ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

Current Issues on Industry,

Trade and Investment
No. 2

UNITED NATIONS
ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC

CURRENT ISSUES ON INDUSTRY,

TRADE AND INVESTMENT
No. 2

ESCAP works towards reducing poverty and

managing globalization

UNITED NATIONS
New York, 2003
i
 ST/ESCAP/2298

UNITED NATIONS PUBLICATION

Sales No. E.04.II.F.6

Copyright  United Nations 2003

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ISBN: 92-1-120359-7 ISSN: 0252-4481

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ii ii
 III. Promoting Business and Technology Incubation for Improved Competitiveness of
Small and Medium Enterprises: Workshops proceedings

CONTENTS
Page
Abbreviations .............................................................................................................................................. v

I. FOREIGN DIRECT INVESTMENT AND TECHNOLOGICAL CAPABILITY-

BUILDING IN LEAST DEVELOPED COUNTRIES .............................................................. 1
– Bhavani P. Dhungana
A. Introduction ............................................................................................................................... 1
B. Global and regional issues: implications for foreign direct investment and technological
capacity-building in least developed countries ........................................................................ 2
C. Foreign direct investment: trends and developments ............................................................. 7
D. Technological capability-building through foreign direct investment ................................... 12
E. Conclusions and strategies for foreign direct investment promotion and technological
capability-building in least developed countries ..................................................................... 15

II. TRADE FINANCE INSTITUTIONS FOR TRADE AND SMALL AND MEDIUM-SIZED
ENTERPRISE DEVELOPMENT IN SOUTH CAUCASUS AND CENTRAL ASIA ......... 21
– Yann Duval and Urmi Sengupta
A. Introduction ............................................................................................................................... 21
B. A simple model of national trade finance institutional structure ............................................ 23
C. Is the model adapted to Central Asian and South Caucasus countries? ................................. 30
D. Conclusions and recommendations .......................................................................................... 36
References .......................................................................................................................................... 39

III. ENTREPRENEURSHIP DEVELOPMENT FOR WOMEN IN GMS COUNTRIES ......... 41

– Siti Ichsan
A. Introduction ............................................................................................................................... 41
B. Women and economic development in GMS countries .......................................................... 41
C. Entrepreneurship development ................................................................................................. 51
D. Conclusions and recommendations .......................................................................................... 56

IV. DEVELOPMENTS IN TRADE AND REGIONAL TRADE AGREEMENTS IN ASIA

AND THE PACIFIC ....................................................................................................................... 59
– Marit Nilses
A. Introduction ............................................................................................................................... 59
B. Exports from developing Asia and the Pacific ........................................................................ 59
C. Regional and bilateral trade agreements .................................................................................. 62
D. Regional trade agreements and the multilateral trading system ............................................. 68
E. ESCAP’s work in capacity building for trade negotiations .................................................... 72

iii
Current Issues on Industry, Trade and Investment

CONTENTS (continued)

Page

LIST OF TABLES
I.1 Economic growth rate in developing Asia and the Pacific, 2000-2004 ........................................ 3
I.2 Foreign direct investment, 1991-2001 ............................................................................................ 10

II.1 Obstacles to trade financing or investment financing .................................................................... 23

II.2 A benchmark of macroeconomic indicators for trade finance development from selected
Asian countries ................................................................................................................................ 35

III.1 Labour participation by gender ....................................................................................................... 43

III.2 Gross enrolment ratios by level and gender in 2000 ..................................................................... 43
III.3 Female participation in natural sciences and engineering ............................................................. 45
III.4 Female students by broad field of study, 2000 ............................................................................... 46
III.5 Poverty ............................................................................................................................................. 46
III.6 Labour participation by gender, by sector ...................................................................................... 48
III.7a Size of the informal economy ......................................................................................................... 50
III.7b Size of the non-agricultural informal economy ............................................................................. 50
III.8 Wage and self-employment in non-agricultural informal employment ........................................ 50

IV.1 Exports by developing economies in Asia and the Pacific ............................................................ 60

IV.2 Export structure by main commodities ........................................................................................... 61
IV.3 Intra-trade of regional trade groups ................................................................................................ 68

LIST OF FIGURES
II.1 Trade of CIS except Russian Federation, 1994-2001 .................................................................... 22
II.2 Institutional structure of financial sectors in selected Asian countries ......................................... 24
II.3 The proposed national trade finance institutional structure model ............................................... 25
II.4 Typical timeline of the changes in the banking sector and trade finance institutions in
transition economies ........................................................................................................................ 32
II.5 TFIS model: staged implementation .............................................................................................. 36

III.1 Women’s entrepreneurship development continuum ..................................................................... 54

IV.1 The regional kaleidoscope of trade agreements ............................................................................. 66

LIST OF BOXES
II.1 Reserve Bank of India (RBI) and trade finance ............................................................................. 26
II.2 Facts about COFACE, EFIC and ECGC ........................................................................................ 27
II.3 The EXIM Bank of Thailand .......................................................................................................... 29

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 III. Promoting Business and Technology Incubation for Improved Competitiveness of
Small and Medium Enterprises: Workshops proceedings

ABBREVIATIONS
ADB Asian Development Bank
AEC ASEAN Economic Community
AFTA ASEAN Free Trade Area
APEC Asia-Pacific Economic Cooperation (currently comprises 21 economies: Australia; Brunei
Darussalam; Canada; Chile; China; Hong Kong, China; Indonesia; Japan; Malaysia;
Mexico; New Zealand; Papua New Guinea; Peru; Philippines; Republic of Korea; Russian
Federation; Singapore; Taiwan Province of China; Thailand; and the United States of
America)
ASEAN Association of Southeast Asian Nations (comprises Brunei Darussalam, Cambodia, Indonesia,
Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand
and Viet Nam)
ASEAN-6 Comprises Brunei Darussalam, Indonesia, Malaysia, Philippines, Singapore and Thailand
BDS business development services
BIMST-EC Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation
BTAs bilateral trade agreements
CIS Commonwealth of Independent States
DDA Doha Development Agenda
EBRD European Bank for Reconstruction and Development
ECAs export credit agencies
ECE Economic Commission for Europe
ECO Economic Cooperation Organization
ECOTA ECO Trade Agreement
EU European Union
EXIM export-import bank
FDI foreign direct investment
FTA free trade areas
GATS General Agreement on Trade in Services
GATT/WTO General Agreement on Tariffs and Trade/World Trade Organization
GDP gross domestic product
GMS Greater Mekong Subregion
GMS-BF Greater Mekong Subregion Business Forum
GNI gross national income
ICT information and communication technology
IFIs international financial institutions
ILO International Labour Organization
IMF International Monetary Fund
IPN international production network
IT information technology
ITC International Trade Centre, UNCTAD/WTO
LDCs least developed countries
M&A mergers and acquisitions

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Current Issues on Industry, Trade and Investment

ABBREVIATIONS (continued)

MERCOSUR Mercado Común del Sur (Southern Common Market)

MFN most-favoured-nation
MIS management information systems
MNC multinational corporation
MSG Melanesian Spearhead Group
NAFTA North American Free Trade Agreement
NGOs non-governmental organizations
NBFI non-banking financial institutions
NIEs newly industrialized economies
NIS newly independent States
OECD Organisation for Economic Co-operation and Development (comprises Australia, Austria,
Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary,
Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway,
Poland, Portugal, Republic of Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom
of Great Britain and Northern Ireland, and the United States of America)
R&D research and development
RTAs regional trade agreements
SAARC South Asian Association for Regional Cooperation (comprises Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka)
SAFTA South Asian Free Trade Area
SAPTA South Asian Preferential Trade Arrangement
SARS severe acute respiratory syndrome
SCCA South Caucasus and Central Asia
SMEs small and medium-sized enterprises
SPECA Special Programme for the Economies of Central Asia
TFIS trade finance institutional structure
TNCs transnational corporations
TRIPs trade-related aspects of intellectual property rights
UNCTAD United Nations Conference on Trade and Development
UNESCO United Nations Educational, Scientific and Cultural Organization
UNIFEM United Nations Development Fund for Women
WTO World Trade Organization

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 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
I. FOREIGN DIRECT INVESTMENT AND TECHNOLOGICAL
CAPABILITY-BUILDING IN LEAST DEVELOPED COUNTRIES
Bhavani P. Dhungana*
A. Introduction
Societies, economies and nations have changed
dramatically over the last five decades. They have
changed politically, economically and socially with
far reaching implications of changes on the life styles,
living conditions, consumption patterns, production
systems, thinkings and ways of doing things whether
in business, family management, cooperation with
each other or even in conflicts and war. Nations and
economies have dismantled barriers to trade and
investment, have promoted integration of their
economies and production networks and have
generated wealth through improvements in
production, productivity and values in the whole
chain of production systems and businesses. As
a result of all these changes, the structure of
economies have changed, market-orientation and
individual and corporate initiatives rather than state
domination have been given prominence, levels of
socio-economic development in most of the cases
improved and trade among nations have increased.
Developing countries have strengthened their position
and emerged as challengers to developed countries,
capital availabilities have increased and regionalism
and multi-lateralism are gaining strengths than
national autarky and isolationism. In these changes,
there are some strong messages, as all countries and
economies have not gained or performed positively.
There are national differences, and opportunities and
challenges have been different for different societies,
economies and nations. These processes of changes
categorized as “globalization and liberalization” have
ushered new options and challenges and they are
continuously evolving and evolving at a rapid pace.
National authorities and multilateral organizations
with support from members are progressively opening
new opportunities for socio-economic development
*
Chief, Investment and Enterprise Development Section, Trade
and Investment Division, Economic and Social Commission for
Asia and the Pacific.
and business transactions everywhere. Exploitation
and benefits from these opportunities require
strengthening of competitiveness – a force that needs
to be generated and augmented through concerted
efforts from all sectors and actors of national
economy.
Competitiveness is the key word these days
for survival, sustenance and for gain. In the absence
of competitive strength, nations and societies will
lag behind and economies will remain marginalized.
Therefore in meeting the challenges of competi-
tiveness, societies everywhere should continually
seek coherent strategies to integrate into the global
and regional systems efficiently, and on terms that
suit one’s economy and promote sustained growth.
In a least developed country, the growth should
especially benefit the poor. Government is the
binding agent of this strategy. It describes the way
in which the main players in society, governments,
businesses and civil society, can align their agendas
and manage their society for their individual and
collective benefit, and in this case around the specific
needs and challenges of globalization. It should also
describe how players outside the mainstream,
especially the poor, unemployed and those in the
informal sector, would be motivated to contribute
their added value to society.
In many countries, a number of business
sectors, governments, trade unions and NGOs are
working together already to lead the way in making
their societies and economies as one of the winners
of globalization. Unfortunately many of the least
developed countries, have not been able to move in
tandem with those calls of the modernization and
socio-economic transformation. While globalization
and liberalization have brought challenges that
demand a new role for the government, business
sector and civil society and a need to align new
agendas for the collective benefit of the nation, some
countries have not been able to move and match
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Current Issues on Industry, Trade and Investment
those requirements. Institutions, leaders and
managers have been unable to review and understand
responsibilities, build up capabilities and move ahead.
Petty squabbles, quarrels and vested interests have
distorted and misguided national priorities. It is
however not too late to move in the right direction.
Collectively, everyone within the nation must work
for the nation’s priorities and competitiveness.
There are many ways of improving
competitiveness and being able to move the nation’s
economy for the betterment of its people. It is not
the intention of this article to dwell on all the facets
of competitiveness and national development, but
only to sensitize readers on one issue, i.e., how
a least developed country could strengthen its
technological capability through promotion of foreign
direct investment (FDI), so that needed resources
could be generated and development could occur
benefiting the poor people of the country. It is
a well established fact that economies need to develop
the resource base to attract the kind of investment
that spurs growth and multipliers, and enhances
sustainable development, spreading knowledge and
opportunity for all and this process has to be owned
and nurtured by society concerned with a fair stake
and benefit to all.
Therefore, this article will concentrate on
reviewing and examining the issues as to how a least
developed country can promote FDI, and through it,
build up technological capability for economic
development and competitiveness.
We are all aware that FDI is the new driving
force for international and regional fragmentation of
production, a phenomenon that has brought
substantial volumes of business to many parts of
Asia. It also has the potential to bring new
technologies, moving production up the value chain
and creating new opportunities for sustainable human
development – knowledge and opportunity. With
negotiations in investment on the horizon, societies
need strategies to connect investment policy with
the needs of industry and the stance of investment
negotiators. At the same time, infrastructure and
trade must support investment policy, along with
measures that promote research and development
(R&D), competitive clusters and a skilled workforce
in order to remain competitive on technology if not
2
on cost. But how can least developed countries
prevent a race to the bottom? What attracts investors
and how will they be persuaded to direct finance
that increases the value addition? These are important
issues to be addressed and attempts have been made
in this article.
B. Global and regional issues:
implications for foreign direct
investment and technological capacity-
building in least developed countries
While addressing the issues and strategies to
be followed for technological capacity-building at
the national level in least developed countries
(LDCs), it is highly essential that the economic trends
and events at the global and regional levels be strictly
analysed and watched, as no country/economy can
remain aloof from changes occurring at those levels.
This is even more important if the objective is to
assess the prospects for attracting FDI and thereby
build up technological capability for improved
competitiveness. Therefore, a brief analysis of
critical global and regional issues and trends having
direct implications for capacity building for improved
competitiveness in developing countries, especially
in LDCs, is presented below.
1. Global and regional developments in
output and trade
Despite some weak recovery in major
industrial countries in 2002 and somewhat subdued
performance in the early part of 2003, the overall
global production and trade performance in the early
years of the twenty-first century can be regarded as
somewhat encouraging. Though the performance in
Europe remains somewhat uncertain, but the
surprising turnaround in Japan and the unfolding
recovery in the Untied States of America indicate
that the global economy may gain momentum and is
predicted to be better in the last quarter of 2003 and
early part of 2004. Thus global production had
increased by 1.9 per cent in 2002 and is expected to
be 2.0 per cent in 2003. Forecast for 2004-2005 is
expected to be in the range of 2.9 per cent.1 Growth
1
World Bank, Global Economic Prospects 2004: Realizing
the Development of Promise of the Doha Agenda (Washington,
2003) p. 280.
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries

rate in industrialized countries was 1.6 per cent
in 2002, 1.5 per cent in 2003 and is expected to be
2.4 per cent in 2004-2005. A notable feature of the
current recovery is the lack of the synchronization
of growth among the major industrial countries,
with the United States economy significantly
outperforming most other developed economies.
Overall, accommodative monetary and expansionary
fiscal policies in other industrial countries will
contribute to higher growth. Hence, there is
a stronger sense of optimism than just a year ago,
although risks to the outlook remain significant.2
Developing countries had an average growth
rate of 3.3 per cent in 2002 and likely to have
4.0 per cent in 2003. Growth rate in 2004-2005 is
expected to be in the range of 4.9 per cent.
Growth rate in the Asian region remained
remarkable with 6.5 per cent in 2002 and 5.6 per
cent in 2003 in East Asia. South Asia had a growth
rate of 4.2 per cent in 2002 and 5.8 per cent in 2003.
The overall rate of growth in Asia and the Pacific
was 5.6 per cent in 2002 and is expected to be
5.3 per cent in 2003 (see table I.1). Despite
significant shocks in 2003, including uncertainties
of conflict in Iraq, regional terrorist threats, higher
oil prices and severe acute respiratory syndrome
2
Asian Development Bank, Asian Development Outlook 2003
Update (Manila, 2003) p. 4.
(SARS), most economies of the Asian region
performed well. Overall growth prospects in the
Asian region over the period 2005-2015 remains
encouraging with a forecast of 5 to 6 per cent.3
The global production was expected to pick
up in 2003, somewhat lower than expected, whereas
the trade growth in 2003 is expected to be an
improvement over the performance of 2001 and 2002,
but remains below the 1993-2002 average.4 Export
volumes from developing countries are expected to
expand at a rate close to double digits, with much of
this growth concentrated in Asia and the Pacific
region. In nominal terms, aggregate exports from
developing Asia, accounting for around 18 per cent
of world exports, grew at a rate of almost 20 per
cent in the first half of 2003. Intraregional exports
were especially strong in particular to China from
East Asia which is emerging as a major hub for
production and trade network.
Though the trade policy environment benefited
from the momentum generated by the Doha
Conference, the global trade talks continue to be
stalled in several policy domains vital to developing
countries – agriculture, non-farm trade, special and
differential treatment, and dispute settlement. Nor
3
World Bank, op. cit., pp. 235-238.
4
Asian Development Bank, op. cit., p. 6.

Table I.1. Economic growth rate in developing Asia and the Pacific, 2000-2004
(Annual percentage change)

Country 2000 2001 2002 2003 (est) 2004 (forecast)

East Asia 8.1 4.4 6.5 5.6 6.5
South-East Asia 6.2 1.7 4.1 3.9 4.9
South Asia 4.5 5.0 4.2 5.8 6.1
Afghanistan – – – – –
Bangladesh 5.9 5.3 4.4 5.3 5.7
Bhutan 5.3 6.6 7.7 – –
India 4.4 5.6 4.3 6.0 6.3
Maldives 4.8 3.4 6.0 4.2 2.8
Nepal 6.0 4.6 -0.5 2.3 3.5
Pakistan 3.9 2.2 3.4 5.1 5.0
Sri Lanka 6.0 -1.5 4.0 5.0 5.5
Central Asia 8.2 10.8 7.3 7.5 5.9
The Pacific -0.4 0.3 -0.3 2.5 2.7
Average (developing Asia
and the Pacific) 7.1 4.1 5.6 5.3 6.1
Source: Asian Development Bank, Asian Development Outlook 2003 Update (Manila, 2003), Appendix, page 97.

3
Current Issues on Industry, Trade and Investment
are there significant and satisfactory progresses in
other contentious areas, such as the issues related to
investment, competition, trade facilitation, and
government procurement.5 The recent failure of the
Cancun meeting is one more testimony to the reality
that for the international arena of negotiations and
the global trade system to be fair and free, it will
take time and the developing nations need to emerge
more collectively and strongly and work even more
in a cooperative manner in future. The developing
countries, and enterprises in those countries, not only
need to continuously stimulate and strengthen
competitiveness in an evolving global and regional
production network and competitiveness in their
business environment, but also need to strengthen
their bargaining and negotiating position in global
trade negotiation forums. At the same time,
a continual challenge facing the trading system is to
secure balanced outcomes faithful to these core tenets
which at the same time accommodate the divergent
needs, interests and priorities of the membership,
including those of smaller and weaker countries. This
is a moving target, and the mix that has emerged
from the interplay of principle and pragmatism at
different stages of the GATT/WTO’s development
has never seemed ideal to all participants in the
system. But as long as governments believe that no
serious alternative exists to cooperation, they will
negotiate and the system will continue to modify
and redefine itself. It is this essential process of
modification and redefinition that underlies
negotiations like those upon which members
embarked at Doha in November 2001.6
2. Liberalization
Over the last two decades, the global economy
has witnessed a rapid pace of economic reforms
leading to the liberalization of national economies,
especially in the areas of trade and investments. The
successful conclusion of the Uruguay Round of
Multilateral negotiations and the interest and success
of countries in joining the World Trade Organization
(WTO) further expedited that process. All these
factors are not only leading further liberalizations
and expansion of global trade but are also increasing
5
World Trade Organization, World Trade Report 2003 (Geneva,
2003) p. xii.
6
Ibid.
4
global interdependence and integration of production
activities and economies. While the implementation
of WTO rules and procedures are yet to result in the
establishment of a freer and fairer trading system for
all countries, and the outcome so far has not been
completely free from debates and controversies and
it is felt that the principal gainers have been mostly
the stronger economies. Yet it is quite obvious that
the process when further improved through new
rounds of negotiations would eventually benefit all
nations. While the failure at Cancun was a great
disappointment for all, especially to the developing
world, however, the growing realization is that the
opening up of markets, reduction of trade barriers
and strengthening of domestic private sector, are
leading to expanded market access and increased flow
of capital, including FDI as well as technologies.
Further, although developing countries need policy
flexibility to support and promote their enterprises,
investments in production and marketing, and
export expansion and diversification, latecomers now
face more stringent policy conditions than those
which prevailed previously. On the one hand, the
multilateral framework of WTO rules has in certain
cases narrowed the range of policy options for
governments: quantitative tools of protection are
now largely ruled out, including production
allocations and similar means; tariffs are increasingly
subject to binding commitments; the transition period
for national content and trade balancing requirements
lapses at the end of 1999; and export subsidies will
no longer be permitted for most developing countries
after 2003. On the other hand, commitments
undertaken under IMF/World Bank Structural
Adjustment Programmes have reinforced and
widened WTO commitments and accelerated the
adoption of non-reciprocal autonomous liberalization
measures, and bilateral agreements with major
developed countries have further reduced the
remaining policy options and WTO flexibility. These
forces and processes are creating environments where
enterprises and firms in developing countries,
including in LDCs, have to strengthen their
competitiveness to remain in the domestic and the
international markets.
3. Globalization
The global economy and thereby the national
economies are passing through an intensified phase
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
of interdependence and an environment of greater
movement of capital and other factors of production,
creating new sites for production and production
networks. This process termed as “globalization” as
mentioned earlier is creating a vast array of external
influences on individual economies, societies and
ways of organizing and conducting businesses and
the overall way of human living. The rapid pace of
technological innovations and adaptations, the
reduction in transportation and communication
distances and costs, extensive and intensive use of
information and communication technology (ICT) are
further adding momentum to the globalization
process. The globalization process is also further
driven by the expansion of production activities
across countries/economies by transnational
corporations (TNCs) and is expected to gather further
strength in the coming years. There is an increasing
tendency towards greater division of labour between
the TNCs and subsidiaries/affiliates or local partners.
Several large production enterprises are also
attempting to source the parts and components
through a system of complementarities and linkages.
It is therefore essential that local capabilities of firms
and enterprises be developed so that they can be
effective partners or subsidiaries of TNCs in this
global production networks and in inter-industry or
intra-industry trade, otherwise in the rapid global
market changes, they will not be able to sustain and
maintain their competitiveness and market share.
Globalization has become a hot topic/issue and
its implications have been far reaching. The analysis
and impact assessment of globalization on firms,
economies and societies have been varied and
controversial. Societies and experts have been
divided on the issues, benefits and challenges of
globalization. But one thing is certain. The process
is going to gain momentum and intensity. One cannot
turn back the clock. One can devise different
strategies for dealing with the forces in managing
and dealing with globalization. It is generally felt
that globalization has increased competitive pressures
on firms. Together with rapid technological change,
it has altered the environment in which firms operate.
It is pointed out that globalization offers
unprecedented opportunities for firms to act
successfully, while it simultaneously heightens the
risks for firms lagging behind. In an open and
liberalized world, increasing firm competitiveness has
become a major challenge.
Various studies provide thorough analysis of
the competitiveness of firms in different regions and
detail the different issues related to firm
competitiveness from global rules for business,
regional business environment, corporate governance,
and the key economic sectors of the economies.
Several authors have addressed key issues and the
real challenges facing firms’ operations and
efficiency, the ability of firms to compete in global
markets, the impact of small and medium-sized
enterprises on the stimulation of growth, and the
economic potential of the manufacturing sector in
the developing countries.7 Globalization nevertheless
remains a potentially powerful and dynamic force
for growth and development. It is an evolving
process which presents not only risks and challenges
but also opportunities. In order to ensure that it can
contribute to laying the foundations for enduring and
coherent development, intensified international
cooperation as well as countries’ own national
and collective efforts will be essential to address
effectively the shortcomings of the external
environment and the constraints of underdevelopment.
4. Technological innovations
and changes
One of the major developments of the last
two decades is the rapidity with which technological
innovations and changes are occurring. This is
leading to the shortening of the product life cycles
and the emergence of the new products and product
differentiations. In this context, technological
7
Joseph E. Stiglitz, The Roaring Nineties: A History of the
World’s Prosperous Decade (New York, W.W. Norton and
Company, 2003); Antonio Ocampo and Juan Martin (eds),
Globalization and Development: A Latin American and Caribbean
Perspective (Stanford University Press, September 2003); Samiha
Fawzy (ed), Globalization and Firm Competitiveness in the Middle
East and North Africa Region (Washington, World Bank, June
2002); Simon J. Evenett, Weiping Wu and Shahid Yusuf (eds),
Local Dynamics in an Era of Globalization: 21st Century
Catalysts for Development (Oxford University Press, World Bank,
August 2003); and Bhavani P. Dhungana, “Economic integration
on industrial production networking: Asia’s prospects and
challenges in the twenty-first century”, Current Issues on Industry,
Trade and Investment No. 1 (ST/ESCAP/2276) (New York, United
Nations, 2003).
5
Current Issues on Industry, Trade and Investment
strategies at the macro level need to be designed
ranging from improvements and adaptation of the
traditional technologies to the capability building in
acquiring and adopting the modern and efficient
technologies in various production sectors.
Developing countries and enterprises in developing
economies need to fully realize that technological
capability is the determining factor of competi-
tiveness. In this context, it is essential to note that
technological capability building does not relate only
to innovations and acquisition of technology but
should also relate to management and organization
factors and management of technologies themselves.
These points need to be addressed at the firm level.
Thus availabilities of technological skills, continuous
upgrading and innovations at the firm level will be
the determining factors of competitiveness of firms
and their products. It is therefore highly essential
that technological needs be addressed more
specifically at the enterprise level. It is in this sense
a “bottom-up” approach rather than “top-down”
approach would be practical and effective. It is
however essential to note that technological needs
and facilities for technological build-up has to be
conceived and evolved for the different scales of
production activities differentiated further at the firm
level requirements. The government has to play
a major role in developing and creating facilities at
the macro level as well as for groups of scale level
production units and sectors for technological
upgradation and modernization, especially in LDCs.
The private sector and the enterprises have to play
a proactive role at the firm level.
Furthermore, technological capability-building,
including the requisite skills development, is
a fundamental aspect of the development process
which carries implications for economic restructuring
and strengthening of competitiveness. As countries
develop, the largely unskilled labour-intensive
industries make way for more knowledge-based and
technology-intensive industries in order to sustain
national competitive advantage. The new industries
require advanced and specialized skills to cope
with new, more sophisticated and complicated
technologies. The shift from public sector domination
to private sector-led initiatives also necessitates
a change in approach and thinking, as private sector
industries operate under much more pressure to
innovate and to upgrade the skills of the workforce,
6
including management, in order to stay competitive.
Competitiveness thus assumes global dimensions,
with the pressure to become competitive greater
than ever. In addition, as countries cannot avoid
opening up their economies if they take economic
development seriously, the ensuing inflows of
foreign investment and technology imports put
increasing pressure on domestic industry to improve
performance. In many developing countries,
however, the main bottleneck is the lack of adequate
skills. In this case, foreign investment can bring
with it opportunities and various modalities for skills
development, which the host country should tap to
the maximum extent possible. This important issue
will be further elaborated later in this article.
It has also to be noted that the globalization
process has significantly improved the access of
low-income countries to technological upgradation
through technology imports provided certain
conditions prevail within the country. It has been
fairly documented that low-income countries as
a group have in fact substantially increased GDP
ratio of technology imports over the past few years
though there are large cross-country discrepancies in
technological upgrading within the group.
General-purpose technology continues to
constitute the bulk of technology imports, while
sector-specific technology used for labour-intensive
activities has gained in importance. Improved access
to technology imports appears not to have improved
labour productivity and the demand for skilled labour
in many low-income countries. To raise the benefits
reaped from globalization, governments might need
to make additional efforts towards a simultaneous
increase in technology imports and the skill level of
the domestic labour force.8 This aspect needs to be
even more strongly realized in the context of LDCs
where there are pressing needs for technological
capability building through skills development.
5. Information and communication
technology
There is a wide recognition that the
globalization and advances in information and
8
Jorg Mayer, Globalization, Technology Transfer and Skill
Accumulation in Low-income Countries, UNCTAD Discussion
Paper No. 150 (Geneva, August 2000).
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
communication technologies have had profound
impacts on the business decisions and competi-
tiveness of all enterprises, including FDI, regardless
of size or ownership. It has also put immense
pressures on enterprises to innovate, for instance, by
introducing information technology in areas such as
production, marketing and financial management. In
particular the large-scale enterprises, including TNCs,
have introduced management information systems
which have facilitated their business decisions by
assuring the timely flow of reliable and accurate
information. As such, the use of information
technology has facilitated the implementation of
management techniques such as “just in time”
inventory management and other working capital
management techniques making the operations of the
enterprise more cost effective and competitive. In
addition, information technologies have facilitated
access to information in all kinds of areas relevant
to the operations of the enterprise, and have opened
avenues for expanding products and markets,
boosting both domestic and foreign investment as
well as in promoting competitiveness.9
As globalization has boosted FDI flows
all over the world, and not in the least in the
Asia-Pacific region, the application of information
technology has further facilitated the practice of
so-called “outsourcing”. This might be explained
by the fact that the use of information technology
lowers transaction costs, thereby favouring “buying”
to “making”. Outsourcing involves the manufacturing
of components in separate locations and assembles
them elsewhere. This also allows TNCs and other
big enterprises to adopt sourcing of parts and
components involving widely dispersed industrial
plants and transmit technical and economic
information among numerous information technology
systems at different geographical locations.
Thus, the rapid developments in information
and communication technology have been identified
as the main driving force for improving
competitiveness behind the globalization process, not
only directly but also indirectly, as it has facilitated
government decisions to liberalize and deregulate the
9 of official development finance. In 1996, the Asian
OECD, Information Communication Technology Outlook
2002 (Paris, 2002) and ESCAP, Initiatives for E-Commerce
Capacity-building of Small and Medium Enterprises (ST/ESCAP/
2261) (New York, United Nations, 2003).
economy and business decisions to invest overseas.
In other words, with the help of information
technology, ideas are translated into new processes,
products and services before they make an impact
on the market. It also improves the quality of
design of industrial products by making them
information-intensive and environmentally friendly
rather than energy and material-intensive.
Information technology allows the establishment of
up-to-date management information systems (MIS)
which enable managers to obtain quick and timely
information to facilitate decision-making. In sum,
information and communication technology is used
extensively in various sectors in both developed and
developing countries to improve productivity,
efficiency, flexibility and quality and creates new
business opportunities. The wider application of
information technology has also facilitated the flows
of FDI as well as the technological capability
building. Furthermore, FDI from Asian countries
has also been an important vehicle facilitating the
diffusion of ICT within Asia. It decreases the cost
of doing business through facilitating transaction
processes, procedures and services.
C. Foreign direct investment:
trends and developments
During the last few decades, the Asian
economies have exhibited remarkable vigour and
dynamism in which external private capital flows
have played a very important role while the economic
crisis of 1995-1997 has also been cited as a result of
such unrestricted and unregulated flows leading to
currency and financial crisis, but nevertheless the
overall impact of such capital flows have been
remarkable in overall development process of the
Asian countries.
1. Trends in capital flows
In the 1990s, there has been a significant
change in the composition of external capital flows
to developing countries, with the share of private
capital increasing from 44 per cent in 1990 to 86 per
cent in 1996 and a corresponding decline in the share
region received 50 per cent of private finance going
to developing economies. However, this figure was
reduced to 38 per cent in 2000. Nevertheless, net
7
Current Issues on Industry, Trade and Investment
private capital flows constituted more than 82 per
cent of the total net resource flows to developing
countries in 2000.10 Within private capital, flows of
foreign investment increased five and a half times,
surpassing other types of capital flows and
constituting 54 per cent of total capital flows to
developing countries in 1996. Asia received most of
the capital inflows up to 1996 but then suffered
a decline after the financial crisis of 1997. In recent
years it has picked up again.
Since 1990, private capital flows have far
exceeded official loans and grants to become the
dominant source of external funding for many
developing countries. The terms and conditions under
which these countries access international capital
markets thus weigh heavily on economic performance.
While such accessibility could also depend on other
non-economic factors such as political and other
factors and the capital flows could be highly volatile,
nevertheless. 11 Private capital flows are more
beneficial since they are generally accompanied by
technology transfer, managerial capability and market
access in the case of FDI; a diversified investor base
in the case of bonds; and a reduction in the cost of
capital in the case of portfolio flows. Unlike other
flows, FDI is a “package” which contains capital
along with management, technology and skill and
should take precedence over others. Experience in
developing countries suggests that borrowing capital
from international banks, purchasing technology
through licences and negotiating management
agreements are less efficient, in terms of gains in
productivity, than “unbundling” a FDI package.
2. Trends in foreign direct
investment flows
By now it is clearly evident that FDI has
made a significant contribution in sustaining the
dynamic performance of Asia and the Pacific region
by becoming an important source of capital,
technology and skills. In this regard, Japan and the
capital surplus newly industrialized economies (NIEs)
have appeared as the major suppliers of intraregional
10
Asian Development Bank, Key Indicators 2002 (Manila, 2002)
tables 29 and 30, pp. 79-80.
11
International Monetary Fund, Global Financial Stability
Report 2003 (Washington, 2003), chapter IV, p. 85.
8
FDI. This development has coincided with their
movement to higher level of technologically
sophisticated production structures. Consequently,
the FDI activities of their enterprises are beginning
to make a significant contribution towards
regionalization of manufacturing production and
improving the basis of competitiveness of the
recipient countries.
In recent years, almost all the developing
countries, including LDCs, of the region have shown
an appreciable increase in their awareness about the
potential benefits of FDI in achieving their
development objectives. At an aggregated level, FDI,
particularly in the form of equity investments
involving industrial relocation and complementation,
add to the capital stock of the country. This increase
in the supply of capital enables the recipient country
to achieve faster economic growth and bring about
rapid structural change. As investment in new plants,
equipment, roads, transport and other forms of fixed
capital take hold, the recipient country’s productivity
goes up, spurring the development of a competitive
industrial sector. FDI can also replenish their existing
industrial capital stock and help towards releasing
domestic resources for investment in physical and
social infrastructure like schools, health facilities,
housing, and transport and communication.
Careful selection and use of FDI can bring
other immense benefits to LDCs. In particular, FDI
can promote the development of a more diversified
manufacturing structure and export base in the
country. This can help reduce its dependence on
a narrow range of manufactured products to generate
employment, and on commodity-based, especially
agro-based, exports to earn foreign exchange.
Although agriculture will continue to be the
main source of employment and output in LDCs for
quite some time, its ability to provide employment
to a rapidly rising labour force is reaching limits. In
that regard, if FDI inflows reflect the comparative
advantage of a country, then it can play a significant
role in strategies to generate productive employment.
As manufacturing emerges as the dynamic component
in the industrial sector of developing countries with
a potential for providing increased employment and
generating needed investment surplus, FDI in this
sector can play an important role in achieving the
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
developing countries’ twin objectives of employment
creation and structural change through greater
linkages between manufacturing and other sectors,
and decentralization through dispersal of industrial
activities and other economic activities to relatively
underdeveloped areas, especially to semi-urban and
rural towns.
Export-oriented FDI can also ensure greater
access to foreign markets. In this regard, FDI which
promotes inter- and intraregional trade provides
developed countries with an opportunity to reduce
their dependence on a few external markets and bring
about more stability in their external account. FDI
can also facilitate the transfer of management,
marketing, production and organizational skills. It
can create opportunities for local suppliers and
contractors, and stimulate competition and efficiency.
FDI has become a major conduit for accessing
and adopting most up-to-date production technologies
crucial to achieve and maintain competitiveness,
especially in the early stages of economic develop-
ment. Opportunities for FDI-related technology
transfer are rising. In instances where FDI is at
least partially export-oriented, the likelihood that the
foreign firms will transfer efficient production
processes and up-to-date products is greater. In
a labour-abundant economy, such investments may
largely be concentrated in labour-intensive industries,
using relatively simple production technologies. In
such cases, the most important know-how to be
transferred is likely to involve management and
international marketing skills. This may prove quite
valuable for local managers who have never been
exposed to the requirements of competing in world
markets. The establishment of linkages between the
foreign-invested sector and local suppliers of
materials and services can be an important source of
indigenous technology strengthening.
FDI, like trade, also provides an important
channel for global integration and thereby for
technology transfer. FDI also promotes privatization
and the provision of finance, management and
technology for infrastructure development. The
ASEAN experience shows that FDI can promote
industrial growth, technology upgrading and export
capabilities of host countries through the creation of
intraregional and extra regional linkages. As regards
sectoral distribution, FDI tends to concentrate in
industries using mature or standardized technology
and management skills. Extra efforts are required to
attract those in the high-technology domain.
Furthermore, FDI has contributed to the
globalization of financial markets as leading
corporations set up networks of businesses, which
are often quoted on the various stock exchanges in
the world. Thus, in the economies of many
developing countries, FDI has made a significant
contribution to economic growth, employment
generation, training new skills and acquiring
expertise. It has also facilitated the transfer of
technology to developing countries and increased
their access to international markets. However, the
concentration of FDI in a few of the largest
developing economies means that many LDCs such
as Bangladesh and Nepal, are not able to benefit
fully from the transfer of technology and access to
export markets. LDCs remain heavily dependent on
official development assistance, which has declined
over the years. FDI flows are also subject to the
vagaries of the market. In the current economic
climate, there has been a significant drop in the levels
of FDI to the emerging markets and developing
countries, especially LDCs.
3. Recent trends of foreign direct
investment flows
The recent levels of FDI flows in developing
countries of Asia and the Pacific are presented in
table I.2.
FDI remained stable during much of the 1990s
but as the World Investment Report 2003 indicates,
FDI inflows declined in 2002 as a result of slowing
down of economic growth in several parts of the
world and dim prospects of recovery, but was still
much higher than that of the 1980s. The decline in
FDI in 2002 was uneven across regions and countries.
It was also uneven sectorally: flows into
manufacturing and services declined, while those
into the primary sector rose. The equity and
intra-company loan components of FDI declined
more than reinvested earnings. FDI entering host
economies through mergers and acquisitions (M&A)
went down more than that through green-field
projects.
9
Current Issues on Industry, Trade and Investment

Table I.2. Foreign direct investment, 1991-2001

(US$ million)

Country/area 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

East Asia 6 816.8 12 765.3 29 028.5 35 979.2 39 193.8 44 385.9 49 354.2 64 169.1 75 624.0 114 602.3 88 180.1
China 4 366.0 11 156.0 27 515.0 33 787.0 35 849.2 40 180.0 44 237.0 43 751.0 38 753.0 38 399.3 52 344.0
Hong Kong, China … … … … … … … 14 764.9 24 581.2 61 937.9 22 834.3
Republic of Korea 1 179.8 728.3 588.8 810.3 1 775.8 2 326.0 2 844.2 5 412.3 9 333.4 9 283.4 8 892.8
Mongolia … 2.0 7.7 6.9 9.8 15.9 25.0 18.9 30.4 53.7 …
Taiwan Province of China 1 271.0 879.0 917.0 1 375.0 1 559.0 1 864.0 2 248.0 222.0 2 926.0 4 928.0 4 109.0
South-East Asia 13 399.5 12 103.1 15 928.7 20 148.6 23 717.0 26 892.2 28 573.5 19 949.7 21 599.7 10 949.6 20 934.5
Cambodia 0.0 33.0 54.1 68.9 150.8 293.6 203.7 120.7 143.6 111.7 206.7
Indonesia 1 482.0 1 777.0 2 004.0 2 109.0 4 346.0 6 194.0 4 667.0 -356.0 -2 745.0 -4 550.0 -1 445.9
Lao People’s Democratic
Republic 6.9 7.8 29.9 59.2 95.1 159.8 86.3 45.3 51.5 33.9 83.3
Malaysia 3 998.4 5 183.4 5 005.6 4 341.8 4 178.2 5 078.4 5 136.5 2 163.4 3 895.3 3 787.6 3 548.8
Myanmar 238.1 171.6 104.7 126.1 277.2 310.4 387.2 314.5 253.1 254.8 330.0
Philippines 544.0 228.0 1 238.0 1 591.0 1 478.0 1 517.0 1 222.0 2 287.0 573.0 1 241.0 1 620.7
Singapore 4 887.1 2 204.3 4 686.3 8 550.2 8 787.7 8 608.1 10 746.1 6 389.0 11 803.2 5 406.6 8 608.8
Thailand 2 014.0 2 113.0 1 804.1 1 366.4 2 068.0 2 335.9 3 894.7 7 314.8 6 213.0 3 366.0 5 791.5
Viet Nam 229.0 385.0 1 002.0 1 936.0 2 336.0 2 395.0 2 220.0 1 671.0 1 412.0 1 298.0 2 190.6
South Asia 391.0 749.9 1 120.4 1 587.5 2 939.4 3 511.4 4 896.9 3 547.7 3 073.4 3 089.0 4 596.8
Afghanistan … … … … … … … … … … …
Bangladesh 1.4 3.7 14.0 11.1 1.9 13.5 139.4 190.1 179.7 280.4 250.9
Bhutan 0.6 0.0 0.0 0.0 0.1 1.4 -0.7 0.0 0.0 0.0 -0.1
India 73.5 276.5 550.4 973.3 2 143.6 2 426.1 3 577.3 2 634.7 2 168.6 2 315.1 3 445.1
Maldives 6.5 6.6 6.9 8.7 7.2 9.3 11.4 11.5 12.3 13.0 13.7
Nepal 2.2 4.0 6.0 7.0 8.0 19.2 23.1 12.0 4.4 -0.5 10.8
Pakistan 258.4 336.5 348.6 421.0 722.6 922.0 716.3 506.0 532.0 308.0 630.0
Sri Lanka 48.4 122.6 194.5 166.4 56.0 119.9 430.1 193.4 176.4 173.0 246.3
Central Asia … 118.0 1 417.4 907.9 1 609.4 2 027.6 2 812.9 2 510.6 2 283.7 1 505.0 …
Azerbaijan … … 0.0 22.0 330.1 627.3 1 114.8 1 023.0 510.3 129.9 …
Kazakhstan … 100.0 1 271.4 659.7 964.2 1 137.0 1 321.4 1 151.4 1 587.0 1 282.5 …
Kyrgyzstan … 0.0 10.0 38.2 96.1 47.2 83.8 109.2 44.4 -2.4 …
Tajikistan … 9.0 9.0 12.0 10.0 18.0 18.0 25.0 21.0 22.0 …
Turkmenistan … … 79.0 103.0 233.0 108.1 107.9 62.0 … … …
Uzbekistan … 9.0 48.0 73.0 -24.0 90.0 167.0 140.0 121.0 73.0 …
Pacific 162.7 250.2 204.0 157.6 559.2 155.7 131.4 250.8 290.6 48.8 183.8
Cook Islands … … … … … … … … … … …
Fiji 5.2 103.6 91.2 67.5 69.5 2.4 15.6 107.0 -33.2 -69.3 -23.1
Kiribati 0.4 0.4 -0.8 0.3 0.1 0.2 0.2 0.0 0.0 0.0 -0.5
Marshall Islands … … … … … … … … … … …
Micronesia, Federated
States of – – – – – – – – – – –
Nauru … … … … … … … … … … …
Papua New Guinea 116.7 104.3 62.0 57.0 454.6 111.3 28.6 109.6 296.5 95.9 175.9
Samoa 0.0 0.0 0.0 0.0 0.0 1.2 20.0 3.0 2.0 -1.5 1.2
Solomon Islands 14.5 14.2 23.4 2.1 2.0 5.9 33.8 8.8 9.9 1.4 7.5
Timor-Leste … … … … … … … … … … …
Tonga 0.4 1.2 2.2 0.9 2.0 2.0 3.0 2.0 2.0 2.0 2.6
Tuvalu … … … … … … … … … … …
Vanuatu 25.5 26.5 26.0 29.8 31.0 32.7 30.2 20.4 13.4 20.3 20.1
Total (Reporting) 20 770.0 25 986.5 47 699.0 58 780.7 68 018.7 76 972.8 85 768.9 90 427.9 102 871.4 130 194.7 113 895.2

Source: Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries (Manila, 2003).

10
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
The Asia-Pacific region was not spared either
from the global decline in FDI inflows in 2002. FDI
inflows to the region declined for the second
consecutive year, from US$ 107 billion in 2001 to
US$ 95 billion, uneven by subregion, country and
industry. All subregions, except Central Asia and
South Asia, received lower FDI flows than in 2001.
Flows to 31 of the region’s 57 economies declined.
However, several countries received significantly
higher flows. Intraregional investment flows,
particularly in South-East Asia and North-East Asia,
remained strong, partly as a result of the relocation
of production activities, expanding regional
production networks and continued regional
integration efforts. FDI in the electronics industry
continued to decline due to rationalization of
production activities in the region and adjustments
to weak global demand. While long-term prospects
for an increase in FDI flows to the region remain
promising, the short-term outlook is uncertain.12 FDI
increased from US$ 5 billion in 2002 to US$ 9 billion
in 2005 in South Asia. India, for example, has
joined the top ten recipients of FDI in 2002 with
US$ 3.6 billion. Apart from that, in 2002, South
Asia received US$ 16 billion in remittances. This is
the second highest among developing country regions
and equals 2.5 per cent of the GDP for the region.
For 2001, India alone, received US$ 10 billion, thus
much higher than FDI inflows, and was the largest
recipient of remittances in the developing world.
Other major recipients included Bangladesh
(US$ 2.1 billion), Pakistan (US$ 1.5 billion) and
Sri Lanka (US$ 1.1 billion).
Thus, the dramatic expansion of FDI inflows
over the 1990s had generated a lot of optimism
among developing countries to share the benefits of
deeper integration with the world economy by playing
host to FDI inflows. However, the developments in
2001 and 2002 were a bit disappointing yet the
emerging patterns of FDI inflows as presented above
suggest that FDI boom will be fuelled by cross-border
M&A as a part of the wave of corporate consoli-
dation and restructuring. FDI inflows will remain
concentrated in a handful of high and middle-income
countries with 80 per cent of global FDI going to
OECD countries and poorest countries could remain
marginalized in the global distribution of FDI inflows.
12
UNCTAD, World Investment Report 2003 (Geneva, 2003).
The share of developing countries, particularly in
Asia, in recent years in FDI inflows has declined.
The economic crisis of 1997 is partly responsible
for the declining share of developing Asia. Regional
economic integration has also become an important
factor in determining the pattern of FDI inflows. The
rather slow progress of the process of regional
economic integration in Asia compared with other
regions is also responsible for the declining share of
the region in FDI inflows. South Asia, comprising
some of the poorest economies in the region, is also
increasingly marginalized in distribution of FDI
inflows. Though the prospects for poorer countries
such as those in South Asia, except India, for FDI
inflows do not seem bright in the light of the findings
of empirical studies on their determinants that bring
out importance of market size and income levels,
levels of urbanization and quality of infrastructure,
among other factors. However, if countries could
expedite policy liberalization in close monitoring of
the developments at the regional and global levels,
they could increase their share of FDI inflows. Some
Asian countries are the most rapidly liberalizing
economies in the world and facing diminished FDI
inflows, many of the governments in Asia have
accelerated the liberalization of FDI regimes. All in
all, it is predicted that FDI flows will stabilize in
2003. Flows to the developing countries and
developed countries are likely to remain at levels
comparable to those in 2002. In the longer run,
beginning with 2004, global flows should rebound
and return to an upward trend. The prospects for
a future rise depend on factors at the macro-, micro-
and institutional levels. The fundamental economic
forces driving FDI growth remain largely unchanged.
Intense competition continues to force TNCs to invest
in new markets and to seek access to low-cost
resources and factors of production. Whether these
forces lead to significantly higher FDI in the medium
term depends on a recovery in world economic
growth and a revival in stock markets, as well as the
resurgence of cross-border M&A. Privatization may
also be a factor. FDI policies continue to be more
favourable, and new bilateral and regional
arrangements could provide a better enabling
framework for cross-border investment.
The determinants of FDI attraction remains
basically dependent on the general level of
development in the host country, strength of the
11
Current Issues on Industry, Trade and Investment
national private sector, advanced factor conditions,
market size and market access of the host country,
availabilities of support services and industries and
other specific strategies at the firm/enterprise levels.
Furthermore, the issues that have been repeatedly
emphasized for attracting FDI and for which host
country needs to demonstrate renewed commitments
through concerted actions and with clear visibilities,
are of strategic urgency in LDCs. Issues that are
conducive to such flows include good governance
and transparency, sound macroeconomic conditions,
and tax and fiscal policies. It also entails the
development of appropriate national and/or regional
institutions. For example, the establishment of
national and regional investment guarantee agencies,
and other multilateral investment guarantee schemes
should be encouraged to provide insurance against
non-commercial risks on attractive terms. Such
agencies can be set up as joint ventures with the
private banking and insurance sector. Working
alongside one-stop investment promotion agencies,
such agencies can be effective tools in lowering the
information and entry costs for investors and raising
expected returns on investment, thereby increasing
the potential volume and duration of investment flows.
In this context, recent studies have also clearly
and empirically shown that the surge in FDI flows
in the 1990s was driven to a large extent by the
privatization measures undertaken by a number of
countries.
Most studies find that FDI is most stable
among different types of capital flows and this has
contributed to the overall stability of flows until
recently. In a study that relates the driving forces of
FDI to the observed increased integration of capital
markets, it is pointed out that the share of FDI
variance explained by global (“push”) factors has
increased notably in the last 15 years, from less than
10 per cent to around 50 per cent. It is also shown
that the development of local financial markets
contributes significantly to the growth in FDI.
Furthermore, it is pointed out that important pull
factors appear to be political and economic stability,
the size and growth of the domestic market, the
proximity of other large markets, predictable rules
for investment and a sound legal framework, the ease
of profit repatriation, and the availability of skilled
labour and infrastructure.
12
Analysts have cited three major trends in the
recent surge of FDI to emerging markets. First, FDI
has been increasingly directed to the service sector,
while it traditionally had concentrated in the natural
resources and manufacturing sectors. This shift was
led by the progress in privatization of state-owned
assets and the large investments needed to keep up
with innovations in the information technology sector.
Second, while traditionally FDI was to a large
extent of the “green-field” variety,13 M&A – which
used to be the main mode of foreign entry in
industrial countries – have played a growing role in
developing countries and accounted for a significant
part of the privatization programmes.
Third, FDI has remained relatively resilient
during the string of market crises, but a full
assessment of the contribution of FDI to the stability
of flows would have to consider funding, hedging,
and other activities of multinational enterprises.14
D. Technological capability-building
through foreign direct investment
FDI has thus played an important role in
overall development process in several countries of
the Asia-Pacific region. FDI impacts have been
different, especially when it comes to capability-
building at the national level. It is also obvious that
levels of technology and quality of human resources
of the country are two of the important critical factors
in attracting FDI and thereby in development in
general and in industrial and technological changes
in particular. Industrial performances and economic
development in Asia and the Pacific developing as
well as developed countries have clearly shown that
the pace at which industrialization proceeds and
economic development progresses depends on the
marked acceleration of science and technology. As
advances in science and technology give rise to new
knowledge, new products and new processes, will
have far reaching implications for economies to move
in new directions for achieving competitiveness and
increased market opportunities. The present age can
13
A “green-field” investment involves the setting up of new
units or facilities by foreign firms – as opposed to the purchase
of existing ones.
14
International Monetary Fund, op. cit.
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
be regarded as a period of rapid technological
innovation, and therefore one cannot conceive today’s
business development and national economic progress
without regard to these fast technological innovations.
In the post war period, several new manufacturing
technologies were invented including synthetic fibres
and products. Others included television and
computers based on electronic and materials
technologies, new chemicals, and petrochemical
products. These new technologies brought important
changes in the structure of industry. Thereafter,
further technological innovations in micro-
electronics, informatics, biotechnology, genetic
engineering, new materials, and laser technology and
optic fibres created new means of competition in the
national and international markets. In recent years,
skill-intensive and knowledge-based technologies are
the most important ones. The developing countries
of Asia and the Pacific, including LDCs, unless they
develop the capability to acquire, adjust and adopt
these technologies, would be losing grounds in
international competitiveness in this period of
greater integration and interdependence of global
and regional economies. Sustained growth and
development in all developing countries, especially
in LDCs, requires that these countries quickly attain
basic thresholds on a number of fronts such as sound
economic governance, basic health care and
education, minimum levels of core infrastructure,
access to regional and global markets and most
important that they build up capabilities for
technological upgradation and competitiveness.
As mentioned earlier, drastic changes are
already emerging in the international trade system,
in the financial system, in technological parameters
and in the price system for various commodities and
products, which have created important challenges
for developing countries, especially to maintain and
enhance their technological competence and output
competitiveness both in terms of quantity and quality.
Though several developing countries of the
ESCAP region have advanced significantly, however,
the progress in science and technology and the
technological innovations as well as effective
adoption of imported technologies, is still limited.
This is especially the case in LDCs. The distinctive
characteristics of any modern economic and industrial
structure is the mass production system made possible
by a combination of large-scale capital investment
and highly developed technology. In this context,
the importance of technological capability is
absolute in development process. Furthermore,
technological innovation and adaptation for small and
medium-scale industries, which occupy a prominent
place in LDCs, is also crucial as technologies are
the source of new products and the impetus for
survival and competitiveness. In this respect, LDCs
of Asia and the Pacific have to further strengthen
their efforts in successfully acquiring and adopting
modern technologies.
1. Modes of technology transfer and
capability-building
There are various channels of technology
transfer and adaptation. These include FDI, joint
ventures, licensing, original equipment manufacture,
own-design and manufacture, subcontracting, imports
of capital goods, franchising, management contracts,
marketing contract, technical service contract, turnkey
contracts, international subcontracting, informal
means (overseas training, hiring of experts, returnees),
overseas acquisitions or equity investments, strategic
partnership or alliances for technology. Other modes
of technology acquisition include minority interest
in firms with R&D programmes, contracts for R&D
to other companies and research institutes, grants
consortia, bilateral cooperative technology agreements,
and buying technology embedded in products,
material sub-assembly or processes. Out of these,
the most popular modes are licensing, joint ventures
and FDI.
The experience of NIEs also show that original
equipment manufacture and own-design and
manufacture have played a major role in technology
adaptation and upgrading, eventually leading to
independent designing and development. Furthermore,
component supply through subcontracting with
foreign affiliates helped domestic component
producers in several host countries to enter the
vertically integrated production chains of TNCs
geared to export markets during the 1970s and 1990s.
Subcontracting arrangements were common for
consumer goods, such as electronics, footwear,
furniture, garments, house ware and toys. In East
and South-East Asia, networks of local producers
(mainly joint ventures with TNCs) were established
13
Current Issues on Industry, Trade and Investment
to supply components to automobile and electronics
TNCs, with plants in different countries specializing
in different areas to supply the regional market.
2. Policies and strategies for
promoting a foreign direct
investment-technology nexus
In all those processes and times, inflows of
FDI as determined by a complex set of economic,
political and social factors, and foreign investors have
to be used for effective conduit for technology
transfer in LDCs.
In that context, for host countries, the policy
agenda for increasing FDI and technology inflows
and for drawing maximum benefits from them include
the following priorities: ensuring a stable economic
environment conducive to sustained economic
growth; encouraging the development and upgrading
of local industrial and technological capabilities;
strengthening infrastructure and human resource
development, especially technical skills; and
providing the requisite legal, regulatory and
institutional set-up. Those countries, especially
LDCs, that have only recently become open to FDI
need to ensure that the “open-door policy” is
maintained and remains stable. They should examine
the possibility of a further liberalization of FDI
regimes; the harmonization of FDI and related
policies on industry, trade and technology; and
improving the efficiency of their administrative
set-ups for investment approvals. To the extent
possible, host countries should seek to avoid
competitive bidding, enhance exchanges of
information and promote transparency in order to
reduce unnecessary transaction costs.
LDCs in the region should pay particular
attention to firms from neighbouring countries, so as
to capitalize on growing intraregional investment.
Special attention needs to be given to SMEs, whose
special needs – dictated by their limited financial
and managerial resources and insufficient information
– may call for incentives for joint ventures among
small and medium-sized TNCs.
Successfully enticing TNCs and other
enterprises from outside to locate in a country can
trigger a chain reaction that leads to substantial
14
sequential and associated investment. The most
obvious targets are firms already established in
a country. Governments can strive to encourage
sequential investment (including reinvested earnings),
which can provide positive demonstration effects for
potential new investors.
One of the most important determinants of
a foreign affiliate’s impact on technology and skills
in a host country is the extent of its forward and
backward linkages with local firms. FDI policy
should therefore have a trade component, as TNCs
are interested in the suitability of a country for
inclusion in their intra-firm division of labour. At
the same time, trade policy should have an FDI
component to take advantage of the market access
that TNC systems provide. Generally, FDI should
not be encouraged either entirely for import
substitution (for example, tariff incentives) or
completely for export promotion (for example,
export processing zones). Since FDI is a package, it
should be treated as such. The composition of the
package that can be attracted depends very much on
a country’s characteristics, including its level of
development.
LDCs should focus more intensely on
governance issues and accelerate efforts aimed at
improving the efficiency of public sector enterprises
in the provision and utility of services, cost recovery
and regulatory oversight and in the establishment of
a facilitating business environment. They should
also undertake bold reforms in local governments
and micro-levels to promote efficient decentralization
for timely implementation of infrastructure and social
sector programmes.
The strengthening of local capital and stock
markets is essential for the development and
broadening of the domestic investor base and
technological capability-building. In this respect,
strengthening of domestic private sector has a role
to play in broadening the investment base. A prudent
regulatory framework, along with transparency and
efficiency of price dissemination, are necessary to
ensure investor confidence.
Among the main issues to be tacked for build-
operate-transfer financing schemes in infrastructure
are the need to restructure some utility sectors, the
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
need for an improved regulatory environment and
measures to reduce demand risks and foreign
exchange risks.
It is also essential that the developed
countries supplement their domestic policies with
international instruments aimed at facilitating outward
FDI and technology transfer, especially targeting
LDCs. They should improve FDI liberalization
standards generally and encourage a level playing
field among themselves.
E. Conclusions and strategies for
foreign direct investment promotion
and technological capability-building
in least developed countries
LDCs need to fully realize that acceleration
of economic development process requires much
more concerted efforts at the national level through
increased investments and capability-building for
competitiveness. In this context, it is essential that
policies and strategies as well as institutional/
infrastructural facilities be reformed and streng-
thened. Strategies and policies have also to be
modified due to changing positions of comparative
advantage as a result of altering conditions in the
technology, international trade and domestic demand.
East and South-East Asian countries adopted
open-economy policies and tried to promote exports
and reduced trade barriers with significant results.
The two largest economies of the Asian region, i.e.,
China and India, have in recent years adopted
open-door policies with liberalization of their
international trade and foreign investment policies.
While further openness of these economies is
desirable, nevertheless, it is already reaping fruitful
results.
These countries have achieved remarkable
progress in economic and industrial development and
exports and have been able to achieve structural
change in manufacturing, while LDCs still are heavily
dependent on agro-based industries and exporters of
primary products. These economies are facing
problems of low valued manufactured products. They
should attempt at strengthening their efforts towards
adding value to their products through improvement
of technologies, standardization and quality control.
They should aim at establishing greater linkage
between industry and other sectors of the economy,
especially with agriculture. They should attempt at
new methods of production techniques and processing
for meeting international standards. Consequently,
apart from NIEs already producing skill and
technology-intensive products, LDCs of the region
could also move more effectively towards these types
of products. Such countries have already adopted
open policy and several incentive measures for
exports, but their technological levels need further
improvements, if they really go to meet international
competitiveness.
These LDCs have again and again stressed
the need for attracting more FDI and for improved
application of modern technologies to solve their
development problems. In these contexts, the
development of human resources is one of the crucial
concern of LDCs in building-up the technological
capability and strengthening competitiveness. It is
also essential that these countries devise new
ways of managing the challenges of globalization,
promote integration to the regional and global levels
and build-up capabilities for sustaining and improving
competitiveness. In these context, the following
measures are essential.
1. Measures for managing challenges of
globalization and promoting integration
While the forces of globalization and the new
economy are outside the direct influence and control
of the individual economies, especially the least
developed ones, yet it is very important that certain
policies and measures be put in place to take
advantage of the globalization process and benefit
from the resulting outcomes of FDI inflows and
technological capability build-up.
In that context and in order to participate
effectively in the globalized economy, a certain
degree of stability in macroeconomic parameters such
as price level and flexibility in policy instruments
such as the exchange rate and interest rate is needed
in LDCs.
Liberalization of international trade and
investment regimes needs to be expedited as a means
to encourage inflows of new ideas, skills and
15
Current Issues on Industry, Trade and Investment
technologies and also to capture the gains from trade
and investment. In this regard, a change in emphasis
from excessive dependence on foreign borrowings
in favour of FDI and within the latter, emphasis on
green-field investments is required. At the same time,
hasty liberalization of the financial sector should be
avoided.
It has become apparent that ICT is the main
defining element of the new economy. As such, the
application and utilization of ICT in trade and
investment is also a major aspect of boosting national
competitiveness. Therefore, LDCs need to implement
policies and strategies for the effective application
and utilization of ICT so as to maximize the benefits
they can derive from the globalization process. It is
also important to ensure a significant rise in the
allocation of national resources towards promotion
and capacity-building for ICT so as to widen and
deepen its use across all sectors of the economy.
Policies restructuring human resources
development towards higher value-added industrial
sectors and some form of R&D to encourage
technology transfer and adaptation should be
introduced in order to maintain international
competitiveness of industries. Special attention
should be given to capacity building of SMEs,
particularly those in the dynamic export-oriented
manufacturing sector and in the services sector. The
recent experiences in South-East Asia show that
SMEs have adjusted to the crisis quickly, and
absorbed a large number of displaced workers in the
crisis affected countries, thus demonstrating that
SMEs can provide a form of social safety net.
One of the important lessons learned recently
from the experiences of NIEs and other developing
countries is the need for national institutions to deal
effectively with the challenges and risks associated
with growing interdependence and globalization.
This need is clearly seen in the promotion of FDI
and in the financial sector, in particular the banking
sector in LDCs. These countries do not have effective
national institutions to manage matters related to FDI
promotion and also to trade policy reforms in the
context of WTO. Hence, there is an urgent need for
creating such institutions and strengthening their
capacities.
16
2. Measures for promoting foreign
direct investment
Like other developing countries, LDCs are also
going through a phase of economic liberalization that
provides a solid foundation for the success of intra-
and interregional cooperation. They need to make
greater efforts to create a more liberal trading and
investment environment in order to reduce wide
disparities in the levels of income and market size
and to share the distribution of benefits. The
following measures could promote FDI in these
countries:
(1) Since FDI has increasingly become
market-driven, LDCs would increase their locational
attraction if closer linkages were established
with neighbouring countries in order to generate
larger markets and complementary locational
advantages. Such an approach could also facilitate
the technology-exchange among neighbouring
countries. The regional integration could be used as
strategy to overcome the limitations of market size.
Furthermore, since almost all countries in the Asian
and Pacific region are trying to attract FDI, a great
deal of competitive overbidding and unnecessary loss
of resources could be avoided through some
harmonization of FDI policies among different
governments;
(2) Instead of competing for foreign capital,
LDCs could undertake appropriate policy and
institutional reforms which will not only encourage
more savings and investment internally but also help
in augmenting capital flows to the Asian region;
(3) At the regional level, LDCs should
cooperate with one another to modernize their
financial systems to cope with increase in trade and
cross-border capital flows. They should try their
best to facilitate intraregional funding and to reduce
the impact of any global credit crunch;
(4) The sheer magnitude of investment
required for technological R&D calls for subregional
pooling of limited resources (financial, physical and
human) to obtain the best possible leverage. Attempts
should be made to evolve common R&D institutions
at the regional level;
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
(5) It may be desirable to establish a regional
investment guarantee facility. A major problem in
attracting investment funds to developing countries,
especially in LDCs, is the perceived risk of
confiscation, civil strife and political turmoil;
(6) Another aspect of regional cooperation
that is of growing importance is the sharing of
information, particularly on methodologies for
creating and maintaining efficient human capital,
infrastructure and technological capabilities.
Regional cooperation can reduce the transaction costs
of gathering and utilizing information, and through
economies of scale, can reduce R&D costs. In this
respect, the Regional Investment Information and
Promotion Service (RIIPS) and the Asian and Pacific
Centre for Transfer of Technology (APCTT) under
the auspices of ESCAP could make significant
contributions. However, there is still sufficient scope
for improvement in evolving data banks and regional
information networks on FDI opportunities and
technological capabilities in the region.
For LDCs where there is a lack of capacity to
undertake comprehensive efforts to develop local
capacity, there is an urgent need for more active
support by the donor community in such areas as
strengthening the private sector and local
entrepreneurship, building institutional capacity,
improving physical infrastructure and enhancing
human resources development. On a broader level,
regional financing institutions and development banks
could play complementary roles in enhancing
regional cooperation to attract more private
international capital into the Asian and Pacific region.
Such institutions should expand their catalytic role
in private sector financing. Other multilateral
financial institutions will also have to strengthen their
catalytic role through co-financing and guarantee with
a view to encouraging participation of private capital
in the development process.
The efforts of low income countries and LDCs
in attracting FDI inflows may be more successful if
they target the flows originating in emerging sources
such as NIEs and other developing neighbour
countries, rather than those originating in the more
conventional sources viz. industrialized countries.
3. Measures to strengthen technological
capability-building
It is quite commonly recognized that FDI may
have both direct and indirect impacts on local
technological development. There are still intensive
discussions, however, with regard to the extent and
even the consequences of such impacts. Positive
consequences from the direct impact may occur
through the contribution to higher factor productivity,
changes in product and export composition, R&D
undertaken by foreign affiliates, the introduction of
organizational innovation and improved management
practices, and employment and training. Indirect
impacts may occur through collaboration with local
R&D institutions, technology transfer to local
downstream and upstream producers, the effects of
the presence of foreign affiliates on competition and
on the efficiency of local producers and the turnover
of trained personnel.
In these respects, trade and FDI inflows will
help to a large extent in building up technological
capabilities, as the process of building technological
capabilities is rather complex and local enterprises
have to learn many new factors. The process involves
time, effort, cost and risk and complex interactions
between firms and between firms and institutions. It
is highly sensitive to the incentive environment
(macroeconomic policies, trade and industrial
regimes) and to the availability of factors such as
skills and information. The costs and risks of learning
differ by technology, with complex technologies
involving much higher costs than simple ones. The
process is a cumulative and evolutionary one,
building upon many choices and experiences. In the
following paragraphs, first the trade-technology and
then investment-technology linkages, as ways of
promoting technological capabilities are presented.
Thereafter, specific measures for technological
capability building through FDI promotion are
presented.
It is quite evident that the new paradigms
of production and overall development process is
not only leading to new ways of doing things,
but also to intensifying the severe pressures of
competitiveness and sustainability. It has been very
17
Current Issues on Industry, Trade and Investment
correctly pointed out that a new “paradigm” of
production is emerging which involves not only new
technologies (in the traditional sense), but also new
management and organizational techniques, different
forms of linkages between enterprises, and tighter
relations between industry, pure science and flows
of information between economic agents. It also
involves a much larger role for such international
factors as trade and capital movements. Trade is
playing an increasing role in the economic life of
nearly all nations, and investment flows are rising
faster than any other economic aggregate. The
shrinking of economic space that results is making
for deep structural changes in the global economy
and in patterns of comparative advantage. But their
effects are very unevenly distributed across the
developing world, with some countries participating
strongly in the emerging system and others
increasingly marginalized.15
The ability of developing countries including
LDCs to receive, transfer, adopt and develop
technologies, and manage them will depend on the
extent of the development of endogenous
technological capability and human resources. The
transition to more cost-effective, competitive methods
of production requires a deeper understanding of the
entire production process and of the managerial and
technological systems involved. The issue for many
countries has less to do with access to a particular
technology but more with the process of technological
transformation and sustainable capability-building.
As capacity for handling the “software” part of the
technology package has become a key requirement,
a more sophisticated education and training of firm
managers, engineers and other senior staff involved
in the generation of technological innovations is
needed to understand the link between technology
performance, competitiveness and environmental
benefits.
(a) Trade-technology linkage
The positive effects of trade on technological
capability building can be analysed and explained
both in terms of exports and imports.
15
Sanjaya Lall, Science and Technology in the New Global
Environment, in collaboration with UNCTAD (New York, United
Nations, 1995) p. 3.
18
On the export side, when enterprises are
exposed to the international markets, they are
provided with the opportunity and the incentive to
improve on existing technological capabilities in
order to compete with the products manufactured
under best available production technologies and
management techniques.16 The incentives work in
three ways:
(1) Necessity to compete in foreign markets
encourages the enterprises to upgrade the quality of
their products or to lower their production costs.
Foreign markets can serve as an important source of
information about the quality level of the competitive
products, different tastes of customers, and worldwide
market trends. The acquisition of market and product
information can be done by the enterprises
themselves, but often the importers and buyers in
foreign markets supply engineering blue prints and
specifications and important feedback on the quality
and performance of the products.
(2) The foreign exchange that is generated
through export can be utilized to import capital
equipment, intermediate inputs, and technological
information that can help upgrade the product quality
and lower production costs, hence, raise the
competitiveness of the manufacturing sector.
(3) The manufacturing enterprises can
broaden their market horizon dramatically and,
therefore, raise the returns on investment in the
improvements of technological capabilities.
By engaging in export to foreign markets, the
enterprises are able to receive various market signals
and are encouraged to improve their competitiveness.
On the import side, there are two ways that
trade stimulates technological progress. One is
through the import of capital goods. The technology
embodied in the advanced manufacturing facilities
improves and upgrades the technological level of
the production. The success of the export-oriented
economies such as the Republic of Korea, Taiwan
Province of China and, in recent decades, China,
was attributed partly to the easy access to foreign
16
ESCAP, Promoting International Competitiveness and
Efficient Resource Utilization in Manufacturing in Asia and the
Pacific – Proceedings of the Regional Seminar, 17-21 December
1991, Beijing, (ST/ESCAP/1237) (Bangkok, 1991) chapter I.
 I. Foreign Direct Investment and Technological Capability-Building in Least Developed Countries
capital goods by the exporting enterprises in spite of
the relatively high protection of their domestic
markets. In these cases, the import had a direct
impact on technological progress.
The other way is through the import of other
manufacturing products. Although the impact works
more indirectly, it is worth paying attention to it.
The availability of imported products generates
greater competition in the domestic market. The
customers are exposed to internationally competitive
products and acquire a larger choice. In order to
compete with imports, domestic manufacturers now
have incentives to upgrade their product quality or
lower production costs. Through imported products,
important market and technological information is
made available for domestic manufacturers. It is
made possible without going into foreign markets.
The availability of more advanced products may
make technological acquisition through copying or
reversing engineering easier. In these ways, the
opening of the domestic market can serve the
technological progress through greater competition.
(b) Investment-technology linkage
The positive effects of FDI on technological
progress are dependent on the objectives pursued by
the host countries. Most of the time, FDI is promoted
only along the lines of capital formation and
employment generation, with disregard to other
national capability building measures. This thinking
is however changing.
The TNCs that make investments certainly
bring their technological capabilities with them.
Whether their intention is either to export back to
their own country market or to some third country
markets, the production facilities and the related
knowhow still have to be a relatively high level so
as to manufacture the “world standard” products that
can successfully compete in the respective markets.
Therefore, FDI in those cases brings competitive
technology in export-oriented enterprises since
foreign companies often have to transfer their most
recent technology where there is an open competitive
environment in the local market. The question here
is whether the technologies of the TNCs will be
transferred to local population and the local
technological capabilities will be enhanced. When
locally manufactured products of the TNCs are sold
simultaneously in the domestic market, the same
technology enhancing effects take place as in the
case of import.
The direct effect of technology acquisition in
host countries occurs for local population who are
employed by, at least partially, export-oriented TNCs.
Before the actual manufacturing start, those both
skilled and unskilled workers and also those in
management position may receive instructions and
trainings either locally or abroad by the TNCs. Even
though these formal trainings may not be available,
the local managers and employees gain hands-on
experience on on-the-job training after the operation
starts. Turnover of experienced personnel to local
manufacturers certainly enhances local technological
capabilities but more important is the strengthening
of technological capabilities of those in the TNCs.
They are exposed to the managerial and technological
skills that were not available in the absence of TNC
investment. Consequently, investment contributes
to the strengthening of the human resource base for
industrial development.
Another effect of the presence of TNCs on
local technological capabilities is on upstream
producers. The TNCs make linkages with local
suppliers of materials, parts and components, and
services to some extent. By requiring quality that
meets their own needs, the TNCs contribute to raising
the capabilities of local suppliers. Some corporations
are known to try to establish close linkages with
local suppliers by providing technical knowhow and
specifications, and even necessary financing in some
cases. Of course, whether this type of local supplier
linkage develops or not depends greatly upon various
factors such as the existing technological levels of
local suppliers and the government policy on local
content, since the TNCs try to keep and constantly
upgrade their own competitiveness.
Those above mentioned factors will be
successful only if certain basic conditions are present.
As mentioned earlier, the most important one is the
skills formation through appropriate programme of
human resources development. It is a well
established fact that technological upgradation
through various means including FDI inflows are
necessary not only to move in new competitive fields
19
Current Issues on Industry, Trade and Investment
but also to continuously improve productivity and
competitiveness in the existing units. Furthermore,
the capacity to examine alternative technologies
suitable for enterprises has to be built at many points
and institutions, and cannot be established in a short
time, or designed only for a specific problem or
branch. Many components enter in the building of
technological capacities, starting from the educational
system, the industrial and technological research
institutes, the advisory and consultancy services, the
design experimentation, testing and analysis centres
and project preparations, evaluation and feasibility
studies. The technological capacity depends also
upon the establishment of appropriate programmes
of R&D, and availability of information about
alternative technologies. Institutions and mechanisms
are required to identify problems and difficulties in
production so as to seek technological solutions for
them, and in addition develop technological
knowledge and ideas into full practical applications.
20
As a general conclusion it may be stressed
that technological upgradation and capability building
in LDCs will call for an accentuation of the level of
and shifts in the pattern of human resources
development. Skill requirements in industry, in
service institutions, in governmental organizations
and other enterprises will grow and need to be treated
as a key prerequisite for and key element of the
comparative and competitive advantages of the
countries’ overall progress. Development of human
resources cannot be treated as a residual in the
development process and has to be “tagged on”
to advance the technological capabilities. It is
a prerequisite for the advance of technology and the
identification and pursuance of new opportunities
which are made possible thereby.
Thus, it is possible to build up technological
capability through FDI inflows, provided the above
mentioned factors are present or created.
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
II. TRADE FINANCE INSTITUTIONS FOR TRADE AND SMALL
AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT
IN SOUTH CAUCASUS AND CENTRAL ASIA
Yann Duval and Urmi Sengupta*
A. Introduction
Cross-border exchanges of goods and services
are widely acknowledged as an important engine of
growth for most developing and transition economies.
The recent WTO ministerial meeting in Cancun has
further demonstrated the importance of international
trade and investment flows, with many developing
economies joining hands to vigorously defend their
interests in this area. While countries need to actively
engage in negotiations with others to create
a favourable foreign environment, each must first
insure that its domestic environment is favourable to
trade development.
Whether the domestic environment is
favourable can ultimately be measured by the
economic cost of importing or exporting specific
goods and services into or from the domestic market.
In most economies, major transaction cost factors
would include transportation costs and financing costs
(including insurance), as well as costs associated with
red tape. Unpredictable and/or uncompetitive
transportation, financing, or procedurals and
documentation costs can all be formidable barriers
to trade for small and medium-sized enterprises.
Financing of trade and investment has long
been identified as one of the most challenging issues
faced by new and small and medium-sized enterprises
(SMEs) in developing or transition economies
(Dhungana, 2003; USDC, 2002; Suhir and Kovach,
2003; UNCTAD, 2002; among others). The issue of
financing is particularly important, as financing is
* Yann Duval and Urmi Sengupta are Economic Affairs Officer
and former Intern, respectively, both in the Trade Efficiency and
Facilitation Section, Trade and Investment Division, ESCAP. The
authors acknowledge valuable inputs and research assistance from
Mr. Lee Yow Jinn, Senior Associate, International Trade Institute
of Singapore, and Ms. Neravan Rojchaichaninthorn, former Intern,
ESCAP.
Development in South Caucasus and Central Asia
needed not only during the export process itself, but
also for the production of the goods and services to
be exported, which may include imports of raw
material or intermediate goods. Lack of financing at
any time during the production and/or the export
process will result in a failed transaction.
Economies in transition in South Caucasus
and Central Asia (SCCA), all members of both
ESCAP and the Commonwealth of Independent
States (CIS), include the following countries:
Armenia, Azerbaijan and Georgia (South Caucasus);
Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan
and Uzbekistan (Central Asia). These countries are
all newly independent states (NIS) in transition from
the central planning system of the former Soviet
Union to a market-based system. The transition
process started for most of these countries in the
early 1990s and involved large scale reforms,
including a complete revamping of their financial
sector infrastructure. As part of the transition process,
many SCCA countries have privatized their entire
financial sector.
The new capital requirements imposed on
existing banks and the inexistence of deposit
insurance mechanisms resulted in many bank failures
and a loss of confidence of the population in banks,
such that the deposit base of many of the countries,
as a percentage of GDP, is often extremely low (less
than 10 per cent). The financial sectors remain
extremely weak in many of the SCCA countries, and
generally provide, if at all, very limited support to
SMEs. While some of the development banks and
other international institutions or foreign aid agencies,
especially the European Bank for Reconstruction and
Development (EBRD), are now providing lines of
credits to SMEs through domestic banks, much
remain to be done to develop a trade finance
infrastructure able to effectively support the export
potential of these young enterprises.
21
Current Issues on Industry, Trade and Investment
Exports of goods and services from CIS
countries have increased by an average of 6 per cent
a year from 1994 to 2001.1 Taking into account the
impact of the 1998 Russian financial crisis on the
CIS countries, the moderate growth rate of trade
shown in figure II.1 remain encouraging, although
significant differences exist across countries. This
positive growth in trade has been accompanied in
the 1990s by a shift from intra-CIS trade to non-CIS
trade. Newly independent states as well as Russia
preferred to sell to non-CIS countries for political
reasons but also because these countries could offer
hard currencies, higher prices and less risks than
their neighbouring economies in transition.
Figure II.1. Trade of CIS except Russian
Federation, 1994-2001
(in millions of US$)
45 000
40 000
35 000
30 000
25 000
20 000
15 000 CIS-11 exports
10 000
5 000 CIS-11 imports
0 investment financing, followed by the cost of a loan
1994 1995 1996 1997 1998 1999 2000 2001
Source: ECE (a), 2003.
The sluggish growth in intra-CIS trade can be
partly attributed to an underdeveloped trade finance
infrastructure within the CIS region, including
inadequate exchange rate and payment systems and
an unreliable and inefficient financial system,
resulting in limited payment options and ability to
mitigate the risks associated with cross-border
transactions (ECE (a), 2003).2 While much progress
has been made since the early 1990s, most CIS
countries need to further develop their financial
1
In addition to the already mentioned SCCA countries, CIS
countries also include Belarus, the Republic of Moldova, the
Russian Federation, and Ukraine (often referred to as European
CIS countries).
2
Note that it is not argued here that these are the only, or most
important, factors explaining the sluggish trade growth. Some
other factors affecting the official trade data reported in some of
those countries include internal conflicts (e.g. Georgia), red tape
and corruption, lack of transparency, inadequate transportation
and other basic infrastructures, and national standards not
compatible with international ones. Many of these issues need to
be addressed in a holistic manner, based on a comprehensive
trade development strategy.
22
systems to adequately encourage and support the
growth of trade, both within and outside of the CIS.
This is particularly important given the very high
correlation between trade volume and government
revenue in many transition economies with weak tax
collection systems.
Most of CIS exports consist of oil
(Turkmenistan, Russian Federation, Azerbaijan,
Kazakhstan) and primary commodities. Trade in oil
and, to a lesser extent, primary commodities, has
long been facilitated by governments and/or large
international trading companies. However, the
growing number of entrepreneurs and SMEs in SCCA
countries face significant obstacles to financing trade
and related investments. Because of the lack of track
record (many companies are new since the private
sector began to develop only after independence)
and the lack of (enforced) auditing and accounting
standards, among others, collateral requirements often
reach 150 per cent of the amount of the loan.
High collateral requirements are indeed
considered by businesses in transition economies to
be the most important obstacle to trade and
(i.e., cost of borrowing) and weak or unreliable
financial statements (see table II.1). Other obstacles
include the fact that many banks do not loan below
a certain amount, which makes it difficult for small
companies to get financing when they need it (e.g.,
Kartu Bank, one of the four biggest banks in Georgia
does not make any loan below US$ 20,000). Poor
management skills and poor business proposals,
comes fourth and fifth, respectively, as the most
important obstacles to trade and investment financing.
In countries where foreign banks are allowed to
operate, many businesses are unable to benefit from
their credit lines, as these banks remain very weary
of the risks (commercial and political). Other barriers
to trade-related financing not listed in table II.1
include lack of effective bankruptcy laws and the
fact that most lending rarely exceeds 12 months.
With real interest rates on short-term loans of
over 30 per cent per year in some SCCA countries,3
3
The real interest rate in Armenia reported in the World Bank
Development Indicators Database (data for the year 2000) was
33 per cent. The real interest rate for the same year in Czech
Republic was only 6 per cent.
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
Development in South Caucasus and Central Asia

Table II.1. Obstacles to trade financing or investment financing

(most important: 1; least important: 11)

Avgerage
Armenia Azerbaijan Georgia Kazakhstan Kyrgyzstan
ranking
Lack of collateral 1 1 1 1 1 1
Cost of a loan 2 2 2 8 2 2
Balance sheet weakness (e.g., lack of
capital; unreliable accounting) 2 3 3 2 4 4
Minimum amount needed 4 6 9 3 5
Management weakness 4 4 3 5 6
Poor business proposal 5 5 5 4 8 3
Lack of credit lines from foreign banks 6 4 9 6 6 7
Unacceptable terms of foreign vendors 7 10 7 7 8
Source: Modified from BISNIS Finance Survey 2003, WWW.BISNIS.DOC.GOV

it is easily understood that the financial environment
does not provide SMEs with trade and investment
financing options that would allow them to be
competitive in servicing foreign markets. Most
entrepreneurs in these countries are likely to be
denied the benefits of international trade unless
a favourable trade finance infrastructure, including
specialized trade finance institutions, are developed
to assist them in overcoming the above-mentioned
obstacles.
Based on a review of trade finance related
institutions in Asian countries, a generic model
of a national trade finance institutional structure
(TFIS) is developed for possible adoption and
implementation in SCCA countries.
B. A simple model of national trade
finance institutional structure
The national TFIS of a country is part of its
overall financial sector structure. Developing
countries with fairly well-developed financial sectors
appear to have adopted a two-tier banking system,
where one Central Bank or Monetary Authority
conducts monetary policy and regulates the banking
system. Most of these countries also feature financial
market institutions at different stages of development,
such as stock markets, foreign exchange and
derivative markets, as well as non-banking financial
institutions and domestic credit rating agencies. More
importantly, at least from a trade finance perspective,
these countries also feature a number of specialized
institutions, among which are trade finance
institutions (see figure II.2). The TFIS model
proposed below is mainly based on this last
observation.
1. The proposed national TFIS model
While many developing countries have
increasingly left commercial banking to the private
sector, they have retained ownership in special-
purpose banks, such as development and industrial
banking institutions, and including trade-related
financial institutions such as export credit insurance
and guarantee companies, or Export-Import Banks
(EXIMs). This is also true in most developed
countries, including the United States of America,
with its government-owned EXIM Bank. While
recent trends have shown a willingness to make these
organizations more independent (self-financed), most
countries have been reluctant to privatize them as
they provide governments with some tools to address
perceived market failures in the financial and trading
sectors.4
The suggested TFIS model is presented
in figure II.3. In this model, the institutions are
grouped in three categories based on the level of
government ownership and control. While the level
of government control over trade finance related
organizations vary significantly across countries, the
model presented here is arguably representative of
the basic TFIS of many middle and high income
countries. Note that the financial market institutions,
4
See Stiglitz, 1994 for a discussion of the role for the
government in financial markets.

23
Current Issues on Industry, Trade and Investment

Figure II.2. Institutional structure of financial sectors in selected Asian countries

Source: Association of Development Financing Institutions in Asia and the Pacific (ADFIAP) <http://www.adfiap.org>

24
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
Figure II.3. The proposed national trade finance institutional structure model
(e.g., bond markets, stock markets, securities markets,
among others) and other institutions indirectly linked
to trade finance, are not included in the model, given
the limited scope of this paper. The role of each of
the institutions in the model, as well as the
relationship between these institutions, is discussed
in more details below.
2. Level I institutions
(a) Central banks and monetary authorities
Most countries now have a central bank or
a monetary authority. These institutions are typically
responsible for managing the money supply, as well
as the regulation and oversight of the financial
system, particularly the banking system. They also
often act as the banker to and the financial agent of
the Government.
Central banks can influence the availability
of trade finance through regulations as well as
through refinancing schemes. For example, The
Reserve Bank of India (RBI) administers interest rates
on export credit, specifies the export finance
provision requirements for commercial banks, and
provides a rediscounting facility to these banks for
Development in South Caucasus and Central Asia
their lending activities to the private sector. In
addition, it also issues directives regarding the
implementation of new rules and regulations on trade,
and develops procedures regarding the financial
aspects of the trade transactions, including
requirements for foreign currency dealings and
eligibility criteria for financing schemes developed
for the promotion of exports (see box II.1 for more
details).
(b) Other level I institutions
Ministries of finance can also play an
important role in trade development. For example,
in Thailand, the Export-Import Bank of Thailand
(level II institution) is under the Ministry of Finance,
and was established jointly by the Bank of Thailand
and the Ministry of Finance. In some countries,
Ministries of Finance also play a role in providing
tax incentives or tax holidays so as to encourage
trade development. Depending on the needs and
strategies of the governments, these tax incentives
may be limited to specific groups of traders (e.g.,
SMEs) and/or products (e.g., handicrafts). Finally,
Customs Departments, often under the finance
ministries, can greatly affect the cost of trade
transactions and the time it will take for goods to
25
Current Issues on Industry, Trade and Investment

Box II.1. Reserve Bank of India (RBI) and trade finance

The Reserve Bank of India, India’s Central Bank, plays an active role in the promotion and support of trade, as
shown below.

“Trade finance is a crucial element in the design of trade policies. From time to time, the Reserve Bank has
undertaken several measures to ensure adequate and timely availability of credit for exports at competitive interest
rates. The Reserve Bank’s export credit refinance schemes have played a pivotal role in this area. Commercial banks
have been providing credit to exporters at pre-shipment and post-shipment stages, both in rupees as well as foreign
currency. The rupee export credit has been generally available at rate of interest linked to the Prime Lending Rate
(PLR). The export credit in foreign currency is provided at internationally competitive interest rates linked to London
Inter-Bank Offer Rate (LIBOR) or similar interest rates. The Reserve Bank has been adjusting interest rates on rupee
export credit from time to time taking into account the need to maintain competitiveness by looking at interest rate
differentials, as also other factors like inflation and developments in financial markets.

The Reserve Bank has also taken measures to support institutional arrangements for export promotion, such as
policy initiatives to provide a liberalised environment for the operations of Special Economic Zones (SEZ) units. These
measures include: (i) exemption from interest rate surcharge on import finance; (ii) release of foreign exchange to
Domestic Tariff Area (DTA) units for buying goods from Export Oriented Units/Export Processing Zones/Special Economic
Zones (EOU/EPZ/SEZ) units; (iii) permitting 100 per cent retention of foreign exchange in Exchange Earners Foreign
Currency (EEFC) accounts; (iv) permitting overseas investment by SEZ units from the EEFC accounts through the
automatic route, write-off of unrealised export bills and (v) permitting SEZ units to enter into a contract in overseas
commodity exchanges or markets to hedge the price risk in the commodity on export/import provided that the contract is
made on a ‘stand alone’ basis.”

Source: Reserve Bank of India, Currency & Finance Report, 2002-03, (www.rbi.org.in)

reach their final destination. This will in turn affect
the financing needs of traders.
Ministries in charge of trade are typically in
charge of regulating trade as well as of developing
and implementing an overall trade development
strategy. Most ministries in charge of trade oversee
trade promotion organizations (TPOs), such as trade
and investment promotion agencies. These agencies
provide export support services which may include
trade facilitation and trade finance services.5 One
important role of the agencies in charge of trade
development is to correctly assess the needs of the
private sector and to coordinate with other ministries,
including the finance ministry, to develop policies,
regulations, and programmes that will facilitate trade.
From that perspective, the ministry of trade, based
on regular interactions with traders and other
stakeholders in trading activities, should be proactive
in the development and implementation of laws and
regulations that affect trade, even if these laws and
regulations are not under the direct responsibility of
the ministry (as is typically the case for trade finance
regulations and many other trade facilitation-related
measures).
Other government institutions may also play
an important role in making trade finance tools and
instruments available. Indeed, in some countries,
the Central Bank does not oversee all the financial
institutions. For example, in Malaysia, securities
markets are supervised by the Securities Commission,
while the insurance companies in the Philippines are
under the supervision of the Insurance Commission.
In order to facilitate trade finance infrastructure
development, all the regulations and provisions of
the financial sector regulatory bodies should be
scrutinized to insure that they do not unnecessarily
impede trade.
3. Level II institutions
(a) Export credit insurance and guarantee
institutions

5
For more information on the role and structure of TPOs, Credit insurance is an insurance against
see ESCAP, 2001. non-payment of an export contract. Such insurance

26
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
Development in South Caucasus and Central Asia

typically covers the exporter and its bank against the
risk of buyers’ fraud or bankruptcy, and sometimes
the political risk. An export credit insurance makes
it easier for exporters to safely extend credit to buyers
(often a key factor in getting an export contract) and
obtain needed working capital from their bank,
because some of the risk associated with the export
transaction is shifted to the insurer.
Institutions providing export credit insurance
and guarantees can take different forms. Some of
the first such institutions established were
government-backed organizations (part of the trade
or finance ministries) for which export growth was
the only priority. Increasingly, however, export credit
insurers are government-owned corporations tasked
with encouraging exports as well as making a profit.
Export credit insurers may also take the
form of private partnership of banks, insurance
companies and other related organizations. In these
organizations, governments take on political risk
either through a department or through an appointed
agent.6 Given the prevailing conditions in CIS
economies, a private credit insurer in which the
government only takes on the role of official reinsurer
of all political risk on exports, as in Zimbabwe, may
be particularly appropriate.
While the cost of establishing an export credit
insurance agency needs to be weighted against the
export potential of a country, it is important to
recognize that domestic traders will likely be at
a disadvantage compared to foreign traders whose
transactions can readily be insured.
(b) Export-import banks (EXIM banks)
EXIM banks are typically government-owned
banks established to facilitate and encourage the
development of trade. They are often conceived as
a one-stop shop for export-import financing, taking
6
For more details, see ITC, 1998.

Box II.2. Facts about COFACE, EFIC and ECGC

COFACE, the French Export Credit Insurance and Guarantee Company, is one of the leading export credit
insurance companies in the world, and active in over 91 countries around the world. It started as a state-owned
company in 1946, with the goal of supporting exports of French products to a wide range of destinations. COFACE was
privatized in 1994, and listed in the stock market in 2000. In 2002, Natexis Banque Populaire, a French bank, took
majority ownership of COFACE. While most of COFACE’s business is to provide its own credit insurance and risk
management products, it remains in charge of providing public insurance and guarantees to exporters on behalf of the
French Government.

EFIC, Australia’s Export Finance and Insurance Corporation, is set up as an integrated government-owned
corporation. At the end of 1996, it had a paid-in capital of A$ 6 million, supported by A$ 200 million of callable capital
and a comprehensive government guarantee, and accumulated reserves and profits of A$ 177 million. On the basis of
this capital structure, EFIC was able to support A$ 5 billion of credit insurance annually, as well as A$ 1 billion of
medium-term lending and guarantees to banks. This represented about 10 per cent of Australia’s exports at the time.

ECGC, the Export Credit Guarantee Corporation of India, originated from the Exports Risk Insurance Corporation
(ERIC) that had been created by the Government of India in 1957. In 1964, ERIC was transformed into the ECGC,
a company wholly-owned by the Government of India. ECGC functions under the administrative control of the
Ministry of Commerce, Government of India. A Board of Directors comprising representatives of the Government,
Reserve Bank of India, banking, insurance and exporting community manages the organization. ECGC is the fifth
largest credit insurer in the world in terms of coverage of national exports. However, in the context of the liberalization
of the Indian economy and in view of the opening of the insurance sector within the purview of Insurance Regulatory
and Development Authority (IRDA), the role and position of ECGC in the Indian insurance market is going to be
challenged and ECGC is repositioning itself as a multi-product organization servicing the export sector of the
small-scale industry segment. ECGC’s recent initiatives include insurance cover on losses from discrepancies in
documents under Letter of Credits.

Sources: www.coface.fr; ITC; ECGC, Annual Report 2001-2; and various other sources.

27
Current Issues on Industry, Trade and Investment
over some of the responsibilities of what may have
been distinct units or departments of ministries of
trade, finance, or even the Central Bank, as was the
case for the Thai EXIM bank (see box II.3 for more
details). Sometimes, the activities of a previously
established Export Credit Insurance Agency may be
merged into the newly created EXIM bank.
Many of the larger EXIM banks are members
of the Berne Union (www.berneunion.org.uk), whose
goal is to promote sound practices in export and
investment financing, and to facilitate the exchange
of information and expertise among members. While
new export credit agencies (EXIMs as well as export
credit insurance institutions) do not qualify for
membership, the Berne Union, in cooperation with
the EBRD, has set up the Prague Club to support
ECAs in developing their export credit and
investment schemes. Many ECAs of transition and
emerging economies, including EXIMT, meet
regularly during the Club’s meetings.
4. Level III institutions
(a) Commercial banks
In most countries, commercial banks are, from
far, the largest providers of trade finance services.
The main role of banks is to act as facilitators and/or
intermediaries between savers and borrowers. Banks
provide short-term financing of trade transactions
by various means, including advances against
(or discounting of) export bills. They also help
reduce the risk inherent in trade transactions by
providing documentary credit (e.g., letters of credit)
services or other alternative methods of payments,
and by facilitating access to foreign exchange markets
to hedge against a possible currency risk.
While private commercial banks make up
the largest share of trade financing activities in
most countries, they generally favour lending to
well-established and larger firms to reduce their risk
exposure, or to the government. As a result, small
and medium enterprises may find it difficult to secure
trade financing through traditional commercial banks.
In the case of transition economies, where the private
sector mostly consist of small firms with a short
corporate history, trade financing through commercial
28
banks typically involve very high collateral
requirements (e.g., 150 per cent of the value of the
loan in Mongolia), which severely limits these firms
ability to export and grow.
(b) Non-banking financial institutions
The non-banking financial institutions (NBFI)
are an important part of the trade finance
infrastructure. While they are typically not authorized
to take deposits (as opposed to banks), they can play
an important role in trade finance. A non-exhaustive
list of NBFI includes export houses, factors, as well
as agencies specialized in leasing or counter trade
arrangements.
Export houses are non-bank institutions that
traditionally provide confirmation services only,
typically acting on behalf of overseas buyers.
However, over time, they have often extended their
services to trade financing. Many export houses
may provide finance to cover the gap between the
goods leaving the factory and being purchase by
the end user. Credit is provided for periods of 30 to
180 days and is available for all types of goods
(export of capital goods can often be covered for
periods of up to 5 years). Export houses commissions
are based on the period of credit, average invoice
value, volume of business and the amount of other
services provided.
Factors are organizations that buy from traders
their outstanding book debts. In practice, the exporter
will send all invoices at specified intervals and will
receive a cheque for an agreed initial percentage
of the total invoice value usually in the range of
80-85 per cent. As payments are made, the balances
of sum due are credited to the exporter.
Leasing may be described as an agreement
whereby the lessor (e.g., a leasing company) conveys
to the lessee (e.g., a wine producer and exporter), in
return for a payment or series of payments, the right
to use an asset (e.g., a harvesting machine) for an
agreed period of time. Some estimate that leasing
companies provide about one eighth of the world’s
annual equipment financing requirement. Leasing
can allow small firms to finance their growth and/or
survival in difficult environment, and should therefore
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
Development in South Caucasus and Central Asia

Box II.3. The EXIM Bank of Thailand

The success of Thailand’s economic development efforts during the second half of the 1980s had prompted many
economists to believe that Thailand could further this success by adopting an export-led growth strategy that would
provide SMEs with an opportunity to participate in international trading. To support this strategy, Thailand consolidated
and/or created a number of institutions specializing in foreign trade, among which is EXIM Thailand (EXIMT).

EXIMT was established in 1993 by promulgation of the Export-Import Bank of Thailand Act B.E. 2536. EXIM
Thailand was set up as a 100 per cent government-owned corporation with start-up capital of 2.5 trillion baht (US$ 100
million) provided by the Bank of Thailand (BoT) and the Ministry of Finance. The Board of Directors of EXIM Bank
comprised high-level representatives from all the trade-related ministries as well as private sector representatives.

The Packing Credit Facilities (subsidized pre-shipment and post-shipment financing facilities provided to exporters
mostly through commercial banks) was transferred from the BoT to the newly formed EXIMT. The Bank complemented
this facility with a standard pre-shipment (unsubsidized) facility directed at small and new exporters, and started
offering export insurance and letter of credit facilities.

EXIMT’s purpose was to provide financial services to support imports, exports and foreign investment beneficial
to the Thai economy. The Bank was mandated and authorized to provide a wide array of financial services, ranging
from export refinancing to export credit insurance. An Amendment to the Export-Import Bank of Thailand Act also
promulgated in 1993 further broadened the mandate of EXIM Thailand to allow the Bank to support export-related
domestic investment. As a result, the Bank added to its product portfolio, a credit facility for business expansion.

EXIMT’s number of products and services increased over time and became more sector and SME specific.
Foreign investment advisory services as well as export advisory services began to be offered in 1999. In recent years,
the Bank developed a SME Financial Service Centre offering streamlined products and services and faster response
time. EXIM Thailand has recently discontinued its subsidized packing credit facility to comply with WTO rules, but
also because the facility had become unnecessary due to the high level of market liquidity and falling interest rates.

After more than 10 years of operations and going through a major financial crisis, a review of EXIM Thailand’s
experience indicates that:

● An EXIM bank can be effective in stimulating the development of trade finance, by introducing new products
and services (such as export credit insurance) and by disseminating relevant information to potential exporters.
Once an EXIM bank has developed a good experience in evaluating SMEs export potential, the bank may use
this experience to offer longer-term business expansion related credit.

● An EXIM bank’s credit rating will typically have sovereign credit rating, because it is backed by the Government.
Such a rating may make it easier for the bank to access international credit markets as compared to domestic
banks.

● An EXIM bank should focus on complementing the offerings of commercial banks, and provide credit to
small and new exporters as well as to SMEs with export potential, or additional credit lines to large exporters
who are unable to secure additional credit from commercial banks.

● Offering a wide array of products and services makes it easier for the bank to market its services and satisfy
the needs of its clients (and be profitable).

● An EXIM bank can help regulate the cost of trade finance services offered by commercial banks, especially
when there are few commercial banks offering international banking services.

● An EXIM bank, while not expected to finance a large share of exports and foreign investment under normal
circumstances, can be an effective backup financing source during major financial crises (EXIMT’s activities
doubled during the Asian crisis).

● An EXIM bank should be managed as a self-sustainable organization, with no subsidies of interest rate, but
a modern and creative risk assessment and management programme to support small and new enterprises with
export potential.

29
Current Issues on Industry, Trade and Investment
be encouraged in SCCA countries (see Lasfer and
Levis, 1998).7
Counter trade can be considered to be a viable
alternative in countries where capital or funding is
limited. Some financial institutions specialize in
arranging counter trade deals, by assisting exporters
to negotiate and dispose of the goods they will receive
as payment for their exports.
Note that, in most countries, the services
offered by NBFI may also be offered by commercial
banks and some of the level II institutions. For
example, ECGC Limited (India) offers factoring
services to exporters.
C. Is the model adapted to Central
Asian and South Caucasus
countries?
To answer this question, we start with a review
of selected experiences of some of the countries most
advanced in their transition process, followed by
a stylized analysis of the financial sector dynamics
in NIS over time.
1. Selected experiences from ECE member
countries in transition8
The selected experiences from Ukraine, Czech
Republic, and Estonia presented below highlight
some of the challenges and issues related to the
development of state-supported trade finance
institutions (level II institutions), which are often
lacking or underdeveloped in SCCA countries.
(a) Ukraine
“State support to enterprises in transition
economies has not always been successful. Some
time ago there was an Innovation Fund in the
Ukraine, which was financed through deductions
from company revenues (1 per cent of the total
revenue). This fund was actually governed by State
officials; they were in charge of loan allocation. The
history of this Fund testifies that as much as 70 per
7
See www.leaseurope.org, for more information on leasing.
8
The material in this section is borrowed from ECE (b) 2003.
30
cent of loans were provided to enterprises that were
operational for less than one year. Consequently,
the Fund’s loan portfolio mainly consisted of bad
loans. Currently [October 2001], the Innovation Fund
is under liquidation and there are several proposals
on how to use its financial resources and there are
discussions in the Government regarding the
establishment of a State Bank for Reconstruction and
Development.
“One more example of an unsuccessful
State-supported project in which our bank
participated relates to servicing intergovernmental
credit lines. In the early 1990s, through these
intergovernmental credit lines, Ukrainian enterprises
obtained loans worth more than US$ 3 billion. The
loans were approved by the Foreign Exchange and
Credits Commission of the Ukrainian Government.
As in the case of the Innovation Fund, borrowing
through intergovernmental credit lines resulted in
a large amount of bad debts, which the Government
had to service imposing considerable burden on the
State budget.
“The State Export-Import Bank of the Ukraine
was established in January 1992 on the basis of the
former USSR Vneshekonombank representative
office in Ukraine. The bank inherited from
Vneshekonombank its staff, and, as you know,
personnel are the most precious asset. The
Export-Import Bank has become one of the leading
banks in servicing the foreign trade of Ukrainian
enterprises. During its first years of operation, it
serviced up to 40 per cent of Ukrainian foreign trade.
At present, the respective figure is about 20 per cent
and the Export-Import Bank is considered by
enterprises to be one of the most professional in
foreign trade financing.
“Initially, the founders of the Export-Import
Bank thought that its functions would be similar to
those of western banks specializing in foreign trade
financing. However, in practice, the functions of
the bank have become very broad, characteristic
rather of a universal bank. Until last year, the Export-
Import Bank, which was established as a State-owned
entity, was outside of the Ukrainian legal framework
– according to the Law on Banks and Banking
Activities of Ukraine, the banking structure comprises
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
only two levels, namely the Central Bank and
commercial banks, which the then already existing
State Sberbank and Export-Import Bank not
mentioned. To remedy this, it was decided in 2000
to transform our bank into a joint stock company
and that is how the open joint stock company ‘State
Export-Import Bank of Ukraine’ was established.”
(Source: Mr. Mikhaylo Butsko, Deputy Head, Export
Development Department, Eximbank, Ukraine,
October 2001.)
(b) Czech Republic
“There are a number of State entities providing
enterprises with information on existing insurance
and financial opportunities. Czech Trade, for
example, is a small agency that provides information
to SMEs about foreign markets and support schemes
offered by international organizations (e.g., the World
Bank). Czech Trade also conducts market research,
helps companies to participate in international fairs,
and offers them advice on export finance and
insurance. This agency has branches abroad, which
assist in promoting Czech goods abroad.
“The most important link in the export support
system is the Export Insurance Agency (EGAP a.s.).
Established in 1992, it has achieved considerable
results in export credit financing and insurance. In
1995, the Czech Export Bank (CEB, a.s.) was
established with the aim of financing medium and
long-term export projects. The Czech Government
participated in the statutory capital of EGAP and
CEB, having allocated funds from the State budget.
It also provides government guarantees for EGAP
and CEB. At the same time, both institutions
have created their own reserves and are financially
self-sufficient.
“CEB provides refinancing credits to
commercial banks: it borrows on international
markets with government guarantees and then
on-lends these resources to Czech commercial banks.
Further on, direct export credits channelled from
western banks to Czech commercial banks via
CEB have become more common. Pre-shipment
(pre-export) financing appears to be the most
demanded financial instrument in export financing.
At the same time the Bank guarantees the exporters’
obligations (notably, guarantees on pre-shipment
finance, performance bonds, etc.).
Development in South Caucasus and Central Asia
“CEB supplies medium and long-term export
financing, whereas domestic commercial banks are
unable to provide such a service. It also creates the
possibility for Czech exporters to provide credit to
their buyers at internationally competitive conditions.
The system of minimal fixed interest rates adopted
by the OECD allows Czech exporters to be
competitive as compared with their German, French
and other OECD competitors. It should be noted
that CEB does not subsidize interest rates on loans
to exporters and it does not anticipate using this
instrument of export finance.
“CEB finances only 2 per cent of Czech
exports. However, this portion of exports is important
because it includes products with high value-added,
the production of which involves many local suppliers
and sub-contractors. Therefore, its operations also
have an indirect, positive effect on export growth in
machine building, in particular. In 2000, CEB’s share
in the outstanding credits in foreign currency was
over 8 per cent.” (Source: Ms. Miroslava Hrnirova,
Deputy General Director and Member of Board,
Czech Export Bank, October 2001).
(c) Estonia
“ ‘Estonia’ is a small country and its exports
are small (total export value is less than US$ 3
billion). It is worth noting that Estonia has a most
liberal trade regime. The development of the
Estonian banking system has been dynamic, and in
1998 the Government felt that there was more
demand for export risk insurance than for direct
export finance. Thus, in 1999, the Law on
government insurance of export risk was adopted.
“ ‘KredEx’ Fund was established in 2001 on
the basis of three funds, namely the Export
Guaranteeing and Crediting Fund, Business Credits
Insurance Fund, and Mortgage Insurance Fund, as
the result of a government effort to minimize
budgetary expenditure and make the insurance
scheme more cost effective. At present, the volume
of reserves is almost US$ 5 million and the total
volume of loans that the fund is able to extend
amounts to US$ 15 million.
“KredEx’s major activities include issuing
guarantees for bank credits, and, secondly, export
credit risk insurance. Since the fund is quite young,
31
Current Issues on Industry, Trade and Investment
at present it offers only two insurance products:
a simple insurance and a framework insurance (where
transactions with all the client’s principal buyers are
insured). The minimum premium is 0.4 per cent for
short term credits, and the maximum amount of
guarantees provided cannot exceed US$ 17.5 million.
(...) Given the short-term nature of credits, the fund’s
activity can cover about 5 per cent of total Estonian
exports.” (Source: Mr. Sergei Semjonov, Officer,
Export and Credit Guarantee Fund “KredEx”,
October 2001.)
2. Financial sector dynamics in NIS
countries since independence
In order to understand whether the above
model is adapted to SCCA countries, it is useful to
review the evolution of the financial sectors in these
and other transition economies. Three basic stages
may be identified from the experience in the
development of their financial sector since 1990.
Figure II.4 is an attempt to represent graphically the
typical NIS financial sector dynamics, although wide
Figure II.4. Typical timeline of the changes in the banking sector and trade finance institutions
in transition economies
32
variations exist across countries.9 This figure was
designed based on information gathered during
advisory missions to Mongolia and Georgia, as well
as on a report on the evolution of banking supervision
in the Czech Republic (Czech National Bank, 1999).
In the first stage, the countries convert their
banking system into a two-tier system, with one
central bank, in charge of monetary policies and
financial sector regulations, and introduce new
banking legislation, authorizing the development
of private commercial banks. This typically results
in the creation of a large number of small
undercapitalized banks (over 400 in Georgia,
a country with a population of less than 5 million),
due to weak or inexistent prudential regulations. The
9
Indeed, this representation is highly stylized and does not
readily take into account the effect of the Russian financial crisis,
which adversely affected all CIS economies, but to varying
degrees. Financial sector dynamics can also be expected to vary
somewhat depending on whether or not a country prefers
a slower more progressive approach to transition reforms as
opposed to a quicker more radical transition process.
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
share of state ownership in banks starts falling sharply
as a result.
In the second stage, the development of
banking supervision mechanisms (including
prudential rules such as minimum capital
requirements) and the unravelling of “pyramid
schemes” set up by smaller banks, as well as the
high level of inflation of the newly created currencies,
result in the bankruptcy of most of the private
banks, and the need to privatize some or all of the
state-owned banks. In particular, some of the
specialized trade development banks, typically
state-owned, disappear or cease activity.10 At this
stage, trust in the banking system falls in many
countries because of (1) failure of many recently
established undercapitalized private banks and
(2) high inflation and instability of newly created
national currencies drastically reducing the value of
deposits (originally in rubbles) in state-owned banks.
Trust in the government also falls as a result.
The third stage, arguably, is characterized by
a stabilization of the number of banks, an increase
in domestic deposits, and an increase in government
involvement in the banking and financial sector
through specialized financial institutions, including
EXIM banks and/or export credit insurance and
guarantees agencies (level II institutions).
This last stage has arguably been reached in
some transition economies, especially the ones being
considered for early entry in the European Union.
The following economies in transition have active
export credit agencies: Albania, Belarus, Bosnia and
Herzegovina, Bulgaria, Croatia, Czech Republic,
Estonia, Hungary, Lithuania, Macedonia, Poland,
Romania, Slovak Republic and Slovenia. 11 In
addition, (only) two of the SCCA countries appear
to have active state-owned trade finance related
institutions: Uzbekistan, whose export credit agency
is a member of the Prague Club (Uzbekinvest); and
10
Extreme policies sometimes had to be adopted, such as an
agreement between the World Bank and the Government of
Georgia suggesting that the Government not be allowed to
maintain direct ownership in any of the banks (Source: David
Chkhartishvili, National Training Workshop on Trade Finance
Infrastructure Development, Tbilisi, Georgia, 15-16 October
2003).
11
Based on the list of the Prague Club members, Berne Union
Yearbook, 2003 (www.berneunion.org.uk).
Development in South Caucasus and Central Asia
Kazakhstan, whose recently established Development
Bank of Kazakhstan (DBK) is expected to become
the Government’s primary vehicle for promoting
exports in the non-extracting sectors of the Kazakh
economy.12
3. A favourable macroeconomic
environment as a pre-requisite to
TFIS implementation
What can be concluded from the TFIS
experiences in the countries that have made the most
progress in their transition to market economies and
their financial sector dynamics? Probably that the
simple trade finance institutional model presented
earlier is adapted to the SCCA economies in which
the level of trust in both the public institutions and
the banking system is increasing, as measured by
a reduction in the level of corruption, the willingness
of the private sector to move activities from the
informal to the formal sector of the domestic
economy, and the growth in government revenue and
the overall economy.
Stage III, during which the proposed TFIS
model is to be fully implemented, has not been
reached by most SCCA countries. Many of these
economies appear to still be in the second stage of
their financial sector evolution, where the financial
sector structure is supposed to stabilize and where
the emerging private sector gains trust in the
government, through implementation of reform
programmes that create an environment favourable
to economic growth and trade development. Indeed,
the third stage can be reached only once the trust
in the banking sector, often seriously affected in
stage II of the transition, has been restored. However,
this trust in the financial sector will only be restored
if people inside and outside the country trust the
governing authorities, and if internal and regional
territorial conflicts have been solved.
Full implementation of the TFIS model is
unlikely to yield positive results if implemented
12
The financial sector in Kazakhstan is widely acknowledged
as the best in Central Asia, as reflected by the good international
credit ratings of its banks (see The Economist, 2003). While
Kazakhstan also reportedly has an EXIM Bank of Kazakhstan
(see Kadrzhanova, 2003), no information was found that
confirmed whether this bank is still active.
33
Current Issues on Industry, Trade and Investment
before stage III is reached. Indeed, the main feature
of the model is to create state-owned trade finance
institutions (level II) to support traders. If the State,
as represented by its government officials, is not
trusted, it is unlikely that relevant private sector
participants will become clients of the new
institutions. Perhaps more importantly, governments,
in most cases, will not have enough resources to
establish and sustain operations of the new
institutions, since many of the income-generating
activities will remain in the informal sector of the
economy. While it is beyond the scope of this paper
to discuss ways to improve trust in the government,
clear legislations, fair and consistent enforcement of
regulations, regular consultations with the private
sector, are some of the ways to increase trust.
The level of foreign and domestic trust in
the government is often reflected in, and dependent
of, the macroeconomic and legal environment.
Table II.2 summarizes a number of macroeconomic
indicators believed to have a long-term impact on
financial sector development, and trade finance
infrastructure development in particular (ITC, 2003).
The table provides a benchmark, defined as the
median value of each indicator in a group of 129
developing countries. A country that is below the
median value is doing worth (or better) than most
developing countries in the world. The direction of
the effect of each macroeconomic indicator is also
given, with a “+” sign indicating that a higher value
of the indicator is generally preferable (while a “–”
suggests that a lower value of the indicator is
preferable) for the development of the financial sector
and trade finance.
As can be seen from table II.2, the SCCA
countries typically have macroeconomic performance
indicators that are below those of most developing
countries, and far below those of the most successful
Eastern European countries (this is especially true
for SCCA countries which have limited oil and gas
resources to boost export and government revenue).
In the context of this paper, the very large interest
spreads (difference between interest rates on savings
and borrowings) and real interest rates (up to 33 per
cent for Kazakhstan), as well as the very low amount
of domestic credit channelled to the private sector,
are of particular interest.
34
Once again, the indicators suggest that the
proposed TFIS model may not be fully implemented
before the macroeconomic situation in many of the
SCCA economies improves. In fact, proceeding with
the establishment of (likely weak) state-owned trade
finance institutions to support SMEs before the
macroeconomic environment shows signs of
improvement may be counter productive. Indeed,
as argued in the case study of EXIM Thailand
(see box II.3), one of the key advantages of
state-owned export credit agencies over private
commercial banks, is that they often have the same
international credit rating as the government
(sovereign debt credit rating). While this is a clear
advantage in countries that enjoy a high sovereign
debt credit rating, this may not be in many SCCA
countries, where the sovereign credit ratings are often
well below investment grade (with the exception of
Kazakhstan). Creating or maintaining state-owned
trade finance institutions in these conditions may
unnecessarily mobilize (or even drain) government
resources, with no tangible benefits to SMEs.
4. Toward a step-by-step implementation
of the TFIS model
Given the prevailing situation in SCCA
countries, the proposed TFIS model could be
implemented in steps, as shown in figure II.5. Many
developing countries have used this approach, starting
out with (ad hoc) export financing schemes managed
by the Central Bank (level I institutions).
The next step would be to establish a credit
insurance and guarantee agency with limited products
and scope, perhaps as an extension of an existing
trade and investment promotion agency under the
Ministry in charge of trade. The establishment of an
EXIM bank, or other specialized banks (such as SME
banks, industrial banks), could come much later, only
after a thorough needs assessment has been done,
and when the government has enough resources to
properly support and maintain such institutions.
A step-by-step implementation may allow
countries to offer the most urgently needed services
to SMEs before they reach stage III of their financial
sector evolution. Note, however, that careful
feasibility and needs analysis should be conducted
 Table II.2. A benchmark of macroeconomic indicators for trade finance development from selected Asian countries

a b Selected Eastern Other selected

Caucasian CIS Central Asian CIS
Indicators Europeanc ESCAP members d Benchmark
AM AZ GE KZ KG TJ TM UZ CZ HU PL SK IN TH

TRADE FLOWS
Total Trade as a % of GDP 74 79 84 107 94 165 116 83 144 139 66 150 31 126 84 +
Cover Ratio as a % 46 106 81 124 88 95 118 114 95 99 81 97 84 114 85 +
Change in Total Trade (Y-5 to Y) as a % 38 97 98 61 4 0 23 -15 26 72 49 33 53 1 23 +
NET RESOURCES
Net FDI Flows as a % of GNI 1 -8 2 -2 -4 0 .. 0 -3 -1 1 9 0 -2 0 +
Net Official Development Assistance as a % of GNI 11 3 6 1 18 15 1 3 1 1 1 1 0 1 3 +
EXTERNAL DEBT & LIQUIDITY
Total External Debt Stock as a % of GNI 46 24 54 39 150 125 .. 59 43 67 41 50 22 66 59 –
Total External Debt Service as a % Total Exports 8 8 10 17 29 11 .. 26 13 24 21 18 13 16 13 –
Reserves in Months of Goods & Services Imports 4 4 1 3 5 .. .. .. 4 4 6 4 7 5 4 +
Current Account Balance as a % of GNI -14 -3 -5 6 -6 -7 10 2 -4 -3 -6 -4 -1 8 -4 +
Short Term Debt as a % of Long Term Debt 32 71 25 9 21 18 .. 10 73 16 13 14 4 29 15 –
EXCHANGE RATE POLICY
Exchange Rate Arrangement IF MF IF MF MF IF P MF MF P IF MF MF IF
Exchange Rate Volatility (1996-2002) 10 7 22 33 49 18 83 13 22 16 17 11 20 –
CREDIT MARKET
Government deficit in % of GDP .. .. .. 0 -2 .. .. -2 -3 0 -3 -5 -2 –
Domestic Credit to the Private Sector as a % of GDP 11 6 9 13 4 .. .. .. 50 31 26 31 29 109 24 +
Moody’s sovereign LT debt rating .. .. .. Ba2 .. .. B2 .. Baa1 A3 Baa1 Baa3 Ba2 Baa3
Standard & Poor’s sovereign LT debt rating .. .. .. BB .. .. .. .. A- A- BBB+ BBB- BB BBB-
MONETARY AND FINANCIAL SYSTEM
Deposit as a % of GDP 9 11 5 11 5 .. .. 65 40 38 61 47 94 +
Quasi money as & of narrow money (Fin. Deep II) 112 145 69 68 61 .. .. 190 152 257 223 235 569 +
FINANCIAL SECTOR EFFICIENCY
Interest Rate Spread 13 .. 23 .. 34 .. .. .. 4 3 6 6 .. 5 9 –
Real Interest Rate 33 .. 29 .. 25 .. .. .. 6 5 12 8 8 6 9 –

Source: Calculated by ITC from IMF (2002) and World Bank (2002).
a
Armenia (AM), Azerbaijan (AZ) and Georgia (GE).
b
Kazakhstan (KZ), Kyrgyzstan (KG), Tajikistan (TJ), Turkmenistan (TM) and Uzbekistan (UZ).
c
Czech Republic (CZ), Hungary (HU), Poland (PL) and Slovakia (SK).
d
India (IN) and Thailand (TH).
II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
Development in South Caucasus and Central Asia

35
Current Issues on Industry, Trade and Investment
Figure II.5. TFIS model: staged implementation
before any new services or institutions are
established, so as to identify the sequencing of the
institutional build-up, which may vary depending on
the need of the countries.
D. Conclusions and recommendations
New and small and medium enterprises in
SCCA countries face numerous obstacles that
seriously limit their ability to participate in
international trade and reap the benefits of the
globalization process. One of these obstacles is the
lack of access to trade finance, including trade-related
investment financing. However, in contrast with most
middle and high income countries, SCCA transition
economies, for the most part, have not yet developed
the trade finance institutions needed to support SMEs
international trade activities.
Based on the experiences of selected Asian
developing countries, a simple national trade finance
institutional structure (TFIS) model was proposed
for possible implementation in SCCA countries,
characterized by three levels of institutions, classified
according to their relations to the government. The
following recommendations can be made for each of
the three institutional levels.
36
1. Level I institutions
(direct governmental role)
● The Central Bank/monetary authority should
take into account the needs of SMEs and trade
development when establishing financial
system regulations, including simplification of
export-related financing rules and procedures.
Enforcement of prudential and other
regulations should be strengthened so as to
rapidly stabilize the banking and financial
system.
● The ministries of finance should also adopt,
whenever possible, policies that encourage the
development of SMEs, including possible tax
incentives for export-oriented SMEs and
streamlining of customs procedures.
● The ministries in charge of trade should play
an active role in promoting and supporting
SMEs trade. Establishment of a trade
promotion organization (TPO) able to provide
expert advice on trade financing would be
a possibility. More importantly, these
ministries should be able to actively negotiate
removal of trade obstacles set up by other
administrative or regulatory bodies.
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
2. Level II (full or partial government
ownership and limited direct
management role)
● Careful needs and feasibility analysis should
be done before establishing level II
institutions.
– In particular, level II institutions should
not be established if the government
cannot readily support them at their
early stages of development (proper
capitalization is essential).
– Another key issue is whether these
institutions should be established under
the Ministry of Finance and/or Ministry
of Trade, and whether they should have
to comply with all the regulations
imposed on similar private entities.
● Strengthening of the macroeconomic and
legal environment (by level I and other
responsible institutions) is a pre-requisite
to establishment/strengthening of these
institutions.
● Given the lack of resources in many SCCA
countries, some of the functions of level II
institutions could be performed by level I
institutions at the early stage (Central Bank
and Ministry of Trade, in particular).
● Level II institutions most adapted to SCCA
countries may take the form of public-private
partnerships, such as in the case of the export
credit agency of Zimbabwe.
● Step-by-step implementation of the
institutional model is recommended, as shown
in figure II.5.
3. Level III (market driven, no or very
limited government ownership)
● Clear and transparent legislation (developed
in cooperation with level I institutions) would
be needed to encourage the development of
private non-banking financial institutions,
including leasing companies.
● Specialized training and education programmes
should be made available domestically to
Development in South Caucasus and Central Asia
upgrade the skills of commercial bank
personnel to international standards.
If only one conclusion had to be drawn
from this analysis, it would be that creating
government-backed trade finance institutions when
the government is too weak to support or manage
them may be counter productive. As a country’s
macroeconomic conditions improves, as measured
by international credit ratings as well as trade ratios
and other relevant indicators, governments may
implement an export-led growth strategy that includes
development of level II institutions to support the
emerging private sector.
In the meantime, a country with limited ability
to provide trade finance to SMEs, may request
support from a number of international financial
institutions (IFI), many of which have been
increasingly active in extending loans to SMEs
through existing commercial banks.13 Many of the
IFI are also offering useful technical assistance
services on trade and SME finance. 14 SCCA
countries, most of whom receive significant amounts
of overseas development aid (see table II.2), could
also request that part of this aid be redirected to
assistance programmes related to SMEs financing
for trade development, or to conduct feasibility
studies and needs analysis on national trade finance
institutions.
While this paper has (partially) addressed the
institutional aspects of trade finance infrastructure
development for improving SMEs access to trade
finance, it is important to realize that this is only
one facet of trade finance infrastructure development.
Indeed, the trade finance infrastructure necessarily
includes legal, technological and accounting aspects
that have not been directly addressed in this paper.
In addition, trade finance infrastructure development
should be taken in the context of the overall
development of a country, and fully integrated into
the national trade development strategy developed
13
Major IFI with active SME and trade finance related
programmes include the World Bank, the Asian Development
Bank, and the European Bank of Reconstruction and Development
(EBRD).
14
For example, the Asian Development Bank is implementing
technical assistance for trade and SME development in Pakistan,
which may be replicated in some of the SCCA countries (see
Shah, 2003).
37
Current Issues on Industry, Trade and Investment
by the Ministry in charge of trade in cooperation
with all the relevant stakeholders.
The simple national TFIS model proposed
could be extended to include relevant financial
markets (foreign exchange and securities markets),
and, perhaps, an institutionalized working group on
trade finance issues, composed of relevant
institutions, including private sector trade-related
associations. Regional trade finance institutions
could also be included in the model, as regional
initiatives could be a more effective way to support
trade and SMEs development in many of the smaller
SCCA economies.15
15
The Islamic Corporation for the Insurance of Investment and
Export Credit (ICIEC), a subsidiary of the Islamic Development
Bank (IDB) is one option for many Central Asian countries
(www.iciec.com).
38
Although, as argued in this paper, setting up
state-supported trade finance institutions may be part
of the solution, further research is needed to identify
innovative ways in which trade financing can be
made available in developing and transition
economies at affordable rates and with reduced
collateral requirements. This may require answering
the following question: to what extent should the
financial policy options and regulations that have
proved effective in developed countries be transferred
to emerging economies?16
16
A similar question was recently raised by Michael H. Moskow,
President and Chief Executive Officer, Federal Reserve Bank of
Chicago. See Moskow (2001).
 II. Trade Finance Institutions for Trade and Small and Medium-Sized Enterprise
References
Dhungana, B.P., 2003 “Strengthening the
competitiveness of small and medium
enterprises in the globalization process:
prospects and challenges”, Investment
Promotion and Enterprise Development
Bulletin for Asia and the Pacific, No. 1,
ESCAP, United Nations.
ECE (a) 2003. Economic Survey of Europe, No. 1,
United Nations.
ECE (b), 2003. “Trade finance for small and
medium-sized enterprises in CIS countries”,
Trade and Investment Guides, No. 7, United
Nations. (www.unece.org).
ESCAP, 2001. “Export promotion for economies in
transition”, Studies in Trade and Investment,
No. 45, p. 106 (www.unescap.org).
Kadrzhanova, A., January 2003. How do Companies
in Eurasia Finance their Trade/Investment
Deals?, BISNIS, Almaty, Kazakhstan.
(www.bisnis.doc.gov).
ITC, 2003. Trade Finance Pointer: Methodology,
Interpretation and Theoretical Considerations,
unpublished draft. (www.intracen.org).
ITC, 1998. Export Credit Insurance and Guarantee
Schemes, Trade Support Services, ITC.
Lasfer A. and M. Levis, 1998. “The determinants of
the leasing decision of small and large
Development in South Caucasus and Central Asia
companies”, European Financial Management,
Vol. 4, No. 2.
Moskow, M.H., 2002. “Financial infrastructure in
emerging economies”, Journal of Financial
Intermediation, No. 11, pp. 354-361.
Shah, M.A., April 2003. ADB’s Perspective on SME
Sector Growth and Development in Pakistan,
http://www.adb.org/Documents/Speeches/
2003/ms2003040.asp
Stiglitz, J.E., 1994. “The role of the State in financial
markets”, Proceedings of the World Bank
Annual Conference on Development
Economics 1993, IBRD/WB.
Suhir, E. and Z. Kovach, June 2003. Administrative
Barriers to Entrepreneurship in Central Asia,
Center for International Private Enterprise.
(www.cipe.org).
The Economist, 31 May 2003. “Finance in
Kazakhstan: small but elegant”, The
Economist, p. 67.
USDC, Country Commercial Guides FY 2002
(various countries). (www.usatrade.gov).
UNCTAD, November 2002. Report on the Expert
Meeting on Improving the Competitiveness of
SMEs through Enhancing Productive
Capacity: Financing Technology, (TD/B/
COM.3/50).
39
 III. Entrepreneurship Development for Women in GMS Countries
III. ENTREPRENEURSHIP DEVELOPMENT FOR
WOMEN IN GMS COUNTRIES
Siti Ichsan*
A. Introduction
Entrepreneurial women are a relatively young
emerging force in the economic arena. All over the
world women’s participation in economic activity
has seen a steady increase, as economic ideologies,
perceptions about women, and technologies are
changing. Similarly the establishment of women-
owned enterprises had seen a noteworthy growth,
which is still in full progress.1 Women worldwide,
managing their own enterprise, operate in a different
environment in each country or society, but all have
come forward as prominent new players.
Notwithstanding the differences, countries of
the Greater Mekong Subregion (GMS) have a few
factors in common; besides their geographically
clustered location, most of their economies have
made a recent transition from centrally planned to
market-oriented economies, or rather find themselves
in certain stages of such transition. This unifies
women in the area somewhat as a group being
affected by the same economical climate.
However, from the onset we must state that,
generalizations for the region can hardly be forged.
Firstly due to the diversity of social environment
and secondly due to the lack of historical (gender
disaggregated) data for this newly emerging group.
Current research on women entrepreneurs is often
conducted per country, with focus on different
subgroups varying from hill tribe women or rural
women to textile industry workers or urban poor.
Since ESCAP itself has in the recent past not
conducted any research into this specific topic in the
GMS countries, this paper draws on a range of
indirect sources.
*
Consultant, Investment and Enterprise Development Section,
Trade and Investment Division, ESCAP, Bangkok.
1
ESCAP, “Women in small business in Indonesia: issues and
key approaches”, Women in Development Discussion Paper
No. 4 (Bangkok, 1999).
This paper intends to indicate, based on
materials of such diversity, the need for support from
several angles for women in GMS countries to
become entrepreneurs. In view of the above
limitations, we do encourage further research on
national level on a consistent basis, to support policy
decisions and institutional design.
The following section is to elaborate on why
women in GMS countries should be assisted in order
for them to operate as competent entrepreneurs. The
subsequent section focuses on how entrepreneurship
development can be an all-encompassing tool to
address the intertwined socio-economic problem of
gender asymmetry in economic development. The
final section will give indications on possible policy
measures and action, both at the national and
international levels.
B. Women and economic development
in GMS countries
1. Why women in GMS countries?
(a) Cultural background
In some GMS countries women have had
a relatively egalitarian position in society, as
compared with other parts in the world. In regard to
performing economic activities, some countries
traditionally discriminate relatively little. In some
of these countries, women traditionally hold
prominent roles in trade and commercial professions.
Nonetheless, many of these countries also
automatically assume men to take higher positions
than women in hierarchical structures whether they
are in government institutions, commercial
undertakings or in social organizations. It can thus
be assumed that their equal contribution does not
automatically pave the way to equal status in GMS
societies.
41
Current Issues on Industry, Trade and Investment
However, in the field of entrepreneurship, in
which organizations usually start out very “flat”, this
has not hindered women to claim influential
positions. In some instances entrepreneurship is even
engaged in, specifically in order to gain the
managerial autonomy, independence and status,
which has been blocked to women in regular career
paths, due to gender discrimination.2 Another motive
to engage in entrepreneurship, mostly encountered
in developing countries is economic necessity.
Still, we can regretfully not yet speak of
gender equality for entrepreneurs in the region. As
in most places in the world, the contribution of
women to the economy is under-valued, which
manifests itself in discrimination, in the uneven
distribution of responsibility among sexes and in
uneven division of the amount of work.
(b) Change in household dynamics
Women’s work is often divided in two
categories: productive work and reproductive work.3
Here we feel it is time to make a comment regarding
the structural dynamics of the family. Using the
metaphor of a company, we can say that the
functional division of work in the family used to be
based on gender: women worked inside the house,
men worked to gain cash (mostly outside the house).
However, the shift that has taken place is the
increasing participation of women in the latter kind
of work. Hence other family members will have to
compensate for the time and effort that were
previously contributed by the women to the work
inside the house. It is only fair that if a woman’s
“portfolio” of work changes, naturally the tasks in
the entire household change.
Even though the “portfolio” of a woman’s
work has changed (see the following subsection on
gender asymmetry in employment), in many societies
the functional division of work has not changed
accordingly. One of the reasons for this gap is the
automatic assumption of a traditional family role for
women. Women’s responsibility as a caretaker in
the household is clung to so fervently, that the
2
ILO, Women, Gender and Work – What is equality and how
do we get there? (Geneva, 2001).
3
Sometimes a third category is added for community work.
42
redistribution of tasks in the house is not yet
synchronized with the progress gained in terms of
equality regarding participation in the workforce,
although the transition has taken place more quickly
in urban areas. If this gap between responsibility
and the division of work is not attended to, women
end up with a structurally disadvantaged position.
(c) Economic transition
The framework of laws governing economic
activity and the mechanisms regulating it; the
financial system; the administrative procedures for
a given country; the institutions which translate policy
into action and make legal provisions accessible; all
are part of a country’s economic architecture. This
architecture is as vital to the economy as tracks are
essential for a train in motion.
In regard to economies in transition such as
the GMS countries, these usually have to drastically
alter their existing economic infrastructure.
Government institutions need to be adjusted in such
a fashion that the interface between the public and
private sectors is optimal, whereas formerly they
used to be operated in a strictly top-down manner.
Much has been accomplished in this respect;
however, a lot still remains to be done.
By now, both the institutions entrusted with
the regulatory responsibility, and the institutions to
promote or facilitate entrepreneurial initiatives from
the private sector, are in place in most GMS countries
and have evolved into recognized authorities. 4
However, the institutions are not fully accustomed
to the “new” system and there is still a lot of room
for improvement.
Since legal and regulatory institutions as well
as the supporting financial systems are not yet of
such quality to enable entrepreneurs to compete
globally on competitive terms, such indirect form of
assistance to entrepreneurs deserves a lot of attention
in the GMS region.
4
B.P. Dhungana, “Strengthening the competitiveness of small
and medium enterprises in the globalization process: prospects
and challenges”, Investment Promotion and Enterprise
Development Bulletin for Asia and the Pacific, No. 1, (ST/ESCAP/
2259) (New York, United Nations, 2003).
 III. Entrepreneurship Development for Women in GMS Countries

(d) Macroeconomic policy Table III.1. Labour participation by gender

(Female participation as a percentage of
Some state that the macroeconomic reform the total labour force)
undertaken during the economic transition in the
GMS countries does not sufficiently consider the 1980 1990 2000
effects of these changes on women.5 The reason for Cambodia 55 54 52
this is that the conceptual framework underlying Lao People’s
macroeconomic theory is known to incorporate solely Democratic
the monetized economy, failing to recognize a lot of Republic ... ... ...
the non-remunerated work, which is often performed Myanmar 44 44 43
by women.6 It is argued that these policies do not Thailand 47 46 46
take “traditional women’s work” into account, and Viet Nam 48 50 49
expect women to invest an equal amount of time Source: World Bank, Gender Stats, 2003.
and energy in remunerated work.

2. Gender asymmetry in employment the employment gender participation gap reduced,

but also the degree of diversification has continuously
(a) Asymmetries in labour-force participation increased.7

Globally we encounter an increasing (b) Asymmetries within economic sectors

participation of women in the total workforce. This
trend is brought about by many factors, including
the feminist movement’s plight towards equal
treatment, the pressure of increased competition, the
socialist ideology which promoted equal participation
of both sexes in production, wars which disrupted
the balance in composition of the population.
The socialist era, through its ideology of
equal participation in the workforce, induced a leap
towards equality as is still reflected in the first part
of table III.1. In the following decades, not only has
5
M. Beresford, Impact of Macro-economic Reform on Women
in Vietnam (New York, UNIFEM, 1997).
6
L. Corner, Women, Men and Economics – the Gender
Differentiated Impact of Macroeconomics (Bangkok, UNIFEM
Asia-Pacific, 1996).
In most countries the issue is, however, not so
much a matter of participation since official
participation rates may already seem satisfactory.
However, the diversification of work is less advanced.
In GMS countries we often find that unequal
representation in certain sectors of the economy can
lead to structural inequalities, depriving women from
the opportunities of which other sectors of the
economy can avail.
While the agricultural sector is in decline as
the major provider of employment (see table III.2),
the percentage of women workers in this sector has
increased. Often women are left in the village to
7
E. Caroll, Changing Identities of Chinese Women (London,
Zed Books, 1995).

Table III.2. Gross enrolment ratios by level and gender in 2000

Primary Secondary Tertiary

Male Female Male Female Male Female
Cambodia 117 103 24 13 4 2
Lao People’s Democratic
Republic 121 104 44 31 4 2
Myanmar 89 89 40 38 8 15
Thailand 97 93 84 80 39 32
Viet Nam 109 102 70 64 11 8
Source: Asian Development Bank, Key Indicators 2003, 2003.

43
Current Issues on Industry, Trade and Investment
tend the house and fields, while men find remunerated
work outside the home where exposure to opportunity
is much greater. This leaves the women in
a disadvantaged position in regard to educational and
professional opportunities, and thus more vulnerable
to poverty.8
Women are, however, also increasingly
represented in the service sector which is regarded
as a more modern sector with more opportunities for
further individual growth.
(c) Asymmetries in job security
In many societies we still encounter the
persisting view that the male is responsible for
earning the cash for a family. Hence women are
often last to be hired and first to be laid off. This
trend has even increased after the privatization of
state-owned enterprises (SOE) in countries such as
China, where the government policy previously
ensured gender equality in employment.9 Women in
the region generally enjoy less job security than men.
They are fired easily, but also hired easily, as they
are willing to accept lower wages. The Asian crises
also contributed for the (temporary) loss of many
jobs in export industries, employing mainly women,
however, for men the loss of job was not less.10
(d) Asymmetries in status and recognition
Another issue for which overall participation
of women in the workforce is not very indicative, is
the fact that women are overly represented in the
jobs with lower status, authority and/or remuneration.
In attaining positions of power, women often run in
to a “glass-ceiling”, beyond which further career
growth is not possible solely due to these social
restrictions. Thus, upper management in most
countries remains largely reserved for men; while
women mostly end up with inferior tasks and
positions.
8
W.R. Böning, “South-East Asia and the Pacific multi
disciplinary team”, Gender Equality in the World of Work in Asia
and the Pacific (Manila, ILO SEAPMAT, 1999).
9
Caroll, op. cit.
10
J. Ghosh, Women in Development Discussion Paper Series
No. 1: Impact of Globalization on Women: Women and Economic
Liberalization in the Asian and Pacific Region (Bangkok, ESCAP,
1999).
44
(e) Asymmetries in remuneration
Gender asymmetries are also found in the
remuneration of work. Inequality surfaces in plain
discrimination between men and women in wages
for similar jobs. In many GMS countries this
discrimination is excused on the grounds that families
are dependent on the income of the male in the
household, and the income of the woman is merely
complementary. Besides the fact that such an act is
plain discrimination, in this day and age, this
argument is not applicable any longer, since
responsibility in household structures is shifting. The
more the efficiency is attained in household chores,
the more the division of responsibility and labour
changes within the household. Furthermore, the
argument disregards the situation of widows and other
women-headed families, which are consequently left
more vulnerable to poverty.
Despite increasing equal participation and
contribution of women in the workforce, sectoral
disparities, disparities in job security, status and
remuneration, show inequalities which are not in line
with fundamental human rights according to which
each individual, male or female, should be treated as
the same.
3. Gender asymmetry in access
to resources
Often women in GMS countries encounter
more barriers than men to direct access to resources
such as education technology networks and so on.
From a social point of view, we can state that the
abilities and potential of women are undervalued;
where women’s work is perceived as less lucrative,
families and institutions may firstly fail to appreciate
its true value and hence may secondly be less willing
to invest resources in women. Consequently, women
do not only have a disadvantaged position for direct
production and thus to gain income, but even more
vital; it limits their opportunities, which will only
intensify their under-privileged condition.
This lack of opportunity and access to
resources to improve one’s situation, can be classified
as one of the dimensions of poverty (poor health,
illiteracy, inadequate schooling, social exclusion,
powerlessness and discrimination are all widely
 III. Entrepreneurship Development for Women in GMS Countries
recognized as contributing to poverty).11 Access to
resources is hence of specific importance, as it is
primarily this factor that directs the way out of
a marginalized position.
This Section focuses on the socio-economic
aspects of the resource accessibility, especially in
regard to female members of the household. The
individual resources of significance for economic
activities are therefore confronted with the social
situation of women.
(a) Skill development training and education
While making brief remarks on the influence
of resource accessibility of all resources required for
production (or for economic activity in general),
a special remark is to be made regarding education.
The value of education in itself for personal
development is commonly agreed on, and
increasingly the value of education for the
development of human resources is being recognized
as an asset. Education is regarded as the most
important investment in the human capital of
a country, which just as any other resource can lead
to specific competitive advantage.
Therefore it is appropriate to start the list of
resources with education. The level of education is
one of the major determinants for developing the
ability to acquire other resources. If education is
not sufficiently invested in, other investments may
hence be in vain.
A tendency, completely based upon the social
construction that it is more natural for women to
assume work in the house than for men, is to give
precedence to the education of boys over that of
girls. Some countries, specifically the patriarchal
ones, still have a tendency to abide by such
practices.12 Further, women are first to sacrifice
schooling and personal development for
complications within the household. Such
discrepancies between the sexes in access to
education, directly leads to inequality in opportunity
and thus in future opportunities.
11
UNFPA, State of the World Population, (New York, 2002).
12
Caroll, op. cit.
However, in most GMS countries there is no
disparity of particular significance in participation
in formal education. The thought of equal
participation in the workforce and education, spread
during the more revolutionary years of the socialist
era, may have had a positive effect on gender equality
in education.13 However, the current situation as
illustrated in table III.3 still shows some discrepancies
in enrolment. (Primary education enrolment rates
above 100 per cent, may be explained by the
possibility that not all those who enroll in school are
registered as citizens.)
Table III.3. Female participation in natural
sciences and engineering
(share of female students, percentage of total
enrolments, in natural sciences and engineering)
1982 2000
Africa 19 27
Asia 16 23
Oceania 22 30
Mexico 14 30
Europe 24 30
Source: UNESCO, Institute for Statistics, 2003.
(b) Technology
Appropriate technology is a resource of great
importance for economic development. Very often
in the current “age of knowledge”, technologies play
a significant role in production efficiency as well as
in the household. Technology has as such become
a most valuable asset and due to the insatiable
demand for it, technology itself has become
a lucrative industry.
Hence, high-technology industries are given
special national preference due to the higher
profitability of such industries. They may receive
special treatment or financial benefits. Consequently
high-technology industries play a leading role in
the economic development of a country. As
precedence is given to these kinds of industries, they
can be said to have a certain bargaining power, since
development plans are usually slightly biased towards
them.
13
Ibid.
45
Current Issues on Industry, Trade and Investment

Considering their power, it is only just for Table III.5. Poverty

these industries to consist of men and women alike,
however, table III.4 implies that in GMS countries Population in poverty
Country
men figure more prominently in this field. Women Total Urban Rural
are more overly represented in industries at the lower Cambodia 35.5 25.2 40.0
end of the market, which require less expertise and Lao People’s
less investment. In itself this hierarchical gender Democratic
representation is not a desirable social situation, Republic 38.6 26.9 41.0
however a change is currently underway and many Myanmar 22.9 .. ..
governments have even tried to encourage especially Thailand 12.9 1.5 17.2
women to study technological studies, with financial Viet Nam 37.0 9.0 45.0
incentives such as scholarships. Source: ADB, Key Indicators 2002, 2002.

Table III.4. Female students by broad field the growing demand for information technology (IT)
of study, 2000 workers, some identify ICT as a great opportunity
(share of female students, percentage for women specifically.14 Not so much because it
of total enrolments) allows a lot of work to be done at home or on free
lance basis, but more specifically because of the
Engineering,
Social general shift towards the use of IT in doing business.
manu-
sciences, The opportunities mentioned are the conduct of sales
Science facturing
business
and directly over the Internet, and more important, the
and law substantial efficiencies communication networks can
construction
accrue to.
Cambodia 16.6 30.6 5.5
Lao People’s
Technological developments do not only
Democratic
Republic 28.1 30.8 11.5 exponentially enhance efficiency of economic
Myanmar 63.6 60.9 ... activity; but they also reduce the time it takes to
Thailand ... ... ... perform certain household chores. The resulting
Viet Nam ... 47.5 13.7 efficiency makes a large part of the time (which was
previously occupied by household chores) available
Source: Adapted from UNESCO, EFA Global Monitoring
to women for other uses such as commercial
Report 2003/4, 2003.
production. Hence a natural result is the increasing
participation of women in economic activities, as
Despite these encouragements from the can be discerned all over the world.
governments’ side, table III.5 displays that the
enrolment rate for female students is significantly Such reduction in time provides more
lower than that for male students, in technological flexibility as regard to – by whom and – at what
studies. This indicates that professions and time activities can be performed; since household
educational paths are still influenced by gender role chores cease to constitute a day-filling task anymore,
perceptions in society, which will perhaps always be and the role of the women in commerce or production
the case to some extent. Perhaps more effort should is expanding, the household chores can slowly
be exerted in changing the common perception in become more and more equal responsibility under
society of gender roles. Since technology plays such household members.
a leading role in economic development, it would be
a shame if women would not be represented equally
in the field.
14
ESCAP, Women in Development Discussion Paper No. 12:
Moreover, in the field of information and Creating Business Opportunities for Women through ICT
communication technology (ICT), we see that due to (Bangkok, 2001).

46
 III. Entrepreneurship Development for Women in GMS Countries
(c) Infrastructure
Transportation networks, electricity, water and
communication networks are infrastructural
provisions, which are indispensable for economic
activities. Since most exporting countries have these
basic infrastructure provisions in place, it is almost
impossible to compete with them, lest these basic
resources are provided.
Furthermore in societies where women
mostly do the work in the house, the installation of
basic infrastructure such as electricity networks is
essential to reap the benefits, offered by technological
developments.
Communication networks also carry
a considerable impact. Especially when it comes to
commercial production and trade, regular
communication with different parties is bound to
increase. Especially to entrepreneurs, communication
networks are vital. Communication networks can
aid in instances where women are still burdened with
being tied to the house and hence are pressed to
work from there. Even though they are physically
located in the house, they have access to and
increased exposure to the “outside world” enhancing
their knowledge and experience, opportunities and
social involvement.
(d) Credit
The role of financial investment capital is
indisputable for entrepreneurs. Capital is generally
scarce in the region, especially after the financial
crisis in 1997. The crisis itself of course already
indicated the ailments of the financial sector. Even
though recovery is in process, many businesses still
feel that access to credit for productive investment
is one of the main obstacles in conducting business.15
Even though industrialization is well in
progress, many of the GMS countries have large rural
populations. In the rural areas the level of education
is low and in some cases girls even have less access
to education than boys (see the previous subsection
15
UNCTAD, The Least Developed Countries Report 2002
(Geneva, 2002).
on human resources, education). This educational
arrear causes them to simply not be aware of the
possibility and procedures of formal lending.16
In rural areas of the GSM countries, the lack
of collateral required by formal lending institutions,
constitutes a major stumbling block. Hence many
of them have to resort to informal moneylenders,
which are widely available in all the GMS
countries (in Viet Nam for example approximately
70 per cent).17
Many non-governmental organizations (NGOs)
have similarly taken up the task to meet the growing
need for micro credit and other “alternative” lending
schemes. Some of them are especially reserved for
women, or have taken special conditions into
consideration the specific borrowing needs and
repayment options most suitable for rural women.18
(e) Markets
Women in the region do often find that they
do not have sufficient knowledge and information
about markets.19 This has caused their strategies to
be very production focused. With sufficient
vocational training and practical experience this
problem may be solved. Since education and
information are more easily accessible to men,
women’s range of opportunities to establish
enterprises is comparatively lower.
The asymmetry in access to resources is in
itself a reason why more opportunities should be
given to women. If entrepreneurial individuals are
provided some resources, they are able to do great
things, as indeed being entrepreneurial is being
resourceful. Promoting equal access to resources is
however only one component of promoting
entrepreneurship among women.
16
K. Barry, Vietnam’s Women in Transition (New York,
St. Martin’s Press, 1996).
17
Beresford, op. cit.
18
Documents of ESCAP Workshop on Social Protection
Schemes for Women in the Informal Sector, 8-10 September 2003,
Bangkok.
19
ESCAP, Women in Development Discussion Paper Series
No. 4: Women in Small Business in Indochina: Issues and Key
Approaches (Bangkok, 1999).
47
Current Issues on Industry, Trade and Investment

4. Gender asymmetry in poverty 79 per cent in Cambodia (1995), 82 per cent for Lao
People’s Democratic Republic (1990), and 65 per
(a) Rural-urban disparities cent (1990) and 47 per cent (1995) for Thailand) has
been recognized as one of the reasons why poverty
Poverty in GMS countries is concentrated
in the Asia-Pacific region is increasingly feminized.20
mostly in rural areas (table III.6), since these areas
The fact that table III.2 shows female participation
are confronted with problems regarding access to
in agriculture diminishes at a higher speed than for
services and output markets, etc. Another
men, in the more rapidly developing countries
characteristic of the rural-urban gap is the drain of
Thailand and Viet Nam, may be well due to the
human resources from the rural areas to the urbanized
general movement away from agriculture. The fact
ones, drawn by opportunities and often driven by
that women’s participation rates were very high to
poverty. The rural areas become even more deprived
start with, may explain in part why their participation
and thus become caught in a vicious cycle, which
in this sector is diminishing more rapidly than for
will only widen the rural-urban gap further.
men.
Interestingly, we find the gender issues more
Furthermore, seasonality of agriculture is in
pronounced in rural areas, specifically in terms of
some rural areas a cause for underemployment;
access to education and other services, and in the
however these periods are often filled up with other
social restrictions imposed by role-patterns.
economic activities such as production in the home
or wage work in urban areas. Entrepreneurship
Women’s relatively high representation in
the agricultural sector (female participation as
20
a percentage the agricultural labour force range from Böning, op. cit.

Table III.6. Labour participation by gender, by sector

1980 1995 2000

Agriculture
Male Female Male Female Male Female
Cambodia 70 80 69 78 ... ...
Lao People’s Democratic
Republic 77 82 76 81 ... ...
Myanmar 72 80 70 78 ... ...
Thailand 68 74 63 65 50 47
Viet Nam 71 75 70 73 70 71
1980 1990 2000
Industry
Male Female Male Female Male Female
Cambodia 7 7 7 8 ... ...
Lao People’s Democratic
Republic 7 4 7 5 ... ...
Myanmar 9 7 11 9 ... ...
Thailand 13 8 16 12 20 17
Viet Nam 16 10 17 11 12 9
1980 1990 2000
Services
Male Female Male Female Male Female
Cambodia 23 14 24 14 ... ...
Lao People’s Democratic
Republic 16 13 17 14 ... ...
Myanmar 19 12 19 14 ... ...
Thailand 20 18 21 23 31 36
Viet Nam 13 15 13 16 18 20
Source: ADB, Key Indicators 2002, 2002.

48
 III. Entrepreneurship Development for Women in GMS Countries
development may serve as a perfect tool to negate
this kind of periods.
(b) Disconcerting working conditions
A problem which is of relevance in both rural
and urban areas is the conditions under which women
perform their work. The gender asymmetries brought
forward in the previous section, such as job insecurity
and unequal remuneration, and discrimination often
cause women to end up at the bottom end of the
spectrum of quality of working conditions. In the
worst cases women are deprived of even basic human
rights. The gender asymmetry in access to resources
aggravates this impact, since it restricts the way out
of this deprivation.
(c) Globalization and income distribution
One development, often accused of
contributing to the process of deprivation and poverty,
is the widening effect that globalization has on
income distribution. It is argued the impact can be
felt more strongly in economies in transition, since
these governments are still getting used to the market
system.
Limited education/knowledge about markets
and about marketing leads developing countries to
focus on production rather than on markets.21 This
is reflected in their competitiveness. It is furthermore
related to the issue of technology. Since developed
countries mostly have a much higher degree of
technology integrated in their daily lives, they thus
have much less training to do when modern
technologies have to be applied in production
processes.
Producers in GMS countries may believe that
being cost-leader is the only option open to them to
gain competitive advantage. Although developing
the human resources to such an extent that they too
can make use of advanced technology would be an
alternative, in practice there may not be enough funds
for technology acquisition. In other cases, such
investments may not be worthwhile when human
21
As mentioned during ESCAP Expert Group Meeting on
Assessing Regional Implementation of Commitments from the
World Summit for Social Development, held 16-18 September
2003, Bangkok.
resource turnover is high, and when it is likely that
after training the employees leave to offer their skills
to another employer.
It may be clear that most employee-retention
strategies are uncommon in such environment.
Similarly, other aspects of human resource
management are far from common and certainly not
many investments are made in the human resources
of most companies. Even though many countries
are member of organizations such as the International
Labour Organization (ILO), with its conventions to
protect the rights of workers and to define the
standards which are to be met, have not signed these
conventions,22 since they feel it would limit their
competitive capacity too much. While hoping that
competition will in the near future instigate a trend
amongst employers towards human resource
development, in this transitional phase, many still
rely on low wages and associated practices, or
employing parts of the workforce informally.
(d) Informal sector growth
The informal sector, which is currently
growing at a much higher pace than before,23 is also
seen as an infamous breeding ground for deterioration
of working conditions. The informal sector has by
definition no formal description for the work to be
done, or of the conditions in which the work is to be
performed.
Usually the working conditions are thus not
very becoming, due to the fact that workers in the
informal economy cannot avail of any protections
against indecent working conditions. The economic
situation of women in the informal sector can drive
them to accept “flexible” working conditions. This
may simply consist of part-time work, but sometimes
it means work that is under-remunerated or even
unhealthy or unsafe.
Yet table III.7 conveys that the size of the
informal sector in developing countries is quite large,
and planners should not underestimate the effect of
22
http://www.ilo.org/public/english/standards/decl/ratification/
index.htm
23
F. Schneider and D. Erntse, IMF Economic Issues, No. 30:
Hiding in the Shadows – The Growth of the Underground Economy
(Washington, 2002).
49
Current Issues on Industry, Trade and Investment

Table III.7a. Size of the informal economy the human rights of the workers are not even in place.
This is a direct state of poverty and deprivation.
Percentage of GDP, Young women may be recruited in industries as they
Economy group
1988-2000
are more subservient and less likely to object to
Developing economies 35-44 repetitive work in unhealthy circumstances.
Economies in transition 21-30 Alternatively young women are recruited in the
OECD 14-16 entertainment and catering industry, purposefully
Source: IMF, “Hiding in the shadows – the growth of the exposed to harassment to attract clients.24
underground economy”, Economic Issues, No. 30,
2002. Symptoms in society such as child labour,
trafficking of women and children, or violation of
Table III.7b. Size of the non-agricultural labour laws are other examples of the worst
informal economy “working” conditions. Their occurrence has several
causes; however, poverty is one of the main ailments
Informal economy as a percentage that lay at the heart of these problems. The lack of
Economy group of non-agricultural
resources to improve one’s condition and the lack of
employment
voice are forms of deprivation and can be regarded
Asia 65 as poverty in themselves. It is well known that the
Source: UNIFEM, Progress of the World’s Women, 2002. poverty trap includes the lack of access to escape its
vicious clutch through the lack of access to resources
its current growth. It has significant implications to develop oneself. The limited access to resources
for the working conditions of a great part of the is a principal obstruction to escape poverty, and the
population. In Asia, the informal sector is under-valuation of the work that women perform only
predominantly composed of women, and that they limits possibilities further.
often have to resort to self-employment to sustain
themselves (table III.8), possibly because wage-jobs Often the age of the persons subjected to such
are hard to find for them. inhumanities matters and so does their gender.
Women have, during the transition and in the face of
Indeed, not only illegally employed numerous other developments, become more
wageworkers are part of the informal economy, vulnerable to poverty, in all its dimensions, and less
home-based production activities and many other able to get out of poverty once in it. Concerns have
unregistered entrepreneurial activities similarly, can been expressed about the feminization of poverty in
often be classified as the informal sector. Hence some societies.25 Since the feminization of poverty
they are not included in official statistics; neither is the product of the dual gender asymmetries in
can they avail of protections or regulations which employment and access to resources, these two
are in place for the formal economy. should be fervently attended to.

(e) Feminization of poverty 24

B. Athreya, Working Women in Cambodia (Berkeley, UC
Berkeley Labor Center, 2003).
As mentioned before, in the worst cases, 25
UNIFEM, Progress of the World’s Women 2002, (New York,
working conditions may be in such a bad state that 2002).

Table III.8. Wage and self-employment in non-agricultural informal employment

Self-employment as % of non-agricultural Wage-employment as % of non-agricultural

informal employment informal employment
Total Men Women Total Men Women
Asia 59 55 63 41 45 37
Source: UNIFEM, Progress of the World’s Women, 2002.

50
 III. Entrepreneurship Development for Women in GMS Countries
In summary, disparities have either surfaced
or prevailed, in the light of the current changes that
the GMS countries have gone through, firstly in
employment and in access to resources, and
consequently in the gender-composition of the poor.
In order to attain healthy socio-economic progress
these disparities need to be eradicated.
C. Entrepreneurship development
Section B illustrates why specifically women
in GMS countries ought to be assisted to become
entrepreneurs. This section intends to offer a solution
as to how entrepreneurship development assistance
can be provided.
Since the definition of entrepreneurship has
seen shifts throughout time and more specifically
throughout the different fields of study, first the use
of the word needs elaboration. Subsequently the
different perspectives or angles from which to
perceive entrepreneurship development are described
in order to get a complete picture of issues and
interests involved. In view of the broad perspective,
congruent broad approaches to assistance will be
described. Finally the ESCAP activities in respect
to the matter will be summarized.
1. Defining entrepreneurship
The definition of entrepreneurship has seen
shifts throughout time from being a broad synonym
for the spirit of “undertaking things” to very specific
actions performed by governments to promote the
establishment of enterprises. Economists often define
entrepreneurs as agents of change, as they mobilize
resources, open up markets, introduce new
technologies and exploit other opportunities. 26
Psychologists focus on behavioural attributes and
managers tend to describe entrepreneurs by means
of their functional attributes and competencies.
However, roughly two general descriptions
can be distinguished. 27 The first considers
26
J. Hailey, “The politics of entrepreneurship – affirmative-
action policies for indigenous entrepreneur”, Small Enterprise
Development – an International Journal, vol. 3, No. 2 (Essex,
ITDG Publishing, 1992).
27
M. Farbman and W.F. Steel, “Research issues for small
enterprise development” in Small Enterprise Development – an
International Journal, vol. 3, No. 2 (Essex, ITDG Publishing,
1992).
entrepreneurship to be a survival strategy for people
with no other employment perspectives. The second
singles out the entrepreneurial character attributes
and defines entrepreneurship as the display of such
traits (such as learning by doing, proactiveness,
creativity, taking calculated risk, an urge for
independence) specifically utilized in a business
context.28
Depending upon which of these definitions
one uses, the design for providing assistance will be
different. Naturally an approach to assist individuals
out of poverty and deprivation by introducing
them to entrepreneurship and trying to develop
entrepreneurial spirit amongst them, will be
inherently different from an approach to support
entrepreneurial individuals who are already
resourceful and eager to take initiatives.
2. Perspectives on entrepreneurship
development support
(a) Macro-level perspective
i. National context
There is no need to elaborate on the virtuous
cycle in which entrepreneurship enhances economic
activity, which eliminates social evils by creating
jobs and wealth. Jobs and wealth in turn, serve
as incentives for individuals to follow the
entrepreneurial path further. Specifically to GMS
and other economies in transition entrepreneurship
is essential to develop the private sector. It is, after
all, responsible for the most substantive part of
economic activity.
Besides economic growth and job creation,
entrepreneurship has an alleviating effect on poverty.
This is not only one of the main reasons to utilize
entrepreneurship development on macro level, but it
is similarly instrumental on an individual level for
combating poverty and deprivation.
From a macro-level point of view there are
two ways to assist entrepreneurs: either directly by
providing them business development services
28
M.S. Din and A.A. Gibb, “Universities, small business and
entrepreneurship education: towards a holistic approach” in
Small Enterprise Development – an International Journal, vol. 1,
No. 4, (Essex, ITDG Publishing, 1990).
51
Current Issues on Industry, Trade and Investment
(BDS),29 or indirectly by providing an environment
in which entrepreneurs can easily develop themselves.
The latter constitutes mainly the provision of an
economic infrastructural framework. If the economic
infrastructure is not in place or is not operating
properly, other initiatives to develop entrepreneurship
will most certainly bear fewer fruit, if any at all.
ii. Global context
Globalization, a trend in current motion, is
impossible to be ignored for today’s entrepreneur.
The concept of globalization is commonly perceived
as a multidimensional phenomenon comprising
political and cultural dimensions, and most notably
economic ones. This is not surprising as it is the
economic aspects that currently have a tremendous
impact. As such, globalization is commonly
described as the increasing interdependency among
nations for both consumption and production.
Integration of markets has the potential to open up
new opportunities, which in turn can release people
from the poverty trap.
In general this development has instigated in
the GMS countries, an attempt to compete on the
basis of production costs. In such environment
working conditions in many instances tend to
deteriorate since employers try continuously to
increase the amount of work they can get from one
unit of labour. Hence, in the opinion of many
economic globalization critics, increasing competition
fuels a “race-to-the-bottom” as developing countries
engage in a labour-cost price war and compete to
provide the highest “flexibility” in labour standards.
29
BDS can constitute activities such as: training in specific
production skills, training in business skills, facilitating access to
information, facilitating access to markets, facilitating access to
credit and financial services, facilitating access to or developing
specialized consulting services (e.g. accounting, management
strategy, advertising, product design), access to international
standard certification).
In a market economy it is obvious that whoever has the best
resources or skills to provide any of these services should do so
on a commercial basis. As an encouragement, however, many
governments or development assistance organizations provide such
services, often on a subsidized basis. Whether such subsidized
service provision distorts the commercial BDS market is an
interesting question, however, reaches beyond the scope of this
paper.
52
There is another aspect of globalization in
which entrepreneurship development is of particular
importance. The large multinational corporations
(MNCs), which are seen as the toughest to compete
with, are starting to feel negative effects of their
size. Although they enjoy economies of scale, the
size of their business simultaneously hampers their
flexibility. At the increasing speed with which change
occurs across markets these days, this is a very
serious implication.30 Some companies have tried to
avert this problem, by decentralizing authority and
responsibility to the local units, however along with
that, cases of abuse of this newly gained authority
have increased and naturally damaged the companies
in question.
As an alternative to a high degree of
decentralization, spin-offs or “patronage” of
entrepreneurs has become a popular way for MNCs
to maintain their flexibility and entrepreneurial spirit.
They support small young, flexible and creative
initiatives during the financially difficult start-up or
development period, even though they are not directly
part of the company. This indicates that, new ideas
and entrepreneurship always maintain the nexus
around which an economy evolves.
This is an implication of importance to us:
even though entrepreneurs may have difficulty
competing with bigger firms, they do have
characteristics which the latter desires to have.
Entrepreneurs can even attract funds from such
companies in order to let their own initiative mature.
Under the influence of globalization, the international
economic infrastructure is continuously improving.
This similarly allows funds and technology to cross
borders more easily and entrepreneurs may thereby
even be able to increasingly benefit from foreign
direct investment (FDI).
However, the prerequisites for such occurrence
remain: a good national economic infrastructure and
a high degree of flexibility, creativity and other
entrepreneurial attributes.
Thirdly, globalization also allows production
across borders. Especially for GMS countries this
30
APCTT, CD rom: Business e-coach, Facilitating Growth of
Technology-led SMEs in Asia and the Pacific, New Delhi, 2003.
 III. Entrepreneurship Development for Women in GMS Countries
is an interesting issue, since their labour costs
are relatively lower than in the countries in the
Asia-Pacific region, which are more specialized in
technology. Globalization offers a short cut to
technological development, by giving rise to the
opportunity for entrepreneurs to find their place in
an international production network (IPN). This
usually includes the transfer of technology or methods
of operation in order for them to produce. The culture
of retaining and training employees, which goes along
with this process, initiates step towards improved
working structures in which people can develop
themselves. However, getting into such networks
requires experience and high quality standards of
work.
(b) Perspective of the (woman) entrepreneur
i. Micro-level impact
Combating poverty and deprivation often
requires a bottom-up approach, since the intended
benefit does otherwise not reach the poorest of the
poor. As entrepreneurship empowers, through
constant learning form “formal” sources as well as
from practice and experience, entrepreneurship
contributes considerably to personal development.
Entrepreneurship development teaches people to be
resourceful, as a countermeasure for deprivation,
while simultaneously improving their financial
position, as a countermeasure for (financial) poverty.
It also allows them to work quite independently,
a working situation which gives fewer opportunities
for exploitation.
Furthermore, it gives individuals insight in
organizing and organizational structures. Firstly in
a business context, but easily applicable to social
organization, it can strengthen communities and
democratic processes. Individuals will be able to
organize themselves into structures for specific social
purposes, which is enrichment for the entire
community.
As a consequence of its innate attributes
of self-development and income generation,
entrepreneurship serves as an effective solution to
the gender-determined entrapment in a disadvantaged
economic situation.
ii. Women entrepreneurs
Entrepreneurship development reaches out to
private persons in the population and encourages
them to organize themselves in a formal structure
to engage in economic activity. Entrepreneurship
for many women embodies the escape from
discrimination in the established business
environment. For others it is a form of self-defence
against the job insecurity and wage insecurity, which
is found to be more volatile for women than for
men.
Besides these push factors, the fact that
economies in transition are promoting enterprise
development and entrepreneurship as a part of private
sector development constitutes a main pull factor.
Other pull factors may want to try out “winning
ideas”,31 proving one’s competence, etc.
3. Targeting entrepreneurship
development activities
The benefits of women entrepreneurship
development spread themselves across a spectrum
ranging from improvement of the macroeconomic
environment on the one side, to the empowerment
of individual women on the other, as illustrated in
figure III.1 below. Depending on the chosen level
of influence, activities differ. For example, if the
national population at large is targeted, policy advice
and improvement of the economic infrastructure are
important instruments to bring about the desired
change, while for the empowerment of individuals,
direct services and community building are more
appropriate. Many activities that have significant
impact on individuals inherently have an indirect
impact on higher levels as well.
There is another dimension to entrepreneurship
development, for which reference is made to the
statement in the beginning of this section, that there
are mainly two uses of the word “entrepreneur”
(namely those with no other/better employment
perspectives and those motivated by personal
31
APEC, Women Entrepreneurs in SMEs in the APEC region
(APEC#99-SO-01.1) (Taejon-City, published on behalf of APEC
secretariat, Singapore, 1999).
53
Current Issues on Industry, Trade and Investment
aspirations). In entrepreneurship development,
the individuals who are the least resource-full
(poor/deprived in figure III.1) can be placed at one
end of the spectrum while the resourceful
(entrepreneurial/inspired) groups/individuals can be
placed at the other end. In essence the difference
between them is that the former mainly engages in
entrepreneurship due to external or secondary causes,
while the latter group engages in entrepreneurship
simply for its own merit, they simply enjoy
entrepreneurial activities.
Figure III.1. Women’s entrepreneurship
development continuum
1 Policy advice
2 Strengthening national structures for private sector
development
3 Strengthening human resources in private sector
organizations
4 Mobilizing resources
5 Promoting entrepreneurship
6 Assisting entrepreneurs
7 Strengthening communities
8 Empowering women
Just as with the dimension of level/scale of
impact, there are differences in the approach to be
used when assisting individuals or groups at different
positions in this second spectrum. For example, the
lesser resourceful can be assisted by encouraging
them to develop their entrepreneurial competencies.
Of course the activities to facilitate entrepreneurial
individuals in conducting their business are much
different from the former. Hence this dimension
similarly needs to be carefully taken into account
when designing activities to promote women
entrepreneurship.
54
The numbered circles in figure III.1
correspond to the numbers below it, which give
examples of appropriate activities, in regard to the
level of impact desired and the degree of
entrepreneurial motivation.
Individuals who engage in entrepreneurship
because of their limited opportunities to find paid
jobs or out of other economic necessity will firstly
need to develop basic entrepreneurial skills and
character.
In the pursuit of developing entrepreneurial
character, the following findings may be taken into
consideration; scholars have found that the
development of entrepreneurial spirit is influenced
by innumerable factors surrounding an individual,
however, they can be roughly classified into five
categories:32
(a) Role images to serve as examples,
(b) Opportunity for familiarization, for
example through family background,
(c) Networks, contacts and acquaintances for
familiarization and for opportunities to
enter a market,
(d) Opportunity to practise entrepreneurial
attributes, and
(e) Knowledge of business management.
These influences can be taken as starting
points when trying to encourage entrepreneurial spirit.
Generally, programmes which aim to use
entrepreneurship as a method of poverty reduction
or as a way out of deprivation require a high degree
of personal attention per beneficiary.
Conversely, assisting entrepreneurial
individuals in an attempt to set up an enterprise, is
relatively easier, since the right “seeds” such as goals
and creativity are already present in the individual
herself. They usually have a clear view already
of what they need and hence assisting them
can constitute simply servicing those needs in
a coordinated way. Commonly a division is made
into four major groups, categorizing the provision of
32
Din and Gibb, op. cit.
 III. Entrepreneurship Development for Women in GMS Countries
the following resources required in the conduct of
business:33
1. Training in business skills (which
may include sensitization in societies
which are averse or unfamiliar with
entrepreneurship (by women))
2. Training in production skills (including
technology transfer and follow up
services)
3. Consultancy and providing information
(consultancy on business strategy issues
requiring information about markets,
regulations, prices, etc. as well as on
production and technology related issues
which often require access to and use of
specialized networks)
4. Credit (resource mobilization/savings
groups, cooperation with financial
institutions, special credit schemes,
mediation/representation, etc.)
It may thus become clear that promoting
entrepreneurship in general, can be assisted on many
different levels and in many different ways. Different
players can address issues which entrepreneurs face,
depending on their own resources and competencies.
It has been found that the more accurately
targeted entrepreneurship development programmes
are, the more effective they are in attaining progress
for those participating in the programme. It is
understandable that the more a programme considers
the specific situation in which the beneficiaries may
find themselves, the better they know how to assist
them. Since women often face a specific set of
common problems or barriers, this is why women
entrepreneurship becomes a topic of special attention
to begin with.
Design of entrepreneurship programmes
should therefore start by dividing the population of
individuals which would benefit from assistance, in
33
M. Allal, International Best Practice in Micro and Small
Enterprise Development, (Bangkok, ILO ROAP, 1999).
segments according to common features or
conditions. From there on, their specific needs at
specific levels can be identified and attended. This
will result in a diverse range of initiatives from the
public sector, but also from NGOs and from private
sector organizations, or even on fully commercial
basis.
4. ESCAP initiatives
Current developments in the ever-changing
global economic landscape have urged GMS
countries to accelerate the creation of mechanisms
which can coordinate socio-economic development
in an integrated manner. Several competencies need
to be present within the countries in question if
such mechanisms are to be implemented. ESCAP
has been supporting such capacity building in
many different areas. The support of enterprise
development has been one of them.
ESCAP’s Trade and Investment Division, has
been the focal point for initiatives in regard of
enterprise development (among others). Main
activities in the past in GMS countries, concerning
the promotion of enterprise development and the
private sector in general, constituted largely of
assistance to governments in policy research and
formulation. Through time governments have made
vast advancements towards implementing the market
system and the needed institutions.
Consequently the focus of assistance has
shifted to initiatives directly targeting the private
sector organizations. Illustrative of this is the
instigating role that ESCAP played in the
establishment of the GMS Business Forum
(GMS-BF) in which the individual chambers of
commerce of the GMS countries collaborate to
promote intraregional trade and investment.
A more recent development has been that, in
collaboration with these chambers of commerce,
several trainings, in the areas of management,
marketing, e-commerce and other enterprise
management and entrepreneurship development
related issues, have been provided directly to persons
in the business sector.
55
Current Issues on Industry, Trade and Investment
The Emerging Social Issues Division is
composed of several Sections of which one is devoted
to gender and development issues. The main
activities of this Section include:
● monitoring and evaluating the progress
achieved by countries in the region in
implementing the global and regional
mandates and strategies;
● collecting, evaluating and disseminating
information on gender and development;
● issuing a periodical publication;
● convening intergovernmental and expert
group meetings on various issues in the
field;
● developing capacity of concerned
government offices and civil society
organizations to promote gender equality
in various sectors; and
● cooperating with concerned United
Nations bodies, specialized agencies and
NGOs on activities relating to advancing
the status of women in Asia and the
Pacific.
Though the Gender and Development Section
has not concentrated on enterprise development
specifically, it commands a high expertise in gender
analysis which can be applied in any field. Besides
this, the Section has built an impressive collection
of gender-related information (including one on
women entrepreneurship) and extensive experience
across the Asia-Pacific region.
Concerning entrepreneurship development for
women particularly, the two Divisions have joined
in collaboration, in order to provide trainings to the
private sector in entrepreneurship development,
additionally addressing the gender dimensions of such
undertakings.
The entrepreneurship trainings are given to
strengthen the local entrepreneurial base of the
countries in the region. Specific attention is given
to women entrepreneurs, as they are relatively
underrepresented as entrepreneurs in their respective
countries. This disequilibrium was found with main
causes ranging from limited access to specialized
56
education, to the lack of opportunity provided to
assume positions of responsibilities within
enterprises, varying from country to country. Hence
the trainings intended to impart or upgrade
specialized, practical knowledge concerning
enterprise management to restore the imbalance.
D. Conclusions and recommendations
Considering the inequalities between men
and women in regard to economic activity,
and recognizing the value of entrepreneurship
development for national economies as well as for
individuals, entrepreneurship development can
certainly be employed to solve the current gender
asymmetries described throughout the paper.
The key to effective entrepreneurship
development, may be the accurate targeting of
activities and composing a suitable spectrum of such
activities that corresponds to the socio-economic
climate in a country at a given time. As economies
fluctuate, these initiatives too are subjected to
perpetual change. In view of such reasoning, the
following recommendations can be made.
1. Regional level actions
(a) Knowledge sharing
To get more insight on the dynamics
of entrepreneurship development in different
environment and in different circumstances, exchange
of national experiences (in the use of different
approaches to entrepreneurship development) is
recommended. It can strengthen the base of
knowledge about entrepreneurship development
dynamics, which is desirable for planning, designing
and adjusting national entrepreneurship development
initiatives.
(b) Private sector involvement
In order to support women entrepreneurs to
overcome gender specific obstacles in managing
and operating their enterprises, private sector
organizations from different GMS countries are
important actors to instigate change. Since they
themselves are constituents of the business
 III. Entrepreneurship Development for Women in GMS Countries
environment already, they can contribute by forming
networks which uphold gender quality.
Specifically in the light of globalization, such
international networks can assume great importance
as they may even form a new infrastructure for the
conduct of international business and trade.
2. National level actions
(a) Awareness raising of social gender
constructions in all layers of society
Besides economic reasons women engage in
entrepreneurship to acquire a sense of self-fulfillment.
Social constructions about gender, restricting
self-development should be countered.
Raising awareness is the starting point of all
planned change. In this case, awareness is to be
raised on gender equality in general, specifically
among planners and decision makers, and others
involved in drafting national policy. Similarly at
local government level, planners may need to be
aware.
Gender-focused assessment of current policies
and procedures may be done with the help of
independent observers which are specialized in
gender analysis.
Besides addressing planners, initiatives may
also be directly targeted towards the general public,
specifically the youth, since it is mostly the childhood
and adolescence period in which one’s concepts
concerning gender are formed. NGOs and women’s
organizations can be of value in this process of
making desirable change (towards equality) occur.
(b) Government infrastructure and coordination
The primary task of facilitating a government
is to establish the prerequisites needed for individuals
to independently take part in the economy.
Specifically the economic infrastructure is of
importance in this process.
The development and maturation of legal
system and other infrastructural provisions should
be based upon open and transparent practices.
Awareness concerning gender bias within current
practices should be raised, so they can be eradicated.
Furthermore it is advised to have one body
overseeing all activities concerning entrepreneurship
development, in order to coordinate and supply
information about current initiatives. This would
also avert the danger of duplication of efforts by
different ministries, NGOs or other organizations.
(c) Direct support to the private sector to enhance
the human resource base
Education and practical, vocational trainings
are to be aligned directly with the needs in the
economy and access to it should be equal to all. To
ensure the latter, knowledge is required about the
obstacles women and girls encounter in accessing
these services.
In addition, entrepreneurship needs to be
encouraged. For example, part-time trainings or
help-desks for setting up enterprises may further
negate the disparity between the available human
resources and the needs as directed by the economy.
Special concern should go out to ensuring that women
participate in such initiatives. This requires knowing
where and how to reach women.
57
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
IV. DEVELOPMENTS IN TRADE AND REGIONAL TRADE
AGREEMENTS IN ASIA AND THE PACIFIC
Marit Nilses*
A. Introduction
Liberalization of trade has the potential to
increase growth and welfare in the participating
countries. However, trade liberalization can also
bring along costs, and developing countries often
face more constraints in benefiting as rapidly from
trade liberalization than their more developed trading
partners do. They have often more limited resources
or insufficient institutions to deal with the burden of
adjustments needed or demanded of them, or to take
full advantages of the opportunities arising from trade
liberalization.
The World Trade Organization (WTO)
negotiations under the Doha Development Agenda
suffered a setback when the meeting in Cancun,
Mexico in September 2003 collapsed. Although
commitment to the Doha Development Agenda
remains high, as witnessed by extensive efforts by
ESCAP members and associate members to bring
the talks back on track, multilateralism is a slow and
difficult process. Not surprisingly, therefore, regional
and particularly bilateral trade agreements have
soared. After long having been a region with
relatively few regional and bilateral trade agreements,
the Asian and Pacific region now stands out as being
particularly active on this front.
This paper intends to give a brief overview of
trade in the region, the status and trends in regional
and bilateral trade agreements in the region, the
multilateral liberalization agenda as well as what
ESCAP is doing to assist member countries in
strengthening their capacities to gain tangible benefits
*
Associate Economic Affairs Officer, Investment and Enterprise
Development Section, Trade and Investment Division, ESCAP,
Bangkok. The author is grateful for valuable comments from
Ms. Tiziana Bonapace, Officer-in-Charge, Trade Policy Section,
Ms. Mia Mikic, Economic Affairs Officer and Mr. Matthias
Brückner, Associate Economic Affairs Officer, Trade Policy
Section, Trade and Investment Division, ESCAP.
from trade agreements, whether they are on
a multilateral or regional level.
B. Exports from developing Asia
and the Pacific
Between 1996 and 2001 the value of world
trade in products grew by approximately 13 per cent.
During the same period, exports from developing
Asia and the Pacific to the world grew by
approximately 27 per cent, thus at a considerably
higher pace than world exports. This brought the
share of exports from developing Asia and the
Pacific up to around one fifth of world exports in
2001 (table IV.1).
While export growth was strong in several
countries, including Bangladesh, China, Cambodia,
Myanmar, Nepal, Philippines and Viet Nam, it
experienced a fall in some economies, including
Bhutan; Hong Kong, China; Lao People’s Democratic
Republic; Turkmenistan and Uzbekistan.
These figures hide dramatic inter-country
variations. Among the developing economies of Asia
and the Pacific, the five largest exporters together
make up for about two thirds of all exports from the
region. China, as the largest exporter, contributed
about 5 per cent of total world exports or about
25 per cent of the Asian and Pacific exports to the
world in 2001. As the second largest exporter, the
Republic of Korea accounted for about 14 per cent
of the Asian and Pacific exports, followed by Taiwan
Province of China and Singapore with around 12 per
cent, and Malaysia with around 8 per cent of the
Asian and Pacific exports to the world.
Exports from the Asian and Pacific countries
to the rest of the Asian and Pacific region experienced
a 17 per cent rise during the period, thus growing at
a slower pace than exports to the rest of the world.
While intraregional exports make up for around
59
Current Issues on Industry, Trade and Investment

Table IV.1. Exports by developing economies in Asia and the Pacific

Exports to
Exports, millions of US$, Exports to developing developing Asia
Exports to world and the Pacific,
SITC 3 Asia and Pacific
% of total exports
1996 2001 Changea 1996 2001 Changea 1996 2001
Central Asia
Armeniab 152 229 51 1 52 5 100 1 23
Azerbaijan 631 2 314 267 377 156 -59 60 7
Georgia 320 69 – 22
Kazakhstan 5 911 8 620 46 1 269 1 388 9 21 16
Kyrgyzstan 507 297 59 –
Tajikistanb 345 327 -5 43 21 -51 12 6
Turkmenistanb 2 161 655 -70 214 272 27 10 42
Uzbekistanb 2 827 1 778 -37 649 331 -49 23 19
West Asia: Islamic
Republic of Iran 23 292 1 446 – 6
South Asia
Afghanistanb 125 93 -26 50 48 -4 40 52
Bangladesh 3 539 5 682 61 311 374 20 9 7
Bhutanb 41 33 -20 38 26 -32 93 79
India 33 404 44 307 33 8 274 9 939 20 25 22
Maldives 59 77 31 27 28 4 46 36
Nepalb 412 752 83 78 380 387 19 51
Pakistan 9 266 9 178 -1 2 324 1 833 -21 25 20
Sri Lanka 4 587 386 – 8
East Asia
China 151 048 266 098 76 57 554 89 558 56 38 34
Hong Kong, China 27 431 20 273 -26 12 261 9 026 -26 45 45
Macao, China 1 989 1 884 -5 424 86 -80 21 5
Mongolia 424 448 6 92 244 165 22 54
Republic of Korea 129 715 150 435 16 51 200 54 944 7 39 37
Taiwan Province of China 115 679 122 782 6 47 104 51 981 10 41 42
South-East Asia
Brunei Darussalamb 2 916 3 626 24 983 1 214 23 34 33
Cambodiab 288 1 717 496 136 156 15 47 9
Indonesia 49 815 56 317 13 17 301 20 800 20 35 37
Lao People’s Democratic
Republicb 287 254 -11 92 102 11 32 40
Malaysia 78 315 88 005 12 36 795 38 716 5 47 44
Myanmarb 1 282 2 849 122 908 1 725 90 71 61
Philippines 20 542 32 150 57 5 284 10 639 101 26 33
Singapore 125 008 121 754 -3 64 054 65 383 2 51 54
Thailand 55 678 65 113 17 20 669 23 295 13 37 36
Viet Namb 7 265 14 129 94 2 116 4 113 94 29 29
The Pacific
Fiji 460 47 – 10
Kiribati 5 3 60 –
Sum of above economies 827 067 1 050 538 27 330 928 388 778 17 40 37
World 4 955 482 5 621 246 13 868 660 891 782 3 18 16
Sum of above economies,
% of world 17 19 38 44

Source: UNCTAD, COMTRADE database, and own calculations.

a
“Change” refers to percentage change between 1996 and 2001.
b
Country export data not available in COMTRADE for the specified years. Mirrored data was therefore used (reported
imports by partner countries used as proxy for exports). One problem with this is that exports are calculated FoB and
imports CiF, which is higher. Another is that mirrored data will not reflect imports from other non-reporters. Thus, in
the first case, mirrored data will tend to overestimate the real value of exports, and in the second it will underestimate it.

60
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific

Table IV.2. Export structure by main commodities

(Per cent)

Manufactured goods, of which

Total Agri-
All food Ores and Machinery Other Unallo-
value cultural
Fuels Chemical and manufac-
(millions items raw metals cated
products transport tured
of US$) materials
equipment goods
Central Asia
Armenia 204 13.5 4.9 10.1 21.4 1.7 15.0 24.5 8.9
Azerbaijan 1 745 3.2 2.4 85.1 2.9 2.0 3.6 0.9 0.0
Georgia 330 27.4 3.0 8.4 28.2 10.4 12.8 9.3 0.6
Kazakhstan 9 116 6.6 1.3 53.0 19.7 2.5 2.1 12.9 1.9
Kyrgyzstana 454 15.8 6.1 11.8 5.8 3.3 9.7 7.2 40.4
Tajikistan 692 4.2 12.2 13.3 53.9 1.4 7.9 3.6 3.6
Turkmenistan 2 506 0.3 9.9 81.0 0.4 0.5 0.6 5.8 1.5
West Asia: Islamic
Republic of Iran 27 771 2.9 0.4 88.6 0.8 1.2 0.5 5.5 0.1
East Asia
China 249 203 5.4 1.1 3.2 1.8 4.8 33.1 50.4 0.2
Hong Kong, China 23 537 1.5 0.4 0.5 1.9 3.4 24.5 66.3 1.7
Macao, China 2 134 0.9 0.0 0.0 0.0 0.5 2.5 96.1 0.0
Republic of Korea 172 267 1.6 0.9 5.5 1.2 7.9 58.1 23.9 0.9
Taiwan Province of
China 148 727 1.2 1.1 1.2 1.2 5.9 58.4 30.8 0.2
South Asia
Bangladeshb 3 407 10.5 2.7 0.5 0.0 3.0 1.6 80.5 1.3
Bhutana 116 13.3 1.7 41.9 3.1 11.4 0.3 28.3 0.0
Indiaa 36 672 14.5 1.4 0.3 2.5 10.0 6.9 62.3 2.2
Maldives 76 53.7 0.0 0.0 0.1 0.0 0.0 46.2 0.0
Nepal 709 9.9 0.5 0.0 0.2 8.5 0.5 57.7 22.7
Pakistan 9 130 10.5 3.0 1.4 0.2 1.6 0.4 82.7 0.2
Sri Lankaa 4 467 21.1 2.0 0.4 0.2 0.6 4.2 70.2 1.3
South-East Asia
Brunei Darussalamc 2 148 0.0 0.0 99.5 0.0 0.0 0.0 0.5 0.0
Indonesia 62 124 8.9 3.6 25.3 4.9 5.0 17.3 34.4 0.6
Malaysia 98 230 5.5 2.6 9.6 1.0 3.8 62.5 14.1 0.8
Philippines 38 078 4.8 0.6 1.3 1.6 0.9 76.1 14.3 0.4
Singapore 137 806 2.2 0.5 9.8 1.1 6.8 67.4 11.2 1.1
Thailand 68 787 14.4 3.3 3.2 1.3 5.9 43.6 25.8 2.5
Pacific
Fiji 469 41.9 4.0 0.0 0.2 0.8 0.2 45.3 7.7
Kiribatia 8 91.5 8.5 0.0 0.1 0.0 0.0 0.0 0.0
Papua New Guinea 2 407 15.4 2.3 28.8 51.3 0.0 2.0 0.2 0.1
Samoac 8 96.3 0.1 0.0 0.0 0.0 0.4 3.1 0.0
Tonga 9 93.2 2.1 0.0 0.0 2.7 0.0 1.7 0.4
Vanuatu 23 71.4 14.9 0.0 0.0 0.1 1.6 6.2 5.8
Source: UNCTAD, Handbook of Statistics 2002, table 4.1A, pp. 132-143.
Notes: Figures from 2000 and re-exports are not included.
a
Figures from 1999.
b
Figures from 1995.
c
Figures from 1990.

61
Current Issues on Industry, Trade and Investment

40 per cent of total exports from the region, the as to what extent these can be said to have contributed
percentages vary considerably among countries. It to increasing trade within the Asian and Pacific
was generally highest for Myanmar (in large part region.
due to trade sanctions imposed on trade with the rest
of the world) and lowest for Bangladesh, the Islamic C. Regional and bilateral trade
Republic of Iran, Sri Lanka and Tajikistan.
agreements
The export structure also varies considerably
The late 1990s saw a huge surge in regional
among countries and subregions (table IV.2). Exports
trade agreements (RTAs) and bilateral trade
from the Central Asian countries are in large part
agreements (BTAs) in the world. By May 2003 over
concentrated in fuels as well as ores and metals. In
265 such trade agreements had been notified to the
the year 2000, fuels accounted for as much as 53 per
GATT/WTO, and over half of those (138) were
cent of exports from Kazakhstan, 81 per cent of
notified after 1995. WTO also estimated that another
exports Turkmenistan and 85 per cent of exports from
60 RTAs and BTAs were operational in the world,
Azerbaijan. Ores and metals accounted for 54 per
although not yet notified.1
cent of exports from Azerbaijan, 28 per cent of
Georgian exports, and 21 and 20 per cent respectively The importance of regional and bilateral trade
of exports from Armenia and Kazakhstan. agreements is also shown by the fact that 43 per
cent of world merchandise trade in 2000 was
Exports from developing East, South and
estimated to have taken place under these kinds of
South-East Asia are heavily concentrated in the
agreements. Furthermore, WTO estimates that this
manufacturing sector. While exports from East and
figure will rise to over 50 per cent in 2005.
South-East Asia are divided between machinery and
According to WTO, this ratio shows large differences
transport equipment and other manufactured goods,
between regions. It was largest for Western Europe
exports from South Asia are mainly concentrated in
and the economies in transition, and smallest for
the latter category. The only exceptions are Brunei
Asia.2
Darussalam, Bhutan and Indonesia where fuels also
contribute significantly to export earnings. Food
1. Regional trade agreements in Asia
items also make up for a large part of exports from
and the Pacific
the Maldives and Sri Lanka.
Until very recently, the number of RTAs in
For the Pacific Island economies, food export
the Asian and Pacific region was quite small. This
is the single most important source of export earnings.
picture has however started to change very rapidly.
It is especially important for countries such as
During 2003 several framework agreements to set
Kiribati, Samoa and Tonga, where it makes up for
up free trade areas (FTA) have been concluded, and
more than 90 per cent of exports. The exception is
an unprecedented number or bilateral agreements are
Papua New Guinea where fuels and ores and metals
under negotiation.
account for most export earnings, as well as Fiji,
where other manufactured goods are also an The degrees of integration implicit in the trade
important source of export earnings. agreements vary considerably. While all cover trade
in goods, some also extend further to include trade
Agricultural raw materials account for
facilitation measures, liberalization of services,
a relatively small amount of exports, the highest being
agreements on investment, technical cooperation and
in Vanuatu at 15 per cent, followed by Tajikistan at
in some cases, even liberalization of capital and
12 per cent and Turkmenistan at 10 per cent.
movement of labour.
With this short overview of the trends and
patterns in exports from developing Asia and the
Pacific as a background, we will now turn to look at 1
WTO homepage 08/10/2003 <www.wto.org/english/thewto_e/
the present integration efforts through trade whatis_e/tif_e/bey1_e.htm>.
agreements in the Asian and Pacific region, as well 2
WTO, World Trade Report 2003 (Geneva, 2003) p. 48.

62
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
The least amount of integration is offered by
the agreements that only cover trade in goods,
especially the ones that are based on a positive list
agreement. A positive list agreement means that
a product has to be included in a list in order enjoy
tariff reductions (e.g. South Asia Preferential Trade
Arrangement, Bangkok Agreement), as opposed to
a negative list where all products are included in
tariff reductions unless they are specifically
mentioned as exceptions (e.g. ASEAN Free Trade
Area).
Below follows a short overview of the status
of some of larger RTAs in the Asian and Pacific
region. Whereas liberalization in all areas is
important for a high level of integration, the focus
below is on trade liberalization.
(a) ASEAN Free Trade Area (AFTA)
The ASEAN Free Trade Area (AFTA) was
established in 1992 among the then six members of
ASEAN (Brunei Darussalam, Indonesia, Malaysia,
Philippines, Singapore and Thailand). When ASEAN
was extended with four new members (Cambodia,
Lao People’s Democratic Republic, Myanmar and
Viet Nam) in the mid- to late 1990s, they were
absorbed into AFTA with an extended timeframe for
completing the tariff reduction process.
The scheme used for tariff reductions within
AFTA is called the Common Effective Preferential
Tariff Scheme (CEPT). Initially the tariff reduction
programme aimed at achieving a goal of 0-5 per
cent tariffs on the products covered by the agreement,
as spelled out in the Inclusion List (IL). The goal
has later been set higher, and it is now to ultimately
reach zero tariffs on all products covered by the
agreement. However, all products are not covered
by the agreement. The parties of AFTA have
established a Sensitive list and a General Exemption
list. Some examples of excluded products are motor
vehicles and parts in the case of Malaysia, rice for
Indonesia, Malaysia and the Philippines, and sugar
for Indonesia.
Virtually all tariffs in IL have now been
reduced to 0-5 per cent among AFTA original
members, and about 48 per cent of those tariff lines
now have zero tariffs. The new signatories now
have until 2006 (Viet Nam), 2008 (Lao People’s
Democratic Republic and Myanmar) and 2010
(Cambodia) to reach the 0-5 per cent tariff for
intra-ASEAN trade. Tariffs will be completely
abolished by 2010 for ASEAN-6 and 2015 for the
new members with flexibility on some products until
2018. A number of trade facilitation measures are
also under way in the areas of customs procedures,
standards and conformity assessment and sanitary
and phyto-sanitary measures (SPS).
Interestingly, AFTA has been able to include
(with some exceptions) unprocessed agricultural
products in its liberalization programmes. As such,
it provides an example of instances where regional
trade agreements can move further than the
multilateral agreements in some areas.
ASEAN has now taken steps to move the
regional integration further by agreeing to set up an
ASEAN Single Community (ASC). The Declaration
of ASEAN Concord II, which was signed in October
2003 during the Bali meeting of ASEAN, lays out
the basis for the agreement. The agreement focuses
on regional cooperation in three pillars: security,
economic, and social and cultural issues.
As the second pillar, the ASEAN Economic
Community (AEC) envisions a European style
integration with the establishment of a single market
and production base characterized by the free flow
of goods, services, investment and freer flow of
capital by 2020. The AEC action plan includes
undertakings to eliminate non tariff barriers,
accelerate the implementation of mutual recognition
arrangements for five priority sectors (electrical and
electronic equipment, cosmetics, pharmaceuticals,
telecommunications equipment and processed foods),
progressively remove capital controls and strengthen
intellectual property rights, simplify visa procedures
and eventually issue a single ASEAN visa for
overseas visitors, as well as standardize requirements
for professional services to enable free movement of
professional and skilled labour within the region.3
Members agreed to the full integration of 11 sectors:
wood-based products; autos and parts; rubber-based
products; textiles and apparel; agro-based products;
3
“Attempt to move up target date rebuffed”, Bangkok Post,
8 October 2003.
63
Current Issues on Industry, Trade and Investment
fisheries; electronics; e-Asean; health care; air travel;
and tourism.
Since the ASEAN region has a population of
about 500 million, a combined gross domestic
product of US$ 737 billion and a total trade of
US$ 720 billion, 4 the establishment of AEC is
expected to produce a huge free trade area in the
region, an area that will be further extended if the
negotiations on free trade agreements between
ASEAN and China, India and Japan respectively are
successfully concluded. The goal of these agreements
is to establish free trade areas between the original
members of ASEAN and China in 2010, India in
2011 and Japan in 2012, and five years later between
the new ASEAN members and the three countries
respectively. The discussions on creating an
ASEAN+3 FTA (China, Japan, Republic of Korea)
have not yet produced any agreement. The Republic
of Korea has also held discussions on a FTA
with ASEAN separately, but no such agreement exists
as yet.
(b) South Asian Preferential Trade Arrangement
(SAPTA)
The South Asian Association for Regional
Cooperation (SAARC) was created in 1985. It has
seven member countries: Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka. In
December 1995 the SAARC member countries
implemented the South Asian Preferential Trading
Arrangement (SAPTA). SAPTA is a positive list
agreement under which the contracting states open
up their economies depending on their priorities.
There has therefore been no uniformity in the
liberalization of products under SAPTA, and the
coverage and depth of tariff cuts thus vary across
the countries. Liberalization has taken place through
four rounds of negotiations. The first three rounds
liberalized 5,500 products.
Discussions have also been ongoing within
SAARC to establish a South Asian Free Trade Area
(SAFTA), modelled on AFTA. The goal is now to
have a draft treaty for SAFTA finalized in time for
the next (twelfth) summit of SAARC, which is
planned to be held during 4-6 January 2004 in
Islamabad, Pakistan. However, since two former
4
ASEAN homepage: www.aseansec.org
64
deadlines have already been missed (December 2001
and December 2002), some doubt whether this
deadline will be met or not.5
(c) The Bangkok Agreement
The oldest of the regional trading agreements,
the Bangkok Agreement, was set up in 1975. Its
five initial signatories are: Bangladesh, India, Lao
People’s Democratic Republic, Republic of Korea
and Sri Lanka. In April 2000 China acceded to the
Bangkok Agreement. Liberalization under the
Bangkok Agreement is based on a positive list, thus
covering fewer tariff lines than the negative list based
AFTA.
Following the accession of China, the Bangkok
Agreement now covers not only a major part of the
population in the ESCAP region, but also two of the
fastest growing economies in the region.
After the accession of China, the Bangkok
Agreement member countries agreed to launch
a process to revitalize the Agreement. This process
consisted of three major steps. The first was
a revision of the text of the Agreement to reflect
changes in the international trading system that have
taken place since the Agreement was first established,
such as the formation of WTO. The second was the
establishment of a Ministerial Council to provide
overall supervision of the management of the
Agreement. Finally, as the third step, a new round
of negotiations (the Third Round) was launched.
Negotiations under this Round are ongoing and are
expected to be completed soon.
As the interim secretariat of the Bangkok
Agreement, ESCAP is now exploring the possibility
of the Bangkok Agreement evolving into a common
Asian and Pacific framework mechanism that would
set out common principles, practices and operational
procedures for liberalization initiatives.
(d) ECO Trade Agreement (ECOTA)
The Economic Cooperation Organization
(ECO) was established in 1985 by the Islamic
5
“Devoid of action: That’s SAARC”, Kathmandu Post,
16 July 2003. http://www.kantipuronline.com/archive/kpost/2003-
7-16/kp_editorial.htm#Devoid%20of%20action>
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
Republic of Iran, Pakistan and Turkey. They were
joined in 1992 by the inclusion of seven new
members: Afghanistan, Azerbaijan, Kazakhstan,
Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.
ECO is an intergovernmental organization and its
purpose is sustainable socio-economic development
of the member states. One of its main objectives is
to promote trade within the region as well as with
the rest of the world, based on the principle of free
trade. This has now been formalized in the
ECO Trade Agreement (ECOTA) that was presented
at the Second ECO Ministerial Meeting on
Commerce/Foreign Trade in July 2003, and was
signed by Afghanistan, Islamic Republic of Iran,
Pakistan, Tajikistan and Turkey. According to the
agreement, tariffs are to be reduced to a maximum
of 15 per cent during 8 years (15 years for
Afghanistan). Reductions will be performed
according to a positive list, which at the end of the
stipulated period shall cover at least 80 per cent of
the goods on tariff lines.
The High Level Expert Group (HLEG) that
had been in charge of preparing the agreement has
been further mandated to devise a fast track
mechanism in order for the countries to be able to
progress quickly towards a free trade area, as well
as to consider a draft agreement on Promotion and
Protection of Investments in the ECO region.6
2. Bilateral free trade agreements
The formation of bilateral trade agreements
(BTAs) is at the same time gaining momentum in
the region. Singapore has during the last couple of
years been very active in negotiating and signing
bilateral free trade agreements with a number of
partners, including Australia, Japan, New Zealand
and the United States of America.
After having for a long time abstained from
taking part in BTAs and RTAs, Japan and the
Republic of Korea have also started negotiating
these kinds of agreements. Japan’s first bilateral
free trade agreement was signed with Singapore in
6
ECO homepage: <http://www.ecosecretariat.org>.
2003. The “Japan-Singapore Economic Partnership
Agreement” is an example of an advanced form of
regionalism that goes much further than the reduction
of tariffs to include a whole range of issues such as
trade facilitation, liberalization in services, anti-
dumping, government procurement, cooperation on
development of human resources, science and
technology, SMEs, etc. The agreement removes
tariffs on 98 per cent of the goods traded between
the two nations. Apart from this, Japan has also
been working on creating free trade agreement with
Mexico, and is currently holding discussions with
the Republic of Korea as well as with Taiwan
Province of China, and several countries in ASEAN
individually, including Malaysia, the Philippines and
Thailand.
Thailand has also taken a very active stance
in the negotiation of free trade agreements. Lately,
it has signed agreements to negotiate FTAs with
China, and in October 2003, with India. Thailand
has furthermore expressed interest to negotiate
several other FTAs, among others with the United
States.
Following the successful implementation of
India’s bilateral free trade agreements with Bhutan,
Nepal and Sri Lanka, other regional partners in South
Asia are also pursuing similar kinds of arrangements.
Pakistan and Sri Lanka have also been negotiating
free trade agreements, and Bangladesh is currently
discussing the formulation of bilateral free trade
agreements with Pakistan and Sri Lanka among
others.
The above examples show that the web of
trade agreements in the region is growing increasingly
intertwined. With such a large prevalence of trade
agreements there is always a risk of confusion for
business and customs officials as to what rules applies
in a single case (e.g. which agreement takes
precedence in the case of trade between China/India
and Thailand, is it the bilateral free trade agreements
or the free trade agreement with ASEAN?). It is
therefore important to assure that this myriad of
agreements do not become an obstacle in itself to
trade in the region.
65
Current Issues on Industry, Trade and Investment

Figure IV.1. The regional kaleidoscope of trade agreements

Illustrative list of regional integration arrangements of ESCAP members
and associate members and areas

ECO
Afghanistan
Azerbaijan
Iran (Islamic SAPTA
BIMST-EC
Republic of)
Kazakhstan Bhutan
Maldives Bangkok
Kyrgyzstan Agreement
Tajikistan Nepal
Turkey Bangladesh
Turkmenistan India
Uzbekistan Pakistan Sri Lanka

ASEAN

Cambodia Myanmar Lao PDR

APEC Thailand China

Brunei Darussalam Republic of Korea
Indonesia
Malaysia
Hong Kong, China
Philippines
Japan
Singapore
Russian Federation
Viet Nam
Taiwan Province of China
United States of America
SPARTECA
ANZCERTA
New Zealand
PATCRA Australia

Melanesian Spearhead Group

Papua New Guinea

Fiji
Solomon Islands
Vanuatu block refers to
regional
Cook Islands arrangements
Kiribati
Marshall Islands line refers to
Micronesia (Federated States of) bilateral or
Nauru plurilateral
Niue agreements in
Samoa force or under
Tonga negotiation
Tuvalu

Source: Tiziana Bonapace, in Progression Towards the Doha Development Agenda: Selected Papers on Trade and Development
Research Issues for Asian Countries, UNCTAD/International Institute for Trade and Development, October 2003.

66
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
3. Other types of regional integration
arrangements in Asia
and the Pacific
(a) APEC
Asia-Pacific Economic Cooperation (APEC)
was established in 1989 among its now 21 member
countries. APEC is a forum for facilitating economic
growth, cooperation, trade and investment in the
Asia-Pacific region. As such it comprises not only
trade liberalization, but also trade facilitation
measures such as elimination of regulations in
investments and services, rationalization of customs
procedures and harmonization of standards. In 1994
APEC adopted the “Bogor Goals”, which sets out
the vision of achieving free and open trade and
investment in the Asia-Pacific region by 2010 for
industrialized economies and 2020 for developing
economies.
APEC’s approach to liberalization is unique
in that it is based on open regionalism and
non-discrimination in a strict sense. This means that
the best tariff preferences that one APEC member
accords to other members shall also be accorded on
a most-favoured-nation (MFN) basis to all non-APEC
members. Non-members therefore do not need to
fear being excluded from the benefits of the APEC
liberalization process.
Another distinguishing feature of APEC is that
it operates on the basis of voluntary and non-binding
commitments. Thus it does not have any treaty to
give it legal backing. The fact that the objective of
achieving free trade by 2020 remains a non-formal
arrangement has probably contributed to the
slowdown in the liberalization process that APEC
has seen over the last few years.
(b) Growth zones approaches
Growth zones initiatives are basically regional
groupings that work together to foster socio-economic
progress in the member countries by promoting
cooperation in a number of sectors including trade
and investment. One such initiative is the
Bangladesh-India-Myanmar-Sri Lanka-Thailand
Economic Cooperation (BIMST-EC). BIMST-EC
was established in Bangkok in 1997. Its primary
objective is to achieve economic, trade and technical
collaboration within the region. However, since
BIMST-EC was established just before the Asian
financial crisis, it lost some speed at the start.
In 2000, the Trade and Economic Ministers of
BIMST-EC expressed the wish to work towards the
establishment of a preferential trade agreement in
the area, an agreement that would later culminate in
a free trade area. An intergovernmental group was
established to study possible approaches towards
realizing this objective. A draft on a free trade
agreement is now nearing its completion, and there
are expectations that the free-trade agreement will
be able to be launched in 2006.7
4. Development of exports within regional
trade groups
With the spread in regional trade agreements,
the question naturally arises whether or not this has
contributed to increasing trade within the regional
groupings. Table IV.1 shows a slight decrease in
overall exports from developing Asia and the Pacific
to other countries in developing Asia and the Pacific
as a percentage of exports between 1996 and 2001.
However, as can be seen from table IV.3, trade within
the regional trade groups has increased over the years.
Intra-grouping trade as a share of total exports has
also increased in most cases, although they declined
somewhat for AFTA and ECO in 2001. These figures
thus point in the direction that trade within the
groupings have increased.
However, the question remains if this would
have happened even in the absence of regional trade
agreements. Looking at APEC, for example, the
increases in trade between the partners started long
before the set up of the cooperation in 1989. As for
AFTA, although extensive liberalization has been
undertaken, especially during the late 1990s, there
does not seem to be much proof of increasing
intraregional trade, but rather a small decline in
intraregional trade as a percentage of total trade of
the member countries. However, this is not
necessarily a negative result, as it could also imply
that RTA has minimal trade diversion effects, and
that it maintains a strong outward-orientation.
7
Asia Business DAILY, 23 November 2003.
67
Current Issues on Industry, Trade and Investment

Table IV.3. Intra-trade of regional trade groups

Trade
Value of intra-group trade Intra-group trade as percentage concentra-
(exports in millions of US$) of total exports of each group tion ratioa
1980 1990 1995 2001 1980 1990 1995 2001 2001
APEC 357 697 901 561 1 688 707 2 066 066 57.9 68.4 71.8 72.5 1.4
ASEAN (AFTA) 12 413 27 365 79 544 88 559 17.4 19.0 24.6 22.4 3.2
Bangkok Agreement 783 2 429 21 728 40 853 1.7 1.6 6.8 8.7 1.0
CIS – – 31 529 22 484 – – 28.6 18.2 8.3
ECOb 392 1 243 4 746 4 545 6.3 3.2 7.9 5.4 3.6
EU 456 857 981 260 1 259 699 1 400 846 60.8 65.9 62.4 61.2 1.5
MERCOSUR 3 424 4 127 14 199 19 413 11.6 8.9 20.3 20.8 12.5
MSG 15 8 24 31 0.8 0.4 0.5 0.8 11.6
NAFTA 102 218 226 273 394 472 624 252 33.6 41.4 46.2 54.8 2.7
SAARC (SAPTA) 613 863 2 024 3 188 4.8 3.2 4.4 4.9 4.2
Source: UNCTAD, Handbook of Statistics 2002, table 1.4, p. 34, and own calculations.
a
Trade concentration ratio is calculated as the ratio of the intraregional trade share to that region’s share of world trade.
b
Prior to 1995, data unavailable for the following countries: Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan
and Uzbekistan.

The intraregional trade share as percentage of
total exports of the grouping will, however, tend to
vary with the size of the regional trading arrangement,
either in terms of the number of members or the
volume of trading among members. Therefore,
a high intra-group trade share does not necessarily
reflect a greater tendency for its members to trade
with other members of the group. A better measure
of intraregional trade bias is provided by trade
concentration ratios. 8 This measure gives an
indication as to whether members of a group have
a tendency to trade more with other members of the
group than it does with the rest of the world. As can
be seen from table IV.3, the trade concentration ratio
is greater than one in all the regional groupings apart
from the Bangkok Agreement where it is equal to
one. This tendency to trade more with partners within
the grouping can however be due to factors such as
geographical proximity, and does not necessarily
indicate any trade diversion.
Judging from the above, it is thus difficult to
draw any conclusions as to what degree these regional
arrangements have indeed contributed to increasing
trade within the respective regions.
With the web of regional and bilateral trade
agreements becoming increasingly intertwined, it is
important to consider that although liberalization on
a regional or bilateral level is often easier to achieve
and normally brings some benefits to the participating
countries, it still has some drawbacks when compared
with multilateral liberalization. The following section
will discuss how regional and bilateral agreements
comply with WTO, the benefits and costs of regional
versus multilateral liberalization, as well as give
a short overview of the ongoing WTO negotiations
under the Doha Development Agenda.
D. Regional trade agreements and the
multilateral trading system

As the organization charged with devising

8
WTO, World Trade Report 2003 (Geneva, 2003) p. 56. Trade
concentration ratios are calculated as the ratio of the intraregional
trade share to that region’s share of world trade. This measure
adjusts for the size of RTAs and their degree of openness to the
rest of the world. A concentration ratio close to one indicates
that the distribution of trade is close to that of total trade, whereas
a concentration ratio above one indicates that trade is concentrated
within the group.
multilateral rules for the smoother and freer conduct
of world trade, the World Trade Organization (WTO)
was created in 1995 to administer the Uruguay Round
Agreements and to conduct the following rounds of
trade negotiations. With its 148 member countries it
now encompasses a majority of the countries in the
world, thus bringing it closer to realizing its objective
of being a universal trading system.

68
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
Relatively few among the ESCAP member
countries have been able to accede to WTO. Only
24 of the developing country members of ESCAP
are presently members. A further 10 developing
countries are in the process of accession, while 11
developing members and 7 developing associate
members have no WTO status. Until recently, only
4 of the 13 least developed countries (LDCs) in the
region were members. At the WTO Ministerial
Meeting in Cancun in 2003, both Cambodia and
Nepal became new members of WTO, thus raising
the number of ESCAP LDCs in the world body to
six.
1. Regional trade agreements and the
WTO system
To achieve freer and fairer trade, WTO has
established a number of principles. One of the most
important principles is that of non-discrimination.
This means that a country should not treat its trading
partners differently, nor should it discriminate
between national and foreign products, services or
items of intellectual property once they have entered
its market. WTO members thus have to accord all
other members the status of “most-favoured-nation”
(MFN), as well as grant them “national treatment”.
Since any trade arrangement, bilateral or
regional, is preferential and thus discriminatory
in nature, they would run counter to the
founding principle of the GATT/WTO, namely
non-discrimination. GATT Article XXIV does,
however, allow for FTA and customs unions to be
set up, providing that the following conditions are
met:
● trade barriers after integration are not on
the whole higher or more restrictive after
the formation of FTA or customs union
than they were before
● all tariffs and other regulations of
commerce are removed on substantially
all intraregional exchanges of goods
within a reasonable length of time,
namely 10 years
● they are notified to the Committee on
Regional Trade Agreements.
However, differences of opinion exist as to
what constitutes “substantially all trade”, how to
determine whether trade barriers have risen or not
on trade with third parties that have been left out of
RTA, and what a “reasonable length of time” is.
Some of these issues were addressed in the Uruguay
Round. As an attempt to clarify the issue, the
GATT 1994 Understanding on the Interpretation of
Article XXIV states that RTAs should facilitate trade
between members and not raise barriers to the trade
of non-members. Furthermore, when forming or
enlarging RTA, its members should “to the greatest
possible extent avoid creating adverse effects on the
trade of other members”. The Understanding also
established the 10-year transition period for
implementation of an agreement, with allowance
made for exceptional circumstances.
In the case of RTAs in developing countries,
the 1979 Decision on Differential and More
Favourable Treatment of Developing Countries (the
so-called Enabling Clause) provides them with the
option of concluding agreements among themselves
that do not require members to fully remove internal
barriers to trade. Most of the regional trade
agreements between developing countries in Asia and
the Pacific are notified to WTO under this clause.
Within WTO, the Committee on Regional
Trade Agreements has the task to examine how
regional trade arrangements might affect the
multilateral trading system, and whether they are
compliant or not with GATT Article XXIV or GATS
Article V. The Committee has completed a number
of assessments of the effects of RTAs. However,
due to the vagueness of the rules, the Committee has
not been able to reach a consensus on whether RTAs
comply with WTO rules or not. It is therefore one
of the areas included in the negotiations under the
Doha Development Agenda.
2. Regional and multilateral liberalization –
benefits and costs
The arguments for entering into trade
agreements are both political and economic. The
most obvious advantage is that trade agreements
can substantially reduce trade barriers and ensure
that a country is treated in a non-discriminatory way
69
Current Issues on Industry, Trade and Investment
by its trading partners. The lowering of tariffs and
other barriers to trade can also help create a larger
internal market, thus allowing companies to organize
their production in the way that is most efficient.
This can bring welfare benefits to consumers at the
same time as it can increase the competitiveness of
firms in the global market. Trade agreements can
also make it easier to reach agreements on common
standards, administrative procedures and other
measures to facilitate trade on a larger scale, thereby
further increasing the possibilities for companies to
achieve economies of scale in production. The fact
of belonging to a group with set rules and common
internal tariffs can furthermore help create a more
favourable climate to attract foreign direct
investments, which in turn can entail other positive
effects such as transfer of technology and skills.
On the political side, one of the major
arguments for international trade agreements has been
that it can help deepen political ties among
participants, and thus enhance security.9 Another
motivation, especially for smaller countries, has been
to enhance the bargaining power through joining
forces with others. Reciprocal liberalization
negotiations have also the added advantage that
they can make it easier to politically motivate
liberalization domestically, especially in sectors
where it would otherwise be difficult. Furthermore,
cooperation on trade issues may help countries
cooperate on other issues, thus increasing the scope
for mutual gain.
Among the drawbacks that have been raised
about regional and multilateral trade agreements are
that countries have to give up some sovereignty in
decision-making. Some other arguments concentrate
on the functioning of the WTO system. With WTO
being a “club of members”, the existing members
have been blamed to often put too hard demands on
acceding members, sometimes requiring them to
liberalize sectors too quickly.
Although multilateral liberalization (or, for that
matter, unilateral liberalization) would in general be
expected to bring about larger positive welfare effects
9 10
However, on the flipside, an agreement that is perceived as
unfair could instead increase tension among the participants. For
a discussion, see World Bank, Trade Blocs (Oxford University
Press, 2000) and WTO, World Trade Report 2003, p. 50.
70
than liberalization among a limited group of
countries, there are several arguments that also speak
in favour of regional trade agreements. Firstly, with
multilateral negotiations being complicated, regional
trade agreements might help pave way for multilateral
agreements by forming consensus on a regional basis.
The physical and sometimes historical and cultural
proximity of the participating countries in a regional
trade agreement can make it easier to reach the
necessary understanding, thereby making it easier to
conclude regional agreements than multilateral ones.
Integration in some sensitive sectors, e.g. labour
movements and harmonization of standards, might
also prove to be easier within a regional framework
than within the multilateral framework.
Furthermore, more highly integrating forms
of regional agreements can also bring about more
stable macroeconomic policies, in particular through
the sharing of information, cooperation in advocating
stable fiscal and monetary policies, and engaging in
strong “peer pressure” against unstable policies. They
also have the possibility of bringing about more focus
on competition policy and government procurement,
thereby further increasing competition and reducing
the power of domestic monopolies.10
The primary drawback of regional or bilateral
trade agreements, in comparison with multilateral
ones, is that they have proven to almost always create
some trade diversion, although the degree of trade
diversion and the associated welfare loss can vary.
This has two effects. First, it has an effect on the
participating countries, since it reduces the possible
welfare gains that could be achieved through
multilateral agreements. Secondly, it can have effects
on third countries, especially the ones with smaller
economies and weaker export capacities. The degree
of trade diversion versus trade creation caused by
the agreement will be the defining factor for how
much third countries will be affected by the
agreement. Because of this effect on third parties,
regional and bilateral trade agreements will however
always be second best to multilateral liberalization.
“Liberalization, deregulation and trade facilitation: reducing
the transaction costs of doing business”, in Export Competitiveness
and Sustained Economic Recovery (ST/ESCAP/2150) (ESCAP,
2001).
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
Another major drawback concerns the
problems that arise with multiple memberships in
different regional and bilateral agreements. One such
problem is resource requirements. Large resources
are needed first to conclude these agreements, and
later to implement them. In countries with limited
capacity at the government level, these resources
might sometimes be put to better use in other areas.
Furthermore, the more resources that are spent on
concluding regional and bilateral agreements, the
less would generally be available for negotiating
multilateral agreements. This is perhaps the most
insidious effect of the current spread of RTAs and
BTAs, since it can potentially undermine the political
willingness and administrative capacity to conclude
and abide by multilateral (and regional) agreements.11
With multiple memberships in trade agreement
it can also happen that different agreements contradict
each other. This can create uncertainty among
investors, traders and customs officials as to what
tariff levels and rules of origin that applies. Unless
there are clear indications as to which agreements
take precedence, the existence of several RTAs or
BTAs can thus cause a delay in the private sector
decision-making, as well as increase the time and
thereby cost of doing business.
3. WTO and the Doha Development
Agenda
The mandate for the ongoing negotiations
under WTO is contained in the Declaration adopted
by Ministers at the Ministerial Meeting in Doha,
Qatar, in 2001. After the lessons with the failed
WTO Ministerial Meeting in Seattle, United States,
the present round was named Doha Development
Agenda (DDA) to reflect that development-related
issues had been placed at the centre of the Doha
Ministerial Declaration. This is being reflected in
the work programmes and negotiating mandates in
the Declaration, which refer to issues such as the
importance of the development dimension, special
and differential treatment, the priorities of developing
11
T. Bonapace, “Multilateralism and regionalism: enhancing
integration of developing countries into the multilateral trading
system through regionalism” in Regional Perspectives on the WTO
Agenda: Concerns and Common Interests (ST/ESCAP/2161)
(ESCAP, 2001).
countries, and the need for technical assistance and
capacity building to achieve that goal.12
Negotiations under DDA cover everything
from market access issues, to rules-related issues,
dispute settlement and technical assistance and
capacity building issues. Apart from the negotiations
on dispute settlement, the negotiations under DDA
comprise a single undertaking.
Market access negotiations in DDA encompass
trade in services, agriculture and non-agricultural
tariffs, and non-tariff barriers. Market access is the
traditional area of negotiations under GATT/WTO.
Although average tariff rates for industrial goods are
now on average at their lowest levels since GATT
was established, tariffs are still high in some sectors
that are particularly important to developing
countries, such as agriculture, textile, clothing and
footwear. With agricultural products and textiles and
clothing accounting for more than 70 per cent of
poor countries’ exports, the benefits from reduction
of tariff peaks are large. 13 Furthermore, bound
average tariffs remain high in many developing
countries, thus posing obstacles to increased
South-South trade. Much therefore remains to be
done in this area.
The negotiations and work programme on
rules-related issues cover areas such as anti-dumping,
subsidies and countervailing measures, regional trade
agreements. As mentioned above, the work on
regional trade agreements is meant to clarify the
interpretation of the rules on regional trade
agreements, and their compatibility with the
multilateral system.
The goal for the negotiations under the Doha
Development Agenda was to conclude the
negotiations by 1 January 2005. The meeting in
Cancun, Mexico, was meant to be a mid-point mark,
a meeting that would assure that negotiations were
on track as well as spell out more clearly the scope
and content of the second half of the negotiations.
However, the earlier timetables for the Doha
negotiating issues had already been missed before
the meeting in Cancun. Thus, with the collapse of
12
WTO, World Trade Report, 2003, p. 122.
13
WTO, Annual Report 2003 (Geneva, 2003) p. 10.
71
Current Issues on Industry, Trade and Investment
the Cancun meeting, it is now clear that the original
timetable will not be able to be kept. However, it
does not imply that the negotiating round is dead.
Many countries have restated their firm commitment
to continue the negotiations, and it is therefore of
importance that negotiations continue and an
agreement be reached.
A successful conclusion of the Doha
negotiations could reduce the number of people living
in poverty by 144 million or 13 per cent by 2015,
according to the World Bank estimates.14 This points
to the importance for developing countries to continue
the negotiations under the Doha Development
Agenda, while still making sure that the agreements
reached are in their interest. With the formation of
the Group of Twenty-one (G21) at the Cancun
meeting, developing countries have shown that their
voice can be heard at the negotiating table. The
challenge is now to get the round back on track, and
to use that negotiating power to achieve an outcome
of the negotiations that is acceptable to developed
countries, while still assuring that it contributes
substantially to development. The following section
gives a brief overview of what ESCAP is doing to
assist its member countries in achieving a good
outcome of the negotiations under the Doha
Development Agenda.
E. ESCAP’s work in capacity building
for trade negotiations
The ESCAP secretariat has recently been
reorganized in order to better be able to address the
increased pace of globalization by helping countries
to integrate their economies into the regional and
global levels. The Trade and Investment Division is
the main division responsible for capacity building
in promoting the flows of trade and investment in
the ESCAP developing countries. A brief review of
ESCAP’s role as well as past, present and coming
activities is presented below.
1. ESCAP’s role within trade and
investment
Under the thematic programme on Managing
Globalization, the Trade and Investment Division
14
IMF and World Bank, Market Access for Developing Country
Exports – Selected Issues, 26 September 2002, p. 4.
72
within ESCAP works to enhance the capacity of the
developing member countries to respond effectively
to challenges and opportunities inherent in the
globalization process. This is done through a mix
of research and operational activities, the main
ones being: (a) thematic policy-oriented research,
(b) workshops, training, roundtable discussions,
study tours and other activities to improve the
capacity of institutions and the skills of its personnel
in dealing with the issues of trade, investment
and enterprise development, and (c) advisory
services to governments regarding the promotion of
trade, investment competitiveness and enterprise
development.
2. Main focus of activities in the area of
trade negotiations
The objective of ESCAP’s activities in trade
policy is to improve the capacity of countries to
participate in the multilateral trading system on an
equitable basis. More specifically, the goal is to
increase the capacity of member states to participate
effectively in WTO, to facilitate formulation of sound
national trade policies, and to assist member countries
in their efforts to remove obstacles to trade.
A major group of activities in the trade policy
area consists of training programmes and seminars
on WTO agreements and the Doha Development
Agenda. These trainings and seminars are both of
a general and specialized type, and they are organized
for concerned government officials who take part in
WTO negotiations. The purpose of the trainings is
not only to enhance their understanding of the
existing WTO agreements, but also to improve their
capacity to participate effectively in the negotiations.
The training workshops are a joint ESCAP/WTO
activity, sometimes also in partnership with other
institutions such as UNCTAD and ITC, as well as
subregional organizations such as ASEAN.
From time to time, in conjunction with these
activities, ESCAP also organizes policy dialogues
on trade policies, including on the Doha negotiations.
Through these policy dialogues, efforts are made
to bridge differences and facilitate common
understanding in the region in order to strengthen
cooperation among the ESCAP member states of the
region.
 IV. Developments in Trade and Regional Trade Agreements in Asia and the Pacific
As a platform for the trainings and seminars,
ESCAP undertakes analytical studies on key issues
within trade and investment in the region, published
among others in the ESCAP publication series on
Studies in Trade and Investment. At the request of
member governments, ESCAP also provides advisory
services on trade and investment.
ESCAP also supports member countries in the
area of regional trade agreements. As one of its
activities, ESCAP functions as the secretariat for the
Bangkok Agreement, and has done so since its
inception. At the request of the signatories, the
Bangkok Agreement has been reviewed and
revitalized over the last few years, and a new round
of negotiations for further tariffs reductions has been
launched and is ongoing. ESCAP is also providing
support for other regional economic cooperation
mechanisms, such as BIMST-EC and the Special
Programme for Economies of Central Asia (SPECA).
Furthermore, in the beginning of 2002, ESCAP
established an informal network of countries that are
aspiring to accede to WTO. The aim of the network
is to enable acceding Governments to tap into the
knowledge and experience of other Governments that
have recently acceded to WTO.
3. Recent activities to support accession
and negotiations on multilateral and
regional trade agreements
In order to further promote regional
integration, a workshop on regional trade agreements
was held in Bangkok in January 2003. A seminar on
the integration of LDCs into the Bangkok Agreement
was furthermore held in September 2003.
Preparations for the WTO negotiations in
Cancun under the Doha Development Agenda have
been intense during 2003, with a number of regional
training workshops and seminars in various fields.
The Fifth ESCAP/WTO Trade Policy Course on
WTO Agreements and the Doha Development
Agenda was held in Bangkok in February 2003. To
prepare member countries for the negotiations at the
WTO meeting in Cancun, ESCAP and WTO
furthermore organized a high-level regional policy
dialogue on the WTO negotiating agenda in June
2003. This was followed by an ESCAP regional
seminar on facilitating the accession of ESCAP
members to WTO through regional cooperation.
Considering the importance of agricultural issues
in the negotiations, ESCAP and WTO arranged
a regional training workshop on multilateral
negotiations on agriculture in July 2003.
In October 2003, a trade policy training course
on WTO agreements and procedures was undertaken
in Almaty, Kazakhstan. This was followed by an
advanced course for senior government officials on
the Doha Development Agenda, with the aim to assist
them with analytical tools needed to formulate
appropriate negotiating positions on issues central to
the Doha Development Agenda.15 Furthermore, in
October, ESCAP organized a regional seminar on
telecommunications and trade issues. The workshop
was organized together with WTO and the
International Telecommunications Union (ITU) and
its aim was to facilitate the more effective
participation of Asian and Pacific economies in the
negotiation and implementation of WTO Agreements.
Lastly, in November 2003, the Sixth WTO/
UNESCAP Trade Policy Course on WTO Agreements
and the Doha Development Agenda was held in
Manila, Philippines. The overarching objective of
the workshops and trainings on WTO issues is
to strengthen developing countries’ effective
participation in the WTO negotiations and work
programme through a deeper understanding of WTO
Agreements, the issues involved and a better
knowledge of the range of options available.
Although the negotiations in Cancun stalled,
there is still hope that they will be resumed. And
even if the multilateral negotiations would stall for
some time, the effects of the increasing amount of
regional and bilateral agreements in the region
deserves continued attention and analysis. ESCAP
is therefore continuing its efforts, together with its
partners, to build the capacity of member states to
understand the effects of and negotiate regional and
multilateral agreements.
15
This course was planned in Beijing for April 2003, and started
as planned but had to be cancelled after a couple of days due to
the incidence of the severe acute respiratory syndrome (SARS).
73
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Printed in Bangkok United Nations publication
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