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Promoting Resource-Based Export-Oriented SMEs for Employment Generation and Poverty Alleviation in Asia and Pacific

* _____________________________________________________________________

DR. TARUN DAS** Economic Adviser Ministry of Finance Government of India

January 2003 ____________________________________________________________________ ____ * Prepared for the International Trade and Industry (ITD) Division, ESCAP, United Nations, Bangkok as a background paper for the “Expert Group Meeting on Promoting resource-based Export-oriented SMEs for poverty alleviation in Asia and the Pacific”. ** The author would like to express his gratitude to ESCAP, particularly to the Director and Chief of the ITD Division for providing an opportunity to prepare this report and the Ministry of Finance, Government of India for granting necessary permission for writing this report. However, the paper expresses personal views of the author and should not be attributed to the views of the Government of India.

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Promoting Resource-Based Export-Oriented SMEs for Employment Generation and Poverty Alleviation in Asia and Pacific* _____________________________________________________________________
CONTENTS 1.1 Objectives and Scope of the Study 1.2 An Overview of the Study 1.3 Profile of Regions and Sample Countries (a) South Asia and SAARC (b) East and South East Asia 1.4 Structure of GDP and External Trade (a) Trend in sectoral shares in GDP (b) Structure of manufacturing value added (c) Structure of merchandise exports and imports 1.5 Export dynamism of Asian developing countries (a) Trend in export shares (b) Contribution of labour-intensive products to exports (c) Twenty most dynamic products in world trade 2 Resource based and agro based industries: Sectors’ main characteristics Definition and types of industries (a) Typology of industries (b) Distribution of world MVA for selected branches (c) Leading producing countries of agro and resource based industries (d) Concept of small and medium enterprises (SMEs) 2.1 Structure of the sector 2.2 Economic significance (a) Contribution to GDP (b) Contribution to employment (c) Contribution to productivity 2.4 Issues at stake (a) Prospects of agro based and resource based SMEs (b) Major issues for consideration (c) Availability of skilled labour and modern technology (d) Availability of raw materials and credits (e) International barriers on trade (f) Role of multinationals and foreign investment (i) international production networks (ii) production sharing and preferential market access (g) Environment and sustainability

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3 Rationale for development and contribution of agro-based and resource-based industries to poverty alleviation Rationale for development of agro and resource based SMEs 3.1 Growth and poverty alleviation 3.2 Employment generation 4 Economic Policies and strategies for Development of agro-based and resource-based industries 4.1 Industry development formulation 4.2 Business environment (a) Licenses and regulatory system (b) Fiscal and investment incentives (c) Export promotion schemes (d) Role of special economic zones (SEZs) (e) Foreign investment policy 4.3 Development of skills and technology 4.4 Access to capital (a) Lending by commercial banks (b) Specialised financial institutions (c) Role of micro finance 4.5 Infrastructure and information technology (a) Cluster development (b) Trading houses (c) Networking (d) IT and E-Commerce 5 Role of International Organisations for the development Of agro-based and resource-based industries 5.1 Role of World Bank, ADB and IMF for policy planning 5.2 Institutional capacity building (a) Role of ESCAP (i) Exchange of national experiences (ii) Promotion of indigenous capacity building (iii) Research on sectoral restructuring (b) Asian and Pacific Centre for Transfer of Technology (APCTT) (c) Environmentally sound technologies (ESTs) Technology Fairs and Promotion of ESTs Technology Bureau of Small Enterprises (TBSE) Mechanism for Exchange of Technology Information (METI) 5.3 World Trade Organisation (WTO) (a) Role of WTO (b) WTO and market access (i) Import tariffs (ii) Agreement on Agriculture

(i) (ii) (iii)

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6 Conclusions and Recommendations 6.1 Role of Agro-based and Resource-based industries 6.2 National Level Policies 6.3 Development Strategy for the Agro-based and Resource-based industries (a) Macro economic policies (b) Fiscal incentives (c) Technology development (d) Infrastructure and human resource development (e) Competent and committed bureaucracy (f) Legal, Institutional and Regulatory System 6.4 Role of External Trade (a) Trade and techniques of production (b) Role of export promotion policies (c) Free trade zones (FTZs) 6.5 Participation at Regional Level (a) Regional economic co-operation (b) Role of ESCAP (i) FDI and technology transfer (ii) FDI and export promotion (iii) Multilayered bilateral cooperation (iv) Cooperation at subregional level (v) Role of NGOs (vi) Source Book on ESTs (vii) Cooperation among country associations 6.6 Multilateral Level Actions (a) Role of WTIO (b) Market access for agriculture and T&C 6.7 Technical Assistance

Selected References

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ACRONYMS ADB Asian Development Bank AFTA ASEAN Free Trade Area APCTT Asia and Pacific Centre for Transfer for Technology APEC Asia Pacific Economic Cooperation (presently comprises 21 countries viz. Australia, Brunei Darussalam, Canada, Chile, China PR, Hong Kong, Indonesia, Japan, Korea Republic, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Chinese Taipei, Thailand and the United States). ASEAN Association of South-East Asian Nations (comprises Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand, Vietnam, Lao PDR, Myanmar, Cambodia) ATC Agreement on Textiles and Clothing ECB External Commercial Borrowing EEC European Economic Community EOU Export Oriented Unit EPZ Export Processing Zone ESCAP Economic and Social Commission for Asia and the Pacific FDI Foreign Direct Investment FIIs Foreign Institutional Investors FTZ Free Trade Zone GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product GSP Generalized System of Preferences ILO International Labour Office IMF International Monetary Fund INTEST international Network for Transfer of Environmentally Sound Technologies IPR Intellectual Property Rights M&A Mergers and acquisitions MFN Most Favoured Nation MIGA Multilateral Investment Guarantee Agency NIEs Newly Industrializing Economies OCBs Overseas Corporate Bodies OECD Organisation for Economic Co-operation and Development, comprise Australia, Austria, Belgium, Canada, and Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Republic of Korea, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States of America. OPEC Organisation of Petroleum Exporting Countries PPP Purchasing Power Parity QRs Quantitative restrictions R&D Research and Development SAARC South Asian Association for Regional Cooperation comprises Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. SEs Small enterprises

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SEZ Special Economic Zone SMIs Small and Medium-Sized Industries SIDBI Small Industries Development Bank of India SSI Small Scale Industry SOEs State Owned Enterprises TBSE Technoly Bureau of Small Enterprises TNCs Transnational Corporations UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UNIDO United Nations Industrial Development Organisation VATIS Value Added Technology Information System WB World Bank WTO World Trade Organisation Notes on Units Million = 1000 thousand Billion = 1000 million Trillion = 1000 billion Tons = 1000 kilograms Dollar $ = US dollars, unless otherwise specified

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1 INTRODUCTION AND OVERVIEW

1.1 Objectives and Scope of the Study The present report is a part of studies being prepared for the Expert Group Meeting on Promoting Resource-based Export-oriented SMEs for Poverty Alleviation in Asia and the Pacific to be held in November 2002 by the International trade and Industry Division of the ESCAP, United Nations. The basic objective of the meeting is to deliberate on the prospects and challenges for promoting resource-based and agro-based Small and Medium Enterprises (SMEs) for employment generation, export-promotion and thereby help countries in promoting integration at the regional and global levels. The meeting is also expected to identify areas for policy orientations, institutional capacity building and private sector led rural enterprise development with a view to improve employment in rural areas and productivity improvement for poverty alleviation. It is also expected that some new ways and means entrepreneurship development would be evolved. As the study is concerned with the role of agro-based and resource-based SMEs for employment generation and poverty alleviation in the past and future issues, the time frame of the study is confined mainly to 1990s. For analytical purpose, Asian economies considered in the study have been grouped into the following regions: South Asia comprising Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The Newly Industrializing Economies (NIEs) comprising Hong Kong, China; the Republic of Korea; Singapore; and Taiwan, China. Developing Economies in the Southeast Asia comprising Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Thailand and Vietnam. These countries alongwith Brunei and Singapore now constitute the Association of Southeast Asian Nations (ASEAN) and ASEAN Free Trade Area (AFTA). Three other economies in East Asia viz. Japan, Mongolia and People’s Republic of China are also included in the study. 1.2 An Overview of the Study This report is divided into six chapters including this introduction which describes the scope of the study, and provides general economic profiles of Asian economies. The chapter also discusses the structure of GDP and external trade and the contribution of the agro-based and resource-based small and medium industries in merchandise exports.

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Chapter-2 discusses the types of industries, their structure and key industry players, their contribution to employment generation, industrial value added and overall GDP. The chapter also provides an introduction of various issues at stake such as the following: (a) Integration of agricultural production and agro-based industries (b) Availability of basic raw materials and finance (c) Location of the industries, transport cost and accessibility to markets (d) Economies of scale and size of markets (e) Availability of skilled workers and technical capacity building (f) Role of multinationals and foreign investment (g) Technological Upgradation (h) Environment and sustainability Chapter 3 discusses valuable contributions made by agro-based and resource based industries to poverty alleviation and the rationale of promoting these industries towards economic empowerment of the poor. Development of agro-based industries, particularly SMEs, in rural areas leads to valorization of agricultural land and commodities, enhancement of revenues, and development of skill of the rural poor. These enterprises employ the work force, which may otherwise remain idle or under employed and thereby contribute significantly to poverty alleviation and promote economic and social justice. Agro-based industries open up new channels of distribution and marketing of agricultural commodities produced by the small farmers and raise their incomes. Higher employment provides the poor with a source of empowerment and income security. Chapter 4 deals with industry development strategies and business environment in Asian developing countries. It provides a critical analysis of problems and barriers faced by the agro-based and resource-based industries. Major problems relate to the following: (a) Unfavorable business environment through proliferation of licenses, regulations, permits, taxes and duties on agricultural commodities, and various restrictions on movements and trade of agricultural goods, (b) low level of skill development, (c) low access to capital provided by banks and development institutions, (d) Constraints on transport, communications and information technology. The chapter focuses on need for integration of industrial activities at regional level, regional capacity building and identification of credible pilot programmes, rationalisation of fiscal, monetary and other policies for development of SMEs, and improvement of infrastructure and information technology in rural areas. Chapter 5 deals with role of international organisations (including the United Nations) for the development of agro-based and resource-based industries through technical assistance programs for formulation of appropriate policies, institutional capacity building, skill development, networking and investment promotion.

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Chapter 6 summarises the basic issues and problems for development of agro-based and resource-based industries and makes recommendations for appropriate national level actions and strategies and regional level actions for promoting these enterprises for poverty alleviation in Asia and the Pacific. The report ends with a list of selected bibliography on the subject. 1.3 Profile of Regions and Sample Countries Selected countries for this study covering 55 per cent of the world population and 15 per cent of area display a number of contrasts (see Tables 1.1 and 1.2 for general economic profiles of the countries). The sample 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 a city-state like Singapore. The sample includes the world’s second largest economy Japan with per capita GNP of $35620 in 2000 on the one hand, and some of the poorest countries of the world – Bangladesh, Cambodia, Mongolia, Nepal and Vietnam. Social development indicators also differ widely among the regions. While East Asia generally have higher degree of adult literacy and life expectation, South Asian countries except Sri Lanka, Maldives and Myanmar lag far behind. Despite serious foreign exchange and 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 (Table 1.2). 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. The slowdown of global growth during 2001 was accompanied by an even more marked deceleration of growth of international trade. After expanding by about 14 per cent in 2000, export volumes from the developing countries rose by less than 1 per cent in 2001. This slowdown affected almost all major regions. The economic impact of these declines was reinforced by downward pressure on export prices. Leading to a pronounced deterioration by 3 per cent, in the terms of trade of developing countries in 2001.

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Table-1.1 Basic Economic Indicators of selected Asian countries in 2000 Country Population million 2000 Area '000 sq.km. 2000 GNP GNP PPP GNP PPP GNP US$ billion per capita US$ billion Per capita (US $) (US $) 2000 2000 2000 2000 Adult Literacy (%) 2000 Life Expectancy (years) 2000

Newly Industrializing Economies (NIEs) Hong Kong Korea,Republic Singapore Taiwan,China China Mongolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 7 47 4 22 1262 2 12 210 5 23 48 76 61 79 131 0.8 1016 0.3 23 138 19 127 5154 1855 474 516 295 1355 659 903 6057 1 99 1 36 9598 1567 181 1905 237 330 677 300 513 332 144 47 3287 0.3 147 796 66 378 101491 16385 24217 20459 11023 5140 24297 32315 133806 176 421 99 280 1063 0.9 3 120 1.5 79 .. 79 122 30 48 0.5 455 0.5 6 61 16 4519 6315 1962 953 1895 618 595 310 24994 31309 25920 8910 24740 12670 840 390 260 570 290 3380 .. 1040 2000 390 South Asia 370 590 450 1960 240 440 850 East Asia 35620 3436 19980 7609 3140 3624 1545 2984 1044 24793 44459 27080 3910 4130 6670 7080 5270 2240 1600 27770 7410 209 1.2 2375 1.2 32 257 67 1590 1440 2340 4240 1370 1860 3460 174 818 100 .. 4951 4 17 596 8 194 .. 319 384 157 25590 17300 24910 .. 3920 1760 1440 2830 1540 8330 .. 4220 6320 2000

79 72 76 75 69 64 53 64 52 71 59 66 69 68 58 48 62 63 55 60 72 80 65 68 68 69 66 61 52 77 67

80 73 78 76 70 67 54 66 54 72 60 69 69 69 61 61 63 68 58 63 73 81 64 69 69 70 68 63 47 78 66

China & Mongolia

South-East Asia

World
1230 1060 2010 3670 2090 440 470 27680 5170

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank. (3) Asian Development Outlook 2002, Asian Development Bank, Manila.

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Table-1.2 Growth of output in selected Asian countries in 1980-1990 and 1990-2000 Country GDP growth per annum 1980-1990 6.9 8.9 6.7 8.8 GDP growth Agriculture Industry per annum Growth pa Growth pa 1990-2000 1990-2000 1990-2000 Newly Industrializing Economies (NIEs) 4.0 5.7 7.8 6.1 .. 2.0 -1.6 0.5 .. 6.3 7.9 5.3 Manufacture Growth pa 1990-2000 .. 7.5 7.1 5.5 Services growth pa 1990-2000 .. 5.7 7.8 7.0

Hong Kong Korea,Republic Singapore Taiwan,China

China & Mongolia China Mongolia 10.1 5.4 10.3 1.0 4.1 3.2 South-East Asia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World n.a. 6.1 3.7 5.3 0.6 1.0 7.6 4.6 4.3 7.5 5.8 12.1 4.6 6.3 4.0 4.1 3.5 7.9 .. 1.7 2.0 5.6 1.6 3.3 3.3 4.8 4.2 6.5 7.0 6.6 3.3 4.2 7.9 4.8 6.2 6.0 6.6 4.9 3.7 5.3 1.3 World 3.5 7.2 -1.5 3.3 3.0 5.6 2.5 2.5 2.7 2.2 3.1 -2.3 2.3 2.6 3.1 2.8 0.0 1.4 3.7 9.3 -3.8 3.3 0.9 6.2 1.6 0.7 1.5 5.7 9.9 .. 2.6 3.8 6.6 1.6 .. .. 4.1 6.4 1.6 3.4 4.5 7.1 2.6 .. 2.9 1.9 2.1 4.9 0.3 5.3 1.6 2.1 4.8 South Asia 2.9 10.2 3.0 10.3 2.5 4.4 1.9 East Asia -3.2 -0.4 0.5 2.5 7.3 10.5 6.4 10.5 7.2 3.9 7.0 7.2 2.5 7.0 2.4 9.2 3.5 8.1 4.5 5.7 8.0 7.2 6.2 4.4 6.0 8.3 5.2 11.0 8.6 10.1 3.3 5.3 12.1 8.2 6.7 11.7 9.8 7.0 3.0 6.4 .. 6.9 4.0 6.5 7.2 6.8 4.0 3.7 7.7 13.7 -0.5 13.4 .. 9.0 0.1

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Table 1.3 Structure of Demand in selected Asian economies in 1990 and 2000 Country Household final consumption expenditure as % of GDP 1990 2000 General govt. consumption expenditure as % of GDP 1990 2000 Gross Domestic Exports of goods Imports of goods Gross Domestic Investment and services and services Savings % of GDP % of GDP % of GDP % of GDP 1990 2000 1990 2000 1990 2000 1990 2000

Newly industrializing Economies (NIEs) Hong Kong, China Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 57 53 46 .. 50 58 91 59 .. 52 89 72 57 86 86 .. 66 .. 83 74 76 53 60 54 55 65 57 69 66 59 59 58 58 40 .. 47 66 92 67 82 43 87 63 60 69 78 .. 65 .. 75 77 72 56 60 54 58 66 51 68 66 61 61 7 10 10 .. 12 32 7 9 .. 14 .. 10 9 8 4 .. 12 .. 9 15 10 13 14 11 18 13 20 12 17 18 17 10 10 10 .. 13 20 .. 7 5 11 .. 13 9 6 5 .. 13 .. 9 11 10 16 14 11 16 15 18 12 17 17 17 27 38 37 .. 35 38 8 31 .. 32 13 24 41 13 South Asia 17 .. 25 .. 18 19 23 East Asia 33 World 26 35 28 19 24 24 15 23 24 26 23 30 21 20 20 23 17 22 22 10 21 26 23 14 33 9 27 20 20 10 31 42 44 17 38 15 32 22 23 9 20 26 24 12 35 13 26 20 20 8 29 37 39 18 28 18 32 22 23 34 26 35 26 21 23 20 16 24 24 28 26 35 26 19 30 20 17 22 23 23 .. 24 .. 24 16 28 6 .. 7 .. 11 16 29 14 .. 14 .. 24 16 40 14 .. 10 .. 21 23 38 19 .. 17 .. 32 19 51 10 .. 22 .. 8 11 14 18 .. 21 .. 16 12 17 28 29 31 .. 37 30 15 18 24 26 13 18 23 27 134 29 202 .. 18 24 6 25 .. 75 3 28 34 26 150 45 180 .. 26 65 40 39 36 125 0 56 67 .. 126 30 195 .. 14 53 13 24 .. 72 5 33 42 33 145 42 161 .. 23 82 47 31 48 104 1 50 59 .. 36 37 44 .. 38 9 2 32 .. 34 11 18 34 6 32 31 50 .. 40 14 8 26 13 47 13 24 31 25

China and Mongolia

South-East Asia

Note: Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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In Asia, where recovery after the 1997 financial crisis was driven by exports, owing to the rapid expansion of investment in the IT sector, the fall in United States demand led to stagnation in export growth, a rapid deterioration of current account positions and declining growth rates in early 2001 in all countries except India and China. The adverse impact on the region of the slowdown in the United States has been exacerbated by the return of recession in Japan. The Asian Development Bank has estimated that for its members the value of exports fell by 5 per cent in 2001, compared to an increase of over 20 per cent in 2000. Similarly, the value of merchandise imports, which grew by almost 25 per cent in 2000, declined by 3 per cent 2001. Overall, the aggregate current account balance for the region, in surplus since 1997, is expected to remain positive but to fall as a share of GDP from 3.4 per cent 2000 to 2.3 per cent in 2001, and to further erode in 2002 as recovery fuels import demand (ADB, 2001). 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 (Table 1.3). 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

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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. Two themes have characterised the development approach of most the Asian economies: a strong economic role for the private sector and relatively outward-looking development policy. 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. (a) South Asia and SAARC 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. 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 in any other region except Africa, high infant mortality rates, high rates of malnutrition and low levels of literacy (except Maldives and Sri Lanka). Fueling the growth in 1990s in South Asia were savings and investment rates of around 20-25 percent, mainly from domestic sources building on strong legal and political traditions and a growing pool of technical manpower. Deregulation and trade reforms increased internal competition, reduced transactions costs, and improved product range and quality. The increased private activity stimulated the financial sector and is beginning to attract foreign investment, particularly in infrastructure and the stock market. As compared to the world and other developing countries, the contribution of the industrial sector to GDP in South Asia is rather small. During 1990s, the service sector grew at a faster rate than the industrial sector in South Asia. 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, while imports consist of mostly crude oil, petroleum products and capital goods.

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The challenge facing South Asia in the new millennium is how to continue the high economic growth of the 1990s with rapid reductions in poverty and unemployment and improvement in social indicators. A sustainable growth path for the 2000s must be based on continued economic reforms, lower fiscal deficits, dynamic capital market, sustainable balance-of-payments, and improvement in environment. Economic cooperation in the region would be an effective instrument for improving the welfare of the people. (b) East Asia and South-East Asia Over the past three decades, the economies of East Asia made remarkable economic progress and grew faster than all other regions of the world. Many South East Asian economies, particularly Korea, Taiwan Province of China, Hong Kong SAR, China, Indonesia, Malaysia, Thailand and Singapore experienced sustained economic progress since 1980s with some attaining an average growth rate of 8-10 percent a year, except for the crisis period during 1997-1999. In East Asia and Pacific, GDP grew at average annual rate of 7.2 percent in 1990s, while annual population growth averaged 1.2 percent. The rapid growth of the East Asian economies was accompanied by impressive advances in social development indicators. Poverty, infant mortality, and adult illiteracy declined significantly, while life expectancy at birth rose considerably. Also, contrary to the earlier conventional wisdom, rapid economic growth was achieved with significant reduction in poverty ratios and without increases in income inequality (World Bank 1998). Economic growth in Asia correlates strongly not only with export growth but also with high savings and investment rates. A trinity of openness to trade, high investment and high savings rates coexist the fast growing economies of Asia and it is important to stress the presence of three factors to achieve higher growth. The benefits of a more liberal trading environment reached beyond the narrow efficiency gains highlighted by the theory of comparative advantage. Other benefits include more competitive goods and factor markets, increased investment including foreign capital, and associated transfer of knowledge and technology. Savings and investment rates of the South East Asian economies were generally higher than those in other regions. Governments boosted savings through a combination of fundamental and interventionist policies. The former included maintaining macroeconomic stability – primarily controlling inflation, and ensuring the security of banks. The latter included forced savings by both households and corporate bodies through public provident funds and insurance. East and South East Asia relied heavily on export-push strategy and were generally open to foreign investment and technology transfer. Initially endowed with abundant labour resources, they expanded their exports of low value added and labour intensive goods. Subsequently, as labour costs increased, they shifted the structure of manufacturing production and exports towards more sophisticated and higher value added products.

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The prospects for an improved world-trading environment have been enhanced with the formation of the World Trade Organisation (WTO). But there are still legitimate concerns in a number of areas. There is a view that the gradual nature of some of the reforms did not adequately cover investment issues, and much remains to be done to reduce tariff and non-tariff barriers to trade in both services and agriculture. Some developing countries fear that new obstacles in the name of “social conditionalities and environment protection” might take the place of old ones. There is also evidence that some industrialized countries have bound themselves to maximum tariffs on many commodities such as textiles and agricultural commodities in which many developing countries in Asia have comparative advantage. “Dirty tariffication”, as this practice is called, opens the way to reducing the potential gains from the WTO agreement. During 1997-1999, a number of Southeast Asian economies and Korea had been in the grip of severe financial crises that had thrown the region into deep recession. Economic activity in Japan, after languishing since the busting of the asset price bubble in 1990, also contracted sharply since spring 1997. Unemployment rates increased to 3 percent in Malaysia, 6 percent in Korea and 15 percent in Indonesia in 1998. Poverty, therefore, increased at an alarming rate. Indonesia, which had an impressive record of poverty reduction, experienced a rise in the poverty ratio from 11 per cent to about 16 per cent within a year (World Bank 1998). The severity of the “Asian crisis” raised questions about the durability of the region’s rapid growth and the factors that underlay it. Although the region recovered quickly following the structural reforms and adjustment programs supported by the IMF and other funding agencies, recent crisis had highlighted that there remain serious obstacles to sustained development for many countries in the region. Despite recent gains, the countries of the region had an average income of US$4120 in 2000, which is much below that of US$27450 in the developed countries. Serious environmental damages associated with rapid urbanisation, inadequate regulation and planning, and incorrect pricing of resources, continues to impose major costs. Another serious problem is the historical inadequacy of infrastructure investment relative to rapidly growing demand. As the region’s infrastructure needs are large, the private sector themselves and foreign direct investment (FDI) will have to play an increasingly critical role in developing and modernising East Asia’s infrastructure base. In turn, governments of the region will need to strengthen the regulatory and legal frameworks to attract and secure such investment. The need for expanding competent management across most areas of development is emerging as a major issue in East Asia. Effective institutions are essential in pollution monitoring and control, design and implementation of monetary and fiscal policies, traffic-management planning and deregulation.

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1.4 Structure of GDP, Trade and Employment (a) Trend of Sectoral Shares Sectoral shares in GDP indicate mixed trends over time among regions and countries (Table 1.4). In all the regions and countries under study except Mongolia and Myanmar, share of agriculture declined during 1990s. For newly industrialized countries (NIEs), which have dominant share of the services sector in GDP, share of industry and manufacturing either remained unchanged or declined and shares of services increased further in 1990s. Only in Korean republic, share of manufacturing in GDP increased from 29 per cent in 1990 to 31 per cent in 2000 and that of agriculture declined from 9 per cent to 5 per cent over the same period. 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. As regards individual countries in the Southeast Asia, only Myanmar, Philippines and Vietnam experienced decline of share of manufacturing in 1990s. There was also substantial increase in the share industry in overall GDP in 1990s in all countries except in Myanmar and Philippines (Table 1.4). 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. Structure of manufacturing value added An analysis of the structure of manufacturing given in Table 1.5 indicates that in general the shares of agriculture and primary sector based traditional goods (such as food, beverages, tobacco, textiles and clothing) in overall manufacturing value added have declining share, while the shares of machinery, transport and equipment, chemicals or other products have increasing share in GDP in 1990s. It is also observed from the table that these agro-based and allied sectors have significant shares in manufacturing in Hong Kong, China, Indonesia, Philippines, Thailand, Bangladesh, India, Nepal, Pakistan and Sri Lanka. Structure of merchandise exports and imports An analysis of the structure of exports and imports given in Tables 1.6 and 1.7 indicate that 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 1.4: Structure of output in selected Asian countries in 1990 and 2000 Country GDP billion US$ 1990 Hong Kong Korea, Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 75 253 37 158 355 .. 1 114 1 44 .. 44 85 6 30 0.3 317 0.3 4 40 8 3052 4404 927 1253 1133 401 405 298 17414 21817 GDP billion US$ 2000 Agriculture % of GDP 1990 2000 Industry % of GDP 1990 2000 14 43 34 35 51 19 20 47 23 45 9 31 40 37 24 32 27 15 22 23 27 32 35 46 35 29 37 26 30 .. 31 Manufacture % of GDP 1990 18 29 27 30 33 .. 5 18 10 24 8 25 27 19 13 20 17 .. 6 17 15 27 23 28 .. 23 12 17 17 .. .. 2000 6 31 26 24 35 5 6 26 17 33 7 23 32 18 15 20 16 .. 10 15 17 22 23 32 .. 21 14 16 14 .. 22 Services % of GDP 1990 74 48 65 57 31 52 33 42 24 43 32 44 50 40 50 34 41 .. 32 49 48 58 46 40 39 55 47 43 48 .. 57 2000 85 53 66 63 33 48 42 36 24 44 33 53 49 39 51 35 48 75 37 51 53 66 54 41 57 64 48 49 53 .. 64

Newly Industrializing Economies (NIEs) 163 0 0 25 457 92 279 1080 1 3 153 2 90 .. 75 122 31 47 0.4 457 0.4 5 62 16 4842 6561 2059 942 2001 660 597 323 24927 31493 9 0 3 27 17 South-East Asia 56 20 61 15 57 22 12 37 South Asia 29 38 31 .. 52 26 26 East Asia 2 World 16 20 17 9 15 31 18 .. 7 12 13 10 7 14 25 17 .. 5 38 40 44 36 39 27 34 .. 36 1 39 25 33 25 10 40 26 20 21 28 28 .. 16 25 26 37 17 53 11 60 16 10 24 11 38 15 42 11 34 37 23 5 0 2 16 33 43 34 40 42 30

China and Mongolia

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank. (3) World Development Outlook 2002, Asian Development Bank, Manila.

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Table 1.5 Structure of manufacturing in selected Asian economies in 1990 and 1999 Country Manufacture Value Added US$ billion 1990 Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 12.6 72.8 9.9 47 116.6 .. 0.06 20.9 0.1 10.7 .. 11.0 23.2 1.2 3.8 0.06 48.8 .. 0.2 6.2 1.0 810 852 260 n.a. 254 46 61 43 3765 4617 1999 Food-beverages and tobacco % share 1990 1999 Textiles and Clothing % share 1990 1999 Machinery and Chemicals Transport Equipment % share % share 1990 1999 1990 1999 24 45 60 .. 28 .. .. 20 .. 43 .. 15 .. .. .. .. 24 .. 3 13 .. 40 .. .. .. .. .. .. .. .. .. 2 9 10 .. 13 1 .. 9 .. 11 .. 12 2 .. 17 .. 14 .. 5 15 4 10 .. .. .. .. .. .. .. .. .. 3 10 11 .. 11 .. .. 9 .. 8 .. 13 .. .. .. .. 20 .. 6 16 .. 10 .. .. .. .. .. .. .. .. .. Other manufacturing % share 1990 33 36 29 .. 34 27 .. 37 .. 39 .. 26 26 .. 14 .. 34 .. 25 25 17 37 .. .. .. .. .. .. .. .. .. 1999 40 29 25 .. 32 .. .. 36 .. 35 .. 29 .. .. .. .. 35 .. 23 22 .. 35 .. .. .. .. .. .. .. .. ..

Newly Industrializing economies (NIEs) 8.5 8 11 36 21 21 124.8 21.0 67 333.4 0.05 0.2 36.6 0.2 23.2 .. 16.5 38.0 5.0 6.9 0.08 61.6 .. 0.4 8.5 2.3 970 1350 584 n.a. 330 77 81 39 4048 5398 11 4 .. 15 33 .. 27 .. 13 .. 39 24 .. 24 .. 12 .. 37 24 50 9 .. .. .. .. .. .. .. .. .. 8 4 .. 16 .. .. 16 .. 9 .. 33 .. .. .. .. 11 .. 35 23 .. 11 .. .. .. .. .. .. .. .. .. 12 3 .. 15 37 .. 15 .. 6 .. 11 30 .. South Asia 38 .. 15 .. 31 27 24 East Asia 5 World .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 4 40 .. .. 10 .. 34 26 .. 7 .. 25 .. 1 9 4 8 1 .. 12 .. .. 18 .. 5 .. 9 .. .. 32 53 .. 24 1 .. 12 .. 31 .. 13 19 ..

China and Mongolia

South-East Asia

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Table 1.6 Structure of merchandise exports in selected Asian economies in 1990 and 2000 Country Merchandise exports US$ billion 1990 2000 Food % share Agrl. Raw materials % share 1990 2000 Fruits % share Ores and minerals % share 1990 2000 Manufactures % share

1990

2000

1990

2000

1990

2000

Newly industrializing Economies (NIEs) Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 82.4 65.0 52.8 .. 62.0 0.7 0.09 25.7 0.08 29.4 0.3 8.1 23.0 2.4 1.7 .. 18.0 .. 0.2 5.6 2.0 287.6 702 221 125 143 127 28 66 2730 3433 202.4 172.3 137.9 148 249.3 0.4 0.7 62.1 0.3 98.2 1.4 39.8 69.1 14.5 6.5 .. 42.3 .. 0.8 9.2 5.1 479.2 174 712 307 356 213 64 93 4612 6356 3 3 5 .. 13 .. .. 11 .. 12 51 19 29 .. 14 .. 16 .. 13 9 34 1 15 12 .. 26 3 16 13 8 10 2 2 2 .. 5 .. .. 9 .. 6 .. 5 14 .. 7 .. 14 .. 21 11 21 0 9 6 5 21 3 15 17 6 7 0 1 3 .. 3 .. .. 5 .. 14 36 2 5 .. South Asia 7 .. 4 .. 3 10 6 East Asia 1 World 4 5 .. 4 1 5 3 3 3 2 2 3 3 0 1 4 2 2 20 10 .. 24 79 2 28 5 8 21 7 26 18 80 0 28 4 8 5 2 .. 12 3 4 7 3 4 4 2 6 9 2 2 8 2 3 54 68 .. 34 15 71 20 79 74 61 83 53 48 14 80 36 82 78 0 0 0 1 1 96 94 2 .. 1 .. 0 3 2 1 .. 3 .. 0 1 1 0 .. 0 .. 0 1 0 0 .. 5 .. 0 0 2 0 .. 2 .. 2 0 0 77 .. 71 .. 83 79 54 91 .. 79 .. 77 85 75 0 1 0 .. 1 .. .. 4 .. 3 .. 1 3 .. 0 1 18 .. 8 .. .. 44 .. 18 0 2 1 .. 0 5 10 .. 3 .. .. 25 .. 10 .. 1 3 .. 1 1 2 .. 2 .. .. 4 .. 2 2 8 1 .. 2 1 1 .. 2 .. .. 5 .. 1 .. 2 1 .. 95 94 72 .. 72 .. .. 35 .. 54 10 68 63 .. 95 91 86 95 88 .. .. 57 .. 80 .. 92 76 ..

China and Mongolia

South-East Asia

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Table 1.7 Structure of merchandise imports in selected Asian economies in 1990 and 2000 Country Merchandise imports US$ billion 1990 2000 Food % share Agrl. Raw materials % share 1990 2000 Fruits % share Ores and minerals % share 1990 2000 Manufactures % share

1990

2000

1990

2000

1990

2000

Newly industrializing Economies (NIEs) Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 84.7 69.8 60.9 .. 53.3 0.9 0.2 21.8 0.2 29.2 0.3 13.0 33.4 2.8 3.6 .. 23.6 .. 0.7 7.5 2.7 235.4 663 231 137 121 100 39 56 2846 3516 214.2 160.5 134.5 148 225.1 0.6 0.6 33.5 0.6 82.2 2.4 33.8 61.9 15.6 8.4 .. 50.5 .. 1.6 11.0 6.8 379.5 1616 620 312 381 138 79 86 4949 6565 8 6 6 .. 9 .. .. 5 .. 7 13 10 5 .. 19 .. 3 .. 15 17 19 15 9 7 .. 11 19 9 .. 9 9 4 5 3 .. 4 .. .. 10 .. 4 .. 8 4 .. 15 .. 7 .. 17 14 15 13 8 5 9 8 18 10 10 7 7 2 8 2 .. 6 .. .. 5 .. 1 1 2 5 .. South Asia 5 .. 4 .. 7 4 2 East Asia 7 World 4 5 .. 3 3 4 .. 3 3 3 3 2 2 2 4 2 2 2 11 9 .. 13 6 23 .. 11 11 12 14 9 10 6 26 14 10 10 4 4 .. 3 3 6 .. 4 4 3 4 3 2 2 4 2 3 3 70 73 .. 69 68 54 .. 72 71 71 72 65 78 70 54 68 75 74 3 25 20 9 6 44 57 5 .. 3 .. 5 3 1 16 .. 27 .. 9 21 13 7 .. 31 .. 12 33 6 3 .. 8 .. 2 4 1 2 .. 5 .. 3 2 1 56 .. 51 .. 67 54 65 69 .. 51 .. 63 47 77 1 3 0 .. 5 .. .. 7 .. 1 .. 1 3 .. 2 16 16 .. 2 .. .. 9 .. 5 5 15 9 .. 2 24 12 .. 9 .. .. 18 .. 8 .. 12 12 .. 2 7 2 .. 3 .. .. 4 .. 4 0 3 4 .. 2 6 2 .. 6 .. .. 3 .. 3 .. 3 3 .. 85 63 73 .. 80 62 .. 77 .. 82 81 53 75 .. 91 62 82 95 76 65 .. 61 .. 85 .. 76 77 ..

China and Mongolia

South-East Asia

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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1.5 Export dynamism of Asian developing countries (a) Trend of export shares Between 1970 and 1999 merchandise exports of developing countries grew at an average annual rate of 12 per cent, compared to 10 per cent for the world as a whole, resulting in their share in world merchandise trade increasing from less than one fourth to almost one third. During this period share of trade among them also reached 40 per cent of their total exports. These trends were accompanied by a rapid transformation in the composition of their exports from primary commodities to manufactures, which accounted for 70 per cent of developing country exports at the end of the 1990s compared with around 20 per cent during 1970s and early 1980s. The share of agricultural commodities fell from about 20 per cent to 10 per cent during the same period. Rapid liberalization of trade and foreign direct investment (FDI) has been the chosen policy approach, and in many cases this has indeed been accompanied by increased participation of developing countries in world trade, including a rapid expansion of their exports. However, as indicated in TDR 1999, for almost all developing countries imports expanded faster than exports, resulting in a deterioration of their trade balance. Therefore, their trade expansion was not necessarily accompanied by faster growth in gross domestic product (GDP) and by greater income convergence with industrial countries. The share of developed countries in world income increased from less than 73 per cent in 1980 to 77 per cent in 1999, while that of developing countries stagnated at around 20 per cent. The share of developed countries in world manufactured exports fell from 82 per cent in 1980 to 71 per cent in 1997. Their share in world manufacturing income also declined from 85 per cent to 73 per cent during this period (Table 1.8). 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 exports, and was able to reduce the gap with richer industrial countries. All the countries under the group of NIEs and ASEAN had significant increase in their shares of world manufacturing exports during 1980-1997. China’s share in world manufacturing exports increased significantly from 1.1 per cent in 1980 to 3.8 per cent in 1997 and that in world manufacturing income increased from 3.3 per cent to 5.8 per cent over the same period. Developing economies shares both in world manufacturing exports and value added show a sharp increase during the same period, but growth in exports is much stronger than in value added. All Asian economies increased their shares in world manufacturing exports. Similarly, with the exception of Hong Kong (China) and the Philippines, all East Asian countries increased their shares in world manufacturing value added. All these economies pursued rapid liberalization of trade and investment over the past two decades.

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Table 1.8: Share of selected regional groups and developing economies in world manufacturing exports and manufacturing income in 1980 and 1997 Region/ economy Share in world Manufacturing exports 1980 1997 82.3 70.9 10.6 26.5 1.5 3.5 0.2 0.2 0.7 0.7 0.0 0.1 0.2 2.2 6.0 16.9 8.9 1.7 0.2 0.6 1.4 2.9 0.9 2.6 1.6 2.8 3.6 1.2 0.1 0.6 0.2 1.5 0.1 0.5 0.2 1.0 3.8 3.3 0.4 0.6 0.1 0.5 Share in world Manufacturing income 1980 1997 85.5 73.3 14.5 23.8 7.1 6.7 0.9 0.9 2.9 2.7 0.2 0.2 1.9 1.2 7.3 14.0 4.5 0.3 0.2 0.7 2.3 0.1 0.4 0.6 1.6 2.6 0.4 1.0 0.2 0.5 0.3 0.3 0.3 0.8 5.8 1.1 1.1 0.4 0.5

Developed countries Developing countries Latin America Argentina Brazil Chile Mexico South and East Asia NIEs 5.1 Hong Kong, China Republic of Korea Singapore Taiwan, China ASEAN-4 0.6 Indonesia Malaysia Philippines Thailand China 1.1 India Turkey Source: UNCTAD (TDR 2002)

(b) Contribution of labour-intensive products to exports A classification of products made by TDR 2002 according to the mix of different skill, technology and capital intensity and scale characteristics results in five categories: (A) Primary commodities, (B) Labour and resource-intensive manufactures, (C) Manufactures with low skill and technology intensity, (D) Manufactures with medium skill and technology intensity, and (E) Manufactures with high skill and technology intensity Trade in all five categories expanded considerably since the mid-1980s (Table 1.9). Generally, trade in skill and technology-intensive manufactures increased faster than that of labour-intensive and resource-based manufacturers and primary commodities. These differences cannot be explained only in terms of differences in income elasticity or comparative advantage. Policies governing market access also play a major role in boosting skill and technology-intensive sectors in which industrial countries have a competitive edge over agricultural commodities and middle-range manufactures, which are more important for less advanced countries.

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Table-1.9 Structure of exports by product categories according to factor intensity in 1980 and 1998 (percentage share) Product category Share in exports of Share in developing countries World exports 1980 1998 1980 1998 A. Primary commodities 50.8 19.0 25.7 14.8 B. Labor-intensive and resource based manufactures C. Manufacture with low skill and technology intensity D. Manufacture with medium skill and technology intensity E. Manufacture with high skill and technology intensity F. Unclassified 21.8 5.8 8.2 11.6 1.8 23.2 7.3 16.8 31.0 2.7 14.7 10.1 26.6 20.2 2.7 15.0 7.6 29.6 30.2 2.8

The expansion was rapid for manufactures with high skill and technology intensity since 1993. Trade in such products increased about fivefold in 1980-1998. Trade in labour- and resource-intensive products, and medium skill-and technology-intensive manufactures, also increased faster than total non-fuel trade. By contrast, trade in manufactures with low skill and technology intensity, and non-fuel primary commodities, increased at slower rate than the average, particularly in recent years. Thus there was a sharp fall in the share of non-fuel primary commodities in world trade, and a strong and sustained increase in the share of manufactures with high skill and technology intensity. Indeed, by the end of the 1990s, the share of the latter product category came to exceed the share of medium skill-and technology-intensive manufactures (Table-1.9). Perhaps the most striking finding is that the higher the skill and technology contents of exports, the faster is the growth rate of exports of developing countries. However, this does not necessarily imply that there has been a rapid and sustained technological upgrading in exports of developing countries. First, their rapid growth in exports of skilland technology-intensive goods started from a relatively small base in the early 1980s. Secondly, in many cases, in involvement of developing countries in exports of such products is usually limited to the labour-intensive processes in these sectors as a part of international production sharing. (c) Twenty most dynamic products in world trade Table-1.10 shows the trend growth rates of the 20 most dynamic products in world trade during 1980-1998. Most of these products fall into four categories: • Electronic and electrical goods • Textiles and labour-intensive products particularly textiles and clothing • Finished products from industries that require high R&D expenditures and are characterized by high technological complexity or economies of scale; and • Primary commodities including silk, non-alcoholic beverages and cereals
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The main exports of developing countries are concentrated in computers and office equipment; telecom, audio/video equipment, semiconductors; and clothing, which involve labour-intensive processes. This suggests that the increased importance of global production sharing has been a crucial determinant of the growth of their exports.
Table-1.10 Export value growth and share in total exports Of the 20 most market-dynamic products 1980-1998 (per cent) SITC code Product groups Average annual export growth 1980-1998 16.3 15.0 14.6 14.1 13.3 13.2 13.1 13.1 12.9 12.6 12.4 12.2 12.1 12.0 11.9 11.9 11.9 11.7 11.6 11.5 12.9 8.4 11.3 Share in total world export 1980 1.0 0.9 0.7 0.1 0.2 0.0 0.3 0.6 0.3 0.3 0.1 0.1 0.2 0.4 1.5 0.2 0.2 0.2 1.1 1.1 9.5 15.4 1998 4.0 3.4 2.3 0.3 0.5 0.0 0.6 1.2 0.6 0.7 0.1 0.1 0.4 0.7 3.0 0.3 0.4 0.3 2.0 1.7 22.6 24.3 Share in total exports from developing countries 1980 1998 1.9 7.7 0.2 5.0 0.3 3.6 0.0 0.3 0.1 0.2 0.0 0.0 0.8 1.4 0.6 1.1 0.2 0.8 0.2 0.5 0.1 0.2 0.1 0.1 0.1 0.2 0.3 1.0 1.7 2.9 0.8 0.8 0.1 0.2 0.1 0.6 0.4 0.6 0.7 1.5 14.1 28.7

776 752 759 871 553 261 846 893 771 898 612 111 872 773 764 844 048 655 541 778

Transistors and semiconductors Computers Computer parts, office machines Optical instruments Perfumes and cosmetics Silk Knitted garments Plastic articles Electric power machinery Musical instruments & records Leather manufactures Non-alcoholic beverages Medical instruments Electricity distribution equipment Telecommunications and parts Textile undergarments Cereal preparations Knitted articles Pharmaceutical products Electrical machinery 20 most dynamic products Memo Items: World exports Developing country exports

Source : UNCTAD, TDR 2002.

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The experiences of major exporting countries regarding fastest growing product groups of exports reveals the following: • • • • Computers, office machines, optical instruments, and telecommunications, audio and video equipment are the most important subgroups in the dynamic exports of the ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand). Passenger motor vehicles are also among the 20 fastest growing exports from ASEAN countries. The most dynamic products in exports from South Asia belong to a wide variety of products groups, but there are significantly fewer electronics products than in East Asia. The absence of any product from the clothing sector is also notable. Electronic and electrical goods are the leading exports of all four first-tier NIEs (though they are less important in the Republic of Korea than in the others) as well as of Malaysia, the Philippines and Thailand. They also play an important role in China, Costa Rica and Mexico. Textiles and labour-intensive manufactures, in particular clothing, are important in China, Costa Rica, India, Mexico, Morocco, the Philippines, the Republic of Korea, Taiwan, Thailand, Tunisia and Turkey. Primary commodities and, in particular, supply-dynamic primary commodities are of some importance in India, Indonesia, Malaysia, the Philippines, Thailand, Tunisia and Turkey, and are very important for a number of countries in South America and for Morocco.

• •

No doubt country-specific factors, including size and resource endowments, influenced the export composition and dynamics of these countries. However, there is a distinctive regional pattern in the experiences of different countries, which suggests that geography has played an important role. However, this does not mean that international production networks are contained within regions. Traditional labour-intensive products are the obvious candidates for the first generation of manufactured exports. As incomes rise and the surplus labour is absorbed, rising labour costs and the entry of lower-cost producers progressively erode the competitiveness of many labour-intensive manufactures. This leads to a new challenge, that of upgrading industrial activity so as to produce more sophisticated manufactures. This move away from resource-dependent and labour-intensive activities towards more technology-and skill-intensive activities underlies the success of post-war industrialization in East Asia, mainly in Japan, the Republic of Korea and Taiwan Province of China. China participates in labour-intensive segments of international production networks, and the direct import content of its exports of electrical and electronic goods is high. It has also large traditional labour-intensive export industries with relatively high value added and little import content. Furthermore, China has so far avoided rapid import liberalization (except for exports), and its imports of manufactured consumer goods remain low.

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2 RESOURCE BASED AND AGRO BASED INDUSTRIES: SECTOR’S MAIN CHARACTERISTICS

2.1 Definition and Types of Industries (a) Typology of Industries There is no uniform definition of the agro-based and resource-based industries. Different organisations and consultants use different concepts depending on the scope of the study. In the broadest sense of the terms, all manufacturing industries depending on agricultural and natural resources can be categorized as agro-based and resource based industries. As per International Standard Industrial Classification these manufacturing units may fall under the following broad categories (detailed types of these are indicated in Table 2.1). (a) (b) (c) (d) (e) (f) (g) (h) (i) Food processing industries and beverages (ISIC 311-313) Tobacco and tobacco products (314) Textiles (321) Wearing apparel, leather and leather products and footwear (322-324) Wood and cork products (331) Paper (341) Printing and publishing (342) Rubber and plastic products (355-356) Non-metallic mineral products (361-362, 369) (b) Distribution of World MVA for selected branches Tables 2.2-A and 2.2-B indicate the distribution of world manufacturing value added. It is observed that the share of industrialised countries in world MVA declined continuously from 85.5 per cent in 1980 to 76 per cent in 1990 and that of the developing countries had the corresponding increase from 14.5 per cent to 24 per cent over the period (Table 2.2A). The importance of Asian developing countries in world manufacturing production can be highlighted by the fact that they account for more than two thirds of total MVA in the developing countries. The share of South and East Asia increased from 43 per cent in 1985 to 66.8 per cent in 2001 and that of China from 13.3 per cent to 30.2 per cent in developing country MVA, while the shares of all other regions (viz. Africa, Latin America, West Asia and Europe) declined during the same period (Table 2.2-B). Table 2.3 indicates that the developing countries increased their shares in all agro-based and resource-based industries as classified above during 1985-2000. They also gained their share in chemicals, petroleum and coal products, basic metals, metal products, electrical machinery and transport equipment, and their share in sectoral MVA declined only in non-electrical capital goods. In 1990s South and East Asia recorded positive growth rates in all branches except clothing, leather and wood products and had the highest growth rates in all branches in developing countries (Table 2.4-A). Consequently, South and East Asia increased their shares in 1990s in the MVA of all agro-based,
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resource-based and all other products except in wood and cork products with only marginal loss (Table 2.4-B). Table 2.1: Agro based and Resource based industries as per ISIC
ISIC 3-digit level 4-digit level 3 311/2 3111 3112 3113 3114 3115 3117 3118 3119 3121 3122 313 3131 3132 3133 3134 314 3140 321 3211 3212 3213 3214 3219 322 3220 323 3231 3232 3233 324 3240 331 3311 3312 3319 332 3320 341 3411 3412 3419 342 3420 361 3610 369 3691 3692 3699 Description Manufacturing Food manufacturing Slaughtering, preparing and preserving meat Manufacture of dairy products Canning and preserving of fruits and vegetables Canning, preserving and processing of fish, crustacean and similar foods Manufacture of vegetable and animal oils and fats Manufacture of bakery products Sugar factories and refineries Manufacture of cocoa, chocolate and sugar confectionery Manufacture of food products not elsewhere classified Manufacture of prepared animal feeds Beverage industries Distilling, rectifying and blending spirits Wine industries Malt liquors and malt Soft drinks and carbonated waters industries Tobacco manufactures Manufacture of textiles Spinning, weaving and finishing textiles Manufacture of made-up textile goods except wearing apparel Knitting mills Manufacture of carpets and rugs Manufacture of textiles not elsewhere classified Manufacture of wearing apparel, except footwear Leather, leather products & substitutes, fur, except footwear/wearing apparel Tanneries and leather finishing Fur dressing and dyeing industries Leather, leather products & substitutes except footwear and wearing apparel Footwear, except vulcanized or molded rubber or plastic footwear Manufacture of wood and wood and cork products, except furniture Sawmills, planing and other wood mills Manufacture of wooden and cane containers and small cane were Manufacture of wood and cork products not elsewhere classified Manufacture of furniture and fixtures, except primarily of metal Manufacture of paper and paper products Manufacture of pulp, paper and paperboard Manufacture of containers and boxes of paper and paperboard Manufacture of pulp, paper and paperboard articles not elsewhere classified Printing, publishing and allied industries Manufacture of pottery, china and earthenware Manufacture of other non-metallic products Manufacture of structural clay products Manufacture of cement, lime and plaster Manufacture of non-metallic mineral products not elsewhere classified

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Table 2.2-A Distribution of World Manufacturing Value Added (MVA) 1980-2001
Year Eastern Europe EU Industrialized Countries Other Japan North Others America Western Europe 1.7 1.6 1.5 1.4 1.4 1.3 13.6 15.4 16.8 15.8 14.1 14.6 23.9 23.9 23.4 25.2 26.8 26.3 2.0 1.8 1.7 1.8 1.7 1.6 Total Developing Countries Africa Latin South & West America East Asia Asia 0.9 1.0 0.9 0.9 0.9 0.9 6.7 5.9 5.3 5.4 5.4 5.3 5.2 6.6 8.8 13.4 15.7 16.1 1.7 2.0 1.9 1.6 1.7 1.7 Total

1980 1985 1990 1995 2000 2001

9.1 9.5 8.3 3.5 3.3 3.7

35.2 32.3 31.4 31.0 29.0 28.5

85.5 84.5 83.1 78.7 76.3 76.0

14.5 15.5 16.9 21.3 23.7 24.0

Table-2.2-B Distribution of MVA and Population among developing countries in 1985-2001 (Percentage) Country groups 1985 Low income Middle income High income China Developing countries Africa Latin America South and East Asia West Asia & Europe Developing countries 14.4 53.2 19.1 13.3 100.0 6.2 38.0 43.0 12.8 100.0 2.4 MVA at constant 1990 prices 1990 15.7 46.2 22.3 15.8 100.0 5.4 31.5 52.0 11.1 100.0 2.0 1995 15.5 37.5 22.2 24.8 100.0 4.1 25.5 62.6 7.8 100.0 1.6 2000 14.5 33.6 22.4 29.5 100.0 3.9 22.6 66.2 7.3 100.0 1.6 2001 14.5 33.0 22.3 30.2 100.0 3.9 22.1 66.8 7.2 100.0 1.6 1985 49.2 18.8 2.7 29.3 100.0 13.7 11.2 71.4 3.7 100.0 11.7 1990 49.9 18.8 2.7 28.6 100.0 14.3 11.1 70.8 3.8 100.0 12.1 Population 1995 50.8 18.9 2.7 27.6 100.0 14.9 11.1 70.2 3.8 100.0 12.6 2000 51.7 19.0 2.6 26.7 100.0 15.6 11.0 69.4 4.0 100.0 13.1 2001 52.0 19.0 2.6 26.4 100.0 15.7 11.0 69.3 4.0 100.0 13.3

Memo Item:
Least dev. countries

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

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Table-2.3 Distribution of World Value Added: Selected branches and year (Percentage) Branch (ISIC) 1985 1. 2. 3. 4. 5. 6. 7. 8. 9. Food products and beverages (311-313) Tobacco (314) Textiles (321) Wearing app., leather, footwear (322-324) Wood and cork products (331) Paper (341) Printing and publishing (342) Chemicals (351-352) 84 71 77 77 89 90 94 86 69 86 85 86 91 92 91 89 Industrialized countries 1990 83 70 75 75 88 90 94 85 64 86 83 83 91 93 89 90 1995 81 66 70 75 88 88 92 82 60 85 79 79 90 93 87 86 2000 80 61 67 72 89 88 93 81 57 84 78 77 90 96 90 84 1985 16 29 23 23 11 10 6 14 31 14 15 14 9 7 10 11 Developing Countries 1990 17 30 25 25 12 10 6 15 36 14 17 17 9 7 11 10 1995 19 34 30 25 12 12 8 18 40 15 21 21 10 7 13 14 2000 20 39 33 28 11 12 7 19 43 16 22 23 10 4 10 16

Petroleum inc. coal products (353-354) 10. Rubber and plastic products (355-356) 11. Non-metallic mineral products (361-2, 369) 12. Basic metals (371-372) 13. Metal products (381) 14. Non-electrical machinery (382) 15. Electrical machinery (383) 16. Transport equipment (384)

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

30

Table 2.4-A Annual Growth of Value Added of Selected branches in developing regions (Percentage)
Branch (ISIC) All countries 19801990 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Food products and beverages (311-313) Tobacco (314) Textiles (321) Wearing app., leather, footwear (322-324) Wood and cork products (331) Paper (341) Printing and publishing (342) Chemicals (351352) Petroleum inc. coal products (353-354) Rubber and plastic products (355-356) Non-metallic mineral products (361-2, 369) Basic metals (371-372) Metal products (381) Non-electrical machinery (382) Electrical machinery (383) Transport equipment (384) Prof. Scientific equipment (385) Other manuf. Inc. furniture (390 and 332) 2.7 1.9 2.6 2.0 2.6 4.9 3.6 5.1 4.6 5.5 3.8 5.0 3.7 3.6 7.6 3.1 4.8 2.5 19902000 3.8 6.7 0.9 -1.4 -0.4 4.0 2.9 5.4 3.8 3.5 4.1 5.2 2.8 3.5 7.6 6.8 1.7 1.2 South and East Asia 19801990 5.3 2.7 3.1 6.3 4.4 7.9 7.9 9.7 5.3 9.0 7.4 7.7 7.8 8.1 15.2 7.6 9.1 7.5 19902000 6.7 10.3 1.8 -1.8 -0.9 6.3 3.8 8.0 6.2 3.2 5.7 6.7 3.3 5.1 9.5 9.3 1.4 0.4 Developing regions West Asia and Europe 19801990 1.5 1.7 5.0 2.2 -1.3 3.8 1.8 6.4 7.6 2.1 5.5 7.2 3.5 1.3 2.7 5.6 3.9 -2.1 19902000 0.6 6.2 0.7 -2.7 -0.4 0.6 -1.6 2.2 3.4 5.1 3.2 1.3 -0.6 2.2 4.8 -0.8 0.3 1.8 Latin America 19801990 1.6 1.4 0.7 -1.5 1.6 3.4 1.7 2.5 3.2 2.5 0.4 2.3 0.7 0.9 1.5 0.3 1.2 0.6 19902000 2.6 2.9 -0.7 -1.0 1.6 2.8 3.1 3.8 1.7 3.6 2.6 4.2 3.2 1.4 3.8 4.8 2.2 2.4 North America 19801990 3.2 2.4 1.7 2.2 6.0 2.6 -4.2 6.6 0.2 5.8 4.0 6.0 0.6 4.6 6.9 -2.5 15.1 0.9 19902000 3.2 2.7 -0.4 1.3 -1.7 1.6 -1.4 4.3 0.9 2.4 2.8 2.9 1.2 1.9 1.5 -0.8 -0.2 0.6 Sub-Saharan Africa 19801990 2.0 0.5 1.6 -2.1 0.2 3.2 3.7 -0.5 2.3 4.0 1.1 0.2 1.3 -2.6 -5.7 -8.3 6.6 -7.1 19902000 1.3 0.3 0.7 0.8 -1.0 -0.7 1.2 2.7 1.3 2.4 2.7 5.0 1.1 -0.6 -0.9 -1.6 -4.0 2.0

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

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Table 2.4-B Distribution of MVA of Selected branches among developing regions (Percentage)
Branch (ISIC) Africa 1990 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Food products and beverages (311-313) Tobacco (314) Textiles (321) Wearing app., leather, footwear (322-324) Wood and cork products (331) Paper (341) Printing and publishing (342) Chemicals (351352) Petroleum inc. coal products (353-354) Rubber and plastic products (355-356) Non-metallic mineral products (361-2, 369) Basic metals (371-372) Metal products (381) Non-electrical machinery (382) Electrical machinery (383) Transport equipment (384) 10.9 9.0 8.5 6.5 9.3 4.7 4.9 4.3 8.2 3.2 9.4 4.3 6.8 2.4 2.6 3.1 2000 9.8 6.9 7.7 8.2 9.2 3.3 3.5 3.3 6.6 2.7 8.1 3.9 5.9 1.7 1.3 1.4 Latin America 1990 45.7 40.9 23.1 34.3 20.9 46.3 41.3 47.1 33.8 33.4 33.0 39.0 34.3 38.2 29.0 40.9 2000 44.1 37.0 20.7 35.7 24.1 44.3 43.7 40.5 27.2 33.0 28.8 34.5 36.8 31.0 18.6 35.8 Developing regions South and East Asia 1990 2000 31.7 39.4 54.2 43.4 55.2 37.9 42.6 36.3 33.8 54.4 40.2 45.0 45.7 48.0 60.1 47.2 37.4 43.6 59.4 43.6 54.7 45.1 46.1 47.6 44.0 54.4 48.0 54.1 49.3 58.7 74.8 58.9 West Asia and Europe 1990 2000 11.7 10.7 14.2 15.8 12.6 11.1 11.2 12.3 24.2 9.0 17.4 11.7 13.2 11.4 8.3 8.8 8.7 12.5 12.2 12.5 11.0 7.3 6.7 8.6 22.2 9.9 15.1 7.5 8.0 8.6 5.3 3.9 All countries 1990 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2000 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Least developed countries 1990 5.8 4.8 4.6 3.1 2.6 1.7 2.2 1.5 1.4 0.6 2.2 0.6 1.4 0.4 0.5 0.6 2000 6.7 5.7 4.3 5.4 3.2 1.0 2.0 1.2 1.2 0.6 1.8 0.5 1.4 0.3 0.2 0.3

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

(c) Leading producing countries of agro and resource based industries Tables 2.5-A to 2.5-J indicate the 15 leading producing countries of agro and resourcebased products in the world and in developing countries in 1990 and 2000. It may be observed from the tables that Asian developing countries have improved their position in most of the products during 1990s. Within the developing countries (excluding China) their progress in significant in production of food products and beverages, tobacco, textiles, leather and footwear, wood products, paper, and rubber and plastic products. Table 2.5–K on the position of China in its main export products also indicate that China has significant share in world trade in exports of agro-based and resource-based industries such as toys and sporting goods, footwear, knitted outer and under garments, textiles, travel goods, apparel and clothing, textiles, radios, watches and clocks.

32

Table 2.5-A Leading Producers of Food Products and Beverages (ISIC 311-313) in 1990 and 2000 World leading producers* 1990 Country USA Japan Germany France U.K. Italy Spain Brazil Canada Mexico Netherlands Argentina Australia Belgium Korea, Rep Sum of above
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Japan Germany France U.K. Italy Spain Brazil Canada Mexico Argentina Netherlands Australia India Belgium Sum of above Country 22.6 15.7 8.3 5.6 5.2 4.1 3.8 2.6 2.5 1.9 1.8 1.8 1.4 1.3 1.2 79.8 22.6 13.4 8.7 5.4 4.7 4.0 3.5 2.8 2.5 2.2 2.2 1.9 1.6 1.4 1.3 78.2

2000
Share (%)

Country Brazil Mexico Argentina India Korea, Rep Philippines Indonesia Turkey Thailand Taiwan, China Myanmar Malaysia Peru Colombia Egypt Sum of above

Share (%)

Brazil Mexico Argentina Korea, Rep India Yugoslavia Turkey Philippines Thailand Taiwan, China Indonesia Colombia Puerto Rico Peru Venezuela Sum of above

12.9 9.2 8.9 5.9 5.1 4.3 4.0 3.8 3.8 3.4 2.5 2.3 1.8 1.6 1.5 71.0

12.2 9.8 9.6 6.1 5.7 5.7 4.7 4.1 3.9 2.6 2.4 1.9 1.8 1.7 1.5 73.7

Table 2.5-B Leading Producers of Tobacco (ISIC 314) in 1990 and 2000 World leading producers* 1990 Country USA Germany Argentina Netherlands Indonesia Korea, Rep Cuba Japan U.K. France Austria Brazil Mexico Turkey Spain Sum of above * **
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Germany Indonesia Argentina Turkey Netherlands Austria Korea, Rep Mexico Japan Cuba Spain Brazil U.K. France Sum of above Country 26.6 18.9 3.6 3.2 3.1 3.0 3.0 3.0 2.8 2.5 2.3 2.1 2.1 2.0 1.7 79.9 21.1 17.2 7.6 5.6 3.8 3.4 3.2 3.0 2.6 2.6 2.6 2.1 1.8 1.8 1.6 80.0

2000
Share (%)

Country Indonesia Argentina Turkey Korea, Rep Mexico Cuba Brazil India Bangladesh Philippines Morocco Thailand Pakistan Hong Kong Venezuela Sum of above

Share (%)

Argentina Indonesia Korea, Rep Cuba Brazil Mexico Turkey India Thailand Morocco Philippines Hong Kong Pakistan Yugoslavia Bangladesh Sum of above

11.5 10.1 9.8 9.7 6.9 6.8 6.4 4.8 3.3 2.6 2.5 1.9 1.9 1.5 1.5 81.2

19.0 14.0 9.4 7.3 6.6 6.4 4.6 3.8 2.7 2.5 1.8 1.8 1.7 1.3 1.1 84.0

Excluding Eastern Europe, the former USSR and Mainland China. Excluding Mainland China.

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

33

Table-2.5-C Leading Producers of Textiles (ISIC 321) in 1990 and 2000 World leading producers* 1990 Country USA Japan Italy Germany France India Brazil U.K. Korea, Rep Taiwan, China Spain Turkey Yugoslavia Thailand Canada Sum of above
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Italy Japan India Germany France Taiwan, China Brazil Turkey U.K. Spain Korea, Rep Canada Iran Indonesia Sum of above Country 16.3 16.0 10.5 7.0 4.0 3.9 3.4 3.3 2.9 2.7 2.5 2.2 1.6 1.5 1.4 79.2 18.9 12.3 9.4 8.1 5.2 3.4 3.2 3.2 2.9 2.6 2.2 2.2 2.1 1.4 1.4 78.5

2000
Share (%)

Country India Taiwan, China Brazil Turkey Korea, Rep Iran Indonesia Mexico Pakistan Thailand Hong Kong Peru Argentina Egypt Colombia Sum of above

Share (%)

India Brazil Korea, Rep Taiwan, China Turkey Yugoslavia Thailand Hong Kong Pakistan Iran Argentina Mexico Indonesia Egypt Bangladesh Sum of above

12.9 11.3 9.7 9.0 7.2 5.3 5.1 3.5 3.3 3.2 3.2 3.1 3.1 2.2 1.8 82.2

22.5 8.8 8.8 8.0 6.2 4.0 3.9 3.6 3.4 3.0 2.6 2.2 2.0 1.9 1.8 76.3

Table-2.5-D Leading Producers of Wearing app., Leather, Footwear (ISIC 322-324) in 1990 and 2000 World leading producers* 1990 Country USA Japan Italy Germany France Brazil U.K. Spain Korea, Rep Thailand Yugoslavia Canada Hong Kong Portugal Taiwan, China Sum of above * **
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Italy Japan Brazil Spain U.K. Germany France Canada Hong Kong Thailand Indonesia Argentina Korea, Rep Mexico Sum of above Country 18.3 11.9 11.1 6.2 5.8 5.4 4.0 3.6 2.9 2.5 2.2 2.0 2.0 1.7 1.5 81.1 20.8 13.9 10.4 5.0 3.7 3.5 3.4 3.1 2.4 2.2 2.2 2.2 1.9 1.7 1.6 78.0

2000
Share (%)

Country Brazil Hong Kong Thailand Indonesia Argentina Korea, Rep Mexico Turkey Philippines Bangladesh India Taiwan, China Iraq Tunisia Puerto Rico Sum of above

Share (%)

Brazil Korea, Rep Thailand Yugoslavia Hong Kong Taiwan, China Argentina Mexico Turkey India Iraq Indonesia Philippines Puerto Rico Algeria Sum of above

18.9 10.1 8.8 7.6 6.9 5.2 4.8 3.5 3.3 3.0 2.8 2.3 1.9 1.6 1.5 82.2

15.8 7.1 7.0 6.9 6.2 5.4 5.2 4.1 3.4 3.1 2.8 2.7 2.7 2.0 1.9 76.3

Excluding Eastern Europe, the former USSR and Mainland China. Excluding Mainland China.

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

34

Table-2.5-E Leading Producers of Wood and Cork Products (ISIC 331) in 1990 and 2000 World leading producers* 1990 Country USA Japan Germany France Canada Italy Spain Sweden U. K. Switzerland Indonesia Finland Australia Austria Brazil Sum of above
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Japan Germany Canada France Italy Sweden Spain Finland Switzerland U. K. Austria Australia Indonesia Thailand Sum of above Country 22.1 18.9 8.3 5.0 4.8 3.7 3.7 3.6 3.5 2.8 2.3 2.1 1.7 1.3 1.2 85.0 24.6 10.5 9.6 5.7 4.8 4.6 3.9 3.8 2.9 2.7 2.7 2.4 2.1 2.0 1.5 83.8

2000
Share (%)

Country Indonesia Thailand Malaysia Brazil Argentina Korea, Rep Turkey India Philippines Sudan Taiwan, China Chile Honduras Ghana Mexico Sum of above

Share (%)

Indonesia Brazil Thailand Yugoslavia Malaysia Korea, Rep Taiwan, China Argentina Algeria Turkey India Philippines Chile Cameroon Iran Sum of above

17.5 9.6 8.7 7.8 7.7 6.7 6.0 4.7 2.9 2.3 2.2 2.2 1.8 1.4 1.4 83.0

16.7 12.3 11.2 10.3 5.9 4.9 3.7 2.4 2.2 1.6 1.5 1.4 1.4 1.4 1.3 78.2

Table-2.5-F Leading Producers of Paper (ISIC 341) in 1990 and 2000 World leading producers* 1990 Country USA Japan Germany Canada Italy U.K. France Sweden Finland Brazil Spain Netherlands Korea, Rep Mexico Austria Sum of above
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000 Country USA Japan Germany Italy Canada France U.K. Finland Sweden Brazil Spain Korea, Rep India Netherlands Austria Sum of above Country 31.3 15.5 9.4 4.8 4.6 4.5 4.2 2.8 2.5 2.4 1.9 1.3 1.1 1.0 1.0 88.3 31.3 14.2 8.3 4.9 4.8 4.3 3.4 3.1 2.9 2.6 2.2 1.4 1.3 1.2 1.2 87.1

2000
Share (%)

Country Brazil Korea, Rep India Mexico Taiwan, China Argentina Indonesia Turkey Thailand Philippines Chile Colombia Hong Kong Iran Peru Sum of above

Share (%)

Brazil Korea, Rep Mexico India Taiwan, China Argentina Yugoslavia Turkey Indonesia Chile Colombia Hong Kong Philippines Venezuela Malaysia Sum of above

22.0 10.0 9.4 7.5 7.1 5.6 4.6 4.1 3.7 2.2 1.9 1.8 1.5 1.4 1.3 84.1

20.4 10.7 9.9 8.3 6.5 6.0 5.8 3.2 3.0 2.5 2.5 2.0 1.6 1.4 1.3 85.1

* Excluding Eastern Europe, the former USSR and Mainland China. ** Excluding Mainland China.

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

35

Table-2.5-G Leading Producers of Printing and Publishing (ISIC 342) in 1990 and 2000 World leading producers* 1990 Country USA Japan U.K. France Italy Germany Canada Spain Switzerland Netherlands Australia Sweden Brazil Finland Korea, Rep Sum of above * **
Share (%) 35.7

Leading producers in developing countries** 1990
Share (%) 33.8

2000 Country USA Japan U.K. Italy Germany France Spain Switzerland Canada Netherlands Australia Argentina Sweden Brazil Denmark Sum of above Country

2000
Share (%) 16.4

Country Argentina Brazil Korea, Rep India Thailand Taiwan, China Singapore Hong Kong Malaysia Mexico Turkey Philippines Peru Chile Iran Sum of above

21.1 6.9 4.9 4.6 4.5 2.7 2.5 1.7 1.7 1.3 1.2 1.0 0.9 0.8 91.5

20.4 6.5 5.6 4.9 4.8 2.7 2.0 1.9 1.8 1.4 1.3 1.1 1.0 0.9 90.1

Brazil Korea, Rep Argentina Hong Kong Taiwan, China Yugoslavia India Singapore Turkey Mexico Malaysia Thailand Colombia Indonesia Puerto Rico Sum of above

Share (%) 17.6

12.9 12.8 6.1 5.6 5.0 4.8 3.6 3.5 2.5 2.3 2.3 1.5 1.3 1.1 81.7

13.2 10.4 6.8 6.3 5.3 4.4 4.0 2.4 2.3 2.1 2.0 2.0 1.7 1.4 81.9

Excluding Eastern Europe, the former USSR and Mainland China. Excluding Mainland China. Table-2.5-H Leading Producers of Rubber and Plastic Products (ISIC 355-356) in 1990 and 2000 World leading producers* 1990 2000
Share (%)

Leading producers in developing countries** 1990
Share (%)

2000
Share (%)

Country Japan USA Germany Italy U.K. France Spain Taiwan, China Korea, rep Brazil Canada Belgium Netherlands Mexico India Sum of above

Country USA Japan Germany Italy France U.K. Spain Canada Korea, Rep Brazil Taiwan, China Malaysia Belgium India Argentina Sum of above

Country Taiwan, China Korea, Rep Brazil Mexico India Argentina Malaysia Turkey Indonesia Yugoslavia Hong Kong Singapore Colombia Iran U.A. Emirates Sum of above

Country Korea, Rep Brazil Taiwan, China Malaysia India Argentina Mexico Turkey Indonesia Peru Philippines Singapore U.A. Emirates Iran Thailand Sum of above

Share (%)

22.7 21.5 12.8 6.5 4.8 4.8 2.7 2.6 2.3 2.2 1.8 1.1 1.0 1.0 0.9 88.7

25.8 16.6 11.8 6.3 5.1 4.3 3.4 2.7 2.6 2.0 1.8 1.7 1.2 1.1 1.0 87.4

17.4 15.4 14.7 6.5 6.4 5.2 3.6 3.3 3.2 3.0 2.8 1.3 1.3 1.2 1.2 86.5

15.9 12.2 10.9 10.7 6.5 6.4 6.1 6.1 3.7 1.9 1.8 1.3 1.3 1.2 1.1 87.1

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

36

Table-2.5-I Leading Producers of Non-metallic Mineral Products (ISIC 361, 362, 369) in 1990 and 2000 World leading producers* 1990 Country Japan USA Germany Italy France U.K. Spain Mexico Korea, Rep Brazil Canada Turkey India Switzerland Austria Sum of above * **
Share (%) 20.7

Leading producers in developing countries** 1990
Share (%) 17.3

2000 Country USA Japan Germany Italy Spain France U.K. India Korea, Rep Mexico Turkey Brazil Canada Austria Taiwan, China Sum of above Country

2000
Share (%) 10.9

Country India Korea, Rep Mexico Turkey Brazil Taiwan, China Thailand Malaysia Argentina Iran Philippines Indonesia Egypt Saudi Arabia Morocco Sum of above

15.3 10.0 8.2 5.5 5.5 4.4 2.0 2.0 1.9 1.5 1.5 1.4 1.3 1.2 82.4

15.9 9.5 7.8 4.8 4.8 4.2 3.5 2.3 2.3 2.2 2.0 1.6 1.2 1.2 80.6

Mexico Korea, Rep Brazil Turkey India Taiwan, China Argentina Thailand Yugoslavia Iran Saudi Arabia Malaysia Algeria Indonesia Egypt Sum of above

Share (%) 14.9

10.8 10.7 8.1 7.8 6.1 4.5 4.3 3.0 2.9 2.3 2.1 2.0 1.9 1.8 79.2

10.0 9.9 9.4 8.6 5.1 4.2 3.8 3.6 3.0 2.4 2.2 1.8 1.7 1.5 82.1

Excluding Eastern Europe, the former USSR and Mainland China. Excluding Mainland China. Table-2.5-J Leading Producers of Metal Products (ISIC 381) in 1990 and 2000 World leading producers* 1990 2000
Share (%) 23.3

Leading producers in developing countries** 1990
Share (%) 23.8

2000
Share (%) 14.3

Country Japan USA Germany France Italy U.K. Spain Canada Switzerland Sweden Korea, Rep Brazil Netherlands Australia Taiwan, China Sum of above * **

Country USA Japan Germany France Italy U.K. Spain Canada Switzerland Sweden Brazil Korea, Rep Austria Belgium Mexico Sum of above

Country Korea, Rep Brazil Taiwan, China Mexico Argentina India Yugoslavia Turkey Thailand Singapore Hong Kong Algeria Indonesia Iraq Iran Sum of above

Country Brazil Korea, Rep Mexico Taiwan, China Malaysia India Argentina Thailand Singapore Turkey Iran Indonesia Saudi Arabia Peru Chile Sum of above

Share (%) 13.1

20.6 14.6 6.6 5.1 4.5 2.6 1.9 1.5 1.5 1.4 1.4 1.3 1.1 1.1 88.4

17.2 16.2 6.6 4.6 3.4 2.5 2.1 1.7 1.6 1.4 1.4 1.4 1.3 1.3 86.5

14.0 11.7 7.5 6.8 4.8 4.6 4.0 2.9 2.8 2.8 1.9 1.9 1.6 1.6 83.2

12.7 12.2 11.9 6.1 5.5 5.2 4.0 3.0 2.6 1.9 1.5 1.3 1.3 1.2 83.5

Excluding Eastern Europe, the former USSR and Mainland China. Excluding Mainland China.

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

37

Table 2.5-K China's Position in World Trade in its main export products Average of 1997 and 1998 SITC code 894 851 845 843 752 842 764 846 893 831 778 848 759 899 755 652 762 658 821 653 771 844 651 776 333 772 699 885 Product groups Product category B B B B E B E B D B D B E F D B E B B B D B B E A D C E Percentage share of product group in China's total exports World exports 4.5 24.5 4.4 23.0 3.7 16.7 3.6 16.1 3.4 3.9 3.3 19.0 3.2 4.3 2.7 17.3 2.1 7.0 1.8 31.0 1.8 4.2 1.7 26.4 1.6 2.8 1.6 8.8 1.6 8.8 1.6 12.3 1.5 18.9 1.5 18.6 1.5 5.0 1.4 8.5 1.2 8.6 1.2 17.0 1.2 6.5 1.2 1.1 1.2 1.0 1.2 2.9 1.0 4.4 1.0 12.0 59.7

Toys and sporting goods Footwear Knitted outergarments Women's textiles outergarments Computers Men's textile outergarments Telecom equipment, and parts Knitted undergarments Plastic articles Travel goods Electrical machinery Apparel and clothing accessories Computers and office machines Miscellaneous manufactures Household equipment Woven cotton fabrics Radios Made-up textile articles Furniture and parts thereof Woven man-made fibre fabrics Electric power machinery Textile undergarments Textile yarn Transistors and semiconductors Crude petroleum Electrical apparatus Base metal manufactures Watches and clocks Total shares of above items

Note: The classification of products into product categories in this table follows that in this chapter. The categories are as follows: A=primary commodities; B=labour-intensive and resource-based manufactures; C=manufactures with low skill and technology intensity; D=manufactures with medium skill and technology intensity; E=manufactures with high skill and technology intensity; F=unclassified manufactured product.
Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

38

(d) Concept of Small and Medium Enterprises (SMEs) The focus of this study is on the resource based and export oriented small and medium enterprises (SMEs). But, the concept of small and medium industries differs from country to country. The single criterion for defining small-scale industry (SSI) units in India is historical value of plant and machinery. Workforce as a criterion for defining SSIs in India was discontinued in 1960. Another distinct feature of industrial classification by size in India is the absence of the concept of medium scale industries. In many parts of the world, the widely prevalent notion is that of Small and Medium Enterprises (SMEs). It is also seen that workforce rather than assets are the major criterion for determining the size of a unit in most of the countries. The criteria of defining SMEs in selected Asian and other countries are presented in Table-2.6. The comparison of SME definition as given in Table-2.6 shows that workforce based definition of SSIs and/or SMEs is prevalent in countries such as the United States, U.K., Thailand, Sweden, Spain, Netherlands, Denmark, Korea, Ireland, Indonesia, Germany, France, Greece, Italy and Australia. On the other hand, Belgium, China, Malaysia, Mexico, Portugal, Singapore, and Taiwan use workforce along with one of the other criterion, such as investment ceiling, annual turnover, shareholder fund, gross income/sales, revenue, or fixed assets for categorizing industrial units as SSIs or SMEs. Japan categorizes industrial units as manufacturing wholesale trade and retail trade on the basis of asset capitalization or the number of employees, while Thailand categorizes entire manufacturing sector as labour intensive or capital intensive sector based on employment criteria. 2.2 Structure of the sector Table 2.7 presents the structure of MVA in industrialized and developing countries during 1985-2000. It is observed from the table that in 2000, agro-based and resource-based manufacturing had a share of about 45 per cent in total MVA of developing countries compared with only 28 per cent in industrialized countries. In developing countries, food products and beverages had the highest share (13.3 per cent) in total MVA in 2000 followed by chemicals (12.8 per cent), electrical machinery (12.1 per cent) and transport equipment (9.5 per cent). In contrast, in 2000 the industrialized countries had the dominant share in non-electrical machinery (19.7 per cent) followed by electrical machinery (18.9 per cent), chemicals (9.6 per cent), food products and beverages (8.9 per cent) and transport equipment (8.5 per cent). In both the industrialized and developing countries the shares of agro based and resource based products such as food products and beverages, tobacco, textiles, wearing materials and leather, wood and cork products, paper, printing and publishing have increased during the period 1985-2000.
39

Table 2.6
Definition of Small and Medium Industries in selected Asian and other countries Country China India Indonesia Japan Korea Malaysia Singapore Taiwan Thailand Vietnam Brunei Hong Kong Australia USA Canada Mexico Belgium Denmark France Germany Greece Ireland Italy Netherlands Portugal Spain Sweden Switzerland U. K. Category of industries SME Small Scale Industry SME Manufacturing Wholesale trade Retail trade and services Manufacturing Services SMIs Sis Mis Manufacturing/ services SMEs SSEs Labour intensive sectors Capital intensive sectors SME SME SME Small enterprises Medium enterprises Very small enterprise, Small enterprise, Medium enterprise Manufacturing Micro Small medium SME Manufacturing SME SME Small enterprises Medium enterprises SME Small enterprises Small enterprises Medium enterprises SME Small enterprises Medium enterprises SME SME SME Country’s official definition <100 employees and investment<30 mln Yuan Investment in plant and machinery up to Rupees 10 million <100 employees <300 employees or asset<100 mln Yen <50 employees or assets<30 mln Yen <50 employees or assets<10 mln Yen <300 employees <20 employees <75 workers or share fund<RM 2.5 mln 5-50 workers & share fund<Rm 0.5 ml 50-75 workers, fund RM 0.5-2.5 mln <100 employees and assets <S$12 mln <200 employees, capital<NT$40 mln <20 employees, sales<NT$120 mln <200 employees <100 employees <200 employees Up to 100 employees Manufacturing<100 employees <20 employees <100 employees < 20 employees 20-99 employees 100-499 employees < 200 employees <15 workers and sales <US$175,000 15-99 employees & sales <US$175,000 100-249 workers & sales <US$350,000 < 50 workers & turnover ECU 4.2 mm 6-499 employees 10-499 employees <500 employees <50 employees 50-500 employees <500 employees <200 employees <10 employees 10-100 employees <500 employment <200 employees 200-499 employees <200 employees No fixed definition No fixed definition Measure Employment & Investment Investment Employment Employment and assets Employment Employment And shareholder fund Employ./assets Employment And sales Employment Employment Employment Employment Employment Employment Employment Employment and gross sales or income Empl. / turnover Employment Employment Employment Employment Employment Employment Employment Employment Employment Employment

40

Table 2.7 Structure of MVA in Industrialized and Developing Countries in 1985-2000 (Percentage) Brach (ISIC) 1985 Food products & beverages (311-313) Tobacco (314) Textiles (321) Wearing app., leather (322-324) Wood and cork products (331) Paper (341) Printing and publishing (342) Chemicals (351-352) Petroleum inc. coal products (353-354) Rubber and plastic products (355-356) Non-metallic mineral prod (361-62-69) Basic metals (371-372) Metal products (381) Non-electrical machinery (382) Electrical machinery (383) Transport equipment (384) Prof. Scientific equipment (385) Other manuf. Incl. Furniture (390-332) Total manufacturing (3) 12.0 1.3 4.2 3.3 1.8 3.2 5.1 10.0 2.7 3.8 4.1 6.2 6.1 11.2 9.7 9.9 2.6 2.8 100 Industrialized countries 1990 11.2 1.2 3.7 2.7 1.7 3.2 5.2 10.2 2.4 4.0 4.0 5.6 6.1 12.3 10.7 10.4 2.5 2.9 100 1995 11.0 1.2 2.9 2.2 1.6 3.3 5.1 10.6 2.3 4.2 3.7 5.3 6.0 13.7 12.6 9.4 2.4 2.5 100 2000 8.9 0.8 2.0 1.1 1.3 2.8 4.2 9.6 1.8 3.6 3.0 4.3 5.0 19.7 18.9 8.5 2.1 2.5 100 1985 15.2 3.6 8.2 6.3 1.4 2.1 2.0 11.0 7.9 3.9 4.7 6.5 3.9 5.5 6.6 7.8 0.8 2.6 100 Developing countries 1990 14.5 3.1 7.6 5.4 1.4 2.3 2.1 11.3 8.2 4.0 4.9 6.9 3.8 5.5 8.3 7.4 0.9 2.4 100 1995 14.0 3.1 6.4 3.9 1.2 2.3 2.2 11.9 8.1 4.0 5.2 7.5 3.7 5.4 9.8 8.3 0.8 2.2 100 2000 13.3 3.1 5.6 3.2 1.0 2.2 1.9 12.8 7.8 3.9 4.9 7.5 3.4 5.3 12.1 9.5 0.7 1.8 100

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

41

2.3 Economic Significance (a) Contribution to GDP Growth rates of manufacturing value added and the share of MVA in GDP in selected Asian countries are given in Table 2.8. It is observed from the table that the 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). Contribution to Employment Table 2.9 presents male and female employment by economic activity in selected Asian economies in 1990 and 2000. It is observed from the table that in NIEs, service sector has predominant share in both male and female employment followed by industry and agriculture in that order, whereas in most of the countries in South Asia and South East Asia, agriculture and allied sector has the predominant share in both male and female employment. Over time, consistent with the change in sectoral shares in GDP, both male and female labour force have shifted from agriculture to industry and service in NIEs and South East Asian countries. Table 2.10 provides information on the share of females in total employment by different branches of manufacturing in selected Asian countries (Macao, Taiwan, India, Indonesia, Japan, Malaysia, Myanmar, Nepal, Philippines, Korean republic and Sri Lanka) in the most recent period for which data are available. It is observed from the table that in many countries, the share of female employment in total sectoral employment is higher than that of male employment in tobacco, textiles, wearing apparel, footwear, leather and fur products, chinaware and potteries. (b) Contribution to productivity Table 2.11 presents value added per employee in different branches of manufacturing in selected Asian countries (Japan, Bangladesh, Hong Kong, Macao, Taiwan, India, Indonesia, Malaysia, Korean Republic, Singapore and Sri Lanka) in latest year, for which data are available, and may provide some indication about differences in labour productivity in different segments. For almost all the countries, iron and steel has the highest productivity of labour, while the sector with the lowest value added per employee is not uniform across the countries. However, productivity of majority of agro-based and resource-based industries such as food products and beverages, textiles and clothing, apparel, leather products and footwear were relatively high in most of the countries.

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Table-2.8 Growth rate and share of MVA in selected Asian countries in 1980-2000 Country Total MVA Growth rate (%) 1980-1990 Hong Kong Korea,Republic Singapore Taiwan,China 4.7 12.1 6.6 8.4 10.7 5.8 8.0 12.6 6.8 8.9 -0.1 0.2 9.5 7.1 3.0 12.7 7.4 12.0 6.6 7.7 6.3 4.8 2.8 5.1 2.2 5.9 2.4 8.5 3.9 1.4 9.0 7.5 4.0 3.1 1990-2000 -1.8 7.5 6.7 5.1 13.2 1.1 8.7 6.6 12.1 9.3 6.6 3.0 5.8 11.1 7.3 10.5 7.2 8.8 8.5 3.6 8.1 0.6 1.9 6.4 4.3 5.9 3.2 5.8 2.9 2.9 8.9 6.5 2.7 2.8 Per capita MVA Growth rate (%) 1980-1990 3.5 10.8 4.3 7.0 9.1 2.7 3.8 10.5 4.1 6.1 -2.0 -2.2 7.6 4.7 0.4 9.9 5.2 8.6 4.3 4.5 4.6 4.2 2.0 3.0 -0.6 3.4 0.2 6.3 1.0 -0.6 6.9 5.3 1.3 1.4 1990-2000 -3.6 6.6 3.6 4.2 12.1 -0.2 5.4 5.0 9.4 7.0 4.9 0.8 4.4 9.3 4.9 8.3 5.3 5.6 5.9 1.0 6.9 0.3 Value ($) 2000 1499 3434 5049 3920 347 210 13 201 53 1258 70 187 650 28 53 30 92 63 21 65 122 6865 2669 314 37 88 556 2685 78 643 300 292 580 1037 1985 20.9 25.6 22.2 35.7 31.6 26.5 4.1 17.2 7.6 19.9 8.5 24.6 22.0 14.0 13.4 5.7 17.1 5.3 5.9 16.3 12.6 25.8 22.9 21.4 10.2 15.3 22.2 21.2 12.6 25.0 22.8 18.9 16.8 22.7 1990 2000 Share of MVA in GDP

Newly Industrialized Economies (NIEs)
16.3 28.9 27.2 32.7 33.1 29.0 5.2 20.7 10.0 26.5 7.8 24.8 27.2 12.3 12.7 8.1 18.7 5.4 6.0 17.4 14.8 25.8 22.4 22.2 9.7 16.8 21.9 22.7 12.3 24.1 25.1 23.0 16.2 22.4 8.9 35.0 25.4 29.3 42.8 30.1 7.7 24.8 17.9 32.4 8.2 24.1 31.7 16.4 16.0 12.1 20.0 6.1 8.8 17.0 19.0 23.9 21.5 25.5 10.0 18.3 21.7 25.3 12.3 22.8 30.4 25.9 16.8 22.3

China & Mongolia
China Mongolia

South-East Asia
Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam

South Asia
Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka

East Asia
Japan Industrialized countries Developing countries Least developed countries Low income Middle income High Income Africa Latin America South and East Asia ASEAN West Asia and Europe World

World
1.4 4.6 1.7 3.8 1.4 4.3 0.4 1.2 7.3 4.7 0.5 1.3

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Report 2002.

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Table 2.9 Employment by economic activity in selected Asian economies in 1990 and 2000 Country Agriculture Male as % of male labor force 1980- 19981982 2000 Female as % of female labor force 1980- 19981982 2000 Industry Male as % of male labor force 1980- 19981982 2000 Female as % of female labor force 1980- 19981982 2000 Services Male as % of male labor force 1980- 19981982 2000 Female as % of female labor force 1980- 19981982 2000

Newly industrializing Economies (NIEs) Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 2 31 2 .. .. .. .. 57 77 34 .. 60 68 .. .. .. .. .. .. .. 44 9 .. .. .. .. .. .. .. 7 .. 0 10 0 .. .. .. .. .. .. 21 .. 47 50 .. .. .. .. .. .. .. 38 5 .. .. 22 20 .. .. .. 4 .. 1 39 1 .. .. .. .. 54 82 44 .. 37 74 .. .. .. .. .. .. .. 51 13 .. .. .. .. .. .. .. 6 .. 0 13 0 .. .. .. .. .. .. 13 .. 27 47 .. .. .. .. .. .. .. 49 6 .. .. 21 11 .. .. .. 2 .. 47 32 33 .. .. .. .. 13 7 26 .. 16 13 .. South Asia .. .. .. .. .. .. 19 East Asia 40 World .. .. .. .. .. .. .. 42 .. .. .. 31 28 .. .. .. 36 .. .. .. .. .. .. .. .. 22 .. .. .. 16 14 .. .. .. 15 .. .. .. .. .. .. .. .. 51 .. .. .. 48 52 .. .. .. 60 .. .. .. .. .. .. .. .. 72 .. .. .. 64 75 .. .. .. 82 .. 38 28 22 51 57 58 73 .. .. .. .. .. .. 23 .. .. .. .. .. .. 18 .. .. .. .. .. .. 22 .. .. .. .. .. .. 30 .. .. .. .. .. .. 37 .. .. .. .. .. .. 28 .. .. .. .. .. .. 27 28 34 33 .. .. .. .. .. .. 33 .. 18 20 .. 56 24 40 .. .. .. .. 13 4 20 .. 15 8 .. 12 19 23 .. .. .. .. .. .. 29 .. 13 17 .. 52 37 65 .. .. .. .. 29 16 40 .. 25 20 .. 71 56 67 .. .. .. .. .. .. 46 .. 36 31 .. 43 37 59 .. .. .. .. 33 13 36 .. 48 18 .. 88 68 77 .. .. .. .. .. .. 58 .. 61 36 ..

China and Mongolia

South-East Asia

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Table-2.10 Share of Females in Total Employment by Branches in Selected Asian Countries (Percentage) Branch (ISIC) Macao 1997 48 24 39 70 81 58 78 10 6 20 29 .. 50 .. .. 40 30 .. 17 16 .. .. 11 17 69 4 57 68 72 Taiwan 1997 45 34 93 53 79 34 65 41 38 32 37 24 45 10 11 41 45 39 38 23 15 23 33 35 52 24 57 52 42 India 1997 15 6 35 9 55 16 38 9 1 4 3 1 19 0.3 5 4 5 7 2 7 1 1 2 2 8 1 12 16 11 Indonesia 1999 41 35 82 52 78 55 73 36 32 23 .. 17 47 .. .. 23 49 .. .. .. 4 14 25 17 62 11 63 .. .. Japan 1999 59 31 34 60 84 50 54 29 28 32 30 11 34 9 15 29 40 42 24 19 10 17 25 24 37 17 36 42 35 Malay -sia 1997 38 38 16 49 73 71 55 35 28 34 38 18 40 11 13 45 43 55 28 16 13 22 25 42 67 21 91 71 47 Myanmar 1999 .. .. 47 .. .. 53 73 .. 21 .. 45 .. 46 13 .. 35 47 50 36 .. .. 20 27 .. .. .. .. 38 .. Nepal 1996 8 9 7 37 18 8 16 3 5 19 7 .. 10 5 .. 12 7 .. 6 15 0.1 .. 2 1 5 .. .. 21 22 Philippines 1995 33 9 45 52 80 67 58 17 29 23 31 20 33 13 23 41 27 44 9 14 8 18 19 48 70 12 80 65 46 Korea Rep 1999 50 24 19 47 74 42 49 23 20 31 11 30 .. .. 20 26 51 17 14 7 12 20 19 41 10 36 43 31 Sri Lanka 1998 34 12 71 62 86 69 57 35 4 20 12 19 41 .. .. 30 40 48 17 28 6 3 7 .. 45 10 30 74 58

1. 2. 3. 4. 5.

Food products (311-312) Beverages (313) Tobacco (314) Textiles (321)

Wearing app. (322) 6. Leather and fur products (323) 7. Footwear (324) 8. Wood and cork products (331) 9. Furniture, fixtures (332) 10. Paper (341) 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. Printing and publishing (342) Industrial Chemicals (351) Other Chemicals (352) Petroleum refineries (353) POL and coal products (354) Rubber products (355) Plastic products (356) Pottery,earthen ware (361) Glass (362) Other non-metal min. prod (369) Iron and Steel (371) Non-ferrous metals (372) Metal products (381) Non-electrical machinery (382) Electrical machinery (383) Transport equipment (384) Prof. Scientific equipment (385) Other manufactures (390) Total manufacturing (3)

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

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Table 2.11 Value added per employee in selected Asian countries (in 100 US dollars)
Products (ISIC) Japan 1999 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Food products (311-3120 Textiles (321) Wearing apparel (322) Leather and leather products (323) Footwear (324) Wood and cork products (331) Furniture and fixtures (332) Paper (341) Rubber products (355) Plastic products (356) Pottery, china, earthenware (361) Iron and Steel (371) Non-ferrous metals (372) Metal products (381) 738 535 339 635 505 621 427 1030 1013 853 615 1440 1096 869 Bangl adesh 1997 37 11 9 39 33 17 15 24 11 38 13 82 .. 23 Hong Kong 1999 356 327 276 213 142 277 261 351 336 294 .. 460 462 326 Macao 1997 108 128 113 74 83 67 142 99 .. 119 .. .. .. 129 Taiwan 1990 276 161 203 124 123 109 226 231 141 160 116 442 347 132 India 1998 26 20 26 20 21 13 25 28 47 28 20 67 68 34 Indonesia 1999 46 42 25 28 27 38 20 81 46 36 72 149 198 56 Malay -sia 1997 208 197 74 78 80 101 101 173 167 168 102 741 337 172 Korea Rep 1999 639 427 238 421 267 423 363 715 570 484 260 1175 773 409 Singapore 1999 463 335 180 342 187 291 235 498 409 303 .. 750 343 354 Sri Lanka 1998 60 28 25 40 51 22 8 50 46 33 28 80 35 30

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

2.4 Issues at stake (a) Prospects of agro based and resource based SMEs Up to mid-1997, the economies of Southeast Asian countries experienced robust economic growth due to: • • • • • • Political, social and economic stability Endowment of natural and human resources Efficient legal and institutional framework Pro-business and pro-foreign direct investment policies Sound macroeconomic policies Emphasis on the market, private enterprise, outward-looking industrialization and relatively open economies.

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Despite this growth, Asian SMEs suffered from age-old problems: • • • • • Low level of productivity, lower average value added and output levels per employee; Inadequate access to financial institutions and high credit cost; Higher costs of raw materials because of small quantities ordered; Inadequate level of technology and managerial skills due to lack or inadequacy of R&D and difficulty of access to technological information; Difficulties in marketing and distribution due to lack of direct overseas market exposure and penetration;

Although many government programs focused on developing the SME sector, these support programs suffered from the following deficiencies:

• • • • •

Involvement of too many government agencies with minimal coordination; Short run and unfocused approach for the development of SMEs; Absence of continuity or frequent revisions of many programs; More benefits accrued to large and medium industries compared to small industries; Involvement of many non-governmental organizations for private groups (local chambers, federations and associations) necessitating need for greater coordination.

Economic liberalization affected Small and Medium Industries in many ways with some positive as well as negative effects:

• • • • • • • •

Decrease in number of micro-enterprises. Better access to and low prices for machinery, equipment and tools. Greater competition in consumer goods sectors. Improved access to the system of new and universalized government incentives. Increased access to financial resources. High costs of support services including infrastructure. More opportunities for subcontracting and networking from foreign investment. Greater competition from foreign investments in modern market and labour force.

The East Asian economic crisis diminished the positive effects, at times even negating them and magnifying the negative effects. The crisis exposed weaknesses in the competitive ability of the traditional manufacturing and had disproportionate effects on small and medium-size enterprises (SMEs). Although East Asian firms, including those in crisis countries, were adept in adopting new manufacturing techniques, they faced continual challenges from low wage developing countries and from China and Japan. As in the case of Mexican crisis, the East Asian crisis led to a sharp fall of production and investment in non-traded sectors. This is expected because currency depreciation, which favours traded goods, reduces incentive to invest in non-tradable sectors.

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(b) Major issues for consideration Above analysis indicates that major issues at stake for the development of agro-based and resource based SMEs include the following: (h) Integration of agriculture and agro-based industries (i) Availability of raw materials and credits (j) Location of industry, transport costs and access to markets (k) Economies of scale and size of markets (l) Availability of skilled labour and capacity building (m)Lack of modern technology (n) International barriers on trade (o) Role of multinationals and foreign investment (p) Environment and sustainability In many developing countries there is lack of co-ordination for the development of agriculture and agro based industries due to several restrictions imposed on both internal and external trade of agricultural commodities. Due to lack of basic infrastructure such as electricity and transport, agro-based food processing industries are generally established nearer to the cities and towns, which are the major consumption and demand centres for these goods. As a result, transport costs for raw materials become high and impose a burden on the cost of production. In order to reap several fiscal and monetary benefits, agro based and resource-based industries generally lack vertical expansion and therefore suffer from the low economies of scale. Availability of Skilled labour and Modern Technology Lack of technological upgradation in SSI is attributable to a number of factors such as lack of coordination between technology schemes required for SSI and technology developers, and lack of resources and technological manpower by SSI. The reasons for such lack of effective coordination between R&D schemes by technical institutes and development policy of the SSIs could be ascribed to the following factors: • Institutional research is mainly science-driven and not technology/ demand-driven. • The basic research payoff period is too long. • The growing complexity of industrial R&D. • R&D institutions act as an 'ivory tower' and do not commercialize the research result. • Industry's primary orientation is towards short-term profits and product improvements and not on long term cost effectiveness. Technology development capability of the SSI is found to be weak mainly due to: • Inadequate management skills. • Lack of access to technological information and Consultancy services. • Relative isolation from technology hubs. • Low levels of investment in R&D. • The desire to avoid risks (the 'not-me-first' syndrome). • Emphasis on production and not on production costs.

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(c) Availability of raw materials and credits In many developing countries, the predominant view is that state owned banks could reduce poverty by providing subsidized lending to the SMEs. This view is based on the perception that the private sector is not able or willing to supply the necessary financial services to key economic sectors and it does not have any interest in lending to the poor. However, experience indicate that the state-owned financial institutions often hinder more general financial market development, serve only a small proportion of the poor and have favoured politically connected larger borrowers. They have also high transactions cost, high level of non-performing assets and low productivity. In the late 1980s, this approach was countered by a belief that state withdrawal would be more beneficial and more efficient. As a result, either closing or privatizing State owned financial institutions became an important priority in adjustment programs supported by IMF and other international financial institutions. However, the expectation that private institutions would rapidly take the place of state-owned banks and improve the provision of financial services to the poor has not been materialized. In recent years, financial services for the poor through the so-called "micro-finance movement" have generated considerable support by academics, donors, and development practitioners. Availability of credit from both formal and informal micro-finance institutions can generate employment in small informal businesses, which in turn has the potential to increase the income of the poor. (d) International barriers on trade There are still several barriers in multilateral trading arrangements for market access in labour-intensive manufactures. Although there have been some recent initiatives in this area, including preferential market access provided by the EU, and the United States, the improved access they offer is restricted to the poorest countries. Pockets of protection remain in products of particular interest to developing countries. Between 6 per cent and 14 per cent of Quad (Canada, the EU, Japan, and the United States) tariff lines are subject to "tariff peaks." The effect of these tariffs is further aggravated by the subsidies on agriculture in OECD countries (which depresses world prices of commodities), quotas in textiles and clothing trade, and high barriers in inter-developing country trade. Trade in textiles and clothing is still governed by quota regulations, and developing countries’ manufactured exports encounter high tariffs and contingent forms of protection such as anti-dumping action and labour and environmental standards. Tariff peaks imposed by developed countries are often concentrated in labour-intensive manufactures. Textiles, clothing, leather and rubber products, footwear and travel goods are subject to tariff peaks in Canada and the United States; and leather, rubber, footwear and travel goods are subject to tariff peaks in Canada and the United States; and leather, rubber, footwear and travel goods in Japan. In the EU, tariff peaks concern mainly agricultural

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products, but leather, rubber, footwear and travel goods are the most affected categories within manufactures (UNCTAD/ WTO, 2000). Table 2.12 gives average most favoured nation (MFN) tariff rates as applied to selected groups of manufactured imports by developed and developing economies. The Table confirms that developed countries apply higher import tariffs to traditional labourintensive products (textiles, clothing, leather, travel goods and footwear) than to other products, and within the group of traditional labour-intensive manufactures, import tariffs are highest on clothing and footwear. The low-income countries in Africa and Asia have, on average, higher tariffs than the middle-and high-income developing countries. The table also reveals that the NIEs apply, on average, lower tariffs than developed countries to all of the selected traditional labour-intensive manufacturing sectors. Table 2.12 Average MFN tariffs of selected economies by product groups (per cent)
Importing economy/ region Manufa ctures 4.1 5.4 4.9 4.4 2.9 3.1 4.0 Textiles Clothing Leather & travel goods 5.0 4.7 4.2 3.3 10.2 2.7 5.5 Footwear Computers and office equipment 13.7 11.1 16.3 12.4 19.2 9.5 13.4 0.3 0.3 0.2 0.8 0.0 0.3 0.4 Telecom, Audio. Video. equipment 2.6 5.4 1.5 4.1 0.0 3.0 1.6

Developed countries
Australia Canada European Union Japan New Zealand United States Developing countries NIEs Hong Kong Rep of Korea Singapore Taiwan, China

7.8 9.9 10.7 7.9 6.5 2.4 9.1

14.5 20.7 18.4 11.4 11.0 13.7 11.4

ASEAN-4
Indonesia Malaysia Philippines Thailand

South Asia
Bangladesh India Sri Lanka Other Asia China Latin America North Africa Sub-Saharan Africa High/ middle income developing countries

3.6 0.0 8.0 0.0 6.4 10.6 9.0 9.9 7.4 16.1 21.4 22.2 34.1 8.0 12.5 9.6 11.9 25.9 16.8 14.6

4.5 0.0 9.4 0.0 8.3 14.7 12.6 16.7 10.7 18.7 24.2 30.2 39.0 3.4 14.3 9.7 15.8 38.4 21.8 19.5

6.4 0.0 12.4 0.0 13.1 24.1 18.1 19.6 19.2 39.7 29.2 .. 40.0 11.0 20.8 16.1 20.8 44.1 34.5 26.9

2.8 0.0 6.5 0.0 4.6 10.8 8.8 9.5 7.8 17.3 22.1 17.1 32.3 17.0 19.3 13.0 14.1 33.8 19.6 16.8

4.3 0.0 12.2 0.0 5.0 23.6 17.8 26.8 15.0 34.8 33.6 .. 44.0 23.2 25.8 20.4 20.8 44.5 26.9 25.1

2.3 0.0 7.3 0.0 1.6 5.8 3.8 2.0 1.0 16.4 14.0 9.4 28.9 3.6 8.3 4.0 8.3 15.6 15.5 10.3

4.3 0.0 8.0 0.0 8.1 14.4 13.9 13.1 10.9 19.5 22.3 22.5 37.0 7.4 17.2 13.7 13.6 25.4 23.9 15.3

Source: UNCTAD World Trade Report 2002.

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The rapid growth of developing country T&C exports has created a high dependency on these products for export earnings (Table-2.13). Textiles alone accounted for 51 per cent of Pakistan's merchandise exports in 1999, clothing for 50 per cent of Sri Lanka's. Among least developed countries, T&C represented 83 per cent of Bangladesh's merchandise exports and 87 per cent of Cambodia's. The remarkable growth in T&C exports from developing countries was achieved despite extensive quantitative restrictions and high tariffs in developed countries, which are the main export markets for most developing countries. Agricultural liberalization in both industrial and developing countries is likely to have long-term, dynamic effects on developing country production and trade. A joint study by the IMF and World Bank (2002) indicate that gains from agricultural liberalisation alone would be on the order of US$30 billion in income and US$120 billion in exports per year. Increased investment and upgraded technologies could magnify the benefits of liberalization, but require a framework of supportive domestic policies and infrastructure (transport, logistics, credit, and technical assistance). Tariff barriers on T&C far exceed those on other manufactured products, in industrial and developing countries alike. Despite an international agreement to phase out quotas on textile and clothing trade, the vast majority is still in place. The backloading of quota removal by Canada, the EU, and the United States is set to cause sharp adjustment pressures on the less competitive suppliers in both industrial and developing countries at the end of the implementation period in early 2005. Protection often imposes disproportionate burdens on the poor. Protection has raised the prices of necessities in industrial countries, with a larger share in the consumption basket of lower-income households. In developing countries, barriers to exports of labourintensive goods slowed job-creation. It is estimated by the World Bank that industrial country restrictions on trade in textiles and clothing prevented the creation of over 20 million jobs in developing countries. Therefore, a removal of restrictions on trade on textiles and clothing is necessary for alleviation of poverty in developing countries. A further concern is that antidumping measures have become far more common in recent years with developing countries being increasingly active. There is a risk that this trend might intensify as statutory protection declines. Furthermore, technical barriers (including health, safety, and product standards) have been accumulating at a fast pace, and many developing countries are ill prepared to meet their complexity and cost. Most developing countries have preferential access to industrial country markets through GSP schemes, but the benefits are often limited. Preference margins are smaller for "sensitive" products, which are also the most protected. Utilization rates of GSP schemes tend to be low due to restrictive rules of origin or social and environmental requirements.

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Table-2.13 Exports of textiles and clothing in 2001 (in billions of US dollars and percentages) Countries World Camdodia Macao SAR Bangladesh Pakistan Mauritius
Sri Lanka

Value (US$ billion) 356.4 1.1 2.1 4.2 6.7 1.0
2.5

Percentage in the country’s total merchandise exports 5.8 88.7 83.9 83.4 72.8 63.6
54.4

Tunisia Turkey Morocco India Romania China Hong Kong SAR Portugal Egypt Bulgaria Jamaica Greece Indonesia Vietnam Croatia Italy Korea Taiwan, China Peru Thailand Slovenia Poland Slovak Republic Uruguay Philippines Mexico Belgium-Luxembourg Czech Republic Colombia

2.5 10.2 2.4 10.2 2.5 52.2 37.7 4.2 0.6 0.8 0.3 1.3 8.2 2.0 0.6 25.2 16.0 14.7 0.6 6.1 0.7 2.7 0.9 0.2 2.7 11.2 11.5 1.9 0.8

42.6 38.4 33.7 28.2 24.4 20.9 18.6 18.2 17.8 16.9 16.5 16.4 13.3 13.1 12.7 10.6 10.6 9.9 9.1 8.8 8.7 8.4 7.7 7.4 6.8 6.8 6.4 6.4 6.0

Source: International Monetary Fund (2002)

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(e) Role of multinationals and foreign investment (i) International Production Networks The three product groups with the fastest and most stable growth rates over the past two decades (namely, parts and components for electrical and electronic goods, labourintensive products, such as clothing, and finished goods with high R&D content) had been most affected by the globalization of production processes through international production sharing. Lower transport and communication costs and reduced trade and regulatory barriers facilitated production sharing, which are generally concentrated in labour-intensive activities. These activities involve technically unsophisticated production such as clothing or footwear; but they also involve separation and location in different sites of labour-intensive segments of otherwise technologically complex production processes, such as those in the electronics or the automotive industry. International production networks involve large TNCs, which produce a standardized set of goods in several locations, or groups of small and medium-sized enterprises located in different countries and linked through international subcontracting. In the production of standardized goods, scale economies play a key role, and TNCs seek to increase profits by choosing locations with appropriate combinations of high labour productivity and low wage and infrastructure costs. However, know-how and technology are usually kept within the TNCs themselves. (ii) Production sharing and preferential market access International production sharing constitutes a particular form of input-output relations between imports and exports that tends to raise the direct import content of exports relative to value added. The development of international production sharing has often been associated with the provision of preferential market access. The MFA quota restrictions have had a crucial impact on production location and expansion of trade in textiles and clothing, particularly in Asia, where countries that had exhausted their quotas in industrial markets shifted production to new locations, using them as bases for exports. Preferential tariffs provided under regional trade agreements among developing countries, such as the Southern Common Market (MERCOSUR) in Latin America and the ASEAN Free Trade Agreement (AFTA) in Asia, had a substantial impact on the expansion of trade in specific products among the countries involved. For example, the creation or consolidation of regional automobile industries in Latin America and in the Association of Southeast Asian Nations (ASEAN), respectively, has given rise to substantial increases in FDI and intra-industry trade in these regions.

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(f) Environment and sustainability Location, safety and environmental regulations are necessary for the efficient functioning of industry, but these are a relatively small component of sectoral regulation. Complicated regulations and laws in most developing countries have their origins to offset market failures. The financial sector, transport and telecommunications, professional services and media all have special regulatory requirements, but most of these regulations are excessively detailed and outdated. The reduction, simplification and rationalisation of rules and procedures, laws and regulations alongwith greater transparency and reduction of bureaucratic intervention are needed to ensure that a country can obtain benefits from development of industry including SMEs. Industries in agriculture, forestry, fisheries, minerals and hydro power have various environmental aspects that should be taken into account on a nationwide basis rather than project by project. Agriculture and real estate present difficulties for foreign investment because of complexities of landownership, and rules and taxes regarding tenancy, sale, purchase, transfer, lease or mortgage. Because of these problems, many countries like India donot allow foreign investment in agriculture and real estate. In the case of plantation, foreign investment in nucleus estates and processing facilities can provide a market for farmers and at the same time enable them to improve their productivity. The rapid increase of industrialisation puts a pressure on infrastructure facilities for human settlements manifesting in environmental problems in the form of increased incidence of air, water and noise pollution. The manufacturing technology adopted by most of SMEs places a heavy load on environment through intensive use of resources and energy as in evident in natural resource depletion (agricultural land, fossil fuel, minerals and forestry) and water, air and land contamination. With high proportion of fossil fuel as the main source of industrial energy and major air polluting industries (such as mini steel, cement and fertilizer plants and automobiles) growing, industrial development has contributed significantly to air pollution. SMEs also lack proper arrangements for disposal of solid and hazardous wastes with serious environmental health implications. Most of the SMEs in the developing countries lack technical knowledge and financial resources to install proper affluent treatment plants and other pollution abatement equipment. Although the industries are encouraged and fiscal incentives such as soft loans and excise and customs duty concessions are provided for installing equipment for pollution control, in many cases government has to take punitive measures including legal action and shifting of SMEs out of the urban areas. In recent years, international trade issues have been very much inter-mixed with environmental issues. The massive demonstration of NGOs at Seattle, demand of USA for explicit mandate by WTO on environmental and labour standards, insistence on environmental cleanliness by developed countries, more vigorously by EU countries, are all testimony to the impending threat to SSIs for non-conformance to standards on safety, health and environment (SSHE) in developing countries.

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3 RATIONALE FOR DEVELOPMENT AND CONTRIBUTION OF AGROAND RESOURCE-BASED INDUSTRIES TO POVERTY ALLEVIATION 3.1 Rationale for development of agro and resource based SMEs Rationale for promoting agro and resource based SMEs lies in their valuable contributions to employment generation and poverty alleviation. These enterprises contribute significantly to poverty alleviation and promote economic and social justice by employing a significant portion of the poor and low skill work force, which may otherwise remain unemployed or under employed. Higher employment in rural areas helps in reduction of inequalities, development of backward areas and balanced regional growth and development. The poor persons cannot participate in the growth process for reasons of extreme deprivation or vulnerability combined with poverty or face continuing exposure to risks of ill health and malnutrition, which may jeopardize their ability to participate in the opportunities offered by growth. Employment generated by the SMEs provides effective safety nets that insure rural poor against the income fluctuations. Development of agro-based and resource-based industries provides opportunities for the growth of economic activities in the informal sector and micro enterprises in both rural and urban areas. The informal sector remains an important source of income and employment for the poor and self-employed in developing countries. This sector is very diverse and covers multiple economic activities ranging from petty trading and personal and domestic services to manufacturing, transport and construction. The social groups include artisans and craftsmen, hawkers, fruits and vegetable vendors, women, and daily labourers for construction and other services. Employment or ownership of microenterprise provides the poor with a source of empowerment and income security and enables them to participate actively in rural and overall economic development. Agro-based industries open up new channels of distribution and marketing for agricultural commodities produced by the small and marginal farmers and raise their incomes. Development of resource-based industries, particularly SMEs, in rural areas leads to valorization of agricultural land, agricultural commodities and other resources. Locations of agro-based and resource-based industries in rural areas help to distribute broadly among the rural poor the benefits of economic growth. They also improve value addition and productivity of rural industries through wider distribution networks and greater access to both internal and external markets. A dynamic small and medium industries sector serves not only to create employment but also to earn foreign exchange through exports, upgrade the quality of the labour force and diffuse technological know-how throughout the economy. These industries help to mobilize domestic resources by utilising the savings, labour and agricultural raw

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materials that otherwise remain idle. They serve the low-income consumer markets and produce a wide variety of goods that also include sophisticated products for export. The location of small and medium industries in rural areas creates livelihood opportunities that help to stop migration to urban centres. They provide a training ground for the small-scale entrepreneurs and business management personnel, who may later join larger undertakings. The role of financial markets as an instrument to promote SMEs and to alleviate poverty is generally focused on supplying credit facilities. However, credit is only one of the financial services that the poor need. Access to bank accounts or savings facilities in the rural areas is equally important. For example, people who extract their income primarily from agriculture must build up financial assets following harvests to sustain themselves for the rest of the year. Even the poorest households are eager to save if they can obtain positive real interest rates and there are conveniently located deposit collecting facilities. This point has been confirmed by the experience in Bangladesh and Indonesia. Integration of SMEs into global market offers the potential for more rapid growth and poverty reduction. Increased market access for agricultural products would work to directly address poverty reduction in developing countries. While the rapid expansion of demand for unskilled labour in manufacturing and urban services in many developing countries has sharply reduced rural poverty, about three-quarters of the world's poor still live in rural areas, where agriculture is often the dominant economic activity (IFAD, 2001). Agriculture accounts for about 27 per cent of GDP in developing countries, a similar share of exports and 50 per cent of employment. This dependency on agriculture is even higher in LDCs. But agricultural markets are among the most heavily distorted and attract tariffs several times higher than those facing manufactured imports. Historically, textiles and clothing (T&C) have played a unique role in economic development and poverty reduction. Their contribution to the Industrial Revolution in Western Europe and North America in the 18th and 19th centuries is well known, and they continued to spearhead industrialization in many developing countries in the 20th century. Since textile and clothing production often requires only simple technology and is intensive in unskilled labour, many developing countries have a strong comparative advantage in these sectors. In the mid-1960s, developing countries accounted for 15 per cent of world textile exports and less than 25 per cent of world clothing exports. By 1998, these shares had reached 50 per cent and 70 per cent, respectively. However, the sector has also long been a prime target for protectionism. Despite these positive aspects, SMEs are criticised for their inability to realize economies of scale in procurement and production, and to have higher costs of production. In many countries, SMEs exist on the strength of costly government support programs in terms of several fiscal, monetary and other concessions.

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3.2 Growth and Poverty Alleviation In many Asian developing countries, agro-based and resource-based small and medium industries have succeeded in achieving the intended objectives of absorbing surplus labour, alleviating poverty and bringing about a more balanced regional growth. In many cases, SMEs have succeeded in raising their share in terms of number of establishments, employment and output vis-à-vis large-scale industries. This is clearly illustrated in the Philippines in the case of professional and scientific equipment, electrical machinery and non-metallic products, pottery, glass products and electrical equipment. Table 3.1 presents the average annual growth rates by broad branches of manufacturing in selected Asian economies (India, Indonesia, Republic of Korea, Singapore, Sri Lanka and Hong Kong) during 1990s. Although growth rates of agro based and resource based industries were adversely affected in the East Asian countries due to economic crisis at the end of 1990s, India and Sri Lanka achieved significant growth rates in the value added of these industries in the 1990s During 1990s, sectors achieving average annual growth rates exceeding 8 per cent (i.e. the average growth rate of MVA recorded by East Asian countries in 1990s) include the following: Non-metallic mineral products, motor vehicles and trailers, paper and paper products, radio and TV sets, textiles, chemical products, basic metals, machinery and equipment in India; Food and beverages, wearing apparel and fur products, paper products, coke and petroleum, basic metals in Indonesia; Coke and petroleum products, chemical products, basic metals, computers and office machinery, radio and TV sets, motor vehicles and other transport equipment in Republic of Korea; Chemical products in Singapore; Wood and paper products in Sri Lanka; None in Hong Kong which recorded negative growth for most of the subgroups. Of all the crisis economies, Korea’s industrial production recovered the fastest rising above the pre-crisis levels within two years, whereas the levels of industrial production in Malaysia, Thailand and Indonesia remained below the pre-crisis level even after two years (World Bank 2000). The more rapid recovery in Korea reflects partly its greater strengths in sectors such as electronics, computers and telecommunications. Korean firms also performed well in transport equipment, whereas Malaysian and Thai firms suffered in these sectors. Korea had poor performance in traditional and resource-based sectors such as food, chemicals, base metals, paper and pulp products.

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Traditional manufacturing sectors were expected to lead the way to recovery in the crisis countries having lower wages. In Thailand the textiles sector grew rapidly following the depreciation of Baht, but output fell back to pre crisis level as the currency appreciated and Thai products faced steep competition in export markets. Traditional manufacturing in Korea rebounded only slightly after the crisis reinforcing a secular decline. Small and medium sized firms were adversely affected in all crisis countries. While aggregate Korean industrial output started to increase in late 1998, production by SMEs continued to fall in absolute terms until July 1999, resulting in a decline by one-third from pre crisis production levels. In other countries, where SMEs had larger proportion in industrial production, poor performance by SMEs intensified overall industrial set back. For example, more than 50,000 small firms and 400,000 households throughout Thailand accounted for about 50 per cent of non-performing loans in 1999. The inability to restructure these debts effectively contributes to financial sector problems, which feed back into continued financial difficulties of SMEs. Despite these adverse effects of the economic crisis, countries continued with their commitment to liberalization and Globalisation while strengthening international regulation for financial markets and capital flows. Countries also enhanced their global competitiveness with structural reform programs supported by the multilateral organisations like the ADB, IMF and the World Bank. Countries continued to review the rigid and outdated laws, rules and regulations particularly in services, finance, labour, technology and all production inputs. As SMEs account for almost 80 per cent of industrial establishments in Asia, and these SMEs faced serious shortage of capital, markets and professional management, all the countries continued to have special programs for the development and technology upgradation of the SMEs. They also emphasised the development of both physical and social infrastructure, especially public utilities, research and development and technical-oriented infrastructure, which are particularly needed by the small and medium enterprises. The countries continued to move from resource based and labour intensive types of industries to skill and knowledge based and medium and high technology industries. They also liberalised further foreign investment policies to attract more of the widely accepted foreign direct investment and portfolio investment. Table 3.2-A to 3.2-C present sectoral shares in manufacturing employment and value added in selected countries (India, Indonesia, Philippines, Republic of Korea, Singapore, China, Hong Kong, Sri Lanka and Thailand) in the most recent year for which data are available. These tables indicate that agro-based and resource-based manufacturing units account for major shares in value added in all these countries.

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Table 3.1 Average Annual Growth of Manufacturing in Selected Asian economies during 1990-1999 (in percentage) Products by ISIC 15 16 17 18 19 20 21 22 23 24 25 26 27 Food and beverages Tobacco products Textiles Wearing apparel, fur products Leather, its products, footwear Wood products (excl.furniture) Paper and paper products Printing and publishing Coke, refines petroleum Chemicals and products Rubber and plastic products Non-metallic mineral products Basic metals India 4.7 2.6 8.3 -4.4 1.7 0.5 10.9 .. 4.0 8.3 3.0 18.3 9.3 2.3 8.0 3.4 5.3 10.6 2.7 13.4 75 .. .. 7.1 Indonesia 100.0 .. 4.3 26.6 .. -3.5 28.2 -3.6 10.7 .. .. 4.6 12.6 0.3 -9.0 .. 2.8 .. -6.5 -4.8 .. .. .. 3.9 Korea Republic 2.6 0.8 -3.1 -5.0 -7.6 -3.1 5.4 0.6 19.0 13.6 3.7 2.6 7.3 1.4 4.3 73.9 6.2 55.7 3.7 14.3 25.7 -2.1 .. 9.9 Singapore 0.4 .. -5.6 -5.4 -1.5 -3.6 -1.4 4.4 1.8 17.1 1.5 1.5 -0.6 2.5 3.9 .. 5.8 .. .. 2.6 .. -5.3 .. 8.1 Sri Lanka 1.6 .. 7.0 .. .. 14.5 10.0 .. .. 1.1 .. 0.2 0.1 5.7 .. .. .. .. .. .. .. .. .. 3.1 Hong Kong 0.0 .. -2.1 -1.2 .. .. 2.4 .. .. -4.7 -7.1 .. -4.9 .. -5.5 .. 0.2 .. .. .. .. -3.7 .. -1.9

28 Fabricated metal products 29 Machinery & equipment n.e.c. 30 Office / computing machinery 31 Electrical machinery 32 Radio, TV, comm. Equipment 33 Medical & optical instruments 34 Motor vehicles, trailers 35 Other transport equipment 36 Furniture, residual manufacturing 37 Recycling
38 Total Manufacture

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Table 3.2-A Distribution of Employment and value added among the manufacturing sectors (in percentage) Products by ISIC 15 Food and beverages 16 Tobacco products 17 Textiles 18 Wearing apparel, fur 19 Leather, its products, footwear 20 Wood products (excl.furniture) 21 Paper and paper products 22 Printing and publishing 23 Coke, refines petroleum 24 Chemicals and products 25 Rubber and plastic products 26 Non-metallic mineral products 27 Basic metals 28 fabricated metal products 29 Machinery & equipment n.e.c. 30 Office & computing machinery 31 Electrical machinery 32 Radio, TV, comm. Equipment 33Medical & optical instruments 34 Motor vehicles, trailers 35 Other transport equipment 36 Furniture, manufacturing n.e.c. 37 Recycling Total Manufacturing Labor 16.1 5.3 17.1 3.3 1.5 0.9 2.0 1.3 0.8 9.6 3.4 5.2 7.3 3.2 8.8 0.2 3.1 1.7 1.0 3.3 3.4 1.3 0.0 100.0 India MVA 12.2 2.0 12.4 1.0 0.5 2.5 2.0 1.3 2.0 15.7 3.7 5.3 9.1 4.0 5.8 0.5 8.5 2.4 1.5 4.7 4.3 1.5 0.1 100.0 Indonesia Labor 13.9 6.0 15.7 10.7 7.0 10.2 2.4 1.3 0.1 4.7 6.9 0.1 1.4 2.7 1.2 0.0 1.7 3.7 0.5 1.0 1.6 6.9 0.1 100.0 MVA 13.6 8.9 12.6 5.0 3.7 7.5 3.8 2.9 0.2 7.2 5.3 0.0 4.5 2.9 0.8 0.0 3.1 4.9 0.6 2.6 6.9 2.8 0.0 100.0 Philippines Labor 16.8 0.7 4.8 14.2 3.8 2.1 2.1 2.7 0.2 5.0 3.8 4.3 3.5 3.6 3.3 2.1 4.3 11.3 3.3 1.8 1.0 5.0 0.1 100.0 MVA 29.8 4.1 2.1 5.2 1.0 0.9 2.2 2.0 9.7 12.0 2.5 4.8 3.9 1.8 1.7 3.2 3.4 2.8 1.2 2.0 1.8 1.9 0.0 100.0

Source: The International Yearbook of Industrial Statistics 2002, UNIDO.

• In India, chemical products had the highest share in MVA (15.7 per cent) followed by

textiles (12.4 per cent), food and beverages (12.2 per cent), basic metals (9.1 per cent) and electrical machinery (8.5 per cent). Sectors having significant share in employment include food and beverages, tobacco, textiles, chemical products, basic metals, machinery and equipment, and automobiles. • Dominant sectors for MVA in Indonesia include food and beverages (having a share of 13.6 per cent in MVA), textiles (12.6 per cent), tobacco products (8.9 per cent) and wood products (7.5 per cent). Sectors having significant share in employment include food and beverages, textiles, chemical products, non-metallic mineral products, basic metals, machinery and equipment, electrical machinery and automobiles. • Dominant sectors for MVA in Philippines include food and beverages (29.8%) and chemical products (12%). Sectors having significant share in employment include food and beverages, textiles, wearing apparel and fur products, chemical products, non-metallic mineral products, electrical machinery, radio and TV sets and furniture.

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Table 3.2-B Distribution of Employment and value added among the manufacturing sectors (in percentage) Products by ISIC
15 Food and beverages 16 Tobacco products 17 Textiles 18 Wearing apparel, fur 19 Leather, its products, footwear 20 Wood products (excl.furniture) 21 Paper and paper products 22 Printing and publishing 23 Coke, refines petroleum 24 Chemicals and products 25 Rubber and plastic products 26 Non-metallic mineral products 27 Basic metals 28 fabricated metal products 29 Machinery & equipment n.e.c. 30 Office & computing machinery 31 Electrical machinery 32 Radio, TV, comm. Equipment 33Medical & optical instruments 34 Motor vehicles, trailers 35 Other transport equipment 36 Furniture, manufacturing n.e.c. 37 Recycling Total Manufacturing Korea, Rep Labor 7.0 0.1 9.0 5.5 2.1 1.0 2.2 3.1 0.4 5.4 5.8 3.4 4.2 6.8 10.2 1.9 5.2 9.7 1.7 8.0 3.8 3.2 0.2 100.0 MVA 7.8 1.1 5.5 1.9 1.0 0.6 2.3 2.5 3.8 9.5 4.2 3.9 6.6 4.0 7.1 2.8 3.7 16.2 1.0 8.7 4.1 1.6 0.1 100.0

Singapore
Labor 5.1 0.0 0.4 2.3 0.3 0.4 1.3 5.8 0.9 6.4 5.7 1.7 0.4 10.8 10.3 12.6 3.1 17.4 2.4 1.0 9.3 2.2 0.1 100.0 MVA 3.1 0.0 0.2 0.5 0.1 0.2 0.8 4.8 4.1 18.5 2.3 1.4 0.4 4.8 5.3 22.5 1.9 19.4 2.8 0.6 5.8 0.7 0.1 100.0 Labor 8.2 0.6 11.0 4.4 2.4 1.0 2.6 1.3 1.5 11.1 3.9 9.3 8.3 3.6 4.3 6.9 4.6 4.3 1.2 6.8 2.0 0.5 0.1 100.0

China MVA 10.2 5.4 6.7 3.1 1.7 0.8 2.1 1.2 3.6 12.0 3.6 6.1 9.0 3.3 3.6 4.0 6.0 7.6 1.1 7.2 1.3 0.5 0.1 100.0

• Dominant sectors in MVA in Korean Republic include radio and TV sets (16.2%),

chemical products (9.5%) and food and beverages (7.8%). Sectors having significant share in employment include food and beverages, textiles, wearing apparel and fur products, chemical products, rubber and plastic products, fabricated metal products, machinery and equipment, radio and TV sets, electrical machinery, and automobiles. • Dominant sectors in MVA Singapore include computers & office machinery (22.5%), radio and TV sets (19.4%) and chemical products (18.5%). Sectors with high employment potential include food and beverages, chemical products, fabricated metal products, machinery and equipment, computers and office equipment, radio and TV sets, and automobiles. • China had significant share of MVA in food and beverages, chemical products, basic metals, radio and TV sets and automobiles. Sectors having significant share in employment include food and beverages, textiles, chemical products, non-metallic mineral products, basic metals, computers and office equipment, and automobiles.

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Table 3.2-C Distribution of Employment and value added among the manufacturing sectors (in percentage) Products by ISIC Hong Kong Sri Lanka Thailand
15 Food and beverages 16 Tobacco products 17 Textiles 18 Wearing apparel, fur 19 Leather, its products, footwear 20 Wood products (excl.furniture) 21 Paper and paper products 22 Printing and publishing 23 Coke, refines petroleum 24 Chemicals and products 25 Rubber and plastic products 26 Non-metallic mineral products 27 Basic metals 28 fabricated metal products 29 Machinery & equipment n.e.c. 30 Office & computing machinery 31 Electrical machinery 32 Radio, TV, comm. Equipment 33Medical & optical instruments 34 Motor vehicles, trailers 35 Other transport equipment 36 Furniture, manufacturing n.e.c. 37 Recycling Total Manufacturing Labor 11.1 0.4 14.0 16.5 0.1 0.2 1.5 16.0 0.2 2.4 2.9 2.0 0.9 3.9 3.5 2.5 2.9 7.5 2.3 4.8 0.0 4.3 0.0 100.0 MVA 10.6 0.9 10.9 10.9 0.1 0.1 1.3 16.2 0.3 3.3 2.2 4.2 1.0 3.0 4.2 3.6 3.6 13.0 2.5 4.6 0.0 3.7 0.0 100.0 Labor 14.1 5.6 15.2 33.3 2.3 1.4 1.0 2.1 0.4 2.2 7.1 5.8 0.3 1.3 0.4 0.7 0.7 0.4 0.1 1.6 0.0 4.0 0.0 100.0 MVA 26.4 12.2 9.3 18.4 2.4 0.6 1.1 0.9 2.1 6.8 6.7 4.0 0.5 0.9 0.5 1.0 1.2 0.5 0.0 2.2 0.0 2.2 0.0 100.0 Labor 19.0 0.4 10.1 7.1 3.9 2.1 1.4 1.6 0.1 3.0 8.8 6.4 4.2 2.8 4.8 1.8 4.4 6.4 0.3 3.9 0.1 7.5 0.0 100.0 MVA 25.4 0.1 6.8 3.3 2.2 0.8 1.8 1.3 0.1 4.4 6.7 8.6 1.5 3.3 5.4 3.1 5.6 3.8 0.2 10.8 0.8 3.9 0.0 100.0

• Dominant sectors in MVA in Hong Kong include food & beverages, textiles, wearing

apparel, printing and publishing, radio and TV sets. Sectors having significant share in employment include food and beverages, textiles, wearing apparel and fur products, printing and publishing, radio and TV sets, furniture and automobiles. • Sri Lanka had dominant shares in MVA in food and beverages, tobacco products, wearing apparel, chemicals, rubber and plastic products. Sectors with high employment include food and beverages, tobacco products, textiles, wearing apparel, rubber and plastic products, non-metallic mineral products, and furniture. • Thailand had dominant shares in food and beverages, motor vehicles, non-metallic mineral products, textiles and rubber and plastic products. Sectors with high employment include food and beverages, textiles, wearing apparel, rubber and plastic products, non-metallic mineral products, radio and TV sets, and furniture.

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The significance of SMEs in the development process may be beyond the recorded shares in MVA and employment that are directly attributed to them. They are often the vehicles, which facilitate the birth and expansion of large-scale industries in the structural transformation that occurs with growth in income. For example, in the Republic of Korea, much of the increase in employment of factories with 100 or more workers since 1960s came from small firms that grew larger and larger over time. In India, Indonesia, and the Philippines, most of the enterprises now in existence began as household firms, subsequently growing into the SMEs and into larger enterprises in a number of cases. In order to achieve faster growth and alleviation of poverty, industrialization in many developing countries has focused on development of textiles and clothing industries. As a labour-intensive sector, clothing provides significant job opportunities in labour-abundant economies having a comparative advantage due to lower wages. Moreover, for over two decades the quota regulations of the Multi-Fibre Arrangement enabled latecomers to access markets for clothing and textiles once other countries filled their MFA quotas. More recently, improvements in production and communication technologies and declining transport costs have enabled geographical separation of the labour-intensive segments from the skill-and capital-intensive segments of the manufacturing process in textiles and clothing. For example, while growing automation has increased the capitalintensity of the pre-assembling stages of the production process, the assembling stages have remained relatively labour-intensive. As a result, it has become both technically feasible and economically profitable for high-wage country manufactures to relocate their assembling stages of production to low-wage countries and to re-import the end products for domestic sale or for export to third markets. The NIEs in East Asia were the first to establish production facilities under outsourcing agreements with large United States retailers and brand-name merchandisers. It is generally held that prices of manufactures are much less flexible than prices of primary commodities in world trade, because markets for manufactures are much less competitive. Most markets for manufactures have high barriers to entry; many are oligopolistic, controlled by a small number of producers who often compete on the basis of quality, design, marketing, branding and product differentiation rather than prices. In most major industrial countries, wages in firms are not flexible due to a number of labour market regulations, including minimum wage legislation, collective bargaining and restrictions on hiring and firing. The absence of such conditions in the labour markets of most developing countries, together with large amounts of surplus labour, often implies that wages in developing countries are much more flexible than in industrial countries. This increases the ability of firms to lower wages when there are price declines so those profit margins are maintained. It thus allows them to compete on the basis of prices in markets for labour-intensive manufactures.

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Furthermore, the East Asian experience shows that mobility of low-skilled labour is greater among developing countries than between developing and industrial countries. All these factors combined not only introduce greater price flexibility in the markets for developing countries labour-intensive manufactures vis-à-vis those exported by industrial countries, but also exert a downward pressure on their prices and terms of trade. The share of developing countries in world export grew considerably during the period 1980-1998 for both clothing and selected products from the electronics industry, which are labour-intensive. However, the increase was concentrated in a small number of economies. The NIEs accounted for two thirds of all clothing exports from developing economies during the first half of the 1980s, but their share declined thereafter to about one fifth by the mid-1990s, as they upgraded their exports and began to exist from the clothing markets. Their market shares were taken up by other developing countries in Asia, notably those in South Asia, the ASEAN-4, China, Turkey and Mexico. In the markets for the selected products from the electronics sector NIEs accounted for most of the spectacular increase in the share of developing countries in world exports during; 1980-1995. During this period, the share of these economies increased from two thirds to three fourths of all developing country exports of these products. Other developing countries, such as the ASEAN-4, China and Mexico have succeeded in increasing their market shares in the past few years. It is interesting to note that the ASEAN-4 and China have gained market shares in the electronics sector much more rapidly than in clothing. 3.3 Employment generation Small and medium industries have predominant shares in output, exports and employment in agro-based and resource-based industries in many Asian countries such as Bangladesh, India, Pakistan, China, Korea, Indonesia, Thailand and Philippines. Even they played a significant role in the economic development in USA, Germany, Japan and Singapore. They are mainly in the textiles, garments, wood products, food processing, leather products, fabricated metals, machinery and equipment, rubber and plastic products, pottery, printing and publishing. International experiences indicate that even under most competitive conditions, unorganised and small business enterprises not only provide major employment opportunities but also survive alongside with the highly organised sector. For example, There are about 23 million small business enterprises in the USA that constitute the principal source of new jobs in the economy. All firms under the US Small Business Act:

• Employ 53 per cent of the private workforce;
• Represent 99 per cent of all employers; • Account for more than 50 per cent of GDP; • Account for 28 per cent of jobs in the high technology sectors; • Provide 55 per cent of all innovations;
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• • • • •

Provide virtually all new jobs in the economy; Account for 47 per cent of all sales in the country; Account for 35 per cent of federal contract deals; Account for 51 per cent of private sector output; and Represent 96 per cent of all US exporters.

Nearly 60 per cent of US small business have 4 employees or less, 18 per cent have 5 to 9 employees, 11 per cent have 10 to 19, 9 per cent have 20 to 99, and only 1.4 per cent have above 100 to 499 - the traditional high-end demarcation in qualifying in the small business segment. In Germany, 64 per cent of all employed have their jobs in small and medium firms, which contributed at least 48 per cent to the Gross National Product and 27 per cent to exports for the year 1990. As regards Asian countries, in 1990 small and medium enterprises accounted for 95 per cent of establishments in Bangladesh, 98 per cent in Thailand, 93 per cent in Malaysia, 70 per cent in Indonesia and 80 per cent in the Philippines. The SSI sector in India produces over 7,500 products ranging from consumer goods to sophisticated machinery and computer peripherals and covers a wide spectrum of industries. Small-scale industries basically fall under the unorganised sector, which accounts for 93 per cent of employment. Besides, SSI sector contributes over 40 per cent of the gross turnover in the manufacturing output, 45 per cent of manufacturing exports and 40 per cent of total exports. In Japan, of the total 54.16 million people engaged nationwide (excluding those in primary industries), 42.27 million, i.e., 78 per cent employment is in small and medium enterprises. Their share of employment in various manufacturing sub sectors ranged from 41 percent in transport machinery to 100 percent in silverware. SMEs accounted for 99 per cent of all business establishments, 52 per cent of both manufacturing value added and exports, 64 per cent of wholesale business and 78 per cent of retail sales. Korean development has been largely driven by the expansion of conglomerates. But in the 1980s, the SME sector began to grow rapidly. There are now nearly 96,000 small and medium manufacturing enterprises, which employ 1 to 300 persons each. They represent 99 per cent of all manufacturing enterprises and account for 69 per cent of total employment in this sector. Like South Korea, Taiwan has made rapid strides in expanding its industrial base and in enhancing exports. SMEs in Taiwan account for 90 per cent of enterprises and 65 per cent of exports. The root of the progress made by both the Republic of Korea and Taiwan is the combined result of the sound economic policies and a strong scientific and technological base. Like South Korea, Taiwan benefited tremendously from the Asian export boom to the USA. The main exports have been textiles, clothing, footwear, furniture, chemicals, electric appliances and consumer and computer electronics.

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In China, the highest priority is given to employment generation, environmental and ecological protection, poverty eradication and raising the living standards of people in rural areas by increasing agricultural productivity. In China SMEs provide nearly 75 per cent of urban job opportunities and the number of units has exceeded 8 million, being 99 per cent of total enterprises in China. A large number of these enterprises are employing around 4 persons per unit under the SME sectors. SMEs account for 78 per cent of employees, 64 per cent of industrial turnover, 52 per cent of corporate profits and 52 per cent of fixed assets held by industry. In 1985, the Chinese Government started the SPARK programme, a project aimed at establishing "big agriculture" in the vast rural areas for fostering the development of industrialised agriculture, animal husbandry, forestry and all types of agro and forest produce processing industries. The SPARK programme is a scientific and technological development plan implemented by the State Science and Technology Commission (SSTC) to develop advanced technologies for the township enterprises. From 1986 to 1993, more than 50,000 projects had been implemented at various levels under the SPARK programmes, covering more than 85 per cent of the total number of towns and training 30 million technical and management personnel. Over 400 types of advanced technical equipment had been developed and more than 100 SPARK technologyintensive zones had been established. Since 1993, 71 regional pillar industries, 43 SPARK technology-intensive zones and 173 industries at provinces have been established all over China. Today, there are over 2000 technology trade markets all over China employing about 1 million people. In China, rural industries dominate production in cement, iron and steel, fertilisers, hydropower and agri-machinery and contribute 25 per cent of rural employment. Initial focus of rural industry in China was on primary processing of farm production, handicrafts, manufacturing and repairing of simple farm tools, developing and processing local industrial resources. The industries were small and used primitive techniques. Reforms in China have encouraged rural industrialisation alongwith entry of multinationals in export-oriented sectors. Sub-contracting and ancillarisation have helped the dispersal of industry and growth of the small and medium industries and rural non-farm sector in many countries. The most successful example of sub-contracting from large urban areas to small rural entrepreneurs is Japan. The division of responsibility and resources, in keeping with its economic propensity, has given Japan an unparalleled global edge. Its success is attributed to expanding demand, limited capital of large companies, low basic skills required by small units and paternalistic relationships. Big business houses share the production process, technology and innovation with small/medium industries. Thailand, Malaysia and Indonesia have adopted Japanese model with variations to suit each nation’s cultural and social environment. In Thailand large companies are allowed to develop ancillaries, which can operate within the same factory premises and yet entitled to have independent recruitment, wage structure and service conditions.

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In Pakistan, sub-contracting have been in practice over a long period in traditional products such as carpets, garments and footwear. Sub-contracting is also strong in the labour intensive activities of rattan in Indonesia and for garments in Philippines. “Bapakangkat” (parent Unit) and “Anakangkat” (related units) of Indonesia are good examples of networking. Under the scheme, in addition to contractual networking, the Bapakangkat provides technical and financial assistance, leases plant and equipment and trains people who leads to higher employment and lowering of cost of production. These facts suggest that although the definition of SSEs may not be uniform across countries, they contribute significantly to employment generation. As unemployment is the root cause of poverty, the SMEs through employment generation help in poverty reduction. However, all available studies show that the growth and the quality of employment in the SMEs has been very much affected by the absence of timely low cost credit, improved technology, good infrastructure, quality consciousness, modern marketing, proper organisation and a synergy with the large organised industries. All measures should be taken to improve technology, quality and productivity by vocational and other training, skill development, organizational changes like cluster development etc. Indeed hardly 5.3 per cent of Indian youth in the labour force in the age group of 19-24 in 1999-2000 are trained in vocational skills through formal training as against nearly 30 per cent in selected LDCs and above 70 per cent in developed countries. SMEs have high employment elasticity. Their employment intensive character should be protected by selecting proper labour-intensive technology drawn from all sources including from the grassroots indigenous level. Proper rules and regulations should be laid down so that benefits of higher growth get translated in the form of increased earnings of the workers. As the major portion of the poor exist in the unorganised sector, a faster growth and productivity in this sector will also reduce poverty. In the attempt to increase the labour productivity, it is necessary to improve the job quality and its security by major changes in legislation regarding basic social security, working conditions minimum wages and protection of labour interests.

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4 ECONOMIC POLICIES AND STRATEGIES FOR DEVELOPMENT OF AGRO-BASED AND RESOURCE-BASED SMEs

4.1 Industry Development Formulation The development of the agro-based and resource-based industries provides the poor opportunities to generate income and assets. But, these industries face many barriers development and cannot fulfill their potential to generate income or improve wealth distribution to the poor and to contribute to poverty alleviation. In rural areas, the business environment may not be favourable to thriving agro-based industries. This reflects not only low skill development but also low access to capital, information and technology. These constraints are discussed in detail in the following sections. Even after establishment of the World Trade Organisation (WTO), there are still several barriers in multilateral trading arrangements for market access in agro-based manufactures. Although there have been some initiatives in this area such as preferential market access provided by the EU and the United States, the improved access they offer is restricted to the poorest countries. Given that those countries generally are not large exporters of labour-intensive manufactures, the initiatives do little to improve market access for such exports. In Canada and the United States, tariff peaks are concentrated in textiles and clothing; in the EU and Japan, in agriculture, food products and footwear. The majority of developing countries with capacity to expand exports of agro-based products continue to face significant barriers. Trade in textiles and clothing continues to be governed by quota regulations, and developing countries’ manufactured exports encounter high tariffs, and increased contingent forms of protection, such as antidumping action and labour and environmental standards. The roadblock towards technological upgradation and transfer of technology to SSIs is also due to complex modalities of technology transfer, lack of knowledge about new global trade system which is being engineered by WTO through GATT, GATS, TRIMS and TRIPS, and various technical and non-tariff barriers for exports of products by SSIs imposed by advanced countries on grounds of environment, health, labour etc. Another important constraint pertains to inadequate availability of finance towards the acquisition of patenting for any indigenously developed technology or product. Technology quality management by adhering to ISO standards has been found lacking in many SSIs. After the establishment of World Trade Organisation (WTO), the roles of Intellectual Property Rights (IPRs) and Patenting have become dominant in the flow of technologies and international trade. IPRs include copyrights, patents, trademarks and designs. All these have far-reaching implications for SSIs since reverse engineering, an important source of technology for SSIs, is difficult under the stricter IPR regime. The issues of IPRs and Patenting have serious implications for specific segments like agro and food processing, biotechnology, chemicals including pharmaceuticals etc.

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In order to learn from international best practices and to formulate appropriate policies for the development of agro-based and resource-based industries, the following measures are suggested: (a) A task force at the regional level may help to come with an action plan to formulate strategies to support the development of agro-based and resource-based industries. (b) A regional capacity building program could help regional governments or development agencies to work with the private sector to stimulate growth and opportunity (c) Identification of some pilot programs with progressive regions can provide a good demonstration or benchmark for other regions to replicate. 4.2 Business environment (a) Licenses and regulatory system All the countries have specialised organised and very elaborate system of rules and regulation, licenses and control for the development of SMEs. Fiscal and other incentives are also given in some form or other to the SMEs and export oriented units in almost all countries including developed countries. Some of these policies are directed explicitly at these industries, while others are generally aimed at firms in certain priority sectors on account of their special role in development. The nodal agency for SSIs promotion and development in the USA is called Small Business Administration (SBA). Established in 1953, SBA provides financial, technical and management assistance to enable Americans to start, run and grow their business enterprises. SBA has a portfolio of $45 billion business loans and is the USA's single largest promoter of small business. It provides loans, loan guarantees and what are called "disaster loans". In 1998, the SBA offered management and technical assistance to more than one million business entrepreneurs. Japan has enacted the Small and Medium Enterprise Basic Law which stipulates that the government must implement necessary measures in a comprehensive manner in the following areas for the SME sectors: (a) (b) (c) (d) (e) (f) Modernization of equipment; Improvement of technology; Stimulation of demand; Rationalisation of management; Structural upgrading of small and medium enterprises; and Prevention of excessive competition and establishment of proper sub-contracting.

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The SPARK programme on rural industrialisation approved by the Chinese Government in 1986 aims at modernising the rural economy through Science and Technology. The SPARK programme works at three levels - county, province and central government. In general, units under SPARK include (i) village and township enterprises having R&D units in cooperation, (ii) R&D units which have village or township units for cooperation and (iii) scientific and production consortium. SPARK has adopted a mechanism of setting up technology development and extension network that interlinks local sectors and central departments and institutions for continuous flow of technology. In addition, China has set up non-profitable productivity centres promoted by the SSTC that provide comprehensive service to medium and small-sized enterprises. These productivity centres are equipped with computers, fax machines and training equipment and systems used in developed USA, Japan, Hong Kong, Italy, Australia, the European Union (EU) and countries like Singapore. China’s experience in providing 100 million jobs in rural enterprises under non-farm sector during 1986-1993 reveals that its rural non-agricultural enterprises owe their success to a market-orientation, availability of infrastructure, stress on higher technology, incentive-linked wages, competitiveness, diversity in products and community cooperation. Small and medium enterprises play an important role in South Korea's economy that is supported both by Government and a well-developed institutional mechanism and infrastructure. The development of SSIs has South Korea's Constitutional support which states that "promotion of SSIs is the duty of the nation", while the country has also placed a comprehensive SME legislation on its statute book. In India, the primary responsibility to develop village and small industries rests with the State Governments. However, Central Government provides various fiscal and monetary incentives and support services for promotion of SSIs, and also for development of all industries in industrially backward areas for reducing regional imbalances. The government prescribes minimum credits (presently 40 per cent of total credits) that government-owned commercial banks must lend to the priority sectors which include agriculture, SSI and retail trade and transport operators. In addition, it has established specialized institutions that extend long-term finance for fixed asset purchases. Some credits and equity funds also come from state industrial development corporations. Government provides various other fiscal, monetary and non-monetary incentives to promote SMEs and export oriented units (see Box 4.1). India has a unique policy of reservation of products for exclusive manufacture in the SSI sector as a promotional and protective measure for the SSI, which was initiated in 1967 with 47 items and reaching a peak level of 873 items in October 1984. The policy is applicable only to the manufacturing units and not for servicing or repairing activities. This policy has statutory backing from the Industries (Development and Regulation) Act, 1951. As on June 30, 2001 there were 799 items in the reserved list. An item, viz. readymade garments, was de-reserved in January 2001 and further 12 items were de-reserved in June 29, 2001 and 14 items in 2002.

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Box- 4.1

Policy Support to SSI Sector in India

The policy framework for the growth and development of the small and medium industries in the competitive environment inter alia includes: (i) (ii) SSI sector falls under the Priority Sector Lending Programme of the Banks. Fiscal incentives to SSI units by the Central government include Corporate tax exemptions or concessions for exports and SMEs, Customs and excise duty drawback for inputs and raw materials for exports, Excise duty exemption or concessions for SSIs, Tax holiday for new industrial units in infrastructure and backward regions etc. State Governments incentives to SSIs include provision of land on easy terms, capital subsidy, seed capital assistance, subsidy on power generating sets, exemptions or deferment of sales tax and stamp duty, lower tariffs for public utilities, interest subsidy, assistance for preparation of project reports, subsidy for obtaining technical know-how and testing in approved test houses, etc. Protection through product reservation (currently 749 items out of about 8000 items manufactured in the SSI sector are reserved). Price Preference (up to 15 per cent) and Purchase Preference in respect of 358 items by the Government Departments/Agencies. Support for technology upgradation through Small Industries Service Institutes (SISIs), Product-cum-Process Development Centres (PPDCs), Regional Testing Centres (RTCs), Tool Rooms and Training Centres financial incentives for acquiring ISO9000 certification, adoption of bar coding etc. Entrepreneurship Development Programmes conducted by various National level Institute and support to State level Institutes. Encouraging Ancillaries, Vendor Development, Sub-contracting Exchanges etc. Emphasis on Development of Infrastructure for the SSI sector.

(iii)

(iv) (v) (vi)

(vii) (viii) (ix)

Recent Initiatives to increase credit flow to the SSI Sector include the following: (i) Enhancement of loan limit under Composite Loan Scheme, (ii) Increase in project cost limit under National Equity Fund (NEF) Scheme, (iii) Credit Guarantee Fund Trust for Small Industries, (iv) Concessional assistance under Technology Development and Modernisation Fund (v) Special schemes for modernisation of units under Technology Upgradation Fund Scheme for textiles and jute industries (vi) Tannery Modernisation Scheme (vii) Credit Linked Capital subsidy Scheme for Technology Upgradation. (viii) Public sector banks have so far opened more than 400 specialised SSI branches. (ix) Laghu Udyam Credit Card Scheme launched in November 2001.

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(b) Fiscal and investment incentives Tax incentives accorded to firms are in the form of exemptions from sales taxes, customs duties and income taxes. Such exemptions are granted for a variety of purposes and have selective effects from the standpoint of firm size. In India, for example, small firms are given central excise duties exemption which declines with firm size until it disappears for large industries. However, many countries generally grant tax concessions on the basis of considerations other than size. Tax holidays are granted for the establishment or expansion of industries, which are classified as new or necessary or particularly desirable such as infrastructure and core industries. Investment incentive packages are also provided for diversifying exports and to regional dispersion of growth and employment opportunities. India, which perhaps has the biggest program and network for small industries, has an elaborate organization to promote investments in different small industries and the ancillaries. These provide for industrial estate facilities, tax holidays, export incentives and other direct subsidies such as transport subsidies concessional credit and purchase and price preference. In Indonesia and Philippines, new investment promotion facilities such as import duty concessions on capital goods and raw material imports are available to firms, including small and medium industries, in priority sectors. The general nature of the investment incentive system, except in India, however, places the SMEs in a disadvantageous situation for the following reasons:

• Proliferation of licenses, permits, taxes and duties, control over agricultural price • • • • •

policies imposes major costs on the agro-based and resource-based SMEs. Administrative procedures, documentation and follow-up activities for incentives involve fixed cost, and the net value of the implicit subsidy is much lower for SMEs. SMEs have less capability in financial management and project evaluation, making it more difficult to meet documentation and project feasibility prerequisites for a loan. Investment boards are generally located in the capital, and the travel time and expense can be a significant burden on SMEs that are generally located in the rural areas. Many types of tax concessions, e.g., exemption from duties on imported machinery, are more valuable to large firms than to small labour-intensive firms. General tax rates on corporate and individual incomes are very high in many countries in Asia (Table 4.1) (c) Export promotion schemes

Of all the policies pursued in East Asia, "export promotion" is the most often talked about. This policy starts from a basic principle in international economics, that any tax on imports is a tax on exports, either through raising the cost of export production, or making the domestic market more attractive. In East Asia, one the major factor for

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economic success has been the maintenance and encouragement of export competitiveness, while retaining some degree of domestic protection.

Table 4.1 Tax Policies in selected Asian economies in 1990 and 2000 Country Tax Taxes on Domestic taxes revenue income, profits on goods and % of and capital gains services GDP % of total taxes % of corresponding value added Export duties % of tax revenue Import duties % of tax revenue Highest marginal Income Tax rate Individual Corporate rate Exemption limit income (US $) Times PC GNP 2000 2000 2000 2000

2000

1990

2000

1990

2000

1990

2000

1990

2000

Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan

.. .. 16 .. 7 22 .. 17 .. .. 3 14 14 15 7 .. 10 .. 9 12 15 ..

.. 38 45 .. 50 28 .. 65 .. 43 30 33 26 .. .. .. 19 .. 13 13 12 73

.. .. 50 .. 7 16 .. 65 .. .. 35 44 34 32 15 .. 36 .. 21 28 15 ..

Newly industrializing Economies (NIEs) .. .. .. .. .. 7 4 .. 1.5 9 .. 6 .. 6 7 6 9 .. .. .. 7 .. 7 9 15 2.4 .. 5 .. 6.5 16 .. 6 .. .. 4 5 8 8 5 .. 5 .. 7 8 14 .. 0 0 .. 0 0 .. 0.1 .. 10 0 0 0.2 .. South Asia .. .. 0.1 .. 0.4 0 4 East Asia 0 .. 1.4 0 .. 0.1 .. 1 0 0 .. .. 36 .. 37 44 27 .. 0 .. 0 2.3 .. 0.5 .. .. 0 0 0.3 0 13 4 .. 22 20 .. 7 .. 15 23 28 24 ..

.. .. 3 .. 7 8 .. 2 .. .. 9 21 12 21 30 .. 27 .. 31 16 13 ..

17 40 28 .. 45 .. 20 35 40 29 30 32 37 50 .. .. 30 .. .. 35 35 37

13,462 63,507 400,000 .. 12,089 .. 38,412 20,949 658 39,474 .. 10,000 92,829 5,695 .. .. 3,222 .. .. 17,271 3,630 156,863

0.5 7.1 16.2 .. 14.4 .. 147.7 36.8 2.3 11.7 .. 9.6 46.4 14.6 .. .. 7.2 .. .. 39.3 4.3 4.4

16 28 26 .. 30 .. 20 30 .. 28 30 32 30 32 .. .. 40 .. .. .. 35 30

China and Mongolia

South-East Asia

Note: Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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East and Southeast Asia, in addition to maintaining realistic exchange rates, and reducing the average level of tariffs, pursued policies directly in support of exports by granting free trade status for all export activities. This is achieved through: (i) fenced private or public free trade zones (FTZs); (ii) nonfenced FTZs; (iii) bonded manufacturing warehouses (BMWs); (iv) duty exemption; and (v) duty drawbacks/rebates. The first three were specialized schemes, which had been widely and effectively used in countries at the early stages of development. Duty exemptions and drawbacks are economy-wide schemes that were desirable complementary systems, used at the advanced stage of development. However, development experience suggests that in many low-income countries, the implementation of economy-wide schemes has been flawed, due to inadequate development of the necessary instruments, institutions and mechanisms (World Bank 1996). The fundamental features of Korea's pioneering export promotion drive were the duty drawback scheme, implemented through the domestic letter of credit (DL/c) and the export finance system. The Instruments selected for Korea's export drive were comprehensive and far-reaching. They included the provision of income tax deductions, import duty exemptions and drawbacks, liberal access to pre and post-shipment and investment finance at preferential rates, export finance guarantees and credit insurance, preferential rates for electricity and rail transport, and supportive infrastructure investment, such as the provision of free trade zones. Taiwan also used effectively the system of duty drawbacks for export promotion, but the scheme was significantly different. In Taiwan unlike in Korea duty rebates are claimed on the basis of customs documents of exports and imports. Export credit (through banks) is much less significant, as a proportion of export value, than in Korea. More of the credit comes through suppliers credit (in the form of post-dated cheque), or buyers' credit (mainly from Japanese trading companies which account for an estimated 30 to 50 per cent of Taiwan, China's exports). Indirect exports cannot get export credit on the basis of documentary proof of their production for an export orders. Finally, Korea's system differs from that of Taiwan, China's in the area of input coefficients. For many products they have been set more generously in Korea, so as to give more of a subsidy to exports through an extra amount of rebate. Indonesia, Malaysia and Thailand also applied export support instruments including tax incentives, duty drawbacks and exemptions, and export and investment finance. But, the intensive efforts were initiated only in the early 1980s and the system of exemptions and drawbacks was unsatisfactory, because of limited access (especially by small and indirect exporters) and slow and cumbersome procedures. Compared to Korea, the Southeast Asian systems have not been as comprehensive in coverage and as automatic in access. There are four main methods of financing trade: (i) company credit; (ii) bank credit; (iii) bank loans and (iv) self-financing. In most developing countries, exporters cannot meet financing needs through company credit or bank credit because they lack modern banks and trading companies that can internalize the risk-taking. Therefore, the immediate objective of assuring access to trade financing must be met through bank loans.

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The three instruments for the bank loan-based trade financing system are: (I) transactionbased, self-liquidating mechanisms for trade financing (including rediscount mechanisms of the central bank); (ii) institutions to deal with exporters' non-performance risk (i.e. preshipment export finance guarantees (PEFG); and (iii) institutions to deal with overseas buyers' non-payment risk (i.e. export credit insurance and guarantees (ECI/G). The Bank of Korea's trade financing mechanisms are particularly good examples of successful bank loan-based trade financing and consisted of all these instruments. (d) Role of Special Economic Zones (SEZs) Free Trade Zones (FTZs) became popular as an instrument for attracting foreign investment for export development in the early 1970s. For countries, which lack the financial and institutional infrastructure necessary, to support economy-wide export activities, FTZs, ensure the quickest access to free trade status within designated areas. The rapid expansion of export processing zones (EPZs) in developing countries during the last two decades represents a significant development in the world economy. Ireland is credited with establishing the first modern EPZ in the world with the establishment of the Shannon Export Free Zone in 1955. The success of the Shannon experiment led to the rapid growth of EPZs in developing countries. The first developing country to set up an EPZ was India with the creation of the Kandla Free Trade Zone in 1965. In 1996 there were more than 200 EPZs in 60 developing countries compared with just eight EPZs in 1970 and 55 EPZs in 1980. Nearly half of EPZs were located in Asia. Malaysia, Indonesia, Mauritius, Sri Lanka, and the Dominican Republic are examples of countries that used FTZs and bonded manufacturing warehouses (BMWs) in the early stages of manufacturing for export. China, through its Special Economic Zones (SEZs) also granted an opening for international economic and technical cooperation in the 1980s. Korea and Taiwan, China that already had considerable capacity for exporting manufactured goods, established FTZs as part of an equal footing export policy. Malaysia is one of the leading countries where FTZs have played a significant role in the growth of industrial exports. Within ten years, FTZ exports accounted for 51 per cent of total manufactured exports, and 14 per cent of merchandise exports. Excellent infrastructure, macroeconomic and political stability, and outward-oriented strategies adopted in the 1970s made Malaysia attractive to foreign investors. The Malaysian government, in turn, actively promoted foreign investment to develop labour-intensive industries as part of its export-led growth approach. In Malaysia FTZs were better integrated with the rest of the economy, which provided inputs from foreign-owned plants and joint ventures. Artificial barriers were dismantled, and a Korean-type export financing scheme with pre-shipment export finance for backward-integrated supplies were established as a part of export growth strategy. Malaysia's FTZs have provided an important step towards a more liberal overall

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economic environment. In recent years, some of the duty-free and other benefits received by FTZ firms have been extended to firms producing for export outside the zones. The Bataan EPZ, the largest and longest operating in the Philippines, has not been successful compared to other zones in the Philippines and Asia. Only some of the anticipated benefits from the EPZ-employment creation and foreign exchange earningshave been achieved. Transfer pricing by multinationals has reduced tax revenues from the FTZ. The Philippines experience suggests that tax holidays are less important than they appear. The Philippines experience also shows that although the gains from employment generation are large, FTZs should not be used primarily as an outlet for abundant labour (World Bank 1996). China's early experiment with market forces was in 1979, through four Special Economic Zones (SEZs) in Shenzhen, Shantou and Ziamen, mainly to exploit connections with overseas Chinese. The remarkable success of market-based reforms and the SEZs spurred the opening up of trade and investment all across China, and has a dramatic effect on inflows of foreign investment, industrial output and exports. The emergence of EPZs reflects a shift in the industrialisation strategy of developing countries, which in the 1950s and 1960s favoured import substitution policies. The inward-looking policies were supported with high tariff rates, generous subsidies and foreign exchange restrictions. Since the late 1960s, there had been a gradual shift in emphasis towards an outward-looking industrialisation strategy through the promotion of non-traditional exports. This was accompanied by a more liberal attitude towards FDI in an effort to attract it not only to acquire much needed capital but also to promote the transfer of new technologies, upgrade skills and acquire access to international markets through distribution channels. EPZs were a means of fostering export-oriented industrialization, and in some countries they assumed a prominent role in the strategy. There is undeniable evidence that the EPZ sector, although still small, has been among the most dynamic sectors in attracting FDI. EPZs accounted for more than 85 percent of FDI in Mauritius and over 70 percent in Mexico. FDI inflows to the oldest four special economic zones in China amounted to more than 30 percent of FDI inflows in 1989. Foreign investors account for a major portion of investment and employment in EPZs, which are characterised by the dominance of the textiles, garments or the electronics industry. There is also evidence that EPZs were successful in promoting exports of manufactures and in generating foreign exchange earnings. One of the striking features of EPZs is the tendency to breed a distinct type of industrial monoculture, either in textiles and garments or in the electronics industry. An analysis of the structure of employment by product group in EPZs of selected countries indicate that there is one dominant industry in each country such as textiles and garments industry in Bangladesh, China, Dominican Republic, Egypt, Jamaica, Mauritius and Sri Lanka; and the electronics industry in Barbados, Brazil, Republic of Korea, Malaysia, Mexico and Taiwan, China. Concentration rates vary among countries and zones. In Jamaica, Mauritius and Sri Lanka, the leading industry, textiles and garments, accounts for almost

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90 percent of total employment, whereas for the electronics industry, EPZs in Malaysia have the highest concentration rate of over 74 percent. EPZ’s role as an effective instrument for the long-term development of industries depends on the degree of linkages created with the domestic industries and on the extent to which they are able to transfer technology and to upgrade skills. In this regard, EPZs seem to have fallen short of expectations. A major constraint to the transfer of technology and skills is the nature of the production processes typically undertaken in EPZs, which involve low technology or simple skills (UNCTAD 1993). Success of EPZs depends on a favourable investment climate, skilled labour force and an active local business community and government’s support for the EPZs, while failures may be attributable to poor locations, inadequate infrastructure, insufficient promotion, excessive costs and mismanagement. The long-term viability of EPZs also requires that their operations should be properly integrated with the overall economic and industrial development strategy of the country. Results of a cost-benefit survey of a few Asian EPZs have shown that incentives, subsidies and infrastructure expenditures entail considerable costs for the host countries (UNCTAD 1993). These costs are difficult to justify from both financial and economic viewpoints. Stiff competition among EPZs of developing countries to attract investors has led to increasingly generous incentives resulting in erosion of net benefits. (e) Foreign Investment Policy Foreign Direct Investment (FDI) acts an engine of growth and embodies a package of important sources of capital, technology, and managerial, marketing and technical skills. The presence of multinationals promotes greater efficiency and dynamism in the domestic economy. The training gained by workers and local managers and their exposure to modern organisational system and methods are valuable assets. Most of the Asian developing countries in recent years had welcomed FDI and had undertaken general economic policies leading to a stable macroeconomic framework and liberalization of industrial, trade, financial and public sectors and specific FDI-related measures such as transparent and non-discriminatory legal and regulatory systems. These policies for selected Asian countries are summarised in Tables 4.2, 4.3 and 4.4. Among the traditional factors influencing FDI, most important factors are domestic market potentials and low cost of labour. Governments of home and host countries have adopted various measures to encourage FDI. Widely used instruments are bilateral investment protection agreements containing rules on fair and equitable treatment, repatriation of equity and dividends, and international arbitration in the case of disputes.

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Table 4.2 Comparative statement on Foreign Investment regime in selected Asian countries
Country 1. India Sectors allowed Areas of 100% foreign for Foreign Direct equity Investment All except defense, 100% EOUs, FTZ, agriculture, Planta- EPZ, power, technology tion, atomic energy, parks, hospitals, rail transport shipping, priority areas All except arms, All allowed sectors drugs, forestry, nuclear power, rail Selected areas All allowed sectors, minimum of 35% All sectors Projects with FDI above Rs.20 million All except defense, In any business alcoholic beverage All areas except All allowed sectors broking, retail and personal services All sectors except All allowed sectors banned/ restricted All sectors All areas except public utilities, media, telecom and transport All sectors except FDI of at least $50 mln, retail trade and EOUs, designated advertising sectors and locations All sectors Designated sectors All sectors except 100% EOUs and media, retail trade, designated sectors engineering and accountancy All sectors except Over 80% exports, negative list designated sectors and locations All sectors except All allowed sectors, minerals, telecom, Minimum of 30% aviation, shipping All except public All allowed sectors, utilities, leasing, Minimum of 25% real estate, trust, transport All sectors except All sectors except broadcasting banking All sectors except All sectors except prohibited list restricted list All sectors except All sectors except arms,environment, prohibited list related industries Selected sectors All allowed sectors Duration of FDR Unlimited Local content obligation Abolished since 1991 Value addition for EOUs No No No No No No 51% in 20 years No No Export obligations None except for 100% EOUs None except for EOUs No No No No No No No No No

2. Bangladesh 3.Myanmer 4.Nepal 5.Pakistan 6. Sri Lanka 7.South Korea 8.Singapore 9.Indonesia 10.Malaysia 11.Philippines

Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited 30 years Unlimited Unlimited

12.Thailand 13.Vietnam 14. China

Unlimited 20 years 10-30 years Unlimited Unlimited Unlimited 15 years

51% in 5 yrs in allied and agriculture No No

No No No

15.Hong Kong 16.Taiwan 17.Japan 18.Lao, PDR

No No No No

No No No No

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Table 4.3 Comparative statement on tax regime in selected Asian countries
Country 1. India Corporate tax rate Local cos.35%, Foreign cos.42% Tax holidays 5-10 years for R&D, infrastructure, EOU, EPZ, SEZ, Tech.Parks, backward areas 5-12 years for backward areas 3 years No tax on exports, cottage industries 5-7 years except for cigarette, bidi, saw mill and alcohol 3 years for all, 4 yrs for rural/ backward areas For EOUs, tourism, backward areas, infra. Tax holiday for high technology 5-10 years for pioneer status Abolished in 1984 85% exemption for 5 years for pioneer status 8 years for pioneer status 3-8 years for IPZs, targeted industries 2-4 years 2 years general, 5 years for ports none 5 years for high tech. industries None 4-6 years For EOUs and capital goods For power, engineering For tourism, EOUs, infra. For exports Import duty exemptions For exports, fertilisers, EPZ, SEZ, Tech.Parks For EOUs Other fiscal concessions Incentives for utility tariffs, capital subsidy Lower import duty for backward areas Lower land leasing rate Tax rebate for backward areas Lower indirect taxes Accelerated depreciation Lower duty for high tech Capital subsidy Vat exemption for EOUs Capital subsidy Lower rates on wages, inf. Reinvestment Lower duties on capital goods Incentives for reinvestment Tax rebate for R&D, infra No excise except on POL, tobacco Cap subsidy Local govt. incentives …. Remittances Free

2. Bangladesh 3.Myanmer 4.Nepal 5.Pakistan 6. Sri Lanka 7.South Korea 8.Singapore 9.Indonesia 10.Malaysia 11.Philippines 12.Thailand 13.Vietnam 14. China 15.Hong Kong 16.Taiwan 17.Japan 18.Lao, PDR 30-45% 27% 10-30% 28% 20% for SMEs 10-45% 30% 30% Local cos.55%, Foreign cos.33% 15-16.5% 20% 52%

Free Restricted .. Free Restricted Free Free Restricted Free Free Free Restricted Free Free Free Free Free

For EOUs For EOU/EPZ For capital goods For EOU/ EPZ For EOU/ EPZ For EOU/ SEZ Free port, No import duty On capital goods, R&D Low import duties (0-5%) For few items

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Table 4.3 Private Sector Development and Investment Climate in selected Asian economies in 1990 and 2000 Country Private fixed Domestic credit to investment as % of private sector domestic fixed As % of GDP investment 1990 2000 1990 2000 .. 87 .. .. 34 .. 90 70 .. 65 .. 82 85 .. 58 .. 61 .. .. 52 .. 84 65 63 .. 74 .. 56 .. 82 78 Foreign Direct Investment As % of GDP 1990 2000 F RF F F SS .. .. R .. RF .. SS RF .. F .. AI .. R R RF F Entry and Exit Regulation in 2000 Entry Repatriation of: Income F F F F F .. .. R .. F R F F R F .. F .. R F R F Capital F F F F F .. .. R .. D R F F R F .. F .. R F F F

Hong Kong Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World

Newly Industrializing Economies (NIEs) .. 165 159 .. 89.0 79 .. .. 47 .. 61 61 .. 51 .. 69 68 .. 70 .. 70 .. .. 62 .. 79 67 50 .. 80 .. 72 .. .. .. 66 97 .. 88 19 n.a. 47 1 69 5 22 83 3 17 .. 25 .. 13 28 20 195 42 71 .. 28 42 25 43 108 97 102 110 .. 125 8 South-East Asia 7 21 9 136 9 45 109 35 South Asia 25 .. 29 .. 31 29 29 East Asia 188 World 55 106 21 28 47 29 66 136 120 0.9 15 0 0.9 0.9 0.1 1.0 3.0 2.7 3.5 3.9 3.8 4.5 1.0 0.6 1.8 10.1 8.8 1.7 0.9 0 .. 0 .. 0 0.6 0.5 0.6 .. 0.6 .. 0 0.5 1.1 1.7 1.0 0.7 5.3 .. 1.2 3.0 0.6 3.9 4.2 5.4 2.0 .. 2.8 2.8 4.1 0.7 20.7 .. 1.2 .. 3.2 11.6 .. 4.3 3.4

China and Mongolia

Notes: (a) Two dots (..) stand for "Data not available" (b) Entry and exit regulations are classified as Free (F), Relatively Free (RF), Delayed (D), Selected Sectors (SS), Authorised Investors only (AI), Restricted (R). Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Impediments to FDI include sectoral protection, ceilings on foreign ownership, licensing and approval 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 small and medium industry associations and federations that SMEs face an uneven playing field due to laws and regulations that favour large conglomerates and multinationals or high costs on business detrimental to SMEs. 4.3 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. While they were successful in developing their own technological capability based on imported technology, technology transfer through FDI was small relative to other means of transfer. A lesson that can be drawn from the Japanese experience is that there must be a close interaction and coordination among public-funded R&D institutions, private sector institutions, in-house R&D by private sector, universities and other technical institutions, so that duplication or multiplication of R&D efforts is avoided and national resources are not wasted. The Republic of Korea also followed a path similar to that of Japan and Malaysia to enhance technological capability. Despite attractions, such as, political stability, the rapid pace of deregulation, moderate inflation, and availability of relatively cheap labour, large domestic market and plentiful natural resources, most of the Asian developing countries do face obstacles to technology transfer. These difficulties vary in degrees across all Asian countries given their different levels of technological development and absorptive capacity. They fall broadly into the following categories, namely, (a) (b) (c) (d) (e) (f) (g) Poor infrastructure and utilities; Strict laws and regulations on foreign firms, and inefficiencies in the implementation of deregulation policies; Shortage of trained technical and managerial workforce; Weak local supporting industry in the production of parts and components; Low rate of diffusion of technology to the rest of the economy except for FDI; High cost of technology agreements; and Transfer of technology, which is not environment friendly.

An important condition for successful technology transfer is the ability of the host countries to attract foreign investment and to provide an environment that enhances the willingness of foreign investors to take a long-term view and transfer know-how to local partners and workers.

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Lack of transparency and excessive bureaucracy in the implementation of foreign investment laws often cause a big gap between approval and actual realization rates, which may be as low as 30 to 35 per cent in the case of several countries in the Asia Pacific region. Furthermore, the gap between approval and actual investment is as long as two to three years. Most of the SAARC countries share common strengths and problems. The problems relate to low level of technology, environmental degradation and a limited base of export concentrated on natural resources and semi-finished products. For long time, these countries were dependent on the West for their technological need and paid little attention to build their own technological capabilities. By and large, SAARC countries encouraged transplantation of turnkey projects operating at a sub-optimal level of efficiency and capacity utilization and were unable to absorb, adapt and develop technologies needed for their economic development. Whatever science and technology (S&T) infrastructure was developed, it remained weak in establishing linkages with the productive sectors. Furthermore, much of the aid acquired in the past was spent on public sector projects that were inefficient. There is also lack of sufficient linkages and networking among the academia and the enterprise. The Chinese case is an example that has met with considerable success in technological upgradation of its small-scale sector through transfer of technology by creating sufficient institutional mechanisms. In this direction, the SPARK Programme was initiated in 1986 for Village and Township Enterprises (VTEs) in rural areas and the Torch Programme (for high tech areas) initiated in 1988 catering to industries mostly in 120 High Technology Development Zones (HTDZs) in urban areas. To facilitate transfer of technology and reduce the barriers between research institutions and the enterprises, some 55,000 New Technology Enterprises (NTEs) have been set up. The government provides soft bank loans, preferential taxation policies and development on infrastructure facilities and risk capital for start-up for NTEs through a government-financing agency known as the Venture Investment Corporation. With the onset of economic liberalisation in India in 1991, the Government of India liberalised the import of technologies by domestic manufacturers. Some salient features relating to the technology import policy are: • • • There is a commitment to development and utilization of indigenous capabilities in technology and manufacturing, and its upgradation to world standards. Foreign investment and technology collaboration are welcome to obtain higher technology to increase exports and expand the production base. Relationship between domestic and foreign industry is much more dynamic in terms of technology and investment.

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• • •

Indian companies are free to negotiate terms of technology acquisition with their foreign counterparts according to commercial judgment. Procedures for foreign investment, foreign technology agreements and services of foreign technicians have been made easier and liberal. Imports of capital goods had been completely liberalised with significant reduction of import duties.

India has acquired imported technologies, either by outright purchase, direct foreign investment, and joint ventures or on the basis of royalty payments. For the acquisition of foreign technologies, Indian companies have also received support and assistance from international organisation like APCTT, UN, UNIDO, and IDRC, CANADA. Main sources of imported technologies have been the USA, the UK, the erstwhile USSR, Germany, France and Japan. Many financial and non-financial support systems built over a period of time helped in the acquisition, adaptation and assimilation of imported and indigenous technologies. India was also able to provide technical and consultancy services to not only African and Asian developing countries but also to some developed countries. However, India still lags far behind in its R&D activities when compared to advanced countries, since the expenditure on R&D is very low (see Table 4.5). The R & D expenditure at 0.6 percent of GNP in India, 0.4 per cent in Malaysia, 0.2 per cent in Philippines, and at 0.1 percent in Thailand, 0.07 per cent in Indonesia and 0.06 per cent in China in 1989-2000 were considerably lower than that in USA (2.7%), Japan (2.8%), Germany (2.9%), and South Korea (2.7%) and Singapore (1.1%). In USA, Japan, Germany and South Korea, major portion of the funds was contributed by the private sector. In contrast R&D expenditures are mostly funded by the public sector in Thailand, Indonesia, China and India. India has built a wide array of institutions to support the development and diffusion of industrial technologies since the inception of planning in 1951. It has virtually all basic, applied, hardware and software and R&D institutions, some of which have world-class standards. But, these institutions have failed to commercialize R&D activities as these are virtually financed and controlled by the public sector without any linkage with the private sector. Since 1993 Government had encouraged private sector funding of research institutions by providing tax relief on R&D expenditure.

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Table 4.5 Science and Technology Development in selected Asian economies in 1990 and 2000 Country Scientists and engineers in R&D per million people 1990-2000 93 2139 2182 .. 459 468 .. .. .. 154 .. 156 102 274 51 .. 158 .. .. 78 188 4960 .. 496 2212 287 .. 158 .. 3344 .. Technicians in R&D per million people 1990-2000 100 574 283 .. 187 92 .. .. .. 44 .. 22 75 .. 32 .. 115 .. .. 14 45 663 .. 193 478 .. .. 114 .. .. .. Science and engineering students % of total tertiary level students 1987-1997 36 32 .. .. China and Mongolia China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 43 24 South-East Asia 13 39 20 27 56 14 18 .. South Asia 47 .. 25 .. 13 32 34 East Asia 21 World 35 43 44 30 29 24 29 25 35 75,298 14,817 34,905 10,075 3,106 8,896 3,499 437,339 512,637 .. 0.88 0.83 0.58 .. 0.62 .. 2.30 2.12 156.8 100.5 15.6 40.5 .. .. .. 847.0 1003.8 16 25 10 16 1 3 8 22 20 43,891 2.80 127,368 28 130 .. 8,439 .. 35 232 61 .. .. 0.62 .. .. .. .. 0 .. 1,245 .. 0 0 0.1 0 .. 4 .. 0 0 3 3 123 2 304 3 159 356 106 .. 0.07 .. 0.42 .. 0.21 0.10 .. .. 5.7 .. 40.0 .. 8.5 13.9 .. .. 16 .. 59 .. 59 32 .. 9,081 13 0.06 0.07 40.8 .. 19 .. Science and technical Journal articles 1997 2,080 4,619 1,164 .. Expenditures for R&D % of GNP High technology exports US$ billion % of manufactured exports 2000 23 35 63 ..

1989-2000 .. 2.70 1.13 ..

2000 5.2 54.0 73.6 ..

Newly industrializing Economies (NIEs) Hong Kong Korea,Rep Singapore Taiwan,China

Note: (a) Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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4.4 Access to capital (a) Lending by commercial banks In Korea, USA, Japan, China as in India, the Credit Guarantee programmes help small enterprises to have access to bank loans without collateral support. Like India, Korea has set up a special technology development fund and other programmes for supporting venture capital. On the marketing side, the Central Government, local autonomous authorities and State-run corporations in Korea are encouraged to extend procurements from SMEs and provide special incentives to increase exports. Among the numerous government support organizations for SSIs, the Korean Technology Banking corporation and Korea Technology Credit Guarantee Fund provide finance for technology development projects and venture capital finance, besides extending credit guarantees for SSIs. Research Co-operatives promoted by industry are encouraged to undertake R&D. The Korean Technology Banking Corporation (a private institution) and the Korean Development Investment Corporation (a subsidiary of the Korean Development Bank) provides substantial financial support. The Small and Medium Industry Promotion Corporation (SMIPC), a non-profit autonomous organisation established by the South Korea in 1979, provides financial assistance for industrial extension services concerning management and technology. Mention may also be made of the Korean Institute of Industries and Technology Information, a non-profit organisation and the Ministry of Trade, Industry and Energy, the helps in nationwide dissemination of information to support industrial and technological developments in South Korea. In Germany, special privileges and special incentives are provided for the Small and Medium firms. For example, in the "Equity support programme" earmarked for the small and medium industries, special support is given to young entrepreneurs and new enterprises. This programme includes, among others, no interest for two years, a comparatively low interest rate, 10-year grace period and 20-year repayment period. India has a very organised system under which public sector commercial banks and financial institutes provide various financial assistance to SSI units (see Box 4.2). The Small Industries Development Bank of India (SIDBI) is a good example of a specialised bank which provides financial and other services exclusively to the SMEs. SIDBI was set up under an Act of Parliament as the all India financial institution for promotion, financing and development of SSI, and commenced its operations on April 2, 1990. Apart from extending financial assistance, SIDBI co-ordinates the functions of institutions engaged in similar activities. As an apex institution for SSIs, SIDBI’s lending operations are supplemented with promotional and developmental activities. SIDBI focuses on meeting the credit requirements of the SSI sector in general and in emerging areas like technology up-gradation, venture capital financing, information technology, micro enterprises, export promotion etc. in particular (see Box 4.3).

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Box-4.2 Role of Financial Institutes and Commercial Banks in SSI Financing in India
• The credit needs of entrepreneurs could be divided in three parts: short term, medium term and long term finance. Accordingly, the conventional mechanism for financing of SSIs in India stressed provision of term loans and working capital. The public and private sector banks, Small Industries Development Bank of India (SIDBI), Regional Rural Banks, Urban Cooperative Banks and foreign banks meet the credit needs of the sector. While State Financial Corporations (SFCs) grant loans for setting up new industries or modernisation of the existing ones, Khadi and Village Industries Commission and Khadi and Village Industries Boards assist in financing handicrafts and village industries. National Small Industries Corporation (NSIC) and State Small Industries Corporations (SSICs) supply machinery on a hire-purchase basis to small-scale and ancillary industries. SFCs are one of the oldest credit institutions in the country, which cater to the long-term credit needs of SMEs. At present, there are 18 SFCs covering the entire country and they have been in existence for 5 decades now. Almost 75% of SFCs assistance flows to the SSI Sector. Over the years the financial health of SFCs has become a cause of concern. Some of the reasons for the poor financial health of SFCs are poor recovery and increase in Non Performing Assets. Government of India had amended the SFCs Act 1951 in the year 2000 so as to give them more operational flexibility for improving their performance. The Small Industries Development Bank of India (SIDBI) has played a pioneering role in developing the financial and other support mechanisms aimed at hastening the dispersal of SSIs. The enhanced contribution of the Indian small-scale sector is reflected in its contribution to investment, output, employment and exports due partly to SIDBI's conscious policy of larger credit dispensation and evolution and streamlining of support mechanisms.

China has a pilot project to introduce credit guarantee schemes for SMEs, covering 30 provinces. As per estimates, a corpus of around 7.6 billion Yuan has been raised. Like India, China has the National Technological Innovation Fund to supplement technology upgradation among SMEs. In Bangladesh the government directs funds to SMEs through scheduled banks, which are obliged to lend prescribed share of their total resources to these industries as working capital. Some nationalized banks have also helped finance subcontracting arrangements of small industries to large ones, but these constitute a small portion of the banks loan portfolio, and as with the other loans, the recovery rate is low. In Indonesia the most important among the priority schemes has been the provision of working capital and small investment credit for fixed asset acquisition, but lending has been below target as lending agencies involved have exercised extreme caution in disbursement of such loans. In the Philippines there are also specialized programs for the SMEs.

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Box 4.3 Schemes of Assistance to the SSI sector introduced by the Small Industries Development Bank of India (SIDBI) since 1990-91
1990-91 Marketing Infrastructure Scheme Direct Discounting of Bills for Equipment and components Infrastructure Development 1991-92 Scheme for Ancillarisation Resource Support to Factoring Companies 1992-93 Equipment Finance Scheme Project Finance Scheme Venture Capital Scheme 1993-94 Direct Equity Scheme Foreign Currency Term Loan Integrated Infrastructure Development Scheme 1994-95 Pre-Shipment Credit in Foreign Currency (PCFC) Scheme Equity Assistance Scheme ISO 9000 Certification Scheme Micro Credit Scheme Technical assistance for small enterprises 1995-96 TDMF (Trade Development Mutual Fund) Scheme Marketing Finance and Development 1996-97 International Finance to SMEs Vendor Development Scheme Credit Rating for SSIs 1997-98 Direct Factoring Services Line of Credit for Marketing Exports Bills Financing Pre and Post-shipment Credit in Rupees Bills Rediscounting against Inland Supply bills of SSIs 1998-2000 Technology Upgradation Fund Scheme for Textile Industries Short Term Loans to State Electricity Boards/ Power Companies 2000-01 Capital Subsidy Scheme for Technology Upgradation of SSIs Refinance Scheme for term loans granted by SFCs/ SICs 2002-03 Infrastructure financing strengthened and widened Introduction of Loghu Udyami Credit Card for providing simplified credit facilities to SMEs, retail trade, artisans, small entrepreneurs, professionals and self employed persons

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Table 4.6 Financial Depth and Efficiency in selected Asian economies in 1990 and 2000 Country Domestic credit Liquid liabilities provided by as % of GDP banking sector as % of GDP 1990 2000 1990 2000 Quasi-liquid assets as % of GDP 1990 2000 Ratio of bank liquid reserves to bank assets as % of GDP 1990 2000 Interest rate spread percentage points 1990 2000 Spread over LIBOR percentage points 1990 2000

Newly industrializing Economies (NIEs) Hong Kong, China Korea,Rep Singapore Taiwan,China China Mangolia Cambodia Indonesia Lao, PDR Malaysia Myanmar Philippines Thailand Vietnam Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Japan Low & middle income East Asia & Pacific Europe & Central Asia Latin America & Carib. Mid. East & N.Africa South Asia Sub-Saharan Africa High Income World 156 66 76 .. 90 73 .. 46 5 76 33 27 91 5 24 .. 52 .. 29 51 43 260 61 73 .. 59 69 49 57 132 121 141 104 90 .. 133 11 7 66 11 143 27 68 122 35 35 .. 53 .. 43 49 44 311 69 116 36 38 70 51 77 174 152 182 55 123 .. 79 56 .. 40 7 64 28 37 75 23 23 .. 43 .. 32 40 35 182 43 64 .. 25 62 41 33 93 83 237 98 108 .. 152 25 15 58 17 130 26 67 115 44 35 .. 56 .. 52 48 47 190 66 124 36 30 62 53 34 102 92 167 46 101 .. 41 15 .. 29 3 43 8 28 66 9 South Asia 17 .. 28 .. 19 10 23 East Asia 155 World 27 43 .. 18 30 25 17 .. .. 45 86 25 21 37 36 14 77 68 13 6 .. 22 14 13 12 2 10 11 11 11 15 10 8 10 1 8.5 142 1.5 1.4 3.4 2.0 -1.4 -4.5 26 .. 39 .. 35 20 37 13 .. 15 .. 13 9 10 8 .. 8 .. 11 6 8 4.0 .. 9.0 .. 2.5 .. -6.4 6.9 .. 4.0 .. 3.5 .. 7.0 7.7 .. 8.2 .. 6.1 .. 4.7 9.0 .. 5.8 .. 2.9 .. 9.6 222 89 87 .. 91 12 11 45 14 106 10 55 101 24 0.1 6 4 .. 16 2 .. 5 3 6 272 21 3 13 0.3 2 2.5 .. 13 18 47 8 28 14 23 7 2 9 3.3 0 2.7 .. 0.7 .. .. 3.3 .. 1.3 2.1 4.6 2.2 .. 4.7 0.6 4.1 .. 3.6 16.5 10.5 6.0 20.0 3.4 5.5 2.6 4.5 6.9 1.7 1.7 -1.0 .. 1.0 .. .. 12.5 .. -1.1 -0.3 15.8 6.1 .. 3.0 2.0 -0.7 .. -0.7 23.7 10.9 11.9 25.5 0.2 8.7 4.4 1.3 4.0

China and Mongolia

South-East Asia

Note: Two dots (..) stand for "Data not available" Sources : (1) World Development Indicators 2002, World Bank. (2) World Development Report 2002, World Bank.

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Despite all these measures, in virtually all of the countries, small and medium industries complain about the paucity of funds available to them and the onerous terms associated with loans they receive. Interest rates on government loans are lower than market rates but the funds available are limited and high collaterals are required by both private and government banks. Interest spreads are very high in many countries (Table 4.6). (b) Specialized financial institutions In industrialized countries, besides commercial banks which undertake general lending, there are large numbers of specialized financial institutions that focus on lending of particular types, such as:

Factoring companies, which lend against trade receivables and which frequently undertake the task of debt collecting for companies using their services. The receivables themselves provide the security for the loan. Leasing companies, which lend for the purchase of capital equipment, allowing the lessee to take delivery of equipment which effectively serves as the collateral for the leasing contract. Trade credit suppliers, which finance purchases of raw materials and which use raw material inventories as collateral. Mortgage finance companies, which specialize in financing mortgages.

The specialized financial institutions play a vital role in allowing businesses to grow. In most developing countries there are very few leasing or trade credit entities as the financial and judicial systems necessary for their effective operations do not exist. Role of Micro-finance Institutions Since the late 1980s, the number of micro-finance institutions (MFIs) has grown rapidly in many developing countries. MFIs can be defined as formal, semi-formal, or informal providers of financial services to low-income clients, including the self-employed. Financial services generally are restricted to lending although some MFIs also provide savings, insurance and payments services. There are a number of reasons why MFIs are likely to bring benefits to the poor. MFIs enjoy better local knowledge and proximity, which is an important advantage because the majority of poor households live in vast rural areas that are undeserved by the commercial banks. Furthermore, the semi-formal and informal MFIs complement the formal financial system by providing financial services to those who have limited access to the formal financial system. However, the importance of micro-finance as an instrument of poverty alleviation should be treated with caution. The quality of the loan portfolio of MFIs is often poor because of
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inadequate management. A large number of these institutions are not efficient and survive on subsidies from their donors. Lending rates charged by MFIs are usually very high. The linkages between MFIs and commercial banks are often weak. Replication of successful MFI models is often impossible due to differences in demographic or cultural contexts. Finally, there are still no countries with a comprehensive network of microfinance institutions. Above analysis indicates that access to capital is a critical factor for the development of agro-based industries, particularly the SMEs. Funding is critical to these industries in their early stage of development. Commercial banks should offer more appropriate instruments to SMEs and develop micro credit schemes with the support of government. There is also need to develop specialised banks for supply of venture capital, trade credits, mortgage finance, factoring and leasing services to the SMEs. Commercial banks in the East and South East Asian countries are suffering lending constraints in the aftermath of the Asian crisis. Governments and multilateral lending institutions (like ADB) should consider the creation of special funds dedicated to help funding SMEs in the agro-based and resource-based sectors. 4.5 Infrastructure and Information technology Development of proper legal and institutional set up and efficient infrastructure (transport and telecommunications) are essential for the development of SMEs. In open economies, such as Singapore, Hong Kong or Mauritius, only minimal investment laws and regulations exist and administrative costs are negligible. Most developing countries like India are faced with a transition period. The experience of countries such as Indonesia, Malaysia, Taiwan and Thailand suggests that the transition can be managed well. The faster an economy is reformed, the easier the management of private investment including foreign investment. Regulations can be simple and their administration may be made efficient and transparent. As regards infrastructure, some of the measures to improve the production and marketing of SMEs are suggested below: (a) Cluster development A 'Cluster' refers to a geographically bounded concentration of similar, related or complementary businesses, with active channels for business transactions and communications that share specialised infrastructure, labour, markets and services. Cluster approach facilitates SMEs to introduce innovative marketing. UNIDO has helped to develop clusters for exports of textiles, rubber and pharmaceuticals in India to improve their international competitiveness. (b) Trading Houses

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Japanese experience in this is worth noting. Japan is the pioneer in setting up large trading houses known as "Sogo Sosha". These companies assisted marketing of products of Japanese SMEs. In order to encourage export of products of SMEs, Government of India encouraged setting up of Export Houses and Trading Houses and also extended various facilities as well as incentives to Export Houses and Trading Houses. (c) E-Commerce and development of information technology (IT) E-commerce has revolutionized the international trade due to: • • • Reduction in transaction costs globally. Direct contractual relations between buyers and sellers. More transparency in dealings.

The three major directions of commercial activity viz. (i) Business to Business (B2B), (ii) Business to Consumer (B2C), and (iii) Business to Government (B2G) have been very much captured through e-commerce and can help SMEs to expand their market, get information of both demand and supply, behaviour of customers etc. Hong Kong, China and Singapore are aggressively expanding their ICT infrastructure to improve their ability to take advantage of the Internet and globalisation. All the developed and developing countries are now attaching special importance to the development IT infrastructure through formulation of national policies on IT and related sectors. The government of India has passed in Parliament a convergence bill to cover telecommunications, IT and broadcasting under the same act. Under the framework of WTO, there is a special international arrangement on IT under which all participating countries have agreed to duty free entry for all IT products and components. (d) Networking Networking can play a dominant role in supporting SMEs for marketing of their products. Networking is of many types. However, vertical (which are aimed at finding complementary activities in the development of a new product) and knowledge networks (which are associations geared to solving a common technology or market information) are more relevant in the context of market.

5 ROLE OF INTERNATIONAL ORGANISATIONS FOR THE DEVELOPMENT OF AGRO-BASED AND RESOURCE-BASED INDUSTRIES

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5.1 Role of World Bank, ADB and IMF This chapter discusses role of various multilateral organisations for the development of resource based and agro based industries through assistance in policy formulation, institutional capacity building, networking, investment promotion and skill development. Through poverty reduction programs, World Bank and Asian Development Bank provide aid, technical assistance and concessional loans to various countries and help them to formulate appropriate policies. These development agencies believe that unemployment is the root cause of poverty and attach significant importance for employment generation through the development agro and resourrce based industries in the Asian developing countries. The world Bank also provides grants under the Institutional Development Fund (IDF) for capacity building. The International Monetary Fund (IMF) as a part of their annual Article-IV Consultation and Surveillance helps the developing countries for formulation of appropriate policies. More recently, all the crisis affected countries in the South East Asia viz. Thailand, Indonesia, Korea, Malaysia and Philippines intensified their structural reforms and stabilisation programs with the help of multilateral funding agencies like the IMF, World bank and the Asian Development Bank (Das 2002). The root cause of the East Asian crisis, unlike some earlier crisis episodes in Latin America, were not in macro-economic imbalances, rather stems from structural weaknesses. These weaknesses manifested themselves in progressively weaker banking and financial sectors and heavily leveraged corporate sectors. So the reforms program emphasised banking sector reforms, corporate restructuring and good governance. The vast bulk of measures taken by the countries involved financial sector restructuring which was seen as essential to restore market confidence, overcome the crisis and lessen vulnerability to future crisis. Corporate sector restructuring, a critical counterpart to the reforms in the financial sector, was a vital part of the IMF supported program. However, as the Fund was not well equipped to deal with corporate sector issues, which were beyond its areas of expertise, close collaboration with the World Bank and ADB was necessary for design of measures in this area. Due to the complexity of the needed restructuring of the financial and corporate sectors, the policy matrices expanded substantially as the programs evolved during 1997-1999. The policy matrices went beyond the core areas of financial and corporate restructuring. Some of the additional areas covered such as capital account liberalisation, strengthening the social safety nets, labour market reforms, and systematic reforms (e.g. institution building, the legal and regulatory framework) were essential to support the core areas. Other areas of reforms included trade and financial services liberalisation, privatisation of public enterprises, and tax reforms.

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5.2 Role of Regional Organisations (a) ESCAP

As the largest, and perhaps the most influential, international organization in the AsiaPacific region, ESCAP has undertaken extensive work and has a major role to play in future to promote technology flows and development of industries in the its member states. The following areas may be the focus of its future action: (i) Exchange of national experiences

Asia has become the leading recipient of inward FDI among all the regions in the world, accompanied by the largest investment-related technology flows. In attracting FDI, assimilating foreign technology, and promoting export, the Asian countries have adopted different strategies and approaches, formulated specific plans and priorities according to their national objectives and conditions. An exchange program of national experiences and development practices at the regional or sub-regional level will help countries in the region to learn from each other and improve national performance. (ii) Promotion of endogenous capacity-building

ESCAP has been conducting/sponsoring various activities, including international and bilateral seminar and workshops, the dissemination of information through journals and computerized communication, and the publication of various manuals. Since ESCAP is in a position to objectively and intimately evaluate the specific situations and needs of each of its members, these activities should continue to be intensified for speedier endogenous capability-building by its members and more effective technology transfer to the region. (iii) Research on sectoral restructuring

A number of research studies on food processing, dyestuff and manufacturing industries carried out by ESCAP have provided very useful reference materials for the regional countries in formulating sectoral technology upgrading and development policies. Such type of studies on agro-based and research based SMEs by ESCAP would be welcome. (b) Asian and Pacific Centre for Transfer of Technology (APCTT)

As a regional organization specializing in technology transfer, APCTT has distinguished itself in a number of activities such as information dissemination, technology fairs, skill training, and promotion of Environmentally Sound Technologies (ESTs). The member States of APCTT have recognized these activities as highly practical and very useful.

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(i)

Environmentally Sound Technologies (ESTs)

With information dissemination as one of its major activities, APCTT has built up a data bank on technology opportunities, experts, and institutions called the Mechanism for Exchange of Technical Information (METI) which was made possible with the support of UNDP. The International Network for Transfer of Environmentally Sound Technologies (INTEST) is a worldwide network of technology transfer, consultancy and engineering institutions and companies. APCTT has linkages with over 1000 agencies outside India, and information received is regularly updated in its data bank. APCTT also has standardized the technology information format so that a fair amount of data useful for decision-making will be available. In addition, the Centre brings out a number of publications and periodicals, such as Tech Monitor and Value Added Technology Information Service. These information services help member states to meet their information needs and produce greater awareness on technology flows. There seems to be a need for APCTT to expand the METI service to include not only SMEs but also large business in the member countries, and to link METI with other information service net works around the world. (ii) Technology fairs and promotion of ESTs

This is another area where ESCAP's initiatives have received strong support from its members. The seminar and workshops run by ESCAP in the past have either initiated a new promotional activity or played a catalytic role in endogenous capacity building. Corporation in the Adoption of the ISO 9000 Series in Bangkok in 1997. Other United Nations bodies have also supported systems to provide technical information for meeting the needs of technology in developing countries. Thus TIPs (technology information promotion system) has been established, with a national branch in New Delhi, India UNIDO has attempted to provide technical information through INTIB which has promoted technologies through arranging techmarts in different parts of the world. (iii) Technology Bureau for Small Enterprises (TBSE) While individual countries are responsible for improving their own technological capabilities, it is important to recognize the regional dimension in the upgrading process. Intra-regional and inter-regional information flows have become increasingly important factors in the economic development of the countries of the region. Rapid changes in technology and management practices, and the increasing role of services are revitalizing small enterprises (SEs) the world over. In the developed countries, SEs have already become an important source of technological innovation. Their main advantages lie in higher flexibility, and managerial adaptability and capacity to remain cost efficient. With exports as the key word for developing economies, there is no alternative for industry in general and for small industries in particular, but to upgrade their technology levels.

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TBSE is an important instrument in raising the technology level of SEs. The main objective of the Bureau is to assist SEs in technology acquisition, adoption, and upgradation through its technology information and promotion services. It is the outcome of the alliance formed between APCTT and Small Industries Development Bank of India (SIDBI). APCTT maintains close and effective linkages with key sources and users of technology, and other national and international centres involved in technology management, transfer, and utilization. It handles more than 250 business references with the help of over 1000 partners in about 70 countries. The Bureau aims to provide a platform where SEs can interact with global enterprises in the acquisition of technology or the marketing of technical capabilities. Towards this end, it has taken immediate steps to arrange for speedy access to information on sources of technology and facilitate transfer through a professionally managed system for the benefit of SEs in India and SMEs in the Asia-Pacific region. Functioning from the headquarters of APCTT, the Bureau has focused its activities on matchmaking, finance syndication, business collaborations, and support services to SEs. (iv) 'Mechanism for Exchange of Technology Information' (METI)

At the international level, APCTT implemented a project on 'Mechanism for Exchange of Technology Information' (METI) with active participation of 12 member countries in the region. APCTT has evolved an 'International Network for Transfer of Environmentally sound Technologies' (INTEST) which deals with technologies available worldwide. The catalytic role played by APCTT in promoting flows of technologies and facilitating access to them on favourable terms needs to be further strengthened. APCTT brings out a bi-monthly publication 'Value Added Technology Information Service' (VATIS) with updated information on priority sectors such as: food processing, waste management; sources of non-conventional energy; ozone layer protection and biotechnology. APCTT proposes to cover more sectors and areas depending on the needs of the member countries. APCTT also organizes business meetings and promotes technology market forums, such as, 'Techmarts' to bring together buyers and sellers of technology in specialized and high-tech areas. In addition, it disseminates information on technology offers and requests, and on available consultants through its bimonthly publication "AsiaPacific Tech Monitor' and through exhibitions and workshops. In India, APCTT is co-operating with the Small Industries Development Bank of India (SIDBI) to assist small-scale industries in technology-transfer-related problems through Technology Bureau for Small Enterprises (TBSE). In India, APCTT joined hands with the National Small Industries Corporation (NSIC) and the Council of Scientific and Industrial Research (CSIR), and formed a consortium to assist SSIs in the country to improve and secure access of SSIs to advanced technologies, strengthen linkages between R&D institutions and create and strengthen the local innovative system.

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5.3 World Trade Organisation (WTO) (a) Role of WTO The prevailing world trade order came into existence in 1995, with the culmination of the Uruguay Round of trade talks. The institutionalisation of this order is represented by the World Trade Organisation (WTO) which monitors the compliance of member countries with a number of agreements on trade relationships between countries and also acts as a dispute resolution mechanism. The current order is fundamentally different from the previous regime, manifested primarily in the General Agreement on Trade and Tariffs (GATT) focussing mainly on commodities and manufactured goods. Besides commodities, a number of other factors have become extremely important in cross-border transactions. These can be broadly classified into three categories: services, knowledge and capital. The agreements administered by the WTO now cover the first two categories, while a collective agreement on capital flows is also on the agenda for future talks. Thus, the new order is far wider in scope than the one it displaced. Quantification of all these various impacts is obviously very difficult. Most of them are outside the purview of this study. However, the most significant impact on the developing countries is likely to be that of the elimination of QRs under GATT. While the Uruguay Round agreements achieved sizeable reduction in the use of NTMs, the phasing out period for existing NTMs differed significantly for different products. NTMs in agriculture, affecting temperate zone food products (particularly grains and dairy products) exported mainly by developed countries, were to be phased out almost immediately, but those on textiles and clothing were given a transition period of 10 years, and VERs four years. These imbalances are reinforced by the unequal incidence of VERs across exporting countries and products. For example, as of 1992, of the 79 VERs outside agriculture and textiles and clothing, 69 involved Japan and the Republic of Korea as exporters, and they applied mainly to motor vehicles and consumer electronics. Regarding broad product categories, available evidence suggests that trade liberalization has been limited and slow in agriculture, textiles and clothing; compared to other sectors. Access to markets for these products continues to be much more restricted. Agricultural subsidies, particularly in the EU, have been largely responsible for restricting growth of exports of a number of agricultural commodities from developing countries. In manufacturing, except in textiles and closing, differences in the evolution of market access conditions are not large enough to explain the differences in the pace of expansion of trade in these products. Among other factors, the growing importance of international production networks, appear to have played a greater role.

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(b) WTO and Market Access Market access covers a broad range of issues, which are briefly outlined in Box 5.1. The scope of this report is limited to analyzing protection in agro and resource based exports with special attention to trade in agriculture and T&C - two sectors a that are of great export interest of developing countries. In the context of the Doha Development Agenda, WTO members are committed to negotiations aimed at substantially improving market access for agricultural and industrial products, in particular for developing countries. (i) Import Tariffs Successive rounds of multilateral negotiations have lowered average levels of protection. Industrial countries have generally set applied tariff rates close to their tariff binding, enhancing the predictability and transparency of market access regimes. In contrast, most developing countries bind their tariffs at levels well above their applied rates so that they could in principle substantially increase their applied tariffs without infringing their WTO commitments. Among broad country groups, it is notable that the average tariffs of least developed countries (LDCs) (17.9 per cent) is higher than that of other developing countries (14.0 per cent) and well above that of industrial countries (5.2 per cent). However, averages of most-favoured-nation (MFN) applied tariffs by importing country or region provide an incomplete picture of protection for the following reasons: (a) A number of barriers are not covered by the standard MFN databases, including specific tariffs (viz. Absolute monetary value per unit of imports), tariff rate quotas, prohibitions, contingent protection, the costs of rules of origin, and environmental and technical standards. (b) The averages do not capture the impact of tariff dispersion, in particular tariff peaks and escalation. (c) Because of preference schemes and differing export structures, the barriers faced by exporters to the same market can vary widely. (d) Uncertainty over market access related to contingent protection, interpretation of norms and procedures, and the discretionary nature of many preference schemes, may represent a further disincentive to exporters.

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Box 5.1. WTO and Market Access Market access refers to the ability of providers of foreign goods and services to sell in a given country. For the purposes of market access negotiations, WTO subdivides tradable items into four groups viz. agricultural goods, textiles and clothing, industrial goods, and services. A different set of multilaterally agreed rules apply to each group. Main market access barriers include: • Import tariffs and other price-based border measures: government policies usually targeted at restricting market access in a particular commodity and raising budget revenue. These measures include import duties tariff quotas, and other border duties, levies, and charges. • Non-tariff border measures: government policies that may restrict market access through non-price instruments. Such measures include quantitative restrictions (import quotas, direct prohibitions, domestic content requirements, licensing); contingency measures (antidumping, countervailing, and safeguard measures); technical barriers to trade (TBT) (regulations, standards, testing and certification procedures); sanitary and phytosanitary measures (SPS) (food, animal and plant health and safety). • Domestic policy measures: government policies, which may restrict market access if not applied uniformly to domestic and imported goods and services. These are tax, competition, credit, and investment policies; price controls; and fiscal incentives, in particular, trade-distorting export subsidies and domestic support. Negotiations on market access. The Doha Development Agenda envisages negotiations on market access in all the above areas.

Developing countries generally face higher barriers to their exports than industrial countries. Adoption by all industrial countries of schemes that provide unrestricted market access for LDCs could have significant benefits without imposing undue costs on other suppliers, given the very small share of LDCs in world trade (around 0.5 per cent). Trade preferences also have duty drawbacks. Apart from the economic inefficiencies, they create vested interests and should therefore be set firmly within a context of rapid multilateral liberalization. Improved market access for LDC exports will not be sufficient to ensure sustained growth in exports as constraints in key infrastructure sectors like telecommunications, transport, and financial services often add more to export costs than foreign trade barriers (world Bank, 2002).

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(ii) Agreement on Agriculture Agriculture has traditionally been heavily shielded from import competition. It was not until the conclusion of the Uruguay Round in 1994 that the sector was brought under effective GATT disciplines. The Uruguay Round marked the beginning of a gradual liberalization process in agriculture-initially over six years for industrial countries and ten years for developing countries. WTO members also made a commitment to engage in negotiations to continue the reform process in the final year of the six-year implementation period- part of the so-called "built-in Agenda". The key commitments entailed move away from quantitative restrictions, a binding of maximum tariff rates, and the reduction of domestic support and export subsidies (Box 5.2). Under the Agreement on Textiles and Clothing (ATC), quota restrictions are being gradually abolished (as products are "integrated") over the period 1995-2005 and quotas that have not been removed are subject to a progressive increase in their growth rates (see Box 5.3).
Box 5.2 Uruguay Round: Principal Commitment on Agriculture Tariffication and Binds: Non-tariff measures to be converted to bound tariff at the start of the implementation period with average tariff cuts by industrial countries of 36 per cent over six years from a 1986-88 base, and a minimum cut of 15 per cent on any tariff line. Minimum import access: Tariff rate quotas were introduced to guarantee minimum market access by the end of the implementation period. Domestic support, as measured by the total Aggregate Measurement of Support (AMS), to be reduced by 20 per cent from a 1986-88 base over the implementation period. Exempt are domestic supports of less than 5 per cent "green box" subsidies allowed for purposes such as development and technical progress, and "blue box" subsidies linked to output reduction schemes. Export subsidies to be reduced by 36 per cent in value and subsidized exports by 21 per cent in volume for each product over the implementation period from a 1986-90 base. Special safeguard provision, triggered by volume increases or prices reduction, permit the imposition of additional duties up to specified limits. • Greater flexibility was given to developing countries in their commitments to market access reductions in domestic and export subsidies (generally 2/3 of developed country commitments and a longer implementation period of 10 years). For subsidies excluded from the reduction commitments, the measures will be considered nonactionable in terms of countervailing duties and legal challenges in the WTO until the end of 2003.

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Box 5. 3. The Agreement on Textiles and Clothing (ATC)
• Under the Uruguay Round Agreement on Textiles and Clothing (ATC), MFA quotas are to be phased out progressively over a 10-year period. In the first stage, which began on January 1, 1995, WTO Members were required to integrate products representing not less than 16 per cent in volume terms of their 1990 import of T&C. In stage 2, starting January 1998 not less than a further 17 per cent was to be integrated, and in stage 3, from January 2002, a further 18 per cent. Finally, on January 1, 2005, all remaining products (amounting to a maximum 49 per cent) are to be automatically integrated. Products not yet integrated are subject to a special transitional safeguard mechanism, whereby an importing country can apply quantitative restrictions for up to three years on imports from a particular source of supply which causes or threatens to cause serious injury to the domestic industry. After integration, regular GATT safeguards apply. In addition to this integration process, the ATC accelerated the growth rates for remaining quotas. The annual growth rates of quota volumes were increased by a factor of 16 per cent for the first stage of the Agreement, by a further 25 per cent for the second stage, and another 27 per cent for the last stage. LDCs enjoy one-stage advancement in the acceleration of quota growth. In additional to the MFA quotas, T&C imports are subject to exceptionally high tariffs in both developed and developing countries. Trade-weighted average (applied) tariffs for non-OECD countries are 16 per cent. This average conceals large variations among individual countries. The largest developing country exporters tend to have higher tariffs. ASEAN, China, and South Asia all have tariffs in the range of 20-33 per cent on textiles, and of 30-35 per cent on clothing.

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6 CONCLUSIONS AND RECOMMENDATIONS

6.1 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. In general, SMEs have higher labour elasticity and have grown at a higher rate than overall industrial sector. This proves their ability to compete globally. But, these industries face a number of problems and constraints, which include the following: (a) (b) (c) (d) (e) (f) (g) (h) 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 and lack of foreign investment, and Increased competition due to removal of QRs and reduction of customs duties.

A wide range of opportunities can be seized by small-scale and labour-intensive industries. It is particularly so in the Asian region where horizontal division of labour through trade and joint venture projects are increasing sharply. The following measures need to be given priority for strengthening the SMI sector: • It is necessary to facilitate the transfer of technology to the SMEs by suitable arrangements such as regional information networks and provision of timely and adequate finance to SMEs. Adequate backward and forward linkages need to be established between small and large units in terms of sub-contracting, production sharing and manufacture of parts. Suitable measures may be taken to enhance the access of the SMI sector to information particularly relating to external markets and foreign investment. Vertical expansion of the SMEs may be limited due to reservation of items and limits on investment. A review of the reservation policy and investment limits is necessary to facilitate capacity expansion, technology upgradation and economies of scale. Much of the existing growth of SMEs has taken place in and around the metropolitan areas, but the balanced regional growth requires that the process of industrialisation needs to be extended to the countryside. In this respect, the experience of China in

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setting up Township Enterprises on a large scale may be particularly relevant for other developing countries. • SMEs are most vulnerable to trade protectionism and exchange rate fluctuations. Undesirable tariffs and non-tariff restrictions on their products must be removed to enhance the export potentials of SMEs. 6.2 National Level Policies At the national level, development of agro-based and resource-based SMEs call for various policies, including the following: Marketing Sectors with competitive advantage need to be identified and sector specific innovative marketing support devised. SMEs need to be promoted as ideal destinations for franchising and outsourcing. A mandatory purchase policy on Government purchases would provide a captive market. US Small Business Act provides for compulsory purchase of 24 per cent of Government purchases from small business. Technology In the pre-liberalization era, technology upgradation was often the last priority for SSIs. With limited competition in the market place, depreciated machinery provided a cost advantage. This has changed with liberalization, which emphasises on better quality. As technology upgradation becomes a key parameter of competitiveness, it is necessary to focus on enhancing technology information through a Technology Bank and facilitating technology transfers through soft financing and a capital subsidy scheme. Infrastructure Power, water, industrial estates, roads, telecommunications and a clean environment are some of the more critical aspects of infrastructure for doing business. Production and commerce are heavily dependent on these inputs. Improvement in infrastructure facilities to the SMEs is necessary to enhance their efficiency and productivity. Clusters Clusters have the potential to be springboards of core competencies. The creation of common facilities, upgradation of infrastructure, demonstration projects, capacity building, strengthening of associations, targeted credit delivery and brand building are activities suggested for being built around clusters. Cluster development has to be accorded priority for existing ones and the potential clusters would have to be identified and appropriate action plan need to be worked out for their integrated development. The programme needs support in the form of adequate

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infrastructure to the clusters and active involvement of Industry Associations in maintenance of their services. Access to Information The World Wide Web is changing the face of the market place. Information is being described as the fifth factor of production. Databases on market related and financing related information need to be identified and made accessible in a user-friendly manner. Government must provide more of its SSI related services through the Net. Innovative Financing Techniques There is a need for developing innovative financing measures such as setting up of Venture Capital Funds, Leasing companies, Mortgage finance companies, Factoring companies, Trade credit suppliers and micro finance. Micro Finance Development of micro-finance promotes economic growth, thereby contributing to poverty alleviation. Not only financial development fosters economic growth and creates employment opportunities for the poor, but also helps to mobilise savings. 6.3 Development strategy for agro and resource-based SMEs While agro and resource based small and medium industries play important roles in different stages of a country's economic, social and political development, various studies conclude that many of the small and medium industries in Asian developing countries are less efficient and less productive than their larger counter-parts. They suffer from high mortality rates, which inflict heavy costs to the economy. Many of them lack entrepreneurial and technical resources to make them successful. While, various incentives may make them profitable, the efforts might be economically wasteful. (a) Macro-economic Pollicies Macro-economic stability is one of the necessary conditions for efficient development of resource base of industries and poverty reduction. Macro-economic volatility puts a break on economic growth. High and unpredictable inflation hurts everybody particularly the poor as their incomes are not indexed to prices, and thus contributes directly to higher poverty rates. However, sound macro-economic polices have only limited capacity to alleviate poverty directly. These policies should be directed at promoting growth through prudent implementation of macro-economic goals, and eschewing direct interventions for protecting the interests of the poor and for developing target groups of industries with employment potential and comparative advantage.

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The experiences of India, Bangladesh, Pakistan, China, Korea, Indonesia, Thailand, Philippines, Japan and Singapore suggest that given appropriate program and policy assistance, small and medium industries can make substantial contributions not only to output and employment but also to exports. Rather than general subsidies, selective support may be extended to qualified firms and industries only with fixed term finance for the specific purpose of assisting them to become competitive. (b) Fiscal Incentives In many countries, tax holidays have been given as an investment incentive, but the benefit has been marginal either because they are not available to small and medium industries or they are more accessible to larger industries. Moreover, tax holidays have been less effective in the regional dispersal of industries, as industries tend to be located near the main demand centres or regions with better infrastructure facilities. Instead of providing tax breaks for industries, it may be more productive to develop basic infrastructure facilities in backward areas through increased allocation of public funds. A reform of government policies should redirect the focus from the microeconomic level of the firm to the macroeconomic level of business and the economic environment. Instead of focusing on the different concessions to be provided, greater emphasis should be placed on creating an environment conducive to long-term development of not only efficient but also viable small and medium industries. This may entail the dismantling of costly incentives and subsidies that encourage inefficiency and waste in firms, increasing the availability of essential inputs and bank credits for small and medium industries, and introducing a wide array of marketing options and possibilities. (c ) Technology development One of the major problems faced by the SMEs is technological obsolescence and use of outdated plant, machinery and equipment. Considering the urgent need for attaining technological competitiveness of SSIs in the face of global competition, it is important to stimulate technological revolution in SSIs. However, developing countries should not blindly adopt advanced technologies but acquire or develop technologies that are appropriate to the local needs and that ensure a smooth transition from outdated traditional technologies to more modern technologies conforming to local conditions. It is generally agreed that instead of importing and adopting advanced technologies from the West, developing countries should acquire, adapt and use technologies that are available from the "regional sources" as these are more compatible with the local culture, skills, raw materials and demand. The technology policies adopted by SSIs should be an integral part of the overall Science and Technology (S&T) policies in all countries. The experiences of the developed economies of the USA, Japan and the Europe have shown that the average size of the firm increases with the growth in national and per capita incomes. SSIs in the developed

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countries are far more productive than even large firms because of the usage of modern technology and management techniques. Economic development is invariably accompanied by a reduction in wage disparities among different sectors, industries and firms of different sizes. In order to remain competitive in the era of globalisation, it is imperative that SMEs must upgrade their technology, which may involve (i) Introduction of new tools and equipment, (ii) changes in the manufacturing process, (iii) improvement in the quality of products, (iv) introduction of new designs, (v) use of new raw materials and (vi) usage of modern management and information technology. This requires an integrated approach encompassing identification, technology transfer, adaptation and absorption. The Government should provide financial assistance to the SMEs for technology up-gradation and modernisation. The following are some of the recommendations for such an integrated approach: (i) Technology Information Setting up of a Technology Bank at the country and regional level is recommended, which will have information on technologies available and their sources. In addition, it could provide information on technology policy, technologies for different sectors and their applications, institutional infrastructure, sources of finance for acquiring technology within the country and from abroad. To start with, it will disseminate information on upgradation of technology, process know-how and design alongwith institutions and also provide consultancy services or any other input required. A compendium of available technologies from R & D institutions in various countries could be brought out on sectoral basis and circulated amongst the facilitating institutions and industry associations for dissemination of technology related information. (ii) Financial assistance Financing may also be provided to units entering into collaboration for technical knowhow and technology upgradation with a view to enhance the marketability of their products or enter into buy back arrangements for exports. Concessional customs duties within WTO framework may be provided for the imports of environment friendly plants and machinery for technology upgradation for SMEs as is generally applicable to export oriented units. (iii) Industry clusters As major portions of the exports of SMEs emerge from industrial clusters, massive program needs to be launched to modernise export oriented industrial clusters. (iv) Quality upgradation More number of SMEs to be encouraged to obtain ISO 9000 so that it gains momentum. Encouragement could be given to Small Industry Associations in the form some financial

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grants to set up and operate testing laboratories. Strengthening of existing testing facilities in technical institutions would also be necessary. At least one testing facility for each major cluster should be set up to fulfil their needs. (v) Role of FDI The diversity of experiences in Asia with respect of FDI requires different policy approaches on the part of host countries. Those countries that have only recently been open to FDI need to ensure that the “open door policy” is maintained and remains stable. They should examine the possibility of a further liberalisation of FDI regimes; the harmonisation of FDI and related policies on industry, trade and technology; and improving the efficiency of their administrative set-up for investment approvals. In doing so, all countries in the region should pay particular attention to the firms from neighbouring countries, so as to capitalise the growing intra-regional investment. Special attention needs to be given to small and medium-sized enterprises whose special needs dictated by their limited financial and managerial resources and insufficient information may call for incentives for the joint ventures. The Asian market has high potentials for small and medium-sized TNCs. (vi) Consortia for SSI marketing Government may promote setting up of more consortia for SSI marketing and provide them financial and other support. The participation of SMEs in domestic and international trade fairs should be encouraged and promoted. (d) Infrastructure and Human Resource Development Efficient physical infrastructure and skill labour are critical factors for enhancing productivity and efficiency. For the more dynamic traded goods and services, telecommunications are the most important facilitator of investment, and technological and organisational innovations drive foreign investment into those countries which have trained and skilled workforce and fairly high educational standards. This points to the overriding importance of developing countries to invest more in the development of human resources, infrastructure and services. It also highlights the risk of being marginalised for the least developed countries with a low level of skilled labour force and infrastructure constraints. The existence of a dynamic local business sector creates a supportive environment through efficient networks of local suppliers, service firms, consultants, partners or competitors. It is, therefore, necessary to concentrate efforts on the development of local entrepreneurship. Equally important is the availability of high quality telecommunications and transport systems, energy supply and other utilities. (e) Competent and Committed Bureaucracy

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Another important institutional prerequisite appears to be the establishment of a competent economic bureaucracy. The complexity and difficulty of managing targeted industrial policies places high demands on the economic administrators, who must be able to balance financial support for targeted industries with penalties for non-performance. The economies of Japan, Korea, and Taiwan, China had economic bureaucracies capable of imposing discipline on private industry. In short, management of a set of successful industrial policies requires a stable macroeconomic framework and committed economic bureaucracy capable of running complex pricing policies and objectively running public subsidy schemes. (f) Legal, Institutional and Regulatory system It is also necessary to strengthen the regulatory system and the legal and institutional setup for orderly growth of industries. As regards the limits and nature of government intervention in private sector activities, it is necessary to devise optimal rules for regulatory system, which while servicing its legitimate purpose will not transcend its limits to the disadvantage of the private sector development. First, any policy affecting allocation of resources and regulation of private sector needs to be transparent and based on a specified set of procedures. Second, even when there is strong presumption in favor of government intervention, it is imperative to limit it to minimum necessary scale. Third, from amongst the available alternative regulatory sets, it is necessary to go in for one, which provides the least scope for rent seeking. Alongwith with deregulation, more important measures are needed to be directed towards creating a legal and institutional infrastructure for the smooth functioning of the private sector. This is well illustrated by the Indonesian experience. Though Indonesia’s industrial policy, trade and financial sector reforms were deep and sweeping, they failed to get a full pay-off as Indonesia lagged in changing its corporate law and other laws vital to trade and industry. Similar was the case with issues of land and property rights. An important lesson from the East Asian development experience is that a holistic approach to deregulation is more productive than a partial deregulation in any one sphere say in industrial policy which is divorced from any reform in other areas. Domestic deregulation should proceed pair pass with liberalisation of trade and tariffs in order to ensure optimal allocation of resources between traded and no-traded goods. 6.4 Role of External Trade (a) Trade and Techniques of Production On the basis of a detailed analysis on the relationship between trade and manufacturing value added (MVA) in the Trade and Development Report 2002, UNCTAD (2002)

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concluded that for more than a decade, world trade has been growing, on average, faster than world income as a result of rapid integration. Policies governing market access for both goods and FDI had a more decisive influence over the evolution of trade in many products. The increased mobility of capital, together with continued restrictions on the mobility of labour has accelerated trade in a number of sectors where production chains can be split up and located in different countries. Policies in developing countries have also contributed by offering various incentives to FDI and encouraging TNCs to operate in their territories with minimum restrictions. UNCTAD further observed that aggregate picture conceals considerable diversity in the developing world: • First, countries that has not been able to move away from primary commodities, the markets for which are relatively stagnant or declining, 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, labourintensive products which generally lack dynamism in world markets. Third, a number of developing countries have also experienced a rapid rise in skilland technology-intensive products. However, with some exception, the involvement of developing countries in the manufacture of such products has been confined to labour-intensive and assembly-type processes with little value added. Fourth, a few developing economies have seen sharp increases in their shares in world manufacturing value added. This group includes some East Asian NIEs that had already achieved considerable progress in industrialization before other developing economies began to shift their emphasis to export-oriented production. Fifth, with the exception of this last group, exports of developing countries continue to be concentrated on resource-based, labour-intensive products. However, market growth is slow for many of these products, which continue to be protected by both tariff and non-tariff barriers in industrial countries.

Above trends lead to the conclusion that 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, as this could cause significant terms-of-trade losses and create frictions in the global trading system. UNCTAD (2002) suggested that these problems could be avoided by three sets of factors: • First, by faster growth of markets for labour-intensive manufactures in more advanced economies (both the industrialized countries and the NIEs) which in turn depends on faster income growth and improved market access;

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Second, the middle-income countries should diversify their trade and production and move out of labour-intensive manufactures and create space for lower-income countries, both in the markets of advanced countries and in their own markets; and Finally, the developing countries themselves should expand their domestic markets by overcoming their deep-seated problems of unemployment and poverty.

A return to rapid and sustained growth and full employment policies in the industrialised countries is crucial for averting problems associated with potential frictions within the multilateral trading system. The growth in trade among developing countries is also crucial for expanding markets for labour-intensive products. In particular, industrial upgrading in more advanced developing countries would allow new players to take over labour-intensive activities in line with the "flying geese paradigm". This has already happened to some extent. China and the other highly populated low-income countries that have adopted more export-oriented strategies gained much of the market shares given up by NIEs when these economies shifted to more capital- and technology-intensive exports. The industrial upgrading needed in the middle-income countries depends, to a large extent, on the policies they pursue in such areas as trade, industry and technology. It also depends on the extent to which large economies such as China, India and Indonesia will rely on foreign markets to create jobs and incomes for large segments of their population. Rapid industrialization in the NIEs particularly at the early stages of their development depended heavily on expansion of exports. As these countries were poor in natural resources, they depended on expansion of labour-intensive manufacturing to earn the foreign exchange for importing capital goods and some essential primary commodities such as oil. They had also small domestic market and their industries needed foreign markets to achieve the necessary economies of scale in production. But large countries such as China and India can rely less on foreign markets for their industrialization. Skill mix and resource endowments in China and India are sufficiently well developed to allow rapid upgrading in a number of technology-intensive sectors to enable them to earn the foreign exchange needed for sustained economic growth and development of agro-based and resource-based industries. (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. But, these schemes had limited success in other Asian developing countries due to cumbersome rules and procedures, and the costs from delays and paperwork outweigh the reductions in duty. A review of experience in East Asia and Africa suggest that simple exemption schemes focusing on the direct exporter are more sustainable and attractive to the private sector than drawback mechanisms. One of the key requirement of a modernized duty exemption or drawback should be the development of a system of pre-tabulated and published input-output co-efficient. The work of pre-tabulating the quantity or value co-efficients should be carried out by

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technical persons, separated from the Customs, while the Customs Office may focus on the implementation of exemptions and drawbacks based on the pretabulated and published co-efficient. This is based on the experience of (a) Korea and Taiwan, China (b) recent experiences of developing countries such as India and Bangladesh; (c) almost fifty World Bank projects (during 1980-90) on the implementations of the duty-free import administration reforms most of which failed primarily due to the mishandling of the input-output co-effiicient administration; and (d) the new GATT rules on export subsidies that require the systematic documentation of the input-output co-efficients. The other key measure of export support has been the supply of export credits to exporters, especially for pre-shipment finance. It is necessary to restructure and strengthen the existing financial system with a focus on trade finance, rather than creating new institutions for supply of export or foreign exchange credits. It is also necessary to modernise Customs Administrations in many countries for quick disbursement of duty drawback claims. An inefficient ;customs administration comes in the form of slow or non-existent rebates, and negative effective protection. An alternative solution that merits consideration would be zero tariffs on imported raw materials and intermediates, coupled with increased reliance for revenue purposes on domestic indirect taxes, such as VAT. (c) Free Trade Zones The free trade status for export activities can be achieved through: (I) fenced private or public free trade zones (FTZs); (ii) nonfenced FTZs, (iii) bonded drawbacks/ rebates. These specialised schemes have been widely and effectively used in countries at the early stages of development. The fundamental feature of Korea’s pioneering export promotion drive was the duty drawback scheme implemented through the domestic letter of credit (DLC) and the export finance system. In Korea, the Input Coefficient Administration, which estimates and publishes detailed input-output coefficients, band and individual commodity drawback rates, and the back-to-back credit system offered through Domestic Letters of Credit (DLCs), has efficiently provided tax free inputs and ready access to working capital finance to direct and indirect exporters. India, Taiwan, China, Indonesia, Malaysia and Thailand also have export support instruments including tax incentives, duty drawbacks and exemptions, and export and investment finance for exporters. Four broad conclusions can be drawn from the Asian experience for development of export promotion zones: • Where the general economic climate is reasonable, or becoming so, the development of FTZs can be a useful instrument to the development of export-oriented industry, as it can lower initial investment costs for investors, and encourage economies of agglomeration.

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FTZs should be a component of a broader outward-oriented development strategy, rather than a substitute for such a strategy, or an excuse to delay much needed economy-wide trade reforms. FTZs should have proper infrastructure and linkages with the other parts of the country through proper hinterland development. The benefits from FTZs in terms of foreign exchange earnings, employment, technology transfer and linkages with domestic markets may be limited, unless accompanied by an appropriate policy framework and human capital development for sustained export development. While accepting that sometimes market failure justifies a potential role for the public sector in the development of free trade zones, the pricing of land in such zones should not be subsidized. Similarly, as part of a general programme to promote foreign investment, governments should be sure to remain open to the private development of such industrial estates, as in being done in China. 6.5 Participation at Regional Level (a) Regional Economic Co-operation

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A strengthening of regional economic cooperation could help this process along in East and South Asia. The successful use of strategic trade, industrial and macro-economic policies led to a pattern of regional division of labour, described as the "flying geese" model. As the leading economies in the region successfully shifted from resource-based and labour-intensive industries to sophisticated manufacturing activities, they provided space for the less developed countries to enter simpler manufacturing stages. Regional trade and investment flows played a central role in this process by helping to create markets and by the transfer of skills and technology to neighbouring countries. The challenge now lies in the extension of this regional dynamics and the growth pattern to include newly emerging countries such as China and India, as well as other less developed countries in South and East Asia. Since regional economic arrangements imply close interdependence among a group of economies, there is the risk of contagion effect that problems in one country may be transmitted to its neighbours. In fact, a number of financial problems in the regional integration at the end of 1990s contributed to volatile capital flows fuelling a boom-bust cycle in East Asian economies. Thus, maintenance of a stable and rapid regional growth needs not only credible economic policies for upgrading of production and exports, but also appropriate regional arrangements to ensure the stability of financial markets, including lending facilities and agreement on a sustainable pattern of exchange rates (TDR 2001). (b) Role of ESCAP

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ESCAP and its regional institutions such as Asian and Pacific Centre for Transfer of Technology (APCTT), the Regional Network for Agricultural Machinery (RNAM), and the Regional Coordination Centre for Research and Development of Coarse Grains, Pulses, Roots and Tuber Crops in the Humid Tropics of Asia and the Pacific (CGRPT) have carried out many activities in the past, and could do more in the future, to promote the exchange of national experiences, skill training and endogenous capability-building, research on sectoral restructuring, the dissemination of information and specific technology and ESTs through seminars, workshops and technology fairs. (i) FDI and technology transfer

FDI-related technology transfer have played a major role in the development of many developing members of ESCAP, such as the Republic of Korea and Taiwan Province of China, as well as South-East Asia, as is evident from their flexible and practical approach to FDI. Other ESCAP members are therefore advised to take a similar approach. In particular, ESCAP members that have abundant, low-cost labour should welcome labour-intensive technology; this should be the case even in countries that have already built up a high level of science and technology, for instance, China and India. Technology is a means for developing the economy and improving the standard of living. Low-level technology is usually appropriate for those economies seeking to attain full employment, which is the best policy for eradication of poverty. (ii) FDI and Export promotion Foreign direct investment (FDI) can be critical in introducing widespread technological change, improving the agility and competitiveness of firms, and providing access to skills and global markets. This is evident in China, and to a lesser extent in Bangladesh, India, and Kenya, where FDI is increasingly generating spillover effects in many sectors. Successful cases show the importance of having governments promote and welcome FDI, particularly in infrastructure such as communications and energy. They also show the importance of true such as communications and energy. They also show the importance of avoiding excessive regulation and restrictions on expatriates and financial flows and the business activities of firms. Export promotion through FDI is a key reason for the government's desire to attract FDI. FDI can help to channel capital into industries that have the potential to compete internationally, and the global linkages of TNCs can facilitate their access to foreign markets. The share of foreign affiliates in total Chinese exports increased from a negligible amount in 1978 to 27.5 per cent in 1993, with even higher shares in electronics, machinery, footwear, toys, travel goods, and textiles and clothing. Given that the absolute volume of China's total exports has also been increasing substantially, this is a remarkable achievement. (iii) Multilayered bilateral cooperation

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FDI and technology are increasingly flowing into ESCAP member countries from not only developed countries but also from Asian NIEs and other dynamic Asian economies. Technology from the latter may often be more appropriate than that of Japan in the case of less-developed economies, in the sense that in the former it is more labour-intensive. For this reason, the flow of FDI and technology from Asian NIEs and other dynamic Asian economies should be actively encouraged by all organisations including ESCAP.

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(iv) Cooperation at Subregional level In the ESCAP region, ASEAN and SAARC are major subregional associations. The fact that both the associations are building up intra-subregional cooperation for preferential trade with minimal discrimination against other countries is a welcome move. These arrangements will realize economies of scale for their member countries, the size of which will be measured by the manufacturing , including those of India and Indonesia. It is hoped that discrimination against non-member countries will not intensify. (v) Role of NGOs NGOs can serve as technical advisers to importing agencies by helping them in the choice, appraisal, and negotiation of technology transfer, and in the assimilation and dissemination of imported technologies. They may also be objective observers in monitoring the government activities needed to facilitate the transfer process. Their comments on the activities can serve as bases for the national legislative institutions, such as the parliament, to force the government to improve services and cooperation. NGOs may conduct long-term studies on technology requirements of the country or enterprise, and render help in skill training and access to information. (vi) Source book on ESTs

In 1993 APCTT, with support from the Ministry of Environment of the Government of India, had published a very useful book entitled 101 Environmentally Friendly Technologies, giving details of technology in different sectors, on such aspects as the use of solar energy, energy conservation, energy from wastes, building materials, material conservation, new products and equipment, food processing, waste composting, waste treatment, and waste recycling. It will be appropriate to prepare a similar source book containing information on Environmentally Sound Technologies (ESTs). This could be prepared by ESCAP in cooperation with APCTT and other technology transfer institutes in the region. Technology source books from technology-supplying countries of the region would be very valuable, but it must be ensured that they are updated periodically. (vii) Co-operation among country associations

There is a need for national governments, NGOs, and international organizations in Asia and the Pacific to intensify their efforts to facilitate technology flows to and from countries of the region. For this there should be continual interaction and dialogue among the country federations, chambers and associations of industries. A number of initiatives could be taken by them, either jointly at the regional level, or separately at the national level, in order to promote stronger technology transfer and greater economic development in the region. The initiatives should include:

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(i)

In-depth studies on the status of endogenous capabilities of developing countries of the ESCAP region in agro-based and resource-based industries, with a view to identifying areas of comparative advantage and cooperation on the basis of complementarity Research on problems in technology flows between developed and developing countries, and their role and influence in different sectors of the economy. Establishment of a regional scheme of demand-oriented training in skills involved in different aspects of technology transfer. Such a scheme would utilize institutional and on-the-job training facilities of more advanced developing countries and could be operated with the cooperation of national technology transfer centres. Organisation of seminars, workshops, and conferences to provide the exchange of national experiences, introduce new investment forms, and disseminate particular technologies. Strengthening the existing information networks on technology transfer so that they can better satisfy the requirements of the developing countries. Formulation of a common strategy for the prevention and removal of barriers to flows of investment, technology, goods and services. Establishment of national and then regional data bases 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 in the developing countries of the region. Strengthening the cooperation between regional institutions such as APCTT, CGRPT, and RNAM, and the divisions of the ESCAP secretariat; and between ESCAP and other international organizations. 6.6 Multilateral level actions (a) Role of WTO

(ii) (iii)

(iv)

(v) (vi) (vii) (viii)

(ix)

Improving market access for developing country exports requires a comprehensive approach to liberalization. The Doha Development Agenda by WTO contains important commitments but initial efforts need to be sustained. Particular issues include: • The phasing out by all countries of tariff peaks (tariffs of 15 per cent or higher) and multiplicity of rates is essential for development dimension of the current round of multilateral trade negotiations.

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• • •

Developing countries should receive more technical assistance to implement product and process standards. Schemes that provide unrestricted market access for all least developed countries should be extended by all large trading nations. In agriculture, effective liberalization must cover border protection and subsidies in both industrial and developing countries. OECD countries must de-link agricultural income support from production and coordinate reforms of subsidy and tariff regimes. In textiles and clothing, the priority must be to accelerate the removal of quotas in order to avoid an adjustment shock in 2005 as a result of the phasing out of quotas under the Uruguay Round Agreement on Textiles and Clothing. The simultaneous reduction in import tariffs would help to mitigate adjustment pressures. 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 consumers, in particular, must be addressed as part of overall poverty-reduction and development strategies by the multilateral organisations like the IMF, World Bank, ADB and UNDP. (b) Market Access for Agriculture and T&C Exports

• •

Market access barriers in world trade remain significant for products of export interest to developing countries. The 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. These benefits would derive partly from the elimination of access barriers to industrial country markets and partly from reforms of the trade regimes of developing countries themselves. In the aggregate, further opening of external trade is a win-win proposition for both industrial and developing countries. It is desirable to accelerate the removal of quotas on textiles and clothing imports. Given the risks associated with the backloading of quota removal under the ATC, the objective should be to limit the adjustment shock at the end of the transition period for both importing and exporting countries. It is also desirable under the Doha round negotiations to substantially lower tariffs on T&C trade, in both industrial and developing countries. Tariffs in this sector are exceptionally high and liberalization can be expected to carry large benefits for developing countries in terms of exports, employment, and income. 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 with the aim to limit the scope for discretion and incorporating consumer interest.

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6.7 Technical Assistance For stronger regional integration in South Asia as well as East and Southeast Asia., many countries are starting to coordinate and harmonize policies for tariffs, taxation, investment and business regulations. But the most productive impetus to regional integration would come from removing the restrictions on movements of goods, capital, and people. Regional integration is also likely to get a boost from strengthening the regional growth centres in South Asia and Southeast Asia. These could produce important pull effects on growth throughout the continent. They would also help promote FDI by enlarging markets. But regional integration should not be a substitute for globalisation, but should be a means to strengthen it. Multilateral agencies have helped the developing countries by providing financial and technical support and investment guarantees for the development of infrastructure and human resources. They have also played a more catalytic role in mobilising funds from a wide range of private sources. External assistance should further be increased and continued to be provided on concessional terms, given the long-term nature of investment in human capital and its link to poverty alleviation, skill formation and enhancement of industrial productivity and efficiency. The international organisations like the World Bank, IFC, Asian Development Bank, UNDP, UNICEF, UNIDO and UNCTAD are engaged in the provision of technical assistance, consultancy and advisory services with regard to the development of the private sector, human resource development, and promotion of non-debt-creating financial flows. The regional organisations can spur institutional progress by providing forum for high level discussions on Asian solutions to Asian problems and by providing a framework for collective policy actions for the development of SMEs. Although the experience with technical assistance received from these institutions 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 the growth and globalisation of SMEs with special attention to entrepreneurs from rural areas, ethnic minority areas, economically backward areas, ethnic and backward classes, and women and young entrepreneurs. Regional technical assistance programmes on harmonisation of national and regional policies on trade, tariffs, taxation, investment and business regulations and plans for private sector development and foreign investment. Promotion of technology management, evaluation, assessment and enterprises cooperation for the blending of indigenous technology and imported technology.

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• • •

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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Selected Bibliography Asian Development Bank (1995). Asia: Development Experience and Agenda, ADB Theme Paper 3, Asian Development Bank, Manila. ______ (1997) Emerging Asia-Changes and Challenges, ADB, Manila. ______ (2002) Asian Development Outlook 2002, ADB, Manila. Asian Productivity Organisation (1999) Asia Economic Crisis: in Search of Higher Competitiveness in Global Markets, APO, Tokyo. Chakwin, Naomi and Hamid, Naved (1997). Economic environment in Asia for investment, in Investing in Asia, ed.C.P.Oman et.el.1997. Das, Tarun (1993). Macro-economic Framework, Special Economic Zones and Foreign Investment in India, Ad-Hoc Working Group on Investment and Financial Flows: NonDebt Creating Finance for Development, Country Report No.TD/B/WG.1/Misc.3/ Add3/ UNCTAD, United Nations, Geneva, pp.1-75, June 1993. ______ (1996) Policies and Strategies for Promoting Private Sector’s Role in Industrial and Technological Development Including Privatisation in the Asian Economies, pp.1171, ST/ESCAP/1696, United Nations, New York. ______ (1997) Technology Transfer- Growth Nexus Towards Greater Regionalisation And Complementation of Manufacturing Production and Technology Upgrading, pp.1258, Report prepared for ESCAP, United Nations, Bangkok, October 1997. ______ (1998) Private Sector Development Programmes in Selected Countries in Asia and Lessons for Africa, pp.1-165, Report prepared for Economic Commission for Africa, United Nations, Addis Ababa, Nov. 1998. ______ (1999) East Asian Economic Crisis and Lessons for External Debt Management, pp.77-95, in External Debt Management- Issues, Lessons and Preventive Measures, edited by A. Vasudevan, Reserve Bank of India, Mumbai, April 1999. _______ (2000) Role of Fiscal Policies for Management of External Capital Flows, in Corporate External Debt Management, published by CRISIL, Mumbai. _______ (2002) Implications of Globalisation on Industrial Diversification Process and Improved Competitiveness of Manufacturing in ESCAP Countries pp.ix+1-86, ESCAP, United Nations, Bangkok, ST/ESCAP/2197, UN Publications Sales No.E.02.II.F.52, ISBN: 92-120116-0, March 2002.

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Dasgupta, Biplab (1996). New Political Economy and the East Asian Development Experience, mimeo, December 1996, New Delhi. ESCAP (1993) Economic and Social Survey of Asia and Pacific 1992, Part 2, Expansion of Investment and Intraregional Trade as a vehicle for Enhancing Regional Economic Cooperation and Development in Asia and Pacific, United Nations, New York. ______(1994a) Proceedings of the Regional Seminar on Investment Promotion and Enhancement of the Role of the Private Sector in Asia and the Pacific, United Nations, New York. ______(1994b) Privatisation: Issues and Prospects, ST/ESCAP/1439, United Nations, New York. ______(1996) Policies and Strategies for Promoting Private Sector’s Role in Industrial and Technological Development, Including Privatisation in South-Asian Economies, U.N., New York. ______(1997) Economic and Social Survey of Asia and the Pacific 1997- Asia and the Pacific into the Twenty First Century: Development Challenges and Opportunities, U.N, New York. ______(1998) Technological Transfer and Technological Capability Building in Asia and the Pacific, Vol.1, Big Countries and Developed Economies, U.N, New York. Harrold, Peter, Malathi Jayawickrama and Deepak Bhattasali (1996) Practical lessons for Africa from East Asia in Industrial and Trade Policies, Washington DC Holden, Paul (2001) Credit and poverty: Institutional reforms to make financial markets work, The Inter-American development Bank, Washington DC> Holden, Paul and Vassili Prokopenco (2001) Financial Development and Poverty Alleviation: Issues and Policy Implications for Developing and Transition Countries, IMF Working Paper No.Wp/01/160, October 2001, Washington DC. Industrial Bank for Reconstruction and Development (IBRD) 1995, Bureaucrats in Business: The Economics and Politics of Government Ownership, June 1995, Washington, DC. International Monetary Fund (1997) World Economic Outlook- Globalisation, Opportunities and Challenges, May 1997, IMF, Washington, D.C. _______ (1998) Mitigating the social costs of the Asian crisis, Finance and Development, Volume 35, Number 3, September 1998, Washington DC

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_______ (2002a) Improving Market Access Toward Greater Coherence Between Aid and Trade, March 2002, Washington DC. _______ (2002b) Market Access for developing Country ExportsSelected Issues, Joint Discussion Paper by the IMF and World Bank. August 2002, Washington DC. Morduch, Jonathan (1999) The Microfinance Promise, Journal of Economic Literature, Vol.37, no.4, pp.1569-1614. Oman, C.P., Brooks, D.H. and Foy, C. (1997). Investing in Asia, Development Centre, The Organisation for Economic Co-operation and Development (OECD). UNIDO (2002) The International Yearbook of Industrial Statistics 2002, Vienna. United Nations Conference on Trade and Development (UNCTAD) (2001) World Investment Report 1997, United Nations, Geneva. ______ (2002) Trade Development Report, United Nations, Geneva. World Bank (1994). Infrastructure Development in East Asia and Pacific: Towards a New Public-Private Partnership, Washington, DC. ______(1995). Private Sector Development in Low-Income Countries, Washington DC ______(1996). Practical lessons for Africa from East Asia in Industrial and Trade Policies, Washington DC ______(1998a) The World Bank Group: Supporting Private Sector Development: A Status Report, September 1998, Washington, DC ______(1998b) Social Washington DC Consequences of the East Asian Crisis,

_____ (2000) East Asia: Recovery and Beyond, Washington DC _____ (2002a) World Development Report 2003, Washington, DC _____ (2002b) Development, Trade and WTO: A Handbook, Washington, DC

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