|
|
|
National S&T Development Policy Studies
Rethinking of the Economic Development Paradigm: Lessons from Japan and the East Asian NIEs
Joint SPF/CMT Cooperation on "Rethinking of the Economic Development Paradigm: Lessons from Japan and the East Asian NIEs"
The cooperation took roots following a brainstorming session comprising of researchers from the Asian NIEs in November, 1996. For a long time, the dominant paradigms explaining the dynamic economic growth of East Asiahave come mainly from the West. In 1993, the World Bank publisheda report entitled "The East Asian Miracle" suggested that while fundamentalbasic economic principles were sound, the economic growth in the regionwas nothing more than a miracle. Somehow, this group of countries was able to perform unusually good macroeconomics management and maintain stability, which provided the essential framework for private investment that propelled their economic growth. In his book "Myth of East Asian Miracles", Western academic Paul Krugman argued that the East Asian economic growth will not sustain. This argument is based on his empirical studies, which showed that total factor productivity growth in the region, particularly for Singapore, has been negative, or at best near zero. His studies suggested that economic growth has basically been achieved through factor input expansion and as such, factor expansion will eventually ceased and so will economic growth. It is the objective of this project to give the Asian perspective and interpretation of its development experience and to engage the West in a constructive debate on the subject.
Original Concept Paper for "Rethinking the Development Paradigm: Lessons from Japan and the East Asian NIEs"
(January 1997)
Dr Ng Chee Yuen
Senior Visiting Fellow
Dr Wong Poh Kam
Director, Centre for Management of Technology Faculty of Business Administration
National University of Singapore
Introduction: The Ascendancy of the "Free-Market, Minimalist State" Development Paradigm
Despite the successful economic development experiences of the more industrialized East Asian economies (Japan, Taiwan, South Korea, Singapore, Hong Kong), the dominant paradigm for explaining these experiences comes not from sindigenous intellectuals in the East Asian countries, but from mainstream Western neoclassical development economics. We can characterize this dominant paradigm as "Free market, Minimalist State". The main thrusts of this paradigm can be best understood in terms of the arguments made in two influential works : "The East Asian Miracle" of the World Bank, and the "Myth of East Asian Miracle" by Paul Krugman.
The "East Asian Miracle" (EAM) report basically argues that the high growth performance of East Asian countries can be explained by a core of common factors such as high savings rate, high investment in human capital,prudent macroeconomic policy, political stability and protection of property rights, and openness to world trade and investment. Beyond getting these "fundamentals" right, the report downplays the role of other forms of state intervention, arguing either that such interventions were absent,or where they have been significant, the results have been generally more failures than successes. The underlying assumption is that markets will naturally emerge if the state gets out of the way through liberalization. While acknowledging that there may be instances of market failure, the report generally cautions against state intervention as it may lead "state failure" that outweighs the market failure it is designed to cure. In particular, the report is generally critical of industrial policy designed to promote the development of particular industries.
The "Myth of East Asian Miracles" (MEAM) by Paul Krugman, drawing upon empirical work by Young (1992, 1993) and Lau (1993) utilizing neoclassical production function estimation methodology, argues that the high GDP growth performances of the East Asian NIEs is nothing remarkable, since they could be accounted for by expansion of inputs, with little or no productivity growth through technical progress (i.e. total factor productivity (TFP) is a negligible source of growth in these economies). The paper therefore concludes that the historically high but "TFP-less" growth cannot be sustained in the future (analogy to the unsustainable growth of Russia is drawn). By implications, the paper also seems to suggest that whatever distinctive institutional or cultural factors these economies have developed could not have been superior to those of the advanced Western nations, since they resulted in only input-driven growth, whereas the latter have produced consistently high TFP growth. Thus, while EAM sees useful lessons from the high East Asian economic growth experience for other developing economies (in terms of how they "get the fundamentals right"), MEAM casts doubt even on that.
One consequence of the ascendancy of the free market, minimalist state paradigm is the growing popularity of the privatization school of thought. Privatization has gained significant momentum since the late 1980s, not only in East Asia, but also among developed economies. Everywhere, downsizing government is in vogue. It is now widely believed that most state interventions and state involvement in economic activities has been grossly ineffective and inefficient, even in advanced countries, let alone developing ones. From public utilities to even customs revenue collection, an increasing number of public services are thought to be more efficiently run when they are turned over to private operators, or to private market financing mechanisms (e.g. BOT). While the experiences of privatization have indeed been generally positive so far whenever they were coupled with increased competition, this hasled to an increasing call for an even wider range of public services to be privatized, including activities that were previously thought to involve significant market failures (e.g. public health, R&D), on the grounds that state failures have generally been worse than whatever market failures they were supposed to cure. By extension, the privatization school of thought has also led to increasing attack on state regulations of all kinds (even though privatization may in fact requires new regulatory frameworks to be established to work well) in the name of creating freer markets.
While the above three strands of thoughts have all confirmed the supremacy of the free market capitalist system in general, the recent problems encountered by the Japanese, German and French economies have led to a concomitant ascendancy of the claim of superiority of the American model of capitalist institutions in particular (the persistent twin deficit problems notwithstanding). Free-market economics proponents (as typified by the Economist magazine) argue that the poor economic performance of these other advanced industrial economies in recent years are the cumulative results of years of too much state intervention in the labour and capital markets when compared to the US. They therefore advocate that the only way for these economies to improve their competitiveness is to ditch their old state interventionist policies, and related social institutions, in favour of the free-market institutions of the US.
In the US, the political counterpart of the ascendancy of the free-market enterprise ideology is the argument that the Western model of parliamentary democracy and emphasis on individual freedom is an essential part of the free market enterprise system. The US establishment is particularly keen that the Asian NIEs adopt not only free-market liberalization policies but also the political institutions of the West. They have been gratified by the movements of Korea and Taiwan towards their political models, but were particularly irked by Singapore's political leadership's perceived "defiance" in this regard. In particular, they regard with suspicion the idea of Eastern cultural values as more supportive of a communitarian form of political ideology, and dismiss such arguments as a disguised form of soft authoritarian control by paternalistic leaders.
In summary, the prevailing Western intellectual establishment view in the West seems to be that the free market model with minimalist state intervention is the universally applicable model for economic development. All successful economic development, whether of the East Asian NIEs or of the advanced countries, must be based on it. The additional political argument is that the adoption of the free market model must (eventually) involve the adoption of Western political institutions and individual liberal ideology as well.
The implications of the above "free-market, minimalist state" paradigm are obvious: firstly, all developing countries should adopt this approach to economic development to achieve industrial take-off comparable to that of the East Asian NIEs, while the former socialist states must similarly move towards this approach to achieve their transition to modern capitalist economies; secondly, the East Asian NIEs themselves must liberalize much more, both economically and politically, to become advanced industrial economies; and thirdly, advanced countries like Japan and Germany must similarly ditch their own brand of capitalism and completely liberalize their labour and financial markets the way the US has done.
Another potential implication is that all developing countries, regardless of their level of development, should be expected to pursue a substantially similar degree of liberalization in future WTO multilateral negotiations. Indeed, the US administration has demonstrated an increasing demand for substantial reciprocity from developing countries in recent trade liberalization negotiations.
Questioning the Dominant Paradigm
While we believe that there is much truth in the free-market enterprise, minimalist state paradigm, especially for more advanced economies, we are of the conviction that the paradigm is not universally applicable to all stages of economic development, nor to all economies of whatever size. As some Western scholars have already observed, several key arguments of EAM against industrial policy are empirically weak and involved the use of questionable methodologies (see e.g. Rodrik(1994), Amsden(1995), Wade(1994), Lall(1995)). Recent empirical work (e.g. Bosworth, Chenand Collins(1996)) have also undermined Krugman's assertions about TFP-less growth in the four East Asian NIEs. More fundamentally, however, we believe that some of the underlying assumptions of the free-market, minimalist state paradigm -- neoclassical development economics and western liberal political theory -- to be flawed when applied to the contexts of many developing countries.They certainly did not apply in the contexts that Japan and the East Asian NIEs found themselves before their industrial take-off.
We believe that our skepticism towards the free enterprise, minimalist state paradigm for development is widely shared by many scholars from Japan and the four East Asian NIEs. Indeed, there has been useful individual effort at taking issues with specific theoretical arguments or empirical basis in the EAM and MEAM in recent years (e.g. Aoki et.al.(1996), Ohno(1996),Kang(1996), Goh and Low(1996)). However, there has not been a concerted effort to pool the collective wisdom of indigenous scholars from Japan and the four East Asian NIEs to provide a comprehensive response to challenge the dominant paradigm. We therefore believe that it is timely for Sasakawa Peace Foundation to provide the catalytic leadership to initiate a joint research project that brings together indigenous scholars from Japan and the four Asian NIEs to pursue such a collective endeavour.We believe that, with the leadership of SPF, the output of the project can form the basis for an alternative view of the East Asian development experience that can be widely disseminated to, and debated among, Western scholars and policy makers in international development agencies such as the World Bank.
We believe that the key issues that the research project should address include the following:
a) Re-examination of the theoretical assumptions of the free market, minimalist state paradigm for developing economies
As pointed out by Ohno(1996), the free-market, minimalist state paradigm for economic development rests upon two implicit but fundamental theoretical assumptions: (1) markets will emerge naturally if the state gets out of the way through liberalization; (2) western liberal model of political institutions based on parliamentary representative democracy is universally applicable irrespective of the stage of development of society.
A key focus of the research project is to question these two assumptions, both theoretically and in the light of the experience of Japan and the four Asian NIEs. In particular, the research project should build upon the recent work of Aoki et.al.(1996), Ohno(1996) and others to provide an alternative emerging institutional economics approach that: (1) recognizes the potential "underdevelopment of the market economy";, i.e. markets are socially constructed and hence may not develop naturally nor function efficiently through liberalization alone; (2) recognizes the potential market-enhancing role of the state, i.e. the role of the state and market needs not be substitutional, but mutually enhancing in many cases; (3) recognizes the importance of social and cultural institutions unique to each society that shape economic behaviour (such as high savings rate, high investment in education, etc.) over and above state policies; and (4) recognizes the importance of political institutions and leadership that provide the stable environment and long-term development vision to initiate and guide the development process; and that other forms of political institutions than the western liberal model may be more effective in providing such stability conditions and forging concensus on such long-term vision.
b) Re-examination of the empirical arguments against industrial policy in the EAM
By emphasizing the common factors for high economic growth among East Asian economies, we believe that the "East Asian Miracle" of the World Bank and its derivative literatures have tended to over-simplify the diverse experiences of these economies. In particular, the EAM dismisses the contributing role of industrial policy in the four Asian NIEs on questionable empirical grounds. Some of these empirical weaknesses have already been pointed out by western scholars. For example, contrary to assertion to the contrary, Wade (1990) and Amsden(1994) have pointed out that the state in Japan, Korea, Taiwan and Singapore did intervene significantly in various stages of their economic development in pursuit of specific industrial policies, and moreover done so in quite diverse manners, while Rodrik(1994) showed the glaring weaknesses in the impact analysis of industrial policies in the EAM report. Although Japan and Korea have their share of industrial policy failures, it is difficult to explain how they could have developed their highly competitive industries such as automobile, steel, shipbuilding, semiconductors and industrial machine tools without substantial state intervention. Similarly, Singapore's and Taiwan's successes in the electronics and IT industries also owe much to state direction, though through policies which are quite different from one another (Wong,1995) and from Japan and South Korea.
There is thus a need for this project build upon these existing critiques to examine in greater detail the specific industrial policies pursued by Japan and each of the three East Asian NIEs (Korea, Taiwan, Singapore)that accounted for their relative successes or failures. The contrasting experience of Hong Kong, which did not pursue any industrial policy, can be illuminating in comparison with the industrial development experience of the other NIEs.
To make the contributions of the project more concrete, we suggest that there should be specific industry studies for each of the five economies. The micro-economic industry case studies will serve to highlight the specific contributions of state policies as well as social economic institutional factors. The individual industry case studies should address issues such as:
- Why did intervention not degenerate into rent-seeking behaviour and the capture of the state by private interest groups ?
- How did the selective interventions critically affect the pace and content of development of the industry concerned ?
- Did such policies overcome market failures to promote technological deepening and entry into technologically more advanced products in the industries concerned ?
- Would these countries have performed so credibly in the particular industries the absence of intervention?
- Did flexibility in changing course and specific checks contain otherwise excessive costs of interventions?
c) Re-examination of the Role of Technological Capability Development in the "Industrial Catch-Up" of Japan and the Asian NIEs
An important aspect of industrial policy is the acquisition of technological capabilities. Indeed, we believe that a crucial difference between the more advanced East Asian economies of Japan and the East Asian NIEs and other high-growth East Asian countries like Malaysia, Indonesia and Thailand has been the pace and depth of development of technological capabilities. We believe that state intervention policies have been critical to the faster pace of accumulation of technological know-how in the more advanced East Asian economies. This is an aspect that has not been given sufficient attention in the World Bank study. While Japan provided an initial model for the East Asian NIEs, there is increasing evidence that Taiwan, Singapore and Korea actually pursued quite different models of rapid technological acquisition (Hobday, 1995). We believe that a re-examination of the specific processes of technology development in Japan and the East Asian NIEs would yield new insights on the role of the state in accelerating industrial catch-up. Such a re-examination of the process of technology acquisition in the context of the East Asian NIEs is also important because the Krugman thesis would seem to imply that the high growth of the East Asian NIEs were achieved without much technological innovation, and hence not different from other high growth East Asian countries like Malaysia, Thailand and Indonesia.
Besides providing a conceptual framework for examining the diverse technological learning processes of Japan and the four Asian NIEs, the research project will seek to illuminate these processes through the specific industry case studies mentioned in (b) above. We believe that findings from this part of the project will provide useful lessons for other near NIEs like Malaysia, Thailand and Indonesia which are now seeking to make similar transition into high-tech industrialization that the four NIEs have already made.
d) Lessons from the East Asian experience on the Role of the State in the "Late-Industrializing" Context
Based on the new theoretical and empirical insights generated from the above, the project should seek to address the kind of lessons that can be drawn from the East Asian experience for other developing countries which are at different stages of economic development. We believe that the findings based on our research approach should point to a different set of lessons for other developing countries than the ones conventionally prescribed by the EAM. In particular, we believe that the paradigm of minimalist state may be more applicable to the advanced economies where a strong and diverse private sector already exists, and where enabling market institutions, often of a self-regulating nature, have already been well entrenched. In contrast, in many developing countries, this is not the case, and thus a case for a stronger presence of the state. It is true that, in many developing countries, pervasive intervention by the state has in fact been the cause of why the private sector is so weak. What is at issue, we believe, however, is not whether there should be an important role of the state, but what kind of role. We believe that our interpretation of the experience of Japan and the East Asian NIEs based on the research of this project should suggest that there is a strong state role in building social institutions, in providing the framework for market development, in promoting industrial and technological development through industrial policies, and in enhancing the working of markets through policies that take into consideration the specific socio-cultural contexts of each country. We believe that this stronger state role is necessary for countries in the "late-industrializing" context (Amsden, 1992), although they may become less so when the countries approach the technological frontiers. The late-industrializing context implies that technological catch-up through industry and technology targeting is more feasible and less risky, because one can learn from the experience of other more advanced countries. It is also necessary because of the increasingly competitive global environment, which requires countries to seek specialization and to develop core competencies at a much earlier stage of industrialization than was necessary for the advanced countries and the Asian NIEs historically.
The implications of our interpretation of the role of the state in late-industrializing economies for ODA policies should be be explored.
e) Re-examination of The Necessary Coupling of the Anglo-Saxon Political Institutional Order with the Free-Market Enterprise System
Last, but not least, the research project should try to address the kind of political institutional order that is appropriate for promoting economic development among developing countries. At the heart of the recent debates concerning the communitarian value of Asian society as articulated by the political leadership of Singapore vs. the neo-liberal view of the American press is the issue whether high economic growth performance and free-market enterprise principles can be sustained without necessarily adopting wholesale the political institutional order advocated by the US liberal establishment. To enrich this debate, it would be useful for the views of Japanese, Korean and Taiwanese scholars to be incorporated in the light of our re-examination of the development experiences of these economies.
In summary, the research project seeks to bring together indigenous scholars from Japan and the four Asian NIEs to develop an alternative interpretation of their economic development experience that recognizes the role of the state in overcoming underdevelopment of markets and in enhancing the functioning of market institutions, and that suggests political institutional arrangements that may not necessarilty conform to the western conception of the state. The outputs of the collective efforts of the scholars from the different East Asian countries, we believe, will help to counter the excesses of the prevailing development paradigm, and lead to the formulation of ODA policies that are more relevant and beneficial for the developing countries.
Update of Concept Paper for the Project
(March,1998)
Several months after the commencement of our project, the financial turmoil in East Asia has unfolded with increasing ferocity. Of the five economies under study in our project, Korea has been engulfed in her worst debt crisis for the last four decades, while the gravity of the problems of the Japanese financial sector has become more obvious in recent months with a rising number of bankruptcies of major financial institutions. Although Taiwan, Hong Kong and Singapore have so far endured the recent financial turmoil much better than Korea and other South East Asian economies like Thailand, Indonesia and Malaysia, the overall sentiments among the international financial community towards East Asia as a whole have become extremely negative. An increasing number of Western analysts have trumpeted the end of the East Asian Miracle (e.g. the Economist recently wrote: "The rise of East Asia has ended"), or that it was all a mirage to begin with.
These developments notwithstanding, our project team continues to affirm the importance of the exercise we are engaging in. Indeed, we believe that the recent financial turmoil and economic set-backs encountered by many East Asian countries make it even more critical and timely that an objective re-assessment be made of the conventional explanations of the past economic success of East Asia in general and of the five countries under study in particular.
Firstly, far from destroying argument for any positive role of the state in East Asian industrial development (and hence confirming the validity of the neoclassical development paradigm), as many western analysts have claimed, the East Asian financial turmoil in recent months has actually helped in sharpening the contrast between what state policies had been positive, and what had not. In particular, we believe that there are still many valuable lessons in positive state intervention roles in industrial and technological development in the economies concerned, even though these are now clouded by the exposure of various state failures in other economic sectors, especially financial institutions and domestic sectors. It is thus important that a balanced and nuanced interpretation of the East Asian development experience be made, especially in the light of the current wave of extreme pessimism that tends to negate everything about East Asia.
Secondly, the fact that the four advanced NIEs (with the exception of Korea) have so far fared much better than the other "high-performance economies" (HPEs) (identified in the World Bank EAM book) supports our earlier contention that the industrial and technological development performance of these countries do set them apart from other Asian HPEs like Thailand, Indonesia and Thailand. Despite their financial sector woes, Japanese and Korean companies remain strong and competitive in a wide range of high-tech industries, and indeed, the weakening of their currencies vs. the US dollar will make them even more competitive in the future.
Thirdly, the ideological attack on the role of the state in East Asia and on so-called "Asian values" has intensified in the light of the setbacks of so many East Asian countries. Just as "Asian Values" have been uncritically and euphemistically used in the past to explain the success of East Asian development, "Asian Values" are now being seen as the primary cause of Asia's malaise -- corruption, bureaucratic incompetence, lack of transparency, etc. While there is much truth in such critiques, and indeed our country studies have been highlighting these aspects as well, we believe that the swing towards the negative may be going too far. In light of the prevailing, overly-negative sentiments, the project needs to re-consider how best to conduct the dissemination exercise effectively.
Last, but not least, arising from the first researchers' workshop in February, 1998, the research team recognizes the need to take a prospective view of the future challenges facing the East Asian countries in addition to the original historical focus of the project. In this regard, the project team recognizes the importance of taking into account the changed global environment (e.g. WTO framework, globalization of financial capital, impact of rapid change in information and communications technology) when examining the applicability of the East Asian development experience to other developing countries. Moreover, the project will pay more attention to drawing implications for future policy reforms in the respective countries as they seek to sustain their growth into the 21st century.
To take into account the latest developments, the project proposes to modify the original project activities proposed for the second year as follows:
1) To allow more time for the country research teams to extend and deepen their analysis and interpretation to take into account the developments in recent months. In particular, the research should highlight the implications for future industrial policy reforms in the respective countries, as well as the potential limits of replicating the past East Asian development experience in the changed global environment of the 21st century.
2) To assess the changing perceptions of East Asia by Western scholars, researchers and commentators in the light of the recent financial turmoil so as to better identify the best strategies for dissemination and dialogues with Western scholars.
|
