Features

Why do some countries prosper and others don’t?

15 Jul 2014 - {{hitsCtrl.values.hits}}

Many years ago, as primary students, we were taught that most rich countries were in the North of the globe and most poor countries are in the South, but later on we learnt that it was not geography that causes wealth or poverty. After all, Australia and New Zealand are part of the Southern hemisphere and both are doing fine. You couldn’t say this of Papua New Guinea, which is the Asian country closest to Australia and New Zealand.

A superficial view is to blame racial differences. Black Africa is the poorest and most disordered part of the world and Haiti, with an almost entirely black population, is the poorest country of the Americas. But the coincidence is accidental. What makes some countries rich and others prone to poverty is not related to skin colour or racial factors. Many immigrants from poor nations do very well in the US and Canada, though one has to admit that both countries are likely to make immigration easy only for the best and the brightest of those who hail from the Third World countries.

It is also not the presence or lack of natural resources what makes a country rich or poor in the long run. Japan is a country with very limited natural resources and it has been the richest country in Asia for a long time. On the other hand, it is easy to predict that some Third World countries that currently are rich because of immense reserves of natural wealth while not being burdened with large populations will slide back when the natural resources are depleted.

While a handful of countries thanks to great leadership managed to achieve economic prosperity that has helped them to escape the perils of poverty, while many other countries fail in this respect and continue to be trapped in poverty. Was it chance? Their people? Their products and services? Their markets?

The growth experience of various countries of the world as we all know is filled with success and a great deal of disasters, which has huge implications for the living standards of ordinary people. While I can obviously only provide partial explanations to some of these questions, this article attempts to identify the type of character the industrial sector needs to have to achieve economic advancement.

Much of Japan’s success can be traced to the country’s economic disadvantages

Drivers of prosperity

Industries often thrive when they are forced to overcome high labour costs or lack natural resources. When their customers won’t accept inferior, outdated products, when their local competitors are ‘murderous’ and when the government offers no protection from their competition and sets tough technical and regularity standards.
For instance, the Italian shoe industry is prodded by sophisticated consumer demand that encourages entry by many new firms. Many of them, family owned, compete very jealously. The shoemakers are compelled to spew out new models continuously and must keep improving to increase efficiency to stay competitive within Italy’s quirky, high-cost infrastructure. When the home market got saturated, Italian manufacturers went overseas and achieved international success.

According to Porter, competitive advantage based on only one or two factors is unsustainable. South Korea’s construction industry grew rapidly during the mid ‘80s simply by applying low-cost labour to projects that did not require sophisticated engineering. It lost out when other countries that had cheap labour jumped in.

Resources-based advantages too frequently suffer the same fate. Two additional variables, ‘chance’ and ‘government’ have an important effect. Chance is outside the control of industries; wars and embargoes can reshape industry structure in a country for or against it.

A government can improve or retard competitive advantage. Vigorous enforcement of antitrust laws encourages competition and stimulates innovation. For an industry to flourish, domestic rivalry is nearly always necessary. It drives companies to move beyond whatever initial advantage that led to the founding of the industry and to develop their international potential. To maintain competitive advantage, the industry must normally broaden and upgrade from their original sources of success and take it to the next level.

Japan
For example, Japan began exporting cars in the 1950s but did not reach international success until the late 1970s. The Japanese auto industry moved through four distinct phases: its initial success reflects a number of circumstances, low-cost, skilled labour and cheap steel; home demand conditions that led Japanese firms to concentrate on small cars and emphasis on ‘fit and finish’ to satisfy Japanese consumers, who are sensitive to appearance, and a succession of new entrants that created intense domestic rivalry in the 1960s.

Japan also demonstrated the benefits of being disadvantaged in natural resources, capital or labour. Faced with labour shortages and higher wages in the 1960s, Japanese automakers took labour out of manufacturing, achieving wide gains in productivity.

Furthermore, prodded by the high priced yen, Japan took process technology to a unique level, the use of robots, just-in-time supply and redesigning parts for more efficiency. Much of Japan’s success can be traced to the country’s economic disadvantages.

Lacking in resources, Japanese firms were forced to develop skills and technologies while the shortage of usable land made real estate prices extremely high. This not only affected demand conditions by favouring compact and space-efficient goods, but also led companies to shorten production lines and avoid inventory. Hence, ‘just-in-time’ manufacturing was introduced.

Finally, the rise of the yen and a succession of two oil shocks advanced Japanese efficiency rather than retarding it. Internationally, in a number of industries, Japan has achieved a strong position. The home market-- large, homogeneous and concentrated-- provides a unique stimulus to Japanese companies.

Japan also has a curious combination of advanced and backward infrastructure. For instance, telecommunications are superb but congested roads and the tendency to overload vehicles means the trucks are ideally suited for developing countries. While domestic rivalry is intense in virtually every industry in which Japan is internationally successful, it is absent in many large sectors that fail to add up to the standards of the world’s best, like food and paper.

Japan is also weak in services of nearly all types - this will no doubt act as a future constraint for Japanese prosperity and Japanese dominance in world markets.

India, even though poor in resource, is super rich in human talent and in technology

North America
After the war, the United States enjoyed a unique combination of circumstances that spawned and sustained internationally competitive industries. It had a large affluent home market and modern plants and technology poised to supply burgeoning international demand against little or no foreign competition. But these commonly cited reasons for the U.S. dominance in post-war competition only explain partially the reasons for America’s success and its weakness.

The U.S. was the first mass consumption society. American companies pioneered low-cost, standardized, mass-produced and mass-market products in industries such as food and appliances. Moreover, many of the techniques of modern marketing were pioneered in the U.S. Commercial television was introduced in America 12 years before it appeared anywhere else. Needless to say, it was competition- fed by a sense of limitless opportunity that mostly set America apart.

However, over the years, many American companies once pre-eminent became complacent and greedy and fat in the belly. Data suggests that all was not too well in the upgrading of the U.S. industry for many years. A low rate of net capital investments, disappointing productivity increases and a slow rate of growth in the per capita income relative to other nations contributed to its downfall. All these date back to the 1950s. American companies simply added cheap labour.

Today, the U.S. is losing its ability to create the specialized factor that led to its past dominance. Research suggests that America’s basic education system is faltering badly, Research and development is lagging behind. Today, Americans tolerate products and services that no Japanese or German would accept. Rather than fight importers, U.S. companies prefer to buy them or get the government to establish quotas.

Economically depressed America will never regain its past glory and now paralyzed by vested interest, until it stops the partisan bickering and put a stop to its unsustainable levels of borrowing, mostly from China. In addition, The US also needs to be aware of the disruption the weaker countries within the eurozone and Russia can have on their financial sector.

Today, the U.S. is losing its ability to create the specialized factor that led to its past dominance

China, India and Asian economies
The Chinese economy has continued to grow quickly despite the problems in the West and the Middle East. Many observers wonder whether China’s authoritarian political system and high savings rate have given it an advantage in promoting economic growth. In the early stage of economic growth, many believe that a country needs a strong government that can mobilize and direct resources that are important.

Therefore, the success of poor countries, according to them, hinges critically on the quality of government leadership, i.e. its development-oriented leadership, its ability to promote good talent to head critical institutions and its collaborative approach for policy formulation with industry.

China’s future success will largely depend on its ability to liberalize the financial sector in market direction, ensure a democratic system that ensures more people get a bigger share of their growth and more discussion about the human and environmental cost of its massive infrastructure spectacles.

On the other hand, India, even though poor in resource, is super rich in human talent and in technology. Companies via frugal innovation have been able to create affordable products to billions of people in South Asia. By creating scale, Indian companies have expanded domestically and overseas and thereby grown their economy in their own country. Indian companies are stepping into the next level of development by investing big time in HRD and RD almost imitating the Japanese companies in the 70s and 80s.

However, the gap between the rural have-nots and the urban-haves are widening by the day, causing huge problems in many states - this is an issue PM Narendra Modi will need to address during his first term.

Asian Tigers all saw their economies take off during the 70s and 80s not purely because of authoritarian regimes but because they aggressively pumped up exports and integrated into the world economy. Many of them, despite being starved of human talent, have become service hubs for many top corporations earning top dollars for their country by cleverly opening their doors to skilled talent and by leveraging on technology.

In the final analysis, to create a basis for competitive advantage and a platform for top economic growth, many believe that a country needs competent and credible leaders, healthy savings, high levels of investment in technology and people, good macroeconomic management and finally, a disciplined public service.

(Dinesh Weerakkody is a thought leader in HR)

Features

Why do some countries prosper and others don’t?

Much of Japan’s success can be traced to the country’s economic disadvantages

India, even though poor in resource, is super rich in human talent and in technology

Today, the U.S. is losing its ability to create the specialized factor that led to its past dominance

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