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Asian Economics Essay

Asian Economics

Asian Developing Countries

In our research, we will consider the economic development of tree Asian countries – Malaysia, Singapore and Thailand. Rapid growth of the Asian countries appears to be a starting point of studying economic development theory on practice. The importance of the study of the causes of rapid growth of the East Asian countries 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. The formerly centrally planned developing economies, notably China and Vietnam, have drawn on the experience accumulated by Malaysia, Singapore and Thailand. Attempts are also being made to use the East Asian experience to assist reconstruction in Central and Eastern Europe. (Adams and Davis, 1994: 8-26).

When many developing countries, after following growth defeating policies for thirty years or more, began to pursue the sort of basic economic reforms that Thailand and Singapore 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

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microeconomic reform measures, labeled the ‘Washington Consensus’, was drawn up and there was much discussion of the proper sequencing of these reforms in countries (including Australia) at various stages of development. Few of the countries carrying out such ‘adjustment’, apart from those already among the Asian countries, have thus far succeeded in placing themselves on a sustained growth path (Spiegelglas and Welsh, 1980: 58-66).

Most of the researchers, who have covered East Asian development in depth, have focused on appropriate policy frameworks to explain why the Malaysia, Singapore and Thailand grew rapidly. An outward orientation 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. (Spiegelglas and Welsh, 1980: 67-69).

The development process changes economic organization and 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 neutrality 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 piece-meal 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. (Udoh, 1998: 230-31).

Comparative Advantage, Socioeconomics, Trade and Industry Policy

The series of GATT negotiations which freed up access to industrial country markets from the 1950s improved the viability of the comparative advantage strategy in our three countries. At a time when import substitution policies dominated development discussions, Malaysia, Singapore and Thailand pursued comparative advantage in low cost labor intensive exports. Thailand’s producers of manufactured food and other labor intensive products started to export in the 1960s despite heavy protectionist biases against them, because the domestic market was small after their experience in mainland China. Singapore’s manufacturers of wigs and clothing followed in the early 1970s because their country’s extreme poverty also denied them domestic markets. The economic benefits of the export of labor 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 labor intensive components of manufacturing processes. The range of labor intensive exports from the ‘four little tigers’ grew rapidly. But whereas Thailand and Singapore (despite the latter’s brief flirtation with import substitution) were essentially free trading city states, dependent on service inter-mediation activities, Thailand and Singapore 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 servants tried to ‘pick winners’, usually with disastrous results. In time the inefficiency of the system, combined with (justified) threats of countervailing duties by industrial countries, began to make trade liberalization imperative in Singapore and Thailand, but the lobbies created by the protectionist and mercantilist incentives made reforms extremely painful and slow. (Little, 1980: 51-56).

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 fragmentation 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, Thailand and Singapore were 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. (Little, 1980: 56-62).

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. By the end of the decade it had become clear that the economies most exposed to the vicissitudes of international trade 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. (Little, 1980: 63).

As the countries wages rose with their growth (as the comparative advantage theorists predicted) food processors and clothing manufacturers followed Singapore and Thailand 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 Singapore and Thailand. But although nominal protection was high, it was in practice less onerous than in many other countries, so that the export range widened. (Little, 1980: 59-68).

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. (Little, 1980: 70-72).

The comparative advantage strategy had severe critics. It was argued that new entrants would crowd out old producers so that the experience of the Asian countries could not be replicated, particularly by large countries. In the 1980s this hypothesis was disproved by a rapid and large scale growth of labor intensive exports from China. Old ghosts were revived to argue that high exports of labor intensive goods would drive down the barter terms of trade of such products with resulting declines in export income as volumes of exports increased. The 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 Arrangement (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 Singapore, Thailand and also Malaysia 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. (Little, 1980: 72-83).

Technological change was feared by some critics of outward orientation. It was argued that while the Asian countries had benefited from the breaking up of manufacturing processes into industrial and developing country components according to labor 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. 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 training 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. (Wade, 1990: 42-61).

The dynamism of comparative advantage gains outpaced the static effects predicted. It led to the shift of labor intensive production, with concomitant management, investment and labor training, and in some cases infrastructural investment, within the region. Unlike many developing country regions, East Asia has avoided regional trade arrangements. (Mincer, 1978: 120-121).

As the rapid growth of the Asian countries became known, export orientation became conventional 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. On the experience of other developing countries like Philippines, 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 labor supply. The lowering of tariffs was accompanied by the raising of quantitative restrictions – and vice versa. In addition, Malaysian experience makes it clear that while appropriate trade and industrial policies have been essential to overall growth, they have not been sufficient. (Rao, 1988: 44-45).

Human Resource Development and Income Distribution

Although Singapore was able to grow rapidly despite the immigration that raised its population from 2 to 6 million from 1950 to 1990, Malaysia and Thailand recognized the high costs of rapid natural population growth. All East Asia 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,’ underwriting 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. (Spiegelglas and Welsh, 1980: 84)

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 centers, 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. (Spiegelglas and Welsh, 1980: 85-92)

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, but formal vocational training has proved difficult to organize. The bulk of training has been on the job. The East Asian economies fostered the interest of the work force in education. (Rao, 1988: 25). 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 factories’ 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. With further work on Malaysia, Singapore and Thailand (and many other developing countries), it became clear both that rapid sustained growth has immediate positive income distribution outcomes and that equity can not be improved without growth. The policies that influence the quality of growth, notably rapid 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 egregiously toward high income groups, improve income distribution. (Mincer, 1978: 125).

The Role of Government

It is generally agreed that governments have played a major role in the growth of the Asian countries. But such agreement covers a broad spectrum of views that range from reliance on market signals to a claim that heavily interventionist policies have been the source of success in Malaysia, Singapore and Thailand. The range of countries under consideration and their complex evolution 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. (Wade, 1990: 42-61).

Economic Growth, Evaluation and Conclusions

Early studies made it clear those 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 human resource development, which appeared on of a primary reason of economic development. In an open trading world, small countries could use their social and political cohesion to adopt socioeconomic policies that offset the absence of a large domestic market. (Bowman, 1986: 98). Private direct foreign investment inflows were costly in protected economies. Private and public capital inflows were correlated with economic mismanagement rather than with growth. Therefore, socioeconomic policies are shown to be very important for developing economies. (Bauer, 1994: 89-94).

The Asian countries were among early users of models for socioeconomic policy determination, substituting increasingly rigorous methodologies for intuitive insights. In the late 1980s, as quantitative growth theory exercises sought to find the determinants of growth through neoclassical modeling and subsequently through ‘new’ growth theory modeling, much of the focus was on Asia because this is where the highest growth in developing countries had to be explained.

Words: 2,839.

Works Cited:

Adams, F.G., and Davis, I.M. ‘The role of policy in economic development: East Asia and Latin America’, Asian Pacific Economic Literature 8(1), 8-26, 1994.

Bauer, P. Economic Analysis and Policy in Underdeveloped Countries. New York: NY University Press, 1994.

Bowman, M. J. “The Human Investment Revolution in Economic Thought,” Sociology of Education, 39, pp. 111-137, 1986.

Little, I. and Scott, M.T. Industry and Trade in Some Developing Countries: a comparative study. Oxford: University Press, 1980.

Mincer, Jacob. “Investment in Capital and Personal Income Distribution,” Journal of Political Economy, 66, pp. 281-302, 1978.

Rao, V. ‘East Asian developing countries’, Asian-Pacific Economic Literature 2(1), 26-45, 1988.

Spiegelglas, Stephen and Welsh, Charles W., (eds.) Economic Development Challenge and Promise. New Jersey: Prentice-Hall , 1980.

Udoh James. Sustainable Development in Third World Countries: Applied and Theoretical Perspectives. New York, Viking Press, 1998.

Wade, R. Governing the Market: economic theory and the role of government in East Asian industrialization. Princeton: Princeton University Press, 1990.

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