1. In 1994, even as the Asian region was booming, Stanford economist Paul Krugman sounded warning bells. Drawing upon the empirical work on total factor productivity by Alwyn Young, Krugman argued that the growth of the East Asia’s NIEs - Hong Kong, Singapore, South Korea and Taiwan - was largely due to factor accumulation, that is, the accumulation and investment of capital equipment, machines and labour. Krugman concluded that the then high growth rates would not be sustained, because the NIEs would soon run out of added inputs. For effect, he even likened them to the old Soviet Union.

2. Today, the growth rates of these countries have indeed declined in the financial crisis. Has Krugman been vindicated? The answer is not a straightforward one. The causes of the problems in Asian countries are complex and inter-twined. I do not intend to get into the detailed arguments, but it is important to return to some basics.

3. Capital has always played an important role in the theories of economic growth. In the neo-classical growth theory of Robert Solow and Trevor Swan, economic growth slows as the physical capital stock in the economy grows, though continued technological progress can help delay the onset of the law of diminishing returns.

4. Romer’s seminal work on endogeneous growth theories, however, turned the law of diminishing returns on its head. By broadening the definition of capital to include human capital, that is, the knowledge and skills embodied in the workforce, growth need not slow down. A study that analyzed growth rates across a large number of countries showed that, disregarding human capital, the accumulation of physical capital could only explain less than 30 percent of the variations in growth rates.

5. The notion of "Intellectual Capital" is itself an extension of this idea of human capital. Intellectual capital can be defined as the knowledge, skills, experience, intuition and attitudes of the workforce.

6. This definition opens up many possibilities. The total amount of intellectual capital in an economy can be increased by the old-fashioned way, by creating more babies to increase the size of the workforce. It can also be increased by increasing the capacity of each worker. I will focus on the latter rather than the former.

7. There are no simple measures of intellectual capital, but we can arrive at some proxies. I have assembled some interesting data to share with you.

8. As expected, the stock of intellectual capital varies greatly across the Asian countries. For instance, the mean years of schooling an adult has received in the Asian developing countries like Indonesia and Vietnam is less than 5, while citizens in the NIEs like Singapore and South Korea have an average of 7.8 and 10.1 years of formal education. This contrasts with developed countries like the US and Japan which have figures of 12.4 and 10.8 respectively.

9. Another proxy of intellectual capital is the number of research scientists and engineers per 10,000 labour force. There are less than 4 in Indonesia and the Philippines. Singapore and South Korea have 60.2 and 62.3. The US and Japan are at 75.2 and 109.8. [please see highlighted figures in Table 1 attached]

10. From these figures, we can draw the first conclusion, which is that many Asian countries are now operating way below capacity, in terms of what their people would be capable of doing if they had the education, training, and accumulated knowledge and experience to draw upon, judging from what the US and Japan have achieved. Is anything being done to fully develop this potential?

11. Now, one of the most basic measures of education is the literacy rate. In some South-East Asian countries, literacy rates increased by twenty percentage points or more from 1970 to 1990. In Indonesia, the literacy rate went up from 54% to 77%. For Singapore, it rose from 69% to 89% over the same period. [please see highlighted figures in Table 1 attached]

12. A higher level education indicator is the mean years of schooling received. In the NIEs, the number of years increased by 3 to 4 years between 1975 and 1995. In some countries, this meant the majority having received full secondary instead of only primary education. Beyond that South Korea is a prime example of the rapid expansion in mass higher education. The mean years of schooling rose from 7.6 in 1980 to 10.1 in 1995. [please see Table 2] Tertiary enrolment increased from 35% of each cohort to 55% in 1995.

13. Hence, the second conclusion is that the gap between actual capacity and potential capacity is not insurmountable. The Asian countries have been able to increase their intellectual capital stock very quickly over the last two to three decades. The Asian countries can continue to increase their intellectual capital stock, provided they have the resources and the political will to invest in their people. In fact, some Asian economies have already surpassed the major OECD countries in certain indicators. For instance, Taiwan, South Korea and Hong Kong have a higher tertiary enrolment in science and technical fields as a percentage of cohort than the average in major OECD countries.

14. Third, not all Asian countries are the same. There is wide variation in the stock of intellectual capital and differing speeds of building it up. Singapore has been fortunate to be able to continue to make investments in intellectual capital.

15. In 1981, we had about 10 research scientists and engineers per 10,000 labour force. Today, there are more than 60. [please see Graph] In 1985, the mean years of schooling in Singapore was 5.7. Today, about 20% of each cohort reach university, another 40% graduate from a polytechnic and more than 20% receive vocational skills training. Together, this implies that more than 80% of each cohort will receive some form of post-secondary education.

16. Let me move away now from the quantitative to the qualitative aspects, and also touch on some policy issues. I will describe what we are doing in Singapore to illustrate this.

17. Firstly, even as we are increasing the number of years of formal education our people receive, Singapore is embarking on a major review - ranging from curriculum to teaching methods - to nurture creativity and innovation in our young, encourage in them the entrepreneurial, risk-taking spirit and develop their talents to the fullest. Intellectual capital encompasses mind-sets and attitudes. Using what we call the "Thinking Schools, Learning Nation" vision, we aim to foster an open and inquisitive mind which is eager to learn and apply the vast amount of information available in the globally connected future.

18. Secondly, we are formulating a National System of Lifelong Learning. This will put in place the strategic architecture for every Singaporean, young and old, to pick up new skills and knowledge throughout his life. Initiatives range from the provision of government funds for retraining older workers to the attraction of world-class institutions like INSEAD to set up postgraduate campuses in Singapore. We see the provision of mass continual education and training as the next big development in education. Indeed, this is a logical progression from the provision of mass general education to meet the needs of a basic industrial economy, to the provision of mass higher education to meet the needs of a services and technologically based economy. Mass continual education where everyone in the workforce is continually upgrading themselves forms the basis for the knowledge-based economy of the future.

19. Thirdly, as a small country, Singapore recognizes the need to attract top talent from around the world to work here, for added fizz and vibrancy in our economy and society as the country modernizes. Singapore has the vision to be a Talent Capital, to be a hub for ideas, creativity and innovation. Apart from direct attraction factors like an open economy with high standards of living, we also do not neglect the indirect, "pull" factors of the "softer" aspects in life. These include the efforts to maintain a clean, healthy environment and to develop ourselves as a regional hub in the arts.

20. Fourthly, we see Information Technology (IT) as a key enabler in enhancing overall national capacity. The use of IT opens up endless opportunities in self-directed, creative learning for school students and open learning for working adults. By the third-quarter of 1999, every home on Singapore island will be cable-ready. In other words, every Singaporean home will, within a year, be connected to an optic fibre network capable of high-speed delivery of information, education and entertainment services. Laws have also been updated to encourage electronic commerce and safeguard electronic transactions and intellectual property.

21. Lastly, intellectual capital is useless if it is set in an environment that does not allow it to flourish. The business and economic environment in Singapore remains open, transparent and predictable. It is predictable in the sense of having consistency in policy stance rather than an absence of business and market risks.

na - Not Available

* 1976 figure.

^ 1996 figure.

Technical Notes:

Literacy rates (LR) are for populations aged 15 and over.

Mean Years of Schooling (MYS):

Singapore - for non-students aged 25 years and over.

South Korea - for non-students aged 6 and over.

Others - for populations aged 25 and over.

Sources for LR and MYS:

Singapore Dept of Statistics; Directorate-General of Budget, Accounting and Statistics, ROC; National Statistics Office, South Korea; HDR, UNDP;

Sources for RSEs:

Indonesia, Thailand and Vietnam - UNESCO.