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Journal of the Asia Pacific Economy Vol. 14, No. 2, May 2009, 107–115

Industrializing Southeast Asia

Rajah Rasiaha∗ and Hing Ai Yunb

a Faculty of Economics and Administration, University of Malaya, 50603 Kuala Lumpur, Malaysia; bFaculty of Social Sciences, National University of Singapore, Singapore

This paper introduces the state of industrialization in Southeast Asia, rationale used to promote industrialization, the timing of policy emphasis on export orientation and the different outcomes enjoyed by the market and transition economies. Although a number of economies have experimented with import substitution policies, industrialization in the Southeast Asian economies is largely driven by export markets. The paper ends by providing the setting for a deeper scrutiny of manufacturing issues selectively by industry in Southeast Asia.

Keywords: industrialization; Southeast Asia; import substitution; export orientation

JEL classifications: O14, O25, O53

1. Introduction

Following the controversial publication of the East Asian Miracle by the World Bank (1993), there has been intense debate on the drivers of industrialization in East and Southeast Asia. Among the key findings of World Bank (1993) was that government intervention was indeed pervasive in the Northeast Asian economies while market forces were the dominant driver of industrialization in the Southeast Asian economies, and because ‘government failure is more serious than market failure as well as because the global economy no longer tolerates interventionist policies’, the latter route is the more desirable one for developing economies to adopt. Accepting eventually that interventions accompanied rapid economic growth, neo-liberal works argued that it was achieved through perspiration rather than inspiration (see Krugman 1994). Young’s (1994, 1995) influential articles using the total factor productivity (TFP) methodology, originally developed by Solow (1956) and Swann (1956), had shown that these countries had grown because of expansion in factor inputs rather than technical change. There were subsequently a number of works with neo-liberal economists using adapted TFP methodologies or using different periods to show that growth could be sustained owing to higher TFP levels, but the dirigistes shattered the planks of Young’s works by simply attacking the methodology used (Lall 1994, 1996, Rasiah 1995, 2003, Felipe 2003). Kaldor (1960), Nelson (1994), Singh (1998) and Rasiah (2000, 2008) had argued that the TFP framework failed to capture technical progress embodied in capital and replacement capital.

Whatever the ideological and theoretical problems of the leading economic arguments, the Asian financial crisis applied serious pressure on the Southeast Asian economies to

∗Corresponding author. Email: [email protected]

ISSN: 1354-7860 print / 1469-9648 online C© 2009 Taylor & Francis

DOI: 10.1080/13547860902785948 http://www.informaworld.com

108 R. Rasiah and Hing A.Y.

pursue belt-tightening industrial strategies. Unlike the Northeast Asian economies where local capital drove industrial catch-up, foreign ownership led export-oriented industrial- ization in most of Southeast Asia. Export-processing zones a la Singapore, Malaysia and Thailand became the prime industrial approach adopted across Philippines, Indonesia, Viet- nam, Cambodia, Laos, Myanmar and East Timor. Foreign direct investment became a key source of capital inputs in these strategies. Myanmar and East Timor have experienced little industrialization owing to serious political instability. Industrialization never figured as an important policy objective only in Brunei.

This special issue is targeted at bringing together industrial transformation that has occurred across Southeast Asia. Because past policies are important in explaining these developments, the papers in the issue take account of the history of industrialization of each of the countries for the respective industries chosen. The focus of this issue is neither on establishing the efficacy of neo-liberal arguments nor on proving the state’s efforts to get relative prices wrong. It focuses on explaining government mediation of domestic efforts as well as international forces and their industrial consequences in Southeast Asia. This introductory paper is organized as follows. The next section provides the rationale for the pursuit of industrial policy and the form it took in Southeast Asia. The subsequent section discusses the importance of manufacturing in the Southeast Asian economies. The last section provides the setting for the issue.

2. Why industrialize?

The arguments on industrialization as the vehicle to promote growth arose largely from the advocates of industrial policy. Smith (1776) and Young (1928) had articulated the arguments incisively to show why industrialization is essential to drive increasing returns activities in particular economies. Gerschenkron (1962), Chang (2003), Lall (2001) and Reinert (2007) provided historical evidence systemically to argue that all successful developers have used industrial policy either consciously or unconsciously to industrialize. Kaldor (1967) used the Verdoorn relationship to argue that manufacturing possessed increasing returns properties and hence enjoyed the greatest potential for supporting rapid economic growth. Using two econometric equations, Kaldor (1967) demonstrated that manufacturing enjoyed a positive and the strongest elasticity of change with gross domestic product (GDP). Several other studies also provided quantitative evidence to show the cumulative causation effects of manufacturing (see Cripps and Tarling 1973, Brailovsky 1981, Weiss 1984, Rasiah 1995).

Industrialization – both the growth in share of GDP and the diversification into higher- value-added activities – has been associated with the successful development of the OECD (Organization for Economic Cooperation and Development) countries in the initial years of rapid growth (see Reinert 2007). East and Southeast Asia’s successful developers – Japan, Korea, Singapore and Taiwan – enjoyed rapid industrialization throughout their high growth years (see Hamilton 1983, Amsden 1989, Rodan 1990, Wade 1990).

Attempts to discuss the importance of industrialization will not be complete without a discussion on the trade and the structural orientation of industries that should be promoted. The 1950s advocates of industrial development recommended a focus on inward-oriented heavy and capital goods as an integral part of final consumption goods manufacturing. This approach arose from Marx (1867), Kalecki (1976) and McFarlane (1984) who argued that the department capital goods were critical complementary inputs for the development of other industries. Britain, the US, Germany, Japan, Korea and Taiwan very much en- joyed the development of both light manufacturing and complementary heavy industries, thereby making them versatile in entering a wide range of final goods industries. Yet, light manufacturing goods such as textiles and garments also grew rapidly in these countries.

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Apart from Britain – which had de-industrialized rapidly by the 1970s – the other countries are also at the frontier in the manufacture of electronics devices (WTO 2007).

The focus on heavy industries behind import substitution – in both large and small domestic markets – failed in many countries because of a combination of a lack of scale and crony approaches that removed competitive pressures to drive firm-level technological catch-up. Poorly coordinated and cronyist import substitution policies failed in Latin Amer- ica (Jenkins 1987, Evans 1995, Cardoso 2001), Philippines (Ofreneo 2008) and Malaysia (Jesudasan 1987, Jomo 1990, Rasiah 2003).

However, Korea and Taiwan managed to achieve competitiveness in the heavy industries of steel, shipbuilding and cars and machinery and steel by using import substitution for export promotion, and a deliberate learning and innovation strategies and performance standards (Fransman 1986, Amsden 1989, Rasiah and Lin 2005). Governments in these countries enjoyed autonomy from clientelist groups to enforce stringent conditions on the manufacturers. Hence, it can be argued that strategic industrial policy a la the Northeast Asian models has been successful.

Unlike the Northeast Asian experiences where local capital became the pivot upon which technological catch-up was achieved, foreign capital has been the prime driver of industrialization in Southeast Asia. The small-size status prevented any possible replication of the Northeast Asian approach in Singapore, and hence manufacturing by and large evolved as multinationals incorporated the Island into their value chains by relocating particular stages of production and distribution. Nevertheless, government intervention was crucial to strengthen the quality of supporting high-technology environment in the country to stimulate upgrading in multinationals. Hence, Singapore managed to sustain improvements in value-added manufacturing while at the same time attracting knowledge- intensive services activities.

Malaysia, Thailand, Philippines and Indonesia took on a more complex but eclectic approach trying to marry both the Northeast Asian experiences when supporting heavy industries and the Singaporean approach when attracting foreign investment in export- oriented light industries. Whereas the Northeast Asian economies started industrialization as resource-poor economies, most Southeast Asian economies have enjoyed strong en- dowments in petroleum and other minerals, metal ores, timber and agricultural crops. Malaysia continues to have such a dualistic policy framework. Thailand does not have an explicit policy to protect manufacturing since the 1990s but incentives remain im- portant in some industries (Rock 2000). Political instability and severe balance of pay- ment problems by the 1980s forced Philippines to abandon its protectionist policies and adopt liberal export-oriented policies to promote industrialization. The 1997–1998 finan- cial crisis and subsequent political fallout drove Indonesia to pursue similar policies from 2000.

There is also recognition in the transitional economies about the significance of indus- trialization for development. Apart from isolated Myanmar, the transitional economies of Vietnam, Cambodia and Laos have been integrating rapidly into export-oriented industrial value chains.

3. Southeast Asian industrialization

Although each country is different, the industrialization experience of the Southeast Asian economies can be examined under the categories of market and transition economies. Whereas the market economies enjoyed integration in the capitalist system much earlier, the transition economies were cut off from formal economic relations until Doi Moi started in Vietnam in 1989.

110 R. Rasiah and Hing A.Y.

3.1. Market economies

Although proactive industrialization in Southeast Asia began first in Philippines, Indone- sia and Thailand behind import substitution policies, Singapore and Malaysia enjoyed the highest manufacturing widening and deepening following their exposure to export-oriented industrialization since the 1960s and 1970s respectively. Malaysia had faced import sub- stitution since the Pioneer Industry Ordinance of 1958, and Singapore until it left the Federation of Malaysia in 1965, but the small domestic market discouraged further expan- sion. The Malaysian government also entered heavy industrialization from 1981 but there is little evidence to suggest that this policy has succeeded. In fact, its steel plant, Perwaja, went bankrupt by the late 1990s despite a massive bailout in the late 1980s (Khor 1987, Jomo 1998).

The import substitution experiences of Indonesia, Malaysia, Philippines and Thailand have generally been unsuccessful. Malaysia enjoyed considerable success in stimulating the transition from crude palm oil exports to processed palm oil exports and oleo-chemicals when the government imposed an export tax briefly in the early 1980s (see Gopal 1999). The import substitution automobile policies of Thailand, Philippines and Indonesia were gradu- ally eliminated following inefficient operations, trade pressures from abroad, governments’ inability to provide subsidies and the success of export-oriented industries. Malaysia has persisted with protecting the automobile industry but its export capacity has remained low compared to Thailand, Philippines and Indonesia. Automotive exports from Malaysia only rose from US$307 million in 2000 to US$920 million in 2006, whereas exports from Thai- land, Philippines and Indonesia rose from US$2417 million, US$583 million and US$369 million respectively in 2000 to US$9901 million, US$1506 million and US$1724 million respectively in 2006 (WTO 2007, Table 11.54).

Singapore showed the largest amount of manufactured exports with the figure rising from US$37.5 billion in 1990 to US$117.7 billion in 2000 and US$214.1 billion in 2006 (see Figure 1). Malaysia followed next with manufactured exports rising from US$15.8 billion in 1990 to US$78.9 billion in 2000 and US$117.9 billion in 2006. Thailand was a close third followed by Indonesia.

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Figure 1. Manufactured exports, market economies, 1990–2006. Source: WTO (2007), World Bank (2007).

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Figure 2. Manufacturing share in exports, market economies, 2000–2006. Source: WTO (2007), World Bank (2007).

The share of manufactured exports in GDP of Philippines was the highest in the years 2000 and 2006 (see Figure 2). The shares of manufactured exports in the GDP of Philippines, Singapore, Malaysia, Thailand and Indonesia in 2000 were 87.4, 85.4, 80.4, 74.8 and 56.5% respectively. Except for Thailand the shares for the rest fell in 2006. The share of manufactured exports in the GDP of Thailand alone rose to 75.3% in 2006.

3.2. Transition economies

Industrialization in the transitional economies of Vietnam, Cambodia, Laos and Myanmar took off on a rapid scale only from the 1990s. Indeed, Vietnam’s industrial transformation

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Figure 3. Manufactured exports, transition economies, 2000–2006. Source: WTO (2007), World Bank (2007).

112 R. Rasiah and Hing A.Y.

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Figure 4. Share of manufactured exports in GDP, transition economies, 2000–2006. Source: WTO (2007), World Bank (2007).

has been dramatic given the focus of socialism before the 1989 (see Beresford 1988, 1997) account of socialism in Vietnam. The fall of the Soviet Union was instrumental in the shift towards market-augmenting industrial focus in Vietnam and Laos. Whereas stable governments had already emerged behind socialism in Laos and Vietnam by the end of the 1970s, civil war prevented Cambodia from pursuing unification and development until the 1990s, while Myanmar continues to languish in chaos. Myanmar is not discussed in this paper because of problems with data reliability.

Manufactured exports grew strongly over the period 2000–2006 in Cambodia, Laos and Vietnam. Driven largely by garment exports, Cambodia’s manufactured exports grew from US$1.3 billion in 2000 to US$3.7 billion in 2006 (see Figure 3). Driven by a combination of agro-processed products, wood products and garments, manufactured exports from Laos grew from US$0.2 billion in 2000 to US$0.7 billion in 2006. Manufactured exports from Vietnam grew from US$6.2 billion in 2000 to US$24.1 billion in 2006. Although these figures are small when compared to the Southeast Asian market economies, the expansion rates suggest that it will be a matter of time that their significance becomes as important.

Whereas the share of manufactured exports in the GDP of Indonesia, Malaysia, Philip- pines and Singapore had declined over the period 2000–2006, the shares rose in the late- comers of Cambodia, Laos and Vietnam (see Figure 4). By far manufacturing was the most significant in the Cambodian economy accounting for 47.8% and 67.3% of GDP in 2000 and 2006 respectively. Nevertheless, the growth was also important in Laos and Vietnam where the share of manufactured exports in GDP rose from 11.1% and 23.5% respectively, in 2000 to 19.9% and 39.5% respectively in 2006.

Overall, it can be seen that manufacturing’s significance in the economies of Southeast Asia is either rising rapidly as is the case with the transition economies or is still very important as in Indonesia, Malaysia, Philippines, Singapore and Thailand.

4. The setting

For a number of reasons this issue makes no attempt to provide an exhaustive account of industrialization in Southeast Asia. In addition to paucity of data, the area specialization

Journal of the Asia Pacific Economy 113

of experts,1 as well as the relative importance of particular industries in certain coun- tries, makes some omissions unavoidable. Nevertheless, the issue attempts to provide a substantive albeit selective account of industrialization in Southeast Asia.

The papers were selected on the basis of the significance of particular industries to the Southeast Asian economies and their importance to particular countries. Electronics has dominated manufactured exports from Singapore, Malaysia, Philippines, Thailand and Indonesia for a number of decades and hence is discussed in greater detail. Indonesia excels in wood-based products accounting for the largest exports of plywood in the world in 2000. Garment exports have become very important for Vietnam, Cambodia and Laos since the turn of the millennium. Its significance initially also rose in Myanmar but has since the imposition of trade sanctions in 2003 by the US gradually declined in importance. Because of the peculiarity of trade-involving countries enjoying LDC (least developed country) status as they have been accorded preferential access through the ‘everything but arms’ clause by the European Union since 2001 and bilateral trading agreements with others such as the US, Vietnam is examined separately from Cambodia and Laos.

Whereas metal smelting dominated Malaysian exports for over a century, its signifi- cance has fallen since the crash of the tin mining industry in 1980 (Jomo 1990). It is for these reasons Philippines was chosen for this assessment, which offers a good example of an economy that has done well in metal-based products since the 1990s. Typical with in- dustrialization in the country the industry’s evolution has been dominated by liberalization and trade union pressures.

Singapore exemplifies how a strong state role can push a tiny economy up to higher levels of technological proficiency (Wong 2004). Ironically, Singapore was the fourth largest exporter of chemical products from Asia in 2006 with strong specialization in petro- chemicals despite lacking in natural resource endowments. The Singapore story obviously shows that endowments and technological capabilities can be created when the right policy mix is put in place.

Note 1. Palm oil processing was excluded only because of the editors’ inability to attract contributions.

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