Classical economics theory believes in amarket led system built on a foundation of three principles; appropriateincentives, private property and a stable macro-economic environment.
In linewith this, development would mean leveraging products that add value, createdby putting capital alongside labor. In order for market forces to operateproperly, incentives are vital, as are stability and private property becausepromised rewards fail to materialize without them. However, this economicsystem inexorably leads to social injustice, inequality and elitism, whichneeds to be addressed in order to preserve trust in the system and carry itforward. State led explanations on the other hand, believe that markets are meansto deliver economic progress but need to be properly regulated by the state inorder to promote sound markets. In summary, the state enforces boundaries as towhere the market can operate and is able to influence the final outcomes.Fledgling industry protection is another way the state tries to create thespace from which developing countries can build capabilities, by investing inproductivity enhancing factor inputs. Development can be sustained by investingin social capabilities, some of which may require constraining parts of themarket. While there are arguments for the validity of both of these theoriesand to an extent both of those apply to East Asia, I believe that the ratio is skewedmore towards the state led explanation.
China, Korea, Taiwan, Hong Kong, Singaporeand Japan, more commonly referred to as East Asia have seen remarkable economicsuccess over a long period of time, especially when compared to otherdeveloping regions. At the first glance, these countries are all verydifferent. Some are small city states (Hong Kong) while others are large(China), some are culturally diverse (such as Singapore) while others areculturally homogenous (Japan).
But most of all, each economy has a differentculture and history and has reached this point by treading on very differentpaths. The one thing that is common amongst them all is the role of theirrespective governments in acting as a catalyst for economic growth. In some,authoritarian governments gave way to democracies while others are still governedunder autocratic rule. For all the countries, there was a focus on savings,education and hard work; the markers of classical economic explanations forgrowth. However, the presence of their respective governments in these policiesand many more cannot be discounted, as a result state led explanations have hadmore influence here. Autocratic or democratic, government rule and regulationsare what led to economic growth. Let us take Japan as an example. Japanadopted and then adapted economic systems that were already successfullyestablished around the world.
Modelling its bank after Belgium, army afterGermany and so on, Japan put its own take on its “imported” institutions andsystems. Placing the utmost importance on learning as well as opening itself upto the various technologies around the world, Japan learnt from abroad and theninculcated these learning into the heart of Japanese culture. Japan quicklyestablished the basics for a market economy, making sure it was able to provideproperty rights, contract law, financial systems and a lack of corruption forbusinesses. Having access to these tools helped small firms get on their feetquickly. While the government gave benefits to almost every sector in order toboost it, Japan’s lack of trade protection for certain sectors assured theirhigh performances and success. Firms learnt how to be nimble in order tocompete and survive. Industries like services on the other hand, were protectedby the State and did not grow as rapidly or efficiently. Japan’s keiretsu modeleffectively linked companies across the board, shutting shareholders out andgiving absolute power to the management of the company, shutting down any andall classic economical checks and balances.
However, Japan has found great successin this model and has used it to elevate its economic and political standing. Korea, having been ruled by Japan, got ajump start on its industrialization initially as a support system for Japan.This leads to a large number on industries and firms being started whenoccupied by Japan, modeled on Japanese businesses. After getting freedom andseparating from North Korea, for a few years nothing really happens (economicswise) in South Korea till Park Chung Hee stages a coup and takes over aspresident.
He maintains control of the economy till he passes away, beinginvolved in a very hands-on manner. Focusing on education, infrastructure,technology and innovation, he takes South Korea to where it effectively istoday. Korean chaebols work similarly to Japanese kieretsu’s, with companiesand businesses being connected to each other. The policies changed after Park’sdeath and South Korea has slowed down its economic growth rate somewhat. Itremains to be seen if it can continue a similar appropriate rate as ademocracy. Throughout South Korea’s economicdevelopment, the state kept a large role in business, directing policies andcredit to favored firms while financially or legally punishing other firms fromtime to time.
This authoritarian stance can be largely attributed with liftingSouth Korea’s economy up and helping them break the vicious cycle ofinstability and poverty. By having such a government after the coup, the statewas able to accumulate its resources and then mobilize them into specific channelswhich were then used to catalyze productivity growth. Policies such as tradeliberalization, institutional and policy reform and a focus on human andphysical capital were established by the State in order to speed up growth. Thegovernment put greater emphasis on long run growth, often sacrificing civilliberties and freedom of expression for its sake.
By improving the quality offinancial systems and giving potential investors protection as well as puttingin regulations, the government was able to foster an environment forinvestment. The government sought to create markets where they did not exist,by directing investments and deploying resources strategically. By following an”open door” policy for technology and being flexible and adaptable with respectto innovation from all around the world, South Korea had an edge over countriessuch as China who were shut off from the world for some time. As a result ofinstituting these policies to create macroeconomic stability and an atmosphereinstrumental for ensuring political stability, South Korea was able to grow byleaps and bounds, because of an authoritarian government. Taking a look at Singapore, we have asimilar story of a country that threw open the doors to foreign investment,while the government had majority or entire ownership of a lot of leadingfirms.
According to World Bank data, it is towards the top of the charts forgovernment efficiency, spending, healthcare costs as well as education. Thegovernment has a tight hold on the country, with the state even trying to fixmillennials dating lives. Lee Kuan Yew’s vision for the country made Singaporethe country it is today, with quite a few state controls on citizens notusually observed or accepted in the western world. Policies instituted by thestate legally and financially (tax regulations) attracted investors from allover the world which is what Singapore, a country lacking in natural resourceswas aiming for. These attractions did come with moves like restraining laborunions and consolidating the rest into one umbrella and a steady limitation ofcivil liberties and human rights that would be unacceptable to the westernworld. And it is beginning to show in the country. While Singapore today is oneof the world’s fastest growing economies, and the effectiveness of the state’sfree market, education and globalization policies is undeniable, citizens arestarting to want more. Income disparity is glaring and citizens areincreasingly becoming restless with no way of being able to express it legally.
Happiness amongst citizens is another issue the country is facing that is atthe least an indirect effect of its policies and no change seems to be insight. The problem with authoritarian governmentsis that you never know until it’s too late if they will work in favor of thecountry and its citizens progress. Ideally, an authoritarian government shouldhave an economically literate strong leader with an equally capable team aroundhim along with a governing system in place that allows for top down coherentand flexible decision making. While certain countries (such as South Korea andSingapore) definitely fell into this category, countries such as North Koreaare on the opposite end of the spectrum. While the government in North Korea ishigher up on the authoritarian scale, things have not worked out at all forNorth Korea. It has become a totalitarian state, absolutely shut off from therest of the world.
This also means that there are finite chances for economicopenness or reform, even with its neighbor, South Korea. Although there is nota lot of data, according to the CIA factbook, North Korea is ranked 215 out of230 countries when it comes to GDP per capita comparison. Most of its funds areallocated to military research and spending, draining away resourcesdesperately needed for investment and civilian consumption. Manufacturing,industrial and power outputs have ceased to grow for years from a fraction ofpre-1990 levels, with no improvement in sight. The famine in the mid 1990’s issaid to have caused the deaths of a big percent of the population. Domesticproduction of food still does not satisfy demand and a large percent of thepopulation is malnourished and living in poor conditions, with no hope insight. China has faced terrible consequences ofauthoritarian rule as well. Mao’s “Great Leap Forward” caused terribleconsequences for industries such as agriculture that caused the famine leadingto 25-30 million excess deaths.
Overall economic output fell, furtherdistancing the gap between what Mao promised and what was actually delivered.Moreover, this started a period of isolation from the rest of the world as theSoviet Union cut off all ties with China. This further worsened the economicsituation as there was no knowledge or technology transfer between China andthe rest of the world. Mao’s experiments disrupted the lives of millions,without any kind of outcome which might have justified the disruption.
Hiscultural revolution was just as bad, with greater reaching social, cultural andpolitical ramifications. Politically, he alienated the idea of one leader fromthe party manifesto, along with ousting some very talented political leaders aswell as causing widespread fear and distrust of the government. Groups ofstudents as well as Red Guards attacked people openly on the streets, accusingthem of wearing “elitist/bourgeois clothes”. Intellectuals and party officialswere systematically purged with “imperialist signs” being removed. In essence,the Cultural Revolution debilitated the economy, ruined millions of lives andplunged China into 10 years of bloodshed, mayhem, hunger and stagnation. In summary, I believe that East Asia’sgrowth and success can be credited to the authoritarian rule commonly found inthese countries, as well as the state led economic policies, a fact that SouthEast Asia has tried to replicate without success.
In economies prone to rentseeking, unstable financial systems and an inefficient legal system,authoritarian rule seems to foster growth more than democracy. As in ademocracy, an element of luck is also involved when it comes to the leader ofthe country and is as important.