Events in the international community

United Nations General Assembly

57th Session, New York, 2002

Statement by John Langmore,
Representative to the United Nations and Director, ILO Liaison Office, New York

Agenda Item 85: Sectoral policy questions:
    (a) Industrial development cooperation

One reason this is an important discussion is that evidence has been accumulating that the conventional policies for encouraging industrial development have succeeded in only a few countries. I will briefly discuss reasons for the widespread difficulty many developing countries have experienced in generating industrial development. A second theme of these remarks will be the great and growing importance of the services sector.

In the industrial sector, the recent evidence suggests that developing countries are diverging rather than converging in terms of output, export and technological upgrading performance – and so in the extent of employment growth in manufacturing. In the industrial sector, the ability of countries to generate and sustain employment depends on their capacity to  gain prompt access to, efficiently use and keep up with new technologies. This needs new sets of skills, organizational relations and infrastructure. In turn this requires constant technological effort.

The evidence suggests that those countries that are able to spend most on their own research and development will do best in this competitive struggle. Other determinants of competitive advantage include much more than access to commodities or cheap labour. Professor Sanjaya Lall has shown that ‘Technological competence, skills, work discipline and trainability, competitive supplier clusters, strong support institutions, good infrastructure and well-honed administrative capabilities are the new tools of comparative advantage.’

Unfortunately, the prevailing orthodoxy during the last two decades has been far more concerned with liberalization of trade and finance than with these more practical issues. Liberalization is often counter-productive because of the market failure resulting from such deficiencies as concentrations of market power and lack of symmetrical access to information: ‘ …in the presence of market failure … free trade and import liberalization may not be the best policy for developing countries … The design of liberalization has to take account of the extent and type of market failure.’ (Lall)

It is crucial that international trade and financial organizations recognize this reality and modify their strategies. If these organizations are to become more effective they would have to become empirical rather than ideological, concentrate on what is likely to work best in individual countries, and change the focus of trade policy to the powerful, which talk endlessly about the benefits of free trade but continue to massively subsidize their agriculture and minimize promised reciprocal reductions in protection.

That point is widely acknowledged. Most economists would also readily accept another recommendation, about the importance of improving technological capabilities. The difficulty with that goal is, of course, in finding the most effective combinations of education, training, work experience, public and policy-supported private research and development within the financial capacity of each country. A related issue is how to encourage sufficient trained people to stay in their home countries, an aspect of migration policy to which the World Commission on the Social Dimension of Globalization will no doubt give attention.  

Another difficulty for most developing countries is that they can expect little assistance from foreign investment. Most international financial flows go to developed countries: in 1999 and 2000 over 60 per cent of global financial flows were sent to the US alone. No doubt the situation is very different this year, but the early statistics show that total FDI in developing countries is declining. This, combined with the concentration of production, and the attractiveness of large markets, means that most developing countries will continue to be excluded from significant FDI.

There might therefore be net costs for them in hopelessly attempting to fit into the ‘golden straight jacket’ of policies said to be attractive to financial markets and foreign investors. The alternative is more domestically self-reliant policies combined with increased concessional external finance.

Domestic saving must be the major source of private and public funds for investment. Even this has an international dimension. The availability of credit at low interest rates in every country depends to some extent on the state of monetary policy in the US, Europe and Japan. Improved international macroeconomic coordination and more representative institutions to manage it, is vital.

This is vital too for reducing the financial instability that has been the single most important factor responsible for the rise of  country income inequality of the last twenty years. The obvious approach for those countries that have not yet comprehensively liberalized is more caution about the extent and sequencing of financial liberalization. Malaysian experience does seem to suggest that carefully judged capital account regulation could have a useful place, at least in certain circumstances. Chile and other countries have demonstrated that increasing the cost of short-term capital movements can contribute usefully to reducing instability caused by hot money movements. Experience of the Asian financial crisis shows the importance of adopting redistributive policies, including social protection, before liberalization. For those countries that have liberalized, the issue is how to escape from the vicious circle of strengthening supervision or selectively reregulating without increasing the risk premium on their bonds.

Before concluding I want to briefly mention a second theme: the importance of increasing attention to the service sector. Services account for well over 60 per cent of world GDP. During the period from 1980 to 1998 the services share of world GDP has risen by five per cent and the corresponding increase for low and middle income countries has been nine per cent. In 1998 services were estimated to account for 38 per cent of GDP in low-income countries, 56 per cent in middle-income countries and an average of 65 per cent in high-income economies. The services sector includes many industries - education, health, personal care, finance, telecommunications and transport among them.  In addition, services account for 20 per cent of cross border trade, and that proportion is rising, and not just in the naturally international industries of finance, telecommunications and transport. A crucial element in national development strategy, especially relating to growth of employment, is to concentrate on means of increasing employment in services. For as incomes rise the proportion people want to spend on human services such as education and health increases, and the number of people employed in those industries naturally rises, and so does the quality of life for all.