Dodwell's blog on SOM2 in Boracay - Post 5

May 18, 2015

Among the more sensitive ambitions in Boracay – the subject of a “Friends of the Chair” debate – was to agree a series of workshops examining “localization policies”, and whether they succeed or not in bringing higher-value-adding activity into an economy.
Of course, the academic consensus seems to be that localization policies act as serious barriers to trade and investment, and instead of strengthening the home economy, lead to higher costs, lower productivity, loss of investment, and a failure to find a place in global value chains. In spite of this consensus, many developing economies impose localization requirements, believing they bring in new and higher value jobs, and lift the economy into higher-skill areas that strengthen the local economy.
What exactly are localization policies? They are policies that require a foreign investor to partner with a local company, or require a minimum percentage of the equity in a venture to be in local hands, or demand the transfer of particular processes or technologies, or insist on local people filling a particular share of jobs in a venture. For example, the Indonesian government recently proposed that any foreigner working in a local venture must be able to speak Bahasa – a clear barrier to a company that wants to bring in overseas professionals to fill particular skills gaps. Mercifully this plan was shot down at the last minute.
The aims of localization policies are in some ways worthy. They are rooted in a legitimate concern that a foreign company does not simply “plunder” the local economy, exploiting resources or cheap unskilled local labour to concentrate skills – and profits – elsewhere down the value chain. They are rooted in a legitimate concern for foreign investors to bring benefits to the local economy and local working populations, generating jobs, raising skills, bringing in new technologies that can spur economic development.
Problem is that most evidence shows rather clearly these policies tend to hit few of these publicly espoused targets, but instead enrich local vested interests, and cut economies out of international value chains, resulting in stunted investment at the expense of other economies.
As a recent OECD study concluded: “Trade related Local content requirements (LCRs) have led to a fall in global welfare. The impact of these measures on gross domestic product and other macroeconomic outcomes is quite small, as is their impact on unemployment – a primary objective in most cases. Total imports and total exports decline in every modeled region…”
So a US proposal to hold a series of workshops examining the impact of various localization initiatives – what they aim to achieve, whether and how they achieve that aim, and what alternative policies (perhaps less trade-distorting ones) might meet those aims more effectively – seems a good idea.
Perhaps not surprisingly there was keen pushback from certain developing member economies. Inevitable perhaps, but a pity. There can surely be no harm in workshop discussions to examine what these policies are trying to achieve, and whether they are succeeding.
At this point it is not clear whether the workshops will go ahead or not. The first was proposed for SOM3 in Cebu in August. Let’s hope it can go ahead.
Mr David Dodwell at work
[ Back ]