Economic Development in Asia

Chapter 3 – Growth and the Asian Experience

• For the last forty years, a group of countries in East and Southeast Asia have grown at remarkably high rates.

• Japan led the way, beginning right after World War II.

• It was joined by Thailand, Taiwan, Singapore and Korea in the 1960s.

• Southeast Asia followed in the 1970s.

The Asian Growth Miracle

• The policy environment in most developing countries throughout the world stressed import substitution policies for industry.

• Government strategy that emphasizes replacement of some agricultural or industrial imports to encourage local production for local consumption, rather than producing for export markets.

The theory was that developing countries had a comparative advantage in primary products and so they should export these products.

Policy Environment Before the Transition to Rapid Growth

• Primary factors- Openness- Macroeconomic Stability- Labor Market Flexibility- Education Policies

• Secondary factors- Initial Conditions- Sector Policies

The Asian Growth Miracle

• The first factor in the primary strategy was outward looking policies and emphasis on exports and acquisition of foreign technology.

Silk Factory, China

Primary Factors-Openness

• First, some industrial capability was built up by focusing on import substitution in industries with ties to agriculture - footwear, food processing and textiles.

• Second, after some years, industrial policy shifted to promoting external markets.

Primary Factors-Openness

• In Southeast Asia, the focus was also put on rubber, sugar, coconut and palm oil products as well as some specialized textile products such as silk.

• Slowly the emphasis shifted toward labor intensive industries that were not necessarily tied to the agricultural base such as electronics assembly and apparel.

Primary Factors-Openness

• The shift from import substitution to export promotion was led by a shift in the trade regime so that there were lower tariff rates on exports and imports.

Primary Factors-Openness

• Transformation to labor intensive export oriented industry was supported by flow of foreign direct investment – initially from Japan and the US, particularly in Korea, Taiwan and the Philippines.

• Later the volume increased and more flows began coming in from Europe.

Primary Factors-Openness

Strategies to improve Openness:• Foreign technology acquired by buying from foreign

companies under license.• By copying it without license – sometimes legally and

sometimes not.• By entering into joint ventures (FDI).

• East Asia (Korea, Japan, Taiwan) by and large followed the first route while Southeast Asia followed the second.

Primary Factors-Openness

• The second set of primary factors focused on the importance of macroeconomic policies and the role of the government.

Primary Factors-Macroeconomic Stability

• There was a lot of government intervention in the industrial and financial sectors in some countries and little in others.

• What was important was the efficiency and incorruptibility of the bureaucracy.

Primary Factors-Macroeconomic Stability

• In the Philippines, policy environments were similar to those in the successful countries but growth was slowed by other factors such as corruption, lack of political will, corruption and domestic unrest.

Primary Factors-Macroeconomic Stability

• The third set of primary factors focused on education and labor productivity.

• As stressed by the new growth theories, education played a critical role in both the transition to an export led growth strategy and to the ability to sustain it.

• By 2000, some of the educational advantages of Asia had began to erode.

Primary Factors-Education and Labour Productivity

• The conclusion is that labor market flexibility has to be considered along with education.

• The miracles economies did not have strong unions until recently (Korea) and weak minimum wage legislation.

• Mobility from rural to urban is also high.

Primary Factors-Education and Labour Productivity

• Initial conditions played a part in the success of the miracle conditions.

• Land, income and wealth distribution in the miracle economies were generally more even than in other countries and regions.

• Average educational attainment was high at the miracle economies.

Secondary Factors-Differences in Initial Conditions

• Sector policies were influential to the growth of the miracle economies.

• Agricultural sector policies were not particularly onerous.

• Industrial policies were benign and competition flourished in most countries.

• High levels and growth rates of savings and investment in miracle economies.

Secondary Factors-Sector Policy