Asia’s Industrial Transformation: The Role of Manufacturing and Global Value Chains (Part 2)

This paper argues that the single most important factor that explains East Asia’s development success was its fast structural transformation toward industrialization, manufacturing in particular. Workers moved out of agriculture into manufacturing, and the sector diversified and upgraded its structure. Manufacturing activities are subject to increasing returns to scale, and many manufacturing goods have high income elasticities of demand. As a consequence, the sector is referred to as the “engine of growth.” It is in the context of industrialization that openness played an important role in East Asia’s success, i.e., the connection between “export-led growth” (the relaxation of the balance-of-payments constraint on foreign exchange) and industrialization. Part 2 of the paper reviews the role of Asia’s developmental states in consciously accelerating industrial development and learning, as well as the region’s mixed experiences with industrial policies. Second, it provides a discussion of how Asian firms hooked up on to global value chains.