Asian Economic Community By Tarun Das

Asian Economic Community- Prospects and Major Issues Dr. Tarun Das, Economic Adviser, Ministry of Finance, India.

1 Objectives and Scope Asian economies display a number of contrasts. Asia includes two most populous countries of the world viz. China and India, and also small economies like Bhutan and Maldives with population less than a million and city-states like Singapore. It includes the world’s three largest economies (viz. Japan, China and India) in terms of PPPadjusted GDP after USA. It also includes some of the poorest countries of the world– Bangladesh, Cambodia, Mongolia, Nepal and Vietnam. Social development indicators differ widely in the region. The objectives of this paper are: • • •

To examine prospects and challenges for Asian economies for achieving sustained higher growth and poverty reduction To identify areas for policy orientations, institutional capacity building and public-private partnership To suggest measures in promoting integration at the regional and global levels. 2. Present Economic Situation (A) East and South East Asia

Despite serious financial crisis in some of the East Asian countries in 1997-1999, Asian developing economies had shown remarkable economic vigor and dynamism during 1990-2000 by outperforming by a wide margin other developing regions and industrial countries as a group. As regards industrial growth, performance by the developing countries of Asia continued to outpace that in every other developing region and even the industrialised countries by about 5 percentage points. The continued robust growth in Asia was attributable to a number of factors such as widespread and sustained policy reforms in industry, trade and financial sectors and continued surge of foreign capital flows to these countries. The best performers during 1990s have been in Asia. China’s growth has been particularly spectacular, with real GDP growing at 10.3 percent a year and real per capita income at 9.2 percent during 1990-2000. Building on past investments in human, physical and institutional capital, continual high growth was the result of an ambitious, comprehensive and sustained reforms programme. There were continual liberalisation of agriculture, redirection of savings to the provinces, removal of price controls, gradual liberalisation of external trade, revamping of the tax and financial systems, and conversion of economic zones into attractive manufacturing platforms for export.

1

Table-1 Growth of output in selected Asian countries in 1980-1990 and 1990-2000 Country

GDP growth Per annum 1980-1990

GDP growth Per annum 1990-2000

Agriculture Growth pa 1990-2000

Industry Growth pa 1990-2000

Manufacture Growth pa 1990-2000

Services Growth pa 1990-2000

China India

10.1 5.8

10.3 6.0

4.1 3.0

13.7 6.4

13.4 7.0

9.0 8.0

Japan

4.1

1.3

-3.2

-0.4

0.5

2.5

World

2

Low & middle income

3.5

East Asia & Pacific

3.5

2.2

3.7

5.7

4.1

7.9

7.2

3.1

9.3

9.9

6.4

Europe & Central Asia

..

-1.5

-2.3

-3.8

..

1.6

Latin America & Carib.

1.7

3.3

2.3

3.3

2.6

3.4

Mid. East & N.Africa

2.0

3.0

2.6

0.9

3.8

4.5

South Asia

5.6

5.6

3.1

6.2

6.6

7.1

Sub-Saharan Africa

1.6

2.5

2.8

1.6

1.6

2.6

High Income

3.3

2.5

0.0

0.7

..

..

World

3.3

2.7

1.4

1.5

..

2.9

Table-2 Structure of Demand in selected Asian economies in 1990 and 2000 Country

Household final consumption expenditure as % of GDP 1990 2000

General govt. consumption expenditure as % of GDP 1990 2000

China India

50 66

47 65

12 12

13 13

Japan

53

56

13

16

14

14

Gross Domestic Exports of goods Imports of goods Gross Domestic Investment and services and services Savings % of GDP % of GDP % of GDP % of GDP 1990

2000

1990

2000

1990

2000

1990

2000

35 25

37 24

18 7

26 14

14 10

23 17

38 22

40 21

33

26

10

10

9

8

34

28

23

21

31

20

29

26

26

World 26

Low & middle income

60

60

East Asia & Pacific

54

54

11

11

35

30

26

42

26

37

35

35

Europe & Central Asia

55

58

18

16

28

21

23

44

24

39

26

26

Latin America & Carib.

65

66

13

15

19

20

14

17

12

18

21

19

Mid. East & N.Africa

57

51

20

18

24

20

33

38

35

28

23

30

South Asia

69

68

12

12

24

23

9

15

13

18

20

20

Sub-Saharan Africa

66

66

17

17

15

17

27

32

26

32

16

17

High Income

59

61

18

17

23

22

20

22

20

22

24

22

World

59

61

17

17

24

22

20

23

20

23

24

23

Policies for growth dynamism in East and South East Asia can be summarized as:     



A trinity of openness to trade, high investment and high savings rates Export-oriented investment-led growth Relatively outward-looking development policy. “Catch-up type” economic growth. “Virtuous circle” of economic development Strong economic role for the private sector

3

The mechanism that contributed the high growth of the Asian economies in these years can be summarised as export-oriented investment-led growth supported by extremely low production costs. As judged by ratios to GDP, investments and exports together made a much higher contribution to growth in Asia than in the other regions. Asian economies achieved high economic growth by introducing capital and technology from advanced countries, while enjoying the benefits of the huge markets that these advanced countries offer. In other words, the Asian economies are typical examples of “catch-up type” economic growth. Rapid growth in intra-Asian trade was accompanied by rising FDI. The traditional focus of foreign investment by Asian companies in financial sector and real estate of industrial countries was augmented by rapid growth in investment in manufacturing, primarily in South-east Asia. The changing pattern of capital flows was partly due to the changing cost structure in the Asian economies as wages and other costs were rising rapidly in Japan and the NIEs. It was also indicative of the movement towards higher value added and more technologically intensive activities in these economies. The process of rapid growth in output and intraregional trade and investment in Asia is sometimes referred to as a “virtuous circle” of economic development. Foreign capital inflows were the result of favourable policy environment, sustained industrialisation, trade expansion and overall economic growth. This process is gradually helping to internalise Asian growth and to reduce Asia’s vulnerability to external shocks. During 1990s, the “virtuous circle” evolved rapidly primarily due to the structural adjustment process in Japan subsequent to the sharp appreciation of the yen following the Plaza Accord. Japan’s growth became increasingly “domestic demand led” and it had been sustaining rapid export growth of other Asian countries. More recently, such a process occurred in the NIEs as well, fueling further intra-regional trade and investment. Rapid structural adjustment and shifting comparative advantage from Japan to the NIEs and further to the Southeast Asian countries due to rising wages and factor prices contributed significantly to Asia’s dynamism. South Asia, which depended more on the agriculture sector, was initially left out of this process. But the situation changed in recent years, as these countries liberalised trade and investment regimes gradually and cautiously. South Asia achieved an average growth rate of 5.6 per cent a year during 1990s, which was regarded as a “lost decade” for many other regions of the world. (B) South Asia South Asia is a region full of contrasts. On the one hand, it has vast economic potential due to its large market space measured by the size of its population, emerging middle class and rising purchasing power. Its bio-diversity is an immense wealth, and mineral and water resources are plenty. The region is endowed with a large pool of skilled and semi-skilled manpower. It achieved an average growth rate of 5.6 per cent a year in 1990s, which was regarded as a “lost decade” for many other regions of the world.

4

On the other hand, South Asia is characterised by widespread poverty and unemployment and low levels of living. While accounting for a fifth of the world’s population, South Asia is also home to nearly half the world’s poor. It has lower life expectancy than any other region except Africa, high infant mortality rates, high rates of malnutrition and low levels of literacy (except Maldives and Sri Lanka). The share of South Asia in world trade is negligible being less than one per cent. The composition of South Asian trade reveals concentration of exports in labour-intensive products like textiles, clothing, gems and jewelry, Imports consist of mostly crude oil, petroleum products and capital goods. (c ) Broad lessons of Asian development The broad lessons of development during the past decade are that countries with more market-friendly policies and outward-looking strategies do better both in generating growth and reducing poverty. While there was general focus on the need of reforms, the pace had been uneven due to mainly political economy issues. Recent progress was most visible in reforms in privatisation, industrial, trade, external, fiscal and financial sectors. 3. Trend of Sectoral Shares In East Asia and Pacific as a whole, the shares of industry, manufacturing and services increased in 1990s at the cost of agriculture whose share declined by 7 percentage points. For South Asia as a whole, the share of services in GDP improved in 1990s at the cost of all other sectors. In all the individual countries, agricultural share declined, while industrial share increased in Bangladesh, Bhutan, Nepal and Sri Lanka. Table -3: Structure of output in selected Asian countries in 1990 and 2000 Country

GDP billion US$

GDP billion US$

Agriculture % of GDP

Industry % of GDP

Manufacture % of GDP

Services % of GDP

1990

2000

1990

2000

1990

2000

1990

2000

1990

2000

China India

355 317

1080 457

27 31

16 25

42 28

51 27

33 17

35 16

31 41

33 48

Japan

3052

4842

2

1

39

32

27

22

58

66

Low & middle income

4404

6561

16

12

38

35

23

23

46

54

East Asia & Pacific

927

2059

20

13

40

46

28

32

40

41

Europe & Central Asia

1253

942

17

10

44

35

..

..

39

57

Latin America & Carib.

1133

2001

9

7

36

29

23

21

55

64

Mid. East & N.Africa

401

660

15

14

39

37

12

14

47

48

South Asia

405

597

31

25

27

26

17

16

43

49

Sub-Saharan Africa

298

323

18

17

34

30

17

14

48

53

High Income

17414

24927

..

..

..

..

..

..

..

..

World

21817

31493

7

5

36

31

..

22

57

64

World

5

4. Manufacturing Value Added Asian developing countries improved their position in manufacturing value added although their share in population declined in 1990s. Their progress was significant in production of food products and beverages, tobacco, textiles, leather and footwear, wood products, paper, and rubber and plastic products. China has significant share in world trade in exports of toys and sporting goods, footwear, travel goods, knitted outer and under garments, apparel and clothing, textiles, and radios, watches and clocks. Table-4-A Share in World MVA Year

Developed Japan Total

1980 1985 1990 1995 2000 2001

13.6 15.4 16.8 15.8 14.1 14.6

85.5 84.5 83.1 78.7 76.3 76.0

Developing South & Total East Asia 5.2 6.6 8.8 13.4 15.7 16.1

14.5 15.5 16.9 21.3 23.7 24.0

Table-4-B Share in Developing Countries’ MVA Country groups

China Africa Latin America South and East Asia West Asia & Europe Developing countries Least dev. countries

Share in MVA 1985 2001 13.3 6.2 38.0 43.0 12.8 100.0 2.4

Share in population 1985 2001

30.2 3.9 22.1 66.8 7.2 100.0 1.6

29.3 13.7 11.2 71.4 3.7 100.0 11.7

26.4 15.7 11.0 69.3 4.0 100.0 13.3

(a) Contribution of MVA to GDP Share of MVA in GDP in 2000 was highest in South and East Asia at 30.4 per cent. China had the highest share at 42.8 per cent followed by Korea (35 per cent), Malaysia (32.4 per cent), Thailand (31.7 per cent) and Mongolia (30.1 per cent). (b) Structure of manufacturing value added In general, the shares of agricultural and traditional goods (such as food, beverages, tobacco, textiles and clothing) in overall manufacturing value added had declining share, while the shares of machinery, transport and equipment, chemicals or other products had increasing share in GDP in 1990s. Agro-based sectors had significant shares in manufacturing in Hong Kong, China, Indonesia, Philippines, Thailand, Bangladesh, India, Nepal, Pakistan and Sri Lanka. (c) Structure of merchandise exports and imports Manufactures have predominant share in both merchandise exports and imports in all the countries. Agricultural products and raw materials and primary goods (such as ores and minerals) have significant shares in total merchandise trade in China, India, Malaysia, Myanmar, and most of South Asian countries.

6

Table-5-A Composition of exports Country

Food % share

Agrl. Raw Materials (% share)

Fruits % share

Ores and Minerals (% share)

Manufactures % share

1990

2000

1990

2000

1990

2000

1990

2000

1990

2000

Low & middle income East Asia & Pacific

15 12

9 6

4 5

2 2

20 10

21 7

5 2

4 2

54 68

61 83

Europe & Central Asia

..

5

..

3

..

26

..

6

..

53

Latin America & Carib.

26

21

4

3

24

18

12

9

34

48

Mid. East & N.Africa

3

3

1

0

79

80

3

2

15

14

South Asia

16

15

5

1

2

0

4

2

71

80

Sub-Saharan Africa

13

17

3

4

28

28

7

8

20

36

High Income

8

6

3

2

5

4

3

2

79

82

World

10

7

3

2

8

8

4

3

74

78

Table-5-B Composition of imports Country

Food % share 1990 2000

Agrl. Raw Materials (% share) 1990 2000

Fruits % share 1990 2000

Ores and Minerals (% share) 1990 2000

Manufactures % share 1990 2000

Low & middle income East Asia & Pacific

9 7

8 5

4 5

3 3

11 9

12 14

4 4

3 4

70 73

71 72

Europe & Central Asia

..

9

..

2

..

9

..

3

..

65

Latin America & Carib.

11

8

3

2

13

10

3

2

69

78

Mid. East & N.Africa

19

18

3

2

6

6

3

2

68

70

South Asia

9

10

4

4

23

26

6

4

54

54

Sub-Saharan Africa

..

10

..

2

..

14

..

2

..

68

High Income

9

7

3

2

11

10

4

3

72

75

World

9

7

3

2

11

10

4

3

71

74

Table-6 Share of selected regions and developing economies in world Manufacturing exports and manufacturing income in 1980 and 1997

Region/ economy Developed countries Developing countries Latin America South and East Asia NIEs Hong Kong, China Republic of Korea Singapore Taiwan, China ASEAN-4 Indonesia Malaysia Philippines Thailand China India

Share in world Manufacturing exports 1980 1997 82.3 70.9 10.6 26.5 1.5 3.5 6.0 16.9 5.1 8.9 0.2 0.6 1.4 2.9 0.9 2.6 1.6 2.8 0.6 3.6 0.1 0.6 0.2 1.5 0.1 0.5 0.2 1.0 1.1 3.8 0.4 0.6

7

Share in world Manufacturing income 1980 1997 85.5 73.3 14.5 23.8 7.1 6.7 7.3 14.0 1.7 4.5 0.3 0.2 0.7 2.3 0.1 0.4 0.6 1.6 1.2 2.6 0.4 1.0 0.2 0.5 0.3 0.3 0.3 0.8 3.3 5.8 1.1 1.1

(d) Export dynamism of Asian developing countries The share of developed countries in world-manufactured exports fell from 82 per cent in 1980 to 70 percent in 1997. Their share in world manufacturing income also declined from 85 per cent to 71 per cent during this period. Among the developing countries, it was mainly the East and South East Asian economies that improved their share in both world manufacturing income and manufacturing. ASEAN have comparative advantages in computers, office machines, optical instruments, and telecommunications, audio and video equipment, automobiles, while NIEs have comparative advantages in electronic and electrical goods. Textiles and labour-intensive manufactures, in particular clothing, are important in China, India, the Philippines, the Republic of Korea, Taiwan, Thailand. Primary commodities are important in India, Indonesia, Malaysia, the Philippines and Thailand. 5 Role of Small and Medium Enterprises (SMEs) SMEs play an important role for employment generation and poverty alleviation in Asian economies. SMEs account for 95 per cent of establishments in Bangladesh, 98 per cent in Thailand, 93 per cent in Malaysia, 70 per cent in Indonesia, 80 per cent in the Philippines and 99 per cent in Japan, Korean Republic and China. In India, SMEs account for 93 per cent of employment, 40 per cent of the manufacturing output, 45 per cent of manufacturing exports and 40 per cent of total exports. In Japan, SMEs account for 78 per cent employment, 99 per cent of all business establishments, 52 per cent of manufacturing output and exports, 64 per cent of wholesale business and 78 per cent of retail sales. In Korean Republic, SMEs account for 99 per cent of all manufacturing enterprises, 69 per cent of total employment, SMEs in Taiwan account for 90 per cent of enterprises and 65 per cent of exports. In China SMEs account for 99 per cent of total enterprises, 78 per cent of employees, 75 per cent of urban job opportunities, 64 per cent of industrial turnover, 52 per cent of corporate profits and 52 per cent of fixed assets held by industry. 6 External Environments Developing countries face significant barriers for exports of agro-based products. Preferential market access to EU and USA is restricted to the poorest countries. In Canada and the USA, peak tariffs are concentrated in textiles and clothing. In the EU, peak tariff rates exist in agriculture, footwear and food products. Developing countries’ manufactured exports encounter high tariffs, and Increased contingent forms of protection, such as anti-dumping action and labour and environmental standards. GATT, GATS, TRIMS, TRIPS, ISO standards are generally stringent. Various technical and nontariff barriers for exports of SSI products to advanced countries on grounds of environment, health, labour standards etc.

8

8. Role of Special Economic Zones (SEZs) Ireland is credited with establishing the first modern EPZ in the world with the establishment of the Shannon Export Free Zone in 1955. The first developing country to set up an EPZ was India with the creation of the Kandla Free Trade Zone in 1965. More than 200 EPZs in 60 developing countries existed in 1996 compared with just eight EPZs in 1970 and 55 EPZs in 1980. Nearly half of EPZs were located in Asia. There was tendency to breed a distinct type of industrial monoculture, either in textiles and garments or in the electronics industry. In general, one dominate industry in each country such as textiles and garments industry in Bangladesh, China, Dominican Republic, Egypt, India, Jamaica, Mauritius and Sri Lanka. Electronics industry in Barbados, Brazil, Republic of Korea, Malaysia, Mexico and Taiwan, China. 9. Role of Foreign Investment FDI acts an engine of growth and embodies a package of important sources of capital, technology, and managerial, marketing and technical skills. Most of the Asian countries have adopted an open door policy for FDI. Traditional factors influencing FDI include domestic market potentials, fiscal incentives and low cost of labour. Impediments to FDI include restrictions on repatriation of equity and profits, sectoral protection, ceilings on foreign equity, licensing procedures, performance requirements and restrictions on employment of foreign staff. The formation of regional trading groupings (such as NAFTA, ASEAN, SAARC etc.) has an important impact on the FDI pattern. In the foreseeable future, countries outside the regional groupings might be at a disadvantage in attracting FDI. There is general complain from SMEs associations and federations that SMEs face an uneven playing field due to laws and regulations. 10. Development of Skill and Technology Japan primarily relied on licensing, technical collaborations and imports of capital goods as channels for technology transfer from the West. The Republic of Korea also followed a path similar to that of Japan and Malaysia to enhance technological capability. The Chinese case is an example that has met with considerable success in technological upgradation of its small-scale sector through transfer of technology. India has built a wide array of institutions to support the development and diffusion of industrial technologies. Most of the Asian developing countries do face obstacles to technology transfer due to: (a) Poor infrastructure and utilities; (b) Strict laws and regulations on foreign firms, and inefficiencies in the implementation of deregulation policies; (c) Shortage of trained technical and managerial workforce; (d) Weak local supporting industry in the production of parts and components; (e) Low rate of diffusion of technology to the rest of the economy except for FDI; (f) High cost of technology agreements; and (g) Transfer of technology, which is not environment friendly. 9

10. Specialized financial institutions In industrialized countries, besides commercial banks there are large numbers of specialized financial institutions such as factoring companies, leasing companies, trade credit suppliers, mortgage finance companies and micro-finance Institutions. In most of the Asian developing countries there are very few leasing or trade credit entities. 11 Role of International Organisations ESCAP, United Nations has done considerable progress in exchange of national experiences, promotion of endogenous capacity building and research on sectoral restructuring in member countries. Asian and Pacific Centre for Transfer of Technology (APCTT) has also contributed significantly for establishment of Environmentally Sound Technologies (ESTs), Technology fairs and promotion of ESTs and Technology Bureau for Small Enterprises (TBSE). However, there is scope for further improvement. Role of World Trade Organision (WTO) Successive rounds of multilateral negotiations have lowered average levels of protection. Industrial countries generally set applied tariff rates close to their tariff binding. In contrast, most developing countries bind their tariffs at levels well above their applied rates. Main market access barriers include: • Import tariffs and other price-based border measures • Non-tariff border measures:  Quantitative restrictions;  Contingency measures (antidumping, countervailing, safeguard measures);  Technical barriers to trade (regulations, standards, testing, certification);  Sanitary phytosanitary measures (SPS) (food, animal and plant health and safety). • Domestic policy measures • Developing countries generally face higher barriers to their exports than industrial countries. 12 CONCLUSIONS AND RECOMMENDATIONS 12.1

Macro-economic Policies

Most of the Asian economies are undertaking credible reforms in trade, industry, financial and fiscal sectors. Sound macro-economic management is the first defense against any internal and external shocks. Countries must maintain the tempo of reforms and integration with the global economy. They should put special emphasis on infrastructure and human resource development, good governance and establishment of competent and committed bureaucracy, strengthening legal, institutional and regulatory system for public-private partnership.

10

12.2

Role of FDI

The Asian market has high potentials for small and medium-sized TNCs. Countries need to maintain their “open door policy”. However, instead of focusing on fiscal concessions, greater emphasis should be placed on creating an environment conducive to long-term development of efficient and viable industries. Fiscal incentives and investment environment In 1960s the International Chambers of Commerce argued strongly that developing countries should attract foreign investment with tax ‘holidays’ and other incentives such as subsidized credit and privileged access to protect domestic markets. The International Monetary Fund (IMF) favoured the suggestions, but advised that incentives should be extended to all investors. Many developing countries began to compete for foreign investment with various incentives. But, a considerable body of evidence showed that these incentives failed to attract foreign investment. Only those ‘fly-by-night’ firms that move from country to country, exploiting tax holidays, are attracted by these incentives, but they exit as soon as fiscal incentives expire or are withdrawn. An efficient and equitable tax system with internationally competitive taxes and duties is far more conducive to long run investment inflows than incentives. Inflows of foreign direct investment are determined by a complex set of economic, political and social factors and that investors look beyond the array of investment incentives (in particular fiscal incentives) offered. Performance requirements and various restrictions and regulations act as disincentives to foreign direct investment and often serve to offset the positive effects of investment incentives. What matters most for the foreign investors is their ability to reduce business risk, increase profitability to repatriate capital and investment income. Foreign investors are also attracted by market opportunities (domestic and exports), a clear legal and institutional set up, administrative speed and efficiency, efficient infrastructure services and above all by liberal economic policies and stable macro economic environment. Although some transnational firms desire to have wholly or majority owned branches or subsidiaries, it is widely held that some form of joint venture with a host country partner is preferable because of the experience and insights local partners bring. Local partners are particularly effective in managing labour and dealing with regulatory issues. Foreign investors are also moving into joint ventures with public enterprises, preferring corporatised ones. Foreign investment with its capital, technology and management package can make a considerable contribution to the vast investment required for infrastructure. Existing plants can be made more productive and new facilities can be provided, often on the BOT/ BOO principles, but governments and investors are still at the process of learning and experimenting.

11

Low wage rates and low production costs From the viewpoint of the advanced countries, India is an extremely attractive place for establishing production bases because of its extremely low production costs and huge domestic market. Like China, India has large and low-income farming populations, and also a large pool of technical and skilled labour implying the existence of a potentially huge supply of labour for the manufacturing and the services sectors. This reserve should enable manufacturers to secure an adequate labour force. Most of the Asian economies are going through a stage of demographic transition. Younger people would make up a larger proportion of the Asian population and can be expected to play a major role in ensuring a smooth supply of labour in the future. Besides low labour costs, various other production costs such as real estate rents, transport, communications and electricity charges are lower in developing countries than in the advanced countries.

12.3 Role of External Trade (a) Trade and Technology Policy World trade has been growing, on average, faster than world income. General trends are: First, countries that have not been able to move away from primary commodities have been marginalised in world trade. Second, most developing countries that have been able to shift from primary commodities to manufactures have done so by focusing on resource-based, labour-intensive products. Third, a number of developing countries have also experienced a rapid rise in skill- and technology-intensive products. Fourth, NIEs have seen sharp increases in their shares in world manufacturing exports. Fifth, with the exception of this last group, exports of developing countries continue to be concentrated on resource-based, labour-intensive products. A simultaneous drive by a large number of developing countries to expand their existing exports and to increase competition among them for attracting FDI in labour-intensive products could be self-defeating. We need a number of measures. First, improved market access and faster growth of markets for labour-intensive manufactures in more advanced economies. Second, the middle-income countries should diversify their trade and move out of labour-intensive manufactures and create space for lower-income countries. Finally, the developing countries themselves should expand their domestic markets by overcoming their deep-seated problems of unemployment and poverty. Industrial upgrading in advanced developing countries would allow new players to take over labour-intensive activities in line with the "flying geese paradigm". Economic policies on trade and technology of large economies such as Japan, China, India and Indonesia are crucial for development of trade in Asia. Large countries such as China and India can rely less on foreign markets for their industrialization. (b) Role of export promotion policies Export promotion schemes have been a critical part of East Asia's economic success and merit special consideration. These schemes consisted of mainly duty exemption and drawback systems. The experiences of Korea, Taiwan, India and Bangladesh indicate that one of the key requirement for the success of duty exemption or drawback should be the development of a pre-tabulated and published matrix of input-output co-efficients.

12

The other key measures include supply of export credits to exporters and modernisation of Customs Administrations. India, Taiwan, Indonesia, Malaysia and Thailand have efficient export support instruments including tax incentives, duty drawbacks and exemptions, and export and investment finance for exporters. (c) Free Trade Zones Five broad conclusions can be drawn from the Asian experience for development of export promotion zones: • • • • •

FTZs can be a useful instrument to the development of export-oriented industry. FTZs should be a component of a broader outward-oriented development strategy. FTZs should have proper infrastructure and linkages with mainland. An appropriate policy framework must accompany FTZ development. Pricing of land in such zones should not be subsidized. 12.4

Role of agro-based and resource-based SMEs

In many developing countries, agro-based and resource-based SMEs contribute significantly to GDP growth, employment generation and poverty alleviation. But, SMEs face a number of problems and constraints: lower productivity and outdated technology, lack of skill labour and managerial skill, constraints on infrastructure, low economies of scale, lack of modern marketing, increased capital intensity, high cost of domestic credit, lack of foreign investment, increased internal and external competition and high degree of mortality. A wide range of opportunities can be seized by SMEs through regional economic cooperation and information networks, technology upgradation, provision of timely and adequate finance, adequate backward and forward linkages, vertical expansion of the SMEs, dispersal of SMEs as in China and India and removal of tariffs and non-tariff restrictions. 12.5 India, China and Japan Economic co-operation among three giant economies in Asia viz. India, China and Japan can create enormous economic opportunities and spill-over effects on other developing countries by creating demand and employment opportunities. Japan has enormous capital, good corporate governance, high productivity, modern technology and efficient transport and communications. As compared to China, India has an advantage in terms of a democratic set-up, resilience of the economy, rule of law, market economy, better legal and financial systems and English language proficiency. As compared to India, China has advantage in terms of higher savings, investment and economic growth, disciplined, better-educated and healthier work force.

13

India is looking at China to learn how to achieve higher growth without loosing democracy and freedom. India can learn from China regarding clarity in direction of reforms and sincerity in implementation. China is looking at India to know how to move towards market economy and privatisation without loosing growth. China can learn from India regarding creativity, innovations and transparency. Both India and China can learn from Japan regarding better work culture, corporate governance and public-private partnership in infrastructure development. 12.6 Demographic Transition Most of the Asian economies are going through demographic transition with fall in fertility rates, increase in expectation of life, rise in the proportion of the working group in total population and the fall in dependency ratio. The IMF has concluded that the national savings, investment and growth rates vary directly with the proportion of people in the middle age brackets. Fiscal positions also improve. But subsequently, the proportion of the working group will fall and the dependency ratio would rise and these effects go into reverse. The impact of demographic transition over next three decades is significantly negative in Japan and Western Europe, modestly negative in the US, emerging Asia and Latin America and positive in the Middle East and Africa. Reforms are necessary in pension, provident and insurance funds and old age social security. 12.7

Participation at Regional Level

(a) Regional Economic Co-operation The challenge lies in the extension of regional dynamics and the growth pattern to include newly emerging countries such as China and India. (b) Role of ESCAP ESCAP and its regional institutions such as APCTT, RNAM, and CGRPT made significant contribution, and could do more in the future in the areas of FDI related technology transfer and export promotion, multileveled bilateral cooperation and cooperation at sub-regional level. In the ESCAP region, ASEAN and SAARC are major subregional associations. It is hoped that discrimination against non-member countries will not intensify. (c) Role of NGOs and industry and trade associations NGO and industry, trade and business associations can play significant role in organization of seminars, workshops, and conferences, strengthening the existing information networks on technology transfer, harmonization of national policies, establishment of national and then regional databases on imported technologies and an information-sharing network, provision of a suitable form of linkage between research institutions, technology brooking agencies, and concerned government departments and

14

strengthening the cooperation between APCTT, CGRPT, RNAM, ESCAP secretariat; and between ESCAP and other international organizations. 12.8

Multilateral level actions

WTO can play major role by phasing out by all countries of tariff peaks and multiplicity of rates, more technical assistance to implement product and process standards, improved market access to developed countries for labour intensive products, liberalization of imports, especially for agricultural products and textiles and clothing, can generate large benefits for developing countries in terms of incomes, exports and employment. It is desirable to accelerate the removal of quotas on textiles and clothing imports. It is also desirable under the Doha round negotiations to substantially lower tariffs on T&C trade, in both industrial and developing countries. In order to prevent anti-dumping action from taking the place of quotas and tariffs once these are liberalized, trade remedy rules should be reviewed. In agriculture, OECD countries must de-link agricultural income support from production and coordinate reforms of subsidy and tariff regimes. Reform of market access in developing countries themselves would contribute as much to a developmentoriented multilateral trading system as OECD policies. Distribution effects of reforms should be recognized and dealt with properly. Food security issues and the concerns of poor countries must be addressed as part of overall poverty-reduction and development strategies by the multilateral organisations like the IMF, World Bank, ADB and UNDP. 12.9 Technical Assistance The World Bank, IFC, Asian Development Bank, UNDP, UNICEF, UNIDO and UNCTAD are engaged in the provision of technical assistance. Although the experience with technical assistance have been found to be very valuable, there is scope for improvement in the following fields: • Promotion of regional cooperation in human resource development, R&D, S&T development, technology blending, use of IT and computer training and facilities. • Consultancy and training aimed at technology upgrading and skill improvement for SMEs with special attention to rural areas, economically backward areas, ethnic and minority groups, and women and young entrepreneurs. • Regional technical assistance programmes on harmonisation of national and regional policies on trade, tariffs, taxation, investment and business regulations. • Promotion of technology management, evaluation, assessment and enterprises cooperation for the blending of indigenous technology and imported technology. • Improvement of the institutional machinery, administrative and legal framework with a view to facilitating private investment including foreign investment. • Advisory services for developing countries and LDCs to strengthen capital markets and to attract foreign portfolio investment. • Technical support for developing countries and countries in transition to upgrade their institutional capacity to identify, design, negotiate, and implement schemes on BOT/BOO/BOLT for infrastructure development.

15

Selected References Asian Development Bank (1995). Asia: Development Experience and Agenda, ADB Theme Paper 3, Asian Development Bank, Manila. ______ (1997) Emerging Asia-Changes and Challenges, ADB, Manila. ______ (2003) Asian Development Outlook 2003, ADB, Manila. Asian Productivity Organisation (1999) Asia Economic Crisis: in Search of Higher Competitiveness in Global Markets, APO, Tokyo. Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for investment, in Investing in Asia, ed.C.P.Oman et.el.1997. Das, Tarun (1993). Macro-economic Framework, Special Economic Zones and Foreign Investment in India, Ad-Hoc Working Group on Investment and Financial Flows, Report No.TD/B/WG.1/Misc.3/Add3/UNCTAD, United Nations, Geneva, pp.1-75, June 1993. ______ (1996) Policies and Strategies for Promoting Private Sector’s Role in Industrial and Technological Development Including Privatisation in the Asian Economies, pp.1171, ST/ESCAP/1696, United Nations, New York. ______ (1997) Technology Transfer- Growth Nexus Towards Greater Rationalisation And Complementation of Manufacturing Production and Technology Upgrading, pp.1-258, Report prepared for ESCAP, United Nations, Bangkok, October 1997. ______ (1998) Private Sector Development Programmes in Selected Countries in Asia and Lessons for Africa, pp.1-165, Report prepared for Economic Commission for Africa, United Nations, Addis Ababa, Nov. 1998. ______ (1999) East Asian Economic Crisis and Lessons for External Debt Management, pp.77-95, in External Debt Management- Issues, Lessons and Preventive Measures, edited by A. Vasudevan, Reserve Bank of India, Mumbai, April 1999. _______ (2000) Role of Fiscal Policies for Management of External Capital Flows, in Corporate External Debt Management, published by CRISIL, Mumbai. _______ (2002) Implications of Globalisation on Industrial Diversification Process and Improved Competitiveness of Manufacturing in ESCAP Countries pp.ix+1-86, ESCAP, UN, Bangkok, ST/ESCAP/2197, ISBN: 92-120116-0, March 2002. _______ (2003a) Promoting Resource-Based Export Oriented Industries in Asia and Pacific, ESCAP, United Nations, Bangkok, pp.1-120, January 2003. _______ (2003b) Economic Reforms in India- Rationale, Scope, Progress and Unfinished Agenda, Planning department, Bank of Maharashtra, Pune, February 2003. Das, Tarun, Ashis Saha, Rajaram Dasgupta and Rohit Parmer (2003) Papers and Proceedings of the Seminar on Construction of an Index of Services Production, National Institute for Bank Management, Pune. ESCAP (1994a) Proceedings of the Regional Seminar on Investment Promotion and Enhancement of the Role of the Private Sector in ESCAP, United Nations, New York.

16

______(1994b) Privatisation: Issues and Prospects, ST/ESCAP/1439, UN, New York. ______(1997) ESCAP Survey 1997- Asia and the Pacific into the Twenty First Century: Development Challenges and Opportunities, U.N, New York. Harold, Peter, Malathi Jayawickrama and Deepak Bhattasali (1996) Practical lessons for Africa from East Asia in Industrial and Trade Policies, Washington DC Industrial Bank for Reconstruction and Development (1995), Bureaucrats in Business: The Economics and Politics of Government Ownership, June 1995, Washington, DC. International Monetary Fund (1997) World Economic Outlook- Globalisation, Opportunities and Challenges, May 1997, IMF, Washington, D.C. _______ (1998) Mitigating the social costs of the Asian crisis, Finance and Development, Volume 35, Number 3, September 1998, Washington DC _______ (2002a) Improving Market Access Toward Greater Coherence Between Aid and Trade, March 2002, Washington DC. _______ (2002b) Market Access for developing Country ExportsSelected Issues, Joint Discussion Paper by the IMF and World Bank. August 2002, Washington DC. Oman, C.P., Brooks, D.H. and Foy, C. (1997). Investing in Asia, Development Centre, The Organisation for Economic Co-operation and Development (OECD). UNIDO (2002) The International Yearbook of Industrial Statistics 2002, Vienna. United Nations Conference on Trade and Development (UNCTAD) (2001) World Investment Report 1997, United Nations, Geneva. ______ (2002) Trade Development Report, United Nations, Geneva. World Bank (1996). Practical lessons for Africa from East Asia in Industrial and Trade Policies, Washington DC ______(1998b) Social Consequences of the East Asian Crisis, Washington DC _____ (2000) East Asia: Recovery and Beyond, Washington DC _____ (2002a) World Development Report 2003, Washington, DC _____ (2002b) Development, Trade and WTO: A Handbook, Washington, DC WTO (2001) Assessment of Services Liberalisation: Potentially relevant consideration and criteria, S/CSS/W/117, 15 November 2001.

17

18