The Future of Asia: Forces of Change and Potential Surprises – Supplementary Report

Policy Horizons | Horizons de politiques May 1, 2014

Image of yellow arrows going from left to right against a white background for The Future of Asia Forces of Change and Potential Surprises Supplementary Report blog post

Hybrid Models of State and Market-Led Innovation

What is it?

Influenced by the strong economic growth of China over the past two decades, many Asian countries see the benefits of a strong state, especially in the aftermath of the 2008 financial crisis. Nevertheless, China and others are experimenting with a range of strategies that allow governments to leverage the private sector while still maintaining overall control.¹ The newly established Pilot Free Trade Zone in Shanghai is one such example.² Its main objectives are to promote competition and boost economic growth and vitality through easing foreign investment rules, allowing goods to be imported, processed and re-exported without customs intervention, and permitting the cross-border use and convertibility of the Yuan.³ The zone is expected to be a litmus test for further liberalization initiatives across China.

Asian governments are also leveraging private sector investments through Public-Private Partnerships (PPP) to meet the growing need for infrastructure development projects throughout the region.⁴ Asia will need to invest approximately $750 billion per year in national and regional infrastructure projects between 2010 and 2020.⁵ Early indications also point to the use of PPPs in the social sector, namely the Model Schools initiative in India.⁶ The pilot PPP Centre in Indonesia may promote further development of these public-private models.⁷

Asian countries are also using the levers of the state to promote innovation in important sectors of their economies, which have resulted in some first-rate companies as well as potential opportunities for the development of small and medium enterprises.⁸ Singapore provides a good example of state intervention in the economy without hindering entrepreneurship. Another example is India’s recent Science, Technology and Innovation (STI) policy released in January 2013, which aims to make India one of the top five global scientific powers by 2020.⁹This policy includes measures to increase R&D spending, identify critical sectors for STI investment, increase financial mechanisms for small and medium scale enterprises, leverage the private sector to facilitate investments in science and technology, and focus STI efforts to promote inclusive growth.

Why is it important?

A hybrid state-market approach to managing the economy affects how particular industries develop. For example, China’s commitment towards renewable energy to reach carbon pollution reduction targets translates into direct government assistance for wind and solar energy manufacturers. The same could be said for India’s recent STI policy. Some Asian countries may find this hybrid approach appealing if it makes policy more consistent over time and allows decisions to be made quickly and in a timely manner. However, there is also a risk that this will lead to a strategy of “picking favourites” that creates inefficiencies in large state-backed companies and stifles innovation in smaller enterprises and start-ups.¹⁰

If the Chinese government continues to experiment with various forms of privatization, such as the Shanghai Free Trade Zone, it could result in a wave of further liberalization initiatives. This may solidify the hybrid state-market approach and, depending on the results, could have spillover effects to other parts of the region and beyond.