The export-push strategy of East Asia's high-performing economies was both their most successful selective intervention and the one with the most applicability to other developing economies
Trade policies in all the Asian economies (except Hong Kong) passed through an import-substitution phase with high and variable protection of domestic import substitutes. In all cases, however, policies that strongly favored the production of import substitutes to the detriment of exports were abandoned. And governments of high-performing Asian economies (HPAEs)---Hong Kong, Indonesia, Japan, Malaysia, the Republic of Korea, Singapore, Taiwan (China), and Thailand---adopted strategic pro-export policies that established a free trade regime and offered a range of other incentives for exports.[1] This approach provided a mechanism by which industry moved rapidly toward international best practice, despite highly imperfect world markets for technology.
In the HPAEs that intervened selectively to promote exports, a contest based on performance in global markets played the allocative role that is normally ascribed to neutral exposure of both import-substituting and exporting industries to international competition.
Export targets provided a consistent yardstick to measure the success of market interventions. When protected sectors interfered with the exports of other sectors, the latter could seek redress and were successful. Even where domestic content rules were imposed---for example, on foreign direct investors in Taiwan (China)---they were suspended if they interfered with exports. The emphasis on export competitiveness gave businesses and bureaucrats a transparent and objective system to gauge the desirability of specific actions. Interventions could not be made arbitrarily---if they interfered with exports, they could be appealed at a higher level of government.
The more recent export-push efforts of the Southeast Asian newly industrializing economies---Indonesia, Malaysia, and Thailand---have relied less on highly specific incentives and more on gradual reductions in import protection, coupled with institutional support of exporters and a duty-free regime for inputs for exports.
The success of the HPAEs rests partly on what they have done and partly on what they have not done. They have not imposed general import restrictions to redress balance of payments deficits. Hong Kong, Malaysia, Singapore, Taiwan (China), and Thailand had no cause to impose such restrictions, since their current account balances never faced serious long-term deficits. Indonesia and Korea, with more troubled current accounts, might have imposed restrictions but did not.
The benefit of avoiding import restrictions is widely understood. The trade regimes of the eight HPAEs have differed widely, but each has gradually liberalized without incurring a serious current account deficit. Often trade liberalization has been part of a policy package that included devaluation, exchange rate unification, fiscal reform, and foreign aid or concessional loans to offset a temporarily deteriorating current account.
The close link between successful macroeconomic policies and trade liberalization can be seen in the experiences of Indonesia, Korea, and Taiwan (China). Indonesia began trade liberalization in the late 1960s. In Korea, devaluations and trade liberalization have gone hand in hand, beginning with a drastic devaluation in 1961. Taiwan (China) took its first big step in 1958 with a policy package that included a 25% devaluation, a unified exchange rate, export incentives, and the widespread removal of quantitative import restrictions.
The three economies used deliberately undervalued exchange rates to assist exporters. Exchange rate policy and the fiscal and monetary tools to carry it out became part of an overall export-push strategy.
One can see a fairly clear relationship between devaluations in these economies and export growth in the 1980s. All three of Indonesia's devaluations had clear effects on exports of manufactures. From 1986 to 1988 the volume of these exports rose 80% (from a fairly low base), and growth continued through 1990. The Korean real exchange rate was kept fairly stable by numerous nominal devaluations during the period of the first great Korean export boom, 1963-72. The effects on exports of real devaluation from 1982 to 1988 can also be seen clearly. Taiwan's (China) real exchange rate relative to the U.S. dollar depreciated sharply from 1980 to 1985 (the period of general dollar appreciation), and the result can be clearly seen in an export boom to the United States.
Each of the eight HPAEs contributed to one or more of the four elements of a successful export push: access to imports at world prices; both long- and short-term financing; market penetration; and flexibility.
Access to imports at world prices. HPAE governments have found numerous ways to grant exporters access to imports at world prices: free trade zones, export processing zones, bonded warehouses, duty drawbacks, or tariff exemptions.
Export financing. Expansion into new export activities often requires financing, both long- and short-term. Nearly every HPAE has had some program to ensure access to credit, often at subsidized prices.
Market penetration. Nearly all governments recognized the difficulty exporters face in cracking into foreign markets, and again chose various means to encourage exporters to overcome the hurdles. Some directly subsidized export activity (direct income tax incentives), some subsidized market penetration (through exporter associations), some subsidized small and medium-size exporters to offset their difficulties in market penetration, and some promoted the creation of international trading companies.
Flexibility. Pragmatism and policy flexibility proved important because hitting the right strategy is not easy, for three reasons. The right strategy depends on the circumstances. It changes as the economy changes. And it is not always obvious.
The success of the southern-tier HPAEs' export drives in the late 1970s and 1980s, along with the continued rapid growth of exports from the northern HPAEs (particularly of China's exports), indicates that such drives can succeed even when industrial-economy markets are not expanding rapidly. The more recent drives have depended on consumers in industrial economies buying goods made in Asia rather than goods made elsewhere.
Exports from the developing world remain tiny relative to the size of the major industrial economies. In 1988 developing-economy exports of manufactured goods accounted for just 3.1% of total manufactured goods consumption in the European Community, North America, and Japan. This overall figure masks the HPAEs' dominance of the export market for garments and other light manufactures.
The scope for export expansion remains substantial. Indeed, individual developing economies, particularly smaller economies currently contemplating an export-led expansion, could safely assume that demand for their products is infinitely elastic, except for saturated export markets.
Despite heightened competition, expanding global markets will remain open to developing-economy manufactured exports. One reason is the continuing effort to open markets under the auspices of the General Agreement on Tariffs and Trade. Another is the growing role of regional trading blocs.
Who provides the market if all economies push exports? The dramatic growth of trade within Asia makes it clear that export-oriented economies create markets for imports---initially for capital goods from advanced countries, but later for a broader range of goods from the Asia-Pacific region. To compete internationally, exporters must meet global standards of quality and price, for which they need access to technology, capital, and intermediate inputs at world prices. As a result, production in Asia has become more and more international, with capital goods coming from Japan, labor-intensive assembly being performed in low-wage economies such as Indonesia and Thailand, and more sophisticated operations such as design, marketing, and finance being provided from Hong Kong, Singapore, and Taiwan (China).