Krugman 1994 Essay On Asian Tigers Singapore

Development, Legitimacy, and the Role of the State: The Asian Tigers from Independence to Industrialisation

Note: Whenever possible Simplified Pinyin has been used throughout for the transliteration of Chinese names and places for its ease of use and predominance in modern literature. As Taiwan typically uses the more archaic Wade-Giles system readers may be unfamiliar with Pinyin names for individuals like Jiang Jieshi (Chiang Kai-Shek in WG) or even Mao Zedong (Mao Tse-Tung in WG), but they have been employed for consistency throughout.

As recently as the early 1960s South Korea, Taiwan, Singapore and Hong Kong (the “Asian Tigers”) were considered to be a part of the third world: Harvey and Lee rather unkindly refer to it as “economic backwardness.”[1] Since the 1997 Asian Financial Crisis, praise of the “Asian Miracle” has dwindled in academia,[2] yet the Tigers still stand as rare examples of states which have successfully “developed” in a manner no one could have predicted 50 years ago – and at a considerably faster rate than any of our current efforts at third-world development seem to be proceeding. Are there lessons to be learnt from the rapid economic growth of the Tigers, from the 1960s through to the 1990s, and do these have a practical application in contemporary development?

In 1949 Harry Truman introduced the concept of development to the world, identifying it as a key priority of the West in order to maintain peace and prosperity amongst all the people of the world.[3] In the beginnings of the great ideological war against Communism, he took care to articulate that his program of development would be “based on the concept on of democratic fair-dealing.” This vision shapes the nature of development even today, with economic development and state-building more generally predicated on the assumption that if liberal democracy is established then all other aspects of development will naturally follow. We see this in IMF loan conditionality, requiring liberalisation of economies in regions where the government formally had tight control,[4] and even in post-conflict statebuilding exercises, where the end goal is often the establishment of democratic elections.[5]

I will not dispute the value of democracy, but there is a fundamental difference between a thing being good in its own right and a good thing leading to other good things. The examples of the Tigers show us an alternate path to development: a strong central government guiding the economy rapidly forward through distinct stages of development until it reaches full industrialisation. This hypothesis, the “developmental state,” is one that has been argued for by a number of economists for some time now. However if we accept this as a viable method of development two questions remain unanswered: why was it particularly successful in East Asia, and how can we transplant it to other parts of the world in need?

Mary, Mary, Quite Contrary: How Economists Think the Garden Grows

Before examining the economic development of the Asian Tigers it is important to identify the theoretical framework in which they might sit. Models for economic development are as varied as there are development economists, but at the risk of sacrificing diversity for ease of analysis we can broadly identify three distinct models. These three models are less cohesive blueprints and more categories of development policy broadly derived from the Neoliberal, Keynesian and Heterodox economic traditions respectively, which for our purposes we can identify as Market-led, Interventionalist and State-led models for economic development.[6]

The Market-led development model is that traditionally pushed by the IMF, advocating market liberalisation following a classical faith in the rationality of market actors.[7] The blame for the failures of some economies and the success of others is placed at the feet of interfering governments, and the removal of tariffs and other barriers to trade liberalisation are seen as an important initial step in the development process.[8] According to advocates of this model for development, a free market will naturally result in development of those industries that are most efficient, described in HOS theory as specialisation in production of goods produced using their relatively-abundant factor (to the world market).[9]

In practical terms, the liberalisation of both the domestic market and international trade is expected to result in semi-sustainable economies relying on export of either raw materials or (in land-scarce, labour-abundant states) perhaps even the product of light industry to balance the import of the machinery and other tools needed for these industries.[10] While critics point out that this leaves high value-added industries controlled by the developed countries of today, with the countries pursuing this model stuck with low-value-added industries like agriculture, resource extraction, and at best light industry, advocates would respond that it is still a clear improvement over the current situation of developing states.[11]

The second model for economic development proposed is what we might call the Interventionalist model. This model broadly follows from the writing of Lord Keynes and his views on the role of government in moderating the errors of the free market when necessary.[12] The Interventionalist development model acknowledges the role of actors in the free market but also the need for government action and intervention in stimulating growth and reducing unemployment.[13] Actors may be rational, but oversight is needed to stabilise output. Chandavarkar, while refuting the existence of a Keynesian model for development, does concede that he presented the first “economic rationale for a central bank as a development agency,”[14] setting the stage for a development model in which both government and market work together to achieve economic growth and ultimately development. The actual policies pursued by the state will be highly reactive and tailored to the needs of the market.

This skepticism regarding the ability of market actors is taken to its logical conclusion in our third model for economic development, the State-led model. This is borne out of the Heterodox tradition, as it refutes a basic principle of classical economics that what is good for the rational actor is good for the economy as a whole. The criticism is hinted at above in the limitations of market-led growth, as rational actors will always focus on the optimal activity available to them at the time of decision making, whereas development should always focus on improving future activities. The clearest way to illustrate this is with an example in the two-factor HOS tradition: given Country A’s high level of industry and skilled labour, and their trading partner Country B’s high level of unskilled labour, the optimum activity for entrepeneurs in B to engage in would be along the lines of light industries or resource extraction. This unfortunately reinforces the imbalance in value-added activities between A and B. For B to develop its industrial base and ultimately engage in higher value-added activities in the future, it would require considerable investment in activities that currently are sub-optimum. As rational actors would never engage in sub-optimum activities, it requires the guidance of the state to invest in those industries which will (hopefully) pay off in future, and therefore develop the economy as a whole.

This model is essentially a reworking of the “developmental state” hypothesis used by commentators to explain the very cases we will be examining, but it has not received much favour as a model for development. Chang and Grabel suggest that this results from the challenge a state-centric development model posed to the Neoliberal establishment, an argument discussed in a later section.[15] As a model, Chang and Grabel suggest the following policies should be pursued by the government seeking development: trade protectionism while new industries are developing, a clear strategy for systemic development of higher-value-added industries, a cautious approach to privitisation and the nationalisation of some industries where appropriate, a relaxed approach to intellectual property law and strict control of both capital and foreign debt.[16]

As we will see below, and unsurprisingly given its origins in analysis of the Asian Tigers themselves, all of the countries under discussion conform to the state-led development model in contrast to the market-led or state-intervention models. However supporters of the market-led and interventionist models would argue that while state-led development may have been effective in East Asia, it is not applicable to other parts of the world.[17] The failures of state-led economies like China under Mao, North Korea and the Soviet Union all indicate that strong states do not necessarily mean strong economies – there must be some other factors missing from past analyses of development in the Asian Tigers that can make the state-led model work.

The Tigers’ Stripes: Case Studies in Succesful State-led Development

South Korea

In 1945 South Korea was finally made independent of Japanese rule, only to immediately be placed under US military occupation.[18] The long-awaited autonomy it achieved was rapidly overshadowed by the Korean War (1950-3) with the North, which destroyed two-thirds of existing production facilities worth some three times the GNP.[19] The long road from these humble origins to its current position in the G20 can be analysed as a systemic movement in four discrete phases, beginning in the Rhee era but mostly taking place under the Park government (both before and after the establishment of yushin government).

The first phase of development constituted recovery from the devastation of the war, with an average of 15.9% of GNP coming from US aid (with a peak of 22.9% in 1957).[20] 64% of investment savings were US-owned, and Import Substitution Industrialisation was adopted with 30% of aid going towards agricultural equipment.[21] Worker’s unions were suppressed by the Rhee government to keep labour cheap.[22] Korean economic growth in this period was highly dependent on US aid and investment savings and vulnerable to intense fluctuations.[23]

The Park coup in 1961 demarcates the second phase of Korean economic development: the development of light industries and export-oriented growth. Having recovered from the war and no longer entirely reliant on US aid to pay for imports, the Korean economy could now begin to utilise its cheap labour force to grow through exportation of light industrial goods. Here we begin to see the first clear departure from the Market-led or even Interventionalist models of growth in the adoption of the First Five-Year Economic Development Plan (1962). This established clear macro-economic growth targets in investment, industrial structure and trade balance, and established trade policy, industrial policy, and macro-economic policy in pursuit of these goals. This was called “guided capitalism,” in which “the state shall either directly participate or indirectly render guidance” to key industries, particularly the labour-intenstive light industries that would lead to rapid export growth.[24]

To return to classical terminology, the optimum activity at this phase in Korean history for an individual actor to participate in would be those same light industries. Unfortunately if this were the case then the Korean economy would have been perpetually stuck in the same phase with no high-value-added industries being developed. Obviously this did not happen. While growth in the early 1960s was fantastic, as high as 10% in some years, the Park government did not see this as a sustainable means of growth. The foreign currency earnt through this explosion of export was reinvested in the advanced technologies and machinery which was necessary to progress to the next stage of development, while tariffs and subsidies were used to shield growing advanced industries from the international market.[25]

This set up the third stage of development, articulated in Park’s second Five-Year Plan: the development of heavy and chemical industries, supported by legislation and key policy instruments.[26] Foreign capital, though still under heavy government restrictions, was sought to help bolster growth and exports grew at almost 39.2% per annum.[27] This phase of development has lasted the longest of any thus far, with export-driven growth from heavy industry carrying Korea forwards until the early nineties. During this period factor input increases, both in capital accumulation and in quality of labour through education, accounted for a massive degree of growth in industrial output, setting up Korea well for the next phase of development.[28]

The 1990s saw a number of significant changes in the South Korean economy and marked the fourth and current phase of development, the push into high tech industry. The World Bank data on high-technology exports sadly only extends as far back as 1988, but even this shows a dramatic change. In 1988 high-technology exports made up only 15% of total export, but this number increases almost by an entire percentile every following year.[29] This international demand for Korean goods, coupled with a dramatic increase in domestic consumption and higher standards of living across society, marked the definite movement of Korea into “successful state” status.

In Korea’s economic history we can identify four discrete phases of development: a period of Import Substitution Industrialisation; the development of light industry and export-led growth while reinvesting in and protecting heavy industry; the development of heavy industry, increases in labour quality through education and permissal of limited degrees of foreign capital; and finally the development of the high-tech industry, the skilled labour required for which stimulating domestic consumption. The second through fourth phase show remarkably steady GDP growth in all but three years: the year of Park’s assassination and the 1997 and 2003 crises.

All of this was driven by the central state with a clear end-goal in mind and a range of effective legislative and policy tools for implementation. Aggressive reinvestment in infrastructure, state-owned industries and clearly communicated economic plans over a long period of time allowed for a progression through distinct phases of development even when reinvestment in the newer phases would have appeared the less optimal to individual market actors.[30] It was this incessant push forward that eventually led to Korea’s development as a fully industrialised and technological economy.

Taiwan

Taiwan shares a similar story to Korea, although at least in economic terms its origins are marginally less humble. Our story again begins at the end of a war, but Taiwan itself was left relatively unscathed by the fighting and still bearing the remnants of Japanese colonial attempts at development: some established agricultural exports in rice, sugar and pineapples, basic food processing plants and a handful of textile factories.[31] Leadership initially adopted a policy of ISI in pursuit of subsistence, but due to bad experiences with inflation on the mainland a more aggressive growth policy was not adopted until the USA threatened to reduce aid in the 1950s.[32] Only then did Jiang and the GMD begin to industrialise along the lines we saw in Korea.

Before this period the primary sector (mainly agriculture and fishery) accounted for nearly a third of GDP before rapidly dropping to just 7% in the industrial explosion, and food processing (the dominant industry on GMD occupation) fell from 47% of manufactory output in the 1950s to just 31% in the industrialised 60s, finally dropping to 12% in the early 1980s (the end of the heavy industry era).[33] Interestingly after the initial boom of light industry (particularly textiles) we would expect to see from from Korea’s experience, light industry remained statistically significant all the way into the 1980s.[34]

Heavy industry was quickly established, in particular steel, electronics and petrochemical, as soon as the state ascertained that domestic and international demand was sufficient.[35] While other state firms were privatised during the development process to encourage foreign investment and expertise, these industries were always seen as essential to reconquest of the mainland and so remained firmly nationalised.[36]

While Yongping Wu points out that small- to mid-sized firms had an important role to play during this phase of development,[37] the state never lost its firm grip over the direction of the economy. A key measure here was control of foreign exchange, limiting the access of private firms to imported materials and serving both to keep up domestic demand for processed raw materials (which was done in state firms and onsold to selected firms) and to reduce capital risk.[38]

Vincent Chang describes the final phase in economic development, to fully-fledged technological state. Once the competitive advantage in labour-intensive products seemed to be slipping (both as a result of a more educated workforce and the rising competition from China in the late 1970s) the state essentially decided to jump before they were pushed: “the export-oriented economic structure… must be upgraded to become more technology- and skill-intensive.”[39] The state’s role in “the inception of pivotal technologies and in the export vigour of Taiwan’s information industry,” as well as in key large-scale industries like semiconductor production was immense,[40] and as in Korea led to the development of a substantive skilled-labour population who with their increased disposable incomes stimulated both domestic consumption and the service industry.

Taiwan followed a similar trajectory to Korea in its progression through four distinct stages of development, though with two exceptions of note: first that light industry played a key role in the economy all the way into the 1980s, and second that leadership did not seek to move beyond the first phase until threatened with aid reductions by the US. The unexpected lack of decline in light industry once heavier industries were developed could perhaps be attributable to the role of small- and mid-sized industries as discussed by Chang – with most heavy industries nationalised but small-scale entrepreneurship tolerated, this is a logical industry to gravitate towards. The second point is by far more significant, and may contain a clue as to the underlying reason that the Asian Tigers successfully developed through state-led, rather than market-led or interventionalist, methods.

The City-States: Singapore and Hong Kong

Singapore was perhaps the most “democratic” of the Tigers in its early life, if in name only: so charismatic was the leadership of Li Guangyao that in the words of a British diplomat “politics disappeared” leaving only an “administrative state.”[41] After reluctantly accepting Singapore’s independence from Malaysia in 1965, Li took control of Singaporean politics in “soft authoritarianism” until his retirement in 2011 and much of Singapore’s success is directly attributed to his personal vision and ability.[42]

Singapore’s development follows a now-familiar path. While not facing the challenges of rebuilding after a war, Singapore stood alone as a modern city-state with too little land to effectively feed its citizens. Food and water had to be provided for by imports, necessitating a quick push towards export-oriented light industries to balance trade.[43] Interestingly Singapore sought to supplement the local lack of technical and managerial knowledge by attracting international firms, albeit in a limited fashion, using their capital and resources to kick-start the light industry that would provide the backbone of Singapore’s economy for the next few decades.[44]

The 1970s saw a dramatic change in the structure of Singapore’s economy, with manufacturing and heavy industry becoming increasingly more of a priority throughout the 1970s and 80s.[45] This was largely in response to the challenge that China’s burgeoning light industry under Deng posed to Singapore’s output, and was pushed forward by the central government through a combination of reinvestment of wages in industry, infrastructure, housing and communications through the Central Provident Fund and an increase in minimum wage, forcing employers to seek more efficient modes of production.[46]

Unlike Taiwan and South Korea, Singapore’s move to the final phase of development was not marked by the establishment of the high-tech industry but rather by fulfillment of Stamford Raffles’ original vision for Singapore as the trading and financial hub of Southeast Asia.[47] Trade, import refinement and finance all require skilled labour, much like high tech industry, and Singapore’s unique geographic position and recent market liberalisation allow this to serve as the high-level industry that cements its position as a fully developed nation, just as high tech industries do for South Korea and Taiwan.

Given today’s liberal markets, and the nominal democracy of Singapore’s modern history, it is tempting to think of Singapore as an example of liberal market-led development in action. However the importance of the Central Providence Fund in establishing the infrastructure needed for heavy industry and the dominant role of Li in both politics and economic direction both suggest that the state was the principal mover in the development of Singapore’s economy, with liberal elements only being introduced in the late phases of development to pave the way to a financial and trade hub.

Hong Kong is similar in many ways to Singapore, although it is notable for being the most consistently laissez-faire (and therefore market-led) of the Tigers. As in Singapore the pressing need to balance trade deficits due to poor agricultural potential led to a rapid development of light industry, but then advocates of market-led development would argue that the next steps through to trade and financial services would have been a logical step for market actors to take, given the proximity to China and the historical nature of Hong Kong as a trade port.[48]

The importance of market actors in the development of Hong Kong cannot be denied, but there are some features of development (glossed over in Neoliberal accounts) that suggest that the state had a not-insignificant role in guiding the economy. In particular Vogel points to the allocation of public funds, with the vast majority diverted to developing the infrastructure that would be required by heavier industries – roads, universities, and most interestingly land development specifically for the use of factories; and all this a good decade before there was any significant market-led demand for these public goods.[49] The state may have left market actors to find their own way, but they were not subtle about putting a map in their hands.

Hong Kong, like Singapore, ended up as a financial centre for its region as well as a major industrial producer – not bad for a former entrepot.[50] It is unusual among the Tigers for having a fairly consistent laissez-faire approach to the market, and is by far the closest to a market-led model of development. However this is not to say that the state had no hand in pushing development forward when the market might have been content to stay in one phase.

When taken into consideration with the other Tigers, we have a clear idea of how their economies developed. In all cases barring to an extent Hong Kong, a strong central state created a long-term plan for development that saw it through from the early days of ISI all the way to the establishment of advanced technological or financial industries. The state was able to implement these plans through a range of policy tools, without considerable domestic challenges and with the ability to adapt the details of the plans to the challenges they encountered along the way. Rather than dwell in any particular phases of development, the Tigers pushed forward, aggressively reinvesting in the infrastructure needed to establish the next phase and protect it from the advantages of the international market until it was ready to shoulder the burden of economic growth. This saw them through, with some variation, from backwards islands, peninsulas, and losers in war, to four of the most powerful economies in East Asia. But can this success be replicated elsewhere?

The Missing Link: Leadership and Legitimacy

We may now have a model for economic development, but this does not not mean that we can easily transplant it to other parts of the world. Other countries, notably the Soviet Union, Maoist China and North Korea, have attempted to lead development from the state with little success. Why was state-led development successful in the Tigers, but not elsewhere? And can we replicate this in other parts of the world?

Advocates of market-led or interventionalist growth would say that we could not. According to them the development of the Tigers, while ultimately successful, was highly idiosyncratic to the East Asian region and cannot be exported elsewhere, the universal alternative obviously being the liberalisation of markets (to the varying degrees required of their models). The most common explanation of the Tiger’s success is that it was in some way due to their shared Confucian culture.[51] Confucianism’s emphasis on social hierarchy and the nation-family, they would say, provides East Asians with the unique outlook required to tolerate the submission of personal economic interest to the state’s long-term goals. Other parts of the world, lacking such an ingrained cultural disposition, would not accept the state’s mandate and frustrate progress.

Beyond the obvious objection that there are still a number of Confucian states in the early stages of development, Chang has considerable disdain for this argument. He describes culture as having a “Jekyll and Hyde” nature, the positives and negatives being called on as needed to justify an argument.[52] The first example he gives here is an account of an Australian businessman touring a Japanese factory in 1915 and concluding that the reason for Japan’s then-backwardsness was due to the inherent cultural laziness of the Japanese people. How times (and cultural stereotypes) have changed. Indeed, when East Asia was still in the early stages of development the blame was placed as firmly on Confucianism as its current success is today. Chang’s response to the culturalist argument is essentially that within any culture or religion an observer can find sufficient characteristics to justify just about any argument that they wish to make, which somewhat undermines the claim that state-led development can only be successful in countries with a certain culture. “No culture,” he concludes, “is either unequivocally good or bad for economic development. Everything depends on what people do with the raw material of their culture.”[53]

If the success of state-led development in East Asia cannot be attributed to their shared culture, then what? I would suggest the missing link here is the legitimacy of these countries’ leaders. All four Tigers had a strong central leadership able to effectively steer the direction of the economy without significant internal challenges, an indication that all enjoyed considerable legitimacy. Most governments today derive their legitimacy from democratic elections – when the Obama administration makes a decision, the decision is made by the people and for the people. Older forms of government have derived their legitimacy from the Divine Right of kings or from Hobbes’s Leviathan, to name a few examples. But from where did the leaders of the Tigers derive their legitimacy?

In all four cases, to varying degrees, the legitimacy (and continued survival) of the leadership rested in some way on the continual economic success that they were able to provide to the people. This meant that the leaders of all four of these countries had considerable motivation to aggressively seek sustainable development, and the fact that legitimacy was based on neither democracy (which can lead to instability and a lack of long-term planning) or ideology (as in the Communist states, binding development to a prescribed course with no room for adaption) allowed them to pursue this sustained development with stability and flexibility, explaining their particular success.

The unity and legitimacy of Korean leadership was based on “forced unity” against the ideological foe of the North.[54] The division was based on ideological grounds, with leaders of both North and South claiming to represent the ideology that was in the people’s best interests, and so the success of either leadership could best be gauged by their subjects by how much better off they appeared to be when compared to their neighbours. Park knew that he was relatively safe from uprising (though apparently not from assassination) because the USA would not tolerate the fall of an anti-Communist regime, meaning that he had considerable stability and the ability to make long-term plans, but he also knew that the best means to maintain legitimacy was by proving ideological superiority over the North by achieving greater economic gains.[55]

Even today, much of Taiwan’s identity is based around its relationship with mainland China, and a recent study concluded that while public identification with the mainland is less clamourous than it was a decade ago, continuous GMD leadership until the 2000 elections meant that the leadership was always committed to their One China policy.[56] This rivalry with the Mainland, shared by both leadership and wider society, provided the legitimisation for continuous GMD rule[57] and again gave a strong economic focus to the regime: they needed a strong economy both to prove superiority over the PRC but more importantly to support the military forces that they needed to pose a challenge to the mainland. This manifested most obviously in the continued nationalisation of the steel, petrochemical, electronics and vehicle manufacturing industries, as all have an obvious military application. Taiwanese leadership needed these industries in particular to have a strong foundation in order to support their claims, both necessitating development and removing the potential obstacles of democractic instability and ideological inflexibility.

The relationship between the economic development of Singapore and Hong Kong and the interests of their respective leaderships is an even more pressing issue of survival: given their tiny size, they simply didn’t have the agricultural basis to survive as independent countries. If they had not industrialised and maintained a position of economic necessity within the region (as trading ports and later as financial centres) then they would not have been able to feed their population. The legitimacy of the leadership here is based simply on continued economic survival of the state, partly mitigated in Hong Kong’s case by its colony status. The legitimacy of its leadership was also tied to its status as a Crown property and it might ultimately have relied on Britain to support it should it have failed to develop successfully – this would account for it being the most laissez-faire of the Tigers. Singapore, sandwiched between its economic rivals of Malaysia and China, had no such fallback and the leadership’s continued rule rested solely on their ability to deliver the economic goods.

In the cases of all four Tigers we see a clear trend in the leadership and the location of its legitimacy – to varying degrees the position of the leadership is sustained and justified by the economic development that they were able to deliver. Because they did not rest their legitimacy upon democracy or ideology, leadership not only had the motivation to aggressively pursue development, it had the ability to do so with stability of government and flexibility of approach. The Tiger approach to development is perhaps best characterised then as “success due to coherent and flexible policies, effective implementation by the state… and political capacity to insulate economic planning from competing interests.”[58]

Putting It Together: Replicating the Tigers’ Success

So how could we replicate the success of the Tigers in other developing states? The crucial element is the leadership. If a state’s has a leadership that in some way derives its legitimacy from economic success, rather than democratic elections or ideological correctness, this will provide it both the motivation and the ability to effectively pursue the long-term and aggressive development progression we saw in the Tigers, with clear transitions through ISI, light industry, heavy industry, and finally into a fourth stage of high tech industry, skilled labour and increased domestic consumption.

The biggest issue facing developing states is that in too many cases the leadership rests its legitimacy not on the economic benefits that it can bring to its subjects but rather on the military forces that it commands and with which it can suppress any dissent.[59] A good number of these states (and too many more besides) likely face a not-unrelated issue that with their position secured by some form of legitimacy leadership is more concerned with the benefits that its position can provide for itself than to the country at large – they might be stable government not bound to inflexible ideologies, but without the motivation of legitimisation they are happy to focus their attention on patronage rather than enacting development policies.

In order to rectify this situation, and to encourage development in states sorely in need of it, some drastic measures must be taken. Statebuilders need to generate in state leaders a pressing urgency to pursue sustained economic development that will make the government stable (non-democratic) flexible (not bound to ideology) and motivated to actively pursue sustainable development progression. Alternate sources of legitimisation, such as military strength, need to be stripped by some means from leaders who show no signs of interest in the long-term economic interests of their state in order to refocus their attentions, while short-term revenue streams that will eventually dwindle need to be limited – extractive industries for instance should have their exports limited to fight the “resource curse” and force consideration of alternate industries.[60]

Here overzealous democratisation poses its own danger, quite apart from any criticism of market liberalisation in developing states. Democracy at best provides a degree of instability in leadership – it is hard to make effective Five Year Plans (as in South Korea) when the government could be radically different as little as three years into the future, let alone long-term plans for development of key strategic industries as in Taiwan. At its worst, democracy provides yet another legitimisation for leaderships primarily concerned with its own benefit and not sufficiently motivated to aggressively push through development plans.[61] Democracy is certainly a good thing and should be a goal of statebuilding, but it is not the only good thing, and it may even provide an obstacle to development – better perhaps to wait until the government is more institutionalised and society is more stable overall than to introduce it too soon.

Ultimately the pattern of economic development achieved by the Asian Tigers is replicable elsewhere in the world, if the key issue of legitimisation and the role of the leadership in development is addressed. However it may require some rethinking of the priorities of statebuilding exercises, and other goals like the establishment of democracy may need to be pushed back in order to maintain the stable, flexible, and economically-motivated leadership that seems to be required for effective state-led development.

Conclusions

Of the three models of development we can identify in literature, it is the state-led model that was successfully employed in the “Asian Miracle” of the Tigers. In contrast to the Neoliberal approach of market liberalisation and faith in the rationality of individual actors, this model describes a strong central state utilising a range of policy tools to aggressively pursue development even against the wishes of market actors. This sees development follow a clear progression through ISI, light industry, heavy and chemical industries, and then finally technological industry, with the export revenue of each stage being used to fund the next and heavy protection from the international market until industries have been sufficiently established.

Rather than being a product of particular cultural values, the success of this model in East Asia can be attributed to the unique pressures placed on the leadership of these states to pursue economic development lest stagnancy threaten their legitimacy. The reliance on economic development for legitimacy rather than democratic elections or ideological justification allowed the East Asian states to have both stability and flexibility in their planning, effectively enacting long-term plans for reinvestment and development while still adapting to the situation of the international economy and any new challenges that might arise (such as China’s development of light industry in competition to Singapore’s). A state-led economy has every chance of failing if they are not sufficiently stable, flexible and motivated to pursue development, as other cases might suggest.

The Asian Tigers provide us with an interesting alternative to the developmental strategies most commonly seen in statebuilding exercises, with their emphasis on liberal values like democracy and market-led growth. Replication of their successes may well be possible, though it will require a dramatic rethinking of our approaches to development economics and our conception of the relationship between a regime’s legitimacy and security.

Bibliography

BHATTACHARJEA, Aditya. “Krugman’s Economics: An Introduction.” Economic and Political Weekly 43:49. 2008.

BANURI, Tariq. “Sustainable Development is the New Economic Paradigm.” Development 56:2. 2013.

CHANDAVARKAR, Anand. “Was Keynes a Development Economist?” Economic and Political Weekly 21:7. 1986.

CHANDRASEKHAR, C.P. “Investment Behaviour, Economies of Scale and Efficiency in an Import-Substituting Regime: A Study of Two Industries.” Economic and Political Weekly 22:19/21. 1987.

CHANG, Ha-Joon. Bad Samaritans. London, UK: Random House. 2007.

CHANG, Ha-Joon, and Ilene GRABEL. Reclaiming Development: An Alternative Economic Policy Manual. New York, USA: Zed Books. 2004.

CHANG, Vincent. “Developing the Information Industry in Taiwan: Entrepreneurial State, Guerilla Capitalists, and Accomodative Technologists.” Pacific Affairs 68:4. 1995-6.

COHEN, Benjamin. “Finance and Security in East Asia.” The Nexus of Economics, Security and International Relations in East Asia. Eds. A. Goldstein and E. Mansfield. California, USA: Stanford University Press. 2012.

COLLIER, Paul. Wars, Guns and Votes: Democracy in Dangerous Places. London, UK: Vintage Books. 2010.

COLLINS, Susan. “Lessons from Korean Economic Growth.” The American Economic Review 80:2. 1990.

DANBY, Colin. “A Two-Factor World: The Heckscher-Ochlin-Samuelson Model.” 1998. http://faculty.washington.edu/danby/bls324/trade/hos.html (accessed 19th May 2014).

DEPREZ, Johan. “Open-Economy Expectations, Decisions and Equilibria: Applying Keynes’ Aggregate Supply and Demand Model.” Journal of Post Keynesian Economics 19:4. 1997.

ELLICKSON, Robert. “Bringing Culture and Human Frailty to Rational Actors.” Yale Law School Faculty Scholarship Series Paper 461. 1989.

GARRAN, Robert. Tigers Tamed: The End of the Asian Miracle. Hawaii, USA: University of Hawaii Press. 1998.

HARVEY, Charles, and Hyunhoon LEE. “New Regionalism in East Asia: How Does It Relate To The East Asian Development Model?” ASEAN Economic Bulletin 19:2. 2002.

HO, Samuel. “Economics, Economic Bureaucracy and Taiwan’s Economic Development.” Pacific Affairs 60:2. 1987.

HUFF, W.G. “Patterns in the Economic Development of Singapore.” The Journal of Developing Areas 21:3. 1987.

JOHNSON, Chalmers. MITI and the Japanese Miracle: The Growth of Industrial Policy 1924-1975. Stanford: Stanford University Press. 1982.

JOMO, J.S., and Rudiger VON ARNIM. “Trade Theory Status Quo Despite Krugman.” Economic and Political Weekly 43:19. 2008.

KAPUR, Devesh. “The IMF: a Cure or a Curse?” Foreign Policy 111. 1998.

KIM, Chungil. The History of Korea. Conneticut, USA: Greenwood. 2005.

RAINIS, Gustav. “Towards a Model of Development.” In Liberalisation in the Process of Economic Development. Eds. L. Krause and K Kihwan, California, USA: University of California Press. 1991.

SHIN, Dongmyeon. Social and Economic Policies in Korea: Ideas, Networks and Linkages. London, UK: Routledge Cuzon. 2003.

SO, Alvin. “The Economic Success of Hong Kong: Insights from a World-Systems Perspective.” Sociological Perspectives 29:2. 1986.

SOBEL, Richard, William-Arthur HAYNES and Yu ZHENG. “Taiwan Public Opinion Trends, 1998-2009.” Public Opinion Quarterly 74:4. 2010.

SUN, Chen. “The Role of Medium-Term Plans in Development.” In Liberalisation in the Process of Economic Development. Eds. L. Krause and K Kihwan, California, USA: University of California Press. 1991.

TAI, Hung-Chao. “The Oriental Alternative: A Hypothesis on Culture and Economy.” In Confucianism and Economic Development: An Oriental Alternative. Ed. H-C. Tai. DC, USA: The Washington Institute Press. 1989.

TRUMAN, Harry. Inaugural Address. 1949. http://www.bartleby.com/124/pres53.html (accessed 19th May 2014).

VOGEL, Ezra. Four Little Dragons: The Spread of Industrialisation in East Asia. Massachussets, USA: Harvard University Press. 1991.

WADE, Robert. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton: Princeton University Press. 1990.

WEINTHAL, Erika, and Pauline Jones LUONG. “An Alternative Strategy To Manaing Mineral Wealth.” Perspectives on Politics. 2006.

The World Databank. World Bank. 2014. databank.worldbank.org (accessed 20th May 2014).

WU, Yongping. “Rethinking the Taiwanese Developmental State.” China Quarterly 177. 2004.

XING, Guoxin. “Hu Jintao’s Political Thinking and Legitimacy Building: A Post-Marxist Perspective.” Asian Affairs 36:4. 2009.

ZAKARIA, Fareed. “Culture is Destiny: A Conversation with Lee Kuan Yew.” Foreign Affairs 73:2. 1994.

[1]   Charles Harvey and Hyunhoon Lee, “New Regionalism in East Asia: How Does It Relate To The East Asian Development Model?” ASEAN Economic Bulletin 19:2 (2002), 126

[2]   See Robert Garran, Tigers Tamed: The End of the Asian Miracle (Hawaii, USA: University of Hawaii Press, 1998) for a prime example; also Benjamin Cohen, “Finance and Security in East Asia,” in The Nexus of Economics, Security and International Relations in East Asia, eds. A. Goldstein and E. Mansfield (California, USA: Stanford University Press, 2012), 41

[3]   Harry Truman, Inaugural Address (1949), http://www.bartleby.com/124/pres53.html (accessed 19th May 2014)

[4]   Devesh Kapur, “The IMF: a Cure or a Curse?” Foreign Policy 111 (1998), 115

[5]   Paul Collier, Wars, Guns and Votes: Democracy in Dangerous Places (London, UK: Vintage Books, 2010), 15

[6]   cf. Marglin’s neoclassical, neo-Keynesian and neo-Marxist strands of economic thought analysed in Tariq Banuri, “Sustainable Development is the New Economic Paradigm,” Development 56:2 (2013), 209

[7]   See Gustav Rainis, “Towards a Model of Development,” in Liberalisation in the Process of Economic Development, eds. L. Krause and K Kihwan (California, USA: University of California Press, 1991),78 for analysis of the positive correlation of market liberalisation and good economic performance; Robert Ellickson, “Bringing Culture and Human Frailty to Rational Actors,” Yale Law School Faculty Scholarship Series Paper 461 (1989), 23 for an elegant summary of the rational actor concept.

[8]   Aditya Bhattacharjea, “Krugman’s Economics: An Introduction,” Economic and Political Weekly 43:49 (2008), 27

[9]   Illustrated by Colin Danby, “A Two-Factor World: The Heckscher-Ochlin-Samuelson Model” (1998), http://faculty.washington.edu/danby/bls324/trade/hos.html (accessed 19th May 2014)

[10] C.P. Chandrasekhar, “Investment Behaviour, Economies of Scale and Efficiency in an Import-Substituting Regime: A Study of Two Industries,” Economic and Political Weekly 22:19/21 (1987), 62

[11] A withering critique is found in K.S. Jomo and Rudiger von Arnim, “Trade Theory Status Quo Despite Krugman,” Economic and Political Weekly 43:19 (2008), 30

[12] Summarised in Johan Deprez, “Open-Economy Expectations, Decisions and Equilibria: Applying Keynes’ Aggregate Supply and Demand Model,” Journal of Post Keynesian Economics 19:4 (1997), 600

[13] Chen Sun, “The Role of Medium-Term Plans in Development,” in Liberalisation in the Process of Economic Development, eds. L. Krause and K Kihwan (California, USA: University of California Press, 1991), 146

[14] Anand Chandavarkar, “Was Keynes a Development Economist?” Economic and Political Weekly 21:7 (1986), 305

[15] Ha-Joon Chang and Ilene Grabel, Reclaiming Development: An Alternative Economic Policy Manual (New York, USA: Zed Books, 2004), 38; cf. Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1924-1975 (Stanford: Stanford University Press, 1982); Robert Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990)

[16] Ibid at 66; 78-9; 90; 101; 114; and 120 respectively

[17] Chang and Grabel, Reclaiming Development, 38

[18] Chungil Kim, The History of Korea (Conneticut, USA: Greenwood, 2005), 144

[19] Dongmyeon Shin, Social and Economic Policies in Korea: Ideas, Networks and Linkages (London, UK: Routledge Cuzon, 2003), 47

[20] Ibid

[21] Ibid, 48

[22] Ibid, 50

[23] Ibid, 51

[24] Ibid, 55

[25] Ha-Joon Chang, Bad Samaritans (London, UK: Random House, 2007), 14-15

[26] Shin, Social and Economic Policies, 56-7

[27] Ibid, 57-8

[28] Susan Collins, “Lessons from Korean Economic Growth,” The American Economic Review 80:2 (1990), 105

[29] The World Databank (World Bank, 2014), databank.worldbank.org (accessed 20th May 2014)

[30] Shin, Social and Economic Policies, 17

[31] Ezra Vogel, Four Little Dragons: The Spread of Industrialisation in East Asia (Massachussets, USA: Harvard University Press, 1991), 13-4

[32] Ibid, 14-5; 22-3

[33] Samuel Ho, “Economics, Economic Bureaucracy and Taiwan’s Economic Development,” Pacific Affairs 60:2 (1987), 229

[34] Ibid

[35] Vogel, Four Little Dragons, 31

[36] Ibid, 29

[37] Yongping Wu, “Rethinking the Taiwanese Developmental State,” China Quarterly 177 (2004), 105

[38] Vogel, Four Little Dragons, 301

[39] Vincent Chang, “Developing the Information Industry in Taiwan: Entrepreneurial State, Guerilla Capitalists, and Accomodative Technologists,” Pacific Affairs 68:4 (1995-6), 551

[40] Ibid, 552

[41] Vogel, Four Little Dragons, 76-7

[42] Fareed Zakaria, “Culture is Destiny: A Conversation with Lee Kuan Yew,” Foreign Affairs 73:2 (1994), 109

[43] W.G. Huff, “Patterns in the Economic Development of Singapore,” The Journal of Developing Areas 21:3 (1987), 309-10

[44] Vogel, Four Little Dragons, 77

[45] Huff, “Economic Development of Singapore,” 317

[46] Vogel, Four Little Dragons, 79-80

[47] Based on statistics from The World Databank

[48] A summary of the market-led argument is found in Alvin So, “The Economic Success of Hong Kong: Insights from a World-Systems Perspective,” Sociological Perspectives 29:2 (1986), 242-3

[49] Vogel, Four Little Dragons, 71

[50] So, “Economic Success of Hong Kong,” 241

[51] Hung-Chao Tai, “The Oriental Alternative: A Hypothesis on Culture and Economy,” in Confucianism and Economic Development: An Oriental Alternative, ed. H-C. Tai (DC, USA: The Washington Institute Press, 1989)

[52] This paragraph from Chang, Bad Samaritans, Chapter 9: Lazy Japanese and Thieving Germans

[53] Ibid, 193

[54] Vogel, Four Little Dragons, 44

[55] Similar to the strategy adopted by the Hu government in China, see Guoxin Xing, “Hu Jintao’s Political Thinking and Legitimacy Building: A Post-Marxist Perspective,” Asian Affairs 36:4 (2009), 213

[56] Richard Sobel, William-Arthur Haynes and Yu Zheng, “Taiwan Public Opinion Trends, 1998-2009,” Public Opinion Quarterly 74:4 (2010), 784

[57] Vogel, Four Little Dragons, 17

[58] Shin, Social and Economic Policies, 17

[59] Collier, Wars, Guns, and Votes, 19

[60] Erika Weinthal and Pauline Jones Luong, “An Alternative Strategy To Manaing Mineral Wealth,” Perspectives on Politics (2006), 39-42

[61] Collier, Wars, Guns, and Votes, 20

Written by: Bruno Marshall Shirley
Written at: Victoria University of Wellington
Written for: Professor Jon Fraenkel
Date written: June 2014

Growth in East Asia
What We Can and What We Cannot Infer

Michael Sarel

[Preface]  [What We Can and What We Cannot Infer]  [The Nature of Growth]
[The Role of Public Policy]  [Investment and Exports]  [Initial Conditions]
[Concluding Remarks]  [References]  [Author Information]


Preface

The Economic Issues series was inaugurated in September 1996. Its aim is to make accessible to a broad readership of nonspecialists some of the economic research being produced in the International Monetary Fund on topical issues. The raw material of the series is drawn mainly from IMF Working Papers, technical papers produced by Fund staff members and visiting scholars, as well as from policy-related research papers. This material is refined for the general readership by editing and partial redrafting.

The following paper draws on material originally contained in IMF Working Paper 95/98, "Growth in East Asia: What We Can and What We Cannot Infer From It," by Michael Sarel, an Economist in the Fund's Southeast Asia and Pacific Department. It has been prepared by David D. Driscoll of the Fund's External Relations Department. Readers interested in the original Working Paper may purchase a copy from IMF Publication Services.

Growth in East Asia
What We Can and What We Cannot Infer

The spectacular growth of many economies in East Asia over the past 30 years has amazed the economics profession and has evoked a torrent of books and articles attempting to explain the phenomenon. Articles on why the most successful economies of the region Hong Kong, Korea, Singapore, and Taiwan Province of China have grown, to say the least, robustly invariably refer to the phenomenon as "miraculous." When practitioners of the Dismal Science have recourse to a Higher Power, the reader knows that he is in trouble. Confusion is compounded when he discovers that ideological debate has multiplied even further the analyses of this phenomenon. Rather than swelling the torrent of interpretations, this paper sets for itself the modest agenda of reviewing the weightiest arguments in the literature that attempt to identify the reasons for the extraordinary economic growth in East Asia and trying to decide which arguments make sense. The exercise has value because finding the right explanation might suggest how to replicate this success elsewhere and, as a bonus, might also satisfy the reader's urge to solve an engaging intellectual puzzle. It is best if we start with the facts.

Since 1960 Asia, the largest and most populous of the continents, has become richer faster than any other region of the world. Of course, this growth has not occurred at the same pace all over the continent. The western part of Asia grew during this period at about the same rate as the rest of the world, but, as a whole, the eastern half (ten countries: China, Hong Kong, Indonesia, Japan, Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, and Thailand) turned in a superior performance, although variations in achievement can be observed here too. The worst performer was the Philippines, which grew at about 2 percent a year (in per capita terms), about equal to the average of non-Asian countries. China, Indonesia, Japan, Malaysia, and Thailand did better, achieving growth rates of 3-5 percent. This impressive achievement is, however, still modest compared with the phenomenal growth of Hong Kong, Korea, Singapore, and Taiwan Province of China, known as the "Four Tigers" because of their powerful and intimidating economic performance. The Tigers have had annual growth rates of output per person well in excess of 6 percent. These growth rates, sustained over a 30-year period, are simply amazing. While the average resident of a non-Asian country in 1990 was 72 percent richer than his parents were in 1960, the corresponding figure for the average Korean is no less than 638 percent.

This paper begins by looking at the long-running debate over the nature of growth. Is growth the result for the most part of an accumulation of manpower and machinery, or is it the result of employing the latest technology? The paper then looks at the growth record of the four countries from three other angles: the influence of government intervention, the extent to which investments and exports can be considered the main engines of growth, and the significance for sustained growth of the economic conditions prevailing at the very beginning of the countries' period of extended growth. The paper concludes with a few minimalist observations on possible areas for future study.

The Nature of Growth:
Factor Accumulation or Technological Progress

Everyone agrees that the economies of East Asia, and particularly the Four Tigers, have grown spectacularly over the past generation, but nobody seems to agree on why. The debate over why they have grown so well in the past raises difficult questions about regional growth in the future and about the aspiration of countries elsewhere to replicate the East Asian success. The arguments at the center of the debate are based on theoretical notions of growth accounting.

This accounting method deals with three elements that contribute to the production of goods and services: labor, capital, and technology. Labor and capital, known collectively as the "factors of production," refer in this context to the workforce and to the capital goods (buildings, machines, vehicles) that the workforce uses in manufacturing some product or providing some service. Technology refers to all the methods employed by labor and capital to produce a good and depends on the development or acquisition of practical skills to get the job done more quickly and more efficiently. No one denies that all three elements must be present to some degree if an economy is to grow. What is subject to debate is the contribution of the factors of production relative to that of technology. Some believe that increased use of labor and capital explain all growth; others are persuaded that the answer to growth lies in the use of more efficient technology.

Within the growth accounting framework it is possible to describe mathematically, using a simple equation, the contributions of these three elements to the overall production of an economy. By dividing the equation by the number of people in the workforce, one can derive a dynamic equation that shows how output per person increases over time. Such an equation mathematically describes the contribution to higher output of the growth rate of labor participation, of capital employed per person, and of technology (the latter also known as the growth of "total factor productivity"). If applied empirically to specific economies this equation can give a good idea of what proportion of increased output is a result of higher labor participation and better use of capital and what proportion is the result of technological progress.

The traditional formulation of this equation suggests that a significant and sustained rate of technological progress is the only possible way, over the long run, for an economy to achieve a sustained rate of growth in output per person. Why? The labor participation rate can be increased for a while and will increase production, but obviously it cannot increase indefinitely (everybody will ultimately be employed). And more growth in capital than in labor ultimately leads to diminishing returns to capital, resulting in a fall in the growth of output even if capital continues to grow at a constant rate. Therefore, in order to achieve permanent growth, an economy must continuously improve its technology. This kind of growth is called "intensive growth." In contrast to intensive growth, increasing output by increasing inputs of labor and capital (extensive growth) can work only for a limited period, but it cannot last too long.

In a famous study, Solow (1956) conducted a growth accounting exercise such as the one described above. He found that accumulation of capital and an increase in the labor participation rate had a relatively minor effect, while technological progress accounted for most of the growth in output per person. Further studies have reconfirmed the validity of these conclusions. Accordingly, the standard view about the success of the East Asian countries emphasizes the role of technology in their high growth rates and focuses on the fast technological catch-up in these economies. In this view, these economies have succeeded because they learned to use technology faster and more efficiently than their competitors did.

A Contrarian View

The collapse of the Soviet Union in about 1990, after years of apparent economic success, caught most people by surprise. This collapse seemed to lend credence to the "extensive growth hypothesis," which argues that the Soviet Union, after many decades of extensive growth, ran into the inevitable diminishing returns effect, just as predicted in the growth accounting framework, because it had relied for its economic growth on a massive accumulation of capital and labor and had been slow to accept innovative technology. These developments in the economy of the Soviet Union served to raise concerns about other economies, including some East Asian countries, that have invested primarily in labor and capital rather than in technology over the past few decades. Krugman (1994) makes the comparison specific:

Likewise, in explaining the extraordinary postwar growth of the Four Tigers, Young (1994b) concludes that

In the same vein, Kim and Lau (1994), comparing the sources of economic growth in these countries with those of Germany, France, Japan, the United Kingdom, and the United States, found that

The results of these studies are not only strikingly different from the view presented earlier of the primacy of technological progress, but they also convey a very pessimistic message. First, economic growth in the Four Tigers is hardly miraculous: it is just the expected outcome of a massive accumulation of labor and capital. Second, the progress of these economies along this growth path for the past 30 years cannot continue. Sooner or later they will experience a dramatic decrease in growth. Third, the societies in these countries made enormous sacrifices of consumption and leisure to achieve these growth rates. Therefore, even if their so-called success can be replicated in other countries, it is probably not wise to do so.

But how conclusive are these results? In fact, conclusions based on these studies are not very robust in that they are sensitive to the specific assumptions of each study.

The main reason for this sensitivity is the difficulty of estimating the rate of growth of capital stock in the East Asian countries during the period under study. Especially in the case of the Four Tigers, for which there are no good data before 1960, it is extremely difficult to estimate the capital stock at that time. To estimate how much capital was available in 1960, dubious assumptions have to be made about the depreciation rate of capital stock and about how much investment flowed in during the years of explosive growth beginning in 1960. What, for example, are the depreciation rates of different types of capital (buildings, industrial machinery, computers)? Are they equal for all countries and for all industries, or are they higher in faster-growing economies? What method is being used to estimate investment flows in the past?

Additional interpretational problems come from trying to estimate the share of national income attributable to capital and the share attributable to labor. Does the same amount of capital produce equal income in all countries and in all industries? Can statistics about the labor participation rate be trusted? Is the amount of effective work proportional to the hours that people work, or does working extra hours lead to diminishing returns? Should different types of labor (factory, office) be summed together? How should human capital be treated?

Because of these unanswered and perhaps unanswerable questions, the results of studies that emphasize the contribution to growth of capital and labor and depreciate that of technology should not be regarded as definitive. They should be viewed as interesting, but only suggestive.

Some Counter-Contrarian Evidence

Using conventional parameters and a conventional method of extrapolation, we have conducted a growth accounting exercise for the Four Tigers during 1960-90 along the lines suggested by Young (1994a). The capital stock in these economies is assumed to be 0 in 1900 and subsequently to increase by investment flows less depreciation. The intention of this exercise is to demonstrate the general fragility of conclusions about the nature of the growth process in East Asia.

Figures 1-4 describe the results of this growth accounting exercise. Figure 1 compares the growth rates of output per person of the Four Tigers with those of the rest of the world during 1960-75 and 1975-90. The first four bars in this figure describe the growth rates of the individual Tigers. The fifth bar describes the simple average growth rate of 100 countries, representing the rest of the world (row). The sixth bar represents the mean of the growth rate of the rest of the world plus a 1.96 standard deviation (row + 1.96sd). Growth rates can be regarded as "high" if they are above the row but below row + 1.96sd, "very high" if they are around row + 1.96sd, and "outstanding" if they exceed this value. Figure 1 shows that in this comparison the growth rates of output per person of Hong Kong, Korea, and Taiwan Province of China were very high in the 1960-75 period and outstanding in 1975-90, while the growth rate of Singapore was outstanding during the first period and very high during the second.

Figure 2 describes, in the same manner, the growth rate of labor participation, which was generally high for the Four Tigers and outstanding in the case of Singapore during 1960-75. The first panel in Figure 3 describes the growth rate of capital per person during 1975-90. The rate of capital accumulation was high in Hong Kong, very high in Singapore and Taiwan Province of China, and outstanding in Korea. The second panel of Figure 3 describes the estimated rate of productivity growth during 1975-90: outstanding for Hong Kong, very high for Taiwan Province of China, somewhere between high and very high for Korea, and high for Singapore.

Finally, Figure 4 compares the rates of technological progress (total factor productivity) in the Four Tigers during 1975-90 with those achieved by Japan and the United States during the same period. The first panel of Figure 4 shows that the growth in productivity in all Four Tigers exceeded by far productivity growth in the United States. Three of the four (except Singapore) also exceeded productivity growth in Japan. The second panel of Figure 4 describes the proportion of growth of output per person that is explained by productivity growth. It demonstrates that in the case of the Four Tigers this proportion was not systematically different from those of Japan and the United States: for Hong Kong and Taiwan Province of China it was slightly higher, while in the case of Korea and Singapore it was slightly lower.

What conclusion emerges from this exercise? Although the Four Tigers accumulated capital and increased labor participation at a much faster rate than other economies, the increase in these two factors far from fully explains their exceptional growth rates; growth in productivity attributable to innovative technology also accounts for a significant fraction. In the case of Hong Kong, Korea, and Taiwan Province of China, their growth rates of total factor productivity are as outstanding as their output growth rates. Productivity growth in Singapore is less spectacular, but is still much above the world average. As a percentage of the growth rates of output per person, the productivity growth rates in these four economies are roughly similar to those in Japan and the United States.

A final note on the debate. Just when one seems to have arrived at the above unambiguous and intellectually satisfying conclusions, a nagging doubt recommends checking on how sensitive these findings are to changes in the main parameters of the growth accounting exercise, such as the a parameter (usually at 0.3333) indicating the relative contribution of labor and capital, the depreciation rate, the reference period for extrapolation, the chosen estimation period, and the date for the beginning of capital accumulation. A sensitivity analysis shows that most parameters do not affect the results in any significant way, but that the a parameter and the choice of a specific estimation period are all-important. Small, simultaneous changes in both a and the estimation period give results opposite to the neat conclusions presented above. The findings reported by Young (1994a) regarding the low productivity growth in the Four Tigers were obtained by using a relatively high value for a (0.45) and a specific estimation period (1970-85). These choices, though only slightly different from those in the baseline calculation, together yield an estimate of productivity growth significantly lower than the baseline result. In other words, the debate over the relative contribution to economic growth of factor accumulation versus more efficient technology is still very much alive. Stay tuned.

Role of Public Policy

As the foregoing consideration suggests, the labor and capital accumulation versus total factor productivity debate remains inconclusive. Can other factors shed light on the mystery of growth? One suggestion is to look at the role of government.

Lucas (1988) asked, "Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's? If so, what, exactly?" The importance of this question can hardly be exaggerated. A usable answer would be the academic equivalent of alchemy, turning the dross of everyday economics into pure gold. Accordingly, the highest ambition of economists who examine the East Asian success is to identify a set of public policies that has promoted economic growth there and gives promise of doing so elsewhere.

It should come as no surprise that opinions vary considerably about the effect of public policy and selective government interventions on stimulating economic growth. Exponents of these opinions fall into three schools. The first emphasizes the primacy of free markets. This school requires only that the government "get the basics right" and opposes any other kind of government intervention. (Getting the basics right means creating an environment in which the economy will thrive by, for example, making sure that the exchange rate reflects the economic fundamentals, that interest rates yield a positive return, that inflation is kept under control, and that taxes are not so burdensome as to discourage economic activity.) The second also embraces the view that the government get the basics right, but in addition advocates selective interventionist policies, particularly in developing countries. The third, somewhat agnostic, school denies the possibility of coming to any conclusion about the effects of public policy or of selective interventions on economic growth. The whole debate, according to this school, gets you nowhere.

Free Markets

The first school, basing its views on what is known as the neoclassical approach to economics in general and to economic growth in particular, espouses an underlying belief in classical liberalism. The production possibilities of any economy at any time are determined, according to this view, by the availability of physical resources and of innovative technology. The rate of economic growth in the long run is determined by the rate of technological progress, which is itself a natural outcome of fierce competition in the laissez-faire economic system. Since it regards markets as efficient, this school maintains that government should confine itself to providing public goods (roads and bridges, police protection) and to getting the basics right and should abstain from any further intervention in the market.

This school wishes to restrict the role of government in the economy, but it is not anarchistic. It would assign to government both a microeconomic and a macroeconomic function. In its microeconomic aspect, government should ensure property rights, law and order, and adequate provision of public goods. It should avoid high tax rates, price controls, and other distortions of relative prices. On the macroeconomic side, government should ensure stable and low inflation, avoid excessive budget deficits, promote the integrity of the financial and banking system, provide for open markets, and strive for stable and realistic exchange rates.

Advocates of this view see the success of East Asia as the natural outcome of these cautious policies.

Selective Intervention

The revisionist view does not share the neoclassical belief in the efficiency of markets. It asserts that, especially in the poorer countries, markets work imperfectly. In poor countries, production creates externalities (unintended undesirable effects, such as pollution), credit is limited, and the market is a melée in which foreign and domestic firms savage one another and the public through unfair trade practices. Accordingly, the revisionists recommend an activist government that will moderate the excesses of the market and assist the orderly development of the economy by acquiring technology and by allocating funds for useful projects that promise a good rate of return. De Long and Summers (1991) sum up this view: "The government should jump-start the industrialization process by transforming economic structure faster than private entrepreneurs would." Advocates of this view see the success of East Asia as confirming their conviction.

The revisionist view recognizes that the government must often choose firm-specific, highly complex, and nonuniform interventions. In extreme contradiction to the neoclassical doctrine, it allows, and even recommends, the active use of tax policy to manipulate relative prices in the economy. Even the World Bank (1993) report, after emphasizing the necessity of neoclassical "getting the basics right" policies in East Asia, concedes that

Agnosticism

A third school, rejecting the claims of both the neoclassicists and the revisionists, claims that we can say nothing meaningful about selective interventions because we cannot properly identify how such policies spur economic growth. There are four reasons for this skepticism.

First, in analyzing "successful" policies, there is clear selection bias. Success has a thousand fathers; failure is an orphan. We know from the outset that the East Asian economies have been successful and that therefore government intervention did not inhibit growth. Consequently interventions in these economies are widely studied. On the other hand, since economists find unsuccessful economies much less attractive to study, they rarely look at government intervention in economies of this type. The selection of interventions to be analyzed is therefore skewed and is not scientifically neutral.

Second, in most cases it is impossible to offer a realistic counterfactual scenario. Would the Hawaiians have invented innovative igloos if it snowed a lot in Honolulu? Would the U.S. economy have grown faster if, like the Soviet Union, its government had turned Communist in 1917? In other words, in analyzing specific interventions, we cannot address the most (and perhaps the only) relevant question, "How fast would these economies have grown if these policies had not been in place?"

Third, public policy in the successful East Asian economies is far from homogeneous. Variation is large in the specific sectors and industries targeted for selective intervention in different countries. The more one examines the policies individual East Asian economies have pursued, the more evident it becomes how different, and indeed contradictory, these policies have been. Rodrik (1994), for example, remarks that the East Asian model encompasses highly interventionist strategies (Japan and Korea), as well as noninterventionist ones (Hong Kong and Thailand); explicitly redistributive policies (Malaysia), as well as distributionally neutral ones (most of the rest); clientelism (Indonesia and Thailand), as well as strong, autonomous states (Japan, Korea, Singapore); emphasis on large conglomerates (Korea), as well as on small, entrepreneurial firms (Taiwan). This range of strategies, all followed more or less successfully, suggests that the search for a simple explanation of the East Asian miracle may well be futile.

Fourth, determining the correct direction of causality is tricky. For instance, in successful economies one usually finds policies that encourage low fiscal deficits and good educational systems. Are these policies responsible for the success of the economy, or is the success of the economy responsible for the policies? Observing that a specific variable is present along with growth does not necessarily constitute proof that the policy generates growth. It might be the other way around. For example, it is much easier for a government to maintain a healthy fiscal position when the economy is growing and tax revenues are on the increase than when the economy is stagnant and demand is strong for deficit-creating social expenditures, such as unemployment compensation. Is a small deficit a result or is it a cause of economic growth? Conventional wisdom relates education to wealth. But which causes which? When an economy is booming, a government can afford generous subsidies for education. Moreover, the demand for education increases when an economy is growing and the population is becoming richer (it is unnecessary for children to start working at age 12). Furthermore, when an economy experiences rapid technological change, the advantage of educated over uneducated workers will be greater than when the economy is stagnant. Therefore there will be an increase in the demand for education by individuals who want a better job in the dynamic economy. In this case, by the way, further education constitutes an advantage for the specific individual relative to other individuals but does not necessarily improve the macroeconomic prospects of the economy.

These examples are presented not to prove that government policies are unimportant, but to make the modest point that we still understand very little about the relationship between public policy and the extraordinary growth rates of the East Asian economies. Other countries should be careful in trying to imitate the East Asian policies. Not understanding the causality between growth and industrialization, in particular, has proved to be a costly mistake for many poor countries that pushed for rapid industrialization in a futile effort to boost economic growth.

Investment and Exports: The Engines of Growth?

Among the many reasons suggested to account for the East Asian success, the investment rate and the export orientation of these economies enjoy enthusiastic support. These are often called "engines of growth" because their strength seems to be pulling the whole economy forward. Moreover, they appear to generate beneficial spillover effects for the rest of the economy. The policy implication of this view is obvious. If the hypothesis is valid, the government should jump start the engines of growth, and if certain sectors continue to contribute to economic progress, while others do not, then government should assist the economy's forward motion by promoting the "good" sectors. Therefore, it should encourage investments and exports, using such policy instruments as direct subsidies or preferential allocation of credit to promote these activities.

Main Arguments

The view that investments and exports are engines of growth is based on one empirical and one theoretical argument. The empirical argument is that most East Asian countries that experience phenomenal growth rates also enjoy impressive rates of investment and are successful exporters. The theoretical argument as regards investment is that a high investment rate increases the capital stock (things used to create wealth) and that this can permanently increase the growth rate through economies of scale (e.g., bigger, more efficient factories, larger markets) and other beneficial side effects. In the case of exports, the theoretical argument is that export orientation increases the openness of the economy and, by exposing it to foreign technology and foreign competition, provokes a rapid rate of technological progress.

What Is the Direction of Causality?

As stated above, a positive correlation between two variables (where one is found, the other is found) does not prove that one causes the other. In all the East Asian economies one can find export orientation and rapid technological progress. How are export orientation and technological progress related? The theoretical argument suggests that because a country is oriented to exporting, it becomes exposed to foreign technology: export orientation is the cause of technological advance. But the opposite might also be true, that technological advances cause export orientation. Suppose that some industries improve their technology and others do not. It is natural that industries with more advanced technology can compete in international markets and increase the quantity of their exports. In this case, the data will reveal a strong correlation between export performance and the rate of technological progress across industries. Likewise, developing countries that are better in learning and applying advanced foreign technology will enjoy an advantage in world markets and be able to sell their products abroad.

Investment rates (or equivalently, saving rates) appear to have a causal relationship to growth rates (i.e., saving causes growth). Nevertheless, a strong argument of reversed causality can be made even in this case. A study by Carroll and Weil (1994), examining data on savings and investment within households in various countries, found, in fact, that growth causes saving, but saving does not cause growth. Using these data, they discovered that households whose income is on the rise save more than households that experience little or no growth in income, a finding that represents a powerful reinterpretation of the growth-saving relationship. The study also offers from its findings a theoretical explanation that recognizes savers as creatures of habit. Although their incomes may be growing, households will respond slowly to their expanding wealth and will increase their consumption only gradually, with the effect that they save more. In this case, increased saving rates are caused by increased growth rates, and not vice versa.

Initial Conditions

The main empirical argument that a high rate of investment and a concentration on exporting have caused economic growth is the strong positive correlation between these two variables and the rates of growth found in the East Asian economies. In particular, the Four Tigers, the best performing economies in the region, display exceptional investment rates and an extremely high degree of openness (that is, they have a lot of exports and imports relative to the size of the economy). The section above stressed the problem of possible reverse causality between growth and these variables. A further problem is that of averages. Most studies observe a correlation between investment and exporting that are averaged over a period and a rate of growth that is averaged over the same period. Using averages over a period obscures the relation between the variables. A simple partial solution to disentangling the skein of causality is to observe the values of the explanatory variables at the beginning of the period rather than to take their average values over the period. Finding, for example, that economies with high growth rates during the 1960-90 period had very high investment rates or a significant export orientation around 1960 would go a long way toward solving the problem of reverse causality.

An examination of the dynamics of the investment rate and the openness of the economies of Hong Kong, Korea, Singapore, and Taiwan Province of China that compares the 1960 levels of these variables in the Four Tigers with those in other countries does not offer much support for the view that export orientation and investment have been engines of growth. The comparison of the 1960 investment rates of the four economies with the investment rates of 100 other economies clearly rejects the view that investment rates were high in the Four Tigers in 1960. Not only were the investment rates in these economies low in absolute values, but they were very modest even when compared with rates in other countries with a comparable level of income.

The same comparative exercise can be performed to test for openness (imports and exports as a percentage of GDP), taking into consideration such factors as the geographical size of the country, an important variable in determining the degree of openness of an economy. Small countries need to trade more than large countries with big internal markets. Reflecting this, Hong Kong and Singapore show a high degree of openness both during 1960-90 and at the beginning of the same period. On the other hand, Korea and Taiwan Province of China, which are geographically much larger, were not particularly open in 1960, either in absolute terms or relative to other countries of comparable size.

This analysis demonstrates that high investment rates and a large degree of openness were certainly not a general feature of the Four Tigers in 1960. The high investment rates (Korea, Singapore, and Taiwan Province of China) and the high degree of openness (Korea and Taiwan Province of China) were economic features that evolved in these economies only gradually, accompanying rather than preceding the process of economic growth. The conclusion is that the view of these activities as engines of growth does not find much support in the data.

Some Positive Evidence Regarding Initial Conditions

Were there other variables that characterized the initial conditions in the East Asian countries and, if so, what contribution might they have made to the subsequent growth of these economies? A study by Rodrik in 1994 examined precisely this question. It was inspired by the view that "In searching for the secrets of the East Asian miracle, the obvious place to look is the set of initial conditions that precede economic take-off." Examining the initial conditions, the study finds that, in certain important respects, they were very different from what one would expect, given the income level of these economies.

Tracing average growth of income per person in 41 countries during 1960-85 back to initial conditions in 1960, Rodrik shows that countries that were poorer, but that had good primary education systems and less inequality of income and land distribution around 1960, grew faster than the others during the following period. The study compares actual data on education and demographics (fertility rate and mortality rate) in eight East Asian countries with the predicted values we would expect, given their initial income, and compared inequality of income and land ownership around 1960 with the same characteristics of other developing countries at a comparable income level. The results show strong evidence that in terms of initial conditions (equality of land and income, school enrollment, high life expectancy and low fertility rates), the eight East Asian countries were significantly better off than countries with similar levels of income. These findings raise the possibility (but do not prove) that these initial conditions may help explain the phenomenal growth rates we observed in East Asia after 1960.

The empirical evidence presented by Rodrik regarding the possible influence of initial conditions in explaining the East Asian miracle is impressive but should be accepted with caution because of the small number of observations. Data on initial conditions in 1960, especially for developing countries, are rare and are of questionable quality. While Rodrik's results suggest a possible explanation for the East Asian success, they are not robust enough to rule out other possibilities. Furthermore, it is not clear what the normative implications of these findings are. For example, suppose that land equality is indeed beneficial for economic growth. Does that mean that land redistribution is a good policy to promote growth? Not necessarily. The redistribution may be extremely damaging by weakening property rights or disrupting political stability, which are obviously essential to growth. Likewise, lowering fertility rates by government decree may be bad for growth, even if low fertility rates are found to be good for growth.

Concluding Remarks

The recent literature on the East Asian growth experience has sparked an intense intellectual debate. This study has attempted to review critically the main arguments in this debate, covering some of its most important dimensions. Inevitably, other important dimensions did not receive fair representation, such as theories about nonmonotonic dynamics of growth (in which middle-income countries can take off and grow faster than either rich or poor countries) and about the importance of the geographical concentration of growth successes (why is East Asia the habitat of all Four Tigers?).

The study does not offer clear and conclusive results nor does it make clear policy recommendations. Its main judgment is that, from a positive point of view, a promising avenue for the explanation of growth performance is the examination of initial conditions. Nevertheless, from a normative point of view, it is far from clear what specific policies governments should pursue, beyond the standard set of policies aimed at getting the basics right.

References

Carroll, Christopher D., and David N. Weil, "Saving and Growth: A Reinterpretation," Carnegie-Rochester Conference Series on Public Policy, Vol. 40 (1994), pp. 133-92.

De Long, J. Bradford, and Lawrence H. Summers , "Equipment Investment and Economic Growth," Quarterly Journal of Economics, No. 106 (May 1991), pp. 445-502.

Kim, Jong-Il, and Lawrence J. Lau, "The Sources of Economic Growth of the East Asian Newly Industrialized Countries," Journal of the Japanese and International Economies, Vol. 8 (1994), pp. 235-71.

Krugman, Paul, "The Myth of Asia's Miracle," Foreign Affairs, Vol. 73 (November-December, 1994), pp. 62-78.

Lucas, Robert E., Jr., "On the Mechanics of Economic Development," Journal of Monetary Economics, No. 22 (July, 1988), pp. 3-42.

Rodrik, Dani, "King Kong Meets Godzilla: The World Bank and the East Asian Miracle," Chapter 1 in Miracle or Design? Lessons From the East Experience, ed. by Albert Fishlow and others (Washington: Overseas Development Council, 1994).

Solow, Robert M., "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics, No. 70 (1956), pp. 65-94.

World Bank, The East Asian Miracle: Economic Growth and Public Policy, Summary (New York: Oxford University Press, 1993).

Young, Alwyn, "Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong and Singapore," NBER Economics Annual, (1992) pp. 13-54.

------ "Lessons From the East Asian NICs: A Contrarian View," European Economic Review, No. 38 (April, 1994a), pp. 964-73.

------ "Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience," NBER Working Paper, No. 4680 (March, 1994b).

Author Information

Michael Sarel is an economist in Southeast Asia and Pacific Department of the International Monetary Fund. He graduated from the Hebrew University of Jerusalem and received a Ph.D from Harvard University.

0 thoughts on “Krugman 1994 Essay On Asian Tigers Singapore

Leave a Reply

Your email address will not be published. Required fields are marked *