AUTOMOBILE INDUSTRIALIZATION IN EAST ASIA: POLITICAL ECONOMY OF NATIONAL PERFORMANCE

1. AUTOMOBILE INDUSTRIALIZATION IN EAST ASIA: POLITICAL ECONOMY OF NATIONAL PERFORMANCE Richard Doner (Emory University) Gregory Noble (University of Tokyo) John Ravenhill (Australian National University April 27, 20111

2. Project Overview • Co-authored book project on cross-national variation in East Asian automobile industries • Puzzle • Extensive growth • Upgrading • Alternative Arguments • DNR approach • Role of Business Associations • Limitations / Questions

3. Automobile Industry Performance: Extensive Growth / Upgrading

4. East Asian Auto Performance

5. Alternative Explanations • Market size / Scale economies • Population not determinate of “effective market size” (Indonesia vs. China) • Exports and niche markets (Thai one-ton pickup trucks; Taiwan REM exports; Korea “Pony”) • Washington Consensus: “Sound Money / Free Markets” • Maro stability necessary….but • NICs experience with “wrong” prices (e.g. low % loans, targeted fiscal incentives, e.g. Thai pickup) • Trade liberalization important but • Alternative sources of competitive pressures (export push) • Benefits depend on build-up of local technol capacities • FDI • Consequence or cause of development? • Singapore vs. Malaysia? • Endogenous growth: Benefits depend on domestic absorption capacities • Promotes wage inequality? Depends on existing education system and pool of skilled labor • Key role of technical education (e.g. Thailand) • Growth of informal labor

6. “Institutions” Are The Answer….(well, sort of) • “Good Governance” • Bureaucratic quality (Weberianness) is important (merit-based recruitment, stable career tracks, expertise) • But…value of bureaucratic quality depends on what leaders make of it • But…effective institutional designs vary with policy goals / local conditions • Capacity for experimentation key (e.g. China) • Good governance “endogenous”? • “Developmental States” • Highly useful in demonstrating benefits of coherent state intervention • But danger of confusing institutional presence with institutional capacities (e.g. “pilot agencies”) • Little attention to stage-specific needs • Emphasis on autonomy minimized contribution of private actors (“embedded autonomy”? ) • Emphasis on autonomy led to “thin politics” – little attention to leaders’ motivations, pressures etc.

7. Political – Institutional Approach • Development stages: Institutions for what? • What kinds of competences and resources needed for different stages? • What are the difficulties of building these competencies? • Institutional design or institutional capacities? • Politics of institutional origins: Where do “good” institutions come from?

8. Explaining Performance Variation Resource Providers buyers, competitors, suppliers of intermediates and capital equipment, public research institutions, public-private research consortia, company-oriented service suppliers. Competencies / Resources property rights macro stability investment incentives trade administration new markets education / skills R&D standards / testing Performance Outcomes extensive growth upgrading “Governing” Institutions state agencies bus. Assocs. Unions pub.-priv. consult

9. Performance Outcomes via Development Stages • Igniting vs. sustaining growth (Rodrik) • 1st vs. 2nd generation econ reforms (Nelson) • “Extensive” vs. “intensive growth” (Irmen) • Diversification vs. specialization (Imbs and Wacziarg ) • “Middle-income trap” (e.g. Yusuf / Nabeshima) • Extensive growth vs. upgrading

10. Extensive Growth: Challenges • Investment-driven process • Requires mobilizing resources “hidden, scattered, or badly utilized...” • Market failures: existing information and assets will not lead entrepreneurs to put their resources into new activities. • Need to facilitate investment of invest scarce funds in activities whose short-term risks exceed potential but uncertain, long-term development benefits • Key challenge: Risk socialization • Assume stable property rights and macro stability • Information (e.g. through low interest loans, tax/tariff incentives) • Coordination through provision of complementary assets (e.g. infrastructure) • But also….expose producers to market discipline • However, …no focus on indigenous tech. capacity and/or linkages

11. Upgrading: Challenges of Learning and Linkages • Learning • To operate existing production efficiently via engineering, product management, raw materials control, scheduling, repair / maintenance, trouble shooting • To create new capacity through search and select technology, new management skills etc. • To innovate products and processes through adaptations of tools, products, processes • Challenges of innovation and improving technology capacity • Innovation refers to products/processes “new” to firm • Externalities (poaching) • Public bads (monopolistic markets for certain technologies) • Public goods (R&D) • Information imperfection • What works in local context? • Variability of learning by technology • Tacit, not codified knowledge need to “tinker”; requires active learning • Linkages: Ustream capacities developed enough to serve competitive downstream users

12. Competencies / Resources

13. Distinguishing Development “Difficulties” • Number of actors whose participation is required to implement policy • Information intensity • Level and novelty of technology • Site specificity • Availability of existing template • Distributional Consequences • Numbers of winners vs. losers • Political strength (e.g. cohesion, leverage) of winners vs. losers • Speed of gains vs. losses • Upgrading more difficult than extensive growth (ceteris paribus)

14. Competencies / Resources

15. Example: Investment Promotion

16. Example: Vocational / Technical Training

17. Vocational/Technical Training “Network” in Thailand (Ritchie 2010)

18. Upgrading Requires “Governance” Institutions • “Governing” – reconciling interests and preference of diverse yet interdependent actors • State agencies with functional supervisory responsibility • Ministries • Investment promotion agencies • Environmental protection agencies • Business associations • Unions • Public-private consultative

19. Effective Governance Depends on Institutional Capacities • Consultation • Identify actors’ preferences, interests, capacities • Multiple forms: • Top-down vs. bi-directional • Participation in formulation and/or implementation • More difficult task, more bi-directional, participation in implementation • Credibility • “Problems of credibility …major obstacle to better growth performance” (Brunetti and Weder 1994) • Rewards and sanctions • Need to avoid unexpected change (time inconsistency) while maintaining flexibility to change…based on consultation • Monitoring • Provides information about actors’ actual behavior • “Without monitoring, there can be no credible commitment” (Ostrom (1990). • More difficult the development policy task, stronger institutions requires

20. Example: University-Industry Linkages in Thailand • Collaboration fragile • Partly result of weak S&T research in Thai universities • Underlying problems in governance institutions, especially Ministries of Education and University Affairs, as well as local business associations

21. Automotive Business Associations

22. Explaining Business Association Strength / Weakness • Level #1: Key role of state institutions in providing incentives for associational strength / role • Corresponding ministries (e.g. Industry) • Investment promotion agency • “isomorphism” (coercive, mimetic, normative) • Level #2: Political Institutions (veto players) • Number of parties and factions • Government / cabinet (in)stability (The key government agency overseeing the auto industry in Thailand – Ministry of Industry - had 14 different ministers in 11 Years) • Level #3: Preferences of Political Leaders • Short term / particularistic focus on rewarding narrow coalitions • Longer term / broader focus on development outcomes

23. Why Would Political Leaders Forego Short-term Gains for Long-term Development? • Alternative approaches • Good governance….but problems of measurement and endogeneity • Democracy…but no clear link between regime type and development • Deep background factors, e.g. colonial legacies…links unclear • Able/corruption-free leaders…but silent on leaders’ incentives • Systemic Vulnerability • Claims on state resources • External threats requiring • Internal, popular pressures and demands • Available resources to satisfy claims • Natural resource revenues • Foreign aid • Foreign investment

24. Political Origins of Institutional Capacities Political Institutions (veto players) Constraints / Pressures on Political Leaders Claims on resources -external threats -internal demands Available resources -natural resource revenues -foreign aid -FDI Governance Institutions’ Capacities -consultation -credibility -monitoring Preferences of Political Leaders

25. Big Questions • Crises and Threats • What constitutes crisis / threat? • Threshold to promote institutional strengthening? • Threshold to transform veto players? • Mechanisms linking threats to outcomes? • Positive outcomes inevitable? likely? • Ambiguous impact of FDI • Source of technological spillovers….in presence of strong local competencies • Can reduce demand for competencies by providing in-house or at home • But sudden loss of FDI might prompt internal strengthening…? • Crisis as stimulus to cross-class collaboration • N. Europe: “vulnerability and openness…(can)…impress on elites the need for internal unity and cooperation” (Katzenstein 1985)“ • E. Asian NICs: threats key to push elites on need for export strategy that engaged and rewarded non-elites, including labor • Expansion of informal labor

26. THANK YOU….QUESTIONS? COMMENTS?

27. Difficult Analytics of Crises Crisis literature is extensive but offers few consistent guidelines What is a “real crisis”? Impact and consequences? Mechanisms through which crises influence outcomes? Defining “crisis:” dimensions of difference Substance: economic vs. political Spatial: internal vs. external Onset speed: rapid vs. gradual (Pierson: “time horizons”) Duration: shorter vs. longer Crisis categories: from shock to ongoing threats Rapid onset, short-term, exogenous econ. shock (e.g. 1997 Asian $ crisis) Rapid onset, long-lasting, exogenous econ. shock (e.g. 1970s oil crisis) Gradual onset, long-lasting, endogenous econ. “exhaustion” (ISI, mid-income trap) Gradual, long-term external security threats (e.g. S. Korea, Taiwan post-WWII) Gradual, long-term (?) contentious politics (e.g. Singapore labor early 1960s) Gradual, long-term combination of external / domestic political threats with low access to resources, i.e. systemic vulnerability (e.g. E. Asian NICs)

28. Impacts of Crises 28 • Views on crises’ impacts have evolved • Initially very optimistic: (“f there is one single theme…(in)…the political economy literature it is…that crisis is instigator of reform” – Rodrik 1996) • Now, recognize cross-national variation in response to similar crisis • Now, disaggregate reform process (formulation, implementation, sustinability, macro/micro components) • Now, highlight key role of domestic variables • Nature of coalitions • Nature of assets held • Capital-labor conflicts • Political institutions..influencing elite cohesion • Now, suggests causal mechanisms • Mechanisms: How might crises influence outcomes • Learning: chaos  reassessment of previous policies and new mapping • Special politics: economic disarray and weaker opposition suspension of rules and delegation of authority to particular actors • Change in equilibrium behavior: actors revise payoffs and time horizons • Increase risk-taking behavior (“prospect theory”)

29. Preliminary Arguments 29 • Mechanisms: Crises and Innovation • Learning: scanning for new models and institutional experimentation • Change in equilibrium behavior: lengthen time horizons to account for long gestation periods • Increase risk-taking behavior: forego immediate benefits of particularistic policies for longer-term benefits of more public goods • Special politics: reduction in # of veto players AND/OR increase in # of veto players, i.e. elite cohesion and popular/labor incorporation • When will such mechanisms operate? What kinds of crisis? • Gradual onset, multi-dimensional, threats ,as reflected in the vulnerability concept , constitute a necessary condition for the development of innovation-supporting institutions

30. Title

32. Title 2 Notes (1) www.oica.net (2) Data refers to “Motor vehicles for the transport of persons”. Source: COMTRADE, SITC Rev.3 (3) Data for Taiwan is sourced from Taiwan's Bureau of Foreign Trade Statistics (http://cus93.trade.gov.tw/ENGLISH/FSCE/) (4) Parts refer to the same product codes that we had using when calculating Low/Medium/High tech components. Source: COMTRADE, SITC Rev (5) Data denominated in USD except for Malaysia (MYR) and Taiwan (NT$1000) (6) Data for Taiwan is sourced from http://www.ttvma.org/information.php (7) Negative number means a trade deficit. (8) Data for Philippines sourced from http://www.asean-autofed.com/statistics.html (9) Data for Malaysia denominated in MYR (10) Data sourced from COMTRADE, SITC Rev 3 (11) For Indonesia, Malaysia, Philippines - calculated from data extracted from ILO LABORSTA Database. Employment in Auto industry refer to employment in the manufacture of motor Vehicles, Trailers and Semi-Trailer and other transport equiment. (12) For Korea, source: Korean Automobile Industry Report 2008 (13) For Korea, source: Korean Automobile Industry Report 2010 (14) Source: Unido website (http://www.unido.org/index.php?id=1000313) (15) Data for China is 2007, Philippines is 2005, the others 2006 (16) Data for Taiwan is for 2006 and is calculated from data extracted from http://win.dgbas.gov.tw/dgbas04/bc2/ics95/GENERAL/EN/ZG8.pdf

33. World trade of automotive products by selected countries 2001-08 (USD billions) Source: WTO Statistics database time series. Accessed by 14.12.2009. Figures are rounded off. Notes: SITC groups 781, 782, 783, 784, and subgroups 7132, 7783. USD at current prices. #) Estimated value. Taken from Peter Wad, “Impact of the Global Economic and Financial Crisis over the Automotive Industry in Developing Countries” UNIDO Working Paper.

34. Global South motor vehicle manufacturers’ production (all types) and ranking 2001-07 (million units) Source: OICA statistics. For Proton 2007, Automotive Quarterly Review 2008 Q4, fig. 3.3 p. 229. Taken from Peter Wad, “Impact of the Global Economic and Financial Crisis over the Automotive Industry in Developing Countries” UNIDO Working Paper.

35. Development Stages, Competencies, Difficulties