post-World-War-II

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SPEED INTENSITY AND THE SOUTH CHINA TRADE BOOM
Kelly B. Olds*
* Department of Economics, National Taiwan University.
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Abstract
Producers of speed-intensive goods, e.g. clothing or electronics, face markets that are
in constant flux due to changing fashion or technology. Throughout the 20th-century,
business networks in the south China area have had a comparative advantage in
producing speed-intensive goods due to their quick reaction time. This comparative
advantage was of little value prior to World War II, but since the war, international
telephone and air service have made international trade in speed-intensive goods
practical. This has caused the demand for speed-intensive goods on the international
market to grow at an extremely rapid pace. This growth in demand can explain the
post-World-War-II export booms experienced by Hong Kong, Taiwan and finally
China.
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1. Introduction
The East Asian trade boom is one of the salient features of the post-war
economy. This paper argues that in the case of the south China economies—Hong
Kong, Taiwan, and later southern China—the trade boom was due to a sudden
increase in international demand for speed-intensive goods for which south Chinese
business networks had long had a comparative advantage. The immediate cause of
the trade "miracle" was thus external to the economies in question. The increase in
international demand was mainly due to technological change and all that was needed
to take advantage of the increased demand an economic regime which allowed small
enterprises to respond to this new demand. The argument for this proposition
proceeds in three steps.
First, the concept of "speed intensity" must be clearly defined and shown to be
empirically measurable. In section two of this paper, speed-intensive goods are
defined and characterized. In short, these are goods for which demand falls quickly
over time. A CPI might list an average price for an average dress and this price may
change little over time, but the price for any particular dress will fall quickly as the
dress goes out of fashion. In speed-intensive markets, one's ability to deal with
search and information costs in the market is much more important to profitability
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than overcoming transaction costs within the firm. The first speed-intensive export
industry in the south China area was Taiwan's pre-war hat industry which is briefly
described. In the post-war period, there were three important categories of
internationally-traded speed-intensive goods: (1) apparel, shoes and handbags, (2)
consumer (and later business) electronics and (3) miscellaneous manufactures, mainly
toys and cheap plastic goods. Section three presents trade data which shows
empirically that U.S. imports from the south China area (and East and Southeast Asia
generally) in the above three categories were indeed speed-intensive. The data
shows that in the years 1966-1970, the first period for which data is available, United
States imports in the speed-intensive categories were virtually unique in their
propensity to be shipped by air.
Second, the south China economies must be shown to have a comparative
advantage in speed-intensive goods. Section four offers a simple theoretical model
to explain how a comparative advantage in speed-intensive production might arise and
persist. Serious observers of south Chinese exporters describe these businesses as
having the characteristics of businesses in speed-intensive industries. Most
importantly, post-war net exports show that the comparative advantage of these
economies was primarily in those categories of goods which rated highest in speed
intensity. By 1973, virtually all of Hong Kong's net exports were speed-intensive
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goods. This contrasted markedly with Japan.
Finally, international demand for speed-intensive goods must be shown to have
grown greatly after World War II. Section five shows that U.S. imports of
speed-intensive goods grew with extreme rapidity. From 1953 to 1973, the real
value of speed-intensive imports grew by a factor of twenty-two. There were large
increases in speed-intensive imports from all areas of the world, so this growth can
not be attributed to supply factors within the south China economies. Not only did
fashion and technology change slower previous to the war, but the slowness in
communications and transportation meant that local producers had a huge advantage
over foreign producers in speed-intensive markets. The telegraph system of that
period was sufficient to make known prices of standardized, relatively unchanging
goods in markets throughout the world, but this limited form of communication was
of much less use when dealing with ever-changing non-standardized products.
Buyers for the dress industry, for example, had to see the product they were buying
and this generally meant personally traveling to the production area. Before the war,
travel between Asia and the U.S. was done by ship and a buying trip would have
lasted months. Speed-intensive trade was thus largely impractical. After the war,
air travel by buyers quickly became the rule and quick trips could be made to other
countries. The international trade show was created. South Chinese business
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networks had always been adept at speed-intensive production and once
speed-intensive goods became traded goods, they received a windfall much as
oil-producing areas once received a windfall from the new automobile industry.
2. Speed-Intensive Goods
A speed-intensive good is a good that has two qualities: (1) The good requires
a significant one-time fixed cost to begin production and (2) the expected demand for
the good is quickly decreasing. The one-time fixed cost generally consists of search
and set-up costs. One must quickly identify the demand for a potential good and
then set-up a system of production that can get a large number of these goods onto the
market during the relatively short time in which the market price of the good remains
above the cost of production. The decreasing demand for the good is generally due
to one of two factors. The first is changes in fashion. A fashionable shoe or dress,
or a toy linked to a popular movie can be sold profitably for only a short period of
time and is then likely to be thrown into the remainder bin. The fashion problem for
clothes is compounded by seasonality. By the 1980s, there were six seasons for
women's clothing in the U.S each year [De Paola and Mueller, p. 162]. Clothes
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ordered for March will be returned to the manufacturer if they arrive April 1
[Morawetz, p. 113]. The second factor leading to falling demand is technical change.
Electronic equipment, for example, becomes quickly outdated. Electronic
components are constantly being improved. When a new computer chip becomes
available, those who can get products using this chip quickly onto the market
generally make most of the profit. Soon newer chips come out and the market price
of goods based on the older technology quickly drops.
In addition to the two above-stated qualities which define a speed-intensive
good, there are several other important characteristics generally associated with such
goods. First, these goods are entrepreneurship-intensive. The key to making a
profit in the speed-intensive sector is alertness to market conditions. The two types
of skills most important to managers of economic enterprises are (1) entrepreneurial
skills, which allow one to react quickly to changes in the marketplace and (2)
organizational skills, which allow one to use production factors efficiently and
overcome agency problems within the firm. In an economy with both a
speed-intensive and non-speed-intensive sector, managers will be sorted by the market
into one of the sectors based on their characteristics. In the speed-intensive sector,
good entrepreneurial skills can overcome a deficit in organizational skills. In the
non-speed-intensive sector, change in the marketplace happens slower and good
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organizational skills which allow one to minimize production costs will be relatively
more important to success. To take full advantage of such a division of labor,
enterprises in the speed-intensive industry will tend to be small so as to minimize
management problems. For example, whenever possible, firms in the
speed-intensive sector will assemble products using purchased intermediate goods
rather than produce the intermediate goods themselves.
A second characteristic of speed-intensive production is that it tends to use
variable factors of production, primarily labor and materials, in order to maintain
flexibility. Fixed factors of production, such as capital goods, will be used sparingly.
If expensive capital equipment is used, it will have to be multipurpose equipment
which may still be used once the product now produced is discontinued and some
unknown new product takes its place.
Because of the need for flexibility, speed-intensive industries will tend to be
located in countries where it is easy to establish and disband companies and hire and
fire short-term employees. Government regulations that make hiring and firing more
expensive could benefit non-speed-intensive industries by making it easier for
employers to commit to long-term relations with their employees and thus limit
agency problems, but speed-intensive industries will prefer a less regulated
environment. On the other hand, insecure property rights are a smaller problem for
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speed-intensive industries than for non-speed-intensive industries since
speed-intensive industries have less fixed capital. Thus, speed-intensive goods are
often produced in a "wild west" environment where government plays a limited role.
A third characteristic of speed-intensive markets is that manufacturing costs are
small relative to the initial sale price of the good. On the one hand, the cost of
identifying or creating consumer demand is often larger than the cost of physically
producing the good. On the other hand, a high profit on initial sales is necessary
since demand is falling quickly and many of the speed-intensive items produced will
end up being sold at a loss, if at all. The manufacturing cost of imported clothes is
often no more than one-third the initial price paid by the consumer and over half of
this manufacturing cost consists of the cost of the cloth bought by the clothing
manufacturer [Morawetz, pp. 92, 126-127]. Therefore, the idea that the clothing
industry and other speed-intensive industries are labor-intensive is somewhat
misleading. While it is true that the capital-labor ratio in the manufacturing process
is usually low, the proportion of the final product's initial price attributable to
manufacturing labor is also low. Therefore, when locating production, cheap labor is
a secondary consideration. Flexibility and quick reliable communications and
transportation are key.
A final characteristic of speed-intensive industries is local industry-wide
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economies of scale. Enterprises in a speed-intensive sector often work together.
Sub-contracting is one common form of cooperation. When an entrepreneur
discovers a new business opportunity, the quantity of goods demanded by the new
customer seldom matches the entrepreneur's current production capacity. In order to
produce the order quickly, much of it is contracted out. Therefore, one must have
good connections with other producers and be well-informed concerning their
capabilities and reputation. The cost of connections and information is lowered if
production is centered in one region. Connections between buyers, sellers and the
various middlemen are also important. In industries like clothing and shoes, new
ideas and business offers constantly come from both distributors and producers.
Since the market, on both the demand and supply side, is in constant flux, production
units are small and time is at a premium, matching buyers and sellers and determining
prices is a significant cost that can be lowered by regional concentration. Finally
regional concentration is efficient due to the high mobility of labor. Since
production lines are constantly opening up and shutting down, all labor contracts are
short term. Few workers would invest in the skills necessary for production if there
were not a thick market for labor. Concentrating production in one region thus
encourages investment in human capital by lowering the cost of the frequent changes
in employment. Well-known examples of local concentration in a speed-intensive
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industry are Silicon Valley and Manhattan's garment district.
The only successful speed-intensive export from the south China region during
the pre-World-War-II era were hats woven in Taiwan. Not only did this industry
show all the qualities above discussed, but it is also important to the argument in this
paper since it shows that business networks in this region already had the capacity to
carry out speed-intensive production in the 1920s and 1930s. Grass-woven hat
production began around the turn of the century concurrently in Okinawa and Taiwan.
The hats were originally sold in Japan, but by World War I, most were being exported
to the West. Taiwanese and Okinawan business representatives would meet with
Western merchants in Kobe and get orders that they would wire back to producers.
The cost of producing a hat was split about evenly between labor and materials.
Almost no fixed capital was needed.
Before 1920, the hat industry was not particularly speed-intensive since there
was little change in hat styles. During this period, the Okinawan industry slowly
increased its market share at Taiwan's expense. Japanese who observed both the
Okinawan and Taiwanese hat industries were most impressed with what they saw in
Okinawa. Okinawan women worked for lower wages and did better work. The
Okinawan women had long-term relationships with well-established manufacturers
who cooperated within a strong trade organization. The long-term relationships
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mitigated agency problems. In Taiwan, the Japanese reported that manufacturing
firms were very short-lived. When demand for hats grew, grocers, farmers, butchers,
etc. would set up hundreds of small enterprises. Female workers constantly switched
companies. The female workers were commonly cheated and they themselves
cheated the firms that employed them. While the Okinawan trade organization
united Okinawan producers when bargaining for raw materials or selling hats to
Western buyers, Japanese-led attempts to organize Taiwanese producers into a
meaningful trade organization came to naught. Japanese accused Taiwanese
producers of practicing cutthroat competition. After 1920, however, much to the
bewilderment of Japanese observers, the Taiwanese hat industry increasingly
displaced the Okinawan industry in the international market.
After 1920, market change became an important factor in the hat industry. A
Japanese paper factory had successfully manufactured paper strips that could serve as
a cheap substitute for the dried grass and leaves that had previously been used. This
occurred just as the bottom fell out of the market for the traditional hat types. In
Taiwan, small producers scrambled to find a new hat type that would sell. Almost
every year, some new hat material or hat style was produced and Taiwan's market
share slowly increased. Then in 1928, the Taiwanese producers finally found an
extremely popular hat type that took Taiwan's hat production to its peak level. This
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hat type, however, was only popular for a couple years and then demand dropped to
almost nothing. The Taiwanese hat industry tried more hat types and soon found
they could sell ultra-cheap hats in large quantities during the depression years.
During this period of changing market conditions, the Okinawans moved much slower.
On observing the great success of the Taiwanese in 1928, the Okinawans also started
producing the new successful hat type, but by the time their product came out, the
market was already in decline. In the 1930s, the Okinawans left the cheap hat
market to the Taiwanese and regained some of the market share they had lost to the
Taiwanese by continuing to produce a smaller number of the more expensive
high-quality hats for which there was a relatively stable demand.
The Taiwanese hat industry's success after 1920 was built on seeking out
potential market opportunities that could quickly evaporate. The fixed costs
consisted of (1) search costs born by Taiwanese business agents in Kobe seeking out
new materials and markets and (2) training costs for female laborers who needed to
constantly update their skills so they could produce new hat types with new materials.
These investments often did not succeed and few enterprises stayed in business more
than a year or two. The characteristics common to speed-intensive industries were
all evident in Taiwan. Although the Japanese criticized the Taiwanese for their
seeming inability to organize production intelligently, their sole criticism of
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Taiwanese entrepreneurship was that it was excessive. The Japanese began
mechanizing hat weaving in the 1920s and had a large export of machine made hats in
the 1930s, but the Taiwanese maintained flexibility, and thus market share, by using
almost no capital equipment beyond simple hat frames. Most strikingly, the large
majority of Taiwanese hat producers all clustered in one small area of the island, in
the coastal townships of present-day Miaoli and Taichung counties. In many of these
townships, virtually all women wove hats. Businesses not only competed but also
cooperated. When an agent in Kobe signed a deal with a Western firm to provide a
large number of a certain type hat, the main office in Taiwan would quickly
sub-contract out all the production it could not immediately handle itself.
Occasionally a producer would try to move out of this area and start producing hats in
a cheaper area where there was less demand for female labor, but most of these
attempts quickly failed.1
Taiwanese were thus capable of speed-intensive manufacture before the war, but
international demand was too limited to give much employment. The international
1 There is no information on the Taiwanese and Okinawan hat industries in English.
The primary reports describing this industry (in Japanese) are Bank of Taiwan,
Research Office (1919), Office of the Governor-General in Taiwan, Bureau of
Agriculture and Industry, Section of Commerce and Industry (1942), Office of the
Governor-General in Taiwan, Department of Civil Administration, Bureau of
Agriculture and Industry (1908 and 1915), Taichung Prefecture Industrial Promotion
Office (1933). In Chinese the best source for this material is Chang (2002).
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hat market was just one small crack in the door that would be thrown wide open in the
post-war period.
There were three main types of speed-intensive goods in the post-war
international marketplace: (1) clothing, shoes and handbags, (2) consumer electronics
and (3) miscellaneous manufactures. Clothing, shoes and handbags were subject to
fashion change. Many toys, cheap plastic goods and accessories were also subject to
quick changes in fashion. Consumer electronics (and later business electronics)
were subject to quickly changing technology. Naturally, goods in these categories
were not all speed-intensive and some goods in other categories were speed-intensive
but, as the next section will show, these categories are a good proxy for
speed-intensive production—at least during the late 1960s when Hong Kong and
Taiwan exports were booming.
3. Empirically Measuring Speed Intensity
The United States began recording the value and weight of imports into the
country by Schedule A category, country of origin and means of transportation in
1966. Schedule A category numbers were almost equivalent to the SITC categories
then in international use. Shipping goods by air was faster, but was more expensive.
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Therefore, lightness of goods and speed intensity were the primary factors
determining whether goods were shipped by air. During this period, 7.6% of goods
(measured by value) exported to the United States from East and Southeast Asia were
sent by air. All goods were classified into 4-digit schedule-A sub-groups. East and
Southeast Asian goods imported into the U.S. fell into 502 different 4-digit
sub-groups. Since the total weight and value of the imports shipped from each
country in each sub-category are given by method of transportation, one can divide
weight by value to establish the average weight per dollar of the goods in each
sub-group from each country by means of transportation. For the years 1966,
through 1970, there are 2680 entries for imports by air and 6172 entries for shipments
by sea. We divide these sub-categories into two types: those we claim to be
speed-intensive and those we claim to be non-speed-intensive. Goods we believe to
be speed-intensive are those in Schedule A categories #724 (consumer electronics),
categories #83—85 (handbags, apparel and shoes) and #89 (miscellaneous
manufactures). In table 1, the goods have been further sorted by average weight per
U.S. dollar into four weight categories. There were no categories of goods shipped
by sea whose average weight was less than 0.1 pound per dollar. Goods this light
were shipped by air regardless of speed-intensity. Goods over 0.3 pounds per dollar
were usually too heavy to justify air shipment regardless of speed intensity. But for
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those goods whose weight per dollar was between 0.1 and 0.3 pounds, those goods we
have hypothesized to be speed intensive are clearly more likely to be shipped by air.
$813 millions worth of non-speed-intensive goods were transported to the U.S. by
ship in categories in which the average weight of the seaborne goods shipped fell
within the 0.1—0.3 pound range. Only $162 millions worth of non-speed-intensive
goods were transported to the U.S. by air in categories in which the average weight of
the airborne goods shipped fell within this range. For speed-intensive goods in this
weight class, the corresponding figures were $160 millions worth or goods shipped by
sea and $397 millions worth shipped by air. Thus, while only 16.6% of
non-speed-intensive goods were shipped by air 71.2% of speed-intensive goods were
thus shipped. Not only were more goods shipped by air but the average weight of
these goods was greater. Speed-intensive goods in the 0.1—0.3 pound category
shipped by air averaged 0.210 pounds per dollar versus 0.188 pounds per dollar for
non-speed-intensive goods. Speed-intensive goods shipped by sea in this weight
category were also heavier than non-speed-intensive goods: 0.217 pounds versus
0.197 pounds.
Since this paper argues that the goods from Hong Kong and Taiwan were
particularly speed-intensive we also have a separate listing for goods originating from
these economies. Goods shipped from Hong Kong and Taiwan were much more
17
likely to go by air regardless of category. This may have been because goods within
any given category were likely to be more speed-intensive if produced in the south
China area, but it is also possible that goods could be shipped out of this area by air
relatively cheaply compared with the cost of shipment by sea. In any case, the data
shows that speed-intensive categories of goods were more likely to go by air whether
they were shipped out of the south China area, or not. The one anomaly in the table
is that in the 0.3 to 0.7 pounds weight class, non-speed-intensive goods shipped out of
the south China area were unusually likely to go by air, even more than
speed-intensive goods, but this is probably due to small sample size.
Table 2 shows the likelihood of being shipped by air for the three types of
speed-intensive goods individually. The least speed intensive of these categories
was miscellaneous manufactures. This is probably because the category was indeed
miscellaneous. The chance of shipment by air for goods in the 0.1—0.3 pounds
weight class for all three categories was over 50%.
Were speed-intensive goods unique in their tendency to be shipped by air
Since the difference between speed-intensive and non-speed-intensive goods is shown
by the 0.1-and-0.3-pounds-per-dollar weight class, table 3 shows the chance of being
shipped by air for other categories of goods in this weight class. All two-digit
schedule-A categories of goods shipped to the U.S. from East and Southeast Asia
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during this period in which total shipment value exceeded US$5 million are shown
(with category #72 divided into goods in category #724 and other #72-category
goods). These categories include 99% of all goods shipped to the U.S. from East
Asia. The chance of shipment by air was over 50% for the three speed-intensive
categories. There was one other small category of goods which was normally
shipped by air: category #66, mineral-based goods. Virtually all the goods in this
category between 0.1 and 0.3 pounds in average weight were costume jewelry.
These are speed-intensive goods but since the great majority of traded mineral goods
are not speed intensive, this category of goods is left out of this study.
4. The Comparative Advantage of South China Business Networks
Business networks are tools that have evolved to overcome transaction costs.
Their characteristics are determined by the human capital in the business community
and the conditions the businesses have faced. Due to coordination problems, these
networks can not always adjust quickly to change. A historically successful strategy
used by a business network may be suboptimal in a changed environment but attempts
by individuals to experiment with alternate strategies can cause confusion and
misunderstanding. Thus even if a new strategy would be superior if adopted by the
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whole network, it may harm the individual businessperson and be abandoned. In
short, business networks are subject to path dependence and can be "locked into" a
variety of equilibria depending on their historical development [Arthur and North].
Business networks are complicated social phenomena but the primary
characteristic of a business network that determines whether it is well-suited for
production of speed-intensive goods is the average number of business relationships
per person. Businesspeople have only a limited amount of time and resources they
can expend on making and cultivating relationships. Therefore, there is a trade-off
between the number of relationships a businessperson has and how much he can
invest in creating transparency within each relationship. Businesspeople who invest
heavily in a small number of relationships with potential partners, suppliers and
customers suffer from lack of both flexibility and information sources, but their heavy
investment in transparency eliminates "noise" which can lead to misunderstanding
and distrust. Businesspeople who maintain large numbers of contacts have great
flexibility and many sources of information but their relationships are noisy due to
low investment. Since the relationships can be ended unexpectedly at any time due
to noise which causes misunderstanding, businesspeople expect each relationship to
be relatively short term and they are thus more apt to cheat. Networks with many
connections per node do well in speed-intensive production because information is
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spread quickly. Networks with few connections per node do well in
organization-intensive production which involves asset specificity problems and thus
requires long-term commitments.
Ideally, a people in a business network would look at transaction costs in their
market and adjust the average number of relationships per person to suit present
conditions, but coordination costs along with endogenous human capital accumulation
makes adjustment difficult. Consider the case of a business network whose members
in the past have invested heavily in a small number of relationships. Suppose this
network's market changes or it enters a new market in which flexibility is now
relatively more important compared to mutual trust. If a member of this business
network responds by cutting investment in his current relationships in order to
increase the number of his relationships, then those people in current relationships
with him may take this as a sign he is going to end the relationship or at least wishes
to free ride on the investment in transparency of the other party. He will also have
trouble finding appropriate partners since other people are tied to long-term
relationships in which they have invested heavily. Finally, he will find that the
human capital he has acquired in the relatively noise free environment will not be
well-suited to his new strategy. He will not be accustomed to dealing with people
who invest little in relationships. In the opposite case of a
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many-low-investment-relationships network moving into a market where trust is more
important, similar adjustment problems will occur. For example, a person who
begins to invest more in a fewer number of relationships will find his partner in each
relationship may not reciprocate and instead free ride. Since his partners are
surrounded by people looking for short-term relationships, the opportunity cost of
cheating will be lower for his partners than it would be if they were in an environment
in which most potential partners were tied up in long-term relationships.
South Chinese business networks have been active throughout East and
Southeast Asia for centuries. They have made their profits largely through arbitrage.
The political environment has been such that they have seldom invested in much fixed
capital, so they have faced few asset-specificity problems which would require them
to develop skills in creating and enforcing long-term contractual relationships.
In the post-war period, the south Chinese specialization in speed-intensive
industries is not only born out by statistics but has often been noted anecdotally.
Lam and Lee describe Chinese business in Hong Kong and Taiwan as "guerilla
capitalism" which they argue is characterized by flexibility and responsiveness to
market conditions and the mutual sharing of resources and information. Small
Chinese firms "seek out an opportunity for high profit margins in a particular good,
develop a formula, exploit it by rapidly flooding the market before the established
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firms can respond, make profits over the short term, and then leave the market for
another one before competition forces the prices down to the point where firms from
newly industrializing countries are no longer profitable without large scale
investments in technology or infrastructure" [p. 109]. This is exactly the strategy
that must be used in speed-intensive markets. They also note that any capital
equipment used is generally multi-purpose equipment: "no Chinese owner of a
stamping plant for automobile parts is going to turn down business stamping
computer casings if there is surplus machinery and the price is right" [p. 113]. Yu
surveys Hong Kong businesses and concludes that their success is based on
Kirznerian entrepreneurship—alertness to opportunity. He notes that rush orders and
overtime were prevalent among the businesses surveyed [p. 75]. Sit and Wong [p.
188] report that payments for subcontract work in the Hong Kong textile industry are
often set by the contractor since there is not enough time to negotiate prices.
Net exports of Hong Kong, Taiwan, China and Japan are shown in table 4. In
this table, with one exception, net exports are defined as the amount by which exports
exceed imports within each 2-digit SITC category. Whenever imports exceed
exports, net exports in that category are set equal to zero. The sole exception is
category 72 (electrical machinery) which, before 1978, I divide into two categories:
724 and everything else. Trade categories that consisted of mainly speed-intensive
23
goods are shown individually. These include clothing (SITC # 84), shoes (SITC
#85), handbags and travel goods (SITC# 83), consumer electronics (SITC #724) prior
to 1978 and consumer and business electronics (SITC #75 and #76) after the revision,
and the catch-all miscellaneous-manufactures category (SITC# 89).
The exports of Japan, Hong Kong and Taiwan grew quickly in the post-war
period, but the export boom in each country was different. Japan was a developed
country before the war and its post-war economic recovery and growth resembled that
of Western Europe. In Japan, exports boomed in both the speed-intensive and
non-speed-intensive sectors. During the first ten years, the speed-intensive sector
grew quicker than the non-speed-intensive sector, but after 1963 the speed-intensive
sector's share of net exports decreased. During the 1960s, Japan's capital-intensive
organization-intensive heavy industry was increasing in importance. This is the
pattern that traditional economic development models would predict.
Speed-intensive goods were never much more than 20% of Japan's net exports.
Hong Kong's case was different. In 1953, Hong Kong's speed-intensive
industries, particularly the apparel and shoe industries, were already successful
exporters. Throughout the next twenty years its specialization in speed-intensive
industries continued to increase until Hong Kong was a net importer in virtually every
other category. This is different than a standard economic development model might
24
predict since Hong Kong's success meant a great increase in capital and thus
capital-intensive industries should have become more important. The fact that Hong
Kong never "advanced" to the capital-intensive stage of manufacturing bothered some
observers who saw this as a failure of the free market. But Hong Kong's
government would not give special aid to capital-intensive organization-intensive
heavy industry and Hong Kong demonstrated in the 1980s that it was possible for an
economy to become a developed service economy without going through a
heavy-industry stage.
Taiwan was an intermediate case. In the 1950s, Taiwan's few exports were
primarily agricultural products. The government used import-substitution policy and
encouraged self-sufficiency. Both tariff and non-tariff barriers were used. The
latter particularly affected speed-intensive industries since they not only made
international trade expensive but also slowed it down. Virtually the only
speed-intensive exporters during this period were hat manufacturers who complained
that their business was throttled not merely by the costs of tariffs and overvalued
exchange rates, but also by the long and uncertain time-lag caused by the bureaucratic
trade regulations. In the late-1950s, Taiwanese policymakers became increasingly
aware of the export successes of Japan and Hong Kong and began to gradually open
up Taiwan's economy. During the 1960s, Taiwan began to follow the Hong Kong
25
road to success so that by 1973, Taiwan's speed-intensive sector accounted for about
57% of net exports and in the 1980s the proportion of net exports that were speed
intensive began to approach 90%. After 1989, Taiwan's exports to the West
remained heavily speed-intensive, but trade with China increased. Taiwanese
business placed much of their speed-intensive production across the straits in southern
China. Since relative to southern China, Taiwan's comparative advantage was
security of property rights, Taiwanese businesses began using Taiwan as a base to
produce capital-intensive intermediate goods to be assembled into speed-intensive
products in southern China.
In the 1980s, China became an important exporter on world markets. From
1984, when statistics first become available to 1993, the speed-intensity ratio of
China's net exports quickly rose. During the 1990s and 2000s, approximately 2/3 of
China's net exports were in the speed-intensive categories. Since by the 1990s,
speed intensity was becoming more important for goods in other categories, such as
home furnishings, the proportion of speed-intensive goods is probably being
underestimated and the proportion of southern China's net exports that were speed
intensive (for which we have no figures) was certainly even higher than that of the
country generally.
One of the metaphors commonly used to describe the Asian dragons (Japan and
26
the four little dragons, Hong Kong, Taiwan, Singapore and South Korea) is flying
geese. The flying-geese metaphor assumes that Japan was the lead goose. Japan
first began producing low-tech labor-intensive goods. Then as Japan gained
experience and rising wages made its products more expensive it would move on to
producing goods that were increasingly skill and capital intensive. One of the little
dragons, as a following goose, would take on the production that Japan was
abandoning. When this little dragon gained experience and the wages of its labor
force rose to a certain point it would move up the ladder of production and leave the
now too labor-intensive production to the next goose down the line. Superficially,
the metaphor seems to work since most of the economies did gradually move toward
increasingly skill- and capital-intensive production with Japan in the lead. But, as
just noted, the production in the south China region was very different than Japanese
production. Regardless of the years compared, the Japanese economy tended to do
best in organization-intensive exports while the south China area specialized in
speed-intensive exports. The clothing and textile sectors show this most clearly.
Development economists have often grouped textiles and clothing together as
one of the earliest low-tech labor-intensive sectors to develop during the
industrialization process. But though these industries have certain features in
common, they are very different as far as speed-intensity is concerned. Using
27
twentieth-century technology, textiles are best produced in large factories. They are
standardized products whose prices in different markets are well-known. Demand
for textiles is much less volatile than for clothing. Success in producing textiles
requires good organization. Clothing on the other hand is usually produced in small
factories or workshops. Organization is relatively less important. What is
important is the entrepreneurial ability to keep up with and exploit constant change in
the market.
Figures 1 and 2 show how international trade in textile and clothing changed
over time in Japan, Hong Kong, Taiwan and China. These figures show net textile
and clothing exports with net exports being defined simply as exports minus imports.
Japan was primarily a textile exporter. In early years, it sometimes processed its
textiles into clothes before exporting them, but non-processed textiles were most
important. During the 1970s, Japan became a net-importer of clothes although its
textile exports remained strong. Hong Kong, on the other hand, was a
textile-importing economy. The great demand the clothing industry had for textiles
led to textile mills being set up in Hong Kong, but overall Hong Kong never had a
comparative advantage in producing textiles. Its comparative advantage lay in
processing textiles into clothing. Taiwan, once again, was an intermediate case. In
the 1950s, its government was trying to use import-substitution to imitate Japanese
28
economic development. Economic policy makers were mainly engineers and
thought large factories were the key to economic development and modernization, and
they saw low-tech textile factories as the obvious starting point. They saw no need
to promote mere tailoring. Therefore, they strongly protected the textile industry
leaving clothing-makers with poor expensive cloth unsuitable for making exportable
clothes. They also protected the sewing machine industry forcing clothing producers
to use expensive inferior machines [Schive, 1990]. Most of the "clothes" exports
shown by the figure in the 1950s were hats that did not use textiles. By the end of
the 1950s, Hong Kong wages were rising so that Western buyers were making
enquiries as to the possibility of producing clothing in Taiwan. The Taiwan
government gradually backed off of its attempt to imitate Japan and, in effect,
accepted Hong Kong as its lead goose. However, the government's favoritism
toward the textile industry seems to have remained a problem and compared to Hong
Kong, Taiwan had greater success in the shoe and consumer electronics industries
than in the clothing industry. Like the Japanese, Taiwan remained a textile exporter,
but unlike the Japanese, most Taiwanese textiles were processed into clothes before
being exported.
Chinese data becomes available in 1984 and their pattern is very similar to the
Hong Kong pattern. China has had a small net export of textiles throughout the
29
1984-2003 period, but this was very small compared to its booming clothing exports.
In 1989, Taiwan's textile exports surpassed clothing exports. Many of Taiwan's
textile exports were going to China for processing [Schive, 1995, p. 28].
5. The Growth in International Demand for Speed-Intensive Goods
The preceding sections of this paper have argued that the south Chinese
economies had a strong comparative advantage in producing speed-intensive goods
which has largely determined the role they have played in international trade.
Speed-intensive goods were almost all non-traded goods in the pre-war era but, after
the war, trade in these goods grew quickly. It is impossible to predict what would
have happened to the economies of the south China area if this change had not taken
place. But it can be shown that the increase in the international trade of
speed-intensive goods was so explosive that there is little need to look elsewhere to
explain the south China economic "miracle." All that was needed to take advantage
of this quickly growing international demand was a certain degree of openness to
international trade.
The growth in international demand for speed-intensive goods came for two
30
reasons: First, changes in fashion and technology have quickened so that
speed-intensive goods gained in importance throughout the developed world.
Second, and by far most important, transportation and communications improved so
that speed-intensive goods no longer faced large natural barriers to trade. Before the
war, domestic producers had a great advantage in speed-intensive industries because
they could get market information much quicker than a producer in a foreign country.
After the war, international air and telephone service suddenly made large-scale trade
in speed-intensive goods feasible.
During the 1950s and early 1960s, by far the most important speed-intensive
good was clothing. Before the war, there was already a large market for ready-made
clothes in the United States and Great Britain [Godley] but, throughout most of the
world, clothing was either stitched at home or made by local tailors and seamstresses.
The limited international trade in clothing focused primarily on special items such as
gloves, hats and underwear.
The American ready-made clothing industry was centered in midtown
Manhattan's garment district. By 1929, it is estimated that 80% of ready-made
women's clothing was produced in New York City [De Paola, p. 109]. Manhattan
was not a low-wage area and rents were high. Attempts were made to set up
factories outside the city, and local garment centers did exist elsewhere in Texas and
31
California [DeMoss], but moving outside Manhattan was seldom a successful strategy
because it left producers "out of the loop." What one saved in production costs was
more than countered by a loss in timely information. After the war, when quick
communications and transportation had become cheaper, sewing work was often
moved into up-state New York to save costs, but the main company office stayed in
Manhattan.
Clothing and accessories that were imported into the United States before the
war usually came from Europe. American buyers would travel to Europe by ship, a
trip that lasted several weeks. They would stay in Europe a couple months making
purchases and then return by ship. During this period, communication with the
United States was limited to brief telegrams. This form of business was known as
the "craft trade" and mainly consisted of buying hand-worked items whose appeal
was based on novelty. The items did not have to be fashionably up-to-date [White,
pp. 38-9]. After the war, the trade changed. Buyers flew into Europe for several
days, converged on popular trade shows and kept in touch with the home office by
telephone. Fashionable French and Italian clothing began to appear on American store
shelves.
Travel between the U.S. and the south China area was much slower than
between the U.S. and Europe. Pre-war Taiwanese were fortunate in that there was a
32
community of American buyers in Japan due to the silk trade. Air service between
the U.S. and Asia had to wait until after the war. Before the war, Hong Kong had a
small apparel industry which exported clothes to British colonies in Asia. Hong
Kong only got air service in 1936 when it became possible to send airmail as far as
Britain. After the war, airline travel to and from Hong Kong and Taiwan became
common. Hong Kong began exporting apparel to Britain soon after the war, but due
to the long delay between order and delivery its early exports tended to be in the less
speed-intensive fields such as work clothes and undergarments before it shifted
gradually into more speed-intensive fashionable clothing [Winterton and Barlow].
As in Europe, post-war Hong Kong also developed apparel trade fairs that attracted
buyers who flew in from all over the world. Such shows would have been clearly
impossible before the war.
The trade boom in speed-intensive goods is shown in table 5. In the 1950s, as
in the pre-war era, most international trade was trade in raw or partially-processed
materials and producer goods. Most speed-intensive goods in the 1950s were clothes,
shoes and accessories. In 1953, these speed-intensive goods accounted for less than
2% of U.S. imports and were dwarfed by the trade in textiles and leather. Many of
the traded goods in these categories were probably still not very speed intensive.
The plastic industry was still in its infancy and the electronics that existed were still
33
high-tech luxury goods best produced in the United States.
The post-war growth in speed-intensive imports into developed nations after the
war was much faster than growth in total imports. The first column of table 5 shows
that between 1953 and 2003 total imports measured in 1953 U.S. dollars rose twenty
fold. The second column shows that speed-intensive imports rose over 230 fold.
These imports, which had originally accounted for 2% of total U.S. imports, were
over 24% of total imports in 2003. Data from other developed countries generally
show the same overall pattern as the U.S. data. Moreover, these figures understate
the growth in traded speed-intensive goods. Not only did the amount of clothing or
toys increase greatly, but the proportion of traded clothes and toys that were
speed-intensive became ever greater and the speed intensity of the average item
increased. Consumer electronic goods become outdated much faster in the 1980s
and 1990s, than they had in the 1960s and 1970s and the change in the stock of toys at
the toy store from Christmas to Christmas is also ever growing. Furthermore, by the
1990s, other categories of goods such as household furnishings and appliances were
also becoming speed intensive.
The massive increase in traded speed-intensive goods was not due to change
within East Asia. If the growth in trade in speed-intensive goods was due to an
improvement in supply conditions within East Asia, then one would expect to see the
34
greater East Asian competitiveness squeezing other exporting countries out of the
speed-intensive markets. But if the growth in the market was due to increasing
international demand, then the share of the market held by the economies with a
comparative advantage in speed-intensive goods might expand, but the exports of all
countries meeting this growing demand should generally rise. Between 1953 and
1983, Hong Kong and Taiwan increased their market share of speed-intensive imports
into the U.S. from 1.4% to 26.5%, but other nations were still able to increase their
exports of speed-intensive goods to the U.S. by a factor of 35. Even if one removes
Japan and all four of the little dragons from the data, speed-intensive exports by other
countries to the U.S. increases by a factor of 20, much faster than the increase in total
U.S. imports.
6. Concluding Remarks
South Chinese business networks did not succeed after the war by moving into
already existing markets. Their success came in new international markets. The
source of growth in the south China area was the increase in international demand for
speed-intensive goods. The increase in this demand was due to technological change
external to the south China economies. The fundamental difference in the three
35
Chinese economies was when the respective governments' opened their economies to
trade. Hong Kong was already an open economy previous to World War II, but its
openness was only of limited benefit in the pre-war era since speed-intensive goods
were still primarily non-traded goods. After the war, its economy quickly took off.
Taiwan began opening up its economy around 1960, but still retained many tariffs and
protective policies. There were other countries equally, or more, open to trade, but
these economies did not have Taiwan's comparative advantage in the booming
speed-intensive goods trade. China was in a much tighter ideological strait jacket
than Taiwan. It did not begin opening its economy until the late 1970s. When the
Chinese government began opening the country's markets, there was no intention to
specialize in speed-intensive exports. The Chinese government, similarly to the
Taiwanese government, assumed that economic advance depended on setting up big
capital-intensive factories. The government's plans, however, were soon
overwhelmed by their economy's comparative advantage.
From a long-run historical perspective, the post-war improvements in
transportation (and communication) are part of an ongoing transportation revolution
that began previous to the industrial revolution. Until the mid-20th century, the
improvements in transportation were sufficient to benefit Western businesses (and
later Japanese businesses) which were skilled at overcoming intra-firm agency
36
problems. The expanding international markets meant these firms could produce
with ever greater economies of scale. It was not until after World War II, however,
that the communications and transportation system improved to the point that it could
be much benefit to south Chinese business networks which had a comparative
advantage in producing non-standardized products quickly in response to ever
changing market conditions. Once international air travel and telephone
communications did become available, the comparative advantage of southern
Chinese business networks rose in value relative to the comparative advantage of
Western business networks and the southern Chinese economies could now begin to
rapidly catch up. As improvements in transportation and communication continue,
one would expect to see greater advantages accruing to business networks, such as the
south Chinese networks, which have historically had a comparative advantage in
quick reaction time. One identifying characteristic of such business cultures is that
they often have a history of creating trade diasporas which have succeeded based on
price arbitrage.
37
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United Nations, Dept. of Economic and Social Affairs [1983-2003], International
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40
Table 1. Imports to the United States from East and Southeast Asia by weight class
and speed intensity.
EAST &
SOUTHEAST
ASIA
HONG KONG &
TAIWAN
E & SE ASIA LESS
HONG KONG &
TAIWAN TYPE
OF IMPORTS
WEIGHT
CLASS
(LBS/$)
Amount
%
shipped
by air
Amount
%
shipped
by air
Amount
%
shipped
by air
0.0—0.1 697 100.0% 250 100.0% 448 100.0%
0.1—0.3 975 16.6% 49 78.1% 926 13.4%
0.3—0.5 1436 3.3% 36 18.2% 1400 2.9%
Non-Speed-
Intensive Goods
0.5—1.5 15316 0.2% 991 0.5% 14326 0.1%
0.0—0.1 504 100.0% 270 100.0% 234 100.0%
0.1—0.3 557 71.2% 297 99.8% 260 38.5%
0.3—0.5 4922 3.9% 1131 7.2% 3791 3.0%
Speed-Intensive
Goods
0.5—1.5 3778 0.4% 1365 0.6% 2413 0.3%
Source: U.S. Bureau of the Census [1966-1970]. Imports from Thailand, South
Vietnam, Malaysia, Singapore, Indonesia, the Philippines, Macao, South Korea, Hong
Kong, Taiwan, Japan and Nansei and Nanpo Islands are included in the sample. The
amount is stated in millions of US$.
41
Table 2. Speed-intensive imports to the United States from East and Southeast Asia
by weight class and type.
EAST &
SOUTHEAST
ASIA TYPE
OF IMPORTS
WEIGHT
CLASS
(LBS/$)
Amount
%
shipped
by air
0.0—0.1 0 100.0%
0.1—0.3 82 100.0%
0.3—0.5 1663 6.3%
SITC #724
Consumer
Electronics
0.5—1.5 1233 0.5%
0.0—0.1 42 100.0%
0.1—0.3 685 68.5%
0.3—0.5 660 6.9%
SITC #83—85
Apparel, Shoes,
Handbags
0.5—1.5 2622 0.3%
0.0—0.1 462 100.0%
0.1—0.3 86 55.9%
0.3—0.5 674 2.7%
SITC #89
Miscellaneous
Manufactures
0.5—1.5 1848 1.5%
Source: same as table 1. The amount is stated in millions of US$.
42
Table 3. Imports to the United States from East and Southeast Asia in sub-groups with
an average weight of 0.1—0.3 pounds per dollar, by category
IMPORT CATEGORY AMOUNT % SHIPPED
BY AIR
SITC #724
TVs, Radios, Telephones
82 100
SITC #66
Mineral Manufactures
9 94
SITC #84
Clothing
390 69
SITC #89
Misc. Manufactures
86 56
SITC #71
Non-electric Machinery
144 35
SITC #72 (less #724)
Electric Machinery
167 27
SITC #86
Instruments
212 17
SITC #29
Animal & Vegetable Mat.
7 12
SITC #65
Textile Yarn & Fabrics
372 4
SITC #26
Textile Fibers & Waste
49 0
Total 1517 36
Source: same as table 1. The amount is stated in millions of US$.
43
Table 4. Net Exports of Hong Kong, Taiwan China and Japan
Place Year Apparel
(%)
Shoes
(%)
Hand-
Bags
(%)
Consumer
Electronics
(%)
Various
Manufactures
(%)
All Speed-
Intensive
Goods (%)
1953 34.7 9.7 1.3 0 4.7 50.5
1963 61.0 6.0 1.1 0 24.0 92.0
1973 63.5 1.7 3.3 4.3 26.8 99.6
1983 53.7 0.2 2.6 12.3 21.8 90.6
1993 47.2 4.1 4.4 6.0 33.0 94.7
Hong
Kong
2003 37.4 3.7 4.5 9.9 37.6 93.1
1963 4.5 0 0 0.2 0.2 5.0
1973 24.0 7.7 1.9 12.8 10.9 57.4
1983 25.1 15.2 6.7 19.1 20.6 86.7
1993 7.7 6.2 1.1 30.0 15.0 60.0
Taiwan
2003 2.4 0.2 0 36.7 10.4 49.7
1984 16.2 0 0 0 5.7 21.9
1993 49.3 13.9 4.7 0.1 18.5 66.0 China
2003 22.4 5.5 2.3 28.2 11.2 69.6
1953 3.7 0.3 0.2 0 5.8 10.0
1963 5.3 1.7 0.4 7.0 7.9 22.2
1973 0 0 0.1 10.0 4.2 14.2
1983 0 0 0 18.7 2.5 21.2
1993 0 0 0 19.4 0.6 20.0
Japan
2003 0 0 0 20.3 0 20.3
From the United Nations, Dept. of Economic and Social Affairs [1953-1973],
Commodity Trade Statistics according to the Standard International Trade
Classification, United Nations, Dept. of Economic and Social Affairs [1983-2003],
International Trade Statistics Yearbook (non Taiwan data), Chinese Maritime Customs
[1983], The Trade of China, Taiwan District (Taiwan data), and AREMOS
(1993-2003, Taiwan data)
44
Table 5. Imports to the United States 1953—2003
United States
Year
Total
Imports
Total
Speed-Inten
sive
Imports
Speed-Intensiv
e
Imports from
Hong Kong,
Taiwan &
China
Total
Speed-Intensi
ve Imports
Less Hong
Kong, Taiwan
& China
Total
Speed-Intensi
ve Imports
Less the 5
Dragons
1953 10,778 223 3 220 180
1963 14,239
(2.8)
1,091
(17.2%)
111
(43.5%)
982
(16.1%)
610
(13.0%)
1973 39,783
(10.8%)
4,928
(16.3%)
1,201
(26.9%)
3,727
(14.3%)
2,027
(12.8%)
1983 75,375
(6.6%)
10,686
(8.0%)
2,835
(9.0%)
7,851
(7.7%)
3,740
(6.3%)
1993 123,367
(5.1%)
28,365
(10.3%)
8,406
(11.5%)
19,959
(9.8%)
10,182
(10.5%)
2003 215,354
(5.7%)
52,149
(6.3%)
19,263
(8.6%)
32,886
(5.1%)
25,199
(9.5%)
Imports are in millions of 1953 US dollars (deflated by the GDP deflator). The
number in parentheses shows the average annual rate of growth over the previous
decade. From the Commodity Trade Statistics according to the Standard
International Trade Classification, United Nations, Dept. of Economic and Social
Affairs [1953-1973], International Trade Statistics Yearbook, United Nations, Dept. of
Economic and Social Affairs [1983] and http://dataweb.usitc.gov (1993-2003)
45
Figure 1. Net textile and clothing exports, 1952—1983.
-2000
-1000
0
1000
2000
3000
4000
5000
6000
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
Taiwan ApparelTaiwan TextilesHong Kong Apparel
Hong Kong TextilesJapan ApparelJapan Textiles
From the United Nations, Dept. of Economic and Social Affairs [1952-1982] and
Statistical Department, Inspectorate General of Customs [1976—1982] (post-1975
Taiwan data). The amounts are in millions of US$.
46
Figure 2. Net textile and clothing exports, 1984—1998.
-30000
-20000
-10000
0
10000
20000
30000
40000
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
Taiwan ApparelTaiwan TextilesHong Kong Apparel
Hong Kong TextilesJapan ApparelJapan Textiles
China ApparelChina Textiles
From United Nations, Dept. of Economic and Social Affairs [1984-1998] (non Taiwan
data), Statistical Department, Inspectorate General of Customs [1984—1988]
(1983-1988, Taiwan data), and AREMOS (1989-2003, Taiwan data). The amounts
are in millions of US$.

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