Trade, Foreign Investment, and Industrial Policy for Developing Countries 4069

capital goods, and intermediate goods tariffs. For the 1970s through the current decade,
Estevadeordal and Taylor show that tariff protection affects growth more negatively if
tariffs are on capital or intermediate goods. We continue and expand this discussion to
include a more general evaluation of the literature on trade and growth in Section 4.
Another approach relies on qualitative case study evidence to contrast the apparent
success of East Asia countries relative to Latin America and elsewhere in the use of
industrial policy. There is significant debate over whether the use of a range of industrial
policy instruments, including infant-industry protection, helped or hurt development in
East Asia. A common view is that East Asian countries used export subsidies whereas
Latin American countries used import tariffs, and that this explains part of the difference
in performance in these two regions. In fact, East Asian countries used both import tariffs
and export subsidies, and this created a setting in which the incentives were neutral
regarding import substitution versus exports, although manufacturing as a whole enjoyed
some net promotion (World Bank, 1993). China’s policies over the last 25 years could
similarly be described as using both import tariffs and export subsidies.
South Korea and Taiwan had tremendous rates of physical and human capital accu-
mulation over the 1960s, 1970s, and 1980s, and this went together with rapidly changing
comparative advantage toward capital intensive goods. Of course, the standard explana-
tion of this experience is that capital accumulation caused by some exogenous factors led
to a changing comparative advantage. But an alternative interpretation, consistent with
the model presented in Section 2.1.2, is that such a structural transformation was not
inevitable because of multiple equilibria. In particular, without protection or promotion
of the capital intensive sectors, countries would have remained specialized in the sectors
where they enjoyed a static comparative advantage; since these sectors were not capital
intensive, then capital accumulation would not have taken place. Amsden (1989) and
Wade (1990) have argued that IP was crucial for some East Asian countries to capitalize
on their latent comparative advantage in advanced manufacturing.
It is clear that East Asian countries indeed pursued several policies to encourage
particular sectors, such as production subsidies, subsidized credit, fiscal incentives, and
trade protection. But what was the actual effect of these policies relative to what would
have happened in their absence? Can IP be credited with bringing about the successful
industrialization experienced in East Asia? One approach in the literature has been to
check whether the industries that received most support are the ones that have grown
most rapidly.28 As we discussed above, protection is typically motivated by political or
terms of trade reasons rather than prospects for higher growth through IP. In the late
twentieth century, in contrast to the last century when industrial countries protected
emerging industries, it appears that trade barriers were often designed to protect “sun-
set” industries rather than to encourage “sunrise” industries (see Noland & Pack, 2003).