64: Economics 9 - Economic Development For Developed Economies

Preamble

I am not economically trained and the thinking below could either come across as i) Bizarre, or ii) Obvious to those who read it. Welp, anyway:

It is indisputable (come fight me bro) that a good economy - is one that keeps people employed well and in meaningful occupations thus creating social stability in a country.

During the Post- WWII era, national economic development followed a strategem to bring themsleves out of poverty. It was reliant on developing countries integrating themselves into the global world order, building exportable skills, and carving out competitive niches to win.

To summarise, the core concept (my rough intepretation) was essentially:

Step 1) Attract foreign investment and knowledge, utilising competitive factors (resources, labour arbitration); Step 2) Domicile said knowledge, and drive locally developed exports; Step 3)??? Step 4) Profit

It isn’t perfect - on step 2), some countries (cough Korea/Japan) concentrated the domiciliation and competitiveness advantage so narrowly, that it created economic-warping institutes (chaebols/keiretsu). Great economic drivers, for sure, but it may be harder to balance off the social trade offs due to its concetration on wealth.

Aside from the meme/joke on step 3 & 4 - A key question would be what really comes next after step 2?

In today’s ever more complex environment, it would appear that this model has run its course for those who have accomplished it, as the eventual realisation that Economic development for its own sake, is not the be-all, end-all for good governance in complex environments. This is seen in the relative slower growth of advanced economies.

This post is a review and contemplation on the future of economic for countries that may no longer be guided by Porter’s playbook - at a time of tackling the daunting challenge of crafting new strategies in an outrageously volatile period.

Anchoring the Principle of Modern Development (personal view, don’t hate)

Like many other topics I’ve written about, I’d start by anchoring my thinking in a core tenet/ fundamental belief.

To me, I maintain that modern (globalised) Economic Development is about exploiting global inequalities and minimise domestic inequality through distribution. This is especially true for globally oriented countries. This is a reflection of my framework for inequality written here.

Different countries of course, emphasise different aspects. The two ideological exemplars (as of writing this) being China and the US.

The US, in my view, has placed a high emphasis on exploiting global inequalities. It came out on top of the global food chain post-WWII, as we see US media, culture, manufacturing (less so now) spread all over the world. This has certainly accrued a great and significant amount of wealth in the US. The American dream was fuelled by an incredibly strong global position.

These days however, its politics and society seem ever more divided, and challenged by issues of social unrest which I presume is rooted in the ills of inequality.

China on the other hand, positioned itself as a low-cost labour destination for manufacturing of much of the world’s goods. Cheap, affordable, and initialy of lower quality (No longer true, btw) is how China came to exploit its own “lower” position as a economy behind the US, Europe and many other Asian nations. Having succeeded, and now exceeded in many ways through that path, China is making moves to address its issues of domestic stability - and taking measures to avoid rampant inequality in favour of “common prosperity”. This is truly, the current biggest challenge for many advanced economies globally.

In short, there is a premise and focus on global vs domestic development. Driven by market forces, pure domestic development and global development can run in opposing directions if left unchecked. Acknowledge these two broad segments I feel, brings us one step closer to addressing the issue.

Indeed, when I mulled over this thinking a few years back, China did announce its dual speed economic system, which (oo la la, if i may say so myself) rather precisely aligned to my thoughts back then.

The Natural Limits to Current Developmental Approaches

Perhaps during the initial stages of a healthily-developing economy, objective metrics have proven demosntrate better life expectancy, poverty alleviation, employment, etc. We must be grateful for such a system, that has indeed, objectively, in most cases, made life better for the majority.

However, towards the later stages of a “developed” economy, some other signs begin to appear:

Declining growth, as the ability to exploit global markets decrease, and diminishing returns;
Increased inequality, with weak domestic redistribution from the exploitation of global markets;
Declining population, as the existing global economic model promotes individualism (hence, adopting a global rather than traditional trend/culture);
Social tensions emerge agaisnt globalisation, again, with a lack of effective domestic redistribution.
Natural of certain activities due to labour arbitration (say low-skilled manufacturing)

With this, and despite the objective betterment of the country, a new set of problems emerge, leading to what I see as a cyclical conclusion to contentment, and the rise of discontent. I see it in the natural questioning of economic growth (despite its benefits of having destroyed poverty and uplifted standards of living) in favour of individual fulfilment, environmentalism, and society. I briefly touch on this on how economic trends follow (heuristically), Mazlow’s hierachy here.

I note - that countries are dynamic beings, and there is no true final state or right answer. Indeed, for every herculean effort to achieve a golden age, there is the inevitable decline into a dark age.

The Glocal Divide

If we accept the premise above, how then, can domestic tensions be addressed? Can this truly be fixed?

I arrive at an unfortunate conclusion, though the sparring between my heart and brain is a protracted battle:

I start by positing that exploiting global markets continue to be the most effective channel of prosperity. Just rattling off with not too much thought, this confers advantages in stronger purchasing power parity, accumulation of wealth and comfort both domestically and overseas. Does this create happiness? Questionable - but it must surely help. As previously written, I view Percevied Inequality as a great source of discontentment, seen in advanced economies.

So in the extreme case of maximum prosperity, we must believe that the majority of the population are globally competitive at the highest tier. This way, there is full access from all citizens to achieve this prosperity and benefit, at all levels, from a globalised, competitive economy. Now, unless a country feeds its citizens superhuman brain drugs, or somehow unlocks absolute maximum economic potential and fulfilment of each and every one of its citizens, I find this difficult to envision.

So while I can see countries attaining the first principle of development (exploit global markets), I find it very difficult to see how the second principle of minimising domestic inequalities could work.

Of course, the principles do not necessarily hold true for all. Countries with significant domestic markets (China), need not focus on global exploitation, although it has done so immensely well as a first step. Countries aflush with natural resources too - need not be terribly concerned if their coffers can be distributed as welfare (but watch our for that Dutch Disease though).

But if the unachievable is unattainble, then my next line of thinking is to…well…lets think about it in segments…

The Stratification of Society

The stratification of classes is not new to mankind. I have written about this in the context of inequality.

For this mental model however, I take a predominantly international-political-socio-economic Singaporean lens to derive the classes below.

Its.. a 2 x 2, based on i) those who can directly access Global Prosperity vs those who cannot; and ii) Foreigners vs Locals. These both feature heavily in most competitive and modern economies. So the four quadrants are:

Foreigners who are directly related to global prosperity - often brought in to transfer knowledge, and/or take advantage of a stronger global positioning. I.e. expatriates;
Locals who are direct beneficiaries of global prosperity - either through working with quadrant 1, or having ownership of a way to exploit globalisation;
Locals who play a domestic supporting role - SMEs at the mercy of larger global players; domestic or localised parts of the economy. They could supply large companies, or provide unavoidably domestic services such as food, retail, distribtution, etc.
Foreigners who play a domestic supporting role - largely doing jobs that locals do not want to do, and often coming from a country of weaker global positioning. Construction workers, service staff, etc.

And so I surmise that Domestic politics therefore become a battle ground between segments 2 and 3, with angsty comments by 1, and a largely neglected 4.

But where do you go from here?

To bring to as many from quadrant 3) to 2)? and have quadrant 3) filled with robots and foreigners from quadrant 4)? and/or:
To appease quadrant 3) by minimising quadrant 1), but in doing so weaken 2)?

No. Simple. Answers.

In a future post, I shall detail some thoughts on specific types of countries - the future of the Small and the future of the currently underdeveloped. Til then.