Annex A

"Common Economic Challenges Facing East Asia and Latin America"

Toru Yanagihara
Professor, Faculty of International Development
Takushoku University, Tokyo, Japan

This Symposium, organized as one of the activities of the FEALAC, provides all the participants with a valuable format for the identification of common challenges, review of relevant experiences, exchange of views and ideas, and exploration of solutions and strategies to be considered in the (broadly defined) domain of economic development. In this broad category, we will place our particular focus and emphasis on the three issue areas: (1) Promotion of Small- and Medium-Size Enterprises (SMEs); (2) Economic Development and Poverty; and (3) IT Revolution and Developing Countries. Each of these themes is important enough to be accorded full, systematic attention and analysis. Furthermore, the linkages between them will be no less important in exploring and designing policy approaches.

In this initial round of our dialogue and collective investigation, it will be highly useful to take stock of, and thus become mutually aware of, how policy challenges are conceived and addressed by various governments represented here. Let me first draw a rough sketch of the overall economic situations in East Asia and Latin America as a backdrop for issue-focused discussions to follow in this Symposium.

Most countries in Latin America experienced episodes of debt crisis and underwent the lost decade of the 1980s. Growth returned in the 1990s but was typically at reduced rates and with increased volatility. Much of East Asia was hit by the crisis of 1997, with resultant (partial) loss of economic dynamism and diminished prospects for sustained development. Both regions undergo a period of structural reform and adaptation --- structural reforms in terms of changes in the rules of the game and structural adaptations in terms of changes in the plays of the game.

The process of reform and adaptation is neither simple nor painless. New rules cannot be effectively instituted by the mere stroke of the governmental pen. They need to be dovetailed to specific conditions and be accepted by the players and the referees to be effectively implemented. In other words, they need to be evolved over time through a process of mutual adjustments on the part of the players and the referees.

Structural adaptations, as exemplified by new modes of business management or inter-firm transactions, are typically initiated by economic actors themselves, sometimes with explicit or implicit support from governmental bureaucracy. In many cases, they are prompted by drastic changes in business environments, either on the demand side or on the supply side. Such adaptations might call for underpinnings of reformed legal frameworks and new administrative functions to become operational and institutionalized. It is all the more important, therefore, to be able to identify essential and urgent reforms and to see to it that necessary preconditions be in place in time and that unavoidable side effects be addressed.

In tackling this general agenda, let us focus on a set of issues and take an empirical, or experience-based, approach to them. That should help embed general thematic discourse of reform and adaptation in more specific contexts. As already mentioned, the issues proposed for discussion are: (1) Promotion of Small- and Medium-sized Enterprises (SMEs); (2) Economic Development and Poverty Reduction; and (3) Information Technology (IT) Revolution. These issues are broad enough to embrace most, if not all, of important development challenges facing our economies.

(1) Promotion of Small- and Medium-sized Enterprises (SMEs)

Broadening and deepening the productive basis of the real economy, a theme closely related to the strengthening of the SMEs sector. This challenge might need to be conceived of as not only national one but also as regional or sub-regional one, as trade and investment liberalizations proceed and businesses expand their scopes of operation across national borders.

The recognition of the importance of the promotion of the SMEs sector is nothing new. We therefore need to make sure that we will not end up just repeating and reconfirming this time-honored recognition. We should be able to take stock of various approaches and initiatives proposed and tried in the past and add new ones to be contemplated in the light of changing technological, socio-economic and political conditions.

There is no shortage of concepts, ideas or models. Linkages, clusters, ventures, incubators, flexible specialization, micro finance, Italy model, and Taiwan model, to name those immediately come to mind. In the realm of SME policies, OECD has compiled and published Best Practice Policies for Small and Medium-Sized Enterprises, organized around four key issue areas related to the promotion of SMEs: financing, business environment, management capability, and access to markets. Some of the lessons and recommendations contained therein might not be immediately relevant or applicable. But, it could serve as useful guide in making our discussion experience-based and context-specific. The purpose of the exercise is not to produce a "manual" of best practices but rather to provide a forum for discussion which could lead to "best practice".

What do we collectively know as to what works (or is expected to work) and under what conditions? And what will be respective roles of private and public actors? Can we identify such strategic factors that would generate a chain reaction of innovative responses? Or do we need to squarely address all aspects of SME operation as a total package? To what extent and in what way the IT Revolution promises to be either the strategic factor or the system builder?

(2) Economic Development and Poverty Reduction

Poverty reduction needs to be addressed anew in earnest now that that goal seems to be less likely to be realized as automatic by-product of overall growth, with growth rates reduced and types of labor demand changed. Furthermore, poverty and attendant income distribution questions are acquiring added significance in the context of increasingly more participatory polity.

The recognition of the importance of poverty reduction is nothing new, either. This goal has been accorded added significance and urgency by the international development community during the past decade in the wake of a prolonged adjustment-cum-stagnation period in many parts of the developing world. There is now what might be called a new global regime for combating poverty coordinated by international organizations, most notably the World Bank. The Bank has come to play a broader leadership role both in the formulation and implementation of policy and institutional reforms and in the coordination of actors involved, official and private, as well as local and international. It has instituted two schemes, "Comprehensive Development Framework (CDF)" and "Poverty Reduction Strategic Paper (PRSP)" for poverty reduction in low-income countries (Cambodia, Laos, Mongolia, Vietnam in East Asia and Bolivia, Guyana, Honduras, Nicaragua in Latin America). The underlying approaches are also applied to middle-income countries in the Bank's country assistance strategies.

CDF is summarized in a matrix, where development issues and goals are listed along the horizontal axis and contributions by various actors in each issue area are registered along the vertical axis. The matrix is designed to provide an overall view of the ongoing and anticipated contributions by all the development actors involved and to serve as diagnostic and prognostic device for the host country in its attempt to promote and facilitate coordination and collaboration.

PRSP is a three-year action plan for poverty reduction to be drawn up by the government and approved by the Boards of the World Bank and the IMF. It is stipulated that the formulation and implementation of PRSP be predicated on the following requirements: 1) a long-term and multidimensional approach to poverty reduction; 2) determination of the priority of policies and programs based on their feasibility and effectiveness in poverty reduction; and 3) broad participation in the decision making process within the country and promotion of the coordination and partnership among various actors under the government's leadership.

It should be recognized that the CDF-PRSP regime as described above does exist as a global scheme for combating poverty. It does not follow, however, all the ideas and initiatives come from within it. On the contrary, diverse experiences and lessons need to be brought into that otherwise empty framework of general principles. It is all the more reason why we need to redouble our efforts in sorting out dos and don'ts in various specific conditions based on concrete experiences and reflections thereon.

(3) Information Technology Revolution

Keeping abreast with the accelerating pace and spread of IT Revolution has shaped up to be one of the urgent challenges facing the region's economies in their attempt to secure a share (or at least a foothold) in the cutting-edge technologies and systems and to maximize the benefits of potentially wide-ranging applications. (In fact, the IT Revolution seem to have powerful roles to play both in the strengthening of the SMEs sector and in poverty reduction.)

On this theme, we will need to be very clear as to whether we are interested in the promotion of the IT industry itself or in the utilization and dissemination of socio-economic benefits and administrative innovations. These are two separate issues, although there could arise occasional coincidental cases of overlapping.

The first task mostly takes the form of establishing and nurturing mini silicon valleys. There are successful cases of this, most notably in Hsinchu in Taiwan and Bangalore in India. In this industry as well, there seems to operate the mundane economic logic of process specialization once technologies and formulas become standardized and locations dictated by competitiveness in cost, quality, delivery and reliability. You do not have to be on the cutting edge to share in the growth of IT industry. In this connection, it is also important to look and see where and how new opportunities for IT-based service exports are opening up. Some of the Caribbean countries have been pioneers in this. But it has been replicated in other English-speaking countries. It is intriguing to contemplate whether the same logic could hold within Chinese or Spanish language spheres.

The second task of spreading the benefits of IT seems to be best addressed by building on and supporting burgeoning social entrepreneurs in the field. There are all sorts of innovative enterprise for socio-economic developments: From World e-Inclusion, an initiative by Hewlett-Packard to help bridge the digital divide and bring the benefits of IT to the two-thirds of the world's population so far left out of the Revolution, to Geekcorps, a non-profit organization committed to expanding the Internet revolution internationally by pairing skilled volunteers from the high-tech world with small businesses in emerging nations, and to Grameen Phone, a provider of commercial cellular phone service to poor rural population in Bnagladesh.

Public sector actors have roles to play in either of the two above-mentioned tasks in IT. Physical and institutional infrastructure will need to be installed. Public education will need to contribute to the increase in digital literacy. All these requirements notwithstanding, the roles of public sector actors will be to enable and facilitate private initiatives.

We have gathered here to help set in motion a new forum for inter-regional dialogue and cooperation. In this enterprise, we should be guided by pioneering spirit, infused with development spirit (or "bias for hope"). At the same time, we should be clear-headed as to what is feasible and meaningful for our economies. Let us hope that there are important gaps in the global development landscape our Forum is uniquely suited to address.

Back to Index