Industrialisation strategy

All the Asian Tigers had significant trade and current account surpluses regardless of industrialisation strategy. Except for Hong Kong, the industrialisation strategies of the Asian Tigers fit the model of export-oriented industrialisation (EOI).

The importance of exports for economic development was discussed widely by, for example, Bela Balassa. However, there has been an argument about industrialisation and the deteriorating terms of trade for exports, which was most notably discussed by Raul Prebisch, who recommended import-substituting industrialisation (ISI). However, ISI-only policies would result in huge trade deficits, as the Latin American countries experienced in the 1980s. According to Gary Gereffi, industrialisation strategies take five steps in their relation to trade strategies. First, any developing economy that lacks capital, foreign currency reserves and technology must start with a commodity phase by exporting items such as agricultural goods and minerals to earn enough foreign currency to purchase machines and technologies from developed countries. The economy cannot stay in this stage for very long, however, because the terms of trade of agricultural goods deteriorate over the long-term, as mentioned above, as productivity increases in primary commodities are limited. Furthermore, the economy in this stage is vulnerable because of the weather and other uncontrollable factors that can affect the economy tremendously.

Once currency reserves are accumulated, the economy moves into the next stage called primary import-substituting industrialisation. In this process, the government needs to protect domestic companies in order to nurture infant industries by raising tariffs and instituting other subsidies to combat foreign imports that have quality advantages. At this point, the economy focuses on labour-intensive products such as clothes, processed foods and shoes.

Once they obtain a certain level of technology and capability of manufacturing these products, the economy can then compete in the international market due to its lower labour cost. This is the third stage called the primary export-orientated industrialisation. This will provide the country with enough capital and foreign currency reserves to step up to the next phase. The economy has no luxury to stay in this stage, as other developing countries will catch up while the economy will face rising wages as development succeeds. Besides, at this level, the economy still needs to import expensive machinery to make these labour-intensive products. Therefore, the trade surplus at this level can be very small.

Therefore, the economy then needs to ‘deepen' its industrialisation by focusing on more highly value-added products such as consumer durables, intermediate goods such as steel, petrochemicals and machinery, and high technology goods. Again, the government needs to protect domestic companies from foreign competition as developed countries have higher levels of technology. The developing economy at this point must face a steep learning curve in science and technology, and cheap labour does not provide significant advantage any more. This fourth stage is called the secondary import-substitution industrialisation. Once the economy masters the top-level technologies of the international standard, it can then move into the final, fifth stage called the secondary export-orientated industrialisation. At this final stage the structure of industry becomes one of developed economies.

South Korea and Taiwan reached this final stage in a wide variety of their products while Singapore achieved this in limited industries. All three economies had to go through two ISI stages quickly as the protection cannot last long, due to potential damage to the economies during ISI. During the ISI stages, the government faces major dilemmas. On the one hand, it needs to purchase technologies or machines from developed countries. In order to make these imports cheaper, the government maintains the local currency at an appreciated level. However, this will make their exports more expensive, which makes their products, whether commodities or labour-intensive products, less competitive internationally. Therefore, the trade surplus will shrink during the ISI stage, or it may result in trade deficits. In order to shorten the ISI periods, the economies need to accelerate the learning process, which requires a focus on science/ technology education that is very close to commercial technologies. Let's now examine each Asian Tiger historically and individually.

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Source: Barnett Vincent (ed.). Routledge Handbook of the History of Global Economic Thought. Routledge,2015. — 359 p. 2015

Industrialisation strategy

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