Southeast Asia's Misunderstood Miracle

Industrial Policy And Economic Development In Thailand, Malaysia And Indonesia

Jomo K.S.

• Publisher: Taylor & Francis
• Year: 2019
• Print ISBN: 9780367288075
• eBook ISBN: 9781000312355
• Edition: 1
• Topic: Politik & Internationale Beziehungen
• Subtopic: Asiatische Politik

"The debate on the major factors contributing to Southeast Asian industrialization continues unabated. As might be expected, there is much at stake in this debate. The debate is largely ideological in nature and partly centers on the role and contribution of state interventions and other institutions in market
processes in the context of late industrialization. At the risk of caricaturing the debate, on the one hand, one finds the dominant and more influential position held by those who blame the state for all that has gone wrong and credit the market for all that has turned out right; on the other hand, the minority statist
extreme position basically credits most major economic achievements in East Asia to appropriate interventions by developmentalist states. While very few people would actually fully identify with either of these caricatured extremes, much of the discussion actually gravitates around either of these poles.
"

1
The World Bank's East Asian Miracle

In September 1993, the World Bank published The East Asian Miracle Economic Growth and Public Policy. Eight "high performing" Asian economies achieved the highest growth rates in the world between 1965 and 1990, Since the early 1980s, China has joined their number. According to the Report, the statistical chance of such success on a regional scale is extremely remote. Is East Asia growing rapidly as a region, or have many economies in the same region simply managed to get things right? What is East Asia's success due to? The report concludes: "In large measure, the HPAEs (high-performing Asian economies) have achieved high growth by getting the basics right.... In this sense, there is little that is 'miraculous' about the HPAEs' superior record of growth; it is largely due to superior accumulation of physical and human capital" (World Bank 1993:5).

The argument is made in the following manner. Eight economies—Japan, the four so-called first-tier newly industrializing economies of the Republic of Korea (South Korea), the Republic of China (Taiwan), the island city-state of Singapore and the British Crown colony of Hong Kong, as well as the three second-tier newly industrializing countries (NICs) of Malaysia, Thailand and Indonesia in Southeast (SE) Asia—were identified as East Asian miracle economies, having achieved rapid economic growth and structural change in the postwar period, especially since the 1960s. While acknowledging considerable government intervention, especially in Japan, South Korea and Taiwan, the study concludes that the gains from industrial policy are ambiguous.

The Bank study emphasizes that besides Hongkong, and more contentiously, Singapore, the second-tier Southeast Asian NICs have also achieved rapid growth and industrialization without resorting to industrial policy (Thailand), or by abandoning it (Malaysia, Indonesia). The study emphasizes the difficulty of getting industrial policy right, as well as the special historical, political and cultural circumstances in the Northeast (NE) Asian economic miracle which enabled competent, meritocratic and insulated technocracies to pursue industrial policy and thus strengthen regime legitimacy. Emphasizing that such conditions are unlikely to prevail elsewhere, the report eschews industrial policy, pointing instead to the second-tier Southeast Asian NICs' supposed record of rapid growth and industrialization without industrial policy as more desirable, alternative models for emulation.

The study was apparently commissioned at the insistence of the Japanese government to gain greater recognition and appreciation of the Japanese experience. This apparently came about after years of frustration with the neoclassical economic orthodoxy and free market conservatism, which has long dominated Bank thinking and policy recommendations, especially since the resurgence of neo-liberal economic fundamentalism in the 1980s. Though it is still unclear whether the publication is indicative of a more deep-rooted shift in Bank thinking, as some insiders would like to believe, the book was nonetheless important for explicitly incorporating some arguments made by proponents of industrial policy, thus acknowledging a position previously considered beyond the pale of economic orthodoxy. However, as pointed out by various critics, in many respects, the publication did not go far enough, as it sought to reconcile undeniable achievements of state intervention with its own neo-liberal laissez fairism.

Despite its emphasis on fundamentals, the report pays surprisingly little attention to the actual mobilization and deployment of savings, which has been primarily responsible for the high investment rates as well as the rapid growth and structural transformation which has taken place. As Akyuz and Gore (1994) have pointed out, the high savings rates in East Asia primarily involve corporate— rather than household—savings, i.e. out of profits. This suggests the existence of regulatory and institutional frameworks encouraging such savings and investment behavior instead of, say, high levels of dividend payments to shareholders, which would be encouraged by institutions, such as the Bank, urging the development of stock markets.

The report concedes that directed credit contributed to the success of Northeast Asian economies (i.e. Japan, South Korea and Taiwan); while some observers suggest that this is due to Joseph Stiglitz's authorship of the study on industrial financing, others claim that this was a necessary concession to the financiers of the Miracle study, namely the Japanese Ministry of Finance. In contrast, the report is more disparaging of the contribution of other aspects of industrial policy which lie within the jurisdiction of the Ministry of International Trade and Industry in Japan. While the report acknowledges that industrial policy has been pursued in Northeast Asia, it also claims that the results have been mixed, and that the Northeast Asian economic miracle cannot be attributed to other kinds of state intervention, especially government promotion of selected strategic industries. Besides relying on the ambiguities inherent in making counter-factual arguments, the Bank study resorts to an extremely restrictive definition of industrial policy, which is then translated into a dubious methodology to make its case (see Chang 1994b). By employing this curious methodology, the Bank concludes that the results of industrial policy in East Asia have been ambiguous.

The study also emphasizes the difficulty of getting industrial policy right, as well as the special historical, political and cultural circumstances in the Northeast Asian economic miracle which enabled competent, meritocratic and insulated technocracies to pursue industrial policy and thus strengthen regime legitimacy. Emphasizing that such conditions are unlikely to prevail elsewhere, the report eschews industrial policy, pointing instead to the second-tier Southeast Asian NICs' record of rapid growth and industrialization without—or even despite— industrial policy as more desirable, alternative models for emulation. It then goes on to emphasize that the domestic and international conditions faced by most developing countries today are such that industrial policy is unlikely to succeed today in case any government should still want to try.

Instead, the report claims that the Northeast Asian success has been largely due to their ability to switch from distortionary import substitution to allegedly non-distortionary export-oriented industrialization. Wade (1991) has described an interesting variation of this "free market" argument as the "simulated free market" thesis (Little 1981; Bhagwati 1988). Unlike the "free market" thesis, it at least concedes that the South Korean state has been distortionary, but argues that the distortionary effects of import substitution in South Korea were sufficiently negated by and hence compensated for by the same government's export promotion and subsidization efforts.

The report argues that Indonesia, Malaysia and Thailand "may show the way for the next generation of developing economies to follow export-push strategies" (World Bank 1993:25); unlike the Northeast Asian economies, these three economies followed strategies courting direct foreign investment and creating a favorable environment for exporters without at the same time following policies of financial repression and industrial targeting. Thus, the Miracle study claims that the Southeast Asian second-tier NICs have grown rapidly by relying on market forces and minimal, but appropriate and generally supportive interventions (e.g. in the areas of primary education and infrastructure provision) without, or even despite bad industrial policy, i.e. attempting selective policy interventions— involving trade, finance, technology and human resources—to promote particular industries.

Thus, the 1993 Miracle study by the World Bank presents the success of the so-called second-tier NICs (Malaysia, Indonesia, Thailand) as proof that other developing countries do not need industrial policy to achieve rapid growth, industrialization and structural change.

Several points can be conceded at the outset. Historical circumstances are undoubtedly different in Southeast Asia. The post-Meiji experience in Japan and its colonies of Korea and Taiwan resulted in certain industrial, educational and administrative developments in the first half of this century which were quite distinct from those experienced in other ex-colonial economies, and arguably more conducive to subsequent rapid industrialization. More manufacturing activity seems to have developed in these Japanese colonies than in other colonies. With the possible exception of the Philippines under the US, tertiary education developed much more in the Japanese colonies than under European colonialism. Correspondingly, the administrative ethos which developed was meritocratic, potentially developmentalist and nationalistic. The post-World War Two conditions in Northeast Asia made possible land reforms which were not only more equitable and regime-legitimizing, but also conducive to growth and capital accumulation for industrialization. Cold War considerations ensured generous aid at a crucial time as well as tolerant attitudes to NE Asian government policies by the United States administration which would certainly be unacceptable today, e.g. regular violation of intellectual property claims of mainly US-based transnational corporations.

In emphasizing what it considers getting economic fundamentals right, the report glosses over differences among the HPAEs. Perkins (1994) has suggested that there are three rather than just one East Asian model, grouping together Japan, South Korea and Taiwan as distinct from the municipal economies of Hongkong and Singapore on the one hand, and the second-tier Southeast Asian NICs of Malaysia, Thailand and Indonesia on the other. While agreeing with these distinctions at one level, serious attention to other dimensions would complicate the picture. For example, if we put aside the second-tier NICs for a moment, it appears that industrial policy has been much more important in Japan and South Korea, while state-owned enterprises have played a much bigger role in Singapore and Taiwan. Many other similarly instructive distinctions can be made, which suggests that nuanced comparative historical institutional analysis may be more rewarding than the generalizing discourse favored by the Bank study or the one- or even two-dimensional categorization favored by others.

The Miracle study's rejection of industrial policy and emphasis on creating conditions to attract foreign investment as policy prescriptions emerging from the study are curious to say the least. Of the eight HPAEs, only Malaysia and Singapore have generally relied much more than most other developing countries on foreign direct investment (FDI), for essentially political reasons. After seceding from Malaysia in 1965, the Singapore authorities deemed it crucial to attract foreign investment to ensure a continued international stake in the security and future of Singapore, even at the expense of discriminating against predominantly ethnic Chinese domestic capital (Rodan 1989). In Malaysia, foreign investment has been favored by influential elements in the ethnic Malay-dominated regimes to limit and circumvent the expansion and accompanying influence of ethnic Chinese Malaysian capital (Jesudason 1989; Bowie 1991).

Restrictions on foreign investment have allowed internationally competitive domestic manufacturing firms to emerge, often with state support, in most of the East Asian economies. Such regulation has also increased the gains and reduced the losses to the national economy from the presence of foreign investment. The intensive use of FDI may also only have been a temporary phenomenon observed at a relatively early phase of development when domestic capital accumulation, technological capacity and external market access are still very weak; hence, for example, South Korea relied much more on FDI only up to the early 1970s (Chang 1995a). The importance of FDI at a particular historical moment may largely be due to temporary foreign investor interest, e.g. in response to the Indonesian liberalization in the face of the 1986 petroleum price collapse just when Japan and the first-tier NICs were facing declines in their international competitiveness in the face of their currency appreciations, rising wage and other production costs, increasing political instability, greater pressures for industrial pollution controls and so on, and were seeking to relocate their more labor-intensive and environmentally less acceptable industries.

While the Bank's Miracle study acknowledges that the statistical probability of eight contiguous economies growing so rapidly over such an extended period of time is very remote from its own perspective, it does not deem this regional dimension of simultaneous growth and structural transformation in the region worthy of explanation. As this study will discuss, industrial relocation within the East Asian region has grown tremendously in the last decade, and has contributed a great deal to the export-oriented manufacturing boom in the second-tier Southeast Asian NICs. Much of this has been driven by firm responses to changing domestic and regional conditions, including comparative labor and other production costs as well as differential environmental, occupational health and pollution regulation. In this connection, however, there is also-considerable evidence that the pattern and pace of "regional industrial restructuring" in East Asia are not simply firm or market-driven, but also very much influenced by Japanese, Taiwanese, South Korean and Singaporean industrial policies, which have encouraged such industries to relocate in Southeast Asia and China, as we shall discuss later.

This study offers a different interpretation of the second-tier Southeast Asian NIC experiences. It will therefore dispute some, though not all, of the World Bank's explanations for rapid growth and structural change in the second-tier Southeast Asian NICs. It will review the historical and contemporary factors contributing to rapid economic development in the region, especially in the last decade. While there is little disagreement about the broad macroeconomic and other trends noted by the Bank, this study attempts to offer a more nuanced explanation focusing particularly on the nature, role and consequences of regional location as well as state intervention, especially industrial policy.

The rest of this study is organized as follows. We shall proceed by first identifying some distinctive characteristics of the Southeast Asian second-tier NICs which would require qualification of the tendency to speak of the East Asian region and experience in homogenizing terms. The role of ethnic Chinese business networks in the region will also be mentioned in this connection, though available information does not lend itself to detailed and systematic analysis. We then focus on East Asian regional economic dynamics, particularly since the yen and other East Asian NIE currency appreciations of the mid-1980s, which catalyzed a chain of developments that have sustained rapid growth throughout the region since then. After reviewing post-endaka Japanese investment trends in Southeast Asia, we shall also consider the dynamics of Taiwanese as well as South Korean economic expansion in the region. Chapters 4, 5 and 6 then look at economic growth, industrialization and industrial policy in Thailand, Malaysia and Indonesia respectively, critically considering the nature, role and implications of state intervention in these economies. We shall consider the evolution and outcomes of development strategies, particularly industrial policies in Indonesia, Thailand and Malaysia, especially with respect to investment, trade and labor. Besides considering the influence of the changing regional division of labor (focusing on trade and FDI policies), other aspects of industrial policy will be surveyed. In this way, we shall try to address the question of whether the second-tier NICs offer a superior or more feasible model for emulation by identifying the sources as well as sustainability of their growth, and examining the role of industrial policy in the three countries. Special attention is given to related labor, human resources and technology issues. The concluding chapter draws some lessons from this study, especially for policymaking by other developing countries. This allows us to critically reconsider some of the major policy implications and recommendations of the Bank's Miracle study as well as of other efforts to interpret the Southeast Asian component of the recent rapid growth and industrialization in East Asia.

2
Southeast Asian Differences

In recent years, much has been said and made of the booms in most East Asian economies. Before the recent booms in Southeast Asia and China, attention was focussed on Japan and the East Asian newly industrializing economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore. With rapid economic growth in most of the economies in the Association of South East Asian Nations (ASEAN) since the 1970s, and in Vietnam as well since the late 1980s, there has been increased interest in the second generation of East Asian NICs and further speculation and debate about the crucial factors responsible for the economic miracles in East Asia, especially of its Southeast Asian component.

Whatever the origins and nature of the developmental strategies pursued by the second-tier NICs, the key question for other developing countries is whether the Southeast Asian experience provides an attractive alternative to the strategy pursued by the first-tier NICs, as the World Bank seems to be suggesting. Has the development of certain manufacturing industries in these second-tier NICs resulted in much accumulation of local managerial and technological capabilities? Are the manufacturing sectors of the second-tier NICs currently economic enclaves with little technological and managerial capabilities outside foreign subsidiaries? If so, does this mean that they are going to remain so in the future? Are the technological and managerial capabilities accumulated in foreign firms adequate to ensure continued industrial progress in these countries, whether or not the foreign investors stay? What are the governments and the domestically-controlled firms of these Southeast Asian second-tier NICs doing to ensure sustained growth and technological progress? If the foreign investors move somewhere else (e.g. to China and Vietnam), will the second-tier NICs be able to continue to progress industrially, especially technologically, particularly if they are still heavily reliant on foreign investors for capital, technology and market access? It is quite possible that these countries are already in the process of accumulating adequate capabilities that will take them further. If this is the case, it will be crucial to ascertain the relative contributions of market processes and specific government policies to the development of these capabilities.

Before considering the regional economic dynamics and the country experiences in detail in the following chapters, this chapter will begin by briefly considering various issues which have been raised in emphasizing similarities as well as differences between the second-tier Southeast Asia NICs and the other HPAEs. After identifying some characteristics of the Southeast Asian second-tier NICs, the role of ethnic Chinese business networks in the region will be briefly reviewed. While far from exhaustive, this brief survey should provide some orientation to the range of issues implicitly if not explicitly addressed in the following four chapters.

Differences With First-Tier East Asian NIEs

The impressive indices of manufacturing sector growth in the second-tier Southeast Asian NICs conceal important differences with the experiences of the other first-tier East Asian NIEs, i.e. South Korea, Taiwan, Hong Kong and Singapore. Besides having relatively lower economic growth compared to the first-tier East Asian NIEs, the second-tier Southeast Asian NICs have also had relatively higher population growth, which means that average living standards have risen more slowly. In terms of the contribution of manufacturing to GDP, the second-tier NICs have also performed well, but not as well as the East Asian NIEs. The share of primary commodities in exports has also declined significantly. Hence, at least in gross aggregate terms, the Southeast Asian second-tier NICs seem to be progressing well on the path of industrialization, although somewhat behind the East Asian NICs. However, these figures do not tell us very...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Preface
• Acknowledgments
• Contents
• Tables
• Glossary
• 1. The World Bank's East Asian Miracle
• 2. Southeast Asian Differences
• 3. Southeast Asian "Flying Geese"
• 4. Thailand
• 5. Malaysia
• 6. Indonesia
• 7. Lessons from Southeast Asia
• Bibliography
• Index