The Middle-Income Trap and East Asian Miracle Lessons

Transcription

1 The Middle-Income Trap and East Asian Miracle Lessons PIER Economic Seminar March 2017 Veerayooth Kanchoochat, PhD Associate Professor of Political Economy National Graduate Institute for Policy Studies (GRIPS), Tokyo

2 Outline 1) Introduction 2) MIT: One term, two definitions, and three solutions 3) Education and institutions as magic bullets? 4) Structural transformation through comparative advantage? 5) Industrial policy without yardsticks and macroeconomic stability? 6) Conclusion 2

3 I. INTRODUCTION 3

4 The rise of the MIT debate The status of middle-income countries is defined by the World Bank: GNI per capita in 2015 from $1,026 to 12,475. The Bank s measures and categories have been adjusted time and again after the official World Bank classification started in In 1960 there were 101 middle-income economies only 13 countries could move to high-income by Japan, Taiwan, Singapore, South Korea, Hong Kong, Greece, Ireland, Israel, Mauritius, Portugal, Puerto Rico, Spain, and Equatorial Guinea. 4

5 The rise of the MIT debate So, approximately the 87% of middle-income countries have been stuck in this category for half a century. The phrase middle income trap was invented by Gill and Kharas in An East Asian Renaissance: Ideas for Growth (World Bank 2007) to characterze this situation. Appealing and ambiguous enough to become a powerful buzzword since then. Featuring in international magazines and organizations. Now having 5,290 papers on google scholar. Are these works/people talking about the same thing? Not quite. 5

6 The paper s goals Goals o To provide one of the earliest attempts at categorizing the MIT literature o To evaluate each MIT strand through East Asian Experience Why East Asia? o 13 survivors = Japan, Taiwan, Singapore, South Korea, Hong Kong, Greece, Ireland, Israel, Mauritius, Portugal, Puerto Rico, Spain, and Equatorial Guinea. o East Asia (Japan, Taiwan, Singapore, South Korea and Hong Kong) are the survivors without natural resource wealth and European advantage. Notes o Country focus: More on Taiwan, Singapore, South Korea (first-tier NIEs) o Period: Mainly between 1960s and 1980s (catch-up from mid- to highincome) 6

7 II. MIDDLE-INCOME TRAP ONE TERM, TWO DEFINITIONS, AND THREE SOLUTIONS 7

8 Two definitions of the MIT Generally, the term MIT refers to the situation in which countries, despite attaining middle-income status for certain periods, have failed to grow further into high-income level. However, there is no accepted definition of what the MIT is. One group of literature sees the trap as growth slowdowns. For example, Eichengreen et al. (2013) define MIT as those who had undergone average GDP growth of at least 3.5% for several years, and then stepped down by at least 2% between successive seven-year periods (also Felipe et al. 2012; Aiyae et al. 2013). Another group puts the MIT into the broader debate over economic catching up of developing countries in relation to such developed countries as the US or Japan (e.g. Lin and Rosenblatt 2012; Lee 2013). 8

9 Three solutions to the MIT 9

10 (1) Getting education and institutions right Causes of MIT: Inadequate quality of education and institutions. The role of the state = Minimum state or limited to functional intervention Policy suggestions: To make the right incentive systems; investing more in education and R&D. Jitsuchon (2012: 19) the state should devise the right incentive system so that economic agents would want to pursue their own prosperity...providing public research infrastructure and tax benefits for implementing innovation and R&D activities is an example. 10

11 (2) Changing export composition through comparative advantage Causes of MIT: Inadequate capabilities to produce and export higher-technology products. The role of the state = Facilitating state. Policy suggestions: To support industries in which a country possesses comparative advantage. Justin Lin: The best way for a developing country to achieve sustained, dynamic growth is to follow comparative advantage in its industrial development and to tap into the potential of advantages of backwardness in industrial upgrading (Lin 2012: 397). 11

12 (3) Industrial upgrading by the proactive state Causes of MIT: Inappropriate and insufficient role of the state in enhancing capabilities to produce and export highertechnology products. The role of the state = Proactive state intervention. Policy suggestions: To focus on capability accumulation and deliberate attention to advancing industrial upgrading. Paus (2012: 130): Sustained broad-based upgrading happens where there is a proactive government with an overall focus on capability accumulation and deliberate attention to advancing social capabilities in sync with the needs of private sector upgrading (p. 130). 12

13 The MIT literature in a nutshell Despite using the same phrase, the MIT literature varies considerably in the definitions provided, cases studied, underlying causes of the trap analyzed, and policies suggested. To make it more tractable, we can categorize the literature into three groups, labeled by their policy standpoints: 1) Getting education and institutions right 2) Changing export composition through comparative advantage 3) Industrial upgrading by the proactive state 13

14 III. Education and institutions as magic bullets? 14

15 #Lesson 1 Education needs to link with industrial targets. 15

16 Education and economic growth: It s complicated A number of cross-country studies find the relationships between education and economic growth to be weak or even irrelevant. Pritchett (2001): Cross national data show no association between increases in human capital attributable to the rising educational attainment of the labor force and the rate of growth of output per worker (also Benhabib and Spiegel 1994; Pritchett 1996). Some other studies even find the opposite relationship; it is economic growth that leads to higher quality and quantity of education (Bils and Klenow 2000). Why complicated? Much of knowledge gained in education is not directly relevant for productivity enhancement. 16

17 Education and economic growth: East Asian lesson The causal link from education to growth is at best indirect, and requires many more things in the casual process. To have direct impact on growth, education policy has to be tailored to support the national development strategy. University-Industry linkages example Singapore s Nanyang Technical University was established after having clear industrial targets, and coming with Skills Development Fund. Rather than simply increasing average years of schooling or gross tertiary enrolment. Comparing Philippines and EA/SEA. 17

18 #Lesson 2 Growth-enhancing governance is more relevant than good governance. 18

19 Institutions and growth: Even more complicated With regard to institutions, most MIT literature is influenced by the so-called good governance institutions meant for minimizing the role of the state as well as rent-seeking activities. But there are various methodological problems, especially the measurement errors and missing-variable considerations. Another theoretical strand = Liberalized institutions are less good at generating growth than are properly regulated institutions and markets (e.g. Nelson and Winter 1982; Lall and Teubal 1998; Cimoli et al. 2009). 19

20 Institutions and growth: East Asian lesson East Asia was growing well despite their institutions being highly deficient by modern standards, in such areas as democracy, bureaucracy and judiciary, property rights, western-style corporate governance, and financial institutions. Rents and rent-seeking are always damaging to growth, and therefore should be eliminated at all costs? Perfect competition vis-à-vis East Asian managed competition. Economic efficiency with rampant corruption in South Korea. Schumpeterian rents are necessary for innovative activities. From East Asian experience, it is more about how such rents have been created and manage => Variety of growth-enhancing governance (e.g. conglomerate-led in Korea; SMEs-led in Taiwan). 20

21 Summary: Education, institutions and economic growth MIT s first strand (Getting education and institutions right) suffers from the causal trap. Education and certain institutions are desirable on their own, but their impact on national growth is indirect we need to put them into context. From East Asian experience, to promote growth, education needs to link with the country s national industrial strategy. Likewise, East Asia did not possess good institutions during their catch-up period. Institutions were designed after growth strategies. 21

22 IV. Structural transformation through comparative advantage? 22

23 #Lesson 3 Long-term growth is about structural transformation and export composition. 23

24 What defines a country s economic development? Equatorial Guinea also succeeded in escaping from MIT, why no one calls it a developed country nor wants to learn from it? MIT s second strand brings two insights: Reviving the old definition of economic development, that is, development is about structural transformation of productive capabilities. Shifting the focus from export expansion to export composition as a prime indicator of structural transformation. East Asia reaffirms both statements: Successful catching up of East Asia is the result of such transformation in a faster and more intense manner than any other developing region, as indicated by its changing export composition. 24

25 Worldwide manufacturing development paths (changes in the shares of manufacturing in GDP at current prices, ) Source: Calculation from Szirmai (2012, Table 3). 25

26 Export composition vis-à-vis export expansion Export expansion alone is not sufficient for sustaining structural transformation. What separates export-led industrialization in East Asia from other regions is export composition. Latin America and East/ Southeast Asia have pursued export-led strategy in the catch-up process. Although Latin American countries managed to reach East Asian levels of market penetration in OECD markets (matching export expansion) in the 1990s, they only did so in their traditional export products. While East Asian countries able to increase remarkably the share of high-tech products in their exports to the same markets (different export composition). 26

27 Latin America and East Asia Different trajectories in high-tech exports 1960s & 1990s LA & EA: different export-trajectories in 'high-technology' exports, 1960s & 1990s 80% % of X to OECD markets with high R&D content Singapore Malaysia 80% 60% 60% 40% Korea Taiwan 40% Thailand China 20% 20% Brazil Latin America* 0% 0% 0% 20% 40% 60% 80% 100% % of X in which country gained market shares in OECD M Source: Gabriel Palma (2009) Flying geese and waddling ducks: The different capabilities of East Asia and Latin America to demand-adapt and supply-upgrade their export productive capacity. See also Felipe et al (2012) & Eichengreen et al (2013).

28 #Lesson 4 Changing export compositions usually goes against comparative advantage. 28

29 State intervention and changing export composition What is the role of the state in changing the country s export composition? MIT s second strand considers that state intervention is fine as long as it follows the country s comparative advantage. Theoretically, comparative advantage concept is based upon such assumptions as: (a) the no conditions, such as no externalities; no increasing returns to scale; no factor mobility between countries; no technological change; and (b) the necessary conditions, such as the perfect competition in all markets in both countries. Empirically, high-speed structural transformation in East Asia was a result of various mixtures of proactive state intervention aimed at upgrading their industrial structures. 29

30 State intervention and changing export composition Source: Veerayooth Kanchoochat and Patarapong Intarakumnerd (2014) Tigers Trapped: Tracing the Middle-income Trap through the East and Southeast Asian Experience. HTW Berlin Working Paper No. 04/

31 Summary: Structural transformation, export composition and economic growth MIT s second strand shifted the focus of national development as well as export performance. But it still suffers from the historical trap. A transformation of productive structure should be seen as the crux of economic development, whereby the continuously changed composition of export products is key to sustaining the transformation. However, East Asian countries usually went against their comparative advantage and targeted new industries/products that would receive strong state support ( selective industrial policy ) every decade or so. Moreover, there is no shortage of theoretical underpinnings for the role of the proactive state in economic development, as conventionally assumed. Economics literature: Information externalities and coordination externalities. Innovation literature: Systemic failures in national innovation systems. 31

32 V. Selective industrial policy without yardsticks and macroeconomic stability? 32

33 #Lesson 5 Effective industrial policy requires an explicit yardstick and exit strategy. 33

34 Industrial policymaking in East Asia MIT s third strand gives weight to state intervention and industrial policy. Although East Asia seems to concur with this view, the Achilles heel of this approach is its lesser emphasis on the pragmatic guidelines on effective state intervention and relation to macroeconomic stability. Despite typically being referred to as the East Asian model, there is neither industrial policy template nor a recipe for a magic bullet. Variations across the theme deserve close attention. For example, in terms of trade policy, Singapore is much less interventionist than Japan and Korea. But Singapore and Taiwan are far more interventionist than Japan and Korea when it comes to the role of state-owned enterprises (SOEs). 34

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36 Industrial policymaking in East Asia Government support of East Asian NIEs had (1) an explicit yardstick and (2) clear exit strategy. Disciplinary tools: conditionality, sunset clauses, built-in program reviews, monitoring, benchmarking, and periodic evaluation. In Southeast Asian NIEs, infant industry protection was typically open-ended and non-selective, and no required performance in exchange for policy support. 36

37 Industrial policymaking in East and Southeast Asia East Asian Punishment Taiwan: Quantitative import restrictions and export licensing, approval for capital goods imports for new plants, no nongovernmental borrowing. Korea: Punitive measures included access to subsidized credit and import licenses; income tax audits; a number of other measures of suasion; even prison sentences! Singapore: Positive incentives. Southeast Asia: More carrots, less sticks, no required performance Malaysia: Technology transfer has not involved any ex post monitoring and appraisal, while ex ante screening is poorly managed. Proton case. Thailand: No explicit industrial policy before 2001, except auto and petro. But still poorly designed and weak evaluation process. Philippines: Powerful business under fragmented state obstructed reforms. 37

38 #Lesson 6 Macroeconomic stability is required to complement national development strategy. 38

39 Macroeconomic management in South Korea In East Asia, macroeconomic policies were instrumental in gearing the countries towards structural transformation and changing export composition but not quite in a conventional way. South Korea was most unorthodox. Fiscal and monetary policies were employed to sustain high investment by creating an expansionary environment, even through inflationary measures if necessary. During Park Chung Hee regime ( ), Korea s annual per capita income was growing at 9.5% in parallel 15.5% inflation rate. Park also nationalized commercial banks to pursued policy loans, which accounted for 57.9% of total bank loans. Shift to export-oriented industrialisation was steered by a host of inflationary incentives e.g. low-interest loans, foreign exchange credits, and repeated devaluation of foreign exchange rates. 39

40 Macroeconomic management in Taiwan Taiwan was less unorthodox. Throughout its catching-up period, it attained surplus budgeting, high real interest rates, low money supply and stable foreign exchange rates. However, during the high-growth period of 9.7% ( ), Taiwan still had an average inflation rate of 7.2%. When confronting external shocks, the top priority was placed on macroeconomic stability, although once the economy was stabilized growth would return to the top of the agenda. For example, whenever export growth slowed down, Taiwan s central bank would lower the rediscount rate on export loans to stimulate investment. 40

41 Macroeconomic management in Singapore (I) Singapore was complicated despite its low inflation, high savings and investment and small government expenditures. Government budget surplus could be a misleading indicator of Singapore s macroeconomic policies due to the role of GLCs and CPF. First, its state-owned enterprises, aka government-linked companies (GLCs), have been instrumental in reallocating the country s resources. GLCs held majority shares in a wide range of areas, including Singapore Airlines, telecommunications, financial services, energy and natural resources, transport, shipping, semiconductors. Public sector share of gross fixed capital formation in Singapore was 35.6% in 1960s, 26.7% in 1970s and 30.3% in 1980s. Singapore used GLCs (with no effect on government budget) to stimulate the economy amid recession and manage aggregate demand. 41

42 Macroeconomic management in Singapore (II) Second, another hidden resource of Singapore also came from national compulsory social security scheme that forces every employee to save, named the Central Provident Fund (CPF). Between 1974 and 1985, government savings rose from 23 to 67% of gross national savings. CPF provided a ready and non-inflationary source of finance for government spending, including fiscal incentives for foreign investors, with lower than market interest rates. Together, GLCs and the CPF functioned as an automatic stabilizer for inflation for Singapore s catch-up strategy (Chowdhury 2008). 42

43 Summary: Proactive state, industrial policy and macroeconomic management MIT s third strand is based on real history of East Asia and argues for the proactive state. But usually falls into a practical trap by its lack of pragmatic guidelines on effective state intervention and how that is complemented by macro policies. There is no single East Asian model. Their policies entailed variation in carrot-and-stick incentives, indicated by explicit yardstick + exit strategy. Macroeconomic stability was also a necessity. But East Asia considered it as part of national development strategy. South Korea may be growthoriented, but Taiwan and Singapore incorporated efficiency, growth and equity together. 43

44 VI. CONCLUSION 44

45 Debating the middle-income trap From 101 middle-income economies in 1960, only 13 countries could move forward to become high-income. Most countries have been trapped in the MIT. But analyses of the causes and policy suggestions vary. We may categorize the MIT literature into three groups: a) Getting education and institutions right b) Changing export composition through comparative advantage c) Industrial upgrading by the proactive state East Asia experience is relevant to today s developing countries, as Japan, Taiwan, Singapore and South Korea are the main MIT escapers without natural resource wealth and European advantage. 45

46 Take-away lessons from East Asia 1) Education needs to link with industrial targets. 2) Growth-enhancing governance is more relevant than good governance. 3) Long-term growth is about structural transformation and export composition. 4) Changing export compositions usually goes against comparative advantage. 5) Effective industrial policy requires an explicit yardstick and exit strategy. 6) Macroeconomic stability is required to complement national development strategy. 46

47 Thank You Reference Veerayooth Kanchoochat (2015) The Middle-income Trap and East Asian Miracle Lessons. in Alfredo Calcagno et al (eds) Rethinking Development Strategies after the Global Financial Crisis. New York and Geneva: United Nations. Contact 47