East Asian experience can be replicated - UNCTAD

According to UNCTAD's Trade and Development Report of 1996, the success of the East Asian economies (through an export-oriented development strategy with strong State intervention in industrial policy) can be replicated by other South countries, despite the constraints of new trading rules and the prevalent international economic climate.

by Chakravarthi Raghavan

GENEVA: The economic success stories of the East Asian economies - an export-oriented development strategy, with a strong government intervention for an industrial policy - can be replicated (but not cloned) by other developing nations, even if they are constrained now, by the new trading rules and the international economic environment.

This is the message from the UN Conference on Trade and Development (UNCTAD) in its Trade and Development Report 1996 (TDR), which stresses the importance of maintaining "open markets" in the industrialized world (to enable these countries to sell more and buy more), but also pointing to the scope for South-South cooperation that could provide dynamism to their efforts.

South-South cooperation

Government policies, the TDR says, played an important role in fostering East Asian regional integration, "which could be characterized as a recycling of comparative advantage".

"This experience suggests that with proper policies, South-South cooperation could play a decisive role in fostering outward-oriented development, through closer trade and investment links. Indeed, such cooperation may become increasingly important in the light of broader developments in the global economy."

But in underlining the regional dimensions of their trade, and reduced dependence on the markets of industrialized countries, the TDR points also to the limitations to this idea.

In the concluding portion of his overview to the Report, UNCTAD Secretary-General, Rubens Ricupero said: "The conclusion of the Uruguay Round has clearly opened up new export opportunities and improved security of market access compared to the situation when the East Asian Newly Industrializing Economies (NIEs) began to industrialize. In this regard it has encouraged outward-oriented strategies. At the same time, it has closed or narrowed some policy options pursued by the East Asian NIEs. Certainly, the scope for lengthy periods of protection, resort to extensive trade-related subsidies and performance standards and lax enforcement of intellectual property rights has been reduced."

"However, in many areas critical to the East Asian experience, such as investment and savings, research and development, and regional policies, there remain ample room for active policy measures that needs to be fully utilized. In any case it is necessary to avoid exaggerated claims regarding either opportunities or limitations and to stress the need for objective analysis of the options, which remain open to developing countries when seeking to emulate the experience of the East Asian economies."

The TDR message, carefully read, thus provides grounds for developing countries not to throw up their hands and 'accept' the World Bank/WTO "globalization and liberalization" thesis (with its inextricably linked marginalization of their peoples) and proceed on belief and faith that development would be achieved by free markets and foreign investors.

Rather, the TDR suggests, governments need to use the instruments available, including those to regulate and direct foreign direct investment (FDI), and use them with intelligence to further domestic savings, investment, exports and growth and development.

However, a caveat needs to be attached to this view.

While there is scope within the WTO rules for governments of many developing countries to act, and the scope is larger for the least developed who have longer time spans, it should not be forgotten that the rules were put in place by major industrialized nations to "hobble" the developing countries and prevent rising competitivity. This is an exercise they have not abandoned, but constantly engaged in, for the benefit of their corporations. This is true not only of the US, the European Union (EU) and other European nations, but also of Japan - which has tabled, at the WTO, proposals for study/negotiations of an investment treaty.

The least developed were given larger leeway in the final package of the Uruguay Round, simply because the US and EU realized that the longer time-spans to them would pose no threat - given the fact that the Least Developed Countries (LDCs) have to build-up many things first - including the state machinery that has been mostly, if not wholly, dismantled in the economic area through structural adjustment programmes (SAPs) - and that this would take all the time-span provided.

And while the TDR, in places explicitly, and more often implicitly, hints at the things countries can still do despite the WTO trading system and its asymmetric weights on policies of late- or catch-up industrializers, it avoids or understates the specific limitations and developing countries working to change these limitations.

Emergence of a more balanced consensus

As an English writer and poet (amended for politically, gender-correct language) put it, people look around the world and their ills and ask why, but it is left to a few to ask why not.

These 'why nots' used to figure in the discourses in the UN family institutions, has now become muted over the last decade or so.

But as UNCTAD Secretary-General Rubens Ricupero noted in his news conference on 16 September, a new and more balanced consensus (counter to the neo-liberal theology of the Washington Consensus) is now emerging.

Though he did go further, it is clear that developing countries and their civil society and businesses have to provide their own lead, seize this tide and change the rules, beginning with the "why not" - acting in concert to the extent possible.

UNCTAD has over the years, been looking at the many development experiences, and within that of the Far East economies, and has rebutted in earlier reports, the facile view (that flow from the World Bank and some private think tanks about the "market-friendly" policies of these economies - with governments generally adopting a hand-off stance in the economic arena, intervening only reluctantly, but with transparent government interventions.)

More recently, UNCTAD has undertaken a study of the East Asian experience and its applicability to other countries, under a project funded by Japan - after the World Bank cited other priorities and walked away from this debate. In March this year, UNCTAD held a conference in Kuala Lumpur, Malaysia, with the participation of many scholars and their studies and papers.

Results of UNCTAD's study

The TDR brings together the results of this continuing study, to make several points:

* The East Asian success is the result of active government interventions, working closely with the private sector, but also willing to discipline it, to promote corporate savings and investment, industrial upgrading by acquisition and/or adapting and generating new technologies;

* This experience has useful lessons for other developing countries, and more so the LDCs, in three areas - need for and ways and means of establishing a dynamic interaction between exports and investment in industrialization process; the possibilities of mobilizing and making full use of natural resource endowments and abundant unskilled labour; and need for upgrading and moving up the technological ladder to raise productivity and per capita incomes and how this could be done;

* The diversity of the East Asian experience shows the range of options available in pursuing the outward-oriented strategies.

The TDR rebuts also, the neo-liberal view that the East Asian experience has highlighted the benefits of rapid liberalization of foreign trade and finance and deregulation of domestic markets to the detriment of the State, and says the reality is more complex.

In most countries, the TDR says, the State provided a necessary compliment to, and sometimes corrective influence on, the market, particularly by promoting a rapid pace of capital accumulation and technological progress linked to exports.

Analyzing the experiences of both the first tier Far East NIEs (South Korea, Taiwan, Hong Kong and Singapore), as well as the second tier ones (Indonesia, Malaysia and Thailand), the TDR affirms the replicability of these strategies for other developing countries.

Outward oriented development, it says, is a dynamic process where investment, imports, exports and industrial upgrading are clearly inter-twined. Such a process is consistent with varying degrees of import substitution and export orientation, and with concentration on different products and markets.

"There is thus considerable room for manoeuvre in a pragmatic approach to development policy in a globalizing world, which can accommodate differences in levels of industrial development, natural resource endowments and macro-economic constraints".

But, replication by a large number requires not only the successful pursuit of trade, industrial and technology policies by developing countries, but also open markets in the North, which in turn depends upon finding solutions to the severe labour problems besetting many advanced industrial economies.

The Report however rejects the claim that growing import penetration by the developing countries of the Organization for Economic Cooperation and Development (OECD) domestic markets is to blame for these problems. "Outward-oriented development in the South and expansionary policies in the North provide the basis for a new global policy dialogue," the TDR argues.

However, those seeking to emulate the East Asian-type export-oriented development face some challenges too.

Compared to the first tier NIEs, they can expect to be subject to closer surveillance of their domestic trade and investment policies - all of which will be subject to the WTO disciplines.

Analyzing the successful policies of the first tier NIEs who started with labour-intensive industries and began moving up the ladder, and the subsequent policies of the second tier NIEs, the TDR brings out some of the challenges facing the second tier NIEs who have relied much more on FDI and transnational corporations (TNCs), and also some problems ahead.

Though for example, Indonesia, Malaysia and Thailand, have some exports in hi-tech areas, these appear to be mostly based on imports of the inputs, a further processing, and then, exports of the parts and components for final production elsewhere.

The TDR notes that it is not possible through market forces alone to move economies successfully through various stages of industrialization and export orientation.

In the early stages of development, FDI can contribute to development by creating employment, facilitating transformation of natural resources into current revenue and generating foreign exchange. The essential advantage of hosting FDI, in addition to bringing in of capital, is that FDI brings in a host of assets and capabilities already fully operational.

But the central control that TNCs maintain over their "assets", may limit or totally prevent development of an indigenous production and export capability.

Technology assets

But the choice (by host countries to FDI) of industries or part industries to host is likely to be important. Whether a spillover could become the basis of broader development, depends on the kinds of incentives made available as well as relative bargaining power of TNCs and host country governments. This is particularly true of technology assets - an area where TNCs have strong economic reasons to keep innovative work centralized at home or in a few advanced countries. The efforts of host governments to build domestic capacity in this area could create potential conflicts.

Hence, the way domestic policy-makers manage FDI, including its function in the export-import nexus, is likely to be critical. But these policies would be impossible if a multilateral investment agreement, guaranteeing a right of investment and establishment, under conditions of Most-Favoured-Nation (MFN) and national treatment, is concluded as advocated by the WTO (and UNCTAD's own Division on TNCs).

In terms of the current propensity of TNCs to slice and locate many parts of the production chain in geographically dispersed sites, the spillovers from FDI and TNC operations would be reduced.

And in such a situation, it is far less likely that increased FDI flows to developing countries would lead to an upgrading of their technologies necessary for industrialization and economic growth. And in the absence of policies to promote such upgrading and spillovers, heavy reliance on FDI, particularly in production facilities, requiring heavy imports of specialized semi-finished goods, could lead to balance-of-payments problems.

An important element of contrast between the Far East economies and the Latin American NIEs has been that the former are grabbing an increasing share of the market in products with high income elasticity and dynamic growth, whereas the reverse has been the case in most of the Latin American countries.

Even Chile, a major export oriented economy over the past decade, and one often compared to the second tier NIEs of the Far East, does not resemble the second tier NIEs. More than four-fifths of Chilean exports are in less dynamic products, and in about half of which its competitiveness has been increasing while that of the other half has been decreasing. Only Brazil and Mexico in Latin America have been gaining market shares in both less dynamic and in highly dynamic products. (SUNS3832)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS)from which the above article first appeared.