Transcript THE EAST ASIAN MIRACLE REVISITED

THE EAST ASIAN MIRACLE
REVISITED
8 “miracle” economies: Japan, 4 tigers, 3 NIEs
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
1244.2
860
370
20
17
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
China
Vietnam
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
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
4 Tigers
3 NIEs
China
India, Vietnam, …
Time
THE MIRACLE: causes(?)
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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?)
THE CRISIS: causes(?)
http://www.bschool.nus.edu.sg/depart/bp/bizds/crisis.htm#ASIAN FINANCIAL CRISIS
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EXCHANGE RATE MISALIGNMENT
EXPORT SLOWDOWN
WEAK FINANCIAL INSTITUTIONS
MORAL HAZARD
• PANIC (A CRISIS IN CONFIDENCE)
Current Account balances prior to the “crisis”
(% of GDP)
1990 1991 1992 1993 1994 1995 1996
Korea
Indonesia
Malaysia
Philippines
Singapore
Thailand
Hong Kong
China
-1.24 -3.16 -1.70
-0.16
-1.45
-1.91
-4.89
-4.40 -4.40 -2.46
-0.82
-1.54
-4.25
-3.41
-2.27 -9.08 -4.06 -10.11 -11.51 -13.45
-5.99
-6.30 -2.46 -3.17
-6.69
-3.74
-5.06
-5.86
9.45 12.36 12.38
8.48
18.12
17.93
16.26
-8.74 -8.61 -6.28
-6.50
-7.16
-9.00
-9.18
8.40
6.58
5.26
8.14
1.98
-2.21
0.58
3.02
3.07
1.09
-2.17
1.17
1.02
-0.34
GLOBAL CAPITALISM:
The “ New Imperialism” (?!)
• The radical argument:
Today’s 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”.
The radicals
• Mahathir Mohamed: • George Soros:
“…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.”
“I’m afraid that the
prevailing view, which
is one of extending
the market
mechanism to all
domains, has the
potential of destroying
society.”
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
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
Ideas for reforming global capitalism
System reinforcement
Market-reinforcement
– guarantor for loans
– transparency
• reserve transactions
– capital controls
• economic statistics
• tax forex transactions
• foreign indebtedness
• control ST inflows
– regulation
– “lender of last resort”
• capital adequacy
Regional mechanisms
• a global regulator
– Currency swaps
– reduce moral hazard
– Surveillance
• curb the IMF
– Common currency or
• bail in private lenders
basket
• “orderly workouts”
– Asian Monetary Fund
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; China’s
dominance of Asian trade and investment
The East Asian Miracle ~ Explanation
according to the World Bank:
“getting the fundamentals right”, with
highly selective interventions
The policy choices:
Fundamental
Selective
• Macroeconomic stability
• High investments in
human capital
• Stable and secure
financial systems
• Limited price distortions
• Agricultural development
• Openness to foreign
technology
• Mild financial repression
• Directed credit
• Selective industrial
promotion
• Export-push trade
policies
CAUSES OF THE “MIRACLE”:
PUBLIC 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”
CAUSES OF THE “MIRACLE”:
PUBLIC 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.
CAUSES OF THE “MIRACLE”:
PUBLIC 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”
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
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–
–
–
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?
THE KRUGMAN CRITIQUE
“The Myth of Asia’s Miracle”
(Foreign Affairs, Nov/Dec 1994)
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
TFP Growth rates (%)
Table 1
Table 2
Hong Kong
Singapore
S Korea
Taiwan
period
1966-91
1966-90
1966-90
1966-90
Canada
France
Germany
Italy
Japan
Holland
UK
USA
1947-73
1950-73
1950-73
1952-73
1952-73
1951-73
1955-73
1947-73
Source: Young (1994)
TFP growth
2.3
-0.3
1.6
1.9
1.8
3.0
3.7
3.4
4.1
2.5
1.9
1.4
Singapore:
1966-73
capital
9.0
labor
2.4
residual (TFP)
1.3
GDP
12.7
Source: Rao & Lee (1995)
1976-84
5.6
2.3
0.6
8.5
1987-94
3.6
2.4
2.6
8.6
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.
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”
Lessons—How to breed Tigers
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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.