East Asia -- a region that has transformed itself since the financial crisis of the 90s by creating more competitive and innovative economies -- must now turn to the urgent domestic challenges of inequality, social cohesion, corruption and environmental degradation arising from its success, a new World Bank report has found.

An East Asian Renaissance: Ideas for Growth by a World Bank team led by Chief Economist for East Asia & Pacific, Dr Homi Kharas and Economic Adviser, Dr Indermit Gill is the first comprehensive analysis of the new forces and challenges at play in the region since the Bank's seminal report of 1993, The East Asian Miracle.

Launched in a conference edition today at the World Bank-IMF annual meetings in Singapore, the report shows that having successfully undergone two waves of integration since the Asian financial crisis -- first with global markets and then with the region itself -- East Asia now needs to move to a third integration, this one at the domestic level.

"As a result of the growth spurred by global and regional integration, unprecedented economic progress has been made in East Asia," said Dr. Kharas. "In a few years, almost everyone in developing East Asia will be living in a middle-income country. The development challenge at the middle-income level is considerably more complex."

The report argues that regional flows of goods, finance and technology are helping even smaller East Asian countries reap the benefits of economies of scale and that this regional integration must be encouraged. But it also points out that these measures have to be supported by actions at the domestic level to ease the stresses and strains that rapid economic growth leaves in its wake. Foremost in this agenda is the need to build vibrant cities, cohesive societies and clean governments.

"Cities are at the core of a development strategy based on international integration, investment and innovation," said Dr Gill. "East Asia is witnessing the largest rural-to-urban shift of population in history. Two million new urban dwellers are expected in East Asian cities every month for the next 20 years. This will mean planning for and building dynamic, connected cities that are linked to the outside world so that economic growth continues and social cohesion is strengthened."

The report analyses the forces that have transformed East Asia since the early 1990s and concludes that a new economic paradigm has been at work in the region over the last 10 years. This new landscape emphasizes the importance of economies of scale to East Asia's continuing success and highlights more sophisticated intra-regional trade patterns, greater focus on higher skill and technology products, rapid uptake of innovation and healthier banking and credit structures.

"What's going on now in East Asia is something quite new -- a renaissance," says Dr Kharas. "The old Asia relied on the famous flying geese analogy that saw lead industries move to low-wage countries. The new Asia is more self-reliant, innovative and networked -- it's characterized by a very competitive business environment that encourages innovation and a labor force able to absorb new ideas."

To address the new challenges the region now faces, the report suggests that for low-income economies, the basic principles of openness, macroeconomic stability and stronger investment in human and physical capital continue to offer the most promising path to progress. For the growing number of middle income countries in the region, it says a shift is needed from just exploiting comparative advantage to also exploiting economies of scale. This means prioritizing regional agreements to enlarge markets, strengthening education and developing skilled labor forces, and building robust macroeconomic environments.

To reinvest the economic returns that accompany fast growth, the report emphasizes the need for clean governments prepared to tackle the centralized corruption that continues to constrain development in some East Asian countries. Over the past 20 years, the efforts of civil society organizations have brought about major improvements in political rights and civil liberties. This has also helped bring about aggressive anti-corruption programs across the region.

Dr Kharas said the region would gradually see further moves from the traditional modes of governance based on the 'rule of man' to the more modern 'rule of law' or as the Chinese say, from renzhi to fazhi.

"If East Asian policymakers succeed in meeting this next wave of challenges, within a generation they can eliminate poverty and lead their countries into the ranks of prosperous, developed nations of the world," Dr Kharas said.

(China Development Gateway September 18, 2006)