Personal Finance

Asian Tigers offer great growth plan

Uganda-Economy

A street in Kampala, Uganda. FILE PHOTO | NMG

Summary

  • Many development analysts have pointed lower-income economies in the direction of the so-called Asian Tigers whose rapid economic transformation was nothing short of spectacular in the absence of mineral wealth.
  • These standout economies, including Singapore, South Korea and Malaysia sustained a fast-clip growth, enabling them to move from low to middle and higher incomes.
  • What’s even more encouraging is the fact that this growth was widespread, lifting millions of households from poverty.

What will it take for the entire Africa to transition to middle-income status? A lot, it seems, but not entirely impossible. Of the 54 African States, 24 were classified by the World Bank as low-income in 2018.

More telling is the fact that only nine countries account for three-quarters of the continent’s GDP while 400 companies have revenues exceeding $1 billion. According to WealthInsight, there are 2,050 African multi-millionaires—individuals whose net worth is over $30 million. This pales in comparison to 51,192 multi-millionaires in North America and 48,245 in Asia.

Many development analysts have pointed lower-income economies in the direction of the so-called Asian Tigers whose rapid economic transformation was nothing short of spectacular in the absence of mineral wealth.

These standout economies, including Singapore, South Korea and Malaysia sustained a fast-clip growth, enabling them to move from low to middle and higher incomes. What’s even more encouraging is the fact that this growth was widespread, lifting millions of households from poverty.

For what’s the point of having growth that’s not shared by all countrymen and women? Unfortunately, recent growth witnessed in Africa has either been insufficient, sporadic or disproportionate (benefitting only a few) to have a truly transformative impact on the wider society.

So what set the Asian Tigers apart in promoting shared prosperity as their economies expanded?

Beginning in the 1950s and 1960s, today’s successful East Asian economies adopted an export-oriented development strategy based on labour-intensive manufacturing.

They then moved up the industrial ladder, step by step, gradually accumulating development capital. By leveraging and refining their underlying capabilities, these high-performing countries sustained their growth by using their comparative advantage to upgrade their industrial base, diversify and increase competitiveness and sophistication of their goods and services.

Most of these economies increased their competitiveness in complex industries by adopting a variety of policies and business strategies. These included setting up clusters (industries that support mutual development, such as textile production and garment manufacturing), integrating into global value chains, automating, increasing domestic consumption, and boosting trade beyond their shores.

While times have changed, the basic principles remain pretty much the same, something most African economies could use as a guide.

For starters, modern economic growth is a process of continuous structural transformation. This involves constant technological innovation in existing industries, emergence of new, high value-added industries, and improvements to hard infrastructure such as power supply and road networks.

Not to be neglected are institutions (soft infrastructure), whose strengthening underpins sustained progress.

Economic structures, including technology uptake, determine labour productivity. On the other hand, hard and soft infrastructure determines transaction costs that are endogenous to the endowment structure in an economy such as land, capital, and labour with potential to create comparative advantage. Endowments determine the economy’s total budget and relative factor prices at any given time. These, in turn, determine which industries in the economy have comparative advantage.

If all the industries in the economy are consistent with the economy’s comparative advantage, the economy will have an appropriate industrial structure. Such a structure enables the economy to operate with the lowest factor costs for production in both the domestic and the international markets. Therefore, as an economy’s structure of factor endowments evolves from one level of development to another, the optimal industrial structure will evolve too. When the industries in an economy move from traditional resource intensive or labour-intensive industries to modern capital-intensive industries, continuous improvement is required in hard infrastructure such as power, roads, and ports, as well as soft infrastructure such as financial institutions and the legal system. These improvements reduce transaction costs and transform the industries of an economy’s comparative advantage into a competitive advantage.

However, should the entire Africa finally transition to middle-income status, the risk of middle-income trap looms large.

To potentially avoid stagnation, it means that African governments will need to deepen their investments in human development factors such as better hospitals and schools, over and above mega infrastructure investments.