Explaining the Rapid Growth of the EACs, Level Analytics - Essay Example

Explaining the rapid growth of the EACs; Level Analytics Introduction In the late 1920s, the countries in East Asia had enjoyed unprecedented sustained and rapid growth in their economies. From around 1970s, different view emerged as explanations to this rapid industrialization in these Asian economies. Some theorists to explain the this trend used the dependency theory while others tried to use the third way method in explaining the cultural value systems of the Asian countries as as a major cause (Wallerstein 1982, Berger 1988, Kahn 1979). However, the core idea can be classified into two major approaches: The market-centric approach which is based on Liberalism(or neoclassical) and state-centric approach rooted in mercantilism. After World Banks noted acceptance of a certain role of government intervention, it can be said that ‘Developmental state’ theory is the centre of the debate (Johnson 1982; Amsden 1989; Wade 1990; Chan 1993; MacIntyre 1994; Evans 1995). For instance, Korea was cited as being one of the nations that had highly Confucian values and was characterized by significant state-led export oriented industrialization, authoritarianism and political development which was followed by economic development. Korea is ranked among the most developed third world countries which further raised the need for the study of the reasons why East Asian countries have been able to record such a magnitude of economic growth within a very short time. As a matter of fact, East Asian countries development has been far much more than other developing countries particularly those in Latin America such as Brazil, Paraguay, Uruguay etc. The question under investigation in this work is what is the implication of East Asian Economic Development? The importance of this question is that it will shed light into the reasons why East Asian countries have been able to record high economic growth rate within a short time and could reveal possible routes that other developing economies could adopt and move on to a trajectory of higher growth. The present study will attempt to present an analytical overview of the factors that caused the phenomenon. As shall be shown, none of the arguments that try to explain the event are comprehensively convincing nor are totally discardable thereby reflecting partial truth to all of them. The Liberalist views tend to stress on increased market orientation while Mercantilist views emphasize on efficient regulation. The present study will explore both sides of the argument using a level analysis framework to pursue the truth. In the following section, a survey of the relevant literature is presented. We present the major arguments of both the Liberalists and the Mercantilists and point out the inadequacies of both thereby motivating the independent level analysis that follows in the section after that. Both international and domestic factors are analyzed and the policy implications are presented before finally concluding with a brief summary of the findings. Literature review Since the 1980s, EAC’s economic success came into the academic spotlight. The main reason of this was its economic growth was noteworthy compared to other developing countries’ – especially with Latin America. Not only because of the pace of development, but also the sustainability. From the late 1980s, various strands of literature emerged to explain the phenomenon. On one side, academics like B. Balassa (1989) and A. Krueger (1995) with support from the World Bank (1993) argued that the decisive reason of East Asian success was Economic liberalization and the minimization of government intervention. On the other side, interestingly, political economists such as A. Amsden (1989), R. Wade (1992) and Ha-Joon Chang (2004) criticized their liberalist perspectives by arguing the cause to be efficient state intervention. Liberal approach (Neoclassical approach) The most basic argument of liberal approach is that East Asian government successfully provided ‘stable macroeconomic environment for saving and investment, and a competitive, open economic structure (Kuznets 1988). Liberalists such as Balassa, Bhagwati, Krueger, Little and Westphal share common views. To summarize, first, they agree that the EAC’s market condition which enables free competition led them to the economic success. Secondly, they emphasize the free movement of production factors, and thirdly, countries can develop where free trade between countries exists. After World Bank published the research paper ‘East Asian Miracle : Economic Growth and Public Policy’ with the fund of Japanese government, the Liberalist perspectives found solid footing. For them, EAC’s success was the result of ‘unshackling exports’ and reaping the benefits of introducing competition (Myint 1988). In a stable macro economy, they succeeded to develop by moving towards market oriented profit maximization through removal of distortions and competitive pricing. The Liberalists also assessed that the EACs effectively utilized Foreign Direct Investment and Trance National Corporations to support their economic growth. Even though Liberal approach gives us many relevant points, there are some shortcomings. They concentrate excessively on external factors ignoring the autonomy of government. And the measurement of development used often is only partial. GNP per capita can reflect only so much as the success in attaining high growth. Important aspects of welfare captured in rate of employment, distribution of income and inequality etc were not considered. State-centric approach(mercantilistic approach) According to the State-Centric or Mercantilist approach the economic development of East Asian countries was a result of the effective and efficient intervention by the state. Led by theorists such as Young and Krugman, these theorists hold that the development of East Asian countries was fuelled by the intervention of the government in offering an enabling environment through which both physical and human capital could be utilized and engendered sustainably. In this regard, the government played a major role in promoting import- substitutes in order to enhance industrialization by accumulating enough capital from imports that could be used later for investment. They believed transferring part of the economy to the control of the private sector from the public sector brings about a more improved and efficient government which offers a sustainable environment in which the private sector can operate in. In this respect, the main economic areas that propelled the East Asian countries into a greater level of industrialization were reforms on taxes which means that the EAC broadened their tax net or base, use of positive and market determined interests rates, adoption of exchange rates that were competitive, import liberalization with greater emphasis on elimination of restrictions that were quantitative such as licences. In addition, the EAC used the deregulation strategy to allow for easy entry into the market as well as competition restriction in order to avoid the death of small scale enterprises, capital financialization to mention a few. Other Alternatives There are also a significant number of other independent explanations to the phenomenon. Jeffrey Sachs (1998) for instance believes that the strength of the Asian model is not perfection but its flexibility and practicality. This was reflected in not only external conditions such as restructuring of International labor division, technological distribution, but also in domestic conditions like political power structures, operations and organizations of various institutions etc. Some scholars have pointed out favorable initial conditions for these economies to be the primal driving force. In terms of economic development, initial conditions are important in the sense that it can determine the direction of industrialization. And these initial conditions are decided not with coincidences, but with political, economical, social factors in historical context. Political stability has also been attributed as being a major force. Compared to Latin American Countries, the influence of transition of political system in EACs was small. Due to civil society being under firm control of government, those governments could implement hegemonic order without any penetration of civil pressure. The political Elite actively reacted toward international environmental shift by policing export oriented strategies. In the perspective of world economy, Latin American countries was under the direct influence of so-called ‘core state’, but EACs were regulated due to the reason of ideological competition between West and East (Koo, 1985). The fundamental difference was that while the Latin American governments tried to act a role as entrepreneurial state by installing state enterprise, East Asian government acted macro economically by focusing on economic planning and framing market mechanism. Another alternative suggested is that growth could have been faster than any other region ‘not because markets have been allowed to operate freely but because the subsidization process has been qualitatively superior’(Amsden, 1992). Flaws in the Theories Like many scholars pointed out the difficulties of finding ‘the most’ crucial factor that led EAC’s development, it might be impossible to figure out the truth behind the various facts. Or even there might be no ‘independent objective reality’ of East Asian Miracle.(Maturana 1991) And each theoretical perspective possibly could be overemphasizing or undermining ‘a dim view of East Asian economic success’ with statistical numbers.(Wade 1990). Indeed previous debate reveals numerous weaknesses. Firstly, we hardly can find any critical perspective from any side before the financial crisis of 1997. So it failed to shed light on some negative effect like ‘redistribution effect’ in some countries. If there are some critics, it mostly comes from logical contradiction, that is, second, dual geographical standards. Based on the vague distinction between ‘East Asian’ countries and ‘South East Asian’ countries, many articles often use ‘East Asian’ countries to ‘agree’ on the issue, include South East Asian countries like Philippines to criticize on that. Third, they assume East Asian Countries as 1 identity, regardless of its specific characteristics. For example, they neglect different governmental style within East Asian countries, and given condition such as natural resources which can make differences. Fourth, previous debate showed its vulnerability to the short-term change of economies in the region. From financial crisis in 1997 to the instant recovery from crisis, changes in “the” dominant theory revealed how vulnerable to power game in academic field the stances were. Last but not least, on theoretical perspective, there are always two dimensions on the debate. Based on dichotomous perspective of liberalism and mercantilism, ‘methods and outcome’ and ‘domestic and international level’ are mixed complicatedly. The problem is, when they try to merge them into one, because of its dichotomous characteristic, they reveal contradiction. For example, with liberal perspective, we can explain the international level and the outstanding outcomes of EACs, but still cannot explain many aspects-mostly mercantilistic aspects mentioned above- of development. It means firstly, they lost explanatory power, and second, they lost historical context by too much focusing on classical theories. So conclusively, it seems that it is time to analyze afresh. We shall precisely aim for that using factor analysis utilizing level of analysis framework. Research Design As mentioned briefly about the riskiness about why which countries are classified as EACs, but the others not, we need to be careful in defining the research object groups. This study firstly sets geographical limitations to EACs. That is, to be precise this study will exclude South East Asian countries such as Malaysia, Philippines and Thailand. Secondly, time dimension shall be from 1960s to the late 1980s when there were the dramatic economic developments in the region. As a result, the research objects dealt with in this study are mainly South Korea and Taiwan which fits the following last condition, that is, Developmental state. These countries- especially South Korea during 1960s to 1980s- are perfectly suited to this case. According to World Bank’s development report in 1992, South Korean annual growth rate was 9.8% for three decades. Moreover, with strong government and efficient bureaucrats, they pursued export-oriented strategy with selective intervention toward industry. This study shall use systematic level of analysis as methodology. By using level analysis, in other words, by describing both international and domestic level to draw comprehensive picture of the East Asian Miracle, this study shall attempt to offset the gap between liberal and mercantilistic approach. If the driving forces of East Asian development can be found in both international and domestic factors, it seems natural and plausible to take this systematic methodology, for it is regarded that it can produce ‘comprehensive and total picture’ of specific phenomena in Political Economy.(Singer 2007) Systematic level analysis International level At the international level, EAC’s development was partly by virtue of favorable international environment. Firstly, due to the reigning Cold war made the U.S to support EACs generously. And with geopolitical reasons, EACs could take advantage of it. Moreover, compared to Latin American countries were under the direct influence of ‘core-state’, but EACs were relatively regulated due to the reason of ideological competition between West and East. For example, US provided financial support both directly and indirectly to Korea. For 30 years from 1960s to 1980s, US support 15 billion dollars which was an overwhelming amount compared to other instances of the US’s support toward developing countries.(Islam 2000) Secondly, prior industrialization of Japan had a significant impact on the development of EACs. Some scholars agreed with the model of ‘flying Geese paradigm’: not only South Asian countries, but also EACs by getting direct investment and enjoying international division of labor (Kojima, 1977; Akamatsu, 1962; Cumings, 1987). Whatever the reason was, the process of restructuring was accompanied by capital movement and technological spread. After Japanese Yen got stronger in the 80s, which meant a higher production cost than before, distribution of capital and labor provoked according to comparative advantage. In the similar context with above, thirdly, relative position of EACs made them to enjoy the ‘advantages of backwardness’. The Veblen-Gerschenkron spillover effect explains the benefit of late industrialized countries can take benefit of its latedness by abridging ‘learning by doing’ process of former industrialized countries (Gerschenkron, 1962). Even though they also mentioned the need of advanced banking system and financial policy, it is undeniable that favorable international environment was one of the most important factor. Fourthly, as Amsden (1994) points out, the development of technology brought a positive spill over on production capabilities’. Needless to say, East Asian skilled but cheap labor were what globalized capital was on the lookout for. So EACs could provide their labor using comparative advantage especially in labor-intensive production.(Amsden & Hikino, 1994) Above stated international factors played pivotal roles in East Asian development as a foundation of economic growth. However these do not provide a perfectly complete picture. For instance, favorable international ambience can not explain why some countries under the same environment could not succeed to attain development. It is essentially this aspect which makes us look into domestic factors. Domestic level Domestic factors assume importance particularly because in reality, international conditions are nearly uncontrollable, actual economic policy could be more plausible reason for the development. Firstly, these economies had the advantage of basic infrastructures left back by Japanese colonies. In the early 1920s, most EACs experienced Japanese colonialism. Like other colonial traders did, Japan had extracted labor and crops from the colonies. This process of extraction had profound negative consequences on many aspects in colonies. However, ironically, after finishing colonial period, their legacy such as railway and modern education system became significant contributing factors to East Asian development as infrastructure. Second, both Taiwan and Korea underwent many wars. This was significant in reducing the conflict between classes. World War II and the Civil War had considerable impacts on the overall country ranging from political system to economic actors. For example, experiencing war resulted to reduction in both labor and capitalist classes. This power vacuum created the space of possibility for strong government. Indeed, apart from Hong Kong, successful EACs all had strong governments. Third, successful EACs have only a few natural resources from the first stage. This limitation of natural resources formed a framework of developing Export Oriented policies. Moreover, this factor indirectly worked toward creating high-skilled and disciplined labor which many scholars depict as one of the major factors for development. With these factors in place, the authoritarian government was successful in rapidly penetrating and evolving the economy according to its plans. Often non democratic regime is regarded as having fast decision making system compared to democratic system which need the consensus process. Since 1960s to 1980s was a period marked by transitions in terms of increasing trade volumes and several events such as an oil crisis, that required flexible decisions and adjustment capabilities and rapid decision making abilities could be a huge advantage. Lastly, EACs like Korea had autonomous bureaucracy which effectively led to decisive unidirectional policy making. The term ‘Embedded autonomy’ used by Evans represents a close relationship between bureaucracy and private companies at that time (Evans 1993; Amsden, 1992). Bureaucratic control over industrial sector was strong a situation that Weiss and Hobson (1995) coin as ‘governed interdependence’. The most important feature was the stable governmental control. With firm national goals in place, financial institutions were created as ‘pilot agencies like Japans Ministry of International Trade and Industry. By using these institutions, the market forces were effectively harnessed. The industrialization therefore followed a policed market-oriented trajectory. This feature had a mercantilistic connotation, but there also were liberal stamps behind the policy, such as setting a price at a globally competitive level. Conclusions Thus, what emerges from the level analysis is that both the favorable international environment as well as efficient governance had significant advantages which contributed to the rapid growth. Policy Implications The most important policy implication is the role of the effective governance that emerges from this discussion. Although all of the economies of the area had access to the beneficial international factors, only economies with strong governments were able to properly take advantage of these factors. The government played the role of controlling the extent to which market forces would be able to penetrate the economies thus controlling rather than being controlled by these. Aspects such as firm discipline in fiscal policies, public spending redirection, foreign direct investment inward liberalization and state enterprises privatizations are also notable policy adoptions that contributed significantly in EAC’s economic development. Summary The present work explored the EACs remarkable economic growth and the validity of various theoretical assessments of the phenomenon. Two main strands of literature were identified: Liberalists, who emphasized the privatizations and global integration as fundamental causes and the mercantilists who objected to this hypotheses and attributed the miraculous growth to efficient and controlled governance. From detailed explorations, both sides were found to be incapable in explaining certain aspects or others by themselves. This motivated a level analysis which analysed both international as well as domesetic factors and found both to have had significant contributions. While the international factors provided the opportunities, the domestic factors led to effective utilization of these opportunities thus establishing the importance of both. Read More