The Developing Industrial Countries : Prospects for the 1980s

 

The Financial Times Conference on Trade and Development, Frankfurt, Federal Republic of Germany, February 15, 1979.

 
The Emergence of the Newly Industrializing Countries
 

               In the course of the past 15 years, certain countries have pulled themselves out of poverty and despair and laid a solid foundation for their future economic development-and this, in a way, has changed the nature of international relations. These countries are variously known as developing industrial countries, advanced developing countries, or newly industrializing countries (NICs). Whatever they are called, these countries have been the object of attention in the rest of the world because of their growing impact on the world economy, which perhaps explains my presence here today.

According to the OECD classification, six countries in Europe, two in Latin America, and four in East Asia constitute the NICs (see footnote for list). They have accomplished a rapid economic growth since the 1960s, and their per capita GNP is over $1,000. It is not easy to generalize about the reasons for this rapid growth, as NICs have worked with different social and material factors. Yet on closer examination, one may find the following common characteristics. First, most NICs have enjoyed a sustained political and social stability, which has made it possible for their governments to play an important role in promoting economic development. Secondly, all of them adopted an outward-looking development strategy: They chose export promotion over import substitution, actively sought foreign capital and technology, and nurtured the absorptive capacity of the economy. The outcome of this policy can be seen in the combined share of world manufacture exports of these countries, which rose from 2.6 percent in 1963 to 7.2 percent in 1976. By contrast, India, which chose protectionist policies throughout the period, reduced its share from 24.6 percent in 1963 to 6.6 percent in 1973.

Thirdly, it is interesting to note that with the exception of Yugoslavia all the NICs maintain market economies under a free enterprise system. As a matter of fact, even Yugoslavia has developed a unique, market-oriented management system that allows a certain degree of autonomous decision making by Workers' Councils in individual production units.

The Role of the NICs in the World Economy

There are reasons why NICs draw other countries' attention. Only some 15 years ago, the countries that are now known as NICs were not distinguishable from other Less Developed Countries (LDCs). Korea, for example, suffered from a vicious cycle of poverty and political unrest accompanied by widespread unemployment, an expanding population, and a war-ravaged and divided homeland. Like the present-day LDCs, Korea then had to rely on concessional aid from foreign governments and international organizations just to keep up its meager standard of living.

The NICs' rapid growth seems to call forth different interpretations from different angles. One interpretation is that the NICs' growth is essentially an embodiment of capitalist development characterized by the exploitation of indigenous material and human resources and maldistribution of income. Subscribers to this view then hope to promote economic development by reforming the existing international economic order. However, most LDCs are interested in the experience of the NICs for possible application to their own respective economic conditions. For my part, I wish that the NICs' record of achievement might give hope and encouragement to these countries and help them find more useful goals and methods for their development efforts than are available from the experiences of mature industrial countries.

Opinion in developed countries on NICs is also divided, although the majority endorses the NIC experience. International organizations such as the World Bank, which have devoted themselves to the progress of developing countries, for example, hold Korea to be a success story in international development. We appreciate this judgement, and we also feel that we owe thanks to the developed industrial countries, without whose generous cooperation and assistance Korea's development would not have been possible.

Since 1973, however, the economic relationship between the developed industrial and newly industrializing countries, particularly the Far Eastern Four, has been under stress. I am speaking of new protectionism, which relies on quantitative and administrative restrictions to market access that are directed specifically and discriminatingly against the most efficient producers. The argument underlying the neoprotectionism is that the NICs' industrialization and ensuing expansion of exports are encroaching on the markets of developed countries and have contributed to unemployment and economic slowdown in the latter. Personally, I am dismayed by the logic behind this view, which warrants a closer examination. As to the alleged "encroachment," UN statistics indicate that the NICs' share of OECD manufactured imports was only about 8 percent in 1976, which is equivalent to a meager 1 percent of the total value of industrial products in the developed market economies.

Findings of several studies indicate that the decline in employment due to import competition is generally small compared to that due to technological changes. According to ILO studies, for example, the elimination of all trade barriers against all import from all the developing countries would lead to a 1.5 percent decline in manufacturing employment spread over five to ten years in the developing countries. By contrast, technological change associated with increases in productivity entails an annual displacement of labor of 3 to 4 percent. The employment argument often leaves out of account the increased employment generated through the developed nations' exports of manufactures to developing countries. Indeed, manufactured exports of OECD countries increased more than imports of manufactured goods from the NICs, leading to a substantial surplus in total in the trade account of the developed nations. This is confirmed by the fact that the NICs' trade deficit in manufactures with OECD countries almost quadrupled between 1963 and 1976, from about $4.5 billion to some $17.5 billion. This being the case, Professor Bela Balassa concluded:

The high rate of unemployment in the developed nations, then, cannot be attributed to international trade. Rather, unemployment has been the result of policies applied by these countries, which unfavorably affected domestic production and investment. Nor can one expect that protection would reduce unemployment. . . . With the developing countries spending practically all foreign exchange earnings, a decline in their exports would be accompanied by a commensurate fall in their imports. As a result, total employment in the developed countries would not increase, but there would be a shift from highly skilled to less skilled jobs.

Prospects for the 1980s

According to a World Bank projection, per capita income of Less Developed and Middle Income Countries is likely to grow at the rate of 2 and 4 percent per annum, respectively, during the 1977-1985 period. At a 4 percent growth rate, this means that the average per capita income of Middle Income Countries will reach $2,100 by 1985 in 1975 dollars.

This projection provides us with a good basis for discussion. In particular, the bank placed utmost importance on the role of international trade in the projected development. The bank estimates that manufactured exports from Middle Income Countries can grow at the rate of 11 percent per annum, from $33 billion in 1975 to $94 billion by 1985, if the world-particularly the developed countries-maintains the same conditions for trade and capital transfer in the future as existed during the 1960s. Primary commodity exports from Middle Income Countries will increase some 50 percent during the period. If we assume a trading environment where no barriers are imposed, according to the bank the volume of manufactured exports from Middle Income Countries would expand by an extra $24 billion per year by 1985, and by another $21 billion if supply constraints are removed by the Middle Income Countries themselves.

Having seen the recent proliferation of protectionist policies, I for one do not expect that developed countries will remove all trade barriers even over a ten-year period. Nor are developing countries likely to dismantle all supply constraints. Nevertheless, the projected trade potential does give us an idea of the magnitude of benefits that the world should be able to reap from following a more rational policy. Even if less than fully rational policies were to be pursued, according to the bank's projection the world still can expand its trade by $4 billion if the Tokyo Round negotiations lead to tariff reductions of 50 percent; by another $6 billion annually if nontariff barriers are removed partially; and by still another $10 billion if the developing countries mobilize at least half of their presently unemployed export potential through greater efficiencies and further reduction of supply constraints.

At this juncture I can inform you on the very recent measures my government has taken to liberalize imports. Since last May, Korea has opened up its market for about 200 items, as well as reducing the tariff on many imports-including selected agricultural products. We did so to stabilize the supply-shy domestic economy and to stimulate our firms with foreign competition. In fact, this year alone, we purposely plan to run a current account deficit of some $1.4 billion. I hope that this message will get across to the European business community.

Let me turn to the prospect of growth in a few regions of the world that will have an important bearing on the future course of international development in the coming decade.

As an economist from an Asian country, it may be presumptuous for me to say that East Asia today occupies the brightest spot in an otherwise pessimistic world economic projection. But I believe that this vast region, containing one-half of the world's population and a rich endowment of natural resources, will become an increasingly powerful growth center in the 1980s.

Nine countries in East Asia, including China, experienced an average 8 percent annual growth rate between 1970 and 1977. Even after the oil crisis, their economies kept growing, although at a slower rate. Their combined foreign trade more than quadrupled, from $64.1 billion in 1970 to $281.2 billion in 1977. The four Asian NICs-Korea, Taiwan, Hong Kong, and Singapore-multiplied their combined imports of OECD manufactures about eight times, from $1.6 billion in 1965 to $12.5 billion in 1977.

We are well aware of the potential impact of China's decision to adopt an outward-looking strategy about which Lord Roll spoke to us yesterday with his incisive analysis. By her own estimation, China plans to invest at least $100 billion by 1985, most of which will have to come from the developed countries. Whether China will accomplish her rather ambitious goal of modernization depends largely on her ability to transform the internal economic system in line with the new strategy, develop absorptive capacity, and to overcome possible balance-of-payment constraints.

At any rate, China's belated entry into the global economic process-together with the increasing role of the rest of the communist countries-will have far-reaching implications with respect to the World's economic progress in the years to come.

Another region whose growing involvement in the international economic process, I hope, will persuade its leaders to participate more actively in international trade is Eastern Europe. In spite of the enormous quantity of endowed resources and the combined GNP of some $1.3 trillion in 1976, the communist bloc's share of world trade has remained at a low level of 4.3 percent. The communist countries together account for 30 percent of the world's population and 20 percent of its combined GNP. During the 1970-1976 period, however, communist countries' manufactured trade increased at a remarkable rate of 17.5 percent per annum, to reach $50.2 billion or 9 percent of world manufactured trade in 1976. The communist countries' trade with the newly industrializing countries has remained at a negligible fraction, although the two groups of countries have much to exchange for mutual benefit.

It has become fashionable to say that the world is a community of interdependent nations. The essence of interdependence, it seems to me, is that international relations become more like domestic relations. In terms of economic development, interdependence means free flow of goods, capital, technology, and even labor. What we need to do is to facilitate their flow and improve individual country's absorptive capacities. Mature developed economies have surplus capital and advantages in sophisticated technology. Newly industrializing countries possess better growth prospects through increased labor productivity and improved managerial as well as technological know-how, and the other developing countries are endowed with an abundance of resources and human potential that can be developed and mobilized with capital and technology from the developed countries and the NICs.

Last night, we heard Chancellor Schmidt speaking of the necessity to make structural adjustments. We must realize that the process of adjustment is a painful one, which, however, is unavoidable. I suggest that all countries-developed, newly industrializing, and less developed-must share the burden of adjustment by coordinating industrial and trade policies for the betterment of the world.

I should now like to conclude my remarks by quoting from John Stuart Mill, who expressed about 150 years ago the ideal of free trade so eloquently:

It is hardly possible to overrate the value . . . of placing human beings in contact with persons dissimilar to themselves, and with modes of thought and action unlike those with which they are familiar. . . . Such communication has always been and is peculiarly in the present age, one of the primary sources of progress.