Editor's Note: Swarnim Waglé is a consultant with the Investing Across Borders indicators project of the World Bank Group.
Ha-Joon Chang, a teacher at the University of Cambridge in England, describes himself as a “heterodox” economist and has been a long-time critic of the World Bank and the IMF. A few weeks ago, he was invited to be a keynote speaker at the recent 2009 Annual Bank Conference on Development Economics (ABCDE) in Seoul, where he revived an old debate on industrial policy that many might have considered settled had the latest economic crisis not struck.
Here is the debate in a nutshell: Mainstream economists attributed the dramatic economic transformation of East Asia over the past forty years to policies of outward orientation in trade and foreign direct investment (FDI). Chang, however, contends that there was no uniform East Asian strategy. While the city-states of Hong Kong and Singapore followed a laissez-faire approach, Chang picks South Korea and Taiwan as having evolved through a strategic use of openness and protectionism. They complemented outward-orientation with a domestic investment strategy (including credit subsidies and tax incentives) to raise the private return to capital in ways that could be considered “heterodox” or WTO-illegal today.
FDI was subsidized in labor-intensive manufacturing sectors, primarily to earn foreign currency that supported the import-substituting industries where FDI was restricted. Korea simultaneously encouraged technology spillovers by screening and choosing foreign investors that were more willing to transfer technologies to local companies. Seventy to 80 per cent of foreign technologies were introduced by local firms that imported capital goods embodying advanced technologies, which the locals adapted to through “learning by doing.” Chang approvingly says Korea organically integrated free trade, export promotion, and infant industry protection to subject different industries to different policies at the same time, and the same industry to more than one policy over time.
In his speech at ABCDE, Chang describes the resulting product space:
In the 1950s, Korea's main exports were tungsten ore, seaweed, and basic textiles and garments. In the 1960s, the government developed non-traditional export industries like wigs, plywood, shoes, and cheap electronics assembly, with the help of massive export support programs, while upgrading existing export industries, especially textile and garments. By the early 1970s, many of the export industries, especially plywood and wigs, hit the wall, so it launched the HCI (Heavy and Chemical Industrialization) program to develop industries like shipbuilding, steel, petrochemical, automobile, and high-end electronics despite the fact that it did not have comparative advantage in these industries at the time. Without these industries, Korea would not have sustained its export growth momentum beyond the 1970s.
In response to the current global economic downturn, there are fears that countries will resort to greater protectionism. Does a position such as that of Ha-Joon Chang provide renewed ammunition to globalization skeptics? Further, because Chang is Korean himself, he often goes unchallenged overseas in his interpretation of Korean economic history. I wonder if the audience in Seoul this time disagreed with him, and how?