East Asia and the Pacific
Home to some 2.3 billion people, the East Asia and the Pacific (EAP) region is characterized by profound diversity with respect to size, development level, political and economic system, geography, culture and history. One feature common across most economies in the region has been economic dynamism, which has contributed to rapid industrialization, a rise in living standards and a drastic reduction in extreme poverty, which fell from 30% to less than 10% over just a decade.
In 2017, the EAP was the fastest-growing region in the world and accounted for about one-third of global growth, due primarily to China’s significant contribution. The region’s developing economies grew at 6.6%, owing to a favourable global economic context that encouraged a rise in exports, strong consumption and high investment.2 Nine of the region’s 10 developing economies covered in the GCI 4.0 achieved at least 3% growth in 2017, and in five—Cambodia, China, Lao PDR, the Philippines, and Viet Nam—growth exceeded 6%. The region’s seven advanced economies averaged a healthy 2.9% growth.
The results of the GCI 4.0 paint a mostly positive picture of the region’s competitive landscape, confirming the widely shared view that overall growth momentum is set to last. Yet some of the region’s economies continue to suffer major competitiveness deficits. The region’s seven advanced economies all feature in the top 20 of the GCI 4.0 rankings and three of the world’s seven most competitive economies—Singapore (83.5, 2nd), Japan (82.5, 5th) and Hong Kong SAR (82.3, 7th)—stem from the region. Most boast world-class physical and digital infrastructure and connectivity, macroeconomic stability, strong human capital and well-developed financial systems. However, performance on the innovation ecosystem is uneven. There is, for example, a 17-point score gap between Republic of Korea (78.2, 8th) and New Zealand (61.4, 27th) on the Innovation capability pillar. Still, the region’s innovation hubs—Japan, Korea, and Taiwan (China)—could improve on the so-called ‘softer’ drivers of innovation to attain the level of “super innovators” such as Germany, the United States and Switzerland (see the In Depth section on innovation in Chapter 1).
Among the region’s emerging markets, the picture is more diverse, with three distinct groups. Malaysia (74.4, 25th) and China (72.6, 28th) are less than 30 points to the competitiveness frontier (the highest score on the GCI) and on par with many advanced economies. The largest ASEAN economies—Indonesia, the Philippines, Viet Nam and Thailand—as well as Brunei Darussalam are 40 points or less to the frontier. Finally, Mongolia (52.7, 99th), Cambodia (50.2, 110th) and Lao PDR (49.3, 112th) are only halfway to the frontier, reflecting major weaknesses that threaten sustained growth. This makes them vulnerable to a sudden shock, such as a faster-than-expected rise in interest rates in advanced economies and escalating trade tensions, or, as in the specific case of Mongolia, lower commodity prices. The strengths of the region’s advanced economies are often weaknesses for most of the developing ones: infrastructure (average score on the Infrastructure pillar of 65.4 compared with 87.0 for advanced economies), ICT adoption (average pillar 3 score of 56.8 vs 82.4), education and skills (average score on the Skills pillar of 59.6 vs 77.2), financial system development (average pillar 9 score of 64.1 vs 85.3), and innovation capability (average pillar 12 score of 72.3 vs 39.3).
Singapore ranks second (score of 83.5) on the overall rankings behind the United States as a result of a very strong performance across the board. Singapore features in the top 10 of seven pillars and in the top 20 of a further four. Openness is the defining feature of this global trading hub and one of the main drivers of its economic success. Singapore leads the Infrastructure pillar with a near-perfect score of 95.7. In particular, it boasts world-class transport infrastructure, services and connectivity. It also tops the Product market pillar (81.2), where it leads the trade openness component. Singapore also punches well above its weight in terms of market size, when taking into account imports (71.0, 27th globally). Singapore also achieves a perfect mark in the Health pillar, thanks to a healthy life expectancy of 74 years, ahead of Japan. Singapore is a regional innovation house, but in order to become a global powerhouse, it will need to improve its ecosystem further: Skills (76.0, 20th), Business dynamism (74.7, 16th) and Innovation capability (75.0, 14th) are the three pillars—besides Market size—where Singapore scores below 80.
Japan ranks 5th overall (score of 82.5), and second in the region. It is the most improved of the top 10 economies, rising three places compared with the 2017 backcast edition. Japan appears in the top 10 of seven pillars. It ranks first in the Health pillar, and Japan’s digital (87.4, 3rd) and physical infrastructures (91.5, 5th) are top notch. It notably ranks first on air transport infrastructure (92.5), while 93% of the adult population uses the internet on a regular basis. Japan boasts the world’s third-largest penetration rate of fiber-to-the-home internet connections (23 per 100 population), a remarkable feat given the size of the country. Japan’s two weakest pillars are Institutions (71.1, 20th)—where its performance is undermined by low levels of social capital (47.8, 95th) and relatively weak corporate governance (65.8, 40th)—and Skills (73.6, 26th), where it receives average marks for the quality of the current (63.0, 26th) and future (73.2, 55th) workforces. Japan is already an innovation hub (77.5, 6th), but it needs to nurture the ‘softer’ drivers of the innovation ecosystem in order to become a ‘super innovator’. For example, Japan scores low on several measures of entrepreneurial culture, including risk aversion (53.6, 47th) and creativity, as well as critical thinking (39.0, 70th).
Hong Kong SAR ranks 7th overall (score of 82.3) and third in Asia. Its competitiveness landscape is similar to that of Singapore, although it does slightly less well in terms of innovation and labour market efficiency. Hong Kong features in the top 10 of seven of the 12 pillars of the GCI 4.0. Remarkably, it ranks second in four pillars: Infrastructure (94.0), where it ranks first in terms of sea port infrastructure and connectivity; ICT adoption (87.9); Financial system (90.1), where it ranks first for stock market capitalization and second for stability (97.0); and Product market (79.0), where it ranks second in terms of trade openness (84.5). The main challenge for Hong Kong is to develop its Innovation capability (pillar 12), the weakest aspect of its performance (61.9, 26th).
Australia ranks 14th overall (78.9), up one spot from the 2017 backcast edition, and places fifth in the region, four places ahead of New Zealand. The country appears in the top 10 of three pillars. Notably, it shares the top spot of the Macroeconomic stability pillar (100.0). It achieves a near perfect mark on the Health pillar (98.5, 8th) and a very high score for the breadth, depth and stability of its financial system (85.6, 13th). Outside these areas, Australia’s performance shows room for improvement. The functioning of its labour market (68.5, 22nd) is notably affected by its rigidity: Australia’s innovation capacity (69.8, 18th) is ranked 20 points lower than the best performers in this category. The country does well when it comes to research and development (78.8) but struggles on the softer dimensions of the innovation ecosystem, including on the Interaction and diversity (60.8) and Entrepreneurial culture (61.6) sub-pillars.
The Republic of Korea ranks 15th overall (78.8), up two ranks compared with the 2017 backcast edition, and sixth in the East Asia and the Pacific region. The country leads the ICT adoption pillar, boasting some of the world’s highest penetration rates of ICTs. A global innovation powerhouse, Korea ranks 8th on the Innovation pillar. Notably, it spends the equivalent of 4.2% of GDP on R&D spending, second only to Israel (4.3%). But like some of its regional peers, Korea struggles on the less tangible drivers of innovation: critical thinking (35.5, 90th), interaction and diversity (54.5, 80th) and entrepreneurial and corporate cultures (51.3, 50th). Within this last component, Korea ranks 77th for entrepreneurial risk-taking and 88th for employee empowerment. Korea’s two weakest pillars are Product market (56.2, 67th), mostly due to the lack of domestic competition, and Labour market (62.4, 48th), due to its rigidity and sub-optimal utilization of human capital.
China ranks 28th overall (score of 72.6), leading the BRICS economies ahead of the Russian Federation (65.6, 43rd), India (62.0, 58th), South Africa (60.8, 67th), and Brazil (59.5, 72nd). As the world’s second largest economy, the largest when taking trade into account, China is now at a critical juncture as it transitions to a new phase of its economic development—referred to as the “new normal” by President Xi Jinping—in which its economy is driven less by investments and exports and more by consumption and services. In this context, the country has been increasingly betting on innovation. It has become a prominent player in some specific areas, like artificial intelligence. With a score of 64.4 (24th) it already stands above many advanced economies, but still trails leaders like Germany, the United States and Switzerland by some 20 points. In order to catch up with these ‘super innovators’, China would need to improve performance on softer drivers of innovation, such as diversity, collaboration and various aspects of openness. Other relative strengths include the Infrastructure (78.1, 29th) and ICT adoption (71.5, 26th) pillars, two remarkable achievements given the sheer size of the country. On a less positive note, China’s institutional framework (54.6, 65th) needs further improvement. Policy-makers should also offer a more level-playing field for companies by promoting domestic and foreign competition (57.4, 55th), and addressing various inefficiencies and rigidities in the labour market (59.3, 69th).
Indonesia ranks 45th overall (64.9), a gain of two places and 1.4 points compared with the 2017 backcast edition. South-East Asia’s largest economy, Indonesia ranks 4th in the region behind Singapore (2nd), Malaysia (25th), and Thailand (38th). Indonesia benefits from the very large size of its market (81.6, 8th). It is also one of the world’s most connected emerging economies (61.1, 50th), on par with many richer and much smaller economies, such as Chile and Georgia. Indonesia’s score in that category is 20 points higher than the average score of the lower-middle income group to which it belongs. This factor, combined with a quite vibrant entrepreneurial culture (61.1, 24th) and overall business dynamism (69.0, 30th) bodes well for the future. However, innovation capability remains limited (37.1, 68th). In particular, research and development activities remain extremely limited, with R&D spending amounting to less than 0.1% of GDP (112th). Within the other pillars of the index, performance is uneven. One area of specific concern is public health. A newborn in Indonesia can expect to live only 62 years in good health, one of the lowest figures outside sub-Saharan Africa.