Southeast Asian Paper Tigers?

K. S. Jomo

• Publisher: Taylor & Francis
• Year: 2003
• eBook ISBN: 9781134424238
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This important collection is a timely contribution to the debate on the Asian financial crisis. With chapters written by well-established international experts in Asian economics, this book constitutes a finely judged example of the varying opinions on the matter.

1 Introduction
Southeast Asia’s ersatz miracle

Jomo K. S.

From the 1980s, and especially in the early and mid-1990s, there was growing international recognition of the rapid economic growth, structural change and industrialisation of the East Asian region, including four economies of Southeast Asia, namely Singapore, Malaysia, Thailand and Indonesia. There was a tendency to see East Asia as a much more economically coherent region than it actually is, and a corresponding tendency to see economic progress in the region as similar in origin and nature. Terms such as the ‘Far East’, ‘Asia-Pacific’, ‘Pacific Asia’, ‘East Asia’, ‘Asian miracle’, ‘yen bloc’, ‘flying geese’, ‘tigers’, ‘mini-dragons’ and so on have tended to encourage this perception of the region as far more economically integrated and similar than it actually is.

This volume mainly focuses on the three economies of Southeast Asia that have been considered part of the second generation or second tier of newly industrialising economies or countries besides Singapore, which is usually considered as one of the first generation or tier. It shows that although the economies of Southeast Asia, and hence East Asia, are quite heterogeneous, and at quite different levels of development, they have shared some policies that distinguish them from the other high-growth economies of the East Asian region.

Most importantly, the Southeast Asian high-growth economies have relied heavily on foreign direct investment (FDI) to develop most of their internationally competitive industrial capabilities. Government interventions in the region have, however, been influenced by a variety of considerations besides economic development and late industrialisation. Consequently, industrial policy has also varied in nature, quality and effectiveness. Yet, it will be shown that the economies in the region would not have achieved as much as they have without industrial policy.

The East Asian miracle and Southeast Asia

The most important and influential document recognising the rapid growth, structural change and industrialisation of much of East Asia in the last three decades or more has been the East Asian Miracle volume published by the World Bank in 1993. As is now well known, the World Bank did not commission the study of its own volition, and with the East Asian financial crisis of 1997–98, there are many in the Bank who would now wish to disown the study. In fact, it appears that the study would not have been undertaken by the Bank if not for the initiative of Shiratori, the Japanese executive director – or government representative – on the Bank’s board.

Shiratori had pointed out the region’s rapid growth and structural change in sharp contrast to the Bank’s poor experience with structural adjustment programmes (SAPs) in Latin America, Africa and other parts of the world, and with the transitions it was trying to engineer in Eastern Europe. The SAPs and transitions had generally turned out to be very problematic, even resulting in severe recessions in several of these economies, and rather slow and unimpressive growth rates elsewhere, resulting in the so-called ‘lost decade’ of the 1980s. Shiratori suggested that the Bank should learn and draw lessons from the experiences of East Asia where, by the early 1990s, more than half a dozen countries had grown for at least a quarter of a century at rates exceeding 6 per cent per annum. Shiratori offered Japanese government funding for such a study, which the Bank then undertook.

In its East Asian Miracle (EAM) study, the World Bank identified eight high- performing Asian economies: Japan, the four first-generation newly industrialising economies (NIEs) or countries (NICs), dragons or tigers, namely South Korea, Taiwan, Hong Kong and Singapore, and the three second- generation South East Asian NICs, namely Malaysia, Thailand and Indonesia. Interestingly, of course, China was left out, perhaps because the Chinese experience would upset the analysis the Bank offers in that volume in very fundamental ways. The Bank study recognises that the likelihood of eight relatively contiguous economies growing so rapidly for such a sustained period of time is less than one in 60,000. Yet, it does not acknowledge the significance of geography – unlike the later 1997 Emerging Asia (EA) study led by the now defunct Harvard Institute of International Development (HIID) for the Asian Development Bank (ADB).

With the EAM study, the Bank seemed to have shifted its position from the sort of extreme neo-liberalism – or almost extreme economic liberalism – of the 1980s, to acknowledging an important developmental role for the state in the 1990s. The Miracle study appears to have had a lot to do with this shift, and this impression has been reinforced by other Bank activities and publications, especially the 1997 World Development Report advocating effective – rather than minimalist – states (World Bank 1997).

In the Miracle study, the Bank identifies at least six types of state interventions, which it saw as having been very important in East Asia. It approves of the first four, deemed functional interventions, and is more sceptical of the last two, deemed strategic interventions. Functional interventions are said to compensate for market failures, and are, hence, necessary and less distortive of markets, while the latter two strategic interventions are considered to be more market-distortive. The two types of strategic interventions considered are in the areas of finance, specifically what it calls directed (i.e. subsidised) credit, and international trade, while the four functional interventions the Bank approved of are:

1. ensuring macroeconomic discipline and macroeconomic balances;
2. providing physical and social infrastructure;
3. providing good governance more generally; and
4. raising savings and investment rates.

It is very important to compare what has actually happened in East Asia with the way the World Bank has presented this.¹ Beginning with the importance of macroeconomic discipline, there is very little dispute that maintaining macroeconomic balances has been important in East Asia. But what the Bank considers to be the acceptable parameters of macroeconomic discipline may be disputed. One finds, for instance, that inflation was generally kept under 20 per cent in the high-performing Asian economies (HPAEs), but it certainly was not always kept below 10 per cent in all the economies. In other words, single digit inflation was neither a policy priority nor always ensured in some East Asian countries during their high-growth periods.²

Similarly, when considering other macroeconomic balances such as the fiscal balance and the current account of the balance of payments, one finds that the balances were not always strictly maintained in the way the Bretton Woods institutions now seem to insist on for much of the developing world. Malaysia and Thailand have had relatively high current account deficits throughout the 1990s, while other countries with much lower deficits were not spared the recent currency attacks and massive depreciation.

On physical and social infrastructure, until the 1980s, the Bank would probably have gone along with what the East Asians have done. However, since the 1980s, the Bank increasingly seems to be recommending private provision of physical infrastructure. With the exception of Hong Kong, most physical infrastructure in East Asia has been provided by governments until fairly recently, when there have been the beginnings of privatisation in the provision of physical infrastructure, which has become the basis for powerful private monopolies associated with ‘crony capitalism’.

The role of government has been extremely important in providing so-called social infrastructure and services in East Asia. In some of its other documents, the Bank seems to acknowledge this, but nonetheless recommends a more modest role for government in the provision of social infrastructure. For instance, the Bank recommends universal and free primary education, but does not recommend the subsidisation of education beyond the primary level, when the ‘user/consumer’ (student) should bear the full costs of education as far as the World Bank is concerned. This would have had very serious consequences in terms of human resource development, if one contrasts that recommendation with the actual experience of East Asia. To give some sense of how important government support for education has been beyond the primary level, in Korea today, over 40 per cent of young people of university age attend universities. Thailand has a percentage of close to 20 per cent, Indonesia has 10 per cent and most of the first-generation East Asian NIEs have well over 25 per cent, generally over 30 per cent.

The notion of good governance is quite ambiguous, and is often used rather tautologically. When things are going well, there must be good governance; otherwise, presumably, things would not be going well. So one does not really have much of an explanation of good economic performance by simply invoking good governance, although it is widely touted these days, sometimes ad nauseum. There have been important efforts to try to understand the factors contributing to good governance, and the 1997 World Development Report has been important and useful in this regard. It seems from the East Asian experience that what was called ‘strong government’, in Gunnar Myrdal’s sense, has been important, though the notion of ‘strong government’ is often misunderstood and wrongly associated with authoritarian government.³

What Peter Evans (1995) calls ‘embedded autonomy’ has become a useful way to try to understand some conditions for good governance. Here, embeddedness refers to the institutional capacity and capability of the governments concerned to effectively provide the co-ordination necessary for rapid accumulation and economic transformation. Autonomy is primarily understood to be from ‘vested interests’, ‘special interest groups’, ‘distributional coalitions’ and ‘rent seekers’ who, in more favourable or conducive circumstances, would be able to influence public policy to their own advantage. This kind of autonomy is considered to have been very crucial in ensuring that regimes in East Asia could effectively serve as developmental states.

The role of the state in generating savings and encouraging investments is also generally agreed upon. However, much of the high level of East Asian savings actually comprises of corporate or firm savings, rather than just household savings. Household savings in East Asia are not spectacularly higher than in the rest of the world, except in Malaysia and Singapore. The difference in Malaysia and Singapore is due to the mandatory or forced savings schemes introduced in the late colonial period and the relatively high proportion of the working class or wage-owners as a proportion of the labour force. The latter is particularly true in the case of Singapore, but is also not insignificant in the case of Malaysia. The significance of coerced savings needs mention because of the popular view that the high savings and investment rates in the region exist because East Asians are culturally if not congenitally thrifty.

The large contribution of high corporate savings implies that firms have often been able to enjoy very high profit rates due to government interventions, subsidies, tax breaks and other incentives for particular types of investments favoured by the governments, enabling the firms concerned to enjoy higher ‘rents’. But what has been most important is that conditions (e.g. tax incentives and other inducements), largely created by governments, have induced high rates of reinvestment of these huge profits by these firms.

How have these high rates of reinvestment been assured? In some countries in East Asia, these have been assured by having very strict controls on foreign exchange outflows. Capital flight was made very difficult in some countries in East Asia, especially South Korea and Taiwan, during their high-growth periods. Also, by structuring laws so that reinvestment of profits has been subject to little or no tax at all, or by offering other incentives to undertake particular types of investments, high levels of reinvestment have been successfully induced.

In pursuing these supposedly functional interventions, the East Asian governments were not just market conforming, but instead played important roles which have been more than simply market augmenting, as suggested by the World Bank analysis. On the more controversial, so-called strategic interventions in finance and international trade, the Bank almost grudgingly concedes that financial interventions have been important and successful in East Asia, particularly in Northeast Asia – i.e. in Japan, Korea and Taiwan. However, the Bank implies that nobody else is capable of successfully pursuing the types of policies that the Northeast Asians successfully implemented because state capabilities in Northeast Asia have been almost unique and are non-replicable.

Creating the conditions for attracting investment, both domestic private investment as well as foreign investment, has had much more to do with reforming incentives and governance more generally to attract particular types of investments to generate specific sources of economic growth rather than liberalising financial markets as such. Southeast Asian governments, notably Singapore and Malaysia, have especially sought to attract FDI into areas where indigenous industrial capabilities were not expected to become internationally competitive. Venture-capital markets, rather than the usual stock markets, tend to be more supportive of developing new industrial and technological capabilities.

Attracting FDI should, however, be distinguished from capital account liberalisation. Chile, which has been very FDI-friendly, has imposed fairly onerous obstacles on easy exit, probably limiting capital inflows, especially of a short-term nature. Capital account liberalisation has come under renewed consideration after the East Asian financial crisis since mid-1997, precipitated by an eventually successful currency attack on the over-valued Thai baht and greatly exacerbated by herd-like panicky withdrawals from the entire Southeast Asian region, inducing currency and stock market collapses ( Jomo 1998).⁴ Since those who control financial assets usually enjoy disproportionate political influence in most contemporary economies, especially in most developing countries, liberalising financial markets alone, without offering sufficient inducements for a net inflow of portfolio investments, may well cause greater movements out rather than in.

Why did the Bank give a positive evaluation of financial interventions in Northeast Asia despite their clear violation of market norms? A few might suggest that this evidence offers no other possible conclusion, but most observers would dispute this, especially given the ongoing problems of the Japanese financial system. Another explanation is the influence and unorthodox analysis of current World Bank Senior Vice-President and Chief Economist, Joseph Stiglitz, then a professor at Stanford University, who is credited with being the principal author of this part of the Miracle study.⁵ The more cynical might point out that the study was funded by the Japanese Ministry of Finance (MoF), and it is hardly likely that the World Bank would bite the hand that feeds it by negatively evaluating the Ministry’s record. Given the historic rivalry between the Finance Ministry and the bureaucratically weaker Ministry of International Trade and Industry (MITI), some Japanese suggest that it is not surprising that the Bank study did not criticise the role of the Ministry of Finance of Japan, but was less sympathetic to MITI and international trade-related industrial policy.

The Miracle volume’s evaluation of the record of Japan’s MITI and its counterparts elsewhere in the region is more predictable, arguing that government interventions have been trade-distortionary and, more importantly, generally unsuccessful in East Asia, with some minor exceptions. However, contrary to the impression given by the study, the Japanese, South Korean and Taiwanese governments did pursue import substituting industrialisation policies from the 1950s, but soon pursued export-orientation as well to ensure that their industries quickly become internationally competitive by requiring a rapid transition from import substitution to export-orientation.

In many cases, infant industries were generally provided with effective protection conditional on export promotion, which had the effect of forcing the firms and industries concerned to quickly become internationally competitive. By giving firms protection for certain periods, depending on the product being made, and by also requiring that they begin exporting certain shares of output within similarly specified periods, strict discipline was imposed on the firms in return for the temporary trade protection they enjoyed.

Quantitatively, such policies forced firms to push down their own production costs as quickly as possible, e.g. by trying to achieve greater economies of scale and accelerating progress up learning curves. Requiring exports has also meant that producers had to achieve international quality standards quickly, which imposed pressures to progress technologically in terms of products as well as processes. With strict discipline imposed, but also some flexibility in enforcement, many firms managed to rapidly achieve international competitiveness.

The Miracle volume and its supporting studies have implied and argued that Southeast Asia began to take off after it reversed such trade interventions. Hence, the mid-1980s are portrayed by the Bank as a period of e...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Illustrations
• Contributors
• Acknowledgements
• Abbreviations
• 1. Introduction: Southeast Asia’s Ersatz Miracle
• 2. Manufacturing Export Growth In Indonesia, Malaysia and Thailand
• 3. New Approaches to Investment Policy In the ASEAN 4
• 4. Technology Policies and Innovation Systems In Southeast Asia
• 5. Education and Economic Development In Southeast Asia: Myths and Realities
• 6. Growth With Equity In East Asia?
• 7. Financial Capacity and Governance In Southeast Asia