Asian Economic Community- Prospects and Major Issues

Dr. Tarun Das, Economic Adviser, Ministry of Finance, India.

1 Objectives and Scope

Asian economies display a number of contrasts. Asia includes two most populous
countries of the world viz. China and India, and also small economies like Bhutan and
Maldives with population less than a million and city-states like Singapore. It includes
the world’s three largest economies (viz. Japan, China and India) in terms of PPP-
adjusted GDP after USA. It also includes some of the poorest countries of the world–
Bangladesh, Cambodia, Mongolia, Nepal and Vietnam. Social development indicators
differ widely in the region. The objectives of this paper are:

• To examine prospects and challenges for Asian economies for achieving sustained
higher growth and poverty reduction
• To identify areas for policy orientations, institutional capacity building and
public-private partnership
• To suggest measures in promoting integration at the regional and global levels.

2. Present Economic Situation

(A) East and South East Asia

Despite serious financial crisis in some of the East Asian countries in 1997-1999, Asian
developing economies had shown remarkable economic vigor and dynamism during
1990-2000 by outperforming by a wide margin other developing regions and industrial
countries as a group. As regards industrial growth, performance by the developing
countries of Asia continued to outpace that in every other developing region and even the
industrialised countries by about 5 percentage points. The continued robust growth in
Asia was attributable to a number of factors such as widespread and sustained policy
reforms in industry, trade and financial sectors and continued surge of foreign capital
flows to these countries.

The best performers during 1990s have been in Asia. China’s growth has been
particularly spectacular, with real GDP growing at 10.3 percent a year and real per capita
income at 9.2 percent during 1990-2000. Building on past investments in human,
physical and institutional capital, continual high growth was the result of an ambitious,
comprehensive and sustained reforms programme. There were continual liberalisation of
agriculture, redirection of savings to the provinces, removal of price controls, gradual
liberalisation of external trade, revamping of the tax and financial systems, and
conversion of economic zones into attractive manufacturing platforms for export.

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 Table-1 Growth of output in selected Asian countries in 1980-1990 and 1990-2000
Country GDP growth GDP growth Agriculture Industry Manufacture Services
Per annum Per annum Growth pa Growth pa Growth pa Growth pa
1980-1990 1990-2000 1990-2000 1990-2000 1990-2000 1990-2000

China 10.1 10.3 4.1 13.7 13.4 9.0

India 5.8 6.0 3.0 6.4 7.0 8.0
Japan 4.1 1.3 -3.2 -0.4 0.5 2.5
World

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Low & middle income 3.5 3.5 2.2 3.7 5.7 4.1
East Asia & Pacific 7.9 7.2 3.1 9.3 9.9 6.4
Europe & Central Asia .. -1.5 -2.3 -3.8 .. 1.6
Latin America & Carib. 1.7 3.3 2.3 3.3 2.6 3.4
Mid. East & N.Africa 2.0 3.0 2.6 0.9 3.8 4.5
South Asia 5.6 5.6 3.1 6.2 6.6 7.1
Sub-Saharan Africa 1.6 2.5 2.8 1.6 1.6 2.6
High Income 3.3 2.5 0.0 0.7 .. ..
World 3.3 2.7 1.4 1.5 .. 2.9

Table-2 Structure of Demand in selected Asian economies in 1990 and 2000

Country Household final General govt. Gross Domestic Exports of goods Imports of goods Gross Domestic
consumption consumption Investment and services and services Savings
expenditure expenditure % of GDP % of GDP % of GDP % of GDP
as % of GDP as % of GDP
1990 2000 1990 2000 1990 2000 1990 2000 1990 2000 1990 2000
China 50 47 12 13 35 37 18 26 14 23 38 40
India 66 65 12 13 25 24 7 14 10 17 22 21
Japan 53 56 13 16 33 26 10 10 9 8 34 28
World
Low & middle income 60 60 14 14 26 23 21 31 20 29 26 26
East Asia & Pacific 54 54 11 11 35 30 26 42 26 37 35 35
Europe & Central Asia 55 58 18 16 28 21 23 44 24 39 26 26
Latin America & Carib. 65 66 13 15 19 20 14 17 12 18 21 19
Mid. East & N.Africa 57 51 20 18 24 20 33 38 35 28 23 30
South Asia 69 68 12 12 24 23 9 15 13 18 20 20
Sub-Saharan Africa 66 66 17 17 15 17 27 32 26 32 16 17
High Income 59 61 18 17 23 22 20 22 20 22 24 22
World 59 61 17 17 24 22 20 23 20 23 24 23

Policies for growth dynamism in East and South East Asia can be summarized as:

 A trinity of openness to trade, high investment and high savings rates

 Export-oriented investment-led growth
 Relatively outward-looking development policy.
 “Catch-up type” economic growth.
 “Virtuous circle” of economic development
 Strong economic role for the private sector

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The mechanism that contributed the high growth of the Asian economies in these years
can be summarised as export-oriented investment-led growth supported by extremely low
production costs. As judged by ratios to GDP, investments and exports together made a
much higher contribution to growth in Asia than in the other regions. Asian economies
achieved high economic growth by introducing capital and technology from advanced
countries, while enjoying the benefits of the huge markets that these advanced countries
offer. In other words, the Asian economies are typical examples of “catch-up type”
economic growth.

Rapid growth in intra-Asian trade was accompanied by rising FDI. The traditional focus
of foreign investment by Asian companies in financial sector and real estate of industrial
countries was augmented by rapid growth in investment in manufacturing, primarily in
South-east Asia. The changing pattern of capital flows was partly due to the changing
cost structure in the Asian economies as wages and other costs were rising rapidly in
Japan and the NIEs. It was also indicative of the movement towards higher value added
and more technologically intensive activities in these economies.

The process of rapid growth in output and intraregional trade and investment in Asia is
sometimes referred to as a “virtuous circle” of economic development. Foreign capital
inflows were the result of favourable policy environment, sustained industrialisation,
trade expansion and overall economic growth. This process is gradually helping to
internalise Asian growth and to reduce Asia’s vulnerability to external shocks.

During 1990s, the “virtuous circle” evolved rapidly primarily due to the structural
adjustment process in Japan subsequent to the sharp appreciation of the yen following the
Plaza Accord. Japan’s growth became increasingly “domestic demand led” and it had
been sustaining rapid export growth of other Asian countries. More recently, such a
process occurred in the NIEs as well, fueling further intra-regional trade and investment.
Rapid structural adjustment and shifting comparative advantage from Japan to the NIEs
and further to the Southeast Asian countries due to rising wages and factor prices
contributed significantly to Asia’s dynamism. South Asia, which depended more on the
agriculture sector, was initially left out of this process. But the situation changed in
recent years, as these countries liberalised trade and investment regimes gradually and
cautiously. South Asia achieved an average growth rate of 5.6 per cent a year during
1990s, which was regarded as a “lost decade” for many other regions of the world.

(B) South Asia

South Asia is a region full of contrasts. On the one hand, it has vast economic potential
due to its large market space measured by the size of its population, emerging middle
class and rising purchasing power. Its bio-diversity is an immense wealth, and mineral
and water resources are plenty. The region is endowed with a large pool of skilled and
semi-skilled manpower. It achieved an average growth rate of 5.6 per cent a year in
1990s, which was regarded as a “lost decade” for many other regions of the world.

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On the other hand, South Asia is characterised by widespread poverty and unemployment
and low levels of living. While accounting for a fifth of the world’s population, South
Asia is also home to nearly half the world’s poor. It has lower life expectancy than any
other region except Africa, high infant mortality rates, high rates of malnutrition and low
levels of literacy (except Maldives and Sri Lanka).

The share of South Asia in world trade is negligible being less than one per cent. The
composition of South Asian trade reveals concentration of exports in labour-intensive
products like textiles, clothing, gems and jewelry, Imports consist of mostly crude oil,
petroleum products and capital goods.

(c ) Broad lessons of Asian development

The broad lessons of development during the past decade are that countries with more
market-friendly policies and outward-looking strategies do better both in generating
growth and reducing poverty. While there was general focus on the need of reforms, the
pace had been uneven due to mainly political economy issues. Recent progress was most
visible in reforms in privatisation, industrial, trade, external, fiscal and financial sectors.

3. Trend of Sectoral Shares

In East Asia and Pacific as a whole, the shares of industry, manufacturing and services
increased in 1990s at the cost of agriculture whose share declined by 7 percentage points.
For South Asia as a whole, the share of services in GDP improved in 1990s at the cost of
all other sectors. In all the individual countries, agricultural share declined, while
industrial share increased in Bangladesh, Bhutan, Nepal and Sri Lanka.
Table -3: Structure of output in selected Asian countries in 1990 and 2000

Country GDP GDP Agriculture Industry Manufacture Services

billion US$ billion US$ % of GDP % of GDP % of GDP % of GDP

1990 2000 1990 2000 1990 2000 1990 2000 1990 2000
China 355 1080 27 16 42 51 33 35 31 33
India 317 457 31 25 28 27 17 16 41 48
Japan 3052 4842 2 1 39 32 27 22 58 66
World
Low & middle income 4404 6561 16 12 38 35 23 23 46 54
East Asia & Pacific 927 2059 20 13 40 46 28 32 40 41
Europe & Central Asia 1253 942 17 10 44 35 .. .. 39 57
Latin America & Carib. 1133 2001 9 7 36 29 23 21 55 64
Mid. East & N.Africa 401 660 15 14 39 37 12 14 47 48
South Asia 405 597 31 25 27 26 17 16 43 49
Sub-Saharan Africa 298 323 18 17 34 30 17 14 48 53
High Income 17414 24927 .. .. .. .. .. .. .. ..
World 21817 31493 7 5 36 31 .. 22 57 64

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 4. Manufacturing Value Added

Asian developing countries improved their position in manufacturing value added

although their share in population declined in 1990s. Their progress was significant in
production of food products and beverages, tobacco, textiles, leather and footwear, wood
products, paper, and rubber and plastic products. China has significant share in world
trade in exports of toys and sporting goods, footwear, travel goods, knitted outer and
under garments, apparel and clothing, textiles, and radios, watches and clocks.

Table-4-A Share in World MVA Table-4-B Share in Developing Countries’ MVA

Year Developed Developing Country groups Share in MVA Share in population
Japan Total South & Total 1985 2001 1985 2001
East
Asia
China 13.3 30.2 29.3 26.4
1980 13.6 85.5 5.2 14.5 Africa 6.2 3.9 13.7 15.7
1985 15.4 84.5 6.6 15.5 Latin America 38.0 22.1 11.2 11.0
1990 16.8 83.1 8.8 16.9 South and East Asia 43.0 66.8 71.4 69.3
1995 15.8 78.7 13.4 21.3 West Asia & Europe 12.8 7.2 3.7 4.0
2000 14.1 76.3 15.7 23.7 Developing countries 100.0 100.0 100.0 100.0
2001 14.6 76.0 16.1 24.0 Least dev. countries 2.4 1.6 11.7 13.3

(a) Contribution of MVA to GDP

Share of MVA in GDP in 2000 was highest in South and East Asia at 30.4 per cent. China
had the highest share at 42.8 per cent followed by Korea (35 per cent), Malaysia (32.4 per
cent), Thailand (31.7 per cent) and Mongolia (30.1 per cent).

(b) Structure of manufacturing value added

In general, the shares of agricultural and traditional goods (such as food, beverages,
tobacco, textiles and clothing) in overall manufacturing value added had declining share,
while the shares of machinery, transport and equipment, chemicals or other products had
increasing share in GDP in 1990s. Agro-based sectors had significant shares in
manufacturing in Hong Kong, China, Indonesia, Philippines, Thailand, Bangladesh,
India, Nepal, Pakistan and Sri Lanka.

(c) Structure of merchandise exports and imports

Manufactures have predominant share in both merchandise exports and imports in all the
countries. Agricultural products and raw materials and primary goods (such as ores and
minerals) have significant shares in total merchandise trade in China, India, Malaysia,
Myanmar, and most of South Asian countries.

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 Table-5-A Composition of exports
Country Food Agrl. Raw Fruits Ores and Manufactures
% share Materials (% share) % share Minerals (% share) % share
1990 2000 1990 2000 1990 2000 1990 2000 1990 2000

Low & middle income 15 9 4 2 20 21 5 4 54 61

East Asia & Pacific 12 6 5 2 10 7 2 2 68 83
Europe & Central Asia .. 5 .. 3 .. 26 .. 6 .. 53
Latin America & Carib. 26 21 4 3 24 18 12 9 34 48
Mid. East & N.Africa 3 3 1 0 79 80 3 2 15 14
South Asia 16 15 5 1 2 0 4 2 71 80
Sub-Saharan Africa 13 17 3 4 28 28 7 8 20 36
High Income 8 6 3 2 5 4 3 2 79 82
World 10 7 3 2 8 8 4 3 74 78

Table-5-B Composition of imports

Country Food Agrl. Raw Fruits Ores and Manufactures
% share Materials (% share) % share Minerals (% share) % share
1990 2000 1990 2000 1990 2000 1990 2000 1990 2000
Low & middle income 9 8 4 3 11 12 4 3 70 71
East Asia & Pacific 7 5 5 3 9 14 4 4 73 72
Europe & Central Asia .. 9 .. 2 .. 9 .. 3 .. 65
Latin America & Carib. 11 8 3 2 13 10 3 2 69 78
Mid. East & N.Africa 19 18 3 2 6 6 3 2 68 70
South Asia 9 10 4 4 23 26 6 4 54 54
Sub-Saharan Africa .. 10 .. 2 .. 14 .. 2 .. 68
High Income 9 7 3 2 11 10 4 3 72 75
World 9 7 3 2 11 10 4 3 71 74

Table-6 Share of selected regions and developing economies in world

Manufacturing exports and manufacturing income in 1980 and 1997
Region/ economy Share in world Share in world
Manufacturing exports Manufacturing income
1980 1997 1980 1997
Developed countries 82.3 70.9 85.5 73.3
Developing countries 10.6 26.5 14.5 23.8
Latin America 1.5 3.5 7.1 6.7
South and East Asia 6.0 16.9 7.3 14.0
NIEs 5.1 8.9 1.7 4.5
Hong Kong, China 0.2 0.6 0.3 0.2
Republic of Korea 1.4 2.9 0.7 2.3
Singapore 0.9 2.6 0.1 0.4
Taiwan, China 1.6 2.8 0.6 1.6
ASEAN-4 0.6 3.6 1.2 2.6
Indonesia 0.1 0.6 0.4 1.0
Malaysia 0.2 1.5 0.2 0.5
Philippines 0.1 0.5 0.3 0.3
Thailand 0.2 1.0 0.3 0.8
China 1.1 3.8 3.3 5.8
India 0.4 0.6 1.1 1.1

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 (d) Export dynamism of Asian developing countries

The share of developed countries in world-manufactured exports fell from 82 per cent in
1980 to 70 percent in 1997. Their share in world manufacturing income also declined
from 85 per cent to 71 per cent during this period. Among the developing countries, it
was mainly the East and South East Asian economies that improved their share in both
world manufacturing income and manufacturing.

ASEAN have comparative advantages in computers, office machines, optical

instruments, and telecommunications, audio and video equipment, automobiles, while
NIEs have comparative advantages in electronic and electrical goods. Textiles and
labour-intensive manufactures, in particular clothing, are important in China, India, the
Philippines, the Republic of Korea, Taiwan, Thailand. Primary commodities are
important in India, Indonesia, Malaysia, the Philippines and Thailand.

5 Role of Small and Medium Enterprises (SMEs)

SMEs play an important role for employment generation and poverty alleviation in Asian
economies. SMEs account for 95 per cent of establishments in Bangladesh, 98 per cent in
Thailand, 93 per cent in Malaysia, 70 per cent in Indonesia, 80 per cent in the Philippines
and 99 per cent in Japan, Korean Republic and China.

In India, SMEs account for 93 per cent of employment, 40 per cent of the manufacturing
output, 45 per cent of manufacturing exports and 40 per cent of total exports. In Japan,
SMEs account for 78 per cent employment, 99 per cent of all business establishments, 52
per cent of manufacturing output and exports, 64 per cent of wholesale business and 78
per cent of retail sales.

In Korean Republic, SMEs account for 99 per cent of all manufacturing enterprises, 69
per cent of total employment, SMEs in Taiwan account for 90 per cent of enterprises and
65 per cent of exports. In China SMEs account for 99 per cent of total enterprises, 78
per cent of employees, 75 per cent of urban job opportunities, 64 per cent of industrial
turnover, 52 per cent of corporate profits and 52 per cent of fixed assets held by industry.

6 External Environments

Developing countries face significant barriers for exports of agro-based products.

Preferential market access to EU and USA is restricted to the poorest countries. In
Canada and the USA, peak tariffs are concentrated in textiles and clothing. In the EU,
peak tariff rates exist in agriculture, footwear and food products. Developing countries’
manufactured exports encounter high tariffs, and Increased contingent forms of
protection, such as anti-dumping action and labour and environmental standards. GATT,
GATS, TRIMS, TRIPS, ISO standards are generally stringent. Various technical and non-
tariff barriers for exports of SSI products to advanced countries on grounds of
environment, health, labour standards etc.

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 8. Role of Special Economic Zones (SEZs)

Ireland is credited with establishing the first modern EPZ in the world with the
establishment of the Shannon Export Free Zone in 1955. The first developing country to
set up an EPZ was India with the creation of the Kandla Free Trade Zone in 1965. More
than 200 EPZs in 60 developing countries existed in 1996 compared with just eight
EPZs in 1970 and 55 EPZs in 1980. Nearly half of EPZs were located in Asia. There was
tendency to breed a distinct type of industrial monoculture, either in textiles and
garments or in the electronics industry. In general, one dominate industry in each
country such as textiles and garments industry in Bangladesh, China, Dominican
Republic, Egypt, India, Jamaica, Mauritius and Sri Lanka. Electronics industry in
Barbados, Brazil, Republic of Korea, Malaysia, Mexico and Taiwan, China.

9. Role of Foreign Investment

FDI acts an engine of growth and embodies a package of important sources of capital,
technology, and managerial, marketing and technical skills. Most of the Asian countries
have adopted an open door policy for FDI. Traditional factors influencing FDI include
domestic market potentials, fiscal incentives and low cost of labour. Impediments to FDI
include restrictions on repatriation of equity and profits, sectoral protection, ceilings on
foreign equity, licensing procedures, performance requirements and restrictions on
employment of foreign staff. The formation of regional trading groupings (such as
NAFTA, ASEAN, SAARC etc.) has an important impact on the FDI pattern. In the
foreseeable future, countries outside the regional groupings might be at a disadvantage in
attracting FDI. There is general complain from SMEs associations and federations that
SMEs face an uneven playing field due to laws and regulations.

10. Development of Skill and Technology

Japan primarily relied on licensing, technical collaborations and imports of capital goods
as channels for technology transfer from the West. The Republic of Korea also followed
a path similar to that of Japan and Malaysia to enhance technological capability. The
Chinese case is an example that has met with considerable success in technological
upgradation of its small-scale sector through transfer of technology. India has built a
wide array of institutions to support the development and diffusion of industrial
technologies.

Most of the Asian developing countries do face obstacles to technology transfer due to:
(a) Poor infrastructure and utilities;
(b) Strict laws and regulations on foreign firms, and inefficiencies in the
implementation of deregulation policies;
(c) Shortage of trained technical and managerial workforce;
(d) Weak local supporting industry in the production of parts and components;
(e) Low rate of diffusion of technology to the rest of the economy except for FDI;
(f) High cost of technology agreements; and
(g) Transfer of technology, which is not environment friendly.

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 10. Specialized financial institutions

In industrialized countries, besides commercial banks there are large numbers of

specialized financial institutions such as factoring companies, leasing companies, trade
credit suppliers, mortgage finance companies and micro-finance Institutions. In most of
the Asian developing countries there are very few leasing or trade credit entities.

11 Role of International Organisations

ESCAP, United Nations has done considerable progress in exchange of national

experiences, promotion of endogenous capacity building and research on sectoral
restructuring in member countries. Asian and Pacific Centre for Transfer of Technology
(APCTT) has also contributed significantly for establishment of Environmentally Sound
Technologies (ESTs), Technology fairs and promotion of ESTs and Technology Bureau
for Small Enterprises (TBSE). However, there is scope for further improvement.

Role of World Trade Organision (WTO)

Successive rounds of multilateral negotiations have lowered average levels of protection.

Industrial countries generally set applied tariff rates close to their tariff binding. In
contrast, most developing countries bind their tariffs at levels well above their applied
rates. Main market access barriers include:
• Import tariffs and other price-based border measures
• Non-tariff border measures:
 Quantitative restrictions;
 Contingency measures (antidumping, countervailing, safeguard measures);
 Technical barriers to trade (regulations, standards, testing, certification);
 Sanitary phytosanitary measures (SPS) (food, animal and plant health and safety).
• Domestic policy measures
• Developing countries generally face higher barriers to their exports than industrial
countries.

12 CONCLUSIONS AND RECOMMENDATIONS

12.1 Macro-economic Policies

Most of the Asian economies are undertaking credible reforms in trade, industry, financial
and fiscal sectors. Sound macro-economic management is the first defense against any
internal and external shocks. Countries must maintain the tempo of reforms and
integration with the global economy. They should put special emphasis on infrastructure
and human resource development, good governance and establishment of competent and
committed bureaucracy, strengthening legal, institutional and regulatory system for
public-private partnership.

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 12.2 Role of FDI

The Asian market has high potentials for small and medium-sized TNCs. Countries need
to maintain their “open door policy”. However, instead of focusing on fiscal concessions,
greater emphasis should be placed on creating an environment conducive to long-term
development of efficient and viable industries.

Fiscal incentives and investment environment

In 1960s the International Chambers of Commerce argued strongly that developing

countries should attract foreign investment with tax ‘holidays’ and other incentives such
as subsidized credit and privileged access to protect domestic markets. The International
Monetary Fund (IMF) favoured the suggestions, but advised that incentives should be
extended to all investors. Many developing countries began to compete for foreign
investment with various incentives. But, a considerable body of evidence showed that
these incentives failed to attract foreign investment. Only those ‘fly-by-night’ firms that
move from country to country, exploiting tax holidays, are attracted by these incentives,
but they exit as soon as fiscal incentives expire or are withdrawn. An efficient and
equitable tax system with internationally competitive taxes and duties is far more
conducive to long run investment inflows than incentives.

Inflows of foreign direct investment are determined by a complex set of economic,

political and social factors and that investors look beyond the array of investment
incentives (in particular fiscal incentives) offered. Performance requirements and various
restrictions and regulations act as disincentives to foreign direct investment and often
serve to offset the positive effects of investment incentives. What matters most for the
foreign investors is their ability to reduce business risk, increase profitability to repatriate
capital and investment income.

Foreign investors are also attracted by market opportunities (domestic and exports), a
clear legal and institutional set up, administrative speed and efficiency, efficient
infrastructure services and above all by liberal economic policies and stable macro
economic environment.

Although some transnational firms desire to have wholly or majority owned branches or
subsidiaries, it is widely held that some form of joint venture with a host country partner
is preferable because of the experience and insights local partners bring. Local partners
are particularly effective in managing labour and dealing with regulatory issues.

Foreign investors are also moving into joint ventures with public enterprises, preferring
corporatised ones. Foreign investment with its capital, technology and management
package can make a considerable contribution to the vast investment required for
infrastructure. Existing plants can be made more productive and new facilities can be
provided, often on the BOT/ BOO principles, but governments and investors are still at
the process of learning and experimenting.

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Low wage rates and low production costs

From the viewpoint of the advanced countries, India is an extremely attractive place for establishing
production bases because of its extremely low production costs and huge domestic market. Like China,
India has large and low-income farming populations, and also a large pool of technical and skilled labour
implying the existence of a potentially huge supply of labour for the manufacturing and the services
sectors. This reserve should enable manufacturers to secure an adequate labour force. Most of the Asian
economies are going through a stage of demographic transition. Younger people would make up a larger
proportion of the Asian population and can be expected to play a major role in ensuring a smooth supply of
labour in the future. Besides low labour costs, various other production costs such as real estate rents,
transport, communications and electricity charges are lower in developing countries than in the advanced
countries.

12.3 Role of External Trade

(a) Trade and Technology Policy

World trade has been growing, on average, faster than world income. General trends are:
First, countries that have not been able to move away from primary commodities have
been marginalised in world trade. Second, most developing countries that have been able
to shift from primary commodities to manufactures have done so by focusing on
resource-based, labour-intensive products. Third, a number of developing countries have
also experienced a rapid rise in skill- and technology-intensive products. Fourth, NIEs
have seen sharp increases in their shares in world manufacturing exports. Fifth, with the
exception of this last group, exports of developing countries continue to be concentrated
on resource-based, labour-intensive products.

A simultaneous drive by a large number of developing countries to expand their existing

exports and to increase competition among them for attracting FDI in labour-intensive
products could be self-defeating. We need a number of measures. First, improved market
access and faster growth of markets for labour-intensive manufactures in more advanced
economies. Second, the middle-income countries should diversify their trade and move
out of labour-intensive manufactures and create space for lower-income countries.
Finally, the developing countries themselves should expand their domestic markets by
overcoming their deep-seated problems of unemployment and poverty.

Industrial upgrading in advanced developing countries would allow new players to take
over labour-intensive activities in line with the "flying geese paradigm". Economic
policies on trade and technology of large economies such as Japan, China, India and
Indonesia are crucial for development of trade in Asia. Large countries such as China and
India can rely less on foreign markets for their industrialization.

(b) Role of export promotion policies

Export promotion schemes have been a critical part of East Asia's economic success and
merit special consideration. These schemes consisted of mainly duty exemption and
drawback systems. The experiences of Korea, Taiwan, India and Bangladesh indicate that
one of the key requirement for the success of duty exemption or drawback should be the
development of a pre-tabulated and published matrix of input-output co-efficients.

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The other key measures include supply of export credits to exporters and modernisation
of Customs Administrations. India, Taiwan, Indonesia, Malaysia and Thailand have
efficient export support instruments including tax incentives, duty drawbacks and
exemptions, and export and investment finance for exporters.

(c) Free Trade Zones

Five broad conclusions can be drawn from the Asian experience for development of
export promotion zones:

• FTZs can be a useful instrument to the development of export-oriented industry.

• FTZs should be a component of a broader outward-oriented development strategy.
• FTZs should have proper infrastructure and linkages with mainland.
• An appropriate policy framework must accompany FTZ development.
• Pricing of land in such zones should not be subsidized.

12.4 Role of agro-based and resource-based SMEs

In many developing countries, agro-based and resource-based SMEs contribute

significantly to GDP growth, employment generation and poverty alleviation.
But, SMEs face a number of problems and constraints: lower productivity and outdated
technology, lack of skill labour and managerial skill, constraints on infrastructure, low
economies of scale, lack of modern marketing, increased capital intensity, high cost of
domestic credit, lack of foreign investment, increased internal and external competition
and high degree of mortality.

A wide range of opportunities can be seized by SMEs through regional economic co-
operation and information networks, technology upgradation, provision of timely and
adequate finance, adequate backward and forward linkages, vertical expansion of the
SMEs, dispersal of SMEs as in China and India and removal of tariffs and non-tariff
restrictions.

12.5 India, China and Japan

Economic co-operation among three giant economies in Asia viz. India, China and Japan
can create enormous economic opportunities and spill-over effects on other developing
countries by creating demand and employment opportunities. Japan has enormous capital,
good corporate governance, high productivity, modern technology and efficient transport
and communications. As compared to China, India has an advantage in terms of a
democratic set-up, resilience of the economy, rule of law, market economy, better legal
and financial systems and English language proficiency. As compared to India, China has
advantage in terms of higher savings, investment and economic growth, disciplined,
better-educated and healthier work force.

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India is looking at China to learn how to achieve higher growth without loosing
democracy and freedom. India can learn from China regarding clarity in direction of
reforms and sincerity in implementation. China is looking at India to know how to move
towards market economy and privatisation without loosing growth. China can learn from
India regarding creativity, innovations and transparency. Both India and China can learn
from Japan regarding better work culture, corporate governance and public-private
partnership in infrastructure development.

12.6 Demographic Transition

Most of the Asian economies are going through demographic transition with fall in
fertility rates, increase in expectation of life, rise in the proportion of the working group
in total population and the fall in dependency ratio. The IMF has concluded that the
national savings, investment and growth rates vary directly with the proportion of people
in the middle age brackets. Fiscal positions also improve. But subsequently, the
proportion of the working group will fall and the dependency ratio would rise and these
effects go into reverse. The impact of demographic transition over next three decades is
significantly negative in Japan and Western Europe, modestly negative in the US,
emerging Asia and Latin America and positive in the Middle East and Africa. Reforms
are necessary in pension, provident and insurance funds and old age social security.

12.7 Participation at Regional Level

(a) Regional Economic Co-operation

The challenge lies in the extension of regional dynamics and the growth pattern to
include newly emerging countries such as China and India.

(b) Role of ESCAP

ESCAP and its regional institutions such as APCTT, RNAM, and CGRPT made
significant contribution, and could do more in the future in the areas of FDI related
technology transfer and export promotion, multileveled bilateral cooperation and
cooperation at sub-regional level. In the ESCAP region, ASEAN and SAARC are major
subregional associations. It is hoped that discrimination against non-member countries
will not intensify.

(c) Role of NGOs and industry and trade associations

NGO and industry, trade and business associations can play significant role in
organization of seminars, workshops, and conferences, strengthening the existing
information networks on technology transfer, harmonization of national policies,
establishment of national and then regional databases on imported technologies and an
information-sharing network, provision of a suitable form of linkage between research
institutions, technology brooking agencies, and concerned government departments and

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strengthening the cooperation between APCTT, CGRPT, RNAM, ESCAP secretariat; and
between ESCAP and other international organizations.

12.8 Multilateral level actions

WTO can play major role by phasing out by all countries of tariff peaks and multiplicity
of rates, more technical assistance to implement product and process standards, improved
market access to developed countries for labour intensive products, liberalization of
imports, especially for agricultural products and textiles and clothing, can generate large
benefits for developing countries in terms of incomes, exports and employment. It is
desirable to accelerate the removal of quotas on textiles and clothing imports. It is also
desirable under the Doha round negotiations to substantially lower tariffs on T&C trade,
in both industrial and developing countries. In order to prevent anti-dumping action from
taking the place of quotas and tariffs once these are liberalized, trade remedy rules should
be reviewed. In agriculture, OECD countries must de-link agricultural income support
from production and coordinate reforms of subsidy and tariff regimes. Reform of market
access in developing countries themselves would contribute as much to a development-
oriented multilateral trading system as OECD policies. Distribution effects of reforms
should be recognized and dealt with properly. Food security issues and the concerns of
poor countries must be addressed as part of overall poverty-reduction and development
strategies by the multilateral organisations like the IMF, World Bank, ADB and UNDP.

12.9 Technical Assistance

The World Bank, IFC, Asian Development Bank, UNDP, UNICEF, UNIDO and
UNCTAD are engaged in the provision of technical assistance. Although the experience
with technical assistance have been found to be very valuable, there is scope for
improvement in the following fields:
• Promotion of regional cooperation in human resource development, R&D, S&T
development, technology blending, use of IT and computer training and facilities.
• Consultancy and training aimed at technology upgrading and skill improvement for
SMEs with special attention to rural areas, economically backward areas, ethnic and
minority groups, and women and young entrepreneurs.
• Regional technical assistance programmes on harmonisation of national and regional
policies on trade, tariffs, taxation, investment and business regulations.
• Promotion of technology management, evaluation, assessment and enterprises
cooperation for the blending of indigenous technology and imported technology.
• Improvement of the institutional machinery, administrative and legal framework with
a view to facilitating private investment including foreign investment.
• Advisory services for developing countries and LDCs to strengthen capital markets
and to attract foreign portfolio investment.
• Technical support for developing countries and countries in transition to upgrade their
institutional capacity to identify, design, negotiate, and implement schemes on
BOT/BOO/BOLT for infrastructure development.

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Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for
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