15 The Asian Miracle and the Asian Crisis
INTRODUCTION
THE CHARACTERISTICS OF THE MIRACLE
Economic variables are often highly correlated and a difficult problem is to identify cause
and effect. To one observer, for example, high savings cause high investment and
therefore rising incomes, while to another rising incomes have been the consequence
rather than the cause of rapid growth. Standard statistical tests provide some help but will
not give unambiguous answers. In this section we will identify the characteristics of the
“miracle” and leave until later an examination of the extent to which this is attributable to
policy and institutional factors.
High and Persistent Economic Growth
Growth with Increasing Equality
A Rapid Demographic Transition
A Rapid Accumulation of Human Capital
Sharp and Sustained Increases in Savings Rates
ECONOMIC FEATURES OF THE MIRACLE
A High Rate of Private Investment
Providing Access to Capital.
Directed Credit.
Development Bank
The Limited Role of Stock and Bond Markets.
Tax Policies.
Low Capital Goods Prices.
Bounding Risks
Controls on the Export of Capital
Repression of Interest Rates.
Export Growth
High Labor Productivity Growth
THE DEBATE OVER THE MIRACLE
The Market, or Neoclassical, Explanation
East Asia’s success is due to the similar rewards for selling in the domestic and foreign markets.
Because variation of incentives across sectors, as measured by the effective rate of protection of value
added, has been limited, inputs have flowed to sectors roughly on the basis of static comparative
advantage, and international competition has provided an impetus for cost discipline and technological
upgrading. Traded inputs have been made available to exporters at international prices, and exporters
have faced an international price regime in making their decisions. Finally, factor markets have been
roughly competitive, so positive real rates of interest have prevailed, and there has been an absence of
duality in the wage structure by size of firm or sector of production. 1
The Revisionist Critique
The “Market Friendly” Approach
The market friendly approach captures important aspects of East Asia’s success. These economies are
stable macroeconomically, have high shares of international trade in GDP, invest heavily in people, and
have strong competition among firms. But the characteristics are the outcome of many different policy
instruments. And the instruments chosen particularly in the north-east HPAEs, Japan, Korea, Taiwan,
China, sometimes included extensive government intervention in markets to guide private sector
resource allocation.2
Augmenting the Market through Competition.
INSULATING THE BUREAUCRACY.
The Role of Trade.
The restriction on imports and foreign direct investment [into] Japan was probably the most important
policy until the early 1970s (as regards innovation). Restricting the growing Japanese market, already
the second largest in the capitalist world in the late 1960s, to the Japanese firms who were competing
intensively among themselves gave a strong incentive to invest in plants, equipment and R&D. 3
THE SUSTAINABILITY OF THE MIRACLE
First, factor accumulation has been much more important than total
factor productivity growth, especially in comparison to earlier epochs of
rapid catch-up growth in western Europe and Japan; nonetheless,
1
2
See World Bank, The Asian Miracle, 82.
See World Bank, The Asian Miracle, 85.
Rodrik, Dani, “King Kong Meets Godzilla: The World Bank and the East Asian Miracle,” in Miracle or Design?
Lessons from the East Asian Experience, ed. Albert Fishlow et al. (Washington, D.C.: Overseas Development Council).
3
productivity performance has been stronger than has been allowed by
critics of the east Asian experience. Second, a temporary demographic
advantage of rising labor force participation has given these economies
an added boost to economic growth during recent decades. Third,
development has taken place rapidly from an initial position of economic
backwardness, which has generated its own legacy of financial and other
institutions4.
What caused the crisis?
4
Crafts, Nicholas, “East Asian Growth: Before and After the Crisis,” IMF, 1998, WP/98/137.
Policy response to the crisis
Of course, not everyone agrees with the international community's
approach of trying to cushion the effects of such crises. Some say that it
would be better simply to let the chips fall where they may, arguing that to
come to the assistance of countries in crisis will only encourage more
reckless behavior on the part of borrowers and lenders. I do not share the
view that we should step aside in these cases. To begin with, the notion
that the availability of IMF programs encourages reckless behavior by
countries is far-fetched: no country would deliberately court such a crisis
even if it thought international assistance would be forthcoming. The
economic, financial, social, and political pain is simply too great; nor do
countries show any great desire to enter IMF programs unless they
absolutely have to5.
The second criticism is that the fiscal and monetary policies urged on the governments in
the region contributed to the crisis by causing a shop drop in demand and creating more
economic contraction, bankruptcies and unemployment. In a potentially recessionary
situation, the IMF’s critics maintain, steps should be taken to bolster demand – not to
reduce it.
Again Fischer has articulated the IMF position. Other observers have
advocated more expansionary fiscal programs to offset the inevitable
slowdown in economic growth. The balance here is a fine one. As
already noted, at the outset of the crisis, countries need to firm their
fiscal positions, to deal both with the future costs of financial
restructuring and--depending on the balance of payments situation--the
need to reduce the current account deficit. Beyond that, if the economic
situation worsens, the IMF generally agrees with the country to let
automatic stabilizers work and the deficit to widen somewhat. However,
we cannot remain indifferent to the level of the fiscal deficit, particularly
since a country in crisis typically has only limited access to borrowing
and since the alternative of printing money would be potentially
disastrous in these circumstances.
The Aftermath
As noted above the long term effect of the crisis has been less than was feared at the time,
an especially surprising outcome when viewed against the problems of the European and
US economies during 2000-2002. These difficulties included a major US market
collapse and a sharp fall in all kinds of information technology related equipment that
dealt a sharp blow to the economies of Korea and Taiwan. Growth has been positive for
5 The Asian Crisis: A View from the IMF, Address by Stanley Fischer, First Deputy Managing Director of the International Monetary
Fund at the Midwinter Conference of the Bankers' Association for Foreign Trade, Washington, D.C., January 22, 1998
almost every country in the region for every year except 2001. The exceptions have been
Taiwan and Singapore in 2001 and Japan in 1998, 2001 and 2002,
Foreign investment inflows are now positive into the region, although (except for China)
they are running at about the half that they were in 1996 and 1997. The economies do
still face major problems. The non-productive loans (NPLs) on the still considerable; in
Indonesia in early 2002, some 50% were non performing with almost 30% in Thailand.
Nevertheless, it can be said that the road to recovery6 has been started down. The
question is whether the developmental model should change, and whether this will occur
as natural consequence of the crisis or will require policy intervention.
6
East Asia: The Road to Recovery, Washington : World Bank, 1998
THE LESSONS OF THE MIRACLE
1. Macroeconomic stability is an important prerequisite for sustained economic expansion.
Growth is not possible in a hyperinflationary situation, or for that matter in one of widely
fluctuating demand. However, single-digit inflation is not a necessity; moderately high
inflation rates have been associated with rapid growth in South Korea and elsewhere.
2. Government action is essential in establishing the preconditions of growth, especially in
transportation, communication, and education. As Patrick found in Japan, macroindustrial
policy creating infrastructure and human capital does work.
3. The record of microeconomic industrial policy has been mixed. Some apparent successes
have been counterweighed by some very notable failures. Problems are more likely the
closer the economy gets to the cutting edge of new technology. In the early stages of
industrialization it is easier to predict the most appropriate sectors to favor, since changes
in the industrial structure can follow an established pattern of comparative advantage. In
later phases of growth it becomes harder to “pick winners,” as the Japanese experience
with inter alia HDTV shows.
4. Reliance on directed credit may have adverse consequences for the banking sector, which
can be left with a portfolio of losers. If they are not guided by bureaucrats, bankers will
pay care to assess the risks associated with a loan. The direction of credit by planning
agencies distorts the allocative efficiency of financial markets and removes discretion from
the bankers. Being forced to lend to politicians’ favorites, rather than the most potentially
productive firms, can upset the stability of the financial sector, as experiences in South
Korea and Japan showed in the Asian financial crisis.
5. Education expenditure is generally worthwhile, but is most effective when it is directed
toward elementary education. Raising the literacy rate is cheap relative to producing a
university graduate, and the greatest gains in workforce productivity are provided by a
literate workforce.
6. The probity of financial markets is important. Individuals are less likely to save if they lack
faith in financial intermediaries. Somewhat surprisingly the Asian financial crisis of 1997–
1998 has not had a profound affect on personal saving.
7. Stock markets have not been an important element in the initial growth and development
of Asian economies. Equity markets in early stages of development have tended to be
shallow, rather volatile, and more significant in the redistribution of wealth than in the
creation of it. Even in the most developed of the Asian economies, Japan, the stock market
has been manipulated and has been a potential source of economic instability.
8. Foreign direct investment has not been a dominant factor in Asian growth. Japan’s success
was financed to a very large degree out of domestic saving; in Korea loans from
multilateral agencies were a substantial factor. In Indonesia and Singapore foreign
investment has been more vital. In fact, the greater the reliance on foreign finance the
more vulnerable was an economy to the panic and capital outflow of the crisi years.
9. Competitions—for example, those predicated on export performance—can be useful ways
to augment the market, but only if they are well designed and disinterestedly administered.
Recent problems in Korea concerning the dominance of few major groups calls into
question how well Korean “competitions” helped the long-run growth of the economy. It is
possible that the reliance on such competitions encouraged the over expansion, and
subsequent collapse, of the dominant chaebol.
10. Well-paid and respected civil servants lower the probability of corruption. For a long time
the image of incorruptible and very competent civil servants was a vaunted characteristic
of the Asian model. American businesspeople, deeply mistrustful of government officials
at home, attributed farseeing powers to those of Japan and Korea. However, more
systematic studies of the Asian experience have revealed a much higher degree of
corruption and a lower degree of competence, than once thought the case.
The Lesson of the Crisis
. . . despite its favorable attributes, such as effective
mechanisms for technology transfer, outward orientation, and high
savings, investment and human capital accumulation.there are downsides
to the developmental state model, including a tendency to wasteful
investment and the difficulties that it may pose for the transition to
freer capital markets. These last are more attractive after the initial phase
of development when coordination problems loom less large and
diminishing returns are a bigger concern. Because the greatest successes
of this managed development have come in the context of export-oriented
manufacturing and industrialization, [I conclude] that an alternate model
may be more appealing in the coming years of de-industrialization7.
7
Crafts, Nicholas, “East Asian Growth: Before and After the Crisis,” IMF, 1998, WP/98/137.