BETWEEN FOUR WORLDS: CHINA, RUSSIA, JAPAN AND AUSTRALIA.
BETWEEN FOUR CAREERS and FOUR LANGUAGES

En Route to Australia, via Southeast Asia including Thailand

1. An Unusual Research Technique
2. The Thai Car Industry Model
3. A Model of the Rest of the World
4. The Market as a Factor of Production

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The year allowed for PhD fieldwork in Japan over, it was time to return to Canberra.

The scholarship generously allowed me to do some more fieldwork en route through Southeast Asia.

Here that book listing Japanese direct investments overseas which my Japan mentor, Professor Kojima, had got for me years back proved invaluable.

1. An Unusual Research Technique 

Normally a non-Japanese researcher seeking inside information on Japanese firms in Southeast Asian would not even know where, and how, to start.

Even if he knew where to start, how would he be able to get into the firms and ask questions.

With only a few days available in each country our researcher would have been in deep trouble.

I was more fortunate. 

The Kojima book listed all the investment projects approved for each country.

The local Japanese embassy was helpful, providing addresses of each of those Japanese firms listed in the Kojima book.

Arriving at the address and holding the Kojima book, I would normally be able to get to see the man in charge by saying I was trying to confirm the data in the book (my fear that Japan firms would not want to talk to foreigners was unfounded). 

I would then open the Kojima book at the page where his firm was listed, together with the reasons given there for its investment (a key point in my research).

Surprised that I already knew something about his investment, the man in charge would then be happy to give extra details to fill out the picture, particularly reasons for the investment.

Looking back I should have been much more grateful to Kojima. That book was the make or break for my thesis.

I was well on my way to doing some serious PhD research.

…

But it was not till I got to Thailand that I really hit the jackpot.

It is one of my great regrets that I never got it written up properly.

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Normally, a country like Thailand seeking to industrialise has only one path – concentrate on creating low-tech industries, textiles usually, able to take advantage of low labour or raw material costs, and hope to be able find export markets.

Then after a multitude of years, when the textile industry is established, hope to be able to move into production of more sophisticated goods.

It is a miserably slow existence, especially since there are dozens of other backward economies in the world all trying to do the same thing. 

It is made worse by our free trade fanatics.

For when you finally have created the industrial base needed for a move to mid-tech products, they insist you open your market to the same product produced more cheaply by other more technically advanced economiess.

Little wonder development becomes very difficult.

…   

Given these problems, the idea of going from close to zero to the level of being able to create a car industry able to export around the world is almost fantasy.

Yet Thailand was able to do this.

How it was able to do this deserves much, much more study than it gets. 

It provides a model that can lift much of the developing world from poverty to industrial prosperity. Which is probably why it is not studied – there are a lot of people out there in the advanced economies who would prefer the world did not know.

Too many actors have a vested interest in maintaining the status quo.  

2. The Thai Car Industry Model

The car industry in Asia in the sixties was in a mess.

The Japanese, the American, the European car makers, all determined to gain footholds in emerging markets with potential, had all set up operations for the sale of imported complete vehicles – sometimes with some local assembly operation. 

Governments would then impose tariffs on imported complete vehicles in the hope this would encourage new or expanded local assembly operations. At the same time they would begin to impose tariffs on imported parts and materials in the hope the foreign investor would begin local production of those imported parts and materials, and eventually local production of fully assembled vehicles.

But the leap from local assembly of imported parts and materials to local vehicle production was a leap too far. Who was going to produce the array of mid to high tech parts needed for an efficient, competitive vehicle industry? Even if they could be largely imported they would have to be assembled. The industry would still not be competitive. 

The result was what we see so often – a small-scale, still inefficient assembly   industry trying to compete with continuing imports of complete vehicles, more attractive to consumers than the locally assembled product despite the high tariffs imposed on complete vehicles.  

Lacking scale economies it was impossible to lower the cost of most locally produced parts and materials. The result was a high cost vehicle industry relying on subsidies, as in Malaysia.

…

The Thai approach was different. Very high tariffs were imposed on imports of complete vehicles, high enough to cut imports to close to zero. But parts and materials could be imported freely to encourage a local assembly industry. Usually parts and materials would be imported from the parent company, often at cost or less in a bid to make the assembled product competitive with rival assemblers. 

Then as local assembly grew in scale the government began to impose high tariffs on one or two (but no more) selected parts and materials being imported, but whose local production was seen as low cost or desirable – vehicle springs, for example, or tyres (which in the Thai case could use locally produced rubber). 

But other parts and materials could continue to be imported freely. 

Local assemblers faced a dilemma: set up plants to produce the product hit by the selective tariffs, or pull out of Thailand and write off the value of the assembly operations they had painfully built.

US and European producers began to balk at the cost of having locally to produce the parts or materials hit with the selective tariffs. They would decide to abandon or sell at a loss the assembly plant they had built, and pull out – particularly those who realised what Thailand was about: that it planned to follow up by imposing selective tariffs on other imported parts and materials.

Japanese vehicle producers decided otherwise. Either because of their stronger ‘survival instinct’ (in Japanese it is called ikenokori instinct) or 2. because they could further cut costs of parts and materials from the parent company or 3. they could hope to increase sales as US and European competitors pulled out, or 4. a cooperative willingness to cut costs by all assemblers taking output from a single facility locally producing the selectively targeted parts or materials, or 5. Japanese firm placed a higher premium on foothold investments in developing markets — whatever the reason most stayed. 

They would decide to bite the bullet and continue local operation.

The Japanese joint venture model of overseas investment was a further factor, with the Japanese providing the funds and technology while the local partner handled sales and labour recruitment.

…

All this in turn encouraged the Thai authorities to impose more selective tariffs on imported parts and materials which could be produced locally at reasonable cost.  

But by this time the fact of fewer producers competing for a share of the growing Thai market was producing scale economies for surviving producers. And the cost of having to write off funds already invested in local assembly plus any local production of parts and materials would be greater.

The incentive for the foreigner (now almost exclusively Japanese) to stay the course would increase, especially if there could be agreements to share the cost for local production of the formerly imported parts or materials now subject to a range of selective tariffs.

And so in this organic way Thailand began to gain the full range of efficient parts and materials industries needed for a reasonably competitive domestic vehicle industry.  It remained only for the government to provide normal export subsidies for the industry to gain the scale economies needed for international competitiveness. 

More thoughts on the Thai model

As I continued my voyage across Asia I began to realise how the Thai model of industrialisation could be used in other developing countries. 

Not just for making vehicles, but for a whole range of products.

The problem with most industrialisation plans was that tariffs were imposed on a range of products in the belief that encouraging their local production would provide the interlocking skills and externalities needed for takeoff – the industrial base..  

But the tariffs could not be too high.  High tariffs on a range of manufactured imports would simply push the economy into an upward inflationary spiral.

So tariffs had to be kept low and imported goods would still seem more attractive to buyers than hastily and clumsily assembled local counterparts.

Thai Genius

The Thai genius was to concentrate on only one product – vehicles, a product with a range of externalities. And the tariffs would be set high enough to make import and local sales of competing complete vehicles very difficult.

This guaranteed virtually all vehicles sold would be locally assembled and produced. 

And while the assembled car may have been less attractive for buyers, in most cases they had no choice.  And in buying the car they at least had the consolation they were helping create a new Thai industry and also providing training for a hitherto raw work force.

Staff from the head company in Japan were helping provide the all-important transfer of skills.

Only when the assembly plants were up and running did Thailand begin to impose selective high tariffs on a range of parts and materials still being imported.

With this progressive imposition on  tariffs on imported parts and materials Thailand could force (or encourage) the now mainly Japanese car makers in Thailand to provide the machines, technical aid etc. needed to produce locally many of the parts and materials formerly imported.

This in turn, and combined with the development of other industries taking advantage of low Thai labour costs, saw the gradual emergence not just of a car industry but of an industrial base also.

As in many Western economies, the establishment of a car industry did much to help creation of that industrial base.

…

The Thai car tariff policy was a form of blackmail –  either you cooperate by  producing locally parts and material formerly imported, or you go out of business, lose your existing assembly plant and lose your Thai market foothold.

It was crude, but it worked. 

European and US makers, especially those without links into Thailand’s society (the Thai economy has a strong Chinese presence, to which the Japanese but few others could easily relate), gradually folded their tents and left.

…

The final move – subsidies for exports – gave the producers the export volume allowing them the scale economies to be competitive in world markets.

And so in the space to around thirty years Thailand transformed itself into not just a competitive car maker but a maker of many other goods, many using the industrial base created by the automobile industry.

3. A Model for the Rest of the World

I only saw part of this remarkable development. 

But what I saw was enough to impress me:

1.  Japanese technicians brought in for special projects working side by side with Thai workers, making sure skills were transferred.

2. Thai workers gradually rising to technician and overseer status.

3.  The beginnings of the all-important industrial base beginning to emerge.

From start to finish it was a natural process, with supporting industries gradually emerging and with the Japanese parent company promoting the output of the Thai factory almost as their own as the finished product moved onto world markets. 

The Japanese parent company would also provide the high-tech products needed for global sales. 

At the peak, Thailand was exporting around two million vehicles a year, reduced now to one million as markets sagged and competition grew.

But meanwhile the industry was also supplying a rapidly growing domestic market as income levels rose.

4. The Market as a Factor of Production

The Thai experience should force a revision of economic theory.  

The textbooks tell us the standard factors of production needed for economic development are – finance, skills, labour, materials.

Without these factors, production cannot happen.

Well-meaning donor countries often try to provide one or other of these factors, without success.  They blame lack of success on the so-called transfer problem.

But what Thailand shows is that the domestic market is also a factor of production.

Provided there is a domestic market big enough to attract foothold-seeking foreign investment, then with smart tariff policies almost anyone can trigger the process of efficient production, even without the other factors.

True, in this Thai model, a market big enough to encourage foothold investment was the key factor, since sales at first had to be restricted to the domestic market.

But anyone who has a domestic market big enough to attract that investment can with the right tariff policies eventually gain the technology-intensive investment and products usually available only in advanced economies.

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True, car buyers in the initially protected domestic market will have to pay more than if that market was unprotected. 

This upsets our laissez-faire market advocates.  

What they do not realise is that the extra price car buyers pay is, in reality, a very effective and temporary subsidy for the creation of an efficient car industry, able in the future to provide them with better and cheaper cars, and able even to export. 

And that industry in turn encourages the emergence of many ancillary industries. 

Even the industry needed to produce the glossy pamphlets needed to sell the cars can be considered as one of these ancillary industries.

Handled properly, higher tariffs on imported vehicles is a very small price to pay for creating a major industry in a formerly backward nation.  

5. A Lesson for the Rest of the World

Today the industrialised North is overwhelmed by problem of economic refugees from Latin American and African countries. 

If those countries could be persuaded, or allowed, to follow the Thai model the problem would gradually disappear.

If lacking market size, these countries need only to combine with adjacent economies in a customs union to create a market big enough to attract the number of foothold-seeking foreign investors, Japanese especially, needed to get the model working.

All they would then need are the planners to handle the tariff policies needed to make the plan work. 

That should not be too difficult, especially if the goal is an end to global poverty and under-development. 

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But do not expect to see any of this in the textbooks.

Industry policies have been taken over by laissez-faire purists, or by politicians using tariffs indiscriminately to support industry favourites or industry zombies. 

The idea of using tariffs from start to finish to guide industrial development seems beyond comprehension, except in Thailand.

But it would have been front and centre in my ANU thesis, if it had not been for the many obstacles in my life at the time, including fighting the Vietnam War.