Fruits of integration East Asia has benefited far more than Latin America from the expansion of global trade. Most of East Asia's growth in intra-industry trade has been in high-technology exports such as electronic and communications technology components , which have been the category of most rapid growth in world trade. In Latin America, except for Brazil and Mexico, export growth was heavily weighted toward natural resource commodities and low- and medium-technology exports.
As a result, whereas East Asia's share of global manufactured exports rose sharply, that for Latin America remained flat. Excluding Mexico, Latin America's share of global manufactured exports was only 2 percent, a rate below that recorded in In a global economy in which international production systems for commodities such as automobiles, electronics, and garments have become increasingly fragmented across national boundaries and trade in manufactured goods mostly in the form of intrafirm trade has risen to 80 percent of total trade, East Asia has benefited far more than Latin America from the gains of global trade patterns.
A key driver in the trade dynamics described above has been foreign direct investment FDI by multinational corporations. Not only has East Asia generally received more FDI flows than Latin America but the flows to East Asia have also mostly been channeled into manufacturing, which has fed exports. In Latin America, during —, roughly half of FDI flows were related to mergers and acquisitions in connection with the privatization of state-owned utilities and domestic banks. Much of the rest has been directed, particularly in the Southern Cone and Andean countries, to the exploitation of natural resources mining, oil, and forestry , where restrictions on private and foreign participation have been lifted under the reform effort.
However, most economies remain more closed than their Asian counterparts.
Mexico is the one Latin America country that comes close to the East Asian model in its export drive. Differences in FDI have also affected technological capacity and intraregional trade. Latin America has not upgraded its technology as fast as East Asia, leading to weaker performance across a range of indicators, such as transport costs; port efficiency; and depth of road, rail, and airfreight facilities. Similarly, tertiary enrollments in science and engineering education and business expenditures on research and development, on average, are well below the regional average for East Asia.
Korea, Singapore, and Taiwan Province of China are among the world leaders in these areas. The dynamism of investment and exports in East Asia has also been enhanced by regional forces or positive "neighborhood effects".
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Intraregional trade has been growing sharply among East Asian countries and, by the end of the past decade, represented about 37 percent of total regional trade; for Latin America, intraregional trade accounted for only about 18 percent of total trade flows. This phenomenon is likely to increase in East Asia with China's increasing dominance as a major world exporter and destination for FDI flows.
Increasingly, institutions are seen as accounting for divergent growth patterns across countries. Analysts have identified three areas in which government institutions have helped underpin growth in East Asia.
One is the strong record of policy consistency of governments: policy credibility and political stability, along with a stable macroeconomic environment, have underpinned the promotion of long-term investment in East Asia. A second element is the strong focus on economic development as a strategic national goal.
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Such a strategic vision projected by national leaders has been especially characteristic of China, Korea, Malaysia, Singapore, and Taiwan Province of China. Third, the strength and independence of government bureaucracy has also been important to East Asia's economic development and has too often been lacking in Latin America. Asian governments have tended to foster the development of a professional, merit-based civil service tradition, insulated from political influence, to implement economic policy in close consultation with business groups.
To streamline decision making, lead government agencies with strong coordinating authority were created to translate a national strategic vision of economic development into specific actions. Singapore's Economic Development Board is a prominent example of such an institution.
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Singapore has been one of the top-rated countries in the world for the quality of its public institutions, and seven of the East Asian countries surveyed in the World Economic Forum's Competitiveness Report were in the top half of countries. Most of the Latin American countries were in the bottom half. Notwithstanding the strength of East Asia's government institutions, the Asian financial crisis revealed how, in certain cases, close coordination between the public and private sectors gave rise to serious problems in corporate governance and regulatory forbearance.
This experience showed that certain institutional arrangements that may have been effective at earlier stages of development needed to be adapted and transformed as market-based arrangements expanded more fully. Despite these problems, the elements of strategic vision, policy consistency, and bureaucratic autonomy in East Asian societies during their postwar development have compensated for the lack of well-developed market-based institutions and legal frameworks that supported economic development in the advanced countries.
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By the same token, these elements were not particularly prominent in Latin America, where many governments exemplified capture by special interests or were dominated by patron-client-based political parties focused on the distribution of rents to favored elements of society. In respect of bureaucratic strength, there are clear examples such as Brazil, Chile, and Mexico of strong ministries of finance and independent central banks that have developed more recently in the region, but a professional civil service tradition has not generally been fostered. Often, government office holding has been a reward for political support of the ruling political party.
Latin America's recent economic record, unlike that of East Asia, is clearly mixed in terms of reform results and benefits gained from globalization. Four key lessons for economic policy can be drawn from these compared experiences. First, the requirement of macroeconomic stability for sustained economic growth must be viewed as more than simply an issue of maintaining low inflation and fiscal control. The soundness and stability of the financial system is an essential ingredient of the appropriate macroeconomic framework for development.
Stable and competitive values for the real exchange rate and domestic real interest rates are critically important as well. Second, notwithstanding past debates about the relative importance of the state and the market in the development process, governments have a crucial role to play in supporting economic growth through the establishment of good infrastructure, support for technical training and local technology absorption, and the promotion of exports and FDI.
Third, if governments are to play a positive role in the development process, then the integrity of public institutions needs to be ensured. In many countries, this will require continued public sector reform to streamline bureaucracies and establish independent judiciaries, tax and customs authorities, and regulatory agencies. Strong support should also be given to anticorruption initiatives and the development of civil society organizations to strengthen oversight of government activities. Fourth, the experience of East Asia has shown that institutions are context-specific and need to be adapted over time.
In the absence of well-developed legal frameworks for property rights at the beginning of the post—World War II development phase, other arrangements, including close coordination between government and business, clear policy signals, and good public administration, provided the necessary institutional support for productive investment. At later stages of the development process, however, experience has shown that these arrangements needed to be supplemented by appropriate regulatory and governance structures to support an evolving market-based system.
Share This. Free Email Notification Receive emails when we post new items of interest to you. A quarterly magazine of the IMF. June , Volume 43, Number 2.
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