SEMINARS

Training and education in international affairs:
Japan, Palestine and the Middle East (1999)

During the 50 years that followed World War II, the international community witnessed the dra­matic development of the Japanese economy. Japan’s increasing economic success during this period, especially that of its manufacturing in­dustry, has led the world to pay more attention to its industrial policies.

Japan’s industrial competitiveness in the world market has sometimes caused many observers in the West to view Japan’s industrial policies with caution and to criticize them due to a lack of ac­curate knowledge. However, many developing coun­tries, including the newly industrialized econo­mies (NIEs), the ASEAN members, China and most recently, Middle Eastern countries have displayed a strong interest in learning les­sons from Japan’s experience after World War II. Unfortunately, many of them seem incapable of understanding precisely what Japan’s indus­trial policies are, which is why we should sum­marize the definition and role of industrial poli­cies and the factors of Japanese economic suc­cess.

Definition and Role of Industrial Policy

Definition

Industrial policies are government policies that are directly aimed at inducing growth and struc­tural change in the industrial sector. Of course, the purpose, content and measures used have dif­fered not only from country to country but even in different periods within the same coun­try. As a result, it is difficult to define and gener­alize what an industrial policy entails. For the sake of convenience, the definition of industrial policy often embraces two distinct components: indus­trial policy and industrial organization policy. The first is targeted towards the redistri­bution of factors of production such as capital and labor among different industries to tailor the whole national industry into a desired form. These con­ditions usually tend to create and maintain busi­ness competition in order to guar­antee maximum efficiency in corporate activi­ties.

Role

Some experts believe that reliance on the free-market mechanism based on free competition allows for the optimal allocation of available resources. The free-market mechanism is often hampered by the presence of oligopolistic busi­ness and particularly by market failures, as in the case of public goods.

Since World War II, the relationship between industrial policy and the free market mechanism in Japan has been interpreted by the Industrial Structure Committee - an advisory body to the Ministry of International Trade and Industry (MITI) - as a necessary economic policy for the effective realization of competitive functions deriving the most benefit from the principles of free market and international divisions of labor and making up for the constraints inherent in these principles. The different industrial policies undertaken by Japan during the post-World War II period have always been based on harnessing the Japanese economy’s strong disposition to­wards competition.

Factors of Japanese Economic Success

It is true that industrial policies in Japan have made a considerable contribution to the rapid expansion of the Japanese economy over the last 50 years. At the same time, we should bear in mind that Japan’s economic success was not brought about only by an industrial policy. Rather, it was an ideal mix of external and in­digenous factors that led to the country’s eco­nomic development.

External factors

The external environment surrounding post-World War II Japan was very beneficial for the following reasons:

·  A free-trade system was secured under the IMF-GATT regime.

·  National resources and energy abroad were abundant, inexpensive and readily available due to relatively stable international relations.

·  Advanced technological innovations were eas­ily obtained from around the world.

·  The initial period of economic expansion in Ja­pan coincided with a period of world economic growth.

Indigenous factors

Post-World War II Japan also enjoyed favorable domestic factors - the root of economic success. These factors included the following:

·  Japanese society was characterized by high levels of education and a high degree of social mobility, and the domestic economy retained its inherent disposition to competition.

·  Japan achieved high labor performance through diligent Japanese workers, life-long employ­ment together with seniority-based wages, in­de­pendent labor unions based on in­dividual companies that are usually coopera­tive with em­ployers, and other so-called ‘Japa­nese-style employment practices’.

·  Japanese managers were able to plan long-term investment for profits because companies were relatively free from dividend payment re­quire­ment, mainly as a result of the weak con­trol exerted by shareholders.

Cooperation Between the Public and Private Sectors: The Case of Japan

The public and private sectors play important roles in industrial policy-making and imple­menta­tion in Japan, which can be partially at­tributed to the level of coordination and coop­eration.

Inter-government coordination

On the government side, the special policy divi­sions responsible for direct supervision of in­dustries have played a central role in this regard. In the MITI, for example, there are divisions in charge of iron and steel, automobiles, machinery and textiles. They usually collect and analyze domestic and overseas information on industries in order to formulate and implement policies, which involves formulating laws to promote specific industries (including tax and financial incen­tives), revising tariff rates, trade and in­vestment regulations, approving the introduction of facili­ties, technologies and foreign invest­ments, as well as formulating future visions for the indus­tries.

The policies proposed by them are coordinated by related divisions and passed on to depart­ments and ministries according to their needs. Inside the ministry, coordination is performed with the ‘horizontal’ bureaus of International Trade Pol­icy, Industrial Policy, Industrial Loca­tion and Environmental Protection. At the same time, poli­cies related to tariffs and financing are coordi­nated with concerned departments in the Minis­try of Finance. Sometimes coordination is also required with the legal department of the Cabinet - the Fair Trade (Anti-Monopoly) Commission.

Industry associations

The government divisions in charge of the vari­ous industries also maintain close ties with in­dustry associations, which allows them to obtain the information and ideas needed to formulate policies and prevent differences of opinion be­tween the government and private sectors. In­dus­try associations differ in size, purpose and activi­ties. National-level industry associations work in exchanging, coordinating and compiling the opin­ions of member companies. They also have the important task of maintaining ties with related government divisions for the exchange of infor­mation and opinions on the industries. The presi­dents and chairpersons of industry associa­tions are in most cases selected from top manag­ers, who serve as industrial representatives dur­ing their terms. In the larger industry associa­tions, retired officials with experience in related gov­ernment departments often serve as execu­tive directors or secretary-generals.

As representatives of industry interests, industry associations also engage in various activities to support government policies. The major industry associations have considerable political influ­ence due to their political contributions, and for this reason alone they are effective in bringing policy proposals to fruition. The relationship be­tween the government and industry associa­tions goes through different phases, with the govern­ment becoming more of an intermediary once the in­dustries have developed to a certain extent.

Council system

The council system is often used when making decisions regarding important industrial policies. Councils are established as advisory organs to the ministries and consist of industry leaders in addition to academics and journalists. They so­licit opinions regarding draft policies and coor­dinate the interests of the connected parties. They are also effective in collecting, exchanging and distributing industry information.

Economically, enhanced coordination among firms has improved the flow of information be­tween businesses and the government. Politi­cally, this has helped to establish a commitment to shared growth and reduced rent seeking. It has also performed an important monitoring function to assess the performance of the industry, econ­omy and administration.

Coordinating between export policy and indus­trial policy (MITI)

In order to bring trade and production together and to blend the domestic economy and its struc­tures in a way that works to the benefit of com­merce, strong coordination between indus­trial pol­icy and international trade policy is es­sential. Close coordination between the different minis­tries and bureaus ensures there is a broad per­spective on domestic and international eco­nomic policies and careful attention to individual in­dustries.

Role of specialized banks

Specialized development banks such as the Ja­pan Development Bank (JDB) and the Export Import Bank of Japan were created to comple­ment the commercial banks. These banks usually control project selection and monitoring inde­pendently, albeit within broad government guidelines.

The JDB began operations in May 1951 as the government’s principal organization in supply­ing equipment funds to industry, taking over the role previously played by the disbanded Recon­version Finance Bank (RFB). Prior to the estab­lishment of the JDB, the Export Import Bank of Japan was founded in February 1950 and de­signed to complement the trade and overseas in­vestment financing activities of commercial banks. The major differences between the JDB and the RFB are as follows:

·  The JDB specialized in the supply of equip­ment funds, while the RFB was empowered to provide both equipment and operating funds.

·  The JDB extended only long-term financing with payment terms of one year or more, whereas the RFB handled short-term loans for periods of as little as six months in addition to longer-term credit.

·  The JDB was prohibited from competing with commercial banks, whereas the RFB was not.

·  The JDB, which was prohibited from issuing bonds, depended for its working funds entirely on equity funds from the government, whereas the RFB was able to collect working funds through equity increases and bond issuance.

Factors Surrounding the West Bank

 and Gaza Strip

At this point, it would be useful to compare the external and indigenous factors of the West Bank and Gaza Strip economies with those of Japan after World War II.

External factors

Most of the external conditions surrounding the West Bank and Gaza Strip today are beneficial, based on the assumption that the peace process will develop further to the point of full peace in the region. Under these circumstances, it will become easier for counties in the region to allo­cate more resources for economic development.

·  Peace will reverse capital flight, which has occurred steadily in the region over the past three decades or so, as well as speed up capital inflows including aid money from the donor countries, particularly those in the West.

·  Large-scale projects - starting with infrastruc­ture, such as the building and rehabilitating of new highways, railways, seaports, and airports etc. - may be carried out through the region, which will surely have positive economic ef­fects on the Middle Eastern countries.

·  Peace could also bring about severe economic competition among the parties in the region in the future, and it might thus have a negative impact on those economies that are still relying on centrally planned measures, limited in size and endowed with an insufficient natural re­source base.

·  Whether we like it or not, the free-trade system will be secured under the newly implemented World Trade Organization (WTO) regime. How­ever, one must remember that becoming a member of the WTO regime will have both posi­tive and negative effects on any econo­mies, which include new regulations and re­strictions on some goods and industries. In ad­dition, gen­erally speaking, protectionism will be all but banned with some exceptions.

·  The new phenomenon of regionalism at the international level, as exemplified by NAFTA, the European Union (EU) and APEC, could be another disadvantageous factor, not only for Palestinians, but also for all Middle Eastern countries, because it may lead to mutual bene­ficial economic conditions among the parties involved in each agreement. In this regard, a new partnership among Mediterranean coun­tries - 15 from the EU and 12 from the eastern and southern coasts - which started in Barce­lona in November 1995 would be important for the West Bank and Gaza Strip in expanding markets abroad.

Indigenous factors

·  The West Bank and Gaza Strip have a rela­tively high level of labor. However, workers are usually not accustomed to the most ad­vanced technology and so on.

·  Usually the introduction of modern methods of manufacturing and management has lagged behind.

·  There are talented businessmen throughout the area with a strong desire to build up their own industries.

·  There are Palestinians abroad who have suc­ceeded in many fields of business and who have a wealth of experience and a huge amount of capital.

Decisive factor: the character and development state of the economy

There are some patterns of an industrial strategy that parties should adopt according to the char­acter and development stage of their economy. Hence, one should examine the type of industrial strategy that would best suit the West Bank and Gaza Strip, taking into account the external and indigenous factors surrounding them as well as the economic preconditions mentioned above. As explained previously these would be:

·  A window of opportunity is emerging due to the continuation of the peace process, even though competition may soon become stronger.

·  A new partnership is developing among Medi­ter­ranean nations.

·  The West Bank and Gaza are located at the heart of the East Mediterranean, the Mashreq, the Gulf and Egypt.

·  The indigenous market is limited to Palestinians.

·  A high-level labor force is available, but usu­ally its members are not equipped with the tech­nologies and skills needed to promote sales in the market abroad.

·  There are sites for tourism, marine sports and summer resorts that might absorb foreigners, al­though most of them are at the developing stage.

Judging from the circumstances surrounding the West Bank and Gaza and the current con­ditions, the best option would be to start from develop­ing export-oriented light industries, tar­geting the East Mediterranean region and the Gulf area.

Lesson from the ‘Four Dragons’

There are countries that have achieved a break­through in spite of the limited size of their do­mestic markets, such as the ‘Four Dragons’ of East Asia: Hong Kong, Taiwan, Korea and Sin­gapore. The experiences of these countries might be useful for the West Bank and Gaza Strip, al­though some of them are currently facing eco­nomic problems. In the countries mentioned, export industries have been the en­gine of eco­nomic development, i.e., export-oriented indus­trial strategies have been adopted from the earliest stages of industrializa­tion. In addi­tion, the intro­duction of ‘managerial resources’ was actively promoted (e.g., capi­tal, technology, man­power, corporate know-how, etc.) at a time when these were almost non-available domesti­cally. What we have learned from the Asian economic crisis is that we must establish a sound financial policy based on an appropriate financial system and must carefully check the amount and com­po­si­tion of capital from abroad.

Moreover, these countries have consistently adopted a clear strategy of developing ‘export processing zones’ as a concrete policy measure to bring foreign companies to their country. This policy has been promoted together with com­plementary preferential meas­ures, such as tax exemptions. Lastly, a policy to improve rela­tively weak infrastructural condi­tions in the ex­port processing zones was also implemented.

Many countries in the world today - particularly those whose domestic markets have a limited size - have adopted a policy of promoting export proc­essing zones, with varying degrees of suc­cess. Usually those zones that materialized to trans­form and root ‘managerial resources’ into domes­tic industries have become winners. Most probably, the lesson to be extracted is the fol­lowing: to secure the success of a strategy of ‘export proc­essing zones’ as in Asia, measures transforming ‘managerial resources’ firmly into domestic industries are very much needed.

One of the options for the Palestinians in the future might be to establish industrial zones and free zones, to be connected by the latest modern traffic networks and to serve as an export and transit base in the region. In this regard, the experience of Asia’s ‘Four Dragons’ could serve as a mirror for the West Bank and Gaza Strip.

For the success of the drive towards industrial development to materialize, Palestinian indus­tries must overcome the two most critical con­straints to efficient growth, namely foreign mar­ket access and access to technological advances and innovations. Two policy options are envi­sioned to serve this end: first, the development of indigenous skills and talent to penetrate ex­port markets and to catch up on the technologi­cal level; and second, attracting foreign direct investment from trans­national corporations that have the most de­veloped marketing net­works and own frontier technologies.

Furthermore, competitive industrial development in the Middle East is heavily contingent on the harmonization of investment policies among coun­tries of the region, and the ability to fully liberalize market entry except for security-re­lated and other clearly identified sectors ac­cord­ing to a set of commonly agreed criteria. Efforts to pro­mote joint venture projects should be given pri­ority on the policy agenda of Arab governments.

Alongside policies for trade and investment lib­eralization, there is considerable scope for Arab cooperation in industrial development, given the existence of a number of specialized institutions at the regional level. Trade barriers currently imposed by each Arab country on all manufac­tured products from other Arab countries and the rest of the world should be gradually eliminated.

Arab countries should also together design a plan that develops a number of key industries for which growth prospects and dynamic compara­tive advantage are expected and in which co­op­eration would raise the rate of return. Among the industries and sub-sectors that deserve atten­tion and study are the following: capital goods, down­stream petrochemical products, special metals, microelectronics and software. In each of these fields, a number of specific lines can be identified as potential niches.

It would also be most effective to support joint research and development programs with indus­trial applications in areas of potential dynamic comparative advantage such as renewable en­ergy, desalinization, biotechnology, building materials, and irriga­tion equip­ment. This would comple­ment and support the growth of related industry sectors and provide opportunities for new investments.

To conclude, industrial cooperation among the parties in the Mashreq region should be given a new impetus under a liberalized en­vironment in which competition and export-ori­ented foreign direct investment becomes an es­sential engine of growth. The focus of attention should be the pro­vision of an enabling institu­tional environment and attractive investment climate at the national level, so as to maximize on flows of foreign direct investment, which bring much needed capi­tal, technology and ex­port markets. At the re­gional level, institutional and government sup­port for joint activities would promote long-term gains for all countries of the region.

The following recommendations might be useful in considering the future economic policy of the West Bank and Gaza Strip. They are extracted from the expert meetings on ‘Industrial Strate­gies and Policies and Managerial and Entrepre­neu­rial Skills under Conditions of Global and Re­gional Change’. Although the seminar was held in Manama, Bahrain, over three years ago (20-23 November 1995), I believe most of the rec­ommendations adopted at the meetings are still applicable to the countries in the region today.

Strategic Objectives

Building a competitive industrial sector is now a critical component of a vital strategy of survival and success in this rapidly changing ‘New World’ economic environment. Among the most critical factors are the following:

·   emphasizing an outward-oriented industrial­ized strategy;

·   raising the levels of domestic savings and investment;

·   pursuing industrial and technological strength­ening;

·   accelerating human capital accumulation;

·   building and maintaining an efficient produc­tion-linked infrastructure;

·   providing a sound and accommodating macro­economic environment;

·   seeking a more equitable distribution of in­come and wealth;

·   fostering broader economic cooperation among the Arabs.

The need for this innovative and outward-look­ing industrial policy is a part of a broader eco­nomic renewal agenda to overcome severe struc­tural problems resulting from weak and limited indus­trial bases and the heavy depend­ence on oil and oil rents. This effort is not about setting out elaborate blueprints for the economy, nor is it about establishing an array of expensive govern­ment programs. Rather, it is about pro­viding a framework that enables all segments of society to work together as partners. Grand schemes and large governmental programs did not bear the fruits they were supposed to in the Arab region. While some of these grand schemes and blue­prints may have been acceptable at the earlier stages of Arab development, they are no longer workable. Development is too complex a process for one single social group to be en­trusted with it.

Recommendations

This effort is required at both national and re­gional levels as well as at both the macro and enterprise levels. The following recommenda­tions are suggested for the macro and enterprise levels:

The macro level

The Arabs need to move away from the rentier economies of the past to productive economies based on high value added and sustainable pro­duction. This will increasingly depend on build­ing innovation capabilities, entrepreneurial and technical skills and on a full-fledged and delib­erate entry into the new knowledge-based econ­omy. To move into high value added and sus­tainable production the Arab governments need to develop - with assistance from international agencies and institutions - and implement new economic and industrial strategies and policies that will take the following into consideration:

1.     Developing industrial linkages and net­works within each state and among Arab states, be­gin­ning with sub-regional cooperation among smaller groupings of states while aim­ing at build­ing larger and broader regional co­opera­tion;

2.     Fostering greater cooperation with wider European and Mediterranean economic re­gions and other regions in order to safeguard the Arab interest, give voice to Arab con­cerns and participate in shaping policy initia­tives that affect the region;

3.     Defining a new role for governments to act in several critical areas that can have the great­est impact on strengthening Arab com­petitive fundamentals:

·  putting strong emphasis on investing in peo­ple, training and knowledge;

·  emphasizing the development of sectoral strate­gies, strategic groups of companies, com­munity initiatives and industrial entre­preneurship;

·  reforming the civil service while stressing ef­ficiency, merit, accountability, transparency and integrity;

·  changing the balance between the public sector and civil society by balancing and em­powering the institutions that mediate be­tween the State and the citizens and strength­ening democratic institutions and practices;

·  building State capacity to design and imple­ment industrial policies while emphasizing the need to build a strong political commit­ment to development and the political will to override vested interest groups;

·  building State capacity for flexibility in changing the nature, scope and extent of State intervention in response to new issues and challenges that emerge at different stages of industrialization;

·  diverting the savings from military expendi­ture to enhance economic and industrial de­velopment and to increase expenditure on the critical sectors of health, poverty eradi­cation and education;

4.     Stimulating high value added produc­tion in the Arab region. It is essential to move away from heavy dependence on oil and oil-related production and our dependency on natural resources. This is needed to diversify eco­nomic structures, markets, technological ca­pabilities and skills and circumvent rampant ‘rentierism’ in the Arab economy, while em­phasizing dynamic comparative advantage;

5.     Developing a stronger presence in the new economy (knowledge and information-based production);

6.     Considering the establishment and/or en­hance­ment of investment development of­fices to coordinate and exchange informa­tion, to re­duce harmful and injurious compe­tition among the Arabs for the same inves­tors, and to derive more accommodating con­ditions for the benefit of the local economies, including but not re­stricted to home-based manufacturing and product mandates;

7.     Creating network and linkages among firms to overcome size difficulties. Networks of linked firms, industries and institutions should be encouraged to create competitive advan­tage that cannot be created by individual firms acting alone. There is a need to foster coop­erative relationships, which help to cre­ate competitive advantage by stimulating tech­nol­ogy transfer, continuous innovation and skill development and training. There is also the need to build on the synergies gener­ated through cooperation among firms and institu­tions to spark new co­op­erative initia­tives among Arab states, create vested inter­est in re­gional cooperation and ce­ment the integra­tion of markets and energies;

8.     Considering the development of sector part­nership funds and other sectoral initiatives among regional private sectors, institutions and firms, to increase their networks and in­crease the intensity of their contacts. More public in­vestment in network infrastructure will be needed, particularly in the informa­tional infra­structure;

9.     Small and micro enterprises face par­ticular dif­ficulties in building international ca­pabili­ties because of a lack of information, ex­per­tise and investment funds. The long-term suc­cess and growth of these firms frequently de­pends on taking advantage of international trade, investment and technology acquisition op­portunities. Arab governments should con­sider all efforts needed to strengthen SMEs in­cluding the establishment and/or enhance­ment of trade promotion offices in key inter­national loca­tions or use their embassies for such func­tions;

10.  Accelerating the development of local and re­gional technological capacities and strength­en­ing Arab technological infrastruc­tures through promoting the establishment of na­tional and regional Arab centers of excel­lence in tech­nology and at the same time nur­turing and promoting the development and dif­fusion of technological incubators;

11.  Attaching greater importance to the social dimensions of industrialization by pur­suing the following:

·  increasing the participation of women in all aspects of the industrialization process within the context of our social and cultural envi­ron­ment;

·  promoting a more equitable distribution of income and poverty alleviation through em­ployment generation;

12.  Empowering the private sector, NGOs and community initiatives and promoting part­nerships with the public sector;

13.  Assisting in restructuring the private sector to enhance the development of new characteris­tics and traditions needed so that this sector can fulfill its due responsibilities;

14.  Promoting environment-friendly indus­tri­aliza­tion by putting a major emphasis on cleaner production and green industries.

The micro level

1.     As entrepreneurial small businesses are now creating the bulk of new employment the world over, the governments of ESCWA coun­tries need to promote such enterprises through spe­cial support mechanisms, mar­ket­ing and man­agement advice, and tax in­cen­tives.

2.     Technology and business incubators can help provide such integrated support in one afford­able package as part of a national SME strat­egy. Incubators and other support mecha­nisms should be provided initial State support as an investment in nurturing entrepreneurship.

3.     Chambers of industry and commerce, when appropriately insulated from government in­terference can be effective. They need to be strengthened to provide training, in­formation, advisory and promotional services. Pri­vate sector specialized institutions and mecha­nisms should be established and/or strength­ened.

4.     Entrepreneurship development pro­grams being undertaken by ESCWA, often in cooperation with the Friedrich Ebert Stiftung, should now be raised to higher technical levels as the needs of the managers and start-up com­panies become increasingly sophisticated.

5.     An entrepreneurship program should be inte­grated into the overall educational system, starting at primary school level and on through college and executive courses.

6.     Further, ECSWA needs to initiate ac­tivities in new fields such as innovation strate­gies, consultancy capabilities, management of tech­nology, and the regular exchange of trade and technology information.

7.     Universities, particularly engineering and tech­nical colleges have to be transformed to provide training, research and consultancy (TRC) services, to better meet social needs in a rapidly changing global environment.

8.     ESCWA countries need to progress beyond traditional industries such as light me­chanical/ garment-type products to selected knowledge-based goods and services, such as computer software, microelectronics, pharma­ceuticals, advanced materials, and environ­mental tech­nologies, taking into consideration the com­parative advantages of each country. Entry into niche markets requires better access to foreign know-how, adaptation through in-house research, and linkages to key players both south-south and south-north, and mostly identification and development of compara­tive competitive capabilities.

9.     Technology-based enterprises also re­quire ac­cess to risk (venture) capital. Financial mar­kets in selected countries should be en­cour­aged to support venture capital initia­tives through innovative mechanisms.

10.  SMEs – and large enterprises - need special assistance to enhance the quality of products, with related testing facilities, as well as to conform, as appropriate, to international stan­dards and intellectual property protection, in their own interests. ESCWA initiatives in promoting the adherence to quality impera­tives and practices, particularly efforts related to ISO 9000, should be enhanced through further semi­nars, training, workshops, and confer­ences.

11.  Expatriate nationals, that is ESCWA coun­tries professionals now residing abroad, need encouragement and special incentives to re-transfer their skills and capital to their coun­tries of origin, to participate in the effort to root the new economy in the region.

12.  Business persons must balance their preoccu­pation regarding perceived threats of massive Israeli encroachments into their mar­kets, start­ing with a thorough study of the vari­ous aspects of the Israeli market and economy in preparation for mobilizing their comparative advantage to cope with Israeli challenges and to penetrate Israeli markets.