The phenomenal post war growth and industrialisation period in South East Asia, were cause for various debates in economic literature, arguing about the role of government intervention, questioning the standard neo-liberal “Washington Consensus” development theories pushed by the World Bank. In their 1993 report the bank was largely attributing this success to ‘focusing on doing the fundamentals well’ such as capital and human accumulation de facto forming an engine of growth, thus downplaying the role of government intervention. Criticised by Amsden (1994) as inherently ideological, the World Banks paradigm was seen as narcissistic, crafted to support laissez-faire economics and was heavily questioned regarding the research methods used (Kwon, 1994). From a more objective standpoint one can see that these two sides are two far away from each other to come to a mutual conclusion as Kuhn said: “the proponents of competing paradigms practice their trades in different worlds, they see different things when they look from the same point in the same direction.” (Kuhn, 1970).
Joseph E. Stiglitz who was also involved in writing the original report, later reflected and re-interpreted the World Bank report, attempting to explain the rapid growth of the 8 economies that were part of the ‘East Asian Miracle’ (Thailand, Indonesia, Hong Kong, Japan, Rep. of Korea, Malaysia, Singapore and Taiwan), by considering various theories. While he does see the significance of cultural differences between these countries, he finds it “implausible to attribute the success of each of these countries to special factors”, and asks to instead look for common factors that existed across the 8 nations of the time. Furthermore, he dismisses statistical explanations since they can’t account for the multitude of programs involved, give only temporary snapshots and can’t explain certain phenomena like the rapid closure of technology gaps.
As a result, he referenced 4 metaphors (engine, physics, chemical and biological) to make the East Asian Growth Miracle more understandable and provide different viewpoints regarding the level of government intervention.
Following his dismissal of statistical explanations, he discarded a physical metaphor since it only looks at an economy as an equilibrium system, completely neglecting the immense changes these societies went through, despite their economic growth being so heavily dependent on the character of the nation (Phelps, 2006). Furthermore, this metaphor only views the role of government as an ancillary one, leaving out the heavy investment into education and key industries.
Secondly, as afore mentioned, there is the viewpoint that capital accumulation was acting as an engine for economic growth, being the main driver behind all development. While this argument was mostly aligned with the World Banks report, it only really worked once human capital accumulation was included into the equation, which was largely pushed by public funding (loans for schooling) and not the free market motor alone, like the metaphor implies.
Furthermore, one could argue that capital accumulation and high saving rates were just a by-product of a multitude of policies and regulatory changes within the HPAEs, therefore disputing the ‘one single engine’ metaphor. Figure 1.5 in the World Bank report illustrates these above average rates, posing the question: why were savings rates so high?
This can only be explained by the existence of a particular financial system (i.e. publicly owned banks in Korea that people could trust) but also strategic micro economic interventions (in extreme cases death penalty on taking money out of the country).
Together with aspects such as low public consumption, control of inflation (keeping real interest positive) and demographic shifts towards a younger society, lowering the dependency ratio, it paints a picture that forces one to include more factors than just capital accumulation and makes the metaphor of an engine of growth unsuitable.
Thus, a slightly more appealing metaphor is that of biological evolution and flexibility. Following a quite Darwinist school of thought, it states that only species that adapt to their changing environments survive. The HPAEs showed that government, like private sector enterprises, can overcome bureaucracy and be highly adaptive. A few years into the industrialisation process their economies became more and more complex, forcing governments to adapt since there was no need nor capacity for active intervention and promote a shift in focusing on higher levels of technology and value-added industries (Stiglitz, 1996).
Lastly and perhaps most appropriate when looking at actual levels of government intervention is the metaphor of chemical growth, in the form of the government acting purely as a catalyst. This is based on the nature of a catalyst, being able to set off a strong chemical reaction without using itself up in the process. Evidence for this can be found in the World Bank report itself, showing that interventions were always quite small, especially when comparing them to other developing economies.
As seen in these two figures this is especially relevant to trade tariffs and directed credit. While protection was sometimes significant for selected industries, on the whole it was still small, relative to countries in, for example, South America. The same applied to the subsidies for directed-credit programs which were often small. In part, this was due to the way in which directed credit programs were financed, namely by postal deposits, whose repayment set a limit on subsidies. Furthermore, several HPAEs created development banks which, unlike securities markets, have the capacity and incentive to monitor business borrowers closely, which is crucial in such early stages of development without many financial analysts and investment information available. Pairing this close supervision with a long-term investment strategy could provide much better funding for business and protected from short term investors that couldn’t distinguish between situations where profits are low
because of an economic downturn and those where they are low because of bad management. (Stiglitz, 1996) Further, like in the case of Japan, the government initially bought a substantial share of the bonds issued by long-term credit banks creating a catalyst in
ensuring that other private banks and financial institutions subscribed to these
bonds. This is directly linked to ‘crowding in’ effects that both Stiglitz and Amsden mention, stating that through small interventions like subsidies or protectionism by the state, the private sector would follow and invest in these sectors, developing the industry overall.
Following this chemical metaphor, one therefore has to conclude that while interventions were minimal it does not mean they were not effective since they were after all still distortions to the free functioning of markets. The government can therefore be seen as a key player who, through investments in human capital and infrastructure, can have a large effect on the private return to investment and promote growth by providing a solid foundation for enterprises to build on.
In my opinion, a chemical metaphor would therefore be the most suitable explanation, since it most accurately reflects the level of state intervention and potentially provides a more holistic picture of the East Asian Growth Miracle. I also believe that cultural factors played a huge role in the way Japan and Korea picked itself up after WW2 and the Korean War respectively, by creating a culture of sacrifice and dedication to education and work instilled through strong family values, which would make it hard to implicate in other developing economies today.