The South-East Asian conundrum

What they won’t tell you about the Asian Tigers

Robert Wade

Neoliberal economists take the South-East Asian economic miracle as a case study and a litmus test for their theories and assumptions. They argue that the post-war boom in the region was fuelled by a set of reforms which emphasised private players and free markets over State intervention and central planning. Low taxes and interest rates, according to this reading, attracted foreign investments and spurred local entrepreneurship, enabling these countries to take off before the rest of Asia, especially South Asia.

Meanwhile, the governments of these countries intervened, if at all, to promote business activity, refraining from raising taxes or redistributing income. The private sector played a much bigger role, to the extent that economists contend either that the State provided an environment for free enterprise to flourish or that its role in the region’s economic miracle has, as Hugh Patrick puts it, “often been exaggerated.”

To be sure, not all these economies saw through these reforms at the same time, or grew at the same rate. Growth was always uneven, and its effects were unevenly spread: thus some countries, like Taiwan and South Korea, took off faster than others like Singapore, while the latter grew much earlier and more rapidly than Thailand and Malaysia.

Yet all these countries supposedly experienced take-off by abandoning planning and import substitution in favour of export orientation. Moreover, by focusing on their core strengths, in line with comparative advantage theory, they built up internationally competitive industries. In other words, industrialisation propelled growth because they liberalised markets and trade, thus stimulating entrepreneurship and attracting foreign investment.

It goes without saying that South-East Asia is frequently cited by Sri Lanka’s economists as a case study for where we should be. These commentators point at the role of free enterprise and export orientation in the South-East Asian economic miracle. They acknowledge that the region did undergo import substitution, but then contend that this was brief and more importantly was linked to a longer-term export-led strategy.

Interestingly enough, none of their accounts explains how one phase led to the other, except to note that even when intervening in the economy, these governments left political considerations out from policy formulation. To quote one commentator,

“Where selective interventions succeeded, they did so because of three essential prerequisites. First, they addressed problems in the functioning of markets. Second, they took place within the context of good, fundamental policies. Third, their success depended on the ability of governments to establish and monitor appropriate economic-performance criteria related to the interventions (World Bank, 1993).”

However, the same commentator argues that even this form of intervention has limited applicability today, partly owing to World Trade Organisation policies. To quote the World Bank, “the market-oriented aspects of East Asia’s policies can be recommended with few reservations, but the more institutionally demanding aspects, such as contest-based interventions, have not been successfully used in other settings.” In other words, we need only focus on the later reforms implemented by these countries, and need not look into or even consider what led to, and in fact facilitated, those reforms.

Highly simplistic and selective, this interpretation of post-war South-East Asian economic history suffers from certain methodological flaws. Yet there’s no shortage of economists and columnists who point to the region’s economic success, buttressing their arguments with assumptions that are, to say the least, rather suspect. What’s concerning is that it is their view of South-East Asia’s economic miracle that dominates narratives about where Sri Lanka must go to escape its crisis. Those narratives, in turn, are reinforced by economists based in East and South-East Asia, who, at various forums in Sri Lanka, present a selective and cherry-picked interpretation of the factors which led to rapid growth in the region.

Perhaps the most comprehensive account of the South-East Asian economic miracle is Robert Wade’s Governing the Market: Economic Theory and the Role of Government in East Asia’s Industrialization. First published in 1990, the book won an award from the American Political Science Association two years later. Wade’s specialisation has been in the fields of political economy and development economics, and he is presently Professor of Global Political Economy at the London School of Economics. Previously he worked at the Institute of Development Studies in Sussex; one of his colleagues there was Mick Moore.

Wade worked at the World Bank from 1984 to 1988. Yet his book does not conform to the conventional World Bank/IMF view of South-East Asia’s economic success, a point he notes rather sardonically. Indeed, far from prejudicing him, his World Bank stint helped him grasp the limitations of the policies that such institutions were prescribing back then.

The book addresses these limitations. Its point isn’t so much that South-East Asia grew owing to State intervention as that the fact that it did questions the neoclassical/neoliberal paradigm that has gained traction among policymakers since the 1970s. This sounds hardly radical today, but in 1990, it was a very radical proposition to make.

The first section is perhaps the most interesting. In it Wade outlines, then proceeds to disprove, some of the more important theoretical assumptions of the anti-interventionist school. His take on free trade theory is particularly valid.

“However, the theory of comparative advantage covers only the effects of once-and-for-all changes in trade restrictions. It does not specify a causal mechanism linking realization of comparative advantage to higher growth. A leading proponent admits that ‘in its present state, trade theory provides little guidance as to the role of trade policy and trade strategy in promoting growth.’” (Wade, 1990, p. 22, emphasis mine)

What follows from this is a critique of neoclassical/neoliberal theory. For Wade, economists and policymakers tend to “rely on ad-hoc factors to make the link between freer markets and higher growth.” Analysing IMF and World Bank data, he sees no correlation between outward orientation and economic growth, though economists frequently make the case for such a relationship. He quotes the likes of Hans Singer and Patricia Gray, who have ascertained that export orientation worked best with positive global conditions, as when world demand grew in 1967–1973 before contracting in 1973–1977. He then goes on to show how economists and institutions have drawn their conclusions from a handful of case studies, sometimes just one: “[O]nly anthropologists,” he observes critically, “are allowed to draw sweeping conclusions from a sample of less than two.”

Wade charts South-East Asia’s industrialisation drive from the 1930s to the 1980s and notes how World War II and the two big regional military confrontations which followed, the Korean and Vietnam Wars, helped it catch up. He then delves into how these confrontations shaped economic policy, something Richard Stubbs has also delved into in his essay “War and Economic Development: Export-Oriented Industrialization in East and South-east Asia” (Comparative Politics, 1999). His conclusions are the same as Stubbs’s: without government intervention, South-East Asia would not have clinched impressive growth rates.

Interestingly, unlike in countries like Sri Lanka, where economic orthodoxy prevailed against industrial policy, Western experts actively helped South-East Asian governments set up and implement industrialisation strategies. The Taiwanese government, for instance, “sought out US companies” with USAID support; over a period of two years no fewer than 24 US companies “rushed to make production arrangements.” These governments then rapidly developed the steel, metals, and electronics sectors, while in the 1970s they forayed into nuclear energy, through which they managed to weather the oil shock.

The early winners — Taiwan, South Korea, Singapore, Hong Kong — soon penetrated the US market — despite protectionist sentiment from the Reagan government and competition from Japan — and helped latecomers in the region — in particular Thailand and Malaysia — catch up. Partly owing to American pressure, Japanese investments flooded the latter two countries, leading to knock-on effects on the entire region. Trade with Japan quickly grew: Malaysia’s exports of manufactured goods there, for instance, jumped from USD 380 million in 1986 to USD 5.9 billion in 1995. Eventually, these developments helped Vietnam become the South-East Asian economic success story of the 1990s.

Paul Krugman has suggested that accumulation, rather than productivity, played a more pivotal role in generating rapid growth in South-East Asia. As Richard Stubbs has noted, in this the region was responding to geostrategic imperatives, particularly its alignment with a pro-US Cold War camp, first through SEATO and later through ASEAN.

Far from reducing government intervention in the region, US experts tapped into the immense potential of State-led industrialisation, helping these countries achieve in years what many others would achieve in decades. Someone, I think Hegel, once observed that freedom is the recognition of necessity. There is perhaps no better case study for the link between “economic freedom” and political necessity in the 20th century than South-East Asia: a point which orthodox economists may not want to harp on about.

The writer can be reached at udakdev1@gmail.com

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Sri Lankan. History fanatic. Movie addict. Book lover.

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Uditha Devapriya

Uditha Devapriya

Sri Lankan. History fanatic. Movie addict. Book lover.

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