REINVENTING THE ECONOMY

In the "New Economy" of the next millennium, information and technology will be the keys to competitive advantage, more important than land or connections or even money. Successful companies will consist of networks of semi-autonomous "knowledge workers" acting quickly to match products and production with customer needs. Governments will provide fair and stable regulatory and legal environments to attract the best firms and educate their citizens to equip them for the latest jobs, though national borders will fade as business goes global.

But in Asia today, most big companies are based in property, commodities or fading heavy industries. Management, often family controlled, emphasizes loyalty and obedience. Technology is imported, and any locally-generated software is quickly pirated. Regulatory and legal systems are shallow and weak. The best minds are fleeing to Silicon Valley while one-third of secondary-school age children are not even in class. Asia is starting to recover from the Crisis that has plagued the region for two years - but so what? Does Asia have a chance in the New Economy?

It had better, because the "Old Economy" is fading fast. All through the 1990s, too much of Asia's economic growth came from money being pumped into economies, and not from the creation of new value. "We were on a trend line which was unsustainable, particularly because of the speculative froth," says Victor Fung, chairman of trading company Li & Fung Group and head of the Hong Kong Trade Development Council (HKTDC). Of greater concern, the foundations beneath the froth are also eroding. Asian economies took off in the 1970s and 1980s because of the massive transfer of low-skill manufacturing jobs from higher-wage regions. Those jobs are now moving to even lower-cost economies such as Latin America, and there is no new wave coming to replace them, says economist Stephen Parker of the Asian Development Bank Institute (ADBI) in Tokyo.

And the "Asian model of capitalism" - with its government-business cooperation and management focus on growth over profits - has also been shown wanting. While it did create industries from scratch, it also turned out to have produced huge overcapacity, oceans of red ink, and companies unable to meet international competition. "With globalization and deregulation, the bar for performance has been raised," Roberto Romulo, head of Equitable Card Network in the Philippines and chairman of the Pacific Economic Cooperation Council, said in a recent speech. "Those who have prospered primarily because of government fiat or those who have not been able to adjust to the competition have fallen by the wayside."

So what's ahead? First, the macro picture. The biggest challenge Asian policymakers face is to keep employed millions of factory workers who are now seeing their low-skill jobs slip away to lower-cost locales, says the ADBI's Parker. Sewing shoes and building cheap TVs for export to the West and Japan lifted these workers out of poverty only a decade or two ago, and few have the education to move into higher-skilled fields. The answer is to shift emphasis from exports to domestic and regional markets, where there is untapped demand for basic consumer goods. "This is not about a Gucci consumer boom but about expanding consumption by basically 'poor' people of clothes and refrigerators," Parker says. That, of course, also means keeping those nascent consumers employed. Also expanding will be services - from banking to medicine to restaurants - which are mostly produced and consumed domestically. They are immature in most of Asia and have huge potential, although their development will need a major upgrade in the educational level of the workforce.

Business leaders will also have to think differently in future. This means more than focusing on domestic demand, and even goes beyond the lessons about corporate governance and shareholder value that the Crisis has taught. Victor Fung says Asia's economic center of gravity is shifting from asset-intensive to knowledge-intensive businesses. In the former, business depends on capital assets - be they property, plantations or petrochemical plants - and success comes from the big boss making a few big decisions on how to employ those assets. In the latter, business depends on a structure for delivering a service or executing certain functions - think bank or trading company or even an electronics manufacturer with subcontractors spread across the region - and success depends on many individuals making independent decisions while working together. Intellectual property, expertise and execution - that means staff who can think for themselves - will be more important than real assets.

One major impetus for change is information technology, which is boosting the productivity of managers and factory workers alike. Here, Asia lags badly. Not only is IT mostly generated in the West - and will continue to be for the foreseeable future - Asia lacks the engineers, the college graduates, even the high school gradutes to fully absorb IT into offices, shops and production lines. That will take huge investments in education and a generation to change, says the ADBI's Parker. And if change doesn't happen, Asia's poor will be left behind as a fortunate few join their highly-skilled Western counterparts. Then there is globalization. European financial giants are buying banks in Thailand. U.S. carmaker General Motors is talking to Korea's Daewoo and others about boosting production in the region. And with offices full of Asian managers, multinationals are not at any disadvantage to local competitors in understanding local markets. In fact, with stronger management systems, better technology and easier access to capital, they are at an advantage. Simon Tay, chairman of the Singapore Institute of Interntional Affairs, wonders if Asian businesses will be doomed to be just subcontractors for multinational corporations.

Maybe, or maybe not. Take IT, where foreign firms enjoy their biggest lead. The HKTDC's Fung says the gap is currently widening, but he is not too worried because the gap is not in hardware, where patent-protected technology gives owners rents for years, but in software, where creativity and marketing flair can create a business in days. "Frankly, I think Asians are quite good at this - look at India," Fung says. "Once China and Southeast Asia get going, I think the gap will close quickly. Moreover, he reckons that Silicon Valley corporate culture is more akin to Hong Kong's - with emphasis on individual entrepreneurship rather than hierarchies - than with mainstream corporate America's. Which makes sense, given a quarter of Silicon Valley firms are run by Chinese and Indians engineers. And while talented Asians are leaving home to make their fortunes in the West, many are coming back - in person and on line - to jump-start Asia's technology fortunes.

So what does Asia's economic future hold? Growth will be slower than in the boom years, but it should be steadier and more sustainable. There will be more international participation, although foreign companies will be more Asianized and Asian businesses will be more global. The dominance of property and plantation tycoons will fade, while taking their place will be myriad smaller firms led by their MBA and engineer children as well as their classmates of humbler origins. New challenges will emerge - foremost among them the question of whether the earth can support so much economic activity. Assuming respective economic growth rates of 6% and 2%, China's nominal GDP per capita will match that of the United States in 2098 (not counting inflation or population increase). Of course by then, talking about "China" and the "United States" may be a quaint anachronism in one global economy.

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TIME:

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