Tarun Das Economic Adviser Ministry Of Finance, India.: Presented By

Promoting Agro-based and Resource-Based Export-Oriented SMEs in Asia and Pacific Presented by Tarun Das Economic Adviser Ministry of Finance, India. 1

An Overview of the Study 1. Objectives and scope of the study 2. Main characteristics of Resource based and agro based industries 3. Rationale for development and their contribution to poverty alleviation 4. Policies and strategies for development of agro-based and resource-based industries 5. Role of International Organizations 6. Conclusions and Recommendations

2

1.1 Objectives  To examine prospects and challenges for promoting resource-based and agro-based SMEs for export-promotion, employment generation and poverty alleviation  To identify areas for policy orientations, institutional capacity building and private sector led rural enterprise development  To suggest measures in promoting integration at the regional and global levels. 3

1.2 Scope of the Study  South Asia comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.  NIEs comprising Hong Kong, China; the Republic of Korea; Singapore; and Taiwan, China.  Selected economies in the Southeast Asia viz. Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Thailand, Vietnam. These with Brunei and Singapore now constitute the Association of Southeast Asian Nations (ASEAN) and ASEAN Free Trade Area (AFTA).  Three other economies in East Asia viz. Japan, Mongolia and People’s Republic of China. These countries cover 55 per cent of the world population and 15 per cent of area, and display a number of contrasts.

4

1.3 East and South-East Asia 1.  Despite serious financial crisis in some of the East Asian countries in 1997-1999, Asian developing economies had shown remarkable economic vigor and dynamism in 1990s. 2. They outperformed other developing regions and industrial countries by wide margins in industrial and overall economic growth. 3. The continued robust growth in Asia was attributable to a number of factors such as:  Sustained policy reforms in industry, trade and financial sectors and  Continued surge of foreign capital. 5

1.4 South Asia 1.

2. 3.

4. 5. 6.

Despite rich natural resources South Asia is characterized 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 in 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. Exports consist of mainly labour-intensive products like textiles, clothing, gems and jewelry. Imports consist of mostly crude oil, petroleum products and capital goods. 6

1.5 Policies for Growth Dynamism  An open door policy for trade, FDI and foreign technology  Strong role for the private sector  A trinity of openness to trade, high investment and high savings rates  Export-oriented investment-led growth  “Catch-up type” economic growth.  “Virtuous circle” of development 7

1.6 Broad Lessons for Development • Countries with more market-friendly and outwardlooking policies do better in both generating growth and reducing poverty. • Both well governed state and orderly functioning markets are essential for high growth and development. • Government should withdraw from sectors where private participation is more efficient and more productive. • But, scope of government remains large in social and infrastructure development.

8

1.7 Sectoral Growth Rates Regions

GDP GDP Ind Manf Services 1980s 1990s 90s 1990s 1990s East Asia & Pacific 7.9 7.2 9.3 9.9 6.4 South Asia 5.6 5.6 6.2 6.6 7.1 Europe & Cent Asia .. -1.5 -3.8 .. 1.6 Latin Am. & Carib. 1.7 3.3 3.3 2.6 3.4 Mid. East & N.Afr. 2.0 3.0 0.9 3.8 4.5 Sub-Sah. Africa 1.6 2.5 1.6 1.6 2.6 World 3.3 2.7 1.5 .. 2.9

9

1.8 Structure of GDP (as % of GDP) Regions

GDI 1990 2000 East Asia & Pacific 35 30 South Asia 24 23 Europe & Central Asia 28 21 Latin America & Carib. 19 20 Mid. East & N.Africa 24 20 Sub-Saharan Africa 15 17 World 24 22

Exports 1990 2000 26 42 9 15 23 44 14 17 33 38 27 32 20 23 10

1.9 Structure of GDP (as % of GDP) Country

Imports Savings 1990 2000 1990 2000 East Asia & Pacific 26 37 35 35 South Asia 13 18 20 20 Europe & Central Asia 24 39 26 26 Latin America & Carib. 12 18 21 19 Mid. East & N.Africa 35 28 23 30 Sub-Saharan Africa 26 32 16 17 World 20 23 24 23 11

1.10 Sectoral shares in GDP (percentage) Country

Agriculture Industry 1990 2000 1990 2000 East Asia & Pacific 20 13 40 46 South Asia 31 25 27 26 Europe & Central Asia 17 10 44 35 Latin America & Carib. 9 7 36 29 Mid. East & N.Africa 15 14 39 37 Sub-Saharan Africa 18 17 34 30 World 7 5 36 31  In East Asia and Pacific, the shares of industry, manufacturing and services increased in 1990s at the cost of agriculture. 12

1.11 Sectoral shares in GDP (percentage) Country

Manufacture 1990 2000

Services 1990

2000 East Asia & Pacific 28 32 40 41 South Asia 17 16 43 49 Europe & Central Asia .. .. 39 57 Latin America & Carib. 23 21 55 64 Mid. East & N.Africa 12 14 47 48 Sub-Saharan Africa 17 14 48 53 World .. 22 57 64  In South Asia, the share of services in GDP improved in 1990s at the cost of other sectors.

13

1.12 Structure of manufacturing output  In general, the shares of agriculture and primary sector based traditional goods (such as food, beverages, tobacco, textiles and clothing) in overall MVA declined in 1990s.  The shares of chemicals, machinery, transport and equipment increased in 1990s.  Agro-based sectors had significant shares in MVA in Hong Kong, China, Indonesia, Philippines, Thailand, India, Bangladesh, Nepal, Pakistan and Sri Lanka. 14

1.13 Structure of merchandise trade  Manufactures have predominant share in both merchandise exports and imports in all the countries.  Agricultural products, 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.

15

1.14 Export Dynamism in Asia Region

Manf. Exports (%) 1980 1997 Developed countries 82.3 70.9 Developing countries 10.6 26.5 Latin America 1.5 3.5 South and East Asia 6.0 16.9 NIEs 5.1 8.9 Hong Kong, China 0.2 0.6 Republic of Korea 1.4 2.9 Singapore 0.9 2.6 Taiwan, China 1.6 2.8 ASEAN-4 0.6 3.6 Indonesia 0.1 0.6 Malaysia 0.2 1.5 Philippines 0.1 0.5 Thailand 0.2 1.0 China 1.1 3.8 India 0.4 0.6

Manf. 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

16

1.15 Structure of exports (per cent)

Product category A: B: C: D: E: Unclassified

DC Exports World Exports 1980 1998 1980 1998 51 19 26 15 22 23 15 15 6 7 10 8 8 17 27 30 12 31 20 30 2 3 3 3

A: Primary commodities, B: Labor-intensive and resource based manufactures, C: Manufacture with low skill-technology intensity, D: Manufacture with medium skill-technology inten. E: Manufacture with high skill-technology intensity

17

1.16 Most Dynamic Export Products in Asia  ASEAN- Computers, office machines, optical instruments, automobiles, telecom, audio and video equipment.  NIEs- 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, Thailand. 18

2.1 Types of Industries a. Food processing industries and beverages (ISIC 311313) b. Tobacco and tobacco products (314) c. Textiles (321) d. Wearing apparel, leather and leather products and footwear (322-324) e. Wood and cork products (331) f. Paper (341) g. Printing and publishing (342) h. Rubber and plastic products (355-356) i. Non-metallic mineral products (361-362, 369) 19

2.2 Share in MVA in Developing Countries Country groups

Share in MVA 1985 2001

South & East Asia 43 China 13 Africa 6 Latin America 38 West Asia & Europe 13 Developing countries 100 Memo Item: LDCs 2.4

67 30 4 22 7 100 1.6

Share in pop 1985 2001

71 69 29 26 14 16 11 11 4 4 100 100 11.7

13.3 20

2.3 Share of Asia in developing countries MVA Branch (ISIC) 1985 1. Food/beverages (311-13) 32 2. Tobacco (314) 39 3. Textiles (321) 54 4. Wear.app., leather, footwear (322-324) 43 5. Wood and cork products (331) 55 6. Paper & paper products (341) 38 7. Printing and publishing (342) 43 8. Chemicals (351-352) 36 9. Petroleum inc. coal products (353-35 34 10. Rubber and plastic products (355-356) 54 11. Non-metallic Mineral products (361-2, 369) 40 12. Basic metals (371-372) 45 13. Metal products (381) 46 14. Non-electrical machinery (382) 48 15. Electrical machinery (383) 60 16. Transport equipment (384) 47

2000 37 44 59 44 55 45 46 48 44 54 48 54 49 59 75 59

21

2.4 China’s position in world exports (in %)

SITC code Product groups Type China's exports World exports 894 Toys and sporting goods B 4.5 24.5 851 Footwear B 4.4 23.0 845 Knitted outergarments B 3.7 16.7 843 Women's outergarments B 3.6 16.1 842 Men's outergarments B 3.3 19.0 846 Knitted undergarments B 2.7 17.3 831 Travel goods B 1.8 31.0 848 Apparel and clothing B 1.7 26.4 652 Woven cotton fabrics B 1.6 12.3 762 Radios E 1.5 18.9 658 Made-up textiles B 1.5 18.6 821 Furniture and parts B 1.5 5.0 653 Woven fibre fabrics B 1.4 8.6 844 Textile undergarments B 1.2 17.0 651 Textile yarn B 1.2 6.5 22 885 Watches and clocks E 1.0 12.0

2.5 Structure of the sector  In both industrialized and developing countries the shares of agro based and resource based products increased in 1985-2000.  In 2000, agro-based and resource-based manufacturing had a share of 45% in total MVA of developing countries compared with only 28% in industrialized countries.  In developing countries, food products and beverages had the highest share (13.3%) in total MVA, followed by chemicals (12.8%), electrical machinery (12.1%) and transport equipment (9.5%). 23

2.6 Structure of the sector in Developed countries

In contrast, in 2000 the industrialized countries had  Dominant share in non-electrical machinery (19.7%) followed by  Electrical machinery (18.9 per cent),  Chemicals (9.6 per cent),  Food products and beverages (8.9%) and  Transport equipment (8.5 per cent). 24

2.7 Contribution of MVA to GDP in 2000 Among regions, share of MVA in GDP in 2000 was highest at 30.4 per cent in South and East Asia. Among countries, highest share at 42.8% in China  35 per cent in Korea, 32.4 per cent in Malaysia, 31.7 per cent in Thailand and 30.1 per cent in Mongolia. 25

2.8 Contribution to Employment  In NIEs, services had predominant share in both male and female employment followed by industry and agriculture in that order,  In South Asia and South East Asia, agriculture and allied sector had the predominant share in both male and female employment.  Female employment had higher share in total sectoral employment than male employment in tobacco, textiles, wearing apparel, footwear, leather and fur products, chinaware and potteries.

26

2.9 Contribution to Productivity  For almost all the countries, iron and steel has the highest productivity of labour,  While the sector with the lowest value added per employee is not uniform across the countries.  However, productivity of majority of agro-based and resource-based industries such as food products and beverages, textiles and clothing, apparel, leather products and footwear were relatively high in most of the countries.

27

2.10 Constraints for development Asian SMEs suffer from age-old problems:  Low level of productivity and outdated technology  Lack of skilled labour and managerial skill  Low economies of scale  Inadequate access to capital and high credit cost;  Constraints on infrastructure  Higher costs of raw materials  Difficulties in marketing and distribution  Lack of foreign investment  Increased internal and external competition 28

2.11 Government Support Programs Government support programs suffer from the following deficiencies:  Involvement of too many government and private agencies with minimal coordination;  Short run and unfocused approach for the development of SMEs;  Absence of continuity or frequent revisions of policies and programs;  More benefits accrued to large and medium industries compared to small industries. 29

2.12 Major issues for consideration  Integration of agriculture and agro-based industries  Availability of raw materials and credits  Location of industry and transport costs  Economies of scale and size of markets  Availability of skilled labour & capacity building  Upgradation of technology  International barriers on trade  Role of multinationals and foreign investment

30

3.1 Rationale for development of SMEs   SMEs make Valuable contributions to employment  generation and poverty alleviation   SMEs  provide  effective  safety  nets  to  rural  poor  against the income fluctuations.  Provide  opportunities  for  the  growth  of  economic  activities in the informal sector.  Agro-based  industries  open  up  new  channels  of  distribution and marketing.  Help to earn foreign exchange through exports,   Upgrade the quality of the labour force  Help to mobilize and utilize domestic resources  Agro-based and resource-based manufacturing units  account for major shares in value added. 31

3.2 Contribution of SMEs in USA  53 per cent of the private workforce;  99 per cent of all employers;  96 per cent of all US exporters.  50 per cent of GDP;  28 per cent of jobs in high technology sectors;  55 per cent of all innovations;  47 per cent of all sales in the country;  35 per cent of federal contract deals;  51 per cent of private sector output.   32

3.3 Contribution of SMEs in Germany and India

In Germany, SMEs account for:  64 per cent of all employment  48 per cent to the Gross National Product  27 per cent to exports for the year 1990. 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. 33

3.4 SMEs

account for:

95% 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, 90 per cent in Taiwan, 98 per cent in Korean Republic, 99 per cent in Japan, 99 per cent in China.   34

3.5 Contribution of SMEs in Japan and Korea In Japan, SMEs account for:  78 per cent employment  99% of all business establishments,  52% of manufacturing output/ exports,  64 per cent of wholesale business and  78 per cent of retail sales. SMEs in Korean Republic account for:  99% of all manufacturing enterprises  69 per cent of total employment. 35

3.6 Contribution of SMEs in China and Taiwan

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% of fixed assets held by industry SMEs in Taiwan account for:  90 per cent of enterprises and  65 per cent of exports.

36

4.1 Business environment • All countries have specialized organization and very elaborate system of rules and regulation • Small Business Administration (SBA) in USA • SME Basic Law in Japan • SPARK programme on rural industrialization in China • South Korea- a comprehensive SME legislation on its statute book • Development Commissioner for SSI and separate ministry for food processing industries in India.

37

4.2 External environment  Developing countries face significant barriers for exports of agro-based products  In Canada and the USA, peak tariffs are concentrated in textiles and clothing. In the EU and Japan, in agriculture, footwear and food products.  Developing countries’ manufactured exports encounter high tariffs, and increased contingent forms of protection, such as anti-dumping action  Various technical and non-tariff barriers for SSI exports on grounds of environment, health, labour etc.  The roadblock towards technological upgradation and transfer of technology to SSI because of:  GATT, GATS, TRIMS, TRIPS, ISO standards  IPRs- copyrights, patents, trademarks and designs. 38

4.3 Policy Support to SSI Sector in India             

Priority Sector Lending Program by the banks. Specialized bank branches for SSI. Laghu Udyam Credit Card Scheme since Nov 2001. Various fiscal and other incentives to SSI sector. Product reservation and dereservation for SSI sector Price and Purchase Preference by govt departments Support for technology upgradation and R&D Entrepreneurship Development Programmes, Encouraging Ancillaries and Sub-contracting Credit Guarantee Fund Trust for SSI sector Technology Development and Modernization Fund Technology Upgradation for textiles and jute industries Tannery Modernization Scheme

39

4.4 Role of Export promotion schemes and Special Economic Zones • India, China, Korea, Taiwan, Indonesia, Malaysia and Thailand have various export support instruments • First developing country EPZ was set up at Kandla in India in 1965. • More than 200 EPZs in 60 developing countries in 1996 • Nearly half of EPZs were located in Asia. • In general, one dominant 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. 40

4.5 Role of Foreign Investment • FDI acts as an engine of growth and embodies a package of capital, technology, managerial, marketing and technical skills. • Asian countries have adopted an open door policy. • Traditional factors influencing FDI- domestic market potentials and low cost of labour. • Impediments to FDI include sectoral protection, ceilings on foreign equity, licensing, performance criteria, restrictions on employment & convertibility. • Regional trading groupings (NAFTA, ASEAN, SAARC) have an important impact on the FDI pattern. • Countries outside the regional groupings might be at a disadvantageous position in attracting FDI. • There is general complain from SMEs federations that SMEs face an uneven playing field due to regulations. 41

4.6 Development of Technology Most of the Asian developing countries do face obstacles to technology transfer due to:  Poor infrastructure and utilities;  Strict laws and regulations on foreign firms, and inefficiencies in the implementation of deregulation policies;  Shortage of trained technical and managerial workforce;  Weak local supporting industry for parts and components;  Low rate of diffusion of technology to the rest of the economy;  High cost of technology agreements;  Transfer of environment unfriendly technology.  The Chinese has made considerable success in technological upgradation of its SMEs through transfer of technology.  India has also built a wide array of institutions to support the development and diffusion of industrial technologies.

42

4.7 Access to Capital  In Korea, USA, Japan, China, India, the Credit Guarantee 



 

programmes help small enterprises to have access to bank loans without collateral support. India and Korea have set up special finance institutions and technology development fund and other programmes for supporting venture capital. Korean Technology Banking Corporation, Korean Technology Credit Guarantee Fund, the Small and Medium Industry Promotion Corporation, and the Korean Development Investment Corporation provides substantial financial support to SMEs. India has an organised system under which public sector banks provide various financial help to SSIs. Small Industries Development Bank of India provides various kinds of technical and financial help to SSIs. 43

4.8 Specialized Financial Institutions • Industrialized countries have large numbers of specialized financial institutions: Factoring companies, Leasing companies, Trade credit companies, Mortgage finance companies Micro-finance Institutions • In most developing countries there are very few leasing or trade credit entities.   44

5.1 Role of International Organizations 1. 2.    3.

Role of World Bank, ADB and IMF ESCAP Exchange of national experiences Promotion of endogenous capacity-building Research on sectoral restructuring Asian and Pacific Centre for Transfer of Technology (APCTT)  Environmentally Sound Technologies (ESTs)  Technology fairs and promotion of ESTs  Technology Bureau for Small Enterprises (TBSE)

45

5.2 Role of WTO • General Agreement on Trade and Tariffs (GATT) focused mainly on manufactured goods. • In addition to goods, WTO covers cross-border flows of services and knowledge, while a collective agreement on capital flows is also on the agenda. • Available evidence suggests that trade liberalization has been limited and slow in agriculture, textiles and clothing; compared to other sectors. • Access to markets for these products continues to be much more restricted. • Agricultural subsidies, particularly in the EU, restricts the growth of exports of a number of agricultural commodities from developing countries. 46

5.3 WTO and Market Access • 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 (TBT) (regulations, standards, testing and certification procedures);  Sanitary and 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.

47

5.4 Agreement on Agriculture  Tariffication and Binds  Minimum import access  Reduction of domestic support, as measured by the total Aggregate Measurement of Support (AMS),  Phasing out of export subsidies  Special safeguard provision,

48

5.5 Agreement on Textiles & Clothing  MFA quotas are to be phased out progressively over a 10year period.  Products not yet integrated are subject to a special transitional safeguard mechanism.  The ATC accelerated the growth rates for remaining quotas.  T&C imports are subject to exceptionally high tariffs in both developed and developing countries.  ASEAN, China, and South Asia all have tariffs in the range of 20-33 per cent on textiles, and of 30-35 per cent on clothing.  •

49

6.1 Recommendations A wide range of opportunities can be seized by SMEs through:  Technology upgradation  Regional information networks  Provision of timely and adequate finance  Adequate backward and forward linkages  Vertical expansion of the SMEs  Dispersal of SMEs as in China and India  Removal of tariffs and non-tariff restrictions 50

6.2 Development strategies and policies (a) Macro-economic policies (b) Fiscal incentives (c) Science and Technology policy (d) Foreign investment policy (e) Reservation policy (f) Infrastructure and human development (g) Establishment of competent and committed bureaucracy (h) Strengthening legal, institutional and regulatory system 51

6.3 National level policies  Marketing support  Mandatory purchase policy  Technology upgradation  Establishment of Technology Bank for SMEs  Development infrastructure and IT  Development of Clusters and Networks  Development of specialized bank as in India  Innovative Financing Techniques  Venture Capital Funds, Leasing companies  Mortgage finance companies, Micro finance  Factoring companies, Trade credit suppliers

52

6.4 Role of external trade (a) Trade and technology policies of large economies- Japan, China, India etc. (b) Export promotion policies (c) Free Trade Zones (d) Improved market access in developed countries (e) Diversification of markets and export products by middle income countries (f) Expansion of domestic markets by developing countries themselves (g) Flying geese paradigm 53

6.5 Regional Economic Co-operation ESCAP in association with APCTT, RNAM, and CGRPT can help for the following:  FDI related technology transfer  FDI related Export promotion  Multilayered bilateral cooperation  Strengthening Cooperation at Sub regional level- ASEAN and SAARC  Encouraging Role of NGOs  Preparation of Source book on ESTs  Co-operation among country associations 54

6.6 Co-operation among country associations

 Organization of seminars and workshops  Strengthening the existing information networks on technology transfer  Harmonization of national policies  Establishment of national and then regional data banks on imported technologies and an information-sharing network.  Establish linkages among research institutions, technology brooking agencies, and concerned government departments  Strengthen cooperation among APCTT, CGRPT, RNAM, ESCAP and between ESCAP and other international organizations. 55

6.7 Role of WTO • Phasing out 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. • To accelerate the removal of import quotas on T&C. • Lower tariffs on T&C trade, in both industrial and developing countries. • Review anti-dumping actions and trade related rules • Reforms on agricultural subsidy in OECD • Reform of market access in developing countries. • Food security issues and the concerns of poor countries must be addressed as part of overall poverty-reduction and development strategies by the multilateral organizations. 56

6.8 Technical Assistance (TA)

The World Bank, IFC, ADB, ESCAP, UNDP, UNIDO and UNCTAD can provide TA for the following: • Promotion of regional cooperation in development of human resources, R&D, S&T and use of IT. • Consultancy and training aimed at technology upgrading and skill improvement for SMEs with attention to rural and backward areas, ethnic and minority groups, and women and young entrepreneurs. • Technical assistance programs on harmonization of national and regional policies on trade, tariffs, taxation, investment and57 business regulations.

6.9 Technical Assistance • Promotion of technology management, assessment and enterprises cooperation for the blending of indigenous technology with imported technology. • Improve institutional, 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 to upgrade their institutional capacity to identify, design, negotiate and implement schemes on BOT for infrastructure development. 58

6.10 Action Points for ESCAP On the basis of deliberations of this Expert Group meeting : • ESCAP may set up a task force at the regional level • May formulate a regional capacity building program • May identify some pilot programs 59

THANK YOU 60