The State, The Factory & The Export Whip
How nations built prosperity through manufacturing and what made some succeed while others stumbled
For a country to prosper, manufacturing and exports create a lot of mid-level jobs. This is how countries have progressed — employing large numbers of unskilled and semi-skilled workers, lifting them into something resembling a middle class. The question is: how does a country double down on this?
The State needs to be conducive. It can nurture manufacturing companies through subsidy or protection. But nurturing alone is not enough — there also needs to be export discipline. What if the company nurtured by the State does not perform? What if the State backs the wrong company altogether? That is crony capitalism, and it is a trap many nations have fallen into.
In South East Asia, when the energies of entrepreneurs are directed toward fooling politicians rather than exporting, it becomes a serious problem. This is precisely why some countries in the region have not flourished in the way some might have hoped despite having the raw ingredients for growth.
The mechanism of learning manufacturing skills is simple: learning by doing. You keep making things, again and again, until you make them well. Depreciation, in many ways, is a tax break — and in Japan, the amount of depreciation companies were allowed to charge was tied directly to their export performance. In Korea, half a dozen automakers were set up in the 1970s and 80s with State subsidies. Ruthless State support to performing manufacturers — which in turn drove exports.
Protectionism, in many ways, is the rich man’s entry ticket to industrial prosperity. Once they’re in, economists say protectionism is inefficient — and the same nations that industrialised behind high protective walls turn around and preach free trade to everyone else.
The Blueprint: Germany to Japan to Korea
North East Asia’s manufacturing policy was largely copied from the US and Germany. Japan’s first Prime Minister, Ito Hirobumi, spent a couple of months in Germany in 1882, studying the Prussian model up close. Like Prussia, Japan discouraged foreigners from making direct investments in its economy.
For two decades Japan had depended on raw silk as its primary foreign currency earner. Only in the 1880s did it seriously emulate Germany and begin building factories. Then came the domestic recession of the 1920s — thousands of manufacturers went out of business — and the industrial policy was modified to create a subsidy system that forced big businesses to serve the national interest.
General Park Chung-hee & The Korean Miracle
General Park Chung-hee came to power in a coup on 16 May 1961, and he is the man who defined South Korea’s manufacturing policy. Park had served as a lieutenant in the Japanese colonial military and was widely read — drawing ideas not just from Japan but also from Germany’s post-war re-industrialisation.
He published One Nation’s Path: Ideology for Social Reconstruction, which laid out the roadmap for Korea. The following year came The Country, The Revolution and I, in which he examined different historical revolutions through the lens of economic development. In 1964, he declared that every November 30th would be celebrated as Korea’s National Export Day.
Why Malaysia Stumbled
Taiwan does low-level manufacturing supporting global companies like Apple. Korea built its own Samsung. The difference is not luck. It is the discipline applied to State-backed entrepreneurs.
Malaysia is a cautionary tale. Prime Minister Mahathir tried to make State firms do more than they were capable of and completely failed to discipline Malaysia’s leading entrepreneurs. Today, Malaysia’s auto industry is a challenge to the State. Japan and Korea, by contrast, eventually privatised their steel makers: the State stepped in, forced growth, and then stepped back.
The State’s role is not to take over all aspects of entrepreneurship, but to channel private entrepreneurs toward development ends. Businessmen granted concessions without development strings attached are a problem — they take the rent and give nothing back.
Rents as Bait: The Korean Model Up Close
Park Chung-hee nurtured world-beating entrepreneurs, but never trusted them. Rents are a bait with which a successful developing State catches and controls its entrepreneurs. Hyundai’s founder, Chung Ju-yung, was received weekly by Park. At the time of the coup, Hyundai Construction was one of Korea’s Big 5 building firms. Under Park, Chung’s portfolio was transformed — from construction into a global force in cars, cement plants, and eventually semiconductors.
Lucky Goldstar — today’s LG — was similarly handled. When the government asked founder Koo to get into the cable business and arrange a foreign loan for it, Koo tried to wiggle out, saying he knew nothing about cables. The government’s response was blunt: normally they give a week to comply. For Koo, they would make an exception: two weeks. The message was clear.
Under the previous government of Syngman Rhee, crony capitalists had received plenty of favours but returned little. Park’s approach was different. The relationship was transactional in both directions. Businessmen like Chung paid close attention to government policy documents, because those documents determined what concessions were available and what would be demanded in return.
The difference between a Korean miracle and a Malaysian stumble was not resources or intention. It was action. When governments backed entrepreneurs with one hand and held them accountable with the other, nations transformed. When they handed out concessions without strings attached, crony capitalism filled the void. For any country today seeking to build a manufacturing base and lift its people into prosperity, a blueprint already exists. The next step is to execute well.
Thank you for reading.
Leave a Reply