Action Programme on Productivity Improvement, Competitiveness and Quality Jobs in

Developing Countries - Working Paper PMD 2

Competitiveness in a rapidly globalizing economy: Lessons

of experience
by Ganeshan Wignaraja

Table of contents

FOREWORD

1. Introduction

2. Alternative approaches to national and enterprise competitiveness

3. Trends in globalization and competitiveness

4. What explains the long-run competitiveness record of industrial latecomers?

5. Factors affecting implementation

6. Towards designing best practice national competitiveness strategy

7. Summary and lessons

Appendix 1: Clothing Industry Training Institute in Sri Lanka

Appendix 2: The determinants of competitiveness in African and Asian economies

Appendix 3: Organizations undertaking studies and assessments of competitiveness

Bibliography

FOREWORD

The current wave of globalization of the economy has generated widespread interest among
countries and within countries in the development and upgrading of national competitiveness.
Annual reports on competitiveness rankings of countries receive much attention not only of
economic managers but of broad cross sections of societies.

Nations do not compete as enterprises do. Rather, nations compete in creating the conditions
that attract and encourage investors - foreign and domestic alike - to invest in productive and
competitive enterprises within their borders (or even for local enterprise to invest in other
countries, if such investments will contribute to enhancing international presence and market
proximity and responsiveness). Nations compete in creating the policy, structural and
institutional framework that encourages and enables enterprises to constantly upgrade
themselves and keep on improving productivity and competitiveness. A nation competes
through putting in place programmes and incentive systems that help and enable its
enterprises to develop competitive advantages and pursue competitive strategies for
successful participation in international and domestic markets.

Globalization is continuously introducing major transformations in trading and production

systems. The competitive pressures, coupled with the rapid advances in production,
information and transport technology, is accelerating the spread and intensity of globalized
manufacturing systems. The need for increased adaptability and flexibility to rapidly changing
markets is changing the nature of work and its organization. At the same time, there is a
growing concern that economic growth should be accompanied by social justice. Indeed,
countries must build the competitiveness framework that achieves the complementarity of
national economic and social development. As emphasised in the ILO Report Decent Work,
"Over the next decade the major issue will be the adaptation of national economies and
national institutions to global change, as well as the adaptation of global change to global
needs".

This paper draws from experiences of many developing countries in building national
competitiveness. It is written for government officials, employers, workers' representatives,
and managers who are now very much concerned with being able to benefit from the
opportunities arising from globalization as well as cope with the threats posed by heightened
competition. Very often, these social partners are called to contribute to concerted action on
building the foundations for national competitiveness enhancement.

This paper is produced under the Action Programme on Productivity Improvement,

Competitiveness and Quality Jobs in Developing Countries. With increasing globalization, it
is more and more appreciated that productivity improvement is crucial to a country's
integration into the global economy. With the opportunities for growth of output and trade
and the increased competition offered by globalization, it is important for countries to develop
the capacity to pursue strategies for productivity and competitiveness improvement of
industries supplying local and international markets. Particularly for developing countries,
productivity improvement is essential to create more jobs through growth from new
investments and to sustain jobs in the face of increased competition.

The Action Programme promotes the "high road" to productivity improvement and
competitiveness, i.e. approaches that aim at achieving both economic and social objectives at
the same time. It is developing various guides and manuals on improving productivity and
competitiveness through innovation, participation, human resource development, labour-
management cooperation, and better working conditions, among others. It is documenting
national, sectoral and enterprises level "best practices" in productivity and competitiveness
improvement. The manuals and guides and the best practice cases will be disseminated
through publications, national workshops and seminars as well as through the undertaking of
policy and programmes development advisory services.

The work done by Ms. Lydia Badia to bring this paper to publication is gratefully
acknowledged.

Arturo L. Tolentino

Manager Action Programme on Productivity Improvement,

Competitiveness and Quality Jobs in Developing Countries

1. Introduction

Globalization has accelerated since the mid-1980s. It involves a complex process of

international integration with revolutionary implications for developed and developing
countries alike. It brings together international trade flows with foreign direct investment and
portfolio capital flows. The speed and persuasiveness of recent globalization has been
particularly striking. Anthony Giddens, the Director of the London School of Economics,
equates Globalization with a kind of "runaway world" or "new world without end". He writes:

"Globalization: the term may not be particularly attractive or elegant. But absolutely no one
who wants to understand our prospects and possibilities at the century's end can afford to
ignore it. I travel a lot. I have not come across a single country recently where globalization
isn't being intensively discussed. In France, it is mondialisation. In Spain and Latin America it
is globalizacion. The Germans say Globalisierung.

The global spread of the term is evidence of the very developments to which it refers. Every
business guru talks about it. No political speech is complete without it. Yet as little as ten
years ago, the term was hardly used, either in the academic literature or in everyday language.
It has come from nowhere to be almost everywhere." (1)

Globalization generally refers to a process of broadening and deepening of inter-relationships

in international trade, foreign investment and portfolio flows. The outcome is the creation of a
global marketplace for goods and services that is largely indifferent to national borders and
governmental influence. Previous episodes of Globalization since the 1960s have altered the
production, export and employment structure of the world economy but many barriers to full
integration still remained. Although analysts seem to differ on the policy implications of
globalization, most would concur that the post-1980s episode is likely to herald more rapid
international economic integration than previous episodes. Rapid technological change
(particularly the revolution in computing and communications technologies) coupled with
falls in barriers to international trade (through the implementation of the Uruguay Round
Agreements and economic liberalisation in developing countries), have driven it.

The recent episode of globalization is characterized by unprecedented falls in production and

shipment costs, access to new sources of supply, growing demand, increased competition and
stringent quality requirements. The terms of competition in a rapidly globalizing economy
have put a premium on speed of delivery, product differentiation, flexibility, quality and
innovation. In short, enterprise growth and exporting are increasingly associated with the
acquisition of technological change and other forms of manufacturing capabilities. A
competitive economy is the sum of the dynamism of the enterprises within it.

Globalization and national competitiveness are popular issues in economic policy debates.
Economic theory suggests that globalization will lead to greater convergence in economic
performance (including competitiveness performance) between open economies. However,
empirical studies highlight growing gaps in medium-term performance between different
developing economies in the 1980s and 1990s. An over-reliance on one or two primary
product exports is still a feature of many small Caribbean Island economies. Sluggish
manufactured export growth characterises the majority of African developing economies.
South Asian economies have had reasonable export growth in textiles and garment but have
had limited export diversification into high skill activities (such as electronics and precision
engineering activities). Only East Asian economies (and, to lesser extent, the former Eastern
European economies) have had strong export growth coupled with industrial upgrading and
diversification, historically witnessed in industrially developed economies. In this regard,
economies in Latin American lie somewhat below their East Asian competitors.

The lacklustre competitive performance of some developing economies -- particularly in

Africa and the Caribbean -- has fuelled concerns about the use of liberalisation policies as a
panacea for competitive industrial development. The financial crisis in East Asia and the
deepening global economic crisis have raised new questions about the applicability of the
"export-led East Asian development model" in other developing economies. Concerns about
contagion effects from Asia to other emerging economies have led to calls for the introduction
of more capital flow controls and other forms of autarkic policy instruments. However, this
may put back industrial development rather than enhance it. There seems to be a lack of
consensus on whether liberalisation and deregulation can foster industrialisation in developing
economies. At the same time, there is a lack of clarity on industrial policy alternatives.

This paper seeks to clarify these pressing issues facing government, the private sector and
trade unions and focuses on alternative industrialisation strategies in open economies. It
examines alternative approaches to national competitiveness during globalization; the factors
affecting the competitiveness performance in different developing regions; a competitiveness
policy framework for government, the private sector and labour organizations; and the lessons
of experience. It recommends a holistic national approach for competitiveness in developing
economies undergoing globalization that is based on two critical elements:

(i) A public-private-labour organization partnership for national competitiveness.

(ii) A "liberalisation plus strategy".

Mounting evidence suggests that a single economic actor (be it government, the private sector
or trade unions) is unlikely to solve the competitiveness problems of developing economies
and that different actors working together generates a synergy which is greater than the sum
of individual actions. In addition, a liberalisation plus strategy -- which combines liberal trade
and investment policies with strong measures for industrial finance, human resources and
technology support and infrastructure -- is better associated with national competitiveness
than a "simple liberalisation only" approach.

2. Alternative approaches to national and enterprise competitiveness

Definitions

The concept of competitiveness is somewhat elusive particularly at the national level. There is
an on-going academic debate over the merits of emphasising price (i.e., exchange rates and
wages) and non-price factors (i.e., technology, design, productivity, human capital etc.) in
such a definition. (2) This debate -- which examines theoretical issues underlying the concept
of competitiveness -- is beyond the scope of the paper. For convenience, this paper adopts a
non-price factor based view of competitiveness, which has become increasingly common in
the policy literature on the subject. Following the OECD, we define competitiveness as:
" the degree to which, under open market conditions, a country can produce goods and
services that meet the test of foreign competition while simultaneously maintaining and
expanding domestic real income"(3) (our emphasis).

This definition is based on an understanding of the nature of technological change in

manufacturing enterprises in developing countries.As discussed below, it focuses on the issue
of learning costs to absorb technological and other manufacturing capabilities in enterprises in
industrial latecomers. The pace at which enterprises acquire these capabilities is reflected in
shifts in comparative advantage at the country-level. Thus, national competitiveness can be
proxied by manufactured export performance relative to competitor economies. A more
competitive economy is characterized by rapid manufactured export growth combined with
sustained technological upgrading and diversification. This is a measurable notion, which
emphasizes both growth performance and structural change over time in the manufacturing
sectors of individual open economies. Moreover, it emphasizes efficiency considerations
(namely the ability of a country's manufacturing sector to meet the test of competition in
international markets) and gives rise to policy suggestions. Similarly, competitiveness policy
can be viewed as the sum of policy instruments, which may induce more rapid export growth
and technological upgrading from a country's enterprises.

Competitiveness in developed economies

The issue of what determines national trade patterns between economies has long preoccupied
the attention of international economists and policymakers. In this regard, the theory of
comparative advantage and its variants has served as the dominant explanation of trade
patterns. Most economists would probably agree with the following view that "competition in
the market for tradeables takes place by and large between individual agents and corporate
bodies. The terms on which they compete are fashioned by the drivers of comparative
advantage - factor endowments, factor productivity, technology-- and industrial
competitiveness. These terms can also of course be influenced by government policy -- tariffs,
subsidies, quotas and so on can impact on the competitiveness of individual firms and
sectors." (Greenaway,1997, p. 1484). With notable exceptions, international trade theory has
emphasized free trade and non-intervention as the optimal policies for economies.

More recently and controversially, however, there has been a shift in trade and industrial
practice. Policy circles in developed economies have become pre-occupied with the issue of
"national competitiveness". The UK, the US, Japan and the European Union, among others,
have invested heavily in analysing competitiveness issues and even devised a series of
competitiveness white papers.(4) In part, this interest has been driven by the creation of league
tables of competitiveness indicators (like GDP per capita and labour productivity), a
perception of declining competitiveness performance, and a feeling that rising national
competitiveness is associated with the systematic use of competitiveness policies. Given that
developed economies are largely open economies with few policy-induced distortions and
well developed markets and institutions, their competitiveness policies have tended to focus
on improvements in education and training, research and development, physical
infrastructure, industrial finance and de-regulation of markets. Other competitiveness policy
issues -- like trade liberalisation, export promotion and reduction in entry barriers to foreign
investment - have been underplayed.

Competitiveness in developing economies

In contrast with developed economies, with some notable exceptions, there has been relatively
little interest in national competitiveness issues among policy-makers in developing
economies. In several developing economies, structural adjustment policies (SAPs) of the
IMF and World Bank have formed the backbone of the policy agenda for growth and
exporting. SAPS have focussed attention on removing distortions created by past government
actions to the working of the market mechanism. Meanwhile, competitiveness policies
(particularly, public policy actions those dealing with technology and the allocation of
resources between different industries) have been neglected in adjustment programmes.

But there has been academic interest in competitiveness issues, particularly among
economists and economic historians interested in technical change and its effects on growth
and exports. Technological change is widely observed to be the dominant force behind rapid
industrial growth, exports and rising living standards. A classic historical study has noted that:

"the West's path to wealth involved and required a society willing to tolerate and accept social
and political change far more drastic than any previous revolution ….The West has grown
rich, by comparison to other economies, by allowing its economic sector the autonomy to
experiment in the development of new and diverse products, methods of manufacture, modes
of enterprise operation, market relations, methods of transportation and communication and
relations between capital and labour" (Rosenberg and Birdzell, 1986, pp. 332-3).

Technological advance in the West generated an "innovation capability gap" between them
and industrial latecomers who had relatively poor innovation capabilities. Building on
previous work on comparative advantage, this research suggests that export competitiveness
develops in individual manufacturing firms within late industrialising economies. (5)
According to this view, national competitiveness is the sum of the efficiency and dynamism
of component firms. At the start of their industrial drives, industrial latecomers have little
indigenous technology and need to master the use of imported technology from advanced
industrial economies in order to industrialize. Enterprises are required to learn new industrial
technologies and industrial skills within an environment of imperfect and missing factor
markets (for inputs like industrial skills, technology and finance) as well as under-developed
institutions.

Market failures can arise from the absence of markets in developing countries or from
imperfections in existing markets (like externalities, incomplete or asymmetric information,
risk and uncertainty, unpredictable learning effects, technological linkages, monopolies etc).
In such underdeveloped markets with few participants, technological learning can be
extremely risky and expensive for the individual enterprise and is often not undertaken. This
is particularly the case in complex industries like engineering and electronics (which entail
higher learning costs in search, experimentation, engineering and research and development
activities) than simple industries like textiles and garments (see Box 1 on the uneven
technological learning experience in Sri Lankan industry since trade liberalisation).

Box 1: Uneven learning in an industrial latecomer: Sri Lanka The Sri Lankan case illustrates the
relationship between technological capability building, export performance and government policies
in an industrial latecomer. In the early 1970s, Sri Lanka was a typical industrial latecomer with a
small industrial base (13.9 per cent manufacturing to GDP ratio). An import substitution strategy
held back private sector and export growth by generating an anti-export bias, restricting technology
imports and fostering inefficient state enterprises. Sri Lanka adopted economic reforms in 1977
emphasising outward-oriented trade and investment policies. Sri Lanka’s manufactured exports
accelerated to 20.7 per cent per year in 1980-95 compared with less than 10 per cent in the early
1970s. By 1995, the country’s per capita exports were US$ 153.1, the highest in South Asia. Much of
this growth was due to the rapid expansion of garments, which account for 80 per cent of
manufactured exports. Meanwhile, technologically sophisticated exports like electronics and
engineering have grown relatively slowly and account for very small export shares. A recent study
relates the pattern of export growth and upgrading to technological factors in garments, electronics
and light engineering. The study found that operating capabilities in all three industries seem to be
quite good at low levels of technological sophistication. However, the ability to develop new
products is weak and none of the firms appears to undertake process-centred R&D activities.
Industrial engineering as a distinct category does not exist. There are few inter-firm linkages (in the
form of supplier or subcontracting relations) or linkages between firms and technology institutions.
The study also indicated industry-wise differences in technological capabilities in the sample firms,
which are related to their export performance. Garments firms, which had the strongest export
growth, seem to have the best technological capabilities. They are quite efficient at selecting
technologies, quality control and maintenance. They have good linkages with technology institutes
(particularly the Clothing Industry Training Institute) and have initiated some sub-contracting
relations with smaller local firms. However, their ability to design new products seems to be weak
and they do not conduct any process (or product) centred R&D activities. Electronics firms, which
have grown relatively slowly, have demonstrated fairly efficient quality control and maintenance
capabilities. However their ability to select new technologies, design new products and strike local
linkages, is weak. Furthermore, they have only just begun to undertake, on a very small scale, some
product-centred R&D. Light engineering firms, which have grown relatively slowly, have shown
reasonable capabilities to select technologies and some ability to design new products. However,
basic process engineering capabilities in the form of quality control and plant layout changes seem
weak. In addition, there has been little attempt to strike local subcontracting linkages or make use of
technology institutions. The study concluded that Sri Lanka’s manufactured exports had grown since
liberalisation but had not upgraded. To promote industrial upgrading and diversification, Sri Lanka
needed to complement its liberalisation policies with new policies to improve its technical and
engineering skill base, its technology institutions, its industrial finance system and attract new
foreign investment. Thus, incentive and structural policies went hand in hand in a competitiveness
building agenda (see below). Source: Wignaraja (1994 and 1998).

Using competitiveness strategies and other policy tools, the governments of these late
industrialising economies need to support risky enterprise technological learning by
systematic actions to remedy market imperfections and create new institutions. Within a few
decades, large sections of industry in the late industrialising economies are likely to acquire
the relevant technological capabilities -- in areas like quality management, equipment
maintenance, just in time inventory reduction, process control, energy saving and reverse
engineering - in order to compete internationally. This is a continuous process. Once the
initial comparative advantages are exhausted and industries needed to upgrade and diversify,
additional and new interventions may have to be devised by the late industrialising
governments in order to stimulate further technological learning. In essence, each of the late
industrialising economies will need to rely on a coherent set of government actions to induce
domestic industrial revolutions based on imported technology.

East Asian competitiveness model and financial crisis

Competitiveness in late industrialising economies is influenced by the interaction of incentive

policies (macroeconomic policies, trade and industrial policies) and structural policies
(technological effort, skills and physical infrastructure). The four East Asian newly
industrialising economies (NIEs) -- like Korea, Taiwan, Hong Kong and Singapore -- are the
most successful among the late industrializers using borrowed technology from the West.
During the last three decades, these four transformed from poor subsistence economies to
industrial powerhouses and now export automobiles, ships, semiconductors and industrial
chemicals. Their GDP has consistently grown at 5 per cent or more annually in these
economies. By the early 1990s, the four NIEs approached per capita incomes witnessed in
many developed economies. The four NIEs have been followed by a second generation of
Asian NIEs (Malaysia, Thailand, Indonesia and the Philippines). The export performance of
these eight economies in a comparative perspective will be analysed in the next section.

There are many differences between these economies. For instance, Singapore and Hong
Kong are small city-states while Korea and Taiwan are medium sized economies. They also
had different colonial experiences -- Singapore and Hong Kong were under British rule while
Korea was under Japanese rule - and other initial conditions. There are also many similarities.
With the exception of Taiwan, they all received substantial foreign aid. With the exception of
Korea, they have predominantly Chinese populations and business practices. They are all
located in Asia, which has seen rapid post-war growth centring on Japan.

Above all, there are some striking similarities in their economic policies, particularly those
directed at creating export competitiveness since 1960s. The experience of the East Asian
NIEs suggests that, amongst other things, national export competitiveness is associated with
macroeconomic stability, an outward-oriented trade regime, high levels of foreign investment,
intense technological effort, investments in skills at all levels and investments in physical
infrastructure (see Box 2).(6) Success has meant that East Asia has been held up as a
development model for other industrial latecomers. As we shall see below, despite the Asian
crisis, the competitiveness strategies mentioned in Box 2 are still relevant even today and
provide useful lessons.

The emerging consensus on East Asian competitiveness policies was recently shaken by the
financial problems in Asia that occurred in mid-1997. The crisis began in Thailand with the
devaluation of the Baht and quickly spread to Korea, Malaysia, Indonesia and the Philippines.
The largest rescue package in history of more than $100 billion has so far failed to stem the
problem and Russia and Brazil were affected in turn. At the time of writing an on-going
debate was taking place in the literature over the causes and consequences of the Asian Crisis.
(7)
Several diverse explanations have been offered for the Asian Crisis but no consensus has
been reached. These include the following:

Lax regulation and supervision of the financial system. This together with implicit
government guarantees is considered to have led to moral hazard and produced excessive
external borrowing.

Pervasive government intervention in economic decision-making led to corruption and

cronyism that further distorted incentive structures and reduced the efficiency of investment.

Over-eager lending to Asian economies (unjustified by economic fundamentals) by

international banks and other lenders.

Weak early warning systems and inadequate intervention by the IMF and the G-7 to prevent
the Crisis from spreading beyond Thailand.

Regardless of its causes, one outcome of the currency crisis in East Asia is new worries about
the applicability of the East Asian competitiveness model elsewhere in the developing world.
At one extreme there have been calls for an abandonment of export-led growth and market-
friendly policies, which form the bedrock of the East Asian model, in favour of pervasive
government restrictions on private sector activity and selective de-linking from the
international economic system. At the other end, there have been calls for even greater
economic liberalisation and even less government interventions in economic activity. Perhaps,
these worries and knee-jerk policy reactions may be a bit misplaced. The fact is that there is
no such thing as single development model that can be transferred without adaptation from
one economy to another. Each developing country in unique in its history, culture, traditions,
geographical location and policy experience. What works in one context may fail elsewhere
because of differences in these country-specific factors. Luck, political stability, government
capabilities and the role of the private sector in economic activity also seem to influence
successful development outcomes.

What seems to be reasonable is the drawing of broad developmental and policy lessons from
one particularly successful experience for use elsewhere. The financial sectors of East Asian
economies may be shaky in the aftermath of the currency crisis but the production base,
industrial capabilities and human resources of these economies are still significantly ahead of
other developing economies. So too is their experience of competitiveness policy formulation
and management and public-private sector partnerships. When domestic and international
conditions improve, these economies are likely to resume rapid growth trajectories. Similarly,
where relevant, particular micro-level policies and institutions from East Asia can be adapted
for use in other locations. Sometimes, these adaptations can involve a scaling down of a
particularly programme or institution to a smaller target audience. Other times, it can involve
a radical reorientation of incentive schemes, activities and delivery mechanisms. Equally
important, in the interests of avoiding future economic costs and resource misallocation, is
that past policy mistakes of East Asia (weak macroeconomic management, poor financial
sector supervision and management and cronyism) should be internalized and not repeated
elsewhere. Thus, the East Asian competitiveness experience is still relevant today for other
developing economies that are attempting to industrialize and compete on international
markets.

Box 2: Common ingredients in East Asian competitiveness strategies Historically, the four East
Asian Tiger economies (Korea, Taiwan, Singapore and Hong Kong) had the best competitiveness
strategies in the developing world. Acknowledging that there are some differences in emphasis given
to strategic industrial interventions between economies, from less interventionist to more
interventionist, the common ingredients in East Asian competitiveness strategies were: A stable
predictable macroeconomic environment. Budget deficits were kept low, inflation was tightly
controlled, a competitive real effective exchange rate was maintained and debt crises were avoided in
order to encourage savings, investment and rapid economic growth. All the Asian tigers adhered to
prudent macroeconomic management. Encouragement of domestic savings. These countries achieved
impressive rates of national savings and investment by historical standards. By 1993, gross domestic
savings were 35 per cent of GDP in East Asia. The rapid expansion of domestic savings was induced
in these economies by the growth of corporate profits using attractive fiscal incentives, establishing
state-run postal savings systems to attract small savers, encouraging mandatory pension plans,
prudent regulation of savings institutions and protection of depositors from bank defaults. Outward-
oriented trade and industrial policies. Moderate infant industry protection and an aggressive export
push (e.g. duty-free imported inputs, export contests and overseas marketing support) were employed
to create competitiveness and force domestic firms into overseas markets. As industries matured and
entered export markets, new industries were promoted. The emphasis given to “creating winners”, of
course, differed between individual countries -- Hong Kong, along with most of the second tier
tigers, were the least interventionist; Singapore in between; and Korea and Taiwan were the most
interventionist. Aggressive foreign direct investment (FDI) promotion strategies. FDI was selectively
attracted through competitive investment incentives, carefully targeted long-term promotion
strategies and a comprehensive set of soft infrastructure policies (particularly, specialized technical
skills, technological institutions, export marketing agents and other business services). Singapore and
Malaysia are the most successful examples of such FDI strategies. East Asia received foreign
investment inflows of US$ 62 billion in 1995 (over 60 per cent of total developing country inward
investment). Investments in human capital. As early as the mid-1960s, the four Asian tiger
economies had achieved almost universal primary enrolment; one third secondary enrolment; and
their tertiary enrolment, particularly in science and engineering subjects, were the highest in the
developing world. Interestingly, by the 1990s Korea and Taiwan’s share of engineers in the
population (0.98 per cent and 0.86 per cent, respectively) was double that of economies like the
USA, Germany and Japan. There was also a strong emphasis on vocational training and firm-level
training through tax break and the creation of industry-specific training institutions. A similar focus
was given to education and training in the second tier Asian tiger economies. Creation of a
comprehensive network of technology institutions. Industrial technological capabilities (pertaining to
quality management, productivity and new product development) were upgraded via new technology
institutions, subsided finance and campaigns to raise the awareness of the benefits of R&D.
Comprehensive extension services encouraged small and medium enterprises (SMEs) to become
subcontractors and suppliers. Korea and Singapore have world class technology institutions and
Taiwan has the best technical support system for SMEs. Building efficient infrastructure. All the
Asian economies increased their investments in infrastructure and maintained the quality of existing
infrastructure (particularly, airports, ports, telecommunications and power). Singapore and Malaysi a
probably have the most efficient infrastructure among the Asian economies. Source: Based on World
Bank (1993), Stiglitz (1996), Wignaraja (1997).

3. Trends in globalization and competitiveness

Accelerating globalization

Table 1: Indicators of the Growth of International

Economic Activity

(Average annual percentage changes), 1964-1997

Period
World World World
export FDI real
volum flows GDP
e

1964- 9.2 n.a 4.6

1973

1973- 4.6 14.8 3.6

1980

1980- 2.4 4.9 2.6

1985

1985- 6.7 14.3 3.2

1994

1994- 8.7 20.9 3.9

 1997

Sources: Perraton et.al. (1997) for data until 1994. The

data for 1994-1997 were calculated from IMF (1998)
World Economic Outlook 1998, OECD (1997)
Financial Market Trends Nov 1997 and UNCTAD
(1997b) World Investment Report 1997.

Over the last decade, the world economy has witnessed an acceleration in globalization. Table
1 provides data on some summary indicators of globalization -- growth rates of world export
volume, world FDI flows, and world GDP -- for various sub-periods between 1964-1997. The
period 1964-1973 was at the tail-end of a 'golden age for capitalism' in which a new liberal
world order was established with new international institutions (e.g. the IMF and the World
Bank) along with widespread de-colonisation and a massive reconstruction effort in
developed countries. There was a successful dismantling of trade barriers, a fast growth of
international trade, a restoration of private capital flows and the establishment of large aid
programmes. However, the fast growth of world trade, investment and GDP of the golden age
came to an abrupt end in the early 1970s and early 1980s. Two oil price hikes induced by
OPEC, a prolonged recession in developed countries and the debt crisis in developing
countries hit the world economy.

Thereafter, there has been a gradual upturn in these international economic indicators. Since
the mid-1980s, world trade growth has accelerated far outpacing the growth of world output,
and foreign direct investment (FDI) flows have increased significantly. In the latest sub-
period, 1994-1997, world export volume growth reached 8.7 per cent per year compared with
3.9 per cent for world GDP growth. Meanwhile, world FDI flows grew at a staggering 20.9
per cent. These rates represent historical highs for the world economy during the last quarter
of a century. In the wake of the Asian currency crisis and the likely international economic
recession, the pace of globalization is likely to slow down somewhat.

The recent increase in the pace of globalization is associated with reductions in natural and
regulatory impediments to international trade and investment. Rapid technological change
has led to large declines in computing, communication and shipment costs and therefore
reduced natural barriers to trade and investment. (8) The falls in computing and communication
costs, which have markedly increased access to information technology and transfer, have
stimulated the growth of international trade and investment in financial and other services.
There have also been major falls in shipment costs (both sea and air freight) and
miniaturisation which have stimulated trade and investment in manufactures. The other driver
of globalization is unilateral and multilateral trade liberalisation. Many developing countries
have shed inward-oriented, state-dominated development strategies and embarked on
structural adjustment programmes (SAPs) to foster an outward-oriented, market-friendly
policy stance. In addition, the Uruguay Round of international trade negotiations was
concluded in 1993 and will bring significant multilateral liberalisation in agriculture, industry
and services.(9)

A recent study indicates that with the full implementation of the Uruguay Round, the average
tariff on manufactured imports is expected to fall to 3 per cent (down from 6 per cent in 1980
and 47 per cent in 1947).(10) More generally, a number of studies have attempted to quantify
the effects of the Uruguay Round on world economic welfare. One of the most recent and
most comprehensive by Harrison et.al. (1997) used a numerical general equilibrium model
which incorporates increasing returns to scale, 24 regions, 22 commodities and steady state
growth effects. They concluded that:

"we find that the world as a whole gains substantially from the reforms of the Uruguay Round
(UR): about $96 billion annually in our increasing returns to scale (IRTS) static model and
$171 billion on our IRTS steady state model" (Harrison et.al, 1997, p. 1405). In respect to the
distribution of the gains between different groups of economies, however, the findings were
more mixed. They found that "the European Union, the United States and Japan gain the most
from the Round, as these are regions that reduce distortions the most" (Harrison et.al, 1997, p.
1427-1428).

Meanwhile, they suggest that some developing economies (including those in Sub-Saharan
Africa) will lose from the Round in the short-run but that most will gain as distortions are
reduced in the long run.

Impact of globalization on developing economy competitiveness

There was a strong expectation in certain policy circles that globalization would generate
income and export convergence in the world economy by increasing growth rates in
developing countries via specialisation according to comparative advantage and reductions in
policy-induced distortions. Above and beyond better resource allocation in line with
international prices, there are other growth-transmitting aspects of international exchange
which are important including realisation of economies of scale, rising factor productivity,
access to new technologies and management methods, increased domestic technological
activity and increased savings and capital accumulation.(11) These latter mechanisms
emphasize the supply-side of the development process - the possibility of alleviating domestic
shortages, overcoming diseconomies of the small size of a domestic market and an
acceleration of technological leaning. Many of these mechanisms are well known in the
literature and are those associated with the static and dynamic gains from liberalisation to
international trade and inward investment.(12)

In practice, the changes in world trade, GDP, investment and national economic policies have
had a marked impact on overall developing economy manufactured export competitiveness
since the 1980s. However, as work by Harrison et.al (1997) on the effects of the Uruguay
Round on developing countries suggests, this impact has been uneven between different
developing economies. To date some have benefited from globalization and liberalisation of
economic activity and shown dramatic improvements in their export competitiveness but
others have lagged far behind the best performers with little apparent hope of catching-up in
the short-run. The export competitiveness patterns of different developing economies can be
viewed using the following summary indicators:

medium-run manufactured export growth rates which indicates sustained increases in the size
of exports but provides little information on changes in the composition of export over time;

the breakdown of manufactured exports into high and low technology exports which
indicates the technological complexity of a country's manufactured export structure.
Both are needed to highlight a country's competitive performance. This paper makes a simple
distinction between more competitive and less competitive economies and regions. Thus, a
more competitive economy (region) is characterized by rapid long-run manufactured export
growth based on a large share of high technology exports while a less competitive economy
(region) has slower export growth and a smaller share of high technology exports. The use of
technological upgrading as a measure of long-run performance receives empirical support
from Chenery and associates in a study of 39 developed and developing countries from the
late 1940s to the mid 1970s (Chenery et al., 1986; Syrquin, 1994). Their work shows that
significant changes occur in the composition of manufacturing output during industrial
development. They report that the normal evolution of industrial structures is towards deeper
and more complex activities, with considerable local linkages. Their work also found that,
during the process of industrialisation, a corresponding structural change takes place in the
composition of manufactured exports involving a significant shift away from simple, low skill
activities towards higher skill activities. Other forms of technological upgrading may also
take place. As export development progresses and matures, it involves deepening in any or all
four forms -- technological upgrading of products (and processes) within industries, entry into
more complex and demanding new activities, increasing local content and mastering more
complex technological tasks within industries (from those relevant to assembly to those
needed for more value-added activity, improvement and finally research and development).(13)

Figures 1 and 2 provide information on annual average manufactured export growth rates
(in current US$) for 1980-1996 and average shares of high technology exports in 1996
for four developing regions: East Asia, Latin America and the Caribbean, South Asia, and
Africa. These are our calculations based on data from the World Bank World Development
Indicators 1998. Table 2 provides the data on the individual countries, which were used for
the regional groupings. High-technology exports are defined by the World Bank as goods
which are produced by a country's 10 most R&D-intensive industries. In line with empirical
studies in international economics, a United States industry classification was used to
determine average R&D intensities of individual industries and this was applied to developing
countries export structures.

As Figure 1 shows, manufactured export growth in East Asia was 15.5 per cent per year in
1980-96 compared with 14.4 per cent in Latin America and the Caribbean, 11.7 per cent in
the South Asia and 5.5 per cent in Africa. The more general point is that East Asia's long-run
export growth rates are impressive even by the historical standards of developed economies.
Similarly, of the four developing regions, East Asia had the largest share of high technology
exports (46.8 per cent) in its manufactured exports while Africa had the least (2.5 per cent).
Latin America (21.5 per cent) and South Asia (5.3 per cent) fall in between these extremes.

The analysis of regional export competitiveness masks differences within the geographical
groupings. Table 2 provides country-level data on manufactured export values in US$
millions in 1980 and 1996, growth rates in current US$ between 1980-1996 and the share of
high technology exports in 1996. The following points can be made:

Within the African grouping, South Africa -- with the largest manufactured export base in the
region -- had a modest export growth performance in 1980-1996 (4.2 per cent). The strong
performers in Africa with an export base in excess of US$ 1 billion are Ghana (26.1 per cent),
Mauritius (15.6 per cent), Côte d'Ivoire (11.9 per cent) and Zimbabwe (10.5 per cent). The
remaining African economies have disappointing export growth rates of under 10 per cent.
There is also little evidence of a significant presence of high technology exports in the
individual African economies.

India, the largest South Asian exporter, records a reasonable export growth performance (11.1
per cent). Sri Lanka has the fastest growth rate (18.5 per cent) but a relatively small export
base. Pakistan and Bangladesh have growth rates that are close to Indian levels but much
smaller export bases. Like with African economies, there is little evidence of a significant
presence of high technology exports in the individual South Asian economies. India stands
out as a exception to the rest of South Asia but its share of high technology exports (10 per
cent) is well below the average for East Asia as well as that for Latin America.

Mexico, the largest Latin American exporter, grew the fastest in the region (25.9 per cent). Of
the others with a reasonable export base, Chile records a strong growth rate (11.2 per cent)
while Brazil and Argentina are close behind. Mexico has the large proportion of high
technology exports (33 per cent) in the region.

In contrast with the other three regions, the East Asian region has several large exporters (four
economies had exports in excess of US$ 100 billion). China, the largest in the entire sample
(US$ 151 billion), had an impressive growth performance (18.2 per cent). Singapore is next
with 16.5 per cent. The two second tier Asian Tigers, Thailand and Malaysia, also record
strong growth rates in excess of 20 per cent while the two first tier Asian Tigers, Korea and
Taiwan, had growth rates above 10 per cent. Several of the East Asian economies have
significant shares of high technology exports but Singapore (71 per cent) and Malaysia (67
per cent) seem to have the largest share

Implications of lagging competitiveness

Our preliminary analysis suggests that East Asia (and to a lesser extent, Latin America) have
witnessed good competitive performance during the period under review but South Asia and
Africa have been relatively weak. Historically, the competitive production of manufactures
for exports has acted as an "engine of growth" in successful developing economies.
Conversely, weak export competitiveness can hold back economic development in developing
economies. It deprives them of increases in savings and capital accumulation, employment
and foreign exchange. Additionally, it limits the transmission of the direct benefits of post-
Uruguay Round liberalisation (like better resource allocation, gains in productive efficiency,
access to new technologies and creation of marketing linkages). Moreover, weak export
competitiveness - which is often seen as revealing low technological capabilities and poor
labour productivity - can act to deter foreign investment in particular production locations.
Given that foreign investment is a shortcut way of achieving rapid industrial growth, its
absence deprives countries of an important source of technological dynamism and marketing
linkages. Finally, weak competitiveness can affect political and social stability -- in
economies where parts of the population appear to be suffering the effects from globalization
and liberalisation, political pressure often mounts to abandon economic reform altogether.(14)
In a world of accelerating technical change, heightened competition and spreading
globalization, many developing economies seem to be increasingly marginalized and
manufactured export convergence with more successful economies seems remote. Thus, it is
imperative to enhance export competitiveness in developing economies using innovative
approaches. Before going into the details of relevant policies, the issue of why some
developing regions have succeeded and why others have lagged behind is examined next in
the context of a study of the determinants of Asian and African competitiveness.
Table 2: Manufactured export growth and upgrading in selected developing economies
1980-1996
Manufactured exports , $ Manufactured High Technology
million
export growth, exports as a per cent of total manufactured
exports
per cent p.a
1980 1996 1980-96 1996
East Asia
China 8,705.3 126,879.5 18.2 per cent 21.0
Korea 15,701.4 114,451.7 13.2 per cent 39.0
Malaysia 2,458.4 59,394.8 22.0 per cent 67.0
Singapore 9,106.3 104,827.0 16.5 per cent 71.0
Taiwan 17,424.0 103,774.1 11.8 per cent
Thailand 1,592.3 40,726.7 22.5 per cent 36.0
Total 54,987.6 550,053.6 15.5 per cent 46.8
Latin America & Caribbean
Argentina 1,844.6 7,143.0 8.8 per cent 17.0
Brazil 7,448.8 25,468.6 8.0 per cent 18.0
Chile 412.6 2,247.0 11.2 per cent 18.0
Jamaica 593.5 929.4 2.8 per cent
Mexico 1,853.0 74,256.0 25.9 per cent 32.0
Peru 555.2 836.2 2.6 per cent 11.0
Trinidad 203.9 957.8 10.2 per cent 33.0
Total 12,911.6 111,838.0 14.4 per cent 21.5
South Asia
Bangladesh 503.2 2,670.6 11.0 per cent
India 4,431.5 23,920.5 11.1 per cent 10.0
Pakistan 1,242.2 7,783.4 12.2 per cent 3.0
Sri Lanka 198.2 2,990.8 18.5 per cent 3.0
Total 6,375.1 37,365.3 11.7 per cent 5.3
Africa
Cameroon 52.8 140.6 6.3 per cent 3.0
Central African Rep. 28.9 49.5 3.4 per cent 0.0
Côte d'Ivoire 140.0 849.3 11.9 per cent
Ghana 9.4 387.3 26.1 per cent
Kenya 157.6 396.5 5.9 per cent
Madagascar 23.2 86.2 8.5 per cent 3.0
Malawi 16.1 35.1 5.0 per cent 3.0
Mauritius 113.4 1,155.3 15.6 per cent 1.0
South Africa 4,597.2 8,884.7 4.2 per cent
Tanzania 73.9 115.9 2.9 per cent
Uganda 4.7 5.7 1.3 per cent
Zambia 212.8 204.0 -0.3 per cent
Zimbabwe 155.9 775.2 10.5 per cent 5.0
Total 5,504.2 12,895.2 5.5 per cent 2.5
Note: Blanks indicate data gaps.

Source: Calculated from World Bank, World Development Indicators 1998.

4. What explains the long-run competitiveness record of industrial latecomers?

The previous section highlighted the striking gap in the competitiveness performance of
African economies as a group relative to other developing regions over the last two decades.
Compared to more industrially advanced developing economies, the export structures of most
African economies are still dominated by a handful of primary products and the value of
manufactured exports is relatively small. Even within manufactured exports, these economies
tend to be struck at the low skill/technology end. African economies have also witnessed slow
export growth and limited technological upgrading from their small base of manufactures.
The lagging performance of African economies is a cause for concern in national and
international policy circles.

A common view attributes relatively Africa's relatively weak competitive performance to the
effects of external shocks like war, drought, terms of trade and indebtedness.(15) This view
suggests that African competitiveness has been stifled by intermittent political conflict,
prolonged drought, declining terms of trade and crippling external debt. There is some
validity in this argument. The 1980s were a "lost decade" in developmental terms for many
African countries because of domestic recessions induced largely by effects of external
shocks. Such shocks probably reduced economic and export growth below trend rate.
However, the lack of cross-country information on these factors has made it difficult to test
for the influence of external shocks on African competitiveness.

An alternative viewpoint takes external shocks as given and places more emphasis on internal
economic factors, particularly those relating to enterprise dynamics, domestic economic
policies and structural constraints to industrialisation. The results of a recent statistical study
on a sample of 28 African economies and 11 Asian economies are relevant to this discussion.
(16)
Appendix 2 contains a more detailed account of the work.

This study looked at some of the key policy factors (macroeconomic conditions) and
structural constraints (skills, foreign investment and technological effort), which influenced
African manufacturing competitiveness during the late 1980s and early 1990s. The focus of
the statistical analysis was on the African economies but the Asian group was used as a
control group. The statistical method used was a simple two sample T-test on the means of
individual variables. (17)

The main statistically significant findings were that:

Asian economies had significantly higher investment and savings rates than African
economies indicating that good macroeconomic management matters for competitiveness.

Asian economies had significantly higher total factor productivity growth than African
economies suggesting that technological effort influences competitiveness.

Asian economies had significantly higher foreign direct investment inflows than African
economies suggesting that inward investment can dynamize competitiveness.
Asian economies had significantly higher secondary enrolment and tertiary enrolment ratios
than African economies indicating that skills of different kinds matter for competitiveness.

Asian economies had a significantly higher number of telephones per 1000 population than
African economies indicating that physical infrastructure affects competitiveness.

The study concluded that there was empirical support for a broad-based explanation of
Africa's weak competitive performance incorporating the effects of external shocks,
geographical isolation and as well as structural and policy factors. The study also concluded
that, drawing on successful development experience, future competitiveness strategies for
African economies should emphasize savings and investment generation, industrial skill
creation, attraction of foreign investment and indigenous technological effort.

5. Factors affecting implementation

Recent development experience suggests that many influences can hinder the design and
effective implementation of a policy agenda for industrial reform and competitiveness. (18)
Some of these - e.g. a sudden fall in world demand or a rise in world interest rates -- are
external to an economy and outside the control of policy makers. Other important influences,
however, are internal to an economy and within the scope of policy-making including
macroeconomic performance, political stability, government capabilities, government
commitment, and relations with the private sector. Countries, which have minimized the
hindering effects of these influences, seem to have the best chance of enhancing their long-
term competitiveness.

Macroeconomic performance. Good macroeconomic conditions assist the implementation

of national competitiveness strategies while macroeconomic crises are a hindrance.
Difficulties in containing inflation, sudden exchange rate devaluation, sharp declines in
commodity prices, collapses in external demand and domestic recession often contribute to
reversals in certain aspects of competitiveness policies after their implementation including
the re-imposition of exchange controls or import controls and cuts in education and training
expenditures.

Political stability. Civil conflict, domestic political violence and international disputes also
reduce the government's capacity to undertake competitiveness strategies. Defence
expenditures are often increased at the expense of foreign investment, export promotion and
technology support budgets. Key policy makers are sometimes switched from economic
management to crisis management. In this vein, negotiations with arms dealers and aid donors
assume a higher priority than a dialogue with the private sector over competitiveness strategy
or a focus on policy implementation and monitoring. Moreover, the country's reputation
suffers as a destination for foreign investment and foreign buyers may seek out more reliable
suppliers. Country reputations and international goodwill are "a scarce national resource" and
can take many decades and many millions of dollars in promotion campaigns to rebuild.

Government capabilities. While there is a theoretical case for public action to enhance
competitiveness, in practice governments may lack the requisite skills and information to
formulate, implement and monitor such strategies. Undertaking detailed national
competitiveness strategies (involving carefully designed foreign investment targeting, export
contests, training programmes and technology development schemes) demands a host of
economic, management engineering and information technology skills that are in short supply
in many developing country civil services. In part this may be due to civil service recruitment
practices and compensation schemes which typically focus on recruiting generalists and
giving them on-the-job training rather than hiring specialists with relevant private sector
experience.

Government commitment. Owing in part to their concern with structural issues (like skills,
technology and institutional reforms) competitiveness policies can take time to show results.
Inadequate commitment by government has often limited the seriousness of policy
implementation and backsliding has sometimes affected sustainability. Changing
governments and leaders (as well as internal opposition to changes within government) have
frequently led to policy reversals.

Private sector capabilities and relations with government. Countries which have had a
long period of inward-looking policies are sometimes characterized by a tiny private sector
with limited industrial experience. Such an "infant private sector" is unlikely to have the
requisite technological and marketing capabilities to respond quickly to changes in incentive
policies or have the relevant international exposure to advise to government on good
competitiveness policies. Similarly, a government with a "socialist overhang" is likely to
regard the private sector with suspicion, particularly multinational affiliates, and may not seek
their advice on economic policy matters and implementation issues. A significant national
welfare loss would occur if the private sector were not actively involved in the consultative
process.

6. Towards designing best practice national competitiveness strategy

The available literature on national competitiveness increasingly views competitiveness

strategy in holistic terms, involving the use of several related policies. (19) This literature
typically rejects the view found in popular discourses that a single instrument can achieve a
major improvement in national competitiveness. Following this literature, this paper
emphasizes a holistic approach to national competitiveness policies, which has two elements:

A three-way national partnership (involving complementary actions by government, the

private sector and labour organization) for national competitiveness.

A "liberalisation plus strategy" involving a mix of policy instruments.

The importance of the first element is largely self-explanatory. The successful implementation
of any set of economic policies (including competitiveness strategy) requires a consensus
amongst a country's principal social partners (including government, the private sector and
labour organizations). As discussed below, each of these partners also needs to contribute
actively to the design of competitiveness policy. The second element is somewhat more
complicated. For convenience, it can be seen in terms of: (a) incentive policies (instruments
which remove economic distortions created by past government actions that discourage
private sector growth and competitiveness) and; (b) structural policies (which seek to
overcome market deficiencies in the creation of new competitive advantages by firms. Such
policies focus on inputs for learning in firms including skills, finance and technology). The
point to stress is that it is the interaction of (a) and (b) that determines success at firm and
enterprise-level.
The remainder of this section discusses the main actions by government, the private sector
and labour organizations. Within these broad headings, actions under (a) and (b) are
mentioned where relevant.

Actions for governments

Table 3 identifies a sample of constraints to improving competitiveness and elements of a

competitiveness strategy for a typical developing economy, which has recently adopted a
more outward-oriented market-friendly policy stance. Space does not permit us to do justice
to all available incentive and structural policies and some important headings like domestic
competition policies and privatisation have been omitted from the table. The items under
incentive policies are macroeconomic policy, trade policy and foreign investment policy
while the rest fall under structural policies. There is also a separate item in the table called
policy management, which refers to an institutional mechanism for integrating incentive and
structural policies and for involving the private sector in policy-making.

Macroeconomic policy. A stable, predictable macroeconomic environment is a sine qua non

for improved export competitiveness but the situation is asymmetric: macroeconomic stability
cannot ensure competitiveness but macroeconomic instability inevitably hurts
competitiveness. Experience suggests that many developing countries embark on a
competitiveness strategy (or even for that matter an economic liberalisation programme) in
the wake of a macroeconomic crisis associated with unsustainable fiscal and balance of
payments deficits and high inflation. In such circumstances, an overvalued real exchange rate
might also arise from expansionary fiscal and monetary policies and exchange controls.
Macroeconomic instability is likely to send confusing signals about the profitability of
resource reallocation to enterprises and investors and may lead to a subdued (or mixed)
supply response. If a lack of policy credibility leads to a low supply response, then the
processing of implementing a new competitiveness strategy may itself may become difficult
to sustain. Much has been written about what constitutes good macroeconomic policy for
competitiveness. Regardless of the author, in essence the medicine would be the same for our
typical developing economy: budget deficits should be kept low, inflation tightly controlled,
the real exchange rate kept competitive and debt crises avoided in order to encourage savings,
investment and growth. Much emphasis is also placed on consistency, coherence and
continuity of macroeconomic policies.

Trade policy. Development experience suggests that a country's trade policy has a great deal
of influence on its export competitiveness. Economists typically classify countries by their
trade policies into inward and outward-oriented economies. The difference between them is in
terms of the effective protection granted to production for the home market compared with
exports. (20)

Table 3: Government actions for competitiveness in a developing economy

Policy Area Constraint Suggestion
Policy Lack of a coordinating vision and Establish a national competitiveness council
mechanism to formulate
Management
strategy and monitor implementation
INCENTIVE POLICIES
Macroeconomic High inflation & large Develop a plan to reduce fiscal deficit within a
fiscal specified time
policy Deficit Period
Appreciating real Adopt a more aggressive approach to
exchange rate exchange rate

Management
Lack of policy Implement reforms and involve private sector
credibility in pre-budget consultations
Trade policy High and variable Persist with import liberalisation to achieve
effective low, uniform

Protection effective protection

Weak export drive Revamp trade promotion organization to
become more pro-

active and allocate more funds for overseas

marketing
Long delays in refunds Streamline bureaucratic procedures and
on introduce

imported inputs computerisation at customs

Foreign investment Unfocussed foreign Develop a pro-active foreign investment
Policy investment promotion strategy

promotion strategy which targets a few realistic sectors and host

countries
Poor international Establish overseas investment promotion
image/lack of offices as a joint

contact with potential venture with the private sector

investors
Uncompetitive EPZ Evaluate EPZ incentives against competitors
package and change

offer to attract flagship multinationals

Cumbersome foreign Streamline procedures and eventually abolish
investment approvals

approval process Altogether

STRUCTURAL POLICIES
Industrial High interest rates and Manage prudent monetary policies and introduce
finance an
competition into the banking sector
oligopolistic banking
system
Anti-SME bias in credit Introduce training for bank staff on assessing SME
credit
allocation by banks
and specialist SME funding windows
Human Skill gaps in potential Conduct a survey of future skill needs benchmarked
resources areas of comparative against competitors and a prioritising of future skill
advantage needs
Inefficient public sector Introduce partial cost recovery of services for public
training institutions instit-

utions & assist industry associations to launch

training centres
Limited enterprise Introduce an information campaign to educate
training enterprises

about skill gaps and a tax deduction for training

investments
Technology Weak quality standards Provide part-grants for SMEs to obtain ISO9000
in certification
Support
Industry
Low industrial Establish a productivity centre to improve industrial
productivity
productivity to world standards
Inadequate linkages Introduce partial cost recovery of service for public
between
institutions and an aggressive marketing campaign
technology institutions
& industry
Infrastructure High costs of sea and Liberalise air and sea cargo entry to foreign operators
air freight
Long delays in T>Consider commercialisation/privatisation of
accessing utilities infrastructure
connections
parastatals with an effective regulatory framework

An inward-oriented trade policy grants significant protection for home market production and
is biased against exports where as an outward-oriented policy has limited protection and
favours exports. Economists agree that an outward-oriented trade regime is better associated
with improved export competitiveness than an inward-oriented one. An outward -oriented
trade regime induces better resource allocation according to comparative advantage; the
realisation of economies of scale; access to new technologies, imported inputs and markets;
investments in new technologies due to competitive pressures; and less rent-seeking
behaviour.

But there is an active debate on how fast quantitative restrictions and tariffs should be
removed outward-oriented economy should be achieved. Gradual import liberalisation may be
justified on economic grounds in large developing economies with a long industrial
experience, a core of potentially competitive enterprises, well functioning technological and
marketing support institutions and a business-friendly government. China might be a case in
point. The liberalisation programme of APEC may be mentioned as an example of this
gradual approach. Otherwise, rapid import liberalisation would be optimal for our typical
developing economy. Regardless of the speed of liberalisation, quantitative restrictions should
be eliminated immediately and be followed by staged reductions in the dispersion of tariffs.
This way, price signals would influence resource reallocation and industrial efficiency at an
early stage.

Foreign direct investment (FDI) policy Attracting export-oriented FDI is viewed by

economists as a shortcut method for entering the production of manufactures for export and
for technologically upgrading export competitiveness over time in developing economies. For
same reasons that large firms are expected to outperform small firms -- including economies
of scale in investments in R&D and capital market imperfections which confer an advantage
on large firms --subsidiaries of multinationals can be expected to have higher export
capabilities than local firms. Moreover, domestic affiliates of multinationals are better placed
to acquire export capabilities because of their ready access to the "ownership advantages"
(such as technologies, managerial and technical skills, and marketing-know) of their parent
corporations.

Many developing economies are unable to reap the full potential of export-oriented FDI
because of weaknesses in their investment environment such as high cost, unproductive and
illiterate labour; political instability; pervasive corruption; inefficient physical infrastructure;
and an inadequate legal system and accounting standards. A weak foreign investment
promotion strategy also contributes to a lack of inward investment. Commonly found
problems might include: unfocussed investment promotion efforts with limited targeting of
individual firms and investor markets; a poor international image as an investment
destination; uncompetitive fiscal incentive in export processing zones (EPZ); and
cumbersome foreign investment approval processes which lead to long delays in approvals
and provide scope for rent seeking behaviour. In this vein, the optimal approach to attracting
export-oriented FDI in our typical developing economy should emphasize: a pro-active FDI
promotion strategy which targets a few realistic sectors and host countries; creating of
overseas investment promotion offices in a few host countries as a joint venture with the
private sector to act as a first point of contact for investors and to permit active networking
among potential investors; keeping EPZ competitive against international competitor
destinations; and a streamlining of approval procedures with provision for their eventual
abolishment. Box 3 presents a case study from the UK to illustrate this approach.

Box 3: The UK's active approach to cultivating potential foreign investors An example from the UK's
recent experience highlights the value of cultivating foreign investors and the importance of close co-
ordination between government investment promotion agencies. The UK foreign investment
promotion system is de-centralized -- it consists of a central body, the Invest in Britain Bureau (IBB)
which is responsible for overall promotion and several regional bodies which undertake local
investment facilitation. Effective market research by the IBB revealed that Siemens, a German
electrical and electronics MNC, was considering where to locate its new semiconductor fabrication
plant in 1995. Supported by the central government, a local partnership led by the Northern
Development Company was created to persuade Siemens to invest in the northeast of England rather
than in other production locations including Austria and Ireland. A package was rapidly put together
which consisted of the following elements: The Tyne and Wear Development Company identified
suitable land; English Partnerships developed that land into a low vibration site, with access to
essential infrastructure of the type needed for semiconductor manufacture; Tyneside TEC and
Employment Services provided tailored recruitment and training support to meet Siemens'
requirements for skilled labour. Representatives of the region's universities visited Siemens in
Germany to demonstrate the strength of the region's infrastructure and its ability to supply high
quality graduate technicians and engineers. Northern Tyneside Council and the Government's Office
for the northeast worked together to offer a rapid response to planning application and Enterprise
Zone issues. DTI, North Tyneside City Challenge and North Tyneside Council put together financial
support worth over £30 million. The package -- along with the warm welcome offered to Siemens by
the UK Government centrally; good market research; ample supplies of educated, productive
manpower; high quality infrastructure; macroeconomic stability; and a large local market -- was
successful. In August 1995, Siemens announced its intention to locate the £1.1 billion facility in
North Tyneside, creating up to 1500 new jobs. Source: Adapted from UK Cabinet Office (1996).

Human resources Investments in skills at all levels are a vital pre-condition for improved
export competitiveness. Investments in primary and secondary education help to develop
literate, muti-lingual, numerate production workers, who are the bedrock of successful labour-
intensive industrialisation. As industry moves into more complex activities, investments in
industry-specific vocational training and tertiary-level technical skills (particularly
mathematics, science, engineering and information technology) become necessary to enter
new activities. Equally important are investments by firms in formal employee training to
tailor-make skills for industry. There are many ways of approaching human resource
development in our typical developing economy but one of the main priorities seems to be a
survey of future skill needs benchmarked against competitor countries to identify skill gaps in
potential areas of comparative advantage. This would also guide national investments in
education and training. Other ideas might include: partial cost recovery of service approaches
for turning around ineffective public sector training institutions, assistance for industry
associations to launch training centres, an information campaign to educate firms about skills
gaps and a tax deduction scheme for enterprise-level training investments.

Technology support In a world of rapidly changing technologies and long learning cycles,
comprehensive technological support is critical for improving export competitiveness. In our
typical developing country, which is likely to have industrial technological capabilities which
lag well behind world frontiers in most industries, technological support should not be
directed at R&D activities to create new products and processes at world frontiers. Instead,
the first call on scarce resources should be for institutions and schemes to deal with basic
production capabilities including productivity improvement, testing and metrology services,
introducing ISO9000 quality management and total quality management practices, and
technical extension services for small and medium enterprises.(21) As the economy matures
and becomes more technologically sophisticated, the emphasis could shift somewhat to
developing design and R&D capabilities. Policy suggestions for our typical developing
economy would include providing part-grants for SMEs to obtain ISO9000 certification,
establishing a productivity centre to improve productivity to world standards, introducing
partial cost recovery of services for public institutions, and an awareness campaign for
industry about technology gaps and available services. Developing industrial linkages is also
an important activity in this regard (see Box 4 on the East Asian experience).

Box 4: East Asian approaches to developing industrial linkages In an attempt

to spread the technological benefits from foreign investment, several East
Asian economies have designed impressive programmes to foster the creation
of intra-firm linkages between MNC affiliates and local SMEs. Such
programmes have contributed to increased local content, improved local
technological capabilities, more employment and the creation of additional
export capacity in these economies. Well known industrial linkage
programmes include the following: Production Networks for Exports, PRC.
China developed networks of local suppliers by targeting local enterprises in
selected provinces into training collaborations with MNCs, focusing on light
industrial products, textiles, machinery and electronic goods for export. Over
200 rural export enterprises have benefited. BUILD Program, Thailand. Under
this initiative, active match-making, brokering, technical assistance and
information dissemination activities are provided by the Thai BOI to
encourage industrial linkages between MNCs and local industries. Vendor
Support Program, Malaysia. The Malaysian program is a comprehensive
approach to upgrading local supplier capabilities. Debt financing is available
on a preferential basis to participating enterprises, venture capital is provided
to local firms. Technical assistance is encouraged through active collaboration
with MNCs, and industry-led training initiatives, such as the Penang Skills
Development Centre. Adapted from Lall, Rao and Wignaraja (1996).

Industrial finance Access to finance at competitive interest rates (for working capital and
capital investments) is an obvious requirement for creating and sustaining export
competitiveness. Yet enterprises, particularly SMEs, in most developing economies would
complain about high interest rates (in part due to oligopolistic banking practices) and a lack of
access to bank credit. Industrial finance is a whole subject in itself but our initial suggestions
for our typical developing economy would be to institute prudent monetary policy
management, introduce competition into the banking sector, introduce training schemes for
bank staff on assessing SME credit and specialist "soft terms" funding windows for SMEs.
Once the financial system has deepened, there could be scope for introducing different
financing mechanisms including venture capital arrangements.

Infrastructure An efficient infrastructure is necessary for improved export competitiveness.

Persistent infrastructural problems in a given developing economy can significantly raise
transaction costs for its enterprises relative to those in competitor economies. For instance,
bottlenecks in the availability of air and sea cargo space and high charges feed into
uncompetitive pricing, missed foreign buyer deadlines, poor country reputation and
cancellation of repeat ordering. Similarly, long delays in accessing utilities like telephone and
electricity connections during business start-up or expansion raise production costs and
wastage of management time. The overall recommendation for our typical developing
economy is for it to invest a given percentage of GDP in new infrastructure like ports and
airport facilities and in maintaining the quality of existing infrastructure like roads and
electricity supply capacity. Other recommendations might include: liberalisation of air and sea
cargo entry to low cost foreign operators; and consider commercialisation/privatisation of
infrastructure parastatals and put in place an effective regulatory framework.

Actions for the private sector and labour organizations

Thus far the discussion has largely focussed on best practice government actions to induce
national export competitiveness. In part, this is because the roles for the private sector
(business associations and private enterprises) and labour organizations (trade unions and
other organized labour groups) are normally underscored in policy discussions. The analysis
looks at possible roles for each of these actors in turn.

Private Sector

Some would suggest that the role for the private sector is as follows.

Competitive markets are the best way for efficiently organizing the production and
distribution of goods and services in an economy. In a market economy, the major pre-
occupation for private enterprises is to produce and distribute their output at the lowest
possible cost in order to maximize profits. Competition involves enterprises in a struggle to
create new competitive advantages by investing in technological upgrading, marketing
capabilities and skill formation. Those that have successfully acquired competitive
capabilities will survive while the less efficient ones will go under. Over time, new enterprises
will be established in response to market opportunities and incentives. On behalf of their
members, business associations present business viewpoints and interests to government and
to attempt to lobby them on policy changes. In some cases, business associations also provide
information on market opportunities and support services to their paid-up members.
Accordingly, there are complementary ways in which enterprises and business associations
can pull together. Where this synergy works well, there can be significant gains for the private
sector as a whole.

A similar analogy can be applied to the relationship between the private sector and the
government in an outward-oriented economy. If markets work well, and are allowed to, there
can be large economic gains. If markets fail, and governments intervene carefully to remedy
market failures, then there can be further gains. When markets and government work together,
the whole is likely to be greater than the sum as evidenced by the economic success of
economies like Singapore and Taiwan and more recently Chile, Mauritius and Costa Rica. In
an environment of a withering of the state in many developing economies -- as evidenced by
public expenditures cuts and declining public sector responsibility for economic activity --
and a rising share of private sector output in GDP, the private sector may also need to
contribute to developing national competitiveness strategies.

Successful development experience indicates that the private sector can contribute several
inputs to designing and implementing national competitiveness strategies:

Help government to plug information gaps. Access to timely and detailed information is a
key determinant of national and enterprise-level competitiveness but such information tends
to be unevenly distributed within any economy. Owing to its involvement in world markets,
the private sector has better access than government to information about a host of
competitive threats (e.g. new technologies, external demand conditions, overseas government
policies, WTO rules and regulations) and new market opportunities. Active private sector
participation in national policy making bodies and international trade negotiations are
possible ways of making this knowledge socially effective. Private sector situation-specific
knowledge, experience of the enterprise-level impact of policy changes and negotiation skills
would be valuable inputs into these exercises. Private sector business associations can further
contribute to policy making by carrying out regular surveys of enterprise confidence and
obstacles to competitiveness. This can be particularly useful in persuading governments to
remove bureaucratic obstacles to business (see Box 5 On Mauritius).

Box 5: Removing red tape in Mauritius with private sector assistance The Mauritian trade and
industrial regime in the 1980s imposed a number of transactions costs to businesses caused by
administrative procedures of the public sector. The reality for business was an environment of
excessive bureaucratic procedures (concerning imports, exports, foreign exchange allocation, foreign
investment, taxation and business entry and exit) which raised transactions costs for the private
sector. Procedures increased operating costs above optimum levels, wasted scarce management time,
employment of additional staff to deal with redundant paperwork, acted as an obstacle to efforts to
adopt quick response practices, and provided incentives for rent-seeking behaviour by public
officials. In the late 1980s, the private sector initiated a dialogue with government on red tape
problems faced by business and provided detailed documentation on its effects. These efforts were
fruitful. In the early 1990s the government began promoting manufacturing efficiency by
streamlining and abolishing unnecessary procedures/documents. In 1991 import licensing was
abolished. This was soon followed by the elimination of foreign exchange controls in 1994 (i.e.,
foreign exchange transactions no longer needed Bank of Mauritius approval) and a streamlining of
foreign investment approvals in 1998 (normal FDI approvals which are eligible for "fast track"
processing have a target of 4 weeks while others, a maximum of 12 weeks). There has also been a
reduction in processing times for EPZ certificates (from 3-6 months to 1-2 months) and work permits
for long-term expatriate technical staff. Moreover, in 1990 a One Stop Shop was created within the
Ministry of Industry and Commerce to help firms obtain permits/clearances for business start-up and
operation. The One Stop Shop operated through a system of liaison officers who are responsible for
sorting out enterprises' problems with government departments. Difficult cases were referred to an
inter-ministerial committee chaired by the Permanent Secretary or the Minister of Industry and
Commerce. Clearly progress has been achieved in several areas of procedural reform and this has
generally benefited the private sector including SMEs. Source: Fieldwork by the Author in Mauritius
during 1996 and 1998.

Augment government capabilities. In many developing economies, the private sector has
developed a solid base of modern management, financial, marketing and technical skills while
government has become increasingly weak in the areas. In part this may be due to relatively
higher compensation packages in the private sector (which attract the best university and
technical school graduates) and investments in employee training in private firms. A short-
term secondment programme - whereby experienced private sector managers and technicians
can work in government departments on specified projects for a given period - may be a
useful way to improve government capabilities and develop a better public-private sector
dialogue on competitiveness issues. Another route may be to undertake joint public-private
sector overseas investment promotion missions to improve the country's image as a
favourable destination for foreign direct investment in selected host countries. Private sector
presentational and marketing skills would be a useful input into image building and
investment generation activities. Participate in infrastructure projects. Many developing
countries are characterized by a wide range of infrastructure gaps ranging power fluctuations
to uncompetitive utility costs and are faced with the challenge of investing in new
infrastructure and maintaining the quality of existing infrastructure. The problem is that
infrastructure investments often involve very high project costs which debt-ridden
governments are unable to meet. One solution might be joint-ventures between government
and the private sector to develop new infrastructure projects. This may involve arrange ments,
which call for some private sector funding and private sector management with government
funding and financial guarantees. The British Government encourages variants of this
arrangements through its Build-Operate-Transfer (BOT) and Design-Build-Finance-Operate
(DBFO) schemes.

Help weaker firms to help themselves. Most developing economies are characterized by a
dualistic industrial structure with a small base of efficient exporting enterprises and a long tail
of under-performers. The challenge is how to raise the efficiency of weaker firms to best
practice levels. Many government institutions dealing with quality, productivity and other
aspects of technology are actively involved in this process but such efforts are generally
inadequate given the scale of the problem. Leading internationally competitive enterprises can
also actively assist in upgrading the export capabilities of weaker enterprises and SMEs by
establishing industry-specific training centres; carrying out productivity benchmarking
exercises and quality awareness training; and providing advice on effective marketing
strategies. Actively attempting to develop local sub-contracting and supplier relations is
another important way of transferring technologies and skills from larger firms to SMEs.

It is worth emphasising that an active public-private sector partnership is a necessary and

sufficient condition for an efficient and practical competitiveness strategy in our typical
developing economy. In turn, a successful strategy will fuel future national competitiveness,
economic growth, rising per capita incomes, more internal consumption of goods and services
and more employment. Thus, a more competitive economy will generate a "win win situation"
for both government and the private sector. ¨¨

Labour Organizations

The bipartite partnership between government and business should be readily extended into a
tripartite grouping for competitiveness by the addition of labour organizations. Some analysts
would justify the inclusion of labour organizations on the grounds of worker participation or
the need for social inclusion and ensuring that the social impacts of competitive strategies are
fully taken into account. These non-economic arguments are good reasons in themselves but
there are also sound economic grounds for a tripartite grouping for enhancing national
competitiveness. Two spring to mind:

(1) Opportunity costs of poor industrial relations. A tripartite approach to competitiveness

can reduce the social costs and industrial unrest in the economy. Industrial unrest is costly to
firms in terms of lost output, machine downtime, sluggish productivity and foregone orders. It
is also costly to countries and governments. For instance, a country with a poor industrial
relations record is a relatively undesirable location for inward investment compared with
others. An environment characterized by dialogue between business, unions and government
and industrial harmony is a pre-requisite for productivity improvement and competitiveness.

(2) Productivity improvement. Bringing labour productivity to international best practice

(like the acquisition technological capabilities) involves a long and complex process of
investing in the requisite skills. Firms need to take the lead in the process of skill creation but
workers organizations can also make an important contribution. Best practice suggests that
they can raise workers awareness of the need for productivity improvement and provide
valuable formal and informal training (see Box 6 on the case of NTUC in Singapore).
Sustained productivity improvement can only be achieved through joint efforts of labour and
management.

Box 6: Labour organizations and productivity improvement in Singapore Singapore has an enviable
record of industrial restructuring and productivity improvement. As wages rose and international
competition became more intensive in the 1970s, the country was able to achieve the transition from
low to high skill industrial export production. By 1996, it exported manufactures worth $ 104 billion
(of which 71 per cent were high technology exports). Several factors contributed to this success
including its strategic location in a dynamic region, its reputation as a centre for production
excellence, the attraction of high skill foreign direct investment, investments in education and
training, programmes for productivity improvement, and the creation of a world-class infrastructure.
The tripartite consensus for productivity improvement (involving business, labour organizations and
government) was also a contributory factor. With training and consultancy services from the
Singapore Productivity and Standards Board (PSB), enterprises implemented impressive shop-floor
strategies to raise productivity. The productivity-raising efforts of the PSB and firms were
complemented by the following actions taken by the National Trade Union Congress (NTUC): (a)
The NTUC set up a Productivity Promotion Secretariat (PPS) with the objective of inculcating
productivity and quality consciousness among workers. The PPS encouraged workers to participate
in various productivity improvement schemes through dissemination of productivity related
information in union journals, the NTUC News, forums, and seminars at union and national levels;
productivity courses for union leaders to equip them with the basic concepts of the productivity
schemes, quizzes; visits to companies that successfully implemented productivity programmes; and
productivity cross-word puzzle for union members to learn productivity the fun way. (b) Other
relevant NTUC promotion programmes include Productivity Night, exhibitions on skills training,
NTUC Radio Heart Talks and interviews, etc. A three day course on "Union Leaders' Role in
Productivity Promotion which emphasizes team-building, hands-on calculation of value-added, and
dialogue sessions with practitioners. (c) The NTUC participates in various national bodies that have
bearing on productivity improvement of the nation. For instance, the NTUC is represented on the
National Automation Committee set-up to endorse, review and formulate policies for the national
automation movement; the PSB; the Institute of Technical Education and other related organizations.
The NTUC is regarded as a model for labour organizations in developing economies. Its role in
enhancing industrial productivity and enterprise competitiveness has been particularly effective.
Based on Low (undated).

7. Summary and lessons

Few historical processes have generated such reflection and debate as globalization. In part
this may because of its profound economic, social and political implications which will
eventually encompass every economy, every firm and every worker. In the wake of the Asian
financial crisis and possible global recession, the debate on globalization has intensified.
Many more questions are being raised than economists and other social scientists can answer.
There may be many neat theoretical models to use in analysing globalization but the evidence
on its effects is incomplete and available only with a time lag. Bearing this qualification in
mind, some general trends are slowly beginning to appear. These will be refined and
deepened with the passage of time and more concrete data.

Globalization is likely to benefit most developing countries eventually because of potential

gains from trade and investment flows. These are powerful influences on economic
development and manufacturing competitiveness because they entail better resource
allocation according to comparative advantage, rising factor productivity and increased
technological activity. But their effects will take time to disseminate to all developing
economies. The available evidence confirms this fact. Although some developing countries
have witnessed dramatic improvements in their manufacturing competitiveness, others have
lagged behind during rapid globalization/liberalisation in 1980-1996. East Asian economies
(and, to a lesser extent, Latin American economies) have improved their competitive
performance with strong manufactured export growth and technological upgrading. South
Asian economies have seen some limited gains particularly in regard to manufactured export
growth. African economies have recorded neither strong export growth nor upgrading inspite
of large inflows of foreign aid and technical assistance. The lack of catch-up shown by
African economies remains an empirical puzzle.

National competitiveness is based on technical change, which arises at the level of

manufacturing enterprises within a given developing economy. Technical change in
developing country enterprises involves creating the capabilities to use imported technologies
efficiently rather than undertaking R&D activities at technological frontiers. This involves a
long and uncertain process of investment in learning. The sum of enterprise competitiveness
determines a country's relative competitiveness positioning in particular industries. Many
factors -- including luck, initial conditions, the international economic environment, the
nature of markets and institutions, and policy support -- influence outcomes.

Of these, policy support is probably the most important driver of export success and (in any
case, the only one that readily can be influenced). Experience suggests that most developing
countries can reap gains from liberalisation and adjustment programmes compared with
inward-oriented, state dominated development strategies. In order to reap further gains,
markets and governments need to work together to evolve coherent national competitiveness
strategies which emphasize incentive policies as well as structural policies. Such strategies
should contain actions to ensure prudent macroeconomic management, outward-oriented trade
and industrial regimes, a targeted approach to foreign investment promotion, sustained
investments in human capital and enterprise training, comprehensive technology support,
access to industrial finance at competitive interest rates, and efficient and well maintained
physical infrastructure. Some of these elements like macroeconomic management are a part of
standard adjustment programmes but others (like human development, technology support
and targeted foreign investment promotion) go beyond them. Bold governmental actions are a
necessary but not sufficient condition for success.

With a rising share of private sector activity in GDP, the private sector can make an important
contribution to designing and implementing national competitiveness strategies in developing
countries. This pro-active role can include: helping government to plug information gaps
through participation in national policy making bodies and international trade negotiations;
augmenting government capabilities via short-term secondment programmes of private sector
managers and technicians; participating in infrastructure projects through joint finance and
management skills; and helping weaker firms to help themselves via creating industry-specific
training centres and other actions.

Along with government and the private sector, labour organizations are also an integral
partner in developing national competitiveness. This is on sound economic grounds rather
than ideology. A tripartite approach to competitiveness can reduce industrial unrest and social
costs to economic activity as well as contribute to productivity improvement. Best practice
experience suggests that trade unions can profitably undertake industrial training for their
members and complement productivity programmes of enterprises. They can also contribute
to national productivity awareness.

Inspite of the best tripartite efforts, even well designed competitiveness strategies can fail or
show poor results. Development experience shows that many negative factors can hinder
success. These include: continuous political violence and instability; deteriorating
macroeconomic conditions; weak government capabilities to design and implement
competitiveness strategies; a lack of government commitment to reform; poor relations
between the government and the private sector. Common sense suggests that developing
economies that take steps to mitigate or reduce the impact of these impediments are more
likely to succeed.

Additionally, a coherent strategy should be kept in place for sufficient time to show results;
the Asian experience suggests that there are no quick fixes to building manufacturing
competitiveness. It took Korea, Taiwan and Singapore 30 years, with the right policies and
favourable world demand, to create an export structure of high skill items. Likewise Sri Lanka
and Mauritius took about 15 years to create a large, low skill export base. In the interim,
agricultural and service sector competitiveness might be developed to provide alternative
engines of exports and economic growth.

Appendix 1: Clothing Industry Training Institute in Sri Lanka

This case study of a successful industry-specific training institution was prepared using data
collected from visits to Sri Lanka in 1996-1997. Unless otherwise stated, the data given below
refer to 1996-97.

In response to a severe skilled shortage in the garment industry, the Government of Sri Lanka
established the Clothing Industry Training Institute (CITI) under the Ministry of Handlooms
and Textile Industries in 1984. The total project cost was US$ 1.5 million (with funding from
the World Bank) and consultants from the United Kingdom were involved in setting up
training courses, conducting them and counter-part training. After 3 years, the foreign
consultants left and a dynamic Sri Lankan director took over. Its financing has changed over
time from a 100 per cent per cent Government grant to a current level of about 40 per cent.
The proportion earned by the CITI increased from 0 per cent to 60 per cent in 1996 and it is
keen to become financially fully self-supporting in the future. However, the Ministry of
Handlooms and Textile Industries, fearing a loss of control, seems reluctant to allow the CITI
to do so. The CITI employed 27 staff of which 16 were faculty. The faculty contained 1 MSc
in textile technology from abroad, 7 technical degree/diploma holders and 7 experienced
garment workers.(22)

In the mid-1990s, The CITI conducted 26 training courses for workers and managers on
different aspects of clothing production, design, supervision and management. It offered the
only diploma in clothing manufacturing in Sri Lanka, a comprehensive certificate in sewing
machine maintenance and a host of short courses (including tailor-made training courses for
specific firms). The main ones included:

A diploma in clothing manufacture lasting 18 months offering management training for

clothing executives. The minimum entry requirement is 3 A' levels passes and 14 were
enrolled in 1994. The curriculum covers pattern construction, manufacture, industrial
engineering, production management, total quality management and accounting.

A sewing machine mechanics course leading to the National Apprentice and Industrial
Training Authority Certificate over 12 months. The minimum entry requirement is 6 O'level
passes and 11 were enrolled in 1994.

A production supervisor training course over 3 weeks covering management, method study,
line balancing, quality control and recruitment. Experience in the industry is required and 60
underwent this training in 1994.

A pattern cutting, grading and styling development course over 6 weeks providing methods to
develop garment styles from block patterns. The minimum entry requirement is 6 O'level
passes (including maths) and 91 students participated in 1994.

A course on quality control for the sewing industry over 2 weeks to develop skills in quality
control and inspection. Production experience is required and 81 students participated in
1994.

A sewing machine operator course for inexperienced persons lasting 4 weeks. In 1994, 70
students took the course.

The tailor-made training courses for firms cover advanced sewing techniques, quality control
and cutting. In 1994, 5 such courses were conducted.

In 1995, it began a quarterly 1-day workshop on productivity improvement for supervisors and
workers.

The numbers trained at CITI have increased from 500-700 a year in 1984-87 to 1,325 in 1995,
totalling 13,170 in 1984-1995 due a rise in demand for specialized training in clothing
manufacturing. The number of courses provided by CITI has increased from 40 a year in
1984-87 to 80 in 1995, totalling 640 in 1984-1995. It also hosted 75 seminars for visiting
speakers; undertook 50 in-house training consultancy projects for clothing firms; organized 2
major international exhibitions of new equipment and product designs in Colombo; and
published a quarterly journal during the same period. It has a library containing books,
journals and videos on garment production. Finally, the CITI provided other technical
services for garment firms including cutting and pattern grading to customers specifications,
lay planning to ensure economical use of raw materials, pressing tests, valuation reports and
computerized production analysis to ensure efficient plant management. In 1989, the CITI
won a Presidential Merit Award for services provided to the clothing industry.

By the mid-1990s, the CITI was well placed to undertake the crucial function of training
specialized manpower for the clothing industry in Sri Lanka. In the 12 years of its life (by the
mid-1990s), it had established a strong standing in the garment industry and demands for its
training services are growing. It is the main institution used for specialized training by both
local and foreign firms and has made a significant contribution to the acquisition of
technological capabilities and competitiveness through improvements in sewing machine
operator skills, maintenance of equipment, total quality management, industrial engineering,
styling development, production supervision and management skills. More recently, it has
attempted to boost firm-level productivity by undertaking the workshop for workers and
supervisors.

There were several shortcomings, however, that constrained the CITI from playing a more
active role in the garment industry. It was too small and unable to meet the growing demand
for its services. The site it was on had no space for expansion. It was held back by too much
bureaucratic control in its day-to-day operations but felt that it could become totally self-
financing by "corporatizing" its operations. It suffered from a high turnover of its senior
faculty but was unable to compete with private garment firms that poach trained manpower.(23)
It needed a fully equipped design centre to encourage the creation of an independent design
capability in the garment industry and to support to move into upmarket garments.

Appendix 2: The determinants of competitiveness in African and Asian economies

A comparative statistical analysis was undertaken for some of the factors affecting national
export competitiveness in Asian and African economies using a two-sample T-test on the
means of the individual variables.(24)

The purpose of the T-test is to determine whether the two sample means are equal and when
the two groups under study are distinct in statistical terms. In other words, the mean values of
a particular country characteristic (e.g. the share of savings in GDP) are computed for the
Asian and African samples and examined for statistical significance. The exercise is then
repeated for other country characteristics like the ratio of imports to GDP and so on. The
analysis was based on information from 28 African and 11 Asian economies. The lack of
observations meant that we had to lump East and South Asian economies together to form a
broad Asian grouping. Meanwhile, the African grouping had a wide cross-section of Eastern,
Western and Southern African economies. The best export performers in Asia and Africa
were selected in Table 2 along with countries exhibiting a range of performance. It is
recognized that the test presented here is not the most optimal method to shed light on inter-
country differences in performance. Rather its purpose was to provide a preliminary analysis
of determinants of competitive performance that could be investigated further using more
sophisticated statistical methods.
The country characteristics and the variables used to capture them are as follows:(25)

Macroeconomic conditions are represented by three variables -- the share of investment in

GDP in 1993, the share of savings in GDP in 1993 and the per cent depreciation in the real
effective exchange rate (REER) between 1989 and 1994.

Import liberalisation is represented by the ratio of imports to GDP in 1993.

Foreign investment is represented by the value of foreign investment inflows (US$ mn) in
1991-94.

Technological effort is represented by economy-wide total factor productivity growth (TFPG)

in 1960-87.

Skills are represented by two variables, the secondary enrolment ratio in 1992 and the per cent
of population enrolled in tertiary-level technical subjects (natural science, maths, computing
and engineering) in the early 1990s.

Physical infrastructure is represented by the number of telephone lines per 1000 population in
1992.

Table A1 provides the results of T-tests on the means on the variables in the Asian and
African samples. The * on the T-statistic indicates that the mean is statistically significant at
the 5 per cent level. The main findings are as follows:

Macroeconomic conditions. Asian countries have significantly higher investment ratios (the
means for the investment coefficients are 28.6 per cent and 15.6 per cent, respectively) and
significantly higher savings ratios (the means for the savings coefficients are 27.5 per cent and
8.8 per cent, respectively). Thus, good macroeconomic management matters for export
competitiveness. Interestingly, however, African countries have significantly higher
deprecations in the real effective exchange rate (the means are 23.4 per cent and 5.5 per cent,
respectively). The somewhat unexpected finding concerning real exchange rate depreciation
can be attributed to successful exchange rate management in 22 of the African countries
following structural adjustment during 1989-94. In contrast, in Asia there was a tendency for
the real exchange rate to appreciate in a few countries (Malaysia, Sri Lanka, Hong Kong and
Singapore) due to sudden increases in capital inflows during this same period.

Import liberalisation. The ratio of imports to GDP does not show any statistically significant
difference. One possible explanation for this may be mis-specification of the variable. The
import to GDP ratio, which captures other things like the availability of external financing, is
only a crude approximation for import liberalisation and trade orientation more generally. The
lack of data on export taxes, quotas and subsidies did not permit the construction of a more
robust indicator.

Technological effort. Asian countries have significantly higher total factor productivity
growth (the means for TFPG are 1.19 per cent and -0.12 per cent, respectively), suggesting
that technological effort influences competitiveness.
Foreign investment. Asian countries have significantly higher foreign investment inflows (the
means are US$ 1759.5 million and US$ 55.0 million, respectively), suggesting that foreign
investment influences competitiveness.

Skills. In terms of secondary education, Asian countries have a significantly higher secondary
enrolment ratio than African countries, with the mean being 49.4 per cent for the former and
20.8 per cent for the latter. Similarly, the tertiary technical enrolment ratio also shows a
significant statistical difference (the means are 0.47 per cent and 0.06 per cent, respectively).
Both results indicate that skills matter for competitiveness.

Physical infrastructure. In terms of telecommunications, Asian countries have a significantly

higher number of telephones per 1000 population than African countries (the means are 132.9
and 10.5, respectively). Thus, physical infrastructure influences competitiveness.

Appendix 3:Organizations undertaking studies and assessments of competitiveness

1. The Organization for Economic Co-operation and Development, 2 rue Andre Pascal, 75775
Paris, CEDEX 16, France.

2. The International Labour Office, 4 route des Morillons, CH-1211, Geneva 22, Switzerland.

3. The World Bank, 1818 H Street, N.W. Washington D.C 20433, USA.

4. IMD International, P.O.Box 915, Chemin de Bellervive 23, CH-1001, Lausanne,

Switzerland.

5. International Trade Centre, 54-56 rue de Montbrillant, 1202 Geneva, Switzerland.

6. The Commonwealth Secretariat, Marlborough House, Pall Mall, London SW1 9SY,
England.

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Notes:
1
Giddens (1999), p. 31.
2
Economists typically view a country's competitiveness in terms of changes in real effective
exchange rates or real wages relative to competitors. Thus, a depreciation in a country real
effective exchange rate or a fall in real wages are both regarded as an improvement in national
competitiveness. The difficulty with these approaches is that they generally assume away
industrial learning costs associated with the absorption of imported technology by taking
technology as being freely available to all countries and to all firms within them. However,
empirical studies indicate that technological and productivity factors are often the most
important determinants of competitiveness. See Boltho (1996), Fagerberg (1996) and Lall
(1997).
3
OECD (1992), p. 237.
4
See, for instance, UK Cabinet Office (1996), Commission of the European Communities
(1993) and McKinsey Global Institute (1998). See also El-Agraa (1997) for a comparative
analysis of UK and Japanese competitiveness policies. For a sceptical view of the concept and
its policy implications, see Krugman (1994).
5
See, Pack and Westphal (1986), Lall (1990), Lall, Barba-Navaretti, Teitel, and Wignaraja
(1994), Ul Haque (ed. 1995), Lipsey (1997), and Wignaraja (1998).
6
For a survey of these issues, see World Bank (1993), Stiglitiz (1996) and Lall (1997).
7
For different viewpoints on the Asian Crisis, see Chote and Others (1998), IMF (1998),
UNCTAD (1998), and the special sections of World Development (vol. 26, no.8, 1998) and
the Journal of Development Studies (vol. .34, no. 6, 1998). The articles by Wade (1998) and
Chang (1998) are offer alternative viewpoints to the standard IMF position on the Crisis.
8
According to one estimate, the price of computer processing power has fallen by an average
of 30 per cent per year in real terms over the last twenty years and today "computer power
costs one- hundredth of 1 per cent of what it did in the early 1970s"World Bank estimate
quoted in the Economist, September 28th 1996, p. 8.
9
This is a complex set of negotiations and covers agreements a number of key areas: (a) tariff
reductions in manufactured goods, (b) tariffication of non-tariff barriers in agriculture and
binding commitments to reduce the level of agricultural protection, (c) the reduction of export
and production subsidies in agriculture, (d) the elimination of Voluntary Export Restraints
(VERs) and the multi-fibre agreement governing trade in textiles, (e) institutional rule
changes, such as the establishment of the World Trade Organization (WTO) and safeguards,
antidumping and countervailing duty measures, (f) new areas like Trade Related Investment
Measures (TRIMs), Trade Related Aspects of Intellectual Property Rights (TRIPs) and
General Agreement on Trade in Services, and (g) issues receiving increasing interest such as
public procurement of goods and services.
10
UNDP (1997), p. 83.
11
See Ben-David (1993) and World Bank (1996). For a more sceptical view see Griffin
(1989); UNCTAD (1997).
12
See Bhagwati (1988) for a discussion of these concepts.
13
See Lall (1997) for an elaboration of this point.
14
See Rodrik (1997).
15
See Stein (1995) and World Bank (1994) on the debate over Africa's recent economic
performance.
16
See Faruqi and Wignaraja (1996).
17
The T-test attempts to determine whether the two sample means are equal and when the two
groups under study are distinct in statistical terms. In other words, the average values of a
particular country characteristic (e.g. the share of savings in GDP) are computed separately
for the Asian and African groupings and examined for statistical significance. The exercise is
then repeated for other country characteristics like the ratio of imports to GDP and so on. If a
variable was not statistically significant, this meant that it was not a valid explanation. The
lack of observations meant that we had to lump East and South Asian economies together to
form a broad Asian grouping. Meanwhile, the African grouping had a wide cross-section of
Eastern, Western and Southern African economies.
18
See Wignaraja (1998).

See Lall and Wignaraja (1998), El-Agraa (1997), Stiglitz (1996), Fagerberg (1996) and Ul
19

Haque (1995 ed.).

20
See Bhagwati (1988) for an detailed discussion on the features of inward and outward-
orientation.
21
On SMEs see Tolentino (1995).
22
The CITI faculty members without technical degrees each had about 12 years of production
experience in garments.
23
Unlike many other public technology institutions, the CITI has attempted to retain its staff
by encouraging them to supplement their income through consultancy work. The staff are
paid a monthly salary and retain 25 per cent of their consultancy fees and a daily subsistence
allowance. A top CITI faculty member's gross pay is about US$ 230 per month (US$ 150
salary and US$ 80 consultancy fees) while a middle-level manager in a garment factory earns
US$ 500 a month. On top of this, the manager would get various bonuses and possibly a
company car or motor bike.
24
This Appendix is based on Faruqi and Wignaraja (1996) which contains a full list of the
countries used in the T-test. For a fuller explanation of the two-sample T-test see: Groebner
and Shannon (1989).

The following data sources were used: Asian Development Bank, Asian Development
25

Outlook 1994; World Bank, African Development Indicators 1996; UN, World Investment
Report 1995; World Bank, World Development Report 1993 & 1995; UNESCO, Statistical
Yearbook 1995; and Nehru and Dhareshwar (1994).

Updated by GT. Approved by HH. Last update: 24 January 2000