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Worldwide Article

Lifting Asia's Economic Plateau

A Slow But Necessary Path to Self-Renewal Begins in China

Almost everywhere in Asia, economic growth has slowed down perceptibly in recent years. Japan is in its second decade of stagnation and, even with the recent optimism about recovery, expects to eke out only a modest growth in 2003. The "four little dragons" of the 1980s and early '90s-Singapore, Hong Kong, Taiwan, and South Korea-have not done much better since the Asia financial crisis of 1997-98. Singapore, which was accustomed to 8 percent or higher growth every year before 1998, has had two negative growth years since then (1998 and 2001) and appears to be heading into another one this year. Hong Kong experienced -5 percent growth in 1998 and has averaged about 4 percent growth since then-lackluster compared to its record before 1998. Taiwan has gone from 6-8 percent annual growth in the decade before 1998 to an average of 3-4 percent since then. South Korea, after recovering from a 6.7 percent contraction in 1998, has performed erratically, and in fact experienced sequential quarter-to-quarter contraction in the first half of 2003. The other smaller economies in South Asia have behaved more or less similarly to the four little dragons.

The only major strong-growth economy belongs to China. There, the growth has averaged above 6 percent since 1998. What caused the slowdown in economic growth in all the countries outside China? There were perhaps many reasons, but the biggest reason may be one word: China. For more than a decade now, China has acted as a strong magnet for manufacturing industries. China has a large available workforce of good quality; its wage levels are low compared to most of the developing nations in Asia; and its national and local governments have been very solicitous in attracting investments, technology, and talents.

After more than a decade of strong growth, China's magnetism shows no sign of weakening. Only a small percentage of the potential workforce is tapped. As manufacturing goes inland from the coastal area and as China's agricultural economy converts to industrial, the potential availability of an industrial workforce is almost unlimited. The wage levels are rising, but have a long way to go before they catch up even with most of the developing countries. As to the government's efforts to attract investors and expatriate and repatriate talents, well, success feeds upon itself, and the national and local governments certainly show no sign of tiring so far.

China's climb up the manufacturing technology ladder has been fast. In the late 1980s and early '90s, aside from the state-owned heavy industries, China's manufacturing consisted of light industries using what was generally considered lower-end technology-textiles, bikes, shoes, etc. In the mid '90s, China got into PCs and electronic assembly. Now it is building up critical components industries, such as semiconductors.

In expanding the size, the technology, and the range of its manufacturing, China is doing what Japan and the smaller countries in East Asia did in the decades after World War II. In the process, China is, to a significant extent, out-competing other Asian countries and taking over the position that the other countries, including Japan, enjoyed in the world supply chain.

What should the other Asian countries do? Basically, the companies in the other countries have responded with a two-part solution. First, move manufacturing to China when economics requires and politics permits. This part of the solution has met with reasonable success, at least from the companies' point of view-indeed, companies' very success has led to slower growth for their home countries' economies.

The second part of the solution is to create a new business model or business that will allow the company to continue to operate competitively in the home country. This new model or business might be variously described as more marketing-oriented, more knowledge-based, or higher value-added. Many companies in Asia are attempting this. Even companies in China are trying to upgrade to higher levels of value-added as they gradually capture more and more older-style manufacturing.

But to succeed in creating new business models and businesses requires lots and lots of innovations, entrepreneurship, and investments. Do the countries of Asia have the educational system and social culture to spawn the necessary innovations and entrepreneurship? Do they have the financial institutions to provide the investments? Do the governments maintain enough of a level playing field, so that small entrepreneurial companies don't get snuffed out or gobbled up just when they begin to have a little success?

Social, cultural, and institutional challenges create their own limits to economic growth, which are quite different from the limits imposed by environmental and natural resource constraints. Faced with these challenges, constant self-renewal-as the United States seems capable of-appears to be the only way to keep lifting the economic plateau. Japan reached a high plateau in the late 1980s and has stayed there since then. Will it lift itself to a higher one? Each of the four little dragons seems to have reached its own plateau in the years after 1997-98. Will they lift themselves to higher plateaus? It's hard to be optimistic, because societal, cultural, and institutional transformations are difficult and take a long time. But one waits and sees.

Morris Chang is the founding Chairman of Taiwan Semiconductor Manufacturing Company Ltd. (TSMC). TSMC pioneered in the "dedicated silicon foundry" industry and is the largest silicon foundry in the world.

Prior to founding TSMC in 1987, Dr. Chang was at Texas Instruments for 25 years (1958-1983), where he was Group Vice President for the company's worldwide semiconductor business. Dr. Chang earned B.S. and M.S. degrees from the Massachusetts Institute of Technology and a Ph.D. from Stanford.

Selected by Time Magazine and CNN in 2001 as one of the Top 25 Most Influential CEOs, Dr. Chang was the 2000 recipient of the IEEE Robert N. Noyce Award for exceptional contributions to micro-electronics industry. He is a member of MIT Corporation and the National Academy of Engineering, and is on the advisory boards of the New York Stock Exchange, Stanford University, and the University of California at Berkeley.

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