1. The East Asian Miracle: Economic Growth and Public Policy Overview

2. Overview: Making of a Miracle Subject of the study: HPAEs (high- performing Asian economies) Japan, Four Tigers (Hong Kong, South Korea, Singapore, Taiwan), three NIEs in Southeast Asia (Indonesia, Malaysia, Thailand) No common culture (intentional by World Bank?) Reasons for this study Fast & equitable economic growth for sustained period (1965-1990). Some common features, distinct from other economies. Attention paid to the relationship between public policy and economic growth.

3. Performances of HPAEs Rapid and sustained economic growth About 5.5% annual growth thru 1965-1990 Twice as fast as the rest of East Asia Three times as fast as Latin America Almost twice as fast as the advanced economies Rather equitable income distribution Much lower & declining Gini coefficient than other developing economies. Other evidences supporting economic development Increase in life expectancy from 56 (1960) to 71 (1990), substantial drop of population under absolute poverty, etc.

4. Major Factors of East Asia’s Success Getting the basics right, with fundamentally sound development policy. Good macroeconomic management, providing basis for high private saving/investment. Policies for developing banking system (financial intermediary between savers & investors). Mobilize savings, then lend to the best users. Rapidly growing human capital (thru good education policy) & better-educated people from the start (for some countries).

5. Major Factors of East Asia’s Success (cont’d) Selective gov’t intervention to foster growth. (Eg) Sometimes development of specific industries pursued (industrial policy). At the center of controversy on East Asian economies. Difficulty in separating the effects of intervention. What if no selective gov’t intervention? “In a few economies in Northeast Asia, some government interventions resulted in better performance.” Applicable to other developing economies? “skepitcal because conditions for success are too rigorous to copy.” Key questions: “which specific intervention policies” & “under what institutional & economic conditions” work?

6. Ch. 1. The Essence of the Miracle: Rapid Growth with Equity Key shared characteristics of HPAEs, Even though there are substantial differences in natural resource endowment, population, culture, and economic policy, among them. Rapid & sustained growth with equitable income distribution between 1960 and 1990. In addition, rapid demographic transition, dynamic agriculture (early period), and very rapid export growth, etc.

7. Growth Accounting based on one econometric study (Ch 1- cont’d). Accumulation of physical capital High domestic private saving (about 20% of GDP), leading to high domestic investment Rapidly growing human capital (thru education), based on relatively good intial level. Above two factors account for 2/3 of the economic growth (according to their empirical research ). Productivity growth contributed the remaining 1/3 of their growth. Unusually high contribution as developing countries. Successful allocation of capital (& labor) to high-yielding investments (sectors). Technological catching up with advanced economies.

8. Ch.2. Public Policies and Growth Getting the Basics right. Maintain stable macro-economic environment Low distortions in relative-price (opening to int’l trade, absence of price control, etc). Selective government intervention to foster development Tools: targeting credit to selected industries, interest-rate control, import restriction, export target, etc. Q. Are the selective interventions good for economic growth? Conflict with neoclassical economics (level playing field, neutral incentive, resource allocation thru market ) or the so- called Washington Consensus.

9. Contending Views on Public Policy for Economic Growth of East Asian Countries Neoclassical View Stress the success in getting the basics right & then let market work. Revisionist View HPAEs (particularly, in Northeast Asia) not wholly conform to the neoclassical model. Industrial policy and intervention in financial markets Government “led the market” Markets consistently fail in obtaining dynamic efficiency. <cf: static efficiency Government remedied it by deliberately “getting the prices wrong” to boost some industries.

10. (Continued) Market-Friendly View (by World Bank) Expand the neoclassical view Accept effective but carefully limited government activism. To ensure adequate investment in people, provide competitive conditions for private enterprises, open to int’l trade, stable macro-economy. However, government of Northeast Asian HPAEs’ did more than this. Extensive government intervention to guide private- sector resource allocation.

11. Functional Approach to explain economic growth (of this book) Link rapid growth to the three central functions: accumulation, efficient allocation, technological catch- up. Understand how gov’t policies (either fundamental or interventionist) contributed to the above three functions. Fundamental policy: macroeconomic stability, high investment in human capital, limited price distortions, stable financial system, etc. Selective interventions: financial repression, industrial promotion with directed credit, export promotion, etc.

12. (Functional Approach: Continued) Pre-condition for success of gov’t intervention : Market failure: coordination failure in many markets, particularly in the early stages of development. Market competition + Contests Gov’t-run contests (as a disciplinary measure): distribute rewards based on performances. Need competent and impartial referees (high-quality civil service). <cf: government failure Pragmatic flexibility in pursuing objectives Adjust policies depending on situations, while the central functions are addressed. Again, need competent civil service.

13. Ch. 3. Macroeconomic Stability and Export Growth Responsible macroeconomic management Limited fiscal deficits, relatively low (& predictable) inflation, stable (positive) real interest rate, etc. Allow long-term planning, private investment & financial saving. The policies for stable macroeconomic stability also contributed to export growth. High public saving allowed exchange rate protection, facilitating export growth. Trade policies promoting manufactured exports, combined with domestic market protection. Export credit, duty-free import for supplies for exports, etc.

14. Ch. 4. Institutional Basis for Shared Growth Combination of authoritarian leader, technocratic elite, and key leaders of the private sector <Cf. authoritarian leaders of other regions. For securing legitimacy & support, the leaders established the principle of shared growth, Require complex coordination. Established instituitonal arrangements for this purpose. Persuade economic elites for pro-growth policy, for sharing benefits of growth with common people. Convince the common people that they would benefit from growth.

15. Ch. 5. Accumulating Human and Physical Capital Both fundamental & interventionist policies for, Building human capital Initial level higher than other developing countries. Public education focus on primary (initially) and secondary (later) education. Focus on technical areas in higher education Contribute also to equitable income distribution. Increasing saving and physical investment. Fundamental policy: avoid inflation, bank security Interventionist policy for saving: control consumer lending, even mandatory saving, etc. Interventionist policy for investment: mild financial repression, tax credit for investment, etc.

16. Ch. 6. Efficient Allocation and Productivity Change Fundamental & interventionist policies mixed. A key question: Interventionist policies adversely affect the allocative efficiency? Flexible labor market Focus on job creation (increasing demand for workers), rather than being responsive to organized labor (union). Growth of agriculture- small difference bet. urban wage income and rural income <cf: other developing country Financial markets & credit allocation Government intervention in capital allocation. It may be justifiable (mainly market failure due to underdeveloped capital market), but carry high risk. Risk contained by strict performance criteria and monitoring.

17. (Continued: Ch. 6) Openness to Foreign technology Get technology transfer thru. licenses, capital goods import, foreign training, etc. Sector-specific industrial policy Japan in 1950-60s, Korea 1970-80s. Using import protection, capital subsidies, etc. Not much impact on the evolution of industrial structure. Export Push: winning mix of fundamental & intervention. A major source of rapid productivity growth. Earn foreign currency, rather than for-ex control. Open to international competition, making the relative price distortion be small. Export became channel for technological upgrade under imperfect world technology market (mkt failure).

18. Summing up: Lessons from the success of HPAEs Getting the fundamentals right is essential. (Policies for) high domestic saving & human capital, sound macroeconomic policy, limited price distortion, etc. Careful selective interventions helped economic growth of HPAEs. Market failures in developing economies corrected (mitigated) by some interventionist policies. Costs of interventions carefully contained. Mild price distortion, subsidy limited, etc. Costly interventions quickly modified or abandoned: pragmatic flexibility.

19. (Continued) Assessment of East Asian Interventionist Policies Difficult to assess the net effects of East Asian interventionist policies. Promotion of specific industries often not worked. In some situations, it worked, carrying high risk. Export-push has been most successful. Question: the selective interventions applicable to other developing countries in the 1990s? Skeptical, because markets are much more open. Eg. Low interest rate- capital outflow will follow. Export-push still promising for developing countries, but more difficult under WTO system.