Globalization and Industrial Diversification by Tarun Das

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Implications of Globalisation on Industrial Diversification

Process and Improved Competitiveness of Manufacturing

in ESCAP countries

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DR. TARUN DAS

Economic Adviser

Ministry of Finance, Government of India, and

Consultant, UN-ESCAP, Bangkok, Thailand.

December 15, 2001

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_

Prepared for the International Trade and Industry (ITD) Division, ESCAP, United

Nations, Bangkok as a part of their Project on Implications of Globalisation on theIndustrial and Technological Development Process in Developing Countries.

The author would like to express his gratitude to ESCAP, particularly to the Director

and Chief of the ITD Division for providing an opportunity to prepare this report andthe Ministry of Finance, Government of India for granting necessary permission forwriting this report. However, the paper expresses personal views of the author andshould not be attributed to the views of the Government of India.

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Implications of Globalisation on Industrial Diversification

Process and Improved Competitiveness of Manufacturing

in ESCAP countries

CONTENTS

1 Introduction and Overview

1.1 Objectives and Scope of the Study1.2 An Overview of the Study1.3 Profile of Regions and Sample Countries

(a) General economic profile

(b) South Asia and SAARC(c) East and South East Asia1.4 Overall growth and industrial progress in Asia and Pacific in 1990s

(a) Overall economic growth(b) Industrial progress(c) Trend of sectoral shares(d) Impact of crisis on manufacturing

1.5 Policy reforms for industrial diversification and improved competitiveness

2 Implications of Globalisation and Regional Integration on Industrial Progress

2.1 Challenges and Prospects of Globalisation

(a) Globalisation and its impact on international trade

Share in world exports

Growth rates of merchandise exports and its share in GDP

Japan's economic slowdown and linkages with Asia

Agricultural exports

Services exports

Direction of trade(b) Developments in investment(c) Backward linkages of TNCs for parts and components(d) ICT revolution and new economy

2.2 Regional Integration and Industrial Development(a) ASEAN and AFTA(b) SAARC and SAFTA(c) APEC(d) ESCAP(e) Multilateral Agreement on Investment (MAI)

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3: East Asian Economic Crisis During 1997-1999:

Origins, Onset, Spread, Measures and Lessons of the Crisis

3.1 Anatomy of the Crisis

3.2 Origins of the Crisis(a) Victims of their own economic success(b) Changes in External Environment(c) Macroeconomic Management and Exchange Rate Arrangements(d) Financial Sector and other Structural Weaknesses

3.3 Onset and Spread of the crisis3.4 Role of multilateral financial institutions3.5 Summary of Structural Reforms in Crisis Countries

(a) Financial and Corporate Sector Reforms(b) Competition and Governance Policies(c) Trade Reforms

(d) Social Policies(e) Stabilisation Policies3.6 Lessons from the Asian Crisis for Macro-economic management

(a) General policies(b) Financial sector reforms(c) Monetary policies(d) Fiscal policies(e) Sequencing capital account convertibility(f) International co-operation(g) External Debt Management Strategy

4 Role of Foreign Capital in Industrial and Infrastructure Development

4.1 Private capital flows to developing countries4.2 Relation between capital flows and economic growth4.3 FDI - Technology - Growth Nexus4.4 Regional distribution of FDI4.5 Sectoral Distribution of FDI4.6 Modes of Foreign Capital

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4. Foreign Capital for industrial and Infrastructure Development5 Role of Privatisation for Development of Industry and Infrastructure

6 Policies and Strategies for Promoting Globalisation

6.1 Macro-economic policies6.2 The Export-Push Strategy and Role of Export Processing Zones6.3 Promoting industrial linkages6.4 Role of Small and Medium-Sized Industries (SMIs)6.5 Role of information technology6.6 Technological capacity building6.7 Role of Natural and Human Resources6.8 Regional and sub-regional co-operation

ASEAN Experience

SAARC Experience

ESCAP experience

7 Concluding observations and recommendations

7.1 Policy areas7.2 Industrial capacity building7.3 Facilitating private sector growth7.4 Industrial investment promotion7.5 Technological capacity building7.6 Application of information technology7.7 Strengthening capacities for SMEs7.8 Human resource development

7.9 Promoting regional co-operation

Selected Bibliography

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ACRONYMS

ADB Asian Development BankADR American Depository Receipts

AFTA ASEAN Free Trade AreaAPEC Asia Pacific Economic Cooperation (presently comprises 21 countries includingAustralia, Brunei Darussalam, Canada, Chile, China PR, Hong Kong, Indonesia,

Japan, Korea Republic, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru,the Philippines, Russia, Singapore, Chinese Taipei, Thailand and the United States).

ASEAN Association of South-East Asian Nations (comprises Brunei, Indonesia,Malaysia, Philippines, Singapore, Thailand, Vietnam, Lao PDR, Myanmer, Cambodia.

BOL Build, Operate and LeaseBOLT Build, Operate, Lease and TransferBOO Build, Operate and OwnBOOT Build, Operate, Own and Transfer

BOT Build, Operate and TransferCIS Commonwealth of Independent StatesECB External Commercial BorrowingEEC European Economic CommunityEHTP Electronic Hardware Technology ParkEOU Export Oriented UnitEPZ Export Processing ZoneESCAP Economic and Social Commission for Asia and the PacificESTP Electronics Software Technology ParkFCCB Foreign Currency Convertible BondFDI Foreign Direct InvestmentFERA Foreign Exchange Regulation ActFIIs Foreign Institutional InvestorsFTZ Free Trade ZoneGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGDRM Global Depository Receipt MechanismGNP Gross National ProductGSP Generalised System of PreferencesICOR Incremental Capital-Output RatioILO International Labour OfficeIMF International Monetary FundIPR Intellectual Property RightsM&A Mergers and acquisitionsMFN Most Favoured NationMIGA Multilateral Investment Guarantee Agency NIEs Newly Industrializing EconomiesOCBs Overseas Corporate Bodies

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OECD Organisation for Economic Co-operation and Development, compriseAustralia, Austria, Belgium, Canada, and Czech Republic, Denmark, Finland,

France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Rep. of Korea,Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Spain,

Sweden, Switzerland, Turkey, United Kingdom, United States of America.

ODM Own - Design - ManufactureOEM Original Equipment ManufactureOPEC Organisation of Petroleum Exporting CountriesPPP Purchasing Power ParityR&D Research and DevelopmentSAARC South Asian Association for Regional Cooperation comprises Bangladesh,

Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.SMIs Small and Medium-Sized IndustriesSOEs State Owned EnterprisesSTP Software Technology Park

TNCs Transnational CorporationsUN United NationsUNCTAD United Nations Conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUNIDO United Nations Industrial Development OrganisationWB World BankWTO World Trade Organisation

Notes on Units

Million = 1000 thousandBillion = 1000 millionTrillion = 1000 billionTons = 1000 kilogramsDollar $ = US dollars, unless otherwise specified

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INTRODUCTION AND OVERVIEW

1.1 Objectives and Scope of the Study

The present study is a part of a larger project for analysing the implications ofglobalisation on the industrial and technological development process of developingcountries in the ESCAP region. The basic objective of the present study is to criticallyanalyse the trend and pattern of globalisation in Asian developing economies and toexamine its impact on the industrial progress and diversification and competitiveness ofmanufacturing industries.

As the study is concerned with the impact of globalisation in the past and future issues,

the time frame of the study is confined mainly to 1990s. For analytical purpose, Asianeconomies considered in the study have been grouped into the following regions:

South Asia comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and SriLanka.

The Newly Industrializing Economies (NIEs) comprising Hong Kong, China; theRepublic of Korea; Singapore; and Taiwan, China.

Developing Economies in the Southeast Asia comprising Cambodia, Indonesia, Lao PDR,Malaysia, Myanmar, the Philippines, Thailand and Vietnam. These countries alongwith

Brunei and Singapore now constitute the Association of Southeast Asian Nations(ASEAN) and ASEAN Free Trade Area (AFTA).

Three other economies in East Asia comprising Japan, Mongolia and Peoples Republicof China.

1.2 An Overview of the Study

This report is divided into seven chapters including this introduction which describesobjectives and scope of the study, and provides general economic profiles and policies ofAsian economies. The chapter also discusses the extent of industrialisation of sample

countries and regions in pre-crisis and post-crisis period in 1990s.

Chapter 2 provides a critical analysis of the challenges and prospects of globalisation ofindustrial progress in Asian developing countries with particular emphasis ondevelopments in trade, investment and information technology affecting competitivenessof manufacturing industries. The chapter focuses on need for integration of industrialactivities at regional and global levels, capacity building improvement of

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competitiveness, international linkages for markets, with special reference to developedcountries and economies in transition.

Chapter 3 makes a review of the origins, onset and spread of financial crisis in the EastAsian economies. The Chapter also discusses the measures taken by the East Asian

economies with the help of multilateral funding agencies to tackle the crisis, and lessonsfrom the economic crisis for developing countries.

Chapter 4 deals with role of foreign capital including foreign investment for industrialand technology development in Asian economies.

Chapter 5 makes a critical review of the role of privatisation for development of industry,infrastructure and services in Asian economies.Chapter 6 deals with broad policies, reforms and strategies for promoting greaterliberalisation and globalisation. It particularly discusses the role of the following policies:

Alignment of industrial policies with trade, investment, fiscal, monetary, financial

and overall macro-economic policies,

Exploiting the potential for promoting complementarities, backward linkages for parts

and components, and forward linkages with value added products and services,

SMEs development, business incubation and entrepreneurship.

Utilisation of information technology and other knowledge bases industries to access

and retain competitiveness in global markets.

Other technology capacity building and adaptations,

Role of human resource and skill development,

And regional and subregional co-operation for promoting industrialisation.

Chapter 7 summarises the basic issues and problems for promoting greater industrialdiversification and makes recommendations on the following issues:

Policy areas.

Institutional capacity building,

Facilitating private sector growth,

Industrial investment promotion.

Technological capacity building,

Applications of information technologies.

Strengthening capacities for SME growth and development, and

Human resource development for industry.

The report ends with a list ofselected bibliography on the subject.

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1.3 Profile of Regions and Sample Countries

(a) General Economic Profile

Selected countries for this study covering 55 per cent of the world population and 15 per

cent of area display a number of contrasts (see Tables 1.1 and 1.2 for general economicprofiles of the sample countries). The sample includes two most populous countries of theworld viz. China and India, and also small economies like Bhutan and Maldives withpopulation less than a million and a city-state Singapore. The sample includes the worldssecond largest economy Japan with per capita GNP of $34210 in 2000, and some of thepoorest countries of the world Bangladesh, Cambodia, Mongolia, Nepal and Vietnam(Table 1.2). Levels of social indicators also differ widely among the regions. While EastAsian countries generally have higher degree of adult literacy and life expectation, SouthAsian countries except Sri Lanka, Maldives and Myanmar lag far behind.

In 1990s, despite serious foreign exchange and financial crisis in some of the East Asian

countries during 1997-1999, Asian developing economies had shown remarkableeconomic vigor and dynamism by outperforming by a wide margin other developingregions and industrial countries as a group. As regards industrial growth, performance bythe developing countries of Asia continued to outpace that in every other developingregion and even the industrialised countries by about 5 percentage points. The continuedrobust growth in Asia was attributable to a number of factors such as widespread andsustained policy reforms in industry, trade and financial sectors and continued surge offoreign capital flows to these countries.

The best performers have been in Asia. Chinas growth has been particularly spectacular,with real GDP growing at 10.3 percent a year and real per capita income at 9.2 percentduring 1990-2000. Building on past investments in human, physical, and institutionalcapital, continual high growth was the result of an ambitious, comprehensive, andsustained reforms programme. Economic reforms liberalised agriculture, redirected alarge part of savings to the provinces, removed price controls, gradually liberalised trade,revamped the tax and financial systems, and converted economic zones into attractivemanufacturing platforms for export.

The mechanism that contributed the high growth of the Asian economies in these yearscan be summarised as export-oriented investment-led growth supported by extremely lowproduction costs. As judged by ratios to GDP, investments and exports made a muchhigher contribution to growth in Asia than in the other regions. Asian economies achievedhigh economic growth by introducing capital and technology from advanced countries,while enjoying the benefits of the huge markets that these advanced countries offer. Inother words, the Asian economies are typical examples of catch-up type economicgrowth.

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Table-1.1 Basic Indicators of Selected Asian Countries in 1995 and 2000

Country Area Population GR of Pop. Adult Adult Life Exp. Life Exp.

in 2000 Mid-2000 percent literacy(%) Literacy(%) years years

000 sq.km (million) 1990-2000 1995 1999 1995 1999

NIEsHong Kong 1 7 1.8 92 93 79 80

Korea,Republic 99 47 1.0 99 98 72 73

Singapore 1 4 2.8 91 92 76 78

Taiwan,China 36 22 1.1 92 93 75 76

China & Mongolia

China 9597 1261 1.1 81 83 69 70

Mongolia 1567 2 1.3 n.a. 62 64 67

South-East

Cambodia 181 12 2.7 n.a. 49 53 54

Indonesia 1905 210 1.7 84 86 64 66

Lao, PDR 237 5 2.6 57 47 52 54

Malaysia 330 23 2.5 83 87 71 72

Myanmar 677 46 1.2 83 84 59 60Philippines 300 76 2.2 95 95 66 69

Thailand 513 61 0.9 94 95 69 69

Vietnam 332 79 1.7 94 93 68 69

South Asia

Bangladesh 144 130 1.6 38 41 58 61

Bhutan 47 0.8 2.9 42 43 48 61

India 3288 1016 1.8 52 56 62 63

Maldives 0.3 0.3 2.6 93 96 63 68

Nepal 147 24 2.4 27 40 55 58

Pakistan 796 138 2.5 38 45 60 63

Sri Lanka 66 19 1.3 90 91 72 73

East Asia

Japan 378 127 0.3 99 99 80 81Low & middle income 101487 5152 1.6 70 75 65 64

East Asia & Pacific 16385 1853 1.2 83 85 68 69

Europe & Central Asia 24209 475 0.2 95 97 68 69

Latin America & Carib. 20461 516 1.6 87 88 69 70

Mid. East & N.Africa 11024 296 2.2 61 64 66 68

South Asia 5140 1355 1.9 49 54 61 63

Sub-Saharan Africa 24267 569 2.6 57 61 52 47

High Income 32087 903 0.7 n.a. n.a. 77 78

World 133572 6054 1.4 n.a. n.a. 67 66

n.a. Data not available

Sources : (1) World Development Report 1997, World Bank.

(2) World Development Report 2002, World Bank.

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Table-1.2 Per capita GNP and GDP Growth Rates of Selected Asian Countries in 1995 and 2000

Country Per capita

GNP

Per capita

GNP

GR of

PC GNP

GR of

PC GNP

GDP

$ billion

GDP

$ billion

PPP GNP

Per capita

(US$)

1995

(US$)

2000

1985-1995 1995-2000 1995 2000 US$

2000

NIEs

Hong Kong 22990 25950 4.8 2.5 144 163 25660

Korea,Republic 9700 8910 7.7 -1.7 456 457 17340

Singapore 26730 24740 6.2 -1.5 84 92 24970

Taiwan,China 10011 12670 6.5 4.8 225 279 n.a.

China & Mongolia

China 620 840 8.3 6.3 698 1080 3594

Mongolia 310 390 -3.8 4.7 1 1 1660

South-East

Cambodia n.a. 260 n.a. n.a. 3 3.2 1410

Indonesia 980 570 6.0 -10.3 198 153 2840

Lao, PDR 350 290 2.7 -3.7 2 1.7 1530

Malaysia 3890 3380 5.7 -2.8 85 89 8360

Myanmar n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Philippines 1050 1040 1.5 -0.2 74 75 4220

Thailand 2740 2010 8.4 -6.0 167 122 6330

Vietnam 240 390 n.a. 10.2 20 31 2030

South Asia

Bangladesh 240 380 2.1 9.6 29 48 1650

Bhutan 420 550 4.9 5.5 0.3 0.4 1350

India 340 460 3.2 6.2 324 479 2390

Maldives 990 1460 5.9 8.1 0.3 0.4 4880

Nepal 200 220 2.4 1.9 4 5 1360

Pakistan 460 470 1.2 0.4 61 62 1960

Sri Lanka 700 870 2.6 4.4 13 16 3470

East Asia

Japan 39640 34210 2.9 -2.9 5109 4677 26460

Low & middle income 1090 1230 0.4 2.4 5393 6568 3890

East Asia & Pacific 800 1060 7.2 5.8 1341 2059 4120

Europe & Central Asia 2220 2010 -3.5 -2.0 1103 961 6620

Latin America & Carib. 3320 3680 0.3 2.1 1688 1995 7030

Mid. East & N.Africa 1780 2040 -0.3 2.8 524 592 5170

South Asia 350 460 2.9 5.6 439 620 2260

Sub-Saharan Africa 490 480 -1.1 -0.4 297 322 1560

High Income 24930 27510 1.9 2.0 22486 24772 27450

World 4880 5150 0.8 1.1 27846 31337 7350




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Rapid growth in intra-Asian trade has been accompanied by rising foreign directinvestment. The traditional focus of overseas investment by Asian companies in financialand real estate markets of industrial countries has been augmented by rapid growth ininvestment in manufacturing, primarily in South-east Asia. The changing pattern of

capital flows is, to some extent, a reflection of the changing cost structure in the Asianeconomies as wages and other costs have risen rapidly in Japan and the NIEs. It is alsoindicative of the movement towards higher value added and more technologicallyintensive activities in these economies.

The process of rapid growth in output and intraregional trade and investment in Asia issometimes referred to as a virtuous circle of economic development. Foreign capitalinflows have combined with a favourable policy environment, industrialisation and tradeexpansion to achieve a sustained acceleration in economic growth. The efficient use ofresources, increased trade and rapid growth have, in turn, stimulated an increase in theflow of intraregional foreign investment. This process is gradually helping to internalise

Asian growth and to reduce Asias 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. Japans growth became

increasingly domestic demand led and it had been sustaining rapid export growth of other Asian

countries. More recently, such a process has 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 have contributed

significantly to Asias dynamism. South Asia, which depends more on the agriculture sector, was by and

large left out of this process. But the situation is changing, albeit slowly, as these countries globalise

gradually and cautiously.

(b) South Asia and SAARC

South Asia is a region full of contrasts. On the one hand, it has vast economic potential.

During 1990s it achieved an average growth rate of 5.6 per cent a year compared with 3.6per cent by all low-and middle-income countries. Its growth was exceeded only by thatin East Asia and Pacific. Progress in reducing fertility led to annual growth in per capitalincome by 3.7 per cent during 1990s which was regarded as a lost decade for manyother regions of the world. In fact, Sub Saharan Africa and Europe and Central Asiawitnessed a decline of per capita income in 1990s (Table 1.3).

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towards moving to a full-fledged value-added tax, and Pakistan made important progressin broadening the tax base by introducing an agricultural income and wealth tax.

SAARC has completed more than fifteen years of its existence, but the process ofeconomic cooperation in the region had been slow. Nevertheless, SAARC has established

itself as an important regional grouping due to its large market space measured by thesize of its population and its potential purchasing power. The ongoing economic reformsand globalisation by the SAARC economies have also made the region an attractivedestination for foreign direct investment and other capital flows.

The SAARC is rich in natural resources, which are not fully utilised. Its bio-diversity isan immense wealth, and mineral and water resources are plenty. The region is endowedwith a large pool of skilled and semi-skilled manpower. Despite these advantages, theregion faces common problems of poverty and unemployment. Economic cooperation inthe region would be an effective instrument for improving the welfare of the people.

As compared to the world and other developing countries, the contribution of theindustrial sector to GDP in South Asia is rather small. During 1990s, the service sectorgrew at a faster rate than the industrial sector in South Asia. Within the service sector,major contribution came from the financial and trade sectors, and contribution of thetransport and communications also improved rapidly in recent years.

The share of South Asia in world trade is negligible being less than one per cent. Theintra-regional trade of South Asian countries is also insignificant, being 3.5 per cent oftotal trade, compared to the intra-regional trade of all developing countries at around 40percent of their total trade. This implies that there is significant potential for increasingintra-regional trade among the SAARC economies. About 35 per cent of South Asiasexports are destined towards other developing countries, while dependence of South Asiaon other developing countries for imports is to the extent of 46 percent. The compositionof South Asian trade reveals concentration of exports in labour-intensive products liketextiles, clothing, gems and jewellery, while imports consist of mostly crude oil,petroleum products and capital goods.

Most of the exports in intra-regional trade originate from India, followed by Pakistan,while Bangladesh and Sri Lanka are major importers in intra-regional market. In recentyears, the combined share of imports of Bangladesh and Sri Lanka was about 70 percentin total intra-regional trade, while the share of Indias exports in intra-South Asian tradewas 60 per cent.

The challenge facing South Asia in the new millennium is how to continue the higheconomic growth of the 1990s with rapid reductions in poverty and unemployment andimprovement in social indicators. A sustainable growth path for the 2000s must be basedon continued economic reforms, lower fiscal deficits, dynamic capital market, sustainablebalance-of-payments, and improvement in environment.

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(c) East Asia and South-East Asia

Over the past three decades, the economies of East Asia made remarkable economicprogress and grew faster than all other regions of the world. Following on the heels ofJapans double-digit growth in the 1960s, Korea, Taiwan Province of China, Hong Kong

SAR, and Singapore grew at very rapid rates from the mid-1960s with their per capitaincomes rising to match those in a number of advanced economies in western Europe.They were followed in the 1980s and the 1990s by the Southeast Asian economies(especially Indonesia, Malaysia, and Thailand) which also grew at exceptionally fast rate.All these countries experienced sustained economic growth with some attaining anaverage growth rate of 8-10 percent a year for a decade, except for the crisis period. InEast Asia and Pacific, GDP grew at average annual rate of 7.2 percent in 1990s, whileannual population growth averaged 1.2 percent.

Savings and investment rates of the South East Asian economies were generally higherthan those in other regions (Table 1.4). Governments boosted savings through a

combination of fundamental and interventionist policies. The former includedmaintaining macro-economic stability primarily controlling inflation, and ensuring thesecurity of banks. Low to moderate inflation rates and largely positive real interest rateslowered the risk of holding financial assets, and hence encouraged financial savings.While nominal interest rates were low and were frequently controlled by thegovernments, these rates still assured positive real returns in the range of 3-6 percent perannum for the investors and moderate yields to the commercial banks and financialinstitutions because of low transactions cost.

Table-1.4 Gross domestic savings as % of GDP in Asia and Africa (%)

Region 1967-1973 1974-1980 1981-1990 1990-1997 1998-1999

Gross Domestic Savings

Sub-Saharan Africa 15.7 20.7 12.6 15.9 15

East Asia 21.1 28.4 33.2 33.5 37

Southeast Asia 18.9 28.1 31.9 32.0 36

South Asia 14.4 17.1 19.1 22.0 18

Gross Domestic Investment

Sub-Saharan Africa 17.3 17.9 19.1 16.6 18

East Asia 25.4 27.0 27.7 31.6 35

Southeast Asia 20.1 21.0 22.1 27.5 33South Asia 16.2 16.5 17.0 21.0 22

Source: Bank Economic and Social Data base, The World Bank, 1998, 2000.

East and South East Asian countries relied heavily on export-push strategy and weregenerally open to foreign investment and technology transfer although they adopteddifferent strategies regarding industrial promotion and foreign technology. Somedepended on FDI by TNCs, others on licensing and imports of capital goods. All the

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countries were successful in expanding industrial base and exports, but they adopteddifferent industrial structures, export specialisation and technological capabilities(Dasgupta 1996).

The rapid growth of the East Asian economies was accompanied by impressive advances

in social development indicators. Poverty, infant mortality, and adult illiteracy declinedsignificantly, while life expectancy at birth rose considerably. Also, contrary to the earlierconventional wisdom, rapid economic growth was achieved with significant reduction inpoverty ratios (Table 1.5) and without increases in income inequality.

Table-1.5: Poverty incidence and growth rates in India

and selected Asian countries (in per cent)

Country Poverty

ratios1975

Poverty

Ratios1995

Annual

ReductionIn 1975-95Percentage

Point

Average

GDP growth1970-1980

Average

GDPGrowth1980-1995

India 54.9 36.0 0.9 3.2 5.6China 59.5 22.2 1.9 5.0 11.1Indonesia 64.3 11.4 2.6 7.8 6.6Korea 23.0 5.0 0.9 9.0 8.7Malaysia 17.4 4.3 0.7 7.8 6.4Philippines 35.7 25.5 0.5 6.2 1.4Thailand 8.1 0.9 0.4 7.2 7.9

Source of data: For India, Planning Commission, Government of India; and for othersWorld Bank Report on Social Consequences of the East Asian Financial Crisis,September, 1998.Note: For India, poverty ratios refer to the years 1973 and 1993 respectively.

During 1997-1999, however, a number of Southeast Asian economies and Korea hadbeen in the grip of severe financial crises that had thrown the region into deep recession.Economic activity in Japan, after languishing since the busting of the asset price bubblein 1990, also contracted sharply since spring 1997. Unemployment rates increased to 3percent in Malaysia, 6 percent in Korea and 15 percent in Indonesia in 1998. Poverty,therefore, increased at an alarming rate. Indonesia, which had an impressive record of

poverty reduction, experienced a rise in the poverty ratio from 11 per cent to about 16 percent within a year (World Bank 1998). The severity of the Asian crisis raised questionsabout the durability of the regions rapid growth and the factors that underlay it.

Although the region recovered quickly following the structural reforms and adjustmentprograms supported by the IMF and other funding agencies, recent crisis had highlightedthat there remain serious obstacles to sustained development for many countries in theregion. Despite recent gains, the countries of the region had an average income of

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US$4120 in 2000, which is much below that of US$27450 in the developed countries.Serious environmental damages associated with rapid urbanisation, inadequate regulationand planning, and incorrect pricing of resources, continues to impose major costs.

Another serious problem is the historical inadequacy of infrastructure investment relative

to rapidly growing demand. As the regions infrastructure needs are large, the privatesector themselves and foreign direct investment (FDI) will have to play an increasinglycritical role in developing and modernising East Asias infrastructure base. In turn,governments of the region will need to strengthen the regulatory and legal frameworks toattract and secure such investment. The need for expanding competent managementacross most areas of development is emerging as a major issue in East Asia. Effectiveinstitutions are essential in pollution monitoring and control, design and implementationof monetary and fiscal policies, traffic-management planning and deregulation.

1.4 Overall Growth and Industrial Progress in Asia and Pacific in 1990s

(a) Overall Economic Growth

As a consequence of East Asian economic crisis in 1997-1998, GDP growth rate turnednegative in 1998 in Hong Kong (-5.3 per cent), Republic of Korea (-6.7 per cent),Indonesia (-13.1 per cent), Malaysia (-7.4 per cent), Philippines (-0.4 per cent) andThailand (-10.8 per cent) (Table 1.6). Consequently, there was a significant fall ofoverall growth rates in most of the countries in East and South East Asia in the secondhalf of 1990s compared with those in the first half of 1990s (Table 1.8).

Average annual growth rate of real GDP for East Asia and Pacific declined from 10.3 percent in 1990-1995 to 4.1 per cent in 1996-2000. There was a decline of average growthfrom 5.6 per cent in the first half of 1990s to 3.6 per cent in the second half of 1990s inHong Kong, from 7.2 per cent to only 5 per cent in Korean republic, from 8.7 per cent to6.4 per cent in Singapore, from 6.5 to 5.8 per cent in Taiwan, from 8.7 to only 4.8 percent in Malaysia, from 8.4 per cent to only 0.4 per cent in Thailand, and from 7.6 per centto only 1 per cent in Indonesia. Although China was relatively unaffected from thecontagion effect, its average growth rate also declined from 12.8 per cent in the first halfto 8.3 per cent in the second half of 1990s.

The South Asian countries in general were insulated from the East Asian contagion effect because of their less dependence on global trade and restrictions on convertibility ofdomestic currency. As a whole, the average growth rate of the South Asian countriesincreased from 4.6 per cent in the first half to 5,9 per cent in the second half of 1990s.There was significant improvement of growth rates in the second half of 1990s in India,Maldives and Bangladesh due to sound macro-economic management and continuance ofstructural reforms in industry and trade. There was marginal improvement of growth ratesin the second half of 1990s in Bhutan and Sri Lanka, while Pakistan and Nepal witnessedsome decline of growth rates due to socio-political problems.

The sources of East Asias rapid and sustained economic growth have been the focus ofextensive research. Central to much of this research have been attempts to measure the

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relative contributions of factor inputs physical and human capital and technologicalprogress to the persistently high rates of growth. A commonly used approach is toestimate the total factor productivity (TFP) growth as the residual of the growth in outputper worker over a weighted average of the accumulation of physical and human capitalper worker. TFP growth basically measures the increase in productivity brought about by

technological advances and greater organisational efficiency.

Empirical estimates of the contributions of factor inputs and TFP growth to east Asianeconomies output growth fall in a wide range, with capital accumulation generally foundto have made the largest contribution. Productivity growth is found to have made smallerbut still significant contributions. A World Bank study found that over 1960-94, in allfour of the Asian newly industralised economies and the three fast grown ASEANeconomies Indonesia, Malaysia, and Thailand the contribution of capital per workerdominated growth in factor productivity in explaining growth in output per worker. Sincethe early 1980s, however, TFP growth appears to have played a larger role.

Taking into consideration international differences in productivity levels, abundantopportunity exists for further technological catch-up in the East Asian economies. Realoutput per worker in Korea, one of the most advanced of the east Asian economies, isonly about one-half of the level in the United States, and labour productivity in other eastAsian economies represents s fractions of the U.S. level. Therefore, much of the catch-upin real GDP per capita in east Asia has occurred through increased capital intensity ratherthan growth in TFP, so that productivity gaps remain wide.

Table 1.6: Trend of Growth Rates in Selected Asian Countries in 1996-2000

Country GDP growth rate GDP growth rate GDP growth rate

1996 1997 1998 1999 2000 1996-2000

NIEs 6.3 5.8 -2.9 7.9 8.4 5.1

Hong Kong 4.5 5.0 -5.3 3.1 10.5 3.6

Korea, Rep 6.8 5.0 -6.7 10.9 8.8 5.0

Singapore 7.5 8.5 0.1 5.9 9.9 6.4

Taiwan,China 6.1 6.7 4.6 5.4 6.0 5.8

China and Mongolia

China 9.6 8.8 7.8 7.1 8.0 8.3

Mangolia 2.4 4.0 3.5 3.2 0.5 2.7

South-East 7.4 3.5 -9.0 3.1 5.1 2.0

Cambodia 5.5 3.7 1.8 5.0 4.5 4.1

Indonesia 7.8 4.7 -13.1 0.8 4.8 1.0

Lao, PDR 6.9 6.9 4.0 5.2 5.5 5.7

Malaysia 10.0 7.3 -7.4 5.8 8.5 4.8

Myanmar 6.4 5.7 5.8 10.9 9.0 7.6

Philippines 5.8 5.2 -0.6 3.3 3.9 3.5

Thailand 5.9 -1.4 -10.8 4.2 4.2 0.4

Vietnam 9.3 8.2 4.4 4.7 6.1 6.5

South Asia 7.0 4.7 6.1 5.8 5.8 5.9

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Bangladesh 4.6 5.4 5.2 4.9 5.5 5.1

Bhutan 6.0 7.3 5.5 5.9 6.1 6.2

India 7.5 5.0 6.6 6.4 5.2 6.1

Maldives 8.3 7.8 8.9 8.8 4.2 7.6

Nepal 2.9 4.9 3.3 4.4 6.4 4.4

Pakistan 6.8 1.9 4.3 3.1 4.8 4.2

Sri Lanka 3.8 6.3 4.7 4.3 6.0 5.0

East Asia

Japan 3.5 1.4 -2.0 -0.5 1.7 0.6

Sources: Asian Development Outlook 2001, Asian Development Bank, Manila.

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Table 1.7 Trend of Industry Growth Rates in Selected Asian Countries in 1996-2000

Country Industry growth rate Industry growth rate Industry growth rate

1996 1997 1998 1999 2000 1996-

2000

NIEs

Hong Kong n.a. n.a. n.a. n.a. n.a. n.a.

Korea,Rep n.a. n.a. n.a. n.a. n.a. n.a.

Singapore 7.2 7.4 1.0 6.5 10.3 6.5

Taiwan,China 4.2 6.1 2.7 4.7 6.0 4.7

China and Mongolia

China 12.1 10.5 8.9 8.1 9.6 9.8

Mangolia -3.2 -3.3 3.8 3.2 1.0 0.3

South-East

Cambodia 11.7 20.4 8.6 11.4 16.0 13.6

Indonesia 10.7 5.2 -14.0 1.9 5.5 1.9

Lao, PDR 17.3 8.1 8.5 7.5 7.3 9.7

Malaysia 14.4 7.5 -10.9 8.0 14.7 6.7

Myanmar 10.7 8.9 6.1 13.7 9.0 9.7

Philippines 6.4 6.1 -2.1 0.9 3.6 3.0

Thailand 6.9 -1.9 -13.3 9.5 5.2 1.3

Vietnam 14.5 12.6 7.3 7.6 9.7 10.3

South Asia

Bangladesh 7.0 5.8 8.3 4.9 5.6 6.3

Bhutan 8.4 3.8 7.7 12.4 10.3 8.5

India 6.0 5.9 3.6 6.4 6.6 5.7

Maldives 3.9 11.6 21.1 17.5 5.8 12.0

Nepal 8.3 6.4 2.3 6.0 8.7 6.3

Pakistan 5.4 1.0 6.8 2.5 3.0 3.7

Sri Lanka 5.6 7.7 5.9 4.8 6.4 6.1

Sources : (1) Asian Development Outlook 2001, Asian Development Bank, Manila.

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Table-1.8 Growth Rates of GDP and Industry of Selected Asian Countries in 1995 and 2000

Country GR of

GDP

GR of

GDP

GR of

GDP

GR of

GDP

Growth rate in Industry

percent percent percent percent Percent percent percent

1980-1990 1990-1995 1996-2000 1990-2000 1980-1990 1990-1995 1996-2000

NIEs

Hong Kong 6.9 5.6 3.6 4.0 n.a. n.a. n.a.

Korea,Republic 9.1 7.2 5.0 5.7 14.7 7.8 n.a.

Singapore 7.3 8.7 6.4 7.8 6.1 8.7 6.5

Taiwan,China 8.8 6.5 5.8 6.1 8.1 6.0 4.7

China & Mongolia

China 10.3 12.8 8.3 10.3 11.7 16.5 9.8

Mongolia 5.4 -3.3 2.7 1.0 5.8 -2.8 0.3

South-East

Cambodia 5.4 6.4 4.1 4.6 n.a. 11.4 13.6

Indonesia 6.4 7.6 1.0 4.2 5.9 10.3 1.9

Lao, PDR n.a. 6.5 5.7 6.5 n.a. 12.5 9.7

Malaysia 5.2 8.7 4.8 7.0 7.4 11.2 6.7

Myanmar -0.1 5.9 7.6 6.8 -0.2 9.5 9.7

Philippines 1.0 2.3 3.5 3.2 -0.9 3.0 3.0

Thailand 7.9 8.4 0.4 4.2 10.3 10.5 1.3

Vietnam 8.1 8.3 6.5 7.9 7.7 12.9 10.3

South Asia

Bangladesh 4.1 4.1 5.1 4.8 5.6 6.9 6.3

Bhutan 7.5 5.8 6.2 6.2 12.3 11.9 8.5

India 5.8 4.6 6.1 6.0 7.1 6.6 5.7

Maldives 12.1 6.5 7.6 6.6 9.0 8.6 12.0

Nepal 4.7 5.1 4.4 4.8 6.2 8.6 6.3

Pakistan 6.2 4.6 4.2 3.7 7.6 5.7 3.7

Sri Lanka 3.8 4.8 5.0 5.3 4.9 7.3 6.1

East Asia

Japan 4.0 1.0 0.6 1.3 4.9 0.7 n.a.

Low & middle income 2.8 2.1 5.1 3.6 3.9 4.9 n.a.East Asia & Pacific 7.6 10.3 4.1 7.2 8.9 15.0 n.a.Europe & Central Asia 2.3 -6.5 3.3 -1.6 n.a. n.a. n.a.Latin America & Carib. 1.7 3.2 3.4 3.3 1.4 2.5 n.a.Mid. East & N.Africa 0.2 2.3 3.7 3.0 1.1 n.a. n.a.South Asia 5.7 4.6 5.9 5.6 6.9 5.3 n.a.Sub-Saharan Africa 1.7 1.4 3.4 2.4 0.6 0.2 n.a.High Income 3.2 2.0 2.8 2.4 3.2 0.7 n.a.World 3.1 2.0 3.2 2.6 3.3 1.4 n.a.




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Table-1.9 Growth Rates of agriculture and Service Sector of Selected Asian Countries in 1995 and 2000

Country Growth Rate in agriculture Growth Rate in services

1981-90 1991-1996 1999-2000 1980-1990 1991-1996 1999-2000

NIEs

Hong Kong 0.8 n.a. n.a. 9.6 n.a. n.a.Korea,Republic 8.1 1.0 n.a. 15.4 8.1 n.a.Singapore -6.9 1.6 -1.3 8.2 8.1 6.7Taiwan,China 1.9 0.4 0.7 10.1 7.9 6.2China & Mongolia China 5.5 4.2 2.6 12.4 9.3 7.7Mongolia 3.1 0.3 n.a. 5.1 -4.3 n.a.South-East Cambodia n.a. 2.3 0.5 n.a. 8.3 4.9Indonesia 3.1 2.9 2.2 7.6 7.6 2.1

Lao, PDR n.a. 4.0 4.7 n.a. 7.4 6.1Malaysia 3.9 1.8 2.1 4.3 9.2 4.2Myanmar -0.3 5.2 8.0 0.2 5.5 8.1Philippines 1.0 1.7 4.7 2.9 3.1 4.3Thailand 3.8 3.5 2.0 7.7 7.4 1.9Vietnam 7.4 4.4 4.4 9.3 9.5 3.3South Asia Bangladesh 2.4 1.1 5.6 5.2 5.6 5.0Bhutan 4.9 2.3 2.7 8.1 6.4 5.0India 3.1 2.6 0.8 6.8 6.9 9.0Maldives 6.9 2.3 2.5 16.6 8.2 6.1

Nepal 2.7 2.2 3.8 5.4 7.5 6.0Pakistan 4.1 4.5 4.6 6.7 5.1 4.3

Sri Lanka 1.0 1.8 3.5 4.3 5.3 5.6East Asia

Japan 1.2 -2.8 -1.5 3.7 2.6 n.a.

Low & middle income 3.1 2.0 n.a. 3.6 4.5 n.a.East Asia & Pacific 4.8 3.9 n.a. 9.0 8.4 n.a.Europe & Central Asia n.a. n.a. n.a. n.a. n.a. n.a.Latin America & Carib. 2.0 2.3 n.a. 1.9 3.8 n.a.Mid. East & N.Africa 4.5 3.3 n.a. 1.2 n.a. n.a.South Asia 3.2 3.0 n.a. 6.6 6.0 n.a.Sub-Saharan Africa 1.9 1.5 n.a. 2.5 1.5 n.a.High Income 2.3 0.6 n.a. 3.4 2.3 n.a. World 2.8 1.3 n.a. 3.4 2.6 n.a.


Sources : (1) World Development Report 1997, World Bank.(2) World Development Report 2002, World Bank.

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Table-1.10 Distribution of GDP for Agriculture, Industry and Services in 1995 and 2000 (per cent)

Country Share of Agricultur

e

Share of Industry Share of Services

1995 2000 1995 2000 1995 2000

NIEs

Hong Kong 0 0 18 15 82 85

Korea, Rep. of 7 5 31 44 63 51

Singapore 0 0 43 34 57 66

Chinese Taipei 3 2 39 35 58 63

China & Mongolia

China, Peo.Rep 19 16 53 49 28 34

Mongolia 23 32 42 30 35 39

Southeast Asia

Cambodia 45 44 19 19 37 38

Indonesia 16 17 42 47 42 36

Lao PDR 57 53 19 22 25 25

Malaysia 14 12 47 40 39 48

Myanmar 46 60 15 9 39 31

Philippines 22 17 36 30 43 53

Thailand 11 10 42 40 47 50

Vietnam 34 25 28 34 38 40

South Asia

Bangladesh 33 26 20 25 48 49

Bhutan 38 33 28 32 34 35

India 28 27 31 27 41 46

Maldives n.a. 10 n.a. 15 n.a. 75

Nepal 42 39 19 20 39 41

Pakistan 24 26 27 23 49 50

Sri Lanka 20 21 31 27 49 52

East Asia

Japan 2 2 40 36 58 62

Low & middle income 14 13 36 35 48 52

East Asia & Pacific 18 15 44 46 38 38

Europe & Central Asia 11 10 n.a. 33 n.a. 57

Latin America & Carib. 10 8 33 31 55 61

Mid. East & N.Africa 11 14 58 38 31 48

South Asia 30 27 27 26 41 47

Sub-Saharan Africa 20 15 30 28 48 57

High Income 2 2 32 32 66 66

World 5 5 33 31 63 63




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Table-1.11: Share and Structure of Manufacturing in Asian Countries in 1990s:

Country Share of Manufacturing in GDP Structure of Manufacturing (% )percent Food, beverage,tobacco Textiles & Clothing

1970 1995 1999 1970 1992 1970 1992NIEs

Hong Kong 29 9 6 4 11 41 35

Korea, Rep. of 21 27 32 26 10 17 12

Singapore 20 27 26 10 10 13 14

Chinese Taipei n.a. 30 24 n.a. n.a. n.a. n.a.

China & Mongolia

China, Peo.Rep 30 38 24 n.a. 13 .. 13

Mongolia n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Southeast Asia

Cambodia n.a. 6 6 n.a. n.a. n.a. n.a.

Indonesia 16 24 25 65 23 14 16

Lao PDR n.a. 14 17 n.a. n.a. n.a. n.a.

Malaysia 12 33 35 26 10 3 6Myanmar 10 10 6 n.a. n.a. n.a. n.a.

Philippines 25 23 20 39 37 8 13

Thailand 16 29 32 23 16 14 16

Vietnam n.a. 22 21 n.a. n.a. n.a. n.a.

South Asia

Bangladesh 6 10 17 30 24 47 38

Bhutan n.a. 20 20 n.a. n.a. .. n.a.

India 15 19 16 13 12 21 15

Maldives n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Nepal 4 10 9 n.a. 31 .. 39

Pakistan 16 17 17 24 23 n.a. n.a.

Sri Lanka 17 16 17 26 40 19 29

East Asia Japan 36 24 24 8 10 8 5

Low & middle income 21 20 22

East Asia & Pacific 27 32 28

Europe & Central Asia n.a. n.a. n.a.

Latin America & Carib. 25 21 21

Mid. East & N.Africa 7 n.a. n.a.

South Asia 15 17 16

Sub-Saharan Africa 12 15 17

High Income 24 21 21

World 23 21 21

n.a. Not available.

Sources : (1) World Development Report 1995, World Bank, 1995.

(2) World Development Report 1997, World Bank, 1997.

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Table-1.11 Share and Structure of Manufacturing in Asian Countries 1995: Completed

Country Machinery ,transport Chemicals Others

equipment

1970 1992 1970 1992 1970 1992NIEs

Hong Kong 16 21 2 2 36 32Korea, Rep. of 11 30 11 10 36 37Singapore 24 33 13 6 40 38Chinese Taipei n.a. n.a. n.a. n.a. n.a. n.a.

China & Mongolia

China, Peo.Rep n.a. 27 n.a. 12 n.a. 35Mongolia n.a. n.a. n.a. n.a. n.a. n.a.

Southeast Asia

Cambodia n.a. n.a. n.a. n.a. n.a. n.a.

Indonesia 2 14 6 7 13 40Lao PDR n.a. n.a. n.a. n.a. n.a. n.a.

Malaysia 8 34 9 11 54 39Myanmar n.a. n.a. n.a. n.a. n.a. n.a.

Philippines 8 11 13 12 32 27Thailand 4 40 25 5 34 23

Vietnam n.a. n.a. n.a. n.a. n.a. n.a.

South Asia

Bangladesh 3 7 11 17 10 15Bhutan n.a. n.a. n.a. n.a. n.a. n.a.

India 30 25 14 14 32 35Maldives n.a. n.a. n.a. n.a. n.a. n.a.

Nepal n.a. 1 n.a. 4 n.a. 25Pakistan 6 5 9 10 23 24Sri Lanka 10 4 11 5 33 22

East AsiaJapan 34 38 11 10 40 38

n.a. Not available.

Sources : (1) World Development Report 1995, World Bank, 1995.

(2) World Development Report 1997, World Bank, 1997.

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(b) Industrial progress

Industrial growth was severely affected in the second half in most of East Asiancountries. In 1998 industrial growth decelerated to 1 per cent in Singapore, 2.7 per cent in

Taiwan, and the actual industrial value added declined in Indonesia (-14 per cent),Malaysia (-10.9 per cent), Philippines (-2.1 per cent) and Thailand (-13.3 per cent) (Table1.7). However, all the countries were able to recover quickly due to structural adjustmentprograms and achieved positive growth rates in industry in 1999-2000. In all thesecountries, average industrial growth was significantly lower in the second half of 1990sthan that in the first half.

Average annual growth rate of industrial value added decelerated from 8.7 per cent in1990-1995 to 6.5 per cent in 1996-2000 in Singapore, from 6 per cent to 4.7 per cent inTaiwan, China, from 16.5 per cent to 9.8 per cent in China, from 10.3 per cent to only 1.9per cent in Indonesia, from 11.2 per cent to 6.7 per cent in Malaysia, and from 10.5 per

cent to 1.3 per cent in Thailand (Table 1.8). As with overall economic growth, industrialgrowth was most adversely affected in Thailand and Indonesia.

Within South Asia, except Maldives, all the countries also achieved lower growth rates ofindustrial production in the second half than in the first half due to lower external demandfor their traditional and other exports.

Lower industrial growth in the second half of 1990s also affected the growth of servicesectors in the second half in most of the countries. Services growth was most adverselyaffected in the second half in Thailand, Indonesia and Malaysia. Average growth rate ofservices declined from 8.1 per cent in 1991-1996 to 6.2 per cent in 1999-2000 inSingapore, from 7.9 per cent to 6.2 per cent in Taiwan, China, from 9.3 per cent to 7.7 percent in China, from 7.6 per cent to 2.1 per cent in Indonesia, from 9.2 per cent to 4.2 percent in Malaysia, and from 7.4 per cent to 1.9 per cent in Thailand over the same period(Table 1.9).

Within South Asia, except India and Sri Lanka, all the countries experienced deceleration of growth rates in

the services sector in the second half of 1990s. In India, average growth rate of services accelerated

significantly from 6.9 per cent in 1990-1996 to 9 per cent in 1999-2000 due to substantial progress of

financial services, personal and community services, telecommunications and computer softwares.

(c ) Trend of Sectoral Shares

Sectoral shares in GDP indicate mixed trends over time among regions and countries(Table 1.10). For newly industrialised countries (NIEs), which have dominant share ofthe services sector in GDP, share of industry declined and shares of services increasedfurther during 1995-2000 in Hong Kong, Singapore and Taiwan. Only in Korean

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republic, share of industry in GDP increased from 31 per cent in 1995 to 44 per cent in2000 and that of services declined from 63 per cent to 51 per cent over the same period.

In East Asia and Pacific as a whole, the share of services remained unchanged at 38 percent, share of industry increased by 2 percentage points from 44 to 46 per cent during

1995-2000 and that of agriculture declined by the corresponding percentage point. Asregards individual countries in the Southeast Asia, only Indonesia, Lao PDR and Vietnamexperienced increased share of industry in 1995-2000. In Malaysia, Philippines andThailand, while the share of industry in overall GDP declined, there was substantialincrease of the share of services sector in 1995-2000 (Table 1.10).

For South Asia as a whole, the share of agriculture declined from 30 per cent in 1995 to27 per cent in 2000, that of industry also declined from 27 to 26 per cent and the share ofservices increased from 41 to 47 per cent. In Bangladesh, Bhutan and Nepal, share ofagriculture declined while shares of both industry and services increased during 1995-2000. In India, there was decline of shares in both agriculture and industry and

corresponding increase of share of services sector.An analysis of the trends ofShares of manufacturinggiven in Table 1.11 indicates thatexcept for Sub-Saharan Africa, all the regional groups experienced either a decline of theshare of manufacturing in overall GDP during 1995-2000 (South Asia, East Asia andPacific) or invariant share of manufacturing (Latin America and Caribbean, High incomecountries and the World as a whole).

An analysis of the structure of manufacturinggiven in Table 1.11 indicates that ingeneral the shares of agriculture and primary sector based traditional goods (such asfood, beverages, tobacco and textiles) in overall manufacturing production have decliningtrends over time, while the shares of machinery, transport and equipment, chemicals orother products have increasing trends over time.

(d) Impact of Crisis on Manufacturing

The crisis emphasised weaknesses in the competitive ability of the traditionalmanufacturing and had disproportionate effects on small and medium-size enterprises(SMEs). Although East Asian firms, including those in crisis countries, were adept inadopting new manufacturing techniques, they faced continual challenges from low wagedeveloping countries and from China and Japan. As in the case of Mexican crisis, theEast Asian crisis led to a sharp fall of production and investment in non-traded sectors.This is expected because currency depreciations, which favour traded goods, reduceincentive to invest in non-tradable sectors.

In general, non-tradable sectors faced high levels of non-performing assets. In Malaysiaabout three-fourths of the non-performing loans were to enterprises in nontradablesectors. Even in the pre-crisis period the nontradable sectors such as real estate, retailtrade and distribution had been characterised by overcapacity and low productivity.Corporate distress, measured by percentage of firms unable to meet current debtobligations, was highest in Indonesia and lowest Malaysia. Among the sectors, in general,

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corporate distress was highest in real estate followed by services and manufacturing(Table 1.12).

Table 1.12 Corporate Distress in Crisis Countries in 1995-2000

(Percentage of firms unable to meet current debt obligation)

Country 1995Total

1996Total

1997Total

1998Total

1999Total

1999

Manufacturing

Service Realestate

1995Total

Indonesia 12.6 17.9 40.3 58.2 63.8 41.8 66.8 86.9 52.9

Korea, rep. 8.5 11.2 24.3 33.8 26.7 19.8 28.1 43.9 17.2

Malaysia 3.4 5.6 17.1 34.3 26.3 39.3 33.3 52.8 13.8

Thailand 6.7 10.4 32.6 30.4 28.3 21.8 29.4 46.9 22.3

Source: Global Economic Prospects and the Developing Countries, World Bank, 2000.

Of all the crisis economies, Koreas industrial production recovered the fastest risingabove the pre-crisis levels within two years, whereas the levels of industrial production in

Malaysia, Thailand and Indonesia remained below the pre-crisis level even after twoyears (World Bank 2000). The more rapid recovery in Korea reflects partly its greaterstrengths in sectors such as electronics, computers and telecommunications. Korean firmsalso performed well in transport equipment, whereas Malaysian and Thai firms sufferedin these sectors. Korea had poor performance in traditional and resource-based sectorssuch as food, chemicals, base metals, paper and pulp products.

Traditional manufacturing sectors were expected to lead the way to recovery in the crisiscountries having lower wages. In Thailand the textiles sector grew rapidly following thedepreciation of Baht, but output fell back to precrisis level as the currency appreciatedand Thai products faced steep competition in export markets.Traditional manufacturing

in Korea rebounded only slightly after the crisis reinforcing a secular decline.

Small and medium sized firms were adversely affected in all crisis countries. Whileaggregate Korean industrial output started to increase in late 1998, production by SMEscontinued to fall in absolute terms until July 1999, resulting in a decline by one-thirdfrom precrisis production levels. In other countries, where SMEs had larger proportion inindustrial production, poor performance by SMEs intensified overall industrial set back.For example, more than 50,000 small firms and 400,000 households throughout Thailandaccounted for about 50 per cent of non-performing loans in 1999. The inability torestructure these debts effectively contributes to financial sector problems, which feedback into continued financial difficulties of SMEs.

Although large firms were drivers in recovery, they also posed systemic risks. In Korea,the onset of the crisis was associated with the collapse of two conglomerates, Hanbo steeland Kia. Subsequently, there was collapse of Daewoo in 1999 due to delays in itsrestructuring. In Thailand the financial problems of Thai petrochemicals were the resultof over investment in capacity and excessive reliance on external debt. Throughout theregion, diversified conglomerates were initially regarded as too big to fail asdemonstrated by early efforts of the Korean and Malaysian governments to bail out

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largest business groups. The takeover of chaebol Daewoo by its creditors was animportant break from this perception.

1.5 Policy Reforms for Industrial Diversification and Improved Competitiveness

All the crisis affected countries viz. Thailand, Indonesia, Korea, Malaysia and Philippinesintensified their structural reforms and stabilisation programs with the help of multilateralfunding agencies like the IMF, World bank and the Asian Development Bank. Chapter 3deals with detailed scope of these reforms. Here we summarise the basic strategy and thegeneral policies adopted by these countries.

The root cause of the East Asian crisis, unlike some earlier crisis episodes in LatinAmerica, were not in macro-economic imbalances, rather stems from structuralweaknesses (Neiss 1999). These weaknesses manifested themselves in progressivelyweaker banking and financial sectors and heavily leveraged corporate sectors. So thereforms program emphasised banking sector reforms, corporate restructuring and

improving corporate governance. All these countries were convinced that returning to thenormal growth path and sustained industrial progress requires not only reflationarypolicies but also major corporate restructuring.

The vast bulk of measures taken by the countries involved financial sector restructuringwhich was seen as essential to restore market confidence, overcome the crisis and lessenvulnerability to future crisis. Corporate sector restructuring, a critical counterpart to thereforms in the financial sector, was a vital part of the IMF supported program. However,as the Fund was not well equipped to deal with corporate sector issues, which werebeyond its areas of expertise, close collaboration with the World Bank was necessary fordesign of measures in this area. Due to the complexity of the needed restructuring of thefinancial and corporate sectors, the policy matrices expanded substantially as theprograms evolved during 1997-1999.

The policy matrices went beyond the core areas of financial and corporate restructuring.Some of the additional areas covered such as capital account liberalisation, strengtheningthe social safety nets, labour market reforms, and systematic reforms (e.g. institutionbuilding, the legal and regulatory framework) were essential to support the core areas.Other areas of reforms included trade and financial services liberalisation, privatisation of public enterprises, and tax reforms. Table 1.13 presents illustrative postcrisis policyreforms in selected crisis affected countries.

On corporate debt restructuring, the countries followed the so-called London Approachpracticed in England under the guidance of the Bank of England in which Government provides only the necessary legal set up and framework for voluntary negotiationsbetween debtors and creditors, but donot play an active role for complete debt workouts.These workouts are complex and involve not only debt restructuring and debt write offbut also debt-equity swaps and operational restructuring such as management contract,sale or closure of affiliates. Such corporate restructuring was much less advanced than thefinancial restructuring followed by most countries as an element of recovery.

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Table 1.13 Illustrative Postcrisis Policy Reforms in Crisis Countries

Country Corporate governance Loss allocation

and transfer

Factor mobility

Indonesia Corporate Secretary made

compulsory to improve

disclosure, Bankruptcy Law updated

(Aug.1998),

Code of best practices for

corporate governance.

Tax exemptions for

loan-loss reserves held

by Banks (March1998).

Relaxation of foreign

ownership limits

(Sept.1997), Tax holidays up to 8

years for newinvestments in 22industries (Jan.1999)

Korea,Republic

Restrictions on cross-debt

guarantees (1998),

Introduction of

international accountingstandards (Aug.1999)

Lowering the minimum

equity holding require-

ment to exercise share-holders rights (1999)

Revaluation and

adjustment of capitaland foreign exchangelosses (Aug. 1999)

Introduction of Foreign

Investment PromotionAct (Nov. 1998)

Malaysia Creation of High Level

Finance Committee onCorporate GovernanceCode on takeovers andmergers with stricterdisclosure standards (Jan.1999)

Reduction of corporate

tax rate from 30 percent to 28 per cent (Oct1997),

Tax exemption on

interest from NPLs forthe years 1999-2000.

Reduction of property

gains tax rate from 30%to 5% for nonresidentson the sale of propertyheld for minimum fiveyears (October 1997),

Exemption of real

property gains tax onmergers of financialinstitutions (Jan 1999)

Thailand Financial statements of

public companies andfinancial institutions to beas per international bestpractices (1999),

Requirement of Board

Audit Committee (1999),

Bankruptcy and fore-

closure laws amended(March 1999)

Elimination/ deferral of

income tax and taxes onasset transfer andunpaid interest (Jan1999),

Introduction of new

asset depreciationmethod (March 1999)

Alien Business Law

(enacted in Aug 1998,revised in Oct 1999),

Tax free mergers and

acquisitions for 100%mergers (Jan 1999),

Introduction of Equity

Fund, ThailandRecovery Fund for largeand medium scalecompanies, and VentureCapital Fund for smalland medium sizeenterprises (Mar 1999),

Reduction of real estatetransfer fee from 2 to0.01% of the appraisedvalue (March 1999).

Source: Global Economic Prospects and the Developing Countries, World Bank, 2000.

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The crisis provided good opportunities for corporate and industrial restructuring. As toomuch diversification does not add to resilience in times of crisis, very diversifiedconglomerates had to redefine their core business and important locations. They had tosell some of their businesses to reduce exposure. This is particularly true for

multinationals in the field of automobiles and electronics.

Toyotas operations in the Southeast region during the crisis period provides a goodexample how a multinational affected by global slowdown coped up with the crisis. Atthe beginning of the crisis in 1998, Toyota was the third largest automaker in the worldafter General Motors and Ford, exported cars to 160 countries, and had had 34manufacturing units in 24 countries (Takemoto 1999). It had seven marketingorganisations and nine manufacturing units in ASEAN countries, one manufacturing andmarketing company in Taiwan and several operations including production of enginesand semi-finished cast iron and aluminum in China. In addition Toyota has a managementservice company in ASEAN, Toyota Motor Management Services Singapore (TMSS).

Toyotas ASEAN exports include both complete built units (CBU) and a wide variety ofparts including jigs, dies, equipment, and machine tools. Toyotas engine exports haverecently been enlarged to Japan, ASEAN, India and South Africa. During crisis periodToyota expanded its operations in Asia and established a factory in India for productionof family-type multipurpose vehicles designed for the Indian market, and another factoryin China for production of a coaster-class bus for the Chinese market.

Excluding Taiwan where Toyota did relatively well, the overall production of Toyota inbig-4 ASEAN markets in Thailand, Indonesia, Malaysia and Philippines dropped by 65per cent in 1998. Toyota factory in Thailand was closed for two months, and the factoryin Indonesia for domestic production was closed for some days, although production ofexport vehicles in Indonesia continued with full capacity.

The crisis affected technological advancement in Asian countries most directly byreducing financial support for technology sector. As the major concern of the privatesector ad the government was to solve the financial crisis, the budgets were underpressure to address unemployment, inflation and social concerns. So the focus wasshifted from the long-term payback period required for technology investment(Butsuntorn 1999).

The crisis changed the traditional resistance to cross-border mergers and acquisitions inEast Asia. For example, in the cement industry, the British Company Blue Circle acquired58 per cent of Malayan Cement in Malaysia, while Holderbank, which is the largestcement producer in the world, bought 33 per cent share of the Republic Cement and 70per cent share of Tenggara Cement. In the Philippines, Holderbank bought 40 per centstake in Union Cement, while British Blue Circle became a partner in Mindanao Cementand Fortune Cement. In Thailand, also the French Company Ciment Franche acquired 49per cent stake of Jalaprathan Cement, while Holderbank bought 25 per cent share of SiamCity Cement. All these mergers and acquisitions in the region strengthened globalnetworking in marketing and manufacturing.

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In Korea, foreign ownership in listed companies jumped from 13 per cent in 1996 to over30 per cent at the end of 2000 (Chopra et al 2001). Many of the Koreas leadingcompanies are now majority foreign owned including Samsung Electronics (57 per cent),POSCO (56 per cent) and Hyundai Motors (50 per cent), though the foreign stakeholders

are mainly portfolio and institutional investors and may not have interest in management.In addition, Renault has taken over Samsung Motors, and Daimler Chrysler now owns 15per cent stake in Hyundai Motors.

To help eliminate overcapacity in key manufacturing industries, the Korean governmentcalled for a number of mergers and swaps the so-called Big Deals. In September 1998,the top-5 chaebols (Hyundai, Daewoo, Samsung, SK and LG), which accounted for alarge share of the countrys resources and exports, agreed on the general terms formerging and swapping 17 companies in seven core industries covering aircraft, autos,petrochemicals, power generation, rolling stock, semiconductors and ship engines. As aresult of these restructuring, the average debt-to-equity ratio for the non-financial

corporate sector declined from 425 per cent in 1997 to 235 per cent in 1999. For themanufacturing sector, which accounts for over half of the nonfinancial corporate sectorthe average debt-to-equity declined from 396 per cent in 1997 to 215 per cent at end-1999 and further to 193 per cent at end-June 2000.

The countries continued to review the rigid and outdated laws, rules and regulationsparticularly in services, finance, labour, technology and all production inputs. As SMEsaccount for almost 80 per cent of industrial establishments in Asia, and these SMEs facedserious shortage of capital, markets and professional management, all the countriescontinued to have special programs for the development and technology upgradation ofthe SMEs. They also emphasised the development of both physical and socialinfrastructure, especially public utilities, research and development and technical-orientedinfrastructure, which are particularly needed by the small and medium enterprises.

The countries continued to move from resource based and labour intensive types ofindustries to skill and knowledge based and medium and high technology industries.They also liberalised further foreign investment policies to attract more of the widelyaccepted foreign direct investment and portfolio investment.

The multinational corporations operating in the region are trying to establish cooperationand partnership among manufacturing sectors. The alliance partners are fighting the crisistogether, supplementing and reinforcing each other and responding successfully toopportunities and constraints of new environment. The following are the best examples inthis regard. Sony and Microsoft have introduced new products for interactive cabletelevision and have become leaders in global digital home-electronics market bycombining their computer software and audiovisual technologies. Matsushita has alsoformed tie-up with Northern Telecom of Canada to develop new cellular phone systemusing wide-band code-division multiple access technology.

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2 IMPLICATIONS OF GLOBALISATION AND REGIONAL INTEGRATION

ON INDUSTRIAL PROGRESS

2.1 Challenges and Prospects of Globalisation

(a) Globalisation and its Impact on International Trade

Globalisation can be defined as the ongoing economic, technological,social and political integration of the world that began after the SecondWorld War (ADB 2001). There are several dimensions to this dynamic

process such as increased internationalisation of economic markets asreflected by movements of goods, persons, capital and various servicesacross countries. There are also institutional and social changes that are

taking place within geographical boundaries of different states. Thereare also changes in international economic and political relations.Globalisation has helped rising world economic growth and reductionof poverty through increased flows of goods, services and investment.

Globalisation has helped world trade to surge from 23 per cent of worldGDP in 1960 to 32.5 per cent in 1991 and further to 41 per cent in 2000(Table 2.1). The major contributing factors for this growth aresummarised below:

(i) Effective tariff rates and non-tariff barriers (NTBs) have been reducedsignificantly during 1990s (Table 2.2) and by 80-90 per cent since theSecond World War.

(ii) Costs of ocean shipping, air transport and telecommunications havedropped significantly in last 50 years (Table 2.3).

(iii) Outsourcing has increased substantially in automobiles andelectronics. However, in 1990s foreign affiliates are being establishedto have the advantage of domestic sourcing and backward linkages inautomobiles, IT and food processing.

(iv) There had been significant advancement is research and technologyleading to explosive growth in knowledge-based industries.

Table-2.1 Total Merchandise trade (percent of world GDP)

19

19

19

19

19

19

19

19

20

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60

70

80

91

96

97

98

99

00

World 23

.1

25

.2

41

.9

32

.5

37

.2

38

.9

38

.8

38

.8

41

.2Industrialcountries

15.7

18.7

28.5

23.2

24.7

25.5

26.2

26.2

30.4

Developingcountries

7.5

6.5

13.4

9.3

12.5

13.4

12.6

12.6

10.7

Source: Asian Development outlook 2001, ADB, manila.

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Table 2.2 Mean tariff rates and non-tariff barriers in selected countries

Country Mean tariff rate

(%)

World import-

weighted

Mean tariff (per

cent)

% of

tariff lines

under

NTBs

1990 1999 1990 1999 Recent

year

India 84.1 34.3 93.6 28.0 5.2

Bangladesh

123.2 22.4 125.5 18.5 n.a.

China 44.9 33.4 46.5 18.5 11.2

Indonesia 27.1 11.8 27.4 14.3 2

S. Korea 18.6 7.8 17.8 7.0 n.a.

Malaysia 17.6 12.0 14.4 9.4 2.4

Nepal 18.3 13.5 21 17.8 0.5

Pakistan 53 50.0 n.a. n.a. 17.3

Philippines 28 9.3 28.8 8.5 n.a.Sri Lanka 27.5 19.1 22.2 19.8 4

Taiwan 10.9 6.7 12.2 6.5 n.a.

Thailand 41.7 47.3 42,4 43.7 4.2

Source: World Development Indicators 1997, 1999, 2000, 2001/02.

Table 2.3 Trend of transport, communications and computers cost in 1960-2000

Ye

ar

Ocean

freight

1920=100

Average

revenue per

PKM on air

(in 1990

US$)

Cost of 3-

minute

telephone

call,

New York-London

(in 2000

US$)

Price of

computers

relative to

GDP

(2000=100)

1960

28 0.24 60.42 186,900

1970

29 0.16 41.61 19,998

1980

25 0.10 6.32 2,794

1990

30 0.11 4.37 728

2000 27 0.08 0.40 100

Source: World Economic Outlook, May 1997, World Bank, updated to 2000, U.S.Commerce Department, Bureau of Economic Analysis.

Table 2.4 Share of manufacture exports in total exports in Asian countries (percent)

Country 1975 1985 1990 1995 2000

Hong Kong,China

98 98 99 95 95

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Korea 82 92 94 93 91

Singapore 52 54 74 80 86

Taipei, China 81 91 94 93 95

China, PR n.a. 49 74 81 88

Indonesia n.a. 14 38 53 54

Malaysia 31 32 56 65 80

Philippines 22 62 73 76 41

Thailand 24 43 65 73 74

India 51 58 75 75 76

Pakistan 52 67 77 85 84

Sri Lanka 11 34 62 73 75

As most of the East and Southeast countries adopted export-orientedstrategy, share of exports in their GDP recorded substantial increase.

Share of inter-regional trade also accelerated significantly during 1990s.In both Hong Kong, China and Taipei, China trade with MainlandChina increased while China's trade with the region fell as OECDmarkets became more important. Korea began to export moremanufactured goods such as automobiles and electronics to the rest ofAsia. Singapore increased its trade with Indonesia and Malaysia inelectrical products. In India, opening up of the economy in 1990shelped the country integrate more with its Asian neighbours. InIndonesia, the increased trade within the region has been in the exports

of primary products particularly palm oil and crude oil, and of labour-intensive products.

After the second world, Asian countries began exporting primaryproducts to the industrial countries. In the 1960s, the NIEs started toexport labour-intensive manufacture products to Europe, Japan and theUSA. Subsequently, ASEAN countries and China joined them asexporters of labour-intensive manufactured goods. Over time, thesecountries upgraded their technology and gradually moved to highervalue added and capital-intensive exports such as automobiles, and

subsequently to skill- and knowledge-intensive products, such aselectronics, computers and pharmaceuticals. Asian exporters increasedtheir market shares in traditional manufactured exports throughimproved quality and competitive prices.

Countries in East Asia had, in general, large shares of manufacturingexports in total merchandised exports (Table 2.4). Consequently, these

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countries were the first to be adversely affected by the global slowdownand collapse of import demand in the United States and Japan. EastAsias high-tech laden exports (about one third of total shipments fromthe region) were adversely affected as demand for computers,telecommunications equipment and other semiconductor-based capitalgoods dissipated. However, even after the crisis, the share ofmanufacturing exports was highest in East Asia (Table 2.5). In fact, theshare of manufacturing export in total exports increased during 1995-2000 in almost all countries in East and Southeast Asia exceptPhilippines (Table 2.6). The share of high-tech exports in totalmanufacturing exports was high in Korea, Singapore, Chinese Taipei,Malaysia, Thailand and Philippines (Table 2.6). The share ofmanufacturing imports also increased in almost all countries in 1990-1999 (Table 2.7).

Table 2.5 Composition of developing country exports (per cent) in

1998-2000

Regions Percentage Share in total exports

Manufacturing

Oil Non-oil

commodities

Services

Total

All developingcountries 56 13 16 15 100

East Asia 72 3 12 13 100

South Asia 60 0 20 20 100

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Table-2.6: Exports of Selected Asian Countries in 1995 and 2000

Country Merchandise Exports Share in World Export Manufact. Exports Hightec

hBillions of US$ % % % in total exports Exports :

% in

manf.

1995 2000 1995 2000 1995 2000 Exports

NIEs

Hong Kong 174 202 3.4 3.2 95 95 21

Korea, Rep. of 125 173 2.4 2.7 93 91 32

Singapore 118 138 2.3 2.2 80 86 61

Chinese Taipei 112 148 2.2 2.3 93 95 40

China & Mongolia

China, Peo.Rep 149 249 2.9 3.9 81 88 17

Mongolia 0.3 0.4 0.0 0.0 n.a. 10 n.a.

Southeast Asia

Cambodia 0.9 0.6 0.0 0.0 n.a. n.a. n.a.

Indonesia 45 62 0.9 1.0 53 54 10Lao PDR 0.4 0.3 0.0 0.0 15 n.a. n.a.

Malaysia 74 98 1.4 1.5 65 80 59

Myanmar 1 1.3 0.0 0.0 n.a. n.a. n.a.

Philippines 18 40 0.3 0.6 76 41 59

Thailand 57 69 1.1 1.1 73 74 32

Viet Nam 5 14 0.1 0.2 n.a. n.a. n.a.

South Asia

Bangladesh 3 6 0.1 0.1 81 91 0

Bhutan n.a. n.a. 0.0 0.0 n.a. n.a. n.a.

India 31 42 0.6 0.7 75 76 10

Maldives n.a. n.a. 0.0 0.0 n.a. n.a. n.a.

Nepal 0.3 0.8 0.0 0.0 84 69 0

Pakistan 8 9 0.2 0.1 85 84 0Sri Lanka 4 5 0.1 0.1 73 75 3

East Asia

Japan 443 479 8.6 7.5 97 94 27

Low & middle income 1152 1747 22.4 27.5 n.a. 64 20

East Asia & Pacific 359 712 7.0 11.2 n.a. 81 31

Europe & Central Asia 346 307 6.7 4.8 n.a. 56 10

Latin America & Carib. 221 358 4.3 5.6 n.a. 48 14

Mid. East & N.Africa 106 214 2.1 3.4 n.a. 17 1

South Asia 47 64 0.9 1.0 n.a. 79 4

Sub-Saharan Africa 73 93 1.4 1.5 n.a. 39 9

High Income 3997 4603 77.7 72.5 n.a. 82 22

World 5145 6350 100.0 100.0 n.a. 79 21




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Table-2.7 : Average Annual Growth Rates of Exports and Imports in 1990-99 (per cent)

Country Merchan- Merchan- Exports of goods Share in GDP Manf.

Imp

dised exp. dised imp. and services in 2000 % in totalGR (%) GR (%) GR (%) GR (%) Merchand. Merchand. imports

1990-1999 1990-1999 1980-1990 1990-1999 exports imports 1990 1998

NIEs

Hong Kong 8.3 9.2 14.4 9.5 124 114 85 89

Korea, Rep. of 12.3 8.1 12.0 15.7 38 30 63 61

Singapore 5.7 7.3 10.8 13.3 149 123 73 84

Chinese Taipei 5.3 8.6 n.a. n.a. 53 39 69 73

China & Mongolia

China, Peo.Rep 16.0 10.5 11.5 14.5 23 17 80 81

Mongolia n.a. n.a. n.a. n.a. 41 n.a. 62 65

Southeast Asia

Cambodia n.a. n.a. n.a. n.a. 18 n.a. n.a. n.a.

Indonesia 8.4 5.0 2.9 8.6 41 17 77 69Lao PDR n.a. n.a. n.a. n.a. 18 n.a. n.a. n.a.

Malaysia 10.8 9.7 10.9 13.2 110 78 82 85

Myanmar 15.5 19.6 1.9 7.5 6 81 83

Philippines 12.4 9.4 3.5 9.6 53 30 53 80

Thailand 9.1 4.8 14.1 9.4 56 39 75 78

Viet Nam 23.4 16.0 n.a. 27.7 46 42 n.a. n.a.

South Asia

Bangladesh 14.6 7.2 7.7 13.7 12 16 56 69

Bhutan n.a. n.a. n.a. n.a. 0 0 n.a. n.a.

India 9.8 6.0 5.9 12.4 9 10 51 55

Maldives n.a. n.a. n.a. n.a. 0 0 n.a. n.a.

Nepal 13.7 8.9 3.9 14.3 15 35 67 42

Pakistan 4.8 1.2 8.4 2.7 15 16 54 55Sri Lanka 9.0 8.6 4.9 8.4 34 34 65 67

East Asia

Japan 2.7 4.9 4.5 3.9 10 6 44 58

Low & middle income 7.1 6.2 6.6 8.2 27 20 70 74

East Asia & Pacific 12.3 8.6 11.1 12.6 35 21 73 75

Europe & Central Asia 2.6 2.5 n.a. 4.4 32 31 n.a. 67

Latin America & Carib. 5.5 10.8 5.4 8.7 18 15 69 80

Mid. East & N.Africa 3.9 1.8 n.a. n.a. 36 19 69 69

South Asia 9.2 5.5 6.5 9.6 10 12 54 56

Sub-Saharan Africa 2.7 3.5 2.4 4.4 29 24 n.a. 71

High Income 5.6 6.2 5.0 6.5 19 18 71 78

World 5.9 6.2 5.2 6.9 20 18 71 77

n.a. Data not available Sources : (1) Global Economic Prospects 2002, World Bank.(2) World Development Report 2002, World Bank.

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Share in World exports

During 2000 among the developing countries, East Asia and Pacific had the highest sharein world exports (11.2 per cent) followed by Latin America and Caribbean (5.6 per cent)and Europe and Central Asia (4.8 per cent). South Asia had the lowest share at 1 per cent.

Despite economic crisis, almost all the countries in East and South East Asia and SouthAsia either maintained their share in world trade or achieved some increase in shares in1995-2000 except marginal decline of shares by Hong Kong, Singapore and Pakistan andsignificant fall in Japan (Table 2.6). Developing countries as a group increased theirshare in world trade from 22.4 per cent in 1995 to 27.5 per cent in 2000.

Growth rates of merchandise exports and its share inGDP

During 1990-1999 East Asia and the Pacific had the highest growth rate of merchandise

exports (12.3%) followed by South Asia (9.2%) and Latin America and Caribbean(5.5%). As regards average growth of merchandise imports, Latin America and theCaribbean achieved the highest growth (10.8%) followed by East Asia and Pacific (8.6%)and South Asia (5.5%) (Table 2.7). In 2000 the share of merchandise exports in GDPwas the highest in Middle East and North Africa (36%) closely followed by East Asia andPacific (35%) and Europe and Central Asia (32%) (Table 2.7). Among the countries,Singapore had the highest share of exports in GDP (149%) followed by Hong Kong(124%) and Malaysia (110%).

Japans economic slowdown and linkages with East

Asia

During 1970s and 1980s East Asias developing and newly industrialised countries

found that links with Japans goods trade, banking flows, direct investment and

official assistance helped in boosting trade, financial integration and growth within

the region. However, in 1990s Japan experienced economic slowdown with meager

output growth of 1.4 per cent per annum and the problem of significant non-

performing loans in its banking system. While the region has become relatively less

dependent on trade with Japan, the linkages with Japan remain significant with

around 12 per cent of East Asian exports being sold to Japan and 20 per cent of

imports coming from Japan (Table 2.8).

Japanese lending to East Asia doubled between 1990 and 1996 rising to 4.4 per cent

of GDP and as high as 21 per cent of GDP in Thailand. The financial crisis of 1997-

1998 yielded a swift decline in Japanese bank loans on the crisis-5 countries

(Indonesia, Republic of Korea, Malaysia, the Philippines and Thailand) dropping

by 30 per cent in 1996-1998. From 1998 through 2000, Japanese claim on developing

countries fell by 53 per cent for Asia Pacific region and 12 per cent for other

developing regions.

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While Japanese FDI has declined and its banks havereduced lending to many East Asian countries since the

Asian crisis, Japan nonetheless remains an important

source of capital. There are also strong linkages betweenstock markets in Japan and a number of countries in East

Asia, particularly with Hong Kong, Korea and Singapore.

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Table 2.8 Linkages between Japan and East Asia in 2000 (per cent)

Country Share ofexports to

Japan

Exports toJapan as

% of GDP

ExternalDebt/ GDP

Share ofDebt in

Yen

Stockmarket

correlation

Share of banklending from

Japanese banks

Share ofFDI from

Japan

Indonesia 22 8 97 21 0.03 25 13

Thailand 16 9 66 32 0.21 37 25Korea 11 4 28 17 0.32 18 16Hong Kong 6 7 . . 0.40 32 .Malaysia 13 13 48 30 0.12 27 14Philippines 14 7 76 27 0.09 18 7Singapore 7 11 . . 0.30 27 23China 16 4 14 16 0.00 18 7

Source: Global Economic Prospects 2001, World Bank.

Agriculture exports

Restrictions on trade of agriculture and labour intensive manufactures, notably textilesand clothing, are damaging to the developing countries. Virtually all major agriculturalcommodities face trade barriers such as steeply rising non-transparent tariffs, quotas onnon-tariff imports, domestic and export subsidies in high-income countries, and stateenterprise trading in many developing countries. About one third of exports of thedeveloping countries face tariff peaks in one of four major markets, the United States,Japan, Europe or Canada (World Bank 2001). Developing countries can havesubstantial gains from reducing protection in these sectors as part of negotiated reciprocalreduction in high-income countries for agriculture and labour intensive manufactures.

Services exports

Services are the fastest growing component of the global economy, and trade and foreigninvestment in services had grown at a faster speed than that in goods in the last decade.More efficient services in finance, telecommunications, transportation and professionalservices improve the overall performance of the economy with their broad linkageeffects. Developing countries can gain significantly from further liberalisation of tradeand foreign investment in services.

In 1997 global service sector output was valued at $6.6 trillion or 61 per cent of globalo

Globalization and Industrial Diversification by Tarun Das

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