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 BankPolic ResearchReport
AWorld

The
EastAIsian
Miracle
Economic Growth
and Public Policy

SUI\MMARY

TfheWorld Bank
W2shington,D.C.
 Forewvor

TXEBATES
ON THEAPPROPRIATh
ROLEOF PUBUCPoua YIN EGO-
3nomic development have occupied policyrnakers and scholars
* ti'~since the studly of developing economniesbegan in earnest at the
close ofWorlcl War R. The successof many of the econorries in EastAsia
mnachieving rapid and equitable growth, often in the context of activist
public policies, raises complex questionisabout the relationship between
governmenr th: private sector, and the marker. Seemingly, the rapidl:y
growing 'economiesin East Asia used many of the same policy instru-
ments as other developing economies, but with greter success. Under-
standing which policies contributed to their rapid growth, and how is a
major question for research on development poliqy.For these reasons I an-
nounced at the time of the 1991 Annual Meeting of the Board of Gover-
nors of the World Bantk in Bangkok, Thailand, thzatour Development
Economics Vice Presidencywould undertake a comparative study of eco-
nomic growth and public policy in East Asia.
ThjeE&tAsianMirace is the summnaryof that program of research.It apm
pears as the first in a seriesof PolicyResearchReports, whichLare intended to
bring to a broad audiencethe resultsof researchon developmrnen t policyissues
carried out by staffof the WorldBank. As reports on policy isses, we intend
that they should help us to rake stock of what we kcnowand dearly identifjy
what we do nor know;they should contribute to the debate in both thenac-
demic and policy communities on approprie public policy obectiveosand
-nstruments for developingeconomies;and tey shotd be accessibleto non-
specialiostsBecausethye summarizc ressrch, we also antidpate hiatePolicy
ResearchRepormwillprovoke further debate, both within the Bankxand out-
side, cconcerng the methods used and the condrusionsdrawn.
'What does this report tell us about the East Asian miraces?The re-
search shows that most ofecast miasetaordinary growth isdue to supe-
nor accmulation of physical and human capital. But these economies
were also better able than most to allocate physical andthunma resources
to highly poductive investments -andto acquire and master technoloy
In this senrsethere is nothing 'miraculous' about the East Asian
Economics' success; each haS pueformed these essential ianctions of
growe-th be than
sittermost other economies.

m
-IS, RACLE

The eight economiesstudied usedverydifferentcombinationsof poli-

cies,fiom hands-offto highly interventionist Thus, there is no single
-East Asian model of development.This diversityof experiencerein-
forcesthe viewthat economicpoliciesand policyadvicemust be country-
specific,if they are to be effccrive.But there are also some common
threads among the high-perfbrmingEast Asian economies The authors
condude chatrapidgrowthin eacheconomywasprimarilydue to the ap-
plication of a set of common,market-friendlyeconomic policies,leading
to both higher accumulatonand better allocationof resources.Whilethis
cocndusionis nor strikinglynew, it reinforcesother researchthat has
stressedthe essentialneed for developingecononiiesto get the policyfiu-
danentals right The researchalso further supports the desirabilityof a
two-trackapproachto developmentpolicy emphasizingmacroeconomic
scabilityon one hand and invesmnentsin peopleon the other. The im-
porranceof good macroeconormic managementand broadlybasededuca-
rional systemsfor EastAsia'srapidgrowth is abundandydemonstrated.
The report also brealk some new ground. It concludesthat in some
economires,mainlythose in NortheastAsia, some selectiventerventions
contributed to growth,and it advancesour undersmndingof the condi-
tions requiredfor interventions:o succeed.The authorsarguethat where
selectiveinterventionssucceededthey did so becauseof three essential
prerequisites.First, they addressedproblemsin the functioningof mar-
kets. Second, they tbok placewithin the context of good, fundamental
policies.Third, their successdepeindedon the ability of govenmentsto
estabish and monitor appropnateeconomic-performance aiteria related
to dhe interventions-in the authors' terms, to create economic contests.
:Theseprerequisitessuggestthat the institutional contet within which
policiesare implementedis as important to their successor failureas the
policiesthemselves,and the reportdevotessubstntial attentionto the in-
stitutional basesfor EastAsia'srapid growth.
Whilethesefactorshelpto explain whyapparently-si policies did not
an man otherecoomics,
-X- succeea aso laves unansweredmanv
important questionsThe market-orentedaspectsofEastAsiaspolics can
be recommendedwitk few resatiorons, but the moreinsiutionally de-
-manding aspects,suchascontstbased interventionsIve not beensur-
fully used in otherserngs.Noneconomic ficors, including culture,politcs,
and history,arealsoimporant to the EastAsiansuccessstory.Thus, thereis
sdlt much to be leamedabout the interactons betweenpolicychoicesand in-
stitutionalcapabilityand betweeneconomican neors in de-
velopment.Work in theseareaswillcontinue beyond this report-
The supportof the Govemmentofjapan for the researchprogramon
acknowledged.The re-
the high-performingAsian economies is grawefiully

iv
 ,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~5 -

port is a produca of the staffof the World Bank, and the judgments made
herein do not necessarily reflect the view of its Board of Directors or the
governments they represenL

Lewis T. Preston
President
The World Bank

August 1993

V
Contents of the Book

TheResearchTeam
Acknowkedgmenr
Definitionsand Dma Noptes

Overvew The Making Ofa Miracle

The Esence of the Miacl: Rapid Growth with Equit:y
Policiesfor Rapid Growth in a Changing World Economy
Note

1Growth, Equityr andt Economic Change in East Asia

Rapid and Sustained Economic Growth
Declining laconic Inequality and Reduced Povertyr
Dynamic Agricultural Sectors
Rapid Growth of Exports
Ra2pidDemographiicTransitions
H-ighInvestment and Savings Rates
Creating Human Capital
Rapid Productivity Growth
Appendix 1.1: Accountng for Growth
Appendix 1.2: What Do Tests of Cognitive Skills Show?
Notes

2 Public-Policy and Growth

Policy Explanations
The Functonal Growth Framework
NotCes

3 The Quest fir Macroeconomic Stability and

Rapid Export Growth
Pra'gmaticOrthodoxyin M-ce-onomic Management
Creatingan Export Pushs
Appendix
E 3.1: Econofmc and PoliticalThzncdines
Notes

"amII
 LEACLE

4 An Institutional Basisfor SharedGrowth

Achieving Legitimacythrough Shared Growth
Insulating the Economic Technocracy
Wooing Big Business
Notes

5 Strategiesfor Rapid Accumulation

Explaining East Asia'sHigh Human Capital Fornation
-ExplainingEast Asia'sHigh Savings Rates
ExplainingEast Asia'sHgh Investment Rates
Appendix 5.1: Granger CausalityTests for Savings
Rates and Growth Rates
Appendix 5.2: Technical Note on the Relationship between
Interest Rates and Growth
Notes

6 Using Resources Efficientry Relying on Marketsand Exports

Explaining East Asias Efficient Resource Use
Using the Market: Labor Markets in East Asia
Assisting the Market Financial Markets and Allocation
Using the International Market Trade and Industrial Policy
How Manufactured Exports Incrcased Productivity
Appendix 6.1: Testing the Impact of Industrial
Poliqc on Productivity Change
Appendix 6.2: Tests of the Relationship between TFP
Change and Trade Policies
Notes

7 Policies and Pragmatism in a Changing World

Foundations of Rapid Growth-Getting the
Fundamentals Right
Creating Institutions to Promote Growth
Intervening in Markets
Note

Bibliogrphic Note

-vi.
-TheResearchTeam

tHE POLICY RESEARCH REPORT WAS PREPARED BYA TEAM LED BY

John Page and comprisingNancy Birdsall,Ed Campos,W. Max
_ , Corden, Chang-ShikKim, Howard Pack,Richard Sabor,Joseph
E. Stiglitz,and Marilou Uy.Robert Cassen,WilliamEasterly,Robert 1
Lawrence,Peter Petri, and Lant Pritchett made major contributions.
LawrenceMacDonaldwas the principaleditor. Case studiesof the seven
developinghigh-perforniingAsianeconomries were undertakenunder the
direcion of Danny Leipziger.The team was assisted by Maria Luisa
Ccogiani, Varuni Dayaratna,Leora Friedber&Jay Gonzalez,Jennifer
Kller, May Khamis, Sonia Plaza, Myriam Quispe, Carol Strunk and
AvakoYasuda.The work wasinitiatedby LawrenceH. Summersand was
caried out under the generaldirectionof Nancy BirdsalL
The editorial-produccionteam for the report wasled byAlfiredImhof-
The support staff was headedby SushmaRajan and included Milgros
_.:.
1_,Jn.M.arie Hopkins, Anna Marie Maranon, and Linda Oehler.
Polly Means gave graphicalassistance Bruce Ross-Larsonand Mera.de
Coquereaumont provided additional editorial support. The map was
done by JeffreyN. Lecksell.Mika Iwasai coordinatedworkin Japan.
Preparationof the report drew on severalother related researchpro-
and civilservicewere car-
jects. Studiesof the Japanesemain bank systenm
ried out under the directionof Hyung-KIKim. Yoon-JeCho and Dimitri
Vitas directed the project on the effectivenessof credit policies in East
Asia. Brian Levy directed the project on support systems for small and
medium-sizeenterprisesin Asia,and John Pagecoordinatedprojectson
Japaneseperspectiveson public policy during the rapid growth period,
and tax policy and tax administration in East Asia.

is
.. Acknowledgments

ANYINDIVIDUALSINSIDEAND OUTSIDETHE WORLD BANK

provided valuable contributions and comments. (Specific
N-:4v acknowledgment
1 of their effortsis made in rhe Bibliographic
Note at the end of the book.) Particularthanks are due to the following
senior officialsof the economiesstudied who reviewedand commented
on an earlierdraft: Seung-ChulAhn, IsaoKuboma,Shijuro Ogama,J. B.
Surnarlin,Teh Kok Peng, Chikao Tsukuda Tan Sri Dato Lin SeeYan,
and CesarVraru V-modThomas commentedon severaldrafs and coor-
dinated the comments of his colleaguesin the East Asia and Pacific
Region of the Bank.Comments by Carl Dahinan, KemalDervis,Mark
Gesovitz Ralph W. Harbison, Magdi Iskander,Hyung-KiKim, Danny
Leipziger,Johanneslirn, Gobind Nankani, Mieko Nishimizu, Guy P
Pfeffermann, D. C. Rao, and Michael Walton contributed to the
improvementof the book
Preparationof the report was aided by seminarsorganizedby the In-
donesianEconomistsAssociation,the EconomicSociey of Singapore,the
MonectaryAuthority of Singapore,StanfordUniversity,and the World In-
stitute-for DevelopmentEconomicResearch.The financialassistanceof
the Governmencof Japan is gratefiullyacdmowledged.

xi
 AST ASIA HAS A REMARKABLERECORD OF HIGH AND SUS-
rained economic growth. From 1965 toi 1990 the twenity-
thre economies of East Asia grew fster than all other
regions (see figure 1). Most of this achievemnentis attribut-
able to seemingly miraculous growth in just eight
economies: Japan; the 'Four Tigers," Hong Kong, the Re-
public of Korea, Singapore, and Taiwan, China; and the three newly in-
dustrializing economies (NIBs)of Southeast Asia, Indonesia, Malaysia,and
Thailand. Moreover, these eight:economies have bcen unusually success-
ful at sharing the fr-uits of growth. Compared with other developing
economies, they have had lower and decining levelsof inequality. Rapid
growth and improvingequity are the defiing characteristicsof the East
Asian mirale and the eight high-performingEast Asian economies
(-MEs) that are the subjectof our study.*
The unusual nature of the H miE rapid per capita income growth is
strikngly evidentin figure2. Whie there is tremendousvariationin the
economiesplotted, on the whole developingeconomieshave not been.

Figure
1 Average
Growth
ofGNPperCapita,i
1965-96

eantAsia

EastAsiawithoutHPAEc u
SouthAsia

MiduleEastandMedHtroacean

. 00 ~SubtSaharoa
Aftlca| .__

OECDeoob

IaUn riclaawnd
Calbb _
i . I I I I I
0 1 2 3 4 S 6
:GNP,per
capita Vowth rate (perment)

*Recady China, particularlysouthem China, has recordedremarkably

high growthrats usingpoliciesthar in somewaysresemblethe HPAEs.This
vry significanrdevelopmentis beyond the scope of our study, mainlybcau
China's ownershipstructure, methods of corporateand civil governanceand
relianceon marketsareso differentfrom the HPAEs,and in sudc rapidflux, dtat
cross-economycomparisonis problenatic. We touch on China's recent devel-
-opment in Chaptcr3 of The EastAsinMirazle.

- --. $. 0 . :l -:- - . : 0 - : - : - . ~ ~~ ~~
 , I,i;
l . ' : C:VE

Figure2 GDPGrowthRate,196045, and GDPPer CapitaLevel,1960

GDPgrowth rate (percant, average,1960-85)

Tae,
-China i
- . *China
E HongKong
6 -- *Re~p.oi *Jlapan. ._. - r ____Japa

':~ ~~~~~ *J9pIf

Thellani
d.
4- - --- M M aa by ala - - ~ - - - - - ~ - - - -- __.
_._._*C___

4tS .- _ _o X ! -|

0- 0~~~~~0
. -. _ _I__ _

U HigNncomeeconomies
-2 _- * HPAEs
- Othr developingeconomies

0 0.2 0.4 0.6 0.8 LO 12

Relativeper capita GDP,1960 (purcentage
of U.S. GDPpercapia, 1960)

Notc Thisfigur plotsthis rcgrcssionequation:GDPG 0.013 . 0.062RGDP60- 0.06IRGDP6O2. N . 119;RZ= 0.036

(0.004) (O.O27) (0.033)

catching up with the advanced economies since 1960; more than 70 per-
cent of them grew more slowly than the average for the economies that
belong to the Organization for Economic Cooperation and Development
(OECD).More disturbingly, in thirteen developing economies, per capita
income actually felL Growth among the eight mIPAEs is quite different.
Their growth rates are significantlyabove the OECD average. Unlike most
ofthe rest ofthe developingworld, the developing HPAEshave been catch-
ing up to the advanced econornies.
Other developing economnieshave grown flst for a few years, particu-
larly before the 1980s, but few others have sustained high growth rates-
over three decades. Figure 3 shows the growth rates in per capita income
for 118 economies in two periods, 1960-70 and 1970-85. The eleven
thar achieved rapid growth during both periods are in rhe northeast cor-
ner. Of these, five are East Asian success stories-Hong Kong, Japan,
Korea, Singapore,and Taiwan, China. The other three HPAEs-Indonesia,
Malaysia, and Thailand-all show accelerating growth, with higher
growt rates in the second period than in the first. If growth were ran-,
--

2:;
 GDPgrowth ate(perent), 197045

Singap ~Taiwan.
China
I ore*p *
.-
Rep.of Korea
IDP Ire
lab (percen9*Malay la
' u m *% ThallancJ

:ffi
L4_._. _ _

S
_
S~~~~~W
_ 1- 1U a 1a

-2%'-

0 % - 0%~~~~~ t <_ 0t.-; _ ________ __ ___ ___

.0 S

-2%~ ~ ~~~0

aresevety-6&h percentlc of growthratesin eachperiod

Not&:Boxes

-domly distributed, there is roughly one chance in 10,000

that success
would be so regionally concentrated.
The HPAEs' lowand dedining levelsof inequalityare also a remarkableecx-
ceptionto historicalexperienceand contemporary evidencein other regions
The positiveassociationbetween growth and improving equiy in the HPAEs,
and the contrast with odter economies, is illustrated in figure 4. Forty
economies are ranked by the ratio of theincome share of the richest fifih of
: -. the population to the income share of the poorest fifth and per capita real
GDP:growth during 1965-90.The northwest corner of the figure identifies
; .- economies with high growdt-h(GDP per capita greater than 4.0 percent) and
low relativeinequality(ratio ofthe income share of the top quintile to that of
-- : the bottom: quintile less than 10). All of-the high growth, low inequality
-: econoes arenEast Asia. S HPAEsonyMalaysia, which hasan
indexof inequality above 15, is excluded,while China enters. For-the ight
HPAEs, rapidgrowth and declininginequalityhave been shared virues.t
As the resdltof rapid&shared growth, human welfare has improved dra-
: marically (see table 1). In the HPAEs,the proportion of people living in

3
 andGmwthof GDP,1965-89
Figure4 :ncomeInequarrty
GDP growth per capita (psrcamt)

: =:

ep. of Korea
*Chlna
-- _______ _ _ _ _ B tswan _ _ _ _ _

Taiwan, ChI
| _ '___
Singapore H
RepofKoreaIrjKong
__ _ osw I n
6- .- 7_ .. _

': *1
Japan6 -_-__
1 __
' *
E I 1
- Indonesk -p

; Th iand |-Malaysia i

i .- IBII l

2 * Italy ll
_ _ * ~~Austria_ .. I
France
0SB~
* Blelgium
United KingdoM e* Austr ilia a Colombia '
* Sri Lanka I I I _ -_ _
-|
Sw.'tzer
and* Meexlco - - -
* Pakistan iI aK enya I

; ~~~Mala
iCvl-l--
-India *Venezuela
---
i
§j _
I.
- 4 Nepa I Argentina
o~~~~Bota .

Bangladesh * Peru |
-fla * Argentina d
dCitevdoirvl I

0 .. . _ __... -
*Maurit naIa r

-~ __ 'Sudanj
Sd
*1Ghana
_____ I ______ 1
*Zarnbla |

-~~~~ ~_ ~~~~
2- -1- I 1-| __ '___ _
*: ~ -_ _ I_ _ _ _ _ I_ _ _ _ I _ I I 4
O 5 10 15 20 25 30 35 40 45
Income
InequnUty

J- . Incotmeinequalityis measd bythe ratioof thc incomesharcsof tdcrichesr20 pcrcencand rhepoorcsr20pcmezrtofthepopulation.

.
4
W, . - : - - ' '--
 povertydropped sharply-for example,from 58 percent in 1972 to 17
percentin 1982 in Indonesia,and from37 percent in 1973to lessthan 15
percent in Malaysiain 1987. Absolutepovertyalso declinedin other de-
velopingeconomiessincethe early1970s,but much lesssteeply,fom 54 -
to 43 percent in Indiaand from 50 to 21 percentin Brazil.A host ofother
social and economicindicators,fiom education to applianceownership,
have alsoimprovedrapidlyin the HPAES, and now areat levelsthat some-
timessurpassthosein industrialeconomies.

EastAsia'sSuccess
Understanding

H-ATCAUSEDEAST ASIA'SSUCCESS?
SUPERIOR
ACCUMUIA-
dAonaccountedformost ofthe growti in the HPAE. Privatedo-
: v * mesiic investment, combined with rapidlygrowing human
capital,weretheprincipalenginesof growdt.High levelsof domesticfinan-

Table1 Changes
inSelected
Indicators
of Poverty
:' 'S .Last -. tint a- Pre

1 ~ ~ .77~ ~~ . i,, !7 :. "' ' - 4 ) ' "'. i7l

; - - - - : i . - ': . - , .44 .Y - S

~~t1ndonesia1~9724-3258 .>7'A? f1 .. "-415 679 0 56~t-

Z{way~~~*1973_s ~3>1-2 i22' ~4
Sigpoe 3 9728 -. 1 02 0 . 1
Thru.ntori~962~8 ~2rr-77r- '0 r 1-1- 136
..- t r ;-il.. *< ; Gha
. c s= Af; m;~
ilbor,
:tBi14< R- $90-S \<15" 2 2 ,r 254- 9

~~~~~-1971786r¼.,4252 .. ,.-;"' < 0

-54311.~ 1f5 373;-3
Yt2t.i17 E".kL7 >6.r'- ~- 0 ~.J
';:, : a::;
.9-.f .'.- - X,.- :: X,0
J ,..... f 2-, i : , \- .- -f L ;t-
'. . -..
,, .,
;
,; . . -
, 0
.' . .. i ..
f.962~ ~39 kt4t.5 4A
n.

'ArNw hsuh icus

rcwnoziiysra3Mpccifcpvcqrincs.DOfficulxorwnmonfLrusc pYCZyIIC1- he cria ~iki&fr-i.$
ii-Itn = pm y'q0,0 dlar,- 947 0ii ' . 1.x

t:h m& rha expn&ur.u-

awencome ;4.' A!%
'-4, 4~~co
Z1.-' -'.,c,,.1 -
*1'~ ~ ~ ~~l riii 4tY'XEa15
, .- J
 cial savings sustamined the HPAEs'high investment levels.Agriculture, while
declining in relative importance, nonetheless experienced rapid growth.
Manufictured exports grew extremelyrapidly, facilitatingthe absorprion of
foreign technology. Population growth rates declined more rapidly in the
HPAESthan in other parts of the developing world, leading to more rapid
growth in per capita consumption and larger surplusesfor reinvestment In
addition, and pardy becauseof these factors, the HpsEs may have becn bet-
ter at allocating resour to high-reurn activities. Finally, the HPAEshave
had unusuallyhigh productivitygrowthh;change in toml factor producrhry,
a key measure ofpmducdiviry,is higher in dte HPAESthan in most other de-
velopingeconomies.
Whilesome ofthe HPAEsbenefited from a head start in remis of the ed-
ucation and public administration systems, most of their growth rcsulted
from gettng the policy basics right MacroeconoImicmanagement was
unusually good, providing the stable environment essential for private in-
vestment. Policies to increase the integrity of the banking system, and to
make it more accessibleto nontraditional savers,increased the levels offi-
nancial savings. Education policies that focused on primary and sec-
ondary schooling generated rapid increases in labor force skills.
Agricultural policies stressed productvity change and did not tax the rural
economy excessively. Governments either actively encouraged family
plaining or, at the minimumn,did not restrict family planning choices. Fi-
naIy, aMlthe HPAEskept price distortions within reasonable bounds and
were open to foreign ideas and technology,policies that, alongwith other
fundamentals, facilitated efficient allocation and helped to set the stage
for hi productvity growth.
But these fumdarienmalpolicies do not tell the entire story. In each of
these economies the govememnt also intervened to foster developmenr,
often systematicaRlyand through multiple channels. Policy interventions
wok- many fmors: targeted and subsidized credit to selected industries,
low deposit raAtesand ceilings on borrowing rates tO increase profitsand
retained earnngs, protection of domestic imporc substtutes, subsidies to
dechlinin industries, the establishment and financial support of govern-
ment banks, public investments in applied research, firm- and industr
spedificexport targets, development of export marketing institutions, and
wide sharing of infornation between public and private sectors.
At least some of these interventions violate the dictum of establishing
for the private sector a level playing field, a neutral incentves regime. Yet
these strategies of selective promotion were dosely associated with high
rates of accumulation, generally efficient allocaion and, in the fistest-
growing economies, high rates of productivity growth. Were some selec-
tive intemrentions,infact, good. orgrowth?-

-- 6 0--0--:0.---
 In addressingthis questionwe facea centralmethodologicalproblem.
Sincewe chose the HPAEs for their unusuallyrapid growth, we know be-
forewebegintanalysisthat their interventionsdid nor inhibit growth.But
it is veryhard to establishstaistcal links betweengrowthand a specific
intervention,and even more difficult to establishcausality.Becausewe
cannotknowwhat would have happenedin the absenceof a specificpol-
icy,we cannotproveconclusivelywhetherinterventionsincrcascdgrowth
rates.Moreover,becausethe HPAEsdifferedfrom lesssuccessfuteconomies
both in their doser adherenceto policyfundamentalsand in the manner
in which they implernentedinterventions,separatingthe relativeimpact
of fundamentalsand inteventions is virtually impossible.Thus, in at-
tempting to distinguishinterventionsthat contributed to growth firom
those-thatwere eithergrowth neutral or harmful to growth we cannot
offrr a rigorous countedictual scenario. Instead, we have had to relyon
analyticaland empiricaltools to producewhat Keyneswould havecalled
an "essayin persuasion."
Our judgment is that in a few economies,mainly in Northeast Asia,
governmentinterventionsappear in some instancesto have resultedin
higherand moreequalgrowththan otherwisewouldhaveoccurred.How-
ever,the prerequisitesfor successwereso rigorousthat policymakersseek-
ing to followsimilarpaths in other EastAsianeconomiesmet with failure.
Thus, the problem is not only to try to understandwhich polities con-
tributed to grwth with equity, but also to understand the-insttutional
antdeconomic circumstnces which made them viable.

Circumstances,
Public
Policy,
andGrowth

G:
.-. EOGRAPI{Y
ANDCULTURE
CLEARLY
HAVEBEEN
IMPORTANT
fact ors in East Asias rapid growth. Ready access to common sea
lanes and relative geographical proximity are the most obvious
shared characteristics of the successfiulAsian economies. Intraregional
economic relationships dare back many centuries to Chinas relations
-with tribute states-the kingdoms that became Cambodia, Japan, Korea,
Laos, Myanmar, and Vict Nam. To the south, Muslim traders sailed
from India trading at points in between, for hundreds of years
before the arrival of European ships. These traditional ties, reinforced in,
the nineteenth and twentieth centuries by surges of emigration, have fos-
tered elements of a common trading culture, including two lingua fran-
Ca-, Bahasa and Hokein Chinese, that contnue to be felt in the region
tday
to - -. -- :. -. 7
.7
 :~~~~~~C E

In our own century,cheap ocean transport and sharedhistoricaI expe-

riences firther knit together a far-flung, culturally disparae region.
Throughout SoutheastAsia,ethnicChinesewith links to Hong Kongand
Taiwan,China, and drawingon a common culturalheritage have been
more and more activein intraregionaltrade and investment.Such links
and geographicalproximity probably facilitated attempts to emulate
Japan'ssuccess:Korea borrowedJapanese techniquesfor building large
trading companiesand directing the structure of industry;Malaysiafo-
cused first on developingheavy industryand more recentlyon building
business-governmentrelationships;and SingaporeusedJapaneseexperi-
ence in penetratingforeign marketsand shiftingindustry to knowledge-
intensivebranches.More broadly,Japan'sexampleundoubtedlyinspired
poicymakersthroughoutEast Asia.
Finally,geographicalproximityfacilitatedcapitalflows,partcularly in
the last decade,as Northeast Asian manufacturersof labor-intensiveex-
ports movedtheir factoriessouth tO take advantageof lowerwages.Suc-
cessivewavesof investment,first from Japan and later from Hong Kong,
Korea, Singapore,and Taiwan, China, have washed over Indonesia,
Malaysia,and Thailand. The appreciationof the Japaneseyen and U.S.
restrictionson Japaneseimports created rare opportunitiesfor other East
Asian producers to enter international markets. Producers of garments,
shoes,televisionsets, automobilesand other products,first in Koreaand
Taiwan, China, and later in Southeast Asia, took advantageof these
episodesto establishlucrativemarkerpositions.These capitalflowswere
mostly encouragedby generallyliberal treaunentof foreign investment;.
where investmenthas been restricted,informal credit and infonmation
networkshave helpedinvestorsto movecapitalrelativelyfreely.
If geography,history,and culturewerean adequateexplaation for the
HPAEssuccss, other economieswould havelitde to learn fiom EastAsia'ssuc-
cess stories. Fortunately, evidence suggeststhat this is not the case. Many
HiA-s passedthroughperiodsof macroeconomic instabilityand low growth
bdore makingpolicychangesthat launchedthemon a high-grwth trajec-
tory.Moreover, economiesthat are part ofthe samematrixofgeogaphy,cul-
ture, and histoy as the HPAEsbut continue to followdifferenteconomnic
policies-the DemocraticPeoples Republic of Koreaand the Philippinesare
twowidelydiverget exmples-haveyet to sharein the EastAsianmirale.
Thesefacs suggs that policiesratherthan crcumstnces havebeendecisive.

PoicyExplanations
for RaphiGmwth

Among the variety of policy explanations, two broad views have

emerged.Adherentsof the neoclassicalviewhave stressedEast Asias sUc-

8
 cessin getting the basicsright. Its proponentsargue that the successful
Asiancconomieshave beenbetter than othersat providinga stablemacro-
economicenvironmentand a reliablelegalframeworkto promote domes-
tic and internationalcompetition.They alsostressthat the orientationof
the HFAEStowardinternatonal tradeand the absenceof pricecontrolsand
other disrordionarypolicieshave led to low relativepricedistortions. In-
vestmentsin people, education,and health are legitimateroles for gov-
emnmentin the neoclassicalframework, and its adherents stress the
importanceof hurmancapitalin the HPAEs' success.
-Adherentsof the revisionistviewhavesuccessfully shownthat EastAsia
doesnot whollyconforn to the neoclassicalmodel. Industrialpolicyand
interventions in financial markers, common in East Asia, are not easily
reconciled with the neocasical framework. Some policies in some
economies are much more in accordwith models of state-led develop-
ment. Moreovcr,whilethe neoclassical modelwould explaingrowthwith a
standardset of relativelyconstantpolices, the policy mixesused by East
Asian economieswere diverseand flexible.Revisionissargue that East
Asian governments "led the marker in criticalways. In contuastto the neo-
classicalview,whichacknowledges
relativelyfew casesof marketfailure,re-
visionists contend that markets consistently fail to guide investment to
industriesthat would generatethe highescgrowthfor the overalleconomy.
In East Asia, the revisionistsargue,governmemntsreemediedthis by deliber-
ately"gettingthe priceswrong,"usingincentives and subsidiesto boost in-
dustriesthat wouldnot otherwisehavethrived.
VWhile the revisionistschoolhas providedvaluableinsightsinto the his-
ory, role, and ertent of East Asianinterventions,demonstratingconvinc-
* 0 inglythe scope of governmentactionsto promote industrialdevelopment
- inJapan,
m Korea,Singapore,and Taiwan,China,its proponentshavenot es-
: tablishedthat interventions,per se,acceleratedgrowth.Moreover,someim-
porlnt government interventions in East Asia, such as Korea'spromotion
of heavyand chemicalindustries,havehad litde apparentimpacton indus-
efifrt to squeezeour
-tial structure.In other instances,such as Singapore's
labor-intensiveindustriesby boostingwagesand Malaysiasheavyindustry
push, policieshave dearly backfired.Thus neitherview fully accountsfor
East Asi;s phenomenal growth.
*S The market-friendlyviewset forth in WorldDeelopmentReport1991
---: expandedon the neoclassical view,describinghow rapidgrowthhas been
associatedwith effectivebut carefullydelimitedgovernmentactivism.Ac-
cording to the market-friendlyview, governmentsshould perform four
*- functions of growth: ensureadequate investmentsin people, providea
competitiveclimarefor privateenterprise,keep the economyopen to in-
temational trade, and maintain a stable macroeconomy.Beyond these

9
 LEL

roles, governments are likely to do more harn than good. Based on an ex-
haustive review of the experienceof developing economies durng the past
thirty years, WorldDevelopmentReport 1991concluded that governments
generally have failed to improve economic performance by guiding re-
source allocations through means other than market mechanisms.
The market-fiiendlyapproach captures important aspects of East Asia's
success.These economies are stable macroeconomically, have high shares
of international trade in GDP, invest heavily in people, and have strong
competiton among firms. But these characteristics represent the out-
comesof many different policy instruments. And the instruments chosen,
paricularly in the northeastemnHPAEs, Japan, Korea and Taiwan, China,
somenimes involved govemments in guiding resource allocation by the
private sector. The suc essesof these economies, moreover, srand up well
to the less interventionist pathstken by Hong ong, Malaysia, and more
recendy Indonesia and Thaiand.

AFtindonalApproach
to Understanding
Growth

To accommodate this shifting diversity of policies, we have developed

a framework which links rapid growth to the attainment of three func-
tions. In this 'iew, each of the HPAEsmaintained macroeconomic stability
and accomplished three fimcrions of growth:accumulation, efficient ato-
cation, and rapid technological catching up. They did this with shifting
combinations of policies, ranging from market-oriented to stae-led, both
across economies and over time.
Figure 5 gives a schematic view of the functional approachto under-
standing East Asias success.We classifyi policy choices (first column) into
two broad groups, fundamentals and selective interventions. Among the
most imporant fundamental policiesare macroeconomicstability,high in-
vestments in human capitl stable and secure financial systems, limited
price distortions, and openness to foreign technology. Selectve interven-
tions include mild financial repression (keeping;interest rates positive,but
low), directed credir, selectiveindustial promotion, and export-push trade
policies. Using this famreworlXwe have tried to understand how govern-
ment polices, both fundamental and interventionist, may have contributed
to accumulation, more efficient allocation, or productviy growdL
To be successfiul,an intervention must address one or more marker fail-
ures;for if such failures do nor exist, markets by definition will perform
the allocation fiuction more efficiently than any intervention. Coordina-
tion problems, such as lack of information or lack of risk markers, are a
frequent cause of marker filure and are particularly comrmon in the early
stages of development. Some oif East Asia'smost successful interventions

I0
 Figure5 A Functinl Approachto Gxrwth
Competitive
Policy choices discipline Growthfunctions Outcomes

Accumnulation
Fundamenbs Rapidand
Fund*mentds .sustainedAr.umultlon gmwflh
-o Stable
ffnacroeconomy . Increasing
human
- Highhumancapital capital a Rapidgrowthof
. exports
. hsvng ....
-*Highsavings D
Effecive
andsecure n Marke-Ia
s e High vestment *- Rapiddemographic
* Limitingprice distortions 6 i Export - ._ - . * Rapidagricultural
I * Openness to foreign ' / *ometic
I compedtton ~~~~~~~transformadon-
* rapid
. technology Dornestlc __*Rapid.
. Agricultural
o dIeieoprent : rcompetition Industrializaion
: .| ~~policies IV-r AlbcIio
* ' ' /
,. tEffective use of
humancapitalIn
Selectiveinterventlons liabormarket a
- a ~~~~High
returnson
a-EXport
. - push 0 -
ainvestment _ * * Equalincome
I * Rnancial represslon / Contetamed dibution
* Directedcredit - Export*credit . . Reduced
p rtyr
. Selectilepronotion I* Investrnent a Improving
social _
I ~~~coordination ProductMtty
change indicators
_____________ i
.nformation * Productivitybased
Insfiutlons exchange catching
up
*! Technocrati
insulaion
I Insulation~chang
9 Technocratic * Rapidtechnological
_
I * Highquality
civilservice chnt
* Monitodrig

can be seen as government-initiated responses to these coordination

problems-responses which emphasize cooperative behavior among pri-
vate firms and dear performance-based standards of success.
Competitive discipline (second column of figure 5) is crucial to effi-
dent investment. Most economiesemploy only market-based compen-
-tion. We argue that some HPAEs have gone a step fiurther by creating
contests that combine competition with the benefits of cooperation,
among firms and between govemrnmenr and the privace sector. Such con-
tests range from very simple nonnmarketallocation rules such as access to
rationed credit fir exporters, to very complex coordination of private in-
vesrment in the govermnent-business deliberation councils of Japan and
Korea. The key feature of each contest, however, is that the goverrnent
distibutes rewards-for example, accessto credit or foreign exchange-
based on performance, which the government and competing firms mon-:
itor.-To succeed, selective interventions must be disciplined by
competition, via either markets or contests.
Economic contests, like all others, require competent and imparrial
referees-that is, strong institutions. Thus, a high-quality civil service
-with the opacity to monitor performance, and which is insulated from
.- D. .;': ' t.:. :. ,. -' , . - S; - ' - .,:
 ~
-~ ~~~~~A
L LE

political interference, is an essntial element of contest-based competi-

non. Of course, a high-qualiy civil service also augments a governments
ability to design and implement non-contest-based policies.
Our framework-is only an effort to order and interpret information.
No HPAEgovernment set out to achieve the functions of growth. Rather
they used multiple, shifting policy instruments in pursuit of more imme-
diate economic objectives. Pragmatic flexibility-the capacity and will-
ingnessto change policies-is as much a hallmarkof the HPAEs as any
single policy instrument. This is well illustrated by the great variety of
ways in which the HPAEs achieved two important objectivesmacroeco-
nomic stabiliy and rapid export growth.

Stability
Macroeconomic
Achieving
andExportGC r-t-H

ESPONSIBLEMACROECONOMICMANAGEMENTENCOURAGED
planning and investment and was partly responsible as
_ wellfo exceptional savings rates. Over the past thirty years,
annual inflation averaged approximately 9 percent in the HPABS,com-
pared with 18 percent in other low- and middle-income economies
Table2 Inflation
Rates (LMIEs)(see table 2). The IPFAESalso adjusted their macroeconomic poli-
cies to terms of trade shocks more quickly and effctvcly than other
- - ,;Average low- and middle-income economies. As a ult, they have enjoyed more
-E~a4Iregkn f9614r . <robust recoveriesof private investment. The broad impaca of low infla-
- >,FK * j-5
;
;-;>- tion and manageable fiscal deficits is evident in dtree snilking pairs of
- tssonii; * figures ,i; 8.8.~ .-the performaccs of selected HEs and selected com-
5 ;;<. contrasdng
Ihdonesia5 - 124, parators in three areas: revenue from money creation as a percentage of
IXe R. Of - 1 GDP,real interest rates, and real exchange rates (see figures 6, 7, and 8).

% wCu - 6.2 . i- Macroeconomic andDebt

FiscalPnidence,
Stability,

Fiscal
-ai prudence was the key to macroeconomic stability. While some
618
'6mncomamze1maHPAEs ran substa l fiscal deficits, their high savings and rapid growth
SfI th enabled them to avoid inflationary financing of the deficit. Fiscal pru-
M g~Sre6jSaraqMfrk ^20.0 dence also helped to reduce the need for foreign borrowing; and the fi-
-;

-V0
-btY i vorable feedback from other policies enabled the four HPAEs that did
;4-l - ibbn4tQ;-%4t 19~ borrow abroad-Indonesia, Korea, Malaysia, and Thailand-to sustain
debt bettcr than other developing economies. In some instances-Ko:ea
-in 1980-1985, Malaysia in 1982-88, and Indonesiasince 1987-debt to
a2^ ,>l@E;$9-^
: §5,. M GNP ratios were quite high compared with other indebted econormies(see

I2.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
 : m~~~~~~~~~~~~~~~~~~~~~~~~~~~~4

- -ure6 RevenuesfromMoeny Creatioasa Percentageof GDP:

Examplesfrm East Asia and Other
Seectd Econoniies
(percent)

AI h-Q-1
_ 7 ;t -- r <--rr77lij1l
12 FIiI, F
___ t
-H
i |Thailand
l i- § |
malaysia _

__

ii'- £ -[---- - ~~~~~~~~~Rep.

OfKorea -- _

2 j-

; D j1970 1972 1974 197S l.978 lM 910

92 1986"S is4R

10 - _________

4 - \ | i | ' I 4 j I

0 ~1970 2972 2.f974 2978 2.978 1980 198 98 2984 .8

2-

1970 1972 1974 1976 ±978 1980 1982 194 l98"

Noet:Revenues from moneyamion as a perccnwgcofGDP is detinedas raio of nominal

changein high-powered money wonominal GDP.

mable3), yet none ficed a debt crisis in the sense of being forced to
reschedule. High levels of exports meant that foreign exchange was read-
ily available to service the foreign debt. Similarly, high growdt implied
that returns on bormwed capital were suffident to pay the interest.
Korea-ssuccessfil handling of a very high foreign debt illustrates these
trends. Beginning in the early 1970s, Koreaborrowed heavilyto financepri-
vate sector investment and build up foreign exchange reserves.By 1984

'3
 ~RACLE

FMgre7 ReallnterestRates Examples

from EastAsia
andOtherSelectedEconomies
Inteet rte (prcent)
ARel
20 - : rp-T
10-r

0-
450 - A*

470- T 1 T 1 1 j - - Rep.ofKamma
- t=
1-j -I I - Thiand

-W~~~"

19701972 1974 1976 1978 1980 1S82 1984 1886

20-1

- :- - - -~~~-70-- + +-- -' r4 -i- 1--6m

~~~~~I
-0- - ---
-20----
- '--; 'A I
4
-40 -i~~~~~~1 -

450 .LI PK
-70- -- 1 4--i- - Ghana

-90 - - _____ __

-100-
187 1972 1974 1976 197 198 ±98 18984 1986

Noic Rcal int=rest ADesare defined as dth depositrAte defld by thec onsuncr price indac

KDreasforeign debt was fourch larget in the world and equalledmore than
half of its- rNPin 1985. Yet, becauseof its high export-NP ratio and rapid
oveR growth, Koreaneverlost ceditworthiness.From 1986 the govement
pursued an active debt-reduction poliqr, dawing on burgeoning interna-
tional reseves generatedby exports to make payments ahead ofschedulc; by
1990 the debt-GNPratio was down to 14 percent (In contrist, when Mex-
ico ficed severeproblems with its creditors in 1982, it had a much lower
- debt-GNPratio than Korea in 1984 but a much higher debt-export ratio.)

'4:
 Figure 8 Examplesof Real ExchangeRateVaiiabity in East Asia
and OtherSelcted Econonies
Reg exchango rate perent)

300- _ - Rep.of eo-,--

MaWylayI

.-
T-O
197 197-l2 I I i I

1,970 172 1974 1976 197S 1950 1982 1984 1986 198$

35 -- I II
I t , -jI )I s --- Atent-na ! ! |
300- a - -- M.xico I

f- - IIIIzIX
25 0 K

:M -,

KetInde of realexnge atc 1980=100;realdepreation is dowv.

Cmeatig an ExportPush

.Manyof the policiesthat fosteredmacroeconomicstabiliy also con-

tributed to rapid export growth. Fiscal discIpline and high public savings
allowedJapan and Taiwan,China, to underake extended periods of ex-
c.hange rateprorection. Adjustments to cxdange rates in other HPAEs-

" '5
 Table3 Internaional
Indebtedness

'Ratio of totalr
;'e
. t .'- '' -4 tativotal ' &'btio atorred.-
de::to GNP' e andseces
Eco-om_rqp'ion ;Payk r 1991 Paryar' 1997

n69.0 -.
-Idonesi 66.4 263.5 .225.6
Korea, Rep. of 52.5 15.0 5.2-
-.. -,;865 .- 47,6. 38A 542
-Th;dind . --47.8>. 39.04- -171.7 94.8
-ow- and mid- --
Aff : .me
*- - economie
: - .s:. - -! . .'.: ... ;. r176.2 3..4
- -oAsia, 29.6 - ;.-- 293.3
S106.1
* .LadnA,A,ic
and Qr -;bn. - 37.4 268.0;
L.; 198
7 frcIndncsia, and1985or 1986 hrodicothertrc countrcs .

validated by expenditure reducing policies-kept them competitive, de-

spite differential inflation with trading partners.
In addition to manaoeconomicfactors, the HPAES used a variety of ap-
proachesto promoting exports All except Hong Kong began with a period
of import substitution and a strong bias against exports. But each moved
to establish a pro-export regime more quicldy than other developing
economies. First, Japan in the 1950s and early 1960s and then the Four
Tigers in rhe late 1960s,shifted trade policies to encourage manucrcauing
exports. In Japan, Korea, and Taiwan, China, governments established a
pro-export incentive structure that coexisted with moderate but highly
variable protection of the domestic marker. A wide variety of instruments
Wasused, including export aedir, duty-free imports for exportersand their
suppliers, export targets, and tax incentives. In the Southeast Asian NIEs,
the export push came later, in the early 1980s, and the instruments were
different. Reductions in import protection were more generalizedand were
accompaniedby export credit and supportng institutions. Export devel-
opment has relied much lesson highly selectve interventions and more on
broadly based market incentives and direct foreign investmentr

theInstfit onalBasisforGrowth
Building

OME ECONOMISTS AND POLITICALSCIENTISTS HAVE ARGUED

that the East Asian mirade is due to the high quality and authori-
tarian nature of the region's institutions. They describe East Asian

xr6
political regiumesas "developmental states" in which powerful technocrat-
ic bureaucracies, shieldedt from political pressure, devise and implement
well-honed interventions. We believe developmental statemodels over-
look the central role of government-private sectrorcooperation. While
leaders of the H-PAEs have tended to be either authoritarian or paternalis-
tic, they have also been willing to grant a voice and genuine authority to
a technocratic elite and key elements in the private sector. Unlike
authoritain ledesinmny other economies, leaders in rt 'e HPAEs real-
ize that economic development was impossible without zuoperation.

The Principle
ofShared
Gmwth

To establishtheir legitimacyandtwin the support of the societyat large,

East Asian leaders established the principleof shared growth, promising in
effect that as the economy expanded all groups would benefit. But sharing
growth raised complex coordination problems. First, leaders had to con-
vince.economic elitesto support pro-growth policies.Then they had to per-
suade the elites to share the benefits of growth with the middle-classand
poor. Fially, to win the cooperation of the middle-classand the poor, lead-
ers had to show them that they would indeed benefit from future growth.
Very explicit mechanisms were used to demonstrate the intent that all
would have a share of future wealth. Korea and Taiwan, China, carried out
Ccomprehensive land reform programs; Indonesia used rice and ferdilizer
pricepolicies ofnSharedence
:~~~~~~~~~~d
to to-da
aise rural incomes;Malaysia polidple
introduced explicitwealth-
sharingprogramsto improvethe lot of ethiic Malaysvis--vis the better-
off ethnicChinese;Hong Kongand Singaporeundertook massivepublic
housingprograms;in severl economies,governmentsassistedworkerico-
opeatives andestablished programsto encouragesmall and mediumi-size
enterprises.'Whateverthe forn, these programsdemonstratedthat the
goarcnmnt intendedfor all to sharein the benefitsof growth.

Foskering
- Effective
Bureancaacy

To cackle coordination problems, leaders needed institutions and

mechanisms to reassure competing groups that each would benefit from
growth. The first step was to recruit a competent and relativelyhonest
Technocrtccadre and insulatc it f dyu-o-a olitic ier&ren
tore
The power of these technocracieshasvaried greaty. In Japan, Korea,Sin-
gapore,andTaiwn, Coino a, well- d bureaucracieswield substan-
tial power. Otier -oHPAEs have had small, general-purposeplanning
agecies.But in each economy,economictechnocratshelped leadersto
devis a crediblceconomicstrategy..

'7
 LE

How did the northeasternAsian economicsfoster effectivebureaucra-

des? In addition to tapping the prestige traditionallyaccordedcivil ser-
vants, these governments have employed numerous mechanisms to
increasethe appealof a publicservicecareer,therebyheighteningcompe-
tition and improving the pool of applicants.The overallprinciples of
thesemechanisms,readilyapplicableto any society,are:
* Total compensation,including pay, perks, and prestige,must be
competitivewith the privatesector.
* Recruitmentand promotion must be merit-basedand highlycom-
petitive.
* Thosewho make it to the top shouldbe amply rewarded.

In bureaucracies,as in nearly everythingelse, you get what you pay

for. Relatve civilservicepay issignificantlybetter in the Four Tigersthan
in other economies.Relativepay in Malaysiaand Thailand is about the
sameas the averagefor other low- and middle-incomeeconomiesbFutis
still significanldyhigher than in the Philippines,the laggardamong the
EastAsianeconomies.In general,the more favorablythe total public sec-
tor compensationpackagecomparesto compensationin the privatesec-
tor, the better the qualityof the bureaucracy.Not surprisingly,Singapor.
which is widelyperceivedto have the region'smost competent and U:j
right bureaucracy,paysics bureaucratsbest.
In economieswhere public sectorwagesare good, if not equal to the
privatesector, prestigeuwill persuadesome talented individualsto forgo
higher earningsin the privatesector.Prestge is enhancedby highlycom-
petitive,Vmerit-based recruitmentand promotion.If civilserviceexamsare
highlycompetitive,individualswho pass them will be relativelyrare, rais-
ing the status of public employmnent. Job securitycan alsooffet slighdy
lowerpay.In most HPAE bureaucracies,dismissalis unlikelyunlessthe bu-
reaucratcommitsa seriousmistake.Securitytranslatesinto lowerincome
variabilitr,whichin turn providesincentivesfor puhlic employeesto ac-
cept a lowersalary.
In many HPAEs a public employeecan look forward to a retirement
pension, a benefit not normallyavilahblein the private sector exceptin
largecorporations. In Japanandsome otherHPAEs, retirementcomesearly
and the rewardsto a successfulbureaucratare substatial, extendingbe-;
-yondthe pay,perks,and prestigeto includea lucrativejob in a pubire-or
private corporation,or occasionallyelecziontO political office. The trick
for-governmentsis to hit on a combinationthat wilLattract competentin-
dividualsto the civilservice.

':
 Crating a Business-Fiendy
E.wimnment

Effictivebureaucraciesenabledleadersin the HPAsEto estblish legal

and regulatorystructuresthat were genemllyhospitableto privateinvest-
ment. Beyondthis, the HPAEs have with varyingdegreesof formalityand
successenhanced communicationsbetween businessand governent.
Japan, Korea,Malaysia,and Singaporehaveestablishedforums,whichwe
call deliberationcouncils,to encouragegovernment-businesscollabora-
tion. In contrast to lobbying,where rulesare murkyand groups seekse-
-ct advantageoverone another,the deliberationcouncilsmade the rules
dearer to allparticipants.
In Japan and Korea,technocratsuseddeliberaion councilsto establish
contestsamong firms.Becausethe privatesectorparticipatedin drafting
the rules;and becausethe processwas transparentto all participants,pri-
vatesectorgroupsbecamemorewillingparticipantsin the leadership'sde-
velopmentefforts.One by-productof these contestswas a tendencyto
minimizeprnvateresourcesdevoted to wasteful rent-seekingactvities
rather than productive endeavors.Deliberationcouncils also facilitated
information exchangesbetween the pnrvatesector and government,
among firms, and between managementand labor The councils thus
supplementedthe market'sinformationtransmissionfunction, enablng
the HPAEsto respond more quicWkly than ochereconormiesto changing
markets.
Institutionsof busincss-government communicationhavenot beenstatic
-in the HPAFaThe role ofthe deliberationcouncilis changingin Japan anrd
Koreato a moreindicativeand consensus-building role,alongfunctionalas
opposedto industry-specific lines.In Malavsiathe councilsappearto be in-
aceasngin importanceand scope In Thailandthe formalmechanismsof
coimunication havegenerallyben usedto presenrtbusinesses'positionsto
-0government andreducesuspicionof the privatesector.In the-caseofistu-
tional development,just esin economicpolicym2lng,EastAsiangovern-
menitshavechangedwithchangingcicumsnces.

Accumulating
Human
andPhysical
Captlal

AST?ASIAN ECONOMES USED A COMBINATON OF FUNDAMENTAL

and interventonist policies to achieve rapid accumulation of
physicaland human resources.Fundamentalsincludedsuch tradi-
ional governmentobligationsas providingadequateinfrastructureand
education, andsecure financialinstituons.Iterventions includedid

- - 0 : ; ?~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I
'9
 repression of interest rates, stare capitalism, mandatory savings mecha-
nisms, and socialization of risk.

BIlldEig Human Capital

Levelsof human capital were higher in the HPiES in the 1960s than in
other low- and middle-income econonies. Educational investments re-
sulted in universalprimary education and in widely availablesecondaryed-
ucation. In addition, the quality of schoolinghas improved more rapidly in
the HPAEsthan in other middle-income economies; as ferdliy rates fell in
the 1970s, education spending per child rose sharply even as education ac-
penditure as a percentage of cNP remained constant or, in some cases, de-
clined. Table 4 shows changesin the size of school-age populations due to
shiftng fertility rates for the HPAES and several other economies. In Hong
KongEKorea, and Singapore, the school-age perce-ntageof the population
dropped by nearly half from 1965 to 1989. Malaysia and Thailand also
achieved substantial, if less dramatic declines, similar to those for Brazil
and Colombia. In Bangladesh, Kenya, Nigeria, and Paldstan, conversely,
high ferdlity has meant that the school-age percentage of the population
has remained very high and in severalcases actually increased.
Rapid human capital accumulation was fostered by two additional fac-
tors. First, many HPAEshad a head start on a virtuous cirde: initial low in-

Table4 Size and Growthof School-AgePopulation

-, . . &h. 1 ~4~(oŽ4).fl., W~-.f=W
r~~~~~~~~~~~~~~C mot Taf of pnni*z
7h X6-11)

-, ~ (ntaIpopsL~nmz
Kr.. po7wnn IpaCrII8J/

4443.4. ~
B¶#%~~sI1%:• IJ.4~~~.44 t.k ~ 4.

;~~~~~~~~~~HnKn :0 ;-rzA
:: 4 ...40 srsnY
-. ~
X:2:-'' :1'-
%f~n ... tA. ,4. 2-C -. Si .- )
.7_4
t,tfOIjJl5-7-,- ~7' ~ r~vr1Ub

.- :-~~~~~~~~~
,26 C.t ,,ca- .i - epo
.3~ 4 ---
-, , ~
'J~~~~~~~~~~~~ 4. N~~~~~~~.4

.*-4-.v.- L 4 7.4.

20:~~~~~~~9
!_.- .X
*. 0 - - * -~~dtiKrAaior . . .4- -.- ..-- .- .i -. .;.l
t A.- ;k
 equalityof incomeand educationlet to educationalexpansion,whichre-
inoirced low inequality.Second, in contrast to other regions, public
spendinghas been concentrated on primary and secondaryeducation.
Demandfor terLiaryeducationwaslargelyabsorbedby a self-financedpri-
vatesystem.At the post-secondarylevel,public spendinghas focusedon
scientificand technologicaleducation (induding engineering)whilede-
nmandfor universityeducationin humanitiesand socialscienceshas been
handledthrough the self-financedprivatesystem.
As a result, the broad baseand rechnicalbias of human capitalin the
HPAEs has been particularlynoteworthy.Averageeducationalattainment
in the low-wageend of the labor forceis higherin HPAEs than in other
middle-incomeeconomies.The HPAEs have also promoted enterprise
tning programs, including many subsidizedby goverment Post-
secondaryeducation has focusedon technicalskilLsmore than in other
middle-incomeeconomies.Some HPAES also actively recruited foreign
teachersand sent largenumbers of studentsabroad,particularlyin voca-
tionally ;nd technologicaly sophisticateddisciplines.Overall, educa-
tional investmentsseem'particularlywell focusedon the acquisitionand
-masteryof technology.

IncreasingSangs andInvestment

The HPAEs' performance in two fundamentl policy areas increasedsav- Fhg 9 Savings Ratesof HPAEs
ings. First, by avoiding inflation, they avoidedvolatilityof real interest andSeected conmeS, 197048:
rates on deposits and ensured that races were largelypositive. Table 5 con- -
trasts real interest rates in the HPAEs
with the highly negativereal rates in NPAEs
othmerdeveloping economies; for example, avreage rares were -44 percent
-in Argentina, -15 percent in Turkey;and -28 percent in Zambia. The sa- F'" ,
biliry of interest rates in the FMPAs
is shownin an average standard devia-
tion of 3.5, dose to the OECD average of 2.8, while the averagestandard
' - ', deviation was 40 in Latin America and 14 in Sub-Sahl-aranAfiica. 0 t- 20 30 40
Second, HPAE governments ensured the security of banks and made Peol6DP
them more convenient to small and rural savers.The major instruments Nar EuropeincludesAusria, edlgium,
usedto builda bank-basedfinancialsystem were strong prudential regu- n ofGenn-any
Republic Hnland, Fmanc the Fedeni
befibrereunific2tion,
lation and supervision, limittions on competion and institutonal re- G IcLad, Irdend,lwly.Luxem-
forms. In addition, Japan, Korea, Malaysia, Singapore, and Taiwan, bourg the Nedhadsj Norwy, Portual
China, established postal savings systems which 5
gs
lowered tie tansaction Px' Sw Swinerad, and ie
~~~~~~~~~~~~~United
IGngdomn.
'OthcCiziduclsdhese
-costsand increasedthesafetyofsaving substanalreourcs vopin ecnomics Argeina, Bazil
availableto government.These initiatives promoted rapid growth of de- Chile,Colombia.aced' Ivoire.Egpr
posits in financialinstititnons(seefigure9). Ghana,India, Merico,Moroao, Nigenria.
Paiostn, Peru, Sni Lz2. Turey, Urug-
Some goverments also used-a variety of more interventionist mecha- u the fomer Yugoslaia,and
nisnmsto increasesavings Public sector savingswere high in Sigapore andc z:ire

.. S . ,,:: - ............................................ : . - : -
:.--Tabb 5 AveragRealIntfeduRate onDepodt,SeleebdEcononmies

, -.... .. 40. ,,.. hAi .7.e .,,

; ffi* J<g;r--g2 ""I }.llriw- * zS - - gs)-

- w.-Ss.,~~~~~~~~~~~~~F ccr r 3 d-srdnn6

siS174l9Smnlhm&eho v- - . -196-

re ~~ ~ ~~Be4n Taian ,
7t1sadhihEl2l l mpst t

-~ ~~~~~~y . ..

~~~-59'
.:....: -, g : .4, . 0i -i :i
- ;": -' ''22.'
"'- - - ' - " '- - - -. ' - : 'S:f ': '

'- ff';0L--''|
' ' -', '"'?, ,-'-' , 0',; -,'D- '-',, '''' 0 - -,,"-; -; -'-0-'-''D
 high, there was an economyL-wvide high return on savings--forced or nor.
Thus, in contrast to other economiues,such as the republics of the former
Soviet Union, which used compulsory saving but failed to achieve high
rates of return on Investmenc welfarecostsin the 1-nAEs were dearly lowv.
The HPAEsencouraged investment by several means First, they didt a
bet job than most developing economies at creating infrstructure that
Complemented private invesment- Second, they acrated an investment-
friendly environment through a combination of txpolicies Favoringin-
vestment andl polcicis chat kept the relative prices of capital goods low,
largely by avoiding the effcts of high tariffs on imported capicalgoods
These fundamental policies had an important impact on private invest-
mert. Third and more contrverial, most irnE governments controlled
deposit and lending rates below marker dearing levels, a practice te-rmed
"finanial repression'
* Japan, Korea, Malaysia, Thailand, and Taiwan, China, had extended
-periods of mild financial repression. Increasing interest rates froro nega-
- to zero or mildly positive real rates and avoiding fluctuations (by
avoiding unstble infladon) encouraged financial savings. But because
.savngs are not very responsive to margially higher real interest rates,
governments were able to mildly repress interest rate on deposits with a
minimal impact on saving ant pass the lower rates to final borrowers,thus
subsidizing corporainons. Thisofr enrof income from households to
firm -changednotonlythev olume ofsavings, but alsocthefonn inwhich
savings.were held, from debt to corporate equisc o
Financial repression require credit rationing with atndant risks of
misallocationof capital. Thus there is a trade-off between the possiblein-
crease in savingsand investmncrtand the risk that the increasedcapital will
be bdly invested There is some evidencethat in Japan, Korea, and Taiwan,
China, govrnmet allocatedcredit to acvities with high socialraeurns ne-
pteally to exports. If this were the case, there may have been allocative
benefits from crdit raEtioning,and nlmo nomic evidence from Japan
supports the view that accessto govemrmentcredi inreasd investment.
Tests Of dte relationship bbeweeninterest rates and growth suggest ta in
; s--beadlpnvae vstm hr ssm vds:da nJpn oent andTavan
the eases-ofjapan, Kowea,and Taiwan, China, the negative relationshipbe-
tweeminrms rate repressionand growth found in cross-econom analyses
Is not psent crpression
ild of interst rates at positive real levelsappar-
* ndy dfidnot inhibit growth, andumay have enhanced it.
fii:zheass, ofJpnCCXea n awn hina,a thengci
Finalyi some gofvceranme especialy inrc the eltoshpb
norn
tasten Asian tier,
spr:-eadprivatevinvestent risks-tothe public In somceeconomies the go
ernLmentowned or controlledthe instiettions providing invesment
flmds,-in others -it offipred licit credit gans and in sti others it
implcit:lyguaranteed the finandal viability of promoted projecsmyRa

23
 uionshipbanking by a vaicty of public and private banking institutions in
Hong Kong, Japan, Korea, Malaysia, Singapore, Thailand, and Taiwan,
China, involved the bankng sector in the management of troubled enter-
prises, increasing the likelihood ofcreeditorworkous. Directed-credit pro-
grams in Japan, Korea, and Taiwan, China, signaled directions of
government policy and provided implicit insurnce to private banks.

Ach-ieing
Efficient
Alcation and
Ptivy
P-oduc Change

OME OF TnE ERVENTIONSIN MARKETS TO SUPPORTACCUM-

ulation in the HPAES,induding financial repression and the social-
ization and bounding ofrisk, could have adversely affected the allo-
cation of resources. Similarly, industrial trgetng could have resulted in
xtensie rent-seeking and great inefficiency. Apparently they did no.t
The allocadional rules followed by HPAE govenmenparicularly the
mtervntions ailned at individual enterprises-are therefore among the
most controversial aspects of the East Asian success story. Despite these
interventons, however, relative prices in the HPEMsgenerally reflected
economic costs and benefits more dosely than relative prices in most
other developing economies.
Like policies related to accumulation, policies affectng allocation and
productivity change fall into fundamental and interventionist categories.
L-abor marker policies tended to rely on fundamentals, using the market
and reinforcing its flcdbility. In capial markets, governments intevened
stemially, both to control inteesct rates and to direct creditr but acted
widLin a framework of careul monitoring and generally low subsidies to
borrowers. Tlade policies have included substantial protection of local
mnanuf&cturers,but less than in most other developing countries; in addi-
tion, HPAEgovernmenLs of;et some disadvantage of protection by actively
supporiing exports. Finlly, while interventions to support specific indus-
tries have generally not been successful, the exporc-push strategy, the com-
plex of fundamental and inteventionist policies to encourage rapid export
growth, has resulted in numemus benefits, induding more efficient alloca-
tion, the acquisition offoreign technology, and rapid productvity growth.

Feadble Labor Markets

Goverment roles in labor mares in the successful Asian econonies

contras sharply with the situation in most other developing economies.
24.. ..
HPAE governments have generaly been less vulnerable than other
.developing-economy governmentsto organizedlabor'sdemands to legis-
late a minimumwage.Rather,they have focusedtheir effortson job gen-
eration, effectivelyboosting the demand for workers. As a result,
employmentlevelshave risen first,followedby marker-and producivity-
driven inacase in wage levels. Becausewagesor at least wage rate in-
creases have been dlownwardlyflexidblein response to changesin the
demandfor labor,adjUStmnta to macroeconomic
shockshas generally
bee quickerand less painful in East Asia than in other developig re-
gions. More rapid adjustmentscontributedto the He'ma sustainedeco-
nonlc growth,which in turn made possiblemuch more rapid Wage
growththan in other regions(seefigure10).
High productivityand income growth in agriculturecontributed to
labormarketflexibifliybyhelpingto keepEastAsianurban wagesdose to
the supply price of labor. In contrast to many other developing
economies,where the gap bertwen urban andrural incomcs has been
largeand growing,in the HPAEsthe incomesof urban and rralworkers
with similarskil levelshaverisen at roughlythe samepace;moreover,the
overallgap betweenurban and rural incomesis smallerin the opAEs than
giother developingeconomiaes.In Stb-SaharanAfrica, Latin America,
and SouthAsia,wherewagesin the urban formalsectorare often pushed
up by legislatedmUiniumwagesand other nonmarkerforces,urban wage
eaers oft-enhave incomestwice their counterpart' in informralsectors.

ra 10 Incresee
inRealEarningi

p.of 4 iKor I _

Taiwan,
Chinr u fna-a - - a

F~~~~~~~~~~~~~~~~~~~
m Rea I8 InrF Inz

earnerAs haiiaonc m min

LatnAmaandrnSOates _909

--1=;' . 1, I.
2 3 4
i--1=''|'-
5 6 7 8
= ~
= 9L 101 ~ ~ ~ ~~~~~~~2
Inaem harealeaings (p=ent)

N-N ndexforTaiwan, Chin2r 1979 100. OtherAsian economics are Ban Indi
ldesh,
Pa'isan and dhePhiippines_.
 In contrast, thecgap between the formal andtinformal sectors in East Asia
is only, about 20 percent.
East Asii!s more rapidt wage inacrases are also partly the result of a
slower growth of supply and more rapid growth of demand for labor
Slower growth in supply has bee-nlargely a function of declining l&riliry
rates.When the currently high-income econom-ieswere industrializing
-during the nineteenth century, their populations grew at an average an-
nual rate of only 0.8 percent. Today, Sub-Saharan Africa's population is
grwing at roughly four tmes tht rat the populatons ofLatn America
and South Asia are growing at roughly three times that rate. Only in East
Asia have population growth rates declined to levels approaching those
which prevailed in the high-income econormies.
We have already seen how early demographic trnsitions markedly re-
dlucedthe rate of growth of the school-age population, thereby easing the
finandal burden of maintaining education enrollment rates. Similarly,
early demographic transitions also reduced, with a lag the rate of growth
Of new entrts ito the East Asian labor force. The annual rare of labor
force growth during the 1980s waas26 percaet in Sub-SahiaranAfrica and
Latin America and 2.2 percen in South Asia.In East Asia,despiE increases
in the par-ipation rates of women, the rate was 1.8 percent (see table 6).
At the same tdee labor deuand has been growing aster among the
:eAEs than in other regions. For the period 1960-90, the rates ofgrowth
of wage employment in manufacturing. construcion,u and sevices havec
tended to be substantiallyhigr in East Asia than in Sub-Saharan.Africa,
Latin America, or South Asgi.Moreover, asiabor dlemandgrew,ir also be-
came more and more skill,-intensi Becauseeducatedworkerswere readily
- in thc patrtiiaro have been
exportersoe,
available,EastAsianttQ-ot h aea to sift
able to producton ofStech-
18pret(setbeO

Rates
Table6 LaborFotheGmowth
Dain
Amertnda,
orSuteianMteoi e aslao.dmnd.e t lo e
Mg oeadmr kl-ltltBcueeuac wdesqr edl
wage astAsin
i avalabe.
- empSayment apoter hae ben
in manuicnsn bIetO and s
t ;hfE o poduuonoftch e

P51n -I *s1

z6~
~ ~ ~ ~~~~~~~2
7.6.
nologicallysophisticaed goods when rsing wages eroded intemational
comperinvenessin labor-intensive
manufacturedgoods.

Markets
Capital andAllocatien

The HPAEs influencedcredit allocationin threeways:enforcingregula-

tionsto improveprivatebanks'project selecton; creatingfinancialinsti-
tutions, especially long-term credit (development)banks;and directing
credit to specificsectorsand firms through public and privatebanks.All
three approachescan be justifiedin theoryand eachhas worked in some
HPAES, yet each involvesprogressivelymore governmenrintervcntionin
creditmarketsand so carriesa higherrisk.
Govenment relationshipswith banksin the HPAEshavevariedwidely.
In Hong Kong banks are prvate and reguated primarilyto ensuretheir
solvency.In Indonesia,Malaysia,Singaporc.and Thailand, banksare pri-
vately owned and exerciseindependent authority over lending. While
govenments have broadlyguided credit allocatons through regulations
and moral suasion,project selectionis geerally left to bankers.In other
HPAEs,banks have been subjectto direct state control or stringent credit
alocatlon guidelines.For example,Indonesia,Korea,and Taiwan,China,
tightlycontrolledthe allocaton of credit by public commercialbanks.
Each of the HPAEmade some attempts to direct credit to priorityac-
tivities.All East Asian economiesexceptHong Kong giveautomaticac-
cessto credit for exportr Housing ws a pnonty in Hong Kong and
Singapore,while agricultureand smalland medium-sizeenterpriseswere
targetedsectorsin Indonesia,Malaysia,and Thailand.Taiwan,China, has
recentlytarged technologicaldevelopmenLJapan and Koreahave used
aceditas a tool of industial policy,organizingcontests through delibera-
.ive councilsto promote at varioustimesthe shipbuilding,chemical,and
automobileindustmies.
The implict subsidyof directed-creditprogramsin the HmAEs wasgen-
erallysmall, especally in comparisonwith other developingeconomies
(see table 7), but access to credit and the signal of goemrnmentsupport to
favoredsectorsor enterpriseswereimportant. In K3>rea, the subsidyfiom
pre&rentialcredit was largedurng the 1970s,resulting in a big gap be-
tweenbank and curb market interestrates.This gap has declinedsharply
in recentyears,asKoreahas shiftedawayfrom heavycreditsubsidiesto se-
lectedsectors.In Japan, implicitsubsidiesweresmall and the directon of
credit may have been more important as a signalingand insurancemech-
anisrmthan as an incentive.
AlthoughEastAsiasdirected-creditprogramswere designedto achieve
.--
policyobjctv, they neverthlessinduded stictperformancecriia In

2-7
 Table7 RealInterstRatesonDirected
Credit,
Selected
HPAEs andOtherDeveloping
Economies
(percent)

7~~ - Ye;t ~~~~,5

r ,, --- f"

-" L

nomicnei, qdite credit 1rogrms7980he4eeconoi0sm

Kbca
Fp.o 198i0-80 ihidty 2. .

-. ~~~inat.nr.r....il ..- !.'*b

.&6vimqoenmn ecoa Darg

cs.Insuried the 'N6iadieŽcindividu

peurfo d ao
.1981nce-b

diece at firn wi ihpotenia fo£7hoosa plov.Tu

gcAowr-. '- '.:

Japan,:c . managen chose porer onomies,nthe 4"nk
changing

:;hinvl overineanal s9caora

t velopmentand15 inc n o n o
.~~~~~~~~~~~~~~k
.9

pronane-bas9edalocaonan mon40in and haetheeorebe

:;-: ~.0 :~ ~ ~ ~- Mi>l8Z8 240

Japan, pnublcesbankEve
managrshoe porojectsondasi
economicsth chngenag
employingnrigorousectreditevaluatioans
toeselretamong applicansso thatscl
allynonistore mthemalargeconglomeratesdus oingncmarkser-orine literaiza
- .~~~~~~~fie
~ - ecnonees
hav- improved allocation, capival
thesentesntional
credit -hedeto
especia4 inw bankrupcy. Rsento-70
2ssessments
- ra -. ,

- 0 - tinomicevieanct
ti~~~~~onuha mevidnce
that directcd-credir
-directed-credit programsithese
ithese eccinom inm
decL;nomes
m-
''etrk eipd rsnt H'A5 have usa *9 strong,
creseoinesmetprmtdnwatvteanbores,ndee
;- v . 0~~~hes strortngly pefrac-ae diecdci m-hnim apert
28~
~ ~ ~~~~~drce t im ihhg oeta o tcnlgclsilvr.Tu
 -7t

TradePdiciesandPatterns
of Protection

Most HPAEsbegan industrialiation with a protectionist orientation

and graduallymoved towardincreasingtyfree trade. Along the way they
often tapped some of the efficiency-generating benefitsof international
competition through mixed trade regimes:they granted exportersduty-
freeimportsof capitaland intermediategoodswhilecontinuingto protect
consumergoods. Export prices wereset in the internationalmarkecand
were oftensubstantiallylessthan current marginalor averagecost. Profits
in protected domestic markers offset export losses,while competition in
the internationalmarkerpushed firms to maximlizeefficienqc.
Despitethe protectionof domesticmanufacturersevidentin allthe HPAES
exceptHong Kongand Singapore,domesticpricesin theseeconomiesare
morecloselyalignedto internationalpricesthan in otherdevelopingregions.
Two bodies of evidencesupport dtis conclusion. Fit, nominal tariff rates
adjustedfor nontariffbarriersare lowerin the HuAEsthan in most otler de-
velopingeconomies.Second,comparisonsof realGNPacrosseconomies in-
dicatethat domesticrelativepricesfor tradablegoodsin the HPAES are more
selsdy
alignedto internationalpricesthan in otherregions.
One of the feSv
systematicattempts to compare nominal tariff ates across
a broadrangeof developingeconomiescondudesthat theywerelowerin the
n?As than in any other group of developingeconomiesexceptthe island
ecnomies of the Caribbeanand the oil smtesofWcsrAsia.The difFerence
and the
betweenLatinAmerica(albeitbeforeits recenttradeliberalizations)
HurAEs favoredimporrsubstitutes,they did
isstriking.Thus whilethe HPAEs
so lessthan most otherdevelopingeconomies.
This is bome out by comparisonsof intemationaland domesticprices.
Figure 11showsan index of ourwardorientation based on international
comparisons of price levels and price variability for the HPAEs compared
-withother regionalgroupings.The HPAEsas a group are more outward
oriented than other regions;their relativeprices are closerto and more
consistendyrelatedto internationalprices. While any large, nukti-econ-
omy effortat realpnce comparisonss subjectto methodologicaland em-
pirical criticism,the results are broadly indicativeand consistentwith
other evidence East Asia'srelativeprices of traded goodswere closeron
averageto internationalpricesthan those of other developingareas.
The HPAEs haavemaximizedthe benefitsof an outward orientation by
activelyseekingforeigntechnologytirough a variey of mechanisms.All
welcomedtechnologytransfersin the form of licenses,capitl goodsim-
ports, and foreign training. Openness to foreign direct investment has
speededtechnologyacquisitionin Hong Kong, Malysia, Singapore,and,
more recendy,Indonesiaand Thailand.Japan, Korea,and, to a lesserex-,

29
 Figre11 Index
ofOutward
Orientaliom

OECD ,nomhs I I
ASIa1
Sou1th
Lale A1nadexwid Cofbbvard 1 1
Middlet
EastI_______ _____

Sub6sahatan
AMes
f._._ f ___ __ _ _

0 3. 2 3 4

tent, Taiwan, China, retricted foreign direct investment but offict this
disadrantage by aggressively acquiring foreign knowledge through -
censes and othr meanms.
In contrast, other low- and middle-income economies such as Ar-
gentina and India, besides being less outwardly oriented than the HPAE,
have adopted policies that actively hindered the acquisition of foreign
knowledge. Ofien they have been preoccupied with supposedly excessive
pricesfor licenses; they have refuisedto provide foreign exchange.for trips
to acquire knowledge, been restricdve of foreign direCEinvestment, and
have attempted prematurely to build up their machine-producing sectors,
thus forgoing theknowledge embodied in imported equipmienc

Ptomoting
San iindusties

Most East Asian goverments have attempted to promote specificindus-

triesor industrialsectorsto some degree.The best-knowninstancesarejapan's
hevy industry prmotion policis ofbthe1950s and the subsequentimtation
of thesepolicis in Korea.These oficis induded ioport protectionas weolas
subsidiesfor capitaland other imported inputs. Malaysia,Singapore,Taiwan,
China--and even Hong Kongt-huvealso establishedpgrogams, typicaly
w;ith more moderate incentives,to accelerte development of advanced in-
dustrics.We find very little evidencethat industrial polcies haveafcfcted ci-
ther the sectoral structure of industry or rates ofproductivity change.Indeed
industial structuresin Japan, Korea,and Taiwan, China, haveevolvd during
the past hirtyyears as we-wouldexpect on rhe basisoffactor-basedcompara-
tve advantageand changingfator cendowrents.
It is not altogether surprising that industrial policy in Japan, Korea, and
- - Taiwan, China, produced mainly markcet conforming results. While selec-
tively promoting capital-and lmowldge-intensiveindustries, thcsegovern-
ments also took steps to ensure that they were fostering profitable,
-* = - intemationally competitivefirns. Moreover,the way in which they formu-

30
lated industrialpoliciesintroduceda largeamountof market information,
and usedperformance,usuallyexportperformance,as a yardstickL In other
-;IPAES,suchinternadonalmarketlinkswerenot usedand industrialpolicies
wereunsuccessful, as in the casesof theheavyindustrypush in Malaysiaand
-thestate-supportedeffortto build an aerospaceindustryin Indonesia.

AchievingProducivitGrowththrough
an ExportPush

One combinationoffandamenmal and interventionistpoliciespracticed

in thC HPAEs has been a significantsourceof rpid productivitychangc
their promotion of manufacturedexports. Although all HPAEs except for
HongKongpassedthroughan import-substitutionphase,thesecndedcar-
lier than in other economies,typicallybecauseof a pressingnecd for for-
eign exchange.In contrast to many other economies, which tried to
preserveforeign exchange by tightening import controls, the HPAESset out
to carn additional foreign exchange by increasing exports. Malaysia and
Singaporeadopted trade regimes that were dose to freetrade;Japan, Korea,
and Taiwan, China, adopted mixed regimes that were largely free for ex-
port industries. Indonesia and Thailand, beginning lathr,adopted export
incentives and moved gradually to reduce domestic protection. In each of
the HIAEs,exchange rate policies were liberalized and, often, currencies
were devalued. Overall, these policies exposed much of the indusial sec-
tor to intemational competition which increasedproductivity growth.
The northern-tier economies-Japan, Korea, and Taiwan, China-
staled the process of import liberalization, often for extended periods, and
heavily promoted exports. Thus while incentives were largey equal, they
were the resultof countervailing subsidiesratherthan trade neutality; pro-
*motionof xports coexistedtogether with protection of the domestic mar-
-ker. In the Southeast Asian HPAEs, conversely,:govenments created an
export-push through a gradual but continuous liberalization of the trade
regime,supplemented by institutional support for exporters.In both cases,
governments were credibly committed to the export-push strategy, and
producers, even those in the protected domestic Marker, knew that sooner
or later their time to export would come. These experiences suggest that
economies making the transidon from import substitution regimes to
more balanced incentives would benefit from activelypromoting exports,
especiallyin -caseswhere import liberalizationis moving slowly.
- Manufactured export growi provided a powerful mechanism for tech-
-nologicalupgrading. Becausefirms which export havegreater accessto best-
-practice technologj, there are both benefits-w the enterprise and spillovers
to the rest of the economy which are not reflectedin marke transactions.
These information'related externalities are an important source of rapid.

3'
 R ACL E

productivitygrowth.Both cross-economy evidenceand moredetailedstud-

produdv typerfoirmance
ies of the induswtrial ofJapan,Korea,and Taiwan,
China, confirmthe significanceof exportsto rapid productivitygrowth.

Economies
for OtherDeveloping
Lessons

5 W- tT HAT LESSONS CAN OTHER DEVELOPING ECONOMIES

learn from East Asia's experience? First, gerting the finda-
v menralsight was essential. Without high levelsof domestic
saving, broadly based human capital, good macroeconomic manage-
ment, and limited price distortions, there vould have been no basis for
growth anxdno means by which the gains of rapid productivity change
could be realized. Policies to assist the financial sector's capture of nonfi-
nancial savings and to increase household and corporate savings were
central. Acquisition of technology through openness to direct foreign
invesunent and licensing were crucial to rapid productivity growth.
Public investment complemented private investment and increased irs
onentationto exports Education policies stressed universal primary edu-
cation and improvements in educational quality at primary and sec-
ondary levels.
Second, very rapid growth of the type aperienced by Japan, the Four
T-iers, and more recently the East Asian NIEs has also benefited from care-
fiul policy interventions to accelerate growth. All interventions carry with
them costs, either in the form of direct fiscalcosts of subsidies or fbregone
.*; r-evenues, or in the form of implicit taxationof households and firms, for
-example,throughthe structure of protecrion or interest rate controls. One
of the defining characterstics of interventions in the iPAn is that in gen-
eral they have been carried out within well defined bounds limiting the
implicit or explcit costs. Thus, price distortions were present but not cx-
cessive;interest rate controls gencrally had as benchmarks intemational
interest rates; and explicit subsidies were kept within bounds. Given the
overriding importance that each of the HPAEsascnibedto macroeconomnic
stability, interventions which threatened to undermine that policy funda-
mental were modified or abandoned-for example,the heavy and chem-
ical industries drive in Korea or the heavy industry push in Malaysia.
These limits to intervention stand in sharp contrast to many other devel-
oping .economies where interentions have not been consistent with
macroeconomricdiscipline.
;Wh&ether these interventions builr on the rapid growth made possible
,-bygood findamentals or detractedfiom it is the most difficult question

32
 we have tried to answer. It is much easier to show that the HPAEs limited
the costs and duration of inappropriately chosen interventions-itself an
impressive achievement-than to demonstrate condusively chat those in-
terventions that were maintained over a long period accelerated growth.
Our assessment is that promotion of specific industries generally did nor
work and therefore holds little promise for other developing economies.
Direcced credit has worked in certain situations but carries high risk. The
exort-push strategy has been by far the most successful set of policy in-
tervention and holds the most promise for other developing economies.
But the efficacyof institutionally demanding strategies-including some
i-0ofthe more narrowlytargetedaspects of the export-push stratcegy-is un-
Xcertain in or settings,and they are dearly difculr tO imitate when
strong institutions are not securelyin place. Moreover, many HPAE inter-
ventions carry high risks that probably make them unsuitable for adapta-
tion in parrs of Sub-Saharan Africa and Laiin America, and elsewherein
Asia, where actvist government involvement in the economy has often
gone awry. Promoting specific industries or attempting to leap stages of
technological development has oftien been a costly failure strongly nega-
tive real interest rates and large subsidies to borrowers debilitate the fi-
nancial system; and directing credit without adequace moniroring and
selection of borrowers distorts allocation. Thus, the hct that interventions
were an element of some EastAsia economicsuccessstories should not be-
come a reason to resist needed market-oriented reform.
Evrenso, an export-pushstrategy appears to hold great promise for
ocher developing economies. Exports are a powerful mechanism to ac-
* quire and master foreign technolog. Moreover, the most important ex-
port promotion measures remain viable in todays global economy, despite
increasing pressure on developingeconomies to refrain from imterventions
thar violate international trading rules such as the General Agreement on
Tariffsand Trade. Keypro-export policies, such as creating a free trade en-
v -wironment for exporters, providing support services for small and
medium-size exporters, improving business-government communica-
tions, and easing rhe decline of uncompetitive industries are unlikely to
-provoke opposition fron trading parmers. However, more highly targered
interventonist measures, such as export subsidies and directed credits
- linked ro exporprecisely those that are difficult for many developing
- economiesto manage-are mcompatiblewith a changingworld trading
environment.
East Asia's own -responses to changing domestic and international cir-
* cumscancesput these lessonsin perspective.Ihe HPAEs are themselvesin-
volvedi in a continuing process of reform, adapting policy instruments and
institutons to achieve the objective of continued growth with equic In

33
 hiEL

manycases these refoms involve reducing. modiying, or abandoning pol-

icy-istruments which were judged to have succeeded in the past. Koreasfi-
nancial sector reform, Indonesia's trade reforms, Thailandcspromoion of
foreign investment,and Malaysia'sprivatizationprograms are casesin point.
The outcome of these initiatives will provide fiurther valuable lessons on
how successful policy instruments shift over time, as the relative roles of
markets, dte public administraton, and the private sector change in re-
sponse to economic and socialdevelopment.
The experience of the inPA'sbroadens our understanding of the range
of policies that contribute to rapid growth. It also teaches us that willing-
ness to experiment and to adapt policies to changing circumstances is a
key element in economic success.What we have not discovered fUIlyis
why the governments in these economies have been more willing and ber-
ter able than others to experiment and adapt; answers go beyond eco-
nomics To include the study of institutions, and the related issues of
politics, history and culture. Taking such questions into account compli-
cates rarher dhan simplifies the task of developmenL In every economy,
however,governMents face a two-pronged taslc thy must select and
adapt policies, both fundamentals and interventions, according to their
institutional circumstances, and at the same time strive to upgrade insd-
tutonal capability to make policy implemenation more efifcdve and to
icrease the number of availablepolicy options.

34i
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