Download WWS-561 / Week-3 / EAST ASIAN MIRACLE - WORLD BANK

Session 3
World Bank, The East Asian Miracle, 1993, pp. 1-26
Summary: The paper explains the reason for the high rates of growth of East Asian economies
as a result of "good governance and policies" and lists out all the things which these economies
did right as a policy prescription for other developing nations.
The issue: 23 East Asian Economies (of which the most important are the High performing Asian
Economies - HPAEs- Japan, Hong Kong, Korea, Singapore, Taiwan, China, Indonesia, Malaysia,
Thailand) grew faster than all other regions of the world between 1965-90 and this was reflected
in:
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Rapid and sustained growth of real income per capita
Decreasing income inequalities
Rapid demographic transitions
Human welfare increased dramatically (life expectancy, poverty levels etc.)
Dynamic agricultural sector (rapid growth and productivity improvement in even while
agriculture was declining in relative importance)
Rapid export growth
High levels of Private domestic investment sustained by high levels of domestic financial
savings
Rapidly growing human capital
Dynamic industrialization (success in allocating capital to high yielding investments and at
catching up technologically to the industrial economies)
Public policies responsible for "getting their fundamentals / basics right":
The government intervened systematically through multiple channels to foster development. But
it never let the cost of that intervention become too excessive nor were they continued beyond
the minimum possible. Thus the governments used policies ranging from market oriented to state
led that varied across economies and time. All policies can be seen as Fundamental or Selective
depending on how they change the economic structure of the country.
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Good macroeconomic management/stability:
Limited fiscal deficits
Inflation under control (moderate and predictable)
Stable interest rates
Increased saving and investment:
Established and financially supported government banks
Made it more accessible to non- traditional savers (lowered transaction costs)
Encouraged private savings through tax incentives and compulsory provident funds
Maintain high public savings
High interest rates on loans for consumer items
Stiff taxes on luxury consumption
Created complementary infrastructure for private investments (e.g. Power, highways)
Low tariffs on imported capital goods and price distortion in favor of capital goods
Created long term credit (development) banks
Project selection left to the banks to prevent bad debts (stress on performance criteria)
Education policy (accumulate human capital):
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Focused on universal primary and secondary education to generate rapid increases in labor
force skills
 Limited public funding of post secondary education focused on technical skills.
 Made public investment in applied research
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Agricultural policy:
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Stressed productivity
Did not tax the rural economy excessively.
Export promotion policies:
Although all HPAEs began with a period of import substitution and a strong bias against exports,
they soon established a pro-export regime aimed at earning foreign exchange.
 Price distortions due to such policies kept within reasonable limits
 Open to foreign ideas and technology
 Welcome foreign direct investment
 Developed export marketing institutions
 Exchange rate protection to keep exports competitive despite domestic inflation
 Liberal export credit
 Duty free imports for exporters
 Tax incentives to exporters
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Selective industrial promotion:
The governments "led the market" in critical ways. Markets consistently fail to guide investment
to industries that can generate the highest growth for the overall economy. The governments
remedied this by deliberately "getting the prices wrong" - altering the incentive structure- to boost
industries that would not have otherwise thrived (capital and knowledge intensive industries).
 Targeting and subsidizing credit to select industries.
 Kept deposit rates low and maintained ceiling on borrowing rates to increase profits and
retained earnings
 Protected domestic import substitutes
 Subsidized declining industries
 Wide information sharing between public and private sectors
 Neutral incentives regime
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High quality Civil service:
Economic contests require competent and impartial referees- that is strong institutions. Thus a
high quality civil service that has the capacity to design and monitor performance is essential to
contest based competition. Some of the features of the civil service were:
 Technocrats
 Impartial
 Insulated from political interference.
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Nature of leadership
Leaders of HPAEs have tended to be either authoritarian or paternalistic but they were willing
to grant a voice and genuine authority to a technocratic elite and key leaders of the private
sector
Explicit methods used to help new capital and entrepreneurs by the leaders like land reforms,
deliberation councils (to coordinate the actions of the government and the private sector).
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This along with the education policy was primarily responsible for reduced income
inequalities
Reduce wasteful rent seeking
Not responsive to demands of organized labor for minimum wage legislation. Instead
focused on job generation thus reducing unemployment
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