Some policies that favoured accumulation in the Tiger countreis including stringent financial discipline and bounding of risk, could have adversely affected the allocation of resources.
Similarly, industrial targeting could have resulted in extensive rent-seeking and greater inefficiency. But they did not. The allocational rules followed by Tiger governments, particularly the devices used to shift market incentives, are therefore among the most controversial aspects of the South-East Asian success story.
Governments’ roles in labour markets in the successful Asian economies contrast sharply with the situation in most other developing economies. Tiger governmetns have generally been less vulnerable than other developing economies, in regard to organized labour’s demands to legislate a minimum wage. Rather, they have focussed on job genreration then effectively boosting the demand for workers. As a result, employment levels have risen first, followed by market and productivity driven increases in wage levels. Wages or at least wage rate increases have been downwardly flexible in response to changes in the demand for labour, adjustment to macro-economic shocks has generally been quicker and less painful in South-East Asia than in other developing regions. Rapid adjustments helped to sustain growth, which in turn made more rapid real wage growth possible.
Most Tigers influenced credit allocation in three ways : (i) by enforcing regulations to improve private banks’ project selection ; (i) by creating financial institutions, especially long-term credit (development) banks and (iii) by directing credit to specific sectors and firms, through public and private banks.
The Tigers have actively sought foreign technology through a variety of mechanisms. All welcomed technology transfers in the form of licenses, capital goods imports, and foreign training. Openness to direct foreign investment (DEI) has speeded technology acquisition in Hongkong, Malaysia, Singapore, and more recently, Indonesia and Thailand. Korea and to a lesser extent, Taiwan, restricted DEI but offset this disadvantage by aggressively acquiring foreign knowledge through licenses and other means.
Most East-Asian government have pursued sector-specific industrial policies to some degree. The best-known instances include Japan’s heavy industry promotion policies of the 1950s which were imitated successfully by South Korea. These policies included import protection as well as subsidies for capital and other imported inputs. Malaysia, Singapore, Taiwan, and even Hong Kong established programme with moderate incentives, to accelerate development of advanced industries. Despite these actions, we find very little evidence that industrial policies have affected either the sectoral structure of industry or rates of productivity change. Indeed, industrial structures in Korea and Taiwan, have evolved during the past thirty years, given factor-based comparative advantage and changing factor endowments.
Trade—Check and Balance
Although all Tigers, except Hong Kong, passed through an import-substitution phase, with high and variable protection of domestic import substitutes, these periods ended earlier than in other economies, typically because of a compelling need for foreign excahnge. In contrast to many other economies, which tried to preserve foreign exchange with stricter import controls, the Tigers set out to earn additional foreign exchange by increasing exports. Hong Kong and Singapore adopted trade regimes that were close to free trade ; Korea and Taiwan adopted mixed regimes that were largely free for export industries. In the 1980s, Indonesia, Malaysia and Thailand have adopted a wide variety of export incentives while gradually reducing protection.
Exchange rate, policies were liberalized and currencies frequently devalued, to support export growth. Overall, these policies exposed much of the industrial sector to international competition and resulted in domestic relative prices that were closer to international prices than in most other developing economies.