Government Versus Market In East Asia Standard of

Government Versus Market In East Asia

Standard of Living

The New Asia • Just a few decades ago much of Asia was very poor, but they have moved up • The average person now live a remarkable life compared to the past • Maybe not to US levels, but they are getting close

Asian Tigers • New industrializing countries – – – – Hong Kong Republic of Korea Singapore Taiwan Indonesia Malaysia Thailand • Some might list Japan as the first, others would list the Philippines and Viet Nam. Some even include China • It is important to explore these economies not only to look at the countries themselves, but also as a possible blueprint to help the other poor countries

Note That Not All Countries Joined This Group • • Lao People’s Democratic Republic Cambodia Mongolia Myanmar Solomon Islands Fiji Palau

First Glance • First look shows a group of countries that are very different • Almost strange to group them together – Hong Kong and Singapore are city states • Both have fewer people that the New York metro – Indonesia is the other extreme is very populous at over 200 million – The city states and Taiwan are nearly at the same level as the US

First Glance • Indonesia and Malaysia at the other extreme are still very poor

GDP and Population for the East Asia Tigers Country GDP in 2005 (Billions $) Population in 2005 (millions) GDP Per Capita in 2005 ($) Per Capita GDP as a Share of US Hong Kong 242 6. 8 35422 86% Republic of Korea 1074 48. 3 22310 54% Singapore 133 4. 3 30601 74% Taiwan 650 22. 8 28552 69% Indonesia 889 219. 2 4055 10% Malaysia 289 26 11957 29% Thailand 558 65. 1 8571 21% Total 3835 392. 5

GDP and Pop

Why Do We Group Them Together

Extraordinary Economic Changes • When you have growth changes at those level one has tremendous and rapid changes in the standard of living • If a country grows at 7% per year, the average standard of living will – Double in 10 years – Double again in 20 years (quadruple) – Double again in 30 years (octuple) – This is roughly what they did

Think about that in a Lifetime • In a working lifetime, the economy and the standard of living for the people had an extraordinary change • Can you imagine receiving 8 times your first “real job’s” wages at the end of your working career near retirement

And All The Other Stuff • I could run through all the other social indicators – Level of poverty has dropped – Infant mortality has gone down – Life expectancy has increased – And all of this happen with a greater degree of equality than other developing areas like Latin America or Africa

One Big Stumble • 1997 and 1998 , there was a major international financial meltdown followed by a deep recession • After they recovered in the early 2000 s, growth returned, but not at the same level

Focus on the Strong Growth • The 70 s and 80 s were the strongest period of growth for these Tigers • We continually hear about these countries today, but most economists were caught of guard at first • Economic literature from the 50 s have no comments about the future of Asia

The Big Question • The big question is whether government policy played a part in this tremendous growth • Why? We are always interested in if policy can be applied to other poor countries • Should credit be given to fundamentals or the government industrial policy and trade barriers?

Market Fundamental for Success • As a starting point, the East Asian Miracle study from the 1990 s from a World Bank group – What caused East Asia’s success? In large measure [these countries] achieved high growth by getting the basics right. Private domestic investment and rapidly growing human capital were the principal engines of growth. High level of domestic financial savings sustained the… high investment levels… All… reasonable bounds and were open to foreign ideas and technology….

• But these fundamental policies don’t tell the entire story. In most of these economies, in one form or another, the government intervened systematically through multiple channels—to foster development, and in some cases the development of specific industries…. .

• Our judgment us that in a few economies… in some instances, government interventions resulted in higher and more equal growth than otherwise would have occurred —East Asian Miracle (1983)

Fundamentals and Gov • The big story is that the Tigers are basically fundamentals done well, but in some cases government helped the process

Time to Sort • Start with the fundamental building blocks of growth – Macroeconomic stability – Education – High rate of saving and investment – Market based incentives

Macroeconomic Stability • Low inflation and sound budget policy • In general they were very successful with the exception being in Asian crisis of 1997 and 1998 • Most had low budget deficits and low inflation • This is a good stable climate for a business to grow

Inflation

Average Annual Inflation From 1960 s through 1980 s • Under 4% for Malaysia and Singapore • Around 6% for Taiwan and Thailand • Around 12% in Indonesia and South Korea

Tigers Kept Borrowing Under Control • Up through the early 1990 s, total accumulated international debt was in the range of 40% of GDP

Building Human Capital Through Education • These economies invested heavily in education

Minnesota • Unfortunately, I need to add that Minnesota has been reducing investment in education per capita since the 60 s. And Higher Ed has seen rapid reduction of investment as a percentage of GDP in the last 15 years

Back to the Tigers • Most had or established universal primary education to higher levels of education • Both the quantity and quality of education has risen dramatically • The start back in the 60 s was universal primary education—South Korea, Hong Kong, & Singapore – Taiwan already had primary – Even huge Indonesia had 70% in primary schools in 1965

More Education • By the 1980 s this group of primary school students were working their way up to the new secondary schools – In Korea in the late 1980 s, about 90% of children were going to secondary school – Even in poorer and larger Indonesia, almost half were going to secondary school – Expenses increased by factors of 3 and 4 per pupil – Higher spending and higher growth made this easy

Birth Rates • Sharp reductions in birth rates starting in the 1960 s • Combine that with the increased spending in education gives an very educated workforce • Compound this with the value of education – I know that it is a stereotype that Asians are all good at school, but there is a cultural bias to a strong education.

Education Results • On international test, we often find that kids in say Singapore or South Korea are out performing European nations and the US – Having said that by the end of college, the US is back near the top. Many HS in America are dysfunctional and when you combine that America’s attitude about education, one can see why students need at least some community college

Bad Mouthing the US

High Rates of National Savings and Investment • In 1965, the rates of saving and investment were comparable to those in Latin America – Around 15% of GDP • Latin America has not changed and Tigers have reached 30%-35% of GDP

High Saving • This high saving translated into both higher private investment by companies and higher public investment by governments • About 50/50 public/private • And they tended to offset each other. When private was down, public went up and vice versa. • Public was a true investment: irrigation for land, roads, electricity, water facilities, background infrastructure—and that education—investments that will increase productivity

Fairly Light-Handed Intervention in Markets • The had extensive competition in their domestic markets

Open Trade and Budget Deficits • The open trade tended to go hand in hand with low deficits – They often had the situation of either running big deficits to provide subsidies or just let everything remain open – They selected macroeconomic stability and did not provide subsidies • They also did not make the mistake that many developing countries have made by beating on ag – Some have put heavy taxes on ag and then subsidize food to keep it cheap

I Should Not Overstate • The East Asian Tigers have had a substantial amount of government intervention

Open to Technology • • • This goes with saying Always willing to import machinery abroad Willing to license Willing to accept foreign direct investment Much faster than trying to build all the technology from within • Building from within has been the path of India and Latin America—wasteful and unsuccessful

Science and Technology • They always embraced science and engineering programs – In some areas like Malaysia and Taiwan, they became famous for big industrial parks for high tech industry

Overall Where Is This Going • Economic growth is a matter of workers with more education and skills, using more physical equipment and better technology, in an economic environment that has good incentives and investment • That followed this well

Now! What about the Government Intervention? • Government across East Asian did use interventionist policy • Results, however, are mixed – Many of the countries tried to designate certain industries as strategic – Then use licenses, fees, and subsidies to support those industries • An example is South Korea that promoted iron, steel, electronics, and the chemical industry • On the other hand Indonesia and Thailand did not select industries

Difficulties Of Selected Industries • Selecting industries often does not work that well – I should say that receiving a subsidy does help the industry – But the question is whether the subsidy helps the overall economy – To help the overall economy, you need to spur that industry enough so that it can pay back the subsidy and help the rest of the economy

You Need To Think About What Industries Will Important • You need to predict what industries will be important in the future • Political you need to support only the winners and not the losers – This process added a great amount of licenses and red tape – This is fertile ground for bribes

Bailout or Not • What do you do when you select a loser – Do you bailout the wrong business – Korea is an example of a country that bailed out several industries that were labeled as strategic, but actually failed (ship building, construction, and heavy machinery) • Ironically many container ships now com from SK

What Else Happens • There is control of savings and interest rates – up until the early 90 s, the Tigers typically regulated what interest rate banks could charge borrowers and what interest rate banks could pay lenders – Also blocked new banks from entering the market – Most Tigers also had government sponsored postal savings institutions (tied to the post office and allowed the rural population to save)

Result • The banks were flush with money – They would then lend to businesses at good rates – This worked for a period to get large amounts of funds to businesses • Here in the US we have a relatively low rate of saving and we put a relatively large amount of our saving into residential real estate—plus we have a relatively large amount of consumer loans • East Asia on the other hand has high savings that flow to companies for investment rather than helping people buy houses in the suburbs

Another Way to Help • Export Incentives – No shock that these countries have expanded their world share of exports – Share of world exports for these 7 countries • 3% in 1965 • 6% in 1980 • 9% in 1990 – East Asian Tigers’ share of exports of all developing economies • 12% in 1965 • 58% in 1990 (obviously down today because of China)

Part Just Growth • As they got bigger and bigger they just participated more in world markets • In addition, governments often pushed exports – They held export contests • When a company gets an export order, they then got access to cheaper credit • If you can clearly set the rules, this prevents subsidies based predictions from bureaucrats

Korea and Taiwan • Taiwan for example gave tax breaks to companies that continued to export • And most importantly, Korea and Taiwan cut off companies that failed to produce

In East Asia, Fundamentals Were More Important • Fundamentals or Government Intervention – This is a continuing debate for not just the Tigers, but all growth – In the case of the Tigers it is clear that fundamentals were the most important – One way economists explore this is through a counter-factual. What would happen if the Tiger had just fundamentals or just government intervention

Counter-Factual • For example, what if the Tigers improved the fundamentals – Education, savings & investment, technology, macro stability, and market incentives – BUT no government intervention with either trade or industrial policy – The World Bank report indicated that this would have only a small difference in the actual growth

Counter-Factual • Consider the alternative – What if the government of the East Asian Tigers had intervened as they did in the markets Credit controls Subsidies industries and successful exporters Trade barriers BUT had not improved the fundamentals—no gains in education, no saving and investment, no new technology, high inflation and budget deficits, no market incentives • I know that you think I am being silly and that it is obvious they would have had little growth—just remember that this scenario is similar to part of Africa and Latin America • •

Why is the Record so Poor, but Talked About So Much • Why is government intervention discussed so heavily – Parts of the government functions are easier than the business world—it is easy to collect taxes and pay government workers. It is very difficult however to develop a product that will be profitable on a world market – Without the profit incentive, many government statistics do not provide useful info and they do not like to look bad so often report stats that appear to make gov useful

Here is an interest Thought • There are many times here in America when the people ask the government to do one thing and then expect the firms to do something else when in reality our requests should be flip-flopped – We want government to have the task of creating jobs and economics growth—a task best suited for business – Then we want our firms to focus on social responsibility and protecting people from economic shocks, providing health insurance and protecting the environment—all task better for the government to handle

Let the Government • Focus in on education, worker safety, the environment, consumer protection • The fundamentals! Studies show the Tigers are about the fundamentals