Growth and Competitivenessfrom the East AsianPerspective
This version without photos to save memory

Kenichi Ohno
National Graduate Institute for Policy
Studies, Tokyo

Pro-Poor Growth 2003
The first round of poverty reduction
drive is over (MDGs, PRSP) Emerging recognition that growth isneeded for sustained poverty reduction
 Attention turns to:--Ensuring “pro-poor growth”--Contents of growth strategy
1Japanese Uneasiness

The gap between the current strategy
and E Asian development experience:--Poverty reduction as ultimate goal???
--Pro-poor growth—what is it???

Inability to clearly articulate Japan’s aid
goals: ideas, aid system, language
 ODA budget is declining (-5.8% in FY03)
while EU and US are increasing aid
Fear that Japan’s aid will be discredited
or marginalized Japan feels that global aid strategy
changes too fast

2

Domestic Division“Use aid for national interest andAsian dynamism!” “Use aid for global and humanitarian
purposes, not for economic interest!”
 “Cut ODA!” (recession/budget crisis,
ODA scandals, China)
What should be done?
Japan should be fully engaged in global
aid strategy, not isolation or rejection.
 Japan should bring a new perspective asa non-West industrialized country.
 To do so, Japan should clearly define its
aid goals and its comparative advantage.
 Leadership, networking, and institutional
reform are needed.
3

Topics for Discussion
1. “Pro-poor growth”
2. Development experience ofEast Asia
3. Vietnam’s CPRGS (=PRSP)
4. Japan’s engagement principle(1) “Pro-Poor Growth”
Morally correct, politically convenient andcurrently very popular, but...

Definition?
 Desirability?--is more equality always

good? Should we not balance equality andincentive?
Channels and linkages--many ways to
cut poverty, direct and indirect. Strategy
should be geared to each country.

4Equity vs. Incentive Tradeoff
John Rawls: “Choose the society which
maximizes the welfare of the poorest”
Deng Xiaoping: “Those who can, get richfirst. Let others imitate and follow”
Innovation requires reward, but too
much inequality destabilizes society. The
right mix is needed for each country.

Perfect equality is the ideal ofcommunism. Does pro-poor growth(faster rise of the poor) support it?
--Where do we switch (criteria)?

Society can be too equal and stagnant:--General poverty in poorest countries--Transition from socialist egalitarianism--Welfare state in excess

5

“Technocratic Model” and its failure
Economic growth
START

Political suppression

Rising inequality

Political instability
ED

Social explosion!!!
Samuel P.Huntington and Joan M. Nelson, o Easy Choice: Political
Participation in Developing Countries, Harvard Univ. Press, 1976.

“Populist Model” and its failure
Equalization
START

Increased participation

Economic stagnation

Political instability
ED

Politicalsuppression!!!
SamuelP.Huntington and Joan M. Nelson, o Easy Choice: Political
Participation in Developing Countries, Harvard Univ. Press, 1976.

6

East Asian Way to SuccessTwo-tier approach Primary: create source of growth.
 Supplementary but very important: deal
with problems caused by growth—income gap,
regional imbalance, environment, congestion,drug, crime, social change, etc.
Yasusuke Murakami: “industrialization policy must
be combined with supplementing policies or it
will fail” (Theory of Developmentalism, 1994)

Revised Technocratic Model (E. Asia)
Economic growth
START

Developmental stateRising inequality

Political stabilityED(checked)
Supplementingpolicies

A freer & more democraticsociety (a few decades later)

cf. Korea, Taiwan

7Three Channels of Pro-Poor Growth(1) Direct channel (impacting the poor directly)--Health, education, gender, rural jobs &development, etc.

(2) Market channel (growth helps poor via economiclinkages)--Inter-sectoral and inter-regional labor
migration (cf. Chinese TVEs)--Increasing demand (cf. proto-industrialization,multiplier effect)--Reinvestment (formal, informal and internalfinancing)Three Channels (contd.)(3) Policy channel (supplementing the marketchannel)--Price support, taxes, subsidies--Fiscal transfer, public investment,infrastructure--Micro and SME credit and other financial
measures--Proper design of trade and investment policies--Pro-poor legal framework

8

Broadening the Scope

So far, disproportionate attention on thedirect channel—the question of sustainability andthe risk of permanent aid dependencyEmerging emphasis on pro-poor growth--Focus still too narrow, not integrated--Past studies on growth, equality, incentive,migration, etc. have not been incorporated--The right mix depends on each country(2) East Asian Experience
Growth driven by trade and investment
 Collective growth, not isolated or random Staggered participation in the regional
production network
 Region as an enabling environment for
catching up (model and pressure)9Per Capita GDP(In 1990 internationaldollars)Graph:
GDP inGeary-Khamis
EA vs Africa
4000
3500

East Asia

3000
2500
2000

Africa

1500
1000
5000
1950

1960

1970

1980

1990

1998

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

“Asian Dynamism”
Geographic diffusion of industrialization
 Within each country, industrialization
proceeds from low-tech to high-tech Also known as the Flying Geese Pattern Clear order and structure (with apossibility of re-formation)
10

Flying Geese 1

Photo by Saizou Uchida (location: Sakai-gun, Fukui Prefecture, Japan)

Per Capita Income (2000)

US$

40,000Graph:
percapita
incomeat Actual
ExchangeRate
30,00020,000at PPP

10,000

Cambodia

Lao PDR

VietnamIndonesia

China

Philippines

T hailand

M alaysia

Korea

Singapore

Hong KongJapan0Source: World Bank, World Development Indicators 2002 .

11Manufactured Exports(% of total exports)
100%Japan

Graph: manufactured exports

TaiwanKorea

80%Singapore
Malaysia

60%

ThailandPhilippines
40%

Indonesia
China

20%

Vietnam
Myanmar
1998
1999
2000

1996
1997

1993
1994
1995

1990
1991
1992

1988
1989

1987

1984
1985
1986

1981
1982
1983

1980

1978
1979

1975
1976
1977

0%

Source: ADB, Key Indicators of Developing Asian and Pacific Countries , 2001/1993; IMF, International Financial Statistics Yearbook 1990. For
Japan, Japan Statistical Yearbook 2002/1999, Statistics Bureau/Statistical Research and Training Institute, Ministry of Public Management,
Home Affairs, Posts and Telecommunications, Japan.
Sources: ADB, Key Indicators of Developing Asian and Pacific Countries , 2001/1993; IMF, International Financial Statistics Yearbook 1990. For Japan, Japan

Structural Transformation in East Asia
3Country2Latestcomers

Latecomers

ASEAN4NIEs

1

Japan
Garment

SteelPopular TV

Video

Digital
CameraTime

12

Garment

Competitiveness

Competitiveness

Japan

1

SteelPopularTV
Video HDTV

2

Garment

NIEs
Japan

Latecomers
ASEAN4Competitiveness

Time

3

LatestcomersTime

International Division of Labor

Garment

Steel

PopularVideo HDTV
TV

Latest comers

ASEAN4

Latecomers

Japan
NIEs

East Asia's Trading Partners
100%Others
Europe80%

N. America
60%

Japan
40%

East Asia

20%0%

1980

1985

19901995

1996

13

Foreign Direct Investment Flows(Billions of USD / year)[1st Half of 1990s][2nd Half of 1990s]

JapanJapan
2.4

2.4
2.6

NIEs

NIEs
8.7

4.8
7.8

8.5

2.2

ASEAN4ASEAN4
1.3

9.8

4.3
1.3

11.5

China

China

Source: Ministry of Economy, Trade and Industry, White Paper on International Trade 2002, p12.
Note: Flows less than $1 billion are not shown. The “NIEs to China” flow excludes Hong Kong.

Trade in Machine Parts(Billions of USD / year)[1990][1998]

JapanJapan
8.5

18.6

NIEs

NIEs
7.2

5.0

ASEAN4

29.9

21.7

15.3

19.2

ASEAN47.6

6.9
5.56.8

China

China

Source: Ministry of Economy, Trade and Industry, White Paper on International Trade 2001, p12.
Note: Flows less than $5 billion are not shown.

14

The Role of Government
In low-income or transition economies
with undeveloped markets, privatizationand free trade alone may not lead toprosperity
 Unregulated markets may be unstable andpolarize income
 The national goal was (is) to catch up andbe prosperousBasic Roles of East Asian States

Political stability and social integration(precondition for development)

Task 1: Create a competitive marketeconomy
 Task 2: Initiate and manage globalintegration
 Task 3: Cope with negative aspects ofgrowth15

Poverty Reduction in East Asia

Extreme poverty in E Asia already halved(1990: 27.6%  1999: 14.2%)

National strategy for equitable growth
already in place(even before PRSP/MDGs)

Aid coordination centered on pro-poor
measures unlikely to work in East Asia

Redefining “Good Governance”
and “Selectivity”
To initiate trade-driven growth, different
and narrower conditions are needed--Strong leader(ship) with ownership--Strong administration for policy consistency andeffective implementation

High-performing East Asia did not have--Transparency, accountability, participatory process,clean government, privatization, free trade(maybe not necessary for initiating growth?)16

(3) Vietnam’s CPRGS“Comprehensive Poverty Reduction andGrowth Strategy” (completed May 2002)
Considered “great success” because ofstrong country ownership Like Minded Donor Group (LMDG) wants
to further strengthen the process
--PIP, SWAP, budget support, aid harmonization...

Vietnam’s View
Highest national documents are Five-Year
Plan and Ten-Year Strategy CPRGS is one of the “other” papers
 Donors should respect national process
 “ODA is culture”--forced aid coordinationis unrealistic
 Aid diplomacy--willing to go with different
donor demands within certain bounds17Japan’s Aid Policy in Vietnam
Top donor (30%+)--involved in all sectors, esp. infrastructure
and policy advice--multi-modality (loans, TAs, grants)--supporting growth and coping with growth
impactAnnoyed by CPRGS; independent andcritical until mid 2002
 Review underway (revising Country Aid

Strategy Plan for Vietnam)

Japan’s New Initiative
A new team in Hanoi (Autumn), CG (Dec.2002)

Active coordination among Embassy,JICA, JBIC, Tokyo... began Positive engagement in CPRGS process Include infrastructure as a key pillar ofpoverty reduction (cooperation withWorld Bank)
 More involvement in the debate on propoor growth, aid harmonization, etc.
18

Goals in the Near Future

Add content to growth strategy (not justframework)--Vietnam has no realistic vision or strategy--Industrial policy and trade policy inconsistent--FDI policy deteriorating since 2002

Intensify policy dialog with Vietnam, donorsand enhance Japan’s comparative advantage
 Adjust Japan’s aid modality where necessary
 Advertise Vietnam as an East Asian model

(4) Japan’s EngagementPrinciple


Two-track principle(1) For the prosperity of Japan and East Asia
(2) For solving global issues (poverty, education,health, environment, refugees, peace building...)Helping the “self-help” effort of LDCs--Aid is not humanitarian charity--To grow and become equal trading partners--Not for all; but we encourage as many countries
as possible to challenge

19Supplementing private dynamism Leadership in growth debate
 Aid modality harmonization?
--Balancing diversity and harmonization--Some procedures can be harmonized, butideas are often “non-fungible”

Japan’s Approach to Growth
Respect for each country’s uniqueness Long-term and holistic perspective Real-sector concern (trade, investment,key industries, technology...) Help in good times as well as bad20

As Growth Debate Begins...
Contents differ between West and Japan
West: privatization, free trade, rule of law,clean & transparent government, levelplaying field, market comes first...
Japan: active government, national vision,
proper design of industrial, trade, FDI policy,
sector specific intervention...
Common: political & macro stability, HRD, SME
support, environment, HIV...
 Back to the 1980s (unresolved issue)

THE END

Photo by Saizou Uchida (location: Sakai-gun, Fukui Prefecture, Japan)

21