Sunday, January 24, 2010

Asian Miracles

Last week, I had an inspirational discussion with my wife, sister, and brother-in-law regarding the criticism of public policy recommendations prescribed by Mr. Narayan Murthy of Infosys Technologies. These conversations or I must say, messages/comments, motivated me to stretch myself to read more about policy related ideas in the Asian development. Here is an article authored by my South Korean friend Bin Kim Young, who is an amateur economist and an avid reader of the issues related to development and public policy. He outlines the architecture of these “miracle” economies.

Some background first. South South Korea, Taiwan, Singapore, and Hong Kong had per capita GDP equal to or less than that of India in the 50s and 60s. After posting unprecedented growth rates of over 10% for next two-three decades, these economies shattered the label of “developing economies” or “third world economies” and joined the prestigious and powerful group of OECD countries. Please find the illustration of to support the poverty obliteration in the chart below:

The story of this remarkable economic development and poverty eradication has been well documented in the landmark book “The Miracle” authored by Mr Michael Schuman. This book is a magnanimous endeavour to identify the mechanics of success of Japan, South Korea, Singapore, Honk Kong, Taiwan, China, and more recently India and Indonesia. This book is a must read for souls interested in the development and growth of economies. I will try to summarize the key points of this book in the next two blogs. I will primarily focus on the central features of each country’s economic policy and execution of these ideas. A detailed understanding of the success story of these economies shall pave a path towards forming a coherent economic development policy for our nation.



Japanese economy was in doldrums after the World War II. Most of the industries were paralyzed, Japanese Government was severely constrained with cash, and unemployment was running upwards along with poverty. In these situations, aid from the US and the vision of a few Japanese intellectuals became the turning point of the economic revival. The Japanese marvel was fundamentally based on strong Government intervention and a strategic vision of the Economic Development Board (EBD). Ministry of International Trade and Industry (MITI) was conceived and it dictated the growth policy of the nation for next half of the twentieth century. MITI selected companies and industries which were “winners” and subsidized their capital, input resources, and other requirements. Some of these industries were protected by high import taxes and trade barriers. In the next stage, export orientation to the US and other western economies became the mantra of MITI. Many infrastructure related industries such as steel, heavy machinery, and manufacturing were encouraged by the Japanese Government.

A dedicated team of bureaucrats at MITI guaranteed that most of these policies were successful. Japanese industries overcame lack of natural resources via discipline, efficiency, and competitiveness. In the later stages of development, entrepreneurs such as Mr Morita (of Sony) and Mr Honda defeated the MITI’s guidelines to develop innovative products and became pioneers of the electronics and car industry. The ecosystem developed by MITI led to the industrial wonder that we now know as Japan.

One place where Japanese fell behind was the integration of Japanese economy with the world economies. Service sector was not fully developed, at least in a comparison with the other developed economies in areas such as finance, IT, technology etc. The structural problem of Japanese economy of isolation and cultural protection discouraged immigration. Moreover, its success bred arrogance. With aging population and stagnated economy, Japan is considered a dog when compared with the China and India.

South Korea

Park Chung Hee, a dictator who ceased power from the South Korean democratic Government in May 1961, envisioned turning South Korea into an economic behemoth. His vision was very similar to that of Japanese bureaucrats. Immediately, South Korean junta and the economic bureaucrats copied the successful Japanese “model” of MITI and the state supported industrialization. Heavy industries and infrastructure were subsidized and developed at a rapid pace.

South Korea rejected the popular idea (at that time) of import substitution and adopted export orientation as the future direction for their economic growth. South Korean conglomerates, Chaebols, were at the heart of the South Korean miracle. Chaebols were required to compete in the international markets. This policy compelled them to become efficient and quality oriented. The vision and will of the benevolent dictator ensured that all the policies were implemented with utmost urgency and rigor. Smartly, South Korea did not bother to reinvent the wheel; it just copied the “proven” Japanese model. Now we hear about LG, Samsung, Hyundai, Kia, and many other South Korean brands. We better get used to these brands and Koreans as they are here to stay.

What can we learn from these two models?

1. Government must support basic industries, at least in the early stages

2. Industries must be coerced to compete in the international markets

3. Continuous improvement and advancement of technology is critical for sustainability

4. Execution is the most significant feature of any policy. Success of a policy desires conviction and commitment from the rulers towards the cause.

In the next blog, I will try to address the remaining economies: Singapore, Hong Kong, and China. These economies are deeply integrated with the global economy and propose a mutant of the Japanese model discussed in this article.

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