Asian Successes vs. Middle Eastern Failures: The Role of Technology Transfer in Economic Development

HOWARD PACK

Asian Successes vs. Middle Eastern Failures

The Role of Technology Transfer in Economic Development

The differences between the two regions in their openness to trade, investment, and new ideas could not be more striking, nor could the economic consequences be more stark.

In 1960, Korea, Taiwan, Syria, Tunisia, Morocco, Jordan, and Egypt were in roughly the same economic position. Average per capita income was about $1,500 in 1995 U.S. dollars, and none of these countries had significant manufacturing capacity or exports. China and India were much poorer than any of these countries. Today, the discrepancies between the Middle Eastern and more advanced Asian nations are quite striking, and identifying the source of these differences is critical to understanding the dynamics of economic development.

Korea is the home to Samsung, LG, Hyundai, and other notable technology-driven firms. Phillips, the major European consumer electronics firm, could enter the flat panel TV market only through a joint venture with LG. Taiwan is the base for Acer, which recently acquired Gateway, a major U.S. computer company. Four decades ago, Samsung, LG, and Hyundai were small firms. Acer, Logitech, and other large Taiwanese high-tech firms did not exist. Newer industrializing nations such as China and India are also improving their technological base. China is home to Lenovo, the largest laptop manufacturer in Asia, which now owns IBM’s former laptop division, and India possesses a thriving software industry. Egypt, the most industrially developed Arab economy, exports largely simple textiles and clothing.

Scholarly understanding of the mechanisms of economic development has shifted over time. One of the earliest influential hypotheses in analyzing economic development was by Alexander Gerschenkron, who asserted the “advantages of relative backwardness,” the ability of poor nations to benefit from accessing existing, more productive technology from the rich nations. Rather than having to develop them de nouveau through the R&D process, with all of the huge expenses and false roads inevitably encountered, borrowing was much less expensive and risky. Other scholars emphasized the need for absorptive capacity: the existence of a minimum level of domestic institutional and industrial capacity to enable late starters to take advantage of the potential for catching up. This local capability depended on public and private competence: infrastructure, education, the financial system, and the quality of government institutions. Simon Kuznets, a Nobel Laureate, argued that the rapid economic growth in developed nations had stemmed from the systematic application of science and technology to the production process.

The role of technology transfer reentered the mainstream of discussion about the engines of growth in developed nations as a central point of endogenous growth theory set forth in the 1980s. But this welcome improvement largely emphasizes science and innovation on the frontier of knowledge rather than the transfer of existing technology to poorer regions. I will focus on the role of technology transfer in the economic growth of countries, contrasting some of the economies of the Middle East with those of successful Asian nations such as Korea and Taiwan. The divergence in experience between the Asian nations and Egypt, Jordan, or Tunisia as exemplars of non-oil rich Middle Eastern countries can be explained by many factors, including differences in the quality of leadership and economic policy. But a crucial distinction in these cases was the willingness and ability to tap external knowledge to exploit the technology gap.

Since the publication of the World Bank’s East Asian Miracle in 1993, there has been a general consensus about the proximate sources of rapid growth in the Asian economies. These include: high rates of investment in physical capital such as roads, buildings, and machinery; growing levels of education; a stable macroeconomic policy that controlled inflation; and an emphasis on exports that motivated firms to compete in global markets, thus generating a demand for international technology transfer. The policies generating this performance included maintaining stable foreign exchange rates set to provide some mild incentives to export. Underlying these policies was a general consensus that economic growth was a primary goal of government. A competent bureaucracy, insulated from populist pressures, implemented the growth-oriented policies of the political leaders. This insulation reflected the authoritarian nature of the governments, but it is important to note that although not democratic and occasionally harsh, the governments were not the brutal dictatorial regimes that characterized much of the developing world in the 1960s through the 1980s.

The Arab economies generally had limited economic growth and exhibited behavior considerably different from that of their Asian counterparts: less investment; an orientation to the domestic economy rather than openness to foreign trade and international technology transfer; and less effort to build a high-quality education system. A full discussion of the Middle Eastern nations is provided in a recent book that I coauthored with Marcus Noland. Although the Middle Eastern countries began where the Asian countries began in 1960 and possessed many favorable characteristics such as proximity to European markets, their economic growth trailed far behind that of their Asian counterparts from 1960 to 2000 (Figure 1). On the other hand, they were hardly the hopeless cases often depicted in western media. Egypt, Morocco, and Tunisia experienced per capita income growth of 2% for a good part of the period. Oil-rich nations such as Kuwait and Saudi Arabia enjoyed a rapid ascension in the 1970s, when oil prices rose rapidly, followed by a precipitous decline beginning in the mid-1980s, when oil prices fell. The fortunes of the two groups of economies, the oil-rich and the oil-poor, are closely linked by large remittances from workers who emigrate from the latter to the former. And in the current oil boom, the oil-rich Arab countries are investing heavily in their poorer neighbors, in part because of a reluctance to invest in western economies since 9/11. Yet even in the past four years of a new oil price boom, most of the Arab nations lag their lower-middle-income peers in the rest of the developing world.

In 2000, per capita income in the oil-poor countries of the Middle East such as Egypt, Morocco, and Syria was less than 20% of the income in the industrialized countries, about what it was in 1960. But in Korea and Taiwan, per capita income had risen to more than 60% of the levels in the industrialized world (Figure 2). Part of the difference in income growth is explained by better productivity growth in Asia. In turn, this differential is partly attributable to Asia’s greater inflow of international knowledge and the ability to effectively absorb it. Although many factors contributed to productivity growth in the Asian countries, I will focus on measures of technology inflow and the quality of education, where the contrast with the Middle East is particularly pronounced.