Does the East Asian Miracle Prove Mercantilism or Liberalism Right - Research Paper Example

Introduction The past three decades for the East Asian Economies have been fundamentally consequential in terms of generating instructional experiences as well as engendering significant reiterations of existing perspectives and the resultant emergence of new ones. Hong Kong, Singapore, Thailand, Indonesia, Malaysia, Taiwan, South Korea stand as examples of economies exhibiting rapid and strong growth emerging from states of poverty and underdevelopment during the post second world war era. The Economies of Japan and the Peoples Republic of China (PRC) shared similar fates. However, the mid 1997 marked a phase of difficulty with a financial crisis that initiated in Thailand affecting and hindering the growth of the region. The noteworthy fact is that the recovery was rapid and in spite of predictions of downfalls, the economies were able to reinstate themselves onto the previous trajectory swiftly. The phase of initial growth was as “miraculous” and the rapid recovery was also identified as being spectacular (Islam & Chowdhury, 2000). However, opinion regarding whether it was the openness to exports and thus a predominantly neo-liberal approach to development or rather the significant state interventions and thus a mercantile or a revisionist approach that led to this observed success, is considerably divided. The present essay seeks to analytically explore the fundamental factors behind East Asian economic growth as well as causes and consequences of the crisis and the subsequent recovery to finally identify whether it was a dominant role played by the state or the effective utilization of opportunities opened up by the market that best explains the observed events. However, it should be noted that attempting to decode the relative extent of the role played by either the interventions of the government or the market is difficult and the possibility of adopting multiple perspectives stands as a predominant reason for the very existence of the related debate. Defining the dynamics between the state and the market has resulted in one of the longest and the most difficult debate in IPE scene not only because this question is closely related to political province and economical province which are linked by through tenets of governance of economic policy, but also since the dynamics have implications for typecasting a states political disposition as well. Besides, with the present situation of collapsing boundaries between the economy and politics, this issue is gradually mounting in terms of complexity. The debate between liberalism and mercantilism in East Asia region has one of the longest histories and could not reach a conclusion until now. Even though it may be argued to be unique and a special case, this debate has deep rooted implications for theoretical development and insight to the other underdeveloped state like Sub-Sahara or South East Asian countries. It should be however noted, it is hard to point out any one perspectives victory over the other in absolute terms. As Maturana pointed out, there might be no ‘independent object reality’, so for every point of view, every kind of explanation. (Maturana, 1991) Moreover, because East Asian Economy is not a single unit, identifying the particular approach favourable generically to all the economies of the region is a complicated endeavour. Further, there also exists the possibility of any ideology being overemphasized or undermined by ‘a dim view of East Asia’s Economic success’ with statistical evidences (Wade, 1990). As already mentioned, in spite of being classified as East Asian Countries, and even sharing a number of common elements contributing their economies, each country has its own government style and history thereby generating a degree of asymmetry. Moreover, in EACs many dimensions are overlapped. For example, international and domestic dimension, political factors and economic issues are connected with the concept of economic policy. And this region itself is very dynamic region in a sense that, its rapid changing mode of labour quickly lessens the importance of low skilled labour. Plus, special location of East Asia and its geopolitical importance and its unique cultural heritage embedded with principles such as Confucianism complicate the question further. Before moving forth on the quest to answer the question, it is to be noted that most of the current debate seems to be attaching excessive importance to the usage of economic and financial methodologies and frameworks to analysis. However, I do feel every issue about International Political Economy should be analyzed from a predominantly political perspective particularly as macro-economic circumstances which define the condition of one country’s realm are the essentially results of the power politics between nations (International Relations) and one countrys economic policy is naturally the outcome of political process within its political territory. Bearing this fact in mind, I intend to adopt a level analysis framework to analyze the true character of EACs miracle. Analysis of Key factors (level analysis) INTERNATIONAL LEVEL Given certain international circumstances, EACs could have had certain advantages to develop their economy rapidly. Firstly, during the cold war, ideological competition with Soviet Union made the U.S. to support EACs more mercifully. For instance, from 1954 to 1984, support worth 15 billion dollars was provided by the USA to South Korea region and 6.3 billion to Taiwan (Islam & Chowdhury, 2000). Secondly, industrialization of Japan and its subsequent fast growth had a very significant impact on the development and growth of the EACs in the mid twentieth century. Japanese investment toward EACs started in 1970s. As ‘Flying Geese model’ points out, Japanese investment at that time was not limited to direct capital investment (Kojima 1977; Cumings 1987). With the capital flow, part of the labour intensive technology was imported to many EACs. Especially in the 80s, the value of the Japanese Yen increased rapidly and led to raised production costs in Japan. So through foreign investment in the EACs, production could be optimally fine tuned. This pattern went on until the early 1990s when the Japanese economy started to stagnate. Thirdly, as mentioned above, EACs’ international position was low to start off with, thus resulting in arguments that they could have enjoyed the ‘advantage of backwardness’. Alexander Gerschenkron (1962) explained that late industrialized countries could enjoy the late-comer’s advantages such as obtaining developed technology and development loans (DLF loan). However, to take such advantage, a well developed banking system and substantial investment is in order. By necessity, the major part of this ‘Big spurt’ should be from the public sector. This does signify the perceived importance of intervention for EACs. From this perspective, EACs also were blessed with the “learning effect” of not having to repeat the mistakes which the former industrialized countries had made. Fourthly, because globalized capital seeks cheap and skilled labour in the world, with its abundance of labour supply EACs had comparative advantages to be ripped from labor intensive productions (Hikino & Amdsen, 1994) . Lastly, Adopting and imitating foreign technology resulted in ‘a positive spillover on production capabilities, constituting another competitive asset in the market.’ (Amsden : 141p). However, these fore-mentioned advantages of this liberal atmosphere of international economy were available globally. And therefore, why it was the EA economies that were best able to utilize these advantages where others failed stands as a question investigating and more importantly brings us to the question of the national level factors and the role of the state in these economies. DOMESTIC LEVEL Even though international conditions have significant effects, since they are beyond national control, the most important and determinant variables must have been the actual policy framework classified at the domestic level. This section identifies the domestic level factors that seem to have been most significantly relevant. First, most of the East Asian countries including South Korea and Taiwan were historically subject to Japanese colonialism. Japan colonized many of EACs and extracted labour and crops from them. However, through the process Japan contributed to development of infrastructure in its colonies. For example, during early 20th, the Japanese emperor built up a railway network and schools of modern type in Taiwan and Korea. These strongly emerged as basis for the economic development in the late 20th century. Secondly, most of the EACs suffer from lack of natural resources. This became a basic factor toward making the industrial policy export-oriented. Further, efforts to create disciplined and skilled labour forces also had significant contributions in the development of the region. Thirdly, as a result of several wars in the East Asian area, including World War II and the Korean War, almost all the East Asian Countries substantially had weakened labour forced as well as reduced strengths of the capitalist class. Naturally, this vacuum of classes became the decisive condition to the emergence of strong state.1 Fourthly, these nations were characterized by military or authoritarian governance. As a result penetration and sustenance of power within territory was strong and thus allowed rapid decision making. In fact such authoritarian governance provided the advantage over democracy as in case of the latter, important political decisions can be sanctioned only once consensus of the majority. This would be an important factor especially in transitional period after Oil Crisis in the 70s. Fifth, they had a bureaucracy of ability. Like Peter Evans pointed out in the concept of ‘embedded autonomy’ (1995), the economic bureaucrat and the political bureaucrat coincided. This results in flexible industrial, financial, labour policies. Most noteworthy point in this respect is that successful countries in EACs have a stable governmental control. With its strength, successful EACs started to guide the market. And started to build institutions to mobilize the resources and guide economy within and outside of the country. The strong government led to with a clear national goal, namely reconstruction of the nation after the war, actively got a pretext to involve directly in the economy. This reflects the similarity of EAC’s domestic situation to countries which used mercantilistic policies in the 16th and 17th centuries.2 For example, Taiwan and Korea had a ‘pilot agency’ like Japan had MITI. These controlled the wage price. And they set the price at global level and selectively intervened in the economy. With the relative autonomy, the whole economy could be fine tuned to an advantage to compete global rivals without political hindrances. Liberalist approach  Generally speaking, the late 20s is dominated by liberalist theories. The reach of these extended to explaining the EACs development as well. Especially after the Mexican financial crisis of 1982 due to the balance of payment deficits with IMF and World Bank the Washington Consensus affected almost all developing countries. It would be important to note at this juncture a fundamental aspect of liberalist approaches. Often it is misunderstood that liberalists devaluate the role of government because one of their argument is that regarding principal source of underdevelopment as government policies that distort economic incentives, inhibit market forces, and actually work against economic development (Gilpin, 2001). However, the liberalists do not always deny the role of government. Basically, even though they prefer small governments (Caporaso and Levine 1992), as we can see in the World Bank’s report (1999), in the process of growth, they accept certain minimal roles for the government. However the difference from mercantilistic views is about the extent of control to be accorded to the government. Whilst mercantilists the EACs miracle attribute to the successful control of the state, liberalists insist that it was actually a minimalized role of government and a pro-market approach that caused the success (the World Bank 1993). They insist that EAC’s growth was a natural or inherent property of capitalist economies and ‘unshackling exports’ was a key to success. These views emphasize the EAC government’s role in removing obstacles, and assisting private enterprises and Foreign Direct Investments. Liberal approach toward the East Asian Miracle can be characterized by few factors that EAC had achieved. Those are, stable macro-economy, accumulation of physical and human capital, removal of distortions, comparative advantage based policies, high rates of investment, using TNCs as engines of growth, and above all, openness to the world. In short, Liberalists have a belief on the market and prefer the market conforming economic development strategies to analyze EAC’s economic growth. When it comes to East Asian countries, they assess that the development policy, specifically that of export-led growth the EACs used was appropriate in the liberal circumstance of the open economy and significant for the miraculous growth as well as post-crisis recovery.   MERCANTILISTIC APPROACH The mercantilists argue that it was actually the optimality of the governance and its effective and efficient handling of private capital and the market forces that led to the success story of the EAC’s. Existence of efficient and development-oriented bureaucracy, institutions which back up government’s industrial policy, their power to cut social pressure such as a demand of distribution is important. Moreover, keep market friendly attitude, they had a ‘Pilot agency’ that can set the long-term strategy of the country and control all of the resources such as the Economic planning board in Korea. Assessing the EAC’s miracle Now, with an understanding of the factors that contributed heavily to the growth we proceed to determine whether the frameworks adopted which proved to be effective were driven by principles of mercantilism or those of liberalism. As pointed out above, EAC’s economic development has many weighty factors. And each perspective explains well some aspect of EAC’s economic growth, and in some senses both played important roles. It is true that liberal approach explains a part of East Asian Countries miracle. For instance, EACs used FDI effectively, and with using market-conforming policy they pursued export-oriented strategy. Besides, some of their process was liberal toward the global economy such as provoking competence. However, Liberalist approach is not sufficient. Theorists have noted and even the World Bank Report (1999) concedes that the government did play an important role. Like Leibenstein mentioned the ‘critical minimum investment’, at the first stage’s ‘big push’ was made by the government in EAC. Because contrary to Western developed dynamics between the market and the state, EAC was under influence by strong government which effectively reconstructed the country. Also in the process, government used selective intervention and strategic approach. Through utilising the authoritarian control they governed the market and mobilized resources effectively. Therefore, if one has to identify the predominance of either ideology, mercantilism seems to score higher. However, we cannot ignore the overall influence of liberal atmosphere of the world. But in a sense who can take an advantage of this ambience is critical, determinant should be the government. Thus, I think that the experience of East Asian growth proved that efficient government can operate market system efficiently in a certain phase of development and in a certain circumstance (Wade 1990, Dietz 1992). That is to say, the driving force of EACs has been the government that led and organized their domestic critical factors effectively, and maximised the advantages obtainable from the otherwise uncontrollable international conditions flexibly. CONCLUSIONS – mercantilistic approach toward liberalism After Schumpeter pointed out the possible bad effects of the market economy, the debate between the state and the market became one of the classical debates in IPE. And we’ve studied that this debate reflected to EAC’s miracle and the role of government. As I mentioned before, it is really effort-demanding process. However, as we can see in Wades argument, most of the neoliberal theorist lack from giving evidences. Both of them are giving us only circumstantial and cognitive evidences. With a critical mind of current debate leaned toward economic financial, we’ve researched critical political factors that affected to EAC using level analysis. And we’ve found that the key could be found out in their economy policy and political factors. And observing who made the economic policy, we could realize that the role of government was the primal determinant. So does that mean mercantilism is proved right from the lessons learnt from the East Asian miracle? From this point of view, can we answer this question: ‘Does the East Asian miracle ‘prove’ mercantilism or liberalism right?’ ‘No’ would be the answer. Even though they used some liberalistic methods in the process of development, it had a mercantilistic purpose backed up by powerful government. When we remember that EAC’s government tried to govern the market and politics above economy in the mid 20th, it could be said to be a reflection of a predominantly mercantilist approach to development. And Like Levy, Amsden and Onis said, strategic choice and intervention was the critical determinant and impetus of EAC’s economic development. However, even if it had some mercantilistic characteristics, we have to recall that this process was under a specific circumstance that even government could not control. It was ‘mercantilistic approach facing global liberalism’. As I have already pointed out, ‘EACs pressured economic development influenced by many political factors of special international, domestic circumstances. So it has implications just as a transient phenomenon which can apply for limited situation. This limitation leads us not to any absolute answer that can hold true for all economies. Like many scholars are pointing out EAC’s pressured economy’s side effects and limitations. It would be an abnormal progress in normal circumstance. Moreover, recent globalization and regionalism such as FTA, NAFTA, APEC, and democratization in underdeveloped countries as a global phenomenon and increasing social demands are leading to certain controversial implications. We thus cannot deny either and neither can we choose any one of the posited ideologies that we have examined. However this does not devalue the implication of this debate. We have learned that EAC’s miracle can give an insight to economies still suffering from underdeveloped states. The final lesson is therefore that optimality has to be reached. Only thing we have to do is to make a harmonious tuning between the market and government. The lesson can therefore be summarised through the lines former president of the world bank Wolfensohn said: "Without an effective state, sustainable development, both economic and social, is impossible" References Gerschenkron, A., 1962. Economic Backwardness in Historical Perspective, Cambridge: Harvard University Press. Islam, Iyanatul & Anis Chowdhury. 2000. Chapter 1: The Evolution of East Asian Political Economy: An Analytical History, in The Political Economy of East Asia: Post-Crisis Debates, pages 1-21. Feng, Yi. 2000. Political Foundations of Economic Management: an Interpretation of Economic Development and Economic Crisis in East Asia, in The East Asian Development Model: Economic Growth, Institutional Failure and the Aftermath of the Crisis, Pages, 71-96. Hikino, T. and A.H. Amsden, 1994. Staying behind, stumbling back, sneaking up, soaring ahead: late industrialization in historical perspective, in W.J. Baumol, R. R. Nelson, and E.N. Wolff (eds.), Convergence of Productivity: Cross-national studies and historical evidence, NY: Oxford U. Press, 285-315. (‘The Irrelevance of Economic Liberalisation in the Third World’, World Development, Vol 17, No 10, October 1989 (pp. 1523-1530)) (Gilpin, Robert Global political economy : understanding the international economic order, 2001, Princeton University press, p.311) Read More