Elements of a Knowledge Based Development Strategy

1. Elements of a Knowledge Based Development Strategy World Bank & NESDB January 29, 2007

2. Overview • Productivity can make a big difference. • Recent per capita GDP growth approximately 3.5-4% p.a. – means doubling in 18-20 years. • An increase to 5% means doubling in 14 years. • Can Thailand raise TFP growth from about 1% p.a. to 2.5% p.a.?

3. Sources of TFP Increase • Most of the recent increase from labor transfer out of agriculture, which is likely to decline. • Alternative sources are through innovation and efficiency gains in industry and services. • Exploiting these sources to the fullest will determine whether growth is in the 4% range or in the 6% range.

4. What Are the Big Challenges? • Many electronic products becoming commodified and backward and forward linkages into higher value adding activities not occurring. • FDI not promising a wave of new industry which could accelerate growth and lead to spillovers for industry. • Local industry not diversifying rapidly into new products or moving into higher quality end of existing products. • China factor and on the horizon, the India factor calls for finding new focii of competitive advantage with long-term prospects.

5. China Economic Shock Is Unprecedented China, UnitedKingdom,1820-70 UnitedStates,1820-70 China,Maddison1978-2003 Percent Initial share 4.9 5.2 1.8 Annual growth 7.5 2.1 4.2 World growth 3.1 0.9 0.9 Excess growth 4.4 1 .2 3.3 Number of years 25 50 50

6. And Greater than Other Post-war Growth Spurts Percent of world GDP 16 China 12 Japan 8 Germany 4 South Korea Taiwan, China 0 1 3 5 7 9 11 13 15 17 19 21 23 25 Years since turnaround

7. Product structure of exports Japan Korea China India 100% 80% 60% 40% 20% 0% 1965 1975 1985 1995 2003 1965 1975 1985 1995 1987 1995 2003 1975 1985 1995 2003 2003 Labor- and resource-intensive manufactures Medium-skill and technology-intensive manufactures Electronics Primary commodities manufactures Low-skill and technology-intensive manufactures High-skill and technology-intensive manufactures

8. What Fuels’ China’s Advance? • Readiness to learn and great effort to transfer technology and groom Chinese firms. • Dynamic and wealthy urban middle class, source of demand. Offers potential for domestic businesses to mature, innovate, and launch new products. • China acquiring reputation as a success story, creating a “buzz”. Leading foreign companies view their future prospects as being tied to success in the Chinese market. MNCs transferring production and research to China. This is creating a virtuous spiral, a self-fulfilling prophecy.

9. Economic Symbiosis between China and Southeast Asia • Rest of East Asia produces and exports mainly components, capital goods, and raw material. • China focuses on assembly. • Trade balance favors rest of East Asia.

10. Economic Symbiosis

11. Can the Symbiosis Persist?Is This a Positive-Sum Game? • Possibly not because manufacture of components and capital goods also shifting to China. • Advantages of proximity to assemblers – especially for high-tech products with innovation. • Location of R&D activities in China and FDI in upstream activities continuing. If the symbiosis begins to dissolves, what then?

12. What Does This Imply for Asia • Building competitive advantage in new areas and shifting resources. • Relying on innovation and productivity-led growth. • Pursuing regional or global scale of operations in manufacturing and services. • Fully exploit size and openness of Chinese market through trade and FDI.

13. Policy Agenda for Future Knowledge Economy • Over 10 years, significantly improve quality of primary and secondary education, especially the provision of science, math, and English language skills. Thailand should aim to be in the top ten by 2015.

14. Policy Agenda for Future Knowledge Economy • Take steps to make at least two universities in Thailand among the top 15 research universities in Asia and at least one should be in the top 50 in the world.

15. Policy Agenda for Future Knowledge Economy • Develop at least one world class research center which uses biotech to promote innovation in the agro-food industry. This should be comparable in quality to ITRI and aim for comparable spillover effects in terms of assistance to small firms and new starts. Institute would form alliances with leading international food companies such as Nestle.

16. Policy Agenda for Future Knowledge Economy • Make one or two design schools/institutes among the top ranked in the world, equivalent to Pratt in New York or other schools in Milan and Paris. • Draw lessons from Milan and New York and strengthen ties with their institutes.

17. Policy Agenda for Future Knowledge Economy • Work with firms in agro-food processing, creative industries, and garments industries to raise R&D. Provide subsidies for internships for S&E graduates and design school graduates to work in these industries. • Offer strong incentives to firms in food processing/biotech to locate research centers in Bangkok.

18. Policy Agenda for Future Knowledge Economy • By 2015, Thailand should, in coordination with local firms, increase its R&D spending to 0.6% of GDP and double their patents registered at the USPTO.