Economic theorists have had something of a battering in recent years. They failed to explain, let alone predict, Japan’s lost two decades of economic progress. And they failed to predict, or even criticize, the policies that allowed Thailand to emerge as a leading global manufacturer and exporter of automobiles.
During some economic research in Asia during the early 1970s, I came across a Thailand that seemed to have fallen into the very protectionist trap those theorists like to warn us about. To industrialize it had imposed heavy tariffs on the import of finished manufactured goods, automobiles especially.
And while foreign car exporters to Thailand, the Japanese especially, had then rushed in to build assembly plants, Thailand seemed destined to remain forever saddled with inefficient assembly plants while having to import at great cost the parts and materials needed to keep those plants alive.
Its only way to growth, the theorists said, was to rely on exports of primary goods and so gradually pull itself into growth. Protectionism was a no-no.
True, at the time it was accepted reluctantly that the Sinitic culture nations of Asia using protectionist policies — Taiwan, Singapore, South Korea and maybe even China itself — might just possibly be able to rely on good work ethics and smart bureaucrats to try avoid the dangers. But Thailand?
Suffering from weak government, corrupt bureaucracy and a very laid-back work ethic, it seemed destined to remain down there with Myanmar, Indonesia, Pakistan, Sri Lanka, Bangladesh and the Philippines as one of the sick nations of Asia. The idea of going from zero to create an efficient car industry seemed absurd.
The one thing Thailand seemed good at producing was military coups, and even there they seemed to have had problems. Out of a total of 18 since 1932, seven had been unsuccessful.
But the Thai economic planners (some of whom I knew) had another idea, and it was a good idea. They waited till the foreigners had their car assembly plants up and running. They then decreed that while the assemblers could continue freely to import most of the parts and materials they needed, certain products — brakes and suspension systems for example — would have to be produced locally.
The car assemblers complained bitterly. They had, in effect, been blackmailed. They had already invested much in those inefficient assembly plants to get a foothold in the future Thai market. But if they did not invest more to produce those parts locally they would lose the money they had already invested, and the foothold.
The Japanese with their strong survival ethic battled on. But many of the others preferred to pull out.
Gradually the planners began to raise tariffs on other parts — wheels, tires, bodywork, even engines. With each turn of the screw, the remaining assemblers had no choice but to invest more to protect what they had already invested.
The final twist of the screw came when the planners switched from protectionism to free trade. Tariffs on imported cars were reduced, forcing the remaining producers in Thailand — now mainly Japanese — to become even more efficient.
Meanwhile, and thanks to similar policies in other areas of the economy, new technologies were being introduced. Workers were being trained. Thailand was developing a competitive industrial base and its market for locally produced automobiles was expanding.
Then when the Thai planners moved to the next stage — subsidies for exports instead of tariffs on imports — the foreigners quickly began to move much of their export production to the lower labor-cost factories they had already established in Thailand. Today it is not for nothing that Thailand is called the Detroit of the East.
Other industries in Thailand saw similar policies. Garment importers were hit by high tariffs but were told they could import cloth freely and produce the garments in Thailand. Then they were told import of cloth was banned but they could import yarn and other materials needed to produce the cloth in Thailand. By now you get the picture: Thailand soon had an efficient textile industry exporting around the world.
The Thai “blackmail” model of development has lessons for all the developing nations.
One is that while free trade has its merits it needs to be restricted according to time and place. Ignore the unrestricted free trade mantras coming from the Asia-Pacific Economic Forum, International Monetary Fund and World Trade Organization, and all the other multi-lettered outfits set up by textbook economists seemingly determined to keep developing nations backward forever. The other is to ignore your domestic economic nationalists opposed to foreign investment. If you lack skilled domestic entrepreneurs, then if anything relying on the foreigners is an advantage since they cannot use political pressure to stop your planners from imposing those made-in-Thailand “blackmail” policies.
Traveling in Latin America, one sees time and again how many of those fine nations have had their economies crippled by our free trade, laissez faire theorists, leaving the way open to creeping poverty and crime.
Unlike Thailand, most began with the advantage of well-educated elites and strong middle classes. But with small domestic markets and weak industrial bases (apart from Mexico with its proximity to the United States), they could not hope to create from zero industries able to compete with the West and now with much of Asia.
Some are even losing their nascent textile industries. When they do try to go the protectionist route, they either go too far, as Argentina has, or they run into IMF-WTO lectures and strictures.
Australia too seems determined to follow the Latin American route. With the sensible protectionist policies it had back in the 1950s, it had developed a good industrial base despite a small domestic market and persistent currency over-valuation. But when the free trade, laissez faire people took over in Canberra in the 1970s (in Australia they call themselves “economic rationalists”), Australia began to lose its industrial base and its once quite efficient car industry was in trouble. The industry was urged to begin exporting to nations like Thailand to get the scale-economies it could have gained in Australia through sensible industry policies. That failed and today Australia is having to import cars from Thailand.
“Cry for Argentina” used to be a favorite catch-call among Australia’s economic rationalists decrying government intervention in the economy. But now it is “Cry for Australia” and the dozens of other nations around the world crucified on the cross of laissez faire and unrestricted free trade.
Gregory Clark is a longtime Japanese resident formerly involved with industry and foreign policy in Australia. A Japanese translation of this article can be found at www.gregoryclark.net
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