Growth Diagnostic Framework: Rationale and Applications

Lectures 1 and 2

By
Mukul Asher
[email protected]

Prepared for: The Intensive course , Asian Public Policy program, School of
International and Public Policy Hitotsubashi University, July 31 to August 5
2023. 1
 Abstract
This presentation argues that just as in medical practice diagnosis is made
based on few vital body signs, focusing on few vital economic signs
(or growth drivers) can help policymakers to structure a context specific
response to managing various growth drivers in a coherent and credible
manner.

The diagnostic framework of Rodrik (2010) has been modified by the presenter
to better suit the context in many low and middle income countries. This
approach implies that decentralized sector or sub-sector specific analysis within
the local context is essential to move from
broad growth drivers (or growth models) to policy advice.

Such an approach is more knowledge and local domain expertise intensive

than generalized policy prescriptions traditionally favored by the national
governments and multilateral institutions.

A framework is not a blueprint. It requires adaptation and thinking about

sequencing and appropriate doses. Thus, a blueprint should not be 2
mechanically adopted.
 ABSTRACT

It is argued that this framework remains relevant to address

growth and social stability challenges arising from Covid-19
pandemic and its aftermath; and in the context of digital
economy and new technologies.
Participants will be asked for their country-specific context
and how the farmwork can be adapted in the emerging
global geo-economic and geo-strategic environment.
The presentation also covers selected summaries of
reasons and case studies of why nations regress or fail to
develop in spite of positive endowments and past
successes.

3
 Organization

• Preliminaries-Relevant thoughts and Observations

• Select Global Macro-Economic Indicators
• Why Basic Science Matters for Economic Growth
• Traditional Growth Drivers: A Summary and Insights
• Covid -19 Pandemic: Insights for Growth
• Limitations of the Conventional Approaches
• Growth Diagnostic Framework
• Brief Comments on Why Nations (or Regions) May Regress
• Case studies on why Nations may regress

4
Preliminaries-Relevant Thoughts and Observations
 Preliminaries-Relevant Thoughts and Observations

• scientific method: First the data,

then the analysis, third the
policy implications, and finally
the views

6
 Preliminaries-Relevant Thoughts and Observations

Richard Feynman (1918-88) Nobel Prize in

Physics in 1965
“You can know the name of that bird in all the
languages of the world, but when you’re finished,
you’ll know absolutely nothing whatever about the
bird. You’ll only know about humans in different
places, and what they call the bird… I learned very
early the difference between knowing the name of
something and knowing something.”
https://fs.blog/intellectual-giants/richard-feynman/
Accessed on 21 May 2021

7
 Preliminaries-Relevant Thoughts and Observations

• Learning should never stop. The Feynman technique is a

simple technique that helps you learn anything new.
• Step 1: Choose a concept that you think you broadly
understand.
• Step 2: Explain it to a child (yes, if you know it well enough,
you should be able to teach it to a child; also prevents you
from relying on jargon).
• Step 3: The previous step would have helped you
understand your own gaps in knowledge (you stumble
explaining in simple terms when you don't understand
something clearly), so go back and fill in those gaps.
• Step 4: Repeat Steps 2 and 3 till there are no gaps. You
have now really learnt something new!

8
Preliminaries-Relevant Thoughts and Observations
Preliminaries-Relevant Thoughts and Observations

13
14
 Select Global Macro-Economic Indicators

• Economic growth, civilizational

consciousness, social mobility, family
stability, equality of sexes are all
deeply interconnected even if there
are inevitable nuances and tradeoffs
• The next few slides provide select global macroeconomic indicators
to set the context for understanding Growth Diagnostics .

15
16
17
Select Global Macro-Economic Indicators
Select Global Macro-Economic Indicators

19
 Turkish Lira is down more than any other currency in the past 10
years. There's nothing inherently bad about Lira. It's a currency like
any other. What's made it fall is policy choices, which have - over and
over - pursued short-term growth at the expense of a stable currency
Robin Brooks
@RobinBrooksIIF
Chief Economist @IIF June 17 203

20
Select Global Macro-Economic Indicators
 Select Global Macro-Economic Indicators

According to Brookings, an average of five people are

entering the global middle class per second, and by 2030, the
worldwide middle class population is expected to reach 5.3
billion. (see definition of Middle-class below)
https://www.visualcapitalist.com/5-undeniable-long-term-trends-s
haping-societys-future/
Accessed on 7 March 2021

22
 Select Global Macro-Economic
Indicators

• Breaking down global GDP distribution into cartograms highlights

some interesting anomalies worth considering:
1. North America, Europe, and East Asia, with a combined GDP of
nearly $75 trillion, make up 80% of the world’s GDP in nominal terms.
2. The U.S. State of California accounts for 3.7% of the world’s GDP by
itself, which ranks higher than the United Kingdom’s total contribution
of 3.3%.
3. Canada as a country accounts for 2% of the world’s GDP, which is
comparable to the GDP contribution of the Greater Tokyo Area at 2.2%.
4. With a GDP of $3 trillion, India’s contribution overshadows the GDP of
the whole African continent ($2.6 trillion).
5. This visualization highlights the economic might of cities better than a
conventional map. One standout example of this is in Ontario, Canada.
The Greater Toronto Area completely eclipses the economy of the rest
of the province.
24
25
26
https://awealthofcommonsense.com/2021/05/200-years-of-asset-class-returns/

27
here are the annual real returns by decade: Same Source

28
29
30
31
Select Global Macro-Economic Indicators

32
 Why Basic Science Matters for Economic Growth

By Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal and

Diaa Noureldin

https://mail.google.com/mail/u/0/#inbox/FMfcgzGlkFxTJgzRkRtJgBhVRmkSbQzn
Accessed on 6 October 2021
• what are the drivers of long-term growth? Productivity—the ability to create more outputs with the
same inputs—is an important one. In our latest World Economic Outlook, we emphasize the role
of innovation in stimulating long-term productivity growth. Surprisingly, productivity growth has
been declining for decades in advanced economies despite steady increases in research and
development (R&D), a proxy for innovation effort.

• Our analysis suggests that the composition of R&D matters for growth. We find
that basic scientific research affects more sectors, in more countries and for a longer time
than applied research (commercially oriented R&D by firms), and that for emerging market and
developing economies, access to foreign research is especially important. Easy technology
transfer, cross-border scientific collaboration and policies that fund basic research can foster the
kind of innovation we need for long-term growth .

33
 Why Basic Science Matters for Economic Growth

By Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal and

Diaa Noureldin

• Inventions draw on basic scientific knowledge

• While applied research is important to bring innovations to market, basic research expands the
knowledge base needed for breakthrough scientific progress. A striking example is the
development of COVID-19 vaccines, which in addition to saving millions of lives has helped bring
forward the reopening of many economies, potentially injecting trillions into the global economy.
Like other major innovations, scientists drew on decades of accumulated knowledge in different
fields to develop the mRNA vaccines.

• Basic research is not tied to a particular product or country and can be combined in unpredictable
ways and used in different fields. This means that it spreads more widely and remains relevant
for a longer time than applied knowledge. This is evident from the difference in citations between
scientific articles used for basic research, and patents (applied research). Citations for scientific
articles peak at about eight years versus three years for patents
• Spillovers are important for emerging markets and developing
economies

34
 Why Basic Science Matters for Economic Growth

By Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal and

Diaa Noureldin

• While the bulk of basic research is conducted in advanced economies, our analysis suggests that
knowledge transfer between countries is an important driver of innovation, especially in emerging
market and developing economies.

• Emerging market and developing economies rely much more on foreign than homegrown
research (basic and applied) for innovation and growth. In countries where education systems
are strong and financial markets deep, the estimated effect of foreign technology adoption on
productivity growth—through trade, foreign direct investment or learning-by-doing—is particularly
large. As such, emerging market and developing economies may find that policies to adapt
foreign knowledge to local conditions are a better avenue for development than investing directly
in homegrown basic research.

• We gauge this by looking at data on research stocks—measures of accumulated knowledge

through research expenditure. As the chart shows, a 1-percentage-point increase in foreign basic
knowledge increases annual patenting in emerging market and developing economies by around
0.9 percentage point more than in advanced economies.

35
 Why Basic Science Matters for Economic Growth

By Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal and Diaa

Noureldin

• Innovation is a key driver of productivity growth

• Why does patenting matter? It’s a proxy for measuring innovation. An increase in the stock of
patents by 1 percent can increase productivity per worker by 0.04 percent. That may not sound
like much, but it adds up. Small increases over time improve living standards.

• We estimate that a 10 percent permanent increase in the stock of a country’s own basic research
can increase productivity by 0.3 percent. The impact of the same increase in the stock
of foreign basic research is larger. Productivity increases by 0.6 percent. Because these are
average numbers only, the impact on emerging markets and developing economies is likely to be
even bigger.

• Basic science also plays a larger role in green innovation (including renewables) than in dirty
technologies (such as gas turbines), suggesting that policies to boost basic research can help
tackle climate change.

36
 Why Basic Science Matters for Economic Growth

By Philip Barrett, Niels-Jakob Hansen, Jean-Marc Natal and

Diaa Noureldin
• Policies for a more buoyant and inclusive future

• Because private firms can only capture a small part of the uncertain financial reward of engaging in basic
research, they tend to underinvest in it, providing a strong case for public policy intervention. But designing the
right policies—including determining how you fund research—can be tricky. For example, funding basic research
only at universities and public labs could be inefficient. Potentially important synergies between the private and
public sector would be lost. It may also be difficult to disentangle basic and applied private research for the sake
of subsidizing only the former.

• Our analysis shows that an implementable hybrid policy that doubles subsidies to private research (basic and
applied alike) and boosts public research expenditure by a third could increase productivity growth in advanced
economies by 0.2 percentage point a year. Better targeting of subsidies to basic research and closer
public‑private cooperation could boost this even further, at lower cost for public finances.

• These investments would start to pay for themselves within about a decade and would have a sizeable impact on
incomes. We estimate that per capita incomes would be about 12 percent higher than they are now had these
investments been made between 1960 and 2018.

• Finally, because of important spillovers to emerging markets, it is also key to ensure the free flow of
ideas and collaboration across borders .

37
Traditional Growth Drivers: A Summary and
Insights
 The literature usually classified main drivers of growth
as follows:
 Quantity and quality of labor
 Capital
 Land and natural resources
 Managerial and organizational capabilities
 Entrepreneurship
 Knowledge (its generation, adaptation, and diffusion)
 Knowledge explosion in many areas, most notably in IT,
telecommunication, biological sciences, and energy has increased
the knowledge-intensity of human activities in general. Those
countries and organizations which are not currently fully utilizing the
existing stock of knowledge can progress rapidly if they develop
appropriate capacities and mindsets.

39
Traditional Growth Drivers: A Summary and
Insights
 Disruptive technologies could have far reaching consequences on
the current patterns of production, distribution and consumption; on
current dominant companies in various sectors, and on location of
economic activities and international competitiveness.
 Those countries and organizations which have the capacity to
monitor and understand the potential of disruptive technologies are
likely to be better placed to manage them. Among the disruptive
technologies, is additive manufacturing (McKinsy Global Institute,
‘Disruptive technologies: Advances that will transform life, business,
and the global economy’, May 2013)

40
41
 Innovation Cycles: The Six Waves
From the first wave of textiles and water power in the industrial revolution,
to the internet in the 1990s, here are the six waves of innovation
and their key breakthroughs.
Source: Edelsen Institute, Detlef Reis

First Second Third Fourth Fifth Sixth

Wave Wave Wave Wave Wave Wave
Water Steam Electricity Petroche Digital Digitizatio
Power Rail Chemicals micals Network n (AI, IoT,
Textiles Steel Internal- Electronic Software AV,
Iron Combusti s New Robots &
on Engine Aviation Media Drones)
Clean
Tech

60 years 55 years 50 years 40 years 30 years 25 years

42
 Traditional Growth Drivers: A Summary and Insights

• During the first wave of the Industrial Revolution, water power was
instrumental in manufacturing paper, textiles, and iron goods. Unlike the mills
of the past, full-sized dams fed turbines through complex belt systems.
Advances in textiles brought the first factory, and cities expanded around them.
• With the second wave, between about 1845 and 1900, came significant rail,
steam, and steel advancements. The rail industry alone affected countless
industries, from iron and oil to steel and copper. In turn, great railway
monopolies were formed.
• The emergence of electricity powering light and telephone communication
through the third wave dominated the first half of the 1900s. Henry Ford
introduced the Model T, and the assembly line transformed the auto industry.
Automobiles became closely linked with the expansion of the American
metropolis. Later, in the fourth wave, aviation revolutionized travel.

• After the internet emerged by the early 1990s, barriers to information were
upended. New media changed political discourse, news cycles, and
communication in the fifth wave. The internet ushered in a new frontier of
globalization, a borderless landscape of digital information flow
43
 Traditional Growth Drivers: A Summary and Insights

• The sixth wave, marked by artificial intelligence and digitization across

information of things (IoT), robotics, and drones, will likely paint an entirely
new picture. Namely, the automation of systems, predictive analytics, and data
processing could make an impact. In turn, physical goods and services will
likely be digitized. The time to complete tasks could shift from hours to even

seconds .
• At the same time, clean tech could come to the forefront. At the heart
of each technological innovation is solving complex problems, and
climate concerns are becoming increasingly pressing. Lower costs in
solar PV and wind are also predicating efficiency advantages.

44
Advantages and Disadvantages of Additive Manufacturing Processes
https://www.horizontechnology.biz/blog/advantages-and-disadvantag
es-of-additive-manufacturing-process-vs-powder-metallurgy
Accessed on April 25 2021

What Is Additive Manufacturing?

As with any new technology, there are several pros and cons of
additive manufacturing as engineers go through trial and error.
The metal additive manufacturing (AM) process is die-less -- it uses
powder to create a component in a way that resembles an inkjet
printer. But, instead of printing ink bubbles, the machine "prints"
particles of metallic or nonmetallic products that are sintered or laser
fused.

These sintering and lasing fusing processes are two distinct methods
of additive manufacturing. They are either sintered as a second step
or laser fused as part of the process.

AM starts with a bed of powder. A binder is injected in a particular

spot that “glues” the powder particles together. This “glued” mass of
powder is then sintered to form a PM part. The second process uses a
laser to fuse the powder particles metallurgically while still in the
45
powder bed. So, in a sense it's not true "printing," which is 2D.
Additive Manufacturing Advantages
Metal additive manufacturing isn’t just technology for
technology’s sake. There are indeed functional benefits of the
additive manufacturing process

1. Rare Shape-Making Ability

Additive manufacturing is very attractive for unusual or
complex component shapes that can be difficult to
manufacture using other processes. Design software makes it
possible to create nearly any geometric form, such as hollow
spaces or honeycombs, that maintain stability while decreasing
weight.
In this regard, think of 3D printing as powder metallurgy (PM) on
steroids.

2. Manufacturing + Assembly in 1
An additive manufacturing line can produce multiple components
at a time. Instead of creating individual parts and assembling
them at a later point, an additive manufacturer can combine46
manufacturing and assembly into a single process.
3. Even Less Waste

Additive manufacturing almost always involves

less waste material.
Traditional manufacturing processes typically involve
removing product from a larger workpiece, while AM
actually adds product from scratch to create your
component. Using only the material necessary to
create a part ensures minimal waste.
Again, this is an area where conventional powder
metallurgy excels, but 3D printing takes the
elimination of secondary machining to another level
-- to a point.
You have a certain amount of ink that spills onto
certain particles. In the case of laser, perhaps it isn’t
as tightly focused as it should be. So sometimes
particles get “glued” where they shouldn't be, so
they need to be discarded. If you don’t, you can
create a void or defect in a part.
There’s always a small amount of waste in
manufacturing, even in AM.
47
And in 3D printing, even a small amount of
https://www.qualitymag.com/articles/96307-additive-manufacturing-past-present
-and-future

accessed on 25 April 2021

48
Disadvantages of 3D printing:

It’s Almost Always Cost-Prohibitive

manufacturing is rarely the most cost-
effective path to an end product.
There are considerable capital costs to
purchase the equipment necessary to
support additive manufacturing. These
costs, whether you’re attempting in-house
3D printing or outsourcing it, are hard to
justify compared with traditional
processes.
Also, engineers specifying materials for AM
frequently look for very fine or small
particles or distribution. This can make the
raw material cost of your project skyrocket
-- even more so if the powder needs to be
spherical or gas atomized.
If the part can be pressed in PM and
machined (if necessary) later, there’s
usually no reason to force AM into your
manufacturing process.
49
2. No Mixing Allowed
The mechanical properties of a
finished product are dependent
upon the
characteristics of the powder
used in the process.
Additive manufacturing typically
uses a pre-alloyed material in the
base powder. Why? There's no
way to successfully introduce
additional materials and traits
later in the 3D printing process.
If your alloying material isn’t
present from Step 1, you’re out
of luck. All the materials and
characteristics you want in your
component have to be in the mix
ASAP.
50
Additive Manufacturing Disadvantages
Many of the benefits of additive manufacturing already
exist in powder metallurgy, just in lesser form. You’ll
have to decide whether modest improvements in those
areas are worth the disadvantages of 3D printing:

51
3. It’s Slow, and Niche
Industrial
adaptation to additive manufactu
ring
has been slow, and it’s still
considered a niche process even
in 2019. That’s because after all
these years, AM is still
not an efficient way of producing
a high volume of parts
.
Remember how we complimented
AM’s ability to produce multiple
parts at once? Good thing,
because it’s otherwise a snail-like
process. Depending on your
desired final shape, it can take 2-
3 hours to produce a shape that
conventional PM could make in 5-
10 seconds.
Unless your design is such a
52
unique shape that there’s no
other way it can be economically
53
Where Does 3D Printing Fit With Powder Metallurgy?
For many years, 3D printing has been helpful in the
production of prototypes, but its shortcomings are evident when
you need large quantities of quickly produced, low-cost
items.
Additive manufacturing is instead finding its place in component
manufacturing as a complement to
conventional pressing and sintering. Home or office versions of 3D
printers use plastic to form the end part, but 3D printing can also
be achieved in the industrial world using metal in powder form,
similar to the process used by powder metallurgy companies.
Decisions about whether to work with powder metallurgy suppliers
are often based on the pros and cons of 3D printing. Sure, it’d be
neat to jump on board with this emerging technology, but is it
really necessary? Or can you get the job done with conventional
powder metallurgy mixed with some advanced techniques
and materials?

54
https://amfg.ai/2019/11/07/additive-manufa
cturing-around-the-world-what-is-the-state-
of-3d-printing-adoption-in-north-america-an
d-europe 55
Accessed on 1 July 2020
Examples of AM from India
https://indiainfrahub.com/2023/featured/print-me-a-post-office-in
dias-construction-industry-embraces-3-d-printing-technology/
Accessed on June 18 2023
3-D printing is now a disruptive technology in the building
industry that has legs and is gaining traction — a small market
that is set to explode.
For the companies and clients in India who are pioneering 3-D
printed construction, it is an idea whose time has come.
India’s first post office building, constructed using 3-D printing
technology, is fast nearing completion on Bengaluru’s Cambridge
Road.
When completed, it will house the Halasuru Bazaar Post Office —
in a 1,100 square feet facility.
Being undertaken by Larsen and Toubro (L&T), the total
construction cost is likely to be around Rs 23 lakh — about 30-40
56
per cent cheaper than a structure built in the conventional way.
57
 The prototype 2-storied building in L&T’s
Kanchipuram campus. (Photo: L&T)The
company went on to construct a 2-
storeyed 65 sqm (650 sqft) building
at its Kanchipuram, Tamil Nadu
facility. The structure was ‘printed’ in
106 hours. See Next slide

3-D printed 1BHK house constructed

in IIT Madras campus by Tvasta.
(Photo: Tvasta) in the slide after
next.
58
59
60
How are different industries
adopting additive manufacturing?
August 12, 2019 by Carlota V.
https://www.3dnatives.com/en/industries-ad 61
ditive-manufacturing-120820195/#!
Traditional Growth Drivers :A Summary and
Insights
• Research suggests that factor accumulation alone, without new
technologies or improved human capital, which the society’s
institutions are able to absorb, leaves a significant proportion of
economic growth unexplained.

• Learning to use these drivers is even more essential for economies

with relatively small domestic market, high concentration of
economic activity in one or two sectors, and the need to move to
higher value added activities.

62
Traditional Growth Drivers: A Summary and
Insights
• Romer (2010) argues that traditional international trade flows(and by
implications investment and technology firms) are imperfect
substitutes for flow of underlying ideas. Good quality economic
growth requires rearranging existing resource use in such a way as
to add economic value.

• Both these are of particular relevance to improving production and

delivery of public services in India. They are also important for large
parts of the private sector which are still in a catch-up phase , not
utilizing knowledge available

• It is the interactions between rules, skills to benefit from- learning

curve-knowledge economy and knowledge Management, and
technologies significantly influence why some technologies (mobile
telephony) can be more successfully diffused globally, then others
(such as safe drinking water, education, and health care delivery).

• Openness to flow of new ideas, and creating environment for their

adoption is central to Romer’s views on how low and middle income
countries can catch up with high income countries quickly. 63
 Traditional Growth Drivers: A Summary and
Insights
Figure 1: Production Possibility Frontier(PPF)

Private
A country is in a “catch
.
Goods
up” phase if it is

B
. C operating well below
global best PPF. It can
grow rapidly during this
A . phase. But on coming
closer to PPF, growth
rate slows.

Public
Goods
Application of knowledge economy is essential to shift from point A to point B.
This will not only enhance growth rate, but will also increase availability of both
public and private goods, with given resources and technology. This is the
sustainable way of improving living standards. To move to point C, increased resources , 64
Particularly capital (both human and physical), plus technological progress will be required.
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• A knowledge-based economy is an economy in which

generation and application of knowledge, in all its varied
aspects, are used as an integral part of generating
income and wealth in the economy, and in household
consumption and production activities.

• Household consumption has traditionally not been given

importance in this context. But, in this environmentally
sensitive era, this neglect must be addressed.
65
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• Generation of knowledge must be distinguished from its application

and from diffusion (or imitation). New knowledge is costly to
produce, but once produced, it can be used with zero or very low
marginal cost, particularly in this digital age. Therefore, knowledge
has public goods type characteristics.

66
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• When people have unhindered access to knowledge in any

particular area, positive network externalities could emerge. As
chances favour the connected mind, these, in turn, create,
information spill over, and liquid networks where ideas get stretched
and blended to suit different needs, often unrelated (Johnson 2010:
54)

• The relative importance of networked channels, and in particular

non-market/Networked channel has been growing (Johnson, 2010)

67
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

Figure 2a: Channels of Innovations

68
Traditional Growth Drivers: A Summary and
Insights /13
Knowledge Economy and Knowledge Management
Figure 2b: Channels of Innovations

69
 The Most Innovative Companies in 2023

• Every year, Boston Consulting Group (BCG) releases

their Most Innovative Companies ranking. Based on a
survey of over 1,000 innovation executives polled in
Dec. 2022 and Jan. 2023, BCG assessed a company’s
performance on four dimensions:
• Global mindshare: the number of votes received from all
global innovation executives

• Industry peer view: the number of votes received from

executives in a company’s own industry
• Industry disruption: the Diversity Index (Herfindahl-
Hirschman) of votes across industries
• Value creation: total shareholder return, including share
buybacks, over the 3-year period from Jan. 2020 through
Dec. 2022 70
71
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

Learning Curve: Definition

• In manufacturing and in engineering economics, the
learning/experience curve effect is said to occur when,
as cumulative output increases, input (such as labour)
needed per unit of output decreases.
• However, the learning curve concept also applies to
organisations in the social sector and delivery of public
and private sector services.
• The key challenge is broadening the scope of the
learning curve and organizational integrity to public
sector organizations.
72
72
 Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• Reasons for Learning Curve :The reasons why the
learning/experience curve phenomenon is observed
include the following:
• First, workers often take longer to accomplish a given
task the first few times they do it; however, with
experience, they become more adept and their speed
increases level.
• Second, managers learn to schedule the production
process more effectively and engineers learn to improve
the efficiency of the processes; in other words, both
technical and managerial efficiency increases as
cumulative output increases. 73
73
 Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

Third, engineers may be able to design improved products and

processes in economic terms, designing such that costs are
saved without increasing defects

Fourth, suppliers of materials may learn how to process

materials required by the firm more efficiently and pass on,
part of the savings, to firms.

74
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• Lastly, experience results in an organisational “tune up”, especially
reflected in well-developed formal systems to allow for smooth
relationships among individuals responsible for various tasks (Hax
and Majluf 1982: 54).

• The learning/experience curve concept needs to be separated from

the economies of scale concept. The learning curve is related to
stock of production or cumulative output of a firm, while economies
of scale are related to the flow of production in a particular period.

• In Figure 3 , the ‘80% Learning Curve” depicts a scenario where,

every time the production doubles, the cost per unit decreases to
80% of the previous. 75
75
Traditional Growth Drivers: A Summary and
Insights
Knowledge Economy and Knowledge Management
Learning curve (Experience Curve)
Figure: 3

Source:Hax, Arnoldo C. and Nicholas S. Majluf. 1982. “Competitive Cost Dynamics: The Experience Curve,” Interfaces, Vol. 12, no. 5, pp: 50-61 76
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• Learning mindset and structures, and organizational

integrity are essential to competently negotiate the
learning/experience curve.

• Thus, if an organisation has been producing a particular

good or a service for a considerable period of time, but
has not benchmarked as to how its resource costs per
unit compare with the more efficient, competitive
producers, then the process of learning from the
experience will be hindered.
77
77
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• The textbook example is usually of Airbus which through learning
curve concepts became competitive with well-established aircraft
manufacturer Boeing in a relatively short period of time.

• Learning organisations enable their employees to expand their

capacity to create results they truly desire, and where employees
are provided with supporting infrastructure and encouraged to
acquire capabilities to perform their responsibilities.

78
78
79
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• An important component of organisational integrity is that

information flows in both directions represent an accurate and timely
state of affairs. In such an organisation, defensive behaviour i.e.
actions the individual takes to forestall embarrassment or threat
when they are faced with failure or errors, is minimised.

80
80
Traditional Growth Drivers: A Summary and
Insights

Knowledge Economy and Knowledge Management

• Taking advantage of the learning curve and evolving organizational

integrity require considerable effort in technology, human resources,
organisational leadership and supportive socio-economic-political
norms.

• An organization must also have mechanisms and structures to

assess the need for new directions, while becoming proficient at
undertaking existing tasks.

81
81
 Traditional Growth Drivers: A Summary and
Insights
Impact Of Learning, On Performance Need For Accelerating Curve

ECONOMIC SOCIAL ENVIRONMENTAL

PERFORMANCE PERFORMANCE PERFORMANCE

SUSTAINED, PLANNED RENEWAL

VALUE QUALITY OF LIFE ECO EFFICIENCY

LEARNING ORGANISATION
STRATEGY FOCUSED, ADAPTIVE, EFFECTIVE

CLASS ROOM EXPERIENTIAL

MDP CONTINUOUS MENTORING COACHING

IMPROVEMENT INTERNAL EXTERNAL
EXPERTS EXPERTISE
82
Source: By V.Ram
 Traditional Growth Drivers: A Summary and
Insights
Learning Organisation are ADAPTABLE organisms

FOR ANY ORGANISM TO SURVIVE, ITS RATE OF

LEARNING HAS TO BE EQUAL TO, OR GREATER
THAN, THE RATE OF CHANGE IN ITS
ENVIRONMENT

L C
Source: Reg Revans
Source: By V.Ram 83
 Covid -19 Pandemic: Insights for Growth

• The Pandemic has accelerated the shift in focus on just

growth strategies but also on public health, health infrastructure, including adapting
research and being relatively diversified in obtaining key medicines and medical equipment,
education, social protection systems, food security, and science and technology policies.

• Managing both demand and supply side of macro , sectoral balances, , and micro aspects,
including motivational, behavioral, and sustaining of social trust and social capital have
become even more essential.

• The importance of ensuring that basic social and physical amenities, and daily food supply
are available throughout the country has also become more prominent due to the
Pandemic.
• Currency management and supply/logistics management have acquired greater
prominence
• Friend-Shoring is more prevalent since the pandemic as compared to earlier phase of
globalization when cheapest sourcing predominated even when it led to excessive
dependence on one country, particularly a country which wants to disrupt the current geo
political arrange ments
 Limitations of the
Conventional Approaches

First, they provide a list of broad general factors

(sometimes numerous) without suggesting their
relative importance for a particular public policy
growth challenge in a specific context.

85
 Limitations of the
Conventional Approaches

Second, a list of growth drivers indicated in

some of the growth literature involves implicit
theorizing (or cause-effect relationships) which
are not rigorously stated and neither are the
magnitudes of the relationships and impact.
These severely constrain their usefulness for
addressing a policymakers growth challenge in
a specific context.

86
 Limitations of the
Conventional Approaches

The diagnostic approach, using medical analogy for examining few vital signs
to assess health condition, therefore holds promise.

HABERMANN and PADRUTT (2011) assess that:

“… Growth Diagnostics is a useful tool to inform growth strategies in
developing countries, whereas the new framework’s flexibility is
discerned as both its essential strength and its main weakness.
Among the approach’s most important contributions are its explicit
renunciation of economic rules of thumb in favor of fact-based
diagnosis and context-specific policy design, its ability to identify
reform priorities based on expected impact as well as its caution with
respect to potentially adverse second-best interactions between
different policy reforms.”

87
 Growth Diagnostics Approach

• The next graph has been modified by the

author based on Rodrik 2010. The
diagnostics approach is thus flexible.

88
 Possible Approach to Diagnosing Growth Challenges in a
Context- Specific Manner

Output/ Income Per Person/per Household

Knowledge Productive Cooperative

Investment Skill-Set
Application/Productivity Livelihoods Federalism

Supply Demand Supply Demand Supply Demand Supply Demand Supply Demand
side side side side side side side side side side
problems problems problems problems problems problems problems problems Problems Problems

In each of the above areas, initiatives needed to plan to minimize imbalances in demand and
supply
Other areas to consider:

Poorly designed and administered taxes; poor design and enforcement of property rights and
government contracts; Weak public financial management; macroeconomic and coordination failures
failures
Product market failure; coordination failure, significant externalities and spillovers; Dysfunctional
market failure concentration of economic power and weak competition ;Labour market limitations

problems in other Societal norms of behavior; poor geography, organizational capacities to deliver Public services;
markets/Areas Weak complementary markets when several sectors need to be coordinated; weak linkages between
market and non-market activities impacting on household welfare

89
Source: Adapted and modified by the Author based on Dani Rodrik (2010) Diagnostics before
Prescription. Journal of Economic Perspective, Vol. 24 (3). Pp. 33-44
A Case for Growth Diagnostics Approach/3

Source: Hausmann R., Rodrik D., Velasco A. (2005). “Growth Diagnostics”. Retrived from http://
www6.iadb.org/WMSFiles/products/research/files/pubS-852.pdf
 Transformative Infrastructure Investment: An Example

• Regional Rapid Transport System (RRTS) — is a

reliable, fast and regional mass transit system
that will connect major cities of Haryana,
Rajasthan and Uttar Pradesh to Delhi with a high
speed rail network.
• But why is it needed when Delhi has the best
metro rail system in India?
• Because Delhi is not just the capital of India— it’s
also the migrant capital of India & this puts
pressure on its infrastructure. How?
• Delhi will soon overtake Tokyo to become the
world's most populous city. But population growth
is not the problem, population density is.
 Transformative Infrastructure Investment: An Example

• Regional Rapid Transport System (RRTS) — is a reliable, fast

and regional mass transit system that will connect major
cities of Haryana, Rajasthan and Uttar Pradesh to Delhi with
a high speed rail network.
• But why is it needed when Delhi has the best metro rail
system in India?
• Because Delhi is not just the capital of India— it’s also the
migrant capital of India & this puts pressure on its
infrastructure. How?
• Delhi will soon overtake Tokyo to become the world's most
populous city. But population growth is not the problem,
population density is.
 Transformative Infrastructure Investment: An Example

• The system will cater to passengers looking to travel relatively

longer distance with fewer stops and at higher speed — along a
dedicated path.

• Designed at Alstom’s Hyderabad engineering center and

manufactured at Savli, Vadodara (Gujarat), these trains are
100% indigenous. And at lightning fast speed of 180 kmph,
they'll be 3 times faster than the Delhi metro — making RRTS
trains the fastest in India.

• A person living in a tier 2 city like Meerut can now dream of

working in an MNC located in Gurugram. Not only will it bring
lots of business and job opportunities to Delhi & its satellite
cities — but will also lead to a balanced economic development
in the neighboring regions.
Transformative Infrastructure Investment: An Example
 Political commitment to growth
Needed

Stefan Dercon, a Belgian-British economist at Oxford

university and an international development practitioner, is
the latest to try to crack the mystery. The result is an
important book, Gambling on Development, both scholarly
and grounded in experience. It may come as close as any
to answering this critical question.
Its thesis is brutally simple. “The defining feature of a
development bargain is a commitment by those with the
power to shape politics, the economy and society, to
striving for growth and development,” writes Dercon.
 Political commitment to Growth

Growth happens, in other words, when elites try to bring it about.

To do so, they must gamble on increasing the size of the
economic pie rather than carving up the one that already exists.
This is risky.

Their gamble may fail and they may be blamed. Or it may

succeed and they may be pushed from power by new entrants.
 https://www.core-econ.org/the-economy/book/text/01.

html#110-varieties-of-capitalism-institutions-government-and-the-economy

Where capitalism is less dynamic, the explanation might be that:12 13

• János Kornai. 2013. Dynamism, Rivalry, and the Surplus Economy: Two Essays on the
Nature of Capitalism. Oxford: Oxford University Press. Close footnote
• Dolores Augustine. 2013. ‘Innovation and Ideology: Werner Hartmann and the Failure of the East
German Electronics Industry’. In The East German Economy, 1945–2010: Falling behind or
Catching Up? Cambridge: Cambridge University Press. Close footnote

• Private property is not secure: There is weak enforcement of the rule of law and of contracts, or
expropriation either by criminal elements or by government bodies.
• Markets are not competitive: They fail to offer the carrots and wield the sticks that make a capitalist
economy dynamic.
• Firms are owned and managed by people who survive because of their connections to
government or their privileged birth: They did not become owners or managers because they were
good at delivering high-quality goods and services at a competitive price. The other two failures would make this
more likely to occur.
• Combinations of failures of the three basic institutions of capitalism mean that individuals and groups often have
more to gain by spending time and resources in lobbying, criminal activity, and other ways of shifting the
distribution of income in their favour. They have less to gain from the direct creation of economic value. 14
98
 httml#110-varieties-of-capitalism-institutions-government-and-the-economy
https://www.core-econ.org/the-economy/book/text/01.

• One of the reasons why capitalism comes in so

many forms is that over the course of history
and today, capitalist economies have coexisted
with many political systems. A political
system, such as democracy or dictatorship,
determines how governments will be selected,
and how those governments will make and
implement decisions that affect the population.

99
 Brief Comments on Why Nations (or Regions) May Regress

• Daron Acemoglu and James A. Robinson. 2012. Why Nations Fail: The Origins
of Power, Prosperity, and Poverty. New York, NY: Crown Publishing
Group. Close footno
• Capitalism is the first economic system in human history in which membership of the
elite often depends on a high level of economic performance. As a firm owner, if you
fail, you are no longer part of the club. Nobody kicks you out, because that is not
necessary: you simply go bankrupt.
• An important feature of the discipline of the market—produce good products profitably
or fail—is that where it works well it is automatic, because having a friend in power is
no guarantee that you could remain in business. The same discipline applies to firms
and to individuals in firms: losers lose. Market competition provides a mechanism for
weeding out those who underperform.
• Think of how different this is from other economic systems. A feudal lord who
managed his estate poorly was just a shabby lord. But the owner of a firm that could
not produce goods that people would buy, at prices that more than covered the cost, is
bankrupt—and a bankrupt owner is an ex-owner.

100
 Brief Comments on Why Nations (or Regions) May Regress

Why some nations attain prosperity and stability but

not others?

• These are relative, and so is the notion of failure. In answering the question the book
distinguishes between “extractive” and “inclusive” economic institutions which are
over the long –term co-related with “extractive” and “inclusive” political institutions.
The two aspects of economic and political institutions impact each other.

101
Brief Comments on Why Nations (or Regions)
May Regress
• The correlation is not exact, not even in the medium term. But over
long term the co-relation is likely to be highly probable. However,
there are always chances of regress, such as crony capitalism or
money politics in successful high income economies. China’s case
remains an interesting one as its astonishing growth for over three
decades for a country of its size is unprecedented.

• While institutions are important, knowledge about how to develop

inclusive, or even good institutions is not robust. Context specific
analysis and diagnostics and willingness to learn and experiment
will be needed. There are however other factors than institutions
which also impact on nation’s economic trajectory. These may be
classified broadly as ‘geography’ ‘culture’. Their role has been
important in some cases(e.g. land-locked countries) but not
necessarily decisive.
102
 Case Studies
• Select case studies are provided of why
some nations could not sustain growth,
and realize potential

103
 Case Study: South Africa
The ANC destroyed South Africa
Corrupt politicians care little for the fracturing nation

BY BRIAN POTTINGER
https://unherd.com/2021/11/how-the-anc-destroyed-south-africa/
Accessed on 6 November 2021

• A hinge moment happened this week in South Africa. The country finally
transitioned from rainbow utopianism to reality.
• The turning point was the municipal elections in which the 110-year-old ruling
African National Congress failed to gain a majority of the vote. The party is,
despite its manifest failings, still custodian of the liberator’s mantle among many
black South Africans — a recent survey showed that although 60% of ANC voters

104
 Case Study: South Africa
• associated their party with corruption, they
would nonetheless vote for it; such is the
brand loyalty— but the party’s once
hegemonic power is in retreat. The decline
over the years is neatly in tandem with the
nation’s trajectory towards a failed state. At its
peak in 2004, the ANC pulled nearly 70% of
the national vote. This week, it could barely
pull past 46%.
105
 Case Study: South Africa
• The party has lost majority control of all the major metropolitan areas; across 62
municipalities, desperate, if informal, coalition negotiations on power and
patronage are underway. And the collapse is being blamed on the fact that so few
ANC supporters bothered to vote.
• This is surely the result of catastrophic declines in public trust across all institutions
of state — and particularly in the political classes during President Cyril
Ramaphosa’s term. According to some under-reported polling in August, two thirds
of respondents said they were willing – 46% were “very willing” — to give up
elections altogether in favour of a non-elected government that could provide
security, houses and jobs.
• His predecessors — Thabo Mbeki, P W Botha, John Vorster — all had the courage
to split their parties to move ahead with what they saw to be reformist policies. Not
the incumbent. He lost the one opportunity to save South Africa: to appeal above
his party to the country and to unify all the modernist forces against the criminal,
pre-modern and racist ones, most of them in his own party.

106
 Case Study: South Africa
• Twenty seven years into the ANC’s divisive misrule, the political movements have solidified
as never before into their racial components. The ANC is now an entirely black party: the tiny
residual support from the racial minorities evaporated when Ramaphosa failed to deliver.
• The EFF is unashamedly black and exclusivist: a nativist and racist organisation of
provocateurs canvassing for support among the poor while wearing Gucci jeans, literally. Its
support sits at an estimated 10% in these elections: a 20% improvement since 2016
• The classically liberal Democratic Alliance has made heroic attempts to break out from its
strongholds in the white, Indian and coloured areas. It has failed: black support has been
historically negligible and the party has seen a decline in national share in these elections from
24% to 21%.
• The Inkatha Freedom Party, rooted in traditional and conservative Zulu areas, has stayed
constant at about 5% of the vote, and had the unalloyed pleasure of claiming the ward in
which Zuma has his mega-million state-provided home. The Freedom Front Plus,
unambiguously representing conservative white, primarily Afrikaner, and Afrikaans-speaking
coloured interests, has trebled its support.

107
 Case Study: South Africa
• A late-comer, Action South Africa, led by a personable black former DA Mayor of
Johannesburg and proclaiming its multi-racial profile, has created a stir by winning a
significant share of votes in Johannesburg but made little national headway at below 3% of
share. In any case, its core constituency is also primarily amongst urban minorities tired of the
DA.
• Thanks to the long-tail legacy of apartheid’s policy of residential segregation, many of the
country’s suburbs are still largely racially defined. These are the citadels into which the
minority communities retreat to enjoy their lives, ply their politics, conduct their businesses,
pray, shop, school their young and, if necessary, take up arms to protect themselves when
Ramaphosa’s State goes AWOL, as it did in the July Troubles.
• For decades now these informal cantons have become ever more self-sufficient: they have
private police, hospitals, schools and an army of fixers to mediate between them and a truly
appalling bureaucracy. So-called Public-Private Partnerships control large public business and
tourist spaces, property developers build public roads, private companies manage water
reticulation and major road routes are maintained by private enterprise.

108
 Case Study: South Africa
• Recent Government policy allows for Independent Power Producers: energy self-
sufficiency is now within the grasp of these localised and internally expatriated
communities.
• And thus the contours of a new and informal cantonal South African state is
emerging after 27 years of ANC misrule: self-sufficient and defensive pockets of
privilege scattered in the interior and in a coastal arc from the Mozambican border
on the Indian Ocean to the Namibian border on the Atlantic. All of this new South
Africa is set in a sea of rural and urban poverty presided over by a ghostlike State
managed by a collapsed and indifferent bureaucracy and a squabbling and corrupt
political class. The old feel-good notions of a non-racial South Africa, Archbishop
Tutu’s famous Rainbow Nation, were naïve and are now dead. Cold reality rules.

109
 Case Study: Southeast Asia
Southeast Asia risks stumbling toward a South American future
Current trajectory suggests region will struggle to escape middle-income trap
William Bratton
November 28, 2021 05:00 JST

https://asia.nikkei.com/Opinion/Southeast-Asia-risks-stumbling-toward-a-South-American-future
Accessed on 1 December 2021

110
 Case Study: Southeast Asia
• It is easy to forget that it was South America, not Asia, that was once seen as the world's emerging
economic hot spot.
• Many of the region's countries were relatively prosperous in the first half of the 20th
century. Argentina, for example, was then one of the world's richest countries. They also achieved
impressive growth rates in the immediate aftermath of World War II.
• https://asia.nikkei.com/Opinion/Southeast-Asi
But South America has fallen far since those halcyon days. The region's combined gross domestic
product, in constanta-risks-stumbling-toward-a-South-American-fu
dollar terms, was 22% of the U.S.'s in 1980 but just 17% in 2020. This relative
ture
decline is even more stark on a per capita basis.
• Accessed
Brazil's GDP per capita onof1the
was 22% December 2021
U.S.'s in 1980 but only 14% in 2020, while Mexico's fell
from 25% to 15% over the same period.
• This underperformance, and the subsequent inability of many South American countries to escape
the middle-income trap, has been explained by a number of broad but interrelated factors.
• The first was their failure to upgrade their economic structures, develop internationally
competitive industries and reduce their reliance on primary exports. The second was their
ineffectiveness at addressing widening income and social inequalities and the third was the
region's political instability which resulted in more short-term populism than long-term economic
thinking.

111
 Case Study: Southeast Asia
• South America may be geographically distant from Southeast Asia, but there are
now many existing and emerging similarities between the two regions.
• "Like South America, Southeast Asian countries, with the notable exception of
Singapore, are struggling to develop the more advanced industries so necessary to
transition from simple employment-led economic expansion to more sustainable
productivity-led growth," writes Bratton. "The fundamental problem is that if
Southeast Asia cannot develop more advanced industries, then it will not escape a
future in which it specializes in the exports of raw materials, agricultural products,
lower-order goods and tourism."

• It is true that there are pockets of manufacturing excellence within the region, but
these are geographically concentrated and often not at the scale to be
internationally competitive. The region's manufacturers are instead generally low-
order and domestically-orientated, despite numerous but frequently futile efforts to
develop more advanced sectors.

112
 Case Study: Southeast Asia
• In fact, many Southeast Asian countries have experienced
premature deindustrialization given their positions in the
development cycle. And it may now be too late to reverse this
trend. In the same way, South America failed to develop their
manufacturing sectors in the face of American and European
competition, Southeast Asia's producers will almost certainly
struggle against hypercompetitive Chinese imports.
• The fundamental problem is that if Southeast Asia cannot develop
more advanced industries, then it will not escape a future in
which it specializes in the exports of raw materials, agricultural
products, lower-order goods and tourism, while relying on more
advanced manufactured imports from the region's dominant
economy just like South America. And if this geographic division
of labor and trade emerges, then the long-term consequences will
be the same.
• Such an outcome is looking increasingly likely, though, because
many of the necessary ingredients for such productivity-led
economic development are missing across much of the region 113
 Case Study: Southeast Asia
• Not only is there a lack of regionally coordinated industrial
policies -- important if Southeast Asian countries are to develop
complementary rather than competitive industrial structures --
but there is a widespread reluctance to invest in the necessary
human capital. Indonesia, Thailand and the Philippines, for
example, all spend significantly less on education, as a proportion
of GDP, than Brazil, Argentina and Mexico.
• That feeds through to a lack of innovation and technological
advances. This reality may seem at odds with the current
excitement over the emergence of various regional internet
platforms, which are often presented as examples of Southeast
Asia's advances, but these are the exceptions rather than the
general rule.
• Over the last three years, Southeast Asian entities secured just 19,300 patent
grants, not much more than Australia's 17,300 over the same period and
significantly fewer than South Korea's 424,600. Furthermore, much of Southeast
Asia's innovation is concentrated in Singapore and, to a lesser extent, Malaysia.
There is little evidence that the rest of the region, especially Indonesia, the
Philippines and Thailand, have the innovation capabilities required for longer-term114
growth.
 Case Study: Southeast Asia
• These dynamics will also have a more insidious outcome: widening social and
income inequalities. This will not just constrain the region's economic outlook. It
also increases the risk of political instability over time.
• Political instability would not be new to Southeast Asia, of course. After all, many
countries across the region, Singapore again being the notable exception, are
already typified by short-term populism, patronage and weak institutions.
• The problem, however, is that the region's current economic trajectory is likely to
make its political environments worse. And, as South America has already
demonstrated, political instability is rarely conducive to the longer-term thinking
needed to sustain development.
• There are, therefore, important lessons for Southeast Asia from South America's
difficulties, especially as the similarities between the two regions are increasing.
The fundamental question is whether the Southeast Asian countries will address
their industrial structures, widening inequalities and unstable political environments
more successfully than their South American peers

115
 Case Study: Southeast Asia
• As of now, the evidence is not promising, especially as certain
trends are becoming more entrenched. In the same way South
America struggled in the shadow of the U.S., Southeast Asia faces
a difficult outlook as China's economic edge. This is already being
reflected in differing economic performances. Indonesia's GDP
per capita, in constant dollar terms, was 87% of China's in 2000
but just 37% in 2020, while Thailand's fell from 164% to 61%
over the same period.
• This is not to say that the region will not achieve economic
growth. On current trajectories, though, it will continue to
underperform China and will struggle to achieve the necessary
economic momentum to escape the middle-income trap over the
longer term.
• If such a fate is to be avoided, countries across the region need to
learn from South America and take action now.

116
 Case Study: Laos
• https://asia.nikkei.com/Economy/Laos-face
s-public-backlash-as-economy-teeters-tow
ard-default?utm_campaign=IC_asia_daily
_free&utm_medium=email&utm_source=N
A_newsletter&utm_content=article_link
• Accessed June 23 2022

117
 Case Study: Laos
• Laos faces public backlash as economy teeters toward default
Debt crisis triggers rare anger against communist leaders on social media

The economic crisis has been brewing over recent months. The signs range from long lines of vehicles at gas
stations in Vientiane and beyond to a spike in the price of food and other essentials, as the kip, the local
currency, weakened against the dollar.

In June, international ratings agencies raised the ante in a warning that the Laotian economy, already saddled
with fiscal and current-account deficits for years and grappling with a liquidity and solvency crisis, is being
fingered for potential default. It immediately drew parallels with the economic meltdown in Sri Lanka, the South
Asian nation that announced in April that it had run out of dollars to meet its foreign debts this year.

The government's response to public frustration has been as revealing, with leading officials admitting to the
crisis in the $20 billion economy. Prime Minister Phankham Viphavanh is among them. During the latest session
of Laos' National Assembly, which convened last week, he revealed in a moment of candor that he was aware of
the criticism on social media.

Finance Minister Bounchorn Oubonpaseth has been equally candid about mounting pressures in the
impoverished country of 7.5 million people. On Monday, he told the members of the National Assembly that the
country has amassed huge debt because of "massive loans borrowed for national development from 2010 and
2016." The annual foreign debt servicing had grown from $1.2 billion in 2018 to $1.4 billion in 2022, he said. "In
118
2010, our external debt-service payments amounted to just $160 million, which could be paid for out of domestic
revenue."
 Case Study: Laos
• Similar openness was evident in May, when senior officials at the Central
Bank of Laos said that only 33% of the country's export earnings had
reentered local banks by the end of April, depriving the country of building
sufficient foreign reserves to pay for imports and service foreign debt. The
main foreign exchange earners are energy sales to neighbors from
hydropower projects, the extraction industry and agriculture products.
• Tokyo University professor Toshiro Nishizawa believes this official candor is
being done selectively in the wake of financial challenges that he describes
as "tremendous and worrying." But Nishizawa, who formerly served as a
policy adviser to the Laotian government, said the official warnings are
"formulaic, preset and generalized." He is not expecting an immediate
disclosure of key economic and financial indicators, "due partly to political
sensitivities and capacity constraints.“
• Analysts say the economic crisis threatening to rattle the entrenched communist order comes in the wake
of back-to-back external crises: COVID-19 in 2020, which drained foreign earnings from a lucrative tourism
sector; the Russia-Ukraine war, which has increased oil prices; and the increase in U.S. interest rates,
which is weakening local currencies against the dollar to make imports pricier.
• This week's firing of Bank of Lao Gov. Sonexay Sitphaxay hints at the panic that has set in. He has been
replaced by Bonleua Sinxayvoravong, the former deputy finance minister.
• But signs of an economic downturn had already been evident. The World Bank, International Monetary
Fund and other international agencies had warned Laos before the pandemic that it was headed toward an
external debt crisis because of depleted foreign reserves.

119
 Case Study: Laos
• "A large current-account deficit, low level of reserves, a high level of debt,
managed exchange rate, and a dollarized banking system amplify macro-
vulnerabilities," the IMF noted in August 2019 following its Article IV
consultation of the Laotian economy.
• According to the World Bank, by the end of 2021 the country's public debt
had skyrocketed to 88% of gross domestic product, with foreign debt at an
estimated $14.5 billion. The country's list of foreign lenders included
Chinese creditors, who accounted for a 47% share, reflecting Laos' close ties
with China, which in the past decade has become Laos' largest lender,
investor and trading partner. In addition, Laos owes 11% of its debt to China
from bilateral loans.
• The World Bank and the Asian Development Bank account for a combined
17%, international sovereign bonds 17%, and non-concessional loans 8%.
Some of the bonds are in Thai baht -- after Laos tapped the Thai capital
market in 2013 -- and in U.S. dollars.

120
 Case Study Of Magnolia

The East Asia forum

Coal smuggling trains the Mongolian public’s eye on systemic
corruption
17 April 2023
Authors: Gantulga Munkherdene, National University of
Mongolia and Ariell Ahearn, University of Oxford
• Mongolia has substantial coal deposits across the country.
Coal is an important source of government revenue
alongside mineral exports from mega mines such as Oyu
Tolgoi and the Erdenet copper mine. But in September
2022, a coal scandal began to unfold in Mongolia’s capital
city of Ulaanbaatar.

121
 Case Study Of Magnolia

• Multiple disclosures were made regarding corruption and conflicts

of interest associated with the state-owned coal company,
Erdenes-Tavan Tolgoi JSC. Then in October 2022, the Mongolian
government revealed that coal was being illegally transported
across the Chinese border without customs registration. This coal
smuggling was allegedly directed by individuals in high-level
government positions. Mongolia’s new national opposition
political party, the HUN Party, calculated that the
total loss of potential revenue to the Mongolian government was
equivalent to an estimated 40 trillion Mongolian tugrik (US$13
billion). The Mongolian government did not officially confirm this
figure.

• Coal executives involved in such deals directly implicated the

governing Mongolian People’s Party (MPP) because Erdenes-Tavan
Tolgoi JSC is state owned. According to Mongolian news media
revelations in December 2022, Erdenes-Tavan Tolgoi JSC
executives secretly signed multiple offtake contracts (largely with
Chinese and Mongolian companies) to fund infrastructure projects
in exchange for cheap coal. These projects included the Zag water122
pipeline, the Bogd Khan railway and Tavantolgoi Gashuun Sukhait
 Case Study Of Magnolia

• Erdenes-Tavan Tolgoi JSC’s chief executive officer was

eventually arrested and imprisoned. Mongolia’s
government installed a special representative to replace
him. On 30 March 2023, two members of parliament —
Tumurbaatar Ayursaikhan and Dashdemberal Bat-Erdene
— lost their positions. Several Chinese officials associated
with the coal trade were also arrested in China at the end
of 2022.
• This revelation of secret, internal deal-making within the
state-owned company triggered large-scale protests in
Ulaanbaatar. Yet these protests were directed not only at
this scandal but embodied a larger anger at political
dysfunction and endemic corruption in Mongolia. During
the protests, many different opinions were broadcasted,
including calls for the government to resign. Protesters
also promised that this would be the first of further 123
protests planned for when the intense winter cold thawed.
• This scandal was seen as an example of so-called ‘theft-by-law’ because
state secrets rules technically protect internal deal-making and it is within
the power of the ruling party’s decision makers. The scandal’s information
source remains unclear — no single whistleblower has come forward,
though several copies of the offtake agreements have been shared publicly.
• The initial spotlight on the smuggling came from within MPP. Given the
nature of Mongolian politics over the last decade, this situation is an
indication of party fracturing and an internal fight for financial resources.
• With the next election coming in June 2024, internal party fighting may
have culminated in Prime Minister Luvsannamsrain Oyun-Erdene’s effort to
exert his control over the MPP and use the scandal to display an anti-
corruption stance. This was evident in Prime Minister Oyun-Erdene’s speech
at the Plenary Session of Mongolia’s parliament on 15 December 2022 when
he stated his rejection of the ‘MANAN gang’. MANAN refers to MAN — the
MPP, and AN — the Democratic Party — combined to construct the
Mongolian word for ‘fog’.

124
 Case Study Of Magnolia

• Corruption scandals have plagued Mongolia. The

Mongolian government unfairly awarded scholarships to
relatives or children of politicians and a state-run health
and social insurance fund was subject to high levels of
corruption and theft of assets. The Development Bank of
Mongolia’s famous Chinggis and Samurai bond money was
gutted by government authorities and their family
members and major Mongolian private companies with
political connections. The state fund for small and medium
enterprises also gave large loans to members of the MPP
— often without them paying them back.
• The coal smuggling scandal is another example of the
culture of corruption in a long line of similar events. But it
is unclear why the Mongolian government only uncovered
this so-called open secret of coal smuggling within its own
party now. 125
 Case Study Of Magnolia

• The coal smuggling scandal is another example of the culture of

corruption in a long line of similar events. But it is unclear why the
Mongolian government only uncovered this so-called open secret
of coal smuggling within its own party now.
• Coal smuggling has been on the radar since at least 2018 when
former member of Mongolia’s parliament from Omnogobi
province, Luvsang Enkhbold, warned about millions of tonnes of
coal missing in customs declaration forms. Beyond pointing to
internal fighting for power within the MPP, the scandal may serve
as a convenient crisis to make the prime minister look good in
anticipation of the elections in 2024.
• The scandal could distract the Mongolian population from bigger
protests calling for genuine reform.
• Gantulga Munkherdene is Senior Lecturer at the Department of
Anthropology and Archaeology, National University of Mongolia. 126
 Japan: Industrial policy

https://asia.nikkei.com/Politics/Honda-others-to-receive-1.8bn-in-battery-
semiconductor-subsidies?
utm_campaign=IC_JP_update_free&utm_medium=email&utm_source=NA_ne
wsletter&utm_content=article_link&del_type=4&pub_date=2023042909000
0&seq_num=6&si=00103781
Accessed on 29 April 2023

• Honda Motor and other companies will receive subsidies totaling up to

240 billion yen ($1.79 billion) from Japan's Ministry of Economy, Trade
and Industry to produce storage batteries and semiconductors, which the
government has designated as strategically critical products.
• The automaker said on Friday that it will team with battery manufacturer
GS Yuasa and invest 434.1 billion yen to develop and mass-produce
lithium-ion batteries for electric vehicles at factories in Japan. The
government will provide a subsidy of up to 158.7 billion yen.
• "We would like to meet a wide range of demand for batteries in Japan,
particularly for electric vehicles," Honda President and CEO Toshihiro
Mibe said.
127
 Japan: Industrial policy

• "We will strengthen our domestic manufacturing base and strive for a
carbon-neutral society," said Osamu Murao, GS Yuasa's president and
CEO.
• Seven other Japanese companies involved in battery materials are set to
receive subsidies. These include Panasonic's automotive battery unit,
Panasonic Energy.
• Other candidates include Kureha -- which develops and produces binders,
an essential part of lithium-ion batteries -- and Asahi Kasei, a producer of
separators, which isolate anodes and cathodes.
• Japan's second supplementary budget for fiscal 2022 allocated over 1
trillion yen to bolster production and expand stockpiles in 11 areas
designated as strategically critical products. Around 331.6 billion yen was
allocated for storage batteries and 368.6 billion yen for semiconductors.
• In the new round of subsidies, the industry ministry doled out up
to 184.6 billion yen for storage batteries and up to 56.4 billion
yen for semiconductors from the budget .
128
 Japan: Industrial policy

• In the field of semiconductors, Ibiden and Renesas Electronics

will receive subsidies of up to 40.5 billion yen and 15.9 billion
yen, respectively. Ibiden plans to start production of
semiconductor package substrates for personal computers and
data centers at its factory in Gifu prefecture in July-September
2025.

129
 Additional References/1
• Acemoglu, Daron and Robinson, James A (2012), “Why Nations Fail :The origins
of power, prosperity and poverty”, Random House.

• Additive Manufacturing Around the World: What is the State of 3D Printing Adoption in
North America and Europe?
• 07 November 2019.
https://amfg.ai/2019/11/07/additive-manufacturing-around-the-world-what-is-the-state-
of-3d-printing-adoption-in-north-america-and-europe/
accessed on 1 July 2020
• Dercon, S. 2022. Gambling on Development, Why some countries win and others
lose, Hurst Publishers

• Harald HABERMANN & Pablo PADRUTT, 2011. "

Growth Diagnostics: Strengths and Weaknesses of a Creative Analytical Fra
mework to Identify Economic Growth Constraints in Developing Countries
," Journal of Knowledge Management, Economics and Information Technology,
ScientificPapers.org, vol. 1(7), pages 1-25, December.
• Hax, Arnoldo C. and Nicholas S. Majluf. 1982. “Competitive Cost Dynamics: The
Experience Curve,” Interfaces, Vol. 12, no. 5, pp: 50-61
• Decron, Stefan
1. Johnson, Steven. 2010 Where Good Ideas Come From: The Natural History of 130
Innovation. New York: Riverhead Publishers.
 References/2
.

• McKinsy Global Institute, “Disruptive technologies: Advances that will transform life, business, and the
global economy’”, May 2013, available at
http://www.mckinsey.com/insights/business_technology/disruptive_technologies

• Rodrik, D.(2010). Diagnostics before Prescription. Journal of Economic Perspective, Vol. 24 (3). Pp. 33-44.

• Hausmann R., Rodrik D., Velasco A. (2005). “Growth Diagnostics”. Retrived from
http://www6.iadb.org/WMSFiles/products/research/files/pubS-852.pdf.

• Romer, P. M. “Which Parts Of Globalization Matter For Catch-Up Growth?” , National Bureau of Economic
Research Working Paper 15755, February 2010, available at: http://www.nber.org/papers/w15755

• Sealy W. “Additive Manufacturing As a Disruptive Technology: How to Avoid the Pitfall”, US, American
Journal of Engineering and Technology Research, Vol 12, 2012.

131