Part Two RETHINKING DEVELOPMENT STRATEGIES: SOME LESSONS FROM EAST ASIAN EXPERIENCE Introduction 73 Introduction Rapid growth, rising living standards and in- linkages have added a distinct dimension to the East creased international competitiveness in the Asian growth experience. Following the lead of economies of East Asia have caught the attention the earlier Report, it also examines the role of poli- of policymakers and researchers in other develop- cies in linking exports to investment, as well as in ing regions, as well as in the developed world. A upgrading and diversifying export structures. In broad debate has consequently opened up on the this context, the complementarity between effec- lessons that can be drawn for meeting the wider tive export promotion measures and import challenges of economic development. The region’s substitution policies is examined. Differences performance relative to other regions can no longer among countries in the choice and effectiveness of be regarded as a passing phenomenon. But how policies are explored, as well as those within the such high and sustained rates of growth have been region between the first-tier NIEs and the second- achieved among a large group of economies is still tier ones (Indonesia, Malaysia and Thailand). the subject of debate. To date opinion has been divided. On one view, the experience confirms the From this perspective the issue of replicating case for “getting prices right” through the free play East Asian success outside the region comes into of market forces. On another, it points to the lim- sharper focus. Broadly speaking, outward-oriented its of price signals as a guide to the process of development is a dynamic process where invest- capital accumulation and technological catching- ment, imports, exports and industrial upgrading are up, and confirms the benefits to be drawn from closely intertwined. Such a process is consistent appropriate forms of government intervention. with varying degrees of import substitution and Both these interpretations have tended to pose stark export orientation, and with concentration on dif- choices for other developing countries seeking to ferent products and markets. There is thus emulate the East Asian example: the market ver- considerable room for manoeuvre in a pragmatic sus the State; inward- versus outward-oriented approach to development policy in a globalizing development; investment or exports as the engine world, which can accommodate differences in lev- of growth. els of industrial development, natural resource endowments and macroeconomic constraints. This issue of TDR pursues a different line. In TDR 1994 the analysis focused on the links be- Replication by a large number of countries tween capital accumulation, technological progress not only requires the successful pursuit of trade, and economic growth in the first-tier East Asian industrial and technology policies by developing newly industrializing economies (NIEs) - Hong countries, but also open markets in the North. This Kong, Republic of Korea, Singapore and Taiwan in turn will depend upon finding solutions to the Province of China. It examined possible conflicts severe labour market problems which continue to as well as complementarities between the State and beset many advanced industrial economies. As last the market in evolving government-business rela- year, this year’s Report rejects the claim, which tions built around a profit-investment nexus has become louder over the past year, that grow- animated by strategic policy interventions and ap- ing import penetration by developing countries of propriate institutions. Building on that research, their domestic markets is to blame for these prob- this year’s Report emphasizes the interdependence lems, assesses the scope for increased North-South of exports and investment and its role in accelerat- trade, and argues that outward-oriented develop- ing structural change and industrial growth. In ment in the South and expansionary policies in the particular, it considers the extent to which mutu- North provide the basis for a new global policy ally reinforcing regional trade and investment dialogue. 74 Trade and Development Report, 1996 However, there are also new challenges con- shaping the regional integration process. The chap- fronting policymakers in developing countries ter also assesses the implications of recent shifts seeking to emulate the East Asian type of export- in competitiveness for growth and employment in oriented industrialization. In the first place, Japan, as well as for industrialization and devel- compared to the first-tier NIEs, they can certainly opment of the developing countries of the region. expect closer surveillance of their domestic trade Chapter II seeks to account for the success of the and investment policies, which will be subject to East Asian economies in linking a rapid pace of WTO disciplines. The Report assesses from this investment and industrial upgrading to exports. standpoint the new trading environment and the The role of trade and industrial policies in animat- scope for permissible policy alternatives for pro- ing an investment-export nexus is emphasized, and moting industrialization in the South. Moreover, differences in export performance among econo- given the uncertain economic prospects in the ad- mies in the region are related to differences in policy vanced industrial economies, the regional success orientation, including policies relating to FDI and of East Asia not only encourages a fresh look at TNCs. The final chapter examines the issue of rep- the potential gains from South-South economic co- licating the East Asian export performance on a large operation, but also widens the opportunities for scale. In particular, the danger of a “fallacy of com- such cooperation. position” that may arise from widespread efforts to promote low-skill manufactured exports is exam- Chapter I examines the regional dimension of ined, as well as the potential problems such exports East Asian industrialization and growth, concen- might pose for advanced economies. An assess- trating on trade and investment links among ment is also made of whether the post-Uruguay countries. Particular attention is paid to macro- Round trading regime precludes the policies that economic pressures and government policies in underpinned export success in East Asia. Integration and Industrialization in East Asia 75 Chapter I INTEGRATION AND INDUSTRIALIZATION IN EAST ASIA A. The flying geese paradigm During the past two decades, the economic spective roles of policy and markets in this proc- performance of Japan and a small group of rap- ess, and the stability and sustainability of the idly growing East Asian countries, including the process itself. Republic of Korea, Taiwan Province of China, Hong Kong and Singapore (collectively identified In this process, trade is the most important as the first-tier newly industrializing economies, vehicle for transferring new goods and technology NIEs) has attracted considerable attention. More across countries. Imports from the more advanced recently, strong growth in a second tier of (South- countries (senshinkoku) would allow new goods East) Asian industrializing countries (Indonesia, to be introduced into the “follower” countries Malaysia and Thailand) and the re-emergence of (koshinkoku). They would also allow the transfer China in the world economy have added weight to of technology and capital goods needed for their the idea of a wave of industrial development spread- subsequent production in the “follower” economy ing across a much wider region and focused and, eventually, for their export to other countries. attention on East Asia1 as a new growth pole in the Finally, when a country loses competitiveness in a world economy. particular product, its domestic production is phased out and replaced by imports from the “fol- This regional pattern of industrialization, lowers”, which have succeeded in building up a which has not only proceeded in waves but also competitive industry in that product. Thus, this progressively involved a regional division of la- sequence combines the life-cycle of a particular bour based on an industrial and locational product with a dynamic process of shifting com- hierarchy, has been dubbed as a “flying geese de- parative advantage. The outcome is a constantly velopment paradigm.”2 This paradigm provides a evolving regional division of labour within a group description of the life-cycles of various industries of economies all striving for the common goal of in the course of economic development and of the industrialization. relocation of industries from one country to an- other through trade and foreign direct investment More recently emphasis has been placed on (FDI) in response to shifts in competitiveness.3 FDI as an additional channel for “recycling com- However, there is more at stake in the flying geese parative advantage”. On this view, FDI both shapes paradigm than pure description. The significance and is shaped by the evolution of comparative ad- of the paradigm lies in its analysis of the linkages vantage between the follower countries and the lead between the different countries in a regional hier- country. Domestic investment withdraws from archy, the mechanisms by which development is those sectors suffering from loss of competitive- transmitted from one country to another, the re- ness (e.g. labour-intensive sectors such as textiles 76 Trade and Development Report, 1996 Box 4 THEORIES OF TRADE AND