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2.2 Production Structures and Employment In Industry Under
Autarkic Protection Versus Export Orientation
Developing country governments have historically differed
very considerably in their industrialization strategies. At the two extremes of policy are
autarkic industrialization for industrial self-sufficiency, and industrialization in a
fully open or relatively liberal trading régime, responding to international market
demand and supplying foreign as well as local markets. Many countries have changed their
policy stance over time, moving along the policy spectrum away from complete autarky
towards greater openness; consequently a hybrid of policies is often found in practice,
with elements from both strategies coexisting.
The underlying rationales and the policy measures used to
implement different industrialization strategies are well known. Autarkic strategies,
viable in their purest form only for large economies, were driven by three concerns. The
first was an often nationalistic desire to establish an integrated industrial structure.
The second was the belief that conditions in international markets were inherently biased
against developing country producers. The bias arose either because cartels and
oligopolies based in industrialized countries colluded to resist new entrants, or because
trading conditions were structurally distorted, essentially as a result of demand
conditions, against the kinds of primary commodities that developing country producers
could supply. The third was that protection was necessary before countries could become
competitive internationally. This refers to the policy of giving "infant
industry" protection from established foreign producers to local businesses during
their start-up period.
In principle, the goal of autarkic development was to
attain complete national self-sufficiency in manufactured products by building capacity at
all levels of an integrated vertical producer chain. The industrial sector was to produce
the whole range of producer and consumer products, ranging from heavy basic supplies and
raw materials (metals, industrial chemicals, power generation); to production of
components and parts; and to production of consumer goods.
The governments of many large developing countries,
especially in Latin America and South Asia, favoured autarkic industrialization, and it
was of course the governing strategy in the centrally planned socialist economies. But the
approach found widespread favour throughout the developing world, including the larger
East Asian economies. However, autarkic industrialization proved a costly policy to
governments and to the population at large. Protection allowed persistent cost
inefficiencies and entailed the emergence of quasi-rents and rent-seeking behaviour by
firms. Sometimes subsidies to producers were very large, as was the overpricing of
consumer goods to local markets relative to international prices. The maturation of
domestic producers proved elusive: vested interests emerged to defend the economic rents
that could be made behind trade barriers and resisted their reduction. Another consequence
of protection was that the tariff structures imposed on imports cheapened the cost of
capital and encouraged more capital intensive production methods than the real local
relative cost of capital and labour would have led to. On the other side, the spectacular
economic success of the East Asian nations, which gave a central place to export
production and succeeded in penetrating world markets to an unprecedented degree, tended
to highlight the failures of the autarkic approach and to suggest that other
industrialization strategies might be more successful.
For these reasons, and under the pressure of the
requirement under structural adjustment programmes that governments reduce public
spending, eliminate industrial subsidies and liberalize trade, which the debt crisis of
the early 1980s made developing countries subject to, autarky and import substitution are
now largely abandoned as the prevailing approach to industrialization in developing
countries.
The alternative strategy, now so much in the ascendant
worldwide, is export-oriented or export-promoting. This strategy is premised on the
possibility of exploiting international comparative advantage in trade, and the idea that
international competitiveness is attainable more or less immediately by developing country
producers in certain manufacturing product categories. These categories are identified on
the basis of the factor proportions used in production. In conformity with developing
countries" abundance of labour resources and scarcity of capital, compared to
developed countries, products made by relatively labour intensive methods are expected to
be internationally competitive.
An export-oriented industrial strategy is put into effect
through a set of macro-economic policies, which typically include devaluation of the local
currency (making product sales in foreign markets more attractive), lower tariffs on
imported materials and components, improvements in the administrative treatment of
exporters, such as "fast track" provision of operating permits, and sometimes
favourable tax treatment for exporters by way of special tax holidays, etc.
Producers based in export processing zones (EPZs) often
benefited from a complete set of such preferences, but they also applied to other
locations to a greater or lesser extent (World Bank, 1992). EPZs were set up largely to
attract foreign investment, for provision of capital, market expertise and/or technology,
according to the particular needs of the local economy (ILO/UNCTC, 1988). EPZs have
assumed different levels of significance in leading the export drive in different
developing countries. In the Asian countries they were used largely to bring in technology
and marketing expertise to help penetrate foreign markets, since high local savings rates
meant there was no marked shortage of finance capital. Consequently, even in the smaller
countries such as Singapore, EPZ-based exporters account for a relatively small part of
total industrial output and exports. By contrast, in small island countries (e.g. the
Dominican Republic, Jamaica and Mauritius) and in large countries where an autarkic
industrialization strategy otherwise generally prevailed (e.g. India), EPZs were a way of
attracting investment to add to sparse local supplies of capital. Experienced foreign
producers were induced to provide the major part of the country's manufactured exports,
operating in export enclaves sealed off from the protectionist policies in force elsewhere
in the economy.
The export oriented industrialization strategy has been
remarkably successful, demonstrating good performance, by any and all economic criteria,
including sustained increases in real wages and low rates of unemployment from the 1970s
onwards (Turnham, 1995). It has proven successful not only in the East Asian
"miracle" countries which first embarked on such policies in a major way, i.e.,
the Republic of Korea, Taiwan Province of China, Singapore and Hong Kong, but in other
countries which followed their example later, such as Malaysia, Thailand and Indonesia in
South-East Asia; most recently and spectacularly, China; and Brazil and Mexico in Latin
America and Tunisia in North Africa, which together loosely constitute what has been
called the "second generation" of NICs (newly industrializing countries). All
have promoted export industry and achieved rapid growth in their share of world markets.
Latterly India, the last large developing country economy to have remained dedicated to
the autarkic model, has liberalized trade and opened its markets to foreign investors. And
another group of countries in Eastern Europe, notably Romania and Hungary, have adopted
the same approach, promoting the expansion of export industry as their leading sector.
While export production appears to have been the main
ingredient or manifestation of the "Asian Miracle", the precise role that
export-promotion policy played in the East Asian success story is a matter of keen and
continuing debate. The significance of export growth as representing the cause or the
effect of general economic growth is disputed, as is the precise role of government
policies in the process (Little, 1989 vs. Wade, 1990). The relevance of the Asian
experience to other developing countries may also be limited, given the historical
conditions specific to East Asia (Riedel, 1993).
Nevertheless, the international financial institutions,
notably the World Bank, which set the economic policy reform agenda for borrowing
developing countries, have in Structural Adjustment Programmes advocated a trade
liberalizing agenda based on a simple model of the East Asian experience, claiming that
such policies are conducive to the creation of an internationally competitive industrial
sector and inimical to the maintenance of inefficient local industry. Certainly, the
experience of many sub-Saharan African countries, which have seen the collapse of local
manufacturing capacity and disinvestment by foreign capital, is proof of the latter
(Riddell, 1990; Bennell, 1995). But they have not managed to develop any export capacity
in non-traditional products. Simple trade liberalizing policies have certainly not on
their own been universally effective in promoting exports and growth.
Although the 1960s and 1970s were generally characterized
by import substituting industrialization in developing countries, and the 1980s by the
spread of market liberalization policies, there has been considerable variation in the
timing of the shift away from protected industrialization in different countries. As
noted, the East Asian tigers, starting with Hong Kong, were the first to begin active
promotion of exports of manufactures in the early 1960s. Some Latin American countries
(e.g. Colombia and the Dominican Republic) also began early to explore ways of generating
foreign exchange in pockets of non-traditional export production, without changing their
generally protectionist policy stance. The result is that at any time a mixture of
industrialization policies have been in effect.4 The policy
mix has also however reflected the fact that even those countries that most prominently
swung over to export promotion did not espouse a simple trade liberalizing, free market
approach for the whole of the industrial sector. In particular, large segments of
non-exporting manufacturing industry are maintained, often in the state sector and with
considerable subsidy, in the East Asian countries, co-existing with the export sector
(Riedel, 1993).
These countries have been able to maintain protected
and/or subsidized heavy industrial structures in tandem with their exporting sectors
because their high domestic savings rates have given them immunity from the dictates of
the international financial institutions in matters of economic policy. Their overall
industrialization strategy is to foster both export capacity and production capacity in
non-competitive but strategically valuable lines in different parts of the industrial
sector. The performance of some of the protected industries lends support to the case for
long-term infant industry protection — the Republic of Korea exports steel and is a
major world shipbuilder, testament to the possibility of eventual attainment of
international competitiveness in the heavy industrial field. Most subsidized heavy
industry still has virtually no links of any kind with the export sector (Riedel, 1993).
The product categories that have dominated developing
countries' export drive in manufactures comprise a range characterized by marked labour
intensity of production (Yeats, 1988). Developing countries have achieved a greater share
of world markets in these kind of products than in any other. A broad grouping of classic
labour intensive, sometimes primary product-based products — comprising clothing,
processed foods, drink and tobacco, leather and footwear — exported by developing
countries accounted for 24 per cent of world exports in 1989 (UNCTAD, 1992: Annex Table
III-1). Clothing remains the classic start-up product for developing country producers to
export on their own account. It continues to dominate the manufactures export basket of
many of the poorest developing countries. In 1993 clothing accounted for 56 per cent of
the merchandise exports of Bangladesh, 49 per cent of Sri Lanka, 53 per cent of Mauritius,
and 20 per cent of China (GATT, 1994: Table III.42). In total, clothing accounts for
approximately 6 per cent of developing countries' total exports (see Table 1).
Processed food products are another major item, which
accounts for a major part of manufactured exports in countries such as Morocco and
Bangladesh, although a country's possibility of exporting such products depends on an
arbitrary distribution of suitable primary raw materials (e.g. fish and shrimp in these
two cases).5 The predominance of such labour intensive items in developing
countries' manufactured exports gives empirical support to theories of resource
endowments-based comparative advantage as the basis for trade.
Measurement of research and development (R&D)
expenditure levels of different industries gives another measure of relative factor use in
the production process. R&D measures the expenditure by firms in pursuit of
improvements in production technology, which are usually then embodied in changes in
machinery and equipment. For this reason high R&D is strongly associated with capital
intensity. Developing countries' market share in world trade is much higher in low R&D
sectors than in high R&D sectors. They amounted to 24 per cent of low R&D products
in 1989, (15 per cent in 1970), compared to 15 per cent in high R & D products in 1989
(compared to 2.5 in 1970) (UNCTAD: 1992, Annex Table III-1).
The perhaps surprisingly high figure for developing
countries' share of high R&D product categories has two explanations. First, many of
the countries classed among the developing countries have in economic terms in effect
graduated from that group, in terms of their per capita income, technological capacity and
factor endowment. The composition of their manufactured output has changed accordingly
towards more capital intensive, R&D dependent activities.
The second reason relates to the fact that the high
R&D product category includes office machines and computers, electronics components
and telecommunications equipment. These have been among the fastest growing product groups
in world trade. Table 1 illustrates the rapidity of their growth over the period 1980-1981
to 1990-1991. These products have seen their share of developing countries' total exports
increase nearly five times over that period, with annual growth rates in export values in
some of the component product groups as high as 43 per cent per annum (automatic data
processing equipment), 30 per cent per annum (office machinery and automatic data
processing equipment parts) and 17 per cent per annum (semi-conductors). (UNCTAD, 1993:
Table 4.3). By 1990-1991 electronics exports from developing countries amounted to almost
twice the value of clothing exports.
Nevertheless, the difference between these products and
the classic export manufactures is more apparent than real with respect to the economic
characteristics of the production methods used in developing countries. Much electronics
production in developing countries has the peculiar dual characteristic of being both high
R&D and labour intensive. Although the electronics industry is, in all its
heterogeneity, essentially the bearer of the modern technological revolution and has
extremely high R&D levels, production of electronics products involves many distinct
and separable activities. The work carried out in developing countries concerns only a
small part of the total range of production activities. It mainly consists of
assembly-type operations, using imported components, with factor use ratios at the labour
intensive end of the range. Simple cost considerations dictated that electronics
companies, right from the beginning, located them in lower wage countries, by analogy with
the world distribution of production capacity in clothing and other technologically simple
labour intensive processes. The growth of electronics in developing countries'
manufactures exports does not disturb the explanatory power of the comparative advantage
model.
The differing technological level of the clothing and
electronics industries does however have other consequences. The high R&D level of the
electronics industry is reflected in its dominance worldwide by giant Northern-based TNCs,
which have the organizational capacity to seek cost savings by scattering integral parts
of the production process. By contrast, the clothing industry, in which R&D levels are
low, includes many more indigenous developing country producers. In the few cases where
TNCs are present in this industry, they are small or medium sized and sometimes based in
developing countries themselves (United Nations, 1994). International production links
certainly exist in the clothing industry, but they tend to take the form of sub-contracts
between separately owned firms, rather than command chains between head offices and
subsidiaries of TNCs.6
The labour intensity of clothing and other classic
manufactures exports has two corollaries. First, the relatively small capital commitment
required makes for ease of entry to the sector by new firms. There is little place in this
sector, on the domestic or world level, for collusive behaviour or restrictive business
practices by established firms to keep out new entrants. Market conditions as well as the
low level of technology therefore make international markets in these products a prime
candidate for indigenous competitors from new source locations. This is not to say that
technology in this sector is static. There are quite marked changes over time in the
ranking of countries' unit labour costs (see Table 2), which reflect changes in both wage
rates and labour productivity (United Nations, 1994a). Even so, rises in labour
productivity in these ("light") product categories tend to lag significantly
behind those in other ("heavy") parts of industry (UNCTAD, 1993). Technical
progress, although real, has therefore not undermined the relative labour intensity of
clothing production within the modern industrial sector.
The second corollary has to do with the nature of
employment in these sectors and the characteristics of the sectoral workforce, to which we
now turn.
3 Support for these assertions is found in the following sections.
4 Pearson (1992), while pointing correctly to the complexity of the situation,
perhaps goes too far in denying any historical progression from autarkic to export
oriented industrial strategies. Such a transition can be said in any event to be
predicated within the autarkic approach.
5 It may be because of this absolute link with the presence of particular primary
resources that the food processing industry seems to have received much less research
attention in the international trade literature than its importance to developing
countries as a source of exports warrants.
6 This is based on case study evidence; no estimate of the overall share of
sub-contracted production or of production by TNC subsidiaries in developing countries'
total exports of clothing is available.
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