south east asia development 3a ppt

3a. Industrialization and
industrial policy

1
Overview

Rationales for industrialization

SEA industrialization patterns

Industrial promotion policies, esp. tariffs

Effects of a tariff on industry growth, welfare and
distribution
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Motives for industrialization

Modernization, technology transfer

Diversification

Less reliance on season/climate

Less price risk – manufacturing prices are stable

Less dependence on foreign sources

(Belief in) increasing returns in some industries - lower
unit costs permit more output using same resources.

Marshallian interfirm/interindustry externalities (shared

infrastructure, agglomeration externalities)

Overall aim: capture 'long-run comparative advantage' as
an industrial economy.
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Why so much variation in industriztn and employment
rates and patterns among apparently similar economies?
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GDP Share 1990
Output per worker 1990
Country
Agric
Ind.
Serv.
Agric
Ind.
Serv.
Indonesia
22
40
38
0.4
2.9
1.2
Philippines
22

35
43
0.5
2.3
1.1
Thailand
12
39
48
0.2
2.8
2.2
Source: World Development Report, various years. Y/L in $’000
Industrial promotion strategies

Why? Promote industrial growth, get growth dividend

How? Mainly, but not exclusively, trade policies

Economics of protectionism

Tariffs are most popular, if not best, way to protect favored
industries.

Easier to monitor trade flows at the port

Raise revenue for G.

Easy to levy (many losers, but per capita losses are small)


Some of the biggest losers may be foreigners anyway.
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A tariff boosts production by raising domestic price from p* to p*(1+t)
Diverts demand from imports to domestic products (a)
Reduces total demand (consumers must pay more)
Raises gov’t revenue (c)
Causes deadweight losses through misallocation (b + d)
0 Q
1
Q
2
Q
3
Q
4

p*(1+t)
p*
S
D
a b c d
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•
Supply of forex comes from exports; demand is to cover imports
•
Tariff on imports reduces the demand for forex
Floating exchange rate: tariff causes ER appreciation
•
Lerner symmetry: a tariff discourages both imports and exports

D = import bill
D'
S = export earnings
For. exchange
Exch. rate
(Rp/$)
E
0
E
1
F
1
F
0
Philippine protectionism and development

In SE Asia, the Philippines had highest and most persistent tariffs

High rates of nominal protection on imports produced negative
effective protection for traditional exports (agriculture)

Effective protective rates by import category:
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Import category 1960 1970
Consumer items
Nonessential 349 354
Semiessential 149 57
Essential -15 5
Producer items
Nonessential 173 203

Semiessential 52 14
Essential 50 19
Trad’l exports -27 -33
• What effect would these have had on incentives to produce and invest?
Intersectoral impacts: agriculture

Industry protection hurts agriculture indirectly: higher
input costs, less competitive exchange rate, etc.

Nominal rate of assistance – direct policies

Real rate of assistance – includes indirect effects

Joining WTO was indirectly good for Philippine
agriculture
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Philippines
1965-69 1970-79 1990-94 2000-04
Nominal rate of assistance
to agriculture
14.3 -6.0 16.7 27.9
Nominal rate of assistance
to non-agriculture
20.3 16.3 9.9 7.3
Real rate of assistance to
agriculture
-5.0 -19.8 6.1 19.1
Static gains and losses from protection

Protected industries grow, at expense of foreigners,

consumers and other industries

Gov’t revenue will probably be higher due to tariffs

Inward orientation: domestic markets for all goods

become
relatively important

Industry structure: protection tends to create monopolies

“rent-seeking society”
•
Distortions to investment and FDI incentives
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Dynamics: growth implications of protection
Does inward orientation have long-run effects on growth?

Answer depends on how protection is used

Do infant industries really do grow up?

Do the costs of protection inhibit/enhance growth in
other sectors?

Protection and growth in the long run

Incentives & opportunities for rent-seeking (infant industries
fail to grow)


Investment follows rents rather than seeking efficient
opportunities …
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The Bhagwati effect in Thailand

Bhagwati hypothesis: rent-seeking FDI creates fewer
productivity gains than efficiency-seeking FDI

High tariffs and monopoly power attract rent-seeking FDI

Protected industries are more capital-intensive than average,
so there’s a ‘technology gap’ as well

Growth dividends from this FDI are small – or even negative

Kohpaiboon (World Dev 2006) finds this for Thailand:

At the mean rate of industry protection, labor productivity is
lower by 0.15% for every 1% higher foreign ownership share

Implication: protection “damages” the growth effect of FDI

Any comparisons with Vietnam?
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Protection and income distribution (1)
Supply side (factor markets)

What are the characteristics of industries most likely to be
awarded protection?


Which industries display least comp. adv?

What are the likely factor market effects of expansion in
these industries (& contraction/slower growth in others)?

Factors used intensively in expanding industries enjoy price
rises (demand for their services has risen)

Factors used intensively in contracting sectors lose

In SE Asia, which factors are likely to gain most from
industry promotion? Lose most?
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Demand side (product markets)

Consumers of goods produced in protected industries lose thru
higher prices.

Industries using inputs produced by protected sectors lose.

Consumers of goods whose prices are indirectly affected (N
goods) lose.

Protection and non-traded goods: if T and N goods are substitutes,
raising some T prices will increase N demand and price
Combined distributional outcomes

Losers from protection are owners of factors not intensively used
in protected industries, and/or consumers of protected goods

and/or non-traded goods.
Winners and losers from protection
Each group contains:

President Marcos (1 person)

Manufacturing sector capitalists (2 people)

Farmers in export crop sectors (coffee, coconut, tropical fruit) (2 p)

Skilled workers/middle class (1 p)

Unskilled workers (2+ p)

“Make the case” to President; President decides what to do and
why, and explains decision to class
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Given the chance, which
groups would vote for
industry protection, and
which against? Why?
(at least 3 reasons…
individual interest and
national interest)
Industrialization and protection: summary

Development benefits of industry growth are clear

But ISI in SE Asia was not the most efficient path to
industrialization


Uncompetitive industries rely on (small) domestic market

Protected industries are capital-intensive, their growth does
not generate many jobs

Spillover costs to other industries, including exporters

Protected industries attract ‘bad’ (rent-seeking) investment

Protection favors owners of capital against owners of labor

Any alternatives? Under what conditions might industry
grow successfully without protection?
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