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East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence
Published online by Cambridge University Press: 13 June 2011
Abstract
Neoliberal economists say that growth is easy, provided the state does not obstruct the natural growth-inducing processes of a capitalist economy. They point to the success of South Korea and Taiwan as evidence that this proposition also holds for quite poor economies. Using chapters of Helen Hughes's edited volume by way of illustration, this article shows that the neoliberals ignore so much contrary evidence as to suggest that the neoliberal paradigm has entered a degenerative stage, like classical economics in the years before Keynes's breakthrough and like much Marxist writing of the 1970s.
Two recent books about East Asia offer ways forward. The one by Alice Amsden argues that Korea has done better than other developing countries because it has created a more powerful synergy between a state that aggressively steers market competition and large, diversified business groups whose firms focus strategically on production processes at the shop floor. In conditions of “late development” this synergy is the key to success. Stephan Haggard's book accepts the core economic mechanism of the neoliberals but argues that the choice between sensible export-oriented policies, as in East Asia, or unsensible secondary import-substitution policies, as in Latin America, is determined by a complex conjunction of international pressures, domestic coalitions, political institutions, and ideas.
Both books make important contributions to the debate. But they are weakened by not situating the experience of their case studies within an account of trends in the world system and by not addressing the question of what prevented massive “government failure” in market interventions in the East Asian cases. The last part of this paper takes a short step in this direction.
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References
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11 Director of the Resource Systems Institute at the East-West Center, formerly the chief economist of the Asian Development Bank.
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31 Wade (fn. 29, 1988), 35.
32 North Korea may show a similar reduction in this indicator of hardship, via central planning, and may have eliminated poverty in food and savings earlier. If so, these are important achievements. But the capacity of the North Korean economy to provide rising real wages and a diversified consumption bundle is much lower than that of South Korea; its political and civil rights are also far more attenuated, and the conditions of work in agriculture and industry probably are far worse.
33 Another good case is Pahl and Winkler's 1974 prediction that a system of corporatism would be established in Britain “by 1980.” See Pahl, R. and Winkler, J., “The Coming Cor-poratism,” New Society 10 (October 1974Google Scholar). It would be interesting to hear from Gittings, McCormack, Foster-Carter, and the others why they think their predictions for South Korea and North Korea turned out to be so wrong.
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39 Little formerly held a chair in economics at Oxford University.
40 Little, , “The Experience and Causes of Rapid Labour-intensive Development in Korea, Taiwan Province, Hong Kong and Singapore; and the Possibilities of Emulation,” in Lee, Eddy, ed., Export-led Industrialization and Development (Geneva: Asian Employment Programme, International Labour Organization, 1981)Google Scholar. For the role of the Korean government in credit allocation, see IIJones, LeroySaKong, , Government, Business and Entrepreneurship in Economic Development: The Korean Case (Cambridge: Harvard University Press, 1980)CrossRefGoogle Scholar.
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48 Zambia at independence in 1964 had all of twelve hundred high school graduates. In Botswana in 1965, the year before independence, thirteen students passed their O-level exams. Most sub-Sharan countries at independence were taken over by governments whose leadership group was comprised mainly of people with a primary school education or less. Compare East Asia; see Wade (fn. 17), 64, 190, 217–25. One should (as Krueger does not) link the question of the appropriate types and amounts of government intervention to the educational competence of the government. On the significance for Africa's growth of its debt burden, falling terms of trade, unstable exchange rates, falling aid, and agricultural policies and textile protection in the West, see, e.g., Hewitt, Adrian and Singer, Hans, “How to Foster Diversification, Not Dependence,” Africa Recovery 4 (October-December 1990), 36–39Google Scholar; and Helleiner, Gerald K., “Structural Adjustment and Long-Term Development in Sub-saharan Africa” (Paper for workshop on Alternative Development Strategies in Africa, Oxford, December 11–13, 1989)Google Scholar; and idem, , Sub-saharan Africa: From Crisis to Sustainable Growth (Washington D.C.: World Bank, 1989)Google Scholar. On the “weak government” hypothesis, see Migdal, Joel, Strong Societies and Weak States: State-Society Relations and State Capabilities in Third World (Princeton: Princeton University Press, 1986)Google Scholar; the book is good on the “state” side but mischaracterizes African “society” as “strong.”
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52 Ross Levine and David Renelt have recently provided more evidence of insufficient standards of proof, a problem that applies not only to the work of the neoliberals; see Levine and Renelt, “A Sensitivity Analysis of Cross-Country Growth Regressions” (Mimeo, Macroeconomic Adjustment and Growth Division, World Bank, November 29, 1990). They examine the vast literature on cross-country regressions of long-run growth against various policy variables, with a view to determining which conclusions are robust and which are fragile. Robust conclusions are those that survive small changes in the right-hand (i.e., independent) variables. “We find that there is not a strong independent relationship between almost every existing policy indicator and growth.… [T]he broad array of fiscal expenditure variables, monetary policy indicators, political stability indexes, human capital and fertility measures considered by the profession are not robustly correlated with growth; and newer indicators that we have assembled to capture exchange rate, tax, and fiscal expenditure policies are also not robustly correlated with growth” (p. 2). The one variable that could not be shaken off by fairly small changes in the specification of the independent variables was investment: “We found a positive and robust correlation between average growth rates and the average share of investment in GDP” (p. 26). I want to draw special attention to their findings on trade and price distortions, the subject that occupies the core of neoclassical development economics: “When controlling for the share of investment in GDP, we could not find a robust independent relationship between any trade or international price distortion indicator and growth” (pp. 19–20). These findings suggest that economists of all stripes ought to be a little more modest than usual in claiming to understand development. But note that the Levine and Renelt findings are based on an unusual notion of robustness; in their work robustness relates to which variables are included or excluded. More familiar notions of robustness relate to changes in sample size, time period, or functional form. Unrobustness in their sense is less significant than unrobustness in the other senses, because according to their criterion any hypothesized growth mechanism that depends essentially on several variables is likely to be found unrobust. For example, their finding that human capital variables are unrobust is unsurprising if one considers that human capital and physical capital are complementary, such that a high rate of human capital formation is unlikely to be an important cause of growth in the absence of fairly rapid physical capital accumulation.
53 Sales, of course, are not equal to value added. The true share of these companies in GDP (total value added) is probably one-third to one-half of this 67 percent.
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59 Amsden (fn. 54), 12–13.
60 Ibid., 23.
61 Wade (fn. 17), chap. 10.
62 Perhaps Amsden's argument could be clarified by distinguishing three senses of “distortion.” One is deviation from the market equilibrium price, which just offsets disadvantages due to “market imperfections” elsewhere in the system. Another is deviation that pulls resources into uses expected to be to the country's future comparative advantage. The third is deviation that provides big windfall gains for little effort. Korea presumably had much less distortion in the third sense than other countries had, but presumably not in the second sense.
63 See Colclough (fn. 3).
64 Wade (fn. 17), 23–24.
65 For a brief discussion, see ibid., chap. 10, esp. 319–20. For a very useful recent study, see Auty, Richard, “Creating Comparative Advantage: South Korean Steel and Petrochemicals,” Tijdschrift voor Econ. en Soc. Geografie 82, no. 1 (1991)Google Scholar.
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68 This is likely, but most of the evidence I cite stops short of this period. Pack (fn. 66) suggests that even after the mid-1970s total factor productivity growth was not especially good, and he credits continued rapid absorption of factors, including extra investment. But subsequent evidence suggests to him that productivity growth within manufacturing has indeed been more of a driver than he thought when he wrote the article in Chenery and Srinivasan (fn. 66); Pack, personal communication with author.
69 See Minford, , “A Labour-based Theory of International Trade,” in Black, J. and MacBean, A., eds., Causes of Changes in the Structure of International Trade, 1960–85 LondonMacmillan, 1989)Google Scholar; Wood, , “A New-Old Theoretical View of North-South Trade, Employment and Wages,” Discussion Paper 292 (Sussex: Institute of Development Studies, University of Sussex, 1991)Google Scholar. Wood's paper is based on one chapter of his book, North-South Trade, Employment and Inequality (London: Oxford University Press, forthcoming)Google Scholar.
70 I owe this idea of stretching CA to Adrian Wood.
71 I owe this point to Richard Auty.
72 On government leadership and followership of the market, see Wade (fn. 57); and idem (fn. 17), chaps. 1, 10. See also Stern, Joseph, “Industrial Targeting in Korea,” Discussion Paper no. 343 (Cambridge: Harvard Institute for International Development, 1990)Google Scholar. The latter makes an important contribution to the analysis of industrial policy in general and to the literature on Korea, and I regret not coming across it until this paper was going to press.
73 See Lall, Sanjay, Learning to Industrialize: The Acquisition of Technological Capability by India (London: Macmillan, 1988)Google Scholar. “Learning” makes a jazzy title but receives little conceptual attention; it seems to be used as a single word to mean “technological change that leads to productivity growth.” The problem is that the word seems to indicate some specific mechanism of causality, but this promise is not fulfilled in Lall's (or Amsden's) discussion. For a useful overview of some of the problems, see Martin Bell, “‘Learning’ and the Accumulation of Industrial Technological Capacity in Developing Countries,” in Martin Fransman and I am grateful to Bell for discussion on some of these points.
74 See Bell (fn. 73); and Cohen, W. and Levinthal, D., “Innovation and Learning: The Two Faces of R&D,” Economic Journal 99 (September 1990)Google Scholar.
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76 Amsden is undertaking research in Thailand, Malaysia, and Indonesia to test an important but unsupported argument in the book: “The general properties of an industrialization process based on learning, or borrowing technology are entirely different from those of an industrialization process based on the generation of new products or processes.… Thus, the late acquisition of international competitiveness has given rise to certain common tendencies in otherwise diverse countries.” That is, the other, less successful late industrializers have states with a set of roles broadly similar to Korea's that they carry out less effectively, price structures that are also “wrong” but less rightly “wrong,” diversified business groups that are less diversified than Korea's but still more diversified and centrally managed than those of the West, and a strategic focus within firms on the shop floor but with fewer engineers and more top-down management.
77 Haggard does not say why he thinks this is true. It would be worth a little economic analysis, even in a work of political economy–if only to be able to distinguish between “real” economic objections to devaluation and those that conceal some other agenda. A devaluation would increase local currency receipts from coffee at a constant world price. But then after a lag Brazilian supply would increase (assuming no production controls), pushing out the world supply curve and lowering the world price. Would this wipe out the gains to Brazilian coffee producers? Suppose Brazil had 50 percent of the world coffee market. Suppose a given devaluation gives rise to a 10 percent increase in Brazilian supply, making a 5 percent increase in world supply. For Brazil to loose revenue in foreign currency, this 5 percent increase in world supply would have to cause a fall in world price by more than 10 percent (demand elasticity of less than 0.5). I do not know whether these values are accurate for Brazil of the mid-1950s, but they could easily enough be checked. There is then a further complication. What mattered to Brazilian coffee growers was presumably not coffee revenues in foreign currency but the value of their domestic currency receipts; devaluation would have lowered the value of each unit of domestic currency, other things being equal, because imports would cost more. So the economics of the alleged opposition of the coffee growers to devaluation is not entirely straightforward.
78 To be fair, there has been much confusion, conceptual as well as terminological, in the economics literature on trade policy. A first step toward clarity is to distinguish market and nonmarket bias, tradables and nontradables bias, and export and import bias, concepts that can be applied to many types of policies (not just to trade policies but also, for example, to labor market policies). A helpful paper is Sebastian Edwards, “Openness, Outward Orientation, Trade Liberalization, and Economic Performance in Developing Countries,” PPR Working Paper 191 (Washington D.C.: World Bank, 1989).
79 Wade (fn. 17), pp. 15–21, chap. 5, p. 308.
80 Ibid., esp. chap. 1, pp. 15–21, chap. 5, chap. 10, pp. 307–9, 333–42.
81 For a case study along these lines that provides a quantitative estimate of how much economic benefit Italy's rulers were prepared to give up in order to raise political support, see Wade, , “Regional Policy in a Severe International Environment: Politics and Markets in South Italy,” Pacific Viewpoint 23 (October 1982)Google Scholar.
82 Machiavelli, N., The Prince (London: J. M. Dent, Everyman edition, 1968), 29Google Scholar.
83 This paragraph draws on John Toye, “Interest Group Politics and the Implementation of Adjustment Policies in Sub-saharan Africa” (Mimeo, Institute of Development Studies, Brighton, 1991).
84 This sets up a puzzle about Malaysia, which has drawn on a good natural resource endowment with much less of these predicted effects. Its per capita income is about the same as Korea's.
85 Lipton, , “The State-Market Dilemma, Civil Society, and Structural Adjustment,” Round Table 317 (1991)Google Scholar.
86 A study of Hong Kong, the U.S., and France found that the Chinese respondents had a significantly higher capacity “for understanding the abstract notion of socio-political responsibility at the societal level.” A Taiwanese educator has written that “social science ought to emphasize the development in children of moral concepts, group consciousness, patriotic thoughts, habits of cooperation, the attitude of service and the spirit of sacrifice, etc.”; see Wilson, Richard, “Moral Behavior in Chinese Society: A Theoretical Perspective,” in Wilson, R., Greenblatt, S., and Wilson, A., eds., Moral Behavior in Chinese Society (New York: Prae ger, 1981)Google Scholar. See further Wade (fn. 17), chaps. 7, 10; and Ronald Dore, “Reflections on Culture and Social Change,” in Gereffi and Wyman (fn. 57).
87 See Bates, R., Brock, P., and Tiefenthaler, J., “Risk and Trade Regimes: Another Exploration,” International Organization 45, no. 1 (1991)CrossRefGoogle Scholar; and Wade (fn. 17), chaps. 10, 11.
88 This is obviously a highly stylized account. In a longer treatment we would have to deal with the dispersion around these tendencies–such as bureaucratic corruption and infighting, the Rhee period in Korea, and the early Chiang Kai-shek period in Taiwan. We might look at these questions in terms of the “Migdal effect”–the tendency of insecurely established leaders to pulverize the arms of the bureaucracy in order to prevent challenges to their rule from centers of power within the state while at the same time relying on those arms for policy effectiveness and legitimacy. See Migdal (fn. 48). For further discussion, see Wade (fn. 17), chaps. 7–10, esp. 333–42; idem (fn. 5, 1982), chap. 8; and idem (fn. 5, 1983). See also Bruce Cumings, “The Abortive Abertura: South Korea in the Light of Latin American Experience,” New Left Review 173 (1989).
89 Arrighi and Drangel (fn. 22).
90 See Vogel, Ezra, One Step Ahead in China: Guandong under Reform (Cambridge: Harvard University Press, 1989)Google Scholar.
91 See the discussion between senior British economic policymakers and academic analysts of British decline in Hennessy, Peter and Anstey, Caroline, eds., From Clogs to Clogs: Britain's Relative Economic Decline since 1851, Strathclyde Papers on Government and Politics (Glasgow: Department of Government, University of Strathclyde, 1991)Google Scholar.
92 For a careful attempt to estimate the effect of trade with the “South” on workers of the “North,” see Wood, Adrian, “How Much Does Trade with the South Affect Workers in the North?” World Bank Research Observer 6, no. 1 (1991)CrossRefGoogle Scholar. See also Bienefeld, Manfred, “The International Context for National Development Strategies: Constraints and Opportunities in a Changing World,” in Bienefeld, and Godfrey, Martin, eds., The Strugglefor Development: National Strategies in an International Context (Chichester: John Wiley, 1982)Google Scholar; Streeten, Paul, “Comparative Advantage and Free Trade,” in Khan, Azizur Rahman and Sobhan, R., eds., Trade, Planning, and Rural Development (Basingstoke: Macmillan, 1990Google Scholar); and Evans (fn. 35).
93 The quintessentially neoclassical Heckscher-Ohlin theory says clearly that within each country some gain and some lose from the opening of trade. This is overlooked by many neoliberal practitioners. I should emphasize that my argument does not imply a blanket rejection of free trade policies. On the contrary, in stressing the importance of certain political a second-best strategy in cases where the state cannot even begin to approach those conditions (as in some sub-Saharan African countries, for example). There is after all some truth to the neoclassical economists’ implicit theory of power (also Marx's, in his writings on India) that the possibilities created by expanding markets erode existing power structures, so powerful is the incentive of profit; for that reason power structures are more or less ignored in the neoclassical analysis.
94 This follows only if evidence shows that the liberalization of the structural adjustment package is usually good for export capacity, export earnings, and hence debt servicing. A recent World Bank report, carefully read, casts doubt on this and hence on what is in the bank's self-interest. See World Bank, Adjustment Lending: An Evaluation of Ten Years of Experience, Policy and Research no. 1 (Washington, D.C.: Country Economics Department, World Bank, 1988).
95 I suggest no more than that the interests of transnational capital are one important set of causes of the wave of democratization in developing countries and of the salience of democracy and human rights in Northern strategy for North-South relations. See World Bank, World Development Report, 1991 (Washington, D.C.: World Bank, 1991)Google Scholar, chap. 7.
96 Frey, Bruno et al. , “Consensus and Dissensus among Economists: An Empirical Inquiry,” American Economic Review 74, no. 1 (1984)Google Scholar.
97 Colander, David and Klamer, Arjo, “The Making of an Economist,” Journal of Economic Perspectives 1 (Fall 1987)CrossRefGoogle Scholar, 100.
98 See U.S. Congress, House of Representatives, Industrial Competitiveness Act House Report 98–697, 98th Cong., 2d sess., April 24, 1984, p. 83Google Scholar.
99 He was responding to complaints that tight monetary policies were destroying Britain's manufacturing industry; “Profile: Sir Terence Burns, Not Merely a Civil Servant,” Independent, March 16, 1991, p. 16.
100 This is not to endorse a “proindustry/antiservices” argument, nor is it to suggest that comparative advantage is irrelevant. Rather, the point is that Governor Park and the MITI official believe that government has some responsibility for formulating a view of the appropriate industrial and trade profile of the economy and for using public power to push in that direction, whereas Stein and Burns emphatically do not. It may be thought that a new interventionism has already arrived in mainstream economics, in particular, in the form of “strategic trade theory.” But I am talking here of the developing country context, and most proponents of strategic trade theory would say it does not apply widely under developing country conditions. The World Bank has certainly tried to neutralize its polluting effect on neoliberal prescriptions. After summarizing strategic trade theory it concludes, “The trade theorists who helped develop the literature on strategic trade theory remain extremely scep-tical about its policy relevance. Most fear that, rather than being used to enhance national welfare, these new ideas will do damage in the hands of interventionists who take cover behind the intellectual respectability these ideas provide.” Note the implication that “interventionists” have no intellectual justification for their position and hence need a cover of intellectual respectability. See “Strengthening Trade Policy Reform (Washington, D.C.: World Bank, November 1989), Box 1–2. See also E. Helpman, “The Noncompetitive Theory of International Trade and Trade Policy,” Annual Conference on Development Economics, supplement to the World Bank Economic Review (1989). Helpman concludes, “Policy should be designed on a case-by-case basis and .. . no intervention (free trade) remains a good rule of thumb” (p. 193). Only the first part of the sentence really follows from his analysis, the second being more the World Bank line. See also Wade (fn. 17), 14, 378. If a new interventionism has not yet entered the mainstream, there are signs of a new defensiveness. Consider, for example, the following. After the Economist published an unusually enthusiastic review of Governing the Market (June 1, 1991, pp. 102–3), the reviewer received over six transatlantic phone calls from World Bank officials ringing to complain about the Economist publishing a favorable review of a book by an interventionist. Several said the journal was lowering its standards. Another said, “Don't you know he is an interventionist?” The reviewer asked each whether he had read the book or even glanced at it. Answer: No, in every case. See Fallows, James, “Economics of the Colonial Cringe,” Washington Post, October 6, 1991,Google Scholar for an exactly opposite interpretation of the Economist's review.
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