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Moderator:  Calla Wiemer (calla.wiemer@acaes.us)

Review of Keun Lee, The Art of Economic Catch-Up

Cambridge University Press, 2019.

The received image of catch-up growth has developing countries following steadfastly along a path trodden by their predecessors. Keun Lee, professor of economics at Seoul National University and 2014 winner of the Schumpeter Prize, upends that image arguing that if latecomers aim merely to follow in the footsteps of countries that have gone before, they will never catch up. Rather, each country must find its own way to advance based on cutting-edge innovation along ever shifting frontiers.

Sticking too long to the historic path of frontrunners is a surefire way to end up in the "middle income trap". The follower route to catch-up begins well enough with a low income country absorbing imported technologies and models of production, typically with the aid of foreign direct investment or production contracting. At an early stage of development, this approach helps build capabilities in technology, organization, and global engagement. Over time, workers become more productive, wages rise, and saving increases to support investment in physical and human capital. But this model loses momentum as higher production costs undermine competitive advantage vis-a-vis new up-and-comers.

Breaking out of the trap requires a development strategy centered on innovation. Lee packs the book with examples of developing countries finding places on technological frontiers and synthesizes these examples into replicable elements of a strategy. Specifically, "detours" are instrumental when the middle income trap begins to bind. Up to that point, reliance on imitative production techniques and global value chains is a boon to development. To foster capacity building in innovation, however, countries must shrink their participation in global value chains and expand their scope of domestic value added activity. Korea followed such a course in automobile manufacturing, entering the industry by carrying out final assembly for Ford, then forming a joint venture with Mitsubishi, and ultimately collaborating with a British firm to develop an engine and launch its own brand, the Hyundai. (p. 61) The long game is to then re-enter the global value chain at a higher return position based on provision of design, marketing, and financial services while contracting out the lower return manufacturing work.  

"Leapfrogging" involves skipping over a receding generation of technology to stake a position in the emerging generation. China's Huawei succeeded in doing this in telecom systems. Catapulted by strong government support both in research and development and in large-scale purchase of the product, Huawei was able to claim the lead in 5G technology. (p. 171) Industries with short technology cycles are especially amenable to leapfrogging. Quick obsolescence of older technologies can leave the dominant players of one era resting on their laurels, slow to give up a good thing. 

"Flying on a balloon" takes the rider through a window of opportunity momentarily unimpeded by entrenched incumbents or other barriers to entry. An example is India's move into the new product space of information technology services. The opening was created by a technology shift from localized computer hardware to client-server systems in the late 1980s. This generated a need for software development and maintenance services that could be provided remotely. India was well positioned to take advantage of the opportunity given trained technicians freed up by the exit of IBM under a shift in government policies, and English language fluency was also a plus. (pp. 174-6) Multiple Indian firms pounced on the opportunity and continue to thrive in this sector.

Innovation-based catch-up can be facilated in a number of ways. First, big business conglomerates can contribute by way of:  funding for research and development; capacity for cross-subsidization of new ventures; shared managerial talent; recognizable global identity; and internal transactional efficiencies in countries with weak institutions. In China certainly, and in Korea as well, state ownership of enterprises has been instrumental in achieving scale and mobilizing resources for R&D. Second, government can provide R&D support through public or private institutions or public-private collaborations. Third, a nuanced approach to protecting intellectual property rights can help nurture innovative capacity, a thesis Lee has developed in a post on this blog, "Intellectual Property Rights in Economic Development: The Korean Experience". Put briefly, at an early stage of development, modest technological advances should be protected under petit patents with implementation of a full-blown patent regime slow-walked to allow diffusion of imported technologies while domestic innovation capacity gains maturity. Finally, education is all-important for innovation led development.

Lee's take on catch-up growth is inspired and liberating. It augurs hope, for example, to the Philippines, where there is much lamenting of "development progeria", or the premature ageing into a services economy. Indeed, Lee is explicit in an aside that an approach to development based on "the continuous emergence of new technologies ... does not discriminate service in favor of manufacturing." (p. 197) His citing of India's success in IT services could equally apply to the Philippines for business process outsourcing. The essence of the "art of economic catch-up" is that countries should exploit whatever particular frontiers serve to their advantage and not feel bound by any fore-ordained, standardized notion of a pathway.

This insight resonates all the more as the world navigates the 4th industrial revolution. Automation is broadly eliminating the kinds of low-skill manufacturing jobs that Korea and Taiwan, and more recently China, relied on to jump start their economic development. Yet Lee is optimistic that Southeast Asia in particular is poised for "leapfrogging into the smart factory system". (p. 231) Fourth industrial revolution technologies are shaping up to be highly disruptive of existing supply chains and organizational structures. This will create constant roiling of entry points for latecomers. Pressure to address climate change will add to the flux. The trick will be to take advantage of ever changing opportunities.

To conclude: this book is a real eye opener and a call to step up.

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