Appendix Commonwealth Round Table on Growth and Alleviation in East Asia and other LDCs

A Note on the Commonwealth industrial powerhouse. In the 1980s East Asia Round Table emerged as the best performer in the developing Mr. Ivan Mbirimi and Dr. Ganeshan Wignaraja , world in terms of rapid per capita income growth Commonwealth Secretariat (see chart 1), sustained industrial deepening and diversification and a dramatic increase in living A round table conference was held in London on standards. The round table emphasised that 25 January 1996 to discuss Professor Cassen's today, these economies are competing overseas paper on "Strategies for Growth and Poverty with the likes of Japan, the US and the UK. It Alleviation" and to examine whether East Asia's was also emphasised that success in per capita development experience could be replicated by income growth and poverty reduction in the first other developing countries. The round table tier dragons has spilt over into a second tier of involved senior Commonwealth Secretariat staff East Asian dragons (Malaysia, Thailand and and experts from the Universities of Oxford, Indonesia) but slow progress on both counts has Cambridge, Sussex, the London School of been recorded in other developing regions. Economics, the Overseas Development Institute Africa's weak performance in the 1980s and and the British Cabinet Office (see the list of 1990s was mentioned as a cause for concern in participants below). It was chaired by Sir international policy circles. Humphrey Maud, the Deputy Secretary-General (Economic & Social Affairs) of the Secretariat. Chart 1 Per Capita Income Growth in LDCs, The agenda included an introduction to the (% p.a) 1980-93 issues by Mr. Rumman Faruqi, Director of the Economic Affairs Division of the Secretariat; keynote presentations by Professor Robert Cassen and Dr. Sanjaya Lall of Oxford University and Professor John Toye of Sussex University; and a discussion between the participants. The main points from the presentations and the discussion can be briefly considered under three headings: (1) East Asia's economic success; (2) ingredients in East Asia's success; and (3) lessons for Africa.

East Asia's Economic Success The round table noted that the rise of the four East Asian "dragons" (Korea, Taiwan, Singapore Ingredients in East Asia's Success and Hong Kong) is a spectacular post-war devel­ The round table noted that there is little agree- opment achievement. Within a quarter of a ment in policy circles on the factors which century, each economy transformed from a sub­ underlie East Asia's success and there is even less sistence trading and agricultural base into an agreement on whether this experience can be

48 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION replicated in Africa. In an attempt to build a require agrarian reform, investments in consensus on these issues, the round table exam­ and use of corporate fiscal ined opposing viewpoints. The round table incentives to encourage the growth of recognised that East Asia was fortunate to have corporate profits and savings. good initial conditions for rapid development • Third is the adoption of an outward-looking such as a booming world economy, a close prox­ The catalytic role imity to the expanding Japanese market, industrial strategy. played by foreign investment - in accessing substantial international trading experience and capital, technology and marketing-know- large inflows of foreign aid. While acknowledg­ how - to drive industrialisation in Africa is ing the contribution of these factors, the round widely recognised. So too is the need to table concluded that a major explanation for East formulate the relevant promotion policies Asia's performance was the adoption of a coher­ and soft infrastructure to attract foreign ent strategy for growth and poverty alleviation in investment into the industrial and service the early 1960s that was sustained to date. Box 1 sectors in Africa. Far more controversial, shows the six ingredients in East Asia's common however, is industrial policy for domestic strategy. industry. The use of selective industrial policies practised in East Asia may be more difficult in the 1990s given the move Lessons for Africa towards global economic liberalisation There was a consensus among round table par­ embodied in the Uruguay round and the ticipants that the inward-oriented development creation of the World Trade Organisation strategies pursued by African countries in the which is less tolerant of protection and past had failed to deliver sustained growth and subsidisation of industry. The success of poverty reduction. Amongst other things, selective policies also depends on the Africa's inward-oriented strategies resulted in government's ability to collect, monitor and poor per capita growth, declining industrial and analyse information - such a capacity may agricultural growth, a sluggish export sector and be weak in several African countries. In this a tendency for income distribution to concen­ context, a gradual but credible approach to trate. Round table participants also felt that trade liberalisation with a strong export several aspects of East Asia's development strat­ push may be appropriate. egy, adapted to different initial conditions and historical circumstances, were relevant to • Fourth is investments in human capital. African countries. With a few exceptions, enrolment rates at all levels are low across • First is a strong commitment to achieving Africa, firm-level training is limited to a few macro-economic stability and rapid large enterprises and governmental capacity growth. Macro-economic management to monitor and analyse information is weak. should be geared towards high savings and The creation of appropriate skills in investment rates, low budget deficits and industry and government is thus a vital pre­ moderate inflation rates. Macro-economic condition for sustainable development in stability and rapid growth are fundamental Africa. influences on private sector expansion, employment creation and poverty • Fifth is the creation of technology reduction. institutions. In view of low levels of • Second is the encouragement of domestic technological capabilities in African savings. Amongst other things, this may manufacturing, there is an urgent need to

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 49 Box 1:

Elements in East Asia's Success

• A stable, predictable macro-economic environment Budget deficits were kept low, inflation was tightly controlled, a competitive real exchange rate was maintained and debt crises were avoided - in order to encourage savings and investment and rapid growth.

• Encouragement of domestic savings These countries achieved impressive rates of savings and investment by historical standards. Good initial conditions (i.e., land reform and thus relatively equal income distribution and favourable human capital due to educational investments) stimulated the growth of savings and investment. However, growth of corporate profits and savings were the crucial element in the rapid increase in domestic savings. In turn, corporate fiscal incentives were widely used to promote growth of corporate profits.

• Selective outward-oriented industrial policies Moderate infant industry protection and an aggressive export push were employed to create competitiveness and force domestic firms into overseas markets. As industries matured and entered export markets, new industries were promoted. Foreign investment was selectively targeted through a combination of promotion and a comprehensive set of soft infrastructure policies (particularly, specialised technical skills, technological institutions, export marketing agents and other business services). The emphasis given to "creating winners", of course, differed between individual countries - Hong Kong was the least interventionist, Singapore in between, and Korea and Taiwan were the most interventionist.

• Investments in human capital As early as the mid-1960s, these countries achieved almost universal primary enrolment; one third secondary enrolment; and their tertiary enrolment, particularly in science and engineering subjects, were the highest in the developing world. There was also a strong emphasis on vocational training and the creation of industry-specific training institutions.

• Creation of a comprehensive network of technology institutions To upgrade production skills in manufacturing pertaining to improving process quality, productivity and new product development. Industry-specific technological institutions were also created to lower barriers to entry in high-technology industries and extension services were used to encourage small and medium enterprises.

• Programmes to reduce poverty These countries emphasised health care, education, land reform, a green revolution in agriculture and financial support for micro-enterprises.

50 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION boost quality awareness, productivity Some of the means they employed were fairly improvement and the creation of new conventional: paying attention to the macro- products for export. Existing technology economic fundamentals was one: low domestic institutions may need to be reformed and and foreign deficits; competitive exchange rates; new institutions may need to be established for the most part, low inflation rates, and high to deal with these issues. The establishment rates of investment in both physical and human of private sector providers of technology capital; and, usually, positive real rates of interest. import services needs to be encouraged. But some of their methods were not in line with current orthodoxies: public ownership of banks, • Sixth is a programme to develop the directed and often subsidized credit; selective agricultural sector and reduce poverty. import protection; and a range of government Rural poverty in Africa is widespread and measures to accelerate technological capability an agriculture-led development policy and promote exports, as well as, in some cases at (incorporating land reform, technological least, a good deal of government guidance or change and micro-finance) is a valuable influence on investments by private and foreign supplement to poverty reduction through companies. rapid growth. Development of the Whether other countries can follow in their agricultural sector and processed primary footsteps is an open question. The Uruguay exports in many African countries will in Round certainly provides opportunities. But the turn provide inputs for industrial WTO restricts some of the export promotion development in the form of surplus labour, methods used in East Asia: Bank/Fund structur­ capital for investment, foreign exchange al adjustment programmes have tended to insist and a market for industrial goods. on import liberalisation, ignoring arguments for selective protection. Besides, there may not be In the final analysis, the round table felt that room for any large number of countries to expand individual African countries may need to re­ exports of manufactures on the East Asian scale. examine their own experience in the light of They will also have to target exports of services East Asian development practise and draw rele­ and agricultural commodities. vant lessons. In doing so, they should set realistic Finally, it must be said that other countries objectives for long-run development and main­ have tried some of the measures the East Asians tain a consistent strategy. African countries used without obtaining the same results. East should also bear in mind changed global eco­ Asian governments, when they interfered with nomic circumstances in the 1990s and the market principles, nevertheless subjected private limitations that they impose on national eco­ sector companies to market tests. Profitability nomic policy. and export success had to be achieved, or privi­ leges were withdrawn. These are things other countries have mostly not done when they fol­ Opening presentation lowed interventionist policies. Professor Robert Cassen, Queen Elizabeth House As the paper puts it, the essential conditions and St Antony's College, for doing what the East Asians did included the capacity to sustain a stable macro and policy The East Asian countries have drawn attention environment over long periods; a well-trained because of their successful transformation. Korea's and effective bureaucracy; and the political per capita income was $325 in 1960, and is about conditions which ensured that public policy $8,000 today. How did they do it, and can other served economic and not partisan political countries follow their example? goals.

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 51 The paper reaches two conclusions: there is countries, strengthening governmental capaci- much to learn from the East Asian experience, ties will be crucial. Just to give an example, it is and countries can certainly adapt some of their government that leads the privatization process. methods to their own circumstances and make (And here I might emphasize something the use of them. And secondly that any country can paper raises and which a number of be inspired by their example, and move away Commonwealth countries have found to be from poverty and lack of development in a few important, that is, measures to attract widespread decades, largely by their own efforts. We may participation in shareholding and overcome some hope that the new emphases in economic policy of the political difficulties of privatization.) in a large number of countries may already have Apart from purchasing technology from begun this process. But if we are looking for areas abroad and developing it domestically, the prin- to apply the lessons, I might single out, first, cipal sources of new technology are from examining carefully the implications of the investments by foreign firms, and from supplier- WTO and Bank/Fund structural adjustment for relations with foreign buyers in exporting. A exporting and other aspects of the East Asian great deal can be done to give support to tech- story; and second, ways of providing technolog- nological development for large, medium and ical support as these countries have done, small firms by following best practice elsewhere, particularly to small and medium enterprises. and the paper refers to this. Part of this develop- ment also depends on education and training, Strategies for Growth and Poverty Alleviation to which I come in a moment. Clearly what has been learned from East Asia is Growth does not automatically generate high important for promoting growth in general. levels of employment, the second part of an anti- Getting the macro-fundamentals "right" is one of poverty strategy. There are numerous lessons the keys. A recent research finding is that the from employment experience. For many coun- capacity to cope with exogenous shocks is crucial tries, agriculture must remain a significant source for growth; countries with high deficits and infla- of employment; doing better in this respect often tion in normal times will not be able to manage means removing the obstacles which have inhib- shocks; nor will they have the stable economic ited agricultural growth in the past, and climate which attracts investors. Otherwise, the eliminating subsidies to inputs - electricity for key engines of growth in the 20th century, in example - which substitute for labour. addition to exporting, have been the private Encouraging small and medium scale enterprises, sector and technology. and better approaches to rural credit and micro- The paper notes that while many countries finance, are also important ingredients. have introduced liberalising reforms, private Labour-market factors matter too. In general investment has been slow to pick up. This is research does not find that repressing union partly because of the retrenchment which has activity and labour has played a positive part in commonly accompanied reforms, but partly also employment. What has been negative have been because it takes as much as five years for investors attempts to improve job security and conditions to become confident that the policies and con- by measures which discourage firms from hiring ditions for investment are there to stay. The more labour. pervasive the pre-reform constraints on the Last but far from least, human development. private sector, the harder it is to move forward. In A large range of evidence has begun to show the enthusiasm for market reforms, it should not how important health and education have been be forgotten how important governments are for for . A major emphasis of the creating the infrastructure and institutions that paper is that financial authorities should not permit the private sector to flourish. For several think of these sectors as 'welfare', or as satisfying

52 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION primarily humanitarian concerns. They do of of what one might want to know in this area. course have that role. But they can also be highly And it manages to be encyclopaedic at the same productive investments. Many public expendí- time as being very concise. But since the discus­ tures in health and education will be recouped sant's job is to put a different spin on the ball, I quickly by governments through reduced went through the paper very carefully, looking for demands on services in the fairly short term. It is propositions with which I could disagree. I have hard for countries to shift out of exporting to say that I found hardly any propositions with primary products and into manufacturing without which I disagreed. The paper is excellent both as a strong base in human resources. Foreign direct a synthesis of academic wisdom on these ques­ investment today is increasingly attracted by low- tions and also as a very helpful guide to the cost skilled labour, not low-cost labour as such. relevant literature, so that those who want to In fact, provided other economic circumstances follow up particular points can get into that lit­ are moving in the right direction, human devel­ erature. It also contains a number of interesting opment can itself be an "engine of growth". ideas about the question of what can be done in learning the lessons of the East Asian experi­ International Co-operation ence. So what can I do? I felt that what we have here is a canvas filled with a large number of Lastly the paper turns to international co-oper­ small dots of truth. I propose to join up some of ation. If aid for long-term development is going the dots in my own way and so draw my own to continue to shrink, it is all the more important that it concentrate on measures to make it more picture. Relying rather heavily on Robert's paper, effective in contributing to the growth, employ­ I am going to give some slight differences of ment and human development policies which emphasis, some areas of light and shade in this. the paper describes as the three pillars of an anti- On the whole, my spin is a little bit more pes­ poverty strategy. The specific measures are spelled simistic than what we have heard from Robert, out in the paper, and listed succinctly on the last both in the paper and his comments this page of the Executive Summary, and I will not morning. I apologise for that, but I must say what rehearse them now. I am sure colleagues are keen I think is right. to get on with the discussion. I will only add that One part of the paper that I would pull out for donors and recipients alike are concerned about special emphasis is the rather brief section - the performance of aid, especially, in some coun­ "Japan: a note". It seems to me that Japan needs tries, increasing dependency on aid rather than much more than just a note. I see the East Asian increasing capacities to develop without it. If miracle not exactly in the way that Robert has shrinking aid makes for concentration on how to done. I don't find the Hong Kong or Singapore redress this state of affairs, higher effectiveness experience particularly relevant to the question may compensate for lesser quantity. of how other developing countries can go forward. They are rather special cases of small city states which you would expect to be doing a lot of exporting and to be well in touch with inter­ Comment by Prof John Toye national currents through trade and other Institute of Development Studies, Sussex mechanisms. While it is interesting to hear about them, they are not the heart of the East Asian I find it difficult to put a markedly different spin miracle. on the ball, because the paper which Robert I also disagree with the term 'miracle'. I don't wrote is very excellent in many ways. It is a very disagree that there has been an extraordinary comprehensive paper and it covers a lot of growth in the way that Robert has said. The facts ground. I think of it as almost an encyclopaedia are there but whether it is a miracle, i.e. some-

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 53 thing which cannot be explained by normal to organise a dynamic process of cascading of means of explanation, I doubt. My explanation growth to those nearby. One possible exception, would put Japan very much at the heart of this of course, might turn out to be South Africa. But experience and the countries that I would focus unless you can get that growth pole in the South on are Japan itself, Korea and Taiwan but also the African area, it is difficult to think of this kind of coming third tier of Indonesia, Malaysia and systematic long-term spread effect to neighbour­ Thailand. There are various ways of describing ing countries. the dynamics of this experience and various There is another point that I would like to metaphors have been used. The Japanese flag, which is prompted by the reference in described it as the 'flying geese pattern'. This is a Robert's paper (page 6) to economists' conven­ process whereby, having modernised the Japanese tional notion of the factors of production as land, economy, a structured transition takes place labour and capital. One has to think of the within the neighbouring area. Japanese indus­ factors of production in a new way. In his tries which have been superseded in the remarks, Robert referred to Adrian Wood's work modernising process are decanted in a co-opera­ on the new basis of comparative advantage. The tive way to neighbouring countries. I have just underlying idea here is that nowadays capital is been reading a fascinating book on this by mobile, and can be attracted in the right condi­ Dennis McNamara who describes the process by tions. It's not a fixed given which determines which over the last 25 years the Japanese textile comparative advantage. The factors which are industry has been deliberately wound down and relatively fixed are land and skills. This high­ transferred through various mechanisms to lights, even more strongly than Robert puts it neighbouring countries. This is part of a deliber­ himself, the role which skill formation needs to ate process, which the Japanese are quite clear play in a process of growth through expanding about, and which has enormously benefited their manufacturing exports. I am far less convinced neighbours in terms of a continuing self-rein­ than Robert is that agricultural exports will play forcing dynamism of growth in the area. the same role in a growth process, at least the But there is no Asian model, which applies to rapid growth process. In the long run they may, all the growing countries of the region. All of but in terms of the sort of growth rates we are these experiences are different from one another looking at in the East Asian case, the dominance and Robert brought out in this paper some of of manufacturing exports seems to me to be very the differences. The difference is marked between strongly indicated. the use of the very small number of large corpo­ What else can be said of the ingredients of the rations in Korea and the small enterprise focus of so-called "miracle"? I am fascinated by the story development in Taiwan. But there are other of the role of the government and I accept what models in the third tier as technology, invest­ Robert has said, and what said also, ment, orders and sub-contracting, cascade down about the precise ways in which the government to the third tier of countries. So there is no one has intervened. I would stress that it hasn't all been model. What there is, is a dynamic process which beneficial and that even with the human skills can be called 'flying geese', or 'cascading' or what­ which were available in Korea, the government ever. If that is the case then that seems to me to did encourage the over-extension of certain indus­ reduce further one's estimate of the possibilities tries, such as ship building and heavy chemical of replicating this in Africa. There is no region­ industries, in the 1970s. That was partly what al growth point in Africa from which such a precipitated the brief crisis for which adjustment cascading process can begin. There is no good was required between 1979/83. The story has not neighbour who is sufficiently organised, not only been one of the unqualified success of govern­ to achieve its own modernisation, but then also ment intervention. Governments, even the

54 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION Korean government, can make mistakes about ism or patriarchy. This could be vital in under­ which the right industries for the country are. standing why a given economic strategy works Interestingly, the Korean government is by out differently in Asia and in Africa. no means a text book case of good government. Now I think that I have probably used up my It is a highly repressive regime which now time. I have more comments to make but I don't appears, from reports of the trials of the want to trespass too much on your goodwill. Presidents of the country, to be extremely, grossly corrupt. What is interesting about this is that the corruption seems to have been very direct (i.e. give me a large brown envelope ) and not a Comment by Dr Sanjaya Lall form of corruption which was operated indirect­ Queen Elizabeth House, University of Oxford ly through wholesale distorting of the economic system. I think it characteristic of a lot of devel­ Thank you very much. I find myself in a very oping countries to construct systems of economic difficult position. I start by saying that Robert's management which are basically there to gener­ paper is excellent - it is wide ranging, it is com­ ate rent. If you have a system which is so blatant prehensive, it is practical and it is wise. As with that you simply demand payments, you don't John Toye, I have not much to say on the necessarily need to go through an indirect route content of the paper itself. Some of the things I to get the pay-offs to the right people. It may be was going to say have already been said by John a blessing in disguise that some Asian authori­ Toye, so I find myself in a doubly difficult posi­ tarian governments practised direct rather than tion. So I will talk about two things which might indirect corruption. stimulate discussion: (1) what was the East Asian Coming back to the question of what are the strategy; and (2) what does it mean for non-East factors which give comparative advantage today, Asian countries, in particular Sub-Saharan I would like also to mention factor number four African countries. - something called social capital which is now There was no single East Asian model but coming into vogue. I have a feeling that social rather a series of very different models, govern­ capital may be a concept which has been overdue ments, and political economies addressing very for recognition in the vocabulary of economists. different objectives. Now how do economists Social capital is essentially the social networks of deal with this? Economists when they talk about trust, the density and nature of such networks, government policies, view the need for inter­ which lie outside market and government rela­ vention as being driven by market failures. tionships, and which then condition the Market failure is a very impressive term. effectiveness with which both government and Economists immediately think they know what market operate. There are few empirical studies the other person is talking about. Market failures of social capital in developing countries. The are deviations from a competitive market equi­ best we have is of Italy by Robert Putnam, which librium. Non-economists of course, are totally itself is still controversial. I suggest on the confused by all this, they are very impressed and research front that this is a very important area. view what economists are saying as being correct. Social capital is a kind of mediating factor in the However, market failure is the wrong word to nature of society. This is something distinct from use. We are really talking about overall govern­ human capital formation as such. It is to do with ment policy which is not simply market failure, the way in which people interact with one but something much broader. So the use of the another, whether on a horizontal plane, as it market failure terminology in describing what were, across society or whether interactions are the East Asians were doing is really rather con­ channelled in a vertical linkage of patrimonial- fusing. To deal with market failures, there are

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 55 three major kinds: externalities (when prices capital-intensive industries like petro-chemicals, don't capture what really is going on), public ship repairs, etc. Ten years later, they say even goods, (something which has no price and there­ this is not enough, let us go for high-technology fore the government is forced to provide it), and electronics. There is no market failure involved. the regulation of monopoly (enforcing of com­ It is a question of strategy. Take Korea, which petitiveness). These are relatively trivial policy started with garments, and said we do not want issues. The policies which the East Asian coun­ to be in garments at all, we prefer to be in heavy tries adopted were not dealing with market industry. But unlike Singapore, which depended failures in this rather static sense. There were on multinationals, we want to build up our own elements which all governments were doing, and technology base. So, from garments they go into upsetting the rules of the game in the process, textiles, from textiles, they go into textile such as providing infrastructure. Yes, these were machinery, and from textile machinery they go addressing market failures in the trivial sense. into machinery making and electronics in But what they were doing was really quite differ­ general. We do not want to depend on multina­ ent. There are five points I wish to make on this. tionals, therefore, we have to create very large First, is that each of the four East Asian firms. We have to create a domestic technology dragons/tigers, adopted very different strategies base, we have to do research and development, which had nothing to do with addressing market etc. They were not addressing market failures. failures in the static sense. So we must talk about The same markets existed. They all started the government strategies to improve markets. They same way. Addressing different objectives - they were creating new markets, altering the struc­ were changing the whole structure within which tures of markets, creating new endowments and the economy operated. So that is the first point institutions within which markets functioned, - we are talking about industrial strategy and not and they were really changing the whole social market failures. structure within which the markets were operat­ Secondly, the most important point, is that ing. By no conceivable means can we, as each country had a very different strategy, as I economists, talk about this as a process of cor­ indicated. Hong Kong had a strategy of "laissez- recting market failures. faire"; it started with unique initial conditions, Let me give you an example: each of these took off, did very well for a while industrially countries started with a simple industry - the and then started declining. Hong Kong is most prominent being garments. Garments were presently undergoing the most massive de-indus­ the easiest industry to get into - with three trialisation of any of the tigers. Initially, the other months of training, a literate labour force and a economies' industries remain at 30-40 per cent of few technicians, a country can export garments GNP and continue to grow 7-10 per cent per efficiently in the world market. Once you start annum. Hong Kong's industry is growing at only doing this, is there a market failure involved? 1 or 2 per cent. Manufactured exports are declin­ Hong Kong says that the market has determined ing in real terms by 10 per cent per annum. In that we should be in a simple area of labour- contrast, Singapore, a much smaller economy intensive products like garments, leave it to the with much higher wages, has not suffered de- market and there we will stay. A smaller industrialisation. Its manufactured exports are economy, Singapore comes along and says no we growing at double digit figures. Unlike Hong do not want to be in garments at all. We see Kong, Singapore adopted free trade, combined that, ten years down the road, garments are going with massive interventions to attract foreign to be uncompetitive. It is a very easy industry to investment and to direct them into particular get into and therefore we should aim for some­ industries. Where foreign investment would not thing much more complex. Let us go for come in, the Government of Singapore created

56 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION public enterprises to act as a catalyst to foreign a domestic technology base requires consider­ investment inflows. Then you have Korea and able government intervention. Taiwan which went much further and limited I suppose the fifth lesson, which follows from foreign investment to very high-technology this, is that the NICs were not picking winners industries, and created other industries with but they were creating winners. They were not national enterprises. Very different strategies with addressing market failures in which the market very different implications - each for very differ­ has a mass of information which governments ent structures of industries, very different find it impossible to process. The neo-classical structures of exports and, in the long term, prob­ view that governments can never really be more ably very different propensities to continue efficient than markets, simply because there is growing at a high rate. Today, we find Hong Kong too much information around, is probably true in declining, Korea and Taiwan maintaining the a static sense. But when a country changes the highest rate of growth and Singapore nearly parameters within which markets operate, it does there. not face the same sort of problems. What these The third point relates to what the World countries were doing was guiding the economy Bank called functional or market-friendly inter­ into hi-tech, high skill industries (like electron­ ventions. The now admits that there ics), and they are doing it in a coherent fashion. is a role for governments but that they should be They were creating all the conditions which were non-selective - one should not pick winners. required for firms to become efficient. So it is Functional interventions are very important for not just protecting hi-tech industries. You offer a providing good infrastructure, good macro-eco­ bit of protection and you offset protection by nomic management, basic skills and so on. They forcing firms to export. In order for the firms to are necessary conditions for growth, but not suf­ export efficiently, you create a base of skills - ficient. Functional interventions by themselves these skills are not generic skills (high (like in Hong Kong) are not enough because you school/graduates) - they are very specific, tar­ get to a certain point beyond which your static geted skills in the particular industries that they comparative advantage runs out - simply creat­ were setting up. It is a very coherent, integrated ing skills is not enough. One then has to go in for strategy of making things happen. Its feasibility is much more selective promotional policy, either shown by the East Asian experience - whether it within a free market, like Singapore, or much is easy or not is very difficult to say. Picking more targeted and interventionist, like Korea or winners is wrong and is very difficult. Creating Taiwan. winners is difficult but it is possible; it is a nec­ The fourth lesson from the larger economies, essary part of the development strategy. So what like Korea and Taiwan, is that it becomes very does all this mean now for non-East Asian coun­ important to build a domestic technology base. tries, especially Sub-Saharan Africa? Large economies cannot be driven, like First, of course, past patterns of interventions Singapore, purely on the basis of foreign invest­ were wrong. There is no excuse for going back to ment. They have to start building a domestic old-fashioned import substitution with an enor­ technology base which, for a long time, means mous inward-looking public sector. Countries not innovating on the frontiers of technology. have to liberalise and they have to globalise. The The ability to diversify on the basis of imported content of liberalisation and globalisation are technology is a very different proposition to not very clear; there are many different ways to doing R & D. It is to use imported technology approach this argument objectively. To become effectively - to make VCRs, microwave ovens, efficient in world trade, implies growing rapidly colour televisions on the basis of technology with an expanding, efficient manufacturing innovated elsewhere. Needless to say, to develop sector. How do we do this? One set of prescrip-

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 57 tions is structural adjustment, a big bang opening become a Hong Kong. Hong Kong had very of the economy and letting markets do all the unique circumstances before it took off, even work. Based on the theory that markets are ulti­ with labour-intensive industry. What happens is mately very efficient and governments are that big bang liberalisation realises comparative basically very inefficient, you open and liberalise advantage, but it realises static comparative and you become an East Asian tiger. Experience advantage. It does not redo the process of does not bear this out in Latin America or Sub- dynamic growth. And the process of dynamic Saharan Africa. It is difficult to talk about Asia growth requires functional interventions, build­ because this region was never really liberalised in ing skills and so on, but it requires so much more. this fashion. The Asian pattern of liberalisation It requires economising on scarce resources - has always been a much more controlled pattern, marshalling the skills , technology and manage­ with a very large role for governments. ment in order to go into a few activities which I was looking at the case of Ghana which has have a chance of making it in the world market. the longest history of structural adjustment in The lesson that one draws from this is that Sub-Saharan Africa (about 8-12 years, depending liberalisation is necessary but in the process of when you date structural adjustment). It has the liberalisation one has to be selective. It is not a longest history of consistent structural adjust­ sudden opening up to market forces, because ment in Africa, they have devalued, privatised, market forces are very cruel; they can destroy a opened up foreign trade and they have done lot of industry which basically is viable. In addi­ everything by the book. What has been the tion, the realisation of comparative advantage is result? An initial burst of economic growth of 10­ very static and there are cases in Latin America ­2 per cent, while excess capacity was being used where, over a long term, comparative advantage up, and imports were coming in to feed existing had developed much more slowly than East Asia. capacity. Once competing imports start to be lib­ The story of East Asia is that governments com­ eralised and excess capacities are used up, the pressed and made dynamic the process much rate of growth goes down to 5 per cent. For the faster than market forces would. past five years, they have been growing at 1 to 2 The third lesson is that you must liberalise per cent. In per capita terms, there was a decline more gradually. But just slowing down the process in manufacturing growth. Is there a surge in man­ of liberalisation alone is not going to help ufacturing exports? Resources released from anyone. Simply protecting inefficient industries inefficient activities automatically seeking out for another 10 or 15 years is a total waste of efficient activities, going into labour-intensive natural resources. Liberalisation has to be geared products, as one would expect? No. The textiles to and integrated with the programme of build­ garment industry and the footwear industry were ing supply-side capabilities - building skills, devastated. In fact, every industry in which technology, institutions and whatever firms need Ghana should be following Hong Kong is declin­ in order to become efficient in whatever indus­ ing. The few manufactured exports which are try they happen to be in or the next stage of growing are resource based. These have always industrialisation. In short, there needs to be a existed, and show very little sign of dynamism. coherent strategy. Markets themselves will not Total manufactured exports from Ghana two produce the strategy. One is talking about com­ years ago were less than $15 million, it is not petitiveness but not competitiveness strategy in doing a tiger. Why? Because the government the way Michael Porter goes around advocating opened up very quickly without preparing indus­ to developing countries. Large numbers of com­ try to compete overseas. Even in a simple panies, like the Monitor Groups, are selling labour-intensive industry (like textiles and gar­ competitiveness packages to different developing ments), a lot of work is needed before you countries. Lots of business school jargon but not

58 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION much economic content in it because they do not they did. It is an enormous amount of work on have the economic analysis behind it. Where do the part of governments to understand what markets function, where do they not function, other governments did - information and, of what is the role for government in creating strat­ course, building skills, building the capabilities, egy? I think it is a very important area of work for insulating them from political influence, we all research on what develops competitiveness in know, but I think the basis of adjustment must be the context of liberalisation and globalisation. to build up government capabilities. The fourth point, the most important aspect The final point is how much scope is there left of adjustment, often neglected, is the building of for replicating the East Asian diverse strategy? I government capacity. Industrial capacity will not think Robert's paper touched on this but didn't come unless there is the capacity to design and really discuss it. The new emerging rules of the administer the right kinds of policies. Building game - the World Trade Organisation, Structural government capacity is partly the structural Adjustment, pressures from donors and so on - adjustment prescription of downsizing govern- are really narrowing very much the scope for ment and firing inefficient bureaucrats, but this industrial interventions as they were practised is the negative side. The positive side is that you 20 years ago, and much of it is very healthy. Of have to develop government capacity in terms of course, a lot of interventions were disastrous. But the information available in order to devise effec­ it is narrowing the scope compared with what tive policy. What did the East Asian actually do, Korea, Japan and Taiwan did and, to some how did they support their industries, how did extent, that is very undesirable. How much scope Taiwan with its nearly one million small to is there left? We are faced with this juggernaut of medium enterprises manage to get them into liberalisation rolling along and it is very difficult export markets at the frontiers of technology and to turn it back. I think on the whole, the effects keep them there? What kind of support was of liberalisation are more positive than negative. needed? Do we understand this? We know that But we have to retain some scope for interven­ Taiwan, for instance, had the world's most effec­ tions in trade, which is most hit by the rules of tive system of supporting small to medium the game. There is also lots of scope for domes­ enterprises. A lot of institutions provided capital, tic policy interventions. This is, again, an technology, training, skills, but we do not know important subject but I don't know enough about the details. I think there is an enormous amount it and I think a lot of work needs to be done. of work in terms of research to understand what

List of Participants

1 Ms Victoria Britain 5 Mr Adrian Hewitt 9 Mr Michael Prest The Guardian Newspaper Ltd Overseas Development Institute The Observer, The Guardian Newspaper London ECl London Ltd London ECl 2 Professor Robert Cassen 6 Dr Sanjaya Lall Research Professor in the Economics of Queen Elizabeth House, 10 Professor Ashwani Saith Development University of Oxford London School of Economics, Queen Elizabeth House, Oxford University of London 7 Mr Akhtar Mahmood University Visiting Fellow 11 Professor 3 Dr Anthony Courakis Clare Hall, Cambridge Queens College, University of Brasenose College, University of Oxford Cambridge 8 Mr Steven McLelland 4 Dr Ε V Κ Fitzgerald Adviser, Cabinet Office, 12 Mr David Suratgar Queen Elizabeth House, Oxford 70 Whitehall, London Deputy Chairman, Morgan Grenfell University SW1A 2AF London ECl

STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION 59 13 Professor John Toye, 8 Dr O A Ajayi 17 Mr Daniel Woolford Director, Institute of Development Special Adviser, Export & Industrial Temporary Public Affairs Officer, Studies, Sussex University Development Division Information & Public Affairs Division 14 Dr John Wells 9 Dr Raj Kumar 18 Datuk R Chander Faculty of Economics & Politics Special Adviser (Economic), Economic Consultant, ComSec University of Cambridge & Legal Advisory Services Division 19 Mr I R Thomas 10 Dr Chris Easter Assistant Director, Economic Affairs Assistant Director, (Agriculture and Division Rural Development), Economic Affairs 20 Mr Κ Β Κ Rao Division From the Secretariat Chief Economics Officer, Economic 11 Mr J B Allie Affairs Division 1 Sir Humphrey Maud Assistant Director, General Technical 21 Mr D L Dodhia Deputy Secretary-General, Assistance Services Division Economic and Social Affairs Chief Economics Officer, Economic 12 Mr Michael Gillibrand Affairs Division 2 Mr Nick Hare Adviser (Commercialisation), 22 Dr B Mukherjee Deputy Secretary-General, Management & Training Services Senior Economics Officer, Economic Development Co-operation Division Affairs Division 3 Mr S G Mole 13 Dr I Coomaraswamy 23 Mr Ivan Mbirimi Director, Secretary-General's Office Assistant Director, Private Office Senior Economics Officer, Economic 4 Ms Ε Stamiris 14 Dr Lucy Steward Affairs Division Director, Gender and Youth Affairs Chief Programme Officer, Education 24 Dr Ganeshan Wignaraja Division Department, Human Resource Senior Economics Officer, Economic Development Division 5 Mr Rumman Faruqi Affairs Division Director, Economic Affairs Division 15 Mr Guy Hewitt 6 Mr Μ A Fathers Senior Project Officer, Gender and Director, Information and Public Affairs Youth Affairs Division Division 16 Mr Asif Khan 7 Mr Richard Gold Co-ordinator of News & Features Director, Export and Industrial Services, Information & Public Affairs Development Division Division

60 STRATEGIES FOR GROWTH AND POVERTY ALLEVIATION