All of the following developments occurred in the consumer goods market during the late 1900s EXCEPT

8.1 Introduction

Many scholars have attempted to fit the East Asian industrialization experience into what is often called the ‘flying geese pattern’ of development. Japan in this view was the leader and innovator and the other economies of East Asia followed the leader. When this model was applied to all of East and Southeast Asia, however, it fitted poorly. Hong Kong and Singapore followed a much more laissez-faire approach, and while many Southeast Asian economies at times attempted an approach similar to that of Japan, the results were often failures. Korea and Taiwan, however, were colonies of Japan (from 1910 to 1945 and 1895 to 1945 respectively) and there is no doubt that their post-1960 industrial development policies and the nature of the associated supporting institutions were influenced by the Japanese experience, probably more so in Korea than Taiwan. Korea’s post-independence leadership, for the most part, grew up under Japanese rule, while Taiwan’s political leadership after 1945 came from the Chinese mainland.1

When Japan initiated its industrialization drive, however, it faced a different context from that facing Korea and Taiwan a half-century or more later. Japan was a true pioneer in that it was the first non-European/North American economy to achieve sustained industrialization and modern economic growth. In a broader sense, of course, Japan was a follower country that learned from the first pioneers of industrialization, notably England. The context Japan faced in the latter decades of the nineteenth century and the first decades of the twentieth, however, was very different from the context that faced England and the United States, although it had more in common with Germany.2

When Japan began to modernize its economy, it faced a world dominated by British free trade views and practices. Japan was forced to accept those views in the treaty that opened up the economy—mercantilist policies pushing exports and tightly restricting imports were impossible until much later. Japan’s economy was influenced by the First World War, which cut off Asia from most trade with Europe. There followed a decade of comparative prosperity in much of the industrialized world, which then turned into the Great Depression of the 1930s and the Second World War. Facing a similar world situation after 1914, many economies in South America began an industrialization drive based heavily on import substitution behind high trade barriers. Japan followed a very different path, one that before 1914 took advantage of the world’s open trading system, followed then by the trade protection provided by the First World War, but done without recourse to high tariffs and other trade restrictions. Japan changed course during the trade wars of the 1930s and this change was further reinforced by the country’s decision to become a major colonial power in Asia with the help of the Japanese military.

The international context in which Korea and Taiwan began their industrial drive was different from that facing Japan earlier, in a number of ways. To begin with, a quarter-century had passed from the time when Japanese industrial development was governed by and then destroyed by war. During that time there had been steady industrial expansion and technological innovation, particularly in North America. The backlog of untapped technology available to newly industrialized nations was thus substantially larger than it was in the mid-1930s. Japan itself took advantage of this backlog and it is likely that it accounts for a significant part of the rapid growth spurt that Japan experienced between recovery from the Second World War, usually dated as 1953, and its slowdown to more normal high-income country growth rates in 1973. The backlog of technology available to Korea and Taiwan had accumulated not just for twenty-five years, but for more than half a century, and this was a major reason why industrialization in those two economies, once it started, proceeded at double-digit growth rates for three decades.

Korean and Taiwan’s industrialization, unlike the earlier Japanese one, did not face a Great Depression and they could export into the wide-open economy of the United States during their first growth spurt. Also unlike Japan, they were not subject to a treaty prohibiting them from raising protective barriers for their domestic markets. Mercantilist policies promoting exports and limiting imports were possible in Korea and Taiwan in ways that they had not been in Japan before the Great Depression, because of Japan’s treaty obligations on tariffs until 1899 and the implicit rules of the inter-war world economy thereafter. Nor did Korea and Taiwan face anything remotely comparable to the trade wars and build-up to all-out war in Europe and Asia that characterized the 1930s. South Korea and Taiwan, however, controlled territories that were determined by the outcomes of post-1945 civil wars, civil wars that to this day have not been formally ended. Industrialization policies in both economies were as a result heavily influenced by the possibility that economic failure could lead to their being swallowed up by the opposing sides in their civil wars.

In what follows we begin with a discussion of the Japanese industrialization experience before the Second World War. This is followed by an analysis of the industrialization of Korea and Taiwan after the Second World War.

8.2 Japan

Unique among emerging peripheral countries in the twentieth century, Japan began its industrial development in the late 1800s and successfully maintained the momentum over the following decades to become fully industrialized in the first half of the next century.3 This transition is especially remarkable given the country’s starting point: politically fragmented; agrarian; reliant on handicrafts and traditional techniques for manufacturing; and relatively isolated from international markets. By the early 1900s, however, the country had an integrated domestic market connected by railroads; was a leading exporter of textiles and light manufactures; and had burgeoning modern sectors in metal processing, machinery, and chemicals. Institutional and political change was also vigorous over this period, with the country adopting foreign practices like central banking, commercial and civil codes, the gold standard, and an overseas empire following wars with China and Russia.

While the contours of Japan’s transition from a traditional to an industrial economy have been studied in great detail, identifying turning points in the process remains an active subject of scholarship.4 Moreover, there is revived interest in the factors contributing to the country’s successful industrial performance and their relative importance.5 This chapter adds to the literature by providing an overview of Japan’s pre-war economy, but focusing on the changes to its industrial structure and other features coinciding with the country’s development.

8.2.1 Early Modern Period and Historical Background

The historical context of modern Japanese economic growth is well known. Following the opening of the country in the mid-1800s, the Tokugawa and Meiji governments rapidly adopted foreign technologies for national defence and to ‘catch up’ on leading industrial nations like the United Kingdom and United States.6 Political centralization via institutional reform, infrastructure investment, and military conscription by the Tokyo-based Meiji government contrasted with the semi-autonomy exercised by domains in the Tokugawa period, facilitating the spread of literacy, legal institutions, and finance.7 Universal primary education, funded by local authorities, was announced in 1872 and made compulsory in 1890, and institutes were established to disseminate agricultural and technical best practices.8 The 1873 tax and land reform, which also discontinued samurai stipends in lieu of government bonds, provided a more reliable public revenue stream to finance the modernization programme as well as model enterprises in engineering, arsenals, shipbuilding, and textile production.9 However, only after the Matsukata deflation in the early 1880s did public finances stabilize, which followed a period of currency debasement and experimentation with a national banking system.10 Major policies pursued by successive administrations included promulgating a constitution with limited suffrage; colonization of Taiwan and Korea; and renegotiating treaties with Western nations on extra-territoriality and tariff autonomy.

Straitened finances in the late 1870s resulting from trade deficits, modernization costs, and civil unrest suppression forced the government to privatize many of its model enterprises, providing a fillip to the private sector. Entrepreneurs like Shibusawa Eiichi and the zaibatsu conglomerates of Mitsui and Mitsubishi led the expansion of industry and technology, while many ex-samurai used their commutation bonds to invest in the nascent banking sector.11 These banks and other intermediaries in turn provided local sources of financing for modern enterprises.12 Private business also benefited from public investment in infrastructure and industries, with the government’s share of capital investment averaging 30 to 40 per cent of the national total between the late 1890s and the First World War, at which point the country had emerged as an industrial economy.13

8.2.2 Timing of Japan’s Industrialization

To date the onset of Japanese industrialization, scholars have used various metrics including growth rates for national output, industrial value added, and capital formation.14 Based on these measures, Japan entered its ‘modern economic growth’ period in the early 1880s, the 1890s, or the early 1900s, respectively.15 All these series have strengths and weaknesses, but share the objective of timing significant shifts in Japan’s economic performance. National and per capita output by themselves abstract away from the composition of production, while industrial value added and capital formation growth rates are both relative measures that do not adjust for developing countries’ varying initial stocks of industrial output and investment, especially when compared with leading economies that made their transition in an earlier, but more developmentally similar, period of time.

An alternative approach, useful for marking the country’s full-fledged arrival to industrialized status as opposed to its take-off, would be to compare industry’s share of output in Japan and in leading economies at a time when the latter would be recognized as being industrialized.16 For example, using the United States as reference, its average share of manufacturing and construction output in total output between 1895 and 1914 was 11.8 per cent. Japan reached a similar stage of industrial performance in 1897. Similarly, Japan’s share of machinery and transport equipment in total manufacturing exceeded 5 per cent in 1907, which was the average for the United States in the pre-First World War period (Fig. 8.1).17

Fig. 8.1.

United States and Japanese industry shares, 1885–1914

Sources: Wattenberg (1976), series F3 and P318-374 in constant 1913 dollars; Ohkawa, Takamatsu, and Yamamoto (1974), Table 25, and Shinohara (1972), Table 2, in constant 1934–6 yen. All series reported as five-year moving averages.

This focus on the decade spanning 1897–1907 coincides with existing studies and highlights a familiar pattern of industrial development. Heavy industries like machinery manufacturing in Japan followed the same trajectory as the United States, with the two countries shifting toward more capital and resource intensive sectors over the sixty years leading up to the 1930s. In the case of the United States, the shift was from processed food products and textiles to lumber products and wood furniture, with a dramatic increase in the machinery output share in the early 1910s coinciding with the First World War. Similarly, Japanese food processing declined relative to higher-value products like silk and cotton textiles. At the same time, stone and mineral processing and chemical manufacturing grew steadily, with the former and machinery accelerating in trend starting in the early 1900s.18

While Japan remained far behind the United States in terms of the absolute and relative output of heavy sectors through the pre-Second World War period, its industrial structure increasingly resembled those of leading countries rather than those of peripheral ones. This is true not only in terms of the share of output among industrial sectors, but also in terms of the relative speed with which they grew to economic importance. In particular, technological diffusion in manufacturing was faster in Japan than the United States in the late nineteenth century, which is striking given the former’s much lower initial per capita output.19 To explain these dynamics, the remainder of this section presents evidence regarding the contributions of trade, investment, and shocks to both the domestic and global economies.

8.2.3 The Impact of Trade

Although not colonized, Japan was subjected to numerous predations on its sovereignty, especially in its economic relations.20 Besides extra-territorial privileges for foreigners residing in its eight treaty ports, Japan relinquished tariff autonomy, opening its domestic market to foreign manufactures and reducing potential revenues from its exports.21 Import tariffs averaged 3.75 per cent between 1868 and 1898, but after regaining autonomy the following year they rose to an average of 7.65 per cent up until the eve of the First World War.22 Low barriers meant that trade grew rapidly over the Meiji period, averaging a quarter of national output in the early 1900s and increasing thereafter.

Given its undeveloped manufacturing sectors, Japan initially ran persistent trade deficits as foreign firms gained market share, especially in capital equipment.23 This changed, however, as the economy shifted towards higher-value-added goods, which was reflected in the composition of Japanese trade. As shown in Table 8.1, starting from the Meiji period and up until the Second World War there was a marked decline in processed food products exports, while textiles grew to become the top foreign exchange earner for virtually the entire half-century. Machinery exports also increased, albeit more modestly. The pattern for imports is more ambiguous: textiles were steadily replaced by food products in the last two decades before the turn of the century, and then by stone and mineral products as well as miscellaneous commodities afterward.24 This suggests that while domestic industries were producing more valuable goods for export at the inter-sectoral level, demand within the economy shifted from household consumption toward intermediate products used by firms. However, given the growth of Japanese machinery and its relatively constant import share over this period, the country was moderately successful in substituting away from foreign capital goods.

Table 8.1.

Disaggregated trade shares by manufacturing sector, 1880–1930

Source: Japan Statistical Association (1987), Table 10-2-a in current yen. All series reported as five-year moving averages.

This movement into capital-intensive, higher-value-added production is illustrated by the two major sectors of textiles and metal processing. Since trade data are available at a more detailed level than those reported for industrial output, one can examine shifts in domestic demand and supply of traded goods to infer broader structural change among industries and the national economy. For instance, Table 8.2 shows trends for the three categories of textiles, which indicate that exports moved away from yarn and thread toward finished cloth between the 1870s and the Second World War. The change in shares was particularly rapid in the two decades prior to 1900, coinciding with the period when Japan’s share of manufacturing in output matched that of the United States. After 1900, the third category of clothing and accessories began to grow, although the overall contribution remained in the single digits for most of the pre-war period.

Table 8.2.

Disaggregated trade shares in textiles and metal goods, 1880–1930

Source: Japan Statistical Association (1987), Table 10-2-a in current yen. All series reported as five-year moving averages.

For the heavier industries of metal goods and processing, the three categories of metal ores, metalworking, and machinery show a similar pattern of increasing value added over time. As Table 8.2 shows, the export share for machinery rose gradually in the 1880s before a rapid increase in the late 1910s, mirroring large decreases in ore exports in the same years. Import trends are less clear, with metal ores having high shares in the 1870s, then falling in the next two decades before rising thereafter. In contrast, machinery imports were highest in the 1880s and 1890s before declining until the 1920s. The First World War boosted domestic machinery exports, but this was a continuation of a rising trend during the previous decade. The war’s impact on imported metal manufactures is also apparent, but much shorter lived.

Taken together, while capital- and energy-intensive sectors like machinery were important for Japan’s sustained development into a mature industrial economy, the country relied on exports of its lighter manufactures to industrialize within the global economy. Furthermore, the decomposition of textiles and metal goods trade indicates that Japan moved away from import-substitution manufacturing to internationally competitive exports around the turn of the century. For textiles, the value of raw material imports exceeded that of finished cloth and clothing in the late 1890s, while for metal goods the change occurred in the 1910s. As discussed later in the chapter, both import and export shares by trade partner region also remained largely constant during this period, indicating the country’s competitive success in these markets.

8.2.4 Domestic Factors

Shifts in industrial and trade composition are consistent with domestic trends in capital investment, firm size, and labour. Japanese firms grew in capitalization and workers, particularly in manufacturing. In terms of overall capital shares, there appear to be three distinct phases: before 1900, there was major investment in the transport and manufacturing sectors, led by railroads and textiles; high growth in commercial services like banking and trade in the early 1900s; and a resurgence of manufacturing after 1910, led by heavier industries like metal processing and machinery.25 Average firm size also indicates the concentration of capital in the transport and mining sectors, while both manufacturing and commerce grew in firm numbers and capitalization.

The distribution of the labour force also changed during this period, with the share engaged in agriculture steadily decreasing between 1880 and 1920 in favour of manufacturing.26 A comparison with the increase in manufacturing output indicates rising labour productivity in industrial sectors, maybe due to the greater availability of capital, which started from a low base and remained below levels in more advanced economies.27 Lower Japanese industrial productivity, however, was mitigated by lower pay, with a large wage differential between male and female workers, and labour repression in the form of legislation curtailing unionization and strikes.28

8.2.5 Changing World Conditions

Shifts in Japanese industrial structure may have been partly due to conditions outside the control of domestic policy-makers. While Japan’s involvement in the global economy and relatively free trade were externally imposed, exports (and to a lesser extent, capital inflows) helped finance its modernization programme and build the capacity to produce more sophisticated goods.29 The unexpected victories in the Sino- and Russo-Japanese wars boosted domestic investment in related sectors and increased access to nearby markets.30 Reparations paid by China in the 1895 Treaty of Shimonoseki enabled Japan to finance its adoption of the gold standard, while the integration of Taiwan, Korea, and parts of northern China provided primary products to supply its heavy industries and feed the population.31

Similarly, the First World War was fortuitous for the Japanese economy in leaving the country physically unscarred while providing opportunities for its manufacturers and traders. European withdrawal from East Asian operations during the war meant Japan could readily substitute for shipping services and exports to the region, including India, Southeast Asia, and Oceania.32 Shown in Table 8.3, Japanese exports to its colonies and the rest of Asia rose quickly in the 1910s, eclipsing those to industrial markets in Europe and North America shortly after. Japanese imports also shifted toward the Asia-Pacific as its economy took in greater quantities of raw materials, continuing the trend from the turn of the century. As a share of total output, manufacturing nearly trebled over the 1910s, exceeding even American growth rates. The resumption of international peace tempered export growth, with its share of national output not returning to the pre-First World War high until after the Second World War. Higher machinery exports, however, continued and demand for imported metal ores resumed after a downturn in the 1920s.

Table 8.3.

Export and import shares by region, 1880–1940

a Rest of Asia includes China, Hong Kong, Asiatic Russia, Southeast Asia, and other parts of Asia; Korea, Taiwan, and northern China (Kwantung and Manchuria) separately reported over time.

Source: Yamazawa and Yamamoto (1979), Tables 13 and 14 in current yen. All series reported in five-year moving averages.

Unlike industrialized economies in the inter-war period, Japan’s experience of the 1920s and 1930s was neither roaring nor depressed. In March 1920, the Japanese stock market fell sharply due to investor uncertainty about post-First World War growth and was immediately followed in April by a series of bank runs.33 The rest of the decade was punctuated by the 1923 Kanto earthquake, which killed an estimated 100,000 to 140,000 people in the greater Tokyo region and destroyed large numbers of industrial facilities and residences; and a financial panic in 1927 stemming from a reconstruction boom, bad loans, and bank failures. Compounding the problems was government interest in re-adopting the gold standard (abandoned in 1916), which led to fiscal austerity and tighter monetary policies.34

Recovery began in the early 1930s, in part due to the dramatic expansion of exports and industrial production in the first half of the decade. While Japan’s military aggression in China was the most obvious feature of this period, the economy also experienced significant changes, starting with the depreciation of the yen in 1932 to 42 per cent of its value in the previous year.35 This depreciation came months after the government reinstated an embargo on gold exports, promoting import substitution and industrial rationalization, and was followed by looser monetary policy and higher military and public works spending. While the value of trade doubled between 1932 and 1936, the volume of exports increased sixfold compared to imports, though the overall trade balance remained in slight deficit over these years. Exacerbating the deficit were the shift in textiles from silk to cotton goods, since the latter required raw materials imported from abroad; the need for metal ores and fuel for heavy industries; and the rise in protectionism against Japanese products.36 Nevertheless, the patterns of economic restructuring and composition of trade persisted, in that textiles remained important but were steadily replaced by higher-value-added metal products and machinery. Hostilities with China and later the United States meant that capital-intensive sectors supporting the war effort received considerable investment at the expense of consumption, with significant government intervention to rationalize production.

8.3 Korea and Taiwan

Japan surrendered its control of Korea in 1945 and the southern half of the Korean peninsula regained its independence in 1948 when the brief US occupation came to an end. War between the north and south broke out in June 1950 and continued for three years. During that time Seoul and Pyongyang and most other cities on the peninsula were reduced to rubble. Most of the physical infrastructure built by the Japanese colonial administration prior to 1945 was also destroyed. Most Japanese-built industries were in the north, as were what few mines existed on the peninsula. The south was cut off from these even before they were destroyed during the war. What South Korea inherited from the Japanese colonial period was mostly some human capital resulting from the Japanese colonial education system and some experience working in enterprises, many of which were owned and managed at the upper levels by Japanese. The Japanese colonial education system, for all of its inequities and its emphasis on the Japanese language, together with Korea’s traditional high Confucian value placed on education, clearly gave the nation a stronger human capital base than that found in most low-income countries in the early 1950s. This base made it possible at the high end as early as the 1960s to send thousands of students to top universities abroad for advanced degrees in fields such as engineering and the natural sciences. At home it made possible the rapid expansion of an education system of steadily increasing quality at all levels.

There have been suggestions that import-substituting industrialization occurred during the period 1945–62, prior to the reforms that generated Korea’s high-growth decades, and that this laid the foundation for what followed. Hyundai Corporation, for example, was founded in 1947 and did a great deal of construction work rebuilding what war had destroyed. Samsung began even earlier (in 1938) as a small export company in Taegu, selling dried fish and vegetables. Daewoo, however, was not founded until 1967. Thus much of the experience gained during the 1945–62 period was in business, but not particularly in starting and operating industrial enterprises. Nevertheless there were workers and even a few lower-level managers who had acquired experience in the few manufacturing establishments that did exist in the south before the Korean War, and others with experience in the north who migrated south at partition or during the war.

There were some modern food-processing and textile mills and a few other light industries, but the total value of manufacturing value added as late as 1961 was only 8 per cent of GDP. There were also traditional village handicrafts and food processing, but there is little data on these and no reason to think that their activities played a role in the development of modern manufacturing. There were virtually no exports of manufactures and very few exports of any kind, while imports were mostly financed with US aid. Thus there was some experience gained by running and working in industrial establishments but the total manufacturing workforce as late as 1963 was only 610,000 and that was mostly unskilled labour. The Korean chaebol and many other businesses would soon demonstrate that they could build and operate a much larger and more complex industrial economy, but the experience most of them brought from this earlier period was experience in how to do business, to buy and sell for a profit, and to mobilize construction crews.37

Taiwan did not suffer the same amount of destruction of its physical infrastructure, although destruction during the Second World War from Allied bombing was considerable. The years from 1949 until 1960 were mostly dominated by the retreat of the Kuomintang from the Chinese mainland, and then the settlement of 1.6 million mainlanders that accompanied that retreat. As in the case of Korea, most of the cost of imports was paid for by US foreign aid, and the NT$, like the Korean won, was seriously overvalued. Installed electric power capacity in 1960 was 260 megawatts, up from 61.5 megawatts in 1954. Manufacturing did grow rapidly after 1952, averaging 16 per cent per year, but from a tiny base, led by sugar, canned pineapples, alcoholic beverages, cement, cotton yarn, and cloth (Economic Planning Council, 1974). There were a few industrialists, notably those from the state-run China Petroleum Corporation plus a few private entrepreneurs who had joined the retreat of the Kuomintang government to Taiwan, but most of the business people were local Taiwanese, some of whom may have gained some relevant experience during the Japanese colonial period. All of these firms were very small in scale and that remained true for some time after the reform period began.

Taiwan’s change in policies beginning in 1959–60, which led to the manufacturing and export boom of the 1960s and after, was driven by a number of considerations. Some of these were similar to what Korea would face two or three years later, but the Taiwanese change was more complex. There was no change in government in Taiwan; the Kuomintang and Chiang Kai-shek were in charge before, during and after the changes. The government economic officials who had come from the Chinese mainland were mostly from the state enterprise sector and many were imbued with a state-led planning model of growth that emphasized import substitution. The main changes in policy that ultimately had the most influence were those dealing with improving incentives for the private sector, unifying the multiple exchange rates then in force, reforming the banking system, and introducing measures to increase exports. The motivation for this last point was the desire to become less dependent on US aid. No one at the time, however, had any idea of how this last goal would come to dominate all of the others. And it was immediately apparent that exports mainly meant the export of manufactures. Taiwan had few minerals to speak of, and land reform along with other measures had reduced rice exports, a major export during the colonial period, to 3 per cent of total exports by 1960.

Thus a whole series of policies were introduced, and some of them, such as the devaluation of the exchange rate, began before 1960. In addition there were import tax rebates, low-interest loans for exporters, Export Processing Zones, and the ‘Statute for Encouraging Investment’. This latter measure included everything from tax deductions for exporters to easing the then difficult process of obtaining land for manufacturing establishments. The export-processing law was not in place until 1965 but many of the other changes were implemented almost immediately.38

The changes in policy in Korea were if anything even more abrupt. US pressure did lead to a semblance of civilian democratic rule, but it also greatly reinforced the Korean government’s desire to become less dependent on US aid. Even more clearly than in the case of Taiwan, increasing exports meant manufactured exports. Land reform in Korea had led the former rice surplus to be consumed domestically, Korea did not have a semi-tropical climate that could grow sugar and pineapples, and there were no minerals in the southern part of the Korean peninsula. That left only manufactures and Korea began to promote the export of manufactures with a series of measures that will be described in the next section. Korea also introduced banking and interest rate reform and a variety of other economic reform measures.

The governments of both Korea and Taiwan thus reached a decision to fundamentally change the direction of their economic development policies at roughly the same time (Taiwan a bit earlier) and for many of the same reasons. Both wanted to reduce their dependence on US aid. Both had few natural resources or agricultural products that could increase exports sufficiently to accomplish this goal of reduced dependence. It is also the case that both had experienced four to five decades of Japanese colonial rule. While Korea deeply resented this period and Taiwan did not, they both saw what Japan had accomplished decades earlier with a policy of industrialization that had manufactured exports as a major component. Finally, both understood that they had to create a more modern and efficient economy and society if their governments, and even their states, were to survive. It was therefore the political logic of the situation they found themselves in that led Korea and Taiwan to pick the development strategy that they then implemented. It was certainly not the dominant paradigm of development economists at the time.

8.3.1 Export-Led Industrialization: Korea, the First Phase

The changes in policy that led to the boom in manufactured exports and the accelerated growth of manufacturing were similar in both Korea and Taiwan, although there were differences in the specifics. The first key characteristic that the reforms had in common was the fact that both economies began their export push with a major devaluation. The second was that neither country pursued a broad liberalization of foreign trade. Their policies were geared to the promotion of exports through specific interventions that would overcome the many barriers to exporting that previously existed. Imports and the use of foreign exchange remained tightly restricted. Import substitution for a wide range of industrial sectors remained in place.

Devaluation of the won and the NT dollar came first. The changes in the exchange rate were dramatic. The NT$ lost half of its value relative to the US dollar, and the Korean won lost two-thirds of its value relative to the US dollar. Both maintained this level of devaluation through the 1960s and most of the 1970s. Neither the overvalued nor the undervalued exchange rate should be thought of as equilibrium rates. In addition to that, both systems remained riddled with state interventions in their international commerce on both the import and export side. The exchange rate that resulted from the devaluations of the late 1950s and early 1960s was in a sense undervalued and it remained that way through the 1960s and 1970s. Undervalued in this context, however, only means that both Korea and Taiwan probably could have promoted exports with a less pronounced devaluation. It was some time (the mid-1980s) before either economy could be said to be in a balance of payments equilibrium and at that point both economies experienced revaluation vis-à-vis the US dollar.

Given the numerous state interventions in international trade in both Taiwan and Korea, it is perhaps surprising that some analysts have argued that basically these two economies ‘got their prices right’: that is, they recreated what amounted to free market prices in a very un-free market environment. This argument was made in the book on Korea by Frank, Kim, and Westphal (1975) that was part of a set of studies on foreign trade regimes and economic development.39 The alternative argument, made notably by Alice Amsden (1991), was that Korea deliberately ‘got the prices wrong’—that is, Korea used trade barriers and other measures to ensure that infant industries, notably in the heavy industry sector, were protected from international competition and received prices well above world market prices for those products.

Frank, Kim, and Westphal’s conclusion was based on a careful calculation of the effective rate of protection on a wide range of Korean products. Given the number of export subsidies and trade restrictions in Korea, this was a formidable undertaking. Their primary concern was to determine whether all of these restrictions and subsidies led to an efficient or inefficient allocation of resources for economic development. Since Korea’s overall economic performance and its performance in industry in particular, during this period and the period that followed, involved very high growth rates, their conclusion that these restrictions and subsidies led to a relatively efficient outcome is no doubt correct. Their implicit argument that trade interventions produced a domestic price structure that was similar enough to the world price structure to produce a similar outcome is more questionable. There is not room to address their full analysis here, but other data developed for a different purpose were published around the same time.

As part of the early efforts to calculate the purchasing power parity GDP of various countries, the UN compared the prices in Korea with world (basically US) prices for 103 sectors (Fig. 8.2). As the figure makes clear, the domestic prices of roughly two-thirds of the tradable products listed had domestic prices below, and often far below, world prices. The commodities at that end of the spectrum included virtually all clothing items and all shoe categories, with PPP exchange rates often below 200 won/$1. At the other end of the spectrum were passenger automobiles (761 won/$1), ships and boats (519 won/$1), communications equipment (543 won/$1), construction machinery (387 won/$1), and refrigerators and freezers (980 won/$1). Alice Amsden’s research focused particularly on the steel industry. Steel is not in the list because it is an intermediate product and purchasing power parity calculations use only final demand consumption and investment products, but steel was highly protected at this time. Many of these highly protected sectors became the focus of the Korean Heavy and Chemical Industry Drive of the 1970s and many of these highly protected sectors by the 1980s were a major component of Korean exports and no longer required protection.

Fig. 8.2.

Sector PPP per dollar for Korean tradable sectors, 1970

Note: The official won/US$ exchange rate in December 1970 was 316.65 won/US$1.00 and the rate in December 1969 was 304.45 won/US$1.00. Source: Kravis, Heston, and Summers (1978), pp. 146–52.

This suggests that what Korea was pursuing was a classic infant industry strategy, where the government provided protection for industries in the learning phase but expected them to bring their costs down steadily and become exporters.

There was a major change in Korea’s approach to industrial development in the 1970s. Government interventions in the 1960s were generally designed to help all exporters. The government did not target particular exporting firms or exporting industries. Most of the subsidies were available to anyone who met the criteria. This approach changed in a dramatic way with the Heavy and Chemical Industry Drive of the 1970s.40 That drive was initiated by President Park, who empowered a government official, Oh Won Chol, to form a Blue House committee of government officials to draw up a plan for a drive by Korea to promote a range of major heavy industrial products, beginning with steel, shipbuilding, certain types of machinery, petrochemicals, and other chemicals. It was at that point that the government went to individual companies, typically the large chaebol such as Hyundai and Daewoo, and asked them to take on the task of developing one of these industries.

The incentives to do so were considerable. The government had already decided to provide much of the related infrastructure through the construction of a heavy industry industrial park, loans at below market rates were available, and in many cases the chaebol were given temporary monopolies over the domestic market for the particular item. Added to specific support measures was the general proposition that, given the active role played by government in directing and controlling the economy, companies wanted and needed to be seen as cooperative by that government. Thus government industrial policy decisions during the 1960s and 1970s were made mostly using technocratic criteria. That was to change as the country moved beyond the 1970s.

The performance of Korean manufacturing throughout the 1960s and 1970s was impressive by any standard. GDP grew at 9.2 per cent per year (1979/1961) while manufacturing grew at 17.9 per cent a year and the share of manufacturing in GDP rose from 13.5 per cent in 1961 to 27.7 per cent in 1979. Total exports from Korea in nominal US dollars grew at 42.7 per cent a year (1979/1964) and the share of manufactures in these exports rose from 55 per cent in 1964 to 89.9 per cent in 1979 (Table 8.4). The US market took 29 per cent of these exports in 1979, the Japanese market took 22.3 per cent, and the next largest economy, Germany, took only 5.6 per cent.

Sources: Economic Planning Board (1986), pp. 227–8; Economic Planning Board (1987), pp. 213–14; and National Statistical Office (1993), pp. 250–1.

There were also rapid and large changes in the structure of industry and exports (Fig. 8.3). The producer goods industry surpassed the consumer goods industry by the late 1970s and exports of machinery and transport equipment surpassed those of the more labour-intensive consumer industries. The dominance of machinery and transport equipment exports increased further in the 1980s and beyond.

Fig. 8.3.

Korea: the share of producer and consumer goods industries (per cent)

Note: The data up through 1979 are for light and heavy industry and only after that are derived from data on producer and consumer goods industries. Sources: Economic Planning Board (1980), p. 281 and (1986), p. 104.

8.3.2 Industrial Development in Taiwan, 1960–79

Taiwan’s manufacturing experience in the 1960s had many features in common with Korea, some of which, notably the devaluation of the currency and unification of the multiple exchange rates, have already been discussed.41 Taiwan put up high tariff walls on products mainly produced for the domestic market and introduced a variety of subsidies and other incentives for exporters. The motive of the government was to earn foreign exchange. Any firm that could contribute to that end was given access to the various export support measures. Taiwan made somewhat greater use of Export Processing Zones, but in 1971 all of the zones together accounted for only 7.9 per cent of total exports; twenty years later that share had fallen to 5.2 per cent. The real value of such zones is to provide lessons in how to create a supporting environment for private exporting firms in the country at large, and they probably played that role in Taiwan.

Like in Korea, Taiwanese exporting industrial firms mainly produced labour-intensive products such as shoes, textiles, and garments. Most were very small in these early years. In 1974 there were 111 ‘big business groups’ with an average of seven firms in each group but with an average employment of only a little over 300 per firm. These business groups were the larger economic organizations on the island. There were over 25,000 registered factories on Taiwan in the late 1960s, most of them quite small. However, many and perhaps most of these factories were not completely autonomous enterprises. Most were subcontractors to a central enterprise or to several enterprises that would assemble the various components into a product that could be exported.

Taiwan began to move beyond labour-intensive consumer manufactures at much the same time as Korea began its Heavy and Chemical Industry Drive. This heavy industry push in the 1970s was called the ‘Ten Major Development Projects’. Petrochemicals were a priority, as was steel. Machinery and electronics remained mostly in the hands of small private enterprises. All of these government efforts in the heavy industry sector involved the establishment or expansion of state-owned enterprises. The China Petroleum Corporation, which had been founded on the mainland but had moved to Taiwan, was given a monopoly over upstream naphtha cracking plants and the corporation built two large plants in 1975 and 1978. The government also created two new state-owned enterprises, the China Petrochemical Development Corporation and Chung-Tai Chemicals, to produce mid-stream petrochemical products. There were also private firms in the sector, mainly involving mid-stream synthetic fibres, but 43 per cent of all investment in petrochemicals went to state-owned firms. Efforts to develop a shipbuilding industry were less effective. A state enterprise, the Taiwan Shipbuilding Corporation, already existed but could only build 100,000 ton cargo ships. The goal was to become a major producer of oil tankers of several hundred thousand tons and to that end the government provided 45 per cent of the investment in a new state enterprise, the China Shipbuilding Corporation, with the rest provided by foreign investors. Despite a variety of subsidies provided by the government, however, the China Shipbuilding Corporation never became internationally competitive. Korea’s shipbuilding effort ran into similar head winds in the late 1970s, but the Korean government made a decision to provide what amounted to subsidies to companies that imported petroleum into Korea on Korean-made tankers. That saved Hyundai, the builder of the first supertankers, and Hyundai and Korea went on to become one of the largest shipbuilding countries in the world. A similar measure by Taiwan (to persuade ship owners flying the Chinese Nationalist Flag to buy Taiwanese-made ships) was not successful.

The Taiwanese government also made efforts to build an automobile industry to replace the small-scale producing units that already existed from the late 1960s, but which were only one step up from the assembly of imported parts that constituted the automobile sector in so many developing countries (there was a 60 per cent local content requirement in the Taiwanese case, beginning in 1965). Unlike Korea, Taiwan never became a producer of an internationally competitive product. These efforts in Taiwan did, however, produce an internationally competitive automobile parts sector. Automobile parts, in contrast with name brand complete automobiles, probably fitted the then small scale of most manufacturers on the island. In addition, the parts sector was largely private and producers either became efficient or went out of business.

The impact of these changes on the structure of Taiwan’s industrial sector and its exports was rapid. By the late 1970s the share of machinery and transport equipment plus chemicals and petroleum far surpassed the share of textiles and apparel, which had begun to decline (Table 8.5). The shift in the structure of exports to the producer goods sector was not quite as rapid as in Korea, but by the mid-1980s these sectors combined had surpassed the share of the consumer goods sectors combined (Table 8.6).

Table 8.5.

Taiwanese shares of industrial sectors in industry and mining (per cent)

Note: These shares are based on the weights used to construct Taiwan’s industrial output index.

Source: Directorate General of Budget, Accounting and Statistics (1990), p. 288.

Table 8.6.

Taiwanese sectoral export shares (per cent)

Source: Council for Economic Planning and Development (1994), pp. 192–3.

8.3.3 Changing Industrial Policies and the Increasing Role of Market Forces

Opposition to the highly interventionist approach to industrial policy peaked in the late 1970s in both Taiwan and Korea. The 1970s industrial policy that targeted specific industries and individual firms within those industries was the first to decline sharply, although it did not disappear altogether. The declining use of government policy to promote specific industries and firms began even before President Park’s assassination in 1979 and continued under the Chun Doo-hwan government in the 1980s, a government more concerned with reining in inflation than in promoting heavy industries. In the case of Taiwan, its weakened international political situation together with the OPEC price increases of 1978 and 1979 led to concern by the government that Taiwan’s heavy industry-oriented industrial policy in the 1970s was making the island overly dependent on petroleum imports that could be cut off or sharply reduced. By the mid-1980s opposition to petrochemical plants also became a source of major demonstrations against new plants, as Taiwan was making the transition to a more democratic and open political system.

A further consideration in the shifting approach to manufacturing was that wages in both economies and unit labour costs (Figs 8.4 and 8.5) were rising rapidly, making the labour-intensive industries of the 1960s and 1970s less and less competitive in international markets. In Taiwan there was a government-led shift in emphasis toward high technology. To educate the broader population in the importance of computers and information technology, the government took the lead by rapidly expanding the role and use of computers and information technology within the government itself. Universities were required to revamp their curricula to give greater emphasis to training relevant to high technology. The government directly sponsored research in a wide range of high-technology fields. Companies that started up firms in this area also received various direct incentives such as reduced taxes and easier access to credit, as had been the case with earlier export-oriented industries, but these incentives were secondary to the main effort. An important element in this effort was to encourage people who had left Taiwan to further their education abroad, mainly in the United States, to return home and set up firms in these high-technology sectors.

Fig. 8.4.

Taiwanese manufacturing real wages, unit labour costs, and labour productivity

Source: Various issues of Council for Economic Planning and Development, Taiwan Statistical Data Book.

Fig. 8.5.

Indices of Korean manufacturing real wages, own wages, and labour productivity

Source: Various issues of National Statistical Office, Major Statistics of Korean Economy.

In Korea, the relative power of the chaebol had changed dramatically over the course of the 1960s and 1970s. By the mid-1980s they were less dependent on the government and the government was becoming more dependent on them as illegal sources of campaign funding among other things. This kind of corruption, however, does not appear to have had a major impact on industrial policy during the presidencies of either Chun Doo-hwan or Roh Tae-woo. A bigger issue facing the government was what to do about companies that had done what was asked of them during the Heavy and Chemical Industry Drive, but where the results of their efforts had produced large losses and threatened bankruptcy. There was an implicit assumption that if the company did what was asked of it, the government would help them out of any trouble that resulted. Much of the early 1980s was thus devoted to cleaning up various unsuccessful efforts of the 1970s campaign.

Unlike in Taiwan, there was never in Korea a clear decision to move away from heavy industry to an emphasis on information technology. On the contrary, heavy industries had become the mainstay of Korean exports by the 1980s and remained so into the next century. Machinery and transport equipment, for example, saw their share of Korean exports rise from 20.3 per cent in 1980 to 42.5 per cent in 1992, the last year of President Noh’s term in office. Heavy industry products overall were 41.6 per cent of total exports in 1980 and 59.5 per cent in 1992 (and 72.3 per cent in 2000). Information technology products became an important part of heavy industry exports later, but they grew rapidly and accounted for 33.4 per cent of all heavy industry exports and 27 per cent of total exports in 2001.

Korea’s government, like that of Taiwan, was concerned from the 1960s on with the fact that Koreans were increasingly being trained in high-technology areas mainly in the United States, but few were returning home to work in Korea. In an attempt to change this situation, the Korean government first created the Korea Institute of Science and Technology in 1966, a multi-disciplinary research institute mainly in the sciences and engineering. The Korean Advanced Institute of Science (KAIST) was established in 1971 as an educational and research institution, and rapidly rose to be among the highest-status universities in Korea (and in international university rankings). And the chaebol also had research institutes. Overall research and development expenditures in Korea rose from 0.29 per cent of GDP in 1973 to 0.57 per cent in 1979 at the end of the Heavy and Chemical Industry program, before doubling to 1.02 per cent of GDP in 1982 and doubling again to 2.01 per cent in 1991.

Finally, by the 1980s and 1990s there was no longer a foreign exchange constraint in either Korea or Taiwan that could justify tight restrictions on imports, while the United States was becoming increasingly intolerant of trade restrictions as a means of infant industry protection, particularly given that most of the industries were no longer infants. Both economies thus greatly reduced the use of import restrictions as an instrument of industrial policy. Keeping the exchange rate undervalued was also no longer tolerated or justified and in both economies the currency was revalued to something closer to a market-driven exchange rate.

8.4 Conclusion

The Japanese, South Korean, and Taiwanese governments played leading roles in their respective industrialization drives, but the nature of those governments and their evolution from one kind of leadership to another differed. In Japan the Meiji restoration that began in 1868 kept much of the pre-modern elite in control, but fundamentally changed most of the institutions that had characterized the semi-feudal Tokugawa period. After that, however, that same elite ruled for six decades while experimenting with reforms that would facilitate Japan’s catching-up with the world powers of Europe and North America. It was not until the Japanese military came to dominate the government that the nature of the ruling elite that governed economic policy changed fundamentally. The nature of the government and the manufacturing strategies pursued were also influenced by the external environment, notably the First World War that cut Europe off from active economic involvement with Asia, the Great Depression that was accompanied by rising protection and trade wars, and then the Second World War from which Japan did not recover until the early 1950s.

Korea and Taiwan were ruled by Japan until 1945. During that period Japan pursued economic development strategies that were driven by colonial interests and emphasized agriculture and mining exports. Independence in 1945 brought completely new governments to these countries, which were initially more interested in political and military goals than in industrialization or economic development. External pressures, due in part to their over-dependence on US aid, and the threat to their very existence, led to fundamental changes in policy in both economies in the early 1960s. What followed was similar, in that both governments led manufacturing development efforts that transformed their economies in a matter of decades.

Manufacturing development in Korea and Taiwan from the 1960s to the early 1990s was much faster than the growth of Japanese manufacturing in the pre-Second World War period, although Japan’s own continued manufacturing growth after economic recovery from that war was equally rapid for two decades, and its pre-Second World War experience was more rapid than in most other industrialized economies at that time. A plausible hypothesis is that higher growth from the mid-1950s onward in all three countries was due in part to a large backlog of unused technologies, as well as of knowledge about what development strategies worked and which did not, allowing these economies, particularly Korea and Taiwan, to leapfrog ahead. Korea and Taiwan had the added advantage of being able to learn from Japan’s experience starting from a similar economic foundation, whereas Japan had to figure out what would best fit. Korea and Taiwan’s manufacturing growth (and Japan’s after the Second World War) also benefited from being able to pursue an export-oriented strategy in an increasingly open world market.

The faster pace of manufacturing growth in Korea and Taiwan also meant that the structure of industry and of industrial exports changed more rapidly than in Japan, although the nature of the structural changes was similar. All three countries began their industrial development drives with a focus on exports of labour-intensive products, but Korea and Taiwan experienced a more rapid shift from labour-intensive products to producer goods, notably machinery and transport equipment, with this occurring less than two decades after their rapid growth began. In Japan this shift began at the turn of the century, increased with the military build-up of the 1930s, and peaked in the post-Second World War era.

The industrial organization structure differed between the three economies, with the differences being between Korea and Japan, on the one hand, and Taiwan on the other. There were large business groups in both Korea and Japan—zaibatsu in Japan before the Second World War and keiretsu after the war, and chaebol in Korea. In Taiwan, most industrial firms during the first two decades of industrial development were small in scale, and business groups were looser combinations of these smaller firms, usually with a lead firm. Over time, this has changed as large groups have arisen, but these have not reached the level of dominance of the business groups of Korea and Japan.

Finally, rapid manufacturing growth is a transitional phase in all countries, and this was the case in Japan, Korea, and Taiwan. The starting point is an economy dominated by agriculture and handicrafts plus supporting commercial and financial services; there follows a period in which industrial growth dominates the economy. At purchasing power parity per capita incomes in the $14,000 to $17,000 range, however, industrial growth is increasingly replaced by services, including many modern services that did not exist in earlier periods.42 In Korea and Taiwan, this transition into and then out of a focus on manufacturing took place over three decades. In Japan it took much longer, both because growth generally was much slower in the first half of the twentieth century than in the latter half, and because of the impact of the Second World War, which set Japan back for over a decade. In Japan it took roughly seven decades from when industrialization started to when the share of industry in GDP began to fall.

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Notes

1

These issues are the discussed at length in Perkins (2013).

2

For a comparison of the German and Japanese development experiences, see Landes (1965).

3

Pre-conditions for modern industrial growth preceded the Meiji period, dating back to the Tokugawa era (1603–1868). These included a well-developed internal market for commodities and finance and significant human capital in terms of education and literacy; see Crawcour (1974; 1997a) and Lockwood (1954).

4

E.g. Lockwood (1954), Ohkawa and Rosovsky (1973), and Ohkawa and Shinohara (1979). Historical data collections include the Estimates of Long-Term Economic Statistics of Japan since 1868 and those produced by the Japanese Statistical Association (2007).

6

The regime change from the Tokugawa (1603–1868) to Meiji periods and its underlying causes are discussed in Lockwood (1954), Gordon (2009), and Crawcour (1997a). Much of the following discussion is based on these sources.

7

The current division of the country into 47 prefectures began from 1871, when nearly 300 hereditary domains were consolidated and assigned governors (initially, many of the former lords) chosen by the Meiji government, through 1888.

8

Taira (1997), pp. 273–4, and Crawcour (1997b), p. 67. Pre-Meiji literacy rates were unusually high, approximately 40 and 10 per cent for males and females, respectively, and are implicated in the country’s economic growth.

9

Crawcour (1997a), pp. 43–4, and

Japan also accessed international capital markets, with its first bond offering of £1 million in 1870 used to finance the first railway and other public outlays.

14

Ohkawa and Shinohara (1979), Bénétrix et al. (2015), and Ohkawa and Rosovsky (1973), respectively. These studies relate to the economic convergence literature, such as Barro (1997) and Rodrik (2013).

15

Ohkawa and Shinohara (1979), p. 12; Bénétrix et al. (2015), Table 3; Ohkawa and Rosovsky (1973), p. 31.

16

Bénétrix et al. (2015) identify 1899 as the year when Japan joined the ‘modern growth club’, based on having ten years of average industrial growth exceeding 5 per cent.

17

For Japan, manufacturing comprises ten sub-sectors: food products; textiles; lumber and wood products; chemicals; stone, clay, and glass products; iron and steel; non-ferrous metals; machinery; printing and publishing; and other manufacturing (Shinohara, 1972). For the United States, manufacturing and construction materials include 44 categories, which are then mapped into the broader industry classification equivalent for Japan (Wattenberg, 1976).

18

See also Crawcour (1997b), pp. 51–2. The three sub-sectors of stone, clay, and glass products; iron and steel; and non-ferrous metals are grouped together in the Japanese data as they individually overlap with their more detailed American equivalents, which are also aggregated to the higher level of classification.

21

Tariffs were set at a maximum of 5 per cent ad valorem until 1899, when Japan began to successfully renegotiate its treaties; full autonomy was not negotiated until 1911, before which Japan could set a maximum of tariff of 15 per cent (

22

Yamazawa and Yamamoto (1979), Table 22. Exchange rates did not play a significant role in the period between 1897 and 1914 as Japan was on the gold standard.

23

Japan’s low-tariff, high-growth experience in the pre-war era contrasts with that of most other countries; see Clemens and Williamson (2004).

24

Note that the food products category for trade does not directly correspond with that for industry output, in that the former also includes unprocessed food items like grains and livestock.

25

See Rousseau (1997) and Tang (2013; 2014). Data for capital investment and firms by major industry are from Japan Statistical Association (1987), Tables 10-5-a and 10-5-b.

26

Data for industry labour shares from Umemura et al. (1988), Tables 5, 10, 12, 13, and 18.

29

Import tariffs comprised a minor share of government revenues: less than 2.3 per cent before Japan regained tariff autonomy in 1899, and less than 6 per cent from then until the war with China in 1937; see Yamazawa and Yamamoto (1979), Table 22.

30

The 1872 Treaty of Kanghwa gave Japan access to three Korean treaty ports, which allowed for a significant expansion of bilateral trade (Gordon, 2009, p. 113). Korea was later annexed in 1910, while Taiwan was colonized in 1895 following the war with China.

31

Matsukata (1899). Japan dominated Korean and Taiwanese trade, with about 90 per cent of Korean exports going to Japan in the 1870s and remaining high thereafter; Taiwanese exports grew from under 30 per cent in 1900 to 80 per cent in 1910, and exceeded 90 per cent for most of the 1930s (Gordon, 2009; Odaka et al., 2008, Table 9.1).

34

Nakamura (1987), pp. 59–61.

37

The Korea data in this paragraph are mainly from Economic Planning Board (1980).

38

For a more in-depth discussion of the process that led to the change in development policies, see Hsueh, Hsu, and Perkins (2001).

39

The influential book by the World Bank (1993), Chapter 6, makes a similar argument that while a number of East Asian economies did promote import substitution, basically they distorted prices much less than in most other developing economies.

40

This discussion of the Heavy and Chemical Industry Drive is based mainly on Stern et al. (1995).

41

The discussion in this section is drawn mostly from Hsueh, Hsu, and Perkins (2001).

42

The lower figure is the purchasing power parity per capita GDP (in 2011 prices) in Korea in the early 1990s and the higher figure is that for Japan in the early 1970s. This is when the share of manufacturing (in Korea) and of industry (in Japan) began to decline as a share of GDP (World Bank, 2014).

Which of the following developments changed the US garment industry in the 1850s?

How did American fashion change from the early to the late nineteenth century?

Which Census first revealed that a majority of Americans were living in cities 1880 1880 1910 1920?

Which of the following was true about the political bosses in Northeastern cities during the late nineteenth and early twentieth centuries?