East Asia's success stems partly from the policies adopted and partly from the institutional mechanisms created to implement them
While leaders of the high-performing Asian have tended to be either authoritarian or paternalistic, they have also been willing to grant a voice and genuine authority to technocratic elites and to key leaders of the private sector. Unlike authoritarian leaders in many other economies, leaders in the HPAEs realized that economic development requires cooperation.
To establish their legitimacy and win popular support, 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.[1] First, leaders had to convince economic elites to support pro-growth policies. Then, 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.
Explicit mechanisms were used to demonstrate the intent that all would have a share of future wealth. Korea and Taiwan (China) carried out comprehensive land reform programs; Indonesia used rice and fertilizer price policies to raise rural incomes; Malaysia introduced explicit wealth-sharing programs to improve the lot of ethnic Malays relative to the better-off ethnic Chinese; Hong Kong and Singapore undertook massive public housing programs; and in several economies, governments assisted workers' cooperatives and established programs to encourage small and medium-size enterprises.
These wealth-sharing measures have differed from the typical redistributive approach of most developing economies. Rather than granting direct income transfers or subsidizing specific commodities (for example, food or fuel), HPAE governments improved public infrastructure and housing, initiated land reform, and promoted labor-intensive sectors.
To tackle coordination problems, leaders needed institutions and mechanisms to reassure competing groups that each would benefit from growth. The first step was to recruit a competent and relatively honest technocratic cadre and insulate it from day-to-day political interference.
Leaders in the HPAEs also built a business-friendly environment. A major element of that environment was a legal and regulatory structure that was generally hospitable to private investment. Beyond this, the HPAEs have with varying degrees of success enhanced communication between business and government. Japan, Korea, Malaysia, and Singapore have established forums, or deliberation councils, in which private sector groups are invited to help shape and implement the government policies relevant to their interests. In contrast to lobbying, where rules are murky and groups seek secret advantage over one another, the deliberation councils promote a level playing field by facilitating the transmission of information to the private sector in a democratic way. In Japan, the councils are intended to make allocation rules clear to all participants.
Education is arguably the most important of the HPAEs' wealth-sharing, opportunity-creating mechanisms. The goals of universal basic education and wide access to secondary and higher education contributed substantially to opportunities for upward mobility. This mobility makes the general population more accepting of the market-oriented policies needed to foster growth.
Theory and empirical evidence suggest that widespread ownership of land not only improves equity but also improves land productivity. All the HPAEs with substantial agrarian sectors have widespread land holding, resulting from either traditional ownership patterns (Indonesia and Thailand) or land reform (Japan, Korea, and Taiwan, China). Malaysia, with a relatively small population and ample land, is an exception; there, corporate-owned plantations have dominated agricultural output since the colonial era. Hong Kong and Singapore have almost no agricultural sector.
Korea and Taiwan (China) began land reform under broadly similar circumstances. In both cases, authoritarian governments facing a communist threat were dependent on the assistance of the United States, whose advisers urged them to adopt more egalitarian land holding. In Taiwan (China) the government seized land from the landlords, compensating them with shares in state enterprises. It then sold the land to the tillers at favorable credit terms and favorable prices. The government then helped the tillers upgrade production for domestic and export markets. The program worked economically and politically. Land reform helped Taiwan (China) achieve one of the world's most equitable income distributions.
Just as numerous small land holdings improved equity and efficiency, the HPAEs benefited from a profusion of small and medium-size enterprises (SMEs). The large number of SMEs generally reflected market forces rather than government intervention. But several of these economies supported SMEs with preferential credits and specific support services. Rapid growth of labor-intensive manufacturing in these firms absorbed large numbers of workers, reducing unemployment and attracting rural labor. As firms shifted to more sophisticated production, efficiency rose and workers' real incomes increased.
Support for SMEs has been most explicit and successful in Taiwan (China). There, SMEs comprise at least 90% of enterprises in each sector. Other HPAEs have also encouraged SME industries. Japan has directed enormous financial resources toward developing small and medium-size enterprises. In 1989, SMEs accounted for about 52% of both manufacturing value added and sales in that country.
Two HPAEs, Hong Kong and Singapore, intervened heavily in housing markets. By providing low-cost housing for the majority of residents, both programs have helped to decrease inequality and minimize social unrest, thus providing the long-term stability attractive to investors. Moreover, the massive construction effort created jobs when both economies faced high unemployment; subsequently, the wide availability of low-cost housing for workers helped to hold down wage demands, subsidizing labor-intensive manufacturing.
While insulation of the technocracy may be necessary, it is hardly sufficient in the long term. To sustain growth, a bureaucracy must have the competence to formulate effective policies and the integrity to implement them fairly. The more policymakers attempt to fine-tune the economy, the greater the need for competence and honesty. Among the HPAEs, Japan, Korea, Singapore, and Taiwan (China) have been successful in building competent bureaucracies. The Southeast Asian newly industrializing economies have gradually introduced measures to upgrade theirs, with Malaysia in the forefront of the process. Corruption and bribery, while not absent, have been less frequent and smaller in these HPAEs than in other low- and middle-income economies.
The most successful bureaucracies have not relied on work ethic alone. HPAE bureaucracies have employed several mechanisms to increase the appeal of a public service career, thereby heightening competition and improving the pool of applicants. The overall principles of these mechanisms, readily applicable to any society, are: