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Manufacturing Miracles?: The Rise and Fall of Export-Oriented Industrialization and

Alternatives to Export-Led Growth in East and Southeast Asia

Kevin Gawora

Security in Asia

Professor Ear

April 30th, 2015

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Export-Led Growth as a Magic Bullet?: The Promise and Pitfalls of Export-Oriented

Industrialization

One of the most notable events of the twentieth century has been the economic

rise of Japan and the rest of East Asia. From being a third-world backwater, war-torn and

humiliated Japan rose from the ashes to become the second largest economy in the world

by 19801. South Korea, Taiwan, Hong Kong and Singapore, emulated Japan’s economic

performance starting in the later half of the 1960’s to become regional economic powers,

and China followed with an economic boom starting in 1978 which led growth so rapid

as to challenge the United States’ economic hegemony. This explosive growth in East

Asia was mainly achieved by export-oriented industrialization (EOI), which is a process

by which industrialization and growth and increased by exporting goods for which the

nation has a comparative advantage. In Japan, China, and the rest of East Asia, this began

with labor-intensive goods, such as garments and toys, progressing to televisions and

cameras, and finally to high tech products that we associate East Asia with today. Despite

its phenomenal success, EOI has many limitations, such as increased sensitivity to

external markets, over simplification of economies to exporting a small range of

products, which was a main reason behind the severity of the 1997-1998 Asian Economic

Crisis. In addition, by focusing on external, rather than internal markets, EOI diverts

resources to building capital stock, rather than developing human capital and domestic

demand to support long-term growth. As Southeast Asia is now the main development

“frontier”, alternatives to the traditional EOI structure are beginning to brought to light,

1 "United Nations Statistics Division - National Accounts." United Nations Statistics Division - National Accounts. N.p., n.d. Web. 06 Mar. 2015.

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which could lead to new growth models, less growing pains and a more sustainable

development path for the rest of Asia.

Literature Review and Alternative Explanations

In researching my paper I consulted a wide variety of academic journal articles,

class readings and, on occasion, articles from online newspapers. Most of the statistics

that I cite in the paper come from World Bank databases and journal articles, which cite

statistics taken from databases, or were created based on empirical analyses such as

regressions. I cite all of the works used in my paper using footnotes, and take no credit

for the work written to be anyone else’s but the author’s themselves. While the evidence

that I have compiled supports my point, there are alternative explanations for the

problems that EOI faces. For example, problems with EOI later explained in the paper,

such as overconcentration of industries into large conglomerates could be explained by a

lack of antitrust regulations in EOI nations. Additionally, the cause of stagnating middle

class could be the lack of a strong welfare state or other government programs, in EOI

countries, which are designed in to increase economic mobility. Although there are

alternative explanations for the problems that EOI currently faces, I argue that the core

tenets of the system itself need major reform in order to secure long-term growth in East

and Southeast Asia.

From Backwater to Behemoth (1950’s – 1997): The Rise of EOI and the East Asian

Miracle

EOI most famous case study is the development of the Japanese economy in the post

WWII era. After the war, growth was considered a priority in American-occupied Japan

because it was viewed that poor, demoralized, Japanese could revolt, potentially turning

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Japan communist. Japan started on the road to recovery and growth due to the surge in

orders for ships and other war goods for American G.I.s in the Korean War (1950 –

1953).2 Government sponsorship, through the Ministry of International Trade and

Industry, promoted Japanese industry and helped ensure worldwide competitiveness,3

while Prime Minister Ikeda’s “income doubling plan”, lowered taxes, interest rates and

tariffs to promote private investment and savings4. The result was a boom in cheap

Japanese exports which contributed to an average of 10.8% growth in the 1960’s and

Japan having the third largest nominal GDP in the world by 1970, up from seventh

largest in 1960.5 Japan’s success only continued from there; by 1990 it had a GDP,

adjusted for purchasing power parity of over $2.3 trillion.6 Other East Asian countries,

namely Taiwan, South Korea, Hong Kong and Singapore, the “Tigers”, copied Japan’s

strategy of cheap, high quality goods, and had similar economic booms during the same

period. While the phenomenal growth of Japan and the Asian tigers over this period has

established a strong case for the EOI development model, developments in recent years

have challenged the consensus about its success.

From Boom to Stagnation (1997 – present?): EOI Major Drawbacks’ Exposed

Although Japan and the Tigers adopted similar policies with similar results, we

cannot declare EOI a panacea for development; in order to truly see its effects, we must

analyze its shortcomings. One limitation of EOI economies is that during global

2 Ibid, pg. 145.3 Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925-1975. Stanford, CA: Stanford UP, 1982. 7-82. Print.4 Chall. Chapter 5 1960-1964: Fiscal and Monetary Policy under the “Income-Doubling Plan” (2010): 166-208. Japanese Ministry of Finance, Apr. 2010. Web. 6 Mar. 2015.5 Takada, Masahiro. "Japan’s Economic Miracle: Underlying Factors and Strategies for the Growth." (1999): 3-18. 23 Mar. 1999. Web. 6 Mar. 2015.6 "World DataBank." The World Bank DataBank. N.p., n.d. Web. 05 Mar. 2015.

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recessions or sluggish growth, they perform worse than non-EOI ones, since they are

more dependent of global economic conditions to drive demand for their goods. This

became apparent during the East Asian financial crisis of 1997- 1998, caused by overly

liberal credit and an overheated Thai economy, when South Korea’s GDP per capita fell

by more than 18%, a Great Depression style collapse.7 During a recession, industries

which depend heavily on export, such as manufacturing, cars and heavy industry, have

suffered worse than other industries. Kia Motors, previously one of South Korea’s

shining examples of the benefits of EOI, suffered catastrophic losses and had to ask for

emergency loans in 1998.8 Additionally, the preference for huge conglomerates, known

as chaebol in South Korea, keiretsu in Japan, and family-owned mega-corporations in

Hong Kong, places power and allocates wealth in the hands of elites, which promotes

corruption and income inequality. In the late 1990’s, Hong Kong’s top fifteen families

controlled 84% of the country’s GDP.9 Corruption has become so endemic that when

members of conglomerates were caught in fraud, they were allowed to remain in their

powerful positions.10 Finally, the very growth of the middle class that EOI claims to

support has actually been stagnating, or even falling recent years. In China, wages fell

from 53% to 43% of GDP, and domestic consumption as a share of GDP has fallen from

45% to 35% of the economy.11 This decreasing portion of domestic consumption in the

7 Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan policy Dialogue. School of Advanced International Studies of Johns Hopkins University, 7–9 June, Washington, D.C.8 Adelman, Irma, and Song Byung Nak. "The Korean Financial Crisis of 1997-98." (n.d.): n. pag. Web. 6 Mar. 2015.9 Klien, Brian, and Kenneth Cukier. "Tamed Tigers, Distressed Dragon." Foreign Affairs. N.p., July-Aug. 2009. Web. 6 Mar. 2015.10 Krik, Donald. "Obsessed with Control, Some Korean Tycoons End Up In Handcuffs." Forbes. Forbes Magazine, 30 Apr. 2014. Web. 30 Apr. 2015. <http://www.forbes.com/sites/forbesasia/2014/04/30/obsessed-with-control-some-korean-tycoons-end-up-in-handcuffs/>.11 ibid, pg 4

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economy leads exporters to shift focus even more towards foreign markets, which further

increases the intensity of boom and bust cycles. Stagnating wages mean that Chinese, and

many other East and South East Asians, well-being has not kept up with growth around

them, leading to higher inequality, which stifles long-run growth and creates social and

political instability. With the overreliance on foreign markets, boom-and-bust growth

cycles, overly centralized and powerful corporations and rising inequality, EOI has many

drawbacks. To look for future growth models for East and Southeast Asia, we must look

away from EOI, and towards more sustainable and balanced growth policies.

Rising from the Ashes Part I: Regulating the Labor Market

Although EOI has in large part led to the East Asian Miracle of the late twentieth

century, it does not come without its drawbacks, such as decreased domestic

consumption, rising inequality, and overreliance on foreign markets. A new model of

economic thinking is needed to secure a sustainable path for growth and development

throughout East and Southeast Asia. First, EOI economies must first decrease their

dependence on foreign investment as a driver for economic growth. Currently, domestic

consumption as a share of GDP in many EOI economies is falling as a result of it being

squeezed out by rising foreign investments. For example, in China, domestic

consumption fell from close to 50% of GDP in 1978 to around 37% in 2006, whereas

foreign investment rose from 30% to 40% in the same period.12 In order to reverse this

process, and promote domestic consumption, the labor market must be regulated more

stringently. Raising the minimum wage, which would improve workers’ purchasing

power and increase their bargaining power to negotiate better wages and conditions, can

12 Kotz, David M., and Andong Zhu. China's Growth Model: Problems and Alternatives. Network Ideas. University of Massachusetts, Amherst, Department of Economics, Oct. 2008. Web. 14 Apr. 2015. <http://www.networkideas.org/ideasact/jan09/pdf/andong.pdf>.

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do this. Increasing workers’ purchasing power would not only increase domestic

consumption, but also serve as an incentive for firms to reallocate resources to produce

for the domestic market, which would decrease reliance on exports. The Blackwell Box,

an economic model, which shows the constraints that the neo-liberal model imposes on

EOI economies, is an excellent example of how both private and public-sector workers

lose from EOI. The model shows that private sector workers are subject to the constant

pressures of globalization, while public-sector workers are battered by privatization. In

addition, both are subject to the insecurities of austerity and labor market deregulation,

which leads workers to be excluded from the benefits of rising prosperity.13 When

workers and other middle-income earners are left out from the benefits of rising

prosperity it increases inequality, which slows growth. Although more stringent

regulation of the labor market seems to run counter to neo-liberal economic thought, a

similar revolution occurred in the United States at the turn of the twentieth century. In

1914, Henry Ford raised his daily wage from $2 to $5 and established a two-day

weekend, which was designed to increase productivity, reduce worker turnover and

create a new market for his cars.14 From the 1920s to the end of 1970s, Detroit, and the

American automotive industry became a prime example for how a balance between

workers’ rights and a desire for profit could lead to sustainable prosperity and a rising

middle class. The same revolution in thinking needs to happen in EOI economies, which

are plagued by a shrinking middle class, draconian working condition, and low pay for

unskilled workers. Although improving workers’ wages and bargaining power is an

13 Palley, Thomas I. A New Development Paradigm: Domestic Demand-Led Growth. Foreign Policy in Focus. N.p., 1 Sept. 2002. Web. 27 Apr. 2015. <http://fpif.org/a_new_development_paradigm_domestic_demand-led_growth/>.14 Taylor, Jason, and George Selgin. "By Our Bootstraps: Origins and Effects of the High-wage Doctrine and the Minimum Wage." Journal of Labor Research 20.4 (1999): 447-62. Web.

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important first step, to truly achieve sustainable growth, reforming the fundamental

nature of EOI economies (investing in infrastructure and capital goods) needs to be

replaced.

Rising from the Ashes Part II: Increasing Healthcare and Education Spending

In initial stages of growth, investment in capital goods, raw materials extraction,

and other inputs used to create an industrial economy are key to establishing conditions

that will lead to industrialization and takeoff in undeveloped economies. As EOI

economies, have advanced beyond “lower middle income” status, defined as a GNI per

capita of greater than $4085, they must invest in social infrastructure to secure long-term

growth. As EOI economies have focused on increasing investment to expand their

manufacturing sectors, this has the negative side-effect of leading to a lack of sufficient

investment in health care, education and other forms of social spending. These policies

inhibit long-term growth by de-emphasizing a knowledge-based economy built on

healthy, productive and educated workers, a model which will drive growth in the

twenty-first century. China, one of the worst offenders, spends less than four percent of

its government budget on healthcare, which is on par with Cameroon.15 South Korea,

Taiwan and Japan have regressive healthcare financing systems, which harms the poor,

who are the most vulnerable socioeconomic group, and who have the most potential to

increase labor productivity.16 This creates problems as a sick and uneducated workforce

leads to fewer improvements in labor productivity, leaving manufactures in EOI

economies unable to keep up with demand for their cheap goods, as well as leads to less

15 "Healthcare Expenditure (% of GDP)." World Bank. N.p., Jan. 2015. Web. 26 Apr. 2015. <http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS>. 16 Wagstaff, Adam. "Health Systems In East Asia: What Can Developing Countries Learn From Japan And The Asian Tigers?" Health Economics 1.16 (2007): 441-56. Web. 27 Apr. 2015. <http://onlinelibrary.wiley.com/doi/10.1002/hec.1180/epdf>.

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innovation. Innovation and knowledge-based growth will be key to not only China’s, but

other EOI economies building of a knowledge economy after the EOI period ends.

Establishing a progressive healthcare financing system and increasing funding will leave

the poor with more disposable income with which to increase domestic demand, as well

as increase labor productivity by creating a healthier workforce.

Education spending also must be increased and equalized if EOI economies are to

thrive in the coming decades. The money that EOI economies have poured into

investment to expand their export capacities crowds out funding available for education.

Government spending on education in poorer EOI countries, such as Thailand, has

hovered between 2.5 and 4% for the past three decades.17 In many EOI countries on the

lower end of the development spectrum such as China, Vietnam and Indonesia, there

exists a vast disparity between the quality and funding of education between rich and

poor counties. For example, in China the ratio of spending per pupil at the primary level

in the highest and lowest spending provinces has grown from 5.2 in 1989 to 10.6 in

2000.18 In the Philippines, there is a similar trend, with there being almost triple the

amount of per pupil funding at the primary level between the richest and poorest cities.19

Unequal education spending leads to the disenfranchisement of potential future

innovators and hinders the future growth of the knowledge sector of the economy on

which long-term growth is based. Adequate education funding is key to establishing,

maintaining and building an educated workforce that is capable of innovation rather than

just production of goods destined for export. This is why EOI countries must look to the

17 Government Education on Education, total (% of GDP). Jan. 2015. Raw data. World Bank, Washington D.C.18 King, Elizabeth M., and Susana Cordeiro Guerra. "Education reforms in East Asia: Policy, process, and impact." East Asia decentralizes: Making local government work 292 (2005): 179 - 210.19 Ibid, pg. 191

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long term and increase and equalize education funding so as to avoid the pitfall of being a

“workshop of the world” (until labor costs get too high), and look towards creating a

knowledge-based economy.

Rising from the Ashes Part III: Building the Framework for a Service Economy

Although export oriented manufacturing can serve as a base for initial growth,

once that strategy is exhausted, services become a key part of the transition to long-term

sustainable growth. East- and South-east Asian EOI economies have made some attempt

at this transition. Despite the fact that the service sector is large in several EOI

economies, its growth rate has been stagnating, or even falling in recent decades. In 1990,

the service sector in “Developing Asia”, which includes South Korea, Hong Kong and

Singapore, comprised approximately 45% of GDP, in 2000 this rose to around 50%, but

it fell to 48% in 2010.20 Services provide an outlet for skilled workers to harness their

ingenuity and experience to expand the economy beyond simply manufacturing. Service

jobs such as lawyers, teachers and engineers typically have higher incomes, which creates

a multiplier effect due to increased spending. In fact, services, rather than manufacturing,

in East and Southeast Asia, have been a huge contributor to overall growth in region. It is

estimated the service sector accounted for majority of GDP growth in most economies in

the region in the past two decades.21 Expanding services also ties in with increase funding

for education, particularly at the secondary and tertiary levels, as a growing service sector

requires workers with the appropriate level of human capital to fill vacant positions.

Therefore, increasing education spending will have spillover effects into other areas of

20 Noland, Marcus, Donghyun Park, and Gemma Estrada. "Sector Shares of GDP by Subregion." Asian Development Bank Working Paper Series. 320th ed. Manila: Asian Development Bank, 2012. 10. Web. 29 Apr. 2015. <http://www.adb.org/sites/default/files/publication/30080/economics-wp320.pdf>. 21 Ibid, pg. 12.

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the economy besides increasing human capital, further justifying that particular policy

option as a tool for development beyond EOI. Despite the attraction of pouring money

into expanding services without any reservations, growing the service sector must be

done smartly and appropriately in order to maximize its potential benefits.

Increasing the share of the economy devoted to services without making sure the

proper foundations are in place is a recipe for leading an EOI country into a development

trap. Vietnam’s service sector, which comprises 35% of its economy, has been burdened

with low productivity, among other bottlenecks.22 This is mainly caused by

underinvestment in education, as well as an overly burdensome business environment.

State-owned banks are rife with mismanagement and corruption, and the government

remains heavily involved in the telecommunications and financial sectors. Vietnam as

well as other Southeast Asian countries can learn from the success of Japan the Asian

Tigers, which have had, and some continue to have, strong government involvement in

their service economies, but have produced global leaders in the telecommunications

industry.23 Although expanding the service sector remains a powerful policy tool to

continue growth after EOI has been exhausted, it has to be done with a properly funded

education system and transparent and efficient regulations in order to properly work.

Conclusion: The Future of East and Southeast Asian Growth (and the decline of EOI?)

Export-oriented industrialization has led to spectacular growth in the late

twentieth century for a handful of East and Southeast Asian nations, which many

countries are emulating today. Despite the perceived panacea that is EOI, it has major

22 Drysdale, Peter. "Services as a Driver of Asia’s Economic Growth." East Asia Forum. East Asia Forum, 12 Aug. 2013. Web. 29 Apr. 2015. <http://www.eastasiaforum.org/2013/08/12/services-as-a-driver-of-asia-pacific-economic-growth/>.23 Kushida, Kenji. "The Japanese Wireless Telecommunications Industry: Innovation, Organizational Structures and Government Policy." Stanford Journal of East Asian Affairs 2 (2002): 55-70. Stanford University, Spring 2002. Web. 30 Apr. 2015. <http://web.stanford.edu/group/sjeaa/journal2/japan1.pdf>.

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drawbacks. Potential shortcomings include an overreliance on the world economy to

drive exports and thus growth, placing economic power in the hands an elite few, and

overinvestment in capital stock growth as opposed to healthcare, education, and other

social services. Although EOI has its benefits, other policy solutions, still within the

framework of manufacturing assisted (not led) growth, could lead to more sustainable

development for developed and developing EOI economies. Increased labor market

regulation and other policy tools to raise domestic demand leads to a decrease on the

reliance of the global economy to drive national and regional growth. Expanding

spending on healthcare and education results in a more productive and inventive

workforce capable of innovating and driving long-run growth after the sun-setting of

major manufacturing. Finally, growing the share of the economy devoted to services, if

done with a well-educated workforce, feeds off of a highly-skilled workforce and results

in growth based in ideas, technology and innovation, rather than simply greater capital

intensity. Economic thinking has undergone revolutions before, and models that were

previously held in high regard by all but the most fringe economists have proven to be

fatally flawed. Export-oriented industrialization as an ideology is beginning that process;

hopefully a more inclusive, balanced and sustainable model of development will emerge

in its place.

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Works Cited

Adelman, Irma, and Song Byung Nak. "The Korean Financial Crisis of 1997-98." (n.d.):

n. pag. Web. 6 Mar. 2015.

Chall. Chapter 5 1960-1964: Fiscal and Monetary Policy under the “Income-Doubling

Plan” (2010): 166-208. Japanese Ministry of Finance, Apr. 2010. Web. 6 Mar. 2015.

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Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan

policy Dialogue. School of Advanced International Studies of Johns Hopkins University,

7–9 June, Washington, D.C.

Drysdale, Peter. "Services as a Driver of Asia’s Economic Growth." East Asia Forum.

East Asia Forum, 12 Aug. 2013. Web. 29 Apr. 2015.

<http://www.eastasiaforum.org/2013/08/12/services-as-a-driver-of-asia-pacific-

economic-growth/>.

Government Education on Education, total (% of GDP). Jan. 2015. Raw data. World

Bank, Washington D.C.

"Healthcare Expenditure (% of GDP)." World Bank. N.p., Jan. 2015. Web. 26 Apr. 2015.

<http://data.worldbank.org/indicator/SH.XPD.TOTL.ZS>.

Johnson, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy,

1925-1975. Stanford, CA: Stanford UP, 1982. 7-82. Print.

King, Elizabeth M., and Susana Cordeiro Guerra. "Education reforms in East Asia:

Policy, process, and impact." East Asia decentralizes: Making local government work

292 (2005): 179 - 210.

Klien, Brian, and Kenneth Cukier. "Tamed Tigers, Distressed Dragon." Foreign Affairs.

N.p., July-Aug. 2009. Web. 6 Mar. 2015.

Kotz, David M., and Andong Zhu. China's Growth Model: Problems and Alternatives.

Network Ideas. University of Massachusetts, Amherst, Department of Economics, Oct.

2008. Web. 14 Apr. 2015.

<http://www.networkideas.org/ideasact/jan09/pdf/andong.pdf>.

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Krik, Donald. "Obsessed with Control, Some Korean Tycoons End Up In Handcuffs."

Forbes. Forbes Magazine, 30 Apr. 2014. Web. 30 Apr. 2015.

<http://www.forbes.com/sites/forbesasia/2014/04/30/obsessed-with-control-some-korean-

tycoons-end-up-in-handcuffs/>.

Kushida, Kenji. "The Japanese Wireless Telecommunications Industry: Innovation,

Organizational Structures and Government Policy." Stanford Journal of East Asian

Affairs 2 (2002): 55-70. Stanford University, Spring 2002. Web. 30 Apr. 2015.

<http://web.stanford.edu/group/sjeaa/journal2/japan1.pdf>.

Noland, Marcus, Donghyun Park, and Gemma Estrada. "Sector Shares of GDP by

Subregion." Asian Development Bank Working Paper Series. 320th ed. Manila: Asian

Development Bank, 2012. 10. Web. 29 Apr. 2015.

<http://www.adb.org/sites/default/files/publication/30080/economics-wp320.pdf>.

Palley, Thomas I. A New Development Paradigm: Domestic Demand-Led Growth.

Foreign Policy in Focus. N.p., 1 Sept. 2002. Web. 27 Apr. 2015.

<http://fpif.org/a_new_development_paradigm_domestic_demand-led_growth/>.

Takada, Masahiro. "Japan’s Economic Miracle: Underlying Factors and Strategies for the

Growth." (1999): 3-18. 23 Mar. 1999. Web. 6 Mar. 2015.

Taylor, Jason, and George Selgin. "By Our Bootstraps: Origins and Effects of the High-

wage Doctrine and the Minimum Wage." Journal of Labor Research 20.4 (1999): 447-

62. Web.

"United Nations Statistics Division - National Accounts." United Nations Statistics

Division - National Accounts. N.p., n.d. Web. 06 Mar. 2015.

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Wagstaff, Adam. "Health Systems In East Asia: What Can Developing Countries Learn

From Japan And The Asian Tigers?" Health Economics 1.16 (2007): 441-56. Web. 27

Apr. 2015. <http://onlinelibrary.wiley.com/doi/10.1002/hec.1180/epdf>.

"World DataBank." The World Bank DataBank. N.p., n.d. Web. 05 Mar. 2015.

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