Overview Analytical Framework & Transformation Strategy

1. OverviewAnalytical Framework & Transformation Strategy Policy Formulation in Developing Countries

2. About This Course • Design, implementation and assessment of growth-oriented development policies • Collection and comparison of international best and worst practices (not abstract theory or cross-country regressions) • Both positive and normative aspects (situation analysis and policy advice) • Interactive, evolving and open-ended discussion

3. Creation of a Developmental State: An Operational Question Predatory/patrimonial state—power and state machinery for perpetuating private benefits of leader, his family and friends Developmental state—policies and institutions for value creation & competitiveness for all people and enterprises How can we promote DS instead of PS? • Political approach—encourage emergence of developmental agenda, actors and coalitions • Technical approach—provision of pragmatic & concrete cases of international best policy practices for willing governments to learn & adopt

4. Development Policy:Desirability vs. Feasibility • Development is both a political process and an economic process. What should be doneHRD & technology Infrastructure Integration & competition Systemic transition, etc What can be done Leadership and elites Coalition formationPopular mindset Administrative capacity (mainly economics) (mainly politics) • Each country is unique in what needs to bedone as well as what can actually be done. • Any policy maker must work with economic and political space simultaneously.

5. Key Relations and Coalitions • Leadership style • Horizontal coordination within central government • Vertical coordination between central and local governments • Relation with non-government stakeholders • Relation with foreign governments We assume that these five relations are critical in determining policy effectiveness. We do not pre-impose the content of each relation. Each country must create its own.

6. Key Relations and Coalitions Cf. Leftwich’s DLP

7. Policy Learning Latecomer countries must learn three kinds of policy making: • Growth policies • Policies to cope with growth-generated problems (income & wealth gaps, migration, traffic, housing, corruption, environment…) • Macroeconomic management under integration  Unless these are learned, development effort will stall. They can be learned from comparative study of international best practices.

8. Growth Policy & Social Policy Economic growth START Emergence of new problems Growth policy by developmental state Income & wealth gaps, environmental damage, congestion, cultural change, property speculation, macro instability, corruption… Social stability & popular support 20-30 years later Maturity of middle class and political aspiration Social policy Democratic, high-income society FINISH

9. What Must Be Learned? • Policy measures • Policy procedure and organization • Policy structure—vision, strategy, action plans, monitoring • National movement for mindset change The purpose is to acquire capability to create policy packagesuitable for each country using foreign models as building blocks. Government can learn by self-study or with assistance from advanced countries.

10. Learning from Other Countries It is NOT copying some policy adopted in some other country without local context. Ad hoc or random copying should be avoided. The claim that “our country is unique” should not be used as an excuse for not learning from others. Learn mindset and methodology for conducting industrial strategies effectively. Learn how to make policies. Early achievers (Japan, Korea, Singapore…) improvised through self-effort and trial-and-error. For today’s latecomers, more systematic learning is desirable.

11. Institutional Dynamics After knowing current status and desired system, how can we move from the one to the other? Common obstacles: --Political resistance: corruption, vested interests, neo-partrimonialism, predatory state --Incompetence: leaders do not know or care --Lack of knowledge or a mistake in designing transition steps --Bureaucratic sectionalism: no ministry or department has full authority or responsibility to execute reform

12. Comparative Institutional Analysis • Prof. Masahiko Aoki and othersat Stanford Univ. and Tokyo Univ. • Based on evolutionary game theory • Some questions --Why do multiple systems emerge and coexist, without any system dominating all others? --What is the dynamic mechanism of moving from one system to another?

13. Key Concepts • Institutional complementarity E.g., OJT, life-time employment, keiretsu system, main banks were mutually consistent in Postwar Japan • Strategic complementarity E.g., people in competitive society study professional skills, people in connection society give parties & gifts. • Path dependence E.g., because of these complementarities, a system, once started, will have little incentive to deviate.

14. Forces of Systemic Change • Collective mutation • Foreign pressure (contact with another system) • Policy as deus ex machina --Strong leader --Political parties, interest groups, people’s movement --Researchers, advisors, intellectuals Those who are inside the country but do not follow the rules of the existing system initiate change against resistance • Combining policy and foreign pressure

15. Collective mutation Foreign pressure Policy Policy and foreign pressure

16. Lazy Workers in Japan(Early 20th Century) Survey of Industrial Workers, Ministry of Agriculture and Commerce, 1901 • Japanese workers are only half as productive as American workers. • They stop working when supervisors are not watching. • Skilled workers are few, and they are often too proud and lazy. • Job hopping is rampant in comparison with US. • Japanese workers never save.  Even today’s high performers started with low capacity in private and public sectors.

17. South Korea: Unpromising Place with Inept Institution The Lessons of East Asia – Korea, K. Kim & D.M. Leipziger (1993) • Heavily dependent on US foreign aid for food, fuel and other raw materials, Korea was not seen as a promising place for major investments. • During the period from 1940 to 1960, the Korean bureaucracy was a kind of spoils system. The East Asian Miracle, The World Bank (1993) • At late as 1960, the Korean civil service was widely viewed as a corrupt and inept institution. • In less than two decades, this view has been dramatically altered. By the late 1970s, the bureaucracy had become one of the most reputable in developing world. How did this come about?

18. Thailand: Haphazard Planning, Shortage of Qualified Personnel World Bank Mission Report 1959 • Investments have been authorized without first trying to find out if they would serve urgent needs, if they would be as productive as other alternatives, or if the particular forms of investment chosen were the best means of attaining their objectives. • There is a shortage of trained manpower and of managers and administrators qualified by experience to operate industrial concerns and government departments efficiently. • It will be most difficult, if not impossible, to find suitably trained and sufficiently experienced Thai personnel who can be spared from present assignments to fill all these important senior positions. Source: A Public Development Program for Thailand, Report of a Mission organized by the IBRD at the request of the Government of Thailand, The Johns Hopkins Press, 1959.

19. Middle Income Trap • The developmental trap occurs when a country is stuck at income dictated by given resources and initial advantages, and cannot rise beyond that level (growth is given, not created). • The level of income where the trap may occur depends on endowment of resources and advantages. Low endowment  Poverty trap Moderate endowment  Middle income trap High endowment  High income

20. Trap (cont.) • Countries may reach certain income by liberalization and integration, but reaching higher income requires strong policy effort to stimulate private dynamism, not laissez-faire. • Growth based on FDI, aid, big projects, natural resources, or locational advantages will eventually end. The true source of development is value creation by humans (skills, knowledge, technology). • Government must produce policies & institutions that promote human capital formation. This is possible even under globalization, but appropriate action is different from past policies. I call it “proactive industrial policy.”

21. Speed of Catching Up: East Asia Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars) Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

22. Latin America Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars) Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

23. South Asia Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars) Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

24. Africa Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars) Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

25. Russia & Eastern Europe Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars) Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

26. Stages of Catching-up Industrialization Internalizing parts and components Internalizing skills and technology Pre- industrialization Initial FDI absorption Internalizing innovation Creativity Technology absorption STAGE FOUR Full capability in innovation and product design as global leader Agglomeration (acceleration of FDI) STAGE THREE Management & technology mastered, can produce high quality goods Arrival of manufacturing FDI STAGE TWO Have supporting industries, but still under foreign guidance Japan, US, EU STAGE ONE Simple manufacturing under foreign guidance Korea, Taiwan STAGE ZERO Monoculture, subsistence agriculture, aid dependency Thailand, Malaysia Vietnam Glass ceiling for ASEAN countries(Middle Income Trap) Poor countries

27. Proactive Industrial Policy:Seven Required Principles 1. Strong commitment to global integration and private sector driven growth 2. A wise and strong government guiding private sector 3. Securing sufficient policy tools for latecomer industrialization 4. Constant policy learning through concrete projects and programs 5. Internalization of knowledge, skills and technology as a national goal 6. Effective public-private partnership 7. Collection and sharing of sufficient industrial information between government and businesses

28. Standard Policy Menu in East Asia • Kaizen (factory productivity improvement tools) • Shindan (SME management consultant system) • Engineering universities (King Mongkut ITK, Nanyang Polytechnic, Thai-Nichi Institute of Technology…) • TVET-business linkage (Singapore, Thailand…) • SME finance (two-step loans, credit guarantees…) • Integrated export promotion (Korea) • Innovation by technology research institutes (Taiwan) • Industrial zone development (Taiwan, Korea, Thailand, Malaysia, Singapore…) • Strategic FDI marketing (Thai BOI, Malaysia’s MIDA, Penang, Singapore) • Supporting industry promotion (parts & components; Thai auto)