4 - How Less Developed Economies in Southeast Asia Can Participate in Production Networks: Industrial Policy in the WTO and FTA Era

Summary

Introduction

In view of geographical proximity as well as economic, social and cultural affinity, the experiences of industrial development in the neighbouring Southeast Asian economies, such as Singapore, Thailand, and Malaysia, can provide invaluable lessons to the less developed economies in the region. In the more advanced Southeast Asian economies, a rapid decline in transport and communication costs and diminishing trade and investment barriers have reduced the costs of organizing production networks across borders, so that extensive production networks have been established through the activities of multinational corporations (MNCs). At the same time, local industries have enhanced their capacities by participating in such networks, and the emergence of local suppliers and local workforce with industry-specific skills has become important factors in determining the competitiveness of industries (Kuroiwa and Toh 2008).

Less developed economies in Southeast Asia, especially Cambodia, Laos, Myanmar, and Vietnam (CLMV), are northern neighbours of Singapore, Malaysia, and Thailand. At the same time, they are southern neighbours of China and other Northeast Asian economies. Such geographical proximity facilitates the movement of goods, services, natural persons, and investment across borders. Moreover, AFTA and other relevant free trade agreements (FTAs), as well as infrastructure development such as the East-West, North-South, and Southern Economic Corridors, are leading to the reconfiguration of corporate activities, so that — as in the NAFTA and EU — regional production networks spread from the high income to low income countries to exploit lower labour costs in the latter countries.

In this paper, industrial policies in Southeast Asia are first reviewed. In Southeast Asia, liberalization in trade and investment was crucial in extending production networks into less developed economies. At the same time, constraints on industrial policy, notably shrinking policy space, are examined to consider feasible and appropriate industrial policy in an era of globalization, at a time when participation in the World Trade Organization (WTO) and FTAs are becoming the norms. Industries such as electronics, automotive, and clothing are expected to expand production networks and production networks in these industries are examined with the use of input-output analysis. Finally, industrial policies in less developed Southeast Asia are revisited, with particular reference to policy measures whereby participation in production networks plays a crucial role in industrial development.