The c a u s a l i t y i s from d i s t o r t i o n s ,
o r l a c k o f them,
to r e s u l t s .
That, I take i t , i s a f a i r summary of the c e n t r a l i n t e r p r e t a t i o n
of the East A s i a n e x p e r i e n c e by n e o c l a s s i c a l development economics.
While
i t i s c o r r e c t i n some r e s p e c t s , i t i s a l s o , I argue, wrong i n o t h e r s .
In
p a r t i c u l a r , n e i t h e r Japan, Taiwan, nor South Korea have m a i n t a i n e d a c l o s e
a p p r o x i m a t i o n to a n e u t r a l p o l i c y regime over the post-war p e r i o d .
They
have a l l a c t i v e l y f o s t e r e d the development of many new i n d u s t r i e s , and
s u c c e s s f u l l y s o , i n the sense t h a t many of those i n d u s t r i e s have become
i n t e r n a t i o n a l l y competitive.
is
If
t h i s argument i s accepted,
the i m p l i c a t i o n
that a n e u t r a l p o l i c y regime i s not a necessary c o n d i t i o n f o r r a p i d
'best a t t a i n a b l e i n the c i r c u m s t a n c e s ' ) g r o w t h .
(or
1
A b a s i c weakness o f n e o c l a s s i c a l development economics i s i t s
i n a t t e n t i o n t o the i d e a that governments d i f f e r i n t h e i r c a p a c i t i e s
guide the market.
to
The argument a g a i n s t s e l e c t i v e government f o s t e r i n g
i s made i n u n i v e r s a l i s t i c terms;
an e q u a l l y u n i v e r s a l i s t i c
and i t has r e c e n t l y been s t r e n g t h e n e d by
theory of nonmarket
failure
(Wolf
1979).
The
l a t t e r makes the e m i n e n t l y s e n s i b l e p o i n t that w h i l e market f a i l u r e may
e s t a b l i s h a motive f o r government i n t e r v e n t i o n , the b e n e f i t s of the
proposed i n t e r v e n t i o n have to be assessed a g a i n s t the l i k e l i h o o d t h a t the
b e n e f i t s w i l l a c t u a l l y b e r e a l i z e d ( t h a t the i n t e r v e n t i o n w i l l b e
implemented as i n t e n d e d ) , and a g a i n s t the a d d i t i o n a l c o s t s generated by
that i n t e r v e n t i o n .
Wolf p r o v i d e s a whole s e r i e s of reasons why one would
expect e x t e n s i v e nonmarket — or governmental -- f a i l u r e .
The t h r u s t of
the argument pushes us back to the p r e s c r i p t i o n of ' g e t t i n g the p r i c e s
right'
and l e t t i n g market s i g n a l s d r i v e resource a l l o c a t i o n .
My argument is t h a t the governments of Taiwan, South Korea and
Japan (TKJ f o r s h o r t ) have a n u n u s u a l l y w e l l developed c a p a c i t y f o r
selective intervention;
and t h a t
set of p o l i c y i n s t r u m e n t s ,
and
t h i s c a p a c i t y r e s t s upon
(a) a p o w e r f u l
(b) a c e r t a i n k i n d of o r g a n i z a t i o n of
the
s t a t e , and o f i t s l i n k s w i t h o t h e r major economic i n s t i t u t i o n s I n the
society.
The East A s i a n t h r e e show s t r i k i n g s i m i l a r i t i e s w i t h r e s p e c t t o
2
both i n s t r u m e n t s and i n s t i t u t i o n s .
They a l s o , of c o u r s e , show s t r i k i n g
s i m i l a r i t i e s w i t h r e s p e c t t o ( c ) s u p e r i o r economic p e r f o r m a n c e — n o t a b l y
w i t h r e s p e c t t o r a p i d r e s t r u c t u r i n g o f the economy towards h i g h e r
technology p r o d u c t i o n .
The q u e s t i o n i s :
what are the c a u s a l c o n n e c t i o n s
between ( a ) , ( b ) , and ( c ) ?
The s h o r t answer is t h a t we don't know:
there is a d r a m a t i c
p a u c i t y o f e m p i r i c a l evidence o n t h i s q u e s t i o n , and e s p e c i a l l y f o r the
country w i t h the best economic performance o f a l l , Taiwan.
This is only
p a r t l y because o f the p r a c t i c a l d i f f i c u l t i e s o f c o l l e c t i n g r e l e v a n t d a t a ;
i t i s a l s o because the p e r s p e c t i v e o f n e o c l a s s i c a l development economics
tends t o o c c l u d e these q u e s t i o n s from s e r i o u s c o n s i d e r a t i o n .
I can g i v e o n l y a few components of my own t e n t a t i v e answer.
I n t h i s paper
I shall first
e s t a b l i s h t h a t the governments do have p o w e r f u l i n s t r u m e n t s of s e l e c t i v e
promotion at t h e i r d i s p o s a l .
I then d i s c u s s the argument t h a t the use of
these i n s t r u m e n t s has i n f a c t c o n t r i b u t e d t o s u p e r i o r economic
performance.
F i n a l l y I ask about the c o n d i t i o n s which have a l l o w e d these
p o t e n t i a l net b e n e f i t s t o b e r e a l i z e d i n the East A s i a n c a s e s , though they
may w e l l not be r e a l i z e d in o t h e r c o n d i t i o n s .
I. INSTRUMENTS
F o r a government t o l e a d i n d u s t r i a l r e s t r u c t u r i n g , i t must be
a b l e t o w i e l d i n s t r u m e n t s capable o f d i s c r i m i n a t i n g between i n d u s t r i a l
s e c t o r s , and i t must b e a b l e t o check the i n f l u e n c e o f foreign-owned f i r m s
in the domestic economy.
Can TKJ governments do
this?
We b e g i n w i t h
f i n a n c i a l i n s t r u m e n t s , then c o n s i d e r those o f trade and f o r e i g n i n v e s t m e n t .
Financial
Instruments
L e t us s t a r t from Zysman's d i s t i n c t i o n between c a p i t a l
market-based and c r e d i t - b a s e d f i n a n c i a l systems (1983).
The two types of
systems have v e r y d i f f e r e n t i m p l i c a t i o n s f o r the p o t e n t i a l i n f l u e n c e o f
governments and/or banks over b u s i n e s s .
In a c a p i t a l market system,
s e c u r i t i e s ( s t o c k s and bonds) are the main source of l o n g - t e r m b u s i n e s s
finance.
There is a wide range of c a p i t a l and money-market i n s t r u m e n t s ,
and a l a r g e number of s p e c i a l i s e d f i n a n c i a l i n s t i t u t i o n s competing s t r o n g l y
i n terms o f p r i c e and s e r v i c e .
P r i c e s are determined i n l a r g e p a r t through
the i n t e r p l a y of s u p p l y and demand.
F i n a n c i a l i n s t i t u t i o n s have
arms-length r e l a t i o n s w i t h p a r t i c u l a r f i r m s .
The U S and B r i t i s h f i n a n c i a l
systems are c l e a r examples of the type.
In a c r e d i t - b a s e d system the c a p i t a l market i s weak, and f i r m s
depend h e a v i l y o n c r e d i t f o r r a i s i n g f i n a n c e beyond r e t a i n e d e a r n i n g s .
c u t - o f f i n c r e d i t r a i s e s the p r o s p e c t o f immediate l i q u i d a t i o n .
Firms are
t h e r e f o r e h e a v i l y dependent on whoever c o n t r o l s c r e d i t — on banks,
extent t h a t banks are the main s u p p l i e r s .
A
to the
The banks may be r e l a t i v e l y
autonomous of the government, as in Germany, or they may themselves be
dependent on the government.
In t h i s l a t t e r case,
the government s e t s
f i n a n c i a l p r i c e s , and both through p r i c e s and the government's a b i l i t y to
i n f l u e n c e the a l l o c a t i o n of bank l e n d i n g more d i r e c t l y , the government can
e x e r c i s e a p o w e r f u l i n f l u e n c e over the economy's investment p a t t e r n .
The East A s i a n t h r e e a l l have c r e d i t - b a s e d f i n a n c i a l systems,
w i t h government-administered p r i c e s .
F i r m s ' dependence o n c r e d i t i s seen
i n the h i g h d e b t - t o - e q u i t y r a t i o s t y p i c a l o f the c o r p o r a t e s e c t o r :
o f f i c i a l figures
using
(not i n f l a t i o n - a d j u s t e d ) , corporate d e b t / e q u i t y r a t i o s
have been in the 300-400 p e r c e n t range in Japan over the 1950s t h r o u g h the
1970s, much same in South Korea over the 1970s, and 160-200 p e r c e n t in
Taiwan over the 1970s.
US and UK d e b t / e q u i t y r a t i o s have been around
S e c u r i t i e s markets a r e weak i n v i r t u a l l y a l l d e v e l o p i n g c o u n t r i e s
(van Agtmael 1984), so a s i m p l e d i s t i n c t i o n between c a p i t a l - m a r k e t - b a s e d
and c r e d i t - b a s e d f i n a n c i a l systems does not d i f f e r e n t i a t e those of Korea
and Taiwan from those of o t h e r d e v e l o p i n g c o u n t r i e s .
D i r e c t comparison of
c o r p o r a t e d e b t / e q u i t y r a t i o s might be one c r i t e r i o n .
By t h i s s t a n d a r d many
o t h e r i n d u s t r i a l i z i n g c o u n t r i e s have much lower r a t i o s than Korea and
Taiwan:
B r a z i l and M e x i c o , f o r example, had a r a t i o of 100-120 p e r c e n t
over the 1970s.
But such comparisons are hazardous, e s p e c i a l l y because of
differences in accounting f o r i n f l a t i o n .
Another c r i t e r i o n might b e the
percentage o f t o t a l c r e d i t s u b j e c t t o government c r e d i t c o n t r o l s o n
sectoral allocation.
T h i s too i s p r o b l e m a t i c , because when the government
has much i n f l u e n c e over the banks and the banks a r e the major s o u r c e o f
credit,
the government may e x e r t i n f l u e n c e over c r e d i t a l l o c a t i o n by
i n f o r m a l 'jaw bone' c o n t r o l , i n ways i m p o s s i b l e t o q u a n t i f y .
4
Having
s t a t e d some o f the d i f f i c u l t i e s i n comparing TKJ's f i n a n c i a l systems w i t h
those e l s e w h e r e , I s h a l l bypass them by u s i n g a f i r s t a p p r o x i m a t i o n
argument i n what f o l l o w s , r e c o g n i z i n g t h a t i t s h o u l d be made e x p l i c i t l y
comparative.
I n a l l t h r e e c o u n t r i e s f i r m s depend h e a v i l y o n c r e d i t f o r
f i n a n c i n g , and the banks are by f a r the most i m p o r t a n t source of c r e d i t .
5
A l l t h r e e governments have been wary of a l l o w i n g a r a p i d growth of non-bank
f i n a n c i a l i n s t i t u t i o n s , which might pose a c h a l l e n g e to the dominance of
the banks.
I n Taiwan, v i r t u a l l y the e n t i r e banking system i s
government-owned.
I n Korea the same was true u n t i l 1980-83, and t h e
government s t i l l reaches f a r down i n t o the now o f f i c i a l l y d e n a t i o n a l i z e d
banks i n terms o f p e r s o n n e l p o l i c i e s , appointment o f s e n i o r managers, range
o f s e r v i c e s , and the l i k e .
I n Japan the banks a r e m o s t l y p r i v a t e l y owned,
but depend on the c e n t r a l bank f o r access to supplementary d e p o s i t s on
which to expand t h e i r l e n d i n g .
They borrow enormous amounts from the
c e n t r a l bank, not as a r i g h t but as a p r i v i l e g e a g a i n s t the o b l i g a t i o n to
r e s p e c t the c e n t r a l bank's c o n d i t i o n s f o r the a l l o c a t i o n o f l e n d i n g .
In
a l l three cases government s e t s i n t e r e s t r a t e s and l i m i t s o n c o l l a t e r a l
requirements.
So the t h r e e governments seem to have been more than happy to do
l i t t l e to overcome c a p i t a l market f a i l u r e , even to encourage i t .
there advantages t o the a l t e r n a t i v e c r e d i t - b a s e d model,
less
6
Are
despite i t s
being
market-driven?
The f i r s t advantage i s t h a t a c r e d i t - b a s e d system p e r m i t s f a s t e r
investment
in developing country c o n d i t i o n s
than would b e
investment
depended on the growth of
own p r o f i t s or on the
firms'
i n e v i t a b l y slow development o f s e c u r i t i e s markets.
possible
if
Increases i n the
d e p o s i t r a t e o f i n t e r e s t can e f f e c t a f a s t e r i n c r e a s e i n i n v e s t i b l e
resources than i s p o s s i b l e through the growth o f e q u i t y .
Also,
the
government i s a b l e t o r e s t r i c t the use o f i n v e s t i b l e resources f o r mergers,
s p e c u l a t i o n , paper e n t r e p r e n e u r s h i p , and consumer b o r r o w i n g ; s a v i n g s have a
b e t t e r chance o f being t r a n s l a t e d i n t o p r o d u c t i v e investment,
and
p r o d u c t i v e investment i s l e s s a f f e c t e d by s p e c u l a t i v e s t o c k exchange booms
(Matthews 1959:148).
The second advantage is t h a t a c r e d i t - b a s e d system encourages
more r a p i d s e c t o r a l m o b i l i t y , and permits the government to g u i d e t h a t
mobility.
credit
Even s m a l l changes i n the d i s c o u n t r a t e o r i n c o n c e s s i o n a l
rates
between s e c t o r s can have a dramatic e f f e c t on r e s o u r c e
a l l o c a t i o n , because the e f f e c t o f such changes o n f i r m s ' cash f l o w p o s i t i o n
i s g r e a t e r than where f i r m s have s m a l l e r d e b t / e q u i t y r a t i o s .
the government
i s not j u s t
trying
t o promote
Thus, where
r a p i d growth i n aggregate,
i s doing so by means of s e l e c t i v e f o s t e r i n g of 'key' s e c t o r s , a
credit-based
firms
f i n a n c i a l system g i v e s
to e n t e r s e c t o r s
i t a powerful mechanism f o r i n d u c i n g
they would o t h e r w i s e not.
but
Third,
the c r e d i t - b a s e d system helps
to a v o i d the b i a s
towards
s h o r t - t e r m company d e c i s i o n - m a k i n g i n h e r e n t in a s t o c k market system.
c r e d i t o r needs the borrowing company to do w e l l :
The
i t i s concerned about the
company's market share and a b i l i t y to repay loans over the l o n g term, and
these depend on how w e l l the company is d e v e l o p i n g new p r o d u c t s ,
c o n t r o l l i n g c o s t s and q u a l i t y , and so on.
So these become the c r i t e r i a
which managers are concerned w i t h , r a t h e r than s t o c k market q u o t a t i o n s
(Johnson 1985, Dore 1985).
The f o u r t h advantage i s more d i r e c t l y p o l i t i c a l .
s t r a t e g y r e q u i r e s a p o l i t i c a l base.
hence over h i g h l y l e v e r a g e d f i r m s ,
Industrial
C o n t r o l over the f i n a n c i a l system, and
has been used i n a l l t h r e e c o u n t r i e s
b u i l d up the s o c i a l c o a l i t i o n s needed to support
to
the government's
o b j e c t i v e s — t h u s h e l p i n g i m p l e m e n t a t i o n o f the i n d u s t r i a l s t r a t e g y .
Firms
are d i s s u a d e d from opposing the government by knowledge t h a t opponents may
find credit d i f f i c u l t to obtain.
These are f o u r major p o t e n t i a l advantages of a c r e d i t - b a s e d ,
a d m i n i s t e r e d - p r i c e f i n a n c i a l system.
However, such a system c o n t a i n s
c e r t a i n i n n e r i m p e r a t i v e s f o r government a c t i o n which must b e met i f t h e s e
advantages are to be r e a l i z e d ,
and which have profound i m p l i c a t i o n s f o r the
government's o v e r a l l r o l e i n the economy (Wade 1985).
The f i r s t i s t h a t the government must help to s o c i a l i z e r i s k .
Increases i n d e p o s i t i n t e r e s t r a t e s can i n c r e a s e the f l o w o f f i n a n c i a l
savings;
but at
the new r a t e s the p r i v a t e s e c t o r may not be prepared to
borrow the s a v i n g s u n l e s s the government i n t e r v e n e s to s o c i a l i z e some of
the p r o s p e c t i v e p r i v a t e l o s s e s .
translated i n t o loans,
Even i f i n the s h o r t run the s a v i n g s are
the h i g h e r s a v i n g s and investment made p o s s i b l e by
the h i g h e r r a t e s w i l l not be s u s t a i n a b l e i n the l o n g e r run w i t h o u t measures
to s o c i a l i z e r i s k .
This i s because h i g h l y leveraged f i r m s are v u l n e r a b l e
t o d e c l i n e s i n c u r r e n t e a r n i n g s t o below the l e v e l s r e q u i r e d b y debt
repayment,
repayments
on debt
being f i x e d
(whereas
payments
on e q u i t y are a
share o f p r o f i t s ) . With f i r m s v u l n e r a b l e i n t h i s way, s o are the banks
which c a r r y the
'non-performing' l o a n s .
So where d e b t / e q u i t y r a t i o s are
h i g h , t h e r e i s a n e v e r - p r e s e n t danger o f f i n a n c i a l i n s t a b i l i t y i n the
economy:
meaning b a n k r u p t c i e s , w i t h d r a w a l of s a v i n g s , a f a l l i n r e a l
i n v e s t m e n t , and slower growth.
borrow l e s s ,
To ease such dangers, f i r m s are l i k e l y to
and banks t o l e n d l e s s ,
than i f the government were t o
s o c i a l i z e some of the r i s k s of p r i v a t e l o s s — t o s h i f t onto government some
of the r i s k s
to which l e n d e r s and h i g h d e b t / e q u i t y producers are exposed.
I f the government does s o c i a l i z e some of the r i s k of l o s s e s , the s u p p l y and
demand of l o a n a b l e funds w i l l be g r e a t e r , so investment and hence growth
can be h i g h e r .
T h i s advantage a p p l i e s e s p e c i a l l y i n the case o f h i g h l y
c o r r e l a t e d r i s k s , to which most f i r m s i n major s e c t o r s are exposed.
So i t
a p p l i e s e s p e c i a l l y t o i n t e r e s t r a t e changes, o r economy-wide r e c e s s i o n , o r
changes i n major e x p o r t markets, or p o l i t i c a l r i s k s .
T h e r e f o r e the impetus
f o r government to s h o u l d e r some of the r i s k s of investment and s a v i n g i n an
economy w i t h h i g h d e b t / e q u i t y r a t i o s i s e s p e c i a l l y s t r o n g i n
trade-dependent economies,
l i k e Taiwan and South Korea,
and i n p o l i c i e s
under e x t e r n a l o r i n t e r n a l t h r e a t , a g a i n l i k e Taiwan and South Korea.
The
impetus i s r e i n f o r c e d where, a s i n a l l t h r e e o f our c a s e s , the economy i s
i n v e s t i n g h e a v i l y i n l a r g e lump p r o j e c t s , where e n t r y takes l o n g and e x i t
a l s o takes l o n g .
T h i s impetus
then leads
the government
to p r o v i d e a b a t t e r y of
ways to reduce the r i s k s of f i n a n c i a l i n s t a b i l i t y :
not o n l y l e n d e r of l a s t
r e s o r t f a c i l i t i e s and d e p o s i t i n s u r a n c e , but a l s o s u b s i d i e s to banks
i m p e r i l e d b y l o a n l o s s e s , product and c r e d i t s u b s i d i e s t o f i r m s i n
f i n a n c i a l d i f f i c u l t i e s , banks' s h a r e - h o l d i n g i n companies, government
s h a r e - h o l d i n g in banks and in lumpy p r o j e c t s , and even government ownership
o f the banks; p l u s , o f c o u r s e , government c o n t r o l o f i n t e r e s t r a t e s and
exchange r a t e s , t o dampen f i r m s ' exposure t o market f l u c t u a t i o n s i n these
two important sources o f c o r r e l a t e d r i s k .
In s h o r t ,
the l o g i c o f h i g h
d e b t / e q u i t y r a t i o s f o r c e s the government to become i n v o l v e d i n c o r p o r a t e
financing.
The second i m p e r a t i v e i s f o r the s u p p l i e r of c r e d i t t o become
i n t i m a t e (not a r m s - l e n g t h ) w i t h company management.
The s u p p l i e r o f c r e d i t
may f o r t h i s purpose be the government (Korea) or the banks (Germany), or
some of both ( J a p a n ) .
In any c a s e , the reason f o r involvement w i t h
management i s t h a t the c r e d i t o r cannot s i m p l y withdraw when a company runs
i n t o d i f f i c u l t i e s b y s e l l i n g the s e c u r i t i e s i n the secondary c a p i t a l
m a r k e t — f o r the reason t h a t the secondary c a p i t a l markets are l i t t l e
developed.
G i v e n t h a t the ' e x i t ' s t r a t e g y o f the c a p i t a l market model i s
not a v a i l a b l e ,
the a l t e r n a t i v e i s
' v o i c e ' and
' l o y a l t y ' , to t r y to
r e s t r u c t u r e company management so as t o make i t more c o m p e t i t i v e , and t o
take the l o n g - t e r m view.
N e v e r t h e l e s s the government and/or the banks m u s t — a s the t h i r d
i m p e r a t i v e — d e v e l o p a n i n s t i t u t i o n a l c a p a c i t y t o d i s c r i m i n a t e between
r e s p o n s i b l e and i r r e s p o n s i b l e b o r r o w i n g , and t o p e n a l i z e the l a t t e r .
That
i s , f i r m s which borrow w i t h o u t due commercial c a u t i o n and run i n t o t r o u b l e
must not expect the government o r the banks t o c o n t i n u e t o b a i l them out
(the moral hazard problem).
Once market s i g n a l s a r e b l u n t e d by a d m i n i s t e r e d p r i c i n g and
s o c i a l i z e d r i s k , the government m u s t — t h e f o u r t h i m p e r a t i v e — c r e a t e a
c e n t r a l guidance agency capable of supplementing market s i g n a l s by i t s own
s i g n a l s as t o which s e c t o r s w i l l be most p r o f i t a b l e .
F i n a l l y , the government must m a i n t a i n a c l e a v a g e between the
domestic economy and the i n t e r n a t i o n a l economy w i t h r e s p e c t to f i n a n c i a l
f l o w s , so as to be a b l e to c o n t r o l these f l o w s in and o u t .
Without such
c o n t r o l , w i t h f i r m s f r e e t o borrow a s they wish o n i n t e r n a t i o n a l markets,
government's own c o n t r o l over the c o s t of c a p i t a l to domestic borrowers
i s weakened, as i s i t s a b i l i t y t o g u i d e s e c t o r a l a l l o c a t i o n .
These f i v e i m p e r a t i v e s are r e f l e c t e d i n r e a d i l y i d e n t i f i a b l e
f e a t u r e s of the f i n a n c i a l systems of a l l o f our c o u n t r i e s (Wade 1985).
For
example, the c e n t r a l g u i d a n c e a g e n c i e s i n each c o u n t r y are w e l l known:
Japan's MITI; South Korea's Economic P l a n n i n g Board; Taiwan's C o u n c i l f o r
Economic P l a n n i n g and Development, and i t s I n d u s t r i a l Development Bureau.
A g a i n , banks are o n l y too w e l l aware o f the r e s t r i c t i o n s o n t h e i r f o r e i g n
t r a n s a c t i o n s , and i n a l l o f the c o u n t r i e s f o r e i g n banks are o n l y a l l o w e d
i n t o those pockets o f b u s i n e s s which the l o c a l banks cannot d o w e l l .
Taiwan's banks must r e p o r t a l l f o r e i g n t r a n s a c t i o n s weekly t o the c e n t r a l
bank, i t s f o r e i g n banks must r e p o r t a l l t r a n s a c t i o n s d a i l y .
Central
a l l o c a t i o n of f o r e i g n exchange has been a powerful i n s t r u m e n t of c o n t r o l
over f i r m s and s e c t o r a l growth i n a l l t h r e e c o u n t r i e s (because of common
dependence on i m p o r t s of raw m a t e r i a l s ) .
For a l l the s i m i l a r i t i e s i n the s t r u c t u r e o f the f i n a n c i a l system
and the f i n a n c i a l i n s t r u m e n t s a v a i l a b l e t o p o l i c y makers, t h e r e are a l s o
important d i f f e r e n c e s between the t h r e e c o u n t r i e s .
I t has been s a i d t h a t
'The Japanese banking system i s among the most c e n t r a l i z e d and c o n t r o l l a b l e
i n the w o r l d ' (Pempel 1978:152).
But Japanese banks are m o s t l y p r i v a t e l y
owned, and have some autonomy w i t h r e s p e c t to c r i t e r i a of l e n d i n g and
response t o 'bad' l o a n s .
Involvement i n company management i s s h a r e d
between bank c r e d i t o r s and government ( e . g . M I T I ) .
Korean and Taiwanese
banks, on the o t h e r hand, are state-owned (Korea's u n t i l 1980-83), and have
l e s s autonomy than Japan's.
Korean banks o p e r a t e as d i r e c t i n s t r u m e n t s of government p o l i c y
(at l e a s t w i t h respect t o b i g l o a n s ) :
t h e i r c r i t e r i a o f l e n d i n g are s e t b y
government, and in cases of bad l o a n s the government d i r e c t s them to
-11continue lending or not.
(Korea's h i g h i n f l a t i o n of the 1970s was r e l a t e d
to a government p o l i c y of l e n d i n g many f i r m s out of d i f f i c u l t i e s . )
Hence
c o l l a t e r a l r e q u i r e m e n t s are not a major requirement (except f o r s m a l l
companies), so the banks are n o t , in t h a t sense, 'pawnbrokers'.
Yet
n e i t h e r do the banks have the c a p a c i t y to undertake independent a n a l y s i s of
company b a l a n c e s h e e t s , market p r o s p e c t s , and cash f l o w p r o j e c t i o n s ; or at
any r a t e , they a r e not a b l e t o make such a n a l y s i s a b a s i s f o r l e n d i n g
decisions.
So not o n l y are the Korean banks not pawnbrokers, they are not
venture c a p i t a l i s t s e i t h e r .
I n s t e a d o f the banks having i n t i m a t e t i e s w i t h
( b i g ) company management, i t i s the government i t s e l f which has t h e s e t i e s .
A s f o r Taiwan, c o l l a t e r a l requirements are higher f o r p r i v a t e
f i r m s than in Japan or Korea, and banks a r e commonly known, p e j o r a t i v e l y ,
as 'pawnshops'; c o n v e r s e l y , they have no more of a venture c a p i t a l i s t
c a p a b i l i t y ( i n the above sense) than the Korean banks.
As in Korea, it is
the government, more than the banks, which is i n v o l v e d w i t h company
management.
But t h i s involvement seems to be l e s s than i n South K o r e a , as
f a r a s the p r i v a t e s e c t o r i s concerned; g o v e r n m e n t - ( p r i v a t e ) b u s i n e s s
r e l a t i o n s a r e somewhat more a r m s - l e n g t h than i n e i t h e r Korea o r Japan.
8
T h i s may be because Taiwan has fewer g i a n t companies than Korea or Japan ;
a l s o because of the e t h n i c t e n s i o n s between the mainlander-dominated
government and the i s l a n d e r - d o m i n a t e d b u s i n e s s s e c t o r ; and a l s o because the
p u b l i c e n t e r p r i s e s e c t o r i n Taiwan i s b i g g e r than i n Korea and much b i g g e r
9
a g a i n than i n Japan , s o government-business r e l a t i o n s which i n Korea and
Japan i n v o l v e c r o s s i n g the p u b l i c s e c t o r - p r i v a t e s e c t o r boundary are i n
Taiwan a l r e a d y c o n t a i n e d w i t h i n the p u b l i c s e c t o r , and hence do not appear
t o r e p r e s e n t 'government i n t e r f e r e n c e ' i n ( p r i v a t e ) b u s i n e s s management.
There are c l o s e (which i s not t o say always f r i e n d l y ) r e l a t i o n s w i t h i n the
t r i a n g l e o f c e n t r a l d e c i s i o n - m a k e r s , government-owned banks, and p u b l i c
enterprises.
-12So the Korean and Taiwanese cases r e p r e s e n t d i s t i n c t s u b - s p e c i e s
of the c r e d i t - b a s e d model.
But a l l t h r e e cases have i n common t h a t ,
because o f f i r m s ' h i g h d e b t / e q u i t y r a t i o s , governments can w i e l d a g r e a t
d e a l of i n f l u e n c e over ( b i g ) f i r m s and over the economy's investment
p a t t e r n more g e n e r a l l y v i a t h e i r i n f l u e n c e over the sources of c r e d i t .
As
Zysman puts i t , ' S e l e c t i v e c r e d i t a l l o c a t i o n i s the s i n g l e d i s c r e t i o n
n e c e s s a r y t o a l l s t a t e - l e d i n d u s t r i a l s t r a t e g i e s ' (1983:76).
Governments
in economies w i t h c a p i t a l - m a r k e t - b a s e d f i n a n c i a l systems do not have
a n y t h i n g l i k e the same degree of s t e e r a g e c a p a b i l i t y .
Trade Instruments
Trade c o n t r o l s have been i m p o r t a n t i n s t r u m e n t s o f s t e e r a g e i n a l l
three c o u n t r i e s (Japan p r e - 1 9 7 0 i s h , i f not l a t e r ) .
The governments have
not a l l o w e d the domestic market f o r t r a d a b l e s to be d i r e c t l y i n t e g r a t e d
i n t o the i n t e r n a t i o n a l market:
they have not a l l o w e d the use of f o r e i g n
exchange, the c o m p o s i t i o n of i m p o r t s , to be d e c i d e d by domestic demand in
r e l a t i o n to p r i c e s s e t o u t s i d e the c o u n t r y .
They have i n f l u e n c e d the
volume and c o m p o s i t i o n of i m p o r t s by a combination of s e l e c t i v e c o n t r o l s on
t r a d e , both ( n o n - d i s c r e t i o n a r y ) t a r i f f s and ( d i s c r e t i o n a r y ) q u a n t i t a t i v e
controls.
I s h a l l c o n c e n t r a t e here on Taiwan because l e s s i s known about
i t s trade c o n t r o l s , and because the most f a m i l i a r reason f o r t r a d e
c o n t r o l s — the need to save s c a r c e f o r e i g n exchange — has not
reason
for
m a i n t a i n i n g Taiwan's
elaborate
apparatus
of
been a
trade management:
Taiwan ( u n l i k e South Korea) has run b a l a n c e of payments s u r p l u s e s most
years s i n c e 1970.
The reason i s more d i r e c t l y to do w i t h b u i l d i n g up
t e c h n o l o g i c a l and s u p p l y c a p a c i t y w i t h i n Taiwan.
Taiwan's t a r i f f s t r u c t u r e i s m i n u t e l y d i f f e r e n t i a t e d by p r o d u c t ,
w i t h t a r i f f s r a n g i n g from z e r o t o w e l l over 100 p e r c e n t .
It is quite
i n c o n s i s t e n t w i t h the m o d i f i e d n e o c l a s s i c a l p r e s c r i p t i o n f o r a 10-15
percent u n i f o r m r a t e o f e f f e c t i v e p r o t e c t i o n f o r a l l m a n u f a c t u r i n g o t h e r
than the i n f a n t i n d u s t r i e s , which s h o u l d get a u n i f o r m r a t e of no more than
double the normal r a t e (e.g. B a l a s s a 1977).
I have no evidence on how
c l o s e l y the s t r u c t u r e o f t a r i f f p r o t e c t i o n corresponds w i t h the
government's s e c t o r a l development p r i o r i t i e s .
The s i t u a t i o n w i t h r e s p e c t t o q u a n t i t a t i v e c o n t r o l s i s c l e a r e r .
For the most u n d e r s t a n d a b l e of reasons the government is a n x i o u s not to be
seen to be d o i n g a n y t h i n g which might p r o v i d e a p r e t e x t f o r o t h e r c o u n t r i e s
to put up b a r r i e r s to i t s e x p o r t s , and takes care to keep most of the
q u a n t i t a t i v e c o n t r o l s out o f s i g h t .
The p u b l i c c l a s s i f i c a t o n o f i m p o r t s
i n t o ' p r o h i b i t e d ' , ' c o n t r o l l e d ' , and ' p e r m i s s i b l e ' does not c a p t u r e the
scope of the system, f o r many items on the ' p e r m i s s i b l e s ' l i s t a r e i n f a c t
not f r e e l y imported (Westphal 1978, Wade 1984, f o r t h c o m i n g ) .
'permissibles'
l i s t is
c o v e r t l y d i v i d e d i n t o two p a r t s ,
The
one p a r t
containing
items which r e a l l y are f r e e l y imported (though they may be s u b j e c t to
r e s t r i c t i o n s as to o r i g i n , and as t o what k i n d o f agency can import them),
the o t h e r p a r t c o n t a i n i n g items f o r which s p e c i a l p e r m i s s i o n must be
obtained.
When a would-be i m p o r t e r a p p l i e s to a bank f o r a l i c e n s e ( a l l
imports and e x p o r t s must be covered by a l i c e n s e ) , the bank checks to see
whether the i t e m i s on the ' c o v e r t l y c o n t r o l l e d p e r m i s s i b l e s ' l i s t .
If so,
the request i s r e f e r r e d back t o the government ( n o r m a l l y the I n d u s t r i a l
Development Bureau).
T y p i c a l l y the would-be i m p o r t e r w i l l be asked t o
p r o v i d e evidence t h a t the domestic s u p p l i e r ( s ) cannot meet h i s terras on
p r i c e , q u a l i t y , or d e l i v e r y .
He may be asked to f u r n i s h a l e t t e r from the
relevant producers' a s s o c i a t i o n to that e f f e c t .
T h i s c o u l d be c a l l e d the ' r e f e r r a l ' mechanism of import c o n t r o l ,
o r the
'law o f s i m i l a r s ' (but i t ' s not a l a w ) .
I t has almost c e r t a i n l y — I
know of no d i r e c t e v i d e n c e — b e e n an i m p o r t a n t i n s t r u m e n t of secondary
import s u b s t i t u t i o n . P e t r o c h e m i c a l s , c h e m i c a l s , s t e e l , o t h e r b a s i c
m e t a l s — t h e s e s e c t o r s , c h a r a c t e r i s e d by standardised, basic products w i t h
h i g h c a p i t a l r e q u i r e m e n t s , are covered by the r e f e r r a l mechanism.
So a l s o
a r e some machinery and components, i n c l u d i n g some machine t o o l s , f o r k l i f t
t r u c k s , and b e a r i n g s .
(The p r e s e n t tense r e f e r s to 1978-1983.)
At the
l e a s t , the mechanism s e r v e s the u s e f u l f u n c t i o n o f s t i m u l a t i n g — i n f a c t
f o r c i n g — i n c r e a s e d c o n t a c t between purchasers and p o t e n t i a l l o c a l s u p p l i e r s
(Westphal 1978); which has to be balanced a g a i n s t the c o s t of d e l a y s , on
which I have no i n f o r m a t i o n .
For machinery, the r e f e r r a l mechanism
p r o v i d e s o n l y weak p r o t e c t i o n i n g e n e r a l , because the p l a n n e r s a r e w e l l
aware of the importance of a l l o w i n g i n d u s t r i a l i s t s to use the equipment
they t h i n k best s u i t e d t o t h e i r p a r t i c u l a r market.
F o r more s t a n d a r d i z e d
c a p i t a l - i n t e n s i v e p r o d u c t s l i k e c h e m i c a l s , i m p o r t i n g can be much tougher
once l o c a l c a p a c i t y e x i s t s .
A manufacturer who needs a h i g h e r percentage
p u r i t y i n h i s c a u s t i c soda than the l o c a l s u p p l i e r can match may become so
f e d up w i t h d e l a y s in h i s r e q u e s t s to import that he d e c i d e s to h e l p one or
two l o c a l producers t o upgrade to the p o i n t where he can buy h i s
r e q u i r e m e n t s from them.
Which is j u s t what the Taiwan government wants.
Because the government i s a b l e t o c o n t r o l q u a n t i t i e s o f goods
c r o s s i n g the n a t i o n a l boundary, i t can use i n t e r n a t i o n a l p r i c e s t o
d i s c i p l i n e the p r i c e - s e t t i n g o f p r o t e c t e d domestic p r o d u c e r s .
It is very
s e n s i t i v e to the p o i n t t h a t t h e r e must be good reasons why d o m e s t i c p r i c e s
o f p r o t e c t e d items are s i g n i f i c a n t l y h i g h e r than i n t e r n a t i o n a l p r i c e s ,
e s p e c i a l l y in the case of items to be used f o r export p r o d u c t i o n .
(There
a r e some g l a r i n g e x c e p t i o n s to t h i s r u l e , n o t a b l y i n the a u t o m o b i l e
assembly i n d u s t r y . ) S o the t h r e a t o f a l l o w i n g i n imports i f the p r i c e s o f
domestic s u b s t i t u t e s get too f a r out of l i n e can be s u f f i c i e n t to h o l d
p r i c e s t o near i n t e r n a t i o n a l l e v e l s , w i t h o u t there b e i n g a f r e e f l o w o f
goods a c r o s s the n a t i o n a l boundary.
When l i t t l e i s known about the r e f e r r a l mechanism today,
a l l the more d i f f i c u l t
1970s.
to judge how important
Ian L i t t l e and Maurice S c o t t
l i b e r a l i s a t i o n occurred
through the
v i r t u a l l y f r e e of trade c o n t r o l s '
One h y p o t h e s i s i s
e a r l y 1970s,
i t was d u r i n g the
i t is
1960s and
both c l a i m that p r o g r e s s i v e t r a d e
1960s
' u n t i l i n the
1970s
Taiwan was
( L i t t l e 1979:474, a l s o S c o t t 1979:327).
that a l l q u a n t i t a t i v e c o n t r o l s were indeed l i f t e d by the
o n l y to be reimposed j u s t a f t e r the time when L i t t l e and S c o t t
were w r i t i n g ,
i n 1976-77.
e s t a b l i s h e d by 1978,
C e r t a i n l y the r e f e r r a l mechanism was w e l l
when Westphal d e s c r i b e d i t
(1978).
The second
h y p o t h e s i s is that the c o n t r o l s were in p l a c e through the 1960s and 1970s,
as in the 1950s and as in the 1980s.
A l l through the 1950s the p l a n n e r s
had j u s t i f i e d q u a n t i t a t i v e c o n t r o l s i n the face o f economists'
on the grounds
of
criticism,
t h e i r g r e a t e r accuracy and f l e x i b i l i t y than t a r i f f s
managing trade q u a n t i t i e s .
But the o f f i c i a l system of
'controlled'
for
and
' p e r m i s s i b l e ' items was then, and is now, cumbersome in terms of the
procedures needed to get
happened
in the
items
onto and o f f
l i b e r a l i s a t i o n of
trade
the l i s t s .
controls
was
a switch of
the f o r m a l l y c o n t r o l l e d to the de f a c t o c o n t r o l l e d l i s t ,
the planners more f l e x i b i l i t y to manage
liberalise.
of import
it was,
This i s not to say that
items
on the
'permissible'
and a f l u c t u a t i n g part
moment.
I f so,
What may have
so as
items
from
to permit
trade q u a n t i t i e s while a p p e a r i n g to
the whole of the i n c r e a s e i n the share
l i s t was
illusory;
only t h a t
part
depending on the p r i o r i t i e s and needs
of
of
the
the e a s i n g of q u a n t i t a t i v e r e s t r i c t i o n s d u r i n g the
l i b e r a l i z a t i o n of 1958-62, which bears so much of the weight of
the
n e o c l a s s i c a l e x p l a n a t i o n f o r Taiwan's subsequent r a p i d growth, may have
been l e s s
r e a l than the o f f i c i a l f i g u r e s suggest.
1 0
What i s the import p o s i t i o n of e x p o r t e r s ?
In the n e o c l a s s i c a l
s t o r y the most important reason f o r Taiwan's boom i n manufactured e x p o r t s
( a f t e r the a v a i l a b i l i t y o f cheap l a b o u r ) i s that exporters f a c e d a v i r t u a l
-16f r e e t r a d e regime;
they c o u l d buy i n p u t s f o r e x p o r t s at w o r l d market
p r i c e s , and hence have not had a net i n c e n t i v e to s e l l on the d o m e s t i c
market r a t h e r than o n the i n t e r n a t i o n a l market ( u n l i k e i n the t e x t b o o k
i m p o r t - s u b s t i t u t i n g trade regime).
I t i s t r u e t h a t e x p o r t e r s pay n o t a r i f f duty o n i n t e r m e d i a t e s
used f o r e x p o r t p r o d u c t i o n .
not f r e e l y i m p o r t a b l e ,
However some very i m p o r t a n t i n t e r m e d i a t e s a r e
because they are s u b j e c t to the mechanism of
q u a n t i t a t i v e import c o n t r o l j u s t d e s c r i b e d .
I n p r i n c i p l e , items can o n l y
be put on the l i s t s u b j e c t t o t h i s c o n t r o l i f the p r i c e of the domestic
s u b s t i t u t e i s e q u a l to the c . i . f . p r i c e of imports when the i m p o r t s a r e t o
b e used f o r e x p o r t p r o d u c t i o n , o r e q u a l t o the c . i . f . p r i c e p l u s a l l
t a r i f f s and o t h e r charges when the i m p o r t s are to be used f o r domestic
market p r o d u c t i o n .
the
domestic
I n p r a c t i c e t h e r e i s scope f o r n e g o t i a t i o n i n f a v o u r o f
producer.
As f o r c a p i t a l goods,
e x p o r t e r s do have to pay duty — u n l e s s
they produce products which appear on a l i s t of s p e c i f i c items t o be
encouraged (e.g.
h i g h v o l t a g e i n s u l a t i o n tape w i t h working t o l e r a n c e of 6.6
kv or more), and u n l e s s a domestic s u b s t i t u t e f o r the c a p i t a l good is not
a v a i l a b l e ( a g a i n t h e r e i s room f o r n e g o t i a t i o n o n what c o n s t i t u t e s a
substitute).
And a v a r i e t y o f c a p i t a l goods are s u b j e c t t o q u a n t i t a t i v e
import c o n t r o l s , even i f they are t o b e used f o r export p r o d u c t i o n .
E x p o r t e r s a r e , however, exempt from i n d i r e c t taxes on i n p u t p u r c h a s e s .
They have a l s o in the past been g i v e n an i n c e n t i v e through the
s p e c i f i c a t i o n o f s i d e - c o n d i t i o n s o n the l i s t s o f items t o b e g i v e n f i s c a l
i n c e n t i v e s , which s a i d t h a t the f i s c a l i n c e n t i v e would o n l y b e g i v e n i f a
c e r t a i n minimum share of the output was e x p o r t e d .
The f a c t t h a t e x p o r t e r s have t o pay duty on many c a p i t a l goods
( o f t e n o f 20+ percent i n the l a t e 1970s) and cannot f r e e l y import some v e r y
i m p o r t a n t i n t e r m e d i a t e s as w e l l as some c a p i t a l goods, must q u a l i f y the
p r o p o s i t i o n t h a t e x p o r t s have f a c e d a f r e e trade regime.
L i t t l e q u a n t i t a t i v e evidence i s a v a i l a b l e on the magnitude of
protection.
The o n l y comparative s t u d y f o r Taiwan and Korea uses d a t a from
the l a t e 1960s.
I t suggests t h a t w h i l e the economy-wide average l e v e l of
p r o t e c t i o n was r e l a t i v e l y low f o r both Taiwan and Korea by the l a t e 1960s,
p a r t s o f the m a n u f a c t u r i n g s e c t o r were h e a v i l y p r o t e c t e d , g i v i n g h i g h
v a r i a n c e around the average.
H s i n g , u s i n g 1966 d a t a f o r Taiwan, c a l c u l a t e s
an e f f e c t i v e p r o t e c t i o n f o r home market consumer goods of 126 p e r c e n t
(1971:144). I n B a l a s s a ' s c l a s s i f i c a t i o n , the 'import-competing' i n d u s t r i e s
(those i n which l e s s than 1 0 percent o f domestic p r o d u c t i o n i s e x p o r t e d ,
and in which i m p o r t s account f o r more than 10 percent of domestic
consumption) r e c e i v e d a n e f f e c t i v e p r o t e c t i o n r a t e o f 133 p e r c e n t i n Taiwan
in 1969 (Lee and L i a n g 1982:325),
and Kim 1982:246).
and 64 percent in Korea in 1968
(Westphal
For the same i n d u s t r i e s net e f f e c t i v e s u b s i d y r a t e s
s t r o n g l y f a v o r e d domestic market s a l e over export s a l e :
61 a g a i n s t 15
percent f o r Taiwan, and 100 a g a i n s t 39 percent f o r Korea ( B a l a s s a
1982:35). To i n t e r p r e t these f i g u r e s one needs to know how much of the
economy's a c t i v i t y i s i n c l u d e d i n the h i g h l y p r o t e c t e d s e c t o r s , as w e l l
1 1
as the degree of correspondence between the h i g h l y p r o t e c t e d s e c t o r s and
the i n f a n t i n d u s t r i e s t h a t the government was t r y i n g to promote.
needs c o r r e s p o n d i n g data from o t h e r c o u n t r i e s .
One then
L a c k i n g t h i s , I conclude
w i t h a p r o p o s i t i o n i n need o f c a r e f u l t e s t i n g , t h a t p a r t s o f the
manufacturing s e c t o r have r e c e i v e d r e l a t i v e l y h i g h l e v e l s o f p r o t e c t i o n i n
Taiwan and South Korea (a f o r t i o r i i n J a p a n ) , and t h a t the i n d u s t r i e s which
the government has t r i e d t o promote are i n c l u d e d i n these p a r t s .
I n a l l t h r e e c o u n t r i e s import c o n t r o l s have had the c e n t r a l
f u n c t i o n o f r e d u c i n g the r i s k t o which i n v e s t o r s i n new, e s p e c i a l l y
c a p i t a l - i n t e n s i v e i n d u s t r i e s , are exposed, thereby encouraging the
-18expansion and deepening of domestic s u p p l y c a p a b i l i t y .
They have
encouraged domestic manufacturers to i n v e s t on a s c a l e s u f f i c i e n t to
generate the i n c r e a s i n g r e t u r n s t o which m a n u f a c t u r i n g i s s u b j e c t ; and they
have then helped to p r o v i d e s t r o n g and r e l i a b l e domestic demand f o r the
products o f the p r o t e c t e d i n d u s t r i e s , s o t h a t these i n d u s t r i e s can s p r e a d
overheads over l a r g e r output and thus lower t h e i r u n i t c o s t s .
At a more
a g g r e g a t i v e l e v e l , import c o n t r o l s have s e r v e d the f u n c t i o n o f r e t a i n i n g
w i t h i n the d o m e s t i c economy more of the growth in demand from the e x p o r t
market, so p r o v i d i n g d o m e s t i c a l l y based f i r m s w i t h a more e x p a n s i v e
economic environment than i f more of the a d d i t i o n a l demand g e n e r a t e d by
e x p o r t s l e a k e d abroad in the form of i m p o r t s .
With a more e x p a n s i v e
economic environment, domestic f i r m s are more l i k e l y to keep t h e i r
p r o d u c t i v i t y d r i v i n g f o r w a r d , and hence i n c r e a s e t h e i r i n t e r n a t i o n a l
c o m p e t i t i v e n e s s at a l a t e r s t a g e .
Direct foreign investment controls
I f the domestic economy i s dominated b y m u l t i n a t i o n a l companies,
the development consequences of the above l o g i c w i l l be d i f f e r e n t than i f
the f i r m s are p r e d o m i n a n t l y n a t i o n a l l y - o w n e d .
In much of L a t i n America and
Sub-Saharan A f r i c a , m u l t i n a t i o n a l s c o n t r o l most f i r m s p r o d u c i n g f o r the
upper income l e v e l s of the domestic market.
In TKJ, by c o n t r a s t ,
m u l t i n a t i o n a l s have had a s m a l l presence i n r e l a t i o n to the economy as a
whole.
( I n Taiwan over the 1970s, f o r e i g n investment accounted f o r about 8
percent o f investment i n m a n u f a c t u r i n g , l e s s i n South Korea and Japan.)
More i m p o r t a n t l y , they have had r e s t r i c t e d access to the domestic market.
By one means or another the governments have d i r e c t e d them towards e x p o r t s
(though e x p o r t requirements are l e s s the more the government wants t h e i r
technology).
-19T h i s p a r t i c u l a r i n t e r f e r e n c e w i t h the i n t e r n a t i o n a l market has
advantages i n terms o f the development o f n a t i o n a l p r o d u c t i o n c a p a b i l i t i e s
and income d i s t r i b u t i o n .
I t means t h a t government e f f o r t s to promote the
growth and r e s t r u c t u r i n g of domestic p r o d u c t i o n c a p a c i t y do not have to go
through the m u l t i n a t i o n a l s , whose o b j e c t i v e s may not w h o l l y c o i n c i d e w i t h
the development o f n a t i o n a l p r o d u c t i o n c a p a b i l i t y .
The government i s a b l e
t o use i n v e s t i b l e funds a c c o r d i n g t o s p e c i f i c p r i o r i t i e s designed t o
f u r t h e r i n t e g r a t e the domestic market, through having more i n f l u e n c e over
the f i r m s t h a t produce f o r the domestic market than i f those f i r m s were
predominantly m u l t i n a t i o n a l s .
Second,
multinationals
operating
on
the
domestic market tend to f o l l o w m a r k e t i n g s t r a t e g i e s that have l i t t l e t o do
w i t h average incomes or t r a d i t i o n a l consumer b e h a v i o r ; which may tend to
a c c e n t u a t e income i n e q u a l i t i e s .
In TKJ, the d i v e r s i f i c a t i o n of goods made
a v a i l a b l e to consumers is a g r a d u a l and c o n t r o l l e d process geared to the
p o p u l a t i o n ' s p u r c h a s i n g power.
So in South Korea, the most modern of
consumer goods, manufactured c h i e f l y by m u l t i n a t i o n a l s , were f o r a l o n g
time r e s t r i c t e d f o r e x p o r t .
Only g r a d u a l l y have some of these p r o d u c t s
become a v a i l a b l e f o r domestic p u r c h a s e r s , as b a s i c needs In food and
c l o t h i n g have been met ( I k o n i c o f f 1985).
Other Instruments
Other
instruments
of
industrial
v a r y i n g degrees i n the t h r e e c o u n t r i e s .
'administrative
guidance',
a
practice
of
steerage are a l s o i m p o r t a n t
to
Japan i s known f o r i t s
governmental
c o n s u l t a t i o n w i t h and
p e r s u a s i o n of company management w i t h o u t the b a c k i n g of law; but the same
t h i n g o c c u r s r o u t i n e l y i n South Korea and Taiwan, and i s , i n d e e d , a
potential
instrument
i n any
credit-based
financial
system where
government has much c o n t r o l over the banks (as we have s e e n ) .
the
Japan and
South Korea have made much use of market s t r u c t u r e p o l i c y , not of the
a n t i - t r u s t k i n d but of n e a r l y the o p p o s i t e :
to promote the development of
l a r g e - s c a l e f i r m s and t r a d i n g companies, a b l e to compete a g a i n s t the US and
European g i a n t s .
Taiwan has done much l e s s t o f o s t e r the development o f
12
agglomerates.
But i t does have a l a r g e p u b l i c e n t e r p r i s e s e c t o r ,
13
u n u s u a l l y l a r g e even when compared to South Korea's
; and an a r r a y of
' s p e c i a l s t a t u s ' , o s t e n s i b l y p r i v a t e f i r m s l i n k e d t o the p a r t y o r the
m i l i t a r y which, g i v e n the c e n t r a l i s e d n a t u r e o f the s t a t e , are a l s o
a v a i l a b l e as instruments of s e l e c t i v e i n t e r v e n t i o n .
Taiwan has, i n
a d d i t i o n , an e l a b o r a t e scheme o f f i s c a l i n c e n t i v e s f o r the p r o d u c t i o n o f
t i g h t l y s p e c i f i e d products.
(The s p e c i f i c a t i o n s change over t i m e , s o a s t o
keep the i n c e n t i v e s p r e s s i n g a g a i n s t p r o d u c t i o n f r o n t i e r s . )
L i k e Korea,
Taiwan has a f o r e s t of R&D o r g a n i z a t i o n s under s t a t e a u s p i c e s ; though t h e i r
name i n Taiwan t r a n s l a t e s as 'Research and S e r v i c e ' r a t h e r than 'Research
and Development' o r g a n i z a t i o n s , f o r they are i n t e n d e d to be an i n d u s t r i a l
e x t e n s i o n f o r c e as much as a r e s e a r c h s t a f f .
I n Japan the government has
r e l i e d more on e n c o u r a g i n g groups of p r i v a t e f i r m s t o form t h e i r own R&D
cartels.
However, n e i t h e r R&D o r g a n i z a t i o n s nor t e c h n o l o g y l i c e n s i n g have
been the main s o u r c e s of new i n d u s t r i a l t e c h n o l o g y in Taiwan and K o r e a .
These have been:
i m p o r t e d c a p i t a l goods; s t u d e n t s sent o v e r s e a s f o r h i g h e r
l e v e l e d u c a t i o n and a t t r a c t e d back by v i g o r o u s government e f f o r t s ; and
f o r e i g n e x p e r t s employed t o work l o c a l l y a l o n g s i d e l o c a l s ( W e s t p h a l , Kim
and Dahlman 1984).
A l l t h r e e f l o w s of 'embodied' t e c h n o l o g y have been
s u b j e c t t o government i n f l u e n c e .
Aggressivity
There i s n o need t o l a b o u r the p o i n t :
a l l t h r e e governments have
the means to i n t e r v e n e p o w e r f u l l y i n markets, t o s e t c o n s t r a i n t s on the
scope of market d e c i s i o n - m a k e r s , w i t h the o b j e c t of b r i n g i n g about c e r t a i n
market outcomes. Japan's and South Korea's i n d u s t r i a l p o l i c i e s have been
-21more a g g r e s s i v e than Taiwan's, in the sense t h a t the government has put
more pressure—rmore i n c e n t i v e s , more p e n a l t i e s f o r n o n - c o m p l i a n c e — b e h i n d
i t s attempts t o s h i f t the economy i n c e r t a i n d i r e c t i o n s .
have to do w i t h the f o l l o w i n g d i f f e r e n c e s :
The reasons may
(a) In s a v i n g s :
Taiwan's
domestic s a v i n g s r a t e has been much h i g h e r than Korea's, so t h e government
has been a b l e t o f a v o r c e r t a i n s e c t o r s without the t i g h t r a t i o n i n g o f o t h e r
s e c t o r s which Korea has had to undertake in order to do the same (even
though Korea has borrowed h e a v i l y abroad to make-up some of the
difference).
(b) In degree of openness of the economy:
Japan's d o m e s t i c
s a v i n g s a r e a l s o h i g h , so the f i r s t c o n s i d e r a t i o n does not s e r v e t o e x p l a i n
the d i f f e r e n c e between Taiwan and Japan.
P a r t of t h a t d i f f e r e n c e may be
due t o the f a c t t h a t Japan's economy i s l e s s exposed t o the i n t e r n a t i o n a l
economy, and so the government c a n , w i t h the same amount of a d m i n i s t r a t i v e
e f f o r t , more a g g r e s s i v e l y r i g markets than i n a more open economy.
the p u b l i c e n t e r p r i s e s e c t o r :
Taiwan's
( c ) In
large public enterprise sector
g i v e s the government an i n s t r u m e n t of i n d u s t r i a l s t r a t e g y whose use does
not
involve
crossing
and which i s
interference.
the
boundary between
therefore less
the
p u b l i c and p r i v a t e
sectors,
l i k e l y t o generate a sense o f a g g r e s s i v e
(d) In the o r g a n i z a t i o n of the p r i v a t e s e c t o r :
Japan and
South Korea both have more h i g h l y c e n t r a l i z e d p r i v a t e s e c t o r s than Taiwan
(the r e s u l t ,
in part,
o f government i n t e n t i o n i n each c a s e ) .
With the
Japanese and South Korean governments both f a c i n g l a r g e r p r i v a t e
agglomerates,
themselves
well
organized
into
peak
associations,
stronger
i n s t r u m e n t s of governmental inducement and p e n a l t y are sometimes r e q u i r e d
to s h i f t firms in desired d i r e c t i o n s
c o n f l i c t i n Taiwan,
than i n Taiwan.
Moreover,
the e t h n i c
running c l o s e t o the p u b l i c s e c t o r - p r i v a t e s e c t o r
d i v i d e , e n j o i n s on the government a more s u b t l e approach to p r i v a t e s e c t o r
s t e e r a g e than the Japanese and Korean governments need t a k e .
f o r e i g n economic p o l i c y :
( e ) In
Japan and South Korea have both planned head-on
-22c o n f r o n t a t i o n w i t h o t h e r c o u n t r i e s ( n o t a b l y the US) i n key i n d u s t r i e s ;
t h e i r p r o d u c t i o n c a p a c i t y d e c i s i o n s o n l y make sense on the a s s u m p t i o n t h a t
they c o u l d knock o u t - c a p a c i t y in o t h e r c o u n t r i e s .
Taiwan has been more
c i r c u m s p e c t , s e e k i n g market n i c h e s more complementary than c o m p e t i t i v e w i t h
those of the US,
and the government has had to be c o r r e s p o n d i n g l y l e s s
a c t i v e i n o r c h e s t r a t i n g and s u p p o r t i n g the a c t i v i t i e s o f f i r m s who would
c h a l l e n g e the US and European g i a n t s .
II.
EFFECTS OF INDUSTRIAL STRATEGY
A common response of n e o c l a s s i c a l development economists t o t h e
p r o p o s i t i o n t h a t TKJ have had a v i g o r o u s i n d u s t r i a l s t r a t e g y i s t o say t h a t
the v a r i o u s s e c t o r a l p o l i c i e s amount t o no more than 'hand-waving'; o r even
t h a t economic performance would have been s t i l l b e t t e r w i t h o u t them.
L i t t l e i s more c a r e f u l :
Ian
he admits t h a t i f by p l a n n i n g i s meant any
promotion o f i n d u s t r i e s t h a t would b e u n l i k e l y t o s t a r t i n response t o
p r i c e s i g n a l s , t h e r e was a l o t o f p l a n n i n g i n Taiwan i n the 1950s, a g a i n i n
the l a t t e r p a r t of the 1960s, and a l l through the 1970s (1979:489).
Yet i n
an 18,000 word paper on Taiwan he makes no attempt to d e s c r i b e or a s s e s s
the impact of t h i s p l a n n i n g .
Whether the promotion of i n d u s t r i e s t h a t
would b e u n l i k e l y t o s t a r t i n response t o p r i c e s i g n a l s h e l p s development
or not i s , he s a y s , 'a f u t i l e q u e s t i o n ' because of the absence of a
counterfactual.
F u t i l e q u e s t i o n o r n o t , h i s own i m p l i e d answer i s t h a t
d e l i b e r a t e i n d u s t r i a l s t e e r a g e has been a minor enough element f o r i t t o b e
c o m p l e t e l y i g n o r e d i n a l o n g account o f Taiwan's s u c c e s s .
Gustav R a n i s , i n
an e q u a l l y l o n g account of Taiwan's i n d u s t r i a l development, does more o r
l e s s the same (1979).
Hosomi and Okumura a l l e g e e x p l i c i t l y t h a t i t was
Japan's h i g h economic growth which a l l o w e d i n d u s t r i a l p o l i c y and the
consensus mechanism to work, not the o t h e r way around ( 1 9 8 2 : 1 5 0 ) — w i t h no
evidence e i t h e r way.
David Henderson, an economist a t t a c h e d to the US
-23C o u n c i l of Economic A d v i s o r s , has no doubt that
'The r e a l e x p l a n a t i o n f o r
the Japanese economic m i r a c l e i s the c o u n t r y ' s l a i s s e z - f a i r e p o l i c i e s o n
t a x e s , a n t i t r u s t , b a n k i n g , and l a b o r .
Japan teaches a l e s s o n ... about the
v i t a l i t y of the f r e e market' (1983, c i t e d i n Johnson 1985:3).
The i d e a
t h a t Japanese i n d u s t r i a l p o l i c i e s a c t u a l l y hindered economic performance i s
caught in the a s s e r t i o n t h a t 'Without MITI Japan would have grown at 15
p e r c e n t per annum i n s t e a d of o n l y 10 p e r c e n t ' (unnamed Japanese economist
quoted by L i t t l e 1979:491).
Saxonhouse (1983) and T r e z i s e (1983) make more
s e r i o u s arguments t o the e f f e c t t h a t s e l e c t i v e i n d u s t r i a l s t e e r a g e has been
a v e r y minor element i n Japan's s u c c e s s .
There is indeed a c o l o s s a l i d e n t i f i c a t i o n problem.
How can one
t e l l t h a t market l i b e r a l i s a t i o n ( c o u p l e d w i t h g e n e r a l i n f r a s t r u c t u r a l and
e d u c a t i o n a l i n v e s t m e n t ) was the most i m p o r t a n t f a c t o r by f a r ?
What k i n d of
e v i d e n c e i s needed t o show t h a t i n d u s t r i a l s t r a t e g y made a d i f f e r e n c e too
important to ignore?
The q u e s t i o n is c o m p l i c a t e d by the need to d i s t i n g u i s h two l e v e l s
o f i n d u s t r i a l s t r a t e g y — t h e g e n e r i c l e v e l , o n the one hand, i n c l u d i n g
p o l i c i e s on the exchange r a t e , f i n a n c e , t a x a t i o n , and so on, which t o g e t h e r
e s t a b l i s h the broad t h r u s t o f government p o l i c y towards i n d u s t r i a l growth
and c o m p e t i t i v e n e s s v i s - a - v i s r e d i s t r i b u t i o n and consumption;
s e c t o r a l l e v e l , o n the o t h e r ( S c o t t 1985).
and the
The e f f e c t o f s e c t o r a l
p o l i c i e s can be expected to depend p a r t l y on the net e f f e c t of g e n e r i c
policy.
S e p a r a t i n g out the r e l a t i v e impact o f p o l i c i e s a t these two l e v e l s
i s c l e a r l y a major u n d e r t a k i n g i n i t s e l f .
P u t t i n g t h a t a s i d e , how might
one assess impact a t s e c t o r a l l e v e l ?
One might study a s e t of i n d u s t r i e s to examine the c o n n e c t i o n
between promotion measures and subsequent growth.
e x e r c i s e would be f r a u g h t w i t h d i f f i c u l t y .
In p r a c t i c e , such an
Complete i n f o r m a t i o n on the
amount of a s s i s t a n c e , even i f measured o n l y i n terms of f i n a n c i a l
disbursements or exemptions, would be d i f f i c u l t to f i n d (much i n f o r m a t i o n
o n the use o f c o n c e s s i o n a l c r e d i t i n Taiwan i s c o n f i d e n t i a l ,
f o r example).
Worse, p r o m o t i o n a l measures cannot be l i m i t e d to f i n a n c i a l d i s b u r s e m e n t s or
legal directives.
I n a l l t h r e e c o u n t r i e s , the p i l o t agencies l a c k l a r g e
funds and f i r m s t a t u t o r y powers;
straightforwardly
to
clear directives.
connect
so it is v i r t u a l l y impossible
manufacturing
successes
with
financial
help
or
Many of the channels of t r a n s m i s s i o n of i n f l u e n c e are
d i f f i c u l t to d e t e c t , l e t a l o n e q u a n t i f y .
For example, development bank
l o a n s may t r i g g e r a g r e a t e r volume of commercial bank c r e d i t i n the same
d i r e c t i o n s than would o t h e r w i s e have f o l l o w e d — t h i s
'announcement e f f e c t '
might be used to e x p l a i n why the Japan Development Bank, a l t h o u g h a
r e l a t i v e l y s m a l l s o u r c e of l o a n s ,
steerage.)
has s t i l l been important i n i n d u s t r i a l
There i s the f u r t h e r d i f f i c u l t y o f h o l d i n g o t h e r t h i n g s
constant f o r h i g h a s s i s t a n c e and low a s s i s t a n c e s u b - s e c t o r s .
But beyond
a l l t h i s the q u e s t i o n remains o f how t o i n t e r p r e t the r e s u l t s :
if
s u b - s e c t o r s which r e c e i v e d a l o t of a s s i s t a n c e grew more s l o w l y than those
which d i d n o t ,
does
this indicate
the f a i l u r e o f a s s i s t a n c e measures,
or
does i t i n d i c a t e e f f e c t i v e t a r g e t t i n g o n i n d u s t r i e s that need a s s i s t a n c e a s
a c o n d i t i o n of subsequent f a s t growth?
Even i f such s t u d i e s show e f f e c t i v e n e s s at the i n d u s t r y l e v e l ,
however, they l e a v e open the q u e s t i o n of whether the c o u n t r y would not have
been b e t t e r o f f d o i n g t h i n g s o t h e r than d e v e l o p i n g those p a r t i c u l a r
industries.
' L o c a l ' o p t i m a l i t y does not e s t a b l i s h ' g l o b a l ' o p t i m a l i t y
( g l o b a l i n the sense o f the n a t i o n a l economy).
aggregate
production
function analysis
I t i s tempting t o use
t o estimate
the extent
of
'global'
o p t i m a l i t y , w i t h the s i z e of the r e s i d u a l s i n d i c a t i n g the maximum p o s s i b l e
extent
the
of
the government's
residuals
depends
contribution.
The problem is
o n how the p r o d u c t i o n f u n c t i o n i s
that
the s i z e
specified,
a matter c a l l i n g f o r a l a r g e element of s u b j e c t i v e judgement.
The
of
which
is
'global'
-25i s s u e can be got a t another way, by comparing c o u n t r i e s which i n many
i m p o r t a n t r e s p e c t s are s i m i l a r but where the r o l e of government has been
significantly different:
example ( B o l t h o 1981).
Japan and I t a l y i n the post-war p e r i o d , f o r
The hazards are o b v i o u s .
At b e s t one can make a c i r c u m s t a n c i a l case t h a t i n d u s t r i a l
s t r a t e g y has made a p o s i t i v e c o n t r i b u t i o n .
For example, we have Yusuf and
P e t e r s ' c o n c l u s i o n t h a t f o r a n a l y s i n g investment i n South K o r e a , a model
based o n government p o l i c y o b j e c t i v e s and p l a n n e r s ' p r e f e r e n c e s g i v e s
b e t t e r r e s u l t s than a s t a n d a r d neoclassical market-determined model (1984).
We have T a i z o Y a k u s h i j i ' s study of the Japanese a u t o m o b i l e i n d u s t r y from
1900 to 1960, w h i c h shows how each government i n t e r v e n t i o n changed f i r m s '
b e h a v i o r , and how the changed b e h a v i o r i n t u r n gave r i s e t o changes i n the
n a t u r e of the subsequent i n t e r v e n t i o n (1984).
We have Magaziner and Hout's
s t u d y , which shows f o r s e v e r a l Japanese i n d u s t r i e s the c o n n e c t i o n between
government promotion or non-promotion and subsequent performance (1980).
We a l s o have Westphal's work on Korean i n f a n t i n d u s t r i e s , which s u g g e s t s
t h a t many of the promoted i n d u s t r i e s have become i n t e r n a t i o n a l l y
c o m p e t i t i v e , a b l e t o compete i n t e r n a t i o n a l l y and d o m e s t i c a l l y w i t h o u t
s u b s i d i e s ; 'many' i n the sense of a h i g h b a l l - p a r k average, which i n c l u d e s
some much p u b l i c i z e d f a i l u r e s , e s p e c i a l l y i n the l a t e 1970s and e a r l y 1980s
(1982:264).
He would be the f i r s t t o admit that h i s evidence i s not
c o n c l u s i v e ; but i n the c o n t e x t o f the o t h e r evidence c i t e d i t i s
suggestive.
I have not seen d a t a f o r Taiwan on what has happened
subsequently t o those h i g h l y p r o t e c t e d import-competing i n d u s t r i e s o f
1969,
but i t c o u l d b e found.
S e v e r a l s t u d i e s examine the i s s u e c o m p a r a t i v e l y .
For example,
Enos s t u d i e s the a d o p t i o n of the same p e t r o c h e m i c a l t e c h n o l o g y s u p p l i e d by
the same U.S. s u p p l i e r i n South K o r e a , C h i l e and Hong Kong, and f i n d s t h a t
South Koreas l e a d o n a l l o f s e v e r a l measurable i n d i c e s o f a d o p t i o n can b e
r e l a t e d to s p e c i f i c a c t i o n s o f the Korean government (1984).
Mody asks why
in the 1980s Korea has taken a commanding l e a d over Taiwan in
m i c r o e l e c t r o n i c s , even though by c o n v e n t i o n a l measures of comparative
advantage Taiwan should be w e l l ahead.
He f i n d s the reasons a r e r e l a t e d to
the Korean government's d e t e r m i n a t i o n t o b u i l d l a r g e agglomerates ( i n p a r t
through the a g g r e s s i v e r a t i o n i n g of c r e d i t which has come i n f o r much
n e o c l a s s i c a l c r i t i c i s m ) , and i t s c l o s u r e o f the domestic market t o d i r e c t
f o r e i g n investment (1985).
A number of papers q u e s t i o n the n e o c l a s s i c a l argument more
directly.
Some say that the n e o c l a s s i c a l s have some of t h e i r c r u c i a l f a c t s
wrong about i n d i v i d u a l c o u n t r y cases ( e . g . Wade forthcoming, Amsden 1984,
Luedde-Neurath 1985, Haggard and Moon 1983, Cumings 1984, B o l t h o 1984, Pack
and Westphal f o r t h c o m i n g ) .
Others argue with evidence t h a t p r i c e
d i s t o r t i o n s d o not i n f a c t c o r r e l a t e c l o s e l y with inward o r outward
o r i e n t e d t r a d e regimes or with measures of n a t i o n a l economic performance
( B r a d f o r d 1984, Aghazadeh and Evans 1985); which q u e s t i o n s the p r o p o s i t i o n
t h a t market l i b e r a l i z a t i o n c o u l d have been the d r i v i n g f o r c e behind JKT
success.
A l l these s t u d i e s can b e c h a l l e n g e d .
n e o c l a s s i c a l s to query t h e i r v a l i d i t y ;
evidence.
But i t i s not enough f o r
they must themselves p r o v i d e c o u n t e r
T h i s evidence cannot be l i m i t e d to economy-wide averages l i k e
'outward' and 'inward' o r i e n t e d , but must a l s o address the i s s u e of
d i s p e r s i o n around the average.
So in the comparison between Taiwan and
Korea on the one hand, and I n d i a and L a t i n America on the o t h e r ,
the f i r s t
important f a c t about trade regimes i s t h a t the East A s i a n type i s more
'liberal'
i n the sense that the average l e v e l of p r o t e c t i o n i s much l o w e r .
But the second important f a c t , which the n e o c l a s s i c a l argument has tended
to i g n o r e , i s that d i s p e r s i o n around the average i s much h i g h e r i n E a s t
A s i a , because the s e l e c t i v e promotion of some i n d u s t r i e s r e q u i r e s h i g h
-27p r o t e c t i o n to a s m a l l number.
The f a c t of high v a r i a n c e takes on a l l the
more i m p o r t a n c e - g i v e n the low average.
I can f i n d l i t t l e e m p i r i c a l support f o r the p r o p o s i t i o n t h a t the
s e c t o r a l i n d u s t r i a l s t r a t e g i e s of TKJ amounted to mere hand-waving, or t h a t
t h e i r o v e r a l l economic performance would have been s u p e r i o r i f they had had
a more n e u t r a l p o l i c y regime.
Can i t be s e r i o u s l y argued t h a t i f the
Governor of the Bank of Japan had got h i s way in the mid-1950s, and
prevented a
t a r g e t t i n g of
s t e e l and automobiles
on
the
grounds
t h a t Japan's
comparative advantage l a y in t e x t i l e s , Japan would now be e c o n o m i c a l l y
b e t t e r o f f ( H o f h e i n z and C a l d e r 1982:130)?
may be an e x c e p t i o n ;
but
South Korea i n the l a t e 1970s
t h i s is because the o b j e c t i v e of i n t e r v e n t i o n
s h i f t e d away from f o s t e r i n g economic c o m p e t i t i v e n e s s towards a t t a i n i n g
military self-sufficiency.
s t r a t e g y supports
A t the l e a s t the evidence o n i n d u s t r i a l
the p r o p o s i t i o n
that
a c t i v e and
s e l e c t i v e government
i n t e r v e n t i o n i n a market economy can c o e x i s t w i t h o u t s t a n d i n g economic
performance.
simply
14
A n e o c l a s s i c a l might then argue t h a t the i n t e r v e n t i o n
'mimicked'
the market,
market would have produced.
point:
h e l p i n g to reach r e s u l t s
that an
'ideal'
Whether t h i s i s s o o r n o t , i t i s b e s i d e the
which i s t h a t the unguided market would, i n r e a l i t y , not have
produced the same r e s u l t .
To c l a i m o t h e r w i s e i s to c l a i m e x t r a o r d i n a r y
a b i l i t y t o f o r e c a s t e x t r a o r d i n a r y performance.
However, the f o r c e of e m p i r i c a l evidence a l s o depends on the
adequacy o f the u n d e r l y i n g t h e o r y ,
and i t i s
t r u e that the t h e o r e t i c a l
b a s i s f o r a s e l e c t i v e i n d u s t r i a l s t r a t e g y i s l e s s w e l l developed than t h a t
which supports a n o n - i n t e r v e n t i o n i s t approach.
This
reflects
the
n e o c l a s s i c a l emphasis on t r a d e r a t h e r than t e c h n o l o g i c a l change as the
c e n t r a l p r o c e s s of i n d u s t r i a l i z a t i o n .
When t e c h n o l o g i c a l change i s t a k e n
a s the c e n t e r p i e c e , a n economic r a t i o n a l e f o r s e l e c t i v e i n d u s t r i a l
promotion
follows
from
two
propositions.
The f i r s t i s t h a t n a t i o n a l comparative advantage i s not s i m p l y
the r e s u l t of g i v e n endowments of c a p i t a l ,
l a b o r , and n a t u r a l r e s o u r c e s ,
but i s a l s o "the r e s u l t o f government promotion; because comparative
advantage r e s t s on accumulated c a p i t a l and s k i l l s
('technological mastery',
in Westphal's phrase: 1982), which can be enhanced by a l o n g - t e r m n a t i o n a l
strategy.
The second i s t h a t some s e c t o r s and products are more i m p o r t a n t
to the economy's f u t u r e growth p r o s p e c t s than o t h e r s .
major
'externalities',
These s e c t o r s have
in the sense that the people a f f e c t e d by a d e c i s i o n
about p r o d u c t i o n and p r i c e go f a r beyond the immediate buyer and s e l l e r .
The e x t e r n a l i t i e s argument f o r p u b l i c p r o v i s i o n o f p h y s i c a l i n f r a s t r u c t u r e
i s w e l l recognized i n n e o c l a s s i c a l theory.
But e x t e r n a l i t i e s are t r e a t e d
as a b e r r a t i o n s from normal economic b e h a v i o r .
The governments of TKJ have
acted as though e x t e r n a l i t i e s were v e r y important i n some s e c t o r s , w h i c h
have then been t r e a t e d as p a r t of the i n d u s t r i a l i n f r a s t r u c t u r e .
The i n d u s t r i e s
so t r e a t e d are e s p e c i a l l y those where a l a r g e
commitment o f time o r c a p i t a l i s r e q u i r e d i n p r o d u c t i o n .
Any complex
economic system encounters a source o f i n s t a b i l i t y a r i s i n g from the
u n c e r t a i n t y i n h e r e n t i n the attempt t o match s u p p l y d e c i s i o n s now w i t h
demand d e c i s i o n s at some time i n the f u t u r e .
l e f t to the v a g a r i e s of the market
I f p r i c e s and p r o f i t s are
(the i n t e r n a t i o n a l market as w e l l as the
domestic m a r k e t ) , investment i n i n d u s t r i e s which r e q u i r e a l a r g e commitment
of time or c a p i t a l may not be made, and a higher than d e s i r a b l e p r o p o r t i o n
of the economy's investment w i l l go i n t o quick r e t u r n p r o j e c t s .
Also,
i n d i v i d u a l f i r m s on t h e i r own may be more i n c l i n e d to s t i c k w i t h i n a narrow
range of
products.
f a m i l i a r product
lines
than branch i n t o new i n d u s t r i e s
and
A n exgenous (non-market) f o r c e i s needed t o f a v o r such s h i f t s ,
to l e a d economic agents from s h o r t e r to l o n g e r term investment and
marketing s t r a t e g i e s ,
t o channel p r o f i t s from c u r r e n t l y p r o f i t a b l e
-29a c t i v i t i e s i n t o investment i n those l i k e l y to become p r o f i t a b l e i n the
future.
I n these same l a r g e - l u m p , l o n g - g e s t a t i o n s e c t o r s , p r o d u c t i o n
economies of s c a l e a r e l i k e l y t o be i m p o r t a n t .
C o m p e t i t i v e advantage can
be g a i n e d by f i r m s if they are encouraged to develop a s c a l e l a r g e enough
to c a p t u r e the c o s t advantages.
a c q u i s i t i o n of
L e a r n i n g - c u r v e economies, to do w i t h the
t e c h n o l o g i a l mastery,
may a l s o
be
important;
costs
per u n i t
of output t y p i c a l l y f a l l s h a r p l y as (and i f ) f i r m s a c q u i r e t e c h n o l o g i c a l
mastery over a newly i n t r o d u c e d t e c h n o l o g y (Westphal 1982, Pack and
Westphal 1985, Fransman 1985).
Where e x t e r n a l economies, economies of s c a l e , and l e a r n i n g - c u r v e
economies are i m p o r t a n t , the market s t r u c t u r e i s u n l i k e l y t o g e n e r a t e
socially
desirable
outcomes
— rapid
growth and
s t r u c t u r e towards h i g h e r value-added p r o d u c t s .
shifts
in
economic
I n TKJ, government p o l i c y
has played a n important r o l e i n s t i m u l a t i n g t h e i r r e a l i z a t i o n ,
and hence i n
i m p r o v i n g domestic a b i l i t y t o compete a g a i n s t o t h e r c o u n t a r i e s ' s u p p l i e r s ,
the o b j e c t has been to encourage investment on a s c a l e s u f f i c i e n t to
c a p t u r e economies of s c a l e where these are i m p o r t a n t
to c o o r d i n a t e the
development of backwards and forwards l i n k a g e s so t h a t e x t e r n a l economies
from any one a c t i v i t y are captured w i t h i n the n a t i o n a l u n i t ;
encourage
domestic
producers
to
upgrade
their
technological
t y i n g some of the i n c e n t i v e s to such u p g r a d i n g .
and to
capability
by
I f one accepts t h a t
e x t e r n a l economies, economies of s c a l e , and l e a r n i n g - c u r v e economies are
major sources of t e c h n o l o g i c a l advance and p r o d u c t i v i t y growth, the e f f o r t s
of the s t a t e t o make sure t h a t market c o n d i t i o n s do not o b s t r u c t t h e i r
r e a l i z a t i o n w i t h i n the n a t i o n a l u n i t take o n great s i g n i f i c a n c e i n
e x p l a i n i n g the s u p e r i o r economic performance of TKJ.
-30I I I . THE CONDITIONS OF SUCCESSFUL INTERVENTION
We come now to the q u e s t i o n of how and why the TKJ governments
were a b l e t o reap the p o t e n t i a l b e n e f i t s o f an i n d u s t r i a l p o l i c y , when many
other governments, one can be c o n f i d e n t i n s a y i n g , c o u l d not (e.g. Wade
1979, 1982, 1982a, 1984).
expectations
What i s i t t h a t d e f e a t s the s o r t s of
t h a t go under the r u b r i c of
'nonmarket f a i l u r e ' ?
Of course the demand s i d e is i m p o r t a n t .
With the opening of the
US market to i m p o r t s of cheap l a b o r manufactures in the 1960s, Taiwan,
Korea, and Japan had a huge range of p r o f i t a b l e p r o d u c t i o n p o s s i b i l i t i e s
open up f o r them.
T h i s , coupled w i t h a r e s p o n s i v e p r o d u c t i o n system,
p u l l e d the economy p o w e r f u l l y a l o n g .
production
system
highly
The q u e s t i o n i s what made t h e
responsive?
I have f o c u s s e d on one of s e v e r a l components
15
i n d u s t r i a l l e a d e r s h i p e x e r c i s e d by the t h r e e governments.
of an answer:
the
What
c h a r a c t e r i s t i c s of the e x e r c i s e of l e a d e r s h i p have been most i m p o r t a n t f o r
the s u c c e s s of the government's i n t e r v e n t i o n s ?
Three s t a n d o u t :
(a)
i n t e r v e n t i o n s were ( g e n e r a l l y s p e a k i n g ) aimed at promoting c o m p e t i t i v e
p r o d u c t i o n , (b) they were s e l e c t i v e between i n d u s t r i e s , and ( c ) they were
1 6
cumulative
(a)
in
t h e i r impact.
The c e n t r a l economic b u r e a u c r a t s o f a l l t h r e e c o u n t r i e s seem t o
have r e a l i z e d t h a t mere p r o t e c t i o n was not s u f f i c i e n t t o generate r a p i d
growth.
They have sought to couple p r o t e c t i o n w i t h c o m p e t i t i t i o n , so as to
ensure that t h e l e t h a r g y - i n d u c i n g e f f e c t of p r o t e c t i o n was swamped by t h e
investment-inducing e f f e c t .
p o l i c y has
been to keep out
technology)
and
induce
I n Japan, w i t h i t s l a r g e domestic market,
imports
(other
than raw m a t e r i a l s and h i g h
r e l y on a p a r t l y government-created market
'cut-throat oligopoly'
(Hadley. 1970).
structure
to
South Korea and Taiwan,
s m a l l e r domestic markets, have a l l o w e d more m o n o p o l i s t i c p r o d u c t i o n i n
heavy and c h e m i c a l i n d u s t r i e s .
the
But the South Korean government has
with
-31s t r o n g l y encouraged the i n f a n t s o f these i n d u s t r i e s t o s t a r t e x p o r t i n g v e r y
soon (Westphal.1982),
thus e x p o s i n g them d i r e c t l y to i n t e r n a t i o n a l
c o m p e t i t i v e p r e s s u r e . — even when e x p o r t s had to be s o l d at a l o s s ,
recouped by the f i r m from p r o f i t s on i m p o r t s t i e d to export performance.
In other words,
the Korean d e f i n i t i o n of c o m p e t i t i v e n e s s emphasized e x p o r t
success to an u n u s u a l degree.
The Taiwan government seems to have put l e s s
p r e s s u r e on the i n f a n t s to e x p o r t , and r e l i e d more on the t h r e a t of
a l l o w i n g i n i m p o r t s i f the p r i c e s of domestic s u b s t i t u t e s moved much above
international prices.
T h i s may be p a r t of the reason why, even though they
export l i t t l e , Taiwan's p u b l i c e n t e r p r i s e s are more e f f e c t i v e than those i n
many o t h e r c o u n t r i e s ; they s u p p l y to downstream f i r m s which do e x p o r t , from
whom comes p r e s s u r e to match the c o s t s of overseas c o m p e t i t o r s .
J u s t why the c e n t r a l economic b u r e a u c r a t s saw the need to c o u p l e
p r o t e c t i o n w i t h c o m p e t i t i o n , when t h e i r c o u n t e r p a r t s i n many o t h e r
countries did not,
is an open q u e s t i o n .
In any case the outcome was a form
o f p r o t e c t i o n q u i t e d i f f e r e n t t o the t y p i c a l form i n L a t i n America: where
there was l i t t l e encouragement e i t h e r f o r c o m p e t i t i o n between f o r e i g n f i r m s
and domestic f i r m s on the domestic market,
(b)
or f o r domestic f i r m s to e x p o r t .
I n t e r v e n t i o n s have been s e l e c t i v e .
Large p a r t s of the economy
are more or l e s s i g n o r e d i n terms of government promotion.
The
d i s c r i m i n a t o r y nature of s t a t e i n t e r v e n t i o n i s taken f o r g r a n t e d as much as
the o p p o s i t e i s taken f o r granted i n the US or B r i t a i n , where the
d e c l a r a t i o n t h a t a n economic p o l i c y i s d i s c r i m i n a t o r y i s a n a c t o f
condemnation.
Pack and Westphal
(forthcoming)
argue t h a t
the a x i s
of
d i s c r i m i n a t i o n i s between ' w e l l - e s t a b l i s h e d ' i n d u s t r i e s ( i n the sense o f
being i n t e r n a t i o n a l l y c o m p e t i t i v e ) and ' i n f a n t i n d u s t r i e s ' .
The former
face a l a r g e l y n e u t r a l p o l i c y regime, the l a t t e r (or some of them) f a c e
positive industry bias.
But the governments a l s o seem to be q u i t e
i n t e r v e n t i o n i s t w i t h r e s p e c t t o 'commanding h e i g h t s ' k i n d s o f i n d u s t r i e s
(those t h a t b y t h e i r l i n k s w i t h o t h e r s e c t o r s can a f f e c t the e n t i r e
economy's g r o w t h ) , even i f w e l l - e s t a b l i s h e d .
We c e r t a i n l y need more
evidence on the c r i t e r i a of s e l e c t i o n , the degree of s e l e c t i v i t y , and on
how temporary i n f a n t i n d u s t r y p r o t e c t i o n i s .
But i n any case,
given that
i n t e r v e n t i o n i s s e l e c t i v e and t h a t the c r i t e r i a of s e l e c t i o n have something
to do with future competitiveness,
t h i s serves t o d i f f e r e n t i a t e East A s i a n
i n t e r v e n t i o n from much of L a t i n American,
intervention,
where
the assumption has
coupled w i t h u n s e l e c t i v e
support
of
I n d i a n , and New Zealand
tended
to be
that c o n t r o l s
any domestic market
on
trade,
industrial
investment, would be s u f f i c i e n t to promote the r i g h t k i n d of
industrialization.
(c)
1 7
I n t e r v e n t i o n s have a h i g h degree of coherence, in the sense t h a t
t h e i r impact i s c u m u l a t i v e .
controls
a l s o get
help
f i s c a l i n c e n t i v e s too.
The a c t i v i t i e s that get help through t r a d e
through p r e f e r e n t i a l
investment
finance
and/or
Taiwan's f i s c a l i n c e n t i v e s , to t a k e a s m a l l
example, are t a r g e t e d at three l i s t s of products to be promoted:
the f i r s t and most i n c l u s i v e l i s t r e c e i v e the l e a s t i n c e n t i v e s ;
items on
those on
the second l i s t , a sub-set of the f i r s t , r e c e i v e a d d i t i o n a l i n c e n t i v e s ;
those on the t h i r d l i s t ,
a sub-set of the second,
r e c e i v e s t i l l more.
A g a i n , however, the q u e s t i o n of how c u m u l a t i v e the p r o m o t i o n a l measures
a r e , and the l o g i c of the p a t t e r n of c u m u l a t i o n ,
empirical
is in bad need of
research.
What are the o r g a n i z a t i o n a l requirements f o r such a p a t t e r n of
i n t e r v e n t i o n to be r e a l i z e d ?
One i s a c r e d i t - b a s e d f i n a n c i a l system i n
which government e x e r c i s e s i n f l u e n c e over the a l l o c a t i o n o f s i g n i f i c a n t
amounts of c r e d i t :
in
developing
i t can support more r a p i d growth than would be p o s s i b l e
country
conditions
based o n r e t a i n e d e a r n i n g s ;
f o r promoting p a r t i c u l a r
it
through
a
also gives
sectors
capital-market
system or
the government a p o w e r f u l
and i n f l u e n c i n g the
balance
between
one
lever
-33investment and consumption; and i t s e l f can be a d i s c i p l i n e on government
i n t e r v e n t i o n s , because the o t h e r s i d e of f i r m s ' dependence on government
and the banks is the government's and the banks' need f o r the f i r m s to do
well.
The second o r g a n i z a t i o n a l c h a r a c t e r i s t i c c o u l d be d e s c r i b e d as a
c e n t r a l i z e d d e c i s i o n - m a k i n g s t r u c t u r e w i t h i n the s t a t e .
There needs
to
be
a p o i n t where r e l a t i v e p r i o r i t i e s can be d e c i d e d , where the e x t e r n a l i t i e s
f a c i n g p r i v a t e agents can be i n t e r n a l i z e d , and judgements can be made about
how to encourage
the
transfer
of
resources
from c u r r e n t l y p r o f i t a b l e
a c t i v i t i e s t o those which a r e p r o m i s i n g f o r the f u t u r e ( t h e same judgements
as the management of a l a r g e f i r m must make, but t a k i n g account o f
externalities,
and based on an e x e r c i s e of f o r e s i g h t which the o r d i n a r y
businessman c o u l d not
a f f o r d to c u l t i v a t e ) .
c e n t r a l i z e d decision-making
structure
is
South Korea's v e r s i o n o f
contained
in
the
links
this
between
the
Blue House, the Economic P l a n n i n g Board, the M i n i s t r y of Commerce and
Industry,
and the M i n i s t r y o f Finance.
Taiwan's i s b u i l t o n the l i n k s
between the C a b i n e t , the C o u n c i l f o r Economic P l a n n i n g and Development, the
I n d u s t r i a l Development Board, and the c e n t r a l bank.
It has been argued by Chalmers Johnson amongst o t h e r s t h a t a
t h i r d o r g a n i z a t i o n a l r e q u i s i t e i s a h i g h degree o f p u b l i c - p r i v a t e
c o o p e r a t i o n between the managers of the s t a t e and the managers of p r i v a t e
enterprise.
'This c o o p e r a t i o n ' , says Johnson, ' i s achieved through
innumerable, c o n t i n u o u s l y o p e r a t i n g forums f o r c o o r d i n a t i n g views and
investment
plans,
sharing
international
commercial
intelligence,
making
adjustments t o conform t o the b u s i n e s s c y c l e o r o t h e r changes i n the
economic environment, d e c i d i n g on the new i n d u s t r i e s needed in o r d e r to
maintain i n t e r n a t i o n a l competitive a b i l i t y . . . '
(1981:13).
The i m p l i c a t i o n
seems t o be that the p r i v a t e s e c t o r , l i k e the s t a t e , needs t o be a r r a n g e d
i n t o peak a s s o c i a t i o n s through which r e p r e s e n t a t i o n t o these ' c o n t i n u o u s l y
-34o p e r a t i n g forums' can be made:
so t h a t a c e n t r a l i z e d s t a t e f a c e s a
c e n t r a l i z e d p r i v a t e s e c t o r , and n e g o t i a t i o n takes p l a c e between them.
This
c e r t a i n l y corresponds t o Japan, and i t corresponds t o what i s emerging i n
South Korea.
I t i s f u r t h e r away from Taiwan, however, where the p r i v a t e
s e c t o r remains s t r i k i n g l y d e c e n t r a l i z e d , and where Johnson's c o n t i n u o u s l y
o p e r a t i n g forums are not much i n e v i d e n c e .
This i s not t o say t h a t a l l o r
most g o v e r n m e n t - p r i v a t e s e c t o r r e l a t i o n s i n Taiwan are 'arms-length'.
It
i s t o say t h a t these r e l a t i o n s d o n o t , i n the main, i n v o l v e r e p r e s e n t a t i v e s
of l a r g e a g g r e g a t i o n s of b u s i n e s s i n t e r e s t s , as they do in Japan and to an
i n c r e a s i n g degree in South Korea.
On the o t h e r hand, Taiwan does have an
a c t i v e b u s i n e s s p r e s s through which i s b u i l t u p a consensual i d e n t i f i c a t i o n
of the problems f a c i n g the economy and the
direction
i n which they s h o u l d be
s o l v e d ; which perhaps matters more than the e x i s t e n c e of c o o r d i n a t i n g
organizations.
How then i s the use of t h i s c o n c e n t r a t e d mass of p u b l i c power
kept d i s c i p l i n e d ?
Why i s t h e r e not e x t e n s i v e n o n - m a r k e t f a i l u r e ?
S i x p o i n t s are i m p o r t a n t .
First,
the c e n t r a l d e c i s i o n - m a k i n g
s t r u c t u r e i s s t a f f e d b y the best m a n a g e r i a l t a l e n t a v a i l a b l e i n the
18
system.
Second, the c e n t r a l d e c i s i o n - m a k e r s are r e l a t i v e l y i n s u l a t e d
from a l l but the s t r o n g e s t o f p r e s s u r e groups. Consequently i t makes n o
sense i n these c o u n t r i e s , as i t does i n some o t h e r s , to see p u b l i c p o l i c y
as the v e c t o r of p a r t i c u l a r i s t i c i n t e r e s t s b e a r i n g on the s t a t e , or to see
government agencies a s the f i e f d o m s o f p a r t i c u l a r p r i v a t e i n t e r e s t s .
Third,
the i n s u l a t i o n o f the c e n t r a l d e c i s i o n - m a k e r s , i n t u r n ,
is
based o n a n a u t h o r i t a r i a n , e x e c u t i v e - b a s e d p o l i t i c a l s t r u c t u r e , i n which
the e x e c u t i v e j e a l o u s l y guards the f e e b l e n e s s o f the l e g i s l a t u r e .
P o l i t i c a l and c i v i l r i g h t s are much more f u l l y developed i n Japan than i n
the o t h e r two.
But even in Japan, the most t h a t the l e g i s l a t u r e can do to
i n f l u e n c e the d i r e c t i o n o f p o l i c y i s t o t h r e a t e n t o w i t h h o l d a u t h o r i t y .
-35The weakness o f the l e g i s l a t u r e ensures t h a t , even i n Japan, p o p u l a r
p a r t i c i p a t i o n i n e l e c t i o n s does not t r a n s l a t e i n t o the e x e r c i s e o f r e a l
power.
Which m a t t e r s e s p e c i a l l y because any government w i t h a p o w e r f u l
e l e c t e d l e g i s l a t u r e w i l l f i n d i t d i f f i c u l t t o hold the l i n e a g a i n s t
unbalanced i n c r e a s e s i n consumption a t the expense o f i n v e s t m e n t .
is,
As it
the s t a t e has been l e f t f r e e to j u s t i f y i t s e l f and n e g o t i a t e w i t h a
narrow c o n s t i t u e n c y on p a r t i c u l a r i s s u e s and t a c t i c s .
However,
the
a u t h o r i t a r i a n c h a r a c t e r of these regimes should not be e x a g g e r a t e d .
Compared to o t h e r middle-income c o u n t r i e s , Taiwan and South Korea come
about h a l f way down a r a n k i n g by c i v i l and p o l i t i c a l r i g h t s ; so many
middle-income c o u n t r i e s (and more low-income c o u n t r i e s ) have a worse s t a t e
of c i v i l and p o l i t i c a l r i g h t s than these t w o .
1 9
F o u r t h , none of these c o u n t r i e s has a p o w e r f u l l a b o r , or
l e f t - w i n g movement.
In South Korea and Taiwan such a movement s c a r c e l y
exists,
due p a r t l y t o government r e p r e s s i o n .
excluded
from p o l i t i c s .
This
may
help
I n Japan i t e x i s t s but i s
e x p l a i n why s t a t e - p r o v i d e d
s e c u r i t y schemes are l i t t l e developed even i n Japan.
economic
Yet the
e x t r a o r d i n a r i l y r a p i d r i s e i n mass l i v i n g standards (compared to o t h e r
c o u n t r i e s ) suggests t h a t governments which exclude ' l a b o r ' do not
necessarily follow anti-labor p o l i c i e s .
experience suggests
that
if
a rapid
The East A s i a n c a p i t a l i s t
reinvestment
occurs,
the
r a t e of
employment can r i s e so q u i c k l y toward f u l l employment that
government-imposed c o n s t r a i n t s on the o p e r a t i o n of the market are not
needed:
big
w e l f a r e guarantees can be p r o v i d e d by f i r m s and f a m i l i e s .
'if',
however.
Fifth,
It is
20
none of the three c o u n t r i e s e x p e r i e n c e the c o n f l i c t ,
c h r o n i c i n many o t h e r c o u n t r i e s , between p o w e r f u l n a t u r a l r e s o u r c e owners
and manufacturers.
In
countries with substantial
natural
resource wealth,
the n a t u r a l r e s o u r c e owners t y p i c a l l y want a c l o s e a p p r o x i m a t i o n t o f r e e
-36t r a d e ; they want to be a b l e to e x p o r t and use t h e i r e x p o r t e a r n i n g s to
purchase the best manufactures a v a i l a b l e on the i n t e r n a t i o n a l market; they
do not see why they s h o u l d have to buy the second-rate p r o d u c t s of d o m e s t i c
manufacturers.
The domestic m a n u f a c t u r e r s , on the o t h e r hand, want s t a t e
h e l p f o r domestic m a n u f a c t u r i n g .
The c o n f l i c t between these two s e t s of
i n t e r e s t s tends to make i t d i f f i c u l t i n many d e v e l o p i n g c o u n t r i e s to
s u s t a i n a l o n g - t e r m view of the n a t i o n ' s best economic i n t e r e s t s .
These f i v e p o i n t s r e l a t e t o the e f f e c t o f s t a t e o r g a n i z a t i o n and
the s t r u c t u r e of p o l i t i c s on the use of p u b l i c power.
There i s f i n a l l y the
matter of the g o a l s sought by the c e n t r a l d e c i s i o n - m a k e r s , a m a t t e r of much
g r e a t e r importance i n t h i s k i n d of s t a t e than where power i s more
dispersed.
The c e n t r a l p o i n t i s that i n a l l three c o u n t r i e s the p o l i t i c a l
e l i t e sees a p a t t e r n of growth which makes sense i n the l o n g run as
e s e n t i a l t o i t s own s u r v i v a l .
P o l i t i c a l l e g i t i m a c y i s t o a n unusual degree
based on economic success (compare f o r example I t a l y or Egypt:
Mason 1984).
Wade 1979,
E s p e c i a l l y i n Taiwan and South Korea, the g e o - p o l i t i c a l
s i t u a t i o n of the c o u n t r y has made i t s i m p l y too r i s k y f o r the e l i t e , i n i t s
own p e r c e p t i o n , to take an u m p i r i n g , ' l e t the market work', view of i t s
responsibilities.
So the e l i t e has needed success f o r the p e r p e t u a t i o n of
i t s own power, and has been r e l a t i v e l y i n s u l a t e d from p r e s s u r e s .
t h i s are f a c t o r s more c u l t u r a l than s i t u a t i o n a l .
Beyond
The c e n t r a l
d e c i s i o n - m a k e r s are the k i n d of people who i d e n t i f y w i t h the o b j e c t i v e s of
t h e i r o r g a n i z a t i o n s and of the s t a t e and do have some sense of moral
r e s p o n s i b i l i t y f o r a c h i e v i n g o b j e c t i v e s o t h e r than the use o f p u b l i c power
f o r p r i v a t e enrichment.
They have demonstrated an u n m i t i g a t e d c o n f i d e n c e
in the need f o r the s t a t e to be a l e a d i n g p l a y e r in the market (Pye 1985).
L i t t l e i s known about how the p u b l i c s e r v i c e o r g a n i z a t i o n s work
i n these c o u n t r i e s :
about management c o n t r o l systems, l e a r n i n g from
e r r o r s , o r n e g o t i a t i o n and c o m p e t i t i o n between bureaus.
I t appears t h a t ,
-37contrary
benefit
to
orthodox p u b l i c a d m i n i s t r a t i o n
from an o v e r l a p p i n g of
economic
precepts,
bureaus
in
Taiwan d e r i v e s
the
public
great
sector,
competition-between which s e r v e s to keep bureaus on t h e i r toes — or e l s e
by-passed (Wade 1985a).
I s u s p e c t t h a t the s t a n d a r d image of East A s i a n
b u r e a u c r a c i e s as t i g h t l y i n t e g r a t e d , top-down c o n t r o l systems needs major
q u a l i f i c a t i o n ( M i c h e l l , 1984, Wade 1982b).
Yet somehow t h e r e does seem t o
be a c l o s e r than normal correspondence in these c o u n t r i e s between, on the
one hand, the g o a l s t h a t a p p l y w i t h i n non-market o r g a n i z a t i o n s to g u i d e ,
r e g u l a t e and e v a l u a t e agency p e r s o n n e l and performance (what Wolf c a l l s
'internalities':
1979:116), and the n a t i o n a l g o a l s enunciated b y c e n t r a l
decision-makers on the o t h e r .
E x p l a i n i n g how t h i s occurs
important t o p i c f o r r e s e a r c h ;
interventions
can
be
is a v e r y
f o r i t r e l a t e s d i r e c t l y t o how government
o r i e n t e d mainly
towards
growth,
competitiveness
and
21
restructuring
concerns.
So we a r r i v e at the great East A s i a n c a p i t a l i s t synergism,
between a p u b l i c system o r i e n t e d towards developmental and n a t i o n a l
security goals,
maximization.
and a p r i v a t e system geared towards
The
i n t e r a c t i o n between
d e c i s i o n s made i n each.
the
two
long-terra p r o f i t
systems
affects
the
The i n t e n t of the p u b l i c system i s t o m a n i p u l a t e
the i n p u t s i n t o p r i v a t e (or p u b l i c e n t e r p r i s e ) d e c i s i o n - m a k i n g so as
to
secure development g o a l s ; but the content of the p u b l i c system's a c t i o n s i
modified
by feedback on p r o f i t and
raw m a t e r i a l
costs
p r o p e r t y are not
(Johnson
displaced,
1983,
(COSS).
conditions,
Inkster
1983).
market
The market
prospects,
and
and
private
only modified.
The p u b l i c system takes
strong s t a t e '
loss
the
form of a
'competitively-oriented
' C o m p e t i t i v e l y - o r i e n t e d ' serves t o d i f f e r e n t i a t e i t
from many other ' s t r o n g ' s t a t e s , n o t a b l y those of a communist v a r i e t y .
c o r o l l a r y o f c o m p e t i t i v e l y - o r i e n t e d i s t h a t the s t a t e i n t e r v e n e s
s e l e c t i v e l y , p a y i n g a t t e n t i o n t o some i n d u s t r i e s more than o t h e r s , and
A
-38p a y i n g much more a t t e n t i o n to c a p i t a l and t e c h n o l o g y markets than l a b o r
markets.
Much i s l e f t to p r i v a t e s e c t o r i n i t i a t i v e s f e e d i n g o f f the base
p r o v i d e d b y the p u b l i c system; i n d e e d , the area l e f t t o p r i v a t e i n i t i a t i v e s
tends c o n s t a n t l y to expand, w i t h o u t g o i n g so f a r as to erode p u b l i c c o n t r o l
over the v i t a l a s p e c t s .
' P l a n n i n g ' i n t h i s arrangement does not i n v o l v e
any ( s e r i o u s ) attempt to c o o r d i n a t e the whole economy, except at the l e v e l
of macro b a l a n c e .
I t f o c u s s e s on a r e l a t i v e l y s m a l l number of s e c t o r s
chosen f o r s p e c i a l emphasis.
S o these c o u n t r i e s f i t both the 'Japan I n c . '
image and the ' l a i s s e z - f a i r e ' image t o the extent t h a t they f i t e i t h e r :
but i n d i f f e r e n t s e c t o r s and d i f f e r e n t f a c t o r markets.
The p o i n t o f
i n t e r e s t i s not which image f i t s b e t t e r , but how t h e i r p r o c e s s e s i n t e r a c t .
Somewhere i n t h i s i n t e r a c t i o n l i e s the reason why East A s i a ' s abundant
' s o c i a l c o a l i t i o n s ' or ' c a r t e l s ' do not have the s t a g n a t i o n - i n d u c i n g
e f f e c t s t h a t Mancur Olson's t h e o r y (1982) would p r e d i c t ; q u i t e the
contrary.
If we have e v i d e n c e t h a t these governments take growth and
c o m p e t i t i v e n e s s as p r i m a r y g o a l s (such evidence can be independent of
growth and c o m p e t i t i v e n e s s outcomes), and t h a t the governments are
o r g a n i z e d i n such a way as to have the means to i n t e r v e n e i n p u r s u i t of
these g o a l s , then t h i s feeds back t o the e a r l i e r argument about the e f f e c t s
of i n d u s t r i a l strategy.
I t adds another p i e c e o f c i r c u m s t a n t i a l e v i d e n c e
t o the argument t h a t i n d u s t r i a l s t r a t e g y i n Taiwan, South Korea and Japan
has been e f f e c t i v e .
In the f u t u r e one can expect t h a t forms of s e l e c t i v e i n t e r v e n t i o n
w i l l change i n Korea and Taiwan, and perhaps d e c l i n e o v e r a l l as has a l r e a d y
happened in Japan over the 1970s.
It may be argued t h a t a f t e r twenty to
t h i r t y y e a r s of r a p i d post-war development, markets are l e s s l i k e l y t o f a i l
now; t h a t the growing economic s t r e n g t h of p r i v a t e agents w i l l be
t r a n s l a t e d i n t o g r e a t e r p o l i t i c a l power and thence i n t o g r e a t e r c o r r u p t i o n
-39of the i n t e r v e n t i o n p r o c e s s ; and t h a t s e l e c t i v e promotion now produces
higher c o s t r e a c t i o n s from t r a d i n g p a r t n e r s (Westphal 1985).
On the o t h e r
hand, i t can b e argued t h a t i n a s e v e r e l y c o m p e t i t i v e i n t e r n a t i o n a l
environment, w i t h v o l a t i l e exchange r a t e s , i n t e r e s t r a t e s , and c a p i t a l
f l o w s , long-term d e c i s i o n s f o c u s s e d o n a n a t i o n a l i n t e r e s t w i l l o n l y b e
taken i n a c o n t e x t o f d e l i b e r a t e l y c r e a t e d s t a b i l i t y .
The a r t o f
government i n t e r v e n t i o n i s then to c r e a t e t h i s s t a b i l i t y i n key s e c t o r s
without removing c o m p e t i t i v e p r e s s u r e s ,
trading partners.
and without i n c u r r i n g the wrath of
-40-
NOTES
1.
T h i s is the weakest i m p l i c a t i o n .
The s t r o n g e s t is t h a t a n o n - n e u t r a l
p o l i c y regime — s y s t e m a t i c i n t e r v e n t i o n i n s e a r c h o f dynamic g a i n s i n
comparative advantage — i s a n e c e s s a r y (but not s u f f i c i e n t ) c o n d i t i o n
f o r r a p i d growth and r e s t r u c t u r i n g .
2.
Whether one emphasizes s i m i l a r i t y or d i f f e r e n c e depends on t h e
q u e s t i o n and the comparator.
Pye
(1985) emphasizes d i f f e r e n c e s
between J a p a n , Korea and Taiwan in terms of concepts of power and
hence p o l i t i c a l s t r u c t u r e .
(1981, 1983).
My emphasis on s i m i l a r i t y f o l l o w s Johnson
Note t h a t my r e f e r e n c e s to Japan are p r i m a r i l y to Japan
of the 1950s and 1960s.
3.
I thank P e t e r W a l l , of the I n t e r n a t i o n a l Finance C o r p o r a t i o n , f o r the
above d e b t / e q u i t y f i g u r e s .
The numerator i n c l u d e s s h o r t - t e r m debt.
The samples on which the f i g u r e s a r e based a r e not f u l l y c o n s i s t e n t
e i t h e r a c r o s s time or a c r o s s c o u n t r i e s , and must be taken as rough
orders
4.
of magnitude o n l y .
A t h i r d c r i t e r i o n i s the v a r i a n c e i n bank i n t e r e s t r a t e s and
c o l l a t e r a l requirements between i n d u s t r i a l s e c t o r s .
Another i s the
importance of r e t a i n e d e a r n i n g s i n r e l a t i o n to c r e d i t ; i n some
d e v e l o p i n g c o u n t r i e s r e t u r n e d e a r n i n g s are so important as to w a r r a n t
c a l l i n g t h e i r f i n a n c i a l system 'retained-earnings-based'.
5.
The curb market, an u n r e g u l a t e d , s e m i - l e g a l c r e d i t market, s u p p l i e d
some 20 t o 30 percent o f t o t a l borrowings i n Taiwan over t h e 1970s and
-41v e r y r o u g h l y the same in Korea (Wade 1985).
Two o t h e r i m p o r t a n t
sources of f i n a n c e are f o r e i g n loans and disbursements from the
government
budget
— both c o n t r o l l e d
by government.
In K o r e a ,
the
N a t i o n a l Investment Fund has accounted f o r about 10 percent of t o t a l
borrowings i n r e c e n t y e a r s , and i s t a r g e t t e d a t heavy and c h e m i c a l
i n d u s t r i e s ; a n o t h e r 3 5 percent i s covered b y quotas f o r commercial
bank loans t o s m a l l and medium e n t e r p r i s e s (whose s e c t o r a l c o m p o s i t i o n
i s not c l e a r ) .
rates
(such as
Taiwan has a v a r i e t y o f s p e c i a l funds a t c o n c e s s i o n a l
the Sino-American Fund,
the Development Fund);
and a l s o
uses the mechanism of the l o a n guarantee to encourage more l e n d i n g to
certain sectors.
6.
A l s o , f i r m s themselves have tended t o r e s i s t going p u b l i c , f o r f e a r o f
losing
7.
control.
The i m p l i c a t i o n s of high d e b t / e q u i t y r a t i o s a l s o depend on
p r o f i t a b i l i t y a t the f i r m l e v e l :
i n an economy where p r o f i t a b i l i t y i s
h i g h e r and more secure the danger of economy-wide f i n a n c i a l
i n s t a b i l i t y i s less.
The same a p p l i e s t o the i m p l i c a t i o n s of h i g h
d e b t / e q u i t y r a t i o s f o r the r e l a t i o n s h i p between banks and b u s i n e s s .
8.
Of the 500 l a r g e s t (by s a l e s ) n o n - f i n a n c i a l non-US companies i n 1981,
Taiwan had 2, South Korea 10, Japan 130 (Fortune 1982).
9.
U s i n g the percentage share o f p u b l i c e n t e r p r i s e s i n g r o s s f i x e d
c a p i t a l f o r m a t i o n ( t h e o n l y i n d e x f o r which i n f o r m a t i o n on many
c o u n t r i e s i s r e a d i l y a v a i l a b l e ) , Taiwan i s i n the top q u i n t i l e o f
d e v e l o p i n g c o u n t r i e s ( i n a sample of 51:
Short 1983).
In the p e r i o d
-421965-1980 Taiwan has averaged about 31 p e r c e n t , Korea 23 p e r c e n t ,
Japan 11 p e r c e n t .
10.
For an e x c e l l e n t account of Korea's o v e r t and c o v e r t import c o n t r o l s
see Luedde-Neurath, f o r t h c o m i n g .
11.
Even if the amount of value-added from these s e c t o r s e q u a l s o n l y 10
p e r c e n t , s a y , o f the t o t a l , t h i s does not mean t h a t p r o t e c t i o n t o
these s e c t o r s can b e t r e a t e d a s q u a n t i t a t i v e l y t r i v i a l i n the o v e r a l l
picture.
I f there i s , roughly speaking, a p o s i t i v e r e l a t i o n s h i p
between the government's s e l e c t i v i t y w i t h r e s p e c t t o promoted
i n d u s t r i e s and the e f f e c t i v e n e s s of t h a t promotion, one would e x p e c t
e f f e c t i v e i n t e r v e n t i o n t o g o w i t h a r a t h e r s m a l l share o f t o t a l
value-added.
12.
See note 8.
13.
See note 9.
14.
In Hong Kong an unguided market produced r o u g h l y s i m i l a r performance.
Hong Kong, however, i s the e x c e p t i o n , not o n l y because o f i t s
c i t y - s t a t e s i z e but a l s o because i t s commercial f i r m s have had ready
a c c e s s t o B r i t i s h m e r c a n t i l e s k i l l s and c o n n e c t i o n s over many decades.
15.
In a w i d e r t r e a t m e n t I would a l s o emphasize the w i d e l y d i f f u s e d
entrepreneurial drive;
the sheer w i l l t o d o b e t t e r , r e i n f o r c i n g ,
independent o f , the d e s i r e t o become r i c h e r .
but
That d r i v e i s r e l a t e d t o
the very h i g h l e v e l s o f e d u c a t i o n i n the p o p u l a t i o n a t l a r g e .
The
e d u c a t i o n system emphasizes e n g i n e e r i n g and o t h e r t e c h n i c a l s u b j e c t s ,
-43so much so t h a t of the middle-income c o u n t r i e s Taiwan has one of the
h i g h e s t number of e n g i n e e r s per 1,000 people employed in
m a n u f a c t u r i n g ; i n Zymelman's 1 4 middle-income c o u n t r i e s the average i s
4.6,
Taiwan has 8,
o n l y Singapore is h i g h e r w i t h 10
from e a r l y t o middle 1970s).
16.
(1980,
using data
Korea i s not g i v e n .
A l o t of Japanese i n t e r v e n t i o n has been m o t i v a t e d by r e d i s t r i b u t i v i s t
o b j e c t i v e s , though the o v e r a l l balance i s ( i n c o n t r a s t t o the US)
c l e a r l y on the s i d e of c o m p e t i t i v e p r o d u c t i o n .
There has been, not
o n l y i n a g r i c u l t u r e , a good d e a l o f e a s i n g o f d e c l i n e b y p r o t e c t i o n
and s u b s i d y .
Showing some concern f o r the l o s e r s has had i m p o r t a n t
p o l i t i c a l e f f e c t s , r e i n f o r c i n g a sense o f f a i r n e s s which has g a i n e d
support f o r the g e n e r a l t h r u s t o f growth and r e s t r u c t u r i n g p o l i c i e s .
17.
With r e s p e c t t o L a t i n America t h e r e are two a l t e r n a t i v e p r o p o s i t i o n s :
one, t h a t even the p l a n n e r s made t h i s assumption; two, t h a t the
p l a n n e r s ( t h o s e u s i n g the CEPAL approach, f o r example) wanted to
e x e r c i s e s e l e c t i v i t y i n much the same way as the East A s i a n s , but
t h e i r p r i n c i p l e s were not t r a n s l a t e d i n t o p o l i c i e s .
18.
T h i s p r o p o s i t i o n i s w e l l e s t a b l i s h e d f o r Japan, l e s s w e l l e s t a b l i s h e d
f o r Korea, and s t i l l l e s s w e l l e s t a b l i s h e d f o r Taiwan, where
i n f o r m a t i o n on r e c r u i t m e n t to such agencies as the C o u n c i l f o r
Economic P l a n n i n g and Development, the I n d u s t r i a l Development Bureau,
and the Research and Development E v a l u a t i o n Commission is almost
wholly l a c k i n g .
-44-
19.
T h i s is based on data in G a s t i l 1973 and 1984, t a k i n g the m i d d l e
income c o u n t r i e s a s those s o c l a s s i f i e d i n the World Development
Report
1978 (World Bank 1978).
20.
See note 16.
21.
A comparative study of forms, s c a l e and causes of c o r r u p t i o n in t h e s e
c o u n t r i e s and o t h e r d e v e l o p i n g c o u n t r i e s remains to be w r i t t e n .
C o r r u p t i o n i n p a r t s of the c i v i l s e r v i c e i s common i n Taiwan ( e . g .
p u b l i c works, p o l i c e , customs).
My i m p r e s s i o n i s t h a t i t i s k e p t away
from m a t t e r s which are seen a s i m p o r t a n t f o r n a t i o n a l w e l f a r e ( e . g .
w i t h i n the customs, i t i s c o n c e n t r a t e d away from i m p o r t s o f i m p o r t a n t
export i n p u t s ) ; and takes the form o f cost i n f l a t i o n f o r w e l l - b u i l t
p u b l i c works, r a t h e r than sub-standard c o n s t r u c t i o n o f p r o p e r l y p r i c e d
p u b l i c works.
Compare Wade 1982, 1982a.
-45-
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