Effect of State Intervention on Economic Growth of East Asian Nations

The East Asian Miracle: To what extent was state intervention responsible for the economic growth of the Asian Tigers?

Abstract

According to a 1993 World Bank report named ‘The East Asian Miracle’, the tremendous economic growth experienced by the Asian Tigers (South Korea, Taiwan, Singapore, Hong Kong) was due to the neoliberal fiscal policies implemented by their respective governments. However, it has been suggested that the state played a significant role in the economic evolution of all four states, and that it was an interventionist development model that helped the countries progress from ‘under-developed’ to ‘advance’ in only thirty years. Therefore, to what extent was state intervention responsible for this economic boom? Why did a particular growth strategy achieve such unbelievable results? This dissertation aims to answer these questions by first defining the theoretical framework on which this topic sits, before analysing the economic and political history of each of the four countries. The essay then goes on to evaluate the explaining factors behind said growth. It concludes that it was not simply state intervention that led to rapid economic growth, but rather an intense government-led development model that was used to some extent by each state. This model’s success was due to the culture, attitudes to education, and strength of the government shared in each of the Tigers.

The East Asian Miracle: To what extent was state intervention responsible for the economic growth of the Asian Tigers?

Introduction

The term ‘Asian Tigers’ refers to a group of four East Asian states that each underwent a phase of astonishing growth and development. From 1965 to 1995, the countries of South Korea, Taiwan, Singapore, and Hong Kong experienced growth rates of over 6% on average and astounded the international community by transforming from ‘third world’ economies into some of the most advanced in the region (Mascelluti, 2015). A 1993 World Bank report named ‘The East Asian Miracle’ attributed a market-led development model and neoliberal policies as the reasoning for their lengthy economic boom, due to the low taxes, small welfare states, and export-led policies that were observed in each of the states (1993). Indeed, since the end of WWII, the neoliberal approach to developing low-income economies has dominated academia, partially due to its success in achieving growth in the West. It is engrained within international politics and is supported by the IMF, the World Bank, and the US (Shirley, 2014). However, neoliberalism has been criticised as a mechanism for supressing under-developed states from growing (Yeung, 2000), and in the case of the four Asian Tigers, a distinct alternative road to development may be interpreted. Therefore, critics have argued that state intervention and the industrial strategies they implemented had a much more significant effect on economic development than neoliberal policies and have reasoned that it was not Smith’s “invisible hand” that stimulated growth, but rather the “visible hand” of each of the Tigers’ governments (Movahed, 2014). Therefore, this dissertation will attempt to gauge to what extent can state intervention explain the astonishing growth the Asian Tigers faced when compared to other development models by exploring which model is most applicable to each state, and why. Comparisons will be made between each of the Tigers, and overall an extensive analysis of the causes of the Asian Miracle will hopefully be achieved.

The outline for the dissertation is as follows; first, an explanation of the theoretical background of the topic. This consists of a breakdown of three distinct development models found in literature which are most likely to properly explain the economic growth in each of the Asian Tigers. The second section will analyse the economic and political history of South Korea, Taiwan, Singapore and Hong Kong in order to identify which economic development model was responsible for each state. The third section evaluates why the relevant strategies where so successful in achieving such high growth rates. Several factors are discussed including culture, education, and political climate. The fourth and final section concludes that whilst government intervention is somewhat responsible for the economic development experienced, a government-led development model may be more closely attributed to this achievement.

Theoretical Background

In order to fully analyse the extent to which state intervention is responsible for the economic development of the Asian Tiger states, it is vital to define the theoretical foundation on which the topic sits. The economic development of the four Tigers represents just one segment of a larger sphere of development economics, a topic which studies the transformation of underdeveloped nations into more affluent ones. Development economics is relatively new within academia, yet numerous models that detail a country’s growth strategy have risen to prominence. These ideas can be said to generally fall under three separate umbrellas of political thought and have come to be seen as the most established within the topic. The three most relevant theoretical models share the economic philosophies of Keynesian, Neoliberal, and Heterodox theories. These are interventionist, market-led, and government-led models for economic development respectively (Banuri, 2013). Due to the variety and complexity of economic development, it is important to define each model in order to determine the extent to which a state-intervention model was followed as opposed to market-led or government-led models.

The model which most closely resembles the notion of state-intervention is interventionist, which largely draws upon the philosophies of Keynesianism and the idea that governments should make necessary interventions in order to correct errors in the free market (Deprez, 1997). Although actors are considered rational, supervision by the state in required to stabilise output. As is the case in most monopolistic and imperfect-competition markets, a firm may exercise abusive actions that result in a loss of welfare, therefore state intervention is needed in order to decrease unemployment and encourage growth (Sun, 1991). This is most often achieved through policies such as taxation, price setting, and subsidies, and is one of the key arguments in Keynesian economic theory (Lawlor, 2006). All economies to some extent undergo state intervention, however the amount each experiences varies drastically. Whilst Chandavarkar dismantled the argument that Keynesian theories apply to the development model, he concedes that Maynard Keynes offered the first “economic rationale for a central bank as a development agency,” (1986) which paved the way towards a working development model where the market and government of a state synchronise in order to further economic progress and therefore development. Therefore, the interventionist development model has gained significance within development economics academia and may go far in explaining why the Asian Tigers experienced such rapid growth.

As mentioned previously, the 1993 World Bank report regarded neoliberal economic policies as the main drivers behind the Tiger states’ development, rather than state-intervention. Neoliberal ideology resides at the opposite end of the development economics spectrum to the interventionist model, and consequently gives rise to the market-led development model. The market-led model is based on the neoliberal argument that state intervention prevents development, as when government interference grows too big it restricts the freedom of dynamic individuals who drive economic growth (Ellickson, 1989). Therefore, development failures in some economies, such as the USSR, can be blamed on overbearing state intervention. In order to promote growth, the market-led development model supports policies such as deregulation, privatisation, lower taxes, and the liberalisation of trade through the elimination of tariffs and other barriers (Bhattacharjea, 2008). Supporters of the market-led model suggest that states who implement these policies will experience freer markets and less corruption, resulting in an increase in productive efficiency that will translate into higher economic growth (Danby, 1998). It can, however, be argued that this model results in the high-tech, value-added industries being dominated by more developed nations, and that under-developed nations are trapped by low value-added industries such as resource extraction, agriculture and light industry (Chandrasekhar, 1992). Nevertheless, proponents of the market-led model have argued that this still remains a more prosperous source of growth compared to the current position of developing states and may therefore be responsible for the growth experienced within the Tiger states (Jomo and Von Arnim, 2008).

The third and final economic development model that may be responsible for the growth of the Asian Tigers is the state-led model. Whilst in the interventionist model the government only intervenes in the otherwise-open economy when deemed necessary, the state-led model is distinctly different in that the state plays a central role in managing resources and guiding the markets. This model is defined in relation to the school of Heterodox economics, and what makes the government-led growth model unconventional is that it refutes one of the key foundations of classical economics, that what benefits a rational actor must therefore benefit the state’s economy overall (Dow, 2007). Traditionally, rational individual actors always want to hone in on the optimally efficient activity presented to them in the present, whereas as the state-led model proposes that development is best achieved when the focus is on improving future activities (Ellickson, 1989). As rational individual actors would never participate in substandard industries of their own free-will, a steady push by the government is therefore required in order to invest in said activities so as to fully develop the economy in the future. Chang and Grabel propose that the government-led growth model uses the ensuing policies in order to stimulate growth: a firm grip over both foreign and capital debt; an adoption of a wary attitude towards privatisation and the nationalisation of some industries where applicable; trade protectionism to allow budding industries to develop; a laissez-faire attitude towards intellectual property law; and a well-defined plan in order to systematically develop higher value-added industries (2004). Therefore, the state-led development model may be a viable alternative in claiming responsibility for the rapid growth observed in the four Tigers.

When looking at these three models, it is clear that they cover a significant proportion of the policies that a state may decide to implement in order to create growth. Therefore, it is rational to assume that the governments of South Korea, Taiwan, Singapore, and Hong Kong followed at least one of these models. In the following analysis, the economic development histories of each state will be discussed in order to determine the development path they took, and the development model each country most closely followed will be deduced.

Country Analysis

South Korea

When looking to determine the extent of state intervention within South Korea, a logical starting point is when the country finally gained independence from colonial Japanese rule in 1945, where it immediately found itself placed under US military occupation (Kim, 2014). The attainment of autonomy that they had yearned for was quickly dominated by the Korean War (1950-3) with the North, which obliterated two-thirds of the country’s manufacturing facilities worth over three times their GNP (Shin, 2003). The first phase of the country’s economic development consisted of recuperating from the destruction of the war, with US aid on average consisting of 15.9% of GNP (with a peak of 22.9% in 1957) (Shin, 2003). Import substitution industrialisation was implemented with 30% of aid diverted into agricultural equipment, and the US owned 64% of investment savings (Shin, 2003). The economic growth South Korea achieved at this time was heavily reliant on the contributions made by the US, both in investment savings and aid, and was therefore vulnerable to market fluctuations (Shin, 2003). It can therefore be observed that an interventionist model was already being used in order to stimulate development.

The coup implemented by Park and his supporters in 1961 set the marker for which the second economic development period came to fruition: the expansion of export-oriented development and light industries. Due to its diminishing reliance upon the US government to aid in buying imports and its recovery from the war, the South Korean economy was now starting to make use of the cheap labour force at hand in order to strengthen its exportation of light industrial goods. It is here that the initial deviation from the interventionist development model can be discerned, propagated by the establishing of the First Five-Year Economic Development Plan. Distinct macro-economic targets for growth were adopted for the trade balance and industrial structure, and the plan defined clear industrial, trade and macro-economic policies in order to achieve these goals. It was named “guided capitalism”, in which “the state shall either directly participate or indirectly render guidance” to crucial industries, predominantly those that would result in rapid export growth such as the labour-intensive light manufacturers (Shin, 2003). It is here, therefore, where the shift toward a government-led growth model and away from state intervention was made.

The growth experienced by the country in the early 1960s was unprecedented, reaching as high as 10% some years, however this was not viewed as a sustainable foundation for further development by the Park government. The country’s development may have become stagnant if it had remained within the same stage with no high-value-added industries being established. Therefore, government-led development policies were implemented as they used subsidies and tariffs to shield budding advanced industries from the global market, whilst also reinvesting the foreign currency earned through their expanding exports into the machinery and training needed to evolve into the next developmental phase (Chang, 2007). It is this strong push from the state to shelter and nurture tertiary industries that indicates that state-led development is responsible for South Korea’s growth.

This progression resulted in the third stage of economic development, as seen in Park’s Second Five-Year Plan: the advancement of chemical and heavy manufacturing, buoyed by new policy instruments and legislation (Shin, 2003). Export-driven development stemming from heavy industry sustained the country up until the early nineties, resulting in this development era being the longest thus far. Although still being retained by substantial government restrictions, foreign capital was pursued to help reinforce any potential growth and exports escalated at almost 39% per annum (Shin, 2003). Throughout this phase government-led policies were remained prominent, and factor input increases, both in the accumulation of capital and in quality of labour through education, resulted in a monumental amount of growth in manufacturing output and the ideal placement for South Korea within the international market for the next period of development (Collins, 1990). The South Korean economy experienced sizeable changes throughout the 1990s which shifted them into the fourth and current stage of development: the drive towards high tech industries. High-technology exports only yielded 15% of total export in 1988, however that figure has increased significantly year on year ever since (World Databank, 2018).

When assessing the extent to which state intervention was responsible for the country’s growth, it is clear that the entirety of South Korea’s development was propelled by a central government. Well-conveyed economic plans, state-owned industries and a determined reinvestment of earnings in infrastructure over several decades allowed the country to evolve through clear stages of development, even when said push into new industries appeared less optimal to individual market actors (Shin, 2003). Therefore, it was a state-led, rather than simply interventionist or even market-led, development model that was responsible for the country’s economic growth.

Taiwan

Whilst sharing a similar narrative to South Korea, Taiwan’s roots are relatively less humble, at least in economic terms. The country found itself comparatively intact after fighting it had experienced in the Chinese Civil War (1946-9) and still contained traces of Japanese colonial efforts to develop: a few textile factories, rudimentary food processing plants and handful of developed agricultural exports in pineapples, rice and sugar (Vogel, 1993). Whilst import substitution industrialisation was initially taken up by the government in order to provide sustainable growth, negative experiences with inflation meant that a hard-line growth policy was not implemented until a threat to cut off aid was made by the US in the 1950s (Vogel, 1993). Therefore, the extent to which state intervention was responsible for Taiwan’s development initially appears unclear.

The moment demand was deemed adequate by Taiwan’s government, heavy industries such as electronics, petrochemical and steel were rapidly established through heavy investment from the state (Vogel, 1993). Whilst many businesses that were previously state-owned were allowed to privatise during this development phase in order to garner foreign investment and knowledge, these heavy industries remained resolutely nationalised due to being perceived as a vital asset for the re-conquering of mainland China (Vogel, 1993). Yongping Wu voices the idea that private small- and medium-sized firms played a crucial part in the economic development of the country during this era, however the Taiwan government never loosened its hold over the economy and its direction (2004). The most significant indicator of this was the state’s control of foreign exchange, which constrained private firms’ procurement of imported materials and acted as both a limit on capital risk and as a way to boost domestic demand for processed raw materials (Vogel, 1993). Therefore, although not as all-encompassing as South Korea, the state-led model seems to take precedence over intervention.

The evolution from the country’s final economic development stage into a fully-fledged high-tech industrial state was rapid. As Taiwan’s competitive advantage in labour-intensive goods appeared to be declining, due to a combination of a rise in competition from China and a more educated workforce through the late 1970s, the country made a push to advance before it was too late. The government’s role in “the inception of pivotal technologies and in the export vigour of Taiwan’s information industry,” (Wang, 1996) along with key large-scale industries such as semiconductor construction was colossal and resulted in the growth of a sizeable and skilled population of workers who fuelled the service industry and domestic consumption with their raised disposable incomes. Consequently, when taking all indicators into consideration, it is clear that the state-led development can take responsibility for the rapid growth within Taiwan.

Singapore

Singapore warrants the label of being the most ‘democratic’, if in name only, of the four Tigers in the country’s early history: the control Li Guangyao held over the state was so alluring that in the words of a British diplomat “politics disappeared” and simply left an “administrative state” (Vogel, 1993). This is already a clear indication that the growth the country experienced may have been caused by more than simply intervention. A considerable amount of Singapore’s development can be directly attributed to Li’s particular vision and skill, considering that after the country gained its independence form Malaysia in 1965 he implemented “soft authoritarianism” upon the state’s politics all the way up until his retirement in 2011 (Zakaria, 1994).

The country’s development pursues a similar trajectory to South Korea and Taiwan. Although it had the fortune of not having to rebound and recuperate from a devastating war, Singapore found itself as a single modern city-state without the means to sustain its people due to a lack of arable land. Essential goods such as water and food had to be imported which fuelled the need to develop export-focused light industries in order to balance trade (Huff, 1987). Intriguingly, in order to stimulate the light industry, the government used its resources and capital to attract international companies to act as a substitute for the domestic lack of managerial and technical knowledge (Vogel, 1993). These policies can clearly be attributed to a state-led model and helped stimulate the country’s expansion into new markets.

Heavy industry and manufacturing became progressively prioritised throughout the 1970s and 80s, which lead to a remarkable change in the structure of Singapore’s economy (Huff, 1987). This was mainly triggered by the threat that mainland China’s expanding light industries under Deng presented to the country’s output and was accelerated by a state-led model of control through a series of reinvestments of wages in infrastructure, communications, housing and industry by the Central Provident Fund and a raise of the national minimum wage, which resulted in firms having to develop more efficient modes of production (Vogel, 1993).

Contrasting with the development in South Korea and Taiwan, Singapore’s transition into the fourth phase of economic development was not defined by the growth of a technological industry but instead by accomplishing Stamford Raffles’ primary vision for the country as the financial and trading centre of Southeast Asia. Like high-tech industries, finance and trade services demanded highly skilled labour and this, coupled with Singapore’s advantageous geographic position, resulted in the high-level industry that marked the country as a wholly economically developed nation, just as technological industries do for Taiwan and South Korea.

It may be easy to think of Singapore as a stellar illustration of neoliberal market-led development, due to its more liberal markets and the appearance of democracy in the country’s recent development. However, the crucial role of Li in both economic and political direction as well as the significance of the Central Providence Fund in developing the infrastructure required for heavy industry infer that the government was the main engine driving the development observed in the economy, and that more liberal aspects of the market were introduced only in the later stages of economic progress in order to bridge the gap towards a trade and financial hub. Therefore, a state-led model of development appears to be responsible for the majority of Singapore’s growth.

Hong Kong

The city-state of Hong Kong shares many similarities with Singapore, however it differs in that it is the most laissez-faire (and consequently market-led) out of the four Tigers. Similarly to Singapore, a lack of agricultural capacity resulted in an urgent need for the government to balance its trade deficit by quickly developing light industries and following an export-led industrialisation strategy, however it has been said that the advancement of Hong Kong through the trade and financial services stage would have been a logical move regardless of government intervention, due to the country’s origins as a trade port and its connection with China (So, 1986).

The significance of the market-led model in the economic evolution of Hong Kong is undeniable, as can be seen in the government’s “positive non-interventionism” approach to the economy (Yeung, 2000). However, there are still a few aspects of its development that can be attributed to the government’s role in driving the economy. Vogel in particular considers the distribution of the country’s public funds with a significant portion being allocated for the improvement of infrastructure that would be needed for heavy industries – universities, roads, and most importantly developing land for heavy industry use (1993). Furthermore, this all started at least a decade before any real market-led demand was felt for these public goods (Vogel, 1993). The government may have appeared to be taking a step back to let the market grow organically, however it is clear they held ideas about the direction the economy should take.

Despite being a former entrepot, Hong Kong, like Singapore, developed to the extent that it became a chief industrial manufacturer as well as a financial hub for the region (So, 1986). It is somewhat of an outlier among the Asian Tigers in that the country consistently held a laissez-faire approach to the global market and can therefore be considered as sharing the most similarities with a market-led model of development. However, the role the government played in stimulating the economy to develop beyond its initial phase cannot be overlooked, and therefore the significance of state intervention should not be ignored.

Evaluation

Whilst the previous section has determined whether state-intervention is more responsible for economic development than the other models, this section aims to evaluate why the relevant development models were so successful in stimulating growth within each of the four Asian Tiger economies. When taking into consideration the individual paths to development they took, it is clear that the overarching model most applicable to each economy was that of the state-led development model. Although Hong Kong took a market-led approach to some extent, each state worked to push development ever further instead of settling into a particular set of industries, by re-investing in the capital and infrastructure within emerging industries and also protecting said industries from the international market until they were large enough. Therefore, it can be said that a state-led development model, rather than simply state-intervention, was responsible for the miraculous growth observed within the Asian Tigers. However, a further question presents itself; why was the state-led model was so successful within these particular states? Indeed, similar situations in Latin America and the USSR at the time did not lead to the exorbitant growth that was experienced in South Korea, Taiwan, Singapore, and Hong Kong (Lall, 1996). Consequently, the following analysis will look into several factors that might explain why the state-led growth was responsible for development within the Tigers, rather than state-intervention.

The first factor that contributed to the triumph of state-led growth within the Tigers is that of the shared Confucian culture within the region (Tai, 1989). Traditionally, many economists viewed the religion as an inherent barrier for economic development, due to its historical ties to feudalism that directly oppose contemporary capitalism (Mascelluti, 2015). However, the importance placed upon the collective family and social hierarchy within Confucianism could be said to instil the mindset needed to endure the sacrifice of individual economic interest in favour of the country’s prosperity, an attitude which appears prevalent within the Tigers (Shirley, 2014). This idea of sacrifice opposes the ideas observed in the interventionist model, where only policies which benefit rational actors will benefit a state’s economy overall. Furthermore, the viewing of the government as a higher power and the value placed upon education also helped bolster the feat achieved by each of the Tigers’ long-term economic goals (Mascelluti, 2015). Conversely, in other parts of the globe, it could be predicted that submission would not be so easy due to individuals being deficient of this unique outlook. This may explain why government-led growth may not be so successful elsewhere.

The second factor explaining why state-led growth was so effective within the Asian Tigers is that education was viewed, to some extent, as crucial to the development of the economy by each of the four countries. As the demand for secondary and tertiary education drew throughout the 1970s, each state started to invest in these institutions, and by 1986 secondary school enrolment rates had increased dramatically, reaching 95 per cent in South Korea (Mascelluti, 2015). This increase in the proportion of an educated labour force resulted in more individuals seeking higher skilled jobs in burgeoning industries, which helped the state-led development strategies by growing these industries until they no longer needed to be sheltered from the international market (McLoughlin, 1985). Furthermore, a more educated society typically results in a more efficient and stable economy, translating into higher growth (Overholt, 2011). Therefore, it is clear that each of the Tiger states’ decision to invest in education provided a stable and advantageous foundation from which government-led development, and therefore economic growth, could thrive.

The third and arguably most important factor in explaining the success of the state-led development model is that of the political strength demonstrated by each of the Asian Tigers’ leaders. Each of the four states possessed legitimate central governance that provided the ability to consistently direct the development of the markets without any noteworthy domestic challenges (Shirley, 2014). In the case of South Korea, their government’s authority was founded upon “forced unity” in opposition of the North (Vogel, 1993). Consequently, the prosperity of the South could be easily measured by its citizens by their economic position in comparison to the North. With regards to Taiwan, much of the country’s status is focused around the state’s connection with China. Found both in leadership and the population, Taiwan’s competition with its neighbour supplied the legitimisation for uninterrupted GMD rule (Vogel, 1993) and, similarly to South Korea, provided an effective economic focus to the government. The connection between the success of government-led growth within Hong Kong and Singapore and the intentions of their individual governments is an all the more basic case of survival. Due to their small size, neither possess the agricultural means to prosper as self-sufficient states. The two states’ leadership legitimacy was therefore founded upon the sustained survival of the countries’ economies. Therefore, to some extent, in all four states the legitimacy and furthering prosperity of the government depended on the constant financial attainment they could securely deliver to the population. As a result of this, each government had a large incentive to fervently and continually pursue sustainable development (Wade, 2004). Therefore, instead of implementing interventionist policies to promote moderate development in an otherwise market-led economy, as would be the case in an interventionist model, the state-led development model was responsible for significant and sustained growth throughout the period. Furthermore, due to each government not founding their legitimacy on either democracy, which could create volatility and an absence of long-term goals, or ideology, which leaves no room for adjustment due to the combining of development and a fixed path, this permitted each Tiger state to achieve permanent sustainable growth (Wade, 2004).

Consequently, it can be clearly seen why the state-led model for economic development, rather than the interventionist model, was responsible for the growth observed within the Asian Tigers. Their shared culture, stances on education, and strong political leaders, all played a role in cultivating the perfect climate in which the state-led model thrived. The approach the Asian Tigers took to development is therefore best surmised as “success due to coherent and flexible policies, effective implementation by the state… and political capacity to insulate economic planning from competing interests” (Shin, 2003).

Conclusions

When considering the extent to which state intervention was responsible for the economic growth of the Asian Tigers, it is clear that its impact was small. Rather, an intense state-led development model, using well-defined plans and investment strategies, had a much larger effect in stimulating growth within the majority of the countries. This model defines a powerful central government that employs varying strategies to stimulate development despite the desires of individual workers, as opposed to the Neoliberal model’s market liberalisation and the Keynesian ideas of government intervention. Whilst an interventionist development model is a viable option for growth, in this instance the state-led development strategy of nationalisation and substantial investment in fledgling industries was crucial to the rapid industrialisation and economic growth of the Tiger states. Whilst Hong Kong appeared to lean the most towards a market-led model, it is clear that the neoliberal ideas supported by the 1993 World Bank report can be rebuked and that the state-led model of economic development was the most responsible in developing the Asian Tigers far beyond their predicted means.

The success of the state-led development model is due to a manifestation of unique cultural values and a focus on the importance of education. It is also due to the particular stresses placed upon each government to solidify their legitimacy by developing the economy. This dependence upon the development of the markets for legitimacy instead of ideology or democracy permitted the Tiger states to achieve stability and flexibility within their long-term goals, which successfully aided in their development. The Asian Tigers allow us to observe an illuminating alternative to the most common classical developmental approaches considered in state-building exercises, that normally stress the significance of liberal values such as market-led growth and democracy. Reproducing their accomplishments may be achievable, however it will necessitate a complete change in our attitude towards development economics and our notion of the connection between a government’s legitimacy and competence.

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