RIETI Conference in Johannesburg

Growth Driven by Trade, Investment and Economic Cooperation - The East Asian Experience in Economic Development and Cooperation

Transcript #1

Growth Driven by Trade, Investment and Economic Cooperation: The East Asian Experience of Economic Development and Cooperation

Mr. Yoshihiko Sumi: Let us begin the second session of the Development Day. In this session we will follow up on the discussion of the East Asian development model in the first session, although we would like to focus more on the link between trade, investment and economic cooperation in the East-Asian region as well as its implications on development in the rest of the world.

Let me introduce myself. My name is Yoshihiko Sumi. I am Deputy Director-General for Trade Policy with Japan's Ministry of Economy Trade and Industry (METI). I am going to moderate this session this afternoon, which will last until three o'clock, maybe a little bit later than that.

We want to thank all of you for coming to this session and also we want to thank the four distinguished speakers, panelists, sitting on my left, who traveled all the way to Johannesburg to participate in this session.

Let me start by saying that for those in Washington, D.C. who visit the headquarters of the World Bank, you will see in the lobby capitalized letters saying "Our dream is a world free of poverty," and everybody agrees and there is a very broad consensus among the management of the bank, as well as the staff of the bank and other donors and visitors of the World Bank. However, the question is still open: how? How do you achieve that goal, and that is the reason that we organized the three consecutive sessions on this Development Day, today, to discuss what should be the mode of that poverty reduction effort in the various parts of the world which are struggling for development and reduced poverty. So that is the main objective of our session.

First of all, we would like to remind you that this is not just preaching to the other developing countries of the success and lessons of East-Asian development. Rather, we just want to share with you the experiences of these East-Asian economies, particularly those countries and economies which have very close links with my own country, Japan, and those who also experienced some hardship during the Asian financial crisis in 1997 and 1998. The challenges have been gently addressed by these countries, although some structural issues still need to be addressed. You will hear other issues to be addressed which have been raised by the development success itself. So we do not want to just focus on the success side, we also want to highlight the negative aspects of rapid and successful development.

Having said that, I just want to move on, straight to the speakers' remarks and interventions. First, I would like to invite Professor Kenichi Ohno, on my left, who is a professor at the National Graduate Institute for Policy Studies (GRIPS) of Japan, who has had very extensive research experience in development economics and international finance. He is a PhD graduate from Stanford University in the United States. He had worked for the IMF for some period and then he came back to Japan to teach at various institutions, and he has been working as a research fellow at the Research Institution of Economy, Trade and Industry (RIETI), which is one of the two organizers of this session. You will hear the basic points to be discussed today so that the other speakers and panelists can elaborate or comment or criticize later on. Just for the sake of the time, I would like to ask Professor Ohno to conclude his presentation within 20 minutes. So, Professor Ohno, you have the floor.

Kenichi OhnoMr. Kenichi Ohno: Thank you very much. I would like cover many aspects of East-Asian development. I would like to start with this figure, but I think this screen here is a little bit hard to see so you also have my slide handouts in your package, so you may want to follow that. And if you could also close that drape, I think that would be better.

This chart shows that in East Asia and Africa, in the 1950s, 1960s, and 1970s, the income levels were similar according to Angus Madison's statistics. Only in the 1980s and 1990s there is an enormous gap evolving, because East Asia grew very fast and Africa stagnated. Let me skip over these basic diagrams, except this one. This shows the histories of wars, crisis, and internal troubles, and this picture is to show that East Asia has not been very peaceful, especially Indo-China, which has been mired in wars and internal conflicts. The red ones shows the hot wars, the pink ones are serious domestic troubles, and yellow lines show international economic crisis.

Now, East-Asian development has the following features: it was a growth driven by trade and investment; it was not driven by conditionalities or good governance. It was a collective growth of an entire region, not isolated or random. There was staggered participation in a regional production network. One by one, Japan, Korea, Philippines, and Thailand- they jumped into this existing production network of the region. And the region itself provided an enabling environment for catching up by providing a model and providing pressure to do better and to become more competitive, otherwise you will fail.

What we call "Asian Dynamism" has the following features: geographically, the industrialization defused, expanded from the core to the periphery. Within each country that participated in this dynamism, industrialization proceeded from low-technology to high-technology. This pattern is also known as the "Flying Geese" pattern, by which we mean there is a clear order and a structure to it, although there is the possibility of reformation. This picture-it is kind of hard to see-but this is actually how geese fly. There is a top bird and then two wings of follow-up birds. This is another picture, a little bit more complex substructure, but basically a V shape. This is another shape where the top bird is not very clear and there are some dropouts from the front lines. As the geese fly, I think there are lots of variations, but the basic structure is the top bird followed by the other birds.

Let's look at how the East-Asian birds are flying. This is per capita income in 2000. The top bird is still Japan, followed by Hong Kong and Singapore, the small economies, Korea, Malaysia, down the line. And the lowest income countries are really low, about US$300 to US$400 per capita. This shows the manufactured exports lines over the years, the percentage of total exports. The first birds, like Japan, Taiwan, and Korea, always had manufactured exports dominating throughout this period of a quarter of a century. But there are three or four countries that went up very fast, from agricultural producers to dominantly manufacturing producers, like Singapore, Malaysia, Thailand, and most recently China. There are three or more birds just catching up to become middle producers, like the Philippines, Indonesia, and Vietnam. Vietnam is catching up very fast, and Myanmar is still an agricultural producer. But you can see this catching-up pattern with time delays.

This is a schematic diagram to show what is happening. On the horizontal axis we have time; on the vertical we have the countries, and garments, steel, and other goods are passed on from one country to another. This passing on of products is done by Foreign Direct Investment (FDI). You can carve this diagram this way or that way, three different ways, and you can have this diagram. If you look at Japan, Japan's exports shift over time. If you look at one product, like garment, the exporting countries shift, and if you look at one point in time, you can see the international division of labor across the countries.

This shows East Asia's trading partners. The dark part is East Asia trading within East Asia, intra-regional trade, and that portion is increasing. What we can see is the rest of the trading partners for East Asia are basically equally divided by Japan, America, and Europe.

This shows the FDI flows in the early 1990s and late 1990s. Within these several years, the structure of FDI flows did not change very much, as you can see, but the volume increased very much.

This shows trade in machine parts from 1990 to 1998, and of course trading machine parts show the deepening of the international division of labor in this production network. As you can see, in the 1990s, it is a relatively simple structure where machine parts are exported from Japan to lower echelon countries. By 1998, it has become more complex. Also, China joined this network. There are also machine parts exports from lower-level countries to higher-level countries within the span of only several years, and this is the dynamism of East Asia.

So East Asia has been driven by private sector trade and investment primarily, it has a clear structure, it is changing, and it is very dynamic. In this context, what is the role of the government? In general, I think in lower-income and transitional economies with undeveloped markets, privatization and free trade alone may not lead you to prosperity. Unregulated markets may be unstable and polarize income I think it is vital for these governments to become an active agent in escaping from the vicious circle of low income, low savings, low productivity, and low other things.

There are factors often cited as the cause of the East-Asia high performance, for example, high-level education, export promotion, and so forth. I think these are not real true causes. These are the policy tools needed to join the regional production network that I have just mentioned, which each country must prepare. So if you do not have these elements, you do not join the production network of East Asia and you do not have any development. So, the regional environment sort of forces you to adopt these things.

According to my view, I think the basic roles of the East Asia states are as follows: First and foremost, as a precondition for development, political stability and social integration is necessary. If you do not have this, there is no development. If you have political stability and social integration by any means, then I think there are three tasks. The first task is to create a competitive market economy. In a lower-income country, the market is not something that exists already. It is not competitive yet. So these things must be generated and supported by the government. Just freeing the economy will not give you this. Task two is to initiate and manage global integration, because global integration gives you the impetus to develop and to create the market. There is a risky aspect too, so you have to manage the risk of integration as well as initiate integration. Task three is to cope with the negative aspects of growth, the negative aspects of success. For example, emerging income gaps, congestion, pollution, corruption, and so forth. If you do all these three things on top of the first, most important step-political stability and social integration-then you will have East-Asian development.

But these are very tall orders. Not every country can do this, how East Asia solved this problem. What if the government is very weak? The East-Asian answer is to install a strong state with economic capability. It is not just a strong state, it is not just a dictatorship. We have many dictatorships with very weak economic capability. What we need is a strong state with economic capability and with the following features: a national obsession with industrialization and export competitiveness, a powerful and economically literate leader (that is very rare; we have powerful leaders but very few economically literate leaders), we need an elite team to support the leader, and there should be top-down decision making, not necessarily democratic by Western standards.