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Resurgent AsiaDiversity in Development$

Deepak Nayyar

Print publication date: 2019

Print ISBN-13: 9780198849513

Published to Oxford Scholarship Online: November 2019

DOI: 10.1093/oso/9780198849513.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (www.oxfordscholarship.com). (c) Copyright Oxford University Press, 2020. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 21 February 2020

Openness and industrialization

Openness and industrialization

Chapter:
(p.115) 5 Openness and industrialization
Source:
Resurgent Asia
Author(s):

Deepak Nayyar

Publisher:
Oxford University Press
DOI:10.1093/oso/9780198849513.003.0005

Abstract and Keywords

The past fifty years witnessed a marked increase in the degree of economic openness in Asia, reflected in its rising share of world trade and investment flows. There were, of course, differences between countries, depending upon their size. The pace of industrialization was also impressive. For Asia, and the Asian-14, the share of manufacturing in GDP rose from one-tenth in 1970 to one-fourth in 2016. But industrialization was most unequal even among the Asian-14. Economic openness has performed a critical supportive role in the process, wherever it has been in the form of strategic integration with, rather than passive insertion into, the world economy. Analysis of the industrialization experience in the Asian-14 shows that openness, while necessary, was not sufficient. It was conducive to industrialization only when combined with sensible industrial policy that was implemented by effective governments. In future, however, technological learning and technological capabilities are also essential to provide the foundations for sustaining industrialization.

Keywords:   capital flows, diversity, economic openness, effective governments, global value chains, industrial policy, manufacturing value added, strategic intervention, technological learning, trade patterns

Over the past fifty years, the evolution of thinking about openness and industrialization, in the wider context of development, has seen some twists and turns. These changes have been shaped by history, ideology, and experience. The ideological spectrum spans the entire range, from a strong belief in the magic of markets and openness at one end, to a strong conviction about the necessity of strategic intervention and calibrated openness at the other, in the pursuit of industrialization. It is striking that both such polar opposite ideological perspectives invoke the story of industrialization in Asia to support their worldviews. However, the development experience of Asia is much too diverse and far too complex for simple prescriptive generalizations. There are significant differences between countries. And there are significant changes within countries over time. Even so, the degree of openness of economies and the nature of strategic intervention in markets have remained the critical issues in the debate on industrialization.

The object of this chapter is to analyse openness and industrialization, which have been centre-stage in the process of economic development in Asia over the past fifty years. Section 1 outlines the contours of economic openness in the Asian-14, situated in the wider context of Asia and the world economy, with a focus on international trade and capital flows, to consider how these changed over time and differed across countries. Section 2 traces the trajectories of industrialization in the Asian-14, using Asia and the world economy as points of reference, to examine transformations in industrial production and the related changes in trade patterns across countries over time. Section 3 discusses the enormous diversity in the nature of openness and process of industrialization among the Asian-14, touching upon their intersections, to highlight the similarities and differences between countries. Section 4 analyses the very different paths to industrialization in the Asian-14, exploring how or why the relationship between economic openness, industrial policy, and effective government was a determinant of success. Section 5 concludes with a brief discussion on the critical importance of technology in the process of industrialization.

1. Contours of openness

During the period from the mid-nineteenth century to the mid-twentieth century, international trade with Europe locked Asian countries into an international (p.116) division of labour that inhibited industrialization and stifled growth. Indeed, there was a causal connection between the Great Specialization and the Great Divergence. For that reason, perhaps, in the early post-colonial era, starting around 1950, most Asian countries adopted strategies of development that provided a sharp contrast with the preceding hundred years. There was a conscious attempt to limit the degree of openness and of integration with the world economy because open economies of the colonial past were associated with deindustrialization and underdevelopment. Industrialization was seen as an imperative in catching up, which had to begin with import substitution in the manufacturing sector, but was, in effect, state-led industrialization. This approach also represented the consensus in thinking about development at the time. In such a milieu, the possibilities that economic openness could also create development opportunities were simply not recognized. Gunnar Myrdal’s thinking in Asian Drama was similar, where the entire discussion on foreign trade was based on the premise of export pessimism, while the elaborate discussion on capital flows argued that international capital movements could not be a source of investment in Asia as they had been in Europe.1 It would seem that export pessimism and capital immobility were accepted as characteristics of the world economy that would remain forever. However, it was not long before the actual industrialization experience in Asia—in which the impressive economic performance of South Korea, Taiwan, Singapore, and Hong Kong, at the time attributed to markets and openness by mainstream economists, was juxtaposed with the disappointing economic performance of other Asian countries, attributed to excessive state intervention and restricted openness, even though such attributions were questioned by critics—led to changes in both thinking and policies beginning circa 1980. The spread of markets and the gathering momentum of globalization reinforced changes in thinking. It led to a marked increase in the degree of economic openness in Asian countries. This began with international trade, to be followed by capital flows in the form of investment and finance.

1.1 International trade

International trade is the most visible form of openness in terms of engagement with the world economy. During the early post-colonial era, the share of Asia in world trade dropped from 14 per cent in 1950 to 8.4 per cent in 1970, reaching its lowest level in the early 1970s (Nayyar, 2013). Over the next four decades, increasing openness in Asia led to a transformation in the significance of international trade.

Tables 5.1 and 5.2 set out evidence on merchandise exports from, and imports into, each of the Asian-14, as a percentage of GDP, which reflects their economic openness in the national context, and as a percentage of world trade, which shows (p.117) (p.118) (p.119) their relative importance in the global context, during the period from 1970 to 2016. In order to keep the statistics within manageable proportions, the figures are presented for selected benchmark years, at decadal intervals. The exceptions are 2008, as the global economic crisis led to a sharp contraction in trade flows thereafter, and 2016, the latest year for which data are available. For the purpose of reference and comparison, the tables also present the corresponding figures in percentages for the Asian-14, Asia, developing countries, industrialized countries, and the world.

Table 5.1 Merchandise exports from the Asian-14: 1970–2016

(as a percentage of GDP)

(as a percentage of world exports)

1970

1980

1990

2000

2008

2016

1970

1980

1990

2000

2008

2016

China

2.6

5.9

15.6

20.5

31.1

18.7

0.73

0.88

1.78

3.86

8.86

13.12

South Korea

9.3

26.9

23.3

30.7

42.1

35.1

0.26

0.85

1.86

2.67

2.61

3.10

Taiwan

24.7

46.9

40.3

45.7

61.3

52.9

0.45

0.97

1.92

2.35

1.58

1.75

Indonesia

10.6

25.8

19.2

37.1

25.7

15.5

0.35

1.07

0.73

1.01

0.86

0.91

Malaysia

43.6

52.9

66.9

104.7

86.4

63.9

0.53

0.63

0.84

1.52

1.23

1.18

Philippines

14.0

16.0

16.5

47.0

28.2

18.8

0.33

0.28

0.23

0.59

0.30

0.36

Singapore

80.9

160.4

135.6

143.8

175.9

113.9

0.49

0.95

1.51

2.14

2.09

2.11

Thailand

9.6

19.4

26.1

54.7

61.0

52.9

0.22

0.32

0.66

1.07

1.10

1.35

Vietnam

14.1

37.1

46.5

63.2

86.1

0.02

0.07

0.22

0.39

1.11

Bangladesh

4.5

5.9

14.1

16.8

15.8

0.04

0.05

0.10

0.10

0.22

India

3.4

4.8

5.7

9.3

15.5

11.7

0.64

0.42

0.51

0.66

1.21

1.65

Pakistan

3.4

8.4

10.8

11.7

13.5

7.2

0.14

0.13

0.16

0.14

0.13

0.13

Sri Lanka

12.1

21.7

20.4

28.4

18.1

12.7

0.11

0.05

0.05

0.08

0.05

0.06

Turkey

2.4

3.1

6.2

10.2

17.3

16.5

0.2

0.1

0.4

0.4

0.8

0.9

Asian-14

5.7

14.8

20.7

30.4

34.9

23.1

4.4

6.7

10.8

16.8

21.3

27.9

Asia

9.3

27.0

25.8

35.2

40.0

26.2

8.4

18.2

16.9

23.8

29.9

35.9

Developing Countries

10.5

22.3

21.1

28.3

34.3

23.9

19.1

29.7

24.1

31.9

39.0

43.7

Industrialized Countries

10.2

15.9

14.0

16.4

21.2

19.2

76.3

66.2

72.5

65.8

56.5

53.5

World

9.4

16.7

15.2

19.2

25.4

21.1

100.0

100.0

100.0

100.0

100.0

100.0

Note: The percentages have been calculated from data on merchandise exports and GDP in current prices and market exchange rates. The share of developing countries and industrialized countries in world exports does not add up to 100. The residual is attributable to the transition economies of Eastern Europe and the former USSR.

Source: Author’s calculations from United Nations, UNCTAD Stat based on UN International Trade Statistics, and UN National Accounts Statistics.

Table 5.2 Merchandise imports into the Asian-14: 1970–2016

(as a percentage of GDP)

(as a percentage of world imports)

1970

1980

1990

2000

2008

2016

1970

1980

1990

2000

2008

2016

China

2.5

6.5

13.4

18.5

24.6

14.2

0.7

1.0

1.5

3.4

6.9

9.8

South Korea

22.0

34.3

25.0

28.6

43.4

28.8

0.6

1.1

1.9

2.4

2.6

2.5

Taiwan

26.4

46.7

32.8

42.4

57.7

43.5

0.5

0.9

1.5

2.1

1.5

1.4

Indonesia

9.6

12.8

16.3

24.7

23.5

14.6

0.3

0.5

0.6

0.7

0.8

0.8

Malaysia

36.2

44.0

66.5

87.4

67.7

56.8

0.4

0.5

0.8

1.2

0.9

1.0

Philippines

16.7

23.1

26.5

45.7

34.7

28.2

0.4

0.4

0.4

0.6

0.4

0.5

Singapore

128.2

198.8

156.6

140.4

166.4

98.3

0.7

1.1

1.7

2.0

1.9

1.8

Thailand

17.6

27.5

37.4

49.1

61.5

47.7

0.4

0.4

0.9

0.9

1.1

1.2

Vietnam

54.9

42.5

50.2

81.4

84.9

0.0

0.1

0.1

0.2

0.5

1.1

Bangladesh

15.5

12.9

19.5

26.0

20.3

0.0

0.1

0.1

0.1

0.1

0.3

India

3.6

8.3

7.4

11.4

25.6

15.9

0.6

0.7

0.7

0.8

1.9

2.2

Pakistan

5.9

17.3

14.3

14.1

28.0

16.7

0.2

0.3

0.2

0.2

0.3

0.3

Sri Lanka

13.7

41.7

28.6

32.8

29.9

23.9

0.1

0.1

0.1

0.1

0.1

0.1

Turkey

3.8

8.4

10.8

20.0

26.4

23.0

0.3

0.4

0.6

0.8

1.2

1.2

Asian-14

7.1

17.1

21.9

28.9

33.8

20.4

5.3

7.6

11.0

15.5

20.3

24.4

Asia

9.5

20.2

25.2

31.9

35.9

23.5

8.4

13.3

15.9

20.9

26.3

31.9

Developing Countries

10.6

18.4

20.0

26.3

31.3

22.5

18.5

24.0

22.2

28.8

34.9

40.8

Industrialized Countries

10.7

17.6

14.7

17.9

23.6

20.6

77.0

72.0

74.0

69.8

61.7

56.9

World

9.7

17.0

15.7

19.8

25.9

21.3

100.0

100.0

100.0

100.0

100.0

100.0

Note: The percentages have been calculated from data on merchandise imports and GDP in current prices and market exchange rates. The share of developing countries and industrialized countries in world imports does not add up to 100. The residual is attributable to the transition economies of Eastern Europe and the former USSR.

Source: Author’s calculations from United Nations, UNCTAD Stat based on UN International Trade Statistics, and UN National Accounts Statistics.

The tables show that, for Asia as a whole, the share of exports and imports in GDP rose rapidly from less than one-tenth in 1970 to about two-fifths in 2008 but, in the aftermath of the financial crisis and the Great Recession, contracted to roughly one-fourth in 2016. This reflected a substantial increase in the degree of openness in trade until 2008 that was dampened by the global economic crisis. During 2009–2016, these trade–GDP ratios witnessed a contraction that was modest in industrialized countries and significant in developing countries but substantial in Asia. The export–GDP ratios for Asia were consistently higher than the import–GDP ratios, which suggests asymmetrical openness, but that was partly attributable to West Asia’s oil-exporting countries.2 Among the Asian-14, Indonesia was the only country that was a major oil-exporter.3

The export–GDP and import–GDP ratios in the Asian-14 also rose between 1970 and 2008 but fell in 2016, in most economies except for Vietnam where these ratios continued to rise. The degree of openness increased rapidly in China, South Korea, Taiwan, Singapore, and Vietnam, slowly in India, Bangladesh, Pakistan, Sri Lanka, with Indonesia, Malaysia, Philippines, Thailand, and Turkey somewhere in the middle. In general, except for Indonesia, these trade–GDP ratios were the highest in the Southeast Asian countries. This is no surprise, because the ratio of exports or imports to GDP is bound to be the highest in small economies (Taiwan, Malaysia, and Singapore, although it was not so for Sri Lanka) and the lowest in large economies (China, India, and Indonesia). For medium-size countries, trade–GDP ratios were high (South Korea, Thailand, and Vietnam) or not high (Philippines, Bangladesh, Pakistan, and Turkey) depending upon their degree of openness. There were asymmetries between export–GDP and import–GDP ratios for the Asian-14. Starting 1990, the export–GDP ratio in Taiwan, South Korea, and China was significantly higher than the import–GDP ratio, as these economies ran trade surpluses. So did Malaysia and Indonesia (an oil-exporter). In Philippines, Singapore, and Thailand, the import–GDP ratio exceeded the export–GDP ratio, except after the financial crisis when they sought to accumulate foreign exchange reserves through trade surpluses. In India, Pakistan, Bangladesh, and Sri Lanka, as well as Vietnam and Turkey, the import–GDP ratio was mostly higher than the export–GDP ratio, as these countries ran trade deficits.

Given that the share of countries in world exports or world imports essentially depends on their size, it is no surprise that the distribution trade flows within Asia (p.120) was unequal. The share of the Asian-14 in Asia’s merchandise trade was three-fourths in 2016 as compared with one-half in 1970. There was also a concentration among a few countries in the Asian-14. In 2016, in total world trade, the share of China was 11 per cent, the shares of South Korea, Taiwan, Singapore, and India were in the range of 2–3 per cent, while the shares of Malaysia, Thailand, and Vietnam were around 1 per cent.4 The share of China was about the same as that of the other seven countries taken together. In 1970, such concentration in a few was somewhat less, and China was just one among eight countries.

The focus so far has been on merchandise trade, as exports and imports of goods were always the primary form of international trade.5 Of course, services such as shipping and insurance, which are intimately linked with merchandise trade, were always traded, and there was tourism. But the past three decades have witnessed real change in the possibilities of trade in services. The technological revolution in transport and communication has made hitherto non-traded services tradable, either by a dramatic reduction in the cost of transport, which increases the mobility of producers and consumers of services, or by developing a means of communication, which eliminates the need for physical proximity between producers and consumers of services. There is now a flourishing trade in software. In addition, financial services, business services, education services, and health services, which are skill-intensive or technology-intensive, have become so much more tradable.6

Table 5.3 outlines the increasing significance of trade in services by presenting evidence on exports and imports of services, as a percentage of GDP and as a percentage of world trade, for the Asian-14, in three benchmark years—1980, 2000, and 2013—while providing corresponding figures for the Asian-14, Asia, developing countries, industrialized countries, and the world for purpose of comparison. It shows that for Asia as a whole, and for the Asian-14, trade in services as a proportion of GDP was much smaller than merchandise trade, as it was for developing countries, industrialized countries, and the world. There was a modest increase in this share between 1980 and 2000 followed by a slight drop in 2013. The distribution of trade in services across countries was unequal. In 1980, the Asian-14 accounted for about one-half of Asia’s trade in services. In 2013, this proportion had increased to almost three-fourths. And there was, by then, a further concentration within the Asian-14. The countries with the largest shares (in descending order), China, India, Singapore, and South Korea, taken together, accounted for more than one-half of Asia’s trade in services. The shares of Thailand and Taiwan were distinctly lower, while the shares of the others were negligible. In fact, exports of services from China, India, Singapore, and South Korea constituted one-eighth of world exports in 2013, and were largely skill-intensive or technology-intensive.

Table 5.3 International trade in services for the Asian-14: 1980–2013

(as a percentage of GDP)

(as a percentage of world trade)

Exports

Imports

World Exports

World Imports

1980

2000

2013

1980

2000

2013

1980

2000

2013

1980

2000

2013

China

2.5

2.1

3.0

3.4

2.0

4.4

2.4

7.4

South Korea

7.6

5.6

8.7

5.8

6.0

8.2

1.2

2.1

2.4

0.8

2.2

2.4

Taiwan

4.6

6.0

10.1

6.0

8.0

8.3

0.5

1.3

1.1

0.6

1.8

0.9

Indonesia

3.0

2.4

8.9

3.8

0.3

0.5

0.6

1.8

0.9

Malaysia

4.6

14.9

12.4

12.1

17.9

14.0

0.3

0.9

0.8

0.7

1.1

1.0

Philippines

4.0

4.2

8.0

4.0

6.5

5.4

0.4

0.2

0.5

0.3

0.4

0.3

Singapore

40.2

29.8

40.5

24.1

31.4

42.5

1.2

1.9

2.6

0.7

2.0

2.9

Thailand

4.5

11.0

14.0

4.9

12.3

13.1

0.4

0.9

1.2

0.4

1.0

1.2

Vietnam

8.7

6.1

10.4

7.7

0.2

0.2

0.2

0.3

Bangladesh

1.3

1.8

2.5

2.9

3.6

4.3

0.1

0.1

0.1

0.1

0.1

0.2

India

1.7

3.7

7.9

1.7

4.2

6.6

0.8

1.1

3.2

0.7

1.3

2.8

Pakistan

2.1

1.8

2.2

2.8

2.9

3.5

0.2

0.1

0.1

0.2

0.2

0.2

Sri Lanka

4.7

4.9

6.3

7.2

8.5

4.7

0.1

0.1

0.1

0.08

0.1

0.1

Turkey

0.8

7.5

5.0

0.6

3.3

2.5

0.2

1.3

1.0

0.1

0.6

0.5

Asian-14

2.2

5.3

5.0

2.2

6.0

5.0

5.2

12.5

18.2

5.3

14.2

20.9

Asia

2.9

5.9

5.7

5.8

6.9

6.4

10.3

16.8

24.5

17.8

19.7

28.6

Developing Countries

2.7

4.8

4.9

5.1

5.7

5.9

18.5

23.1

30.1

31.2

27.4

37.7

Industrialized Countries

3.7

4.4

7.0

3.5

4.1

5.8

79.0

75.5

67.2

66.1

70.8

58.1

World

3.2

4.5

6.1

3.6

4.5

5.8

100.0

100.0

100.0

100.0

100.0

100.0

Note: Comparable data are not available after 2013. The share of developing countries and industrialized countries in world exports and world imports does not add up to 100. The residual is attributable to the transition economies of Eastern Europe and the former USSR.

Source: United Nations, UNCTAD Stat, based on IMF Balance of Payments Statistics.

(p.121) (p.122) 1.2 Capital flows

There have been significant changes not only in the nature of capital flows but also in the degree of openness to foreign capital in Asia over the past fifty years. The changes were sequential with some overlaps. In the first phase, beginning around 1960, concessional development assistance was the most important form of capital flows to Asia, which diminished in relative importance after 1990. In the second phase, starting around 1980, foreign direct investment surfaced and progressively became the most important form of capital flows to Asia. In the third phase, that began around the turn of the century, portfolio investment in the newly industrializing countries of Asia emerged as a new form of capital flows, enabled by capital account liberalization and driven by internationalization of finance.

In earlier stages of the post-colonial era in Asia, international capital movements were almost negligible. During this period, large trade deficits were common in most Asian countries, so that external resources were necessary to finance development. It was foreign aid that bridged this gap. Table 5.4 presents evidence on concessional development assistance to the Asian-14, from donor countries and multilateral institutions, as a percentage of gross capital formation in each of these countries, during the period 1961–2016, which is divided into decades so that the statistics remain within manageable proportions. It shows the macroeconomic significance of foreign aid, which could have been an important source of financing investment in many countries, not just in the earlier decades 1961–1980, when it was the only (p.123) significant source of capital flows, but also in the later period 1981–2000. The critical importance of foreign aid in the Cold War era is obvious. During 1961–1970 and 1971–1980, aid as a proportion of investment was 37 per cent and 15 per cent respectively in South Korea, 52 per cent and 20 per cent in Indonesia, 40 per cent and 23 per cent in Pakistan, 15 per cent and 6 per cent in Turkey, while it was in the range of 5–10 per cent in Malaysia, Philippines, Singapore, and Thailand. For Taiwan and Vietnam, during 1971–1980, these proportions were 8 per cent and 73 per cent respectively.7 Even at a later stage, during 1981–2000, foreign aid was large as a proportion of investment in Indonesia, Pakistan, Philippines, and Vietnam. Similarly, foreign aid was important for Bangladesh and Sri Lanka throughout these decades. India and China also received foreign aid but, given the large size of their economies, it was modest as a proportion of investment, except in India during 1961–1970. The significance of foreign aid as a source of capital inflows diminished rapidly during 2001–2010 in most of the Asian-14, except in Indonesia, Philippines, Vietnam, Bangladesh, Pakistan, and Sri Lanka. By 2010–2016, it was significant only in Vietnam and Pakistan.

Table 5.4 Concessional development assistance to the Asian-14 as a percentage of gross capital formation (annual averages)

1961–1970

1971–1980

1981–1990

1991–2000

2001–2010

2011–2016

China

0.6

2.0

2.3

0.5

0.1

South Korea

37.3

14.5

3.3

1.2

Taiwan

7.7

2.0

0.6

Indonesia

51.8

19.7

9.1

14.9

5.1

1.6

Malaysia

5.7

7.4

6.2

4.1

3.4

1.6

Philippines

9.2

9.8

12.7

15.6

6.7

3.1

Singapore

3.4

5.9

3.6

3.9

Thailand

8.0

6.1

6.1

8.1

2.9

1.6

Vietnam

72.5

26.5

15.9

9.3

11.7

Bangladesh

56.8

22.8

13.7

6.2

3.8

India

11.8

4.5

2.8

2.8

1.2

0.9

Pakistan

39.5

22.9

11.0

11.2

7.6

6.5

Sri Lanka

12.4

18.9

26.7

13.0

7.6

2.9

Turkey

14.5

6.2

5.9

3.9

2.7

1.7

Source: Author’s calculations from: (i) OECD DAC database for Concessional Development Assistance, and (ii) UN National Accounts Statistics for Gross Capital Formation. See Appendix.

International investment by large firms from industrialized countries surfaced in the 1970s as regimes for capital exports were liberalized. Asian countries had always been a destination for their investments to obtain natural resources and primary commodities. It began in the nineteenth century with the large trading firms from Europe, and continued in the post-colonial era with their modern corporate counterparts. The increasing openness of Asian countries to private foreign capital, beginning around 1980, turned them into destinations for transnational corporations to manufacture for domestic markets or export markets or both. It was not long before such investments also came to the services sector.

Table 5.5 sets out available evidence on the flows of foreign direct investment, inward and outward, as a percentage of gross capital formation, in each of the Asian-14, with annual averages for the periods 1981–1990, 1991–2000, 2001–2008, and 2009–2016, while providing corresponding figures for the Asian-14, Asia, developing countries, industrialized countries, and the world for the purpose of comparison. Once again, 2008 is used in the periodization, since the global economic crisis led to a downturn in foreign direct investment thereafter. Table 5.6, in the same format, provides statistics on stocks of foreign direct investment, inward and outward, as a percentage GDP, for each of the Asian-14, in 1980, 1990, 2000, 2008, and 2016. Taken together, the two tables sketch a complete picture.

Table 5.5 Flows of foreign direct investment into and from the Asian-14: 1981–1990 to 2009–2016 (annual averages as a percentage of gross capital formation)

Inward Flows

Outward Flows

1981–1990

1991–2000

2001–2008

2009–2016

1981–1990

1991–2000

2001–2008

2009–2016

China

1.6

11.0

6.8

3.0

0.4

0.8

1.6

2.6

South Korea

1.3

2.4

3.5

2.5

1.1

1.9

3.8

7.2

Taiwan

2.6

2.5

4.5

2.7

7.6

5.0

8.6

11.9

Indonesia

1.4

3.3

4.2

5.1

0.03

1.4

3.0

1.1

Malaysia

11.3

17.5

13.8

13.4

2.3

6.0

15.4

17.6

Philippines

3.7

7.5

6.8

7.0

0.3

0.9

2.7

5.5

Singapore

26.9

36.8

71.1

73.8

4.7

20.6

48.1

43.7

Thailand

4.5

6.8

13.0

7.8

0.2

0.8

1.4

8.3

Vietnam

3.5

26.1

16.5

20.1

0.0

0.0

0.4

2.5

Bangladesh

0.0

3.2

3.9

3.4

0.0

0.03

0.06

0.08

India

0.2

1.9

5.3

5.1

0.01

0.1

2.7

1.5

Pakistan

1.5

3.9

13.2

4.7

0.2

0.04

0.3

0.2

Sri Lanka

2.1

4.0

4.3

3.5

0.04

0.2

0.4

0.3

Turkey

0.9

1.4

8.3

5.3

0.0

0.4

0.9

1.4

Asian-14

2.1

7.2

7.4

4.6

0.9

2.0

3.3

3.5

Asia

2.9

7.7

9.3

6.2

1.3

4.3

5.7

4.3

Developing Countries

3.0

8.6

10.6

7.6

0.9

3.4

5.3

4.1

Industrialized Countries

2.8

6.9

8.6

8.7

4.0

9.2

12.3

9.5

World

2.6

7.0

9.4

8.3

3.1

7.8

10.2

6.9

Note: The annual averages in percentages have been calculated.

Source: UNCTAD Foreign Direct Investment Online Database and UN National Accounts Statistics.

Table 5.6 Stocks of foreign direct investment for the Asian-14: 1980–2016 (as a percentage of GDP)

Inward Stock

Outward Stock

1980

1990

2000

2008

2016

1980

1990

2000

2008

2016

China

0.4

5.2

15.9

8.2

12.1

1.1

2.3

4.0

11.4

South Korea

1.8

1.9

7.8

9.5

13.1

0.2

0.8

3.8

9.8

21.7

Taiwan

5.7

5.8

5.9

10.9

14.2

30.8

18.2

20.1

39.2

60.6

Indonesia

5.4

6.5

14.2

13.3

25.2

0.0

0.1

3.9

0.5

6.3

Malaysia

21.1

23.4

56.2

31.9

41.0

1.2

1.7

16.9

29.0

42.8

Philippines

3.6

6.7

17.0

12.5

21.1

0.2

0.8

1.3

3.3

14.9

Singapore

44.3

78.3

115.4

238.7

369.2

6.4

20.1

59.2

165.5

229.8

Thailand

2.9

9.3

24.5

32.4

46.3

0.0

0.5

2.6

3.6

21.0

Vietnam

0.4

3.8

47.3

41.8

56.2

0.6

4.9

Bangladesh

2.8

1.7

4.8

5.3

6.6

0.2

0.1

0.1

0.1

India

0.3

0.5

3.6

10.0

14.1

0.0

0.0

0.4

5.0

6.4

Pakistan

2.2

3.7

9.0

10.9

13.8

0.1

0.5

0.6

1.3

0.7

Sri Lanka

4.7

7.2

13.1

11.4

12.0

0.1

0.3

0.6

1.4

Turkey

9.3

5.4

6.9

10.6

15.4

0.6

1.3

2.3

4.4

Asian-14

3.5

6.2

15.4

15.3

20.5

1.5

2.6

5.7

9.5

16.1

Asia

15.4

14.9

24.1

21.9

28.5

1.2

2.9

13.7

15.1

22.6

Developing Countries

10.8

12.7

22.9

22.1

31.0

2.6

3.5

10.2

12.1

19.8

Industrialized Countries

4.8

9.3

22.2

25.4

37.9

5.7

11.7

25.8

31.6

44.8

World

5.7

9.6

22.3

24.2

35.3

4.5

9.8

22.2

25.2

34.6

Note: For the Asian-14 outward stock, in 1980, figures for Bangladesh, China, Sri Lanka, Turkey, and Vietnam are not available.

Source: Author’s calculations from UNCTAD Foreign Direct Investment Online Database and UN National Accounts Statistics.

The inward flows of foreign direct investment, as a percentage of gross capital formation, increased in Asia, developing countries, and industrialized countries, between 1981–1990 and 2001–2008, but these inflows contracted everywhere during 2009–2016, most sharply in Asia. However, even at their peak, this proportion was less than 10 per cent in Asia. The trends over time were similar (p.124) (p.125) (p.126) for most of the Asian-14. Malaysia, Singapore, and Vietnam were the exceptions, with much higher proportions which did not drop in 2009–2016. In fact, for most of the Asian-14, during 1981–2000, as a proportion of gross capital formation, foreign aid inflows were greater than foreign direct investment inflows; Malaysia and Singapore were exceptions throughout, while China and Vietnam were exceptions during 1991–2000. In Bangladesh, Pakistan, and Sri Lanka, foreign aid was larger than foreign direct investment even after 2000. The inward stocks of foreign direct investment, as a proportion of GDP, increased rapidly in Asia, developing countries, and industrialized countries throughout the period from 1980 to 2016. There was a similar uninterrupted increase in the Asian-14. However, this proportion differed significantly across countries. In 2016, it was in the range of 12–15 per cent in China, South Korea, Taiwan, India, Pakistan, Sri, and Turkey, 20–25 per cent in Indonesia and Philippines, and 40–50 per cent in Malaysia, Thailand, and Vietnam, while Singapore at 370 per cent and Bangladesh at 6 per cent were the outliers. Clearly, there was a steady increase in economic openness to foreign direct investment in Asia, which gathered momentum after 2000.

The outward flows of foreign direct investment, as a percentage of gross capital formation, also increased in Asia, and the Asian-14, in consonance with developing countries and less than industrialized countries, from 1981–1990 to 2001–2008, but contracted during 2009–2016. However, in most of the Asian-14, except Indonesia, India, and Singapore, this increase was uninterrupted. Of course, the proportions were low or negligible during 1981–2000, except for Taiwan, Malaysia, and Singapore. These proportions did rise in most of the Asian-14 during 2001–2016 but were still at low levels. The proportions were higher in South Korea, Taiwan, Malaysia, and Singapore, where outflows were also greater than inflows. The outward stocks of foreign direct investment, as a proportion of GDP, increased rapidly in Asia, from 1 per cent in 1980 to 23 per cent 2016. There was a similar uninterrupted increase in the Asian-14. In 2016, this proportion was high in Taiwan, Malaysia, and Singapore (small economies), medium in South Korea, Thailand, and Philippines (mid-size economies), and low in China, India, and Indonesia (large economies), while it was even lower in the remaining Asian-14. The emergence of Asian countries as origins of foreign direct investment lends another dimension to their increasing openness.8

There is yet another form of international investment which has emerged with capital account liberalization, that is, portfolio investment. Unfortunately, it is exceedingly difficult to find evidence on distribution by countries of origin and destination or inflows and outflows. But there can be little doubt that it has grown in significance as mutual funds and pension funds from industrialized countries have searched worldwide for financial assets that would yield higher capital appreciation or higher returns on their investible resources. Much of this placement is still in industrialized countries but many economies among the Asian-14 are also destinations for these footloose and volatile capital flows.9

(p.127) 2. Trajectories of industrialization

The nineteenth century witnessed rapid deindustrialization in Asia, Africa, and Latin America, as their total share in world manufacturing production fell from 60.5 per cent in 1830 to 7.5 per cent in 1913 and was just 8.3 per cent in 1963, of which the share of China and India was 47.4 per cent in 1830, 5 per cent in 1913, and 5.3 per cent in 1963 (Table 1.4). This process was driven by the economics of colonialism and the politics of imperialism. It led to the demise of traditional industries in Asia, particularly China and India, reducing their skill levels and technological capabilities over time. Thus, in the early post-colonial era, it is no surprise that industrialization was seen as an imperative in Asia. The essential ideas were developed then and the rationale was set out, at some length, in Asian Drama.10 The spread effects of industrialization were associated with higher investment levels on the demand-side and scale economies on the supply-side, together with backward and forward linkages within and between sectors, which recognized the importance of capturing externalities that would arise in the process.

Since 1950, there have been three discernible phases in terms of dominant thinking about how to pursue industrialization as an objective, which were shaped and reshaped by outcomes in development. During the first phase, 1950–1975, the widely accepted Development Consensus emphasized industrialization as a necessity in the quest for catching-up with the rich countries, starting with import substitution in the manufacturing sector, fostered by a supportive, if not leading, role for the state. In the second phase, 1975–2000, as the Washington Consensus gathered momentum, influence and acceptance, the emphasis shifted to markets and openness as the only path to an efficient industrialization, relegating state intervention and industrial policy to the dustbin. In the third phase, beginning around 2000, there is rethinking yet again, induced by actual development experience and the global economic crisis, that seeks to highlight the importance of industrial policies and strategic interventions in the pursuit of industrialization. Interestingly enough, the industrialization experience of Asia is the arena for contending, often conflicting, views on the subject.

2.1 Industrial production

The most visible outcome of industrialization is in output.11 Table 5.7 sets out evidence on manufacturing value added in each of the Asian-14, as a percentage of GDP, which reflects their industrialization in the national context, and as a percentage of world manufacturing value added, which shows their relative importance in the global context, during the period 1970–2016, for selected benchmark years at decadal intervals, providing corresponding figures in percentages for the Asian-14, Asia, developing countries, industrialized countries and the (p.128) (p.129) world, as a point of comparison. It shows that, between 1970 and 2016, in Asia, the share of manufacturing value added in GDP rose from 10 per cent to 23 per cent, while its share in world manufacturing value added jumped from 4 per cent to 41 per cent, which was a remarkable transformation. Over this period, the corresponding shares for developing countries also rose, which was also attributable almost entirely to Asia.

Table 5.7 Manufacturing value added in the Asian-14: 1970–2016

(as a percentage of GDP)

(as a percentage of World MVA)

1970

1980

1990

2000

2010

2016

1970

1980

1990

2000

2010

2016

China

(7.9)

(5.5)

(14.7)

(27.3)

31.7

27.5

(0.8)

(0.6)

(1.3)

(6.0)

18.3

25.5

South Korea

17.2

21.6

24.6

26.0

27.8

26.6

0.2

0.5

1.5

2.6

2.9

3.1

Taiwan

28.1

34.3

31.2

25.7

29.0

30.0

0.2

0.5

1.1

1.5

1.2

1.3

Indonesia

9.0

11.6

20.5

24.7

22.0

20.5

0.1

0.4

0.6

0.8

1.6

1.6

Malaysia

14.7

21.9

24.2

30.9

23.4

22.8

0.07

0.2

0.2

0.5

0.6

0.6

Philippines

26.7

27.6

26.6

24.5

21.4

19.6

0.2

0.4

0.3

0.4

0.4

0.5

Singapore

17.5

26.5

24.4

25.9

20.2

18.4

0.04

0.1

0.2

0.5

0.5

0.5

Thailand

15.9

21.5

27.4

28.6

31.1

27.4

0.1

0.3

0.5

0.7

1.0

0.9

Vietnam

16.0

16.0

12.2

18.4

12.9

14.3

0.05

0.01

0.02

0.1

0.1

0.2

Bangladesh

7.9

16.6

12.9

14.7

16.1

17.0

0.06

0.1

0.08

0.1

0.2

0.3

India

14.9

17.2

18.0

16.8

16.2

14.9

1.1

1.2

1.3

1.4

2.6

2.8

Pakistan

10.1

9.9

10.7

9.9

13.1

12.0

0.2

0.1

0.1

0.1

0.2

0.3

Sri Lanka

13.5

17.0

16.2

17.5

18.1

15.5

0.05

0.03

0.03

0.06

0.1

0.1

Turkey

17.6

19.7

25.3

18.8

15.1

16.6

0.5

0.7

1.2

0.9

1.1

1.2

Asian-14

9.8

12.9

18.0

14.9

26.3

24.3

2.8

4.5

7.1

9.6

30.8

38.8

Asia

10.4

11.2

16.7

13.9

23.6

22.5

3.6

5.8

8.3

10.9

32.8

40.8

Developing Countries

14.2

14.1

17.6

14.4

20.0

19.9

9.8

14.4

15.4

18.9

41.5

48.1

Industrialized Countries

25.1

22.4

20.0

17.1

13.9

13.5

70.2

71.4

79.2

79.9

55.9

49.9

World

24.9

21.8

19.9

16.5

15.9

16.0

100.0

100.0

100.0

100.0

100.0

100.0

Notes:

a The percentages have been calculated from data on manufacturing value added and GDP in current prices at market exchange rates.

b The figures for China, in 1970, 1980, 1990, and 2000, are calculated from the Groningen Growth and Development Centre online database and are not strictly comparable with figures for subsequent years.

c The share of developing countries and industrialized countries in world manufacturing value added does not add up to 100. The residual is attributable to the transition economies of Eastern Europe and the former USSR.

Source: Author’s calculations from UNCTAD Stat based on UN National Accounts Statistics.

In the Asian-14, between 1970 and 2016, the share of manufacturing value added in GDP increased from 10 per cent to 24 per cent. It rose everywhere, peaked at different times in different countries at different levels and fell thereafter. This peak level was reached for Taiwan, Philippines, and Singapore in 1980, for India and Turkey in 1990, for Indonesia, Malaysia, and Vietnam in 2000, for China, South Korea, Thailand, Pakistan, and Sri Lanka in 2010, and for Bangladesh in 2016.12 It is worth noting that, in 1970, for most of the Asian-14, the share of manufacturing value added in GDP was higher than in Asia as a whole except in China, Indonesia, Bangladesh, and Pakistan, whereas in 2016 it was higher than in Asia as a whole only for China, South Korea, Taiwan, Malaysia, and Thailand, but it was lower for Indonesia, Philippines, Singapore, Vietnam, Bangladesh, India, Pakistan, Sri Lanka, and Turkey.

The share of the Asian-14 in world manufacturing value added increased from 3 per cent in 1970 to 39 per cent in 2016. This share rose much more in some countries than in others, so that its inter-country distribution became far more unequal. In 1970, there was only one country—India—which had a share of more than 1 per cent, while China and Turkey had shares of more than 0.5 per cent, the three together accounting for more than two-thirds of the share of Asia in world manufacturing value added. In 2016, there were six economies—China, South Korea, India, Taiwan, Indonesia, and Turkey—which had a share of more than 1 per cent, accounting for almost nine-tenths of the share of Asia in world manufacturing value added. It is important to recognize the importance of China in this story. In 2016, China alone accounted for 25.5 per cent of world manufacturing value added, distinctly higher than the share of the United States at 17.6 per cent, the European Union at 19.4 per cent and Japan at 8.5 per cent. It is surprising that this stunning dominance has surfaced in such a short span of time. In 2000, the share of China in world manufacturing value added was just 6 per cent, compared with the United States at 25.4 per cent, the European Union at 24.5 per cent, and Japan at 18.1 per cent.13 It would seem that the entire increase in China’s share was at the expense of the United States, the European Union, and Japan.14 In fact, the share of Asia, excluding China, in world manufacturing value added also increased from 4 per cent in 2000 to 15 per cent in 2016. Clearly, this transformation was not only about China. The decline of manufacturing in industrialized countries, relative rather than absolute, was attributable partly to the Great Recession but mostly to the continuing structural change, with manufacturing giving way to services as per capita incomes (p.130) rose. Even so, the stunning transformation in such a short period of time, reflected in the statistics, is difficult to explain.

The share of countries in world manufacturing value added depends upon their size. For that reason, the preceding discussion considered manufacturing value added as a percentage of GDP, which normalized for differences in income size, as a measure of industrialization. However, manufacturing value added (MVA) per capita, which normalizes for differences in population size, might be even more appropriate for cross-country comparisons.

Figure 5.1 plots trends in manufacturing value added per capita in constant 2010 dollars, for each of the Asian-14 during 1970–2016 using time series data, on a logarithm scale to highlight differences in growth across countries over time. It confirms the rapid and sustained industrialization in Singapore, South Korea, and (p.131) Taiwan. China has followed the same path during 2004–2016 for which data are available. However, growth in MVA per capita witnessed a distinct slowdown in Indonesia, Malaysia, Philippines, and Thailand since the late 1990s; their loss of industrial dynamism was attributable to the financial crisis.15 India (since 1980), Bangladesh, and Vietnam (since 1990), where MVA per capita is lower but its growth has been respectable and sustained, provide a sharp contrast. Turkey and Sri Lanka, at somewhat higher levels of MVA per capita, have also sustained this growth, albeit at a slower pace. Pakistan, with sluggish growth throughout, is the outlier.

Openness and industrialization

Figure 5.1 Growth in manufacturing value added per capita in the Asian-14: 1970–2016 (in constant 2010 US$)

Note: For China, the data are available only for the period 2004–2016.

Source: Author’s calculations from United Nations, National Accounts Statistics, and Population Statistics.

2.2 Trade patterns

The rising share in world manufacturing output was reflected in the emergence of Asian countries as important sources of manufactured exports in the world economy, which suggests that their industrial sectors also became competitive in international markets.

Table 5.8 presents available evidence on manufactured exports from each of the Asian-14, as a percentage of their total merchandise exports and as a percentage of world manufactured exports, during the period 1970–2016, for selected benchmark years at decadal intervals. It shows that, over this period, the share of manufactured goods in total exports increased everywhere in the Asian-14. In 1970, this share exceeded 50 per cent only in South Korea, Taiwan, India, and Pakistan, whereas this share was less than 10 per cent in Indonesia, Malaysia, Philippines, Thailand, Sri Lanka, and Turkey. By 1990, it was higher than 50 per cent in all the Asian-14, including Bangladesh, except Indonesia and Philippines. In 2016, it was in the range of 70–90 per cent in all of the Asian-14. It is worth noting that peak shares were often attained earlier than 2016: South Korea as early as 1990, Taiwan, Indonesia, Malaysia, Philippines, Singapore, Thailand, India, Pakistan, Sri Lanka, and Turkey in 2000, with only China and Vietnam in 2016.16 Between 1970 and 2016, most of the Asian-14 increased their share in world manufactured exports, but much more for a few than for others, while the shares of some countries such as Philippines, Bangladesh, Pakistan, and Sri Lanka remained miniscule. In 1970, there were only two economies—India and Taiwan—which had a share of 0.6 per cent, while South Korea had a share of 0.4 per cent. In 2016, there were five economies that had shares higher than 1.5 per cent: China, South Korea, Taiwan, Singapore, and India. Of these, China alone had a share of 17.5 per cent, which was far larger than others but not quite as dominant as it was in world manufacturing value added.

Table 5.8 Manufactured exports from the Asian-14: 1970–2016

(as a percentage of total merchandise exports)

(as a percentage of world manufactured exports)

1970

1980

1990

2000

2010

2016

1970

1980

1990

2000

2010

2016

China

71.4

88.2

93.6

93.7

1.9

4.7

14.7

17.5

South Korea

76.6

89.4

93.2

89.9

88.3

89.9

0.4

1.6

2.5

3.3

4.1

4.0

Taiwan

75.8

92.2

93.2

89.1

91.3

0.6

2.6

3.0

2.4

2.3

Indonesia

1.1

2.3

35.2

53.9

37.0

46.7

0.01

0.05

0.4

0.7

0.6

0.6

Malaysia

6.5

18.7

53.9

80.4

67.1

68.0

0.06

0.2

0.7

1.7

1.3

1.1

Philippines

7.6

21.3

38.1

91.3

56.3

82.7

0.04

0.1

0.1

0.7

0.3

0.4

Singapore

27.5

46.7

71.1

85.4

72.2

76.4

0.2

0.9

1.6

2.5

2.5

2.3

Thailand

5.4

25.0

63.2

74.9

73.2

74.5

0.02

0.2

0.6

1.1

1.4

1.4

Vietnam

0.0

0.0

42.6

64.0

82.1

0.0

0.0

0.0

0.1

0.5

1.3

Bangladesh

66.0

72.2

77.8

91.9

0.05

0.1

0.1

0.2

0.0

India

51.9

51.4

69.7

77.7

63.8

73.1

0.6

0.4

0.5

0.7

1.4

1.7

Pakistan

57.2

48.8

78.6

86.4

74.5

78.7

0.2

0.1

0.2

0.2

0.2

0.1

Sri Lanka

1.6

18.5

53.2

75.2

64.2

72.4

0.0

0.02

0.0

0.1

0.1

0.1

Turkey

8.9

26.9

67.7

80.4

79.2

80.1

0.03

0.08

0.4

0.5

0.9

1.0

Asian-14

22.5

32.0

69.3

83.0

81.9

85.2

1.6

3.7

8.9

16.4

28.1

31.5

Asia

26.7

17.1

61.4

72.7

71.0

76.1

4.0

6.3

15.1

23.8

35.5

39.0

Developing Countries

15.5

14.3

48.6

65.7

62.7

70.3

5.3

8.6

17.1

28.7

40.2

43.8

Industrialized Countries

67.8

66.6

76.0

77.2

70.4

71.6

92.3

89.6

80.5

69.6

57.9

54.5

World

56.1

49.1

68.4

73.0

65.5

70.2

100.0

100.0

100.0

100.0

100.0

100.0

Note: The share of developing countries and industrialized countries in world manufactured exports does not add up to 100. The residual is attributable to the transition economies of Eastern Europe and the former USSR. Manufactured goods are defined as the sum of SITC 5 (chemicals), SITC 6 (manufactured goods), SITC 7 (machinery and transport equipment), and SITC 8 (miscellaneous manufactured articles) less 68 (non-ferrous metals).

Source: Author’s calculations from United Nations COMTRADE online database.

It is also important to examine how industrialization changed the composition of trade. In doing so, it is necessary to make the obvious distinction between primary commodities and manufactured goods, but it is just as important to distinguish between different categories of manufactures depending upon the (p.132) (p.133) degree of processing and the level of technology. For this purpose, it is both appropriate and valuable to use the well-known classification, based on the natural-resource content and the technological content of merchandise exports, developed by the late Sanjaya Lall (2000). It is, however, necessary to recognize a significant limitation of the Lall-classification. At the time it was developed, in 2000, high-technology manufactures included computers and electronic goods. Subsequently, these became an integral part of assembly operations that drove international trade flows. Hence, such a definition tends to overstate the high-technology component in manufactured exports from, and imports into, Asian countries, particularly China and the smaller Southeast Asian economies. Even so, this classification serves an important analytical purpose.

Figure 5.2 outlines the changes in the composition of exports from the Asian-14, making a distinction between primary products, resource-based manufactures, low-technology manufactures, medium-technology manufactures and high-technology manufactures, during the period from 1980 to 2016, for selected benchmark years at decadal intervals. The primary source used does not provide data on Taiwan and Bangladesh, while the data for China, Pakistan, and Turkey are available starting 1990 and for Vietnam starting 2000.

Openness and industrialization

Figure 5.2 Changes in the composition of merchandise exports from the Asian-14: 1980–2016 (in percentages)

Note: The classifications are based on Lall (2000). The figures in the bars may not add up to 100 because of rounding-off to the nearest whole number.

Source: Author’s calculations from United Nations COMTRADE online database.

These statistics suggest a structural transformation that confirms the impact of industrialization on trade. During the period under review, in general, the share of primary products in total exports dropped sharply, the share of resource-based manufactures fell, the share of low-technology manufactures declined or changed little, while the share of medium-technology and high-technology manufactures, taken together, rose significantly. There were, of course, exceptions. The share of resource-based manufactures increased in India, Indonesia, Thailand, and Turkey, while the share of low-technology manufactures increased in Indonesia, Malaysia, Thailand, Pakistan, Sri Lanka, and Vietnam. There were also important differences between countries. In China, South Korea, and Singapore, industrialization is far more visible as the share of medium- and high-technology manufactures in total exports jumped from just over one-third to almost three-fourths, although there must have been an assembly component in such exports from China. In Malaysia, Philippines, and Thailand, the share of primary products and resource-based manufactures in total exports dropped from 80 per cent to a range of 20–30 per cent. The share of medium- and high-technology manufactures in total exports, in 2016, was more than 50 per cent in Malaysia and Thailand and almost 75 per cent in Philippines. These high proportions were obviously attributable to assembly operations, rather than a deepening of industrialization.17 In Indonesia and Sri Lanka, the share of primary products in total exports fell from 80 to 30 per cent and 60 to 20 per cent respectively, while the share of resource-based and low-technology manufactures rose from 18 to 50 per cent and 35 to 70 per cent respectively. In India and Turkey, the share of resource-based and low-technology manufactures in total exports remained almost unchanged around 55 per cent, while the share of (p.134) (p.135) medium- and high-technology manufactures rose from roughly 15 to 30 per cent and 20 to 40 per cent respectively. In Pakistan, during 1990–2016, the share of resource-based and low-technology manufactures in total exports remained almost the same at 75 per cent. In Vietnam, during 2000–2016, the share of primary products and resource-based manufactures dropped from 60 per cent to 20 per cent.

Openness and industrialization

Figure 5.3 Changes in the composition of merchandise imports from the Asian-14: 1980–2016 (in percentages)

Note: The classifications are based on Lall (2000). The figures in the bars may not add up to 100 because of rounding-off to the nearest whole number.

Source: Author’s calculations from United Nations COMTRADE online database.

Industrialization should also be reflected in the structure of imports. Figure 5.3 traces the changes in the composition of imports in the twelve Asian countries, based on the same classification for the same periods and years. This shows that, in general, the share of primary products in total imports diminished, the share of resource-based manufactures and low-technology manufactures changed little, while the share of medium- and high-technology manufactures rose. Once again, there were exceptions. The share of primary products in total imports increased in China and Vietnam, the share of resource-based manufactures decreased in India and Vietnam, while the share of low-technology manufactures rose in Thailand and Vietnam. The differences between countries were consistent with changes in export patterns, reflecting similarities in the level or nature of industrialization within each of the following country-groups: China, South Korea, and Singapore; Malaysia, Philippines, and Thailand; Indonesia and Sri Lanka; and India and Turkey. Once again, the significance of high-technology manufactures in the imports of China, Malaysia, Philippines, and Thailand is overstated because of imports for assembly operations.

2.3 Manufacturing for world markets

There were three phases in the growth of manufactured exports from Asia that started in the early-1970s, the mid-1980s, and the early 2000s, respectively, which were interconnected but sequential with the progressive integration of Asia into the world economy over time (Nayyar, 2013).

In the first phase, external markets became increasingly important in the process of industrialization for Asian countries. It was a litmus test for domestic firms seeking to become competitive in international markets. In large countries, exports were the end rather than the beginning of the market expansion path for such firms. However, in some small countries, particularly in specific sectors, transnational corporations played an important role in developing manufactured exports.18 This process gathered momentum in South Korea, Taiwan, Singapore, and Hong Kong, where firms manufactured for the world market rather than domestic markets and relied more on large international firms as manufacturers, partners, or buyers. Malaysia and Thailand followed in their footsteps, manufacturing for home-county markets of transnational corporations.

(p.136) (p.137) During the second phase, there was a progressive internationalization of production. This began with transnational corporations from industrialized countries engaging in offshore assembly operations under special tariff provisions, relocating production through international sub-contracting.19 The essential underlying factor was large differences in wages. In fact, even wage costs per unit of output in these developing countries were distinctly lower despite much lower levels of productivity. But the process was driven by the competition for markets between large international firms from industrialized countries seeking to reduce costs. Transnational manufacturing firms relocated assembly operations or component manufacture. Transnational buying groups sourced simple labour-intensive consumer goods such as clothing through sub-contracting from Asian countries.20

In the third phase, as globalization gathered momentum, reinforced by the revolution in transport and communication, there was a growing interdependence and deepening integration between countries in the world economy. Such global economic integration led to an increasing worldwide relocation of parts of production processes, which became more feasible, in terms of rapid technological change and declining transport costs, to Asian countries with relatively skilled labour and low wages. This, in turn, led to a massive expansion of world trade in manufactures, especially in components for assembly or intermediates for processing. The phenomenon is described as the rise of global value chains.21 It was not as new as it is sometimes made out to be, but was the culmination of a process that began two decades earlier.

Given the nature of international trade statistics, it is not possible to find empirical evidence on such cross-border trade at a macro-level. It is, however, widely known that global value chains are particularly important in three sectors: textiles, clothing, leather, and footwear; computer, electronic, and optical equipment; and motor vehicles. The OECD and the WTO have estimated domestic value added in manufactured exports from each of these three sectors, for the period 1995–2011, in countries where such trade is significant. Table 5.9 presents this evidence, which is available for eleven countries among the Asian-14 for 1995 and 2011. For the eleven countries taken together, using statistics on their manufactured exports, the share of these three sectors in the gross value of total manufactured exports is estimated at 50.5 per cent in 1995 and 41.5 per cent in 2011.22 Thus, the sectors in which global value chains were important accounted for a large proportion of total manufactured exports from these eleven Asian countries.

Table 5.9 Domestic value added in the gross value of exports of manufactured goods in Asian countries for selected sectors: 1995 and 2011

Total Exports of Manufactures

Textiles, Textile Products, Leather, & Footwear

Computer, Electronic, & Optical Equipment

Motor Vehicles, Trailers, & Semi-Trailers

1995

2011

1995

2011

1995

2011

1995

2011

China

55.6

59.9

61.6

73.5

32.9

45.0

47.7

66.9

South Korea

72.7

53.1

78.7

64.7

72.2

57.8

75.5

62.3

Taiwan

62.6

49.0

71.6

56.9

55.5

55.4

62.0

52.2

Indonesia

80.7

81.4

82.2

81.8

65.2

72.9

66.7

74.5

Malaysia

61.3

47.6

62.6

50.8

54.2

33.2

61.3

40.9

Philippines

58.8

71.0

67.3

84.4

49.1

71.5

57.3

59.7

Singapore

48.1

51.0

52.2

44.2

47.5

59.9

37.1

51.7

Thailand

68.2

49.0

81.9

56.9

51.1

55.4

57.1

52.2

Vietnam

68.2

51.7

64.5

74.1

42.1

34.8

54.2

43.6

India

87.4

63.8

90.2

80.2

84.6

68.8

87.2

67.5

Turkey

87.7

64.8

91.5

77.3

81.9

61.1

83.9

55.8

Source: OECD-WTO TIVA Database.

Table 5.9 suggests some generalizations. First, net foreign exchange earnings were much less than the gross value of manufactured exports for all sectors and all countries. Second, of the three sectors, domestic value added was the highest by a wide margin in textiles, clothing, leather, and footwear, and clearly the lowest in computer, electronic, and optical equipment, with motor vehicles in the middle. (p.138) Third, between 1995 and 2011, the proportion of domestic value added in the gross value of manufactured exports from the three sectors rose in China, Indonesia, Philippines, and Singapore while it fell in South Korea, Taiwan, Malaysia, Thailand, Vietnam, India, and Turkey. Fourth, the proportion of domestic value added in all three sectors in Indonesia, India, and Turkey was far higher than elsewhere in 1995 and despite the subsequent decline in India and Turkey, in 2011, it was still higher than in most countries. Some plausible inferences follow. China and Singapore probably moved up the value chain,23 while Indonesia and Philippines reduced the import content of exports in these sectors. South Korea and Taiwan possibly increased outsourcing of components in these sectors. Malaysia and Thailand perhaps enhanced their insertion into global value chains. India and Turkey were probably the least integrated with global value chains in their manufactured exports.

3. Diversity across Asia

The preceding discussion on the contours of openness and the trajectories of industrialization in Asia over the past fifty years highlights the enormous diversity across countries in this vast continent, which is juxtaposed with changes within countries over time that make cross-country analysis even more difficult. There were differences in size, endowments, and drivers, that influenced both openness and industrialization.

(p.139) The geographical and economic size ranged from small (Taiwan, Malaysia, Singapore, and Sri Lanka) through medium (South Korea, Philippines, Thailand, Vietnam, Bangladesh, Pakistan, and Turkey) to large (China, India, and Indonesia). There were different endowments. Most of these countries were resource-poor and land-scarce, except for Indonesia, Malaysia, and Turkey that were resource-rich and land-abundant, while the large countries, China and India, were also endowed with natural resources. But all of these countries were labour-abundant. There were different drivers. In the early stages, many of the Asian-14 might have relied on primary commodities or natural resources as the basis for manufacturing, but it was not long before they moved to rely on cheap labour which was their most abundant resource.

Initial conditions, particularly infrastructure and education, mattered since a critical minimum in both was necessary to kick-start industrialization. To begin with, there were differences in levels between the Asian-14 attributable to different colonial legacies. In this respect, East Asia was much better endowed than South Asia. Of course, even if initial conditions were bequeathed by history, government intervention could, and did, improve that legacy, everywhere, most effectively in East Asian countries, followed by Southeast Asian countries, and then South Asian countries. But there was a third dimension to initial conditions, relevant even if less critical, which was some sort of manufacturing experience embedded in history. For some economies, this experience was pre-capitalist, coming from artisans or handicrafts, as in China, India, and Turkey. For other economies such as Indonesia, Malaysia, Singapore, Taiwan, and Thailand, this experience originated in migrants mostly from China but partly from India, while in Turkey it came from European migrants. But colonialism was also a source of manufacturing experience, from the British in India, Pakistan, Bangladesh, Sri Lanka, Malaysia, Singapore, and China, from the Dutch in Indonesia, from the Americans in Philippines, or from the Japanese in Manchuria (China), South Korea,24 and Taiwan. Such manufacturing experience, which might have made some difference in the earlier stages for countries, did exist in most of the Asian-14.25

The relative importance of, and emphasis on, external markets and external resources as compared with domestic markets and domestic resources, which is an important aspect of openness and industrialization, differed among the Asian-14. This was, in part, a function of the size of countries, but was also shaped by strategies and policies that changed over time. Yet, it is possible to classify the Asian-14 into four broad groups. There were several countries—Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam—where external markets and resources were much more important than domestic markets and resources. There were two economies—South Korea and Taiwan—that emphasized external markets and domestic resources. There were some countries—Bangladesh, Pakistan, and Sri Lanka—that relied mostly on domestic markets (p.140) but were significantly dependent on external resources. In the two largest countries—China and India—domestic markets and domestic resources were far more important than external markets and resources. In Turkey, too, domestic markets and domestic resources were more important, except for some reliance on external resources in the earlier stages.

Until the early 1970s, when industrialization was state-led, based on import substitution in the manufacturing sector, except in Singapore and Hong Kong, openness was restricted in most of the Asian-14. This situation was transformed by the early 1990s. Yet, there were differences in the nature and degree of openness across economies. It is possible to distinguish between four broad groups. There was unrestricted openness only in Singapore. There was moderated openness in Indonesia, Malaysia, Philippines, and Thailand, which meant largely open economies with few restrictions in some spheres. There was calibrated openness, in South Korea and Taiwan, characterized by asymmetries in openness by design manifest in strategic trade policy that was open for the export sector but restrictive for other sectors, with limits on openness to foreign capital and tight curbs on foreign brand names, which has been dispensed with since these countries have industrialized. There was controlled openness, in China, India, Pakistan, Bangladesh, Sri Lanka, Turkey, and Vietnam, which was much more extensive than in other countries, not only in trade but also with respect to foreign investment and foreign technology and that has been progressively liberalized since the early 2000s, although openness continues to be regulated in most of these countries.

There were different models of industrialization, in terms of the relative importance of the foreign sector, as the extent of reliance on foreign capital, foreign technology, and foreign markets differed across the Asian-14. The Southeast Asian countries—Malaysia, Philippines, Singapore, Thailand, and Vietnam—relied far more on foreign capital, foreign technology, and foreign markets. This is, of course, a general characterization, for there were domestic firms that were a part of the industrialization process in each of these countries. The East Asian economies—South Korea and Taiwan—relied on foreign markets but mobilized domestic resources and developed domestic technological capabilities, so that it was domestic firms that led the process of industrialization. The mega-economy model, followed by China and India, relied mostly on domestic markets, domestic resources, and domestic technologies in the earlier stages of industrialization but at later stages both countries joined the quest for external markets with a selective approach to foreign capital and foreign technology. The South Asian countries—Pakistan, Bangladesh, and Sri Lanka—relied mostly on domestic markets but were dependent on foreign capital (more foreign aid than foreign direct investment) and used foreign technology. Turkey sought to find a blend of domestic and foreign in capital, technology, and markets, which evolved over time, moving towards increasing openness in all three spheres.26

(p.141) It is essential to recognize the diversity of Asia reflected in forms of openness and paths to industrialization, which also changed over time. Even so, it seems that there are some discernible patterns in this diversity which make the task of cross-country analysis somewhat less difficult.

4. Paths to industrialization

It is clear that, during the past fifty years, industrialization has been a key driver of economic growth and structural transformation in most of the Asian-14. This role has acquired even greater significance in the past quarter century. Economic openness has performed a critical supportive role in the process, wherever it has been in the form of strategic integration with, rather than passive insertion into, the world economy. The guiding role of governments, as catalysts or leaders, has been at the foundation of success at industrialization. This success, although uneven across countries, has been remarkable. It would have been difficult to imagine in 1950, or even in 1970. In retrospect, this industrialization experience of Asia is often cited by scholars, with polar opposite ideological views, in support of their worldviews. It must be stressed that prescriptive, often oversimplified, generalizations which follow are misleading. The most important lesson from the Asian experience is that there are no magic wands: whether markets and openness or state intervention and controls. The paths to industrialization varied and the recipes for success were country-specific.

Interestingly enough, paths to industrialization were broadly similar across countries in Asia during 1950–1975, except in the city states of Hong Kong and Singapore, when most Asian countries sought to industrialize based on import substitution in the manufacturing sector with governments in a leading role. The actual industrialization experience of this era led to a mounting critique from orthodox economics.27 The essential argument was that industrialization policies, which protected domestic industries from foreign competition and led to excessive or inappropriate state intervention in the market, were responsible for the high cost and the low growth in most economies. Inward-looking policies driven by import substitution, particularly in the sphere of trade, were seen as the prime culprit. The prescription followed from the critique. More openness and less intervention would impart both efficiency and dynamism to the process. And outward-looking policies, particularly in the sphere of trade, were seen as the prime saviour, because trade policies were perceived as critical. This approach to trade and industrialization was narrow in its focus. It did not recognize that there is more to trade policies than the distinction between import substitution and export promotion, just as there is much more to industrialization than simply trade policies.28 This critique was juxtaposed with the impressive economic performance of South Korea, Taiwan, and (p.142) Singapore which was attributed to markets and openness. The unqualified enthusiasm for free(r) trade in mainstream economics, unmindful of the distinction between statics and dynamics, or the formal exposition of the free-trade argument in economic theory with its careful assumptions, proofs, and exceptions, was indeed puzzling.29 Heterodox critics argued that the characterization of these countries as free-trade and laissez-faire economies was caricature history, for their export-orientation was not the equivalent of free trade, just as the visible hand of the state was more in evidence than the invisible hand of the market.30 Thus, industrialization was not so much about getting prices right as it was about getting state intervention right.

It was also not recognized that this period, when protection or promotion was provided to domestic industry, witnessed rapid industrialization in Asia, with rates of growth in manufacturing output that revealed a sharp contrast with their past of deindustrialization from the mid-nineteenth to the mid-twentieth century, when they practiced free trade. Indeed, during this period, which coincided with the golden age of capitalism, industrial growth in Asia kept pace with that in industrialized countries. Of course, there were problems that surfaced. Infant industries did not come of age in many countries. Government interventions in the form of ‘operational controls’ tended to be ‘negative rather than positive’, or ‘discretionary rather than uniform’, without any co-ordination, which was akin to ‘driving a car with the accelerator pushed to the floor but the brakes on’, which served vested interests and incumbent firms (Myrdal, 1968, p. 925). It happened in India but not everywhere in Asia. Yet, this was also a phase of learning to industrialize, through developing managerial capabilities in individuals and technological capabilities in firms, to become competitive in world markets. Such learning takes time so that outcomes in industrialization surface with a time lag. This accounts for the acceleration of growth in manufacturing output in Asia that became visible in the early 1970s. It was not the magic of markets that produced the sudden spurt in industrialization. It came from the foundations that had been laid in the preceding quarter century.31 Obviously, it is not appropriate to focus on that earlier phase, 1950–1975, in isolation. In fact, an analysis of the Asian industrialization experience since then clearly shows that proactive industrial policy was instrumental in success.32

Industrial policy, in some form or the other, is an integral part of starting, as also sustaining, the process of industrialization in countries that are latecomers to development.33 It is essential for creating some initial conditions. It is necessary for creating enabling institutions. It is the basic foundation for the supportive role of governments, whether as leaders or catalysts. Such intervention can and does come in different forms at different stages of development. But industrial policy always matters, because industrialization is about learning-by-doing. The counterfactual validates this proposition. For some countries, in the past, deindustrialization was about unlearning-by-not-doing. For many countries, in the (p.143) present, the absence of industrial policy, which has adverse consequences for industrialization, is also industrial policy.

It is possible to think of industrial policy in Asia at the macro-level, meso-level and micro-level. This blurs the distinction between general and selective interventions but it reflects observed realities in practice. At the macro-level, for the economy as a whole, governments sought to foster industrialization through industrial protection and import substitution to manufacture for the domestic market or industrial promotion through export orientation to manufacture for the world market. The stress on the former in large countries was motivated by the object of learning to industrialize, not only in consumer goods but also in intermediate goods and capital goods, so that exports were the end of the market expansion path for firms. The emphasis on the latter in small countries was also motivated by the object of learning to industrialize, but with a focus on labour-intensive manufactured consumer goods, so that exports were the beginning of the market expansion path for firms. At the meso-level, for particular industries, government intervention sought to develop sunrise industries or retrench sunset industries. Strategic government support for industries to be developed was possible through a range of policy instruments. But the withdrawal of such support, always possible in principle, required effective governments in practice. At the micro-level, always for selected firms, government support in the domestic market, or in the world market, sought to nurture their managerial or technological capabilities, or encourage their horizontal and vertical expansion, so that they were able to realize scale economies, not only in production but also in marketing to develop global brand names and create large international firms. This was about picking winners and creating champions. The complexity of government intervention necessary increased progressively in moving from the macro-level through the meso- to the micro-level.

Success or failure, in terms of outcomes, depends upon the nature and the quality of intervention. Thus, industrial policy is no panacea. There are benefits and there are costs. However, outcomes are not binary. More often than not, outcomes are a mix of success and failure. This mix changes over time. Moreover, in the process of learning to industrialize, the costs surface earlier while the benefits accrue after a time lag. It follows that industrial policy must be assessed not at a point in time but over a period of time. The real question, then, is how to make industrial policy more effective for intended outcomes. It could slip into rents and patronage. Its success depends upon the nature of the state and the effectiveness of administrative systems. This, in turn, requires institutionalized control mechanisms. At the same time, the risks associated with industrial policy must be balanced against the risks associated with no industrial policy.

The pioneering success stories of industrialization in Asia during the past fifty years—South Korea, Taiwan, and Singapore—are striking examples of the critical importance of industrial policy.34 Governments in South Korea and Taiwan (p.144) intervened at the macro-, meso- and micro-levels. Trade policy was characterized by an asymmetry, as it was open for the export sector but restrictive for other sectors, while exchange rates were undervalued over long periods, so that domestic industries could become competitive in the world market for manufactured goods. The allocation of scarce investible resources to selected sectors was influenced by the strategic use of differential interest rates in South Korea and by tax credits in Taiwan. Both countries preferred to access foreign technology through licensing rather than foreign investment. Infant industry protection was progressively scaled down as domestic firms were induced to export so as to become competitive in world markets. For selected firms, governments sought to nurture their managerial and technological capabilities, foster their horizontal and vertical expansion, or encourage technological upgrading, so that they were able to realize scale economies and technological learning in production, without which their industrialization could have stopped at labour-intensive consumer goods as wages rose. This also helped realize scale economies in marketing, to develop global brand names and create large international firms such as Samsung and LG in South Korea (which was helped by a ban on the use of foreign brand names), or Foxconn in Taiwan. Singapore was somewhat different. It followed free trade and welcomed transnational corporations. However, while relying on foreign direct investment, it was selective, even strategic, in choosing the firms and the sectors. At the same time, it relied heavily on state-owned-enterprises, which still account for roughly one-fifth of GDP, as a means of influencing the shape of industrialization. In addition, the government owned nine-tenths of the land, which was used for strategic bargaining with international firms in pursuit of industrial policy objectives. In all three countries, successful industrialization was driven by industrial policy that was implemented by effective governments.

The more recent success story of industrialization in Asia is that of China, which adopted a gradualist approach in transition to a market economy, with some economic decentralization in its highly centralized political system.35 For one, it adopted a dual-track pricing system, which protected state-owned enterprises from market forces during the transition by allowing them to sell for profit while learning to compete in the market. For another, it attracted foreign direct investment into export-processing zones, using tax incentives, that were enclaves which provided an excellent infrastructure and disciplined workers, while encouraging domestic firms to set up in these zones to integrate with international firms and global value chains. Unlike South Korea and Taiwan, China relied far more on foreign direct investment and did not impose formal conditions in terms of export obligations or local sourcing. But it engaged in strategic bargaining with transnational corporations by using its high-quality infrastructure, disciplined skilled workers, and large domestic market as levers, to impose informal conditions on local sourcing, export commitments, or technology-transfer. Once such industrialization gathered momentum, the government turned its attention to the (p.145) strategic long-term objectives of building domestic managerial and technological capabilities, R&D capacities, vertical diversification, and technological learning. At a much earlier stage of industrialization, Vietnam is attempting to follow in the footsteps of China, using industrial policy to attract foreign direct investment and connect with global value chains to promote manufacturing for world markets.36 Both countries have effective governments that can implement industrial policy.

Apart from Singapore and Vietnam, the other Southeast Asian countries among the Asian-14 are Indonesia, Malaysia, Philippines, and Thailand.37 Over the past fifty years, the structural transformation of these economies, reflected in the changed composition of output and employment, the diversification of trade patterns, and the growth in manufacturing value added, suggests that industrialization has been impressive. Of course, there were differences among countries. Industrialization in Malaysia and Thailand made much more progress than in Indonesia, while Philippines lagged behind. There were also differences that have surfaced over time. Until around 2000, Malaysia, Thailand, and Indonesia, described as the second-tier NICs, were seen as success stories in the footsteps of the East Asian Tigers. In this phase, industrial policy and the guiding role of governments were important underlying factors. But, after the Asian financial crisis, the four economies have all experienced a distinct slowdown in industrialization and growth. Investment levels have dropped sharply. Industrial dynamism has waned. Growth in MVA per capita has slowed down significantly. It is plausible to suggest, though impossible to prove, why industrialization was not sustained. The growth in industrial output and manufactured exports was driven by foreign direct investment, in which low-cost docile labour was the prime attraction for global value chains. However, the proportion of domestic value added in the gross value of manufactured exports which was never high dropped further in this slowdown phase, surprisingly enough more in Malaysia and Thailand than in Indonesia or Philippines. Insofar as manufacturing was led by exports based on an assembly of imported components or parts, linkages with domestic economies were weak, while learning was limited. Consequently, these economies witnessed a horizontal spread of manufacturing activities rather than vertical diversification or technological upgrading. Clearly, industrialization in these countries could have sustained longer and progressed further if industrial policy had been more purposive and effective. Once again, Malaysia and Thailand are probably better placed than Indonesia and Philippines to revive the momentum of industrialization.

In comparison with East Asian countries, which have led the process of industrialization in Asia, and Southeast Asian countries, which simply did not match that performance, South Asian countries—India, Pakistan, Bangladesh, and Sri Lanka—were laggards in industrialization.38 During 1950–1980, industrial growth was impressive, as it was a real departure from deindustrialization in the colonial era, but its quality and sustainability were subjected to question. (p.146) It was not cost-efficient, largely because infant industries did not grow up to become competitive in world markets. The implementation of industrial policy, even if well-intentioned, left much to be desired. Myrdal’s concerns about the nature and effectiveness of state intervention in South Asian countries were broadly correct. This might have been a phase of learning to industrialize that laid the foundations. However, for subsequent, more successful industrialization, economic reforms and increased openness, beginning around 1990, also did not lead to the expected turnaround in performance, simply because governments never used industrial policy to upgrade the economy. In fact, industrial policy was abandoned in the hope that markets would do the trick.

In the pursuit of industrialization, the performance of Pakistan was perhaps the worst, in terms of vertical diversification of industrial production or trade patterns, while growth in MVA per capita was the slowest. Sri Lanka’s performance was much better in terms of growth in MVA per capita and manufactured exports, made possible by an increased openness, leading to some integration with global value chains, particularly in garments. However, it could have done far better since, in terms of social indicators of development, fifty years ago, it was more like Southeast Asia than the other South Asian countries. It did not, possibly because of the prolonged civil war. Bangladesh made impressive strides in industrialization from 1980, reflected in the sustained growth in MVA per capita, plus rapidly rising shares of manufacturing in GDP and of manufactures in merchandise exports. The garments sector was the driver, in whose development industrial policy played a critical role. Bangladesh, which had preferential access to quota-protected markets as a least-developed country, entered into an agreement with the South Korean firm, Daewoo, to transfer a percentage of future sales revenues to Daewoo if it could create export capabilities in its Bangladesh partner-firm Desh. The rents so promised were a credible incentive. Desh became a competitive global firm. Its supply-chain model was imitated by thousands of Bangladeshi entrepreneurs leading to an explosive growth in the garments sector.39

The story of industrialization in India is complex. It would mean too much of a digression to enter into a discussion here. Even so, it is important to recognize that the essential foundations were laid during 1950–1980 as India learnt to industrialize (Lall, 1987). There were limitations implicit in the implementation, rather than the design, of industrial policy during that period. Yet, peak shares of manufacturing in GDP and manufactures in merchandise exports were attained before economic liberalization. It is ironical that increased economic openness, beginning in 1991, seems to have worsened, rather than improved, India’s performance in industrialization. Clearly, economic openness, while necessary, was not sufficient. The government almost dispensed with industrial policy without creating the conditions or the ecosystem that might have enabled the manufacturing to become competitive in world markets. The pace and the sequence of import liberalization, followed by the rush to join free-trade agreements, led to the (p.147) beginnings of some deindustrialization. It is time to rethink and revive industrial policy, which requires a co-ordination not only of trade, investment, and technology policies, but also of interest rate and exchange rate policies, in shaping degrees of economic openness to achieve the desired objectives.40

In this context, it is worth pointing out that industrial policy was responsible for three success stories of industrialization in India: pharmaceuticals, automobiles, and software.41 The industrial policy might have been intended for a different purpose in pharmaceuticals, so that the outcome might have been unintended, but it was intended, by design, in automobiles and software. This is seldom recognized. Consider each in turn.

The Patents Act of 1970 in India stipulated that, in pharmaceuticals, product patents would no longer be admissible and only process patents would be allowed. This was a real boost for the pharmaceuticals sector, which was enabled to produce medicines at affordable prices for domestic consumers, in conformity with the object of the legislation. Over the next three decades, beginning with exports, and followed by R&D, India’s pharmaceutical firms developed technological capabilities that made them competitive in world markets, transforming India into a pharmacy for the developing world, well before the TRIPS agreement led to an amendment of the Patents Act to allow product patents.

In 1982, the government in India entered into an agreement with the Japanese firm, Suzuki, to enter the highly protected domestic automobile industry provided it produced a car in India with 70 per cent domestic content within five years. Maruti-Suzuki was established as a joint venture in 1982.42 And there was no question of the capacity of the state in India to enforce this condition. Suzuki knew that if the condition was met, there would be very high profits from the lucrative domestic market that was bound to grow over time. It made the investment to develop the auto-components sector, which became globally competitive within a decade. This enabled India to transform its automobile industry and develop its own branded cars. In 2016, India produced 4.5 million motor vehicles, of which it exported 0.9 million.43 Suzuki rapidly recovered its costs of financing through the learning period, became the majority shareholder, continued to earn lucrative profits, and built a global reputation as a manufacturer of cars.

India imposed a ban on IBM in 1977. This led to the development of computer maintenance skills. By the mid-1980s, software development began life, driven by the domestic market to begin with, followed by exports soon after in an arrangement with Texas Instruments. In 1991, the government established Software Technology Parks of India as a society to encourage and promote the export of software from India. Domestic firms could be located anywhere in India and were provided with direct satellite links. The government also exempted profits earned in software exports from income tax. This exemption continued from 1991 to 2011. In the late 1990s, there were close consultations between industry and government to chart out a road map for next steps. Software exports boomed, (p.148) to reach US$111 billion in 2016, as compared with total merchandise exports at US$275 billion.44

Clearly, success at industrialization in Asia was driven by sensible industrial policy that was implemented by effective governments. There is, of course, a danger that the very success of the Asian-14 might lead them into dead-ends or middle-income traps, unless they can diversify manufacturing, in vertical rather than horizontal spreads, and upgrade technologies. In countries lagging behind, effective industrial policy will also require human capital and institutional quality as prerequisites. Going forward, industrial policy will need to be creative, recognizing the implications of technological changes on the horizon for labour-intensive manufactured exports, and the increasing interdependence between manufacturing and services.

5. Technology, learning, and industrialization

In the ultimate analysis, catching up is about making a transition from being a developing country to becoming an industrialized country. The simple litmus test is whether a country is able to make a transition from imports through absorption, adaptation, and diffusion of technologies, to innovation, so that it advances the technology frontier in some, even a few, industries or sectors. Thus, countries that are on the path to industrialization only through integration into global value chains cannot sustain the process. Of course, it could be an important first step in technological learning. However, unless they move up the technology ladder, they would be stuck with assembly operations or manufacturing simple components. In this sense, South Korea, Taiwan, and Singapore have completed the transition. China has moved up the technology ladder rapidly, in terms of R&D and technological capabilities, particularly in the defence sector and in robotics. It is almost there. India suggests a potential. It is competitive in information technology. It can build and launch satellites into space. Yet, it has not arrived at the technology frontier to lead innovation in any domain. The other countries have miles to go.

In an analysis of technology for industrialization in developing countries, Lall (1992) made an important distinction between firm-level technological capabilities at the micro-level and national technological capabilities at a macro-level. Firms operate not on a production function but at a point so that their technical progress, building upon their own efforts, experience, and skills, is localized around that point (Atkinson and Stiglitz, 1969). Thus, evolutionary theories, which stress investment capabilities, production capabilities, and linkage capabilities, provide a plausible explanation of firm-level technological change, which is a continuous process of absorption, learning, and innovation (Nelson and Winter, 1982). Given the nature of the learning process, such capabilities are (p.149) both firm-specific and path-dependent (Rosenberg, 1994).45 However, technological development in firms at the micro-level is also shaped by technological capabilities in the economy at the macro-level. National technological capabilities are the outcome of a complex interaction between incentives, capabilities, and institutions. Each may suffer market failure and so require corrective intervention. Such interventions, which need careful formulation and application, are necessary for industrial success (Lall, 1990, 1991 and 1992). It becomes possible for late industrializers to complete the transition once they develop technological capabilities both at the micro-level in firms and at the macro-level in the economy. The process of technological learning and the development of technological capabilities at different levels—firms, sectors and economies—are closely intertwined.46

R&D is a significant, observable, underlying factor that shapes technological capabilities in firms at the micro-level and economies at the macro-level. Table 5.10 sets out evidence on R&D expenditure as a percentage of GDP in the Asian-14 for selected years during 1996–2015. It reveals that South Korea, Taiwan, and Singapore were definitely comparable with, if not better than, industrialized countries in their R&D effort. In fact, in 2015, at 4.22 per cent, South Korea had almost the highest R&D–GDP ratio in the world, compared with 3.28 per cent in Japan, 2.92 per cent in Germany, 2.72 per cent in the United States, and 2.27 per cent in France.47 It is no surprise that South Korea, Taiwan, and Singapore joined the league of industrialized nations in terms of technological capabilities. (p.150) China increased its R&D–GDP ratio from 0.56 per cent to 2.06 per cent in just two decades. By doing so, it is catching up in technological capabilities. It is worth noting that India, the other country among the Asian-14 with a technological potential, regressed in terms of its R&D–GDP ratio, which was higher than that of China in 1996 but was less than one-third that of China in 2015, so that its falling behind in industrialization is no surprise.

Table 5.10 R&D expenditure as a percentage of GDP for the Asian-14

1996

2000

2005

2010

2015

China

0.56

0.89

1.31

1.71

2.06

South Korea

2.26

2.18

2.63

3.47

4.22

Taiwan

1.80

2.06

2.30

2.80

3.05

Indonesia

0.07

Malaysia

0.22

0.47

1.04

1.30

Philippines

0.11

Singapore

1.32

1.82

2.16

2.01

Thailand

0.12

0.24

0.22

0.62

Vietnam

0.44

Bangladesh

India

0.65

0.77

0.84

0.82

0.62

Pakistan

0.13

0.44

0.25

Sri Lanka

0.18

0.14

0.14

0.11

Turkey

0.45

0.47

0.57

0.80

0.88

Note: R&D expenditure is made up of domestic expenditures on research and development. This includes both capital and current expenditures in the four main sectors: business enterprise, government, higher education, and private non-profit. R&D covers basic research, applied research, and experimental development.

Source: UNESCO, Institute of Statistics, online database. The statistics for Taiwan are obtained from Taiwan Statistical Data Book.

In order to examine the implications for other latecomers to industrialization, it is important to consider the foundations of technological capabilities and the common policy dilemmas which surface (Nayyar, 2011). In such an exercise, some general lessons from the industrialization experience of the Asian-14 are instructive.

The level of technological development and the capacity for innovation are often country-specific, sector-specific or context-specific. Yet, there are discernible similarities in the essential foundations. First, an emphasis on higher education and science research in the early stages of industrialization created the initial conditions. This development of human resources laid the foundations of capabilities in individuals at a micro-level. Second, import substitution in manufactured goods, or manufacturing for world markets (beyond integration into global value chains), with some special effort to establish a capital goods sector, recognized the importance of learning-by-doing. Such learning was critical in the endeavour to industrialize for it created technological capabilities in firms at a meso-level. Third, industrializing late required institutional mechanisms, which were neither mutually exclusive nor exhaustive, to support catching-up. There was an attempt to foster imitation and leapfrog on the part of domestic firms, sometimes with explicit or implicit lax systems for the protection of intellectual property rights. This was often juxtaposed with a proactive technology policy in the form of strategic interventions by the government. Economic policies in the sphere of international trade and international investment were used to promote the insertion of domestic firms into global value chains. Once domestic firms became competitive in world markets, policy regimes were modified so that the acquisition of foreign firms also became a means for the acquisition of foreign technology (Nayyar, 2008). Such mechanisms were meant to create national technological capabilities at a macro-level.

The industrialization experience of the Asian-14 suggests that each of them faced some common policy dilemmas. The most important of these was striking a balance between imports of technology and indigenous technological development. There were instances where import of technologies was followed by stagnation, rather than adaptation, diffusion, and innovation at home. There were instances where indigenous technological development did not lead to widespread diffusion, let alone up-gradation. In such situations, market structures and government policies did not combine to provide an environment that would encourage the absorption of imported technology and speed up the development of (p.151) indigenous technology, or create a milieu that would be conducive to diffusion and innovation. Even so, an open regime for the import of technology is not an answer, for the discipline of the market cannot restrain the recurrence of such imports by domestic firms time after time. Such firms are much like the schoolboy, who can find someone else to write the examinations for him year after year and thus never learns. Domestic technological capabilities may not emerge either because there is no incentive to learn (imports are possible) or because they are stifled (imports are better). The problem may be accentuated in sectors where technical progress is rapid and obsolescence is high. There are two other common dilemmas. For one, it is difficult to foster the culture of R&D in domestic firms. This is not automatic. It needs incentives, embedded in industrial policy, for start-up and scale-up. For another, it is difficult to develop synergies between science and industry that transform scientific knowledge into marketable products. This is not automatic either. It needs institutional mechanisms to build bridges between the two worlds. Every latecomer to industrialization, at every stage in history, has confronted these dilemmas. Each has attempted to address the dilemmas in different ways. The countries that have succeeded in industrializing late, and making the transition from importation to innovation, from know-how to know-why, have done so by resolving these dilemmas.

Notes:

(1.) See Myrdal (1968, volume II, chapter 13).

(2.) In this context, it is worth noting that the rise in Asia’s export–GDP ratio in 1980, as also in 2000, was attributable to the spike in world oil prices, since its import–GDP ratio and its share of world imports in both 1980 and 2000 was much lower.

(3.) This is reflected in the peaks in Indonesia’s export–GDP ratios, as well as its share of world exports, in 1980 and 2000, while its import–GDP ratio, and its share of world imports, in those years was far lower.

(4.) World trade is defined as the merchandise exports plus merchandise imports and these shares of countries have been calculated from US dollar values in current prices at market exchange rates.

(5.) It is worth noting that a significant proportion of Asia’s merchandise trade was trade within Asia. For an analysis of intra-Asia trade, see Chapter 8.

(6.) For a detailed discussion on the factors underlying the much-enhanced possibilities of international trade in services, see Nayyar (1988).

(7.) During 1961–1970, this proportion would have been much higher in Taiwan, and just as high in Vietnam, but data on gross capital formation are not available. In that decade, the average annual gross aid inflow was $104 million to Taiwan and $321 million to Vietnam, compared with $316 million to South Korea and $219 million to Indonesia.

(8.) For a discussion on the emergence of large international firms from Asian countries, see Chapter 8.

(p.253) (9.) For an analysis of the economic implications and consequences of such portfolio investment flows to Asian countries, see Chapter 8.

(10.) See Myrdal (1968), volume II, chapter 24.

(11.) The discussion on industrialization in this chapter treats it as synonymous with manufacturing, so that it excludes mining, construction, and utilities, which are a part of the industrial sector in national accounts statistics.

(12.) It should be noted that the peak levels reported here are based on statistics for the selected benchmark years in Table 5.7. Time-series data might yield different peak levels and peak years.

(13.) These percentage shares have been calculated from UN National Accounts Statistics.

(14.) Between 2000 and 2016, the share of the United States, the European Union, and Japan, taken together, in world manufacturing value added dropped by 22.5 per cent, while the share of China rose by 19.5 per cent and that of other Asian countries rose by 11 per cent.

(15.) For an analysis of the industrial slowdown in Southeast Asian countries, see Chang and Zach (2019).

(16.) These peak levels are based on data for selected benchmark years in Table 5.8. Peak levels and peak years might be different with time-series data.

(17.) In fact, the import content of such manufactured exports (particularly in computer, electronic, and optical equipment) was very high (Table 5.9). Thus, in 2016, the share of medium- and high-technology manufactures in the total imports of these three countries was also rather high at 55–60 per cent.

(18.) This earliest phase is analysed by Helleiner (1973) and Nayyar (1978).

(19.) See Helleiner (1973), Sharpston (1975), and Nayyar (1978).

(20.) The location decision of transnational corporations was strongly influenced by perceptions of political stability and labour docility (Nayyar, 1978).

(21.) There is a growing literature on this subject. See, for example, Feenstra (1998), Humphrey and Schmitz (2002), Kaplinsky (2005), and Gereffi et al. (2005), Milberg and Winkler (2013), UNCTAD (2013), Gereffi (2018), and Nathan et al. (2018).

(22.) Calculated from the OECD–WTO TIVA database, which also provides statistics on the dollar values of exports. For the eleven countries in Table 5.9, in 1995, the gross value of total exports from these three sectors was $259 billion while the gross value of total manufactured exports was $512 billion. In 2011, these figures were $1,349 billion and $3,246 billion respectively. In the eleven economies, the percentage shares of the three sectors, taken together, in the gross value of total manufactured exports in 1995 and 2011 respectively were: China (46 and 48), South Korea (56 and 41), Taiwan (47 and 51), Indonesia (34 and 22), Malaysia (44 and 41), Philippines (69 and 51), Singapore (58 and 36), Thailand (39 and 29), Vietnam (54 and 36), India (37 and 18) and Turkey (45 and 33); these percentages have been calculated from statistics in dollar values reported in the OECD–WTO TIVA database. There was a decline everywhere except for China and Taiwan. While these changes over time might just reflect a change in the composition of manufactured exports, the different levels across countries probably reflect differences in the degree of engagement with global value chains.

(23.) For an analysis of the rising domestic content in China’s manufactured exports, using firm-level and customs transaction-level data, see Kee and Tang (2016). It is plausible (p.254) to suggest, though impossible to establish, that the rising domestic value added in China may have been a factor underlying the slowdown in such world trade.

(24.) Interestingly, North Korea was far more industrialized, and richer, than South Korea, as industrialization under Japanese colonialism was concentrated in the former.

(25.) The significance of past manufacturing experience is emphasized by Amsden (2001). But this is an overstated hypothesis. For a discussion, see Nayyar (2013).

(26.) For an analysis of major policy shifts over time in Turkey, starting 1950, see Önis and Senses (2007).

(27.) See, for example, Little et al. (1970), Bhagwati (1978), and Krueger (1978).

(28.) For a more detailed discussion, see Nayyar (2013). See also Helleiner (1992) and Nayyar (1997).

(29.) For a critical evaluation, see Diaz-Alejandro (1975), Krugman (1987), and Nayyar (1996).

(30.) See Amsden (1989), Wade (1990), (Lim, 1995), and Chang (1996) who provide systematic evidence on the proactive role of the state in these countries.

(31.) In this context, it is important to note that much the same can be said about industrialized countries, where industrial protection and state intervention were just as important, at earlier stages of their development when they were latecomers to industrialization (Chang, 2002; Reinert, 2007).

(32.) For an analysis, with supporting evidence, see the companion volume (Nayyar, 2019). See, in particular, Chang and Zach (2019), Kozul-Wright and Poon (2019), Wade (2019), Khan (2019), Nayyar (2019b), Lin (2019), and Montes (2019).

(33.) There is a vast literature on industrial policy. See, for example, Reich (1982), Pinder (1982), Johnson (1984), Lindbeck (1981), Landesmann (1992), Chang (1996), and Noman and Stiglitz (2017).

(34.) For an analysis, with supporting arguments and evidence, see Chang and Zach (2019) and Wade (2019). See also Amsden (1989), Wade (1990), Ranis (1992), Lim (1995), Chang (1996), Lall (1997), Chang (2004), and Nayyar (2013 and 2017).

(35.) For a detailed discussion on strategies and policies for industrialization in China, see Lin (2012 and 2019), Kozul-Wright and Poon (2019) and Chang and Zach (2019).

(36.) See Tarp (2019).

(37.) Industrialization and development in these countries is analysed at some length in Montes (2019). It is also discussed in Chang and Zach (2019). See also Jomo (2001a) and Coxhead (2015). There are, in addition, several studies on country experiences: Indonesia (Hill, 1996; Booth, 1998), Malaysia (Jomo, 1993; Rasiah, 1995), and Thailand (Lall, 1998).

(38.) For a discussion on economic development in South Asia in the companion volume, see Basu (2019) on India, and Osmani (2019) on Pakistan, Bangladesh, and Sri Lanka. On India, see also Chaudhuri (2002), and Nagaraj (2003, 2016).

(39.) For an analytical narrative, see Khan (2019), who cites this as an example of a ‘political settlement’ in which Daewoo had a credible assurance of potential ex post rent if it could deliver on its commitment to impart export capabilities in garments to its partner firm Desh.

(40.) For a more detailed discussion, see Nayyar (2017b).

(p.255) (41.) For a narrative of, and discussion on, developments in these sectors, see Chaudhuri (2005) on pharmaceuticals, Bhargava (2013) on automobiles, and Balakrishnan (2006) and Karnik (2012) on software.

(42.) To begin with, the ratio of equity held by the government and Suzuki was 74:26. Suzuki had the option to increase its equity to 40 per cent after five years (on meeting the condition), which was exercised in 1987. The company was listed in stock exchanges in 1992 with equity shares at 50:50. Suzuki became a majority owner in 2002 with 54 per cent equity. In 2007, the government sold its equity in the market.

(43.) Statistics published by the Society of Indian Automobile Manufacturers (www.siamindia.com). Passenger vehicles produced and exported were 3.8 million and 0.8 million respectively, while the rest were commercial vehicles.

(44.) Statistics published by the National Association of Software and Services Companies (NASSCOM) and the Ministry of Commerce.

(45.) For this reason, the heterodox literature places the acquisition and development of technological capabilities centre-stage in the story of success at industrialization. See, for example, Pack and Westphal (1986), Lall (1987), Dahlman et al. (1987), Amsden (1989), Lall (1990), and Bell and Pavit (1993).

(46.) The literature on this subject is limited. For a perceptive analysis of learning, situated in a wider context, see Stiglitz and Greenwald (2014).

(47.) These figures are from the OECD online database on R&D expenditure. In 2015, the highest R&D–GDP ratio in the world was in Israel at 4.25 per cent, while averages for the OECD and for the EU-28 were 2.34 per cent and 1.96 per cent respectively.