An East Asian Model for Latin American Success (The International Political Economy of New Regionalisms Series)

The International Political Economy of

An East Asian Model for

New Regionalisms Series

Latin American Success The New Path

The International PolWcal Economy o/New Regionalisms Series presents innovative analyses of a range of novel regional relations and institutions. Going beyond established, formal, interstate economic organizations, this essential series provides informed interdisciplinary and international research and debate about myriad heterogeneous intermediate level interactions. Ref ective of its cosmopolitan and creative orientation, this series is developed by an international editorial team of established and emerging scholars in both the South and North. I t reinforces ongoing networks of analysts in both academia and think-tanks as well as international agencies concerned with micro-, meso- and macro-level regionalisms. Editorial Board

ANILHIRA Simon Fraser University, Canada

Timothy M. Shaw, Royal Roads University, Victoria, BC, Canada Isidro Morales, Universidad de las Americas, Puebla, Mexico Maria Nzomo, Embassy of Kenya, Zimbabwe Nicola Phillips, University of Manchester, U K Johan Saravanamuttu, Science University of Malaysia, Malaysia Fredrik SOderbaum, Goteborg Universitet, Sweden Recent titles in the series

Regional Integration and Poverty Edited by Dirk Willem te Velde and the Overseas Development Institute

Redefining the Pacif c? Regionalism Past, Present and Future Edited by Jenny Bryant-Tokalau and Ian Frazer

The Limits of Regionalism NAFTA's Labour Accord Robert G. Finbow

European Union and New Regionalism Regional Actors and Global Governance in a Post-Hegemonic Era Second Edition Edited by Mario TeM

ASHGATE

Contents

Ani! Hira 2007 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior pennission of the publisher. Anil Hira has asserted his moral right under the Copyright, Designs and Patents Act, 1 988, to be identified as the author of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hampshire GU l l 3HR England

Ashgate Publishing Company Suite 420 1 0 1 Cherry Street Burlington, VT 0540 1 -4405 USA

Hira, Ani! An East Asian model for Latin American success: the new path. (the international political economy of new regionalisms series) I. Industrial promotion Latin America 2. Industrial promotion - East Asia 3. Industrial policy Latin America 4. Industrial policy - East Asia 5. Latin America Economic policy 6. East Asia Economic policy

2

Why an Active Industrial Policy is Needed for Development

29

3

Industrial Policy Lessons for Latin America from East Asia

53

4

Lessons from the Rise of China: The Continuing Relevance of the East Asian Model for Latin American Industrial Policy

87

Sectoral and Political Foundations for a New I ndustrial Policy Path for Latin America

1 03

Putting Institutions and Sectoral Policy to Work: Lessons from Success Stories in East Asia and Latin America

13 1

5

6

I. Title

338.9'8 Library of Congress Cataloging-in-Publication Data

Hira, Ani\' An East Asian model for Latin American success: the new path / by Ani! Hira. p. cm. -- (International political economy of new regionalisms series) Includes bibliographical references and index. ISBN 978-0-7546-7 1 08-4 I . Industrial promotion--Latin America. 2. Industrial policy--Latin America. 3 . Latin America--Economic policy. 4 . Industrial promotion--East Asia. 5. Industrial policy--East Asia. 6. East Asia--Economic policy. I. Title. HC 1 30.I53H57 2007 338.98--dc22 200701 4527

,

vi ix xxi x.xiii

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

British Library Cataloguing in Publication Data

Printed and bound in Great Britain by MPO Books Ltd. Bodmin. Cornwal l

List ofFigures and Tables Preface Acknowledgements List ofAcronyms

Bibliography Index

1 59 181

List Figures and Tables

Figures

5.1

Key Relationships for a true IP

1 19

Tables

3.5 3.6 3.7 3.8 3.9 3.10 3. 1 1 3.12 3.13

U S economic and military assistance and defense expenditures abroad, 1 95 0-73 GDP per capita, totals and growth, 1 9 1 3-98 Employment in LA and EA, % of population, 1 950-98 Percent growth in value of merchandise exports at constant prices 1 870- 1 998 Openness, % of GDP per capita, 1 950-2000 Gross national savings (% of GNI) inflation Debt, 1 990-200 1 FDI in LA vs. EA Countries Overall central government deficit/surplus Tax revenue source as a % o ftotal revenue Government expenditures by function Interest rates and business environment Comparing standards of living and inequality i n E A and L A

4.1 4.2 4.3 4.4

Comparing long-run economic performance: China's amazing spurt Comparison of FDI inf ows for various developing countries Share of state-owned banks, 1 998 Average annual growth in tax revenue in China, 1 994-1 999

88 89 93 96

5.1 5.2 5.3a 5.3b 5 .4 5.5 5.6 5.7 5.8

Structure of output (value added % of GDP, 200 1 ) Comparing manufacturing in LA vs. EA, 1 995 Comparing sectoral production mix in EA and LA by output, 1 995 Comparing sectoral production mix in EA and LA by output, 1 995 Sectoral production mix by number of employees, 1 995 Key exports and i mports, EA vs. LA Innovation in EA vs. LA Rank order of leading US manufacturing sectors, 1 997 The most important frms in the world

1 05 1 06 1 07 1 08 1 09 1 10 1 12 1 16 118

3.1 3 .2 3.3 3.4

60 72 74 74 75 75 76 78 81 81 82 83 84

xx

An East Asian Modelfor Latin American Success

nationalization, or relying solely on the newer proposals of regional autonomy and self-sufficient agriculture. Nor does it require the cross the fingers hope that macroeconomic stability will lead eventually to some benefits for the impoverished majority. I offer a plan for developing both growth and equity simultaneously and expect that the idea itself can help us to overcome political divisions. History shows the power of ideas to move political mountains and to inspire generations to move forward. While my focus is on industrialization policies that are closer to the BRIC (Brazil, Russia, India, and China) model of using large domestic markets to spur competitive nations, I also present a variant on the strategy that is closer to smaller developing economies. In the former case, a direct approach towards fomenting sectors is helpful, while in the latter a flexible niche strategy is more appropriate. We review both strategies in detail in our discussions of China as the l arge market case and Taiwan, Singapore and Costa Rica as the small market cases. We turn then to a serious discussion on how to win the political battle for pushing LA to adopt an EA model. We close with policy recommendations for both the state and the private sector, using success stories from both regions.

Acknowledgements

Academics, contrary to graduate school perceptions, is strongly geared against innovative thinking. My former professor, David Arase, helped to introduce me to the East Asian l iterature, opening up a door to new ideas for which I am forever grateful. Though I had thought about this project for a long time, and worked through it for a number of years, it was an uphill battle to bring it to fruition. One prospective publisher even told me at one point to give up. But I suppose it is dogged faith in the possibilities of ideas, more than anything else, that allowed me to continue the effort. Several anonymous reviewers, some encouraging, some not, were very helpfu l in pushing the arguments forward through its multiple versions. However, the proj ect would not have come to fruition without the support of the managing editor, Kirstin Howgate at Ashgate, and the series editor, Tim Shaw, who "had a little faith in me." The latter suggested adding the f nal ehapter and gave strong encouragement throughout the intensive editing process. I am very fortunate to have his guidance. The stable and encouraging environment that Simon Fraser University and my colleagues in the Political Science Department create has allowed me to move forward on bold propositional projects such as this one. I would l ike to thank my colleagues who read all or parts of the manuscript, Tsuyoshi Kawasaki, Mike Howlett, Paul Haslam, and Gerardo Otero. Three reviewers deserve special recognition for their painstaking review that allowed small changes to lead to l arge improvements: Ron Hira, Richard Lipsey, and Kathryn Lavelle. My partner, Patricia, was dedicated as al ways in the fumes of the marathon, helping not only with moral support but also in preparing the final drafts.

List of Acronyms

BRIC EA EOI FDT IDB IP lSI 1S12 LA MITI MNCs SOE

Brazil, Russia, India, and China East Asia Export Oriented I ndustrialization Foreign Direct Investment I nter-American Development Bank industrial policy I mport Substituting Industrialization l S I of capital and economies of scale intensive goods, such as durables Latin America Ministry of I nternational Trade and I ndustry (Japan) Multinational Corporations State Owned Enterprise

Chapter 1

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy This book is dedicated to Patricia, a true angel who taught me everything I need to know. Introduction

In the preface, we discussed the problems with the implicit foundations of the predominant approaches to LA development. Building upon the oldest story in the world, that of conspiratorial fate, the Left focuses on emotion-based critique, pointing out that misery must have some blame. As we have seen, the problem with this approach is not only is it non-productive, but it also glosses over many of the complications inherent in the LA landscape. For example, as I have pointed out elsewhere (Hira 1 998), a class - and/or imperialist-based analysis not only begs the question of the haphazard nature of rebellion (leading to bringing in exogenous variables such as control through ideology), but also misses the multi-faceted aspects of individual and group identity, such as religion, race, gender, ethnicity and geography as well as the wide variety of possible reaction-interactions over time and space. On the Right, the glib faith that the only thing that matters is individual maximization of economic goods also not only misses the rich social context of development, but the fact that other goals such as domestic equity and a sense of place may also affect behavior. This leaves us with the last predominant approach of the literature, namely that of policy analysts. This group, including primarily economists in state institutions, multilateral development banks, and think tanks, is by far the most influential in setting policy, matching resources with supposed dominance by way of "scientif c" expertise and privileged access to policymakers. This group creates barriers from conversing with others through its insistence that mathematically-based economic models are the only sensible way to discuss policy issues. The end result is incredibly sophisticated ways of refecting the problems that exist, such as fscal imbalances' effects on growth, but no attempt to answer why or how such problems can be fxed, and certainly no sense of evaluating or assigning responsibility to agency, that is the decisions people choose to make. I The problem of exclusion by this group hit home to me when I had the good fortune to be invited by a multilateral development bank to give a paper I had 1 For examples, see Norman Loayza, Pablo Fajnzyl ber, and Cesar Calderon, Economic Growth in Latin America and the Caribbean: Stylized Facts, Explanations, and Forecasts, Washington: World 8ank, 2005; Andres Solimano, ed., Vanil'hlng Growth in Latin America: The Late Twentieth Century Experience, Northampton, MA: Edward Elgar, 2006.

An East Asian Modelfor Latin American Success

2

prepared on why the FTAA (Free Trade Agreement of the Americas) was going to fail on the basis of international relations bargaining theory. My discussant, an economist from the region, stated that no commentary could be given since "there was no regression model" in the paper. As I sat through paper after paper at the conference of economic modeling I could not help but ask one of the experts what the public policy implications of his work were. There seemed to be no clear answer to this question, nor could 1 find a "recommendations" section at the end of most papers. To be sure, the mainstream economists who are the dominant policy advisors have had to respond to the problem of contextualizing economic policies. The initial blindness of the effects of structural adjustment policies on the poor was just one of a series of criticisms (again without suggestions for f xing fiscal problems and other vulnerabilities that led to the imposition of such policies) that have pointed this weakness out. While the World Bank and its regional counterparts have now discovered that good governance and institutions might indeed matter, at least insofar as recognizing the importance of transactions costs,2 they have largely ignored the work of a rich emerging vein of political economy scholars who have been dealing with these problems in a way that pro-actively considers policy and political context in making recommendations (see Tendler 1 997 for example). This work builds upon emerging work in that vein by cross-fertilizing the literature from two regions, EA and LA, with historical, policy-oriented, and statistical analysis.3 The problem again seems to center around the fact that economists are uncomfortable with the lack of a unifying theory of political and social change. More importantly, by defnition as either multilateral institutions or as "neutral" policy advisors their mandate forces them to shy away from any direct political stance. Thus the policy advice of the supposed optimality of a theoretical free market remains at the most general level, progressing to an attempt to "count" the economic costs of red tape and corruption on the otherwise theoretically well-functioning market-based economy. The end result of both class-based analysis and the optimality of markets as the ultimate basis of analysis is that they squeeze out the wide variation and richness of historical experience, thus creating blinders to the huge variety of possibilities. My contention here is that understanding the historical context of the problem is the essential starting point for a solution-oriented empirical analysis. Therefore, 2 Most of the new work espouses a 2nd generation of reforms for neoliberalism, downplaying the shortcomings and conflicts unresolved by such policies. See, for example, Inter-American Development Bank, The Politics of Policies: Economic and Social Progress in Latin A merica 2006 Report, Washington: Inter-American Development Bank, which takes a pure rules-based view of politics, and Pedro-Pablo Kuczynski and John Williamson, After the Washington Consensus: Restarting Growth andReform in Latin America, Washington: Institute for Intemational Economics, 2003, which takes the usual recipe approach of recommending what policy reforms need to happen for the market to function efficiently. As Chang points out, institutions in the North have evolved historically, through a mix of necessity, confict, . opportunities, and policy decision-making. See Ha-Joon Chang, "Institutional Development in Historical Perspective," 499-521 in Chang, ed., rethinking development economics, London: Anthem, 2003. 3 Recent work by Sanjaya Lall and Ha Joon Chang argue along somewhat similar lines to my own efforts for industrial promotion, though they are not applied specifica ll y to Latin America See bibliography for relevant citations from these authors. .

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

3

before getting to a direct argument of how a "new path" to equity and growth could be found in Latin America, we must f rst demonstrate the overall feasibility of change in historical context. In this chapter, I build upon the ideas approach to Latin American economic history that I have suggested elsewhere in order to demonstrate two key planks of this foundational argument.4 First, I wish to show that ideas have had the ability to influence economic decision-making throughout Latin American history.5 Second, I endeavor to demonstrate that the Latin American state has always been the key actor in economic decision-making (for background discussion see Vellinga 1 998). Third, I begin the argument, which I f nish in the fnal chapter, that the timing and politics currently in LA lend themselves to a paradigm shift in the EA direction I am proposing. This means that a move towards an EA-style development model is not only time ly, but eminently possible, once the battle of ideas is won. Hopeful ly, this book will be a f rst salvo in that battle. The foundation of my own approach to explaining Latin American political economy lies in building my policy-oriented decision-making framework upon the "historical-structural" approach laid out 30 some years ago by Fernando Henrique Cardoso and Enzo Faletto (Cardoso and Faletto 1 979). The basic idea behind this approach is to look at the importance of historical relationships and circumstances in constraining and promoting certain types of economic decisi0ns. By structures, I refer here to sets of relationships among powerful pol itical actors, as well as norms and ideas about acceptable behavior and shared goals that are embedded in a culture. "Structures" guide but do not determine behavior. Structures are multi-layered, and include actors, ideas, and norms at the international, regional, domestic, and! or local level. In short, structures are relationships between important entities that seem to have some lasting value and staying power. Practical ly speaking, structures are always changing, both in evolutionary and revolutionary terms. In any given structure, moreover, there are multiple possibil ities for achieving an equilibrium (stable situation) among the different powerful actors. Similarly, while the Cardoso and Faletto approach implies "path dependency," in the sense that historical patterns tend to have a staying power, by no means does history determine decisions. Ifanything, I would argue that the array ofchoices always available is vastly underestimated because ofthe cognitive "semi-blindness" that the sway of a particularly strong set of ideas has in different historical periods. One example is the academic literature that arose in the 1 960s surrounding "bureaucratic authoritarianism" in Latin America. This literature was created in the wake of a series of military takeovers of democratic governments throughout Latin America. In general, the literature linked the military takeovers to an economic growth crisis in 4 Parts of this chapter are adapted from my unpublished dissertation, "Ideas and Political Economy in Latin America," PhD. Political Science, Claremont Graduate University, Califomia, 1997. The best general economic history is found in Rosemary Thorp, Progress, Poverty, and Exclusion: An Economic History of Latin America in the 20'h Century,

Washington: Johns Hopkins University Press, 1998. 5 I avoid conducting an extensive literature review here in order to save space. However, I have included a number ofthe most important books on the topic in the bibliography. A broad review of ideas and ideologies in LA is found in Leslie Bethe ll, ed., Ideas and ideologies in twentieth century Latin America, New York: Cambridge Universi ty Press, 1996.

4

An East Asian Modelfor Latin A merican Success

the region, partly by relating the need to suppress skilled wages in order to improve trade and savings balances. Both this and the related literature on authoritarianism that emerged at the time were strongly pessimistic about the chances for restoring democracy in the short-run. In fact, the literature underplayed the political factors of anti-Communism, which was a key motivator behind the coups (the military seeking to restore power relationships). The revival of democracy in the region throughout the 1 9808 and 1 9908 was as surprising to many Latin American specialists and policymakers as the "fall" ofthe Soviet Union was to international relations theorists. The point is that the operating ideas about the region, which worked in synergy with the policies adopted and political developments, were much more controlling of the possibilities for action than was realized at the time. Ideas and cultural values are perhaps the most underestimated factors in explaining economic decision making. They do not f t neatly into any economics framework, yet they are transcendent in explaining not only why some policy choices are made at certain times, but also the general traj ectory of policy choices over long periods oftime. Moreover, as we explained in the preface, neoliberalism is currently confronting a major crisis so the timing i s right for a paradigm change in the region. Nonetheless, academics tend to be very skeptical about the power of ideas much of social science work is based on more easily followed interests and constraints related to the use of coercion and/or allocation of resources. There is therefore a general under-appreciation for how ideas can shape coercive and allocation-based decisions. It is absolutely vital, therefore, to make the case that ideas can make a di lerence in order to argue that the set of ideas the follow in this book can change Latin American economic policies. Structure, Actors, and Discourse: Three Frameworksfor Explaining Latin American Economic Ideas

In order to understand how ideas affect economic policy, we need to move beyond merely stating the content of the ideas and explain exactly how and why certain ideas became i mportant at certain times, and the exact ways in which they inf uence economic policy at the time. I n order to accomplish this task, I will buil d upon two frameworks that I developed in my previous work,6 adding a third and new framework for this project (rhetoric and interests). We can then apply these to Latin American history to set up the context for our enquiry as to how to move forward. How the Frameworks Work Together

An oversight of most social scientists, and perhaps the weakest point of theorizing in either the social or natural sciences, is the inability to incorporate multiple levels of analysis simultaneously. By multiple levels of analysis, I refer not only to the .spatial interaction of the international, domestic, and local levels, but also to the 6 Anil H ira, Ideas and Economic Policy in Latin America: Regional, National, and Organizational Perspectives. Westport: Greenwood, 1998. I n the book, I not only present the frameworks for how ideas atTect political economy. but apply them in detailed case studies to Latin America. Indonesia. and Egypt.

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

5

interweaving of one temporal period with another. To state it simply, it is easy to see that the past is involved in the present, if nothing else through shaping perceptions, and the future (possibilities) also figures into present decisions. I would add to this a third step of sophistication that we need to move forward in our understanding, that is, the interaction of ideas, culture, and political action. These three aspects are the source of the frameworks I propose here. Now, let's look at how each framework operates separately, and then we shal l review how they all fit together in more concrete terms in Latin American economic history. Framework 1:

Moving Beyond Economic Knowledge Networks

It goes without saying that ideas are important. Whil e we would not say that ideas are everything, since action also matters, without ideas, no actions would be purposeful or meaningful. Ideas, whether we are talking about general frameworks, such as monetarism, or specific questions, such as the value of a progressive tax system to social harmony, are the definers of the context, tool s and substance withOn) which pol itical action can take place. However, we also nced to concretize ideas into political action. In order to understand how ideas become policy, we need to iso late empirical referents, including actors and institutions that can act either for or against certain economic ideas. Ideas can exist as a casual conversation, an intellectual exercise, or a work of art, but when we are examining the nexus between ideas and pol icy, we wi l l look to the actors that create, promote, dissemi nate, and fight for or against certain sets or ideas in the policy arena.7 Ideas exist in every stratum of society, but the main conversations that matter to economic policy tend to be concentrated among an el ite set of actors. Economic policies are in and of themselves intricate, requiring an advaneed knowledge of macro and microeconomics. Moreover, unl ike social policy issues, such as abortion rights, economic policy decisions, particularly on the macroeconomic level, may seem more remote to the general popUlation. Lastly, when we think of the main institutions of econom ic policy in most countries these days, we think of large businesses or coalitions of businesses or unions that can lobby the govcrnment, and, more importantly, top-level government agencies. In general, the decision makers in these agencies, such as in central banks, tend to be relatively �

7 My perspective contrasts with approaches that focus on institutional arrangements, interest groups and/or technocrats (bureaucrats who are economic experts as the key sources of economic policy change in LA. For examples, see Kathryn Sikkink, Ideas and institutions: developmentalism in Brazil and Argentina, Ithaca: Cornell University Press, 1 99 1 ; Miguel Angel Centeno, Democracy Within Reason: Technocratic Revolution in Mexico, 2nd ed., University Park, PA: The Pennsylvania State University Press, 1 994; Eduardo Silva, The state and capital in Chile: business elites, technocrats, and market economics, Boulder: Westview, 1 996; Jorge I. Domingeuz, ed., Technopols: free politics and markets in Latin America in the 1990s, University Park, PA: Pennsylvania State University Press, 1 997; Veronica M ontecinos, Economists, Politics and the State: Chile 1958-1994, Amsterdam: CEDLA, 1 998; Miguel A. Centeno and Patricio Silva, The Politics of Expertise in Latin America, New York: St. Martin's Press, 1998; Glen Biglaiser. Guardians of the Nation? Economists, Generals, and Economic Refbrm in Latin America, N otre Dame: University of Notre Dame Press, 2002.

6

An East Asian Modelfor Latin American Success

insulated from direct reclamations from the public, absent crisis conditions.s Thus we can see that economic policy decisions are largely made by a network of public, private, and academic, and domestic and foreign actors who advise and influence political decision-makers. This is not to say that the public has nothing to say about economic ideas. We know from our own experience that in economic hard times, such as hyperinflation, people often mobilize for demonstrations in reaction against a perceived failure of government policy. Much rarer, however, i s a pro-active and well-organized message from the public at large. In collective action terms, the public as a whole is too diverse a group and the stakes of everyday economic policy action are perceived (mistakenly) as too remote from daily lives to warrant active political stances. The possible counter-argument that there are numerous citizens' advocacy groups lobbying for specific issues, such as consumer R ights, ignores the elitist nature of those efforts. That is, the efforts oflobbying groups are quite often one step removed from their general constituency, and carried on by staff members who live in a capital city, have upper-level educational credentials, and generally come from an above average class background. In Latin America, most well-organized non-governmental organizations (NGOs) usually depend upon funding from outside, primarily US or European funding. Perhaps a good way to differentiate this is to say that the public at large has "notions," or much more basic understandings and ideas about economic policy, than those close to decision makers. We therefore might find that our framework should be one that explains how elite groups affect economic policy action. I have set up a preliminary framework elsewhere (Hira 1 998) that makes a suggestion in this direction. The framework basically posits that "experts" are often well-organized into groups that share common principles and beliefs about economic policy. They help to justify and take responsibility for politicians' economic policy decisions, and so receive the support of political groups in return. They also help to articulate and formulate the recommendations of interest groups, such as large businesses, that have strong opinions on economic policy in terms of the national interest. In return for this service, they often receive financial support (directly or indirectly) from lobbying groups. I feel now that this framework, which I sketched out i n 1 998, may be a bit too limited to explain the variety of ways in which experts can influence economic policy. I think the framework works very well in many situations, such as Chile under General P inochet, or on certain issues in which the level of policy sophistication required is very high, such as the US Government effort to bail out the semiconductor industry in the 1 980s. However, as I will explain in Framework 3 below, the way that an economic issue is portrayed more widely, not just the sophistication of the ideas themselves, may be crucial in opening up the dialogue about policy to a wider audience.9 Thus, as Ravi Roy has pointed out, economic notions can be carried not only in elite 8 Interestingly, this very separation from everyday politics seems to have given economic experts a kind of "wizard-like" quality in which their unusually high-level expertise can guide the country out of its problems relatively easily. 9 Though I di sc ussed this level ofthe discourse in my pre v ious work, I w as unable for lack oftime and resources to fully explore it in the case studies. ,

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

7

economic knowledge networks, but also in situations of active political parties or public interest groups, by advocacy coalitions.lO These coalitions have a different type of conversation than the high-level sophisticated conversations that I have so far explored, but one that is i mportant to include in order to increase the scope of our analytical framework. We can broadly call these "ideas coalitions," for simplicity, though they are really ideas-interests coalitions. We will include this level of analysis in Framework 3, which I present below. Framework 2:

Historical-Ideological Periods

Experts in the guise of economic knowledge networks do not act in a vacuum. Rather, they work within an existing palette of widely accepted perspectives and "facts" that guide economic behavior. These perspectives inform the economic policy conversation or discourse about what a country's economic policy ought to be. The notion of a discourse in development policy, marked by distinct historical­ ideological periods, and Thomas Kuhn's framework of paradigmatic change can be used to understand how the ideological frameworks behind development policies change overtime. I I By using a discursive framework, we can explain the evolutionary trajectory as well as the ongoing dynamic of ideas over time and space. In some historical periods there may not be a government capable of setting an economic policy agenda, or there may such divisions among the population so that no one side can "win" the argument about which economic policy paradigm is best. By paradigm, I mean a certain perspective on economic policy that has a 1 0 This is the approach that one would have to take in devising a strategy for changing ideas on the national level - mapping out interest group coalitions and points of equilibria that mirror major changes in policy ideas, and then f nding the Right types of catalysts (for example media coverage, mass appeals, elite-level policy discussions, education, and so on) to move the ideas in this new direction. See Ravi K. Roy and Arthur Denzau, Fiscal Policy

Convergence from Reagan to Blair: the Left veers Right. New York: Routledge, 2004 for discussion of the advocacy coalition approach to ideas, which develops the approach outlined in Paul Sabatier's

Policy Change and Learning: An Advocacy Coalition Approach,

Boulder:

i n The Politics of Freeing Markets in Latin America: Chile, A rgentina, and Mexico, Chapel Hill, NC: University of North Carolina Press, 200 1 . See also Marcus 1. Kurtz, 'The boundaries Westview Press, 1993. Judith A. Teichman takes a similar policy networks approach

of Antipoverty Policy: Economic Ideas, Political Coalitions, and the Structure of Social

pp. 139-166 in Peter p. Houtzager and Mick Moore, cds., Changing Paths: International Development and the New Politics ofInclUSion, Ann Arbor: U. of Michigan Press, 2003. Promotion of neoliberal ideas, with strong value-laden assumptions,

Provision in Chile and Mexico,"

is not in some ways unlike emerging networks of social advocates who push a certain view of the world. For more on this, see Margaret E. Keck and Kathryn Sikkink, Activists beyond borders: A dvocacy networks in international politics, Ithaca: Comell University Press, 1998. 11 Thomas Kuhn, The Structure ofScientific RevolutiOns, Chicago: University of Chicago Press, 1962. The modem foundations for the application of ideas to economic policy are found in Peter Hall, Policy Paradigms, Social Learning, and the State: The Case of Economic Policymaking in Britain," Comparative Politics, 25,3 (Apr 1993): 275-96, and The Political Power of Economic Ideas: Keyneslanism A cross Nations. Princeton: Princeton University Press, 1989. "

8

An East Asian Model for Latin American Success

meta-level diagnosis of causes, effects, and opportunities that explain the current situation and future possibilities. For example, one school of Latin American thought, dependency, sees attempts by the developing world at cooperation with the First World as not only futile but counter-productive. Thus, the dependency paradigm set a context of inevitable exploitation that guided economic policy prescription by those in that camp and in strong opposition to the Latin American policies of Import Substituting Industrialization (lSI) during the l ate 1 960s and early 1 970s, which they correctly saw as simply changing the nature of the dependency. The problem, being, of course, that they offered no alternative. Development paradigms, whether neoliberalism or dependency, have tended to paint the world in stark conditions, perhaps exaggerating and over-simplifYing in order to push forward new action. We also find certain historical periods, on the other hand, that are marked by a stability among the interest groups, the politicians, and the expert groups. While the personnel may change in each of these groups, the policy outcomes remain the same because the essential relationships among the actors and the paradigms they share are stable. These hypothesized periods are called historical-ideological periods. Historical-ideological periods need not be limited to particular nations. Since development is an object of international study, it follows that it is an i nternational discourse, so that we f nd certain regional paradigms during given time periods, such as the period of the early 1 960s, when many African countries followed a type of state socialism while Latin American countries followed an import substituting industrialization paradigm. The notion of discourse implies constant change, though not necessarily progression. Kuhn's framework provides one important source of change, namely crisi s-driven change. In our examination of historical-ideological periods, we will see that Kuhn's idea that there is a paradigmatic cycle in which certain ideas become dominant and gain acceptance and, upon entering a crisis period, subsequently become susceptible to challenge from new paradigms, seems to fit many of the major changes in regional economic policy ideas for Latin America. However, unlike Kuhn, we are dealing here with the real world of political and economic i nterests and seemingly diverging perspectives. Therefore, we must link Framework 1 with Framework 2 by stating that the existence of a dominant economic paradigm in a particular time period speaks to the existence of a strong and stable alliance of an economic knowledge network, private interests, and politicians. During these periods of time, the more polarized aspects of the national-level d iscourse seem much less i mportant since a general consensus among those who control economic policy has been achieved. Still, there is always room for diverging interpretations of the paradigm itself and in the reaction to the results of policy decisions. Thus we can speak of a "mini-discourse" within these periods in which people who share the same fundamental paradigm argue about how best to implement it in the real world. Framework 3:

How Paradigms Move from Elite to Mass Levels During

Historical-Ideological Periods: The Relationship of Rhetoric and Interests

Thus far. we have seen that there is a symbioti c, multi-level rel ationship between the ideas coalition of experts-politicians-interests and the historical-ideological

Why Ideas and Slate Leadership are the Key Variables in Latin American Political Economy

9

period. However, we should not neglect the very important idea of legitimacy. By legitimacy, we mean whether the economic policies selected are considered to be the appropriate ones at the time by the public at large. The ideas coalition interacts with the public discourse in three fundamental ways. The f rst is that they seek both concrete and tacit support of their policy decisions. By support, we mean that important groups in society as well as the public-at-Iarge must be willing to make contributions in terms of paying taxes, complying with the new policies, and rallying their organizations' (for example, unions, citizens' groups) active efforts behind the economic plans. In terms of tacit support, we refer to the sense of the public, most prominently filtered through the media, that the economic plan as widely understood is the best one for the country at the time. The sense of the public is clearly reflected in public opinion polls, but there is also a general sense of the tone of the public discourse that is refected not only in the media, but in the daily conversations of the citizens. Economic policy affects every aspect of citizens' lives, from daily working conditions to the prices of groceries, so that every person really talks about economic policy on a daily basis without realizing it. In general, the public discourse does not play a pro-active role in the actual economic policy decisions, unless economic policies seem to prejudice long-held values or expectations, or fundamentally seem to fail. Thus, the second way that the public interacts with the ideas coalition is through manifestations, strikes, protests, and other ad hoc spontaneous communications of displeasure. Throughout Latin American history, there have been frequent strikes and work stoppages, with relative degrees of organization, that have disrupted the intentions of the predominant ideas coalition. These manifestations can happen at times of unexpected or unpreventable economic crisis that may have little to do with the economic policies at the time, such as when the US raised worldwide interest rates and commodity prices sank, forcing a huge downward adjustment by Venezuela in the early 1980s. They might also be directly linked to the economic policies being pursued, such as the recent spate of strikes against the privatization of water in Cochabamba, Bolivia in the early 1 990s. The point remains that the protestors generally do not understand the technical level of the issues - their world view, what they are reacting to and what they want are much more basic than those of policy planners. Thus, there is a natural conflict between those who react to the results of economic policy and those technicians who are trying to figure out how to solve the multiple trade-off.. of incredible complexity, high unpredictability and limited control in terms of the national economy and its relationship with the world economy. It i s no surprise, i n short, that conf ict persists i n LA both because marginal groups are momentaril y upsetting the power equilibrium and because these groups live i n a different world than those deciding policy. For such ongoing conflict to become a manifestation that forces a policy shift, the intensity of the adjustment or perception of injustice must be acute, and may take time to boil over. For example, in the recent Bolivian case, the privatization of the water system had already taken place. It was only when the price increases in the water, in combination with a host of unrelated pain-creating economic conditions occurred, did the momentum against privatization start to build in Bol ivia. We should remember that, in general, most people do not have the

10

An East Asian Modelfor Latin American Success

realization or the resources to become involved in economic policy making, and do not find readily available channels to do so, thus, only when they perceive a crisis on a personal level do they become involved. The perhaps most important, if subtle, way in which the ideas coalition interacts with the public is through what we might call rhetoric or propaganda. While these terms seem to portray a negative content, whether "spin control" is negative or positive depends on your view of the economic policies in question. Every ideas coalition spins its policies along the lines of the dominant values of the society to whom they are selling them. Thus, economic policies are usually portrayed as benefcial to the "national interest," fair to all groups, especially those who are more marginalized, and creating a system that is rational and "divorced from special interests." As our Frameworks 1 and 2 tell us, nothing could be farther from the truth in regard to economic policy! Every economic policy involves winners and losers, change and stasis, and ideas and interests. Thus, the trick of the "spin doctor," is not only a negative mission. It is always the case that a number of people in the ruling coalition believe sincerely in these ideas, and thus they try to convince both organized interests and the public of their conviction. Whether these people are "true believers" or "pragmatists," they play a very important role in passing on the nature, costs and

Why ldeas and State Leadership are the Key Variables in Latin A merican Political Economy I I Latin American Economy History Through the Three Frameworks

Introduction I make the argument in this chapter that the LA state has always been the predominant actor in development decision-making. The private sector has been too parasitic and too weak; labor unions even more so. Foreign actors have been dominant at times, yet the numerous acts of strong nationalism through LA economic history show that the strength of external forces is highly exaggerated, rather used as a scapegoat by LA elites who do not want to identify their interests with those of foreigners. Building upon my previous work, I synthesize the ideas-interest group configuration of each period of Latin American economic history using the following categories: general ideology of how an economy should run; the policy prescriptions which follow from that ideology; the perceived costs and benefits of different policy actions, such as whether welfare subsidies are beneficial in building up human capital or whether they throw off the ability to reach balanced fiscal budgets and reduce the incentives to work; the dominant interest groups, and the degree to which economic and political "leaders"

benefits of complex economic policies in a way that is generally understandable.

are insulated from them to be able to pursue national interests;

However, the way that policies are "sold" to the public often overshoots the truth

the crisis events leading to the breakup of the dominant ideas interest configuration;

in the sense that unrealistic expectations are set up for political reasons. Thus, the

how the overall economic paradigm is legitimized to members of the public.

pattern of distinct historical-ideological periods is marked at the boundaries not only by changes in concrete economic conditions, but also by a general disappointment

The literature on LA economic history generally identifies six major periods of Latin

at the lack of delivery of some promises of the framework. Conditions change

American economic history, which we call historical-ideological periods. While we

unexpectedly, or in a way that the existing ideas-interest coalition is unable to react

must always remember the important national variations within these periods, ideas

to in the short-run, creating the conflict over relative expectations. In the developing

tend to spread and create imitators. Thus, we can add to our frameworks by saying that

world, the fragility of power coalitions leads naturally to a huge gap between the

there is a demonstration, or "learning" effect, when one country seems to adopt a set of

hopes and aspirations of the economic policy and the actual perfornlance within the

economic policies that seems to analyze and solve similar economic policy problems

important constraints of the world economy, opening the way for economic policy

quite successfully. This can lead to the rise of similar coalitions in other countries, which

"entrepreneurs" to undermine any economic policy framework over time and to sell

might not have happened without the spread of ideas across borders. The neoliberal

their own magical solutions. It is important to point out that the relevant "public" for the selling of ideas has

revolution spread from Chile not only to the rest of Latin America, but also eventually back to the developed world where, for example, pension fund privatization, pioneered

expanded over time historically. Whereas in colonial times, the public was members

in Chile, is a current topic amid social security crises. Therefore, we see that the history

of the elite who had to be convinced of the divine right of the King to accept

of ideas is quite regionalized in spatio-temporal terms.

decisions, from around the 1920s, with changes in literacy, voting, industrialization,

Finally, it is important to emphasize that a crisis alone is insufficient to explain

mass media, and related changes, we begin to see a wider public to whom economic

change. There are a number of historical crises in LA history that have not led to

ideas increasingly become legitimized. Through the three frameworks, we have now

ideological change, such as the financial crisis in Chile in 1982; the peso crisis in

discussed the ways in which ideas matter in economic policy. In order to demonstrate our frameworks' validity, we test them out through a brief illustration of changes in Latin American economic history.

Mexico a decade later (1994); and the more recent fnancial crises in Brazil (1999) and Argentina (2000). Rather, what we see in LA economic history is that in each case of major change, the three gears of ideas change

coalitions, new widely-accepted

ideas, and a crisis of legitimacy for the reigning paradigm, must all work together to usher in a new era of economic policy. The latter is what distinguishes "reform" from an ideas "revolution." A new set of ideas is crucial to change policy. Its absence may lead instead to a strong political reaction, including repression, or chaos amidst a lack of consensus; this seems to describe well recent events in Venezuela, Bolivia, Colombia, and Peru, where no consensus on economic policy exists. other than that the

A n East Asian Modelfor Latin A merican Success

12

present one is not working. In the rest of this Chapter, we demonstrate the utility of our framework in explaining historical shifts in Latin American economic policy. 1.

Colonial Period (150ff-1800)

The colonial period may be thought of as a period of economic imposition for Latin America, rather than one of national development. Nonetheless, the centrality of the state to Latin American history begins with its origins. The colonial economic system in Latin America was typical of European colonial arrangements throughout the world, which followed the precepts of mercantilism. 12 Latin America suffered from the legal requirement of having to trade through the home country, whether Spain or Portugal, resulting in a slow and halting industrialization process (R. Shafer 1 978). One result of this unidirectional trade is that intra-regional trade within Latin America was negligible (Crow 1 992). Moreover, the economies of these countries developed an outward trade orientation, which has been maintained. Of course, this outward orientation was also a result of the formidable geographic barriers between Latin Ameriean colonies. Latin American government was hierarchically arranged by viceroys in Spanish America. Much of the aristocracy was created by the monarchs from whom they received large land grants. The result was a conf guration of large­ scale estates, which often included allotments of Indian workers (Donghi 1 993). Thus, clearly power relations and the dynamic tools of power centered around land and control of the military. Another important characteristic which contrasted the Latin American with the English colonies was the importance of the Catholic Church, which worked hand-in­ hand with the colonial state. In Latin America, the Church played an important moral role in underpinning the legitimacy of the colonial enterprise, with a few exceptions (R. Shafer 1 978, 68). I ntellectual activity, often based on the Church, tended to emphasize humanistic studies and was characterized by a fear of innovation, which was in keeping with its association with the staid institutions of Church and monarchy (R. Shafer 1 978, 1 20). Our three frameworks show that the ideas-interest group framework during colonial times was based upon the mercantilist paradigm that a colony was an appendage of the home country, and so should provide resources for the interests of the empire as a whole. The coalition consisted of the primary agricultural and mining interests in the colonies, the colonial administration and the King, and, to a lesser extent, the Church. The nature of the ideas of the Spanish Empire (based on the experience of the recapture of the Iberian peninsula), particularly the role of the Catholic Church, the formation of huge landholdings, and the stifling of industry and internal commerce set out a distinct trajectory for LA from the English colonies. 12 The intentions of the colonizing country were to procure raw materials and primary products for home consumption, wealth accumulation, and trade with other developed countries. In return, the home country provided government, trading facilities, and fnished products for consumption in the colonies. For a review of mercantilism, liberalism, and other international political economy terms, see George T. Crane and Abla Amawi, editors, The Theoretical Evolution (�f International Political Economy: A Reader, New York: Oxford University Press, 1 99 1

.

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 1 3

The real crisis of legitimacy started to arise with the b irth of new generations of elites in the colonies, who resented the long-distance decision making of the Crown from overseas, and the meddling and favoritism of the "peninuslares," or Spanish! Portuguese at home, thus undermining the legitimacy of the foremost mission being to enrich the mother country. 2.

Latin America in the Age ofLiberalism and Independence (l 80ff-1870):

Liberals versus Conservatives

Latin America's development, from the beginning, then, was shaped by ideas and the state. The development of l iberal ideas in Europe and the liberal revolutions in the wake of the Napoleonic Wars were directly responsible for changes in the political and economic traj ectory of Latin America in the turbulent nineteenth century. This period is a great example of what happens when there is no consensus around a new paradigm to order society after major changes in social relations and power take place. The creoles, elites who were born in the New World, were an instrumental group for liberal ideas because of their dissatisfaction with the colonial status quo. Creoles desired political equality with Spaniards, freer economic trade with Europe, to institute the new liberal ideas of political Rights, voting, and representation for the (upper) middle class, and for a separation of Church and State. Members of the upper and privileged class as well as some middle class creoles fought as conservatives against the l iberal movement. This schism between liberals and conservatives continues to be a prominent feature of the Latin American political landscape, albeit in much mollified form. The loosening of commercial and trade restrictions for trade within the Empire began in 1 764, but occurred only gradually. In fact, the opening of free trade within the Spanish Empire was only slowly implemented, having been fully extended only by 1 789 (R. Shafer 1 978, 1 88-9). By the latter part of the eighteenth century, the ideas of the Enlightenment had begun to seep into Spanish America, yet it took more than a century for a consensus to be achieved around these ideas, and they were never fully legitimized. These ideas wcre spread by the constant interchange of people between Latin America and Europe. The Enlightenment essentially held reason as a guiding force for showing man how best to make decisions and form society. These ideas gradually worked their way into the elite discourse. Most importantly, valuing reason as a means to truth has a way of implicitly "leveling the playing f eld." Thus, once adopted, the idea that the best mode of logic should carry the day can start to creep in on superiority on the basis of birthright, class, connections, swordsmanship, morality, and other forms of nobility. The net effect on societies has been to slowly increase the legitimacy ofthe power of those who are decently educated, namely, the middle class. However, there was a major mismatch between these new ideas and the much slower changes in power relations. The early proponents of liberalism were harshly dealt with by authorities, with little public outcry.13 In fact, most creoles in the eighteenth century were more 1 3 Many were inspired by the ideals of the French Revolution, such as Antonio Narino in Bogota and Francisco Miranda in Venezuela. See R. Shafer, pp. 292-3. The American

14

An East Asian Modelfor Latin American Success

concerned with the need for greater economic freedoms than political independence (R. Shafer 1 978, 293-5). The French Revolution and the subsequent Napoleonic Wars served as a catalyst for change for the crisis of legitimacy introduced among the LA elite by the new ideas. Napoleon forced Spain to ally with France, thus placing an enduring burden on Spain for resources in the ensuing wars. This burden, for example, led directly to the seizure of Church property (R. Shafer 1 978, 299-300). More importantly, Napoleonic rule led to the default of local decision-making by creoles in Latin America while Spain was occupied and the Portuguese Crown fed to Brazil. By the early 1 800s, republican governments were set up everywhere, and nobility was abolished. Though economic power continued to be concentrated in the hands of a small wealthy class allied with the military, with economic growth, a middle class, albeit one imitative and subservient to the upper landowning classes, began to appear (R. Shafer 1 978, 357-8). As the new governments faltered under open political challenges, an era of caudillismo [charismatic military based leadership] spread across Spanish America. Military caudillos in the capital regions slowly consolidated power from regional counterparts backed by large landowners. Exports were generally concentrated in agricultural products, and led to the development of related industries, such as financial houses for export loans, railways, and shipping. Other sectors of the economy, including manufacturing, were very slow to develop, with export industries dominating economic policies, such as maintaining low tariffs as well as continuing capital fight. The result was a lack of protection for infant industries and an inadequately developed local financial system (R. Shafer 1 978, 373-6). In sum, the system of liberal economic policies was set up to benefit the large exporting landowners (Donghi 1 993, 1 1 8). Thus, we see the early years of independence as characterized by the gradual formation of two distinct elite-based ideas coalitions seeking to create their own view of what the political economy should entail- and the catalyst for change being the delegitimization of the Spanish and Portuguese Crowns. The l iberal coalition, backing federalist decentralization, minimalist government, and a primary export policy, was dominant immediately after independence. After a series of civil conf icts throughout Spanish America in the latter 1 8th century, however, the conservatives gradually won the battle for political centralization. In the end, Church inf uence was reduced (an aim ofthe liberals), but the central role of the state was solidified (an aim of the conservatives). As in the previous historical period, outside actors wielded important power within the region. The European powers as well as the United States protected and expanded their economic interests through military intervention on numerous occasions during this period. By the end of the 1 9th century, new ideas of positivism would help to usher in a growing role for economic advisors to the LA state, and a gradual consensus was created around the compromise of greater secularism but also a centralized state. Revolution was equally important for inspiring Latin American creoles, such as Bolivar. While the United States failed to provide material, as wel l as ideological, support, both the United States and Britain served as havens for creole exiles. The British were somewhat more forthcoming in supporting the early efTorts by creole activists. See Crow. pp. 4 1 4-42 1 .

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 1 5 3. Export Boom and Early National Development, 1 870-1930: Latin America s First Age of Liberal Economics

The beginnings of the 20th century were marked by the steady development of a politically active middle class and labor unions that would became important factors by the 1 930s and work hand-in-hand with an increasingly active LA state that began to openly discuss development. While centralization had won out over liberal-supported federalism, and the military still played a political role; suffrage increased, and states moved increasingly toward rejection of a role for the Church (R. Shafer 1 978, 503-4). Except for the Mexican Revolution, this period of LA economic history includes a relative consensus among elites on the role of the state as primary products exporting facilitator. The elite consensus behind this idea of the state facilitating development was reinforced by periods of economic boom for many of the countries, who invested to increase their production and reduce the transportation costs of their exports. The world economy, along with technological developments such as refrigeration (leading to beef booms in the Southern Cone) supported strong demand for LA commodities. Foreign investors were the major suppliers of capital for this period, and therefore owners of much ofthe important economic stock, such as the railways. The period was the first one in which population increased rapidly, along with increasing urbanization, and su bsequent waves of European immigration. The population increase, along with the increasing earnings from exports, led to the creation of a viable middle class for the first time. '4 The middle class tended, in typical fashion, to identify with the upper class, rather than with the other emerging social actor - the urban lower class, thus legitimacy around this paradigm was preserved for a time. The first significant middle-class parties, such as the Radical party in Argentina, appeared at this time. The elite-dominated system continued to prevail despite changes in formal political rights, especial ly in rural areas, where large landholdings continued to be the rule. Only in Mexico, after its seven year revolution, was there any significant land reform. The role of the government in society increased dramatically in this era, as a middleman-facilitator between agricultural interests and foreign imperial ones, and partly to deliver new social and economic goods to the emerging middle class, gains made possible by surplus generated from the export boom. For example, literacy rates in most countries shot up as the state took on the role of primary educator. The beginnings of a role for the bureaucracy also developed. The public role in the economy was limited, of course, by the continuing predominance of primary product exports in the economies, and dependence on unreliable and insufficient trade taxes as the primary sources of revenue (R. Shafer 1 978, 502-6). Therefore, foreign imperial companies continued to play crucial roles in the development of infrastructure to service the primary export-based economies. Yet, despite all of these apparent gains in economic growth and standards of living, the consensus around this model remained in legitimacy crisis. Economic 1 4 In Argentina, for example, the middle class was considered to be one third of the population by 1 930.

A n East Asian Modelfor Latin American Success

16

policy maintained a laissez-faire orientation, despite growing resentment at foreign investors. Quickly growing income was accompanied by more obvious income and wealth inequality. Though economic and demographic changes began to foster an emerging middle class, access to political structures remained highly restricted. The crisis of legitimacy was a crisis of a lack of adaptation and adj ustment. The lack of development in institutions led directly to the Mexican Revolution, and subsequently to the populist dictatorships that began to attempt to address the pressing ideas of nationalism and redistribution. The final catalyst for change was the world economic market collapse in 1 929, setting off the Great Depression. This shock from outside would completely and forever change Latin American political economy. 4.

The Age ofNational Populism amid a Changing World Economy: The

Beginnings ofNational Industry Through Import Substitution, I930 �55

The export-led era was forcibly ended when world trade abruptly shut down with the commencement of the Great Depression and, subsequently, World War I I . Besi des losing export markets, and their main source of wealth, Latin American economies also lost their sources of finished goods, necessitating domestic industrial production. Latin American governments became increasingly active in the economy in promoting the cause of industrialization, as well as attempting to take advantage of the huge world demand in commodities created during the World Wars. This period of early industrialization probably accelerated the shift, in Latin American economies due to the changing nature of the world economy 1 5 and in response to the legitimacy crisis of the primary product exporting (PPE) model. Following Engel 's law, as European incomes increased, and families became smaller, European demand for primary goods declined (relative to demand for manufactures as a proportion of their incomes). At the same time, supply m arkets became more competitive, which was heightened by the high tariff barriers that agricultural exports faced in developed countries. These trends would continue, generally, over the course of the century. The parallel trend, of course, was skyrocketing demand for manufactured goods (E. Williamson 1 992, 3 1 9-2 1 ). The Great Depression alone would be insufficient to explain the nature of the change that occurred, which has been described as the first phase of import substituting industrialization ( I S Il ), during which consumer goods begin to be manufactured domestically (Haggard \ 990). The vacuum of foreign interests during this period gave the LA state space to expand its political role and room for nationalists to push for industrialization as a way of increasing autonomy. Industrialization went hand-in-hand with the aforementioned demographic and socioeconomic changes,

15

Clearly, industrialization began long before the Great Depression period. Stimulation

from the export boom at the tum of the century had already led, notes Bulmer-Thomas, to the beginnings of i mport substitution. With the First World War, however, primary commodities

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 1 7

cementing a skilled working and nascent white collar middle class that now became a strong constituency for the new consensus behind lSI. I S I I typically began with consumer products, such as processed food and textile factories, with few technological requirements, and extended next to light electrical industry, relying in the latter phase on foreign capital which had been received before the Crash of 1 929. World War II brought the beginnings ofthe second phase of import substitution - the move towards production of heavy industry, capital goods, and consumer durables. The eventual acceleration to ISI2 did not just happen naturally or "inevitably" as some economic historians suggest. Governments throughout the region set up industrial planning boards, such as CORFO (Corporation for the Development of Production) in Chile, that sought to diversifY the economy away from primary products. The change in economic policy was refected by a shift in the relative national power of pol itical interest groups from a dominant rural oligarchy toward the state, urban industrializers, and, to a lesser extent, organized labor. More importantly, it was the new consensus of this coalition that created l S I and explains its timing. Government involvement in economic activity would increase steadily until the debt crisis ofthe 1 9805. The goal of national economic development, latent in Latin American history, was consciously adopted for the first time by the state.16 Nor is adding interests to crisis sufficient for explaining the change. As with the new ideas of liberalism from the period of Independence, we should remember that the milieu of the age centered around the new ideas of national development through dictatorships in Germany and Italy, as well as the radical ideas of the Soviet Union and labor, and around the development of mass political parties which, along with industrialization, mobi lized new elements of the population into political discourse. The shifts in international economic structure created by the Great Depression and the World Wars catalyzed a parallel adj ustment of power relations in LA, but the new ideas of populist national development determined their direction. Politically, with few exceptions, the "solution" for these new challenges of ideas and interests, for LA, was one of creating populist dictatorships, inspired by European examples. The dictatorships attempted to legitimize themselves to a wider constituency for the first time, using mass communication. The new nationalist populism correspondingly justified government actions which asserted economic independence. National popUlism tended to be personalistic as in previous eras, however they were now married to strong state bureaucracies. The new popular dictators took pains to cultivate a broad apparent following, in contrast to the back room oligarchic politics of the past. Leaders such as Vargas in Brazil, Peron in Argentina, and Cardenas in Mexico not only organized the labor sectors of their economies, but began the first serious programs which promoted domestic industry. The first steps in their plans generally included nationalization of foreign-owned industries, such as petroleum in Mexico. Ultimately, these dictators were able to create two parts of Peter Evans' triple alliance the state and organized industrial capitalists and workers (Evans 1 979). Unfortunately, the lack of available capital

became much more valuable to the warring industrial powers. The Great Depression led to the first conscious efforts at industrial ization and self-sufficiency in manufactures. Victor Bulmer­ Thomas. "The Latin American economies, 1 929-39," in Bethell, v.VI,

19JO:

Latin America since

Economy, Society and Polltlcw: Part I Economy and Society, 1 994 pp. 65-1 1 5 . ,

16

While economic goals were a part of political groups' ambitions throughout Latin

American hi story, an active state role. even in Mexico. which had undergone a socioeconomic revolution. came in fact onl y after the tirst World War. See Donghi. pp. 274-n.

A n Easi Asian Modelfor Latin A merican Success

18

equipment and investment on the world market meant that LA had to rely on a third alliance partner, foreign capital. LA industries therefore emerged from the war period as mere infants. Moreover, the sudden move to industrialization created a strong anti-productive bias against the old regional centers of export production who were also the source by which to finance lSI. Thus, the i nherent contradiction of taxing a source (primary production exports) which you are creating a bias against led eventually to reliance on foreign partners' financial and technical aid. This was also the period in which economists began to dominate the discourse of development in the region. We have to remember that the concept of development originates only after World War II. Thus, our historical view of "ideology" must be tempered with the fact that economic knowledge and theory were still quite underdeveloped, for example the consensus about fighting inf ation through monetary policy was not solidified until the 1 980s. Positivism had made a deep impression on the Latin American militariesl? who then turned to using their supposed organizational and planning superiority on the economy. The period was one in which not only the mass public, but also Leftist parties and bureaucracies, which generally had taken shape in the beginning of the century, began to wield real influence over economic policy. I n Chile, for example, as in other Latin American countries, an urban working class, urban capitalist, and state coalition began its consolidation of power, squeezing agriculture through its economic policies. The primary product surplus from exports, especially in agriculture, was thereby gradually eliminated until incentives became so reversed that Chile became a net food importer by the 1 970s. The strategy of using agricultural surplus was not inherently wrong, so long as it was not bled towards diminishing returns, but the capital invested in industry did not pay off in many cases. The industries which developed were inefficient and dependent upon state protection for the most part, and much of the capital surplus actually went abroad in capital flight (Mamlakis 1 976). The consensus around lSI is reflected by the fact that many of the countries in the region enjoyed regular elections, with the m i litary serving only as a guarantor of peace for civilian rule. This is the period when framework 3, the importance of "public" opinion, begins to make a clear impact on decision-making. The dictators captured the continual and growing public sentiment of anti-imperialism and the desire for wresting national control from foreign interests, culminating in seizures of assets such as Mexican nationalization of the oil industry under Cardenas and Peron's nationalization of the British railways in Argentina. Ironically, it was the very success of lSI in industrialization and in access to political structures by the middle and upper working class that led ultimately to its legitimacy crisis, catalyzed by the Cuban Revolution in 1 959. The desire for greater redistribution was insufficiently addressed by lSI. Though growth and industrialization proceeded, relative inequality 17 For example, the military in Brazil was, in fact, led by an intellectual, Benjamin Constant, to overturn the monarchy in 1 889. Constant was inspired by the Federalists of the United States, such

as

Hamilton. Jefferson. and Madison. and was a member of one of the

numerous national Republican clubs 553-58,

which began to appear around 1 870 in Brazi I. Crow. pp.

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

19

worsened. The increasing popular mobilizations around the region for more drastic redistribution and the specter of Communism backing such popularly supported changes pushed the m i litary to step in. 5.

The Communist Menace, ISI2, and the Rise ofEconomic A dvisors, 1 955-80

From about the middle of the 1 950s, a new age of Leftist political operations set in motion a cycle of military rule repressing recently activated l abor forces, which seemed integral to national development, and centrist rule attempting to compromise with it. A new battle of ideas on the Left, center, and Right was waged, leading to a new cycle of economic instabi lity reflecting a lack of consensus. In hindsight, as in the 1 91h century, it is the lack of ideological-interest consensus that caused LA to miss thc advantages of a unique period of world economic boom, as much as the policy errors made. The cycl e ended, in general, by the end of the 1 960s with harsh military dictatorsh i ps constructed across LA for the express purpose of preventing Commun ist revolutions, such as the Cuban Revolution of 1 959. The Cuban Revolution had brought to the t(lrefront anti-U nited States feelings which had been present in LA ttH some time and which reflected continuing foreign dependence through the triple a l l iance. At the same time, LA regimes were strongly influenced by American advice and resources for economic medication to the radical threat. The resu lt was an attempt, and fai lure, in most cases, at moderate economic reform, including land red istribution, gradual national ization of key industries and exports, and regional integration in the 1 95 0s and early 1 960s, which pleased neither of the polarized pol itical extremes and so were i n feasible. Examples abound, including Frci in Chi le, Quadros in Brazil, and Frondizi in Argentina. Both moderation and polarization were ended by crushing repression from conservative clements and the military throughout Latin America by the mid- 1 970s. Given the common enemy of Communism, United States policy, and that of international institutions, such as the United Nations, turned increasingly to development planning a la the Marshall Plan. The prevailing wisdom i n the early 1 9605 was that economic development would undercut the lower class bases for Communism. In some cases, such as Guatemala in 1 954 and the Dominican Republic in 1 965, the US directly intervened to prevent popularly elected Leftist governments from taking power, but in most cases, the infl uence was indirect through economically-administered incentives and punishments and aid to military regimes. The period was understood by some Latin American analysts as bureaucratic­ authoritarianism, in contrast to the more personalistic dictatorships of previous years. While the reaction to the Leftist threat was the primary military justification for the initial wave of dictatorships, the LA military moved towards an economic paradigm of greater autonomy from the world economy through ISI2 as its main source of legitimacy. However, though industrialization did deepen throughout the region, with the major exceptions of Brazil and Mexico, most countries in this period failed to sustain the economic growth rates which were thought necessary to reinforce middle class support. The period was one of frequent macroeconomic instabil ity, which carried over into a good part to the 1 970s. when the solution of greater government

20

An East Asian Modelfor Latin A merican Success

intervention became ever more frequent. The turn to greaterc intervention belies the dependency idea that LA states are incapable of responding to internal crises and the neoliberal idea that the state is incapable of fostering development. The responses to infationary and exchange rate volatility during the period, in fact, were sound, including efforts to increase exports, speed intra-regional integration, and increase agricultural productivity, but there was inadequate political consensus around them preventing adequate implementation. Some analysts, with good reason, believe that the move towards a second stage of import-substituting industrialization was inherently doomed to failure by several (in hindsight, anyway) obvious economic factors (Skidmore and Smith 1 989, 567). These include the continuation of balance of trade problems, since the need to import f nished manufactures was now replaced by the need to import the capital goods to make them, particularly given continuing technological advances by developed countries' industries. In line with this problem was the need to have heavy foreign involvement in the initial stages to f nance, set up, and run the capital goods producing factories. Secondly, the limited domestic markets meant inefficient scales of production. The result was the typical developing country dualistic economy of a small pocket of highly developed industries, few local owners, heavy state and foreign participation, surrounded by a sea of poverty and restiveness. Why did LA countries continue with ISI2 when most neoliberal economists claim that such efforts of state intervention are doomed to failure? In good part because they had achieved industrialization and product diversification through such policies, despite the heavy costs. Perhaps the most inspiring economic development was the Brazilian military's early economic success. After taking over in 1 964, the military adopted a monetarist reform program, with inflation indexing of wages, rents, interest, taxes, and other economic transactions, encouraging foreign capital, and procuring more aid. Wages were indexed, however, so that real wages actually declined. The monetarist correction was popular with the United States, the World Bank, and the International Monetary Fund, as was a new found anti-Leftist vigor, which certainly helped Brazil to obtain more aid from them. At the same time, the Brazilian state increased its fiscal policy interventions, undertaking large-scale and high-risk projects in several areas, leading to state domination of the oil, steel, energy, and some parts of the transportation industries. The state mollified private capitalists' displeasure with the policies by spreading around contracts. The policies worked spectacularly in terms of gross national product growth, and both Mexico and Brazil were deemed "miracle" economies. However, I S I2 began to fal l apart in 1 974, in the wake of the world oil price hikes. At that point, inflation soared, government deficits went out of control, and the state, responding by borrowing on world capital markets, began to accumulate a huge foreign debt (Skidmore and Smith 1 989, 689-9 1 ). Nevertheless, the Brazilian military, which continued to justity its stay in power by the economic miracle during the 1 9605, did succeed in diversitying exports somewhat for the long-run and in developing several manufacturing industries for export, such as the highly successful aircraft manufacturer, Embraer (see Chapter 6), and world class steel, mining and petrochemical industries. The Brazilian military's economic activism, more

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 2 1

importantly, inspired other Latin American militaries to adopt similarly economic agendas, which they also used to legitimize their rule, such as that which took power in Peru in 1 968. Leftist i deas were inspiring but could not develop political consensus. Cuba's Communist experiment based on Castro's unexpected turn amidst government collapse was all but politically impossible to repeat in most places. Not only did domestic conservative forces, including the military and the United States, rally to defeat such ventures, such as Allende's ill-fated presidency in 1 970, but Castro's success in stabilizing the political economy relied on several unique factors. These included the surprise ofCastro 's conversion to Communism; the wholesale emigration, both voluntary and forced, of opponents ofthe regime to the United States, including large portions of the upper and middle classes; the United States' reluctance to move overtly against Castro after the Bay of Pigs fiasco and its tacit agreement with the Soviets; the massive subsidization of the economy by the Soviet Union; and the reluctance of the Soviet Union to overextend its economic and military resources, especially after the brinksmanship of the Cuban missile crisis. While a number of M arxist guerrilla movements spread throughout Latin America, not until 1 979 did one succeed. The Sandinista regime in Nicaragua, however, suffered economic collapse under the continuing civil war and international embargoes, which were financed and directed in good part by the United States. With the collapse of Soviet financing in the late 1 980s, the ever pragmatic Sandinistas settled for peace, giving up most overt control, while maintaining control of the army and organized labor for continuing political involvement. The Cuban model was thus never really a viable economic paradigm for LA because it was never convincing to the middle and upper classes who have power. Its widespread inspirational appeal stems back to the Creole aspirations for greater autonomy from external interference during the colonial period- in sum, anti-imperialism, not Communism, is the favorite card for LA. By the 1 970s, military governments in much of LA, using heavy repression of Leftists, had won the civil wars but had not reached consensus or legitimacy for their rule. This led them to move towards economics as the basis of their continuation in power. The boom in oil prices during the 1 970s helped Latin American countries which produced petroleum, such as Venezuela and Mexico, to directly finance government spending, while others relied more heavily on the vastly increased private capital markets to borrow at low but fexible interest rates for the same purposes. By the 1 970s, most countries in the region, in attempting to gain the foreign exchange needed for the new sky-high oil prices and in adopting policies of state-led growth, borrowed heavily from the emerging world capital market. The Mexican government, which actually enjoyed the benefits of higher oil prices, still borrowed heavily while engaging in high cost and low efficiency state development projects and social spending. In a sense, we can see that the industrialization progress of the 1 960s was impossible to sustain given the oil price increases of the 1 970s and the resulting contraction of the world economy. Instead of retrenching their industrial expansion plans, governments followed a political, rather than economic logic, in terms of borrowing heavily to continue large projects with no accountability for results. In other words. the consensus around the ideas of ISI2 prevailed within the

22

An East Asian Modelfor Latin American Success

military regimes over a myriad of necessary possible adj ustments in state-market relations, including moving straight into E xport-Oriented Industri alization (EOI) as had East Asia, developing more backward linkages, or neoliberalism, the path of least resistance ultimately taken. Therefore the pressing problems exposed by l S I were never addressed. In effect, Latin American states continued to rely upon imports of Northern technologies, capital goods imports, and intermediate goods, only temporarily, until their import substitution phase was complete. Secondary import substitution policies meant protection of those same industries which the military governments had decided to champion, through a continuing effective taxation on agriculture. Overvalued exchange rates, borrowing heavily on world capital markets, and price subsidies which benefted urban workers were typical of this scheme. The costs to primary product producers was by now very heavy, and continuing nationalizations within the region led to a decline in activity and export earnings in these sectors. Pressures for social reform were held in check by nominal attempts at reform; co-optation of agitators through selective social spending; and. above all , repression of radical movements by the military. The m i litary governments pushed to new heights the LA state's claim of economic expertise and thus its vulnerability to legitimacy crisis at any sudden downturn. The change in the world economic conditions and the economic crises of the 1 980s would lead to middle-class rejection of these regimes, ironically, with devastating results for moving towards addressing the ongoing underlying weaknesses of the economy, such as inequality in land redistribution, export concentration and lack of export prowess in industrialized goods, lack of investment in human capital, and weak fnancial structures. 6.

The Debt Crisis and the Move to Neoliberalism, 1 98{}'-?

The golden age of government spending for social stability and rapid industrialization came to a screeching halt with the sudden increases in interest rates, partly refecting the new United States' monetary policy, in the early 1 980s. Given the huge debt burdens incurred, and a steady deterioration of commodity prices, most Latin American countries, and the military regimes in charge ofthem, found themselves in severe economic and political crisis, yet as we have seen the consensus around I S I2 had begun to break down by the late 1 960s. The solution for the m i litary regimes was simple: to abdicate responsibility for the economic mess by handing over the reins of government to democratic regimes. More importantly, the threat of Communism had faded from the societies, and the Left moderated its political position, opening the way for a more peaceful and acceptable centrist rule. In a way it is ironic that we more recently returned in a sense to the status quo ante of the early 1 960s centrism, however, this time the center seems to enjoy considerably more legitimacy and economic knowledge has increased. The Chilean "miracle" provided a new model of development that spread throughout the region. The m i litary took over in September 1 973, ending the widespread chaos of the Allende years. The military erected a highly repressive political regi me. whi le maintaining a few of the economic gains of the Allende administration. including the nationalization of copper. and. to a lesser degree.

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 2 3

land reforms. I S These policies began a new regional development paradigm for Latin America, which involved the shrinking of the state from an active role in industriali �ation, a return to emphasizing primary exports, the opening of the economy to foreign investment and trade, and tight monetary and fiscal controls. The Pinochet regime also marked the rise of an overt group of technocrats who made economic decisions and openly vied for political support of their economic programs, for the first time since Diaz's cientificos formed their own political party. The " Chicago Boys" in Chil e soon inspired counterparts in other countries of Latin America. Ironically, the neoliberal revolution requires a stronger state, one which can not only cut off special interests who enjoyed lSI subsidies, but also one which can enforce property rights, set up a stable regulatory environment, provide insulation for monetary policy, and act strongly to cut spending and raise and collect new taxes as part of fscal policy. Even well-ensconced Northern governments would have a hard time making such adjustments while dealing with huge external debts, high unemployment, and the myriad of political, social, and economic problems. The 1 980s marked the rise and acceptance of technocrats throughout Latin America to make economic decisions, particularly in instituting the monetarist policies needed to survive the debt-induced austerity of the period. Many of the new pol iticians since this period had distinctively technical degrees in Business or Econom ics, for example, this includes every Mexican President: de la Madrid, Salinas, Zedillo, and Fox (H ira 2007). By the 1 990s, with the inability to utilize fiscal policy given debt burdens, newly democratic Latin American states shopped for a new economic policy framework which would a l low them to deal with the external debt and create some growth base for legitimacy among the upper and middle classes. By this time, the "East Asian miracle" of fantastic and sustained economic growth rates could no longer be ignored. The miracle was widely ascribed to foUowing sound macroeconomic policies and openness, particul arly by international organ izations, a classic case of the infl uence of misrepresented ideas, as we discuss in Chapters 3 and 4. The rise of Latin American economists trained at United States' universities to political power and the success of the monetarist policies of Chile were additional factors in laying out the basis for a new political economy. Given the failure of Communism, the Left was also by now largely persuaded of the need for a capitalistic system, although there was great objection as to the degree to which government spending on social services should decline. In Argentina, for example, a leader from the Leftist Peronist Party, Menem, was the first to succeed in cementing the new monetarism. From Mexico to Brazil, businessmen and economists rose to power as leaders on expressly economic platforms. Carlos Salinas set the precedent for courting international capital by setting tight monetary policies for Mexico and liberalizing the banking and investment sectors. In each case, strong economists came to the forefront on monetary policy, such as Foxley in Chile, Aspe in Mexico, and Cavallo in Argentina. In Peru, the economic formula was first applied by the popular d ictator, Fuj imori, and then by Toledo, a former World Bank economist. The economic policymakers follow the same recipe. In many cases, the 18

See H ira.

) 998

for a full-fledged discussion of the Chilean case.

24

An East Asian Modelfor Latin A merican Success

leaders who first applied the policies, such as Salinas and Alfonsin, have become, in part, scapegoats for the heavy costs of attempting to transform fiscal policy and drastically reducing protection. However, with their succession, the policies have nonetheless not fundamentally changed. Certainly, Latin America had limited economic choices given the harsh world l iquidity situation of the early 1 980s. Still, given the history recounted herewith, the return to an embrace of foreign investment, including ownership of key industries and resources, a return to a reliance on primary product exports, and the retreat of the state from economic and social activism, similar to the primary product export period of the turn of the century, must remain a surprising twist of circumstances indeed. The attitude towards the North is one of renewed invitation on the surface. The policies concentrated on monetary and fiscal restraint, which, of course, have added to the slowdown in the economies, although restoring some semblance of stability to the investment climate. The slowdown in economic growth and the accompanying cuts in fiscal subsidization were and are being felt particularly by the middle and lower classes, while expectations have continued to increase, following the trajectory of the century. However, it is also important to note that the LA state had to create some insulation in order to push forward these changes it had to reduce subsidies and ownership which were deeply entrenched in the interest groups of the society. The fact that the state was able to precipitously reduce the role of labor unions and state-owned or reliant domestic private interests (unexpected by the "rent-seeking" theories of economists) underscores more than ever the strength of the LA state to change direction. As we outlined in the preface, neoliberalism seems to have run its course amidst the current crisis of equity and growth, the brief consensus around these policies refected in the popUlarity of Fujimori, Salinas, and Menem, has gone the way of those erstwhile champions. The region is now ready for another shift. Two of the three elements of change are present: c hanges in interests, and de-legitimization. What we hope to provide in this book is a third element - a new set of ideas that can create a new consensus. Conclusion: Patterns of Growth and Equity in Latin American Economic Hist01Y

We have now accomplished the goals of this chapter by examining LA economic historical change through the prism of ideas, consensus, and legitimacy. We have shown that the fortunes of LA's economy are intimately tied to the world economy. As the world economy has shifted, this has created a forced change in the outer wheel national policies to respond to these conditions. The change in the outer wheel, as well as evolutionary and other changes, including im- and emigration, have meant continual shifts in domestic political economy coalitions in LA. We have seen that from colonial times inclusive to the present neoliberal reduction of state involvement that the LA state has been at the center of all development decision­ making. It is the state, not a revolutionary movement by "the masses" nor a deus ex machina [God in the machine] market, that is at the center of development decisions. In the ultimate crises. even a successful revolution as in the case of Cuba follows

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy 25

state leadership. In the case of the debt crisis, the movement toward neoliberalism and now towards reforming it, is led, ironically, by the state. At any given point, LA could have adjusted in a myriad of ways, yet it was the ideas in fashion that determined the direction and type of reaction. Otherwise, we would never have seen winning coalitions geared to make the state work for them, give up power. LA could have continued with a monarchy, as was tried in Mexico by Maximilian, in Brazil by Pedro II and in Paraguay by Solano Lopez. However, Enlightenment ideas of republicanism and liberalism shaped the Independence period in a different direction. The Independence period could have led to a continuation of agricultural elites, in the pseudo-liberal forms adopted by the end of the 1 9th century. But the ideas of positivism and state responsibil ities for development activities, such as mass literacy, went hand-in-hand with the world economy's support of the primary product export boom to yield a state for the first time actively discussing national development. This period of elite alliance with neo-imperial economic interests continues in some form today, but the cozy restiveness of the beginning of the century changed as new waves of ideas came to Latin America's shores. Changes in the world economy beginning with the Great Depression went hand­ in-hand with changes in ideas. The ideas of anarchism, socialism, communism, and fascism all had major impacts upon the region's development trajectory, as did liberalism beginning earlier. National populism was the version of these new ideas that created temporary consensus in LA. Conscious policies of suffrage and middle class wel fare (a la Battle in U ruguay) to increase middle-class inclusion demonstrate the power of ideas to affect power relations. l S I became a national development strategy that moved the region forward in industrialization, despite the ravages ofthe Cold War and the Cuban Revolution. lS1 could have been modified in response to the oil crisis and the debt crisis ofthe 1 9808. It could have been adjusted downwards into more modest goals, including paying more attention to agricultural productivity and an EA-style export orientation. Unfortunately, the ideas of neoliberalism prevailed instead, leading the state to cut down and change the nature of the patron-client relationships built up over a century of state-building (though these have been merely transformed into patronage networks with far less social or national benefit). In some senses, the LA state has now decided to return to the late 19th century situation of primary commodity exports, except now including labor-intensive exporting, and abandon independent national industrialization projects. In sum, we have shown that ideas have been central to the choices made in any given age. They are central to the overall evolutionary direction of national development and to the adjustments that need to be made to changes in the world economy. They provide not only a focal paradigm for development, but act as a cementing force for decision-making elite interest groups, and a bulwark of legitimacy to the marginalized elements of large portions of the population. Their "stickiness" can be explained by both the achievement of some consensus and occasionally legitimacy and by the lack of other ideas that have compellingly met the needs ofboth power interests and national interests of development. By showing that ideas matter, we have proven that a new alternative path, based on a convincing set of ideas, and given adequate political support by elites, is a clear possibility for LA now. as it was in the past. We have also shown. however. that the history of LA

26

An East Asian Modelfor Latin American Success

economy has been one of only temporary consensus. The most primary motivations: anti-imperialism/independence/recognition; raising standards of living to First World levels, and improving equity and reducing poverty, have never found a sustainable winning formula. The frustration at this inability has led to a grinding fatalism as reflected in dependency on the one hand, and a rejection of the basic reality of the hurtful and ineffective market policies under neoliberalism on the other. It is this frustration that feeds the l imited but increasingly popular solutions of grassroots autonomy from the state and the world capitalist system. On the other hand, while politicians continue to look for short-term solutions to immediate political problems, they still are operating within a certain ideological road map, one that allows them to configure national interest among the special domestic and foreign interests that constitute power in ways that make sense for the nation. This is why historical-ideological periods can be identified across the highly differentiated region. Framework 3, the general legitimacy of economic ideas, has increased in importance over time. Recentl y, public opinion has led to signifcant changes in policy throughout the region. In Chile, to human rights accountability for Pinochet. In Nicaragua, Costa Rica, and elsewhere, to corruption trials. In Bolivia, to the deposition of President Gonzalo Sanchez de Lozada. In Argentina, to a stronger negotiating stance by the government with the I MF and private foreign banks. In Brazil, to a strong rejection of an FTAA on the terms set out by the US. Neoliberalism has become associated in the region with inequity, volatile and unreliable growth, and a new form of global imperialism. All of these changes suggest that the neoliberal period may be in crisis - thus we are in the node of another potential historical shift in Latin American policy. We have seen in our survey that change is both possible and necessary. There is an evolutionary trajectory, ongoing policy experiments over time and space within a historical-ideological paradigm, and mini-crises that raise doubts and lead to further adjustments. If the neoliberal paradigm continues its tailspin, when the system is in crisis, a new set of ideas can push forward the shift to a new type of economic development policies. The problem so far is that, unlike the immediate aftermath of the Cuban Revolution, when socialism was seen as a viable alternative paradigm, no such alternative exists. Cuban-style socialism is rejected by the large majority of Latin Americans who want equity, but also growth and democracy. They recognize that neither the US nor the military would allow for a Cuban Revolution even if opinion somehow miraculously moved in that direction. What is needed therefore is an alternative framework, one that can inspire the current generation of policymakers just as the ideas of industrialization inspired lSI and market efficiency, neoliberalism. In this chapter, we have sought to extinguish the meta-paradigm of dependency and the popular version of Marxism that historical and imperial forces have and continue to doom LA to helpless poverty and that a revolution overturning everything is the only solution. We have seen that rather than helplessness, Latin American history has been f lled with a purposeful, if haphazard, search for locally-appropriate, economically effective, and pol itical ly supported answers to its unique versions of development problems. Within constraints, LA has been able to engage in a wide variety of policy experiments, ranging from nationalization to labor mobilization

Why Ideas and State Leadership are the Key Variables in Latin American Political Economy

27

to marketization. Fatalism is simply false and must be discarded. Ideas work within the constraints of interests in the short-run but the array of possible stable idea­ interest conf gurations is far wider than perceived at any given time. Thus, ideas, pragmatical ly applied, can and have changed the perceptions of interests and the direction of policy, as we have seen throughout LA's economic history. As many analysts have pointed out on both the Left and the Right, the state in LA has been the primary vehicle for oppression, inefficiency and lack of opportunitie s (Vargas L l osa 2005). Nonetheless, it is only the state, ultimately, that can resolve these problems. In the next chapter we need to point our lance at a different type of fatalism a faith among mainstream economists in practice, if not in quiet conversation, that markets solve all problems. What we see is that there is no such thing as a free market - state intervention is ubiquitous. Once we have extinguished the myth of a free market along with fatalism, on the "ash heap of history," we can begin to lay out an alternative blueprint of economic policies between the state (failed revolutionary central ism) and the market (failed neoliberalism ) for Latin American development that will achieve the best promised features of lSI, neoliberalism , and dependency theorists, that is simultaneous achievement of greater and more autonomous national development, efficiency of market outcomes, and greater equity. The main prerequisite for this change in fortunes is constructing a consensus around this idea, which is precisely what this book hopes to help to catalyze.

Chapter 2

Why an Active Industrial Policy is Needed for Development

N ow that we have demonstrated the central importance of the state as an actor in LA history and the abi lity of ideas to shape state policies in a variety of ways in response to the same constraints, dismissing the fatalism, helplessness and hopelessness of the dependency view, we must address the next red herring before getting to which ideas make the most sense for LA economic policy. Much ofthe debate among mainstream economists and dependistas [those who believe in dependency] concerns the optimal ity of the market; often this discussion takes on moral overtones. Mainstream economics is based on theories that show that markets are almost always more efficient and preferred to any state intervention, while many ofthe anti-globalization protests against free trade assert that markets reinforce inequality and unsustainable consumption. My contention in this chapter is that this question, like the question of the inevitabil ity of either "failure" or "progress" of L A , is misplaced. This chapter demonstrates that there is no such thing as a free market in the sense economists would have us believe. When economists debate whether it was markets or institutions that led to East Asian growth, they are missing the fact that not only EA but every Northern state interferes heavily in its markets. As Karl Polanyi pointed out in The Great Transformation, markets arc embedded in historical contexts and social understandings. However, this is not a book about sociology but economics. My objective in this chapter is therefore to show that state interference in market outcomes is ubiquitous, and that LA must therefore adopt an active industry policy (IP) as the center of its development efforts. There is no real situation in which the state does not have a hand in market outcomes. The question then will become what type of state intervention in markets makes the most sense for LA? Below we begin to catalogue the different ways in which states intervene in markets through industrial policy. We concentrate in this book on industry policy towards manufacturing here because it has been the main source of high-paying jobs and social mobi lity since the 1ndustrial Revolution. While services are acquiring increasing importance, there are very little statistical data or study of their role in growth and development. Still, the arguments we make here about promotion of manufacturing could just as easily be made for growing services, such as fnancial, software, and other professional services.l As I have shown e lsewhere in some detail, Northern countries understand very well how important key industries are for their I document the growing importance of services for developing countries particularly those in Asia. in the book Ron and Anil Hira. Outsourcing America, Amacom, 2005.

An East Asian Modelfor Latin A merican Success

30

economies (Hira 2003b, 4 1 -58). Make no mistake, no matter the consequences for economic theory, the US is not going to let its key manufacturing sectors simply disappear. The US and European governments, the main movers behind the push for neoliberal policies in the developing world, are supreme hypocrites. They protect, subsidize, and coddle industries. They play favorites and interfere in the market in a myriad of ways beyond the atrocious subsidies in agriculture, the purported comparative advantage of most developing countries.2 In a study of foreign direct investment on developing countries, mainstream economist Theodore Moran points out in detail that developing countries have to compete not only in market conditions with the built-in advantages of the North, but also with a wide range of government interferences, including subsidies, tax breaks, export financing, abuse of countervailing duties and anti-dumping procedures, and so on (Moran 2002, 7). In lieu of the trite claims of the sanctity of instant redistribution or macroeconom ic stability as the supreme priorities, a more complex, balanced, and helpful dialogue on development found in the industrial policy literature has been largel y forgotten. The industrial policy l iterature, l ike its sister literature on competitiveness, seems to have reached its peak in the l ate 1 980s in tune with the American recession, the rise of East Asia, and the general decline in the US's dominant postwar international position. The US boom in the 1 990s, centered around expectations based on the information technology revolution, extinguished this discussion. As we begin the new millennium, with the increasing failures of neoliberal policies to de l iver either stable growth or equity, this chapter demonstrates that it is high time to revisit the industrial policy arguments. The continuing increases in relative inequality, the bursting of the dot com bubble and American prosperity, and the stagnation of large parts ofthe developing world all call for an exploration of new economic paradigms, and this chapter shows one important avenue for making that conversation fruitful­ namely selective, limited, and purposefu l state regulation and shaping of markets for national outcomes. Brief Literature Review of Discussions about Industrial Policy and Development3

Political economists have long tried to argue with mainstream economists about the benefts of industrialization for development, and, more acutely, about the benefts of state-led industrialization. Unfortunately, these arguments have often been dismissed by economists because they go against the grain of mainstream theory and formal

2

See Oxfam's brilliant report, RiggedRules andDouble Standardl': trade, globalisation, and thefight against poverty, 2002, available at www.maketradefair.com 3 A good general overview of the topic is found in Edward J. Malecki, Technology and Economic Development: The Dynamics of Local, Regional and National Competitiveness,

2nd ed., Essex, England: Longman, 1 997. I have tried to avoid reviewing the whole of the immense literature on industrial, innovation, and technology policy, and instead tried to cull out the important pol icy lessons for developing countries, with Latin America specifically in mind.

Why an Active Industrial Policy is Neededfor Development

31

methods which calls for free markets as the only method of achieving growth. This of course ignores basic history. As Change and Grabel state,4 Britain, for example, prospered at a time in history when it could (and did) colonize and/or dominate weaker nations, engage in slave trade, openly sell opium to China, and force young children to work 1 2-hour days under miserable working conditions. During its development, Britain also routinely violated IPRs (intellectual property rights) and marinated a law from 1 750 to 1 842 that banned exports of machinery to competitor economies. The economy of the USA benefited from very similar circumstances. Additionally. the USA benefited from its vast geographic scope (as the govemment was able to exterminate and/or forcibly relocate Native Americans), a large population of immigrant labour, and its exeeptionally rich endowment of natural resources.

Several seminal works will be highlighted here to introduce readers unfamiliar with the literature to some of the key ideas in regard to industrial policy and development. Perhaps the primary work on the need for state leadership in industrialization is that of Aleksander Gerschenkron, whose book, Economic Backwardness in Historical Perspective, has had a profound infl uence on development thinking (Gootenberg 200 I ). Gerschenkron pointed out through comparative historical case studies that over time, nations that successfully industrial ized, from Britain to the US to Germany to Japan and Russia, progressively used increasing levels of state intervention. This led to an important concept in the political economy literature, namely "late industrialization," implying the importance of the timing of when industrial ization (or even entry into a certain type of production) begins. In the 1 960s, Raul Prebisch'5 work on commodity prices vs. manufactures, as embodied by the Prebisch-Singer hypothesis, added the idea that industrialization was desirable because the prices of industrial products were both less volatile and increasing as compared to commodity prices over time.s Part of the reason is that as incomes rise ( Enge l 's law), a relatively smaller proportion is spent upon basic food products; another part is that over time the technological and skilled labor value of the production process increases while the raw material portion of production costs tend to decrease as a proportion of the final good's value. However, a great deal of skepticism continues to surround the relative prices of commodities, with institutions l ike the World Bank pointing out that commodity producing nations such as New Zealand can be prosperous. In more recent reports, the World Economic Forum and the Inter-American Development Bank, have acknowledged through econometric studies that the evidence points clearly to the conclusion that commodity-based economies grow more slowly than technology-based export ones.6 Moreover, the 4 Ha-Joon Chang and Ilene Grabel, Reclaiming Development: An Alternative Economic Policy Manual, New York: Zed, 2004, p. 44. See Chang's more impressive and eomprehensive argument in Kicking Away the Ladder: Development Strategy in Historical Perspective, London: Anthem Press, 2002. 5 Prebiseh's key work i s The Economic Development ofLatin America andIts Principal Problems. New York: UN, 1 950. 6 World Economic Forum, Global Competitiveness Report 2001�2002, New York: Oxford Uni versity Press, 2002, 46, and Inter-Ameriean Development Bank, Economic and social progress In Latin America. Competitivene,�.\·; The Business of Growth. Washi ngton :

32

A n Ea5t Asian Modeljor Latin American Success

rise ofthe OPEC petroleum cartel led to increasing hopes that commodity producers could organize themselves. Unfortunately, thesc hopes have never been realized into sustainable cartels in any other product, and the grandiose plans of for a New International Economic Order to improve returns to commodity producers through price setting, buffer stocks, and other deliberate mechanisms, seem to be a thing of the past. In line with the context of the Marshall Plan following World War II, in Latin America the argument was not over whetherthere should be industrial promotion, but what type should occur (Hira 1 998). Discussions included whether a "big push" of an entire production process, in a centralized location, should take place, or whether decentralized, regional, and piece-meal industrial development made more sense. In general, Latin American states opted for the big push idea, in part because of the inf uential ideas of "spillovers," or, as Albert Hirschman called them, "linkages." (Hirschman 1 96 1 ) The idea is that industries are linked a viable steel industry facil itates a viable auto industry, for example. This is related to the idea of the "value-added" chain, by which one seeks to capture more and more ofthe processes that add value to a product. For example, an auto industry facilitates the viability of national tire and parts sub-contractors. Spillover effects, similarly, are processes that are enabled from the development or big push in one industrial area. Developing engineers for oil ref ning could create a pool of talented (or human) capital that could lead the charge into petrochemicals. Radical extensions of Prebisch's insights led to a general skepticism not only towards commodities production, but also towards all kinds of dependent links with the developed world. Oftentimes, these led to nationalizations of foreign property andlor stringent conditions on multinational investment. In general, Prebisch 's later ideas that import substitution had to be replaced by the production of capital goods, regional integration and export-oriented industrialization were all but forgotten. Therefore, in practice the Latin American industrialization process was one of substituting only for fnished products, while intermediate input products continued to be imported and, by the 1 970s, fnanced by borrowing on the international capital markets. Thus, Latin America's external dependence was not signifcantly altered. Raymond Vernon's seminal article positing a product cycle added to political economists' arguments that small nations need state help to industrialize, and that high technology and industrial goods can lead to improved living standards (Vernon 1 966). Vernon's product cycle is a theory of product innovation, during which monopoly or oligopoly prof ts can be gained, followed by a stage of mass production, in which the labor-intensive and now standardized parts of the process are moved out to international sites with lower labor costs, followed by a general decline in demand for the product, at which point production sites are determined largely on the basis of labor costs and likely to be completed therefore wholly in developing countries. Vernon's product cycle suggests that production of most items should move over time via comparative advantage to lower cost countries, but the Johns Hopkins University Press for the IADB, 200 1 , 49. See also Sanjaya Lall, "The technological structure and performance of developing country exports, 1 985- 1 998, Oxford Development Studies. 2000 (28): 337-368, p. 3S0.

Why an Active Industrial Policy is Needed/or Development

33

there are two implications that must be considered before considering this bedrock theory of international economics. The first is that technological products, such as computers and autos, are constantly being re-invented into what are, in essence, new products, thereby renewing the product cycle of innovation. The second is that the productivity of developed country workers more than compensates for the lower labor costs ofworkers in the South, and that constant innovation leads to increasingly sophisticated production processes, requiring more highly skilled workers. That productivity advantage came initially from a combination of greater skills and capital equipment. As we see in the outsourcing phenomenon, the acquisition of skills is reducing such advantages to the point where countries such as India and China have targeted industrial policies to close the gaps in certain industries. A simple example of this is the computer industry. Begun in the US, prices have slowly come down as production has moved overseas to lower cost labor markets. Some labor-intensive programming has moved overseas to India as diaspora skills and an active Indian industrial policy have attracted those production components. Yet, new Windows programs, new semiconductor chips, and new products like the iPod still allow US manufacturers to retain control over market profts. Developing countries need to do more than just close the remaining gaps in terms of capital investment and skills. It is only when developing countries can begin to innovate and market their own latest versions of these products, as only Japan has done so far, that they will be able to gain the lion's share of the profits involved (and lead a new cycle of innovation for the next line). Moving into such a position of competing in international manufacturing markets never happened in LA. With the inflationary, balance of payments, and commodity price crises in LA from the late 1 9605, and spurred, ironically, by the OPEC oil price shocks, industrialization through import substitution was considered a failure, and, in l ine again with international trends, was gradually replaced by the neoliberal paradigm of liberalization. The late 1 980s-early 1 990s wave of East Asian l iterature revived the earlier interest in industrialization by attempting to make the case that East Asian states, following Gerschenkron's historical pattern, were successful in terms of growth and equity precisely because they intervened so deeply into industrial development. Stephan Haggard, in his famous Pathways from the Periphery, pointed out the important contrast between East Asian industrialization's export-orientation VS. Latin America's import substitution strategy (Haggard 1 990). The World Bank's rejoinder came in 1 993 with the publication, The East Asian Miracle, in which the institution attempted to refute much of the EA industrial policy literature.7 Regardless of the merits of the argument, which we examine in more 7 World Bank, The East Asian Miracle: Economic Growth and Public Policy, New York: Cambridge Universi ty Press, 1993. A solid rejoinder, among others and along with basic logic and knowledge ofthe region, is found in K.S. Jomo, ed., Manufacturing Competitiveness in Asia: How internationally competitive nationalfirms and industries developed in East Asia,

New York: RoutledgeCurzon, 2003. Marcel Timmer stakes out a middle ground in which he suggests that improvement in various factors, particularly labor productivity was key, but so were gove rn ment policies that directed improvements within selected industries. See The Dynamic.� ofAsian Manufacturing: A Comparative Per,�pective in the Late Twentieth Century, Northampton. MA: Edward E lg ar 2000, .

detail in Chapters 3 and 4, by the 1 980s, the argument was a moot point in much of the developing world, with the onset of the debt crisis, followed by the series of financial shocks and the ongoing recession in much of East Asia. Industrialization through protection or promotion is l argely considered passe and, indeed impossible given the constraints on dcveloping country budgets and the pressures to join free trade agreements in order to secure access to markets. Despite this overall veneer of consensus, behind thc scenes, states remain universally active in sectoral promotion policies, albeit in much more subtle and hidden ways than during the 1 960s. I n order t o finally extinguish the Wizard o f Oz-type illusion of free markets, w e tum in the rest of the chapter to the reasons behind having an industrial policy (or more generally government intervention in markets) and then tum to cataloguing the ways in which governments actually intervene. This effectively makes the mainstream economist view of "the two paradigm debate" that EA succeeded because of markets and macroeconomic stability alone irrelevant in the face of the fact of ubiquitous state intervention everywhere. We close the chapter with a brief discussion on a secondary challenge - refuting the idea that globalization renders industrial policy ineffective. Industrial Policy: Reasons Given fo r the Need for Government Intervention in Markets

Industrial policy has been understood in various ways. Michael Dietrich defines industrial policy "as long-run supply-side initiatives aimed at restructuring or promoting the activities of particular firms or sectors." (Dietrich 1 992, 1 7) Here are the most common reasons given for the need for government intervention in markets: 1.

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34

Market Failure

The market failure school of thought posits that industrial policy is necessary because of key faults that occur in markets. These problems could include very high economies of scale that limit the level of competition; lack of incentives to create new technology; externalities created in the process of production; and high barriers to entry and exit for production. Government intervention must occur, in this sense, for the optimal outcomes to be obtained, that is the outcomes that would have been reached had the market been functioning adequately. For example, it may require some concerted effort for a government to promote research and development in an industry that does not yet exist, but for which there is a potential comparative advantage. Thus, the Brazilian Government's promotion of its pharmaceutical industry has, after many decades, led to viable generic drugs that are more affordable for the local population. A case can also be made that some production produces positive or negative externalities the common example being pollution (a negative one), whose full cost is not borne by the producer. In the case of industrial policy, we expect strong externalities for the region as a result of employment and income providing a tax base and a fiscal base for the quality of life. Similarly, a parallel

35

literature traces the lack of information o r information asymmetries a s part of the transactions cost l iterature. From this point of view, as Joseph Stiglitz pointed out, there may be inefficiencies in markets, such as the market for used cars, because of a lack of information by one or both parties, the buyer in this case. Risk can be considered a related type of category. Risk may not be a market fai lure in the sense that some worthwhile endeavors may take on the characteristics of public goods. Research on malaria, for example, could be a vital social task, but one in which the payoff may be too long-term and too uncertain for Northern pharmaceutical companies to adequately invest in it. If we consider the highly volatile and "shallow" nature of developing country financial markets, as well as the l imited size of the domestic markets and the lack of technological and marketing sophistication of some national companies, even more ordinary industrial endeavors will likely be out of the reach of Latin American entrepreneurs, particularly in smaller countries. The key mainstream rejoinder to the market failure school of thought would be foremost that the government is unable to overcome the market failure. Since there is no profit-related market discipline by government enterprise, the government will not create the atmosphere in which a viable, competitive, and efficient market producer can be created. Instead, the government should focus on creating the conditions, e.g. ensuring macroeconomic balance and viability of financial institutions that will allow for entrepreneurs to take on the risk (and the accompanying gains/losses) of any endeavor. If an enabling market atmosphere is created, and national businessmen still do not enter the industry, the industry may not be viable within the country itself. The government may become active in improving the human capital and infrastructure of a country (though even those are potentially better run by private firms or through government awards of sub-contracts) to attempt to attract foreign investors who will then bring in their expertise, capital, and technology to the task, and take on the risk. I f the government creates a viable investment climate, the population will gain not only from the employment and income created, but also from the spillover effects of the learning process. The government may also look at certain items as public or "club" goods, in which, similar to externalities, the costs and benefits are not equally shared. For example, research and development with long-term payoffs may be viewed in some cases as a public good. A breakthrough i n biotech could benefit an entire nation's pharmaceutical industry and the medical well-being of its population, but may be too costly and/or too risky for a private firm (particularly in a small developing economy) to undertake on its own. Thus, as Chang points out, the question is the balance between the socialization of risk for public benefit and the moral hazard problem by which risks are unnecessarily taken for private, rather than social gain (Chang 1 994, 78-9).

Risk

2.

Late Industrialization/Infant Industry and Industrial/Sectoral Targeting

This argument, in line with the previous discussion, is that there are high start-up and learning curve features which serve as "barriers to entry" to viable production. These could include technology. managerial and other expertise, and even inadequate

36

regulation of markets. The question here again is why the government is better poised than the private sector to lead this in the form of state-owned enterprises, which in Latin America, generally have a very poor record of performance. This issue was partly answered in the East Asian literature by noting that the governments of Japan, South Korea, and Taiwan all worked with private domestic frms. In the case of protection, the question is which industries the government should choose to protect, for how long, and under what conditions. Again, the East Asian literature points out that stringent performance requirements, including export and local content requirements, were placed upon domestic companies, and that disciplinary measures, including phase-out or cut-off of protection and fnancial support were used to attempt to ensure performance. 3.

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An East Asian Modelfor Latin American Success

Technology/Product Cycle Management/Market Dynamics

As noted above in terms of the Vernon product cycle and the dependency view of the world, technology has long been considered part of the key difference in the economic structure of the North versus the South. H owever, the same types of market failure arguments as well as the overal l viability of a technological sector for a developing country have been put into question. When one considers the distance between the educational and research and development infrastructure of the US and Europe compared to the developing world, the task seems daunting. However, larger countries, including China, India, and Brazil have recently created viable leading edge products, such as software development and aerospace products that are internationally competitive. Even a smaller country such as Costa Rica has created a technology pact with large international software companies in an attempt to enter the information technology market. The real question, then, is which countries, under what conditions, in which markets is technology development possible, and, more importantly, how can it be accomplished? Peter Katzenstein's seminal work, Small States in World Markets, adds an interesting wrinkle to this issue (Katzenstein 1 985). Katzenstein points out that Western and Central European corporatist states also have little infuence on demand and supply conditions in international markets, yet have relatively stable growth and equity performance. He suggests that part of the reason for this performance is a highly adaptable and f exible industrial structure that is premised upon an extremely skilled workforce, and state cooperation with industry and labor to facilitate adjustment to improvement of products and new product lines. The problem with this approach is that Latin American states have not shown anything near the capacity required for such leadership. With high levels of corruption and class and group conf ict, establishing a European-style corporatism in Latin America must be viewed with great skepticism. On the other hand, market facilitation, and adjustment policies, such as retraining, are often paid lip service by most Northern countries. The perennial question here is how retraining can be accomplished- the track record of retraining long-time workers in downsizing industries (such as coal mining or steel production) is not very good, reflected by the high levels of protection for those industries internationalIy, including Northern economies (H ira and Hira 2005).

4.

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Spillovers/Military-Industrial Complex

An issue that is an important part of the industrial policy literature is the relative importance ofdeveloping military technology that can then be sold on the international weapons markets and have spillover effects in civilian production. Certainly the development of the internet by the Defense Advanced Research Project Agency (DARPA) of the US, and the close ties between US aerospace and defense contracts points to strong evidence that military spending can have very important effects on industrial structure, and has had particularly profound impacts on leading edge services, including information technology. The question in this area beyond those stated above would be whether in fact it makes sense to attempt to create military spillovers rather than simply funding/protecting an industrialization project directly, as in the case of Europe's Airbus. Brazil's successful development of Embraer, an international ly competitive aerospace industry, falls directly into this category. 5.

Employment, Declining Industries, and Education

Besides the fact that human capital, or a capable, well-fed, healthy, and wel I ­ educated population, i s needed t o create the viable conditions for development, as most mainstream economists acknowledge at the macro-level, there are important implications of industrial policy for employment as well. One ofthe most contentious sectors of multilateral discussion is certainly automobiles, precisely because production in that sector involves so many high paying jobs. It is no coincidence that the supposedly free-market US Government bailed out Chrysler in the 1 980s. In declining industries, the question of promotion and/or retraining becomes especially acute, as the country may view a particular sector as vital not only in economic, but also in political and cultural terms. The European Union has effectively stated this about its unviable (in many sub-sectors) agricultural sector. As noted elsewhere, the role the government can effectively play in economic adjustment either in creating or downsizing remains especially murky. For a developing country experiencing ongoing urbanization, population growth, and pressures on public services, as well as, in the case of Latin America, major internal factionalization, employment creation is both an economic and political necessity. The questions here are similar to those stated earlier- how can this be done, and when and under what conditions is protection worthwhile (rather than allowing the private market to work). The creation of human capital could not conceivably raise any opposition, however, the real question is what type of educational promotion is best for a particular country? The question is about degrees, institutional structures, and opportunity costs among different systems, rather than a simple prof con argument for human capital development. An additional complication is the probable complementarities among different services like education, health, and population growth. There are countries such as Argentina, with high literacy rates, but a poor economy, so the precise relationship between human capital and economic growth is not at a l l clear. On the other hand, as in the case of the military-industrial complex, there is strong evidence that there is an education-industrial complex. The US. Canada. and Europe all heavily subsidize higher education and university-based

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An East Asian Model/or Latin American Success

research with the idea that it will benefit private industry. Besides large research grants, Northern countries also identify particular sectors for promoting re-training, such as having established or increased the funding of technical institutes and research centers once infonnation technology became considered a key industry. 6.

Creating Larger Firms (Economies ofScale) and Facilitating Exports

Given the relative size of international finns in key industrial and even service sectors, an argument can be made that domestic finns should be allowed a defacto oligopoly or monopoly within the domestic market so that it can reach the physical and marketing economies of scale to compete in world markets. The EA literature even suggests that Japan, among others, protects its domestic markets so that domestic consumers can effectively subsidize national companies' exports. Similarly, through JETRO (Japan External Trade Organization), the Japanese Government facilitates the targeting of possible export markets and the entry of national companies into them. While all developed countries have well-honed export facilitation and subsidization institutions, including trade infonnation services and export financing, the extent and types of promotion vary considerably by country, sector, and time period. Moreover, it is quite unclear the extent to which the agencies are really effective and efficient at finding market opportunities that private sector companies could have found themselves. The efficiency of public expenditures argument also comes into play here. In a developing country context, one can make the argument that the domestic economy is probably too small in most of the countries to create a national champion on the basis of the domestic market. More importantly, there is the question of why domestic consumers should pay a collective price for the benefit of the few workers and managers lucky enough to work for a subsidized company. Hence part of the key to an IP argument in a developing setting, as we shall see in our examination of EA IP, is that the end goal must be to create an internationally competitive industry, that is, one that can provide the same or better goods and services to domestic consumers at the same or better price as foreign fnns. For taxpayers, the benefit of this investment is that the creation of employment, incomes, and export earnings from the industry provides a strong fiscal base, lower crime, etc. On the other hand, this also requires the conscious national development of champions, embracing a domestic oligopoly, so that national finns can reach the adequate production, fnancial, and technological economies of scale in order to be able to compete in international markets. The key question, then, is how to provide protection domestically while pushing discipline for competition internationally. 7.

Regional Development

A constant feature of industrial policy, discussed by a vast literature, is the question about using promotion and protection to develop poorer regions within a country. Undoubtedly, the government can develop infrastructure in rural regions to facilitate market access, but economists will raise the question ofthe viability of such schemes. As in the case of adjusting workers and regions in declining industries, schemes to diversify backwards areas, such as Canada's promotion ofnew industries and services

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39

in over-fished Newfoundland, generally have a poor track record. Economists point out that migration and urbanization takes place because the labor force reacts to market signals- both in terms of economic opportunity and quality of life. The question of the many subsidizing the few is also brought up in this context, and the sustainability of supporting losing enterprises rather than simply bearing the shorter­ tenn costs of adjustment is a serious issue. On the other hand, poverty and related social problems are often concentrated in particular regions. Moreover, especially in the developing world, living conditions have become almost unbearable in the large cities, both in tenns of pollution and ability to carry out nonnal business. The strength and concentration of the urban population always raises the question about whether developing governments actually subsidize those urban centers, which was certainly the case in Latin America during the Import Substituting Industrialization (lSI) period. The responses to such arguments do not have to be made purely in terms ofequity considerations. The fact is that oftentimes poorer regions lack in both physical and social infrastructure. Hence strategic investments in these areas can be viewed as a type of facilitation, allowing the market to work as industry moves to areas with lower labor costs. The Arguments Against IP: Is the Medicine Worse than the Symptoms?

The arguments against industrial policy are in line with those against all fonns of government intervention in the economy (most publications from the World Bank and IMF echo this line, see bibliography for examples). They include the attack on the idea that the government has any ability to "pick winners," in tenns of emerging/viable industries and sectors; the likelihood that politically, rather than economical ly, optimal decisions will be made, leading to corruption, cronyism, inefficiency, and poor service, affecting other economic sectors and leading to a net drain (or suboptimal return) on economic resources; the probability that recipients of government aid will not only be tied in politically, but use political avenues as means to sustain such support, leading to a parasitic, rather than independent, viable, and competitive private sector, i.e. "infants that never grow up;" the stifling of foreign direct investment, technology transfer, managerial expertise, and global marketing and retail/distribution chains; the stifling of entrepreneurship and efficient domestic finns; and, most fundamentally, the loss to domestic consumers of the benefits of market competition. M oreover, critics caution that industrial policies would simply invite reciprocal retaliation by other countries. Like most economic theories, these arguments may hold some water in a perfect world of no intervention by any party, but that is not the world we live in. States always intervene in markets and always will, for the reasons noted above, particularly that perfect competition does not exist in most markets that provide employment and high incomes. Since states by definition are political and notj ust economic creatures, they will and should attempt to shape market outcomes for their national interests. The real question, then, is given the myriad of possibilities, some of which may be incompatible, which types of intervention make the most sense for a developing country? In the rest of this chapter, we lay out the possible types of intervention and

An East Asian Modelfor Latin A merican Success

40

then in the next chapter argue why an EA arrangement makes the most sense for LA.

What Tools are Used in Industrial Policy?

Based on the factors above that make almost all markets imperfect in some way, "Strategic Trade and Investment Policies" is the term often used to describe the many different avenues by which countries seek to promote national competitiveness.s There are many definitions and measurements of competitiveness. The most well­ known is Michael Porter's famous diamond model, with the four interrelated factors of firm strategy, structure, and rivalry; demand conditions; factor conditions; and related and supporting industries, all of which are indirectly affected by government policies and chance (Porter 1 990). Our focus here will be on this indirect link . between government and national competitiveness. We can summanze the ways industrial policy is carried out to achieve national competitiveness according to the following categories: Anti-trust and Labor and Environmental Codes

An often overlooked aspect ofi ndustrial policy deeply engrained in Western tradition is the use of anti-trust and labor protection codes to change markets. A nti-trust is used to break up dominant companies, as with the recent cases ofAT&T and M icrosoft in : order to introduce competition. It is interesting to note that perhaps the most stunnmg omission of economists, in their promotion of liberalization in order to increase domestic competition through imports, is that they ignore that dominance can also occur on an international level (thus there is little foreign competition to create a competitive market). Thus we have long-standing companies controlling significant market shares in key global markets over long periods of time. Similarly, we now take for granted basic labor protections, such as worker safety and chil� labor, �s wel l as environmental curbs on market behavior, though they do not effectively eXIst in much of the world on whom we rely for part of our goods. While not the focus of this book, it bears repeating again, the fact that in a global economy, there is little coordination in these areas, by contrast with international macroeconomic issues, such as exchange rates.

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company of Brazil. I n a developing country scenario, SOEs were often set u p to lead the national plan for industrialization. Defining exactly what an SOE is can be quite tricky, as there are many examples of mixed public-private ownership as well. A country entering a new market, with all the problems we discussed in the frst section, may wel l consider an SOE to be a more reliable vehicle than a private sector firm, especially where foreign competition i s already well-established. Protection/rom Competition

In terms of protection, again a wide variety of instruments are available, including quotas, tariffs, differential treatment of imports through regulation, differential treatment offoreign investment, ownership, and personnel, government procurement rules, and a wide variety of non-tariff barriers. Protection can be viewed in some ways as promotion of domestic firms. Sectoral Promotion, including Subs idies

Sectoral promotion is arguably much more key than state-owned enterprises because of the myriad of methods by which it takes place. Van Beers and de Moor suggest five different kinds of public subsidies. The first is on-budget, and includes direct payments or grants to a party. Off-budget subsidies account for the other types. The first category of these is tax policies, including credits, exemptions, deductions, rate relief, holidays, and preferential treatment. The second is public provision below cost. I n this category, we could include infrastructure provision and complementary services, and research and development grants and purchases. The third category would be capital cost subsidies, incl uding all fonns of fnancial incentives. Examples of financial subsidies are preferential loans, liability guarantees, debt forgiveness, and other forn1s of providing capital at below market cost and above market access. Lastly, they cite subsidies through the market mechanism. These include domestic-oriented policies, such as price regulation, quotas, and procurement policies; and trade-oriented measures, such as those listed above under protection (van Beers and de Moor 200 1 , 5). To these suggestions we can add government efforts to aid in marketing or distribution; and even subsidization offactors of production, including infrastructure. I fwe consider the latter avenue of sectoral promotion, the advantages built in by the North over the South are egregious and outside of the scope of trade agreements.

State-Owned Enterprises (SOE8)

Regional Growth A reas/Clusters Based on Flexible Specialization Strategy

There is a strong consensus among economists that state-owned enterprises tend to be less efficient than their private counterparts, based in part upon the difference in incentives and s upposedly levels of competition. Despite this, numerous examples of successful SOEs exist throughout the world, such as Petrobras, the petroleum

An ongoing discussion i n the industrial policy literature questions whether IP should be focused on the national or regional level, similar to the question of whether the government should follow a broad-based TP for growth (for example facilitating

8

See Jeffrey A. Hart and Aseem Prakash for an overview of the strategic trade policy

l iterature, "Globalization, governance, and strategic trade and investment policies," pp.

243-6 in Prakash and Hart. Globalization and Governance. New York: Taylor and Francis, 1 999.

42

An East Asian Modelfor Latin American Success

markets to operate efficiently, such as providing infrastructure and macroeconomic stability) or targeting specif c sectors.9 On a regional level, government procurement and other methods of favoritism can help to develop the "research triangles," or clusters of similar activities which are highlighted in P iore and Sabel's famous book The Second Industrial Divide (Pi ore and Sabel 1 984). Piore and Sabel point out that in some cases, such as Silicon Valley or Milan, there seem to be "horizontal" economies of scale in terms of companies in the same industry benefiting from regional concentration, such as the sharing of ideas and a pool of human capital. "Flexible specialization" is the term used to describe the supposed change from mass production, based on lowest cost economies of scale and transactions costs to just-in-time, specialized and flexible production based on quality and niche marketing to customers' specifications. Flexibility and customization are the key words for the supposed new paradigm. Regional clusters are always supported by local and national government support, such as local universities that produce a steady stream of labor, or government subsidization of infrastructure for research and development.1O Some authors in the I iterature prefer to see these as network, rather than geographically-based clusters (see De la Mothe and Link 2002). Regulatory Policy as a Source ofIndustrial Policy

In my book, Political Economy ofEnergy in the Southern Cone, and in my chapter "Regulatory Games States Play," I argued that regulation could be used as a form of industrial policy. Regulation sets up the rules for how a market operates. 1 t can set the level of competition, the types of standards, the level of entry of foreign companies, and the general red tape, among a myriad of other factors, all of which affect how a market operates. However, most analysts would think of industrial policy as working through more traditional instruments of protection and promotion. Investment in Factors ofProduction and Ways to Reduce Transactions Costs

As noted in the various sections above, the levels of military and direct educational subsidization that feed into research and development of products on the private market are vastly superior in the North, leading to a vicious cycle of increasing gaps in competitiveness. These would include the vastly superior investments in education and health care that give human capital, on the whole, a decided edge in the North. We could extend this line of thinking to include investments that reduce transactions costs, such as Singapore's setting up of broadband transmission throughout its territory. Again, while mainstream economists, such as Theodore Schultz and Robert Barro, along with mainstream institutions such as the World 9 For an overview of these debates, see Malecki. Some authors claim that there are now supra-national innovations systems. See Robert Anderson, Theodore Cohn, Chad Day, Michael Howlett, and Catherine Murray, eds., Innovation Systems in a Global Context: The North A merican Context, Montreal: McGill-Queen's University Press, 1 998. 10 For an overview of this literature. see Rod B. McNaughton and Milford B. Green, Global Competition and Local Networks, Burlington, VT: Ashgate 2002. .

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Bank, often call for investments in human capital to create growth, they fall far short of human capital for an industrial policy. In fact, one could argue that mainstream economics effectively prevents human capital investments through the clampdown on fiscal budgets created by structural adjustment policies designed above to pay back external debt. The fact that countries with high levels of human capital, such as Argentina, India, Sri Lanka, Egypt, and Russia have struggled for many years with both growth and equity, show that investments in human capital alone are inadequate. How does IP Need to be Adjusted for a Global Economy?

Thus far, we have explained the reasons for and the tools of IP, with emphasis on developing country settings, demonstrating en route that intervention in markets is ubiquitous and the wide variety of forms it takes. There is an important and growing vast l iterature on how globalization affects late industrialization in the developing world, effectively limiting the possibilities and outcomes of an active J P. H owever this literature contains all kinds of explanations, some of which seem to have empirical backing and some of which are more speculative. In general. we can see that there are two different views, one focusing on constraints and the other on possibilities for learning, for the possible outcomes of developing country I P in a globalizing economy. Global Commodi�y Chains

One slice of the literature on globalization looks at the emergence of global commodity chains which limit independent industrialization in the developing world. In line with much of the writing about the development of global enterprises, the commodity chain literature focuses on the human networks and localized economic effects created around the international production of a particular good. Most of the commodity chain writers take a critical perspective on such operations; in a dependency-type fashion they see a system of transformation of raw materials and unskilled labor in the periphery as important inputs into Western consumer products. The global commodity chain l iterature also seeks to explain the development of the semi-periphery countries such as South Korea, where semi-skilled labor yields higher local returns, but an overall dependency upon foreign capital, technology, and export markets continues. Gary Gereffi points out that commodity chains can be producer or buyer driven. Producer-driven chains, such as automobiles, aircraft, and machinery, are organized around a multinational corporation's production system. The key decisions are to minimize the costs of production of the different components and various stages of production. By contrast, buyer-driven chains are labor-intensive goods such as c lothing, footwear, toys, and electronics, in which larger retailers use international contracting to minimize the costs of production (without actually producing the goods themselves) (Gereffi 1 994, 95-1 22). In producer-driven chains, companies such as Ford not only control the retail and distribution network, but also the technology, managerial expertise, and capital to produce the good. In buyer-driven chains, firms such as Nike more often rely upon

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branding as well as their access to retail chains owned by others. Besides brand, their main power comes from their design and marketing know-how. The global commodity chains l iterature is quite valuable not only in terms of its sectoral studies,l I but also because it looks at sectors to answer the question- to whom do the benefts of value-added steps of the production process accumulate? This l iterature also does well in pointing out the complex and subtle differences among national strategies for industrialization. Thus the literature points out that upward mobility is possible, but the individual characteristics of industrialization process for example the nature of the global commodity chains of which national production is part - is vital to understanding the overall well-being of the economy. In this sense, through this l iterature, an overall critical stance of globalization i s favorably watered down by the complexities o f real situations that acknowledge that mobility in the industrial ladder and world economy can still take place. The Role of Multinational Corporations

Multinational corporations (MNCs) have been at the center of controversy about development from at least the 1 960s.12 The dependency argument sees MNCs as agents of exploitation. MNCs use their strength in capital, technology, expertise, and access to outside markets to push out local competition, purchase local raw materials and labor at exploitative prices, engage in destructive environmental practices, and avoid taxes and support corrupt e lites, including governments, with no concern for the welfare of their own population. On the other side, MNCs are supposed to open the door for developing eountries to acquire access to markets, to current technology, to world-class training, and to capital and managerial know-how that are unavailable to local entrepreneurs. They are supposed to spur the development, technology, and competitiveness of local firms. One of the most important aspects of MNCs revolves around technology transfer. In practice, it i s quite difficult to separate out MNCs from local developments of technology. A common example occurs when technology has been adapted to the needs of local markets, or when an MNC uses its dominant position to buy out or otherwise usurp local entrepreneurs or subcontractors' breakthroughs. The question about where MNCs place resources has led to a growing literature on decision-making within MNCS.13 Most of this literature is concerned with how 1 1 Teresa Shuk-Ching Poon, Competition and Cooperation in Taiwan s Information Technology Industry: Inter-Firm Netlvorks and Industrial Upgrading, Westport: Quorum, 2002, is an interesting study that combines GCC with the leaming framework discussed

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firms decide to make foreign investment decisions. The most common analytical framework in the literature is Dunning's Ownership, Location, and Internalization (OLl), also known as Dunning's "eclectic" paradigm. Basically, ownership refers to some specific advantages that the frm possesses, which allow it to overcome the costs of competing in a foreign market. These are often referred to as "core competencies," such as proprietary technology or managerial, production, or retail know-how. Location refers to the advantages of the particular host country, such as cheap labor or tax or other benefits. Internalization, which is viewed as a subsequent consideration, refers to the fact that a l arge multinational enterprise can internalize transactions costs of operating in the market, that is, money is saved by not having to contract out services and bargain a price with an external agent, who has their own overhead, etc. Institutional instability, exchange rate risks, and unreliability of sub-contractors could all be factors in frm decisions on whether to purchase a local firm, set up contractual relationships with local companies, develop its own subsidiary and production facilities, or otherwise develop an optimal strategy for its invcstment. These factors are considered along with strategic interaction with other firms and time lags from strategic changes in the market. So, which view about MNCs is correct? Whi le the literature does contain some insights into investment decision-making, there are still major empirical gaps that prevent us from answering this question. For example, most economists acknowledge that the theory and data behind intra-industry and intra-firm trade is quite lacking.14 We simply do not know much about the magnitUde or nature of intra-MNC or intra­ commodity chain transfers. There are a growing number of case studies, but these tend to be concentrated in particular areas of interest, such as automobiles and texti les. The bottom line is that much of this information is private to the finn and so inaccessible to researchers. Moreover, there are few well-developed empirical studies of technology transfer, and even fewer by particular industry (Cantwell and Molero 2003). In this sense, foreign investment should be seen as a bargain between states and M NCs. The nature and terms of the bargain will vary greatly by sector, time, and the resources that each side promises to bring to the table. There is an additional type of bargaining that takes place- that between government, business, and consumers. Dunning calls "alliance capitalism" the need for cooperation among these different partners (Dunning 1 997). For example, governments need tax revenues; corporations need skilled workers; and consumers want good jobs. All three have a stake in creating a situation where a healthy corporate sector can grow on the national level, and adequate attention is paid to investments in human capital and research and development, leading to a virtuous circle of growth. As we have

below onto Taiwan's information technology industry.

1 2 More recent critical treatments along these lines include: the seminal David C. Korten, When Corporations Rule the World, Bloomf eld, CT: Kumarian Press, 200 1 ; and specifically in regard to LA: Michael Edwards and John Gaventa, eds., Global Citizen Action, Boulder: Lynne Rienner, 200 1 , and Frederick Stirton Weaver, Latin America in the World Economy: Mercantile Colonialism to Global Capitalism, Boulder: Westview, 2000. 1 3 For examples, see Thomas L. Brewer, Stephen Young, and S tephen Guisinger, The New Economic Analysis ofMullinational.v: An Agendafor Management. Policy and Research, Northampton. MA: Edward Elgar. 2003; Yadong Luo. Multinational Enterprises in Emerging

Markets, Copenhagen: Copenhagen Business School Press, 2002; William N. Cooke, ed., Multinational Companies and Global Human Resource Strategies, Westport, CT: Quorum, 2003. 14 See Sven W. Amdt and Henryk Kierzkowski, Fragmentation: New Production Patterns in the World Economy, New York: Oxford University Press, 200 I ; and p. J. Lloyd and Hyun-H oon Lee, eds., Frontiers ofResearch In Intra-Industry Trade, New York: Palgrave Macmi llan. 2002.

46

An East Asian Modelfor Latin American Success

seen throughout the book, dichotomous views of good and bad or right and wrong simply don't match the complex reality, which is always mixed. Learning and Governing the Market

Alice Amsden's Asia s Next Giant, on the rapid industrialization of South Korea, typifes the l iterature on learning and governing markets for development. 15 Amsden asserts that late industrializing states face extremely difficult barriers of entry due to timing (well-established f rms already in the market who are already in the product cycle). The costs of creating an infrastructure for the continual project innovation that is needed in world markets, is an extremely expensive and difficult undertaking. A developing country will have a hard time competing with the education and research and development institutions as well as the well-developed and large private sector organizations working in a particular sector. As a result, Amsden suggests, late industrializers are more likely to compete on innovations in process rather than in product. That is, she examines the continual efforts to improve the productivity of South Korean manufacturing as the essential component for arriving closer to world market competitiveness. Amsden's studies of South Korea pointed out that late industrializing nations could enter new industrial markets in part on the basis of competing through constant efforts to reduce the costs of production, rather than simply through product innovation. She also created the term "dynamic comparative advantage," a direct affront to mainstream economists in stating that comparative advantage in some products could actually be created. Amsden's later study of Taiwanese high technology industries builds upon her earlier work (Amsden and Chu 2003). She points to the importance of rapid adjustment; the necessity of national ownership to capture the benefits of research and development and to encourage entrepreneurship; and the goal of creating outward foreign direct investment which can take advantage of specializing the different segments of production. Like Robert Wade, whose seminal book, Governing the Market, demonstrated that the dichotomy between markets and state-led economies is a false one, Amsden believes that one of the keys to success is the dense network of personal relationships between the state and the private sector (Wade 1 990). For Wade, governing the market means that a developing government should engage in "market-friendly" management of the domestic economy. The upshot is that attention must be paid to macroeconomic stability at the same time as creating selective interference on the microeconomic level. This interference is part of long-term planning to move up the value-added chain and capture market shares for higher revenue and wage-producing goods. Selected tools might include conditionalities on foreign investment, such as export and training requirements; subsidized credit to leading f rms; government-led marketing intelligence efforts; and heavy investment in human capital to create a 1 5 Alice H. Amsden, Asia s Next Giant: South Korea and Late Industrialization, New York: Oxford University Press, 1 989. See also Amsden, The Rise of "the Rest ": Challenges to the Westfrom Late-Industrializing Economies, New York: Oxford University Press, 200 1 , and Michael Storper. Stavros B. Thomadakis and Lena J . Tsipourit, Latecomers in the Global Economy. New York: Routledge. 1 998.

Why an Active Industrial Policy is Neededfor Development

47

skilled and ready domestic labor pool. Such interventions should be tempered with performance requirements, which are provided in part through selective and time­ limited competition for government aid, and through the discipline of having to compete on the international market through exports. Factor Markets as Parts o/National innovation Systems

Clearly, factor markets play a key role in terms of national competitiveness. Lall suggests that there are three basic factor markets in regard to internationally competitive industries: human capital; financial capital; and information, specif cally access to foreign technology for transfer (La11 200 1 , 23, 3 1 -33). Obviously these are factors that can be created, rather than either the resource "destiny" or "comparative advantage" that both the dependency school and neoliberals claim locks developing countries into a certain economic profle. However, countries with ready access to capital and high literacy rates, such as oil-rich Venezuela, have also had inconsistent economic growth. Countries with heavy foreign investment and multinational activity, such as Mexico, have not clearly increased their growth rate as a result. More importantly, in none of these cases has the country in question been able to create a nationally-based competitiveness with Northern countries. Therefore, the question is not simply investment in factor markets, but setting up institutions by which those markets can be applied fruitfully to actual innovation and technology problems. The literature on innovation reveals that there is no clear theory on how innovation occurs, or what exactly stimulates it. Some of the literature suggests networks of entrepreneurs; strong intel lectual and institutional property rights; evolutionary product cycles; and Schumpeterian values for entrepreneurship. 16 However, much of the literature suggests that technological development can be stimulated through national innovation systems - systems of higher education, research and development funding for inventors and entrepreneurs, and public institutions dedicated to this task (Nelson 1 993). These national innovation systems should recognize that it is applied science, "design" that leads to product innovation (Kline and Rosenberg 1 986, 275-305). Trust and social capital are words used to describe the necessary social pre-requisites for healthy cooperation both within a national innovation system and among international partners, generally firms, cooperating on research and development. 17 1 6 For examples, see HariolfGrupp, Foundations ofthe Economics ofInnovation: Theory, Measurement and Practice, Northampton, MA: Edward Elgar, 1 998; Andrew Hargadon, How Breakthroughs Happen: The Surprising Truth About How Companies Innovate Boston: Harvard Business School Press, 2003; Andrew H. Van de Ven, Douglas E. Polley, Raghu Garud, and Sankaran Venkataraman, The Innovation Journey, New York: Oxford University Press, 1 999; and Jon Sundbo and Lars Fuglsang, eds., Innovation as Strategic RefleXivity, New York: Routledge, 2002. 1 7 John H. Dunning and Gavin Boyd, eds., Alliance Capitalism and Corporate Management: Entrepreneurial Cooperation in Knowledge Baved Economies, Northampton, MA: Edward Elgar, 2003; David O. Faulkner and Mark de Rond, eds., Cooperative Strategy: Economic. Business. and Organlzatlonal l.lwue.l', New York: Oxford University Press, 2000.

An East Asian Modelfor Latin American Success

48

National innovation systems are often thought of as triangular- involving a partnership among government, industry and education. Technology is considered to be of particular interest as it is presumed to have multiple spill-over effects. I S I n other words, technology development is considered akin to a public good, in the sense that the costs of development may be high up front, but the benefits are spread across a wide range of companies and consumers. Clearly, there is a strong connection between defense spending and technological development, for example the aerospace industry developed around military needs and continues to rely upon military contracts for viability. Corporate research and development, concentrated in fields such as biotechnology, relies heavily upon intel lectual property rights for patent protection and developed through public subsidies to university researchers. Moreover, for national innovation systems to be successful, one needs a strong partnership between the public and private sector. Technological universities and institutes must be funded to develop researchers, and for long-term and public-goods type basic research. The educational infrastructure must have social network links to the private sector in order to develop viable applications. Given these infrastructure requirements, as well as the head start and the larger market size that developed economies have, it is no surprise that until recently developing countries have struggled to develop their own technology. The literature points increasingly to "strategic alliances" by different MNCs, and suggests that the wave of merger and acquisition (M&A) activity of the late 1 980s and early 1 990s was a reflection of Northern governments' recognition that the economies of scale for innovation had increased, though this probably underplays many of the financial motivations of the wave of M&A (for example see Narula 2002). Given the levels of expenditures required for b iotechnology, aerospace, and information technology innovation, and the rapid change of technological level in leading sectors, it is not surprising that national innovation systems seem to be melding with strategic MNC alliances. Therefore, MNCs are seen as a key steppingstone to international competitiveness in terms of technology transfer. Geographical Clusters or "Growth Poles "

I n terms of regional development, the literature also points out the importance of regional c lustering and inter-firm networks for sectoral success stories. 1 9 One need only think about Detroit, Silicon Valley, and Milan, to recognize how common the concentration of rival firms in the same area seems to be. The literature i s not really clear on what gives rise to such clusters - much of it seems to be historical accident 18

An overview of the economic literature on technology and growth is found in Albert

N. Link and Donald S. Siegel, Routledge,

19

Technological Change and Economic Performance, New York:

2003.

Reviews of this literature are found in Peter Brown and Rod B. McNaughton,

3-37 in 2002; Anna Grandori, ed., Interfirm Networks: Organization and Industrial Competitiveness, New York: Routledge, 1 999; and John H. Dunning, ed., Regions. Globalization. and the Knowledge-Based Economy, New York: Oxford University Press, 2000. "Global Competitiveness and Local Networks: A Review of the Literature," pp. McNaughton and Green,

Why an A ctive Industrial Policy is Neededfor Development

49

- or how or when clusters could be pro-actively created. Paniccia offers various suggestions. The first is that clusters could be "autopoietic," or chaotic systems that are self-organizing. The second are push factors, including l ocal expertise, entrepreneurship, or extended-family kinship networks who have an interest in local development of a particular production process. M ore recently, we see deli berate government policies designed to create such clusters through pro-active policies, as suggested here. Pull factors can also lead to geographical clusters, where partnerships between firms and sub-contractors; between firms and universities; and between firms and resources andlor customers can take advantage of proximity and inter-personal cooperation. The nature of the product may require distinct craftsman-like (highly specialized) interrelated stages of development which lends itself to a clustering of small skilled enterprises (Paniccia 2002, especially 33, 1 49-5 1 ). Once a large firm or set of firms is created, the human capital and infrastructure create a spill-over effect which lowers the costs of entry to rival firms, as was obviously the case in Silicon Valley with a huge number of start-ups in the 1 9905. Clustering could also lead to negative externalities, such as congestion; increases in factor costs, particularly labor and real estate; and a tendency towards groupthink. These factors also seem to be present in Sil icon Valley, where costs for land and programmers skyrocketed during the boom. The literature points out the important "enabling" effects that governance at a variety of levels can have in terms of aiding regional clusters, such as predictable fiscal policies; investment in human capital ; and creating top-notch and tailored infrastructure. The literature emphasizes the importance of shared values, trust, and informal ties that allow for the successful operation of networks. It points out that there are successful historical cases of government promotion leading to industrial clusters (Paniccia 2002, 1 52). Thus, clustering brings into question the premise of globalization of highly mobile supply chains. The truth seems to be that both modularization of production chains and clusters explain aspects of the global economy. Conclusion: IP in a Context a/ Globalization

The question of how globalization affects I P mirrors the pessimism and optimism of the dependency/neoliberal duality. Some authors see severe constraints which limit the possibilities for independent industrialization, while others see the possibilities for learning. Like all changes in structure, we can resolve this debate in the same way as we addressed the other in the preface both are simultaneously correct. Changes in structure from globalization create both new constraints and opportunities for developing countries. Having shown in the beginning of this chapter that IP is inevitable, we came to the question of how to create the best possible constellation of policies that will raise the living standards of the largest number of people as high and quickly as possible. We did not find any clear answers in the existing l iterature, however a number of suggestions worth investigating were reviewed. For example, our review of the l iterature suggests that some sectors are more "sticky" than others in the sense that they are not so easily moved from one place to another. I feel the best way to answer the question of "what works" is to look at how EA has succeeded in entering these difficult to move sectors.

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Why an Active Industrial Policy is Neededfor Development

A n East Asian Modelfor Latin American Success

Why therefore the East Asian Miracle "Debate" is a False One

The departure point of the rest of this book is that there was indeed an East Asian miracle of economic growth though much of the post World War I I period, which we demonstrate in the statistical section of the next chapter. We do not deem it worthwhile, given our arguments above to devote exhaustive space in this book to "prove" that IP was truly responsible for the East Asian miracle. On one side, the World Bank launched the first counter-attack to the foundational literature of the developmentalist state with its influential study, The East Asian Miracle (World Bank 1 993). The World Bank's contribution seems to contain mixed messages, in some parts acknowledging the effectiveness of IP (in selected cases), but overall arguing that IP were "largely ineffective (p. 3 1 2)." The World Bank's volume has become the backbone of the "second generation" of reform espoused now by mainstream economists and international financial institutions, which diagnoses the problem of development as centered on problems of making markets work efficiently through institutional reform, which for the most part has completely failed in LA. Much of this literature actually sees IP as an impediment to growth in EA, which according to this view, has grown primarily by getting macroeconomic fundamentals "right."20 Since the end of the Asian financial crisis at the end of the 1 9908, this view seems to have acquired dominance. Not only are there questions about East Asia's ability to continue its IP policies, but also whether the financial crisis is forcing a fundamental restructuring of EA economies towards a US model (Hira 2006, Tan 1 999). East Asia i s not seen as an I P model for these mainstream institutions, but rather as a reinforcement that macroeconomic fundamentals, and perhaps some secondary attention to human capital investment and institutions for markets are the true lessons for Latin America (Birdsall and Jasperson 1 997). Interestingly, this view of the optimality of moving towards liberalization is sometimes echoed by those on the left who see globalization as offering no other choice.21 We leave such debates, like whether free trade is truly optimal, to economists to argue over.22 From the point of view of many political economists, such debates are not worthy of serious investment of time and effort for several reasons. As we have seen, states always intervene in markets. More importantly, there is no control case of macroeconomic stability without heavy IP in East Asia. We do have the case of macroeconomic star Chile, but it does not have a serious manufacturing 20 For examples, see Joseph E. Stiglitz and Shahid Yusuf, eds., Rethinking the East Asian Miracle, Washington: World Bank and New York: Oxford University Press, 200 1 , and M. G. Quibria, Growth and Poverty: Lessons from the East Asian Miracle Revisited, ADB Institute Research Paper 33, Tokyo: Asian Development Bank Institute, Feb. 2002. 2 1 These views are often expressed from a world systems view. For example, see Satoski Ikeda, The TrifUrcating Miracle: Corporations, Workers, Bureaucrats, and the Erosion of Japan :S National Economy, New York: Routledge, 2002. 22 An exciting contribution in this vein will be found in Richard G. Lipsey, Kenneth I Carlaw and Clifford Bekar, Economic Transformations: General Purpose Technologies and Long Term Economic Growth, Oxford University Press forth com ing 2005. See also Dani Rodrik's work, such as "Rethinking Growth Policies in the Developing World," Luca D' Agliano Lecture. Torino. Italy, Oct. 11. 2004.

51

base. However, Chile did have a strong and pro-active I P promotion of new export industries. Still, as we detail in the next chapter, Chile's success has not been on the same level as that of EA, particularly in terms of equity. Nor does "free trade" exist anywhere - it is an abstract principle, just as perfectly competitive markets are. All trade agreements are subject to negotiations and concessions on a sectoral level in practice. Indeed most trade agreements are set up around the mechanism of allowing joining parties to set up exceptions to the principles laid out, and trade negotiations are ful l of conditionalities and opt out and safeguard clauses. In essence, free trade agreements have the effect of "locking in" winners who had a head start in entering global industries.

Conclusion

We have laid out in this chapter the reasons for IP and the ways in which IP takes place every day everywhere in order to promote the idea that an active IP for LA is a must. We have also demonstrated that the real argument must be what type of IP makes sense in a developing country setting. This situation works under the radar of a disingenuous discussion about the failure of I P, when as we have demonstrated the reality is that, by their actions, no states rely solely upon the international institutions' prescription to developing countries of macroeconomic discipline and free markets as the avenue to prosperity. This prescription is, in a sense, a manipulation of these institutions, reflecting the dom inance of the North, to preserve the advantages of early timing and its own I P interventions. Regardless of theoretical discussions of optimality, we see across the board that sectors from automobiles to computers are all subject to huge and ongoing types of government meddling. It i s hard to understand the psychology of the mainstream economist who cannot see these basic facts. Perhaps he/she is so enamored with the beauty of economic theory that the economist is unable to see what those who simply open their eyes can. Or perhaps there is a strong level of groupthink going on, with the immersion in formal models preventing them from seeing the clear fai lure of neoliberalism throughout the region. The bottom line is that no honest discussion about how development can take place until the facts about IP are brought to the forefront. One ()f the foremost facts that is completely ignored by economists is that macroeconomic stability and an active IP are completely compatible. In the next two chapters we sketch out the particular

institutional arrangements behind these harmonious relationships in EA. We now turn to explaining this difference in outcomes as a difference in their brand of IP.

Chapter 3

Industrial Policy Lessons for Latin America from East Asia

Introduction

While we have shown that state intervention occurs in every economy, in LA, any pretense of coherent and deliberate state leadership or vision towards economic development has been dropped under the current paradigm of neoliberalism. Neoliberalism, including economic l iberalization and privatization is under heavy fre in Latin America. The recent elections of Chavez in Venezuela, Lula in Brazil, Correa in Ecuador, Kirchner in Argentina, and Morales in Bolivia indicate a strong level of unhappiness with the low rates of growth and growing inequality in the region. While a return to the heavy protectionism ofearlier decades seems impossible, particularly given the pressures of the external debt load of many Latin American countries, the role of the state remains a subject of implicit debate in the region. It is important to point out that every East and Southeast Asian country has had a unique historical traj ectory. There have been differences in ethnicity and historical development, colonizers, in the types of security threats, the timing of different economic policies, the existence and development of natural and human resources, and in national politics among many other things. This chapter argues that despite all of these huge differences, we can discern a common approach to development that has led across-the-board to superior results in terms of both growth and equity. The problem with the formal or large number of cases approach such as those taken by many economists is that it does not make sense in the context of a discussion about general development strategy, where there are considerably more factors at play than the number ofcases. Following the last chapter, we find that we simply cannot separate the macro from the micro-level variables. In this sense, we cannot simply isolate investments in education, as a number of growth models do, and conclude from that a positive correlation explains growth. A particular correlation can contribute to an explanation, but cannot be separated from the myriad of other variables that overlap (are endogenous and interactive) in the cases. Nor can we can simply increase the number of cases - East and Southeast Asian countries began their industrial expansions in unique country - and international-specific historical contexts. There are only a few East Asian countries, and only a few Latin American countries who are constantly changing as the context changes, with generally incomparable and limited datasets truncated by major political and economic shocks. What we can accomplish here is to use the comparative method to show that, despite major diferences among East Asian economies, including China, a succes::.ful formula of IP relationships can be identified over time. EA, facing the

54

Industrial Policy Lessons for Latin America from East Asia

An East Asian Modelfor Latin American Success

55

The questions we now tum to are what are the dynamic and pro-active elements of EA industrial policy that could give guidance to future LA efforts to change their position in the value-added chain of global production? The literature provides no clear answers to what seems to be a relatively straightforward question. The frst set of literature on the topic, which is quite limited, explicitly compares the economic development of the two regions. Most of the literature simply provides snapshots of the development of different countries in each region, with no real cross-analytical synthesizing comparison; thus both conclusions and recommendations on what LA could learn are largely absent (for example, see Lin 1 989). Stephan Haggard's Pathwaysfrom the Periphery and Gary Gereffi and Donald Wyman's Manufacturing

Miracles paved the way in the early 1 990s for a serious look at industrial policy in Latin America from a comparative point of view. Michael Shafer's 1 994 Winners and Losers: How Sectors Shape the Developmental Prospects ofStates is a relatively overlooked but pioneering contribution in pointing out the vital importance of different economic sectors to development outcomes. Shafer's book was rather sketchy, though, in terms of accounting for important nuances, such as intra-sectoral differences. Jeffry Frieden's 1 99 1 overview of Latin American political economy also contained some important analysis of sectoral attributes, following in the footsteps of Peter Evans' important conceptual work and domestic political economy traditions of the work of Helen M ilner, Robert Rogowski, and Peter Gourevitch. Sylvia Maxf eld and Ben Ross Schneider's edited 1 997 volume has some important discussions about state-business relationships from a comparative perspective.2 The main problem with these books is that they tend to be heavy on general political economy comparisons, but quite sketchy on the detaiIs of sectors. Haggard has some later work on the political economy of adjustment that does look at domestic actors, but this is more conceptual than empirical. In fact, only Shafer looks at specif c countries and specif c sectors in them, but his rubric is highly limited to just two general aspects ofthe sector. As he himself admits, his is an important but preliminary first step in sectoral analysis. A second but more limited area of the literature is specific case studies of sectors. Terry Karl's 1 997 book, The Paradox ofPlenty: Oil Booms and Petro-States, may be the best known of these, with its focus on Venezuelan petroleum, but there are other important and more complex treatments as well. Peter Kingstone, Sarah Schoonmaker, and Roy Nelson, among others, have conducted important case studies of particular Latin American sectors. Unfortunately, these books reveal the problems of sectors in adequate complexity, but more from a post hoc point of view. They uncover in sometimes great detail the myriad of problems from industry lobbying, foreign investors' dominance, and lack of state capacity, but do not suggest how these aspects could be aligned for more favorable results. A third set of literature would include the more technical literature by sectoral experts at institutions such as UNIDO (United Nations Industrial Development Organization) and the World Bank (eg. Sercovich). This literature includes the seminal World Bank report The East Asian Miracle and the 1 997 Asian Development Bank Report, Emerging Asia. This report suggests that macroeconomic stability, rather than state intervention, was responsible for high growth rates in EA. Furthermore, it reaches the unsupported conclusion that government intervention actually had more negative than positive effects. As we saw in the previous chapter, claiming that free markets were responsible for EA growth simply does not square with the fact of state intervention everywhere.3 Chang points out several fundamental flaws in the report's analysis. F irst, it does not adequately consider the role of protective industrial

F or examples, see Sung Gul Hong, The Political Economy ofIndustrial Policy in East Asia: The Semiconductor Industry in Taiwan and South Korea, Northampton, MA: Edward Elgar, 1 997; John A. Mathews and Dong-Sung Cho, Tiger Technology: The Creation of a Semiconductor Industry in East Asia, New York: Cambridge University Press, 2000; and Jomo K.S., et aI., eds, Southeast Asia �' Misunderstood Miracle: Industrial Policy and Economic Development in Thai/and, Malaysia and Indonesia, Boulder, co: Westview, 1 997.

See bibliography for full citations. Sanjaya Lall points to a variety of substantive and methodological errors. See "'The East Asian Miracle' Study: Does the Bell Toll for Industrial Strategy," pp. 1 07-123 in Lall, Learningfrom the Asian Tigers: Studies in Technology and Industrial Policy, New York: St. Martin's Press, 1 996.

same constraints of dependency on finance, technology, and a limited number and type of export markets, provides the most comparable (and only) successful case for other developing countries. The case of China is particularly important to show that the EA blueprint still works in a globalized economy, which is why we address it in a separate chapter. The similarities in the way that the Asian economies are set up provides a basic blueprint for rearranging Latin American economies towards innovation, growth, equity, and competitiveness in world markets. In this sense, we do not see EA as a "miracle," rather as a general set of guidelines for development strategy that can be followed elsewhere. A small and largely-ignored literature (at least by mainstream economists) is growing to more closely study the IP components that have succeeded in EA, sometimes with indirect applications to LA.l This book seeks to reinforce the foundation of these types of studies as a more productive direction for Latin American political economy research in the coming years. To continue our thread from the last chapter, which concluded that there must be an active industrial policy, the conclusion of this chapter will be to begin to address what type of industrial policy makes sense (Rodrik 2004). There are a number of reasons why a move to an activist state a la EA is usually dismissed out of hand in LA, for reasons that we address in depth in this chapter. We must begin the discussion with a more detailed look at the history of industrial policy in LA, which helps us to understand the context in which an EA model is consistently dismissed as a possibility for the region. Then we can begin to address these objections, an exercise that we continue throughout the book. We then tum to an objective comparison of whether and why the nature and quality of the raising of standards ofliving in EA have changed. Building upon the basis of our conclusions in the last chapter, that state intervention is universal, we see in this chapter that it was not state intervention that failed in LA, but the particular type of state intervention. Literature Comparing EA and LA Comes Up Short on Proposals

2 3

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An East Asian Modelfor Latin American Success

policies both in giving some greater insulation to frms struggling with new products and a shortage of f nancing, and in promoting a firm's ability to engage in structural change, that is to undergo wholesale changes in the human, physical, and relational capitaL Second, the report does not adequately examine spill-over effects on linked industries, and cross-sectoral learning effects. Third, the report does not consider dynamic and incremental learning effects of change and i mprovement over time, including improvement in institutions (Chang 2003a, 1 8-40). We can add, as we demonstrate in the fnal chapter, that it is the long-term learning process ofthe private sector that must be protected on a graduated basis in order for late industrializers to have a chance to enter into new sectors, even ones where they theoretically have a comparative advantage. As Malaysian economist K.S. Jomo puts it, in calling the World Bank report "erroneous," (Jomo 200 1 , 1 6- 1 7): the role and contribution of industrial policy instruments in the development of the three second-tier Southeast Asian NICS, especially since 1 970, is undeniable. The role of governments in promoting industrialization beyond what would have been possible and likely without intervention is suggested by the contrasts between the late colonial economies of Malaysia and Indonesia and these national economies today. Despite all the f aws and abuses involved, there is now little doubt that the structural transformation and industrialization of these economies would not have been achieved by exclusive reliance on market forces and private sector initiatives . . . Though the consequences of state intervention . . . have been mixed, this is largely because much of the responsible state intervention has been motivated by considerations other than accelerating late industrialization.

Industrial Policy Lessonsfhr Latin America/j'om East Asia

57

and have a more neoliberal-compatible nature to them (Peres 2002, 8 1 -20 1 ). We can point out severe limitations in regard to an active IP role of the Latin American state. First, the clear priority is macroeconomic stability above all, including equity and microeconomic policies, such as labor and IP. Second, industrial promotion takes current comparative advantage more seriously, and tends to focus on existing industries/resources in terms of their international export potential. There is a sense of growing competition for access to developed markets (dismissing internal development as a possible avenue), reflected in the growing interest in free trade agreements and integration, as well as courting foreign investment. Third, current IP shies strongly away from starting new state-owned enterprises (SOEs), favoring instead creating stable investment c limates and indirect aid to industries. Indeed, many large SOEs have been privatized in the region, with heavy foreign ownership taking over. Fourth, in line with this fact, the role of foreign companies is not necessarily viewed as clearly separable from the development of national industry. As in the case of Mexican maquiladoras, Latin American governments often see foreign companies as necessary partners, bringing capital, technical expertise, and international marketing and distribution networks. Does this new approach towards I P make sense? A review of EA IP indicates otherwise in terms of long-term growth and equity. Before we get to a detailed assessment of the two strategies, we must continue to climb the mountain of implausibility that an active I P a la EA could be adopted in LA. Why did I P Succeed in E A vs. LA?: Dispensing with the Easy Objections

Since Miracle, a series of technical studies have emerged from international institutions. These studies usually exhibit a bias against industrial policy on the one hand, and an inability to discuss politics on the other. They are important fountains of analysis and information, but they do not provide any comprehensive vision or planning. Nor is there any explicit analysis ofEA to understand why industrial policy succeeded there but not in LA. Conclusion

Because of the external debt load and the change in ideas, a ful l blown East Asian industrial policy never caught on in Latin America. Indeed, a wave ofprivatization has swept through Latin America, changing the whole context for economic policy.4 As I have discussed elsewhere, the claims that emerging policies labeled as " neostructuralism" represent a new and strong deviation from neoliberalism, in emphasizing a combination of stable macroeconomic policies, more active social welfare policies, and export promotion (Hira 1 998), are highly dubitable. There is some evidence that Latin American countries have not completely abandoned IP. As Wilson Peres points out, most IP efforts now fall under the guise of"competitiveness," Luigi Manzetti, Privatization: South American Slyle. New York : Oxford University also Judith A. Teichman, The Politic.v ofFreeing Markets In Latin America: Chile. Argentina. and Mexico. Chapel H i l l : University af N orth Carolina Press. 200 1 . 4

Press, 1 999. See

There are a number of reasons why an EA model is dismissed as impossible for LA. We have so far addressed the two most general ones the first being that LA is helplessly constrained in its dependency condition and lack of relative power vis it vis external powers and internal elites (Chapter 1 ), and the second that free markets are really the only answer for LA's problems (Chapter 2). In this section, and through the rest of the book, we begin to systematically examine additional objections and demonstrate why, while not without substance, they are not true obstacles for such a paradigm shift in the region. The Democracy Debate

A central and frequent objection of LA observers i s that any replication ofEA would come with the same authoritarianism, particularly with the case of China. This i s another of many possible debates, including class, ethnicity, effects of different colonizers, and so on, which this book does not consider integral to the argument made here. As in the previous discussion of the EA Miracle, r do not see any clear causality between IP and authoritarian structures. The examples of the previous chapter, such as Airbus and the US's support of the semiconductor and aerospace industries, are from democratic states. Japan has a long-standing democracy in the region, as well as providing the blueprint for EA intervention. Moreover, democracy has developed considerably in EA during the period of lP, with South Korea, Taiwan,

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A n East Asian Model/or Latin A merican Success

Malaysia, and Indonesia all making important strides towards stable democratic rule, despite the Communist threat and civil strife we discuss below. On the other hand, China and Vietnam have developed their own version ofthe EA models, while continuing authoritarian structures. My conclusion from this differentiation is that there is no clear relationship between political regime type and IP. This conclusion is echoed in much ofthe political economy of development literature about economic growth and regime type (for example, see Haggard and Kaufman 1 992). To be sure, there must be certain aspects of state leadership and certain types of institutional arrangements, as we discuss throughout the book. Yet, there is no reason whatsoever why a state cannot receive support for, and be ultimately accountable to, a population for the results of its IP through democratic institutions. Western European countries such as Switzerland and the Netherlands do so all the time. The real question is not about democracy, then, but establishing a democratic consensus for a sensible set of policies that will lead to growth and equity; the patience to wait for their positive results; and the virtuous cycle of political support and continued equitable growth that will ensue. Thirty years ago no one expected Chileans would reach a consensus in support of neoliberal policies introduced by a military regime, especially after the democratic transition (Hira 1 998, and Hira and Sanghera 2004). In the same way, my faith is in the power of ideas to move democracies in LA towards a similar consensus towards an activist IP. Historical Differences

Whereas in EA, some argue, the US overlooked industrial policy in the hopes of containing communism and creating stable states that could pay for military defense, in LA, the US was more concerned about expropriation of its direct investments and access to m ineral resources. Part of these sets of stories is that LA is cursed by dysfunctional legacies from the Spaniards, whose colonialism was much worse than thatofJapan or China. While it is true that Japan did set up some colonial infrastructure in Taiwan and South Korea geared towards secondary industrial production, anyone remotely familiar with either Chinese and/or Japanese colonialism would chafe at the idea that such historical experience was benefcent. The Japanese colonial system was set up explicitly to favor the home colony, not to spur indigenous development, entrepreneurship, or participation in decision-making.s Chang and Grabel point out that Korea '8 literacy rate at the end of Japanese colonialism in 1 945 "was only 22 percent . . . not much better than that of many African countries when they emerged from colonialism. By contrast, Argentina's literacy rate was over 90 percent."(Chang and Grabel 2004, 42) Moreover, one can hardly see any sign of nascent national industrialization in Taiwan or S. Korea in the aftermath of World War II, let alone in 5 Thomas B. Gold, State and Society in the Taiwan Miracle, Annonk: ME Sharpe, 1 986, and Meredith Woo-Cummings, "The Political Economy of Growth in East Asia: A Perspective on the State, Market, and Ideology," pp. 323-341 in Masahiko Aoki, Hyung-Ki Kim, and Masahiro Okuno-Fujiwara, eds., The Role a/ Government in East Asian Economic Development: Comparative Institutional AnalYSis, Oxford: Clarendon Press, 1 997, pp. 32930.

Industrial Policy Lessons/or Latin A mericafrom East Asia

59

Southeast Asia, which was brutalized by Japanese occupation. Their growth began much later. B ruce Cumings, the foremost English-language historian of Northeast Asia, points out that Japan's attraction to Korea was based upon mineral deposits and rich land that could be used to develop soybeans (Cumings 1 990, 1 4 1 -56). He states it best: The Japanese left Korea with many of the trappings of the modem economy when they withdrew in 1 945 . . . a relatively advanced transportation network, with links to the world market system . . . (a) population with modem skills . . . Yet the fundamental fact to remember i s that Japanese-fostered changes . . . did not run their course. Peasants were not torn from the land, destroyed as a class, and integrated into industry; instead they were introduced to industry and then spewed back upon Korean vill ages. Landlords did not tum into commercial and industrial entrepreneurs . . . Korean bureaucrats were not integrated into the career patterns of modern, or rational-legal bureaucracy so much as used as ethnic interlopers in a foreign administration, setting them against their Japanese superiors and their own Korean brethren. Even in the Korean resistance, both nationalist and communist, fissures developed, setting one faction against another with effects that long outlasted the colony itself Finally, the abrupt denouement of the war shattered . . . the incipient transnational unit carved out of northeast Asia. The end of the war divided the Korean nation itself . . . In the process, railroad, road, and sea networks were severed, trailing off into wilderness or emptied of purpose. The Japanese defeat thus destroyed an integral and delicate structure that had linked the metropole to the periphery. The southern half of Korea was left with a disabled economy and chaotic politics that could only fester . . . (Cumings 1 98 1 , 66-67)

One would also have to wonder, in turn, why other Japanese colonies, such as the Philippines and BurmalMyanmar (as well as China) did not reap similar benefts. One would also then have to explain why the Spanish economy has succeeded despite the Iberian heritage, and why there are individual cases of success in LA, such as Embraer and Codelco, where an active industrial pol icy creates their success. C learly, the choice of strategy, as demonstrated by Southeast Asian and now Chinese growth, taking place decades after colonization, matters much more than any questionable benefts of having an Asian colonial master. On the fatalistic side, the argument is often made that EA was "favored" by US foreign policies for development. This argument usually goes something like this: the US wanted EA to industrialize, so that EA, particularly South Korea and Taiwan, could pay for their own defense efforts against communism amidst the Korean and then the Vietnamese conflicts. This argument has more substantive validity, as key to its plausibility is the shift towards export orientation in East Asia in the 1 960s, while Latin America remained stuck on import substituting industrialization ( lSI). The move in East Asia to primary Export-Oriented Industrialization (Eo!, which was the promotion of the production of consumer non-durable items for export) in the early 1 960s, in contrast, was a sea-change in economic orientation. A lthough both Korea and Taiwan recognized the diminishing gains from primary lSI, unlike Latin America, they moved to exporting rather than a higher stage of l S I . This change was associated with the security environment of the 1 950s and 1 9608, when first the Korean and then the Vietnam Wars raged on. Such a scenario necessitated a strongly centralized mil itary command and perhaps a stronger sense of unity among

Industrial Policy Lessonslor Latin Americafrom East Asia

An East Asian Modellor Latin American Success

60

East Asian elites. It also meant, more fundamentally, that, lacking ready natural resources in Korea or Taiwan, exporting was necessary in order to fund defense efforts. Moreover, Korea, Taiwan, and Japan benefited from the supplies to the defense efforts of the US (particularly during the Korean and Vietnamese wars) and US military aid.6 As can be seen in the following table, all of the East Asian and Southeast Asian countries received more aid than LA counterparts, and received proportionately more military than economic aid. Table

3.1

US economic and military assistance and defense expenditures abroad,

1 950-73

U S Economic Aid

Country

US Defense

Argent. Brazil Mexico Indones. Japan Korea Phillip. Taiwan Thailand Turkey Latin Am E. Asia l isted

237.55 25 19.4 285. 1 5 1 758.7 27 12.7 5655.3 1 62 1 .5 2362.4 7 15 . 1 281 9.8 9972.5 14825.7

1 77.4 485 . 1 14.4 1 77.3 1 239.7 621 4.4 741 .3 404 1 . 1 1 3045 42725 1 662.9 1 3 7 1 8.3

nla nla nJa nla 741 0 1 727 1 152 439 956 680 1010 1 1684

Total 4 14.95 3,004.50 299.55 1,936.00 1 1 ,362.40 1 3,596.70 3,514.80 6,842.50 2,975.60 7,772.30 1 2,645.40 40,228.00

In US$ millions current Sources: US Agency for International Development, US Department of Commerce Figures

are

net and subcontracting of defense procurement is not available, which would significantly raise

amounts received by East Asian countries during the Korean and Vietnam Wars.

There is no evidence that the U S promoted EOI with the idea that Korea and Taiwan would become industrial powerhouses one day; such a contention is nonsensical given the conditions both countries faced in the immediate aftermath of World War II. As Cumings states in regard to Korea, Ameriean planners (in 1 948) did not worry about deelining industries. Their vision was the Smithean, internationalist creed of a world of interdependent free trade, encouraging the export of American plants and technology . . . The core thinking for the whole of the new policy first appeared in an August 3 1 NSC 48 draft . . . (which stated) 'General industrialization in individual countries could be aehieved only at a high cost as a result of sacrifcing production in f elds of comparative advantage' . . . certain parts of the world are

6

'natural sources o f supply o f strategic commodities and other basic materials,' giving the United States 'a special opportunity for ' (Cumings 1 990, 1 72-3)

Taiwan and South Korea's tum to EOl was inspired not by prescient economic thinking but rather by the United States' Agency for International Development and by the US-dominated International Monetary Fund's push for self-reliance in terms of f nancing the war effort. The change in policy was also lubricated by these organizations' promises of aid to accompany the reforms. In fact, in both countries, economic planners were anything but optimistic about the success of the change in strategy, and were only proven wrong by the ensuing economic growth (Cheng 1 990, 1 44). The security threat therefore helped to solidify these nations ' economic consensus towards export promotion. By contrast, commodity exports, such as wheat and coffee, enabled Latin America to continue funding lSI (Ranis 1 990, 229). The commodity boom which spared Latin America from the economic growth crisis in East Asia in the early 1 9608 lasted until the late 1 970s. During the 1 970s, Latin America supplanted its foreign exchange earnings with borrowing petrodol lars in the private market, which assured reasonable growth rates and politically-adequate social spending. In the early 1 980s, not only did commodity prices crash, but interest rates were cranked up as the United States severely tightened its monetary policy. The loss of foreign exchange earnings led to a period of stagnant or declining growth rates in Latin America. This external shock has led to the most recent shift in economic policy towards including primary and secondary EOl (the latter being the promotion of consumer durables, and industrial and capital goods production for export). However, LA's version of EOr is missing other key components of the EA strategy as outlined below. As such, while in many cases basic consumer product exports were initiated much earlier than 1 980 in Latin America, these exports occurred on top of or along with primarily lSI policies at the time (Villarreal 1 990, 3 1 0). In EA, meanwhile, Korea and Taiwan followed Japan's early footsteps towards secondary EOI. Both Korea and Taiwan faced heightened restrictions on their textile exports to the United States. Both signed an agreement "voluntarily" decreasing exports in 1 97 1 with the United States, as well as the Multi-Fiber Agreements in 1 973 (Cheng 1 990, 1 62). The move also m ade political sense: the export sector continued to be favored. While the success of EOI in East Asia did bring about new oppositional coalitions, such as the neglected agricultural sectors in both countries, neither regime faced a strong enough challenge, partly thanks to land reform under US occupation, to consider modification of economic policies (Cheng 1 990, 1 65-7 1 ). East Asia's economic success of the 1 960s reinforced the EOI policies in place and helped them to spread elsewhere in the region (Cheng 1 990, 1 56). Southeast Asia7, like Korea, Taiwan, and Japan, benefited from supplying US defense efforts in the Vietnamese War and from US military aid. Most of the countries in this region gained their first policy independence due to the breakup of the colonial system in the late 1 950s and early 1 960s. Their initial economic policies stressed commodity exports, such as petroleum ( Indonesia and Malaysia) and agricultural production (e.g. rice in Thailand). They soon moved to a period of easy import substitution by

I am currently working on an extended version of this analysis for a future article on

the differences in aid between the two regions.

61

7

Note: Refers to Thailand. Indonesia. Malaysia and Philippines.

62

An East Asian Modelfor Latin American Success

the mid- to late 1 960s and early 1 9708 (Lee and Naya 1 988). The flare-up of the Vietnam War can be considered akin to the external catalyst that the Korean War was for EastAsia. United States military aid increased massively to Southeast Asia, as did purchases of local material for the war efforts (See Table 3 . 1 above). Beginning in the late 1 970s, many ofthe Southeast Asian countries undertook the policy change to EOr. This timing was also related to the external shock ofthe rise in oil prices. While Indonesia and Malaysia were major oil exporters, in the 1 970s, their oil resources began to decline. The reaction in each case was a tum towards labor-intensive exports in order to make up for the foreign exchange earnings. These countries adopted primary EOl and foreign investment policies which have encouraged both US and Japanese investors to utilize them in global production networks (Rosario 1 99 1 , 57). Unlike East Asia, they have not benefited from extensive land reform, yet, their record on growth and equity is superior in general to that of LA. In sum, the choice ofEor policies is also undoubtedly a result ofthe learning curve by which Southeast Asian countries have attempted to imitate the successes of East Asia. In the next chapter, we demonstrate that, with distinct historical circumstances, China has also been able to adapt the blueprint for its own development, with tremendous results. The only appropriate conclusion, then, is that EA policies, including Japan, were initially the result of an alignment between domestic forces and external pressures, and subsequently the result of conscious choices. South Korea changed its policies only after Park took over in the early 1 960s. Taiwan's miracle stumbled along initially before gaining momentum in the late 1 960s. In the same way, the Southeast Asian countries transformed their commodity-based economies into export-industrializing ones through choice, not US fat. The relations between Malaysia and the US, for example, were consistently strained under Mahathir. When LA turned to lSI, the reasons included internal political pressures and ideology, as well as the United States' role. LA militaries and the prevailing ideas at the time, supported by the World Bank, Marshall Plan, and the lessons oflndia and the Soviet Union's Five Year Plans, were to focus on rapid internally-based industrialization (Rira 1 998). One of the foremost differences between the US roles in East Asia and Latin America is the greater US ownership of Latin American industries. Another difference is Latin America's much greater reliance on foreign, and particularly US, borrowing, in general, for development than East Asia (Coatsworth 1 993, 1 04). Ironically enough, l S I in Latin America, instead of creating greater independence from the First World, increased Latin America's dependence, in different ways. Now, instead of relying on primary commodity exports, Latin America relied on imports of capital goods, raw materials, intermediate inputs, and foreign technology (Jenkins 1 977, 3-8). Not surprisingly, it is this same greater degree of external dependence which opened Latin America up to external pressures to move to the neoliberal-inspired Export­ Led Industrialization in the 1 9805, a policy by then recommended by the United States in order to ensure orderly debt repayments (Coatsworth 1 993, 1 68-9). These point to internal LA weaknesses as well as the lack of consensus, as we discuss through much of the rest of the book. It is important, moreover, to extinguish the odd but pervasive Leftist argument that the US allowed some development for its own selfish purposes or that in many other ways, the EA miracle was based on some form of good fortune in terms of US policy

Industrial Policy Lessons for Latin America from East Asia

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alignment. This, of course, relies on the erroneous assumption of US omnipotence (the ability to allow), which has been proven wrong by history from Vietnam to Iraq now. Other facts reveal the ridiculously exaggerated nature ofthis conspiratorial argument. First of all, South Korea was devastated by the Korean War. It was, in the words of contemporary assessments at the end of the civil war, "a basket case," a country with few natural resources whose families had been forcefully divided up. Taiwan was not much better with the fleeing Guomindang (KMT) party from Mainland China serving as an occupation force upon an unwelcoming native population, with the main intent being the retaking of China some day. Therefore, it seems the US is being given credit by the Left for being able to create development where it does not otherwise exist. Given the US's track record in developing its allies where its own strategic interests dictated so, including South Vietnam, the Philippines, Cuba before the Revolution, N icaragua under Somoza, Iran, and present-day Afghanistan and Iraq, such an assumption is widely inaccurate and indeed puts these critics in the same fog of miscalculation as some of the overly exuberant analysts of US foreign policy on the right. Second, first the Korean War then the Vietnam War had profound effects not only on the home countries but also upon the long-tenn stability of the entire region. The various refugee crises, followed by genocidal policies in Cambodia, and the regional arms race are hardly the ideal context for economic growth. On the contrary, one would have put the chances for democratic and equitable growth emerging from such a scenario as highly improbable at best Third, LA did not somehow receive different treatment in the sense of US foreign pol icy goals. In the context of the Cold War, American troops were active in the Korean peninsula as well as Vietnam, in the Dominican Republic as well as Honduras. In this sense, the priorities for the US in LA were not any different than anywhere else to fight the Cold War by any means possible, making alliances with anyone on the same side. The support of various authoritarian figures in EA, including M arcos in the Philippines, parallels the support of similar fgures in LA, including Somoza in Nicaragua. Though it is important to note the proximity of aid from the Soviet Union and China into Southeast Asia, external factors were not the deciding factors in the development traj ectories of the two regions. The same pressures from the Soviet Union and China did not l ead to development in Myanamar, Cambodia, or anywhere in Central Asia. In short, without exonerating the US for its obvious and predictable self-interested motivations, with the usual short-sighted implementations, the facts demonstrate the false fatalism of those who exaggerate the role of external forces generally, and the US in particular, in development choices. This leads us to the next red herring, which is the argument that ENs miracle is due to a homogeneous and highly consensual population. Differences in Handling Internal Dissension, Including Ethnic Strife

Obviously, given the diversity of populations in China, Indonesia, Taiwan, and Malaysia, it makes no sense to sustain a causal argument for culture or other homogeneity, as may be the case for Korea and Japan, as a key source of growth for East Asia. To a greater extent than LA, EA has been highly contested and bitterly conflicted along internal l ines. Whi le not diminishing the internal strife of LA during

64

An East Asian Model/or Latin American Success

its history, the conficts did not reach anywhere the same levels as those in South Korea, Malaysia, Singapore, Vietnam, or continuing in the current day in China, Indonesia, and Cambodia. In contrast, in the ongoing conflicts between indigenous groups and fairer elites of LA, there was far less parity between the two sides, as well as a spectrum of identities that reduce the dialectical self-identification of each side. What is also different in the Cold War conflicts was the way that the internal dynamics in the different societies played themselves out. Whereas the South Korean, Taiwanese, and Malaysian elites overcame civil war, internal dissension, and fragmentation to develop a sense of national unity through shared economic growth, LA societies divided even further along class lines, with internal groups taking up different lines along the resources provided by Cold War allies. The Latin American Left miscalculated in thinking another Cuban Revolution was both easy and imminent, including Che's blunder in Bolivia, and the total failure of armed struggle, with the late and redacted exception of success in Nicaragua in 1 979.8 The response to these challenges in LA by the elite victors has hardly been beneficent, rather a military repression has been followed by labor repression and other ways of reducing social safety nets. By contrast, the governments of Singapore and Malaysia, in response to civil war, and the KMT in Taiwan set up affirmative action type programs favoring their native populations. The case of Malaysia is a good example of the differences in state approaches between the two regions. Malaysia consists ethnically of a Chinese minority, comprising 34 percent of the population in 1 980, which has been economically dominant in Malaysia, while the Malays, constituting 55 percent of the population, largely rural smallholders, have been the poorest group. East Indians make up only 1 1 percent of the population, and so have not been as significant in the Malaysian political economy (Nash 1 988, 6). The main "axis" of conf ict between ethnic groups is refected in striking differences between Chinese and Malay assets, income, and education levels. The British created an ethnically divided Malaysia with a corresponding "racial division of labor," by importing Chinese and Indian workers and restricting Malays (Schlossstein 1 99 1 , 224) from the lucrative rubber trade, but setting up a Malay administrative elite (Stenson 1 980, 4-7). With Japanese occupation of Malaysia between 1 942-5, open ethnic conf ict between the Chinese and Malaysians began. The Chinese, who were loyal to their native country were executed by the Japanese and attacked by their Malay lackeys, working ostensibly as policemen. The Malays, in tum, benefited from Japanese rule through exclusive access to administrative jobs in the government. In 1 946, a national alliance, with British encouragement, was formed among the United Malays National Organization (UMNO), the Malaysian Chinese Association (MCA), and the Malaysian Indian Congress (MIC) , which became known as "the Alliance" (Schlossstein 1 99 1 , 225-6). The 1 969 parliamentary 8 The Left within LA seems perfectly able to acknowledge these mistakes. Politicians from Lula to Lagos to Kirchner all represent the consensual rejection of armed struggle for socialism. See Jorge Castaneda, Utopia Unarmed: the Latin American Left after the Cold War, New York: Knopf. 1 993.

Industrial Policy Lessons/or Latin America/rom East Asia

65

election was a major setback for the Alliance, which lost seats to the Chinese­ dominated DAP and to the Islamic party, the Parti Islam Si-Malaysia (PAS). As the Malaysian Chinese Association withdrew its support from the Alliance, presumably in tacit support ofthe victory of the also Chinese DAP, ethnic riots between Chinese and Malays broke out. The Malay elite, which still controlled the government and the armed forces, responded by imposing martial law, in effect taking over the government for themselves. The 1 969 riots' most important catalyzing effect, however, was spurring the Malay-dominated government to politically capitalize on Malay defensiveness by embarking on a new program designed to equalize Malay and Chinese economic statuses. Malay status was to be enhanced through the New Economic Policy (NEP) (Schlossstein 1 99 1 , 227-8). The roots of the NEP may be seen in the nature of Malaysia's economic growth. While overall economic growth may have allowed the maintenance of some degree of harmony among the ethnic groups, since the Chinese business class and foreign capital have been the largest beneficiaries of the economic growth so far, Malays as a group have felt increasingly threatened by, and jealous of, the Chinese success (Jesudason 1 989, 47). Sch lossstein describes NEP as an affirmative action program for Malays. NEP sought to increase Malay ownership in the commercial and industrial sectors to 30 percent by 1 990, with non-Malays being allocated 40 percent and foreign control being reduced to just 30 percent. Government positions, placement and scholarships in education, and other advantages were reserved for Malays. Furthermore, a national authority was set up to fund Malay stock purchases. Malay acquiescence to UMNO rule was gained, in short, not through income or wealth redistribution, but with economic growth and government spending. When the 1 982 world recession reduced Malaysia's foreign exchange earnings through drops in commodity prices, the government began spending programs through borrowing to maintain economic growth. S ince most of the poor in Malaysia are rural Malays, these programs and the continued emphasis that Malaysia has paid to small holder agriculture, in contrast to LA, have paid off in terms of increasing economic development and reducing poverty. The fact that the rural beneficiaries were Malays provides the political reasons for the propitious attention to agriculture (Demery and Demery 1 992, 37-9). While the NEP has been wound down in recent years, the improved participation of Malays in previously Chinese-dominated sectors of the economy as a result of the program has been indisputable (Jomo and Gomez 1 997, 342-372). This success led to a conversation about reducing racial preferences (Rahman Embong 200 1 , 59-85). While the Malaysian experience is distinct in its details and challenges from other EA cases, on the one hand the homogenizing strategy of Singapore and on the other, the negative outcomes and continuing strife in Indonesia (which grudgingly granted autonomy to East Timor) including challenges from newly mobilized Islamic groups, and the relatively homogeneous populations in some states such as Japan and South Korea, it does illustrate some important differences in elite policy choices between the two regions. Where the EA elites generally see shared growth with increasing employment possibilities as a way to win over hostile populations, the mil itary in LA became a club for internal repression, rather than external protection. While the intellectually-based opposition of the Left in LA argued for redistribution

66

An East Asian Modelfor Latin A merican Success

and revolutionary overturning of elite assets, the ethnically-based opposition in EA has instead pushed for strong national guidance of development, and redistribution in government positions and spending, particularly investments in human capital (education and health), and attention to agriculture where the poorest reside.9 Nonetheless, it is important to stress that high levels of education alone do not lead to improved growth or equity (India, Argentina, Russia, and Egypt being historic counter-examples), and in EA and SEA the emphasis has been on poverty reduction, rather than demanding immediate changes in relative inequality. 10 The EA blueprint as a package including direct efforts at poverty reduction in EA has been more effective and less threatening to ruling business and political elites than those in LA, as they see the long-term benef ts in the improvement of local workforces. By contrast, indigenous groups in LA, the majority in some countries, have created autonomous movements, using external promotion to push their demands upon unresponsive institutions. These facts of comparison deserve deeper political analysis, which we shall get to in Chapter 5, but for now, let us simply acknowledge that certain choices were made in LA by Latin Americans, choices that had devastating consequences upon the region's population in contrast to but can be changed now. Diferences in the Role of Labor Unions and The Natural Resource Curse

In the late 1 990s, when conducting research for another book, 1 had an interesting interview with Chilean sociologist Manuel Antonio Garreton, internationally­ renowned for his work on Latin American democratization and economic development. During our interview about Chilean neoliberalism, particularly in its contrast to the years of struggle by the Chilean Left for equality under socialism (in which he had participated), Dr. Garreton, echoing many other conversations I have had with intellectual leaders in the region, simply said "There is no other model (than neoliberalism)." (my translation). When asked about why LA has not looked at the more equitable growth models of EA, Dr. Garreton replied, "What and build our societies upon extreme labor exploitation?" This short conversation with one of LA's leading intellectuals was one of the seeds for this book. It shows how one negative aspect of the EA development experience has been used to avoid looking at it holistically as a possible alternative. True to its history, LA tends to see ideas about progress only from Northern intellectuals. It is clear that many elites in Northern academies as well as the developing world f nd it hard to cross the Rubicon of looking to countries in the more comparable South for answers, rather than in the

9 In fact, improvements in relative inequality have a mixed record in Southeast Asia, though poverty has decreased significantly. See M.G. Quibria, "Growth and Poverty: Lessons from the East Asian Miracle Revisited," ADB Institute Research Paper no. 33 (Feb.), Tokyo: ADB Institute, 2002. 10 Anne Booth points to important contrasts in the educational equity of Korea and Taiwan vs. Southeast Asian states. See "Education and Economic Development in Southeast Asia," 1 73-95 in Jomo K.S., ed., Southeast Asian Paper Tigers? From Miracle to Debacle and Beyond. New York: RoutledgeCurzon. 2003.

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North, which we have been programmed to think of since colonialism as inherently (and acceptably) superior. Certainly, it is true that labor repression has been an important feature of East Asian industrialization, however, that can not take away from the very real gains in ternlS of standards of living and employment prospects of EA populations. EA analysts have often pointed to the low degree of labor strife in the region, related to low levels of labor legislation and protection and a more paternalistic management culture resulting in weak unions (Johnson 1 987, 1 49). Federic C . Deyo relates the differences between the relative strength of unions in LA and weakness in EA to the necessities of the EOl strategy. In the case of EA, wage rates were a powerful source of competitiveness and so had to be held down, whereas l S I wages could be passed on to domestic consumers (Deyo 1 987b). Certainly, the contrast is important, as labor unions play a significantly more important role in some countries of LA, particularly those with a large mining base, such as Venezuela, Bolivia, and Chile, though i t has diminished over time with globalization. Moreover, under lSI, such unions gained strength, as in the case of Argentina, on the basis of forming a limited pool of highly skilled workers in the privileged enclave of high-level industrial activity. By contrast, EA countries have sought to co-opt unionization through improving worker conditions, not j ust in terms of increasing national access to health care and education, but also in improving compensation and working conditions (Deyo 1 997, 2 1 6). The most prominent case of labor unrest, South Korea, bears out this analysis. According to analysts of the topic, Korean development from the 1 960s led to accelerating decreases in unemployment and increases in per capita GDP and real wages. In line with our observations above about general inequality, however, wage distributions have remained highly differentiated between blue - and white-collar workers. Moreover, South Korean workers continue to work more hours than the workers with whom they compare themselves in the First World. These demands dovetailed with the linking of students and trade unionists focused on pushing for democratization into serious actions in the 1 980s and 1 9908 . 1 1 In sum, it is not j ust labor repression but a desire to gain more of the rewards from economic success that has led to greater demands for participation and compensation in South Korea. While we do not wish to dismiss the serious problems of labor repression in EA, its overall importance should not be exaggerated either. There is a strong spirit of cooperation a belief among workers and management alike in collective sacrifice for in the benefit of the nation and future generations. Moreover, the attention paid to acquiring practical skills and continual upgrading not only benefted the overall social mobility of the whole population in terms of employment and rising living

1 1 David L. Lindauer, Jong Gie Kin, Joung-Woo Lee, Hy-Sop Lim, Jae-Young Son, Ezra Vogel, The Strains of Economic Growth: Labor Unrest and Social Dissatisfaction in Korea, Cambridge: Harvard I nstitute for International Development and Korea Development Institute, 1 997, see esp. 37, 45, 48, 56, 8 1 , 89, 99, 1 1 1-12. See also Jomo K.S., "Growth with equity in East Asia?", 1 96-2 1 6 in Jomo K.S., ed., Southeast Asian Paper Tigers ? From Miracle to Debacle and Beyond, New York: RoutiedgeCurzon, 2003, and Seung Ho Kwon and Michael

O'Donnell. The Chaebol and Labour in Korea: The Development of Management Strategy in Hyundai." New York: Routlcdgc. 200 I . esp 33 .

.

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Industrial Policy Lessonsfor Latin America from East Asia

An East Asian Modelfor Latin American Success

standards, but it also allowed EA states to maintain eost competitiveness as they moved up the value-added curve. In sum, this culture of education, commonality, hard work, and investment for the future are the keys to ENs success in creating a world class labor force, one that has the skills to produce the most sophisticated and demanding products in the world, and one that can now begin to adjust its level of sacrifice downwards in the next generation. Another argument that must be discussed is the notion that LA is "cursed" not only by the proximity of the US, but also by its abundant natural resources. This counter­ intuitive argument suggests that colonial domination and later imperialism was much more oppressive in LA than in EA because of the stronger presence of commercial interests, based on natural resources. While economic theory would suggest that presence of such resources is a boon, allowing for a much easier development, on the basis of transferring earnings in these sectors towards diversif cation, the fatalists would have us believe otherwise. Formerly natural-resource based countries including Malaysia and Indonesia, and agriculturall y-based countries Thailand and Vietnam, have been able to diversifY into industrial and high-tech production. More obviously, the presence of natural resources did not impede the historical development of countries such as the US, Australia, and Canada, or more recently oil-rich Norway. Stil l, the natural resource argument does seem to resonate with the intense production concentration and corruption of some LA countries, such as Venezuela, which recently overcame and broke the back of its petroleum company unions under a nominally socialist President. Moreover, it is important to note, as we explain below, that U S foreign direct investment (FDI) as well as security concerns have and continue to play a dominant role in LA's history. Peter Evans points to this factor, as well as the important fact that while there was US-occupation enforced land reform in EA, there is a continuation of family and land-owning based agricultural elite from past to present times in LA.12 However, this continuation is a result of choices made, not some abstract determination of history. Deeper Roots ofDiference: The Latin American Reality13

We readily acknowledge that LA can not just wholesale adopt the features of the EA modeL The LA state, has, through great pain and sacrifice, re-entered a robust period of democratic governance. This governance is not at all incompatible with an active industrial policy. On the contrary, we have seen that in the rejections by Brazil and others of the Free Trade Area of the Americas without major modifications, and in the re-national izations of petroleum and other sectors by Venezuela, Ecuador,

1 2 Peter Evans, "Class, State, and Dependence in East Asia: Lessons for Latin Americanists," pp. 203-226 in Frederic C. Deyo, ed., The Political Economy ofthe New Asian Industrialism, Ithaca: Comell University Press, 1 987. See also Meredith Woo-Cummings, "The Political Economy of Growth in East Asia: A Perspective on the State, Market, and Ideology," pp. 323-34 1 in Masahiko Aoki, Hyung-Ki Kim, and Masahiro Okuno-Fujiwara, ed s . The Ro'e (�fGovernment in East Asian Economic Development: Comparative Institutional Analysis, Oxford: Clarendon Press, 1 997. 1 3 I thank anonymous reviewer for suggesting the addition of this important subsection. ,

69

and Bolivia, that democratic governments can be quite decisive without engaging in inflationary populism or short-term and ultimately destructive policies. Indeed, the Brazilian, Argentine, and Venemelan economies have managed to maintain macroeconomic stability, 14 continue economic growth, and carry out redistributive programs without inflationary policies. I would argue that such strength suggests that the potential for a more active industrial policy is much greater than critics think. However, there are i mportant differences in the cultural character of the elites of both regions, as we have discussed. East Asian states have been created in a context of recent wars that have forged strong national collective identities, across the region. Centeno points out that LA states have never really developed either a strong sense of nationhood or of control over the means of coercion or territory. 15 LA as a region has had relatively few interstate wars. Rather, conflict tends to be internal­ based on divisions between ethnicity and class, rather than nationalism. This reflects the the vast geographical distances and many obstacles to interaction and control; the conquest of large indigenous populations; and the importation of large numbers of slaves in some parts of the region, which reflect a society built upon historical divisions, rather than notions of egalitarian ism. We have to remember that LA gained its independence through European wars (Napoleon's invasion ofiberia), rather than through a struggle for independence against colonialism as was the case in East Asia and the US. The fracturing of colonial power led, outside of Brazil, to a conflict between regional caudillos rather than a continuation of centralized power with the ability to extract internal resources. Many ofthe armies at the time of independence were foreign-trained and often officers were imported from abroad. States lacked the administrative capacity or resources to mount strong militaries, and alliances between the military, landowners, regional caudillos, and, later, with industrialists have always been weak and vacil lating. There is little effort at the symbolic and educational forging of national identities in the region. Other than soccer, few things bind together e lites with their populations in the region; the former are more apt to identifY with European trends, own property in Miami, and send chil dren abroad to study. Perhaps because the elite has been able to live off the extraction of natural resource wealth with little violent external threat, there has been no need to establish a strong extractive state. Yet, this does not prevent them from making different choices in the future. Conclusion

We have seen that EA has hardly been immune from political and historical miseries, indeed in some ways it is even more cursed than LA, if we want to think in those terms. Chinese and Japanese occupations and continuing imperialism; colonialism by less than benign powers such as the Dutch and then the French; development 1 4 Anil Hira andAdam J. Morden, "Venezuela's Chavez: the Emperor has no Distribution," Centre for Global Political Economy (SFU) Working Paper, May 2004. 1 5 Miguel Angel Centeno, Blood and Debt: War and Nation State in Latin America, University Park: The Pennsylvania State University Press, 2002, esp. 1 29, 1 4 1 , 1 50, 1 76, 1 89, 239 and 256. ,

70

industrial Policy Lessons for Latin A merica/rom East Asia

An East Asian ModelforLatin American Success

centered around a handful of commodity products; ethnic and now religiously-based strife and terrorism; and the devastation of civil wars and ongoing tensions spilling across borders in Korea, Vietnam, Cambodia, and Indonesia, are but a handful of the incredibly difficult aspects of the history of the region. Nor has EA escaped corruption. Despite massive corruption, for example, Indonesia was able to re­ invest its petroleum revenues into industrialization. With a heavy concentration in rubber production at the time of its recent independence, Malaysia has been able to diversifY its economy, even entering into high technology industries. In sum, he curse of natural resources turns out to be j ust as exaggerated as the curse of external imperialism- it is an excuse for LA elites to not take responsibility for their own decisions on what to do with those resources. LA elites choose not to invest them in their own popUlations and the diversif cation of their economies. The point of this book and the reason for hope is that there is a strong element of policy choice involved that works in an iterative fashion with elite and national identity. Policy choices affect outcomes and can help to reverse fortunes. Recent elections in LA show that different choices, rather than historical determinants, are establishing the future trajectory of the region. What is needed is to guide those choices towards a long-term strategy of development and thereby a more productive direction for identity development. . Getting to Brass Tacks: Policy Differences

As Alice Amsden points out, East Asian states invested heavily in both egalitarian and directed human capital, and particularly into "mid-technology" industries, such as semi-conductor chips. Their emphasis on shaving off the costs of production, through the training of "shop-floor" engineers, and on creating national leaders who could compete on the world market, contrasts sharply with Latin America on several key fronts. First, Latin America never really focused on developing a national technological capability. Instead l S I was premised on the importation of foreign capital and expertise through foreign MNCs. Second, Latin America never made the same level of investment in human capital. Amsden points out that the level of technical education, particularly applied engineering, lagged severely in Latin America throughout the l S I period. Research and development expenditures have also severely lagged, and much of the research in the region was more ofan academic than applied nature (Amsden 200 1 , 1 4, 58�64, 278�9; Hira forthcoming b). Third, Latin American state-owned enterprises thrived upon the artificial prices of domestic protected markets, never really acquiring the discipline or goal of competing for export. Thus, Latin American national champions provided decreasing or relatively stagnant service, rather than using its protection as a source of investment for improvement. Fourth, Latin American managers tend to be more aloof from shop­ foor production processes, and wider management-labor antagonisms refect social c lass divisions, state-level fragmentation, and cultural predispositions against applied work. How is it, given the widespread corruption in East Asia, particularly in China and Southeast Asia, that growth still achieved such high levels'? Alice Amsden states "Latin America's protracted stagnation probably owed more to the developmental

71

state's failure to create a new 'leading sector ' than to its corrupt practices." (Amsden 200 1 , 1 1 ) However, it is not enough to simply espouse the obvious superiority of the EA economic policy framework. Let us now take a step back and conduct a more comprehensive comparison of the different economic policy choices made by EA and LA, and their consequences. What empirically explains the differences between East Asian industrialization and Latin American industrialization? We attempt to tackle this question by examining the differences in policies and outcomes, using them to begin f lling in the political economy relationships. This will allow us to build a holistic picture not j ust of the useful elements of EA political economy for LA, but how they work together. I n sum, we frst have to show that EA did outperform LA before continuing to discuss why. The contention here is that the combination of the descriptive quantitative analysis here and our qualitative analysis through the book provides the best approach possible to tackling the issues. The developmentalist model from EastAsia discusses the need for macroeconomic balance, while favoring certain sectors on the microeconomic level. Government budgets should be balanced, tax receipts should be reasonable to cover expenditures, exchange rates should be stable, i f subtly devalued vis a vis export market currencies, and inf ation should be kept under control. A number ofquantitative studies including the East Asian Miracle have been performed at the macro-level. However, these have severe limits (Chang 2003a). For example, Cuyers and Dumont state at the end of their regression analysis (Cuyers and Dumont 2005, 1 3 7): I n spite of some signifcant links that w e fnd, all variables reflecting intemational trade and intraregional interdcpendcnce combined explain less than one-half of variance in economic growth. Possible domestic variables like investment in human capital and cducation were beyond the scope of this study . . . these were probably highly important to economic growth, as they determine the ability to absorb, diffuse and use the knowledge and technology that is transferred or that spills over from the most developed countries.

It may very well be that institutional factors and policy instruments that focused on the capacity to absorb technology, whichever channel it was transferred through, made international trade an intraregional growth dynamics contribute to economic growth . . .

The reason behind these limitations is plain to anyone who has worked with international data related to developing countries; there are surprisingly very limited data from consistent sources, limiting the possibilities of doing a long-term cross-sectional study. With so few countries in the sample, and major changes in the structure of the international economy, there simply are not enough data points to warrant a full-blown panel (cross-country, cross-time series) analysis, so we shall rely upon descriptive statistics, in keeping with the expository, wide-ranging nature of our analysis on a wide variety of variables related to general development strategy. 1 6 16

Such analyses already exist, with ambiguous policy lessons. F o r example, one policy

analysis comparing the two regions cites no effects of initial income or external shocks to

but important differences due to low investment, high fertility rates, low quality of human resources, high government consumption, weak rule of l aw, quality of education, and income distribution among other variahles. See Jose de Gregroio and Jong-

terms of trade,

Industrial Policy Lessonsfor Latin Americafrom East A sia

73

We also think that examining amounts standardized as ratios, (values divided by gdp (gross domestic product)) and as percentages is a better way to standardize different starting points and to control for national differences, such as inflation rate and size of economy, thus creating a fairer measure of comparative performance, rather than absolute levels. We acknowledge that there are different starting points and different national economic profiles, and therefore, we think it is necessary to present the data on a country-by-country level. Moreover, it does not make sense to include either China or all of the Southeast Asian countries, since their adoption of the East Asian model is relatively recent and was beset by the war in Vietnam for a good part of the period. Still, we include Malaysia, one of the outstanding performers in the sub-region, in some of the tables as a point of interest. Let us reiterate that we do not seek to isolate one particular variable's weight, but rather to elucidate common patterns of macro and micro variables that cumulatively reveal a regional pattern. I f a regional pattern o f relationships can be discerned, this will lend strong weight that regional economic policies (a blueprint) are leading to different outcomes. In order to accomplish this comparison, we must use long-run historical data, which are very limited in scope and availability. We also acknowledge that any conclusions must be limited, as are the data. For example, data on Taiwan are simply not available in many places for political reasons, including World Bank statistics. We start out with a more inclusive regional comparison on the macroeconomic level and then conduct a microeconomic comparison of Argentina, Brazil, Chile, and Mexico, with South Korea, Taiwan, and Malaysia. Macroeconomic Policy

Table 3.2 contains a wealth of information of the most common measure of national wealth, namely Gross Domestic Product per capita (GDP/capita). We can see from the 1 998 fgure that Japan, South Korea, and Taiwan all have significantly higher GOP/capita than Latin American countries at present. We can also see that, in general, there are significantly higher growth rates in East Asia vs. Latin America, from the I 950s onwards. While there are some spurts of growth in Latin American countries in some parts of this period, such as Chile recently, it is also important to note that growth seems more stable in East Asia than in Latin America. Perhaps the most reliable measure of the quality of life is employment statistics. We also note, going baek to our argument at the end of Chapter 1 , that the growth rates under I S I l and I S I2 are generally better than under neoliberalism, a fact that will b e paralleled in much of this exposition.

Wha Lee, "Growth and Adjustment in East Asia and Latin America," ADB Institute Research Paper no. 54, Manila: Asian Development Bank, Feb. 2004, pp. 48-9. The whole enterprise of growth accounting is fraught with hidden assumptions and unwarranted across-the-board comparisons mixing Northern with developing economies. See Ben Fine, "New Growth Theory," pp. 201 - 1 8 in Chang, 2003.

Table

Industrial Policy Lessonsfor Latin Americafrom East Asia

An East Asian Modelfor Latin American Success

74

3.3

Argentina Brazil Chile Mexico China Indonesia Japan Malaysia South Korea Taiwan

E mployment in LA and Asia, % of population,

1 950 39.8 33 37 30.8 33.8 39 42.7 n/a 30.6 36.4

1 973 37.3 32. 1 29.2 26.3 4 1 .1 37.5 48.4 n/a 32.7 34.5

1 990 36.6 37. 1 33.7 29.4 50 42.3 50.6 38.2 42.2 40.9

1 950-1998

1 998 36 37.7 37.5 32 50.4 42.9 5 1 .5 40.9 42.9 42.6

producers to meet international standards of quality and efficiency. Unlike external debt, an export-based engine of economic growth unlike borrowing does not require later repayment, with the ability to pay subject to changing international commodity prices, changing interest rates (set by Washington), and requiring interest premiums. Exports have been the reliable source ofnew investment capital for EA. Mainstream economists argue strongly that East Asia's superior performance has been based on openness to trade, which is def ned as (exports + imports/GDP per capita). Table 3.4 supports this argument, though in practice, with growing intra-firm and intra-industry trade, tracking such results is increasingly complicated.

Table

Maddison, p. 356

Table 3.3 shows that while Latin American and East Asian countries started on a rough par in terms of overall employment, East Asia has consistently developed more employment while Latin American countries have had small or no increases, or actual decreases. Given the need for developing countries to export goods in order to obtain investment capital, this seems like a logical next step in our analysis. This reinforces our conclusion from the frst two tables that EA has achieved both superior growth and equity to LA.

75

3.5

Argentina Brazil C h ile Mexico China SK Malaysia Taiwan

Openness, % GDP per capita,

Ave 1 950�60 8.4 1 2.3 22.7 26.9 8. 1 5.2 8 1 .9 1 5.3

1 96 1 -70 8.9 8.1 26.8 22.3 8.0 8.9 76.8 26.0

1 950-2000 1 97 1-80 8.9 1 0.5 30.6 22.5 9.0 26.7 75.3 59.0

1 98 1 -90 1 1 .6 9.8 39.1 27.7 2 1 .7 39.3 97.8 74.7

1 99 1�2000 20.8 1 5 .4 55.5 60.3 3 9.6 6 1 .7 1 65.9 9 1.0

Sourcc; Auth cales Penn World Tables 6 . 1

Table

3.4

Percent growth in value of merchandise exports at constant prices,

1870-1998

Argentina Brazil Chile Mexico China Indonesia Japan South Korea Taiwan

1 870- 1 9 1 3 784% 121% 323% 876% 200% 475% 3202% n/a n/a

1 9 1 3-29 58% 3 7% 93% 57% 49% 1 64% 1 58% 656% 273%

1 929-50 -33% 35% - 1 4% -46% 1% - 14% - 1 9% -91 % -3 1 %

1 950-73 101% 1 87% 74% 1 62% 84% 326% 2588% 6948% 3 10 1 %

1 973-98 46 1 % 399% 798% 1 24 1 % 1 528% 485% 264% 249 1 % 1 647%

1 950-98 1 027% 1 329% 1 463% 34 1 5% 2900% 2395% 9680% 1 82527% 558 1 1%

Source: Author calculations from Maddison

Table 3.4 above shows again that East Asia's performance in exporting has far exceeded that of Latin America from 1 950- 1 998. Of the Latin American countries, only Mexico, probably benefiting from the 1 994 NAFTA agreement, seems to register comparable export growth rates. Obviously, developing economies need some source of revenue to invest in new capacity, both to supply and to grow domestic demand. Ex.ports bring in hard and scarce foreign currency, force domestic

Table 3.5 demonstrates that East Asia has, on the whole, relied more on exports and imports than Latin America from the 1 950s-2000. Obviously Communist China's opening has been relatively recent, however the growth of exports and imports for that country is staggering. We see again here the differentiation of Mexico and Chile from the rest of the region, reflecting the NAFTA effect and Chile's success in increasing its exports. However, it is important to point out that Asians have higher savings rates and lower inflation rates as well, as shown in Table 3.6 below.

Table

3.6

Argentina Brazil Chile Mexico S. Korea Malaysia

Gross n ational savings (% of GNI) inf ation

200 1 1 2.8 17 20.3 1 8. 1 28.8 39

Argentina Brazil Chile Mexico Korea Taiwan

ave, 70-75 62.4 2 1 .3 207.2 I Ll 1 5.7 1 1 .7 6.5

ave, 76-80 2 1 1 .2 62.2 82.4 2 1 .4 1 7.4 8.8 4.5

ave, 8 1 -85 3 82.0 151.1 2 1 .5 62.4 7.3 3 .4 5.1

ave, ave, ave, 86-90 9 1-95 96-0 1 1 1 9 1 .9 43.0 0. 1 7.2 1 076.6 1 1 1 3 .8 1 9.4 1 3.9 4.8 75.8 1 8.0 1 7.5 5.4 6.2 3.8 3.8 2.2 1 .6 4.0 1 .4 3.5

Souree: World Bank. World Developmenl lndicators (WDI) 2003 " I M F. World Economic Outlook 2002

Industrial Policy Lessonsfor Latin Americafrom East Asia

An East Asian Modelfor Latin American Success

76

Though the savings data for Taiwan are not available, we see once again a pattern of regional differences in comparing savings and inflation rates. Obviously, in a capital-short situation, domestic savings is a key to investment for the future. A healthy fnancial climate for local public and private borrowing, as well as confdence to place savings in national, as opposed to foreign banks, can only take place when infation is under control. The mere volatility of infation can lead to inflationary expectations, so that most LA nations have yet to provide a sustained track record in infationary management to the point where the expectations spiral (spending due to a lack of confidence in price levels, exchange rates, and financial institutions) has been broken. We also see again Chile's superior performance in macroeconomic management to LA, though still not on a par with East Asian counterparts.17 The recovery of EA from the 1 999 financial crisis seems to be much more healthy than the more recent crisis in Argentina as a result. The final factor that we must look at is external debt, often cited as the key deterrent to growth in developing countries.

Table 3 . 7 1 8

Argentina Brazil Chile Mexico S . Korea Malaysia

Debt,

1990-2001 Total External Debt service % ofXs of G&S 48.6 28.6 1 1 .3 1 8. 1 1 0.4 14. 1 8.1 7.1 6.2 3.6 7.8

% of GNI 9.3

Public debt % of central govt rev 32.5 3.9 25.6 1 9.5 1 0.5 3 1 .4

Source: World Bank W D I 2003 Notes: Xs

exports; GNI = gross national income;

govt government; rev = revenues; G& S = goods and services

Table 3.7 shows that while total debt service is higher in LA, the key difference is that East Asian countries have a greater ability to handle their debt because of their superior performance in exporting, and in generating higher domestic savings. In a nutshell, this means EA can invest more for future growth, leading to a virtuous cycle, as opposed to the short-term vicious cycle of consumption and debt repayments in which LA finds itself.

1 7 See Hira and Sanghera for further analysis of Chile's macroeconomic performance. 1 8 I agree with a reviewer that there is probably something wrong with the figure of 3.9 listed for Brazil's public debt - it seems far too low. However, this is the figure reported in WDI 2003, see p. 250. Strangely, this statistic is not repeated in either W D I 2004 or 2005. According to W DI 2000, p. 252. the fgure for Brazil is 1 5.3 for 1 980.

77

Foreign Direct Investment (FDI)

We should also discuss foreign direct investment (FDI), which naturally links macroeconomic to microeconomic variables. FDI has been a highly controversial topic for decades. Questions surround whether FDI is benef cial and under what circumstances host governments can maximize the benefts ofFD I. A strong part ofthe thought process in LA surrounding imperialism sees foreign investors as inherently exploitative, especially in regard to LA's natural resources. The infamous stories of United Fruit Company's labor conditions in Central America and US involvement in Cuban sugar, among many other examples, give solid reasons for this suspicion. This led to a number of nationalizations throughout LA history, particularly oil and mineral industries. In the 1 960s, the peak of the dependency thinking in the region went hand in hand not only with nationalizations but the setting up of state­ owned enterprises under lSI. Ironically, privatizations in the last two decades have completely reversed this trend in some LA countries, reviving the skepticism of foreign investors' motives and questions of exploitation. It is interesting to note the parallel history of external fnance in the region, with the IMF replacing the hated British gunboats of yesteryear. Obviously, FDI does not necessarily follow the degree of liberalization. 19 Relatively small but liberalized IMF star economies such as El Salvador and Ghana have a hard time attracting foreign investment of any kind, while large economies, such as China, receive the lion's share of all developing country investment despite high restrictions. Investment decision-making is not, as the Left claims, based solely on proftability and/or cheap labor exploitation. If marginal returns on investment and lowest cost labor were the sole criteria, then Bangladesh and the other (capital) poorest countries would receive a much larger proportion. Obviously, risk, knowledge, established supply chains, and other aspects all affect investment decisions. Besides risk factors, investment decision-making may, in some situations, be based as much on the size of the host market as on the potential for production cost savings - hence the superior bargaining power of China with foreign investors. Furthermore, most economists would admit that the effects of foreign direct and portfolio investment are situation-specif c. Moran states: "Turning again to market structure in the developing-country economies that received incoming FDI, there is again pervasive evidence between market imperfections and FDI." He goes on to state that numerous empirical studies have found a high correlation between industry concentration in host markets and levels ofFDI (Moran 2002, 23). Another recent study by economists for a business journal of FDI in LA points to the high level of (profit) repatriation of MNCs as an ongoing concern that host governments are not reaping the benefits of production and sales within their own economies (Baer and M iles 200 I ). The case of Mexico in NAFTA is especially important, as the idea was to integrate into M NC production chains, leading to a natural spillover effect of capital. managerial, marketing. and technology

1 9 See the discussion by Sherif H . Seid. Glohal Regulat/on (�t'F(I�/lln IJirect Investment. Burl ington. VT: Ashgate. 2002. p. 30.

Industrial Policy Lessonsfor Latin Americafrom East Asia

An East Asian Model for Latin American Success

78

transfer to local firms.2o Yet, most studies indicate that there is little evidence of technology transfer to local f rms, either in the case of N AFTA or in other cases (Patel and Pavitt, CEPALb, Roberts and Tybout, 26). Indeed, it is self-evident that the continuing dominance of MNCs underscores the inability of local entrepreneurs to compete on any of these key axes. Moreover, in regard to portfolio capital, the evidence indicates that Chile and Malaysia's capital controls helped to buffer them from successive regional f nancial crises. Therefore, our conclusion from this admittedly quick review of the facts is that FDI is subject in part to the conditions that the host government sets up for it. This is backed up by the EA literature (Wade 1 990). Our next table confirms that FDI, trumpeted by mainstream economists and institutions as the most important source of growth for LA, may be over-rated.

Table

3.8

FDI in LA vs. EA countries

Argentina Brazil Chile Mexico S. Korea Malaysia Taiwan Year Units

2799 1 42530 1 5547 4 1 1 30 999 1 28732 1 5736

Inward %GDP 9.2 2 1 3 .6 1 2.7 0.8 1 9.4 2.5

Outward %GDP 1 .7 0.7 3.8 0.4 1 .4

1 995 $millions

Ave 90�95 %

Ave 90�95 %

Infows

Outflows

Inward Stock

3458 2000 1 499 8080 978

741 676 438 288 1 842 1 050 29 1 7

4655 1 222

Ave, 1 990�95 Ave, 1 990�95 $millions $millions

3.4 6.2

Source: Auth cales World Investment Report 2002, UNCTAD, Geneva, 2002

As with other statistics, the data on FDI for comparative cross-regional purposes are highly limited. However, what we can discern from the Table 3.8 is that EA, with the exception of Malaysia, received far less FDI than LA. Moreover, as numerous regional specialists have pointed out, EA's direct investment comes from Japan and the US, whereas through most of LA (the Southern Cone enjoying some from Europe in recent years), the sole source is the US. Regional specialists claim that this allows EA countries to negotiate better terms on FDl. While being able to play off investors is likely an important bargaining tool, what we see from the above table is that both Korea and Taiwan highly restrict the overall amount of FDI, regardless of the source.

79

In fact, the literature on FDI in EA points out, in contrast to the haphazard policies of LA, that the EA state has quite consciously guided FDI towards certain targeted sectors; placed heavy and time-dependent restrictions on how it can be used; and generally guided it towards export-oriented sectors. In other words, FDI is seen by EA states as a necessary evil, but one which must be harnessed through tough state­ MNC bargaining with the domestic private sector's collaboration and interests close at hand. For the most part, there is no evidence of a coherent, long-term strategy of FDI in LA by contrast, nor is there a clear sense of using FDI to consciously transfer technology and capital in order to help domestic businesses enter into tough sectors.21 Mainstream economists consistently warn of the dangers of distortions which can lead to inefficiencies, special interests, and corruption. For example, Moran points out that domestic content requirements could shackle a domestic industry from becoming competitive on world markets by raising f nal prices (Moran 2002, 43). This simply underscores our point that FDI must be part of a conscious strategy to move up the value-added ladder in global production networks. Moreover, unlike the lSI plans of LA, in which parts and capital were imported for domestic sale, leading to severe macroeconomic problems (Hira 1 998), a conscious effort must be made to create competitiveness throughout the production and value-added process on the one hand, and the discipline of having to sell on world markets on the other. The examples of South Korea and Taiwan suggest two strategies that could be applied to LA. South Korea's chaebol [large vertically-integrated conglomerate] system follows the lead of Japan's keiretsu [large vertically-integrated conglomerate, often based on layers of closely-tied subcontractors], in creating national champions who have the economies of scale in f nance, output, diversif cation, and management and marketing knowledge to compete with global companies independently. This seems to be the natural model for heavy and chemical industries, and, as we show in the next chapter, is followed in this fashion by China. On the other side is the development in Taiwan of smaller-scale manufacturers, also nationally-owned, but focused more on niche markets or goods such as electronics that require less heavy concentration of investment or vertical integration. The Taiwan model would be more appropriate for LA countries such as Chile that may not be able to achieve global dominance in labor­ and capital-intensive manufacturing, as has also been argued by Katzenstein in the case of Western Europe. Unfortunately, as Amsden points out, LA countries never really had a clear and stable long-term strategy for developing globally competitive companies. The region's governments placed so many restrictions and conf icting orders upon both their national companies and foreign investors that producers ended up getting crowded out by core multinationals. She also makes the crucial point that, contrary to neoliberal assumptions and Mexico's NAFTA strategy, MNCs usually do not invest in local capabilities for research and development. These problems were and are compounded by the lack of any clear strategy or government support for

20 See M. Cimoli, ed., Developing Innovation Systems: Mexico in a Global Context, New York: Continuum, 2000, esp. p. 280 on the lack of MNC technology transfer generally and in Mexico particularly, and Hubert Schmitz and Jose Cassiolato, eds., Hi-tech for Industrial

2 1 Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press, 1 990, Dirk Welllem

Development: Lessons from the Brazilian Experience in Electronics and Automobiles, New

te Velde, "Government policies

York: Routledge,

1 992.

towards FDt," pp. 1 66� 1 97 in Ganeshan Wignaraja, ed.,

Competitiveness Strategy in Developing Countries, New York: Routledge, 2003.

80

An East Asian Modelfor Latin A merican Success

research and development in local product innovation, as we discuss below (Amsden 200 1 , 205-8, 243). Summing Up the lvfacroeconomic Comparison and Important Caveats

We have demonstrated here that EA has consistently out-performed LA on a country­ by-country comparison in terms of macroeconomic development. LA sufTers from tremendous volatility in all of its macroeconomic accounts. It i s important to note that there are some indicators that are less clear, which we have not had time to discuss here. For example, comparing investmentlGDP seems to indicate that East Asian countries are higher, but Mexico is close behind. In sum, this macroeconomic review could be used to support either the developmentalist state model or the World Bank et aL 's argument that free markets and exporting lead to economic development. This is where a comparison of the microeconomic climates can be very instructive and follows Chapter 2 which showed the states always intervenc on the microeconomic level. The question is to differentiate the ways EA did so vs. LA. Fiscal Policy

To start a comparison of microeconomic climate, we would like to prove the capacity and quality of EA governments is higher than those in LA, as this is the basic starting point of the EA governing the market l iterature. It is interesting to note, furthermore, that there is no clear difference in my own comparison of government spending/GOP or total consumption/GOP. In the grossest measure, then, the relative importance of public sector spending is the same in both regions. Better results in terms of social welfare and human capital therefore suggest that EA states are much more efficient in their spending patterns. In general, the charge, which seems j ustified, has been made that much of the spending by LA states, particularly during the l S I period, went and goes to political patronage, and results in "white elephants," by contrast with EA, where the results are more effective (for example, see Teranishi 1 997,304 and Adams 1 99 1 ). Stil l, there is no clear index or way to begin to measure the relative quality of government. There could be a wide variety of reasons for Latin American macroeconomic volatility, ranging from greater dependence upon price­ volatile natural resources to lack of effective Central Bank independence. We do not have the space here to explore all of the possibilities, but one in particular is worth highlighting. The Latin American state's dependence on external debt goes hand-in­ hand with a very low capacity to tax. The f rst and most obvious measure of f scal capacity i s overall government deficit or surplus, with data given in Table 3.9. Table 3.9 shows that South Korea's and Malaysia's performance (the latter from the mid- 1 980s) in terms of fiscal discipline has been better in terms of lower levels and less volatility than most countries in Latin America, with the exception of Chile. Fiscal policy, by all accounts, is at the heart of the weakness of LA economies, with every country in the region struggling with tax reform (Hira and Dean 2004). We now tum to the data we have available on sources of federal tax revenues. Tabl e 3 . 1 0 reinforces the differences in the fiscal picture between the two regions. Direct taxes are a key indicator of state capacity, in the sense that they

Industrial Policy Lessonsfor Latin Americafrom East Asia

81

refect the ability of the government to collect income, personal, and property taxes, as opposed to relying on customs duties. The Tabl e demonstrates that LA's ability to tax is much l ower, with the exception of Mexico (though some skepticism should be placed towards Mexico's data). And, with the exception of Chile, LA has much heavier social security burdens, refecting a state much more suscepti ble to patron­ client networks and political pressure, a state geared towards middle and upper class expenditures rather than socially-benef cial l ong-term investments. Large persistent government def cits could also speak to an inability to control cronyism, money­ losing state-owned enterprises and other runaway sources of spending as well as an inability to adequately tax. So, i s there a difference in what East Asian vs. LA countries have been spending tax monies on? The best data we can get are again general categories from the IMF.

Table

3.9

Overall central government deficit/surplus

Argentina Brazil

nla

- 1 7.21

-26.08

-3.29

-7.59

3.83 ( 1 970)

-9.84

- 1 7.0

- \ 5.59

-23. 0 1

Chile

- 1 2. 7 1 ( 1 974)

1 8.84

-7.47

4,03

1 3. 1 4

Mexico

-27.76 ( 1 973)

- 1 6.52

33.72

- 1 4.06

-3.3 1

S . Korea

-.39 ( J 975)

- 1 1 .05

-6.34

-3.63

1 .46

Malaysia

20.9 ( 1 974)

- 1 8.48

-7.78

-7. 1 9

1 0. 1 1

year in ( ) Source: Auth cales fro I M F Govt. Finance Statistics Note: (% of Total Exp & Lending

Table

3. 1 0

2001

repayments)

Tax revenue source a s

% of total revenue

Year

Direct

Argentina

2000

1 7.02

23.39

Brazil

1 998

1 9.44

32.68

Chile

2000

1 8.35

6.43

Mexico

1 999

36.49

1 0.88

1997

26.4 1

9.25

1 997

36.32

S . Korea

Source: Author cales

[\1f' Govt. Finance Statistics 200 I

Note: taxes on income, profits, and capital gains

Table 3 . 1 1 begins to get us even closer to differences in the quality of governance between the two regions. What we see is that while defense expenditures are higher in East Asia, so are education expenditures, with the exception of Mexico.22 There seems to be no clear pattern on health, but another clear difference is the overwhelming burden placed on f scal expenditures by social security payments in Latin America. Forthcoming analysis that I am in the midst of perfonning also shows that more expenditures go towards elitist higher education in LA with a relative neglect of primary education, in contrast to EA. Thus, as we discuss in the next section, the ultimate root of the problem and heart of the difference between the two regions seems to be the much weaker strength, capability, and autonomy of the Latin American state. Is this difference matched by ditferences in private sector perfonnance? We tum to financial policy to begin to answer this question, and return to complete it in our subsequent chapter on sectoral policy differences.

Table 3.11

Korean state has strict and unequivocal control over "every aspect" of the banking industry. Nembhard describes in detail how the Korean financial system was set up to support the chaebols, or national champions. F irst, the banking system was regulated to ensure low interest rates to such enterprises. Second, the government used 'policy loans' directed toward particular industries. Third, the government kept a tight control over foreign financial flows, including aid, in order to channel them in the right directions (Nembhard 1 996, 92-99, 1 9 1 -95, This led, as is well known, to an external dependence on external borrowing responsible for the financial crash ofthe 1 990s, and the more recent deregulation offinance. We note that South Korea's ability to handle its debt crisis has far exceeded its counterparts in Latin America.

Table

3.12

Year 2000 1 998 2000 1 999 1 997

Defense 3 .95 3 .49 8.01 3.27 1 6.66

Education 6.28 6.1 4 1 7. 8 1 25.54 20. 5 1

Health 1 .88 6.21 1 2.4 1 4.22 0.78

1 997

1 1 .14

22.8

6.26

Interest rates a n d business environment

Interest Rates

Expenditures b y fu nction as of total expenditures

Argentina Brazil Chile Mexico S. Korea Malaysia

83

Industrial Policy Lessons for Latin A mericafrom East Asia

A n East Asian Modelfor Latin American Success

82

Soc. 48.46 47.26 36.42 21.17 1 0.79 7.2

Argentina Brazil Chile S. Korea Malaysia Mexico Year

Time to start Time to enforce a Time to resolve contract (days) insolvency (days) up a bus (days)

29. 1 46.7 1 0.2 6.3 9.5 7.9 2001

63 86 34 36 56 41 Jan 02

300 1 80 200 75 270 210 Jan 02

730 3650 1 454 535 545 Jan 02

Source: Author cales IMF Govt. Finance Statistics 2001

Source: Author cales fro World Bank WDI 2003

Financial Policy

On the surface, several Latin American countries such as Brazil and Mexico seem to have followed a similarly developmentalist path in tenns of strong control and directing offinance. However, it is important to note several key differences, beyond the macroeconomic and exchange rate differences noted previously. The most important ofthese is that in the Latin American cases, "the triple alliance," meant that the key partnerships for industrialization included foreign multinational companies (MNCs). Secondly, Latin American finance has obviously relied very heavily on external and often short-term sources, as states struggle with both taxation and fiscal responsibility and with low domestic savings rates, as demonstrated in the tables above. These weaknesses are the primary sources of struggles with inflation and massive capital flight over the last four decades. Thirdly, there never was any l ong­ tenn national plan for financing industrialization, for pol itical reasons reviewed in Chapter 5 . As a result, there was no ability or attempt to create clear i ndustry targets or goalposts for reaching world competitiveness. Moreover, Latin American private enterprises have had chaotic and strenuous access to fnance. in sharp contrast to their competitors. A UN report notes that, in t 995. interest rate spreads were "at l east twice as high in developing countries and economies of transition than in the industrialized world." Moreover, this problem is exacerbated by the tendency of

As pointed out in the previous chapter, the control and direction of finance has been a key component of the East Asian miracle. While we have mentioned in Tables 3.6-3.9 that East Asia has lower debt payments and is more capable of handling the external debt burden through exports and taxes, it bears reinforcing the differences in the financial systems of the two regions. The domestic financial situation is vital in making credit available for businesses to grow, and for consumers to purchase products. It is worth examining the levels of national interest rates across the regions. Table 3 . 1 2 demonstrates that businesses operate in far different environments in EA and LA, backing up the findings of international competitiveness surveys. Interest rates, outside ofMexico, are far lower in EA. In tenns ofbusiness environment, South Korea far outpaces all other countries. These observations are supported by analysts of the financial systems in the two regions. For example, in a detailed comparison of South Korea and Brazil, Jessica Nembhard points out that Brazil exhibited much less capability of controlling its national financial system. She notes that the South 22 Though I am taking these f gures at face value, as one must, l do have strong suspicions about the accuracy of statistics from Mexico.

Industrial Policy Lessonsfor Latin Americafrom East Asia

An East Asian Modelfor Latin American Success

84

banks in developing countries to: a) remain with long-standing and large clients; b) focus on short-term lending and avoid long-term borrowing; c) charge much higher lending rate differentials from both the world and the domestic prime rate, than their counterparts in the North; and d) have considerably less capacity to enable private bond issues, thus effectively closing off the world private capital market for many companies.23 Fourthly, the Latin American penchant to create state-owned enterprises, including political reasons, rather than a partnership between the state and the national private sector, meant that finance could not be used as leveragc to push forward improvements. Nembhard summarizes the problem for Brazil nicely in a way that describes the Latin American case generally: The lack of control over significant institutions in the public f nancial sector and lack of consistent and coordinated fiscal and monetary policy has continued to plague Brazil through the 1 980s. In addition to the weaknesses in execution of monetary policy, the government's f nancial policies in general have never been well unified and its financial command never very effective in part because its scope has been limited and because of the overlapping responsibilities and conf icting functions and objectives of its three major fnancial institutions, the independent policy-making responsibilities of the various public agencies, and the persistence of infation. The government has not successfully operated Brazil's financial system to use monetary and fiscal instruments deliberately and strategically to both reward and punish economic behavior (to the same extent as South Korea . . . ). Its financial institutions compete with the private financial sector more than they guide and regulate private activity. Over the years, it has partly compensated for long-term lacks in private sector financing, but has not compensated for structural weaknesses and general inadequacies and underdevelopments in the private financial system. In fact, it has mostly attempted to augment and empower the private financial sector as a viable separate entity competing with the public sector. Concern has often been focused on providing adequate or equal sources of credit to the private sector, to lessen public sector domination. What has resulted is a large and eomplex system dominated by the federal executive government, although not well controlled by it, and not well unified. The government, therefore, has not always been able to put the credit system effectively in the service of its development plans nor to adequately coordinate its credit policies, capital controls, and development strategies. (Nembhard 1 996, 1 4 1 ) Social Outcomes

Critics of the approach recommended here will point to our emphasis on purely economic measurements of success. While the focus of this study is on economic comparisons, we can also demonstrate that the EastAsian states' approach has resulted in better standards of living as well, as demonstrated in the following table. Table 3 . 1 3 shows that absolute poverty and relative inequality as measured by the Gini coefficient (a measure of the steepness of a curve between the lowest and highest income deciles) are considerably lower in South Korea than in the other �

23 Francisco Sercovich, et aI., Competition and the World Economy: Comparing Industrial Development Policies in the Developing and Transition Economies N orthampton MA: Edward Elgar and United Nations Industrial Development Organization. 1 999. pp. 1 3 1 3 . See also their discussion of Korean industrial policy. pp. 1 94-205. ,

85

countries. Malaysia's performance, with the exception of the efficiency of education expenditures is also superior. The rest of the table backs up our previous observations that though social expenditures are often lower in EA they bring better results, and that the major differences are LA dedication to social security.

Table

3.13

Comparing standards of living and inequality in EA and LA

Popn below $2/day

Gini

Child Education Ave H ealth Mortality Expenditures years of Expenditures schooling

Maternal Mortality ratio

National Argentina Brazil

23.7

59. 1

2001

2000

19

4

8.8

8.6

38

36

4.7

4.9

8.3

1 60 55

2000

1 997-2000

1 990-98

8.7

57.5

12

4.2

7.5

7.2

24.3

5 1 .9

29

4.4

7.2

5 .4

55

S . Korea

<2

3 1 .6

5

3.8

1 0.8

6

20

Malaysia

9.3

49.2

8

6.2

6.8

2.5

Chile Mexico

Notes: 1 998, e xc . Malaysia, 1 997 under 5, 11 000 % of GDP!l 00,000 live births Source: WB, WDI 2003

Conclusion

In this chapter, we have conducted a comprehensive comparison of EA and LA economic policy choices on both the macro and micro-levels, and shown the clear superiority of EA's industrial policy path of development, answering objections as to its applicability en route. In general, EA has been able to do more with highly limited resources by using an export-oriented IP with tight state regulation offinance. We can now anticipate the two objections that I hear as a constant refrain to these suggestions whenever I travel to the region, or speak to Latin Americanists outside the region on this topic. The first is that the EA model is now an historical artifact, a product of unique US foreign policies during 1 950s and 1 9608 as described above, an argument we have already placed in highly dubitable light. We add to our answer by presenting the next chapter which documents that China is fol lowing the same blueprint for success NOW as her neighbors. The second excuse is that even if this prescription is on target, it is a recipe that LA cou ld never follow because of weak state capacity and a lack of political unity. We shall further address that issue in the rest of the book. It is important frst to examine the Chinese miracle and how sectoral targeting works in order to finish laying out in detail the blueprint needed for a productive developmentalist I P in LA.

Chapter 4

Lessons from the Rise of China: The Continuing Relevance of the East Asian Model for Latin American Industrial Policy

Introduction

In the last chapter, we demonstrated ENs superior performance in attaining sustainable and equitable growth and made a strong case that macroeconomic stability was not the only factor. We showed that overall levels of government intervention were not responsible. Rather the data point to the importance of exports; treatment of FDI; the development of a state-dominated financial system; and specifcally targeted government expenditures towards human capital were tied to the success. In this chapter, we can move beyond the regional comparison level to a more detailed level of analysis. By looking in more detail at the case of recent Chinese development, we can accomplish two important tasks in our argument. We can fully dispose of the false argument that EA development was solely the product of unique historical circumstances and a favorable US foreign policy at the time and therefore cannot be reproduced. While we can recognize that China has its own unique version of the model, and its own problems, this chapter shows that we can not j ust dismiss Chinese development strategy as unique, given the commonalities it has with the rest of the region. This argument simply does not hold water when we consider that the EA model continues to provide solid results in South Korea, Taiwan, Malaysia, and Thailand, as we have demonstrated. In this country study, we can expose in much more detai l the EA IP blueprint which LA should follow through bringing out the commonalities of the cases. The astounding rise of the Chinese economy has taken most analysts by surprise. This development has jolted world economic markets over the last 5 years, and is increasing in importance on a daily basis. Yet very little has been written in academic circles explaining the unfathomable acceleration of economic growth in China, a country with one fifth of the world's popUlation. China's economic growth in 2003 was a phenomenal 9. 1 percent, capping 20 years ( 1 980-2000) of annual average growth rates above 1 0 percent! 1 Basic analyses show that China has moved extremely quickly, as a result, from an almost exclusive commodity exporter to a manufacturing Needless to say, these are by far the highest rates in the world. The world average for was 3.2% and 2 . 5% for I 99()'-2000 according to the World Bank.

1 9H()'-90

An East Asian Model for Latin American Success

88

Lessons from the Rise of China

one (Raby 2003, 1 59-1 62). Moreover, China is increasingly capable and moving closer to the leading edge in terms of being able to compete on the world market in not only key sectors such as steel and agriculture, but also electronics and high technology items. For example, China is now one of the world's leading producers of pharmaceuticals, competing well in all categories of that sector (Wu 2003). The case of China, while not without problems as we discuss below, demonstrates that the right type of industrial policy, as followed by its EA neighbors, continues to work wonders in a developing country environment. What is the impact of China's rocket ascension upon the world economy? Recent news reports document increasing trade imbalances in world trade; a rise in international commodity prices (Schwartz 2004, 42-3); and ajobless recovery in the U.S related to the increasing f ight of employment overseas. We proceed in a two step fashion - frst providing an overview of the growing importance of the Chinese economy to the world economy, and then using the developmentalist state framework to explain the sources of its economic growth, consistent with its counterparts in EA, and the implications for other developing economies. After distilling the blueprint for East Asian success in this chapter, we can then tum to how a developmentalist state model could work in Latin America.

Tracking China's Increasing Importance to the World Economy

China's growth has been phenomenal, as Table 4. 1 below shows. China's growth rate parallels those of other East Asian tigers, and has been sustained through their recent downturn. Recent rises in the price of oil and, to a lesser extent, other commodities for manufacturing, have been traced directly to China's growing thirst for commodities. The US Energy Information Administration (EIA) projects China as the second leading world oil consumer, after the US, by 20 1 0.2 China has been enormously successful in moving up the value-added chain, from exporting commodities to exporting manufactures, which now account for over 80 percent of all exports as opposed to around 50 percent in 1 980. China, furthermore, has had phenomenal success in moving into higher technology exports, such as office machine and telecommunications equipment (OECD 2002, 1 39--40). China now commands the largest trade defcit with the U S As demonstrated in Table 4.2 below, China has attracted impressive and increasing amounts of foreign direct investment (FDI). China has recently also become a source of outward FDI, with significant investments in East Asia and Russia (Taylor 2002).

Table 4.2 Table 4.1

89

Comparing long-run economic performance: China's amazing

Comparison of FDI inflows for various developing countries, 1995-2001

spurt

1 9 1 3-50

1 950-73

China

-0.6

2.9

Japan

0.9

8. 1

-0.4

5.8

0.6

6.7

Country

South Korea Taiwan Latin America Africa Western Europe India US

1 .4

2.5

1 980-90

1 990-2000

China

1 0. 1

1 0.7

Japan

4

1 .4

S. Korea

9.4

5.7

Malaysia

5.3

6.3

Thailand

7.6

4.7

Country

Indonesia

6. 1

4.7

-0.7

4.9

1

2. 1

0.8

4. 1

Argentina

-0.2

1 .4

Brazil

2.7

2.9

1 .6

2.5

Chile

4.2

7.2

Mexico

1.1

2.7

India

5.8

6.1

US Canada

3

3 .4

3.3

2.3

Source: OECD, The World Economy in the Second Halfofthe Twentieth Century, for 1 9 1 3 1 973, p . 1 43, World Bank, WDI 2000/1 for 1 980 2000 Note: Average annual % change in GOP; Consistent data fllr Taiwan are not available, however other

Country China India Argentina Brazil Chile

1 995 35,849 2, 1 44 5,609 48,590 2,957

1 998 43,75 1 2,635 7,291 3 1 ,9 1 3 4,638

200 1 46,880 nla 3,2 1 4 22,636 nla

Source: OECD Investment Policy Review China, 2003, p. 1 94 Note: unit is US$miliions

The Blueprint: China as a Developmentalist State

As we saw in the previous chapter, mainstream economists and institutions are claiming that China is proof that market capitalism works and therefore espouse l iberalization for LA. Nothing could be farther from the truth - China, like the rest of EA is better described as a developmentalist state. The pioneering work of Chalmers Johnson set up the term "developmentalist state" to describe the partnership between the state and private industry responsible for the East Asian economic miracle (Johnson 1 982). Johnson sketched the story ofJapan's rise, which he notes was fueled by the things neoclassical economists tell us are counter-productive: an active state that controlled the financial system and regulated trade in order to "pick winners," in terms of both companies and new sectors. A developmentalist state works together

sources put growth rates on a par with Korea's

2

See US Energy Infonnation Administration. www.eia.doe.gov.

90

An East Asian Model jor Latin American Success

with the national private sector to conquer more sophisticated production processes and fuels its competitiveness through a strong orientation towards exporting to fund further growth. The developmental state pushes up domestic savings, but taxes it in order to subsidize growing industries. The developmental state is guided by a strong economic technocracy who are dedicated to national development and enforcing strict performance improvement standards upon public and private enterprises, as we detail in Chapter 6. The rise of the new dragon, China, along with the recovery and resumption of faster growth in East Asia than any other region, demonstrates that the developmental state, not the neoliberal model, is still the best strategy for development. The development of Singapore to, and South Korea, and Taiwan, to near, First World standards of living and the rapid development of Malaysia and China are evidence that this model has been successful in a wide variety of circumstances over time and space. Basic Parameters of Chinese Economic Reform

Why did the Russian economy, much lauded in the beginning of the ' 90s for its sweeping market reforms end up a basket case, while the Chinese economy has become the steady stellar performer of the globe? Part of the reason perhaps lies in the gradualism of the Chinese economic transformation along with political stability, but we need much more detail to provide an adequate explanation. Under Deng Xiaoping, economic reforms were gradually administered, while the bureaucracy was slowly transformed from one based on party loyalty to one more oriented towards economic technocracy. We do not have time to discuss the ideological bridging, but Deng's famous quote to the effect that either a "black cat or white cat can catch mice" demonstrates the effort made in that realm. The path to reform is marked by most analysts by "the Decision," short for a Communist Party Congress paper from Nov. 1 993 that recommended the adoption of a rule-based market system. The landmark decision led to a completely different trajectory for the Chinese economy, covering areas ranging from macroeconomic management to legal and political reform, and served as a blueprint for the reform. In September 1 997, the Communist Party cemented the change to a market economy, in recognizing the private sector as "an important" (previously supplemental) sector of the economy. The 1 997 changes were embedded in the 1 999 Constitution and also marked the important adoption of the principle of the rule of law.4

3 For more on the ideological transformation, see Zhao Chenggen, "Rational Authoritarianism and Chinese Economic Reform," pp. 1 75- 1 90 in P. W. Preston and Jurgen Hacke, Contemporary China: The Dynamics of Change at the Start of the New Millennium, New York: Routledge; and Yanlai Wang, China s Economic Development andDemocratization, Burlington, VT: Ashgate, 2003, esp. pp. 1 00-7. 4 Nicholas C. Hope, Dennis Tao Yang, and Mu Yang Li, "Economic Policy Reform in China," pp. 1-27 in Hope, Yang, and Li, How Far Across the River? Chinese Policy Reform at the Millennium, Stanford : Stanford University Press, 2003, pp. 4-6. For more on political reform, see also Bruce J . Dickson, Red Capitalists in China: The Party, Private Entrepreneurs,

and Prospects/iJr Po/itical Change, New York: Cambridge University Press, 2003.

Lessonsfrom the Rise afChina

91

June Dreyer notes that there were four basic areas o f economic reform that set up the transition to a capitalist economy (Dreyer 2003, 1 5 1-5). The first were the re-introduction and acceleration of an incentives system for agricultural production. China has a much larger rural sector than previous Asian tigers, with approximately 50 percent of its workforce still engaged in agriculture. The second was the creation of incentives and greater autonomy for state-owned enterprises (SOEs), which we discuss in detail below. The third was to reform the government price system, in order to reduce corruption and scarcities of raw materials. The fourth was the introduction ofa series of special economic zones ( SEZs) oriented towards the export processing, which invited in foreign companies to utilize local labor. These SEZs allowed for some experimentation with the way that the market reforms would play out and how they would be administered, providing a learning curve for the national transformation.s Experimentation has also continued through a decentralized cooperation between the central and local governments, designed to encourage entrepreneurship (Aiguo 200 1 , 1 46-9). C learly, China is in an almost unique position for rapid growth in terms of the overall size of its population and resources, and its under-capacity due to the years of Communist mismanagement (Huang 2003). China has a major advantage also in its wealthy and powerful overseas Chinese diaspora. As with other Asians, the Chinese have a very high savings rate. The domestic savings rate for 2003 was estimated at 33 percent!" This has translated into serious investment power among overseas Chinese. These groups control over 50 percent of the economy in every Southeast Asian state, except for the Philippines, where they control 40 percent. It would be impossible to tell the depth of the impact ofthe diaspora, but undoubtedly the effects of investment and business and technological know-how have been profound. An estimated $4.2 billion in foreign direct investment was posited to have come from the Southeast Asian states into China in 1 998 alone! (Bolt 2000, 25,66) Undoubtedly, Hong Kong has been one of the most important keys to Chinese development. As a center of finance, it has helped to manage and encourage continual capital inflows. As an international business center, it has pushed China into current marketing and production practices. Singapore has also played a key role in terms of acting as a gateway and transformational vehicle, as well as a source of needed investment. China Consciously Following the Blueprint ofKorea and Taiwan

C learly, East Asian states "picked winners" in terms of particular sectors in which they deliberately decided to compete. These sectors were not chosen randomly, but after careful and objective study. Sanjaya Lall points out that they tended to have three common characteristics: "learning potential," that is the sectors themselves were 5 Qi Luo, China s Industrial Reform and Open-Door Policy, 1 980-1997, Burlington, VT: Ashgate 200 I , and Justin Yifu Lin. Fang Cai and Zhou Li, The China Miracle: Development Strategy and Economic Refi)rm. revised ed., Hong Kong: Chinese U ni vers ity Press. 2003, pp. ,

.

32 1 -5 . The latter book also looks at China as a developmental state.

6

Dexter Roberts. Bruce Einhorn. David Fairlamb, Moon Ih lwan. and Nanette Byrnes.

"Worrying About China,"

Bu,\·ine.v., Week, 1 / 1 9/2004. Issue 3866, pp. 28-32.

92

An East Asian Modelfor Latin American Success

clearly open to technological improvements, to which we could add Amsden's idea of process innovation; "market potential," that is that the sectors were areas of growing or large-sized world markets, including markets for inputs; and that in each case, sectoral assistance was time-limited and conditional upon measurable progress by the private sector. Lall also points out that sectoral interventions were horizontal as well as vertical. In other words, they did not seek to cover the whole of the production process, but rather to provide inputs and otherwise stimulate activity in it. Examples of horizontal policies might include grants for research and development; active training of engineers in the production process, as Amsden describes in the cases of shipbuilding and steel; scholarships for training engineers abroad, as has been the case with Korea and China more recently; tax holidays and other incentives for specific industries; and technology and export support services for small and medium enterprises and personnel. As we described in the frst chapter, this is a key difference from the historical Latin American policies, which sought a completely vertical process. Still, there are quite important differences in the types of developmental strategies that East Asian states follow. While Japan had a more equitable triumvirate between the large corporate zaibatsu [dominant corporations set up in relation to Japan's military ascendancy], the Ministry of Finance, and MIn [Ministry of I nternational Trade and Industry], the Korean and Taiwanese state have played a more dominant role vis a vis the private sector. This is to be expected by developmentalist theory, which follows the aforementioned idea laid out by Aleksander Gerschenkron that the later the industrialization process takes place, the greater must be the role of the state to help make up the distance (Gerschenkron 1 962). Moreover, the case of Taiwan is described more as a decentralized, family-oriented type of industrialization, while Korea's strategy has been to develop the large heavy chemical and manufacturing national champions, the chaebols. These now familiar conglomerates, such as Daewoo, Samsung, and Hyundai, reflect two important insights into the world economy. The f rst is that the economies of scale, in terms of capital and production costs, for advanced industries such as steel (led by Korea's tremendously successful state-owned national champion, POSCO, recently privatized) and automobiles are enormously high. I f we add in the costs of learning, processing, and the myriad l inkages for sub-contractors and research and design work, we can see why these markets tend to be natural oligopolies, even on the international level. The second is that the small size of the domestic market in terms of capital availability, skilled labor, and consumers, and the very long-term payoff for such investments require the close cooperation of the developing state with its national champions. As I have discussed elsewhere, this relationship does not necessitate privatization, merely a cooperative and arm's length relationship between the state and its national industrial champions based on goals of national interest and performance requirements. Such a relationship is almost impossible to realize if a foreign company is involved (Hira 2003a). The third important point is that in few cases did the national partnership in EA include foreign multinational corporations (MNCs). MNCs did not figure into the Japanese case, and only recently became part of the Korean landscape. In the case of Taiwan, Wade points out that MNCs were limited to key technological or advanced industrial sectors where there was no

Lessons from the Rise of China

93

national capability.7 MNCs were invited in specifically to gear production towards export, and were often required to train Taiwanese managers. Over time, the state gradually built up human capital and technological capacity in the area, allowing for the pushing out of foreign producers in favor of national ones. The Taiwanese way is naturally less costly than that of Korea, and MNCs, including those from Japan, have been far more prominent in Southeast Asia. The evidence suggests that this important difference in strategy may help to explain Taiwan's continuing relatively higher level of dependency. As we detail below, China 50 strategy. by her leaders ' own declarations, has been to follow the successful one ofKorea. 8 Financial Sector and Export Strategies

The state continues to dominate finance in China. The state still retains a dominant control over banking, as seen in Table 4.3. There are widely differing views of the soundness of the banking sector within the l iterature (Huang 2003, 82-93). A number of authors point in particular to the high level of non-performing loans. However, these were addressed through a major reform in 1 999, by which the state took on US $2 1 . 5 1 billions of these, and boosted the banks' capital in return for setting up stricter banking regulations, including accounting and market-based standards (Hope, Lang and Li 2003, 5).

Table 4.3

Share of state-ownedbanks,

China India

Brazil Argentina Mexico Germany Canada France Japan

1998

99 85 47 30 28 47 0

0 15

UK

0

US

0

Source: OECD, China in the World Economy: The Domestic Policy Challenges, 2002, p. 1 9.

The state controlled the value of the local currency, the renminbi, for many years, as well as the exchange market. Moreover, the state continues to use the exchange rate, Wade. See also Lal l , Competitiveness, Technology, and Skil, pp. 240-25 1 . China in the World Economy: The Domestic Policy Challenges, Paris: DECO, 2002, pp. 1 46-7 state this imitation of S . Korea, but it is a common observation in the 7

8

DECO,

literature.

An East Asian Modelfor Latin American Success

94

in developmentalist fashion, to promote exports and reduce imports, by pegging it at a low level to the U S dollar, and ensuring that it remains under-valued through occasional devaluations.9 Undervaluation to support exports is, of course, an integral element of the developmentalist model, and has led to complaints by US officials. More importantly, control of the exchange rate insulated China from many of the effects of the East Asian crisis of the 1 990s. The state categorizes two types of imports: those used in export processing, and imports for consumption. In typical developmentalist fashion, the latter are tightly controlled in China. Imports have to go through the approximately 1 00 large foreign trade corporations (FTCs), which were all state-owned until 1 998. FTCs operate under close scrutiny of the Ministry of Foreign Trade, which exercises a "kind of nontariff" restraint upon imports. In sum, foreign enterprises are largely restricted from selling directly in the vaunted domestic consumer market (Naughton 2000, 64) which was their chief attraction to China! To China's credit, it has turned them around to focusing on using China's labor for export processing, and helped to dampen a hyperinflationary consumption binge a la Mexico during the peso crisis. Most Foreign Direct Investment (FDI) has been concentrated in manufacturing, (OECD 2003a, 45-8) reflecting China's developmentalist strategy to limit foreign f rms to both export and high value-added sectors. This is obviously in sharp contrast to a number of other developing countries in other regions, such as those in Central America, Zambia, Chile, and Venezuela, where foreign investment and involvement have been focused either in agriculture or in natural resource extraction. It is interesting to note that relatively little FDI has gone into services. State-Owned Enterprises (50Es)

A unique feature of China's development is obviously the strong ties between the military, the Communist Party, and large state-owned enterprises. Unlike a number of Latin American countries, even while defense spending has been slashed, the military has been instrumental to economic growth in China. In 1 979, less than 1 0 percent of military industry production was going to civilian markets, while in 1 990, the share was over 65 percent (Berthelemy and Deger 1 995, 1 2) China's transition to the market economy was full of developmentalist state-type incentives. For the frst decade of reform, from 1 978-88, SOEs operated under a "dual track" system, by which they could sell excess production at the market at market prices (once a set quota at state prices was met) (Naughton 2000, 52). SOE employees were protected until a collapse of a number of enterprises in 1 994 (Naughton 2000, 6 1 ). China's SOEs have been widely criticized for corruption and inefficiency in the literature, with some analysts claiming that private enterprises are the real engine of growth (Qian 9

Lessons from the Rise of China

95

and Wu 2003). Certainly, statistics show that both SOEs and collective enterprises contribute increasingly less to the economy in terms of numbers of employees and overall output. They also show lower proft margins in general (OECD 2003a, 1 401 ). However, this ignores the fact that SOEs tend to be in the "commanding heights of the economy," or leading sectors. So, it is probably more accurate to say that while the natural market capacity of China has been filled by the private sector, the ability of the economy to move up the value-added chain, particularly in exports, is closely linked to SOES.1O Sectoral Strategies

Clearly, China has openly followed an IP as part of its development strategy. This strategy includes direct intervention to accelerate industrialization through providing special protection and support to "strategic" or "pillar" industries. China's IP instruments have included tariff and non-tariff barriers, including quotas, licensing and tendering requirements, state trading, and access to favorable f nance. China has pledged to phase out such instruments as part of its accession to the WTO. More importantly, the selected sectors are dominated by SOEs, with little competition from foreign companies. The key sectors include resource-based and industries such as energy, metals, transport, and chemicals. Tobacco processing is also operated as a state monopoly. China clearly has grasped the importance of economies of scale in terms of attempting to create companies that are viable in a global market. Like Korea with Samsung and Daewoo, and Japan before it, China is creating national champions in key sectors. Small and medium enterprises, by contrast, are more important in the liberalized and competitive consumer products sectors, such as electronics, textiles, clothing, and food. Foreign companies are concentrated in export-oriented sectors such as apparel, leather, cultural, educational and sports goods, and electronic and telecommunications equipment (OECD 2002, 1 3 1 -3 ). In fact, the OECD reports that 63.5 percent of all FDI in 2000 was in manufacturing enterprises; no other sector received more than 1 1 percent (OECD 2003a, 202-3) . The key: Technocracy and Developmentll

Perhaps the most important key for a developmental state to function well is the creation of a meritocratic bureaucracy. In China, Deng Xiaopeng pushed for and obtained a massive turnover in state personnel and helped to push the bureaucracy towards a more merit-based system. He used aggressive retirement strategies as well as other mechanisms to create a highly educated planning ministry almost overnight.

For more on the exchange rate, see Ross Garnaut, "China: new engine of world 1 - 1 8 in Garnaut and Ligang Song, eds., China: New Engine of World Growth, Canberra: Asia Pacific Press, 2003, pp. 6-1 1 ; Zhang Zhicaho, "China's foreign exchange policy in a time of change," pp. 45-63 in p. W. Preston and Jurgen Hacke, Contemporary China: The Dynamics of Change at the Start of the New Millennium. New York: Routledge,

Attract I ndustries," in Ron Hira and Ani! H i ra. Outsourcing America, New York: A macom,

2003.

2005.

growth," pp.

10 In the final chapter,

I d i scu ss further the fallacy that SOEs are inevitably less efficient,

including a more extensive literature review. I I For an expanded discussion of research strategies

by sector including the basic set­ Strategies to ,

up of China's national innovation system, see Ani! Hira, "Developing Country

96

He also created a number of research and think tanks to aid the bureaucracy. 12 Nonetheless, concern over corruption through military and government ties continues to run high. 13 Still, the rise of the technocrats can be seen through the continual tinkering with the model, in order to continue to attempt to incentivize the SOES and push them forward. Perhaps the most important indicator in development of state strength is the ability to diversity and expand the tax base, a hurdle with which no Latin American or African country has been able to cross. As seen in Table 4.4, China's state shows remarkable capacity from this standpoint, and particularly impressive is the increasing ability to tax foreign frms.

Table 4.4

Average annual growth in tax revenue in China, 1994-1999

Total Value-added Business Consumption Tariff Corporate profts: total SOE Collective Enterprises Foreign-funded enterprises Personal Income

Growth 1 5 .8 11 20 11 1 5.5 6.3 0.9 1 1 .7 35.3 4 1 .5

Share of total 1 999 1 00 36.3 1 5.6 7.7 5.3 9.6 6 1 .6 2 3.9

Source: OEeD China i n the World Economy: The Domestic Policy Challenges, 2002, p. 42.

Implications of the Chinese Miracle for Developed and Other Developing Countries

I do not wish to imply that China is an economy without problems and assets, some naturally idiosyncratic. Foremost are increasing gaps in relative equity both among regions and different classes. This is distinct from other East Asian countries, where growth and equity have gone more closely hand-in-hand. Part of the difference may be rooted in the fact that extensive land reform was carried out only in Korea and Taiwan, nonetheless Malaysia's growth, without land reform, has also been spectacular and equitable. Still, absolute living standards have risen tremendously in China. Other serious areas of challenge remain, including the need to consider infationary 1 2 Ming Xia, The Dual Developmental State: Development Strategy and Institutional Arrangements for China s Transition, Brookfeld, VT: Ashgate 2000, pp. 80-85. For discussion of the development of the economic technocracy that has guided economic policy, see Catherine Keyser, Professionalizing Research in Post-Mao China, Armonk, New York: M.E. Sharpe, 2003.

1 3 X ia, pp. 222-223.

97

Lessons from the Rise of China

An East Asian Modelfor Latin American Success

pressures from the consumption boom; the possibility that this boom or increased needs for imports of commodities, especially fuel, will also lead to a deterioration in the trade surplus; the continuing problems of corruption and viability of some of the large SOEs; the fragility of the state banking system; grassroots political challenges for opening up the system; 14 continuing high unemployment (estimates place it at 1 5 percent); environmental deterioration; and serious challenges of regional and urban planning from accelerating migration to the cities. While some analysts would like to dwell on the problems accompanying growth, a more reasonable base is to ask the question of where China's development would be had it not adopted the developmentalist strategy. Entry into the WTO should be seen as recognition of the maturation of China's industries, rather than a surrendering to market forces, which would directly contradict the continuation of a strong nationalist state in China. Accession to the WTO means that Chinese leaders think that their industries are now mature enough to compete head-to-head with Western companies under WTO rules. Thus, China is following the pattern of South Korea and Japan before her, in terms of gradually easing intervention as infant industries grow up. In China's case, this process has been accelerated given the vast size of her domestic market. To be fair, as I have pointed out elsewhere, there is a great deal of leeway for state intervention even under "free trade" by international standards, such as US defense procurement, with its private sector spillovers, and investments in academic research centers, and fscal policies (Hira 2003b). However, entry into the WTO may indeed exacerbate the aforementioned problems, particularly differential rates of growth in different regions, as well as lead to increasing reliance on Western foreign investment and pushing out local competitors by a higher degree of competition with Western companies (Raby 2003). Agricultural imports are already rising, and may continue to increase in some areas, such as grain. The domestic auto market is expected to face serious competition for the first time. Some theoretical models predict automobile production downsizing.15 Long-term concerns include not only health care, but creating a much improved educational infrastructure. On the other hand, accession to the WTO is also likely to accelerate the aforementioned trends, increasing capacity in agricultural sub-sectors, heavy and chemical industries, automobiles, pharmaceuticals, electronics, and other high technology and manufactured goods. Indeed, there is some fear that China's growth will create an overcapacity in a number of manufacturing sectors. All models

14 See Tony Saich, Governance and Politics of China, New York: Palgrave, 200 1 , for an overview o f governance challenges; and Wing Thye Woo, "The Travails o f current macroeconomic and exchange rate management," pp. 34-63 in Garnaut and Song for economic problems. 1 5 Wolfgang Deckers, "China, Globalisation and the World Trade Organisation," Journal ofContemporary Asia, 2004, Vol . 34 Issue I , pp. 1 02-20; William Martin, Betina Dimaranan, Thomas W. Hertel, and Elena lanchovinchina, "Trade Policy, Structural Change, and China's Trade Growth," pp. 1 53-75 in Hope, Yang, and Li; and Huang, Jikun, "The Impact of Trade Liberalization on China's Agriculture and Rural Econo my SAIS Review Vol. 23, No. I , (Winter-Spring 2 00 3 ) pp. 1 1 5- 1 3 1 .

.

,

"

An East Asian Modelfor Latin A merican Success

98

agree that China's importance to the world economy will continue to grow, and that it would grow at a continuing rapid pace regardless of WTO entry. 16 Current Western policies towards China can best be described as nai've. There remains some hope that the Chinese economy will become a new engine for growth in the West, with increasing export opportunities once WTO changes take place. A recent report reveals how wrong this act of faith is: at least 760,000 manufacturing jobs have moved from the US to China, and the jobs now moving there are of much higher salary and technical leveis, including strategic companies such as Motorola and General Electric. Moreover, the Chinese trade def cit with the US remains at a six to one ratio in favor of China. 17 Chinese exports are uhiquitous in North America, ranging from textiles to toys to electronic goods. It does not seem to have occurred to Western policymakers that just as China can out-compete them even now with all of her disadvantages, in the future that advantage will continue to grow, and, a more important obvious fact seems beyond their grasp that the Chinese will easily out­ compete foreign companies in their own domestic market, as well. We can expect some major adjustments as this process cannot continue indefinitely. It is quite ironic that in the post-Cold War world, China presents much more of a threat as a capitalist state to the West than as a Communist state. Moreover, the Clintonian expectations of a "peace dividend" from the end of Communism seem laughable now, not only in light of the new war on terrorism, but the fact that security threats continue in various sub-regions of EA. In China continues to have strong concerns and claims to Taiwan, and North Korea remains a top US eon�ern Therefore, the ironic effect of China's "economic miracle," including : foreign Investment and technology transfer may actually be a China more capable of posing security challenges to the US and Europe. For instance, China is putting resources into nanotechnology research, considered by many to be the l eading technology of the future. For the moment, China remains very much a regional power, concerned and concentrated very much in the Far East. However, with its commodity, and especially fuel, import needs increasing, the Chinese government is beginning to pay more attention to Central Asia, and to Latin America. Chinese interest in the Middle East is likely to increase in tum, as well Chinese ability to project global power. Nor should these developments be viewed as any great victory for other developing countries, though obviously there are great benefits for the Chinese people, a large proportion of humanity. There is no doubt now that the size and dynamic of China's economy is having profound impacts upon other developing countries' ability to develop competitive products. While higher commodity prices may help some developing countries, such as Chile with copper, China's rising market share in a wide variety of felds and the immense size of both the unskilled and highly capable labor forces means that the ladder up to producing higher revenue, higher wage, and 16

Lessonsfrom the Rise of China

99

higher value-added products may be closed off in the future. Unlike South Korea and Taiwan, who like their predecessor Japan, began to outsource and invest in Southeast Asia once their wage rates increased, it is unlikely that any other country will be able to compete with China's vast population of unskilled labor any time in the foreseeable future. Even if wages should begin to rise incrementally in some areas; productivity may grow even faster. While there are always possibilities for political implosion or economic crisis of the model, these predictions have been made about China since the reforms began in the early 1 980s. Adjustments to the EA Model post Asian Crisis

Though we are discussing regional development models, we have noted throughout our discussion of EA the important variations by sub-region (EA vs. SEA vs. China) and over time (democratization, improvements in labor conditions). A final important point about the versatility of the EA model is worth noting, namely the weathering of the economic depression caused by the Asian fnancial crisis of 1 997. Among some pessimistic analysts, the Crisis spells the mistaken end ofEA industrial policy. 1 8 Clearly, the Crisis itself was not a simple outcome of crony capitalism and corruption as diagnosed by the World Bank and IMF in recommending wholesale changes to the Model, but it was, in fact, the liberalization of the financial sector itself in SEA that led to the vulnerability to speculative international fnancial flows and real estate bubbles (Jomo 2003b, 1 4). In fact, Malaysia weathered the Crisis much better thanks to its capital controls. Other analysts point instead to the flexibility of the EA model in the wake ofthe financial crisis. They suggest that as economies such as Japan, Korea, and Taiwan mature, the developmental model requires a reduction in state intervention. Thus developmentalism should be looked at as a transitional state, albeit one that must be peeled back selectively and carefully as domestic companies mature to the point of being able to compete (Wong and Ng 1 997, 36,40,45,48-5 1 ). Recognition of the need for state developmentalism to be evolutionary and adaptive is reflected in South Korea's recent shake-up of its chaebols, including selective liberalization of foreign direct investment and China's revaluation of its curency in response to foreign pressure and maturation in 2005. Our consistent analysis then suggests that as EA moves from learner to innovator status, it is natural that states move towards concentrating on R&D and technology efforts, as do those in the North. The most important conclusion from this analysis is that the developmentalist state remains a viable model for developing conntries to emulate. For those who remain unpersuaded of the worthiness of examining it as a legitimate alternative for LA and possibly Africa, the Middle East and Eastern Europe, there may be no way to overcome their resistance to the evidence of performance across several decades and many cases beyond the frst miracle, Japan. The most recent example of rapid growth, Vietnam, is also adapting its state-dominated economic institutions in the direction

Aimin Chen, "The structure of Chinese industry and the impact from China's

WTO entry,"

Comparative Economic Studies (Spring 2002),

Vol. 44, Iss. 1 ; pp. 72-99. See

Martin, Dimaranan, Hertel, and lanchovinchina, for econometric (GTAP) modeling of WTO 1 7 Anonymous. pp. I 4- 1 6.

1 8 Dae-Hwan Kim, State and development in Korea after the Asian Crisis, pp. 63-87 and K. Sundaram Jomo, "What remains of the East Asian model?" 1 1 7-35, both in Costas

outcomes. "

H igh wage jobs moving to China," Quality. (Apr 2003) Vol . 42, I ss.4; -

Lapavitsas and M akoto Noguchi. eds., Beyond Market-Driven Development: Drawing on the experience ofAsia and Latin America. New York: Routledge, 2005.

1 00

A n East Asian Model for Latin A merican Success

of East Asian-style market-conforming guided ones. Unfortunately, the liberalization of the Vietnamese economy under the Doi Moi [change and newness] reforms of the 1 980s was set back by the Asian financial crisis. Nonetheless, Vietnam is now discussed in terms of its potential for take off.19 Vietnam's primary productive growth has come from rapidly growing agricultural exports and light industry based primarily in state­ owned enterprises. Its financial system remains state-dominated. Vietnam, unlike LA, has a strong base of investment in education and health care. It remains to be seen how precisely Vietnam will adapt the EA model to its national idiosyncrasies, but it appears to be headed in the right direction. Another case, India, which is far from the EA model, also shows strong signs of growth, but limited to particular sectors, led by software. I argued in a study of that sector that government intervention and guidance of the sector was and remains fundamental to the sector's success (Hira and Hira 2005). It bears mentioning here that any mini-miracle in Indian software must be closely tied to the development of strong engineers in nearby Indian Institutes of Technology, government fnancial incentives, infrastructure subsidies, and other forms of support, and the aid, fnancial capital, and know how of the Indian diaspora in the sector. As a recent paper by Lall points out, globalization changes the nature of state intervention in late developing economies, and also increases the need for it. Barriers to entry are much higher in industries such as electronics than previously, and skills sets internationally much more competitive (La1l 2003). States in the future may have to select certain niches or adapt instruments to direct FDI into productive national channels in different ways given growing international restrictions (which in fact acknowledge the success ofsuch interventions in EA), but they will need developmental strategy now more than ever.20 I t is time for those concerned with development in other regions to take this model seriously, as it is the only viable explanation, remaining consistent over three decades, for why East Asian economies have dramatically raised their standards of living in a short time, while the rest of the developing world has experienced a growing gap in relative income. Conclusion: Specific Lessons of the Developmentalist Model for Latin America

This chapter demonstrates that the developmentalist model is not unique to South Korea, Taiwan, and Malaysia, but can be adapted even to countries where one would be skeptical of finding fertile ground. The model is current and working throughout the region, not just in China. There are several important lessons from the East Asian experience, as reinforced by Chinese development, for other developing countries. 1 9 Brian Van Arkadie and Raymond Mallon, Vietnam: a transition tiger? Canberra: Asia Pacific Press, 2003, esp. 1 1 8 and 253; Binh Tran-Nam and Chi Do Pham, eds., The Vietnamese Economy: Awakening the Dormant Dragon, New York: Rout1edgeCurzon, 2003; Charles Harvie and Tran Van Hoa, Vietnam s R�forms and Economic Growth, New York: St. Martin's Press, 1 997; Melanie Beresford, "Vietnam: The Transition from Central Planning," pp. 1 79-204 in Garry Rodan, Kevin Hewison, and Richard Robison, eds., The Political Economy a/South-East Asia: An Introduction, New York: Oxford University Press, 1 997. 20 In Political Economy o/the Southern Cone, and Regu latory Games," I suggest ways "

that regulatory and factors policy can be used tor industrial policy purposes, ful l y within the constraints of current and potential trade restrictions.

Lessons/rom the Rise o/Chino

101

We can summarize these in a general sense i n two specifc areas, policy and actors. In terms of policy, there must be a stable and outward oriented macroeconomic, trade, and factors of production oriented strategy. In terms of actors, there must be a national consensus that leads to stable, transparent, coordinated and merit-based institutions, as well as partnership and division of labor between the state, national private industry, and, to a lesser extent, skilled labor. Most importantly, there must be a national strategy, one that pushes forward competitiveness in terms of finance, technology, cost-effectiveness, using the standards of world markets as the benchmark. We can l ist the detailed lessons as follows: 1 . There must be an overall national partnership between the state and a national

bourgeoisie for national development. States should not be involved in direct production, unless they set up a company at arm's length. States alone should not bear the whole risk; the national private sector must share in it. 2. The state must make a pact with the national elite, leading to serious agrarian reform, a sound tax system, and a spiritual and concrete nationalism whereby the elite invest in their own economies as a part of the national team. Agrarian reform is a vital part of creating that nationalism, basic agricultural efficiency that finances growth, and human capital that is freed for industrialization. The reformed tax system allows the state to pursue a targeted sectoral policy, set up a national innovation system, invest in human capital, and increase its own technocratic capacity. In return, the national elite receives stable macroeconomic policies; transparcncy, lack of corruption and otherwise efficient and rational institutions; human capital and infrastructure on world class levels; and state aid in creating their own productive agriculture and industries. The result is a win-win-win virtuous cycle for the state, the capital elite, and the population at large, who all share the benefits of growth. 3. The technocracy ofthe state and the bourgeoisie must be dedicatedly nationalistic, long-term in its vision, merit-based and relatively free of corruption. There must be a strong national unity and shared vision among different elites within the nation, and a sense of obligation to, and connection with, non-elites. 4. Foreign investment can play a useful role, especially in knowledge of markets, provision of finance, and technology transfer. However, it must be geared towards production that is part of a long-term national plan to create nationally­ based competitiveness. 5. National goals must be to develop long-term competitiveness in high value­ added and high technology goods that are price-, demand-, and income-inelastic. In the short-run, attracting low-skilled jobs that have the potential for moving up the value-added chain of a production process could be a good starting point. The products/sectors selected should be high growth ones, which are subject to continuing innovation this allows for the possibility that improved process or innovation can help a latecomer to break into the market. This rules out most commodity-based and most agricultural production, unless it can be converted into value-added products and/or serve to finance investment in other sectors. Agricultural reform and productivity is important primari ly to finance IP and should not be neglected. However. even agricultural products have the potential

1 02

6.

7.

8.

9.

An East Asian Modelfor Latin American Success

for value-added ladders. If Colombia could sell its coffee in shops competing with Starbucks, it would capture far more of the $4 captured in the sale of each latte, and perhaps this task would open up learning to entering other production and retail sectors. Similarly, instead of producing wood, countries with wood should seek to produce and sell the fnal wood products, including furniture. Barriers to entry will likely be substantial, so a learning curve should be mapped out, with goalposts to measure progress over a long-term. Competitiveness must be aided with the help of the state, particularly finance, but must have world market and export standards as the measure of success. State help must be limited and allow for national competition. Goalposts must be set with limits and measurable achievements for continued state support. Industries will be pushed hard towards competitiveness so that they can serve to fuel new investments. The state should set up or help the private sector to export its final products to overseas markets. The state should set up a financial system geared towards production, not consumption. The state must find a way to create extremely high savings rate, and secure financial instruments. The state should rationalize its taxation system so that it has the capacity to funnel investments to targeted sectors. All of this must be done while creating the face of openness, transparency, and abiding by internationally-advocated rules for macroeconomic and trade governance. Nations must be sneaky, tricky, and innovative to identifY ways to govern markets without receiving international sanction, and keep in mind ways of maximizing international bargaining positions. As the most recent literature points out in regard to the post-financial crisis evolution of the EA developmental state, the key to a successful IP is to create a fexible and adaptable planning and implementation strategy. Flexibility is required not only as the natural evolution and success of the plan allows for, at first, targeting of new and more challenging sectors through taxation of previous successes and development of more complex research and innovation infrastructure to support those efforts, and later, a gradual reduction of state intervention as successes lead to a diversified and capable economic sectors have caught up internationally, but also for the continually changing incentives and opportunities of the international economy.

Naturally, it is not enough to simply map out the policy lessons of the EA miracle. From Chapter I , we have premised this book on the fact that ideas can persuade and create a new consensus around these aspects, including a renewed sense of national and regional purpose, just as has occurred in follower countries in EA, and as we saw, has occurred around other paradigm shifts in LA historically. In our next chapter, we tum to how each LA country can begin to map out the Xs and Os of a customized IP based on this blueprint. Then we can close our efforts by extinguishing the final obj ection of those clinging to the albatross of fatalism and blind faith - exploring in greater detail the internal political obstacles to LA adopting developmentalist state policies, the paralJel need to transform LA politics in order for IP to succeed, and the policies to follow once that battle is won.

Chapter 5

Sectoral and Political Foundations for a New Industrial Policy Path for Latin America

Introduction

Ideally, we could create a simple road map for LA on the basis of the previous chapter, choosing the particular factors and route that made the most sense for the region and customized for each country. This chapter makes clear that the types of industries and sectors that a country is i nvolved in have profound implications for its standards of living and equality. As we have discussed throughout the book, each industry has implications for types and levels of employment, revenue amounts from exports, and human capital investments needed for the production process. It is no accident of history that producers of unskilled labor goods or commodities are poor and those of high technology and high value-added manufactures rich. In fact, the theory of comparative advantage in economics, flawed as it is in neglecting the dynamic aspects of human capital development, says nothing in particular about the relative gains from trade; merely that trade increases overall world efficiency. The question confronting developing nations is therefore ultimately not just one of adopting an active EA style IP, but of selecting sectors in which they can earn more and employ more. Unfortunately, students of development have long since discovered what we discussed in the introduction, namely that for a particular country there is no precise path to reach goals of development, even ifthere is agreement. Even in specific areas ranging from state effectiveness (or civil service reform) to technology transfer, there seems little ability to match development theories with clear data in a format that suggests coherent policy proposals for specific long-range planning. Nonetheless, this should not lead us to dismiss all usefulness of looking beyond every situation as idiosyncratic. In fact, we can acknowledge that there are really two helpful (and intertwined) ways to look at industrial policy for development: the comparative level of national strategy, which we have thus far covered, and the sectoral level, which is what we review through the rest of this chapter. We need to acknowledge that these two axes of our analysis are actually intertwined. As Radosevic states following an exhaustive literature review (for instances, Radosevic 1 999, 1 74-5) : . . . technology transfer activities per se cannot explain the outcomes o f transfer. These are largely determined by the interaction of the host country, sector and firm characteristics which must be explicitly taken into account. ( Radosevic 1 999, 1 74-5) Nonetheless, this is not a random pattern of interactions. but a clear hierarchy.

Sectoral and Political Foundations for a New Industrial Policy Pathfor LA

An East Asian ildelfor Latin American Success

1 04

Radosevic continues: The world production system is hierarchical with core firms that operate at the hub of an extensive business network or production clusters, and peripheral frms that operate as local players and which are involved in global or regional networks as offshore or cost-based locations . . . the liberalization of the trade and investment environment will reinforce and deepen the existing differences. In such a situation, the ' catching up' of individual firms or countries starts from a specific position in international markets and production networks. (Radosevic 1 999, 2 1 6-7).

In this chapter, we argue that the key lies not only in fundamentally altering macroeconomic and f nancial systems in LA along the lines of the developmental blueprint we have distilled, but also in a transfonnation of m ieroeconomic strategy centered on trade and a sectoral policy, in order to achieve the development of internationally-competitive exports that provide the surplus for the virtuous circle of growth. The thrust of the chapter is to build upon recent efforts in this area. Notably, a recent comprehensive report by Lal1 et al. reaches the conclusion in comparing EA and LA that "The issue (for LA) in other words, is not so much as to whether to mount an industrial policy but how. There is little doubt that EA intervened more, and more effectively than LAC (Lall, Albaladejo, and Moreira 2004, ii)." The report has other important findings for LA, including that export growth has been more concentrated in LA, with many more losses and suggests export growth may therefore be due to country-specific factors, rather than liberalization (LaU, Albaladejo, and Moreira 2004, 1 3)." In fact, the report suggests that the growing divergence in competiti veness between the two regions in most areas, including education and technological capabilities, is a wake-up call for Latin Americans to revisit the strategic role and capacity of the state (Lall , Albaladejo, and Moreira 2004, 52). This finding echoes other recent analyses which point to the accelerating technological capability of EA as one of the underpinning foundations of its continuing success. I We move forward from this base in the literature to a more difficult and detailed question of starting to define the industrial policy fonnat. We begin the task with explaining how important sectoral or rnicroeconomic level policies are in explaining the differences in perfonnance between the seemingly macro-level differences between the two regions. In other words, EA shows us that it is not just manufacturing per se that matters, but the characteristics of the sectors in which one specializes that detennine the possibilities for equitable and stable growth. We then turn to why political factors in LA have prevented the movement towards an active IP, and how this might change. This will set up for our final chapter, in which we can look to case studies of successful companies in both regions that embody the lessons of this chapter. Shahid Yusuf, M . Anjum Altaf, and Kaoru Nabeshima, eds., Global Production Networking and Technological Change in East Asia, Washington: World B ank, 2004, and Marcel Timmer, who conducts an econometric analysis of Total Factor Productivity growth, in The Dynamics ofAsian Manufacturing: A Comparative Perspective of the Late Twentieth Cenutry, N orthampton, MA: Edward Elgar, 2000, esp. 1 57.

1 05

The Importance of Creating a Clear Sectoral Policy

One can argue that while there is an international level of competition Latin American companies are now facing under neoliberalism, there is nothing near the sign that they are succeeding in the absence of state help to deal with foreign competition. While both East Asia and Latin America have favored certain sectors at different times, both the choice of sectors and the types of promotion have varied considerably. Moreover, as pointed out earlier, i n EA, there is clearer evidence that the state disciplined and guided sectors towards greater competitiveness over time. The success stories of Taiwan's pc (personal computer) industry, Korea's electronics, auto, and steel finns, and China's emergence across the board are all signs of superior microeconomic policies. Let us begin to compare the microeconomic profi le of the two regions by looking at the overall allocation of production in each economy.

Table 5.1

Structure of output (Value added % of GDP, 2001)

Industry Argentina

5

27

17

69

Brazil

14

29

18

57

Chile

9

34

16

57

Mexico

4

27

19

69

S. Korea

4

41

30

54

9

49

31

42

Source: World Bank World Development Indicators 2003

Table 5. 1 shows us that East Asian countries have much greater proportions of their economy devoted towards industry and manufacturing. Latin American countries have more emphasis on services. Brazil is the only country with a double digit agricultural sector. Still, we need to dig deeper into comparing the industrial structure of the two regions. We would like to know the total number of employees, the overall output and production, and, certainly, the amount of wages and salaries paid out. The East Asian literature also points to the all-important factor of capturing value-added in the domestic economy. We turn now to this examination, developing our analysis from the only data available, namely UNIDO's (United Nations Industrial Development Organization) . In this section, we will, for the first time, give a comparative breakdown of the sectoral profile of manufacturing for each major country in the two regions . In order to simplify matters and due to drastic data limitations, we have chosen 1 995 to be the year for comparison, as it is the most recent year for which data are generally available. Our exercise allows for a fair comparison, because just one year is taken and the currency units are US dollars, thus controll ing for infationary and currency exchange differences. After providing a general comparison of the overall manufacturing indicators of each country, we turn to a breakdown to see which are the leading manufacturing sectors in each

An East Asian Modelfor Latin American Success

106

country, again, using a variety of indicators. In the latter part, we limit our exposition to those sectors which account for at least 5 percent of total manufacturing.

Table 5.2

Comparing manufacturing in LA vs. EA, 1 995 Per capita f gures for total manufacturing

Total Output

(USS)

Value Added

#

Employees (%)

Wages and Salaries

Argentina

2791

869

2.42%

363

Brazil

1 775

936

1 .9 1 %

200

Chile

2635

1 1 69

2.39%

22 1

950

365

1 .36%

65

S. Korea

1 0491

4586

6.36%

1 089

Taiwan

1 1 549

3438

1 1 .27%

1 656

5 027

1214

6.98%

335

Mexico

Malaysia

Sources: Author calculations from UN LDO, CIA World Factbook for population

I n Table 5 .2 , we break down total manufacturing statistics for the countries of our analysis. We divide each fgure by total population, in order to control for the overall size of the country, which varies considerably. This makes a lot more sense than dividing by GDP, since that would be redundant. More importantly, dividing by population can give us some very rough measures of productivity. What we fnd is that manufacturing output and value added are higher in East Asia than in LA. The percentage of the popUlation employed in and total spent on manufacturing wages is also much higher.2 B acking up the points made in Chapter 3, here we see that the amount of employment by EA manufacturers is greater, and, with the exception of Argentina, wages and salaries are higher. But, is there a difference in the kinds of products that each region is manufacturing? Tables 5 .3a and 5 .3b show us that there is quite a distinct production profle for LA vs. EA. Much of the manufacturing base of LA still seems to be tied to food products, while that of EA is dominated by the electrical machinery sector. Only Mexico, Brazil and South Korea have signifcant amounts oftransportation equipment manufacturing. However, it is important to note that Mexico's auto manufacturing is wholly foreign­ owned, Brazil's foreign-dominated, while South Korea has several strong national manufacturers, including Hyundai. This story is repeated when we look at the sectoral breakdown by employees and wages and salaries. Table 5.4 shows that food products figure heavily in LA employment in manufacturing, while electronics are the key sector in EA. The fact that LA's manufacturing base is so tied in with agriculture makes one wonder the extent to which the region has really moved beyond the reliance on primary product production 2

While I tried various tests on wage rates, because pay varies so greatly by sector and

even by firm, I could not find adequate and reliable comparative statistical data.

Sectoral and Political Foundations/or a New Industrial Policy Path/or LA Table

5.4

Sectoral production mix by number of e mployees,

Mexico

Chile

Food pdets

23%

1 995

for Brazil

"'data Argentina

1 09

Food pdcts

27%

Food pdets

1 8%

transport equip

8%

fabrieated metal pdcts

7%

transport equip

9%

machinery, exc elect

6%

wood pdcts, exc fum

7%

Beverages

8%

fabrieated metal pdcts

6%

Textiles

6%

Textiles

7%

Textiles

5%

other ehems

5%

other chems

7%

other chems

5%

apparel, exc shoes

5%

machinery, exc eleet

6%

plastic

5%

S. Korea

Malaysia

Taiwan

elect machinery

15%

elect machinery

21 %

elect machinery

29%

transport equip

1 1%

fabricated metal pdcts

1 1%

wood pdcts, exc furn

1 1%

machinery, exc elect

1 0%

Textiles

8%

Food pdets

7%

Textiles

9%

plastic

8%

rubber

5%

fabricated metal pdcts

7%

machinery, exc elect

6%

apparel, exc shoes

5%

apparel, exc shoes

6%

transport equip

6%

fabricated metal pdcts

5%

Food pdcts

6%

plastic

5%

machinery, exc elect

5%

and Salaries

"'Bz data not avail.

Argcntina

Mexico

Chile

Food pdcts

1 9%

Food pdcts

transport equip

1 0%

other chems

21%

Food pdcts

1 6%

other chems

1 1%

6%

transport equip

1 0%

6%

Beverages

7%

6%

machinery, exc elect

6%

machinery, exc elect

5%

industrial chems

5%

Beverages

5%

other chems

9%

fabricated metal pdcts

fabricated metal pdcts

6%

non-ferrous metals

printing/publishing

S. Korea

8%

Malaysia

Taiwan

transport equip

1 5%

elect machinery

21%

elect machinery

elect machinery

1 4%

fabricated metal pdcts

1 0%

wood pdcts, exc fum

7%

machinery, exc elect

1 1%

plastic

7%

Food pdcts

7%

7%

fabricated metal pdcts

5%

7%

machinery, exc eleet

5%

Textiles

8% Textiles

fabricated metal pdcts

7%

Food pdcts

5% machinery.

transport equip

Source: Author calculationM from U N I I>O

exc elect

6%

30%

Sectoral and Political Foundations for a New Industrial Policy Pathfor LA

III

that Prebisch pointed out was a major weakness, back in 1 948. Undoubtedly, the value added and export revenues of food products, as well as the median salaries and wages and the number of employees are lower than more sophisticated large scale industries like machinery, autos, and electronics. When we look at a sectoral breakdown of exports and imports, we f nd a reinforcement of these conclusions. Table 5.5 confrms what we have discussed throughout the book: despite the ability to export by some exceptional companies, LA continues to follow the dependency-type pattern of relying heavily upon exports of agricultural goods and minerals and importing f nished goods. It is also interesting to point out that in both LA and EA, inter-industry trade seems to be key. In other words, both regions import heavy amounts of capital goods. The difference is that EA has managed to upgrade its capabilities so that it can participate in the global production of higher value­ added and higher-technology goods which correspond to a higher standard of living and higher wage employment for its workers. The differences between a migrant farm worker or poultry processing worker and a highly skilled welder/craftsman or computer programmer are the differences between the haves and have-nots in the world, namely characteristics of the sectors in which one is employed. Innovation Policy

Ultimately, the advantage EA has in entering new sectors rests in the microeconomic level upon its technological capability based on a conscious and coherent innovation policy, lacking in LA. In fact, Lall makes the point that the upgrading oftechnological capacity went hand-in-hand with the successful shift to EOI (Export-Oriented Industrialization) in EA (Lall 1 996, 1 2- 1 5). I nnovation policy in EA has included both government subsidization and support of technological upgrading, including, for example, the subsidization and development of research and technology parks and related efforts (for example, S ingapore's new biotech effort); the stimulation of foreign investment in high tech sectors (Malaysia's supercomputing IT corridor); reverse engineering and other forms of iearning (South Korea's mastery of the steel industry); and skills upgrading (La1l 200 1 ). There is no question that EastAsians have made a conscious effort to bridge the technological gap, which is one of the keys to developing manufacturing competitiveness and national champions, as discussed in the literature. We now review evidence on innovation in the two regions. Table 5.6 shows that South Korea is far ahead of the other countries in the sample in regard to innovation policies and outcomes. It is important to notice that the percentage of high technology exports from Malaysia is quite high, which indicates that it is targeting those sectors in terms ofprocessing, if not innovation. As Amsden points out in regard to India and Argentina, it is not enough to simply have a literate and well-educated population. Education must be based on actual factory foor experience and otherwise applied research and development activity geared towards production (Amsden 200 1 , 1 57). Though we do not have comparable data on Taiwan, it is clear that the development of the information technology industry o

.� �

An East Asian iVlodelfor Latin American Success

112

Sectoral and Political Foundationsfor a New Industrial Policy Path for LA

1 13

there i s l inked to direct government action in selecting, subsidizing, and financing the industry before privatizing it to national businesses.3 8 o N

Is East Asia Really More Competitive?

So far, we have shown the macroeconomic and national accounts superiority of East Asia i s matchcd by an intriguingly d ifferent production and sectoral profile on the microeconomic level. But does the fact that EA produces manufactured goods mean that it is more competitive internationally? To answer this question, we examined a number of common scales of competitiveness. These indices tend to rely upon surveys of business executives to report on conditions such as infrastructure, and economic, government, and business efficiency for particular countries. By every survey, EA countries rank far above all LA counterparts. By some measures, Chile rises higher than its counterparts in the rest of LA, though still lagging behind EA.4 How Latin American Can Begin Targeting Sectors

j �

« � .S = Q

... .. ('I

S = =

Though anathema to neoliberal economists, we have discussed the fact that all states have targeted and supported key industries in Chapter 2. Targeting is also a fundamental characteristic of the EA model, as we have pointed out throughout the book. It's no mistake or market outcome that Korean electronics are competing alongside Japanese ones at a lower cost/quality. C learly, sectoral targeting sometimes fails, as with the case of the aircraft industry in Japan and petrochemicals in Korea. Yet, we have shown overall that EA's strategy, even with the expected and inevitable occasional failures, has reaped rich dividends in terms of moving towards new and more highly value-added goods over time, in turn allowing for more resources for investment and higher standards of l iving. The literature on sectoral targeting, particularly in regard to Latin America, is virtually non-existent. M oreover, there is almost no l iterature on the types of government-business-Iabor relations that deals with specific sectors, with a few notable exceptions. The main l iterature tends to talk about general characteristics of sectors, such as "asset-specific" or effects of capital mobility, rather than examining 3 As I point out in my chapter on developing countries' policies to attract IT business, the same types of aggressive government policies have been followed by Ireland, S ingapore, India, and China with success. See Anil Hira, "How Developing Countries Attract Outsourcing Jobs," in Hira and Ron Hira, Outsourcing A merica, New York: Amacom, 2005, and, on Taiwan, Jeff Saperstein and Dr. Daniel Rouach, e ds . , Creating Regional Wealth in the Innovation Economy, Toronto: Financial Times and Prentice Hall, 2002, chapters 1 3- 1 4, pp. 2 1 9-32. 4 Ganeshan Wignaraj a and Ashley Taylor construet a Manufactured Exports Competitiveness Index (MECI) and a separate index of technology-intensive exports for the

developing world, which clearly show East Asian countries at the top. See Wignaraja and Taylor. "Benchmarking competitiveness: a first look at the M Eel," pp. 6 1 -92 in Wignaraja, 00. . Competltivenes.¥ Strategy In Developing CountrJe.f, New York: Routledge. 2003.

1 14

An East Asian Modelfor Latin American Success

and comparing real sectors. However, these studies look at the politics behind the (often disappointing) outcomes, usually from the point of view of businesses lobbying, rather than proposing a pro-active and prospective state-led strategy that could be fol lowed.s There are also a few authors who have done studies of specifc case studies of sectors, including CEPAL (UN Economic Commission for LA) on occasion. The case studies are highly important for bringing to l ight the complexity of state-sector and intersectoral bargaining and coalition-building but they are universally post hoc and occasionaL While the work of these authors is quite important in terms of political economy theorizing, especially in regard to relative strengths of states and private sectors in an international context, and generally placing emphasis on the neglected area of sectors in LA, there is very little in the way of actual and prospective policy guidance that comes from these analyses. Though there is also a growing interest and literature in sectoral competitiveness in an international sense, including the seminal work of Michael Porter, and the ongoing work of organizations such as UNIDO, this literature does not consider the sectors in a LA political context. So, we will provide some guidelines below on how to begin the idea of sectoral targeting for LA, in the hopes of spurring new research agendas in this direction. What Sectors Should Latin A merican Nations Target?

We could start to answer the question in a tautological fashion, by stating that the most attractive industries are those that serve a nation best. We could inventory a particular LA country's strengths, weaknesses, possibilities, and potential competition in terms of assets, overall international position, stage of development, and the like. We could then suggest a number of criteria for decision-making, such as employment creation, revenues creation, amount and depth of linkages, size of current and potential markets; and size and degree of barriers to entry. Ideally, we would be able to create an international profle of all industries and then rank them according to the proportional weights of our decided-upon criteria. Unfortunately, there are no data which looks at industries on a worldwide scale in this fashion ! As a starting point, 1 have been able to accumulate some evidence that helps us to create a global prof le ranking industries according to some of these criteria, recognizing that this exercise would have to be completed by a national­ level political and economic analysis, and that the relative place and definition of different sectors in the world economy is a moving target. Nevertheless, this exposition may provide some suggestive guidelines to help analysts to begin such a national inventory and planning process. We must reinforce important points of caution and guidelines before examining this data. First, obviously, sectoral targeting must be done on a national 5

The case study literature on

are

LA

sectors and industrial policy in general i s quite

R. Kingstone, Crqfting Coalitions for Reform: Business Preferences, Political Institutions. and Neoliberal Reform in Brazil, University Park: Pennsylvania State University Press, 1 999, and Roy C. Nelson. Industrialization and Political qfnity: lndu.ytrial Policy In Brazil. Now York: Thunderbird/Routledge. 1 995. limited. Two important works

Peter

Sectoral and Political Foundations for a New Industrial Policy Path for LA

ll5

and regional level, according t o an estimation o f the potential for sustaining a particular industry over the long-run. Such an estimation must include the potential linkages with existing commodity, industrial, or service production and factors of production. Second, the costs of entry and of maintaining market position must be considered, in terms of the opportunity costs for other industries. Third, the levels of complexity of institutional management in both the public and private sectors should be considered. Fourth, some industries, such as labor intensive electroni c components in Taiwan' s early history, or semiconductors for Malaysia now, may be viewed as important stepping stones for gaining entry into a larger industry. Fifth, though we can indicate below the most promising sectors in terms of overall size, all of the above factors as well as the structure of the market itself must be considered. M arket competition, levels of support and rapidity of innovation required, degrees of hidden and overt market protection, access to export markets, and other aspects of the product market itself must be researched and considered quite carefully. S ixth, an emerging market is likely to be easier to enter than a well­ established market. Thus, though we rely upon overall size (accel eration of market size or emerging products would be much more difficult to size up in this general level of survey), potential growth of market and vulnerability of market leaders are equally viable factors to consider. Seventh, as we have claimed throughout this book, the value-added, employment, and learning aspects all have to be considered in terms of what sectors to target. Finally, as we discuss in detail later, the country must arrive at some consensus for an overall developmentalist strategy. There must be a self-study by government, business, labor, and the general population must be persuaded on this long road. Thus, sectoral choices have to be backed by political consensus, as a nation is pooling its investment towards a certain goal, requiring concentration of resources at first for long-term sharing of the gains. We can begin to explore which sectors to target by looking at the relative importance of different sectors in the US economy. While far from ideal, in the sense that the US is the most advanced economy in the world, it also remains the most i mportant destination market in the world. As we have discussed, self­ sufficiency simply does not make sense for Latin Americans i fthey wish to achieve a standard of living comparable to those in the North. The US is also the market with the best economic statistics by sector. I have prepared some rankings of the top sectors in the US according to some of the basic criteria pointed out in the industrial policy l iterature.

An East Asian Afodelfor Latin American Success

116

Table 5.7

Rank order of leading US manufacturing sectors, 1997

($millions)

Electronic and other electric equipment

2 Industrial machinery and equipment

Chemicals and allied products

3

Chemicals and allied products and equipment

5 Electronic and other electric equipment

Industrial machinery and equipment Food and kindred products Fabricated metal products

Accruals ($millions)

and P-T, WOOs)

I Industrial machinery and equipment

Industrial machinery and equipment

2 Electronic and other electric equipment

Electronic and other electric equipment

3

Chemicals and allied products

Food and kindred products

4 Food and kindred products

Fabricated metal products

5 Fabricated metal products

Chemicals and allied

Source: Author cales BEA statistics :.Iote: Did not include services: notable: govt, real estate, health, construction, in that order

Table 5 . 7 shows that our efforts comparing LA with EA production profi les can now be brought to fruition . We should note f rst of all that we have focused our rankings on goods-producing industries, and not included services. As is well known, services are a fast growing part of mature economies. However, the nature of services and the data on them are still not well-def ned. Moreover, many services that loom large in the statistics, such as government, real estate, health, and construction, are not likely to be sectors that will provide maj or employment outside of the market country, nor are a significant source of export earnings. Our data analysis reveals that while the food products sector appears to be an important one in which LA has an advantage over EA, EA, particularly South Korea and Taiwan, have competitive industries in every other top-ranking sector, particularly electronics. Our chapter on China showed that it is following in its neighbors ' footsteps in terms of targeting similar industries. Sanj aya Lall provides an alternative table ranking the fi fty fastest growing (by 1 996 $ value) manufactures in world trade from 1 980--95 , with the top ten as (Lall 200 1 , 255): 1. 2. 3. . 4. 5. 6. 7. 8.

117

9. articles of plastic 1 0. furniture, parts thereof

Value Added (% of ODP)

1 Food and kindred products

4 Motor vehicles

Sectoral and Political Foundations/or a New Industrial Policy Path/or LA

transistors, valves, etc automatic data processing equip telecom equip. , parts office, auto data processing machinery electrical machinery medicinal, pharma products switchgear and parts machinery for special industries

So, we see here again from this l ist that the EA's sectoral production profile is much closer to the fastest growing industries in terms of trade than is LA. This would indicate to us that the electronics and machinery industries would be logical sectors to target. We can also conduct a firm-level analysis on the l imited international data available, from Forbes. Table 5 . 8 reveals that the motor vehicles, financial services, and petrochemicals industries are among the most important sectors in the world. Other sectors i nclude information technology (IT), telecommunications, pharmaceuticals, and retail services. Thus, it is no surprise that Japan has some of the top companies in the former two, and that South Korea and China have very deliberately targeted motor vehicles, pharmaceuticals, telecommunications, and petrochemicals as key sectors in which to compete internationally. This points to the importance of inter-industry linkages and hourly wages, which are not covered by our statistics. It would be good to know which industries provide employment to upstream and downstream industries. In this sense, we can obviously differentiate the mass production of food products from automobiles or metals, as the latter are parts of intricate production chains. Unfortunately, it would be impossible to calculate what the relative wage of certain industries is over others, as conditions from country to country, not to mention time to time and company to company can vary greatly. However, undoubtedly automotive workers are paid far superior wages to those working in food production. C learly, the industry wage should be related to the overall price, profitability, and value-added of a product, as well as the level of skill and other factors that constrict labor supply. In this sense, we can easily conclude that developing countries should target sectors that provide massive employment in the short-run, and wage increases in the long­ run. Thus, the EA literature discusses the "industrial ladder" of beginning with textiles, moving to electronics, and then to heavy and chemical industries, before finally tackling services and high technology industries. On our regional level of analysis, we can state that the important point here is not to espouse certain industries for LA, but to suggest that the sectors targeted should all be part of a progression towards higher-value-added, employment, and learning production. Again, this logic will need to be adapted according to both a world industry and market analysis and an intimate knowledge of a particular country's current and potential comparative advantage. It would also require a serious overhaul of national f nancial systems. However, we can provide a few illustrative examples of how one could begin the thought process here. For example, Argentina could begin by recognizing that it is at a distinct disadvantage vis a vis Brazil in labor costs. However, Argentina has a very literate population and the potential therefore for a highly developed services industry, for the region. Moreover, Argentina clearly can rely upon its traditional comparative advantage in cattle, wheat, and its emerging advantages in natural gas. Thus, Argentina could also attempt to increase the value

An East Asian Modelfor Latin A merican Success

118

The most important firms in the world

Table 5.S

Forbes Ranking of Largest Companies in the World Assets Profit

Sales I

Wal-Mart

2 ExxonMobil

Citigroup

ExxonMobil

Mizuho Financial

General Electric

Fannie Mae

Citigroup

3

General Motors

4

Royal Dutch/Shell Group BP Allianz Worldwide

5

Ford Motor

UBS

Altria Group

6

Daimler Chrysler

Sumitomo Mitsui Financial

Microsoft

7

Toyota Motor

Deutsche Bank Group

Bank of America

8

General Electric

Mitsubishi Tokyo Financial

Royal Dutch/Shell Group

HSBC Group

SBC Communications

JP Morgan Chasc & Co

Wal-Mart Stores

9 Mitsubishi 1 0 M it sui

& Co.

Pfizer

Note: Mitsui pdces personal and HH pdcts; Altria pdces tobacco Source: Forbes On-line, accessed Jul 04

added that it captures in food products. Instead of simply exporting the raw materials, Argentina could promote the organic nature of its meat products as superior to those in the US and Europe. To date, Argentina has yet to reach out to potential customers to differentiate the superiority of its exports, as it has at last begun to do with wine (lacking the state support afforded to Chile). As Marx pointed out, it is only in the differentiation of commodities that value-added can be created. Thus, Argentina could look into acquiring companies and retail outlets in the US and Europe in food products and expanding the distributional channels for its differentiated products. Mexico is a highly interesting case in that it is tightly linked to US industries through NAFTA. As we illustrated in the last chapter, this has allowed Mexico to distinguish itself from the region both in terms of employment growth and investment, as well as becoming part of key industries, including motor vehicles. Yet, while there are some exceptions, such Vitro in glass and CEMEX in cement, Mexican companies have not yet been able to take advantage of the NAFTA to produce nationally-based competitors. This is where Wade's analysis of Taiwan's policies towards FDI is particularly instructive. Rather than simply opening doors to US investors, the Mexican government could provide assistance and training to local entrepreneurs to begin to develop their own companies. Undoubtedly, they would have advantages in terms of knowledge of the local labor, supply, and consumption markets. Perhaps initially these companies would look to become competitive sub­ contractors or f nd neglected market niches both at home and abroad, but the goal a la EA must be to develop internationally-capable competitors. Moreover, with the multinationals close by, the Mexican government could also make it attractive for the management of U S companies to take the managerial and technical lessons with

Sectoral and Political Foundationsfor a New Industrial Policy Path for LA

119

them to start their own companies. Considering the huge level of remittances f owing back to Mexico from ex-patriates, there should be available capital and interest in such ventures. The problem to date has been the almost complete lack of pro-active IP by the Mexican government to establish such linkages. Political Differences of Industrial Policy in East Asia and Latin America

We can now summarize our proposal for the harmonious mutual relationships needed for successful economic development in the following diagram: F igure 5 . 1 shows that a successful IP must have state leadership at its core, but that the state must also work with allies in the private sector, in academics, and in the f nancial sector to make the system work. We also noted the importance of a "pilot" agency within the state to act as a long-term planner and coordinator for IP. So why is there so much more political consensus around IP in East Asia as opposed to Latin America? We can begin answering this question by starting to address the easy arguments of both the Left and the Right in dismissing these East Asian relationships as politically impossible for LA. The arguments we often hear from the Left are that EA depends exclusively on labor repression and authoritarian governments or is a unique historical accident/conspiracy (which we addressed in Chapter 3); that LA governments are run by venal elites and patronage-filled bureaucracies; and that the US and the all-powerful multinational corporations would not permit the development of strong, independent Latin American states. 1 . National Innovation System

Heavy Industries (Employment)

Targeted Sectors (Future Growth) (temp., to stri sta

Universities Think tanks Private Research Foundations, etc

investments

bj.

technolog ,

performance

nOW-how

ards

State

Domestic and Foreign Investors, including MNCs

(macroeco stability, risk reduction)

National Financial System

Agricultural, Mining, and Other Commodity Exports + Newly Successful Export Industries

consumption,

(growing list over time)

income, personal

Banking System

/

taxes

3. Social Welfare and Human Capltal lnvestmenta Education, Health Care, Retraining and other Insulation from changes In domestic and Intematlonal markets

Figure 5.1

�

2. National System for Global Competition

Key relationships for a true LA I P

domestic public and private savings

] 20

An East Asian Modelfor Latin American Success

has The Right, which has interestin g parallels with the Left in a variety of areas, m mainstrea So, corrupt. as sees also it equal skepticism for the LA state, which s institution of refonn on focused are USAID institutions such as the World Bank and difference key the course, Of law. contract and and regulation, such as the judiciary is that the Left and Right propose diametric ally opposite solutions . The Left wants ts, a purer, revolutionary state or a blossomin g of autonomous grass roots movemen a where ent environm an of creation the rather and while the Right wants less state The . unleashed be can forces creative and thousand LA entrepreneurs can bloom, latter is typifed by the faddish book of Hemando de So1o, The Other Path, which posits that the l ack of enforceable property rights is really the sole crux ofthe problem s (de Soto 1 989). Another argument worth re-mentio ning is that cultural difference dreaded the to contrast in eurship entrepren and , explain Asian savings, education fatal legacy of the Spanish and the imperialis m of the US (Harrison 1 992). We have already dispensed with many ofthese arguments in the previous chapters. The easiest one is the cultural argument . Given the backward nature of the Chinese economy until the last decade, as well as the continuin g backward state of a number of other Asian economies, such as Myanamar, and the stratified timing of EA and SEA growth in tune with policy changes, this is obviously a ridiculou s claim. The new growth spurt of China and Vietnam after adopting the practices of their peers shows that it is the EA model, and not the culture or particularities of the place, that works. We could add to this the fact that LA entrepreneurs have thrived in both the US and Europe, as well as under some circumstances within the region itself, such as Chile. In terms of labor repressio n and authoritarianism, there is no doubt that this has been a feature ofEA developm ent. We have also shown that Latin American countries with strong institutions, particularly Chile and Costa Rica, have developed faster, yet still lack sustainable means of providing equitable and high employment­ providing growth . There is also little evidence for the feasibility of a ful l-scale top , down or bottom up revolution in LA, and even where revolutions have succeeded are countries nary revolutio the that evidence no is there namely Cuba and N icaragua, able to create sustainable growth. However, both the Left and the Right's focus on the state and the elite classes points to some key differences between Latin American and East Asian elites. East Asian elites seem to be more nationalis tic and long-tenn in their views. Though they are also surrounded by corruption scandals, particular ly in Southeast Asia, it does not seem to be as destructive to the national interest as in LA. Though this author has neither the expertise nor the space to ful ly explain A EA culture, we can take a closer look at some of the more troubling aspects of L it. behind politics the and making economic decisionExplanations Why Has LA Industrial Policy Been Dysfu nctional? Political

Existing Explanations

There have been four dominant approaches to a political understanding of Latin American industrial policy. The first set of literature looks at the weakness of the Latin American bourgeoisie as a partial explanation for the classes' inability to

Sectoral and Political Foundations for a New Industrial Policy Path for LA

121

transfonn their countries, including agrarian reform (as discussed b y Hidrobo, 1 992). The second set of l iterature looks at class analysis and bourgeois-state relations (for example, Conaghan, 1 988). This often includes foreign actors such as multinational actors, as in the case of "the triple alliance" of Evans' famous study of Brazil (Evans 1 979). Some authors, following the lead of Cardoso and Faletto, use a historical­ structural approach to emphasize the interplay between long-run structures, including evolution in changes in the mode of production and class relations to explain industrialization (Cardoso and Falletto 1 979). This literature is i m portant in recognizing the ongoing external dependency and the long-term inequalities and divisions within Latin A merican society, which explain some of the inconsistencies and incompleteness in Latin America's industrialization. However, it works on such a general level that it is difficult to test out, since the history of Latin American industrialization is relatively short in tenns of structural change. Moreover, it misses important differentiation among different Latin American cases, time periods, and within economic classes. A third set of literature (Hidrobo 1 992) follows the classic M ilner, Gourevitch, and Rogowski school of domestic political economy in emphasizing the role and lobbying ofinterest groups for industrial policy. This school therefore sees more fissures within the industrial class than a class-based analysis. I t would perhaps more convincingly explain the change from l S I t o neoliberalism as the result of i ncreases in the strength and greater opportunities for international ly as opposed to domestica l ly-oriented producers. The strength of this literature is also in pointing out that industrial owners and the traditional agrarian elite may have some overlap in their membership, thus explaining why industrialization in Latin America could proceed without support for agrarian reform. However, it would be important to recognize the role of more pure ly pol itical motivations, and the machinations of the anned forces in industrial ization. Furthennore, as I pointed out ( Hira 1 998) earlier, the interest group model has a difficult time explaining change absent a major crisis, thus underestimating the agency aspects of policy decision-making, and therefore the range of possible outcomes, and, consequently, the possibil ities for change. Finally, there is a wide and growing body of literature that can be considered part of the policy dialogue. This school of thought spans paradigms, from structuralism to neoliberalism, in focusing on empirical analysis to evaluate and prescribe industrial policies for particular situations. Most international organizations work in this avowedly non-political vein. Within the actors themselves, there is a great deal ofnegotiation. The state includes the executive and legislative branch, each with pecuniary interests. The trade ministry, the f nance/treasury, the defense, the investment bank, the industry, agricultural, and education ministries will also have different interests. The public sector on a national level will be challenged by counterparts on regional and local levels. There will be different companies, some large, some small, some internationalIy- and some domestically-oriented. There will be differing degrees of ties to foreign companies and to government contracts and assistance. Labor is also divided by region, skill set, and particular union. Academic institutions, especially l arge universities conducting research and development (with ties to private industry), will have a particularly heavy stake in I P.

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An East Asian Modelfor Latin A merican Success

Sectoral and Political Foundationsfor a New Industrial Policy Pathfor LA

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What is the best way to explain these political relationships? The obvious answer is that it depends on the particular issue within IP and which actors are involved. What we can do here is sketch out some of the key areas of concern which seem to explain the problematique [complex of problems and issues] of LA IP, and why the lessons of EA are so resisted.

development of clear and consensually-based national strategies for development, including planning for regional sectoral clusters and providing the long-term stability and support to ensure success. However, the problems for establishing a healthy LA IP go well beyond these technical aspects, as daunting as they are. In the fnal sections, we review some of these deeper problems of LA society.

The NeedJor National Innovation and Technology Systems in Latin America

Lack ofLeadership, Solidarity

We have seen that the key to economic growth in the modem world economy is innovation ofnew manufacturing products. As we pointed out in Chapter 2, analysts recognize that innovation can occur in process as well as product. Late entry into industry involves heavy and increasing costs over time as learning and fnancial accumulation within nations, industries and frms creates a cumulative advantage. Therefore emerging sectors of technology, such as biotechnology, seem to be attractive areas for a developing country to target. As is the case currently with China's strategy, Korea and Taiwan worked their way up the technology ladder, beginning with easier components and relying upon cheaper labor costs before tackling higher technology products and eventually innovating their own products . The logic behind a cumulative strategy seems sound in the sense that developing the institutional and human capacity for innovation in one area based more on comparative advantage (cheap labor) will create know-how for more complex production lines later. In fact, perhaps the hardest knowledge to master is to develop retail networks so that one's products can compete on US and European shelves. In the case of Korea and Taiwan, electronics and electrical machinery provided the entree into IT. Most writing about LA economies is centered squarely on macroeconomic problems, we have pointed out that the microeconomic perspective has been neglected.6 As we pointed out in Chapter 2, what is really needed is a national innovation system in each Latin American country. It is the development of the university­ industry-finance-government linkages that lead to the development of internationally competitive national champions in key sectors. What is sorely needed is a series of careful sectoral studies for each country, that consider the institutional bases and possibilities for entree from the perspective of each nation.7 These could lead to the

In this section we can begin to tackle the question of why LA leadership seems to be dysfunctional in its political decision-making. What we can do here is suggest some patterns in the nature of the political relationships, since each situation will be idiosyncratic. However, it is clear that LA elites do not seem to have the same f delity to long-term national interests as the Koreans or Taiwanese do. The $billions in capital flight from LA alone would be more than enough to spark an investment revolution in the region, creating jobs throughout the local economies. As we saw in Chapter 3, the basic unwillingness of Latin Americans to pay taxes or to reform their middle-upper class government spending systems is symptomatic ofa wider inability to work towards long-term solutions to nagging problems such as land reform. We also saw in Chapter 3 that there is a major difference in the levels of investment in human capital in the region, reflecting a much more profound differentiation between the
6 For an analysis of the justification for industry based micro policies from thc viewpoint of modem evolutionary growth theory see R. G. Lipsey (2002), "Some Implications of Endogenous Technological Change for Technology Policies in Developing Countries", in the Economics ofInnovation and New Technology (EINT), Vol 1 1 (4-5), pp 3 2 1 -3 5 1 and Lipsey, K. Carlaw and C. Bekar (2005) Economic Transformations: General Purpose Technologies and Long Term Economic Growth, (Oxford: Oxford University Press. Also see Lipsey, R. G. and K. Carlaw ( 1 996) "A Structuralist View of Innovation Policy", The Policy implications ofKnowledge Based Growth, in Peter Howitt. (ed.), (Calgary: University of Calgary Press) where the authors study about thirty cases of successes and failures in technology policies and derive lessons about the design conditions contributing to success or to failure. 7 A few exciting examples of this new kind of work are found in M . Cimoli, ed., Developing Innovation Systems: Mexico in a Global Context, New York: Continuum, 2000, Gabriel G. Casaburi, Dynamic Agroindustrial Clusters: The Political Economy ofCompetitive Sectors in Argentina and Chile, New York; st. M artin's Press, 1 999; and Hubert Schm itz

and Jose Cassiolato, eds., Hi-tech for Industrial Development: Les,wm,\' from the Brazilian Experience In Electronics and Automobiles, New York: Routledge, 1 992.

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An East Asian Modelfor Latin American Success

therefore seems to be unipolar, in the sense of relying heavily upon charisma and teetering patronage networks, rather than more solid institutional bases. This opens the way for the continual volatility in policies and the sense of crisis, giving rise to another cycle of heroism based on yet another promised revolution in policies. In a sense, the volatility of economic policies alone, whether we look at the l S I or the neoliberal policies, is bound to lead to failure whatever the economic orientation. Relations between LA Governments and Local and Foreign Businessmen, and Short-term Discount Rates

When I ask Latin Americans about what seem to be relatively straightforward problems with solutions, we find the chicken-and-egg nature of LA politic�. Because they have such a profound distrust of the state, they see themselves (gomg across class lines and time) as constantly subject to a potentially imperial force. Rather than being an instrument of the people's (or even the elite's) will for national interests, the state is often viewed as a prize for doling out particularistic interests. This leads then to a sort of short-term political discount rate, where LA leaders and citizens expect a government to fail. The government, working on shaky ground already, tries to offer huge, overnight changes and cranks out or realigns fiscal policy favors, including external debt, to shore up its temporary alliance. As a result, that state comes to be viewed as a vehicle to be captured, rather than a vehicle for leadership and long-term national strategy. This translates into an extreme level of volatility in LA economic and political aspects, and therefore to a lack of cooperation or mutual respect between those within the winning coalition and those outside of it. These conditions are exacerbated in LA, where regional and sometimes ethnically-based historical distrust abounds. As the stakes are raised, the slightest misstep or change in signif cant condition, such as the constant increases/decreases in international interest rates and oil prices, leads to a major crisis within the state. Therefore, it is no surprise that, with the exceptions of Chile (recently) and Costa Rica, the region suffers from very short-term outlooks. Another important contrast with EastAsia as we have pointed out is the cooperative but measured relationship between the state and the national bourgeoisie and capital owners. In EA, the state encourages the private sector, but disciplines its support through the need to export in international markets, and towards high value-added, high employment, and high technology industry. The state invests heavily in training and technology, inviting in foreign companies to help with technology transfer and initial capital until its domestic companies can master the sector themselves. The state then helps with all aspects of sectoral success, from financing to marketing the product overseas, as well providing an initial proving ground through domestic protection. Several analysts, echoing the pioneering work of Chalmers Johnson on Japan, point to the existence of productive and cooperative, but independent policy and production networks as a key strength of EA economic policymaking, allowing for the development of elite consensus in the private and public sectors around the national interest and flexibility and adaptability to changes in the world economy.s 8 Frederic C. Deyo, Richard F. Doner, and Eric Hershberg, Economic Governance and the Cha/lengt: fir Flexibility in East A.,;a. New York: Rowman & Littlefie ld, 200 1 ; Linda

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This is a huge contrast with LA's strategies towards domestic and foreign businesses. In LA, the relationship, in line with the above, has tended to be more of a parasitic one, where the state either sets up the business itself, or the local private and foreign companies operate as domestic o ligopolies, with no incentives to improve. Thus, politics becomes particularistic doling out offavors from a shrinking pie, rather than an expanding growth engine that can then redistribute to new sectors, creating new employment. Even under the neoliberal orientation of the LA state shedding its leadership role, the result has been the dominance of foreign companies, even to the point of pushing out domestic competitors in low barrier ("easy") industries, such as consumer goods and agriculture. Rather than the market sparking a wave of entrepreneurship and investment, it has been in many ways a step backwards for LA companies. It is no accident that Peter Evans used the term "triple alliance" of state-domestic capital-foreign capital to explain economic relationships in LA under l S I. Even under lSI, human capital, or labor, played a minor role as an afterthought, rather than as an integral part of an overall strategy. Under neoliberalism, this has now become a double alliance, or even a unipolar al liance, with the LA state taking a 1 9th century-esque back seat to foreign capitaL It is equally important to note that EA states are more internalZv unified. In each case, the EA economy is directed by what Chalmers Johnson called, referring to M ITI in Japan, an economic 'pilot agency. '9 This agency coordinates both finance and industry towards national interests. These meritocratic agencies set out the broad objectives for the economies and coordinate for long-term achievement, as we detail in the next chapter. Once sectors become competitive, as in current day Japan and to a lesser extent South Korea, then the role of the state becomes more of an active regulator, rather than a leader on I P. There is no such equivalent in LA, where states are plagued not only by political volatility, but in-fighting, overlap and other problems of patronage-based federal and state agencies often working at cross­ purposes. \0 The current turmoil in Mexico is symptomatic of a LA state paralyzed by d ivisive politics and a lack of consensus. Weiss, "Transformative Capacity in Evolution: East Asian Developmental States," pp. 4 1-82 in The Myth ,<{ the Powerless State: Governing the Economy in the Global Era, Cambridge: Polity Press, 1 998; and Michael T. Rock, who suggests Chinese-Indonesian networks are keys to Indonesia's economic growth through industrial policy, in "Making the Case for the Success of Industrial Policy in Indonesia," pp. 283�3 1 O in Jomo K.S., Southeast Asia s Industrialization: Industrial Policy, Capabilities. and Sustainability, New York: Palgrave, 200 1 , esp. 299. 9 See Chalmers Johnson, "Political institutions and economic performance: the govemment-business relationship in Japan, South Korea, and Taiwan," pp. 1 36-64 in Frederic C. Deyo, ed., The Political Economy of the New Asian Industrialism, Ithaca: Comell University Press, 1 987, and Wade and Amsden for specific industry case studies. 10 The point is not lost on some Latin American observers. Etel Solingen calls this "macropolitical consensus," in her book on how Argentina and Brazil developed nuclear capabilities. See Industrial Policy. Technology, and International Bargaining: Designing Nuclear Industries in Argentina and Brazil, Stanford: S tanford University Press, 1 996, esp. pp. 1 - 1 5 . See also Gilmar Masiero. "Pragmatism and Planning East Asia and Brazil," and Jose Luis Leon, "The Role of the State in Economic Development," pp. 1 09- 1 29 and 1 30-

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An East Asian Modelfor Latin A merican Success

Sectoral and Political Foundations for a New Industrial Policy Pathfor LA

Fragmentation in LA Society

It is hard to imagine a clear long-term national strategy for Latin American development based on cooperative state-business-labor relations when LA states are so internally fragmented and volatile. In country after country, the contrast between EA and LA could not be more stark in this regard. Bureaucratic positions are awarded on the basis of patronage, rather then merit. Executive and legislative leaders have little ability to define a clear l ong-term f scal strategy. More importantly, within the bureaucracy itself, there is a clear confusion, with technocrats frequently f ghting against political operatives across the region. II The process is especially damaging when it comes to creating the conditions for the type of stable, long-term I P support needed to nurture national firms into global competitiveness. Often, the development banks are at odds with the Central Banks, the social ministers, the military, and the local and state governments, among others. The lack of insulation for planning is quite a contrast from EA, but even more damning is the inability to coordinate the f nancial aspects with other e lements of a long-term I P. Without frm control of the incentive systems administered by state technocrats, it is impossible to guide the process of industrialization in a supportive and rational fashion. If anything, it is quite remarkable that some LA companies such as Cemex (Mexico) and Petrobras (Brazil) have succeeded against the odds. These problems point to the root cause of the problem of LA development, which is not really economic but political and social. EA elites surely are as venal and undoubtedly as materialistic as those in LA or anywhere else. Still, human rights reports indicate that human rights violations are much more egregious in LA than EA, with the notable exceptions of Cambodia, Myanamar, and China. M oreover, general corruption indices indicate, with the exception of Chile recently, that EA governments are generally more cleanly run. Chalmers Johnson relates the famous amakudari or "descent from heaven" by which Japanese bureaucrats retire to the private sector. This contrasts strongly with the results in LA, even in cases where states seem to be less corrupt, such as in Chile. E A analysts have various terms for this sense of service, which reduces the short-term maximizing that plagues LA. In Japan, the term "industrial harmony" is used. In Singapore, the leadership of Lee Kwan Yew in Singapore is based on continual evocations of 'national interest' and 'pragmatism.' (Wilkinson 1 994) Echoing our discussion on state-business relations, Gregory W. Noble argues that it is not the pilot agencies, but the business-state personal and social networks resting on long cultural traditions that lead to l ong-term cooperation and compromise in EA (Noble 1 998). This long-term view of social 1 56, respectively, in Peter H. Smith, Kotaro Horisaka, and Shoji N ishijima, eds., East Asia and Latin America: The Unlikely A lliance, New York: Rowman & Li ttlefield 2003. 11 See Joan Nelson, Economic Crisis and Policy Choice: The Politics of Adjustment in the Third World, Princeton: Princeton University Press, 1 990. See also Miguel Centeno, Democracy within Reason: Technocratic Revolution in Mexico, University Park: Pennsylvania State University Press, 1 994 for a discussion of technocrats vs. pol iti cal "dinosaurs" in Mexico. Roy Nelson, Industrialization and Political Affinity, pp. 1 1 0-1 1 1 , makes the expl icit comparison between Brazilian state autonomy and unity and that of Korea, noting how far apart the two bureaucracies are. ,

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sacrif ce and cultural harmony seems to be totally lacking in LA, where leaders promise revolutions, reprisals against external and internal forces, and instant wealth for loyal followers. These aspects point to a much greater fragmentation among the e lite classes in LA. The fragmentation is embedded in LA history, which refects political traditions of exclusion and separation both externally and internally. In an external sense, LA never developed a strong sense of nationhood through a synthetic historical tradition, as did China, Japan, Vietnam, and Korea. In this sense, its politics reflects the more volatile state of the recently decolonized Southeast Asian countries, such as the Philippines, Indonesia, and Malaysia. Like these latter three countries, LA colonialization was based on the quick exploitation of the abundant natural resources, as refected in the all important "origin" legends for the region, which revolve around natural genocide of the native population through disease and conquest by a "superior" race for "God and King." Moreover, the colonial administration and serious geographical obstacles led to a separation of regions and countries from interacting with each other, leaving a weak central government that has limited control over its territory and is subject to the conflicting interests of varying regional, ethnic, and resource-based elites. This situation continues today, as illustrated by the Colombian civil war. Thus, from early on LA countries were set up as enclave economies, with strong economic, political, and cultural dependencies on external markets and decision-makers. As mentioned in the previous section, the industrialization process never solved this problem of within elite and elite-mass fragmentation. It is hard to imagine things becoming worse than in the primary product or colonial periods, but in some ways the industrialization of the region exacerbated these problems. Urbanization itself concentrated the demands of the working poor at the doorsteps of governments, leading to an initial wave of popUlist leaders in the 1 930s and 1 940s. Guillermo O' Donnell's famous thesis that LA was following a "bureaucratic authoritarian" path captured nicely the use of the military to repress pro-Communist movements as a response in the 1 950s and I 960s. Labor movements in LA, inspired largely by Marxism, became caught up in the Cold War polarization and US aid to military non-Soviet supporting governments in the region, but this is not the full story. From the beginnings of industrialization, LA labor has developed a more antagonistic relationship with business and government because of the fragmentation of the society. A number of studies have pointed out that not only are labor and government fragmented, but so are business and industry associations (Durand and Silva 1 998, 1 -3 , 1 4- 1 6). The differences in interests within and between the labor, state, and capital, in other words, are exacerbated by a whole host of differences in social networks, based on history, different neighborhoods, differences in education, differences in language and cultural reference points, and so on. In short, LA lacks both horizontal and vertical network ties in political, economic and social senses. While almost all Latin Americans can agree on the critique of external interference, they seem to show little solidarity or pride in a positive sense, which would be the minimal informal skeletal system needed to create a sense of national interest. It is rather d isappointing that some LA elites have not adopted the attitude of garnering support through economic development in lieu of military repression and other forms of internal security as have EA elites. It is understandable that long-term 151 ite and 61 Ite-mass bargaining agreements cannot be reached in such a

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A n East As ian Modelfor Latin American Success

situation of fragmentation. In a sense, this internal fragmentation leads to the histOIY in LA of external elites being able to "pick off' allies within LA countries' el ites, rather than the latter being wedded to a sense of internal solidarity and nationalism around the state, the supposed body and instrument of the public will. The fragmented nature of each LA society points to the difficulties in simply moving towards an integration of the region. While integration makes sense from the point of view of an industrial policy that is more feasible, achieves economies of scale, and affords better bargaining pressure vis a vis the North, until there is unity on the part of individual LA societies, it is hard to envision any immediate gains in a f nally realized pan-American dream. Conclusion: Reversing the Trends in LA

Like me, any economics student of LA should be impressed by the resourcefulness and intelligence of both the working population and the elites under these difficult conditions. The technical capacities of engineers and other technical personnel in leading regional companies such as CODELCO, Petrobras, and Pedevesa are equal to those of any technical corps anywhere in the world, including EA. Ultimately, therefore, the question of adapting and adopting an EA model for LA depends not on some fa�l or inevitable flaw or imperialism, but on a baseline political restructuring of LA state and society. In terms of restructuring the LA state, Peter Evans contributes the most important analytical concept when he discusses "embedded autonomy," which refers to the fact that state bureaucrats are involved in social networks with the private sector while still insulated to make independent decisions. In an invaluable book chapter, Evans makes several crucial points about creating embedded autonomy. First, he points out that it is important to focus on the internal structure of the state. The state itself must be a unified actor with coherent national interests in mind. Second, a strongly coherent state can then select and favor a reshaping of the business sector. As we have seen in the case of EA, the state can push the private sector towards efficiency, competitiveness, and promising sectors. Third, that the process of restructnring must be viewed as dynamic and requiring continual adjustment. Fourth, and equally importantly, the state must reach out to other parts of society over the long-run to be effective (Evans 1 987). Alfredo Montero points out that embeddedness must be not only horizontal (e.g., links between government agencies), but "vertical" (state-society) as well (Montero 2002). Ben Ross Schneider and Sylvia Maxfield point out, in tum, that while the performances of the South Korean and Taiwanese states are clearly superior to those of LA, the conditions for developing embedded autonomy are not at all clear (Maxfield and Schneider 1 997, 1 6- 1 9) . However, they suggest the need to construct a Weberian, meritocratic career civil service with heavy expertise. In terms of embeddedness, they suggest that there have to be well-developed social networks between the bureaucracy and business officials. They also suggest the factors of: hierarchy establishing clear lines of responsibility; a clear arm's length relationship, based on stable budgetary authority, unity of the bureaucracy, and other controls on c1 ienteJism and rent seeking. They furthermore point to the importance

Sectoral and Political Foundationsfor a New Industrial Policy Path fbr LA

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of the organization of the private sector as welL The private sector also must have associations that can create collective action across sectors and industries. In tum, the state can use international competition and regional dispersion and other mechanisms to reduce other sectors (such as agriculture) from exerting undue pressure in the sense of moving the sector to its appropriate place in the national strategy. Last but not least, they mention the importance of having a tightly networked and coherent leadership team, as illustrated by MITI in Japan, and as I have also pointed out existed in the case of Chile (Hira \ 998). These authors take us back to the task of the conscious creation of productive formal and informal networks of cooperation across business, the state, and labor in LA. It would be a hazardous and ultimately unsatisfying venture to close on such a dour note of what must be done. Therefore, in order to point ourselves in the right direction forward, the last chapter examines the concrete actions needed for state renewal and creating successful international competitors.

Chapter 6

Putting Institutions and Sectoral Policy to Work: Lessons from Success Stories in East Asia and Latin America

Introduction

Thus far, we have addressed the potential obstacles and arguments that could be launched against an active East Asian-style industrial policy in Latin America, including political obstacles. We tum now to what shape reforms of the state sector and state-private relations should take in LA, and then provide examples of successes at the company level that could inspire change along these lines. We began and close by showing that the timing is right and that this set of ideas could be politically viable in Latin America, solving some of the problems with the limited benefits of growth historically under neoliberal regimes and the lack of growth altogether under "socialist" ones. In LA, early in the process of neoliberal reforms that swept the region in the 1 980s, there was considerable optimism that macroeconomic reforms and trade liberalization would lead to a new trajectory of growth and equity following the Chilean example (Hira 1 998); such expectations have been disappointed. The so­ called "Washington Consensus" of the early 1 990s included: fiscal discipline and tax reform, redirecting public expenditure to improve income distribution, including primary health care, education, and infrastructure; interest rate, investment, and trade liberalization; privatization; deregulation; and secure property rights (J. Williamson 2002). This led to a wave of optimism about Latin American growth and equity: what Richard Feinberg termed a "universal convergence" of ideas (Inter-American Dialogue 1 993). Unfortunately, the results of the reforms were disappointing in terms of progress in both growth and social equity. Moreover, as we have demonstrated L A nations a s a whole have not signif cantly improved their world competitiveness. While inflation improved in a number of countries, unemployment, income distribution, and poverty remain abysmal. Overall economic growth did not improve, and levels of competitiveness remain considerably below comparable competitors in East Asia. Thus, one interpretation of these results is that inflation was controlled but mainly through dampening economic activity, rather than maturing financial and productive structures of the economy. In sum, serious problems persist at the microeconomic level in Latin America. Firms are simply not producing enough exports or jobs. Mainstream economists have suggested that a second generation of reforms in LA is needed to solve these problems. The list of reforms commonly includes regulatory reform. tax reform. judiciary and legal reforms, central bank independence. anti·

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corruption measures, and targeted social spending, all of which are now folded under the World Bank's term "governance" (Krueger 2000; IMF 1 999; and Kuczynski and Wil liamson 2003). Efforts in this direction have had rather lim ited success. All LA countries have struggled to pass tax reform and to better target spending. All continue to suffer from corruption and weak judiciaries. In fact, privatization continues to be under severe question, with protests in Bolivia in 2005 and the halting of further privatization in Brazil. In short, the problem is not j ust with the substance of mainstream economists' advice, but rather with their naIvete about the possibilities for quick institutional reforms that require major political and social adj ustments. In a period of halting economic growth and poor equity results, the environment is not propitious for further liberalization. Again, what this series of "fracasos" [failures] of neoliberal adjustment suggest to us is that it is high time to consider more seriously a change of model for the region. Why are a number of East Asian companies outside of Japan household names, such as Acer, Samsung, Daewoo, LO, Kia, Lenovo, and Hyundai, while there are almost none from Latin America? What changes need to be made to create an East Asian system in LA so that LA companies can succeed in global markets? Evidently, these changes would have to be modif ed over time and space, fitted to the particular circumstances of each country (and possibly by region within countries) at a given time. We conduct this analysis in two parts, following our fl ow diagram ( Figure 5 . 1 ) of some of the key relationships for an East Asian industrial policy. In the frst part, we focus on the state level, looking at state leadership and state-financial arrangements for IP, comparing the two regions by way of examples. In the second part, we loo k at the nexus o f relationships at the company level, highlighting relationships with the state, finance, universities, foreign investors/partners, and how the company managed to enter into international markets. Again, rather than trying to take on an impossible task of surveying every company and every sector, we use examples in order to illustrate differences among the two regions and the way forward.

What the New LA State Should Look Like

There are several aspects ofthe developmental state that are worth examining in further detail to understand if and how there are differences at the institutional level between EA and LA. In Chalmers Johnson's introduction of the concept of developmental state, he pointed out several features that Japan had developed (Johnson 1 982). First, there was a "pilot" agency that guided national development and picked new sectors, namely MIT!. Second, there was a strong financial agency that provided competitive subsidization ("market conforming i ntervention"), in Japan, the M i nistry of Finance. Third, there was a strongly meritocratic and status- rather than compensation-based system whereby the leading bureaucrats were formed and followed a sense of national duty. This developed all the way through their education system. In line with that is the fourth factor, which is attention to equity-improving investments and policies to maintain employment. To Johnson's elements, we can add a feature pointed out by evolutionary economists, namely the role of innovation and learning.

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On a n institutional level, w e see that there tends t o b e a key set oftechnical institutes which allow the state to help private sector technological learning. We have seen that LA suffers historically from "enclave" economies wherc firms with high levels of manufacturing and/or technology seem to have very few links to the rest of the economy and provide limited employment. Pilot Agency and Educational Preparation of Bureaucracy

The model pilot agency for East Asia has always been MIT! (Ministry ofInternati onal Trade and I nvestment). Entrance into MIT! is based upon extremely competitive examinations, with two percent or less passing rates typical in a given year (Johnson 1 982, 57). Entrants choose lower bureaucratic salaries than they would receive in the private sector because of the prestige afforded to their position, and corruption is relatively low (Johnson 1 982, 68). M ITI not only picked winners in terms of sectors to target for national development but also funded research and development and commercialization for emerging sectors and scouted out the marketing possibilities. In pursuit of the latter, the Japanese Exterual Trade Organization (JETRO) developed a marketing intelligence and assistance system for Japanese companies looking to export. M IT!'s control over quotas and tari ffs on imports and exports allowed it to redirect finances to targeted sectors (Johnson 1 982, 232-3). When these were eroded under international pressure, M ITI turned to using "administrative guidance" as its tool for sectoral pol icy. Administrative guidance is akin to executive orders directing action. Johnson notes the MIT! embodies a determination to achieve economic development as "a national priority" (Johnson 1 982, 305). In Korea, the Economic Planning Board (EPB), reporting directly to the President, played this role. The EPB was established in 1 962 and had both central policymaking and budgetary authority. The EPB was the arbiter of conf icts among different ministries. Like M ITI, entry to the EPB was highly prestigious and competitive through examinations. The technocrats ofthe EPB had a strong sense of mission and bonding as welL ' The EPB was dissolved in 1 994. Taking its place is the Financial Supervisory Commission, which has its own version of "administrative guidance" through regulation (Yee 2004, 259). In Taiwan, Wade suggests that a tight network within the executive branch serves as the pilot agency. The most prominent within this network are the Council for Economic Planning and Development (CEPD) and the Industrial Development Bureau. The CEPD has 12 members, including the head of the Central Bank; all but one are cabinet members. The CEPD counts on a staff of more than 300 engineers, economists, finance and accounting specialists and statisticians, who receive long-term appointments and above average salaries. This group creates O. Yu1 Kwon, "Korea's Economic Policy Framework in the Globalization Era," pp. 29-49 in Kwon, Sung-Hee Jwa, and Kyung-Tae Lee, Korea s New Economic Strategy in the Globalization Era, Northampton, MA: Edward Elgar, 200 I , p. 32. See also David Kang, "Cut

from the same cloth: bureaucracies and rulers in South Korea, 1 948- 1 96 1 ," pp. 1 55-85 in Chang Yun-Shik and Steven Hugh Lee, Trans/ormation.I' in 7Wentleth Century Korea, New York: Routledge. 2006.

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An East Asian lvfodeljor Latin A merican Success

long-term economic plans, including research for sectoral policy. The IDB takes the CEPD 's guidance and creates detailed work plans for actions to be taken. The IDB has 1 80 employees, of which 1 30 were engineers and the rest fnance or accounting specialists (Wade 1 990, 1 95-200). Johnson notes that Tokyo Law School was the most important feeder institution for the elite bureaucracy. Cohort groups entering into this highly competitive arena developed strong personal bonds. These personal bonds continued after bureaucrats retired and entered into private industry, thus ensuring a strong social network among academic, public, and private sectors. Amsden observes that the wage gap between the well-educated manager and the worker in EA is far lower than i n LA. She discusses the relatively small size of central administrative offices of Korean companies; in business there are "shopfoor" managers who can make ready adjustments based on personal knowledge of the production process (Amsden 1 989, 225-3 1 ). Wade notes in Taiwan that most elite bureaucrats come from the same elite two or three universities, led by Taiwan National University. The system for entrance into the public services is highly competitive and by meritocratic examination. While salaries are 30-50 percent lower than in the private sector, there is more competition for public sector jobs, which confer a high level of status. Most senior level bureaucrats are engineers or scientists (Wade, 1 990, 2 1 7-20). By contrast, in no LA country is a pilot agency found. Throughout the region, middle-level bureaucratic positions have been awarded as low-paying, patronage, for life type jobs. There are no competitive exams to enter into top positions, and there is little autonomy from party politics. There is in general a greater skepticism of national industry and private enterprise, thus many of the top graduates in engineering work abroad. Similarly, there i s a strong skepticism of the motivations of the state, which is linked to patronage and corruption, an impediment rather than a source of help to the private sector. There has never been a coherent long-term plan in any Latin American country that matched the political will with the long-term needs of each country. Monica Casalet states about Mexican institutions, which she calls "a non-articulated network": During the import-substitution phase the creation of institutions, along with their financing and orientation, fell directly into the government's sphere of activity. Throughout this phase policies were aimed at consolidating the specialized institutions that foster the productive sector . . . It should be noted that the institutions that emerged during this period lacked institutional and intersectoral articulation. They were, in fact, a response to the initiative of either broader state policies that required a specialized infrastructure to face the process of industrialization and the needs of domestic finns. These institutions have played a substantial role in the adaptation and development of local technology for large public finns and. . .researcher groups . . . After two decades, it follows that this specialized infrastructure was developed through excessively bureaucratic self-contained organizations, which had little concern for the actual outcomes of these initiatives and, furthennore, lacked any control over the institutions' achievements. Organizations had little concem for achieving any particular objectives since funding was secured ex ante and it was not necessary to carry out evaluations to monitor fund allocation. In addition to this, it was difficult to conduct coordinated activities of inter-institutional exchange as

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each institution operated independently and was not actively encouraged to work with the productive system. (Casalet 2000, I l l )

Jose Nun points out that Argentina "lacks a coherent and lasting development strategy," and the national planning style there is "essentially short-term."(Nun 1 995, 5 5-7) In Brazil, the situation is even more complicated by the fact that the state-level institutions for industrial policy in Sao Paulo outelass in many ways those of the national government in Brasilia (Bastos 1 995, 98). Ines B astos states about Brazil: Brazilian political institutions have not developed to a point where they can allow autonomy in economic pol icy-making and at the same time provide organized and stable mechanisms of interest representation. Relationships between decision-makers and societal groups were made either in a patrimonialist way- before and during military rule­ or were simply non existent.

A common reaction to this argument, as other arguments throughout this book, i s that E A bureaucracies are the product o f "lucky" historical circumstances related to Japanese colonialism and Confusion culture, and that LA politics do not allow for any reform that would create a capable bureaucracy, therefore markets are the second best, but only viable option. This fatalistic dependency ending in neoliberal market thinking does a disservice to the human enterprise in LA as well as EA, in the latter case by removing the possibility that human agency can pro-actively change conditions. As Chang poignantly states, Is it really the Confucian tradition that has made its bureaucracy what it is? The principles that lie behind the Singaporean bureaucracy seem more British than Confucian. Take the case of Taiwan. When its bureaucracy was running mainland China before 1 949, it already had the longest tradition of meritorcracy and competitive recruitment in the world, but that did not prevent it from being one of the least competent and most corrupt bureaucracies of the time. Did Korea always have an exceptionally competent bureaucracy? The Korean bureaucracy was notorious for its incompetence and nepotism in the 1 950s, and was sending its bureaucrats for extra training to countries like Pakistan and the Philippines even until the late 1 960s. It was only through continuous efforts at civil service refonn, and not as a result of history and tradition, that Korea managed to create a competent and relatively clean bureaucracy . . . [italics his] (Chang 2003a, 27)

Another argument often heard is the LA already suffers from "hyperpresidentialism," or an excess of executive power with inadequate checks and balances.2 In times of strife and the need for rapid development, as in the cases of S. Korea, Taiwan, Malaysia, and Singapore, a strong executive has been crucial to the coordination and reflexive process required for rapid development of the economy. H owever, given LA's history of internal conflict, a strong bureaucracy, one that is less a machine of patronage and more an institution of nationalism, might be the missing element to guide state directives towards more long-term planning. In the absence of the 2 Scott Mainwaring and Matthew Soberg Shugart, eds., Pre.�identialism and Democracy in Latin America, New York: Cambridge University Press, 1 997.

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strong moral codes of bureaucrats such as those in Japan, there would need to be equally strong oversight commissions - such as auditing agencies and a high level of transparency in terms of spending to keep planners in line. Analysts point out that LA ranks among the lowest regions in terms of the independence of the civil service and the rule of law.3 Over time, the esprit de corps of the planners as being the long-term economic braintrust of society would develop into a stronger peer- and reputational basis for inspired activity. Such developments need not be anti-democratic. Rather the "vertical" bonds of accountability would also kick in along with the horizontal ones4 (for example, auditing, legislative and judicial oversight, and think tanks and academics). By vertical accountability, we mean that the questions of economic strategy would be part of an ongoing discussion. At the most general level, these could be part of an ongoing debate, and the electorate's decisions. This would be quite complementary to the horizontal discussions among the relevant policy networks across elite actors. The media tends to help to bridge the gap between horizontal and vertical accountability in the sense of simplifying complex stories and choices for the public and also creating transparency through its' watchdog role. Political parties can also play a crucial funnel l ing and coalition-building role for large segments of the population when working in harmony with the executive.s In sum, it is not democracy, or strong presidentialism, per se, that creates instability and paralysis in LA economic policy, but rather the absence of consensus around long-term national visions and plans and the horizontal and vertical instruments to reinforce this consensus. Finance

Johnson discusses the importance of the postal savings system in Japan in initially marshalling savings for national IP. Through the postal savings system, a certain percentage of all earnings were forcibly invested in the national savings system at low interest rates. This system provided a ready pool of capital for incipient IP. Perhaps more important was the discipline imposed on companies in exchange for state support. Clear guideposts were set within an extensive framework of incentives. Industrial managers were judged not on the basis of short-term profits, but rather their ability to reach the goals of competitiveness over time. Similarly, litigation in the US model is avoided and the formal and informal state-private networks seek to hammer 3 J. Mark Payne, Daniel Zovatto G., Femando Carrillo Florez, and Andres Allamand Zavala, Democracies in Development: Politics and Reform in Latin America, Washington: Inter-American Development Bank, 2002, pp. 1 6-1 7; and Scott Mainwaring and Christopher Welna, eds. Democratic Accountaiblity in Latin America, New York: Oxford University Press, 2003. 4 I thank an anonymous reviewer for pointing out the importance of this issue. See Enrique Peruzzotti and Catalina Smulovitz, "Social Accountability: An Introduction," pp. 3-34 in Peruzzoti and Smulovitz, Enforcing the Rule ofLaw: Social Accountability in the New Latin A merican Democracies, Pittsburgh: U niversity of P ittsburgh P ress 2006, 27.

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out differences without costly lawsuits (Johnson 1 982, 3 1 8-9). I n Korea, Amsden points out that the government deliberately "got prices wrong." The government provided subsidies for targeted sectors and also provided below market (or negative) interest rate loans, in part from capital borrowed on international markets. Relative prices favored exports, and needed imported inputs for exporting industries were subsidized (Amsden 1 989, 1 43-44 and 1 55). In Taiwan, The IDB was the main arm for negotiations with foreign investors (wooed as part of sectoral policy). The IDB uses competition for trade controls, regulatory, and f nancial incentives to spur private sector activity towards sectoral targets (Wade 1 990, 2 0 1 -208). In Latin America, there has never been a strong disciplining of fnance to marshal resources for investment.6 As indicative of the inability to balance macroeconomic budgets, on the microeconomic level as well, the fnancial system has been poorly regulated and directed by the state. In Brazil, the national development bank (BNDES) has nonetheless played a prominent role in spurring on some of its growing industries, from aircraft manufacturing (Embraer) to agribusiness, albeit with considerably less resources, consistency, long-range planning and regulatory leverage than its counterparts in EA. There is no parallel to the role of BNDES in other LA countries, and the heavy external f nancial dependency as well as the penetration of multinationals speaks poorly of the possibilities for increasing the leverage of development banks unless a major policy direction, such as the one suggested here, is undertaken. In a new comprehensive examination of f nance in LA, Stallings, echoing our conclusions below, suggests that in contrast to the advice by mainstream economists and institutions, ownership is not at the heart of the problem of poor f nancial performance. She states, "if. . . a strong institutional context can be created, public banks can do a reasonable job in terms of efficiency and in carrying out certain social functions." (Stallings 2006, 9) Stallings points to the case of Costa Rica as part of her evidence of this fact. Meanwhile, weak institutions "can undermine the operations of even world-class banks." (Stallings 2006, 53). Labor Relations

Johnson points to several features of Japan's growth that help us to better understand how this high growth model enhanced equity. We noted earlier the important features of land reform and investment in public health and education. In addition, Johnson notes that Japan relied heavily on its internal market for growth, not just on exports (Johnson 1 982, 1 5- 1 6). The protected internal market provides a "proving ground" for Japanese products before they competed overseas. Thus equity in terms of increasing demand for national producers was a part of the growth strategy from the start. Attention to equity existed equally in terms of Japan's unusual labor relations. The prevalence of "lifetime employment" in some sectors and the vast sub­ contracting system which "soaked up labor" allowed Japan (Johnson 1 982, 1 1- 1 2) to create a stable employment situation amidst rising standards of living for its initial decades of growth. Amsden notes that massive investment in education across-the-

,

5

Javier Corrales, Presidents without Parties: The Politics of Economic Reform in

Argentina and Venezuela in the 1 990s, University Park: The Pennsylvania State University Press,

2002.

6

Anil Hira, "Latin America's financial performance under neoliberalism and the new

left governments," forthcoming.

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An East Asian Model for Latin American Success

board set up the ability for fast increases in productivity by Korean workers. Yet the training was not only for general education, but included a variety of vocational­ technical skills training as well. (Amsden 1 989, 2 1 5-25). Similarly, while labor strife has been a key feature of the Korean landscape, Korean wages rose faster in the postwar period than any other nation. In return for more quickly rising wages and job security, Koreans work a greater number of hours than others. Also, relatively more Korean women work (Amsden 1 989, 1 95-2 1 3 ) . In Taiwan, unlike Japan and Korea, the government itself (rather than under pressure from the US), initiated the land reform. Given the ethnic differences between natives and mainlanders, the latter in charge saw the need to raise living standards and employment as a way to gain political legitimacy. An active campaign to increase the sense of nationalism is also part of the educational system (Amsden 1 989, 241-5). By contrast, as we have seen, there are inadequate efforts in LA to raise investments needed for across-the-board productivity increases. Objective indicators and analyses across-the-board indicate relatively low investment in education generally and science and technology in particular. Moreover, there are severe problems in the uneven quality of education.7 There is a disconnection between educational needs of the nation and opportunities. In Brazil, for example, the major universities are public, with low tuition. Entrance is gained by exam. However, because there are wildly different primary educational institutions in terms of quality, as well as the fact that the middle class and upper classes can afford private schools and tutors, the system serves to reinforce rather than dissipate existing inequalities. The volatility and bottlenecks to mobility of the labor market are part of the vicious cycle of instability that chokes growth and equity improvement in LA. How State-Private Sector Relations Should Be Reformed in LA

Introduction

Reforming the LA state is only half the equation. We also need to understand how EA and LA companies have succeeded in international competition despite the seemingly intractabl e institutional and economic problems of developing nations. Studying these companies may point to more nuanced ways of understanding institutional reform possibilities, and also provide a road map for other LA companies to fol low. If more LA companies succeed in exporting, more jobs will be created, wages and revenues w i l l rise, and a more virtuous environment for institutional reform will ensue. The business literature (Kanter 1 997) has created vast volumes on firm advantage, including the importance of encouragement of change; flexibility, networking, 7 H ira, "Learning from the Tigers Learning from the Tigers - Comparing Innovation Institutions of Rapidly Developing Economies with Latin America," CEPAL Review, forthcoming, and Gabriela Dutrenit and Jorge Katz, "Introduction: Innovation, growth and development in Latin America: Stylized facts and a policy agenda," pp. \ 05-30 in Innovation and Economic Development: Lessons from Latin America, special edition of Innovation: Management. Policy & Practice, vol. 7, issue 2-3, April-Aug 2005. p. 1 1 0- \ 1 .

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and culture; information and marketing systems that create intelligence about customer needs and potential markets; virtuous cycles of innovation and product development; and willingness to take a risk. However, the literature is focused almost exclusively on firm competitiveness in the North, where there are a well­ functioning institutional environment, healthy competition, access to large pools of wealthy consumers and capable human capital, and a stronger knowledge and capability to regulate markets. Michael Porter's famous The Competitive Advantage of Nations ' basic diamond model of competitiveness is typicaL He suggests that lower cost and product differentiation based on a broad or narrow scope of products (varying by industry) are the most basic ways to understand firm strategies. Behind those aspects are several key factors, primarily the ability to innovate on process, technology, inputs, transactions costs of organization and coordination. For Porter, a successful frm embodies dynamic capabilities to deal with these innovations, as well as changes in supplier and buyer segments, government regulation, and new entrants. Furthermore, globalization has required firms to consider these factors in a different way altogether. Unfortunately, many economies of the South simply do not meet the basic factor conditions implied in his analysis of the environment to which firms must respond. For example, many developing economies' home markets are quite limited, therefore they must export to achieve minimum economies of scale and moreover, they are unlikely to be able to support a lively and competitive market structure in their own economy. There are a number of business case studies of LA firms, but they do not consider the particular question of overcoming institutional obstacles. In an exhaustive bibliographical review of business studies of Latin America, Maria Ines Barbero states categoricall y, "One of the major deficits concerns the study of firms . . . The stories of individual companies and the analysis of forms of organization and ownership, management, technology, competitiveness, and financing are very few. Studies of the legal environment and the industrial relationships at the factory level are almost nonexistent." She also highlights the even greater scarcity of studies of LA state-owned enterpri ses (Barbero 2003, 334). I n short, we have descriptions of institutional problems, and l imited descriptions o f companies, but no studies that match both in an analysis that seeks to provide pragmatic policy solutions. There are three areas where literature provides useful background infonnation for understanding this issue. The first are descriptions of the LA business environment, oriented towards Northern firms looking to sell there (Nevaer 1 996; D ' Andrea 200 1 ; Becker 2004; Euromonitor 2003; and Robles, Simon and Haar 2002). The second is by economists about the region, which is almost exclusively conducted at the macroeconomic level, with a few notable exceptions, such as occasional sectoral reports by CEPAL and a recent survey on plant productivity (Roberts and Tybout 1 996). Unfortunately, these studies generally do not examine individual firms. The third area is political science and sociology which produce work of a critical nature focused on relations between LA businesses and states (Schneider 2004; Durand and Silva 1 998). In addition, there is a sizeable literature overlapping the second and third areas, on foreign multinationals in the region but with l ittle comparative analysis of LA companies (Suarez and Oliva 2002; Vasquez-Parraga, Felix, and Borders 2004; Aulakh. Kotabe. and Keegen 2000; Chudnovsky and L6pez 2005), ,

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though a number of H arvard business school type case studies of firms have been produced (Carrera and Quiroga 2003), including a few on the firms discussed here (for example, Gemawat, Herrero, and Moneiro). The problem with the literature so far is that it does not yet bring together policy lessons from comparative studies of companies across the region, or by comparison with other regions, controlling for sector. We can make a modest start on that front here. While well-coordinated, meritocratic, and driven institutions are important, it is the state-company partnerships that are the most essential element of East Asian success. We cull from a growing set of case studies of companies in both regions to examine why there seem to be so many more successful global companies in East Asia. In this section, we can address common concerns regarding the management of state-private sector relations. They include: Should the developing state avoid ownership of any company? How do companies enter into new already established competitive markets? How do they overcome the financial hurdles? How do they overcome the technological and human skills challenges? Is State Ownership the Problem?8

One of the key focal points for blame in terms of the fai lures of industrial policy is the "white e lephants" of large state projects and state-owned enterprises (SOEs). As we pointed out, the EA state always kept an arm 's length relationship with SOEs. This led to a number of successes such as Korean POSCO (Pohang Steel Company) (Chang 2003b). Yet, as I have discussed before (Hira 1 998), assessing LA SOEs, or SOEs in general is difficult as the general attitude among mainstream economists is that they are always sub-standard to private ones. In Latin America, the creation of SOEs was an economic and political act. The setting up of SOEs was one way to reduce the imperialistic effects of foreign interference. Moreover, the controversial argument has been made that there was no capable capitalist class in Latin America to start up industry. I n the context of the Marshall Plan and the supposed success of planning in Russia, it was perfectly natural for the Latin American state to set up its own industrial enterprises. From the 1 980s and the neoliberal revolution, SOEs have been lumped together with l S I as a clear historical "failure."9 The World Bank hammers this point home in its sweeping analysis, Bureaucrats in Business (World Bank 1 996). That report includes many of the main arguments against SOEs. First, that SOEs absorb public funds that would be better allocated elsewhere, such as in social services. Second, that SOEs "crowd out" the fnancial markets, reducing credit for competing enterprises. Third, that SOEs are inefficient and poles for government patronage and corruption.

8 This section is based on Rira and Pierre Olivier Pineau, "Moving Beyond the Privatization Paradox: A New Approach to Utility Assessment in Latin America," forthcoming. 9 John Waterbury, Exposed to Innumerable Delusions: Public Enterprise and State Power in Egypt. India, Mexico, and Turkey. New York: Cambridge University Press, 1 993, and Robert R. B ate s Markets and States in Tropical Africa: The Political Basis ofAgricultural ,

Policies. Berkeley: University of California Press, 1 98 1 .

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Fourth, SOEs often have a poor record when i t comes t o pollution. SOEs are directly responsible for large portions of government defcits. Their functions could be better served by private industry, and the inefficient prices of their goods requires protection and reduces the efficiency of other aspects of the economy. Thus, the World Bank, like other international institutions and most mainstream economists is strongly in favor of privatization, which it sees as bringing "great benefits." Still, the report notes that SOEs remain a prominent feature of many developing economies. The report states that the main resistance to divestiture of SOEs is political. The main problem with the World Bank report is that its conclusion is largely based, as noted in the report on page 33, on anecdotal evidence, rather than any systematic study of SOEs. The report states that a more systematic assessment is quite difficult to conduct, because of the lack of comparable public and private frms operating in similar environments. However, it states, that studies show that private firms are more efficient in competitive markets. "Where SOEs operate in noncompetitive markets, the results and interpretations are less clear (World Bank 1 996, 1 7-23)." However, the report then goes on state that "the experience of the formerly centrally planned economies, and the strong negative effect SOEs have on fiscal deficits" all support the premise that large SOEs can hinder growth. (World Bank 1 996, 50). In other words, there seems to me no strong or clear evidence about the performance of SOEs vs. private sector companies outside of centrally-planned economies, which renders the worldwide push for privatization in all cases quite curious. Abu Shair states "there is no conclusive (empirical) evidence .to support the argument for private-ownership superiority," and "there is no clear-cut evidence that public investment is 'crowding out' private investment." (Abu Shair 1 997, 90- 1 ) Our only conclusion i s that there can b e n o sweeping generalization a t this point about public vs. private ownership across contexts. The World B ank report does attempt to address the more interesting question, which is why some SOEs seems to work well while others are clearly sub-par (World Bank ] 996, 55-96). It suggests three measures for the relative success of SOEs: financial performance; productivity; and savings-investment deficit. The latter factor is the extent to which SOEs rely on outside sources for financing. The study assesses SOEs from 1 978-9 1 . It fnds that SOEs performed better in Chile, Korea, and Mexico, and showed substantial improvement there. SOEs in India, Senegal, and Turkey, performed worse, but showed improvement. Those in Ghana, the Philippines, and Egypt performed poorly and did not show improvement. The report goes on to cite several factors that explain the relative success of some SOEs. These include a hard budget constraint and lack of explicit or implicit subsidies, levels of competition to the SOE, including market-determined prices, the need to access independent banks for credit, and the use of performance contracts that set targets with rewards and punishments. They also suggest that contracting out to private firms or use regulatory contracts with private f rms. There are several other problems with the World Bank's measures of SOE performance besides the limited time period and sample of countries surveyed. A number of studies point out that the empirical evidence on SOE performance is really quite am bi gu ous One survey of the literature states "the performance of any enterpri se depends on the incentives managers face. the structure of competition, .

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An East Asian Modelfor Latin American Success

and the environment within which managers operate." (Aharoni 2000) First, SOEs are not set up to create large profits, usually their mission is related to public and national goals. Second, if, which is likely the case, the SOE hires more employees than a private firm would, this may affect its bottom line, but is not necessarily a bad thing. If the SOE is training employees, or using more labor-intensive techniques, this can have positive benefits for the economy. The real question is whether the employees are being used effectively. Third, if the SOE is setting up basic infrastructure, or other heavy industry, the question could be legitimately asked, especially of the immediate post World War 1I period, if any private domestic entrepreneurs would have had the capital, know-how and interest to create such industries. It is only in the last ten years that privatization of basic infrastructure has become common sense among economists, yet in several regions, such as China, SOEs continue to play a significant role. Because ofthe recentness of the reforms, if we want to compare the national SOE's performance with what a comparable foreign private frm could offer, we would be hard pressed to find clear data to make a clear comparison. Moreover, the domestic SOE would keep profits local, be more likely to hire and train locals, and be more likely to generate local economic linkages, such as subcontracting to domestic firms. Furthermore, the limited size of many of the domestic economies of developing countries implies a local monopoly or oligopoly. Last but certainly not least, SOEs would be more likely to subsidize certain groups of consumers (for example, underdeveloped regions), industries, or other non-profit­ oriented motivations that can push forward the national interest. More importantly, as I have suggested in my study of energy in the Southern Cone (Hira 2003a), there is no proofthat private companies will always perform better over the long-run. Hector Schamis, in his book Re-forming the State, actually goes farther and says that privatization can lead to inequitable results and an equally negative role if the end result is market share concentration by a few companies (Schamis 2002) Thus he explains neoliberalism and l iberalization generally as a result of the lobbying of particular distributional coalitions. There are few comprehensive case studies ofprivatization in Latin America, but they seem to generally back up this more realistic view. Saulniers' ( 1 988) comprehensive study of Peruvian SOEs concludes that it is the operating atmosphere and incentive structure, rather than the public or private ownership of a firm per se that determines its success. Two very conservative economists, RolfLiiders and Dominque Hachette, reach some interesting conclusions in their comprehensive study, Privatization in Chile. Although the authors are strongly pro-privatization, since they think that SOEs generally will tend towards inefficiency and corruption, their comprehensive econometric comparison of public and private firms in Chile found "no significant differences" among public, private, and privatized enterprises under similar sets of rules and regulations, including levels of employment ( Haehette and Luders 1 993, 1 27, 1 7 1 , 1 75). They give several reasons for the improvement in Chilean SOEs, which they state occurred after the military takeover in 1 973 ( Hachette and Luders 1 993, 1 3 0). Among these are that the government evaluated SOEs on the basis o f profit maximization; that SOEs had to finance themselves; and that they did not receive any state guarantees to assume new indebtedness during most of 1 974-1 987. The Chilean Government also allowed SOEs fixed possible tariffs, which gave them a maximum return on assets of ten

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percent, forced them to create a monthly data set on performance similar to those created by private companies, and refrained from interfering in their management. Finally, the government forbade SOEs from expanding into profitable investment areas that could be tackled by the private sector. We can acknowledge that SOEs should not be in the business of producing goods that cannot be efficiently produced domestically by a competitive market of legitimate domestic private producers. However, in the cases where industrial policy and the relative limits of domestic competition suggest that an SOE, even if for a temporary period, may be desirable, the real issue becomes not private vs. public ownership per se, but under what conditions public enterprises succeed or fail. Abu Shair suggests several factors that explain the success of SOEs that echo those of other authors (Abu Shair 1 997, 2 1 1 - 14): decentralization of authority; SOEs need some autonomy performance evaluation systems incentives for managers and employees targets for performance increase accountability efficient accounting, info. system, benchmarks and clear criteria for evaluation, follow up on evaluation qualified appointments - merit-based hiring checks on subsidies - evaluations and clear information regarding, time limits outside organizations, individuals have access to info. on SOEs and can evaluate training programs employee participation. On the other side, Adhikari and Kirkpatrick state that SOEs have succeeded in developing countries as commercial ventures, but not at the level of expectations. Moreover, financial performance has been unsatisfactory- with a low return on costs and low productivity growth (Adhikari, Kirkpatrick and Weiss 1 992, 4 1 ). Principal problems include conf icting objectives, government interference in day­ to-day operations, lack of fiscal discipline, and protected uncompetitive market conditions. We continue to see SOEs in Northern countries that play key roles and operate quite efficiently such as Scandinavian energy companies. For that matter, most European energy companies started out as SOEs, with privatization occurring rather recently. I n a sense, every country's government recognizes the importance of key sectors, as we have pointed out tirelessly here, so there is always a relationship between the company and the public sector, for example, Boeing and the US Government. The question, therefore, becomes rather how the government can best discipline and guide the SOE or the private company towards national interests. Regulatory policy, among other tools, such as taxation and financing, can be used to shape market outcomes and support national champions in key sectors, regardless of ownership (Hira 2003b). In EA, there are similarly several state enterpri ses which have been quite successful. In Korea. POSCO (Pohang Iron and Steel Co.). an SOE, became one

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of the largest steel manufacturers in the world. pasco was founded in 1 968. �he state invested $3.6 billion, assuming all of the risk. The government had tned unsuccessfully to start a steel mill with foreign partners, however, these failed as the government wanted larger outputs than their partners. pasco worked through a partnership with Japan's Nippon Steel to develop a new . factory. !he co��any was profitable by 1 973. The government provided cheap capItal, heavtly subSIdized infrastrncture expenses, ensured a cheap supply of electricity, and provided a ready captive customer. Amsden attributes pasco's su�cess to sho�floor management, lean production, and continual attention to productlOn and quahty eontrol (Amsden 1 989, 29 1 -3 1 8). A Model for Smaller Economies: The Singapore Case

The blueprint we have laid out so far and lessons learned are i�portant for any developing economy. However, as we note in the cas� of Costa Rlc� below, some adjustments in strategy are needed for smaller economIes. We have discussed th�se in the context of Taiwan's treatment of foreign investment as a type of learnmg curve for developing new industries. We also mentioned that Taiwan focuses less on capturing the full vertical chain and rather develops niche expertise (for e�ample, computer components, hardware assembly). Singapore is another outstandmg case that can reinforee these points. Singapore is the only eountry so far to not only go for developing to developed status, but to surpass the per capita income level of most Northern states! Like many of the smaller economies of the Caribbean and Central America, Singapore is a small economy, with inadequate domesti� m �rket si�� to naturally support home grown industries. Unlike those economIes, II addItIon, Singapore is densely populated and, with almost no arable land, unable to develop any agricultural sector. Singapore is also ethnically divided, as we discussed above, �ut h �s been �nderthe peaceful enlightened leadership of Lee K.wan Yew for mu� h of Its �IStO.ry. Smgap�re is the extreme of state purposefulne ss, WIth state leadership extendmg II Sparta-hke fashion in to requirements for social conformity. H owever, the important point for our purposes is that Singapore's amazing success is not based on luck or .culturally unique aspects, but rather on an active state-led industrial p �lie! along the l m�s ofthe blueprint we have developed here. While Singapore began ItS Illdepe�dent h �story as an entrepot state in 1 959, similar to Hong Kong, it cultivated finanCial �ervlces and labor-intensive assembly industries developing duty free and low taxatIOn status as ways to attract foreign investment. This is the lesson mainstream eeonomists ga�her from enterpot states, and what could conceivably be reproduced, and has been tried, in states such as Mauritius, Panama, and Urnguay. However, taking just this bit of early history from Singapore's d�velopment . traj ectory would miss the far more important state interven�ions :esponslble for lts . success. As Wong states, "the Singapore government engaged II a Wide range of�ohcy interventions in the all the key factor markets, ranging from land, labor and capital to infrastructure and related supporting industries . . . it would be misleading to characterize S ingapore as . . . market friendly, . . . in many instances . . . t?e Singapore government had del iberately "got prices wrong." (Wong 200 1 a, 535). Smgapore first took advantage

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of its location by investing heavily in its infrastrncture, including its port, airport, and mass transit, to position it as a transportation hub (Haas 70), as part of its push towards development from the ascendancy of the People's Action Party in 1 968. The easy period of inviting foreign multinationals in to take advantage of cheap labor, for low tech activities such as textile and apparel manufacturing, did not last long. In 1 972, the government established the National Wages Council to coordinate organized labor, employers' associations and the government to coordinate labor policy and avoid inflation. The Economic Development Board (EDB), Singapore's counterpart to M ITT, also became active in promoting selected industries. As Wong notes, the EDB not only enjoyed autonomy but also had access to resources through the Government's intervention in fnancial markets. The Government has high tax eapacity, including very high taxes on items such as cars, the use of foreign employees, and the leasing of land. In addition, Singapore' Central Provident Fund is fed by high mandatory retirement contributions, and also provides a public source for mortgages, educational loans, medical expenses, and other financial investments. By the late 1 970s, the government had made the transition to a high wage strategy, which it called the "Second Industrial Restructuring," centered around creating a highly trained workforce and policy package to retain fnancial and industrial sectors. This plan speeifically targeted the eleetronics and petrochemicals sectors, with great success. Singapore beeame one of the most educated places on the planet, with strong emphasis on applied math and science skills. The public sector also takes the lead on health care and housing. With the transition from Lee Kwan Yew to Goh Chok Tong, a third phase of Government leadership has been introdueed. "The Next Lap" is based on the idea of developing advanced industrial clusters (Wong 200 1 a), with research hubs developing new products for the global market, including most prominently IT (information technology) and biotech. Singapore's success in developing a niche capability in hard disk drives is directly related to government targeting (Wong 200 I b). The island now has developed the most extensive public broadband communication system, where everyone is wired, on the planet. The government has developed one of the largest biotech industrial parks, successfully offering large salaries to leading Northern researchers to work there. Singapore has also reached out to its neighbors, which it correctly understands it needs in terms of resource inputs and local market outlets; for example it has developed growth triangles with Malaysia around IT. Our conclusion is that the blueprint works for smaller economies with a few adjustments just as well as for larger ones. The lack of a similarly multi-faeeted strategy is what separates Singapore from other economies, such as Trinidad and Tobago, who have tried to diversifY their exports and failed (Payne and Sutton 200 1 ). The eomplex negotiation of leveraging foreign direct investment to enter into new sectors backed by government capital and strategic factor investments i s the difference. Is the blueprint too complex or difficult for governments outside the region to pull off'? We have already answered the question by pointing out that governments within the region, including China, developed their capacity over time. More limited successes in other regions points out that a view of limitations is i rrationally ethnocentric. For example, studies of moderately successful Mauritius. an island entrepot off of Africa, point direct ly to government interventions and "massive" investments in financial markets, infrastructural deve lopment, human capital, and sectoral targeting

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through the Development B ank of Mauritius as directly responsible for their success (Bonaglia and Fukasaku 2002). Comparing IP Behind Leading Companies in Both Regions: The Taste of Success Paves the Road for More . . .

Part o f any future research into l P i n LA should attempt to explain th e international success of SOE petrochemical giants Pemex, Pedevesa, YPF (now privatized), and Petrobras amidst macroecono mic instability, while LA has produced very few other international champions. Indeed, Petrobras is a world leader in the technology and know-how for offshore petroleum drilling and was able to surprise everyone in creating self-sufficiency for Brazil in petroleum in 2006. We begin to address the questions for success by switching our perspective to the perspective of a LA company looking to compete in global markets. How do Companies Enter into New A lready-Established Competitive Markets?

As noted above, one of the key aspects of EA success has been their ability to rely upon subsidized f nance, intelligence and coordination services ofthe state. Moreover, we have noted how their domestic protected markets have not only provided tariff and sales revenues for further development but also insulated product development. The key difference with LA's import substitution (lSI) phase is that in EA, there was more concentration on particular sectors as part of a long-term sequential strategy. Moreover, there was a concentratio n on developing local upstream and downstream, vertical and horizontal linkages among industries, their suppliers, partners, and customers within the nation. Cimoli, in a study of Mexico, states that while there was protection under l S I, "yet the government failed to provide a well defined, credible schedule for the duration for the protected environment, thus removing the natural incentive to get ready to compete with foreign goods in the future." (Cimoli 2000, 52�53) In LA, authors point out that the liberalization of the 1 980s occurred without planning. So, the resulting fnancial crises in the 1 980s-90s, as in Mexico, Chile, and Argentina came from the fact that setting a f xed exchange rate led to a f ood of imports. As a result, where neoliberalism predicted that LA f rms would modernize in order to compete with foreign f rms, the result was that only a handful of firms have been able to bridge this gap, in the absence of state support or gradual reduction of protection. Moreover, where these firms have succeeded, there have not been systems or mechanisms for diffusing technological knowledge to other companies or industries. lO Whole industries have been largely wiped out, such as Argentina's textile sector during the 2000-2003 financial crisis, so that even in the best turn of optimal circumstances, entrepreneurs will have to pay high and increasing entry fees, including updating equipment, re-Iearning production routines, etc, to re-initiate the industry. It is no wonder that economists are now befuddled with seemingly

rosy macroeconomic conditions but stubbornly high unemployment and stagnant standards of living. How do they Overcome the Technological and Human Skills Challenges?

It is interesting to note that in the case of the three East Asian tigers, research and development w�s carried out in �art by state agencies in terms of selecting and scoping out s�ctors, but m terms of appbed areas, by the companies themselves, Thus, R&D fundmg was closely tied to applied product development and commercialization. States pro-actively set up research and development and commercialization anns and centers to promote technology acquisition over the long haul. �obert Wade recounts how Taiwan, like Korea. moved up the value chain from textiles to manufacturing to high tech and services. In each case, the state sponsored co:np �ny efforts to acquire foreign technology, or started a state plant that was later . pnvatIzed to natlOnal companies. The state wooed foreign companies in its sectors of choice with financial incentives and the offer of a cheap and productive labor force. As competence in the sector grew, the government continued to re-negotiate the terms ,,:, ith foreign companies. The government generally placed some conditions . on foreIgn mvestors, such as export, local content, and local training requirements. The state also developed several research and coordination centers to study technical problems and �o develop and diffuse technology ( Wade 1 990, 9 1 �6). Taiwan, like Kor�a and �hma today, has ?een very pro-active in technology transfer, not on ly buymg deSIgns and conductmg research, but also sending students and workers abroad to learn t?e technology. The government actively set up the Hsinchu park to attract the IT mdustry, as well as making this and similar efforts to attract back capa�le diaspora �Rose�berg 200 1 ). The National Chiao Tung University (NCTU) �t Hs �nchu, established m 1 958, has been a l inchpin of technological developments m Tatwan. NCTU has had a number of successful R&D application developments that have le� to local pr�duction, including semiconductors, lasers, computers, and . telecommUnIcatIOns eqUipment. The importance ofNCTU, the E lectronics Research Service Organisati�n (ESRO) and the Industrial Technology Research Institute (ITRI) cannot be underestImated. As one author states, "The educational infrastructure of Taiwan appears to be the driving force or the primary link between factors underlying the successful develop�ent of the IC (integrated circuit) industry." (Trappey and Chen 200 � , 1 2 8) The ties the state developed with Chinese fami ly interests proved , formul� for a learning curve for industries followed by entering to be a � m-wm . competltIOn thro�gh natlOnal companies. The state nurtured national companies through the iearnmg process. In some cases, such as automobiles Taiwan has had only limited success. In others, such as electronics and computers it has become a world-class exporter. By co�trast, efforts in �A to overcome technological gaps have been haphazard at best. WIthout a strong tIe to state support and diffusion of knowledge, the model has t�nded to rely �p�n transfer by foreign multinationals. Where LA companies acquIre tech nology I t IS general ly without active state support. Woeful tales can be found in other recent LA IP efforts. Nochteff describes the debacle of the effort to create an electronics and IT sector in Argentina.

:

,

1 0 Mario Cimoli and Nelson Correa. "Trade Openness and Technology Gaps in Latin America: A ' Low Growth Trap,'" pp. 45-69 in Jose Antonio Ocampo. ed. Beyond Reforms: Structural Dynamics and Macroeconomic Vulnerability, Washington: CEPA L, 2005,

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The E lectronics and Informatics Policy was created by a presidential National Commission for Informatics (CNI) in 1 984. CNl pushed hard for the promotion of local industry and technological and human capacity building. Tariff protection was created. Government-sponsored projects were open to competitive bidding by national companies, along with performance requirements, and restrictions on the role of foreign partners. While there were initial promising results, the experiment soon fel l apart. CN! had planned for a coordination committee for the sector among the various ministries; the committee was never created. As a result sectoral policy became a "backburner" issue, rather than a political priority. The tariff and tax schemes were poorly timed and haphazard, thus not allowing for a smooth sequential increase in local production capabilities. N eeded adjustments to the policy, such as in tariffs, were mired down in political wrangling. Macroeconomic instability and reluctance reduced state orders which had been expected to buoy national producers in the infant stage. On the private sector side, there was lukewarm or reluctant participation among larger private groups, who relied heavily on foreign informatics suppliers. As a result the ElP fell apart just four years later (Nochteff 1 995). A review of the Brazilian Informatics Policy, designed in 1 984 to favor local production of IT equipment, shared a similar fate. The main tools in this case were restriction of imports, which immediately raised opposition among other Brazilian sectors relying on foreign technology providers. Permission to import needed foreign components led to heavy politicization and bickering over the program. Unfortunately, the state was supposed to provide positive support for l ocal production as weJl as subsidies, venture capital, procurement, tax breaks, etc, which it never fol lowed through on. Moreover, there was inadequate state leadership in building up a local human capital and technological base to supply up-to-date technology for local industry. There were no requirements to export. The pressure mounted as local hardware was unable to keep up with international software developments. By 1 987, government support had withered, in the wake of a macroeconomic crisis (Erber 1 995). The purpose of relaying these tales is not to point a finger at LA, but rather to point out that these are policy errors that are certainly fix-able. Examples from Case Study Analyses ofSectors and Companies

In this section, we synthesize findings from the literature on EA and LA high tech and manufacturing companies to better explicate how the role of the state in EA has enabled its companies to succeed at a higher rate. The Hyundai Group is a particularly interesting case as one of the most successful conglomerates in the region. Hyundai started, like most other Korean companies, as a family enterprise, headed by CY Chung. According to Amsden (Amsden 1 989, 2668),1 1 Chung was able to gamer a number of construction contracts for his company from us military authorities after World War II; these contracts continued through I I See also Soon-Gwon Choi, Kent Eriksson, and Jang-Ho Lee, "Knowledge Translation in the Intemationalisation Process of the Hyundai Motor Company pp. 2 1 2-229 in Anders Blomstermo and D. Deo Sharma, Learning in the lnternationalisation Process of Firms, Northampton, MA: Edward Elgar, 2003; and Seung-Ho Kwon and Chung-Sok Soh,

1 49

the Korean War. In the mid- l 960s, Hyundai began its first cement mill, transferring technology from the Fuller company of the US. This was the basis of winning a major $208 million contract to produce cement in Saudi Arabia ten years later. In 1 967, Hyundai started its automotive division, which began exporting autos for the frst time 20 years later. In 1 973, Hyundai built its first ship, amidst an industry-wide depression. Nonetheless, Korea eventually became the world's largest shipbuilder. Government support was crucial in this transformation. The Korean government ordered the use of Hyundai ships, including the shipment of all fuel supplies. The government had run its own small shipyard, the Korea Shipbuilding and Engineering Corporation (KSEC) from 1 945 to 1 968. KSEC provided many of the engineers and basic capability for Hyundai's shipbuilding efforts, however its level of technology by world standards l agged far behind. The govemment aided Hyundai shipbuilding through pushing for and guaranteeing foreign credit; providing direct subsidies for infrastructure; providing financial guarantees to ensure that Hyundai won its frst order; and continuous technical assistance. Hyundai first bought detailed foreign designs for ships, and then gradually built up its own design department. En route, it received a subcontracting order from Japanese shipbuilder Kawaski which helped its learning curve. It also began a separate subsidiary to develop marine engines (Amsden 1 989, 269-90). In other sectors, the government played a key role in their success. Hyundai also produces electronics, petrochemicals, and is involved in financial services. However, Hyundai is best known for automobile production. Hyundai got its start by producing a licensed kit from Ford. However, the relationship with Ford deteriorated as Hyundai moved towards exports, spurred by govemment targeting. The government pushed for economies of scale were created through a 50 percent domestic content requirement put in place in the 1 960s, and an export push by the end of that decade. Hyundai developed the Pony in 1 973 through seeking design and production help from Mitsubishi, with whom it had agreements in shipbuilding, and contracting out to an Italian design firm. It was rebuffed by other carmakers who did not want to see production re-exported from Korea. The Pony was the only automobile well-suited for Korean conditions, thus it immediately gained domestic market share, and subsequently was able to export to other developing markets. In 1 978, Hyundai was again refused technology transfer from large foreign automakers in its quest to develop a front wheel drive vehicle. It was able to reach a joint agreement with Mitsubishi, with the latter receiving a minority (ten percent) equity share in return for its cooperation. The Pony II marked the first success in developed markets, with sales in Canada. However, Hyundai sales slumped in the mid- 1 980s amidst reliability and quality problems, but its control of the domestic market and government aid kept it in business. Hyundai developed further its in house design, contracting out a British firm to help with the design of the Sonata and also to train its engineers in design, and created an obsessive mandate for quality control. In 1 994, the first completely i n house car, the Accent was introduced. With its success, Hyundai was able to purchase Kia in 1 999, which had persisted in using foreign designs and

,"

"Transformations in Korean capitalism:

11

case study of the Hyundai Business Group," pp.

1 06-3 7 in Chang Yun-Shik and Steven Hugh Lee,

Korea, New York:

Routledge, 2006.

Transfi)rmations in Twentieth Century

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technology. 12 Ironically, Hyundai opened its frst North American plant in the US this year (2006), demonstrating its success after 40 years of efforts. In electronics, the government set up a series of research and training institutes to develop local technological capacity, headed by the Korean Institute of E lectronics Technology (KIET). Using a combination of foreign licensing and joint production agreements in Taiwanese fashion to capture both technology and foreign markets, Samsung and other companies were gradually able to build up local capacity (Amsden 1 989, 3091 8) . It is important to note that even amidst the Asian f nancial crisis in 1 997-1 999, the Korean Government refused to sell Hyundai, despite interest from GM. Thus we can see how Korea's push into shipbuilding and automobiles complemented their efforts vertically in steel. The contrasts with LA counterparts could not be starker. The automobile industry in the region remains in the labor-intensive assembly mode, with few local linkages and limited possibilities for capturing more of the value chain. A 2002 review of the Argentine auto industry states, that despite a promising start (Argentina had begun producing autos under license in the 1 950s), by the 1 980s, the foundations for developing comparative advantage in the industry were no longer apparent: . . . Argentina's vehicle industry is still far behind international standards. It currently exports close to a quarter million vehicles per annum to Brazil under Mercosur preferential conditions but it could not capture new markets in recent years even in spite of the fact that it is currently operating at less than 60% of installed capacity. Moreover, it has now become more of an assembly operation of imported parts and components with little, if any, incidence upon the development of domestic technological capabilities and mechanical engineering skills. It's well-established synergies and externalities vis a vis the local metalworking industry no longer can be argued to be signifcant. (Cimoli and Katz 2002, 8)

Light at the End of the Tunnel: Exceptional LA Success Stories

There are several interesting exceptional companies in LA that show that there is light at the end of the tunnel - if industrial policy is made consistent across-the-board. In agriculture, for example, B isang and Gutman report that LA's competitiveness is based on a strong set of institutions geared towards innovation and extension services for agri-business (Bisang and Gutman 2005). These state agencies are behind the ability ofArgentine and Brazilian soy, wheat, and cattle producers to out­ compete much more heavily subsidized counterparts in the North. Similarly, there are exceptional state-owned companies as noted above, outside the petrochemical industry, that also found success. One interesting example is Argentina's state-owned nuclear energy company, Invap, which has had success in exporting, and therefore

1 2 Seung-Il Jeong, "Hyundai Motor Company," pp. 1 09-33 in Crisis and Restructuring in East Asia: the Case of the Korean Chaebol and the Automotive Industry, New York: Palgrave Macmillan, 2004, and Linsu Kim, "Crisis Construction and Organizational Learn ing : Cap ab i l ity Bui ld i ng in Catchi n g-up at Hyundai M otor." pp. 1 57-74 in Learning and innovation in Economic Development. Northampton. M A : Edward Elgar. 1 999.

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become the subject of several forthcoming studies. The most celebrated exceptional case in the region of high tech, high value-added manufacturing is that of Embraer. Embraer is presently the third l argest civil ian aircraft manufacturer in the world and the only successful Latin American exporter of high value added, high technology manufactured goods in Latin America. As we reveal in a forthcoming study, state policies were ubiquitous and essential to Embraer's success and the failure of a competing aircraft manufacturer in Argentina. 13 State intervention began in the 1 950s with the setting up of technical institutes for the study of aerospace engineering and design in Brazil. Though the vast country provides a natural market for the production of aircraft, national private industry had little success in satisfying domestic demand. Thus, in 1 969, the military government set up Embraer as a state­ owned enterprise to produce military aircraft. From the 1 970s on, Embraer developed a series of designs for military aircraft that were largely supported by the domestic development bank (BNDES) and Brazilian government procurement through the Air Force. Embraer enjoyed steady leadership during the mid- 1 970s- 1 980s under Ozires da Silva. Silva had a vision that Embraer could compete in civilian markets as wel l and began to develop such programs in earnest. He also led Embraer through a series of partnerships with foreign manufacturers, including Italian Aeromacchia, that helped the company to learn the technology by doing. With the debt crisis of the 1 980s, and a major slowdown in the world aircraft market, under the guise of neol iberal ideas, the new Brazilian civilian government privatized Embraer to a consortium of large Brazilian pension funds. The government maintains a "golden share" or veto power on the governing board of the company, and continues to support the company through subsidies and fnancing aid, which led to a World Trade Organization dispute with Canada, who was supporting national rival Bombardier. Under the new leadership of financier Mauricio Botelho in the 1 990s, Embraer turned its attention to the regional jet market emerging in the wake of US deregulation of airlines. Embraer went from a non-player to becoming the foremost rival of Bombardier within the decade and threatens to surpass its formerly dominant rival. Embraer has adapted to the globalization of supply chains by including a number of foreign partners, such as General E lectric, which develops its engines. It has also recently started a joint venture with Harbin company in China, which led to the recent order of 1 000 Embraer planes. In sum, Embraer's success is linked closely to a state-private partnership, with the state playing a key role in helping the industry to overcome the numerous financing, technology, and marketing hurdles to success. The case of Embraer is quite similar to East Asian success stories, yet it is an even more powerful testimony as to what can be accomplished in LA using similar policies. While we have focused in this book on the larger industrial companies, there is no reason why smaller companies cannot escape the commodity trap and enter into niche industrial and/or high tech goods and services. The most interesting example of such an experiment is presently occurring in Costa Rica, though Cuba's biotech sector is also worth mentioning. Costa Rica decided in the late 1 990s to diversify its 1 3 This sub-section is based on H i ra and de Oliveira. "Take OtT and Crash: Lessons from the Diverging Fates of the Brazil ian and Argentine Aircraft Industries," forthcoming.

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agrarian-based exports towards high tech and began actively courting U S IT firms to set up operations there. The effort has paid off handsomely; Costa Rica was able to attract Intel, the world's largest semiconductor chip maker, who exported nearly one billion dollars of product in the first year, 1 998, alone, or 1 8 percent of national exports, completely transfonning the country's economic development. As a result, numerous service providers and subcontractors to this core activity have also re­ located to Costa Rica. The experiment stemmed out of the difficulties inherent with commodity-based production as we have discussed throughout the book. Costa Rica moved in the 1980s to set up export processing zones, with favorable tax and duties treatment, which led to maquila type labor-assembly operations being set up in the country. These operations, as shown in Mexico, have led to little in the way of capturing l inkages or learning effects, particularly in the absence ofan active industrial policy. In the case of Costa Rica, the small size of the economy and population also inherently limits the possibilities for large-scale, diversif ed manufacturing. However, the fact that some of the assembly operations were in the electronics industry probably helped to attract InteL More importantly, Costa Rica has a well­ established if under-publicized tradition of stable institutions and laws, and a strong base of human capital based on long-standing investments in education and health. Costa Rica's President was personally involved in the negotiations process, ensuring a strongly unified and consistent team w ith whom Intel could work. Assurances were needed from the government for ongoing investment in infrastructure and serious re-investment in upgrading the institutions and skill level of high tech workers. The fonner required major upgrades to the electricity, telecommunications, and road systems, as well as the airport. The latter required c lose coordination between Intel, the Ministry of Education, and the Costa Rican Institute of Technology (ITCR) to develop new and tailored programs. While a very promising start, there are still shortcomings in tenns of the Tico Tiger. There is a lack of coherent industrial promotion and strong industry- government partnerships to fonn long-tenn policies for attracting other companies and industries. Horizontal and vertical linkages are limited. Skills and managerial agility have not visibly spread, either. 14 Conclusion: How LA Companies can Compete in Globalizing Economies

As mentioned in Chapter 2, there are a number of objections that could be raised about a state-centered policy given the nature of globalization to integrate countries, liberate the movement of capital and to a lesser extent labor, and to create modular and fexible-type supply chains. Our case studies reinforce our conclusion that globalization in fact makes the role of the state even more important. The state i s needed to create advanced human capital, to enter into product niches, and t o create the operating environment in which globally-oriented companies can compete. The 1 4 Jorge Monge, "Intel-driven enterprise l inkages in Costa Rica," pp. 1 67-9 1 in Rajah Rasiah, Foreign Firms. Technological Capabilities and Economic Performance: Evidence from Africa. Asia and Latin America, Northampton, MA: Edward Elgar, 2004, and Eva Paus,

Foreign Investment. Development. and Globalization: Can Costa Rica Become Ireland?, New York: Pal grave Macmillan. 2005.

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state is needed to support research and development and marketing and finance costs that the private sector is in no position to bear. In some cases, such as Invap and Embraer, the state is needed to incubatc or midwife companics in advanced technical sectors. In addition to the production process-oriented innovation signalled by Amsden to be the foundation of Korean manufacturing learning, there are additional possibilities for learning in the global economy. These relate to the management of f exible and responsive supply chains that cut across borders. M athews' discussion of the success of the Acer group in Taiwan sheds further light on the strategies of the new g l obal companies from the developing world. IS Acer was launched as a family-led conglomerate in order to begin producing IBM-compatible computers in the early 1 990s. The company immediately followed the introduction of the Compaq clone in 1 992. Heavy investment in technological expertise was gained through the state-run R&D labs, and the Industrial Technology Research Institute. Acer went through several painful learning curves before succeeding. It was initially over-stretched in product lines and finances. The CEO, Stan Shih, then re-organized the company into several affiliated fairly autonomous business units, each with its own responsibilities and measures of success, according to product lines and nodes of customer groups. The company fonned local alliances with partner companies wel l-entrenched in particular overseas markets. While this evolutionary step aided expansion, it did not improve l ong-tenn proftabi lity. Thus, Shih went back to the drawing board to provide greater global coordination among the different business units. The units were designed to cover distinct product lines over an entire value­ chain. Coordination of the units ensures compatibility of the different products with each other and sharing of marketing, production, and other important transfers of knowledge across the company. As in other cases, whereas Acer initially contracted with foreign companies to provide the more labor-intensive portions of production, it moved steadily towards more independent and complete value-chain capture of the production process. A roughly similar pattern can be traced for many EA multinationals.16 They start out with strategic but limited partnerships with First World manufacturers. They often target other developing markets then smaller developed markets first. They move slowly with state support into original equipment manufacturing. They 1 5 John A. Mathews, Dragon Multinational: A New Model for Global Growth, New York: Oxford University Press, 2002. See also Teresa Shuk-Ching Poon, "Acer's Global Logistics Network: Strengthening Market Capabilities as OBM," pp. 1 07-42 in Competition

and Cooperation in Taiwan s Information and Technology Industry: Inter-Firm Networks and Industrial Upgrading, Westport, CT: Quorum Books, 2002. 16 See Youngsoo Kim, "Technological capabilities and the Samsung Electronics network," 1 4 1-175 in Michael Barrus, Dieter Ernst, and Stephan Haggard, International Production Networks in Asia: Rivalry or Riches? New York: Routledge, 2000; Park Eul Yong, "Behind POSCO's success: the role of government in technology capacity building," pp. 4 1 -74, and Wu Rong-l and Tsieng M i ng-Shen. "Taiwan's information technology industry," pp . 75-1 05, in Jomo K.S., Manufacturing Competitiveness in Asia: How Internationally Competitive National Firms and Indu.'trles Developed in East Asia, New York: Routledge. 2003.

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simultaneously develop global marketing and supply chain skills. That allows them to outsource work eventually to lower cost labor countries, such as China and Mexico, as local labor costs increase and to gain access to those markets. Their global success has major reverberations and benef ts for the local economy in tenns of jobs, know how, related companies and managerial expertise, as well as revenues for the state, and creates a virtuous cycle of private and policy success and adaptation. State intervention is quite important in the beginning of the sector, in tenns of providing protection, fnancing, and procurement, fostering investment under conditions of export orientation, technology transfer, and productive l inkages with the local economy and companies. As local producers become more successful, state intervention changes in its role to more of an institutional assistant (rather than a leader) to the sector, and becomes the leader in developing technological human and equipment capacity, and directly supporting research, development, and marketing exports. Thus, as we have demonstrated throughout the book, it is the quality of the state intervention that matters, and that quality can be nurtured and improved over time once there is political consensus. Conclusion: Why LA can Change Now: The Three Frameworks of Ideas and Economic Policy Change

In Chapter 1 , we gave three frameworks for how economic policy has changed in LA history. We can now return to these and reinforce why we believe that right now may be a propitious moment for moving towards an EA-style IP paradigm in LA supported by domestic coalitions; consensus around the ideas; and wider legitimacy in LA society. F irst, ideas refect interests. Growth rates under neoliberalism have been weak and volatile, as we saw in our statistical review. Moreover, the rates of unemployment and inequality have remained the same or worsened throughout the continent. With the liberalization of economies, the vaunted growth of neoliberalism has not been manifested on the microeconomic level with the expected benefts ofentrepreneurship, foreign investment and other sources of job creation and social mobility. The loss of protection has led to the wiping out of mainstays of the middle and business classes in LA, rather than a flowering of new opportunities. It is only the absence of a strong revival of labor unions that has left the status quo. The election of new center­ left leaders with a social agenda demonstrates that the business classes, for several elections fercely distrustful of such leaders, now are open to new ideas. While Lagos, Lula, and Kirchner represent a shift from the romanticism of previous years on the left, they also represent an important shift in LA's elite classes' perception of their own interests as including some considerations of social welfare. More importantly, in their moves to dampen down expectations, they refect an opening in LA to move towards longer political discount rates, a longer-tenn perspective, and a greater sense of pragmatism and shared sacrifice and equitable gains. In short, interests in the renewed democracies of LA have been re-defined around a center-left coalition which only seeks a modified version of neoliberalism, one that allows for moderate increases in social spending.

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This diagnosis i s buttressed b y Framework 2 's idea of historical-ideological periods punctuated by crises. In the present state, neoliberalism is everywhere under fire. The lack of job growth and business sector stagnation are just the tips of the iceberg in a groundswell of opposition that equates neoliberalism with imperialism in LA. It is no accident that the previously pro-neoliberal leaders ofthe region, including Fujimori in Peru, Gonzalez de Lozada in Bolivia, the kleptocratic democratic machine (Carlos Andres Perez, et al.) in Venezuela, Menem in Argentina, and f rst Salinas de Gortari and now Fox in Mexico, representing the apex of neoliberalism have all been resoundingly rejected. The rejection of these leaders shows that neoliberalism has not really addressed basic problems of corruption rooted in the fragmentation problems we have discussed. While that has not led to a revival of the now defunct ideas of socialism, it does show that there is a huge opening for a new paradigm. This effort to create a consensus around a center-left "soft" version of neoliberalism is failing and is bound to fail as the radical but directionless new path swathed by Hugo Chavez, inspiring to a new generation of the LA left and their external supporters, continues to prosper amidst neoliberal stasis. In practice, the exigencies of the neoli beral program have put any serious increases in social investment on the back burner, thus exposing the inherent eontradictions of the center-left alternative of the 90s. Framework 3 's emphasis on the legitimacy of a paradigm also shows important cracks in the annour of neoliberalism. Efforts to further privatize SOEs in many countries, such as Brazil and Mexico, have been blocked. Indeed, Brazilian President Lula won the support of a large majority, including the middle and upper classes, despite stating profound opposition to a Free Trade Agreement of the Americas. Whi le Venezuela remains highly polarized, the fact is that elite interests have not been able to thus far block Chavez's rhetorically anti-neoliberal populist machine from remaining in power, including popular demonstrations abetting a military overturn of the recent coup, and voices of support throughout the continent, including Bolivia. Yet, with no clear Chavista model in sight, and the Cuban Revolution de­ legitimized, there are no real alternatives presented at this crisis moment in LA economic history. In sum, we have shown that, according to our historical framework for understanding Latin American economic policy change, the time is ripe for a major shift now. The missing elements, as we saw in Chapter 1 , are a new paradigm and state leadership, from Chapter 2, state leadership centered around an IP for development. From Chapters we saw that an IP based on the EA blueprint is the most sensible type of IP for development, and much more politically attractive than the alternatives. Dependency theory, with its ideological base of anti-imperialism, has never had a winning political coalition. It directly threatens property rights and during the Cold War meant Communism to the US. Thus, a Cuban style revolution, absent a simultaneous breakdown of society over years and a major distraction of the US, seems almost impossible at this point, as even Chavez himself has admitted, both in speech and actions. In any case, Cuba has solved the problem of equity but not growth. We have to recognize that numbers rarely translate directly into power, which requires control over resources, means of coercion, and social discourse. The

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LA elite and international interests have everything to lose in such a revolution, and thus such efforts can only lead to prolonged conf ict. At the same time, the neoliberal promises of "rising tides lifting all boats" are now well worn; growth has been uneven and poorly distributed. While Chile has made laudable progress, and continues to shine with newly rising commodity prices, it stands out for the consensus reached around macroeconomic policies yet continuing h igh relative inequality. Chile's commodity-based growth simply has not translated into strong middle-class jobs. This is something brought out by the tables in the previous chapter- most manufacturing jobs are in copper and to a lesser extent, paper. Exports are commodity-based. It is interesting to note that Chile's main industries, including copper, wine, fresh fruit, f shing, and timber, are undoubtedly tied to previous state efforts to aid diversification. If such competencies were re­ oriented towards more jobs-producing industries and human capital, Chile really would be an example that LA could follow. However, the tum to the left in LA shows that in the rest of the continent, Chile no longer holds its appeal as a model to follow. Mainstream economists and international financial organizations, ignoring politics, will continue to argue that neoliberalism simply has not been properly implemented, and needs instead a further generation of reforms to ensure markets function properly. The image of citizens banging hammers on foreign banks in Argentina and the massive strikes and taking down of a President in Bolivia, the election of a Workers' Party President in Brazil, along with the rise of Hugo Chavez and his would-be imitators are all signs that no winning political coalition can be constructed around neoliberalism. Nor should we be myopic; anti-imperialism extends beyond anti­ US feelings towards all forms of foreign ownership. For example, there has been a growing backlash against the recent rise of Spanish multinationals in key sectors of the region, including banking and energy (Martin and Toral 2005). A middle path, allowing for a productive channelling of anti-imperialist sentiments, splitting the interests of the domestic from the foreign elite, and creating a strong nationalist and regionalist bond across classes, is clearly available. An EA-type IP would be attractive to elite LA domestic and selected foreign interests seeking some protection and help in order to compete on world markets. A sneaky version a la EA would reduce the ire ofthe international fnancial institutions holding external debt and would not directly threaten property rights or ban foreign multinationals. In short, an appropriate IP would ft perfectly within the present historical-ideological moment of paradigmatic crisis and opening for an alternative paradigm. An IP path appeals to both elite and popular culture for the most deeply embedded aspect of LA culture- antipathy towards imperialism. It also appeals to the more recent aspects of anti-corruption and calling for government's pro-active and accountable responses to social needs. As we have discussed, it calls for a different type of government, rather than a major increase in expenditure. Most importantly, it promises serious investments in the population and through human capital investment and increased employment, harmony between elite and mass goals, thus reducing LA tensions and political-economic volatility. It is a win-win paradigm for elites and masses in LA. In short, in promising a long-term attack on problems of growth and equity, I believe that IP can change the development trajectory of the region and fits within al l three frameworks' criteria for paradigmatic change: fits

Putting Institutions and Sectoral Policy to Work

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elite interests; can share consensual respect and adherence as directly fts the current historical-ideological moment, refecting and explaining the ongoing success of EA; has l egitimacy in appealing to mass interests in class mobility, employment, and rising standards of living; and elite interests in raising standards of living through private sector growth and national pride through increasing national independence and success. Of course, we must acknowledge that any EA model would have to be adapted to the LA region, and to the specif cities of the situation. Smaller countries, such as Costa Rica, would be better off following a niche market strategy, as they have with their pursuit of semiconductor factories. Large countries, such as Brazil, have and could follow a more vertically integrated long-term industrial policy. With good reason there is great trepidation and suspicion of private forces in LA. As we have pointed out, external forces (even the Incas as conquerors) have dominated local producers throughout the region's history. Moreover, the domestic private sector has tended to be tepid and parasitic upon state leadership. I once asked a famous Bolivian economist why the Bolivian government had not turned over the mining industry to domestic capital owners in the wake of the 1 952 Revolution. His answer was simple but revealing, "There was no Bolivian bourgeoisie" (capable of managing these mines). In other words, LA states, relying upon mining sectors, including Peru, Mexico, Venezuela, Chile, Ecuador, Colombia, and Bolivia among others, will have an ongoing reliance upon foreign capital, technology, and management, because ofthe nature of those sectors, which are high risk/investment and high reward with volatile pricing. M oreover, every country in the region still relies heavily upon agricultural exports, subject to the volati lity of world markets and the North's protection and subsidies. Even with higher prices spurred, perhaps temporarily by Chinese demand, these sectors will continue to be both volatile and held hostage by the concentrated large import markets and wholesale and retail commodity chains. M oreover, as we have discussed they simply do not lead to the middle-class employment needed for a harmonious social structure. The only choice, then, as we have spelled out, is to use the gift of these natural resources to move up the ladder into more value-added processing and diversif cation. The obstacles to diversif cation into manufacturing or even into services, then, depend upon comprehensive restructuring of f scal and f nancial policies. They depend upon re-orienting the educational and health care systems, and agrarian reform. They depend upon re-orienting and targeting FDI, as we discussed in Chapter 2. In short, political success towards external forces depends wholly on solving the problem of fragmentation in LA society. That is the only way that Latin Americans can overcome the problem of external-internal alliances (in effect external actors "picking off' internal partners) continuing to destroy the internal solidarity needed to pursue a national interest. These alliances should include neighboring LA countries so that economies of scale can be reached. With such unity, one can easily see a LA that can use its current boom in natural resources and agriculture as a springboard for development, rather than a curse and source of continuing particular pursuits. The natural targets would be to move up the value-added curve to capture more of the production process of their raw materials and agriculture. Much of the profit margin of any product is captured in the processing stage, which is why the North has a cascading tariff structure, allowing

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raw materials in at low or subsidized rates and protecting more finished goods. This is partly why Mexico is able to have an auto parts sector, but struggles to produce its own autos, and why it produces petroleum, but little in the way of final petroleum products; the other reason is that it lacks a coherent IP strategy towards moving up the ladder in the sector. LA countries need to understand that they also must develop new supply and retail networks to capture the real value of a product. When we pay $3 for a cup of coffee at Starbucks, the actual value to the coffee farmer is pennies. Therefore the only solution is for Colombia or other LA producers (or in cooperation) to develop their own retail outlets. This is the only way to move around the coyotes (middlemen) of international trade and fnance who have the power to exploit the producers of the raw materials. However, these policy actions can only occur hand-in-hand with a much deeper re-orientation of LA culture and society. The depth and complexity of social transformation needed for development is something largely ignored by academics and policymakers alike, as we see now in the cluelessness about how to create a democratic Iraq. The changes need to occur not only in social networks, but across different levels of ideas, attitudes, perspectives, norms, and roles- and as the disaster in Iraq illustrates they can not be imposed from outside. LA countries need to start thinking outside their fatalistic box. By understanding that the most important obstacles to development are internal, they can acquire a transformative and pro-active, can-do attitude. Ultimately LA societies need to be re-built around consensus, conscience and accountability. Having a democracy would not be a liability, if such a consensus existed. It would take just some example of success of the developmentalist model in LA for a demonstration effect to take place, as occurred in EA following Japan's blueprint for success. Perhaps that inspiration i s being sparked now b y Embraer o r b y Costa Rica's I T policy. The fate of the region is in its own hands.

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Index

Abu Shaif, 1 43 Acer Group (Taiwan), 1 53-4 aircraft manufacturing industry, 1 5 1 AJlende, Salvador, 22 Amsden, Alice human capital investment, 70, 7 1 , 1 34,

1 37-8 innovation policy, 92, 1 1 1 lack of long-term strategies, 79 learning/governing markets, 46 anti-trust and labor protection codes, 40 Argentina automobile industry, 1 50 economic growth, 88 financial policies, 83, 93 fiscal policies, 8 1 , 82 industrial structure, 1 05- 1 0 living standards, 8 5 macroeconomic policies, 7 2 , 74, 7 5 , 76,

78, 89 sectoral interventions, 1 1 2, 1 1 7- 1 8,

1 47-8 Argentina National Commission for Informaties (CNI), 1 48 Articulation (of economy), xvi Asian financial crisis, 50, 99- 1 00 Asia s Next Giant (Amsden), 46 authoritarianism, 3-4, 57 see also bureau-

cratic-authoritarianism automobile industry, 149-50 Barbero, Maria Ines, 1 39 Bastos, Ines, 1 35 Beers, Cees Van, 4 1 BNDES (Brazil National Development Bank), 137, 1 5 1 Brazil economic growth, 8 8 financial policies, 20, 8 3 , 84, 9 3 , 1 37 fiscal pol i c i es 20, 8 1 , 82 human capital investment. 1 38 ,

industrial structure, 1 0.5- 1 0

living standards, 85 macroeconomic policies, 72, 74, 75, 76,

78, 89 political institutions, 1 35 sectoral interventions, 20- 1 , 1 1 2, 148,

151 Brazil National Development Bank (BNDES), 1 37 Britain, 3 1 , 64, 93 bureaucracy, 1 5, 90, 95-6, 1 26, 1 28-9,

1 33-6 "bureaucratic authoritarianism", 3-4, 1 9 20 Bureaucrats in Business (World Bank),

1 40-2 business risk, socialization of, 20, 35-6, 1 44 Canada, 88, 93 Cardoso, Fernando Henrique and Enzo Faletto (historical-structural appro­ ach), 3 Casalet, Monica, 1 34�5 Castro, Fedel, 2 1 Catholic Church, 1 2, 1 4 CEPD (Council for Economic Planning and Development), Taiwan, 1 33-4 Chang, Ha-Joon, 3 1 , 55-6, 1 3 5 Chavez, Hugo, 1 55 Chile, xvi-xvii, 22-3, 1 56 CORFO 1 7 economic growth, 88 f nancial policies, 83 f scal policies, 8 1 , 82 industrial structure, 1 05-1 0 living standards, 85 macroeconomic policies, 72, 74, 75, 76, ,

78, 89 sectoral interventions, 22-3, 1 1 2, 1 42-3 China as developmentalist state, 89-90 economic performance overview, 87-9 economic reform, 90- 1

impact on world economy. 1111-89, 96-9

A n East A sian Modelfor Latin A merican Success

1 82

macroeconomic policies, 72, 74, 75, 93-4 sectoral interventions, 94-6 special economic zones ( S EZs), 9 1 and WTO, 97-8 Church, see Catholic Church Cimoli, Mario, ] 50 class-based analysis, 1 , 2 CNI (National Commission for Informatics), Argentina, 1 48 colonial period, 1 2- 1 3, 58-9 Communism, in LA, 1 9, see also Cuban

Revolution corn petition, protection from, 4 1 Competitive Advantage, The (Porter), 1 3 9 computer industry, 33, 1 53 corporate strategies, 1 3 9-40, 1 49, 1 5 1 , 1 53-4 Costa Rica, 1 5 1 -2 creoles, 1 3 , 1 4 crisis-driven change, 8 , 1 1 26, Cuban Revolution, as a model, 1 9, 1 55-6 cultural differences, 4, 29, 1 20, 1 3 5, 1 58 Cuming, Bruce, 59, 60-1 Cuyers, Ludo, 7 1 De Soto, Hernando, ix, 1 20 debt crisis, 22, 23-25, 8 3 debt service, 76 def cit/surplus, 8 1 democracy debate, 57-8 Deng Xiaoping, 90, 95---6 dependency theory, 3, 8, 26-7, 29, 44, 1 55, see also Marxist approaches development paradigms, 8, see also depend­ ency theory; neoliberalism developmentalist state, 46-7, 89-90, 1 00-2, 1 1 9-20, 1 24-5 Deyo, Federlc C., 67 dictatorships, 1 7, 1 8, 1 9-22 Dietrich, Michael, 34 Dreyer, June, 9 1 Dumont, Michel, 7 1 Dunning, John H., 45

East Asian Miracle, The (World Bank), 33, 50- 1 , 5 5-6

Economic Backwardness in Historical Per­ spective ( Gerschen kron), 3 1 economic knowledge networks, 5-7

economic modeling, 1 , 2 economic reform, 1 9, 90- 1 , 1 3 1 -2 economic structure, 1 05 - 1 1 economics of scale, 3 8 economists, mainstream approach, 1 -2, 23, 13 1 -2 EDB ( Economic Development Board), Sin­ gapore, 1 45, see also pilot agencies education investment, see human capital investment electronics industry, 1 47-8, 1 50, 1 52, 1 53 elite groups, 5-7 embedded autonomy, 1 28 Embraer, 1 5 1 employment/unemployment, 37-8, 74, 1 1 6, 1 1 7, 1 3 7-8 environmental protection, 40 ethnic differences, 63-66 EOI (export-oriented industral ization), 59-63 EPB ( Economic Planning Board), South Korea, 1 33 Evans, Peter (triple alliance), 1 7, 1 2 1 , 1 28 export-oriented industralization (EOI), 59-63 exports, 38, 6 1 , 74-5, 1 1 0- 1 1 , 1 1 2 Argentina, 1 5 0 Brazil, 20 Chile, 1 7 China, 89, 94, 98 Costa Rica, 1 5 2 South Korea, 149 factor markets, 42, 47, 1 44 Fajynzylber. Fernando, xv Faletto, Enzo, 3 FDI (foreign direct investment), 77-80, 89, 94 f nancial policies, 2 1 -3, 82-4, 92-93, 1 36-7, 145, 1 5 l , 1 52 frm-level analysis, 1 1 7- 1 9 firm strategies, 1 3 9-40, 1 49, 1 5 1 , 1 53-4 fscal policies, 24, 80-2, 96 flexible specialization, 42 Forbes ranking, 1 1 7- 1 8 foreign direct investment (FDI), 77-80, 89, 94 free trade agreements, xvi-xvii, 1 -2, 26, 5 1

Garreton, Manuel Antonio, 66 GDP per capita. 72, 73

Index gender equity, xii, xviii Gereffi, Gary, 43-44, 54-55 Gerschenkron, Aleksander, 3 1 , 92 global commodity chains, 43-4, 1 03-4 globalization, xii-xiii, 34, 43-50, 67, 1 00, 1 39, 1 5 1 -3 Governing the Market (Wade), 46-7 Grabel, Ilene, 3 1 Hachette, Dominque, 142 Haggard, Stephan, 33, 54-55 Hira, Anil class/imperialist-based analysis, I elite groups and economic policies, 6 import substituting industralization (ISI), 62, 79 interest groups, 1 2 1 LA f scal policies, 80 neoliberalism, 1 3 1 neostructuralism, 56 state-business relationship. 92 state interventions, 42, 97, 1 00 state leadership, 1 29 state-owned enterprises (SOEs), 1 40, 142, 1 43 technocrats, 2 3 historical differences argument ( E A fa­ vored), 5 8-63 historical-ideological periods, 7-8, 1 0, 1 1 colonial period ( 1 500-1 800), 1 2 1 3 I i beralism and independence ( 1 8001 870), 1 3- 1 4 economic boom ( 1 870- 1 930), 1 5- 1 6 national populism ( 1 930-1 955), 1 6- 1 9, 25 military regimes ( 1 95 5 - 1 980), 1 9-22 debt crisis and neoliberalism ( 1 980- ?), 22-4, 1 3 1-2, 1 54-5, 1 56 "historical-structural" approach, 3 human capital investment, 37-8, 42-3, 70, 95-6, 1 34, 1 45, 1 47 hyperpresidentialism, 1 35 Hyundai Group, 1 48-50 IDB (Industrial Development Bureau), Taiwan, 1 33-4, 1 3 7 ideas approaches and frameworks, 3- 1 0, 1 54-6. see also historical-ideological

frameworks coalitions, 9- 1 0, 1 2. 1 3, ) 4, ) 7. 2 5 economic crisis, I )

1 83

legitimacy, 9-1 0 policy networks, 5-7, see also political consensus import substituting industralization (lSI),

see lSI India, 3 3 , 88, 89, 93, 1 00 Indonesia, 72, 74, 88 industrial policies, 34, 40-3, 54-7, 1 0 1 --2, 1 56-8, see also specif c policies arguments against, 39-40 economies of scale, 38 education, 37-8 employment, 37-8 exports, 38, see also exports globalisation, 43, 49 historical fai lure in LA, 70- 1 infant industry, 35-6 innovation, 47-8 late industrialization, 35-6 learning, 47-8 military spillovers, 37 product cycle, 36 regional development, 3 8-9 technology, 36-7 tools, 40 industrial structure (sectoral mix), xi, 29, 1 0 5- 1 1 industrialization, literature overview, 3 1-4 industry, in LA history, 1 2, 1 4, 1 7, 1 8 inequality, 29, 85, 1 56 information technology (IT) industry, 1 , 22, 1 45 , 1 47-8, 1 53 , see also Costa Rica innovation policies, 1 1 1-1 3 , 1 22-3, see also technology development, human capital investment interest groups, 6, 7, I I , 1 7, 24, 1 2 1 internal dissension, handling of, 63- {j international trade, 74-5 , 94, 1 1 0-1 1 , see also import substituting industraliza­ tion, export-oriented industraliza­ tion, exports in age of liberalism, 1 3, 1 4 i n colonial period, 1 2 in economic boom, I S in military regimes, 22 lSI (import substituting industralization), 1 6-1 7 , 1 8, 20, 22, 25, 62, 73, 1 46 demise of, 22

Japan colonial system, 58-9 as developmentalist state, 89-90

1 84

Index

An East Asian Modelfor Latin American Success

eeonomie growth, 8 8 financial policies, 93 labor relations, 1 3 7 macroeconomic policies, 72, 74, 79 pilot agencies, 1 33 postal savings system, 1 3 6-7 sectoral interventions, 92 Japanese External Trade Organization (JETRO), 1 3 3 Johnson, Chalmers, 89, 1 25, 1 32, 1 33, 1 34, 1 3 6-7 Jomo, K. S., 56 Karl, Terry, 55 Katz, Jorge, 1 50 Katzenstein, Peter, 3 6 Korea, see South Korea Kuhn, Thomas, 7, 8 labor relations, xviii, 66-8, 1 37-8 , 1 45 Lall, Sanjaya, 47, 9 1 , 92, 1 00, 1 04, 1 1 1 landholdings, 1 2, 1 4, 1 5 Leftist approach, xi xii, 1 , 2 1 new Left governments, ix, xvii, 23, 26, 53, 68-9, 1 23, 1 55 legitimacy. see poliey legitimacy liberalism, 1 3, 2 5 living standards, 84-5 Uiders, Rolf, 1 42 macroeconomic policy, comparison of EA­ LA, 73-6 macro micro linkages, xvi xvii, 5 1 , 53 Malaysia economic growth, 8 8 ethnic differences, 64 5 financial policies, 83 fiscal policies, 8 1 , 82 industrial structure, 1 05-10 innovation policies, 1 J 2 internal dissension, 64-5 living standards, 85 macroeconomic policies, 72, 74, 75, 76, 78 New Economic Policy (NEP), 65 manufacturing, comparison of EA LA, J 06, 1 16 market failure, 34-5 Marxist approaches, xi, xix-xx, xv, 1 , 1 27, see also dependency approach Maxfield, Sylvia, 1 2 8-9

Mexico economic growth, 88 financial policies, 83, 93 fiscal policies, 8 1 , 82 industrial structure, 1 05-1 0 living standards, 85 macroeconomic policies, 72, 74, 75, 76, 78 sectoral targeting, 1 1 2, 1 1 8 - 1 9 specialized institutions, 1 34-5 military regimes, 1 9-22 Ministry oflnternational Trade and Invest­ ment (MlTI), 92, 1 25, 1 29, 1 32 3, 145, see also pilot agencies Moor, Andre de, 4 1 Moran, Theodore, xix, 30, 77-8, 79 MST (Movement of the Landless), xii multinational corporations (MNCs), 44-5, 48, 77-8, 92-3, see also specific firms NAFTA (North American Free Trade Agree­ ment), xvi-xviii, 74 79, 1 1 8 National Chiao Tung University, 1 47 national identities, 69, 1 23, see also society fragmentation national innovation systems, 47-8 national populism, 1 7 national saving and infation rates, 75-6 nationalization of industries, 1 7, 1 8 natural resources (curse), 68, 1 57-8 Nembhard, Jessica, 82-3, 84 neoliberalism, xi xiii, xv xvi, xx, 8, 23� {), 29, 53, 1 54-5, 1 56 niche market strategy, xx, 36, 4 1 2, see also Costa Rica, Singapore Nochteff, Jorge, 1 47-8 oil price boom, 2 1 openness, 75, see also exports Other Path, The (Soto), 1 20 Ownership, Location, and Internalization (OLI), 45 "path dependency", 3

Pathways from the Periphery (Haggard), 33 p i lot agencies, 1 25, 1 32-4, 145 Pinochet, Augusto, 22-3 Piore, Michael J., 42 Polanyi, Karl, 29 policy analysis, 1-2

r

policy legitimacy, 9-10, 2 1 , 23 crisis of, 1 3, 1 4, 1 5- 1 6, 1 8, 22, 26, 1 5 5 political consensus and policy networks innovation policies, 1 1 1 , 1 1 2, 1 22-3, see also technology development, human capital investment literature overview, 1 1 9-20, 1 20 \ society fragmentation, 1 26-8, see also national identities state business relationship, 5 , 1 1 , 1 24-6, 146-7, 148-50, 1 54, 1 5 7 state leadership, 3 1 , 36, 53, 1 23-5, 1 32-3, 144, 145

Political Economy ofEnergy in the Southern Cone (Hira), 42 Porter, Michael, 40, 1 39 POSCO (Pohang Iron and Steel Co.), 1 43-4 postal savings system, 1 36-7 Prebisch, Raul, 3 1 privatization, 1 42 product cycle, 32-3, 36 protection from competition, 4 1 public discourse, see policy legitimacy public expenditures, 38, 60, 70, 82, 85, 1 12 , 131 quantitative studies, 7 1 , 73 Radosevic, S , 1 03-4

Re.Jorming the State (Schamis), 142 regional clusters, xviii, 4 1 -2 , 48-9 regional developments, 38-9, 48-9 regulatory policy, 42 Right approach, xi, 1 risk, 35 Sabel, Charles F., 42 Savings 75, 9 1 Schamis, Hector, 1 42 Sclmeider, Ben Ross, 1 28 9

Second Industrial Divide, The (Piore and Sabel), 42 sectoral interventions, 4 1 , 9 1-2, 95, 1 24, 1 33-4, 1 44-�5, 1 47-8, see also industrial structure, innovation poli­ cies, sectoral targeting sectoral targeting, 1 1 3- 1 9, 1 45 world's leading sectors, 1 1 5-8 S EZs (special economic zones). 9 1 Shafer, Michael. 5 5 S h i h , Stan, 1 53

1 85

Silva, Ozires da, 1 5 1 S ingapore, 9 1 , 1 44-5 Singapore Economic Development Board (EDB), 145 Small States in World Markets (Katzen­ stein), 36 social development comparison, 8 5 society fragmentation, 1 26-8, see also national identities SOEs ( state owned enterprises), 40 1 , 9 1 , 94-5, 1 40-4, 1 5 1 Soto, Hernando de, 1 20 Southeast Asia, 6 1 2 South Korea, 58, 59-61 , 63, 1 37-7 bureaucracy, 1 35 economic growth, 88 financial policies, 82-3, 1 37 f scal policies, 8 1 , 82 industrial structure, 1 05- 1 0 innovation policies, 1 1 2 Korean war, effects of, 6 1 2 labor repression, 6 7 living standards, 85 macroeconomic policies, 72, 74, 75, 76, 78, 79 pilot agencies, 13 3 sectoral interventions, 92, 1 49-50 state-owned enterprises (SOEs), 143-4 and United States, 6 1 South Korea Economic Planning Board (EPB), 1 33 South Korea Financial Supervisory Com mission, 1 3 3 Soviet Union, 2 1 special economic zones (SEZs), 9 1 spillover effects, 32, 37, 77-8 Stallings, Barbara, 1 37 state business relationship, 1 24 5, 1 46-7, 148-50, 1 54, see also political consensus state autonomy, xiv xv state compradorial class, xii state interventions, xix, 24-5, 29-30, 3 1 , 32, 33-4, see also sectoral interventions, specif c policies, specific countries arguments against, 39-40 export facilitation, 1 5, 3 8 and global commodity chains, 43-4 governing the market, 46-7

market failure, 34-5 meuurements of, 40-3

1 86

A n East Asian Modelfor Latin A merican Success

and multinational corporations, 44-5 national innovation systems, 47, 48 by Northern countries, xviii-xix regional developments, 38-9, 48-9 state leadership, I , 3 1, 36, 53, 1 23-5, 1 3 2-3, 144, 145, see also state interventions state owned enterprises (SOEs), 40- 1 , 57,

9 1 , 94-5, 140-4, 1 5 1 summary of argument, xi Taiwan, 46, 6 1 bureaueraey, 1 35 economic growth, 88 financial policies, 1 37 firm strategies, 1 53-4 industrial structure, 1 06-1 0 labor relations, 1 38 macroeconomic policies, 72, 74, 75,

78, 79 pilot ageneies, 1 33-4 sectoral interventions, 92-3, 1 47 and United States, 59-61 , 63 Taiwan Council for Economic Planning and Development (CEPO), 1 33-4 Taiwan Industrial Development Bureau (IDB), 1 33-4, 1 3 7 Taiwan National University, 1 34 tax revenue, 8 1 , 96 technocracy, 23, 95 -6, 1 26, 1 33-4

technology development, 36-7 lack of, 70 and national innovation systems, 47, 48 state support of, 1 24, 1 47, 1 50, 1 5 1 Thailand, 88 Tokyo Law School, 1 34 transactions cost reduction, 42-3 United States computer industry, 33 and Cuba, 21 economic growth, 88 foreign policies, 59--63 sectoral targeting, 1 1 5- 1 6 state interventions, 3 0 state owned banks, 93 universities, 1 34, 147 Vernon, Raymond, 32-3 Vietnam, 99- 1 00 Vietnam War, 6 1 2 Wade, Robert, 46, 1 3 3-4, 1 37, 1 47 Washington Consensus, 1 3 1 World Bank reports, 33, 50, 55--6, 1 40-2, see also Bureaucrats in Business, East Asian Miracle Zapatistas, xii