Promoting Agro-Based and Resource Based SMEs in Asia by Tarun Das

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    Promoting Agro-based andResource-Based Export-Oriented

    SMEs in Asia and Pacific

    Presented by

    Tarun Das

    Economic AdviserMinistry of Finance, India.

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    An Overview of the Study

    1. Objectives and scope of the study2. Main characteristics of Resource based and agro based

    industries3. Rationale for development and their contribution to

    poverty alleviation4. Policies and strategies for development of agro-based

    and resource-based industries

    5. Role of International Organizations6. Conclusions and Recommendations

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    1.1 Objectives

    To examine prospects and challenges forpromoting resource-based and agro-basedSMEs for export-promotion, employmentgeneration and poverty alleviation

    To identify areas for policy orientations,institutional capacity building and privatesector led rural enterprise development

    To suggest measures in promoting integrationat the regional and global levels.

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    1.2 Scope of the Study South Asia comprising Bangladesh, Bhutan, India, Maldives, Nepal,

    Pakistan and Sri Lanka.

    NIEs comprising Hong Kong, China; the Republic of Korea;Singapore; and Taiwan, China.

    Selected economies in the Southeast Asia viz. Cambodia, Indonesia,Lao PDR, Malaysia, Myanmar, the Philippines, Thailand, Vietnam.These with Brunei and Singapore now constitute the Association of

    Southeast Asian Nations (ASEAN) and ASEAN Free Trade Area(AFTA).

    Three other economies in East Asia viz. Japan, Mongolia andPeoples Republic of China.

    These countries cover 55 per cent of the world population and 15 percent of area, and display a number of contrasts.

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    1.3 East and South-East Asia

    1. Despite serious financial crisis in some of the East Asiancountries in 1997-1999, Asian developing economies hadshown remarkable economic vigor and dynamism in1990s.

    2. They outperformed other developing regions andindustrial countries by wide margins in industrial andoverall economic growth.

    3. The continued robust growth in Asia was attributable toa number of factors such as:

    Sustained policy reforms in industry, trade and financialsectors andContinued surge of foreign capital.

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    1.4 South Asia1. Despite rich natural resources South Asia is characterized

    by widespread poverty and unemployment and low levels of living.

    2. While accounting for a fifth of the worlds population,South Asia is also home to nearly half the worlds poor.

    3. It has lower life expectancy than in any other region except

    Africa, high infant mortality rates, high rates of malnutrition and low levels of literacy (except Maldives andSri Lanka).

    4. The share of South Asia in world trade is negligible being

    less than one per cent.5. Exports consist of mainly labour-intensive products like

    textiles, clothing, gems and jewelry.

    6. Imports consist of mostly crude oil, petroleum products andcapital goods.

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    1.5 Policies for Growth Dynamism

    An open door policy for trade, FDI andforeign technologyStrong role for the private sector

    A trinity of openness to trade, highinvestment and high savings rates

    Export-oriented investment-led growth

    Catch-up type economic growth.Virtuous circle of development

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    1.6 Broad Lessons for Development Countries with more market-friendly and outward-

    looking policies do better in both generating growthand reducing poverty.

    Both well governed state and orderly functioningmarkets are essential for high growth and

    development. Government should withdraw from sectors whereprivate participation is more efficient and moreproductive.

    But, scope of government remains large in social andinfrastructure development.

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    1.7 Sectoral Growth RatesRegions GDP GDP Ind Manf Services

    1980s 1990s 90s 1990s 1990s

    East Asia & Pacific 7.9 7.2 9.3 9.9 6.4

    South Asia 5.6 5.6 6.2 6.6 7.1

    Europe & Cent Asia .. -1.5 -3.8 .. 1.6Latin Am. & Carib. 1.7 3.3 3.3 2.6 3.4

    Mid. East & N.Afr. 2.0 3.0 0.9 3.8 4.5

    Sub-Sah. Africa 1.6 2.5 1.6 1.6 2.6

    World 3.3 2.7 1.5 .. 2.9

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    1.8 Structure of GDP (as % of GDP)

    Regions GDI Exports1990 2000 1990 2000

    East Asia & Pacific 35 30 26 42South Asia 24 23 9 15Europe & Central Asia 28 21 23 44Latin America & Carib. 19 20 14 17Mid. East & N.Africa 24 20 33 38

    Sub-Saharan Africa 15 17 27 32World 24 22 20 23

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    1.9 Structure of GDP (as % of GDP)Country Imports Savings

    1990 2000 1990 2000East Asia & Pacific 26 37 35 35South Asia 13 18 20 20

    Europe & Central Asia 24 39 26 26Latin America & Carib. 12 18 21 19Mid. East & N.Africa 35 28 23 30

    Sub-Saharan Africa 26 32 16 17World 20 23 24 23

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    1.10 Sectoral shares in GDP (percentage)Country Agriculture Industry

    1990 2000 1990 2000East Asia & Pacific 20 13 40 46South Asia 31 25 27 26Europe & Central Asia 17 10 44 35Latin America & Carib. 9 7 36 29Mid. East & N.Africa 15 14 39 37Sub-Saharan Africa 18 17 34 30

    World 7 5 36 31In East Asia and Pacific, the shares of industry,manufacturing and services increased in 1990s atthe cost of agriculture.

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    1.11 Sectoral shares in GDP (percentage)

    Country Manufacture Services

    1990 2000 19902000East Asia & Pacific 28 32 40 41South Asia 17 16 43 49Europe & Central Asia .. .. 39 57Latin America & Carib. 23 21 55 64Mid. East & N.Africa 12 14 47 48

    Sub-Saharan Africa 17 14 48 53World .. 22 57 64

    In South Asia, the share of services in GDPimproved in 1990s at the cost of other sectors.

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    1.12 Structure of manufacturing output

    In general, the shares of agriculture andprimary sector based traditional goods (such asfood, beverages, tobacco, textiles and clothing)in overall MVA declined in 1990s.

    The shares of chemicals, machinery, transportand equipment increased in 1990s.

    Agro-based sectors had significant shares inMVA in Hong Kong, China, Indonesia,

    Philippines, Thailand, India, Bangladesh,Nepal, Pakistan and Sri Lanka.

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    1.13 Structure of merchandise trade

    Manufactures have predominant share inboth merchandise exports and imports inall the countries.

    Agricultural products, raw materials andprimary goods (such as ores and minerals)have significant shares in total merchandisetrade in China, India, Malaysia, Myanmar,

    and most of South Asian countries.

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    1.14 Export Dynamism in AsiaRegion Manf. Exports (%) Manf. Income (%)

    1980 1997 1980 1997Developed countries 82.3 70.9 85.5 73.3Developing countries 10.6 26.5 14.5 23.8Latin America 1.5 3.5 7.1 6.7South and East Asia 6.0 16.9 7.3 14.0

    NIEs 5.1 8.9 1.7 4.5Hong Kong, China 0.2 0.6 0.3 0.2Republic of Korea 1.4 2.9 0.7 2.3Singapore 0.9 2.6 0.1 0.4Taiwan, China 1.6 2.8 0.6 1.6ASEAN-4 0.6 3.6 1.2 2.6Indonesia 0.1 0.6 0.4 1.0Malaysia 0.2 1.5 0.2 0.5Philippines 0.1 0.5 0.3 0.3Thailand 0.2 1.0 0.3 0.8China 1.1 3.8 3.3 5.8

    India 0.4 0.6 1.1 1.1

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    1.15 Structure of exports (per cent)Product category DC Exports World Exports

    1980 1998 1980 1998A: 51 19 26 15B: 22 23 15 15C: 6 7 10 8

    D: 8 17 27 30E: 12 31 20 30Unclassified 2 3 3 3A: Primary commodities,B: Labor-intensive and resource based manufactures,C: Manufacture with low skill-technology intensity,D: Manufacture with medium skill-technology inten.E: Manufacture with high skill-technology intensity

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    1.16 Most Dynamic Export Products in Asia

    ASEAN- Computers, office machines, opticalinstruments, automobiles, telecom, audio andvideo equipment.

    NIEs- Electronic and electrical goods.

    Textiles and labour-intensive manufactures, inparticular clothing, are important in China, India,the Philippines, the Republic of Korea, Taiwan,Thailand.

    Primary commodities are important in India,Indonesia, Malaysia, the Philippines, Thailand .

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    2.1 Types of Industries

    a. Food processing industries and beverages (ISIC 311-313)b. Tobacco and tobacco products (314)c. Textiles (321)

    d. Wearing apparel, leather and leather products andfootwear (322-324)e. Wood and cork products (331)f. Paper (341)

    g. Printing and publishing (342)h. Rubber and plastic products (355-356)i. Non-metallic mineral products (361-362, 369)

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    2.2 Share in MVA in Developing CountriesCountry groups Share in MVA Share in pop

    1985 2001 1985 2001South & East Asia 43 67 71 69

    China 13 30 29 26 Africa 6 4 14 16Latin America 38 22 11 11West Asia & Europe 13 7 4 4Developing countries 100 100 100 100

    Memo Item :LDCs 2.4 1.6 11.7 13.3

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    2.3 Share of Asia in developing countries MVA Branch (ISIC) 1985 20001. Food/beverages (311-13) 32 372. Tobacco (314) 39 443. Textiles (321) 54 594. Wear.app., leather, footwear (322-324) 43 445. Wood and cork products (331) 55 556. Paper & paper products (341) 38 457. Printing and publishing (342) 43 468. Chemicals (351-352) 36 489. Petroleum inc. coal products (353-35 34 4410. Rubber and plastic products (355-356) 54 5411. Non-metallic Mineral products (361-2, 369) 40 4812. Basic metals (371-372) 45 5413. Metal products (381) 46 4914. Non-electrical machinery (382) 48 5915. Electrical machinery (383) 60 7516. Transport equipment (384) 47 59

    2 4 Chi i i i ld (i %)

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    2.4 Chinas position in world exports (in %)SITC code Product groups Type China's exports World exports894 Toys and sporting goods B 4.5 24.5851 Footwear B 4.4 23.0

    845 Knitted outergarments B 3.7 16.7843 Women's outergarments B 3.6 16.1842 Men's outergarments B 3.3 19.0846 Knitted undergarments B 2.7 17.3

    831 Travel goods B 1.8 31.0848 Apparel and clothing B 1.7 26.4652 Woven cotton fabrics B 1.6 12.3762 Radios E 1.5 18.9658 Made-up textiles B 1.5 18.6821 Furniture and parts B 1.5 5.0653 Woven fibre fabrics B 1.4 8.6844 Textile undergarments B 1.2 17.0651 Textile yarn B 1.2 6.5

    885 Watches and clocks E 1.0 12.0

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    2.5 Structure of the sectorIn both industrialized and developing countries

    the shares of agro based and resource basedproducts increased in 1985-2000.

    In 2000, agro-based and resource-basedmanufacturing had a share of 45% in total

    MVA of developing countries compared withonly 28% in industrialized countries.

    In developing countries, food products andbeverages had the highest share (13.3%) intotal MVA, followed by chemicals (12.8%),electrical machinery (12.1%) and transportequipment (9.5%).

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    2.6 Structure of the sectorin Developed countries

    In contrast, in 2000 the industrialized countrieshad

    Dominant share in non-electrical machinery(19.7%) followed by

    Electrical machinery (18.9 per cent),

    Chemicals (9.6 per cent),

    Food products and beverages (8.9%) and

    Transport equipment (8.5 per cent).

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    2.7 Contribution of MVA to GDP in 2000Among regions, share of MVA in GDP in

    2000 was highest at 30.4 per cent inSouth and East Asia.Among countries, highest share at 42.8%

    in China35 per cent in Korea,32.4 per cent in Malaysia,

    31.7 per cent in Thailand and30.1 per cent in Mongolia .

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    2.8 Contribution to EmploymentIn NIEs, services had predominant share in both

    male and female employment followed by industryand agriculture in that order,

    In South Asia and South East Asia, agricultureand allied sector had the predominant share in

    both male and female employment.Female employment had higher share in totalsectoral employment than male employment intobacco, textiles, wearing apparel, footwear,leather and fur products, chinaware and potteries.

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    2.9 Contribution to ProductivityFor almost all the countries, iron and steel has thehighest productivity of labour,While the sector with the lowest value added peremployee is not uniform across the countries.However, productivity of majority of agro-based andresource-based industries such as food products andbeverages, textiles and clothing, apparel, leatherproducts and footwear were relatively high in most of the countries.

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    2.10 Constraints for developmentAsian SMEs suffer from age-old problems:

    Low level of productivity and outdated technologyLack of skilled labour and managerial skillLow economies of scale

    Inadequate access to capital and high credit cost;Constraints on infrastructureHigher costs of raw materialsDifficulties in marketing and distributionLack of foreign investmentIncreased internal and external competition

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    2.11 Government Support Programs

    Government support programs suffer from thefollowing deficiencies:

    Involvement of too many government and privateagencies with minimal coordination;

    Short run and unfocused approach for thedevelopment of SMEs;

    Absence of continuity or frequent revisions of policies and programs;

    More benefits accrued to large and mediumindustries compared to small industries.

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    2.12 Major issues for considerationIntegration of agriculture and agro-basedindustriesAvailability of raw materials and creditsLocation of industry and transport costs

    Economies of scale and size of marketsAvailability of skilled labour & capacity buildingUpgradation of technology

    International barriers on tradeRole of multinationals and foreign investment

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    3.1 Rationale for development of SMEsSMEs make Valuable contributions to employment

    generation and poverty alleviationSMEs provide effective safety nets to rural poor against the income fluctuations.Provide opportunities for the growth of economic

    activities in the informal sector.Agro-based industries open up new channels of distribution and marketing.Help to earn foreign exchange through exports,

    Upgrade the quality of the labour forceHelp to mobilize and utilize domestic resourcesAgro-based and resource-based manufacturing unitsaccount for major shares in value added.

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    3.2 Contribution of SMEs in USA 53 per cent of the private workforce;99 per cent of all employers;96 per cent of all US exporters.50 per cent of GDP;

    28 per cent of jobs in high technology sectors;55 per cent of all innovations;47 per cent of all sales in the country;35 per cent of federal contract deals;51 per cent of private sector output.

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    3.3 Contribution of SMEs in Germany and India

    In Germany , SMEs account for :64 per cent of all employment48 per cent to the Gross National Product27 per cent to exports for the year 1990.

    In India, SMEs account for:93 per cent of employment40 per cent of the manufacturing output,

    45 per cent of manufacturing exports and40 per cent of total exports.

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    3.4 SMEs account for:95% of establishments in Bangladesh,98 per cent in Thailand,93 per cent in Malaysia,70 per cent in Indonesia,

    80 per cent in the Philippines,90 per cent in Taiwan,98 per cent in Korean Republic,99 per cent in Japan,

    99 per cent in China.

    3 5 Contribution of SMEs in Japan and

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    3.5 Contribution of SMEs in Japan andKorea

    In Japan, SMEs account for:

    78 per cent employment99% of all business establishments,

    52% of manufacturing output/ exports,

    64 per cent of wholesale business and

    78 per cent of retail sales.

    SMEs in Korean Republic account for:99% of all manufacturing enterprises

    69 per cent of total employment.

    3 6 C ib i f SME i Chi d

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    3.6 Contribution of SMEs in China andTaiwan

    In China SMEs account for:

    99 per cent of total enterprises78 per cent of employees,75 per cent of urban job opportunities

    64 per cent of industrial turnover,52 per cent of corporate profits and52% of fixed assets held by industry

    SMEs in Taiwan account for:90 per cent of enterprises and65 per cent of exports.

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    4.1 Business environment All countries have specialized organization and very

    elaborate system of rules and regulation Small Business Administration (SBA) in USA SME Basic Law in Japan

    SPARK programme on rural industrialization inChina South Korea- a comprehensive SME legislation on

    its statute book

    Development Commissioner for SSI and separateministry for food processing industries in India.

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    4.2 External environmentDeveloping countries face significant barriers for

    exports of agro-based productsIn Canada and the USA, peak tariffs are concentratedin textiles and clothing. In the EU and Japan, inagriculture, footwear and food products.Developing countries manufactured exports encounterhigh tariffs, and increased contingent forms of protection, such as anti-dumping actionVarious technical and non-tariff barriers for SSIexports on grounds of environment, health, labour etc.

    The roadblock towards technological upgradation andtransfer of technology to SSI because of:GATT, GATS, TRIMS, TRIPS, ISO standardsIPRs- copyrights, patents, trademarks and designs.

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    4.3 Policy Support to SSI Sector in IndiaPriority Sector Lending Program by the banks.

    Specialized bank branches for SSI.

    Laghu Udyam Credit Card Scheme since Nov 2001.

    Various fiscal and other incentives to SSI sector.

    Product reservation and dereservation for SSI sector

    Price and Purchase Preference by govt departmentsSupport for technology upgradation and R&D

    Entrepreneurship Development Programmes,

    Encouraging Ancillaries and Sub-contracting

    Credit Guarantee Fund Trust for SSI sectorTechnology Development and Modernization Fund

    Technology Upgradation for textiles and jute industries

    Tannery Modernization Scheme

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    4.4 Role of Export promotion schemesand Special Economic Zones

    India, China, Korea, Taiwan, Indonesia, Malaysia andThailand have various export support instruments

    First developing country EPZ was set up at Kandla in Indiain 1965.

    More than 200 EPZs in 60 developing countries in 1996

    Nearly half of EPZs were located in Asia. In general, one dominant industry in each country such as

    textiles and garments industry in Bangladesh, China,Dominican Republic, Egypt, India, Jamaica, Mauritius andSri Lanka;

    Electronics industry in Barbados, Brazil, Republic of Korea,Malaysia, Mexico and Taiwan, China.

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    4.6 Development of TechnologyMost of the Asian developing countries do face obstacles to technology

    transfer due to:

    Poor infrastructure and utilities;

    Strict laws and regulations on foreign firms, and inefficiencies in theimplementation of deregulation policies;Shortage of trained technical and managerial workforce;

    Weak local supporting industry for parts and components;Low rate of diffusion of technology to the rest of the economy;

    High cost of technology agreements;

    Transfer of environment unfriendly technology.

    The Chinese has made considerable success in technological

    upgradation of its SMEs through transfer of technology.India has also built a wide array of institutions to support thedevelopment and diffusion of industrial technologies.

    4 7 Access to Capital

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    4.7 Access to Capital In Korea, USA, Japan, China, India, the Credit Guaranteeprogrammes help small enterprises to have access to bank loans

    without collateral support.India and Korea have set up special finance institutions andtechnology development fund and other programmes forsupporting venture capital.

    Korean Technology Banking Corporation, Korean Technology

    Credit Guarantee Fund, the Small and Medium IndustryPromotion Corporation, and the Korean DevelopmentInvestment Corporation provides substantial financial supportto SMEs.

    India has an organised system under which public sector banksprovide various financial help to SSIs.Small Industries Development Bank of India provides variouskinds of technical and financial help to SSIs.

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    4.8 Specialized Financial Institutions

    Industrialized countries have large numbers of specialized financial institutions:Factoring companies,Leasing companies ,

    Trade credit companies,Mortgage finance companiesMicro-finance Institutions

    In most developing countries there are very fewleasing or trade credit entities.

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    5.1 Role of International Organizations1. Role of World Bank, ADB and IMF2. ESCAP

    Exchange of national experiencesPromotion of endogenous capacity-buildingResearch on sectoral restructuring

    3. Asian and Pacific Centre for Transfer of Technology(APCTT)Environmentally Sound Technologies (ESTs)Technology fairs and promotion of ESTs

    Technology Bureau for Small Enterprises (TBSE)

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    5.2 Role of WTO General Agreement on Trade and Tariffs (GATT) focused

    mainly on manufactured goods. In addition to goods, WTO covers cross-border flows of

    services and knowledge, while a collective agreement oncapital flows is also on the agenda.

    Available evidence suggests that trade liberalization hasbeen limited and slow in agriculture, textiles and clothing;compared to other sectors.

    Access to markets for these products continues to be muchmore restricted.

    Agricultural subsidies, particularly in the EU, restricts thegrowth of exports of a number of agriculturalcommodities from developing countries.

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    5.3 WTO and Market Access Main market access barriers include:

    Import tariffs and other price-based border measuresNon-tariff border measures:Quantitative restrictions;Contingency measures (antidumping, countervailing, safeguardmeasures);

    Technical barriers to trade (TBT) (regulations, standards, testing andcertification procedures);Sanitary and phytosanitary measures (SPS) (food, animal and planthealth and safety).Domestic policy measures

    Developing countries generally face higher barriers to theirexports than industrial countries .

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    5.4 Agreement on Agriculture

    Tariffication and BindsMinimum import access

    Reduction of domestic support, as

    measured by the total AggregateMeasurement of Support (AMS),

    Phasing out of export subsidies

    Special safeguard provision,

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    5.5 Agreement on Textiles & ClothingMFA quotas are to be phased out progressively over a 10-year period.Products not yet integrated are subject to a specialtransitional safeguard mechanism.The ATC accelerated the growth rates for remaining quotas.T&C imports are subject to exceptionally high tariffs in bothdeveloped and developing countries.ASEAN, China, and South Asia all have tariffs in the rangeof 20-33 per cent on textiles, and of 30-35 per cent onclothing.

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    6.2 Development strategies and policies(a) Macro-economic policies(b) Fiscal incentives(c) Science and Technology policy(d) Foreign investment policy

    (e) Reservation policy(f) Infrastructure and human development(g) Establishment of competent and committed

    bureaucracy(h) Strengthening legal, institutional and

    regulatory system

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    6.3 National level policiesMarketing supportMandatory purchase policyTechnology upgradationEstablishment of Technology Bank for SMEsDevelopment infrastructure and IT

    Development of Clusters and NetworksDevelopment of specialized bank as in IndiaInnovative Financing TechniquesVenture Capital Funds, Leasing companiesMortgage finance companies, Micro financeFactoring companies, Trade credit suppliers

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    6.4 Role of external trade(a) Trade and technology policies of large

    economies- Japan, China, India etc.(b) Export promotion policies(c) Free Trade Zones

    (d) Improved market access in developed countries(e) Diversification of markets and export products

    by middle income countries(f) Expansion of domestic markets by developing

    countries themselves(g) Flying geese paradigm

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    6.5 Regional Economic Co-operationESCAP in association with APCTT, RNAM, and

    CGRPT can help for the following:FDI related technology transfer

    FDI related Export promotion

    Multilayered bilateral cooperationStrengthening Cooperation at Sub regionallevel- ASEAN and SAARCEncouraging Role of NGOsPreparation of Source book on ESTsCo-operation among country associations

    6.6 Co-operation among country

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    p g yassociations

    Organization of seminars and workshopsStrengthening the existing informationnetworks on technology transferHarmonization of national policiesEstablishment of national and then regional

    data banks on imported technologies and aninformation-sharing network.Establish linkages among research institutions,technology brooking agencies, and concerned

    government departmentsStrengthen cooperation among APCTT,CGRPT, RNAM, ESCAP and between ESCAPand other international organizations.

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    6.7 Role of WTO Phasing out of tariff peaks and multiplicity of rates. More technical assistance to implement product and process

    standards. Improved market access to developed countries for labour

    intensive products. To accelerate the removal of import quotas on T&C. Lower tariffs on T&C trade, in both industrial and

    developing countries. Review anti-dumping actions and trade related rules Reforms on agricultural subsidy in OECD Reform of market access in developing countries.

    Food security issues and the concerns of poor countries mustbe addressed as part of overall poverty-reduction anddevelopment strategies by the multilateral organizations.

    6 8 Technical Assistance (TA)

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    6.8 Technical Assistance (TA)The World Bank, IFC, ADB, ESCAP, UNDP,

    UNIDO and UNCTAD can provide TA for the

    following: Promotion of regional cooperation in

    development of human resources, R&D, S&Tand use of IT.

    Consultancy and training aimed at technologyupgrading and skill improvement for SMEswith attention to rural and backward areas,ethnic and minority groups, and women andyoung entrepreneurs.

    Technical assistance programs onharmonization of national and regional policieson trade, tariffs, taxation, investment andbusiness regulations.

    6 9 T h i l A i t

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    6.9 Technical Assistance Promotion of technology management, assessment

    and enterprises cooperation for the blending of indigenous technology with imported technology.

    Improve institutional, administrative and legalframework with a view to facilitating privateinvestment including foreign investment

    Advisory services for developing countries and LDCsto strengthen capital markets and to attract foreignportfolio investment.

    Technical support for developing countries toupgrade their institutional capacity to identify,design, negotiate and implement schemes on BOT forinfrastructure development .

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    6.10 Action Points for ESCAP

    On the basis of deliberations of thisExpert Group meeting :

    ESCAP may set up a task force at theregional level

    May formulate a regional capacitybuilding program

    May identify some pilot programs

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    THANK YOU