule, medium term variant projections should be used. 15. Organization for Economic Cooperation and Development, Development Assistance Committee (DAC) Guidelines for Poverty Reduction. 16. Department for International Development, Making Governments Work for Poor People. 17. Relying on capital market returns to help finance pension costs can reduce the size of the contributions needed, but as illustrated by the recent economic crisis, it is also risky and may lead to loss of accrued pensions. 18. Norton, Fozzard, and Foster, Budgets, Donors and Poverty. 19. Colman and Nixson, Economics of Change in Less Developed Countries. 20. Annan, “Davos World Economic Forum United Nations Press Release.”

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PART

3

Learning from Experience

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CHAPTER

12

Sustaining Progress in a Globalizing Society: Lessons from Asia Dennis A. Rondinelli and John M. Heffron

T

he Asia Pacific Basin is likely to remain in the future, as it has been for centuries, a geographical crossroads for trade, investment, social interaction, and cultural integration. Not only has the region had to react to periodic cycles of globalization—primarily through external invasions, trade, and colonization—throughout modern and ancient history, but it has also shaped global economic, social, political, and technological interaction and thereby influenced the rest of the world. The authors who have contributed to this book, each in their own way, describe how governments, the private sector, and organizations of civil society in the Asia Pacific Basin have adjusted to the most recent wave of globalization and, in adjusting, are capturing the benefits of international interaction and struggling with its challenges. In the current period of globalization, economic and technological changes are creating benefits for many people in Asian countries and accentuating differences in income, wealth, and wellbeing for others. The ability of public and private organizations in the Asia Pacific Basin to adjust to the forces of globalization explains much about how this region benefited from increased economic, technological, social, and political interaction. The chapters in this volume chronicle how governments, the private sector, and social organizations experimented, innovated, and adapted, while asking the empirical questions of how widely the benefits will spread, how sustainable economic and social progress will be, and how quickly developing countries in the region will begin to catch up to advanced economies in the future. In the areas of governance, development and application of technology, skills upgrading, and the strengthening of social capital and social protection, public and private organizations in the Asia Pacific Basin are still experimenting with new ways to take advantage of the potential opportunities and cope with the challenges of globalization. 227

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Lessons of Experience: Adjusting to Globalization in Asia In this chapter, we seek to distill the fundamental lessons people and governments in Asia Pacific Basin countries have experienced while undergoing globalization, a process of adjustment that is still in transition, posing new challenges for both advanced and developing economies in the region. Nine major lessons emerge from the studies in this book. Benefiting from Globalization Requires Adjusting to the Driving Forces of International Interaction Through Continuous Innovation, Change, and Adaptation All of the contributors to this volume agree that in order to realize the benefits and minimize the negative impacts, governments and nonstate organizations must adapt rapidly and continuously to changing economic, technological, and social forces over which no single country or organization has absolute control. Clearly, the benefits of globalization do not flow automatically to regions, countries, or groups of people. Potential negative impacts do adversely affect people and countries that do not take actions to mitigate them. For people in most countries, nonparticipation in the global economy is not a viable option, unless their governments deliberately block their ability to do so by enforcing policies that result in political and economic isolation. The few governments that have attempted deliberately to isolate their countries from outside influences—Myanmar and North Korea, for example—condemn their people to a life of poverty and cultural marginalism. Several authors in this volume note that Asia Pacific Basin countries, and especially those in East Asia, have not only adapted to globalization but have taken advantage of potential benefits more effectively than those in many other regions of the world. As Dennis Rondinelli argues in Chapter 3, innovation, change, and adjustment were the key processes that explain the ability of governments in Singapore, Hong Kong, Taiwan, and South Korea to adapt to, benefit from, and reshape the forces of globalization since the early 1980s. East Asian countries gained competitive advantage over other regions of the world through policy and institutional reforms that allowed the advanced and newly industrialized countries to benefit economically from globalization and that differentiated them from less developed countries such as the Philippines, Thailand, Indonesia, and Vietnam. The latter along with China and India, until recently, either lagged in their adjustment or failed to respond to changes in the international economy. Underlying the “East Asian Miracle” was the capacity and willingness of governments and the private sector to create an economic environment conducive to international trade and investment, attract foreign companies and know-how, and shift from labor-intensive, low-cost, competitive advan-

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tage to skills- and knowledge-based economies capable of competing effectively in high-technology industries through domestic and foreign multinational corporations. Rondinelli describes how increasing capacity for technological innovation and the development of technological knowledge differentiate advanced from developing economies in the region, although developing countries such as Malaysia, China, India, and Thailand are moving quickly to adopt new strategies for global competitiveness. He argues that competitiveness itself is sometimes, or at least initially, less important than the development of policies designed to make good use of it. The combination of government policy liberalization, institutional reform, and support for knowledge-based development, along with increasing capacities for technological innovation and its application and for human resource development, Rondinelli contends, explain much of the difference between the ability of advanced and developing countries in Asia to adapt to and benefit from globalization. Whether competition is constructive or destructive, contributes to development goals across the region or detracts from them, depends on these and other such “enlightened” inputs. Much of the innovation, change, and adjustment that took place in Asia since the 1980s had historical roots in previous waves of globalization reaching back to centuries of reluctant and often difficult accommodation. John Heffron points out in Chapter 2, however, that the current period of globalization differs from those that preceded it. Initial interactions along the “silk roads,” whether by land or by sea, were between large coextensive empires ill-fitted to the more circumscribed political and religious boundaries of the emerging modern world. By the time globalizing forces began sweeping across Asia and the Pacific in the sixteenth century, people had organized themselves into self-contained nation-states. Mercantilism, the economic philosophy of the state, was spreading; interstate contacts were becoming more stylized, discreet, and concrete, often governed by treaty agreements and trade contracts (and sometimes by their abrogation) that belied transnationalism in its classical phase. Asian Countries’ Adjustment to Globalization Resulted from Both Strategic Intent and Response to Crisis Although the East Asian “Tigers” strategically positioned themselves to take advantage of globalization by focusing their development policies beginning in the 1960s and 1970s on protecting home industries and promoting exports, encouraging foreign direct investment in the 1980s, and shifting to high-tech development in the 1990s, their policies were also strong responses to a series of crises. Clearly, in East Asian countries the path of adjustment is a long trail of strategic decisions by government leaders to find ways of accommodating

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changing global trends and to capture their economic and social benefits. Provincial leaders in Taiwan began in the 1960s to push for land reform, the modernization of agriculture, the creation of social capital through rural reconstruction and nonfarm rural development, and the replacement of import substitution policies with an export-oriented development strategy that resulted in the island’s “economic “miracle.”1 In Singapore, Lee KuanYew set upon a strategy of transforming his city-state from poverty and dependency by building capacity for manufacturing assembly, production, and distribution; exporting; attracting foreign direct investment; and later adopting and developing modern technologies. In other countries, adjustment came through a combination of strategic intent and the need to respond to unanticipated crises. Sang M. Lee notes that South Korean political leaders, for example, realizing that only by committing resources to export-oriented economic development could they recover from the devastation of forty years of Japanese occupation and the Korean conflict, responded again to the technical revolution that rendered many of their traditional manufacturing industries noncompetitive during the 1990s and early 2000s. Lee explains that as the economic base of the “Asian Tigers” (Hong Kong, Korea, Singapore, and Taiwan) broadened through globalization, their earlier competitive advantage of cost leadership for low- and mid-tech manufactured products began to evaporate. The 1997 Asian financial crisis shocked people in all of the Asian countries that had to be rescued by the International Monetary Fund’s large infusions of funds, shocked them, that is, into the need to put their own houses in order. The realization of their weaknesses, Lee emphasizes, made government leaders in most advanced Asian countries more keenly aware of the need to develop new economic development strategies. He points to the Korean government’s bold restructuring of the chaebols (Korean style family-based conglomerates) and policies that forced banks to wipe clean all bad loans from their balance sheets. Lee contends that while the drastic shock treatment helped Korean businesses to reinvent themselves, the main engine of Korea’s quick recovery from the 1997 financial crisis came through advances in ICT. Kevin Cai also emphasizes in Chapter 4 that the financial crisis of the late 1990s was a catalyst for East Asian governments to push for more regional economic cooperation and to accelerate the movement toward institutionalized regional economic integration, manifested in the AsiaPacific Economic Cooperation organization, the Association of Southeast Asian Nations, and ASEAN Plus Three, as well as numerous bilateral free trade arrangements. Financial crises, Isabel Ortiz explains in Chapter 11, also underscored the urgency for giving greater attention to social protection issues in Asia. Countries affected by the 1997 financial crisis discovered that inadequate

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and underdeveloped social protection systems exposed their working populations to excessive risk and pushed millions of people into poverty and misery, undermining earlier progress in human development. Ortiz points out that countries in economic transition, such as China, discovered both as the result of increasing globalization and the financial crisis that accompanied it that traditional social protection systems were becoming too expensive to sustain, did not benefit the new vulnerable groups emerging from the transition process, and were poorly designed for a market economy. Heffron’s historical perspective on globalization in Asia clearly shows how the current movement toward cooperation emerged from different types of crises that required difficult accommodations between countries attempting to expand their commercial and military power and those attempting to protect their borders from unwanted incursion. The crises arising from competition among colonizing US, Spanish, German, English, Portuguese, Russian, Chinese, and Japanese interests for power and influence in the Asia Pacific in the eighteenth and nineteenth centuries were superseded in the twentieth century by a new wave of internationalism, one grounded in the bourgeois state-building ethic of the past yet decidedly antiimperialist and anticolonial. Asian countries that were able to use crises to modify their development strategies were able not only to overcome the adverse effects more quickly but often to turn them to their advantage. Sang Lee points out in Chapter 6 that although the 1997 financial crisis was a major blow to the Korean economy, it also provided an unexpected new source of economic resurgence. The scarcity of job opportunities for most college graduates and workforce downsizing in struggling corporations forced many skilled young professionals to turn their knowledge and attention to ICT-related venture creation. The Korean government’s comprehensive ICT export plan, e-Silk Road, propelled ICT industry exports to about one-third of the nation’s total exports. Adjusting to Globalization Requires National Governments and the Private Sector to Balance Competition and Cooperation Experience in adjusting to globalization in Asia confirms that nationalistic competition no longer serves as the most effective means of capturing the benefits of international economic and social interaction. Globalization requires national governments to cooperate with others through regional and international economic arrangements while building their countries’ own comparative advantages. Globalization inexorably promotes both competition and cooperation, and governments that do not strike the proper balance are likely to suffer from retaliation.

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Cai documents how East Asia is moving gradually toward a regional economic grouping on a par with the European Union and the North American Free Trade Agreement. The move toward regional economic cooperation was not only a defensive measure against challenges of globalization but also a logical development of increasingly closer economic and political ties in the region. This development will, inevitably, continue to have important policy implications for East Asia and beyond. Heffron points out that multinational economic institutions in the region may have started out historically as mercantile agencies but were soon succeeded by their nation-building ambitions. These multinational institutions were manifested in political treaties and agreements that maximized the value of interstate commerce and cooperation; in the migration of labor and in naturalization policies that accommodated new forms of citizenship; in educational and cultural exchanges that promoted intercultural understanding; in international missionary movements on both sides of the Pacific; and in the rise of nongovernmental humanitarian agencies in the region over the last hundred years as a continual process of change and transition. Asian Countries Are Adjusting to Globalization by Blending External Modern Governance and Business Practices with Culturally Based Traditions Through Which People and Organizations Mediate Change Both political and business leaders in Asia are mediating change by blending modern governance and business practices with more traditional, culturally rooted traditions to pursue the benefits of globalization in uniquely Asian ways. This blending of the modern and the traditional often creates new pathways of change and sometimes delays or diverts governments from embracing international standards, but some degree of accommodation characterizes almost all of the adaptation to globalization now taking place in Asia. Henry Yeung shows in Chapter 5, for example, how business norms and practices are becoming increasingly globalized and how leading Asian firms are being transformed from locally oriented domestic operations to global business enterprises that span continents and national geographical territories. Likewise, G. Shabbir Cheema argues in Chapter 8 that the state and its institutions are under tremendous pressure from national and international organizations to respond to development challenges, including increased accountability and transparency in economic and political decisionmaking. Democratic values, such as the right of citizens to elect their own governments, are increasingly becoming global political standards to which governments in different countries in the region are adjusting at different paces and in different ways mediated through their own cultural and political institutions.

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Clay Wescott illustrates in Chapter 9 how modern technology is also assisting indigenous groups to preserve “cultural memory” and distribute cultural artifacts. Some Asian countries have adopted e-government to strengthen more traditional bureaucratic structures, cultures, and the linkages among administration, citizens, and politicians. He contends that often the blending of modern technology and traditional practices is more effective than attempting to create new institutions. In the private sector, Yeung traces how globalization is diffusing new business norms and practices in Asia through the international education of many Asian managers and their global experience in developing and operating foreign ventures. Among leading Asian firms traditional business practices are giving way to innovative changes in organizational structures and corporate governance that allow Asian firms to become more competitive and more accountable to their stakeholders in the global marketplace. This phenomenon of “globalizing” Asian business, however, represents only the tip of an iceberg, Yeung explains, beneath which a large number of Asian firms remains rather ethnocentric and domestically oriented in their business mind-sets and operational practices. The rise of China’s economy, and of mainland Chinese firms, also complicates the alignment of Asian business practices to global norms and standards. The simultaneous convergence and divergence of business systems in Asia seems to point to the emergence of a hybrid system in which elements of both the traditional Asian business system and the global system coexist. The Blending of Modern and Traditional Practices Is Creating Hybrid Institutions and Practices Through Which Asian Countries Are Adapting to Globalization New hybrid systems that accommodate international standards of business practice and good governance in culturally rooted political systems are emerging in both the private and the public sectors. Cai points out that ASEAN adopted operational principles—mutual respect for national sovereignty, noninterference in the internal affairs of members, and consensus decisionmaking—distinguished it from other regional economic organizations while attempting to achieve the same benefits of cooperation that characterized regional economic groups in other parts of the world. At the national level, Cheema notes the changes in governance policies and practices and the movements toward the democratization of political systems in the Asia Pacific Basin. In tracing the evolution of democratic institutions over the past few decades and the influence of internal and external factors, especially of globalization, that have triggered the transition, he argues that in today’s world, governance can no longer be considered a closed system. The state’s task is to provide a secure and stable social

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and economic domestic environment through inclusive governance and democracy, particularly for the most vulnerable, in order to benefit from globalization. Governments in Asia, Cheema points out, are creating hybrid institutions that adjust to global pressures to change the role of the state—from a regulatory and controlling one to a facilitating and enabling one. States in the Asia Pacific Basin have had to shift from an inward orientation to one of protecting the public good, from traditional to new skills in the public sector, and from government domination to allowing political participation by civil society and the private sector, often at the expense of their traditional prerogatives. He argues that not to do so would be to severely limit and skew the benefits of globalization. Explaining that free, fair, and regular elections, for example, are seen throughout the world as necessary building blocks for democratic transition, Cheema describes cases where Asian countries have strengthened their electoral systems with beneficial impacts on the democratization of political systems. At the same time that participation in the global economy has created greater economic opportunities for Asia Pacific Basin countries, it has also opened channels for both traditional and new forms of corruption that governments in the region must combat if their economies are to remain attractive to foreign investors. Cheema examines the relationships between internal corruption and cross-border corruption as they affect the quality of democratic processes. Wescott also notes in his assessment of electronic government in Asia the blending of modern and traditional practices and behavior into hybrid institutions. Some factors driving e-government adoption work toward convergence of countries to regional and global good practices, while others show path-dependence toward more traditional structures and practices. Convergence toward some administrative practices such as managerialism, outsourcing, public financial management, freedom of information, and combating corruption are motivated by government commitments under international agreements and by competitive pressures. These practices are, in turn, driving the adoption of e-government. The relatively rapid adoption of ICT by the private sector and civil society, Wescott points out, also puts pressure on governments to use comparable ICT innovations, and to develop an appropriate legal and regulatory framework. Bureaucratic cultures and links from administration to citizens and politics are often path dependent, he notes, but ICT is also making traditional structures more responsive. Wescott observes that ICT has yet to play a key role leading to democratic policy reform, although it has expanded citizen participation. The legal, regulatory, and organizational frameworks needed for successful e-government, he finds, include leadership, competition reform, financing, human resources, and appropriate laws and policies.

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Asian Countries Are Adjusting to Globalization Through Knowledge-Based Economic Development and the Creation and Use of Technological Innovations Asian governments are not only increasingly creating and adapting technology to improve the efficiency and effectiveness of their own operations, but are also making technological innovation, adaptation, and application the foundation of new knowledge-based economic development strategies. Several contributors to this volume suggest that those countries that led in knowledge-based technological development more readily adapted to globalization than those that lagged. In Japan, the private sector, with government support, adapted high-technology production processes in the automobile, electronics, semiconductor, and other industries in the late 1970s and early 1980s. South Korea and Singapore are strongly competing to become information and communications technology hubs in Asia. China, Malaysia, Taiwan, and other countries in the region are developing biotechnology, electronics, telecommunications, and other high-technology industrial clusters as the centerpieces of their economic growth strategies for the twentyfirst century. Almost all countries in the region, to one degree or another and at significantly different paces, are converging on knowledge-based industries and the application and development of technology as the foundation for future economic growth. The Korean government, for example, invested heavily in ICT infrastructure development, trained hundreds of thousands of specialists, connected thousands of schools with broadband Internet service free, and provided free training in Internet use to more than 13 million people. As Lee points out, the Korean ICT industry grew by more than 80 percent in four years. Consequently, the ICT industry’s share of GDP grew to the highest among all OECD member countries. Lee argues that as a result of direct government action and with the country’s political elite managing the technological response to globalization, Korea became the world leader in many important ICT areas. By 2005 it had diffused high speed Internet (ADSL) to more than 70 percent of households, promoted CDMA wireless communication system use by over 72 percent of the population, fostered the world’s largest production of DRAM and TFT-LCD panels, and stimulated advances in e-business and e-government. Thailand, on the other hand, lagged behind in both the adoption and use of new technologies and in its progress toward economic development on a level of the “Asian Tigers.” Thailand had to purchase nearly all of its higher technology because it failed to invest in education and research at a level needed to create its own technological capabilities. Purchasing technology—factory equipment, key components, and technology licenses— accounted for much of Thailand’s growing trade deficit in the 1990s.2 The World Bank reported in 2005 that “Thailand’s current technological per-

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formance is not impressive,” and that it does not have the number of researchers, the level of R&D expenditures, nor the number of patents filed comparable to countries such as Singapore or South Korea.3 Thailand’s failure to adjust to the technological revolution left its manufacturing establishments less efficient and effective and weakened its competitiveness in the Asian region. The Development and Transformation of Human Resources in Asia Was and Is a Fundamental Precondition for Participating in and Benefiting from Globalization The experience of Japan and the East Asian “Tigers” in capturing the benefits of globalization illustrates how crucial human resource development and the transformation of low-skilled labor into high-skilled workers has been to successful adaptation in a changing international economy. Rondinelli emphasizes that advanced and newly industrialized countries in Asia invested heavily in education and training and that developing Asian countries are focusing on skill development both as a result of and to attract foreign direct investment. Lee argues in Chapter 6 and Sarosh Kuravilla contends in Chapter 7 that although developing countries account for a steadily increasing share of world manufacturing, partly driven by lower wages and costs, competitive advantage based on low wage production is inherently transitory. Sooner or later, they explain, developing countries in the Asia Pacific Basin have to “upskill” as other lower cost producers emerge. Kuruvilla observes that although upgrading national skills is a crucial policy issue for developing countries, little information is available on what countries can do quickly. He emphasizes that while the economic literature has stressed the importance of investments in education at all levels, skills development in the Asia Pacific Basin is taking place outside the educational system, particularly in vocational and professional training institutions and within corporations. The importance of skills development to the economic growth of Singapore and within the booming information technology and business process outsourcing sectors in India are two good cases in point of the need for greater public-private initiative. Noting that Singapore is perhaps the best known example of a nation that has successfully and continuously upskilled its workforce over the last forty years, Kuruvilla argues that its policies have given the country consistent top rankings in comparative surveys of human resource development. The Singapore system, anchored in and run by the government in collaboration with the private sector, Kuruvilla notes, appears to debunk the conventional wisdom that governments are notoriously poor at organizing and administering skills development, particularly on a national scale.

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Kuruvilla’s studies of India indicate that although it possesses a widely diversified skills profile, recent explosive growth in the business processing outsourcing and information technology sectors has uncovered several skill shortages, and an increasing need for skills development within those industries. In response, both central and regional governments and the private sector in India have taken an active interest in skills development. The Success of Globalization Adjustment Policies Depends on Widespread Social Support and the Mobilization of Social Capital Because globalization produces, at least temporarily, new “winners” and new “losers,” governments seeking to adjust to globalization must gain the support of not only those who benefit but also of those who might suffer from a changing international economy. Anirudh Krishna argues in Chapter 10 that collective action either for or against globalization can be built on the strength of communities’ social capital. He defines social capital as a resource, a propensity for mutually beneficial collective action that different communities possess to different degrees. This resource, he notes, can be directed and used by communities to participate in and obtain benefits from globalization and market opening or, alternatively, it can buttress community-based agitations against policies supporting global linkage. How social capital is mobilized in any given situation, Krishna contends, will depend upon the nature of incentives available to communities. Based on his surveys in sixty village communities in India, Krishna concludes that if strong downward links help communities become active participants in market-led growth, then social capital will help expand support for globalization, but if opportunities are opened to only a few while excluding or neglecting the many, then social capital will more likely be used to oppose globalization. He observes that communities’ economic development objectives, democratic participation, and community harmony are all better served where social capital is high. However, the goals that communities select and how well those goals are served depends equally on the nature of linkages that exist between communities and the state and between communities and the market. He finds that where wide and strong channels of access exist, communities employ social capital in the service of market-strengthening and state-supporting activities; where these channels of access are weak or nonexistent, communities back off and insulate themselves, or they actively oppose the policies of the state and the activities of markets. Krishna draws out the implications of these conclusions from the India study for other countries in Asia. The need to mobilize social capital also compels private sector organizations to develop new networks of interdependence and interaction. Yeung

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explains that Asian managers acquire new knowledge and business practices through complex networks of alliances with customers, suppliers, and foreign firms. These cooperative networks provide not only new knowledge and business skills, but also international sources of financial capital. Adapting to Globalization Compels Governments in Asia to Provide New and More Effective Forms of Social Protection Support for globalization also depends on the ability of governments to protect those who are likely to be hurt, either temporarily or permanently, by its widespread and sometimes devastating effects. Isabel Ortiz reiterates in Chapter 11 that globalization has brought both opportunity and uncertainty in the Asia Pacific Basin as new technologies displace conventional ones, as businesses demand new skills to compete effectively in the world economy, as traditional social networks and relationships give way to more “modern” arrangements, as people in the informal sector, the aged, disabled, and unskilled struggle to survive in new economies, and where cyclical downturns even in growing economies put places and people in jeopardy. Therefore, she argues, governments need to create and implement new forms of social protection. Ortiz points out that although the majority of governments in East Asia have some form of institutionalized social development and protection system, most of the programs in South Asia and the Pacific operate at low levels of effectiveness because of limited coverage (often benefiting the wealthiest groups of society); insufficient funds (social protection is often the lowest government expenditure category); and inadequate instruments. Looking more closely at economic history, Ortiz observes that the most advanced economies of the region—Japan, Australia, New Zealand, Hong Kong, South Korea, Singapore, and Taiwan—stimulated development not only through economic policies but also through active public or public-private interventions in medical care, social and housing assistance, minimum retirement levels, and education. Investing in social protection played an essential part in the modernization programs of these wealthier societies at early stages in their development. She argues that higher levels of social security allowed greater productivity gains in the workforce, expanded domestic demand, and increased economic growth. Weak social protection systems may, Ortiz explains, severely limit future economic growth because in children malnutrition and poverty damage health, cause death, harm reproduction, reduce intelligence, and lower productivity and opportunities for the future adult. Reviewing recent events in the Asia Pacific Basin, Ortiz concludes that social protection is not only justified from a humanitarian viewpoint, it is an economic necessity. By concentrating assets and wealth in the hands of a

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few and maintaining current poverty levels, countries maintain small domestic markets and low domestic demand that depresses local industries.

Challenges for the Future Although both the advanced and the developing economies of the Asia Pacific Basin have adapted their economies and societies to the requirements of capturing the benefits of globalization more than those in many other regions of the world, they also face continuing challenges. The dynamics of globalization require richer countries in Asia—Japan, Australia, New Zealand, Singapore, South Korea, and Taiwan—to maintain their competitive positions in the international economy while seeking greater cooperation with each other and with worldwide trade and investment partners. Poorer Asian countries, such as the Philippines, Vietnam, Indonesia, Thailand, China, and India, on the other hand, face the daunting challenges of reducing poverty, creating stronger business climates, enhancing the skills of their workers, improving the education, health, and well being of their citizens, and closing the still wide gaps in income and wealth among subnational regions and population groups. Solidifying and Extending Regional Economic Cooperation Intraregional foreign direct investment flows have spurred economic ties among Asian countries and interregional FDI flows now link Asia with most other regions of the world but, as Cai emphasizes, the regional economic cooperation that is so essential to success in the global economy is still fragile. Building trust among Asian countries, especially between the developing countries and China and Japan, is essential to regional cooperation. Regional rivalries between China and Japan for political and economic influence and the tensions between emerging Asian economic powers and the United States and Europe will require new economic and political modalities in the future. The multiplicity of regional groupings in Asia will also require leaders to find ways of forging stronger intraregional ties without dividing and marginalizing existing organizational arrangements that benefit groups of countries with quite different interests and needs. Accelerating the Modernization of Commercial Organizations Yeung notes that the private sector is also facilitating the transition from traditional Asian family-owned businesses and conglomerates to professionally managed global corporations that conform to international standards of

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operation. Although family-owned small business may function well in traditional societies, new hybrids will be needed to participate effectively in international trade and investment and to provide the advanced services demanded by international customers. Diffusing opportunities for traditional Asian firms to learn the international businesses norms and practices that will allow them to expand and survive remains a challenge even in the region’s more advanced economies. Yeung underlines the necessity of strengthening regulatory and financial policies to create incentives that encourage more business interaction between domestic and foreign firms. Reinventing Government for the Twenty-First Century With the pressures that globalization brings for good governance, governments in Asia will have to reexamine policies dealing with separation of powers between the executive and legislative branch, and the role of parliaments in the oversight of the executive. Rondinelli shows that although the more economically advanced countries in the region are now ranked by international organizations relatively high in governmental effectiveness and stable governance, many of the developing countries still have public services that are inefficient, partially corrupt, and somewhat ineffective in meeting citizens’ needs. Cheema contends that the effectiveness of parliaments—especially in new and restored democracies—continues to be constrained by low levels of interaction between parliamentarians and their constituents, by parliaments’ weak internal capacity and resource base, by a historical legacy of the executive control on the legislative branch, and by weak oversight institutions. Many Asian countries are experimenting with policies and programs to promote decentralization of authority and resources through political devolution, delegation, deconcentration, and transfer to nongovernmental organizations. Some experiences with national decentralization policies and programs have the potential to strengthen democratic local governance, but Cheema warns that they also uncover key constraints that are impeding implementation, including weak financial and administrative capacities of local governments and weak national level political and legal frameworks. These and other structural safeguards, if not robust, will be unable to control those elements of globalization that threaten to efface local rule, a problem only further compounded by the real weaknesses and declining legitimacy of the former. In order to participate effectively in a global economy, Cheema argues, governments must strengthen the rule of law and their judicial systems to protect civil and political liberties and check abuses of authority. He sees, to varying degrees, progress being made in Asia in promoting the independence of the judiciary and of civil society organizations, with community groups playing a stronger role in improving the access of the poor to justice.

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The pressures to combat corruption, to separate executive and legislative powers, to create democratic checks and balances among the branches of government, and to reform the judiciary in Asian countries will be continuing challenges in the future. Advancing the Pace of Technological Innovation and Adaptation Technological innovation and adaptation has emerged not only as a focus of economic development strategies in Asian countries but as important instruments of public service provision and private commerce. Emphasizing that attribution of results is difficult to prove, Wescott found at least strong anecdotal evidence of generally positive results from e-government, including improvements in citizen participation, government efficiency and effectiveness, service integration, and combating corruption. Yet in many cases such benefits were not achieved, and significant resources were wasted. He notes that like all innovations, e-government brings both benefits and problems. Weighing against the benefits are the risks to information security and privacy, and the challenges of adopting and enforcing appropriate laws and regulations, of financing infrastructure, systems, technical support and training, and of ensuring equitable access and affordability. Finding ways of protecting and securing government and private information as the use of ICT spreads in Asia will be a challenge that governments and the private sector must meet in cooperation with governments of other countries around the world. Lee argues that although ICT has paid handsome dividends thus far to the economies of those Asian countries that have innovated and adapted technology, the government and the private sector must continue developing competitive strategies. In advanced and industrializing economies such as those of Japan, Taiwan, Singapore, and Korea, the domestic market for ICT is fast approaching the saturation point and global competitors are multiplying. Mobilizing Social Support for Participation in the Global Economy Ortiz argues that although globalization offers new opportunities to some, many people remain excluded. Hundreds of millions of people in the Asia Pacific region still live below the poverty line and are excluded from the benefits of economic development. Unless governments and the private sector can find ways of extending opportunities to benefit from globalization to people living in rural villages and communities as well as to the urban elite and to offer social protection to the most vulnerable of the population, as Krishna points out, social capital could easily be mobilized against globalization adjustment policies. Upgrading the skills of workers and enhancing

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human resources to take advantage of globalization’s potential benefits, both Kuruvilla and Krishna note, will be crucial for governments in mobilizing support for globalization in both economically developing and advanced countries in Asia. The success of Singapore, Taiwan, and South Korea in upgrading skills and technological knowledge offers a potential model for other Asian countries seeking to accelerate their adjustment to globalization. In a region with teeming metropolitan centers, a large percentage of the total population lives in rural areas and many people in both urban and rural areas survive in the informal sector. Ortiz explains that different kinds of social protection reforms and policies will be needed in different Asian economies. Where social protection systems are inadequate to deal with the risks faced by the poor in rural and urban areas, social protection programs have to be expanded to ensure coverage for the majority, especially those attempting to survive in the informal sector. Where social protection systems have become too expensive and are no longer appropriate to serve a country’s vulnerable populations in transition economies, they need to be restructured. The guiding vision, Ortiz concludes, should be the same: to provide social protection to all citizens of the Asia Pacific Rim to assist governments in reducing poverty, enhancing productivity, and ensuring that globalization benefits all. Expanding Social and Political Cooperation Finally, perhaps the greatest challenge facing those living in the Asia Pacific Basin is to forge stronger ties of social and political cooperation that allow countries with diverse cultures and resources to work together more effectively to spread the benefits of globalization more widely and to mitigate its potential adversities. Heffron indicates that the history of globalization in the Asia Pacific Basin is a complex, fragmented one, fragmented not only along lines of national exceptionalism but, given problems of physical magnitude, in the inability to encompass the rich mosaic of peoples and cultures that form the region. Globalization, he maintains, if it is to have a place in the history of regional development around the world, must mean, if it is to mean anything, a search for shared purposes however hedged or negotiated by the people and governments in power at the time. It must also mean a search for countervailing centers of power and influence that transcend the particularities of any one state or culture.

Conclusion While few would argue that industrial deregulation, trade liberalization policies, and the general play of free market forces in the Asia Pacific Basin

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have not been critical to the region’s dynamic economic growth, effective government nevertheless still matters. Competent government can act as a break on international investment strategies that ignore local conditions at their peril, as a support to local industries and businesses that might not otherwise be equipped to benefit from globalization, and as a domesticating force over anarchic and ultimately destabilizing forms of competition. What sets the Asia Pacific Basin apart from other regions of the world is the artificial quality of the one (foreign-inspired growth strategies, including economic institutions that are historically exogenous to the region) and the more intrinsic nature of the other (traditionally strong, quasi-authoritarian governments engaged in collectivist forms of central planning and touting command economies as not only more efficient but as elements of a distinctive “Asian Way”). From the Asian perspective, looking back not only at the long history of European and US colonialism in the region, but also at the region’s own record of empire building, the whole concept of the developmental state as in a comparatively rude stage of social and economic progress often makes little sense. More reasonable (because more closely aligned with the region’s historical reality) seem to be policies, both foreign and domestic, requiring mutual adjustment, accommodation, assimilation, and change: a dynamic view of development that demands from all parties a more even playing field. The overarching theme of this book is that globalization—defined as “the movement toward greater international integration and interdependence among people and organizations across national borders”—is in a period of transition in the Asia Pacific region. In this volume we asked several crucial questions: What is the exact nature of this transition? What social, political, and economic forces in the region have conspired to bring it about? In what new directions is this transition leading the region and the rest of the world? The studies here suggest that the answers to these questions are complex, conditioned by problems of history, by regime type, and by changing expectations within the public sector. However, there are a few conclusions that can be drawn. First, the transition is a gradual one—from an understanding of the global marketplace as free, pluralistic, and self-regulating to one that recognizes the value of government in the broadest sense of the term. Governed markets have, historically, been the norm in the Asia Pacific Basin, where a combination of Confucian ethics, deferential politics, and economic protectionism have tended to reinforce paternalistic relations up and down a chain linking the individual, the family, society, and the state. Corporatist solutions precede and complicate pluralistic, democratic ones in the transition from external to internal globalization. Second, the transition is leading the region and the rest of the world in new directions that are critical for the future of human development. It is doing so by redefining the meaning and limits of growth. Not only will suc-

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cessful development policies, whether originating from state or nonstate actors, from now on have to build sustainability into their programs, they will also have to include social capital as a factor of production, emphasizing the human factor generally in the calculation and design of their outcomes. This will of necessity require a broader sharing of the costs and the benefits of globalization. Perhaps the most important new direction militated by the change from entrepreneurial to more managed forms of development lies in the realm of education. Demands for a wide range of educational services, from simple literacy training to vocational education to higher learning, have never been greater in the region. Democracy begins in self-government, and self-government is a function of an individual’s education and knowledge. In today’s world, knowledge is not only of the materials and resources in one’s own backyard, but of the complex parallelogram of forces governing the global community. A broad, global education can teach an appreciation of the unity and connectedness of life, break down the cultural barriers to change through dialogue and mutual understanding, and empower individuals to live more contributive lives, eschewing the privileged status of victims. The transition we chart in this volume is still largely in the making, not only in the Asia Pacific Basin, but around the world. That a transition is occurring is without question. As the contributors to this book so clearly illustrate, the indicators are everywhere—in government, the private sector, and organizations of civil society—and manifested in changes in political, economic, social, technological, and cultural dimensions of life. All societal transitions are complex and uncertain; but we can conclude with some confidence from our assessment of the experience in the Asia Pacific Basin that adjusting to globalization has been and will continue to be a collective enterprise calling on the judgment, expertise, and cooperation of increasing numbers of people and institutions.

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Kevin G. Cai is assistant professor of political science and East Asian studies, Renison College, University of Waterloo, Canada. His research interests include regional integration and institution-building in the Asia Pacific, China’s integration with the regional and global economy, and various political, security, and economic issues of the Asia Pacific region. G. Shabbir Cheema is principal adviser and program director, Division for Public Administration and Development Management, United Nations. As a senior UN official over the past fifteen years, including six years as the director of Governance Division of UNDP, he provided leadership in crafting democratic governance and public administration programs at the country level, and designing global research and training programs in electoral and parliamentary systems, human rights, transparency, and accountability of government, urban management, and decentralization. From 1980 to 1988, he worked as Development Administration Planner at the United Nations Center for Regional Development, Nagoya, Japan. John M. Heffron is professor of history, dean of students, and associate director of the Pacific Basin Research Center at Soka University of America, Aliso Viejo, California. Prior to joining Soka University of America, Heffron taught at the University of Hawaii at Manoa, Montana State University, and in the State University of New York system at both Fredonia and Buffalo. He has published research and commentary in Science & Education, Educational Theory, The History of Education Quarterly, Teachers College Record, American Studies, and Religion and American Culture: A Journal of Interpretation. Anirudh Krishna is assistant professor of public policy and political science at Duke University. He has authored or edited four books on 261

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social capital, rural development, and community experiences in poverty reduction. Sarosh Kuruvilla is professor of collective bargaining, comparative industrial relations, and Asian Studies at Cornell University. His research interests focus broadly in the area of comparative industrial relations and specifically on the linkages between industrial relations policies and practices, national human resource policies and practices, and economic development policies. Sang M. Lee is the University Eminent Scholar, Regents Distinguished Professor, chair of the Management Department, executive director of the Nebraska Productivity and Entrepreneurship Center, and director of the Center for Albania Studies at the University of Nebraska. He is also president of the Pan-Pacific Business Association, an international scholarly society of over four thousand members in thirty-five countries, and fellow of the Academy of Management, Decision Sciences Institute, and PanPacific Business Association. He is a frequent consultant and trainer for a number of business, nonprofit, and government organizations in the United States and abroad. Isabel Ortiz is a senior poverty reduction specialist at the United Nations in New York. Dr. Ortiz has worked at the European Union (1992–1993), High Council of Scientific Research of Spain (CSIC, Department of International Economics, 1993–1994), and lectured on public policy at University of Madrid (1994–1995). From 1995 to 2003 she worked at the Poverty Reduction and Social Development Units of the Asian Development Bank, where she has been team leader/manager of both project and policy initiatives, and became chair of the ADB Working Group on Social Protection. Recent publications include: Social Protection in Asia and the Pacific (2001), Handbook for Poverty and Social Analysis (2001, with N. O’Sullivan et al.), Defining an Agenda for Poverty Reduction (2002). Dennis A. Rondinelli, the director of the Pacific Basin Research Center at Soka University of America, is senior research scholar at the Duke Center for International Development, Duke University, and the Glaxo Distinguished International Professor of Management Emeritus at the University of North Carolina–Chapel Hill. He has served as an adviser, consultant, or expert to the US State Department’s Agency for International Development, the World Bank, the Asian Development Bank, the Canadian International Development Agency, the International Labor Office, the United Nations Development Program, and to private corporations. In 2002

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he was appointed to a four-year term as the member from the United States of the United Nations Expert Committee on Public Administration and he was reappointed in 2005 for a second four-year term. Clay G. Wescott is principal regional cooperation specialist for the Asian Development Bank. His work covers e-government, regional cooperation, governance assessment, civil service reform, public finance, decentralization, citizen participation, and combating corruption. Before joining the ADB, he worked as deputy director for the Management Development and Governance Division of UNDP and Director of the Finance, Management and Economics Division of Development Alternatives, Inc., in Washington, D.C. Previously, he worked with PriceWaterhouse and the Harvard Institute for International Development. Henry Wai-chung Yeung is associate professor in economic geography at the Department of Geography, National University of Singapore. His research interests broadly cover theories and the geography of transnational corporations, Asian firms and their overseas operations, and Chinese business networks in the Asia Pacific region. He is editor of Environment and Planning A and Economic Geography, and Asia Pacific editor of Global Networks.

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Acer Group, 96–97 Alternative Law Groups (ALG), 164, 165 American Board of Commissioners for Foreign Missions: Prudential Committee, 25, 26 Armstrong, Samuel Chapman, 28, 29 ASEAN Free Trade Agreement (AFTA), 32 Asia-Europe Meeting (ASEM), 74 Asia Foundation, 155 Asian Development Bank: donor assistance for information and communication technology, 184, 185 Asian Monetary Fund, 71 Asian Network for Free Elections (ANFREL), 155 Asian Tigers, 39, 54, 109, 112, 229, 230 Asia Pacific Basin: adaptation to globalization in, 47–62; asset ownership in, 161; biotechnology sector in, 57–58; business norms and practices in, 86–91; business restructuring in, 95–98; capital inflows in, 42tab; changes in organization and governance in business, 91–92; changing role of states and governance in, 153; citizen political participation, 174–176; clustering knowledgebased industry in, 58–60; combating corruption in, 156–159, 180–181; Confucian ethics in, 15; cooperation in, 16; corporate management and governance in, 87–88; decentraliza-

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tion policies in, 162–163; democratization and, 151–168; demographic explosion in, 210, 211; diversity in, 15; ease of doing business in, 48, 49tab; economic development and transformation in, 41–44; economic integration in, 65–82; economic reform in, 47–52; economic response to globalization in, 39–63; education in, 61tab, 213–214, 214tab; e-government in, 171–186; electoral process in, 154–156; electronics industry in, 52–54; export market growth in, 42tab; exports to United States, 66, 67, 67tab; family ownership of business, 85, 91, 92, 93tab; financial crisis in, 48, 65, 70–72, 109, 113, 114; financing e-government in, 183–185; globalization of business in, 85–104; governance indicators in, 53tab; gross domestic product in, 42, 42tab; health care in, 214tab; historical antecedents of globalization in, 10, 15–33; hybridization of cultures in, 17; impact of globalization in, 1–13; imposition of liberalization policies on, 71; information and communication technology in, 54–57, 109–124; innovative capacity in, 45–47, 52–58; institutionalized regional cooperation in, 72–81; interdependence of countries in, 1; international business financing, 88; Internet use

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in, 56, 56tab, 57; interstate contacts with, 17; investment in, 42tab; judicial reform in, 163–165; legislative representation in, 160–161; links with outside world, 16, 17, 18; market liberalization in, 47–52; organizing elections in, 154–156; oversight of executive branches in, 159–160; political devolution in, 162–163; progress in health and nutrition, 214–215; property rights in, 49, 50; research and development in, 57–58; resentment of United States dominance, 71; separation of business ownership and management in, 88; skills development strategies in, 127–147; social challenges in, 209–213; social protection policies and, 209–223; social security/welfare in, 214tab; spatial diffusion of norms and practices in business in, 89–91; structural transformation of economies in, 73; technological adaptation in, 52–58; trade arrangements in, 79–81; trade communities in, 16; trade surpluses with United States, 69; United States military presence in, 78 Asia-Pacific Economic Cooperation (APEC), 32, 73–75, 82n17, 230; decisionmaking in, 74, 75; limitations of, 71; open regionalism principle in, 74, 75; as primary regional organization, 74; project based initiatives in, 73, 74 Association of Southeast Asian Nations (ASEAN), 32, 75–77, 82n17, 230, 233; ASEAN Plus One (APO), 77; ASEAN Plus Three (APT), 76, 77–79; founding, 75; Framework Agreement on Comprehensive Economic Cooperation by, 80, 81; Free Trade Area, 76; inability to provide assistance to members, 72; influence of, 76; internal divisions in, 71; limitations of, 71; membership expansion of, 71; operational principles, 76; as source of investment funding, 67 Atherton, Frank, 30 Australia: combating corruption in, 157;

competitive markets in, 183; eBay in, 111; economic development in, 44, 44tab, 52tab; education levels in, 61tab; governance indicators in, 53tab; gross domestic product in, 44, 44tab; income levels in, 8; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; mobile access in, 55, 55tab; patent applications in, 46, 46tab; societal change in, 40 Australian Electoral Commission, 155 Bangladesh, 7; combating corruption in, 157; education spending in, 214tab; e-government in, 176, 179; health care in, 214tab; information and communication technology in, 171; social security/welfare in, 214tab Biopolis, 57–58 Biotechnology, 57–58 Brunei, 76 Business: capital markets and, 99, 100; changes in organization and governance, 91–92; diversification in, 96–97; family-owned, 85, 91, 92, 93tab; globalization and, 85–104; importance of education in, 91; information and communication technology, 110; international financial practices, 88, 98–100; knowledge-based, 152; management and governance issues, 87–88; normative isomorphism in, 91; norms and practices, 86–91; organizational change in, 87–88; organizational restructuring, 95–98; organization of, 86; professionalization of management in, 100–101; separation of ownership and management in, 88; spatial diffusion of norms and practices, 89–91 Cai, Kevin, 11, 65–82, 230, 232, 233, 239 Cambodia, 75; in Association of Southeast Asian Nations (ASEAN), 76; education spending in, 214tab; egovernment in, 172, 175; health care in, 214tab, 215; Internet access in, 171, 172, 175; social security/welfare in, 214tab Canton: as entrepôt city, 16

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Capital: access to, 4; accumulation of, 41; flows, 90, 94tab; human, 41, 110, 127, 144; imports/exports, 67, 68; internal, 90; markets, 70, 88, 90, 99, 138; movement of, 158; physical, 41; raising, 88; resources, 90; venture, 140, 141, 144, 145 Capital, social, 8, 191–205, 237–238; achievements by, 192–194; assessment of effects of, 199–202; benefits accruing from high levels of, 193; cognitive/structural dimensions of, 193; community use of, 194–195; defining, 192, 206n3; development performance and, 199–202; economic development and, 192, 193; linkages and, 194–195; market-strengthening activities and, 192; measuring, 195–199; mobilization of, 192; as neutral resource, 191, 192, 194, 195; objectives served by, 192; use for undesirable ends, 194; use in protests, 191, 202–203, 206n2 Carter Center, 155 Chaebols, 48, 54, 113, 230 Change(s): as driving force of development, 40; governmental, 40; policy, 42; private sector, 40; as result of globalization, 39–63; social, 40 Cheema, G. Shabbir, 11, 151–168, 232–233, 234, 240 China: in Asia-Pacific Economic Cooperation (APEC), 73; belief in global trade in, 7; biotechnology in, 57–58; clustering knowledge-based industry in, 59; competition with, 110; consumer production in, 109; defense of territorial prerogatives by, 19; early trade with, 18–24, 19; eBay in, 111; economic development in, 44, 44tab, 49, 52tab; economic liberalization in, 152; education levels in, 61tab; education spending in, 214tab; e-government in, 171; Agreement on Framework Comprehensive Economic Cooperation by, 80, 81; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab, 215; income levels in, 8; information and communication

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technology in, 171; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; investment climate in, 50; investment in, 54; “loose rein” policy in, 22; market economy in, 152, 193; market oriented policies in, 73; mobile access in, 55, 55tab; nationalism of, 30; outsourcing industry in, 142; patent applications in, 46tab, 144; predatory politics of, 31; regulated economy in, 15; research and development in, 144; silverization of, 20, 21; social security/welfare in, 214tab; societal change in, 40; as source of investment funding, 67; trade arrangements in, 80; trade relations with West, 19, 20; transition economy in, 66; in World Trade Organization, 153 Chinese Exclusion Act (1888), 30 Ch’i-ying, 22, 23 Clinton, Bill, 74 Colonialism, 29 Commerce: globalization of, 85–104; trans-Pacific, 31 Communication: Internet, 12. See also Technology, information and communication Competition: business, 11; economic, 71; increasing, 41; international, 138, 140; with international suppliers, 54; low-cost advantages in, 127; partnership over, 24; regional, 10 Cooperation: in Asia Pacific Basin, 16; economic, 11, 65, 71, 230; external pressures for, 72; institutionalized, 65, 66, 70, 72–81; interfirm, 138, 139; regional, 11, 39, 43, 230; technical, 71; technological, 74 Corruption: awareness of, 12; bribery, 153; combating, 156–159, 166, 180–181; control of, 53tab; cross border, 153, 158; as global issue, 157; growth of political awareness and, 157; independent commissions to combat, 158; proactive media and, 158; prosecution of, 50; weakening of governance institutions and, 156, 157 Cultural: artifacts, 173, 233; changes, 25; conflict, 24; contact, 25, 29; her-

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itage, 118; imperialism, 29; memory, 173, 233; nationalism, 24; superiority, 21; traditions, 23 Culture: availability of, 7; foreign, 7; hybridization of, 17; international, 90; local, 67; patriarcal, 92 Currency: convertibility, 50; depreciation, 70 Cushing, Caleb, 22, 23 Democracy: access to information and, 152; combating corruption and, 156–159; educational levels and, 152; elections and, 151; globalization and, 2, 151–168; guided, 152; information and communication technology and, 151; popular support for, 7; pressure from local communities for, 152; promotion of, 151; public awareness and, 152; regional spread of, 152; separation of executive and legislative powers in, 159–161 Democratization: Asia Pacific Basin and, 151–168; decentralization and, 162–163, 166, 167; role of civil society in, 154 Development: assessment of skills systems, 134–138; change as driving force of, 40; commercial, 25; cost leadership and, 109; economic, 2, 3, 39, 78; equitable, 74; export-oriented, 39, 41, 65, 230; exposure to international competition and, 140; “flying geese,” 68; gender, 210; human asset, 41, 47, 60–62; human resource, 74, 133; information technology and, 109–124; infrastructure, 110; of international law, 1; of investment, 2; nonfarm, 230; policy, 2, 3, 9, 40; project financing, 90; regional, 80; rural, 230; skills, 127–147; social, 2, 12, 39, 54, 212; social capital and, 192; sociopolitical impact of, 40; strategies, 7; sustainable, 74; technology, 85, 152, 230 Digital divide, 8 Dutch East India Company, 20 East Asian Economic Group (EAEG), 77

East Asian Study Group (EASG), 77 East Asian Vision Group (EAVG), 77 Economic: change, 10, 39; competition, 71; cooperation, 11, 65, 71, 230; destabilization, 70; development, 2, 3, 39, 78, 109–124; freedom, 4; growth, 2, 6, 40, 41–43; imperialism, 29; integration, 6, 10, 65–82, 152, 230; interaction, 3; liberalization, 6, 152; open market, 4; reform, 47–52; restructuring, 68, 69; security, 3; zones, 50 Economies: advanced, 3; capital-exporting/importing, 67; command, 152; competitive market, 3; export-oriented, 51, 52; government intervention in, 4; informal, 48; knowledgebased, 56; market oriented, 65, 152, 193; national, 2; regulation of, 15; structural transformation of, 73; transition, 66 Education and training: access to, 8; adult rates of, 60, 61, 61tab; in information and communication technology, 110; internationalization of, 32, 89; investment in, 127, 139; poverty and, 213–214; reform, 130, 131, 132; resources, 33; as social protection, 213–214; vocational, 40 Edwards, Jonathan, 25, 28 E-government, 12, 171–186, 234; adoption factors, 171–173; citizen participation and, 173–176, 178; combating corruption and, 180–181; competition in communications and, 183; defining, 12, 171; digital divide and, 174; effectiveness of, 177–178; efficiency of, 176–177; e-voting, 111; financing, 183–185; good governance practices and, 172; human resources and, 185–186; information and communication technology and, 12, 171–186; innovations in, 173–181; leadership and, 181–182; legal framework, 181–186; modernization of business processes through, 172; natural disasters and, 178; networks of trust and cooperation and, 172, 173; online services, 110; organizational processes, 181–186; policy approaches in,

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182–183; political acceptability and, 185–186; programs, 110; regulatory issues, 181–186; service integration and, 179–180; services available, 174–176; use of resources in, 174 Elections: capacity of management bodies in, 154; competitive, 155; free and fair, 154–156; legislation and, 154; monitoring, 154, 155; organizing, 154–156; participation in, 155; presidential, 156; voter registration and, 154; voter turnout in, 155 Estrada, Joseph, 157 EU. See European Union (EU) Eurocentrism, 31 Europe: early involvement in Asia Pacific Basin, 16, 17, 18, 19, 20, 22; intensifying regionalism in, 72 European Bank for Reconstruction and Development: donor assistance for information and communication technology, 184, 185 European Investment Bank: donor assistance for information and communication technology, 184, 185 European Union (EU), 54, 65, 155, 232 Exchange rates: fixed, 41; floating, 41; fluctuating, 69 Framework Agreement on Comprehensive Economic Cooperation, 80, 81 Free Trade Area of the Americas, 72 Fumimaro, Konoe, 31 General Agreement on Tariffs and Trade (GATT), 32; regional preferential trade arrangements in, 82n11 General Agreement on Trade in Services (GAT), 182–183 Globalization: acceleration of, 11, 47; adaptation to, 1–13, 47–62, 228– 239; adjustments to as crisis responses, 229–231; of Asian business, 85–104; Asian economic response to, 39–63; balancing competition and cooperation in, 231–232; benefitting from, 228–229; blending modern governance and culturally-based tradition, 232–233; business diversification and, 96–98; of business knowledge, 91; capital

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flows and, 70; community responses to, 191–205; comparitive advantage and, 127; control of by rich nations, 3; defining, 1, 40; democracy and, 2, 151–168; dimensions of, 40–47; early mercantile expansion and, 5; economic cooperation and, 65–82; financial experimentation and, 5; future challenges to, 239–242; historical antecedents of, 10, 15–33; as historical social process, 1; human resources and, 236–237; hybrid institutions and, 233–234; impact in Asia, 2–9; income equality and, 191; information and communication technology and, 109–124; innovative capacity and, 45–47; international financial practices and, 98–100; judicial reform and, 163–165; knowledge-based economic development and, 235–236; management and governance issues, 87–88; manifestations of, 1, 2; need for continuous change and innovation in, 228–229; negative consequences of, 2, 3, 4, 5, 153; opposition to, 191; organizational business restructuring and, 95–98; organizational corporate change and, 87–88; positive impacts of, 6, 7; promotion of democracy and, 12; skills development strategies and, 127–147; social capital and, 191–205, 237–238; social protection and, 209–223, 238–239; social support and, 237–238; sustainable progress in, 227–244; technological innovations and, 235–236 Gorbachev, Mikhail, 73 Governments: accountability of, 12, 152; capacity for adaptation, 39; encouragement of savings by, 42; fiscal burdens of, 4; information and communication technology and, 171–186; intervention, 54; macroeconomic management by, 41; participation in, 51; partnerships with private sector, 153–154; transparency and, 2 Gross domestic product: export growth and, 3; indicators, 42tab

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Hawaii, 24; colonization of, 24, 25, 26, 27, 28; commercial development of, 25; downfall of monarchy in, 34n33; missionaries in, 25, 26, 27, 28, 29; relationship with Congregational New England, 25, 26, 27 Health care: infant mortality, 60; investment in, 58. See also individual countries Heffron, John, 1–13, 15–33, 227–244 Holland: early involvement in Asia Pacific Basin, 19, 21 Hong Kong: banking in, 94tab; competitive markets in, 183; corruption in, 50; eBay in, 111; economic development in, 44, 44tab, 52tab; education levels in, 61tab; e-government in, 171; as entrepôt city, 16; export-oriented economy in, 51; family ownership of business, 92, 93tab, 95; governance indicators in, 53tab; gross domestic product in, 44, 44tab; income levels in, 8; information and communication technology in, 171, 173; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; managerial reform in, 173; mobile access in, 55, 55tab; multinational corporations in, 54; patent applications in, 46tab; societal change in, 40; as source of investment funding, 67; trade arrangements in, 80 Honolulu: as entrepôt city, 16 Human rights, 151 Income: disparity, 212; household, 6; inequality, 6; open market economies and, 4 Index of Economic Freedom, 51, 52tab India: assessment of skills development systems in, 134–138; belief in global trade in, 7; Central Apprenticeship Scheme, 132; clustering knowledgebased industry in, 59; combating corruption in, 157, 181; Council of Scientific and Industrial Research in, 133; Criminal Procedure Code in, 165; democratization in, 152; dowry deaths in, 165; economic development in, 44, 44tab, 49, 50, 52tab; education and training in, 61tab, 128,

132, 133, 214tab; e-government in, 174, 175, 176, 178, 186; election of “political families” in, 160; elections in, 156; emigration of skilled labor from, 128; environment for skills development in, 145–146; export earnings, 129, 129tab; export-oriented industrialization in, 128; exposure to international competition in, 140–143; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab; human capital in, 144–145; income levels in, 8; Indian Evidence Act in, 165; Indian Institute of Information Technology in, 144; Indian Penal Code in, 165; information and communication technology in, 140, 141, 141tab, 142, 143; infrastructure in, 145–146; innovative capacity and, 45, 45tab; institutional prerequisites for high skills equilibrium in, 140; internet use in, 56, 56tab, 57; job security in, 141; job turnover in, 141, 142; judicial activism in, 164; lack of collaboration in competitive environments in, 142; legislative representation in, 161; long-term evolution of high skills systems in, 143–146; mobile access in, 55, 55tab; patent applications in, 1, 46tab; Planning Commission in, 133; political devolution in, 162–163; research and development in, 143, 144; skills development initiatives in, 127–147; skills shortages in outsourced areas, 133, 134, 134tab; skills surplus in, 128; social capital use in, 195–203; social security/welfare in, 214tab; societal change in, 40; software and business process outsourcing and, 128, 129, 129tab, 140–143; stock ownership in, 140, 141; technical institutions in, 133; venture capital in, 140, 141; vertical linkages between business firms, 146 Indonesia: in Association of Southeast Asian Nations (ASEAN), 75; banking in, 94tab; belief in global trade in, 7; combating corruption in, 157; corruption in, 50; democratization in,

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152, 154, 155, 156; economic development in, 44, 44tab, 52tab; economic/political decline in, 71; education levels in, 61tab; education spending in, 214tab; e-government in, 173; election of “political families” in, 160; elections in, 154, 155; electronics industry in, 54; family ownership of business, 92, 93tab; financial crisis in, 109; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab; income levels in, 8; information and communication technology in, 172; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; mobile access in, 55, 55tab, 172; patent applications in, 46tab; pluralism in, 152; political devolution in, 162; political participation in, 152; social security/welfare in, 214tab Industrialization: comparitive advantage in, 128; export-oriented, 128, 130; original equipment manufacture and, 53, 54; protection mechanisms and, 210; research and development and, 53; technology-based, 52; upwardly mobile, 68 Infrastructure: development, 110; financing, 171; information, 61; integration into international economy and, 9; investment in, 47, 56; for technology-based manufacturing, 59–60 Institute of Pacific Relations (IPR), 30, 31 Institutions: building, 166; changes in, 21; cultural heritage, 118; democratic, 11, 151–168, 173, 233; financial, 88, 92; governance, 156; human rights, 160; hybrid, 233, 234; multilateral, 70; multinational, 232; oversight, 166; pan-Pacific, 73; reform of, 48; regional, 71, 74; strengthening, 47; technical education, 130; transregional, 74; vocational/professional training, 127; watchdog, 160 Integration: driven by market forces, 68, 69, 70; economic, 6, 10, 65–82, 152, 230; evolution of, 11; impact of financial crisis on, 70–72; interna-

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tional, 3, 10; into international economy, 9; regional, 10, 65–82; technology advances and, 40; technology and, 2; uneven benefits from, 3 International Foundation for Election Systems (IFES), 155 Internationalism, 24, 30 International Monetary Fund (IMF), 71; assistance to South Korea, 113; structural adjustment programs and, 103 International Republican Institute (IRI), 155 International Telecommunications Union (ITU), 183 Interventionism, 30 Investment: acceleration of, 152; attracting, 11, 48, 52, 130; climate, 47; development of, 2; diversion of, 72; in education and training, 127, 139; fixed, 43; flows, 6; foreign direct, 6, 10, 31, 43, 47, 48, 58–60, 65, 66, 135tab, 230; gross domestic, 43; in human asset development, 47, 60–62; in human capital, 127; incentives, 48; increasing, 43–44; inflow, 43; in information and communication technology, 54, 55; in infrastructure, 47, 56; integration into international economy and, 9; intraregional, 66, 67; liberalization, 74, 80; multinational, 48; in open market economies, 4; policies, 41; portfolio, 70; private, 41; public, 42; in public health, 58; in technology, 56; Western domination of, 3 Isolationism, 24 Italy: early involvement in Asia Pacific Basin, 17 Japan: in Asia-Pacific Economic Cooperation (APEC), 73; banking in, 94tab; belief in global trade in, 7; clustering knowledge-based industry in, 59; competitive markets in, 183; concerns about military resurgence of, 69; corruption in, 50; democratization in, 152; developmental assistance from, 184; early trade with, 18, 19; eBay in, 111; economic development in, 44, 44tab, 52tab; economic

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domination of, 68, 69; education levels in, 61tab; e-government in, 171; expansionism of, 30; export-oriented economy in, 51; governance indicators in, 53tab; gross domestic product in, 44, 44tab; income levels in, 8; information and communication technology in, 171; internet use in, 56, 56tab, 57; mobile access in, 55, 55tab; patent applications in, 46, 46tab; predatory politics of, 31; social capital in, 193; societal change in, 40; as source of investment funding, 67, 68; trade arrangements in, 80; trade deficits with, 69; trade relations with West, 19, 20; treaties with United States, 23; Tsukuba Science City in, 59; worker-employer relations in, 5 Java: Dutch East India Company in, 20 Kaishu, Katsu, 30 Kim Dai-jung, 78 Krishna, Anirudh, 12, 191–205, 237, 242 Kuruvilla, Sarosh, 11, 127–147, 236, 237, 242 Labor, 215–216; child, 215; comparitive advantage in, 128; growth of, 41; human, 17; low-cost, 47, 54, 109, 130; markets, 33, 138, 139, 212; regional division of, 68; skilled, 6, 47; standards, 3, 5, 215; unions, 138; upgrade in skills, 11 Laos: in Association of Southeast Asian Nations (ASEAN), 76 Lee, Sang, 11, 109–124, 231, 236, 241 Lee Kuan Yew, 230 Liberalization: economic, 6, 50, 152; immature, 70; investment, 74, 80; market, 7, 47–52; trade, 32, 40, 47–52, 71, 74, 80, 153 Macau, 19, 21, 22; competitive markets in, 183; as entrepôt city, 16; trade arrangements in, 80 Mahathir Mohamad, 77 Malaysia: accountability in, 153; in Association of Southeast Asian Nations (ASEAN), 75; banking in,

94tab; biotechnology in, 57–58; clustering knowledge-based industry in, 59; Communications and Multimedia Act in, 57; democratization in, 152; economic development in, 44, 44tab, 52tab; education levels in, 61tab; education spending in, 214tab; Election Commission in, 155; electronics industry in, 54; family ownership of business, 92, 93tab; financial crisis in, 109; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab; income levels in, 8; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; mobile access in, 55, 55tab; Multimedia Super Corridor in, 59, 62; patent applications in, 46tab; political devolution in, 162; social security/welfare in, 214tab; societal change in, 40; trade arrangements in, 80; transparency in, 153 Manila: Dutch East India Company in, 20; as entrepôt city, 16 Manila Galleon, 21 Marcos, Ferdinand, 167 Markets: capital, 70, 88, 90, 99, 138; development of, 53; emerging, 43, 44; entry of domestic firms into, 41; expanding, 41; export, 42, 110; global, 20; labor, 33, 138, 139, 212; liberalization, 7, 47–52; values, 7 Media, 12; legislative representation and, 161; role in combatting corruption, 158; strengthening democratic institutions and, 158–159 Migration: international, 33 Multilateralism, 70 Multinational corporations, 29, 54; adjustments to globalization in, 11; bribery and, 153, 157; economic development and, 2; joint ventures with, 54 Myanmar: in Association of Southeast Asian Nations (ASEAN), 76; combating corruption in, 157 NAFTA. See North American Free Trade Agreement (NAFTA) Nanking Treaty (1842), 22

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National Citizens’ Movement for Free Elections (NAMFREL), 155 National Democratic Institute (NDI), 155 Nationalism: cultural, 24 Networks: business actor, 89; community, 210; cooperative, 87–88; disintegration of, 210; family, 210; global, 11; of interaction, 1; intersocietal, 17; production, 11; transnational corporate, 87–88 Newly industrialized countries, 44, 44tab; accountability in, 51; capital exports by, 68; economic development of, 42, 43; innovative capacity and, 45–47; as source of investment funding, 67; trade liberalization in, 40 New Order in East Asia, 31 New Zealand: combating corruption in, 157; competitive markets in, 183; eBay in, 111; economic development in, 44, 44tab, 52tab; education levels in, 61tab; e-government in, 172; governance indicators in, 53tab; gross domestic product in, 44, 44tab; income levels in, 8; information and communication technology in, 172; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57; mobile access in, 55, 55tab; patent applications in, 46, 46tab; societal change in, 40 Nongovernmental organizations, 73; influence of, 1, 2; judicial reform and, 164; limitations on state autonomy and, 31; social protection and, 221–222 Nongovernmental organizations, international, 29–31 North American Free Trade Agreement (NAFTA), 65, 232; Free Trade Area of the Americas, 72 OECD. See Organization for Economic Cooperation and Development (OECD) OOCL CargoSmart system, 98, 100 Opium War, 22 Organization for Economic Cooperation and Development (OECD), 3, 153

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Organizations: adaptation to globalization by, 10; civil society, 152, 156, 163; criminal, 164; domestic, 2; extremist, 153; intergovernmental, 76; international, 1, 2, 5; political, 2; public/private, 12, 13, 39; social, 9, 10, 39 Ortiz, Isabel, 12, 209–223, 230, 238, 241 Outsourcing, 4; competition in, 142, 143; diversity in, 129; skills shortages in, 133; software and business process, 128, 129, 129tab, 133, 134, 134tab Pacific Basin Economic Council (PBEC), 73 Pacific Economic Cooperation Conference (PECC), 73 Pacific Trade and Development Conference (PAFTAD), 73 Pakistan: combating corruption in, 157; education spending in, 214tab; health care in, 214tab, 215; social security/welfare in, 214tab Philippines: Alternative Law Groups in, 164, 165; in Association of Southeast Asian Nations (ASEAN), 75; belief in global trade in, 7; combating corruption in, 50, 157, 158–159; competitive markets in, 183; democratization in, 152; economic development in, 44, 44tab, 52tab; education levels in, 61tab; education spending in, 214tab; e-government in, 172, 173, 174, 175, 177, 178; election of “political families” in, 160; electronics industry in, 54; family ownership of business, 92, 93tab; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab; income levels in, 8; information and communication technology in, 172, 173, 183; innovative capacity and, 45, 45tab; Internet access in, 56, 56tab, 57, 175, 178; judicial activism in, 164; mass political action in, 173; mobile access in, 55, 55tab, 172; outsourcing industry in, 142; patent applications in, 46tab; “people power” in,

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152; Philippine Centre for Investigative Journalism (PCIJ), 158, 159, 174; political devolution in, 162; political participation in, 152; social security/welfare in, 214tab; societal change in, 40; trade arrangements in, 80 Policy: clustering knowledge-based industry, 58–60; coordination, 70; development, 2, 3, 9, 40; economic reform, 47–52; human asset development, 47, 60–62; import substitution, 42, 51, 230; investment, 41; liberalization, 6; market liberalization, 47–52; market oriented, 73; political decentralization, 162–163; protectionist, 51; public, 39; race, 30; social, 12, 213–217; social protection, 209–223; trade, 41 Political: awareness, 157; change, 10; decentralization, 162–163; devolution, 162–163; diversity, 69; equality, 31; families, 160; openness, 51; organizations, 2; pluralism, 162; stability indicators, 51; superiority, 21 Portugal: early involvement in Asia Pacific Basin, 16, 17, 19, 20, 21 Poverty: absolute, 6, 60, 62; age and, 210; dire, 60, 62; education and, 213–214; feminization of, 210; lifecycle risks and, 210; rates, 6; reduction, 2, 60, 219; rural, 210; social class and, 210; social protection and, 209; urban, 210 Private sector: business changes in, 10; capacity for adaptation, 39; incentives for manufacturing capabilities in high tech products, 54, 55; partnerships with governments, 153–154; risk reduction mechanisms in, 210, 211tab Privatization, 41 Production: electronics, 68; global networks of, 11; high-tech, 39, 68; patterns, 69; regionalization of, 67; research and development and, 53; transfer of, 68 Property: ownership, 50 Protection, social, 230, 231, 238–239; civil conflict and, 209; determination of needs for, 219–220; economic

development and, 209; education, 213–214; effectiveness of, 213–217; expansion of coverage, 220; financing, 220–221; globalization and, 209–223; health care, 214tab; household reversals and, 210; innovative institutional arrangements for, 221–222; insurance, 216; mobilization of all resources for, 220–221; natural disasters and, 209; policy implications, 219–222; poverty and, 209; priorities, 218; progress in health and nutrition, 214–215; public-private partnerships for, 221–222; service delivery mechanisms, 217tab; social security and, 215–216; vulnerable populations and, 224n12; for workforce, 210 Protectionism, 65, 69 Public sector: adjustments to globalization in, 11; governance transparency in, 6; risk reduction mechanisms in, 210, 211tab Regional: cooperation, 39, 43, 230; customs unions, 32; development, 80; division of labor, 68; economic integration, 65–82; governance indicators, 53tab; identity, 15; institutions, 71; integration, 10; production, 67; trade agreements, 72 Resources: allocation of, 4; capital, 90; educational, 33; financial, 2; human, 11, 127, 133, 142, 185–186; rational use of, 21; use in e-government, 174 Risk(s): assessment, 211tab; civil, 210, 211; economic, 210, 211, 211tab; environmental, 210, 211tab; governance-related, 210, 211tab; informal mechanisms, 211tab; lifecycle, 210, 211tab; natural, 210, 211; poverty and, 210, 211, 211tab; public/private sector mechanisms, 211tab; reduction mechanisms, 210; social, 210, 211tab Rondinelli, Dennis, 1–13, 39–63, 227–244 Samsung Electronics, 97–98, 100 Services: high-value, 39

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Shanghai: Dutch East India Company in, 20; as entrepôt city, 16 Shinawatra, Thaksin, 156 Singapore: Agency for Science, Technology, and Research in, 57; assessment of skills development system in, 134–140; in Association of Southeast Asian Nations (ASEAN), 75; banking in, 94tab; biotechnology in, 57–58; combating corruption in, 157, 158; competitive markets in, 138, 183; corruption in, 50; Corrupt Practices Investigations Bureau, 158; eBay in, 111; Economic Development Board in, 130; economic development in, 44, 44tab, 52tab, 131, 140; education and training reform in, 130, 131, 132; education levels in, 61tab; e-government in, 172; employment rates in, 136tab; environment for skills development in, 145–146; export-oriented industrialization in, 51, 128, 130, 140; family ownership of business, 92, 93tab, 95; foreign investment in education and training in, 130, 131; governance indicators in, 53tab; gross domestic product in, 44, 44tab, 135tab; human capital in, 144–145; importance of lines of communication in skills development in, 132; income levels in, 8; information and communication technology in, 172; infrastructure in, 145; innovative capacity and, 45, 45tab; interfirm cooperation in, 139; Internet access in, 56, 56tab, 57, 171, 172; investment in, 135tab; investment in education and training in, 139; job turnover rates in, 138tab; labor market in, 138, 139; labor productivity in, 135tab; labor union activity in, 138; literacy rate, 135tab; long-term evolution of high skills systems in, 143–146; mobile access in, 55, 55tab; multinational corporations in, 54; National Biotechnology Program in, 57–58; National Trade Union Congress (NTUC), 140; National Wages Council, 128; New Education System in, 131; outsourcing industry

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in, 142; patent applications in, 46tab; People’s Action Party (PAP), 158; Precision Engineering Institute in, 139; relation between economic development and skills development in, 130; research and development in, 57–58; Singapore National Employers Federation (SNEF), 140; Skills Development Fund in, 131; skills development initiatives in, 127–147; societal change in, 40; as source of investment funding, 67; Strategic Economic Plan in, 57; trade arrangements in, 80; vertical linkages between business firms, 146; Vocational and Industrial Training Board in, 130; wage increase policy in, 128 Sinocentrism, 31 Social: assistance, 212, 215; awareness, 12, 151; capital, 8, 191–205; change, 10, 39, 40; class, 210; debate, 159; development, 2, 12, 39, 54, 209, 212; insurance, 212, 216; memory, 173; mobility, 210; organizations, 9, 10, 39; policies, 12; priorities, 212; protection, 8, 12; risk, 210; safety, 60; security, 215–216; services, 63; welfare, 2; well being, 60 South Korea: assistance from International Monetary Fund, 113; banking in, 94tab; belief in global trade in, 7; chaebols in, 48, 54, 113; civil society organizations in, 152; clustering knowledge-based industry in, 59; combating corruption in, 158, 180; competitive markets in, 183; computer use in, 113, 114; corruption in, 50; democratization in, 152; digital economy in, 115–116; digital welfare society in, 117; eBay in, 111; ebusiness volume in, 111, 111tab; economic development in, 52tab, 112–115; economic reform in, 109, 110; education and training programs in, 117–118; education levels in, 61tab; e-government in, 171, 172, 173; e-Government Law, 110; e-Government Special Committee, 110; e-Silk Road in, 115; export-oriented industrialization in, 128; family

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ownership of business, 95; financial crisis in, 5, 48, 109, 113, 114; “flying geese” strategy in, 68; governance indicators in, 53tab; gross domestic product in, 44, 44tab; gross national product in, 110, 112; income levels in, 8; information and communication technology challenges in, 121–122; information and communication technology in, 109–124, 171, 172; information and communication technology infrastructure in, 110, 111; information and communication technology strategies in, 112–115; innovative capacity and, 45, 45tab; Integrity Pact in, 158; Internet use in, 56, 56tab, 57; investment in technology in, 56; mobile access in, 55, 55tab, 114; National Education Information System in, 118; national information and communication technology development strategy in, 115–121; patent applications in, 46, 46tab; political participation in, 152; production system in, 117; research and development in, 56, 57, 144; skills development initiatives in, 127; social capital in, 193; societal change in, 40; as source of investment funding, 67; support for democratic values in, 7; trade arrangements in, 80; transparency in, 180; Ubiquitous Network Society in, 119–121; worker-employer relations in, 5 Sovereignty: erosion of, 153; of God, 25; state, 153; traditional notions of, 2; undermining of by globalization, 2 Spain: early involvement in Asia Pacific Basin, 19, 20, 21 Sri Lanka: education spending in, 214tab; e-government in, 182–183; health care in, 214tab, 215; social security/welfare in, 214tab State(s): autonomy, 31; sovereignty, 153 Suharto (president of Indonesia), 154, 167 Sukarnoputri, Megawati, 156 Sun Yatsen, 31 Taiwan: banking in, 94tab; biotechnology in, 57–58; clustering knowledge-

based industry in, 59; competitive markets in, 183; eBay in, 111; economic development in, 44, 44tab, 52tab; education levels in, 61tab; egovernment in, 171; export-oriented economy in, 51; export-oriented industrialization in, 128; family ownership of business, 93tab, 95; “flying geese” strategy in, 68; governance indicators in, 53tab; gross domestic product in, 44, 44tab; income levels in, 8; information and communication technology in, 171; innovative capacity and, 45, 45tab; Internet use in, 56, 56tab, 57; investment in health care, 58; mobile access in, 55, 55tab; patent applications in, 46tab; service sector competition in, 58; skills development initiatives in, 127; social capital in, 193; societal change in, 40; as source of investment funding, 67; support for democratic values in, 7; trade arrangements in, 80; worker-employer relations in, 5 Tariffs, 80 Technology: access to, 8; adoption of innovative strategies in, 47, 52–58; advances in, 2; applications to government service, 171–186; biotechnology, 57–58; changes in, 10; communication, 11; country rankings, 45tab; development, 152, 230; digital divide and, 8; high, 57–58; integration and, 2, 40; marketplace, 116; multimedia, 58–60; transfer, 4, 6, 50, 67, 130, 133; transportation, 52 Technology, information and communication, 52; access to, 55, 174; combating corruption and, 180–181; democracy and, 151; donor assistance for, 184, 185; economic development and, 109–124; in education, 61, 62; education and training in, 110; e-government and, 12, 171–186; growth of, 11; health issues and, 177; infrastructure development for, 110; investment in, 54, 55; mobile access, 55, 55tab; public-private partnership for, 110; “radio browsing,” 175; sector-building, 54–57; sharing and,

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173; strategies for economic development and, 112–115; use of English and, 175; Voice over Internet Protocol, 57 Terrorism, 153, 164 Thailand: access to information and, 152; accountability in, 153; in Association of Southeast Asian Nations (ASEAN), 75; banking in, 94tab; corruption in, 50; democratization in, 152; economic development in, 44, 44tab, 52tab; education levels in, 61tab; education spending in, 214tab; e-government in, 173; elections in, 156; electronics industry in, 54; export-oriented economy in, 51; family ownership of business, 92, 93tab; financial crisis in, 109, 113; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab; income levels in, 8; information and communication technology in, 173, 183; innovative capacity and, 45, 45tab; Internet use in, 56, 56tab, 57; judicial activism in, 164; mass political action in, 173; mobile access in, 55, 55tab; multiparty competition in, 152; patent applications in, 46tab; social security/welfare in, 214tab; societal change in, 40; trade arrangements in, 80; transparency in, 153 Thai Rak Thai, 156 Tokyo: Dutch East India Company in, 20; as entrepôt city, 16 Trade: acceleration of, 152; agreements, 72; bilateral, 79–81; blocs, 32; communities, 16; comparative advantages in, 4; diversion of, 72; economic development and, 6; facilitation, 71; foreign, 17, 31; free, 19, 30, 60, 79–81; global, 3, 4; imbalances, 33; increasing, 43–44; intercontinental, 21; international, 30; intraregional, 10, 43, 65, 66; liberalization, 32, 40, 47–52, 71, 74, 80, 153; merchandise, 67; negotiations, 72; outward-oriented, 2; patterns, 17; policies, 41; in primary products, 6; theories, 127; zones, 60 Transnational corporations, 3, 87–88

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Transnationalism, 18 Transparency International, 153; Corruption Perception Index, 157 Transportation: improvements in, 11; technology, 52 United Kingdom: early involvement in Asia Pacific Basin, 21, 22, 23; predatory politics of, 31 United Nations: Commission on Human Rights, 153; Convention Against Transnational Organizational Crime, 164; Development Programme, 155; General Assembly, 153 United States: Asian trade surpluses with, 69; in Asia-Pacific Economic Cooperation (APEC), 73; banking in, 94tab; cultural nationalism of, 24; decline in economic power of, 66; early involvement in Asia Pacific Basin, 20, 21, 22, 23, 24–29; encouragement of Asian integration by, 66; exceptionalism of, 24; internationalism of, 24, 30; interventionism of, 30; isolationism of, 24; military presence in Asia, 78; patent filings in, 144; predatory politics of, 31; reduction of market importance for Asian goods, 66, 69; sphere of influence of, 24 Urbanization, 210, 212 Uruguay Round, 73, 74 Vacuum domicillium, 16 Values: commercial, 24; religious, 23, 24 Vietnam: in Association of Southeast Asian Nations (ASEAN), 76; belief in global trade in, 7; combating corruption in, 157; economic development in, 44, 44tab, 52tab; economic liberalization in, 152; education levels in, 61tab; education spending in, 214tab; e-government in, 179, 180, 181–182, 185; governance indicators in, 53tab; gross domestic product in, 44, 44tab; health care in, 214tab, 215; income levels in, 8; information and communication technology in, 179, 180, 181–182; innovative capacity and, 45, 45tab; internet use in, 56, 56tab, 57;

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mobile access in, 55, 55tab; National Information Technology Program in, 181–182; occupation of Cambodia by, 75; patent applications in, 46tab; Public Administration Reform plan in, 182; social security/welfare in, 214tab; societal change in, 40; State Administrative Management Computerization in, 182; transition economy in, 66

World Bank: donor assistance for information and communication technology, 184, 185; Investment Climate Survey, 50; Poverty Reduction Strategy Papers, 219 World Trade Organization, 32, 81, 82n11, 153; Agreement on Government Procurement, 50; agreements, 72 WTO. See World Trade Organization

Washington Conference (1921), 30 Wescott, Clay, 12, 171–186, 233, 234, 241

Yeung, Henry Wai-Chung, 11, 85–104, 232, 233, 239, 240 Yudhoyono, Susilo Bambang, 156

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About the Book

G

lobalization and Change in Asia explores three decades of adjustment on the part of governments, civil society, and the private sector to the complex new forces of international competition. Recognizing that the benefits of globalization have not accrued equally to all Asian countries, or to all stratums of society, the authors seek lessons that can help shape development policy to effect the greatest good. Thus, they focus on the essential ingredients of the most broadly successful globalization strategies—strategies that can most optimally respond to the economic, social, and technological challenges that lay ahead.

Dennis A. Rondinelli is senior research scholar at Duke University’s Center for International Development, as well as director of the Pacific Basin Research Center at Soka University of America. John M. Heffron is professor of history at Soka University of America and associate director of the Pacific Basin Research Center.

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