south east asia development 3a ppt

Motives for industrialization Modernization, technology transfer  Diversification Less reliance on season/climate Less price risk – manufacturing prices are stable Less dependence o

3a Industrialization and

industrial policy

1

 Rationales for industrialization

 SEA industrialization patterns

 Industrial promotion policies, esp tariffs

 Effects of a tariff on industry growth, welfare and distribution

2

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

3

Why so much variation in industriztn and employment rates and patterns among apparently similar economies?

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

dividend

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

7

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 Q1 Q2 Q3 Q4

p*(1+t)

p*

S

D

a b c d

• 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/$)

E0

E1

F1 F0

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:

10

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

11

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

12

Dynamics: growth implications of protection

Does inward orientation have long-run effects on

growth?

in other sectors?

Incentives & opportunities for rent-seeking (infant industries fail to grow)

Investment follows rents rather than seeking

efficient opportunities …

13

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?

14

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?

15

Demand side (product markets)

thru higher prices

(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

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)

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

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

grow successfully without protection?

18