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.

Nevermind the BRICs, Here Come the MAVINS

What does being an emerging market mean? The definition seems amorphous. When Jim O'Neill coined the term BRICs back in 2001, he had in mind demographic and financial blocs in developing or transitional economies that were vast and growing. This definition was relaxed to include countries that had "caught up" with advanced economies such as South Korea and Gulf Cooperation Council members.

As the Great Recession turns into the Great Recovery, the converging economies seem to be compensating for the somewhat stagnant growth experienced by most of the developed world. Market analysts at Bloomberg have now coined a new term, MAVINS, referring to Mexico, Australia, Vietnam, Indonesia, Nigeria and South Africa. These six countries are going to be the BRICs of the new decade.

For policy analysts, the question posed by these forecasts is, how durable are these growth narratives? Recently a prominent shortselling market analyst predicted the imminent bursting of the asset bubble in China. It seems that China could repeat the post-dot com folly of the US Federal Reserve in easing monetary policy too long. It was reported this week that China was unwinding much of its stimulus to avoid such a tragedy, but doubts continue to linger.

More fundamental is the question regarding how suitable the institutional frameworks are for some of these emerging economies. China and Vietnam have taken a similar path to development that most of East Asia took from the 1950s to the 70s - a path different from the Anglo-American model built on the institutional building blocs of property rights, rule of law and democratisation.

Some have argued that to take such a quantum leap in such a short span of time (as opposed to centuries which is how long it took in the West) required experimentation using different tools. The impoverished countries of the East could not afford to enforce a system of property rights and the rule of law to foster impersonal contracting, the basis for market-based transactions, so they instead relied on more paternalistic (read: authoritarian) forms of development, i.e. the Development State. Here is a video stating this argument.

This development strategy only takes these countries so far, so the counter argument goes. Unless these emerging economies, China and Vietnam, adopt reforms in their courts and legal system to strengthen contract and property rights, their growth will eventually slow.

So far, it does not seem like the Communist leaders in either country have signalled any intention to go down that path, so I suppose the theory of sustained growth contingent on second stage reforms posited above will be tested soon.