A number of countries in Asia, North Africa and the Middle East have developed and are still developing at a pace that is unprecedented in human history. Understandably this change has stirred up a great deal of emotions ranging from high excitement to bitter consternation both in those countries and in the rest of the World.
Some people in the developing countries are happy for the progress they are making but others are fearful of losing the familiar lifestyle they grew up with. As for the rest of the World, some people see expanded opportunity for trade and commerce while others see a potentially damaging competition rising to challenge them. And the question now is this: How do these countries do it anyway?
Much has been written about the bolts and nuts of the industrial plan that each country has adopted but little was said about the social impact that the phenomenon of rapid industrialization is having on the ordinary people. Even less was said about the three-way interplay between the society, the government and the phenomenon. I try to touch on some aspects of that interplay in this discussion.
When a program of industrialization is adopted in a country and the economy begins to improve, a well documented trend is seen to develop; infant mortality drops, people live longer and all this leads to families becoming larger. Although these are welcome vital signs, the phenomenon itself hurts the economy in two ways. First, it eats up the savings of the family and thus reduces the level of investment. Second, it swells the population of the country and thus keeps the per capita income from rising as high as it can.
Sooner or later the government realizes that the economy has the potential to grow at an annual rate of 10% or more but that the high rate of birth is moderating the growth; and the idea of initiating a program of family planning is studied seriously. This happens when the big wigs in the government are forced to come to grips with the tough choices they have to make.
They see that they could enact a one child policy like it was done in China or they could encourage the practice of vasectomy like it was done in India. However, both of these methods are intrusive measures that quickly became unpopular in those two countries, and they were too difficult to police anyway. Not many big wigs dwelt on these ideas for long.
And because measures such as these are unthinkable in most other countries, especially in the Middle East and North Africa, an alternative crept into the system almost imperceptibly. Here, the economic factor became a method of family planning. All indications are that this alternative did not come by design but came by a process of natural evolution made inevitable by the force of necessity.
The economic factor came out of the notion that when young men and women turn optimistic about the future, they tend to get married and have children early in life. What materialized in response to this trend was a disincentive that reversed the trend. It did so by encouraging the young to put off marriage to a later date. Thus, the young were encouraged to do something against their grain not because the law of the land nudged them to do so but because the law of economics nudged them to do it.
Governments contributed to the achievement of that goal by preventing the wages and salaries from growing fast enough even when the economy improved considerably. Thus, most of the growth in the economy that would have gone toward consumption was collected as taxes and the money utilized to improve the infrastructure of the country.
These measures were relatively easy to implement because they only involved the local scene. But since those emerging economies are not isolated from the rest of the World, other measures were taken with regard to foreign trade. To this end the governments wanted to keep the exchange rate stable and the value of the currency relatively low for as long as possible given that it was inevitable the currency will be taken on a rollercoaster ride.
This movement of the currency happens because when a country begins to export, the currency firms up. But as the middle class begins to form and the people gain confidence that the good times are here to stay, they want to consume some of the goods they do not yet make locally. They import such goods from abroad and when this is added to the demand for machinery and for raw materials, it causes the local currency to drop.
Eventually a point is reached when the country exports more than it imports and the situation is reversed causing the currency to appreciate again. But when this is seen to crimp the export capabilities of the country, the government intervenes to keep the value of the currency low so as to encourage export.
Eventually a set of regulations is put in place to control the situation but the government also takes into account what happens on another front. It is that when the local people become savvy enough to set up businesses that can trade with the rest of the World, the government wants to protect them from competition. But as the businesses grow strong enough to hold their own, the government eases up the support to let foreign competition force an improvement in local productivity and the quality of the products.
In view of all that, the question is this: What does the mix of policies look like that accomplishes those goals? Of course, every country is different from the other and every phase in each country’s development is different from the previous. Thus, there will be variations on the policies that are adopted at various times and various places but they will all have a few things in common as discussed below.
First, whereas the compensation package for labor in the developed countries reaches two thirds of the national income, it scarcely surpasses a quarter of the national income in the developing countries. The difference between the two levels is the sum of money that is utilized to build the infrastructure of the country and to launch the big projects.
Here, the word infrastructure stands for two sets of things. It is the hard structure such as the roads, bridges, hydro and telephone lines, even new cities, and it is the soft structure such as the training of teachers, business managers, engineers and the like. Many of these people are sent abroad to get trained on the most up to date methods of doing things, and many more are trained at home by local teachers and by foreigners who are invited into the country for the job.
Second, the setting up of industries that have the tendency to foster consumerism is at first discouraged in favor of producing the parts and components for such industries. The most notable candidate in this category is the auto industry. The developing countries avoid it at the beginning because cars use too much raw material when they are made and too much energy after they are made.
But the auto industry is so large worldwide that you cannot avoid getting into it if you want to prosper as a nation. Therefore, those countries get into the business of producing parts and components for the industry to use as spare parts locally and to export the rest. This allows the countries to be part of the industry while putting off the assembly of cars until such time they are ready to let the economy grow more by internal consumption than by export.
Third, except for the mortgage lending institutions whose establishment is encouraged especially in the countries where the resources for building material are plentiful, the consumer lending institutions are discouraged from setting up shop. The net effect is that towns which look every bit like an industrial town in the developed World are inhabited by people who must save all the money they will need to buy a big ticket item.
Also, any sense of a foreign insurance company setting up shop in those countries is strongly resisted by the governments because insurance is seen as making money off the fears and misery of the people without contributing one iota to the industrial development of the country.
But when these countries evolve far enough to want an indigenous insurance industry that stands on sound modern practices, they allow a select number of foreign insurance companies to set up shop on their territory. The purpose here is to give their own people the opportunity to acquire hands on experience in the field, something they will use at a later date to expand their nascent industry.
Only then does the capacity of the insurance companies to provide the marketplace with liquidity for investment and for the expansion of the economy is recognized. In the meantime, however, the people go without the protection that a vibrant insurance industry can provide and remain content with whatever protection the government can provide if any.
Fourth, as the economy develops and its requirements evolve in terms of the machinery it needs to continue developing, the country gets into the production of these machines or parts thereof. The government does it by negotiating with the foreign suppliers a deal whereby the technology is transferred and the licenses are granted to the developing country so as to enable it to participate in the production of what it consumes. The same sort of deal is also negotiated where large quantities of consumer items are used by the citizens of the developing country.
In sum, what took the developed countries two centuries to accomplish, the developing countries aim to accomplish in a quarter of the time. A number of them have had such brilliant successes already that no doubt exists the other countries will do as well. And the best thing we can do in the West apart from learning a thing or two from them is to behave in such a way as to be invited to the party when they celebrate.