Following the Tigers What we can learn from Development Abstract The debate on whether internal or external factors where more important for development was spurred on by the rise of the Four Asian Tigers Singapore, Taiwan, South Korea and Hong Kong (also called NICs – newly industrialized countries). Scholars argue whether export-oriented industrialization policies (neoliberal school) or successful state intervention policies (developmental state school) were the key to the success of the Tigers. Which type of policy should then serve as a model for other countries? What can the EU learn from the Asian Tigers, in terms of encouraging development? Svenja Kathrina Schmitz Europe’s External Economic Policy June 2010
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Following the Tigers
What we can learn from Development
Abstract
The debate on whether internal or external factors where more important for development
was spurred on by the rise of the Four Asian Tigers Singapore, Taiwan, South Korea and
Hong Kong (also called NICs – newly industrialized countries). Scholars argue whether
export-oriented industrialization policies (neoliberal school) or successful state
intervention policies (developmental state school) were the key to the success of the
Tigers. Which type of policy should then serve as a model for other countries? What can
the EU learn from the Asian Tigers, in terms of encouraging development?
Svenja Kathrina Schmitz
Europe’s External
Economic Policy
June 2010
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Contents
Introduction
1. Development
1.1 What is development?
2. East Asia: Tigers as Role Models?
5.1 The East Asian Development Model
3. The EU and Development Models
3.1 The EU‟s Trade and Development Aid Framework and Development Models
4. Conclusion
Literature
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Introduction
Neoliberal approaches undermine developing country capacity for modernization, inhibit
the development of infant industries, and make developing countries vulnerable to
outside shocks, while developmental state models focus on domestically developed
policies including infant industry protection and have resulted in growth and prosperity in
developing countries. Therefore, domestically developed Human Development and
Economic 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 approach
to integration with the global economy. These regions were the first newly industrialized
countries, noted for maintaining exceptionally high growth rates and rapid
industrialization between the early 1960s and 1990s. In the 21st century, all four regions
have since graduated into advanced economies and high-income economies. These
regions are still the world's fastest growing industrialized economies.
David Ricardo‟s theory of comparative advantage says that, accepting their
current levels of technology as given, it is better for a country to specialize in things that
they are relatively better at. His theory fails when a country wants to acquire more
advanced technologies so that it can do more difficult things that few others can do – that
is, when it wants to develop its economy (Chang, 2009, p. 47). Ha-Joon Chang1 is of the
opinion that the Korean economic miracle was the result of a clever and pragmatic
mixture of market incentives and state direction (Chang, 2009). While it took markets
seriously, the Korean strategy recognized that they often need to be corrected through
policy 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 consultant
to the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nations
agencies. He is also a fellow at the Center for Economic and Policy Research in Washington, D.C. Chang is also known for being an
important academic influence on the economist Rafael Correa, currently President of Ecuador.
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1. Development
The foundation of economic development is the acquisition of more
productive knowledge.
- Ha-Joon Chang, 2009
2.1 What is development?
There is no clear definition of economic development. GNP per capita against the Human
Development Index (HDI) is widely used to measure development. The HDI measures
social factors and will therefore give higher rankings to societies that have a more equal
distribution of wealth and invest in social services. The GNP per capita can rank societies
that have a large amount of wealth highly no matter what its distribution amongst the
population. Therefore, HDI will favor countries with a social democratic or socialist
leaning compared to GNP per capita (O‟Brian & Williams (2007). Further, development
is not just economic growth; it refers to economic, social, and cultural variables.
Essentially, the process of economic development can be boiled down to the
adoption of domestic and indigenous high-productivity and high-value-added economic
output (Chang, 2009). More generally, the scope of development is the process of
improvement of economic, political, and social well-being of a nation‟s people
(O'Sullivan, 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 to
be important for development as it is seen to work in developed economies. It is claimed
that growth causes development because some of the increase in income gets spent on
human development such as education and health. Dependency theory supports the idea
of external causation. Dependency theorists argue that poor countries have sometimes
experienced economic growth with little or no economic development; for instance, in
cases where they have functioned mainly as resource-providers to wealthy industrialized
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countries (p.302). However, development is neither solely an internal affair nor driven by
external pressures, only. As O‟Brian & Williams (2007) have pointed out “for many
governments in the third world blaming the external environment is an easy option when
domestic reform proves difficult”.
In the early 1990s, so-called advocates of free trade explained the development
success of the East Asian Tigers with openness to trade (Klein, 2003; O‟Brian &
Williams, 2007). Malaysia, South Korea and Thailand still had highly protectionist
policies, however, that barred foreigners from owning land and from buying out national
firms. Between 1965 and 1980 these countries achieved impressive levels of economic
performance characterized by: fast growth, low inflation, macroeconomic stability, a
strong fiscal position, high savings rates, open economies, thriving export sectors and a
great improvement in welfare indicators such as life expectancy and literacy. The debate
brought about two competing schools of thought: the neoliberal school, and the
developmental state school. The neoliberal approach stressed the export-oriented
industrialization policies by these states. The developmental state school, on the other
hand, focused on the role of the state to successfully control economic growth (O‟Brian
& Williams (2007).
Naomi Klein (2003) explains that developmentalist economists believe that
developing countries have a chance to break out of the cycle of poverty if they turn to an
inward-oriented industrialization strategy, e.g. autarky. The dependence on the export of
natural resources to Europe and North America is not advisable since its prices had been
on a declining path Klein (2003). Developmentalism advocates the regulation or
nationalization of key industries to fuel a government-led development process.
The end of communism meant the end for soviet socialism and its centrally
planned economy. China implemented its Four Modernizations program in 1979 and
therewith successfully overcame socialism (O‟Brian & Williams (2007). From now on,
capitalism was the new cool kid on the block. The Asian financial crisis, which occurred
in 1997, nevertheless, gave an idea about the dangers of the newly popular economic
paradigm (O‟Brian & Williams (2007). The world was reminded that the developing
countries can be very vulnerable to outside shocks and potential limits of development
and its ability to endure was one of the issues at hand.
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Neoliberal approaches to development were adjusted to the post Cold War
economic environment and sustainable development was advanced as the main approach
to 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 of
capability building. This focus on governance issues is now a predominant factor in most
relations between developed and developing nations.
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2. Asia: Tigers as Role Models?
Korea’s progress is as if Haiti had turned into Switzerland.
- Ha-Joon Chang, 2009
2.1 The East Asian Development Model
Korea‟s economic growth and the resulting social transformation over the last four and a
half decades have been truly spectacular. It has gone from being one of the poorest
countries in the world to a country on the par with Portugal and Slovenia in terms of per
capita income. A country whose main exports included tungsten ore, fish and wigs made
with human hair has become a high tech powerhouse, exporting stylish mobile phones
and flat screen TVs coveted all over the world. Better nutrition and health care mean that
a child born in Korea today can expect to live 24 years longer than someone born in the
early 1960s (77years instead of 53 years). Instead of 78 babies out of 1,000, only five
babies will die within a year of birth. In terms of these life-chance indicators, Korea‟s
progress is as if Haiti had turned into Switzerland.
In his article The East Asian Model of Economic Development and Developing
Countries (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 and
makes assumptions about a resulting development model, potentially applicable to other
developing countries. The role of the government, he says, was the most significant
feature of East Asian economic policy leading to the miraculous growth experienced by
these countries between 1970 and 1990 (Park, 2002, p330). Park‟s main findings also
actually suggest that government intervention not only successfully addresses the
limitations of the market; it also is an effective tool for the promotion of economic
development.
2 The term East Asian Tigers or Tigers refers to the highly developed economies of Hong Kong, Singapore,
South Korea and Taiwan.
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According to Cambridge economist Ha Joon Chang (2009), it was a mix of infant
industry protection, export-led industrialization and the promotion of universal education
that paved the way for economic growth and development. State-directed capitalism, the
combination of “the dynamic aspects of a market-oriented economy with the advantages
of centralized planning and direction”, was South Korea‟s and Taiwan‟s main tool for the
successful development of their economies (Park, 2002, p.330). When the Asian financial
crisis hit some Tigers hard, sustainability and applicability of their economic policies
came under scrutiny. As the East Asian Tigers had main common threads in their
development strategies and experiences, it will be interesting to see how the East Asian
development model would look like.
The emerging economies‟ performance in the late 1980s and early 1990s resulted
in an increase in private capital inflows (Park, 2002, p. 331). This supported the
investment boom, which was bank credit-financed. However, in 1997, following a year of
record capital inflow of $93 billion, a net outflow of $12 took place. Amounting to a
reversal of capital flows of $105 billion, the Asian currency crisis was provoked,
“eventually pushing „miracle‟ economies into a dramatic financial meltdown with serious
economic, social, and political consequences” (Park, 2002, p. 332).
East Asian economies soon saw the depreciation of their currencies due a
combination of reversal of foreign capital and the flight of domestic funds. The Tigers
suffered unexpectedly severely, sharing several characteristics that played a role in the
crisis, According to Park (2002), “they include a credit-fuelled investment boom, a weak
and unsound banking sector and financial system, a pegged exchange rate regime, current
account deficits, and loss in investor confidence. How come that the Tigers‟ banking
sector was so weak and unsound that it could not resist outside shocks?
Government authority over the banking sector led to the misconception that
borrowers 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 lack
of procedure and management that exposed the bank-centered financial systems to
outside shocks. It was also the lack of capacity, ones the system was liberalized. As Park
explains: “banks did not have adequate capacity for project evaluation in lending
practices, especially in the aftermath of increased financial liberalization in these
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countries” (Park, 2002, p.333). The brittle financial system was exposed to large,
capricious, foreign capital flows, which “made the Asian emerging market economies
extremely vulnerable to changes in investor confidence” (Park, 2002, p.334).
The Tiger‟s economies were too sensitive to outside shocks and were therefore hit
hard by the Asian financial crisis. That does not mean, however, that the East Asian
development 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 the
potential weaknesses of the East Asian development model that had to be fixed. “The
crisis underlined the advantages of public bureaucracies skilled at managing the economy
and responding to shocks” (Stiglitz & Yusuf, 2001, p.8). What, however, is the East
Asian development model exactly?
While different models of development economics emerged over time, two
general movements can be characterized in the debate over economic development. One
was the liberal approach, claiming that only the „invisible hand‟ of the market, as
presented by Adam Smith, would efficiently provide for economic growth and that
regulation only misleads the economy. A different belief focused on government
planning as the only policy which would guarantee the effective mobilization of
resources and their fair and successful deployment in favor of economic growth. Two
different examples of this model where India and China on their ways to economic
growth and development.
China and India both did very well in the 1950s and 1960s, following national
planning to transform “a predominantly agrarian society with masses of populations
living in extreme poverty” into an industrialized society with a higher per capita income
and living standard. The road to economic growth and development was paved with
autarky, central planning, import-substituting industrialization and the promotion of
heavy industries. Their autarkic trade policies resulted in cutting off any link between
domestic and international markets. Agriculture was heavily taxed to finance
industrialization. While India was a parliamentary democracy and China a centralized
authoritarian system, their development strategies started to pay off quickly, which led to
a „developmental race‟. Park explains the importance of this race: “The outcome of the
race would have some far reaching political implications: If China won, the totalitarian
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model of Soviet Union and its ally China would have a profound impact on the leadership
of 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 assumed
that 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 the
Four Asian Tigers South Korea, Taiwan, Hong Kong, and Singapore. The
“developmental strategies of these East Asian tigers soon became the focus of universal
attention” (Park, 2002, p. 337). Export oriented development strategies which were
guided 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 East
Asian economic performance. First, a stable business environment with relatively low
inflation encouraged investment (p. 5), and was backed by the protection of infant
industries (Chang, 2009; Park, 2002). Second, central planning and bureaucratic
regulation, like prudent and sustainable fiscal policies, guaranteed the equal distribution
of rewards from higher growth (Stiglitz & Yusuf, 2001; Park, 2002; Chang, 2009). Third,
exchange rate policies underpinned export competitiveness, aiming at becoming what
Chang calls an „export powerhouse‟ (Chang, 2009). The Asian Tigers followed a road of
export-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 maximize
domestic savings and promote efficient allocation and integration with the global
financial system” was one of the strands of the East Asian miracle. Park (2002) and
Chang (2009), however, explain that the liberalization of the financial sector and the
integration into the global system was a gradual undertaking, commenced at a stage
where the Tiger‟s economies already had extensively grown and built their capacities.
Guaranteeing the competitiveness of a sector should always be a prerequisite before
opening up the domestic market and integrating into the world economy. Otherwise the
level of vulnerability may be too high, and the risk for the sector to be severely harmed
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will be too big. The Asian financial crisis has basically shown that the financial system of
some 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 of
primary and secondary schooling as well as the creation of a hierarchy of skills to
buttress 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;