Dynamic Capacity Developmentin East Asian Industrialization

Izumi Ohno & Kenichi Ohno (GRIPS)
July 2008

Menu
 East Asian miracles and disasters
 Dynamic capacity development—desirable policies vs. local capability
 Goal orientation—vision, strategies and concrete actions
 How donors can assist
 Examples from China, Japan, Thailand,
Malaysia, Vietnam, El Salvador, Indochina,MozambiqueDiversity inEast Asian Performance
E. Asia has high growth on average, but it contains
super-performers as well as disastrous states.
 Winners’ bias in studying high performers only; weshould compare successes and failures in E. Asia.
Average Income(1990 International Geary-Khamis dollars)

40003500

East Asia

30002500
2000

A f ri ca

1500
100050001950

1960

1970

1980

1990

1998

Source: Angus Maddison, The World Economy: A Millennium
Perspective, OECD Development Centre, 2001.

Per Capita GDP in 2004 (＄＄PPP) World Bank data
0
Hong KongJapan
TaiwanSingapore
Brunei
S Korea
Malaysia
Thailand
China
Philippines
Indonesia
Vietnam
Cambodia
PNG
Mongolia
Laos
N Korea
MyanmarEast Timor

5000 10000 15000 20000 25000 30000 35000

Green: participants in East
Asian production network

Diversity in Political and Economic
Development
Governance, WGI2005

High correlation(0.90) but
causality cannot
be argued fromthis diagram600
Sin500

Hkg
Jpn

S Kor
400

MalMong

Twn

Only circled
economies
participate inregional dynamism

Bru

Thai300
Phil
VN

China

200
Camb

E Timor

Indo

PNG
Lao
N Kor
Mya

100

0100

1000

10000

100000Per capita income ($PPP2004, log scale)

Sources: Compiled
from World Bank,Worldwide GovernanceIndicators, Sep. 2006;
and World Bank, World
Development
Indicators, 2006.

Different Speed of Catching Up
Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)
100%

Japan
80%

TaiwanS. Korea

60%

Malaysia
Thailand40%

Indonesia
20%

Philippines
Vietnam
2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

0%

Sources: Angus Maddison, The World Economy: A Millennium Perspective, OECD Development Centre, 2001;
the Central Bank of the Republic of China; and IMF International Financial Statistics (for updating 1998-2006).

Lazy Workers in Japan(Early 20th Century)
Survey of Industrial Workers, Ministry of Agriculture andCommerce, 1901
 Japanese workers are only half as productive as Americanworkers.
 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.

South Korea: Unpromising Place withInept Institution
The Lessons of East Asia – Korea, K. Kim & D.M.
Leipziger (1993)


Heavily dependent on US foreign aid for food, fuel and otherraw materials, Korea was not seen as a promising place formajor 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 asa corrupt and inept institution.
In less than two decades, this view has been dramaticallyaltered. By the late 1970s, the bureaucracy had become oneof the most reputable in developing world. How did this comeabout?

Thailand: Haphazard Planning,
Shortage of Qualified Personnel
World Bank Mission Report 1959

Investments have been authorized without first trying to findout if they would serve urgent needs, if they would be as
productive as other alternatives, or if the particular forms ofinvestment chosen were the best means of attaining theirobjectives.
There is a shortage of trained manpower and of managers
and administrators qualified by experience to operateindustrial concerns and government departments efficiently.
It will be most difficult, if not impossible, to find suitably trained
and sufficiently experienced Thai personnel who can bespared from present assignments to fill all these importantsenior positions.

Source: A Public Development Program for Thailand, Report of a Mission organized by the IBRD at the requestof the Government of Thailand, The Johns Hopkins Press, 1959.

Policy Design:
Desirability vs. Feasibility


Development is both a political process and an economicprocess.
What should be done

What can be done

HRD & technology
Infrastructure
Integration & competition
Systemic transition, etc

Leadership
Political constraints
Popular sentiment
Administrative capacity(mainly economics)(mainly politics)

Each country is unique in what needs to be done as wellas what can actually be done.
 Any policy maker must work with economic and politicalspace simultaneously.
Policy Design (cont.)

Policy advice without feasibility consideration cannot beimplemented—regardless of whether proposed actions
are a few or many, common or tailor-made.
Eg. macro conditionality (fiscal & monetary austerity),transitional strategy (big-bang vs. gradualism), external
opening, governance, growth diagnostics, etc.

We need to figure out a policy sequence which is bothdesirable and feasible in each country’s context.
 While the government is directly responsible for politics,
outsiders can indirectly assist in overcoming politicalproblems.
Good Governance Debate
Worldwide Governance Indicators (Kaufman Index)

Causality? (growth ↔ governance) Feasibility of a long menu of institutional changes andcapacity-building initiatives?
 No guidance on what specifically needs to be done in
the real world context:- Merilee Grindle: “good enough” governance- Mushtaq Khan: “growth-enhancing” governancecapability- Y. Shimomura: “endogenous” good governanceelements
East Asian high performers did not (do not) score highin Kaufman Index.

Growth Diagnostics (HRV Model)?
Hausmann, Rodrik and Velasco (2005)
Discover a small number of most binding constraints togrowth in each country.
HRV Tree—private investment is key to growth; inquiry starts
with low return or high cost of finance, and the causes ofeach.
Harvard, WB, DFID, AsDB,IDB etc. are conducting
GD in many countries.

Problems with Growth Diagnostics
Search for desirable policies without considering
political/administrative feasibility (a few or many,common or unique – secondary issues).
 Discovery of general weaknesses relative to global
norm instead of enhancing the country’s uniquestrengths (do you need to be “average” in all
aspects before launching a development strategy?) Diagnostics only—no clear mechanism forprescribing concrete actions (the task is left topolicy makers).
How to Cope with
Economics-Politics Nexus

Joint research in economics & political science?
 Fine for academics but not much use for policy makers (tooabstract for operational use)

Policy-capability matching? (WDR97)
Improve institutions/governance before attempting difficult
policies (such as selective industrial policy)
 Too broad and without focus; difficult to put into practice ormobilize political supportDynamic capacity development
Improve ability through selective hands-on experience—clear goals, focused effort, trials and errors, cumulative senseof achievement

More onDynamic Capacity Development
Goal orientation: long-term vision  phased
strategies  concrete action plans.
 Direct most effort to perfecting your strengths rather
than correcting your general weaknesses (don’t worry
too much about Kaufman index or investors’ ranking).
 Stop abstract thinking and start concrete action


No—Is industrial policy useful? What is the role of state?
Yes—Let’s build this port & industrial zone successfully, etc.

Achieve successes one by one, and be proud.
 Top leaders: take political risk and responsibility tomove things fast forward.
A Comparison of East and West
East Asian

Traditional

PurposeEnhance strengths tocreate competitiveness

Find weaknesses relative
to norm, and correct them

Selectivity

Future vision, phased
strategies, concrete
actions to achieve goals

Improve governance,institutions etc. generally(let market do the rest)

Time frame

Patient; build trust through Short-term implementation
long-term engagement
and frequent reviews

Modality

Hands-on experience, less Emphasize framework,
talk or writing
monitoring,dissemination

Example: Pragmatism ofDeng Xiaoping in China(In power 1978-97)

All for production increase rather than fighting forpolitical ideology (cf. Mao, in power 1949-76)
 “Black Cat or White Cat” – capitalism (FDI) orsocialism (SOEs) does not matter as long as itcatches mice (increase production).
 Special Economic Zones – creating good businessconditions in limited areas to receive investment.
 Trial-and-error and flexible adjustment (“Even trystock market and see”).
 “Some get rich first, others can follow later.”Example: Latecomer Japan
Beats British Textile Industry
1883 Establishment of Cotton Spinning Industry
Target: import substitution of cotton yarn (industrial input)
Actors: Eiichi Shibusawa (super business organizer)
Takeo Yamanobe (engineer studying in UK)
Action: establish Osaka Spinning Co. with sufficient scale andtechnical breakthroughResult: instant success with a large number of followers; Japanovertakes UK as textile exporter by early 20th century; The
City of Osaka is called “Manchester of the Orient”

Shibusawa

Yamanobe

Example: Thai Automotive
Master Plan 2002-06
PM Thaksin’s Vision: Become “Detroit of Asia”
Targets: produce 1 million cars/year & export 40%
produce 2 million motorcycles/year & export 20%
export high quality parts (>200 billion baht)
localization >60%
Actors: Ministry of Industry, Thai Automotive Institute, FDI
producers, local suppliers
Action: 180 pages of policy matrices detailing strategies,
actions plans, performance criteria, responsible parties
Result: all targets achieved by 2005, one year ahead ofscheduleNEP2MPMalaya Plans
1MP1219566065703MP754MP805MP856MP90

OPP1
MP: Malaysia Plan (5-yr plan)
OPP: Outline Perspective Plan
IMP: Industrial Master Plan
NEP: New Economic Policy

7MP958MP

2000

OPP2IMP1

EPU: Economic Planning Unit
MITI: Ministry of International
Trade and Industry

Industrial Master Plan 2 (1996-2005):- Raising & broadening value chains- Cluster-based industrial development- Electronics, textiles, chemicals, resourcebased industries, food, transport machinery,materials, machinery & equipment

Example: Malaysia

9MP05

OPP3IMP2EPU
1015(OPP4)
IMP3Vision 2020 (1991-2020)

20EPU
MITI
Mahathir

Become a fully developed
country by 2020 featuring:- National unity- Confidence- Democracy- Moral & ethics- Tolerance- Science & technology- Caring culture- Economic justice- Prosperity

How Donors Can HelpEngage in long-term, open-ended policy dialogue
for self-discovery and strategy formulation(preferably followed by specific ODA and otherassistance).
 Build a core infrastructure and align aid andinvestments around it through donor coordinationand private-public partnership.
Japan’s Policy Dialogue withDeveloping CountriesArgentina – Okita Mission 1985-87; 1994-96 (follow up) Vietnam – Ishikawa Project 1995-2001
 Thailand – Mizutani Report for upgrading SMEs andsupporting industries, 1999
 Indonesia – Continuous Government-Business Policy
Dialogue; Urata Report for SMEs, 2000; Prof. Shiraishi& Asanuma, 2002-04 (post-Asian crisis)
 Laos – Prof. Hara for overall development strategy,
2000-05
 Myanmar – Prof. Odaka,1999-2002 (but failed)Ishikawa Project in Vietnam
1995-2001






Communist Party General Secretary Do Muoi requested Prof.
Shigeru Ishikawa to study the Vietnamese economy. Thebilateral project was agreed between two prime ministers.
JICA mobilized a large number of scholars and consultants.
Prof. Ishikawa emphasized the spirit of mutual respect andjoint work (and a lot of patience).
Topics covered: macro, budget & finance, industry, agriculture,trade, SOE reform, Asian financial crisis.
Continued dialogue—New Miyazawa Plan (1999), VietnamJapan Joint Initiative for improving investment climate (2003-).
Now under preparation—Vietnam-Japan Partnership for
Supporting Industry Development.

Ishikawa Project in Vietnam
Vietnam = Transition economy+ Underdevelopment

Advise on the drafting
process of the 6th FiveYear Plan

Phase 1 (95.8-96.6)
Macro-economy
Fiscal and monetary
policyIndustrial policy
Agricultural and ruraldevelopment

Tasks:•Macroeconomic stabilization•Structural adjustment (systemic transitionto market economy)•Long-term development strategy

Advice on theimplementation issues ofthe 6th Five-Year Plan,
including participation inAFTA/APEC/WTO andindustrial policy
Phase 2 (96.7-98.3)
Fiscal and monetary
policyParticipation in AFTA/
APEC/ WTO andindustrial policy
Agricultural and ruraldevelopment
SOE reform

Advice on the emerging
issues arising from theEast Asian crises and theeconomic integration
process

Advice on theformulation of the 7th
Five-Year Plan

Follow-up Phase(98.7-99.7)
General commentary
Fiscal and monetary
matters
Industry and trade
Agricultural and ruraldevelopment

Phase 3 (99.9-01.3)
General commentary
Fiscal and financial
reformFollow
Trade and industryup
Agricultural and ruraldevelopment
SOE reform and private
sector development

Joint research (2001- )Agriculture and rural development (livestock, vegetable,fruits and industrial crops, etc.)
Source: MPI and JICA, Study on the Economic Development Policy inthe Transition toward a Market-Oriented Economy In the Socialist Republicof Viet Nam (Phase 3) Final Report Vol. General Commentary, 2001, pp.iii-vi.

Monetary policy under partial dollarization

JICA Vietnam Office, Executive Summary of “Ishikawa Project” Phase 3,
March 29, 2002.

Trade and industrial policies in the age of integration(NEU-JICA joint research program GRIPS-VDF)

Fiscal policy (introduction of personal income tax)

Policy Dialogue in Africa?
The Case of Zambia
JICA is conducting “Triangle of Hope” Project
2006-09 (improving investment climate) mobilizinga Malaysian consultant under new methodology.
 As a next step, Zambia wants Japan to help
formulate a long-term industrial strategy.
 Japanese Embassy, JICA and K Ohno submitted aconcept paper (Dec.2007).
 Our proposal:
(i) Create strong super-secretariat under President(ii) Learn E Asian way through studies, seminars etc (1 year)(iii) Draft Zambia Industrialization Strategy with JICA
support (2 years)

Japanese Assistance for Core
Infrastructure
Greater Mekong Subregion – East-West andNorth-South Corridors for development of Indochina
 Thailand – Eastern Seaboard: creation of industrialzones around a port infrastructure Vietnam – Highway No.5 (Hanoi – Haiphong Port)
for FDI attraction (industrial clusters) Cambodia – Sihanoukville Port, power and telecom
networks, special economic zone
 El Salvador – La Union Port + regional development Mozambique (planned) – Nacala Port and Corridor
for regional development
El Salvador: Growth Diagnostics
vs. Japan’s ODA

Hausmann-Rodrik Growth Diagnostics 2003: The largest
constraint in El Salvador is the lack of self-discovery causedby market failure (low appropriability). Infrastructure is not abinding constraint.
Local Report 2008 (FUSADES): Our infrastructure is best inCentral America and we are already a regional hub, but wecan do even better by handling trade more efficiently. This willraise our productivity and competitiveness. For this purpose,
infrastructure, especially La Union Port, is essential.
Japanese ODA in El Salvador: Upgrade La Union Port as
key infrastructure. Additional support for social & HRD,
productive sectors, Eastern Region development, andregional integration.

The Vision: Strengthening El Salvador’s
Position as a Regional Transport Hub

Airport already aregional hub (built byJapan 28 years ago)
Central American
Highway link
Pacific-Atlantic link via
Panama Canal – ElSalvador as a regional
feederHowever, La Union Portis low capacity
 Build a new port with
sufficient capacity andservices

Road(US aid)

Bridge(Japanese aid)

(Japanese aid)

Pacific OceanRegional development(Japanese aid)Components of Japan’s ODA in
El Salvador (ongoing)
KEY INFRASTRUCTURE- Construction of La Union Port- Rebuilding an old bridge (Honduras border)- Digital map technology for efficient planning- Urban development planning for La Union City

Social & Human RD- MEGATEC La Union(training center)- Primary schools & math- Clean water- Rural electrification- Solid waste control

Support for
Productive Sectors

Eastern Region
Development- SME promotion- Aquaculture- Small-scale agriculture- Reservoirs & irrigation- Small-scale livestock- La Union Port
- Plan Puebla Panama- CAFTA & other FTAs
- Cent. Amer. integration- M/P for Eastern Region

The Vision for
GMS inSoutheast Asia
(Source: JBIC)

The Vision for Nacala Corridor inMozambique(Source: JBIC)

Conclusion:
East Asian Policy Engagement
Building new competitiveness from the country’sstrengths, not correcting general weaknesses.
 Goal-oriented approach—vision, phased strategies,concrete action plans.
 Focus effort strategically—don’t waste time ingeneral improvement without clear goals.
 Donor-recipient policy dialogue for trust, knowledgetransfer, and strategy formulation.
 Long-term open-ended engagement rather thanoutcome-based approach with frequent reviews.