A study compares between East Asia and South Asia on the level
of economic development and draws some lessons for South Asia.
In 1960, GDP per capita in South Asian countries was higher than in some East Asian countries, such as China and Indonesia. The table below illutstrates what happened next :
Even though East Asia and South Asia are in the same region, began the
second half of the twentieth century in a similar economic situation and are well connected
with each other, it is to be explored why has there been such a wide discrepancy in the economic development
between the two sub-regions.
The development performance of many East Asian countries has showed that economic development is possible even without utilizing the colonization process, which helped propel the economic progress of many European countries until the twentieth century. Several European countries colonized different parts of Asia, Africa and Latin America in the past during the time of their economic development. They heavily exploited the natural and human resources available in their colonies. In this context, one can ask whether the East Asian Development Model serves as an alternative to the Anglo-Saxon development model.
During the initial stage of economic development, some East Asian economies, such as Japan, the Republic of Korea, Singapore and Taiwan Province of China had a number of common policy approaches, including, among them, protection of domestic firms from foreign competition through import substitution, the provision of direct and indirect subsidies and the use of preferential foreign exchange facilities and undervalued exchange rates, as well as large-scale fixed investment supported by ample domestic savings. Those economies had strict capital control regimes until recently. In addition, they pursued active industrial policies.
The second-tier of newly industrialized countries, such as Indonesia, Malaysia and Thailand, also followed similar approaches to propel their economies. An important impetus in kick starting the development process in those countries was the crucial role of the government as a developmental state. It is argued that there was a “nationalist” State with a developmental vision that had the capacity to identify “strategy switching points” once diminishing returns set in. Another researcher similarly argued that the transformation of the East Asian sub-region could not be attributed to the results of free trade and unregulated markets.
The East Asian Development Model basically includes (a) a pro-investment macroeconomic policy, (b) control on luxury consumption, (c) strict controls on foreign direct investment, (d) infant industry protection with export promotion, and (e) a productivity-oriented instead of an allocation oriented view of competition.
Political stability and credibility are also important for economic development since unstable politics generates greater uncertainty, which, in turn, makes economic activities subject to constant revisions. The Keynesian notion of “animal spirits” and “investor confidence” can only emerge in stable political environment. During the rapid growth phase, authoritarian or at least semi-authoritarian regimes had ruled these countries. Governments in the East Asian countries have, in fact, remained strong enough to exercise widespread control and to even take potentially unpopular decisions if they were considered to promote economic development. The governments of those countries have been effective due to strong bureaucracies, which are organized under a strict meritocracy and have attracted highly capable graduates from top universities by offering competitive pay. Many South Asian countries, on the other hand, have been constantly marred by political instability and internal conflict, resulting in a weak government and bureaucracy.
Under the guiding role of the State, East Asian countries encouraged high investment, export-led growth and a focus on the manufacturing sector to absorb excess labour from rural and traditional sectors as a way to boost labour productivity. The East Asian Development Model is in fact a state-guided development model which does not let the market identify the areas of comparative advantage. Instead, government plays an active role through industrial policy, development planning, technology transfer and selective incentives. A researcher argued that state coordination led to an investment boom — utilizing credit policies, subsidies and tax policies. Both the Republic of Korean and Taiwan Province of China provided these incentives for selective increases in investment spending.
The study concludes by saying : 'The development experiences of East Asia show that the governments played a constructive role as a developmental state. In South Asian countries, until recently, governments had been involved significantly in economic affairs. Before the adoption of economic liberalization in the 1980s and in the beginning of 1990s, South Asian countries had pursued economic policies similar to the ones applied in East Asia. These included promoting import substitution, setting up a licensing system, regulating the financial system, disbursing concessional loans to domestic industries, maintaining favourable exchange rates to promote exports, developing state-owned enterprises and setting a high tariff wall to discourage imports. Despite this, the South Asian economies failed to grow at the same level as those experienced by East Asian countries. It has been argued that the failure in South Asia was due to the absence of rapid growth in agriculture, an equitable income distribution and substantial accumulation of human capital.
More importantly, East Asian governments did pursue an active industrial policy to develop the manufacturing sector and technology transfer with human capital development. In contrast, South Asian governments were weaker than those in East Asia and the development process was fragile in the sub-region due the weak interlinkages in the economy. It appeared that the governments of countries in South Asia failed to identify “strategy switch points” to lead to greater growth. Instead, they mainly relied on the exports of simple and labour-intensive manufactured commodities. During the controlled regime, rent-seeking activities directed at unproductive sectors were rampant in South Asia and thus the countries did not succeed in expanding exports after applying import substitution programmes.
Based on the experience of East Asian countries, economic development requires high investment, the construction of infrastructure, the expansion of health facilities and quality education, adoption of technology and innovative practices, and job creation inside the economy. The government should play an active role in promoting those areas although in many instances, it may not be in a position to do so. For the private sector to thrive, a congenial environment for economic activities with adequate physical infrastructure must be in place. Even by adopting a changing scenario, the countries of South Asia, taking into account the experiences of the countries in East Asia, should increase investment in their economies, follow an export-led policy, and develop human capital and physical infrastructure. In addition, the countries in South Asia need to think about the productive use of remittances. Moreover, managing conflict is also a key public policy issue to ensure the future stability and growth in South Asia.'
Acknowledgement : The piece above is summarized from a 2013 paper : ECONOMIC DEVELOPMENT IN SOUTH AND EAST ASIA: EMPIRICAL EXAMINATION OF EAST ASIAN DEVELOPMENT MODEL by Prakash Kumar Shrestha
In 1960, GDP per capita in South Asian countries was higher than in some East Asian countries, such as China and Indonesia. The table below illutstrates what happened next :
The development performance of many East Asian countries has showed that economic development is possible even without utilizing the colonization process, which helped propel the economic progress of many European countries until the twentieth century. Several European countries colonized different parts of Asia, Africa and Latin America in the past during the time of their economic development. They heavily exploited the natural and human resources available in their colonies. In this context, one can ask whether the East Asian Development Model serves as an alternative to the Anglo-Saxon development model.
During the initial stage of economic development, some East Asian economies, such as Japan, the Republic of Korea, Singapore and Taiwan Province of China had a number of common policy approaches, including, among them, protection of domestic firms from foreign competition through import substitution, the provision of direct and indirect subsidies and the use of preferential foreign exchange facilities and undervalued exchange rates, as well as large-scale fixed investment supported by ample domestic savings. Those economies had strict capital control regimes until recently. In addition, they pursued active industrial policies.
The second-tier of newly industrialized countries, such as Indonesia, Malaysia and Thailand, also followed similar approaches to propel their economies. An important impetus in kick starting the development process in those countries was the crucial role of the government as a developmental state. It is argued that there was a “nationalist” State with a developmental vision that had the capacity to identify “strategy switching points” once diminishing returns set in. Another researcher similarly argued that the transformation of the East Asian sub-region could not be attributed to the results of free trade and unregulated markets.
The East Asian Development Model basically includes (a) a pro-investment macroeconomic policy, (b) control on luxury consumption, (c) strict controls on foreign direct investment, (d) infant industry protection with export promotion, and (e) a productivity-oriented instead of an allocation oriented view of competition.
Political stability and credibility are also important for economic development since unstable politics generates greater uncertainty, which, in turn, makes economic activities subject to constant revisions. The Keynesian notion of “animal spirits” and “investor confidence” can only emerge in stable political environment. During the rapid growth phase, authoritarian or at least semi-authoritarian regimes had ruled these countries. Governments in the East Asian countries have, in fact, remained strong enough to exercise widespread control and to even take potentially unpopular decisions if they were considered to promote economic development. The governments of those countries have been effective due to strong bureaucracies, which are organized under a strict meritocracy and have attracted highly capable graduates from top universities by offering competitive pay. Many South Asian countries, on the other hand, have been constantly marred by political instability and internal conflict, resulting in a weak government and bureaucracy.
Under the guiding role of the State, East Asian countries encouraged high investment, export-led growth and a focus on the manufacturing sector to absorb excess labour from rural and traditional sectors as a way to boost labour productivity. The East Asian Development Model is in fact a state-guided development model which does not let the market identify the areas of comparative advantage. Instead, government plays an active role through industrial policy, development planning, technology transfer and selective incentives. A researcher argued that state coordination led to an investment boom — utilizing credit policies, subsidies and tax policies. Both the Republic of Korean and Taiwan Province of China provided these incentives for selective increases in investment spending.
The study concludes by saying : 'The development experiences of East Asia show that the governments played a constructive role as a developmental state. In South Asian countries, until recently, governments had been involved significantly in economic affairs. Before the adoption of economic liberalization in the 1980s and in the beginning of 1990s, South Asian countries had pursued economic policies similar to the ones applied in East Asia. These included promoting import substitution, setting up a licensing system, regulating the financial system, disbursing concessional loans to domestic industries, maintaining favourable exchange rates to promote exports, developing state-owned enterprises and setting a high tariff wall to discourage imports. Despite this, the South Asian economies failed to grow at the same level as those experienced by East Asian countries. It has been argued that the failure in South Asia was due to the absence of rapid growth in agriculture, an equitable income distribution and substantial accumulation of human capital.
More importantly, East Asian governments did pursue an active industrial policy to develop the manufacturing sector and technology transfer with human capital development. In contrast, South Asian governments were weaker than those in East Asia and the development process was fragile in the sub-region due the weak interlinkages in the economy. It appeared that the governments of countries in South Asia failed to identify “strategy switch points” to lead to greater growth. Instead, they mainly relied on the exports of simple and labour-intensive manufactured commodities. During the controlled regime, rent-seeking activities directed at unproductive sectors were rampant in South Asia and thus the countries did not succeed in expanding exports after applying import substitution programmes.
Based on the experience of East Asian countries, economic development requires high investment, the construction of infrastructure, the expansion of health facilities and quality education, adoption of technology and innovative practices, and job creation inside the economy. The government should play an active role in promoting those areas although in many instances, it may not be in a position to do so. For the private sector to thrive, a congenial environment for economic activities with adequate physical infrastructure must be in place. Even by adopting a changing scenario, the countries of South Asia, taking into account the experiences of the countries in East Asia, should increase investment in their economies, follow an export-led policy, and develop human capital and physical infrastructure. In addition, the countries in South Asia need to think about the productive use of remittances. Moreover, managing conflict is also a key public policy issue to ensure the future stability and growth in South Asia.'
Acknowledgement : The piece above is summarized from a 2013 paper : ECONOMIC DEVELOPMENT IN SOUTH AND EAST ASIA: EMPIRICAL EXAMINATION OF EAST ASIAN DEVELOPMENT MODEL by Prakash Kumar Shrestha
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