Catalog

	Table of Contents
p. 51 of 54 BACK | NEXT I. Developing Asia and the World - Economic Developments and Prospects II. Economic Trends and Prospects in Developing Asia III. Asia's Globalization Challenge Introduction The Asian Growth Experience and Globalization Policies for Adapting to Globalization Institutional Options in a Globalizing Environment Conclusions - Toward a Framework for Globalization

Asian Development Outlook 2001 : III. Asia's Globalization Challenge

---

The Asian Growth Experience and Globalization

The rapid growth of Asia in the last three decades, particularly of the newly industrialized economies (NIEs) of Hong Kong, China; Republic of Korea (Korea); Singapore; and Taipei,China, as well as the economies of Southeast Asia, has been widely documented. This rapid progress in economic development occurred through export-led growth accompanied by high savings and investment rates, competitive pricing, a supportive macroeconomic framework, inflows of new technology, and a dynamic response to the changing pattern of overseas demand. This was a strategy that was eminently successful in much of Asia and one that other developing countries began to emulate (as discussed in Emerging Asia, ADB 1997).

Since that book was published, a regional financial crisis has changed the course of Asia's emergence. Nevertheless, the region remains dynamic and still features many of the policies that were responsible for this high growth in the past. Not unexpectedly, Asia's strong growth performance unleashed a major debate about the factor inputs that were responsible for this growth. The general point was that factor inputs of labor and capital (as opposed to new technology) accounted for much of the growth in DMCs over the past three decades (see further discussion on this in Box 3.1).

To the extent that Asian growth was unprecedented in the history of developing economies, its uniqueness lies in the arrangements developed to participate in globalization and to close the technological gap. It has been argued that the success that it has had in catching up reflects its reliance on market forces in combination with government guidance for achieving the requisite allocation of resources (World Bank 1993). Governments pursued policies and nurtured institutions to promote savings. Financial systems were organized around a relatively small number of large banks, which could be influenced and directed by the authorities. They funneled these savings into investment. Subsidies were provided for firms in strategic sectors. Barriers to entry ensured that these investments were profitable (Rodrik 1995, Cho 1996).

Interest-rate controls made it more difficult for firms not favored by the authorities to bid for scarce finance. Land reform, public spending on rural infrastructure, deliberative councils, and tripartism-coordinated negotiations over wages and other determinants of industrial development involving labor, management, and government-provided the necessary reassurance that the returns to these high levels of savings and investment would be widely shared (Campos and Root 1996).

These policies and institutions were tailored to facilitate growth that was based on factor accumulation rather than on increases in total factor productivity (TFP), and they were suc-cessful. (TFP-or changes therein-attempts to measure output growth that can be accounted for by the growth of labor and capital inputs).

As DMCs continue to close the gap with the technological leaders, however, they will have to "graduate" from a growth model based on accumulation to one based on innovation.³ They will have to adapt their institutions accordingly. And they will have to do so in a manner consistent with the opportunities and constraints of globalization. This need for knowledge, learning, and policy adjustment in the context of globalization is explored in the next section, Policies for Adapting to Globalization. Now we turn briefly to a discussion of Asian patterns of globalization.

Globalization Trends

After the Second World War, on gaining independence, many Asian countries began exporting primary products to the industrial countries. In the 1960s, the NIEs began to export labor-intensive manufactured products to Europe, Japan, and the US. Subsequently, Southeast Asian countries (Indonesia, Malaysia, Philippines, and Thailand-the ASEAN 4) and the PRC joined them as exporters of labor-intensive manufactured goods. With time, these economies gradually moved into higher value-added, and skill- and capital-intensive exports. As a result of these trends, the share of manufactured exports increased dramatically in many DMCs (Table 3.3).

Asian exporters increased their market share in traditional manufactured exports through improved quality and competitive prices. They also moved into those markets where the income elasticity of demand for imports in the industrial countries was high, thereby guaranteeing rapid export growth. These included a range of skill- and technology-intensive industries such as electronics, computers, and pharmaceuticals.

Much of the impetus for strengthening international economic ties came from Japan and the US following the Korean War. The US made substantial infrastructure investments in both Taipei,China and Korea and supported land reform. Both these Asian economies enjoyed technology transfers from joint ventures with Japanese companies, adopting aspects of Japanese industrial policy, methods of production, inventory control, and distribution. In the mid-1980s, FDI began to flow into labor-intensive industries. These "sunset" industries were no longer viable in Japan because of high wages and a strong yen. This flow of FDI from Japan helped develop further manufacturing industries across the region, accelerating growth and technology transfer. The above description does not, however, capture the economic development style of some other Asian countries that adopted globalization after experimenting with other approaches for quite some time.

The cases of the two economic giants of Asia-the PRC and India-are thus worth a more detailed look. These economies did not begin the transition to globalization until much later. Until 1978, the PRC remained virtually isolated from market economies, trading almost exclusively with other centrally planned economies. In the 1980s, however, it undertook a series of liberalization measures that began to open up the economy. In India, self-imposed near isolation lasted until the early 1990s. The trade-to-GDP ratio actually declined between 1950 and 1990. However, in the 1990s, several parts of the economy were liberalized and international trade increased.

People's Republic of China. Having observed the initial success of the NIEs, the PRC embarked on a wide-ranging series of socioeconomic reforms in the late 1970s that eventually propelled it from an inwardly focused, highly centralized economy to one of the most important manufacturing and trading nations in the world. The first reforms were in the rural economy. In the household responsibility system, which replaced the commune system, communes leased plots to individual households for 15 years (later 30 years). The household delivered a fixed quota of production to the village and kept the balance to consume or to sell in private markets that quickly developed. The results were remarkable. From 1978 to 1986, the value of farm output at current prices nearly tripled. Rising rural incomes created a demand for consumer goods, which were increasingly supplied by town and village enterprises (TVEs)-collectively owned firms formed by local governments that took advantage of increased rural savings and the pool of available labor created by increased farming efficiency. Industrial production in the countryside accelerated, growing at an average of 30 percent per annum during the 1980s (Kennedy and Vietor 2001). The TVEs' share of industrial output rose quickly from almost nothing to more than a third of total industrial output.

As industrial output rose, trade and investment reforms were quickly transforming an isolated country that had no FDI inflows and a ratio of total trade to GDP of only 10 percent in the mid-1970s, compared with more than 30 percent in many NIEs and Southeast Asian economies. Three related sets of reforms facilitated this transformation. The first was trade reform undertaken on a piecemeal basis from the late 1970s through the 1980s. Local governments licensed new foreign trade corporations (FTCs) to bypass the 12 FTCs authorized by the central Government. By the end of the 1980s, the number of FTCs had mushroomed to over 5,000 and the number of domestic firms with trading rights had increased to over 10,000. This liberalization of the trading environment at the firm level was accompanied by a gradual liberalization of the tariff regime.

The second policy initiative was liberalization of FDI. This was much more radical because it overturned a policy of careful monitoring of foreign activities in the country, even though the initial reforms were confined to a few coastal areas in the southern part of the country. The PRC was able to attract enormous inflows of FDI, so that by the mid-1990s it was the largest recipient of FDI among developing countries. Three coastal cities (Shenzen, Shantou, and Xiamen) and a province (Hainan) were designated as "special economic zones" in 1980, and this was expanded to 14 coastal cities in 1984. These regions have grown at double-digit rates ever since.

The third set of reforms involved the exchange rate. The currency was devalued in real terms over the 1980s and early 1990s and foreign currency transactions were gradually deregulated. The current account (though not the capital account) was made fully convertible in the late 1990s. The special economic zones generally enjoyed a greater level of external sector liberalization.

These reforms led to a dramatic transformation of the PRC's links with the outside world. Exports grew very fast for two decades, in absolute terms, from $10 billion in 1978 to $195 billion in 1999 and as a percent of GDP from less than 7 percent to about 20 percent over the same period. The response of FDI was slower at first, but increased rapidly by the end of the 1990s. From $57 million in 1980, it grew to over $40 billion by the mid-1990s, an increase of 700 percent in less than 20 years. The special economic zones were the focal point for both exports and FDI, particularly in the 1990s: by the end of that decade, enterprises with foreign investments accounted for over 40 percent of total exports.

To take advantage of the spread of the "new economy," the PRC has recently made rapid strides in the development and spread of fiber optic technology to increase telecommunications capacity. Both fixed and mobile line capacity has ballooned in the past decade from virtually nothing to about 15 lines per 100 inhabitants, higher than in any DMC apart from the NIEs and Malaysia.

India. The country followed a strategy of growth controlled and directed by the Government for most of the period from independence in 1947 until the beginning of the 1990s. This strategy focused on control of the economy through four complementary policies: extensive regulation of international trade and investment, control of key sectors of production, central control of domestic investment, and an elaborate system of licensing and regulation.

In pursuit of an import-substitution strategy, the Government introduced regulations to control foreign exchange transactions and imports, with the former allocated according to a priority list. Debt repayments received the highest priority, followed by capital goods, raw materials, and lastly, consumer goods, which were rarely approved. Policies toward foreign investment depended upon the ability to earn foreign exchange and the Government's attitude to the role that the foreign investment could play. Between 1957 and 1970, joint ventures were encouraged but the first oil shock and a balance-of-payments crisis resulted in a reversal of policy. After the second oil price shock of the late 1970s, the policy was reversed again.

To control key sectors of the economy, the Government nationalized several industries including commercial banks, life insurance companies, and large firms in processing and manufacturing fertilizer, mining, chemicals, steel, and oil. By the 1980s, the Government owned nearly half the country's Industrial assets. The returns were low and efficiency poor. Because the financial sector was owned by the state and foreign capital investment was controlled, the Government had a virtual lock on how investment was allocated in the economy.

The Government controlled virtually all business activity (both entry and exit) through licenses as well as many prices. This regulatory control extended to all private firms as well as the public sector. The control of production capacity was introduced to prevent duplication and reduce "unnecessary competition," but tended to protect inefficient firms.

Industrial policy throughout this period pushed development toward more capital-intensive industries and away from the economy's comparative advantage in labor-intensive products, even though many incentives for small businesses were on the books. The end result of this bureaucratic network of subsidies, taxes, prohibitions, and controls was a highly inefficient and cumbersome economic system that grew slowly at 3 percent per annum, without much competition or new technology. Isolated from the global economy, India produced the same products year after year at high costs. By the beginning of the 1990s, India had been left far behind in nearly every respect by the NIEs and the countries of Southeast Asia.

In the 1990s, the worsening balance-of-payments crisis forced the Indian Government to reconsider its policy stance. Considerable progress was made in overhauling foreign trade and investment regulations, in reducing state control of industry, in liberalizing the financial sector, in freeing up investment decisions, and in eliminating many regulations on capacity creation and import licensing. The rupee was devalued and made fully convertible on the current account in 1991. Most import licenses were eliminated and tariffs were lowered and simplified. The rules for approving FDI were revamped and the ceiling on foreign ownership removed. The Government also made a concerted effort to reduce the role of the public sector in the economy, including opening up some sectors to the private sector, selling government assets, and closing loss-incurring businesses. Capacity licensing was significantly reduced and the banking system was opened up to foreign ownership and entry. Interest rates were partially deregulated.

There was, and continues to be, debate about the nature of reforms and, in some political quarters, there is opposition to them. Despite these difficulties, the ongoing reforms have had a significant effect on those sectors of the economy where openness and competition have been most apparent. Economic growth accelerated, particularly since 1996, to 7 percent by the end of the 1990s. FDI has flowed in, total trade as a proportion of GDP has increased to nearly 20 percent, the economy is more open, and portfolio investment has increased. Finally, the ICT sector, especially software exports, has become a showpiece for the reform effort as many new companies have been listed on stock exchanges both at home and abroad.

Many areas remain where the reforms have been less effective or have not been implemented at all. Disputes have arisen regarding FDI, including the validity of contracts and property rights. Approval procedures have kept FDI from flowing into smaller and potentially more dynamic enterprises. Nevertheless, India has made significant strides toward opening up the economy.

International Trade Trends

As more DMC's adopted an export-oriented growth strategy, world trade accelerated as did trade among DMCs. Figure 3.2 compares the shares of exports to DMCs from selected countries in 1985 and 1999. In both Hong Kong, China and Taipei,China, trade with the PRC increased while the PRC's trade with the region fell as OECD markets became more important. Korea began to export more manufactured goods such as automobiles to the rest of Asia. For Singapore, trade with Indonesia and Malaysia, particularly in electrical products became increasingly important. In India, the opening up of the economy in the 1990s helped the country integrate more with its Asian neighbors. In Indonesia, the increased trade within the region has been in exports of primary materials-particularly oil-and of labor-intensive manufactures.

Interestingly, at the same time that trade among DMCs was increasing, with few exceptions the share of exports to Japan decreased, sometimes quite substantially (see Figure 3.3). For Indonesia and Malaysia, this represents a decline in primary exports such as oil, rubber, and palm oil. For the PRC, Korea, and Philippines, it probably reflects the fact that during the 1990s the Japanese economy, and hence its demand for imports, grew more slowly than the US economy, which became a more important export market for many DMCs during the long US expansion of the 1990s.

Capital Movements

As they adopted more liberal trade policies, many DMCs opened their economies to financial capital flows. Referring to Figure 3.1, inflows accelerated throughout the first part of the 1990s, nearly tripling between 1990 and 1997. Between 1997 and 1999, however, there was a sharp reversal in capital inflows to Asia as a result of the financial crisis-from inflows of $188 billion in 1996 to outflows of $125 billion in 1998 as portfolio and other investment inflows turned sharply negative. Only FDI inflows remained positive in 1998, continuing to grow, particularly to the NIEs.

Until the financial crisis, the PRC managed to attract the bulk of FDI to the Asian region. Total FDI inflows to the PRC surged more than 10-fold between 1990 and 1998 and its share of total regional FDI inflows rose from 20 percent to over 50 percent. However, other countries were also able to build up FDI quite rapidly. FDI inflows nearly doubled in the NIEs and more than doubled in Southeast Asia between 1990 and 1997. FDI inflows increased quite rapidly in South Asia, albeit from a low base. Portfolio and other investment was much more volatile than FDI, reacting more dramatically to the financial crisis.

Other investment, mostly bank loans, reversed from an inflow of $37 billion in 1996 in Southeast Asia to an outflow of $19 billion in 1997 and further to an outflow of $28 billion in 1998. In the NIEs, the reversal came a year later, from inflows of $40 billion in 1997 to outflows of nearly $30 billion in 1998. In the PRC, the reversal was more modest-from an inflow of about $20 billion to an outflow of $9 billion between 1997 and 1998.

Overall, within Asia there has been greater financial integration over time while the pattern of financial integration has followed the pattern of trade. Generally, dollar-denominated asset markets have shown significant growth, particularly in Hong Kong, China; and Singapore, while financial integration has grown among PRC; Hong Kong, China; and Taipei,China. Furthermore, with greater financial liberalization, many more international and regional banks and financial institutions are competing for business throughout Asia.

Labor Movements

DMCs have experienced a trend toward integration on many levels, including labor markets. Although migration trends are harder to gauge, since labor movements are often unrecorded, the broad pattern is clear.

Richer Asian countries that grew rapidly in the 1980s and 1990s now have low levels of unemployment and are experiencing a growing need for a variety of skills that are in short supply among the domestic labor force. While the movement of unskilled labor has received wide publicity, there is also a strong flow of immigrants in some skilled and professional occupations. The main recipients of this new wave of migration have been Japan; Singapore; and Taipei,China; and more recently, Malaysia and Thailand. Japan and Taipei,China have attracted labor from all over Asia while Singapore has experienced a large volume of migration from Malaysia.

Some countries have been both significant importers and exporters of labor. For a few years before the Asian financial crisis, Thailand was importing labor from Myanmar, Viet Nam, and to a lesser extent Cambodia and the Lao PDR. Yet it also sent many migrants to the Middle East. Malaysia has been importing labor from Indonesia and sending migrants to Singapore.

Cambodia, Indonesia, Lao PDR, Philippines, and Viet Nam have higher levels of unemployment and somewhat lower standards of living than the NIEs and the rest of Southeast Asia. Thus, these countries have been the major suppliers of migrants to the rest of the region. In the case of the Philippines, facility with the English language has allowed migrants to move to many different countries.

Recently, with the advent and spread of the Internet and the new economy, it is jobs that are beginning to move in search of labor rather than the reverse. Using advanced telecommunications technology, many tasks can be easily and efficiently outsourced to developing countries. Some examples include data entry, software programming and development, Internet website development, computer help lines, and some accounting functions. This has resulted in an increase in services income to Asia.

The Pacific DMCs have witnessed substantial migration to New Zealand and Australia from some of the closer islands including the Cook Islands and Tonga, and to the US from Samoa, Marshall Islands, and Federated States of Micronesia. This migration is general in nature and is the result of slow growth in job opportunities in the domestic market and of pressure from rapid population growth.

Globalization and Poverty

In this section, we have discussed Asia's growth experience and globalization. Economic theory and evidence support the proposition that a strategy of openness leads to high rates of economic growth and poverty reduction. It is posited that a reduction of barriers to trade tends to increase the demand for relatively abundant factors of production. In the case of Asia, these have been initially unskilled and semiskilled laborers, i.e., those most likely to be poor. Evidence to support this proposition-that openness generally reduces poverty-is presented in two stages. As Figure 3.4 demonstrates for selected DMCs, countries that are more open to trade tend to enjoy higher rates of growth. Numerous studies support this result, including Sachs and Warner (1995), OECD (1998), and Gwartney and Lawson (2000). Next, as Figure 3.5 shows, there is a strong negative relationship between growth in the incidence of poverty and the rate of long-run economic growth. This relationship is exemplified by the NIEs and Southeast Asian countries, where the development of outward-looking, export-oriented industries resulted in rapid income growth and a reduction in poverty during the 1980s and 1990s. In these two groups of economies, incomes grew at an average rate of over 6 percent between 1987 and 1998 while the poverty rate (the percent of the population with an income below $1 per day) declined from 23 percent to 9.6 percent over the same period (World Bank 2001, IMF 2000). The implication is that globalization, when accompanied by appropriate domestic policies, can promote poverty reduction. However, as will be discussed in the section Policies for Adapting to Globalization, globalization can increase economic volatility, to which the poor are more vulnerable.

________________

Back Introduction	Next Policies for Adapting to Globalization