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How might we best account for the economic success of the countries of East Asia in the period 1945 to 1980?

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International Economics 6

International Economics

Introduction

This paper explores the economic success of countries of East Asia between 1945 and 1980. Based on a number of theories and models, it examines the contribution of developed nations like Japan and the culture of East Asian people to growth their economies with least dependence on monetary institutions. East Asian countries that showed remarkable economic growth between 1945 to early 1990s include Taiwan, Singapore, South Korea and Hong Kong. The ‘flying geese’ model and product cycle theory have been used in this paper to point out a unique pattern of development that has been deemed successful. I believe that economic growth of nations is influenced by trade, culture, politics, and the willingness of the population to pursue growth in diversified sectors.

Countries of East Asia in the period 1945 to 1980: The economic success

Countries of East Asia, especially South Korea, were able to advance their economies and achieve economic and human development indicators within a short period. The growth period came in stages where the reconstruction period was in the period between 1945 and 1961 while export-oriented growth period was between 1965 and 1973 (Kimura, 2006). Furthermore, 1974 to 1982 was the crisis and recovery period. To start with, Japan’s remarkable industrial development was achieved through the leadership of state in economic processes between 1925 and 1975. With heavy military expenditures and political turmoil, Japan and Korea’s economic performance has been particularly impressive. Similarly, Johnson (1982) acknowledges that the Japanese industrial policy constituted industrial structure policy and industrialization rationalization policy. I have learned that most of the physical facilities after Korean liberation from Japan remained underutilized in addition to the Korean war of 1950 to 1953 that damaged its economy. However, Korea did manage to pursue import substitution strategy and protectionist trade. Meanwhile, neighboring countries like Taiwan, Thailand and Vietnam also pursued similar strategies.

Theoretically, Akamatsu coined the phrase ‘flying geese’ development pattern in the 1930s to explain the industrialization process of the latecomer economies (Akamatsu, 1962). I think he must have observed a basic pattern of industrial growth and variant pattern in ‘lead goose’ and ‘follower geese’. As a lead goose, I think that Japan became instrumental in creating FDIs in Korea to standardardize and stabilize production. In Product Cycle Theory, Vernon (1966) agrees that countries with comparative advantage were encouraged to take in foreign direct investments (FDIs) and desire to increase intra-industry trade. Furthermore, Kojima (2000) argues that firms that intend to enter import restricting countries undertake FDIs and once they overcome tariffs and trade barriers, they monopolize local markets. I also observed in Akamatsu’s theory that Japan may have played huge role of economic peacemaker in East Asia as opposed to being a policeman. Japan’s economic structure is upgraded and diversified from textiles to steel and to knowledge intensive goods and machinery (Hayashi, 2010).

Singapore embraced democracy and soft authoritarianism because it did not have enough land to feed its people. Instead, it attracted international firms to gain resources, knowledge and capital (Weiss, 2000). Taiwan began with light industry in the 1950s to heavy industry in the 1970s. It then seized the small-and medium sized firms and empowered them to imported materials, access of private firms and control of foreign exchange (Kwon, 1994). Just like Korea, I think Singapore became the financial and trading hub of Southeast Asia after following a different growth path that required use of skilled labor. I have learned that the development of Singapore economy was as a result of liberal-market led development in areas of finance, import refinement and trade. The growth of Asian geese (FDI-led growth) led to purchase of more inputs, capital goods and components from Japan, Korea and Taiwan and shipped to third country markets as exports. I learned that intra-Asian integration was vital in leading to the openness of markets in the European Union and United States as providers of technology and investment.

South Korea catapulted its economy to demonstrate to the North that embracing capitalism was ideologically superior (Vu, 2010). Seoul in 1953 was ridden with orphans, beggars, rubble and gutted buildings and by 1988, it hosted the Summer Olympic Games identified by prosperous middle class, first-class hotels, boutiques and plush restaurants. I believe that could be the reason why the transformation of South Korea is termed as ‘the miracle on the Han’ by some scholars and writers. The government and the people of the Asian tigers transformed their countries from foreign aid dependent in the 1950s to economic powerhouses in the 1980s (Higgot, 1998). Not only is South Korea a leader in production of semiconductors and automobiles but also in ships, shoes, electronic goods, steel and clothes (Lin, 2011). Besides, it is not surprising that a number of factors associated with Korean culture, politics, society and international relations may have played a role in its rapid growth after 1961 (Kimura, 2006). For example, Japan minimized military expenditure and maximized savings terming dependence on foreign aid and enterprise as dangerous. I think the source of the ‘miracle’ is associated with East Asia’s wealth accumulation record and productivity change.

Most of the East Asian countries began to specialize in large scale production of different products that are niche or differentiated in the 50s and 60s (Lee, 2008). In the theory of following, Petri (1988) suggests that diversification of products with intra-industry or industry is justified against opportunity cost. I have learned that East Asian nations were able to upgrade to knowledge-intensive from labor-intensive goods. I suppose that Japan and Korea have similar FG industrial development pattern with some time lag of between 15 an 25 years. Although the EU and the US may have played some role as the lead goose, I think the Asian tigers were keen followers with high degree of innovation to catch-up with differentiated industrial revolution exhibited in many western nations. I think Korea developed a network of interrelations with foreign firms to achieve specialization and intra-industry trade which are characteristic to ‘lead goose’ and ‘follower goose’ principle.

Meanwhile, East Asian nations including Japan and Korea had strong and efficient financial systems as well as established regional buffer institution to prevent attacks on currency markets and stocks (Lee, 1995). Based on the FG development model, these may have contributed to a spread of economic growth tentacles to North Korea, India, Pakistan and ASEAN members (Myanmar, Laos, Cambodia and Vietnam). I think the FG pattern of desirability and development of Asian values is not in doubt. I believe that Asian nations witnessed rapid growth after contagious financial crises. I have learned that the flying geese model was developed to illustrate how Asian countries between 1945 and 1980 were able to pursue technological development. Strong growth in domestic investments explains the success in economic growth of East Asian countries as they stimulated investment behavior (Rodrik, 1994). I feel in the weight of deeper reforms, the legal, political, and social regimes as well as in the production system of East Asian nations was stable. I also think that Asian countries enlarged their regional division of labor and innovation of new products and technology.

Conclusion

East Asian countries, unlike many other developing countries, underwent dramatic improvement in the growth of their economies between 1945 and 1990. A number of factors may have contributed to this peculiar growth path. Using the flying geese model, countries such as Japan may have influenced the growth of ASEAN 4 and the Newly Industrializing countries of South East Asia. Lee (1995) underscores the role of educated workforce, Foreign Direct Investment (FDIs) and comparative advantage as the key factors in economic development of these East Asian nations. I think Japan, being an industrialized nation, created technological outflows and markets for cheaper goods from most of the East Asian nations. As a result, they were able to develop faster and attain the status of newly developed nations.

Reference list

Akamatsu, K 1962, A Historical Pattern of Economic Growth in Developing Countries, Journal of Developing Economies, vol. 1, no. 1, pp. 3-25.

Hayashi, S 2010, The Developmental State in the Era of Globalization: Beyond the Northeast Asian model of political economy, The Pacific Review, vol. 23, no. 1, pp. 45-69.

Higgot, R 1998, The Asian Economic Crisis: A study in the politics of resentment, New Political Economy, vol. 3, no. 3, pp. 333-356.

Johnson, C 1982, MITI and the Japanese Miracle: The growth of industrial policy, 1925-1975. Stanford, Stanford University Press.

Kimura, F 2006, International Production and Distribution Networks in East Asia: Eighteen facts, mechanics, and policy implications, Asian Economic Policy Review, vol. 1, no. 1, pp. 326-344.

Komija, K 2000, The ‘flying geese’ model of Asian economic development: Origin, theoretical extensions, and regional policy implications, Journal of Asian Economics, vol. 11, no. 2, pp. 375-401.

Kwon, J 1994, The East Asia Challenge to Neoclassical Orthodoxy, World Development, vol. 22, no. 2, pp. 635-644.

Lee, CH 1995, The Economic Transformation of South Korea: Lessons for the 29 Transition Economies, Development Centre Studies, Paris, Organisation for Economic Cooperation and Development.

Lee, YW 2008, The Japanese Challenge to Neoliberalism: Who and what is ‘normal’ in the history of the world economy? Review of International Political Economy, vol. 15, no. 4, pp. 506-534.

Lin, JY 2011, New Structural Economics: A framework for rethinking development. The World Bank Research Observer, vol. 26, no. 2, pp. 194-221.

Petri, PA 1988, Korea’s export niche: origins and prospects, World Development, vol. 16, no. 2, pp. 47-63.

Rodrik, D 1994, King Kong Meets Godzilla: The World Bank and the East Asian Miracle, CEPR Discussion Paper, 944, London, CEPR.

Vernon, R 1966, International Investment and International Trade in the Product Cycles, Quarterly Journal of Economics, vol. 80, no. 2, pp. 190-207.

Vu, T 2010, Paths to Development in Asia: South Korea, Vietnam, China and Indonesia, Cambridge, Cambridge University Press.

Weiss, L 2000, Developmental state in transition: adapting, dismantling, innovating, and ‘normalizing’, The Pacific Review, vol. 13, no. 1, pp. 21-55.