1. Structural Transformation and Innovation Systems: industrial dynamics and innovation systems (a value added approach) Prof. Luciano G. Coutinho Prof. Mariano Laplane NEIT/IE - UNICAMP Globelics: BRICS – Workshop Aalborg February 2006

2. 2/41 BRICS portrait: population, area, density, total and per capita domestic product Brazil183.9138.547.40322593.0913.225 Mexico105.6991.958.20154676.1486.397 South Africa47.2081.221.03739212.7774.507 China*1.285.3429.560.9611341.895.0001.474 India1.087.1243.287.263331680.682626 Republic of Korea47.64599.268480679.67514.266 Russian Federation143.89917.075.4008582.3194.047 * revised. Source: UNCTAD Handbook of Statistics, 2005. Density inhabitants per km 2 PopulationNominal GDP 2004 totalper capita total 2004 thousands Area km 2

3. 3/41 BRICS and selected countries: Gini index/ social unequality Is the highly unevenly distributed income a serious development problem for Brazil and South Africa? Is China increasing social unequality a problem for the future? Source: UNDP Most recent data Brazil59.3 Russia31.0 India32.5 China44.7 South Africa57.8 Mexico54.6 Korea, Rep.31.6 USA40.8 Japan24.9

4. 4/41 BRICS growth performance in the last 25 years: as well known... China is the world’s fastest growing economy in the last 25 years, with a very high investment rate Brazil’s economy has shown an irregular and mediocre performance, well bellow its potential India: since the nineties GDP is growing quite well and more regularly; however it can do better Russia: after the deep crisis of the nineties (disorganization of the state-socialist economy) oil prices have helped an economic recovery

5. 5/41 BRICS growth performance in the last 25 years: as well known... South Africa: GDP growth performance has improved slowly, however well bellow its potential as investment lags behind Korea: GDP growth is high in per-capita terms and its per-capita income has approached the level of a developed economy Mexico: plugged to the US economy it shows a relatively weak performance, below its potential

6. 6/41 Annual average growth rates of total real GDP (%) 1980-891990-002001-04 Brazil3,12,91,8 Mexico0,83,11,7 Rep. of Korea8,55,84,6 China10,610,48,8 India5,76,06,1 Russia--4,76,1 South Africa1,42,13,2 Source: UNCTAD Handbook of Statistics, 2005.

7. 7/41 BRICS: gross fixed capital formation (% GDP), 1970-2003 1970-791990-992000-2003 Brazil21.719.520.5 Russiana20.817.6 India15.822.322.4 China27.033.239.2 South Africa26.416.314.8 World24.422.121.1 Source: NEIT-IE-UNICAMP from BIRD’s World Development indicators

8. 8/41 Industrial performance and growth China: spectacular GDP growth is certainly related to the high competitiveness of its manufacturing system Brazil, Russia, South Africa: manufacturing has lost relative importance and weight; international competitiveness has faltered… India: manufacturing has grown, on average, at the same pace of GDP Question: is an improvement of manufacturing’s competitiveness an important factor for long term growth?

9. 9/41 BRICS: manufacturing value added (% GDP), 1993 and 2003 19932003Var 1993-2003 Brazil20.518.6-9.3 Russia22.822.5-1.3 India14.715.66.1 China32.837.614.6 South Africa18.918.0-4.8 Developed18.919.00.5 Developing22.722.80.4 Source: UNIDO

10. 10/41 Growth and competitiveness East-Asian economies have grabbed an additional 13 percentage points of world trade in the last 25 years China’s performance is, by far, the more dynamic Brazil’s share of world exports has stagnated (with a slight recent improvement) India has also shown some moderate improvement from a low start basis South Africa has lost relative importance in world exports Russia’s recent improvement related to oil and gas price boom Apparently, global competitiveness has been a key factor for fast growth

11. 11/41 Evolution of market share of world merchandise exports 1980199020032004 Developed Countries65,372,064,863,1 Developing Countries29,524,332,133,5. Latin America+ Caribbean5,54,15,05,1. Brazil1,00,91,01,1. Mexico0,91,22,22,1. Developing Asia18,016,924,725,8. West Asia9,93,94,14,4. Russia--1,82,0. South Asia0,70,81,1. India0,40,50,8. East Asia7,112,019,420,1. China0,91,85,86,4. Rep. of Korea0,91,92,62,8. Africa5,93,22,42,5.South Africa1,30,70,5 Memo: PED's excl. first-tier NIEs and China 24,814,816,817,4 Source: UNCTAD Country Value of Exports

12. 12/41 BRICS’ share in world manufacturing value added (1993-2003) China has doubled its share in global manufacturing (in value added terms) India’s manufacturing share grew but its relative size is yet small Brazil and Russia: their manufacturing systems have lost share in the world economy; however some improvement is taking place after 2003 South Africa’s share in global manufacturing has stagnated

13. 13/41 BRICS and selected countries: share in world manufactured value added, 1993 and 2003 19932003Var 1993-2003 Brazil2.52.1-16.0 Russia2.01.6-20.0 India0.91.233.3 China3.56.997.1 South Africa0.5 0.0 Korea, Rep.2.23.454.5 USA21.223.39.9 Japan22.418.2-18.8 Mexico1.01.110.0 Source: UNIDO

14. 14/41 BRICS manufactured value added per capita (95’ constant US$), 1993 and 2003 19932003 Var 1993-2003 (%) Brazil8388501.4 Russia7247929.4 India508264.0 China157388147.1 South Africa68174910.0 Developed4,7845,71019.4 Developing23935649.0 The evolution of manufacturing productivity seems to be in line with overall growth performance in manufacturing

15. 15/41 Competitiveness in manufacturing high tech products seems to be a relevant driver of fast growth and yet an even more important factor for a strong export record China has almost quadrupled its share of world’s high tech production. It has surpassed Korea and is now equivalent to Japan! India has shown important advance but her share in high tech products is still small Brazil and Russia: have shown a stagnant performance in world’s manufacturing of high tech products South Africa’s presence in high tech is quite small

16. 16/41 BRICS and selected countries: share in world high-tech products exports (%), 1993 and 2003 19932003Var 1993-2003 BRICS2.78.5217.8 Brazil0.4 1.1 Russia0.5 -11.0 India0.20.4100.9 China1.57.0359.3 South Africana0.1- Mexico1.22.075.9 Korea, Rep.2.84.042.0 USA18.113.3-26.6 Japan13.77.5-45.4 World100.0 - Source: NEIT-IE-UNICAMP from UNCTAD primary data

17. 17/41 BRICS and selected countries: high-tech products share in countries’ total exports (%), 1993 and 2003 Source: NEIT-IE-UNICAMP from UNCTAD primary data 19932003Var 1993-2003 BRICS11.524.3111.0 Brazil9.712.226.3 Russia8.37.3-13.0 India8.113.667.3 China15.034.0126.9 South Africana10.0- Mexico19.926.030.2 Korea, Rep.30.443.242.2 USA35.039.011.3 Japan34.133.6-1.5 World24.128.819.9

18. 18/41 Growing importance of high-tech sectors in China’s economy (“two tunnels” strategy) China’s industrial system has diversified extraordinarily in the last 25 years: it has a very large intermediate goods base (steel, cement, petrochemicals) and a very large non-durable consumption goods sector. In recent years the development of durable consumption goods and of high-tech sectors (computers, consumer electronics, etc.) has speeded up High-tech products already accounts for 36% of Chinese exports (2005) Employment in high-tech sectors is growing fast and has accounted for 19% of the total in 2002

19. 19/41 Growing importance of high-tech sectors in China’s economy (“two tunnels” strategy) China has escalated R&D expenditures from 0,6% of GDP in the mid nineties to almost 1,9% last year Enrollment in high education (specially in engineering) has expanded very rapidly, as well as students pursuing graduate studies abroad (circa 150 thousand) China’s recent record in global patent applications is impressive

20. 20/41 China: manufacturing employment (% total manufacturing employment), 2002 Rubber and Plastics products ISIC (Revision 2)China Food products6.0 Beverages2.0 Tobacco0.5 Textiles10.6 Wearing apparel,except footwear5.9 Leather products3.1 Wood products,except furniture1.1 Furniture,except metal0.8 Paper and products2.6 Printing and publishing1.2 Industrial chemicals10.1 Petroleum refineries 1.2 4.3 Pottery,china,earthenware1.5 Glass and products1.0 Other non-metallic mineral prod.6.1 Iron and steel5.3 Non-ferrous metals2.3 Fabricated metal products3.9 Machinery,except electrical9.8 Machinery electric10.4 Transport equipment6.6 Professional & scientific equipm.1.3 Other manufactured products2.4 Source: UNIDO

21. 21/41 Selected countries: R&D expenditures (%/GDP), 1996 and 2001 19962001Var 1996-2001 Brazil0.771.0536.0 Russia0.901.16 Indiana - China0.601.0982.4 South Africana - Korea, Rep.2.602.9613.7 USA2.552.809.9 Japan2.773.0911.4 Mexico0.310.3411.2 World2.062.4619.5 Source: NEIT-IE-UNICAMP from BIRD’s World Development Indicators

22. 22/41 Selected countries: enrollment in high education as a % of the total, 1990 and 2000 Source: NEIT-IE-UNICAMP from BIRD’s World Development Indicators 19902000Var 1990-2000 Brazil11,216,244,0 Russia52,162,820,5 India6,110,674,6 China3,012,7326,6 South Africa13,214,610,4 Korea, Rep.38,677,6101,1 USA75,270,7-6,0 Japan29,647,761,1 Mexico14,520,541,1 World16,023,949,9

23. 23/41 BRICS and selected countries: stock of patent applications, residents, 2001 Number% Brazil6,7060.7 Russia25,0462.7 India2340.0 China30,3243.2 South Africa1750.0 Korea, Rep.74,0017.9 USA190,90720.3 Japan388,39041.4 Mexico5940.1 World939,267100.0

24. 24/41 Comparison of manufacturing structures Whereas the share of high-tech sectors in manufacturing (value added) ranges between 14% and 17% (automotive- complex included) in Brazil, Russia, India and South Africa it has attained circa 35% in the case of China By the same token, employment in high-tech sectors varies around 8,5% of the total manufacturing employment (for Brazil, Russia, India and South Africa) whereas in China it represents 19% If the automotive-complex is excluded the share of employment in high-tech sector (to Brazil, Russia, India and South Africa) would vary from 2,6% to 5,5% of the total

25. 25/41 Comparison of manufacturing structures Relative shares of so-called “traditional” consumer-goods manufacturing (e.g. food and beverages, tobacco, textiles and wearing apparel, leather products and footware) are higher in Brazil, India, Russia and South Africa On the other hand, the relative shares of natural resource- based and of primary commodity-based manufacturing is quite different among the BRICS, reflecting different geography and natural endownments

26. 26/41 BRICS: manufacturing structure (share in countries’ MVA), 2002

27. 27/41 BRICS: manufacturing employment (% total manufacturing employment), 2002

28. 28/41 Different manufacturing profiles Russia: a very strong defense-related industrial complex, specially in aeronautics & space; a large production-base in non-electric machinery and equipment; a powerful manufacturing complex related to oil and gas Brazil: a broad set of competitive natural-resource-based and agricultural-based manufacturing (steel, non ferrous metals, pulp and paper, wood products, sugar and ethanol, orange juice, soya-derivates, coffee); a fairly diversified durable-consumption goods industry; one leading firm in the aeronautic sector

29. 29/41 Different manufacturing profiles India: a very large service-economy, her manufacturing capability is relatively small and concentrated in basic non- durable consumption goods (textiles and wearing apparel, food and beverages); with the exception of a strong chemical and chemical products-complex the base of intermediate goods production is relatively small, as well as the automotive-complex South Africa: has a powerful mineral resource-based industry (steel and non-ferrous metals) and her manufacturing system is concentrated in non-durable consumption goods (food and beverages, tobacco, textiles and apparel); relatively strong in the automotive sector

30. 30/41 Innovation and S&T Systems Russia: strong position in high education, with a powerful scientific system particularly dedicated to space and defense-related activities; expanding R&D expenditures and patent activities are related to the former specializations India: an expanding scientific system with good quality but very weak in industrial R&D (and patenting); employment of highly qualified human resources biased towards services (IT related) Brazil: an improving scientific system (with good international rating); R&D activities are very uneven and concentrated, with some success cases (like in agribusiness) patent activity is weak; some key sectoral innovation systems have been disintegrated in the nineties

31. 31/41 Innovation and S&T Systems South Africa: very weak R&D and industrial innovation activities; limited scientific capability China: a remarkable effort in building up a national scientific and technological innovation system as a purposeful strategy; R&D activities growing at a very fast pace given the increasing economic importance of high- tech sectors

32. 32/41 BRICS: recent export performance with remarkable improvement of foreign exchange position China’s large trade surplus derived from her highly competitive performance in manufacturing exports and… Very favourable terms of trade (prices of oil, metals and other commodities) in last three years have helped Brazil, South Africa, Russia and India to strengthen their foreign exchange position Question: could this recently gained foreign exchange robustness help to put in place new national development strategies? Or could it result in indulgence (in relation to current performance and to the historical record)?

33. 33/41 Recent external robustness Reserves/external debt (%) External debt/exports (%) Source: JP Morgan, Consensus Forecasts and projections.

34. 34/41 Source: JP Morgan, Consensus Forecasts and projections. External debt service/exports Recent external robustness

35. 35/41 Are there domestic financial constraints? Brazil and Russia: their banking systems had retracted but can they expand in order to finance capital formation? How can the capital market help? Issues: how to create reliable institutional conditions and juridical protection for investors, creditors and for securitized assets? China: how to cope with the low risk-standards of the banking system? Is there a role for the capital market? India: how to enhance the contributions of both (bank credit and capital market)? South Africa: is everything fine? What is lacking to accelerate private investment?

36. 36/41 Financial Structure: outstanding domestic debt securities, stock market capitalization and bank credit, 2004

37. 37/41 Outstanding Domestic Corporate Debt (Securities)

38. 38/41 Some lessons and questions for research There is not a single development model to be mimetized. The Chinese model may elicit many useful lessons but cannot be automatically copied. An interesting view-point: how did the Chinese successfully “copied” many of the Korean strategies (of the 70’s and 80’s)? The strengthening of competitiveness and innovation in manufacturing seems to be a necessary condition for a better long term growth performance

39. 39/41 Some lessons and questions for research Keeping up and developing new competitive conditions in low and medium tech intensive sectors, such as to allow for dynamic trade performances and for the creation of employment opportunities, seems to be a wise strategy for BRICS Innovation (including DUI and STI modes), education and skill-apprenticeship (thru experience and thru training) should be a key focus for promotion of local development, as sub-regional promotion policies seem absolutely prioritary to BRICS’ efforts to reduce social and regional unequality

40. 40/41 Some lessons and questions for research How to take advantage of existing capabilities and of revealed competitive (sub-sector/niche) activities to capture dynamic potential of the high-tech sectors? In other words, how to build up from existing competitive advantage (however scarce) in high-tech? How to take full advantage of the ICT-revolution as smart users/adaptors (to the rest of the economy)? How to avoid the risks of info-exclusion? How to capture/explore new opportunities in activities/niches/services related to ICT waves? How to create some fundamental conditions (what are they?) in order to minimize policy-risks?

41. 41/41 Some lessons and questions for research: macro-questions Are the fundamental macroeconomic conditions ready for building up a new national development strategy? From the outlook of the foreign-exchange position the answer seems to be yes, but how about the fiscal and financial conditions? Are there sufficient political and societal aspiration and cohesion around a new (potential) development strategy? Is such national strategy consistent and clear enough? What are the critical challenges to be surpassed in order to reach it?