Analyse the Processes Leading to the Emergence of the New Wave of Newly Industrialised Economies

Since the Second World War there have been dramatic changes in the world economy, one of the most significant being the shift in geography of the world’s manufacturing industry. During the 1960’s manufacturing industry began moving from developed countries into developing countries. These Newly Industrialising Economies (NIE) include Brazil, Mexico, Singapore, Hong Kong, Taiwan and South Korea. It is the rapid growth of the latter four country’s economies (the ‘tiger economies’) that has spurred the emergence of the ‘New Wave’ NIEs; Malaysia, Thailand, Indonesia and the Philippines.

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Change in government policy, guidance from the International Monetary Fund (IMF), Foreign Direct Investment and the surfacing of an integrated Asian economy are all key factors in their emergence. The ‘New Wave’ or ‘second-tier’ NIEs mentioned are known collectively as the ‘ASEAN-4’ (Association of South East Asian Nations). General processes involved in the rise of the ASEAN will be analysed, with specific reference to the economies of Malaysia and Thailand, the most rapidly changing second-tier NIEs. To do this, the reasons for the phenomenal growth of the first-tier NIEs in the 1960’s have to be identified.

Government policy of NIEs was based upon attracting intensive labour industries and amassing capital produced from them in order to develop their own economy. Initially the NIEs in both Latin America and East Asia followed a policy of import substitution orientated (ISO) where the manufacture of products, which would otherwise be imported, takes place1. Tariffs are put in place in order to aid the growth of their fledgling industries. This highly protectionist stance remained in Latin America longer than in East Asia where export orientated industry (EOI) grew in favour of ISO2 because of their small domestic market.

This involved a large devaluation of currency in order to become more competitive and to attract foreign direct investment (FDI) from Japan, USA and the UK. Transnational corporations (TNC) in developed countries saw the opportunity to invest in the Pacific Region mainly because labour was cheap and they could locate in export-processing zones (EPZ). The reason that labour was so cheap was the fact that a large proportion of the populations of South Korea, Taiwan and Singapore worked in the countryside prior to 1967. It was the government intervention of these countries that moved rural workers into the factories.

In South Korea grain prices were held down in cities to help keep wages down. This also meant rural incomes were depressed between 1967 and 1976, leading to 7 million people leaving agriculture to become industrial labourers3, adding to an already large labour supply. The labour force was not only large and cheap, it was also relatively docile and the government closely regulated unions4. Not only was the labour force of the TNCs provided for by the host government, their location was also. EPZs are specific areas within a country that offer ‘… Favourable investment and trade conditions as compared with the remainder of the host country. 5 These incentives all increased the flow of FDI into these countries, while the specific zoning allowed domestic companies to flourish.

All the tiger economies have been underpinned by high saving and domestic investment rates, decisions that have been responsible for their phenomenal growth. Figure 1 shows the high percentage of GDP both invested and saved. The central role played by the state in the development of the first tier NIEs Figure 1 Gross Domestic Saving and Investment rates (per cent of GDP), 1971- 95 cannot be understated, as the average growth rate of the tiger economies between 1971-93 was 8. %, compared with the world average of 2. 9% in the same period6.

Analysing the processes involved in the growth of the tiger economies raises a number of questions regarding the emerging second-tier economies. Why did the ASEAN-4 not enjoy similar growth in this period? Did the growth of the tiger economies have any bearing upon their emergence? Malaysia, Thailand, The Philippines and Indonesia are known as the ASEAN and are located in South East Asia. Each of the countries are richly endowed with natural resources with extensive deposits of oil, gas, tin, copper, bauxite, coal and uranium7.

Natural resources are one distinction between the ASEAN countries from the tiger economies; as the tigers have relatively few. It is the abundance of natural resources in the ASEAN that has meant that their economy up until the 1980’s was structurally different to the first wave of NIEs. In Fig. 2 the table shows that the average GDP growth rate in the period 1971- 80 of the ASEAN countries is easily comparable to that of the NIEs. The distinction between the ‘first wave’ and ‘second wave’ however is that there was not much structural change in their economies in this period.

Unlike the East Asian NIE’s the ASEAN economies were mainly driven by the export of primary products and not by manufacturing. By comparing both the NIEs and the ASEAN in the table (fig. 2) the ASEAN can be seen to have a limited economy based primarily on Agriculture in the period 1971-80. However within the period 1970- 93 in each of ASEAN countries; with notable exemption of The Philippines, there is a significant fall in the sectoral share of GDP of agriculture and a rise in the share of industry.

This sectoral change Figure 2 n the economies of the ASEAN countries, especially Thailand and Malaysia, has brought massive growth rates of GDP (fig. 1). The key period for this change is 1981-90 as a number of factors affected their economies. A global recession between 1982 and 1986 saw commodity prices tumble which coincided with the realignment of currencies in East Asia. The recession saw governments within the ASEAN change policy quickly from highly protectionist to welcoming foreign investment. Action by the government and the Plaza agreement of 1985 saw the beginning of large amounts of FDI from Japan and East Asia entering the economies of the ASEAN.

In fact the period 1985-86 has been described as the ‘watershed in the evolution of the Asia-Pacific Region in the World Economy’8. In the Plaza Agreement the Group of 5 (G5) declared their intention to bring the dollar down to a more competitive level in the international market9, this brought about the appreciation of Japanese yen and later, in 1988 the tiger economies respective currencies. This was significant because their economies lost their competitiveness on the world market. In order restore their international competitiveness both the NIEs and Japan increased their levels of FDI substantially.

Japan invested US$3. 6 billion in the ASEAN in the period 1986-89, one third of this directed towards production of electrical machinery10. In the same period over US$850 million was invested by both Taiwanese and South Korean governments, again electronics was the single largest sector11. FDI not only changed in size but also, which sectors it was being invested in. Previous to the years 1986- 89 it was being invested in the extraction of raw materials, now it was being invested in EOI, i. e manufactures intended to be exported.

This change in flow and size of FDI was the main process involved in the emergence of the ‘new wave’ of NIE’s. This surge of FDI was because of both ‘push and pull factors’12. The most important push factor was the increased cost of labour in the tiger economies. In South Korea this was because the workforce was becoming more militant, while in Taiwan there was a growing labour shortage. In South Korea, wages rose by 30 per cent in the period 1985-8713 while in Taiwan wages in 1990 were 58 per cent above what they were in 198614.

Another reason to locate overseas was that America had put in place non-tariff barriers such as voluntary export-restraints targeting both the tiger economies and Japan under the US Generalised Scheme of Preferences 198815. As America is the biggest market for the Asian economy, countries such as Taiwan, South Korea and Japan had to find a way to bypass these barriers. The final reason why TNCs in NIEs and Japan wanted to move manufacturing industry from their home shores was that their polluting industries were facing increased government regulation16.

Taiwan’s investment in Malaysia reflects this pressure – 75% was in the production of metal products17. Manufacturers from Japan and the NIE’s had little choice but to relocate the stages of production that were becoming too costly overseas. The ASEAN countries were obvious choices because of proximity and labour wages being fractional to the cost of domestic wages18. To look at the flow of FDI from the NIE’s and Japan’s perspective alone is naive, because the ASEAN countries receiving FDI introduced measures in order to make themselves more attractive to foreign investors after the Plaza Agreement of 1985.