Knowledge-based economy

Follow the leader

Southeast Asian nations will eventually need to swap farming for flash drives and become knowledge-based economies. Singapore is already showing how it’s done

Kevin Ponniah
October 22, 2015
Follow the leader
Illustration by Oliver Raw

On August 6, 1998, with Asean engulfed in the Asian Financial Crisis, Singapore’s deputy prime minister, Tony Tan, gave a speech at the Chinese High School, one of the city-state’s best. His topic: how Singapore’s economy could prosper in the 21st Century.

In a global, ‘weightless’ economy, where the value of a product lies in the knowledge required to make and distribute it, rather than the cost of the raw materials involved, Tan told the students, the future success of Singapore would depend on more than just diligent and well-informed graduates.

“For Singapore to transit effectively to a knowledge-based economy,” he said, “we must infuse our society with a culture of creativity, entrepreneurship, enthusiasm for change, an appetite for risk and a tolerance for failure.

“We must have the mindset that the job we are engaged in will not be permanent but will change every few years, and we must prepare for this by having and continuously upgrading a broad-based foundation of knowledge and skills.”

After independence in 1965, Singapore had embarked on distinct phases of economic development underpinned by incentivised foreign investment. Having successfully swapped labour-intensive garment and textile factories for electronic component plants and a high-value service industry by the 1990s, around the time of Tan’s speech the state decided to turn its focus to knowledge and innovation.

In the years since, Singapore’s GDP per capita has nearly tripled. Although its wealth per person was already miles ahead of other Asean economies in 1998, the island nation now stands head and shoulders above anyone else in the region in having successfully developed a knowledge-based economy.

Along with cementing its position as a high-tech world leader in electronics manufacturing (the government claims 40% of the world’s hard disks are made there), Singapore boosted spending on R&D as a share of GDP from 1.34% in 1996 to above 2% by 2001, an outlay that has remained roughly consistent since, with aims to go far higher.

Futuristic tech and R&D clusters, with names including Biopolis and Fusionopolis, have provided top-notch facilities for public- and private-sector research in biomedical sciences, ICT, media, physical sciences and engineering. The country’s universities, meanwhile, are now recognised as some of the best in the world.

In 2012, Singapore was ranked 23rd globally in the World Bank’s Knowledge Economy Index, which focused on four pillars: economic incentive regime; innovation; education; and ICT. Malaysia, the next Asean nation in the rankings, came 48th, followed by Thailand in 66th.

With most countries in the region expected to reach middle-income status by 2020, institutions such as the Asian Development Bank (ADB) are urging the rest of Asean to catch up and create knowledge-based economies of their own. Failure to do so, they warn, could see most of the region stuck in the so-called ‘middle-income trap’.

Policy wonks and economists believe Singapore provides a useful template, and escape route, for its neighbours.

“All countries in the region could benefit a great deal by copying Singapore’s economic openness to trade and investment, entrepreneurial spirit, efficient government, strong anti-corruption practices and emphasis on high-quality education at all levels,” said Tony Makin, a visiting professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy.

The problem is that the other Asean nations are not only very different from Singapore – a small, urbanised island with an efficient, meritocratic bureaucracy and limited political freedoms – but also vastly different from each other in terms of culture, size, political systems and levels of economic development.

The region’s upper middle-income countries – Malaysia, Thailand, Indonesia and the Philippines – have taken an “extraordinarily long time to move from upper middle-income to high-income”, Jay Menon, lead economist for trade and regional cooperation at the Asian Development Bank, told Southeast Asia Globe.

A key problem, he said, is a skills mismatch between the needs of a knowledge-based economy and the type of graduates being produced. “Malaysia is a good example. [You have] a large number of educational institutions at the post-secondary level, but the largest number of unemployed are also graduates. So there is not a lack of education, but a lack of the right kinds of education or skills that is preventing them from moving up the value chain from low-skilled, highly labour-intensive activities to knowledge-based or innovation-based activities.”

Good governance and political stability are also major concerns. State intervention in the Singaporean economy worked because of clean government and an open business environment, Menon said.

But in Malaysia, where large, government-linked firms dominate a number of sectors, private investment is often crowded out. Cronyism and corruption have also plagued the economy, with the country currently mired in a scandal centred on hundreds of millions of dollars reportedly missing from a state development fund.

Thailand has been trying to develop economic clusters around the automotive industry and electronics, Menon added, but has “struggled with political issues”.

Malaysia and Thailand have also lagged behind in training enough scientists and engineers relative to their population sizes. In 2011, Malaysia had 158 technicians in R&D and 1,643 researchers in R&D per million people, according to World Bank statistics. Singapore, in comparison, had 463 technicians and 6,494 researchers per million people.

Looking at Asean’s upper middle-income countries, “it’s hard to pick a second Singapore”, Menon said.

But this is not to say these countries have not had successes in knowledge-based areas. Malaysia’s second-smallest state, Penang, on the northwestern coast, has long been a manufacturing hub for the electronics industry due to successful clustering policies. According to the Penang state government, the small area contributed 39% of Malaysia’s gross output in the electronics and electrical product industry in 2012.

Malaysia and Thailand also outranked Japan in terms of their business environment in the 2012 Knowledge Economy Index, while Malaysia has implemented strong intellectual property protections, a factor seen as crucial in knowledge-based economies. It was ranked 25th globally in this area by the World Economic Forum in its 2014-15 Global Competitiveness Report.

The lower-income Asean economies – Cambodia, Vietnam, Myanmar and Laos – still enjoy comparative advantages in labour-intensive manufacturing and are growing rapidly as a result, much like their wealthier neighbours once did.

But in its 2014 report titled Innovative Asia: Advancing the Knowledge-Based Economy, the ADB warned that emerging economies will “find it impossible to continue their success under the same growth models used so effectively over the past few decades, as technology accelerates and changes the ways countries produce and trade”.

With rising wages eroding cost advantages, developing knowledge-based economies to boost productivity is “imperative to sustain high rates of growth in the future”, even for these lower-income nations, according to the ADB report.

Countries such as Myanmar and Cambodia can move their economies up the value chain by recognising that well thought out policies are needed to address market and coordination failures, and that such policies need to be consistently implemented, said Dirk Willem te Velde, a senior research fellow at the London-based Overseas Development Institute.

“Practically, this means clustering policies around zones, fostering upgrading in garments through skill policies, building high-quality and appropriate infrastructure… and sowing the seeds for knowledge-intensive manufacturing,” he added.

But some experts caution that prescriptive policies may not be appropriate for Asean’s least-developed economies, some of which are perhaps decades away from developing into knowledge-based ones.

“Not all economies in Asean can, or should, pursue the same industry policies, knowledge-based or otherwise,” said the Lee Kuan Yew School’s Makin. “International trade theory suggests each would be better off pursuing those industries that best suit their relative costs and resource endowments.”

One immediate area that these countries can focus on with a view to a long-term transition into a knowledge-based economy is education. Anne Rose Dingemans, the managing director in Cambodia for online jobs portal Everjobs, said that firms in the country are looking for skills in graduates that universities are simply not cultivating.

“Soft skills like innovative and critical thinking as well as problem solving are the most commonly mentioned,” she said.

The choice of generalist degree courses such as management or accounting by the majority of students, due to perceived better career prospects, also means that technical skills needed for higher-value industries are lacking, while graduates in certain fields are oversupplied.

“Investing in infrastructure, lecturers, diversifying the specialisations being offered, updating curriculums to respond to market demands, promoting technical fields such as sciences, engineering or medicine, and working on the Mutually Recognised Skills Framework together with the Asean community are some of the measures that could make Cambodia a strong player in the region,” Dingemans said.

Myanmar, which is trying to deal with a deluge of foreign investment, faces similar challenges. On the Everjobs portal in the country ( IT and software is the industry with the most vacancies. Finding skilled labour, especially in knowledge-based industries, is a chief complaint from foreign firms.

However, both Cambodia and Myanmar, despite starting from a low base, are well poised to harness the driver of a knowledge-based economy: ICT.

The number of internet users in the two countries grew at the fastest rates in Asia-Pacific between January 2014 and March 2015, according to data from digital agency We Are Social. Cambodia saw growth of 414%, while the number of users in Myanmar grew by 346%.

Still, both countries have a long way to go before they could call themselves truly web-connected societies. Internet penetration in Cambodia remains at 25% nationally. In Myanmar, that figure is just 5%, according to We Are Social.

The seeds are there for Asean states to make the economic transition, some sooner than others. Singapore’s policy book offers clear lessons, but without other factors, such as good governance, attempts to emulate the success of Southeast Asia’s high-tech metropolis will bear little fruit. 

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