Asian Development Experience Vol. 1: External Factors for Asian Development

8 Seeking New Development Strategies: The Role of Government and ODA in Southeast Asia

194 Asian Development Experience, Vol. 1 8 Seeking New Development Strategies: The Role of Government and ODA in Southeast Asia1 Fukunari Kimura 194 1. Introduction Although major players have alternated, the East Asian region has continued to serve as the world’s growth centre for four decades. Justifying its claim for the ‘East Asian Miracle’, the World Bank emphasized in its 1993 report (World Bank 1993) the existence of well-managed macroeconomic fundamentals and wisely designed microeconomic policies. Over the last decade, another important element was added to the characteristics of the East Asian economies; i.e., the formation of international production/distribution networks. The Southeast Asian (SEA) countries2 after the latter half of the 1980s, as well as China in the 1990s with some important differences, present a new development model of less developed countries (LDCs) in the globalization era. An important turning point was in the mid-1980s. Before that, these countries were cautious about accepting too much FDI, as many LDCs still are, and foreign companies were allowed to come only into selected industries with various restrictions. In the latter half of the 1980s and the early 1990s, the SEA countries switched their policies and started hosting nearly every kind of FDI with facilitating measures, which ended up with the unprecedented formation of international production/distribution networks taking advantage of fragmentation and agglomeration. The development pattern of the SEA countries is fundamentally different in many respects from the pattern of preceding economies such as Japan and Korea in which industrialization started from import substitution by local indigenous firms. The role of FDI is different from that in Latin America and other parts of the world in terms of the number of countries involved in international production/distribution Seeking New Development Strategies 195 networks. Market forces are of course important, but the policy framework is not simple laissez-faire; rather, the new role of government is pursued. Now the SEA countries are facing new challenges. China has emerged as a great attractor of FDI, and competition over location advantages has become intense. The difficulties include stubborn technological gaps between local indigenous firms and foreign affiliates, lack of human capital, highly distortive investment incentives to keep footloose foreign affiliates in the territory, and others. How to remove inefficiencies in import-substituting industries and how to further activate international production/distribution networks are the issues. In these contexts, the Japanese official development assistance (ODA) programme for the East Asian countries should also be evaluated. This chapter argues the new role of government in the context of new development strategies applied by the SEA countries and partially by China and discusses some implications for economic cooperation programmes implemented by the Government of Japan. The next section presents the development strategies the SEA countries applied from the mid-1980s. Section 3 investigates the pros and cons of traditional importsubstituting FDI policy. Section 4 explains the economic logic behind the formation of international production/distribution networks and claims the importance of government policies. Section 5 interprets current issues on industrial development in the SEA countries. The last section discusses the implication for economic cooperation programmes. 2. Development Strategies of the SEA Countries: Overview There are a few peculiar features in the development strategies of the SEA countries throughout their history of development. First, in the literature of development economics, we often classify development strategies into two distinctive categories, import substitution and export orientation, and regard these two strategies as contradictory with each other. However, the SEA countries have continuously tried to have two types of industries at the same time. This is the so-called “dual track approach”. To accelerate import substitution, the government must provide a certain level of incentives for the industries concerned. Trade protection is one of the typical policies for such purposes. Trade protection naturally tends to affect exporting industries negatively. In order to mitigate the inconsistency between the two objectives, the SEA countries have tried to manipulate this delicate policy combination for a long period. Second, hosting FDI has been an essential element in their development strategies, and their industrialization has virtually proceeded with foreign companies as a core. Foreign companies have been introduced to both import-substituting industries and export-oriented industries. 196 Asian Development Experience, Vol. 1 The significance of foreign companies in the whole picture of development strategies is qualitatively different from that in Japan and Korea in the 1950s and 1960s. Keeping...