Recipe of East Asian Development

By: Bikal Dhungel

East Asian countries like Taiwan, South Korea, Malaysia, Singapore are example for the rest of the world as most successful transforming economies. From agrar society with only few industries after World War II, they are technological leaders today, not in all products but they have secured their places as producers of some of the high-tech goods. It took less than 40 years to develop in that scale. Other countries in Asia and Africa have tried to learn from them, however unsuccessfully. Their recipe of advanced economic development doesnt seem simple. The economic policies they took are straightforward but the evolutionary policies in different stage are not clear enough. This is where most countries that try to adapt their policies fail.

2 months ago, Singapore's father of nation Lee kuan Yew died. He is regarded as the man behind Singapore's success. When he died, newspapers around the world started publishing more about him, not much personal but more about his policies and how he led Singapore to have one of the highest per capita income in the world. One graph, that was shown everywhere became the icon of Lee Kuan Yew's achievement. It was a simple time series graph that said, in the year Lee kuan Yew took the role of head of head, Singapore's per capita income was 400 dollars and when we left, it was over 50,000 dollars. It says everything that is needed to say. Many countries in Africa and Asia had leaders who ruled for same period but they became poorer than 40 years ago. How come ? What did East Asia do to make this happen ? There is no standard measures what all countries did. They took slightly different policies but they also have many things in common.

The process of development generally goes as follows: A country has subsistence farming culture, they are dependent on external support in times of need and income remains low. As they develop, they graduate into simple manufacturing, mostly under foreign guidance and service sector like the establishment of schools and offices will start to develop. In this third stage, supporting industries will grow, they will focus on learning in order to increase productivity. This will pressure the government to provide infra-structure but as the tax revenue increases, this will also be supplied. In the next stage, technology will develop, firms will master management skills, they start to train the workers, importance of learning increases and will start to produce high quality goods. Up to this stage, there will be a large rural to urban migration. Subsistence farmers migrate to work in industries. Due to productivity growth and the employment of better technology in agriculture, crop yield will increase and farmers save their time which they can use by working in industries. The agricultural production will grow further but their share of GDP will decrease as manufacturing and service sector will grow. Until the middle of this stage, there will be some deteriorating effect on environment because of high production but as production becomes efficient and clean, environmental effects will gradually decrease. Also the citizens start to demand better quality air or environmental protection. Real world example of this stage is China which ignored the environmental consequences of its growth first but after the events like Shanghai fogs and pollution, the state brought tough environmental law. The final stage of development process is when a country is technological leader and innovation hub. Established firms invest heavily in innovation and technology, the government supports in the process and they will lead the world markets for high-tech products. The US, Germany and few other countries have secured their place in this stage and as long as they continue their quest for efficiency and technological advancement, they will remain technological leaders. This stage is also highly competitive and not all sectors of a country will be a leader nor all the places. There will be high disparity among places. For example, the per capita income of the poorest US state Mississippi has an average per capita income equivalent of Spain whereas Alaska has twice the income. In Germany, the southern states are much richer than eastern states.

The process of development sounds simple in theory but the real challenge lies on how to graduate from one stage to the other how to adapt with changing situation, how to bring new feasible policies and how to maintain the growth. This is the point where we have lot to learn from East Asia. When countries are in the first stage, subsistence farming economy, they need a ladder to climb up. To find that ladder is challenging. Once the ladder is there, you climb upwards. So, what east Asia teaches is, 'get the fundamentals right'. But what are the fundamentals ? Fundamentals are for example universal education and healthcare, stable macroeconomic situation, effective financial institutions, high human capital, genuine and pro farmer agriculture, effective market and pricing policy for agricultural products, openness to foreign technology, growth oriented development policy, property rights law etc. If any of these points is not functioning well, first it should be sorted out. East Asian countries worked few years in it, then they focused on individual sectors. They reformed institutions and government bureaucracy. Civil service was made of high quality and efficient, mechanisms to monitor them were established, and technological elements were brought in. Institutions are the rule makers of any society, they are the referees of an economy, when they are well functioning, an economy can function well. When they fail, the economy fails. Once they are efficient and highly effective, policies they make will be effective. The focus after institution turned to industrial policy. Within industrial policy, they reformed trade policy, technology policy, financial policy and competition policy. Trade was not fully free. Although free trade is highly correlated with higher growth rate and development, any company needs time to grow and develop competitiveness before it can compete with foreign firms. In the initial stage, they need protection. Take a real life example. We live in a country where all of us are uneducated. But we need skilled people to run our government. So, when we allow foreigners to come to our country for free, they will continue coming and ruling us and we cannot compete with them because they were well educated than us. So, in this case, if our country wants to be ruled by its own citizen, first of all it should invest in our education, train us well and stop the foreigners to come so that we can practice working in the government until we develop these capabilities. Only then we can compete with them. This is the same in Trade Policy. First the country should protect its infant industries until the industries grow. However, if the industries fail to achieve efficiency, this support should be pulled out and the fund should be directed towards the sector that prove to be efficient. Few east asian countries had free trade all the time but few had protectionist policies that eventually vanished towards free trade. Technology policy was pro innovation. Technological advances got government support. Financial policy was more focused on providing the financial access to those who could not borrow. Financial industry was differentiated. Big banks helped big industries whereas small cooperatives helped small industries or small scale entrepreneurs. Moreover, deposit rates while borrowing was kept low so that more people have access to finance but there was also borrowing ceiling to avoid the misuse. Competition was fair, there was no distortions, cartels were discouraged and credit was also directed to sectors that were effective.

In addition, there was export push, there was selective promotion, and the economy was neither fully market oriented nor centrally planned. It was a mixed form. Government intervened when it was totally necessary and left it to the market when it was functioning properly. Investment in education was not only higher in number but also in quality. The curriculum was reformed, the policy of hiring and training teachers was reformed. Teaching became the profession where best minds were recruited and best practices were adopted from around the world.

To conclude, how east Asia developed was: get the basics right, intervene in the economy if it is necessary, leave it to the market otherwise, reform the institutions to make the rule of the game, create the framework for private investment, let the firms make profit in order to give them incentive, focus on education in all level, improve the quality of education and encourage specialized education and training, support rural agriculture so that it can support urban industrialization, be open to foreign technology, encourage high-tech foreign firms who are the sources of knowledge, support specific industries, help those having problems but also pull out the fund if it is not making progress over time, bring a good financial policy, supervise the financial institution tightly, encourage to launch innovative financial instruments, manage the macro economy better, maintain social peace, work for social and political inclusion, point and remove the elements of culture that are against modernization and development etc.

It is not that countries didnt try to copy these policies, they did but it never worked well as it did in east Asia. One reason why it didnt work might be because the people were not playing the rule. Development is not a one way street. Government brings policies but it is upon the people to carry it on. When the control mechanism is corrupt and people misuse the system, it will be harder for rest of the society to go further and when there are many such loopholes, the whole country will fail to develop. Looking at two examples, one from China and one from India, we can observe that Chinese growth is more rapid than of India. Both of them have fantastic policies, with experts ruling in policy making places but the reason why China grew so fast is its power of implementation. When China wants to build a highway, it builds it. Nobody can protest. The government is a form of authoritarian state that restricts the freedom of movement within the country. One needs a work contract to migrate from rural to urban area. This makes easier to plan and intervene. In India however, when a road is to be built, there will be protests by the affected ones. They have right to go against the government. India is a democratic state, so it cannot restrict the freedom of movement. So it is a messy country. When population growth was high, China brought one child policy which is totally impossible in India. As the state is authoritarian, corruption in China is lower than in India as people fear the persecution more than they do in India and policies will be implemented faster in China than in India. This has both advantages as well as disadvantages. What I wanted to say by this example is, development is not one sided process, people should also be ready to take it, support in this process and play their part.

Despite all of this, there was a big financial crisis in East Asia in 1997 that marked the end of growth and several government leaders stepped down. The crisis recovered slowly but still, in comparison to 40 years earlier, they had a giant leap forward. Singapore is a global financial hub, Taiwan has established itself as exporter of high tech goods. Malaysian skyline doesnt look less attractive than of the city of London and South Korea is the manufacturer of world renowned brands like Hyundai, Samsung, Kia Motors, LG and Daewoo. The most important lesson East Asia gave to the rest of the world is, we cannot always blame Colonialism, Geography and other factors that are restricting our economic growth, if there is a will, if the government is strongly committed to development, if it is genuinely pro growth and if it is ready to sacrifice its life for the life of its children, in less than a generation, a country can increase its income by more than twenty fold and presents itself as a technological leader.