Overview Analytical Framework & Transformation Strategy

OverviewAnalytical Framework & Transformation Strategy

Policy Formulation in Developing Countries

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

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

Development Policy:Desirability vs. Feasibility Development is both a political process and an

economic process.

What should be doneHRD & technology

InfrastructureIntegration & competitionSystemic transition, etc

What can be doneLeadership and elites

Coalition formationPopular mindset

Administrative capacity

Each country is unique in what needs to be done as well as what can actually be done.

Any policy maker must work with economic and political space simultaneously.

(mainly economics) (mainly politics)

Key Relations and Coalitions1. Leadership style2. Horizontal coordination within central

government3. Vertical coordination between central and local

governments4. Relation with non-government stakeholders5. 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.

Key Relations and Coalitions

Cf. Leftwich’s DLP

Policy LearningLatecomer 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.

Growth Policy & Social Policy

Economic growth

Emergence of new problems

Social stability & popular support

Growth policy by developmental state

START

Income & wealth gaps, environmental damage, congestion, cultural change, property speculation, macro instability, corruption…

Social policy20-30 years later

Democratic, high-income societyFINISH

Maturity of middle class and political aspiration

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 package suitable for each country using foreign models as building blocks.

Government can learn by self-study or with assistance from advanced countries.

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.

Institutional DynamicsAfter 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

Comparative Institutional Analysis Prof. Masahiko Aoki and others

at 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?

Key Concepts Institutional complementarity

E.g., OJT, life-time employment, keiretsu system, main banks were mutually consistent in Postwar Japan

Strategic complementarityE.g., people in competitive society study professional

skills, people in connection society give parties & gifts.

Path dependenceE.g., because of these complementarities, a system,

once started, will have little incentive to deviate.

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

Collective mutation Foreign pressure

Policy Policy and foreign pressure

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.

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?

South Korea: Unpromising Place with Inept Institution

Thailand: Haphazard Planning, Shortage of Qualified PersonnelWorld 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 requestof the Government of Thailand, The Johns Hopkins Press, 1959.

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 trapModerate endowment Middle income trapHigh endowment High income

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.”

Trap (cont.)

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Japan

Singapore

Hong Kong

Taiwan

S. Korea

Malaysia

Thailand

Indonesia

Philippines

Vietnam

China

Speed of Catching Up: East Asia

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).

Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

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Taiwan

S. Korea

Malaysia

Thailand

Indonesia

Philippines

Vietnam

China

Latin America



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Argentina

Brazil

Chile

Colombia

Mexico

Peru

Urguay

Venezuela

South Asia



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India

Sri Lanka

Pakistan

Bangladesh

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Botswana

Cote d'Ivoire

Egypt

Ghana

Kenya

Madagascar

Nigeria

South Africa

Tanzania

Tunisia

Uganda

Zambia

Africa



Russia & Eastern Europe



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USSR

Czeco'kia

Hungary

Poland

Romania

Yugoslavia

STAGE ONE

Simple manufacturing under foreign

guidance

STAGE TWO

Have supporting

industries, but still under

foreign guidance

STAGE THREE

Management & technology

mastered, can produce high quality goods

STAGE FOUR

Full capability in innovation and product

design as global leader

Vietnam

Thailand, Malaysia

Korea, Taiwan

Japan, US, EU

Agglomeration (acceleration of

FDI)

Creativity

Glass ceiling for ASEAN countries(Middle Income Trap)

Stages of Catching-up Industrialization

Initial FDI absorption

Internalizing parts and

components

Technology absorption

Internalizing skills and

technology

Internalizing innovation

STAGE ZERO

Monoculture, subsistence

agriculture, aid dependency

Pre- industrialization

Arrival of manufacturing

FDI

Poor countries

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 partnership7. Collection and sharing of sufficient industrial

information between government and businesses

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)

Overview Analytical Framework & Transformation Strategy

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