Developing Countries

29
Technology, globalization, and international competitiveness:

Challenges for developing countries
Carl Dahlman*
1. Introduction
This paper traces the role of technology in economic growth and
competitiveness, summarizes the strategies of the fastest growing economies
over the last 5 years from the perspective of their technology strategy,
summarizes some of the !ey glo"al trends which are ma!ing it more difficult
for developing countries to replicate the fast growth e#perience of the
countries mentioned, and traces the impact of the rise of China on
developing countries$ The main argument of this paper is that technology is
an increasingly important element of glo"alisation and of competitiveness
and that the acceleration in the rate of technological change and the pre-
re%uisites necessary to participate effectively in glo"alisation are ma!ing it
more difficult for many developing countries to compete$
&ection 2 gives a long-term perspective on technology and
economic growth$ &ection ' presents a glo"al overview of changes in
regional competitiveness as revealed "y economic growth$ &ection (
identifies some of the high performers in the last 5 years and reviews the
strategies of the high performing )ast *sian economies comprising the
well !nown +gang of four,, plus three &outh )ast *sian countries$ &ection
5 reviews the strategies of the -./C0 countries, the largest developing
country economies 1-razil, .ussia, /ndia, China and 0e#ico2$ /t also
argues that it is harder for developing countries to replicate the success of
the high performing )ast *sian countries for two main reasons$ 3ne relates
to new elements in the glo"al competitive environment$ These are
summarized in section 4$ The other is the rapid rise of China 1and to a
lesser e#tent /ndia2$ This is covered in &ection 5, which also includes a
preliminary analysis of the effects of the rapid rise of China on the rest
of the world$ 6inally, &ection 7 draws some conclusions$ Developing
countries must develop more technological capa"ility and greater
fle#i"ility to succeed in the more demanding and asymmetric glo"al
environment$ /t is li!ely that the pressures of glo"alisation and greater inter-
national competition generate strong protectionist retrenchment in "oth
developed and developing countries$ These should "e resisted$ The world
as a whole will "e "etter off if developed countries focus on increasing their
fle#- i"ility to ad8ust to changing comparative advantage resulting from
rapid technical change, and developing countries focus on increasing their
education, infrastructure, and technological capa"ility$ There remain
however large asymmetries in the glo"al system and greater efforts need to
"e made to provide some glo"al "alancing and transfer mechanisms$
* 9eorgetown :niversity, )dmund *$ ;alsh &chool of 6oreign
&ervice$
' /ndustrial Development for the 2<st Century
2. Knoledge, technology, and groth in long!term perspective
2.1 "ong!term trends
3ne of the "est ways to see the role of !nowledge in development, which
is "oth so"ering and enlightening, is to ta!e a long historical perspective
on "oth the growth of population and the increase in average per capita
income 1figure <2$
<
6or the first <,( years of the past two millennia,
the glo"al population grew very slowly$
2
*lthough there were privileged
elites with much higher income during this period, average per capita
incomes hovered around =( 1in <99 international :& dollars2$ This
figure is so"ering in that it is roughly the same as that for today>s poorest
countries$ ?et some- thing remar!a"le "egan to happen around <5$
-oth the glo"al population and per capita income "egan to increase
simultaneously$ This shift was due to the convergence of many factors, in
particular@ "etter hygieneA the development of ingenious ways to
harness wind and water power to augment human and animal energyA
and advances in agricultural techni%ues such as irrigation, improved
seeds, and multiple cropping$ ;hat is even more remar!a"le, when
viewed from a long-term perspective, is how suddenly, even seemingly
e#ponentially, "oth population and per capita incomes "egan to rise from
the <7s onward$ This tremendous growth was in large part led "y the
development of the steam engine, where"y man!ind was first a"le to
harness fossil fuel energy for productive tas!s$ This augmentation of
power ena"led the industrial revolution with the corresponding
proliferation of productive activity and e#pansion in the range of
products and services "rought to mar!et$
*s a compounding factor, further improvements in agriculture
released a stream of la"our into the recently arisen and relatively more
productive industrial sectors$ &imultaneous with these demographic
changes and enhanced production technology, railroads and steamships
supported scale economies and provided new opportunities for
specialization and e#change$ /n the early nineteenth century, this "road
social and economic transformation set the course toward the advanced
standard of living which is today the hallmar! of developed countries$
These first "asic transformations were followed "y successive radical
inventions and corresponding institutional restructurings$ Consider, for
e#ample, the advent of electricity$ 0ore or less suddenly, power could "e
distri"uted in discrete units including into the home for powering
numerous la"our saving devices$ This technological change gradually
released women into the wor!force and increased output$ 3ther e#amples
include the following@ gas and then electric lighting increased the length
of the wor!ing dayA the development of the gasoline engine untethered
power from grids and led to more fle#i"le transportationA the telegraph,
and then the telephone reduced distance "y ma!ing it possi"le to
communicate and coordinate activities across space, enlarging mar!ets
and furthering opportunities for
'< Technology, 9lo"alization, and /nternational Competitiveness
specialization and e#change$ )ventually, the development of the
semiconduc- tor spawned the current information technology revolution
which ought to "e viewed as one more epochal innovation wave that
transforms the organization of economic and social activity$
'
*s such,
development strategy today must "e "ased upon the evolving productive
and developmental logic of information technology and !nowledge
economics$
.egretta"ly, the "enefits of all these many historical advances have
not "een e%ually spread$ 6rom the <5s onward, per capita incomes
diverged across countries and regions 1figure 22$ The "enefits of increased
per capita income concentrated first in )ngland which spawned the
industrial revolution, then spread to ;estern )urope, and soon thereafter
to the :nited &tates 1:&2$ -y the end of the <7s, the :& "egan to
overta!e )urope in many areas of industrial production$
Boo!ing at figure 2, it is natural to as!@ what accounts for the
dazzling performance of the :&C To a great e#tent, :& growth was
supported "y a large internal mar!et that allowed "roader e#ploitation of
transportation and communications advances starting with the railroad$
)m"racing these technologies "rought large cost reductions from
e#tensive economies of scale and scope$ The :& was also a land rich in
natural resources including naviga"le rivers, ara"le land, tim"er, and
minerals$ ?et, more important than these contri"uting factors, the
foundation of *merican economic growth was a fa"ric of institutions
and an economic incentive regime which supported entrepreneurship,
e#perimentation, and ris!-ta!ing$ * core e#pression of this orientation,
the :& may "e said to have invented the process of invention itselfD
when Thomas *lva )dison created the first industrial research and
development 1.ED2 la"oratory$ *fter )dison, the industrial .ED la"
was %uic!ly imitated "y many large :& companies$ -y <9 there were
more industrial research la"oratories in the :& than in )urope$
Citing .ED as the core element in :& economic growth may lead
some to thin! that the solution to une%ual economic growth is to create
more research capa"ility in the developing world$ ;hile this orientation
may help, the innovation needs of developing countries are "oth simpler and
more com- ple#@ simpler "ecause to a large e#tent developing countries can
attain increases in productivity "y ma!ing effective use of e#isting
!nowledgeA more com- ple#, "ecause the !ey re%uirements of technology-
driven development are not 8ust new !nowledge$
(
/n addition, development
re%uires education, pac!ages of technical s!ills, and a whole series of
institutions, networ!s and capa"ilities which ena"le the effective use of
e#isting !nowledge and must "e part of, or even precede, any serious effort
to create new !nowledge$ -ecause addressing these constraints is critical
for developing countries, the following sections offer greater detail on
different aspects of innovation in order to lay the groundwor! for
e#plaining the strategies of different countries over time$
'2 /ndustrial Development for the 2<st Century
2.2 Innovation in the conte#t of developing countries
/nnovation in the conte#t of developing countries is not so much a matter
of pushing "ac! the frontier of glo"al !nowledge, "ut more the challenge
of facilitating the first use of new technology in the domestic
conte#t$ /nnovations should "e considered "roadly as improved products,
processes, and "usiness or organizational models$ Development
strategists ought to thin! not only of .ED and the creation of !nowledge,
"ut also attend to the details of its ac%uisition, adaptation, dissemination,
and use in diversified local settings$ /t is useful to review what is involved in
each of these five activities as this ta#onomy will help structure the
analysis of the most appropriate policies, institutions and capa"ilities
necessary to increase innovation in the "road sense suggested here$
2.$ The creation, ac%uisition, adaptation, dissemination, and
use of &noledge in developing countries
The creation of !nowledge is the process of inventive activity$ /t is usually
the result of e#plicit research and development effort normally carried out "y
scientists and engineers$ The !ey institutions involved in the creation of
!nowledge are pu"lic .ED la"oratories, universities, and private .ED
centres$ Fowever, not all creation of !nowledge is the result of formal
.ED effort$ &ometimes inventions come from the e#perience of
production, or through informal trial and errorA sometimes they come
from serendipitous insight$ Gota"ly, the multiple origination of !nowledge
raises a measurement pro"lem "ecause not all .ED activity results in an
invention, and not all inventions come from formal .ED activity$
Gonetheless, various pro#ies are availa"le to trac! !nowledge, .ED effort,
and their interconnections$ *ccordingly, the most standard pro#ies will "e
applied as needed in the following discussion$
6or countries "ehind the technological frontier, acquisition of e#isting
!nowledge may "e e#pected to yield higher increases in productivity than
would flow from a similar scale investment in .ED or other efforts to push
"ac! the technological frontier$ There are many means of technology
transfer for private goods$ Direct foreign investment, licensing,
technical assistance, importation of technology as em"odied in capital
goods, components or products, copying and reverse engineering, and
foreign study are the !ey channels$ *lso, more generally, easy
communication allows access to technical information in printed or
electronic form, especially including what can "e accessed through the
internet$ Hroprietary technology is usually sold or transferred on a
contractual "asis$ -ut even proprietary technology may lea! out depending
on the strength of the /ntellectual Hroperty .ights 1/H.2 regime and its
enforcement, and the reverse engineering capacity of users$ Fowever,
despite significant proprietary constraints, much of the most useful
technology is in the pu"lic domain or is owned "y governments who
could potentially put it in the pu"lic domain$ *s such, the !ey challenges
for
'' Technology, 9lo"alization, and /nternational Competitiveness
development strategy are less a"out the creation and ac%uisition process and
more often related to the challenges of delivering technology and
!nowledge to those who need it$
Technologies often must undergo adaptation to "e applica"le in
specific local conditions$ This need is particularly clear in agriculture,
where new technologies such as hy"rid seeds are very sensitive to specific
local conditions$ To meet local needs, further research and
e#perimentation is often re%uired to adapt general agriculture solutions to
specific temperature, soil, and water conditions as well as local pests$ To a
lesser e#tent, even industrial technologies have to "e adapted to local
conditions@ access to raw materials, sources of power, la"our traditions,
various standards, and climate are 8ust some of the local idiosyncrasies
that leave their mar! on industry$ *nd yet, often the s!ills necessary to
adapt technologies to local conditions are not too dissimilar from those
necessary to create new technology$ &imilar to !nowledge creation,
adaptation also re%uires research and e#perimentation$
/n the private sector, the dissemination of !nowledge happens when
enterprises e#pand, sell, or transfer their !nowledge, or when other firms or
organizations imitate or replicate the !nowledge others have created$ The
efficient dissemination of !nowledge re%uires appropriate mechanisms to
educate potential users in the "enefits of the related technology, often a
process inclu- sive of "road educational advance, not 8ust the provision of
technical information$
5
0uch dissemination also occurs through the sale of
new machinery or other inputs that em"ody a new technology$ There are
also specialized institutions, such as agricultural research and e#tension
systems, productivity organizations, and consulting firms that specialize
in helping disseminate technologies$ These efforts usually involve e#plicit
training, demonstration pro8ects, or technical assistance on how to use the
technology$
To use new technologies usually re%uires literacy as well as
specialized training$ *lso, "eyond education, using new technology often
re%uires access to complementary inputs and supporting industries, and
access to finance for new e%uipment, inputs or purchase of the
technology license$ ;hen it involves starting a new "usiness, it is
important to have a supportive regulatory environment, namely one
without e#cessive red tape, "ut which at the same time has a strong rule of
law, respects private property, and facilitates the enforcement of
contracts$ *t the "roadest level, !nowledge use also re%uires
macroeconomic sta"ility and good governance$ /n short, it re%uires a well
developed economic and institutional regime$
Countries have followed different strategies in how they created,
ac%uired, adapted, disseminated or used !nowledge for their
development$ 0ost countries that are "ehind the glo"al technological
frontier can ta!e advantage of ac%uiring !nowledge that already e#ists
elsewhere in the world and adapting it for use in their local settings$ This is
most often done through trade and through formal technology transfer
agreements$ 6oreign technology owners are not always willing to license
'' Technology, 9lo"alization, and /nternational Competitiveness
their cutting edge technology$
'( /ndustrial Development for the 2<st Century
&ome countries e#plicitly try to attract foreign investors to "ring their
advanced foreign technology to their countries, while others do not$ /n addi-
tion, not all countries that have put in place foreign investment
promotion policies have met with success$ Countries have sometimes
preferred to develop their own technology, rather than to rely 1primarily2
on foreign technology$ &ections ( and 5 of the paper will trace the
strategies of the high performing countries and the largest developing
countries$ / will attempt to draw some conclusions on what wor!s under
what circumstances "efore consider- ing some of the new elements of glo"al
competition 1sections 4 and 52 which are affecting what may "e feasi"le in
the new, more demanding conte#t$
$. 'lobal overvie of changing competitiveness
-efore focusing on the strategies of the developing countries that have had
the highest rates of growth in the last 5 years, it is useful to have a
somewhat "roader perspective of the relative performance of different
regions$ 6igure ' presents the shares of glo"al 9DH accounted for "y the
two largest single economies as well as the )uropean :nion 1):2, plus
the developing world divided into the si# regions used "y the ;orld
-an!$
4
This is done using two different sets of data$ /n 6igure 'a,
nominal e#change rates are used$ /n 6igure '" purchasing power parity
1HHH2 e#change rates are used$
*s can "e seen in 6igure 'a, the share of the :& in glo"al value
added declined during the seventies and eighties as Iapan increased its
share$ The Iapanese economy e#perienced very fast growth in the first half
of the twentieth century "ased on copying and reverse engineering of
technology developed in the ;est$ This rapid growth was truncated
during the ;orld ;ar // and its direct aftermath, "ut resumed soon
thereafter, again, "ased on copying and reverse engineering of foreign
technology$ -y the second half of the twentieth century, Iapan innovated
many elements of what came to "e !nown as the Iapanese production
system, eventually "ecoming the fastest growing economy in the world$
Iapan has, however, not managed to recover fully from recession in the
early <99s$
The :&, on the other hand, had faster growth in the second half of
the nineties than the rest of the world and recovered most of its lost glo"al
9DH share "y 2$ The rapid growth of the :& in the last five years of
the twentieth century, at an average annual rate of 5 per cent, was
remar!a"le$ :ntil then, it had "een thought that countries at the frontier
could not grow so fast$ /ts rapid growth was attri"uted to investments in
information technology and organizational change which "egan to "e
made in the late <97s and early <99s when the country was trying to
!eep ahead of Iapan$ /t is note- worthy that the ): also lost glo"al 9DH
share, whether measured "y the original ): <5 countries, or the e#panded
):-25$
5
/n the developing world, the only region that continuously
increased its share of glo"al 9DH was )ast *sia$ *ll other regions lost
'( /ndustrial Development for the 2<st Century
glo"al 9DH share or at "est "arely maintained it$ The remar!a"le
growth of the )ast
'5 Technology, 9lo"alization, and /nternational Competitiveness
*sian developing countries can "e appreciated "etter when 9DH is
convert- ed using HHH e#change rates as in 6igure '"$ /n that figure it can
"e seen that the share of the )ast *sian developing countries surpasses that
of Iapan and "egins to appro#imate that of the :&$
(. Countries ith successful long!term groth
3nly a handful of countries have made the transition from +developing, to
+developed,$ Iapan did it in the first half of the last century$ The +gang
of four, 1Fong Jong, ChinaA .epu"lic of Jorea, &ingapore, and
Taiwan, Hrovince of China2 did it in the second half of last century$
/t is instructive to identify which countries have achieved high
growth performance over the last 5 years and to compare their strategies
and performance with that of the five largest developing countries 1the
-./C0s2$
7
Ta"le < presents the average annual rates of 9DH growth for all
countries that have grown at an average annual rate of 5 per cent or
more "etween
<945 and 2($ /t also includes the rates of growth for the last <( years
as well as the last ( years to see how they have done in the more recent
period$
3n the high performer side, there are a couple of surprises$ Ha!istan
has averaged annual growth a"ove 5 per cent for "oth parts of the
period, although its average growth rate has slowed over the last <( years$
/t is now also a special case given the geopolitical developments since
9K<<, and will not "e covered here$ -otswana is a special case due to its
diamond trade and also will not "e considered here$ The other high
performers are the familiar ones from )ast *sia$ The original *sian +gang
of four, 1see a"ove2 ma!e it to the group of high performers, in spite of the
<995 *sian crisis, which hit all of them hard$ Fong Jong, &ingapore, and
Taiwan, however, e#perienced a somewhat slower average rate of growth
for the last four years L a fact that may "e related to the rapid rise of
China$ Three of what are sometimes called the ne#t-tier *sian newly
industrialized countries 1G/Cs2 L /ndonesia, 0alaysia and Thailand L
also ma!e it$
9
China, which did not receive much attention as a high
performing country even at the "eginning of the <99s in spite of its trac!
record, has "een the "est long-term performer of all and will "e the central
focus of section 4 of this paper$
<
*mong the other -./C0s, the two Batin *merican countries
1-razil and 0e#ico2 grew at over 5 per cent annually in the first half of
the period$ /n contrast, they grew at less than ' per cent in the second half,
slower than the glo"al average, and have lost share in the glo"al economy$
<<
/ndia, on the other hand, which grew at an average of only '$' per cent in
the <945-<97 period, grew at 5$7 per cent in the <97-2( period$ /ts
growth has actually "een accelerating, and for 2'-25 it grew at 7
per cent annually$ .ussia went through a crisis and fragmentation with
severe contraction of 9DH during the transition, and even a significant
drop of life e#pectancy$ &ince <997, it has started to grow than!s to
massive oil and gas e#ports, with an average growth of 4$7 per cent for
2-2($
<2
The high performing )ast *sian economies plus the -./C0s account-
ed in 2( for 5 per cent of the world>s population, <5 per cent of its
gross national income 1'' per cent in HHH terms2, and 25 per cent of its
merchandise e#ports 1see ta"le 52$ 9iven that these <2 economies account
for 4 per cent of the developing world>s population, a"out 55 per cent
of its 9DH, and 9' per cent of its merchandise e#ports, it is %uite
instructive and relevant to e#amine in more detail the strategies of the
*sians compared to the non-*sian -./C0 countries that have not "een
performing as well$
<'
Ta"le 2 maps their strategies in terms of the e#tent to which they
have relied on foreign direct investment or their own .ED and the
e#tent to which they are inward or outward oriented$ *ll the successful
*sian countries have "een outward oriented in their trade strategy while the
non-)ast *sian countries have "een more inward oriented$ *n inward
orientation means that they have tended to protect the domestic mar!et
from outside competition and have also generally tried to develop their
own technology$ *n outward orientation does not necessarily mean low
tariff and non-tariff "arriers$ /t means that the countries have generally
"een open to outside ideas and have used e#ports as a way to put pressure
on domestic firms to improve their capa"ilities even while there may have
"een some degree of protection$ /t is also useful to distinguish "etween
countries that have "een relatively passive in their openness to foreign
direct investment 16D/2 and those that have "een more strategic in using
industrial policy e#tensively to induce 6D/ to develop "ac!ward lin!ages
and increase its contri"ution to the economy$
<(
This is 8ust a rough characterization of the "road strategies of these
countries$ *s will "e seen in the summaries "elow, there have "een
some changes over time$ Those changes are in themselves significant and
will "e pic!ed up again after this section, for they have implications for
what other countries will or will not "e a"le to do$ Ta"les ', ( and 5
provide some !ey indicators for the +gang of four,, the other high
performing *sian economies, and the -./C0 countries respectively$
<5
(.1 The first ave of high performing )ast *sian economies
<4
Republic of Korea: Autonomous technological development
Jorea>s strategy is close to that of Iapan$ Bi!e Iapan, it relied very little
on 6D/$ /nstead, initially it ac%uired a lot of its technology through trade,
copying, reverse engineering and technology licensing$
<5
;hen it "ecame
a competitive threat to the countries that were licensing technology, its
companies had to "egin to invest in .ED to develop their own
technology$
<7
The government had a strong role in industrial policy$ /t
used success in the e#port mar!et as the yardstic! "y which to measure
performance$ This also led to the creation of large industrial conglomerates
!nown as chae"ols$ These have "een part of the Jorean success story
"ecause they have had deep poc!ets to cross-su"sidize ris!y ventures in
new areas out of the profits of their more competitive +cash cows,$ /n
<945 Jorea spent only $5 per cent of its 9DH
on .ED and 7 per cent of the effort was underta!en "y the
government$ -y the mid <99s it was spending over 2 per cent of 9DH,
more than 5 per cent of which was accounted for "y the private sector,
primarily the chae- "ols, who were having trou"le o"taining licenses from
foreign competitors$ /t was only after the <995 financial crisis that Jorea
opened up to foreign investment to get foreign e#change into the economy
from the sale of failed companies, "ut also to get access to more advanced
foreign technology and to put pressure on domestic firms to perform
"etter$
<9
)ven so, as can "e seen from Ta"le ', among the +gang of four,
Jorea has relied the least on 6D/$ 3n the other hand, Jorea invests the
most in .ED and in higher education$ /t has one of the highest tertiary
enrolment rates in the world$
Hong Kong: Laissez-faire development
Fong Jong, at the other e#treme, is a laissez-faire economy with
complete integration into the glo"al trading system$ *long with &ingapore,
it is one of the countries most dependent on trade and 6D/ for access to
!nowledge$ The share of trade to 9DH is over ' per cent in "oth, and the
average share of 6D/ to 9DH has "een over 2 per cent also in "oth$
3ne of the special aspects of Fong Jong is that it has served as the
gateway for "usiness with China$ -esides "eing a critical entrepot for
China trade, Fong Jong was %uic! to outsource la"our-intensive
manufacturing activity to mainland China$ /t also developed e#tensive
lin!s with foreign "uyers and "ecame a transportation and logistics centre
for trade in the region$
2
-eing the gateway to China also gave it a
special and privileged position in "ecoming a financial and service centre$
*mong the +gang of four,, Fong Jong also used to "e the one with the
wea!est education "ase$ Fong Jong had the addition- al constraint of some
uncertainty when it reverted "ac! to China in <999$ /n addition, it has
"een facing competition from &hanghai as part of China>s e#plicit strategy
to support &hanghai after <99$ *s a result, in the <99s the local
government "egan to engage in more pro-active policy-ma!ing, "eginning
to invest more in .ED, higher education and infrastructure 1e$g$ infor-
mation and communications technology L /CT L infrastructure and the new
airport2$ Gevertheless, Fong Jong still lags on these counts vis-M-vis the
other three economies$
Singapore: Strategic use of foreign
investment
&ingapore also had an open trade regime and depended very much on 6D/
for its technology$ /t had however a much stronger and activist
government role than Fong Jong$ ;hile generally wor!ing with mar!et
principles, the government was heavily involved in attracting the !ind of
foreign investment which it thought would contri"ute the most to
economic development$ The development story of &ingapore is one of
moving %uic!ly from cheap uns!illed la"our to "ecoming a !nowledge-
"ased economy$ /n the mid
<94s, after independence from the :J, it "riefly entered a federation
with
0alaysia$ ;hen that failed, Hrime 0inister Bee Jwan ?ew opted for
attracting outward oriented foreign investment "ased on cheap and
disciplined la"our$ &ingapore attracted foreign investment when most
other countries 1li!e /ndia2 were shunning it$ ;age rates rose rapidly as
the foreign firms came in$ The government therefore invested heavily in
secondary and technical tertiary education and in upgrading the s!ills of
&ingaporean wor!ers in order to remain competitive$
6urthermore, it invested very heavily in developing a port and airport in
order to "ecome an efficient transhipment point for trade "etween &outh
)ast *sia, )urope and the :&$ /n the <99s, it invested heavily in /CT to
improve trade logistics and further reduce transactions costs$
2<
-y the end of
the <99s, the government also "egan to invest more in .ED and to
position &ingapore as a ma8or educational hu" for *sia$ /t has now
"ecome an important regional hu" for finance, education, and regional
corporate head- %uarters for multinational corporations 10GCs2, and for
medicine L all !nowledge-"ased services$
22
Taian !"rovince of #hina$: State-directed technological development
Taiwan was somewhat in "etween the strong industrial policy approach
of Jorea and the more open trade "ut still government-directed
approach of &ingapore$ Three special characteristics of Taiwan that are
important to understanding its success are the role of the state, the
Chinese diaspora, and the structure of industry$ 6irst, the government has
had a strong role in its economic development$ /n the <95s the !ey
development strategy was import su"stitution under high tariff walls$ The
<94s saw a switch to e#port orientation$ /n the period up to <99, the
government had a very active role in the economy$ /t made e#tensive use
of tariff and non-tariff "arriers and selective credit to favour specific
sectors and to develop new industries$
2'
/n addition, the government was
very strategic toward the use of 6D/ and actively encouraged the
development of "ac!ward lin!ages and technology transfer$
2(
6urthermore, the government set up special industrial par!s, including
the Fsinchu &cience -ased /ndustrial Har! in the vicinity of universities
and a large pu"lic research institute to stimulate technology development
and the creation of new high technology enterprises$
&econd, Taiwan has drawn very successfully on the large Chinese
diaspora wor!ing in the high-tech industry around the world$ The
government developed various mechanisms such as wise men councils and
periodic meet- ings to draw on the advice of this diaspora$ /t has also
actively sought to attract "ac! some of its nationals with high tech
e#perience$ * good e#ample of its strong industrial policy as well as the
lin! to the diaspora was the development of the science "ased industrial
par! of Fsinchu and the /ndustrial Technology .esearch /nstitute$ This
involved a strong role of government in developing the electronics
industry and in attracting nationals "ac! to Taiwan$
25
This was very
successful in moving its electronics industry
from simple assem"ly of electronic products, often for foreign companies, to
developing its own chip ma!ing capa"ility, and "ecoming an important
own "rand player in the glo"al industry$
* third special characteristic of Taiwan is that, unli!e Jorea, its
industrial sector has "een made up primarily of small and medium-sized
firms, rather than large chae"ols with deep poc!ets to cross-su"sidize ris!y
ventures$ The government has thus developed a strong supportive
technological infrastructure such as technical information services and
specialized pu"lic research institutes$ /t also developed special programs to
create technological lin!ages "etween foreign firms and small domestic
suppliers$ *s Taiwan>s own wages rose, it offshored la"our-intensive
assem"ly industry to China, especially in &henzhen and 9uangdong$ /t !ept
its high-tech industry home$ Fowever, as China deepened its trade
reforms and maintained rapid growth, and clearly "ecame a dominant
economy, Taiwanese investors started to transfer their high-tech
manufacturing to the Chinese mainland$ There are now +little Taipeis,
all along the Chinese coast$
(.2 +trategies of the second ave of high performing )ast *sian
economies
The second group of high performing )ast *sian economies 1/ndonesia,
0alaysia, and Thailand2 has "een more similar in their industrial and tech-
nological strategy$ Nietnam has "een added to this group, although it
only achieved annual growth rates a"ove 5 per cent in the <97-2(
period, "ecause it is following in the footsteps of these other countries,
al"eit from a lower human capital and institutional "ase as a transition
country to a mar- !et economy 1see ta"le (2$ They have all "een e#port
oriented, although 0alaysia, Thailand and Nietnam more so than
/ndonesia 1the share of trade to 9DH has "een over < per cent for all "ut
/ndonesia2$ The first three also have had higher investment to 9DH rates
than /ndonesia$ /n all of them 6D/ played a critical role in e#port growth,
in 0alaysia and Thailand more so than in the others$ 0alaysia and
Thailand are also more advanced than /ndonesia and Nietnam in
investments in .ED and in education, particularly tertiary education$
0alaysia is the most industrialized of the four and has the highest share of
manufactured e#ports as well as the most technology-intensive
manufactured e#ports$ They were all negatively affected "y the *sian
financial crisis in <995 1Nietnam least of all2, "ut have recovered$
/ndonesia averaged growth of ($7 per cent per annum from <97 to 2(,
and 0alaysia and Thailand have grown a"ove 4 per cent per annum$
Nietnam, meanwhile, has "een steadily increasing its average growth rate
since the *sian financial crisis$
( /ndustrial Development for the 2<st Century
,. +trategies of the -.IC/ countries
-efore summarizing the strategies of /ndia and China, "oth of which merit
more in-depth treatment, it is instructive to contrast the strategy or the )ast
*sian G/Cs with those of the three -./C0 countries that have not per-
formed wellD-razil, 0e#ico, and .ussia$ 3n the face of it, these three
countries should have "een e#pected to perform "etter$ *ll three are
large economies, have a critical mass of trained professionals, and
significant investments in .ED L though more so in .ussia, and to some
e#tent -razil, than in 0e#ico$ *ll have also achieved islands of
technological e#cellence such as nuclear, space and aeronautics and deep
oil e#ploration in -razilA petroleum, glass, steel and cement in 0e#icoA
and military and space technology in .ussia$ Fowever, these islands of
e#cellence have not permeated the economies "ut remain enclaves rather
than the precursors of more general innovation capa"ility$
,.1 -razil: +till mostly a primary commodities e#porter in spite
of decades of government .01 effort
The -razilian government has "een focusing on science and technology for
more than four decades$ The military government of the <94s saw techno-
logical capa"ility as a strategic element and promoted investment in .ED
and higher education institutions$ Bi!e /ndia, it developed a large
nuclear program$ /n addition, it has developed a strong space and
aeronautics program$ 3ne island of e#cellence has "een )m"raer, now
the world>s third largest producer of aircraft, which was "orn as a spin-off
of the aeronautics research institute$ -razil has also attracted 6D/ and has
"een second only to China in attracting the most volume among
developing countries$ Fowever, -razilian industry has not "een very
competitive in general$ There are three !ey factors for this$ 3ne is that,
along with /ndia, -razil is one of the most inward oriented of the large
developing countries$ /t has thought of itself as a continental economy that
could "e nearly self-sufficient in almost everything$ The share of trade in
9DH is only ' per cent and it also has high tariff and non-tariff "arriers
1Ta"le 52$
Thus its domestic industry has not "een su"8ected to pressures from
international competition as much as the )ast *sian economies covered
a"ove$ This has also meant that a lot of the foreign investment that came
to -razil has "een oriented towards the protected internal mar!et rather
than towards using -razil as an e#port platform as was the case for the
*sian economies$ *s a result, together with /ndia, -razil has among the
lowest ratios of manufactured e#ports to 9DH and the lowest shares of
high technology e#ports in manufactured e#ports$ &econd, -razil has had
much more macroeconomic insta"ility$ 6or firms, financial engineering
has thus "een more important than focusing on industrial engineering
and developing a strong technological capa"ility to e#port$ Third, -razil has
very high costs of
(< Technology, 9lo"alization, and /nternational Competitiveness
capital, high direct and indirect ta#es, and high indirect la"our costs as a
result of high ta#es on la"our and rigidities in the la"our mar!et$ *s a
result, -razil has a very large informal economy 1estimated "y some at (
per cent2 and is not very competitive in manufactured e#ports$
* "right spot for -razil, however, has "een agricultural and mineral
e#ports$ /n cereal production -razil has high productivity "ecause of good
land and climatic conditions as well as successful agricultural research and
e#tension programs "y the 6ederal and some of the state governments$
-razil is also rich in many mineral resources with strong -razilian
companies such as CN.D 1minerals2, Hetro"ras 1petroleum2, and
9erdau 1steel2$
24
*gricultural and mineral e#ports have "een growing very rapidly, mainly
to feed China>s increased demand$ These natural resource driven e#ports
have "een important in raising -razil>s overall rate of growth in spite of
continued competitive pro"lems in its industrial sector$
,.2 /e#ico: 2alling behind in spite of being ne#t to the 3nited
+tates
0e#ico>s e#perience is similar to -razil>s in many respects$ Fowever, it has
"een much more integrated into the glo"al mar!et through trade$ The share
of trade in 9DH is nearly dou"le that of -razil$ Hart of this used to "e
petroleum e#ports, "ut 0e#ico also diversified into manufactured e#ports$
This occurred initially through foreign investment in the +ma%uila, "order
assem"ly industry$ &pecial provisions in the :& tariff code L which imposed
import duty only on foreign value-added when certain types of good were
e#ported for assem"ly and re-imported L stimulated the growth of electronics
assem"ly plants in 0e#ico$ ;hen 0e#ico 8oined G*6T* 1Gorth
*merican 6ree Trade *greement2 in
<99(, however, much of the advantage of this special import regime
disap- peared$ *t the same time, many firms found it more attractive to
move their la"our-intensive industries to China$ G*6T* did, however,
"ring in more 6D/ focused on the :& mar!et and manufactured e#ports
have increased$ The share of manufactured e#ports in merchandise e#ports
increased from (' per cent to 7 per cent "etween <99 and 2($
Gevertheless, 0e#ico was overta!en "y China two years ago as the second
largest e#porter to the :&$
0e#ico has "een losing competitiveness "ecause of high transportation
costs, electricity and other infrastructure costs, as well as the relatively
low level of education of its la"our force$ :nli!e the *sian high performers,
it was not a"le to develop strong "ac!ward lin!ages from most of the
foreign firms, particularly those in the ma%uila sector$
25
0e#ico has
spawned some large competitive domestic companies such as *mOrica
0Pvil 1cellular telephone service provider2, C)0)Q 1cement2, 6)0&*
and 9.:0* 1food and "ev- erages2, 0odelo 1"eer2, and Gema! 1auto
engine cylinder heads2, "ut most of them are e#panding more a"road than
in 0e#ico "ecause of the difficult domestic conditions$
(2 /ndustrial Development for the 2<st Century
0e#ico has invested much less than -razil in .ED, as can "e seen
"y the very low e#penditures on .ED as a share of 9DH 18ust $( per
cent of 9DH vs$ <$ per cent in -razil2$
,.$ .ussia: -ecoming a petro!economy ith poor industrial
competitiveness
*s is well !nown, .ussia was a scientific and technological super-
power$ ;ith the economic crisis that followed the collapse of the &oviet
:nion in
<99<, however, the scientific and technological support infrastructure suf-
fered significant contraction$ 0any of the former mechanisms for transfer-
ring research output to production collapsed$ /n addition, as .ussian indus-
try was very outmoded, if not o"solete, and not geared up for
competitive industrial production, there was also a significant contraction
of the industrial "ase$ 6urthermore, most firms turned to import of
technology, capital goods, and components rather than to the domestic
scientific community or research la"s for technology$ *s a result, .ussia
produces much "asic science "ut few commercial applications$ .ussia has
not "een a"le to attract much 6D/ e#cept to its oil and gas sector$ Hart of
the reason it has not "een successful is foreign investors> frustrations
with "ureaucracy and corruption as well as with a perceived lac! of
security of property rights in light of recent e#perience, e$g$, with the re-
nationalization of ?u!os$
:ntil recently .ussia was also not very well integrated into glo"al trade$
;ith the high international prices for oil and gas, .ussia is now growing
"y e#ploiting its large natural gas and petroleum reserves$ This is a very
un"al- anced growth, however, and .ussia is in effect de-industrializing as
the large foreign e#change inflows are generating Dutch disease effects$
Nirtually everything other than natural resources 1and armaments2 is
losing competitiveness$ /n 2(, only 2' per cent of its e#ports were
manufactured products and the share of manufacturing in total output
has "een falling too$
The .ussian economy is a cautionary tale of the importance of an
effective economic and institutional regime$ Faving a highly educated
population and a strong scientific and technological capa"ility without an
effective economic and institutional regime has meant that .ussia>s strong
!nowledge assets have not "een well deployed to increase economic growth
and competitiveness$
,.( India: Cautiously beginning to integrate into the global
trade system
*fter independence from -ritain in <9(5, /ndia em"ar!ed on its own
development strategy$ *s a reaction to what was considered an
e#ploitative colo- nial e#perience, the government developed a very
autar!ic, inward oriented strategy$ The main elements of that strategy were
import su"stitution, a large pu"lic sector with central planning, strong
intervention in la"our and capi-
(' Technology, 9lo"alization, and /nternational Competitiveness
tal mar!ets, and over-regulation of "usiness, including the reservation
of
<,5 items for production "y small-scale
industry$
There were also very strong restrictions on 6D/ and on the licensing of
foreign technology$ During this period, technology policy focused very
much on self reliance$
27
The /ndian economy grew very slowly "etween
<95 and
<97 at what "ecame !nown derisively as the +Findu rate of growth, of
2 per cent to ' per cent per annum in contrast to rates of growth of 5 per
cent to < per cent for many other *sian economies$ Fowever, one of the
great successes of this period was the green revolution$ The pu"lic
agricultural research efforts of /ndian institutions wor!ing with other
pu"lic research institutions worldwide led to significant improvement in
wheat varieties with higher productivity$ The dissemination and use of
these new improved varieties turned /ndia from a grain importing
country with periodic famines into a net agricultural e#porter$
The <97s saw the introduction of pro-"usiness reforms initiated "y
/ndira 9andhi and later carried out "y .a8iv 9andhi$ These included
easing restrictions on capacity e#pansion "y large firms, removal of many
price con- trols, and the reduction of corporate ta#es$ These were followed
in <99< "y a more significant li"eralization of the economy as a result of
severe "alance of payments crisis$ These reforms included li"eralizing
imports, reducing investment licensing, privatizing some state-owned
enterprises, allowing automatic approval of 6D/ in some sectors, and
reducing the num"er of products reserved for small-scale industry$
29
The impact of this li"eralization on the economy and on science and
technology policy was significant$ The average rate of growth for the econo-
my 8umped to 4$ per cent for <99-2$ 6irms which had not had to
worry much a"out efficiency in a protected and over-regulated domestic
mar!et suddenly wo!e up to the need to improve their products and
services and to reduce their costs$ &ome parts of the pu"lic research
infrastructure responded to the change in the overall incentive regime$
'
The impact of growing competitive pressure was also reflected in an
increase in the num"er of private firms doing .ED and in the increase in
their .ED relative to sales$
*s part of the conditions for 8oining the ;T3 in <995, /ndia agreed to
"ring its intellectual property legislation into conformity with developed
country standards$ This was done through a series of amendments in <999
and 25$ The opening up of foreign investment also "rought stronger com-
petitors into the domestic mar!et$
&ince 2, /ndia is showing greater participation in the glo"al
arena$ -etween 2 and 2( the /ndian economy achieved an average
annual growth rate of 4$2 per cent, and since 2' it has actually "een
growing at 7 per cent$ /ndia>s engineering talent "egan to "e recognized
glo"ally than!s to the reputation its software engineers ac%uired in fi#ing the
+?2J "ug,$ This launched its e#pansion into software services and "usiness
(' Technology, 9lo"alization, and /nternational Competitiveness
process outsourc-
(( /ndustrial Development for the 2<st Century
ing 1-H32 glo"ally$ /n addition, in the last five years an increasing num"er
of 0GCs are not only producing in /ndia, "ut setting up their own .ED
centres in the country, attracted largely "y the relatively low cost and high
level of human capital availa"le locally, as well as the possi"ility of
wor!ing round the cloc! with their other research centres than!s to digital
networ!s$ The result of this increased .ED investment "y 0GCs in
/ndia as well as some increased .ED investment "y domestic firms has
led to an estimated increase in .ED from an average of a"out $7 per cent
of 9DH for the 2 years up to 2' to as much as <$< per cent of 9DH in
25$
'<
,., China: )mbracing globalisation
There have "een many "uilding "loc!s to China>s innovation strategy$
'2
The first was massive importation of turn!ey plants, mostly in heavy
industry, from the &oviet :nion in the <95s as part of its initial
industrialization drive$ This ended with the 9reat Beap forward in <957
when China went on a more autar!ic technological development strategy
1+a furnace in every "ac! yard,2 and the Cultural .evolution of the <94s$
This was a period of tur- moil and relative stagnation$ /n the early <95s,
Rhou )nlai proposed the +four modernizations, 1agriculture, industry,
science and the military2$ This led again to massive importation of
technology, primarily from the ;est and Iapan$ Deng Qiaoping>s decision
to give farmers more autonomy over their production L the rural
household responsi"ility system L was another mile- stone in China>s
reforms$ This led to a strong increase in agricultural productivity$ These
reforms were eventually applied to the industrial sector, freeing enterprises
to ma!e more of their own decisions and to en8oy the rewards of good
ones$ The effect of these changes was to create a strong incentive for
finding "etter and more efficient ways to produce$ * third initiative,
very important for the rural sectors, was the &par! program which aimed to
speed the dissemination of agricultural technology$ This was
su"se%uently rein- forced with the Torch Hrogram aimed at disseminating
more advanced technologies throughout the economy$ * fourth measure
was to create enclaves open to 6D/ with a near free trade regime in special
economic zones 1&)Rs2$ /nitially only a few were set up as pilot
e#periments$ These performed very well, so the government e#panded
them gradually$ ;hen China decided to 8oin the ;T3 in <995, these
were effectively e#panded to the whole economy$ -esides the &)Rs,
e#plicit measures were underta!en during the <97s and <99s to li"eralize
6D/ rules$
Thus, China has "een very effective at "oth disseminating
!nowledge domestically and tapping into glo"al !nowledge through
trade and 6D/$ *mong the large economies, China is the most integrated
through trade$ The share of merchandise and services trade in 9DH in 2(
was 45 per cent$ /n addition, China has "ecome the second largest host
to 6D/$ The share of 6D/ inflows to 9DH increased to 5 per cent at its
pea! and has averaged 5$< per cent for the last < years$
(5 Technology, 9lo"alization, and /nternational Competitiveness
China is now engaged in a ma8or strategy to strengthen its own
innovation$ /n <997 it was investing 8ust $5 per cent of 9DH in .ED$
*round
22-2', however, it decided to put more emphasis on own innovation$
-etween 2' and 2(, China increased its investments in .ED "y 5 per
cent and "y 25 it was investing <$( per cent of 9DH$ 6or the new
five- year plan China announced in Decem"er 25 that it would "e
increasing its .ED e#penditures to 2$ per cent of 9DH "y 2< and to
2$5 per cent 1the average for developed countries2 "y 225$
''
To put this in
a glo"al conte#t, figure ( presents .ED e#penditures of the largest
spending countries in HHH terms$ The circles correspond to the a"solute
value "eing spent, the hor- izontal a#is gives its share of 9DH, and the
vertical a#is shows the num"er of scientists and engineers in .ED per
million people$ *ccording to the 3)CD>s latest &cience, Technology
and /ndustry 3utloo!, in 2( China was the third largest national
spender on .ED, "ut given it rapidly increasing e#penditures, it
pro"a"ly overtoo! Iapan "y the end of 24$ Fowever, it is still not as
efficient in .ED as developed countries$
Thus, China has followed a five pronged strategy$ 3ne prong was
to import a massive num"er of turn!ey plants, first from the &oviet :nion,
then turn!ey plants and capital goods from the ;est$ * second has "een to
copy, reverse engineer and otherwise "orrow as much foreign technology as
possi- "le$ Bi!e Iapan, and Jorea earlier, this has "een facilitated "y
investments in human capital$ * third has "een to disseminate !nowledge
internally$ The fourth was to tap foreign !nowledge through trade and
through 6D/$ Gow that it is catching up in many sectors and that it is "eing
seen as a ma8or com- petitor, the fifth prong consists in "eginning to
innovate on its own account "y increasing investments in .ED$
,.4 Conclusion
This section has traced the strategies of the successful high performing
economies and contrasted them with those of -razil, 0e#ico, and
.ussia which have not "een performing as well$ 6rom the comparisons it
may "e inferred that the !ey elements of the successful strategies of
the *sian economies have "een a strong outward orientation, heavy use
of foreign !nowledge 1including copying and reverse engineering and
otherwise appro- priating foreign !nowledge2, macroeconomic sta"ility, high
investment rates, and an economic incentive and institutional regime that
demands improved performance$ *ll of them e#cept Jorea and /ndia made
e#tensive use of 6D/ as a way to ac%uire foreign !nowledge and to penetrate
e#port mar!ets$ Jorea opted not to rely on 6D/, "ut to ac%uire
!nowledge through trade, and reverse engineering, and to invest
su"stantially in its own .ED$ /t also invested massively in secondary
and then tertiary education$ These high levels of education facilitated its
assimilation of foreign technology and the development of its own
technological capa"ility, including its large investments in .ED$ /ndia,
which also opted to limit 6D/ until the last <5 years,
followed a more autar!ic strategy than Jorea, as it did not rely much on
ac%uiring foreign !nowledge through trade$ :nli!e Jorea, however it
did not e#pand significantly its own .ED investments, nor did it invest
much in e#panding secondary and tertiary education$ That is one of the
reasons why its performance until the opening up in the <99s was so
poor$ *fter
<99<, as it drew more on foreign !nowledge, its economic growth
improved and eventually accelerated to over 7 per cent for the last three
years$
-razil and 0e#ico did get 6D/, "ut much of it came for the protected
domestic mar!ets$ *lso, these countries did not ma!e as massive
investments in .ED and education as Jorea$ .ussia did invest a lot in
.ED, "ut most of it was focused on military o"8ectives$ /ts commercial
industrial technology was generally %uite poor$ )ngagement with the
glo"al system through trade was limited, and this in turn limited
!nowledge ac%uisition and spillovers$ /t also had a poor economic and
institutional regime which did not allocate resources to the most productive
uses, leading to poor competitive performance$ /ts recent growth
performance is "ased on natural resource rents rather than on technological
capa"ility$
Thus it appears that a common strategy for most of the high
performers was to start with la"our intensive e#ports and to gradually move
up to more sophisticated products$
Fowever, the simpler la"our-intensive outward oriented strategies that
wor!ed in the past are no longer as easy to replicate for two reasons$ 3ne
is that the glo"al conte#t has changed significantly$ &ome of these new
trends and their implications for developing countries are developed in
&ection 4$ The second is the speed, scale and scope of China>s entry onto
the glo"al stage$ /t is pre-empting the simple la"our-intensive growth
strategy "ecause its advantages are not only low cost "ut also very
productive la"our, as well as economies of scale in transportation and
logistics$ /t is also moving up the technology ladder very %uic!ly, and is
fully plugged into international value chains and distri"ution systems$ The
implications of China>s rise for other countries will "e covered in &ection
5$
4. Key global trends
The !ey glo"al trends that are changing the glo"al competitive conte#t and
therefore the possi"ilities for developing countries include@ increasing
speed in the creation and dissemination of !nowledgeA trade li"eralization,
glo"alisation, and physical disintegration of productionA increased
importance of integrated value chainsA increased role of 0GCs in
production and distri"u- tionA and changing elements of competition$
'(
4.1 Increasing speed in creation and dissemination of
&noledge
*dvances in science, com"ined with the information revolution 1itself a
product of these advances2, are driving an acceleration in the creation and
dissemination of !nowledge$ /t is now possi"le to codify and digitize much
of our understanding of science$ This permits modelling and simulation,
which in turn further speeds up the understanding of science and the cre-
ation of new goods and services$ The time "etween "asic scientific discovery
and commercial application is decreasing$ This is particularly evident in
"iotechnology$ The product life cycle of most manufactured products is
also shrin!ing$ This is evident in the electronic products industry, ranging
from computers and mo"ile phones to consumer electronics$
'5
The increased importance of new technology can "e seen in the
increasing variety of goods and services produced$ This can "e appreciated in
the increasing importance of manufactured products and services in trade$
6or the world as whole, the share of manufactured products in trade has
increased from 57 per cent in <945 to 45 per cent in <97, 5' per cent in
<99 and 55 per cent in 2($ This is partly "ecause the demand for
manufactured products is more income-elastic than for primary
commodities$ Developing countries that do not have the capa"ility to
move into production of manufactured products therefore lose out on the
possi"ility of "enefiting from the most dynamic part of merchandise trade$
/n addition, the technological intensity of trade in manufactured goods is
increasing$ This can "e seen in trade among 3)CD countries, which
accounts for appro#imately two-thirds of world trade$ 6or their trade in
manufactures, which accounts for the "ul! of their e#ports, over the last ten
years the share of medium and high technology manufactured e#ports has
increased from 59$7 per cent in <99( to 4( per cent in 2' 1figure 52$
The implication of the speed-up in the creation and dissemination of
!nowledge is that developing countries need to find effective ways of tapping
into the very rapidly growing stoc! of glo"al !nowledge$ Those that are
more advanced also have to invest more in their own .ED in order to
compete with new frontier technological advances$
4.2 Trade liberalization
&ince the 9*TT there has "een a trend towards increasing li"eralization
in trade policy among most countries$ /n developing countries, average
tariff levels have fallen from '($( per cent in <97-7' to <2$4 per cent in
2-
2<A in developed countries they have fallen from 7$2 per cent in <979-92
to ($ per cent in 2$
'4
/n addition, non-tariff "arriers have fallen$ There
is also a movement towards greater openness in trade in services,
including not only financial and "usiness services, "ut also education$
'5
;e
are moving closer to free trade in manufactured products, "ut the same
does not apply to agriculture$ ;hile movement of capital is increasingly
free, this is not generally the case for la"our, where international mo"ility
has "een concentrated among the highly s!illed, for which some
advanced countries have created special temporary immigration visas,
particularly for information technology specialists$
0any services areas that were once considered non-trada"le have
now "ecome trada"le to the e#tent that they can "e digitized and
provided remotely, across national "oundaries, through the internet$ Thus
we are moving to a system of freer trade which is "ringing increasing
competitive pressure to domestic mar!ets the world over$
*t the same time, there has "een a strengthening in the rules and
regulations of the international trading system$ &ome protectionist
trade and industrial policies used effectively "y some of the current
developed countries as well as some of the *sian high performers to
promote their industries and services are now not allowed under ;T3
rules$
'7
0oreover, stronger enforcea"le sanctions against piracy of
intellectual property through the T./H& mechanism of the ;T3 now
e#ist$ *s a result, it is now much harder for developing countries to use
some of the policies that helped some countries ac%uire more advanced
technology as part of their development strategy$
The challenge for developing countries is therefore to determine how
"est to "e open to international competition while at the same time nurtur-
ing the development of their own production capa"ilities$ /f they
li"eralize too early, they run the ris! of having their domestic industries
wiped out "y well esta"lished and stronger foreign competitors$
4.$ 'lobalisation
The two trends 8ust discussed have led to a dramatic e#pansion of
glo"alisation L the greater integration of economic and social activity
around the world$ The reduction in communication and transportation
costs com"ined with trade li"eralization has led to a dramatic e#pansion
of trade$ /mports and e#ports as a share of glo"al 9DH have increased
from ( per cent in
<99 to 55 per cent in 2($ /n addition, the reduction of
communications cost and the spread of the mass media have virtually
created a +real time world,, where events that happen in one place are
instantly !nown worldwide$
0oreover, as the formerly inward oriented economies of China,
/ndia, and the former &oviet :nion have increased their participation in
the international trading system, the net effect is that the glo"al la"our
force has effectively dou"led 16reeman, 242$ This has strong
implications for developed as well as developing countries$ Developed
countries are now facing competition from much lower cost wor!ers,
which is putting pressure on la"our-intensive industries$ 6reeman goes on
to argue that the dou"ling of the glo"al la"our force has increased the
marginal productivity of capital$ *s a result, that share of value added that
is going to capital has increased, while that which is going to la"our has
decreased$ The principal "eneficiaries of this glo"alisation and re"alancing
of relative wages are the multinational corporations which are the most
effective agents at intermediating and ta!ing advantage of differences in
glo"al factor prices$
The implication of this increased glo"alisation for developing countries
is that they are more e#posed to everything that is happening worldwide$
/t also means that everything happens faster, so in addition to facing more
competition, they have to develop greater capa"ility than "efore in
order to respond rapidly and ade%uately to new threats and opportunities$
4.( 5hysical disintegration of production and increased impor!
tance of integrated supply chains
The reduction in transportation and communication costs com"ined with
the digitalization of information has led to the physical disintegration of
production$ -ecause of lower transactions costs, different components of a
final product are now manufactured in several different countries$
'9
The
product may then "e assem"led in yet another country and then
distri"uted worldwide$ The same applies to some services$ This means
that, to get products or services to the mar!et, it is now more important
than in the past to tap into glo"al supply chains$ )ven .ED is "eing
commoditized to some e#tent as it is "eing outsourced to specialized
centres in different countries, including /ndia and China$
(
This is what is "eing called the two great +un"undlings,$
(<
/t is useful
to distinguish them "ecause they have different tra8ectories and
implications$ The first un"undling is the end of the necessity to produce
goods close to consumers$ This has "een going on for centuries "ut has
"een accelerated "y the rapid decline in transportation costs in the last four
decades, particularly since the widespread use of containers and "ul!
carriers$ The impact of this has "een that much manufacturing production,
especially of the more standard and la"our-intensive goods, is "eing
transferred to developing countries with lower la"our costs$
The second un"undling is the end of the need to perform most manu-
facturing stages near each other$ This has "een made possi"le "y the
rapidly falling costs of telecommunications and the possi"ility of codifying
and dig- itizing tas!s$ The impact of this has "een that many service tas!s
supporting manufacturing as well as other services have "een offshored to
countries with lower la"our costs$
(2
The implication of these developments is that there are increased
opportunities for those countries that can position themselves to ta!e
advantage of the two un"undlings$ The ma8or developing country
"eneficiary of the first un"undling has "een China, which is "ecoming the
manufacturing wor!shop of the world$ The ma8or "eneficiary of the second
un"undling has "een /ndia, than!s to its critical mass of higher educated
)nglish spea!ing technicians, engineers, and scientists$ 3ther economies
such as the Hhilippines, Nietnam, former &oviet repu"lics with critical
mass of highly s!illed manpower, and some Cari""ean )nglish spea!ing
island economies are also "enefiting from digital trade made possi"le "y
this second un"undling$ 0ost other develop-
5 /ndustrial Development for the 2<st Century
ing countries without critical mass in the s!ills "ase, )nglish language or the
advanced telecommunications and other physical infrastructure have not "en-
efited as much and are having trou"le competing on "oth fronts$
Developed countries are also "eing impacted "y increased
glo"alisation and the two un"undlings$ The first is more in !eeping with
the e#pectations of traditional trade and product cycle theory, which
postulated that la"our- intensive manufacturing would move to la"our
a"undant countries$ :nder this theory it was e#pected that developed
countries would stay ahead "y moving into more s!ill- and technology-
intensive sectors$ Fowever, the second un"undling is a newer
phenomenon not foreseen "y traditional trade theory$ /t was not
anticipated that services could "e traded virtually than!s to advances in
information technology$
Narious economists, including *lan -linder 1242 and 9ene
9rossman et al$ 1242 are "eginning to focus on this phenomenon$
-linder has even gone as far as to call offshoring the third industrial
revolution$ /ts most significant idiosyncrasy is that the dividing line
"etween 8o"s that can "e outsourced versus those that cannot is not
related to s!ills$ 0any highly s!illed and !nowledge-intensive 8o"s can
now "e outsourced$ -linder 1242 estimates that the total num"er of
8o"s suscepti"le to offshoring may "e two to three times the total
num"er of current manufacturing 8o"s in the :&$
('
This is an important
new element not anticipated "y economic policy in developed
economies$ /t is no longer sufficient for developed countries to invest in
higher education to stay ahead$ They will need to focus on e#ploiting
advantages in non-trada"le services, transform their educational systems
to prepare wor!ers for those 8o"s, strengthen innovation and creativity,
and put in place ade%uate trade ad8ustment mechanisms 1-linder, 242$
4., Increased role of /6Cs in production and distribution
3ne of the !ey drivers of glo"alisation with significant implications for
developing country strategies is the increased role of 0GCs$ They are the
!ey producers and disseminators of applied !nowledge$ They are
estimated to account for at least half of total glo"al .ED and more than
two-thirds of "usiness .ED$
((
0GCs disseminate !nowledge directly
through their oper- ations in foreign countries and through licensing
agreements$ /n addition, they often are the first to introduce new products,
processes, or "usiness and management methods in many foreign
countries, providing e#amples and ideas for imitation "y domestic
companies$ They also train wor!ers, man- agers and researchers who may
disseminate some of the !nowledge and e#perience ac%uired while wor!ing
for the multinational when they leave to wor! for another company or set
up their own$
/t is estimated that the value added "y 0GCs in their home
countries plus that in foreign affiliates represents 25 per cent of glo"al
9DH$
(5
3n the trade side, it is estimated that affiliates of foreign firms
account for one-third
5< Technology, 9lo"alization, and /nternational Competitiveness
of world e#ports$
(4
Fowever, the influence of 0GCs is greater than this$
They affect a much larger share of 9DH if one ta!es into account
"ac!ward and forward lin!ages, as well as their role in demonstrating new
technologies and putting pressure on domestic firms to upgrade
production processes$ *lthough there is no accurate estimate, pro"a"ly
more than half of the remaining trade is done through supply chains
controlled "y multinationals as part of vertical chains or through
distri"ution chains$
/n addition, 0GCs are now operating much more as independent
glo"- al agents$
(5
.ather than responding to the needs of any country,
even their original home country, their o"8ective is to operate glo"ally in
the "est way to increase returns to their investors, whoever they are and
wherever they may "e$ This will increasingly put them at odds with the
interests of their home countries 1as they shift even high value, high s!ill
8o"s and functions, including research, out of their home "ase2 as well as
host countries 1as one location is pit against another and resources are
redeployed to wherever it is more profita"le2$
3ne of the implications of the increased role of 0GCs in the
generation of !nowledge and in production and distri"ution of goods is that
developing countries now need to pay more attention to how to attract
and ma!e the most effective use of foreign investment$ )ven Jorea and
Iapan, which were the countries that made least use of 6D/, have had to
open up in the <99s in order to get access to some cutting-edge
technology that foreign firms are not willing to license$ Fowever, 6D/ to
developing countries is very heavily concentrated in 8ust a few of them$
The top ten developing countries account for 45 per cent of the total
6D/ going to developing countries$
(7
6D/ goes to where it finds the most attractive profit opportunities, either to
supply local mar!ets, or to use those locations as e#port platforms for
other mar!ets$ 0ost evidence shows that offering special ta# and other
incentives is usually not sufficient to offset ma8or economic disadvantages
perceived "y foreign investors$ Therefore, countries that cannot offer
intrinsic advantages to attract 6D/ are going to have to find alternative
ways of getting access to relevant foreign !nowledge$ These can include
"uying some of the technologies through arm>s-length transactions,
technical assistance, copying and reverse engineering, and own
technological development, "ut these pose their own sets of challenges 1as
discussed a"ove2$
*nother implication of this for developing countries is that they have
to "ecome integrated into glo"al supply chains normally controlled "y
multinational producers or distri"utors 1li!e ;al-0art or other large
retailers2$ )ntry into supply chains is usually at the simpler levels such as
ma!ing simple manufactured goods, producing simple components, or
assem"ling su"components$ -oth getting into and moving to higher value
added activities in vertical supply chains can "e difficult$ 6or the first, the
supplier must demonstrate capa"ility to produce to high standards of
%uality and timeliness in deliveryA for the second, strengthened
technological capa"ilities are re%uired$
(9
)ntering supply chains controlled "y distri"utors such as ;al-0art is
also difficult$ :sually production runs have to "e large$ &uppliers must also
"e a"le to maintain %uality and timeliness$ *ll three of these
re%uirements ma!e it difficult for smaller countries with smaller firms to
enter these supply chains$
5
Their producers generally do not have the
scale to produce the volumes re%uired 1;al-0art is sourcing over 25
"illion dollars worth of goods from China, cuts out middlemen, and goes
directly to the producers2$ /n addition, a "uyer li!e ;al-0art e#erts
continued pressure on the suppliers to reduce costs and improve %uality
and speed of delivery$
/t should "e noted that there are only a few companies from
developing countries which have managed to create and sell glo"ally
under their own "rand names$
5<
This indicates how difficult and
e#pensive it is to develop own "rand and distri"ution systems$
4.4 Changing elements of competition
Competitiveness used to "e "ased 1to a greater degree2 on static
comparative advantage$ Today, competitiveness does not 8ust depend on
the cost of factors of production, or on a specific technological
advantage$ .ather, it depends on continuous innovation, high level s!ills
and learning, an efficient communications and transport infrastructure,
and a supportive ena"ling environment$
52
)ach of these aspects is
discussed "elow in greater detail$
%nnovation becoming a critical
component
/n this conte#t of rapid development and dissemination of new
!nowledge, innovation is "ecoming a more critical element of
competitiveness$ 6irms have to "e constantly innovating to avoid falling
"ehind$ This does not necessarily mean that they have to "e moving the
technological frontier forward$ 3nly the most advanced firms do that$
Fowever, all firms need to "e at least fast imitators and adopt, use and
improve new technology in order not to fall "ehind$ This puts a great deal
of pressure on firms> technological capa"ilities$ 0oreover, innovation is not
8ust a matter of new products or new processes and ways to produce them,
"ut also "etter organization and management techni%ues, and "etter
"usiness models which facilitate doing "usiness$
5'
*n e#ample of what is
essentially a very simple innovation is containerized cargo, which has
greatly facilitated shipping manufactured products and dra- matically cut
down freight costs$ *n e#ample of "usiness innovation is the development
of consumer product companies such as Dell, which su"con- tract
production according to their design and specifications to third parties,
eliminate distri"utors, and sell directly to the final consumer$ *nother
e#ample of a "usiness innovation is ;al-0art>s monitoring of consumer
demand from points of sale through electronic cash registers, lin!ing that
information to central ordering directly to producers all around the world,
there"y elim- inating intermediaries in production and distri"ution$
5' Technology, 9lo"alization, and /nternational Competitiveness
The implication of this for companies is that they have to ma!e
greater efforts to !eep up with new technologies and new forms of "usiness
organization and production and distri"ution networ!s$ This re%uires
more investment in their technological capa"ility to search for, ac%uire
and adapt technology to their needs and in managing production and
distri"ution systems$ 6or those that are closer to the frontier, it means that
they need to put more effort into real cutting edge innovations in
technology and "usiness$
&ducation and s'ills as fundamental
enablers
Technological advance is very complementary with higher s!ills and
more education$
5(
*s a result, education and s!ills are "ecoming more
important in international competitiveness$ 0GCs ma!e their location
decisions partly "ased on the education and s!ills of the local wor!forces$
This means that countries need to ma!e more investments on increasing
education and s!ills$ 9lo"ally, there has "een an increase in average
educational attainment$ There has "een a strong increase in the num"er of
persons with higher education$ -ecause of the !nowledge revolution, there
is a need for people to learn a diverse range of new s!ills$ This has given
rise to what Heter Druc!er termed the +!nowledge wor!er, 1Druc!er,
<99(2$ The !nowledge wor!er is not 8ust the HhD with very narrow and
advanced education$ &Khe is the technician and the graduate of the 8unior
college$ /n the :nited &tates, '5 per cent of students in tertiary education
are older than the typical college age cohort of
<7-2($ 0any are wor!ers who are coming "ac! to get their college
degrees, or wor!ers who already have college degrees "ut are coming "ac!
to o"tain specialized training certificates or more advanced degrees$ Thus
there is a need to thin! in terms of systems of life-long learning$
This implies that developing countries need not only to e#pand primary
education, "ut that they also need to e#pand the access and %uality of sec-
ondary and tertiary education$ This may "e difficult given tight
"udgetary constraints, so many developing countries will have to rely more
on tuitions and private provision of higher education$ /ncreasing higher
education may "ring the ris! of losing people to the "rain drain if
graduates cannot find good 8o"s locally$ Thus developing country
governments have to thin! through their higher education strategies more
carefully$ /n addition, governments need to thin! of education and
training as integrated systems for life- long learning and to start designing
systems that will have multiple providers and multiple pathways to
different levels of certification and %ualification$ They also have to ma!e
more effective use of distance education technologies, particularly the
potential of internet "ased education and training services which can "e
delivered anywhere, anytime at any pace$
55
Logistics( transportation( and distribution becoming more
important
/n this new conte#t of increased glo"alisation, rapid technical change, and
shorter product life cycles, modular production and outsourcing, and the
5( /ndustrial Development for the 2<st Century
need to get components and products to the customer %uic!ly, logistics
1transportation, distri"ution channels, and warehousing2, which connects
manufacturing and retailing, is "ecoming another critical factor for compet-
itiveness$
54
Therefore, transportation infrastructure L roads, railroads, air-
ports, seaports and transportation companies, with coordination ena"led "y
/T L is critical for countries to participate effectively in the glo"al mar!et$
55
The implication of this for many developing countries is that, even if
they can produce competitively, it may still "e very difficult for them to get
into glo"- al value chains "ecause of high transport costs$ Typically,
developing countries have very poor transportation infrastructure$ /n addition,
they fre%uently do not have the volume to warrant "ul! transport systems nor
the fre%uency of service re%uired to ma!e the transportation costs
competitive$ This wor!s against small countries far from the main mar!ets$
0ost countries in *frica have very poor shipping or air lin!s with the rest of
the world, and few of these have direct lin!s with !ey mar!ets$ This means
that there are usually many stops and several tran- shipments "efore products
get to their final destination$ This increases "oth transportation costs as
well as the inventory costs for goods in transit$
Hart of the cost advantage of China is not 8ust low wages and that it
has over 2 million underemployed wor!ers in agriculture that can "e
"rought into industrial production, "ut that it has developed large scale and
low cost transportation infrastructure$ Com"ined with fre%uent shipping
and air service to ma8or world mar!ets, it can place its goods virtually
anywhere, for a fraction of the costs of most other developing countries$
&fficient %T becoming ne critical infrastructure
/nformation technology is "ecoming a fundamental ena"ling infrastructure
of the new competitive regime$ +&upply chain management re%uires speed
across glo"al space to accomplish what a factory accomplished internally
with the assem"ly line$ /nformation and communications technologies
1/CT2 are the tools that allow fle#i"le accumulation to function$,
57
/CT is
a critical part of what ena"les the organization and coordination of glo"al
production networ!s and the integration of glo"al supply chains$ /t is also
an essential element for monitoring what the consumers are "uying and
what they want, and passing that information seamlessly along to producing
units which often are not even owned "y "rand name manufacturers$ This
real-time information on the changing needs of the mar!et, indeed even
direct interaction with the consumer 1as in the e#amples of made to order
computers or automo"iles2, as well as internal electronic e#change and
management "etween different depart- ments and division within firms
and among firms, their suppliers and distri"utors, are "ecoming essential
new ingredients of the glo"al economy$
There are several implications for developing countries$ *t the national
level, there needs to "e modern and low cost communication systems as
well as good training in the s!ills necessary to use these networ!s$ 6or the
development of e-"usiness, there need to "e appropriate legal and
regulatory sys-
55 Technology, 9lo"alization, and /nternational Competitiveness
tems including e-signature as well as secure digital communications and
safe payment systems$ *t the level of the firm, investments in training and
hardware as well as in restructuring "usiness processes are also necessary
in order to ta!e advantage of the reduction in transactions costs and time
that can "e o"tained through these technologies$
59
The enabling environment as a still necessar) factor
The ena"ling environment consists of the government regulations and insti-
tutions that facilitate the operation of "usiness and the economy$ /t
includes the "asic institutions such as government, rule of law, efficiency
of capital and la"our mar!ets, ease of setting up or shutting down
"usiness$ /t also includes the a"ility of the government to create consensus
and the a"ility to help people who fall through the crac!s in the system$
7. The China 8and India9
factor8s9
4:
6igure 4 presents the current and pro8ected size through 2<5 of the
world>s nine largest economies in terms of purchasing power parity 1HHH2
comparisons$
4<
:sing HHH e#change rates, China is already the second
largest economy in the world and /ndia the fourth largest$ 0oreover, using
average growth rates for the period <99<-2' to pro8ect future size, China
will "ecome the largest economy, surpassing the :& "y appro#imately
2<', and /ndia will surpass Iapan 1currently the third largest economy2,
"y the end of ne#t year$ ;hile past performance is not necessarily a good
predictor of future performance, these pro8ections are helpful to
emphasize that China and /ndia are already large players in economic
terms and that they are going to "e even larger given that they are
growing almost three times faster than the world average$ /t is therefore
useful to ta!e stoc! of their strengths and challenges and to e#plore the
potential impact of their growth on other countries$
7.1 China;s strengths and challenges
China>s strengths are numerous and varied$
42
3ne strength is its very large
size and rapid growth$ /t has critical mass and economies of scale$ /t also
has a government that has a long-term strategic vision and is a"le to
orchestrate and implement long-term plans$ Hart of why it has "een a"le
to upgrade its technology so fast is "ecause it is well integrated into the
glo"al trade system$ *s noted, it has the largest traded sector among the
world>s large countries$ /t gets modern technology em"odied in capital
goods and components and its e#port firms are forced to compete with the
"est a"road$ /t has also used 6D/ to rapidly modernize its economy$
4'
Through the lure of its very large internal mar!et and the potential to
serve as an e#port platform as well, it attracts 0GCs willing to "ring the
most modern technology into the country$ /n addition, "ecause of its
rising supply of scientists and engineers, over
5 .ED centres have "een set up "y 0GCs in China$ 0oreover, it
has
"een investing heavily in higher education$ /n <995, its tertiary enrolment
rate was 4$5 per cent$ &ince then it has "een increasing new entrants "y
5 per cent per year$ Bast year, its tertiary enrolment rate reached 2< per
cent and the num"er of students enrolled at the tertiary level surpassed that
in the :&$ 6orty percent of them were in mathematics, science and
engineering$
China also faces many challenges$ 3ne of them is increasing
income ine%uality$ /ts 9ini coefficient increased from $'' in <99 to $(5
in 2'$ There are also very large regional income ine%ualities "etween
the coastal provinces, where 9DH has "een growing at <5 per cent to 2
per cent per year, and the western provinces, where growth has "een 8ust 2
per cent to 5 per cent $ *s part of its rapid restructuring and transition to
the mar!et economy, for the past five years the state-owned enterprises
have "een shedding wor!ers at the rate of <2 to <5 million wor!ers a year$
These lay-offs plus the increasing income ine%uality are potentially
desta"ilizing$ /n addition, every year China a"sor"s < to <5 million rural
migrants into the cities$ /ts financial sector is another wea! area as there
is a very large non-performing loan portfolio$ Hart of the pro"lem is that
the financial system still channels the "ul! of the funds to the state
enterprise sector$ &ince the social security system is still not well developed,
state enterprises still act as an informal social security system and re%uire
support from the government$ China also has a rapidly ageing population,
and "ecause of the one-child policy adopted some years ago, it will start to
have a very high dependency ratio in 2 years$
China is also facing very severe environmental constraints$ /t is
natural resource poor, particularly on a per capita "asis$ /t relies on imports
from the rest of the world for a large part of its raw materials$ /t turned
from "eing an oil e#porter until the <99s to now "eing the second largest
oil importer after the :&$ /t has a water shortage$ The ?ellow .iver
periodically dries up$ The rate of desertification is increasing$ The 9o"i
desert is moving toward -ei8ing and there are sand storms that "low red
dust all the way to Gorth *merica$ ;ater and air pollution are serious
pro"lems$ /t is estimated that several million people die each year from
air pollution$ *ir pollution is getting worse not only "ecause of China>s
rapid industrialization, "ut also "ecause it has opted for a very rapid
e#pansion of cars as a "asic means of transportation$
6inally, China also faces the challenge of how long a one party
system can continue to function effectively as the country transitions
rapidly to a private mar!et economy$ The num"er of demonstrations
has "een rising since the late <99s to reach over 7, last year$
Thus, while China has "een growing very fast, and the consensus
e#pec- tation of most economists is that it can continue to grow at 5-7 per
cent for another < to 2 years, it also has some severe structural pro"lems$
7.2 India;s strengths and challenges
/ndia is a rising economic power, "ut one which has not yet integrated
very much with the glo"al economy and still has not achieved its
potential as
much as China$ /t has many strengths, "ut it will also "e facing many
challenges in the increasingly competitive and fast changing glo"al
economy$
4(
/ndia>s !ey strengths are its large domestic mar!et, its young and
growing population, a strong private sector with e#perience in mar!et
institutions, and a well developed legal and financial system$ /n addition,
from the perspective of the !nowledge economy, another source of
strength is a large critical mass of highly trained )nglish spea!ing
engineers, "usinessmen, scientists and other professionals, who have "een
the dynamo "ehind the growth of the service sector$ /n fact, -linder
124, p$ <252 sees /ndia as a greater challenge than China to developed
countries in terms of future competition "ecause it is currently stronger in
terms of the second un"undling 1see &ingh,
25, in this volume, for an analysis of the strengths and limitations of
/ndia>s service-led industrialization2$
The reality, however, is that the supply of highly trained
!nowledge wor!ers such as scientists and engineers in /ndia is much more
limited than commonly thought$ There is a highly "ifurcated higher
education system$ The premier part consists of seven /ndian /nstitutes of
Technology, si# /ndian /nstitutes of 0anagement, the /ndian /nstitute
of &ciences, the /ndian &tatistical /nstitute, and the *ll /ndian /nstitute
of 0edical &ciences which are world class$ Fowever, they produce only ten
thousand graduates per year$ The "ul! of the higher education system
produces graduates of very low %uality$ * recent 0cJinsey study estimates
that only < to 2 per cent of the graduates are properly trained to wor! for
0GCs$ There are also many political economy pro"lems to increasing
the supply of the premier institutes or to improving the %uality of the
"roader system$ These constraints on the a"ility to e#pand rapidly the
supply of high level human capital will constrain /ndia>s a"ility to e#ploit
the second un"undling$
0ore generally, one of /ndia>s !ey challenges is its rapidly growing
and young population$ /ndia>s population is e#pected to continue to
grow at a rate of <$5 per cent per year until 22 and to overta!e China>s$
*n important part of the challenge is that /ndia>s population has low
average educational attainment$ The average years of schooling of the
adult population is less than 5, compared to nearly 7 in China and <2 in
developed countries$ /n addition, illiteracy is 52 per cent among women
and 25 per cent among men$
*nother challenge is poor infrastructure L in terms of power
supply, roads, ports and airports$ This increases the cost of doing "usiness$
/n addition, /ndia is noted for an e#cessively "ureaucratic and regulated
environment which also increases the cost of doing "usiness$
*ll these factors constrain the a"ility of the /ndian economy to react to
changing opportunities$ Bow education reduces wor!force fle#i"ility$
Hoor infrastructure and high costs of doing "usiness constrain domestic
and foreign investment$ The high costs of getting goods in and out of
/ndia constrain the country>s a"ility to compete internationally and to
attract e#port
oriented foreign investment e#cept for "usiness that can "e done
digitally rather than re%uiring physical shipments$
7.$ The impact of China;s rise on the rest of the orld
The speed, scale, and scope of China>s economic growth is
unprecedented in economic history$ China>s rapid integration into the
glo"al trading system has "een spectacular and has implications for the
rest of the world$
*+
China>s merchandise e#ports have surged from :&=25 "illion in <97(
to :&=42 "illion in <99 and :&=59' "illion in 2($ /ts share of world
merchandise e#ports shot up from less than $5 per cent in <97 to 4$5
per cent in 2( 1figure 52$ *lthough China used to e#port some
commodities and fuels, its e#ports are primarily manufactures and their
share in the total has "een increasing L from 52 per cent in <99 to
9< per cent "y 2($ 6urthermore, as in the other *sian high
performing economies, its manufactured e#ports started primarily as
la"our-intensive goods 1particularly te#tiles and clothing2, "ut the
technology intensity of its e#ports has "een increasing very rapidly$ /n
<997, the share of high technology e#ports in China>s manufactured
e#ports was <5 per cent$ -y 2( it had dou"led to
' per cent$
6igure 7 pro8ects the growth of merchandise e#ports of the eight
largest economies in the world, using the average e#port growth rates from
the past
5 years$ *ccording to these pro8ections, China>s merchandise e#ports
surpass the :&>s "y 24 and those of 9ermany "y a"out 29$ This is
no longer "ased on HHH "ut on nominal e#change rates$ Thus China already
is a ma8or force to "e rec!oned with and is li!ely to "ecome even more
important in the near future$ /ndia is still at a much earlier stage and will
not "e as important for some time to come, although it has the
potential to increase its e#ports and have a more significant impact on
world mar!ets$ The rest of this section will therefore focus on the impact
of China>s rising importance in glo"al trade on the rest of the world$
To analyze the impact of China>s trade on the glo"al system, it is
useful to distinguish direct effects from indirect effects$ Direct effects
include the direct impact of e#ports and imports on other countries$ The
indirect effects include the impact of e#ports and imports on third
mar!ets, as well as any secondary effects that China>s growth may have on
other international flows such as direct foreign investment and finance$
These are hard to %uantify "ut an attempt will "e made to at least indicate
what some of these may "e for different countries$
6irst, it should "e noted that while China is rapidly increasing its
e#ports it is also increasing its imports$ Thus, it is opening up the
opportunity for many countries to e#port to China, or even to set up
manufacturing facili- ties there$ China>s imports are primarily natural
resources, and machinery and components$ Therefore, developing country
e#porters of commodities are li!ely to "enefit from increased e#ports and
higher prices 1indeed many
are already doing so2$ The same goes for e#porters of capital goods and
components$ The main e#porters of capital goods are li!ely to "e developed
countries$ Component e#porters include many countries in )ast and
&outh )ast *sia, as China has "ecome the final assem"ler and e#porter of
many finished goods "ased on components from neigh"ouring countries$
44
45
/t should also "e noted that an important indirect impact of China>s
rapid e#pansion of manufactured e#ports is that they have helped to drive
the price of many manufactured products down$ That has meant an
increase in welfare for consumers all over the world$ The pro"lem, of
course, is that the direct competition from cheaper Chinese manufactured
products has dimin- ished mar!ets and profits for producers of those goods
from other countries, and some may even "e driven out of "usiness$ This
is already clear in the production of te#tiles and garments where China
has a very clear comparative advantage that was "eing constrained until
Ianuary 25 "y the %uotas of the 0ulti-6i"re *greement and its
successor$
*n important indirect impact of China>s rapid growth on the rest of
the world is its pressure on glo"al environmental resources$ The
impact of China>s voracious appetite for natural resources has already "een
seen in rapidly rising prices for many natural resources and
commodities, particularly oil$ There are also the negative e#ternalities of
increased trans"oundary air pollution and glo"al warming$
,eveloped countries pro"a"ly have the most to gain from the
e#pansion of China>s trade$ They are the "iggest importers of Chinese
manufactures, so their consumers will get the advantage of lower prices$
They will feel some competition in the medium technology level and
many manufacturers may have to switch to production in or sourcing from
China$ Fowever, they have higher educated wor!ers and more capa"ility
to compete through innovation, so they should "e a"le to redeploy
wor!ers to more competitive areas$ 0oreover, a very large share of Chinese
manufactured e#ports are "eing produced or sourced there "y 0GCs
head%uartered in developed countries$ Thus, these 0GCs and their
stoc!holders are "enefiting$ *lso, developed countries are "etter placed to
e#port the capital goods and consumer dura"les and services in demand "y
China as people reach higher incomes and want more sophisticated
consumer goods and services$ Gevertheless, there will "e considera"le
ad8ustment pains as some industries face Chinese competition$ These are
li!ely to "e more pronounced in the ): than in the :& as the rate of
unemployment is already higher in )uropean countries and their
economies are less fle#i"le and less innovative than the :&$
,eveloping countries in South &ast Asia have also "een "enefiting from
China>s growing trade$ The poorer natural resource rich countries are
supplying China with natural resources and primary commodities$
The more advanced economies, including Iapan, Jorea, and Taiwan, are
supplying it with capital goods and components for its e#panding higher
technology manufacturing in special high-tech e#port processing zones$
Fowever, there
is a ris! that some suppliers will shift to producing directly in China,
thus reducing e#ports and domestic 8o"s$ 0iddle-income countries of
&outh )ast *sia face perhaps the "iggest competitive challenge from
China in their e#port mar!ets for manufactures, though they have also
en8oyed increased demand for their components from Chinese
assem"ly plants as well as increased demand for their natural resource
"ased e#ports$ The la"our rich low-income countries 1such as Nietnam,
Cam"odia and some &outh *sian countries, particularly /ndia2 may find
that, as Chinese wages rise, some of the la"our-intensive production that is
still done in China will "e transferred to them$
47
Latin American countries are li!ely to e#perience two different
effects$ 0e#ico and some of the Central *merican te#tiles e#porters which
have had preferential arrangements with the :&, such as the Dominican
.epu"lic and Gicaragua, are already feeling the pain of increased
competition$ 3n the other hand, many natural resource-rich countries in
Batin *merican, including -razil, are e#periencing an e#port "oom
than!s to increased import demand from China$ China is also sealing
many long-term supply contracts$ /n addition, a significant inflow of
Chinese 6D/ is emerging, mainly into natural resource sectors, "ut this
may e#pand to manufacturing for domestic or regional mar!ets$ * few
Batin *merican companies are also "eginning to invest in the rapidly
growing Chinese mar!et$ /n the medium and long-run, Batin *merica is
li!ely to find it difficult to !eep up with the Chinese e#pansion of
manufactured e#ports$ Batin *merican e#porters of manufactured goods
are already facing increased competition from Chinese e#porters not only
in other Batin *merican mar!ets, "ut also in the :& and the ):, and this
is li!ely to get more intense$ *s noted, even -razil and 0e#ico, which are
the most industrially advanced of the Batin *merican countries, are not
investing enough in education or carrying out enough innovation efforts to
"ecome more effective competitors with China$ Therefore, the Chinese
competition is "ecoming more of a threat for their future
manufacturing growth$
49
African countries are li!ely to e#perience similar effects to Batin
*merica "ut even more pronounced$ Te#tiles and garments, which has
"een the most important manufactured e#port industry of *frica, is
already facing very strong Chinese competition and many factories are
closing down$ 3n the other hand, many countries are "enefiting from
increased sales of minerals and commodities to China, and these e#ports are
"ooming$ /n fact, they are growing so much that a pro"lem for many
*frican countries is going to "e to manage the impact of increased e#port
earnings in order to avoid Dutch disease effects caused "y appreciation of
e#change rates$ /n addition, there is rapidly growing Chinese foreign
investment in *frica, particularly in mining and commodities and
supporting infrastructure$ * critical issue is whether this new Chinese
investment will develop more lin!ages than that of preced- ing foreign
investment from other countries$
5
9iven past historical e#peri-
ence and the low education and institutional capa"ility in most *frican
countries, it is not clear that these positive lin!ages will develop very %uic!-
ly, if at all$
5<
*id agencies will also have to consider how to ad8ust their
policy advice given how China is pre-empting the usual one of la"our-
intensive e#port growth$ *id agencies will also have to factor in the
implications of a much larger Chinese influence in *frica not 8ust in the
commercial and economic spheres, "ut also in terms of development
assistance and policy advice$
<. Conclusions and implications
/t is a challenge to draw together all the different strands covered in
this paper, "ut this will "e attempted here under various headings$
&ome are more tentative than others$ 3"viously much more could "e done
on any of these topics so they are listed here to provo!e further discussion
and more research$
The international environment is becoming more competitive( demanding
and fast paced- The world has "ecome more integrated through the
e#pansion of trade, investment, and communications$ The /CT revolution
has also led to an e#plosion in the internationalization of all types of
services that can "e done digitally$ Thus there is more international
competitive pressure$ Hroduct life cycles have "ecome shorter$
Hroduction, distri"ution, and supply chains have "ecome more
integrated glo"ally even as production has "ecome more fragmented
across countries$$
The global s)stem depends on efficient communications and information
s)s- tem( plus e.cellent logistics to get goods and services in and out of
countries and delivered to the customer in a matter of hours or days, rather
than wee!s or months$ This has led to a speed-up in production and
distri"ution systems$ &uppliers have to respond immediately to customer
demand$
/ost developing countries do not have the pre-requisites to compete
success- full) in this more demanding global s)stem- /t is not 8ust that they do
not have the latest technologies or s!ills$ They will have to put in place more
agile procedures and ways of doing "usiness$ They also do not have the
logistics and infrastructure$ )ven if they had the money to invest in the
physical infrastructure, they do not have the economies of scale for "ul!
air or sea shipping via the most direct routes to !ey mar!ets$ This means
that many developing countries are e#cluded from these fast paced
mar!ets$
#hina and %ndia !if it can open up more( reduce bureaucrac) and red
tape( and invest more in infrastructure( education( and R0,$ ill do ell in
this ne competitive s)stem- They have the scale and critical mass of highly
trained people and .ED, as well as large internal mar!ets to play
successfully in the glo"al system$ They are also large and strategic
enough to "e among the countries developing the rules of the glo"al
system$ *s such they can play an important leadership role for other
developing countries$
,eveloping countries have to position themselves to tr) to benefit as much
as possible from this demanding globalised orld- This involves many
things$
6irst, it means more investments in human capital$ This is not 8ust in
"asic education, "ut secondary, technical and higher education and a
system of life-long learning$ &econd, it means more investment in two
!inds of infrastructure$ 3ne is the traditional physical infrastructure
needed to lin! to the glo"al economy L roads, ports, airports$ The other is
the new /CT infrastructure which has already "ecome so critical for
competition in the new real- time world and for ta!ing advantage of the
second un"undling$ Third, it means improvements in the economic and
institutional regime L the rule of law, the efficiency of capital and la"our
mar!ets$ 6ourth, it means improvement in governance L the a"ility of
government to help its citizens respond successfully to the new challenges
and to help people falling "etween the crac!s$
52
1hat countries can do ill depend on their level of development and
their specific economic( political( and social structure- They will need to
e#amine carefully how to ma!e "est use of their resources and how to
leverage them in this new competitive environment$ They need to thin!
and act more strategically$ They can learn a"out creating consensus on
longer term visions from some of the high performing )ast *sian
economies$ They have to learn how to ma!e effective use of glo"al
!nowledge, how to attract 6D/ than can contri"ute to their national
development, and how to get positive e#ternalities from that investment$
2ecause of ver) strong ad3ustment pressures and trend toards
marginaliza- tion of man) countries and even ithin countries( there has been
an increase in the difference in incomes beteen the richest countries and the
poorest- /n <97, the gap "etween the richest country and the poorest was
a"out <5 times$ Gow it is 5 times$
5'
)ven within developed
countries there is a trend toward increasing ine%uality$ The gap in incomes
"etween !nowledge wor!- ers and those with high school education or less
is increasing$
4n a global level( part of hat is going on is a massive integration of
labour mar'ets and rebalancing of relative incomes- ;ith the entry of
China, /ndia and the former &oviet economies into the glo"al mar!et
economy, the world>s effective la"our force has dou"led$ ;ith reduction of
transportation, communication and information processing costs there is
increased trade in goods and services$ Together with rapid technological
change, the shifts in production locations and the redeployment of
resources which glo"alisation is causing are resulting in large ad8ustment
pressures$
There is the possibilit) of bac'lash against globalisation ith a ris' of
moving bac' to protectionist trade regimes- /f at all, this is li!ely to start in
;estern )urope "ecause it is more rigid than the :&, "ut it could spread
to the :&$ 9lo"alisation will also "e a contentious issue for developing
countries that are "eing left out$ Gote for e#ample the movement towards
the left in Batin *merica, seemingly largely from a feeling that the
;ashington Consensus reforms have failed$ /t will "e important for the
sta"ility of the world for "oth developed and developing countries to resist
the temptation to revert to pro-
tectionism$ Developed countries in particular should focus instead on
increasing the fle#i"ility of their economies to ad8ust to changing compara-
tive advantage, focusing on la"our retraining, improving social safety nets,
and fostering creativity and innovation$ Developing countries need to wor!
on improving their human capital and physical infrastructure as well as their
capa"ilities to ta!e advantages of the two un"undlings$
5inall)( there are increasing fissures in the global s)stem- There are large
asymmetries in the glo"al rules of the game and in the distri"ution of
income and wealth$ The least developed countries are falling further
"ehind$ The glo"al system is not "enefiting all e%ually$ 0ore efforts need
to "e made to open up possi"ilities for the disenfranchised$
9
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6igure <$ The impact of technological advances on glo"al population and 9DH per capita L *
two millennium perspective
4,
5,
5,
4,
(,
5,
',
(,
',
2,
2,
<,
<,

; orld 9DH per capita 1<99 international =:&2 ;orld Hopulation 10illion2
&ource@ Calculated from 0addison 12<2$
6igure 2$ The differentiation in regional and country performance since the industrial revolu-
tion, selected regions and countries
',
25,
2,
<5,
<,
5,
<(7 <54 <4( <52 <7 <75 <95 <997

;estern )urope )astern )urope :nited &tates Batin *merica
Iapan China /ndia 3ther *sia *frica
&ource@ Calculated from 0addison 12<2$
6igure 'a$ &hares of different world regions in glo"al value added 1constant 2
:& dollars2,S
'5
'
25
2
<5
<
5
:nited &tates Iapan )ast *sia E Hacific

)urope E Central *sia Batin *merica E Cari""ean 0iddle )ast E Gorth *frica
&outh *sia &u"-&aharan *frica ):-<5 ):-25
&ource@ Compiled from the ;orld Development /ndicators data"ase$
6igure '"$ &hares of different world regions in glo"al value added 1HHH :&=2, S
'
25
2
<5
<
5
:nited &tates Iapan )ast *sia E Hacific

)urope E Central *sia Batin *merica E Cari""ean 0iddle )ast E Gorth *frica
&outh *sia &u"-&aharan *frica ):-<5 ):-25
&ource@ Compiled from the ;orld Development /ndicators data"ase$
Iapan
:&*
.ussia
6rance
Jorea
:J
9ermany
-razil
China
/ndia
0edium-high
technology
Figh
technology
Bow
technology
0edium-low
technology
.
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6igure ($ Total gross domestic e#penditure on .ED 1HHH :&=2
5,7
(,7
',7
2,7
<,7
7
.ED e#penditure as S of 9DH

&ource@ Computed from data in ;orld -an! 124a2$
6igure 5$ &tructure of 3)CD manufacturing trade "y technology intensity, S
(5
(
'5
'
25
2
<5
<
<99( <995 <994 <995 <997 <999 2 2< 22 2'
&ource@ 3)CD 1252$
3"s$@ e#cludes Bu#em"ourg and the &lova! .epu"lic$
*verage value of total 3)CD e#ports and imports of goods$
6igure 4$ .elative economic size and pro8ections through 2<5 for largest economies, S of
glo"al 9DH
25
2
<5
<
5
2' 25 25 29 2<< 2<' 2<5

China Iapan 6rance 9ermany /taly :nited Jingdom
:nited &tates /ndia Canada
&ource@ Hro8ected "ased on data from the ;orld Development /ndicators data"ase$
6igure 5$ &hare of merchandise trade of main e#porters, <97-2(, S
<(
<2
<
7
4
(
2
9ermany :nited &tates China Iapan 6rance

Getherlands /taly :nited Jingdom Canada
&ource@ Calculated "ased on ;orld -an! 124a2$
Country <945-<97 <97-2( <99-2( 2-2(
-razil 5$9 2$5 2$ 2$4
Fong Jong 1China2 7$5 5$( ($< ($4
/ndonesia 4$9 5$( ($7 ($4
0alaysia 5$( 4$2 4$5 5$
Ha!istan 5$7 5$2 ($< ($
&ingapore <$( 4$9 4$( ($
Thailand 5$4 4$ 5$< 5$
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6igure 7$ China>s share of merchandise trade surpasses :& "y end 24
2,5,
2,,
<,5,
<,,
5,
<995 <994 <995 <997 <999 2 2< 22 2' 2( 25 24 25 27 29 2<

Canada China 9ermany /ndia
/taly Iapan :&* :J
&ource@ Hro8ected "ased on data from the ;orld Development /ndicators data"ase$
Table 1.
High performing plus BRICM
-otswana <'$' 5$7 5$( 4$
China 5$' 9$5 9$5 9$
/ndia '$' 5$7 5$5 5$7
Jorea, .ep$ 7$2 4$5 5$9 5$(
0e#ico 4$4 2$7 '$< 2$4
.ussian 6ederation nKa nKa -<$< 4$7
Taiwan 1China2
Source: #omputed from 1orld 2an' !677*a$-
nKa 4$( 5$' '$'
Table 2.
Broad characterization of strategies
toward trade and foreign direct inestment
!"#I$
3utward /nward
6D/ passive Fong Jong
/ndonesia
0alaysia
Thailand
Nietnam
-razil
0e#ico
1although it turned
outward with G*6T*2
6D/ strategic China
1"ut now increasing own .ED2
&ingapore
Taiwan
3wn .ED Jorea
TIapanU
/ndia
.ussia
Fong Jong &outh Jorea &ingapore Taiwan
9ross Capital 6ormation as S of 9DH 1<99(-2'2 27$7 '2$< 29$9 22$<
Tariff E Gon-Tariff -arriers* 1242 <$ '$5 <$ 2$
.oyalty and license fee payments 1millions :&= 2(2 (9< (,(5 ',''( nKa
.oyalty and license fee .eceipts 1millions :&= 2(2 <94 <,59< <95 nKa
0anufactured trade as S of 9DH 12'2 252$5 (7$5 2(4$' 55$5
Tertiary )nrolment .ates 12(2 24$ 7($5 ('$7 nKa
&cience enrolment ratio 1S of tertiary
students 1<997-2'2
<($' <$' nKa nKa
.esearchers in .ED K million population 1222 <,547 2,959 (,'52 ',9'5
&cientific and Technical Iournal *rticles 12<2 <7<5 <<,'5 2,4' 7,72
Hatent applications 9rant "y :&HT3 12(2 4(< (,45< (75 5,22
Table %.
The four high performing &ast 'sian
economies
9DH 9rowth rate 1<999-2(2 ($7 5$( ($2 '$'
Trade as S of 9DH 12(2 ''$4 5'$7 nKa <9$
9ross 6oreign /nvestment as share
of 9DH 1average <99(-2'2
'5$ <$7 2<$5 nKa
.oyalty and license fee paymentsK
million population 12(2
5'$ 92$5 555$5 nKa
.oyalty and license fee .eceiptsK
29$< '5$2 (5$7 nKa
Figh technology e#ports as S of
manufactured e#ports 12'2
<2$5 '2$2 57$7 ('$
&cience and )ngineering )nrolment .atio
1S of tertiary students <997-222
'$2 (<$< nKa nKa
.esearchers in .ED 12'2 <,4'9 <5<,25( <7,<2 75,'9(
Total e#penditures on .ED as S of 9DH 1222 $4 2$9 2$2 <$7
&cientific and technical 8ournal articlesK
million population 12<2
255$ 2''$< 4'$< '4<$5
Hatent applications granted "y :&HT3K
9'$4 95$ <<<$7 '<7$5
Source: #ompiled form 12% KA/ !1orld 2an' %nstitute Knoledge Assessment /ethodolog)$
677*- 4bs-: 8 The loer the number( the more open the trade regime to imports and e.ports-
/ndonesia 0alaysia Thailand Nietnam
9ross Capital 6ormation as S of 9DH1<99(-2'2 2<$9 '<$5 29$5 29$5
Tariff E Gon-Tariff -arriers* 1242 '$ 2$5 '$5 ($5
.oyalty and license fee payment 1millions :&= 2(2 nKa 572 <,57( nKa
.oyalty and license fee .eceipts 1millions :&= 2(2 nKa 2 <5 nKa
0anufactured trade as S of 9DH 12'2 2($< <'9$' 72$5 4($7
Tertiary )nrolment .ates 12(2 <5$2 24$4 '4$5 <2$<
&cience )nrolment .atio 1S of tertiary
students, <997-2'2
nKa <4$' nKa $
.esearchers in .ED K million population 1222 nKa 295 279 nKa
&cientific and technical 8ournal articles 12<2 25 (9( 525 <57
Hatent applications granted "y :&HT3 12(2 2' 9' 27 <
Table (.
The second wae of &ast 'sian high performers
9DH 9rowth rate 1<999-2(2 ($4 5$< 5$< 5$<
Trade as S of 9DH 12(2 54$9 25$4 <2($4 <25$'
9ross 6oreign Direct /nvestment as
share of 9DH 1average <99(-2'2
'$< 5$( 2$9 5$9
nKa '<$5 25$( nKa
.oyalty and license fee .eceiptsK
nKa $7 $2 nKa
<($5 57$( '$2 <$5
&cience and )ngineering )nrolment .atio
1S of tertiary students, <997-222
nKa ($< nKa <9$5
.esearchers in .ED 12'2 nKa 5,<55 <5,5< nKa
Total e#penditures on .ED as S of 9DH 1222 nKa $5 $2 nKa
<$ 2$7 <<$9 2$
$< '$5 $5 $
Source: #ompiled from 12% KA/ 677*-
4bs-: 8 The loer the number( the more open the trade regime to imports and e.ports-
-razil .ussia /ndia China 0e#ico
9ross Capital 6ormation as S of 9DH 1<99(-2'2 2$9 2$9 2'$< '9$5 22$(
Tariff E Gon-Tariff -arriers* 1242 '$5 '$5 5$ '$ 2$5
.oyalty and license fee payments
1millions :&= 2(2
<,<95 <,95 (2< ',5(7 75
.oyalty and license fee .eceipts
1millions :&= 2(2
<<5 227 25 <5 92
0anufactured trade as S of 9DH 12'2 <5$< <5$7 <'$5 5<$' (4$
Tertiary )nrolment .ates 12(2 <7$2 49$7 <<$( <2$5 2<$5
&cience enrolment ratio 1S of
tertiary students, <997-2'2
nKa nKa <5$< nKa <2$5
.esearchers in .ED K million population 1222 '52 ',(<5 <2 4'' 25(
&cientific and technical 8ournal articles 12<2 5,25 <5,7(4 <<,54 2,957 '2
Hatent applications granted "y :&HT3 12(2 <4< <5' '54 595 <2
Table ).
BRICM
9DH 9rowth rate 1<999-2(2 2$5 4$9 5$5 7$5 2$4
Trade as S of 9DH 12(2 '$ 52$4 '$5 44$< 57$5
9ross 6oreign /nvestment as share
of 9DH 1average <99(-2'2
'$( <$9 $5 5$< '$
4$5 5$5 $( 2$7 5$7
.oyalty and license fee
.eceiptsK million population 12(2
$4 <$4 $' $< $9
<2$ <7$9 ($7 25$< 2<$'
&cience and )ngineering enrolment ratio
1S of tertiary students, <997-222
nKa nKa 2$< nKa '<$<
.esearchers in .ED 12'2 59,7'7 (75,(55 <<5,527 7<,525 25,424
Total e#penditures on .ED as S of 9DH 1222 <$ <$2 $9 <$2 $(
(<$7 <9$5 <$5 <4$5 '2$'
$9 <$2 $( $5 <$
Source: #ompiled from 12% KA/ 677*-
4bs-: 8 The loer the number( the more open the trade regime to imports and e.ports-
Country <945-<97 <97-2( <99-25 2-2(
-otswana <'$' 5$7 5$( 4$
-razil 5$9 2$5 2$< 2$4
Chad -$5 5$' 5$' <2$
China 5$' 9$5 9$5 9$
Congo .ep 4$ ($ 2$ ($(
CVte d>/voire 4$' $7 <$5 -<$
)cuador 5$9 2$( 2$5 ($2
9a"on 7$ 2$' 2$( <$7
9uatemala 5$5 2$5 '$4 2$4
Fong Jong 1China2 7$5 5$( ($< ($4
/ndia '$' 5$7 5$5 5$7
/ran nKa '$2 5$ 5$4
/srael 4$4 ($2 ($4 2$4
Jenya 5$< '$ 2$< 2$(
Be"anon nKa '$< 5$9 '$7
Bi"ya 7$' nKa nKa ($4
0alaysia 5$( 4$2 4$5 5$
0e#ico 4$4 2$7 '$< 2$4
0ozam"i%ue nKa ($2 4$( 5$4
Table *.
Countries with annual growth rates of )+ or more
*lgeria 4$' 2$4 2$5 ($2
-osnia Ferzegovina nKa 5$7 <9$5 5$
Cam"odia nKa 4$5 5$< 4$4
Chile '$' 5$< 5$5 '$7
Colom"ia 5$( '$ 2$7 2$7
Costa .ica 4$( '$7 ($5 '$(
Dominican .ep$ 4$( ($< ($2 '$4
)gypt 5$9 5$ ($' '$7
9reece 5$7 <$9 2$4 ($2
Fonduras 5$5 2$9 '$4 2$4
/celand 5$' 2$7 2$4 '$2
/ndonesia 4$9 5$( ($7 ($4
/reland ($5 5$' 4$7 4$2
Iordan 5$ ($4 5$< 5$(
Jorea, .ep$ 7$2 4$5 5$9 5$(
Besotho 5$4 '$9 '$' 2$(
0alawi 4$2 '$ '$5 2$4
0auritius nKa 5$2 5$< ($(
0orocco 5$5 '$( '$< ($
continued
Country <945-<97 <97-2( <99-25 2-2(
Gigeria 5$< 2$5 '$7 5$2
3man <5$7 4$( '$9 '$4
Ha!istan 5$7 5$2 ($< ($
Hanamas 5$5 '$2 ($5 '$2
Haraguay 5$< 2$7 2$< <$4
Hhilippines 5$5 2$5 '$2 ($(
Hortugal 5$4 2$5 2$' <$
.ussian 6ederation nKa nKa -<$< 4$7
.wanda 4$' '$2 '$' 5$(
&ingapore <$( 4$9 4$( ($
&udan '$' ($( 5$< 4$
&yrian *ra" .$ 5$9 ($ ($5 '$
Taiwan 1China2 nKa 4$( 5$' '$'
Thailand 5$4 4$ 5$< 5$
Tunisia 4$' ($5 ($9 ($7
:ganda nKa nKa 4$5 5$7
:nited *ra" )mirates nKa nKa 4$< 5$2
Nietnam nKa 4$5 5$( 5$2
Rim"a"we 5$' 2$ -$2 5$7
Source: #omputed based on data from 1orld 2an' !677*$( data for Taian estimated from #%A 5actboo' 677*-
Table ,.
Basic data on high performing &ast 'sian
countries plus BRICM !2--($
Hopulation
1millions2
9G/
1"illion2
9G/
per Capita
9G/
1HHH Terms2
HHH
9G/
per Capita
0erchandise
)#ports
1"illion2
-razil <7( 552 ', <,(4 5,9( 94
China <,294 <,9'7 <,5 5,4'( 5,79 59'
Fong Jong 1China2 5 <7( 24,44 2<5 '<,5 244
/ndia <,7 45' 42 ','49 ',<2 54
/ndonesia 2<7 2(7 <,<( 555 ',(7 52
Jorea, .ep$ (7 45' <(, 975 2,5' 25(
0alaysia 25 <<' (,52 2(2 9,52 <25
0e#ico <( 55 4,59 <,< 9,4( <79
.ussian 6ederation <(( (79 ',( <,'92 9,47 <7'
&ingapore ( <5 2(,54 <<4 25,'5 <7
Taiwan 1China2 2' '<< <',5 44 24,'5 <5<
Thailand 4( <57 2,(9 55 5,9' 95
&u"-Total ',<95 4,<(9 -- <7,274 -- 2,'(
;orld Total or ;orld *verage 4,'45 (,272 4,'29 54,279 7,7(( 9,<(5
These <2 )conomies as S ;orld 5$2 <5$' -- '2$5 -- 25$2
Total for Bow- and
0iddle-/ncome Countries
5,'42 7,5 <,52 25,''( (,524 2,(52
These <2 )conomies as S of Bow-
and 0iddle-/ncome Countries
59$4 54$( -- 52$2 -- 9'$2
Source: #omputed based on data from 1orld 2an' !677*$( data for Taian estimated from #%A 5actboo' 677*-
6otes
< *t the "roadest level, average per capita income is a good summary measure of
the effective application of !nowledge to production of goods and services,
although in comparisons across countries it is necessary to "e mindful of cases
where rents from sale of natural resources such as oil "ias per capita income
upward$
2 &ee 0addison 12<2 for a millennial historical overview$
' &ee Herez 1<9922$
( *s pointed out "y 9ershen!ron 1<9422, the advantage for late industrializers is that
they can draw on the technology and e#perience of the already developed
countries$ Fowever it is not so easy to replicate what other countries have done,
as evidenced "y the very small num"er of countries who have made a transition
from low to high incomes$
5 &ee *"ramovitz 1<9742 on catching up with developed countries$
4 &ee ;orld -an! 124a2 for the different country groupings$
5 /n 0ay 25 ten Central )uropean countries 8oined the ):$ 6igure ' has added
their shares to those of the )C-<5 "ac! to <99 to get an estimate of the ):-25 for
comparative purposes$
7 The -./Cs has "ecome a popular aggregation since the 9oldman &ac!s report of
2'$ Fere 0e#ico has "een added to the original list of -./Cs as 0e#ico is
the second largest economy of this group$ Therefore we loo! at the -./CJ0
countries 1with glo"al ran!ing in 2( in terms of economic size in parenthesis2@
-razil 1<'th2, .ussia 1<4th2, /ndia 1<<th2, China 15th2 and 0e#ico 1<th2$
9 The Hhilippines does not "ecause its average annual growth rate was only 2$5
per cent for <97-2($
< The ;orld -an!>s )ast *sia 0iracle "oo! pu"lished in <99' covered Fong
Jong, /ndonesia, Iapan, 0alaysia, Jorea, &ingapore, and Taiwan 1Hrovince of
China2 as the high performing *sian economies$ /t did not give any attention to
China in spite of its already impressive performance$ &ee &tiglitz and ?usuf 12<2
for an updated view of the )ast *sian miracle$
<< The slowdown in growth was generic in Batin *merican countries$ /n the <945-
<97 period, < of the (< countries that averaged more than 5 per cent annual
growth were Batin *merican$ /n the <97-2( period, only one of the <9
countries that grew at more than 5 per cent was Batin *merican$ That country
was Chile whose growth fizzled to an average of '$7 per cent for 2-2($
<2 Figh growth during this period was also typical for the former soviet
countries$ &i#teen of the (9 countries that had average growth a"ove 5 per cent for
2-25 were former soviet economies$ /t appears that after suffering severe
economic contrac- tions and underta!ing !ey reforms in the economic and
regulatory system, many were finally "eginning to grow$
<' Fong Jong, &ingapore and Taiwan are actually considered developed economies
"y the ;orld -an! as their per capita incomes are a"ove the :&=<,44 threshold
used, "ut they have "een included as part of the developing countries> group here
"ecause until relatively recently they were considered as such$
<( &ee Ball>s article in Ball and :rata 12'2 for an ela"oration of this distinction$
<5 Ta"le ' on the second group of *sians includes Nietnam "ecause it has had an
average annual rate of growth of 4$5 per cent for <97-2($
<4 &ee JniivilW 1252, in this volume, for a review of the industrialization of the
high performing )ast *sian economies with a special focus on poverty reduction$
<5 ;estphal, .hee, and Hurcell 1<97<2 have pointed out that Jorea ac%uired a lot
of technology from its early engagement in trade$ This consisted of design and
production technology that was transferred "y large foreign purchasers$ /t also
included technical assistance provided "y supplies of capital goods and turn!ey
plants$ 0ore generally, the fact that Jorean firms were forced to e#port, made them
more aware of the technology used "y the competitors and forced them to !eep up
with new product and process improvements$
<7 Jim 12'2$
<9 Jim 12'2$
2 Bogistics contri"utes 5$' per cent of Fong Jong>s 9DH and employs 4 per cent
of its wor!ing population$
2< &ee Tan, Bui and Boh 1<9922$
22 6or a good account of &ingapore>s foreign investment strategy see ;ong 12'2$
2' &ee ;ade 1<9992, and Goland and Hac! 12'2 for more detail$
2( &ee *w 12'2$
25 &ee Dahlman and &annani!one 1<99<2 for an early account of Taiwan>s
technology strategy$
24 &trong -razilian companies in food processing are HerdigXo and &adia, which
are e#porting to many countries$
25 Bess than one percent of the inputs 1other than la"our, and infrastructure services2
were sourced from 0e#ico$ Hart of the pro"lem was that many of the firms
were already committed to purchases from their :& supplier networ!s and did not
find it attractive enough to develop 0e#ican suppliers due to low %uality and
scale economies$
27 *s part of this, in <95 /ndia enacted intellectual property legislation that did not
recognize product patents for pharmaceuticals or agro-industry products, and limit-
ed the protection for process patents to 8ust five years in these sectorsA and to <(
years in other sectors$ )fforts were oriented towards mission oriented national
programs in defense, nuclear energy spaceA the large capital-intensive state enterprise
sectorA small scale industryA and agriculture$
29 &ee .odri! and &u"ramanian 12(2 for a good account of the "usiness
li"eralization that started "efore the trade li"eralization of the early <99s$
' 0ost nota"le among these was the Council for /ndustrial and &cientific
.esearch 1C&/.2, which "y <995 came out with a new strategy and vision for 2<$
/t changed its orientation from state industry and import su"stitution, to
providing industrial research and development for the new competitive needs of the
industrial sector$
'< ;orld -an! .eport 1forthcoming 252, The )nvironment for /nnovation in
/ndia, ;ashington, DC@ ;orld -an!$
'2 6or a summary of the earlier stages see ?ao 12'2$
'' *ccording to Hremier ;eng Iia"o>s speech on the <5 year technology strategy in
Decem"er 25$
'( 6or a more positive assessment on the prospects for developing countries see the
)conomist 1242, +The Gew Titans,$ This survey points out that all ma8or '2
emerging mar!et countries are growing and had sounder macroeconomic "alances$
/t presents a much more positive future for these emerging mar!et
economies$
Fowever, it does not sufficiently distinguishing short term improvement "ecause of
increases in "asic commodity and natural resource prices from the longer terms
trends which are primarily "eing ta!en advantage of "y China and to some e#tent
/ndia, as will "e argued "elow$
'5 -ut even in more traditional industries such as cars, there in an increase in the
num- "er of variety of products$ /t is now common for consumers to specify the
options on the particular "rand and model of car they wants to purchase, and have
the car made to order$
'4 *verage weighted tariffs 1 using each country>s imports from the world as weights 2
in developing countries have fallen from <9$5 per cent <97-7' to <<$ per cent in
2-2<A and in developed countries from 5$7 per cent in <979-<992 to '$< per
cent in 2 1:GCT*D, 2(2$
'5 &ee 3)CD 12(2$
'7 &ee Chang 1222 for a good development of this argument$
'9 6or a good e#position on modular production as applied to electronics see &turgeon
1222$
( 6or :& 0GCs, .ED underta!en "y foreign affiliates increased from << per cent in
<99( to <' per cent in 22$ 6or &wedish 0GCs it increased from 22 per cent in
<995 to (' per cent in 2'$ 6or the world as whole, .ED e#penditure "y
foreign affiliates is estimated to have risen from :&=' "illion in <99' to :&=45
"illion in
22 L i$e$, from roughly < per cent to <4 per cent of all glo"al "usiness .ED,
:&=(' "illion 1:GCT*D, 252$
(< The use of un"undling for these trends is attri"uted to -aldwin 1242$
(2 6or a current analysis of this "ased on interviews with over 5 companies around
the world see -erger 1242$
(' There is much de"ate on the num"er of 8o"s that might actually "e outsourced,
and -linder>s estimates tend to "e on the high end, "ut the !ey point is that as
/CT advances and more tas!s can "e digitized, many more 8o"s may "e at ris!$
(( /n 2', the top si# 0GCs 16ord, Hfizer, Daimler Chrysler, &iemens, Toyota,
and 9eneral 0otors2 spent more than :&=5 "illion each$ 3nly five developing
countries came near to :&=5 "illion or more per year 1Jorea, China, Taiwan
THrovince of ChinaU, -razil, and .ussia2 L see :GCT*D 1252$
(5 :GCT*D 125, various years2$
(4 /n 2(, the e#ports of 0GCs were appro#imately :&=',49 "illion out of total
world merchandise and non-factor service e#ports of :&=<<,49 "illion 1:GC-
T*D, 22
(5 6or an e#cellent perspective on this from no other than the C)3 of /-0, see
Halmisano 1242$
(7 The economies, in decreasing order of 6D/ inflows in 25 are@ China, Fong
Jong 1China2, :nited *ra" )mirates, -razil, .ussia, -ermuda, Colom"ia,
0e#ico, and TaiwanDsee :GCT*D 1242$
(9 6or a good e#position on supply chains and the difficulty of moving up see
Japlins!y 1252$
5 6or e#ample, according to a recent interview with the handicraft store chain
Ten Thousand Nillages, the main reason why there are so few handicraft products
from *frica is that producers in *frican countries have trou"le producing to the
scale, %uality, and timely delivery re%uired$
59
Technology, 9lo"alization, and /nternational Competitiveness
5< &ome of the most famous are companies such as &amsung, B9, and Fyundai
from JoreaA *cer from TaiwanA China 0o"ile, China Getcom, 6ounder, Benovo,
&*/C, Tsingtao -eer, and RT) Corp from ChinaA -a8a8, -harat, Cipla, Dr$
.eddy>s Ba"s, /nfosys, .an"a#y, .eliance, &atyam, Tata, and ;ipro from
/ndiaA and 9erdau, )m"raer, Gatura, HerdigXo, &adia, and Notorantim from
-razil$
52 The ;orld -an! developed a framewor! and methodology that captures
indicators of all "ut the physical infrastructure elements 1 see
http@KKww w $world"an!$orgK!am2$
5' Halmisano 124, p$<'22 for e#ample writes, +.eal innovation is a"out more than
the simple creation and launching of new products$ /t is also a"out how services,
are delivered, how "usiness process are integrated, how companies and institutions
are managed, how !nowledge is transferred, how pu"lic policies are formulated -
and how enterprises, communities, and societies participate in and "enefit from it
all,$
5( &ee for e#ample De 6erranti et al$ 1222$
55 6or the "road architecture of the !ind of systems that need to "e set up in
developing countries, as applied to China, see Dahlman, Reng and ;ang
1forthcoming
242$
54 6or an e#position on how the traditional factory production system has "een
replaced "y logistics and the implications that has for wor!ers see Ciscel and &mith
1252$
55 6or a good e#position of this and of how some regions in the :& are organizing
pu"- lic private partnerships to create this ena"ling infrastructure see Jasarda
and .ondinelli 1<9972$
57 Ciscel and &mith 125, p$('<2$
59 &tudies from many countries show that efficiency gains are much larger when
investments in hardware are accompanied not only "y training "ut also "y changes
in organizational processes and procedures to ta!e advantage of the potential
offered "y the new technologies 1see 3)CD, 252$
4 6or another view on the impact of these two giants on developing countries see
*lten"urg et al$ 1242$
4< .ather than using nominal e#change rates the figure uses purchasing power
e#change rates$ HHH rates provide a "etter measure for comparing the real levels
of e#penditure across countries$ They are derived from price surveys across countries
to compare what a given "as!et of goods would cost and use that to impute the
appropriate e#change to use$
42 &ee -ergsten 1242 for a good analysis of the implications of China>s rise for
the :&$ &ee Dahlman and *u"ert 12<2 for an earlier analysis of the strengths and
wea!- nesses of China as a !nowledge economy$
4' *ccording to Halmisano 124, p$<'2 8ust "etween 2 and 2' foreign
firms "uilt 4, manufacturing plans in China, some targeted at the domestic
mar!et, "ut many targeted at the glo"al mar!et$
4( 6or a recent analysis of /ndia>s strengths and challenges see Dahlman and :tz
1252$
45 The rate of e#port growth in Iapan and Jorea was faster than in China, "ut
they were smaller as a share of world e#ports$
44 &ee )vans, Japlins!y, and .o"inson 1242 for an e#planation of the triangular
production networ!s which have "een esta"lished in )ast *sia where supply
chain gov- ernor economies li!e Fong Jong and Taiwan organize production in
China using inputs for the )ast *sian region, for "uyers in the :& and ):$
45 &ee /D- 1252 for some data on the degree of intra regional production chains$
47 6or more on the impact of China in )ast *sia, see 9ill and Jharas 1242, and
Fumphrey and &mitz 1242$
49 6or more on the li!ely impact on Batin *merican countries see /D- 1252 and
;orld -an! 124"2
5 6or more on the li!ely impact on *frica see 9oldstein et al$ 1242$
5< 6or a more optimistic assessment of *frica>s prospects in natural resource-
"ased industries including agriculture, see J8YllerstrYm and Dallto 1252 in this
volume$
52 &ee *u"ert et al$ 1forthcoming 252 for some of the !ey elements of strategy
that developing countries will have to master to ta!e advantage of the
opportunities opened up "y the rapid changes in technology$
5' The per capita incomes of Gorway and &witzerland are around :&=5,
compared to per capita income of around :&=< for -urundi, the Democratic
.epu"lic of Congo, and )thiopia$
*c!nowledgements
/ would li!e to than! participants in the &eptem"er 5-7, 24 seminar in
Gew ?or! on the draft papers for this volume for their valua"le
comments$ / would particularly li!e to than! David 3>Connor for his very
useful writ- ten comments on the first draft of this paper$ / would also li!e
to than! Rach ;ilson and *nu"ha Nerma for their e#cellent research
assistance$
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?ao, ?ang 12'2, /n &earch of -alance@ Technological Development in China,
in Competitiveness, 6D/ and Technological *ctivity in )ast *sia, &$ Ball
and &$ :rata, eds$, )dgward )lgar, Gorthampton$

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29

Technology, globalization, and international competitiveness:

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