The Development Experiences and Integration of Newly Industrializing Economies: Lessons for China and Thailand
The Development Experiences and Integration of Newly Industrializing Economies: Lessons for China and Thailand
Jose L. Tongzon
ECONOMIC INTEGRATION: BENEFITS AND RISKS
ECONOMIC DEVELOPMENT OF THE ASIAN “TIGERS”
LESSONS FOR THE EMERGING ECONOMIES
The spectacular economic performance of the newly industrializing economies (NIEs) of Singapore, Taiwan, Hong Kong, and South Korea over the last few decades is well known. Much has been said about their exemplary economic success, but little has been written about the economic factors behind their success and the lessons that can be learned for transitional economies. In the context of the growth of international economic integration and globalization, these emerging economies are facing increasing competitive pressures, which are perceived to pose a serious threat to their industrialization efforts and economic security as they open up their markets. On the other hand, they also see an economic opportunity from economic integration. With globalization and economic integration becoming the mainstream of economic development, more and more countries are beginning to consider how to adapt to the new environment and take advantage of the opportunities to enrich their economies. Thus, how to extract the largest benefit from economic integration and globalization at the least cost is a central question facing developing countries today, especially the transitional economies of Asia, as they implement their obligations and commitments within the framework of global and regional integration. Fortunately, there are successful countries that have dealt with the challenges of economic integration, and it would be instructive to see how they have handled these challenges. The experiences of the NIEs, sometimes referred to as the Asian “tigers,” on economic integration and economic development can provide some valuable lessons for countries in transition, such as China and Thailand, as they grapple with the challenges posed by greater economic integration and competition.
This chapter is organized as follows. The next section briefly outlines the benefits and risks of economic integration from the perspective of the transitional economies.
The following section presents the experiences of the Asian “tigers” in terms of economic development, and highlights the policies adopted by their respective governments to benefit from the process of economic integration. The final section analyzes the lessons that can be learned for the emerging economies.
ECONOMIC INTEGRATION: BENEFITS AND RISKS
Economic integration for transitional economies, in terms of trade liberalization and across-the-board implementation of market-based reforms, offers tremendous economic opportunities for greater market access for exports, greater inflow of foreign capital, and other indirect benefits associated with greater international competition and economies of scale.
The link between export growth and economic growth is supported by a number of cross-sectional empirical studies. See, for example, Michalopolous and Jay (1973), Michaely (1977), Balassa (1978, 1985), Tyler (1981), Feder (1983), Kavoussi (1984), Esfahani (1991), and the World Bank (1993). The link is both direct and indirect. Since exports are a major component of national output in a national accounting sense, an increase in exports means an increase in gross domestic product (GDP), assuming no offsetting fall in any one of the other components.
The indirect link is through the impact on productivity. Productivity increases as a result of a resource allocation effect, externalities, and greater import capacity. The resource allocation effect refers to the greater capacity utilization driven by the external markets and to the more rapid shift of resources from low productivity to high productivity sectors. Externalities include the economies of scale associated with a larger market and better access to information and technology. Exports also increase the capacity to import the required capital for industrialization and economic development.
There are, however, possible risks and dangers associated with economic integration in the transitional economies. One possible risk is the loss of national control and regulation over certain industries, leading to the entrenchment of multinational companies' (MNCs) market power to the detriment of consumers' and workers' welfare. This happens when oligopolistic or monopolistic power is exploited to increase or consolidate MNCs' control over resources and profits. Second, there are potential short-term adjustment costs specific to the economies. Unemployment has already emerged as a serious problem in many transitional economies. In addition to this outcome brought about by the restructuring of their state-owned enterprises, there will be those who will be laid off as weaker industries close down in the face of greater competition. Third, there will be significant fiscal implications. The role of international trade taxes as a major source of government revenue will lose its significance and this may cause budgetary problems for governments. Those that are unable to restructure their sources of fiscal revenue may have to resort to social expenditure-cutting measures to the detriment of the needy and the disadvantaged, which could have adverse implications for economic growth and political stability.
Fourth, another potential problem is the increasing pressure that will be exerted on their existing institutions, as they come into closer contact with the relatively liberal regimes of other countries. The existing institutions are currently designed for a centrally-planned economy, although there have been concerted efforts since the 1980s to restructure these institutions in line with economic transformation. The liberal concept of private ownership and free market enterprise will put increasing pressures on the present system of ownership and the dominant role of the government in transitional economies.
ECONOMIC DEVELOPMENT OF THE ASIAN “TIGERS”
Rapid and sustained growth in international trade has long been a hallmark of successful growth and development strategies in East Asia (World Bank, 2003). Well known are the success stories of NIEs such as South Korea, Taiwan, Hong Kong, and Singapore—known collectively as the Asian “tigers.” These countries have seen their share of world exports more than triple in the past quarter century from 5.4 percent in 1975 to 18.7 percent in 2001. Broad measures of development in East Asia have shown improvement at the same rapid pace. Since the 1960s, the Asian “tigers” have sustained remarkably high growth rates by regional and international standards and achieved high standards of living compared with other Asian countries, except during and immediately after the 1997–1998 Asian financial crisis. A summary of their economic performance relative to other selected countries is shown in Table 1.1. Since 1990, more than 280 million people have seen their incomes rise above the poverty threshold of two U.S. dollars a day.
It should be highlighted that although sustained growth in international trade engendered by the adoption of export-oriented policies has been the hallmark of these economies, they first adopted a policy of import-substitution followed by an export-oriented approach with selective protectionism. In particular, South Korea, Taiwan, and Singapore all went through an import-substitution phase in the 1950s, but started to make policy changes in the 1960s so that by the middle of the 1970s they combined selective protection for certain import-competing sectors with a virtual free-trade regime for exporters—that is, exporters could obtain inputs at world market prices while the effective exchange rate for exporters was close to that which would have ruled under a free trade regime. The full switch to an outward-looking and export-oriented trade regime only occurred after certain reforms with respect to agriculture and human resource development were implemented, thus providing a solid basis for beneficial economic integration. The successful postwar land reforms in South Korea and Taiwan, for example, helped ensure an egalitarian development outcome, and government attention to agriculture and high levels of investment in human capital have all provided important complements to the export-oriented policies they subsequently adopted.
Another key common factor that was largely responsible for the economic success of the NIEs in dealing with the challenges of economic integration was the active and effective role played by their respective governments in terms of formulating and implementing
|Table 1.1 Economic performance of the Asian “tigers”|
|SOURCE: Economic growth and income per capita are from 2002 World Development Indicators CD-ROM, World Bank (except Taiwan's which are from “Statistical Abstract of National Income in Taiwan Area, Republic of China,” http://www.stat.gov.tw/bs4/nis/enisd.htm); GIN.|
|Economic growth (GDP growth, %, simple average of annual growth)|
|Korea Rep. 8.3||8.5||7.6||6.2||8.8|
|Income per capita (GNI per capita, PPP current US$, end year of period)|
|GINI index (latest single year)|
|Proverty incidence (% of population below US$1-a-day poverty line, latest single year)|
appropriate macroeconomic policies and providing support for the private sector. On the macroeconomic level, these governments played a critical role by providing the required infrastructure and environment conducive for business, and formulating and implementing policies that helped them achieve macroeconomic and political stability, a liberal export-oriented economic regime, and competitive rates of return for investment. The creation of a good business environment for foreign investment was not only due to the provision of fiscal incentives but also to the maintenance of macroeconomic and political stability, pro-business policies, and world-class infrastructure. The spectacular success of Singapore in this regard is a convincing example of how foreign capital was attracted by good policies.
In addition, the NIE governments have encouraged domestic savings by pursuing responsible fiscal policies and keeping a tight reign over their government budgets, having effective monetary policies to keep inflation rates low and real interests high, and effective family planning programs to lower their population growth rates and dependency ratios. Investment in education and appropriate skills was also pursued through economic policies. Greater emphasis on vocational and technical training, as opposed to general education, and the provision of universal primary education have been the hallmarks of their success in nurturing the appropriate skills required for a developing economy.
On the microeconomic level, the NIE governments intervened through direct (state-owned enterprises) and indirect ownership of certain industries, by providing different types of assistance to the private sector, and by implementing policies aimed at reducing poverty and income inequality. The assistance took the form of low lending rates, import-duty exemptions, subsidies, the establishment and financial support of state banks, the development of export-marketing institutions, and cooperative ventures between the government and the private sector.
That government intervention based on industrial policy has played a critical role in the NIEs' economic success was first proposed by Johnson (1982). Amsden (1989) has argued
that this type of intervention was crucial to South Korea's rapid growth beginning in the 1960s. Wade (1990) has also documented the role of interventionist policies in Taiwan's rapid development. Singapore was ranked by the World Bank as the most interventionist among the ASEAN-5 (Singapore, Malaysia, Indonesia, Thailand, the Philippines) countries. The state has continually led the private sector in the pursuit of economic development by promoting industries with high growth potential which are crucial to maintaining its international competitiveness. In the mid-1970s, because of tight labor conditions, the state intervened by promoting higher value-added industries, such as those producing computers and electronic components, as well as those involved in precision-engineering, and pharmaceuticals, by offering them investment incentives. After the 1985 recession, the Singapore government under its Strategic Economic Plan (1989) identified fourteen industries for industrial clustering—commodity trading, shipping, precision-engineering, electronics, information technology, petroleum and petrochemicals, construction, heavy engineering, finance, insurance, general supporting industries, tourism, international hub, and domestic industries. Since 1992 the Singapore government has been actively promoting and facilitating the “go-regional drive” to maintain Singapore's international competitiveness and thus sustain its economic development. Through regionalization, Singapore has been able to tap the growth potential in the other parts of the region where it can relocate its labor-intensive operations. Singapore's continued economic dynamism is strongly attributable to the government's foresight and effective leadership in providing the guiding framework for the private sector to cope with the changing challenges of global competition.
The counter argument to the interventionist view is that the NIEs have intervened to neutralize distortions and that the key to their economic success has been their policies which match their import barriers with export subsidies, thus creating neutral regimes which do not discriminate between industries. In those cases where policymakers picked the winners, they were only replicating what market mechanisms would have achieved anyway. According to this view, the role of the NIE governments was to provide a stable macroeconomic environment conducive to international competition and free from distortionary policies, rather than to promote specific industries. Thus, the governments have allowed their economies to do what comes naturally (Riedel, 1988). The World Bank (1993) also supports this view.
Whether or not the NIE governments were choosing the winners based on market-based criteria, it is beyond any doubt that they did actively intervene with appropriate policies and efficient implementation. The policies adopted and implemented in the context of economic integration can be divided into a number of areas, which will be discussed in turn.
Industry structure is very important. A wise government would adjust its industry mix according to changing world economic conditions and its comparative advantage. The NIEs started with exporting labor-intensive manufactures and later shifted the emphasis
to capital-intensive manufactures as their comparative advantage in labor-intensive production diminished. Singapore, in particular, achieved remarkable success in terms of export-oriented labor-intensive industrialization following its separation from the Federation of Malaysia in 1965. During the 1970s, however, Singapore began to experience an increasingly tight domestic labor market and a threat of competition from lower-wage competing countries. By 1979 a restructuring program, together with a “high wage” policy and fiscal incentives for research and development, was introduced to promote capital-intensive, skill-intensive, and higher value-added exports of goods and services. In the midst of intensifying regional competition in the manufacturing sector and the rise of emerging economies, Singapore began focusing more recently on the development of its services sector, technology-intensive manufactures, and highly specialized areas such as biomedical sciences and wafer fabrication.
From 1985 to 2001, the percentage share of GDP accounted for by financial and business services increased from 22 percent to 28 percent, which implies that services have become the main engine of Singapore's economic growth. Furthermore, in order to deal with increasing domestic labor costs, the Singapore government has been encouraging companies to relocate the labor-intensive segments of their production chain to low-cost areas, such as southern Malaysia, the Riau Islands of Indonesia, and other low-cost neighboring countries. In Hong Kong, the same pattern of policy-induced industry restructuring can be observed. Because of the high cost of labor, some labor-intensive industries have been moving to mainland China. South Korea implemented massive industry restructuring after the 1997–1998 Asian crisis. Fifty-five distressed firms were closed in June 1998. In addition, the government sold businesses and assets and allowed divestiture and the establishment of holding companies within a restricted range to restructure large companies. A sum of 1.5 trillion won was put into equity funds and another 1.5 trillion won was put into a debt-restructuring fund.
When governments implement industry restructuring, they must at the same time improve the competitiveness of their core industries. The crucial factor in realizing this goal is the development of a knowledge-based core competency.
For instance, the Singapore government saw manufacturing and services as the two engines of growth for its economy and thus focused its attention on adding value to these two industries to increase its international competitiveness. In the manufacturing sector, the shares of electronics and chemicals and chemical products increased from 25 percent and 8 percent to 36 percent and 17 percent, respectively, during the period 1985 to 2001. In the services sector, the government plans to improve its competitiveness through the following measures: focusing on priority areas; removing regulatory impediments; stimulating demand; developing manpower for services; and providing land at institutional rates for the development of education and health care institutions.
In the South Korean textile and clothing industries, Korean firms developed high technology fiber materials to replace imported materials, which made it possible to reduce its dependence on other countries.
Research and Development, and Innovation
The importance of upgrading a nation's level of technology cannot be overemphasized. One way to realize this goal is to invest more in R&D and innovation. According to statistical data recently released by the Organization for Economic Cooperation and Development (OECD), total business R&D investment in its member countries reached US$330 billion in 1999, significantly higher than the US$230 billion recorded in 1990.
The following measures might be adopted to accelerate a nation's technological progress: strengthening of support for basic research activities, appropriate allocation of investment for business R&D, balanced government support for R&D, strengthening of R&D by small and medium-sized enterprises (SMEs) through the utilization of venture capital, a positive approach to the globalization of R&D, strengthening market control, strengthening of joint R&D ventures, and the establishment of a network among R&D participants.
South Korea and Singapore have relatively high research and development spending as a percentage of national income. For the period 1987–1997, spending on R&D amounted to 2.8 percent of GDP for South Korea and 1.1 percent for Singapore, the two highest in Asia, and in South Korea's case, higher than any other country except Sweden. In terms of technological achievements, that is, how well a country is creating and diffusing technology and building a human skill base, South Korea and Singapore are ranked fifth and tenth, respectively (United Nations, 2001).
In Singapore, the government has set up the Biomedical Council and the Science and Engineering Research Council under the Agency for Science, Technology and Research (A*Star) to drive the overall development of the public R&D infrastructure. The government has established and built up research institutes (RIs) to support their industry clusters and brought in leading scientists to help expand and deepen its research capabilities. From 1999 to 2001, the R&D expenditure of the RIs totaled US$1.1 billion and these are long-term investments to sharpen the country's scientific and technological edge and to build new competitive advantages for Singapore. To promote research and the commercialization of innovative ideas in general, the Singapore government has recommended that innovation-oriented tax incentives be considered, including double-tax deduction for patent-filing costs for companies and individuals.
Small and medium-sized enterprises (SMEs) can react much more quickly than large companies when adapting to economic changes. In addition, SMEs can stimulate people to carve out their own niches and help cultivate the spirit of entrepreneurship. In order to make use of these advantages, governments should assist their development.
The Taiwan government has launched a series of initiatives to assist and develop SMEs and has provided a good business environment for them. Since 2001, the Small and Medium Enterprise Administration (SMEA) has been very aggressive in implementing a number of proposals which are aimed at helping SMEs to participate more actively in government procurement, in obtaining operating funds, and in strengthening the SME Service Network. Apart from improving the business environment for SMEs, the government can also help boost their competitiveness by strengthening their management and product quality, assisting in human resource development and mutual assistance and collaboration between SMEs, and by promoting small local enterprises.
In Singapore, the government has emphasized the need to foster an entrepreneur-ship culture. Since the number of SMEs is limited compared with Taiwan and the United States, the Singapore government has strengthened SMEs by encouraging the growth of enterprising startups, the internationalization of major Singapore companies, and helping the smaller traditional companies to adapt to changing economic conditions.
Although governments need to adopt measures to maintain or improve the competitiveness of the economy, laws are also vital for the implementation of these measures and to protect the benefits for industries, companies, and individuals. The importance of R&D and innovation, which need protection, has already been mentioned. The acquisition of skill sets required for both intellectual property (IP) and legal documentation should be actively encouraged by governments.
The Singapore government has already attracted a strong legal cluster and has joint arbitration agreements with the United Kingdom and the United States. To further strengthen this legal infrastructure, the government will set up an IP Academy that will become the regional center for thought leadership and the training of IP professionals. In addition, many industries have internationally recognized regulatory bodies, such as the Food and Drug Administration and the Federal Aviation Authority, which certify products and facilities to ensure that they meet government thresholds for quality and safety.
In order to maintain a nation's international competitiveness, human resource development is important. Labor markets function by allocating an existing labor resource. As the structure of an economy changes, the demand for advanced knowledge talent exceeds supply. At the same time, because the average educational level has improved in certain countries, there may not be enough people for labor-intensive jobs. In these cases, the importing of foreign labor is an efficient way to solve the problem.
South Korea has experienced labor shortages since the late 1980s. The rapid growth of the South Korean economy was the main reason for the tight labor market, in particular for blue-collar workers. Moreover, such supply-side factors as declining birth rates and
higher rates of enrolment in tertiary education have exacerbated the problem. Together, these factors have resulted in the inflow of unskilled workers from other less-developed Asian countries.
In order to satisfy the demand for highly-educated talent, the Singapore government finances promising foreign students to pursue their Bachelors, Masters, or PhD degrees and encourages them to stay on in Singapore after they graduate.
Education and Training
In the light of globalization and greater integration, knowledge has become a vital factor in determining the competitiveness of an economy. Thus, many countries are paying more attention to education and training consistent with the needs of the market. Moreover, because of industry restructuring, many people have been forced to change their occupations. Training helps these people to adapt to new jobs more quickly.
The NIEs have invested heavily in developing high-level skills as their economies became more sophisticated and their comparative advantage shifted from labor-intensive to capital-intensive or technology-intensive production. They expanded their university system and directed it towards the needs of their industrial policy, changing the emphasis from social studies to technology and science. In the process, these governments exercised tight control over the content and quality of the curriculum, in order to ensure their relevance to the industrial activities being promoted. South Korea has systematically reconstructed its industry in line with the demands of the market. Consequently, its education system has changed accordingly. The number of new college students is linked to the demands of its economy. In South Korea, the universities and colleges have fostered many IT (information technology) talents who have played an important role in Korea's IT development.
In Singapore, the government has devoted considerable effort to developing its industrial training system, now considered one of the world's best for high-technology production. The Skills Development Fund, established in 1979, collects a levy of 1 percent of payroll from employers to subsidize training for lower paid workers. Singapore's four polytechnics, which meet the need for mid-level technical and managerial skills, work closely with the business sector in designing courses and providing practical training. In addition, with government assistance under the Industry-Based Training Program, employers are encouraged to conduct training courses relevant to their needs. The Singapore Economic Development Board (EDB) continually assesses emerging skill needs in consultation with leading enterprises, and initiates specialized courses. National investment in training reached 3.6 percent of the annual payroll in 1995, and the government has plans to raise it to 4 percent, which is higher than that of the United Kingdom, which has an average of 1.8 percent.
The initial impact of these policies was felt mostly in large firms, but efforts to improve small firms' awareness of the training courses and to support industry associations have increased the impact on smaller organizations. To expand the benefits, a
development consultancy scheme has been introduced to provide SMEs with grants for short-term consultancies in management, technical know-how, business development, and staff training. As a result, the workforce has shifted significantly toward more highly skilled jobs, with the share of professional and technical workers rising from 15.7 percent in 1990 to 23.1 percent in 1995. The educational profile of the population has improved dramatically and the number of universities has increased to cater to the growing need for higher education. From one university in 1985, Singapore now has three universities, and there are more polytechnics and other institutions of higher learning. In 1985, Singapore produced only 8,000 polytechnic and university graduates. By 2001, this had risen to 25,800, excluding Singaporeans who were educated overseas.
Financial markets are a source of funds for companies and individuals. A nation's financial system plays a key role in the functioning of a market economy. The level of development of an economy's financial system seems to have an important bearing on resource allocation and growth. In the financial market, two aspects need to be considered. One is the credit market and the other is the financial system.
As mentioned earlier, the SMEs play an important role and an inflow of funds to these enterprises is key to their sustainability and development. However, when companies require investment loans, it seems that the smaller firms suffer from credit constraints more often than the larger ones. Thus, some regulations are needed to help companies access loans and reduce their risks.
Recently, the Chinese government investigated some illegal loans made by the Bank of China, which was suspected of lending large amounts of money to one company. This incident illustrates the urgency of setting up rules to regulate the loan procedure. Hong Kong, Taiwan, China, Singapore, and South Korea have set up an efficient credit system to help companies solve their financial problems. In addition, in order to provide support for strategic industries, the Taiwanese government has since 1982 made available special low-interest loans for the machinery and electronics industries.
It is necessary to reform the financial system as the market economy develops. Taiwan's financial system has experienced major reforms in the past twenty years. These include the liberalization of the financial system, a diminishing government role in the banking sector, the broadening of banking activities, the promotion of financial internationalization, and the liberalization of foreign exchange trading.
As the trend toward trade liberalization continues, information is becoming increasingly important. To some extent, the outcome of international competition is determined by the availability of information. It has been argued that firms in developing countries
face higher transaction and information costs. In principle, higher transaction and information costs associated with investment would have a negative impact on producers' responses to trade liberalization.
Hong Kong, Taiwan, Singapore, and South Korea have set up a well-developed Internet system to facilitate information exchange and transactions between individuals and companies. South Korea has established the so-called “B2B,” or “business-to- business,” network to help companies engage in electronic transactions or “e-business.” The use of the Internet for business purposes has also been widely used in Singapore.
Foreign Direct Investment (FDI)
There are two sides to FDI: one is the inward flow of FDI and the other is the outward flow. The inflow of FDI can foster many benefits. It can provide employment opportunities for the local population, bring in technology, attract financial resources, stimulate the demand for locally-produced goods, and help domestic companies to establish themselves in the local and international markets.
Among the NIEs, Singapore is the most reliant on FDI inflow, which has played a major role in its economic success since its separation from the Malaysian Federation in 1965. With a very small domestic market, limited domestic capital, and a perceived lack of local entrepreneurs, Singapore embarked on a complementary strategy of attracting foreign companies to establish their headquarters and/or manufacturing base in Singapore to spearhead its export-oriented industrialization drive. This strategy worked well for Singapore so that by 1981 the manufacturing sector accounted for half of the total foreign equity investment (Lim and Pang, 1991). In 1993, foreign investment increased further and accounted for 60 percent of total equity investment in the manufacturing sector, earning Singapore a reputation as one of the most heavily foreign-dominated manufacturing sectors in the world. Success was not only due to the generous fiscal incentives offered to foreign companies but also to Singapore's world-class infrastructure (legal, transport, and telecommunications), its pro-business environment and efficient bureaucracy as well as its relatively stable political environment.
One important benefit that FDI can bring to the host country is the technology transfer from foreign investors to local firms, thus enhancing the overall productivity of the host countries. Technology transfer can occur via direct and indirect channels. The direct channel depends primarily on two factors. The first is the amount of technology that is actually transferred from the parent firm to its affiliate in the host country. The second depends on the extent of innovative activities actually carried out by the affiliate in the host country. The indirect channel refers primarily to the linkage effects, demonstration effects, and the effects of increased competition.
The transfer of technology is, however, difficult to achieve, given the general reluctance of foreign investors to share the technology with the host countries if this transfer results in the loss of market power or competitive advantage. It is therefore important for the host countries to devise an effective means of technology transfer. Singapore,
which is more dependent on FDI than any other NIE, has successfully formulated strategies to bring about this transfer of technology. To ensure a real transfer of technology to local firms through subcontracting arrangements, a scheme has been introduced which includes tax incentives and specific institutional arrangements, such as the umbrella strategy, vendor development scheme, and cluster creation. Under the umbrella strategy, one large enterprise, called the umbrella company, provides assistance to small local companies in production and marketing. The umbrella company gets rewards in return, such as government contracts without contest bidding. Under the vendor development scheme, MNCs (multinational corporations) assist local counterparts in the production of parts and components. Under cluster arrangements, small local enterprises are relocated to the same area to become a cluster of vendors for the same industries. Information about buyers (large enterprises) and sellers (small local subcontractors) is provided through the subcontract exchange scheme.
Lim and Pang (1991) have found that linkage effects have significantly improved as many local enterprises supply the MNCs based in Singapore while at the same time manufacturing and exporting on their own account. One example of such a firm is Wearnes Technology, which has progressed from subcontracting computer assembly to marketing its own personal computers (PCs) directly to the United States. According to Wong (1991), by 1998 the supporting industries were dominated by large numbers of small local SMEs. He also noted that several technological trends among SMEs—for example, the increasing use of automation and information technology—had been initiated in the United States and Japan, but were gradually transferred to local firms. Most of the technology transfer was through indirect rather than direct means, including learning facilitation (which takes place through stringent quality control exercised by the MNC buyer). Another important indirect channel was by hiring MNC employees and engaging in reverse engineering. Although local firms generally found it difficult to poach MNC employees, Lim and Pang (1991) found that a pool of experienced indigenous scientific technical and managerial personnel had been created and the MNCs had spawned local entrepreneurs from the ranks of their own employees. It is these former employees who have founded many of the high-technology startups that compete with the MNCs. Not only have they brought with them the technology acquired in these MNCs but they have also engaged in some form of reverse engineering to improve on the MNCs' products. The founder of Creative Technologies, Mr. Sim Wong Hoo, is a good example.
A specific institutional arrangement is the Local Industry Upgrading program managed by MNC engineers on a rotational basis, in which MNCs are encouraged to provide technical and other types of assistance to small local enterprises. In return, the MNC engineers receive compensation from Singapore's Economic Development Board.
The Singapore government has also encouraged its domestic companies to invest abroad to avoid increasing costs at home and to take advantage of the greater economic opportunities outside Singapore. For example, Singapore has set up the Suzhou Industrial Park in China. In addition, Singapore has signed bilateral free-trade agreements with several countries to expand market access and remove the obstacles to trade and investment.
Unlike Singapore, Taiwan and South Korea have adopted an import-substituting industrial strategy aimed at developing their own companies to become international players and exporters of technology. South Korea can now boast about homegrown multinational companies, such as Samsung Electronics, LG, Hyundai, and others. Taiwan has concentrated its resources and attention on the development of its small and mediumsized enterprises, instead of relying on foreign or local MNCs.
Outward FDI has many advantages: it can take advantage of lower labor and transportation costs in the host countries, it can operate behind the trade barriers of those countries, and it can also sell to foreign markets and use the human capital of foreigners.
Social Security Net
Because of industry restructuring and upgrading to reduce costs and improve efficiency in an increasingly competitive market, employees are sometimes laid off. Consequently, protecting the livelihood of these retrenched workers is important to maintain social and political stability and sustainable economic development.
The NIEs that were affected by the 1997–1998 financial crisis have, apart from setting up an efficient unemployment insurance system for the unemployed, which helped to reduce South Korea's unemployment rate quickly after the Asian crisis, have imple- mented various programs and measures to check the spread of unemployment and minimize hardship. These include public employment information services, employment stabilization schemes, training programs, micro-credit, and SME credit and job-creation programs.
South Korea's public employment information service agency is responsible for the registration and administration of unemployment insurance benefits. However, the financial crisis brought into the limelight the need to use these instruments to facilitate the reemployment of thousands of laid-off workers. As a result, public employment services have been strengthened considerably in all these NIEs. In South Korea, the government expanded the number of public employment services agencies from fifty-two in 1997 to 134 in 1999, leading to a considerable increase in the number of people finding jobs through them. A nationwide network of job information centers was also established, providing job-seekers with information and services in relation to vacancies and unemployment benefits. The government also relaxed the regulations for private placement agencies, which resulted in an increase in their number.
In Singapore, apart from the government, which is the main source of reemployment information, the Community Development Councils (CDCs) play an important role in providing employment information. They have been assigned the task of acting as job-matching agencies at the local level. Being closer to the residents, these councils are able to reach out to more people who might not be aware of assistance schemes at the national level. The CDCs also provide counseling services to the residents and advise them to be realistic in their job search. Each council has come up with innovative ways
to facilitate job search and to provide incentives for training, such as free training for cleaners. Thus, the CDCs have played a very important part in their constituencies. Public employment information services have also been strengthened through the use of modern information and communication technology. The Internet has become a new, powerful and cheap tool for posting information on vacancies and placing job-seekers. South Korea's Work-Net is one example. In Singapore, the Ministry of Manpower has expanded its employment assistance through the Internet. For example, it has revamped its Employment Town web site (a one-stop virtual center that provides employment-related information and services) to disseminate employment-related information. In the area of job matching, the Manpower Ministry currently operates a career center, known as [email protected] The center provides one-stop information and advisory services to help Singaporean workers and companies to make timely and well-informed decisions on employment and training. The center offers self-help resources, such as books and publications on resume writing, and training opportunities. Computer stations are also made available for people to access the Internet for job and training opportunities, and even to prepare resumes which can be printed out with the printers provided, and faxed with the facsimile machines available at the center. Officers are also stationed in the center to help those unable to make use of the self-help resources. In addition, the center conducts workshops on resume-writing skills and preparation for interviews. Some of Career-Link's services are also available on the Internet, to enable Internet-savvy executives and professionals to search for jobs and learning opportunities, without them having to physically visit the center.
During the Asian financial crisis, the NIE governments adopted a number of additional policies and measures to protect existing jobs and to create new ones. The provision of incentives for employers was an effective tool in maintaining existing jobs and minimizing layoffs. These incentives took the form of subsidized credit to improve liquidity and avoid bankruptcy, as well as wage subsidies.
Such mechanisms have been employed to a significant extent in South Korea. The employment stabilization scheme consists of two parts: aid for employment adjustment, and for employment promotion. The first consists of employment maintenance subsidies and hiring subsidy programs. Hiring subsidy programs assist employers to hire those laid off in the process of employment adjustment. Employment maintenance subsidy programs offer wage subsidies to firms that retain redundant workers although they are suffering short-term financial difficulties. Depending on the size of the firm, subsidies equivalent to between one-half and two-thirds of wages or allowances due to workers are paid for a maximum of six months. Other measures for protecting jobs are temporary shutdowns, a reduction in working hours, retraining of redundant workers, giving paid or unpaid leave to workers, and dispatching or reassigning workers. In 1998, a large number (1,896) of firms received employment maintenance subsidies, covering a total of almost 800,000 workers. However, the scheme was quite costly and did not guarantee worker retention by firms. Successful retraining programs were conducted for the unemployed. This success was attributed to an increased budget and the provision of
unemployment benefits to the trainees. The Job Skill Development Program comprises three major sub-programs: Assistance to Employers, Assistance to Employees, and Assistance for Training the Unemployed.
Credit was provided to unemployed professionals for self-employment, and program training and startup loans for small businesses were combined. In the wake of the economic crisis, financing for SMEs from commercial banks and other financial institutions dried up, which threatened their survival and added to the risk of rising unemployment. Special loan schemes for SMEs were thus introduced to help in job protection.
Macroeconomic policy includes many aspects, but its ultimate goal is to create a stable and conducive environment for economic development. This can be approached in two ways: creating a suitable economic environment, and formulating a trade policy.
In relation to creating a suitable economic environment, experience has shown that attempts at trade liberalization have often failed not because of the trade reforms themselves but because macroeconomic policies were inconsistent, which reduced the credibility of the reform program and led to excessive adjustment costs and a reversal of trade policies as a result of political resistance.
After the Asian financial crisis, Hong Kong, Taiwan, Singapore, and South Korea were determined to keep their macroeconomic policies unchanged and to regulate the economic environment. The Singapore government continued to pursue rational and prudent macroeconomic policies and maintain fiscal discipline and a stable Singapore dollar. Furthermore, the government planned to cut direct tax rates (corporate and personal incomes) to 20 percent over the next two years to signal Singapore's intent to compete for investment and talent across all sectors.
With regard to trade policy, governments should make use of their membership in the World Trade Organization (WTO) to maintain their competitiveness. The WTO gives countries the right to liberalize their domestic market gradually to reduce the costs of trade liberalization. This includes a transition period; additional flexibility for developing and least-developed countries; and safeguard measures. Governments can use this transition period to strengthen the competitiveness of their industries to deal with trade liberalization.
Sustainable development is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own needs. The benefits of sustainable development are reduced wastage (through energy savings, lower costs of waste disposal, minimizing pollution) thereby providing economic benefits in terms of improved health and a reduced economic burden on health care, more efficient land use and better utilization of natural and open areas, greater competitive advantage as
the country's regional and international image as being clean, safe, and sophisticated is enhanced, and greater community ownership of quality of life issues.
The Hong Kong government has, for example, identified three measures as part of its sustainable development policy: to develop and implement long-term strategies that take into account the environmental, resource and social implications of continuing economic growth; to introduce concepts of sustainable development throughout government and bring a wider group of stakeholders into the consultation framework; and to develop indicators to monitor progress and set measurable targets.
LESSONS FOR THE EMERGING ECONOMIES
The economic success of the Asian “tigers” provides some lessons on how to deal with the challenges associated with the process of economic integration and how to benefit from it. These challenges have been a cause for serious concern among other transitional economies so that there have been some signs of hesitation and ambivalence in the implementation of their commitments within the framework of regional economic integration, and the lack of a clear and comprehensive trade liberalization program. Some examples of this are the tendency for countries to postpone the liberalization of their major tariff items until the last year of the implementation deadline, the listing of tariff items in the Inclusion Lists, which already have 0 to 5 percent tariff rates or which are not traded at all, and the slow progress in the identification of non-tariff barriers and harmonization of customs procedures, as well as the lack of clear timetables for the phasing in of temporarily excluded products into the Inclusion Lists.
The experience of the Asian “tigers,” however, shows that this is not the best option for economic growth and development. The adoption of an export-oriented strategy where businesses can operate on the basis of their natural comparative advantage has been largely responsible for their remarkable economic performance. If they have resorted to selective microeconomic intervention by picking certain sectors in the economy for government assistance, they have only replicated what the market would have chosen anyway (Tongzon, 2002). Furthermore, the assistance provided to these selected industries are usually in the form of subsidies geared to assist them to become competitive internationally. This outward orientation has exposed these industries to the discipline of the market and the forces of global competition.
There is some reason for microeconomic intervention. The need to develop certain industries for strategic purposes and to protect infant industries may sound reasonable when the domestic industry is not yet in a position to compete internationally. However, there is a real danger that these protected industries may remain infants and never grow to face the outside world without government assistance. The experience of the Philippines in the 1970s and early 1980s attests to this danger. The economic crisis the Philippines experienced in the 1980s and early 1990s was due to wrong economic policies as much as to political and economic instability. One major factor behind this failure to join the ranks of
the fast-growing economies of the Association of Southeast Asian Nations (ASEAN) in the 1980s and early 1990s was its inability to make a switch from an import-substitution industrialization policy (ISI) to an export-oriented industrialization policy (EOI). While the dynamic Asian “tigers” had successfully moved from ISI to EOI by adapting to the changing economic conditions and comparative advantage, the Philippines was left behind, saddled with internal problems of rent-seeking and political patronage. The economic turnaround of the Philippine economy since 1992 (from a negative growth rate in 1991 to positive and robust growth since then), when the government had to open up its market under the deregulation program of ex-President Ramos, is a perfect example of how market and trade liberalization can stimulate economic growth. From what was dubbed as the “sick man of Asia” in the 1980s and early 1990s under a protected market regime, the Philippines has now recovered and continues to exhibit strong trade performance and economic growth.
To send the right signals to the private sector, the government of China, for example, should make it clear that trade liberalization is the long-term economic goal and that any forms of government assistance extended are but temporary. Moreover, since China is committed to trade liberalization, it is suggested that the government announce a detailed plan for trade liberalization even earlier than its deadline, to drive home the message to the business community. Furthermore, a wide publicity campaign must be launched among the various sectors about the rationale, mechanisms, and opportunities or possible risks offered by economic integration. The private sector must be supportive of this commitment to trade liberalization so that it can successfully integrate with the region.
The successful experience of the Asian “tigers” has shown the importance of quality intervention and the bureaucracy. The quality rather than the extent of government intervention is important for sustainable growth and development. This is manifested by the spectacular economic performances among the NIEs, although they have had varied levels of government intervention. This also explains the differences in economic performance between the NIEs and the less developed countries of Asia and Africa. Corruption, red tape, and bureaucratic inefficiencies are largely responsible for the failure of many countries to achieve sustainable growth and development.
To have a credible government and consistent policies is an important part of government intervention. A lack of credibility in the intentions of the government and inconsistent policies not only cause uncertainty and confusion, but can also have a negative impact on investment. There is a need for governments to create an environment conducive to the functioning of the market system and for the growth of private enterprise. One important role for the government in this regard is in the improvement of infrastructure (soft and hard), particularly telecommunications, transport, and power supply, in order for the private sector to function efficiently, and in its accounting system to provide sufficient data for effective and efficient decision making.
The promotion of an environment conducive to the development of the private sector does not, however, diminish the important role of state-owned enterprises (SOEs) in economic development. The reformation of the SOEs should continue to make them
more efficient and internationally competitive. China has already undertaken the policy of privatization with the help of foreign financial institutions. This indicates its serious intention to stop the draining of public funds, promote competition, increase state revenues, and develop an internationally competitive private sector. However, the process has been slow and cautious because of the growing concern that it could lead to more job losses and undermine government control over the economy. In this case, the process can be selective and an effective regulatory scheme adopted. However, it should be pointed out that the mere transfer of assets and service functions to the private sector is not a sufficient condition for the establishment of an internationally competitive industry. It must result in greater competition, transparency, and public accountability for privatization to succeed.
In the process of implementing the commitments to economic integration, it is expected that there will be strong opposition from industries that have long enjoyed government protection. The lack of clarity, transparency, and consistency in the formulation and implementation of policies also encourages those industries with vested interests to lobby and influence the direction of trade policy. There is a tendency for governments to accommodate their interests and adopt certain policies inconsistent with the overall trade orientation, or revert to the old policy of inward-looking industrialization. Apart from having the political will to carry out the required market and trade reforms, the governments of emerging economies should learn from the experience of the economically successful countries of East Asia and replicate their success.
The Asian NIEs were able to achieve rapid development of human skills by adopting strategies to equip their population with the right skills to adapt technologies quickly. One important lesson is that the orientation and content of education are as important as resource allocation. These countries have not only invested in basic education but also emphasized a technology-oriented curriculum at the higher levels. In the early stage of their economic development, they gave priority to basic education, and achieved universal primary schooling in the late 1970s. That made it easier to concentrate on improving the quality and increasing the resources in upper secondary and tertiary education. As their economies developed, they needed more skilled and educated workers, and thus higher education expanded rapidly, especially after 1980. For example, in South Korea the tertiary enrolment ratio soared from 16 percent in 1980 to 39 percent in 1990, and then to 68 percent in 1996. This investment in skills training has been part of their export-led development strategy, which provides demand signals for the skills required for improving competitiveness.
To maintain high standards of education, the governments of the Asian “tigers” have generally adopted a policy of providing sufficient monetary incentives for their teachers and educators. Highly qualified educators are generally well-paid compared with their counterparts in other parts of Asia. This recognition of the important contribution that teachers and educators make to society is one of the reasons for the delivery of high quality education in these countries relative to other developing countries in Asia.
Continuous learning is considered a key to developing human skills in the context of rapid technological change. As the economies of the Asian “tigers” have become more
sophisticated, pressures have been felt by governments and firms to provide effective education and training systems. In South Korea, following the enactment of the Vocational Training Law in 1967, the government established well-equipped public vocational training institutes and subsidized in-plant training programs. In the 1970s when the government was seeking to develop heavy and chemical industries, it promoted vocational high schools and junior technical colleges to satisfy the rising demand for technicians. It also established public education and research institutions to supply high-quality scientists and engineers, such as the Korea Institute of Science and Technology in 1967, and the Korea Advanced Institute of Science and Technology in 1971.
The government of Singapore took similar initiatives, launching a series of training programs, such as the Basic Education for Skills Training in 1983, the Modular Skills Training in 1987, and the Core Skills for Effectiveness and Change in 1987. In the 1990s, the government also led the development of the information and communication technology industry by supporting study in this area in tertiary institutions and building specialized training institutes, as well as establishing joint-venture institutes with private companies. Singapore's success in attracting FDI suggests that the following factors are important: building a conducive investment environment, building strong national “champions,” and tapping into regional cooperation.
A conducive investment environment requires a world-class infrastructure, stable macroeconomic environment, and adequate auxiliary industry and other location specific advantages. Indeed, the continued ability of Singapore to attract FDI throughout the 1970s, 1980s, and 1990s despite rising labor costs, labor shortages, and increasing competition from neighboring countries, is a testimony to the ability of the city-state to offer a total business infrastructure which includes a wide range of supporting industries, sufficient logistics networks, well-developed financial and administrative support systems, and human resources which are adequately competent to service the entire business chain (Wong, 1998). Singapore's policy toward foreign investment has been liberal, with few restrictions. There are no limitations on equity ownership, no performance requirements such as local content rules and the training of local replacements for expatriates, no foreign exchange controls or limits on profit repatriation, and no technology transfer requirements or controls (Lim and Pang, 1991).
MNCs favor locations that provide complementary local assets, especially for knowledge-intensive value-added activities. Strong national companies can enter into mutually beneficial alliances with these foreign multinationals. The governments of the transitional economies could help nurture national champions by providing assistance in terms of R&D, capital for expansion, and the like. However, to avoid rent-seeking behavior by local monopolies (national champions) and foreign monopolies (MNCs) that may emerge in certain industries, competition policies may be necessary to encourage efficiency and innovation-based rivalry. The NIEs have exposed their national monopolies to international markets by rigorously monitoring their export targets. Therefore, the adoption of effective competition policies is an area which emerging economies can consider to achieve effective technology transfer through FDI without the drawbacks of monopolies.
With respect to technology transfer, the experience of Singapore shows that the following policies are important in promoting technology transfer: building of local technological capacities, strengthening of human resources, strengthening of forward and backward linkages, strengthening of intellectual property rights protection, attracting MNCs that are committed to a long-term partnership, involvement of third parties, and encouragement of indigenous technology and trajectories of technological development.
Local technological and absorptive capacity can determine the extent to which a developing country can use imported technology effectively. Low absorptive capacity is heightened by the unwillingness of many MNCs to undertake R&D activities in overseas subsidiaries. R&D that is carried out in the subsidiaries is usually confined to experimental development and research. Parent companies develop new technologies, leaving only process adaptation and product development to be carried out by the subsidiaries. However, technological effort through, for example, expenditure on research and development and teaching SMEs technological know-how can positively affect a country's ability to mobilize technology. It is argued in new growth theories that technological learning is cumulative and technological activity experiences increasing returns to scale. Therefore, a nation can benefit from expanding investment in domestic technological capabilities.
Local technological capabilities can be enhanced through certain institutions, such as technology transfer centers, which provide advisory services to local firms with regard to assessing technologies offered by foreign firms in joint ventures. Specialized financial institutions can also be set up to provide funding for acquiring and developing technical know-how. Furthermore, the extent of local technological capability buildup is dependent, in part, on the local economic environment. A market-oriented environment will provide more incentives for technological adaptation than a protected economy. A rapid pace of industrialization can also provide incentives for technological adaptation by increasing the value of this capability.
The lack of a competent labor pool capable of absorbing, assimilating, and adapting to new technologies can sometimes hinder technology transfer. This is one of the contributing factors to the low absorptive capacity witnessed in many developing countries. Thus, it may be beneficial to devote resources to increasing the technological competence of the labor force as a complement to FDI, so that the process of technology transfer may be accelerated. In addition, the mobility of MNCs' technical staff to start new ventures represents another channel of technical transmission. Policies that promote greater mobility of MNC technical staff to local firms can further encourage this channel of technical diffusion. In Singapore, a phenomenon has been emerging whereby MNC employees eventually start their own ventures and become competitors of their former employers.
An important channel of knowledge diffusion for the host country is via vertical inter-firm linkages with domestic companies. Such backward linkages can attract FDI by acting as supporting industries as well as facilitating technology transfer. At the same time, FDI can help create such linkages. However, in numerous instances, small and medium-sized suppliers tend to follow the MNCs by investing overseas to produce intermediate parts and services for their major clients. This phenomenon, to some extent,
limits the creation of backward and forward linkages. Thus, more can be done to promote the creation of such linkages between MNCs and domestic companies that will enhance technology transfer.
In the context of Singapore, the existing Local Industry Upgrading Programme has been utilized to accelerate the process of technological diffusion from MNCs to local subcontractors by increasing the latter's absorptive capacity. At the same time, it is also important that the technological know-how acquired by the direct local subcontractors through their relationships with the MNCs is transmitted to other domestic firms. Perhaps these subcontractors can, in turn, subcontract to a second tier of smaller local enterprises (Wong, 1991).
In addition, knowledge diffusion can be aided by the formation of clusters of interrelated activities, which facilitate spillovers through informal and social contacts among employees and through buyer–seller links. This scenario is evident in Singapore where the EDB promotes the formation of specific industrial clusters, such as chemical and biomedical sciences, and attempts to concentrate them geographically so as to accelerate knowledge spillovers and diffusion.
In the post-Uruguay Round period, intellectual property rights protection is an important determinant of FDI. Weak intellectual property protection may inhibit the transfer of technology by FDIs. Mansfield's (1994) study suggests that technologies transferred by American MNCs to countries with weak intellectual property protection tend to belong to an older vintage. Thus, the strengthening of intellectual property protection may encourage more advanced technology transfer.
In Singapore, Wong's (1991) study reveals the importance of MNCs' commitment to long-term relationships with local suppliers as a basis for inducing technological development of the latter. MNCs can be encouraged to establish long-term partnerships with the governments of developing countries.
It may also be useful to involve more local partners, such as the government, R&D institutions, and academic researchers to facilitate the process of technology transfer. In Singapore, the existing Local Industry Upgrading Programme (which aims to develop the technical, operational, and management skills of local suppliers) was expanded to include these parties. A further possibility could be university–MNC–local firm tie-ups.
For many years, it was claimed that the lack of an independent indigenous entrepreneurial class in Singapore was partly due to the crowding out by stronger foreign capital and perhaps the state itself (through government-linked companies). Thus, while FDI can be a source of technology transfer, governments must also ensure that the technology learned eventually leads to indigenous technological development and does not stifle it instead. Policies should be geared to ensure that technical diffusion through FDI does not permanently attenuate local firms' incentive to do their own R&D. A culture of commercialization should be fostered among R&D personnel to encourage technology development. With the greater emphasis on innovation in Singapore in more recent years, it is promising to note that the level of technology transfer has progressed from an operational level to a more innovative level. For example, Wong (1998) noted that an indigenous innovative electronics sector is beginning to emerge in the Singapore market.
The Asian “tigers” have demonstrated that selective FDI policies may facilitate an autonomous path of international expansion. These countries have tried to select technology that are, as far as possible, unaccompanied by foreign ownership. Such policies have given local firms the independence in decision making which is crucial for eventually pursuing an autonomous path of expansion. The MNCs based in the Asian “tigers” initially acquired technology through the FDI route. However, the process of FDI eventually leading to market transfers can only occur with the presence of complementary inputs, such as responsive local entrepreneurship, continuous updating, and eventually innovation.
The success of the Asian “tigers” in sustaining their industrialization and economic development can be attributed to the following key factors: selective and not open-ended import-substitution and timely switching from import-substituting industrialization to export-oriented industrialization, achievement of high production efficiency based on the principle of comparative advantage, effective upgrading of technology through FDI and domestic expenditure on R&D, appropriate human resource development, and industrial restructuring in accordance with changing economic conditions. Underlying these factors are the formulation and effective implementation of appropriate policies. In this regard, the respective governments and other institutions have played a critical role in their economic success, although the degree of government intervention has varied among them. Their experience can provide several lessons for the emerging economies as they implement their commitments toward economic integration.
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