Explanations of East Asian Economic Development
Especially since the mid-sass the neoclassical approach was criticized by economists who stressed that government intervention played a crucial role in the process of economic growth. This paper aims at presenting a survey of the arguments recently put forward by the critics of the neoclassical approach to explain the role of government in the economic success of
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Without a doubt East Sais’s economic expansion during the past twenty years is one f the most remarkable economic changes since the Second World War. Gross national product of the East Asian countries increased by more than five per cent per year in the period 1965-1990, which is considerably larger than that of Latin America (1. 8 per cent), sub-Sahara Africa (0. 3 per cent), or even the COED (2. 4 per cent). Six of the seven fastest growing economies in the period 1960-1985 (measured on the basis of the average growth of per capita GAP) were East Asian countries.
The economic success of
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Especially since the mid-sass the neoclassical approach was criticized by economists who stressed that government intervention actually played a crucial role in the process of economic growth. In this paper these economists are offered to as the new interventionists. The debate between the neoclassical economists and the new interventionists seems to concentrate on the issue concerning the role of the government in the process of economic development in general and the East Asian growth miracle in particular. Singapore, Hong Kong, Indonesia, Thailand, and Malaysia.
A significant part of the literature used for this article concentrates mainly on South Korea and Taiwan. This paper mainly aims at presenting a survey of the arguments recently put forward by the critics of the neoclassical approach to explain the economic success of
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Section 2 presents a survey of the contributions of development economists with respect to the role of the government in the process of economic development as put forward by them in the sass and sass. Section 3 describes the reactions of the neoclassical economists on these early contributions. They emphasized that especially the market mechanism played an important role in the growth of the East Asian countries. Section 4 deals with the critics of the neoclassical economists and describes their approach to the backgrounds of the Asian miracle.
The discussion on the role of the government in the process of economic development originated in the sass and sass, this discussion fits into the post-war predominance of Keynesian economics. During this period several theoretical models contributions in the literature pointed out that market imperfections Justified government intervention. The main emphasis was on the existence and benefits of economies of scale and the external effects of production. One of the most influential models was the model of industrialization based on the notion of infant industry.
The existence of dynamic economies of scale and positive external effects of production in certain industries prompted the government to actively stimulate the development of these industries since the private sector was thought to be incapable of assessing the long-term economic benefits of investing in these industries. According to this model the government would stimulate the velveteen of these industries by means of subsidies and protective measures until they were sufficiently developed to produce without government support. Other models went further in their recommendations concerning the role of the government in development.
According to several economists, the economic growth potential of developing countries was restricted since many of these countries mainly exported primary goods. They expected that the prices of these goods relative to prices of industrial goods would fall permanently; this is also known as export pessimism. By combining the infant industry argument with export pessimism they minted out that a structural change in the production structure of these countries was absolutely necessary in order to obtain positive long-run economic growth prospects.
The government ought to play an important role since such a drastic change could never be realized through the market mechanism due to considerably large coordination problems in the economy. The emphasis was put on improving infrastructure and education. Both these aspects were assumed to be extremely important in order to realism such a structural change. Furthermore, the mutual determined by the development of other sectors, either as a producer of inputs or s a demander of output.
This caused simultaneous support of different industries necessary. Later on, the debate in literature concentrated on the way in which the government ought to intervene. Some supported simultaneous intervention in all industries essential to economic growth; others stressed the limited availability of scarce resources which would hinder the execution of such a comprehensive strategy. They advocated government intervention mainly in those industries that had the most relations with other industries (unbalanced growth strategy; see Hiroshima, 1958).
These models very much influenced the economic policies pursued y the various developing countries during the sass, sass, and a large part of the sass. The idea of a government intervening in the process of economic growth was appealing to many politicians. It contributed to developing models of central planning, and it stimulated to using trade policies, such as import quota, export subsidies, and fixed exchange rates, introducing price controls and subsidies in markets for goods and production factors, and establishing public enterprises in important sectors like mining and heavy industries.
Many governments pursued policies of import substitution (and later also export promotion). Initially, several countries appeared to be successful in achieving economic growth by way of government intervention. However, as increasingly more problems arose with respect to the models of planned economic growth, this approach was increasingly criticized by economists whose ideas matched the neoclassical tradition. This is the term to which they are referred to in the debate on the role of markets versus the Government in the process of growth.
Mainly at the fact that the above described models primarily pointed at the imperfections of the market mechanism; the models seemed not to be concerned about the possibility that government intervention in itself could also lead to an inefficient allocation of resources. The neoclassical economists rejected the implicit assumptions that allocate inefficiency due to market imperfections would always be larger than the inefficiency resulting from government failures.
This assumption would imply that the government has sufficient information in order to determine for which particular industries positive externalities and dynamic economies of scale could be expected, and to properly assess the costs and benefits of supporting certain activities and industries. This also loud imply a well-functioning apparatus of government within which this information would be translated into a policy in the right way. Moreover, it meant that the government would also be strong enough to resist pressure groups and to minimalism the negative effects of rent-seeking behavior.
Finally, it was anticipated that the government put maximum welfare for the country as a whole before maximizing the individual objectives of those representing the government. The inalienable very much doubted the fact that these conditions had been sufficiently met in developing countries. They were rather convinced of the fact hat especially such factors as lobbying, rent seeking, and a government pursuing mastication of the individual welfare function, would negatively affect the efficiency intervention generally exceeded market imperfections.
Only in some cases the government could play a role, e. G. With respect to providing physical infrastructure, macroeconomic stability, and maintaining order and upholding the law. This is all the government should do. The device of getting the prices right plays a crucial role in the nonlinear view: If the markets are not interfered with, scarce resources will be allocated most efficiently. Their starting points were the basis of the MIFF and World Bank policy. Recommendations that were part of the structural adjustment programmers presented to developing countries in the sass and sass.
The nonlinear interpretation of the role of the government versus the role of the market in the process of economic development has also been applied in analyzing the economic success of
Focusing on export enhanced the development of industries with a comparative advantage. The East Asian countries especially developed those industries in which they had a comparative advantage. The governments had created the right environment – by providing macroeconomic stability and public investment in social and physical infrastructure – in which the private sector was encouraged to invest in such a way that it, would contribute costively to economic development.
The nonlinear interpretation of the economic success of
The nonlinear criticism of the models from the sass and sass was Justified to a certain extent. They rightly emphasized that too much government interference in the process of economic development could lead to considerable inefficiencies. They provided a theoretical basis for the possibility and consequences of government failure (Islam, 1992). Since the early sass and especially during the sass practically everybody agreed on the fact that government-led economic development, with an important role for state enterprises, would lead to large inefficiencies.
However, this id not automatically mean that the nonlinear alternative provided a correct interpretation of the backgrounds of the successes in East Asia. Since the mid-sass there was increasing criticism of the nonlinear interpretation of the role of the market versus the role of the government in development. These critics can be referred to as new interventionists. This group of economists argued that the government could contribute more to economic development than Just providing certain important public goods.
They based their ideas mainly on their analysis of the backgrounds of economic success in East Asia. The centre of their analysis proved to development economists of the sass and sass. Criticism of the Nonlinear Model and the Arguments in Favor of Government Intervention According to the new interventionists, the nonlinear interpretation could not explain satisfactorily the success of the East Asian countries. A growing amount of research showed that government could indeed contribute positively to growth by means of comprehensive intervention in the economic process.
This was not in keeping with the usual nonlinear starting points, and therefore alternative approaches were sought after to explain for this finding. An important alternative explanation of the East Asian economic success was found by emphasizing the extent of problems concerning coordination in less developed economies. Critics of the nonlinear interpretation pointed out that the government could play an important role in stimulating the process of economic development by reducing coordination problems, related to the choice of and relationship between production decisions that hinder development.
These problems concerning coordination are the result of dynamic economies of scale of production and external effects resulting from the strong mutual penitence of certain industries. If such circumstances do play a role, the allocation of resources on the basis of the market mechanism can quite easily become sub- optimal. To begin with, in practice market prices provide information about the current profitability of productive activities; they contain hardly any – if at all – information on future profitability.
Under these circumstances, if there are any activities that lead to economies of scale in the future, current market prices give the wrong signals with respect to optimal allocation. In this case, allocation will not be dynamically efficient. Moreover, investment decisions at the level of the individual entrepreneur may be sub-optimal if the future profitability of an investment project also depends on the degree to which investments are made in other sectors at the same time.
In this case, too, allocation of resources based on the free market principle results in dynamically inefficient allocation. According to the new interventionists, interventions of East Asian governments were mainly aimed at decreasing these coordination problems, thus stimulating economic growth. The interventions actually improved the economy since barriers caused by economies of call and external effects were taken down, which probably would not have happened if resource allocation was based purely on market principles.
The model explaining the East Asian economic miracle as proposed by these new interventionists matches some of the central thoughts of the development economists of the sass and sass. One major difference, however, is that this model is formalized in some recent contributions. Recent theories on industrial organization also point at the positive effect of limited competition – rather than free markets – and protection and co-ordination by the government.
The remainder of this section will iscuss in more detail several of the above mentioned aspects of the East Asian intervention policy, such as the characteristics of industrial policies, the instruments that were used to stimulate specific investments, the institutional context, and the preconditions. Industrial policy countries is the central focus of several new interventionist studies, Focusing mainly on the analysis of the Korean experiences, this is also presents a new interventionist interpretation of the economic development of South Korea.
In her analysis she shows why the Korean government policy can be considered dynamically efficient. She emphasizes the fact that government intervention led to a situation of getting the prices wrong, which, according to her, precisely resulted in an optimal allocation of scarce resources. By deliberately disturbing prices, the government was able to reduce the coordination problems that occur when allocation of resources is left to the market mechanism.
Policies aiming at disturbing the market mechanism led to other priorities concerning what should be produced as compared to the outcomes of the market as the coordinating mechanism. The industrial policies of other rapid rowers in the region have been interpreted in a similar manner in other studies; characterizes the process of economic development in South Korea as the process of late industrialization. Fast growth in this country is mainly based on the implementation of existing (Western) technologies. The aspect of learning, adopting and adjusting existing technologies is central in her analysis.
Since learning processes have the characteristics of a public good and are for example, closely related to increasing economies of scale and the external effects of production, government intervention is vital in the process of late industrialization. The overspent sees to it that the Western technology is copied and implemented as efficiently as possible, and that the labor force is educated sufficiently to work with the new technology. Moreover, they coordinate production decisions in different industries.
Thus, the government becomes an entrepreneur who decides what, when, and how much to produce. The active intervention resulted in the industrial development of South Korea, which would not have been realized without government intervention. The government especially stimulated those industries that were thought to be of crucial importance to the long-term development of South Korea. Whereas in the sass mainly export-oriented industries were stimulated, in the sass emphasis was placed on the development of heavy and chemical industries, the electronics industry, and shipbuilding.
In the sass the centre of attention of industrial policies shifted towards stimulating the development of high- quality industries, the so-called sunrise industries. Due to government intervention South Korea became a leading producer of microchips, and had an important share in the world markets for consumer electronics, cars, and in shipbuilding. In this context, leading economists point out the difficulties involved in the development of specially heavy and chemical industries, and in electronics and shipbuilding.
The relatively long time these industries require reaching maturity, and the limited profitability (or even temporary loss) during the initial phase cause these industries to be rather unattractive when it comes to private investment. This provides a legitimate reason for an active industrial policy by the government. Instruments of government intervention The East Asian governments used various instruments that enabled them to factors, in order to achieve that scarce resource would be applied in the areas they preferred. These instruments primarily aim at creating rents, I. . Providing subsidies for certain investments. A subsidy may be a strong instrument to influence the use and allocation of means; provided that the granting meets certain conditions. A subsidy will contain a protective element on the one hand, and provide an incentive to implement specific activities on the other hand. Given these conditions, a subsidy may contribute to the fact that investors who are granted a subsidy may take into account more than short-term profitability only, and may also consider future possible profitability of the decisions.
In these cases, the dynamic aspects of implementing investment decisions are taken into account, and thus granting subsidies may contribute to a better allocation of means. Initially, subsidies were granted by means of programmers for cheap credit and selective credit loans. In countries like South Korea and Taiwan, the government had a significant impact on determining the nominal deposit and loan rate in the sass and sass. Moreover, they also introduced guidelines with respect to the allocation of bank loans to the private sector.
Thus, they were able to stimulate the development of specific industries and private activities by granting them access to external funding and by abscessing this Funding. The role of the export promotion policy Especially with respect to the role of export-oriented policies as part of industrial policies, and the related specific instruments of government intervention in East Asia, the inalienable and the new interventionists do not agree.
In the nonlinear model the emphasis of government policies on export promotion is very important, since they believe that competition on world markets stimulated East Asian companies to produce efficiently. They exported especially those products for which the countries had a comparative advantage in production. According to the inalienable, the rapid growth of exports Justified this approach. Subsequently, the development of export industries was thought to have a positive effect on the production in other sectors of the economy.
In this model – the so-called model of export-led development – the rapid growth of the export industries led to a growth in investment and was therefore the driving force behind the overall economic success. The new interventionists disputed the nonlinear point of view. Some of them point out the fact that the governments created comparative advantages, thus actually reversing he causal relationship between export growth and comparative advantages. The above mentioned industrial policies in South Korea can again be used to illustrate this view.
The South Koreans developed advantages in shipbuilding, and in the electronics and car industries, all industries in which they initially did not have comparative advantages. Some new interventionists stressed the fact that government intervention stimulated especially those export industries for which competition in international markets was fierce, in order to stimulate the building up of a competitive external sector. To a certain degree, this view resembles the nonlinear interpretation of the role of international trade, although the new develop such a competitive external sector.
They argue that international competition can be regarded as an efficiency check of interventionist policies and the policy measures used. The success or failure of export producing firms provided the government with information which enabled it to decide whether or not to continue support to particular industries, and to decide on the extent of this support. Thus, protection measures and the granting of subsidies were linked to the performance of rims with regard to the development of sales in foreign markets.
Others, however, resist the argument that exports played a crucial role in stimulating the economic growth of these countries. On the one hand, they point at the limited share of the export sector in total GNP of most East Asian growing countries in the period concerned. Considered this limited share, this sector could never have been the driving force behind the strong economic development during the sass and sass. On the other hand, the direction of the causality between exports and investments as supposed by the inalienable is questioned.
It is more likely that the explosive export growth was the result of a strong increase in domestic investments, rather than the other way round. The increase in these investments led to an increasing demand for imports, which – taking into account the limited availability of foreign currencies – went hand in hand with an increase in exports. This increase in exports was realized by reducing the domestic consumption of treatable goods, making them available for exports.
Exports were not hampered by any unfavorable exchange rate policies, which had indeed been the case in many other developing countries in the sass, sass, and part of the sass. They argue that export production was actively stimulated by means of several instruments, particularly the above described systems of substitution. Therefore, some new interventionists argue that the explanation of economic growth in East Asian countries lies in the factors that influenced the strong growth in domestic investments, such as the creation of rents to stimulate investment behavior.
Cooperation between the state and the private sector in the previous sections it has been pointed out continuously that the East Asian governments proved to be able to reduce coordination problems, which undistributed to stimulate economic growth. However, this still has not answered the question concerning the way governments were able to dispose of sufficient information to efficiently coordinate investment decisions and to determine which industries were important in realizing a dynamically efficient allocation of scarce resources.
Several studies have examined this aspect. These studies show that very close ties existed between the government, banks, and the private sector. These ties led to frequent contacts between the government and the private sector about the economy’s weaknesses and strengths. In this way, the government gained a better understanding of the nature of the coordination problems that played a role in the economy. On the basis of this information the government was better able to take decisions concerning intervention.
In the case of South Korea, civil servants from different ministries, bank managers, and managers of large companies regularly met on so-called deliberation councils. Apart from this there were also monthly export meetings. At these meetings, presided by the president of the country and attended were directly discussed, and decisions were taken concerning the outlines of the industrial, trade, and financial policies. Specific attention would be paid to the performance of the export industries, and if necessary the export policy would be adjusted on the basis of the information available.
The South Korean private sector was very much organizes on the basis of conglomerate structures, the so-called Chasubles. A limited number of very large conglomerates were actively involved in various economic activities, thus controlling an important part of the total production of the private sector. The government actively stimulated the development of these large conglomerates. The idea was that this would lead to an optimal use of economies of scale and external effects due to the strong mutual dependence between industries.
In this way, the conglomerates would internalize existing coordination problems. Moreover, an advantage of the existence of several large conglomerates was that there were only a small number of ties between the government and the private sector, so that a relatively small number of policy makers and managers would be responsible for making important decisions. This added to an efficient exchange of information and a reduction of coordination problems.
Some studies describe the model of the East Asian economies as a governed market. This means that private companies competed and cooperated and were supervised by the government. Other studies – especially referring to the case of South Korea – characterize the relations between government and the private sector as a quasi-internal organization. This model describes a firm as an organization that minimalists transaction costs by internalizing certain activities, I. E. These activities are executed within the organization.
This may cause the allocation within an internal organization o be superior to allocation resulting from the market mechanism. The model contains a central management that determines the outlines of the activities of the firm and that delegates the execution and immediate responsibility for the results to different divisions. The divisions are accountable to the central management and have to provide information regularly, enabling the management to change its strategy on the basis of this new information – if necessary.
In this way, coordination problems between the different activities can be reduced. The comparison to the heartsickness of the Korean society applies to a certain extent, if the government is regarded as the central manager and the various conglomerates as the divisions. Due to the intense and informal contacts between the government and the private sector, the government had at their disposal information concerning the nature and extent of coordination problems in the economy.
On the basis of this information, economic policies could be designed and choices could be made on which industries should be supported, since they were supposed to be of crucial importance to the growth of the country. Furthermore, economic policy programmers could constantly be adjusted on the basis of new information so that they would positively contribute to the economic development of the country. To conclude, it can be argued that the strong ties between the government and the private sector contributed to an intense follow and if necessary adjust the activities in private industries.
The new interventionists considered the combination of these ties and the nature of the way the government created rents and distributed these among firms and industrial sectors as an important explanation of the successful government intervention in the arioso East Asian countries. Initial conditions and political factors The new interventionists also point at other factors they feel have been important in realizing that the government translated the information they received from the private sector into a policy that contributed to the successfully reduction of coordination problems.
These factors are closely related to the initial conditions that applied at the moment this miraculous process of economic growth was started. They also point at certain specific political economic circumstances. To begin with, the new interventionists emphasis that in these countries the educational system and the level of education of the labor force were of a relatively high standard as early as the sass, especially compared to countries in Latin America and Africa. This positive initial condition had various positive consequences.
To start with, this meant that labor productivity was relatively high and that the East Asian economies were at least capable of working with relatively high-grade production processes as early as the sass. Moreover, this meant that the copying of Western technologies is the essence of late industrialization – could be executed faster. Finally, the high level of education had a positive effect on the quality of the civil service. The latter was not to be underestimated as an aspect of the success of the East Asian intervention policy.
Several authors have therefore paid special attention to the aspect of the quality of the civil service. An efficient apparatus of government was of great importance in order to translate the information on coordination problems in the economy into a policy that could contribute to increasing economic growth. Moreover, the work ethic of the average civil servant in the Eastern Asian countries was also important in explaining the efficiency of government intervention.
In many developing countries civil servants seemed to be easily corrupted, whereas in most East Asian countries this was relatively less common. Consequently, the abuse of, for example, the granting of subsidies and other benefits to firms could be kept rather limited. To explain this phenomenon the new interventionists argued, among other things that in such countries as South Korea and Taiwan a high degree of social responsibility ad been developed and introduced through the educational system. Education very much contributed to a sense of social awareness.
This led to the fact that a position as a civil servant involved a high social status. This may be an explanation for the fact that the best students often accepted AAA position with the government whereas a similar position in the private sector would pay far more. This high status would also contribute to a lower degree of corruptness as compared to that in many other developing countries. Moreover, a career with the civil service was considered the perfect way to a high position in the private sector.