Development Strategies in a Globalizing World By Dr. Anh-Nga Tran-Nguyen Presentation at ASEAN, April 2003

2 Globalization: what does it mean? Driving force of globalisation: Unilateral or multilateral measures to reduce or eliminate barriers to trade, investment and financial flows Unilateral or multilateral measures to reduce or eliminate barriers to trade, investment and financial flows New information and communication technologies make national boundaries and physical distance irrelevant New information and communication technologies make national boundaries and physical distance irrelevant Multinational companies have a global value chain strategy Multinational companies have a global value chain strategy Openness, integration and interdependence Openness or liberalization of domestic economies does not necessarily lead to more integration to the world economy Openness or liberalization of domestic economies does not necessarily lead to more integration to the world economy Openness lead to more interdependence with other countries and greater exposure to the influence of economic development and policies of the ROW Openness lead to more interdependence with other countries and greater exposure to the influence of economic development and policies of the ROW Interdependence further reinforced by multilateral/ regional/bilateral agreements and rules governing international trade, investment and finance Interdependence further reinforced by multilateral/ regional/bilateral agreements and rules governing international trade, investment and finance Anh-Nga Tran-Nguyen

3 Challenges faced by developing countries Globalisation means more opportunities for trade, investment and finance. At the same time globalisation results in more competition, higher risk and less policy autonomy to formulate a national development strategy Globalisation means more opportunities for trade, investment and finance. At the same time globalisation results in more competition, higher risk and less policy autonomy to formulate a national development strategy Technology gap: more urgent need to close this gap in order to compete in the global markets Technology gap: more urgent need to close this gap in order to compete in the global markets Interdependence: reduced policy autonomy, heightened competition, need to strike alliances and cooperation with other countries Interdependence: reduced policy autonomy, heightened competition, need to strike alliances and cooperation with other countries Interlinkages between trade, finance and investment Interlinkages between trade, finance and investment Multilateral rules and standards: level playing field, but constraints on policy space for a national development strategy. How to find a right balance? Multilateral rules and standards: level playing field, but constraints on policy space for a national development strategy. How to find a right balance? Regional integration Regional integration Anh-Nga Tran-Nguyen

4 Development strategies: challenges at the national level Review of literature: Adam Smith and followers: the role of capital accumulation and population growth Adam Smith and followers: the role of capital accumulation and population growth Neo-classical economists: contribution of technical change as an exogenous factor to economic growth. However, the underlying assumptions used by neoclassical economists excluded the role of Governments in regulating the markets. Other assumptions such as diminishing returns to capital and full employment of labour and all productive resources led to the conclusion of convergence between countries Neo-classical economists: contribution of technical change as an exogenous factor to economic growth. However, the underlying assumptions used by neoclassical economists excluded the role of Governments in regulating the markets. Other assumptions such as diminishing returns to capital and full employment of labour and all productive resources led to the conclusion of convergence between countries Endogenous growth theory: knowledge as a key endogenous growth determinant: Endogenous growth theory: knowledge as a key endogenous growth determinant: Anh-Nga Tran-Nguyen

5 Technoeconomic stages of growth: the process of economic growth is in part a sequence of creative adaptations. Technoeconomic stages of growth: the process of economic growth is in part a sequence of creative adaptations. On the demand side: markets provide economies of scale important for economic growth On the demand side: markets provide economies of scale important for economic growth Empirical evidence: Phases of industralization of some Asian countries (Japan, Republic of Korea, Taiwan Province of China, Singapore and Malaysia): A first phase of import substitution, which perhaps illustrates the first stage of learning by doing, producing mostly light manufacturing products for domestic markets; A first phase of import substitution, which perhaps illustrates the first stage of learning by doing, producing mostly light manufacturing products for domestic markets; A second phase of export-oriented industrialization, based on labour or resource-intensive manufactures, which could sometimes be the upgraded products of the earlier phase of import substitution; A second phase of export-oriented industrialization, based on labour or resource-intensive manufactures, which could sometimes be the upgraded products of the earlier phase of import substitution; In a third phase of industrial upgrading, the value-added and technological content of exports have increased; In a third phase of industrial upgrading, the value-added and technological content of exports have increased; The following phase focus on the development and export of services, and knowledge-based industries The following phase focus on the development and export of services, and knowledge-based industries Anh-Nga Tran-Nguyen

6 Development strategies in a globalizing world Growth depends on: capital accumulation or investment (in the presence of abundant labour) capital accumulation or investment (in the presence of abundant labour) technology and technical progress and technology and technical progress and exports exportsInvestment: Role of the market: investment in physical capital, machinery and equipment not only provides the necessary tools for production, but also promotes an increase in productivity and income per worker. In principle, entrepreneurs will invest in sectors which are the most profitable. Thus, allocation of capital resources will be decided by markets Role of the market: investment in physical capital, machinery and equipment not only provides the necessary tools for production, but also promotes an increase in productivity and income per worker. In principle, entrepreneurs will invest in sectors which are the most profitable. Thus, allocation of capital resources will be decided by markets Role of government: Is there a role for the Government to influence the long-term allocation of capital. It is all that industrial strategy is about, and the debate on whether the Government should "pick up the winners“ Role of government: Is there a role for the Government to influence the long-term allocation of capital. It is all that industrial strategy is about, and the debate on whether the Government should "pick up the winners“

7 Finance: Finance: - Investment-savings gap of the early stages of rapid growth and industry-take off - Import foreign capital, which can come from official sources (bilateral donors or multilateral financial institutions) or private sources (commercial bank lending, portfolio investment, FDI, other short term financing such as trade credit) - Attention to managing capital flows

8 Technology: Adapt foreign technologies and create indigenous technical innovations. Here the role of the Government is crucial to encourage and provide favourable conditions for R&D Adapt foreign technologies and create indigenous technical innovations. Here the role of the Government is crucial to encourage and provide favourable conditions for R&D The process of "technology transfer", or absorption of foreign technology has been instrumental to the successful industrialization of Asian countries, including Japan. subcontracting to domestic supplier firms by foreign companies, original equipment manufacture (OEM), purchase of foreign capital goods, reverse engineering, joint ventures, licensing and patented technologies, FDI, as well as overseas training and the return of nationals with overseas education or experience The process of "technology transfer", or absorption of foreign technology has been instrumental to the successful industrialization of Asian countries, including Japan. subcontracting to domestic supplier firms by foreign companies, original equipment manufacture (OEM), purchase of foreign capital goods, reverse engineering, joint ventures, licensing and patented technologies, FDI, as well as overseas training and the return of nationals with overseas education or experience Anh-Nga Tran-Nguyen

9 Exports: Export-oriented development strategy: to earn more foreign exchange and so to import the products, services and technologies they need to raise living standards and productivity. Greater competitiveness allows developing countries to earn more foreign exchange and so to import the products, services and technologies they need to raise living standards and productivity. Greater competitiveness allows developing countries to diversify away from dependence on a few primary-commodity exports and move up the skills and technology ladder to diversify away from dependence on a few primary-commodity exports and move up the skills and technology ladder greater economies of scale and scope by offering larger and more diverse markets greater economies of scale and scope by offering larger and more diverse markets The key is to increase constantly the value-added of exports and enhance productivity, in order to remain competitive and to widen the scope for the exploitation of increasing returns from larger markets. The key is to increase constantly the value-added of exports and enhance productivity, in order to remain competitive and to widen the scope for the exploitation of increasing returns from larger markets.

10 The policy components: - Policies to create a good investment climate in which corporate and nationaldevelopment interests converge; - Policies to manage integration with the global economy; - Policies to manage the distribution of the benefits of development Investment climate : Investment climate :  Macroeconomic policies  Infrastructure development  Microeconomic policies  Institutional policies  Human development policies Managing intergration in global economy: Managing intergration in global economy:  Trade policies  FDI policies  Managing capital flows Distribution of benefits of development: Distribution of benefits of development:  Policies to alleviate poverty and enhance social equality, including gender equality Policy Framework

11 Factor-driven economy I Investment-driven economy II Innovation-driven economy III 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

12 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. Organization of enterprises and clustering 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. Organization of enterprises and clustering Complex network of inter-related firms and industries; decentralized, flexible and transboundary organization of production network.

13 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