Economics in Asia

Economics in Asia

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Since the mid 1960s, Pacific Asia has had a remarkable rate of economic growth. This growth has been sustainable and faster than all other regions of the world (see fig. 1). This region consists of twenty-three economies but it was just eight who caused most of this amazing growth. The eight were Hong Kong, the Republic of Korea, Singapore, Taiwan, China, (the “Four Tigers”) Japan and the newly industrialised economies (NIEs) of south-east Asia, Indonesia, Malaysia, and Thailand. The eight high performing Asian economies (HPAEs) mentioned here will be the focus of this essay. What caused this success in Pacific Asia? What role did public policies play in engineering this rapid growth? How was the human and physical capital accumulated?

Most of the high growth in the HPAEs was achieved by getting the basics right. Large human capital and private domestic investment largely powered the growth. High domestic savings levels meant HPAE investment levels remained high. Agriculture experienced rapid growth and improvement of its productivity. HPAEs population growth rate declined faster than in other parts of the developing world. HPAEs were also helped by their labour force being better-educated and having more effective public administration than other developing regions. Another cause of this success, was the development policy used. The policies were made to create a stable framework for private investment while increasing the integrity of the banking system, raising levels of financial savings. Education policies concentrated on primary and secondary schools to create a labour force with better skills. Policies on agriculture pushed productivity without pushing the rural economy. Government intervention was also essential to foster development.

The growth of these HPAEs is highly unusual in the developing world. They are highly diverse in culture, resources and population yet they are banded together with some characteristics. They have all had rapid sustained growth with highly equal income distributions. Strong agriculture, rapid demographic changes and export booms.

There are two main views of how the HPAEs were so successful. The first is the neo-classical, which stresses getting the basics right. This was providing a strong legal framework to promote competition (domestic and international), the absence of price distortions (e g price controls) and the investment in people, health and education. The second view is of the revisionist, where the government uses state-led development and intervention to achieve growth.

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The macroeconomic policies of the HPAEs were very responsible. They were able to limit fiscal deficits to levels that could be financed without the pressures of inflation increasing. Inflation was moderate and predictable, enabling interest rates to be very stable. The stability of the macroeconomic environment made long-term planning and private investment possible. HPAEs adjusted to terms of trade shocks more effectively than other developing economies and have had more robust recoveries of financial investment. Export growth grew thanks to exchange rate protection (Japan, Taiwan and China) and exchange rate adjustments. Import substitution (non macroeconomic) and pro export structures were established.

Leaders of HPAEs tried to build an institutional basis for growth. They put forward ideas of shared growth, where everyone benefits from economic groups. Korea and China carried out land reforms while Indonesia used rice and fertiliser policies to raise rural incomes, this was to prove the shared wealth. HPAEs tried to build business-friendly environments by setting up deliberation councils to shape government policy towards business. Private sector companies drafted the rules and so became more willing participants.

The building of human capital was essential to the HPAEs growth. Spending was first concentrated on providing primary education for all. Universal secondly education was introduced later on. Birth rates fell, so when spending remained constant, more resources were available per child. Further education concentrated on skills (mainly technical) and imported educational services for most of this teaching. These improvements resulted in a technologically inclined human capital base from which they could engage the rapid growth of the economy.

The HPAEs increased the levels of savings and investments by avoiding inflation and keeping interest rates on deposits stable and positive. On the whole HPAEs had higher real interest rates on deposits than other low and middle-income developing economies. Banks were given higher security and made more accessible to the public (especially rural areas). Postal banking was introduced to lower transaction costs and free up more resources for the government. These improvements increased levels of deposits in financial institutions.

The Government's role in the HPAEs labour markets contrasted greatly with the situation in other developing countries. Unlike other countries, HPAE leaders were less inclined to give legislation for a minimum wage which would set the wage artificially high. Instead, they concentrated on job generation and creating demand for employment. Employment levels rose followed by rises in wages (due to markets and productivity). Due to the flexibility of wages, HPAEs were able to adjust to macroeconomic shocks more easily than other developing countries, meaning rapid growth could be maintained and real wage growth was possible. Pacific Asian wages were kept close to the supply price of labour by the high productivity and income growth in agriculture (see fig. 3). This brought the gap between urban and rural incomes to less than other developing countries.

The HPAEs have been helped greatly by their openness to foreign technology. They received technology transfers in the form of licences, capital goods imports and foreign training. Direct foreign investment (DFI) has enabled technology acquisition to be speeded up in most of the HPAEs. Another development policy Pacific Government's used, was to promote certain industries such as Japan did with heavy industry in the 1950s.

The promotion of manufactured exports is another reason for the rapid growth (export push). In many other economies, foreign exchange is preserved by stricter import controls, the HPAEs increased exports to earn additional foreign exchange. Export targets were used very often to push export levels to their maximum. The promotion of export markets often coexisted with the protection of domestic ones.

This essay has shown that the HPAEs have used a wide range of policies to achieve the rapid growth that they underwent. Due to the vast amount of policies the HPAEs used, it is hard to pull a simple explanation from which to learn. One could be to concentrate on the basics, the building blocks of a growing economy because as has been shown, everything else stems naturally from them. The huge success of these Pacific Asian countries is quite an achievement and has already spawned imitations. Another could be that an integrated approach helped when no-one straight policy would work. It will be interesting to see how these HPAEs fair in the future, markets are becoming more competitive and some policies such as export pushing which were used previously, may not be as effective today.
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