4. A Comparison of Industrial Policies in Singapore
4.8. The Influence of International Political Economy
International political economy played a deterministic role in the imple- mentation of industrial policies. Taiwanese state did not experience that much pressure from the United States while Japan and Korea have always had trade frictions with the United States. Japan, Korea, and Taiwan were all under pressure by the United States after the mid-1970s due to wors- ening American trade balance against these three countries. Although state intervention in Taiwan was of a much higher degree in Taiwan, the United States did not criticize Taiwan as harshly as Korea. It is argued else- where that Taiwan’s lack of mass productive capacity in the new high- technology industries in the 1970s was one reason for this difference (Li, 1988; Hong, 1997). In Korea, on the other hand, production activities in the new high-technology industries were concentrated in the chaebol which had a large productive capacity and therefore they were the main com- petitors of American high-technology producers. In addition, another reason why Korea was criticized by the United States was that most of the high- technology industries in Korea were created almost from zero and the gov- ernment was imposing several controls on foreign investors, such as limits on foreign share in joint ventures and compulsory technology transfer to domestic firms. Due to the mass production capacity installed in chaebol plants, high-technology industries grew rapidly in Korea. In consequence, the United States exerted pressure on Korea especially in semiconductors trade and Korea faced several trade frictionsvis-à-visthe United States. This came at a time when the United States had similar problems in trade of auto- mobiles and some other technology-intensive products with the Japanese firms (Shinohara, 1982).
Singapore, however, did not face such trade frictions because of its rel- atively small influence on the worsening trade balance of the United States.
Even though the exports of high-technology products from Singapore to the United States have been increasing since the 1980s, the American firms that were settled in Singapore accounted for a substantial portion of them.
Therefore, due to high degree of foreign content in exports, Singapore saved herself from serious trade conflicts with the United States.
In addition to trade frictions, the attitudes of the international financial institutions and the international capital towards industrial policies in East Asia are also of great importance. Both the International Monetary Fund and the World Bank were in favor of the relief of state controls over the economy in developing countries especially after the mid-1970s. At the same time, the MNCs were demanding the opening up of the markets in developing economies because profitability in advanced countries was on the decline. Although they had some common interests with the govern- ments in the East Asian latecomers, especially in technology transfer, their interests opposed with the developmentalist government policies most of the time. International organizations also insisted on more free trade and more free investment and capital movements after the mid-1970s. Parallel to these developments in the international economy, the importance of industrial policies declined due to the pressure from advanced countries. To illustrate this point, Freyet al. (1987) conducted a survey on 900 economists in five advanced countries (Austria, France, Germany, Switzerland, and the United States) and found that the belief in the price system and market mechanism was the central aspect of the consensus among economists at around this time. These economists also supported free trade. Japan, Korea, and Taiwan responded to such calls with deregulation of domestic markets. Singapore, on the other hand, chose to retain the heavy presence of the government in the economy and went on to combine free trade with government interven- tions. As explained in Chapter 3, the government rather acted pragmatically by responding to changes in the global economic conditions.
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CHAPTER 5
LABOR PRODUCTIVITY AND LABOR REALLOCATION: THE SINGAPORE CASE
In the first part of the book, a descriptive analysis of the industrial policies in East Asia was provided. In the second part, we will empirically analyze the impact of the changes in industrial policies on the performance of the economy and its sectors. Since industrial policies are involved mainly with the development of certain manufacturing industries, the emphasis will be on manufacturing industries, especially the promoted ones. However, we do not ignore services sectors as the financial and business services sector in Singapore was deemed as an engine of growth by the government.
Therefore, a wide range of sectors and industries is selected.
In the empirical analyses, we have used two steps. In the first step, the allocation of resources and their impact on the economy is investigated through an examination of the changes in productivity growth they induced.
In the second step, the impacts of policy shocks are examined using a com- putable general equilibrium model.
The first of these analyses is undertaken in Chapters 5 and 6. While Chapter 5 discusses the impact of labor reallocations and the government’s changing labor market policies on labor productivity, Chapter 6 carries it one step further to include TFP growth and reallocation of productive inputs (capital and labor). Special emphasis is placed on specific manufacturing industries promoted under industrial policies.
During the course of industrial development in the EastAsian economies, there were changes in both output and input structures. One expects resource allocation to be optimal to maintain international competitiveness. This makes it crucial to investigate the impact of changes in the input and output structures, especially regarding those promoted manufacturing industries.
The question to ask is in what direction and magnitude the allocation of resources contributed to the industrial growth and productivity. This
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question is especially important for policymakers because diversions from optimal structure incur costs not only for the relevant promoted industries, but also for the society as a whole as they influence the growth and devel- opment path of the economy. In fact, productivity was emphasized in all reports of the committees in Singapore that were established to draw recom- mendations to help the economy out of distress in uneasy times. In addition, wage increases are usually linked to increases in productivity.
In this chapter, we start with labor productivity growth with an appli- cation on Singapore. The uniqueness of Singapore in East Asia with respect to the style of industrial policies forces us to emphasize its experience and then compare it with the others. A comparison of Singapore with the rest of the East Asia is made in Chapter 7. The performance of the economy is evaluated for different periods characterized by specific industrial policies.
The impact of intersectoral reallocations of labor on aggregate labor pro- ductivity is investigated by linking it with labor market policies of the government. Previously, Lim and Lee (2002) found that labor productivity accounts for 78 percent of per capita real output growth rate whereas the increase in employment ratio accounts for the remaining 22 percent for the period 1974–1999. The increase in the employment ratio stems largely from increasing labor force participation ratio for female population. Increasing labor force participation rate was important only during the early phases of industrial development. Once the limits to the expansion of labor force are reached, then the only alternative is improving labor productivity. In this respect, transfer of labor across sectors may be an important source of productivity. Labor can be shifted from less productive to more productive industries and this may help in improving the aggregate productivity.1
MTI (2001) is another comprehensive study on labor productivity per- formance of Singapore for the period 1985–2000 with a decomposition analysis using the same methodology employed in this study. It was found that highly open sectors such as manufacturing had high labor produc- tivity growth rates and domestic-oriented services sectors had low growth rates, i.e., those sectors exposed to international competition succeeded in ensuring productivity gains. In addition, it was found that the predominant
1In economies with substantially large agricultural sector, a shift of labor from agriculture to manufacturing is an example.