Southeast Asia's Misunderstood Miracle: Industrial Policy and Economic Development in Thailand, Malaysia and Indonesia by Jomo K S

Author:Jomo K S [S, Jomo K]
Language: eng
Format: epub
Tags: Ethnic Studies, American, Asian American Studies, Social Science, Political Science, World, Asian, Regional Studies
ISBN: 9781000276411
Google: vq2bDwAAQBAJ
Goodreads: 52802982
Publisher: Routledge
Published: 2019-06-04T00:00:00+00:00

Regional Relocation, Liberalization and Renewed Export-led Industrialization

The recession was accompanied by an outflow of capital. In these circumstances, the exchange rate had to be protected either by further overseas borrowings or by exchange controls, or it had to fall. It fell, and fell sharply. After the second Plaza Hotel meeting in 1985, the US dollar began to depreciate heavily against other major world currencies, particularly the Japanese yen. As the value of the currencies of most East Asian industrializing economies rose, raising comparative production costs in the process, the Malaysian ringgit declined, even against the US dollar. In 1986, the exchange rate of the ringgit to the US dollar fell by a little over 7 percent, but in terms of the IMF's Special Drawing Rights (SDRs, based on a basket of currencies), the ringgit fell by 20 percent (see Ministry of Finance 1989: ii), and the real effective exchange rate fell by about the same percentage.

The boom throughout Southeast Asia from the late 1980s has benefited greatly from investments from the Northeast Asian economies experiencing rising production costs, also due to tightening labor markets as well as stricter environmental restrictions. The withdrawal of privileges under the Generalized System of Preferences (GSP) from the East Asian NICs in February 1988 also encouraged relocation to those countries which still qualified. The effective depreciation of the ringgit lowered production costs in Malaysia as real wage costs declined over the mid-1980s with the rise in unemployment as well as new labor policies and laws weakening organized labor's bargaining position and enhancing labour flexibility. In addition, the 1986 sharp decline in Malaysia's real effective exchange rate was accompanied by a relaxation of the guidelines imposed under the 1975 Industrial Coordination Act (ICA)—for example the requirements for local shareholdings were relaxed—and the increased incentives under the 1986 Promotion of Investments Act. Together, they made Malaysia an even more attractive place for investment.

These factors, combined with favorable new international conditions, resulted in a resurgence of export-oriented manufacturing, largely under the auspices of foreign capital. The timing was perfect, as manufacturers from Northeast Asia (especially Japan, and later, Taiwan and even South Korea) rushed in to relocate their industries and thus take advantage of the enhanced incentives, relatively good infrastructure and lax environmental restrictions as well as comparatively low production costs due to the new exchange rates and increased labor flexibility (Standing 1993). In US dollar terms, manufactured exports in 1987 were 15 percent higher than in 1985 while manufactured imports had risen by only 6 percent over the same two year period (World Bank 1989: 144). As a result, the deficit on the current account of about 14 percent of GNP in 1982 gave way to a surplus of 8 percent by 1987 (World Bank 1989: 1).

Since the late 1980s, incentives for exporting firms have been extended in the form of export abatement allowances and double deduction exemptions. The new trend in foreign investment from East Asia since the mid-1980s has resulted some technological deepening and greater linkages.

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