Strategies and sub-strategies under the industrial paradigm 65

By way of a reminder on terminology, in the DST, which encompasses the entirety of human history, ‘strategies’ are high-level societal choices, , made with respect to T, with technological change under the industrialisation banner

the relevant primary option after the Industrial Revolution. ‘Sub-strategies’ describe how societies approach  in a practical sense through time. In the present context, sub-strategies describe the manner in which societies industrialise and how they adapt their approach as comparative advantages develop and demand structures alter.

Sub-strategies adopted under the industrialisation umbrella are often

characterised by the intensity of factor inputs required in each phase, with the conventional sequence being a staged tradition from labour-intensive to capital-intensive to knowledge-intensive activity. This basic process is

mirrored on a broad sectoral basis by a move from a pre-industrial agricultural economy to one where secondary activity leads (accommodated by the

internal migration of population from rural to urban areas), and finally to one where tertiary activity dominates (at which point the urbanisation rate peaks and sustains at a high level). Orthodox descriptions of this general process abound, with a chronological advance through the initial construction of long- run time series (Bairoch 1982; Clark 1940; League of Nations 1983; Kuznets 1930; Maddison 2003; Mulhall 1892), attempts at systematic taxonomy and general theory-building (Gerschenkron 1962; Rostow 1973, 1978), and the rise of growth accounting, the study of convergence and economic growth’s

proximate drivers (Abramovitz 1986; Barro & Sala-i-Martin 2004; Baumol 1986; Dowrick & Nguyen 1989; Solow 1957). In the regional and country- specific East Asian context, each of these branches has its counterpart (see the range of references cited in the introduction).

Alongside the conventional framework, sub-strategies can be usefully

categorised by their relationship to the external sector, which inter alia, defines a society’s desired level of international engagement. Sub-strategies that

systematically eschew or minimise international engagement are not our theoretical concern here, whether they are genuine autarkies or merely protectionist import substitution regimes. As both Japan and China

proactively embraced the external sector in their high growth eras, and as our principal interest is in projecting China’s performance, the emphasis here must be on sub-strategies that endorse systematic international engagement. A discussion of China’s anti-strategist pathway under Mao forms a large part of Chapter 6.

Industrialisation sub-strategies that incorporate proactive international

engagement can take many forms (Amsden 2001; Chang 2002; Haggard 1996; Rodrik 2007). For the purposes of this study, which ultimately seeks to assess China’s potential to achieve high-income status, which demands successful navigation of the middle-income phase of its development, it is vital to highlight both successes and failures in the historical record. The chapter following this one will outline Japan’s record of remarkable success for more than a century after opening up in the middle part of the nineteenth century, as well as its eventual exhaustion from the early 1990s forward. Beforehand, a detailed but general discussion of outward-oriented sub-strategies under the industrial paradigm is required. As indicated at the outset of the chapter, the

following arguments form a bridge between the overarching DST and the more detailed empirical studies of Japan and China that are still to come.

In the context of the GST embodied in the industrialisation meme, outward- oriented sub-strategies give priority to issues of international competitiveness. Competitiveness is recognised as vital to generate offshore sales, which earn the foreign exchange required to import the technology (and possibly also the natural resources, depending upon individual endowments) a latecomer

society lacks. The absorption of this technology will eventually allow the newly-minted industrial strategist to produce and export more sophisticated products and compete with, and displace, manufactured imports at home as the technological intensity of its industrial structure increases. Outward

orientation entails exposure to market discipline in the search for international customers. Outward orientation demands an ability to move up the value chain as comparative advantages develop by continuously raising productivity levels, which ultimately drive increases in aggregate living standards. A more technologically-intensive fixed capital stock and improvements in human capital jointly raise the productivity of labour, which accommodates higher wages, which boosts domestic purchasing power, offering an expanded home market with a more sophisticated consumption basket.17

An outward-oriented economy industrialises as a means of raising living standards first and foremost—gains in export market share are a symptom of

17 _{For a discussion of the development process through the lens of consumer preferences, as it pertains to}

this goal and not an end in and of themselves. External demand is very

important, and the growth pattern may superficially appear to be export-led in the sense put forward by Kaldor (1966) and Thirlwall (1983), but it is the manufacturing sector that defines industrialisation, and is thus ‘deified’, not exports themselves. In the most conspicuously successful exponents of latecomer outward-oriented industrialisation, where very high GDP growth rates have been recorded, domestic demand consistently expanded at a considerably faster pace than global GDP, even when the nation’s domestic growth was somewhat lower than the growth in its exports and its overall international trade. Successful outward orientation is reflected in a rising trade to GDP ratio, but the trade to GDP ratio itself need not be high in absolute terms or relative to peer economies at similar levels of income per head.

None of the above is meant to imply that an outward-oriented economy must be a determined free trader with an arms-length market-driven financial

system—in the early and middle stages of industrialisation at least, rising industrial nations tend to be anything but laissez faire (Bairoch 1993; Bairoch & Kozul-Wright 1996, Chang 2002). Protectionism, particularly tariff barriers for ‘infant’ industries (Bairoch 1993, Chapters 2 and 3, pp. 16–43) and direct subsidies abound amid an array of policies that benefit the industrialisation goal, both at, and behind, the border. Indeed, ‘getting the prices wrong’, Alice Amsden’s famous phrase (2001, p. 10), is a signalling mechanism available to a strategically-minded state to ensure that aggregate resource allocation benefits the manufacturing sector while emphasising the appropriate leading industrial

clusters as comparative advantages develop over the course of the

industrialisation drive. Long-run success also encompasses the ability to de- emphasise former leading sectors/clusters once their international

competitiveness wanes, which will be highlighted in the following chapter as a failing of Japan’s strategic leadership that ultimately contributed to

stagnation/exhaustion from the 1990s onwards.

Successful outward-oriented industrialisation will result in a rising share of global exports and after a point, ‘dynamic substitution’ between domestic products and imports at home (McKay & Song 2010, pp. 10–11, Tables 2 and 3), reflective of increases in international competitiveness along the value chain. The term ‘dynamic substitution’ is the author’s own. It is chosen to distinguish a shift in import penetration driven by enhanced competitiveness in home industries from discredited strategies of activist import substitution (Lin 2008, 2012). The basic phenomenon was first described in the Asian context by Akamatsu (1962), in his ‘wild geese flying pattern’ model of Japanese economic development. The joint process of more effective competition at home and abroad is supportive of healthy external account repair, with some conspicuously successful latecomer economies from their respective generations—including the US, Japan, South Korea and China— being able to move from trade and current account deficit to surplus status on the back of these dynamics (McKay & Song 2010, p. 10). This observation tallies with the point that in economies operating outward-oriented sub-

strategies, the aggregate savings-investment relationship is not pre-determined at any point in time.