Foreign Direct Investment and Technological Capabilities:The Relevance of the East Asian Experience for Pakistan

1. IntroductionThe 600-page primer of the Lahore School of Economics, Pakistan: Moving the economy forward, contains a wealth of analyses and insights that should nurture a new generation of homegrown economic policymakers. One of these insights is that Pakistan's economy is growing, but not necessarily advancing, in the global economy. On the one hand, it is reassuring to note that economic activity has remained resilient over the last 50 years-with GDP growing at 5.2 percent annually-in spite of frequent setbacks, shocks, and missed opportunities (Hasan, 2013, p. 25). On the other hand, it is disconcerting that growth has not been sustained. This sputtering growth has handicapped Pakistan's efforts to keep pace with other developing countries of comparable economic strength.In recent years (2009-13), some two thirds of the country's economic growth has been driven by consumption and not investment (Pakistan, Ministry of Finance, 2013, pp. 9-10). Growth is, of course, welcome in any form, but investment-led growth can instill a dynamic process of capital formation and technological learning that transforms productive capacity and underpins export success. This growth dynamic-which has not taken hold in Pakistan-is one of the main features of the East Asian experience and is relevant to Pakistan's current economic predicament of prolonging growth spurts into growth spirals (Amjad, 2014).2. The East Asian ExperienceEconomic growth involves an expansion of output through capital accumulation, factor use, and productivity/efficiency gains according to the available production possibilities. Investment generates income, creates productive capacity, and harnesses technological progress. This can be an arduous process but for developing countries operating inside the world technological frontier, it is a relatively simple matter of "catch-up."The premise of catch-up is that scarcities at home can be augmented from abroad. The catch-up process operates through capital inflows, technology transfers and knowledge sharing, and trade: the exchange of traditional products for capital- and skill-intensive goods necessary to transform and upgrade productive capacities. Generally, the more backward the economy, the greater potential it has to catch up with the rest of the world. Additionally, the more open the economy, the greater the links through which the catch-up process can operate and, hence, the greater the scope for catching up. At the same time, the larger objective is to catalyze a growth dynamic within the economy. Excessive reliance on external drivers can perpetuate dependencies that stifle the emergence of entrepreneurial and innovative behavior.Thus, the policy challenge is to manage the catch-up process-the asymmetry of global links, the interaction between foreign and domestic actors, and the national institutions that incentivize economic activity-in a way that the stimulus from abroad uplifts and empowers national capabilities. A passive approach can inculcate a rentier attitude on the part of consumers, producers, and the state. With the right policies, however, the catch-up trajectory can seed growth poles, endogenously driven, that eventually take over, shape, and sustain a country's development path.The East Asian catch-up experience is illustrative (see, for example, MacDonald, 1993; United Nations Conference on Trade and Development [UNCTAD], 1993; Ernst, Ganiatsos, & Mytelka, 1998; Lall & Urata, 2003). In the 1960s, the East Asian economies-the Republic of Korea, Taiwan (China), Malaysia, Singapore, Thailand, and others-were agricultural economies like Pakistan. However, in a relatively short period, these commodity producers were able to achieve high rates of capital accumulation and transform themselves into newly industrialized economies. They altered their structure of exports from primary commodities to manufactures in little more than a decade, and upgraded their export performance to higher-skill manufactures in the following decade. …