ACP-EU Trade and Aid Co-operation Post-Lomé IV:
Chapter 4. Improving Supply Responses in ACP Countries - Complementarities Between Government and the Private Sector, with Particular Reference to SMEs
Libreville, Gabon, 6-7 November 1997
The conventional wisdom regarding structural adjustment is that the 'get your prices right is both a necessary and sufficient condition for growth. This report takes the view 'getting prices right is necessary but not sufficient. It suggests that some interventions are also required. These can be divided into two categories functional and selective (Lall 1994). The former are those interventions which address market failures without favouring any specific activity (eg provision of infrastructure, institutional capacity, education), whereas the latter 'are designed to favour individual activities or groups of activities in order to remedy specific failures or externalities that would lead to sub-optimal resource allocation either in a static or dynamic sense (Lall, UNCTAD Review p65). Selective interventions address a market failures concerning the creation of a dynamic capacity within an economy in particular information and technology upgrading, and skills formation.
Governments also have important roles to play in the co-ordination and timing of policies. This ensures that the skill creation, technological capacity and know-how are developed in line with requirements. However 'Government failures exists in developing countries, and assistance is required to help overcome resulting problems.
An example of this approach is seen in Taiwan ROC where the complimentarities between market mechanisms and government interventions have been very successfully exploited. The case study of Taiwan provides many important lessons for other developing countries.
Increased globalisation means that growth must be private sector led. This requires greater emphasis being placed on micro, small and medium enterprises (SMEs).
The second part of this chapter examines the importance of, and potential benefits of small firm development in developing countries, and stresses the need for a strategy rather than ad hoc development. This is particularly important since small firms experience greater efficiency when they operate in clusters or groups. Under such conditions horizontal and vertical links develop between enterprises. These, together with subcontracting, results in a network of formal and informal relationships which greatly enhance flexibility and speed of reaction time.
Any post Lomé agreement needs to target assistance
towards overcoming 'Government failure, and to provide assistance to support
small enterprise developments.
The discipline imposed on economies by globalisation and
liberalisation requires countries to adopt forward looking and outward
oriented polices. However many developing countries are characterised by
low growth, political instability, weak and fragmented industrial bases,
and low and unstable export earnings that are highly concentrated in primary
products. Under such conditions economies are vulnerable to both exogenous
and endogenous shocks. Their problems are exacerbated when governments
pursue weak macro policies which result in inflation, low levels of private
and public savings and investment, overvalued exchange rates, and balance
of payments problems.
Faced with such problems governments often engage in indiscriminate
protection, the results of which resonates throughout the industrial and
manufacturing sections, and result increased costs and uncompetitiveness,
low levels of productivity, and rent seeking behaviour. Under these conditions
countries are clearly unable to meet the levels of efficiency required
for successful participation in world trade. Adherence to a sound macro
policy, together with the rule of law, and a degree of political stability
are necessary conditions for participation in the global economy, and for
economic growth and development.
Many ACP countries, through structural adjustment programmes,
are implementing macro-policy reforms in terms of financial and trade liberalisation,
exchange rate policies, and reductions in public sector expenditure. Some
still have a way to go.
The conventional wisdom, however, is that this 'getting
your prices right is both necessary and sufficient for growth. The alternative
view put forward in this report is that 'getting your prices right although
a necessary condition for growth is not in itself a sufficient one. Efficient
selective intervention in both product and factor markets to facilitate
market entry, support industrial and export expansion and the formation
of a technological capacity, and to create new markets, is also necessary
for sustained growth.
To understand this controversy it is necessary to understand
the implicit assumptions of the conventional approach to structural adjustment.
This assumes:
1. Goods markets will provide the correct signals for investment if allowed to operate freely.
2. Markets for factors of production are free to respond
to these signals.
3. As a result, the economy will make the most efficient use of the country's resources. The 'guiding hand of the market with its constant flow of information can never be improved upon by government.
4. The acquisition of technological capabilities and knowledge do not enter into this analysis because it is assumed to be available throughout the world and can easily obtained by a developing country. Indeed, it is often claimed that latecomers can grow more rapidly because they can acquire the hard won knowledge of today's more developed countries. Increasing the technological capacity of a country is therefore seen as an engineering problem, not an economic one.
In this view of the world, the role of government is solely
to provide basic public institutions and a legal framework and pursue macro
policies which will ensure a stable and predictable economic environment.
It may be accepted that some factor and product markets may not operate
efficiently where there is a public goods issue. An example would be education,
where the social benefit may be greater than the private benefit captured
through increased lifetime earnings and where the time horizon of individuals
may be less than that of society, in which case there will be private under-investment
in education. Similarly, firms may under-invest in training workers because
other firms may 'free ride, not train workers, and simply poach them away
with higher wages. In these cases the conventional wisdom would be that
government intervention is potentially beneficial provided the intervention
is general and neutral, that is it is not selective between
different economic activities or economic agents(for example policy should
be neutral as between foreign and local firms). Also, such limited interventions
should be indirect, utilising the market, for example, through a
system of taxes and subsidies. The general conclusion of the conventional
structural adjustment approach is that there is no need for policies to
support, protect, and induce the acquisition of technological capabilities
and knowledge in developing countries (Pack and Westphal 1986), or for
those to create new, and upgrade existing industries from which new dynamic
comparative advantages will result (Biggs and Levy 1990), and that where
governments have done so, for example in the NICs, these policies have
had little positive structural effects (as discussed for example, in the
World Bank 'East Asian Miracle). This conventional view is also largely
implicit in the thinking underlying the policy prescriptions of the Commission,
as outlined in the Green Paper.
The alternative view, forwarded by this report, strongly
supports Lalls analysis (1990 1994), and that discussed in the Industrial
Development Report (UNCTAD 1996). As stated earlier globalisation means
that countries must adopt outward orientated policies, this has necessarily
resulted in the need for governments to adopt the discipline of appropriate
macro policies. This approach strongly endorses the conventional view that
sound macro policy and structural change are fundamental prerequisites
for industrial and export-led growth. It also recognises that globalisation
has changed, and to some extent reduced, the role of governments in formulating
economic policies. However this report advocates that the development of
sound and efficient industrial and trade sectors, which are capable of
acting as a platform for export-led growth require that further interventions
be undertaken. The nature of such interventions will be discussed in subsequent
paragraphs. Within this approach we can distinguish a clear and decisive
roles for governments in the co-ordination, and the timing of policy executions,
and in planning and implementing interventions designed to assist the development
of industrial and trade sectors.
The role of government in this approach is outlined in
diagram 6.1 below.
Consider first the role of government in policy co-ordination.
As countries begin to develop, industries and markets do not necessarily
develop in a well co-ordinated and logical manner. Pockets of economic
or entrepreneurial activities may arise, but their future development may
well be thwarted by insufficient physical and business infrastructure,
and underdeveloped financial markets or export channels. The timing and
co-ordination of policies aimed at developing these support systems is
crucial. Similarly in the early stages of industrialisation, output consists
primarily of low-tech, labour-intensive commodities such as wood manufactures,
garments and footwear, together with agricultural output. In order for
industrialisation to proceed smoothly the development of strategic processing
and heavier industries must planned for and not merely allowed to develop
in an ad hoc fashion. Future skill requirements needs to be anticipated
so that education and training keeps pace with industrialisation. The conventional
approach relies heavily on market mechanisms to provide the necessary stimulus
for new industries to develop. However the private sector in general, and
entrepreneurs in particular, are motivated by profits. Profits act as a
signal to entrepreneurs attracting new investments in relatively high performance
industries. These profits arise out of the differences between private
costs and private returns, and accrue to individual firms. For an economy
as a whole however, the focus must be on social costs and social returns.
Given externalities, private sector investment may, in some areas, be sub-optimal
and poorly-timed.
Also, as economies develop some industries will naturally
decline whilst new industries will spring up. There is a critical need
to forecast, with some accuracy, both sunrise and sunset industries, and
formulate policies both to mitigate the impact of shutdowns, and to train
workers in the necessary skills and techniques required for the new sunrise
industries (Industrial Development Report 1996 UNCTAD).
The second, and equally important, role of the State involves
intervention. Lall (1994) stated that interventions can be divided into
two categories - functional and selective. 'Functional Interventions are
those interventions which address market failures without favouring any
specific activity over another whereas "Selective Interventions" are designed
to favour individual activities or groups of activities in order to remedy
specific failures or externalities that would lead to sub-optimal resource
allocation either in a static or dynamic sense" (Lall, 1994 UNCTAD Review
p65). Examples of functional interventions can be seen in the provision
of infrastructure, institutional capacity and the provision of transport,
telecommunications, education and health services. Other general interventions
may also include supporting and restructuring the private sector, regional
policies, and policies aimed at increasing overall export competitiveness.
Selective interventions address the more subtle types
of market failure described by Stewart and Ghani (1991) concerning the
creation of dynamic capacity within an economy. This has particular importance
with respect to information and technology upgrading, and skill formation.
In the neo-classical model, from which the conventional approach is derived,
knowledge and technology are freely, instantaneously, and costlessly available
to all. In practice, in developing countries, nothing is further from the
truth. One of the problems of sub-Saharan Africa is the weakness of its
technological capacity- a problem that does not appear to be abating. Also
it is not sufficient for a nation or a firm to have knowledge of, or acquire
a technology, they must also be able to use it efficiently and adapt it
effectively to their best advantage (Fransman 1985). However in developing
countries local managers may not be familiar with, or fully understand
the skills that are required to use imported techniques or technologies
effectively, or the skills available to them in the workforce may not match
those required for new technologies. The problems need to be addressed.
An integral part of developing long-term technological
capacity is the need, as industrialisation proceeds, to develop an indigenous
R&D capability. This takes time and must be carefully planned for in
terms of skill developments and specialisms in specific areas such as engineering,
material science and bio-technology. Most R& D undertaken in developing
countries is informal and incremental, and generally falls into the 'development'
category - but in order to incrementally upgrade both products and processes,
firms must have a firm grasp of underlying technology. Research institutions
can help adapt and to develop appropriate industry-specific techniques
and technologies so that firms can in turn utilise them as they stand,
or modify them to suit their particular market demands. While some techniques
and technologies may be mastered quickly and relatively costlessly, others
may involve a substantial outlays in both monetary and resource terms,
and involve long time lags.
Under such conditions there are large potential social
returns to be gained from the development of research institutes and programmes
which, once operational, will provide an important channel through which
firms and industries can upgrade. Without intervention these channel will
simply not develop in sufficient numbers. However most ACP countries do
not have the capacity for such development, and there is a critical need
for assistance in this area.
Another related, and well known, cause of market failure lies in the under provision of education and training. Primary and secondary education may, to a large extent, be viewed as general training. Further education and skill training may be regarded as more specific. As has already been mentioned there is a critical need for education policy to be co-ordinated with industrial development thus ensuring that skills are matched to requirements. Whilst primary and secondary education provide many of the skills required for shop floor supervision, many technologies are industry specific or process specific. With the ever accelerating pace of technological change the need for ongoing training is heightened. Individual firms, for reasons discussed earlier, have, on aggregate a lower propensity to invest in training employees than is socially optimal, and therefore intervention is required to ensure its provision.
When developing technological capacity governments also
have a role to play decisions relating involving licensing agreements,
joint ventures. In Japan, the Republic of Korea, and Taiwan ROC, the State
played an active role in searching for and introducing new technologies
(Amsden 1985). It also played a key role as a regulatory body, and taken
the lead role in bargaining with TNCs (Taylor 1995).
Ongoing industrialisation requires a level of institutional
capacity which is lacking in many ACP countries, and governments have a
key role to play in expanding and co-ordinating its development.
The final role of governments in the area of intervention
concerns market creation. Twenty five years ago Kaldor (1972) distinguished
the allocative function of markets from the second, less frequently focused
on function, which he called the creative function.
"a creative function - as an instrument for transmitting
impulses of economic change" (Kalder 1972 lecture
on 'The Irrelevance of Equilibrium Economics' reprinted in Economic Journal,
December 1982).
Here intervention focuses on the creation of new markets.
This can be done, for example, via the State taking the lead in the creation
of key upstream enterprises if the private sector is not forthcoming in
their provision. The establishment of such large enterprises acts as a
catalyst for the development of a host of smaller, downstream firms. This
can be done either as a joint-venture or, if necessary, as a state-owned
enterprise. As industrialisation proceeds, or once such firms are well
established, it is important that ownership and control are divested to
the private sector. Such a policy, as will be discussed later, proved to
be very successful in South Korea and in Taiwan ROC, in the 1970s and 80s.
The case for selective interventions is strengthened if,
following Brutons analysis (1989), which may be viewed as an extension
of the standard infant industry argument, developing countries in general,
particularly the least developed countries, may themselves be considered
to be infant economies, and need to be protected whilst they undergo the
transition period of industrialisation. This argument is heightened in
a global world as these infant economies have little or no experience as
global players and their fragile economies are extremely vulnerable when
exposed to world markets. Under present WTO rules countries with per capita
income less than US$1000 are exempt from regulations regarding selective
subsidies. However some countries, eg Mauritius, do not fall into this
category but, because of their small size and narrow rang of export commodities,
still need support as they attempt to upgrade and diversify.
It is worth noting that the distortions of government
policies in sub-Saharan Africa were no worse than many other developing
countries and that levels of protection and weaknesses in macro policies
were probably worse in Latin America. What has made the sub-Saharan African
situation so serious is the combination of these problems with a very weak
technological and skill capacity in these countries, and this will not
improve significantly without government intervention, both generally in
factor and product markets, and selectively in clusters of related activities,
increasing collective efficiency.
As has already been mentioned a great deal of government
failure also exists in developing countries, both in terms of failing to
eliminate market failures, and in failing to create new market and
markets capacity. For example attempts by governments of developing
countries to fill the gaps in financial markets with specialist development
and financial institutions have a poor record of achievement both in financial
terms and in terms of poverty relief (Hulme and Mosley, 1995). If governments
actively engage in promoting credit to 'favoured industries, eg. by subsidised
interest rates, distortions can be very large. Similarly if governments
do not have enough information to calculate the true relative social costs/benefits
of the formation of different industries, or of undertaking various projects,
or knowledge of the existence of certain technologies, then they cannot
play an effective role in co-ordinating industrial and private sector development.
Given the high potential for 'government failure in ACP
countries, there is a need for EU policy to be aimed at attempting to overcome
this by concentrating their efforts in specific areas. However it is worth
noting that the distortions of government policies in sub-Saharan Africa
were no worse than many other developing countries and that levels of protection
and weaknesses in macro policies were probably worse in Latin America.
What has made the sub-Saharan African situation so serious is the combination
of these problems with a very weak technological and skill capacity in
these countries, and this will not improve significantly without government
intervention, both generally in factor and product markets, and selectively
in clusters of related activities, increasing collective efficiency.
The present EU mandate here is wide. By reducing it, the
Commissions strength and EU funds have the potential to be used more effectively.
This is particularly important at this time when Europe is increasingly
concerned with value for money, and when the percentage share of EU funds
appropriated to ACP countries is being squeezed as Europe is expanding
and strengthening links with the transition economies. The opportunity
cost of not undertaking the required selective interventions is high, and
more work is needed to establish priorities in these areas.
This section will focus, using examples from Taiwan ROC,
on the development of SMEs, and the role of governments in supporting their
ongoing proliferation. If successfully implemented, such a policy has the
potential to reduce dependence on primary commodities and help integrate
an economy into the world trading system without heavy reliance on TNCs.
However, the growth of manufactures by SMEs does not provide an 'easy quick-fit
solution' for low income countries, and attempts to minimise the problems
facing countries undertaking such an approach must be avoided. Nevertheless
small firms offer potential entrepreneurs the opportunity to enter business
activities without being faced with prohibitively high initial levels of
investment and skills.
Traditionally small firms have been viewed as less efficient
than their large counterparts. Indeed neo-classical economic theory only
considers large firms producing under conditions of constant returns to
scale and benefiting from economies of scale and mass production. However,
industrialisation led by large-scale, assembly-line technology, together
with its highly developed division of labour and stratification, is not
always optimum in a developing country. Large firms, and in particular
MNEs, have their place in industrialisation in developing countries, but
the role of SMEs has not always been fully recognised and exploited. Over
the last decade, increased awareness has led to changing consumer tastes
and the need for differentiated products, and it is here that small firms
are able to capitalise on their flexibility and fast response times.
Small scale production has many advantages including the
potential to:
(i) combat rural depopulation and migration thus reducing the problem of dualistic development
(ii) enable firms to set up and develop in sectors and industries not suitable for large production ie in sectors where there are few scale economies
(iii) have a large and positive effect on the distribution of income
(iv) provide local employment, particularly for women, and give them the opportunity to enter the labour market either as employees or entrepreneurs
(v) induce potential entrepreneurs to start up businesses on an on-going basis
(vi) turn local savings into local investments
(vii) absorb and adapt technology, particularly when backward linkages between larger national firms and MNEs are established. (Under such conditions small enterprises are able to incrementally upgrade using appropriate technology)
(viii) upgrade and enhance skills over a wide range of production activities.
With the help of government, support agencies, and other
private organisations these small firm advantages can be harnessed to play
a major role in creating a manufacturing base. However, small size means
that individual firms are vulnerable. Inexperienced entrepreneurs do not
have the range of skills, or the knowledge or information available to
larger enterprises. If they are to operate successfully in global markets
they need to have channels through which to sell their exports and acquire
knowledge and technology.
Internationalisation and changing consumer tastes have
resulted in the creation of niche markets which SMEs, with their enhanced
flexibility and fast response times, are able to exploit. Deregulation
has also, in some areas, had a positive influence on market penetration
for SMEs, but many small firms still have problems in identifying new markets.
The gains from small-scale production are amplified when
individual firms form part of a 'cluster', or co-operative, both in terms
of employment and information flows.(Pyke 1992). Industries such as footwear,
clothing, furniture, mechanical and electrical engineering all lend themselves
to small firm production, and by operating and interacting at differing
levels the industry can together achieve what Schmitz (1995) called "collective
efficiency". Collective efficiency may thus be viewed as the competitive
advantage that agglomerations of small firms within a sector can derive
from interaction and from local external economies. Such agglomerations
are usually referred to as 'clusters, and can be both sectorally and geographically
concentrated. Probably one of the most widely discussed European examples
of the successful development of a cluster is the Italian footwear industry.
Less well known, and more pertinent to the requirements of developing countries
is the ongoing and very successful development of industrial clusters in
the Asian NICS, and particularly in Taiwan, during the 1970s and 80s.
4.5 The Case Study of Taiwan
ROC
No blue print for industrialisation exists. Different
countries require different policies at different stages to cope with changing
economic conditions. But the example of Taiwan ROC provides a host of important
messages for developing countries. It demonstrates quite clearly that a
manufacturing sector comprised almost entirely of SMEs can successfully
lead the industrialisation process via its export success.
Taiwan ROC, is a small island located in the South China
Sea. It has relatively few natural resources, and yet achieved such high
levels of growth during the 1970s and 80s that many authors refereed to
Taiwans growth as an 'economic miracle. The SME sector, which accounted
for over ninety five percent of Taiwans manufacturing outlets in the 1980s
has been described as the backbone of Taiwans manufacturing and export
industries. Yet, contrary to what was first believed by Western scholars
and institutions in the 1980s, Taiwans 'economic miracle was not achieved
solely by the operation of market forces, or 'get your prices right policies,
but by a subtle mix of market forces and efficient and flexible government
intervention.
Under the auspices of an entrepreneurial, and somewhat authoritarian government, Taiwans industrial development was achieved via flexible planning undertaken by the Government using a series of four and ten year development plans which were modified and changed in line with changing economic and political climates (see Wade 1992, Phillips 1994). Starting with the targeting of simple labour intensive exports in the 1960s, new more advanced target industries and technically sophisticated ones were introduced over time, and comparative advantages established in the fields of electronics and computer technology. As industrialisation proceeded, the proportion of government-owned enterprises declined, and that of agriculture as a percentage of GDP gradually, yet substantially, reduced. The authoritative nature of the State enabled the government to pursue a sound and flexible macro policy and develop markets and infrastructure - thus overcoming market failures.
In the 1950s Taiwan adopted import substituting policies
but, unlike so many developing countries at that time, these were relatively
light, and post 1960 a vigorous outward-oriented policy has been pursued.
Nevertheless some I-S industries were developed alongside export industries,
this was particularly so in the post-oil shock years when export and import
industries were developed in tandem, primarily to counter negative exogenous
forces, and to deepen their industrial base, thus reducing outside dependence.
In the 1970s, the first of currently over seventy industrial parks and
three export processing zones was developed along with the establishment
of science and technology research centres. These provided a major stimulus
to the industrial upgrading process and, ultimately, to Taiwan's export
success. This success was augmented by the Governments policy with respect
to foreign direct investment (Amsden 1985, Haggard 1993). The Government
restricted foreign investment to key industries where the technology was
vital to industrial development.
Indeed although FDI was welcomed in designated areas such
as electronics, chemicals, textiles and optical instruments, other areas
were screened from foreign influences (Amsden 1985). Where large scale
investment was deemed necessary, and FDI unforthcoming, the Government
itself set up large up-stream enterprise (which it subsequently divested,
partly or fully, to the private sector). These large upstream plants provided
the incentive for the proliferation of smaller, downstream enterprises.
At the same time there was heavy investment in education and training and
latterly in research and development, to support the upgrading process.
Over time Taiwan's industrial base widened and deepened and during the
1970s, 1980s and 1990s more complex technologies have been introduced,
existing industries upgraded, and new ones developed. This has resulted
the creation of new dynamic comparative advantages, and export successes
that are the envy of many developing and industrialised countries.
Taiwan's experience sheds light on the importance of Government
in providing systematic, planned, yet flexible polices, and the need for
long and medium term goals and strategies. During its developing years
macro policy was tight - for example interest rates and energy prices were
swiftly and substantially raised in response to the two oil price shocks
(see Kuo 1983 for details). Massive investment in education was undertaken.
However, expenditure on further education was co-ordinated and targeted
to development needs. For example during the period 1960-69 the average
percentage of students in higher education enrolled in engineering was
18%; this rose to 33.2% during 1980-89(MOEA ROC). The number of students
in social sciences followed a similar trend until 1983 when, due to a shift
of emphasis, there was a dramatic fall in numbers. The late 80s and 1990
show increases in the number of students under taking management training,
there has also more recently been a re-emphasis on agriculture.
A similar involvement by government in creating technological
capacity can also be observed. At the beginning of 1980 government spending
account for 60.4% of total expenditure on R&D, by 1987, as firms and
private institutions began to undertake more of their own R&D (with
particular emphasis on development) this figure had fallen to 50.8% (National
Science Council ROC 1989).
The Government also set up research institutes, and encouraged
the development of both public and private organisations to support developing
and upgrading industries and entrepreneurs including: the Metals Industry
Development Centre (1963), The China Youth Career Organisation (1979),
the Industrial Design and Packing Centre, the China External Trade Development
Council (which now has offices all over the world), the China Productivity
Centre, and many more.
However perhaps the most remarkable achievement of the
Taiwanese Government was their ability to recognise the complimentarities
between government intervention and market mechanisms. This is nowhere
more apparent than in their policies directed at supporting SME development.
Selective intervention may be said to have been a necessary condition for
Taiwan's industrialisation and export success, it was not a sufficient
one. Market forces have played a crucial and dominant role in the development
of the manufacturing sector.
For historical reasons many Taiwanese businesspeople have
a dislike of too much government interference, and a strong desire for
independence. Cultural factors mean that strong loyalties exist between
families and friends. These factors together with the lack of employment
opportunities in the 1960s and the targeting of exports, provided the potential
for the upsurgence of entrepreneurship.
The role of the Government here can best be described
as that of facilitating, supporting and guiding market forces. By providing
the necessary physical and business infrastructure, it help create an environment
in which enterprises could flourish. However selective interventions were
also employed for example the Government played an active role in creating
new industries by investing up upstream enterprises and thus facilitating
the development of small downstream firms, and ensuring that certain key
or target industries were developed. Skill centres were developed to provide
training, and the changing skill requirements as industries and firms upgraded.
An array of support agencies and supply and export channels
were provided by government and the private sector enabling clusters of
small firms to develop. Over time networks developed and strengthened.
The government also actively engaged in promoting target industries via
the provision of subsidised product development research, training, finance,
and by assisting with factory designs and upgrading. Support for SMEs operating
existing target industries was reduced as they developed, and new more
sophisticated industries were developed and targeted. The development of
firms operating in non targeted industries was generally left to market
forces, and most of these SMEs firms no specific government assistance.
Taiwan's policy towards SMEs is, however, not unique.
South Korea and Japan operate a similar strategy in terms of the support
systems and networking services they provide for small enterprises.
Taiwan ROC ensured that policies affecting the growth
of manufacturing and exports were well co-ordinated and anticipated future
needs. The Government adopted an entrepreneurial attitude. It prioritised
export growth and sought out and established new markets where future dynamic
comparative advantages could be developed. Conditions were established,
and constantly upgraded, so that the private sector could thrive. Any long
term planning was flexible, allowing for upgrading and changing international
conditions. The key element in Taiwans success is that markets were allowed
to work efficiently - but their establishment was managed. In short, the
market sector and the Government worked together in a complementary way.
This chapter has discussed the important and complementary roles of ACP governments, the private sector and the EU in ACP countries. It has presented the case for efficient intervention by governments, which rests on the belief that the existence of market failures means that the private sector will not develop, in the medium and long term, without some form of selective, as well as functional intervention. Globalisation has increased the pressure on ACP countries to establish a thriving private exporting sector to act as an engine of growth. This has led to changing, and to some extent reduced roles for governments and public sectors. But governments still have a vital role to play in the co-ordinating and timing of policies, particularly in education and skill training, in the development of infrastructure and institutional and technological capacity and in creating new markets. However in many ACP countries 'government failure also occurs, and their is a need for support in this area to overcome market failure. A new convention may wish to examine ways in specific support can be developed for individual countries. One of the criteria for developing such capacity is the establishment of an equal working partnership between ACP governments, the Commission and the private sector. This would enable a policy framework, binding to all parties, to be jointly established and agreed on. Policies need to be forward looking and flexible, and geared towards ensuring the private and public sectors assumes their correct role in industrial development. To do this priorities must be established and targeted. Under the 'alternative approach forwarded by this report selective interventions would assume a high priority. However regardless of the approach taken by different countries it is necessary to target assistance, as was done in Taiwan ROC, so that SMEs can develop in sufficient numbers as to lead export growth. Policy instruments that have a high potential to facilitate small firm growth need to be employed. To achieve greatest effectiveness the number of policy instruments must be limited and bureaucratic procedures minimised.
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1. 1 The authors would like to thank Mr. Carl Greenidge for his helpful comments on chapters 4 and 5.
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