Escaping Middle Income Trap: Can Latin America Go Beyond with SpaceX Type Mentality?

A great many countries, caught in the middle-income trap, can learn from Space X success.

The private company with about US$ 1 billion investments, SpaceX, latest launch, just made delivering of cargo into space very cheap, changing the economics of space.

This is the kind of investments, in research and development, clearly, are within reach of many developing countries these days and can result in innovation leading to new business & economics. This does not mean exclusively to space exploration, but can be other, such as biochemistry, nano technology or other new and emerging frontier science.

These types of new industry and economics, could help many developing country, break out of the middle-income trap.

The idea, of SpaceX, is really about vision to break open new opportunities, with well-spent research and development, to produce new innovation. That idea, is the fundamental, that developing countries, could use, to break into many new industries.

SpaceX sent a rocket with cargo into space, and then the rocket, returned to earth, about the same place as the rocket lifted off. That have now resulted, in the cost of delivering cargo into space, dropping significantly. And all it took to develop the SpaceX rocket, was innovation and about US$500 million in private funding & about US$500 million, in indirect government contract.

A Handbook on the Future of Economic Policy in the Developing World: “Middle-income countries seeking to reach the next stage of development can no longer simply import or imitate existing technologies or capabilities; they must build their own. This requires a robust institutional framework – including, for example, a strong education system, well-developed financial markets, and advanced infrastructure – that encourages innovation and can support complex supply chains.”

Americas Quarterly: “The benefits of trade liberalization, foreign investment and good governance are not automatic. If local industries and producers have not reached a certain threshold in their own capacity, then they will not be able to take advantage of the opportunities offered by international markets and foreign investment.”

On industrial policy, many countries, caught in the middle income trap, continues to pay very high price for foreign technology. Take Kingdom of Thailand, the country is spending US$ billions upon billions to import mobile phone 4G technology and US$ billions upon billions, to import a rail system. And basically, for Kingdom of Thailand, there is little home-grown Research & Development, and little focus on innovation.

1)

Innovation: From the Wikipedia

In business and economics, innovation is the catalyst to growth. With rapid advancements in transportation and communications over the past few decades, the old world concepts of factor endowments and comparative advantage which focused on an area’s unique inputs are outmoded for today’s global economy. Economist Joseph Schumpeter, who contributed greatly to the study of innovation economics, argued that industries must incessantly revolutionize the economic structure from within, that is innovate with better or more effective processes and products, as well as market distribution, such as the connection from the craft shop to factory. He famously asserted that “creative destruction is the essential fact about capitalism”.[4] In addition, entrepreneurs continuously look for better ways to satisfy their consumer base with improved quality, durability, service, and price which come to fruition in innovation with advanced technologies and organizational strategies.

2)

Middle-Income Trap:

There had been a great deal of discussions recently about global growth, as emerging markets, once, growing strongly, began, as a group to slow, including even China. And once again, with slowing emerging markets, many pointed to the middle income trap, that many emerging economies, have been stuck in, for decades, such as Brazil.

Then like a storm hitting the planet, innovation suddenly, gained global prominence, as a solution, to slow global growth, and many also point out, to escaping the middle income trap.

With that emerging prominence of innovation, the planet’s first, global innovation report, was just released a few months ago. However, global journalist reported, from studying the report, that only a handful of countries, were responsible, for most of the planet’s innovation.

Can Latin America, escape the middle-income-trap, if the region, adopted more of what made Space X possible?

3)

Most Countries Caught in Middle-Income Trap:

“The forces of economic convergence are powerful, but not all powerful. Poor countries tend to grow faster than rich ones, largely because imitation is easier than invention. But that does not mean that every poor country of five decades ago has caught up, as today’s chart shows. It plots each country’s income per person (adjusted for purchasing power) relative to that of America, both in 1960 and in 2008. The chart appeared in the World Bank’s recent China 2030 report. If every country had caught up, they would all be found in the top row. In fact, most countries that were middle income in 1960 remained so in 2008. Only 13 countries escaped this middle-income trap, becoming high-income economies in 2008,” reports the Economist (source).

4)

How to Escape Middle-Income Trap is Known

But Few Succeed:

“The benefits of trade liberalization, foreign investment and good governance are not automatic. If local industries and producers have not reached a certain threshold in their own capacity, then they will not be able to take advantage of the opportunities offered by international markets and foreign investment. This is where government policy comes in. Well-structured, transparent and predictable interactions between government institutions and private-sector organizations provide the institutional architecture to implement successful, pro-growth industrial policies,” reported the Americas Quarterly.

5)

Latin America’s Middle Income Trap

Americas Quarterly reported

(source)

“Many Latin American countries today are caught in a middle-income trap. On the one hand, they can no longer compete with low-wage countries in standardized products. On the other, they cannot compete with countries with greater capabilities in more technology-intensive goods and services. The reason: many governments have never developed the policies and institutional environment to make the leap to high-tech or industrial economic development—what is often referred to as industrial policy.”

“In the last 60 years, Latin America’s economic strategy has swung—broadly—from import substitution industrialization (ISI) to neoliberalism. Under ISI, governments understood that economic activities differ in their potential for creating sustained growth, and that they need to provide an incentive structure that allows private producers to accumulate the technological capabilities required to compete in activities with increasing returns. Governments also understood they had to adopt policies to support and coordinate the development of complementary social capabilities.”

“But overconfidence in the abilities of governments as well as the lack of built-in performance requirements for protected industries resulted in persistent and widespread inefficiencies and widely divergent productivity within and across sectors of the region’s economies. In the neoliberal period, governments substituted competitiveness policies for industrial policies, assuming that market forces would generate sustained growth.”
“The benefits of trade liberalization, foreign investment and good governance are not automatic. If local industries and producers have not reached a certain threshold in their own capacity, then they will not be able to take advantage of the opportunities offered by international markets and foreign investment. This is where government policy comes in.

Well-structured, transparent and predictable interactions between government institutions and private-sector organizations provide the institutional architecture to implement successful, pro-growth industrial policies.”

6)

How Countries Reach High Income Position:

USA & SpaceX Example

SpaceX is an American aerospace manufacturer and space transport services company with its headquarters in Hawthorne, California, USA. It was founded in 2002 by former PayPal entrepreneur and Tesla Motors CEO Elon Musk

SpaceX is a privately funded space transportation company.[43] It developed its first launch vehicle—Falcon 1—and three rocket engines—Merlin, Kestrel, and Draco—completely with private capital. SpaceX contracted with the US government for a portion of the development funding for the Falcon 9 launch vehicle, which uses a modified version of the Merlin rocket engine.[43] SpaceX is developing the Falcon Heavy launch vehicle,[44] the Raptor methane-fueled rocket engine,[45] and a set of reusable launch vehicle technologies with private capital.[46]
As of May 2012, SpaceX had operated on total funding of approximately $1 billion in its first ten years of operation. Of this, private equity provided about $200M, with Musk investing approximately $100M and other investors having put in about $100M (Founders Fund, Draper Fisher Jurvetson, …).[47]

The remainder has come from progress payments on long-term launch contracts and development contracts. As of April 2012, NASA had put in about $400–500M of this amount, with most of that as progress payments on launch contracts.[48] By May 2012, SpaceX had contracts for 40 launch missions, and each of those contracts provide down payments at contract signing, plus many are paying progress payments as launch vehicle components are built in advance of mission launch, driven in part by US accounting rules for recognizing long-term revenue.[48]

Musk has stated that one of his goals is to improve the cost and reliability of access to space, ultimately by a factor of ten.[60] The company plans in 2004 called for “development of a heavy lift product and even a super-heavy, if there is customer demand” with each size increase resulting in a significant decrease in cost per pound to orbit. CEO Elon Musk said: “I believe $500 per pound ($1,100/kg) or less is very achievable.”[61]
He stated in a 2011 interview that he hopes to send humans to Mars’ surface within 10–20 years.[62] In June 2013, Musk used the descriptor Mars Colonial Transporter to refer to the privately funded development project to design and build a spaceflight system of rocket engines, launch vehicles and space capsules to transport humans to Mars and return to Earth.[32] In March 2014, COO Gwynne Shotwell said that once the Falcon Heavy and Dragon v2 crew version are flying, the focus for the company engineering team will be on developing the technology to support the transport infrastructure necessary for Mars missions.[63] According to Steve Jurvetson, Musk believes that by 2035 at the latest, there will be thousands of rockets flying a million people to Mars, in order to enable a self-sustaining human colony.[64]

7)

Brazil Failure at SpaceX Type of Mentality:

Author: Otaviano Canuto, Senior Adviser and former Vice President of the World Bank, is the co-author of The Day After Tomorrow:

A Handbook on the Future of Economic Policy in the Developing World.

(source)

The prevailing explanation for Brazil’s failure to achieve high-income status lumps the country together with other middle-income economies, all of which transferred unskilled workers from labor-intensive occupations to more modern manufacturing or service industries.

While these new jobs did not require significant upgrading of skills, they employed higher levels of embedded technology, imported from wealthier countries and adapted to local conditions. Together with urbanization, this boosted total factor productivity (TFP), leading to GDP growth far beyond what could be explained by the expansion of labor, capital, and other physical factors of production, thereby lifting the economy to the middle-income bracket.

Progressing to the next stage of economic development is more difficult, reflected in the fact that only 13 of 101 middle-income economies in 1960 reached high-income status by 2008. According to the dominant view, success hinges on an economy’s ability to continue raising TFP by moving up the manufacturing, service, or agriculture value chain toward higher-value-added activities that require more sophisticated technologies, higher-quality human capital, and intangible assets like design and organizational capabilities.

In short, middle-income countries seeking to reach the next stage of development can no longer simply import or imitate existing technologies or capabilities; they must build their own. This requires a robust institutional framework – including, for example, a strong education system, well-developed financial markets, and advanced infrastructure – that encourages innovation and can support complex supply chains. According to this logic, Brazil’s inability to continue its ascent up the income ladder is rooted in its failure to modify its institutional environment.

While this broad assessment is useful, it neglects critical aspects of Brazil’s story – namely, that the country’s three-decade rise to upper-middle-income status created additional growth traps. A targeted strategy for addressing these problems is just as important to Brazil’s continued development as the value-added-based imperative.

The good news is that Brazil’s leaders increasingly seem to understand this. Indeed, Brazil has already taken steps to address the first growth trap: the legacy of macroeconomic instability in the 1970’s and 1980’s. While it took more than two decades to address the issue effectively, when the necessary policy and institutional reforms were finally implemented in the 1990’s – and validated after a change of government – the resulting “stabilization gains” contributed to a growth spurt in the mid-2000’s.

Another impediment to Brazil’s development has been what could be called an “exclusion trap.” While Brazil’s average per capita income currently puts it among upper-middle-income countries, a substantial share of the population has remained mired in poverty, even as the country has captured higher positions on some global value chains, such as technology-intensive agriculture, sophisticated deep-sea oil drilling, and the aircraft industry. With inadequate education, poor health conditions, and a lack of on-the-job training preventing a large proportion of workers from increasing their productivity, Brazil’s potential economic growth has been compromised.

But Brazil has also been making progress in this area. Despite low average growth rates, the income of the bottom quintile of the population grew by more than 6% annually in the 2000’s, owing largely to cost-effective social policies. Provided that the government continues to pursue a comprehensive poverty-reduction strategy – including improved access to health care, financial services, and education – Brazil’s overall productivity should improve in the coming years.

Even so, Brazil has a long way to go. For starters, anemic investment in traditional infrastructure since the 1980’s has become an increasingly heavy drag on TFP, contributing to waste and inefficiency in existing production systems. This could be addressed by fine-tuning the division of labor in infrastructure investment and management between the public and private sectors, with the goal of crowding in the latter.

Of course, Brazil should also address the value-added issue that affects all middle-income economies, which implies the need to improve the private sector’s operating environment. As it stands, key features of that environment – including high man-hour requisites to pay taxes, and cumbersome bureaucratic requirements – make the cost of doing business in Brazil incompatible with complex production chains, while undermining productivity by wasting human and material resources.

Finally, in order to support improvements in the delivery of services, Brazil should launch a broad-based review of public expenditures. Public spending beyond what is needed to finance the government’s basic functions comprises a major share of Brazil’s GDP. Cutting spending that is not aimed at eliminating the exclusion and infrastructure growth traps would enable the government to increase investment in the areas that need it most or reduce the tax burden on the private sector.

Brazil is well positioned to escape the middle-income trap. It is up to its leaders to make the most of that opportunity.

8)

SpaceX in Detail:

From Wikipedia

Space Exploration Technologies Corporation (SpaceX) is an American aerospace manufacturer and space transport services company with its headquarters in Hawthorne, California, USA. It was founded in 2002 by former PayPal entrepreneur and Tesla Motors CEO Elon Musk with the goal of creating the technologies to reduce space transportation costs and enable the colonization of Mars. It has developed the Falcon 1 and Falcon 9 launch vehicles, both of which were designed from conception to eventually become reusable, and the Dragon spacecraft which is flown into orbit by the Falcon 9 launch vehicle to supply the International Space Station (ISS) with cargo. A manned version of Dragon is in development.
SpaceX’s achievements include the first privately funded, liquid-propellant rocket (Falcon 1) to reach orbit, in 2008;[5] the first privately funded company to successfully launch, orbit and recover a spacecraft (Dragon), in 2010; and the first private company to send a spacecraft (Dragon) to the ISS, in 2012.[6] The launch of SES-8, in 2013, was the first SpaceX delivery into geosynchronous orbit, while the launch of the Deep Space Climate Observatory (DSCOVR), in 2015, was the company’s first delivery beyond Earth orbit. On December 21, 2015, SpaceX successfully returned a first stage booster back to the ground at Cape Canaveral, the first such accomplishment by an orbit-capable rocket.

NASA awarded the company a Commercial Orbital Transportation Services (COTS) contract in 2006, to design and demonstrate a launch system to resupply cargo to the International Space Station (ISS). SpaceX, as of May 2015 has flown six missions to the ISS under a cargo resupply contract.[7] NASA also awarded SpaceX a contract in 2011 to develop and demonstrate a human-rated Dragon as part of its Commercial Crew Development (CCDev) program to transport crew to the ISS.[8]

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s