Hang Nguyen

Toulakham Phomsengsavanh

Talina Gayazova

Roman Vernidub

ContentⅠ. IntroductionⅡ. The ModelⅢ. Free Market, Democracy, and Economic DevelopmentⅣ. Why Some High Human Capital Countries Are Not

GrowingV. East Asian Political Economy

1. Japan2. South Korea, Taiwan, 3. Hong Kong4. Singapore5. China

Ⅵ. Policy Implications and Summary

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I. IntroductionObjective - to put forth an EA Model which is applicable, in general, to the development of all other underdeveloped economies.

EA Model - transitional model that explains economic transition from a backward economy to an industrial economy, with major emphasis on the initial stage of the transition.

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unprecedented high growth rate

unconventional growth path

→ The EA economies aroused much interest

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II. The East Asian Model 1. the centrality of policy-augmented human capital;

2. changes in the size and composition of a country’s portfolio of productive industries are an intended outcome of economic policy ;

3. economic differentiation is a necessary condition for economic development ;

4. democracy is not necessarily a precondition for economic development;

5. without political stability no economy will prosper.

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Economic development and Development of democracy do not occur concurrently! Poverty-stricken economy --- likely to choose relief from hunger over

democracy.

Democratic vs. autocratic regime.

III. Free Market, Democracy, and Economic Development

Democratic Autocratic regime

Advantages

politicians seeking reelection have an incentive to reflect the will and interests of a majority of the people.

greatest chance of remaining in power or claiming legitimacy lies in achieving a maximum rate of growth.

Disadvantages

a looming election gives an incentive to pursue short-run accomplishments that can be pointed to during campaign

the power to use the state for strictly private gain.

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Free Market, Democracy, and Economic Development (cont.)

Democracy rarely blossoms in an environment of economic

backwardness, and usually short-lived;

The precedence of economic development over democracy

The Meiji era, the early period of Japanese modernization --- a

period of imperial rule.

The political systems of the rest of the EA countries ranged from

authoritarian to autocracy in their early period of development;

In East Asian , democracy was ushered in by economic success.

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The quality of PAHC --- determines the direction of product and trade specialization

Entrepreneurial ability & policymaking ability are keys to successfulindustrialization.

The conditions --- political stabilityand/or an absence of social conflictare crucial to the success ofindustrialization.

IV. Why Some High Human Capital Countries are not Growing

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Latin American economies (Argentina and Brazil)

Why Some High Human Capital Countries are not Growing (cont.)

Poor industrial policy, too much dependence on domestic endowment of natural resources, and insufficient industrial diversification on one hand and

class conflict—socio-economic inequality on the other.

(a) the exchange rate overvaluation --- by an import substitution (IS) policy has discriminated against exports, giving rise to balance of

payment deficits;

(b) an increase in government spending ---- by tax revenues gave rise to budget deficits financed by accelerating inflation; and

(c) the emphasis on industrialization at the expense of parallel agricultural development --- rural poverty contributing to social

conflict

All culminating in retardation of growth. 9

India up to 1980s

1) India’s bureaucratic management (i.e., use of rationing as predominant mode of regulation for the manufacturing industries), as the primary cause of India’s slow-

paced industrialization.

2) the heterogeneity of the country, hence the pervasiveness of vetoes by interest groups, prevented a single homogenous group from dominating the polity and the

state

Due to a liberal economic reform which has finally unleashed hitherto dormant high level of human capital, enabling India

to ride the wave of the IT revolution.

The PAHC --- the engine for the rapid rise of the Chinese economy, while it was the wrong policy that held back the Chinese economy prior to the 1980s.

Why Some High Human Capital Countries are not Growing (cont.)

Russian leaders were ambivalent about a strong state role in the industrialization

process.

The institutions that took over the state-owned facilities and that managed many other Russian

factories were not private enterprises on the Western model.

Owners acted like absentee landlords and factories were treated as serfdoms operated by forced laborers and run under strict

military discipline which discouraged innovation and adaptation.

the arbitrary use of the state’s power, mostly suppressive, was the key deterrent to its industrialization.

Russia (19th century)

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V. East Asian Political Economy

Underdevelopment:

Poverty uncompetitive market

Political instability ineffective government

EA model:

Import substitution (IS)

Export promotion (EP)

Policy-augmented human capital (PAHC)

Land reform

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1. Japan Meiji Period (1862-1912)

Modernlization

Borrowed technology & scientific knowledge

Integrated economic development

Modernize economic infrastructure (telegraph, postal services, railroads)

Compulsory education

Government as initial industrialists (e.g. cotton, textiles)

Militarism

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1. Japan

Post-war Period

No military purely economic rationale

Capital intensive industries (i.e., steel, petrochemicals)

potential for externalities on related industries

Both labor intensive and capital intensive industries

Flexible, adapt quickly to new technologies

CA of PAHC

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2. South Korea, Taiwan

Japanese colonial period (~1945) and the adjustment period (1945-1950s)

Head start in human capital (education)

Post-war land reform

Difference from Japan: size of domestic market

EP of primary goods

Secondary phase of IS (i.e., production of intermediate and capital goods)

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3. Singapore Fastest rate of growth among EA economies

IS policy (1959-66)

Export-oriented

Labor intensive industrialization strategy

FDI

1979~: skill/technology intensive, high value-added production

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4. Hong Kong Free market environment

Influx of Chinese entrepreneurs (cotton mill operators)

business expertise,

scarce capital,

skilled workers,

export market networks

Government: promoting trade and education

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5. China

China – different from other EA countries, but fits EA model described in the paper:

abundance of human capital

fits Proposition 4 - economic success can be a more expedient route to successful transitionfrom a non-democratic political system to ademocratic system

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1) Central Planning: 1949-1976 Mao government adopted so called “leap forward”

policy - emphasis on heavy industry to achieve quick

industrialization through central planning:

o market/price mechanism was completely ignored

o state enterprises had little managerial autonomy

o agricultural sector was organized into collective farms

o economic incentive was mostly neglected

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2) Economic Liberalization: 1976 and On

Liberalization of economy: inspired by existent EA models -attracted to Korean model as Korean economy registered the highest growth rate under most authoritarian political regime

Rapid accumulation of physical capital and human capital

Physical capital:

China’s open-door policy, which provided an impetus to FDI:

FEZ, Allowing foreign companies to set up joint venture and shareholding companies etc.

High rate of saving - effectively channeled into physical capital formation

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Human capital:

Institutional reforms: household responsibility system (HRS) replaced collective farm

management of state owned enterprises was decentralized, profit sharing by using Contract Responsibility System

town and village enterprises (TVEs) system was lunched

Chinese economy grew at the unprecedented rate of over 10% 20

VI. Policy Implications and Summary Goal of the paper – form widely applicable EA model for

many countries trapped in poverty. Reasons:a) deficiency in human capital

b) the prevalence of political instability

Concept of the policy-augmented human capital (PAHC) turns out to be all the more important in the regime of free trade

EA economies - successful because of the high level of human capital guided by an effective policy. Uniqueness of EA model:

a) validates the critical role of human capital

b) validates the role of government at a time when interventionist policies were either failing elsewhere or facing strong opposition

c) takes cognizance of the importance of the psychological effect an effective policy brings to human capital

d) provides evidence pointing to the precedence of economic development over democracy

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