Labour-intensive industrialization and development in East and South East Asia: a recapitulation4

Amongst the late industrializers, four countries of East and South East Asia (henceforth referred to as ESEA), viz., Republic of Korea, Hong Kong, Singapore, and the Taiwan province of China (henceforth referred to as Taiwan), are regarded as having succeeded in achieving development through export-oriented industrialization. However, in terms of possible emulation by other developing countries, the latter three are often considered to be non-representative because of their small size and other special characteristics. Therefore, the present chapter will use the experience of Korea as a success story and see how far the other developing countries of Asia have been able to develop along the path trodden by that country.

On growth experience in the region as a whole, one would notice several features. First, Korea and some other countries of the ESEA region achieved high and sustained rate of economic growth over several decades (Korea starting in the 1960s and some others starting from the 1970s). The rate of economic growth (measured by annual compound rate of GDP growth) has been consistently higher in the ESEA countries compared to the South Asian countries (see Table 6.3).

The second and an important aspect of the growth experience (which also comes out of the data presented in Table 6.3) has been the high rate of growth of manufacturing industries, especially in Korea and also in some ESEA countries. Indeed, the elasticity of growth of manufacturing with respect to overall GDP growth was over 2 in Korea in the 1960s and dropped to just below 2 (1.9, to be precise) during 1970—80. It dropped to below 1.5 only during the 1980s. In Malaysia also, the elasticity of manufacturing output growth with respect to overall GDP growth has been between 1.5 and 2 for almost three decades (during 1970—96). Indonesia and Thailand also had similar experience. On the other hand, this figure has been in the range of 1.3—1.4 in India and lower in Pakistan. In Bangladesh and Sri Lanka, there has been a considerable degree of fluctuation in the elasticity of manufacturing growth with respect to GDP growth. On the whole, it is quite clear that not only has overall economic growth been higher in Korea and a few other countries of ESEA (Philippines being an exception) than in South Asia, the manufacturing sector has been the major (and a more important) driver of growth in the former. And that enabled Korea (and other countries of

Sources: World Bank, World Development Indicators (1998, 2004, 2007, 2018), available at: http://data.worldbank.org/products/vdi and http://wdi. worldbank.org/table/4.1; World Bank, World Development Reports (1998 and 1999).

Notes: (i) Man = manufacturing output; Em = elasticity of manufacturing growth with respect to GDP growth, n.a. denotes “not available”.

(ii) A number of countries of East and South East Asia suffered from the Asian economic crisis of 1997—98 and its aftermath. As the figures for 1997—99 are affected by sharp declines in overall economic growth as well as export growth, those years have been excluded from this table.

ESEA in varying degrees) to achieve structural change in their economies of a kind that is in line with the Lewis model. Of course, not all countries of ESEA succeeded in achieving such transformation, especially of their labour markets — an issue to which we shall turn in the next section.

The third important aspect of economic growth in the countries of ESEA compared to South Asia has been the superior export performance of the former and greater openness of their economies (Lee, 1981; World Bank, 1993). Indeed, the share of exports in total GDP has been consistently much higher in the countries of ESEA compared to those in South Asia. Even after the economic reforms introduced in the 1980s and the 1990s and the gradual opening up of these economies, the share of exports in GDP in Bangladesh, India, and Pakistan has remained below 25 per cent, whereas it has ranged between 40 and 130 per cent in the countries of ESEA (Islam, 2003). More important from the point of view of industrialization, the growth rate of manufacturing exports has been much higher in the countries of ESEA compared to South Asia (Lee, 1981; Table 6.4 below).

From the point of view of labour-intensive industrialization, it is important to look at the composition of industrial exports. And in that regard, the experience of Korea in particular is noteworthy. During the 1960s (i.e., the early stages of export-led development) the share of “light industries” in manufactured exports remained at high levels — ranging from 83 per cent in 1964 to 89 per cent in 1968. Only in the 1970s, this share started declining and went down to 60 per cent in 1978 (Park, 1981).³ Between 1960 and 1970, direct employment in exports in Korea increased by more than 18 times, or at an average annual rate of 34 per cent. As a result, the share of export industries in total employment expanded from 5 to 22.5 per cent during the same period (Hsia, 1981). In fact, the degree of capital intensity (measured by capital-labour ratio) of Korean manufacturing declined during the 1960s till about the early 1970s (Little, 1981)/’ Capital intensity of Korean manufacturing and of exports in particular started rising only in the early 1970s.

The labour-intensive character of Korea’s early stages of industrialization is also illustrated by the high employment intensity of growth in the manufacturing sector. While estimates for the 1960s is difficult to come by, according to one estimate (Khan, 2006), the elasticity of employment with respect to output growth in manufacturing was 0.69 during the 1970s, and declined to 0.49 during the 1980s. It is thus clear that even after almost a decade of industrialization with high rates of output growth, the manufacturing sector in Korea remained highly employment-friendly. And there was a decline in the elasticity of employment only after surplus labour was exhausted. It should be added here that with an employment elasticity of 0.69, there was still considerable scope for labour productivity to improve, and that is what happened in reality. The high rate of growth-induced expansion in employment was accompanied by high growth in productivity as well as earnings of workers (Storm and Naastepad, 2005; Khan, 2006).

Sources: (i) World Bank: World Development Report (various issues including 1992, 1995, 1997, 1999/2000); (ii) World Bank: WD1, 1997, 2002, 2007, and 2018; (iii) UNCTAD (2006, 2015).

Notes: (i) A number of countries of East and South East Asia suffered from the Asian economic crisis of 1997-98 and its aftermath. As the figures for 1997—99 are affected by sharp declines in overall economic growth as well as export growth, those years have been excluded from this table.

• (ii) The total export growth figures for 1990—96 are for 1990—95 as available in WDI 1997.
• (iii) Manufactured export growth figures have been calculated from UNCTAD data available in various issues of UNCTAD Handbook of Statistics, including UNCTAD (2006, 2015).

Is South Asia facing the possibility of premature de-industrialization?

In the course of the discussion of structural transformation in Chapter 2, reference has been made to the phenomenon of de-industrialization — a term that is used to describe the decline of the share of manufacturing in the total output and employment of an economy. In the analysis and experience of economic growth, this was considered normal for an economy as it attained a certain level of income. For example, in the UK and the USA, the share of manufacturing employment rose to 35 and 36 per cent, respectively, before it started to decline. The level of per capita income at which it happened in those countries as well as in some other developed countries of Europe varied between US$9,000 and USS11,000 (at 1990 prices).

In contrast with de-industrialization experienced by developed countries, some developing countries are facing it at a much lower level of development - a phenomenon that is being referred to as “premature de-industrialization”.⁸ While there may be different explanations for this in different countries, the impact, especially on the generation of productive employment through structural transformation of the economy is likely to be negative. It is, therefore, important to see whether developing countries, especially those with surplus labour and have not yet succeeded in attaining the Lewis turning point are facing the danger of this happening. It is in that context that the question becomes particularly important for the countries South Asia.

A number of studies (e.g., Tregenna, 2011; Rodrik, 2013) point out that there are developing countries where de-industrialization started much below the levels of per capita income at which this happened in the developed countries. Rodrik (2013) mentions India alongside Brazil and China among countries that have already experienced such premature de-industrialization. On India, he says:

Manufacturing employment there peaked at a meager 13% in 2002, and

has since trended down.

On the other hand, Tregenna (2011) mentions India alongside Bolivia, Indonesia, Malaysia, and Thailand as five countries (out of 28 countries included in the study) where the share of manufacturing in total employment did not decline. In fact, data on the share of manufacturing in total employment presented in Table 6.5 below show that between 1993—94 and 2004—05, it increased a bit (from 10.5 per cent to 12 per cent). Furthermore, between 2004—05 and 2011—12, the share increased to 12.9 per cent. The share of manufacturing in India’s GDP also shows a small increase during 2000—14 - from 15 to 17 per cent. While these figures do not signal a spectacular increase in the share of manufacturing either in employment or output, they do not warrant the conclusion that India has already experienced premature de-industrialization.

Table 6.5 Share of Manufacturing in GDP and Total Employment in Selected Countries of South Asia

Sources: Data on share in GDP are from World Bank, World Development Indicators, http:// data.worldbank.org/products/wdi and http://wdi.worldbank.Org/table/4.2.

Notes: Data on share in employment are from (i) Bangladesh: Bangladesh Bureau of Statistics: Labour Force Survey, various years; (ii) India: IHD (2014); (iii) Nepal: GON (2009);

(iv) Pakistan: Amjad and Yusuf (2014); and Government of Pakistan (2016); (v): Sri Lanka: Department of Census and Statistics (2013, 2017).

a These figures are for “Industry” not manufacturing. The figures within parentheses refer to the year of the data.

Out of the other countries of South Asia, Bangladesh witnessed a rise in the share of manufacturing in both GDP and employment. During 2000—14, the rise in the share of GDP was small. But the rise in the share of employment during 1999—2000 to 2016—17 was substantial — from 9.5 per cent to 14.4 per cent. The country has been able to attain this mainly through high growth one labour-intensive export-oriented industry, viz., ready-made garments.⁴

The situation in the other countries of South Asia, especially in Nepal and Pakistan is less clear with respect to industrialization. In Nepal, the share of the sector in GDP declined (2000—14) while that in employment increased slightly (1998—99 to 2008—09). In Pakistan, the share in GDP declined while that in employment remained virtually unchanged up to 2010—11. However, data from the labour force survey of 2014—15 reported in Pakistan Economic Survey 2015-16 (Government of Pakistan, 2016) show that the share rose to 15.33 per cent. In Sri Lanka, the share of the sector in GDP increased slightly — from 17 to 18 per cent. But in the absence of data for manufacturing employment (it’s available for industry which is broader than manufacturing), nothing can be said what has happened to its share in employment.

Further light on the question of de-industrialization can be thrown by data on growth of employment in the manufacturing sector (Table 6.6). A couple of points may be noted on the basis of this data. First, in all the four countries for which data are available for two periods, there has been a decline in

Table 6.6 Growth of Manufacturing Employment in Selected Countries of South Asia

Sources: (i) Bangladesh: Bangladesh Bureau of Statistics: Labour Force Survey, various years; (ii) India: IHD (2014); (iii) Nepal: GON (2009); (iv) Pakistan: Amjad and Yusuf (2014); (v): Sri Lanka: Department of Census and Statistics (2013, 2017).

the rate of employment growth in the sector. Second, the decline has been particularly sharp in the case of India and Pakistan. And during the 2000s, the rate of growth of employment in both those countries has been very low —1.5 and 1 per cent respectively. In Bangladesh also, there has been a decline, although the extent has not been so much. But even in this case, the decline has been quite sharp in recent years - to 2.33 per cent between 2015—16 and 2016—17 compared to the annual average of 5.12 during the previous five years.

What can be said to conclude this discussion on the danger of premature de-industrialization in the countries of South Asia? If the shares in GDP and employment are used as indicators, India and Bangladesh clearly have not entered the phase of de-industrialization. But the same cannot be said so confidently about Nepal, Pakistan, and Sri Lanka. This, however, should not be taken to imply that Bangladesh and India are firmly positioned on the path of industrialization, and manufacturing will be able to perform the role of absorbing the surplus labour in those countries. The share of the sector in total employment was way below that attained by the peak share of 23 per cent attained by both Republic of Korea and Malaysia (both in 2000).

In India, the share rose from 10.5 per cent to 12.9 per cent over a 15-year period. In Bangladesh, the rise was from 9.5 per cent to 14.4 per cent over a 17-year period. Whether the figures in these countries will ever cross the 20 per cent mark, and if so, when, remain open questions. Given the pace and pattern of industrialization in the countries of South Asia, even if they are not showing signs of de-industrialization in a technical sense (i.e., decline in the share of manufacturing in GDP and employment), they may remain prone to this possibility. And this possibility is becoming increasingly real with the availability of labour-saving technologies associated with the fourth industrial revolution — an issue to which we now turn.