Government E-1275: October 9, 2007Session #4. Origins of Asia’s Economic Miracle

1. What explains East Asia’s economic miracle?

2. What explains China’s economic miracle?

3. What explains India’s economic miracle?

Debate over Economic Growth

1. Domestic dimension: state vs. market.– State intervention: public spending; infrastructure,

education/welfare; industrial policy (tax breaks etc.).– Efficiency of markets in allocating resources (money,

goods, labor). – Manufacturing vs. service.

2. External dimension: – Trade: export promotion; liberalization of imports.– Currency controls: convertibility; availability of foreign

exchange. – Foreign Direct Investment (FDI): source of capital &

technology.

Explaining the “Miracle” (I):The Developmental State. • Elite bureaucracy that is “smart,

autonomous, and clean.”– Japan (MITI), SK (EPB), Taiwan (IDB)

• Industrial policy: – Loans from public financial institutions;

formation of cartels; tax breaks.

• Authoritarian regimes & economic performance

– Suppress workers & students.

– Discomforting lessons about regime types & economic growth.

• Colonial legacies (Kohli).

Chalmers Johnson

James Fallows, “Containing Japan” (1989)

• “Containment”• Japan’s democracy: Liberal

Democratic Party’s 1-party rule.• Japan’s capitalism: govt

intervention.• Trade surplus: economics doesn’t

explain Japan’s success.• Japan doesn’t play by int’l rules:

“lack of universalistic principles”

Explaining the “Miracle” (II):The Neoliberal interpretation

• Export-led growth– Contrast with Latin America’s Import-

Substituting Industrialization (ISI).

• Sound economic management: low budget deficits & inflation.

• High savings & investment.• Education: universal primary &

secondary education.• P. Krugman, “The Myth of Asia’s

Miracle” (Foreign Affairs, Nov./Dec. 1994).

– Lack of labor/capital productivity growth; similarity to the Soviet Union.

World Bank report (1993)

China’s “Economic Miracle”

• Gross Domestic Product (GDP) growth: 9~10%/year since 1979:– GDP: $2.2 trillion (#4 behind U.S., Japan, Germany).– Development focused on coastal, urban areas; now a shift to

inland, rural areas. – 70% workforce still in agriculture; a developing economy.

• Trade:– For the U.S., $202 billion trade deficit (2005). PRC accounts

for 30% of U.S. trade deficit.– Demand-side of rising oil prices.

• Chinese holdings of U.S. treasury bonds & notes: about $300 billion.

China’s Economic Reform• Under Deng Xiaoping, after the turmoil of Mao

Zedong’s Cultural Revolution (1966-76).• Gradual, incremental, experimental nature of reform:

Growing Out of the Plan (Barry Naughton).• Rural reform:

– Household responsibility system: Move away from collectivization.

– Return to family-based farming: Restore market incentives: Families sign a contract; pay fees for use of land, machinery; pay taxes; produce/sell goods.

• Enterprise reform:– Boost industrial production in rural areas: Township and

Village Enterprises (TVE), encouraged to maximize profit. – State-owned Enterprises (SOE): still a major part of the

economy.

China’s Economic Reform (cont.)

• Opening to the world economy: – Lessons from the “East Asia miracle”: export-led growth.

– Welcome transfer of money, technology, and management skills from abroad.

– Special Economic Zones (SEZ): lower taxes, better infrastructure (electricity supply, railroad links etc.).

– Promote joint ventures.

– Investment from Hong Kong, Taiwan, overseas Chinese.

– Transform China into the “workshop of the world”: abundant, cheap, relatively skilled labor.

India’s Economic Miracle

• Characteristics of growth:– GDP growth: on average, 7.5% (2002-06).– 100+ Indian firms with market capitalization of $1 billion+:

Infosys, Tata Motors, Wipro etc.– Fortune 500 companies: 125 with R&D facilities in India.– Low labor costs (’06): IT engineer ($6,000); MBA ($7,500).– New middle class: 250 million.– 5 million new cell phone subscriptions added every month.– 70% live in rural areas; 260 million live on less than $1/day.

• Comparison with China:– Manufacturing: India (27% GDP); China (46%).– IT, business process outsourcing (BPO) in Bangalore,

Chennai, Hyderabad, Mumbai.

Origins of India’s Economic Miracle

• Nehru’s socialism:– Import Substituting Industrialization (ISI), as in L. America.

– “License Raj”; Planning Commission, “mixed economy.”

– Skepticism toward foreign direct investment (FDI).

– “Hindu rate of growth”: average 1.3% per capita GDP growth (1950-80).

• India’s neoliberal economic reform, 1991-:– Finance Minister Manmohan Singh.

– Trade liberalization, attack the “license Raj,” tax cuts, opening India to FDI.

– Average tariff: 130% (’91) 35% (’01).

India’s Future Prospects

1. “Skills famine”:– Decreasing # of qualified college graduates/engineers; wage

increases; very high turnover rate.– Need to raise public investment in education.

2. Underdeveloped infrastructure:– 3.5% GDP ($21 bil.) vs. China’s 10.6% GDP ($150 bil.).– Traffic jams, congested airports, power outages.

3. Legacy of the “license Raj”: corruption. – “The ‘license Raj’ may be gone, but the ‘inspector raj is

alive and well; the ‘midnight knock from an excise, customs, labor, or factor inspector still haunts the small entrepreneur.” --Gurcharan Das.

Conclusions

1. No single “Asian model” of development.– Multiple origins and causes of Asia’s miracle.– Commonality: cheap/abundant/skilled labor in manufacturing

(except for India); high levels of savings/investment.– Variations in: state intervention, role of FDI, manufacturing

vs. service.

2. Necessary condition: political consensus for growth.– Japan after World War II; LDP after the 1960s. – ROK after the Korean War (vs. DPRK); ROC vs. PRC. – China & Deng Xiaoping after the Cultural Revolution.– India & Congress Party after the failures of the “license Raj.”

3. Challenges of globalization.– Capital mobility; North-South and South-South competition.