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0 The

East Asian

Miracl e

Economic Growth

and Public Policy

Published for the World Bank

CxCORD UNIVERSrrYPRS

Oxford Univeirm Pressw

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DELI BOMBaY CALC;UJrA MADRAS KARACHi

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Foreword

EBATES ON THE APPROPRIATE ROLE OF PUBLIC POUCY IN

economic development have occupied policymakers and scholars since the study of developing economnies bcgan in earnest at the dosc of World War IL. The success of many of the economies in EastAsia in achieving rapid and equitable growth, often in the context ofacivist public policies, raises complex questions about the relationship between government, the private sector, and the markern Seningly, the rapidly growing economies in East Asia used many of the same poficy instruments as othcr developing economies, but with greater success. Understanding which policies contribuced co their rapid growth, and how, is a major question for research on development pol- icy. Forthese rcasons I announced at the time of the 1991 Annual Meet- ings of the Board of Govemors of the World Bank in Bangkok, Thailand, that our Development Economics Vice Presidencywould un- dertake a comparative study of economic growth and public policy in

East Asia.

This volume is the summary ch. appears

as the first in a series of Policy Rcsearch Reports, which arc intended to bring to a broad audience the results of research on development policy issues carried out by staff of the World Bank.As reports on policy issues, we intend that they should help us to take- stock of what we know and cIealy identifir what we do not know; they should contribure to the de- bat in both the academic and poli-y communities on appropriate pub- lic policy objectives and instruments for developing economies; and they should be accessible tX nonspecialiscs. Because they sunmarize re- search, we also anticipate that Policy Research Reports will provoke far- ther debate, both within the Bank and outside, conceming the methods used and the conclusions drawn. What does this report tell us about the East Asian miracle? The re- seawh shows that most of EastAsias extraordinary growth is due co su- perior accumulation of physical and human capita. But these economies Were also better able than most to allocate physical and buman resources to highly productive investrents and to acquire and master txchnology. In this sense there is nothing 'miraculous" about the East Asian economics' success; each has perfirmed these essential func- tions of growth better than mosr other economies. The eight economics studied used very different combinations of policies, firom hands-ofTto highly interventionist. Thus, them is no sin- gle 'East Asian moder of development. This divcrsity of experience re- inforces the view that economic policies and policy advice must be country-specific, if they are to be effectivec But there arc also some com- mon threads among the high-performing East Asian economies. The authors conclude that rapid growth in each cconomy was primarily due to the application of a set of common, market-friendly economic poli- cies, leading to both higher accumulation and berter allocation of re- sources. While this condusion is not strikingly new, it reinforces other rcsearch that has sressed the essential need for dcveloping economics to ger the policy fundamentals igIL The research also firther supports the desirability of a two-track approach to development policy emphasizing macroeconomic stability on one hand and investments in people on the ocher. The importance of good macroeconomnic management and broadly based educational systems for Easr Asia's rapid growth is abun- dandly demonstrated. The reporr also breaks some new ground. It condudes that in some economics, nainly those in Northeast Asia, some selective interventions contibuted o grwth. and it advances our undersmading of the condi- tions required for interventions to succeed. The authors argue thar where selective intervcntions succceded they did so because of th o es- sential prcrequisites. First, they addressed problems in the functioning of markets. Second, they took place within the contex of good, finda- mental policies. Third, their success depended on the ability of govern- merts to establish and monicor appropriate economic-performance criteria related to the interYcntions-in the authors' terms, to create eco- nomic contests. These prerequisites suggesr that the institional con- text withLin which policies are implemented is as important to their success or failure as the policies themselvcs, and the report dcvotes sub- stantial artention to the institutional bases for East Asi-a rapid growth. While these factors help to explain why apparently sinilar policies did not succeed in mrany other economies, the report also leaves unan- swered many important questions. The market-oricnted asj ctxs of East Asia!s polides can be recommended with few reservations, but the more vi institutionally demanding aspects, stich as contest-based interventions, have nor been successfully used in other settings. Noneconomic factors, induding culture, politics, and history, are also important to the East Asian success story. Thus, there is still much to be learned about the in- teractions between policy choices and inscitutional capability and be- tween economic and noneconomic factors in development. Work in these areas will continue beyond this report. The support of the Government ofjapan for the research program on the high-performing Asian economics is gratfilly acknowledged. The report is a product of the staff of the World Bank, and the judgments made herein do not necessarily reflect the view of its Board of Directors or the governments they rcprescnt.

Lewis T. Preston

President

The World Bank

Augur 1993

vii

Contents

7Te Rear Team xi

Ack3wwkdgmnae xiii

Defmiufons xv

Overview-r The Making of a Miracle

The Essence of the Mirale: Rapid Growth with Equity 8 Policies for Rapid Growth in a Changing World Economy 23

Note 26

1 Growth, Eqrity, and Economic Change 27

Rapid and Sustained Economic Growth 28

Declining Income Inequality and Reduced Poverty 29

Dynamic Agricultural Seaors 32

Rapid Growth of Exports 37

Rapid Demographic Transitions 38

High Investment and Savings Rares- 40

Creatng Human Capital 43

Rapid Productivity Growth 46

Appendix 1.1: Accounting for Growth 60

Appendix 1.2: What Do Tess of Cogniive Skills Show?- 70

Notes 76

2 Public Policy and Growth 79

PolicyExplanations 81

The Functional Growth Framework 87

Notes 103

3 Macroeconomic Stabiity and Export Growth 105

Pragmatic Orthodoxy in Macroeconomic Management 106

Creatng an Export PuLsh 123

Appendix 3.1: Economric and Political Timedines 148

Notes 156

ix

4 An Insitutional Basis for Shared Growth 157

Achicving Legitimacy through Sharcd Growth 158

Insulating the Economic Technocracy 167

Wooing Big Business 181

Notes 189

5 Strategies for Rapid Accumulation 191

Explaining EastAsia's High Human Capital Forrnation 192

Explaining East Asia's High Savings Rates 203

Explaining East Asia's High Investment Rates 221

Appendix 5.1: Granger Causaliy Tests forSavings

Rates and Growth Rates 242

Appendix 5.2: Technical Note on the Relationship beween

Interest Rates and Growth 245

Notes 255

6 Using Resources Efficienty: Relying on

Madrets and Exports 259

Explaining EastAsiais Efficient Resource Use 259

Using the Marken Labor Markets in East Asia 261

Assisting the Markct Financial Markets and Allocation 273 Using the Internarional Market Trmde and Industrial Policy 292 How Manufactured Exports Increased Productiviy 316

Appendix 6.1: Testing dhe Impact of Indusaial

Policy on Productivicy Change 326

Appendix 6.2: Tests of the Relationship berween TFP

Change and Trade Policies 337

Notes 342

7 Polices and Pragmatism in a Changing World 347

Foundations of Rapid Growdh-Getting dhe

Fundamentals Right 347

Creating Institutions to Promote Growdi 352

Intervening in Markets 353

Note 368

Bibligraphic Note 369

The Research Team

T HIS POLICYRESEARCH REPORTWAS PREPARED BYATEAM LED by John Pagc and comprising Nancy Birdsall, Ed Campos, W Max Corden, Chang-Shik Kim, Howard Pack, Richard Sabot, Joseph E. Stiglitz, and Marilou Uy. Robert Cassen, William Easrerly, Robert Z. Lawrence, Petcr Petri, and L-nt Pritchett made major contri- butions. Lawrence MacDonald was the principal editor. Case studies of the seven devcloping high-performing Asian economies werc under- taken under the direction of Danny Leipziger. The tcam was assisted by Maria Ltiisa Cicogniani, Varuni Dayaratna, Leora Friedberg, Jay Gon- zalez, Jennifer Keller, May Khamis, Sonia Plaza, Myriam Quispe, Carol Strunk, and Ayako Yasuda. The work was initiated by Lawrence H. Summers and was carried our under the general direction of Nancy

Birisall.

The editorial-production team for the report was led by Alfred Imlhof The support staff was headed by Sushrma Rjan and included Milagros Divino, Jan-Marie Hopkins, Anna Marie Maranon, and Linda Oehler Polly Means gave graphical assistance. Bruce Ross-Larson and Meta dc Coquercaumont provided additional editorial support The Map was designed by jeffrey N. Lecksel. Mikla Iwasaki coordinatcd work in Japan. XI

Acknowledgments

REPARATION OF THIS REPORT DREW ON SLVERAL OTHER RE- laced research projects. Studies of the Japanese main bank sysrcn and civil service werc carried out under the dirnction of Hyung-Ki Kim. Yoon-Je Cho and Dimirri Vittas directed the project on the effec- tiveness of crcdit policies in EastAsia. Brian Levy directed the project on support systems forsmall and medium-size enterprises in Asia, andJohn Page coordinated projects on lapanese perspectives on public policy dur- ing the rapid growth period, and tax policy and tax administration in

East Asia.

Many individuals inside and outside the World Bank provided valu- able contributions and comments. (Specific acknowledgmcnt of their efifrts is made in the Bibliographic Note at dce end of the book.) Par- ticular thanks are due ro the following senior officials of the economies studied who reviewed and comment"d on an earlier drafc Seung-Chul Ahn, Isao Kubota, Shijuro Ogata, J. B. Sumarlin, Teh Kok Peng, Chilao Tsukuda, Tan Sri Dato Lin See Yan, and Cesar Virata. Vinod Thomas comnmented on several drafts and coordinated the comments of his colleagues in the East Asia and Pacific Region of the Bank. Com- ments by Cad Dahlmaan, Kemnal Dervis, Mark Gersovitz, Ralph W Har- bison, Magdi kskander, Hyung-Ki Kim, Danny Leipziger. Johannes Linn, Gobind Nankani, Mieko Nishimizu, Guy P. Pfeffermann, D. C. Rao, ant Michael Walton contributed to the improvement of the book. Preparation of the report was aided by seminars organized by the In- donesian Economists Association, the Economic Society of Singapore, the Monetary Authority of Singapore, Stanford University, and the World Institute for Development Economic Researeh. The financial as- sistance of the Govemrnment ofJapan is gratefully acknowledged.

Definitions

Economy Groups

OR OPERATIONAL AND ANALYTICAL PURPOSES. THE WORLD

Bank's main criterion for dassifying economies is gross national F product (GNP) per capita. Every economy is dassified as low-in- come, middle-incomc (subdivided into lower-middle and upper-mid- dle), or high-income. Other analytical groups, based on -:gions, exports, and levels of extemal debt, are also used.quotesdbs_dbs27.pdfusesText_33

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