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Asia, Latin America and South Africa show diverging economic trends

30th May 2014

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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The economic success of Asian countries is not due to cheap labour. “It’s not just low wages,” Cambridge University economics professor José Gabriel Palma has affirmed. Although low wages helped start the modern economic development of Asian countries, the key factor was and is lower unit costs – or, in other words, higher productivity.

Furthermore, Asian countries, unlike those of Latin America or South Africa, have been able to sustain high rates of economic growth for decades. High Growth And they have also increased their productivity throughout this period. In contrast, Latin American countries and South Africa have enjoyed periods of high growth, but have not been able to sustain them. “Asian countries are like marathon runners,” he noted. “This is the point: the sustainability of growth.”

Up to about 1980, Brazilian productivity was the same as that in South Korea. After 1980, South Korean productivity left Brazil’s far behind. Palma quipped that, if India had been a Latin American country, it would have had five financial crises during the last 30 years. In reality, it has had none. Indians have, so far, always been able to meet crises before they fully develop, and successfully defuse them.

Providing the framework for this Asian success has been industrial policy. “Industrial policy is the proper way,” said Palma. “But it takes a long time.” China, South Korea, Taiwan, India, Vietnam and others are today benefiting from decades of hard work. Moreover, erroneous industrial policy can create problems. “Industrial policy, per se, is sometimes not very effective.” And, although the manufacturing sector is “the sexy one”, the commodities sector must not be forgotten, as it can contribute a lot to economic growth.

Asia countries have also, in recent decades, invested more in their infrastructure than Latin American countries have. Investment levels in Latin America today are below the levels of 1980, whereas investment levels in Asia today are far higher than they were in Latin America. It is true that Latin America has attracted huge levels of foreign direct investment – totalling $2-trillion since 1999 – but this has barely managed to compensate for the lack of local investment.

Productive Economy

Another important factor in the success of most leading Asian economies is that the rich elites, created by economic development, reinvest the major part of their wealth back into their businesses and the wider productive economy. In Latin America, the wealthy elites tend to reinvest only a minor part (on average 30%) of their wealth back into their businesses. The one exception in Asia is the Philippines, which, like most of Latin America, had been part of the Spanish Empire for centuries. South Africa follows the Latin American pattern, not the Asian.

One thing Latin America is good at is creating jobs. Relative to economic growth, Latin America is better than creating jobs than Asia is, but Asia’s great and rapid economic growth means that many jobs are created and unemployment is low. In the case of Latin America, most of these jobs are in the service sector, and many of them are low skilled and low paid. But there is a high demand for such cheap services in Latin America, creating jobs. And a job is a job – it is better to be employed than unemployed.

South Africa, Palma pointed out, falls between Asia and Latin America, but in a bad way. Since 1994, South Africa has increased its productivity more than Latin American countries (although it has not grown its economy faster), but nowhere near as much as Asian countries have. On the other hand, it has created far fewer jobs than Latin American countries have. “You grow like Latin America and you create jobs [at a rate] like Asia – the worst of both worlds,” he highlighted. “Why does South Africa differ? Why don’t you have that capacity to generate cheap services?” The key point, he stressed, was not to get stuck with creating cheap services jobs, but to start with the creation of such jobs, and then go on to develop higher skilled, better paying jobs in due course.

Palma was addressing the recent International Conference on Manufacturing Led Growth for Employment and Equality, organised by the Trade and Industrial Policy Strategies (better known as TIPS) think tank. He is a specialist in middle-income developing countries.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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