Role of Government in East Asian Miracle - Singapore and Hong Kong - Case Study Example

Introduction Around the world there are many cases where governments intervene in the economies of their countries. This action is normally prompted by various reasons and it takes place in a mixed economy that is market oriented or simply a market economy. The objectives targeted in economic intervention may be political or economic and they include the promotion of economic growth, increasing employment, reducing or raising prices, raising wages, increasing profits, promoting equality, addressing failures in the market and managing interest rates and money supply (Gerald 2006, p. 34). In the Asian countries government intervention in a number of economies has resulted in growth while in others it has had negative effects. Independence of some economies from the government has had positive results in certain countries such as China and Malaysia (Dixon 1991, p. 67). In this essay the role of government intervention in the economic performance of three Asian economies will be discussed in a comparative manner. These countries are Singapore, Hong Kong and the Malaysia. The essay also examines the effect of economic independence in these economies. Finally the state intervention in the economic development of India and China will also be investigated. Singapore and Hong Kong compared Singapore and Hong Kong are two city states in Asia. Their economies have many major differences depending on the involvement of the government. In Hong Kong the government has steered clear of intervening in the economy. On the other hand Singapore has its government involved in its economy and its intervention is strongly felt everywhere (Sarel 1997, p. 154). The economic system of Hong Kong is by many standards free from the control of the government. For a long time the private sector has received the support of the government so that it can dominate and no restrictions exist on labor, enterprise and capital. There exist no visible distinctions between local and foreign companies. Apart from sensitive areas like telecommunication, no official restrictions are placed on foreign ownership. Anybody can easily start a limited company upon the payment of a small fee for registration. According to Lawrence and Jungsoo (2003), there are no industries owned or subsidized by the government and foreign investors are not given any incentive to attract them (p. 45). In all the economies of East Asia, Hong Kong happens to be the only country not using state equity holding in its strategy for development. The country’s income structure is the simplest and its tax rates are the lowest in all industrial economies. The government lacks a general tariff on exports and imports and has no exchange controls or sales taxes or taxes on corporate capital and capital gains. The government declines to make taxation more progressive because they can erode the investment incentive. The economic system of Hong Kong has a labor market that is self regulating with a flexible price and wage structure to go with. It is therefore evident that the lack of intervention by the Hong Kong government is integral to the economic system of the country (Hsieh 1998, p. 65). Contrary to the situation in Hong Kong, the government of Singapore believes that it should maintain a huge presence in the economy although it has a commitment to free trade. This is believed to originate from the Ruling Peoples Action Party (PAP) pro-interventionist instincts as well as the absence of a big local industrial class during the early independence years. To show that the government believes it is effective in planning, the former Deputy Prime Minister of Singapore Dr. Goh Keng Swee once said that; “the government has to be the planner and mobilize of the economic effort but the free enterprise system correctly nurtured and handled can serve as a powerful and versatile instrument of economic growth (Young 1992 p. 41).” Since the time of Singapore’s independence in 1959, the former Prime Minister Lee Kuan Yew has tried to institute certain achievement based and repression policies that have ensured PAP’s political supremacy (Young 1992 p. 45). Bureaucrats and politicians from PAP have a free reign to direct economic policy. The Economic Development Board was formed by the government as a strategy for development which became hospitable to multinational corporations, started promoting local enterprises and fostered development in many ways. It has offices in major overseas cities such as Osaka, Jakarta, Tokyo, Hong Kong, New York, Chicago, Boston and London among others. Using the intelligence from these offices the EDB continuously monitored world markets. Companies that were seen to be of benefit to Singapore were approached to make investments in the country (Hiratsuka 2008 p. 98). In contrast to this Hong Kong has the Trade Development Council and the Hong Kong Productivity Center that offer consultancy facilities and they are only similar to the EDB in a very remote way (World Bank 1994 p. 11). The government also drafted five year plans to help in coordinating infrastructural development. Away from industrial planning the influence of the Singapore government is also felt in the labor market and saving rates. The government has some control on wages as well through the National Wages Council. Although the government is strongly present in the country’s economy Singapore just like Hong Kong is still committed to open competition and free trade (Lawrence and Jungsoo 2003 p. 66). In both Hong Kong and Singapore however things are changing. Singapore is increasingly promoting an entrepreneurial culture with the government taking the lead. There is continuous privatization of firms owned by the government with local enterprises also being promoted. The government is also revamping the education sector so that future Singaporeans can become more creative. On the other hand in Hong Kong the presence of the government in the economy is likely to increase because of political reasons. The country is softening on its non interventionism policy as it becomes more and more interventionist (Hsieh 1998 p. 111). Malaysia compared to Singapore and Hong Kong The economies of Hong Kong and Singapore show a big contrast in terms of state intervention. This is in spite of the fact that things are changing and in future this might no longer be the trend. Comparing these two economies to the economy of Malaysia, another Asian country, Singapore had more similarities to Malaysia than Hong Kong but currently things have changed. There is more economic freedom in Malaysia which creates more similarities to Hong Kong than Singapore (Ezra 1991 p. 231). The economy of Malaysia relied a lot on the state to survive. The economy was state centered although superficially statistics could not show this. The government however does not control everything that happens in the economy. Medium and small enterprises played a very minimal role in the economy. The government did a lot to encourage few conglomerates and tycoons to concentrate wealth in their hands. Many small enterprises are in the black economy since there are stiff rules before one can form a business. These businesses are illegal and therefore have legal risks and they also don’t pay taxes (Hiratsuka 2008 p. 82). Malaysia scores 66.3 on the economy freedom index and number 53 according to the 2011 index (Gerald 2006 p. 66). Its overall performance is above the regional and world averages. The country pursues liberalization and enhances the investment and entrepreneurial environments. The trade regime is open although there are non tariff barriers. Employment procedures are simple and there is no minimum wage that is mandated therefore making the labor sector a flexible one. There are moderate corporate and individual rates of income tax. Limits for foreign ownership in the financial sectors have been eased. Many requirements for domestic equity that restricted foreign investments are no longer there and investment freedom has improved as a result (Lawrence and Jungsoo 2003 p. 52). At the moment Malaysia and Singapore are in contrast to each other while Hong Kong is similar to Malaysia in terms of state economic intervention and economic freedom. However there are changing trends and this observation may not remain for long. The economic freedom index of Malaysia which is expected to rise creates a good environment for economic development and growth. Hong Kong scores 89.7 on the economic freedom index hence it is the freest on that index (Zhiqun 2009 p. 35). It ranks among the most competitive business and financial centers in the world. This has helped a lot to bring economic development and growth to Hong Kong. A free economy has encouraged a lot of foreign and local investment (Zhiqun 2009 p. 13). Based on the 2011 index on economic freedom, Singapore scores 87.2 making it the number two freest on that index (Young, 1992 p. 53). Although the government of Singapore heavily intervenes in the economy it is committed to free trade and competition. This makes the country have a high economic freedom index. Economic freedom helps a lot in bringing about growth and development in the economy of this country (Hiratsuka 2008 p. 54). State intervention in the economies of India and China exists and these economies have sought of benefitted from the involvement of the state in many of investments. Intervention in various sectors has caused the revival of these sectors which has been of advantage to the economy. From low lying economies in the last few decades these economies are emerging to be among the worlds biggest. However the Chinese economy has risen majorly because of economic reform and not state intervention. The economy of India has grown because of increased liberalization with reduced state intervention over the last 20 years. However state intervention has served to uplift various sectors that were experiencing problems (Ezra 1991, 09). Conclusion The essay has examined the intervention of the state into the economies of three Asian countries namely Singapore, Hong Kong and Malaysia. Government intervention has been strong in Malaysia and Singapore but it is waning. A more free market has been maintained in Hong Kong for sometime but the intervention of the government is currently being experienced mainly for political reasons. These three countries have some good economic freedom based on the 2011 economic freedom index. This freedom has helped to bring about the growth and development that can be seen at the moment. Finally the intervention of the state in the economic of India and china has been necessary but in China it is not the cause of the economic rise. References Ezra F. V. (1991), The Four Little Dragons: The Spread of Industrialization in East Asia Cambridge, MA: Harvard University Press. Hsieh, C. (1998). What explains the Industrial Revolution in East Asia? Evidence from factor markets, Princeton University Woodrow Wilson School of Public And International Affairs Discussion Papers In Economics No. 196, 1-42. Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore, NBER Macroeconomic Annual, 13-63. Sarel, M. (1997). Growth and productivity in ASEAN countries, IMF Working Paper 1997/97 Lawrence J. L. and Jungsoo P. (2003) The Sources of East Asian Economic Growth Revisited, Stanford University and the State University of New York at Buffalo World Bank, East Asia and Pacific regional office (1994); East Asia’s trade and investment: regional and global gains from liberalization; World Bank. Zhiqun Z. (2009) Understanding East Asia’s Economic Miracles; Association for Asian Studies Dixon C. (1991) South East Asia in the global economy; Cambridge University Press Gerald A. F. (2006) East Asia, Globalization and the new economy; Taylor and Francis Hiratsuka D. (2008) East Asia’s Economic integration; Progress and benefit Palgrave Macmillan/IDE-JETRO, Read More