Institutions and Economic Growth in Asia

The Case of Mainland China, Hong Kong, Singapore and Malaysia

Flora Huang, Horace Yeung

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9780367591885
• eBook ISBN: 9781315516110
• Edition: 1
• Topic: Social Sciences
• Subtopic: Ethnic Studies
• Index: Social Sciences

This book explores the role of institutions in economic growth, looking in particular at specific Asian countries and at particular cities within those countries. It considers a wide range of factors besides institutions, including the law, cultural factors and overall government arrangements. The differences between the countries studied are highlighted, and the impact of these differences assessed: the impact of English common law on arrangements in Hong Kong, Singapore and Malaysia; sharia law in Malaysia; the differing lengths of time of colonial rule; the extent to which Chinese family businesses control an economy. Also studied are the degree to which the law is effectively applied, and a range of other social, economic and cultural factors. The book's conclusions as to which factors have the greatest impact will be of considerable interest to economists of Asia and those interested in economic growth more widely.

1Introduction

It may not be easy to define the word ‘institution’. According to Acemoglu and colleagues, economists and historians have long emphasised the importance of institutions.¹ The institutions hypothesis claims that societies with a social organisation that encourages investment will prosper. As put by North, ‘Institutions are the rules of the game in a society or, more formally, are the humanly devised constrains that shape human interaction.’² Whilst saying that ‘there is no unanimity in the definition of this concept [of institution]’, Hodgson tries to define institutions as ‘systems of established and prevalent social rules that structure social interactions’ and thus ‘language, money, law, systems of weights and measures, table manners, and firms (and other organisations)’ are all institutions.³

A wide array of parameters must be taken into account to explain the growth stories of the cities. The research by North first, then La Porta and colleagues, not only generated interest from the academic research community, but also from policy makers and regulators with regards to the underlying effects of different institutions on sustainable economic growth and the promotion of efficient financial systems.⁴ Using mainland China, Hong Kong, Malaysia and Singapore as case studies, this book project can enrich the understanding of how various factors (such as law, politics, culture, etc.) can contribute to economic development. By drawing on their development experience, this study seeks to confirm and advise academics, policy makers and regulators on the principles which should inform the design of relevant institutions which are important to development. Also, this study endeavours to take into account a range of parameters which can potentially be linked with economic growth such as different branches of law, questions of legal effectiveness, as well as social, political and cultural factors which are vaguely summarised as ‘Asian values’ by, for example, the late legendary Singaporean leader Lee Kuan Yew. The study will examine and confirm the role of each of these factors in the context of each economy or jurisdiction, and its cities.

Regulation is widely regarded as one of the foundations of economic and financial growth. For example, the ‘Doing Business’ project of the World Bank provides objective measures of business regulations in 185 economies. Empirically, the importance of the legal institutions is supported by the ‘legal origins’ hypothesis that legal systems have a long-run impact on depth of financial markets.⁵ However, Roe has indicated that a political economy-based explanation seems stronger than the legal origins hypothesis.⁶ He argues that continental social democracies did not provide institutions that markets need, so that the financial markets in continental Europe have flourished to a lesser degree than their Anglo-American counterparts. While the work of La Porta and others from a legal perspective and that of Roe from a political perspective have produced a great deal of discussion, the effect of culture appears to be relevant too. From a cultural perspective, laws and rules are used to prevent uncertainties in the behaviour of other people. Therefore, people will look for ‘a structure in their organisations, institutions, and relationships which makes events clearly interpretable and predictable’.⁷

With a range of relevant factors, such as legal rules, politics and culture, the core objective of this book project is to put these factors into the context of the growth stories of five Asian commercial and financial centres (Singapore, Kuala Lumpur, Hong Kong, Shanghai and Shenzhen) across four economies/jurisdictions (Singapore, Malaysia, Hong Kong, China).

In essence, the following research questions will be asked:

•What are the required institutions of a commercial and financial centre?

•How are these institutions contributing to the success of the four selected Asian economies?

•How is the growth story of each of them the same or different from another?

•In the face of globalism/regionalism, what will be the prospects of growth for them?

Although La Porta and colleagues’ research was so ground-breaking and sparked a great many debates, it has been subjected to many criticisms, in particular with respect to its quantitative methodology. As a result, this study seeks to focus more on qualitative contextual analyses, a gap left by the quantitative studies, and enquire into the effects of various factors on the countries/cities with respect to development. The primary aim is to look for any legal rules (and their enforcement), policies and perception of the political and socio-cultural profiles of the cities that can inform its success. Furthermore, because of the expertise of the authors, more attention will be given to the legal factors, but with a caveat and understanding that they are not necessarily the dominant factor in economic development.

The four economies are connected by certain similarities but at the same time have their own characteristics. For example, in all cases, there is a strong presence of a Chinese community. For Malaysia, the Chinese might be an ethnic minority compared to Malays, but its economy is indeed tightly controlled by Malaysian-Chinese entrepreneurs such as Lim Goh Tong and Kuok Hock Nien. Hong Kong, Malaysia and Singapore might have been former British colonies and therefore able to take advantage of an inherited English system, but they are also different in certain ways. For example, Hong Kong has always been an autonomous region, but is not a sovereign state like Malaysia, Singapore and China. On the other hand, as a part of Malaysia before, Singapore appears to have shared many similarities with Kuala Lumpur, but the influence of Islamic traditions in the Malaysian system has complicated the situation. Even within the same nation, the growth stories of Shenzhen and Shanghai are different. For example, the former is more geared towards technology, but the latter focuses on finance.

More generally the four economies can be linked up by the notion ‘Asian values’. The ‘Asian values’ thesis was initially promulgated by the Singaporean former prime minister Lee Kuan Yew and the Malaysian former prime minister Mahathir Mohamad, to explain the root of Asia’s remarkable growth over the previous decades. They claimed that the cultural inclination to respect authority and hard work allows East Asian countries to pursue liberal economic policies without democracy.⁸ Since then, this thesis has gained political prominence in many Asian countries, especially as it is often articulated in government rhetoric and official statements to object to Western liberalism.⁹ The traditional Asian values were explained as ‘harbour deep resentment against the West for its past colonialism’.¹⁰ Recently, Asian values have been developed and reframed to a new model for economic development characterised by high national savings, economy as top priority for government, cautious and prudent policies, and modernised laws.¹¹

In Asian countries with a Confucianism-influenced culture, caution and prudence, as one of the most fundamental accounting concepts, stipulate that a conservative approach should be adopted in determining profits. Revenues and profits should never be overstated. Conversely, provisions are made for all known liabilities. The Western world has enjoyed 200 years of prosperity and Westerners perhaps forgot that the worst could come at any time. On the other hand, for Asian countries, mass civil disorders and wars have occurred continuously. Economic development in the Asian region has substantially been lagging behind their Western counterparts. This is actually a blessing in disguise. Asian people would never forget prudence is one of the virtues that are most useful to individuals. Prosperity is by no means automatic.

Considering elsewhere in the world, the following weaknesses in Latin American financial systems echoed some of the problems which hinder the deepening of domestic financial markets: (1) low savings rates; (2) an unstable macro- economic environment; (3) a range of structural factors mostly economic and institutional in nature; (4) highly volatile capital inflows.¹² Asian countries, in contrast, have exhibited some completely different characteristics. China, Hong Kong, Singapore, Malaysia and some other East and Southeast Asian developing nations have accumulated large current account surpluses while large current account deficits have emerged in the Western world (this is also what the Westerners blame as the cause of crisis).¹³ A key driver of this has been very high savings rates in countries like China and Singapore. From a cultural perspective, some Westerners can live from pay cheque to pay cheque. However, most Asian countries have experienced turbulent times. Asians save more because they know from experience the importance of preparing for rainy days. From a growth perspective, these savings can be channelled to domestic development. From a political economy perspective, holding an abundant amount of foreign debts has given Asian countries the competitive edge on various policy issues.

Amidst a consequential shift of economic and financial gravity to the East after the Global Financial Crisis 2007–08, this book seeks to provide a holistic and comprehensive account of the economic growth of four selected economies/ jurisdictions and the cities within them. It is composed of eight chapters (including this introductory Chapter 1). Chapter 2 will consider the underlying institutional requirements for economic growth, and has the major goal of setting out the necessary ingredients for a successful commercial and financial centre. These will be then applied to the subsequent assessments for each of the economies and their cities in subsequent chapters. A spectrum of factors may be relevant to economic development. Some general preconditions will be examined but with an understanding that particular markets may have their own story. Some scholars, most notably La Porta and colleagues, have long stressed the importance of law and regulation. The specific role of law and its enforcement will be examined. Other factors, such as politics and culture, are also considered.

Chapter 3 will be the start of four largely parallel chapters which discuss the growth experience of the selected economies in this book. Chapter 3 will entail an assessment of China’s development, in particular Shanghai and Shenzhen via the analytical framework laid down in Chapter 2. It will first compare and contrast the country’s state of economy before and after its economic reform in 1978. Subsequently, the growth stories of Shanghai and Shenzhen will be studied. The role played by legal, political and cultural factors and market infrastructure will be discussed. The chapter will also consider if the tremendous growth rate in China in the past three decades is sustainable before a conclusion is made.

Chapter 4 concerns the development of Hong Kong via the analytical framework laid down in Chapter 2. It will first compare and contrast the city’s state of economy before and after its handover in 1997. Subsequently, th...

Table of contents

• Cover
• Half Title
• Seriestitle
• Title Page
• Copyright
• Contents
• List of figures
• List of tables
• Preface and acknowledgements
• List of abbreviations
• List of court cases and regulatory instruments
• 1 Introduction
• 2 Institutions and growth: setting the scene
• 3 China
• 4 Hong Kong
• 5 Singapore
• 6 Malaysia
• 7 Globalisation, regionalism and interdependence of economies
• 8 Conclusion
• Index