The Development Experience of the Newly Industrialised Countries - Coursework Example

EVALUATE CRITICALLY THE DEVELOPMENT EXPERIENCE OF THE NEWLY INDUSTRIALIED COUNTRIES (NICS). DISCUSS IF THAT EXPERIENCE CAN BE DUPLICATED IN OTHER COUNTRIES OF THE THIRD WORLD Introduction The term newly industrialised countries (NICs) is used to refer to countries who mostly after World War II were still considered as developing countries but by the 1980s and 1990s had been able to grow their economies significantly with some achieving near or actual double digits of growth for a sustained period of almost 25 years. (Bhagwati, 1996) The term 'newly industrialised countries' can also be said to be a socio-economic term or categorisation for countries who though have not reached the level of developed country or industrialised country status, ('first world') have had significant economic growth. The Asian countries of India, China Korea, Taiwan, Hong Kong, Singapore, Indonesia, and Malaysia are notable examples NICs and their dramatic successes in economic growth have often been referred to as the East Asian Miracle. Other Asian countries like China and India have also achieved successes in economic growth. The 'economic miracle' of these East Asian countries is however not exclusive to Asia as countries in the Americas like Chile, Brazil and Mexico have also achieved appreciably high growth rates in their economies and could thus be referred to as NICs as well. It must be said though the growth rates vary amongst all the NICs and as such some growths may be relatively higher compared to others in other NICs. Countries like China, India Singapore and Hong Kong however standout of the rest due to the rapid nature of their growth within a space of about 30 years. Also, the use of NICs is a matter of definition and as such a country like South Africa that was largely secluded from the international economy due to its apartheid policies may now be categorised as an NIC by some, while others may classify it as a developed country. This essay will first conduct a generalised or panoramic view of the features that underlie the development experiences of NICs before undertaking a closer look at the experiences of selected NICs. It must be said that though the development experiences may be very varied, some common cardinal features can be seen in the experiences of all NICs. Most NICs were able to achieve high growth rates by instituting market reforms that favoured exports. (Hamilton 1987) There was also a strong emphasis on value added manufacturing that changed their economies from predominantly agrarian economies into industrial and manufacturing based economies. Increased capital investments from foreign and domestic sources played a key role in the development experiences of NICs and so did the development of domestic corporations that could compete with other foreign corporations both on the domestic market and on the regional or international markets as well. (Bhagwati, 1996) Typical examples are the automotive, steel and ship building companies of Korea. Political leadership also contributed significantly to the high growths in the economies of NICs. As stated earlier, though the 'authoritarian' thesis is a disputed one, the fact that relative political stability pertained in the countries that recorded significant growths in their economies goes to show that political leadership played a crucial role in the development experience of NICs (Combie, 2000). The next segment of this essay will undertake a closer look at selected country experiences of NICs. China has been undergoing a dramatic transformation to a market economy. As a result, it currently is the world leader in terms of economic growth, industrial expansion, and exports. It contains an array of potential consumers that far exceeds the markets in Europe or the Western Hemisphere, and it is rapidly emerging as a new epicentre for industry, commerce, and finance. In addition, the so-called "greater China" has substantial amounts of technology and manufacturing capability, outstanding entrepreneurial, marketing, and services acumen in Hong Kong, a fine communications network and a tremendous pool of financial. When these resources are combined with the very large endowment of land, resources, and labour on the mainland, China already is a major superpower in the global economy. The people's Republic of China (PRC or China, for short) has had a long tradition of isolation. Presently, China is actively encouraging trade with the West, and it is a major trading partner of the United States. Despite this progress, many U.S. and European multinationals find that doing business in the PRC can be a long, gruelling process that often results in failure. One primary reason is that Western-based MNCs do not understand the role and impact of Chinese culture. Since the last few decades there has been a multifold increase in the FDI in China. The Chinese economy has now gaining the power of effecting the decisions of the economic bodies of the world. History of FDI growth in China: The country launched its open door policy 26 years ago. Since the policy introduction the FDI flows in the country received a quick response. In 2004 China was at no.2nd position in the world of FDI with $64 billion. The Chinese FDI trends can be examined in two phases. First phase: 1979-82 Second phase: 1984-91 Third phase: 1992-99 In November 1999 US-China had an agreement regarding the WTO, according to which many new reforms were made (Sandra, 2001) those included The sectors relating to the distribution services will be opened for repair and maintenance and China will phase in trading rights and distribution services over three years. The Government for the investment opened the telecommunication industry of China. The professionals were also allowed access to the service markets of China. The services included according, consulting, Information Technology and Engineering. (Lardy, 2000). FDI in China rose to a peak level of US $ 45463 million in 1998. In the first six months of 2002, actual foreign direct investment (FDI) in China rocketed to 24.58 billion U.S. dollars, setting a record growth rate of 18.69 percent year-on-year. (Beijing Time, 2002) On May 20, 2005, the Chinese government reported that first quarter real GDP grew by 9.4% in 2005 over the same period in 2004. On April 15, 2005, the Chinese government reported that its foreign exchange reserves had risen to $659.1 billion by the end of May 2005. (Morrison, 2005) Outward FDI: "The figures on FDI outflows vary. According to China's BOP statistics, the cumulative total during 1990 to 1997 was US$18.9 billion, consisting exclusively of equity capital. Since the 1980s, China has been fast acquiring assets abroad. Researchers7 estimate that Chinese FDI in Hong Kong totalled US$20-30 billion by the end of 1993 or 1994. In fact the net wealth of Chinese affiliates abroad can be measured in hundreds of billion dollars. Officially, the Chinese SOEs had as many as 5 666 affiliates abroad at the end of 1998 with a combined FDI of US$6.33 billion." (Chandra) Both the in-ward and the out-ward FDIs are a strong influencing forces which effect the trade performance of a country. This can be further explained by conducting the following case study. The study reveals increased value to Economy of China due to FDI. In 2003, Sino-Japan trade reached a record high $132 billion. Examining the fast expansion of the bilateral trade suggests that direct investment from Japan performed a critical role in strengthening the economic integration between the two economies. Japanese affiliated manufacturers in China contributed to the soaring bilateral trade in dual ways: exporting their products as final products and intermediate inputs to Japan, and importing intermediates inputs from Japan for their production in China. In 2002, Japanese affiliated manufacturers exported 1,057 billion yen products to Japanese market (METI, 2003). The effect on China's exports and its national economy is tremendous. (Xing, 2004) Sector and geographical distribution of FDI in China Sector Distribution: "So far, the major proportion of FDI is drawn for the manufacturing field, which takes up almost 60 per cent of the total contracted FDI by 1998. Next follows real estate with the share of 24.4 percent. The portion of the distribution industry including transport, wholesale and retailing is 6.0 percent. Construction comes next with 3.1 percent. The primary industry such as agriculture, forestry and fishing takes 1.8 per cent. In the future, service trade, such as finances, telecommunications and wholesale and resale commerce, will take up a larger share as a result of Chinese accession to WTO and further liberalisation. Further investment liberalisation should also take place in traditional industries. Especially, the expansion of FDI in agriculture will depend on the degree of opening up to the market circulation of agricultural products and the industrialised process of production operations. FIEs also generated nearly one fifth of the total tax revenues and 23.5 million job opportunities, employing about one 10th of urban workers. These numbers suggest FDI has contributed nearly one quarter to one third of China's GDP growth."(OECD, 2004) Barriers in the way of FDI in China: The Chinese government has applied a controlled competition culture which against the liberalisation provided by the WTO which lift most of the regulations from the trade & commerce (Yoost, 2005) Many assets in commercial and industrial sectors are state owned. This in turn gives rise to the problem of hidden state regulation imposition of the government on the foreign investors. This strengthens the view that China does not practice liberty in Business (Combie, 2000). Some of the sectors of economy are still protected by the government. Due to the situation the WTO commitments are not fulfilled which gives rise to local competition for foreign investors Factors attracting FDI in India: "India is a prime offshore location for low and high-tech activities, its low-cost, English-speaking and IT-savvy labour force, coupled with a large market potential, underpin global executives' improved outlook and investment confidence this year." (Rediff.com, 2003) The first set of factors which was involved in bringing the FDI to India was the improvement in technology, cheap labour, cost effective production of the goods, cheap and efficient supply chain. The Indian Government also has the cutting edge of Channelling the FDI in the right direction. They are attracting most of the MNEs towards India because at present the Chinese economy can provide them with all the suitable factors desired. Due to its increase in population India has become a growing and profitable market for most of the MNEs & products (Ahluwalia) The second set of factors, relating to SOEs, will change significantly and alter the market environment that foreign firms will face in India. Many if not the majority, of India's best SOEs in industries accessible to foreign investors have set up joint ventures with foreign companies. In the foreseeable future, as the number of SOEs in the national economy continues to shrink, India will facilitate the entry of private domestic firms. MNCs will tend to build up their own affiliates rather than look for Indian domestic partners. At the same time, they will face more competition from private Indian firms as their numbers increase. All of these will become attractive features of the Indian market. Foreign invested enterprises (FIEs) have provided an alternative to private entrepreneur ship because private Indian firms have been largely discriminated against. In the past 20 years, the highly efficient FIEs have contributed a great deal to the Indian economy. In 2002, even though FDI accounted for only one 10th of the gross fixed capital formation, FIEs contributed one third of the industrial output, one quarter of the value added, more than half of the exports, and nearly three quarters of the foreign exchange balances held in Chinese banks by corporations (Zhang, 2005). "The government of India eliminated export quotas as part of its effort to double Indian exports to more than $80 billion by 2007. India is the largest cotton cultivating country. The country has vast reservoir of scientific talent, established pharmaceutical industry, diversity of population and unique natural resources. Key to India's development of biotechnology is the need for a science-based, rules-based regulatory approach, which is the best way to attract private sector investment." (Larson, 2002) The major empirical conclusions of this paper are: (1) Much of the measured trade effect is through FDI rather than cost, as the theory of FDI would indicate, and that studies which concentrate on cost as the channel significantly understate the extent of such expansion. (2) On the whole bilateral country level, outward FDI has a larger predicted impact on China's exports than does inward FDI. On the other hand, inward FDI is found having a larger predicted impact on China's imports than does outward FDI. (3) There is much cross-regional variation and differences in the patterns of FDI-trade links. Regarding to the impact of inward FDI on Chinese trade, FDI is found to boost both export and import growth in Asia, Europe and Oceania. As far as outward FDI is concerned, a unanimous complement link between FDI and trade exists only for Asia, and Africa. (Yong, 2003) It must be noted that a lot of the policies implemented by the NICs may not be workable for other developing countries due to commitments to WTO Agreements. In the Indian example for instance, it is evident that government subsidies through the giving of credit at lower rates than what pertained in the commercial sector, aided investments in export-led manufacturing products. Up until the coming into force of the WTO Agreement in 1995, the international regulation of subsidies was not very strong. (Van de Bosche 2005) The NICs who adopted subsidy policies for export oriented manufacturers thus got away with these practices. Currently, the WTO Agreement on Subsidies and Countervailing Measure prohibits both import substitution subsidies and export subsidies. The leeway that NICs had to implement strong projectionist policies and aggressive export oriented policies may not be workable for other developing countries in the same way it worked for countries like Korea due to stronger international regulations under the WTO. The market liberalisation effects of the WTO principles of non-discrimination in trade policies - the most favoured nation and national treatment principles - may also work against developing countries from undertaking a more systematic opening of the economies to competition from foreign products. (Van den Bosche, 2005) Stiglitz (2005) for instance argues that China adopted a sequential opening of its economy to outside competition while adopting an export oriented policy. It can be realised that the Chinese experience is not different from the Korean experience in this regard - projectionist policies working alongside export oriented policies. Domestic industries and products were thus protected from outside competition till such a time when the domestic capacity was developed enough to be able to compete with other industries and products on the international market. While it is abundantly evident that the adoption of macroeconomic stability, market reforms, good governance and political leadership, and export oriented policies will aid developing countries to grow their economies; there are no absolute specific principles of economic growth. Developing countries will have to take these broad principles and customise them to their specific situations to facilitate the growth of their economies. References Ahluwalia, M, S., 'Understanding India's Reform Trajectory: Past Trends and Future Challenges', India Review, Volume (3), Issue (4). Available at http://www.indiareview.org/3-4.htm Beijing Times (2002). 'News analysis: FDI in China Keeps Growing', Saturday, July 20, 2002, retrieved from http://english.people.com.cn/200207/20/eng20020720_100031.shtml Bhagwati J. (1996). 'The Miracle That Did Happen: Understanding East Asia in Comparative Perspective' http://www.columbia.edu/jb38/East_asian_miracle.pdf (Accessed on 13/03/08) Combie, J., (2000). 'The East Asian Miracle- Did it Exist and, if So, is it Over' Lardy, Nicholas, (1998). 'China's Unfinished Economic Revolution', Washington: the Brooking Institution Larson, Alan P., (2002). 'Technology and Economic Development in India', Under Secretary for Economic, Business, and Agricultural Affairs, Remarks at the India Technology Forum 2002, New York Stock Exchange, New York April 5, 2002, As Prepared for Delivery, available at http://www.state.gov/e/rls/rm/2002/9507.htm Morrison, W. M., (2005). 'China's Economic Conditions, Foreign Affairs', Defense and trade, Congressional research service, The library of Congress, Retrieved from www.fas.org/sgp/crs/row/IB98014.pdf OECD, (2000). 'Main determinants and impacts of foreign direct investment on China's economy', Working paper on Investment, Number 2000/4, retrieved from http://www.oecd.org/dataoecd/57/23/1922648.pdf Hamilton, C., (1987) 'Can the Rest of Asia Emulate the NICs' The Third World Quarterly, 87(4) pp.1225-1256. Havrylchyk, O. & Sandra P., (2001). 'Foreign Direct Investment in China: Reward or Remedy' available at team.univ-paris1.fr/seminaire/2006_Poncet.pdf Van den Bossche, P. (2005) The Law and Policy of the World Trade Organisation, Cambridge: Cambridge University Press Xing, Y., (2004). 'Japanese FDI in China: Trend, Structure, and the Role of Exchange Rates', March 2004 retrieved from http://www.iuj.ac.jp/faculty/xing/papers/FDI_JC_xing.pdf Yoost, D. A., (2004),'People's Republic of China-Rewards, Risks and Recommendations', Orange County Business Journal, Vol. 27,No 17, retrieved from http://www.ocbj.com/ Yong L., (2003). 'The impact of FDI on trade': evidence from China's bilateral trade: Journal of the Academy of Business and Economics, Jan, retrieved from http://www.findarticles.com/p/articles/mi_m0OGT/is_1_1/ai_113563595 Zhang, Y., (2005). 'China must adjust its FDI policies if it wants to retain its global lead in inflows', Foreign Direct Investment, Financial Times Business, April 12, 2005, retrieved from http://www.fdimagazine.com/news/fullstory.php/aid/1211/Tips_for_the_top.html Read More