UNIDO Industrial Development Report 2002 / 2003
Competing Through Innovation and Learning
| Introducing IDR 2002 / 2003 at a press conference at the Vienna International Centre on Tuesday 30 July, UNIDO Director- General said "We wanted this report to be different to the ones UNIDO had prepared in the past..., something that would be useful for policy makers to take decisions and make comparisons". The Director- General said there was a need to find "practical connections and linkages between our daily activities and the fight against poverty that was mandated by the Millennium Declaration goals". He emphasised the urgency of the situation in developing countries by repeating the first words of his formal introduction to the report, "the current predicament of most developing countries and the state of the global economy, reflect optimism in attaining the goals set for the year 2015, and the problem is not just the apparent wedge between intended targets and actual trends, but more fundamentally, the differences on what to expect of the future and how to get there".
"We fully endorse the concepts of market oriented reforms, the importance of institutional reforms, and the need to pursue transparency and good governance policies in the developing countries, and we do believe that globalization is a very good opportunity for developing countries. However, when you look at the numbers, the reality shows that much more should be done to ensure that developing countries at large can benefit from the process of globalization". Quoting average per capita income figures for 1990 and 1999, the Director General pointed out that of the 50 developing countries that were at the bottom of the list in terms of per capita income in 1990, in 1999, "23 are worse off, and the other 27 barely meeting population growth rates. If you look at the speed and rate at which the per capita income is widening in the world, you have a similar picture".
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Director- General Magariños continued. "UNIDO believes that the main problem we have to look at in developing countries is that of the performance of their productivity rates. On how market oriented reforms influence the performance of those productivity rates. You will find that in the report. This is a concept contained in the Scoreboard. That?s why we in the analysis we did for the scoreboard, we follow, not only the evolution of manufacturing value added per capita (MVA), or exports per capita, but also the level of technology included, both in MVA per capita and the level of technology included in the exports per capita".
"You will see that those countries that managed to acquire skills, technology, information and knowledge, were better equipped to keep the performance of their growth rates not only steady, but also at high levels. We believe that one of the shortcomings in the process of market performance analysis promoted throughout the decade of the nineties, is the lack of perception of the importance productivity performance as the main concept to judge whether the reforms were performing properly in developing countries or not. Many times we looked at the current account balance, we looked at the inflation rate, but this was clearly not enough. Inflation rates improved, the account balances in many cases improved, but the productivity rates did not improve at the same pace. This is what we believe should be looked at more carefully".
Following the Director- General's introduction, Director of UNIDO's Industrial Statistics and Economy Branch, Frederic Richard, presented the Report. This feature story is based on that presentation. With respect to the Industrial Development Scoreboard, Director Richard took care to make the point that the Scoreboard is in its early stages of development. "It is very important to point out that it is a very elementary policy tool. The ranking that it gives is not an absolute ranking. What we wanted to do is to provide a tool to countries to start assessing their performance, to start comparing themselves with other countries, which they consider to be in the same range of development as they are. In particular, to compare themselves with countries that have advanced further than they have. So it is not an absolute ranking. It is a policy tool. It has many limitations. But it is unique in the sense that at the moment there is no such tool in the industrial sector. There are many other indices which look at the broader environment, but this tool is specifically focused on industry, on industrial performance and on the key drivers of that performance".
The main objective of the Report, (which, as the Director- General said, is not aimed at academics, but at policy- makers and decision- makers, both in the government and the private sector), is first to have a better understanding of industrial performance and capabilities among developing countries. The second objective is to better understand how developing countries are able to improve their capabilities and their industrial performance, in particular, under the new conditions of globalization and technological change, which so far, have proved beneficial to very few developing countries. The third objective is to develop and propose guidelines and directions, more than solutions, to policy makers on how in their countries, according to the local conditions, they can develop strategy to enhance their performance. Industry is important in this process because it is a source, a user and a diffuser of technology. Technology drives sustainable development, productivity growth and income growth. The new global setting is characterised by increased flow of trade, investment and technology. There is very rapid advance in new technology, new ways in organization, in relationships between firms, and new global rules.
In his presentation, Director Richard said "One thing that is very important in this concept of globalization, is the emergence of global production systems. That means that now, instead of doing the design, the production, the marketing in one place, these different functions are allocated to different parts of the world according to the level of comparative advantage of the regions. So globalisation is not equally distributed, while there is on the one hand, a globalization of the activities of design, manufacturing and marketing, and on the other hand, a very strong localization of these activities where there are comparative advantages. So you can have design done in Europe or in America and the manufacturing, of the same product, done in other parts of the world, in particular developing countries. That has tremendous influence on the conditions and the process of industrialisation of the developing countries: their ability to enter, and to upgrade their position in those global production systems".
IDR 2002 / 2003 says that under the new conditions of competition, it is very important for developing countries to choose the ?high road? to compete, which is to compete to innovation and learning. Director Richard, "Innovation is not finding new products for the world, it is continuously improving your products, your process or entering into more complex segments of activities or into more high tech industries. If you don?t do that, (particularly in the context where all the other countries, because of the new technology, because of new management techniques, are actually innovating and improving their production process), if you stand still, the gap of competition will increase and the only possibility for a country which is not innovating, is to compete through lower wages, through lower standards. The only possibility for a country under the present conditions is to compete by improving products and processes or face marginalization. To innovate means to develop capabilities, means to improve your ability to design, to manufacture, to market". The Report acknowledges that developing capabilities is not easy. "It is not done by simply buying "off the shelf" technology, or by simply attracting foreign investment. It is a very difficult process, which is driven by firms that make efforts to learn the new technology, but it is a difficult process even when there is a supportive environment, which is rarely the case in developing countries".
"The bulk of the report deals with the assessment and monitoring of the industrial performance of countries under the new context and to assess the level of capabilities that countries have to compete. The Competitive Industrial Performance (CIP) index consists of four indicators. Two which measure the extent of industrialization, to what extent the country has industrialised, (not the depth of industrialisation, the second two indicators deal with that), but simply the extent to which the population is at work in industrial activity. These two indicators are: manufacturing value added (MVA) per capita, and manufactured exports".
"The two other indicators assess the level of innovation of a country. The extent to which a country is taking the "high road": moving from low-tech industry to more high-tech activities, to more complex activities, which the Report says, is the only road for a country to improve its productivity, to improve its value added, to improve the contribution of industry to sustainable development. These two indicators are: the relative share of medium and high tech activities, technology industries in MVA and the share in manufactured exports".
"That means that a country that exports more high-tech that another, will receive a higher rating in the scoreboard. The performance index is the average of the values for each of these indicators, with the best performer scoring "one"".
The next objective was to see to what extent the CIP was related to industrial capabilities: capabilities to design; to manufacture; to market; to research; and to produce. Director Richard: "It is of course very difficult to assess this. There are no indicators for that. So we took the drivers of capabilities for which we could identify data. At the beginning we started with some 85 indicators, including framework conditions, business environment and so on. But we saw that there were other indices other scoreboards dealing with this broader assessment. Therefore we wanted to focus on a limited number of key structural drivers of these industrial capabilities. These four drivers are, first of all internal drivers, which are developed within the country, by the country, skills, and we have looked tertiary technical enrolments, of course, primary education, secondary education, play a key role, but here we wanted to focus on the engineering, on the more advanced level of skills. We also looked at the technological efforts, the efforts made by enterprises on research, on improving products and processes. Then we took two external drivers of industrial capabilities: foreign investment and the purchase of technology through royalty payments".
"So this is the Scoreboard. It is very important to point out that it is a very elementary policy tool. The ranking that it gives is not an absolute ranking. What we wanted to do is to provide a tool for countries to start assessing their performance, to start comparing themselves with other countries, which they consider to be in the same range of development as they are. In particular, to compare themselves with countries that have advanced further than they have. So it is not an absolute ranking. It is a policy tool. It has many limitations. But it is unique in the sense that at the moment there is no such tool in the industrial sector. There are many other indices which look at the broader environment, but this tool is specifically focused on industry, on industrial performance and on the key drivers of that performance".
The Scoreboard covers two points in time. Eighty seven countries in 1998 and 80 countries in 1985. The difference in the number of countries is mainly for the transition countries, for which 1985 data was not available.
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Director Richard drew attention to the first fourty countries, "which by the way, according to the index of one to zero, range in 1998 between 0.883 and 0.102 (so it is already a large number of countries in a very short range. In these first fourty counties in the ranking, we have mostly of course, the industrialised countries, this is to be expected. In the first column of the scoreboard (the first 22 countries in the ranking), we see a few developing countries (Singapore, Taiwan Province of China, Korea, Malaysia). The most interesting case, the most notable case is Singapore, which increasingly now appears very much to the top in all the indices. If you take only the MVA, which is the most basic index of industrialization, at the moment Singapore is number four. It increased in ranking since 1985 because of its ability to export, in particular, in high-tech industries, relatively to other countries. As it is a small country, the relative size of is exports is more important. But it is still a notable exception".
"After Singapore, we have the three emerging markets, Taiwan Province of China, Korea, and Malaysia. Then we have a whole range of transition economies and middle income developing economies that are improving their ranks, that are moving up, that still have a pretty decent level of industrial performance and a very good level of drivers. When we look at the second group, the remaining countries between ranking 41 and 87, we see all the developing countries. What is very interesting is to see that between ranking 72 and 87 we have all of the 12 (out of 49) least developed countries (LDC) which were included in the scoreboard. These countries have not progressed, to the contrary, their industrial performance has declined. That means they are stuck, they are not moving up. They are not progressing, and the number of LDCs is increasing. The difference between the LDCs and the other developing countries is increasing".
"If we now look at the ranking by region, (the ?y? axis shows the CIP value), we see of course, that the industrialised countries have an average value of 0.4, and then we have East Asia which has improved its performance considerably, going from a little bit less than 0.2 up to 0.3, so the gap between these countries and the industrialised countries is narrowing. Transition economies are also progressing. But then you have all the other regions which are not progressing as well. In particular, Sub-Sahara Africa, Middle East and North Africa and Turkey, for which the CIP ranking is falling between the two years of our scoreboard".
"If we look closer at the details of these various groupings, we see that East Asia, which in our sample count includes nine countries, led in both years. All countries, except Hong Kong (don?t forget that we are speaking about industrial activity, and Hong Kong, as you know, started to transfer many of its industrial activities to Mainland China), all of the East Asia countries have improved their industrial performance index. Four of these countries improved by more than ten ranks, China, The Philippines, Indonesia, Thailand. In Latin America and the Caribbean, (which in our sample includes 18 countries), only seven countries improved their position (Chile, Costa Rica, El Salvador, Guatemala, Mexico, Uruguay, Venezuela). In Middle East and North Africa, only Egypt improved its ranking. Actually, as we will see, it was very good improvement, of more than ten ranks. In South Asia, which includes five countries, all of the countries either stabilized or improved their position by one rank. Only one, Pakistan, lost five ranks. In Sub-Saharan Africa, only one country out of 16 in the sample, improved its ranking: this was Kenya. The Sub-Saharan countries in the Scoreboard sample includes 12 of the lowest ranking countries in Africa. Among all the LDCs, all lost ranks except Bangladesh and Nepal. Both of these LDCs increased manufactured exports between 1985 and 1998 and moved up one rank over the period".
"If we now look at it from the point of view of ranks won or lost: jumps of more than 10 ranks, we see that six countries have gained more than ten ranks, we already mentioned them, in addition there is Ireland and Egypt. In the case of Egypt, the jump is due to the increase in the level of industrialisation and the increase in the level of manufactured exports, not due to an increase in depth, not to technological upgrading, but the size of the industrial activity has increased".
"The jump of over 10 ranks by Ireland is due to an increase in high tech exports. Countries which have lost 10 or more ranks include four African countries, four Latin American and Caribbean countries, three countries in the Middle East and also Hong Kong, but for the specific reason that I mentioned earlier".
"Other key findings, briefly: only 16 of the 58 developing countries have been able to move up, to innovate. That means if you had visited these countries in 1985 and again today, you would not see any progress. There is no change, they do not move, they continue to do the same thing. There is no upgrading, no improvement of product and process. The drivers of industrial capabilities are, of course, unevenly distributed. Very strong in East Asia, very low in Sub-Sahara Africa".
"It is interesting to see that the successful countries have always adopted a strategy that combines external drivers, that means foreign investment, royalty payments, with local development, this is very important. It means that development does not take place simply by opening up (removing tariffs), bringing foreign investment, buying external technology and enjoying the ride. Efforts have to be made to develop local capabilities: skills, infrastructure, technological efforts. The successful countries are those that have a strategy that combines external drivers and local development.
Of course, industrialised countries use much more R&D (local technological efforts), and developing countries use more foreign investment, but success comes with the combination of both aspects: external and internal development of capabilities".
"There are a few countries that have performed much better than might be expected from their level of capabilities. They are mentioned here: Malaysia, Mexico, The Philippines, Singapore, Taiwan, Thailand. The reason for their good performance is that they have been able to integrate with global production systems. Therefore their performance has been driven by their connections with multinationals, to export markets, to external sources of knowledge. Now of course, it does not mean that they will keep that position. To maintain it they need to develop local capabilities, the scale, the infrastructure and the local technological effort".
on to Part II: Laying the foundations for industrial competitiveness
 Frederic Richard, Tel: +43-1-26026-3821, E-mail: F.Richard@unido.org
editor: ktimmins@unido.org
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