Chaebol industries producing

In addition, the comparative advantage enjoyed by the region in terms of lower wage costs and investment in new technology facilitated a move from agriculture towards labour-intensive manufacturing industries such as textiles, sportswear and microchips, especially encouraging MNCs through the setting up of EPZs where foreign companies could enjoy benefits such as tax breaks and exemptions from labour laws and minimum wages. Although different from those advantages put forward in Latin America, these resulted in the same kinds of benefits for MNCs in producing at a lower price and passing on this saving as profit or to Western consumers.

By the mid-1990s, for instance, Thailand's most important export product had become textiles, bringing in more revenue than more traditional commodities such as rice, rubber and shrimp. Governments in the region also encouraged private domestic investment through low tax, low inflation and high real interest rates so that domestic savings and investment grew to 35-40% of national income. They recognised that developing manufacturing industry had to be accompanied by improved agricultural efficiency and support so that development occurred across urban and rural sectors. 

As time went by, the liberalisation of financial systems in the region enabled a move from labour- to capital- intensive industries as technology and productivity improved through the 1980s and 1990s. Between 1990 and 1996, growth rates accelerated still further. Indonesia, Malaysia, Thailand and Vietnam all enjoyed GDP growth rates of at least 7% each year; figures in Laos, Singapore and Mayanmar approached these rates23. The region's nine main industrialising economies' global share of trade in the manufacturing sector rose from 12% to 17% in this period.

However, those economists who refer to the region as the model of the success of capitalist free markets ignore that macroeconomic policy was designed to support industrialisation. The most widely cited model of economic growth through reliance on the free market, South Korea, actually started its industrial process in the 1950's through import substitution industrialisation, with the establishment of the state-owned Chaebol industries producing for the domestic market.

US aid played a crucial role in establishing and maintaining this industrial base; without the foreign exchange receipts provided by aid, Hewitt, Johnson and Wield (1992) argue that the limited domestic market would not have been able to support the development of industry, and indeed that the transfer from import substitution industrialisation to export-promotion was necessary as aid declined. 

On the other hand, many studies point to a combination of factors that left many Asian countries vulnerable to rapid breakdown, in the same way that import substitution industrialisation had resulted in the build-up of unmanageable foreign debts. The IMF World Economic Outlook Interim Assessment (December 1997) asserts that the successful performance of most of the economies concerned, which was both a result of, and a contributing factor in, the rapid growth of net capital inflows to the region, brought with it policy challenges that were not met by the countries concerned, and helped to bring about the Asian Financial crisis of 1997. The export-led policy the region followed enabled a huge influx of capital into the region that was not controlled by the state the way it had been in some Latin American countries – when the market changed, this money flowed out again, helping to cause and exacerbate problems.

Is neo-liberalism, then, more of a reaction to the difficulties that Latin America experienced than a viable policy for industrialisation? Was import substitution industrialisation inherently flawed or did it simply outlive its usefulness as domestic and international conditions changed? What is clear from this analysis is that although East Asian economies have been more successful in terms of economic growth and industrialisation than Latin American ones, there is less difference between the policies followed in each region than advocates of neo-liberalism suggest.

Both have drawbacks as well as advantages, and both have, in various ways, contributed to financial crises: in Latin America through the build-up of debt and in East Asia through insufficient management of incoming capital. At face value, export-led growth has done more to alleviate poverty and improve social indicators than import substitution industrialisation; but this has less to do with the policies themselves and much more to do with the attitude of the state towards supporting social development through education and health provision. 

Would the remarkable development of South Korea been possible without US aid (from which Latin America did not benefit) and a period of import substitution industrialisation before 1960 where the basis for industrialisation was laid? It should be remembered that the ideas behind import substitution industrialisation ultimately involved the opening up of markets – it was never envisaged as a permanent policy, rather as a stage in the development process of LDCs which was necessary to be able to catch up with the industrialised countries. Hong Kong, one of the three countries used as an exemplar of neo-liberal success, had strong British ties up to 1997, with capital, technology and labour investment all contributing to its economic success.

What seems clear is that the countries that have succeeded in transforming the make-up of their economies from a bias towards agriculture towards industry have become more outward-oriented over time. The reasons for the World Bank's and IMF's promotion of outward-oriented development is hinged not only in the belief of market forces in achieving development, but also in the need for them to ensure that LDCs make debt repayments, which is not possible if a country does not seek to promote exports. Perhaps then, if import substitution industrialisation is time-limited and seen only as a means to achieving growth through promotion of exports, it is still viable for the future.