ECONOMIC

GROWTH/DEVELOPMENT
DATUK DR. JOHN ANTONY XAVIER
UKM-GSB
Objectives

 Enhance the understanding of the theory and practice of economic

policy and development
 Evaluate the effectiveness of economic development in the country and
beyond
 Elaborate on key factors that are central to the development of effective
economic development policies
Outcomes

 Better appreciation of policy issues and theories in development

economics.
 Knowledge and skills to critically evaluate economic problems of
developing countries
 Effectively participate in contemporary policy debate on development
priorities and policy reforms in selected countries.
Why study development economics?

 Helps to understand the big themes of the 21st century – poverty and inequality, globalisation
and trade, and the contrasting experience of success and failure in the economies of different
regions of the world
 Growing inequality in the distribution of resources between different parts of the world.
 China, the most populous country in the world, has experienced economic growth at an unprecedented
rate
 India has also made substantial progress
 But sub-Saharan Africa have stagnated, and the gap in living standards continues to widen.
 Development economics attempts to explore some of the economic challenges peculiar to
some of the poorest countries in the world.
 Investigate the factors that have led to this global inequality.
 Understand why some countries have been able to go through a process of economic and
human development whilst others have languished.
Why study development economics?

 To understand why the world has been divided into two opposite poles;
the North and the South
 Why the development gap between the two is increasing
 the rich countries are getting rich while the poor countries are getting poor (
Lorenz curve and Gini co-efficient are employed to measure international
inequalities
 Moral and ethical justification
Some major challenges of the 21st
century

 To what extent does rapid population growth help or hinder

development?
 Is it necessary for economies to go through a process of structural
transformation – and how does this take place?
 What is the role of education and health care provision in economic
development?
 How important is it for countries to engage in international trade in a
globalising economy? Or in an era of deglobalisation?
 How can less-developed countries achieve sustainable development?
Assessment

 Continuous Assessment
 10% - presentation
 10% for the write-up (3-5 pages) on the presentation (about two to three thousand words)
 20%- take-home assignment (Take a country and discuss the factors that account for its progress
in economic development)
 10% case study (to be distributed)
 20% class participation
 Final Examination: 30%
Porter’s Competitiveness and
Economic Development Model

 Why are some nations or regions more prosperous than others?

 What conditions enable global corporations or local businesses to
innovate and grow?
 Traditional economic theories fail to capture many of the underlying forces
at work in today’s global economy.
 Competitiveness is the only way to achieve sustainable job growth,
improve wages, and raise the standard of living
 Defines competitiveness based on productivity
 Focuses on the microeconomic foundations of competitive
advantage that underpin productivity in nations, regions and clusters
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Diamond model to understand the quality of
business environment

 To identify multiple dimensions of microeconomic competitiveness in

nations and to understand how they interact
 By improving elements in the diamond that impede productivity, nations
can improve competitiveness
 Successful economic development is a process of successive upgrading,
the business environment to enable increasingly sophisticated ways of
competing
 This environment is exemplified in the diamond model
What Are Clusters?

 A geographic concentration of related companies, organizations, and

institutions in a particular field that can be present in a region, state, or
nation
 Clusters arise because they raise a company's productivity
 A business is influenced by local assets and the presence of like firms, institutions,
and infrastructure that surround it
 Enable innovation
 Facilitate commercialisation and business formation
 Developed Progressing
Cluster Map: Healthcare Services Early Stage Area for Focus

Insurers &
Public Sector: Institutions for
Related Clusters Financial
Regulation Collaboration
Intermediaries
• Tourism • Banks • Association of Private Hospitals
• MoH & Medical Device Authority
• Education • Insurance companies of Malaysia
• Malaysian Medical Association
• Financial services • Underwriters • Association of Malaysian
• Malaysian Medical Council
• Waste management Medical Industries
• Malaysian Nurses Association
• Malaysia Healthcare Travel
Council (MoH initiative)
Education &
Research
Institutions GPs / Clinics,
Private / Specialist
Public Hospitals Medical Centers &
Hospitals
• Newcastle University Services
Medicine Malaysia
• Monash University • Puteri Specialist Hospital • Medical facilities
• Hospital Batu Pahat, Kluang, Kota •
• UTM Columbia Asia Hospital - Nusajaya • Nursing and residential care
Tinggi, Mersing, Pontian, Segamat • Kluang Utama Specialist Hospital
• KPJ University College facilities
• Hospital Pakar Sultanah Fatimah •
• Asia Metropolitan University KPJ Johor Specialist Center • Outpatient care centres
• Hospital Permai •
(nursing) Medical Specialist Centre (JB) • Home healthcare services
• Hospital Sultan Ismail (JB) • Pelangi Medical Centre • Ambulatory services
• Hospital Sultanah Aminah • Pasir Gudang Specialist Hospital
• Hospital Tangkak
• Hospital Temenggung Seri
Maharaja Tun Ibrahim

Medical Medical Supply

Biotechnology Retail
Manufacturing Distribution

• JCorp: KPJ, J-BioTech • Devices • Packaging, wholesaling, delivery • Drug stores

• BiotechCorp / Bionexus • Supplies • Pharmacies
• Pharmaceuticals
• Traditional / plant-based medicines
 Penang Electrical and Electronics Cluster Related Industries:
Electronic components
Suppliers: Related Clusters: ICT, health care, Computer and office equipment
Chemicals and metals automotive, transport, retail, Telecommunications
Gases Consumer electronics
biotechnology, medical devices,
Switches Industrial electronics
aerospace
Microprocessors ICT
Connectors Venture Capitalists:
Capacitators Malaysia Technology Development Corp. Training and Research Institutions:
Packaging (plastic Universiti Sains Malaysia
and ceramics) Universiti Malaya
Moulds, tools, dies Malaysian Institute of
Core Manufacturers:
Wires and frames Micro-electronic Systems (MIMOS)
semiconductors, IC design, wafer
Precision machinery Technology Park Malaysia
fabrication,
Stamping, tooling, assembly and testing Public-Private Partnerships:
Plating CREST
Engineering Industry-Government Group for
Federal Government: MIDA, MITI High Technology (MIGHT)
Penang Skills Development Centre
MARTRADE, MOSTI, HRDF, SIRIM, SME Corp. Talent Corp, NCIA
USAINS Info Tech (CoE for E&E)
Penang State Government:
Penang Development Corp. Industry Associations:
SME Market Advisory Resource and TrainingSemi-conductor Fabrication Association Malaysia
Penang Science Council 14 Design,
International Society for Quality Electronic
 Muar Furniture Cluster
Furniture Support Industries
• Coating Education and Research Institutions
• Varnishing Wood-materials Suppliers
• Institutes of higher learning (UiTM • Rubber wood
• Finishers and UPM)
• Fabrics • Fibreboard,
• Professional and private institutions • Particle broad
• Foams (Malaysia Institute of Art, Malaysian
• Adhesives, Glass and • Veneer
Furniture Design Centre, and • Plywood
mirror Limkokwing School of Arts)
• wood products (wood • Sawmills
• Wood industry Skills Development
dowel, round rod etc.) Centre Retailers and Exporters
• Fitting, moulding, joinery • Furniture Industry Technology • OEM
• Specialised ware- Centre • Overseas retailers
housing • Skills Development Fund • Large and small-scale
Furniture
Manufacturers retailers
Machinery and Equipment
Suppliers (Home, Office
• Finishing line system Institutional) Government Services
• Dust extraction system • MITI – MARTRADE
• Tooling • Malaysian Furniture Promotion Council (MFPC)
• Malaysian Timber Industry Board (MTIB)
Industry Associations
• Furniture Resources Centre
• Malaysia Furniture Association
• Furniture Testing Laboratory by FRIM
• Malaysian International Furniture
• HRDF and HRDC
Fair
• Department of Labour
• Malaysia Furniture Council
• Immigration Department
• Johor Furniture Association
• Financing agencies – SMIDEC, EXIM Bank,
• Federation of Johore Furniture
MIDF,
Manufacturers and Traders
SME bank, MTDC, CGC, MECIB
Association
 Stages of Economic Development 16

 Successful economic development is a process of successive upgrading of a nation’s cluster/business

environment to encourage increasingly sophisticated and productive ways of competing
 This process is a sequence of stages, each with different economic characteristics and challenges
1. Factor-Driven Stage
 Competitive advantage is exclusively from endowments of labor and natural resources
 Wages are relatively low

2. Investment-Driven Stage
 Efficient production of standard products and services becomes the dominant source of competitive advantage.
 Economies at this stage concentrate on manufacturing
 They achieve higher wages, but are susceptible to financial crises and external, sector-specific demand shocks.

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Stages of economic development

3. Innovation-Driven Stage
 The ability to produce innovative products and services at the global technology frontier
using the most advanced methods becomes the dominant source of competitive
advantage
 The national business environment is characterized by strengths in all areas of the diamond
together with the presence of deep clusters.
 Clusters become critical motors, not only in generating productivity, but also encouraging
innovation at the world frontier.
 Institutions and incentives supporting innovation are also well developed, increasing the
efficiency of cluster interaction.
 Companies compete with unique strategies that are often global in scope
 Invest strongly in advanced skills, the latest technology, and innovative capacity
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Economic Strategy

 Nations require clear economic strategies that engage all stakeholders, boost
innovation and ultimately improve productivity.
 A collaborative strategy requires setting priorities and moving beyond long lists
of discrete recommendations.
 CREATING AN ECONOMIC STRATEGY: THE VALUE PROPOSITION
 The value proposition defines the distinctive competitive position of a nation given its
assets, location and potential strengths.
 What elements of the business environment can be distinctive strengths relative to
peers?
 What strong or emerging clusters can be built upon?


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How Should States Compete with Each Other?
Tactical (Zero-sum competition)
•Focus on attracting new
investments
•Compete for every plant
•Offer generalised tax breaks
•Provide subsidies to lower/offset
business costs
•Every city and sub-region for itself
•Government drives investment
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Strategic (Positive-sum
competition)
•Also support greater local
investment by existing companies
•Reinforce areas of specialisation
and emerging cluster strength
•Provide state support for traininng,
infrastructure and institutions with
enduring benefit
•Improve the efficiency of doing
business
•Harness efficiency and
coordination across jurisdictions
•Government and private sector
collaborate to build cluster
strength
Attracting Investments: A
Competitive Perspective
MICRO-ECONOMICS OF COMPETITIVENESS
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Growth Diagnostics

 To identify the most binding constraint for achieving desired growth.

economy in question.
 The Diagnostic Process
1. Describe the growth process and define the growth question.
2. Differential diagnosis: use available data about the state and go through the decision tree:
I. Is the problem in the state that expected returns to investment are low, or is it that the
effective cost of finance is high?
II. If it is a case of poor finance:
I. Is the problem an inadequate supply of domestic savings coupled with difficult access
to foreign finance?
II. Is the problem related to a lousy domestic financial system (a small domestic banking
system, large interest rate spreads, high interest rates on loans)?
III. If the expected returns are low, is it because of poor appropriability or poor social returns?
IV. If it is a case of low social returns,
1. Is the situation due to insufficient investment in complementary factors of production
(such as human capital or infrastructure)?
2. Is it due to coordination failures that manifest themselves in low export sophistication,
poor location in the product space and little structural transformation?
V. If it is a case of poor appropriability,
1. Is it due to high actual taxation, insecurity and crime, high macroeconomic risks, poor
property rights and contract enforcement, labor-capital conflicts or political (or policy)
instability?
3. Posit a “syndrome” as the likely answer to the growth question.
4. Use the four “principles of differential diagnosis” as a guideline to identify testable implications of
your “syndrome”. Conduct additional research to gather information to “test” those implications,
i.e., corroborate syndrome. Iterate these 3 steps until you converge in a syndrome that is
consistent with the different pieces of information that you have analyzed.