the digital economy as an accelerator of regional

THE DIGITAL ECONOMY AS AN ACCELERATOR OF REGIONAL INTEGRATION IN ASIA-PACIFIC

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Staff working paper

The Digital Economy as an Accelerator of Regional Integration in Asia-Pacific

Tiziana Bonapace, Jorge Martinez-Navarrete,

United Nations Economic and Social Commission

for Asia and the Pacific (UNESCAP)

Authors Note

The authors gratefully acknowledge the research assistance provided by Francesco Pacella and

comments received from Alberto Isgut and Emma Lovell from ESCAP, Torbjörn Fredriksson

and Rémi Lang from the United Nations Conference on Trade and Development, and John

Moon, consultant

The views expressed herein are those of the authors, and do not necessarily reflect the views of the United Nations. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This publication has been issued without formal editing and the designations employed and material presented do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities or concerning the delimitation of its frontiers or boundaries. Correspondence concerning this article should be addressed to e-mail: [email protected].


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Abstract

This paper seeks to determine the effects of the digital economy in the regional integration

process underway in the Asia-Pacific region. Based on international trade and information and

communications technology (ICT) statistics, the digital economy is accelerating the process of

regional integration in a number of ways. First, the digital economy, by fostering intra-regional

growth in trade and employment, is inducing shifts in the regional development paradigm.

Second, ICT in the region has emerged as a source of dynamism and innovation that has enabled

virtually every other sector to increase productivity, which has changed the way businesses

integrate production processes across borders. Nevertheless, serious challenges remain, and these

need to be addressed before a truly borderless connectivity is achievable region-wide. This paper

suggests policy recommendations to address these challenges; these include the need for an

enabling policy environment that allows for the movement of enterprises up the value chain by

raising technological skills and promoting labour mobility. The paper underlines the need for a

region-wide ICT infrastructure expansion and puts forward proposals for strengthening

intergovernmental cooperation.

Keywords: connectivity, regional integration, ICT for development, digital divide, ICT

infrastructure, trade in ICT goods.


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The Digital Economy as an Accelerator of Regional Integration in Asia-Pacific

The digital economy is an accelerator of the regional integration process already

underway. This is taking place in two ways:

First, because the digital economy is expanding significantly, it is contributing to shifts in

the regional development paradigm, with growth increasingly sourced from within the region.

An increasing percentage of the region’s employment and trade is in the information and

communications technology (ICT) sector. Over the period 2002-2009, intra-regional trade in ICT

goods increased at an annual average of 20.8 % as compared to 15.7% and 8.39% for the

region’s ICT goods destined for the European Union (EU) and United States (US) markets

respectively. The share of ICT parts and components destined for assembly within the region

itself increased from 66% in 2002 to 69.3% in 2009, and even more importantly, the region’s

consumption of end-products more than doubled from US$ 63.9 Billion (or 31.1%) to US$ 148.2

Billion (or 34.5%) as shown in Figure 1.

Figure 1: Share of intraregional trade of ICT goods in Asia-Pacific, 2002 and 2009 (percentage of world total)

Parts, 69.3%

End-products,

31.1%

End-products,

34.5%

Parts, 66.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2002 2009

Source: ESCAP. Based on UN Comtrade data of reported imports by Asia-Pacific economies of ICT goods

originating from Asia-Pacific economies. ICT goods are defined in the “Guide to Measuring the Information

Society”, annex 1A (2009 OECD).

Second, ICT in the region has emerged as a source of dynamism and innovation that has

enabled greater productivity in virtually every other sector and changed the way business is


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done. High-speed communication networks today are having a transformative economic impact

similar to that of the development of transport networks and investment flows a few decades ago.

Through improved internet interoperability, demand for new services and content is growing,

which in turn is fuelling further connectivity and integration among economies and people across

the region. Furthermore, the fact that mobile phones are rapidly moving towards ubiquity in the

region - from 6 to 61 mobile phone subscriptions per 100 inhabitants on average, in less than a

decade (ESCAP, 2011) – there has been a radical improvement in the connectivity of economies

and empowering hitherto marginalized people. Small and medium enterprises (SMEs) now

benefit from improved access to affordable information systems, that enable them to obtain

information in a timely manner, and communicate and better manage their operations (e-mail,

calendars, document management, accounting, among others); this is at considerably lower costs

to those of large enterprises.

However, although a digital way of life is emerging for many people across the Asia-

Pacific region, serious challenges remain. Deep digital divides between and within countries in

the region persist which prevent digital technologies from reaching their true transformational

potential in connecting economies and empowering peoples. These challenges need to be

addressed before a truly borderless connectivity is achieved region-wide.

We examine these developments in more detail below and conclude with a set of policy

recommendations.

Methodology

This research study seeks to determine the effects of the digital economy in the regional

integration process underway in the Asia-pacific region. The study is based on a literature review

(see references section) and on statistical analysis of international trade data of ICT goods

obtained from the United Nations Commodity Trade Statistics Database (UN Comtrade). Annex

A provides details of the trade data used, which follows the methodology of the United Nations

Partnership on Measuring ICT for Development and the definition of “ICT goods” as contained

in the “Guide to Measuring the Information Society” published by the OECD. (OECD, 2009).

Annex A also describes discrepancies in data between the value of ICT goods reported by

exporting countries, and their mirror data namely the value of ICT goods reported by the

destination or importing country.


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Findings

I. The ICT supply chain is a key driver of the market-driven regional integration process

The world imports more ICT goods from Asia-Pacific than from any other region in the

world. These imports have grown rapidly around the world, but since 2002, the fastest demand

has been seen in the intraregional market, which has seen a particularly rapid growth of over 20

% average annually (see Figure 2).

Figure 2: Where the World buys ICT Goods?

Origin of Imports of ICT Goods, 2009

Latin America and Carib.5%

North America7%

Europe19%

Asia and the Pacific68%

Other countries/areas1%

Africa0%

Average Annual Growth of Imports of ICT

Goods Originating from Asia and the

Pacific (2002 – 2009), Selected Economies

United

States,

8.39%

European

Union (15),

15.74%

Asia‐Pacific

Economies,

20.80%

0%

5%

10%

15%

20%

25%

30%

Importer of ICT Goods from Asia‐Pacific

Source: ESCAP. Based on UN Comtrade data of reported imports. ICT goods are defined in the “Guide to

Measuring the Information Society”, annex 1A (2009 OECD).

Reflecting the integrated production system in ICT manufacturing, trade in ICT goods is

dominated by intra-regional flows. For instance, in 2009, Asia-Pacific importers sourced more

than twice the value of ICT parts from within the region (US$ 286 Billion, 69.3%) as compared

to what they sourced from the rest of the world (US$ 126.9 Billion, 30.7 %). The top three

subregions in Asia-Pacific to import these ICT goods (which had been produced within the

region) were, in 2009, East and North-East Asia and South-East Asia, which together accounted

for US$ 388.3 billion, or 46.3%, of the region’s total exports (see Figure 3).


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Figure 3: Top Regions Importing ICT Goods Originating from Asia and the Pacific, 2009

6.0

7.9

8.9

14.6

20.6

50.7

89.6

170.4

171.1

298.7

0 50 100 150 200 250 300

Other countries/areas

Africa

North and Central Asia

Pacific

South and South‐West Asia

Latin America and Carib.

South‐East Asia

North America

Europe

East and North‐East Asia

Billion US$ current

Source: ESCAP. Based on UN Comtrade data of the value of reported imports in ICT goods. ICT goods are defined

in the “Guide To Measuring The Information Society”, Annex 1A (2009 OECD).

The demand for ICT end-products (not parts) originating from Asia-Pacific is still mainly

from outside the region (65.5 %), but as mentioned above, the intraregional demand for end-

products is increasing (see Figure 4).

Figure 4: Destination of Asia-Pacific ICT end-products, 2002 and 2009

2002

To Asia‐Pacific,

31.1%

To rest of

World, 68.9%

2009

To Asia‐Pacific,

34.5%

To rest of

World, 65.5%

Source: ESCAP. Based on UN Comtrade data of reported imports. The definition of end-products is

detailed in Annex A. ICT goods are defined in the “Guide to Measuring the Information Society”, annex 1A (2009

OECD).


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The thriving growth of the ICT sector in Asia-Pacific has been accompanied by a rise in

world class Asian manufacturers, operators and service providers. Using innovative business

models such as targeting low-income but large-volume consumer bases, enterprises in the region

have capitalized on this growing consumer base, leading to a vibrant digital regional market. The

ICT sector is particularly important as a source of export revenue for some economies in the

region, as can be seen in Table 1.

Table 1: Exports of ICT Goods as a Share of Total Exports. Selected Economies, 2009 (Percentage)

Hong Kong, China 43.1Malaysia 36.5Philippines 36.4Singapore 33.9Taiwan, Province of China 33.0China 29.7Republic of Korea 21.9Thailand 19.8Japan 12.1India 3.5

Source: ESCAP, based on data from UNCTAD available at UNCTADstat, Share of ICT goods in international trade, annual, 2009.

A virtuous circle has set in, whereby increased employment creation combined with more

affordable and more diffused ICT equipment and services has stimulated greater demand for

digital products and services. For example, in China’s telecommunication sector, employment

grew annually at an average of 3.7% from 2002 to 2008, while total employment growth on

average has consistently stayed below 1.2% annually since the mid nineties.1 Within the same

context, in 2011, China became the largest market of smartphones, surpassing the United States.2

A recent study measured the impact of the Internet on the Gross Domestic Product (GDP)

of selected economies, in 2009 (McKinsey, 2011). The study considered expenditures and

consumption, by public and private entities, in activities related to the Internet (e.g. e-commerce,

online advertising), telecommunications (e.g. internet service providers), software development

and ICT consulting, as well as hardware manufacturing and maintenance of equipment used for

the Internet. In the region’s four largest economies, internet consumption and expenditures were

1 ESCAP. Full-time telecommunication employees in China obtained from the ITU World Telecommunications/ICT Indicators database 2011. Employment % change per annum in China obtained from ESCAP Statistical Yearbook 2011, p. 220. 2 Reuters. China overtakes U.S. in smartphone sales-analyst, accessed on 25 – Nov – 2011 website: http://www.reuters.com/article/2011/11/23/china-usa-smartphones-idUSN1E7AL1KX20111123


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found to contribute 4% of the GDP of Japan, 2.6% in China, 3.2% in India, and 4.6% in the

Republic of Korea. The growth in the internet economy was found to be largely market oriented,

driven either by private domestic consumption, or by exports. For example in the Republic of

Korea and Japan private consumption is responsible for 69% and 47% respectively of the above

mentioned consumption shares of GDP. For India and China this figure was 47% and 39%,

respectively, which can be explained by net foreign trade in Internet-related activities.

II. Gaps and Opportunities for Regional Integration

Technological innovations in recent years have lead to a second IT revolution, not seen

since the early 1990s. In Asia-Pacific, as in other regions of the world, mobile telephony and

broadband internet in particular are bringing unprecedented digital opportunities that are creating

new spaces for, and an acceleration of, regional integration. At the same time, a number of gaps,

particularly in infrastructure, need to be addressed, if the potential offered by digital

opportunities is not to be turned into a digital divide that accelerates regional inequities to the

detriment of greater regional integration. In this section we review the digital divides and other

gaps, assess them against new opportunities and propose regional policy actions.

While the region benefits from having the most advanced country in the world in terms

of ICT infrastructure and human capacity - the Republic of Korea (according to the ICT

Development Index (IDI) in 2011), closely followed by Hong Kong (China), Japan and

Singapore - it also has countries such as Papua New Guinea which rank among the lowest (ITU

2011: 29).


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Bangladesh, $580Bhutan, $2,030

Fiji, $3,840

Hong Kong, China, $31,420

India, $1,180

Indonesia, $2,050

Japan, $38,080

Korea (Republic of), $19,830

Macao, China, $35,360

Malaysia, $7,350

Maldives, $3,970

Philippines, $2,050

Russian Federation, $9,340

Singapore, $37,220

Sri Lanka, $1,990

Thailand, $3,760

Viet Nam, $930

0

1

2

3

4

5

6

7

8

9

10

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0%

ICT Price Basket (IPB)

ICT

Dev

elo

pm

ent

Ind

ex (

IDI)

The size of the bubble refers to GNI per capita, USD, 2009. Data source: ITU 2011

Sources: ESCAP based on data from International Telecommunications Union, Measuring the Information Society

2011. http://www.itu.int/ITU-D/ict/publications/idi/2011/;

Notes: The ICT Price Basket (IPB) is a composite basket based on the user prices for fixed-telephony, mobile-

telephony and fixed-broadband Internet services, computed as percentage of average income level.

The ICT Development Index (IDI) is a composite index combining 11 indicators related to the level of networked

infrastructure and access to ICT, the level of ICT usage in society, and the level of ICT skills.

Figure 5 shows the relationship between ICT connectivity, per capita income and ICT

usage prices, as calculated in ITU indices. First, as expected, there is a strong correlation

between ICT development and per capita income (correlation value of 0.885). Second, in

contrast, ICT prices and per capita income have an inverse relationship (correlation value of -

0.446) reflecting the regressive nature of the sector across the income spectrum. Third, as the

price index increases, the ICT development index falls sharply with a negative correlation value

of -0.597. In this regard, what is of even greater concern is that, in the very countries that already

have the lowest per capita income levels and the lowest ICT development indices, ICT prices

Figure 5: Relationships between connectivity, usage prices and income, selected economies,

2009

Nepal, $440

Papua New Guinea, $1,180

Cambodia, $610

Lao PDR, $880

0

0.5

1

1.5

2

2.5

20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%


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have increased exponentially four or five fold (see inset countries in Figure 5). This underlines

the close association between poverty, low ICT connectivity, as well as high user prices, that are

not only out of line with other countries in the region, but are also present in those very countries

where people are the least able to afford them. Disconnectedness in these countries can thus turn

into a vicious cycle that negates, particularly for the poorest, the benefits that wider integration

of the region can bring. We return to this in the policy recommendations.

Disconnectedness across the region takes on many forms that can be more problematic

over the long term than ICT indicators suggest. This is the case particularly for access to high-

speed broadband internet. On average, less than 20% of people in Asia-Pacific have access to the

Internet and a mere 3% to 4% have access to high-speed broadband, which is instrumental for

the exchange of content-rich materials. This level of internet access is not only much lower than

in North America (78%), Europe (62%) and even Latin America and the Caribbean (33%), but

the divide is widest in those technologies that are most closely associated with the reshaping of

the information economy and the transformation towards a knowledge-based society in the

region (ESCAP, 2011, p. 238).

These divides are not too surprising given the great inequalities that exist between

countries in the region in their capacity to carry communications traffic internationally

(International Bandwidth).3 The differences result in countries having to pay high prices (and

disproportionately high prices for some countries, as mentioned above) for slow connections,

low quality of communication, as well as low content delivery (e.g. simple email exchanges

rather than data intensive streaming).

International Bandwidth in turn depends on the physical connectivity infrastructure

available to a country which can be divided broadly into three types of technologies, namely

wired connectivity (primarily terrestrial and submarine fibreoptic cables), terrestrial wireless

connectivity, and satellite-based connectivity. Each type provides services that include

broadcasting, telephony, Internet and conferencing at different quality and cost. 3 International Internet bandwidth is the capacity which telecommunication operators have to carry internet traffic internationally. It is measured as the sum of capacity of all Internet exchanges. See ITU definition, unit of measure (Mega Bits Per Second (Mbit/s) at: http://www.itu.int/ITU-D/ict/material/TelecomICT%20Indicators%20Definition_March2010_for%20web.pdf


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Having developed a strong export-oriented economy, most of the region’s high capacity

data transmitting routes are with markets in Europe and North America. In fact, around four-

fifths of high capacity international routes with Asia continue to be the Trans-Pacific routes; with

Hong Kong (China), Tokyo, Singapore and Seoul having emerged as the core global hubs (where

international carriers have established points of presence) in Asia (see Figure 6). The rest are

mainly through the Indian Ocean/Mediterranean routes. This raises a number of issues, while at

the same time providing new opportunities for regional integration.

People-centred regional integration

Complex societal challenges emerge when access to high speed, continuous connectivity

is unequally distributed. On the one hand, many individuals find themselves empowered to

broadcast ideas and connect in ways that are pivotal to the power of group dynamics. An

engaged citizenry with IT-enabled shared values is emerging and often transcends traditional

national boundaries. It is influencing and accelerating the reorganization of all institutional

structures - both horizontally and vertically – combining the interests of multiple and varied

stakeholders. These emerging networks are rapidly centering regional integration processes

around knowledge systems that are flexibile, fluid and pragmatic, as the creativity of individuals

can always lead to further changes. On the other hand, as these lines of creative cooperation are

drawn and redrawn, the fundamental concern remains: it is the most IT-enabled and well-

resourced individuals and groups that benefit and gain the most from technological innovations.

In this process, demarcation lines are being drawn that may accentuate exclusive rather than

inclusive integration, magnifying socio-economic disparities and deepening inequalities between

the regionally connected knowledge society and the unconnected localized population.

Integrating regional ICT infrastructure

Asia’s landmass offers huge opportunities to provide affordable, reliable and secure

broadband access for a more inclusive and integrated regional knowledge society. By investing

in additional terrestrial fibreoptic cable routes, new transit routes for the transmission of data

could be created, while new “internet hub cities” along the routes could also be developed. This

would bring a number of development gains. For one, it would diversify revenue earning

opportunities for landlocked countries which carry telecommunication traffic. Second, to the


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extent that it would reduce dependency on EU and US-centric connectivity, it would introduce

competition among networks and provide incumbent carriers with incentives to lower

connectivity prices across all networks. This is important because most of the international

bandwidth deployed around the world is concentrated in the hands of relatively few international

carriers. Not surprisingly therefore, at present, telecommunication costs in the region are higher

than in European and North American internet hub cities. For example, while Hong Kong

(China) is regarded as the most competitive Internet transit market in Asia, prices are still

approximately 2.5 to 3.5 times higher than in London (United Kingdom). Costs are even higher

in cities far from major Internet exchanges such as Bangkok (Thailand) and Manila (Philippines)

due, at least in part, to the cost of transport back to the primary exchange.4 Third, with regards to

forging new forms of regional integration, internet hubs unlike other forms of infrastructure

hubs, do not need to be located in physical proximity to Asia’s megalopolises. Asia’s congested

mega-cities with their high operation costs and increased exposure to disasters – be they

manmade or natural - increase the attractiveness of finding untapped physical connectivity in

remote expanses of land. In similar ways to the concept of dryports, such internet hubs would

offer new and cost-effective ways of decentralizing economic activities for a more inclusive and

geographically balanced development process in the region. Furthermore, the possibility of

developing cross-sectoral synergies between dryports and internet hub cities could further

enhance the commercial viability of both.

4 TeleGeography, Global Internet Geography Executive Summary, accessed on December 16 2011 at at: http://www.telegeography.com/page_attachments/products/website/research-services/global-internet-geography/0002/4221/telegeography-global-internet.pdf


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Figure 6: Submarine telecommunications cables landing in Asia-Pacific

Source: Adapted from the Submarine Cable Map, publicly available at www.submarinecablemap.com.

Significant increases in regional internet traffic volume

Internet traffic volumes in the region are expected to continue to increase exponentially.

This is due to the well-known dynamic growth processes in the region that will see more region-

centric trade, transportation, financial and energy flows. Furthermore, since digital content

delivery, including cloud-based services, has started to move physically closer,to the region’s

end-users, intra-regional traffic flows will continue to increase. This necessitates the

development of a land-based infrastructure that connects Asian-Pacific countries with each other

directly, and in an affordable, reliable and secure way.


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Momentum increasing in public and private investments

The urgency is supported by a number of subregional initiatives that have come into

existence. For example, in the Greater Mekong Subregion (GMS), progress continues in

completing and upgrading the national sections of the GMS Information Superhighway Network

(ISN)5, which is an ongoing US$ 65 million project funded by the Asian Development Bank

(ADB) to build and develop the backbone of telecommunication connectivity in that subregion

(ADB, 2011). Similarly, in South Asia, under the ADB funded South Asia Subregional

Economic Cooperation (SASEC) Information Highway initiative that aims to establish new and

enhance existing data connectivity capacity between Bangladesh, Bhutan, India, and Nepal,

around US$ 16 million in grants and loans have been approved.6 This initiative may serve as a

preliminary phase to the development of an extended South Asian Association for Regional

Cooperation (SAARC) information highway.

The third generation of the Trans-Eurasia Information Network (TEIN) provides high-

capacity connectivity between research institutions in China, India, Indonesia, Japan, Korea,

Laos, Malaysia, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan Province of

China, Thailand, Vietnam and Australia.7 This network which was recognized at the 8th Asia-

Europe Meeting (ASEM) Summit of Heads of State and Government (Asia-Europe Meeting,

2010) is expanding to Bangladesh, Bhutan and Cambodia.

Similarly, in Central Asia, an initiative called the Central Asia Research and Education

(CAREN) project, amounting to around 6 million euros, came into operation in 2010 connecting

Kyrgyzstan, Tajikistan and Turkmenistan. This network is expected to be extended to

Kazakhstan and Uzbekistan.8

5 Joint Ministerial Statement, GMS in the Next Decade: New Frontiers of Cooperation, 16th Ministerial Meeting, 20 August 2010, Ha Noi, Viet Nam. 6 ADB, project information document, accessed on 29 November 2010 at: www.adb.org/Projects/project.asp?id=40054 7 www.tein3.net accessed on January 3 2012. 8 European Commission website, accessed at: http://ec.europa.eu/europeaid/where/asia/regional-cooperation-central-asia/education-and-research/caren_en.htm


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Cognizant of the need for such infrastructure to be built rapidly, private sector companies

have also stepped up their efforts (TeleGeography, 2011). For example, an underground high-

speed terrestrial network connecting Yadong in China with Siliguri in India was launched in

2010,9 whereas previously these two countries were connected only through submarine cable

routes via Hong-Kong or Singapore. Other private sector initiatives are also underway, for

instance, Russia’s national telecommunications operator Rostelecom and China Telecom

announced in 2011 an agreement to expand the bandwidth of the Transit Europe-Asia (TEA)

cable system – a terrestrial cable system which provides the shortest route between Europe and

Asia, running mainly over Chinese, and Russian territories, and which connects countries in

Central Asia such as Kazakhstan, Ukraine, Azerbaijan, and Georgia.10

By the end of 2009, nine out of the top 30 telecommunications service providers by

revenue in the world were from Asia-Pacific.

Box 1: Pacific connectivity

Some least developed countries (LDCs) in the Pacific, have made progress in getting

connected by submarine cable with the rest of the world. For instance Samoa and

American Samoa are connected through the American Samoa-Hawaii submarine

cable; and the Marshall Islands and the Federated States of Micronesia are connected

via Guam through the HANTRU-1 submarine cable.11 Other Pacific island developing

economies are also connected via submarine cables, such as French Polynesia through

the Honotua cable to Hawaii; New Caledonia through Australia using the Gondwana-

1 cable; and Fiji through the Southern Cross cable (Pacific Islands Forum Secretariat,

2010). Having connected their capitals and densely populated areas, the challenge

remains for these countries to provide connectivity to all of their population – even if

they inhabit remote areas.

Source: ESCAP, based on the Submarine Cable Network Map accessed on January 3,

9 Airtel, accessed on 3 January 2012 at: http://www.airtel.in/wps/wcm/connect/About%20Bharti%20Airtel/bharti+airtel/media+centre/bharti+airtel+news/enterprise/pg-bharti_airtel_launches_high_capacity_direct_terrestrial_link_between_India_and_China 10 Rostelecom website accessed 3 January 2010, available at http://rustele.com/news-and-events/rostelecom-china-telecom-agree-to-expand-europe-asia-bandwidth.html 11 Submarine Cable Map accessed on January 3 at http://submarinecablemap.com/


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publicly available at http://submarinecablemap.com/

Notwithstanding this collection of private and public sector driven initiatives, progress

lags behind the growing influence of the region and expected surges in internet traffic.

Consequently the last issue to consider, is the need for a more systematic form of

intergovernmental cooperation that would provide the organizing framework for the expansion

of ICT connectivity in the region.


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Discussion and Policy recommendations

The region’s integration process stands to gain from further regional policy coordination

that in turn will lead to enhanced productivity, efficiencies, economic well-being and increases in

regional aggregate demand. Several policy recommendations can be drawn from the research

conducted and these have been organized into the following issues: moving enterprises up the

value chain, raising technological skills, facilitating labour and enterprise mobility, and

strengthening regional intergovernmental cooperation in the expansion of ICT infrastructure.

Moving enterprises up the value chain

The region remains very competitive as a supplier of parts, and as a manufacturer of

finished products which have been designed by large multinational companies. Important

portions of the sales profits of such goods go to the companies which design and market these

products. For example, research by the Asian Development Institute found that iPhones (Xing,

Y., and N. Detert, 2011) are designed and marketed by a US company, and are produced with

parts from eight main suppliers, three of which are from Asia-Pacific, namely Toshiba and

Murata (Japan) and Samsung (Republic of Korea). The final assembly of the device is done by

Foxconn (China) and then exported to the US and the rest of the world. The estimated total cost

of producing this device, at the time of the study, including parts and manufacturing, was US$

179 and the retail value at the time of the study was approximately US$ 500.

In deepening regional integration, enterprises in the region must continue to move up the

value chain in order to obtain a larger share of the benefits; this is by not only excelling at

manufacturing and producing parts, but also by designing innovative products and marketing

them as final products. To achieve this, the region must facilitate the combination of skills and

technology from within the region, and strengthen research and development, innovation and

creativity.


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Box 2: Supercomputers: an example of high-tech innovation in Asia

Supercomputers are used to manipulate large amounts of data and simulate complex

scenarios such as weather forecasting, material designs, drug development and other

research activities. Four out of the five most powerful supercomputers in the world

are located in Asia at research institutions with strong government support.

The most powerful supercomputer is located in Japan at the RIKEN Advanced

Institute for Computational Science (AICS) and manufactured by Fujitsu. The AICS

is a result of a cabinet resolution adopted in 2006, the “Third Science and Technology

basic Plan” which designated next-generation supercomputing as a key technology of

national importance (http://www.kcomputer.jp).

The second most powerful supercomputer is located in China at the National

Supercomputing Center in Tianjin and manufactured by the National University of

Defense Technology (NUDT). The NUDT is under the dual supervision of the

Ministry of National Defense and the Ministry of Education

(http://www.nudt.edu.cn). The third most powerful supercomputer is located in the

United States; the fourth is located in China at the National Supercomputing Centre in

Shenzhen (NSCS) (http://nsccsz.gov.cn/) and the fifth is located in Japan at the Global

Scientific Information and Computing Center of the Tokyo Institute of Technology

(http://www.gsic.titech.ac.jp).

Continuing investment in this sector and making this computing power available to

the private sector presents an opportunity for the creation of innovative products and

services to respond to the needs of the region.

Source: TOP500 project accessed 23-Nov-2011 (http://www.top500.org/list/2011/11/100)


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Raising technological skills

As wages and skills continue to increase in some countries in the region (such as China

and India), government and enterprises need to generate employment opportunities,

corresponding to the expectations of this growing middle class, and capitalize on this trend to

develop higher-value-added products and services in the region. Failure to do so may tempt

talented individuals to migrate outside of the region, thus weakening the premises on which

deeper market driven integration should proceed.

Governments and the private sector should consider investing in developing the ICT

skills of individuals at all levels (government, enterprise, and civil society), so that there can be a

critical mass of diverse users, as well as people to maintain and operate the ICT infrastructure

and services.

In order to achieve this, they may wish to cooperate with other countries, in order to

facilitate exchange programmes for students and researchers, and for the reciprocal recognition

of academic degrees and certifications. Cooperation towards the establishment of centers of

excellence, which can bring together human, financial and other resources from the region,

would be beneficial as well, such as The University of the South Pacific (USP) and the Asian and

Pacific Training Centre for Information and Communication Technology for Development

(APCICT) of ESCAP.

Facilitating labour and enterprise mobility

947 million people live in extreme poverty in Asia-Pacific. Enterprises that maintain

mobility can retain competitiveness associated with low labour costs by relocating their

operations to areas with abundant labour and/or by recruiting migrant workers. An enabling

policy environment would be necessary to fully leverage these opportunities. Cooperation and

policy coordination between labour abundant and labour scarce countries would be needed, as

well as between capital receiving and capital supplying countries in order to simplify


21

establishment and operation of foreign-owned ICT-related and other enterprises within the

region.

Figure 7: ICT readiness and cost by subregion in Asia-Pacific, 2009

Source: ESCA, based on data from the “Measuring the information society 2011” report published by

the International Telecommunications Union

Figure 7 shows that the East and North-East Asian subregions have the most developed

ICT infrastructure and skills within Asia-Pacific; and in relative terms offer affordable ICT to

individuals and businesses. The South and South-West Asian subregions have managed to keep

ICT at relatively affordable levels despite its lagging infrastructure.

Strengthening regional intergovernmental cooperation in the expansion of ICT infrastructure

As has been suggested above, strengthening a terrestrial telecommunication network in

Asia-Pacific is important to reduce the cost and increase the communication capacity within the

region. The development of robust terrestrial networks (operating in concert with satellite based

networks when costs related to terrestrial networks are prohibitively high) will reduce

vulnerabilities associated with disruptions of trans-oceanic cables and will help drive down

prices.


22

As there is currently no formal mechanism for inter-governmental cooperation that builds

ICT connectivity infrastructure based on mutual interests and risk sharing, the feasibility of such

an agreement should be examined further. Barriers to cross-border provision of

telecommunication services should be identified, more concretely analyzed, and removed where

possible, with the objective of promoting competitiveness and improved services. Nevertheless,

possible constraints in promoting seamless cross border connectivity across the Asian continent

are of a socio-political nature, and in this regard, it is useful to recall that it took more than 45

years for the Asian Highway Agreement to be concluded and ratified. On the other hand, herein

lies an opportunity: ICT connectivity can ride on and benefit from already agreed regional

infrastructures, especially physical connectivity infrastructures such as transport systems. In this

capacity, the transport network ratified and under implementation by the 28 parties of the Asian

Highway Agreement could be ideal. It is instructive to note that in the region’s most digitally

advanced countries, notably the Republic of Korea among others, ICT fibreoptic cable

infrastructure is deployed along the highway backbone network. If governments could agree to

extend ICT cable conduits through the already agreed regional interconnections of the Asian

Highway, ICT connectivity routes in the region could be built in a rapid, cost-effective and

rationally coordinated manner. Time consuming and costly negotiations, between the private

sector and government, and/or among governments themselves, could be short-circuited, and

implementation of investment projects would be accelerated. Despite the inter-country

connectivity offered by the Asian Highway, further studies need to address the feasibility of

using regional interconnections, that exist among the cable systems of the railway network

agreed to under the Trans Asian Railway Agreement. In this regard, organizations such as the

Secretariat of ESCAP would be well positioned to conduct further studies on various options that

would increase ICT connectivity. Among the options would be the feasibility of adding an ICT

Regional Connectivity Protocol to existing intergovernmental agreements on transport agreed to

under ESCAP auspices.

Box 3: Intra-regional connectivity in other parts of the world

In other regions, such as in Europe, countries are cooperating towards improving their


23

intra-regional ICT connectivity, even to the most remote areas, for instance through

the pan-European Mobile Satellite Services (MSS) programme. This programme

includes services such as internet access, television and radio, and emergency

communications via satellite. In this initiative, policies were established to encourage

private investment to deliver these services on a region wide basis. To this end, the

European Commission harmonized the use of radio spectrum in the 2 GHz frequency

bands and authorized two private companies to act as pan-European systems

providers. These measures were designed to encourage satellite operators to realize

economies of scale resulting from being able to operate in a European-wide market

that increasingly operates on the basis of technically seamless interoperability (Cf.

European Commission Decisions 2007/98/EC, L 265/25, and 2009/449/EC). Similar

mechanisms may be explored which may be suitable for this region.

Source: ESCAP

Leveraging existing intergovernmental agreements on transport would also offer new and

vast opportunities for cross-sectoral synergistic gains. This is because ICT physical connectivity

can be seen as a meta-infrastructure: an infrastructure that enables and integrates all other

services. In other words, by providing ICT infrastructure, the opportunities for providing

affordable and reliable access to a vast array of other services – be it health, education,

microfinance or electricity for example – improve. Companies operating in these sectors often

already operate private networks to fulfill their own needs, such as monitoring their operations

and connecting their nationwide locations (through electrical sub-stations, train stations, highway

toll booths, etc.). An example in India, where the Ministry of Railways leveraged its

infrastructure to extend the telecommunications network, is provided in Box 4. In this regard,

new infrastructure projects should be conceived and funded cross-sectorally from the outset, and

the scope for building on successful models of Public Private Partnerships (PPPs) for

infrastructure development are worthy of further examination and replication across the region.

India, in particular has a long history of PPPs with projects such as the Great Indian Peninsular

Railway Company and the Bombay Tramway Company in the 19th century, and the power

generation and distribution companies in Bombay and Kolkata in the early 20th century. More


24

recently, since the opening of the Indian economy in the 1990’s there have been several PPPs for

water supply, housing, ports, airports, road and urban infrastructure and power generation,

among others.12 Notable projects include the Noida Toll Bridge Company in Delhi, and the

Bangalore International Airport (Comptroller and Auditor General of India, 2009, p.7), as well as

the National Highways Development Project.13

Box 4: Railway and Telecommunications Infrastructure Sharing in

India – a success case

The Indian Ministry of Railways created RailTel Corporation of India

Limited in 2000 to fulfill communication needs for administration, ticketing

and efficient railway operations. While fulfilling these responsibilities,

RailTel has laid down a network of over 34,000 km by leveraging its access

to railway lines, and thus becoming a leading telecommunications service

provider all over India. In addition to modernizing the Indian Railways’s

telecommunications network, RailTel is earning revenue by marketing

surplus bandwidth and other infrastructure to major service providers like

AirTel, Hutch, Tata, BSNL and financial entities like State Bank of India,

Dena Bank and Amar Ujala among others.

Source: Indian Railways Year Book (2008-09).

http://www.indianrailways.gov.in/railwayboard/uploads/directorate/stat_eco

n/pdf/Year_Book_English2008-09.pdf and http://www.railtelindia.com/

Furthermore, as was argued above, the emergence of internet hub cities along new

terrestrial cable routes could further enhance the commercial viability of dryports. The ESCAP

Commission in its resolution 66/4 of 19 May 2010 requested the ESCAP secretariat to work on

an intergovernmental agreement on dry ports and a working draft of the Agreement is now under

12 See at: http://infrastructure.gov.in/ 13 National Highways Authority of India, website accessed on January 30 2012 at: http://www.nhai.org/balancelength.htm


25

negotiation. Cross-sectoral synergies inherent to the development of dryports and internet hub

cities are worth further study.

In conclusion, this paper finds that the digital economy is contributing to the regional

integration process in the Asia-Pacific region and suggests that policymakers in the region

support enterprises so that they can move up the value chain and support individuals and

organizations in raising technological skills. The paper suggests that governments collaborate

with each other to facilitate labour and enterprise mobility, and to expand ICT infrastructure in

the region. Further research would be recommended to identify successful policies, in the areas

mentioned, which could serve as a model for future policy decisions. Lastly, we suggest that the

international community continues to enhance statistical standards to measure the evolving ICT

sector, in particular by supporting the UN Partnership on Measuring ICT for Development.


26

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cit.prc.pdf.


28

Appendix A

Methodology and Discussion Relating to the Analysis of Trade Flows of ICT Goods

In order to analyze the trade flows of ICT goods internationally, the authors used data

from the UN Comtrade database. Large disparities exist between the value of exports, as reported

by exporting countries, and the value of mirror statistics reported by importing countries. The

outline of the methodology used for our estimations is provided below, as is the rationale for

selecting this methodology. We recommend that further work is needed to continue rectifying

these differences. At the international level, the Partnership on Measuring ICT for Development

may consider including this issue in its future work to ensure that trade, in this important sector,

is properly accounted for.

Data sources

Data was downloaded from the database section of Comtrade14. The countries included in

the study are the 53 ESCAP countries,15 which were taken as a whole or divided into subregions.

To study the flow of exports between ESCAP members and to the rest of the World, an

indirect methodology was used. This methodology used the value of the “imports” data reported

by importing countries, instead of the “exports” reported by exporting countries. This was done

with the objective of increasing the accuracy of the analysis inline with the assumption that the

data reported on imports are collected and reported in a more accurate manner than the data on

exports, due to a variety of reasons related to customs regulations, tariff revenues, etc.

During data processing, when a trade flow was found to have the same economy as

importer and exporter (e.g. from China to China), such record was excluded from the

calculations. This was done because the aim of the study was to analyze trade flows between

economies.

14 http://comtrade.un.org/ 15 “Statistical Yearbook for Asia and the Pacific 2011” http://www.unescap.org/stat/data/syb2011/


29

Definition of ICT goods

In this study ICT goods are defined according to the OECD Guide to Measuring the

Information Society 2009. The table below shows the list of Harmonized System (HS) codes

which have been included. For the data observations in 2002, the research team used the HS02

list, and for the year 2009 the HS07 was used.

The OECD paper mentioned above16 was also used as a reference for the following

details: (a) the description of the HS codes used, as well as (b) the conversion methodology from

HS02 to HS07. The distinction between “final products” and “components” was also based on

the same reference paper. For this purpose the research team used the HS codes listed under

section “D. Electronic components” of “Table 2.A1.3. Correspondence between CPC Rev. 2, HS

2007, HS 2002 and HS 1996 classification for ICT goods” and other HS codes which have a

description starting with the word “Part”, are shown under other sections of the same table.

Harmonized System (HS) codes considered ICT Goods

16 “OECD Guide to Measuring the Information Society 2009” http://browse.oecdbookshop.org/oecd/pdfs/free/9311021e.pdf

HS 02 HS 02 HS 07 HS 07 Final Products Components Final Products Components

847050

847290

847220

847130

847141

847149

847110

847150

847160

847180

847190

844351

851722

851721

900911

900912

847170

853110

847330

847350

851790

851890

852290

854011

854012

854020

854040

854050

854060

854071

854072

854079

854081

854089

854110

854121

847050

847290

847130

847141

847149

847150

847160

847180

847190

852841

852851

852861

844331

844332

847170

853110

852560

852550

847330 847350 851770 851890 852290 854011 854012 854020 854040 854050 854060 854071 854072 854079 854081 854089 854110 854121


30

852520

852510

851750

851730

851719

851780

852790

851711

852712

852713

852719

852731

852732

852739

852721

852729

852812

852813

852821

852822

852830

851931

851939

852020

851940

851992

851993

851999

852010

852032

852033

852039

852090

851921

851929

851910

852110

852190

851810

851821

851822

851829

851830

854129

854130

854140

854150

854160

854221

854229

854260

854890

854091

854099

854190

854290

854210

852330

852460

853400

852990

851712

851761

851762

851718

851769

851711

852712

852713

852719

852791

852792

852799

852721

852729

852871

852872

852873

852849

852859

852869

851930

851950

851981

851989

851920

852110

852190

851810

851821

851822

851829

851830

851840

851850

852210

950410

852580

852351

852359

852380

852910

901320

854129 854130 854140 854150 854160 854231 854232 854233 854239 854091 854099 854190 854290 852352 852321 853400 852990


31

Discrepancies

The table below shows how the use of import values and export values which

theoretically should be statistics that mirror each other (exports of country A to country B,

should be the same as imports of country B from country A) results in different values for trade

flows. In UN Comtrade, in 2009, China reports having exported $US 356 billion of ICT goods,

while the sum of the imports from China reported by the rest of the countries in the world, adds

up to $US 408 billion; a difference of approximately $US 52 billion. The case of Hong Kong

(China) raises even higher the rationale for further research into these flows, because the

discrepancy is as high as $US 128 billion.

Selected Exporters of ICT Goods, Using Export and Import Data from the UN Comtrade

Exporter (A) Using Imports (B) Using Exports Difference (A‐B)

CHN $408,500,000,000 $356,000,000,000 $52,500,000,000

HKG (China) $13,730,000,000 $142,000,000,000 ‐$128,270,000,000

USA $81,670,000,000 $114,000,000,000 ‐$32,330,000,000

SGP $48,880,000,000 $91,000,000,000 ‐$42,120,000,000

KOR $105,900,000,000 $80,000,000,000 $25,900,000,000

JPN $85,650,000,000 $70,000,000,000 $15,650,000,000

MYS $83,140,000,000 $57,000,000,000 $26,140,000,000

Internationally accepted standards

851840

851850

852210

950410

852530

852540

852390

852410

852491

852499

854381

852910

901320


32

The Partnership on Measuring ICT for Development is an international, multi-

stakeholder initiative to improve the availability and quality of ICT data and indicators,

particularly in developing countries. This Partnership was launched in 2004, with the objective

of:

Defining a core list of ICT indicators and methodologies to collect these

indicators;

Helping developing countries collect ICT statistics, particularly through capacity-

building and hands-on training for national statistical offices;

Collecting and disseminating information society statistics in a number of

formats, including a global report and database.

Members of the Partnership include the International Telecommunication Union (ITU),

the UN Economic Commission for Africa (ECA), the Organization for Economic Co-Operation

and Development (OECD), the UN Economic Commission for Latin America and the Caribbean

(ECLAC), the United Nations Conference on Trade and Development (UNCTAD), the UN

Economic and Social Commission for Asia and the Pacific (ESCAP), the United Nations

Educational, Scientific and Cultural Organization (UNESCO) Institute for Statistics, the UN

Economic and Social Commission for Western Asia (ESCWA), the United Nations Department

of Economic and Social Affairs (UNDESA), and the EUROSTAT.

These partners have established a set of indicators and methodologies to measure the ICT

sector and meet periodically to continue to enhance methodologies. The currently accepted

methodology is to refer to data aggregated by the United Nations Statistics Division in the

United Nations Commodity Trade Statistics Database - UN Comtrade (United Nations, 2008, p.

66). Partners such as UNCTAD widely disseminate these statistics through publications such as

the Information Economy Report (UNCTAD, 2011) and online through the UNCTAD statistical

portal (http://unctadstat.unctad.org/), using the reported exports appearing in UN Comtrade.

Given the discrepancies identified above between reported exports and reported imports,

the authors suggest that further research is undertaken to find the origin of the discrepancies and

to evaluate whether any changes to the accepted methodologies should be made.

the digital economy as an accelerator of regional

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