This post will seek to explain East Asian and Latin American approaches to industrialization
- identify the main stages of industrial transformation;
- define easy import substitution industrialization ;
- define easy export substitution and explain what exactly is being substituted for what;
- define difficult import substitution industrialization and clarify in what sense do we say that Latin American countries entered this state “prematurely” while the East Asian economies entered this stage “maturely”;
- explain what potential problems are there for countries which follow easy ISI with difficult ISI, thus skipping the export substitution stage of transformation;
- clarify the importance of the easy export substitution stage of industrial transformation as a means to absorb labor from less productive sectors, particularly agriculture.
- explain how the East Asian economies were able to avoid unproductive rent-seeking by industrialists interested in earning above-normal profits who may have wanted to extend infant industry protection via the payment of bribes to government officials while the Latin American economies seemed unable to avoid such costs
A Comparison of East Asian and Latin American Countries Approaches To Industrialization
East Asian Approach to Industrialization
The East Asian countries have been successful compared to Latin American countries because of the stages they have followed for industrial transformation. The main steps of industrial transformation for East Asian countries begins with the first industrial stage of easy import substitution industrialization (ISI). Easy ISI is the policy of restructuring peripheral economies towards the domestic market in order to speed up industrialization. (Klimina 2014) It involves identifying imports which can be substituted by domestic production in favor of relatively simple, non-durable manufactured goods for the domestic market. (Klimina 2014)
The next stage for the Asian countries was the adoption of easy export substitution. Easy export substitution is a new export strategy that emphasized labor-intensive manufacturing of non-durable goods for both domestic and foreign consumption to replace and substitute traditional primary exports. (Klimina 2014) The goal is for easy ISI manufactured exports to eventually take the place of primary product exports.
This then leads to the next stage of industrialization; difficult import substitution industrialization. Difficult ISI is a transfer during easy ISI toward a growing proportion of intermediate and capital goods while non-durable consumer goods imports are progressively replaced by domestic production of those commodities. (Klimina 2014)
This deepens the domestic industrialization processes by extending import substitution backward into the domestic production of durable consumption goods (motor cars), intermediate goods (such as tires and batteries), and capital goods (car body stamping machines. (Klimina 2014) This order of preference is the optimal industrialization strategy and is why Asian economies have been so successful when compared to Latin America countries.
Latin American Approach to Industrialization
Latin America countries took a different order to this industrial transformation. Latin America countries began with easy ISI just like the East Asian countries. However, they skipped the crucial step of export substitution and dived prematurely into difficult ISI.
What is meant by saying that the Latin America countries prematurely transitioned into difficult ISI is that their export income was still heavily dependent on primary products which grew very slow and typically only by increasing the quantity of exports. This is then contrasted with the Asian countries who entered difficult ISI maturely because easy export substitution created less of a dependence on primary product exports and more so on ISI manufactured exports which could generate export income.
Many of the Latin American countries then proceeded by pursuing export promotion after the difficult ISI stages. This then forced the Latin America countries to pursue export substitution to recover from their skipped stages of industrial transformation.
Problems with Skipping the Export Substitution Stage of Transformation
There are many potential problems posed to countries which have followed easy ISI directly with difficult ISI, in the process skipping the crucial export substitution stage of transformation. There are three main problems posed by this;
- the sacrifice of viable entrepreneurial skills,
- insufficient labor absorption,
- and high social costs
Problem: The Sacrifice of Viable Entrepreneurial Skills
The sacrifice of viable entrepreneurial skills arises because countries which have entered the difficult phase of ISI directly following easy ISI stage, have done so by promoting multinational investment within their borders. (Cypher 2014) This led to the local capitalist class becoming more closed off in the production process during difficult ISI.
These MNCs then become the holders of the technology and expertise needed for the manufacturing of goods consistent with the difficult ISI stage. This shifts the focus of power away from the still emerging class of domestic entrepreneurs who had been nurtured by the easy ISI strategy. (Cypher 2014) Moving directly from easy ISI to difficult ISI ended up acting as a counter-intuitive industrial development strategy because the local capitalist class was not ready to produce the goods required to be provided during difficult ISI. They had lacked both contacts within the international economy and the technological proficiency necessary to compete.
The lack of technical skill arises because the industries were not forced to be efficient and competitive because of infant industry protections. Overall, The dependence of MNC investments as principle agents in producing during the difficult ISI stage made the learning process more difficult for local producers, who found themselves closed off in the production process. (Cypher 2014) Another problem posed, and also which illustrates why export promotion is necessary, is the inefficient labor absorption associated with the Latin America countries policy of difficult ISI.
The insufficient labor absorption problem arises because difficult ISI is more capital intensive than traditional labour intensive easy ISI or export substitution. Export substitution changes the fundamental underlying structure of production and puts less emphasis on traditional agriculture and more on labor-using manufacturing that might absorb the surplus labor in urban centers. (Cypher 2014) With the premature enactment of difficult ISI, skipping export promotion, many migrants came to seek the higher wages associated with such capital intensive production.
However, many fail to find work in these sectors because the growth of employment tends to be limited because labor requirements are low. This then pushes them into the urban informal sectors which is characterized by low productivity and income.
The overall problem is that by skipping the export promotion stage makes it difficult to accommodate workers from the countryside because of lack of employment associated with such capital intensive production. Excess labor was more easily absorbed by the labour-intensive nature of non-durable consumers good produced in East Asia, as opposed to capital goods produced in Latin America. (Cypher 2014)
There is also the problem associated with skipping export promotion and diving directly into difficult ISI; the social costs involved with such actions, however, this will be for another discussion.
EAST ASIAN Success: The AVOIDANCE OF UNPRODUCTIVE- RENT SEEKING INDUSTRIALISTS
East Asian countries were successfully able to avoid unproductive rent-seeking industrialists interested in earning above-normal profits, and who would act to extend infant industry protection. This is because the pressures to conform to [East Asian] government policy by the private sector was immense, and at the same time, this persuasion by government ensured that private decision-makers goals tended to be consistent with those of the overall development strategy. (Cypher 2014)
East Asian countries were able to succeed through their performance-based allocation system termed “contests”. To “win” a contest, a firm had to meet the performance standards (rules) set by the governments (referee) if there was any hope for the reward of above average profits. (Cypher 2014) One rule was sustained export performance. This was was the idea to force firms, as a condition of obtaining special access to credit or tax benefits or exclusive licenses to produce something, to become and remain internationally competitive as revealed by their ability to export manufactured goods. (Cypher 2014)
In this system then, above-normal economic profits were the reward for excellent performance and the competition between firms was able to reduce the ability to earn above-normal returns and monopoly profits via bribery and other unproductive activates such as rent-seeking. East Asian policy makers chose the high path of improving the quality of production methods and its factor inputs as the means to reduce costs and compete internationally, rather than relying on the low path of holding costs down by keeping wages low as other less-developed countries have so often tried to do. (Cypher 2014) This, however, wasn’t the only reason that Asian economies were able to avoid unproductive rent-seeking activities.
East Asian countries lacked a natural resource base as opposed to many Latin America countries. The vast natural resource base, given the particular institutional barriers to change (namely, corruption) that prevailed in Latin America and India, actually hindered the transition to the more optimal path of export substitution. (Klimina 2014) Lacking a natural resource base, the East Asian economies were forced to confront the urgency of maintaining and increasing foreign exchange earnings if the growth of domestic industry was to be sustained, and it seemed that the only means for doing so was to find new exports, specifically manufactured exports. (Cypher 2014)
This reduced the incentive to extend infant industry protection via bribes to government officials because it was necessary for growth for their economies because they lacked the natural resources to generate foreign earning through primary exports. Another factor as to why Asian economies were able to avoid unproductive rent-seeking activities is because of their land distribution and ownership patterns.
While land distribution and ownership patterns have changed very little in this century in most Latin America countries and South Asia, in East Asia, fundamental agrarian reforms were imposed after the Second World War. (Cypher 2014) The previously landed classes had been removed from their elite status and thus Asian groups did not have to concern themselves with encrusted habits and strong vested interest groups that may oppose the replacement and substitution of primary product commodity exports with manufactured good exports from the easy ISI industries. (Cypher 2014) Because of the East Asian countries lack of a natural resource base, their performance-based system, and their elimination of an elite class that would oppose the replacement of primary exports, East Asian countries were able to prevail over the Latin America countries and mitigate unproductive rent-seeking activates.
Cypher, James. The Process of Economic Development : Fourth Edition. Routledge, 2014. 1136168273, 9781136168277. http://www.palermo.edu/Archivos_content/2015/derecho/pobreza_multidimensional/bibliografia/Biblio_adic1.pdf
Klimina , Anna. Econ 270, Lecture 8. lecture., University of Saskatchewan.