Rethinking the East Asian Miracle

Citation

Lodewijks, J. (2002), "Rethinking the East Asian Miracle", International Journal of Social Economics, Vol. 29 No. 3, pp. 251-257. https://doi.org/10.1108/ijse.2002.29.3.251.1

The purpose of this publication is to reassess the 1993 World Bank volume on the East Asian Miracle. The contributors, by and large, are quite critical of this earlier volume and their experiences are of course shaped by the crisis of 1997. The concluding chapter by Joseph Stiglitz is the gem in the collection. How he must have been such a breath of fresh air at the World Bank before his recent departure! His is a must‐read chapter for anyone who seriously questions the role of international institutions during the crisis. Stiglitz starts by saying “What is remarkable about East Asia is not that it experienced a crisis in 1997, but that it had experienced so few crises over the preceding three decades” (p. 510). Its economic management was far superior to any of the OECD countries in this respect. Moreover, financial markets in East Asia were deeper than in most of the rest of the developing world, but countries in the region, under pressure from the IMF and the US Treasury, liberalized their capital markets too rapidly, before the appropriate regulatory structures were in place. Hence financial instability was inevitable. Claims of cronyism and corruption miss the point. It is not clear to what extent Asian‐style crony capitalism was different from American‐style cronyism: “Certainly the publicly orchestrated, privately funded bail out of Long‐term Capital Management” raised questions about CEOs using their “corporate positions to bail out their private positions” in the USA (p. 516). We should not be “misled by the chimera of deregulation” (p. 523) and instead realize it was the abandonment of long‐standing policies, under external pressure, that led to the crisis. There is so much more of this insightful critique of the Washington consensus in the chapter. The other chapters do not reach these heights but are very valuable nevertheless.

Howard Pack makes a useful contribution in contrasting firm‐level data on technical absorption and diffusion with macro studies that purport to show that growth was predominantly driven by factor accumulation. He provides a detailed dissection of the total factor productivity studies of East Asia and their various shortcomings. Stiglitz agrees that the total factor productivity debate is “much ado about nothing” (p. 512). Shahid Yusef also questions the econometric findings of low total factor productivity scores and finds it inconsistent with micro data that show East Asian countries’ successful assimilation of imported technology and generation of indigenous technical capacity, resulting in a stream of patents, most notably in Korea and Taiwan (p. 17). However, he notes that countries in the region are being challenged in their education systems to shift away from rote learning, without sacrificing their strengths in mathematics, engineering and science, towards encouraging research that induces creative effort (p. 19).

Many of the contributors naturally focus on financial liberalization. Takatoshi Ito explains that the sequence of liberalization is important. In general, trade liberalization should precede financial liberalization, domestic financial liberalization should precede external financial liberalization, and direct investment liberalization should precede portfolio and bank loan liberalization (capital account liberalization) (p. 71). According to Ito, what happened in Thailand in the first half of the 1990s can be regarded as poorly sequenced liberalization (p. 72). Shahid Yusef warns that “as financial sophistication rises, preventing capital flows becomes increasingly difficult, and derivatives make it problematic for even the most skilled regulators to contain inflows of short‐term capital. China experienced large outflows during 1998‐2000, and in spite of capital controls, the restrictions imposed by Malaysia were decreasingly effective by 2000” (p. 13). Moreover, on the question of the appropriate exchange rate regime, Yusef states that “neither the East Asian crisis nor other currency crises in the 1990s have established the superiority of fixed or flexible rates” (p. 14).

Ronald McKinnon notes that since 1971, “the apparent move to more flexible exchange rates has been a mirage for much of the developing world. In the industrial world, only Great Britain, Japan and now Euroland have freely floating currencies, where the central banks do not react to daily movements in exchange rates” (p. 220). Before the crisis most countries of the region pegged their currencies to the US dollar and, after the crisis, they seem to be reverting to this dollar link. McKinnon argues that the simplest solution for stabilizing effective real exchange rates in East Asia is to fix the yen to the dollar. This would also allow “Japan to escape from the low‐interest liquidity trap and deflationary expectations in which its economy is now mired” (p. 211).

Differences of opinion are a refreshing feature of this volume. Dwight Perkins reviews the possibility that China and Vietnam could pursue the same sort of activist interventionist industrial policy that characterised Japan and Korea. He finds such a possibility unlikely and these countries should resist any such temptation (pp. 260, 288‐9). In contrast, the chapter by K.S. Jomo presents a vigorous defence of activist industrial policy. Robert Lawrence and David Weinstein examine the proposition that openness to trade was a crucial source of East Asia’s rapid growth. They find that the causation is from high productivity growth to export success and not the other way around, but that imports and lower tariffs did stimulate productivity. However, import competition had little impact on productivity growth if the domestic producers were technologically backward. The beneficial effects only occurred if domestic producers were roughly comparable to their foreign counterparts. In contrast, the next chapter by Shujiro Urata examines Japanese multinationals in Asia, and its findings regarding exports and productivity are inconsistent with the previous results of Lawrence and Weinstein (p. 449).

A number of chapters look at China. Justin Yifu Lin and Yang Yao examine China’s rural industrialization and how rural enterprises brought equitable income distribution inside a province through their small, indigenous and labour‐intensive nature. They contrast this with Korean industrialization which was accomplished by drawing rural migrants into cities where a few large firms were concentrated (pp. 149, 180‐2). In chapter 7, Yingyi Qian argues that government ownership and control of the corporate sector in China is a transitional phase and necessary initially where property rights are ill‐defined, capital markets not developed and fiscal institutions (like taxation) are weak (p. 303). Similarly the privatization of state enterprises has been delayed because they provide housing, health care and retirement benefits. These social safety net provisions have not yet developed outside the employment relation. Once market‐supporting institutions are developed then private ownership and control may flourish.

Corporate governance is another theme stressed throughout the volume. Meredith Woo‐Cumings distinguishes two patterns of corporate governance. The first is the Japanese model that has strongly influenced Korea. The second is the Chinese business practice used widely in Southeast Asia. The focus of the paper is Korea and its highly diversified (and heavily indebted) family‐controlled firms and how this industrial structure can be reformed. It is noted that most of East Asia’s corporate assets, other than in Japan, are controlled by a small number of families (p. 21) but that “if cronyism had been a significant drain on resources, the Asian economies would not have grown so fast in the first place” (p. 64).

In this comprehensive volume the respective authors have been given the latitude to write long and detailed chapters (of around 40 to 50 pages each) dealing with aspects of the Asian crisis and recovery. Many of the authors have written on industrial policy, and with a thoroughness that could not be possible in a journal article. In only one or two chapters is the end product quality found wanting. Overall, the editors have assembled high‐profile commentators who make valuable contributions to our understanding of this “miracle” region of the world.