Korea and the BICs (Brazil, India, China): Cthi Catching Up Experiences Carlos A. Primo Braga, Vandana Chandra, and Israel Osorio Economic Policy and Debt Department, PREM, The World Bank
Outline 1. Introduction 1. Does Technological Catch Up Matter? 2. Theoretical Background 3. Measurement Variables 4. Catching up Experiences 1. Korea 2. China 3. Brazil 4. India 5. Empirical Model 6. Conclusion
1. Motivation What is our paper about: Catch up between Korea and the BICs in a global market (using industry level data) Objective: To analyze the interplay between competition and innovation in catch up Analysis focuses on: Comparison of different performances among Korea, China, Brazil and India Testing of Aghion et al. model
1.1 Catch up in income per capita: Korea and Brazil Catching up with OECD Countries High Income OECD Singapore High Income non OECD Brazil South Korea Lower Middle Income Source: World Development Indicators
1.1 Catch up in income per capita: China and India in the Catch Up Game China Lower Middle Income India Low Income Source: World Development Indicators
12Catch 1.2 up in productivity: labor productivity, 1960 2000 Source: Penn World Tables
1.2 Catch up in productivity: Total Factor Productivity Growth Annual % Source: Authors estimates using Penn World Tables
2. Theoretical Background Conventional wisdom: Competition (e.g., trade liberalization) leads to productivity growth and innovation. Schumpeterianmodel: model: Innovation needsrents ; too much competition can be bad for innovation. New Sh Schumpeterian Model: Whether competition is good/bad for innovation and growth depends d on the distance to the technological frontier (inverse U shaped relation between competition and innovation; Aghion, Howitt, et al.).
3. Measurement Variables Measures of Competitiveness Policy Variables 1. Productivity it 1. Openness to foreign competition Value Added per Worker Source: UNIDO S INDSTAT 2. Competitiveness in the International Markets Revealed Comparative Advantage Source: Comtrade Tariff levels Source: TRAINS 2. Export orientation Exports as share of output Source: Comtradeand d UNIDO S INDSTAT 3. Technological content Technology definition applied to exports Source: Lall (2000) and Comtrade Distance to the technological l frontier For Brazil, China, and India a relative measure of Productivity Export Orientation in comparison with South Korea
3.1 Labor Productivity and distance to the technological frontier Textiles 0 2 0 40 60 80 100 V.A. per Worker (Korea=100)- product 321 V.A. per Worker (Current '000 US$/worker) - product 321 0 10 20 30 40 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 KOR IND BRA CHN KOR IND BRA CHN Product: Textiles Source: UNIDO Industrial Statistics Database, Rev. 2 and 3
3.1 Labor Productivity and distance to the technological frontier Electrical machinery 100 60 80 V.A. per Worker (Korea=100)- product 383 V.A. per Worker (Current '000 US$/worker) - product 383 0 20 40 0 2 60 80 100 0 40 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 KOR IND BRA CHN KOR IND BRA CHN Product: Machinery, electric Source: UNIDO Industrial Statistics Database, Rev. 2 and 3
3.1 Labor Productivity and distance to the technological frontier Transport equipment V.A. per Worker (Korea=100)- product 384 V.A. per Worker (Current '000 US$/worker) - product 384 0 20 40 60 80 0 20 40 60 100 80 1980 1985 1990 1995 2000 2005 1980 1985 1990 1995 2000 2005 KOR IND BRA CHN KOR IND BRA CHN Product: Transport equipment Source: UNIDO Industrial Statistics Database, Rev. 2 and 3
3.2 Revealed Comparative Advantage Textiles RCA, 321 Textiles 2 4 0 2 6 8 10 1970 1980 1990 2000 2010 BRA IND CHN KOR Source: UN Comtrade - concordances between SITC and ISIC Codes
3.2 Revealed Comparative Advantage Electrical Machinery RCA, 383 Machinery, electric 0.5 1 1.5 2 2.5 1970 1980 1990 2000 2010 BRA IND CHN KOR Source: UN Comtrade - concordances between SITC and ISIC Codes
3.2 Revealed Comparative Advantage Transport equipment RCA, 384 Transport equipment 0.5 1 1.5 1970 1980 1990 2000 2010 BRA IND CHN KOR Source: UN Comtrade - concordances between SITC and ISIC Codes
3.33 Competitiveness (Tech Definition) Sh hare of pro oducts 80% 70% 60% 50% 40% 30% 20% 10% 0% South Korea: Export competitiveness and catch up in products with a revealed comparative advantage 1980-8484 1985-8989 1990-9494 1995-99 2000-0404 2005-0606 Low Tech 1 Low Tech 2 Med Tech 1&2 Med Tech 3 High Tech 1 High Tech 2 Source: Authors calculations using UN Comtrade database and Lall s (2000) technology definition
3.33 Competitiveness (Tech Definition) Share of pr roducts 80% 70% 60% 50% 40% 30% 20% 10% 0% China: Export competitiveness and catch up in products with a revealed comparative advantage 1980-84 84 1985-89 89 1990-94 94 1995-99 2000-04 04 2005-06 06 Low Tech 1 Low Tech 2 Med Tech 1&2 Med Tech 3 High Tech 1 High Tech 2 Source: Authors calculations using UN Comtrade database and Lall s (2000) technology definition
3.33 Competitiveness (Tech Definition) Sh hare of pro oducts 40% 35% 30% 25% 20% 15% 10% 5% 0% Brazil: Export competitiveness and catch up in products with a revealed comparative advantage 1980-84 1985-89 1990-94 1995-99 2000-04 2005-06 Low Tech 1 Low Tech 2 Med Tech 1&2 Med Tech 3 High Tech 1 High Tech 2 Source: Authors calculations using UN Comtrade database and Lall s (2000) technology definition
3.33 Competitiveness (Tech Definition) 60% India: Export competitiveness and catch up in products with a revealed comparative advantage Sh hare of pro oducts 50% 40% 30% 20% 10% 0% 1980-8484 1985-8989 1990-9494 1995-99 2000-0404 2005-0606 Low Tech 1 Low Tech 2 Med Tech 1&2 Med Tech 3 High Tech 1 High Tech 2 Source: Authors calculations using UN Comtrade database and Lall s (2000) technology definition
3.4 Competition (weighted tariffs) South Korea South Korea: Reduction in tariffs (weighted, %) 18 rates (%) Weighted tariff 15 12 9 6 3 0 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Textiles Iron and steel Fabricated metals Electrical machinery Professional &Scientific equip Wearing apparel Non-ferrous metals Non-electrical machinery Transport equipment Source: TRAINS
3.4 Competition (weighted tariffs) China 90 China: Reduction in weighted tariffs (%) 80 70 Transport equipment 60 Wearing Apparel 50 40 Non-metallic mineral products Textiles 30 Non-electrical 20 machinery 10 Iron and steel Food Products 0 Non-f errous metals 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Food Products Textiles Wearing Apparel Industrial chemicals Petroleum refineries Non-metallic mineral Iron and steel Non-ferrous metals Fabricated metal pro Non-electrical machinery Electrical machinery Transport equipmen Source: TRAINS
3.4 Competition (weighted tariffs) Brazil 50 Brazil: Weighted tariff rates (%) 45 40 Electrical l machinery 35 30 25 20 15 Iron & steel Non-electrical machinery Food Manuf. Transport equipment 10 5 0 Industrial chemicals Petroleum refineries Brazil 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Paper & products Printing, publishing and allied industries Industrial chemicals Petroleum refineries Iron & steel Non-electrical machinery Electrical machinery Transport equipment Food Manuf. Source: TRAINS
3.4 Competition (weighted tariffs) India 100 India - Trade liberalization (weighted tariffs %) ff rate (%) Weighted tari 75 50 Wearing apparel Non-elect rical machinery Transport equipment 25 Food product s Iron and st eel 0 Petroleum refineries 1990 1992 1994 1996 1998 2000 2002 2004 2006 Food products Textiles Wearing apparel Industrial chemicals Petroleum refineries Iron and steel Non-electrical lmachinery Electrical l machinery Transport equipment Source: TRAINS
5.1 South Korea, benchmark R id l f i / l i i Rapid structural transformation/selectivity High savings rate/macro stability/education Outward looking strategy (contingent export promotion) Trade liberalization (late 1980s: Average t= 18.1%, 1988) Distance shortening policies: Seeding and expansion of chaebols Increasing focus on industries with high technological content Support to investments in R&D/focus on building indigenous technological capabilities
52China 5.2 Structural t ltransformation/selectivity it Shift towards high tech industries Export led growth Distance shortening policies: Allow FDI flows conditional on technology transfer and capability building Longterm finance Foster industries with high technological content Attention to government business interface Growing investments in S&T/R&D
53Brazil 5.3 Brazilian Miracle 1967 74/79, 74/79 followed by the Lost Decade Cth Catch up strategy t relied on ISI (icluding on capital goods) Strong anti export bias only began to fall in the 1990s (trade liberalization and export credits) Diffuse distance shortening policies Unstable support for investment in S&T/R&D Barriers to absorption of embedded knowledge (capital goods protection; FDI driven by domestic market) Policies to enhance innovation competencies of firms were not able to correct for weak educational endowment Weak linkages between private sector and innovation sstems(basic science orientation)
54India 5.4 Complex web of government regulations lti and controls during the 1960s 90s (barriers to entry/exit) Late and slow pace of tradeliberalization Limited structural transformation towards high tech industries Distance shortening policies Hand picked industries, but no export orientation Discouraged/Deterred FDI flows Financing provided by the government, but the chosen industries focused onthe domesticmarketmarket Did not foster industries with high technological content Heavy investment in technical skills law of unintended consequences (services revolution)
5.5 Comparison of competition and innovation i policies i Competition FDI (Foreign Competition) x Policies Relaxed Antitrust Regulation x Korea Brazil China India Import Substitution x x Export led growth x x Distance shortening / Innovation policies Source: Authors diagram Selectivity Few/Hightech/Performance x x FDI (Conditional Technology Transfer) x x x Fiscal Incentives x x x x Financing i x x x x Policies to strengthen linkages between private sector and academia/public sector X Weak x Weak Science & Tech Education x x x Science & Tech Parks x x
5.6 South Korea Selectivity in economic transformation from low to high tech industries Share in total Manufacturing Value Added Rank in Rank in Korea 1980-84 1995-99 2000-04 1980-01 2004-05 Machinery, electric 10 18 24 3 1 Transport equipment 8 12 14 6 2 Machinery, except electrical 4 10 10 12 3 Industrial chemicals 9 10 9 2 4 Iron and steel 7 5 7 4 5 Fabricated metal products 4 5 5 11 6 Food products 7 6 5 5 7 Plastic products 2 3 3 18 8 Petroleum products 5 4 3 7 9 Textiles 12 5 3 1 10 Other non-metallic mineral products 3 3 2 10 11 % of total 71 81 84 Source: Authors calculations using UNIDO s INDSTAT4 Database
5.6 China Selectivity in economic transformation from low to high tech industries (Korean style) Share in total Manufacturing Value Added Rank in Rank in China 1980-84 1995-99 2000-04 1980-01 2004-05 Machinery, electric 4 12 16 10 1 Industrial chemicals 12 12 11 3 2 Iron and steel 7 7 10 4 3 Machinery, except electrical 15 8 8 2 4 Food products 5 7 7 8 5 Transport equipment 3 7 7 11 6 Textiles 14 7 6 1 7 Other non-metallic mineral products 5 6 4 7 8 Tobacco 5 5 4 9 9 Petroleum products 5 4 3 6 10 Non-ferrous metals 2 2 3 16 11 % of total 76 76 79 Source: Authors calculations using UNIDO s INDSTAT4 Database
5.6 Brazil Weak selectivity in economic transformation Share in total Manufacturing Value Added Rank in Rank in Brazil 1980-84 1995-99 2000-04 1995-96 2004-05 Food products 15 14 1 1 Industrial chemicals 13 12 2 2 Transport equipment 9 10 3 3 Petroleum products 5 10 7 4 Iron and steel 4 8 8 5 Machinery, except 7 7 4 6 electrical Machinery, electric 6 4 5 7 Paper and products 4 4 10 8 Fabricated metal products 4 4 9 9 Printing and publishing 5 3 6 10 Other non-metallic mineral products 3 3 11 11 % of total 76 79 Source: Authors calculations using UNIDO s INDSTAT4 Database
5.6 India Weak selectivity in economic transformation Share in total Manufacturing Value Added Rank in Rank in India 1980-84 1995-99 2000-04 1980-01 2004-05 Industrial chemicals 15 21 17 2 1 Iron and steel 12 10 15 3 2 Petroleum products 3 4 11 9 3 Transport equipment 9 9 10 4 4 Textiles 15 9 6 1 5 Food products 9 9 6 6 6 Machinery, except electrical 9 7 6 5 7 Machinery, electric 8 7 5 7 8 Other non-metallic mineral products 4 4 4 8 9 Non-ferrous metals 1 3 4 11 10 Fabricated metal products 3 3 2 10 11 % of total 87 85 87 Source: Authors calculations using UNIDO s INDSTAT4 Database
57Export 5.7 Export led growth KOREA CHINA Growth in Manuf. Share of output Share of output Value Added (%) exported (%) exported (%) 1980-04 1980-81 2000-04 1980-81 2000-04 Machinery, electric 3008 38 64 3 34 Transport equipment 2004 5 33 2 15 Machinery, except electrical 3085 20 46 1 67 Industrial chemicals 937 9 36 3 10 Iron and steel 906 28 23 2 7 Fabricated metal products 1292 39 14 Food products 647 16 5 8 10 Plastic products 1681 5 6 Petroleum products 326 2 1 12 3 Textiles 147 30 43 9 37 Other non-metallic mineral products 657 13 4 1 6 Non-ferrous metals 788 3 12 Source: Authors calculations using UNIDO s INDSTAT4 Database and Comtrade
57Export 5.7 Export led growth Brazil India Growth in Manuf. Value Added (%) Share of output exported (%) Share of output exported (%) 1980-04 1980-81 2000-04 1980-81 2000-04 Food products -14 29 13 11 Industrial chemicals -16 9 1 14 Transport equipment 2 33 6 7 Petroleum 108 0 0 0 Iron and steel 64 29 1 13 Machinery, except electrical -24 22 4 14 Machinery, electric -38 19 3 12 Paper and products -6 23 Fabricated metal products -23 9 12 27 Printing and publishing -46 2 Other non-metallic mineral products -11 12 1 7 Textiles 12 35 Source: Authors calculations using UNIDO s INDSTAT4 Database and Comtrade
Source: TRAINS 5.9 Reduction in tariffs in comparative perspective: the Chinese revolution
5.9 Liberalization in a comparative perspective: Tariffs and Non Tariff Barriers Table 3. Tariff and Non Tariff Measures in BICs - Total Trade Weighted Averaged Tariffs in Total Trade 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 Brazil 19.0 12.7 12.7 10.4 10.0 9.4 9.0 8.5 8.5 8.7 China 32.2 23.8 14.7 14.1 10.3 6.5 6.0 4.9 4.4 4.7 India 49.6 23.2 27.5 26.5 25.3 24.1 22.8 13.4 11.9 10.4 Korea 9.5 6.8 7.2 8.6 10.0 9.6 9.2 8.3 7.4 7.4 OTRI 1 (MFN applied tariffs plus Non Tariff Measures) 2001 2005 2006 Brazil 27.2 22.3 21.9 China 21.11 11.2 10.11 India 32.2 19.7 21.9 Korea 10.0-10.0 Source: TRAINS and World Trade Indicators
6. Empirical Methodology LnVAPW i, j, t + β 3DFrontier = α 1 + β 1 DFrontier i, j, t 1 + β 2 Competition i, j, t 1 * Competitioni, j, t 1 + εi, j, t i, j, t 1 Distance to the frontier = Korea's exports to output ratio / each one of the BICs export to output ratios at the ISIC Rev. 2 3 digit disaggregation Competition = ( ) natural logarithm of the tarifs at the industry level multiplied Interactive term = Distance to the frontier x Competition GMM: System Generalized Method of Momentums using the Arellano Bond Methodology. Avoided the excessive use of lagged instruments that diminishes efficiency in the estimates.
6.1 Results: A negative sign in the interactive term Dependent Variable: Natural Log of Value Added per Worker Fixed Effects GMM Distance to the Frontier (lagged) -0.00149*** -0.00218*** Competition (lagged) 0.31653*** 0.34582*** Distance to the Frontier * Competition -0.00067*** -0.00075*** constant 2.96365*** 30 3.07235*** Observations = 1285 1285 Groups = 71 71 Observations per group minimum = 6 6 average = 18.1 18.1 maximum = 27 24 F_test that all ui=0 F(70,1211) = 39.86 Prob>F = 0.000 Number of instruments - 78 Source: Authors estimates
62Simulation 6.2 of Results 30 Time dimensioni 25 Present Past Value Added per Worker (USD / L) 20 15 10 Brazil India China 5 0 0 20 40 60 80 100 120 140 160 180 200 220 240 260 280 300 Distance to the Frontier 320 340 360 380 400 420 440 460 Low Competition High Competition Increasing Competition Source: Authors representation
Conclusions Different experiences in catching up Competition is a plus for innovation, but Distance matters Role of distance shortening measures, importance of outward orientation and sequencing Replicability?