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Latin America/Caribbean and Asia/Pacific Economics and Business Association An initiative of the Inter-American Development Bank and the Asian Development Bank Institute

Second LAEBA Annual Meeting Buenos Aires, Argentina – November 28-29, 2005

Export Growth and Industrial Policy: Lessons from the East Asian Miracle Experience

John Weiss

Sponsored by  Inter­American Development Bank  Integration and Trade Sector  Institute for the Integration of Latin  American and the Caribbean (INTAL) 

Export growth and industrial policy Lessons from East Asian Miracle experience

LAEBA conference 2005 • • • •

‘Strategic policies for global competition’ Four ADBI papers Overview Technology and competitiveness – Indonesia • Singapore model • Clusters and linkages Malaysia

Revival of industrial policy? • Some additional theorizing - increasing returns, externalities • Evidence of history ‘kicking away the ladder’ • Globalization – competitiveness strategies • ‘East Asian model’ – provides reference for successful experience in poor countries

East Asian Miracle • 1993 study – 4 ‘first tier NIEs’ – Singapore, Hong Kong, Korea, Taipei,China plus • 3 ‘second tier NIEs’ – Malaysia, Thailand, Indonesia • Rapid growth, export driven, ladder of comparative advantage • 1990’s second tier FDI-driven ‘new’ exports

Explanations for Miracle • Vast literature, diverse experience • Macro stability, ‘trade openness’, avoidance exchange rate overvaluation, benefits from exporting • Focus on education • High domestic savings and investment– partly endogenous • Technology import and improvement • Role of government, particularly re support for manufacturing

Industrial policy • Interventions to alter resource allocation – towards particular sectors, firms or activities • No single East Asian model – although Korea circa 1970 often exemplar • Wide range of mechanisms – import protection, export subsidies, tax credits, directed credit, EPZs, preferential licensing, technology support, wage repression, financial restraint • Diverse success

Korea shifting pattern • 1960’s export focus – functional, export targets • 1970’s heavy industry drive – selective, links with chaebol, heavy directed credit • 1980’s gradual liberalization, R and D • 1990’s – trade reform, technology focus, less government direction

Characteristics:where it worked • Strong export focus • Balance of incentives – avoidance of ‘antiexport bias’ (Bhagwati), cross subsidization • Flexibility – changing instruments • Performance linked -export criteria • Support time limited • Technology upgrading – either domestically or through FDI

Characteristics:where it failed • Cronyism, political connections • Ethnic dimension • Import substitution orientation – support for high cost producers • Lack of performance criteria and targets • Technology stagnant or inappropriate • ‘Soft state’ versus ‘developmental state’

Did it make a difference? • Tests unsatisfactory – can we isolate one policy? • What is the counterfactual • Where did the money go? Taipei, China most support to declining not ‘strategic’ sectors • Comparisons of productivity growth in supported and non-supported sectors

Did it make a difference? • Korea evidence that 8/12 ‘infants’ grew up • Macro simulations suggest modest positive impact 0.5% annually to growth (Pack) when growth 8% ‘hardly trivial but not secret of success’ • “The fact that almost all economies of the region had industrial policies .. suggests that such policies were an important part of their growth strategies, whether or not the highly imperfect econometric techniques for quantifying such impacts succeeded in verifying such claims” (Stiglitz)

If so, what was the mechanism? • Not ‘first-best’, non-distorting interventions • High investment – high export – high savings nexus • Industrial policy raised profitability of manufacturing viz other sectors • Maintained high investment with export focus • Built up industrial capacity at early stage of development

What is role today? • Often dismissed, but are we ‘kicking away the ladder’? • Lack of independent, technically competent bureaucracy • Global rules (WTO, FTAs) and TNCs only partially rule it out • Bound tariffs, actionable trade-distorting subsidies

Alternative versions • Support types of activities (training, R and D, risk-taking) and clusters (Rodrik) • Identify dynamic /‘strategic’ sectors (Lall) • Common principles, time-bound, selective, performance-based, clustering, ‘open’ trade, innovation • Let winners ‘emerge’ not be ‘picked’

Lessons from Miracle • No single model • Governments can play a positive role, but not all East Asian economies successful • Policy flexibility is important • Exporting a key dimension • Learning and technological upgrading critical

export growth and industrial policy: lessons from the east asian miracle experience