Transcript EastAsia - Minnesota State University Moorhead

Government Versus Market In
East Asia
Standard of Living
The New Asia
• Just a few decades ago much of Asia was very
poor, but they have moved up
• The average person now live a remarkable life
compared to the past
• Maybe not to US levels, but they are getting
close
Asian Tigers
• New industrializing countries
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Hong Kong
Republic of Korea
Singapore
Taiwan
Indonesia
Malaysia
Thailand
• Some might list Japan as the first, others would list the Philippines and
Viet Nam . Some even include China
• It is important to explore these economies not only to look
at the countries themselves, but also as a possible blueprint
to help the other poor countries
Note That Not All Countries Joined
This Group
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Lao People’s Democratic Republic
Cambodia
Mongolia
Myanmar
Solomon Islands
Fiji
Palau
First Glance
• First look shows a group of countries that are
very different
• Almost strange to group them together
– Hong Kong and Singapore are city states
• Both have fewer people that the New York metro
– Indonesia is the other extreme is very populous at
over 200 million
– The city states and Taiwan are nearly at the same
level as the US
First Glance
• Indonesia and Malaysia at the other extreme
are still very poor
GDP and Population for the East Asia
Tigers
Country
GDP in 2005
(Billions $)
Population in
2005
(millions)
GDP Per Capita
in 2005 ($)
Per Capita
GDP as a
Share of US
Hong Kong
242
6.8
35422
86%
Republic of
Korea
1074
48.3
22310
54%
Singapore
133
4.3
30601
74%
Taiwan
650
22.8
28552
69%
Indonesia
889
219.2
4055
10%
Malaysia
289
26
11957
29%
Thailand
558
65.1
8571
21%
Total
3835
392.5
GDP and Pop
Why Do We Group Them Together
Extraordinary Economic Changes
• When you have growth changes at those level
one has tremendous and rapid changes in the
standard of living
• If a country grows at 7% per year, the average
standard of living will
– Double in 10 years
– Double again in 20 years (quadruple)
– Double again in 30 years (octuple)
– This is roughly what they did
Think about that in a Lifetime
• In a working lifetime, the economy and the
standard of living for the people had an
extraordinary change
• Can you imagine receiving 8 times your first
“real job’s” wages at the end of your working
career near retirement
And All The Other Stuff
• I could run through all the other social
indicators
– Level of poverty has dropped
– Infant mortality has gone down
– Life expectancy has increased
– And all of this has happen with a greater degree of
equality than other developing areas like Latin
America or Africa
One Big Stumble
• 1997 and 1998 , there was a major
international financial meltdown followed by a
deep recession
• After they recovered in the early 2000s,
growth returned, but not at the same level
Focus on the Strong Growth
• The 70s and 80s were the strongest period of
growth for these Tigers
• We continually hear about these countries
today, but most economists were caught of
guard at first
• Economic literature from the 50s have no
comments about the future of Asia
The Big Question
• The big question is whether government
policy played a part in this tremendous growth
• Why? We are always interested in if policy
can be applied to other poor countries
• Should credit be given to fundamentals or the
government industrial policy and trade
barriers?
Market Fundamental for Success
• As a starting point, the East Asian Miracle study
from the 1990s from a World Bank group
– What caused East Asia’s success? In large measure
[these countries] achieved high growth by getting the
basics right. Private domestic investment and rapidly
growing human capital were the principal engines of
growth. High level of domestic financial savings
sustained the… high investment levels… All…
reasonable bounds and were open to foreign ideas
and technology….
• But these fundamental policies don’t tell the
entire story. In most of these economies, in
one form or another, the government
intervened systematically through multiple
channels—to foster development, and in
some cases the development of specific
industries…..
• Our judgment us that in a few economies… in
some instances, government interventions
resulted in higher and more equal growth
than otherwise would have occurred
—East Asian Miracle (1983)
Fundamentals and Gov
• The big story is that the Tigers are basically
fundamentals done well, but in some cases
government helped the process
Time to Sort
• Start with the fundamental building blocks of
growth
– Macroeconomic stability
– Education
– High rate of saving and investment
– Market based incentives
Macroeconomic Stability
• Low inflation and sound budget policy
• In general they were very successful with the
exception being in Asian crisis of 1997 and
1998
• Most had low budget deficits and low inflation
• This is a good stable climate for a business to
grow
Inflation
Average Annual Inflation From 1960s
through 1980s
• Under 4% for Malaysia and Singapore
• Around 6% for Taiwan and Thailand
• Around 12% in Indonesia and South Korea
Tigers Kept Borrowing Under Control
• Up through the early 1990s, total accumulated
international debt was in the range of 40% of
GDP
Building Human Capital Through
Education
• These economies invested heavily in
education
Minnesota
• Unfortunately, I need to add that Minnesota
has been reducing investment in education
per capita since the 60s. And Higher Ed has
seen rapid reduction of investment as a
percentage of GDP in the last 15 years
Back to the Tigers
• Most had or established universal primary
education to higher levels of education
• Both the quantity and quality of education has
risen dramatically
• The start back in the 60s was universal primary
education—South Korea, Hong Kong, & Singapore
– Taiwan already had primary
– Even huge Indonesia had 70% in primary schools in
1965
More Education
• By the 1980s this group of primary school
students were working their way up to the
new secondary schools
– In Korea in the late 1980s, about 90% of children
were going to secondary school
– Even in poorer and larger Indonesia, almost half
were going to secondary school
– Expenses increased by factors of 3 and 4 per pupil
– Higher spending and higher growth made this
easy
Birth Rates
• Sharp reductions in birth rates starting in the
1960s
• Combine that with the increased spending in
education gives an very educated workforce
• Compound this with the value of education
– I know that it is a stereotype that Asians are all
good at school, but there is a cultural bias to a
strong education.
Education Results
• On international test, we often find that kids
in say Singapore or South Korea are out
performing European nations and the US
– Having said that by the end of college, the US is
back near the top. Many HS in America are
dysfunctional and when you combine that
America’s attitude about education, one can see
why students need at least some community
college
Bad Mouthing the US
High Rates of National Savings and
Investment
• In 1965, the rates of saving and investment
were comparable to those in Latin America
– Around 15% of GDP
• Latin America has not changed and Tigers
have reached 30%-35% of GDP
High Saving
• This high saving translated into both higher
private investment by companies and higher
public investment by governments
• About 50/50 public/private
• And they tended to offset each other. When
private was down, public went up and vice versa.
• Public was a true investment: irrigation for land,
roads, electricity, water facilities, background
infrastructure—and that education—investments
that will increase productivity
Fairly Light-Handed Intervention in
Markets
• The had extensive competition in their
domestic markets
Open Trade and Budget Deficits
• The open trade tended to go hand in hand with
low deficits
– They often had the situation of either running big
deficits to provide subsidies or just let everything
remain open
– They selected macroeconomic stability and did not
provide subsidies
• They also did not make the mistake that many
developing countries have made by beating on ag
– Some have put heavy taxes on ag and then subsidize
food to keep it cheap
I Should Not Overstate
• The East Asian Tigers have had a substantial
amount of government intervention
Open to Technology
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This goes with saying
Always willing to import machinery abroad
Willing to license
Willing to accept foreign direct investment
Much faster than trying to build all the
technology from within
• Building from within has been the path of India
and Latin America—wasteful and unsuccessful
Science and Technology
• They always embraced science and
engineering programs
– In some areas like Malaysia and Taiwan, they
became famous for big industrial parks for high
tech industry
Overall Where Is This Going
• Economic growth is a matter of workers with
more education and skills, using more physical
equipment and better technology, in an
economic environment that has good
incentives and investment
• That followed this well
Now! What about the Government
Intervention?
• Government across East Asian did use
interventionist policy
• Results, however, are mixed
– Many of the countries tried to designate certain
industries as strategic
– Then use licenses, fees, and subsidies to support those
industries
• An example is South Korea that promoted iron, steel,
electronics, and the chemical industry
• On the other hand Indonesia and Thailand did not select
industries
Difficulties Of Selected Industries
• Selecting industries often does not work that
well
– I should say that receiving a subsidy does help the
industry
– But the question is whether the subsidy helps the
overall economy
– To help the overall economy, you need to spur
that industry enough so that it can pay back the
subsidy and help the rest of the economy
You Need To Think About What
Industries Will Important
• You need to predict what industries will be
important in the future
• Political you need to support only the winners
and not the losers
– This process added a great amount of licenses and
red tape
– This is fertile ground for bribes
Bailout or Not
• What do you do when you select a loser
– Do you bailout the wrong business
– Korea is an example of a country that bailed out
several industries that were labeled as strategic,
but actually failed (ship building, construction, and
heavy machinery)
• Ironically many container ships now com from SK
What Else Happens
• There is control of savings and interest rates
– up until the early 90s, the Tigers typically
regulated what interest rate banks could charge
borrowers and what interest rate banks could pay
lenders
– Also blocked new banks from entering the market
– Most Tigers also had government sponsored
postal savings institutions (tied to the post office
and allowed the rural population to save)
Result
• The banks were flush with money
– They would then lend to businesses at good rates
– This worked for a period to get large amounts of
funds to businesses
• Here in the US we have a relatively low rate of saving
and we put a relatively large amount of our saving into
residential real estate—plus we have a relatively large
amount of consumer loans
• East Asia on the other hand has high savings that flow
to companies for investment rather than helping
people buy houses in the suburbs
Another Way to Help
• Export Incentives
– No shock that these countries have expanded their
world share of exports
– Share of world exports for these 7 countries
• 3% in 1965
• 6% in 1980
• 9% in 1990
– East Asian Tigers’ share of exports of all developing
economies
• 12% in 1965
• 58% in 1990 (obviously down today because of China)
Part Just Growth
• As they got bigger and bigger they just
participated more in world markets
• In addition, governments often pushed
exports
– They held export contests
• When a company gets an export order, they then got
access to cheaper credit
• If you can clearly set the rules, this prevents subsidies
based predictions from bureaucrats
Korea and Taiwan
• Taiwan for example gave tax breaks to
companies that continued to export
• And most importantly, Korea and Taiwan cut
off companies that failed to produce
In East Asia, Fundamentals Were More
Important
• Fundamentals or Government Intervention
– This is a continuing debate for not just the Tigers,
but all growth
– In the case of the Tigers it is clear that
fundamentals were the most important
– One way economists explore this is through a
counter-factual. What would happen if the Tiger
had just fundamentals or just government
intervention
Counter-Factual
• For example, what if the Tigers improved the
fundamentals
– Education, savings & investment, technology,
macro stability, and market incentives
– BUT no government intervention with either trade
or industrial policy
– The World Bank report indicated that this would
have only a small difference in the actual growth
Counter-Factual
• Consider the alternative
– What if the government of the East Asian Tigers had
intervened as they did in the markets
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Credit controls
Subsidies industries and successful exporters
Trade barriers
BUT had not improved the fundamentals—no gains in
education, no saving and investment, no new technology,
high inflation and budget deficits, no market incentives
• I know that you think I am being silly and that it is obvious
they would have had little growth—just remember that this
scenario is similar to part of Africa and Latin America
Why is the Record so Poor, but Talked
About So Much
• Why is government intervention discussed so
heavily
– Parts of the government functions are easier than the
business world—it is easy to collect taxes and pay
government workers. It is very difficult however to
develop a product that will be profitable on a world
market
– Without the profit incentive, many government
statistics do not provide useful info and they do not
like to look bad so often report stats that appear to
make gov useful
Here is an interest Thought
• There are many times here in America when the
people ask the government to do one thing and
then expect the firms to do something else when
in reality our requests should be flip-flopped
– We want government to have the task of creating jobs
and economics growth—a task best suited for
business
– Then we want our firms to focus on social
responsibility and protecting people from economic
shocks, providing health insurance and protecting the
environment—all task better for the government to
handle
Let the Government
• Focus in on education, worker safety, the
environment, consumer protection
• The fundamentals! Studies show the Tigers
are about the fundamentals