THE EAST ASIAN MIRACLE REVISITED

8 “miracle” economies: Japan, 4 tigers, 3 NIEs8 “miracle” economies: Japan, 4 tigers, 3 NIEs

Asia-Pacific economies, 1990 & 2000

population (millions)

GDP per capita ($) 2000

GNP per capita ($) 1990

Export to GDP ratio 2000 (%)

Export to GDP ratio 1990 (%)

Indonesia 203.4 1,110 570 25 24

Malaysia 21.0 4,530 2,320 79 69

Philippines 71.4 1,200 730 29 20

Thailand 59.7 2,740 1,420 34 29

Singapore 3.4 32,810 11,160 124 152

Hong Kong 6.5 25,200 11,490 115 49

S. Korea 45.7 10,550 5,400 29 27

Taiwan 21.7 13,060 7,950 43 43

China 1244.2 860 370 20 17

Vietnam 76.6 335 na 35 na

Japan 126.0 38,160 25,430 9 10

United States 271.8 29,080 21,790 9 7

The economic environment

• East Asian success started from export-oriented strategies, benefiting from growth in the international economy since the 1950s.

• Wave of FDI in Asia (“Flying Geese Pattern”)– Japan4 Tigers3 NIEsChina (?)

– As each wave of development ensued it displaced exports of prior wave, compelling restructuring.

• Internal causes: exchange rate appreciation, wage increases, …

• Restructuring: labor intensivecapital intensiveknowledge

The flying-geese pattern of shifting comparative advantage

textiles

• For a particular country

chemical

• For a particular industry

steel autos electronics

Comparative advantage

Time

Japan 4 Tigers 3 NIEs China India, Vietnam, …

Comparative advantage

Time

THE MIRACLE: causes(?)

• PUBLIC POLICIES• THE SOCIETY (CULTURE, POLITICS)• BUSINESS / MANAGEMENT SYSTEMS• miscellaneous:

– HISTORY– EXTERNALITIES (FLYING GEESE)– LUCK– etc

(Were the “causes” of the Miracle related to the “causes” of the Crisis?)

THE CRISIS: causes(?)http://www.bschool.nus.edu.sg/depart/bp/bizds/crisis.htm#ASIAN FINANCIAL CRISIS

• EXCHANGE RATE MISALIGNMENT

• EXPORT SLOWDOWN

• WEAK FINANCIAL INSTITUTIONS

• MORAL HAZARD

• PANIC (A CRISIS IN CONFIDENCE)

Current Account balances prior to the “crisis” (% of GDP)

1990 1991 1992 1993 1994 1995 1996

Korea -1.24 -3.16 -1.70 -0.16 -1.45 -1.91 -4.89

Indonesia -4.40 -4.40 -2.46 -0.82 -1.54 -4.25 -3.41

Malaysia -2.27 -9.08 -4.06 -10.11 -11.51 -13.45 -5.99

Philippines -6.30 -2.46 -3.17 -6.69 -3.74 -5.06 -5.86

Singapore 9.45 12.36 12.38 8.48 18.12 17.93 16.26

Thailand -8.74 -8.61 -6.28 -6.50 -7.16 -9.00 -9.18

Hong Kong 8.40 6.58 5.26 8.14 1.98 -2.21 0.58

China 3.02 3.07 1.09 -2.17 1.17 1.02 -0.34

GLOBAL CAPITALISM:The “ New Imperialism” (?!)

• The radical argument:Today’s dominant economic doctrines rule out any interpretation, or resolution, of global financial crises (such as the Asian Crisis) that puts part of the blame on the effects of the ideology of globalized markets.

– The Asian Financial Crisis may be seen as a failure of “Asian capitalism” or alternatively, a failure of the “international financial system”.

The radicals

• Mahathir Mohamed: “…the fight for independence will have to begin all over again for the present market rules will surely result in a new imperialism more noxious and debilitating than the old.”

• George Soros: “I’m afraid that the prevailing view, which is one of extending the market mechanism to all domains, has the potential of destroying society.”

One culprit: the IMF

• The IMF is the institution responsible for the “system”. • Nationalists from the Global South are critical of the

IMF for (at least):– Forcing countries to open up to foreign competition and

takeovers– Forcing liberalization American-style– Bailing out foreign banks, while insisting on bankruptcy

for local banks– Fiscal and monetary restraints that kill local businesses– Dictating policy from Washington DC– Lack of transparency

Another culprit: market speculators

• The case for free capital movement is weaker than the case for free trade.

• George Soros himself believes there must be reform of the “system” and hedge funds like his own should be controlled.

• Radical reforms are occasionally implemented:– Debt write-offs, capital controls, market intervention

• Conventional solutions are relied upon:– Better information, sound financial practices,

improved banking and corporate governance, less government involvement, etc etc

Ideas for reforming global capitalismMarket-reinforcement

– transparency• reserve transactions• economic statistics• foreign indebtedness

– regulation• capital adequacy• a global regulator

– reduce moral hazard• curb the IMF• bail in private lenders• “orderly workouts”

System reinforcement

– guarantor for loans

– capital controls

• tax forex transactions

• control ST inflows

– “lender of last resort”

Regional mechanisms

– Currency swaps

– Surveillance

– Common currency or basket

– Asian Monetary Fund

TOWARDS REFORM IN ASIA

• Cronyism.• Too much money, dependence on

speculative capital inflows.• Lack of transparency in the financial sector.• Lack of flexibility in the currency regime.• Increasing current account deficits.• Weakness in the Japanese economy; China’s

dominance of Asian trade and investment

Problems in Asian market economies that led to Crisis

The East Asian Miracle ~ Explanation according to the World Bank:

“getting the fundamentals right”, with highly selective interventions

The policy choices:

Fundamental• Macroeconomic stability• High investments in

human capital• Stable and secure

financial systems• Limited price distortions• Agricultural development • Openness to foreign

technology

Selective• Mild financial repression

• Directed credit

• Selective industrial promotion

• Export-push trade policies

CAUSES OF THE “MIRACLE”:PUBLIC POLICY (World Bank Report)1

• Rapid Accumulation (of human & physical capital)

– Developing human capital• Primary and secondary education was emphasized• Tertiary education funds mostly for hard sciences• Female literacy more workers, lower fertility rates

– Creating effective and secure financial systems• Increased savings: (including “forced” savings)

– promoted by the integrity and accessibility of postal banks

• Increased investment:– investment-friendly environment; creating infrastructure– easy credit through “financial repression”

CAUSES OF THE “MIRACLE”:PUBLIC POLICY (World Bank Report)2

• Efficient Allocation of capital – Letting markets work: flexible labour markets

• governments less responsive to organized labour– Productivity-driven wage rises, even downward– No minimum wage

• emphasis on creating jobs; high employment levels

– Assisting the market: credit for priority areas• Industrial policies: targeting winners

– criteria: growth, productivity, spillover

• Credit directed against strict performance criteria– “contests”, thru deliberative councils

• Most subsidy small, but a signal to capital markets.

CAUSES OF THE “MIRACLE”:PUBLIC POLICY (World Bank Report)3• Technology catch-up and high productivity

– actively seeking foreign technology– industrial policy promoted high-tech sectors– encouraging exports

• other special features of East Asian growth– the principle of shared growth– macroeconomic stability– cooperative competition (led by technocratic elite)

• business-friendly environment, led by private investment• state interventions addressed market failures

– allocated by “contests”

A note on “contests”

• Problem: market “coordination” failures

• Solution: intervention policies emphasizing cooperation• Thus, a need for government-administered competition (contests)

– Rules (performance-based)• Eg, export order, technical progress, etc

– Rewards• Eg, loans, license, tax shelters, etc

– Referees• Eg, civil service, development boards, deliberation councils, etc

• Limits for viability of contests– Benefits may not be great if market coordination is strong.– Costs of government coordination may offset benefits.– Referees may not be effective.– Are they really contests, or political favors?

THE KRUGMAN CRITIQUE

“The Myth of Asia’s Miracle”

(Foreign Affairs, Nov/Dec 1994)

The debate about total factor productivity (TFP)

• The argument:

• The formula:

• Singapore grew through a mobilization of resources that would have done Stalin proud.

• Labour contribution• + Capital contribution• + Efficiency (TFP) • = Economic growth

TFP Growth rates (%)

Table 1 Table 2 Singapore:period TFP growth 1966-73 1976-84 1987-94

Hong Kong 1966-91 2.3 capital 9.0 5.6 3.6Singapore 1966-90 -0.3 labor 2.4 2.3 2.4S Korea 1966-90 1.6 residual (TFP) 1.3 0.6 2.6Taiwan 1966-90 1.9 GDP 12.7 8.5 8.6

Canada 1947-73 1.8 Source: Rao & Lee (1995)France 1950-73 3.0Germany 1950-73 3.7Italy 1952-73 3.4Japan 1952-73 4.1Holland 1951-73 2.5UK 1955-73 1.9USA 1947-73 1.4

Source: Young (1994)

counterarguments• The same formula calculated differently leads to

different conclusions.

• Accumulation and allocation of capital is itself significant;– Investment “meets the market test”; and embodies

technology.

• The opportunities for catchup are immense.– ~~TFP in Singapore should increase in future.

East Asia Growth: Summary--Why an Economic Miracle?

• Rapid growth, sustained over long periods--30 years or more in some--unprecedented

• Very low income inequality--unprecedented

• Low endowment of natural resources

• Lack Western-style democratic institutions

• Massive distortion/ intervention in markets

• Defied received wisdom; hence, a “miracle”

Lessons—How to breed Tigers

• Priority of the State: economic development• Resource-poor, small nations --export• Rapid growth needs a reliance on markets• State can guide markets, but, get prices right• Share pain & gain; sink-or-swim together• Authoritarian leaders pushed tough policies• Investments in basic education paid off • or, World Bank: get the fundamental policies right

– for rapid accumulation, – efficient allocation, – high productivity-growth.