Introduction (Sources of Growth in East Asia)
High levels of economic growth of ASEAN+3 countries have been constituting main debates among economists. While some of these countries have reached advanced economy level, such as South Korea and Singapore, some other are still considered as developing countries in the path of a success story, such as China. In this paper, the most outstanding source of economic growth, industrialization, more specifically industrial policies, will be examined in the light of South Korea, China, and Singapore. Among other source of growth, industrialization is especially selected to analyse as it is closely related to the other elements, if not include them and there is no agricultural-oriented success story reaching over $500 GDP per capita income REF (Kahn 1979:118). The argument of this paper, is that although these three countries have greatly differentiated in terms of policies they applied, the political structure, saving rates; they all achieved economic growth. Therefore, it is possible to claim that even opposite strategies may bring growth depending on the context. In terms of structure, this paper will firstly discuss how South Korea, China, and Singapore industrialized; respectively, and secondly, what are their differences and similarities.
The underlying reasons behind the selection of South Korea, China and Singapore as country cases is that (i) all of them are either industrialized or in the process of industrialization, and (ii) each has followed similar but different patterns.
GDP per capita (current US$)
Source: World Bank
1- South Korea
The most outstanding case was South Korea among other East Asian late developed countries. Its story is remarkable in terms of rapid industrialization, hence it caused a long-debated discussion among economists. Liberal economists, like REF ANNE, presented it as a success of free market policies, appraised the exploitation of classical comparative advantage theory, and gave emphasis on export-oriented industrialization, especially given the failure of Latin American countries. However, it has been revealed that the country’s case was indeed opposite to what liberals advocate. REF General Park, who is the man behind the economic success of South Korea, took the power through a military coup, suppressed his opponents, and governed the country with strict authoritarian regime. The government has intervened the economy, put pressure on business cycles, implemented high tariff rates, supported infant industries, and facilitated financial credits for crucial investments. REF (Luedde-Neurath, 1988).
As a short briefing of South Korean industrialization process, before 1960s, the country’s ambitious development plans started with the coup of General Park Chung-hee in 1961. Prior to this date, Korea had a war with its north counterpart, a devastating economy relied on foreign aids, and weak development programs focusing on industrialization based on domestic demand. Park established an authoritarian regime in which he initialized the economic development program. New industrialization strategy focused on the increasing export capability, instead of taking the base from domestic market. Overall, Korean economy was one of the most rapidly growing economies by more than 7 percentage annual growth per capita income rate. (Westphal, 1990)
When it comes to industrial policies implemented by Park in South Korea, Westphal (1990) makes a distinction between them: Neutral policies, in which state subsidies have no selective agenda, as opposed to non-neutral policies which vary among economic activities. While export-encouraging policies can be considered as non-neutral policies, neutral policies were implemented in supporting infant industries.
In terms of policies which are supporting export activities, Korea’s industrial policies have been different from Latin American countries or Turkey REF (Onaran and Stockhammer, 2005). Instead of pursuing market isolation policy to protect the domestic industries from fierce external competition, South Korea tried to give a broader demand basis to domestic companies by encouraging them to export. In this context, the state has taken a set of measures. Firstly, financial system was facilitated for exporters, they found chance to access lower interest rate credits. Secondly, unitary exchange which had been in effect before, was lifted and instead of it, multiple exchange rate mechanism was put in effect to expand exporters’ financial opportunities. Finally, intermediate input goods for the export oriented industries were exempted from tariff. With all these support from the state, export of industrial products has increased in a short period.
In addition to support for industrial exporters, Park’s regime also removed the complex bureaucratic mechanisms which may block rapid decision making process and effective cooperation. In this regard, state officials have contacted with businessmen on daily basis, a room for controlling export activities was opened just next door of the trade minister, and short term and long term targets were determined jointly by the state and private actors. It is safe to say that one of the most significant factor of the success in the industrialization was the effective and optimal cooperation. (ziya onis REF). Too much cooperation between the state and business may have prevented efficient economic outcomes through blocking the threatening power of the state, as the incentives are provided based on certain conditions. Otherwise, conditions of subsidies given by the state may have become meaningless and investments may have become permanently dependent to subsidies.
The other element of South Korean industrialization was the protection of infant industries. Policies aiming to provide a safe environment for the strategic infant industries were non-neutral. Similarly, the state made easier for them to access financial credits from low interest rates, and granted tax reductions. Furthermore, targeting system was established in which subsidies are reduced or completely abolished if the supported companies fail to achieve pre-determined goals.
To sum up, South Korea has successfully industrialized while many other developing countries failed. This process had started with General Park’s initiatives but continued after his death. Today, South Korea are not implementing these industrial policies any more, instead, a relatively much relaxed free trade regime is now in operation.
2- China
Figure 1: National Industrial Policy Programs in China, 1989-2011
Source: REF Heilmann and Shih 2012.
China had started its industrialization moves long before 1980s. However, after a series of severe failures, beginning in the late 1980s, new industrial policies brought the success. As it can be seen from the figure above, Chinese administration started to follow more detailed and ambitious policies over the course of last two decades. REF Sebastian Heilmann and Lea Shih
One important factor in the creation of Chinese industrial policies which needs to be mentioned was Japanese effect. While all the efforts of China toward industrialization have utterly failed before 1980s, Japan had made a huge improvement and placed itself among developed country cluster. This success attracted notice, and Chinese administration started to copy government guided industrial policies and planning strategy. In this purpose, delegation reports which focus on Japanese industrial modernization have been written in order to absorb their strategies. REF . Sebastian Heilmann and Lea Shih
Periods of Industrialization Processes
Source: REF Estevez-Abe (2008) and Wen(2016a,b) and the references therein.
Chinese industrialization period can be divided into two: First half of the reform era, which started in 1978 and last until early 1990s, was the early industrialization stage. In this stage, labour-intensive production has gained power. In the second stage, starting in early 1990s and still continue, industry transformed its structure to capital-intensive production.
In terms of state intervention to the industrialization, the state had taken very active role in the first reform era. Collectively owned rural enterprises had played a vital role in the industrialization, and both SOEs and these enterprises created a job market for everyone, increasing consumption which provide a large basis of demand level for the industrialization. REF LO AND WU. However, in the second era, share of state-owned enterprises in the economy decreased from 78 per cent to 38 per cent from 1978 to 2010. REF LO AND WU. Among SOEs, those producing labour-intensive goods have been removed, whereas capital-intensive ones remained. Despite the decreasing number of SOEs, state’s control over financial system is still very high. In 2010, for example, state banks constituted more than 70% of the total assets. REF (Lo and Jiang, 2011).
Overall, in the first era, export manufacturing had been supported instead of primary goods, and they had succeeded. However, South Korean type of support for strategically selected industries had failed in this period. When it comes to second era, these policies became successful this time as the infrastructure and early stage completed and they became ready for upgrading.
Chinese administration’s support for domestic industries have been criticized from American, European and Japanese chambers of commerce. In reports prepared by them, China was warned in 2010 and 2011 as its industrial, technology and investment policies caused unfair conditions on market competition for the foreign business inside China. REF http://www.amchamchina.org/article/7914; http://europeanchamber.com.cn/en/chamber-publications; http://www.cjcci.biz/public_html/whitepaper/2011.
Singapore
Singapore, alongside with South Korea and China, has attracted the attention of economists due to its success story, but in a different way. While South Korea and China are still considered as the examples of non-orthodox policies, Singapore is presented to the world as the victory of free trade, limited interventionist liberal policies.
Singapore, one of the Four Asian Tigers, has been entrepot trade until its separation from Malaysia in 1965. The country had started its industrialization process after the separation, and now it has one of the highest GDP per capita income across the world, diverging from the once-merged country, Malaysia. It is, at the same time, attributed as one of the freest trade regimes. However, on the other hand, SOEs in Singapore, including Singapore Airlines, account for 22 per cent of the GDP, all the lads belong to the state, and 85% of the housing supply is provided by the state. CHANG REF.
Figure: GDP per capita income of Singapore and Malaysia between 1960 and 2015.
Source: World Bank
After the separation from the Federation of Malaysia in 1965, it was not likely for Singapore to develop its own industry very rapidly. Even the first PM of the country, Mr Lee Kuan Yew, had sad that the view of a separated Singapore was “political, economic, and geographical absurdity”. REF. This was general view at that time because Singapore did not have natural sources or any industrial infrastructure to hope for an advanced economy. Instead, its consumption was greatly supplied from outside.
The new government made a drastic change in the industrialization strategy. Instead of keeping import substitution policies, like Latin American countries, the state altered the development strategy to export-oriented industrialization, just like South Korea. In this regard, it is possible to say that Singapore may have been influenced by the early success of South Korea as it started the same progress just a few years ago. However, the role of the state with this strategy, was preparing the favourable conditions for FDIs by investing in infrastructure, more than creating its own industries. REF Linda low the role of the government in Singapore’s.. Therefore, with the officially declared new strategy in 1968, the state initialized the export-oriented labour intensive industrialization programme.
The government had changed the strategy but it was still suffering from the insufficient capital for a large scale industrialization project. Instead of following China’s path here, Singapore pursued the way of welcoming foreign capital, and encouraged foreign direct investments. In addition, beginning in late 1970s, state officials decided to encourage improvements in technology, especially information technologies and computers, as it is necessary for the upgrading in the industries. With this purpose, Telecommunications Authority of Singapore and National Computer Board (NCB) had been established. Eventually, Singapore shifted from labour-intensive industrialization to capital intensive production in 1980s. For instance, in the 1980s, Singapore was the leading country of the world in supplying hard disk drives.
Comparison
There are different approaches in explaining what caused such successful policies in industrialization of all three countries. In the previous section, countries have been explained individually. In this section, a set of comparison points in their industrialization policies will be discussed. While explaining policy differences, factors which affect policies, such as political environment, will also be mentioned.
First, one approach is tended to explain these success stories with pre-industrialization conditions. According to this view, the successful industrializations are owed to previous conditions. For the South Korean case, for example, REF XX says that South Korea had higher levels of human capital comparing to Turkey. For China, Mustaqh Khan REF argues that middle class had been demolished in the long communist period of China. Hence, no pressure groups left who are able to channel the state’s economic resources in favour of them, inefficiently. The huge gap between rich bureaucracy and average people gave the Chinese state flexible mobility power. Also, he argues, after decades of severe poverty period Chinese people faced, both intellectuals and the public become more submissive, prioritizing basic economic gains to freedom. Another view that explain China’s industrialization success with prior conditions is that China’s actual economic potential had been long suppressed. Therefore, economic policies which are not as low quality as the previous communist administration, enabled it to realize its potential. When it comes to Singapore, the country’s economy has been based on entrepot trade, such as Hong Kong. This, indeed, even if the trade did not benefit to them, they had the necessary institutional infrastructure. Therefore, they easily attracted the foreign capital.
Secondly, as discussed in the previous section, another important factor in industrialization was interventionist policies of state. Both China and South Korea have heavily supported infant industries, provided huge protection for them, and subsidized export activities whereas Singapore granted only limited support. It can be said that this is partly because of Singapore’s special situation comparing to other two. Singaporean state did not have to provide large amounts of money to support its industries, it had already foreign capital inflow. This was not the case for China or for South Korea. It is difficult to analyse the causality problem in here: Did the capital inflow come to Singapore because of low tax rates or vice versa? Even if this is a difficult question, it is safe to say that the best policy Singaporean state can apply was relatively free trade regime. As it can be seen from this point, different policies can be desirable depending on country-specific conditions.
Thirdly, politics can be the most crucial factor in the industrialization process through direct or indirect effects. It is not possible to understand, for example, how the distribution of power affected the selection process of strategically important sectors, or do authoritarian leaders need to justify their regimes by economic growth. Inclusive institutions have been in effect in Singapore in which British rule had still penetration on politics, while China and South Korea industrialized under exclusive political institutions. The role of political institutions can be observed through two main topics: Implementation of industrial policies. Second, and saving rates.
In terms of implementation of industrial policies, “East Asian miracle” or China’s current industrialization have been used as counter-examples of the view of “democracy does bring growth”. In this sense, South Korea and China have carried out successful industrialization under authoritarian regimes. General Park had established a military rule, and jailed 51 leaders of Chaebol, rich family corporations of South Korea. This, indeed, similar to China’s oppression on intellectuals, forced them to cooperate with Park as they were released in return of confiscation. (Khaled, 2007). Later, these leaders worked in a close cooperation with the state and took the role of decentralizing administration of incentives. On the other hand, Singapore has followed a more democratic path in its industrialization, as an integral of free trade regime.
In terms of saving rates, there is a literature on whether inclusive institutions result in low saving rates. The logic of the argument is that poor people are tended to consume immediately as they need basic goods, and inclusive institutions give them this opportunity. Richer people, on the other hand, are tended to save as they have already purchased what they need in the first place, to some extent. Authoritarian regimes may push the poor people to save more through control over financial system and hence, create investment funds. China, as opposed to other developing countries, has higher interest rates in this sense. This was only possible by the state’s policies which force to increase the savings. South Korea also constrained the expenditure of the people by bringing severe restrictions on imports, although its investment activities are partially funded by the USA. Singapore, on the other hand, did not follow such path as its investment funds have been funded by the foreign capital, or directly by FDIs. Singapore’s strategic geographical location for trade, size of the country, and the welcoming policies of the state to foreigners, facilitated the capital inflow. Hence, without addressing the need to increase domestic saving, foreign capital constituted the primary source for industrialization.
Conclusion
As a conclusion, South Korea, China and Singapore followed different industrialization paths. One outstanding similar pattern of all these countries was export-oriented industrialization. However, they differentiate in support for infant industries, political regimes, and economic backgrounds. All these factors played different roles in their industrialization stories but they proved successful. Hence, it is safe to say that the role of some elements in industrialization is depended on the country-specific differences and cannot be generalized.