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The East Asian model of economic development

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The East Asian model of economic development

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The East Asian model of economic development

  1. 1. Hang Nguyen Toulakham Phomsengsavanh Talina Gayazova Roman Vernidub
  2. 2. Content Ⅰ. Introduction Ⅱ. The Model Ⅲ. Free Market, Democracy, and Economic Development Ⅳ. Why Some High Human Capital Countries Are Not Growing V. East Asian Political Economy 1. Japan 2. South Korea, Taiwan, 3. Hong Kong 4. Singapore 5. China Ⅵ. Policy Implications and Summary 2
  3. 3. I. Introduction Objective - to put forth an EA Model which is applicable, in general, to the development of all other underdeveloped economies. EA Model - transitional model that explains economic transition from a backward economy to an industrial economy, with major emphasis on the initial stage of the transition. 3
  4. 4.  unprecedented high growth rate  unconventional growth path → The EA economies aroused much interest 4
  5. 5. II. The East Asian Model 1. the centrality of policy-augmented human capital; 2. changes in the size and composition of a country’s portfolio of productive industries are an intended outcome of economic policy ; 3. economic differentiation is a necessary condition for economic development ; 4. democracy is not necessarily a precondition for economic development; 5. without political stability no economy will prosper. 5
  6. 6. III. Free Market, Democracy, and Economic Development  Economic development and Development of democracy do not occur concurrently!  Poverty-stricken economy --- likely to choose relief from hunger over democracy.  Democratic vs. autocratic regime. Democratic Autocratic regime Advantages politicians seeking reelection have an incentive to reflect the will and interests of a majority of the people. greatest chance of remaining in power or claiming legitimacy lies in achieving a maximum rate of growth. Disadvantages a looming election gives an incentive to pursue short-run accomplishments that can be pointed to during campaign the power to use the state for strictly private gain. 6
  7. 7. Free Market, Democracy, and Economic Development (cont.)  Democracy rarely blossoms in an environment of economic backwardness, and usually short-lived;  The precedence of economic development over democracy  The Meiji era, the early period of Japanese modernization --- a period of imperial rule.  The political systems of the rest of the EA countries ranged from authoritarian to autocracy in their early period of development;  In East Asian , democracy was ushered in by economic success. 7
  8. 8. IV. Why Some High Human Capital Countries are not Growing The quality of PAHC --- determines the direction of product and trade specialization Entrepreneurial ability & policy making ability are keys to successful industrialization. The conditions --- political stability and/or an absence of social conflict are crucial to the success of industrialization. 8
  9. 9. Why Some High Human Capital Countries are not Growing (cont.) Latin American economies (Argentina and Brazil) Poor industrial policy, too much dependence on domestic endowment of natural resources, and insufficient industrial diversification on one hand and class conflict—socio-economic inequality on the other. (a) the exchange rate overvaluation --- by an import substitution (IS) policy has discriminated against exports, giving rise to balance of payment deficits; (b) an increase in government spending ---- by tax revenues gave rise to budget deficits financed by accelerating inflation; and (c) the emphasis on industrialization at the expense of parallel agricultural development --- rural poverty contributing to social conflict All culminating in retardation of growth. 9
  10. 10. Why Some High Human Capital Countries are not Growing (cont.) India up to 1980s 1) India’s bureaucratic management (i.e., use of rationing as predominant mode of regulation for the manufacturing industries), as the primary cause of India’s slow-paced industrialization. 2) the heterogeneity of the country, hence the pervasiveness of vetoes by interest groups, prevented a single homogenous group from dominating the polity and the state Due to a liberal economic reform which has finally unleashed hitherto dormant high level of human capital, enabling India to ride the wave of the IT revolution. The PAHC --- the engine for the rapid rise of the Chinese economy, while it was the wrong policy that held back the Chinese economy prior to the 1980s. Russia (19th century) Russian leaders were ambivalent about a strong state role in the industrialization process. The institutions that took over the state-owned facilities and that managed many other Russian factories were not private enterprises on the Western model. Owners acted like absentee landlords and factories were treated as serfdoms operated by forced laborers and run under strict military discipline which discouraged innovation and adaptation. the arbitrary use of the state’s power, mostly suppressive, was the key deterrent to its industrialization. 10
  11. 11. V. East Asian Political Economy  Underdevelopment:  Poverty  uncompetitive market  Political instability  ineffective government  EA model:  Import substitution (IS)  Export promotion (EP)  Policy-augmented human capital (PAHC)  Land reform 11
  12. 12. 1. Japan  Meiji Period (1862-1912)  Modernlization  Borrowed technology & scientific knowledge  Integrated economic development  Modernize economic infrastructure (telegraph, postal services, railroads)  Compulsory education  Government as initial industrialists (e.g. cotton, textiles)  Militarism 12
  13. 13. 1. Japan  Post-war Period  No military  purely economic rationale  Capital intensive industries (i.e., steel, petrochemicals)   potential for externalities on related industries  Both labor intensive and capital intensive industries  Flexible, adapt quickly to new technologies  CA of PAHC 13
  14. 14. 2. South Korea, Taiwan  Japanese colonial period (~1945) and the adjustment period (1945-1950s)  Head start in human capital (education)  Post-war land reform  Difference from Japan: size of domestic market  EP of primary goods  Secondary phase of IS (i.e., production of intermediate and capital goods) 14
  15. 15. 3. Singapore  Fastest rate of growth among EA economies  IS policy (1959-66)  Export-oriented  Labor intensive industrialization strategy  FDI  1979~: skill/technology intensive, high value-added production 15
  16. 16. 4. Hong Kong  Free market environment  Influx of Chinese entrepreneurs (cotton mill operators)  business expertise,  scarce capital,  skilled workers,  export market networks  Government: promoting trade and education 16
  17. 17. 5. China  China – different from other EA countries, but fits EA model described in the paper:  abundance of human capital  fits Proposition 4 - economic success can be a more expedient route to successful transition from a non-democratic political system to a democratic system 17
  18. 18. 1) Central Planning: 1949-1976  Mao government adopted so called “leap forward” policy - emphasis on heavy industry to achieve quick industrialization through central planning: o market/price mechanism was completely ignored o state enterprises had little managerial autonomy o agricultural sector was organized into collective farms o economic incentive was mostly neglected 18
  19. 19. 2) Economic Liberalization: 1976 and On  Liberalization of economy: inspired by existent EA models - attracted to Korean model as Korean economy registered the highest growth rate under most authoritarian political regime Rapid accumulation of physical capital and human capital Physical capital:  China’s open-door policy, which provided an impetus to FDI: FEZ, Allowing foreign companies to set up joint venture and shareholding companies etc.  High rate of saving - effectively channeled into physical capital formation 19
  20. 20.  Human capital: Institutional reforms:  household responsibility system (HRS) replaced collective farm  management of state owned enterprises was decentralized, profit sharing by using Contract Responsibility System  town and village enterprises (TVEs) system was lunched Chinese economy grew at the unprecedented rate of over 10% 20
  21. 21. VI. Policy Implications and Summary Goal of the paper – form widely applicable EA model for many countries trapped in poverty. Reasons: a) deficiency in human capital b) the prevalence of political instability Concept of the policy-augmented human capital (PAHC) turns out to be all the more important in the regime of free trade EA economies - successful because of the high level of human capital guided by an effective policy. Uniqueness of EA model: a) validates the critical role of human capital b) validates the role of government at a time when interventionist policies were either failing elsewhere or facing strong opposition c) takes cognizance of the importance of the psychological effect an effective policy brings to human capital d) provides evidence pointing to the precedence of economic development over democracy 21

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