Development Strategies in a Globalizing World

Development Development StrategiesStrategies

in a in a GlobalizingGlobalizing World World

By By

Dr. Anh-Nga Tran-Nguyen Dr. Anh-Nga Tran-Nguyen

Presentation at ASEAN, April 2003 Presentation at ASEAN, April 2003

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Globalization: what does it Globalization: what does it mean?mean?

Driving force of globalisation:Driving force of globalisation:

• Unilateral or multilateral measures to reduce or eliminate Unilateral or multilateral measures to reduce or eliminate barriers to trade, investment and financial flowsbarriers to trade, investment and financial flows

• New information and communication technologies make New information and communication technologies make national boundaries and physical distance irrelevantnational boundaries and physical distance irrelevant

• Multinational companies have a global value chain strategyMultinational companies have a global value chain strategy

Openness, integration and interdependenceOpenness, integration and interdependence

• Openness or liberalization of domestic economies does not Openness or liberalization of domestic economies does not necessarily lead to more integration to the world economynecessarily lead to more integration to the world economy

• Openness lead to more interdependence with other countries Openness lead to more interdependence with other countries and greater exposure to the influence of economic and greater exposure to the influence of economic development and policies of the ROWdevelopment and policies of the ROW

• Interdependence further reinforced by multilateral/ Interdependence further reinforced by multilateral/ regional/bilateral agreements and rules governing regional/bilateral agreements and rules governing international trade, investment and finance international trade, investment and finance

Anh-Nga Tran-NguyenAnh-Nga Tran-Nguyen

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Challenges faced by developing countriesChallenges faced by developing countries

• Globalisation means more opportunities for trade, investment Globalisation means more opportunities for trade, investment and finance. At the same time globalisation results in more and finance. At the same time globalisation results in more competition, higher risk and less policy autonomy to formulate a competition, higher risk and less policy autonomy to formulate a national development strategynational development strategy

• Technology gap: more urgent need to close this gap in order to Technology gap: more urgent need to close this gap in order to compete in the global marketscompete in the global markets

• Interdependence: reduced policy autonomy, heightened Interdependence: reduced policy autonomy, heightened competition, need to strike alliances and cooperation with other competition, need to strike alliances and cooperation with other countriescountries

• Interlinkages between trade, finance and investmentInterlinkages between trade, finance and investment• Multilateral ruleMultilateral ruless aand standards: level playing field, but nd standards: level playing field, but

constraints on policy space for a national development strategy. constraints on policy space for a national development strategy. How to find a right balance?How to find a right balance?

• Regional integrationRegional integration


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Development strategies: challenges Development strategies: challenges at at

the national levelthe national level

Review of literatureReview of literature::

• Adam Smith and followers: the role of capital Adam Smith and followers: the role of capital accumulation and population growth accumulation and population growth

• Neo-classical economists: Neo-classical economists: contribution of technical contribution of technical change as an exogenous factor to economic growth. change as an exogenous factor to economic growth. However, the underlying assumptions used by However, the underlying assumptions used by neoclassical economists excluded the role of neoclassical economists excluded the role of Governments in regulating the markets. Other Governments in regulating the markets. Other assumptions such as diminishing returns to capital and assumptions such as diminishing returns to capital and full employment of labour and all productive resources full employment of labour and all productive resources led to the conclusion of convergence between countriesled to the conclusion of convergence between countries

• Endogenous growth theory: Endogenous growth theory: knowledge as a key knowledge as a key endogenous growth determinant:endogenous growth determinant:


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• Technoeconomic stages of growth: Technoeconomic stages of growth: the process of economic the process of economic growth is in part a sequence of creative adaptations. growth is in part a sequence of creative adaptations.

• On the demand side: markets provide economies of scale On the demand side: markets provide economies of scale important for economic growth important for economic growth

Empirical evidence:Empirical evidence:

Phases of industralization of some Asian countries (Japan, Phases of industralization of some Asian countries (Japan, Republic of Korea, Taiwan Province of China, Singapore and Republic of Korea, Taiwan Province of China, Singapore and Malaysia):Malaysia):

• A first phase of import substitution, which perhaps illustrates A first phase of import substitution, which perhaps illustrates the first stage of learning by doing, producing mostly light the first stage of learning by doing, producing mostly light manufacturing products for domestic markets;manufacturing products for domestic markets;

• A second phase of export-oriented industrialization, based A second phase of export-oriented industrialization, based on labour or resource-intensive manufactures, which could on labour or resource-intensive manufactures, which could sometimes be the upgraded products of the earlier phase of sometimes be the upgraded products of the earlier phase of import substitution;import substitution;

• In a third phase of industrial upgrading, the value-added and In a third phase of industrial upgrading, the value-added and technological content of exports have increased;technological content of exports have increased;

• The following phase focus on the development and export of The following phase focus on the development and export of services, and knowledge-based industriesservices, and knowledge-based industries


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Development strategies in a Development strategies in a globalizing worldglobalizing world

Growth depends on: Growth depends on: • capital accumulation or investment (in the presence of capital accumulation or investment (in the presence of

abundant labour) abundant labour) • technology and technical progress and technology and technical progress and • exportsexports

Investment:Investment:• Role of the market: investment in physical capital, machinery Role of the market: investment in physical capital, machinery

and equipment not only provides the necessary tools for and equipment not only provides the necessary tools for production, but also promotes an increase in productivity and production, but also promotes an increase in productivity and income per worker. In principle, entrepreneurs will invest in income per worker. In principle, entrepreneurs will invest in sectors which are the most profitable. Thus, allocation of sectors which are the most profitable. Thus, allocation of capital resources will be decided by marketscapital resources will be decided by markets

• Role of government: Is there Role of government: Is there a role for the Government to a role for the Government to influence the long-term allocation of capital. It is all that influence the long-term allocation of capital. It is all that industrial strategy is about, and the debate on whether the industrial strategy is about, and the debate on whether the Government should "pick up the winners“Government should "pick up the winners“

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• Finance:Finance:

- - IInvestment-savings gap of the early stages of rapid nvestment-savings gap of the early stages of rapid growth and industry-take off growth and industry-take off

- Import foreign capital, which can come from official - Import foreign capital, which can come from official sources (bilateral donors or multilateral financial sources (bilateral donors or multilateral financial institutions) or private sources (commercial bank institutions) or private sources (commercial bank lending, portfolio investment, FDI, other short term lending, portfolio investment, FDI, other short term financing such as trade credit)financing such as trade credit)

- Attention to managing capital flows- Attention to managing capital flows

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Technology:Technology:

• Adapt foreign technologies and create indigenous Adapt foreign technologies and create indigenous technical innovations. Here the role of the Government is technical innovations. Here the role of the Government is crucial to encourage and provide favourable conditions crucial to encourage and provide favourable conditions for R&Dfor R&D

• The process of "technology transfer", or absorption of The process of "technology transfer", or absorption of foreign technology has been instrumental to the foreign technology has been instrumental to the successful industrialization of Asian countries, including successful industrialization of Asian countries, including Japan. subcontracting to domestic supplier firms by Japan. subcontracting to domestic supplier firms by foreign companies, original equipment manufacture foreign companies, original equipment manufacture (OEM), purchase of foreign capital goods, reverse (OEM), purchase of foreign capital goods, reverse engineering, joint ventures, licensing and patented engineering, joint ventures, licensing and patented technologies, FDI, as well as overseas training and the technologies, FDI, as well as overseas training and the return of nationals with overseas education or experiencereturn of nationals with overseas education or experience


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Exports:Exports:

Export-oriented development strategy: Export-oriented development strategy:

• to earn more foreign exchange and so to import the to earn more foreign exchange and so to import the products, services and technologies they need to raise products, services and technologies they need to raise living standards and productivity. Greater living standards and productivity. Greater competitiveness allows developing countries competitiveness allows developing countries

• to diversify away from dependence on a few primary-to diversify away from dependence on a few primary-commodity exports and move up the skills and commodity exports and move up the skills and technology laddertechnology ladder

• greater economies of scale and scope by offering larger greater economies of scale and scope by offering larger and more diverse marketsand more diverse markets

• The key is to increase constantly the value-added of The key is to increase constantly the value-added of exports and enhance productivity, in order to remain exports and enhance productivity, in order to remain competitive and to widen the scope for the exploitation competitive and to widen the scope for the exploitation of increasing returns from larger markets. of increasing returns from larger markets.

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The policy components:The policy components:- Policies to create a good investment climate in which corporate and Policies to create a good investment climate in which corporate and

nationaldevelopment interests converge;nationaldevelopment interests converge;- Policies to manage integration with the global economy;Policies to manage integration with the global economy; - Policies to manage the distribution of the benefits of developmentPolicies to manage the distribution of the benefits of development

• Investment climate :Investment climate : Macroeconomic policiesMacroeconomic policies Infrastructure developmentInfrastructure development Microeconomic policiesMicroeconomic policies Institutional policiesInstitutional policies Human development policiesHuman development policies

• Managing intergration in global economy:Managing intergration in global economy: Trade policiesTrade policies FDI policiesFDI policies Managing capital flowsManaging capital flows

• Distribution of benefits of development:Distribution of benefits of development: Policies to alleviate poverty and enhance social equality, including Policies to alleviate poverty and enhance social equality, including

gender equality gender equality

Policy FrameworkPolicy Framework

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Factor-driven economy

I

Investment-driven economyII

Innovation-driven economyIII

Technology Simple or standard imported technology to use abundant resources: land, labour, primary commodities (including mineral resources). Exports

•Commodities•Import substitution and exports of simple standard consumer goods (textiles, footwear, processed food, new agricultural products).•Assembly parts and components in the global value chain of TNC.

Technology

More sophisticated imported foreign technology.Local capacity to improve on imported technology. Technology transfer through imports of machinery and equipment, FDI, imitation, or reverse engineering, OEM. Upgrading in the global value chain of TNC.

Exports

•More sophisticated consumer goods (“white” electrical appliances, plastic objects, toys…).•Some capital-intensive and medium-technology goods (refrigerators, automobiles …).•Higher-value chain production for TNC.

Stages of development: framework to analyze policies towards technology development, export promotion and the role of the

Government

Technology

Technology–generating economy innovations in some sectors at the global technological frontier.

Exports

•Medium-technology and high-technology products.•Services

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Government role

• Macroeconomic stability• Investment in education• Infrastructure development• Equal distribution of benefits of growth

Organization of enterprises and clustering

•Self-contained factory processes that require few inputs of materials or components from other plants and a modest amount of managerial experience and skills.

Government role

•Macroeconomic stability•Investment in education•Infrastructure development•Equal distribution of benefits of growth

Focus increasingly on upgrading technical skills and level of education of human capital, investing in specialized human resources. Improving transportation and communications infrastructure. Providing a conducive legal and regulatory system to enhance business efficiency.

Development of financial markets. Facilitating cluster development, for example through creation of EPZs or industrial parkas. Stimulating advanced demand via regulatory standards. Guiding investment in priority sectors through fiscal and financial incentives and other regulatory and administrative means.


•More elaborate network of inter-related industries producing inputs used in each other’s production process

Government role

•Macroeconomic stability•Investment in education•Infrastructure development•Equal distribution of benefits of growth

•Creation of world-class research institutions, encouraging strong •research collaboration with universities. •Facilitating new forms of financing high-technology investment (for example venture capital). Upgrading regulatory standards for the production of sophisticated products. • •Guiding investment in priority sectors.


•Complex network of inter-related firms and industries; decentralized, flexible and transboundary organization of production network.

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•Attraction of FDI in resource-based and labour-intensive sectors.

•Proximity to other upstream and downstream firms multiplies external economies. •FDI and inter-linkages between foreign and domestic firms, foreign firms and domestic research institutes.

•Companies at the frontier of new technology, competition through the development of unique product design.•Emergence of national global companies.

* Attraction of high-tech sectors.

Anh-Nga Tran-Nguyen

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Development Strategies in a Globalizing World