Economic Growth Models

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… Should They Be Imported or Imitated?

By Alfred Kamupingene and Anton de Klerk

The Role of Government in the Formulation of National Industrial Policy

Namibia’s economic growth has surpassed the national target set in NDP2.

Whereas the set target was 4.3%, the actual growth averaged 4.7% for the period 2001-2005 and with a positive outlook for some more good growth for 2007 expected at 4.8%. However, this growth is not spectacular compared to some of the emerging countries like India (9.2%), Singapore (7.9%), Columbia (6.8%) and China (10.7%).

A reasonable and critically important question might therefore be: What are the likes of China doing to allow it to grow at a rate that is double that of Namibia? Furthermore, should we be able to answer this question, then could we not simply follow their example and produce the same growth levels? Or stated otherwise, by incorporating the elements that exist in other fast growing economies, elements that are absent in our own, could we not end up with the same result? This is a critical question facing policy makers and is well summed up by the following well-known quote from economist, Bob Lucas (1978):

“Is there some action the Government of India could take that would lead the Indian Economy to grow like Indonesia’s or Egypt’s? If so, what exactly? If not, what is it about the “nature of India” that makes it so? The consequences for human welfare involved in questions like these are simply staggering: once one starts to think about them, it is hard to think of anything else.”

The empirical answer to our question above is, unfortunately, a clear ‘no’. Econometric studies on the determinants of economic growth are notorious for their inconsistency1.

Anecdotal evidence tends to support this when one considers the fact that the two largest (by population) and of the strongest growing countries in the world apparently have diametrically opposite societal structures – China professes to be a communist centralised state and India a capitalist democracy.

In most developing economies, received wisdom has historically suggested a government’s role should be limited to creating an investment environment conducive to allowing the private sector to prosper. But the successes recorded by the Asian economies have brought to the fore another component which orthodox schools of thoughts have tended to omit.

The striking and unique element in these economies was the market-enhancing role played by Government. This approach negates the view that government and private sector are substitute mechanisms for resource allocation and highlights the crucial role government can play, especially in terms of crafting a country’s Vision and Goals.

These countries have also shown that even when the latter have been set up and articulated, it takes vigour and unwavering leadership to translate them into economic development.

Following from this, we suggest that no one set of ideas, models or theories can be transferred wholesale from one economy to another. Principally, economic ideas on growth are generated within specific environments characterised by unique incentive structures and institutions. Good ideas from one economy can yet be bad ideas for another: the consent of Washington might produce discontent in Windhoek.

The Same Shoe

Even through all feet do not fit the same shoe, wearing shoes is generally a good idea. Therein lies the simple, challenging truth: good economic management is always about substance before it is about form. Walking with the wrong size shoes might well be worse than walking barefoot.

This means that it is more important to accept the need to wear shoes rather than getting fixated on wearing the same fancy shoes as a successful neighbour.

Until the late 1970s, the Chinese centralised system directed a producer to manufacture a certain quota of goods; more recently, any overproduction beyond the quota could be sold via the market mechanism and, not surprisingly, a large part of this surplus came to be exported.

These traditional ‘rules of the Chinese economic game’ created an incentive space within which self-interest worked powerfully to produce higher returns.

Importantly however, this extra reward only worked (at least in the 1980s and 1990s) within the context of Chinese cultural and institutional considerations.

This meant it was not so much the policies of centralised demand or even freedom to produce beyond the quota per se that guaranteed good results but the space created by offering incentives to the individual to make economic decisions for his own benefit.

Other principles which were gradually introduced included: transparency (which served as an effective antidote for free-riding); social cohesion (which encouraged buying by the broader society, thereby lowering transaction costs in the economy and increasing returns); and a greater degree of certainty (which decreased the expected variability in returns for market participants and thereby increased the likelihood of greater willingness to invest).

The challenge to a specific country’s policy makers is therefore firstly the identification of that country’s relevant economic dynamics and thereafter the design of the form (both in terms of policy and supporting institutions) that will deliver the required results within the body of the greater economy.

Experiences of other economies might help in identifying these deeper principles; so too might be the various ways in which they were employed.

The development routes taken by Japan, India, Taiwan and recently of China will serve as the laboratory in which our thinking on this important question will now be put to the test.

Japan

We all admire the miraculous success of Japan’s industrialisation. This success is especially remarkable since the country’s small land size and lack of natural resource endowment might have been seen as constraints.

Research conducted by Masayuki2 highlights the importance of a factor particularly evident in Japan – tradition – that orthodox economic development theory may have overlooked. Masayuki contends it was endogenous factors – factors that had their origin within the system rather than outside it (e.g. foreign technology) – that were the main contributors to Japan’s economic success.

Japanese industrialisation has often been portrayed as a process of transferring and importing technology and organisation from Western countries. Yet it was Japanese society – its norms, values and institutions – that created the foundation that permitted the productive grafting of imported technologies onto it and thereafter allowed for the production of high quality goods. This unique combination created a comparative advantage for the Japanese economy: their model meant, at least initially, lower capital investment (since another country effectively carried the R&D costs) without sacrificing the high marginal productivity that use of the latest technologies gave the user of the products Japan was able to make.

Upon closer inspection of the evolution of the Japanese economy, it is clear that this ‘willingness and ability to transfer and adapt’ has deep historical origins. In particular, the evolution of the Japanese textile and steel industries show how this process ultimately worked. Both industries began when the government imported foreign technologies and, in both cases, both projects were initially commercial failures. Reasons for this varied; for example, a simple difference in the quality and availability of charcoal in the 1880s nearly caused the still-birth of the Japanese steel industry. Yet both industries ultimately learned lessons from their ‘hard knocks’ and turned themselves into world-beaters.

Through government-industry partnership (again an unorthodox approach from a traditional neo-classical developmental viewpoint), technologies were altered to fit the local environment. This helped the Japanese economy create a unique set of rules of the economic game that, in the longer run, helped give Japan its comparative advantages.

Simple ‘copy-paste’ industrial projects therefore proved ineffective in delivering real economic benefits in the Japanese experience. Such benefits were only forthcoming once good foreign ideas were adapted to local economic realities.

China

There is a widely held view that China’s miraculous development can be ascribed to Deng Xiao Ping’s expression: “It does not matter whether a cat is black or white as long as it catches mice.” This suggests that, despite being a communist country, China recorded magnificent growth because of its adoption of capitalist economic ideas. The views proffered are that Chinese rural industrialisation took off through a combination of privatisations, liberalisation, and fiscal decentralisation.

Chris Bramall took a closer look at these claims in his book titled ‘The Industrialisation of Rural China’. He noticed that the development of rural industry in the Maoist period set in motion a process of learning-by-doing.

This meant China’s rural workforce gradually acquired an array of skills and competencies, vastly enhancing its industrial capacity by the late 1970s. The pace of rural industrialisation had begun to accelerate well before Deng’s watershed reorientation of China in 1978. As a result, when China’s urbanization picked up speed in the late 1970s, it was able to draw in rural labour whose skills were not merely agricultural. The growth of the 1980s and 1990s capitalized on the availability of these rural skills but in the setting of fast urbanizing Eastern seaboard clusters.

As in Japan, China’s economic success is due in large part to its unique history rather than the simple application of ‘best-idea’ orthodox economics.

Taiwan

Taiwan is known to have retained high levels of protectionism for a long time in her electronic industry. The success achieved by Taiwan is also ascribed to reverse engineering tactics, i.e. limited improvement or indigenization of foreign products.

Therefore the path followed by Taiwan was that of effectively reinventing the wheel, thereby demonstrating an understanding of the inner-workings of the wheel, coupled with limiting foreign investment in industries identified to be of national priority.

The success of Taiwan’s textile industry is ascribed to government subsidy. The government subsidised entry into the industry by supplying inputs and spinning mills, providing working capital, imposing restrictions and buying up the resulting production.

But the government also restricted entry and tried to prune the non-productive firms. This strategy of promotion/protection and rationalisation was also used by Japan in its computer industry.

India

India’s success in information technology provides a spectacular example of the importance of the heterodoxy of development paths. The industry has grown from a very modest base in the early 1980s to export billions of US Dollars worth of software by 2000. One would have assumed that the fact that the bulk of India’s workforce is unskilled would be a constraint to advancement in such high-tech sector. Ex-post, we now know the factors that led to Infosys and Wipro’s success: the time-zone difference that allows the processing to be done in Bangalore before the West Coast of the US is back at work in the morning, the linkages with the Indian diaspora in Silicon Valley and the establishment of the Indian Institute of Technology.

The use of nationals in the wider diaspora is an important factor that has been exploited by other countries before. US-based Chinese scientists contribute to China’s development through joint research and giving lectures in China during their sabbaticals.

Namibia

Hitherto, Namibia’s economic development agenda has been set out in two five-year policy documents, namely. the First National Development Plan (NDP1) and the Second National Development Plan (NDP2) published in 1995 and 2001 respectively. It was envisaged that manufacturing will be the driver of economic growth through export- oriented manufacturing, import substitution, job creation and diversification of the economy away from the primary sector. Therefore, Namibia needed to identify areas of comparative advantages. The GDP growth target set in NDP1 was not achieved, while the NDP2 target of an average 4.3% over the period was exceeded as the actual outcome was 4.7%.

Although the GDP growth target of NDP2 was exceeded, unfortunately the contributor to the outperformance was the tertiary sector which grew by 5.4% versus a target growth of 4%. Therefore, the economic performance over the last ten years seems to be telling us that we either had placed emphasis on the wrong sector or if the sector we had identified was the appropriate one, then the execution of our policies had some shortcomings.

The common feature in the development programmes of the countries mentioned above was the significant applications of home-grown ideas and knowledge, while in the case of Namibia our export-oriented growth policy was predicated on an EPZ regime which predominantly targeted foreign direct investment (FDI). To date, despite the aforementioned policy interventions, the contribution of manufacturing to economic activity has remained stagnant at around 12% of GDP since 1990.

One is tempted to say that the most appropriate thing for Namibia to do might be to first identify areas of comparative advantages which have a huge component of home-grown knowledge and create targeted macro-economic policies around those.

For this to succeed, the fundamental requirements will be political will, fiscal policy support and harnessing our human and material resources.

An economy can record high growth if the country efficiently and optimally exploits its comparative and absolute advantages. Equally an economy can fall short of its targets because of inherent constraints, some of which can be mutable and some immutable. In order to maximize the positive pay-offs, while at the same time minimizing the negative pay-offs, it needs to use its advantages to the full, minimize the effects of the immutable constraints and surmount the mutable ones.

Conclusion

Different countries’ growth paths may only bear passing similarity due to the variety in the constraints they face and, more importantly, in their binding constraints. Firstly, different countries’ binding constraints may not necessarily be precisely the same partly due to their specific levels of development. Entrepreneurs may be constrained by inadequate inducements to discover costs in new activities in one country but not necessarily in another country. This could for example be due to the different tax rates being levied. Second, the inability to patent inventions reduces the relevance of cost discovery. Emulators and copy-cats can exploit the benefits of past cost discovery and that can be a constraint to innovation. Third, scant attention may have been paid to spurring investments in non-traditional activities.

In a nutshell, what is a drag to development in one country may not be the drag in another country. Therefore, if the development strategies and policies are to be relevant, they have to be informed by local conditions.

Fundamentally, economic development is the actualization of self-discovery.

This is the reason why the one-size fits approach which is many a time used has proven to be ineffective and off-the-mark.

In the light of the many challenges, especially the skilled human capital and small population, speeding up the Namibia GDP growth might sound like a tall order.

However, fortunately the majority of these constraints are mutable. It just takes innovation and ingenuity to find a path around them just like a huge mountain or a wide river does not deter putting up a road or erecting a bridge. As it were, an obstacle is something you see when you take your eyes off the goal.

1 See Levine & Renelt (1992): ‘A sensitivity analysis of cross-country growth regressions’ for a summary of the growth literature. He notes that over 50 variables have been found to be significant determinants in various studies.

2 See Masayuki, T. ‘The Role of Tradition in Japan’s Industrialisation’.

– This article was co-authored by Dr Alfred Kamupingene, Director of Research, Investec Asset Management Namibia and Anton de Klerk, Investment Analyst, Investec Asset Management Africa.

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