UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

First Semester
A.Y. 2023-2024

COURSE LEARNING MODULE

ECON 1023 – Economic Development

Prepared by:

GLADYS T. TUMBALI, DBM

ECON 1023-Economic Development | 1

 School of Accountancy, Business and Hospitality
Business Administration Department
Curriculum 2018-2019

COURSE LEARNING MODULE

ECON 1023 (Economic Development)
AY 2023-2024

Lesson 18: Globalization and the New Economy

Topic: World Trends in Globalization

Asia and Globalization
Information technology and the New Economy
Asia and the New Economy

Learning Outcomes: At the end of this module, you are expected to:

- Define globalization and related concepts;

- Identify the world trends in globalization;
- Understand the role of international institutions in globalization;
- Explain the role of information technology in globalization;
- Describe the concept of the New Economy.

LEARNING CONTENT

Introduction:

Globalization refers to the ongoing economic, social and political integration of economies around the world
that has taken place since World War I. As a result, international flows of capital and labor have risen over the
decades. Trade in goods and services, and capital flows through foreign direct investment (FDI) and financial
investment in equity and debt have been accelerating rapidly between countries. Labor flows, such as
migration and tourism, have also become a global phenomenon. Consequently, international frameworks have
been set up to deal with global issues such as the safeguarding of international financial transactions and
intellectual property rights.

- There has been a growing trend toward greater political, economic and social integration of countries
within continents and also among continents. The Association of Southeast Asian Nations (ASEAN),
the Asia Pacific Economic Cooperation (APEC) forum, and the European Union (EU) are evidence of
this trend.
- In particular, there has been an increase in the international trade of goods and services that has been
facilitated by lower tariffs and the removal of nontariff barriers.
- There has been an increase in the flow of portfolio investments in stocks and bonds across national
borders as investors have become aware of profit-making opportunities in other countries, and the flow
of information regarding these alternatives has increased and become more reliable.
- There has been an acceleration in the flow of FDIs from traditional investors and a spread in FDI as an
investment vehicle for many new countries.

ECON 1023-Economic Development | 2

 - The formation of strategic alliances between companies in different countries for production, marketing,
and distribution of products has increased dramatically. There has also been rapid growth in the size
and reach of transnational corporations which have production, marketing, and distribution platforms in
many different countries.
- There has been an increase in the scope of the terms of international agencies dealing with global
issues, including the United Nations, the International Monetary Fund (IMF), and the World Bank.
- There has been an increase in the flow of both temporary and permanent migrants, as well as in the
number of applicants for migration around the world. This includes migrants within industrial countries,
particularly within Europe, as well as migrants from the developing countries.
- Tourism has become more and more internationalized as visa requirements have been relaxed.
Information about alternative foreign tourist destinations has been widely disseminated through
improvements in telecommunications, and travel to foreign locations has become easier and less
costly, as airlines have become more efficient and their routes and destinations have expanded.

Globalization has brought with it an increasing concern about the impact of greater interrelationships on the
health and stability of the world economy. Globalization and the ever-increasing usage, of information
communication technology (ICT) have caused changes to the traditional methods of production and
operations, and have created what is termed as the “new economy,” which is relatively more knowledge and
technology-based. The “new economy” will be explored in greater detail after first understanding the impact
that globalization has upon the world in general, and on Asia in particular.

Lesson Proper:

WORLD TRENDS IN GLOBALIZATION

The extent to which the world economy has become more globalized can be further appreciated by
analyzing a few trends.

International Trade

The volume of world trade has been increasing more rapidly than world income for many years. This
means that total trade as a proportion of income has risen dramatically. The impact has been greater for
countries that traded extensively in the initial period following World War II, but it has also been substantial for
large land-based economies where trade has traditionally been a smaller percentage of gross domestic
product (GDP). Some of these trends are shown in Table 12.1. World trade in exports increased more than 20
percent in the past decade, compared with the 1980s-from 18.2 percent of world income in the 1980s to 22
percent in the 1990s, according to the IMF. This is because world trade grew nearly twice as fast as world
income in the 1980s and the 1990s, on average. Current IMF figures show that the amount of world trade in
exports has escalated to 28 percent of world income in the 2000s.
Table 12.1

ECON 1023-Economic Development | 3

Financial Flows

Financial inflows that fall under the description of short-term capital/financial flows include short term
bank loans, short-term portfolio investment, such as equities, and government securities and (non-inter) bank
deposits. There has been enormous volatility in most of these components. Consider, for example, the two
components of short term credit (including trade credit) and portfolio equity investment. In the past thirty years,
there have been two surges in these investments in the developing countries.

The first cycle started in the second half of the 1970s and was the result of a surge in short-term bank lending.
There was virtually no portfolio investment in the developing countries at that time. This cycle lasted until the
second oil shock and the ensuing debt crisis in Latin America. The lending cycle, based largely on lending to
Latin America, coincided with the wave of financial liberalization that occurred in the region, particularly in the
Southern Cone countries. At its peak, fund flows totalled between US$20 and US$30 billion per year in the late
1970s and early 1980s.

The second boom began in the late 1980s and lasted until the Asian financial crisis in 1997. This boom
resulted from an increase in both portfolio investment and short-term credit. It was geographically more broadly
based than the earlier boom, extending beyond Latin America to include most of the Asian developing
countries. This boom was strongly influenced by the liberalization of capital accounts in many countries,
combined with the dismantling of exchange controls. With rapid growth in the equity markets and better
information about companies listed on these markets, there was a strong inflow of portfolio investment that
complemented bank lending. A low interest rate environment in the developed countries also made the high
return investments in these developing countries more attractive. Portfolio equity and short-term loans reached
almost US$100 million by the mid-1990s. This was more than 30 percent of total net capital inflows, and almost
40 percent of capital inflows.

Both short term loans and portfolio equity investments fell rapidly in the second half of the 1990s, the former as
a result of the Mexican crisis of 1995, and the latter following the Asian financial crisis of 1997. By the end of
that year, the combined flows had declined by about 85 percent from the peak There was a rebound in the
following years until the global downturn that began in early 2008 and continued into 2009, when both FDI and
portfolio inflows fell drastically. The volatility of portfolio equity investments and short term bank lending was far
greater than the other components of capital flows, Such as FDI which followed a more stable path, as we saw
in the previous section.

Capital inflows tell only a part of the story of the flow of funds in and out of a country. To get a full picture, we
need to consider outflows as well as inflows. Globalization has affected out flows too. As a result of the
liberalization of capital transactions and markets, the outflow of capital by residents has become increasingly
important in determining a country’s net capital flows.

To get an idea of the situation in the developing countries, UNCTAD has compiled a complete capital account
for all developing countries and a somewhat smaller group which it calls emerging market economies. In this
group are most of the Asian economies-with the exception of Hong Kong, Singapore, and Taiwan-for which the
international financial balance sheet is characterized by outflows rather than inflows of capital.

The coexistence of capital inflows with outflows has grown as global financial integration increased. It is
widespread in the developed countries where the process of integration has been going on for many years. For
example, the United States has been a net importer of capital for nearly twenty years but, at the same time, it
has been a net exporter of FDI. Lending and investment abroad by US banks and funds are not inconsistent
with massive new portfolio inflows into the stock and bond markets.

ECON 1023-Economic Development | 4

For the developing counties as a group, net capital inflows and net capital flows (subtracting capital outflows)
are recorded for the decade of the 1990s in Table 12.2. The inflow of more than US$200 billion per year was
partially offset by outflows of more than US$60 billion per year. When measured as a percentage of GDP,
there was a slight downward trend in net capital inflows between 1992 and 1996, followed by the devastating
fall as the Asian financial crisis took hold. Capital flows fell from about 3.5 percent of GDP in 1996 to about 1.5
percent of GDP in 1998, as\capital outflows increased dramatically.
Table 12.2

The third wave of capital flows to and from developing countries started in the early 2000 and is ongoing.
According to the recent UNCTAD’s Trade and Development Report (2008), capital has been flowing “uphill”--
from poor to rich countries since the Asian financial crisis in 1997-1998. Contrary to economic theory,
developing countries are exporting capital and appear to be growing faster than the countries receiving the
capital inflows. This is especially true of the developing countries in Asia, which have accumulated tremendous
foreign exchange reserves.

Foreign Direct Investment and Multinational Enterprises (MNEs)

Foreign direct investment goes beyond trade and portfolio flows as a mechanism for linking economies.
Wholly owned foreign firms or domestic firms with foreign partners serve as a continuing linkage between best-
practice foreign technology and local firms. This ongoing interface extends the globalization of best business
practices to firms in developing countries through transfers of various aspects of innovation, accounting,
management, inventory management, quality control, marketing and distribution. We studied the various
issues surrounding FDI. In this section, we review the changing pattern and size of FDI to the developing
countries as an aspect of globalization.

FDI is closely tied to the fortunes of multinational firms, and both have grown rapidly in the last thirty years.
From next to nothing in the 1970s, FDI in both the developed and developing countries has risen at a dramatic
rate. By the end of 2000; annual FDI inflows totaled about US$830 billion worldwide, with nearly one quarter
going to the developing countries. This is only about 2.7 percent of world GDP, yet it represents an enormous
transfer of investment funds, given the collective size of the world’s developing economies. By 2000, Table
12.3 shows that the FDI inflows account for a smaller percentage share of gross investment in the developing
countries compared with that for the developed countries-with the exception of Latin America and the
Caribbean which exhibit double-digit figures. This is primarily due to a higher proportion of gross investment in
these regions being fuelled by high domestic savings. By 2007, FDI inflows appeared to have slowed,
especially in the developed countries such as the United States.

ECON 1023-Economic Development | 5

 Table 12.3

What is even more surprising is that the flow of FDI has not been dramatically affected by any of the shocks to
the developing economies over this period, although FDI has fallen since the beginning of the global financial
crisis in 2008. It is true that there was a significant surge in FDI to both the developing and developed countries
during and just after the second oil shock. In 1983, the recycling of petrodollars to the Middle East coincided
with a sag in FDI to the developing countries, and as a result.

FDI to the developing countries nearly matched the flows to the developed countries. However, subsequently
the flow of FDI increased at a very rapid pace, especially to the developing countries, which grew from US$142
billion in 1986 to US$1,237.9 billion in 2000.

Thus, the flow of FDI has increased dramatically over time. The flows to the developing countries are
particularly interesting. Using a base of 100 in 1970, these flows increased twenty-five times by the mid 1990s
in current dollar terms, and by over five times in constant dollar terms. By the latter half of the 1990s) these
flows averaged around US$200 billion per year, or about 2.7 percent of world GDP.

However, in 2001, there was a dramatic decline in FDI flows-the sharpest reported since 1970 which have
been attributed to the slowdown of growth in the developed countries and the sluggish international stock
markets. The developing countries have been relatively less affected than the developed countries although
they sustained a fall of 14 percent and 59 percent, respectively (UNCTAD, 2002, p. 3). There was also a
slowdown in FDI flows in 2008 (UNCTAD, 2008).

Information on foreign direct investment by industry and the transfer of technology embodied in this transfer is
more difficult to ascertain. Generally, it would depend upon a host of factors. Some writers would even contend
that some FDI is devoid of technological transfer and is detrimental to the national interests of the recipients,
who often grant numerous tax concessions and spend money to develop sites and services for potential
foreign investors.

Foreign direct investment is undertaken primarily by multinational enterprises (MNEs). These are companies or
enterprises operating in several countries. There are various definitions of a multinational corporation. The
world’s leading authority on MNE, John Dunning (1993) says that an MNE has two distinctive features:

ECON 1023-Economic Development | 6

 First, it organizes and coordinates multiple value-adding activities across national boundaries
and, second it internalizes the cross-border markets for the intermediate products arising from these
activities. No other institution engages in both cross-border production and transaction.

Ideally, any company involved in such cross-border activities would be defined as a MNE. However, the usual
definition has a cut-off point of 25 percent or more of its output capacity/sales coming from outside the country
of origin. Estimates of the size and the number of MNEs vary, and consistent data is not available, since
different countries have different definitions and cross-border ownership is difficult to measure. The UNCTAD’s
World Investment Report, together with the work of Professor Dunning is probably among the best sources of
information on FDI and multinational corporations. The World Investment Report estimates that about 25
percent of global output is produced by MNEs. One-third of this output is estimated to come from the home
country and the rest from overseas affiliates. As the size of FDI has grown during the past decades, so have
the power, reach, and influence of MNEs. Foreign affiliated sales of goods and services in the international and
domestic markets in 1998 (US$11 trillion) was considerably larger than the total sum of world exports (US$7
trillion) (UNCTAD, 1999). Globalization has also resulted in the tremendous rise in cross-border mergers and
acquisitions (M&As) since the mid-1990s (see Figure 12.1). Such strategic alliances between companies in
different countries could be due to a multitude of reasons, ranging from an increase in efficiency to the sharing
of common resources, to capture a larger share of the market or to cut losses through restructuring. No matter
what the reason is for the alliances, their general aim is to remain competitive in the international arena.
Figure 12.1

Labor Migration

International migration of labor has been going on for centuries. There was significant migration from
Europe to the “new world” between the sixteenth and nineteenth centuries, and there were also waves of
immigration to the United States and Latin American from Asia in the nineteenth and twentieth centuries. While
there was a special set of factors underlying each wave of migration, there appear to be a few stylized facts
that are common to all international migration. Migration can be for any number of reasons: to avoid religious
or ethnic persecution, to flee a war zone or natural disaster or to seek a better life, both economically and
socially. Lumped together, these reasons for international migration can be called push factors. ‘

At the other end, there are a series of pull factors. These include the scope for greater economic Opportunity,
political and religious freedom, ease of migration, relationships with friends or family who had previously
migrated, and facility with the language and customs of the country to which potential migrants apply to enter.

Globalization has had the major effect of opening up the awareness of migration opportunities on the pull side,
as well as revealing to potential migrants the chance to improve their standards of living, through better and
ECON 1023-Economic Development | 7
more comprehensive information on the push side. Markets for labor have arisen and been publicized by
recruiting agents that advertise positions in the sending countries.

The economics of international migration and the impact that globalization can have on the flow 0f migrants is
complicated by the nature of the flow of human resources, as opposed to the investment 0f capital. The flow of
migrants is much more restricted than the flow of capital. In many ways, the flow of legal immigrants is
constrained by immigration quotas that are determined on a country-by-country basis, which may or may not
be affected by globalization.

On the other hand, the supply of potential migrants may be significantly affected by growing internationalization
of the production and distribution process for goods and services, and a growing awareness of employment
opportunities that exist in foreign countries.

Official figures on the inflow of migrants into the Organization for Economic Cooperation and Development
(OECD) countries (OECD, 2000) do not seem to show any significant increase in labor migration as a result of
the force of globalization. Instead, variations in the size of legal immigration tend to depend upon exogenous
events involving political asylum such as the Bosnian war, the breakdown of the Soviet Union, the war in
Vietnam, and so forth. It also has to do with the attitude of individual countries toward migration. As far as
illegal immigration into the OECD countries is concerned, it is difficult to measure, much less assess whether
there has been an upward trend.

How Have the Asian Economies Dealt With the Globalization Issue?

Many of the Asian economies have integrated quickly into the increasingly globalized world economy,
as we have seen in previous chapters. However, the two giants in the region, China and India, have been slow
in opening up their economic systems: It is worth looking at the policies followed by these two countries.

CHINA China embarked on a wide-ranging series of economic reforms in the late 1970s which eventually
propelled the country from an inwardly focused, highly centralized communist state to center stage as one of
the most important trading nations in the world economy. A series of internal steps were critical to that
transformation. One of the first steps that the new leader at that time, Deng Xiaoping, did was to tighten control
of population growth. This strategy, which culminated in a one-child per family policy, was quite successful in
the urban areas but met with resistance in the countryside. Eventually, they were relaxed somewhat. Still this
policy was instrumental in reducing the rate of population growth dramatically. While this policy had little effect
on the process of globalization, it had a long term effect on the growth of the labor force, which in later years
became critical to the implementation of reforms in the industrial sector.

The second reform took place in agriculture, where the household responsibility system (HRS) replaced the
commune system. In this system, the communes leased plots of land to individual households, who delivered a
fixed quota of their produce to the commune. The household kept the remainder, either to sell in the private
markets that quickly developed, or to consume themselves. These reforms had an enormous stimulating effect
on agricultural output. From 1978 to 1986, when the HRS spread to cover nearly all the communes, the value
of farm output in current prices almost tripled.

The increased incomes in the countryside contributed to a virtuous cycle of growth. Increased production and
procurement prices raised rural incomes and saving rates. Higher incomes, in turn, created demand for
consumer goods that were in short supply. To meet this demand, local governments began to direct saving into
collectively owned firms, town and village enterprises (TVEs). Increases in. farming efficiency created a pool of
labor that could work in these TVEs. As a result, industrial production in the countryside accelerated. The
TVEs’ share of industrial output rose quickly from almost nothing to more than a third of total industrial output.
ECON 1023-Economic Development | 8
During the 1980s, TVE output grew at an average rate of 30 percent per annum (Kennedy and Victor, 2001, p.
4).

INDIA India followed a policy of government controlled and directed growth for most of its history from 1947
until the beginning of the 1990s. These policies focused on the control of the economy through four
complementary policies: extensive regulation of international trade and investment, control of key sectors of
production, central control of domestic investment, and an elaborate system of licensing and regulation.

In pursuit of an import-substitution strategy, regulations were introduced to control foreign exchange

transactions and imports, with the former being allocated according to a priority list. Debt repayments received
the highest priority, followed by capital goods, raw materials, and lastly consumer goods, which were rarely
approved. Policies toward foreign investment depended upon the ability to earn foreign exchange and the
government’s attitude toward the role that foreign investment could play. Between 1957 and 1970, joint
ventures were encouraged but the first oil shock and a balance of payments crisis resulted in a reversal of the
policy. Then in the late 1970s, the policy was reversed after the second oil shock. However, by that time, India
had become one of the most isolated major countries in the world. Exports plus imports were less than 15
percent of GDP.

To control key sectors, the government nationalized a number 'of industries, including commercial banks, life
insurance, and large firms in processing and manufacturing, such as fertilizer, mining, chemicals, steel, and oil
industries. By the 19803, the government owned nearly half of India’s industrial assets. The returns were low
and efficiency poor. Despite high rates of investment, India’s growth was hampered by poor infrastructure that
further reduced industrial productivity and efficiency.

Because the financial sector was owned by the state and foreign capital investment was controlled and during
some periods, effectively prohibited, the government had a virtual lock on how investment was allocated in the
economy. The Planning Commission established investment policies for state owned firms, and directed the
private sector through its regulation and control of banks’ portfolios.

The government bureaucracy controlled all licenses to do business (both entry and exit) as well as many prices
and the expansion of industrial capacity. This regulatory control extended to all private firms as well as the
public sector. This control of capacity was introduced ostensibly to prevent duplication and reduce
“unnecessary competition? In fact, it was used to prevent new and potentially more efficient firms from entering
the market while protecting the already established, no matter how inefficient.

Industrial policy throughout this period tended to steer development toward more capital-intensive industries,
even though there were many incentives on the books for small businesses.

The end result of this bureaucratic network of controls and regulations, such as subsidies, taxes, prohibitions
and controls, was a highly inefficient and cumbersome economic system that grew slowly without much
competition or new technology. It produced the same products year after year at high costs. It did not follow its
international comparative advantage in labor-intensive products for export but rather remained isolated from
the international community, moving forward at its own slow “Indian rate of growth.” By the beginning of the
1990s, it had been left far behind in nearly every aspect by the NIEs and the countries of Southeast Asia.

MALAYSIA Malaysia initially favored the development of import-substitution strategies and heavy industries,
such as the manufacture of cars, methanol, pulp and paper, which made use of labor-intensive and assembly-
type production techniques, and emphasized domestic demand and self-sufficiency. From the mid-
1980s,.Malaysia realized the importance of foreign markets in accelerating economic growth through exports
and investment, and trade liberalization programs began in earnest. The structure of exports eventually shifted
ECON 1023-Economic Development | 9
from an agricultural base dominated by food crops, rubber, and palm oil to an industrial-related base with
manufactured goods and electronic/IT products.

The government has placed a greater emphasis on higher value and high-tech production activities to further
improve productivity levels in the export sector. Exports of electronic and related peripherals are expected to
become more important as Malaysia proceeds toward its goal of becoming a high value-added manufacturing
center. Malaysia also plans to position its service sector as a regional hub of excellence, in areas such as
transportation and education. New growth engines in the agricultural sector, in high-tech industries such as
aquaculture, agro-technology, and urban horticulture, have also been developed.

Other reforms, such as the liberalization of foreign investment and privatization, have also been implemented.
Administrative rules and regulations have been relaxed to create a more favorable investment climate-for both
private and foreign players. Formerly protected industries have had to face up to growing competition from
other players in the field, undertake the appropriate measures to increase efficiency, or risk closing down.
State-owned corporations, such as the airline and shipping companies, have also been sold off to investors.
The influx of foreign investments has also brought with it greater physical capabilities, technology transfer, and
economic revenue. Thus, such market-oriented policies have lessened government budgetary pressures and
increased overall productivity levels

THE PHILIPPINES The Philippines has actively developed an export-oriented sector, mainly agricultural-
based, to generate sufficient foreign exchange to repay debts incurred by President Ferdinand Marcos and his
cronies in the 19605 up to the mid-1980s. That particular period was characterized by systematic corruption,
patronage, misappropriation of public funds, civil unrest, and martial law, Marcos’ cronies were rewarded with
financial incentives in terms of loans at special rates, together with monopolistic control over state industries.
Thus, wealth was amassed by those in power at the expense of the public, leaving behind inadequate
infrastructures and other social problems, such as poverty and unemployment.

The Philippines has embarked on government policies such as the liberalization of exports and FDI,
deregulation; privatization, and land reforms since the late 1980s to generate economic growth and to enable it
to repay accumulated foreign debts. Such debt payments took up a large proportion of the Philippines’
government budget, thereby leading to insufficient funds for the provision of social services, such as basic
preventive health services like immunization.

Trade reforms were implemented after the fall of Marcos from power but economic development did not really
take off until the early 1990s (Henderson, 2002). Trade was liberalized and import tariffs eliminated. Domestic
manufacturing was further stimulated with the setting up of export-processing zones. In the early phases of
trade liberalization, exports were mainly concentrated in primary commodities, such as food crops, minerals,
and timber, of which the Philippines has a natural abundance of supplies and enjoys comparative advantage.
However, there has been an increase in the trade in manufactured products, such as electronic manufactures,
in recent years.

Furthermore, the establishment of the Foreign Investment Act allowed the entry of foreign investors and
attracted substantial capital inflows into the country. Annual average FDI inflows rose by more than 255
percent-from US$493 million at the end of 1990 to US$1,268 million by 2000. The openness of the economy to
global capital flows may also partially explain why the Philippines was hit by the Asian financial crisis in 1997/
1998. However, the Philippine government appears to hold the view that greater liberalization of trade and FDI,
and global integration was and continues to be essential for its economic development-this was reaffirmed by
its aims to fulfil World Trade Organization (WTO) and ASEAN Free Trade Agreement (AFTA) conditions, as-
stated in The Medium Term Philippines Development Plan, 1999-2004.

ECON 1023-Economic Development | 10

In addition, the Philippines deregulated the banking sector as well as previously protected state industries,
such as telecommunications, airlines and shipping, oil-refining and water supplies, in a move to improve the
overall efficiency and growth of the economy. Fourthly, public-private partner~ ships and the privatization of
public utilities were carried out. However, implementation has been slow (Hayllar, 2003).

Finally, land reforms have been implemented with the aim of improving the domestic effectiveness of the
agricultural sector, which accounts for two-thirds of the workforce, and to increase its competitiveness in the
world since its exports are primarily agricultural products. Land reforms were suggested as early as in 1987 but
were delayed by fierce opposition from the elite for almost a decade. About 200,0001andless farmers have
now received land parcels (Hayllar, 2003, p. 265).

Over the years, the speed and effectiveness of government reforms were to some degree hindered by a
constantly changing political leadership, which created uncertainty and lessened its attractiveness to foreign
investors. Indeed, the Philippines has experienced not less than four new political leaders in the past two
decades: President Corazon Aquino in 1987, Fidel Ramos in 1992, Joseph Estrada in 1998, and Gloria Arroyo
in 2001. Hence, the level of political stability and efficiency of government agencies and their policies have
significantly impacted on investors’ confidence and subsequent inflows of foreign investment.

Overall, the government reforms appear to have improved the Philippines’ level of openness and
competitiveness. The existence of a skilled and relatively low cost base of English speaking workforce is a plus
factor for the Philippines when competing in the global economy. Its low cost makes it particularly attractive for
global outsourcing and production strategies by foreign companies. For instance, the local Manila call centers
charge only one-sixth of the costs (US$200-300 per month) incurred in southern United States and offer
excellent quality service (Henderson, 2002). The Philippines has also been moving up the production scale
toward the manufacture of more sophisticated value-added products, such as electronics and other high-tech
products from agricultural food processing, hence appearing well set for competition in the international arena.
However, critical issues such as the unequal distribution of income and lack of adequate infrastructure need to
be resolved for a more effective usage of all available resources.

Has Globalization Been Good for Developing Countries?

There are now many critics of globalization. This is partly a result of the acceleration in the pace of
globalization in the past two or three decades and’ the information and technological revolutions that have
increased efficiency and slashed the costs of transportation and communication. Looking at the longer sweep
of history, globalization has been taking place since the first explorers set out to see what was over the
horizon.

The focus of the criticism of globalization seems to be primarily on the tendency for the richer industrial
countries to continue to exploit the developing countries, despite the growth of the global trading system and
the establishment of the WTO. The critique of the industrialized countries has several components.

INDUSTRIAL COUNTRIES DO NOT TRANSFER ENOUGH TECHNOLOGY TO DEVELOPING COUNTRIES.

The argument here is that while some technology is transferred, it is almost never at the cutting edge, and
there is often very little actual transfer of technology. Korea is a case in point. Much of the technological
transfer from its partners in the automobile industry was made only at the urging of the Korea partner. In the
case of Daewoo, General Motors helped a textile company to become an international conglomerate not
because of its own vision but because of the vision of its Korean partner.

Generally, multinationals are content with getting by with a limited amount of technological transfer. In the case
of the North American Free Trade Agreement (NAFTA), the agreement prohibits the transfer of technology to
ECON 1023-Economic Development | 11
local companies. In Malaysia, the evidence is that local firms have benefited to some extent from the transfer
of technology in the computer industry but not nearly as much as the local partners of multinationals. In the
Philippines, there has also been very little transfer of technology to local firms.

INTELLECTUAL PROPERTY OF INDUSTRIAL COUNTRIES IS PROTECTED AT THE EXPENSE OF THE

DEVELOPING COUNTRIES The protection of intellectual property is required in order to provide incentives for
new research and development. This is why patent laws were developed and enforced. However, the
developing countries argue that there should be exceptions in obvious cases where the public good of the
world economy would be better served by reducing the reach and application of some of this protection.
Maintaining a high price for AIDS medicines that help HIV/AIDS patients live longer has long been the policy of
drug companies. Recently, they have acceded to pressure to provide subsidies to poor African countries where
the drugs could have a significant impact in alleviating the pain and suffering of large numbers of people with
HIV/AIDS. In the view of many trade economists, this is a royalty collection issue and not a trade issue. The
World Bank has estimated that enforcement of intellectual-property rules will result in a transfer of US$40
billion from the poor countries to companies in the industrial countries (Rosenberg, 2002). Critics of the WTO
and globalization argue that this is unfair.

SUBSIDIES TO FARMERS IN INDUSTRIAL COUNTRIES ARE IN VIOLATION OF FREETRADE Food

subsidies to farmers in the industrial countries lower prices in the international market, increase the export of
farm products from these countries, and reduce the imports from developing countries. European, American,
and Japanese farmers receive large subsidies from the government, as much as 35 percent of income in
Europe, and 20 percent in the United States (Rosenberg, 2002). This allows them to export farm products at
prices below their production cost and undercut prices in other countries where no subsidies are given. Since
farmers in the developing countries are often in the poorest income categories, these policies have a strong
negative impact on poverty in these countries.

THE STRUCTURE OF AID, TECHNOLOGICAL TRANSFER, AND LOCAL CONTENT REQUIREMENTS

MAKE IT DIFFICULT FOR AGRICULTURAL EXPORTERS TO MOVE UP THE LADDER TO EXPORT
MANUFACTURED GOODS This line of reasoning is more relevant in Africa than it is in Asia. Nevertheless, it
is important to recognize that the power of moving away from commodities cannot be underestimated. Prices
for commodities such as coffee, cocoa, rice, sugar, and tin have dropped dramatically over the last twenty
years, and this deterioration in terms of trade is an important reason that living standards in sub-Saharan Africa
have fallen so dramatically. Countries in Asia, particularly the Central Asian republics, need to bear these
trends in mind.

INTERNATIONAL AGENCIES SUCH AS THE IMF AND THE WORLD BANK HAVE NOT SERVED THE
lNTERESTS OF THE DEVELOPING COUNTRIES This blanket criticism has something to do with the
frustration that many poor countries feel when they see others move ahead while they are falling further
behind. Some of the criticism is well deserved, but these agencies are making efforts to reform themselves and
change. One problem in the past was that the IMF had applied the same remedy for fill cases of financial and
macroeconomic distress. In response to these criticisms, a recent panel report by a group advising the US.
Congress on international financial institutions suggested that the IMF should confine itself to short-term crisis
assistance. Furthermore, the policies for structural reform that have worked well in Asia seem not to have
worked as well in Latin America. Yet they have not grown as rap= idly as Asia, with a few exceptions. Many
economists argue that this is because of inherent structural problems, such as uneven income distribution and
economic control by small elites, which the international agencies are unwilling to address.

IMMIGRATION HAS BEEN RESTRICTED EVEN AS CAPITAL HAS MOVED MORE FREELY Immigration
laws have not been adjusted as quickly as regulations on the international flow of other resources. One way to
ECON 1023-Economic Development | 12
address this problem would be to extend schemes for short-term migration that already exists in some areas.
For example, short-term immigration of Turkish workers to Germany, workers from Indonesia to Malaysia, as
well as from several countries to Singapore, and from the Asian economies to the Middle-East oil producers
already exist. By extending these kinds of arrangements in a formal way, there could be greater benefits to
other developing countries. Dani Rodrik (2002) estimates that it could generate US$200 billion annually in
wages to the poor, as well as additional technological transfer.

Henceforth, globalization is a phenomenon that will have a life of its own, a trend that will affect the lives of
millions of people. By harnessing its beneficial aspects and minimizing its detrimental consequences greater
progress can be made in transferring resources and taking advantage of comparative advantage. The point of
this section is that there 18 still a long way to go.

ASIA AND THE “NEW ECONOMY”

A Taxonomy of Countries

The post industrialization transition to a “new economy” has been widely discussed in the United
States. As part of that transition, the service sector has become dominant. It employs the major proportion of
the labor force and makes the largest contribution to value-added.

In the United States, computers and electronic data processing and interchange have penetrated all levels of
the economy, and the use of information technology in the banking and finance sectors and industry is
widespread. More recently, the use of the Internet has blossomed and is being used for retail sales (Business-
to-Customer, B2C), purchases by businesses (Business-to-Business, B2B), and for inventory and
management purposes.

In Europe, the use of the Internet is not as widespread but it is similarly well developed in the use of IT in
banking and finance and for certain accounting and management functions.

SINGAPORE Singapore is at level 1, and it is top in Asia (see Table 12.15). Hong Kong follows closely behind.
The progress of the information economy is quite advanced, with BZB electronic commerce worth over US$50
billion in 2000 (EIU, 2003).This is partially due to the strong presence of multinational companies in the
country. B2C trails behind B2B, but there has been a rise in online purchases, Internet banking, and share
trading in recent years because of its user-friendliness as well as its well established electronic payment mode.
The provision of a multitude of interactive government services, such as payment of utility bills and income
taxes, can be found at a single web site http://www.ecitizen. gov.sg, thereby eradicating unnecessary
duplication of services and improving overall efficiency of the government bodies. With regard to consumers,
two out of five Internet users in Singapore enjoy broadband services, but a recent report pointed out that the
actual number of subscribers is comparatively low, at 300,000 out of 1.2 million users (The Straits Times, April
17, 2003). Hence, there appears to be space for the further growth of information service providers (ISPs).

ECON 1023-Economic Development | 13

 Table 12.15

CHINA China seems to be concentrating on the first stages of the information revolution, or what the author
calls electronic data interchange (EDI). This involves simple things like e-mail, electronic bulletin boards,
ATMs, and other electronic bank transfers. They have not moved to the next level, which includes inventory
management, electronic catalogs, and point-of-sale data gathering. They have also not yet developed BZC and
BZB transactions. Thus, China would definitely be classified under level 4.

INDIA India is also definitely at level 4, although there are sectors of the Indian IT industry that are very highly
developed. Generally, however, the information economy is only evident in a few best practice firms and the
financial sector.

THE PHILIPPINES AND MALAYSIA In Southeast Asia, the Philippines and Malaysia are definitely at levels 3
and 4, respectively. They have electronic banking and stock exchanges, e-mail, and other electronic transfers
and management techniques. They are also beginning to use the Internet more effectively in business
dealings.

THAILAND Thailand is at level 4. They have basic EDI, online trading, and some Internet banking. The last is
held back by the lack of electronic legislations, particularly the long-awaited passing of the Electronic
Transaction Bill which was supposed to be enacted in 2000. Hence, business and banks alike have delayed
going online. Only a small fraction of the local business (15 percent) engages in electronic supply chain
management (EIU, 2003).

INDONESIA Indonesia is also at level 4. It has enabled consumer services such Internet and mobile phone
banking, which started taking off in 2000. B2C is the predominant form of e-commerce, and much greater than
B2B. Wireless commerce is still in the process of development and its potential seems promising with its large
cellular market. The government has also signed an agreement with Malaysia for the electronic exchange of
export data in 2000.
ECON 1023-Economic Development | 14
VIETNAM Development of the new economy in Vietnam is still in its infancy, and has been hampered by its
lack of developed telecommunication infrastructure and limited penetration of users. Internet usage remains
minimal, though the total number of Internet users had risen to 1.5 million by 2002, but it is still less than 2
percent of the total population (International Telecommunications Union, 2003). The risk of cybercrime and
piracy is high since regulations for the legislation environment are not quite in place. Thus, it is placed at level
4 in terms of technological sophistication.

The Potential Impact of the “New Economy” on Developing Asian Countries

GROWTH OF TRADE WILL CREATE ADDITIONAL OPPORTUNITIES The volume of world trade has been
growing faster than income for several decades and barriers to trade have been falling rapidly More openness
in trade and also in the flow of capital should facilitate the spread of the “new economy” to the emerging
economies, particularly those for which international trade has played a significant role in economic
development. Within Asia, there are many countries that fit into this category. All of the NIEs are heavy traders.
In Hong Kong and Singapore, the volume of trade is as large, or larger than its GDP. Furthermore, the level
and sophistication of telecommunications, information technology, and computers are very high.

KNOWLEDGE INTENSITY AND TELECOMMUNICATIONS/COMPUTERS WILL CREATE OPPORTUNITIES

FOR THE EXPORT OF SKILL-INTENSIVE SERVICES Singapore, India, and the Philippines have already
developed substantial software and data entry platforms in the past decade. In the future, this expertise will be
extended to help these economies to enter into the knowledge and information aspects of the “new economy”
more fully. In the case of India, there is a risk of dualism arising as the modern technology sector outpaces the
more traditional sectors of the economy.

GROWTH OF THE INTERNET COULD CREATE A MORE LEVEL PLAYING FIELD The capacity of poorer
countries to market retail products and to bid for subcontracting jobs in the industrial countries could very well
be enhanced by the spread of the Internet. However, the extent of this penetration will depend greatly on
whether these developing countries can compete in this market by supplying quality products or inputs in a
timely manner. The Internet has the capacity to cut the search costs and improve economic efficiency but only
if this new technology IS embraced by a wide section of the economy. If this proves successful, new Internet
companies will be able to take advantage of economies of scale in a truly world market. There are a few
success stories in the developing countries that show the potential for the “new economy” to spread quickly.

OPPORTUNITIES FOR ACCESS TO CAPITALWILL INCREASE AS FDI GROWS AND ASTHE WORLD
STOCK MARKETS BECOME MORE INTEG RATED There are a number of instances where new high tech
companies in developing countries have been able to access venture capital funds from the industrial
countries. China managed to procure US$1 billion from U.S.-based venture capital fund, IDG, for investment in
its Internet businesses in 1999. Hong Kong’s Pacific Century Cyber Works and two other US investment funds
have also set up a US$1.5 billion venture capital fund to invest in emerging Internet companies. Local venture
capital funds, although not as much as those from the developed countries, have been set up, particularly
within major business centers of Southeast Asia and Hong Kong. There is anecdotal evidence that some US$5
billion venture capital flowed into the Asian high tech industry in 1999 (Darrow et al., 2000).

THEREWILL BE GREATER PAYOFFSTO IMPROVING EDUCATION AND COMPUTER SKILLS There is

substantial evidence in the theory of human capital that the returns to education are quite high. The emphasis
in the past had been on returns to women’s education and the synergies that these investments have with
health, fertility, population growth, and infant mortality. In the future, there will also be high returns to
investment in vocational and tertiary education, especially in the fields of computer science, software
development, and the Internet. Many of the opportunities for training can be developed by the private sector.

ECON 1023-Economic Development | 15

Already there has been a rapid expansion of training in these occupations in Thailand, the Philippines, India,
Singapore, and Malaysia. Most of these facilities have sprung up in the private sector and they should be
encouraged. One of the risks of such training is that these IT specialists may be recruited by foreign
companies after their training, thus contributing further to the brain drain. This is all the more reason for
encouraging the private sector to engage in training, as there will be no wastage of public resources.

MORE OPPORTUNITIES FOR VENTURE CAPITAL, MERGERS AND ACQUISITIONS, AND FOREIGN
PARTNERSHIPS AND ALLIANCES WILL ARISE The emphasis placed on the knowledge sectors in Hong
Kong and Singapore is a good example of this trend. They have also formed sizeable government sponsored
venture capital of their own, such as Hong Kong’s US$100 million capital pool, and Singapore’s US$1 billion
Technopreneur fund (Darrow et al., 2000). Moreover, the alliances that have been developed in Taiwan are
interesting. Their experience has shown that even small and medium-scale industries can compete
internationally. They have been able to develop a global strategy which emphasizes the transfer of production
lines that have lost its comparative advantage to other countries, particularly China, where the labor costs are
cheaper but where Taiwan can still take advantage of its marketing and distribution networks worldwide. This
shows that Taiwan seems to be well adapted to the Internet and the “new economy." Small and medium-sized
enterprises (SMEs) in Taiwan have also forged a series of strategic alliances with firms in other countries,
particularly in the computer and electronics industries, so that they can cover the globe with their products.
This network is strategically placed to take advantage of the growth of the “new economy” and the Internet.

*** END of LESSON ***

REFERENCES

Textbooks

Dowling, J.Malcolm, Valenzuela, Ma.R.,Brux, J. (2019) Economic Development Philippine Edition. Cengage
learning Asia Pte Ltd.

WARNING: No part of this E-module/LMS Content can be reproduced, or transported or shared to others without
permission from the University. Unauthorized use of the materials, other than personal learning use, will be penalized.
Please be guided accordingly.

ECON 1023-Economic Development | 16