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(part 2)
DDuring the second half of the 20'sth In the 19th century, industrial policy was given great prominence in the efforts of some East Asian countries to “pull themselves up by the bootstraps”. Selected countries in Asia took seriously the promotion of certain industries deemed critical to development, modernization, poverty alleviation, or national security by implementing a set of government strategies, laws, and programs aimed at shaping the structure of the economy. This usually includes tools such as tariffs or protection for infant industries; concessional loans or tax incentives; direct state investment in strategic sectors; support for research, training and infrastructure; and especially export-promotion measures. The essence of industrial policy is that the government should actively guide and accelerate industrialization rather than leaving everything to the free market.
The successful use of industrial policy resulted in four regions of East Asia: Singapore, Taiwan, Hong Kong and South Korea – commonly known as the Four East Asian Tigers. During the latter half of the last century, they pursued distinct but overlapping industrial policies. All four experienced rapid industrialization, high GDP growth, and poverty alleviation. However, their approaches reflected different political, institutional and geographical circumstances.
Unlike their Southeast Asian neighbors such as Indonesia, the Philippines, Thailand, and Malaysia, they were all poorly endowed with natural resources. However, during the post-World War II period they were all enjoying a baby boom that gave them young and growing labor forces. For example, the population of South Korea grew from 20 million in 1950 to 32 million in 1970, while the population of Taiwan grew from 7.6 million in 1950 to 14.7 million in 1970. Their leaders were very conscious of the fact that their respective economies had to provide employment opportunities for their young and growing populations. This explains why their respective governments wisely chose the labour-intensive, export-oriented path to economic progress.
In the case of South Korea, after an armistice agreement in the war with North Korea, its policymakers under the authoritarian leadership of Park Chung Hee initially protected domestic industries, focusing on light manufacturing such as textiles, toys, food, and other consumer goods. This was the import-substitution phase of industrialization (1950s to early 1960s). This was followed by an export-oriented phase (1960s to 1980s). There was a shift towards promoting exports through stronger state intervention. The government provided concessional loans, low-value currency, tax incentives, massive infrastructure support and security for companies that achieved export targets. There was a deliberate push away from light manufacturing, towards heavy and capital-intensive industries such as steel, shipbuilding, automobiles and petrochemicals. Credit was especially given to large conglomerates such as Hyundai, Samsung, Daewoo, Hanjin, SK Group, LG Group and Lotte Group, known as chaebols. fiThe final phase involved investment in technology and research and development. Policies aimed at global competitiveness promoted electronics, semiconductors and IT. The result was that the economy transformed from agrarian poverty to a leading high-tech and industrial power, now considered a first world economy with a per capita income of over $30,000.
Then it was Taiwan that initiated an exhaustive agricultural reform program that distributed large tracts of land to small farms, which were made highly productive through significant government support of infrastructure spending (particularly farm-to-market roads and irrigation facilities), the development of cooperatives, agricultural extension services, and easy access to credit. Since food security was given top priority, early industrialization was also based on import substitution focused on light industries. The short period of import substitution was soon followed by a shift towards export-oriented industrialization (1960s to 1970s), with the government creating export processing zones and promoting small and medium-sized enterprises (SMEs) in labor-intensive manufacturing such as textiles, apparel, toys, plastics, furniture, etc. In the 1980s and 1990s, the focus was on electronics, semiconductor, and precision industries through state-sponsored research institutes. Public-private cooperation. This culminated in the proliferation of high-tech industrial parks such as Hsinchu Science Park, which nurtured enterprises such as TSMC, creating the semiconductor powerhouse for which Taiwan is famous. As a result of such industrial policy, Taiwan today has become one of the Floridaxible, SME-driven economy that became a global leader in electronics and semiconductors. It is also a leader in the production of high value agricultural products with the use of advanced technology.
The Hong Kong model stands out as the only model among the four tigers to adopt a laissez-faire or free market industrial policy. Unlike other tigers, Hong Kong followed classical (Adam Smith) policies under British colonial rule with minimal intervention. Like the other three, it started with labor-intensive manufacturing (1950s to 1970s) with industries such as textiles, apparel, toys, wigs, furniture, etc., using cheap migrant labor and operating in open markets. In the 1980s and 1990s, as real wages rose and manufacturing shifted to mainland China, Hong Kong transformed into a global financial and services center with little direct state planning. Unlike the other Three Tigers, Hong Kong demonstrated that industrialization was possible under free market conditions. It also demonstrated what kind of infrastructure and institutional support is needed to become an international financial centre.
Belonging to the Southeast Asian region, Singapore showed its ASEAN neighbors how to achieve First World status through a state-led, foreign direct investment-driven economy. In the absence of a large domestic industrial base, Singapore – under the authoritarian leadership of Lee Kuan Yew – actively attracted foreign multinationals through very generous tax incentives, world-class infrastructure, good governance and political stability. From the beginning, its industrial policy was export-oriented, becoming increasingly integrated into global production chains, focusing on electronics, petrochemicals, and later pharmaceuticals. Its high-quality infrastructure has enabled it to become a major tourist destination in Asia. Government-linked corporations (GLCs) such as Singapore Airlines and port operators ensured national control over key sectors. Emphasis was placed on high-quality basic and tertiary education as well as skills training, which led to the development of high-value industries.
To summarize, South Korea and Taiwan developed on the basis of strong state intervention, export-led industrialization, culminating in the introduction of high-tech industries. Singapore pursued a highly state-directed industrialization strategy, relying heavily on foreign direct investment, particularly in the services and high-tech sectors. There was minimal state intervention in Hong Kong, with heavy reliance on services and finance. It was also notable that these countries spent a high percentage (5–8%) of their GDP on public infrastructure. Furthermore, a common strategy adopted by all four was to move rapidly from import substitution to export orientation, unlike the Philippines which persisted in import substitution for too long, which led to its destruction.
(to be continued.)
Bernardo M. Villegas holds a Ph.D. Is. in economics from Harvard, is professor emeritus at the University of Asia and the Pacific, and visiting professor at the IESE Business School in Barcelona, Spain. He was a member of the Constitutional Commission of 1986.
bernardo.villegas@uap.asia
