The Effectiveness of Malaysia and South Korea's Economic Development Strategies - Essay Example

262467 Compare Malaysia and South Koreas economic development strategies and their outcomes after 70s when they started approaching Export Oriented Industrialization (EOI). Also, highlight their differences in approaches to EOI. The following will thoroughly examine the effectiveness of Malaysia and South Koreas economic development strategies and their outcomes after the 70s when they started approaching Export Oriented Industrialization (EOI) as a means of promoting higher growth rates. These two countries have often been included within the term Asian Tiger. Malaysia and South Korea were amongst the Asian countries, which had generally been poor and economically underdeveloped at the start of the immediate post-war period. The majority of the countries that would go on to form the Asian Tigers were colonies, or had recently been colonies which had been ruled by Western powers such as Britain in the case of Malaysia, or in the case of South Korea, by Japan. The Asian Tigers were countries that by and large had substantial natural resources, were strategically well-placed, as well as having the potential of becoming wealthier, and eventually offering their populations higher standards of living and consumption. Prior to the early years of the 70’s Asian countries such as Malaysia and South Korea followed Import Substitution Industrialization (ISI) strategies to expand their levels of economic development. ISI economic development strategies had originally been adopted by Latin American countries such as Argentina, Brazil, and Chile in a reversal of the EOI approaches previously used by their governments. Asian and African countries including Malaysia and South Korea were enthusiastic adopters of ISI strategies for economic development during the 50’s and the 60’s Although the governments of the nation states that make up the so-called Asian Tigers had in fact originally acted independently of each other, the economic policies they pursued led to strong, even dynamic economic growth. Up to the early years of the 70’s it had been claimed that the ISI economic strategies used in the developing countries of Asia, Africa, and Latin America were largely responsible for the high levels of economic growth in countries as diverse as Chile, Malaysia, and South Korea. Besides improving the economic position of each of the Asian Tigers, their economic polices also arguably, had a high level of importance for regional economic development within the Southeast region taken as a whole. Although the countries that became the Asian Tigers held various factors or policies in common with each other, this following examination will concentrate upon South Korea and Malaysia as the main examples to be evaluated. In many respects the blueprint for the economic development of the countries of the Asian Tigers was provided by Japan, which had become one of the most prosperous and dynamic economies in the world by the 70’s.1 However less favourable economic conditions in the late 60’s and the early 70’s changed that. Especially after the Oil Crisis of 1973 prompted many national governments within the developing world to rethink their economic development strategies. The governments of Malaysia and South Korea that were eventually amongst those countries that opted to switch to an EOI based economic development strategy.2 The term Asian Tigers itself was originally made up as a means to describe the high economic growth rates and increased degrees of economic development of countries within the Southeast and East Asia regions. When the term Asian Tigers came into widespread use it usually referred to Hong Kong, Japan, Singapore, alongside the two countries featured in this examination in more detail, South Korea, and Malaysia. Japanese development was faster than that of the other four original Asian Tigers. Some studies of the Asian Tigers have also included Indonesia, Taiwan, Thailand, and although still officially a communist state, China.3 There are sound reasons as to why the governments of the countries within the Southeast and the Eastern regions of Asia decided to attempt to accelerate the rates of economic growth, as well as the depth of economic development within their domestic economies.4 Some of the reasons for striving to achieve sustainable high levels of economic growth and development, social and political motivations were also influential, even if not as paramount as economic factors. The objectives of the governments of the Asian Tigers were to modernise their national economies.5 The intention was to transform their national economies from being underdeveloped, to newly industrialised countries and eventually to become developed countries. Japan was probably the best role model for the governments of South Korea and also Malaysia to emulate.6 Japan had been economically, as well as physically devastated as a consequence of the Second World War, yet its post-war economic development and reconstruction was a remarkable example to copy. In many respects Japan had been the country in Asia that had profited the most from using the ISI economic development strategy.7 Japan due to its key geographical and strategically important military position just like the countries of Western Europe had been helped to recover and develop economically courtesy of substantial funding from the United States.8 South Korea had also benefited from American aid in order to reconstruct after the Korean War.9 Malaysia did not receive such financial assistance from the British and was not granted independence until the Malaysian communist rebels had been defeated towards the end of the 50’s.10 Aside from aid from foreign governments and money from private foreign investors, the governments of South Korea and Malaysia could use the Asian Development Bank, besides the International Monetary Fund (IMF) and the World Bank to fund their economic development projects.11 In some respects the governments of South Korea and Malaysia were able to take advantage of their countries respective geographic and strategic positions when they pursued economic development policies, which led to them being included amongst the Asian Tigers during the 70s and the 80s.12 Perhaps the governments of South Korea and to a lesser extent Malaysia would not have received so much foreign investment had it not been for the Cold War. South Korea in particular, was given substantial American assistance after the end of the Korean War which had caused a great deal of damage.13 The government of South Korea instigated successful strategies for economic growth and development in the aftermath of the Korean War ending. The agricultural sector was reformed, whilst the government actively promoted industrialisation, a process aided by high levels of investment, particularly from the United States and Japan (Tipton, 1998, 305). The Americans were keen for South Korea to have a strong economy to bolster the position of its regime, while Japan was the largest single investor in the country. The reason why industrialisation was successful in South Korea was the high quality of the products made there, as well as the skills of the South Korean workforce. Japanese companies also sited factories in South Korea, due to the skills and the productivity of its workers.14 By the 80.s, South Korea had a strong economy with high growth rates, high productivity levels, advanced industries, as well as highly skilled workers. The combination of all of these factors meant that the country enjoyed dynamic economic growth, definitely entitling it to be included amongst the Asian Tigers. High productivity levels meant that South Korea effectively exported more of its consumer goods and industrial products, making its EOI economic development and growth strategies more successful. In the early 70’s the South Koreans decided to change to an EOI economic growth strategy, concentrating upon exporting petrochemicals, cars, and electrical goods.15 Strong economic growth and development in South Korea arguably had an impact upon economic development in the Southeast and East Asia regions. The government of South Korea realised that unhindered and unrestricted trade, as well as investments would be in the best interests of all the countries within the Asia-Pacific area. After all South Korea was one of the Asian countries in the 80s that were successful due to extensive trade with the United States, Japan, and its other Asian neighbours.16 Malaysia was another country that was included in the Asian Tigers, due to a sustained period of dynamic economic growth and also rapid economic development starting in the 60’s. Malaysia had actually been a former British colony and its economy under British rule had been predominately geared towards the exporting of tin, rubber, and other natural resources.17 Malaysia’s transition from an economically underdeveloped country towards becoming one of the Asian Tigers began during the 50’s when the agricultural sector was made more efficient. Improved agricultural efficiency allowed more labour, material, and financial resources to be used in a rapid industrialisation process, and from the early 70’s an expansion of exports.18 Malaysia is actually fortunate enough to process ample natural resources. Its government adopted ISI strategies to achieve economic development and industrialisation. Financial liberalisation and economic diversification via the EOI strategies were introduced when the previous strategies were not seen as being successful.19 East Asian countries using EOI economic development and growth strategies are prone to changes in global prices for commodities such as timber, cotton, rubber, and sugar which could have implications for the East Asia region as a whole. Long-term decreases in such prices would reverse the growth rates of countries such as South Korea and Malaysia with the possibility of plunging the East Asia region into long lasting recessions. However, the export diversification strategies for the majority of the East Asia economies had been very successful for stimulating high economic growth rates.20 Malaysia was able to finance much of the industrialisation process through the increased exports of agricultural products and later the proceeds of selling industrial goods. The dynamic economic growth and impressive economic development was assisted by the diversity of the industries set up, which ranged from heavy industry such as steel, through to the manufacture of electronic components and consumer goods.21 The government of Malaysia, with the private sector having little influence over decision-making controlled the initial moves towards the industrialisation and also the modernisation of the economy. As with South Korea, trade was of vital importance to the success of the industrialisation and also the modernisation of the economy, as without trade economic growth and development would have occurred slowly if at all. The Malaysian government in a similar way to the South Korean government had attempted to further economic development through the adoption of an ISI development strategy.22 Exports helped to pay for new factories, new machinery, besides raising levels of economic growth.23 In turn new factories and new machinery meant that Malaysia increased its productivity levels, and was then able to export more goods and products abroad. Higher export revenues greatly assisted the transformation of Malaysia into being a newly industrialised country, as well as subsequent progress towards being a fully developed country.24 The government of Malaysia changed its approach to achieving high levels of economic growth and development during the 70’s, allowing the private sector and foreign investment to have a much more pronounced influence over economic policy decision-making than had previously been the case.25 Economic liberalisation would prove to be a precursor for both the democratization of Malaysia, and with efforts to strengthen trade links with other countries in the region.26 Economic growth rates remained impressively high throughout the 80’s, and could have been even better but for widespread corruption.27 The maintaining of strong trading links, the improvement of other areas of trade, alongside attracting substantial foreign investments kept Malaysia’s economic growth and development as impressive as ever during the majority of the 80’s and beyond.28 Trade with Hong Kong, Japan, Singapore, and more recently China also assisted regional economic development as a whole, and not just within each individual country.29 For Malaysia as well as South Korea the promotion of regional and global trading links from the early 70’s onwards was vital for the new EOI economic development and growth strategies to have any realistic chance of succeeding.30 Trade between the Asian Tigers stimulated all of their economies to the mutual benefit of them all. Trade with other countries such as the United States, China, Australia, and Russia was also considered to be important for the economic development of the region.31 In 1989, the Malaysian and South Korean governments amongst the governments of the Asian Tigers were included within the founding members of the Asia Pacific Economic Co-operation organisation. This was a completely new non-governmental organisation, which was intended to boost trade between all of its member states and thus provides further stimulus for regional economic development.32 Prior to the financial meltdown of 1997, East Asia’s long periods of economic growth meant that these economies were seen as sound economies to invest in, arguably less risky than the United States or European Union economies. If the long-term implications for the East Asia regions were that lack of financial regulation would harm their long-term economic growth prospects, then it would not prove too difficult to regulate their financial institutions. Advice and guidance for the introduction of effective regulations would be available from ASEAN, the IMF, and the World Bank. Arguably, confidence is more important than regulation for determining the financial health of any individual economy, or the performance of the whole region.33 The level of government intervention and the amount of financial and business regulations varied across the region, Singapore for instance had a great deal of regulation whilst Hong Kong barely had any at all.34 The financial meltdown in 1997 demonstrated that Asian governments could not assume that economic growth was guaranteed or that it could be sustained over an unlimited period. It also dented confidence that the individual countries could escape the implications of such a meltdown. It should be considered that capitalism is a system that has cycles of strong growths interspersed with periods of downturn.35 Originally foreign investors had tended to invest their funds into the emerging industries and enterprises. Countries such as South Korea, and Malaysia had proved adept at attracting investments to their industrial and business developments, investments that drove growth and modernisation. In fact these countries were seen as ideal role models of economic development by the IMF / World Bank due to low rates of international debts and high economic growth rates over a long period.36 However foreign investments began to shift away industries and businesses towards property and land sales. That shift in how foreign finance was invested occurred because the industrial section of the East Asian economies was now enjoying the spectacular growth rates of the 60’s and the 70’s. Investors turned their attention towards property and land developments as they promised a higher rate of return and profits than investing in industries and businesses.37 However the property markets were not as stable or risk free as the industrial and business sector. High property prices attracted foreign investments and loans to companies and individuals hoping to make their fortunes. The problem for domestic and foreign investors alike was that the property and land prices were unstable and not able to sustain high growth or support the mounting levels of debt used to pay for property and land developments. The situation in East Asia at the start of 1997 provided a prime example of a speculation bubble set to explode. Confidence is a major catalyst for economic growth and progress, yet once confidence has gone it can bring about economic crisis and recession. Once confidence is lost desperate remedies are sometimes required to restore it.38 The immediate implications of the East Asian crisis was for the first time in many decades’ countries like South Korea, and Malaysia were faced with the prospect of severe economic contraction. The consequences of these factors can be demonstrated by financial data for 1998. In Thailand gross national product per capita declined by 8.5 % and the growth of investment declined by 32%. The data for South Korea, and Malaysia, was equally bleak. Respectively they suffered declines of 7.4 % and 38.6%, 9.6% and 42.9%. The economies of the region do face stiff competition in some areas, for instance Thai electronic components are undercut by cheaper Chinese exports, whilst South Korean car manufactures face competition most notably from Japanese rivals.39 The financial meltdown in the East Asia region of 1997 amply demonstrated the increased realisation that all economies are interconnected to each other. The process of globalisation means that the economies of the East Asia region are not only increasingly linked to each other, they are also linked to the global economy.40 Amongst the implications of the financial meltdown in East Asia was the need for reforms being highlighted? Some financial experts believed that reforms would have reduced the impact of the financial meltdown or possibly prevented it. Governments are not always keen to introduce economic reforms though, as opening up economies can increase pressure to introduce social and political reforms which governments do not always want to implement. However, governments may believe that reforms are preferable to the economic, social and political harm caused by the financial meltdowns or severe economic recessions (Evans & Newnham, 1998 p. 139). A worrying implication of the whole crisis was that the International Monetary Fund’s strategies did not solve the crisis immediately. That was mainly due to the nature of the crisis being misunderstood. It was not a crisis caused by a balance of payments problem or high levels of government debt. Too much private borrowing and the banks of the region lending too much money caused the crisis. The usual austerity measures advocated by the International Monetary Fund made the financial situation worse, slowed down the recovery process and meant the governments of those countries involved in the crisis had to receive bigger loans.41 There are also methodological implications of the East Asia financial meltdown. Ideas surrounding International Political Economy could be useful in explaining why such meltdowns occur, whether those meltdowns could be predicted or even avoided by national governments and non-governmental organisations. The meltdown once again demonstrated the close connection between political and economic policies as well as the growing interconnection between economies on a regional and on a global basis42. The meltdown can be argued to demonstrate that the process of globalisation and enhanced information technology makes the world a smaller place with greater prospects and risks for those deciding upon political and economic policies.43 Such trends appear to be reducing the sovereignty of nations not only in East Asia yet across the globe. However as the apparent success of the economic policies pursued in East Asia shows it is too early too write off the ability of nations to determine their own economic and political policies.44 Countries like South Korea and Malaysia in the East Asia region had, since the ‘60s, benefited from almost unbroken periods of high rates of sustainable economic growth, which few other countries came close to matching. The governments of the region had different strategies and ideological outlooks although eventually they adopted similar export diversification programmes. That period of growth moved countries such as South Korea and Malaysia up the order of international economic performers. The financial meltdown in 1997 came as surprise to many governments, financial and political experts, although there are factors that explain how it happened even if it could not have been avoided.45 The financial meltdown affected the confidence that the governments of the region and economic ministries would be able to sustain high levels of economic growth over a long-term period. South Korea, Thailand, Malaysia, and Indonesia were the countries most adversely affected by the financial meltdown. Although the implications for the East Asia region could have been much worse if financial rescue packages had not been put in place. The scale of the meltdown had been considered to be vital. Financial aid meant that recovery occurred faster than could have been expected, given the size of the crisis in 1997. 46 The financial meltdown highlighted structural weaknesses within the economies of East Asia. The main implications for the region were that if those weaknesses were not addressed then the East Asia region could be prone to further economic crisis. Without reforms any renewed levels of economic growth will not be sustainable for any long periods of time. Perhaps it would also be sensible if the East Asia region could find ways to predict potential financial meltdowns to be able to take preventative measures. The crisis clearly demonstrated the interconnectedness between political and economic policies; it arguably showed that globalisation, non-governmental organisations, and economic factors beyond their control could restrict the sovereignty of countries. South Korea and Malaysia however quickly regained impressive growth rates as the levels of their exports picked up again.47 Therefore, the Asian Tigers were able to achieve high rates of economic growth and development through the economic policies adopted by their respective governments. The governments of South Korea and Malaysia at first played a prominent role in promoting economic growth and development in their countries. Malaysia had been a largely agriculture country with a high degree of economic significance due to its production of materials such as rubber for export as a vital part of its EOI economic development strategy. The South Korean government had the task of reconstructing its country after the Korean War. Both countries reformed their agricultural sectors as a means of funding industrialisation and modernisation programmes. To a degree both countries were also helped by American aid, especially South Korea due to their strategic locations during the Cold War. Trade was a vital stimulation for the high economic growth and development experienced by South Korea and Malaysia particularly that with the other developing Asian Tigers and with the United States. Trade generated wealth, and it also stimulated foreign investment into all of the Asian Tigers. Contact with other countries also had the unintended effect of promoting economic and political reform in South Korea and Malaysia. Both countries were keen to promote trade further, as demonstrated by joining the Asia Pacific Economic Co-operation organization. Over all, the entire link between increased economic growth and development within the Asian Tigers and the improvement of the regional economic development, as a whole is strong. 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