why have east asian countries led economic development?

THE ECONOMIC RECORD, V O L 71. NO. 212 MARCH 1995.88-104

Why Have East Asian Countries Led Economic Development?

HELEN HUGHES Universiiy of Melbourne, Parkville, Victoria 3052

I An introduction to the East Asian '7' When post-World-War-I1 reconstruction unex-

pectedly turned into rapid growth not only in industrial but also in developing countries, it became evident that technological advances, including those in such 'soft' technologies as national economic management, could lead to unprecedented new paces of growth and development. These hopes have not been fulfilled in most developing countries. A group of '7'-Hong Kong. Indonesia, the Republic of Korea (South Korea), Malaysia, Singapore, Taiwan and Thai- land-have, however, emerged as leading developing countries with long-term sustained per capita income growth rates of more than 6 per cent. They arc likely to continue to lead world growth during the rest of the 1990s if not longer.

The East Asian '7' include some 350 million people, ranging from Singapore with less than 3 million to Indonesia with nearly 200 million people. Singapore in 1939 already had the highest level of per capita income in Asia after Japan, but in 1945 Thailand and Indonesia were among the poorest countries in the world. South Korea was devastated by Civil War in the early 1950s. The '7' do not encompass all of East Asia. The Brunei petroleum principality is a special 'booming economy'. The economic performance of the Phil- ippines has been more akin to that of the dcvel- oping countries of Latin America than to the East Asian '7'. China only began to grow rapidly in the 1980s. Vietnam is only now beginning to emerge from a dentral planning straight jacket. Laos and Cambodia are barely functioning. The Democratic Republic of Korea ( N o d Korea) and

Burma have not entered into the growth stakes. The East Asian '7' are not the only developing

countries to have achieved sustained rapid development. Botswana, a small resource rich country, and the two island states of Malta and Mauritius, have equalled the performance of the East Asian '7'. India and Pakistan, despite their very low per capita incomes, have outperformed most of the Latin American and North African and Middle eastern countries, notably since the 1970s. Other very poor developing countries, mainly in Sub- Saharan Africa, have dropped back to medieval rates of growth. Explanations of sustained growth and development have to fit the failures as well as the successes and the many countries in between to be persuasive.

A vast literature covering all aspects of the economic and social growth and development of East Asia has evolved in the past 40 years to answer

TABLE I Average Annual Rates of Growth of GNP Per Capita,

Developing Economies by Region, 1 %S- I991 (per cent)

East Asia and the Pacific: East Asia '7' 6.5 Other East Asia 2.0

South Asia 2.0 Latin America and Caribbean 1.8 Middle East and North Africa 1.8 Sub-Saharan Africa 0.2

Source: Calculated from the International Economic Data Bank. Australian National University.

88

1995. The Economic Society of Australia ISSN 00134249.

1995 WHY HAVE EAST ASIAN CWMRlES LED ECONOMIC DEVELOPMENT? 89

questions about how rapid and sustained growth could be achieved. It has many strands. American AID (United States Agency for International Development and its predecessors), Canadian aid and American foundations funded the post- graduate training of East Asians in North Ameri- can universities and stints by American academics in universities in the region. Aid staff resident in the rcgion contributed to analysis and teaching and stimulated a debate on the causes of growth. As East Asian students came back to university and government posts, their influence became central in policy making.

The International Monetary Fund (IMF) and World Bank field missions and their reports fed the development debate. building a large data and information base that stimulated the improvement of national statistics and raised standards of research as the summaries of this work in the World Bank’s World Development Reports (1978-1994) indicate. The Asian Development Bank did not compete with the IMF and World Bank in country economic analyses, but sought to involve economists within the region in wide ranging discussions about growth policies. The East Asian debate encompassed a broad spectrum of development views, but in contrast to other regions, it was dominated by an empirical frame of reference and strongly neoclassical develop ment views emanating from American academia. The United Nations Economic and Social Com- mission for Asia and the Pacific. ESCAP (formerly the Economic Commission for the’Far East,

ECAFE), was active in the development debate from the 1960s. espousing views similar to those that through the Economic Commission for Latin America (ECLA) helped to shape the inward orientation of Latin America. Early ECAFE statist and import substitution ideologies prevailed in South Asia and also had some support in East Asian countries, but they never took over the debate. The success of the ‘four little tigers’ (Hong Kong, South Korea, Singapore and Taiwan) routed the statist and import substitution lobbies in the rest of the East Asian ‘7’ and soon, despite inputs from such United Nations agencies as the Conference on T d e and Development and the Industrial Development Organization, within ESCAP itself.

By the time that American academic interest in Asian development began to wane in the 197Os, other regional and national institutions were able to carry the growth and development debate. Japan’s Institute of Developing Economies, the Australian National University’s Research School of Asian and Pacific Studies (RSPAS) and Sin- gapore’s Institute of South East Asian Studies (ISEAS) and national universities and research institutes created a large and solid body of analysis on which a continuous stream of policy reform could be built.

Explanations of the outstanding performance of the East Asian ‘7’ became more sophisticated as data and analysis improved over time, but they essentially consist of a set of heuristic models: a comparative advantage and trade model, a macro-

TABLE 2 Growth Indicators, the East Asian ‘7’ and the Philippines, 1%5-1992

Average Average Estimated annual real annual real per capita GNP growth per capita GNP

(per cent) (per cent) ( U S 9 GNP growth

1965-9 1 1 %5-9 1 1965 1992

Hong Kong a. 1 Indonesia 6.7 Korea, Rep of 8.9 Malaysia 6.5 Singapore 8.4 Taiwan 9.0 Thailand 7.0

6.1 4.5 7.3 4.0 6.6 7.1 4.6

3000 14200 200 600 1200 7300 1000 2800 2000 13500 1700 lo400 500 1700

Philippines 3.8 1.2 600 800

Source: Calculated from the International Economic Data Bank, Australian National University.

90 ECONOMIC RECORD MARCH

economic stabilization. savings, investment and capital flows model; an agricultural development model; a role of government and infrastructure model; and a human resource and income distribution model. As these analyses evolved, attempts have been made to combine these models quan- titatively in terms of growth theory and qualita- tively as a growth process. The literature is marshalled under these headings.

Economic explanations of how economic growth has been achieved have honed in on the relationship between economic policies and economic growth. This has made it evident that the process of growth is much easier to understand than why did the East Asian '7' (and other rapidly growing countries) adopt growth oriented policies when most developing countries did not. A section on the political economy of East Asian growth concludes the survey.

I1 Comparative Advantage, Trade and Industry Policy

At a time when import substitution policies dominated development discussions. the Hong Kong colonial administration .pursued comparative advantage in low cost labour intensive exports. The series of GATT negotiations which freed up access to industrial country markets from the 1950s improved the viability of the compan- tive advantage strategy. Taiwan's producers of manufactured food and other labour intensive products started to export in the 1950s despite heavy protectionist biases against them. because the domestic market was small after their experience in mainland China. South Korean manufacturers of wigs and clothing followed in the early 1960s because their country's extreme poverty also denied them domestic markets. By the time Singapore awoke from its dreams of becoming the import substitution centre of the Malaysian Fed- eration in 1965, the economic benefits of the export of labour intensive goods of all types were well established. Producers in industrial countries. notably the United States, but later also in Europe and Japan, were looking for suitable production locations into which to move the labour intensive components of manufacturing processes. The range of labour intensive exports from the 'four little tigers' grew rapidly. But whereas Hong Kong and Singapore (despite the latter's brief flir- tation with import substitution) were essentially free trading city states, dependent on service inter- mediation activities, Taiwan and South Korea had

boxed themselves into heavily protectionist (non tariff and tariff barrier) protection and balance of payments crises. Political support for import substituting policies by manufacturing and ideological lobby groups made it impossible to dismantle trade barriers. Both countries had to introduce protection offsets in the shape of quantitative restriction and tariff exemptions and drawbacks on inputs into exports to make production for world markets feasible. Both countries also introduced extensive and complex mercantilist export incentives, including privileged access to domestic monopolistic markets, tax 'holidays' and credit subsidies to make: incentives to exporters even with those for domestic producers. Quantitative restriction and tariff exemptions were the only measures that were effective and did not create additional major distortions to those already present because of protection. The trade and industrial policy environment created was very inefficient. employed an army of bureaucrats and became a haven for rent seekers in the private sector and in the bureaucracy. Because of the market distortions created by the mix of protectionist and export incentive measures, public ser- vants tried to 'pick winners', usually with disastrous results. In time the inefficiency of the system, combined with (justified) threats of coun- tervailing duties by industrial countries, began to make trade liberalization imperative in Taiwan and South Korea, but the lobbies created by the protectionist and mercantilist incentives made reforms extremely painful and slow.

The distortions made by protectionist policies and export incentives led to demands for more and more complicated industrial policies to counter monopolistic trends created by protection. Entry into production was limited to prevent the frag- mentation of economies of scale, price controls then had to be imposed to avoid the ensuing exploitation of monopolistic domestic markets and credit and tax subsidies were used to offset other regulatory distortions. Because offsets to protection worked to some degree. Taiwan and South Korea were, nevertheless, like Hong Kong and Singapore, able to expand the variety and quantity of their exports. Their export drive coincided with rapid demand growth in industrial countries that followed trade liberalization and per capita income growth. Sub-contracting spread from clothing, where small enterprises had traditionally filled out fluctuations in demand for the output of large fmm by using family and other 'informal' labour intensively, to other industries. Employ-

1995 WHY HAVE EAST ASIAN COUhlWES LED ECONOMIC DEVELOPMENT? 91

ment grew in services such as food preparation and retail trade, substantially increasing domestic markets. Taiwan and South Korea built smtegi- cally located export processing zones where trade and industrial policies could be made more neutral than in the rest of the country, particularly for foreign investors. Japanese fms were not particularly welcome in the East Asian countries they had occupied. They had poor linguistic skills so that environments structured for their needs suited them.

With rapidly rising exports and employment, savings and investment grew. Exploiting comparative advantage through exports was recognized as a key development strategy in the early 1970s (Asian Development Bank, 1971; Balassa, 1971a and 1971b; Baneqi and Donges. 1972; Little, Sci- tovsky and Scott, 1970). By the end of the decade it had become clear that the economies most exposed to the vicissitudes of international mde and price fluctuations performed best in the roller coaster years. This lesson was reinforced in the recession of the early 1980s and subsequent growth in industrial country markets.

Thailand, Malaysia and Indonesia were uadi- tionally exporters of agricultural products and Indonesia and Malaysia also had mineral exports, including petroleum. Malaysian agricultural exports grew strongly in the 1960s. Thailand had become a major agricultural exporter by the 1970s. and Indonesian agricultural exports also began to recover in the post-Sukamo years. As the ‘four little tiger’ countries’ wages rose with their growth (as the comparative advantage the- orists predicted) Thai food processors and clothing manufacturers followed Hong Kong, South Korea and Taiwan into world markets despite protectionist policies which created a severe bias against them. Protection for import substitution was particularly high for (mainly Japanese) textiles. The government, followed with protection offsetting exemptions and drawbacks which worked even less effectively than in South Korea and Taiwan (Herderschee. 1990). But although nominal protection was high. it was in practice less onerous than in many other countries, so that the export range widened. Malaysia, despite its strong agricultural exports, became interested in exports of manufactures to deal with the unemployment of school leaven. It thus pioneered an export processing zone next to the international airport at Penang. Labour intensive exports stag- nated during the petroleum boom except for the ovefflow of labour intensive production from

Singapore, but with the fall in petroleum prices in the 1980s. agrkultural exports revived and exports of labour intensive manufactures began in earnest. Unemployment also put pressure on the Indonesian government, but it was unable to make its export wishes effective while petroleum prices were high with consequent ‘booming’ effects on the economy. When petroleum prices fell in the early 1980s. Indonesian clothing manufacturers followed Thai producers, beginning to export ahead of government action to mitigate biases, favouring production for domestic markets. Offsets to protection and export incentives were strengthened, but the devaluation of the rupiah and overall economic liberalization which reduced barriers to exports was. as in Thailand, more effective than incentives (Saad. 1993).

The trade and industry policy mixes in Thai- land, Malaysia and Indonesia followed the Taiwan and South Korea patterns. Protection that initially led to very inefficient import substitution was only gradually offset by competitiveness arising from exports. Once manufactured exports became a significant proportion of total exports and total exports became an important component of GDP, export requirements began to influence economic policies and, through the need to meet international prices, on competitiveness throughout the economy. Service industries had to become efficient. This helped to diversify exports further.

The comparative advantage strategy had severe critics. It was argued that new entrants would crowd out old producers so that the experience of the East Asian ‘7’ could not be replicated, particularly by large countries (Cline, 1982). In the 1980s this hypothesis was disproved by a rapid and large scale growth of labour intensive exports from China (Yang, 1992). Old ghosts were revived to argue that high exports of labour intensive goods would drive down the barter terms of trade of such products with resulting declines in export income as volumes of exports increased (Streeten, 1982). The East Asian countries did drive down the prices of their manufactured exports to capture market shares from industrial country producers and exporters, but the rises in their income terms of trade outweighed declines in barter terms of trade. The industrial countries introduced protectionist measures. mainly through the Multifibre Anangement (and its predecessors and voluntary export restraint clones) against developing country exports. They were mainly


aimed at East Asian clothing and textile exports. They undoubtedly depressed the volumes of these exports from East Asia and lowered prices in uncontrolled markets. The import restrictions, however, only did limited damage. The ‘old’ exporters were able to escape some of the impact of limited volume growth by raising the quality of their products and they enjoyed sizeable rents. The cost of clothing in Hong Kong, Taiwan and South Korea was lower in the domestic than in export markets. The ‘new’ exporters initially benefited from their freedom from quotas in building markets, and followed the ‘old’ exporters in moving up market (Cabalu, 1994; Sad . 1993; Suphat. 1989).

Technological change was feared by some critics of outward orientation. It was argued that while the East Asian countries had benefited from the breaking up of manufacturing processes into industrial and developing country components according to labour and capital intensity in the 1960s and 1970s. technological change would lead to factor intensity reversal that would return major manufacturing processes to industrial countries (Chen, 1987). These fears also proved to be groundless. With experience, export producers adapted to the need for higher skills and more technology intensive processes and moved up market to produce higher quality goods. Private direct foreign investment played a role in this process in some countries though not in others. Alternative ways of transferring technologies came through tertiary tnining abroad, inputs from customers in sophisticated markets and purchases of technology as markets for training, technology transfer and capital flows developed. High capital utilization not only led to high employment through intensive shift work, but also accelerated the depreciation of equipment and the purchase of new technologies.

The dynamism of comparative advantage gains outpaced the static effects predicted. It led to the shift of labour intensive production. with concom- itant management, investment and labour training, and in some cases infnstructural investment, within the region. Mainstream movements have been from Hong Kong and Taiwan to China, Thailand and Indonesia, from South Korea to Indonesia and Thailand , and from Singapore to Malaysia and Indonesia. Because national growth was so rapid among the ‘7’. trade among them grew more rapidly than in any other developing country region. and in some periods even more rapidly than with the rest of the world. Unlike

many developing country regions, East Asia has avoided regional trade arrangements. The Asso- ciation of South East Asian Nations (ASEAN) is a largely political organization with minimal formal trade and other economic relations (Sopie, Chew Lay See and Lim Sang Jin, 1988). Eco- nomic ministers meet periodically to exchange information and views, but they do not coordinate policies. Trade among the ‘7’ has grown out of complementarity, initially in the exchange of raw materials for manufactures. More recently intra- industrial trade has developed (Gunasekera, 1989) out of the rising competitiveness that has followed unilateral trade lit+dization. The conclusion of the Uruguay Round is expected to bring further gains.

As the rapid growth of the East Asian ‘7’ became known, export orientation became con- ventional wisdom. Most developing countries at least paid lip service to export strategies. Many adopted offsets to protection and export incentives, but most were not effective, even within East Asia. The Philippines had high levels of protection from the 1950s (Power and Sicat. 1971). but adopted the same offsets to protection and export incentives as its neighbours, established export processing zones, and repeatedly announced trade liberalization programs. The offsets to protection were ineffectual, the export incentives added to high import substitution rents and the first export processing zone was extremely badly located. lacking transport and labour supply. The lowering of tariffs was accompanied by the raising of quantitative restrictions-and vice vena. In addition, the Philippine experience makes it clear that while appropriate tnde and industrial policies have been essential to overall growth. they have not been sufficient.

111 Macroeconomic Stabilization, Savings, Investment and Capital Flows

Macroeconomic stability has been the ‘sleeper’ of the policies that enabled rapid growth to take place in the ‘7’ (Treadgold, 1990). The technocrats in the region were convinced that economic actors. whether producers or consumers, could not function efficiently in an unstable economic environment. Macroeconomic stability was also essential to maintaining intra-sectoral and inter-sectoral balances. Although East Asian growth has often been seen in terms of industrialization, services and agriculture, mining and other sectors had to grow alongside industry.

1995 WHY HAVE EAST ASIAN COUNTRIES LED ECONOMIC DEVELOPMENT? 93

In the mid 1950s Taiwan and South Korea were regarded as basket cases. The governments were authoritarian and corrupt, inflation was high, budget and balance of payments crises were fre- quent, and the economies were not growing despite huge budgetary and other subsidies from the United States. The United States, despite its political interests in the two counties, decided to cut all budgetary and most other civilian aid to the two countries to make them stand on their own feet.

Taiwanese technocrats reacted by a tough macroeconomic stabilization program. The Budget was balanced by taxation and expenditure reforms and has remained in balance almost every year since 1957 although expenditures have included a large (but unknown) military component. Expen- diture controls meant reining in public enterprises and making them profitable and keeping infrastructure investment as well as current expenditures within the limits of revenue. The money supply was brought under control, giving Taiwan one of the lowest inflation rates in the world, even during the volatile 1970s (Galenson. 1979; Kuo, Ranis and Fei, 1981; Kuo, 1983; Li and Yeh, 1967; and Li. 1976).

Taiwan’s balance of payments was a stiffer problem despite the stabilization of prices. The inability to reduce protection maintained an upward pressure on the exchange rate, penalizing exports. The government and the Central Bank sought to offset these effects by manoeuvres to keep the rate of exchange low. This led to accu- sations that the currency was deliberately under- valued. Interest rate ceilings, combined with credit subsidies and rationing, distorted savings and investment. Mainland China’s military threats made for additional capital flight funded through over-invoicing imports and under-invoicing exports. Foreign transaction controls distorted capital inflows and outflows. The ‘benign neglect’ of a rapidly evolving unregulated ‘informal’ capital market was a mitigating circumstance, though it was. of course, less efficient than an open, formal market with prudential controls would have been. Small and medium sized entrepreneurs had some capital market access, albeit at high cost.

The macroeconomic reforms took some time to become believable, for Taiwan’s experience came on top of years of financial chaos in China, but by the beginning of the 1960s mactoeconomic stability had become accepted as essential to KO- nomic development in general and export growth

TABLE 3 Average Annual Rate of Inflation. the East Asian ‘7’ and the Philippines, 1%S-1980 and 1980-1990

(per cent)

1%5-1980 1980-1990

Hong Kong 8.1 7.2 Indonesia 35.5 8.4

Malaysia 4.9 1.6 Singapore 5.1 1.7 Taiwan 6.0 4.6 Thailand 6.2 3.4

Korea, Republic of 18.4 5.1

Philippines 11.4 14.9

South Asia 8.3 8.0

Source: Calculated from the International Economic Data Bank, Australian National University

in particular. The political uncertainty emanating from China made for short-term and high profit horizons. High capital utilization with a three-shift day, six to seven day week and few public holidays was the norm. Private and public domestic savings rose rapidly, approaching 40 per cent of GDP in 1990 (Table 4).

Taiwan benefited from capital brought in by refugees from Mainland China in the early 1950s and then strictly controlled private direct foreign investment, largely limiting it to export production, to avoid the exploitation of protected domestic market monopoly profits by foreigners. The government and private borrowers took modest advantage of the liquidity of international banks in the 1970s and by the 1980s Taiwan had become a major formal as well as informal capital exporter.

Macroeconomic stabilization was equally important but much more difficult in South Korea. Military expenditures were again an important component of the budget. Loss-making State enterprises proved impossible to reign in. In the late 1960s and again in the late 1970s a break-out of investment in unproductive public manufacturing enterprises led to budget deficits and high inflation (Kmeger, 1979; Kim and Roemer, 1979; Mason et al. 1980).

South Koka severely repressed the financial system to be able to borrow domestically to sub- sidize the budget. Credit rate ceilings led to credit rationing with subsidies to a favoured dozen conglomerates-the chuebof-through the State


owned banks. An informal financial system was not permitted to develop, starving small and medium firms. A decade of policies to stimulate small and medium sized businesses h a - failed to offset the distortions created by financial repression. Periods of inflation had to be followed by currency devaluations. Official exchange ntes were supported by market interventions to keep down the value of the exchange rate buoyed by high protection and peri- odic bouts of inflation resulting from public investment in ‘strategic’ industries.

Pushed by the chaebol lobbyists and also aware of the possibilities of exploitation of the highly protected domestic markets. the South Korean government prohibited inflows of private direct foreign investment. Domestic firms were encouraged to borrow from foreign suppliers’ credit sources and banks, distorting the economy by favouring the purchase of imported. rather than locally produced. capital goods. In the high liquidity 1970s. together with government borrowing abroad, this led to a foreign debt blow out.

South Korea had the most distorted financial system in the region, but the political pressures of relations with North Korea also imposed short lead times on capital earnings, a demand for high profitability and high public and private savings and investment.

In contrast to Taiwan and South Korea. the financial openness of the Hong Kong and Singa- pore economies severely limited the use of mon- e t q and financial policy instruments (Corden, 1984). Both economies followed extremely prudent fiscal policies with limited borrowing for their extensive infrastructural investment (Riedel, IW). Singapore was more interventionist than Hong Kong. it controlled the issue of currency, though as an international banking centre, it could not control credit. A Provident Fund was used to siphon off half employees’ incomes. Individuals’ deposits in the Fund could not be used until retire- ment (except in special circumstances) so that the Fund was available to finance infrastructural investment (Goh Keng Swee. 1977; Hughes and You Poh Seng, 1969; Lim Chong Yah, 1984; You Poh Seng and Lim Chong Yah. 1984). The government actively promoted Singapore as a financial service centre, but Hong Kong attained similar results without such intervention. Singa- pore w a g e d to keep the price level more stable than Hong Kong which has been severely affected by inflation in China.

Open financial markets, combined with free trade, have permitted Hong Kong and Singapore

to leave private direct foreign investment and other capital flows to market forces. Hong Kong was historically an outward oriented entrepot (importing raw materials into China and exporting manufactured goods). As in Taiwan, its private sector was initially funded by refugees from mainland China who brought out capital equipment and. claiming its loss, used insurance payments for working capital. Hong Kong thus found only a limited use for private direct investment from abroad. By the 1970s it became a major source of private direct foreign investment for the region and further afield (in Mauritius, Panama and many other countries). Singapore, as an inward oriented entrepot, exporting raw materials and importing manufactures) had to turn to private direct foreign investment for a package of capital, technology, marketing, labour training and management to ini- tiate its export drive (Hughes and You Poh Sen, 1973). More than 70 per cent of Singapore’s exports still originate in totally or partially foreign owned firms.

Thailand has practised prudent macroeconomic policies since the 1950s. Revenue gathering has been a problem, but expenditures have been modest to limit budget deficits. The Bank of Thai- land intervened with tough monetary policies whenever necessary. Thailand has as a result had one of the lowest rates of inflation in East Asia (and hence in the world) and a very stable rate of exchange. A mildly repressed financial system has developed greater freedom over time. Savings and investment have grown steadily. Except for a period in the 1970s. borrowing from international capital markets has been modest (Warr, 1993).

Private direct investment inflows initially exploited the protected domestic market in the 1970s. so that despite attempts to control the private direct investment inflow, the returns to the economy were probably negative. The Japanese claim of a ‘flying geese pattern’ that stimulated exports in East Asian countries through foreign investment (Kojima. 1978 and 1990) was not in evidence in Japanese or other investment. Only with policy changes that reduced obstacles to exports, did direct foreign investment flow into export oriented and competitive enterprises, earning high socio-economic as well as private returns.

Malaysia’s macroeconomic experience closely matches Thailand’s. Starting from a higher per capita income in the 1950s and a well-developed fiscal and financial system, Malaysia’s macroeconomic management has been outstanding. The


small, open, privately owned financial system inherited from colonial days has greatly expanded under the stimulus of financial openness. The Central Bank has been highly skilled in prudential management of the banking system. Its monetary policies have been exemplary so that inflation has been kept at bay. Malaysia’s currency has accord- ingly been stable, appreciating as expected with rising per capita income. Macroeconomic stability delivered high savings and investment rates. Malaysia’s credit ranking in international capital markets is among the highest in the world (Fong Chan Onn. 1989 and Lim, 1973).

Malaysia used openness to private direct foreign investment to offset ethnic Chinese strength in the economy. Its highly protected, mainly consumer goods industries were thus exploited by foreign firms, many of which earned very high profits but added low or even negative value at international prices. Malaysia used foreign investment to estab- lish corporations with widely held shares so that shares could be reserved for ethnic Malays. The economic costs were thought to be worth the social benefits.

Indonesia had more than loo0 per cent inflation in 1965, its fiscal system was out of control, it had no central bank expenise or traditions and its publicly owned banking system worked according to political directives rather than commercial or economic considerations. There was, however, a dramatic improvement in macroeconomic stability with the Suharto administration from 1%5. Thus although Indonesia’s macroeconomic management has been much weaker than that of the other East Asian ‘7’. in terms both of its starting place and by comparison with other major petroleum countries, macroeconomic measures have been prudent and inflation has been moderate (Booth and McCawley, 1981). Timely exchange rate devaluations restored export capacity for non- petroleum products in the 1980s and 1990s. A very considerable body of research concludes that financial liberalization since the beginning of the 1980s. and particularly in the 1990s. despite difficulties, has progressively led to the strengthen- ing of a banking sector in which private firms now dominate (McLeod forthcoming).

Petroleum revenues ma& for a comfortable fiscal position in the 1970s. and although some resources were wasted, much of the windfall was spent on improving social standards in the countryside. The 1980s have seen fiscal tightening. The Bank of Indonesia rapidly grew into its role of monetary policy manager, appreciably mitigat-

ing the ‘booming sector’ effects in the 1970s and becoming a considerable force in the financial and monetary reform process subsequently.

Private direct foreign investment has been considerable in minerals and other natural resource industries, mostly with positive results. Indone- sia’s management of the exploration and production of petroleum by foreign firms is widely regarded as exemplary. Investment in production for the domestic market has had predictable negative effects, but these have been reduced with trade liberalization and investment in export oriented industries. Indonesia was a major debtor country in 1965, with finle to show for its borrowing. It has subsequently become more, though not totally, prudent.

The Philippine macroeconomic experience differs radically from that of the East Asian ‘7’. Fiscal profligacy, complemented by loose monetary policies. gave rise to budget deficits that led to high inflation, sharp balance of payments crises and devaluations. The government borrowed from a severely repressed financial system, crowding out small and medium sized borrowers. The government encouraged profligate private borrowing abroad by loan guarantees and borrowed heavily on its own account, precipitating a major external debt crisis of Latin American proportions at the end of the 1970s. Despite Byzantine controls, private direct foreign investment was almost entirely in inefficient, highly protected industries. Protection contributed to fiscal problems, but macroeconomic instability in its own right played a major role in the lack of success of export oriented policies. Exports could not grow because the currency was overvalued and unstable.

The East Asian ‘7’ utilized IMF credits and World Bank loans during early periods of growth, but Indonesia now remains the only active bor- rower. The Asian Development Bank still has a somewhat larger clientele. The multilateral financial institutions’ role was not mainly financial. Concessional funds were of c o w welcome, but they only represented a very small proportion of total domestic and foreign savings and investment. Of far greater value were the constant policy dialogues between the multilateral financial institutions and the countries which honed macroeconomic and microeconomic policies.

IV Agricultural Development Of the ‘7’, all but Hong Kong and Singapore

were agricultural economies in the 1950s. East

% ECONOMIC RECORD MARCH

TABLE 4 Gross Domestic Savings Md Invcshmt PI a Share of GDP in the East Asian ‘7’ and the Philippines,

1965. 1975 and 1990 (per cent)

Gross domestic savings Grws domestic investment

1965 1975 1990 1965 1975 1990

Hong Kong Indonesia Korea, Republic of Malaysia Singapon Taiwan Thailand

Philippines

29 8 8

24 10 16 19

21

25 34 36 24 29 26 37 8 25 37 19 36 15 27 37 26 32 20 25 32 29 45 22 40 39 23 37 23 31 23 22 30 2 0 27 38

25 17 21 31 23 ~~~ ~

Source: Calculated from the International Economic Data Bank. Australian National University

Asian intensive agricultural traditions were even evident in the ‘rural’ production of the two city states. Orchids were an early labour intensive export from Singapore. Hong Kong’s New Ter- ritories were densely agricultural, supplying much of the colony’s food.

Agriculture naturally declined as a proportion of GDP with the expansion of industry and services for domestic and foreign markets. and agricultural exports fell as a proportion of total exports, but agricultural output continued to rise and so did the value of agricultural exports, indi- cating the very considerable importance of increasing agricultural productivity to growth.

Taiwan and South Korea’s rapid growth has sometimes been attributed to post-World-War41 land reform. Land reform did take place as part of the post<olonial settlement and the total dev- astation of the countryside during the civil war in K o m but agricultural development in these countries and in Thailand, Malaysia and Indonesia (which did not have land reforms) owed more to the recognition that high protection and incentives for expoxts needed to be offset if agriculture was to thrive and that macroeconomic stability was critical for efficient agriculture. Taiwan’s agricultural output only recovmd to 1939 levels by 1950. In both Taiwan and South Korea agricultural exports helped to stabilize the balance of payments when macroeconomic reforms were ini- tiated. AID teams operating in Taiwan and South Korea in the 1960s played a key role in these countries’ agricultural development by supporting offsets to industrial protection. In both countries this led to complex regulation and control of

prices of inputs and outputs which resulted in many inefficiencies, but the bias against farmers was smaller than in most other developing countries. Labour intensive innovations included new rices and multiple cropping. Farmers’ organizations were used to reduce crrdit costs to offset financial repression and for the innovative marketing of new rural products, particularly for export. In both countries and in Malaysia, infrastructural facilities, notably key roads, rail and rural power, had been relatively well developed in colonial times. In Taiwan and South Korea this encouraged the early development of off-farm rural activities. In Malaysia it made relatively balanced urban development possible.

Thailand’s agricultural output grew rapidly despite transport and other infrastructural limita- tions because protection for industry did not bite hard. Rice taxes were introduced to siphon agricultural profits into industry, but they were only effective to some degree. Fanners evaded them by switching crops to maize for exports albeit at considerable cost to the economy. Some areas, notably the arid north-east east and truubled borders, lagged in productivity and income, but macroeconomic stability encouraged new agricultural products for domestic and export markets. Investment by Taiwanese entrepreneurs introduced cane sugar cultivation on a large scale. Fruit and vegetable processing for export began. Thai farmers found a profitable niche for cassava chip animal feed in the highly distorted European markets where livestock fanners could not import the much lower cost feed grains from North America.

1 9 5 WHY HAVE EAST ASIAN COUNTRIES LED ECONOMIC DEVELOPMENT? 91

Malaysia had been a major plantation crop exporter before World War 11 and Malaysian plan- tations and medium and small scale growers steadily expanded rubber, palm oil and other products. Rapidly rising productivity and quality improvements continued to expand exports. Ambitious new infrastructural investment, notably in the Muda Valley, enabled rice to be grown rea- sonably economically.

Indonesia’s agriculture had been severely distorted during the colonial period. In the Sukarno years it was all but destroyed by government regulation, neglect of the infrastructure and public own- ership of the plantation sector. The expulsion of Chinese ‘middlemen’ lowered agricultural prices at the farm gate and raised them in urban areas. The late 1960s saw a long, slow process of returning to market economics, restoring and improving such basic infrastructural facilities as water management to restore rice production and building a highly diversified rural off-farm economy. Indonesia returned to self sufficiency in rice and increased agricultural exports. Agricultural development still has a long way to go in the eastern islands of lndo- nesia (Hill, 1989). A government ‘transmigration’ program to move farmers from the crowded areas of Java and Sumatra to the outer islands has impeded rather than accelerated outer island agricultural development. Spontaneous migration has been more successful.

The new rice technologies of the ‘green revolution’ based on Taiwan’s experience, but dissem- inated by an international research effort based on Rockefeller and Ford Foundation initiatives. made a major contribution to the agricultural develop ment of East Asia. National agricultural research adaptation and information contributed, but the spread of the new rices and associated technologies of weed and pest control and new processing were implemented through markets by farmers and middlemen. Small producers in the region, notably in Taiwan, but also in the other countries, developed farming and processing machinery and means of financing its use that suited the relatively small scale and high labour intensity of East Asian agriculture.

Governments’ efforts to organize farmers’ production cooperatives led to the growth of strong lobby groups for agricultural protection. In Taiwan and South Korea, because of their political risks, arguments for the protection of basic crops had wide support in the community. Japan provided a bad example. Protectionist arguments have, of course, not stopped at grains. Agricultural

self-sufficiency has led to very high subsidies for meat and dairy farming in countries where such production is highly uncompetitive in terms of international prices. The agricultural lobbies, however, have become strong and agricultural pricing has become increasingly protectionist, undermining efficiency and the ability to exploit comparative advantage (Anderson and Hyami, 1986, and Anderson, 1994)

V Human Resource Development, Income Distribution and Environmental Concerns

Although Hong Kong was able to grow rapidly despite the immigration that raised its population from 2 to 6 million from 1950 to 1990, the East Asian ‘7’ recognized the high costs of rapid natural population growth. After uncertain starts in Thailand and Indonesia, all ‘7’ countries sought to reduce population growth by infrastructural investment that improved water supply and other health inputs and by education policies that brought girls into schools. Rapid employment growth and urbanization gave young women opportunities to work outside the home, raising age at marriage and lowering fertility rates. Falling population growth rates thus enabled human and physical capital ‘deepening,’ under- writing rising living standards.

Claims that high initial levels of education were a major input into East Asian progress can not be sustained. Even in relatively highly developed Singapore workers had to be bribed with free early morning coffee to turn up to work on time in the 1960s. South Korea did not use aid funds on educating its young people in the 1950s in preparation for the export drive that began in the 1960s as is sometimes argued. The suggestion that the Thai Buddhist practice of sending boys to a monastery for a few years led to a highly literate work force does not stand up to scrutiny. Educa- tion was most advanced in the 1950s in the Phil- ippines where, however, it has mainly benefited emigrants during the last 40 years because com- plementary domestic growth policies were lacking.

The education of the East Asian work force has been a long process. Rising public revenues were able to provide the supply as growth stimulated the demand for education. Education began with primary education for boys, spread to girls, and in all but large urban centres, is only now providing mass quality secondary schools. Post secondary vocational education is even now only advanced


in the 'four little tigers'. Academic secondary and tertiary education, though now spreading fast throughout the region. is still largely confined to the children of elites and is very uneven in quality. From a national development point of view, access to quality tertiary graduate and post graduate degrees in industrial countries, partly financed by the Asian countries and aid, but mainly by the students' parents, has played a very important role in the transfer of 'hard' production technologies as well as of 'soft' skills such as business and economic management.

The East Asian countries innovated to increase productivity in education. Schools were used for two shifts during the day and for adult education at night. In some cases short cuts to vocational training produced skilled workers, such as welders, as they were needed for ship repairing in Singapore or shipbuilding in South Korea, but formal vocational training has proved difficult to organize. The bulk of training has been on the job. The EjSt Asian economies fostered the interest of the work force in education. Girls who assembled artificial flowers in rural enterprises in Taiwan in the 1960s attended literacy and numeracy classes in their dormitories at night. Young men and women who entered the work force as piece-work clothing machinists and electronic component assemblers are today the skilled foremen, office workers and managers who are responsible for the high productivity and quality of East Asian fac- tories' output. Today their children learn English in primary school and graduate from high schools with a better education than many in industrial country secondary schools. Singapore is the leader in the quality of education. It has become an exporter of robots.

Rapid employment growth within industry and services, upward mobility, rising incomes for farmers and the opportunities that these changes engendered in 'informal' Sectors have changed the relationship between growth, the alleviation of poverty and income distribution. Initially it was thought that income distribution first deteriorated and only improved at a later stage of development (Kuznets, 1955). Initial research on South Korea appeared to support this conclusion (Adelman and Robinson, 1978). With further work on the '7' (and many other developing countries), it became clear both that rapid sustained growth has imme- diate positive income distribution outcomes and that equity can not be improved without growth (Bautista, 1992: Fields, 1989). The policies that influence the quality of growth. notably npid

employment growth, positive agricultural development, the absence of distortions in urban-rural terms of trade, the absence of inflation (which taxes low income groups), substantial public expenditures on rural and low income urban areas so that the infrastructure is not skewed egre- giously toward high income groups, improve income distribution. Such policies were inherent in the East Asian '7' approach to growth. In Indo- nesia and Malaysia revenues from petroleum rents helped to accelerate the improvement of income distribution, The 'four little tigers' have reduced unemployment to negligible levels. Even in the large low income 6.ountries. Thailand and Indo- nesia, the proportion of the population living in poverty has fallen dramatically (Mehdi Krong- kaew. 1994). In Thailand people living in poverty fell from 57 per cent to 21 per cent of the population between 1%2/3 and 1988.

Environmental issues were given limited attention in most East Asian, as in other countries until recently. Seoul, Bangkok and Jakarta are extreme examples of urban pollution, and environmental degradation is evident in most of the East Asian countries. The worst examples are associated with extremely low living standards. population pressure on land and forests and urban slums. But since the beginning of the 1990s analysis has begun to draw attention to the economic and social impact of environmental degradation (Seda. 1993) and all East Asian countries have taken steps to improve environmental policies. Singa- pore is one of the least polluted cities in the world, its transport system is one of the most advanced and environmental production standards are among the strictest. Development in East Asia supports the view that increases in per capita income are associated with a highly elastic demand for environmentally positive outcomes (Low, 1992). Rapid growth of the East Asian economies is enabling them to incorporate the technological changes that arc being made to reduce environmental pollution in production. They are using market signals, infrastructure expenditures and regulations where necessary to improve the environmental characteristics of their growth.

VI The Role of G o v e m n f It is generally agreed that governments have

played a major role in the growth of the East Asian '7'. But such agreement covers a broad spectrum of views that range from reliance on

199s WHY HAVE EAST ASIAN COUNTRIES LED ECONOMIC DEVELOPMENT? 99

market signals as in Hong Kong to a claim that heavily interventionist policies have been the source of success in East Asia. The range of countries under consideration and their complex evo- lution over nearly fifty years makes it difficult to judge the hypotheses. Much of the literature that purports to evaluate the role of government is polemical with a poor grasp of the development history of the countries under consideration.

The narrowest view of the role of government argues that the positive role of governments has been confined to determining the economic environment in which economic actors, households and entrepreneurs, operate. The environment includes international and domestic peace and the rule of law. Appropriate economic policies, efficiently administered, lead to the development of competitive markets so that economic actors face appropriate competitive price signals. A government may intervene in areas in which natural monopolies or externalities do not allow markets to function effectively, that is in providing infrastructure (Riedel. 1988).

Only Hong Kong’s continuing colonial administration came close to practising such laissez faire economic management. Its main economic intervention was in investment in infrastructure (including land development and public housing) to manage the flood of immigrants from the mainland and yet enable the private sector to deliver high levels of growth. Fiscal policy was clearly and successfully focused on infrastructure objectives. Education, health and welfare expenditures have been efficient but remained minimal. The bureaucracy limited itself to spatial planning, health and safety regulation and the gathering of information needed for private and public sector decisions. Followers of the ‘getting the policies right’ approach to the role of government in development have pointed out that, particularly given the magnitude of its population inflow. Hong Kong has been the most successful economy in the world by growth, development and income distribution criteria. (Hughes, 1993).

The rest of the ‘7’ did not have the luxury of a policy tabula rasu and were not free from protectionist, statist and nationalist development ideologies when they set out on their development paths. All had inherited mixes of policies and administrative interventions that resulted in many market distortions. Even Singapore, which quickly moved to a defucto market oriented strategy in response to its smallness, carried a great deal of statist and mercantilist baggage. Given its lack of

outward oriented entrepot experience compared to Hong Kong, and at a time when flows of private direct foreign investment for labour intensive exports were not yet well established, some of the early Economic Development Board stimulus to the establishment of exports was effective. Sin- gapore considered that it had to make major expenditures on defence and it chose higher standards of infrastructure, particularly in education and also in welfare than Hong Kong. A great deal of its public intervention was, however, counter productive. Several early mistakes in ‘picking winners’ (Singapore silk and a camera monopoly) were fortunately recognized and led to the strict pursuit of market signals thereafter (Low and associates. 1993). A study of the returns to public investment in commercial production has never been undertaken. The granting of export incentives in the form of tax holidays instead of lowering corporate taxes has created a raison d’etre for officials. who otherwise would have nothing to do, to talk to firms. Depressing wages to give Singapore an advantage in foreign markets in the early 1970s and then raising them rapidly to stimulate technological change. together with exces- sive investment in public housing and undue encouragement of hotel building, led to Singapo- re’s only year of negative growth (in 1983) between 1954 and 1994. Despite the extremely high quality of the administrators and the unique absence of conuption, much of the government’s intervention has thus had costs. Able young Sin- gaporeans were encouraged into public service jobs rather than to become entrepreneurs i n an economy constantly bewailing the shortage of‘ indigenous entrepreneurs.

The crux of the role of government argument centers on the other successful East Asian economies, and particularly on Taiwan and South Korea. Two distinct views have been expressed. One view considers that these economies sought to adopt macroeconomic stability and neutral sectoral policies that would lead to a balanced development of all sectors, rapid export growth based on comparative advantage, high savings and investment and hence rapid personal income and standard of living growth, but were unable to do so because of the strength of vested interest and ideological lobbies. Progress toward these goals was therefore a long, slow process until economic changes shifted the balance of political support from import substitution to export oriented lobbies. Unable to put in place appropriate policies, the technocrats who led economic change

I 0 0 ECONOMIC RECORD MARCH

had to go along with economy distorting policies and then intervene to minimize the costs of the distortions. Preventing the exploitation of protected domestic markets by 'picking winners' among foreign investors was an example of such intervention, and like most such steps it achieved its objectives very imperfectly. Credit rationing combined with credit subsidies to offset finan- cially repressed policies also resulted in high costs to the economy. The costs of delaying liberalization were borne by the lowest income groups which did not participate in the wage rises that benefited from the subsidies associated with government intervention in the early years of development. Growth could have been even faster and income distribution could have improved more rapidly if reforms had enabled intervention to be reduced. (Hughes, 1993)

An opposed view argues that government intervention in production, often referred to as 'industrial' policy. followed a 'Japanese model' and was the critical factor in the rapid growth of Taiwan and South Korea (Amsden. 1979 and 1989; Johnson. 1986; Wade, 1990). Market failure is the central theme of this view. I t is argued that market failure does not occur as a result of policy and intervention distortions, but as a result of monop olistic behaviour in domestic and foreign markets. Private direct foreign investment in the form of transnational corporations is a notable source of such behaviour, but so are domestic monopolists. Another source of market failure lies in the lack of domestic enmpreneurship and technical skills in developing counuies. Technology. goods and financial markets are seen as distorted by the actions of business in industrial counmes. Domes- tic market failures result from the actions of 'middlemen' and money lenders who charge extortionate interest rates to small farmers and businessmen. The costs of the government interventions introduced to correct market failure have. however, not been measured and local critics have been ignored (Koo Bohn Young, 1984; Jones and I1 Sakong. 1980 and Lim Youngil. 1981).

An institutional view of the role of government attempts to bridge these two points of view (World Bank, 1993). Appropriate government policies arc given priority in explaining growth. but direct intervention is also argued to be effective if the rules of intervention are transparent if officials an impartial, and if the rewards of intervention are clear. The judgements that these conditions prevailed in Taiwan and South Korea are not supported by facts. Not surprisingly, the

World Bank wams against intervention, presum- ably because the conditions specified for making intervention effective can not exist once a system of intervention is put in place.

VII Modelling Economic Growth Early studies made it clear that factors such as

initial levels of per capita income, natural resource endowment, size of population or geographic area, geographic location. and inflows of foreign public and private capital were not determinants of growth. The absence of natural resources could be offset by rapid hu+ resource development. In an open trading world, small countries could use their social and political cohesion to adopt policies that offset the absence of a large domestic market. Private direct foreign investment inflows were costly in protected economies. Private and public capital inflows were correlated with economic mismanagement rather than with growth (Hughes, 1988).

East Asian countries were among early users of models for policy determination, substituting increasingly rigorous methodologies for intuitive insights (Bautista 1988). In the late 1980s. as quantitative growth theory exercises sought to find the determinants of growth through neoclassical modelling and subsequently through 'new' growth theory modelling. much of the focus was on East Asia because this is where the highest growth in developing countries had to be explained. An analysis of Singapore and Hong Kong growth (Young, 1992) concluded that increases in physical and human capital were the principal causes of growth in both countries. with total factor productivity (TFP) increases being particularly low in Singapore. Kim and Lau (1992) concluded that there has not been a significant increase in technical progress or efficiency in the East Asian countries. More recent analysis by the World Bank (1993) supports these findings but somewhat less forcefully. In Indo- nesia, Malaysia and Singapore. physical and human capital accumulation was again found to be the main source of growth, but in Hong Kong, South Korea, Taiwan and Thailand TFp increases were found to account for about 30 per cent of

Familiarity with the economic changes in East Asia since World War II makes for considerable scepticism about thcsc findings. Most of the advances in technology have admittedly taken the shape of technological efficiency, that is, catching

growth.


up to best practice rather than innovation in best practice, but technological progress, whatever its classification, has so clearly transformed the '7' that the finding that TFP increases have been negligible, notably in Singapore, does not seem cred- ible. The World Bank (1993) concludes that its studies do not clearly indicate whether the 'old' neoclassical growth theory of diminishing returns to capital or the 'new' growth theory of increasing returns to technology is superior in explaining, developing country growth. Both theories have additional problems. Although accumulation is central to growth, the data bases do not take into account the effects of resource allocation and utilization which are covered by such phrases as national economic management, industrial organization and institutional factors. Savings and investment in the Philippines was not greatly below that of the other countries (Table 4), and yet the Philippines grew much more slowly than the '7'. A great deal of a country's savings and investment efforts may be wasted through poor policies. Modelling has some way to go before capturing the full growth story.

MI Development as a Process The importance of the study of the causes of

rapid growth of the East Asian '7' lies in the application of the results to other developing countries. The contrast between East Asian and Latin American experience has attracted a great deal of attention. (Adams and Davis, 1994; Gereffi and Wyman, 1990; Grilli and Salvatore, 1994; Naya, Urmtia, Mark and Fuentes, 1989) The formerly centrally planned developing economies, notably China and Vietnam, have drawn on the experience accumulated by the '7'. Attempts are also being made to use the East Asian experience to assist reconstruction in Central and Eastern Europe. An understanding of the East Asian growth process can also be used by lagging industrial countries such as Australia. But the lessons are not always well drawn or applied. Since the 1970s. for example, almost all developing countries have sought to increase the export of labour intensive manufactures by intro- ducing the combination of offsets to protection and export incentives used in Taiwan, South Korea, Thailand, Malaysia and Indonesia. In most countries, as in the Philippines, this strategy has had little effect because the rest of the policy framework and commitment to a long-term development process are missing.

When many developing countries, after follow- ing growth defeating policies for thirty years or more, began to pursue the sort of basic economic reforms that Taiwan and South Korea had adopted in the 1950s and early 1960s a new 'adjustment' fashion emerged. Originally seen in a need to adjust to external 'shocks' to an economy, it soon became evident that adjustment was primarily needed to overcome domestic policy distortions. A shopping list of macro- and microeconomic reform measures, labelled the 'Washington Con- sensus', was drawn up and there was much discussion of the proper sequencing of these reforms in countries (including Australia) at various stages of development (Williainson, 1994). Few of the countries carrying out such 'adjustment', apart from those already among the East Asian '7', have thus far succeeded in placing themselves on a sustained growth path. Only Chile and the Czech Republic appear to have succeeded although some other Latin American and Central European countries now seem to be on the development road. The jury is still out on developments in China and India.

Most of the researchers who have covered East Asian development in depth, have focused on appropriate policy frameworks to explain why the '7' grew rapidly. An outward orientation as Riedel pointed out (1988) has undoubtedly been the key policy, improving resource allocation and utilization, but rapid, sustained growth has been a long- term process of continually improving the entire policy framework to reduce policy distortions and build an effective social and physical infrastructure. Macroeconomic stability is also necessary for growth, opening up an economy to capital inflows which at the margin not only contribute development resources but are also important to the transfer of technology.

The development process changes economic organization, shifts vested interests from the pursuit of protectionist rents to the lower unit returns but higher volumes of internationally competitive production and improves the quality of administration and entrepreneurship. Market distortions (failures), including those created by direct government intervention in the economy, are reduced as the policy framework is improved. policies approach neutral- ity and the need for administrative interventions is reduced. Political realities make it difficult to sequence reforms optimally. Reforms take place as politics permit, generally in a piecemeal fashion. Rather than focusing on the sequence of reforms, governments have to ensure that the overall pace


of key macroeconomic and microeconomic reforms is maintained. If the pace of reform is not maintained, power shifts back to old vested interests. If inflation is not immediately reigned in so that the exchange rate does not become overvalued, if infrastructural progress is not maintained in social areas such as education as well as in support for production. the development process will be stalled.

IX The Political Economy of Successful Development

The Ieading proponents of the neoclassical 'box of tools' for development had laid out the argument, against prevalent development theories, by the end of the 1960s. The IMF. the World Bank and the Asian Development Bank. in broad outline pursued such views in their dialogues with all developing countries. The reforms needed to accelerate growth were thus well known world wide. The most inter- esting question about the East Asian '7' is thus not 'how' they achieved rapid growth. but why, in contrast to most developing countries, they adopted policies that enabled them to do so.

The attempt to answer this question is still in its infancy. The role of cultural factors in the East Asian success has been discussed. Although the work on 'religion and the rise of capitalism' has been found wanting. attempts have been made to link East Asian growth with ConfuciadBuddhist values of hard work and respect for authority. But China's, and in the 1950s Taiwan's and South Korea's stagnation, were also ascribed to Confu- cian/Buddhist values. It seems more likely that cultural values respond to economic policy frameworks than that cultural values determine policy frameworks. A common historical strand made East Asian immigrant communities, whether Con- fuciafluddhist, Muslim or Hindu, highly entre- preneurial and profit seeking, as migrant communities have been elsewhere, because they represent a self-selected risk-taking group in beleaguered circumstances (Mackie, 1992).

The authoritarian nature of East Asian governments has been credited with the ability to carry through reforms. although on this hypothesis not only Latin American but many African governments could have been expected to lead growth. In practice the authoritarianism of East Asian governments had limits in the implementation of economic reforms. Both Taiwan and South Korea spent 30 years achieving economic changes that technocrafs and economic advisers wanted to introduce in the 1960s. Business lobby groups were strong in

authoritarian countries because governments depended on them for legitimacy. Democracy has developed with rising per capita income in Taiwan and South Korea and has made gains in other East Asian countries. The pace of economic reform has, nevertheless, not slowed down.

Attention has also been given to the 'regional' nature of the economic success of the '7'. Although there has been a great deal of contact between Taiwan and Hong Kong entrepreneurs from the 195Os, and although 'overseas' Chinese entrepreneurs have been active throughout the region, there was less regional interaction than in most developing regions. Taiwan and South Korea have not interacted closely with their neighbours. ASEAN. formed in 1976. has largely confined itself to political issues. APEC (Asia Pacific Economic Cooperation) is a talking shop. The transfer of economic policy lessons, like regional trade, has evidently benefited from the absence of regional organizations.

Models of the political economy of growth are still a long way from throwing light on why the East Asian '7' opted for growth and stuck togrowth policies long enough to see effective outcomes. (Alesina and Perotti. 1994). Once an economy 'took off, continuing on a growth path became progressively easier, not least because of the contrast with the difficulties other developing countries were experiencing in the 1970s and 1980s.

The policy implications of not knowing why the East Asian countries adopted policies for rapid growth are considerable. If most of the developing countries, notably China and India had adopted East Asian policies from the 1950s. the world could be approaching a steady state population in the early 21st century, absolute poverty would largely have been eliminated. most people in developing countries would be enjoying standards of living of modest comfort, and the resources that can be devoted to environmental uses would be greatly enhanced.

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