Reference to miraculous development tends to imply luck or chance in the process of development. In-depth research carried out by the many reputable institutions mentioned earlier reveals that where rapid and sustained economic and social development occurred it has benefited from sustained peace and political stability and was a result of hard work, appropriate policies and even some sacrifices. What is not stated but must have been important is high levels of discipline on the part of society at large and of leaders both in government and the private sector.
The key conditions for growth appeared to involve ensuring correct macro-economic fundamentals : high savings rates; low budget deficits; low inflation; low external debt; keeping appropriate exchange rates; maintaining low price distortions; responding quickly to macro-economic shocks. According to the World Bank, private domestic investment and rapidly growing human capital were the principal engines of growth, both pursued in the context of aggressive export development. In addition, some of the earlier miracle economies (Japan, Republic of Korea and Taiwan Province of China) but to some extent also the current ones took off when it was possible for developing economies to be protectionist; they benefited from it. The above factors are fully compatible with the plus factors associated with economic growth observed by Maddison (1995) in the long term for the period 1820-1992 (see Annex 2 for details).
Without going into an exhaustive summary of the thesis of the World Bank, a listing of the key driving forces and enabling factors could include:
· focus on export growth.
· high rates of savings since the 1960s (this later became self-reinforcing, with high growth rates, investment inflows and rapid demographic transitions permitting even more saving)5. Government policies are reported to have also encouraged (and sometimes compelled) increased savings through a variety of means.
· high rates of investment (in both human and physical capital) - these alone reportedly accounted for about two-thirds of HPAEs6 growth. The economies reported to be mostly investment-driven included Indonesia, Malaysia and Singapore. PR China's recent growth also appears to be investment-driven. Focusing such investment on key sectors until comparative advantage was reinforced or created seems to have been an important contributor to success in the high-performance economies.
· capturing opportunities for greater efficiency: according to the World Bank (1993), the economies of: Japan; Republic of Korea; Hong Kong SAR, China; China; Thailand and Taiwan Province of China are productivity-driven, with growth depending significantly on improvements in factor productivity. There has been emphasis on dynamism and productivity in agricultural policies so as not to tax the rural economy excessively.
· Openness to foreign ideas and technology (and local investment in technological development). For example, during the 1980s, both Republic of Korea and Taiwan Province of China increased their formal R&D expenditures from approximately 1% to 2.5% of GNP. This has been a key contributor to productivity-driven growth.
Although the region's population is generally young and dependency rates remain high, the proportion of people of peak earning age, who are able to save, is also growing rapidly as new births decline.
The World Bank estimated that a 10 percentage points increase in the rate of investment would raise the growth rate of GDP per capita by 0.5%. The high-performance economies all offered generally liberal treatment of foreign investment and generally also assured investors of secure property rights. Secure property rights and complementary public investment in infrastructure are reportedly the two particularly important conditions to investment. World Bank (1993).
The World Bank (1993) estimated that an increase of 10 percentage points in the primary or secondary school enrolment rate would raise per capita income growth by 0.3%. Primary education is reported to be by far the largest single contributor to the HPAEs' predicted growth rates followed by physical investment and then by secondary school enrolment. Universal access to primary education is the norm in the region. Ranis (1995) reports that in Taiwan Province of China, government educational emphasis shifted from compulsory primary to compulsory secondary education. Overall, expenditures on education rose from 2.1% of GNP (11% of the budget) in 1955 to 4.6% of GNP (20% of the budget) in 1970:
· systematic government intervention to ensure focus on the development of specific industries (e.g. some industries were promoted and others not) but without the costs of intervention becoming excessive.
· establishment of clear performance criteria for selective interventions and monitoring performance.
· rapid growth with relative equity7.
A major background factor has been rapid demographic transition (i.e. population control). Some countries have also benefited from historical factors - US assistance in rebuilding Japan after World War II followed by major US economic assistance and military spending in the region throughout the cold war; Japanese colonial investments in basis infrastructure and human capacities in Taiwan Province of China; US investments in Thailand at the time of the Vietnam war etc.
What of the miracle's resilience?
The crisis of mid-1997, the dislocation of which remains amply in evidence nearly a year later shows that the "miracle" was neither permanent nor fully resilient. The atypically rapid growth in some of the Asian economies lasted very long and despite the meltdown, cannot be considered a bubble phenomenon. Japan, the first example, grew fast uninterruptedly for practically all of the post-war period. The IMF (1995) observed that the close correlation between growth in industrial countries and that in developing ones may have broken down in the late 1980s. As a result, during 1990-93, developing economies grew sharply in spite of marked slowdown of industrial economies. This evidence of resilience has not been reconfirmed during the mid-1997 crisis.
Yet notwithstanding this crisis, looking at the fundamentals and the enabling factors for growth should be able to give pointers to future recovery and renewed growth. The next section does this and explores factors such as domestic savings (which reduces dependence on outside funding); regional integration and trade growth (which diversifies away from heavy dependence on a few developed market economies); and supportive policies and institutions. These aspects are also referred to as each subregion and country is reviewed.
The World Bank points to the existence of risks in any outlook and assesses how various regions or economic categories would fare. The World Bank simulations of "boom-bust" situations showed that developing countries suffer market contraction but, in addition, those with weak policy performance and heavy debt face a sharp drop in private capital flows.
East and South Asia show the most resilience during the bust; the former due inter alia to low reliance on primary commodities, competitiveness of its manufactured exports, growing intraregional trade, lower debt and continued access to external financing (due to a good borrowing record - none have bad debts or over-heavy debt). For them, growth slips by only 1 percentage point. The World Bank speculates that, partly because of its lower dependence on exports, South Asia gains least in the boom but also suffers least in the bust.
According to Forbes (1997), a most remarkable characteristic of Pacific Basin economies (which includes East and South East Asia) was their high degree of inter-dependence that served to increase resilience. In total, 66% of exports of APEC member countries in 1992 were destined for other member countries (compared with 53% in 1981). Intra-regional imports accounted for 67.1% of total imports in 1992, and have been growing at a rate of 8.1% per year, considerably faster than imports from outside this region. The APEC economies in 1992 accounted for 41.2% of total world exports and for more than 50% of global GDP. For the future, Malaysia's deputy Prime Minister Ibrahim (1996) acknowledges that nation states will remain but that "nevertheless the trend towards regionalism is inevitable, with governments cooperating for mutual self-interest".
The OECD outlook (1996) suggested that an important reason for resilience was that trade was increasingly within the buoyant region itself (much being among the developing countries), and so also for the share of investment. The region also had the world's highest rates of domestic savings and its surpluses provided a buffer against the vagaries of foreign direct investment. Indeed, the World Bank reported that national saving rates in East Asia rose by 2 percentage points in 1994 as investment inflows increased; they also boosted their foreign reserves and other external assets by about 3% of GDP. As an additional factor towards resilience, the IMF (1995) considered diversification of the export base beyond primary commodities into more stable-market manufactures important; by 1990, manufactures were already 74% of Asia's merchandize exports.
Partial evidence of the region's buffering against overall world conditions came from the fact that growth rates of close to 10% or, at any rate well over 5% were maintained in developing Asia during the entire downward cycle of the Japanese economy. The World Bank (1995a) reported that during the last (global) recession, East Asia's contribution to world import growth rose to 30% from less than 10% in 1984-90. Box 2 nevertheless shows that developments in the major industrial economies are still significant for Asia.
Box 2: Continuing importance of industrial countries for Asia-Pacific prosperity Asia well illustrates the growing intra-regional integration. Through ASEAN South East Asian countries, for example, have increased mutual interdependence and buffering from economic developments in the developed world. However, the links with industrial economies are still strong enough to make a difference. Firstly, Japan remains a dominant economic power in the region; secondly, the cross-pacific trade with the USA also remains quite important. ASEAN's top trading partners are trade now as follows: - Japan 19% - USA 17% - Intra-regional (ASEAN) about 17% - EU about 14% For this reason, the presence of Japan and the US in APEC is important to economic stability for the developing country members. According to the ASEAN Secretariat: · if there is a permanent appreciation of the Japanese Yen, exports from the ASEAN region to Japan can rise by an average of 25.25%. · slowing down of growth in OECD countries will have repercussions for ASEAN economies since more than half of their exports go there. Simulation suggests that a 1 - 2 point deceleration in OECD growth leads to: (a) ASEAN exports to Japan shrink by 3.73%; to the US by 4.29% and to the European Union by 4.12%, and (b) ASEAN investment declines by 2.43 %. Philippine exports appear most sensitive (-9.55% to Japan and declines of over 6% to both the US and EU); Singapore investment appears most sensitive (-8.53%). To improve capture of the benefits from mutual complementarity, there have emerged sub-regional growth zones as part of the economic integration in Southeast Asia. The Singapore-Raiu-Johor growth triangle is probably the oldest and most successful. New ones include Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (BIMP-EAGA), the ASEAN northern growth triangle comprising parts of Indonesia-Malaysia-Thailand and the Mekong River sub-regional development programme comprising parts of Cambodia, Laos, Myanmar, Vietnam, Thailand and PR China. Source: ASEAN Secretariat (1996) |
Nevertheless, according to Kinoshita (1997) "whatever the wisdom in seeking export-led growth ..... Asian economies are still heavily dependent on exports and therefore extremely vulnerable to eternal factors". Provided the Japanese Yen is strong and Japan can import, it appears able to offset weak demand from elsewhere but coincidence with weak demand also from Japan can easily leave the region over-exposed; this coincidence is in place now and it makes regaining growth difficult even if other problems were resolved.
The region's economic prospects in the medium term are optimistic in view of expected healthy expansion of global and inter-regional trade in an environment of increasing derestriction and liberalisation in the context of post-Uruguay initiatives and regional and Pacific basin economic agreements. The general feeling is that the miracle Asian economies will be able to regain to a large degree their trajectory of rapid growth; that notwithstanding a degree of resilience which proved unequal to needs in the 1997 crisis, Asia has internal strengths which make regaining sustained rapid growth possible.
Over-stretched financial systems burdened with non-performing loans, currencies too closely linked to the US dollar, excessive borrowing on short-term markets explained the problems which spread over most of Asia from mid 1997. The devaluation of currencies was expected to result in greater competitiveness but it later turned out that the banking system had nearly collapsed and had lost the ability to finance external trade on which rapid recovery depended.
Driving Forces and Enabling Factors for Strong Growth - Regional Picture
From his OECD-sponsored research, Maddison (1995) identified four main "causal influences" which best explain long-term growth. Annex 2 gives some details on his findings, which can be summarised as: technology, physical capital accumulation, human skills and organising ability development, and international integration of individual national economies through trade. Left unsaid but obviously vital are several background factors, primarily the need for (a) an enabling macro-economic and social policy framework to permit these factors to be effective and (b) adequate societal discipline. After acknowledging the importance of various macro-economic policy strengths, Hohol, (1997) for example, refers to the importance of Asian governments having been able to resist pressures from special interest groups which could have de-railed progress. He also suggests that the Confucian ethic has made for ready acceptance of discipline and authority in many countries so that it has been possible to take tough decisions even if they involved societal belt-tightening. Several analysts have referred to the rejection of the welfare state in most Asian countries as a powerful force for encouraging hard work.
The full interlinkages of various factors and their specific interplay as it has affected Asia-Pacific development cannot be done full justice in this paper. Reference could be made instead to the research report of the World Bank (1993) and to annual Asian Development Bank outlook reviews, apart from those of the IMF and OECD which regularly cover this high potential region. For a global interpretation, Maddison (1995) is recommended.
Here, focus is on developments in trade, savings and investment, and policy and institutional factors, the precise combination of which, in addition to resource endowment and cultural or social attributes and social discipline of a country must be right for sustained development to occur. For Asia's "tiger" economies and for the next two tiers of development mentioned earlier, these factors seem to be in place or are rapidly falling into place. The financial crisis started in mid-1997 has not permanently destroyed the basic elements and, in some cases, reflects more a loss of confidence.
Trade is a major engine for development. Provided markets are liberalised (and there is a strong global and sub-regional trend in this direction) it offers opportunities for even small countries with limited domestic markets to treat the world as their economic hinterland and so to capture economies of scale as easily as large countries. Maddison (1995) reports that between 1820 and 1992, while population has grown 5-fold and GDP 40-fold, trade has expanded 540-fold. Kinoshita (1997) reports very sharp trade upturn after the second World War; world imports of US$130 billion in 1970 had grown over 16-fold to nearly US$7 trillion by 1992, in only two decades. Japan as well as the rapidly industrialising developing Asian economies captured the benefits of this expansion by establishing industry to feed this international trade.
Exporting has been the gateway to development in Asia's most successful countries and territories, starting with Japan after the second world war. To support further growth, the region has also increased imports, initially of capital goods and of "knowledge" services but also of raw material and consumer goods. In 1996, the Asian Development Bank (1996) reported that the volume of world trade continues to increase rapidly, particularly for developing countries. In Asia, rapid expansion of exports has built upon improved competitiveness of domestic industries which have often proved adaptable in upgrading technology as they advance. Many countries in Asia took measures during recent years to further liberalize their foreign trade.
In Asia, export volumes grew particularly strongly, with intraregional trade among developing Asian economies being especially vigorous. (see Box 3.) According to some, liberal trade must remain a pillar of future policy if prosperity is to continue. Dr. Mahatir Mohamed (1997) says of the future "our Pacific era must also be built upon the firm foundation of reducing the obstacles to the flow of goods and services. This is to be open beyond the region. The Pacific community must not be inward-oriented and discriminatory towards the rest of the world".
Box 3: ASEAN - success in promoting trade among developing countries According to the World Bank (1995a), intraregional cooperation initiatives will lead to progressive tariff reductions (as in the projected ASEAN Free Trade Area). In 1995, the World Bank projected export growth over the next decade at 9.5% a year - similar to the 1980s (with imports also rising at nearly 10% a year). ASEAN, a key contributor to the region's exports saw its total trade go up by 20% between 1993-94, with intra-regional trade even faster. In 1993, the level of intra-regional exports in ASEAN's Common Effective Preferential Tariff (CEPT) products among the Member Countries amounted to $32.8 billion. By 1994, the level of intra-regional trade of ASEAN countries in Scheme CEPT products had expanded to $49.8 billion with trade in CEPT products grown at 47%. The implementation of the tariff reduction programme under the CEPT thus contributed significantly to the growth in intra-regional trade. For ASEAN alone, exports were forecast to grow by more than 20% to approach $304 billion in 1995 with to total of ASEAN exports and imports in 1995 being nearly $600 billion so making the association the fourth-largest trading region in the world after the US, Japan and the European Union. Intra-regional trade meanwhile grew at 47% as in 1994, which, if continued, would make this component nearly a fifth of ASEAN trade. Other initiatives are also promoting more liberal trade. For example, the Asia-Pacific Economic Cooperation (APEC) countries have committed themselves to achieve free and open trade and investment by 2020; in parallel, investment regimes continue to be liberalized. Source: Mainly ASEAN Secretariat (1996) |
5 There is a clear link between savings and GDP growth through investment. In a recent review of Central Europe, Lyons reports an Economist Intelligence Unit estimate that to sustain GDP growth of 5% annually would require household savings rates of 20-25%. These rates are lower than those achieved by the high-performers in East Asia. "Mild Chile" Ronan Lyons. Business Central Europe, May 1997.
6 High Performance Asian Economies.
7 Myers (1997) reports for Taiwan Province of China that in 1950 the top 20% households earned 15 times as much as the poorest 20%, by 1980, the ratio had fallen to 4.17 and by 1993 had risen a little to 5.38.
