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Inspiration vs. perspiration: what was the key to East Asia’s economic success?


Emily Vuong

By

May 22nd, 2013


Over the past half a century, a collection of eight nations across Eastern Asia have experienced consistent and incredible rates of economic growth. Was it just luck, or were there far more tangible reasons for these countries’ success?


Paul Krugman wrote a famous paper in the 1990s outlining the myths surrounding the Asian miracle of the 20th century. Rather than it being a ‘miracle’, he presented a less dazzling critique of Asia’s economic success. He proposed that it was a combination of stringent government policy and the further adoption of free trade that was key to sustaining economic growth in East Asia. Most of this growth occurred in eight economies, collectively referred to as the High Performing Asian Economies (HPAEs) – Japan, Hong Kong, the Republic of Korea, Singapore, Taiwan, and the newly industrializing Indonesia, Malaysia, and Thailand [1]. The relationship between public policy and economic growth is now more important than ever, and in light of the continuing economic crisis in Europe, there are a number of lessons to be learnt from the success of the HPAEs.

The Asian Miracle of the second half of the twentieth century can be largely attributed to the authoritarian regimes implemented by domestic governments. To this day, they utilise a heavy hand in central planning even as markets become increasingly decentralised. The HPAEs used a variety of policies to achieve the three functions of growth – accumulation, allocation, and productivity growth. These included the promotion of institutional and policy reform, strengthening of competition, promotion of the accumulation of physical and human capital and adoption of trade liberalisation. Even then, Asia did not experience immediate economic success, with most of the benefit of meticulous government planning through a ‘nexus of policies’ [2] only beginning to accrue over the longer term. As such, Krugman’s view that growth during this period was founded upon good foresight rather than fortune was clearly an insightful one.

The effective use of government policy during this era was pivotal in kick-starting strong and sustainable economic growth. The success of Asia was largely dependent on the types of institutional and structural reforms the government promoted, however it was no single policy that ensured success. Asia’s transition from a ‘peasant society to industrial powerhouse’ was aided by the fact that Eastern culture was more accepting of authoritarian governments [3]. The government played a fundamental role in Asia’s progress, and with less of an emphasis on the importance of civil liberties, there was greater willingness to limit individual freedom of expression for the sake of long run growth. This idea stands in stark contrast to Western ideology, where there is a far greater emphasis on short-term consumer interests, free trade, democracy and civil liberties.

The governments of the HPAEs focussed heavily on the accumulation of physical and human capital during the second half of the 20th century. As a whole, it was recognised that without basic fundamental policies, long-term growth in the economy could and would not be sustained. A dynamic environment was created to encourage investment and constant innovation. Prudential regulations gave investors the peace of mind to invest large sums of capital, which, along with enhancing the integrity of the financial system, promoted ‘financial deepening’. By increasing returns on private investment and advancing technology, firms had a strong incentive to improve the skills and capabilities of the workforce, further attracting foreign investment to the region. Accumulation was the follow-up from basic government policy, helping to cement the norms of good governance and yield long-term results.

The astonishing levels of growth subsequently seen in the East Asian economies illustrate the ‘fallacy of the laissez-faire approach to economic policy’ [4]. Success depended heavily on the implementation of sophisticated industrial policies and selective protectionism. The approach of letting the economy simply ‘be’ and allowing the free market to dictate the allocation of resources, with government’s only role being to facilitate for this freedom of commerce is the basis of Keynesian economic theory, which prevails in most the modern day developed economies.

As a result, both the initial growth and later development in East Asia emphasise the importance of getting the basics right. Fundamental policies help develop the principal drivers of long run growth. Sound development policy is important as it helps facilitate private domestic investment and strengthening of human capital. Governments went about successfully upgrading the education system in Asia, with an emphasis on the importance of improving the skills of the labour force. Another important policy was strengthening the integrity of the financial system, making capital markets far more accessible to investors, as well as providing ‘non-traditional savers’ with the opportunity to save more. During this period the governments of HPAEs also kept their minds open to foreign ideas and technology, with their ‘open door’ policy ensuring that they could take advantage of any opportunities for further development and growth.

The so-called ‘miracle’ of economic success in East Asia during the second half of the twentieth century can be largely attributed to ‘perspiration’ through the development of fundamental government policy, which to this day continues to foster growth, innovation and constant development. Asia’s success was most certainly not an overnight phenomenon. It certainly is, though, an illustration of the importance of core policy initiatives and ongoing scrutiny, still evident today as the governments of the HPAEs face new economic challenges and take steps to ensure they continue down a path of perpetual economic growth.

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Sources:

 

 [1] The World Bank (1993), The East Asian Miracle (Oxford University Press), pages 1-6

[2] Stiglitz, Joseph (1996), ‘Some lessons from the East Asian miracle’, World Bank Research Observer, 11, 151-77.

[3] Crafts, Nicholas and Gianni Toniolo (2010), ‘Aggregate growth, 1950-2005’ in Stephen Broadberry and Kevin O’Rourke (eds.) Cambridge Economic History of Modern Europe Volume 2 (CUP).

[4] Krugman, Paul (1994), ‘The myth of Asia’s miracle’, Foreign Affairs, 73, November-December, pages 62-75.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Owen Wakely

    HI Emily. This is a very interesting perspective. I agree completely with your comment that “The relationship between public policy and economic growth is now more important than ever”. The problem with modern democracies and relatively short election cycles is the incentive for “short termism” (sorry for the clumsy neologism) in policy development. In Australia we see a clear lack of long term vision by both sides of government combined with populist one issue politics from independents and greens. Here it is policy by focus group and news bights. In the US they are stuck in the glue of powerful interest groups, self interested politicians and short term political cycles. Having stable autocratic government enables long term policy development and deployment and a willingness to make unpopular decisions that are in the long term interests of the collective economy. I know i am just highlighting the problem with western democracies and for many these problems are far outweighed by civil liberties and other benefits. In my mind East Asia’s success is in no small way related to formulating, sticking to and executing on sound long term economic policies.

    • Emily Vuong

      Hi Owen, thanks for your input! I believe that public policy was always pivotal in aiding and abetting economic growth and development in East Asia, both in kickstarting it during the first era globalisation and maintaining it throughout the Asian recession of the 90s. I also agree with you when you say Western politicians today are prone to making erratic, short-sighted decisions with regards to the development and formulation of public policy initiatives, many of which lack the long term focus and clarity which seemed so natural and effortless in the hands of the East Asian leaders during the second half of the twentieth century. Krugman, however would disagree with my point there. In my opinion, we can look at sound economic policy as the umbrella initiative which gave rise to East Asia’s success. Under this ‘umbrella’ we can list an array of factors such as the accumulation of manpower and machinery, technology, investments and exports (to name only a few). While it is commonplace to agree that the economies of East Asia have grown spectacularly over the past generation, the debate as to why is an ongoing one – it raises many thought-provoking questions as to whether such economic success can possibly be replicated elsewhere in the future. I believe this debate is what makes the success of the HPAEs so interesting.

      Emily

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