if99.net

IF99 ITB

Archive for the ‘developing countries’ Category

Pathways of Technological Change in Developing Countries

without comments

Essay for Seminar 14: Modern Societies in Transition by Didin Kristinawati

Two roads diverged in a wood, and I

I took the one less traveled by,

And that has made all the difference.

(Robert Frost, 1916)

Introduction

From previous seminars we have noticed that debates about economic growth have recognized technological change as one of its key driving force. In the beginning, neoclassical school of thought found difficulties in explaining to what extent technological change played role in economic growth, Solow model (Mankiw, 1995) showed long term growth attributed to the scaling factor used for the production function (capital, labor, land) and technological change became masked element in residual. Next quantitative studies try to disaggregate residual into components such as economies of scale, human capital formation, and technological change (Verspagen, 2001). So it is with modern economic growth arguments (Kuznets, 1973) that provided overview on how “a country’s economic growth may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustment that it demands.” Thus, there is no doubt that technological change should be taken into account for portraying economic growth both in developed and developing countries.

This essay concerns with industrialization in developing countries that stemmed largely from technological import, imitation, and reverse engineering of existing foreign technology.  Sanjaya Lall argued (Lall, 1992) the process of technological change in developing countries is by acquiring and improving technological capabilities, further will be explained in the second section. This process essentially consists of learning to use and improve on technologies that already exist in advanced industrial economies.  Some evidence from Newly Industrialized Countries (NICs) presented by Lall explains capabilities framework performances in those countries.

It seems conversations about technological change become privilege of developed countries that has been in the frontier of innovation. Therefore, the Original Sussex Manifesto by Social, Technological, and Environmental Pathways to Sustainability-STEPS Center (Ely and Bell, 2009) called for radical changes for shifting paradigm of technological transfer merely from developed to developing countries to paradigm of indigenous innovation, by massively increasing developing countries’ own Science, Technology, and Innovation (STI) capabilities for creating and shaping their own knowledge and technologies. Once again term capabilities used strongly in STI. However, Manifesto emphasized critical point that technological change cannot be separated from development aims and strategy.  Manifesto will review its achievement during 40 years since its emergence.

After discourses of strengthening technological capabilities in developing countries for catching-up their lagging, we are now facing reality of changes in emerging opportunities of ‘leapfrogging’ for developing countries posed by the global emergence of new sectors such as ICT and biotechnology, issue of climate change caused by CO2 emission become in the center political and academicals stage and raising question about the western high-carbon growth trajectory, and swiftly critics that economic growth strategy evoke widespread inequality both between and within countries. This phenomenon could be window opportunity for new paradigm and all at once challenge for developing countries to search for their own optimum technological change pathway.

Based on inspiring writing by Lall and STEPS Center, this short essay will try to figure out to what extent (science and technological) capabilities framework contribute to technological change in developing countries, and its policies implication.  Further, in regards to recent reality of changes above, it is tempting to raise question about next trajectory of technological change in developing countries although cannot be accommodate comprehensively in this short essay.

Technological Capabilities

The work of Lall (Lall, 1992) went away from neoclassical approach. Neoclassical put away technological change for economic growth, its assumes technology is freely available to all countries and within country, firms are all in the same production function, and select technology with reference to relative factor price ratios, no problem in assimilating transferred technology in developing countries, no adoption needed because alternatives are available for all factor prices, all firm equally efficient thus firm specific learning or technical effort are unnecessary and irrelevant. Its underlying assumptions disregard reality and could not explain technological progress.  Therefore, he took over evolutionary approach (Nelson, 1981) in which unit of analysis is micro level (firm or sectors). Its underlying assumption are firm cannot be taken to operate on a common production function, technology are tacit and its underlying principles are not always clearly understood, thus transfer of technology requires learning process and require skills, efforts, and investment by receiver of technology. Then he defined technological change in firm level defines as (i) continuous process to absorb or create technical knowledge; (ii) determined partly by external inputs and partly by past accumulation of skills and knowledge; (iii) covers all types of search and improvement efforts.

From there, he draw firm-level technological capabilities (FTC) framework that have to be internalized by the firm to ensure successful commercial operation. FTC describes in matrix capabilities as indicative categorization and not to show sequence of learning.  It contains :( i) Investment capabilities, the skills needed to identify, prepare, obtain technology for, design, construct, equip, staff, and commission a new facility (or expansion); (ii)Production capabilities, basic skills cover both process and product technologies as well as the monitoring and control functions included under industrial engineering; (iii)Linkage capabilities, skills needed to transmit information, skills and technology to, and receive them from, component or raw material suppliers, and related institutions. Developing countries need to mobilize efforts to build their FTC internally (supply) and externally (demand).  Supply efforts comprises of skilled labor, intense technological efforts, organizational and managerial skills, adaptability, and access to capital goods.  Demand efforts cover acquisition capability to get new technology into production, stable macroeconomic environment, trade policy, incentives, and innovation policy.

When technological capabilities are lifted up into macro (country) level analysis, it is not simply aggregate of individual firm-level capabilities into what so-called national technology capabilities (NTC). Because of externalities and interlinkages, there is an element of response of firms to the policy, market, and institutional framework.  Hence, it is obvious to conceive of national differences in technological capabilities. OECD (Lall, 1992) explained further about this differences, “[...]economic growth arises from the interplay of incentives and capabilities. The capabilities define the best that can be achieved, while the incentives guide the use of the capabilities and, indeed stimulate their expansion, renewal or disappearance. Both incentives and capabilities operate within an institutional framework; institutions set rules of the game, as well as directly intervening in the play; they act to alter capabilities and change incentives; and they can modify behaviour by changing attitudes and expectations.”

NTC comprises of: (i)Capabilities including physical investment, human capital and technological effort. These three are strongly interlinked; (ii)Incentives which arising from market forces, institutional functioning, and government policies. Incentives can be in form of macroeconomic incentives (GNP growth, interest rates, forex, political stability, trade policy inward oriented1 or export-oriented2), incentives from competition (selective intervention policy), and incentives from factor markets (where market failures occur and firms invest less than is socially desirable, governments must be able to step in, to enable firms to internalize markets); (iii)Institution, if markets cannot create the necessary institutions naturally, the development of a proper institutional framework becomes an area of concern. Since underdevelopment is almost defined by the deficiency of institutions, clearly the subject requires consideration. Lall then applied those NTC framework to selection of eight NICs (South Korea, Taiwan, Hongkong, Singapore, Brazil, Mexico, India, and Thailand). Selection based on significant technological change they have been achieved comparing with the rests, thus in turns lift up their economic growth. We will discuss the result of the study in section four.

Science and Technology for Development

Lall works reflected that the natures of developing countries are lagging behind those advanced industrialize world, so catching up is mandatory tasks.  In line with mainstream thoughts that developed countries transfer technology and the rests play role as receiver.  However, two decades before, in 1970 radical document called The Original Sussex Manifesto (later we call Manifesto) written by Professor Sir Hans Singer and friends in STEPS Center came into table. Manifesto (Ely and Bell, 2009) rejected preliminary perspectives of inevitable division of the world into two groups of society: those who engage with S&T in creative process generate technological bases of production and consumption; and those who merely user and apply the result of former creative process. Manifesto tried to shift paradigm of technological transfer to indigenous innovation by massively increasing developing countries’ own science and technology (S&T) capabilities for creating and shaping their own knowledge and technologies. Term ‘indigenous’ became concern related to the debate that economic growth is not ultimate goal of development (although we can see still ongoing contested ideas of development). According to Sen (Sen, 1999) development is freedom to remove various kinds of ‘unfreedoms’ including famine, lack of basic needs, poor health, lack of political liberty and civil rights. Thus, economic growth (as GDP per capita income) is only means, not the end of development; it is the entry point of poverty eradication.  Now we noticed core challenge for Manifesto is strengthening S&T capabilities for developing countries not merely be chooser and user of ‘ready-made’ technology, they should also be adapters, improvers, and creators (significant innovators) of technologies they use for their economic development.

Manifesto proposed recommendation (or we can see as framework) for developing countries to achieve quantitative and qualitative targets for their technological change. Quantitative targets include :( i)Increasing R&D expenditures in developing countries from 0.2% GNP to 0.5%; (ii)Increasing role of aids and donors, advanced countries give direct, financial, and technical assistance to build-up indigenous S&T of 0.05 of their GNP; and (iii)Reorienting R&D in the advanced countries efforts towards the problems, interests, and aims of developing countries. Advanced countries should dedicate 5% of their total R&D to the developing countries orientation. While qualitative targets comprises of: (i) Application effectiveness, concern that any increased in R&D expenditure would be waste if three problems of were not addressed. First, problem of ‘low productivity of R&D activities’, firm or (mainly) government organizational disorders where large amounts of R&D expenditures taken place.  Second, problem of ‘limited systemic integration of S&T activities’ ensuring integration and coupling between research effort and wider process through which this effort is translated into economic application. Third, problem of Limited demand of innovation activities in which no pressures of demand for scientific and technological knowledge; (ii) Orientation, two interacting forces determined R&D orientation of developing countries are pull of advanced country led to internal brain drain (in which R&D in developing countries served for developed countries and become irrelevant to the environment in which it is being done), interacting with domestic forces of orientation of localized demand (reducing poverty and inequality); (iii) Conditions (Economic, institutional, and political) for application-effectiveness and Orientation, here we addressed  conditions of international & national dualism (i.e. unequal power/position in international economy or within country); (iv)Acquiring and Absorbing capabilities to access technology available in developed country, to operate western technology imported or to create new S&T, trough collaboration, training, FDI, or importing technologies.

As long as I concern, those (mainly) qualitative targets of Manifesto quiet similar with Lall’s technological capabilities framework. Both deal with intervention (incentives) needed and organizational capabilities to foster technological change in developing countries. Although Manifesto emphasized indigenous innovation, in my view the recommendation dealt a lot with ‘formal’ knowledge, thus not really accommodated indigenous, traditional, local knowledge. The achievements after 40 years Manifesto recommendation released will be figured out in the next section below.

Study Result of Framework Application

Lall’s study of NTC framework shows (Lall, 1992) in incentives issue trade strategy varies among countries. Singapore, Taiwan, South Korea, India, Thailand, and Hong Kong took export-oriented trade strategy with selective government intervention, while Brazil and Mexico run inward-oriented trade strategy with high protection. It seems export-oriented trade strategy more correlated with industrialization success; it might be result of economies of scale and broaden market/demand.  Although in the same trade strategy, they differ in intervention policy, Hong Kong apply almost no protection with structure of industry specialized in light consumer goods. Singapore specialized in capital/producer goods which required high level of technical skills.  South Korea and Taiwan have been much more interventionist with protection in selected industry.  Brazil and Mexico built up domestic industry with specific intervention in promoted industry. India is well known as highly interventionist with import substitution for industrialization strategy.

In capabilities issue averagely all perform significant increase in human capital, represent by high degree of school enrollment. Singapore performs best in employee training system, not surprising that many multinational companies (MNCs) have subsidiary in Singapore.  In overall countries, large part of R&D activities is backed up by government expenditure. The role of FDI as (in) efficient means of transferring capital, skill, technology, and networks vary greatly among countries, Indian and South Korea have low reliance to FDI, while Singapore and Hong Kong have highly dependence to FDI, others Mexico, Brazil, and Thailand fairly level of FDI dependence. It is interesting that each has different option for industrial strategy and performs as successful NICs (in measurements of early 1990s). The role of institution did not talk much in NTC, but fairly covered by Manifesto.

Now if we take a look at Manifesto achievements (Ely and Bell, 2009) in 40 years, its quantitative targets unevenly distributed, some NICs especially China over Manifesto targets, but most of the rests had not been reached targets. Target of increasing 0.05% amount of developed countries aid for indigenous S&T capabilities was difficult to assess. The same with target of reorienting 5% of R&D in developed countries dedicated for developing countries problem solving also hard to be measured.  Manifesto qualitative targets show application-ineffective R&D that cannot be separated from weakness of institution management (dominant centrally organized of public R&D, underperform of university researchers, weak linkage between supply and demand of innovation). Study shows orientation of STI has changed significantly toward lower income groups in society, but still not making significant contribution to the poorest (bottom of the pyramid). Orientation of STI also strongly influenced by international structure of powers and interest of the elite that shapes innovation in developing countries.  In human capital study shows “local capital and skills have obviously in many cases been adequate to acquire, absorb, and use massive technology flows”. In contrast with Lall, FDI role play 10% in technological transfer, the rest is mainly by importing technology.

Discussion: Questioning Pathways of Technological Change

Lall’s study shows that there exists complex interlinked between determinant factors (incentives, capabilities, institution) of NTC. Incentives structures (intervention, protection, industrial strategy) cannot stand alone without building human capital, technological efforts, and strengthening institution building. The interplay of all these factors in particular stage, particular country’s setting will determine NTC.  There is no single optimal pathway for successfulness of technological change. Thus, it is mandatory for policy makers to self-recognizing of their country’s setting, their development aims, and potential resources to determined strategic choices. Lesson learned from eight NICs above is that they always start early stage with highly interventionist style in trade, macroeconomic environment, human capital building, and technological efforts. Along with development progress selective intervention applied.

As stated above, the idea of Lall is technological catching-up of developing countries with its advanced industrialized countries as principal role model. Even if developing countries can catch-up, who benefits from innovation? Does it benefit majority of the poor? Does it lift up quality of life? In this critical point, Manifesto provide radical ‘reform’ in viewing technological change, it must be related to development context which means taking poverty and inequality into account in each steps of technological strategies and policies.  By evidence of widening inequality and increasing number of people fall into poverties, high carbon (high cost) western industrialization pattern, and concern of environment and resource depletion (sustainability), developing countries are now questioning pathway of western industrialization for development.

Current pathway locks in developing countries as receiver, follower, buyer, chooser, and imprisoned in the ‘lagging far behind’ label (Stirling, 2009). Discussing possible trajectories will not be enough in this short essay, however, in searching of (more sustainable) new trajectories, STEPS Center provide (Stirling, 2009 & Ely and Bell, 2009) alternative approach what so-called ‘3D’ directionality, distribution and diversity as key concepts for innovation, sustainability, development that can be addressed and connected into different policy arena. Directionality of innovation established political and economic approaches to innovation and development emphasize the scale and pace of advances and how efficiently resources produce required outcomes. Distribution of consequences, it is well recognized that social distribution of economic resources and political power are unjust in most countries. This tends to assume that the direction of change is that favored by powerful interests. Poverty then becomes marginal issues. Appraising alternative directions can enhance the scope for addressing crucial issues around the distribution of risks, burdens and benefits. Diversity of pathways, in a world of contending directions for innovation and development and a concern for the social distribution of their consequences, effort of diversity possible pathways has great potential. 3D approach in policy arena tries to gradually change lock-in of western minded technological change.

It seems we are trapped in high carbon industrialization trajectory and western R&D intensive innovation paradigm, then again if only and only developing countries success in self recognition, determine its particular country’s setting, dispensing technological capabilities policy frameworks, and strengthening institution building, nothing is impossible.

References:

Ely, A. and M. Bell (2009) ‘The original Sussex Manifesto: Its past and future relevance’, STEPS Working Paper nr 27 on Innovation, Sustainability and Development – A New Manifesto, University of Sussex, Brighton.

Kuznets, S. (1973), Modern Economic Growth: Findings and Reflections, the American Economic Review, Vol. 63, No. 3 (Jun., 1973), pp. 247-258.

Lall, S. (1992) ‘Technological capabilities and industrialization’, World Development 20 (2): 165-186.

Mankiw, G.N. (1995), The Growth of Nations, Brookings Papers on Economic Activity, Vol. 1995, No. 1, 25th Anniversary Issue, pp. 275-310.

Nelson, R. R. (1981), ‘Research on Productivity Growth and Productivity Differences: Dead Ends and New Departures’, Journal of Economic Literature, Vol. 19, pp. 1029-1064.

Sen, A. (1999), ‘Development as freedom’. Knopf, New York

Stirling, A. (2009) ‘Direction, Distribution and Diversity! Pluralising Progress in Innovation, Sustainability and Development’, STEPS Working Paper 32, Brighton: STEPS Centre

Verspagen, B. (2001), ‘Economic Growth and Technological Change: An Evolutionary Interpretation’, OECD Science, Technology and Industry Working Papers 2001/1, OECD, Directorate for Science, Technology and Industry.

Written by ibu didin

June 8th, 2010 at 2:05 pm

Liberalization of trade in financial services is good (or not) for economic growth in developing countries.

without comments

Bellow, I provide arguments to oppose the liberalization proposition.

As provided in 4a, the argumentation confronting the liberalization in financial service is basically based on the doubt that financial repressions by central bank over financial institutions is really exist. Just to repeat the argument, for instance, the worry that the financial repression will weaken the saving propensity of the people and therefore also weaken transferability of saving into investment but in fact, the demand for investment is not depend on the availability of accumulated saved money since there are always a central bank who can back up the commercial bank in the case of the excessive investment demand. The other argument is that the liberalization through high rate of interest in order to make saving attractive can have a boomerang effect on investment, when investor loosing their mood to invest even though the money have been accumulated through saving simply because the high rate of interest.

The other argument is something related to the situation in developing country itself. Since developing country need investment project to develop and since that investment project need a more stable and steady supply of money which is cannot be satisfied if the financial sector is being liberalized. In the deregulated financial sector, an investment agent is always has a full freedom to move their capital from one financial institution to another institution as they wish without any investment purposive regulation. In this way the availability of private saving is always in the form of “hot” money that can easy to come and easy to go.  This fast moving money is becoming faster in term of transaction by the aid of information and communication technology. Meanwhile, an to be successful an investment project need several condition that most of it need a long lasting commitment to invest since it happening in the real economy. Because, in turn, the investment project in developing country could also highly affects the real macroeconomic indicators such as income and unemployment which is hard if the money market is liberalized.

Written by ibu didin

February 13th, 2010 at 1:06 pm

Intensification of international trade leads to environmental degradation and resource depletion in developing countries.

without comments

Provide three arguments in favour AND three against this proposition.

Intensification of international trade leads to environmental degradation and resource depletion in developing countries because of: (i) developing countries tend to specialize in ‘dirty industries’ that Multi-national corporations (MNCs) transfer their pollution intensive production facilities to poorer countries, because of the uncontrolled environmental regulations or even non-existing environmental regulations in developing countries; (ii) comparative advantage of developing countries produces and export environmentally intensive goods to a greater degree than is efficient, and at prices that are below social cost (iii) deforestation for export crops, rain forest that rich in biodiversity in developing countries is destroyed to give way for the production of certain cash crops such as palm, timber, coffee.

However, there are arguments that international trade can bring beneficial effect for environment as: (i) Techniques or technologies shift to cleaner and environmental friendly, this happen when developing countries imports environmentally friendly products such as fuel-efficient autos.  Trade also brings technological innovation, or multi national corporation who bring global standards to where the domestic site is less friendly. (ii) Multilateral agreements for trade sanction, as in Montreal Protocol on ozone depletion, Kyoto Protocol.

Written by ibu didin

February 13th, 2010 at 12:49 pm