Overview Analytical Framework & Transformation Strategy Policy Formulation in Developing Countries.

OverviewAnalytical Framework & Transformation Strategy

Policy Formulation in Developing Countries

About This Course Design, implementation and assessment of

growth-oriented development policies Collection and comparison of international best

and worst practices (not abstract theory or cross-country regressions)

Both positive and normative aspects (situation analysis and policy advice)

Interactive, evolving and open-ended discussion

Ideas & Concepts for the Course Politics and economics Relationships among key players Policy learning Institutional dynamics Middle income traps

Creation of a Developmental State: An Operational Question Predatory/patrimonial state—power and state

machinery for perpetuating private benefits of leader, his family and friends

Developmental state—policies and institutions for value creation & competitiveness for all people and enterprises

How can we promote DS instead of PS? Political approach—encourage emergence of

developmental agenda, actors and coalitions Technical approach—provision of pragmatic &

concrete cases of international best policy practices for willing governments to learn & adopt

Development Policy:Desirability vs. FeasibilityDevelopment is both a political process and an economic process.

What should be doneHRD & technology

InfrastructureIntegration & competitionSystemic transition, etc

What can be doneLeadership and elites

Coalition formationPopular mindset

Administrative capacity

Each country is unique in what needs to be done (economics) as well as what can actually be done (politics & administrative capacity).

Any policy maker must work with economic and political space simultaneously.

(mainly economics) (mainly politics)

Key Relations and Coalitions1. Leadership style2. Horizontal coordination within central

government3. Vertical coordination between central and local

governments4. Relation with non-government stakeholders5. Relation with foreign players

We assume that these five relations are critical in determining policy effectiveness.

We do not pre-impose an ideal form on each relation. Each country must create its own.

Key Relations and Coalitions

Policy LearningLatecomer countries must learn three kinds of policy

making: Growth policies Social policies to cope with growth-generated

problems (income & wealth gaps, migration, traffic, housing, corruption, environment…)

Macroeconomic management under integration

Unless all these are learned, development effort will stall. They can be efficiently learned from comparative study of international best (and worst) practices.

Growth & Social Policy: An East Asian Pattern

Economic growth

Emergence of new problems

Social stability & popular support

Growth policy by developmental state

START

Income & wealth gaps, environmental damage, congestion, cultural change, land & stock bubbles, macro instability, corruption…

Social policy20-30 years later

Democratic, high-income societyFINISH

Maturity of middle class and political aspiration

What Must Be Learned? Policy measures Policy procedure and organization Policy structure—vision, strategy, action plans,

monitoring National movement for mindset change

The purpose is to acquire capability to create policy package suitable for each country using foreign models as building blocks.

Government can learn by self-study or with help from advanced countries (policy dialogue).

Learning from Other Countries DO NOT copy some policy adopted in some other

country without local context. Ad hoc or random copying should be avoided.

The claim that “our country is unique” should not be used as an excuse for not learning from others.

Learn mindset and methodology for conducting industrial strategies effectively. Learn how to make policies.

Early achievers (Japan, Korea, Singapore…) improvised through self-effort and trial-and-error. For today’s latecomers, more systematic learning is desirable.

Institutional DynamicsAfter knowing current status and desired system,

how can we move from the one to the other?

Common obstacles:--Political resistance: corruption, vested

interests, neo-patrimonialism, predatory state--Incompetence: leaders and officials do not

know or care--Lack of knowledge or a mistake in designing

transition steps--Bureaucratic sectionalism: no ministry or

department has full authority or responsibility to execute reform

Comparative Institutional Analysis Prof. Masahiko Aoki and others

at Stanford Univ. and Tokyo Univ. Based on evolutionary game theory Some questions

--Why do multiple systems emerge and coexist, without any system dominating all others?

--What is the dynamic mechanism of moving from one system to another?

Key Concepts Institutional complementarity

E.g., OJT, life-time employment, keiretsu system, main banks were mutually consistent in Postwar Japan

Strategic complementarityE.g., people in competitive society study professional

skills; people in connection society give parties & gifts.

Path dependenceE.g., because of these complementarities, a system,

once started, will have little incentive to deviate.

Forces of Systemic Change Collective mutation Foreign pressure (contact with another system) Policy as deus ex machina

--Strong leader--Political parties, interest groups, people’s movement--Researchers, advisors, intellectuals

Those who are inside the country but do not follow the rules of the existing system initiate change against resistance

Combining policy and foreign pressure

Collective mutation Foreign pressure

Policy Policy and foreign pressure

Lazy Workers in Japan(Early 20th Century)

Survey of Industrial Workers, Ministry of Agriculture and Commerce, 1901

Japanese workers are only half as productive as American workers.

They stop working when supervisors are not watching. Skilled workers are few, and they are often too proud and

lazy. Job hopping is rampant in comparison with US. Japanese workers never save.

Even today’s high performers started with low capacity in private and public sectors.

The Lessons of East Asia – Korea, K. Kim & D.M. Leipziger (1993)

Heavily dependent on US foreign aid for food, fuel and other raw materials, Korea was not seen as a promising place for major investments.

During the period from 1940 to 1960, the Korean bureaucracy was a kind of spoils system.

The East Asian Miracle, The World Bank (1993) At late as 1960, the Korean civil service was widely

viewed as a corrupt and inept institution. In less than two decades, this view has been

dramatically altered. By the late 1970s, the bureaucracy had become one of the most reputable in developing world. How did this come about?

South Korea: Unpromising Place with Inept Institution

Middle Income Traps A middle income trap is a situation where an

economy is stuck at income dictated by given resources and initial advantages, and cannot rise beyond that level (growth is given, not created).

The level of income where the trap may occur depends on the amount of given advantages relative to population.Low endowment Poverty trapModerate endowment Middle income trapHigh endowment High income stagnation

Countries may reach certain income by liberalization, privatization and integration, but reaching higher income requires strong policy effort to stimulate private dynamism, not laissez-faire.

Growth based on FDI, aid, big projects, natural resources, or locational advantages will eventually end. The true source of development is value creation by people and domestic enterprises (skills, knowledge, technology, innovation).

Government must produce policies & institutions that promote human capital formation. This is possible even under globalization, but appropriate action is different from past policies. I call it “proactive industrial policy.”

Trap (cont.)

Why Do Countries Diverge?

Per capita income

Time

High

Middle

Low

Country that creates internal value through human capital upgrading

Country that grows by given advantages only – natural resource, trade opportunity, FDI, ODA, big projects, asset bubbles; No creation of internal value

Initial growth by liberalization, privatization, integration

Skills, technology, knowledge, innovation

Critical point in history

Middle income trap

10-15 years

Speed of Catching Up: East Asia

Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).

Per capita real income relative to US(Measured by the 1990 international Geary-Khamis dollars)

Latin America



South Asia



Africa



Russia & Eastern Europe



Hypothesis of Policy QualityThe main determinant of the success/failure of development (and overcoming a middle income trap) is the quality of industrial policy.

Policy quality is correlated with income achievementPolicy quality varies widely across countries.Within a country, policy quality is relatively uniform across different policy components

Other factors are also important but not critical—location, geography, natural resources, infrastructure, population, FDI, ODA, mega projects…

Income Performance vs. Quality of Industrial Policy

Note: Policy assessment excludes results of external factors, private effort or foreign support.

Ove

rall

Hum

anre

sour

ce

Sup

port

ing

indu

strie

s

Man

ufac

turin

gS

ME

s

Exp

ort

prom

otio

n

FD

I po

licy

Indu

stria

lpa

rks

Pro

duct

ivity

&in

nova

tion

Singapore $54,040 1 A+

Taiwan $20,930 16 A NA NA

Malaysia $10,400 6 B

Thailand $5,370 18 B-

Indonesia $3,580 120 D

Vietnam $1,730 99 D

India $1,570 134 D

Per capitaincome (WB,2013, USD)

Ease ofDoing

Businessranking (WB,2013, among

189countries)

Industrial policy assessment by GDF(industrial human resource & enterprise support)

Very good

Good

Fair

Fail

Overview Analytical Framework & Transformation Strategy Policy Formulation in Developing Countries.

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