Remodelling East Asian Development

Abstract

I. Introduction At the start of the 1990s the Asian was in full flower. (1) A little more than a decade later, several of the region's leading economies are struggling to regain their earlier growth momentum and Japan, Asia's largest economy and a long-time model for the others, is caught in a seemingly inexorable deflationary spiral. Harder times have forced once confident policy-makers to reconsider the efficacy of past policies and of institutions associated with East Asia's past developmental success. Such scrutiny is profoundly interesting from an academic perspective, but there are now also urgent practical reasons for reappraising the Miracle. There is a need for new policy efforts and for restructuring throughout the region. The shortest route to achieve these is by discarding initiatives that have proven to be failures and building on the strengths of those that are working. From early beginnings in the 1960s, and even before this time (if one includes the measures introduced by Japan in the 1950s), the East Asian model evolved and differentiated into a number of variants, as countries in the region adopted certain basic measures and tailored them to their own circumstances. These variants themselves have continued changing so that the composite East Asian approach to development in the 1990s was a significantly more market-oriented version of the strategy followed in the mid-1980s. When we refer to a remodelling of the East Asian paradigm we are not pointing to the highly dirigiste, protectionist, investment and export-driven model that launched the Miracle close to four decades ago, but the more mellowed pre-1997-98 crisis rendition. By the 1990s, after close to two solid decades of growth and increasing exposure to globalization, East Asian economies were already moving towards a greater liberalization of markets and of trade. There was, in addition, a trend towards more democratic politics in some countries as well as the beginnings of a debate on governance, corporate governance, and legal institutions. The crisis dramatically sharpened choices regarding macroeconomic policies, the role of the state, the building of key market institutions, and the nature of regulation. In the majority of cases, countries do not need to depart radically from policies already in train during the 1990s or introduced after the crisis. But in many instances, there is a need to either follow through systematically with post-crisis reforms--as for instance in the banking sector, corporate governance, and legal reforms--or to modify the emphasis of policies, so as to encourage innovation and to redirect the activities of public agencies towards selective regulation, and away from attempts to manage the market and shape the composition--as well as the organization--of industry. This article assesses how the ingredients of East Asia's past performance fare in light of recent research, and concludes with some suggestions on the priorities, given emerging domestic and global developments. II. The Miracle in the Mirror of Empirical Research Sources of Growth Much of the growth in the industrializing countries of East Asia is traceable to capital accumulation and the benefits accruing from a youthful, fast growing and increasingly educated workforce (see Table 1; Crafts 1999; Bloom and Williamson 1999). (2) As one comes closer to the present, the contribution of total factor productivity (TFP) to growth has risen in the middle- and upper-income countries, although it is still below the average for the Organization for Economic Co-operation and Development (OECD) countries. There remains some controversy as to the precise magnitudes involved, and this is unlikely to be settled because the methodology of estimation is inherently fallible (Felipe 1999). The quality of the data is an additional handicap. However, most researchers believe the growth rates reported for economies in the region--although doubts have been voiced regarding those of China (3)--and broadly accept micro level evidence showing a continuous absorption of manufacturing technology, rising technical efficiency, and a resilient competitiveness extending from low- to middle-tech and now into high-tech products. …