South East Asia

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Bachelor Thesis

South East Asia:

Development Waves in Asia Trade Policy and Knowledge Spillovers

Author: Ron Bouman U1233755

Supervisor: Dr. M. C. Oechslin

Word count: 7694 Content Page

Section 1: Introduction Page 4 1.1 Motivation 4 1.2 Aim and Definition 4 1.3 Method and Approaches 5 1.4 Structure 5

Section 2: The 1st Development Wave 6 2.1 Background 6 2.2 Trade Policy 7 2.3 Industrial Policy 9

Section 3: The 2nd Development Wave 10 3.1 Overview 10 3.2. Korea 11 3.2.1 Background 11 3.2.2 Trade Policy 11 3.2.3 Industrial Policy 13 3.3 Taiwan 13

Section 4: The 3rd Development Wave 14 4.1 Overview 14 4.2 Thailand 15 4.2.1 Background 15 4.2.2 Trade Policy 15 4.3 Malaysia 16 4.3.1 Background 16 4.3.2 Trade Policy 17 4.4 Indonesia 18 4.4.1 Background 18 4.4.2 Trade Policy 18

Section 5: Analysis 20 5.1 Comparisons 20 5.2 Trade Policy 21 5.3 Industrial Policy 23 5.4 Tariffs 24

Section 6: Conclusion 25

Sources 26

Figures and Tables Overview

2.1 Human Capital and Per Capita Income Page 6

2.2: Value of Japanese Exports 1962-1976 7

2.3: Exports/Imports Ratio Japan 8

2.4 Effective Rates of Protection for Japan 9

3.1: GDP per Capita 2nd Wave 10

3.2: GDP and Export growth Korea 12

3.3: Development of Simple Average Tariff Rate Korea 12

4.1: GDP per Capita 3rd Wave 14

4.2: Trade (% of GDP) 3rd Wave 14

4.3: Trade, GDP and Tariffs Thailand 16

4.4: Trade and GDP Growth Malaysia 17

4.5: Trade and Tariffs in Indonesia 19

5.1: Economic Growth rates across World Regions (1959-1990) 20

5.2: Average GDP Growth Rate per Wave 21

5.3: Average Total Trade Growth Rates per Wave 22

5.4: Trade per Capita 22

5.5: Sectoral Promotion per country 23

5.6 Tariff Rates 24

1. Introduction

The rate of growth of certain Asian countries in the last half century has truly been remarkable. It took most developed countries in the Western World roughly a century to reach the current high standard of living and progress, while the East Asian countries have achieved the same within just a quarter of the time period. This phenomenon has amazed economists worldwide and has ‘’evoked a torrents of books and articles attempted to explain the phenomenon’’ (Sarel, 1997). This thesis seeks to investigate the relationships between the different development waves. The focus here is on the similarities and differences of the countries’ trade policies. This will ultimately allow us to better analyze the effectiveness of trade based development strategies and whether countries learn from each other’s developments experiences.

1.1 Motivation

Being a third year economics student I have come to realize in which economical fields my specific interests lies. Macroeconomics has always interested me more than microeconomics. I am interested in the general workings of the system, the powerful engine that keeps society running and spurs progress: the economy. My favorite courses so far were International Trade and Development Economics. The theories in International Trade make intuitively sense, something I like, and it is a very relevant topic. Ever since reading ‘The Bottom Billion’ in Development Economics I have been interested how economics as a field can help poor countries in their struggle to reach a better standard of living. By focusing on the trade policies of successfully developed countries I could combine my two interests.

I choose South East Asia because I spent a half year in that region. I was on exchange in Bangkok for a semester at Chulalongkorn University. During that time I traveled around the region. The thriving economies in those areas stand in stark contrast to the current outlook for most OECD countries. This interested me and made me wonder why these economies are such success stories. Writing my thesis about this was a perfect way to find out.

1.2 Aim and Definition

The development of the Asian countries didn’t happen simultaneously, they were separated in different waves.

We can indentify 3 waves1 in Asian development:

1) Japan (1950) 2) Singapore, South Korea, Hong Kong and Taiwan. Also known as the ‘Asian Tigers’ 3) Thailand, Malaysia and Indonesia2

1 There is a 4th wave as well, namely Vietnam, Cambodia, Laos and Myanmar. This wave is left out since their development started too late to fit in the diagnosis of this paper. 2 The Philippines could arguable be a part of this group. It is left out to makes (data) analysis easier.

Japan was the first to realize high economic growth rates and to achieve the status of a fully developed economy. We will investigate the role of government intervention and trade policy in this development in the section about Japan. The countries that followed, the second and third development waves, had the possibility of following Japan as an economic role model. This thesis is looking to investigate the differences and similarities of the economic policies pursuit by these different waves. This allows us to analyze whether there were knowledge spillovers between the waves. We are especially interested in the trade policy and the ‘boom period’. This is the period in which the economy started growing rapidly and we want to know what sparked it.3

1.3 Method and Approaches

Using data on import restrictions, quotas and tariffs we can measure how open each economy was during its boom. This allows us to make comparisons across the waves. Data from the World Bank is used at length. However, since the boom period happened in the 50’s and 60’s for the first and second wave, it is hard to find good data. Since tariff data is often incomplete and lacking, data on trade and GDP growth are used extensively for analysis.

There are problems however with comparing levels of trade and GDP growth. Countries differ in their level of openness; Japan’s level of trade was 21% of GDP in 1997 compared to 329% in Singapore. Moreover, growth rates are chaotic and fluctuate a lot, which makes it a hard variable to interpret and to detect a pattern in. This thesis solves this by looking at average growth rates over a number of years. These growth rates are the average of the wave countries.4 This makes it easier to see overall patterns and allows us to draw comparisons between the trade patterns across waves.

Furthermore we can compare the role that the government played in the development by looking at the industrial policy pursued by the different countries.

1.4 Structure

This paper consists out of 6 sections. We will focus on each single wave and then the particular countries that are important within that wave. Japan is at the origin of Asian development; its story will therefore be documented quite intensively. The situation and the historical context in which the countries were before the boom will be briefly sketched5. Then the circumstances which coincided with the period of rapid development and the boom itself will be discussed. The focus here is on the trade policy pursued by the country in question. Data about trade and other relevant statistics will be presented along with comparisons to other countries in the wave. After all 3 waves are discussed; there will be analysis in section 5. Differences and similarities between the waves will be discussed and correlations between different variables will be presented with statistics. Section 6 concludes.

3 The time span under investigation is limited in most cases from 1960 to 1997. This is done because the World Bank’s records go as far back as 1960 and the Asian Financial Crisis from 1998 ended the patterns. 4 Extensive data on levels of trade and GDP were unavailable for Taiwan. Taiwan is therefore not included in the wave’s averages. 5 Websites such as Wikipedia were used for information on the historical backgrounds.

2. The 1st Development Wave: Japan

2.1 Background

Japan at the end of the 2nd World War lay in ruins. The war had cost a tremendous amount of lives and the country was hit by two atomic bombs. In 1949, 20th of April, the New York Times reported about the war damage in Japan. One of the headlines read: "Japan’s War Cost Is Put at $31 Billion; 2,252,000 Buildings Razed, 1,850,000 Dead" (Ferguson, 2006). Postwar inflation raged up into a total augmentation of 15.000 % from 1945 to 1949. In 1950, the per capita income of Japan was equal to that of Ethiopia and Somalia and 40 percent less than India. It was less than 75% of the prewar level. After the Japanese surrender, an allied force occupied Japan from 1945 until the start of the Korean War (1950). The American government, under supervision of the Supreme Commander of The Allied Powers (SCAP), was in charge of the first stages of recovery. Economic development was considered to be very important because it would prevent militarism, communism and it would stimulate democracy. The Americans were therefore committed to address Japan’s economic issues. The postwar recovery was helped by an exchange rate that was set at a favorable level, American aid and by the high stock of human capital, see table 2.1. The Japanese workforce was skilled and although many firms were destroyed, the knowledge to run them persisted. Also the import of foreign technology quickened progress.

Table 2.1

Source: Marcus Noland, Howard Pack. (2002) “Industrial Policies and Growth: Lessons from International Experience” Working Papers N° 169, Central Bank of Chile

The outbreak of the Korean War (1950-1953) proved to be beneficial for the Japanese recovery. The American government paid the Japanese government large amounts for their support. Moreover, orders for the Japanese industry amounted to approximately 2 billion dollars, sparking the economic boom that followed.

The 1950’s in Japan are characterized by the transition from postwar reconstruction to the period of high speed economic growth. In 1953 the economy exceeded its prewar level and in 1956 the Japanese Economic Stabilization Board declared that ‘‘We are no longer in the postwar reconstruction period." (Hamada, 1996)

The economy proved resilient when, despite the end of both the Korean War and American aid, it continued to grow fast. Growth rates were high until the 1973 oil crisis, after which the post- recession recovery was strong. Between 1956 and 1973 the average GNP growth rate was 7.4%. Exports multiplied by a factor of 13 between 1962 and 1976; see figure 2.2. This increase resulted from the Japanese Trade policy, on which we will focus now.

Figure 2.2: Value of Japanese Exports 1962-1976

80,000,000

70,000,000

60,000,000

50,000,000

40,000,000

30,000,000

20,000,000

10,000,000

0 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976

Years Export value in thousand $ (Constant 2000 US$) 2000 (Constant $ thousandin value Export

Source: The World Bank

2.2 Trade Policy

The Japanese government has been called the county’s “Doormen” (Borrus, 1986) due to its role of determining under what conditions goods and services could enter and leave the country. In the years after the Second World War, imports were very restricted; the government kept tariff rates high and used import quotas. The government wanted to follow an export orientated growth strategy. Since Japan has little natural resources, its economy relies on imports to grow and develop. Japanese officials recognized that Japan had to export in order to pay for those imports and therefore emphasized the importance of exports.

Japan started its recovery with heavy trade restrictions. Almost every commodity was objected to quotas, high tariff rates and restrictions. There was a government institution that decided which exchange rate a specific company had to pay. Japan wanted to shut off its market, which was already the 2nd largest in the world after 1968, in which it overtook West-Germany. This could give the Japanese firms the time to achieve competitiveness at a world level by actively competing with one another. In Japan, firms are conglomerated into huge cartels called Keiretsu. These firms have huge markets shares and they compete heavily with each other. The Japanese government actively cooperated with the Keiretsu to steer the development and gave them strong incentives to invest in plants, equipment and Research & Development.

This process of shielding off foreign competition to help foster developing industry, which was used by Japan, is called ‘the infant industry argument’’. The validity of this development method is controversial and was justified then by the Japanese trade deficit and its claim for the necessity of becoming an exporting nation. A paper (1993) by Odagiri and Goto argued that the absence of the military in postwar Japan might have caused industries “such as automobiles, which had been helped by the military procurement before the war but was still in its infancy compared to American and European producers, to have been wiped out were the market made open to foreign competition.”, p. 102. As can be seen in Figure 2.3, exports gradually become bigger than imports, as Japanese firms increased their competitiveness.

Figure 2.3: Exports/Imports Ratio Japan

1.8

1.6 1.4 1.2 1

Export/Imports Ratio Export/Imports 0.8 0.6

Years

Source: The World Bank

Table 2.4 shows the tariff rates for Japan in the years 1968, 1975 and 1987. Its average level for those years was 24.9, 19.3 and 15.8 respectively. Tariff rates were very high in the beginning when the Japanese government wanted to shelter its industry from foreign competition. After the Japanese firms increased their competitiveness and exports soared, the tariff rates started to drop. The Japanese firms were very successful but this had negative effects on the trade balance and economies in other countries that pressured Japan to lower its tariffs. Moreover, both the GATT and the IMF, which Japan joined in 1964, pressured the country to liberalize trade. This resulted in the gradually opening up of the Japanese domestic market for foreign competition in the early 60’s. The government eased quotas, reduced tariff rates and allowed foreign capital to flow more freely into Japanese industries. Japan has since then participated in all the tariff cutting rounds under the GATT and the WTO. This change is reflected in the declining average tariff rate over the years as shown in table 2.4. After the full implementation of the Tokyo Round, Japan had an average tariff rate of 2.5%, lower than both the US and the EU. (Odagiri, 1993)

The role of the Japanese government is often credited for creating and stimulating the economic boom. Along with stable macro-economic policy, the government also interfered significantly with the economy using industrial policy. Trade policy is an important aspect of industrial policy and it was used extensively by the Japanese government but they included other measures as well.

2.3 Industrial Policy

Industrial Policy, or IP, is the name for measures implemented by a government to boost economic development and growth. The Japanese government after the 2nd World War devised a complex system of policies aimed at promoting industrial development in Japan. The objective was to gain international comparative advantage for Japan by shifting resources to specific industries. The aim of the policies therefore was to increase productivity of inputs and to influence industrial investment. The policies included tax policy, off-budget finance, direct subsidy, subsidized credit, research and development policy, investment, and technology importation, and tolerance of cartels and other kinds of anti-competitive behavior on the part of domestic firms. (Noland, 2002)

The effectiveness of Industrial Policy aimed at selective industries is highly debated and is beyond the scope of this thesis. We can, however, use it for across wave comparison. We can say that the Japanese government used this policy instrument extensively.

Table 2.4

Source: Shouda, Kenkyu (1982) ‘’Effective rates of protection in Japan’’

3. The 2nd Wave: The Asian Tigers

3.1 Overview

South Korea, Taiwan, Hong Kong and Singapore, often described as the ‘Asian Tigers’ make up the second development wave. Their development started in the early 1960’s and with the exceptions of some crisis years they have been growing ever since. Essentially, these 4 Asian tigers achieved the fastest economic development ever seen. Figure 3.1 shows the rate of economic growth for Korea, Singapore and Hong Kong. In Taiwan the annual economic growth rate averaged 8.7% from 1953- 1990. During the 1970s, it averaged 9.7%. (Galenson, 1979) The average growth rates for South- Korea, Singapore and Hong Kong in the period of 1960-1985 equaled 7.8%, 9.04% and 9.20% respectively.

30,000

Figure 3.1: GDP Per Capita 2nd Wave 25,000

20,000

15,000 South Korea

10,000 Hong Kong Singapore

5,000 GDP P.C (constant 2000 US$) 2000 (constantP.C GDP

1994 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1996 Years

Note: Taiwan is not included because Taiwanese data was unavailable. Source: The World Bank

All four economies have pursued export led growth strategies; although their approach differed. Hong Kong had an almost complete laissez fair experience and could perhaps be said to be the only developing country that has not, or to a very limited extent, used Industrial Policy. (Noland, 2002) However, both Korea and Taiwan had extensive government intervention and industrial policy. Singapore too had a lot of economic planning; its mix of free market and government intervention has earned it the nickname of ‘the Singaporean model’.

Hong Kong and Singapore are rather small island economies. They benefitted from their strategic location which made them into major transportation and trade centers. This makes them different from the other Asian countries and they are therefore not good representatives. Therefore, in order to investigate to which extent the economic boom of the tiger countries is similar to the Japanese economic boom, we are going to look at Korea intensively and to a less extent to Taiwan.

3.2 South Korea

3.2.1 Background

Korea was relatively isolated until the 19th century. The country was annexed by Japan in 1905 and occupied until 1945. From these years Korea inherited Japanese institutions, technology and industries. The Japanese put most of their heavy industries in the North while the South part of the peninsula merely functioned as breadbasket. After the 2nd World War the peninsula was divided in a communist North and capitalist South. The tensions of the cold war made this division uncomfortable and unstable. The Korean War broke out from 1950 to 1953 and ravaged the country. After the Korean War, South Korea embarked upon a period of extensive economic growth. From 1953 to 1996 South Korea transformed from a country ruined by war into the world’s 13th largest economy and as a role model for many developing countries. (Connolly, 2009)

The recovery started with the rule of Park Chung-hee (1963-1979) who commenced a 5 year Economic Development Plan. The government that was ousted by the general had made some efforts to start the recovery but was corrupt and general seen as incompetent. With Park Chung-hee in control the failing strategy of import substitution was changed to the more Japanese approach of export promotion. His leadership, although strict totalitarian, gave the Koreans much needed self confidence and a psychological boost that made the economic boom possible. Park Chung-hee emphasized the importance of education and established a public compulsory education system. This allowed the labor force to become 2.5 times more productive than American workers while being 10 times cheaper which attracted companies from overseas. ( Ch’oe, 2006)

Korea benefited from the outbreak of the Vietnam War. In exchange for substantial economic aid the Koreans provided, after the United States, the largest amount of troops, to help the American war effort. The Korean industry also profited from the demand for weapons and supplies the War created. Additionally, General Park started diplomatic relationships with Japan. The ‘Treaty on Basic Relations between Japan and the Republic of Korea’ was signed in 1965 and normalized the relationship between Korea and Japan. It included 800 million dollar economic support from Japan to Korea. (Oda, 1967)

3.2.2 Trade Policy

The government pursued a failing import substitution strategy which General Park Chung-hee switched for an export promotion approach upon becoming in charge in 1963. Exports were promoted heavily and special measures were introduced to stimulate them. This had an effect; from 1962 to 1992 exports went up with factor 24. GDP went up from 6% to 29.5 in the same time span. (Lee, 1995) Figure 3.2 shows the increase in GDP and exports from 1960- 1985.

Trade in Korea was heavily regulated. It is said that the government used a ‘positive list’ from 1955- 1967; only if a certain commodity was mentioned on the list it could enter or leave the country freely. If it was not mentioned it was subject to restrictions such as tariffs and quotas. After 1967 this was changed to a ‘negative list’, but trade was still heavily state controlled. After the 70’s the emphasis was put on more capital and technological intensive sectors; such as heavy and chemical industries. Government preferred sectors received up to 60% more advantaged loans, which often carried negative interest rates, in the late 70’s. The annual interest rate subsidy was around 10% of GNP in the years 1972-1979. (Noland, 2002)

After the 2nd oil shock and the assassination of the general Park Chung-hee in 1979 these policies ended or were reduced by governments who came after.

Figure 3.2: GDP and Export growth Korea

200000 180000 160000 140000 120000 100000 GDP 80000 Exports 60000 40000

In 2000 US$, Divided by 1 1 million by Divided US$, 2000 In 20000 0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 Years

Source: The World Bank

Korea was very protectionist, like Japan, especially earlier in its boom years. Table 3.3 shows the development of the simple average tariff rate for 1952 and 1984. As you can see in the table, the simple average of tariff rates rose and was very high during the period in which the government tried the import substitution strategy. After the change of authority and the trade strategy was switched to export promotion, the tariffs decreased but were still kept at a fairly high level. The rates rose from 25.4 percent to 39.9 percent during 1952-1962 and then declined to 21.9 percent in 1984.

Table 3.3: Development of Simple Average Tariff Rate Korea

Source: Lee (1995) ‘’Government Interventions and Productivity Growth in Korean Manufacturing Industries’’ NBER Working Paper No. 5060 Note: Import restrictions denote the percentage of the number of items requiring government’s discretionary import approval in the total number of tariff lines in the second half of each year.

3.2.3 Industrial Policy

Korea followed Japan’s example and actively made efforts to alter the sectoral structure of production for a period of roughly 35 years. Sectors that were believed to have better prospects for fast growth and progress were favored and received benefits. (Noland, 2002) After General Park Chung-hee took control of the country, the government started to play a very large role in the economy. The banking sector was under strict control, the currency was devalued in and many exporting promoting measures were implemented. Export became the most important measure of success. Export targets were set and when met firms could expect more favorable tax treatments. Exporters were provided with tax exemptions, incentives, and easy access to credit at preferable rates.

3.3 Taiwan

The Chinese nationalist party, the KMT, escaped to Taiwan after losing mainland China to the communists in 1949. The island had been occupied by the Japanese in World War 2 who had built up agriculture and industry. In the 1950’s, America wanted to protect capitalist Taiwan against the communist party in China. They provided military protection, financial aid and economic support. This gave the Taiwanese the necessary capital to restart the economy. The KMT government was totalitarian and ambitious. They implemented a lot of reforms to boost the economy. Land reforms abandoned the landlord classes and the state orientated the economy from a subsidized import substitution towards export led growth in the 1950’s. Several government bodies were created, universal education and four-year plans were implemented. This caused the economy to shift from agriculture based towards industry orientated and increased the standards of living. (Howe, 1996)

The government used industrial policy: tariffs, quantity restrictions, selective price policies and by actively promoting certain sectors. (Noland, 2002) Moreover, Industrial Policy was used in a new way with the creation of Export Processing Zones. EPZ’s were a combination of an industrial park, a duty- free zone and a free trade area. Investors, whose companies were a source of job opportunities, were attracted to these areas with tax incentives. Between 1952 and 1982, economic growth was on average 8.7%, and between 1983 and 1986 at 6.9%. (Galenson, 1979) This growth was helped by a quiet political and social environment and a cheap and educated labor force without trade unions.

4. The 3rd Wave: Indonesia, Thailand and Malaysia

4.1 Overview

Figure 4.1: GDP Per Capita 3rd Wave 4,500 4,000

3,500

3,000 2,500 2,000 Indonesia

1,500 Thailand GDP per Capitaper GDP 1,000 Malaysia 500 0

Years

Source: The World Bank

From 1970’s on a third group of countries started to grow rapidly. These countries share similarities: all three adopted export driven growth strategies like their predecessors. Industrial policy was used less. These countries were Indonesia, Thailand and Malaysia. High growth rates started in the 1960’s with an average of 6 percent per year as an average for the whole wave and they increased in the following decades to 7.3 and 6.8 percent. From 1991 to 1997 the average growth rate was 6.8 percent as well but this ended with the Asian financial crisis in 1998. The three countries of this wave will be discussed individually after which we will compare them briefly with the previous waves before we turn to our general analysis. Figure 4.2: Trade (% of GDP) 3rd Wave

200 180 160

140 120 100 Thailand 80

Percentage 60 Indonesia 40 Malaysia 20

1979 1986 1993 1975 1976 1977 1978 1980 1981 1982 1983 1984 1985 1987 1988 1989 1990 1991 1992 1994 1995 1996 1997 Years

Source: The World Bank

4.2 Thailand

4.2.1 Background

Thailand is one of the few countries in the world that has never been colonized. The monarchy kept the country free from English or French dominance in the 19th century by using apt diplomacy. This means that Thailand had to develop its institutions and industries by itself. The poor and mainly agricultural country was very behind compared to the Western countries. The monarchy acknowledged this and there were Western styled modernization efforts to develop the country. In 1932 the King was forced to give up its political power and was replaced by a parliament. However, the monarchy has always kept playing an important role in the development of the country. The government sided with the Japanese in the 2nd World War. After the end of the War a democratic elected government was ousted by the military who ruler from then on. Thailand became gradually part of the global system. The Vietnam War proved beneficial for Thailand, which received money from the Americans for their support to the war. Thailand became a popular resting place for American troops, which helped promote Thailand’s tourism. The country opened up for international trade in the 1980’s which spurred growth rates. Thailand became a very export orientated country while the economic growth has led to huge reductions in poverty. Protest against the military government mounted and after several student protests, democracy was restored in 1997. Thailand’s government has since then been rocked back and forth between military coups and fighting between the two political parties. The stable factor during all these years has been King Bhumibol who has reigned since the 1950’s.

4.2.2 Trade Policy

Thailand’s first national development plan was launched in 1961. The aim was to support industrialization by using an import substitution approach. This meant that domestic industry was heavily protected so it could compete against foreign competition. This was done primarily by tariffs. Tariff rates were raised very high, the range of effective rate of protection for the manufacturing sector in Thailand was at its highest point between -21.44 and 1693.45 percent. (Mongkolsamai, 1985) Although the shift to an export promoting strategy was announced in 1974 already, tariff rates stayed high throughout most of the 70’s and 80’s. Significant drops in protectionism occurred in 1988, which caused trade to expand rapidly. This can be seen in Figure 4.3. The blue line in the graph represents what the level of the GDP per capita is in respect to the GDP per capita in 1997. It can be seen as a proxy of economic growth and as one can see, it is very closely correlated to the quantity of trade. We can conclude from this that the Thai economy benefited from trade liberization.

The shift towards export-led growth was remarkable. This move was made with continuous implementation of market orientated reform and trade policy has since been liberal and outward orientated. (Talerngrsi, 2005) In 1995 and 1997 additional packages of tariff reductions were implemented. The maximum rate decreased from 100% in the early 1990’s to 30% in the late 90’s. Furthermore, the tariff structure was simplified. Raw materials where either duty free or faced a 1% duty rate, while finished goods faced the top rates (20 and 30%) and the intermediate goods featured middle rates (5 and 10%). This all resulted in the average tariff rate dropping sharply from 30% in 1990 to 21% in 1995 and to 17% in 1997. (Kohpaiboon, 2010)

Figure 4.3: Trade, GDP and Tariffs Thailand 120 100

60 Trade (% GDP)

40 GDP P.C (% 1997) Percentage 20 Average Tarif Rate

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Years

Source: The World Bank

This shift resulted in a strong increase in exports and imports. Compared to 1981-1985, exports increased more than five-fold in 1991-1995. The opening up of the country to the world markets also attracted foreign investors. FDI went up from US$ 400 million in 1970-1974 to over more than US$ 6.650 million in 1995-1999. The composition of trade changed from mostly raw materials to more industrial products, signaling the existence of intra-industry trade. Thailand exported mainly to the U.S, Europe and Japan. However, in recent years, ASEAN countries became the most important trade partners. Thailand owes its growth for a large extent to stable, steady macroeconomic policy. The export promotion strategy proved to be very important and a big improvement over the import substitution approach used before. Industrial Policy did not contribute a great deal because policy measures were mainly fragmented, divided among different agencies. (Kohpaiboon, 2010)

4.3 Malaysia

4.3.1 Background

Malaysia became subject of the British Empire in the 18th century. In the 2nd World War, the country was occupied by the Japanese for 3 years during which nationalism and the desire for independence grew. They achieved independence in 1957. In 1963 Malaysia was formally declared, consisting out of the peninsula and the northern part of Borneo. There was initial resistance from Indonesia but after Sukarno seized the power in Indonesia, both countries reached an agreement. Singapore left the union in 1965. Being an English colony, Malaysia has adapted mostly English institutions and an English style of government and law. The country is multi ethnic and primarily Islamic. After independence Malaysia’s economy relied mostly on agriculture and mining. The country is strategically located and therefore has always been a center of transport and trade. In the 1970’s, the country started to imitate the Asian tigers with a transition towards manufacturing and other sectors. The industrial sector gained significance and with increasing (Japanese) FDI and exports, Malaysia achieved 7% GDP growth in the 1980’s and 1990’s with low inflation. Ever since independence, Malaysia has shown impressive growth, with growing on average for 6% in the next 50 years. This record has made Malaysia one of the most successful East-Asian economies and the most successful ASEAN economy.

4.3.2 Trade Policy

Malaysia is the 20th largest trading nation in the world, although it is only a small economy. Total trade is larger than that of Indonesia or Turkey (Ramasamy, 2007) This is caused by Malaysia’s high openness to trade and its strategic location on the Malacca Strait. Figure 4.4 shows that Malaysia’s level of trade was close to 200% in 1997. The graph also illustrates the relationship between trade and economic growth. The proxy for economic growth in this graph is the GDP per capita expressed as a percentage of the GDP per capita level in 1997. By expressing economic growth in this way, the correlation between trade and growth is shown more clearly.

Figure 4.4: Trade and GDP Growth Malaysia 200 180 160

140 120 100 80 Trade (%GDP) Percentage 60 GDP P.C (% 1997) 40 20

1976 1982 1960 1962 1964 1966 1968 1970 1972 1974 1978 1980 1984 1986 1988 1990 1992 1994 1996 Years

Source: The World Bank

Malaysia went further than the other ASEAN countries in liberalizing its manufacturing sector and investment regime. This was especially done during the 1980’s and 1990’s. Average tariff rate declined from 15% in 1985 to 7% in 1999. In both years Malaysia had the lowest average tariff rate from the 2nd and 3rd wave countries. Only Japan, that had passed several rounds of agreements on tariff reductions, had lower rates than Malaysia. This illustrates the fact that Malaysia has traditionally been one of the most open countries in Asia. Another significant contribution to Malaysia’s economy has been its ability to attract export-oriented foreign direct investment. There was large investment into the country’s education system, infrastructure, and legal system. The focus on stability succeeded in attracting foreign investors. Malaysia was the only 3rd wave country that has significant government intervention in the form of Industrial Policy. From 1955 on 5 year plans were implemented to stimulate the economy and to achieve income redistribution. The government focused on heavy industry in the 80’s, which was unsuccessful at first but bettered after global circumstances improved. Measures to redistribute income were also employed because the society was organized in such a way by the British, that the ethnic Malay were mostly poor while the Chinese and educated Indians dominated commerce and professional occupations. Social unrest made the government implement the New Economic Policy in which the ethnic Malay were being favored; many special privileges continue to this day. (Menon, 2009)

4.4 Indonesia

4.4.1 Overview

Indonesia is the largest country in our analysis and is with a population of 237 million the 4th most populous country in the world. Indonesia, then the Dutch East Indie’s, was occupied by the Japanese in the 2nd World War. After the war the Dutch struggled to regain control of their colony, in which independence movements had increased in popularity during the Japanese occupation. Indonesia became independent soon after and the leader of the independence movement, Sukarno, took control of the country. However, internal strife with ethnic groups that wanted independence from Jakarta, and corruption in the government hindered development. The economy got into a recession in the 60’s when the country became disengaged from international trade and investment. Suharto, a general who led the anti communist purges by the army after an attempted coup in 1965, forced Sukarno out of power and became the new president. He asked a group of Berkeley trained Indonesian economists to help guide the recovery. This group of intellectuals, sometimes called the Berkeley mafia, tried to promote foreign investment.

4.4.2 Trade Policy

After the dire economic situation in the 1960’s in which Indonesia was at the brink of famine, the country embarked on a period of trade liberalization. This was the work of the ‘Berkeley Mafia’ whose influence caused the pursuit for prudent macroeconomic policy and the attraction of much foreign investment. These measures stabilized the economy and the lower tariffs caused trade to increase. The economy improved and from 1968 on started to grow rapidly. Between the mid 1960’s and 1990, GDP tripled. There were structural transformations in the agricultural, manufacturing, utilities and service sectors. However, this changed in the early 1970’s when the oil prices soared. The high oil rents went hand in hand with corruption and decreased the influence of the technocrats. Vested interests and a focus on heavy industry pressured for more protectionism, which was increased significantly in the late 1970’s. (Liddle, 1991) The oil boom did boost revenue and investments, however, oil prices went down in the 80’s and so did the growth rates, from the previous highs of 7.5% (1975-1980) to 3.7% (1980-1985). In order to increase economic growth, the government tried to make the economy more efficient. Adjustment programs were implemented which the aims of trying to stimulate the non-oil and gas exports and to liberalize trade. 24 reforms package were implemented in between 1983 and 1995. (Basri, 2004) Before the 1980’s, Indonesian’s trade policy was quite protective, when the reforms became effective in 1985, this was then changed to more outward looking and export orientated. Protectionism declined and Indonesia followed the export-led growth strategy like Japan and the Asian tigers did before. See Figure 4.5 for an overview of the Tariff rate and trade as a percentage of GDP. These measures helped the economy; growth rates went up to 6.3% in the years 1985-1990. Corruption remained a big problem however. (Soesastro, 2005)

Figure 4.5:Trade and Tariffs in Indonesia

Trade (% of GDP) Tariff Rate 60

40 30

20 Percentage 10

1973 1977 1981 1970 1971 1972 1974 1975 1976 1978 1979 1980 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Years

Source: The World Bank

Foreign investment once again flowed into the country, especially in the rapidly developing export oriented manufacturing sector. While the trade regime became less restrictive, there was also a slow tarification of the other trade barriers. This was significantly reduced in the 90’s. Trade was liberalized due to the fact that Indonesia participated in the Uruguay round and their commitment to multilateral tariff reductions agreements. (Kis-Katos, 2009) From this period on, the economy kept growing extensively until the crisis in 1998 that forced many Asian economies into deep recession. Indonesia didn’t resort to protectionism and recovered from this crisis. Effort was put into the further liberalization of trade and the reduction of tariffs.

Industrial Policy has not been used as extensively in Indonesia as in the case of the Asian Tigers. Considering the industrial sector, the government was quite interventionist with its aim to establish heavy industries in the early 1980’s. There was however no specific industrial policy to promote industrial development. (Jomo, 2000)

5: Analysis

The eight economies that are discussed in this paper are commonly referred to as the ‘High Performing Asian Economies’ (HPAE’s). These eight economies have experienced very impressive growth rates, compared to other world regions. This is shown in Figure 5.1.

Figure 5.1: Economic Growth rates across World Regions (1959-1990)

Source: World Bank, World Development Report 1992: Development and the Environment

In this section, the different development waves will be analyzed. They will be compared by presenting the data and information about the individual waves. Trade policy, Industrial Policy and tariffs will be the focus. After this we will be able to draw a conclusion on whether there were knowledge spillovers between different development waves.

5.1 Comparisons

Both Korea and Taiwan have many similarities to Japan. Both countries were once Japanese colonies and both share similar values and culture with a high degree of cultural homogeneity. Korea and Taiwan used the Japanese export promotion growth strategy, combined with an initial high level of tariffs to protect the infant industry. This is illustrated in Figure 5.6 Furthermore, they all made significant use of Industrial Policy. As discussed before, Japan, Korea and Taiwan countries that have used Industrial Policy extensively in their development and are called the ‘’exemplars’’ of these (IP) efforts. (Noland, 2002) The similarities are even stronger between Japan and Korea: both recovered after devastating wars. In both Japan (Keiretsu) and Korea (Chaebol) there are very large, influential conglomerates of firms that hold big market shares in different markets. And as shown in table 2.1, both countries had a relative high amount of human capital that propelled the post-war recoveries.

The third wave has remarkable similarities with the 2nd wave. The Asian tiger countries differed from the rest of the developing world when they abandoned the import substitution strategy that was prevalent in that time. They switched to an export promoting approach together with other measures such as investment in human capital and strong interventionist Industrial Policy. Decades of sustained rapid economic growth followed. The 3rd wave countries can be said to have tried to follow their example. All 3 countries have followed different development tracks but all switched to an export promoting strategy at some point. They have embarked on periods of trade liberalization and tariff reductions. This change did not happen suddenly, as described in section 4. Indonesia experienced two waves of trade liberalization, while Thailand switched strategy 1974 but real trade liberalization was kept at large until the late 1980’s. Malaysia has always been quite open to trade

20 but this was intensified in the 80’s and 90’s. However, the 3rd wave differed because they used protectionism to a lesser extent and did not use the infant industry policy measures. In every case, trade became more important in the 1980’s and grew rapidly in the following decades. This was illustrated in Figure 4.2.

Figure 5.2 shows the 10 year average growth rates of the 3 waves. Growth rates are calculated as the 10 year average of the countries consisting out of the wave. This was done so it is easier to interpret the data. One can see that Wave 1 (which consists solely of Japan) is at the end of its boom in the 1971-1980 decade when growth rates were declining. Wave 2 is not growing as explosively as before in that period but still grows rapidly, while Wave 3 experienced almost four decades of sustained rapid growth and seems to overtake the Tiger Economies.

Figure 5.2: Average GDP Growth Rate per Wave 10 9 8

7 6 5 1st wave 4 2nd wave Percentage 3 3rd year 2 1 0 1961-1970 1971-1980 1981-1990 1991-1997 Years

Source: The World Bank

5.2 Trade Policy

As described in section 2, Japan was the first country to have pursued an export promoting strategy. This was done by extensive government stimulation, Industrial Policy and low tariffs for exported goods. Import barriers, however, remained high as Japan sought to protect its domestic industry. This recipe was copied by the Asian Tiger’s who promoted exports by the same means and also continued to protect domestic industries. The third wave countries however, had a somewhat different approach. Their switch from an import substitution to an export promoting strategy coincided with overall drop in tariff rates. Thailand, Malaysia and Indonesia adopted less protectionism and more trade liberalization then previous waves. We can say that the 3rd wave countries learned the importance of trade from the experiences of the Tiger Economies.

Figure 5.3 shows the average growth rates of trade for the 3 waves. The growth rates for each wave are the average of the countries in each wave over a 10 year period. The graph shows that the Japanese total trade expanded rapidly until the 1980’s, when the boom ended. After that trade expanded at an easier pace. The 2nd wave clearly follows Japan. Their boom started later and the increase in total trade therefore slows down at a later point. The 3rd wave however, embarked on extensive growth in trade at a later point. Thailand switched to export promotion in 1974, Indonesia liberalized under pressure from the technocrats in the late 1960’s and Malaysia opened up more in this period as well.

Figure 5.3: Average Total Trade Growth Rates per Wave 12

6 1st Wave 2nd Wave Percentage 4

2 3rd Wave

0 1961-1970 1971-1980 1981-1990 1991-1997 Years

Source: The World Bank Notes: 1) The 3rd wave average for 1961-1970 is calculated without Indonesia. Chaotic economic circumstance caused the low level of trade to fluctuate enormously. Indonesia’s trade growth rate was therefore so unrealistically high that it would bias the figure and is therefore omitted. 2) The 1961-1965 data for Singapore was unavailable and the 1961-1970 2nd wave average is therefore calculated without those years.

To give an indication of the total trade volumes, Figure 5.4 shows the amount of trade per capita for Japan, Korea and Malaysia. In this overview, one can see the initial head start by Japan, which is then followed by Korea and Malaysia.

Figure 5.4: Trade per Capita

900000

800000 700000 600000 500000 400000 1st Wave: Japan 300000 2nd Wave: Korea 200000 3rd Wave: Malaysia

100000 Trade (constant 2000 US$) 2000 (constant Trade

1968 1984 1994 1960 1962 1964 1966 1970 1972 1974 1976 1978 1980 1982 1986 1988 1990 1992 1996 Years

Source: The World Bank Note: These countries are shown because their data fits well together. They are however not perfect representative of their waves. The 2nd wave countries have, on average, higher levels and the 3rd wave countries lower. Also note that trade was only about 20% of GDP in Japan in 1997 while it is higher in Korea and much higher in Malaysia which explains part of the convergence.

5.3 Industrial Policy

As discussed in sections 2 and 3, the Asian Tigers followed Japan’s example in applying government intervention in the development process. In Table 5.5 an overview of these policies is shown. It tells us which sectors were stimulated by the governments of Japan and the Tiger Economies. From this we can conclude that there were definitely learning spillovers between the first and the second wave. The 2nd wave, especially South-Korea and Taiwan, followed the Japanese development approach carefully. Singapore and Hong Kong are mostly left outside the analysis since they differ greatly from the other High Performing Asian Economies (HPAE’s). We can say, however, that Singapore had significant government intervention too.

As pointed out in section 4, Industrial Policy was used only marginally by the third wave countries. Indonesia did have some interventionist government policy but this proved to be inefficient. The years in which Indonesia started to grow rapidly were the years in which the academics managed to persuade the leadership to pursue prudent macroeconomic policy. The same happened in Thailand’s case. A reduction in the tariff rate and the opening up of the markets to international companies was enough to spark a boom in both the economy and trade. Industrial Policy was small scale and without a clear purpose and therefore contributed only little. Malaysia did use some government intervention but it was mostly aimed at the redistribution of income. Growth was achieved by opening up and promoting trade and investment.

Table 5.5: Sectoral Promotion per country

However, this does not mean that there were less knowledge spillovers. The effect of Industrial Policy is debated; notion that it has a large positive influence is controversial (Noland, 2002). This could mean that the 3rd wave countries looked at the Asian Tigers and considered that they did not need Industrial Policy. An explanation for this is that the region benefitted from the development of the earlier waves. Therefore there was more capital and knowledge available which made it easier for the 3rd wave countries to develop. They relied more on liberalizing trade and foreign investment for development and less on protectionism and Industrial Policy.

5.4 Tariffs

Trade policy is often conducted by the use of tariffs and tariffs are therefore an important part of trade policy. After the 2nd World War, the prevailing view was that developing countries should shield off their domestic industries from foreign competition. The first two waves did promote exports, but they also used protectionism extensively. It would therefore be interesting to consider the tariff data. This data, unfortunately, is often fragmented and incomplete. This is because some of the data we are interested in is from the 1950’s and 1960’s, and tariff data was not recorded accurately before the establishment of the WTO. Figure 5.6 shows the data that is available. It shows that over the years, tariff rates tend to decrease. This happened earlier for the 1st and 2nd wave than for the 3rd wave countries because they switched to export promotion strategies earlier. After opening up, the 1st and 2nd wave countries maintained higher tariff rates for a longer time than the 3rd wave countries. This comes from the fact that the 3rd wave countries used less protectionism. We can conclude that the 3rd wave countries noticed the benefits of liberalizing trade and proceeded with lowering their tariffs without resorting to too much protectionism.

Figure 5.6 Tariff Rates

45 40 35 Korea 30 25 Japan 20 Taiwan 15 10 Thailand 5 Indonesia

Percentage (Simple Mean) (Simple Percentage 0

Malaysia

1970 1986 1988 1960 1962 1964 1966 1968 1972 1974 1976 1978 1980 1982 1984 1990 1992 1994 1996 Years

Source: The World Bank, Basri (2004), Connolly (2006), Noland (2002), Ramasam (2007), Shouda (1982), Talerngrsi (2002) Note: 1) Indonesia’ data is the weighted tariff mean while the other data is the simple mean. This could explain why Indonesia’s tariff rate appears to be out of pattern. 2) The figure doesn’t show the tariff rate for Japan, Korea and Taiwan after 1985. This is because we were primarily interested in the economic boom period and the years after that.

Section 5: Conclusion

There is a significant amount of knowledge spillover between the High Performing Asian Economies. Japan seems to have been the example for the group known as the ‘Tiger Economies’: Hong Kong, South Korea, Taiwan and Singapore. Trade policy was copied from Japan when they opened up their economies while promoting exports but keeping tariff level rather high. Heavy government influence in the development of certain industries was also inspired by the Japanese model. These countries had other traits in common such as cultural and ethnic homogeneity and little natural resources. This made it easier to imitate the Japanese approach. Industrial Policy and protectionism, however, were not extensively used by the third wave countries. Malaysia, Thailand and Indonesia relied more on market forces to grow. The 3rd wave countries benefitted from the economic booms of the previous waves. There was more foreign investment available and they could take over in some sectors as the more developed economies focused on more capital intensive sectors. The 3rd wave countries did copy the emphasis on export, which was actively promoted. Most countries were first trying to develop their economies with the import substituting strategy. When they switched to export promotion, they directly followed the Japanese approach.

This paper has investigated the relationship between the simultaneous rapid developments of groups of Asian countries. We can conclude that although there is probably no such thing as an Asian development model, the ability to learn from each other’s experiences is a central characteristic in the East-Asian Development account. Especially in essential areas such as Trade Policy and government policy, development lessons were learned and passed on. With regard to trade policy, we have found noteworthy evidence that liberalization of trade with an emphasis on exports can be very beneficial for developing countries.

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