Synthesis of Growth Factors
The Tigers are highly diverse in natural resources, population, culture, and economic policy. What shared characteristics cause them to be grouped together and set apart from other developing economies? First, they had rapid, sustained growth between 1960 and 1990.
This in itself is unusual among developing economies ; others have grown quickly for periods but not for decades at such high rates. The Tigers are unique in that they combined this growth pattern with fair income distribution, rapid demographic transitions, strong and dynamic agricultural productivity, and unusually rapid export growth. Secondly, these countries also differ from other developing economies in respect of three factors that economists have traditionally associated with economic growth namely (i) high rates of investment, exceeding 20 per cent of GDP on average between 1960 and 1990, participatory private investment, (i) quick accumulation of human capital due to universal primary and secondary education, (iii) and improved productivity which came through allocation of capital to high-yielding investments and catching up in technology.
Pragmatic Resource Allocation and School of Thoughts
Another significant factor was the role of Public policy in helping the Tigers to rapidly accumulate human and physical capital, and to allocate those resources to high-yielding investments. Geography and culture were clearly important considerations, but they do not entirely account for the economic success as foreseen of some less successful economies in the region testifies. Among the variety of policy explanations, two broad views have emerged. Adherents of the neoclassical view stress the success in getting the basics corrected at structural level. A stable macro-economic environment and a reliable legal framework was provided to promote domestic and international competition. The orientation of the Tigers towards international trade and the absence of price controls and other distortionary policies led to relatively lesser price distortions. Investment in people, education and health are legitimate areas for government’s action in the neoclassical framework and its adherents accordingly stress the importance of human capital in the success of these economies. Protagonists of the revisionist school claim that Tigers’ success does not entirely conform to the neoclassical model. Industrial policies and interventions in financial markets are not easily reconciled within the neoclassical framework. Some policies in some economies are much more in accord with models of state-led development with market mechanisms in secondary role. Moreover, while the neoclassical model would explain growth with a standard set of relatively constant policies, the policy mixes used by East-Asian economies were diverse and flexible.
More than most developing economies, the Tigers are characterized by responsible macro-economic management. During the past thirty years, annual inflation averaged approximately 9 per cent7, compared to 18 per cent in other low and middle-income economies. Because inflation was both moderate and predicatable, real interest rates were far more stable. Macro-economic stability encouraged long-term planning and private investment and generated more savings as a consequence. The Tigers also adjusted their macro-economic policies in terms of trade shocks more effectively than most other comparable economies.
Building the Basis for Growth
Some economists and political scientists have argued that the East-Asian miracle is due to the high quality and authoritarian nature of the region’s institutions. East-Asian political regimes are described as “developmental states” in which powerful technocratic bureaucracies, shielded from political pressure, devised and implemented well-intentioned interventions. Developmental state models overlook the central role of government-private sector cooperation. While leaders of the Tigers have tended to be authoritarian or paternalistic, they have also been willing to grant a voice and delegate genuine authority to a technocratic elite and key leaders of the private sector. Unlike authoritarian leaders in many other countries, these leaders realized and appreciated that economic development was impossible without the cooperation of bureaucratic elite and private sector entrepreneurs.
The Principle of Growth
To establish their legitimacy and win the support of the society at large, East-Asian leaders established the principle of shared growth, promising that as the economy expanded, all groups would benefit. But sharing growth raised complex coordination problems. First, leaders had to convince economic elites to support pro-growth policies. Then they had to persuade the elites to share the benefits of growth with the middle class and the poor. Finally, to win the cooperation of the middle class and the poor, the leaders had to show them that they would indeed benefit from future growth.
Savings and Investment
The Tigers increased savings and investment with a combination of fundamental and interventionist policies. Two fundamental policy areas provided a foundation for high and rising savings rates8. First, by avoiding inflation, they avoided volatility of real interest rates on deposits and ensure that rates were largely positive. As a result, they have generally offered higher real interest rates on deposits in the financial system than other developing economies. Second, they ensured the security of banks and made them more accessible to small and rural savers.
The major instruments used to build a secure, bank-based financial system were strong prudential regulation and supervision, limits on competition, and institutional reforms. In Korea, Malaysia, Singapore and Taiwan, postal savings systems lowered transaction costs and increased the safety of saving, while making substantial resources available to government. These initiatives promoted rapid growth of deposits in financial institutions.