What can the GCC learn from China's economic model?
The high tech (HT) exports form an unusually small share of the overall exports. There are no signs that the situation is likely to change in the foreseeable future, since research and development (R&D) expenditure and registered patents remain at the level of low income economies. Meanwhile, China is starting to draw an encouraging trend, boosting expenditure on research and increasing the contribution of technologically advanced merchandise to its exports.
In general, investment in R&D and HT exports are positively related since R&D eventually leads to more technologically intensive production capabilities. Likewise, the higher the share of HT exports the higher the income per capita. Nevertheless, some countries do not adhere to this observed pattern.
Indonesia, Malaysia and the Philippines are amongst the Asian countries, which seem to break the relationship between HT exports and its drivers. HT exports are unusually large for their expenditure in R&D and the number of registered patents. This seemingly contradictory fact actually has a simple explanation. These countries have not developed a resilient network of national firms capable of developing cutting-edge technologies. Before the great recession, more than 70 per cent of the their merchandise exports were sold to high income economies, some of them in the form of goods with small added-value despite being HT. Low production costs enabled companies from developed countries to outsource merchandise while keeping highly valuable services in their homeland.
The GCC countries and some Asian low income economies such as India have low HT exports and R&D. Neither the GCC countries nor India have developed a network of companies with a high tech profile. This would be the snapshot one might expect in a low income economy, and the GCC countries do not match the profile. About 80 per cent of merchandise exports of the Gulf are fuel, whereas in India food and manufacturing account for more than 75 per cent of exports. The GCC model is highly dependent on oil, and the figures of R&D expenditure or scientific research suggest that little has been done in order to diversify its production.
Unlike the GCC countries, South Korea, Singapore, Taiwan and Hong Kong, have the classical profile of high income economies. These countries were capable of developing an indigenous high quality growth model that allowed for very strong performance in the HT sector, and consequently achieving a high degree of HT quality exports. The growth model of these countries allowed for a high GDP per capita, all of them with levels above $25,000.
Not all countries have stuck to their models over time. China is a clear example of an ongoing transition. Its high tech exports share as percentage of GDP has almost tripled in the last 15 years. The patterns in R&D expenditure or patent applications are similar or even higher. The Asian giant is changing its model by developing an indigenous entrepreneurial fabric which is starting to leave its fingerprints on R&D-related indicators and correspondingly on its income. It is not far-fetched to say that China is evolving towards the model that one would expect to find in high income economies.
Since the 90s, economies such as South Korea and Singapore have improved their income considerably, and they have done so by investing intensively in R&D and registering large number of patents. It seems research is one of the paths that lead to healthy development. China is already taking this path and gains in terms of income are already obvious. Evidence suggests the application of this strategy, using private and government resources, would also benefit the GCC, since it would allow the region to lower its exposure to the oil sector.
By Jordi Rof
The writer is an economist at Asiya Investment, an investment firm investing in emerging Asia. Views expressed by him are his own and do not reflect the newspaper’s policy.