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perverts basic realities. It generates the simultaneity of the unsimultaneous in cyberspace.
Therefore, game users commonly share a sense of in-betweenness of the real and the
simulated through their audio-visual experience in cyberspace. In this sense, Baudrillard
(1988) notes how easily an experience of a series of simulated images can produce a sense
of an actual and real experience (see also Nunes, 1995). A Lineage player in the U.S.
describes her spatial in-betweenness (reality vs. freedom) as follows:


Recently, I have found something new to share my spare time with, but it wasn™t
just a “game.” It was more like living a “life” in a fantasy world. ¦ What makes
it special is the realism such as the reality of actually taking the ferry to the
mainland. After leveling up only by killing a lot of orcs and werewolves, I was
ready to leave the Talking Island. The first time I left, it gave me a sense of leaving
an island like Alcatraz and stepping into a land of freedom and mystique. The
land of freedom was a feeling of accomplishment and desire, just like the feeling
of the early immigrants to the United States¦Lineage is more than a game, most
importantly, it is the freedom that gives this game its specialty. ¦ It is a real
fantasy world and it is this that makes me keep on playing this game, and it is
all of us, that makes this unique world a reality in Lineage (Player stories from
the Lineage™s community site, n.d., emphasis added).


The structure of virtual time and space in Lineage plays the more significant role in
producing a certain sense of “real” community in cyberspace, considerably detached
from the real world. In Lineage, the actual length of a day is four hours: two hours are
daytime and the other two are night. Usually it takes over 22˜24 hours, equivalent to
almost six days in Lineage, for an animated character to walk from one end to the other
of each cyberworld in Lineage. Because Lineage contains 50 simulated cyberworlds, it
takes about 1,100˜1,200 real-time hours or about 48˜50 full real days, equivalent to
288˜300 virtual days in Lineage, just to travel around the total space in Lineage. Thus
the time-space compression in cyberspace provides a common spatial and temporal
experience among the game players. The cyberspace in Lineage is pure simulacrum with
its spatiality, for example, when a player states, “A life wouldn™t be real if nobody slept
or ate, and definitely I had limits on playing this ˜life™ just like everyone else. I would sleep
when the Lineage world was dark and would wake up when dawn arrives” (Player stories
from the Lineage™s community site, n.d.).
The simulation of the human body in Lineage is also important in evoking a sense of
community and generating desires for socialization in cyberspace. The game represents
not only specific physical characteristics of human body such as hair, muscle, and skin
color, but it also visualizes invisible human attributes such as physical ability, resistance
to dangers, items for the body, the experience and disposition of hunger, as all these are
translated into quantitative values. The physical features of the game character are



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Internet Economy of the Online Game Business in South Korea 303


divided and quantified into six categories that include strength, dexterity, intelligence,
wisdom, constitution and charisma. Also, the social disposition of game characters is
visually represented. The bodies of game characters are categorized into three colors,
each of which representing an ethical value as lawful, neutral or chaotic. These character
statistics have a great influence on the progression of the game because they are critical
values that define specialized classes (e.g., knight, wizard, prince/princess, and elf) who
have different abilities in the game plot. Each player must choose a specific class to
belong to and consequently socialize and cooperate with other class-based game
players. In other words, while the quantitative simulation of human body enables users
to differentiate themselves from other users in Lineage, they are structurally and
ultimately destined to work together to attain game goals, develop the ability of their
game character, and, most of all, to survive the social life in cyberspace. A game character
actually requires sleeping, eating and exercise in Lineage, just as he or she does in reality.
NCsoft™s Lineage has another distinctive structure in that game users must construct
their own community in order to accomplish specific goals. Figure 7 is a typical
screenshot of Lineage, in which each animated game character represents an individual
game user. The community in Lineage is called “bloodpledge” and is composed of about
5˜100 game users who can communicate in a private mode and cannot harm one another.
They must cooperate in order to defend themselves from other bloodpledges™ attacks and
to accomplish given goals. In South Korea, there were about 1.2 million cumulative
registered communities in mid-2003, of which about 10,000 active game communities have
their own homepages on the Web and meet regularly in PC-caf©s, pubs and restaurants
in the “real” world. Again, the conventional dualism of cyberspace and real world is




Figure 7. NCsoft™s Lineage: A leading massively multiplayer on-line role playing game
(MMORPG)




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304 Park


practically blurred and associated. The following game player™s story describes Lineage™s
community-oriented third spatiality:


I joined a small pledge early on and enjoyed sharing my items with them; we
became a family. ¦ My pledge and I would go to the mainland cave, or Dragon
Valley, and “work” there. We got a room in the hotel when we were tired and
fearlessly went back out to work again. ¦ It was all about teamwork. ¦ Before
dusk, many of us would leave for town to enjoy some beers at the bar. However,
some of my fellow pledgemates would gamble money on slime races only to lose
it all. They would grieve to me how they lost their money, and I would grieve that
our king from Kent Castle raised the taxes again. It was a typical life, after gaining
some levels we would be back in town talking about our Lineage life, and most
importantly our real lives also. ¦ Meeting new people from all over the world
and gathering together to play this “life” is what makes Lineage so special
(Player stories from the Lineage™s community site, n.d., emphasis added).


As a part of its marketing strategy, NCsoft periodically holds game tournaments in South
Korea and Taiwan with a large amount of prize money for participants and winners. It also
sponsors game users™ group travel, festivals and other social events. Along with
NCsoft™s strategy to aggressively promote social bonds among game users, the company
also operates multiple servers and frequently updates the game™s episodes. In March
2003, NCsoft operated 41 servers in South Korea and 33 servers in Taiwan. And, since
Lineage™s launching in 1997, NCsoft have released 12 different game plots. Except for the
servers used for testing and program-downloading, most of the servers have different
episodes, spaces, events and communities so that the company could minimize game
users™ boredom and maximize their desire to socialize with new people in this “third”
space.
However, Lineage is not necessarily NCsoft™s exclusive, finished and closed world that
is produced to exist in the cyberspace. For example, NCsoft invited more than 600 game
players and held several public conferences in major six metropolises of South Korea in
2003. Principal topics in the conferences included Lineage™s system problems (i.e.,
networking speed), modification of animated game characters, plotting of the follow-up
game episodes, development of Lineage™s cyber-communities, etc. Based on these
feedback discussions with its customers, Lineage is becoming a third socio-economic
space that constantly evolves in-between real world and imagined space, and also in-
between producer and customer.




Conclusions
Discussions of the Internet as a GPT and a conventional form of technological innovation
often conceptualize the new information age as a modified replication of the telegraph
era or the telephone age. For example, Button and Taylor (2001) argue that “the new



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permission of Idea Group Inc. is prohibited.
Internet Economy of the Online Game Business in South Korea 305


technology has features common to many other network activities, albeit with a few
idiosyncrasies of its own, and by and large its role in society can be explained in
traditional economic theories, or at least by rather minor variations to that theory.”
However, aside from the Internet™s substantial impacts on conventional transaction
costs, financial and labor markets, overall economic productivity and efficiency, etc., the
“discontinuous” significance of the digital economy such as the online game business
lies in: (1) its heavy dependence on the Internet users™ convenient and inexpensive
accessibility to the broadband Internet infrastructure, (2) its dispensability with the
conventional system of material production, storage and distribution systems, and (3)
its principal concern with the creation of social spaces in which game users can
comfortably enjoy not only the game itself but also their social association with one
another. In this sense, truly, the Internet is arguably “a newly developed space with the
power to give rise to novel forms of human social interaction in almost any area of human
endeavor, commercial or otherwise” (Kenney and Curry, 2001, emphasis added).
In this chapter, I found out that the rapid success and consistent growth of NCsoft™s
Lineage is indebted to two principal factors. The first is the South Korean national
innovation systems (NISs) in the Internet broadband infrastructure sector. Especially
since the 1997 financial crisis, the South Korean government has implemented massive
national projects to construct nation-wide, high-speed, cheap Internet networks in order
to boost its knowledge-based and techno-intensive national economy. In this sense,
about 24,000 broadband-based Internet-caf©s on every street corner in built-up areas
played a crucial role in the success of the online game business, not only because they
provided convenient and high-quality Internet service along with low price, but also
because Internet-caf©s were pivotal “off-line” places of the online game users™ commu-
nities. The second crucial factor is the game company™s technology-intensive, elaborate
efforts at constructing the cyberspace of Lineage as a social space in-between the real
and the imaginary. Lineage is a simulacrum consisting of not only hyper-real images of
basic realities, but also its own spatial and temporal scale. It is a distinct social space in
which game users share common time-space compressed experiences and socialize with
other game users in order to survive the “society” of Lineage in cyberspace. However,
at the same time, I suggested that we should not overestimate the relative autonomy of
the spatiality embedded in the online game, not only because it is primarily based on the
physical network of the broadband-based, Internet infrastructure, but also because it is
essentially and directly meets NCsoft™s economic purpose. In this sense, in order to
reinforce game users™ community activities in cyberspace and embed them in the off-line
real world, NCsoft has invested a significant amount of money in promoting festivals,
game tournaments, public conferences, and other off-line social events for the game user
communities.
In this chapter, I have conceptualized such a socio-cultural economy of the Internet
business as the economy of a “third space” or “in-between space.” Although the digital
economy could not be completely separate from convention economic principles, I argue
that it has emerging forms of new economic space not only in-between the real space and
the virtual space, but also between the production and the consumption of what is
produced. And, as we have seen the case of NCsoft Lineage, the third space is not just
social but also economic space with the game users™ “real” consumption of simulacra
(e.g., avatar game characters and items in Lineage) and its spread effects on other


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permission of Idea Group Inc. is prohibited.
306 Park


economic sectors in the off-line world. In this sense, the emergence of the digital economy
containing certain forms of new economic space would give rise to fertile economic
environment in which many businesses especially such as e-business could explore new
economic opportunities. This perspective requires us to explore the new “spatiality” of
a digital economy. The task does not necessarily connote the economic geography of
distance and location, which explores the geographical dimensions of digital economy,
such as different production (and distribution) systems, organizational networks,
differential transaction costs, and geographical agglomerations. Rather, it behooves us
to have a flexible (and possibly multiple) “epistemological” sensibility to understand the
complicated entanglement of a digital economy with social and cultural spheres. In this
sense, further studies of digital economies, especially in relation to the digital contents
industry, such as the online game, should develop analytic frameworks to understand
the “third spatial economies” emerging in-between online and off-line. These studies
could include the synergetic socioeconomic relations of digital contents in-between
providers and customers, the flexible profit models based on this relation, the potential
and distinct separateness of the cyber-market generated by the broadband-based
Internet infrastructure, the economic implications of the Internet users™ active social
behaviors, and the specific socio-cultural contexts in which they are embedded.




Acknowledgments
I thank Dr. Kehal for his kind invitation to contribution to this book. I also want to thank
the anonymous reviewer, who provided me with a supportive critique and insightful
comments to improve this chapter. Most of all, I acknowledge that this chapter would
have been impossible without the great support from Dr. Stanley Brunn, who reviewed
several drafts and offered several constructive suggestions. Of course, I am completely
responsible for all possible errors and limits of this chapter.




Endnotes
1
The game™s record for the highest number of simultaneous players is 140,000,
including 100,000 in Korea and 40,000 in Taiwan. Jung-Hwan Kim, the global
relations manager for NCsoft, states that they estimate the cost of their network
downtime at $U.S. 400,000 per hour.
2
In mid-2003, NCsoft™s stock price sold for $132 U.S. a share, which is the highest
price for any component in South Korea™s digital economic sector.
3
NCsoft has the potential to surpass both Microsoft™s Xbox Live and Sony™s
broadband PlayStation networks in the race to dominate online gaming (Fulford,
2003).




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Internet Economy of the Online Game Business in South Korea 307

4
Canada is next with about 11 broadband Internet connections per 100 inhabitants.
The other runner-up countries are far behind South Korea with fewer than 10
Internet connections per 100 inhabitants (OECD, 2002).
5
Even though Microsoft generates only $200 million in yearly revenue from Korea,
it has recently invested $500 million in Korea Telecom, in part to test plans for
ubiquitous computing (Fulford, 2003).
6
NCsoft relied on PC-caf©s for about 80 percent of its total revenues in 1997 (Lee and
Choudrie, 2002).




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Opportunities and Challenges of the New Economy for East Asia 313




Chapter XVI



Opportunities and
Challenges of the
New Economy for
East Asia
Donghyun Park
Nanyang Technological University, Singapore




Abstract
The IT revolution has sharply reduced the cost of information and increased its
availability. This revolution is also said to be creating a New Economy in which the
old rules of economics no longer apply. The first part of my paper discusses the economic
impact of the New Economy on East Asia. First, we discuss the potential economic
benefits of the New Economy for the region. We argue that East Asian countries should
focus on applying existing technology to local needs, since doing so promises large
tangible returns, especially in terms of improving the efficiency of the manufacturing
sector, the main engine of the region™s economies. In the long run, the IT revolution will
also raise the quality of corporate governance in the region. Second, we point out that
while the IT revolution may enable East Asian countries to leapfrog some technological
barriers, it does not enable them to leapfrog sound economic policies. Such policies
remain as relevant to good economic performance in the New Economy as they did in
the Old Economy. Furthermore, the potential of IT to accelerate growth and reduce
poverty will be largely unfulfilled in the absence of complementary investments such
as a sound infrastructure for transportation and logistics. Third, East Asian countries
must fulfill certain pre-conditions to make sure that the New Economy takes hold.



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Above all, they must liberalize their telecommunication sectors so as to improve the
quantity and quality of telecom services. They should also make the necessary
investments in human resource development to maximize their returns from the IT
revolution. In short, although the New Economy holds out tremendous economic
potential for East Asia, realizing that promise will require a lot of determination and
hard work. The second part of this chapter deals with the implications of the IT
revolution for regional development. Most of the main points raised in the first part of
this chapter apply to the second part and in this sense, the second part is essentially
an application of the first part, which addressed the broader issue of economic
development, to the narrower issue of regional development. East Asian countries
suffer from significant inter-regional economic inequalities and these inequalities
often extend into all other spheres of national life. Such inequalities inevitably
interfere with well-balanced economic development and impose costs on both the
magnet cities and the rest of the country. A more balanced pattern of development is
therefore desirable, and IT can make significant contributions toward this objective.
In particular, by reducing the concentration of information and knowledge in the main
city and disseminating those valuable resources to the rest of the country, IT reduces
the inequality of opportunity that lies at the root of the inter-regional economic
inequality. However, we must be realistic about what IT can do and cannot do in terms
of promoting greater inter-regional equality. IT by itself will not enable poorer regions
and cities to catch up with the main cities, and will facilitate regional development only
if the fundamental ingredients of regional development are in place. Finally, East Asian
economies must fulfill certain pre-conditions, especially greater inter-regional equality
in telecom and other IT infrastructure, to fully realize IT™s potential benefits for
regional development. In the last section of this chapter, we summarize our main points
and provide some concluding thoughts. In addition, we discuss the policy implications
of our analysis for FDI in Asia, along with implications for potential foreign investors,
especially in the telecommunications industry. FDI into IT sectors cannot only be
profitable for the investors, but can also promote the host country™s economic growth.




Introduction
One of the most fashionable words these days among government officials, academics
and the general public alike throughout Asia is the “New Economy,” which refers to the
economy that is emerging in the midst of the ongoing IT revolution. The IT revolution
refers to the sharp reduction in the cost of finding and communicating information that
has been made possible by the convergence of information and communication technolo-
gies. For this reason, the IT revolution is also known as the ICT revolution. More
convenient and more powerful computing equipment, especially personal computers
(PCs), in combination with better and more affordable telecommunication services, are
jointly driving the IT revolution. Perhaps the most familiar manifestation of this far-
reaching revolution is the Internet, which can literally connect us to the rest of the world
in the comfort of our homes and offices. The IT revolution is giving rise to a new economic
paradigm “ the New Economy.


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Opportunities and Challenges of the New Economy for East Asia 315


The New Economy is structurally different in many ways from the Old Economy. The latter
is based on hardware, whereas software is the defining characteristic of the New
Economy. Value added in the New Economy comes from the creation of new knowledge
rather than the application of existing knowledge, as in the Old Economy. The current
transition from the Old Economy toward the New Economy is therefore a transition from
the industrial age of making and consuming products to the information age of creating
and absorbing knowledge. While the focus of the Old Economy is on transforming raw
materials into goods and services, the focus of the New Economy lies in transforming
intellectual capital into new information and knowledge. For example, transforming iron
and coal into steel is a classical example of the Old Economy in action, whereas creating
new software to process financial data more efficiently fits our mental picture of the New
Economy. In short, intellectual capital, instead of the more traditional factors of produc-
tion such as land, labor and capital, underpin the New Economy.
While there are other forces such as globalization behind the New Economy, its primary
driving engine is the IT revolution. This is because the New Economy is based on creating
and disseminating knowledge and information, and the IT revolution has significantly
reduced the cost of doing so. The ongoing convergence of information technology and
communication technology, which lies at the heart of the IT revolution, is accelerating
the creation and dissemination of knowledge and information. It is worth noting that
knowledge and information are omnipresent but often ignored inputs of production. In
the real world, unlike in the world of textbooks, information is costly, so the IT revolution
represents a supply-side revolution of falling information costs and hence transactions
costs.
Specific examples of firm-level efficiency gains due to IT include lower procurement
costs, better supply chain management, and tighter inventory control. According to a
2000 report by Martin Brooks and Zaki Wahhaj at Goldman Sachs, firms™ potential
savings from purchasing over the Internet range from 2% in the coal industry to 40% in
the electronics components industry. They also estimate that doing business online with
suppliers can reduce the cost of making a car by as much as 14%. British Telecom claims
that procuring good and services online will reduce the direct costs of the goods and
services it purchases by 11%. In a comprehensive recent study of the impact of firm-level
information technology investments in a wide range of industries in the U.S. between
1995 and 1997, Kudyba and Diwan (2002) find that IT investment has a substantial
positive impact on firm productivity and, furthermore, this positive impact increases over
time. Although the efficiency gains vary from firm to firm and industry to industry, at least
some firms and industries will realize substantial gains. Figure 1 summarizes the impact
of the IT revolution at the firm level.
As we can see in Figure 2, at a macro level, the lower information and transactions costs
enable the economy to produce more at each price level, resulting in a rightward shift of
the supply curve, and a new equilibrium of lower price levels and higher outputs. The
positive supply shock entails the best of both worlds “ faster economic growth combined
with deflationary pressures.
At a micro level, while creativity, innovation and risk-taking have always been essential
elements of successful entrepreneurship, there is an even greater premium on those
qualities in the New Economy. At the macro level, this means that the most successful



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Figure 1. The impact of the IT revolution on firms

IT Revolution




Lower Information and
Transactions Costs




Tighter
Better
Lower Inventory
Supply Chain
Procurement Control
Management
Cost




Higher
Efficiency




economies will be those that are most effective at creating new information and
knowledge by taking full advantage of the IT revolution™s information cost savings.
Nimble re-allocation of resources associated with flexible and deregulated markets is vital
for an economy in view of the fast-paced obsolescence of information and hence
technology in the information age. Equally important is human resource development
capable of producing workers who can not only absorb existing knowledge but also
generate new knowledge.
The transformation of manufacturing products into mass-produced, low-margin com-
modities is no longer restricted to low-tech products, but is becoming more evident
further up the technological ladder as well. This trend, which is a consequence of the
globalization of production and economic activity, reinforces the case for a more creative
and innovative workforce and economy, especially in higher-income countries that are
experiencing a hollowing-out of their manufacturing sector. The IT revolution is provid-



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Opportunities and Challenges of the New Economy for East Asia 317


Figure 2. The macro impact of the IT revolution on supply


P S




S™
E


E™



D


Q




ing further momentum to the shift from manufacturing to services in those countries.
Related to this shift in the composition of output is a shift away from mass production
and toward customization to suit individual preferences. IT-induced reduction of
transactions costs between firms and consumers underlies this trend. At the same time,
IT-induced reduction of transactions costs between firms is promoting the contracting
out or outsourcing of various services to other firms. To the extent that inter-firm
transactions costs dictate the optimal size of the firm, we can expect lower inter-firm
transactions costs to result in a smaller optimal size of the firm. This, in turn, implies
increasingly higher levels of specialization and thus concentration on core competen-
cies, with beneficial effects for efficiency and productivity.
Economic globalization and the IT revolution are complementary in a very fundamental
sense “ they both make markets more competitive than ever before. Economic globaliza-
tion, evident in the sustained growth of international flows of goods and services as well
as capital and labor, is breaking down the barriers that protected domestic firms from
international competition. By subjecting firms to relentless external competitive pres-
sures, globalization is forcing them to shape up or shut down. By the same token, the IT
revolution is making more information about producers and products available to
consumers. Armed with more information, consumers are able to choose more selectively
from a wider range of producers and products. They are better able to find the best value
for their money. The IT revolution thus breaks down consumer ignorance, which protects
firms from competitive pressures just as much as tariffs or barriers to entry. Figure 3
summarizes the impact of the IT revolution on consumer choice and welfare.



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Figure 3. The impact of the IT revolution on consumers


IT Revolution




More Information about
Products and Firms for
Consumers




More Consumer Choice and More
Consumer Power vis-à-vis Firms




More Competitive Markets/
Lower Prices and Better Quality




Lower information costs for consumers leaves them with more resources available for
consuming goods and services. In other words, some of the time and money consumers
spend searching for goods and services can be re-allocated on goods and services
themselves. If we think of the cost of gathering information as a tax on consumers, the
IT revolution brings about a reduction in this tax. Furthermore, the economy™s higher
productivity (as a result of the IT revolution) will further increase income and raise
demand for goods and services. Therefore, although the primary impact of the IT
revolution is on supply, it will also have a positive impact on demand at the macro level,
as we can see in Figure 4. This positive demand-side impact will further stimulate
economic growth.
E-commerce, which does not require a physical bricks-and-mortar presence, reduces the
set-up costs of entering and doing business. In the process, e-commerce reduces the



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Opportunities and Challenges of the New Economy for East Asia 319


Figure 4. The macro impact of the IT revolution on supply and demand

P S




S™
E
E™™
E™

D™

D


Q




barriers to entering a market and makes markets more competitive. In short, in the New
Economy, stronger competitive pressures will force firms to become more efficient and
productive over time. Mere survival requires nothing less. We should also note that the
division between the New Economy and the Old Economy is not always a clear-cut one.
Although the New Economy is associated with industries such telecommunications and
telecom equipment, computer hardware and software, biotechnology, and fuel cells and
other alternative energy technology, and the Old Economy with low-tech manufacturing,
even in the most technologically advanced developed countries such as the U.S.,
elements of the two co-exist with each other. In addition, many of the efficiency gains
associated with the IT revolution, in particular the reduction of information costs, are
applicable to the entire spectrum of industries, including those we typically associate
with the Old Economy.
In this chapter, I will focus on the economic impact and implications of the New Economy
for East Asia in the 21st century. East Asia consists of two sub-regions - Northeast Asia
and Southeast Asia. There is a great deal of diversity among the East Asian countries
in terms of economic development and income. They range from Japan and the NIEs (i.e.,
Korea, Taiwan, Hong Kong and Singapore), which are industrialized, high-income
economies at one end, to Myanmar and the Indochina countries at the other end, which
remain among the world™s poorest countries despite recent economic progress. Table 1
shows the population, per capita GDP and per capita GDP in purchasing power parity
terms of selected East Asian countries.
Our focus on economics is not to make light of the social, political, and other effects, of
which there are bound to be many, some of them profound in their own right, but simply



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Table 1. Population and per capita GDP for 2000, selected East Asian economies

Country Population GDP Per Capita, GDP Per Capita,
(millions) US$ PPP, US$
China 1,262 840 3,920
Japan 127 35,620 27,080
Korea (South) 47 8,910 17,300
Taiwan 22 14,000 N.A.
Hong Kong 7 25,920 25,590
Singapore 4 24,740 24,910
Indonesia 210 570 2,830
Vietnam 79 390 2,000
Philippines 76 1,040 4,220
Thailand 61 2,000 6,320
Malaysia 23 3,380 8,330

Source: World development indicators 2001, EIU for Taiwan



to concentrate on my field of expertise as well as to provide a sharper focus to my
reflections on this most important subject. And, as its name suggests, the New Economy
is above all an economic phenomenon. Casual observation alone suggests that the rate
of technological progress in the information technology (IT) field over the past ten years
or so has been absolutely breathtaking. Moore™s Law, according to which the processing
capacity of silicon chips doubles every 18 months, powerfully sums up the speed of
innovation. Although web surfing and e-mailing have now become as much a part of our
daily routines as eating and sleeping, they were little more than fascinating novelties until
quite recently. Microsoft, Cisco and Sun Microsystems, to name just a few, have come
out of nowhere to become among the biggest and most recognized companies in the
world. The New Economy is here, and it is here to stay.
But what are the implications of this New Economy for the global economy? The
extraordinary macroeconomic performance of the U.S., the undisputed standard bearer
of the New Economy with its Silicon Valley, countless dot.coms and venture capitalists,
in recent years has led some economists to proclaim the arrival of an economic nirvana
in which high growth went hand in hand with low inflation. At the other extreme, New
Economy skeptics attribute the remarkable U.S. economy simply to an accidental
convergence of growth-promoting cyclical factors such as the IT investment boom and
inflation-subduing circumstances such as the strong dollar.
At the heart of this heated debate between the supporters and critics of the New Economy
is an empirical issue “ the contribution of IT to productivity. That is to say, theoretical
arguments aside, by how much has the IT revolution helped workers to actually produce
more with a given amount of capital? Whether or not IT enables an economy to achieve
faster growth on a sustainable basis without triggering inflation ultimately depends on
the magnitude of productivity gains.1 Although it is too early to make definitive
judgments,2 the preliminary evidence indicates that IT has clearly led to significant
productivity gains.


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Opportunities and Challenges of the New Economy for East Asia 321


The basic theoretical reason for why IT should promote productivity is intuitively
compelling and clear. As anybody who has searched for books on both hard copy library
catalogues and online library catalogues knows, IT sharply reduces the cost of informa-
tion. And, to repeat, the cost of information is as much of a cost of production as the cost
of oil or steel. In fact, information is perhaps the most important input of all since all
economic transactions require information. To repeat an important example of how IT
boosts efficiency by reducing information costs, it delivers lower procurement costs to
firms by making it easier for them to find the cheapest suppliers and cut down their
transactions costs.3 Now that we have touched upon some general conceptual issues,
we turn our attention first to East Asia.




The Promise of IT
In order to discuss the potential economic benefits of IT for Asia, it is necessary to first
look at the region™s strengths and weaknesses. In terms of regional strengths, a glance
at shops and department stores around the world will reveal that Asia is the manufac-
turing hub of the world. This is particularly true for Japan and the four newly industri-
alized countries of Korea, Taiwan, Hong Kong and Singapore. But it is also true, to a lesser
extent, for Southeast Asia. A noteworthy development in this connection has been the
recent emergence of China as a manufacturing powerhouse, especially for low-tech
goods. Table 2 confirms the importance of manufacturing in the region™s economies
regardless of income level. The only notable exception appears to be Hong Kong.


Table 2. Composition of GDP for selected East Asian economies, 2000

Country Agriculture Manufacturing Services
(%) (%) (%)
China 16 35 33
Japan 1 22 66
Korea (South) 5 31 53
Taiwan 2 26 58
Hong Kong 0 6 85
Singapore 0 26 66
Indonesia 17 26 36
Vietnam 24 18 39
Philippines 16 23 53
Thailand 10 32 49
Malaysia 11 33 44

Source: World development indicators 2001, EIU for Taiwan
Note: The numbers do not add up to 100% because they exclude mining, construction, and utilities.


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Table 3. Electronics output of selected East Asian countries, 1985 and 1998

Country Output in Billions Output in Billions
of US$, of US$,
1985 1998
China 5.6 46.9
Japan 89 196
Korea (South) 6.5 39
Taiwan 56 34
Hong Kong 3.7 8.2
Singapore 4.5 38
Indonesia 0.6 5.2
Philippines 1.1 7.3
Thailand 0.6 14.6
Malaysia 1.9 27
Source: Yearbook of World Electronics Data 2000 (Elsevier)



The region has an especially strong comparative advantage in, and is heavily dependent
upon, manufacturing and exporting electronics products, the hardware of the IT revo-
lution. This is true even to the extent that the global electronics business cycle has a
tangible effect on the economy-wide business cycles of the region™s smaller economies.
Table 3 shows the output of electronics products in selected East Asian countries for
1985 and 1998. For the region as a whole, electronics production reached around US$120
billion in 1985 and over US$420 billion in 1998. As Table 3 clearly shows, not only is the
value of output large, it has grown explosively between these years. It is no exaggeration
to say that East Asia is and will continue to be the world™s electronics factory.4 Therefore,
in the first instance, the IT revolution has had a direct positive impact on East Asia™s
output and exports by boosting the global demand for electronics in general and IT-
related products in particular.
Global output of electronics reached US$482 billion in 1985 and US$1,088 billion in 1998.
In 1985, Japan, the NIEs and other East Asian countries accounted for 18.6%, 4.3% and
2.4%, respectively, of global output. In 1998, the corresponding figures were 18%, 11%
and 10%, respectively. The shares of the NIEs and other East Asian countries have risen
sharply. The share of East Asia as a whole in global output has grown from 25% to almost
40%. Figure 5 illustrates this upward trend.
Table 4 tells us why East Asia dominates the global exports of electronics. Revealed
comparative advantage is a widely used index of a country™s comparative advantage in
international trade. An index greater than one indicates comparative advantage relative
to other countries in the production of a particular good. A higher number suggests a
higher degree of comparative advantage. We can see from Table 4 that most East Asian
countries enjoy comparative advantage in electronics, which explains their strong
positions as electronics exporters in global markets.



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Opportunities and Challenges of the New Economy for East Asia 323


Figure 5. The share of global electronics output for Japan, NIEs and other East Asia,
1985 and 1998


40

35

30
25

20
15

10
5

0
1985 1998

Japan NIES Other East Asia Total East Asia



Source: Yearbook of World Electronics Data 2000 (Elsevier)




Table 4. Revealed comparative advantage in Electronics Exports, 1998

Country Index
China 1.28
Japan 2.53
Korea (South) 1.49
Taiwan 1.52
Hong Kong 0.24
Singapore 1.73
Indonesia 0.54
Philippines 1.24
Thailand 1.34
Malaysia 1.87

Source: Yearbook of World Electronics Data 2000 (Elsevier), WTO (2000)




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Figure 6. Share of Global Electronics Consumption, 1997 (%)



70

60

50

40

30

20

10

0
Share of Global Consumption

Japan NIEs Other East Asia Rest of World


Source: Yearbook of World Electronics Data 2000 (Elsevier)




While electronics exports are a major engine of East Asian growth and the IT revolution
has had a strong positive impact on global demand for electronics, East Asia has emerged
as a big market for electronics in its own right. That is, while East Asia exports much of
its electronics output, the region also consumes a substantial share at home and exports
to each other. For example, in 1997, the region accounted for 45% of global output and
32% of global consumption. Figure 6 shows the shares of Japan, NIEs and rest of East
Asia in global electronics consumption for 1997.
Despite a widespread tendency to talk up software and services and a corresponding
tendency to talk down hardware and manufacturing these days, one should not forget
that export-oriented manufacturing was the engine of the Asian miracle and will remain
an important engine of regional growth into the foreseeable future. Fortunately for East
Asia, the potential benefits of IT for manufacturing are large indeed.5 While the region
does enjoy a comparative advantage in manufacturing, this does not mean there is little
room for productivity improvement.
The conventional wisdom in the context of e-commerce or Internet commerce is that
although B2C (business to consumer), with its Amazons, e-Bays and Yahoos, grabs all
the headlines, B2B (business to business) will generate the lion™s share of growth in e-
commerce over the next few years. What this means is that whether through lower
procurement costs, more efficient supply chain management, or more timely inventory
control, East Asian manufacturers stand to gain a productivity windfall if they can



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Opportunities and Challenges of the New Economy for East Asia 325


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



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




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




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Opportunities and Challenges of the New Economy for East Asia 327


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



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


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

Share of GDP Share of Workforce


Source: World Development Indicators 2001



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




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




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permission of Idea Group Inc. is prohibited.
Opportunities and Challenges of the New Economy for East Asia 329


Table 5. IT diffusion in East Asia, various indicators

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

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




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



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permission of Idea Group Inc. is prohibited.
330 Park


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

600


500


400


300


200


100


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

Japan/NIEs Rest of East Asia


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




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


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permission of Idea Group Inc. is prohibited.
Opportunities and Challenges of the New Economy for East Asia 331


Figure 9. Percentage of online shoppers, 2002

16

14

12

10

8

6

4

2

0
Percentage of Total Populaiton

Korea Taiwan Singapore Malaysia Thailand Indonesia


Source: TNS Global E-Commerce Report (2002)




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


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