Following the tigers

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Following the tigers

  1. 1. Following the Tigers What we can learn from Development AbstractThe debate on whether internal or external factors where more important for developmentwas spurred on by the rise of the Four Asian Tigers Singapore, Taiwan, South Korea andHong Kong (also called NICs – newly industrialized countries). Scholars argue whetherexport-oriented industrialization policies (neoliberal school) or successful stateintervention policies (developmental state school) were the key to the success of theTigers. Which type of policy should then serve as a model for other countries? What canthe EU learn from the Asian Tigers, in terms of encouraging development? Svenja Kathrina Schmitz Europe’s External Economic Policy June 2010
  2. 2. ContentsIntroduction1. Development 1.1 What is development?2. East Asia: Tigers as Role Models? 5.1 The East Asian Development Model3. The EU and Development Models 3.1 The EU‟s Trade and Development Aid Framework and Development Models4. ConclusionLiterature 2
  3. 3. IntroductionNeoliberal approaches undermine developing country capacity for modernization, inhibitthe development of infant industries, and make developing countries vulnerable tooutside shocks, while developmental state models focus on domestically developedpolicies including infant industry protection and have resulted in growth and prosperity indeveloping countries. Therefore, domestically developed Human Development andEconomic Growth policies are needed for the sustainable development of a country.Hence, the EU needs to rethink its external development strategy. The miracle economies of East Asia have succeeded through a strategic approachto integration with the global economy. These regions were the first newly industrializedcountries, noted for maintaining exceptionally high growth rates and rapidindustrialization between the early 1960s and 1990s. In the 21st century, all four regionshave since graduated into advanced economies and high-income economies. Theseregions are still the worlds fastest growing industrialized economies. David Ricardo‟s theory of comparative advantage says that, accepting theircurrent levels of technology as given, it is better for a country to specialize in things thatthey are relatively better at. His theory fails when a country wants to acquire moreadvanced technologies so that it can do more difficult things that few others can do – thatis, when it wants to develop its economy (Chang, 2009, p. 47). Ha-Joon Chang1 is of theopinion that the Korean economic miracle was the result of a clever and pragmaticmixture of market incentives and state direction (Chang, 2009). While it took marketsseriously, the Korean strategy recognized that they often need to be corrected throughpolicy intervention.1 Ha-Joon Chang (b. South Korea in 1963) is currently a lecturer at the University of Cambridge, UK. He has served as a consultantto the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nationsagencies. He is also a fellow at the Center for Economic and Policy Research in Washington, D.C. Chang is also known for being animportant academic influence on the economist Rafael Correa, currently President of Ecuador. 3
  4. 4. 1. Development The foundation of economic development is the acquisition of more productive knowledge. - Ha-Joon Chang, 20092.1 What is development?There is no clear definition of economic development. GNP per capita against the HumanDevelopment Index (HDI) is widely used to measure development. The HDI measuressocial factors and will therefore give higher rankings to societies that have a more equaldistribution of wealth and invest in social services. The GNP per capita can rank societiesthat have a large amount of wealth highly no matter what its distribution amongst thepopulation. Therefore, HDI will favor countries with a social democratic or socialistleaning compared to GNP per capita (O‟Brian & Williams (2007). Further, developmentis not just economic growth; it refers to economic, social, and cultural variables. Essentially, the process of economic development can be boiled down to theadoption of domestic and indigenous high-productivity and high-value-added economicoutput (Chang, 2009). More generally, the scope of development is the process ofimprovement of economic, political, and social well-being of a nation‟s people(OSullivan, Sheffrin, 2003, pp. 471). O‟Brien and Williams (2007) identify different approaches to development.Modernization theory focuses solely on internal factors and modern ways of thinking tobe important for development as it is seen to work in developed economies. It is claimedthat growth causes development because some of the increase in income gets spent onhuman development such as education and health. Dependency theory supports the ideaof external causation. Dependency theorists argue that poor countries have sometimesexperienced economic growth with little or no economic development; for instance, incases where they have functioned mainly as resource-providers to wealthy industrialized 4
  5. 5. countries (p.302). However, development is neither solely an internal affair nor driven byexternal pressures, only. As O‟Brian & Williams (2007) have pointed out “for manygovernments in the third world blaming the external environment is an easy option whendomestic reform proves difficult”. In the early 1990s, so-called advocates of free trade explained the developmentsuccess of the East Asian Tigers with openness to trade (Klein, 2003; O‟Brian &Williams, 2007). Malaysia, South Korea and Thailand still had highly protectionistpolicies, however, that barred foreigners from owning land and from buying out nationalfirms. Between 1965 and 1980 these countries achieved impressive levels of economicperformance characterized by: fast growth, low inflation, macroeconomic stability, astrong fiscal position, high savings rates, open economies, thriving export sectors and agreat improvement in welfare indicators such as life expectancy and literacy. The debatebrought about two competing schools of thought: the neoliberal school, and thedevelopmental state school. The neoliberal approach stressed the export-orientedindustrialization policies by these states. The developmental state school, on the otherhand, focused on the role of the state to successfully control economic growth (O‟Brian& Williams (2007). Naomi Klein (2003) explains that developmentalist economists believe thatdeveloping countries have a chance to break out of the cycle of poverty if they turn to aninward-oriented industrialization strategy, e.g. autarky. The dependence on the export ofnatural resources to Europe and North America is not advisable since its prices had beenon a declining path Klein (2003). Developmentalism advocates the regulation ornationalization of key industries to fuel a government-led development process. The end of communism meant the end for soviet socialism and its centrallyplanned economy. China implemented its Four Modernizations program in 1979 andtherewith successfully overcame socialism (O‟Brian & Williams (2007). From now on,capitalism was the new cool kid on the block. The Asian financial crisis, which occurredin 1997, nevertheless, gave an idea about the dangers of the newly popular economicparadigm (O‟Brian & Williams (2007). The world was reminded that the developingcountries can be very vulnerable to outside shocks and potential limits of developmentand its ability to endure was one of the issues at hand. 5
  6. 6. Neoliberal approaches to development were adjusted to the post Cold Wareconomic environment and sustainable development was advanced as the main approachto development officially in the Rio Conference in 1992 (O‟Brian & Williams (2007).The shift toward sustainable development as defined by the Brundtland Commission(bearing in mind future generations) paved the way for the increasing application ofcapability building. This focus on governance issues is now a predominant factor in mostrelations between developed and developing nations. 6
  7. 7. 2. Asia: Tigers as Role Models? Korea’s progress is as if Haiti had turned into Switzerland. - Ha-Joon Chang, 20092.1 The East Asian Development ModelKorea‟s economic growth and the resulting social transformation over the last four and ahalf decades have been truly spectacular. It has gone from being one of the poorestcountries in the world to a country on the par with Portugal and Slovenia in terms of percapita income. A country whose main exports included tungsten ore, fish and wigs madewith human hair has become a high tech powerhouse, exporting stylish mobile phonesand flat screen TVs coveted all over the world. Better nutrition and health care mean thata child born in Korea today can expect to live 24 years longer than someone born in theearly 1960s (77years instead of 53 years). Instead of 78 babies out of 1,000, only fivebabies will die within a year of birth. In terms of these life-chance indicators, Korea‟sprogress is as if Haiti had turned into Switzerland. In his article The East Asian Model of Economic Development and DevelopingCountries (2002), Jong K. Park, economics professor at the Department of Economics &Finance of the Kennesaw State University, USA, presents several East Asian countries,known as Asian Tigers2, and their way to success and identifies similarities among them.He explains which conditions led to the countries‟ positive economic development andmakes assumptions about a resulting development model, potentially applicable to otherdeveloping countries. The role of the government, he says, was the most significantfeature of East Asian economic policy leading to the miraculous growth experienced bythese countries between 1970 and 1990 (Park, 2002, p330). Park‟s main findings alsoactually suggest that government intervention not only successfully addresses thelimitations of the market; it also is an effective tool for the promotion of economicdevelopment.2 The term East Asian Tigers or Tigers refers to the highly developed economies of Hong Kong, Singapore,South Korea and Taiwan. 7
  8. 8. According to Cambridge economist Ha Joon Chang (2009), it was a mix of infantindustry protection, export-led industrialization and the promotion of universal educationthat paved the way for economic growth and development. State-directed capitalism, thecombination of “the dynamic aspects of a market-oriented economy with the advantagesof centralized planning and direction”, was South Korea‟s and Taiwan‟s main tool for thesuccessful development of their economies (Park, 2002, p.330). When the Asian financialcrisis hit some Tigers hard, sustainability and applicability of their economic policiescame under scrutiny. As the East Asian Tigers had main common threads in theirdevelopment strategies and experiences, it will be interesting to see how the East Asiandevelopment model would look like. The emerging economies‟ performance in the late 1980s and early 1990s resultedin an increase in private capital inflows (Park, 2002, p. 331). This supported theinvestment boom, which was bank credit-financed. However, in 1997, following a year ofrecord capital inflow of $93 billion, a net outflow of $12 took place. Amounting to areversal of capital flows of $105 billion, the Asian currency crisis was provoked,“eventually pushing „miracle‟ economies into a dramatic financial meltdown with seriouseconomic, social, and political consequences” (Park, 2002, p. 332). East Asian economies soon saw the depreciation of their currencies due acombination of reversal of foreign capital and the flight of domestic funds. The Tigerssuffered unexpectedly severely, sharing several characteristics that played a role in thecrisis, According to Park (2002), “they include a credit-fuelled investment boom, a weakand unsound banking sector and financial system, a pegged exchange rate regime, currentaccount deficits, and loss in investor confidence. How come that the Tigers‟ bankingsector was so weak and unsound that it could not resist outside shocks? Government authority over the banking sector led to the misconception thatborrowers of loans were assisted by the government. Therefore there was a lack of“procedures for evaluating risks when extending loans”. Further, it was not only the lackof procedure and management that exposed the bank-centered financial systems tooutside shocks. It was also the lack of capacity, ones the system was liberalized. As Parkexplains: “banks did not have adequate capacity for project evaluation in lendingpractices, especially in the aftermath of increased financial liberalization in these 8
  9. 9. countries” (Park, 2002, p.333). The brittle financial system was exposed to large,capricious, foreign capital flows, which “made the Asian emerging market economiesextremely vulnerable to changes in investor confidence” (Park, 2002, p.334). The Tiger‟s economies were too sensitive to outside shocks and were therefore hithard by the Asian financial crisis. That does not mean, however, that the East Asiandevelopment model loses its strength. The East Asian Tigers not only endured the crisis,they also continued to expand once the crisis was surmounted. The crisis revealed thepotential weaknesses of the East Asian development model that had to be fixed. “Thecrisis underlined the advantages of public bureaucracies skilled at managing the economyand responding to shocks” (Stiglitz & Yusuf, 2001, p.8). What, however, is the EastAsian development model exactly? While different models of development economics emerged over time, twogeneral movements can be characterized in the debate over economic development. Onewas the liberal approach, claiming that only the „invisible hand‟ of the market, aspresented by Adam Smith, would efficiently provide for economic growth and thatregulation only misleads the economy. A different belief focused on governmentplanning as the only policy which would guarantee the effective mobilization ofresources and their fair and successful deployment in favor of economic growth. Twodifferent examples of this model where India and China on their ways to economicgrowth and development. China and India both did very well in the 1950s and 1960s, following nationalplanning to transform “a predominantly agrarian society with masses of populationsliving in extreme poverty” into an industrialized society with a higher per capita incomeand living standard. The road to economic growth and development was paved withautarky, central planning, import-substituting industrialization and the promotion ofheavy industries. Their autarkic trade policies resulted in cutting off any link betweendomestic and international markets. Agriculture was heavily taxed to financeindustrialization. While India was a parliamentary democracy and China a centralizedauthoritarian system, their development strategies started to pay off quickly, which led toa „developmental race‟. Park explains the importance of this race: “The outcome of therace would have some far reaching political implications: If China won, the totalitarian 9
  10. 10. model of Soviet Union and its ally China would have a profound impact on the leadershipof Third World developing countries, pushing them further into the Soviet bloc” (2002,p.336 ff). Although many expected India to be the winner of this race, it can be assumedthat India and China were closely observed by the Western World with some alarm. By the early 1980s the winner of the „developmental race‟, however, would be theFour Asian Tigers South Korea, Taiwan, Hong Kong, and Singapore. The“developmental strategies of these East Asian tigers soon became the focus of universalattention” (Park, 2002, p. 337). Export oriented development strategies which wereguided by the government were part of the reason for success in economic development,especially in South Korea and Taiwan (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003;Zang, 2003; Chang, 2009). Stiglitz and Yusuf (2001) identify six main policy strands for the miraculous EastAsian economic performance. First, a stable business environment with relatively lowinflation encouraged investment (p. 5), and was backed by the protection of infantindustries (Chang, 2009; Park, 2002). Second, central planning and bureaucraticregulation, like prudent and sustainable fiscal policies, guaranteed the equal distributionof rewards from higher growth (Stiglitz & Yusuf, 2001; Park, 2002; Chang, 2009). Third,exchange rate policies underpinned export competitiveness, aiming at becoming whatChang calls an „export powerhouse‟ (Chang, 2009). The Asian Tigers followed a road ofexport-led growth and industrialization (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003;Chang, 2009). Stiglitz‟ and Yusuf‟s fourth point is a bit more complicated, as they claim that“Financial development and the progressive liberalization of the sector so as to maximizedomestic savings and promote efficient allocation and integration with the globalfinancial system” was one of the strands of the East Asian miracle. Park (2002) andChang (2009), however, explain that the liberalization of the financial sector and theintegration into the global system was a gradual undertaking, commenced at a stagewhere the Tiger‟s economies already had extensively grown and built their capacities.Guaranteeing the competitiveness of a sector should always be a prerequisite beforeopening up the domestic market and integrating into the world economy. Otherwise thelevel of vulnerability may be too high, and the risk for the sector to be severely harmed 10
  11. 11. will be too big. The Asian financial crisis has basically shown that the financial system ofsome of the Tigers was (still) too fragile. The fifth point simply mentions efforts to minimize price distortions. And finally,the sixth key to the East Asian miracle is education: “Actions to support the spread ofprimary and secondary schooling as well as the creation of a hierarchy of skills tobuttress an outward looking development push” (Stiglitz & Yusuf, 2001, p.6). As Chang(2009) pointed out, education is one of the cornerstones of economic development.Investment in innovation and technology, and the promotion of a strong, research-oriented university system is crucial for long term economic development (Szirmai, 1997;Stiglitz & Yusuf, 2001; Bretherton, C. & Vogler, J., 2006; Chang, 2009). According to Park, the four most important common ingredients for the Tiger‟seconomic success were first, export oriented development strategies, aiming attransforming the countries into „export powerhouses‟. Second, maintaining high rates ofsavings and investment. Promoting universal education and making substantialinvestments in human capital “so as to better absorb and adapt the most advancedtechnology” (p. 338; see also Chang, 2009). And fourth, policies aimed at industrializingthe economy (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003; Chang 2009). Most importantly, all East Asian Tigers recognized economic development asprimary goal and therefore can be seen as developmental states. Further, they usedinternational trade as primary means for economic growth and development (Park, 2002).South Korea even adopted a growth-first policy (Park, 2002; Chang, 2009), whicheventually led to the emergence of chaebols, giant industrial conglomerates, whicheventually became too big to fail (Park, 2002). While “financial institutions were placedunder government control”, they were doomed to be silent partners, as pointed out earlier.Small and medium-sized enterprises (SMEs) were not given any attention (Park, 2002). In Taiwan, however, SMEs were promoted all the way long. They laid thefoundation of Taiwan‟s sound financial system and industrial organization in theeconomy. As the chaebol became too big to fail and their power increased, the SouthKorean government lost any control and had to watch the conglomerates to take over the“developmental race‟ (Park, 2002). This was very dangerous, since “economic stabilitycannot be sacrificed for rapid economic growth” (Park, 2002, p.342). Now, lessons from 11
  12. 12. the Asian financial crisis can be summarized as follows: (1) no sacrifice of economicstability, (2) a strong government that is capable and independent is needed to maintainthe „commanding heights‟ in the economy (Park, 2002; Jomo, 2003). After all, theconditions for the success of interventionist model are high household savings rate,political consensus that the benefits of financial repression exceed the cost to consumers,rapid increase in GDP to political support for the intervention and to mask itsinefficiencies, trade surpluses to build foreign exchange reserves (Park, 2002). After we have looked at the East Asian Tigers, the two main ingredients of theEast Asian development model are (1) the important role of the government, and therecognition of the limitation of the market; (2) export-led industrialization. Further,innovation and technology and the investment in human capital, as in the promotion ofuniversal education, are important to improve a country‟s comparative advantage.Further, globalization has “magnified the cost of bad, inconsistent policies and weak,inefficient institutions,” (park, 2002) and has shown that it can become a danger to newlyindustrialized countries. The Asian crisis has shown the importance of effective stateinstitutions and that a country should be careful not to open its economy too early.“Heightened exposure to world markets will only become a true lever of economicdevelopment in the presence of institutions able to mitigate market failures and managethe competitive challenges and domestic dislocations produced by openness”(Park 2002;see also Chang, 2009). As it is clear now, Korea opened its economy too early; it lost control over itsgiant companies due to a relaxation of controls over the private sector‟s foreignborrowing. Maintaining the „commanding heights‟ in the economy is not always easy,once economic development is on the rise. The need for a bureaucracy able to conceiveand implement the designs of a strong state is also pointed out by Stiglitz & Yusuf (2001)and Jomo (2003) even talks about good governance and „embedded autonomy‟. The“institutional capacity and capability of the governments concerned to effectively providethe coordination necessary for rapid accumulation and economic transformation” istherefore necessary for economic development (Jomo, 2003, p. 4). Additionally, findingthe right timing of trade liberalization and integration with the global economy is crucial.Nevertheless, the East Asian development model seems appealing to be used as a role 12
  13. 13. model for developing countries. It will be interesting to see whether it would besupported by the EU‟s development cooperation framework. 13
  14. 14. 3. The EU and Development Models3.1 EU’s trade and development aid framework and Development ModelsThe EU engages in relations with third countries in different ways. Concerningdeveloping countries, it established a framework of agreements and programs, connectingtrade agreements with economic aid and currently holds Association Agreements with120 developing countries world wide. EU development policy has its origins in Article131 (now article 182) of the Treaty of Rome enumerates Overseas countries andterritories with special relations to EU member nations and outlines the objective to closeeconomic relations with the European community as a whole in order to promoteeconomic and social development. Article 131EEC (now 182EC) on the Association ofOverseas Countries and Territories (OCTs), reads:The Member States hereby agree to bring into association with the Community the non-European countries and territorieswhich have special relations with Belgium, France, Italy and the Netherlands. These countries and territories, hereinafterreferred to as “the countries and territories”, are listed in Annex IV to this Treaty.The purpose of this association shall be to promote the economic and social development of the countries and territoriesand to establish close economic relations between them and the Community as a whole.[…]Additionally, the establishment of a free-trade area between the six European countriesand their overseas colonies enabled African countries to export their agriculturalcommodities to Europe without tariff restrictions and the Europeans were able to selltheir industrial products on the African market more easily. Further, the EuropeanDevelopment Fund 3 (EDF) was founded to cover for economic and social infrastructureinvestment (European Navigator, 2010). Clearly, article 131 aimed at providing for a smooth transition of former coloniesinto potential economic partners, especially during the following post-colonial period(Bainbridge [2003], Nello [2009], European Navigator [2010]). In 1963 and 1969 theYaoundé and Arusha (Yaoundé II) Conventions extended the association with Europe‟s3 The European Development Fund is financed by European national contributions of the Member States. Itis the main instrument for European Community aid for development cooperation in Africa, the Caribbean,and Pacific (ACP Group) countries and the Overseas Countries and Territories (OCT). 14
  15. 15. OCTs, which was initially set up for five years. From the Western European‟s point ofview, improving the ties with Africa was also important for political reasons. The ColdWar required the attachment of Africa to Western Europe “in order to curb separatisttendencies and the spread of Communism” (European Navigator, 2010). The Soviets, onthe other side, portrayed Western Europe as „enslaving‟ Africa. At the end of the Cold War it seemed that developing countries now had tocompete for investment and aid with the post-communist world (Holland, 2002; O‟Brian& Williams, 2007; Nello, 2009). The Maastricht Treaty (1993) added the goal ofdevelopment cooperation to the EU relationship with developing countries. Communitydevelopment policy now aimed at sustainable economic and social development, smoothand gradual integration into the world economy and finally, the campaign against poverty(Holland, 2002). The Cotonou Agreement of 2000 included a new emphasis on theobservance of human rights and „good governance‟ in the recipient countries (Art.9). TheCotonou Agreement was designed to govern the trade and aid arrangements with thedeveloping African, Caribbean and Pacific states (also called ACP). It granted free accessto the Community market for all ACP industrial products and most ACP agriculturalproducts (Bainbridge [2003], Nello [2009], European Navigator [2010]). The CotonouConvention was eventually to be replaced by the European Partnership Agreements, orEPAs from 2008. EPAs are aimed at arranging the relations between Europe and itsneighboring ACP countries with the objective “to build free trade areas in different ACPregions” (Nello, 2009, p. 438). The World Trade Organization, however, does not havemuch appreciation for the special EU-ACP trade relations, as any new tradingrelationship with the developing world has to be consistent with WTO regulations(Holland, 2002). According to Bainbridge (2003), the European Union gives more aid than otherdonors to agricultural and rural development projects, which present some 50 per cent oftheir total expenditure. Further, In the Generalized system of preferences (GSP), manydeveloping countries enjoy privileged access of their products. Trade is generally perceived as having a crucial role in promoting development.Since 1971, “the EU imports products either duty free, or with a tariff reduction,depending on the arrangement with the beneficiary country”, as part of the GSP (Nello, 15
  16. 16. 2009, p. 437). The „Everything but Arms‟ (EBA) initiative grants access to all otherproducts (besides bananas, sugar and rice) of least developed countries to the Europeanmarket (Nello, 2009). Further, the EU cooperates with international organizations such asthe OECD, the World Bank, and the UNDP “to develop a core set of indicators to assessprogress in meeting the Millennium Development Goals (MDGs). According to Nello,“economic development is a complex process depending on a whole series of factorsincluding the internal situation of the recipient countries, the international economicenvironment, globalization, the evolution of EU policies (such as CAP or CFSP) and theoutcome of the Doha Round. As the quantity of ODA [official development assistance]seems likely to remain limited, it is essential to ensure its quality” (Nello, 2009). Thefollowing points ensure a certain quality for development assistance: First, the promotionof economic growth needs to be emphasized and poverty has to be addressed. Theestablishment of democratic institutions to promote good governance and democraticstandards is important. Further, it is necessary to apply conditionality so that thedemocratization process and the advancement of good governance are ensured asconditions for receiving aid. The promotion of sustainability and simplification andcoordination of aid programs should be addressed as well (Nello, 2009). In summary, the EU‟s global role is clearly related to development aid. It is theworld‟s biggest donor as well as one of the leading trading blocs. The EU‟s approach todevelopment aid focuses on pressuring development countries to open their markets,while granting their products preferential access to the European market. Further, it givesaid in conditionality linked with good governance, capacity building and respect forHuman Rights. 16
  17. 17. Free-trade vs. Capacity BuildingAccording to the Institute for European Studies at Vrije Universiteit Brussel:The aim of the new generation free trade agreements was to increase thecompetitiveness of EU firms by providing market access in parts of the world where thereis potential for market growth but where significant non-tariff barriers exist.In fact, one must ask why these barriers to trade exist and why policy makers indeveloping countries have enacted such legislation in the first place. In the context ofdeveloping country trade regimes, Chang finds that often non-tariff barriers exist fordevelopmental purposes, in line with the often-contested infant-industry-industrializationargument. In other words, barriers to trade exist in developing countries –often alongsidedomestic subsidies and capacity-building incentives such as industry cross-subsidizationand incentives to employ high technology in their productive processes– in order to fosterthe growth of domestic productive capacity and the competitiveness of domestic firms. Thus, seen from the point of view of the developing countries, where tradebarriers exist, debates over EU-Developing country trade access are in this contextreduced to a zero-sum game. More specifically, either the EU gains trade access to agiven developing country and its firms become more competitive or domestic developingcountry industries keep captive the demand necessary in order to try to developproductive capacity. In other words, in dealing with North-South trade, there exists atrade-off between free-trade access for the global north into the global south and capacityand productivity building in the global south. Given the trade-off as seen from the perspective of the developing countries inwhich trade barriers exist, sufficient positive incentive is necessary for the developingcountry in question to agree to grant free-trade access to a northern country, a prospectwhich would yield job losses and the decline of industry, in the minds of those whofollow the infant-industry argument. This incentive can manifest itself in the form ofdevelopment aid. This is the logical basis for the link between trade and aid in EUdevelopment cooperation policy. 17
  18. 18. 4. ConclusionThe miracle economies of East Asia have succeeded through a strategic approach tointegration with the global economy. These regions were the first newly industrializedcountries, noted for maintaining exceptionally high growth rates and rapidindustrialization between the early 1960s and 1990s. In the 21st century, all four regionshave since graduated into advanced economies and high-income economies. Theseregions are still the worlds fastest growing industrialized economies. After we have looked at the East Asian Tigers, the two main ingredients of theEast Asian development model are (1) the important role of the government, and therecognition of the limitation of the market; (2) export-led industrialization. Further,innovation and technology and the investment in human capital, as in the promotion ofuniversal education, are important to improve a country‟s comparative advantage.Further, globalization has magnified the cost of bad, inconsistent policies and weak,inefficient institutions and has shown that it can become a danger to developingcountries. The Asian crisis has shown the importance of effective state institutions andthat a country should be careful not to open its economy too early. As it is clear now, Korea opened its economy too early; it lost control over itsgiant companies due to a relaxation of controls over the private sector‟s foreignborrowing. Maintaining the „commanding heights‟ in the economy is not always easy,once economic development is on the rise. There is a need for a bureaucracy able toconceive and implement the designs of a strong state. Additionally, finding the righttiming of trade liberalization and integration with the global economy is crucial.Nevertheless, the East Asian development model seems appealing to be used as a rolemodel for developing countries. In its relations with developing countries, the European Union focuses almostsolely on trade agreements. It acknowledges the importance of economic growth and thereduction of poverty. It even addresses the need of the establishment of democraticinstitutions to promote good governance and democratic standard. Further, the EUapplies conditionality so that the democratization process and the advancement of goodgovernance are ensured as conditions for receiving aid. The promotion of sustainabilityand simplification and coordination of aid programs should be addressed as well as the 18
  19. 19. promotion of capacity building. The EU‟s approach to development aid focuses onpressuring development countries to open their markets, while granting their productspreferential access to the European market. Further, it gives aid in conditionality linkedwith good governance, capacity building and respect for Human Rights. Given the trade-off as seen from the perspective of the developing countries inwhich trade barriers exist, sufficient positive incentive is necessary for the developingcountry in question to agree to grant free-trade access to a northern country, a prospectwhich would yield job losses and the decline of industry, in the minds of those whofollow the infant-industry argument. This incentive can manifest itself in the form ofdevelopment aid. This is the logical basis for the link between trade and aid in EUdevelopment cooperation policy. Domestically developed Human Capacity building and Economic Growth policiesare needed for the sustainable development of a country. Hence, the EU needs to rethinkits external development strategy. It could improve its approach to good governance andcapacity building. The promotion of free trade, however, as seen in light of this paper,has to be looked at carefully as a tool to encourage economic development. 19
  20. 20. 5. LiteratureBartels, L. (2007) The trade and development policy of the European Union, EuropeanJournal of International Law. 18, 4, 715-756.Bretherton, C.; Vogler, J. (2006) The European Union as a Global Actor, London:Routledge, Ch. 5.Carbone, M. (2008) Mission Impossible: The European Union and policy coherence fordevelopment, Journal of European Integration, 30, 3, 323-342.Chang, HJ. (2007). Bad Samaritans. The Guilty Secrets of Rich Nations and the Threat toGlobal Prosperity. London: Random House Business Books.Corsetti, C; Pesenti, P.; Roubini, N. (1998). Paper Tigers? A Model of the Asian Crisis.National Bureau of Economic Research Networking Paper No.6783.Cox, A., Koning, A. (1997). Understanding European Community Aid. London:Overseas Development Institute.Elgström, O. (2009) Trade and aid? The negotiated construction of EU policy oneconomic partnership agreements, International Politics, 46, 4, 451-468.European Navigator, retrieved May 2010, from www.ena.luFlint, A (2009) The end of a „special relation‟? The New EU-ACP PartnershipAgreements, Review of African Political Economy, 36, 119, 79-92.Holland, M. (2002). The European Union and the Third World. London: Palgrave.Jomo, K.S. (ed.)(2003). Southeast Asian Paper Tigers? From miracle to debacle andbeyond. Oxon, UK: RoutledgeCurzonKlein, N. (2007). The Shock Doctrine. The Rise of Disaster Capitalism. New York:Picador.Nello, S.S. (2009). The European Union. Economics, Policies and History. Ch. 19. EUTraid and Aid Policies. London: McGraw-Hill.O‟Brien, R.; Williams, M. Global political economy. Evolution and dynamics. Chapter 1,Understanding the global political economy. Palgrave Macmillan: Houndsmill, 137-173.O‟Brien, R.; Williams, M. (2007) Global political economy. Evolution and dynamics.Palgrave Macmillan: Houndsmill, Ch.10. 20
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