Economic Development of Southeast Asia

Ian CoxheadUniversity of Wisconsin-Madison

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OverviewWeek 1: Early modern development

Historical background – initial conditions Getting growth started: resources, industry, agriculture“Old style” global shocks: oil crisis, 1970sIncome growth, poverty and distribution

Week 2: Development since mid-1980sPost-Plaza Accord boom, bubble and bustGlobalization, again: trade liberalization and FDIEnter the dragon: the rise of ChinaTopics: human capital, Asian regional integration,

macro policy

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Approach and assessmentLots 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 sayClass participation @ 10%

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1a Southeast Asia before the modern era

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OverviewWhy study “ancient” history?Precolonial SE Asia: the first globalization eraColonialismWar, nationalism and revolutionThe region about 1970: a snapshot

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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 ideasOf course, some differences too:

Then: labor shortage; now, mainly labor abundance relative to rest of world

Is history fate?

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Precolonial SE Asia (~1000-1600 AD)Mainland, Java, Sumatra: centralized kingdoms with capitals

astride navigable riversWealth 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 and rest of world. Major religions display strong centralizing tendencies

Archipelago/Malay peninsula: decentralized political entities, capitals at coastal portsWealth based on resource exports and entrepôt trade between Red Sea

ports, India and China Spread of Islam (a decentralized religion) along maritime trade routes

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Resource endowmentsLabor-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 rainfallSpecific 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 householdManufactures and high-tech products largely imported (ceramics, silk

& painted textiles, navigational eqpt, paper)

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Precolonial globalizationTrade with China, India, & Europe

Maritime Silk RouteEuropean search for “Spice Islands” voyages of discovery

Columbus (1492), De Gama (1498), Magellan (1521), …Migration and cultural flows accompanied trade

Specialization & technology transfersEuropean trade huge expansion of pepper & spice area,

intraregional trade in rice & other staplesVulnerability to global shocks

Trade shocks: closure of China & Japan; European conflictsDependence of global trade routes on small numbers of entrepreneurs

(or on foreign MNCs, e.g. Dutch E. India Co.)

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Summary: precolonial SE AsiaResources: 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).

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Colonialism (17th century to ~1950s) Econ. motives for colonial rule

Trade access to East Asia (Manila, Cochinchina 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 nutmegTrade and tax revenues to support colonial govt Markets for European manufactures.

Strategic and political motives also importantinter-Euro competition for markets & influence (Portugal vs.

Venice, etc.).

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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 non-competitive products" (Fr. official).

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Econ. impacts of colonialismNew modes of production, esp. plantation economies

Esp. in Indonesia. 19th century plantation develpt even led to hunger as food production declined.

New resources and changes in existing resource basesInfrastructural development: railroads, ports, citiesBut 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).

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Welfare impacts of colonialismLittle evidence of gains from trade in colonial era

Falling global terms of trade in early 20th century reduced gains of the 19th 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

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Persistence of colonial impacts

Economic impactsPrimate cities (Jakarta, Saigon, … )Ethnic mix of some populations (Malaysia) Political, administrative, legal and fiscal structures.

Production structureSEA specialized in food (for own consumption) and agric. raw

materials for industrial economies: rubber, palm oil, timber, copra/CNO, sugar.

Trade patternsEurope (later USA, Japan) but no longer much intra-regional or

China/India trade.

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War, nationalism, and revolution

WWII (1941-45 in Pac/Asia) wrought destruction and created opportunities for changeLoss of infrastructure, manpower (esp. Philippines, Burma)Promotion of nationalist (anti-colonialist) movements -- some by the

Japanese themselves Exit from colonialism, 1940s-50s.

Liberation with violence: Indonesia, Vietnam, MalaysiaDomestic political fissures persisted beyond decolonization

Colonial legacies in early nationalist regimesEmphasis on self-legitimation (“nation-building”)Economic nationalism (mistrust of colonial systems)

Self-sufficiency and Soviet-style central planning

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SE Asia about 1970: A snapshotOngoing 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

SE Asia about 1970

Poor

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GDP per capita (constant 2000 US$)

Cambodia

Indonesia 236

Malaysia 1145

Myanmar

Philippines 732

Singapore 4531

Thailand 516

Vietnam

Low & middle income 635

High income 12934

SE Asia about 1970

Agrarian

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Agriculture, value added

(% GDP)

Employment in agriculture

(% of total)

Manuf. exports (% total)

Cambodia 1.6Indonesia 45 62 1.2Malaysia 29 48 6.5Myanmar 60 1.5Philippines 30 54 7.5Singapore 27.5Thailand 26 72 4.7VietnamLow & middle income 25High income 6 71.1

SE Asia about 1970

Unletteredandunconnected

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Literacy rate (% of population)

Telephone lines (per 100 people)

CambodiaIndonesia 47 0.12Malaysia 23 0.96Myanmar 60Philippines 72 0.48Singapore 50 5.13Thailand 68 0.26VietnamLow & middle income 0.00High income >90 18.46

SE Asia about 1970

Moderatesavings & financial dev.

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Gross domestic savings (% of

GDP)Money (M2) as

% of GDPCambodiaIndonesia 14 7.8Malaysia 24 34.8Myanmar 23.8Philippines 22 23.3Singapore 18 61.8Thailand 21 30.2VietnamLow & middle income 21 23.7High income 26 >80

SE Asia about 1970

Somewhat trade-dependent

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Exports of goods and services (% of GDP)

Cambodia

Indonesia 13

Malaysia 41

Myanmar

Philippines 22

Singapore

Thailand 15

Vietnam

Low & middle income 10

High income 14

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Exports as percent of GDP

0

20

40

60

80

100

120

140

Indonesia Malaysia Myanmar Philippines Thailand Vietnam Cambodia

Source: WDI

1960

1970

1980

1990

2000

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Imports as percent of GDP

0

20

40

60

80

100

120

Cambodia Indonesia Malaysia Myanmar Philippines Thailand Vietnam

Source: WDI

1960

1970

1980

1990

2000

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Ag & nat. res exports (% of total)

0

20

40

60

80

100

120

1970 1980 1990 2000

Source: WDI

Indonesia

Malaysia

Philippines

Thailand

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Manufacturing exports (per cent merchandise exports)

0

10

20

30

40

50

60

70

80

90

100

1960 1970 1980 1990 2000

Source: WDI

Indonesia

Malaysia

Philippines

Thailand

Singapore

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Two important themes

Globalization and growth in historical contextShifting patterns of trade in precolonial, colonial, and post-

colonial erasEvolution of global and regional trade networks in late 20th

centuryInfluence of global integration on economic growth

Industrialization vs. reliance on natural resource wealthFollow comparative advantage or hope for dynamic gains

from industry growth?Within industrialization, factor content and links to growth

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SE Asian transitions“3rd world” “Emerging markets”Low income middle incomeNat resources manufacturingRural urbanEconomically isolated integratedGov’t as central actor Gov’t as regulator/facilitator

But not simple: Nonlinear processes! Different speeds of transitionNo guarantees of future trajectory

Read Malcom Dowling: “Asia’s economic miracle”

NIEs: Singapore, HK, Taiwan, KoreaSE 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?

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