Japan Must Seek to Become the Knowledge Hub of Asia
Today, in the middle of the global financial crisis, Japan is more than ever before in need of the ability to come up with ideas to build a bright future for us and forthcoming generations. In this article, I would like to present a vision of a new, post-crisis world, with a particular focus on Asia, from the viewpoint of spatial economics in which I specialize.
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Spatial economics is a new field of economics that analyzes the dynamic changes in inter-city, inter-regional, and international spatial economic systems by focusing on the power of agglomeration arising from the proximity of human activities and through complementary relationships among them. This field of economics was developed in the early 1990s through the vigorous efforts of a group of economists, led by Princeton University Professor Paul Krugman, who was awarded the 2008 Nobel Prize in Economics.
When we look at the latest economic crisis from the perspective of spatial economics, underlying the crisis was a dramatic decrease in broadly-defined "transportation costs" associated with the international transfer of goods, people, money, and information over the past half century. This was realized by the phenomenal development of transportation technologies - most notably, jet aircrafts and container ships - and information and communication technologies (ICT) such as the Internet, and through the expansion of free trade. Against the backdrop of decreasing transportation costs, firms belonging to certain industry sectors began agglomerating in certain areas, which enabled them to achieve low-cost mass production by taking advantage of economies of scale and transporting their products to places of demand at low costs. This resulted in a dramatic increase in production, trade, and investment activities across national boarders, whereby the world economy as a whole enjoyed remarkable growth.
In particular, the past 30 years witnessed the formation of two mega industrial clusters in the world. First, East Asia has become the world's factory, building a sophisticated production network and industrial agglomeration centered on assembling manufacturers. Meanwhile, the United States - the country with the world's largest economy and most powerful military force - has formed the world's largest financial center and asset market, supported by the overwhelming attractiveness of the dollar as the key currency.
However, the rapid growth of the world economy from the 1990s onward, driven by these two engines, i.e. East Asia as the world factory and the U.S. as the world financial center, was inextricably associated with growing imbalances in world trade. An enormous current account surplus accumulated by East Asian economies and oil-exporting countries was flowing back to the U.S., making up for the country's huge current account deficits and enabling American consumers to overspend. This situation was unsustainable over a long period of time and eventually, when the U.S. housing bubble collapsed, led to the global economic crisis.
The world economy is in a "lull" at the moment but the situation does not warrant premature optimism. Meanwhile, from a medium- to long-term viewpoint, it is necessary to rebuild the world economy in a way to put it on a new, sustainable, and more balanced growth path. This calls for correcting global imbalances, assuring the long-term development of Asian economies, and realizing a departure from the current fossil fuel-dependant society. In addition to addressing these global issues, it is also important, particularly for Japan, to tackle problems arising from and associated with aging population and low fertility. What needs to be noted is that success or failure in resolving all these issues hinges on how the sustainable growth of Asia can be achieved.
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Asian economies will likely sustain their high growth for some time ( figure ). It is expected that the U.S., Europe, and Asia will each continue on the path of their development through market competition and international cooperation, respectively forming new and unique industrial clusters in a process that includes innovation in existing industries and the development of various new technologies geared toward reducing dependence on fossil fuel. Asia, for its part, needs to transform into a matured economy comparable to the U.S. and Europe, defining itself as the world's creativity center in addition to further developing as the world's factory or the world's production center.
(Source)The charts have been created using data from the IMF World Economic Outlook Database (figures for 2009 onward are estimates). The 1990 figure for the euro zone has been estimated by RIETI.
*Greater East Asia refers to a group of 18 economies: Japan, China, South Korea, Hong Kong, Taiwan, ASEAN-10, Australia, New Zealand, and India.
Currently, the greater East Asian region boasts a population of more than 3 billion or nearly half the world population. However, population agglomeration in large cities remains generally modest in emerging economies. When further agglomeration takes place under appropriate regional policies, higher economic growth will be achieved and the consumption market will expand significantly. Occurring at the same time will be the formation of a highly efficient asset market, which is expected to give an impetus to investments in industrial facilities, housing, and large-scale social infrastructure including transportation. It is also possible for Asia to develop as the world's creativity center by fully exploiting the intellectual creative power of Asian people.
The prerequisite to achieving this end is regional cooperation in Asia. It is imperative to further solidify cooperation by taking various approaches both in the political and economic spheres. Looking to the formation of an East Asian Community as a long-term goal, Asian economies should vigorously put into practice ideas and initiatives for cooperation, starting from those that are of an urgent nature or acutely needed.
Furthermore, it is important for Asia to grow out of the world's factory and into a knowledge-creating society. Japan has a lot to contribute to the process of such transformation and, through that process, will be able to take a significant leap forward in the development of its own economy. During the course of this century, advanced countries and many of emerging economies will witness a shift in their major economic activities from manufacturing based on mass production to innovation and knowledge production in a broad sense. In fact, foundations are being built in some countries in Asia to evolve into a knowledge-creating society. For instance, in a survey conducted by the Organization for Economic Cooperation and Development (OECD), Japan topped the list of countries with the largest number of patents granted in 2007, while South Korea and China were ranked third and fifth respectively. Furthermore, Japan and South Korea were No. 1 and No. 2 respectively in non-military research and development (R&D) expenditures measured as a percentage of gross domestic product (GDP), while China rapidly moved up through the ranks.
However, it will be difficult to turn East Asia into the world's knowledge creation center if the efforts made by each country are non collaborative in nature. In years to come, it will become increasingly necessary for East Asian countries to explore the knowledge frontier, going beyond just absorbing, and then, modifying and/or improving as appropriate, existing advanced knowledge from the U.S. and Europe. This task can be carried out only by bringing out and utilizing, to the fullest extent, the synergy of a team of diverse brains nurtured in different cultures and histories of countries and regions across East Asia. And to this end, it is necessary to create a closely-knit Asia-wide network for the creation and exchange of knowledge in broad areas including culture in parallel with further deepening the existing production network in East Asia. Needless to say, such a knowledge network should be open to the entire world.
In order to be able to act as a hub of the network and grow with the rest of Asia, Japan, as a nation, needs to enhance its agglomeration forces as a place for innovation, bringing in diverse human resources from around the world. Expectations for Japan's future, along with the record of its achievements in the past, hold the key to its success in becoming a hub in Asia. If people believe that Japan will develop as a science powerhouse in the future, the world's best scientific minds will be drawn to this country. It is impermissible for the government to act in such a manner to negate that prospect. The government must be continuously sending out concrete messages that provide people with convincing reasons to believe in Japan's future as a science powerhouse.
In seeking to develop as a scientific powerhouse, Japan should not limit its focus to R&D in the narrowly-defined field of science and technology. Instead, it should pursue innovation in a much broader sense, involving people of all ranks. Specific examples of such attempts can be found in our own backyard. For instance, Kamikatsu in Tokushima Prefecture is well known as, "a town that has turned leaves into money" through its "Irodori" project, a business that sells leaves and tiny branches grown in the mountains and fields of the town to luxurious "ryotei" Japanese restaurants in big cities to be used as garnishes for dishes. This business involves approximately 150 farmers, mostly women with an average age of 67, who use computers and earn an average of 1.7 million yen per year, which is more than 10 times what the average annual income per farmer in Kamikatsu was prior to launching this business. Although Kamikatsu ranks as the municipality with the highest proportion of aged citizens in Tokushima Prefecture, there are almost no bedridden elderly people in this community and its annual medical spending per person is far lower than those in other municipalities. Similar revitalization projects are underway in a number of towns and villages across Japan.
For Japan, a country heading into an era of a super-aging society, promoting medical and nursing care businesses is not enough. It is imperative to create a society where elderly people can live and enjoy an active life by applying innovative business models such as the one in Kamikatsu.
Lastly, I would like to emphasize the importance of communicating and disseminating cultural information to enrich our society. There are several aspects of Japanese culture that have gained popularity in neighboring Asian countries such as Japanese films, comics, and animation, but also the so-called "gyaru" fashion, which centers on a Japanese adolescent subculture that has recently developed in and around downtown Shibuya in Tokyo. In fact, Shibuya 109, a popular shopping center and the hub of gyaru fashion attracts nearly 9 million young people from nearby Asian countries each year. The whole phenomenon, including fashion magazines and films associated with Japanese gyaru or gal culture, is called the "gyaru industrial revolution" and gyaru-related business is growing by taking in not only domestic but also external demand. Bringing about two-way innovation through cultural and other interactions across Asia will become increasingly important in the coming years.
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In the 1990s, when Japan was in its longest recession, Margaret Thatcher, former Prime Minster of the United Kingdom, was asked what the future held for Japan. Her response was that whether or not Japan had a bright future was entirely dependant upon the Japanese creating their own vision for such a future. It is my belief that now is the time for us to create such a future by drawing a blueprint and summoning all our efforts to make it a reality.
* Translated by RIETI.
January 5, 2010 Nihon Keizai Shimbun
January 27, 2010
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