A Resurgent East Asia Navigating a Changing World Andrew D. Mason Sudhir Shetty WORLD BANK EAST ASIA AND PACIFIC REGIONAL REPORT A Resurgent East Asia WO RLD BA NK E A S T A SIA A N D PACI FIC REGIO N A L REP O RT S Known for their economic success and dynamism, countries in the East Asia and Pacific region must tackle an increasingly complex set of challenges to continue on a path of sustainable devel- opment. Learning from others within the region and beyond can help identify what works, what doesn’t, and why, in the search for practical solutions to these challenges. This regional flagship series presents analyses of issues relevant to the region, drawing on the global knowledge and experience of the World Bank and its partners. The series aims to inform public discussion, policy formulation, and development practitioners’ actions to turn challenges into opportunities. T ITLE S IN T HE SE RIE S A Resurgent East Asia: Navigating a Changing World Growing Smarter: Learning and Equitable Development in East Asia and Pacific Riding the Wave: An East Asian Miracle for the 21st Century Live Long and Prosper: Aging in East Asia and Pacific East Asia Pacific at Work: Employment, Enterprise, and Well-Being Toward Gender Equality in East Asia and the Pacific: A Companion to the World Development Report Putting Higher Education to Work: Skills and Research for Growth in East Asia All books in this series are available for free at https://openknowledge.worldbank.org​ /­handle/10986/2147. World Bank East Asia and Pacific Regional Report A Resurgent East Asia Navigating a Changing World Andrew D. Mason Sudhir Shetty © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www .worldbank .org Some rights reserved 1 2 3 4 21 20 19 18 This work is a product of the staff of The World Bank with external contributions . The fi ndings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent . The World Bank does not guarantee the accuracy of the data included in this work . The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries . 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Contents Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Acknowledgments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The East Asian development model has worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Changing times, rising challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Navigating a changing world: directions for policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1 Developing East Asia: Retrospect and Prospects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 East Asia’s development strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Key development trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 What is changing and why it matters for developing East Asia . . . . . . . . . . . . . . . . . . . . . . 42 Structure of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 2 Sustaining Productivity Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Productivity trends across the region and the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Drivers of East Asia’s productivity trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Sustaining productivity growth in East Asia: Challenges and opportunities . . . . . . . . . . . 68 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 v vi   C o n t e n t s 3 Fostering Inclusive Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Early drivers of growth with equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Emerging challenges to ensuring shared growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 The changing nature of work. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Rising returns to higher-order skills. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 How prepared is developing East Asia to foster inclusive growth in the future?. . . . . . . . . 109 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 4 Enhancing State Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 The state of state effectiveness in developing East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Political economy challenges in middle-income countries. . . . . . . . . . . . . . . . . . . . . . . . . . 128 Rising societal expectations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 Enhancing state effectiveness in developing East Asia: Challenges and opportunities . . . . 134 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Annex 4A Description of data sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 5 Navigating a Changing World: Directions for Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 The five pillars of the policy agenda. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 Pillar 1: Boosting economic competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Pillar 2: Building skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 Pillar 3: Enhancing inclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Pillar 4: Strengthening institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 Pillar 5: Financing the transition to high income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Boxes 1.1 Building on a quarter century of World Bank studies on East Asian development. . . . . 29 2.1 Innovation patterns in developing East Asia: Evidence from enterprise survey data . . . . 65 2.2 The Global Innovation Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 3.1 Global evidence on technology and jobs: Increasing demand for more-advanced skills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.2 Digital technology: Its potential for promoting inclusive growth in developing East Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 3.3 Skills for the new economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.4 Digital technology and the challenge of financial inclusion. . . . . . . . . . . . . . . . . . . . . 114 3.5 The redistributive impacts of fiscal policies in Indonesia and Vietnam: A more detailed look. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 4.1 State-owned enterprise capture in Vietnam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 4.2 A growing middle class with persistently poor access to quality public services: The case of Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 4.3 Raising government revenues faces multiple challenges in developing East Asia. . . . . . 145 C o n t e n t s   vii 5.1 Fostering digital inclusion: Malaysia’s eRezeki and eUsahawan programs . . . . . . . . . 163 5.2 Strengthening meritocratic hiring and promotion, civil service performance, and performance management: Recent initiatives in Indonesia and China . . . . . . . . . 170 Figures O.1 Real GDP growth has been high in developing East Asia, 1991–2016 . . . . . . . . . . . . . . . 3 O.2 Poverty has been declining and economic security increasing in developing East Asia, 2002–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 O.3 Government effectiveness has been increasing in developing East Asia relative to all middle-income countries, 1996–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 O.4 Growth in global trade is slowing, especially trade in goods, 2005–17. . . . . . . . . . . . . . 5 O.5 Trade restrictions on services remain high in developing East Asia. . . . . . . . . . . . . . . . . 6 O.6 Use of industrial robots in manufacturing is increasingly important in several East Asian economies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 O.7 Learning outcomes are systematically lower among poorer students in several East Asian countries, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 O.8 Internet use is lower among poorer households in several East Asian countries . . . . . . . 12 O.9 Government spending on the social sectors is low in developing East Asia. . . . . . . . . . 13 O.10 Countries in developing East Asia rank low in voice and accountability relative to all middle-income countries, 1996–2016. . . . . . . . . . . . . . . . . . . . . . . . 14 O.11 Constraints to executive decision making have increased in developing East Asia, although they remain below upper-middle-income country levels, 1996–2016. . . . . . . 14 O.12 Meritocratic hiring of civil servants is still tempered by personalism in developing East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 O.13 Government revenues are low in developing East Asia relative to many middle- and high-income countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.1 Real GDP growth in developing East Asia, 1991–2016. . . . . . . . . . . . . . . . . . . . . . . . . 32 1.2 Changes in GDP, by developing region, 1991–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.3 Changes in value-added shares in developing East Asia, by sector and country, 1996–97 to 2016–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 1.4 Index of trade performance in goods and services, global and developing East Asia, 2005–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 1.5 Change in shares of trade between China and the rest of developing East Asia, 1995–2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 1.6 GVC participation of developing East Asia relative to other regions, 1995–2011 . . . . . 37 1.7 GVC participation of several developing East Asian countries, 1995–2011. . . . . . . . . . 37 1.8 Growth in cell phone and internet penetration in developing East Asia, 2000–16 . . . . . 38 1.9 Digital Adoption Index for developing East Asian countries, by country GNI per capita, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 1.10 Welfare distribution in developing East Asia, 2002–16. . . . . . . . . . . . . . . . . . . . . . . . . 39 1.11 Welfare distribution in developing East Asia, by country, 2002 and 2016. . . . . . . . . . . 40 1.12 Selected socioeconomic indicators for developing East Asia relative to middle-income countries in other regions, circa 1975 and 2015 . . . . . . . . . . . . . . . . . . 41 1.13 Absolute and relative mobility in education among those born in the 1980s, by region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1.14 Government effectiveness in developing East Asia relative to all middle-income countries, 1996–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 1.15 Increasing role of services in manufacturing, 1970s versus 21st century. . . . . . . . . . . . 43 1.16 Digital technology adoption in developing East Asia, by user type, 2016 . . . . . . . . . . . 44 viii   C o n t e n t s 1.17 Number and density of operational industrial robots in manufacturing, several East Asian economies, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1.18 Change in manufacturing wages, several developing East Asia and comparator countries, 2003–15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.19 Change in relative unit labor costs, several developing East Asia and comparator countries, circa 2003–16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 1.20 Global trade trends, in goods and services, 2005–17. . . . . . . . . . . . . . . . . . . . . . . . . . . 47 1.21 Nonmonetary dimensions of poverty in developing East Asia, by welfare status, circa 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 1.22 Inequality trends across developing East Asia, 2002–16 . . . . . . . . . . . . . . . . . . . . . . . . 49 1.23 Voice and accountability in developing East Asia relative to all middle-income countries, 1996–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 2.1 Trends in labor productivity growth, developing East Asia and selected groups of economies, 1950–2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.2 Labor productivity in major developing East Asian countries relative to the United States, 1990–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 2.3 Capital intensity in major developing East Asian countries relative to the United States, 1990–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.4 Human capital in major developing East Asian countries relative to the United States, 1990–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 2.5 Total factor productivity in major developing East Asian economies relative to the United States, 1990–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.6 Growth in components of labor productivity before and after global financial crisis, major East Asian countries, 2000–07 and 2008–14 . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.7 Contributions to labor productivity growth of intersectoral reallocation and within-sector productivity growth, major developing East Asian countries, 1990–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 2.8 Sectoral decomposition of within-sector labor productivity growth, major developing East Asian countries, 1990–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 2.9 Productivity growth before and after Global Financial Crisis, BRICS and major developing East Asian economies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 B2.1.1 Firms’ innovation rates in several developing East Asian countries, by type and sector, circa 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 B2.1.2 Correlation of firm-level incidence of new product innovations and GDP per capita in several developing East Asian countries, circa 2015 . . . . . . . . . . . . . . . . . . . . 65 B2.1.3 Firms’ use of innovation inputs and innovation rates in several developing East Asian countries, circa 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 B2.1.4 R&D intensity, R&D incidence, and GDP per capita in several developing East Asian countries, circa 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 2.10 Innovation output index, by GDP per capita, several developing East Asian and other countries, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 2.11 Distribution of R&D spending as a share of GDP, by country category . . . . . . . . . . . . 67 2.12 Financial market issuances outstanding as a share of GDP, by type and region, 1990–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 2.13 Decomposition of domestic and international issuances by developing East Asian countries, 1990–2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 2.14 Change in manufacturing value added for East Asian countries with expanding shares of global manufacturing value added, 1994–2015 . . . . . . . . . . . . . . . . . . . . . . . 75 2.15 Peak share of manufacturing employment, by country income level, 1950–2012 . . . . . 75 2.16 Protectionism in goods trade (circa 2015) versus services trade (circa 2011). . . . . . . . . 77 C o n t e n t s   ix 2.17 Impact of services FDI reform on manufacturing productivity in Indonesia, 1997–2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 2.18 Expanded National Innovation System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 B2.2.1 Global Innovation Index framework, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 2.19 Average management score, selected countries, circa 2006–14 . . . . . . . . . . . . . . . . . . . 83 2.20 Size of issuing firms in developing East Asia, 1990–2016 . . . . . . . . . . . . . . . . . . . . . . . 84 2.21 Issuing firms over total listed firms and firm growth in developing East Asia, 1990–2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 3.1 Poverty rates in Vietnam, by urban, rural, and ethnicity, 2016. . . . . . . . . . . . . . . . . . . 91 3.2 Number of direct and indirect export jobs in Indonesia and Vietnam. . . . . . . . . . . . . . 93 3.3 Change in share of blue-collar employment, by manufacturing subsector, early 1990s–2010s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3.4 Change in GDP share from representative manufactures in several East Asian countries, 1994–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3.5 Task-skill intensity of jobs in selected countries, by income level, 2010s. . . . . . . . . . . 102 3.6 Changes in the task-skill intensity of jobs in several developing East Asian countries, early 2000s to 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 3.7 Change in task-skill intensity of jobs in several East Asian countries, by birth cohort, early 2000s to 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 3.8 Change in task-skill intensity of jobs in several East Asian countries, by gender, early 2000s to 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 3.9 Change in task-skill intensity of jobs in China, 2000–15. . . . . . . . . . . . . . . . . . . . . . 108 3.10 Rates of return to different task types in Vietnam, 2012 . . . . . . . . . . . . . . . . . . . . . . 109 3.11 Average student performance on standardized learning assessments in several East Asian economies, 2000s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 3.12 Share of students performing below minimum proficiency on international reading assessments, developing East Asian countries, 2010s . . . . . . . . . . . . . . . . . . . 111 3.13 School enrollment rates among 16- to 18-year-olds in several developing East Asian countries, by welfare status, mid-2010s . . . . . . . . . . . . . . . . . . . . . . . . . . 111 3.14 Percentage of students achieving minimum proficiency in all PISA subjects, several developing East Asian countries, by wealth quintile, 2015 . . . . . . . . . . . . . . . . 112 3.15 Average student performance on standardized learning assessments in several developing East Asia countries in the 2000s, by per capita GDP, relative to outcomes in the Republic of Korea, 1985–2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 3.16 Household cell phone ownership in several developing East Asian countries, by welfare status, mid-2010s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 3.17 Household internet use in several developing East Asian countries, by welfare status, mid-2010s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 B3.4.1 Financial account ownership and use of digital payments by account holders, by income category, in developing East Asian countries, 2017 . . . . . . . . . . . . . . . . . . . . 114 3.18 Government spending on social sectors, by category, in developing East Asia relative to other regions and high-income economies, circa 2010s . . . . . . . . . . . . . . . 115 3.19 Social safety net coverage in East Asia relative to other regions and global average, circa 2010s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 3.20 The distributional impacts of taxes and transfers in developing East Asia, post-2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 3.21 Decomposition of fiscal instruments’ effects on consumption inequality in Indonesia, Mongolia, and Vietnam, mid-2010s. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 B3.5.1 Incidence of taxes and benefits in Vietnam and Indonesia, by market income decile, mid-2010s. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 x   C o n t e n t s 4.1 Governance rankings of developing East Asian countries in a global context, by GDP per capita, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 B4.1.1 Evolution of investment in the Vietnamese economy, mid-1990s to mid-2010s . . . . . 130 4.2 Progress in controlling public sector corruption and developing accountability institutions, by country income and transition status, 1950–2011 . . . . . . . . . . . . . . . . 133 4.3 Share of students enrolled in private primary and lower secondary schools in several East Asian countries, by welfare status, circa early to mid-2010s . . . . . . . . . . 135 4.4 Share of people using private and public health care facilities in several East Asian countries, by welfare status, circa early to mid-2010s . . . . . . . . . . . . . . . . 136 4.5 Civil society participation in policy-making processes in developing East Asia relative to all lower-middle and upper-middle-income countries, 2006–16 . . . . . . . . 138 4.6 Formal avenues for public participation in regulatory decision making, by region, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 4.7 Share of people in developing East Asia who believe they lack influence on government, by country, 2002–15. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 4.8 Transparency of bureaucratic decision making in developing East Asia, 2015 . . . . . . . 140 4.9 Transparency of budget information in developing East Asia, by country, 2006–17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 4.10 Effectiveness of legislatures and judiciaries in providing checks on executive power in developing East Asia, relative to global country income groups, 2017–18. . . . . . . . 141 4.11 Constraints to executive decision making in developing East Asia relative to all lower-middle and upper-middle-income countries, 1996–2016 . . . . . . . . . . . . . . . 142 4.12 Use of merit- or connection-based hiring of civil servants in developing East Asia, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 4.13 Government revenues as a share of GDP in developing East Asia and selected middle- and high-income countries, circa 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Map 3.1 Poverty rates in the Philippines, by region, 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Tables O.1 Most countries in the region face multiple challenges in building vibrant innovation systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 O.2 Policy directions for a resurgent East Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 2.1 Links between labor productivity, trade, and GVCs in developing East Asia. . . . . . . . 63 2.2 Content of preferential trade agreements, developing East Asian countries, 2015 . . . . . 72 2.3 Potential productivity gains from policy-induced reallocation within manufacturing subsectors, several East Asian countries, 2000–07 and 2008–15 . . . . . . . . . . . . . . . . . 74 2.4 Benchmarking developing East Asia on the factors that enable innovation. . . . . . . . . . 81 2.5 Unbundling the institutional pillar of the GII as an enabler of innovation in developing East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 2.6 Unbundling the human capital pillar of the GII as an enabler of innovation in developing East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 2.7 Unbundling the business sophistication pillar of the GII as an enabler of innovation in developing East Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 3.1 Estimated probabilities of jobs being automated in developing East Asian countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 5.1 Policy directions for a resurgent East Asia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 Foreword East Asia continues to be the global exem- This study— A Resurgent East Asia: plar for development success. Over the Navigating a Changing World —is about past half century, a succession of coun- how the region’s middle-income countries will tries across the region has progressed from need to adapt their development model to low-income to middle-income and even to support their transition to high-income status high-income status. This dramatic transfor- in the face of evolving global and country cir- mation of the region—termed the “East Asian cumstances. Slowing growth in global trade Miracle”—has been built on a combination and shifts in its patterns, rapid technological of policies that fostered outward-oriented, change, and evolving economic circumstances labor-intensive growth while building basic within countries all present challenges to sus- human capital and providing sound economic taining productivity growth, fostering inclu- governance. This development strategy has sion, and enhancing state effectiveness. delivered rapid and sustained growth, which The study examines the nature of these chal- has moved hundreds of millions of people out lenges and delineates how policy makers across of poverty and into economic security. developing East Asia will need to address Yet East Asia’s economic resurgence them in the coming decade. While the region’s remains incomplete. More than 90 percent of focus on a combination of outward-oriented its people now live in 10 middle-income coun- growth, human capital development, and tries, many of which can realistically aspire sound economic governance—the East Asian to high-income status in the next generation development model—still has much to recom- or two. But these countries are still much less mend it, this strategy will need to be adjusted affluent and productive than their high-income to changing times. The study highlights policy counterparts. China’s per capita income is still reforms under five pillars: boosting economic only about one-fifth of the average in high- competitiveness, building skills, promoting income economies, while Cambodia’s per inclusion, strengthening state institutions, and capita income is about 3 percent of the high- financing the transition to high income. income average. Significant gaps also exist in Policy makers in the region will need to labor productivity and human capital levels. address both familiar and novel challenges. When the Republic of Korea achieved high- This will include focusing on both emerging income status, for instance, its labor produc- policy priorities, reforms that require special tivity was two and a half times higher and its emphasis as countries transition to high- human capital one-third higher than those of income status, and foundational policies, China today. reform areas that countries have already been xi xii   F O R E W O R D pursuing and that remain critical to sustain- strengthening systems of checks and balances. ing development. Financing the transition to high-income sta- For boosting economic competitiveness, tus will require measures to increase domestic the emerging priorities include the following: resource mobilization, including expanding reforming services sectors, deepening trade the tax base and limiting tax competition, to agreements, broadening innovation poli- sustainably finance the needs and aspirations cies, and improving the access of small and of increasingly middle-class societies. medium enterprises to finance. To build skills, A Resurgent East Asia argues that policy the focus needs to be on developing higher- makers across the region need to act decisively order cognitive and socioemotional skills, or risk missing opportunities to sustain the supporting continuous skills development region’s remarkable development performance. systems, and enhancing people’s digital and Although the precise nature and pace of change technical capabilities. To promote inclusion, are uncertain, their direction is not. This serves it will be important to strengthen employ- only to increase the urgency of reform so that ment services, link unemployment benefit developing East Asia can achieve even greater schemes to economic transitions, and enable and more broadly shared prosperity. affordable access to digital technologies. Strengthening state institutions will require Victoria Kwakwa a greater emphasis on expanding mecha- Regional Vice President nisms for citizens’ voice and participation, East Asia and Pacific Region increasing government transparency, and The World Bank Acknowledgments T his study is a product of the (Brookings Institution) for serving as peer World Bank’s Office of the Chief reviewers, and to Bill Shaw for his advice and Economist, East Asia and Pacific guidance throughout the drafting process . Region . It was authored by Andrew D . Helpful comments and inputs were also received Mason and Sudhir Shetty, with the guidance from Shamma Alam, Omar Arias, Jim Brumby, of Victoria Kwakwa, Regional Vice President, Alejandro Cedeno, Kevin Cruz, Wendy East Asia and Pacific . Cunningham, Gabriel Demombynes, Ndiame The report builds on and synthesizes the Diop, Samuel Freije-Rodriguez, Karolina work of a larger team that included Facundo Goraus, Mary Hallward-Driemeier, Bert Abraham, Pinyi Chen, Ileana Cristina Hofman, Gabriela Inchauste, Jon Jellema, Constantinescu, Juan Cortina, Francis Darko, Theepakorn Jithitikulchai, Bradley Larson, Francesca de Nicola, Reno Dewina, Mariana Xubei Luo, Deepak Mishra, Harry Moroz, Iootty, Vera Kehayova, Kevin Macdonald, Michal Myck, Evgenij Najdov, Mateusz Aaditya Mattoo, Ha Nguyen, Caterina Najsztub, Gaurav Nayyar, Philip O’Keefe, Ruggeri Laderchi, Michele Ruta, Sergio Truman Packard, Obert Pimhidzai, Juul Schmukler, and Judy Yang (all World Bank); Pinxten, Sharon Faye Piza, Rong Qian, David Manu Bhaskaran (Centennial Asia Advisors); Rosenblatt, Marcela Sanchez-Bender, Miguel Edmund Malesky (Duke University); and Eduardo Sanchez Martin, Indhira Santos, Mariana Viollaz (CEDLAS-FCE-UNLP) . Mauro Testaverde, Sailesh Tiwari, Kimsun Cecile Wodon provided invaluable adminis- Tong, Matt Wai-Poi, Mara Warwick, Hernan trative and logistical assistance . Winkler, and Xiaoqing Yu . The team benefited from valuable sug- Mary Fisk and Patricia Katayama pro- gestions provided, throughout the produc- vided excellent advice and guidance on the tion process of this report, by colleagues both publication process . The cover and graph- within and outside the World Bank Group . ics were designed by Bill Pragluski, Critical Particular thanks to Chatib Basri (University Stages . Mary Anderson edited the report . of Indonesia), Homi Kharas (Brookings The team also thanks others who have Institution), Danny Leipziger (George helped prepare this report and apologizes to Washington University and Growth Dialogue), any who may have been overlooked inadver- Bill Maloney (World Bank), and Ana Revenga tently in these acknowledgments . xiii Abbreviations ABS Asian Barometer Survey AI artificial intelligence ALMP active labor market program APEC Asia-Pacific Economic Cooperation API application public interface ASEAN Association of Southeast Asian Nations ASPIRE Atlas of Social Protection Indicators of Resilience and Equity BKN Badan Kepegawaian Negara (Indonesia’s State Civil Service Agency) BRICS Brazil, Russian Federation, India, China, and South Africa BTI Bertelsmann Transformation Index CAT computer-assisted testing CGIAR Consultative Group on International Agricultural Research CHN China CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership CSO civil society organization DAI Digital Adoption Index DNA deoxyribonucleic acid DRC Development Research Center DRM domestic resource mobilization EGRA Early Grade Reading Assessment EIA economic integration agreement EU European Union FDI foreign direct investment FTA free trade agreement FVA foreign value added GDP gross domestic product GII Global Innovation Index xv xvi   A b b r e v i a t i o n s GIZ German Agency for International Cooperation GNI gross national income GSO General Statistics Office of Vietnam GVC global value chain HIC high-income countries IBP International Budget Partnership IBRD International Bank for Reconstruction and Development ICIO Inter-Country Input-Output ICT information and communications technology IDN Indonesia IFC International Finance Corporation IGM intergenerational mobility ILO International Labour Organization IMF International Monetary Fund INSEAD Institut Européen d’Administration des Affaires (European Institute of Business Administration) IoT internet of things IPUMS Integrated Public Use Microdata Series IRRI International Rice Research Institute IT information technology ITC International Trade Centre IZA Institute of Labor Economics KHM Cambodia LACEX Labor Content of Exports LMIC lower-middle-income countries MNG Mongolia MPRA Munich Personal RePEc Archive MRIO multiregion input-output MYS Malaysia NGO nongovernmental organizations NIE newly industrializing economies NIS National Innovation System NRGI Natural Resource Governance Institute OBI Open Budget Index OBS Open Budget Survey OECD Organisation for Economic Co-operation and Development OGI Open Governance Initiative PEFA Public Expenditure and Financial Accountability PHL Philippines PISA Programme for International Student Assessment PPP purchasing power parity PTA preferential trade agreement PWT Penn World Table QoG Quality of Government A b b r e v i a t i o n s   xvii R&D research and development RCA revealed comparative advantage RCM rice crop manager RULC relative unit labor costs SAT State Administration of Taxation SAR Special Administrative Region SEGs state-owned economic groups SMEs small and medium enterprises SOEs state-owned enterprises STAN Structural Analysis STEP Skills Toward Employment and Productivity STRI Services Trade Restrictiveness Index SUSENAS Indonesian National Socio-Economic Survey TFP total factor productivity THL Thailand TIMSS Trends in International Mathematics and Science Study TiVA Trade in Value Added TPP Trans-Pacific Partnership TVET technical and vocational education and training UDB Unified Database (Indonesia) UMIC upper-middle-income countries UNIDO United Nations Industrial Development Organization US United States USAID United States Agency for International Development VAT value added tax VCP Vietnam Communist Party VNM Vietnam WDI World Development Indicators WGI Worldwide Governance Indicators WIPO World Intellectual Property Organization WJP World Justice Project WMS World Management Survey WTO World Trade Organization Overview Introduction Yet East Asia’s resurgence remains incom- East Asia’s renaissance has continued . A suc- plete . More than 90 percent of its people live cession of East Asian economies have pro- in 10 middle-income countries .1 Although gressed from low-income to middle-income several of these countries can now realistically status in the past half century . Since 2000, aspire to high-income status within the next the region’s middle-income economies have generation or two, they are far from afflu- become more prominent . Part of this shift ent . Despite China’s spectacular growth over mirrors the rise of China, which is now the the past 40 years, for instance, its per capita world’s largest (in purchasing power parity income is still only about a fifth of the aver- [PPP] terms) or second-largest economy (at age for high-income economies . Among the market prices) . But it also reflects the emer- region’s economies at the lower end of the gence of the five large Association of Southeast middle-income scale, per capita incomes in Asian Nations (ASEAN) middle-income econ- Cambodia and Vietnam are about 3 percent omies: Indonesia, Malaysia, the Philippines, and 5 percent, respectively, of the high-income Thailand, and Vietnam . Incomes in the region average . These large gaps in standards of liv- have grown rapidly, and poverty has fallen ing are equally striking when viewed in histor- dramatically . The scale of this success has been ical terms: China’s per capita income fell from termed the “East Asian Miracle” because of about 36 percent of the level of the United the sheer pace of the transformation . A half States in 1820 to 20 percent in 1870, and century ago, countries across much of the although it has risen significantly since China’s region faced some of the most difficult devel- economic reforms began in the late 1970s, it is opment challenges in scale and scope . Most still less than a quarter of the U .S . level today .2 were poor agricultural economies, struggling Developing East Asia also lags in labor to overcome legacies of conflict or central productivity and human capital relative not planning . Today, however, the region is bus- only to the United States but to Chile and tling with economic activity—reflecting a the Republic of Korea when those countries lively mix of high- and middle-income econo- attained high-income status (in 2011 and mies that account collectively for nearly one- 2001, respectively) .3 For instance, when Chile third of global gross domestic product (GDP) . and Korea achieved high-income status, their 1 2   A RESURGENT EAST ASIA labor productivity levels were, respectively, economies elsewhere, particularly in Latin almost 2 and 2.5 times that of China in 2015. America and South Asia.4 Human capital levels in Chile and Korea were Outward orientation. Recognizing that a quarter and a third higher, respectively. labor was their most abundant asset in their Other middle-income East Asian econo- early stages of development, these economies mies similarly lag behind the human capital promoted labor-intensive growth in ways and labor productivity levels of Chile and that helped integrate them with the global Korea when they first attained high income. economy. As they developed their manufac- Moreover, productivity growth in the region turing sectors early on, they did so without has been slowing, as in other parts of the taxing labor heavily or discriminating signifi- world. cantly against agriculture. Support for agri- Despite its recent success, develop- cultural productivity growth was key because ing East Asia’s continued resurgence will it helped sustain growth and reduce poverty. depend on its ability to navigate the currents Policies to promote trade openness helped of a changing world and a changing region. expose domestic industries to international Global trade is growing more slowly, and competition while facilitating flows of foreign the patterns of trade are shifting, both investment and know-how. within and beyond the region. Technology Investment in basic human capital. All is changing rapidly and, in so doing, is the successful East Asian economies empha- changing the nature of comparative advan- sized the provision of services to build the tage as well as the structure of demand human capital of their populations. Basic for labor in the region. And the countries’ education, health and nutrition, and fam- economies themselves are changing as they ily planning services were promoted both as become more prosperous. Indeed, it is these a means of raising labor productivity and as changes that help frame the challenges the a way of enabling the poor to benefit from region will face—challenges that can be labor-­i ntensive growth. Educational sys- addressed, but only through a combina- tems achieved broad access to primary and, tion of forward-looking policy actions and increasingly, to secondary schooling. As a renewed energy for reform. result, the generation born in the 1980s had educational attainment almost a third higher The East Asian development than that born in the 1950s. Health care pro- model has worked vision focused on diseases that particularly affected the poor, including by providing pri- The “growth with equity” model mary health care and targeting rural areas. The success of developing East Asia in sus- Several countries also made improving access taining development can be attributed to family planning programs a priority. broadly to a set of policies that have come Sound economic governance. These to be known as the “growth with equity” economies also recognized that for develop- model. Broadly speaking, this strategy con- ment to be sustained, policies needed effec- sists of three pillars: outward orientation, tive implementation. This in turn called for investment in basic human capital, and credible and capable economic governance. sound economic governance. This broad- East Asia’s policy makers generally remained brush characterization obviously abstracts committed to maintaining macroeconomic from many aspects of country-specific devel- stability (including long-term fiscal disci- opment strategies as well as variations in the pline) and to relying primarily on markets pace and sequencing of policies across coun- in allocating resources. When interventions tries. Nevertheless, it captures the essential (so-called industrial policies) were used, they elements of the approach this set of coun- were designed to be consistent with market tries took as well as its contrast to the strat- signals and incentives. Good economic gov- egies adopted by low- and middle-income ernance also relied on the development of at O v er v ie w   3 least small groups of well-trained, competent FIGURE O.1  Real GDP growth has been high in developing civil servants who were largely shielded from East Asia, 1991–2016 political interference. 14 Average annual GDP growth, percent A record of success 12 This development model has resulted in sus- 10 tained productivity growth, inclusion, and 8 effective economic governance across devel- oping East Asia. 6 Income and productivity growth 4 Countries in the region have generally grown 2 steadily and consistently over the past quarter century (figure O.1). China’s rapid and consis- 0 tent growth over this period has obviously been 1991–96 1997–99 2000–09 2010–16 a big part. But the growth story extends beyond Developing East Asia Developing East Asia China China, and as a result, all of the countries that excluding China constitute “developing East Asia” have now Source: World Bank 2017b. reached middle-income status, with several of Note: “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, Malaysia, them now in the upper-middle-income ranks. Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. GDP = gross domestic product. This is a far cry from two decades ago, when the region’s countries were predominantly low- to lower-middle-income. times what it was in 2000. Even leaving aside Developing East Asia’s growth perfor- China, developing East Asian countries have mance has also been striking in its resilience more than doubled their GDP since 2000. despite two major economic crises over the Strong productivity growth was the key past two decades. Although the 1997–98 to much of developing East Asia’s success in Asian Financial Crisis originated in the region sustaining growth over this prolonged period. and was a severe shock, its effects on growth Levels of output per worker have been con- were relatively short-lived, even in Indonesia, verging to the “productivity frontier”—that Malaysia, and Thailand—the countries that of the United States—reflecting to varying were most affected besides Korea. By 1999, extents across countries the roles of capi- growth was positive again across the region, tal deepening (more capital per worker), the and it continued to rise throughout the first accumulation of human capital (more edu- part of the following decade. cated and healthier workers), and growth in The region then weathered the 2008–09 total factor productivity (greater economic Global Financial Crisis, which began in the efficiency). And in most cases, productivity high-income economies, much better than did growth has been faster and more consistent most other low- and middle-income regions. in developing East Asia than in other major China’s public investment-led stimulus helped low- and middle-income countries. sustain its own growth and, through its trade links, supported growth in the rest of devel- Inclusion oping East Asia as well. For much of the Rapid growth has provided broad-based decade since that crisis, East Asia has been benefits to East Asia’s population. First, and the fastest-growing developing region. Since most significantly, the shares of the extreme 2010, it has grown by nearly 6.5 percent a and moderate poor in the region’s population year, on average—not much slower than its have fallen from over half in 2002 to less than 2000–07 pace. As a result, developing East an eighth in 2015 (figure O.2).5 While China Asia’s GDP is now more than three and a half has led the way in this reduction—with its 4   A RESURGENT EAST ASIA FIGURE O.2  Poverty has been declining and economic security rate of extreme and moderate poverty now increasing in developing East Asia, 2002–16 below 7 percent (down from about 58 percent in 2002)—the improvements have cut across 100 the region. Malaysia and Thailand have virtu- 90 ally no extreme or moderate poverty by these 80 percent of total population measures. Indonesia has more than halved 70 the share of its population in these categories 60 since 2002—to about 31 percent in 2016. 50 And Vietnam has reduced its share of poor 40 to just over 8 percent in 2016, down from 30 almost 70 percent in 2002. 20 10 Economic governance 0 The region’s reputation for credible and 2002 2004 2006 2008 2010 2012 2014 2016 year capable economic management can be seen by looking at “government effectiveness,” Extreme poor (less than ppp US$1.90 per day) Moderate poor (ppp US$1.90–US$3.20 per day) which is a composite measure of “the qual- Economically vulnerable (ppp US$3.20–US$5.50 per day) ity of public services, the quality of the civil Economically secure (ppp US$5.50–US$15.00 per day) service and the degree of its independence Middle class (ppp US$15 and higher per day) from political pressures, the quality of pol- Source: World Bank East Asia and Pacific Team for Statistical Development. icy formulation and implementation, and Note: Dollar ranges represent consumption per capita in 2011 purchasing power parity (PPP) terms. the credibility of the government’s commit- “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, Malaysia, ment to such policies.”6 Much of developing Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. East Asia does well on this indicator rela- tive to other middle-income countries, a sig- FIGURE O.3  Government effectiveness has been increasing in nificant change from the mid-1990s, when developing East Asia relative to all middle-income countries, developing East Asia ranked significantly 1996–2016 below other lower-middle- and upper-­ middle-income countries (figure O.3). By 80 2016, the region’s overall ranking had sur- passed that of middle-income country com- parators (although specific countries differ percentile ranking 60 in their rankings). 40 Changing times, rising challenges Changes in the global economic environment, 20 1996 2000 2004 2008 2016 coupled with shifts in the countries them- year selves, are raising questions about the contin- Developing lower-middle Upper-middle ued efficacy of the East Asian “growth with East Asia income income equity” model in underpinning the region’s Source: Worldwide Governance Indicators database (http://www.govindicators.org), as in transition from middle-income to high- Malesky, E., “Institutions and Governance in Asia’s Middle-Income Countries,” background paper income status. Slowing growth in global trade for this study (World Bank, Washington, DC, 2018). Note: “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, Malaysia, and shifts in its patterns, rapid technological Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. “Lower-middle income” and “upper- change, and evolving economic circumstances middle income” comprise all countries globally in those income categories and account for changing compositions of each group over time. The “government effectiveness” subcomponent of the Worldwide within countries all present challenges to sus- Governance Indicators is a composite measure drawn from multiple data sources and capturing “the taining the past success in spurring productiv- quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government’s ity growth, fostering inclusion, and enhancing commitment to such policies” (Worldwide Governance Indicators database). the effectiveness of the state. O v er v ie w   5 Slowing productivity growth FIGURE O.4  Growth in global trade is slowing, especially trade in goods, 2005–17 As noted earlier, East Asia’s development model has helped sustain strong productiv- 250 ity growth for decades. Macroeconomic stability enabled countries to attract for- eign direct investment (FDI) and remain Index of trade values (2005 = 100) resilient to shocks over time. Policies that favored export-oriented manufacturing also 200 facilitated structural change, allowing labor to move from relatively low-productivity (mostly subsistence) agriculture to manufac- turing. And human capital investments, with 150 their focus on basic education, prepared sig- nificant shares of the population to contrib- ute to export-oriented growth. Since the early 2000s, within-sector productivity growth has also been a driving force in East Asian eco- 100 nomic growth, owing to increased participa- 2005 2007 2009 2011 2013 2015 2017 tion in global and regional value chains7 as Year well as to manufacturing innovations sup- Goods Services Transport Travel Other ported by FDI inflows and the progressive services services services deepening of the region’s capital markets fol- Source: World Trade Organization (WTO) merchandise trade values annual dataset and lowing the Asian Financial Crisis.8 WTO-UNCTAD-ITC annual trade in services dataset; World Bank staff calculations. Note: Trade is the average of imports and exports of goods and commercial services in current U.S. dollars. As in much of the world, however, produc- tivity growth appears to have slowed across developing East Asia in the aftermath of the Although each of these interrelated factors Global Financial Crisis. A key challenge will has played a role in the global trade slow- thus be to reactivate productivity growth in down, recent analysis indicates that the most the face of a changing global and regional significant contributor is the decreased pace of environment by addressing ongoing weak- expansion of global value chains in the 2000s, nesses in trade, innovation, and financial sec- especially since the Global Financial Crisis tor policies. (Constantinescu, Mattoo, and Ruta 2018). This challenge is exacerbated by two weak- Trade integration is flagging nesses in the trade regimes of many countries The slowing of global trade is a major chal- in the region. First, the economies of develop- lenge to further integration as a force for ing East Asia have pursued open trade poli- productivity growth (figure O.4). Beyond the cies for goods but have been much less willing effects of the Global Financial Crisis, the rela- to open their services sectors to trade and tionship between trade and income appears foreign investment flows, even between each to have weakened over time. Several factors other. This asymmetric opening of East Asia’s have been put forward for the slowing growth trade between goods and services is illustrated in global trade: (a) the maturing of global and in figure O.5, which maps countries’ levels of regional value chains in the 2000s, partly tariff protection on goods imports against a because of technological change; (b) changes measure of services sector protection. Other in the composition of GDP, particularly the than Cambodia and Mongolia, all countries falling share of investment in GDP; and (c) in the region are in the upper-left quadrant the slowing pace of trade liberalization and of the figure (or close to it), indicating that the recent rise of protectionism, including the their levels of tariff protection on goods are possibility of trade wars. at or below the global median, whereas their 6   A RESURGENT EAST ASIA FIGURE O.5  Trade restrictions on services remain high in developing East Asia 80 70 IND ZWE IRN 60 QAT Services Trade Restrictions Index (STRI) BHR PHL KWT EGY 50 IDN THA OMN MYS PAN BGD TUN SAU LBN JOR NPL VNM 40 BWA LKA DZA CHN NAM BLR ZAF MWI UGA VEN CRI YEM TZA 30 ITA MEX PAK MLI KEN UKR FRA RUS URY LSO CMR KHM KOR FIN TUR NGA CIV RWA BEL JPN CAN CHL MDG UZB BRA 20 AUS PRT DNK HND ZMB MAR MUS USA AUT ALB GTM COL MOZ BDI SEN DEU KAZ CZE HUN GHA ARG PER GRC BGR KGZ PRY BOL ESP SWE ROU NIC DOM GEO TTO 10 GBR MNG NZL ARM ECU NLD POL LTU IRL 0 0 2 4 6 8 10 12 14 16 18 20 Average applied Most Favored Nation (MFN) tari (percent) Source: Constantinescu, C., A. Mattoo, and M. Ruta, “Trade in Developing East Asia: How It Has Changed and Why It Matters,” background paper for this study (World Bank, Washington, DC, 2018). Note: The figure shows average tariff rates on the x axis and the World Bank Services Trade Restrictiveness Index (STRI), which ranges from 0 to 100, on the y axis (circa 2011). The horizontal line indicates the STRI global median; the vertical line indicates the global median tariff rate. Developing East Asian countries shown (in light blue) are Cambodia (KHM), China (CHN), Indonesia (IDN), Malaysia (MYS), Mongolia (MNG), the Philippines (PHL), Thailand (THL), and Vietnam (VNM). levels of services sector protection are above preferential trade agreements (PTAs) are gener- the global median. ally “shallow.”10 For example, even some pol- Services trade can be a powerful engine icy areas covered by World Trade Organization for productivity growth, including through its agreements—such as public procurement, sub- effects on extending value chains and its links sidies, and state trading companies—are not with ongoing technological change.9 Services included in most East Asian PTAs. sector reforms in several low- and middle- This lack of depth in the region’s trade income countries—such as fewer restrictions on agreements matters for productivity growth operations— foreign firm entry, ownership, and ­ because it has reduced the pressures to further have led to growth in both domestic and for- lengthen value chains. Signing “deep” PTAs eign investment. Local manufacturing firms are doubles trade in parts and components and no longer at the mercy of inefficient (public or increases reexported value added by about private) monopolies and have access to better, 22 percent (Laget et al. 2018). The intuition newer, more reliable, and more diverse business is that when trade agreements extend to areas services and technologies via a wider range of such as protection of foreign investment and domestic and foreign providers. intellectual property rights and stronger com- The second weakness in these countries’ petition policies, they contribute to greater trade regimes is that, despite their increas- specialization, which in turn is linked to ing numbers (36 at last count), East Asia’s higher productivity. O v er v ie w   7 Innovation is constrained could also lead to the reshoring of produc- Reduced potential for manufacturing tion by reducing the importance of wage growth, arising in part from technological competitiveness (with robotics and the move change, may limit innovation as a force for to “smart factories”),11 limiting the potential productivity growth. The shares of manu- for scale economies with an emphasis on cus- facturing value added and employment tomization (with 3-D printing), and expand- have been peaking both at lower levels and ing the role of services in the manufacturing at lower per capita incomes than in ear- process. Although these technologies are still lier periods. In most of today’s high-income nascent, their potential could pose a challenge economies, the peak share of manufacturing for developing East Asia (other than China) to employment was almost twice as high as in spur productivity by deepening its manufac- today’s lower-middle-income economies—a turing footprint. pattern seen in East Asia, too. Moreover, the Analysis of the Global Innovation Index share of manufacturing in GDP has fallen (GII) indicates that while much of developing globally and in East Asia, in both high-income East Asia performs at or above levels corre- and middle-income countries. One reason sponding to their income levels, their national could be that technological change is lead- innovation systems must be upgraded if ing to professional service inputs making up innovation is to contribute more signifi- an increasingly large share of manufactures, cantly to productivity growth.12 Although which in turn is resulting in some reshoring of investment in research and development is manufacturing to more-advanced economies important to fostering innovation, a broader (Hallward-Driemeier and Nayyar 2017). If set of enabling factors is needed for an effec- this “premature deindustrialization” trend is tive national innovation system (Cirera and real and persists, it does not augur well for Maloney 2017). These comprise (a) factors the ability of East Asia’s lower-middle-income that support the accumulation of knowledge countries to emulate their more affluent pre- and other forms of capital; (b) firm capa- decessors’ success in relying on manufactur- bilities and incentives to innovate, includ- ing exports to propel growth. ing management capabilities and protection Technological change—the spread of infor- of intellectual property; and (c) government mation and communications technology (ICT) capabilities to formulate and implement inno- (termed “Industry 3.0” in reference to the third vation policies. industrial revolution) as well as the emergence Countries in developing East Asia will of new physical, biological, and advanced therefore need to address multiple con- digital technologies (termed “Industry 4.0”)— straints, albeit in a phased manner, to ensure is also likely to continue. This trend could that innovation continues to contribute further solidify the advantages of the high- to raising firm-level productivity growth. income economies and China, which remain Detailed analysis of the GII highlights which the dominant exporters across major manu- challenges are likely to be binding in each of facturing sectors. It could also further weaken the seven East Asian countries included in the impetus for ­ manufacturing-led produc- the GII rankings.13 All except Malaysia rank tivity growth in the region’s middle-income lower in innovation than the GII’s median economies (other than China). In all five of the country and below the level predicted by main manufacturing sector groups (low-skill, their per capita GDP on at least one of the labor-intensive tradables; medium-skill global GII’s five “input” pillars: institutions, human innovators; high-skill global innovators; capital and research, infrastructure, market commodity-based regional processing; and sophistication, and business s ­ ophistication capital-intensive regional processing), most of (table O.1). Cambodia, Indonesia, and the top 10 exporters are still high-income econ- Thailand stand out as falling short on omies, along with China (Hallward-Driemeier most or all of the different pillars. Looking and Nayyar 2017). Emerging technologies across pillars, most of the seven countries 8   A RESURGENT EAST ASIA TABLE O.1  Most countries in the region face multiple challenges in building vibrant innovation systems Market Business Country Institutions Human capital Infrastructure sophistication sophistication Cambodia 1 1 1 0 1 China 1 0 0 0 0 Indonesia 1 1 1 1 1 Malaysia 0 0 0 0 0 Philippines 1 1 0 1 0 Thailand 1 1 1 0 1 Vietnam 1 0 0 0 1 Source: Global Innovation Index (GII) and World Development Indicators 2017 datasets as elaborated in M. Iootty, “Assessing Innovation Patterns and Constraints in East Asia Region: An Introductory Analysis,” background paper for this study (World Bank, Washington, DC, 2018). Note: A value of 1 (red shading) indicates a GII pillar where the country falls both (a) below the value of the GII median country and (b) below the level predicted by the country’s gross domestic product (GDP) per capita. A value of 0 (green shading) indicates a pillar where the country value equals or exceeds (a) the GII median country value, (b) the level predicted by the country’s GDP per capita, or (c) both. The value of the median country (for each pillar) is calculated across the 127 countries covered by the GII. For definitions of each pillar, see the GII website: https://www.globalinnovationindex.org/. The GII rankings do not include three additional “developing East Asia” countries covered in this volume: Lao PDR, Mongolia, and Myanmar. underperform on institutions and, to a lower end of the middle-income spectrum, lesser extent, on human capital and business such as Cambodia, enterprises that employ sophistication. Unbundling each of these pil- fewer than 100 persons account for almost lars as defined in the GII shows where the 60 percent of total sales and almost three- shortfalls are most pronounced. On insti- quarters of total employment in the indus- tutions, for example, shortfalls are most trial and services sectors. Even in Indonesia marked with respect to countries’ regulatory and the Philippines, more than two-thirds and business environments, with indica- of total sales and 37 and 58 percent of total tors in all countries in the region (includ- employment, respectively, are accounted for ing Malaysia, on regulation) falling below by enterprises with fewer than 100 employ- both the median country’s ranking and the ees. At the same time, these enterprises are income-predicted benchmarks.14 more likely than large firms to cite access to finance as among the most significant Access to finance is limited constraints they face. Among medium-size Capital markets in the larger developing East firms (those with 20–99 employees), almost Asian economies have been deepened since a quarter in Indonesia and one-seventh in the Asian Financial Crisis through growth Vietnam highlight access to finance as a in issuance activity, increased use of equity major constraint, compared with 18 percent and corporate bond issues, and broader use and 9 percent of large firms in those coun- of domestic markets relative to international tries, respectively.16 and intraregional markets. These develop- However, success in improving SME ments have boosted productivity through bet- access to finance in developing East Asia, ter access to capital for large firms. They have as elsewhere, has been limited. Several East also helped to make financial systems more Asian economies, both developing and resilient to some of the risks that precipitated advanced, have set up SME capital markets, the crisis. Despite these important develop- and in some cases, their scope has become ments, access to capital markets still tends to large. The experience of China; Hong Kong be restricted to only the largest firms.15 SAR, China; and Taiwan, China—which Small and medium enterprises (SMEs) have the largest of these markets in East remain important contributors to employ- Asia—suggests that despite their focus on ment and output in most of the region’s SMEs, these markets still tend to serve larger economies, however. In the economies at the firms.17 O v er v ie w   9 Inclusion at risk (World Bank 2016a). And in Vietnam, dis- parities in living standards were cited as a The early focus of the region’s policy mak- concern by a majority of those surveyed, ers on agricultural development and labor-­ with young people most concerned about intensive manufacturing—along with their income and nonincome inequalities (World emphasis on avoiding macroeconomic cri- Bank 2014). These perceptions are con- ses (at least until the years that preceded tributing to a sense that opportunities for the Asian Financial Crisis)—ensured that upward mobility—long a hallmark of East the resulting growth was inclusive. When Asia’s development ­ experience—may now countries across developing East Asia were be becoming scarcer. mainly low income, their populations were predominantly rural and agricultural. Technological change is accelerating Promoting agricultural development was These worries about rising inequality are being a critical pathway to achieve growth and reinforced by the impact of rapid technologi- poverty reduction. cal change on labor markets. Although the Export-oriented manufacturing, similarly, precise pace at which several advanced tech- helped deliver economic growth and jobs nologies will spread is hard to predict, ICT is for low-skilled labor. Coupled with rising already deeply entrenched. These advances— productivity in agriculture, this export ori- so-called Industry 3.0—are seen most clearly entation helped propel countries’ structural in the spread of mobile phones and the inter- transformation, creating regular and rela- net across the region. Despite their diffusion, tively well-paying employment for low-skilled inequalities in access across and within coun- workers who moved from work in rural areas tries remain a concern. Workers who lack into urban-based manufacturing. Low-skilled access to digital technology and the ability labor also benefited from backward and to use it may find themselves falling further forward linkages in agriculture and labor-­ and further behind as technological change intensive manufacturing.18 proceeds. With changing economic circumstances, More broadly, technological change including growing affluence across the is raising the demand for more advanced region, the East Asian development model skills in labor markets across developing seems at risk of delivering less effectively on East Asia, increasing the likelihood that inclusion. Despite the region’s remarkable workers with poor education or weak skill success in reducing income poverty, inequal- sets could be excluded. The advent of the ity rose through much of the early 2000s so-called fourth industrial revolution, or and has remained high in several countries. Industry 4.0, which comprises physical, China, Indonesia, and Malaysia all have biological, and advanced digital technolo- Gini coefficients over 0.4, considered high gies, is likely to further raise the premium by international standards.19 And it is likely on skills.20 Cheaper and more user-friendly that standard measures do not capture the robots, for example, offer the prospect of concentration of wealth at the top of the productivity increases while substituting income distribution. for labor, particularly at the lower-skill end P e o p l e ’s c o n c e r n s a b o u t i n e q u a l- of the market. Advances in artificial intel- ity are also rising. Significant majorities ligence and machine learning will change of the region’s population—more than the way knowledge work is organized and 90 percent in China and more than half reinforce incentives to automate. Similarly, in the Philippines—now think that income additive manufacturing (such as 3-D print- differences in their own countries are too ing) will allow for the ­ c ustomization of large (World Bank 2018b). In Indonesia, production closer to consumers, both 89 percent of those surveyed consider it to reducing the importance of scale economies be quite or very urgent to address inequality in production and disrupting value chains. 10   A RESURGENT EAST ASIA The increasing adoption of all these tech- manufacturing workers) is still below that of nologies in labor-scarce high-income econo- Korea and other advanced economies in the mies and in China could lead to reshoring region (figure O.6). China’s pace of automa- of their production, marking a move away tion will be particularly important in deter- from the offshoring and fragmentation that mining industrial location, productivity, and currently characterizes much of manufac- labor market outcomes—both within China turing. These trends could further reduce and across the region. While rising labor the demand for low-skilled labor in middle- costs are increasing incentives for Chinese income East Asia, which is especially wor- manufacturers to offshore some activi- rying for countries such as Cambodia, ties, thus lengthening regional value chains, Myanmar, and Vietnam. continued declines in the price of industrial Evidence on the pace of adoption and robots will make reshoring to China more impact of Industry 4.0 technologies is still profitable. It is not yet clear which of these sparse. But the price of these technolo- competing forces will win out. gies, including advanced robotics, is falling Policy makers in developing East Asia, rapidly. Consequently, the stock of indus- therefore, face three sets of challenges to trial robots has risen rapidly in advanced promoting inclusive growth in the face of economies, including Japan and Korea. technological change: skills; access to digital China also has seen a sharp rise in its num- technologies; and adequate social protection ber of industrial robots, although the density for those unable to make the necessary eco- of these robots (relative to the number of nomic transitions. FIGURE O.6  Use of industrial robots in manufacturing is increasingly important in several East Asian economies a. Number of robots b. Number of robots per 1,000 employees Japan Korea, Rep. china Singapore Korea, Rep. Japan Taiwan, china china Thailand Taiwan, china hong Kong Singapore SAR, china Malaysia Thailand Indonesia Malaysia vietnam vietnam hong Kong Indonesia SAR, china philippines philippines 0 100 200 300 0 20 40 60 Thousands Number per 1,000 employees Source: International Federation of Robotics and International Labour Organization databases, as estimated in Mason, A., V. Kehayova, and J. Yang, “Trade, Technology, Skills, and Jobs: Exploring the Road Ahead for Developing East Asia,” background paper for this study (World Bank, Washington, DC, 2018). O v er v ie w   11 Skills development is lagging FIGURE O.7  Learning outcomes are systematically lower among Despite the progress developing East Asia has poorer students in several East Asian countries, 2015 made in increasing access to education, with noteworthy upward mobility in education over 100 PISA proficiency in all subjects, percent the past 40 years (Narayan et al. 2018), many countries still face challenges. Specifically, Students achieving minimum 80 whereas 40 percent of students in develop- ing East Asia are realizing impressive learning 60 outcomes (achieving at or above Organisation for Economic Co-operation and Development 40 [OECD] levels), the other 60 percent still face significant challenges in building basic founda- 20 tional skills. Even where students are demon- strating strong learning outcomes, countries face continuing challenges in endowing their 0 China Indonesia Malaysia Thailand Vietnam populations with the advanced skills—higher- (B-S-J-G) order cognitive skills, socioemotional skills, Poorest 20% Second poorest 20% Middle 20% and digital literacy—needed to be competitive Second wealthiest 20% Wealthiest 20% in the 21st-century economy. Moreover, inequalities in educational Source: Bentaouet-Kattan and Macdonald 2018. opportunities persist across socioeconomic Notes: Programme for International Student Assessment (PISA) proficiency scores are intended to convey what students can do in a particular subject. Minimum proficiency is defined as scoring groups in most countries. Although progress at level 2 or higher in each subject (reading, math, and science). Students achieving minimum has been made in closing gaps in access to edu- proficiency in reading can infer information from a text and identify the main ideas of a text; in science, they can use everyday scientific knowledge to draw a conclusion from data; and in cation between the poor and the nonpoor— mathematics, they can apply basic algorithms and formulae using whole numbers, among other especially in basic education—stark differences abilities. Wealth quintiles refer only to the student population and not to the total population. “China (B-S-J-G)” = Beijing, Shanghai, Jiangsu, and Guangdong, China. All PISA data are from 2015 in access remain at the secondary level and except Malaysia data, which is from 2012. beyond.21 Inequalities in educational opportu- nities are also reflected in gaps in learning out- in the Lao People’s Democratic Republic, comes across socioeconomic groups. Students Mongolia, and Myanmar is still only 20–30 from poorer families consistently demonstrate percent—far lower than in China, Malaysia, lower proficiency levels in reading, math, and and the Philippines. science than wealthier students (figure O.7). There is also a digital divide within coun- Even when students from poorer backgrounds tries. Recent estimates indicate that about complete more schooling, they still experience 1.7 billion people lack access to broadband, learning and skills deficits relative to their about 1.2 billion are without internet, and wealthier counterparts. These skills gaps will 400 million do not have mobile phones. create challenges for those individuals to par- Even in China, nearly half the population ticipate successfully in their countries’ labor still lacks access to the internet. Moreover, markets as their countries develop. data from Indonesia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam show Access to digital technologies consistently low internet use among poor remains uneven households—both in absolute terms and com- Ensuring broad access to digital technology pared with middle class or even economically is still a challenge across much of develop- secure households (figure O.8). ing East Asia. Despite the rapid expansion in the use of ICT across the region (with more Support for making economic transitions is cellphones than people in several countries), limited some countries still lag. This digital gap is Older workers; poor and economically vul- particularly stark in internet access, as prox- nerable populations; and those from more ied by internet use. For example, internet use remote, less-developed regions (that is, those 12   A RESURGENT EAST ASIA FIGURE O.8  Internet use is lower among poorer households in •  Patchy safety net coverage. Coverage of several East Asian countries safety nets in developing East Asia is also relatively low, at least compared to other 100 middle-income regions. •  Limited program focus. The region’s social protection and labor programs focus mainly 75 on structural conditions (such as poverty); Households, percent on specific groups (such as youth, elderly, 50 and the disabled); and on access to basic services (such as health care) as opposed to economic transitions. Only a small share 25 of active labor market programs address unemployment, for example, while unem- ployment insurance programs only exist in 0 a subset of countries and cover only a small Indonesia Mongolia Myanmar Philippines Thailand Vietnam share of the unemployed (Betcherman and 2016a 2016a 2015b 2015b 2015b 2016b Moroz 2018). Extreme Moderate Economically Economically Middle poor poor vulnerable secure class State effectiveness challenged Source: World Bank East Asia and Pacific Team for Statistical Development. Notes: Sample sizes for the “extreme poor” in Mongolia and Thailand are too small to enable Across much of developing East Asia, good reliable estimates of internet use. Welfare groups are classified based on per capita income for the economic governance has supported eco- Philippines and on per capita expenditure for other countries (all in 2011 purchasing parity power [PPP] terms) as follows: extreme poor = 50% L uz on St ra it 40–50% skilled labor from rural, agricultural areas Babu nel 30–40% 20–30% into urban manufacturing and services. Finally, changing technologies—whether dig- y a n Ch a n 10–20% <10% HIGHLY URBANIZED CITIES ital technologies (Industry 3.0) or advanced NATIONAL CAPITAL robotics (Industry 4.0)—are also transform- PROVINCE BOUNDARIES REGION BOUNDARIES ing the nature and structure of labor demand Baguio in many countries, and potentially doing so at an increasingly rapid pace. IBRD 43970 | SEPTEMBER 2018 This map was produced by the Cartography Unit of the World Bank Quezon City Group. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of the World Bank Against this background, this chapter MANILA Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. examines the challenges and opportunities Lucena that countries in developing East Asia face in ensuring that growth is inclusive as they tran- Mi nd or Sibuyan Sea sition from middle-income to high-income status. Because rising labor incomes are key o Str ait Visayan Sea Tacloban not only to escaping poverty but also to the Iloilo Bacolod Leyte Gulf Philippine long-term well-being of individuals and their Cebu Lapu-Lapu S ea families, the chapter focuses largely on chal- Puerto Princesa lenges and opportunities in the labor market.3 Dumaguete Butuan The chapter begins with a brief review of Mindanao Sea Cagayan the factors that historically contributed to Sulu Sea Iligan de Oro growth with equity in the region, and in par- ticular, the factors that generated economic Davao Zamboanga Moro Davao opportunity for lower-skilled workers. It then examines how changing trade, technology, Gulf Gulf General Santos and the development process itself are creat- MAL AYSIA Celebes Sea ing challenges to the traditional “growth with 0 50 100 150 Kilometers equity” model and, specifically, how demand Source: World Bank 2018e. IBRD No. 43455, January 2018. ©World Bank. Further permission required for workers’ skills is changing over time. for reuse. Finally, the chapter examines how prepared Note: Poverty headcounts are based on the Philippines national poverty lines, which are set by region and province. At the national level, the official Philippines poverty line was ₱21,753 in 2015, developing East Asian countries are to con- equivalent to 2011 PPP US$2.81 per person per day. front these challenges and to ensure that their citizens have the tools to navigate and succeed Changing trade patterns, along with slow- in a changing economic environment. ing growth in global trade and rising pro- tectionist sentiments among some of the region’s key trading partners, all raise ques- Early drivers of growth with tions about whether labor-intensive manu- equity facturing for export can still provide the Recognizing that labor was their most abun- same engine for economic opportunity for dant asset in the early stages of develop- the region’s low-skilled workers. At the ment, policy makers in developing East Asia same time, ongoing development is chang- promoted labor-intensive growth through ing the nature and structure of production two main channels: promoting agricultural in many countries as firms transition from development and pursuing trade openness.4 the production of less-sophisticated to more- At low income levels, developing East Asian sophisticated goods, requiring different skill countries were predominantly rural, and their sets. And, at least among “second wave” economic structures were heavily agricultural. F ostering I n c l usi v e G ro w t h    93 So, ensuring agricultural development repre- FIGURE 3.2  Number of direct and indirect export jobs in Indonesia sented a critical pathway to achieve both eco- and Vietnam nomic growth and poverty reduction. Because large swaths of their populations were depen- a. Indonesia, by sector, 2011 dent on agriculture, measures to build rural Manufacturing infrastructure, ensure the population’s basic Agriculture literacy and numeracy, support adoption Mining and energy and use of high-yielding rice varieties, and Transport and communication promote agroprocessing all contributed to Trade, sales, and accomodation growth, development, and improved living Other commercial services standards for the rural poor. Rising farm Public services incomes, in turn, increased local demand for Construction goods and services, facilitated development Financial services of rural nonfarm enterprises, and spurred Electricity, gas, and water employment growth in rural areas (World Real estate, renting Bank 2013).5 0 4 8 12 16 Policy makers’ focus on export-oriented Jobs, millions manufacturing has similarly delivered the Direct jobs in exports Indirect jobs in exports dual benefits of higher incomes and more jobs for low-skilled labor. Coupled with rising b. Vietnam, 1989–2012 productivity in agriculture, export orientation 20 helped propel countries’ structural transfor- mation, creating regular and relatively well- paying employment for low-skilled workers 15 who moved out of rural areas and into urban- Jobs, millions based manufacturing. As with agricultural 10 development, export-oriented manufacturing has not only provided factory jobs to low- skilled workers but has also led to significant 5 job spillovers—through backward and for- ward production links and through positive 0 demand effects in local economies. Indeed, 1990 1995 2000 2005 2010 indirect job creation due to export-oriented Year manufacturing has often been substantial Direct jobs in exports Indirect jobs in exports Total jobs in exports ­(figure 3.2). Evidence on the impacts of the 2001 U.S.– Source: Cali and Hollweg 2016; Hollweg 2017; World Bank Labor Content of Exports (LACEX) Vietnam Bilateral Trade Agreement reinforces database. the importance of exports’ effects on both direct and indirect job creation. To begin with, tariff cuts resulted in sharp increases local commerce and supporting services to in manufacturing employment. The increase manufacturing. in manufacturing jobs served to draw labor Although much attention has been placed out of agriculture, supporting Vietnam’s struc- on the links between export-oriented manu- tural transformation (Hoang and Nguyen facturing and employment for low-skilled 2018). This movement of labor did not workers, the exact labor-demand effects translate into declines in agricultural income depend on a number of country-specific fac- because it went along with increases in agri- tors, including the composition of the coun- cultural productivity. There were also strong try’s manufactures for export and its position job spillover effects via increased employ- in regional and global value chains. Vietnam’s ment in several service sectors, including in experience with trade from 2002 to 2012, 94   A RESURGENT EAST ASIA for example, was that increased exports increasingly urban, low-skilled workers may raised demand for both low- and high-skilled find it increasingly difficult to find their niche. labor, although demand for low-skilled labor This section examines emerging challenges to increased more (Poole and others 2017; Poole inclusive growth arising from changing pat- and Santos-Paulino 2017). And although terns of production and trade as well as from export growth raised labor demand for both rapid technological change. female and male workers, the effects were larger among female workers (Poole and Changing patterns of production Santos-Paulino 2017). and trade Analysis of trade and technology adoption in Indonesia commissioned for this report Countries in developing East Asia have typi- finds that the impact of exports on employ- cally used low-skill, labor-intensive manufac- ment differed considerably between two dis- turing as an entry point into export markets, tinct subperiods, driven by the nature and especially through the production of such structure of exports during each period. From products as garments, textiles, leather goods, 2005 to 2010, a period when Indonesia expe- and furniture, where the low-skilled labor rienced a commodity export boom, export share is particularly high. Changes in patterns growth did not increase aggregate employ- of export-oriented manufacturing, at both the ment, although rising exports did raise global and country levels, are reducing rela- employment among better-educated work- tive demand for low-skilled labor, however. ers (those with at least secondary educa- At the global level, nearly all manufac- tion) and among female workers (Darko and turing subsectors have become less intensive Viollaz 2018). From 2011 to 2015, however, in their use of low-skilled labor in produc- following the end of the commodity boom— ­ tion since the early 1990s (figure 3.3). This and an increase in the relative importance of is true even for manufacturing subsectors manufactured exports—greater exports were where total employment has been rising— associated with higher employment more for example, in food, beverages, and tobacco broadly. Additional exports raised demand for products as well as in computers, electronics, those with both low and high education levels and optical equipment (Hallward-Driemeier as well as for both male and female workers. and Nayyar 2017). Moreover, as the region’s countries have developed, their manufacturing has Emerging challenges to ensuring evolved in ways that have increased relative shared growth demand for more-skilled labor. In Indonesia, As the countries of developing East Asia move Malaysia, and the Philippines, for example, through middle-income and toward the high- the composition of manufacturing has been income ranks, changes in domestic patterns shifting away from production of low-skill, of production, coupled with global changes labor-intensive goods to production of more in trade and technology, are likely to make it skill-intensive goods. This change can be seen more difficult to ensure that growth is inclu- in declining shares of their output related to sive. Strategies focused on agricultural sector textiles and apparel as well as food and bever- growth and rural development will continue ages (especially in the Philippines) alongside to be important to varying degrees in “third rising shares related to computers and elec- wave” countries such as Cambodia, the Lao tronics as well as transportation equipment People’s Democratic Republic, Myanmar, since the mid-1990s (figure 3.4). Similar pat- and Vietnam, where upward of 40 percent terns are observed in the Republic of Korea, of the labor force still worked in agriculture which transitioned from middle-income to in 2015.6 Nevertheless, as countries continue high-income status during the period. to grow, their economies become increas- Based on countries’ export baskets, ingly sophisticated and their populations since the mid-1990s, Thailand has moved F ostering I n c l usi v e G ro w t h    95 FIGURE 3.3  Change in share of blue-collar employment, by manufacturing subsector, early 1990s–2010s 100 Wood and products of wood After-2008 share of blue-collar employment, percent and cork, except furniture 90 Fabricated metal Textiles, wearing apparel, and leather products Transport 80 equipment Rubber and Furniture; manufacturing n.e.c. plastics products Basic metals Other nonmetallic mineral products 70 Food, beverages, and tobacco products Paper and paper products; printing and publishing Machinery and equipment n.e.c. 60 Coke, re ned petroleum Electrical machinery products, and nuclear fuel and equipment 50 Chemicals and Computer, electronics, chemical products and optical equipment 40 40 50 60 70 80 90 100 Early1990s share of blue-collar employment, percent Source: Hallward-Driemeier and Nayyar 2017. Note: Calculations based on Integrated Public Use Microdata Series (IPUMS) International, Minnesota Population Center, University of Minnesota. Data are for 20 selected countries based on years of data availability. n.e.c. = not otherwise classified. to higher-value production, developing a FIGURE 3.4  Change in GDP share from representative manufactures revealed comparative advantage (RCA) in in several East Asian countries, 1994–2014 medium-skill industries (for example, trans- portation equipment, electrical equipment, 6 and other machinery and equipment) while losing its RCA in low-skill, labor-intensive change in share of GDp, percentage points 4 manufacturing (World Bank 2018c).7 China has also moved into higher-skill, higher-value-added sectors over the period 2 (for example, computers, electronics, optical instruments, and pharmaceutical products)— 0 although, unlike Thailand, it has maintained its RCA in low-skill, labor-­intensive sectors (World Bank 2018c). Indeed, China main- –2 tained or acquired RCA across a broad swath of manufacturing subsectors over the –4 period, emerging by 2011 as one of the top 10 exporters in four key manufacturing sub- –6 sectors: low-skill, labor-intensive tradables; Indonesia Japan Korea, Rep. Malaysia philippines commodity-based processing; medium-skill ­ manufactures; and high-skill manufactures Food and Textiles and computers and Transport (Hallward-Driemeier and Nayyar 2017). beverages wearing apparel electronics equipment Although the shift from the production of Source: World Bank 2018c, drawing on United Nations Industrial Development Organization (UNIDO) simpler to more sophisticated, more skills- Industrial Statistics (INDSTAT) data. intensive goods is expected as countries grow Note: GDP = gross domestic product. 96   A RESURGENT EAST ASIA and develop, it also means it will be more China serves to shrink regional and global challenging for workers to participate suc- value chains, it could put a drag on the cre- cessfully in this important segment of the ation of new manufacturing jobs elsewhere in labor market. the region. Rising concerns about the impact of auto- mation on jobs has spawned a number of Changing technologies studies attempting to quantify the risk to Rapid technological change will also contrib- people’s jobs from automation, including ute to the challenges of ensuring that growth in developing East Asia. Adopting different is inclusive. Indeed, the prospects for rapid methodologies and defining the risk of auto- industrial automation—whether through the mation in different ways, these studies have adoption of industrial robots, 3-D printing, produced an extraordinarily wide range of or the internet of things (Industry 4.0)—have estimates of the employment risks associated raised concerns that low-skilled workers with automation. For China alone, estimates may find themselves replaced by machines as of the extent to which jobs may be auto- East Asian countries continue to grow and mated over the next 10–20 years range from develop. as low as 7 percent to as high as 77 percent China’s efforts to rapidly expand its stock (table 3.1). of industrial robots (chapter 1) have contrib- The considerable differences in estimates uted to such concerns because of the potential shown in table 3.1 reflect several factors. implications of industrial automation both for Some estimates focus purely on the techno- jobs within China and for offshoring of man- logical feasibility of automation, while others ufacturing elsewhere in the region. At its 19th account for a broader set of economic, regula- National Congress of the Communist Party in tory, and institutional factors that could affect October 2017, China reiterated its intention the extent and pace of industrial automation. to increase the domestic content of its exports There is general agreement that a ­ utomation (Xi 2017). Although the extent and pace of will happen more quickly in wealthy, this shift is uncertain, if such “reshoring” by high-capacity countries than in poorer, TABLE 3.1  Estimated probabilities of jobs being automated in developing East Asian countries Percentage Hallward-Driemeier Manyika, Lund, and Manyika, Chui, and Country and Nayyar (2017)a others (2017)b others (2017)c World Bank (2016)d Cambodia — — — 41–78 China 7e 16 51 55–77 Indonesia — 12 52 — Lao PDR <1 — — — Malaysia — 23 51 49–68 Mongolia — — — 43–60 Philippines — 10 48 — Thailand — 18 55 52–72 Vietnam 1 — — — Sources: Hallward-Driemeier and Nayyar 2017; Manyika, Chui, and others 2017; Manyika, Lund, and others 2017; World Bank 2016. Note: — = not available. Studies shown adopt varying methodologies and definitions in estimating job automation. Although the time frame for automation impacts are not modeled explicitly in all the studies, the discussions generally focus on a 10- to 20-year time horizon. a. Share of current jobs at high risk of automation, based on the “automatability” of their constituent tasks, where “high risk” is defined as a greater than 70 percent probability of a job being automated based on task automatability. b. Percentage of current work activities displaced by automation, 2016–30, based on midpoint adoption scenario. c. Percentage of time spent on activities with technical potential for automation by adapting currently demonstrated technology. d. Upper-bound estimates reflect unadjusted probabilities of automation for occupation, based on Frey and Osborne (2013); lower-bound estimates are adjusted to account for the slower pace of technology adoption in lower-income countries. e. Yunnan Province, China. F ostering I n c l usi v e G ro w t h    97 low-capacity environments. The estimation aggregate employment is mixed. A recent approach also matters. For example, World study of robotization in the United States Development Report 2016: Digital Dividends found significant and sizable negative effects begins by estimating the technical feasibility of robot use on employment (Acemoglu and of automation of different occupations before Restrepo 2017). Other studies of technology adjusting for time lags associated with tech- adoption and robotization in Europe and the nology adoption in low- and middle-income United States, however, find no significant countries (World Bank 2016). The estimates effects on overall employment, although there that take into account the pace of technology is evidence of declines in employment among adoption in low- and middle-income econo- low- to middle-skilled workers (Autor, Dorn, mies are considerably lower than those that and Hanson 2015; Graetz and Michaels focus only on technical feasibility. This can be 2018). In contrast, evidence from middle- seen by comparing the low and high estimates income Latin America indicates that net in the rightmost column of table 3.1, which employment effects can be positive, even for reflect the time-lag adjusted and unadjusted low-skilled workers, when technology raises estimates, respectively. firm productivity and higher firm produc- Similar differences can be seen compar- tivity leads to expanded firm output (Dutz, ing two sets of estimates from the McKinsey Almeida, and Packard 2018). Available evi- Global Institute (the center columns of dence from developing East Asia suggests that table 3.1). The higher of the McKinsey technology can be “labor saving” in some ­ e stimates reflects technical potential for production contexts. However, where adverse ­ a utomation (Manyika, Chui, and others employment effects are found, the magnitudes 2017), whereas the lower of the estimates do not appear to be large (Darko and Viollaz incorporates broader implementation-related 2018; Poole and Santos-Paulino 2017). criteria (Manyika, Lund, and others 2017). What is increasingly clear, however, is Other factors also affect one’s assessment of that new technologies—whether digital tech- the risks of job displacement. For example, nologies (Industry 3.0) or advanced robotics building on Arntz, Gregory, and Zierahn (Industry 4.0)—are changing the structure of (2016), Hallward-Driemeier and Nayyar demand for workers’ skills. And, with some (2017) incorporate more detailed information noteworthy exceptions, new technologies on the task structure of occupations as well appear to increase the demand for workers as on employment type. As the left column with more advanced skills that are not easily of table 3.1 shows, estimates that focus on automated. automation of tasks within occupations result Although much of the empirical evidence in substantially lower estimates than those in this regard still comes from outside the that focus on automation of occupations as region, the effects of technology adoption on a whole. In short, consistent with the broad the demand for skills are already starting to be range of available estimates, there is still con- observed in developing East Asia. In Vietnam, siderable uncertainty about how extensively— for example, increases in computers between and how quickly—industrial automation may 2002 and 2012 were associated with rising displace workers in developing East Asia.8 demand for nonroutine manual skills (Poole Job displacement is only one of several and Santos-Paulino 2017). And in Indonesia, possible labor market effects of automation, increases in computers during the commodity however. While some jobs may disappear, boom period (2005–10) were also associated many jobs will evolve in ways that allow with higher demand for nonroutine skills, workers to adapt and undertake tasks that although in this case, demand increased for are complementary to technology. New jobs nonroutine analytical and interpersonal skills will be created as well. How these differ- (Darko and Viollaz 2018). Interestingly, tech- ent forces will net out is uncertain, however, nology adoption between 2011 and 2015, and evidence on the effects of technology on actually reduced the demand for nonroutine 98   A RESURGENT EAST ASIA cognitive skills in Indonesia. This finding is growth that is broadly shared. Digital tech- consistent with the same study’s finding that nologies can help reduce the cost of access- exports also affected employment patterns ing markets, particularly for smaller firms differently between 2005–10 and 2011–15. and entrepreneurs living in more remote areas Indeed, differences in sectoral patterns of of a country. They can also lower the cost of growth, technologies adopted, and the points getting information about job opportunities, in production processes where firms used new especially outside one’s immediate locality technologies all help explain these differences. (Packard and Montenegro 2017). Although the relationship between tech- Digital technologies improve market nology and the demand for workers’ skills is access because online trading platforms complex—and will continue to evolve as tech- reduce transaction costs, helping to level the nologies advance—the weight of the global playing field between smaller and larger firms evidence indicates that technological change and across geographic distances. Transactions is increasing demand for more-advanced over the internet benefit smaller firms, which skills (box 3.1). also tend to hire relatively low-skilled work- Although technological change is raising ers, by enabling the firms to reach new demand for more-advanced skills, technol- consumers and reap productivity gains. By ogy also holds significant power to enable lowering the costs of obtaining information inclusive growth (World Bank 2016, 2019). about job openings beyond that typically Cross-country evidence highlights multiple available through one’s personal networks or channels through which digital technologies, countries’ public employment services, digital if accessible and affordable, can contribute to technologies can help increase labor mobility BOX 3.1  Global evidence on technology and jobs: Increasing demand for more- advanced skills Until recently, much of the evidence on the effects computerization reduced employment among middle-­ of technology adoption on labor market outcomes skilled workers involved in routine-­ task-intensive focused on the United States and other high-income occupations (such as production jobs, clerical and countries. Although this literature recognizes the pro- administrative support, and sales occupations). ductivity gains associated with technology ­ adoption, Declines in routine employment were largely offset a central concern has been on how new technologies by increases in more abstract-task-intensive occupa- (whether information and communication technology tions (especially among younger, college-­ educated [ICT] or robot-related automation) affect employment, workers) on one hand, and in more manual-task- especially among low- and middle-skilled workers. intensive occupations (particularly among older, One recent study uses data on robot adoption in less-educated workers) on the other. This “hollowing 17 high-income countries between 1993 and 2007 to out” of ­middle-skilled jobs has come to be known in examine the economic impacts of automation (Graetz the literature as “job polarization.” and Michaels 2018). The study finds no significant A recent study on the effects of robot use in local impact of robot adoption on overall employment labor markets in the United States between 1990 and levels. However, its estimates suggest that robotiza- ­ 2007 (Acemoglu and Restrepo 2017) finds sizable tion in these countries was “skills-biased,” reducing negative effects of greater robot use on both employ- the employment share of low-skilled workers. ment and wages as well as shifts in skills demands. Another study by Autor, Dorn, and Hanson One additional robot per 1,000 workers is found (2015), focused specifically on the labor market to reduce employment on the order of 3.0–5.6 jobs impacts of trade and technology adoption in the per robot and to reduce wages by around 0.25–0.50 United States between 1980 and 2007, finds that percent. Employment effects are most pronounced box continues next page F ostering I n c l usi v e G ro w t h    99 BOX 3.1  Global evidence on technology and jobs: Increasing demand for more- advanced skills (continued) in manufacturing; in routine manual, blue collar, to expand their output, and this in turn led to net assembly and related occupations; among men; and employment growth for low-skilled as well as high- among workers with less than college education. skilled workers. In contrast to Autor, Dorn, and Hanson (2015), Not all studies find that technology adoption Acemoglu and Restrepo (2017) find no offset- favors higher-skilled workers, however. In Chile, ting employment gains among other occupational adoption of complex software induced shifts in categories. The authors do find that the impact of employment away from skilled workers and toward robotization is distinct from that of other types of administrative and unskilled production workers information technology (IT) capital, suggesting that (Almeida, Fernandes, and Viollaz 2017). In contrast the precise labor market effects depend on the type to more general investments in ICT (for example, of technology adopted. computers, internet connectivity, and company web- Research on developing and emerging economies sites), complex software served to substitute for has not provided strong evidence of job polariza- workers carrying out higher-order tasks and, as such, tion to date (Das and Hilgenstock 2018; Maloney increased demand for lower-skilled workers per- and Molina 2016). Nonetheless, a growing number forming more routine and manual tasks. Similarly, of country studies find evidence that technology in Indonesia between 2011 and 2015, increases in adoption raises relative demand for more-skilled computers were associated with a relative decline in workers. A recent study on Latin America brings demand for nonroutine analytical and interpersonal together new evidence on ICT adoption in tasks and skills (Darko and Viollaz 2018). Argentina, Brazil, Chile, Colombia, and Mexico An important insight from these studies—­ (Dutz, Almeida, and Packard 2018). The analysis consistent with the Acemoglu and Restrepo (2017) generally reinforces the idea that technology adop- finding on nonrobotic IT capital—is that the precise tion favors workers with higher skills. In contrast effect of technology adoption on jobs and skills is, in to the studies from the high-income economies, part, a function of the nature of the technology being however, the evidence from Latin America paints adopted and where firms are using it in their produc- a more positive picture of the effects of technology tion processes. adoption on low-skilled employment. Investments in ICT raised firm productivity and enabled firms Source: Mason, Kehayova, and Yang 2018. and improve matches between workers’ skills more-advanced skills: higher-order cognitive and employers’ needs. Instances in which skills, socioemotional skills, and higher-order new technologies are supporting inclusive technical skills (box 3.3). Although the spe- growth are already seen across the region, cific nature and pace of these changes differ not just with respect to people’s livelihoods across countries, as countries develop, their but also in better access to goods and services labor markets are moving away from occu- (box 3.2). pations intensive in manual tasks and toward those with more-cognitive tasks, including nonroutine analytical and interpersonal skills The changing nature of work ­(figure 3.5; see also Hardy, Lewandowski, A constellation of factors—structural change, and Park 2018; Macdonald 2018). changes in export-oriented manufacturing Moreover, demand for more-advanced and trade, and new technologies—is chang- skills has generally been increasing over ing what it will take for people to be suc- time. From 2000 to 2012, for example, cessful in the labor markets in developing the share of employment in occupations East Asia. Specifically, demand is rising for that were intensive in nonroutine cognitive 100   A RESURGENT EAST ASIA BOX 3.2  Digital technology: Its potential for promoting inclusive growth in developing East Asia Digital technologies—if broadly available and Enabling small entrepreneurs affordable—hold significant potential to enable Digital solutions are also helping small entrepreneurs inclusive growth in developing East Asia. New improve their livelihoods and provide better services. technologies are reducing the costs of access to Uber-like smartphone applications are proliferat- markets and information. They are improving ing in the region. PassApp, for example, is helping access to goods in remote, difficult-to-reach areas. taxi drivers in Phnom Penh, Cambodia, earn higher And they are helping governments identify poor incomes and provide more reliable services to their and vulnerable populations and deliver services riders (World Bank 2018a). Other digital solutions where needed. Rigorous impact evaluations of are helping people address specific constraints (cul- the impacts of technology on inclusive growth are tural or otherwise). For instance, the Sister Ojek app still scarce. Nonetheless, promising initiatives can in Jakarta, Indonesia, is helping to connect female already be seen across the region, as the examples motorbike drivers with women and children riders, below illustrate. thereby helping to address a gender bias on tradi- tional ridesharing apps reported by some female Strengthening herders’ and farmers’ livelihoods drivers (Karbalail 2018). Mobile phones are enabling rural farmers and herd- ers in Mongolia, whose livelihoods are crucially Facilitating “last-mile” goods delivery dependent on weather patterns, to access “timely and Technology is also increasing access to goods for accurate localized weather forecasts as a means to people living in remote areas. In China, where the reduce risk and improve planning of key livelihood share of e-commerce in total retail sales is the sec- activities” (Hijaba, Vernooy, and Jamba 2013). In ond highest in the world, significant disparities the pilot phase of this project, communities reported remain in access to e-commerce. So, the government improvements in pasture management and in social, has partnered with Alibaba to address the “last- health, and ecological indicators. mile” challenges of providing access to the Taobao Smartphones offer opportunities that go well e-commerce platform—increasingly used in richer beyond weather information, including access to coastal regions—to poorer inland areas (World agricultural extension services. For example, the Bank 2018c). In addition, the internet shopping site International Rice Research Institute (IRRI) of the JD.com is experimenting with deliveries by drone to Consultative Group on International Agricultural facilitate goods delivery to more isolated, difficult- Research (CGIAR), under its Climate-Smart to-reach locations, where delivery costs would other- Agriculture Advisory Services, has developed Rice wise be prohibitive (Bloomberg News 2018). Crop Manager (RCM), a web-based smartphone application currently deployed in many parts of the Supporting more effective service delivery Philippines and Vietnam.a The RCM enables agricul- tural extension staff to ensure sustainable productivity Digital technology is also enabling governments in gains for poor rice farmers through cost-effective crop the region to strengthen their “social information management. systems”—tools to collect information on beneficiaries, ­ Private companies are also experimenting in determine program eligibility, manage payments, and this area. Unilever, in collaboration with Vodafone, implement case management and grievance and redress has piloted a project with coconut sugar farmers in systems. These digitized social registries are helping to Indonesia “to enhance their livelihoods by helping strengthen countries’ abilities to identify those in need implement best practices, increase access to markets and to more reliably deliver support services. and reduce transactional costs” while reaping the Specifically, these social registries are helping to benefits of enhanced traceability of raw materials systematize information on program applicants, and greater security of future supply.b supporting the processes of intake, registration, and box continues next page F ostering I n c l usi v e G ro w t h    101 BOX 3.2  Digital technology: Its potential for promoting inclusive growth in developing East Asia (continued) determination of beneficiary eligibility, based on Sources: Bloomberg News 2018; Hijaba, Vernooy, and Jamba 2013; Karbalail 2018; World Bank 2018d, 2018g. applicants’ socioeconomic data. They are generally a. “Climate-Smart Agriculture Advisory Service,” Adaptation Projects, IRRI designed as multiuse platforms to connect people website: http://climatechange.irri.org/projects/adaptation/climate-smart​ to a range of public services, including social pro- -agriculture-advisory-service. b. “Improving Livelihoods for Smallholder Farmers through Mobile tection, health, pro bono legal services, and banking Technology,” Unilever.com website: https://www.unilever.com​ services. Digitized social registries are already opera- /­sustainable-living/enhancing-livelihoods/inclusive-business/connecting​ -with-smallholder-farmers-to-enhance-livelihoods/mapping-our-farmers​ tional in China (Dibao Registry), Indonesia (UDB), -programmes/improving-livelihoods-through-mobile-technology.html. and the Philippines (Listahanan). and socioemotional skills increased from East Asia move from middle-income to high- 19 percent to 23 percent in low- and middle- income status, this process will only continue. income countries, while the share of occupa- And as technology continues to change, rising tions intensive in nonroutine cognitive and demand for advanced skills will likely only socioemotional skills in high-income countries accelerate. grew from 34 percent to 41 percent (World The changing nature of the task and Bank 2016). As countries in developing skill content of jobs can be seen in data BOX 3.3  Skills for the new economy With economic development comes demand for a to as nonroutine interpersonal—or “soft”—skills, labor force with more-advanced skills. Not only does these encompass a broad range of malleable skills, employment shift toward occupations that require behaviors, attitudes, and personality traits that higher skills levels, but even within jobs, tasks become enable people to navigate workplace and social more skills intensive. Although basic cognitive skills situations. These include such attributes as moti- such as literacy and numeracy may be sufficient at vation, perseverance, organization, and effort, as lower income levels, several types of skills become well as one’s ability to communicate and to work increasingly important as countries move from middle effectively with others. income to high income: higher-order cognitive skills, •  Technical skills reflect learned knowledge in partic- socioemotional skills, and higher-order technical ular domains. They are often discipline specific and skills. These skill sets can be defined as follows: are reflected in information and capabilities that are directly applicable to particular employment and •  Cognitive skills include the use of logical, intui- occupational settings, such as a plumber’s ability to tive, and creative thinking as well as problem fix a water leak, a factory worker’s ability to operate solving using acquired knowledge. Basic— or or maintain a machine, or an office worker’s ability foundational—cognitive skills include literacy to use a computer. Increasingly, basic digital literacy and numerical ability, whereas nonroutine, may also be counted as a critical technical skill. higher-order cognitive skills refer to the ability to understand complex ideas, learn from experi- While the need for an increasingly skilled work- ence, adapt effectively in the workplace, analyze force has always accompanied development, rapid problems using logical processes, and overcome technological change is accelerating the rate at which obstacles using critical thought. workers will require higher-order skills to succeed in •  Socioemotional skills embody the various personal- the labor market. ity traits that are crucial to one’s performance and effectiveness in the workplace. Sometimes referred Sources: Mason, Kehayova, and Yang 2018; World Bank 2016. 102   A RESURGENT EAST ASIA FIGURE 3.5  Task-skill intensity of jobs in selected countries, by income level, 2010s a. Routine cognitivea b. Routine manuala 3.5 3.5 Task-skill intensity index Task-skill intensity index 3.0 3.0 2.5 2.5 2.0 2.0 lIcs lMIcs UMIcs hIcs lIcs lMIcs UMIcs hIcs GNI per capita, ppp (constant 2011 international US$) GNI per capita, ppp (constant 2011 international US$) c. Nonroutine analyticala d. Nonroutine interpersonala 3.5 3.5 Task-skill intensity index Task-skill intensity index 3.0 3.0 2.5 2.5 2.0 2.0 lIcs lMIcs UMIcs hIcs lIcs lMIcs UMIcs hIcs GNI per capita, ppp (constant 2011 international US$) GNI per capita, ppp (constant 2011 international US$) e. Nonroutine physicala 3.5 cambodia 2012 Task-skill intensity index Indonesia 2016 3.0 Japan 2016 Malaysia 2016 Mongolia 2016 2.5 Myanmar 2015 philippines 2016 Thailand 2016 2.0 Other economies lIcs lMIcs UMIcs hIcs GNI per capita, ppp (constant 2011 international US$) Source: Macdonald 2018. Note: Analysis includes 92 countries using International Labour Organization (ILO) data for the most recent available year; Macdonald (2018) finds similar patterns in analyzing 44 countries using data from Integrated Public Use Microdata Series (IPUMS) International, Minnesota Population Center, University of Minnesota. Country income classifications reflect countries’ status in the year the data were collected. GNI = gross national income; LICs = low-income countries; LMICs = lower-middle-income countries; UMICs = upper- middle-income countries; HICs = high-income countries; PPP = purchasing power parity. “Other economies” refers to non-East Asian economies. a. Tasks are categorized as “routine” or “nonroutine” based on how repetitive or structured they are, and as “manual-physical” or “cognitive” (including analytical and interpersonal) based on the type of work involved (see Autor, Levy, and Murnane 2003). More-routine tasks are more susceptible to automation. The task-skill intensity indexes are then created for the five task-skill categorizations using the Occupational Information Network (O*NET) dataset (https://www.onetcenter.org/database.html) and mapped to country-level occupational data. For technical details, see Macdonald (2018) and Mason, Kehayova, and Yang (2018). F ostering I n c l usi v e G ro w t h    103 from Indonesia, Malaysia, Mongolia, the tended to decline.9 These patterns reflect the Philippines, Thailand, and Vietnam show- combination of factors that have accompanied ing how the task and skill intensity of occu- development: movement of labor out of agri- pations has evolved from the early 2000s to culture and into manufacturing and services, 2015 (­figure 3.6). Patterns are largely consis- ­ anufacturing and shifts to higher-value-added m tent across countries. Tasks intensive in cogni- services, and adoption of new technologies. tive skills have tended to increase over time, In Indonesia and Thailand, jobs inten- whereas tasks intensive in manual tasks have sive in cognitive tasks—and, in particular, FIGURE 3.6  Changes in the task-skill intensity of jobs in several developing East Asian countries, early 2000s to 2015 a. Indonesia b. Malaysia 10 10 change in task-skill intensity change in task-skill intensity 5 5 indexes (percent) indexes (percent) 0 0 –5 –5 –10 –10 –15 –15 2000 2005 2010 2015 2000 2005 2010 2015 c. Mongolia d. philippines 10 10 change in task-skill intensity change in task-skill intensity 5 5 indexes (percent) indexes (percent) 0 0 –5 –5 –10 –10 –15 –15 2000 2005 2010 2015 2000 2005 2010 2015 e. Thailand f. vietnam 10 10 change in task-skill intensity change in task-skill intensity 5 5 indexes (percent) indexes (percent) 0 0 –5 –5 –10 –10 –15 –15 2000 2005 2010 2015 2000 2005 2010 2015 Nonroutine analytical Nonroutine interpersonal Nonroutine manual physical Routine cognitive Routine manual Source: Mason, Kehayova, and Yang 2018. Note: Figure presents percentage changes in the task-skill intensity indexes for jobs between the early 2000s and 2015. The exact time horizon for each country reflects data availability in that country. Tasks are categorized as “routine” or “nonroutine” based on how repetitive or structured they are, and as “manual-physical” or “cognitive” (including interpersonal or analytical) based on the type of work involved. Task-skill intensity indexes are then constructed mapping Occupational Information Network (O*NET) dataset task classifications (https://www.onetcenter.org/database.html) to occupational data from surveys in each country. Indexes for each country are normalized to zero for the first year of the data to show changes in the task-skill composition of jobs over time. For additional methodological details, see Mason, Kehayova, and Yang (2018). 104   A RESURGENT EAST ASIA nonroutine analytical and interpersonal From the early 2000s to 2015, in all tasks—are observed to increase only after six countries, task-skill intensities have 2006 and 2010, respectively. In Vietnam, changed most rapidly among relatively jobs intensive in routine manual tasks did not younger cohorts of workers. This can be decline over the period, likely reflecting the ­ igure 3.7, which shows the evolu- seen in f large share of the country’s labor force still in tion of task-skill combinations for three agriculture and its continued specialization in age cohorts: those born before 1958, those low-skill, labor-intensive manufacturing.10 born 1958–77, and those born after 1977. FIGURE 3.7  Change in task-skill intensity of jobs in several East Asian countries, by birth cohort, early 2000s to 2015 a. Indonesia a.1. Born before 1958 a.2. Born 1958–77 a.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 b. Malaysia b.1. Born before 1958 b.2. Born 1958–77 b.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 c. Mongolia c.1. Born before 1958 c.2. Born 1958–77 c.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 Nonroutine analytical Nonroutine interpersonal Nonroutine manual physical Routine cognitive Routine manual figure continues next page F ostering I n c l usi v e G ro w t h    105 FIGURE 3.7  Change in task-skill intensity of jobs in several East Asian countries, by birth cohort, early 2000s to 2015 (continued) d. Philippines d.1. Born before 1958 d.2. Born 1958–77 d.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 e. Thailand e.1. Born before 1958 e.2. Born 1958–77 e.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 f. Vietnam f.1. Born before 1958 f.2. Born 1958–77 f.3. Born after 1977 15 15 15 Change in task-skill intensity 10 10 10 5 5 5 indexes (percent) 0 0 0 –5 –5 –5 –10 –10 –10 –15 –15 –15 –20 –20 –20 –25 –25 –25 2000 2005 2010 2015 2000 2005 2010 2015 2000 2005 2010 2015 Nonroutine analytical Nonroutine interpersonal Nonroutine manual physical Routine cognitive Routine manual Source: Mason, Kehayova, and Yang 2018. Note: Figure presents percentage changes in the task-skill intensity indexes for jobs between the early 2000s and 2015. The exact time horizon for each country reflects data availability in that country. Tasks are categorized as “routine” or “nonroutine” based on how repetitive or structured they are, and as “manual-physical” or “cognitive” (including interpersonal or analytical) based on the type of work involved. Task-skill intensity indexes are then constructed mapping Occupational Information Network (O*NET) dataset task classifications (https://www.onetcenter.org/database.html) to occupational data from surveys in each country. Indexes for each country are normalized to zero for the first year of the data to show changes in the task-skill composition of jobs over time. For additional methodological details, see Mason, Kehayova, and Yang (2018). Tasks intensive in cognitive skills (especially figure 3.6, these patterns reflect the struc- nonroutine analytical and interpersonal tural changes in these economies along with skills) have increased and tasks intensive in rising educational attainment among subse- manual skills have declined most among the quent cohorts of w ­ orkers. Although simi- cohort of workers born after 1977. As in lar, albeit more modest, shifts in task-skill 106   A RESURGENT EAST ASIA intensities are seen among older cohorts with lower manual task content than men. in Mongolia, the Philippines, and Vietnam Moreover, in most countries, task-skill inten- between 2000 and 2015, little change is sities have evolved more rapidly away from observed among older cohorts in Indonesia, manual tasks and toward cognitive tasks for Malaysia, or Thailand. women than for men (figure 3.8). In fact, in Task-skill intensities also appear to differ Indonesia and Malaysia, virtually all of the systematically by gender across the region. shift toward cognitive tasks over the period is In general, women work in occupations observed among women. FIGURE 3.8  Change in task-skill intensity of jobs in several East Asian countries, by gender, early 2000s to 2015 a. Indonesia a.1. Female a.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 b. Malaysia b.1. Female b.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 c. Mongolia c.1. Female c.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 Nonroutine analytical Nonroutine interpersonal Nonroutine manual physical Routine cognitive Routine manual figure continues next page F ostering I n c l usi v e G ro w t h    107 FIGURE 3.8  Change in task-skill intensity of jobs in several East Asian countries, by gender, early 2000s to 2015 (continued) d. Philippines d.1. Female d.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 e. Thailand e.1. Female e.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 f. Vietnam f.1. Female f.2. Male 15 15 Change in task-skill intensity 10 10 indexes (percent) 5 5 0 0 –5 –5 –10 –10 –15 –15 –20 –20 2000 2005 2010 2015 2000 2005 2010 2015 Nonroutine analytical Nonroutine interpersonal Nonroutine manual physical Routine cognitive Routine manual Source: Mason, Kehayova, and Yang 2018. Note: Figure presents percentage changes in the task-skill intensity indexes for jobs between the early 2000s and 2015. The exact time horizon for each country reflects data availability in that country. Tasks are categorized as “routine” or “nonroutine” based on how repetitive or structured they are, and as “manual-physical” or “cognitive” (including interpersonal or analytical) based on the type of work involved. Task-skill intensity indexes are then constructed mapping Occupational Information Network (O*NET) dataset task classifications (https://www.onetcenter.org/database.html) to occupational data from surveys in each country. Indexes for each country are normalized to zero for the first year of the data to show changes in the task-skill composition of jobs over time. For additional methodological details, see Mason, Kehayova, and Yang (2018). 108   A RESURGENT EAST ASIA A recent study has also examined evolving cognitive tasks increasing and routine manual task and skill intensities in China from 2000 tasks decreasing most rapidly. In contrast to to 2015, using census and intercensal data other countries, however, nonroutine manual (Du and Park 2017). The observed patterns tasks continue to rise throughout the period. for China are somewhat different from those In analyzing patterns of occupational found for other countries in developing East change in China over the 2000–15 period, Du Asia (figure 3.9). Whereas tasks intensive in and Park (2017) find that structural changes— routine cognitive skills have increased over the and especially significant growth of retail jobs period, so have tasks intensive in nonroutine during the period—contributed significantly to manual tasks. And, in contrast to most other the observed increase in routine cognitive skills countries in the region, tasks intensive in non- and the reduced demand for more-abstract routine cognitive analytical and interpersonal skills. Structural changes in the economy have skills declined from 2000 to 2010 before not yet contributed to an overall increase in increasing from 2010 to 2015. Indeed, tasks demand for more nonroutine cognitive skills intensive in both nonroutine analytical and among Chinese workers, although the post- interpersonal skills registered a net decline 2010 trends suggest that is changing. over the full 15-year period. Moreover, tasks intensive in routine manual skills increased from 2000 to 2010 before falling after 2010. Rising returns to higher-order The observed reversals in trends for differ- skills ent task-skill combinations over the period School enrollment rates and educational suggest that the dynamics of the Chinese attainment have been rising rapidly through- labor market have shifted in recent years (Du out developing East Asia (World Bank 2018d). and Park 2017). In fact, looking solely at Nonetheless, the demand for higher-order the 2010–15 period, the patterns of evolving skills is rising among firms in the region, and task-skills intensities in China appear much this demand for more advanced skills is likely closer to those observed elsewhere in devel- to rise even more quickly in the future as new oping East Asia since 2000, with nonroutine technologies are adopted by firms seeking to remain competitive in a changing global and regional economic environment. FIGURE 3.9  Change in task-skill intensity of jobs in China, 2000–15 Employers across developing East Asia already report finding it difficult to find the 0.06 right skills to fit their needs, as several exam- 0.04 ples illustrate. In Vietnam, nearly half of change in task-skill intensity index (standard deviations the employers surveyed as part of the Skills from mean in 2000) 0.02 Toward Employment and Productivity (STEP) 0 survey indicated that graduates lacked the –0.02 skills needed in their workplace (Bodewig and others 2014). In the Philippines, about one- –0.04 third of surveyed employers reported being –0.06 unable to fill vacancies because of a lack of –0.08 applicants with requisite skills (Acosta and 2000 2005 2010 2015 others 2017). In China, up to three-­ quarters Nonroutine analytical Nonroutine interpersonal Nonroutine manual of entrepreneurs responding to a recent survey Routine cognitive Routine manual physical indicated that finding adequate technical and managerial skills was difficult (World Bank Source: Adapted from Du and Park 2017. and DRC, forthcoming). Note: Figure presents changes in the task-skill intensity indexes for jobs from 2000 to 2015. Tasks Skill premia, along with skill scarcity, are are categorized as “routine” or “nonroutine” based on how repetitive or structured they are, and as “manual-physical” or “cognitive” (including interpersonal or analytical) based on the type of work reflected in the rates of return to higher levels involved. Task-skill intensity indexes are constructed mapping task classifications to occupational data of education. Labor market returns to tertiary from Chinese census data (2000, 2010) and minicensus data (2005, 2015). Indexes for each country are normalized to zero for the year 2000 to show changes in the task-skill intensity of jobs over time. education in Indonesia are not only higher F ostering I n c l usi v e G ro w t h    109 than those at the primary or secondary level FIGURE 3.10  Rates of return to different task types in Vietnam, 2012 but are also increasing, suggesting a growing scarcity value associated with higher-order 25 skills (Fasih, Afkar, and Tomlinson 2018). 20 In urban China, there is now a 17 percent wage premium for high school graduates 15 and a 55 percent wage premium for college percent graduates (and above) relative to those with 10 middle-school or less education (Du and 5 Park 2017). In Vietnam, hourly earnings of ­ university-educated workers in the private sec- 0 tor are 60 percent higher than those who grad- –5 uated lower secondary school (Demombynes Analytical Interactive Manual Analytical Interactive Manual and Testaverde 2017). Although these (***) (*) (***) wage premia may reflect higher productiv- Nonroutine Routine ity among university-­ educated workers, a recent analysis of jobs in Vietnam argues that Source: Bodewig and others 2014. because employers are most concerned about Note: Estimates use Skills Toward Employment and Productivity (STEP) household survey data. Jobs are divided into categories based on the type of tasks that people reported doing in their jobs. A job skills gaps in those occupations that univer- is first divided into routine or nonroutine tasks, then further classified into those that are analytical sity workers hold (technical, professional, (requiring continuous thinking and problem solving); interactive (requiring interaction with others); and manual. Jobs can be classified into more than one category; for example, jobs can include both and managerial professions), higher returns to nonroutine analytical and interactive tasks. The return displayed is the wage premium associated tertiary education most likely reflect shortages with working in a job in which the specified task type is performed relative to working in a job that is nonanalytical, noninteractive, and nonmanual, such as an office clerk. The returns are estimated of those with (even limited) university educa- using a Mincerian wage regression that controls for education (years of schooling), sex, experience, tion (Cunningham and Pimhidzai 2018). and sector as well as the task content of the job. Significance level: * = 10 percent, ** = 5 percent, *** = 1 percent. Demand for analytical and interpersonal skills is growing, and there is evidence that such tasks command wage premia in the challenge of ensuring that their populations labor markets of developing East Asia, even have the skills needed to participate and con- controlling for education. In Vietnam, non- tribute successfully in increasingly sophisti- routine analytical and interpersonal tasks cated and complex economies. As technology command particularly high wage premia becomes an increasingly integral part of eco- (Macdonald 2018) (figure 3.10). Data on nomic enterprise, countries will also face the urban labor markets in China show similar challenge of ensuring that people have broad, patterns—positive and significant returns to affordable access to digital technologies, are nonroutine cognitive analytical tasks (Du and digitally “literate,” and have access to the Park 2017)—although wage premia associ- resources needed to make the most of these ated with routine cognitive tasks are negative tools. once education is independently accounted This section examines where developing for. New analysis conducted for this report East Asian countries stand with respect to on Indonesia, Mongolia, the Philippines, and endowing their populations with the skills, Vietnam suggests, moreover, that returns technology, and related resources to enable to nonroutine analytical tasks are generally them to participate effectively in future increasing over time (Macdonald 2018).11 growth. It also examines where countries stand in providing support to workers who have difficulty making the necessary skills How prepared is developing East and jobs transitions as economic circum- Asia to foster inclusive growth in stances change. The section concludes with a the future? brief discussion on the extent to which gov- As countries in developing East Asia move ernments in developing East Asia are using from middle-income to high-income sta- public spending and taxes to promote inclu- tus, governments in the region will face the sive growth. 110   A RESURGENT EAST ASIA Education, learning, and skills where students are demonstrating strong learning outcomes, countries face continu- Countries in developing East Asia have made ing challenges in endowing their populations significant progress in increasing access to edu- with 21st-century skills. cation for their populations in recent decades. Standardized learning assessments, As highlighted in chapter 1, high upward such as the Programme for International mobility in education has been one of the hall- Student Assessment (PISA) and Trends in marks of the region’s development experience. International Mathematics and Science The average adult in East Asia now has about Study (TIMSS), help policy makers under- eight years of schooling, twice what it was in stand how schooling outcomes translate 1975 (World Bank 2018d). into learning in a number of countries. Nonetheless, the region faces consider- In developing East Asia, test takers in four able challenges as countries seek to move major metropolitan areas in China (Beijing, from middle-income to high-income status. Shanghai, Jiangsu, and Guangdong) and A recent World Bank report on education in in Vietnam have done particularly well on East Asia, Growing Smarter, finds that while international assessments, suggesting that 40 percent of students in developing East Asia students in these locales are developing are achieving learning outcomes at or about the types of strong foundational skills— the levels of Organisation for Economic in reading, math, and science—required Co-operation and Development (OECD) to participate successfully in the changing countries, the other 60 percent still face sig- economic environments (figure 3.11). Test nificant challenges in building the needed scores among students in Beijing, Shanghai, foundational skills (World Bank 2018d). Even FIGURE 3.11  Average student performance on standardized learning assessments in several East Asian economies, 2000s B-S-J-G (China) Vietnam Macao SAR, China Japan Taiwan, China Thailand Malaysia Korea, Rep. Hong Kong SAR, Singapore China Shanghai, Indonesia China Philippines 106 points; 3.5 years of schooling 350 400 406 450 500 512 550 556 600 650 Composite constructed average of PISA and TIMSS performance over all available iterations Below-average performing systems Average score, below-average performing systems Non-East Asia and Above-average performing systems Average score, above-average performing systems Paci c countries Top performing systems Average score, top performing systems Source: World Bank 2018d. Note: Calculations based on Programme for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS) scores on nine assessments since 2000 (for PISA) and 2003 (for TIMSS). Figure shows composite constructed average performance score over available test iterations, with mean of 500 points and standard deviation of 100 points. The Philippines has only participated in TIMSS. B-S-J-G (China) = Beijing, Shanghai, Jiangsu, and Guangdong, China. F ostering I n c l usi v e G ro w t h    111 Jiangsu, and Guangdong, China, and in FIGURE 3.12  Share of students performing below minimum Vietnam are higher than would be expected proficiency on international reading assessments, developing East given their per capita income levels; indeed, Asian countries, 2010s scores in both Vietnam and the four Chinese Students below minimum pro ciency, percent urban centers surpass OECD averages 60 (World Bank 2018d).12 At the same time, learning outcomes are 50 noticeably lower than would be expected 40 in several developing East Asian coun- tries, including Indonesia, Malaysia, the 30 Philippines, and Thailand. Evidence from PISA and Early Grade Reading Assessments 20 (EGRAs) in the region also indicate that 10 the prevalence of poor reading profi- ciency is alarmingly high among students in 0 some countries (figure 3.12). In Indonesia, m ) ia nd sia ar s DR a J-G ne di ys m na ila ne oP bo pi ala S- n et Malaysia, and Thailand, over one-third and a do ya lip m B- La Th Vi M M Ca In i a( Ph in as much as 55 percent of students were below Ch PISA EGRA basic proficiency levels on the PISA reading assessments (World Bank 2018d). In 2012, Source: Adapted from World Bank 2018d. nearly one-third of Cambodian and Laotian Note: The Programme for International Student Assessment (PISA) percentages indicate the share of 15-year-old students scoring below level 2 (the minimum considered proficient) on the reading second grade students could not read even assessment. The Early Grade Reading Assessment (EGRA) percentages indicate the share of second- one word. grade students who are unable to read a word. PISA reading scores are from 2015, except for Malaysia (2012). National EGRA dates are Cambodia (2012), Lao PDR (2012), Myanmar (2015), and the Moreover, despite considerable progress in Philippines (2014). China (B-S-J-G) = Beijing, Shanghai, Jiangsu, and Guangdong, China. the region, inequalities in educational oppor- tunities persist across socioeconomic groups. FIGURE 3.13  School enrollment rates among 16- to 18-year-olds in Although countries in developing East Asia several developing East Asian countries, by welfare status, mid-2010s have made significant progress in closing gaps in access to education between the poor and 100 nonpoor—especially in basic education— School enrollment, ages 16–18 years important differences in access remain, par- by welfare status, percent ticularly at the secondary level and beyond 75 (figure 3.13). Inequalities in educational opportunities 50 are reflected not only in school access but also in learning outcomes. Students from poorer families consistently demonstrate lower pro- 25 ficiency in reading, math, and science than wealthier students (figure 3.14).13 So, even 0 when students from poorer backgrounds Indonesia Mongolia Myanmar philippines Thailand vietnam attain higher schooling, they commonly face 2016 2016a 2015 2015 2015a 2014 learning and skills deficits relative to their Extreme Moderate Economically Economically Middle wealthier counterparts. And those skills gaps poor poor vulnerable secure class will create challenges for those individuals Source: World Bank East Asia and Pacific Team for Statistical Development. to participate successfully in their countries’ Note: Extreme poor = per capita consumption below the international poverty line (US$1.90 per day at 2011 purchasing power parity [PPP]). Moderate poor = per capita consumption of US$1.90– labor markets as countries develop. This, in US$3.20 per day. Economically vulnerable = per capita consumption of US$3.20–US$5.50 per day. turn, represents a continuing challenge for the Economically secure = per capita consumption of US$5.50–US$15.00 per day. Middle class = per capita consumption exceeding US$15.00 per day. region’s governments to ensure that the ben- a. Sample sizes for the extreme poor in Mongolia and Thailand were too small to enable reliable efits of growth are shared. estimates of schooling outcomes. 112   A RESURGENT EAST ASIA FIGURE 3.14  Percentage of students achieving minimum proficiency The learning and skills development in all PISA subjects, several developing East Asian countries, by challenges that countries face in develop- wealth quintile, 2015 ing East Asia can be placed in perspective by comparing data on current learning out- 100 comes with those achieved by the Republic PISA proficiency in all subjects, percent of Korea during its rise from middle-income to high-income status. Korea is among the Students achieving minimum 80 countries in East Asia that has automated 60 most rapidly, as measured by its opera- tional stock of industrial robots and by its 40 high robot density (number of robots per 1,000 employees), as shown in chapter 1, figure 1.17. 20 Figure 3.15 plots the test score data shown earlier in figure 3.11 for developing 0 China Indonesia Malaysia Thailand Vietnam East Asian countries, but this time according (B-S-J-G) to their per capita income as well as relative to Korea’s 30-year trajectory. By plotting Poorest 20% Second poorest 20% Middle 20% comparable test scores for Korea at 10-year Second wealthiest 20% Wealthiest 20% intervals—from 1985 (when Korea was still Source: Bentaouet-Kattan and Macdonald 2018. a middle-income country) to 2015—the Notes: Programme for International Student Assessment (PISA) proficiency scores are intended to ­ figure shows that, even as a middle-income convey what 15-year-old students can do in a particular subject. Minimum proficiency is defined as level 2 or higher in each subject (reading, math, and science). Students achieving minimum country, Korea achieved relatively high proficiency in literacy can at least infer information from a text and identify the main ideas of a learning outcomes. And its measured learn- text; in science, they can use everyday scientific knowledge to draw a conclusion from data; and in mathematics, they can apply basic algorithms and formulas using whole numbers, among other ing outcomes have continued to improve abilities. Wealth quintiles refer only to the student population and not the total population. China as the country has grown richer. The skills (B-S-J-G) = Beijing, Shanghai, Jiangsu, and Guangdong, China. All PISA data are from 2015 except Malaysia data, which is from 2012. associated with those learning outcomes pro- vided a critical foundation in Korea, both for FIGURE 3.15  Average student performance on standardized endowing the population with higher-order learning assessments in several developing East Asia countries in skills and for achieving inclusive growth as the 2000s, by per capita GDP, relative to outcomes in the Republic of the country transitioned to high-income. Korea, 1985–2015 Countries of developing East Asia thus face a dual challenge in building the skills base for 700 Korea, Rep. Korea, Rep. Korea, Rep. inclusive growth: (a) continuing to develop 2005 2015 strong foundational skills among their popu- 1995 600 Korea, Rep. lations, and (b) increasingly providing their harmonized test scores 1985 populations the opportunity to attain higher- 500 china B-S-J-G vietnam order skills. Thailand Malaysia 400 Indonesia philippines Digital technology access 300 As with learning and skills development, making digital technology broadly available 200 represents an increasingly important chal- 0 5,000 10,000 15,000 20,000 25,000 30,000 lenge to ensuring that the benefits of growth per capita GDp, constant 2010 U.S. dollars are shared in developing East Asia as these Source: World Bank staff calculations, based on World Bank 2018d, plus World Bank harmonized countries seek to move from middle income education test score data. to high income. Despite rapid advances, Note: Except for Korea, the figure shows the composite constructed average performance scores of students on nine assessments since 2000 (for Programme for International Student Assessment broad and inclusive digital technology access [PISA]) and 2003 for the Trends in International Mathematics and Science Study (TIMSS). The Korean is still very much a work in progress across scores reflect harmonized (that is, cross-country comparable) learning outcome data for the specific years indicated: 1985, 1995, 2005, 2015. The Philippines has only participated in TIMSS. China the region. Whereas by 2016, there were B-S-J-G = Beijing, Shanghai, Jiangsu, and Guangdong, China. 95 cell phone subscriptions per 100 people in F ostering I n c l usi v e G ro w t h    113 the region, only about half of the population FIGURE 3.16  Household cell phone ownership in several developing had access to the internet—and with consid- East Asian countries, by welfare status, mid-2010s erable variation across countries (­chapter 1, 100 figure 1.8). Moreover, there remain signifi- cant inequalities in access and use of digital technologies across socioeconomic groups 75 households, percent within countries. In countries where cell phone penetration is already high, inequalities in access across 50 socioeconomic groups are relatively small, as would be expected (figure 3.16). Nonetheless, 25 household survey data suggest that inequali- ties in cell phone access are still relatively large in countries with lower average penetra- 0 Indonesia Mongolia Myanmar philippines Thailand vietnam tion levels, such as Myanmar and Vietnam. 2016 2016a 2015 2015 2015a 2014 Internet penetration tends to be much lower Extreme Moderate Economically Economically Middle than cell phone access across developing East poor poor vulnerable secure class Asia. And wherever overall internet access Source: World Bank East Asia and Pacific Team for Statistical Development. is lower, inequalities across socioeconomic Note: Figure shows the share of households owning at least one cell phone. Extreme poor = per capita groups are also larger. Data from Indonesia, consumption below the international poverty line (US$1.90 per day at 2011 purchasing power parity [PPP]). Moderate poor = per capita consumption of US$1.90–US$3.20 per day. Economically vulnerable = per capita Mongolia, Myanmar, the Philippines, consumption of US$3.20–US$5.50 per day. Economically secure = per capita consumption of US$5.50– Thailand, and Vietnam show consistently low US$15.00 per day. Middle class = per capita consumption exceeding US$15.00 per day. Welfare groups are classified based on per capita income for Philippines and per capita expenditure for other countries. internet use among poor households—both a. Sample sizes for the extreme poor in Mongolia and Thailand are too small to enable reliable in absolute terms and relative to middle- estimates of schooling outcomes. class or even economically secure households (figure 3.17).14 FIGURE 3.17  Household internet use in several developing East Promoting greater equality of access to and Asian countries, by welfare status, mid-2010s use of affordable digital technologies has sig- 100 nificant potential in supporting and enabling inclusive growth. As discussed above, digi- tal technologies can play a critical role in 75 reducing the costs of accessing markets and households, percent information in ways that enable poor and economically vulnerable people to improve 50 their livelihoods. It can also contribute to better access to goods and services i­ncluding, importantly, enhanced financial inclusion 25 (box 3.4). Nonetheless, poor and vulnerable people still face a number of barriers to access and 0 effective use of digital technologies. A recent Indonesia Mongolia Myanmar philippines Thailand vietnam 2016a 2016a 2015b 2015b 2015b 2016b report on mobile-phone ownership and use finds that cost, knowledge of how to use the Extreme Moderate Economically Economically Middle technology, and in some instances, under- poor poor vulnerable secure class standing of the relevance of the technology, Source: World Bank East Asia and Pacific Team for Statistical Development. were the main barriers identified by both Note: Welfare groups are classified based on per capita income for Philippines and per capita expenditure for other countries (all in 2011 purchasing parity power [PPP] terms) as follows: Extreme women and men in developing East Asia poor = 1. The elements of public action that can help 8. For a more detailed discussion of recent address these challenges will be discussed in analyses of automation and jobs in developing chapter 5. East Asia, see Mason, Kehayova, and Yang (2018). 9. Similar patterns are also seen for Cambodia Notes for the 2011–15 period. Those findings are 1. The “extreme poor” are defined in this volume not presented in the figures, however, given as those whose per capita consumption the short time periods for which the analysis is below the international poverty line was possible. (US$1.90 per day at 2011 PPP), while the 10. Consistent with the global evidence, the “moderate poor” are those whose per capita developing East Asian countries with lower consumption is between US$1.90 per day and per capita income levels (for example, US$3.20 per day at 2011 PPP (also referred Cambodia, Lao PDR, and Vietnam) to as the “lower middle-income poverty demonstrate lower intensities of nonroutine line”). The economically vulnerable have per and analytical tasks measured in absolute capita consumption of between US$3.20 and terms (Macdonald 2018; Mason, Kehayova, US$5.50 per day; the economically secure, and Yang 2018). US$5.50 to US$15.00 per day; and the middle 11. Returns to nonroutine analytical tasks were class, exceeding US$15.00 per day. found to be increasing in Mongolia, the 2. This study refers to several waves of Philippines, and Vietnam. No evidence of development in East Asia as follows: the rising returns was found in Indonesia to date, “first wave” refers to the so-called newly however. industrializing economies: Hong Kong SAR, 12. Test scores in Vietnam and in Beijing, China; Korea; Singapore; and Taiwan, China. Shanghai, Jiangsu, and Guangdong, China, A second wave of countries (China, Indonesia, are higher than OECD averages at equivalent Malaysia, and Thailand) followed in the points across the respective countries’ welfare 1980s with sustained growth through the distributions (World Bank 2018d). F ostering I n c l usi v e G ro w t h    121 13. Although comparable proficiency data are a dualism in the labor market and leave not available for China outside Beijing, most workers—those outside the formal Shanghai, Jiangsu, and Guangdong, a study sector—unprotected in the face of job loss. carried out jointly by China’s Development See chapter 5 for a discussion of policies to Research Center and the World Bank support workers in making needed economic discusses continuing learning challenges faced transitions in rapidly changing economic by students in China’s rural areas (World circumstances. Bank and DRC, forthcoming). A forthcoming 18. The challenges of raising fiscal revenues to book on human capital development in China finance the transition to high-income status highlights similar challenges (Rozelle and are discussed in chapter 4. Johnson, forthcoming). 14. Reported internet use is systematically lower in surveys that focus on “internet References subscriptions” as opposed to “internet use” Acemoglu, D., and P. 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DC: World Bank; Beijing: DRC. http://www.xinhuanet.com/2017​ - 10/27​ Xi, J. 2017. “Secure a Decisive Victory in Building a /c_1121867529.htm and http://www​.xinhuanet​ Moderately Prosperous Society in All Respects .com/english/download/Xi_Jinping’s_report​ and Strive for the Great Success of Socialism _at_19th_CPC_National_Congress.pdf. Enhancing State Effectiveness 4 Introduction along with regular consultation between A key pillar of East Asia’s traditional the government and business . “growth with equity” model has been As countries in developing East Asia seek sound economic governance . Three dis- to transition from middle- to high-income tinct, but related, elements characterized status, they will face both old and new gov- this pillar . First, there was a sustained com- ernance challenges as well as increasingly mitment to maintaining macroeconomic rigorous demands on institutions of the stability in the form of stable and usually state . The earlier need for sound economic low inflation and long-term fiscal disci- governance, as traditionally defined, still pline . This emphasis stemmed from the rec- exists . But the institutional and governance ognition that macroeconomic stability was challenges facing developing East Asia will be essential for promoting outward- oriented broader and deeper than they were at earlier growth, including attracting significant stages of development . As the region’s econo- foreign direct investment . Second, East mies become more sophisticated and more Asia’s policy makers sought to rely primar- complex—and as the global economic and ily on markets in allocating resources . As technological environment changes—there discussed in chapter 1, this did not mean will be a higher technical bar for sound eco- rejecting all forms of intervention . It did nomic policy making . In addition, as policy mean, however, that so-called industrial makers seek to build increasingly affluent, policies were designed to be consistent with middle-class societies, they will face increased market signals and incentives . Moreover, demand for more and better-quality services . policies were monitored and adapted or As importantly, efforts to promote greater eliminated if they became too costly . Third, state effectiveness will occur within a chang- good economic governance relied on the ing political economy that, itself, can make the development of at least small cadres of well- identification and implementation of appro- trained, competent civil servants who were priate solutions more challenging than in the largely shielded from political interference, past (Malesky 2018; World Bank 2017b) . 126   A RESURGENT EAST ASIA Three political economy challenges, in on several potential entry points for addressing particular, characterize the transition from the region’s political economy and governance middle- to upper-income status: challenges—citizen voice and participation, government transparency, accountability, and •  The emergence of new interest groups and bureaucratic quality—and then examines the the resulting political economy raise new challenge associated with financing the transi- risks of “capture” in the policy-making tion to high-income status. process. •  The new political economy makes it more difficult to build broad-based coalitions The state of state effectiveness in for sustainable policy reform. developing East Asia •  As markets expand and production net- How does developing East Asia stack up con- works become more complex, traditional cerning key state institutions? The Worldwide deals-based relationships are no longer an Governance Indicators (WGI) provides data adequate substitute for rules-based con- on several measures that are relevant to state tract enforcement. effectiveness, including on government effec- Moreover, with rising affluence comes tiveness, control of corruption, rule of law, rising societal expectations about the range and voice and accountability.1 and quality of services that the state deliv- As noted in chapter 1, developing East ers, including from a larger and more vocal Asian countries tend to score relatively well middle class. on government effectiveness. Seven of the In short, a country’s efforts to move from 10 countries—China, Indonesia, Malaysia, middle income to high income effectively Mongolia, the Philippines, Thailand, and raise the bar for what is required from its Vietnam—ranked above the 50th percentile state institutions. Moreover, failure to address on WGI’s government effectiveness indicator these governance challenges can jeopardize in 2016. All but one country (Malaysia) rose the realization of measures needed to sustain in rank between 2000 and 2016, and three productivity growth and to ensure that of the countries that improved their percen- growth is inclusive. Enhancing state effec- tile rankings registered double-digit increases: tiveness is thus an integral part of making a China, the Lao People’s Democratic Republic, successful transition from middle-income to and Vietnam. The WGI reports standard upper-income status. errors of its indicator estimates, some of This chapter examines the key institutional which are quite large. As a result, only the and governance challenges associated with increases achieved by China and Vietnam can developing East Asian countries’ efforts to be considered statistically significant.2 transition to the high-income ranks. It begins The performance of much of develop- by reviewing the current state of state effec- ing East Asia on the other three governance tiveness in developing East Asia, building on indicators—control of corruption, the rule of the discussion of governance in chapter 1. law, and voice and accountability—is observ- It then examines the political economy and ably weaker. Regarding control of corruption, governance challenges associated with the only one country (Malaysia) scored above the transition from middle income to high income. 50th percentile ranking, although two coun- The chapter also discusses the rising societal tries (Indonesia and Myanmar) registered expectations that accompany rising incomes large and statistically significant improvements and the emergence of increasingly middle- in their rankings between 2000 and 2016. class societies. Building on the insights from In contrast, 7 of the 10 countries declined in that analysis, the chapter turns to several chal- rank during the same period, although none of lenges and opportunities faced by developing those changes was statistically significant. East Asian countries as they seek to enhance Developing East Asian countries also con- state effectiveness. The discussion focuses first tinue to face challenges concerning voice and E n h an c ing S tate E ffe c ti v eness   127 accountability, as discussed in chapter 1. Only Thailand experienced a particularly large and three countries achieved percentile ranks at statistically significant decline, likely linked to or above 50 (Mongolia, the Philippines, and major political changes (Malesky 2018). Indonesia), the latter two only barely. One To help put developing East Asia’s insti- country (Myanmar) registered a large and tutional and governance challenges in a statistically significant increase between 2000 broader, global perspective, figure 4.1 and 2016, although starting from a very low plots countries’ ranks on the four indica- base. As with control of corruption, seven tors against gross domestic product (GDP) countries registered declines in their voice per capita. Country performance on all and accountability rankings over the period. four measures tends to rise with per capita FIGURE 4.1  Governance rankings of developing East Asian countries in a global context, by GDP per capita, 2016 a. Government e ectiveness b. Rule of law 100 100 80 80 China Malaysia WGI rank, percentile WGI rank, percentile 60 Vietnam 60 Vietnam Malaysia Thailand Indonesia Mongolia Thailand Philippines Mongolia China 40 40 Indonesia Lao PDR Philippines Cambodia Lao PDR 20 20 Myanmar Myanmar Cambodia 0 0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Log of GDP per capita, PPP (current 2011 international $) Log of GDP per capita, PPP (current 2011 international $) c. Control of corruption d. Voice and accountability 100 100 80 80 WGI rank, percentile WGI rank, percentile 60 60 Mongolia Malaysia China Philippines Philippines Vietnam Indonesia Indonesia 40 Thailand 40 Mongolia Malaysia Myanmar Myanmar 20 20 Thailand Lao PDR Cambodia Cambodia Vietnam Lao PDR China 0 0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Log of GDP per capita, PPP (current 2011 international $) Log of GDP per capita, PPP (current 2011 international $) Source: Worldwide Governance Indicators (WGI) database (http://www.govindicators.org); World Bank calculations. Note: “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. The diagonal regression lines indicate where countries would be expected to be ranked on each indicator, given their per capita income levels. GDP = gross domestic product; PPP = purchasing power parity. 128   A RESURGENT EAST ASIA income, although to different degrees for dif- Policy capture ferent measures. In the case of government Growth and the associated economic policies effectiveness, most developing East Asian that helped developing East Asian countries countries are above or near the regression move from low-income to middle-income line, suggesting that most are roughly where status created winners and losers in the pro- they would be expected to be, given their cess. And that process, in turn, created a set per capita incomes. This is not true for the of interests—whether business or political other indicators, however, where most of the elites—who have an increasingly strong inter- developing East Asian countries fall below est in the status quo. As discussed in chapters 2 the regression line. The largest gap between and 3, further reforms will be required to sus- expectation and realization is found on the tain future productivity growth and to ensure voice and accountability measures. that the benefits of growth are shared. It is important to note that these figures Nonetheless, those reforms may not be in the are descriptive, not causal. Nonetheless, they interest of those who benefited most from ear- are indicative of state effectiveness in devel- lier stages of development. Indeed, because oping East Asia. And they suggest that as each subsequent reform effort creates win- ­ countries aspire to transition from middle- ners and losers, there is a risk that those who income to high-income levels, strengthening benefited from early periods of growth will the institutions of the state—enhancing state use their newfound strength to block future effectiveness—will be among the key chal- ­ reform (Birdsall and Nellis 2003; Hellman lenges countries in the region will face. 1998; Malesky 2018; World Bank 2017b). The process of capture can take place Political economy challenges in legally through lobbying and advocacy cam- middle-income countries paigns (Bardhan and Mookherjee 2000; In addition to the institutional and gover- Frye 2002), but it can also occur through nance challenges all countries face as they corruption and bribes to enact particular poli- develop, countries that seek to transition from cies while blocking others (Shih 2007). This middle-income to high-income levels often capture of domestic policy makers can hurt face a new set of political economy challenges growth prospects, as leaders do not take the that were less salient at lower levels of devel- difficult steps to achieve the necessary next- opment. These are now relevant for the coun- generation economic reforms. Thus, while tries of developing East Asia, all of which are benefiting those well-connected actors, cap- now middle income. tured economies can experience weaker As countries move from low-income to economic growth and growing inequality middle-income status, groups that bene- (Hellman, Jones, and Kaufmann 2003). fited most from earlier development successes The “winners” may take different forms may find they stand to lose from further eco- in different countries, depending on the struc- nomic reforms. As economies modernize and ture of the economy and the distributional become more complex, a divergent set of effects of early economic growth. In Lao interest groups often emerge that make build- PDR and Vietnam, for example, state-owned ing coalitions and enacting next-generation enterprises (SOEs) that benefited from early reforms more difficult. Moreover, some infor- efforts at international integration have been mal institutions that were sufficient at lower effective in holding back efforts to promote levels of development are no longer sufficient competition from the private sector (Baccini, to propel countries from middle income to Impullitti, and Malesky 2017; Li, Cui, and high income. This section examines three Lu 2018; Pincus 2015; Pincus, Anh, and political economy challenges associated with Le Thuy 2008). Consequently, despite the middle-income status that are key to navigat- rapid growth in the number of private firms ing the transition to high-income status. in both countries, the sector’s contributions E n h an c ing S tate E ffe c ti v eness   129 to output and exports have hardly budged still distorts competition and impedes produc- (box 4.1). Persistent dominance of SOEs in tivity by discouraging new entrants and deter- the Vietnamese economy has distorted scarce ring the more-productive firms from growing resource allocation and hindered productiv- (World Bank and DRC, forthcoming). ity growth (World Bank and MPI 2016). In In Cambodia, Indonesia, Malaysia, and China, although the productivity of SOEs has Myanmar, the beneficiaries have often been improved in recent years, their dominance business conglomerates with political or family BOX 4.1  State-owned enterprise capture in Vietnam Vietnam provides an example in which winners from Vu-Thanh 2017). In addition to their scale, these SEGs early reform periods captured the policy-making pro- still enjoy significant advantages over domestic and cess and tilted the playing field in their favor. Since foreign competitors, including easier access to land, the reform started in 1986, the Vietnam Communist credit, and public procurement contracts. Party (VCP) has removed many aspects of its for- Figure B.4.1.1 highlights Vietnam’s concentra- merly centrally planned economy, such as collectiv- tion of investment in large SOEs. Mean investment ization, price controls, and foreign trade monopoly. per enterprise in the state sector has expanded dra- For historical and ideological reasons, however, the matically since 2007. At the same time, the average VCP has never given up on state-owned enterprises investment size of domestic private enterprises has (SOEs). In fact, the party repeatedly reaffirmed its continued to drop. In recent years, the mismanage- commitment to the state sector, presumably as an ment of SEGs has prompted calls for their dissolu- instrument to maintain economic independence and tion. Nonetheless, preferential treatment for SOEs employment levels (Fforde 2007; Pincus 2015). remains a significant concern for domestic and Early during the reform period, the VCP let go foreign-­invested businesses, as SOEs use their politi- of trade and price controls but did not dismantle cal influence to ward off deepening of reform. In the SOEs, in part to minimize resistance to reforms 2016, despite being significantly outnumbered by from within the state sector (Kokko and Sjoholm 400,000 domestic private firms, Vietnam’s few thou- 2000; Leung and Riedel 2001). In fact, state-owned sand SOEs accounted for about one-third of gross firms grew thanks to advantages, such as monop- domestic product (GDP) and 10 percent of the labor sony prices and their favored position with respect force (Malesky 2017). to exports. In their responses to the country’s 2016 Provincial Between 2001 and 2006, the foreign-invested and Competitiveness Index survey, about 68 percent of domestic private sectors became more competitive foreign-invested firms reported having concerns with and threatened the commanding position of SOEs in the SOE bias in the Vietnamese economy. More than the economy (Hill 2000). This trend ended in 2006 38 percent of domestic private enterprises share those when Vietnam joined the World Trade Organization concerns (Malesky 2017). (WTO). The WTO accession did not reduce the role of Capture by Vietnamese SOEs takes a significant SOEs but, to the contrary, served as a catalyst for their economic toll. SOEs register low returns to assets and further entrenchment. Concerned that trade openness low labor productivity (World Bank and MPI 2016). would leave the domestic market swamped by foreign Their power and economic privileges divert resources competition, the Vietnamese leadership consolidated away from potentially more productive enterprises. selected SOEs into large state-owned economic groups This, in turn, creates a drag on the economy and puts (SEGs) in the image of chaebols in the Republic of at risk reforms that could help propel Vietnam from South Koreaa (Baccini, Impullitti, and Malesky 2017; a middle-income to an upper-income country. box continues next page 130 A RESURGENT EAST ASIA BOX 4.1 State-owned enterprise capture in Vietnam (continued) FIGURE B4.1.1 Evolution of investment in the Vietnamese economy, mid-1990s to mid-2010s a. Share of total investment, by enterprise type, 1993–2016b 70 60 50 Share of total investment 40 30 20 10 0 11 93 95 97 99 01 03 05 07 09 13 15 17 20 19 19 19 19 20 20 20 20 20 20 20 20 year State-owned enterprises Domestic private enterprises Foreign enterprises b. Average investment per domestic private enterprise, 1995–2016 3.0 vietnamese dong, billions 2.0 1.0 0 19 5 96 1997 19 8 2099 20 0 20 1 20 2 03 20 4 05 20 6 2007 20 8 20 9 20 0 2011 20 2 20 3 20 4 2015 16 1 9 9 0 0 0 0 0 0 0 1 1 1 19 19 20 20 year Source: Malesky, Ngoc, and Thach 2018; World Bank and MPI 2016. a. In Korea, chaebols are large business conglomerates, usually run or controlled by a single owner or family, comprising many diversified affiliates. b. Bubble size indicates mean investment per enterprise. connections to current or previous regimes have benefited from past growth . Mongolia, (Blunt, Turner, and Lindroth 2012; Fisman with its vast energy resources and commod- 2001; Kubo and Lwin 2010; Morgenbesser ity exports, has seen policies tilted toward 2017; Strangio 2014) . “Winners” may also these sectors (Blunt 2009; Pomfret 2011; appear in particular industries or sectors that World Bank, forthcoming[b]) . E n h an c ing S tate E ffe c ti v eness   131 Firms that gain privileges in high-capture new and better opportunities for private economies have been found to receive private investors and firms as well as for the low- benefits in the form of greater protection and skilled workers who benefited from bet- support, which translates into extraordinary ter, higher-paying jobs. As countries reach economic performance (Faccio 2006; Fan, middle income and new types of reforms Wong, and Zhang 2007). In Malaysia during are required, the interests of key economic the Asian Financial Crisis, for example, the actors may begin to diverge, however. The market value of politically connected firms interests of investors and firms may dif- increased relative to that of unconnected fer from those of workers, as workers seek firms after international capital controls were higher wages, greater employment protec- imposed, suggesting that these firms had tions, and better working conditions. The easier access to domestic credit (Johnson and interests of firms in different economic sec- Mitton 2003). In China, private firms that tors may also diverge, depending on the thrive often do so as a result of their political expected effects of different reform paths. connections (Li and others 2008; Shih 2007; Increasingly divergent interests arise, as Tsai 2007). well, between domestic and foreign inves- tors (Doner and Schneider 2016), between urban and rural residents, and between a Difficulties in building broad-based growing middle class and poor and vulner- reform coalitions able groups (Desai and Kharas 2017). A consistent theme from the literature on eco- Such divergences can be seen in developing nomic transitions is that countries at low lev- East Asia. In Myanmar, for example, power- els of development may rely on relatively less ful economic interests in the capital-intensive institutionally intensive strategies for growth natural resource sector compete with those and development. Moving from middle of foreign investors in the growing, labor- income to high income requires a differ- intensive garment manufacturing sector that ent set of strategies targeted toward policies has emerged after the far-reaching economic and investments that can foster an economy reforms earlier in the decade (Taguchi and capable of pushing the technological fron- Lar 2015). Representatives of these two sec- tier rather than mimicking existing tech- tors differ on the appropriate regulatory nology (Gill and Kharas 2015; Woo 2009; structure and human capital investments that Yusuf 2017). are needed for industrial upgrading, however. Undertaking next-generation reforms relies And their views are increasingly at odds with on political coalitions. Namely, citizens and the domestic business sector emerging in elites must form an upgrading coalition that Myanmar’s urban centers (Malesky 2018). is prepared to make advances on the busi- These differences have made it difficult for ness climate, competitiveness, or trade and to the national legislature to move forward reorient spending of scarce public resources with many critical regulatory reforms that to develop a more skilled workforce or to are required for Myanmar’s growth to be promote innovation. The problem, however, sustained. These include changes to tax and is that at precisely the point when societies land legislation as well as to business licensing need to form new coalitions, the economic regulations, many of which date back to the forces associated with the transition makes colonial period (Crouch 2017; Than 2015; coalition building more difficult (Doner and Turnell 2014). Schneider 2016). The interests of different classes of work- At earlier stages of development, the ers are also diverging, and some are being interests of diverse sets of actors in the econ- reinforced by policy. As countries in devel- omy may align. The East Asian growth with oping East Asia have developed, the dis- equity model provides a case in point. Its tinction between formal and informal focus on outward-oriented growth provided workers has become increasingly important. 132   A RESURGENT EAST ASIA Although governments in the region are rela- Deals-based relationships versus tive newcomers to labor market regulation rules-based contracts compared with other middle-income regions, The persistence of deals-based relationships several countries now have relatively high between government and business pose levels of employment protection for formal another political economy challenge. Deals- sector workers as well as high minimum based interactions between firms and the state wages (World Bank 2014). These regulations are common in low-income environments. serve to increase the potential conflicts of And in the face of weak institutional capacity, interest between formal and informal workers when markets and production networks are as well as other categories of workers. High relatively small, such relationships may actu- levels of informality are positively associ- ally enable economic activity. But, such rela- ated with high levels of employment protec- tionships can become problematic as countries tion in the region (World Bank 2014). And develop. As markets expand and production in Association of Southeast Asian Nations networks become more complex, traditional (ASEAN) countries, minimum wages have “deals-based relationships” are no longer an been found to disproportionately reduce adequate substitute for “rules-based contract employment opportunities among low-skilled enforcement” (World Bank 2017b). Linked people, women, youth, and recent entrants both to capture and corruption, the failure to to the labor market. As with other cleavages, transition from relationship-based to rules- this fracturing of interests among workers is based systems can impede competition and complicating policy makers’ abilities to build productivity as well as undermine the inclu- coalitions for sustainable reform. sivity of growth. The idea of divergent reform coalitions is Analysis of middle-income countries related to capture in the sense that early win- that have successfully made the transition ners have greater political power. Where the to high-income status suggests that success- arguments differ is that lobbying and corrup- ful countries have been better at combat- enhancing tion are not necessary for efficiency-­ ing corruption; building formal, rules-based reform efforts to stall. In this scenario, coun- institutions; and strengthening government tries may not be able to enact reforms or accountability through greater transpar- will continue to pursue suboptimal policies ency and civil society voice (figure 4.2). because the key political actors cannot agree Those upper-middle-income countries that on a comprehensive reform program. have successfully transitioned to high-income Institutions can play a role in avoiding status have curbed their corruption levels these problems. Doner and Schneider (2016) significantly before becoming high-income argue, for example, that in Malaysia, the economies; those that have not made that broad socioeconomic and ethnic hetero- transition have not seen reductions in cor- geneity of the Barisan Nasional coalition, ruption (figure 4.2, panel a). Combating cor- which held power for an extended period ruption and creating a level playing field in until the recent elections, enabled the coun- which firms can compete and grow requires try to forge governing coalitions that sup- accountable institutions. ported some educational and technological At the upper-middle-income level, legislative, upgrading. By contrast, when Thailand judicial, media, and civil society checks on the reached middle-income status, its govern- government also become increasingly impor- ment system was fragmented with poorly tant. Indeed, countries that have successfully institutionalized parties and limited oppor- transitioned to high-income status tend to put tunities for coalition building. As a result, stronger institutional checks in place when they public goods and state investments were are at upper-middle-income compared with undersupplied (Hicken 2006). those that do not make the transition. This is E n h an c ing S tate E ffe c ti v eness   133 FIGURE 4.2  Progress in controlling public sector corruption and developing accountability institutions, by country income and transition status, 1950–2011 a. control of public sector corruption b. Judicial contraints on the executive 0.10 0.20 Average change in index score Average change in index score 0.05 0.15 0 0.10 –0.05 0.05 –0.10 0 –0.15 –0.05 low-income lower-middle Upper-middle low-income lower-middle Upper-middle income income income income c. Government censorship of the media d. cSO entry and exit 1.5 2.0 Average change in index score Average change in index score 1.5 1.0 1.0 0.5 0.5 0 0 low-income lower-middle Upper-middle low-income lower-middle Upper-middle income income income income Nontransition countries Transition countries Source: Adapted from World Bank 2017b. Note: The bars represent the average change in the relevant category for all “nontransition countries” (dark blue) and “transition countries” (medium blue) during the time a country is at the income level specified. Transition countries are those that reach the subsequent income levels during the sample period (1950–2011). Nontransition countries are those that remain in the same income category or move to a lower income category during the period. All four panels use the same methodology. Income classification cutoffs adjusted over the period to ensure consistency of the analysis. Panel a. Control of public corruption is an index ranging from 0 to 1, with 1 representing the greatest control. Panel b. Judicial constraints on the executive is an index ranging from 0 to 1, with 1 representing the greatest constraints. Panel c. Government censorship of media is an ordinal variable ranging from 0 to 4, with 4 representing the most accountability—that is, the least media censorship. Panel d. Civil society organization (CSO) entry and exit are ordinal variables ranging from 0 to 4, with 4 representing the most accountability—that is, the most CSO entry and exit. seen in the larger improvements in the judicial, European Union accession and membership media, and civil society organization (CSO) has made institutional development credible” indicators among transitioning countries rela- (World Bank 2017b, 161). This suggests a tive to those that failed to make the transition useful role for external commitment mecha- (figure 4.2, panels b, c, and d).3 nisms—such as deeper trade agreements of Note that nearly half of the countries that the sort described in chapter 2—that may transitioned recently from middle-income to help create incentives for and build formal high-income status are in Europe, “where structures to strengthen rules-based decision the external commitment provided by the making and institutions. 134   A RESURGENT EAST ASIA Rising societal expectations middle-class households in developing East Asia still lack internet connectivity (as shown The transition from middle-income to upper- in chapter 3, figure 3.17), affecting their ability income status will bring with it more people to participate in and benefit from economies who are economically secure and, increas- that will be increasingly technology driven. ingly, middle class. With a growing middle Access to high-quality services is impor- class comes rising societal expectations about tant for both future productivity and inclu- the availability and quality of public service sive growth. But it also has an important delivery. Indeed, as countries develop, emer- political economy dimension as the countries gent socioeconomic classes often create coali- of developing East Asia seek to transition tions to demand better governance. Large and to higher-income, increasingly middle-class growing middle classes have historically played societies. More specifically, ensuring access an important role in pressuring governments to to high-quality public services across the wel- deliver better public services, such as education fare distribution may be an important part and health. Such forces were seen, for exam- of a social contract in which economically ple, in the shift of the U.S. political system in secure and middle-class households—with the 19th century—away from patronage and greater economic and political clout—can toward meritocracy (Fukuyama 2014). As they either opt in or opt out of public service use. seek to move from the middle-income to high- Accompanying a lack of quality public service income ranks, governments in developing East provision, therefore, is a risk that the middle Asia will also need to find ways to address ris- classes could turn to an insular world of pri- ing societal expectations about the services the vate service provision while disengaging from state delivers and how well it does so. national policy dialogue on service delivery Sustained economic growth and improve- and development outcomes. There are signs ments in human welfare across much of devel- that middle-class households are opting out oping East Asia have not been accompanied of key public services (figure 4.3, figure 4.4, by appropriate provisions of key public ser- and box 4.2). If so, this would reduce both vices, however. Access to high-quality services demand and accountability for those services, including clean water, sanitation, education, which in turn could jeopardize improved health care, and internet connectivity remains a public service provision more broadly. challenge for many economically secure house- Incentivizing the economically secure holds in the region. One-third of economically and growing middle class to opt in is also secure households and roughly 15 percent important because as the middle class contin- of the region’s middle class (outside China) ues to grow, its financial clout will be criti- lack one or more of the following: access to cal to financing the high-income, middle-class clean water, access to sanitation, and school- agenda through its greater participation in the ing opportunities for their 16- to 18-year-olds region’s tax systems and through greater tax (as shown in chapter 1, figure 1.21). In several compliance. countries, national education systems still fail to provide high-quality education to economi- cally secure and middle-class families, putting Enhancing state effectiveness in at risk the abilities of even better-off labor developing East Asia: Challenges force entrants to compete in increasingly skills- and opportunities based economies. More than 40 percent of the All countries face the challenge of strengthen- wealthiest quintile of students in Indonesia, ing the capacity and effectiveness of their state Malaysia, and Thailand failed to achieve mini- institutions as they develop. The political econ- mum proficiency levels on recent Program for omy challenges that countries in developing International Student Assessment (PISA) exams East Asia now face as they seek to transition (as shown in chapter 3, figure 3.14). Moreover, from middle income to high income—whether significant shares of economically secure and capture of benefits by elites; the difficulty of E n h an c ing S tate E ffe c ti v eness   135 building new coalitions for reform; the chal- FIGURE 4.3  Share of students enrolled in private primary and lenge of moving from ­ relationship-based deals lower secondary schools in several East Asian countries, by welfare to rules-based contracts; or rising societal status, circa early to mid-2010s expectations—all add new layers of com- a. Private primary schoola plexity to the already difficult challenge of 50 strengthening state effectiveness. In that con- text, what potential tools do policy makers 40 welfare status, percent Share of students by have to surmount these challenges? 30 Political scientists and economic histori- ans argue that the development of “inclusive 20 institutions” is critical to avoiding these politi- cal economy traps (Malesky 2018). Similarly, 10 World Development Report 2017: Governance 0 and the Law argues that capture is not inevi- Indonesia Lao PDR Mongolia Thailand table as long as influence and incentives are 2015 2012 2016 2015 balanced through robust public agency design and accountability mechanisms (World Bank b. Private lower-secondary schoolb 2017b). Indeed, research on state institutions 50 and governance points to complementary pathways for enhancing state effectiveness, 40 welfare status, percent Share of students by including strengthening citizen voice and par- 30 ticipation, increasing government transpar- ency, enhancing accountability, and upgrading 20 bureaucratic quality. This section examines where developing East Asian countries stand 10 with respect to these pathways, including the 0 challenges they face and the opportunities for Indonesia Lao PDR Mongolia Thailand moving forward. 2015 2012 2016 2015 Extreme poor Moderate poor Economically vulnerable Strengthening voice, transparency, and Economically secure Middle class accountability Source: World Bank East Asia and Pacific Team for Statistical Development. As countries in developing East Asia aspire to Note: Extreme poor = per capita consumption below the international poverty line (US$1.90 per day move from middle-income to upper-income at 2011 purchasing power parity [PPP]). Moderate poor = US$1.90–US$3.20 per day. Economically vulnerable = US$3.20–US$5.50 per day. Economically secure = US$5.50–US$15.00 per day. Middle status, enabling greater voice and account- class = exceeding US$15.00 per day. ability in economic governance can contribute a. Primary school-aged children defined as 7- to 12-year-olds to ensure cross-country comparability. Sample sizes for the “extreme poor” in Mongolia and Thailand and for “middle class” in Lao PDR are to more effective, sustainable policy making. too small to enable reliable estimates for private primary school. “A more contestable policy arena [also] tends b. Lower-secondary school-aged children defined as 13- to 15-year-olds to ensure cross-country comparability. Although significant shares of poor and vulnerable households in Indonesia send to be associated with higher levels of legiti- their children to private lower-secondary schools, including in rural areas, analysis of school tuition macy and cooperation. When procedures for costs indicates that middle-class families opt to send their children to much more expensive, “elite” private schools. Sample sizes for the “extreme poor” in Mongolia and Thailand, for the “moderate selecting and implementing policies are more poor” in Thailand, and for the “middle class” in Lao PDR are too small to enable reliable estimates for contestable, those policies tend to be perceived private lower-secondary school. as ‘fair’ and to induce cooperation more effec- tively” (World Bank 2017b, 13). Participation consensus around decisions made by govern- by citizens in the shaping of government poli- ment (Fishkin 2009). cies can also produce more sympathy with opposing views (Fung and Wright 2001); Voice and participation respect for evidence-based reasoning (Almond As countries move from middle-income to and Verba 2015); and, critically, a greater com- high-income ranks—and to increasingly mitment to and higher probability of societal middle-class societies—citizens may also 136   A RESURGENT EAST ASIA FIGURE 4.4  Share of people using private and public health care facilities in several East Asian countries, by welfare status, circa early to mid-2010s a. Indonesia (2016) b. lao pDR (2012)a Extreme poor Extreme poor Moderate poor Moderate poor Economically vulnerable Economically vulnerable Economically secure Economically secure Middle class Middle class 0 20 40 60 80 100 0 20 40 60 80 100 percentage of individuals percentage of individuals c. Myanmar (2015) d. vietnam (2016) Extreme poor Extreme poor Moderate poor Moderate poor Economically vulnerable Economically vulnerable Economically secure Economically secure Middle class Middle class 0 20 40 60 80 100 0 20 40 60 80 100 percentage of individuals percentage of individuals public private, modern private, traditional healers Other Source: World Bank East Asia and Pacific Team for Statistical Development. Note: Extreme poor = per capita consumption below the international poverty line (US$1.90 per day at 2011 purchasing power parity [PPP]). Moderate poor = US$1.90–US$3.20 per day. Economically vulnerable = US$3.20–US$5.50 per day. Economically secure = US$5.50–US$15.00 per day. Middle class = exceeding US$15.00 per day. a. Sample sizes for the “middle class” in Lao PDR are too small to enable reliable estimates of public and private health care facility use. BOX 4.2  A growing middle class with persistently poor access to quality public services: The case of Indonesia In Indonesia, the middle class is growing fast—by •  Although middle-class Indonesians face a low 10 percent a year between 2002 and 2016—and now risk of falling back into poverty, many have been accounts for 20 percent of the total population, or unable to escape important aspects of nonmon- 52 million people.a It has already doubled its share of etary deprivation. Half of them experience some national consumption, from 22 percent to 47 percent, form of nonmonetary deprivation, mostly related and this growth is expected to continue. Comprising to poor housing conditions. This puts Indonesia— a growing segment of the population and controlling and other countries in developing East Asia—at significant economic resources, the middle class will odds with what happens elsewhere in the world be a key player in shaping the future of Indonesia, (World Bank 2018e). at the ballot box and as consumers of public and •  Although almost all middle-class Indonesians private goods and services. have access to public health and education To have a sense of how the middle class will services, such services are often of low quality. wield this power, much can be learned by looking Local public health facilities often lack the neces- at the characteristics and choices this group makes sary equipment, for example, or lack staff with now. A World Bank study on the middle class in adequate training to provide basic care or key ser- Indonesia identifies three key features (World Bank, vices. This is even the case in urban Indonesia, forthcoming[a]): where most of the middle class live. box continues next page E n h an c ing S tate E ffe c ti v eness   137 BOX 4.2  A growing middle class with persistently poor access to quality public services: The case of Indonesia (continued) •  Although public social services and infrastruc- evidence suggests it is possible to establish a new ture (such as access to water and sanitation) mat- social contract with certain “coresponsibilities” to ter a lot, the middle class is starting to opt out do just that—that is, by asking the middle class to of public services in favor of privately provided contribute more through taxes that would, in turn, services. Use of private health care services rises contribute to improving the very services that they as middle-class consumption rises, with middle- demand. class and high-income families making up a dis- Recent experimental and quasi-experimental evi- proportionate share of hospital users. There has dence (Mascagni 2016), including from Indonesia also been significant growth of gated communi- (Paler 2013), support the “fiscal exchange” hypoth- ties and “planned towns” in and around urban esis, which posits that there is a positive relation Indonesia. That is, when they can afford to do between tax revenues with public accountability and so, an increasing number of people are choos- the quality of public spending. While international ing to enjoy the full range of privately provided evidence suggests that such fiscal exchange might services and security, including private university hold for specific services in different contexts, there education. is evidence from China, for example, that the middle classes have a high willingness to pay for the services These findings suggest a growing need for that they consider among their highest priorities. action to induce middle-class households to “opt Sources: Mascagni 2016; Paler 2013; World Bank 2018e; World Bank, in” but also to enable them to hold their govern- forthcoming[a]. a. These figures are based on a middle class defined as those households with ments accountable for the availability and quality per capita consumption equivalent to US$7.75 to US$38.00 per day (World of publicly provided goods and services. Recent Bank, forthcoming[a]). give greater inherent value to having greater evaluations in rural Chinese villages find that voice and more participatory public institu- elections served to increase public goods pro- tions as part of changing societal expecta- vision, reduce corruption, and reduce income tions and evolving aspirations. Participation inequality (Martinez-Bravo, Miquel, and Qian decision-making process has an intrin- in the ­ 2012; Martinez-Bravo, Qian, and Yao 2011). sic value in enabling more legitimate choices As highlighted earlier, developing East Asian (Habermas 1996; Rawls 1997). But participa- countries generally rank lower in voice and tion can also have an instrumental value by accountability than would be expected given increasing cooperation, whether in the form their per capita income levels. Indeed, challenges of greater citizen compliance with policy associated with voice and citizen participation makers’ decisions or as ownership of invest- in policy-making processes are observed across ments affecting one’s community. several dimensions. Data from the Bertelsman A study from Indonesia, for example, finds Transformation Index show, for example, that greater community cooperation when par- civil society in developing East Asian countries ticipatory processes were in place. Villagers has less opportunity to participate in policy- reported significantly higher satisfaction, making processes, on average, than it does in increased knowledge, and higher willingness either lower-­middle-income or upper-middle- to contribute to the projects when they were income countries in other regions (figure 4.5).4 allowed to cast votes directly in plebiscites Data on citizen participation in regula- than when the usual decision-­ making pro- tory processes and decision making also help cesses (in meetings run by representatives) underscore the institutional and governance were implemented (Olken 2010). A series of challenges faced by developing East Asian 138   A RESURGENT EAST ASIA countries as they seek to move from middle- for public feedback, and make information income to high-income status. Most high- about existing regulations publicly available income countries have formal mechanisms (World Bank 2017b). Although formal ave- for providing advance public notice about nues for broad-based participation in regula- regulatory changes, provide opportunities tory decision making in developing East Asia are roughly comparable to those in middle- FIGURE 4.5  Civil society participation in policy-making processes income Latin America, such opportunities are in developing East Asia relative to all lower-middle and upper- much more limited than in middle-income middle-income countries, 2006–16 Europe and Central Asia or in high-income 7.0 Organisation for Economic Co-operation and Development (OECD) countries (figure 4.6). Consistent with the data on voice and par- Civil society participation 6.0 ticipation, the people in developing East Asia believe that they have only limited ability to 5.0 influence what their governments do. This view is captured in several waves of the Asian Barometer Survey (ABS), which highlights 4.0 individuals’ perceptions about their partici- pation and influence on government policies 3.0 and actions between 2002 and 2015. The 2006 2008 2010 2012 2014 2016 ABS asks respondents to react to several state- Year ments regarding participation and influence Developing Lower-middle Upper-middle and to answer on a scale from 1 to 5, where East Asia income income 1 means “strongly disagree” and 5 means “strongly agree.”5 Source: Bertelsman Transformation Index (BTI) database, Bertelsman Stiftung, https://www.bti-project​ .org/en/data/rankings/governance​-index/. Figure 4.7 presents the percentage of Note: “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, Malaysia, respondents who agreed or strongly agreed Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. “Lower-middle income” and “upper- middle income” comprise all countries globally in those income categories and account for changing with the statement, “People like me don’t compositions of each group over time. Civil society participation is evaluated on a 10-point scale have any influence over what the government (1 = lowest civil society participation, 10 = highest civil society participation). The decline in the upper- middle-income country score over time reflects the graduation of several of the best-performing does.” Notably, in eight of the nine East Asian countries from upper-middle to high-income status during the period. Once countries move from upper countries for which ABS data were collected middle to high income, their scores are no longer reflected as part of the upper-middle-income country average. in 2015, more than half of those surveyed FIGURE 4.6  Formal avenues for public participation in regulatory decision making, by region, 2016 100 Share of countries, percent 75 50 25 0 High-income East Asia and Europe and Latin America Middle East and South Asia Sub-Saharan OECD Paci c Central Asia and Caribbean North Africa Africa Providing impact assessments Publishing notice Publishing regulations Requesting comments Reporting results Source: World Bank 2017b. Note: OECD = Organisation for Economic Co-operation and Development. E n h an c ing S tate E ffe c ti v eness   139 FIGURE 4.7  Share of people in developing East Asia who believe they lack influence on government, by country, 2002–15 100 percentage of respondents 80 60 40 20 0 Indonesia Mongolia philippines Thailand Malaysia vietnam cambodia china Myanmar 2002 2011 2015 Source: Asian Barometer Survey (ABS) as used in Malesky 2018. Note: Figure shows percentage of ABS respondents agreeing or strongly agreeing with the statement, “People like me don’t have any influence over what the government does.” ABS data were not collected for Lao PDR; for Cambodia, Indonesia, Malaysia, and Vietnam in 2002; and for Myanmar in 2002 or 2011. agreed or strongly agreed that they have no Transparency influence. Moreover, in four of the nine coun- Increasing transparency by improving access tries, more than two-thirds of those surveyed to key information related to government in 2015 agreed or strongly agreed with the processes and decisions is a critical input into statement. enhancing citizens’ participation and voice, To address some of the challenges asso- whether within or outside a democratic elec- ciated with voice and participation, several toral setting (Malesky 2018). Data indicate countries in developing East Asia have taken that several countries in developing East Asia measures to try to increase opportunities for still lag behind global comparators on trans- public input into policy-making processes, parency. In a composite index of civil service introducing institutional mechanisms for transparency from the Quality of Government increasing citizen voice through public consul- Expert Survey (Dahlström and others 2015), tation, “notice and comment,” and voluntary experts rate countries based on several mea- compliance (Malesky 2018). The idea behind sures of transparency in bureaucratic decision introducing consultation and notice and com- making, including public access to govern- ment in the process of drafting regulations is ment documents and records, the existence that people’s voice can be integrated broadly of an independent national audit office with into decision-making processes through an educated and qualified staff, and adequate administrative process and, through that, bureaucratic mechanisms for address- policy makers can also gain valuable infor- ing misconduct on the part of public sector mation about societal views and preferences. employees.6 The index shows significant vari- Nonetheless, questions remain as to whether ation in measures of bureaucratic transpar- administrative approaches to increasing voice ency across the region (figure 4.8). Only the are sufficient to meet forthcoming policy chal- Philippines and Indonesia have transparency lenges as countries seek to transition from scores above the global average (captured by middle income to high income. Broad access the dashed vertical line in figure 4.8). to relevant information is essential, as is the The Open Budget Index (OBI), which opportunity for reasonably open debate, and measures access to accurate information mechanisms to ensure that citizen feedback is about government spending and revenue col- appropriately taken into account. lection, provides an alternative measure of 140   A RESURGENT EAST ASIA FIGURE 4.8  Transparency of bureaucratic decision making in infrastructure plans) be placed online at every developing East Asia, 2015 level of government (Stromseth, Malesky, and Gueorguiev 2017). And Vietnam’s philippines recently passed Access to Information Law, Indonesia modeled after China’s OGI, contains provi- Malaysia sions allowing citizens to request information Mongolia not specifically outlawed and mandates that Thailand agencies reply within a specified time frame china (Malesky 2018). cambodia Information made available through lao pDR transparency initiatives can make an impor- vietnam tant contribution to increased government Myanmar accountability. As with voice and participa- 0 1 2 3 4 5 tion, however, transparency alone is insuf- ficient to promoting accountability. Once Transparency of civil service information is made public, the effectiveness Sources: Dahlström and others 2015, as used in Malesky 2018. of transparency initiatives to promote gov- Note: Dashed line represents the global indicator average for transparency of the civil service. The index comprising six transparency measures is part of the Quality of Government Expert Survey, ernment responsiveness ultimately depends a project of the Quality of Government Institute at the University of Gothenburg, Sweden. on people’s ability to induce action in the policy arena. Government responsiveness is transparency (Seifert, Carlitz, and Mondo a function of the incentives for public offi- 2013).7 Figure 4.9 presents the OBI measures cials to ultimately be accountable, whether of government budget transparency in devel- through electoral or other mechanisms oping East Asian countries between 2006 and (World Bank 2017b). 2017 and compares country scores against global averages for each year. Accountability As in the previous measure, Indonesia In addition to voice and transparency, the and the Philippines score well on budget countries of developing East Asia face the transparency, above global averages, and challenge of strengthening government with improving performance over time. accountability. Accountability is most direct Malaysia, Mongolia, and Thailand also have in contexts where citizens have the opportu- measures at or above the global average in nity to reelect or vote public servants out of 2017. Despite some improvements over the office. In other contexts, greater government time horizon, Cambodia and Vietnam are still accountability—and enhanced state effective- well below the global average, as is China, ness—may require strong institutional checks whose performance was basically flat over on the executive, including through legisla- the period. tures (parliaments) and through independent Against this background, several govern- judiciaries. These checks are important to ments in the region are already taking ini- avoiding capture and insuring against overtly tiatives to increase government transparency. self-interested decision making (Malesky China, Indonesia, Mongolia, Vietnam, and 2018; World Bank 2017b). at least two states in Malaysia have passed Data indicate that legislative and judicial freedom-of-information legislation. Malaysia constraints on executive powers in develop- is also working to expand regulatory trans- ing East Asia are close to or on par with those parency by bringing together all regulations of other middle-income countries—although, and “notice and comment” on a single plat- with one or two exceptions, they are still form. Similarly, China’s Open Governance well below levels found in high-income coun- Initiative (OGI) mandates that a range of tries (figure 4.10). There is also considerable government documents (such as legal, nor- variation across countries. Consistent with mative documents; budgets; and land and other measures of voice and accountability, E n h an c ing S tate E ffe c ti v eness   141 FIGURE 4.9  Transparency of budget information in developing East Asia, by country, 2006–17 100 80 60 OBI score 40 20 0 cambodia china Indonesia Malaysia Mongolia Myanmar philippines Thailand vietnam 2006 2008 2010 2012 2015 2017 Global average Sources: Seifert, Carlitz, and Mondo 2013, as used in Malesky 2018. Note: Figure shows Open Budget Index (OBI) scores for 9 out of 10 developing East Asian countries; OBI scores were not collected for Lao PDR. The OBI assigns countries covered by the Open Budget Survey (a project of the International Budget Partnership) a transparency score on a 100-point scale using questions that assess the amount and timeliness of budget information that governments make publicly available in eight key budget documents in accordance with international good practice standards. FIGURE 4.10  Effectiveness of legislatures and judiciaries in providing checks on executive power in developing East Asia, relative to global country income groups, 2017–18 a. Legislature’s effectiveness b. Judiciary’s effectiveness in limiting government powers in limiting government powers Cambodia Cambodia China China Indonesia Indonesia Malaysia Malaysia Mongolia Mongolia Myanmar Myanmar Philippines Philippines Thailand Thailand Vietnam Vietnam LMICs LMICs UMICs UMICs HICs HICs 0 0.2 0.4 0.6 0.8 1.0 0 0.2 0.4 0.6 0.8 1.0 Index score Index score Source: World Justice Project (WJP) database (https://worldjusticeproject.org/); World Bank calculations. Note: The WJP Rule of Law Index data are based on a general population poll; legal professionals carried out the assessments. The index rates countries on a 0–1 scale, where 0 = most ineffective and 1 = most effective. Data are shown for 9 of 10 countries of developing East Asia; no data are available for Lao PDR. The dashed blue line represents the average score for lower-middle-income countries (LMICs); the dashed green line, the average for upper-middle-income countries (UMICs); and the dashed red line, the average for high-income countries (HICs). 142   A RESURGENT EAST ASIA Indonesia, Mongolia, and the Philippines on government decision making than either perform relatively well on both legislative upper-middle-income countries in other and judicial checks. Cambodia and Vietnam, regions or in high-income economies. As with on the other hand, fall below expectations other measures of voice and accountability, on both measures, scoring lower than other the region’s countries exhibit substantial varia- lower-middle-income countries. tion regarding both levels and trends in execu- Institutional checks on executive power tive constraints. These patterns largely mirror are referred to as “veto points” in the those seen in figure 4.10 regarding legislative political science literature (Malesky 2018). and judicial constraints (Malesky 2018). Technically, veto points are defined as the While electoral systems and institutional number of actors that have a constitution- constraints on executive powers are the ally enshrined ability to block policy changes. most common mechanisms for promoting The idea is that the more actors that have a greater government accountability, they are say over policy, the less prone the system not the only ones. Broad business coalitions will be to capture. The Polity IV project has can also play an important role in demand- developed summary measures of countries’ ing accountability in government (World checks on executive decision making over Bank 2017b). As noted in chapter 1, sound time (Marshall, Gurr, and Jaggers 2017). economic governance among “first wave” The project’s data show that constraints to economies in East Asia was facilitated, in executive decision making have increased part, by mechanisms that established fre- moderately in developing East Asia over the quent and regular consultation between the past two decades (figure 4.11). As a result, government and business (Birdsall and oth- the region as a whole is now roughly on par ers 1993).8 Media and civil society can also with lower-middle-income countries in other play a role, as can international agreements regions, although it still has fewer constraints and institutions. Specifically, international conventions and treaties, as well as multilat- FIGURE 4.11  Constraints to executive decision making eral trade agreements, can serve as valuable in developing East Asia relative to all lower-middle and (even if imperfect) commitment mechanisms upper-middle-income countries, 1996–2016 for governments (World Bank 2017b). 6.0 Enhancing bureaucratic quality Strengthening meritocratic hiring and promo- Executive constraints 5.5 tion of staff in bureaucratic institutions—or 5.0 what World Development Report 2017: Governance and the Law calls “robust pub- 4.5 lic agency design” (World Bank 2017b)—can play an important role in strengthening coun- tries’ institutional capacity to navigate the 4.0 1996 2000 2004 2008 2016 transition from a middle-income to a high- year income, middle-class agenda. Meritocratic Developing lower-middle Upper-middle hiring and promotion can also play a valu- East Asia income income able role in mitigating capture and increasing government responsiveness, if combined with Source: Polity IV 2017 data (Marshall, Gurr, and Jaggers 2017), as used in Malesky 2018. Note: “Executive constraints,” measured on a seven-point scale, captures the extent of institutionalized appropriate accountability mechanisms in checks and balances on the decision-making power of the executive, whether via the legislature, government and commitment to rules-based an independent judiciary, or other accountability groups. 1 = no constraints (unlimited executive authority). 7 = significant constraints (other accountability groups have equal or greater decision- contracts (World Bank 2017b). making power than the executive). “Developing East Asia” includes the following: Cambodia, Data collected as part of the Quality of China, Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. “Lower-middle income” and “upper-middle income” comprise all countries globally in those income Government (QoG) Expert Survey indicate categories and account for changing compositions of each group over time. how countries in developing East Asia fare E n h an c ing S tate E ffe c ti v eness   143 on professional public administration and, FIGURE 4.12  Use of merit- or connection-based hiring of civil in particular, the extent to which the region’s servants in developing East Asia, 2015 civil services are professional rather than polit- icized (Dahlström and others 2015). Drawing a. Meritocratic civil service on the QoG Expert Survey data, figure 4.12 7 presents several dimensions of civil service professionalism in developing East Asia. lao pDR 6 Malaysia The data highlight both some accomplish- china philippines ments as well as ongoing challenges concern- vietnam ing the hiring and promotion of civil servants 5 Meritocratic hiring Indonesia in developing East Asia. Figure 4.12 (panel a) captures the extent to which countries have 4 Myanmar Mongolia Thailand professional and specialized civil services. cambodia Specifically, on the vertical axis, experts 3 rank the extent to which hiring of civil ser- vants in the region is merit based, on a scale 2 from 1 to 7, with 1 being the least merito- cratic and 7 being the most meritocratic. The horizontal axis of the panel a captures 1 the extent to which civil service recruitment 1 2 3 4 5 6 7 is open and selection competitive, again on a competitive selection 7-point expert-ranked scale, with 7 being the b. connections most open and competitive. The dashed lines show the global averages for these indexes. 7 vietnam Countries with highly professional and spe- Mongolia cialized civil services appear in the upper 6 lao pDR Importance of political connections right-hand quadrant of the figure. Malaysia china As the figure shows, developing East Asian cambodia 5 countries generally do well on these metrics. By global standards, most countries appear to Thailand have highly professional civil servants based 4 philippines Myanmar on meritocratic promotion criteria. Notably, the single-party regimes of China and 3 Indonesia Vietnam rank alongside countries with multi- party structures, such as Indonesia, Malaysia, 2 and the Philippines. Several countries in the region have recently undertaken reforms to 1 strengthen meritocratic hiring and promo- tion and, more broadly, to improve civil 1 2 3 4 5 6 7 service performance (World Bank 2018c). Importance of family connections Nonetheless, not all countries in the region Source: Dahlström and others 2015, as used in Malesky 2018. perform well on meritocratic and competi- Notes: “Developing East Asia” includes the following: Cambodia, China, Indonesia, Lao PDR, tive recruitment. Mongolia, Myanmar, and Malaysia, Mongolia, Myanmar, the Philippines, Thailand, and Vietnam. Other dots in the scatterplots represent countries outside developing East Asia. The dashed lines show the global averages for Thailand are all ranked by as having meritoc- each indicator from the Quality of Government Expert Survey. racies that fall below the global average. Figure 4.12 (panel b) highlights a more Survey ranked countries based on the impor- concerning side of civil services in developing tance of political and personal connections East Asia, however—especially as countries in recruitment, on the vertical and horizontal aspire to transition from middle-income to axes, respectively. Countries in which political upper-income levels. Here, the QoG Expert and personal connections are more important 144   A RESURGENT EAST ASIA appear on the upper-right quadrant. Based still tempered by personalism. In fact, all the on these measures, Cambodia, Lao PDR, countries in developing East Asia perform Mongolia, and Vietnam perform worse than more poorly than the global average on at global averages, indicating that meritocracy least one of these two dimensions. in public administration in these countries is The bottom line is that while meritocracy can provide some of the incentive effects asso- FIGURE 4.13  Government revenues as a share of GDP in ciated with electoral accountability, if imper- developing East Asia and selected middle- and high-income fectly implemented, it can infuse government countries, circa 2017 decision making with relationship-based rather than merit-based criteria (Malesky Myanmar 2018). In these cases, there is a risk that coun- Indonesia tries’ civil services can impede progress in Philippines making the transition from relationship- or deals-based systems to rules-based systems, Cambodia a key political economy challenge for middle- Mexico income countries. This, in turn, can make it Singapore more difficult for governments to overcome Lao PDR capture in the economy and in policy making, Malaysia hindering progress on necessary economic and India social policy reforms. Thailand Ireland Financing the transition to high income China As incomes continue to grow, another key Korea, Rep. challenge for governments in developing East Turkey Asia in meeting rising societal expectations is to find ways to finance their higher-income, Brazil increasingly middle-class agendas. This Mongolia includes not only strengthening the availability Israel and quality of basic services for those already Germany in the middle class and those who aspire to be United Kingdom in the middle class but also, as discussed in Russian Federation chapter 3, investing broadly in (a) skills devel- opment, to ensure that people can participate Australia productively in increasingly skills-intensive Italy economies; (b) improved connectivity, to Canada ensure that people can make the most of new France and emerging technologies; and (c) strengthen- South Africa ing social protection systems, to ensure that people who have difficulty transitioning to the New Zealand new economy do not fall into poverty. To be Finland able to finance this ambitious high-income, 0 5 10 15 20 25 30 35 40 45 middle-class agenda, governments in devel- Revenue as a share of GDP, percent oping East Asia will need to both raise more revenue and to spend more effectively. Direct taxes Indirect taxes Nontax revenue Revenue mobilization is low in developing Source: International Center for Tax and Development and United Nations University World Institute East Asia relative to both high-income coun- for Development Economics Research (ICTD/UNU-WIDER) Government Revenue Dataset 2017 and tries and to low- and middle-income econo- World Bank staff calculations. Note: “Developing East Asia” here includes the following: Cambodia, China, Indonesia, Lao PDR, mies in other regions (figure 4.13). Some Malaysia, Mongolia, Myanmar, the Philippines, and Thailand. GDP = gross domestic product. countries in the region have even seen their E n h an c ing S tate E ffe c ti v eness   145 BOX 4.3  Raising government revenues faces multiple challenges in developing East Asia Low revenue mobilization in developing East Asia the basis of a classification of 11 different types largely reflects low tax collection. Although the of income, each taxed at different rates, which countries vary considerably, weak tax performance provides incentives to taxpayers to select income in the region reflects several interrelated structural, categories with lower tax rates. policy, and institutional constraints: •  Institutional constraints result from two main impediments: high tax administration costs and •  Structural constraints are largely a function of low tax compliance. The high costs of tax com- the difficulties of raising taxes in economies with pliance are reflected in the complexity of the large informal sectors and, historically, large region’s tax systems and, often, a lack of trans- shares of the population employed in agriculture. parency in the system. Indeed, several develop- Remoteness in countries such as Indonesia and ing East Asian countries rank quite poorly in the the Philippines that are large and dispersed, rapid Doing Business “ease of paying taxes” rankings migration from rural to urban areas, and poor (World Bank 2018b). understanding of countries’ tax systems have all been complicating factors, albeit to varying Cross-country evidence indicates that governments’ extents in different countries. effectiveness in raising revenues generally increases •  Policy constraints involve a number of design fea- as countries transition toward high-income status. tures that have resulted in complex tax systems “As economies develop, the number of formal mar- (World Bank 2017a). These include large exemp- ket transactions tends to increase, population literacy tions associated with different types of taxes along improves, and government administrative systems with fiscal incentives for investors, including become more effective. These advances, in turn, enable tax holidays, reduced tax rates, and investment a widening of the tax base and an expansion of the allowances. In some contexts, the sheer accumu- set of feasible tax instruments (Gillis 1989)” (Bastagli, lation of taxes, as tax systems have evolved over Coady, and Gupta 2015, 66). Ensuring that these time, has resulted in great complexity. China, advances materialize, however, involves deliberate for example, had some 35 different taxes in the and sustained policy action and institutional improve- 1990s, many of which mobilized little resources. ments, including through tax policy reforms, strength- Recognizing this complexity, the Chinese govern- ening of countries’ tax authorities and related systems, ment undertook tax simplification and, by 2016, and easing and improving tax compliance. reduced that number to 18 (Brondolo and Zhang 2016). Still, personal income remained taxed on Source: Ruggeri Laderchi 2018. tax revenues decline recently (World Bank particular—tend to make up a relatively small 2018d, 2018f). Low revenue mobilization share of revenues, particularly relative to in the region is driven by low tax collection, high-income economies. which reflects a number of different factors, Several East Asian countries have including complex tax codes (which, among embarked on tax administration reforms with other things, include numerous exemptions); the aim of raising revenues and reducing com- weak tax administrations; narrow tax bases; pliance costs: and high costs of tax compliance (box 4.3). Many countries in developing East •  In Cambodia and Myanmar, the govern- Asia continue to rely extensively on indi- ments have introduced self-assessment rect taxation, including value added taxes regimes to help raise tax compliance. In (VAT), excise taxes, and trade taxes (IMF Cambodia specifically, replacing the sim- 2017; World Bank 2017a) as well as, in a plified and estimated tax regimes with few cases, nontax, resource-related revenues. a self-assessment regime that includes Direct taxes—personal income taxes in all small, medium, and large enterprises, 146   A RESURGENT EAST ASIA along with strengthening taxpayer services the quantity and quality of services their and tax audit capacity, has contributed to governments deliver. And these rising raising revenues (World Bank 2018a). demands and expectations will occur in an •  In China, significant reform efforts that increasingly complex political economy for began in the 1990s have included clarifica- reform. This chapter has examined several tions of the administrative structure, sepa- potential entry points for enhancing state ration of the administration of national and effectiveness—through strengthening citizen local taxes, and creation of a new registration voice and participation, increasing govern- system unified between the local and national ment transparency, enhancing accountabil- levels (Brondolo and Zhang 2016). ity, and upgrading bureaucratic quality. It •  In Indonesia, an e-filing system for the has similarly highlighted the importance of VAT has been introduced, while efforts greater domestic revenue mobilization in are ongoing to gradually enforce e-filing financing the transition to high income. The of corporate income taxes and of with- related policy priorities are examined further holding taxes from employees’ payrolls in chapter 5. (World Bank 2018d). •  In Vietnam, efforts to address the percep- tion of corruption and red tape comple- Annex 4A Description of mented the implementation of new tax data sources policies—including reducing the corpo- In analyzing institutions of the state, for rate income tax, simplifying the VAT some purposes it is useful to combine differ- regime (including reducing exemptions), ent data sources into an aggregate measure and reforming the personal income tax to such as the Worldwide Governance Indicators broaden the tax base—that have helped to (WGI), while for other purposes, the disag- stabilize and even raise revenue intake at gregated underlying data are more useful. The a time when revenues were set to decline World Bank has a range of tools to assess the because of the abolition of cross-border quality of governance, including the Doing taxes (OECD and ITC 2015). Business indicators that benchmark the regu- latory environment, cross-country Enterprise Despite these steps, additional and deeper Surveys to assess the investment climate, measures on both tax policy and tax admin- and the Public Expenditure and Financial istration will be needed if governments are Accountability (PEFA) indicators to mea- to be able to finance high-income, increas- sure the performance of fiscal institutions. ingly middle-class agendas. Ensuring greater A number of nongovernmental organizations participation in and compliance with such (NGOs) also measure various dimensions of reformed tax systems will also require greater governance in other ways. government accountability for the quality of This chapter—and more broadly, this spending. study—uses several indicators from multiple sources to inform the analysis of institutions and governance. The objective is to ensure Conclusion robustness of the analysis of several dimen- Countries in developing East Asia will face sions of governance and to provide a compre- growing demands on state institutions as hensive view. This annex briefly describes the they work to transition from middle-income governance-related datasets used in this study. to high-income status. Designing and imple- The World Bank’s GovData360 initiative menting sound economic policies will become provides additional governance indicators at increasingly challenging as the region’s econo- https://govdata360.worldbank.org/, which mies grow and the world changes. As societies includes links and information on the most become increasingly middle class, policy mak- important governance indicators available ers will also face rising expectations about from a variety of sources. E n h an c ing S tate E ffe c ti v eness   147 This study uses the following governance- score on a 100-point scale is assigned using related databases: questions that assess the amount and time- ­ liness of budget information that govern- •  The Asian Barometer Survey (ABS) is a ments make publicly available in eight large-scale, cross-country applied research key budget documents and in accordance program focused on gauging public opin- with international good practice standards. ion on issues related to political values, Data are currently collected on a biennial institutions, and governance in East Asia basis from 115 countries on six continents. and South Asia. The survey collects a (https://www.internationalbudget.org​ range of data on citizens’ attitudes and /­open-budget-survey/) values including trust in institutions, •  The Polity IV Project, managed by the social capital, political participation, citi- Center for Systemic Peace in Vienna, VA, zen involvement, and government respon- collects and codifies data on the authority siveness. The ABS network encompasses characteristics of states for the purposes research teams in 13 East Asian and of comparative, quantitative analysis. The 5 South Asian economies, and it admin- dataset covers all major independent states isters surveys conducted under a common between 1800 and 2015. The project col- research framework and survey methodol- lects data on a range of measures related ogy with the aim of compiling reliable and to political institutions and processes, comparable micro-level data on citizens’ including the ways in which the executive attitudes and values. (http://www.asianba​ is selected, the nature of and constraints on rometer.org/) executive decision making, and the degree •  The Bertelsmann Transformation Index of political participation. It also records (BTI) is an index on institutions and gov- changes in the institutionalized charac- ernance created by Bertelsmann Stiftung, teristics of countries’ governing authority a private foundation with a mission to and produces annual assessments of states’ contribute to social reform. The BTI is a authority characteristics. (http://www​ product of collaboration among 300 aca- .­systemicpeace.org/polityproject.html) demics and country-based local reporters. •  The Quality of Government (QoG) It provides cross-country comparable Expert Survey is a unique dataset with data on political institutions, the market information on the structure and behav- economy, and governance in 129 devel- ior of public administration in 159 oping and transition countries. The data, countries around the world. The data- updated every two years, measure the base includes information on different development of political and economic dimensions of the quality of government, institutions including political structure, including professionalization, openness, rule of law, civil society participation, impartiality, and politicization. The sur- market structure, and international coop- vey is run by the QoG Institute, which eration. (https://www.bti-project.org/en​ conducts and promotes research on the /­data/rankings/governance-index/) quality of government institutions and •  The Open Budget Index (OBI) measures is located in the Department of Political citizen access to accurate information Science at the University of Gothenburg, about government spending and revenue Sweden. The data are compiled on the collection. Based on data from the Open basis of a web survey of 1,294 experts Budget Survey (OBS) and carried out worldwide. (https://qog.pol.gu.se/data​ under the International Budget Partnership /­datadownloads/qogexpertsurveydata) (IBP), the index seeks to provide an inde- •  The World Justice Project (WJP) is an pendent and comparative indicator of cen- independent, multidisciplinary organiza- tral government budget transparency. For tion working to advance the rule of law countries that are covered, a transparency worldwide. The WJP produces the Rule 148   A RESURGENT EAST ASIA of Law Index, which measures the rule of 3. Differences between countries that did and law based on the experiences and percep- did not transition to higher-income levels are tions of the general public and in-country less distinct at the low- and lower-middle- experts worldwide. The WJP Rule of Law income levels than they are once countries have reached upper-middle-income levels Index 2017–2018—based on more than (World Bank 2017b). 110,000 household surveys and 3,000 4. The Bertelsmann Transformation Index expert surveys in 113 countries and juris- (BTI), a project of Bertelsmann Stiftung, dictions worldwide—presents a portrait collects data on several dimensions of of the rule of law in 113 countries based governance in 129 developing and transition on eight factors: constraints on govern- economies, including on the extent to which ment powers, absence of corruption, open governments enable civil society participation government, fundamental rights, order in deliberating on and formulating policies. and security, regulatory enforcement, civil Civil society participation is evaluated justice, and criminal justice. (https://world​ on a 10-point scale, where scores of 1–2 justiceproject.org/) indicate no or limited space for civil society participation and scores of 9–10 indicate •  The Worldwide Governance Indicators active support for civil society engagement in (WGI) project reports aggregate and policy deliberations and formulation. For a individual governance indicators for brief description of the BTI, see annex 4A. For more than 200 countries and territories more information about the BTI, see https:// between 1996 and 2017 on six dimen- www.bti-project.org/. sions of governance: voice and account- 5. The Asian Barometer Survey (ABS) is an ability; political stability and absence of applied research program focused on gauging violence; government effectiveness; regu- public opinion related to political values, latory quality; rule of law; and control institutions, and governance in 18 East of corruption. These aggregate indica- Asia and South Asia economies. For a tors combine the views of a large number brief description of the ABS, see annex 4A. For more information, see http://www​ of enterprise, citizen, and expert survey .asianbarometer.org/. respondents in high-, middle- and low- 6. More specifically, the index comprises six income countries. They are based on more measures: (a) government documents and than 30 individual data sources produced records are open to public access; (b) abuses by a variety of survey institutes, think of power within the public sector are likely tanks, NGOs, international organizations, to be exposed in the media; (c) citizens and and private sector firms. (http://www​ media actors can track the flow of government .­govindicators.org) revenues and expenditures; (d) the National Audit Office is independent from the government; (e) auditors at the National Notes Audit Office have the appropriate education and qualifications; and (f) when found guilty 1. Measuring governance is difficult, and of misconduct, public sector employees no single measure or indicator is perfect. are reprimanded by proper bureaucratic To provide a comprehensive view and to mechanisms. ensure the robustness of the analysis, this 7. The OBI is a project of the International chapter draws from a number of published Budget Partnership. For a brief description of and publicly available databases focused the OBI, see annex 4A. For more information, on governance and institutions. For brief see https://www​.internationalbudget.org/open​ descriptions of the data used in this chapter, -budget-survey​/open-budget-index-rankings/. see annex 4A. 8. This study refers to several waves of 2. For methodological details concerning the development in East Asia. The “first wave” WGI, see Kaufmann, Kraay, and Mastruzzi refers to the so-called newly industrializing (2010). For other information about the WGI, economies: Hong Kong SAR, China; Korea; see http://www.govindicators.org. Singapore; and Taiwan, China. E n h an c ing S tate E ffe c ti v eness   149 References Desai, R. M., and H. Kharas. 2017. “Is a Growing Middle Class Good for the Poor? Social Almond, G. A., and S. Verba. 2015. 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E n h an c ing S tate E ffe c ti v eness   151 Pomfret, R. 2011. “Exploiting Energy and Mineral Asia and Pacific Regional Report. Washington, Resources in Central Asia, Azerbaijan and DC: World Bank. Mongolia.” Comparative Economic Studies ———. 2017a. East Asia and Pacific Economic 53 (1): 5–33. Update, October 2017: Balancing Act . Rawls, J. 1997. “The Idea of Public Reason Washington, DC: World Bank. Revisited.” University of Chicago Law Review ———. 2017b. World Development Report 2017: 64 (3): 765–807 Governance and the Law. Washington, DC: Ruggeri Laderchi, C. 2018. “Fiscal Redistribution World Bank. in East Asia,” Background paper for  A ———. 2018a. “Cambodia Economic Update: Resurgent East Asia: Navigating a Changing Recent Economic Developments and Outlook, World. Washington, DC: World Bank. April 2018.” Selected Issue: Summary Findings Seifert, J., R. Carlitz, and E. Mondo. 2013. “The of Future Jobs in Cambodia. 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East Asia Pacific at Work: Trapped or Merely Slowing?” Asian-Pacific Employment, Enterprise, and Well-Being. East Economic Literature 31 (2): 19–29. Navigating a Changing World: Directions for Policy 5 Introduction and even modified in some ways if countries are to sustain high growth, ensure that devel- Policy makers in developing East Asia con- opment remains inclusive, and deliver on the front familiar as well as novel challenges as rapidly rising expectations of their increas- they navigate their economies through the ingly middle-class societies . coming decade . Wherever their countries Although outward orientation and trade currently are in the middle-income spec- openness remain central to developing East trum, they must find ways to address these Asia’s prospects, the basis for competitive- challenges if they are to continue East Asia’s ness and comparative advantage is shifting success in raising its people’s living standards as trade patterns and technology change . But into another decade . In some respects, the what it will take to remain competitive and to policy agenda includes familiar elements— maintain or enhance comparative advantage current priorities that are fundamental to in an era of slowing global trade and rapidly development and take on even more promi- changing technologies will change . A focus nence going forward . In other ways, though, on trading in goods, which has served the new approaches are needed that take account region exceptionally well in the past, will no of both the changing world and the changing longer be sufficient . Gaining comparative face of the countries themselves . advantage in services that are now increas- The evidence presented in this study sug- ingly tradable, while finding ways to deepen gests that, in many respects, what has become regional and global value chains, will be known as the East Asian development critical . A broader view of innovation will be model—a combination of outward-oriented needed to facilitate enterprises moving to the growth, human capital development, and technological frontier . And access to finan- sound economic governance—still has much cial services must be expanded for small and to recommend it, both to the countries at the medium enterprises (SMEs) . lower end of the middle-income scale and to Human capital investments will also con- those closer to high-income status . But, irre- tinue to be critical, but the nature of the skills spective of countries’ levels of income and that are needed for countries to succeed in development, this strategy that has worked the 21st century has changed . The demand so well thus far will need to be supplemented for higher-order cognitive, socioemotional, 153 154   A RESURGENT EAST ASIA and technical skills has been rising over the the phasing of reforms. Nevertheless, several past couple of decades. Changes in trade priorities relate especially to the challenges patterns and technological change increase identified earlier in this report, and they apply the pace at which those skills will be needed across much of the region. These are the focus across developing East Asia. Looking solely of this chapter. to rapid growth to support those who are less educated or whose skills have become redun- dant will not be sufficient given the economic The five pillars of the policy forces at play. Countries will need to ensure agenda that workers can acquire the skills required The policy agenda discussed in this report for success in this new economy. At the same falls under five pillars: time, for these transitions not to worsen 1. Boosting economic competitiveness economic inequality, countries will need to t h rou g h re or ient i ng t rade p ol ic y, strengthen mechanisms to assist those who strengthening innovation, and broaden- may be displaced and cannot adjust. ing access to finance Designing and implementing sound eco- 2. Building people’s skills with emphasis on nomic policies, while providing the essential higher-order cognitive, socioemotional, foundation for growth, must also be comple- and technical skills, including digital mented by new directions in policy to address literacy the growing complexity of these middle- 3. Promoting inclusion by supporting peo- income economies and meet the needs and ple’s economic transitions, improving expectations of their increasingly m­ iddle-class access to digital technologies, strengthen- societies. Policy making in m ­ iddle-income ing social assistance, and using public East Asian countries will be more compli- spending to increase equity cated, in both its political and technical 4. Strengthening state institutions by pro- dimensions, than it was earlier in their devel- moting greater citizen voice and participa- opment experience. So a greater burden will tion, increasing government transparency, fall on the institutions of the state in several strengthening checks and balances, and dimensions. The state must become more improving the quality of the bureaucracy accountable to its citizens, allowing them 5. Financing the transition to high-income greater voice and assuring more transparency. status by increasing domestic resource And governments must become more capable mobilization and strengthening countries’ in delivering higher-quality public services tax administrations. that meet the needs of societies whose mid- dle classes are expanding rapidly even while The discussion here distinguishes between substantial numbers remain poor or economi- emerging policy priorities and founda- cally vulnerable. The financing of this broad tional policies . Emerging policy priorities set of needs will be a particular challenge for are those reform areas that will require par- the region’s governments. ticular emphasis as countries strive to move The pace at which global and regional eco- from middle-income to high-income s ­ tatus. nomic forces are evolving, particularly those Foundational policies represent reform affecting trade and technology, as well as the areas that developing East Asian economies increasing economic diversity of the region’s have been pursuing for some time and that population only increases the urgency for remain important to providing a solid basis policy makers in developing East Asia. Unless for their sustained development. Navigating they move quickly to respond to these shifts, rapid technological change represents a they could miss the opportunities to continue cutting challenge for policy but also an cross-­ their remarkable development experience. As enabling factor. If embraced and managed, always, action is needed on many fronts, and new technologies can provide additional many priorities will be country specific as will impetus to efforts to promote productivity N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    155 growth, foster economic inclusion, and for new opportunities. Technological changes enhance state effectiveness. Table 5.1 sum- imply that productivity increases will need to marizes the major policy recommendations of come from shifts in economic activity toward the report. greater sophistication in production. Efforts to boost countries’ economic com- petitiveness will need to focus on several areas Pillar 1: Boosting economic of emerging priority for reform, including ser- competitiveness vices sector reforms and deepening of trade Reversing the slowdown in productivity in agreements, broadening of innovation poli- many economies in developing East Asia cies, and improved access to finance for SMEs. requires that they redouble their efforts to While focusing on these emerging priorities, become more competitive. This imperative it will be important that countries maintain is only heightened by the ongoing changes attention on foundational policies that under- in global trade and technology. With trade pin economic competitiveness, including con- growth slowing (particularly for goods), climate, tinuing efforts to improve the business ­ because of the maturation of global value strengthen the regulatory environment, and chains (GVCs), it will be necessary to look strengthen the financial sector infrastructure. TABLE 5.1  Policy directions for a resurgent East Asia Policy priority Boosting economic Strengthening Financing the transition type competitiveness Building skills Promoting inclusion institutions to high income Emerging • Reform services • Develop higher- • Expand employment • Expand mechanisms • Expand the tax base policy sector policies order cognitive and services, including for citizen voice and by introducing or priorities • Deepen trade socioemotional skills, job search assistance participation expanding agreements including through and labor market • Increase government - direct taxes, • Increase competition technology-enabled information transparency including personal and lower entry learning • Broaden • Strengthen income taxes, barriers for provision • Build continuous unemployment accountability property taxes, of broadband skills development benefits in policy making and/or wealth taxes • Attract private systems, including • Integrate social processes, including - taxes that capital to expand TVET and lifelong protection through internal reduce negative broadband provision learning programs, systems linked checks and balances externalities • Upgrade managerial with close links to employment and regional and • Reduce tax capabilities to private sector transitions international competition, including • Expand the scope employers • Expand access to agreements through regional of credit registries, • Enhance technical digital technologies cooperation including with online capacities and digital and make them more platforms literacy affordable • Reform secured transactions systems Foundational • Improve business • Strengthen learning • Reform generalized • Strengthen • Simplify tax codes, policies climate and outcomes in primary subsidies, such as bureaucratic including for reform regulatory and secondary those on food and quality through corporate taxes and environment schools, including for fuel meritocratic hiring VAT • Strengthen financial lagging groups and • Expand social and promotions • Strengthen tax sector infrastructure regions assistance programs and enhanced administration • Work progressively to targeted to the poor performance universalize primary and vulnerable management, and secondary • Reorient public including via digital education, where spending to better platforms relevant promote inclusive • Broaden access to growth university education Note: TVET = technical and vocational education and training; VAT = value added tax. 156   A RESURGENT EAST ASIA Emerging priorities Although regulatory capacity is likely to be more limited in the region’s lower-income Countries in developing East Asia have put in countries such as the Lao People’s Democratic place trade policies that have fostered produc- Republic and Myanmar, global experience tivity growth as their economies have become shows that regulatory design will be a chal- increasingly outward oriented. Maintaining lenge even for the wealthier countries of these open trade policies remains a prior- developing East Asia. Rapid changes in ser- ity for the region even as much of the rest of vices technology and business models are the developing world has moved in the same making old models of regulation redundant. direction and despite the rise of protectionism In communications, the disruption is through in some high-income economies. Within this platforms like Facebook and WeChat; in agenda, two aspects are now more important financial services, by fintech companies like for the region: reform of services sectors and Ant Financial; and in transport, by ride-­ deepening of trade agreements. sharing companies like Didi Chuxing and Grab. These challenges suggest that services Reforming services sectors sector regulation is an area in which regional Although the specifics of such reforms will cooperation could enable a reduction of costs depend on the characteristics of the sec- and a pooling of skills. tor and country, two areas are likely to be Another issue in designing appropriate broadly relevant. First, entry barriers into services sector regulation is to find the right many services sectors need to be reduced and balance between (a) improving domestic competition fostered. Some countries, includ- standards sufficiently to export services and ing Malaysia and Thailand, have placed a (b) not raising standards so high as to hurt priority on changing the ownership of ser- domestic access to services or competitiveness vices sector firms from public to private or in other markets. In the case of professional from national to foreign investors, but they services, for example, low standards and dis- have retained limitations on new entry. These parities in domestic training and examinations restrictions lead typically to a transfer of rents can become a major impediment to obtaining to the new owners, whether they are domestic foreign recognition, while standards that are or foreign firms, at the expense of c ­ onsumers. too high may exclude some consumers and The rationale for these restrictions is usu- businesses from accessing these services. ally that unrestricted entry in sectors such One example of this dilemma was seen in as banking might threaten financial stability. the Philippines’ recent enactment of national However, such concerns are better addressed privacy legislation to ensure continued access through effective prudential regulation rather to the European Union (EU) data processing than by restricting entry and competition. market. However, when this caused many The largest benefits from services liberaliza- Philippines-based U.S. firms to find it too tion are associated typically with eliminating costly to operate in the Philippines and to barriers to entry. suspend new investment plans, the policy had Second, the success of services sector lib- to be reversed (Constantinescu, Mattoo, and eralization, even more than in other parts Ruta 2018). Again, a regional approach could of the economy, depends on putting effec- help countries create locally appropriate stan- tive regulations in place (Mattoo and Sauvé dards without segmenting markets while also 2003). What form this regulation will take increasing the region’s influence on the evolu- depends very much on the type of service tion of international standards in these areas. being regulated. For instance, in financial and professional services, prudential regulations Deepening trade agreements are key, while natural monopolies such as Going beyond tariff reductions in trade agree- telecommunications and other network-based ments can help lengthen GVCs and boost services require procompetitive regulation. trade in services. The priorities include better N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    157 protection of foreign investment and intellec- wearing apparel and leather; and textiles, as tual property rights; a more competitive envi- well as most services sectors. ronment through competition policies and regulation of state-owned enterprises; and Broadening innovation policies easier movement of people and capital across Policy makers in the region are rightly con- borders. Such a policy environment will be cerned about the possibility that unless even more relevant as developing East Asian dramatic actions are taken, the ongoing tech- countries aim not only to specialize in low- nological revolution will pass their countries value-added tasks like product assembly but by and the promise of higher productivity will also to participate increasingly in the produc- go unrealized. This view, while understand- tion of more sophisticated goods and services. able, is too extreme. Policy makers need not Ongoing trade negotiations within develop- only to look at ways of promoting more rapid ing East Asia and with the rest of the world diffusion of digital technologies (“Industry will, therefore, have important consequences 3.0”) but also to adopt a broader view of for the future of GVC integration and innovation policies. productivity growth in regional economies. ­ Increased efforts are necessary, in par- A recent “deep” trade agreement, which ticular, to expand access to digital technolo- includes two developing East Asian coun- gies. While simple mobile technologies have tries (Malaysia and Vietnam) and nine other spread widely across the region, access to middle- and high-income Pacific Rim coun- the internet and to fixed broadband is much tries, is the Comprehensive and Progressive less common. Most of the population across Agreement for Trans-Pacific Partnership developing East Asia is online, but they (CPTPP). It replaces the original Trans-Pacific access the internet through mobile networks. Partnership (TPP) agreement following the Although this has brought benefits, particu- withdrawal of the United States in early 2017. larly to consumers, the foundation of a digital As the TPP had intended, the CPTPP elimi- economy is fixed broadband. Without acces- nates the vast majority of tariffs while also sible broadband, the innovations associated reducing nontariff barriers by harmonizing with “Industry 4.0” technologies, such as the regulatory practices (including on intellectual internet of things (IoT), will not be feasible. property rights, investment policies, and gov- Broadband access is lower and much more ernment procurement) as well as undertaking variable across and within countries, sug- the mutual recognition of procedures on sani- gesting considerable scope for improvement. tary and phytosanitary standards and tech- Also concerning is that broadband adoption nical barriers to trade. It also includes trade among private businesses is low. facilitation procedures that are consistent The fuller diffusion of broadband across with the World Trade Organization (WTO) people and businesses is therefore a priority Trade Facilitation Agreement. to improve competitiveness. Doing so can Recent analysis shows that the CPTPP, ensure, on the one hand, that firms will be although less beneficial than the original TPP able to compete and innovate and, on the because it excludes the United States, would other hand, that aspiring entrepreneurs and have positive trade and income effects for labor market entrants will be able to better both Malaysia and Vietnam (Maliszewska, access markets, finance, and information on Olekseyuk, and Osorio-Rodarte 2018). By inputs, prices, jobs vacancies, and so on. 2030, Vietnam is expected to reap the larg- Two aspects are relevant here for policy. est gain from the agreement, with its gross First, it will be necessary to reform sectoral domestic product (GDP) increasing by about policies to provide higher-quality, competi- 2.8 percent compared with the baseline with- tively priced broadband access. Regulations out the agreement. In Vietnam, the sectors should be modified to provide incentives for that potentially benefit the most from the existing and prospective providers to use CPTPP are food, beverages, and tobacco; the existing infrastructure more efficiently. 158   A RESURGENT EAST ASIA Particularly relevant in this regard are steps and licensing of technology, and improved to promote the sharing of infrastructure to managerial practices—could boost innova- lower entry barriers and increase competi- tion performance across the region. tion while also increasing providers’ abil- ity to lease capacity on nondiscriminatory Improving SMEs’ access to finance terms. Despite the deepening of domestic capital The second set of policy actions needed markets across much of the region, new policy for fuller broadband diffusion would be approaches will be required to expand SMEs’ to expand the provision of the broadband access to finance, especially for investment. network itself. This will require that the Many elements of the traditional approach to sector be able to attract more private capi- providing SME finance—which has relied on tal. Public-private partnerships offer one setting up state-owned banks or specialized promising approach to doing this, including institutions, imposing lending requirements, to deploy broadband networks into areas or capping interest rates—have not been suc- that might not otherwise be commercially cessful. The most promising options attempt viable. Malaysia, which currently lags in fixed to address more directly the reasons that broadband access (with only about a third of SMEs cannot access finance, including the households having access and about the same lack of available information about SMEs or proportion of businesses having a website), the limited collateral they have to offer poten- is considering many of these reform options tial lenders. (World Bank 2018a). Two such innovative schemes are particu- On innovation inputs, an important new larly relevant. Each also highlights the poten- policy direction in many countries is upgrad- tial that digital technologies and platforms ing managerial practices. As stressed in Cirera offer in improving SME access to finance. The and Maloney (2017), managerial capabilities first is to expand information-­sharing mecha- matter for the efficacy of innovation invest- nisms such as credit registries and credit ments: low managerial capabilities prevent bureaus, which collect and disseminate infor- firms from identifying productive opportu- mation about borrowing by SMEs.2 These nities, evaluating their feasibility, managing mechanisms have expanded worldwide over their risk, and allocating human resources. recent decades. Whereas in the 1980s only World Management Survey (WMS) data a handful of economies had credit reporting from the two countries in the region that the institutions in place, as of 2013, more than WMS covers (China and Vietnam) point to 70 percent of economies had a credit regis- serious deficiencies in managerial practices try, and more than 80 percent of them had a in these countries.1 So policies designed to credit bureau (World Bank 2013). According promote the upgrading of organization and to the World Bank’s Doing Business index, managerial practices (such as management in developing East Asia in 2018, credit regis- extension programs) should receive more tries and bureaus covered, respectively, about emphasis in formulating innovation policies, 32 percent and 26 percent of all individuals particularly for countries far from the pro- and firms.3 The coverage of credit registries in ductivity frontier. East Asia is significantly higher than in Latin As indicated in the analysis of country America and in Europe and Central Asia. On performance on the Global Innovation Index the other hand, the region’s credit bureau cov- (GII) in chapter 2, ongoing efforts to address erage is much lower than in these two other gaps across much of the region in human developing regions. capital, and particularly in education, need to Increased coverage by such credit report- be strengthened. Enhancing quality in these ing institutions has been found to signifi- areas—including through measures such as cantly reduce the financing gap between large training for innovative activities, acquisition and small firms (Galindo and Micco 2010). N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    159 In economies with credit registries, SMEs positive impact on firms that can use mov- get a higher share of bank financing, while able assets (Calomiris and others 2017; credit bureaus benefit younger firms more Campello and Larraín 2016; Love, Martinez (Love and Mylenko 2003). Furthermore, Peria, and Singh 2016). the use of credit scores for small businesses Several economies in East Asia have mod- helps increase loans to financially con- ernized their secured transaction systems strained small firms (Berger, Frame, and since the 2000s, including Cambodia, China, Miller 2005). Indonesia, Lao PDR, the Philippines, and The use of online data to assess the cred- Vietnam. China’s experience stands out. itworthiness of firms can complement credit In 2007, China introduced a new property bureaus and registries. Such data can help law that unified the various laws that dealt cover SMEs that lack a credit history. When with various aspects of property ownership, firms conduct business on online platforms, expanded the menu of movable assets that the information that is produced can be could be used as collateral, reformed the used to evaluate the performance of firms, enforcement process, and set up a centralized ­ i ncluding by financial and nonfinancial registry for movable assets. The reform of institutions that are considering lending to the secured transaction system had a positive them. The e-commerce platform Alibaba in effect on SME finance in China. The number China, using its financial arm Ant Financial, of loans collateralized by movable assets grew has implemented an example of such an by more than 20 percent in 2008–10 after initiative. Since 2007, Alibaba has offered having stagnated before the reform (Dalberg microcredit to SME vendors on its platforms. 2011; IFC 2012). To evaluate borrowers, Alibaba relies on all the information collected on vendors’ activi- Foundational policies ties, including sales and payment p ­ rocessing records. In 2009–14, Alibaba provided Improving the business climate and more than $32 billion in loans to more than reforming the regulatory environment 800,000 SMEs (IOSCO 2014). While focusing on emerging policy priorities, The second innovative approach to it will be important that countries continue to improving SMEs’ access to finance focuses enact foundational measures that underpin on broadening collateral that lenders can their economic competitiveness. To increase use to offset the risk of default. SMEs often productivity growth and spur innovation, it lack sufficient immovable assets that can is necessary to ensure a vibrant and competi- serve as collateral, while the legal frame- tive business climate, which is also among the work often does not allow the use of mov- most important “analog complements” to able assets (such as accounts receivable or enable the digital economy.4 machinery) as collateral. This has led coun- Moreover, the emphasis on the business tries to reform their secured transactions climate and the regulatory environment is systems to allow these assets to be used as consistent with the need for a broad view of collateral. For instance, collateral laws could innovation policy and to invest in missing be updated to explicitly define which mov- complementary factors (Cirera and Maloney able assets can be used as collateral and to 2017). The analysis in chapter 2 of where var- establish enforcement mechanisms. These ious regional economies rank on the Global could be complemented with centralized, Innovation Index showed that most countries electronic collateral registries for movable fall short on the Institutions pillar of the GII, assets. Although analysis is limited about the within which the gaps are most marked for impacts of such secured transactions system the regulatory and business environment. reforms in low- and middle-income coun- Measures to address these shortfalls can be tries, the available evidence points toward a expected to increase the returns to innovation. 160   A RESURGENT EAST ASIA Strengthening financial sector schooling access, educational quality, and infrastructure enhanced learning outcomes. To improve access of SMEs to finance, it is also critical that key elements of the finan- Emerging priorities cial infrastructure be improved. In particu- lar, identification systems, insolvency and Developing higher-order skills ­ c reditors’ rights regimes, accounting and Changes in technology mean that work in auditing requirements, and retail payment the 21st century increasingly requires skills systems are all relevant aspects. In many of beyond basic numeracy and literacy, impor- these areas, economies in developing East tant as those will remain. Countries in devel- Asia are implementing reforms that can oping East Asia will increasingly need to help underpin improved access of SMEs emphasize high-order cognitive as well as to finance. For instance, the Philippines is socioemotional skills to ensure that work- implementing a national retail payments ers are productive and competitive in their strategy to facilitate access and reduce the changing economies. cost of low-value payments, elements of As with basic cognitive skills, develop- which would be expected to benefit SMEs ment of socioemotional skills needs to start disproportionately. early. Indeed, socioemotional learning starts in early childhood and is shaped by the same family and environmental factors—health, Pillar 2: Building skills nutrition, and early stimulation—that affect Ongoing technological changes and shifts other dimensions of children’s readiness to in trade patterns often raise the specter of a learn. Socioemotional, as well as other higher- jobless future, including in developing East order skills, can then be further developed Asia. What is more likely, however, is that the over the life cycle (Bodewig and others 2014; nature of work is going to change with time. World Bank and DRC, forthcoming). Some jobs may disappear, but others will A growing number of countries have rec- evolve, and still others—new types of work— ognized emerging skills needs and are putting will be created. Moreover, an increasing share greater emphasis on problem solving, creative of jobs will likely require a broader range thinking, socioemotional, and other higher- of advanced skills than in the past. Success order skills, as in the following examples in navigating this future will, thus, require (World Bank and DRC, forthcoming): countries to support development of more- advanced skills among their populations. •  In the Republic of Korea, the 2015 Revised Building these skills broadly across countries’ National Curriculum aimed to nurture socioeconomic groups will be important both a “creative and integrative” learner by to future productivity growth and to ensuring promoting socioemotional competencies, that growth is inclusive. knowledge-information processing skills, Emerging policy priorities in this area creative thinking skills, communication include developing higher-order cognitive skills, and civic competency by integrating and socioemotional skills among current and liberal arts and natural sciences tracks in future workers, building continuous skills high schools. development systems to enable lifelong learn- •  In Singapore, the traditional focus on ing and skills upgrading, and enhancing peo- academic performance is shifting toward ple’s digital and technical capabilities. a “positive education” model focused on Success in developing higher-order skills skills that will assist students in strength- will require that people have strong basic ening their relationships, building positive skills. As such, it will be important for the emotions, enhancing personal resilience, region’s policy makers to remain focused promoting mindfulness, and encouraging on foundational policies to ensure broad a healthy lifestyle. N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    161 •  In Finland, the new national core curricu- will be important that countries build skills lum introduced collaborative classroom development systems to enable learning practices that are multidisciplinary as well and skills upgrading for people over their as problem and project based. Students are entire working lives. With rapid technologi- expected to participate more actively in the cal change, opportunities for periodic skills learning process, including in the develop- upgrading will become increasingly important ment of the curricula and in ­devising their for current workers—for both productivity own learning goals, while teachers’ role is and inclusion reasons. Multiple job transi- then to provide an enabling learning envi- tions throughout people’s working lives may ronment and support students in achieving also increasingly become the norm in devel- their individual study plans. oping East Asia, as they have in high-income economies. For these reasons, systems of life- Because technology and related labor mar- long learning will become increasingly impor- ket changes are likely to occur faster than tra- tant to ensure workers are prepared for the ditional country education systems can adapt expected impact of technological changes on to them, it will also be important for countries the labor market. in developing East Asia to explore innovative Technical and vocational education and approaches to learning and skills develop- training (TVET) programs can play an impor- ment. Digital technology may provide some tant role as part of countries’ broader skills important solutions through technology- development strategies, as can other programs enabled learning. that support lifelong learning. To be effec- Although there is little rigorous evaluation tive, such programs must have greater mar- to date of online learning tools or adaptive ket relevance and be more closely linked to learning software, several adaptive learning the private sector than in the past. Successful platforms are already available in the region systems will, thus, require close coordination and show some promise. In China, for exam- and partnership between government agen- ple, Yuanfudao offers online courses inspired cies and the private sector. by the Khan Academy (as well as a test data Effective public-private partnerships pool uniquely adapted to China’s testing sys- to foster enterprise leadership in curricu- tem); TutorGroup offers connections anytime lar design, delivery, and practical training anywhere to synchronous tutoring with a live have been built in several countries, includ- tutor; and Kidaptive, a cloud-based adap- ing through the Meister Schools in Korea tive learning platform, enables creation of and through the German apprentice system learner profiles and actionable feedback for (World Bank and DRC, forthcoming). In parents and teachers (World Bank and DRC, the United Kingdom, as well as elsewhere in forthcoming). Europe, sector employer councils have been Although technology-enabled learning tools set up to foster close partnerships with the generally come from the private sector, there private sector. And, some East Asian coun- is considerable scope for public-private part- tries have established independent apex train- nerships to identify and maximize the com- ing authorities, as with Singapore’s Institute plementarities between traditional and new for Technical Education. Governments still learning modalities. Making the most of new need to provide oversight, however, by moni- learning technologies will also benefit from toring program quality, encouraging account- regular evaluation, based on which the most ability, and by ensuring a results orientation effective approaches can then be scaled up. in government financing. Notably, relatively little rigorous impact Building continuous skills evaluation has been carried out on adult development systems training and skills development programs As technology changes and employers’ skills in developing East Asia. Studies from the needs become increasingly sophisticated, it Organisation for Economic Co-operation 162   A RESURGENT EAST ASIA and Development (OECD) and other entrepreneurs; and those in lower-income middle-income regions (especially Latin communities (box 5.1). America) help shed some light, however. For example, training programs are more likely to have a positive effect on post- Foundational policies program employment than on earnings Strengthening basic learning outcomes (Betcherman and Moroz 2018). Studies also Despite much of developing East Asia’s suc- show that positive impacts are larger when cess in increasing access to education, learn- training is adapted to actual labor market ing outcomes in many countries, whether needs. Combining on-the-job training with at the national level or among specific sub- classroom training has also been found to populations, still lag. Almost 60 percent of be more effective than classroom training students across the region lack the necessary alone (Kluve 2016). Linking training with foundational skills, let alone skills that will formal qualification systems also seems be needed to compete and succeed in increas- to help, especially where employers are ingly skills-intensive, technology-driven envi- actively involved in determining the quali- ronments (World Bank 2018b). Many of fication framework. Although international those with the largest deficiencies are those at findings provide some useful guidance, it the bottom of the income distribution or dis- will be important for the region’s coun- advantaged in other ways. Although access to tries to evaluate their training programs to education, including to tertiary education, has ensure they are having the desired impacts, been improving across the region, poor stu- especially in the face of rapidly changing dents still confront lower-quality education economic circumstances. and systematically poorer learning outcomes. Education systems across developing Enhancing people’s digital and technical East Asia will, therefore, have to ramp up capabilities their efforts to increase educational quality Demand for higher-order technical skills— and learning. Drawing lessons from Japan, including the knowledge and ability to use Korea, and Singapore along with other high- information and communication technolo- performing education systems in East Asia gies (ICTs)—is increasing rapidly in middle- and beyond, a recent World Bank report, income countries around the world (World Growing Smarter: Learning and Equitable Bank 2016). Developing East Asia is no Development in East Asia and Pacific, argues exception. Indeed, employers across the that to strengthen learning outcomes and thus region report that it often is difficult to find foundational skills, national education sys- employees with the requisite technical skills tems in developing East Asia should focus on (Mason, Kehayova, and Yang 2018). the following (World Bank 2018b): As technologies change, there will likely be a growing need for specialists able to •  Aligning institutions and systems to ensure develop, operate, and maintain ICT systems. that the basic conditions for learning, At the same time, countries will also need including curricula and broad access to to ensure that their populations have basic educational materials, are in place digital literacy as well as the knowledge and •  Strengthening teacher selection and prepa- ability to use digital business tools and appli- ration to improve the quality of teaching cations. Such knowledge will have important •  Providing adequate public spending for implications for productivity and inclusion. basic education and learning, including Recognizing this led the government of sufficient funding of schools and districts Malaysia in 2015 to initiate its eRezeki and in disadvantaged settings eUsahawan programs to promote greater •  Emphasizing child readiness to learn, involvement in the digital economy among including through support to early child- youth; micro-, small, and medium-size hood health and nutrition and increased N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    163 BOX 5.1  Fostering digital inclusion: Malaysia’s eRezeki and eUsahawan programs In 2015, the Malaysian government launched the to respond to the global trend toward the increased eRezeki and eUsahawan initiatives to facilitate the use of independent contractors or freelancers. greater inclusion of such groups as youth; micro- enterprises, digital entrepreneurs, and the bottom eUsahawan 40 percent of the income distribution (B40) in the The eUsahawan program focuses on improving digital economy. The objective of the eRezeki initia- ­ educational services, particularly related to digital tive is to provide opportunities to members of B40 entrepreneurship, because a lack of skills in this area communities to earn additional income by leveraging is one of the most significant causes for ­ Malaysia’s digital technologies. The eUsahawan initiative is a digital divide. Through the program, a structured digital entrepreneurship program intended to main- digital entrepreneurship curriculum is being rolled ­ stream digital entrepreneurship education among out through public tertiary education institutions, emerging and current microentrepreneurs using a including TVET colleges and higher-learning insti- community-centric approach. tutions, and through entrepreneur development agencies. The initiative targets students and micro- ­ eRezeki entrepreneurs, covering key digital technology trends The eRezeki initiative has three major strategies: that are reshaping businesses today, including social media marketing, mobile commerce, analytics, •  Identify and establish collaboration between local payment, and digital advertising. e-­ and international digital platforms to secure and A network of educational institutions and stra- channel various tasks or work that Malaysian tegic partners has been established to strengthen the workers can perform. These fall into three catego- eUsahawan ecosystem. The eUsahawan curriculum is ries: simple digital microtasks, digitally enabled integrated into the official curriculums of 19 educa- tasks, and digital work. tional institutions, with lecturers at these institutions •  Conduct outreach to targeted communities to being trained as eUsahawan trainers and enabled to profile workers and match them to suitable work. teach both enrolled students and microentrepreneurs. The participants collaborate with participating eUsahawan collaborates with 63 strategic partners to partners’ platforms to start performing the tasks scale up initiatives such as advisory services, outreach and thereby to earn income. efforts, onboarding, trainer mobilization, training •  Provide an intermediary platform to link partici- implementation, and training facilities. pants with work aggregated from local and inter- Since 2015, more than 160,000 students and national platforms through an open application microentrepreneurs have passed through the eUsa- public interface (API). hawan program. Out of these, approximately 30 percent of participants have reported generating In addition, Malaysia’s Global Online Workforce additional sales totaling more than RM 320 million program—an offshoot of the eRezeki program—has over a period of three to six months. been introduced to prepare the country’s workforce Source: World Bank 2018a, World Bank 2018c. access to high-quality early childhood universal primary and secondary school is still education and development services not a reality in much of the region. Universal •  Using regular learning assessments to primary and secondary education will be diagnose challenges and inform improve- essential to ensure that people have the basic ment efforts. skills needed to be productive and successful in the region’s labor markets. Further broadening education access As countries strive to transition from Countries in developing East Asia have made middle-income to high-income status, it will tremendous strides in making primary and be important to continue expanding access secondary education available to their popu- to education and, in particular, to achieve lations. Despite significant progress, however, universal primary and secondary education. 164   A RESURGENT EAST ASIA In addition, efforts to broaden access to and adjusting to changing circumstances. Those raise the quality of university education— who are older, economically vulnerable, or already under way in much of the region— less educated are among those most likely will be increasingly important to ensure that to be affected by economic changes. Several workers are productive and competitive in countries in developing East Asia—­ including rapidly changing economic circumstances. Cambodia, China, Indonesia, Malaysia, Mongolia, the Philippines, and Vietnam— already provide some form of employment Pillar 3: Enhancing inclusion services, although the range and accessi- There is growing concern across the region bility of these services tend to be limited about rising inequality in outcomes and (Betcherman and Moroz 2018). Expanding opportunities. This is reinforced by the pace the coverage of employment services is thus of economic change, which could imply that important. those with less-advanced, less-marketable Like skills development and training pro- skills may have trouble finding employment grams, employment services are a form of in a changing labor market. Also, despite active labor market programs (ALMPs) that developing East Asia’s success in reducing link beneficiaries with income-generating poverty, many remain vulnerable to a range opportunities that are intended to reduce vul- of economic shocks, and their exposure is nerability. Examples of such services include likely to be even greater in a world undergo- job search assistance (including counseling ing rapid technological change. It will, there- and job placement services) and provision of fore, be important for governments in the labor market information. region to put in place stronger, more nimble Interest in such services is relatively recent systems of support to protect workers who in developing East Asia. Nonetheless, these have difficulty adjusting to new and emerging types of services can provide a worthwhile economic circumstances. complement to the usual process of job In addition to supporting the develop- searching and matching based on networks of ment of 21st-century skills, discussed above, family and friends, which disadvantage poor emerging policy priorities include strengthen- and vulnerable workers. The relevance of ing employment support services that assist such programs is likely to be greater in econo- workers displaced by technological change mies with higher shares of wage earners and and trade liberalization, broadening unem- greater administrative capacity. Nonetheless, ployment benefits tied to economic transition, countries with less capacity could focus more and making digital technologies more afford- on “core” employment services, including able and accessible. information on overall job market conditions Several areas of foundational reform will and vacancies and on providing basic job also remain important to fostering inclusive search assistance and placement services. growth and thus warrant policy makers’ Countries with greater capacity and more attention. These include reform of generalized formal labor market structures could consider and inefficient subsidies, expansion of social providing “extended” services, including links assistance programs that target the poor and to training and skills development programs vulnerable, and reorientation of public spend- and to unemployment assistance or insurance ing to promote equity. (Betcherman and Moroz 2018; Mazza 2017). Indeed, evidence suggests that integrated packages of services tend to be more effec- Emerging priorities tive than single interventions (World Bank, Expanding employment support services forthcoming). Development of partnerships As the pace of economic change accelerates with private placement agencies should also with shifting trade patterns and technologi- be considered, including the use of job place- cal change, some workers will have difficulty ment- or results-based payment systems. N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    165 As with other types of ALMPs, evidence in the region remains lower than in some on the effectiveness of employment sup- other middle-income regions (see chapter 3, port programs is limited in middle-income ­ figure 3.19). Where social insurance programs settings, including in developing East Asia. have been put in place, they have tended to Most evidence comes from high-income set- focus on access to services such as health care tings. Nonetheless, employment services have (for example, in Thailand) or for specific usually been found to be cost effective, with groups in the population, such as the elderly, positive impacts on employment outcomes as opposed to those affected by employment (Betcherman and Moroz 2018). Information shocks or economic transitions. and counseling and placement assistance, Unemployment insurance is relatively in particular, are low-cost interventions new in developing East Asia. The tradi- that can improve employment and earnings tional approach to dealing with unemploy- (Brown and Koettl 2015; Card, Kluve, and ment has been through severance programs. Weber 2015). Moreover, digital technologies At present, China, Mongolia, Thailand, and (including smartphone-based applications) Vietnam have active unemployment insurance can reduce the cost of extending labor market schemes. Malaysia introduced unemployment information and employment support even insurance in 2018, with full implementation further, while helping to improve the qual- scheduled to start in 2019. The Philippines ity of matches between workers’ skills and is considering implementing a program, employers’ needs. and Lao PDR and Myanmar have legisla- tion providing for unemployment insurance, Broadening unemployment benefits although these have not yet been implemented Although unemployment in most developing (Betcherman and Moroz 2018). East Asian countries has been low histori- A common feature of existing unemploy- cally, evidence from Indonesia and Vietnam ment insurance schemes in the region has been suggests that new technologies are often labor to link unemployment insurance to ALMPs saving (Darko and Viollaz 2018; Poole and such as employment services, following the Santos-Paulino 2017). Continuing shifts in Korean model. Unemployment insurance in trade, rapid technological change, and asso- the region also tends to have low contribu- ciated changes in labor demand may raise tion and benefit levels. Because of the high the risks of some workers with outmoded incidence of labor informality across much skills becoming unemployed and, if unpro- of the region, coverage also tends to be low. tected, they could fall into poverty. Measures Only one country in developing East Asia, to cover individuals and households against Mongolia, covers self-employed workers on a idiosyncratic risks (such as those associated voluntary basis, similar to Korea.5 with technology-related employment shocks), Traditional concerns about unemploy- or to protect people from poverty have been ment insurance revolve around its effect on relatively limited to date in developing East people’s incentives to work, especially if the Asia. This is reflected in the low spending (as benefits are large or program durations are a share of GDP) on social protection in the long. Cross-country experience indicates that region (as shown in chapter 3, figure 3.18). when unemployment benefits are modest and Some countries have made efforts to expand their duration short, as in developing East poverty-targeted social assistance programs, Asia, unemployment insurance has positive as in China (Dibao, a minimum income guar- net benefits, particularly relative to severance antee program); Indonesia (Program Keluarga programs (Betcherman and Moroz 2018). Harapan [PKH], a conditional cash trans- A bigger concern in the face of changing fer program); and the Philippines (Pantawid economic circumstances in the region is low Pamilya Pilipino Program [4Ps], a condi- unemployment insurance coverage and the tional cash transfer program). However, over- relatively poor protection against poverty if all coverage of social safety net programs workers lose their jobs because of technology 166   A RESURGENT EAST ASIA or trade. Thus, countries might consider (World Bank 2016). Regulatory reforms that developing or expanding unemployment enable market competition and ensure a level insurance systems to cover the self-employed. playing field for operators will thus be impor- These could also be linked to an expanded tant to ensuring that digital technologies are and strengthened system of social assistance, both broadly available and affordable, even to ensure that workers who cannot make the in far-flung corners of the region.6 At the skills transition do not fall into poverty (as same time, there is evidence of market failure further discussed within the “Foundational impeding the development of digital infra- policies” section below). structure, especially in countries’ rural and Development of such integrated and more-remote areas. Even where it is techni- “adaptive” social protection systems can be cally viable to serve remote communities or enabled using existing digital technologies. sparsely populated areas, there may be little Several countries in the region, ­ including commercial incentive to do so, given the costs China, Indonesia, and the Philippines, already and expected returns. Even where providing have information technology (IT)-enabled basic services is commercially feasible, deliv- social registries that capture information ering more-advanced networks suitable for about people’s demographic and welfare carrying data services, such as high-speed status, help validate program eligibility, and internet, may not be economical. confirm delivery of the appropriate benefits. To address these challenges, governments Over time, these registries could be used to around the world have tried a variety of link programs, facilitating development of an approaches to extending digital infrastruc- integrated social safety net that is adaptable, ture. These have included, for example, the based on people’s changing welfare status, establishment of Universal Service Funds that and designed to appropriately account for channel payments by operators to fund rural work incentives. infrastructure and the licensing of mobile and internet service providers where these licenses Making digital technologies widely include specific network rollout obligations accessible and affordable (World Bank 2016). Infrastructure sharing Improving affordable access to digital tech- arrangements—in which operators share one nologies for those who still lack such access another’s network infrastructure (or at least will also play an important role in fostering some elements of it)—have also shown some inclusion—through helping people access promise, as has “mutualization,” a contrac- real-time weather and price information, tual arrangement in which wholesale opera- access markets, purchase consumer goods, tors are created to sell only to other operators, engage in mobile banking, and, when needed, not directly to users. receive social benefits. Despite rapid growth Interventions aimed at making digital in access to mobile-phone and internet tech- services available in poor, rural, and remote nology across developing East Asia, many still areas are continuing to evolve. Given the lack access, especially to broadband internet. increasing importance of digital technologies Broad and affordable access to digital tech- to inclusion in developing East Asia, it will be nologies thus remains an important pending important for countries to continue to iden- agenda across the region. Moreover, poor and tify, evaluate, and share effective solutions vulnerable populations as well as those living to making digital technologies broadly and in rural and more-remote areas still have sys- affordably available. tematically less access to digital technologies than those living in urban centers. Foundational policies Global evidence indicates that efforts to promote market competition, private invest- Reforming generalized subsidies ment, and independent regulation have gener- Several countries in the region still have “indi- ally been effective in extending coverage and rect subsidies” (from setting consumer prices making digital technology access affordable of goods and services artificially low) on N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    167 products such as fuel and food. While typi- equality of economic opportunity over the cally justified because they are seen to support longer term. redistributional objectives, these subsidies Spending on primary and secondary edu- typically benefit households in the upper cation, as opposed to the tertiary level, will be part of the income distribution. In Indonesia, most effective in promoting greater equality for example, a fifth of the government bud- of opportunity. Moreover, it will be increas- get (4 percent of GDP) was spent on energy ingly important to focus on spending not only subsidies, which was about four times the to increase service access but also to improve amount spent on social assistance. Only service quality. It is critical that greater spend- about a third of these subsidies reached the ing on education, for example, translate not poor and vulnerable, far lower than the ben- only into higher enrollment rates but also efits that flowed to the poor from Indonesia’s into better learning and skills outcomes biggest social assistance programs (World (World Bank 2018d). Bank 2018d). Following extensive fuel sub- In principle, savings from reduced spend- sidy reforms in 2015, these subsidies fell to ing on generalized subsidies could cover much about 0.7 percent of GDP in 2017. of the costs of financing the increased spend- ing on the inclusion agenda, including on pro- Expanding social assistance programs tection against employment shocks; expanded As discussed in chapter 3, both spending on employment services; broad, affordable and coverage of targeted social assistance access to digital technologies; enhanced social ­ programs are low in developing East Asia assistance; and more equitable public service relative to other middle-income regions. provision. Enhanced provision and access A recent World Bank study, Riding the to digital technologies can also play a role. Wave: An East Asian Miracle for the 21st Indeed, well-targeted, IT-enabled interven- Century , highlighted the importance of a tions in social protection, labor, and digital well-targeted and adequately resourced connectivity can be particularly cost effective social assistance system as part of devel- in fostering inclusive growth. oping East Asian countries’ strategies to ensure that growth is inclusive (World Bank 2018e). Given the changing economic envi- Pillar 4: Strengthening ronment, targeted safety net programs are institutions important not only to protecting the current As countries in developing East Asia seek poor and vulnerable populations but also to transition from middle-income to high- to ensuring that those who have difficulty income status, the governance challenges they adjusting to new realities are protected from face will be broader and deeper than at earlier becoming poor. stages of development. As countries’ econo- mies become more sophisticated and more Reorient public spending to promote complex—and as the global economic and inclusion technological environments change—there It will also be important to reorient spend- will be a higher technical bar for sound eco- ing toward expanding public services, such nomic policy making. As countries seek to as education and health, that promote build increasingly affluent, middle-class soci- greater equality of opportunity among the eties, they will need to further develop state poor and vulnerable. Such spending has capacity as they face increasing demand for already had a positive distributional impact the delivery of more and better-quality ser- in Indonesia and Vietnam (Ruggeri Laderchi vices. Moreover, countries will face new polit- 2018), and there continues to be scope to ical economy challenges in sustaining past expand such spending in other countries success. Reducing the risk of policy capture, as well. Public spending on education and enabling the formation of broad-based coali- health services can be equality enhancing in tions that favor inclusive growth, and facili- the short term, while contributing to greater tating the transition to rules-based governance 168   A RESURGENT EAST ASIA will all be important. Shifts in global trade and provincial levels. During the policy con- and rapid changes in technology just add to sultation period, the government publicizes the urgency of addressing these challenges. policy proposals, and citizens weigh in, often Strengthening voice and accountability in a critical fashion (Horsley 2009). Evidence will be central to addressing these governance from both countries suggests that consulta- challenges. Three emerging areas for reform tion on legislation and regulatory drafting has will be particularly important: expanding increased voluntary compliance (for example, mechanisms to promote citizen voice and reduced labor disputes) and improved firms’ participation, increasing government trans- perceptions of the respective government’s parency, and strengthening the systems of regulatory legitimacy (Malesky and Taussig checks and balances. Foundational policies 2017a, 2017b). Laws and regulations that to strengthen bureaucratic quality will also be undergo consultation are substantially less critical to ensuring that governments’ capac- likely to be repealed or amended, indicating ity to design and implement policies can meet that learning contributes to policy stability rising societal expectations. (Gueorguiev 2014). In China, the positive impacts of public consultation appear to be most salient among otherwise marginal- Emerging priorities ized groups (Truex 2014). There is also evi- Expanding mechanisms to promote citizen dence that increased public participation voice and participation through Notice and Comment has helped to Given the limited avenues for participating reduce corruption (Stromseth, Malesky, and in policy and regulatory decision-making Gueorguiev 2017). processes, there remains considerable scope Nonetheless, questions remain as to for countries in developing East Asia to whether administrative approaches to strengthen people’s voice. Enabling policy- increasing voice are sufficient to meet forth- making processes to be more inclusive will be coming policy needs and challenges as coun- key to avoiding policy capture. Greater voice tries seek to transition from middle income and participation can contribute to more to high income, especially if accompanying durable reform coalitions, strengthen policy accountability mechanisms are weak. For formulation, and lead to more sustainable consultation to be effective, there must be policy reforms. reasonably open debate, and policy mak- To date, several countries in develop- ers must be prepared to tolerate and, when ing East Asia have taken measures to try to appropriate, take on board critical feedback. increase opportunities for public input into In fact, while public consultation and Notice policy-making processes. China and Vietnam, and Comment have helped increased social for example, have introduced institutional acceptance of legislation, it is less clear as to mechanisms for increasing citizen voice by how much they have influenced the content introducing public consultation, “Notice and quality of public policy. Moreover, rely- and Comment,” and voluntary compliance ing on a single mechanism to contribute to (Malesky 2018). The idea behind introducing policy processes may be insufficient. World consultation and Notice and Comment in the Development Report 2017: Governance process of drafting regulations is that people’s and the Law argues that “all expressions voice can be integrated broadly into decision- of citizens’ collective action, including vot- making processes through an administrative ing, political parties, social movements, civic process and, through that, policy makers can associations, and other less conventional also gain valuable information about societal spaces for policy deliberation, are imper- views and preferences. fect” (World Bank 2017b, 25). As such, it Indeed, China and Vietnam now subject may be important that the region’s govern- hundreds of draft laws and regulations to ments provide opportunities for citizens to public review each year, at both the national give voice through multiple mechanisms. N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    169 Increasing government transparency local knowledge. Transparency, in allowing A critical input to effective citizen voice and the media, civil society, and individuals to participation is accurate, accessible, and report on political abuses and to embarrass actionable information. This includes public local leaders, creates “millions of auditors” access to government documents (for example (Kaufmann 2003) who have been depu- on existing or proposed laws and regulations) tized by central authorities—a substitute as well as to information on government for direct accountability through elections budget proposals and execution. Indeed, and voters (Smulovitz and Peruzzotti 2000). to be effective, measures to increase citizen The idea is that the incentive effect associ- voice and participation in policy processes— ated with increased transparency can have whether through consultation or Notice and an impact, even in the absence of a well-­ Comment—depend critically on the timely functioning electoral system (Bauhr, Grimes, availability of accurate information. As with and Harring 2010). voice and participation, there is still consid- Making information available through erable scope for governments in developing transparency initiatives is an important East Asia to increase transparency and access first step toward increasing accountability. to information. Transparency alone may be insufficient to Several governments in the region are promote accountability or to induce positive already taking initiatives to increase gov- changes in governance, however. Once infor- ernment transparency. For example, China, mation is made public, the effectiveness of Indonesia, Mongolia, Vietnam, and two states transparency initiatives to promote govern- in Malaysia (Selangor and Penang) have all ment responsiveness ultimately depends on passed Freedom of Information legislation. people’s ability to induce action in the policy And Malaysia is working to expand regulatory arena. Government responsiveness is a func- transparency by uniting all regulations and tion of the incentives public officials face in Notice and Comment on one common infor- terms of ultimately being held accountable, mation platform. China’s Open Government whether through electoral or other mecha- Initiative (OGI) mandates that a range of gov- nisms (World Bank 2017b). ernment documents (such as legal, normative documents; budgets; and land and infrastruc- Strengthening accountability ture plans) be placed online at every level of Greater accountability in government will be government. Vietnam’s Access to Information critical for developing East Asian countries Law, which went into effect in 2018, is similar to avoid capture and to address the other to that of China’s OGI. The new Vietnamese emerging political economy challenges as law also contains provisions allowing citi- they seek to transition from middle-income zens to request information not specifically to high-income status. Accountability is most outlawed and mandates that agencies reply commonly achieved through increasing the within a specified time frame (Malesky 2018). contestability of political and policy-making Although evidence on the impact of transpar- processes, creating systems of checks and bal- ency measures in developing East Asia is rela- ances, and developing more-inclusive institu- tively limited, research on the Chinese OGI tions. There is some evidence that the number suggests that the initiative has been effective of checks and balances have increased in in reducing misuse of public funds (Stromseth, parts of developing East Asia and that, as Malesky, and Gueorguiev 2017). a whole, the region is roughly on par with In increasingly complex and diverse econ- lower-­ m iddle-income countries globally. omies and societies, transparency provides Nevertheless, countries in the region would an efficient mechanism for central officials still benefit from further strengthening their to monitor the activities of lower officials by systems of checks and balances. essentially delegating the task of oversight to While electoral systems and institutional groups and individuals with more intimate (legislative and judicial) constraints on 170   A RESURGENT EAST ASIA executive powers are the most common and there will also be a premium on improving direct mechanisms for promoting greater the quality and performance of those who accountability in government, they are not serve in public agencies. A key element of the only means. Broad business coalitions this will involve strengthening mechanisms to can also play a significant role in demanding encourage merit-based selection and promo- accountability on the part of the government tion rather than relying on political or per- (World Bank 2017b). In fact, this was a key sonal relationships and influence. component of sound economic governance Strengthening public sector performance among the now-advanced economies in East management will also play a key role. In this Asia, which institutionalized mechanisms context, technology platforms are providing that established frequent and regular con- increasingly powerful tools to support bureau- sultation between the government and busi- cratic upgrading through computer-assisted ness (Birdsall and others 1993). International recruitment testing systems as well as through agreements and institutions can also contrib- enhanced performance management systems. ute to greater government accountability, as Technology platforms can also improve man- international conventions, treaties, and other agerial control, reduce individual discretion formal agreements can serve as v ­ aluable (including opportunities for rent seeking), (even if imperfect) commitment mechanisms enable feedback on public service quality, and for governments (World Bank 2017b). In the ensure that public resources are collected and economic sphere, regional or multilateral spent efficiently (World Bank 2016). agreements made, for instance, through the Two recent initiatives—one in Indonesia Association of Southeast Asian Nations and one in China—demonstrate how govern- (ASEAN) or through deep trade agreements, ments in the region are working to enhance such as the CPTPP, can serve as such commit- public sector effectiveness through improved ment mechanisms. hiring procedures and enhanced performance management, and aided by new technologi- cal platforms (box 5.2). Continued efforts Foundational policies to raise the quality and effectiveness of civil Strengthening bureaucratic quality servants will be critical to meeting countries’ As development policy making becomes governance challenges as they seek to transi- increasingly complex in developing East Asia, tion from middle income to high income. BOX 5.2  Strengthening meritocratic hiring and promotion, civil service performance, and performance management: Recent initiatives in Indonesia and China Two recent initiatives help illustrate how the gov- corruption in civil service recruitment by line minis- ernments of Indonesia and China are working to try officials. Now, candidates are randomly assigned improve the quality of civil servants at entry and computer questions taken from a purpose-built enhance the management systems governing their database of 20,000 relevant questions. The system day-to-day performance on the job. includes weights assigned to questions to ensure that all candidates face tests of equal difficulty and Indonesia: Computer-assisted civil service allows for affirmative action toward candidates from exams for merit-based recruitment selected groups such as indigenous people or those In Indonesia, the Civil Service Agency (BKN) intro- living in regions with poorer school quality. duced a computer-assisted testing system (CAT) to The exams are graded while being taken, and replace the previously long-standing manual testing the results are posted in real time outside the test- ­ ampant system that had created opportunities for r ing center. This allows observers (such as civil society box continues next page N a v igating a C h anging Wor l d : D ire c tions for Po l i c y    171 BOX 5.2  Strengthening meritocratic hiring and promotion, civil service performance, and performance management: Recent initiatives in Indonesia and China (continued) organizations that are invited to attend) to check that performance plan whose quantitative and qualita- a ­ there is no interference with the results, while pro- tive indicators cascaded down from the national level viding the test takers with their scores at the end of to the bureau level and to the individual. the test. An outreach campaign to university students The Chinese authorities used the new manage- aims to publicize the new system and attract good ment systems to expedite the transition from sales tax candidates who previously might have been discour- to value added tax, while also gaining broad support aged by the opaqueness of the process. from agency staff. The new management systems, how- Although resistance to using the system by ever, also allowed SAT to invest in better performance s ubnational-level authorities remains a challenge ­ management by introducing the Digital HR initiative, to the CAT, informal feedback received by BKN initially tried on a pilot basis. Under this initiative, through social media suggests that the public sees the organizational units and staff are “evaluated on the system as fairer than the one it replaced. basis of a broader set of performance measures than just the revenue target” previously adopted (Brondolo China: Performance management systems for and Zhang 2016, 55). Although the potential to link more effective tax collection the system more closely to remuneration increases and In China, the State Administration of Taxation promotions has not yet been fully realized, the initiative (SAT) embarked on a massive effort to transform already represents a major step in implementing a more the effectiveness of its core tax collection functions transparent performance management system. undertaken by more than 800,000 staff. Over a three-year period, the SAT implemented for all staff Sources: Brondolo and Zhang 2016; World Bank 2018f. Pillar 5: Financing the transition Emerging policy priorities include to high income broadening countries’ tax bases and reducing tax competition, includ- Governments in developing East Asia ing through regional cooperation. To also face the challenge of financing the ensure these policies are as effective as ­ a mbitious high-income, increasingly possible, countries will need to continue middle-class, agendas outlined in this to pursue foundational policies focused report. To do so, however, they will need on simplifying their tax codes, reducing to increase domestic resource mobiliza- the high costs of tax compliance, and tion. Successfully addressing low revenue strengthening their tax administrations. mobilization will require addressing a mul- tiplicity of constraints. In financing the Emerging priorities transition to high income, governments will also need to balance the inevitable Expanding the tax base trade-offs between promoting growth, fos- Efforts to expand the tax base must use tering inclusion, and raising adequate rev- existing taxes better as well as introduce enues. Managing these trade-offs will likely new taxes. Countries in developing East require developing a new social contract, Asia have relied extensively to date on indi- in which governments pro­ v ide more and rect taxes, such as value added taxes (VAT) better public services in return for greater as well as excise and trade taxes. There citizen participation in and better compli- remains scope, however, for raising tax rev- ance with the tax system. enues through more extensive use of direct 172   A RESURGENT EAST ASIA taxes, including greater use and higher cov- Without effective regional cooperation, erage of personal income taxes. Similarly, developing East Asian countries—acting there is scope to increase the use of prop- individually—could be driven toward grant- erty or wealth taxes. The latter taxes have ing excessive fiscal incentives, which would the benefits that they should not unduly undermine their abilities to finance their affect firms’ investment decisions and can increasing revenue needs as they transition be designed in ways that are progressive and to high-income status. In this context, the thus can contribute to promoting inclusive ASEAN countries have attempted to reverse growth. the trend toward tax competition by initiat- Increasing domestic revenues could also ing a dialogue on improving transparency be achieved in part through the introduction and exchange of taxation information (World of new taxes that address market ­ failures— Bank 2017a). for example, on activities that impose nega- tive health or environmental externalities. Foundational policies Discussions are under way in parts of the region regarding the use of “green taxes,” Simplifying tax codes including on carbon emissions and on use of Measures to simplify countries’ tax codes harmful substances like nonbiodegradable could contribute to more transparent, fairer, plastics as well as on tobacco (World Bank and more efficient tax systems, while increas- 2018d). These have the dual benefits of gen- ing ease of payments. Tax simplification can erating government revenues while supporting also contribute to reducing the costs of tax more sustainable economic growth. compliance and, in doing so, support greater Efforts are also under way in several revenue mobilization. Reducing VAT exemp- developing East Asian countries to identify tions, for example, would provide one avenue new tax instruments or to reform existing for tax code simplification, as would simplifi- taxes in the face of mounting budget pres- cation of corporate income taxes. sures. In the Philippines, the government recently initiated a series of intended tax Strengthening tax administration reforms, the first round of which focused on Several countries in the region, including the reform of VAT, personal, and corporate Cambodia, China, Indonesia, Myanmar, the income tax and excise taxes. Other coun- Philippines, and Vietnam, have recognized tries are planning to introduce new tax mea- the need to improve tax administration and sures—for example, new mechanisms for an are undertaking measures to do so. Some of alternative minimum tax and a tax on inheri- those measures have contributed to improved tance and gifts in Indonesia; a tax on passive revenue mobilization. As noted above, new or capital income in Mongolia; and a new technology platforms, coupled with efforts environmental tax in Vietnam (World Bank to raise bureaucratic quality, could also help 2017a, 2018d). lower tax compliance costs and increase revenue collection through enhanced public Reducing tax competition administration. The Chinese tax administra- Efforts to increase domestic revenue mobiliza- tion’s effort to enhance the effectiveness of its tion will also be more effective if they are bet- tax collection is a case in point (as discussed ter coordinated across the region. Countries in box 5.2). in developing East Asia have a history of tax competition, usually to attract foreign direct investment or to prevent it from migrating Conclusion elsewhere (World Bank 2017a). 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Together, these initiatives enable print runs to be lowered and shipping distances decreased, resulting in reduced paper consumption, chemical use, greenhouse gas emissions, and waste. We follow the recommended standards for paper use set by the Green Press Initiative. The majority of our books are printed on Forest Stewardship Council (FSC)–certified paper, with nearly all containing 50–100 percent recycled con- tent. The recycled fiber in our book paper is either unbleached or bleached using totally chlorine-free (TCF), processed chlorine–free (PCF), or enhanced elemental chlorine–free (EECF) processes. ­ More information about the Bank’s environmental philosophy can be found at http://www.worldbank.org/corporateresponsibility. E ast Asia has been a paragon of global development success. The dramatic transformation of the region over the past half century—with a succession of countries having progressed from low-income to middle-income and even to high- income status—has been built on what has come to be known as the “East Asian development model.” A combination of policies that fostered outward-oriented, labor- intensive growth while strengthening basic human capital and providing sound economic governance has been instrumental in moving hundreds of millions of people out of poverty and into economic security. Yet East Asia’s economic resurgence remains incomplete. More than 90 percent of its people now live in 10 middle-income countries, many of which can realistically aspire to high-income status in the next generation or two. But these countries are still much less affluent and productive than their high-income counterparts. Even as the region’s middle-income countries attempt to move up to high-income status, they confront a rapidly changing global and regional economic environment. Slowing growth in global trade and shifts in its patterns, rapid technological change, and evolving country circumstances all present challenges to sustaining productivity growth, fostering inclusion, and enhancing state effectiveness. A Resurgent East Asia: Navigating a Changing World is about how policy makers across developing East Asia will need to adapt their development model to effectively address these challenges in the coming decade and sustain the region’s remarkable development performance. “The world is changing. How do East Asia’s developing economies navigate this change? This is a commendable book on this topic—a must-read for policy makers, academia, and students who are interested in East Asia.” — Chatib Basri, Former Minister of Finance, Government of Indonesia “A Resurgent East Asia is a vital publication for the most successful region as it looks to the future and the expectations of its citizens. This study helps to identify the new areas of risk and to suggest ways to ameliorate them. In so doing, it is an invaluable resource for governments. Based on first-rate analysis, it is a must-read for policy makers and everyone interested in East Asia’s development prospects!” — Danny Leipziger, Managing Director, The Growth Dialogue, and Professor of International Business, George Washington University “This report delivers a careful and rigorous analysis of the strengths of East Asia’s “growth with equity” development strategy. While noting the model’s success in lifting millions out of poverty, the report also warns of the looming challenge of maintaining growth with inclusion, and it highlights the need for countries to improve their social protection systems and ensure that opportunities are fair and available to all. A must-read for policy makers and development practitioners alike.” — Ana Revenga, Senior Fellow, Brookings Institution ISBN 978-1-4648-1333-7 90000 9 781464 813337 SKU 211333