Manufacturing Competitiveness in Asia

Jomo K. S., Jomo K. S.

• Publisher: Routledge
• Year: 2005
• ISBN:
  9781134424306
• Edition: 1
• Topic: Business
• Subtopic: International Business
• Index: Business

There are competing theories to explain the reasons behind the international competitiveness of manufacturing in Asia. Analysing these different theories will bring important lessons, not just for Asia, but for developing economies the world over.
This lucid book studies industries and firms in East Asia and examines the major determinants of their economic performance. With contributions from such leading thinkers as Ha-Joon Chang and Rajah Rasiah, the book covers such themes as:
*industrial policy and East Asia
*Taiwan's information technology industry
*The role of the government in technological capability building
Manufacturing Competitiveness in Asia touches on many important themes and issues and as such will be of great interest to students, academics and policy-makers involved in industrial economics, international trade and Asian studies.

1 Introduction

Jomo K.S. with Ken Togo

There are many competing explanations of the East Asian economic miracle, ranging from the cultural to the conjunctural. Even economic explanations are far from being unanimous, with the debate largely over the role of the state and its consequences. There has been considerable debate about the role and nature of the state, and particularly about the consequences of industrial policy. In this debate, there have been three, sometimes distinct, sometimes overlapping, explanations of the role of the state in what the World Bank (1993) has called the East Asian economic miracle which may be summed up as minimalist, market friendly and developmentalist.

The first, essentially laissez-faire approach arguing for a minimal role for the state, basically asserts that the state has been largely irrelevant or, even worse, actually obstructive of the essentially market forces which have contributed to rapid growth and structural transformation, including industrialisation. The original and most articulate exponents of this view include Little, Scitovsky and Scott (1970), but there are many supporters of this view. Interestingly, these include the many liberals and neo-liberals who have opposed the Park Jung Hi and subsequent military regimes in South Korea and many ‘native’ Taiwanese who used to resent suggestions that the mainland Guomindang regime may have contributed to development on that island.

Such a view became especially influential in the early 1980s as the ideological pendulum in the Anglophone world swung to the far right after the election of Mrs Thatcher and Mr Reagan. Intellectually, this swing was bolstered by Keynesianism’s apparent responsibility for the fiscal crises and ‘stagflation’ of the 1970s, the resurgence of monetarism, the emergence of supply-side economics, the public choice school’s critique of self-seeking politicians and bureaucrats as well as the property rights school’s critique of ill-defined or weak rights as well as greater attention to principal-agent problems. Such views were reflected in what John Toye (1987) has called the ‘counter-revolution’ against development economics – led by Peter Bauer and Deepak Lal (see references in Toye, 1987), reflected for example in the World Bank’s World Development Reports of the early 1980s.

The second, currently popular case for the market-friendly state (World Bank, 1991) was greatly enhanced by the World Bank’s (1993) The East Asian Miracle (EAM) study, and is likely to be seen as drawing additional support from the Asian Development Bank’s (ADB) (1997) study entitled Emerging Asia (EA). Drawing from neo-classical welfare economics, this view accepts the case for government intervention due to the existence and greater significance of externalities and market failures. This approach has given new life to and justification for development economics – which had come under near fatal assault in the early 1980s – by emphasising the more pervasive and deep-rooted nature of externalities and market failures of various types in developing economies. The persistence of such externalities and market failures made the case for what the World Bank (1993) refers to as ‘functional’ interventions – as opposed to ‘market-unfriendly’ ‘strategic’ interventions, which the World Bank did not approve of.

While largely accepting the arguments for state interventions to address market failures, the advocates of the developmental state perspective emphasise that the nature of government interventions in East Asia generally went well beyond the market-friendly functional interventions approved of by the World Bank. While the World Bank disapproved of so-called strategic interventions, the proponents of the developmental state perspective insist that selective industrial policies – involving trade, financial and other interventions – have accounted for ‘late industrialisation’ in East Asia (Amsden, 1989; Wade, 1990; Chang, 1994).

The key argument is that such interventions have been crucial for developing new industrial capabilities which did not previously exist and which would not have spontaneously emerged due to market forces alone. Thus, the old ‘infant industry’ argument was resuscitated, with insights from Gerschenkron’s (1962) observations on the advantages of economic ‘backwardness’ as well as the requirements of ‘late industrialisation’. The developmental state advocates emphasised the role of ‘strong states’ (in Myrdal’s sense (1968)) as well as the manipulation, if not distortion, of market mechanisms to achieve developmental objectives. ‘Market-enhancing’ (Aoki et al., 1997) and other critiques of the earlier emphasis on wasteful rent-seeking behaviour has shown how contingent rents have served as incentives for achieving such goals which go well beyond the neo-classical welfare economics notion of market failures. There has also been greater appreciation of co-operative and associational solutions to co-ordination failure and other collective action problems.

There is, of course, considerable variation in perspectives within the three camps, as well as positions which may be seen as intermediate. For example, a significant number of institutionalists have identified and emphasised collective action problems and co-ordination failures, which may be best addressed by direct government intervention or, alternatively, by private sector collective initiatives, or by improved government–private sector consultation, or even by corporatist institutions and mechanisms. In so far as some such problems may not be generally acknowledged as market failures, the related solutions may not be seen as within the pale of acceptable market-friendly interventions. And in so far as the intervention may be anticipatory or pro-active, rather than reactive, it is more likely to be seen as strategic rather than functional.

As noted earlier, the World Bank’s East Asian Miracle (1993) approves of market-friendly functionalist interventions – such as ensuring good governance, sound macro-economic management, physical and social infrastructure provision and high savings and investment rates – while eschewing market-distorting strategic interventions. Nevertheless, given the significance of the latter, particularly in Northeast Asia, the East Asian Miracle study considered the impact of strategic interventions, particularly ‘directed credit’ and ‘industrial policy-related trade interventions’. The East Asian Miracle study insisted that the latter failed in East Asia, while conceding that ‘directed credit’ worked. However, the World Bank suggested that the conditions and circumstances of such limited success in Northeast Asia were very unusual, if not unique (Confucianism, bureaucratic capability, favourable initial and international conditions, etc.), and therefore not to be emulated.

Growth accounting exercises – suggesting little total factor productivity (TFP) growth in most of the region – have also been invoked by the World Bank, Paul Krugman (1994) and others to suggest the inferiority of East Asian growth in achieving technical progress. The main conclusion drawn is that rapid growth in the region has largely been due to massive factor (capital and labour) inputs due to high savings and investment rates, foreign direct investment, growth of the wage labour force in the formal sector and human capital investments. Further factor inputs are bound to run up against diminishing returns, and rapid East Asian growth cannot be sustained, at least at the breakneck pace of the past three decades.

Many East Asians were deeply offended by Krugman’s (1994) comparison of East Asian growth with that of the Soviet Union in earlier times, and the implications that East Asian economic performance has not been all that miraculous and that slower growth is unavoidable and imminent. However, there has been less critical attention to the bases of his analysis, namely the more conventional neo-classical growth accounting exercises by Alwyn Young (1994) on the one hand, and the more heterodox exercise by Kim Jong-Il and Lawrence Lau (1994).

This is not the place to go into an extended discussion of the theoretical as well as methodological issues involved. However, Dani Rodrik (1994, 1995) observes (see also Collins and Bosworth, 1996) that while ‘the evidence on investment rates is direct and speaks for itself, the evidence on TFP is indirect and has to be interpreted with care’. Also, more recent findings (Collins and Bosworth, 1996; Bosworth and Collins, 2000) suggest that East Asian economies have been evolving toward greater TFP gains since the 1980s as they attain higher stages of development. They also argue that future growth in the region can be sustained as the educational and skill profiles of the labour forces continue to grow. There is also greater appreciation of the crucial conceptual differences and inter-relationship between TFP and cost competitiveness.

Krugman is probably right in claiming that the new endogenous growth theory cannot be invoked against his arguments as even higher TFP residuals would then be expected. However, if technological learning only becomes important beyond a certain stage of development or when technological progress requires changes in the labour process more conducive to such learning and shop-floor innovation, one would have different expectations of TFP growth in East Asia outside of Japan.

But even if we accept the theoretical and methodological bases for Krugman’s claims (which are not unproblematic), there is good reason to suspect his conclusion of lack of technological progress when one considers the consequences of differences in price determination in different product markets which affect growth accounting exercises. In this case, the important distinction is between the more technologically sophisticated products, enjoying legally protected monopolistic rents, and other more mass-produced products in far more competitive markets. The differences in the nature of the labour markets have also had some bearing on product price determination. Most East Asian workers outside of Japan and, perhaps, Singapore have been under-remunerated owing to international labour immobility, among other factors, resulting in the relative under-pricing – and hence competitiveness – of East Asian exports in international trade.

The different economic performances of the three regions considered by Emerging Asia (ADB, 1997) do not merely involve differences in economic growth, or even of structural transformation, though these are not unimportant. Before the 1990s, the World Bank’s first-tier East Asian high-performing Asian economies (HPAEs) (including Singapore) grew by almost two percentage points more than the three second-tier Southeast Asian newly industrialising countries (NICs) (Malaysia, Thailand and Indonesia); the difference was even greater on a per capita basis owing to the higher population growth rates in the latter. When one considers the far larger contribution of natural resource rents to the growth performance of these three NICs, the achievement of the HPAEs is even greater.

Whereas the East Asian Miracle study obscured this difference, the Emerging Asia study addresses it in terms of regional differences. Unfortunately, neither study pays sufficient attention to the major policy differences between the two regions and their consequences in terms of ‘late industrialisation’. Industrial policy has been far more extensively and effectively deployed in Japan, South Korea and Taiwan than in the second-tier Southeast Asian NICs. The success of such industrial policy is reflected in the greater industrial and technological capabilities of the former compared to the latter.

Neither study comes to terms with the fact that Japan, South Korea and Taiwan selectively kept out foreign direct investment (FDI), with FDI only accounting for a modest share of gross domestic capital formation (GDCF), whereas FDI has been far more important in Southeast Asia, especially in Singapore and Malaysia, and that too partly for political reasons. Both studies also repeat the neo-liberal mantra of trade liberalisation and economic openness without fully acknowledging the critical difference between ‘free trade’ à la Little et al. (1970) and the ‘simulated free trade’ juxtaposition of export subsidies against import protection à la Bhagwati (1986, 1988) – as in Northeast Asia.

In making regional generalisations, the Emerging Asia study glosses over many important differences within the three main regions considered. In reviewing the East Asian Miracle study, Dwight Perkins (1994) suggested that generalisations about East Asia obscured the existence of at least three distinct East Asian types among the eight HPAEs – the Northeast Asian HPAEs (including Taiwan), the Southeast Asian HPAEs and the two city states of Hong Kong and Singapore. The significance of industrial and technology policies as well as state-owned enterprises in the island republic, in contrast to the recently returned British colony, underscores the difficulties in making facile generalisations. Any alternative categorisation would also be moot, but the recognition of such variety is often obscured in stressing regional similarities. State-owned enterprises have performed well in Singapore and perhaps in Taiwan as well, but less well in Malaysia and Indonesia, which is not surprising given the circumstances of their establishment and management.

Competition, openness and exports?

The ADB’s Emerging Asia (1997) study argued that market competition, openness and export orientation were the key ingredients of East Asia’s miraculous economic performance. It is not possible to refute these claims comprehensively here, but fortunately others have already done so very persuasively.

On the claim of market competition, one can refer to the World Bank’s (1993) discussion of the importance of ‘contests’ in East Asia. Consistent with the Austrian School critique of the neo-classical economic fetish for perfect competition, East Asian governments have not been insistent on competition to avoid wasteful, excessive competition and to enable firms to achieve economies of scale. Contests or managed competition as well as managed exposure to international markets have instead been used to force firms to become internationally competitive as quickly and as reasonably as possible.

As Bhagwati (1986, 1988) and many others have noted, the East Asian governments have not been open to free trade, as suggested by the Emerging Asia study. Bhagwati has argued that free trade has been ‘simulated’, with import protection in East Asia offset by export subsidies, but this is certainly not free trade as normally understood. Nor were East Asian governments all open to FDI as suggested by the Emerging Asia study. FDI in Japan, South Korea, and even Taiwan has accounted for a smaller proportion of gross domestic capital formation than is the norm for developing countries. Even in the Southeast Asian HPAEs, all with higher than average FDI/GDCF, there has been significant regulation of FDI.

The Emerging Asia study also ignores the problems of liberalisation and openness, such as the causes and consequences of the 1997 financial crisis in Southeast Asia. Contrary to the claim that ‘the market’ will exact swift and painful punishment on governments and economies that do not have their macro-economic house in order, the timing, nature and consequences of the 1997 financial crisis in Southeast Asia underline the imperfect nature of financial markets, as reflected in the long delay in ‘rectification’. In a world economy where foreign exchange spot transactions are worth more than seventy times total international merchandise trade transactions, the financial sector has become increasingly divorced from the real economy. With the recent proliferation of new financial instruments and markets, the financial sector has an even greater potential to inflict damage on the real economy.

Even George Soros (1997) has argued that the unregulated expansion of capitalism, especially finance capital, threatens to undermine the system’s viability and future, i.e. that capitalism has to be saved from itself. While admitting that he himself has profited greatly from financial liberalisation, he argues that excessive liberalisation has resulted in virtual anarchy, which is dangerous for the stability so necessary for the orderly capitalist growth and democratic development desired by his liberal vision of a Popperian ‘open society’.

Ever since Lord Keynes advocated ‘throwing sand’ into the financial system to check the potentially disastrous consequences of unfettered liberalisation, Keynesians – and others – have been wary of the financial liberalisation advocated by ideological neo-liberals and their often naïve allies. Nobel laureate James Tobin has called for a tax on foreign exchange spot transactions to enable more independent national monetary policy, discourage speculative capital movements and increase the relative weight of long-term economic fundamentals against more short-termist and speculative considerations, besides more than adequately funding the United Nations system and programmes. As many have pointed out, the international financial system and its further liberalisation have favoured those already dominant and privileged in the world economy, largely at the expense of the real economy and development in the South.

Dani Rodrik (1994) has challenged the East Asian Miracle study’s claim of the significance of export orientation. The economic histories of Japan, South Korea and Taiwan suggest that most industries began by producing for the domestic market as has been typical of import-substituting industrialisation. The East Asian difference has been in effectively requiring and facilitating the rapid transition to production for export, often through the creative deployment of trade policy. For instance, effective protection has often been provided by some East Asian governments for limited periods of time conditional upon export promotion, i.e. the export of products protected for sale in the domestic market; such a contingent...