THE EAST ASIAN MIRACLE REVISITED

1
THE EAST ASIAN MIRACLE REVISITED
8 miracle economies Japan, 4 tigers, 3 NIEs
2
Asia-Pacific economies, 1990 2000
population (millions) GDP per capita () 2000 GNP per capita () 1990 Export to GDP ratio 2000 () Export to GDP ratio 1990 ()
Indonesia 203.4 1,110 570 25 24
Malaysia 21.0 4,530 2,320 79 69
Philippines 71.4 1,200 730 29 20
Thailand 59.7 2,740 1,420 34 29
Singapore 3.4 32,810 11,160 124 152
Hong Kong 6.5 25,200 11,490 115 49
S. Korea 45.7 10,550 5,400 29 27
Taiwan 21.7 13,060 7,950 43 43
China 1244.2 860 370 20 17
Vietnam 76.6 335 na 35 na
Japan 126.0 38,160 25,430 9 10
United States 271.8 29,080 21,790 9 7
3
The economic environment

• East Asian success started from export-oriented
  strategies, benefiting from growth in the
  international economy since the 1950s.
• Wave of FDI in Asia (Flying Geese Pattern)
• Japan?4 Tigers?3 NIEs?China? (?)
• As each wave of development ensued it displaced
  exports of prior wave, compelling restructuring.
• Internal causes exchange rate appreciation, wage
  increases,
• Restructuring labor intensive?capital
  intensive?knowledge

4
The flying-geese pattern of shifting comparative
advantage

• For a particular country

Comparative advantage
textiles
chemical
steel
autos
electronics
Time

• For a particular industry

Comparative advantage
Japan
India, Vietnam,
4 Tigers
3 NIEs
China
Time
5
THE MIRACLE causes(?)

• PUBLIC POLICIES
• THE SOCIETY (CULTURE, POLITICS)
• BUSINESS / MANAGEMENT SYSTEMS
• miscellaneous
• HISTORY
• EXTERNALITIES (FLYING GEESE)
• LUCK
• etc
• (Were the causes of the Miracle related to the
  causes of the Crisis?)

6
THE CRISIS causes(?)http//www.bschool.nus.edu.s
g/depart/bp/bizds/crisis.htmASIAN FINANCIAL
CRISIS

• EXCHANGE RATE MISALIGNMENT
• EXPORT SLOWDOWN
• WEAK FINANCIAL INSTITUTIONS
• MORAL HAZARD
• PANIC (A CRISIS IN CONFIDENCE)

7
Current Account balances prior to the crisis (
of GDP)
1990 1991 1992 1993 1994 1995 1996
Korea -1.24 -3.16 -1.70 -0.16 -1.45 -1.91 -4.89
Indonesia -4.40 -4.40 -2.46 -0.82 -1.54 -4.25 -3.41
Malaysia -2.27 -9.08 -4.06 -10.11 -11.51 -13.45 -5.99
Philippines -6.30 -2.46 -3.17 -6.69 -3.74 -5.06 -5.86
Singapore 9.45 12.36 12.38 8.48 18.12 17.93 16.26
Thailand -8.74 -8.61 -6.28 -6.50 -7.16 -9.00 -9.18
Hong Kong 8.40 6.58 5.26 8.14 1.98 -2.21 0.58
China 3.02 3.07 1.09 -2.17 1.17 1.02 -0.34
8
GLOBAL CAPITALISMThe New Imperialism (?!)

• The radical argument
• Todays dominant economic doctrines rule out any
  interpretation, or resolution, of global
  financial crises (such as the Asian Crisis) that
  puts part of the blame on the effects of the
  ideology of globalized markets.
• The Asian Financial Crisis may be seen as a
  failure of Asian capitalism or alternatively,
  a failure of the international financial system.

9
The radicals

• Mahathir Mohamed
• the fight for independence will have to begin
  all over again for the present market rules will
  surely result in a new imperialism more noxious
  and debilitating than the old.

• George Soros
• Im afraid that the prevailing view, which is
  one of extending the market mechanism to all
  domains, has the potential of destroying
  society.

10
One culprit the IMF

• The IMF is the institution responsible for the
  system.
• Nationalists from the Global South are critical
  of the IMF for (at least)
• Forcing countries to open up to foreign
  competition and takeovers
• Forcing liberalization American-style
• Bailing out foreign banks, while insisting on
  bankruptcy for local banks
• Fiscal and monetary restraints that kill local
  businesses
• Dictating policy from Washington DC
• Lack of transparency

11
Another culprit market speculators

• The case for free capital movement is weaker than
  the case for free trade.
• George Soros himself believes there must be
  reform of the system and hedge funds like his
  own should be controlled.
• Radical reforms are occasionally implemented
• Debt write-offs, capital controls, market
  intervention
• Conventional solutions are relied upon
• Better information, sound financial practices,
  improved banking and corporate governance,
  less government involvement, etc etc

12
Ideas for reforming global capitalism

• System reinforcement
• guarantor for loans
• capital controls
• tax forex transactions
• control ST inflows
• lender of last resort
• Regional mechanisms
• Currency swaps
• Surveillance
• Common currency or basket
• Asian Monetary Fund

• Market-reinforcement
• transparency
• reserve transactions
• economic statistics
• foreign indebtedness
• regulation
• capital adequacy
• a global regulator
• reduce moral hazard
• curb the IMF
• bail in private lenders
• orderly workouts

13
TOWARDS REFORM IN ASIA
Problems in Asian market economies that led to
Crisis

• Cronyism.
• Too much money, dependence on speculative
  capital inflows.
• Lack of transparency in the financial sector.
• Lack of flexibility in the currency regime.
• Increasing current account deficits.
• Weakness in the Japanese economy Chinas
  dominance of Asian trade and investment

14
The East Asian Miracle Explanation according to
the World Bank getting the fundamentals
right, with highly selective interventions

• Selective
• Mild financial repression
• Directed credit
• Selective industrial promotion
• Export-push trade policies

• The policy choices
• Fundamental
• Macroeconomic stability
• High investments in human capital
• Stable and secure financial systems
• Limited price distortions
• Agricultural development
• Openness to foreign technology

15
CAUSES OF THE MIRACLEPUBLIC POLICY (World
Bank Report)1

• Rapid Accumulation (of human physical capital)
• Developing human capital
• Primary and secondary education was emphasized
• Tertiary education funds mostly for hard sciences
• Female literacy? more workers, lower fertility
  rates
• Creating effective and secure financial systems
• Increased savings (including forced savings)
• promoted by the integrity and accessibility of
  postal banks
• Increased investment
• investment-friendly environment creating
  infrastructure
• easy credit through financial repression

16
CAUSES OF THE MIRACLEPUBLIC POLICY (World
Bank Report)2

• Efficient Allocation of capital
• Letting markets work flexible labour markets
• governments less responsive to organized labour
• Productivity-driven wage rises, even downward
• No minimum wage
• emphasis on creating jobs high employment levels
• Assisting the market credit for priority areas
• Industrial policies targeting winners
• criteria growth, productivity, spillover
• Credit directed against strict performance
  criteria
• contests, thru deliberative councils
• Most subsidy small, but a signal to capital
  markets.

17
CAUSES OF THE MIRACLEPUBLIC POLICY (World
Bank Report)3

• Technology catch-up and high productivity
• actively seeking foreign technology
• industrial policy promoted high-tech sectors
• encouraging exports
• other special features of East Asian growth
• the principle of shared growth
• macroeconomic stability
• cooperative competition (led by technocratic
  elite)
• business-friendly environment, led by private
  investment
• state interventions addressed market failures
• allocated by contests

18
A note on contests

• Problem market coordination failures
• Solution intervention policies emphasizing
  cooperation
• Thus, a need for government-administered
  competition (contests)
• Rules (performance-based)
• Eg, export order, technical progress, etc
• Rewards
• Eg, loans, license, tax shelters, etc
• Referees
• Eg, civil service, development boards,
  deliberation councils, etc
• Limits for viability of contests
• Benefits may not be great if market coordination
  is strong.
• Costs of government coordination may offset
  benefits.
• Referees may not be effective.
• Are they really contests, or political favors?

19
THE KRUGMAN CRITIQUE

• The Myth of Asias Miracle
• (Foreign Affairs, Nov/Dec 1994)

20
The debate about total factor productivity (TFP)

• The argument
• The formula

• Singapore grew through a mobilization of
  resources that would have done Stalin proud.
• Labour contribution
• Capital contribution
• Efficiency (TFP)
• Economic growth

21
TFP Growth rates ()

• Table 1 Table 2 Singapore
• period TFP growth 1966-73 1976-84 1987-94
• Hong Kong 1966-91 2.3 capital 9.0
  5.6 3.6
• Singapore 1966-90 -0.3 labor 2.4
  2.3 2.4
• S Korea 1966-90 1.6 residual (TFP)
  1.3 0.6 2.6
• Taiwan 1966-90 1.9 GDP 12.7
  8.5 8.6
• Canada 1947-73 1.8 Source Rao Lee
  (1995)
• France 1950-73 3.0
• Germany 1950-73 3.7
• Italy 1952-73 3.4
• Japan 1952-73 4.1
• Holland 1951-73 2.5
• UK 1955-73 1.9
• USA 1947-73 1.4
• Source Young (1994)

22
counterarguments

• The same formula calculated differently leads to
  different conclusions.
• Accumulation and allocation of capital is itself
  significant
• Investment meets the market test and embodies
  technology.
• The opportunities for catchup are immense.
• TFP in Singapore should increase in future.

23
East Asia Growth Summary--Why an Economic
Miracle?

• Rapid growth, sustained over long periods--30
  years or more in some--unprecedented
• Very low income inequality--unprecedented
• Low endowment of natural resources
• Lack Western-style democratic institutions
• Massive distortion/ intervention in markets
• Defied received wisdom hence, a miracle

24
LessonsHow to breed Tigers

• Priority of the State economic development
• Resource-poor, small nations --export
• Rapid growth needs a reliance on markets
• State can guide markets, but, get prices right
• Share pain gain sink-or-swim together
• Authoritarian leaders pushed tough policies
• Investments in basic education paid off
• or, World Bank get the fundamental policies
  right
• for rapid accumulation,
• efficient allocation,
• high productivity-growth.