Paths of Industrialization: An Overview Chapter 1 Gary Gereffi

1
Paths of Industrialization An Overview(Chapter
1 Gary Gereffi)

• Latin American and East Asian NICs are among the
  most industrialized nations in the developing
  world but have followed different paths of
  industrialization.
• Latin American NICs focused on import-substituting
  investments in advanced manufacturing industries
  (eg. Automobiles, chemicals, machinery,
  pharmaceuticals) where output was primarily for
  large domestic Latin American markets.
• East Asian NICs (Hong Kong, Taiwan, South Korea,
  and Singapore) more outward oriented
  industrialization to generate foreign exchange of
  manufactured exports (textiles, garments,
  consumer electronics) and later Taiwan, South
  Korea, and Singapore moved to heavier industries
  (steel, shipbuilding, petrochemicals, vehicle
  manufacturing, and computers)
• While the East Asian countries have performed
  better, both economically and socially, both sets
  of countries have been motivated by their
  comparative advantages, attempting to shift them
  into competitive advantage.

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• While the East Asian and Latin American NICs are
  vastly different, they do share some similar
  characteristics
• Rapid and relatively sustained economic growth
  based on a sharp increase in the manufacturing
  sectors share of total output and employment
• A growing diversification of industrial
  production that permits each nation to make ever
  broader ranges of manufactured goods
• A fast expansion of exports with an emphasis on
  manufactures
• Both sets of countries are considered
  upper-middle income by World Bank standards,
  however, the East Asian NICs grew strongly durin
  g the 1980s while the Latin American NICs
  declined.
• South Korea and Taiwan did not experience
  accelerated rates of growth until the mid 1960s
  while Mexico and Brazil were well on their way
  contrastingly South Korea and Taiwan took off
  during the 1980s, so the author asserts that it
  is perhaps too early to overemphasize the recent
  developments of the East Asian NICs without
  keeping them in the global context.

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• Today, East Asian NICs have established
  themselves as the Third Worlds main exporters.
• 3 East Asian superexporters Taiwan, Hong
  Kong, and South Korea.
• East Asian NICs far more dependent on external
  trade than Latin America or Japan because of
  their smaller size. These exports have been
  driven by the phenomenal growth of their
  manufactured exports.lat profile of income
  distribution
• Latin American NICs export a more diversified
  range of products because of their natural
  resources, while East Asian NICs export more
  technology-intensive products.
• East Asian NICs tend to have a very flat income
  distribution while Latin American NICs have more
  inequitable distributions (eg. Brazil in 1976
  top 1percent received a larger slice of national
  income than the entire 50 percent).

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• Development patterns have 3 dimensions
• 1. Types of industries that are most prominent in
  each phase of a countrys economic development
• 2. The degree to which these leading industries
  are inwardly or outwardly oriented (ie. Whether
  production is destined for the domestic market or
  for export)
• 3. The major economic agents relied on to
  implement and sustain development.
• Five main phases of industrial development
• Outward looking
• 1. commodity export phase
• 2. Primary export-oriented industrialization
• 3. Secondary export-oriented industrialization
• Inward looking
• 4. Primary import-substituting industrialization
  (ISI)
• 5. Secondary ISI
• Figure 1.1 p. 18 shows how both E.A and L.A
  followed a mix of these phases.
• Export oriented and Import substituting
  industrialization phases are complimentary and
  interactive.
• Both sets of strategies are subject to
  constraints (eg. Balanace-of-payment problems,
  inflation, trade disruption), but both sets of
  NICs have adapted or switched strategies and
  diversified their patterns of export growth in
  the 1980s.

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• Development strategies sets of government
  policies that shape a countrys relationship to
  the global economy and that affect the domestic
  allocation of resources among industries and
  major social groups.
• Working Hypothesis state-led industrialization
  has become the norm in the Latin American and
  East Asian NICs since the 1950s, although the
  motives, instruments, and consequences of this
  government involvement vary. (p. 23)

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The Neoclassical and Dependency Perspectives

• (Haggard Chapter 1)

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• Both the liberal (neoclassical) and dependency
  perspectives share a common tendency to ignore
  how domestic political forces constrain economic
  policy and shape state responses to the external
  environment.
• Neoclassical perspective argues that economic
  success can only result from the correct policy
  choices.
• Haggard argues that while many countries can
  benefit from market-oriented reforms, but that it
  is unlikely that the East Asian model could be
  exported to other LDCs. East Asian NICs successes
  rest not only on the policies, but also the
  political and institutional environments.
• Dependency perspective argues that countries are
  dependent by their characteristics, regardless
  of what actions or policies they take.
• Haggard argues that such a view is much too rigid
  as the international environment should be viewed
  as shifting constraints through which states
  could learn and expand and change. He goes on to
  say that preoccupation with dependency deflects
  attention from the central theoretical question.
  Under what conditions will the state supplant
  foreign investment in strategic sectors, support
  local capital in doing so, or tighten its
  regulatory grip?

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Neoclassical

• In viewing economic development of NICs, both the
  neoclassical and dependency perspectives neglect
  politics and institutions.
• Import-substituting Industrialization (ISI)
  strongly advocated by Raul Prebisch for Latin
  America. Argued that primary producers faced
  price volatility in the short run and declining
  terms of trade over the longer run the cure
  Industrialization through protection.
• By 1960s, neoclassical critics of ISI argued that
  problems within developing countries could be
  traced to misguided government intervention. This
  argument had three parts
• 1. Stressed the benefits of participation in
  the international division of labor.
• 2. Stressed the costs and distortions of ISI
• 3. Stressed the performance of countries
  pursuing market-conforming policies.
• Liberal thinking rejected thoughts that trade
  between developed and developing countries as
  being harmful to development.
• Evidence accumulated contradicting the claim that
  producers in developing countries faced a secular
  decline in prices, and short-term market
  volatility was found to be less disruptive than
  thought.
• Contemporary liberals continued to ignore the
  political dimension of the political economy.
  Remained unconcerned with unbalanced power
  relationships, and viewed them as being the
  exception rather than the norm.

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• Argued that the market must take reforms to
  ensure both international and domestic markets to
  work efficiently.
• Comparative Advantage example on p. 11.
• ISI lack of exports made balance-of-payment
  difficulties met by increasing control over
  foreign-exchange transactions foreign aid,
  direct investment, and commercial borrowing
  ended up increasing external vulnerability.
• Because capital-intensive production processes
  halted the ability of the industrial sector under
  ISI to increase labor, relatively high wage
  employment coexisted with high rates of under and
  unemployment.
• State control of import licensing and foreign
  exchange led to more corruption, smuggling, and
  black markets along with inefficient resource
  allocation.
• Most developing countries did not have the
  political or administrative capacities for ISI to
  really work.
• Haggard A central argument of this book is that
  the shift to export-led growth was also
  accompanied by economic, legal, and institutional
  reforms that the neoclassical interpretation has
  generally ignored. (15)

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Explaining Development Strategies(Haggard
Chapter 2)

• 3 historical patterns of growth in developing
  countries
• 1. import-substitution trajectory
  (characteristic of Mexico and Brazil)
• 2. export-led growth trajectory (Korea and
  Taiwan)
• 3. entrepot path (related to export-led see
  Singapore and Hong Kong)
• For all of these transitions, policy played an
  important role.
• 4 components of national strategy p. 27-28
• 1. orientation
• 2. instruments
• 3. agents
• 4. integration or coherence.
• Purpose of the chapter to advance the logic of
  different theoretical arguments and identify the
  reasons why some causal factors are likely to
  operate more powerfully than others. Also, to
  establish a set of dimensions by which the cases
  may be compared and identify some of the problems
  and puzzles facing certain cases.

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• Table 2.1 p. 25 explains best the three
  development trajectories
• Several economic forces help explain transitions
  between different growth phases including the
  accumulation of capital and changing comparative
  advantage. policy also important.
• Haggard wants to know how politics affects the
  internal coherence of policy and the consistency
  with which it is pursued over time. (p 28)
• Purpose of comparative historical analysis weigh
  competing explanations of policy change, generate
  some contingent generalizations, and develop more
  convincing explanations of particular cases.
• 4 distinct levels of analysis the international
  system (most powerful in policy reform), domestic
  coalitions, domestic institutions, and ideology.
• Haggard method of agreement and method of
  difference compares and contrasts countries
  with similar growth paths and those with
  alternative paths. Explores variations among
  countries following a similar path to isolate
  peculiarities in cases.

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• External economic shock is likely to have an
  important influence on outward-oriented policies
  regardless of if it is based on entrepot
  activities or the export of products or
  manufactures.
• Also must consider international political
  pressures from external political actors.
• Summary of influence of the international system
  p. 33 table 2.2
• Societal or interest-based explanations of
  policy policy will reflect the interests of
  dominant coalitions, whether seen as ruling
  parties, sectors, classes, or shifting coalitions
  of interest groups. The state is an arena where
  coalition battles are waged.
• The ability to influence policy by social groups-
  agriculture, working class, and business groups-
  best understood through the institutional links
  that they have to the state.
• Haggard To summarize, policies reflect the
  effort to build and sustain coalitions, but
  available organizational resources expand or
  contract politicians freedom of maneuver.
  Characteristics of the state as an institution
  the degree of autonomy from social forces, the
  cohesion of the policy-making apparatus, and the
  available policy instruments are crucial in
  understanding policy reform.

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The Neoclassical Explanation(Wade Ch. 3)

• Widely agreed that the cause of Taiwans
  industrial success is the coming together
  (1958-1962) of 4 key conditions virtual free
  trade regime for exporters and a lowering of
  protection more generally a free labor market
  high interest rates and conservative government
  budgeting.
• Throughout 1950s govt operated under import
  substitution policy, but then took steps unitary
  exchange rate, reduced tarrffs, export promotion,
  and foreign investments.
• Shift towards outward orientation affected GNP
  and exports chiefly through prices.
• Fast export / home market growth growth in
  employment, real wages, and lowering of poverty
• Demand pulled up labor costs, savings grew, shift
  in economy towards capital and technology
  intensive exports.
• Conditions for free trade able to import inputs
  into export production without restrictions and
  tariffs, and exchange rate facing exporters
  should be equal to the hypothetical free trade
  rate.
• For the first condition, Taiwan largely met this
  for the second, Taiwan had the smallest
  difference between official exchange rate and
  hypothetical exchange rate.
• The labor market in Taiwan competitive labor
  market due to government repression of
  institutions (eg. Weak trade unions / collective
  bargaining), low level of unemployment, and
  constant growth of real wages.

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• Taiwan one of first developing countries to adopt
  a high real interest rate policy. this came in
  response to hyperinflation.
• High price of credit has helped exports, but has
  also meant that exporters have to carry the
  interest costs greater than those of their
  competitors.
• Direct taxes are low and there is plenty of
  incentive to make money
• Indirect taxes however are high (customs duties,
  etc.)
• Overall development policy has resulted in
  budgetary surpluses
• Little has been spent on environmental or social
  welfare instead household income pooling, dense
  network of wholesale and retail trade.
• Government budget surpluses have kept inflation
  in check and kept exports competitive and
  investment high.

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• Five more conditions that have been important for
  growth
• A remarkably stable real exchange rate great
  help to investors
• High savings highest savings ration in the
  world much less inflation and foreign borrowing
  (important to note that people have to save for
  their future as pensions are rare and lump sum
  payments are common also savings for childrens
  education and a lack of a social net)
• Well trained labor supply high concentration on
  vocational training, high pay/prestige for
  engineers securing national control over
  technology imports and mastery of these
  technologies Taiwan also has third highest
  level of labor efficiency beating out even the
  U.S in a study of 9 Asian countries plus the U.S.
• Competitive Industrial Structure flexibility,
  low overheads, and lack of monopoly power small
  family firms and business clusters. Dualistic
  economy with large sectors of small-scale firms
  and large-scale firms in 1985 firms with less
  than 300 employees accounted for 65 of
  manufactured exports but big firms used as
  input suppliers (petrochemicals, textiles, steel,
  etc.) to the small firms. Wade argues this way
  that firms are organized and do business presents
  a gap in the argument of his book.
• Stable Government one-party state by the
  Nationalist party (Kuomintang, or KMT) powerful
  executive branch this has allowed Taiwan to
  avoid the pitfalls of many developing countries
  as business people can have faith that there is
  stability.

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• Wades problem How can we decide to what extent
  Taiwans exceptional economic performance is due
  to the presence of many of the neoclassical
  growth conditions and to what extent to the
  governments selective promotion policies? (72)
• Wade argues that it is enough to demonstrate how
  the government has been guiding the market on a
  large scale and that others have overlooked this.

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Questions

• Looking at the case study of Taiwan, do you feel
  that it is an exportable formula to Latin
  American countries? Is it too early to tell if
  this model actually succeeds or is there enough
  evidence to argue that the strong presence of
  government has in fact guided the market?
• Do you agree with Haggards argument that both
  the neoclassical and dependency schools of
  thought tend to ignore domestic political forces
  too much in their views of policy?
• What do you think are the successes and pitfalls
  of each school of thought? In which ways do you
  think they are right, and in which ways do you
  think theyve been too narrow minded?