South East Asia

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 2 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 3 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. 4 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. 5 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.

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