Newly Industrialized Countries - Essay Example

Table of Contents Introduction 2 Benefits of trade liberalization 2 Benefits of being a member of the WTO 3 Macroeconomic management 4 Importance of FDI 5 EO and IS strategy 6 Sustainable development 8 Conclusion 8 References 10 Introduction Newly industrialized countries (NICs) are those who have not yet reached the First World status where the First World refers to those democracies that are technologically advanced and people have a high standard of living. Growth and development takes place in NICs due to various factors. Basically there is a switch from agricultural to industrial economy, they start attracting foreign direct investment (FDI), they adopt an open market economy, and they start with labor-intensive small manufacturing units, their governments become active and most importantly, the macroeconomic policies play an important role. The NICs face a challenge as to make their development sustainable they need to manage the process of development efficiently. They also need to combat poverty, preserve natural resources, and promote rural development. Not all decisions take by such NICs have proved to be right in the long run and the other developing countries have lessons to be learnt if they are seeking to grow faster. Benefits of trade liberalization Countries can either opt to have an import-substitution strategy or export-oriented strategy. The first generation NICs included Spain, Portugal, Greece, Yugoslavia, Brazil and Mexico, Hong Kong, South Korea, Singapore and Taiwan. These countries started to lose their comparative advantage as unskilled labor became scarce and wage rates started to rise. This implies that trade plays an important role in helping the developing countries to take off. Stiglitz (2000) suggests that trade liberalization must be balanced in agenda, process and outcome. Trade liberalization should concentrate not only in sectors that developed countries have comparative advantage, like financial services, but also in which the developing countries have special interest like agriculture and construction services. The developing countries have a disadvantage in participating in negotiations. Not having a representation in WTO serves as a disadvantage. Developing countries face greater volatility and opening to trade contributes to that volatility. Developing nations have persistent problems of high unemployment. Trade liberalization is necessary but not sufficient to reap full benefits from integration into world economy. The costs of liberalization in developing nations are higher. Thus, the developing countries seeking to grow fast should ensure that they have a comprehensive approach in liberalizing trade. Benefits of being a member of the WTO After the Uruguay Round the developing countries expected to benefit out of agriculture and textiles. Domestic subsidies increase in the OECD countries instead of declining. USA and Europe preach free trade but they subsidize agriculture which ruins the chances of farmers in the developing countries from attaining self-sufficiency in food. This demonstrates how the rich nations become richer and over which WTO has little control. The developing nations should not take advantage of such subsidies by imposing countervailing tariffs on agricultural imports. The developing countries need to spend their efforts in protecting their known markets rather than forcing open markets of other countries (Daly, n.d.). In the textiles and clothing sector, very few items have been taken off the quota list. US announced that it would impose tariffs on steel imports to protect its domestic steel industry. The WTO being an association of 149 nations was formed to attempt to reduce the trade barriers among themselves. As such, protests, discord and disputes arise, it has to be from nations or members who have been adversely affected by free trade (Hammond & Grosse, 2003). In the larger interest of the nation, members may have to at times lose certain benefits when the rules are formed. WTO requires certain members to eliminate certain policies that interfere with free trade but this poses a threat to those nations that enjoy an independent framework. For instance, even though China was granted accession to WTO in 2001, China’s government, businesses and people have not yet regulated their behavior according to the norms of the international market (Junglian, 2006). China must abolish laws and rules that do not conform to WTO rules and establish regulations that promote fair competition. It has to stop granting special considerations to some foreign companies and treat all businesses as same. Africa was not allowed to manufacture the drugs for AIDS indigenously but when antibiotic for anthrax was required, the US Administration asked Bayer to slash the prices or they would be forced to buy a cheaper generic version (Singer, p71, 2004). The developed nations were embarrassed with this show of double standards and accepted WTO’s declaration that the member nation could determine emergencies and take effective measures. This issue shows how sharply trade agreements can intrude into the most vital decisions a government can face. WTO justifies that when adjustments cannot be made, members have the option to resist demands to open the relevant sections of the market (WTO-OMC, 2003). Macroeconomic management Malaysia, Indonesia and Thailand were categorized by the World Bank as newly industrializing economies (NIEs) and each of these countries had adopted strategic macroeconomic management disciplines (Ryan, 2000). Rather than allow their country to be ‘colonized’, by foreign capital, they preferred to take their own initiative. The state played a key role in each case by way of mobilizing resources, supporting technology transfer, and inviting Foreign Direct Investment from developed countries. They also received support from International economic agencies like the IMF, World Bank, ADB, and the WTO. The central banks in these countries also guided the commercial banks to extend loan to such projects. Once the projects reached a certain stage, they were handed over to private parties to develop further. Private firms were also given loans to develop entirely new industries. Thirty percent shrinkage of the gross domestic product in one year prompted one to reconsider the roles of the government, the market, and the industry (Barton, 2000). The economy grew because they mobilized on resources and initially they had an abundant supply of cheap labor. With technology along with FDI they became dependent on skilled, highly qualified and productive labor. China had been growing at a rate of about 9% for twenty years and there was a forecast in 1997 that its GNP would surpass the US sometime between 2005 and 2015 (Timesnet.asia). China was sucking in US$40 billion a year in overseas investment. The gap between the myth and reality soon revealed that China lacked in trained personnel and had an immature political structure. It was carrying a burden of bloated state firms. The developing countries have to be cautious not to give up agriculture and farming altogether and before attracting FDI they should have trained and qualified manpower. Merely technology and investment is not sufficient. Importance of FDI Turkey failed to attract FDI due to bureaucracy, corruption and red tape (Erkilek, 2003). Apart from this other economic reasons were increasing economic instability, lack of protection of intellectual property rights, lack of inflation accounting and internationally acceptable accounting standards. The legal structure was insufficient and the infrastructure inadequate. Political instability, internal conflicts, animosity towards foreign presence, fear of political domination was the non-economic reasons. Besides the structure of business in Turkey was predominantly family owned and closely controlled. Turkish administration was control-oriented rather than enforcement and service-oriented. Only when there was a change in the mindset Turkey could attract destination for FDI. This required a radical change in the mindset of the bureaucracy. Turkey now ranks seventh among the countries considering first-time investment in the next three years (Kearney, 2006). Italian investors rank Turkey number one for FDI investments, ranking the country ahead of India and China. While Turkey enjoys the 11th place in the banking sector among the telecom and utilities investors it ranks twelfth. It is also considered a viable platform for the automobile sector in Europe. General Motors (USA) plans to restart its productions facilities in Turkey while Hyundai is expanding its base in Turkey to meet the growing demand in Europe. Thus to grow fast, an open economy and stable political environment is essential. EO and IS strategy In the post-war period the NICs including Korea, Hong Kong, Singapore and Taiwan achieved high standards of living and steady economic growth through structural reforms and export-oriented strategies based on macroeconomic stability (Zdunic, 1997). Import substitution and protection of local industries failed to stimulate growth as also happened in the case of Turkey till it allowed inward FDI to flow. Korea too had to modify its growth strategy following the Organization of Petroleum-Exporting Countries (OPEC) crisis of 1973-74. They had to lower the tariffs and reduce import restrictions. The income tax benefit for exporters was discontinued in favor of preferential export credits and long-term export credit facilities. Capital-intensive industries were favored but these dampened the export growth increasing exchange rate overvaluation aggravated the reduced access to funds for traditional export industries. When Korea returned to an all-out export-oriented policy did it experience phenomenal growth and entered the category of upper-middle-income developing countries. Macroeconomic stability is essential as it means low inflation rates, manageable debts, and economic policies flexible enough to counter any macro-economic crisis that may arise. This can be achieved by careful management of inflation, budget deficits, external debts and exchange rates. Lessons learned from the NICs also demonstrate that outward-oriented policies prepare the country to overcome the effects of external shocks while reliance on external borrowing reinforces the adverse effects of these shocks. Domestic savings ratio in these NICs was high along with high levels of investment efficiency (Balassa, 1990). They also had high export-GDP ratios which was not dependent on the size of the country. Even though Brazil and Mexico have larger economies, Korea’s population and GDP are greater than Argentina’s. To produce locally there should be sophisticated industrial structure and such vertical specialization requires a large domestic market. Without a large domestic market economies of scale cannot be obtained. The intermediate products are highly capital intensive and the margin in such production is very small which can easily be squandered through poor organization of production. There should be no discrimination between exports and imports substitution. They did not engage in excessive borrowing. Sustainable development Other developing countries should also learn that these NICs have not received growth without a cost. Growth has been achieved at the cost of severe environmental degradation (Ciesin, n.d.). In Taiwan, the air and water pollution was so severe that it posed risks to human health. Industrialization and economic growth was give priority without concern for the environment. Most of the rivers are heavily polluted and less than 1% of the human waste receives primary sewage treatment. Excessive use of pesticides and fertilizers, emission of nitrogen oxide from motor vehicles are responsible for the high number of cases of hepatitis B and asthma on the island. In South Korea the tap water is contaminated with heavy metals and other pollutants and only one-fourth of the country’s sewage is treated. Crop yields on farms near factories have also been reduced and the industries in one area were asked to compensate the nearby farmers. NICs have also not paid due attention to the efficient use of energy and other natural resources. In Singapore and South Korea, commercial energy consumption per dollar of GNP is among the highest in the world. Hong Kong’s air quality has deteriorated with industrial growth and increasing energy use. Conclusion It is thus evident that weak financial institutions can create havoc on an economy and that strong financial institutions require strong government regulation as happened in the case of East Asian nations. It also demonstrates that liberalization should take place only with improvements in regulation and supervision. It only deepened the poverty in these countries. Rich countries play political pressure on developing countries while they excuse their own trade barriers and agricultural subsidies by citing ‘political pressures’. Growth requires open economy policy, export-oriented strategy, import substitution, and the minimum borrowings. There should be no discrimination between the EO and IS strategy. Political stability of the nations is also essential. While the NICs have been able to stabilize their population, control education, reforms have taken place, income disparities have reduced, inflation is low, macroeconomic stability is evident, but sustainable development requires development beyond the economic measure of growth. The other developing countries need to draw lessons from the experience of the NICs to stimulate growth and attain sustainable development. It is not enough to invest in human capital; environmental problems can hinder the ability to meet the needs of the future generations. 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T., (2005), FDI Confidence Index, Global Business Policy Council, 09 June 2007 Ryan, L., (2000), The “Asian economic miracle? unmasked The political economy of the reality, International Journal of Social Economics Volume 27 Number 7/8/9/10 2000 pp. 802-815 Singer, Peter One world : The ethics of globalization, 2nd edition. New Haven : Yale University Press, 2004. Stiglitz, J. E., (2000), Two Principles For the Next Round, or How to bring the developing countries in from the cold, Blackwell Publishers, 09 June 2007 Timesnet.asia, Sorting Myth From Reality, Picture Library, 09 June 2007 WTO-OMC (2003), 10 common misunderstandings about the WTO, 09 June 2007 Zdunic, L., (1997), Main lessons learned from structural reforms in the newly industrializing countries, 11 June 2007 Read More