Economic Development in Poor Countries - Term Paper Example

DEVELOPMENT FINANCE due: Table of Contents Table of Contents 2 Introduction 3 Global integration to enhance South-South trade 5 Commercializing innovations to enhance rural growth 11 Development of the BRICS and their impact on South-South trade 12 Industrialization and South-South cooperation in reducing non-income poverty 13 Conclusion 14 Bibliography 17 Introduction Traditionally, economic development in poor countries has been viewed from a perspective centred on the notion of aid from developed countries. Since rich nations always claim that they will help the poor countries, the quest for development has been tied to how to seek or provide this support (Bilal 2012: 1). Development strategies have been made and revised over the years yet it remains unclear whether a viable solution to development has been reached so far. More recently, this traditional approach to development has also been challenged by the rapid rise of South-South interactions. Although not a new trend, it is gaining popularity because it offers alternative or complementary approaches to development in general. For example, while interactions with the North are mostly based on an assistance strategy, cooperation among developing countries is focused on an equal party approach (Bilal 2012: 1). Countries can, therefore, engage in exchange of experience and knowledge in a more open-ended, less prescriptive way that guarantees excellent solutions with respect to the particular problems. Developing countries have been gradually increasing their contribution to the global economy. For instance, developing countries accounted for only 30% of world GDP, about half in 2012 and are anticipated to reach 54% by 2017 (IMF World Economic Outlook 2012: 194). They have also improved in their participation in world trade, from less than 30% in 2000 to 41% by 2010 and are still expected to rise (WTO 2011: 2). Developing economies that have been contributing to this new trend include China, India, Brazil, South Africa and Russia, commonly referred to as BRICS (Brazil, Russia, India, China and South Africa). These developments have had several implications, both positive and negative, to the local as well as the global economy. Some of the major issues, opportunities and challenges to the South-South cooperation are explored in the following sections. Owing to the high rate of specialization demanded by the South-South cooperation, production patterns are likely to change. The new model requires easy exchange of labour especially that concerned with enhanced skills and technical knowledge. However, this free movement is determined by several factors including the transaction costs of movement of workers. Workers act as means of exchanging knowledge and skills among industries, and an adequate flow of knowledge eventually leads to more productivity and hence higher wages. Workers with accumulated knowledge and skills can either benefit or suffer under the emerging economic trend, depending on the policies that are implemented to govern this exchange. For instance, it is usually assumed that in situations of high employment and growth rates, skilled workers can be quickly deployed without incurring costs, whether it is an emerging industry or existing one. Easy exchange of labour leads to an optimal allocation of work among the various firms in the industry. However, in cases where employment rates are low and growth is slow, workers with accumulated skills and technical know-how may be faced with the challenge of a limited labour mobility. Policies targeting transaction costs of organising labour should aim at reducing the costs as much as possible since labour is greatly affected by the changing economic trends and is also a measure of general socio-economic development. Recent studies point to evidence of increased trade liberalization in the developing countries. Trade liberalization favours manufacturing production based on regional comparative advantage in terms of regular and skilled labour between 1985 and 1998 (Sanguinetti, Siedschlag & Martincus 2004: 69). Setting up of industries in locations that offer a comparative advantage has been the trend. For example, the following observations have been made in most developing economies: • Agricultural industries as well as those that depend on farm inputs tend to be located in countries with adequate arable land; • Labour-intensive industries are located in countries with an abundant supply of labour; • Industries that make use of skilled labour are located in countries with adequate technologically skilled workforce; and • Industries that use industrial intermediate inputs tend to be located in countries with a large industrial base to ensure easy access to relevant and varied suppliers. However, more recently, the industrialization pattern has shifted from one that is focused on comparative advantage based on resource availability. Currently, industrialization is driven by knowledge, skills, research and development, technology, innovation-intensity skills and revealed technological advantage. In so doing, the immobile comparative advantage is converted into a dynamic competitiveness within the market. The new pattern implies that industrialization will be more on technologically advanced countries, even though they may not have abundant amounts of the other factors of production. The South-South cooperation combines countries abundant in one or more of these factors creating potential for rapid economic development among the member countries. Global integration to enhance South-South trade Manufactured exports from the South-South trade have gradually increased over the years from 58 per cent in 1990 to 64 percent in 2001. Among the products that have been leading in this category include office and telecommunication equipment, automotive products and machinery and transport equipment. Due to the spatial distribution of these goods, the manufacturing industry benefits considerably from global connectivity. Global integration relies majorly on domestic capability, and countries have the responsibility of increasing local capacity since it is the key to learning, competitiveness and innovation (Bartels & Jebamalai 2009: 10). Enhancing internal capacity of the country is beneficial in various ways. Through foreign direct investment, advanced skills, technology and know-how are brought into the country and can be transferred to the host country through setting up of training facilities. However, countries such as China and the Republic of Korea have developed innovative domestic capacity despite (but also because of) foreign investment restriction through low modal neutrality. Foreign direct investment can provide local linkages, latest technology and enhanced indigenous capabilities. It is however dependent on several other factors such as the configuration of trade and competition regimes, multinational enterprises’ corporate strategies and responsiveness of the local markets among others. Therefore, developing countries have to enhance their domestic capabilities to improve global integration. Agricultural products contribute a very small percentage of South-South trade in terms of exports and have also experienced relatively low growth rates of between 3 to 7 percent (Bartels & Jebamalai 2009: 12). Poor performance in trade is as a result of declining terms of trade, a shift in developing countries’ demand for manufactured goods and other trade barriers. Apart from a few examples, development in the agri-business sector has been inhibited while growth in the South –South trade has been concentrated on manufactured goods. In general, the poorest developing countries that rely heavily on low value-added agricultural products, especially in Africa, have been missing out on the South-South cooperation. Most multinational companies are concerned with their profitability rather than the challenges that face the primary producers of the commodities. The South-South cooperation can offer potential for incorporating these countries into their global trade network although it is not certain if agricultural products will be on high demand to facilitate this move. All the same, the South-South cooperation has the task of bridging the gap between making profits and social responsibility in the agricultural sector. Such a move will ensure that economic development is not concentrated in just a few countries which specialize in manufactured goods. The developing countries also have a responsibility of producing high-quality products that can capture the global market. The extent of vertical intra-industry trade is very limited in South countries, in comparison to East Asia and other industrialized economies. The absence of an adequate framework of policies that encourage such trade is the leading cause of this trend, despite the benefits of increased productivity through exchange of knowledge and technology (Bartels & Jebamalai 2009: 13). Developing countries with similar resources need to focus intra-industry transactions on specialization in the global value chains. Markets should also be formulated in such a way that they facilitate trade within industries. For instance, markets that are large enough to accommodate similar (based on resources) differentiated products seem to encourage this kind of business. Through the South-South cooperation, it is much easier to attain this trade even though it is still not implemented. A challenge to the implementation of business transactions within industries includes the varying levels of income and industrialization across different developing countries. These challenges limit vertical intra-industry trade in terms of scope and complexity, with the exception of East Asia. Restructuring policies would help to correct this inconsistency, especially when directed towards specialization to increase their contribution to global value chains. Tariffs also impose another trade barrier between developing countries and this further curtails intra-industry trade. Even though tariffs have been declining over the years, some countries have average tariffs of about 40 percent. Some of these tariffs are higher on products that other developing countries are more likely to export, with almost 70 per cent of tariffs faced by developing countries being placed by other similar countries. Such tariffs inhibit intra-industry trade in the global market and are an issue that the South-South cooperation needs to address since it also contributes to the marginalization of the same developing countries (Krauss 2006: para 10). However, eliminating tariffs is not an easy task and should be done in phases (Mills 2006: 3) to maximize chances of success. Despite the sophisticated development of financial and capital markets worldwide, the general absence of sources of funds will result in the transaction costs of South-South cooperation being high and barriers to trade increasing. The first step is to address this issue by creating financial services and support for business finance infrastructure for South-South trade. This is possible by implementing policies that encourage financial and capital markets in the South to enable networks of export credit agencies. Local banks that support trade capacity building institutions and efficient payment and credit guarantee arrangements can also contribute to solving this problem (Bartels & Jebamalai 2009: 14). Implementation should however be done in a manner that prevents financial crises, mainly due to short-term borrowing by developing countries to finance imports. South-South cooperation also needs to ensure that technology development is maintained and especially with regards to sustainable energy-related technology in order to hasten rural growth. Adaptation of technology enables a country to grow relatively fast since innovation and transfer of technology based services help to reduce poverty, particularly in rural populations (Bartels & Jebamalai 2009: 15). Since creators and innovators of technology expect rewards for their technology, patenting regimes become necessary. Protection of intellectual property is essential in an economy as it ensures that the investors receive their dues while also helping to finance prospective research in technology development. However, patenting raises the costs of adapting the technology and makes it unreachable for the poor in the society. Such a challenge, however, needs to be addressed through creation of policies that strike a balance between rewarding the innovators and maintaining the availability and adaptability of the technology. The tradability of South technology is also hindered by tariff barriers and increased control of trade in technology. Possible benefits of development and dissemination of technology are restrained thus impeding a nation’s development. To ensure that tradability of South technology is enhanced, the South-South cooperation will have to differentiate it depending on the skill levels of the developing economies. Finding effective means of acquiring technology mostly affects the private sector where financial capital is sourced independently. Although there are many sources of technology in the South, the absence of widespread and dedicated capital and financial markets makes the manufacturers in the South unable to access funds quickly for purchasing or developing technology. Therefore, policies will be required, especially those that recognize the significance of increasing the contributions of capital and financial markets of developing countries and enabling them to form links between the consumers and the entrepreneurs. The South-South cooperation however provides a better platform for exchange and development of South technology, as compared to trade relations with the North. Through the interaction of developing countries, technology can be developed jointly which makes it easier to share and thus results to rapid economic development. The South is hampered by lack of integrated markets that possess high purchasing power and, therefore, joint acquisition and development of technology and creation of manufacturing networks is necessary. Due to the high financial risk involved in coming up with new technology, most entrepreneurs in the South are reluctant to invest in research and development. High risk, coupled with inadequate supply of skilled labour in developing countries, further hinders the process of technology creation and development. However, given an appropriate incentive system, local research and development capability can make significant contributions to long-term sustainable development in the developing countries. Such incentives include policies that enable joint research and development in technology. Most countries in the South are not able to engage in high-end research and development on their own due to the high risk involved, uncertainty of outcomes and high costs. The policies will provide a platform on which such joint research can be done. The South-South cooperation, therefore, needs to make clear policies that encourage joint or collective research and development of technology as it is directly linked to economic development. Also, investment in equipping the workforce with the latest knowledge and skills is essential as the lack of skilled manpower presents a major drawback for most developing countries as far as technology is concerned. Through the South-South cooperation, it is much easier for developing countries to access funds for this purpose. Financial terms are more acceptable as compared to loans from the West and better still when several countries are involved. Technology related service emanates from research and development centres, workshops, laboratories, training centres and consultancy firms among others. These services are essential for the technological development of the nation. Although it is quite simple to obtain modern technology through licensing and paying royalties, it is very difficult to maintain such technology without the support of related service providers. It is important that technology service providers be developed in the South economies and also granted free movement across countries. Unrestricted movement is of particular importance since it ensures that the overall development is maintained, facilitates free trade in these services and creates positive spill-over effects (Bartels & Jebamalai 2009: 16). In order for a country to attract skilled manpower and technology related service providers, restrictions to labour mobility need to be mitigated in developing countries. Through South-South cooperation, trade barriers are likely to be lifted to encourage trade among developing countries. The fact that negotiations are based on mutual benefits between the two parties further facilitates this process. However, this is a gradual process that needs time to implement; otherwise the economy may suffer shocks or unforeseen adverse effects. Commercializing innovations to enhance rural growth A large proportion of the populace globally is marginalized as a result of advanced technology. Various individuals have little or no access to essential services and since technical development is part of economic growth, its impact should be translated to the grassroots level in terms of creation of sustainable livelihoods. Food security and sustainable livelihoods are indicators of poverty. Both can be achieved through various ways including enhancing agricultural production, promoting agro-processing for income generation, reducing losses (both pre and post-harvest) and utilization of local sources of renewable energy. To improve the quality of life in rural areas, mechanisms of recognition of indigenous scientific knowledge is necessary. These innovations serve as promoters of rural development and therefore need to be encouraged in order to increase efficient production systems. However, it is mandatory that innovators of such technology be rewarded through commercialization of their inventions, just like it is done for modern technology. The South-South cooperation through trade provides a better opportunity for promoting local scientific knowledge to the point where it will be economically beneficial to its owners and the larger society. Cooperation among developing countries with the same resources also helps to transfer knowledge and techniques that can further enhance agricultural productivity and lead to product diversity. Development of the BRICS and their impact on South-South trade China falls under one of the largest economies universally, and its partnership with the South-south cooperation could strengthen the business significantly. India is also building strong economic linkages with several developing countries. The growth and partnership of China and India as major economic powers could benefit South-South trade although the impact is more prone to be uneven, depending on the level of industrialization and natural resources of the country. Recent studies have been continually done on the impact of BRICS, specifically on African countries and trade liberalization (Broadman 2007: 59; Goldstein, Pinaud & Reinsen 2006: 1). The emergence of China and India as global economic powers and their rising demand for energy and other commodities presents opportunities as well as challenges for economic development in African and other developing countries. Exports from African countries to India and China provide a significant positive impact, given the favourable terms of trade. However, the inflow of cheap consumer goods from China into the African countries creates another challenge to local industries. These goods increase competition for the local market and also put pressure on them to become more productive otherwise they may face huge losses or shut down altogether. Moreover, it could also be termed as an advantage because competition increases the quality of goods and services produced and prices are lowered. Trade negotiations at the multilateral trade level have been employed to a large extent and almost always result to the formation of coalitions. However, the impact of these coalitions to the economic development of developing countries is minimal and does little to promote South-South cooperation. The agricultural unit has been the worst hit by failed trade talks, despite the fact that most citizens of developing countries rely on agriculture as a source of livelihood (Bartels & Jebamalai 2009: 18). The trend can be attributed to the tendency of most North companies to put corporate profitability ahead of social responsibility. Issues of trade-related aspects of intellectual property rights and a system for resolution of conflicts in the World Trade Organization have posed several difficulties for developing countries (Zejan & Bartels 2006: 1021). South-South cooperation offers better chances of global trade negotiations. The use of an equal party instead of assistance approach to negotiation helps both countries to develop solutions that are mutually beneficial. Also, China and India are emerging are major economic powers worldwide and offer favourable terms of trade. This includes low-interest loans and grants, compared to other North countries which charge high interests on loans thus making it difficult for developing countries to liberate themselves from debt. Industrialization and South-South cooperation in reducing non-income poverty The Millennium Development Goals (MDGs) provide a benchmark for progress. They point out several effects that are the primary causes of poverty, which is broadly classified as either income poverty or non-income poverty. Non-income poverty occurs in ways such as lack of education, health care and social security among others, and is directly linked to income poverty. Raising populations out of non-income poverty remains a major challenge that the South-South cooperation will have to inherit. A number of fundamentals have been proposed (UNIDO 2004: 59) including non-income related factors such as healthcare and primary education. These serve as prerequisites for eradication of poverty and achievement of the MDGs. South-South cooperation, through industrialization, is capable of achieving these goals across developing countries faster than it would take in its absence or in collaboration with North economies. Conclusion South-South cooperation has been on the rise and is set to continue into the future. Apart from contributing additional sources and amounts of resources for development, it also offers an alternative approach to economic development. South-South cooperation has been associated with positive remarks, making it even more appealing. It has however had its share of challenges that raise two major questions: how can South-South cooperation best participate in the development and complement the efforts of traditional donors? The second issue is why South-South is a more preferred route to economic development as opposed to traditional donor cooperation. First, South-South cooperation has attracted much attention from the international donor community, which has embraced South-South cooperation as a useful and complementary means of supporting development in Southern countries. However, traditional donors have attempted to alter some of the strategies of the South-South cooperation with the aim of making the cooperation fit in the Northern agenda of the donor community (Bilal 2012: 23). Although they appreciate the role of the South-South cooperation, Northern donors still complain that they do not follow a set of principles of what should constitute ‘good aid’ practices. They insist that Southern actors should abide by their rules and regulations. In response, Southern donors have remained cautious and sometimes unresponsive (Bilal 2012: 24). Since both the North and South actors have to work together, dialogue is necessary where they can engage in constructive and open agreements on an equal footing. The two parties are very different even in their speech, and this should be put aside to pave the way for constructive dialogue that can produce sustainable solutions for the developing countries. Finding a neutral platform such as the G20 or any other international institutional setting will help to create an even ground on which open dialogue can be conducted. In so doing, most of the goals for development will be achieved Regarding the second question, the choice of approach seems to be the primary determinant of which donor developing countries will prefer. The Northern countries usually view Africa as a problem case that requires solutions from an external source, especially in terms of financial assistance. South-South cooperation, on the other hand, sees Africa as a rapidly growing economy that is capable of forming lasting relations with other development agents. The attitude of Northern countries can be said to be the principal contributor to this trend, and this means that traditional ways of handling economic issues need to be revised and reconsidered. Less focus should be given to an aid relation, and more consideration should be put into political, economic and strategic relations. When these are observed, it creates a better platform for more development contributions such as North-South-South relations (triangular cooperation). South-South cooperation provides promising endeavours, despite the challenges. Most of the implications described above are positive, and the challenges can be overcome through proper planning, cooperation of member countries and transparency. However, clear frameworks need to be put in place since South-South cooperation is still an emerging concept and may lead to sudden economic surprises if implemented hurriedly, without doing adequate research first. Bibliography BARTELS, F. L., & JEBAMALAI, V. (2009). South-South Cooperation, Economic and Industrial Development of Developing Countries: Dynamics, Opportunities and Challenges. United Nations Industrial Development Organization. BILAL, S. (2012). The Rise of South-South relations: Development partnerships reconsidered. Brussels, European. BROADMAN, H. G. (2006). Africas silk road: China and Indias new economic frontier. Washington, D.C., World Bank. GOLDSTEIN, A., PINAUD, N., & REISEN, H. (2006). The Rise of China and India Whats in it for Africa? Paris, OECD Development Centre. IMF. (2012, August 15). IMF World Economic Outlook (WEO) - Growth Resuming, Dangers Remain, April 2012. Retrieved December 12, 2014, from http://www.imf.org/external/pubs/ft/weo/2012/01/ KRUSS, G. (2006, November 29). University-industry links: Lessons from South Africa. Retrieved December 12, 2014, from http://www.scidev.net/global/r- d/opinion/universityindustry-links-lessons-from-south-afri.html MILLS, G. (2006). Ten things that Africa can do for itself. Washington, DC, Heritage Foundation PAUL, C. (2007). The bottom billion: Why the Poorest countries are failing and what can be done about it. 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