The role of government in the industrialisation of Taiwan and Korea in the 1980s

Abstract

Since the early 1980s the established neoclassical economic interpretation of the role of government in East Asian industrialisation has been challenged on two fronts. The first - the new trade theory - purports to show how a country that promotes industries characterised by external economies of a particular kind can help shift its pattern of comparative advantage in a manner that can accelerate economic growth. External economies, it is asserted, are most conspicuous in technology-intensive industries. The second - the governed market model - contends that the state in East Asia (especially Taiwan and Korea) anticipated shifts in comparative advantage and intervened aggressively to develop new export industries. This study uses quantitative techniques to assess the question of whether industrial policy interventions were a necessary or major factor explaining Taiwan's industrialisation during the 1980s. Taiwan's adoption in the early 1980s of a 'strategic industry policy' focusing on high technology industries provides the focal point to test the hypotheses presented by the competing explanations. Of particular interest is whether Taiwan necessarily displays the characteristics presumed to fit the new trade and governed market model. While most of the analysis focuses on Taiwan, the Korean experience is drawn upon for additional insights. The first part of the analysis is directed to measuring the structure of incentives to Taiwan industry. The incentive structure in the early 1980s is found to be neutral in the sense that it did not discriminate amongst industrial activities. By the late 1980s this had changed. However, departures from neutrality are found not to be associated with industries characterised by increasing export specialisation and by implication comparative advantage. The second part of the analysis focuses on determining whether there is a relationship between industry policy interventions and comparative advantage. No distinct tendency is found for the designated 'strategic industries' to exhibit increasing export specialisation following the introduction of the strategic industry policy. Indeed, a number of industries are found to have already possessed relatively strong export specialisation prior to the introduction of the policy. Cross-sectional regression analysis is then used to establish the determinants of incentives. Such an approach is useful because the competing explanations employ the same set of observable industry structural characteristics but make opposite predictions about their association with comparative advantage. The empirical results strongly contradict the predictions of the governed market model and new trade model that the incentive structure was designed for industries with an increasing comparative advantage. Instead, the incentive structure during the 1980s is found to have discriminated in favour of industries characterised by a declining comparative advantage. Some of the strongest results in support of this conclusion are those indicating a negative association between the incentive structure and indicators of export growth and technology-intensity. The issue of whether there is a relationship between the incentive structure and the rate of growth in total factor productivity is also examined. This is a critical test of the argument that judicious encouragement of the right 'infant industries' accelerated growth. Interventions are found not to have had a pronounced impact on the sectoral evolution of the industrial structure. In raising the question of what generated Taiwan's industrial growth over this period, it is suggested that the attributes associated with strong outward-orientation largely explains high productivity growth. This adds support to similar studies showing a positive relationship between productivity differentials among industries and export-orientation.