Industrial Policy in an Era of Globalization: Lessons from Asia (Policy Analyses in International Economics)

134 Pages·2003·0.67 MB·English

by  Marcus Noland

Indust r i a l Polic y
i n a n e r a o f
G l o b a l i z a t i o n
Lessons from Asia

Indust r i a l Polic y
i n a n e r a o f
G l o b a l i z a t i o n
Lessons from Asia

MARCUS NOLAND
HOWARD PACK
Institute for International Economics
Washington, DC
March 2003
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Marcus Noland, senior fellow, was a senior INSTITUTE FOR INTERNATIONAL
economist in the Council of Economic ECONOMICS
Advisers and held research or teaching 1750 Massachusetts Avenue, NW
positions at the Johns Hopkins University, Washington, DC 20036-1903
the University of Southern California, [phone] FAX: [phone]
Tokyo University, Saitama University, http://www.iie.com
the University of Ghana, the Korea
Development Institute, and the East-West C. Fred Bergsten, Director
Center. He received fellowships sponsored Valerie Norville, Director of Publications
by the Japan Society for the Promotion of and Web Development
Science, the Council on Foreign Relations, Brett Kitchen, Director of Marketing
the Council for the International Exchange and Foreign Rights
of Scholars, and the Pohang Iron and Steel
Corporation. He won the 2000–01 Ohira Printing by Kirby Lithographic Company, Inc.
Masayoshi Award for his book Avoiding Typesetting by BMWW
the Apocalypse: The Future of the Two Koreas
(2000). He is the author of Pacific Basin Copyright © 2003 by the Institute for
Developing Countries: Prospects for the International Economics. All rights
Future(1990); coauthor of No More Bashing: reserved. No part of this book may be
Building a New Japan-United States Economic reproduced or utilized in any form or
Relationshipwith C. Fred Bergsten and by any means, electronic or mechanical,
Takatoshi Ito (2001), Global Economic Effects including photocopying, recording, or by
of the Asian Currency Devaluations(1998), information storage or retrieval system,
Reconcilable Differences? United States-Japan without permission from the Institute.
Economic Conflictwith C. Fred Bergsten
(1993), and Japan in the World Economy For reprints/permission to photocopy
with Bela Balassa (1988); coeditor of Pacific please contact the APS customer service
Dynamism and the International Economic department at CCC Academic Permissions
System(1993); and editor of Economic Service, 27 Congress Street, Salem, MA
Integration of the Korean Peninsula(1998). 01970.
Howard Packhas been a professor of eco- Printed in the United States of America
nomics and professor of business and pub- 05 04 03 5 4 3 2 1
lic policy at the Wharton School since 1986,
and professor of management there since Library of Congress Cataloging-in-
1995. He was a consultant at a number Publication Data
of institutions including the World Bank,
the Asian Development Bank, the Inter- Noland, Marcus, 1959–
American Development Bank, the Agency Industrial policy in an era of
for International Development, and the globalization : lessons from Asia/
Overseas Development Council. He was a Marcus Noland, Howard Pack.
fellow at the Harry S. Truman Institute for p. cm.
Peace Research, the Hebrew University, Includes bibliographical references and
Jerusalem, and the Jerusalem Institute for index.
Israel Research at the same university. ISBN 0-88132-350-0
He is on the editorial boards of World
Bank Research Observer, World Development, 1.Industrial policy—Asia. 2. Asia—
Journal of Development Economics, and World Economic policy. 3. Economic
Bank Economic Review. He is the author stabilization—Asia. I. Pack, Howard.
of Productivity, Technology and Industrial II.Title.
Development(Oxford University Press, 1987)
and Structural Change and Economic Policy in HC412 .N5747 2002
Israel(Yale University Press, 1971). 338.095—dc21 2002032236
The views expressed in this publication are those of the authors. This publication is
part of the overall program of the Institute, as endorsed by its Board of Directors,
but does not necessarily reflect the views of individual members of the Board or
the Advisory Committee.
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Contents
Preface ix
Acknowledgments xi
1 Introduction 1
Definition 10
Initiation and Maintenance of Industrialization 11
The Case for Selective Industrial Policy 15
2 Industrial Policies in Japan, Korea, and Taiwan 21
Industrial Policies: Some Preliminaries 21
Industrial Policy in Japan 23
Industrial Policy in Korea 37
Industrial Policy in Taiwan 51
Exports, Growth, and Productivity 57
Appendix 2.1: Total Factor Productivity Growth 63
3 Unintended Consequences 67
Political Economy 67
Long-Term Use May Be Hazardous to One’s Health 69
Corruption 72
v
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4 Replicability 77
Stability and Complexity 77
Irreproducible Initial Conditions? 78
Geography Is Not Destiny—Policy Matters 83
Does the International System Now Constrain Industrial Policy? 88
5 Conclusions 93
Final Thoughts 100
References 103
Index 111
Tables
Table 2.1 Human Capital Index and per capita income,
mid-1950s 25
Table 2.2 Capital subsidy-investment ratio in Japan 27
Table 2.3 Government subsidy share of total research and
development in Japan 30
Table 2.4 Effective rates of protection for Japan 31
Table 2.5 Impact of industrial policy on sectoral growth,
capital accumulation, and total factor productivity
in Japan, 1960–90 35
Table 2.6 Normalized sectoral tax rates in Japan 37
Table 2.7 Science and engineering students 40
Table 2.8 Impact of industrial policy on value added,
growth rate of capital stock, and sectoral total factor
productivity in Korea, 1963–83 45
Table 2.9 Intersectoral purchases, Korea, 1985 50
Table 2.10 Purchases of domestically produced and imported
machinery, Korea and Japan 51
Table 4.1 Distributional indicators, circa 1960 83
Table 4.2 Export similarity, 1968 84
Table 4.3 Rates of growth of total factor productivity 86
Table 4.4 Rates of growth of fixed capital stock 87
Figures
Figure 2.1 Sectoral composition of on-budget subsidies in Japan,
1955–80 26
Figure 2.2 Uses of FILPfunds in Japan, 1955–98 27
Figure 2.3 Human capital accumulation, 1960–86 39
Figure 2.4 Rates of return on capital in Korea 43
Figure 2.5 Export loan subsidy in Taiwan 53
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Figure 2.6 Average tariff burden in Taiwan 54
Figure 2.7 Research and development in Taiwan, 1978–2000 56
Figure 3.1 Corruption rankings for Japan, Korea, and Taiwan 73
Figure 3.2 Governance rankings for Japan, Korea, and Taiwan 73
Figure 4.1a Endowment triangle: Labor, physical capital, land 80
Figure 4.1b Endowment triangle: Labor, human capital, land 80
Figure 4.1c Endowment triangle: Land, physical capital, human
capital 81
Figure 4.1d Endowment triangle: Labor, physical capital, human
capital 81
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INSTITUTE FOR INTERNATIONALECONOMICS
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Ex officio
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*Member of the Executive Committee
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Preface
In a 1990 Institute study, Latin American Adjustment: How Much Has Hap-
pened?, Senior Fellow John Williamson coined the phrase “the Washington
consensus” to encapsulate the reigning agreement in policy circles about
the desirability of a package of policies including macroeconomic stabil-
ity, respect for property rights, sectoral tax neutrality, and trade openness.
In the intervening years, the failure of the transitional economies to meet
expectations, the Asian financial crisis, disappointing performance in
Latin America, and falling per capita incomes in much of sub-Saharan
Africa have spurred widespread disillusionment with these prescriptions
and a reassessment of alternative development strategies.
One such impulse has been a revival in interest among middle-income
and least developed countries alike in the more dirigiste policies pursued
by three Asian success stories: Japan, Korea, and Taiwan. In this volume,
Marcus Noland and Howard Pack analyze the industrial-policy experi-
ences of these three Asian economies to discern what, if any, lessons they
might have for contemporary developing countries. They ask whether the
selective intervention policies pursued by these countries were an impor-
tant part of their successes, whether changes in the international eco-
nomic system impede the ability of contemporary developing countries to
implement similar policies, and whether prospective emulators would be
likely to achieve the same outcomes that the Asians did.
The conclusions of the authors are largely cautionary. Industrial poli-
cies, at best, enhanced growth modestly in the Asian economies. At the
same time, they contributed to unintended negative side effects in the
Asian economies. Differences in the economic fundamentals of contempo-
rary developing countries in comparison with Japan, Korea, and Taiwan,
as well as changes in the international economic system, constrain the
ability of today’s developing countries to implement industrial policies in
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