Economic Development of Southeast Asia Ian Coxhead University

Economic Development of Southeast Asia Ian Coxhead University of Wisconsin-Madison 0

Overview Week 1: Early modern development Historical background – initial conditions Getting growth started: resources, industry, agriculture “Old style” global shocks: oil crisis, 1970 s Income growth, poverty and distribution Week 2: Development since mid-1980 s Post-Plaza Accord boom, bubble and bust Globalization, again: trade liberalization and FDI Enter the dragon: the rise of China Topics: human capital, Asian regional integration, macro policy 1

Approach and assessment Lots of reading! Thinking about what we read: 2 short midweek homeworks @ 10% Connections to data 1 big research assignment, using SE Asian economic growth and development data @ 30% Just checking… 2 end-of-week tests @ 20% Having your say Class participation @ 10% 2

1 a Southeast Asia before the modern era 3

Overview map Why study “ancient” history? Precolonial SE Asia: the first globalization era Colonialism War, nationalism and revolution The region about 1970: a snapshot 4

Why study ancient history? Precolonial SEA has some remarkable similarities with contemporary times: Resource endowments relative to rest of world Natural resource abundance Importers of advanced technologies Trade relationships Esp. predominance of China & Northeast Asia Vulnerability to world market shocks Susceptibility to radical political and religious ideas Of course, some differences too: Then: labor shortage; now, mainly labor abundance relative to rest of world map Is history fate? 5

Precolonial SE Asia (~1000 -1600 AD) Mainland, Java, Sumatra: centralized kingdoms with capitals astride navigable rivers Wealth based on local resource base and taxes on resource exports (rice, spices, specialty timbers) E. g. Ayuthaya (Thailand): about 25% gov’t revenue from taxes on trade between hinterland rest of world. Major religions display strong centralizing tendencies Archipelago/Malay peninsula: decentralized political entities, capitals at coastal ports Wealth based on resource exports and entrepôt trade between Red Sea ports, India and China Spread of Islam (a decentralized religion) along maritime trade routes 6

Resource endowments Labor-scarce, land-abundant economies Slavery & quasi-slavery systems widespread & persistent Many wars were primarily slave raids Corvée and indentured labor under colonialism. Open land frontiers (these weakened central authority) Natural resource wealth Abundant timber and cropland, plentiful & regular rainfall Specific resource endowments of very high value (nutmeg, mace, cloves, tin & other mineral resources) Little reproducible capital and few commercial inst’ns Main unit of production was the household Manufactures and high-tech products largely imported (ceramics, silk & painted textiles, navigational eqpt, paper) 7

Precolonial globalization Trade with China, India, & Europe Maritime Silk Route European search for “Spice Islands” voyages of discovery Columbus (1492), De Gama (1498), Magellan (1521), … Migration and cultural flows accompanied trade Specialization & technology transfers European trade huge expansion of pepper & spice area, intraregional trade in rice & other staples Vulnerability to global shocks Trade shocks: closure of China & Japan; European conflicts Dependence of global trade routes on small numbers of entrepreneurs (or on foreign MNCs, e. g. Dutch E. India Co. ) 8

Summary: precolonial SE Asia Resources: land abundance, labor scarcity. Trade: diversified; regional and global. Econ. structure: mainly diversified; subsistence-oriented; low-tech (no capital). “Southeast Asia … has always been an exporter of raw materials and an importer of manufactures. Its own manufactures were significant items of local trade, but … they were not needed in China or India, the two populous manufacturing centers on its borders. It was the products of tropical agriculture and horticulture… that received the greatest stimulus from the trade boom… followed by forest products” (Reid 1993: 32). 9

Colonialism (17 th century to ~1950 s) Econ. motives for colonial rule Trade access to East Asia (Manila, Cochina as bases/entrepots) SE Asian natural resources (spices, timber, ag. produce, minerals) Treaty of Breda (1697): Dutch exchange an American colony for Run Is. , securing global monopoly on nutmeg Trade and tax revenues to support colonial govt Markets for European manufactures. Strategic and political motives also important inter-Euro competition for markets & influence (Portugal vs. Venice, etc. ). 10

Econ. impacts of colonialism New bilateral trade and commercial links with European economies (e. g. Manila galleon from China to Spain) Redirection of trade flows towards colonial power. Strong in Philippines and Indochina, less so elsewhere New products (rubber, palm oil) and new emphasis on some traditional products (rice, spices) Colonial regimes stressed production for metropolitan markets - and those alone: e. g in VN, "colonial production must be limited to supplying the mother country with raw materials and with noncompetitive products" (Fr. official). map 11

Econ. impacts of colonialism New modes of production, esp. plantation economies Esp. in Indonesia. 19 th century plantation develpt even led to hunger as food production declined. New resources and changes in existing resource bases Infrastructural development: railroads, ports, cities But dendritic development: new cities (Saigon, Rangoon on coast) Movement of people: Chinese & Tamils --> Plantations in Malaya & Philippines; Vietnamese to Cambodia, etc. New technologies and flows of information (economic, political, etc). 12

Welfare impacts of colonialism Little evidence of gains from trade in colonial era Falling global terms of trade in early 20 th century reduced gains of the 19 th century, if any “Colonial drain” -- unrequited export surplus, implying a drain of capital or lack of reinvestment from rest of world. Probable distortion of investment & expenditure incentives Colonial governments placed low priority on ‘development’ expenditures Colonial market distortions probably diverted domestic investments toward less productive activities and consumption But new technologies & info flows (both deliberate and otherwise) from colonizers to colonized map 13

Persistence of colonial impacts Economic impacts Primate cities (Jakarta, Saigon, … ) Ethnic mix of some populations (Malaysia) Political, administrative, legal and fiscal structures. Production structure SEA specialized in food (for own consumption) and agric. raw materials for industrial economies: rubber, palm oil, timber, copra/CNO, sugar. Trade patterns Europe (later USA, Japan) but no longer much intra-regional or China/India trade. 14

War, nationalism, and revolution WWII (1941 -45 in Pac/Asia) wrought destruction and created opportunities for change Loss of infrastructure, manpower (esp. Philippines, Burma) Promotion of nationalist (anti-colonialist) movements -- some by the Japanese themselves Exit from colonialism, 1940 s-50 s. Liberation with violence: Indonesia, Vietnam, Malaysia Domestic political fissures persisted beyond decolonization Colonial legacies in early nationalist regimes Emphasis on self-legitimation (“nation-building”) Economic nationalism (mistrust of colonial systems) map Self-sufficiency and Soviet-style central planning 15

SE Asia about 1970: A snapshot Ongoing or recent wars/violent civil conflict/separatist movements in Vietnam, Cambodia, Laos, Indonesia, Philippines, Thailand Military dictatorships in all countries except Singapore (and Philippines, until 1972) Major challenges of nation-building and establishment of “national” economy 16

SE Asia about 1970 GDP per capita (constant 2000 US$) Poor Cambodia Indonesia 236 Malaysia 1145 Myanmar Philippines 732 Singapore 4531 Thailand 516 Vietnam Low & middle income High income 635 12934 17

SE Asia about 1970 Agrarian Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam Low & middle income High income Agriculture, Employment value added in agriculture (% GDP) (% of total) Manuf. exports (% total) 30 62 48 60 54 26 72 1. 6 1. 2 6. 5 1. 5 7. 5 27. 5 4. 7 25 6 71. 1 45 29 18

SE Asia about 1970 Literacy rate (% Telephone lines of population) (per 100 people) Unlettered and unconnected Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam Low & middle income High income 47 23 60 72 50 68 >90 0. 12 0. 96 0. 48 5. 13 0. 26 0. 00 18. 46 19

SE Asia about 1970 Moderate savings & financial dev. Gross domestic savings (% of Money (M 2) as GDP) % of GDP Cambodia Indonesia Malaysia Myanmar Philippines Singapore Thailand Vietnam Low & middle income High income 14 24 22 18 21 7. 8 34. 8 23. 3 61. 8 30. 2 21 26 23. 7 >80 20

SE Asia about 1970 Exports of goods and services (% of GDP) Somewhat tradedependent Cambodia Indonesia 13 Malaysia 41 Myanmar Philippines 22 Singapore Thailand 15 Vietnam Low & middle income 10 High income 14 21

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Two important themes Globalization and growth in historical context Shifting patterns of trade in precolonial, and post- colonial eras Evolution of global and regional trade networks in late 20 th century Influence of global integration on economic growth Industrialization vs. reliance on natural resource wealth Follow comparative advantage or hope for dynamic gains from industry growth? Within industrialization, factor content and links to growth 26

SE Asian transitions “ 3 rd world” “Emerging markets” Low income middle income Nat resources manufacturing Rural urban Economically isolated integrated Gov’t as central actor Gov’t as regulator/facilitator But not simple: Nonlinear processes! Different speeds of transition No guarantees of future trajectory 27

Read Malcom Dowling: “Asia’s economic miracle” NIEs: Singapore, HK, Taiwan, Korea SE Asia: Indonesia, Thailand, Malaysia What are the 4 “critical” elements of E/SE Asian growth? Ask yourself: is anything different since 1997? Is what was true in 1997 still true today? 28