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Development: Meaning, Measurement and Strategies - Part Seven of ten

Dr Y Subba Reddy, Faculty, Institute for Financial Management and Research (IFMR), Chennai.

Asian 'Miracle'

In Southeast Asia, the development model that was adopted initially was the one based on the Japanese model of intervening capitalism.

In 1945, when the Korean peninsula was partitioned, South Korea had been left with very little. In 1950, when North Korean troops invaded the south (along with direct Chinese participation), it had seemed for a time that South Korea might not survive at all. Despite the end of the war in 1953 with a truce, it showed the precarious position of South Korea. Thus, in the aftermath of the war, South Korea desperately needed to build up its economic strength, especially as both China and North Korea embarked on rapid industrialization, communist-style. But South Korea was in a terrible state, devastated by the war. Seven percent of its population had been killed, including a large proportion of young men, and two thirds of its meager industrial capacity had been destroyed.

Of all the Asian countries, South Korea proved to be the one that most consciously, if ambivalently, adopted the Japanese model. The result was a system that was highly interventionist, but with the discipline of having to export. The government targeted six strategic industries for support - steel, petrochemicals, nonferrous metals, shipbuilding, electronics, and machinery. It pushed the chaebols to pursue aggressively only the most advanced technology, and it pushed for scale. The chaebols had generous access to credit and were insulated from downturns by government support. They were protected from foreign competitors in the Korean market and from domestic competitors as well. The companies received exclusive licenses for their products, and only one chaebol was allowed to sell in the domestic market during the first phase of a new industry.

At the end of 1970s, the government, however, began to back off from the massively interventionist Heavy and Chemical Industries Initiatives program, because of the rise of domestic opposition to the then Park regime. Despite the success of the industrial strategy followed till 1979, the need for a change was recognized. By then, many of the chaebols were becoming woefully inefficient and would have been insolvent without continuing government bailouts. The banking system, largely government owned, was accountable to virtually none. The agricultural system was massively inefficient. The prescription was to pull back the economic frontiers of the state, sell off at least some state controlled enterprises, free up the finance sector, and reduce import barriers in order to expose inefficient industries to foreign competition. There was recognition that complexity of economy had now grown beyond the government's ability to manage it. Consequently, South Korea pursued policies aimed at less intrusive indicative planning, an expanded role for the market, and financial and import liberalization. The changes did not come easily. Considerable opposition had to be met from powerful bureaucracies and from Korean companies used to being taken care of.

Korea is paying a heavy political penalty for its economic success. Massive state intervention created massive opportunities for corruption. In August 1996, two former presidents were found to be guilty of corruption. In its way the outcome was considered an indictment of the entire system that had propelled Korea to the forefront of the world economy. The long years of military dictatorship leave a complex and difficult legacy for the nation. A more mature economy going into the next stage of development will require the realignment of market, government, and industrialization.

For Taiwan, things hardly looked promising in the late 1940s and early 1950s. The economy had few resources, few entrepreneurs, and no savings, and it had been heavily damaged during the war. Yet Taiwan did have a few strong foundations. A legacy of its fifty years of Japanese colonization was the heavy emphasis on education. By 1949, half of the population was literate. They identified a number of causes - hyperinflation, corruption, inequality, lack of agrarian reform, arbitrary government power, failure to embrace modern science and technology. These became the lessons they methodically sought to apply on a much smaller stage.

Gradual would prove to be a fair description of Taiwan's economic policy change. Through most of the 1950s, Taiwan concentrated on the familiar import-substitution strategy, with a heavy investment in infrastructure and a focus on labor-intensive production, backed up by protective tariffs and tax incentives. It also embraced state-owned enterprises. US foreign aid was very important enabling Taiwan to invest in equipment while still paying for its imports. But by the late 1950s, Taiwan could see that American aid would end and thus there was an urgent need to be able to earn foreign exchange. It made a decisive shift to export manufactured goods. This meant not only an opening up but also, although less obviously, the beginning of relaxation of domestic controls. The government supported these new would-be industries through low-cost loans, lower tariffs on imports that went into making exports, and aggressive search for technology. It also encouraged foreign direct investment, in order to facilitate the transfer of skills and technology and upgrading of quality. The results were spectacular. Exports rose from $123 million in 1963 to $3 billion in 1972. A new phase began in 1980, with an emphasis on technology and research and development and from there on the trend toward liberalization became more explicit. As rags-to-riches stories go, Taiwan's is spectacular. Its per capita income rose from $100 in 1949 to almost $14000 today. For several years, its central bank held the largest foreign reserves of any country in the world. Today it produces 30 percent of the world's notebook computers and half of the world's computer keyboards, monitors, scanners, and motherboards.

In the late 1990s Taiwan faces the same squeeze as others of the first generation high-growth - but no longer low-wage- Asian countries. They are pressed on one side by the low-wage, newly industrializing countries and on the other by high-technology products from the established industrial countries. Taiwan has tried to respond by augmenting its high-technology capabilities. Also, Taiwanese entrepreneurs have, in the quest for low wages, stepped up their foreign investment, including a great deal of the mainland.

In early years, Singapore was a country besieged. It had no great confidence that it could make it or even survive. In its development efforts it established the Economic Development Board to guide the creation of a modern economy. State-owned companies were set up staffed with the best that were available. Civil servants were forced to think like businessmen, and their promotions were tied to the profitability of the state-owned enterprises that they ran. A very high savings rate was promoted along with an enormous commitment to education. Yet state domination was only part of the story. For over the same period of time, Singapore made a crucial commitment to international commerce. First it would create an environment conducive to economic growth, low inflation, stable and predictable rules of the game for business and foreigners to operate by, a high saving rate, an anticorruption ethos and a climate friendly to business. Second it made the very fashionable decision to court multinational corporations, for these firms would move in with technology, skills, capital, and access to markets. The firms were vetted carefully for what they brought and what industries they represented. Singapore was looking for stable companies with strong technologies and a willingness to invest with a long-term perspective. In the late 1990s, Singapore worries about losing out to the newer low-cost production areas. It has sought to protect itself by moving up the value chain to higher technologies and by carving out an external economy, new sphere of economic activity- as for instance in the 'second Singapore' it is overseeing in China.

In two decades Malaysia transformed itself from an exporter of rubber and palm oil to one of the world's largest manufacturer of computer chips. With just 19 million people, it is the thirteenth-largest trading nation in the world. It trades more than Russia and twice as that of India. It also has the thirteenth-largest stock market in the world, and 83 percent of its exports are manufactures. The turning point in Malaysia was the 1969 anti-Chinese riots. Democracy was suspended and a 'New Economic Policy' was launched, with the intention of promoting rapid growth and also crucially to bring about redistribution. It was a massive program of affirmative action, quotas, and favoritism that was meant to lift the majority bumiputras - the sons of the soil - out of poverty and into schools and universities and then into the middle class. There was no end to the ingenuity of the program. All business enterprises were to have at least 30 percent Malay participation. The government offered bumiputras lower mortgage rates than non-bumiputras. At the same time, foreign investment was encouraged and the country was launched on a high growth curve - 7.8 percent per year in the 1970s. Per capita income rose from $390 in 1970 to $1900 in 1982. The country also developed national unity. There was enough economic growth to go around.

But by early 1980s, the New Economic Policy floundered. The government had expanded public enterprise and made a very large investment in heavy industry, which was not working. Losses and inefficiency were mounting. The deficit of public enterprises grew markedly as a share of the GNP. Economic growth faltered. At that point a sharp shift in the economic policy was introduced towards greater role for market. The emphasis now was on efficiency and modernization. At this point the relevant parts of Japanese model to the Malaysian economy were also applied. Influenced by the Thatcher's revolution, Malaysia embarked on privatization of state-owned enterprises. The private sector would be the engine of growth. The actual privatization, however, was not laissez faire. The government continued to hold large, even controlling, stakes in many firms. In recent years a new strategy has been launched - National Development Policy and Vision 2020 - which aimed at 7 percent annual growth, meaning that the GNP would double every ten years. In this enterprise, the private sector would operate in close 'partnership' with the government.

Just as Malaysia came charging after the first generation tigers, it will also face competitive challenges from the next generation. And like others in the region, it will have to temper its ambitious plans for infrastructure development. Yet in the meantime, the country has racked up an extraordinary record - not least, keeping ethnic tensions at bay by spreading the benefits of growth.

In Indonesia, there was a long clash between two groups of technocrats - 'engineers', who wanted to undertake big high-visibility projects, and the 'economists', who wanted to reduce government control and intervention. Unlike Taiwan, Indonesia was unable to resolve that clash until 1980s, when the country made a major turn toward the international market and deregulation. It was certainly influenced by opening up of other countries in the region. Its major objective was to free itself from excessive dependence on oil and gas exports. The program has generally worked. Indonesia is now a high-growth country that has successfully moved toward being a significant diversified exporter and away from a heavy reliance on oil and natural gas exports. It however, faces a major question about regional development, the link between education and economic development, the prominent role for of the Chinese entrepreneurs, equity and income distribution and corruption.

Thailand's growth since the mid-1980s was propelled by foreign investment, led by the Japanese. The country went through some tough political battles, centered on a struggle for power between various military and civilian groups. Since the early 1990s, the government has sought to reduce its role in the economy through large-scale privatization. The policy of privatization was carried out for two reasons, necessity and prudence. State companies needed the injection of more state funds if they were to survive and grow. The state could not afford to do that even if companies were profitable. The public was demanding leaner government, getting rid of the fat, and did not want to see state-owned companies to be continued as state employment agencies without any productivity effect or long-term potential. The timing of the end of the communist system was also a major factor in propelling the global trend toward the free market. All fears of capitalism's failures and the belief in the dominance of the state were cast aside with the collapse of the communist state and, with it, of government control.

Vietnam has well-educated population and, in many ways, the attributes to spur growth. Yet its transition is likely to be more difficult than that of the other countries in the region, for the system's legitimacy and ideology are rooted in the Vietnam War and hostility to capitalism and the West. To embrace the market would be to call into question the fundaments of the regime, which is hardly something that the leadership wants to do. Thus for the time being, Vietnam is suspended between state domination and private initiative. There is a market system, but the private sector has not been freed up, nor has reform of state enterprises begun in earnest.

Perhaps the surest sign that East Asia growth is a comprehensive, regional phenomenon comes from the Philippines. For many decades, the country operated far beneath its economic potential. Social inequalities were extreme. Even after the fall of Marcos in 1986, Philippines remained a suspect destination for trade and investment, its chronic corruption and disorder contrasting with fast growth elsewhere in the region. Aquino and Ramos brought economic policy in line with their regional partners. Freed currency markets and the lowered trade barriers had made the black market less pervasive. With a sustained growth rates of 4 percent or higher since 1994, and with the progress made toward ending chronic electricity shortages, the country has become a newly attractive emerging market.

The countries in the region have gone through a series of currency and capital-markets crises in the recent past. Ironically, the impact of the latest is a sign of how far they have come, for none before had either the visibility or the regional and international repercussions. Some see in the 1997 crisis similarities to the bursting of the Japanese 'bubble'. They fear that weak financial sectors, overbuilt real estate, and industrial overcapacity will mean that difficult economic times lie beyond the miracle. Yet one of the hallmarks of these countries over the years has been their flexibility and adaptability, and necessity now provides the opportunity for them to once again restructure their economies and return to sustained growth.

[To be continued]