Economic development strategies
Regional, Analysis, 1/15/2000

The countries of the world are increasingly becoming more open onto each other as a result of technology and trade. This implies that these countries' economies are increasingly subjected to international economic competition.

It would be nice if countries can lock up their borders and keep away the rest of the world out, as no one usually likes to invite competition in. But the benefits from trade are great, and more importantly, it is not possible to stay closed to the world due to many pressures. Although these pressures are cultural, political, and economic, and a strategy is required to face each of them, we will focus now on an economic strategy.

The foundation of a "free market" economy is the principal of "comparative advantage," and this principal of "comparative advantage" is based on the assumption that products and labor can move freely in a market to find their optimum price.

Let us start then with the premise that a free market does not exist on the international level as it is self-evident that labor mobility does not exist in today's international market. A person cannot freely leave one country to another to find work. Also, a free market supposes no government support for industry, another factor that adds distortion to a free market system. There are additional technical issues that add to this distortion, but we need not digress.

In an economic market that is imperfect, with distortions based on national needs that are guided by practical political domestic realities, countries find themselves having to deal with these market imperfections. How does a country join a system of international trade, take advantage of its benefits while strengthening its domestic markets for the sake of local employment. This is at the foundation of governmental decisions regarding trade for many developing countries. There are different trade strategies pursued successfully by different countries at different stages in their development. These strategies ranged from promoting free trade by those who have mature economies and are able to compete effectively, to controlled and protectionist trade by those who are less able to compete. But basically, each country sought strategies that are beneficial to itself, and not to an idealized and abstract trade system.

Different countries have had many successful models for growing economically such as the USA, Europe, Japan and South Korea. If we were to summarize what we think were the crucial factors for these developments, we conclude the following:

1 A national economic policy is clearly established. They all have at least one such guiding institution, although in some countries these institutions are less visible then other countries. But they all have/had such policies.

2. Industry, economic trends, and products were targeted, and given direct or indirect support to guide or accelerate their development.

3. A domestic market is provided and protected, and an international market is sought for exports. This domestic market protectionism is done under different names such as protecting infant industry, industries of concern to national security, the use of unjustified and complex laws and procedures that have to be complied with, etc.. This protectionism has a negative domestic side-effect in that it promotes domestic monopolies and inefficiencies that would be less than optimum for development. So strong "internal competition" is promoted and nourished to deal with this side-effect, while encouraging exports where international competition further strengthen these companies. And as soon as these companies are strong enough to compete at the international level, the door is opened internally for international companies.

4. Government support in direct and indirect research is provided either to companies through contracts, to a whole industry through joint industry consortium companies, or through university laboratories. Universities offer the best venue in the long term to effect research as the results are spread widely to the different sector of the economy, but it takes a long time to develop this strategy and it is slow acting. Direct business assistance through contracts and research has a more immediate effect, but tends to favor one company over another. Support can be provided using an industry consortium, where competing domestic companies can pool talent and resources in well defined tasks, with the help of the government, offers the fastest way to propel an industry to higher competitive levels. It goes without saying that it is best to distribute this aid by considering short, mid and long term needs, and according to optimum return on investment.

These are some of the major narrowly focused steps taken to promote internal economic growth (we are not dealing with education issues etc..). The steps may be more or less appropriate to different degrees depending on each countries circumstance and level of development. But these practices have proven to work in the past. It is worth noting, that an export market is needed for these steps, a problem that is difficult, but which we have addressed in general in a previous article.

One problem with supporting national industries is the lack of governmental or market financial resources for investment. A way around this problem is to find foreign partners that are willing to invest and transfer technology, enticed by suitable incentives, such as tax guarantees, guaranteed purchase contracts, partial investment, or by being given exclusive access rights to the domestic market. By providing exclusive access to the domestic market, a country can have the best companies in the world compete to transfer technology, and if the country's domestic market potential is large, so will be its leverage. This is a crucial point, as it relates to our previous conclusion on the importance of developing countries setting up economic blocs, and using the size of the domestic market as an advantage in different ways for economic development. This strategy cannot be underestimated in its power and effect, and was used most effectively by China. China has managed to supercharge its economic development potential based on direct investment that is premised to a large extent on technology transfer. Technology transfer happens automatically when foreign companies move into a country, but what is important here is the level of the technology that is being transferred. Some companies are known for having the best practices in providing technology and training at the highest level, and thus enriching the local economy on a more permanent bases. There are different kinds of technology transfer that is needed such as managerial and scientific.

5. So we summarize this step as: It is important that technology transfer is sought and occurs in both managerial and scientific skills.

This strategy we have outlined so far is suitable under most circumstance, but it is most effective in a country with a large potential market, or in an economic block.

There are additional advantages or weaknesses that each country or block would have to deal with that are specific to it.

It is difficult to develop all the industrial and service sectors at the same time and at the same speed using internal resources. So countries have to prioritize among sectors and industries they want to develop on their path to rapid economic development.

Assuming that the above strategy is sound for development, we need to get more specific.

We will start with the following unorthodox premise that: A country cannot become a developed country without having at least one industry that can compete very successfully at the international level. We will call this industry or industries a " strategic economic center of excellence." A country needs these strategic economic centers of excellence with the obvious conclusion that the more of them the better. These centers can for example revolve around the petroleum sector. Centers can be established related to petroleum byproducts, or petro chemicals, or petroleum industrial equipment, etc...

Centers can revolve around fishing, tourism, entertainment, media, software, electronics, agricultural products, information technology, automotive industry, aerospace industry, Banking, finance, Marketing, insurance etc...

These centers of excellence need to be developed in such a manner so as to create a high barrier to entry for competitors by succeeding in providing the best products and services in their domain. This means that these centers have to be supported by research and technology of the highest standard.

Typically in successful economies these centers have tended to be regionally located inside a country, and more specifically, they tend to be inside a city. These centers become local engines that force other local companies to raise their standards. A first class tourism center, "demands" first class hotels, and they in turn "demand" first class food service, which in turn "demand" high quality agricultural products etc. And the hotels would "demand" local management, communication, and marketing skills capable of performing and competing at world standards. This is an extremely simplified example to give a flavor of the dynamics. One strategic economic center of excellence has needs that forces other companies to have to meet its own high standards.

Economic experts should be able to identify these centers and provide a strategy to provide a chain of value added products and services around them. (we recommend getting aquainted with Harvard University professor Michael Porter's work in this regard).

Finally, an increase in economic performance can be achieved through two methods that requires minimal investment. One method is through "good" laws that set and enforce high standards for the different industries. This is also counter intuitive to free market advocates. Another method is through improving the management of existing companies, thus adding value to existing capital and labor.

We will be providing detailed examples in future articles.

We hope that we have shed some light on some of the elements of a strategy that can be used in developing local economies in an international environment driven by an imperfect free market system.

Previous Stories:
  A possible road map to international economic development   (1/14/2000)
  Arab common market: Border hostilities an impediment to trade, part 4   (6/26/1999)
  Arab common market: Low inter-trade reveals problem, part 2   (5/12/1999)

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