Asia's developing economies face a choice that will define their future prospects. They can stick with the growth model that got them this far, but which is now running out of steam. Or they can embrace a new model that promises faster, more sustainable growth.
A simple choice, it would seem. But as shown by a new Asian Development Bank (ADB) study, Innovative Asia: Advancing The Knowledge-Based Economy, this new model won't happen unless Asia's developing economies reinvent themselves.
They must become knowledge economies driven not just by factories and farms, but by innovators backed by advanced technologies, world-leading education systems, and business-friendly policies. These economies are fuelled by new industries such as online retailing, medical diagnostics and patented research.
This transition is already apparent in parts of Asia.
Japan tops a new Creative Productivity Index from ADB and the Economist Intelligence Unit (EIU), on turning innovation inputs - which underwrite knowledge economies - into tangible results.
South Korea is the second-ranked Asian country overall, courtesy of strong infrastructure. Singapore's robust institutions help to make it No. 1 on inputs but 10th overall on the index - suggesting there is some room to improve the efficiency of its large investments in innovation and creativity. ADB and the EIU will release the new index today in Singapore.
Singapore, the second-most competitive economy globally, is already a knowledge-economy powerhouse. Its efficient public sector and strong legal protections for business provide a solid foundation for creative industries.
The ADB-EIU survey shows that Singapore has work to do to build on that foundation, and could be even more efficient in turning inputs into palpable outcomes. Patent applications, for example, remain below those in Japan, South Korea and Taipei,China.
Poor underlying skills and infrastructure frustrate the knowledge ambitions of Asia's emerging economies. The competitive edge provided by cheap labour can no longer deliver the hyper-growth that has tripled Asia's share of global gross domestic product (GDP) since 1980. Without a course correction, a middle-income trap looms for much of the region as rising wages and low productivity smother growth.
Knowledge economies offer a way of avoiding this trap and achieving high-income status. Leapfrogging old technology can turn emerging economies into global leaders in innovative products and services.
India, for example, was transformed from a technology laggard into one of the world's biggest mobile-phone markets after its telecommunications sector was liberalised in the 1990s. It quickly skipped up the global information and communications technology value chain, and now IT-enabled services make up 40 per cent of its service exports.
Countries are closing the knowledge gap. India and China doubled their research and development spending between 2007 and 2012. Malaysia, Sri Lanka and China have strengthened their intellectual property regimes and rank above the world average.
To unleash more of the potential of knowledge industries across Asia, governments must take coordinated policy action on four fronts.
They should follow Singaporean, rather than Soviet, models on regulating an economy. The Soviet Union had strong education and research, but its planned economy nullified many returns.
Singapore, by contrast, has responded to changing global realities by transforming itself - initially into a financial centre, and then into an East Asian hub for education and health.
A second task is to ensure colleges and universities produce graduates with the right skills.
This doesn't happen in parts of Asia, where employers can have trouble finding suitable talent. More private-sector engagement can help, as shown by promising initiatives like the Infosys Global Education Centre in Delhi, which works with chambers of commerce to bolster workplace-ready skills.
Next, Asia must expand its low Internet penetration. For knowledge economies to prosper, connectivity must cover everyone. Closing the digital divide demands strong government support. South Korea hasn't looked back since it launched a national IT strategy 20 years ago, created a fund to spur infrastructure investment and connected more than 10,000 schools to the Internet.
Fourthly, developing Asia's ability to innovate is hobbled by low spending on research and development. Emerging Asia falls far short of the spend on research and development - around 1.5 per cent of GDP - that advanced Asian economies spent to progress beyond the middle-income bracket. Hitting this benchmark could spur life-changing innovations, especially for the poor.
Emerging Asia has the makings of a knowledge economy, but the job remains unfinished. Now is the time to make bold choices or a huge opportunity will be missed.
The first writer is dean of the Lee Kuan Yew School of Public Policy, National University of Singapore. The second writer is vice-president of the Asian Development Bank for knowledge management and sustainable development.
