THE ASIAN GROWTH MIRACLE

Many aspects of the growth theories described do apply to the Asian experience,
though each is not fully sufficient to adequately explain the ‘miracle?’ In the following
section, we look at the various aspects that may have supported such rapid growth.
In what follows, we adopt the approach suggested by Quibria (2002), grouping
the explanations for the Asian “miracle” into primary and secondary factors. The primary
factors were present in all the “miracle” economies at the time of their economic takeoff.
The World Bank (1993) study identified the countries falling into this classification to be
Japan, the NIEs (Singapore, Hong Kong, Taiwan, and Korea), Indonesia, Malaysia,
Thailand, and China. The primary factors in these countries form the common
denominator of the Asian growth experience and they are the fundamental determinants
of sustained rapid growth during the period. They are mutually reinforcing and therefore
constitute a bundle of characteristics or factors that cannot be easily separated.
 
In addition, there were secondary factors that were sometimes present and sometimes
not. They contributed to the “miracle” of rapid growth but they varied from country to
country. They added richness and variety to the growth experience.
In analyzing the growth experience of the “miracle” economies, it is important to
distinguish the policy environment that existed during the early stage of the economic
takeoff to sustained high growth and the economic performance that resulted from the
mix of policies. To do this, it is useful to describe the dynamics of the growth process
that resulted in such outstanding growth performance.
PRIMARY FACTORS
First Primary Factor: Importance of Outward-Looking Policies and the Emphasis
on Exports and Foreign Direct Investment
As with other developing countries, the economies of East and Southeast Asia
started the industrialization process by developing import-substituting industries. They
included industries that were natural complements to the agricultural base that already
existed, such as food processing, textiles and apparel, and footwear. There was also a
push toward medium and heavy industries in several countries, including Korea and
India. During the 1960s, development economists and policymakers stressed the
importance of developing a wide range of domestic industries that could supplant
imports. This line of reasoning was termed “bootstrap” development. It was also
popularly believed that the developing countries would need large inflows of
development assistance to supplement domestic saving in order to accomplish this
transformation of the production structure. India took on board these suggestions and
began to develop a wide range of domestic industries with the help of the Soviet Union.
Other countries in Asia were more reluctant to follow this model completely.
Instead, they turned to Japan as an example of how to industrialize. Japan in the 1960s
was building a strong industrial economy based on exports. It had achieved industrial
maturity in the 1930s and it returned to this model of development after World War II,
with the difference being that it targeted much of its production at foreign markets.
Korea, Taiwan, China and later, the major economies of Southeast Asia, followed this
model. Soon after developing some industrial capacity in import-substituting industries,
they turned their attention to external markets. In Korea, the model was followed most
closely as the industrial conglomerates, called chaebol, were modeled on the Japanese
industrial giant kareitsu, such as Mitsubishi and later, Sony and Honda. In Taiwan, the
model was adjusted to stress the development of small and medium industries and the
network of overseas Chinese in the rest of Southeast Asia, particularly Hong Kong and
Singapore, but .also in Europe and North America. The emphasis was initially on
apparel, which shifted quickly to electronics.
In the Southeast Asian countries of Malaysia, the Philippines, and Thailand, the
initial emphasis was on agriculture-based exports such as rubber, sugar, coconut and
palm-oil products, and textile fabrics, such as silk. In Malaysia, large rural estates were
mobilized to increase production, together with research to increase productivity.
Slowly, the emphasis on agriculture-based industry gave way to the development of
labor-intensive industries, including apparel and footwear and later, electronics
assembly. The emphasis on exports was facilitated by government policies, which
varied from country to country.
One of the common threads of these policies was that there was initial protection
of these industries through a combination of import restrictions and tariffs so that
resources would be allocated to them by the private sector in anticipation of good profit
potential. However, these taxes were lower in East and Southeast Asia than they were
in South Asia and other developing regions. More importantly, they were reduced over
time to minimize the distortions in the allocation of resources that were created. In
South Asia, tariffs were also reduced but it took a longer period of time to do so,
resulting in a much slower transition to export promotion from import-substitution,
leading to waste and misallocation of resources.
Tax rates and trade distortions are shown in Table 3.3 where two measures of
trade taxes are reported. The first, taxes as a percentage of exports and imports, may
understate the degree of protection, particularly if taxes are high since there will be less
trade in these products. On the other hand, the average tariff rates may overstate the
degree of protection for the same reason since most trade occurs in products that are
taxed at low rates. Nevertheless, both sets of figures show that there has been a
deceleration in the level of taxation, particularly since 1990. Even in South Asia where
rates were high in 1980 and 1990, the rates fell in the decade of the 1990s and 2000s.
The challenge in South Asia is not only to reduce the rates of taxation, but also to find
other revenue sources to replace the tax on trade and also to reduce the level of
nontariff barriers, which are not only difficult to measure but also restrict trade. Here we
are speaking of bureaucratic procedures and slow processing that increase costs and
reduce efficiency.
 The transformation to labor-intensive industrialization with an emphasis on
exports was supported by the inflow of foreign direct investment, initially in small
amounts from Japan and the United States, and later in greater volume, particularly
from Japan as it accelerated the movement of its labor-intensive industries offshore
when the yen appreciated in value in the second half of the 1980s and early 1990s.
The combination of a shift toward export promotion policies combined with
reductions in tariff rates and complemented by the inflow of foreign direct investment
and supportive macroeconomic policies produced an export boom that lasted more than
twenty years, unprecedented in economic history. The ratio of exports to GDP
increased by leaps and bounds. The proportion of exports derived from manufacturing
also increased dramatically and employment shifted from agriculture to industry, as did
value added (see Table 3.4). By 2000, more than 50 percent of GDP was generated by
the export sector in all the East and Southeast Asian countries except Korea, Indonesia,
and the Philippines (see Table 3.5). Hong Kong and Singapore have had the highest
GDP percentage share of exports in the region historically and currently; it went up to
207 and 231 percent respectively, in 2007. Indonesia, which was slow to start
industrializing because of its earlier dependence on oil, and China. which was also late
in starting and is a very large economy with a huge domestic market, were exporting
less than 50 percent of GDP.
 In South Asia, on the other hand, the rate of export expansion was modest until
the 1990s when trade liberalization policies were adopted' in several countries. Figures
in Table 3.5 show that by 2000, exports of India, Pakistan, and Sri Lanka were generally
only one-third (around 15 percent of GDP) of most countries in East and Southeast
Asia, except for Sri Lanka which exhibited slightly higher export figures of 40 percent.
In this region, Sri Lanka is an interesting case where agricultural exports,
particularly tea, were extremely important in the early years. However, despite more
open export policies than its neighbors (mean tariff rates are not significantly higher
than those in Thailand or China), Sri Lanka has been unable to develop a strong
industrial base because of domestic constraints and a poor climate for foreign
investment as a result of civil unrest.