CHAPTER Industfialization and, Structaral Change 6.1 INTRODUCTION: INDUSTRY AS A LEADING SECTOR “The main structural development that separates a modern high-income economy from a traditional low-income economy is the rapid development of the industrial sector. Broadly speaking, in the early stages of development, the industrial sector comprises anything that is not agricultural in nature. It includes all non-agricultural products. This process of industrialization has been very dramatic in many developing countries and accounts for much of the dynamism of the East Asian “miracle” countries and selected rapidly growing economies in Latin America, As a matter of interest, large countries are likely to have a larger share of income generated by the industrial sector because of economies of scale. Fur- thermore, higher income per capita is closely associated with a higher level of industrialization if we look at a broad range of developed and developing countries. There are exceptions, such as Australia and New Zealand, which developed specialization in minerals and agricultural products respectively. ‘There is also the case of India, which has a large industrial sector but which is still quite poor. 6.2 A Mobe oF STRUCTURAL CHANGE ‘The Jamaican economist and Nobel Prize winner, W. Arthur Lewis (1954) developed the first two- sector model which attempted to capture the interaction between a traditional agricultural sector and amodern industrial sector for a developing economy. John Fei and Gustav Ranis (1964) built upon his work a decade later. The model they developed is therefore often called the Lewis-Fei-Ranis (LFR) model, This model has two sectors which can be defined as traditional and modern, agricultural and industrial, or rural and urban. These are rather fuzzy definitions and we can expect overlaps betweeh different definitions, For example, there may be traditional characteristics in the informal sector of the urban economy. Or there may be modern agricultural processing industries in the countryside. “The essence of the model is to contrast traditional agricultural methods and rural social organization,132 Economic Development hich revolves around family enterprises, with the modern industrial sector where workers earn wages and industrial goods are produced. 6.2.1 Whatare the Features of this Model? First of all, capital accumulation fuels the development of the industrial sector. It grows faster as capital accumulates. There is assumed to be surplus labor in the rural/agriculture sector. The supply of this labor is virtually unlimited. Its opportunity cost is virtually zero. When it is removed from the rural sector, the output of the sector does not change at all, or very little. This would occur when there is high population density in the rural areas and when family farming is widespread. Family farms do not hire labor (and pay them the value of their marginal product). They operate on different principles. Every- cone shares in the output, so that workers are essentially paid the value of their average product. By removing excess labor from the traditional sector and moving it to the industrial sector, the productivity of labor increases. Furthermore, the productivity of those remaining in the rural sector also improves since there are fewer workers—the surplus workers have been removed. sep TR model asumes a particular kind of social organization in the agricultural sector, whichis traditjonal in nature, and also that the marginal product ofthe last workers is zero. There are a few ways we can test this theory. We can look at the evidence. There have been sustained movements from the rural to the urban economy in most developing countries. The productivity in agriculture has increased in these cases, It could be because of technology; certainly prima facia evidence suggests that there is some validity. The mere fact that lots of workers did migrate and continue to migrate is also evidence in support of the theory. This partly reflects the higher productivity of workers using more capital and therefore a higher wage in the city, but it also reflects the lower average wage in agriculture when the Jand is flooded with labor. ’ In the LER (1954, 1964) model, the surplus labor movement into industry provides a’net gain to the society. If the total output ofthe agricultural sector does not fall, then food production is unchanged sad the transferred workers will be fed by the agricultural sector (without trade), which will also be adding to output in the industrial sector. ‘Once the stock of surplus labor is exhausted, the process of industrial development becomes an interplay between the two sectors as the wage rate is driven up in both sectors. Historical experience tells us that it is important to keep the terms of trade between these two sectors on an even keel. What do I mean by this? If the terms of trade move too strongly against the agricultural sector, they will not be able to buy enough equipment to fuel technological developments in the sector. By starving agri- culture, industrialists will choke themselves to death in the long run. If the terms of trade turn against industry, then industrial investments will not be profitable and investment will slow. 6.2.2 Introduction of Trade into the LFR Model ‘When we introduce the possibilities of trade, the model becom i ment by the government in terms of taxes and subsidies has to be maintained in order f se groin be rapid. The Surplses from agriculture have to be mobilized to create investment f fee geal sector. At the same time, these taxes cannot be so high that they strangle the rural toe tna je do know is that export taxes, or an artificially low exchange rate, are not a sector. One thing Agricultural surplus as these could have detrimental effects on long-term good ways to extract the ar aficicicy pole oft elloed when a ibm ateectoy Getoome cau be aoe eo 1 cthlane, anny? bcii6s JEM ieibw S584 eel adficeaey ool fel palate can form a powerful lobby and have been able to persuade legislators to colsleguance de nce at restrictsChapter 6 Industrialization and Structural Change 133 trade and provides large subsidies to farmers who are inefficient on the world market. In Asia, Korea and Japan heavily subsidize rice farm ~ also have large farm subsidy programs, while the European Community (EC) and the United States 6.3 BackwarD AND Forwarb LINKAGES ‘The interaction between the industrial and rural sectors can be studied using the concept of backward and forward linkages. If direct backward linkages are strong, when an industry grows its suppliers also grow. The extent of this linkage can be measured by subtracting the purchases from abroad and its own costs from the value-added generated by the industry itself. 6.3.1 Indirect Backward Linkages Indirect backward linkages are the secondary effects which growth in an industry has on its suppliers. Industries that have strong backward linkages have low value-added and a large input from local sup- pliers. General industries with strong backward linkages include leather, clothing, textiles, food and beverages, and paper. The lowest backward linkages are in agriculture, public utilities, mining, and services. Labor-intensive manufacturing industries have the highest linkages, while primary industries have the lowest. . 63:2 Forward Linkages Forward linkages tell us how a product is related as an input into the production of a product at the next stage—textiles into apparel, for example, or petroleum into plastics. Forward linkages are a good indi- cation of the extent to which an economy can upgrade its industrial base by using its existing expertise and resource base. Both backward and forward linkages are determined from coefficients in input-output tables for individual economies. They do not tell us much about the dynamics of the process of industrialization in terms of causation, but they are useful to better understand the interrelationships that exist within an economy, and can serve as a beginning point for analyzing changes in industrial structure, Analysis of changes in these linkages can also be helpful in assessing the progress of an economy in its efforts to industrialize. : ‘The Asian neyily industrialized economies (NIEs) and the countries of Southeast Asia began their industrialization process with import-substituting industries but later began to focus on exports in labor-intensive industries, such as leather, clothing, and textiles. Because of the strong backward link- ages these industries had on agriculture, there was a mutually reinforcing cycle of growth. Ata later stage; these countries moved into more skill- and capital-intensive industries. (See Section 6.8 for fur- ther details.) . 6.4 Aspects oF INDUSTRIAL DEVELOPMENT 6.4.1 Choice of Technology .dustrialization, there will be a change in the production process as rela- Tn the early stages of induistrialization, countries have limited capital and ion theory, factor proportions are determined by the relative cost technologies may be appropriate in a poor country with plenty As part of the process of in tive prices of factors change plentiful labor. Using simple product of capital and labor. Labor-intensive134 — Economic Development distortions (such as those created by tax ° of low-skilled and cheap labor but because of factor market Ce breaks for capital equipment), the choice of technology may be more caP! 6.4.2 Economies of Scale or when production is taking place Economies of scale come into play when a country is exporting, .e low point on their ona Tange scale forthe domestic market. This enables companies to re are production cost curves, In very small countries, it may be difficult to reach a om eve tndastrles may be is intended for the domestic market alone. Similarly, even in larger cout 4 eae alia. inefficient—such as the automobiles industry in most Asian countries and Hare Ts stimeg ‘The standard for measuring the efficiency of an industry is to use the Ee Ft ladastr peotecion, a protective tariff is imposed to keep out cheaper foreign products through 6.5 Erriciency Issues 6.5.1 Economic Efficiency and Scale of Production Which firms are more efficient? Does firm size have a systematic impact on costs? Given ecoporiles of scale, we might think that the larger the firm, the more efficient it would be. This is not necessarily 7 case as size can introduce inefficiencies. Efficiency depends upon a number of special factors. It may that all firms can be efficient if they have reached a viable size of production that takes full advantage of economies of scale. It is true that there are more small firms in poorer countries but that could just be because ofa lack of capital, or the fact that the market size is limited. Better transport and communica~ tion also make it possible to have a nationwide production, marketing and distribution strategy where goods are produced in the cheapest locations and then shipped all over the country. In recent years, with the development of information and computer technology, this strategy has been extended inter- nationally through the development of networks for subcontracting and outsourcing. 6.5.2 Do Protected Industries Become Efficient Over Time? Evidence suggests that there are numerous pitfalls to a strategy of protecting infant industries. These industries and firms will eventually be forced to compete in external markets, In order to be competi- tive, they should be in an industry where the country has a comparative advantage or else they will be inefficient. A comparison of India with Korea throws up some interesting facts. India protected many of its domestic industries for a long time, for example, automobiles, iron and steel, and others. These industries did not become competitive internationally and have been a drain ‘on the public purse for many years. They were inefficient and not competitive. Only in the 1990s, when regulations on the inflow of foreign capital were relaxed, was India able to produce a range of automobiles at reasonable prices through the use of modern technology. In Korea, subsidies were also given, but these subsidies were performance related—that is, they were withdrawn if the industry did not emerge with strong export products after the initial years of protection. While Korea made many mistakes in promoting heavy and chemical industries in the 1980s, the country also became one of the fastest growing coun- tries in the world during the early 1970s until the early 1990s. It joined the Organization for Economic Cooperation and Development (OECD) in 1996. A similar story can be told for Taiwan, although the emphasis there was on the development of small-and medium-scale industries. These cases ea toe ef the other NIEs and the economies of Southeast Asia are explored further in the following e Asian experience.Chapter 6 Industrialization and Structural Change 135 6.5.3 Are There Advantages to Small-Scale Industrial Development? small-scale enterprises (or small and medium enterprises—SMEs) are generally more labor-intensive. Start-up costs are small and entry and exit is easy because of the small amount of capital needed. They tend to fail more frequently. Small-scale firms can be very successful when they concentrate in particu lar locations where they can share a skilled labor force base and where they can produce differentiated products of high quality. Industries which require craft occupational skills, such as particular kinds of textiles and apparel (batik, silk, specialized cottons), and footwear as well as textiles, are among these. Small-scale firms depend more on economies of agglomeration, which are generated by proximity to firms engaged in similar sectors or in complementary production. Most small producers need access to intermediate material inputs and thus prefer to be close to ports or other transportation facilities. The case of Taiwan is very interesting. The economy has grown very rapidly for several decades and it was not affected much by the Asian financial crisis, Small and medium-sized firms dominate its industrial structure. 6.6 FoREIGN TRADE Exports are critical in explaining productivity gains in the Asian economies. Internal competition does not seem to be sufficient to bring about high rates of productivity increase. For example, in large countries with low industrial concentration ratios, efficiency rates are still low. The textile sectors’ in India’ and the Philippines are good examples. Why? Perhaps it is because of licensing arrange- ments, or a lack of technological transfer as a result of taxes on imports. There is evidence that better internal allocation of resources can add greatly to economic efficiency. Firms financed by foreign direct investment (FDI) are, other things being equal, more efficient than their domestic counterparts. ‘There may be many reasons for this but probably the most important is the need to be competitive internationally. Strategies for international trade are important for studying the growth experience of developing countries. We will only touch on them now, but will discuss them in more details later. 6.7 OTHER TRANSITION Issues Indonesia has not been able to make the transition to higher value-added products that are in demand “in the OECD countries as quickly and as effectively as its neighbors in Southeast Asia. There are several reasons for this. First, Indonesia still has a large oil and natural gas sector and some of its resources are devoted to maintaining and expanding this sector. Secondly, it had a late start in the industrialization process in the early 1980s, and Malaysia, Thailand, and the Philippines had more than a decade's lead in industrializing. Thirdly, it has a labor force that lacks education and training to irgplement technol- gy in these new industries on a wide scale. Fourthly, even after it began industrializing engineers, Who thought they could leapfrog to higher levels of technology, dominated much of its development thinking, Such a strategy was not successful and it further held back the transition to labor-intensive industries that are the country’s comparative advantage. To some extent, Thailand also suffers from a lack of skilled manpower. The educational system is Particularly weak in providing technicians with strong secondary school training, The other countries f Southeast Asia, such as the Philippines and Malaysia, are better positioned to take advantage of the Opportunities for upgrading their industrial capacity. Their labor forces are better trained and are more familiar with English.136 Economic Development 6.8 THE Asian EXPERIENCE WITH INDUSTRIALIZATION experience is that it was unpre- ‘The first thing to note about the Asian industrialization and growth ict Asi cedented in economic history, From the mid-1960s to the late 1990s, the grow’ "e a eae economies of Hong Kong, Korea, and Taiwan, together with Singapore in 9010 et any called the Asian “tigers,” or the newly industrialized economies ee gh 1d Quibria, 2002). Per- other economy or group of economies had in history (World Bank, 19: re od cvty ten yeare: Atthe capita incomes increased by about 7 percent per yeat, $0 that income doubled every . i i d increased fourfold. 5 end of thirty years, incomes per capita af ae a or share of gross domestic pro. duct (GDP) Furthermore, during the same perio in these countries also increased sharply (refer to Table 3.1 in Chaps 3) In the ce es art tte tere ly 38 percent in’ ), an¢ dl ‘went from about 24 percent of GDP in 1970 to nearly 38 ps hen Borthe overall economy. In implies an even more spectacular growth rate for the industrial sector n Taiwan, Singapore, and Hong Kong, the increase in the share of industry was more modest but it also saw a more rapid growth in the industrial sector than in the economy as whole. How were these economies able to sustain such a breakneck pace of ‘growth of industry for such a prolonged period? Economic historians point to a period of growth in the Japanese economy from the Meiji Restoration to the middle of the twentieth century as a comparable period of rapid growth. In fact, it was only about half as fast as the growth of the Asian “tigers.” 6.8.1 AFurther Look at Total Factor Productivity (TFP) If we go back to the discussion in Chapter 3, Section 3.2.2, we can begin to see how this was possible. However, we need more than the raw numbers of the Krugman -Lau-Young (KLY) analysis (Krugman, 1994; Lau, 1996; and Young, 1992, 1995). In their views, the reason for the rapid growth was brute force application of a simple Harrod-Domar growth model augmented by the growth of the population. ‘They argue that both the capital stock and the labor force grew rapidly, Combined with good govern- ‘ment policies, this was enough to ensure the Asian “miracle” ” The question can be raised: “Didn't other countries have a combination of high investment, rapid population growth, and good policies?” There were some but the list of countries is small. Russia and some of its satellites in Eastern Europe had high saving rates and moderately high population growth. However, most economists would agree that they had bad policies until the fall of the Iron Curtain. Spain started from a low base and had high saving rates, moderate population growth and reasonable macroeconomic polices, yet its growth experience was not as rapid as the “tigers” This leads us to believe that there may have been more to the ‘Asian “miracle” than brute force. How does the evidence of the KLY studies compare with the results of studies using a growth accounting methodology? We learned in Chapter 3 that the evidence is more favorable to a greater contributi i (Dowling and Summers, 1998; Chen, 1997; Bosworth and Collins, 1996; and Harberpen 1ooe), See also Table 6.1, which summarizes several estimates, not including Harberger’. Notrenwi rns ne absolute numbers are in the range of 1-2 percent, this is still a nignlfcant ae shat hil the sidering that the TEP contribution for the industrial countries wae in this cree geen tS Ee Ot period, as reflected by Sarels (1997) estimate! for the United States, Aswicahyon’ sislig th postwar assembled evidence of TEP contribution to economic growth for the Sau ne fu (2002) have for the Southeast Asian countries and " Notice that the contribution of TEP to tries wi it od is isolated. tio growth is even higher for some countri then the 1991-1996 per is iod is isolated.Chapter 6 Industrialization and Structural Change 137 Table 6.1 Total Factor Productivity Growth: Results of Selected Studies, 1960-2000 or P Sade al a eid Chal Taal ORCC cea a {Bosworthiand Collins 1996 1960-1994 45% 2686 57.8% Hong Kong ‘Young e 1994, 1995 1966-1991 7B BB 31S Young adj? 1994,1995 1966-1991 73 24 32.9 Young 1994, 1995. 1966-1990 103 Ww 165 Young (adj) = "1994, 1995 1966-1990 103: 13 126 Bosworth and Collins* 1996 1960-1994 57 1s 26.3 Singapore. % Young 1994,1995 1966-1990 87 02 23 Young (adi® © 1994/1995 1966-1990, 187 10 ns Bosworth and Collins* 1996 1960-1994 SA 1S 278 Sarel ype Sore iges': 50 22 440 Singapore MTI 2001 1985-20004 Ww as Taiwan g 8 : ei 3 Young* 1994,1995 1966-1990 N48 26 22.0 Young fadi* “be even more to it than that. A group of economists have argued that conve” berictaee ticn of Production functions or the use of growth accounting formulas is flawed. The} wi Cm a contribution of labor and capital to find the residual contribution to in” of abt Sod epi ae ‘They argue that this is because the process of innovation and the grow! be misleading Th ae lependent. If this is true, conventional methods of estimating TFP would count the contrib “y attribute more explanatory power to the amounts of labor and capital, and dis ontribution to total factor productivity of innovation, learning, and educationChapter 6 Industralization and Structural Change 139 ‘The argument is presented by Alice Amsden (2001) for Korea, Hobday (1995) for the NIEs and other countries, and summarized neatly by Nelson and Pack (1998). ; ‘The argument goes something like this. In order to sustain a rapidly growing industrial sector in a quickly evolving global environment, much mote is required than just a high rate of investment and appropriate pricing of inputs and incentives for export. It requires a continuous process of learning, innovation, experimentation, and continuing structural change. Firms come and go, and the proof of the efficiency and competitiveness of those who are successful is their ability 0 adapt new technology to changing domestic and international circumstances. 6.8.2 Historical Transformation of the Industrial Sector ‘To give you an idea of how the structure of industries within these economies has changed over time, consider a snapshot of their industrial sectors in the early 1960s, 1975, and 1990 (see Table 6.2). In 1960, primary commodities accounted fora large share of total output and exports in Asia while manu- factured commodities generally played a supporting role. The percentage of primary commodities as a hare of total exports? was more than 90 percent for the Southeast Asian countries then—98 percent for Thailand, 97 percent for Indonesia, and 94 percent for Malaysia, to be ‘specific. The NIEs had a lower share of primary commodities but they still ranged from 40 to 62 percent, with the sole exception of Hong Kong with less than 10 percent. The structure of manufacturing was slanted toward labor- intensive products and geared for the domestic market. Manufacturing itself was a small portion of total output. By 1975, there was a dramatic shift in both the composition of industrials and the share of manu- facturing in total output (see Table 6.2). In Korea, for example, the share of manufacturing output grew from 9to 27 percent of GDP and the machinery and chemical sectors share rose dramatically to nearly 37 percent of manufacturing from only 12 percent in 1963.” A nearly identical shift occurred in Taiwan. in Thailand, Malaysia, and Indonesia, the shift was less dramatic although the share of textiles and chemicals also rose quickly. In Indonesia, the higher production of oil accounted for much of the shift in chemicals even though manufacturing output as a share of income did not increase much. ‘Nevertheless, in both Thailand and Malaysia, manufacturing reached 18 percent of GDP. By 1990, there were further increases in manufacturing as a percentage of total output and the machinery indus- try had grown in importance in all the Asian countries, with the exception of Indonesia and Thailand. In the latter case, textiles continued to increase as a share of GDP, while in Indonesia, chemicals contin- ued to be strong. However, exports had jumped to 20 percent of GDP, from 9 percent in 1975. During this period of rapid industrialization, there were concerted efforts by the United States to protect its domestic industry against imports ftom Asia. These included barriers against textile exports as the United States joined the Multifiber Agreement. There were also tariffs placed on manufactured goods. At the same time, US. subsidiaries were developing manufacturing facilities in East Asia. In the 1970s, they began developing plants for integrated circuits in Singapore, which were for the final assembly of products sent by the United States as exports to Europe and Japan. 2 Figures quoted from United Nations Conference on Trade and Development, Trade and Development Report (New York: United Nations, 1996), Chapter II, Tables 33 and 34, » Rodrik (1995) argues that industrial policy in Korea was instrumental in assisting the private sector in making the shift toward export promotion and attracting investment to the export sector, which was very small at the beginning of the period. Investment subsidies to the private sector, support to government-sponsored industries, together with administrative guidance helped to remove the coordination failure that had previously blocked economic takeof. This facilitation by the government had positive external effects through the transfer of technology and innovation across industries in a non-competitive way.140 Economic Development rc Table 6.2 Percentage Composition of Manufacturing Output by Industrial Category for Selected Years Terns 1963 ice ud Indonesia Food 38.0 334 ENE Textiles 80 137 LEDs Wood 20 34 S ng. Paper 10 29 34 Chemicals 120 308 ae: Non-mineral 40 43 cd Metals 110 38 ae Machinery na. 79 94 Others 240 02 05 Manufacturing output/GDP- 8 9 20 Korea : Food 210 178 13 Textiles 292° 2 es 132 Wood 50 27 16 Paper 72 40 46 Chemicals ug 23 176 Non-mineral % 89 ORE 46 Metais 1a 89 128 Machinery aa ane na Others 22 19 A Manufacturing output/GDP 9 een Malaysia : a : aOR : : 156 Textiles re < ot 63 Wood See a 78 G58 Paper 82 Chemicals wae 47. Non-mineral ores eh 25 Metals OS $e 42 6.4 Machinery ~ ree Sake, Sone. Others . 169 28.1 52 my Manufacturing output/6DP 5 e 1.0 ce 24 ~ (continued)Chapter 6 Industrialization and Structural Change 141 Table 6.2 (continued) ok dday rr a fy Taiwan Peed a8 aS Wa Textiles 163 174 125 Mood an FSS 16 Paper 56 28 5A eens 127 187 27 Non-mineral 59 58 39 Nem Ss a2 102 118 Machinery na. 182 225 Others SS 13 28 96 Manufacturing output/GD! 4 20 36 eine, Saks SNe Food 53.9 41.0 33 Textiles : s 95 tba OR abs Wood al 44 29 Paper 30 30 22 Chemicals 56 144 105 Non-mineral é ” 29 42 Metals 54 57 43 ‘Machinery. RS 62 96 18 Others 73 Manufacturing output/GDP » 26 India Food a 197. 108 NS) Textiles 363 195 123 Wood ; C8 Sa 04 Paper 38 49 33 ‘chemicals 126 202 268 Non-mineral 39 47 Metals 163 134 Machinery 23 273 Others i 08. OG eS Manufacturing output/GDP 16 19 SOURCE: Alice H. Amsden, The Rikseof"the est”: hollengesto the West from Late-Industralizing Economies (New York: Oxford University Pres, 2001),pp. 113-115,142 Economic Development Table6.3 Share of Exports of Primary, Light, and Heavy Industries for Selected NIEs, 1955-1973 Tes rminers renee 1955 238 17.2 1963 BRN 342 1970 87 58.0 PES 45 : 1956 6.6 ‘ 8& 1961 en Ta 1966 91 1977 49 Growth: A Comparative Study (New York: Oxford SOURCE: Hollis B. Chenery, Sherman Robinson, and Moshe Syrquin Industrialization and University Press forthe World Bank, 1986), pp. 158-159. 7 ort of manufactured goods in the NIEs rose Despite these difficulties, the production and exp ! products to light and then heavy industry as the composition of exports shifted from primary (see Table 6.3). ; It is evident from this table that even in the 1960s, there was a rapid shift out of primary prod- ucts into manufacturing in both Korea and Taiwan. Much of this transition was into export-oriented industries, Calculations by Chenery et al. (1986, pp. 158-159) show that during the period 1955-1973, 35 percent of the increase in income was generated by export industries in Korea, while in Taiwan, the contribution was 43 percent from 1956 to 1971. Between 1955 and 1963, textiles and chemicals, along with machinery, paper, wood, and petroleum were the major import-substituting sources of growth in the manufacturing sector. However, this changed dramatically during the next decade to 1973 when it saw export expansion across the range of all manufactured product categories (Chenery et al., 1986, p.-184). In Taiwan, the pattern was similar although the shift to export expansion was not as dramatic. ‘Another way to view the transition in manufacturing that took place is to consider the shift in terms of different levels of technology. S. Lall (1998) has broken down manufacturing into five components: 1. Resource-based industries that include aluminum, food, and oil refining as examples. 2. Labor-intensive industries, including garments, footwear, and toys. 3. Scale-intensive industries, including steel, automobiles, paper, and chemicals. 4. Differential industrial products, including TVs, power equipment, and advanced machinery: 5. Science-based industries, including electronics, pharmaceuticals, and biotechnology. _ During the 1980-1995 period, the world growth rate in the science-based industries was much faster than in the other sectors—about 13 percent compared with 8.5 percent for different products, about 8 percent for labor-intensive products, and less for other categories, Lall (1998) has also shown that the share of output in science-based industries increased quite dramatically between 1985 and 1992 in the Asian countries—from 4 to 16 percent in Taiwan, 5 to 31 percent in Singapore, 4'to 42 percent in Malaysia, and 0 to-20 percent in Thailand. In Indonesia, Hong Kong, India, and Pakistan, the increases were minimal. In Korea, the increase was only from 3 to 6 percent. However, there was a lar ye increase in differentiated products, which reflected the push that Korea was making toward heavy manufacturing,Chapter 6 Industrialization and Structural Change 143 ‘This evidence reflects a growing trend toward the manufacture of skill and research-intensive ods in the NIEs and Southeast Asia, goods that were also increasing as a share of manufactured out put generally in the world economy. We will come back to this ‘structural shift in the next section after iscussing the electronics sector. 6.8.3 The Electronics Sector Inorder to examine the structural transformation in the industrial sectors of the NIEs and to look more closely atthe role of technology, it is useful to focus on the electronics industry. This broad industrial ategory had become the most important export of the NIEs, as well as the countries of Southeast Asia the end of the 1990s, Hobday (1995) suggests that the changes in the electronics industry can be described by a stylized S curve representing the size of exports, as well as the technological frontier and ~ esearch and development (R&D) expenditures. In the 1950s and 1960s, the industry grew slowly as firms became familiar with elementary technology, including simple assembly and the assessment and selection of production techniques. In the 1970s, the rate of export growth accelerated and the inflow of technology from foreign firms also increased. Reverse engineering was undertaken and the adapta- tion of technology was further enhanced, Eventually the industry moved toward indigenous design for ‘manufacturing and applied R&D in the 1990s. 6.8.4 Different Patterns of Technological Transfer ‘The methods varied from economy to economy. Singapore and Hong Kong were open to foreign direct investment and worked hard to attract it by offering full ownership, low taxes, and access to mod- ern infrastructure and a well-educated workforce, Singapore adopted a hands-on industrial policy and while it did not necessarily try to influence which industries located in Singapore, it played a strong rolein helping to train the workforce and to provide industrial infrastructure. Hong Kong took a more hands-off attitude, though it did have a very liberal and open economy. Most of the inyestment that ‘came into these two countries was via the foreign investment of transnational enterprises (TNCs). Korea and Taiwan were less open in the manner in which they obtained foreign technology. They did not encourage foreign firms to, set up operations. Rather, they adopted arrangements where local subsidiaries produced for the foreign companies, either to their exact specifications (original equip- ment manufacturing —OEM) or according to their own designs or a combination of foreign and local designs (own design manufacturing—ODM). They did not generally form joint ventures although they sometimes used licensing arrangements. Later in the industrialization process, they also made some overseas acquisitions and formed strategic partnerships with overseas companies to acquire technology. . Even though there were distinct differences in the degree of government intervention and open- ness to foreign ownership, the NIEs all benefited from the same principles that resulted in success (Gee the schematic in Figure 6.1). There were four basic factors underpinning their success: 1. Firms benefited from low rates of interest, low inflation, and high rates of saving within the economies. ‘ 2. They all responded to the open and outward-looking export-led strategies that were generally followed. 3. All the NIEs developed an appropriate human’ resource development strategy that comple- mented and provided trained workers for the growing industrial sector. This included:engi- neering, technical, and vocational schools. ; ; 4. Government intervention was undertaken whenever it was needed. At the outset, this included the a ion of foreign industries by Singapore because it felt that the local economy was too144 Economic Development and Degree of Openness Government Interventio! Figure 6.1 Singapore: tee large firms that are foreign tecimettaetnay | SS own Hong Kong sal I firms and some ‘small local firms and large J ing reign fms foreign fems weak to do it by itself, In Korea, the government stimulated and suppor! ek vite Jarge conglomerates following the Japanese model (chaebol, following 1e e ae eee e it involved the setting up of state-owned firms to industrialize, although not in acopnla Hong Kong, it involved the development of infrastructure and the enhancement of relat with China and Taiwan. 6.8.5 Country Experiences Hence, over the years, the Asian countries have actively developed their electronics sector although there are differences in their field of specialization owing to differences in the labor force and techno- logical advances. For instance, South Korea and Taiwan have well developed semiconductor industries, while Hong Kong and Singapore dominate the disk-drive and motherboard markets. Table 64. provides a ranking of the major exporters of electronics in Asia since 1997. As can be seen, Kotea, Taiwan, and China appear to be gaining the lead as major exporters, whereas Singapore and the Philippines have slipped to ninth and twentieth positions in 2000 from fourth and sixth places, Tespectively, in 1997. Before we discuss comparative advantage in the next section, we will first look at various case studies in Asia to see how their electronics sectors have evolved and developed over the years. SINGAPORE Singapore followed a model of attracting foreign enterprises (transnational corpora- tions or TNCs) to set up operations in Singapore. These TNCs were initially attracted by low labor costs, Political stability, good infrastructure, and an attractive environment Provided by the govern- ment which allowed foreign control and ownership of these subsidiaries. Foreign direct investment {eas attracted initially to the Jurong Industrial Park, including enterprises such as Texas Instruments, Rene lect and Hewlitt Packard from the United States, Fujitsu from Japan, and SGS from Italy. Were also various attempts by the government to Promote ad\ ig techni over the years but these were frustrated by the i Shag on y the economic downturns in 1974- 6. Nevertheless, upgrading of facilities and technologi i PINCH neat competitive in international markers mies Was @ Beneral practice as the TNCs had to zemain In addition to physical infrastructure and fay worable i the development of elecommunicaions and transport infastoarat Suppor the TNCS ire made it an attractive corporate