"International competition": how to develop a country

[Winner]

I will respond only to valid criticisms from people who have offered something.

What did you offer? No strategy at all, only a nebulous belief that a minimalistic government would actually manage the transition better than a proactive one, which is beyond foolish, it's almost criminal to think that.

A country that wants to succeed in creating something resembling a first world economy needs to invest heavily in education, it needs to actively attract investment, it needs to subsidize the development of the right industries, and it needs to intervene in a hundred other ways.

I might add that the laissez-faire zealots actually contributed to the mess we've seen in the post-Communist Europe in the 1990s by poisoning the new democratic politicians' minds with this bull***.

 

[amadeus]

Falling back on failed central panning doctines? You think 45 years of misery under socialism would have taught you something, but it didn't.

 

[innonimatu]

I wouldn't.
The problem with education is that it's expensive and it's easy to wind up on the wrong end of brain drain. Ecuation is important, but don't think it's the first priority. I'd focus on one or two universities and try to make them world class, set up research institutes similar to the Max-Planck or Frauenhofer association to attrac.foreign talent.

My first priority is to fight corruption and create a transparent legal system as to not scare investors away with shady business practices. Then I'd take a good look at what my neighbors are doing, what they are importing or exporting and try to find a niche industry where I don't have too much competition. Forget IT when India is your neighbor, better focus on filtration systems systems or clean energy. Things that the largest or emergent economies will need in the future. After I have identified the industries I want to focus on I'll subsidize them and close this segment of my economy off from foreign competition. Protectionism is often bad, but it has it's uses when you want to create new industries. It worked pretty well for Japan in the past with electronics and cars. I'd also try to copy some of Chinas's socialist industrial policies when they make sense. For example, if a large foreign corporations wants a piece of the cake they'd have to set up a joint-venture with local companies as the majority shareholders.

That's the kind of thing I'd do too. Technology follows industry, and education investment should match needs, at least when resources are scarce.
As for choosing specific industries to target, inviting foreign companies with advantageous conditions (in effect subsidizing them) but with the condition or taking on a local partner (technology transfer) I think that was the strategy used by Japan, Taiwan, Korea, and now China. It requires, usually, that the country has a reasonably large size, such that access to its market can be offered as one of those advantageous conditions.

Also, for those "lower taxes" proposals: That would be having the state cut off its own legs! Starved of revenue, it would become impossible for it to implement any policy at all. Lower taxes? Sure, for some chosen industries, those targeted for development, and only those. And only temporarily. Modern states are not cheap to run. And the while idea of development is to advance to the situation of modern state!

It's interesting, though, that so far we're seeing almost as many different proposals as people posting here. It's not a simple problem. I did intend to avoid discussion development of "third world" countries (Botswana and Zimbabwe were mentioned), because those have indeed very diverse problems and discussion would become hard in a single thread. More like: the merits (and failures!) of those past "tigers" which shot up through development stages, and contemporary (ongoing) cases.

 

[luiz]

Also, for those "lower taxes" proposals: That would be having the state cut off its own legs! Starved of revenue, it would become impossible for it to implement any policy at all.

You must keep in mind that industrial policy is actually a very tiny fraction of the national budget. It's not expensive. The states that impose very high tax burdens don't do it because of industrial policy, they do it because of various welfare and income transfer policies (especially pensions). That's why countries with very active industrial policies but little welfare, like China, Korea, Taiwan and Japan usually have very low tax rates.

More like: the merits (and failures!) of those past "tigers" which shot up through development stages, and contemporary (ongoing) cases.

One thing that is very clear for anyone who has briefly studied the theories of economic growth, but obscure for most other people, is that it's quite easy for a non-industrialised country to achieve very high levels of economic growth (for a period). If you have enough internal stability, and manage to achieve very high domestic savings (which can be a result of capitalist pressures like the lack of a public pension system, or it can be forcibly achieved like in the USSR), growth will be very fast as the nation industrialises. That's sometimes called "Stalinist growth". Of course, returns are diminishing, and if the savings are forced and investment centrally directed, there is a good chance you'll end up with a lot of useless and inefficient industries, and that will have a cost later on (see the USSR). But growth is achieved nonetheless.

My point with the above is that the Tigers ought to pay attention to that fact. They have pretty much exhausted growth possibilities just from internal savings (except for China of course), and now comes the tricky part of slowly making the transtition to a post-industrial economy (that does not mean shutting down industries, just stop relying on ever increased industrial capacity to generate growth). Failure to realize this basic fact will lead to stagnation.

 

[amadeus]

As for choosing specific industries to target, inviting foreign companies with advantageous conditions (in effect subsidizing them) but with the condition or taking on a local partner (technology transfer) I think that was the strategy used by Japan, Taiwan, Korea, and now China. It requires, usually, that the country has a reasonably large size, such that access to its market can be offered as one of those advantageous conditions.

In the case of Japan, the government for many years had a very limited role in terms of taxation and spending and would in fact be closer to Hong Kong and Singapore today on that basis. As far as promoting domestic industry, MITI, the quasi-planning bureau, repeatedly denied a request for a very important technology transfer license from Western Electric. The company lobbying for the technology was Sony. The technology? The transistor.

Korea had a similar regime and under Park Chung-hee normalized relations with Japan in exchange for technical aid and investments. Korea also had a strong (stronger than Japan, I think) planning bureaucracy and tended to target heavy industry like steel and shipbuilding over what were thought of then as high-tech products like TVs and computers. The quotas and five-year plans have since ended as of the early 90s and the Korean economy liberalized and began restructuring to focus more on those high-tech industries.

Taiwan had a much more laissez-faire economy, not keeping interest rates at artificially low levels or trying to "stimulate" growth. The interventions the Taiwanese took (after liberaliztion in 1959) were still a lot less severe than in heavily-interventionist Korea.

Also, for those "lower taxes" proposals: That would be having the state cut off its own legs! Starved of revenue, it would become impossible for it to implement any policy at all.

Exactly. Now you're getting it!

 

[Tee Kay]

Guys, guys, laissez-faire and central planning aren't the only economic systems that exist.

 

[Masada]

That's when things get interesting. Work on the level of education, and you get a people that might do all sorts of things. The question raised tends to be one of whether they will be given the opportunity to have a crack at novelty?

Sure, but novelty isn't really all that great so far as an economic strategy goes. Education is important but it isn't the be-all-and-end-all and should be targeted (as best as one can) to meet the needs of the state. Doing it for the sake of it is all well and good... but doesn't offer much in the way of economic returns.

And that, imo, seems to be largely a matter of how to deal with the traditional Powers That Be in various societies, who will tend to be challenged by the new situation. So, Zimbabwe aside, we get situation like Mubarak's Egypt. Is this nation going to go for development, or continued political controll by ... ; what mix of these?

I've kind of assumed that we are Mubarak in this scenario. And from a pragmatic point of view the Revolution hasn't had Good economic outcomes and likely won't.

My first priority is to fight corruption and create a transparent legal system as to not scare investors away with shady business practices.

Ehhhhhh both take at minimum a generation or two to get working even with a good pre-existent legal tradition. The simple problem being that transparency is almost always a function of having a good judiciary1, strong civil society, respect for the law and a swathe of solid case law. All of which take a while to develop.

Forget IT when India is your neighbor, better focus on filtration systems systems or clean energy. Things that the largest or emergent economies will need in the future.

That's assuming you have the requisite human, technical and financial capital to actually do that. Also, there's the problem of job generation which a high skilled, high capital set of industries won't generate.

1. Consider that you need a few years to train a lawyer, a good few more to get a judge ready, a strong commitment by government over a generation to end up with an independent system, a while to get the processes in place and so forth.

 

[Winner]

Falling back on failed central panning doctines? You think 45 years of misery under socialism would have taught you something, but it didn't.

Guys, guys, laissez-faire and central planning aren't the only economic systems that exist.

^What he said.​

Positing that the only alternative to hands-off approach is a socialist-styled central planning is almost a perfect example of the strawman argument. A proactive government I spoke about is something totally different and if you take a good look at countries which went through the transition more or less successfully, you'll see that none of them accomplished that through laissez-faire passivity.

 

[SeekTruthFromFacts]

The first thing you need is a surplus to invest. Where you get that depends on where you're starting, but land reform is a good place to start. It's easier to capture a surplus from peasantry than oligarchic landlords. If you've got commodities (minerals, cash crops), get hold of that.

Then you invest it in basic health care (urban sanitation and infectious disease control) and crops/industries where you have a competitive advantage on the world market (probably through cheap labour). That will hopefully generate further surpluses, though it depends on global economic trends you can't control. As soon as you can, start investing in education, so you can move up the value chain.

You can grow this way through either state-owned or privately-owned agents, as long as you have competition. It's perfectly possible to have multiple state-owned enterprises competing for business in a market economy. That approach also enables the surplus to be seized more easily, so the fruits of growth can be spread more fairly.

Be honest with your people. Today's voters will not enjoy a welfare state. Their children will.

I suppose you'd have to have some very minimal tax to support the country's defense against external aggression and the court system, though I don't think that would take more than 1-2% of GDP, especially if it was a neutral state that kept its nose out of everybody's business. I don't like any taxes, but I'm not going to give up the hard-earned 99% I want in the hopes of getting that last 1%. In the country, though, I'd encourage people to use arbitration and come up with private common law instead of always coming to government courts to solve problems.

The Somali solution...? Sharia is arguably the common law of Somali society.

The only restrictions on immigration would be health screenings to prevent the spread of epidemics and criminal background checks so as not to become a haven for dangerous fugitives. There would probably be a modest fee to cover the administrative costs those precautions would require.

How many developing countries have an immigration problem?!

Ehhhhhh both take at minimum a generation or two to get working even with a good pre-existent legal tradition. The simple problem being that transparency is almost always a function of having a good judiciary1, strong civil society, respect for the law and a swathe of solid case law. All of which take a while to develop.

I'd be quite tempted to go for a Hong Kong/Shenzhen approach with this. Choose one promising port, and set it up as an economic development zone. Small incentives will make your fledgling lawyers and judges concentrate there, and make the rule of law work there, even if it doesn't anywhere else.* Have free trade in the development zone, and protectionism elsewhere - best of both worlds, if you can pull it off (perhaps with the help of an ex-colonial power with a guilt complex).

*(IMHO, this is where the Republic of China went wrong. They had no Yan'an. They should have held off the Northern Expedition until they'd got a grip on the economy and society in Canton).

 

[Masada]

I'd be quite tempted to go for a Hong Kong/Shenzhen approach with this. Choose one promising port, and set it up as an economic development zone.

That's assuming you have a port worth a damn with access to the hinterlands of a huge market.

Small incentives will make your fledgling lawyers and judges concentrate there, and make the rule of law work there, even if it doesn't anywhere else.*

Executive assurance is easier. You just have el Presidente promise (and keep it) to ensure that the terms of contracts are adhered to. Korea and Singapore both adopted that approach initially.

 

[Tee Kay]

How many developing countries have an immigration problem?!

Plenty. Just because a country is "poor" by Western standards doesn't mean that it's not attractive to people from even poorer areas. While Mexicans are pouring north into the United States, Central Americans are entering Mexico from the south. Haitians move to the Dominican Republic. India is building a border fence to stop Bangladeshis. Freaking Guinea-Bissau is attracting people from all over Africa. I could go on.

 

[NedimNapoleon]

Well if you are close to a "wealthier" nation, could you do the China thing, cheap labor making cheap stuff that are cheap to export to the country where they are sold. Manpower is a becoming a bigger and bigger resource, cheap labor close by to a rich consumer nation is a gold pot. The labor might be cheap but it will still have a better of life than in any other 3rd world country.

EDIT: Foreign investment, but you would need a stable government.

 

[warpus]

Falling back on failed central panning doctines? You think 45 years of misery under socialism would have taught you something, but it didn't.

You do need *some* regulation. Just look at what happened (and what's happening) with American banks.

 

[Traitorfish]

Falling back on failed central panning doctines? You think 45 years of misery under socialism would have taught you something, but it didn't.

If the former Soviet Union is anything to go by, "central planning" can actually be pretty effective when it came to building up a dirt-poor nation fast. It's only once you shift from extensive to intensive development that it went foul, and perhaps China offers an example of the possibility of jumping ship at an opportune moment. (Not that it has anything to do with "socialism" in either case, of course, /obligatory semantic niggle.)

 

[bonefang]

China sure is growing fast, but with dubious track record.
"Whipping population " to produce things fast and cheap. its internal environment is a mess. You go to shanghai, you are welcomed with all grace and beuty. you express your wish to travel inland, you will be taken into the police jurisdiction and questioned about your motives to travel inland.

 

[amadeus]

Positing that the only alternative to hands-off approach is a socialist-styled central planning is almost a perfect example of the strawman argument.

A country that wants to succeed in creating something resembling a first world economy needs to invest heavily in education, it needs to actively attract investment, it needs to subsidize the development of the right industries, and it needs to intervene in a hundred other ways.

Subsidize industry the right industry, intervene in a hundred other ways! Okay, so what you would have is closer to fascism than socialism. Better?

The Somali solution...? Sharia is arguably the common law of Somali society.

Xeer, Somali traditional law, existed before widespread influence of Islam in Somalia. Xeer or sharia, what should stop two parties to agree to use a court system to which they both consent?

You do need *some* regulation. Just look at what happened (and what's happening) with American banks.

That's not really a good example of a free market. You've got the Federal Reserve setting the interest rates, and the whole banking system is run on the premise that so long as not everybody tries to take their money out at once, the system is solvent. You've also got legal tender laws that prohibit merchants and private citizens from circumventing the dollar system. I'd support regulations on the Federal Reserve, though: that's the real big, unaccountable bank that's causing these economic crises.

If the former Soviet Union is anything to go by, "central planning" can actually be pretty effective when it came to building up a dirt-poor nation fast. It's only once you shift from extensive to intensive development that it went foul, and perhaps China offers an example of the possibility of jumping ship at an opportune moment. (Not that it has anything to do with "socialism" in either case, of course, /obligatory semantic niggle.)

If the transition can't happen under the system, then it's a bad system.

 

[berkut]

So
The open question here is: how would you go about doing it, if you were responsible for drafting a development strategy?

I would use unfair economical policies like those used by China, and Japan, them rush a nuclear program to secure it.

 

[Traitorfish]

If the transition can't happen under the system, then it's a bad system.

And if you can't eat soup with a fork, it's a bad fork?

 

[warpus]

That's not really a good example of a free market. You've got the Federal Reserve setting the interest rates, and the whole banking system is run on the premise that so long as not everybody tries to take their money out at once, the system is solvent. You've also got legal tender laws that prohibit merchants and private citizens from circumventing the dollar system. I'd support regulations on the Federal Reserve, though: that's the real big, unaccountable bank that's causing these economic crises.

So you think that regulating the federal reserve is a good idea.. what about regulating banks and other markets?

 

[Tahuti]

The open question here is: how would you go about doing it, if you were responsible for drafting a development strategy?

1. Reduce red tape for businesses and make it easier to start a new business
2. Model tax codes after Western countries, but without all the loopholes
3. Use government spending to build an infrastructure (including internet access)
4. Allow foreign investment and give permanent residency to foreigners who wish to start a business
5. Eliminate trade barriers, both import and export, for as much as it possible