6.

7: OTHER TRANSITION ISSUES

Well, it is true that majority of the Southeast Asian countries were able to make the transition to higher
value-added products as quickly and as effectively, they are still that did not make it just like in the case
of Indonesia and Thailand.

In the case of Indonesia:

1. Dependence on natural resources: Indonesia's economy has traditionally been dependent on

natural resources, such as oil, gas, and minerals. This has meant that there has been less
emphasis on developing other sectors of the economy that could produce higher value-added
products.

2. Late start in the industrialization process: And this due like Political Instability, Limited Human
Capital, Infrastructure Challenges, etc.

3. Low Level of Education and Skill: These two factors, unfortunately, is relatively low compared to
other countries in the region. This can limit the ability of Indonesian companies to innovate and
produce higher value-added products.

In the case of Thailand:

1. Education and Human Capital: Thailand's education system has struggled to produce workers
with the skills needed to support more advanced manufacturing processes. While the country
has a large and growing workforce, many workers lack the technical and managerial skills
needed to support high-tech industries.

6.8: THE ASIAN EXPERIENCE WITH INDUSTRIALIZATION

After all, we can ask ourselves how did the growth rate of the economies of Hong Kong, Korea, and
Taiwan, along with Singapore – better known as the Asian “tigers” or NIEs (Newly Industrialized
Economies) – grew at a faster rate than any other economy or group of economies had in history?

The reason:

The BRUTE FORCE APPLICATION or MARKET POWER of a simple Harrod – Domar growth model
augmented by the growth of the population and highlights the role of government policies in facilitating
the process; hence, the Asian “miracle.”

It should be recalled that the model Harrod – Domar focuses on savings and investment. But the
Tigers went beyond the model by also prioritizing the growth of their population, education, and
technology PLUS government interference. They recognized that: growing population could
provide a larger workforce, invested heavily in education and training programs to develop the
skills and knowledge of their workforce, embraced new technologies and developed a strong
culture of entrepreneurship and innovation.
But then you may wonder, “Didn’t other countries have a combination of high investment, rapid
population growth, and good policies?”

The answer:

Yes, but the list is small. For instance, Russia and some other areas in Eastern Europe had high saving
rates and high population growth BUT most if not all of them had bad policies until the fall of the Iron
Curtain by the Soviet Union.

Spain – from a low base and high saving rates, moderate population growth, and reasonable
macroeconomic policies BUT still not that rapid as the “tigers.”

This leads us to believe that there may have been more to the Asian “miracle” than brute force.

How does the evidence of the Krugman-Lao-Young (KLY) Analysis studies compare with the results of
studies using a growth accounting methodology?

The answer:

The KLY analysis emphasizes the importance of government policies, industrial policy, and foreign
investment in promoting economic growth in the Asian Tigers. This view is supported by studies that
have shown that government policies played a significant role in supporting the development of targeted
industries and promoting investment in technology and infrastructure.

While, growth accounting studies focus on quantifying the contributions of different factors to economic
growth, such as capital accumulation, labor force growth, and productivity improvements. These studies
have also found that the Asian Tigers achieved rapid economic growth through a combination of these
factors, but with a particular emphasis on the role of productivity improvements in driving growth.

Hence, we can say that in order to sustain a rapidly growing industrial sector in a quickly evolving global
environment, much more is required than just a high rate of investment and appropriate pricing of
inputs and incentives for export. It requires a continuous process of learning, innovation,
experimentation, and continuing structural change.
HISTORICAL TRANSFORMATION OF THE INDUSTRIAL SECTOR

With the image, we can have a snapshot or an idea as to how the structure of industries within these
economies has changed over time during the early 1960s, 1975, and 1990.

 1960: Primary commodities accounted for a large share of total output and exports in Asia while
manufactured commodities generally played a supporting role and the structure of
manufacturing was slanted toward labor-intensive products and geared for the domestic market;
hence, manufacturing itself was a small portion of total output.
 1975: There was a dramatic shift in both the composition of industrials and share of
manufacturing total output.
  1990: There were further increases in manufacturing as a percentage of total output and the
machinery industry had grown importance in all the Asian countries.

To view the transition in manufacturing that took place is to consider the shift in terms of different levels
of technology. S. Lall (1998) has broken down manufacturing into 5 COMPONENTS:

1. RESOURCE-BASED INDUSTRIES (aluminum, food, oil refining)

2. LABOR-INTENSIVE INDUSTRIES (garments, footwears, toys)
3. SCALE-INTENSIVE INDUSTRIES (steel, automobile, paper, chemicals)
4. SCIENCE-BASED INDUSTRIES (electronics, pharmaceuticals, biotechnology)
5. DIFFERENTIAL INDUSTRIAL PRODUCTS (TVs, power equipment)

Another way to examine the structural transformation in the industrial sectors of the NIEs is to look
closely at the role of technology specifically the electronics industry.

The changes in the electronics industry can be described by a stylized the S curve.

At the initial stages of development, the electronics sector in NIEs typically grows slowly due to a lack of
infrastructure, human capital, and technological expertise. As these countries begin to invest in and
develop their electronics industry, the growth rate increases rapidly. This is represented by the steep
upward slope of the S curve.

As the industry becomes more established and mature, however, the growth rate starts to slow down.
Due to increasing competition, market saturation, and the need for more advanced technologies and
innovation to maintain growth. This is represented by the flattening out of the S curve as the industry
reaches a plateau.

Finally, as the industry reaches its full potential and begins to decline, the growth rate drops off sharply.
Due to competition from other industries, changing consumer preferences, or the emergence of new
technologies. This is represented by the downward slope of the S curve.

Overall, the stylized S curve provides a useful framework for understanding the growth and development
of the electronics sector in NIEs.

On the other hand, we must understand that methods varied from economy to economy.

Singapore: Adopted a hands-on industrial policy

Hong Kong: took a more hands-off attitude – very liberal and open economy.

Both countries were open to foreign direct investment which most of the investment was via the foreign
investment of transnational enterprises (TNCs) and worked hard to attract it by offering full ownership,
low taxes, and access to modern infrastructure and well-educated workforce.
In the case of Korea and Taiwan both were less open in which they obtained foreign technology. They did
NOT encourage foreign firms to set up operations. RATHER, they adopted arrangements where local
subsidiaries produced for the foreign companies either original equipment manufacturing (OEM) or own
design manufacturing (ODM).

Even though there were distinct difference in the degree of government intervention and openness to
foreign ownership, the NIEs all benefited form the same principles that resulted in success.

4 BASIC FACTORS UNDERPINNING THEIR SUCCESS:

1. Firms benefited from low rates of interest, low inflation, and high rates of saving within the
economies.
2. They all responded to the open and outward-looking export-led strategies that were generally
followed.
3. All the NIEs developed an appropriate human resource development strategy that
complemented and provided trained workers for the growing industrial sector. This includes
engineering, technical, and vocational schools.
4. Government intervention was undertaken whenever it was needed.
Singapore: attraction of foreign industries
Korea: the gov’t stimulated and supported the formation of large conglomerates
following the Japanese model.
Taiwan: setting up of the state-owned firms to industrialize.
Hong Kong: development of infrastructure and the enhancement of relations with China
and Taiwan.

COUNTRY EXPERIENCES:

Before we discussed comparative advantage in the next section, we’ll first look at various case studies in
Asia to see how their electronics sector have evolved and developed over the years. And first we have…

SINGAPORE:

 Attracting foreign enterprises (transnational corporations or TNCs) to set their operations.

 The development of telecommunications and transport infrastructure.
  The Economic Development Board (EDB) supported technical training which includes
engineering and technical schools to ensure the growth of the industrial sectors; hence, to
provide skilled labor force.
 Plants evolved from production learning to investment -led innovative learning.
 Undertaken various measures to move up the technology value chain (like shifting of the
manufacturing focus from low-end products to high-end products).
 Encouraged the development of stronger linkages between local supplier and the multinational
corporations.
 Promotion of other high-technology industries in ICs and semiconductors
 Signing of regional and free trade agreements.

KOREA:

 Leader in the chip industry.

 Developed the capability to produce household appliances, computers, and peripherals.
 TNCs were not welcomed.
 Became of the leaders in chip production worldwide holding a share of the DRAM (Dynamic
Random Access Memory) market by the end of the 1990s.
 Moved slowly from OEM 1980s to ODM 1990s causing a substantial increase in R&D investment
as the industrialization process continued.

TAIWAN:

 Using Korea’s approach in developing the electronics and other industries – discouraged TNCs.
 Set up domestic firms using subcontracting, licensing, and OEM/ODM.
 Relied on small and medium-sized industries and the development were supported by
government policies and skilled technicians and managers supplied by the educational system.
instead of building large conglomerates.
 Specialist in the production of desktop and laptop computers, terminals, monitors, disk drivers,
peripherals, and other components.
 Established linkages with China, Hong Kong, Malaysia, and other countries.

COUNTRIES IN SOUTHEAST ASIA

 Malaysia and Thailand followed same pattern to Singapore.

In Malaysia: electronics accounted for the major part of total exports and of
manufacturing output. Government has invested in effective infrastructures to heighten
its conduciveness to future investments.
 Thailand and Philippines – emphasis on lower-level and simple electronics. (Followed the
Singaporean and Malaysian models relying on TNCs for technology transfer and production
know-how. LESS DEVELOPMENT of local expertise and backward and forward linkages.
Philippines: chip manufacture
Thailand: focused on computers esp. hard-disk drives.
6.9: COMPARATIVE ADAVNATGE AND ASIAN INDUSTRIALIZATION

In this section, we will explore another aspect of the rapid growth of Asian industry as it relates to
foreign trade. Here, the notion of comparative advantage comes into play.

The notion of revealed comparative advantage was first suggested by:

Balassa (1965): Countries that have products that are being exported more intensively have comparative
advantage in producing and exporting – indirect way of measuring comparative
advantage. YET, it shows how competition weeds out the less competitive and rewards
those that are efficient by exporting more.

Amsden (2001): To calculate whether a country would have a dynamic comparative advantage for a
product in a sector, the share of output in that sector should be compared with those of
the United States and Japan.
Dynamic Comparative Advantage: If it begins to catch up with those of the
United States and Japan.
Static Comparative Advantage: If it starts out a level above the United States
and Japan ratios and gets larger

She argues that NIEs have a dynamic comparative advantage in electrical and non-
electrical equipment and transport equipment.

Dowling & Ray (2000): If a country changes its export structure in favor of products for which import
growth form the rest of the world is growing rapidly, then this index will be
larger than when a country’s exports are not responding to this shift in world
import demand.

INFERENCES THAT WE CAN DRAW FROM THIS EVIDENCE ON THE INDUSTRIALIZATION EXPERIENCE OF
THE ASIAN ECONOMIES:

1. Dramatic shift took place in the structure of industry and of exports. It took place in Southeast
and East Asia primarily, but there was an upward trend in the share of manufactured goods in
South Asia esp. in India.
2. The shift in production of manufactured goods within Asia corresponded closely to a similar
pattern of production that was taking place in the world economy.
3. The shift towards manufactured goods production and exports within Asia began with labor-
intensive products and moved toward high-intensity technological and science-based exports,
esp. electronics, in several countries.