Phuah Eng Chye (20 July 2019)
Successful economies serve as development models for others to emulate. These development models are not static; they evolve constantly in response to landscape change. Prior to the twentieth century, industrial production was sufficient to position a country as an economic powerhouse. But as industrialisation spread across the world, the benefits of industrialisation changed. Countries that used industrialisation for purposes of import substitution did not take-off. The next step-up was Japan’s export-led industrialisation model. The Japanese model inspired many copycats such as the Asian tigers. Export-led industrialisation remains an attractive proposition though its validity seems to have been dimmed by the emergence of premature deindustrialisation and the new technologies.
Industrialisation was not the earliest development model though. In earlier centuries (of laissez faire), several cities/countries established themselves as trading (entrepôts) and/or financial centres. This strategy worked well in a physical environment where transportation and other transaction functions (exchange, insurance and financing) were co-located at the same place. Technology has now decoupled transport from the transaction function. As a result, cities that specialise as transhipment hubs no longer generate the buzz it used to.
Several cities evolved from being a gathering place and evolved into international financial centres. Today, economies wishing to establish themselves as financial centres model themselves on New York, London, Switzerland, Hong Kong, Singapore and the other offshore financial centers. Dubai is the notable recent addition to the ranks. But the attraction being of a financial centre or hosting an exchange is fading as technology enables transactions to be conducted virtually. This reduces the ability of the center to capture value-add. In addition, the emphasis has shifted from secrecy to transparency. There is an international crackdown on secrecy veils that protect money laundering, tax avoidance and other sanctioned activities. Another trend is that the base for financial activities is shifting from pure financial centres to the hinterland. Hence, financial centres such as Singapore and Hong Kong are being overshadowed by the emergence of hinterland-based markets in Shenzen, Shanghai and Mumbai.
Being resource rich was not necessarily an advantage in the past. In some economies, internal fighting, corruption and foreign intervention for control of resources subjected countries to colonialization, unrest or suppression. In the 1970s, resource endowments seemed to be a curse even for developed nations as it resulted in huge capital inflows that caused the currency to be overvalued and the economy to become uncompetitive; a condition termed as the Dutch disease. Over the past decades, this archetype has changed. Resource-rich countries have learned to manage their wealth and capital inflows better. They adopted strategies to sterilise the inflows to maintain internal stability. They established sovereign wealth funds (SWFs) and hired professional talent to invest in domestic projects and to manage an internationally diversified portfolio. The adoption of sterilisation policies and SWFs were major developments that cause the direction of global capital flows to reverse; that is to flow from developing into developed countries.
Across development models, efforts usually concentrate on a special economic zone or city. These special zone or cities are provided with incentives, liberal laws and enjoy a high degree of autonomy. One focus was to develop cities as technology hubs. Hillary Hoffower notes that “while it seems that many big cities these days are turning into tech hubs, only a few are truly being defined by their tech industries. Many of these flourishing tech hubs are not only attracting young workers but also ushering in a new wave of wealth, resulting in changes like luxury property booms and old neighborhoods undergoing revitalization periods”. She identifies Tel Aviv (Israel), Berlin (Germany), Shenzhen (China), Lisbon (Portugal), Bengaluru (India) and Stockholm (Sweden) as among the leading tech hubs outside of Silicon Valley.
In other instances, the startup city projects may involve experiments in governance. On these experimental urban enclaves, Sarah Moser points out there “many failed startup city projects”. These projects carry “a wide range of negative impacts” such as “ecological disasters; many have demonstrated little respect for human rights, dignity, or lives; they are not accountable to any public, and they are sites of unprecedented corruption. There is a consistent disregard for legally protected tribal and indigenous land…They are certainly zones of experimentation with new forms of governance and unique levels of autonomy, but at what cost and to whom?”
Sarah Moser cautioned “it is a wild west out there without any semblance of the checks and balances, regulations, and moderating effects that responsible government provides…corrupt and institutionally weak host countries that are desperate for foreign investment…to acquire leased land, until nothing remains except the impulse to dodge tax obligations and seek out pockets of deregulation”.
Conventional approaches have proven more successful. Sarah Moser notes “some of the innovative urban spaces underway in China, Saudi Arabia, and the United Arab Emirates…the projects materializing are driven by strong, authoritarian states and corporations who have the connections, financial backing, negotiating skills, technical expertise, and organizational capacity to pull off engineering feats and governance innovations that were unimaginable ten years ago”. However, she adds that “context matters, and the success of Chinese Special Economic Zones cannot be celebrated in isolation from broader demographic factors and economic history”.
Oliver Wainwright notes that since Songdo was initiated in the late 1990s by the South Korean government, smart city projects “are cropping up from Kenya to Kazakhstan. India has pledged to build 100 smart cities, while Africa is seeing $100 bn pumped into at least 20 projects. China, having initiated 500 of its own smart city pilots, is now summoning a string of outposts through its Belt and Road initiative… Saudi Arabia has pledged to trump them all with Neom, a $500 bn mega-project billed as an answer to Silicon Valley. Planned as a centre for renewable energy, biotechnology, manufacturing, media and entertainment…It claims to be…an incubator for the next era of human progress“.
Oliver Wainwright however cautions that “this new breed of city takes various different forms, from government initiatives, to public-private partnerships, to entirely private enterprises. Many are being used to jump-start economies in the developing world, with masterplans carefully calibrated to attract foreign investors and treasuries looking to sink their funds into something concrete. They provide a powerful means for wealthy countries to expand their strategic influence abroad, with the construction of new cities acting as a form of debt-trap diplomacy, tying host nations into impossibly burdensome deals. They are billed as a panacea for the world’s urban ills, solving overcrowding, congestion and pollution; yet, more often than not, they turn out to be catalysts for land dispossession, environmental degradation and social inequality”.
Landscape change affects not just the development models but also the underlying theories. For example, under an industrialisation paradigm, economic development occurs when the underemployed surplus labour in agriculture migrate to cities for manufacturing jobs. Where the “bright lights” theory referred to the rural-urban migration (rural migrants being attracted by cities’ bright lights), “bright lights” now refers to the methodology of using satellites to measure lights at night to determine the intensity of economic activities, particularly in less developed regions where economic statistics are limited.
Under traditional development planning, the rural-urban problem was addressed by providing incentives to encourage the geographical dispersion of factories. But this does not apply with the phenomenon of urban crowding-rural depopulation. Work in vibrant cities now tend to be information-based revolving around services, technology and the creative industries. Cities thus evolve to become gentrified, global and high-costs. Hence, it is too expensive to locate factories in major cities. However, locating factories in rural areas runs into the problem that depopulation is reducing the supply of skilled workers in these areas. It is worth noting the latest trends of urban crowding-rural depopulation are information rather than industry-driven.
The formerly important role of family-owned businesses in economic development has also diminished due to the emergence of platforms, the shrinkage of household sizes and the shift to global vertical chains. In the meantime, the new technologies are reducing the developmental value from manufacturing, low labour costs and capital. Hence, there is a need to rethink capital formation strategies – particularly those built around SMEs – and immigration policies.
Overall, recent trends suggest there will be fewer opportunities to pursue developmental strategies based on low labour costs and export-led industrialisation. However, recent changes in the patterns of globalisation suggests alternative developmental paths are opening up.
Arvind Panagariya (18 July 2019) “Debunking protectionist myths: Free trade, the developing world, and prosperity”. Cato Institute. https://www.cato.org/publications/economic-development-bulletin/debunking-protectionist-myths-free-trade-developing-world
Oliver Wainwright (19 July 2019) “From South Korea to Malaysia, the smart cities hailed as answer to world’s urban ills turn to ghost towns”. South China Morning Post. https://www.scmp.com/magazines/post-magazine/long-reads/article/3019142/south-korea-malaysia-smart-cities-hailed-answer
Hillary Hoffower (7 June 2019) “Forget San Francisco — these 6 global cities have thriving tech hubs that could make them the next Silicon Valley”. Business Insider US. https://www.businessinsider.my/silicon-valley-around-the-world-tel-aviv-berlin-stockholm-2019-6/?r=US&IR=T
Phuah Eng Chye (10 March 2018) “Organisation of households: Shrinking households, labour market frictions and societal cultures”.
Phuah Eng Chye (24 March 2018) “Organisation of households: Household and business formation”.
Phuah Eng Chye (11 May 2019) “Critique of information”.
Phuah Eng Chye (6 July 2019) “Information and development: Are new technologies disrupting the path to development?”
Sarah Moser (13 July 2018) “The future is already here”. CATO Unbound. https://www.cato-unbound.org/2018/07/13/sarah-moser/future-already-here
Sidewalk Labs (17 June 2019) “Sidewalk Lab’s proposal: Master innovation and development plan”. https://quaysideto.ca/sidewalk-labs-proposal-master-innovation-and-development-plan/
 See Arvind Panagariya for a review of import substitution and export-led strategies.
 Malaysia’s “Look East” policies in the 1980s signaled a switch from Western economic models towards adopting Japanese industrialization strategies and work ethics.
 Phuah Eng Chye “Information and development: Are new technologies disrupting the path to development?”
 See “Sidewalk Lab’s proposal: Master innovation and development plan” for its smart city project.
 UN-Habitat “The links between economic change and urban change”. Department for International Development (DFID). https://www.ucl.ac.uk/~ucftwww/myths/myths_theme_1.htm
 Center for International Earth Science Information Network (9 April 2013) “Bright lights, big city?”. https://blogs.ei.columbia.edu/2013/04/09/bright-lights-big-city/
 See Scott Lash’s description of “lifted-out” space. “Critique of information”.
“Organisation of households: Shrinking households, labour market frictions and societal cultures”; “Organisation of households: Household and business formation”.
 Phuah Eng Chye “Information and development: Are new technologies disrupting the path to development?”