East Asian Industrialization and the Third World
by Kassian Polin
Stellar growth, rising living standards, and escalating international competitiveness in the economies of East Asia have captured the attention of policymakers and researchers in other Third World countries. Much has been made in recent years of the differences between the patterns of development in East Asia and those in Latin America, Africa, and the Caribbean. The remarkable success of the East Asian “miracle countries” has left a deep imprint on scholars and policymakers. Latin America achieved independence more than a century before many East Asian countries, although the latter had a much briefer colonial experience. By the time East Asian trailblazers such as South Korea and Taiwan gained independence after World War II, many Latin American countries had had far higher standards of living and levels of industrialization, urbanization, education, and health. By the 1980s, however, East Asia had overtaken even the more developed countries of Latin America such as Argentina, Uruguay, and Chile, and those in Africa and the Caribbean. This article will analyze the patterns of economic development in these regions, and attempt to draw conclusions about this disparity in the pace of industrialization.
In the 1930s, decades of economic malaise in Latin America prompted many local intellectuals to question the soundness of the Western theory of comparative advantage, and by extension, the neo-classical development model. Raul Prebisch, the renowned Argentinean economist, complained that industrialized countries such as the U.S. and those in Europe depressed prices in the region by buying substitutable goods elsewhere and producing surplus materials for export themselves. Third World countries, including those in Latin America, began to call for growing Keynesian state intervention to stabilize local industries and provide jobs. Prebisch, who was the Director-General of the newly founded United Nations Economic Commission in Latin America (ECLA) in 1948, declared that the theory of comparative advantage was responsible for Latin America’s widespread poverty and for the area’s dependence on industrialized nations.
Concluding that a long-term trend exists for the terms of trade to be unfavorable towards the primary-good exporting periphery, the ECLA advocated a policy of import substitution industrialization (ISI), in which development was to move from an export-oriented economic model towards one more focused on inward-directed growth. Prebisch, in criticizing the U.S. and Europe for refusing to purchase commodities from the region, called on Latin American governments to impose high tariffs for cheap imported goods, encouraged local producers to industrialize and launched a new phase of development based on heavy industry producing durable consumption and capital goods. Argentina, under Juan Peron, was the first Latin American country to adopt ISI, with Chile, Brazil, and Mexico closely following behind. African countries also began to pursue the ISI path afterwards, and the much vaunted export orientation and market liberalization that have been hallmarks of the East Asian newly industrialized countries (NICs) were preceded by an ISI strategy as well.
In analyzing the resounding success of economic development in the East Asian region – starting with Japan in the 1960s and the four “little tigers” of Hong Kong, Singapore, Taiwan, and South Korea – neoclassical theorists have argued that these governments employed market-based development strategies combined with an outward orientation of trade, known otherwise as a non-interventionist strategy. In certain respects, these aspects echo the principles laid out by the neoliberals. However, an obvious ingredient in the East Asian development recipe has been an interventionist state, to a degree that would give pause to most neoclassical economists. In South Korea, for instance, the state protected selected industries based on comparative advantage through tariffs and quotas, nurtured them through export subsidies and subsidized credit, steered firms towards new forms of production, set export targets and rewarded those firms that met or surpassed them. The government also owned and controlled all commercial banks and used them to direct funds towards favored industries. It limited the number of firms allowed to enter an industry, set controls on prices and capital outflows, and distorted prices to favor certain industries. Many preceding ISI efforts of the Third World did not provide incentives for export activities, which led to enormous wastage of resources and uncompetitive industries.
The failure of the African ISI experience is telling. The severity and breadth of protective industries in Africa were amply demonstrated by the interest rate and exchange rate policies that attempted to subsidize all domestic investors and importers respectively. Government interventions by East Asian countries, in accordance with ISI, were less severe and more targeted at specific industries such as textiles, industrial chemicals, iron, and steel. East Asian countries allowed domestic competition and prices to adjust to market forces within the limits of existing policies. For example, even though South Korea institutionalized its pre-eminence over the private sector through its nationalization of commercial banks, the control over foreign loans, the screening of technology imports and the like, as well as the private sector’s role as the principle vehicle of growth were firmly adhered to.
In addition, African countries did not have a genuine agenda for ISI. Many of them did not provide the private sector sufficient opportunities to develop industries so as to benefit from protection against imports. Some countries even had just as many barriers against the growth of their domestic private sector as they had barriers to international trade. The result was an increased monopoly by the government and its institutions. In fact, it can be debated whether ISI actually occurred in Africa at all. The development strategy did not reduce the need for imports, especially when many local factories were highly dependent on foreign inputs. Due to the shortage of foreign exchange, it was not possible to meet import demand. When the African industrial sector expanded too rapidly relative to the growth of the foreign-generating sectors, the terms of trade moved against many sub-Saharan African countries, particularly the non-oil-producing countries. The foreign exchange crisis cut the flow of imports to a trickle. In short, African countries paid the costs of pursuing import substitution without reaping the benefits.
In the 1960s, the dysfunctional state of the education system due to the lingering effects of European colonialism, and foreign control of the most economically productive areas in the majority of African countries were also decisive factors that hindered the region’s economic development. The unequal class structure created by British colonialism was preserved. The provision of education was reserved only for the privileged, who had a tendency to migrate to the industrialized West in search of a better life. The state had few resources to set up technical and vocational schools, putting many Africans at a competitive disadvantage. In addition, Africa was saturated with low-skilled European expatriate workers who were paid with foreign exchange. Europeans maintained control of the most productive economic sectors on the African continent. With the non-existence of substantial manufacturing industries, Africa continued to engage in cash-crop-based Eurocentric trade. This guaranteed that the continent remained a massive exporter of foreign exchange at the expense of local employment and investment, as Europeans continued to expropriate profits instead of investing them in the local economies. Africa, in short, achieved political but not economic independence.
During the period of postwar economic development, significant government taxation of the agricultural sector occurred in many developing countries to provide the resources to initialize state-led industrialization. East Asian countries, however, successfully pursued a combination of ISI and export industrialization (EI), while others did not. The East Asian NICs achieved rapid economic growth through an aggressive strategy of EI – not the traditional primary commodity exports, but new manufactured exports. Manufacturing in each society started with textiles and then progressed to products embodying higher technology, such as electronics and automobiles. The initiative for this growth came from the private sector, while states directed resources where they were most needed. East Asian public resources were utilized in the construction of extensive agricultural infrastructure such as safe water, sanitation and electricity and the like in both the urban and rural areas, at a pace that far outstripped their Latin American and sub-Saharan counterparts. With the rapid development of high-yield crop varieties made possible by improvements in irrigation, the green revolution in East Asia resulted in a significant rise in land productivity for rice and maize during the 1970s. Africa’s lack of infrastructure minimized the beneficial impact of the agricultural breakthrough. In Mexico, only rich farmers were able to adopt new varieties, while high-yielding maize was never diffused among poorer farmers due to an absence of government support for irrigation and other inputs.
Labor market economics and the origins of business groups also provide clues to the success of East Asian economic development. Given that labor markets are usually seriously distorted in developing countries, Latin American and African markets were distorted through institutional wage-setting (minimum wage-legislation) and by labor market activism. In contrast, their East Asian counterparts were more flexible due to weaker enforcement of legislated wage levels, the smaller role played by public sector employment, and in some countries such as South Korea and Singapore, political repression of labor unions. As a result, there was a tendency for the rate of corporate profit and hence the level of saving within the region’s industrial sectors to be higher than those in other areas. This translated into greater rates of investment in local economies, which contributed to economic development. In Latin America, many large business groups came from businesses established by European immigrants, often with special technological knowledge and with backgrounds in multinationals. Landed elites with huge wealth bases in agriculture were uninterested in setting up manufacturing industries. In East Asia, however, business groups advanced up the industrial chain as production shifted from agriculture to transportation and storage, diversifying into banking and other financial activities, and finally into modern manufacturing.
To understand East Asia’s successful ascent up the industrial chain, the nature of the state must be put in perspective. The weakness of the Latin American state, as contrasted with the widely touted “strong” states of East Asia, is due to the fact that Latin America entered modernity much earlier than many East Asian nations, in the context of restricted enclaves. The early insertion of the primary-good-exporting Latin American economies into the global economy, combined with the pattern of industrialization that attempted an idiosyncratic internalization of the experience of the United States, did not result in self-sustaining development. A consistent pattern of exuberant consumption, heavily skewed in favor of urban elite groups at the expense of the rural and lower-income majorities, industrial sectors geared primarily towards the domestic market, as well as the dubious leadership provided by national industries, all conspired towards the weakness of the Latin American state. In contrast, the smothering of local entrepreneurial talent in the wake of revolutionary turmoil in the light of Japanese imperialism, as well as state-led reform to pacify peasant upheaval in a chaotic postwar environment, led to the relative absence of industrial and agricultural entrenched interests in East Asian economies such as South Korea and Taiwan. This East Asian sequencing of land reform as a prerequisite for industrialization, which reversed the sequence in Latin America, effectively equalized incomes more than in most developing countries. It also enabled the emergence of effective interventionist states that were supported by the extensive agricultural and industrial infrastructure that the Japanese provided, which stood in stark contrast to the enormous amounts of disinvestments European colonial powers undertook in their Latin American and Caribbean colonies. In addition, East Asian nations were assisted by the United States, which sought to build up their industrial capacities to help contain the Soviet Union during the Cold War. Washington provided tax relief to U.S. companies when they set up shop in East Asia. From schools to shipping industries, American transfers of capital and technical know-how to East Asian nations produced cloned industries that greatly assisted in the region’s industrialization.
East Asian nations produced forceful states that were somewhat isolated from societal pressures. One should realize, however, that the impressive economic achievements of such countries as Singapore and South Korea have not come from dictatorial, repressive measures or oppressive labor policies. Domestic resources were mobilized mainly through free market-type price mechanisms, while the state created a viable environment for effective entrepreneurship. The framework of economic policy-making was successfully isolated from the clientelist demands of the political process. The institutional infrastructure of East Asia included well-oiled local self-governing units, national extension service and community development programs. These, in turn, produced experienced, dedicated political leaders who could plan and execute long-term development policies conducive to national economic development. Indeed, democratic decentralization, which aims at “political socialization” together with economic development, is, of course, not without inherent contradictions. The delegation of substantial decision-making to local authorities does bring about what the political scientist describes as “a fusion of national and local interest,” rather than weakening the state or central government. This political device alone helped East Asia to close the wide gap in institutions afflicting many developing countries. Their weak institutions of local self-government, plagued by petty politics, parochial loyalties, and a lack of independent sources of finance, have been a constant impediment to many Third World countries.
The Caribbean inherited many of the European colonial structures that Latin America and African countries were saddled with, and thus shared many problems with those regions which were absent in East Asia. Due to the fact that through their historical development the best land belongs to vested interests of an often foreign-based plantocracy, most Caribbean nations are dependent on food imports. In the context of their democratic regimes, a comprehensive land reform which would promote self-sufficient food production seems unlikely. Thus, valuable foreign exchange continues to go into food imports and the continuation of widespread rural poverty means that the size of the domestic market is not maximized. This is only exacerbated by the fact that insular Caribbean nations have much smaller populations than most East Asian countries. In addition, the international economic environment during the 1950s and 1960s was significantly more conducive to late developers than it is today. There is general agreement that protectionism has sharply increased in both agriculture and manufacturing, despite, and sometimes because of, the latest General Agreement on Tariffs and Trade (GATT) agreement.
Developing countries today are not allowed to protect their infant industries – as East Asia was – against superior international competition. The example of the Brazilian hardware industry serves as a stark reminder of investments destroyed by international economic coercion. The industrial structure of Caribbean economies has been affected by the recent neoliberal globalization – enforced by structural adjustment exercises, bilateral assistance programs and new multilateral agreements – in a peculiar way. The Caribbean Basin Initiative, which was touted as a means to boost Caribbean business through the provision of free-trade zones (FTZs), was to effectively provide a cheap-labor site for U.S. businesses. Contrary to the earlier East Asian experience where exports to the U.S. were mainly wholly manufactured products, Caribbean FTZ exporters are encouraged to be involved with low-tech, low-skill component assembly work, with the components themselves mostly produced outside of the region. Seen in this light, by no means have liberalization, privatization and the opening up of Caribbean domestic economies meant anything close to East Asian-style industrial development, as advocates of these policies in the international aid agencies and most Western governments have claimed.
Ultimately, there were many factors that enabled East Asian economies to slowly but steadily ascend the industrial chain, while the majority of Latin American, African, and Caribbean nations were not able to do so concurrently. Although there is no single path to development that fits every country, the recognition of institutional diversity does not accept the argument that there are no lessons to be gleaned from the East Asian experience. It is feasible and enlightening to identify some of the major principles involved, and to adapt the policy tools and institutional means used to fit local conditions elsewhere, and invent new measures if necessary.
Kassian Polin(‘05) is a final year student at Brandeis University majoring in International & Global Studies and Economics, and minoring in Social Justice and Social Policy.