Many East and South East Asian economies have progressed from low income to middle income status in the last 50 years, prompting the World Bank to coin the term “East Asian Miracle” to describe their achievements in overcoming the development challenges developing countries typically face.1 Rapid transformations have continued since 2000, reflecting the rise of China as well as the emergence of large Association of Southeast Asian Nations (ASEAN) economies including Indonesia, Malaysia, the Philippines, Thailand and Viet Nam.
Country-specific development strategies as well as variations in the pace and sequencing of policies across the different countries have characterized the developments achieved by the individual countries. Nonetheless, broadly speaking, a large part of the success of East and South East Asian economies can be attributed to the “outward-oriented industrialization” model. There are two dimensions to this strategy, namely the productive structures of the economy and their integration in global trade.
In the early stages of development, these countries promoted labour-intensive, low-technology manufacturing activities such as textiles, apparel and footwear. This shifted the economic structures away from low-productivity subsistence agriculture to activities with a strong potential for productivity growth.2 The significance of the manufacturing sector for the economy continued to deepen over time. In 2016, Asia had a significantly higher share of manufacturing value added than other regions. Within Asia, manufacturing was more important to East and South East Asian economies compared to the rest of Asia.
Manufacturing in total value added (%)
When the East and South East Asian economies began developing their manufacturing sectors, they targeted the export markets fairly early on (even those countries that briefly experimented with import substitution). The countries’ governments effectively addressed the realities of their national economies, namely 1) the domestic markets were limited in size in the early stages of development and industries could therefore not scale up fast enough. 2) exports would expose domestic industries to international competition while facilitating the flow of foreign investment (FDI) and know-how. 3) exports were important for generating revenue and foreign exchange that could be used to stimulate economic and income growth.
Manufactured products soon became the principal exports of East and South East Asian economies in contrast to the tendency of developing regions’ exports to rely more heavily on semi- processed commodities. Asia had the second highest share of manufactured goods in total merchandise exports, after Europe. Within Asia, East and South East were exporting far more manufactured goods relative to primary goods compared to their peers.
Manufactured goods in total merchandise exports (%)
Having secured a foothold in labour-intensive manufacturing, the economies increasingly began expanding into skills- and technology-intensive manufacturing such as metal products, automotive and telecommunications to sustain their economic and income growth. This is visible in the composition of the countries’ manufacturing value added at a given point in time and how it has evolved over time. In the case of East and South East Asia, the share of manufacturing value added derived from low-technology industries has decreased while medium- and high-technology industries, such as electrical apparatus, telecommunications, automotive, and machinery and appliances, have contributed increasingly more to their manufacturing value added.
Industry share of total manufacturing value added (2016)
The case of East and South East Asia demonstrates that there is a strong positive relationship between the economy’s productive and trade structures. As the countries’ economies began to produce increasing amounts of technology-intensive manufactured goods, they also exported more of those products. Between 1995 and 2016, the share of low-technology manufactured goods in the economies’ total manufactured exports decreased. In 2016, the top export industries for East and South East Asia included a number of high technology industries such as telecommunications, chemicals, office equipment, machinery and appliances, automotive and electrical apparatus.
Industry share of total manufactures exports (2016)
The East and South East Asian economies continued to consolidate their position and increase their market shares in global exports for each of these key industries. For example, in telecommunications, China’s share in global exports increased rapidly from 4 per cent to 33 per cent between 1995 and 2016. During the same period, Viet Nam’s share of world exports in telecommunications grew from zero to 4 per cent.
Global market share of telecommunications exports
Given their increased competitiveness as exporters, East and South East Asia increasingly exported more than they imported, which helped to either widen their trade surpluses or narrow their trade deficits in manufactured goods, notably in specific high-technology industries.
Normalised manufactures trade balance (1995)
Normalised manufactures trade balance (2016)
Researchers have tried to answer the question how East and South East Asia managed to achieve what many developing countries could not. There is no definitive answer, but there seems to be some consensus around two important factors of their development strategies.
The first has to do with continuous investments in human capital. Basic education, health and nutrition, and family planning services were not only provided because they are crucial for promoting inclusiveness, are also a means to increase labour productivity. Universal access to primary and increasingly secondary education has thereby been achieved, while diseases that affected in particular the poor in rural areas have largely been eradicated.
The second factor relates to credible and capable economic governance to ensure effective implementation of policies. East and South East Asian policymakers were generally committed to maintaining macroeconomic stability and a certain degree of fiscal discipline.
The governments’ approach to economic governance was also relatively ‘eclectic’. While policymakers mostly relied on markets to allocate resources, they were equally open to policy interventions and industrial policies that favoured specific activities and industries during a particular stage of development. In general, the more successful countries ensured that domestic firms were not shielded from competition indefinitely, closely monitored intervention measures, and had no qualms about eliminating or modifying measures that became too costly or ineffective.
As the global economic environment changed, questions have been raised about the efficacy of the East and South East Asian model for developing countries. Slowing growth and pattern shifts in global trade, the maturing of international production sharing, as well as rapid technological change present challenges that have a significant impact on economic growth.3 Notwithstanding the changing world and the need to adjust the specifics of policies, it remains as relevant today as it has in the past that development policies will need to boost industrial competitiveness, build skills, promote inclusion, and enhance the effectiveness of the state.
Disclaimer: The views expressed in this article are those of the authors based on their experience and on prior research and do not necessarily reflect the views of UNIDO (read more).
Have your say
What is your opinion on the IAP?