002005901cov 19/04/05 13:04 Page 1 DEVELOPMENT CENTRE POLICY BRIEFS OECD DEVELOPMENT CENTRE POLICY BRIEF No. 26 In its research activities, the Development Centre aims to identify and analyse problems the implications of which will be of concern in the near future to both member and non-member countries of POLICY COHERENCE TOWARDS EAST ASIA: the OECD. The conclusions represent a contribution to the search for policies to deal with the issues involved. DEVELOPMENT CHALLENGES FOR OECD COUNTRIES The Policy Briefs deliver the research findings in a concise and accessible way. This series, with its wide, targeted and rapid by distribution, is specifically intended for policy and decision makers in the fields concerned. K. Fukasaku, M. Kawai, M.G. Plummer Coherence issues drawn from specific country and regional cases and A. Trzeciak-Duval can provide the most concrete information on the development implications of OECD-country policies. A first regional case study focused on East Asia, with financial support from the Policy Research Institute of the Japanese Ministry of Finance. The links between the region’s developing and transition economies and OECD countries face at least five major challenges for promoting major OECD countries are strong, not only through the policies that are consistent with their development goals: international exchange of goods and services but also through international flows of capital, technology and labour. The East G ensuring security and political stability; Asian region is, therefore, of particular interest from the standpoint of the development impact of OECD-country policies. A central G question involves how different policy vectors transmitted by anticipating the impacts of their macroeconomic policies on OECD countries, notably in trade, investment and aid, may or may developing-country growth; not have contributed to the region’s progress. The intensity of such policy impacts has also depended critically on the capacity of East G increasing both market access and capacity building for Asian economies to respond through their own public policies. developing economies; This Brief sketches out the main story lines of what has happened to East Asia over the past decades, particularly since the mid- G supporting governance structures that help maintain financial 1980s, through the lens of OECD countries’ “policy coherence for development”. It also discusses key policy agendas for the region, stability; draws lessons for other developing regions and identifies major challenges ahead for policy coherence in OECD countries. G improving aid effectiveness. OECD DEVELOPMENT CENTRE 2, rue André-Pascal, 75775 Paris Cedex 16 France Tel.: +33 (0)1 45 24 82 00 Fax: +33 (0)1 44 30 61 49 www.oecd.org/dev POLICY BRIEF No. 26 Policy Coherence Towards East Asia: Development Challenges for OECD Countries by K. Fukasaku, M. Kawai, M.G. Plummer and A. Trzeciak-Duval ✒ THE OPINIONS EXPRESSED AND ARGUMENTS EMPLOYED IN THIS PUBLICATION ARE THE SOLE RESPONSIBILITY OF THE AUTHORS AND DO NOT NECESSARILY REFLECT THOSE OF THE OECD, ITS D EVELOPMENT C ENTRE OR OF THE GOVERNMENTS OF THEIR MEMBER COUNTRIES. © OECD 2005 Policy Coherence Towards East Asia: Development Challenges for OECD Countries Table of Contents Acknowledgements ................................................................................................................. 4 Introduction and Overview................................................................................................... 5 Revisiting East Asia’s Development Process..................................................................... 13 The East Asian Crisis and Beyond ...................................................................................... 23 Notes .......................................................................................................................................... 38 Bibliography .............................................................................................................................. 40 Other Titles in the Series ......................................................................................................44 3 OECD Development Centre Policy Brief No. 26 Acknowledgements The authors are grateful to Louka Katseli, Richard Pomfret and other seminar participants as well as Richard Carey, Paul Isenman, Shigeo Kashiwagi, Daisaku Kihara, Willi Leibfritz and Charles Pigott, for their helpful comments and suggestions. Special thanks are also extended to Bob Cornell, Colm Foy, Ulrich Hiemenz, Johannes Jütting and Helmut Reisen for revising the draft at a later stage. Financial support from the Government of Japan is gratefully acknowledged. The views expressed in this Brief are strictly personal and do not necessarily reflect those of the OECD, the Development Centre or their member countries. 4 Policy Coherence Towards East Asia: Development Challenges for OECD Countries Introduction and Overview The East Asian development experience needs to be better understood — especially the region’s clustered, sequential development process and neighbourhood effects linking economies at different levels of industrial development. How have different policy vectors transmitted by OECD countries, notably in the areas of trade, investment and aid, contributed to the development of the region? To what extent have the impacts of OECD-country policies depended on the capacity of East Asian economies to respond through their own public policies? Drawing upon Chapter 1 of the forthcoming publication (Fukasaku et al., 2005), this Brief sketches out the main story lines of what has happened to East Asia over the past decades, particularly since the mid-1980s, through the lens of OECD countries’ “policy coherence for development”. It also discusses key policy agendas for the region, draws lessons for other developing regions and identifies major challenges ahead for policy coherence in OECD countries. The Development Impact of OECD-Country Policies: A Case Study of East Asia The OECD 2002 Ministerial Meeting issued a statement on development, calling upon the OECD to “enhance understanding of the development dimensions of member country policies and their impact on developing countries”. The OECD has responded to this ministerial mandate by launching an OECD-wide programme on policy coherence for development (OECD, 2003c). The term “policy coherence” encompasses policy interactions at several levels. Internationally, coherence is needed among policies applied by different institutions as well as in the positions that countries take in them. At the national level, coherence refers to the consistency between objectives and instruments applied by individual OECD countries in a given policy area, such as development co-operation, as well as between objectives in different areas, such as aid and trade, in light of their combined effects on developing countries. Thus, the problem of policy incoherence for development arises when the objective of policy undertaken in a particular field — such as aid policy or transitional preferential arrangements — gets undermined or obstructed by actions of government in other policy fields — such as trade protection and agricultural subsidies. The OECD’s programme focuses on identifying such mismatches in specific policy contexts and suggesting action to ensure that 5 OECD Development Centre Policy Brief No. 26 OECD countries’ policies help promote or at least do not harm the economic interests of developing countries1. Furthermore, OECD work on this topic seeks to facilitate and support efforts of both OECD and developing countries to encourage the systematic promotion of mutually reinforcing policy actions, including aid, but extending beyond it. The types of OECD-country policy interactions that may affect development outcomes include, inter alia, those resulting from the interplay of policies in the fields of agriculture, trade, investment, migration and aid. Coherence issues drawn from specific country and regional cases can provide most concrete information on the development implications of OECD- country policies. A first regional case study focused on East Asia, with special reference to the region’s development experiences in the post-war years, especially since the mid-1980s. The links between the region’s developing and transition economies and major OECD countries are strong, not only through the international exchange of goods and services but also through international flows of capital, technology and labour. The East Asian region is, therefore, of particular interest from the standpoint of the development impact of OECD- country policies. Key Coherence Lessons from East Asia Several developing economies of East Asia simultaneously experienced major turnarounds in their clustered, sequential development process in the early 1970s and again in the mid-1980s (see the next section on this point). Behind this process, significant changes in the international economic environment indeed occurred. In macroeconomic policy, easy monetary policy among OECD countries in the 1970s led to low real interest rates, and the Asian NIEs (newly industrialising economies, i.e. Chinese Taipei; Hong Kong, China; Korea and Singapore) found it convenient to finance their strong investment demand by borrowing petrodollars recycled through banks in London and New York (Frankel and Roubini, 2003). Relocation of labour-intensive manufacturing among East Asian economies was also facilitated by successive rounds of real effective