Industrialization in Southeast Asian Development

1. Industrialization in Southeast Asian Development

2. The Development Stage • Developing countries characterized by a high degree of subsistence production • Agricultural sector is paramount and important • While industrialization does not insure development it does have some healthy implications • It implies: technology application • It implies: raising productivity per worker • It implies: releasing labor for other tasks • But all sectors must move forward and some balance is desirable

3. Industrialization As A Panacea? • Industrialization is not a panacea or cure all but it does carry with it some important attributes • 1. Employment for deepening labor market • 2. Allows improvement in standard and quality of living • 3. Improves balance of payments • 4. Provides certain element of national prestige

4. Comparing Industry versus Agriculture • Farmer has little control over his environment: pests, drought • Agricultural production is generally slower and product cannot be quality controlled as in manufacturing • Agricultural commodities are susceptible to price swings in the global market • Relative inelasticity of demand for agricultural products, i.e. if prices fall more purchases are not assured • Technology has much greater impact on industry than agriculture • Increased specialization of labor in manufacturing results in higher productivity • Thus manufacturing offers a stronger base for raising the level

5. Nature of Industry in Development • Heavy industry- large scale production of capital goods: iron, steel, machine tools, car production, ship building • Location determined by access to and availability of raw materials • Requires well developed transport infrastructure and power supply • Heavy capital investment • High proportion of relatively skilled workers • Large scale to achieve economies of scale

6. Nature of Industry in Development • Light industries- generally refer to consumer goods: paints, tools, etc • Relies on semi-processed as opposed to raw materials • Less energy per laborer required • Less complex machinery and lower capital investment – operations in simpler buildings • Scale of operations more suited to small, limited markets

7. Strategies for Industry • Import Substitution Industry (ISI)- produce locally more goods previously imported • Manufacturing done behind high tariff walls or quota policies • Too often results in production of non-essential consumer goods for a limited segment of the urban market ignoring rural areas • Contributes little to a diversified and significant export structure since investments are absorbed by inefficient production firms • Usually discouraged in structural adjustment programs (SAPs)

8. Structural Adjustment Programs • Central aims of these programs are to: • Reduce debt that has accumulated • Introduce policy and institutional change necessary to modify structure of economy • Move from agrarian dominance to industrialization • Instruments: currency devaluation, monetary discipline, reduction of pubic spending, trade liberalization, privatization of public enterprises, wage restraints, subsidy removal, institutional reform-especially financial

9. Principal Instruments of Structural Adjustment • Currency devaluation-encourage trade • Monetary discipline- interest rate control • Reduction of public spending- lower expenses on “grandiose” projects • Price reforms- price commodities to sell and reward producers • Trade liberalization- remove tariff barriers to ease flows of trade • Reduction and/or removal of subsidies- especially gasoline • Privatization of public enterprises- sell SOEs to private firms • Wage restraints- control wage levels • Institutional reforms- improve credit and especially banking sector

10. Cottage and Small Scale Industries: Textile, Batik and Handicrafts

11. Cottage and Small Scale Industries • Often outside scope of modern manufacturing organization • Carried on in rural areas, family and local labor which is unskilled- full or part time • Batik- complex, low productivity per worker absence of power-often high import content (higher quality cotton) • But provide a good for export markets • Provide employment opportunities for largely illiterate workforce • Too often unimaginative design, crude workmanship, tend to withdraw into areas where few alternative opportunities

12. Strategies for Industry • Export Oriented Industry (EOI) • State is producing goods for export and engaged in trade as a means of expanding national revenues • Protection is decreased while diversified exports, often with subsidies, are promoted through an aggressive trade policy • Increasing demanded under SAPs so manufacturing becomes secure

13. Constraints on Industrializing Progress • Legacy of colonial rule when industry was suppressed • Deficient infrastructure especially transport • Capital shortage to invest in new opportunities • Low educational levels • Lack of entrepreneurial skills • Limited size of market • Corruption, weak legal system and lack of transparency reduces appeal of foreign investors