Fallacies

Which among the following pairs of countries would you consider to have a larger share of their exports in high-tech manufactures:

a. Korea or Japan 

b. Philippines or Singapore 

c. China or the United States 

d. Mexico or Germany 

The answers are found below: a. Korea b. Philippines c. China d. Mexico 

Surprised? Certainly these facts run counter to the commonly held beliefs about rich and poor countries. The most intriguing insight in all this is that the Philippines, the poorest of the four emerging countries just cited, long considered a laggard in its region as far as exports and investments are concerned, has emerged as a world leader in this regard, edging out Singapore, the former front-runner since 1996. See for yourself here. 

Other interesting observations are: (1) China has been ahead of the US since 2005, (2) Korea has led Japan since 1997, and (3) Mexico has edged out Germany since 1994. Safe to say, the strong performance of these emerging economies over their richer peers cannot be considered a fluke or the result of luck. In economic terms, a "structural shift" has occurred in these economies which have traditionally been exporters of cheap, basic commodities. 

What accounts for this increasing specialization in high-tech manufactures by emerging economies? More importantly, what does it say about their future prospects for growth? Is it a healthy sign or is too much specialization counter-productive? 

Let us first define what high technology means in this context. According to the World Bank definition, these manufactures include "products with high R&D intensity, such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery" or in other words, products with a high innovation component. 

In the Philippines, electronics is the biggest contributor to exports accounting for about 60%. They consist of a wide variety of products with different applications from consumer, auto, office, computer related, to telecommunication, medical and industrial uses. Data from the National Statistics Office for 2008 and 2009 show the value of electronics exports exceeding $20 billion per year, while imports are roughly 68-70% of their totals. This runs counter to the common perception that these domestic industries belong to the low value adding category. 

According to Ricardo Hausmann from the Center for International Development at Harvard University, a professor of the Kennedy School of Government, the complexity of products made by a nation is a reflection of the capabilities that exist within it. Nations that produce highly elaborate products have exhibited the ability to grow and develop due to the fact that very few countries are able to replicate the same conditions required by such activities (here he is explaining his theory of development based on this notion). 

It is more than a question of incomes or wealth. Sri Lankans have an average income slightly above Filipinos, yet their major exports are in textiles and garments. The lack of infrastructure, rule of law and good governance does not seem to deter the presence of high-technology industries in the Philippines. The abundance of engineers and highly skilled, flexible workers appears to be the main driving force.

The triumph of Krugman’s Economic Geography over Porter’s Industry Clusters

(WARNING: Readers of the following may experience minor bouts of dizziness resulting from a re-balancing of mental perceptions of what governments can and cannot do. These symptoms should ease after a day or two. Should they persist, consult any handbook on new international trade theory for relief.)

He is probably the foremost economics blogger to win the Nobel Prize for his theoretical work on international trade and economic geography. Princeton Professor, Dr Paul Krugman in a succinct, yet elegant manner, explains both the sectoral and spatial implications of global production, something that Porter attempts with 800+ pages but fails at achieving the same level of clarity.

Both men began their work at relatively the same period in the late 70s. Of the two, it was Porter who gained prominence and notoriety in the speaker’s circuit for his depiction of competitive forces, which can be regarded as industrial organization for dummies.

While Krugman sought to explain the specialization of regions in producing certain goods deductively through mathematical reasoning, Porter used induction, studying specific cases of concentrated clusters of industry activity. The result is that Krugman provides a policy tool that is easily wielded unlike Porter’s bulky analysis.

Mercantilist Revival

Applied to the firm, Porter’s notion of strategic competition has its use. But when public policy tries to appropriate the same approach to cities, regions and countries, it loses validity according to Krugman. In fact, he calls those who seek to improve the competitiveness of a place to the detriment of all others Mercantilists.

The notion that we can drive up exports by competing as firms do through Strategic Trade Policy is beset with all the pitfalls of selective government intervention. Although it may have had a few instances of success, when applied more broadly the impacts are too minute, while the chances of getting it wrong and the costs associated with failure are too big to ignore.

Porter takes us through several hundred years of history in which nothing is guaranteed to reiterate even if conditions could somehow be duplicated today. Around the world, there are thousands of government supported science parks and export processing zones intended for cluster development, but a few successful ones truly produce value creating innovation. They are usually informal networks that came about more from benign neglect than through selective intervention, i.e. the software hubs of Bangalore India did not have a decent ICT infrastructure during its genesis.