Sunday, July 28, 2013

The making of an Asian tiger

The remarkable economic success of the ‘Asian Tigers’ (South Korea, Taiwan, Singapore and Hong Kong) has long fascinated the world, Asia in particular. The Asian Tigers resurfaced during the May general election campaigns, when PML-N chief Mian Nawaz Sharif claimed that if voted into power, his party would make Pakistan an Asian Tiger.

How did the Asian Tigers become an economic success story? This question warrants an overview of the public policies that facilitated their fast and sustained economic growth. Initially, the policies and economic plans adopted by the Asian Tigers were not much different from the policies and plans pursued by Pakistan. For example, South Korea started its journey towards economic takeoff with import substitution.

It is said that South Korea even followed the initial development plans of Pakistan. But then the roads diverged. The Asian Tigers sustained their economic growth at least for three decades since their takeoff in the 1960s whereas our economic growth proceeded in fits and starts. The Asian Tigers witnessed, on average, more than a seven percent growth rate between 1960 and 1990. In 1990, their share in the economy of the developing world was almost 34 percent.

Several explanations have been put forth for the unprecedented economic growth of these countries. Literature on this subject traces the roots of their economic takeoff to the colonial period. Umesh C Gulati, in ‘The foundations of economic growth: the case of four tigers’, writes that Korea and Taiwan witnessed much higher economic growth rates under the Japanese than did India under the British rule during 1910-1945. While India experienced long stagnation in the first half of the 20th century, the economic growth rates in Korea and Taiwan were slightly higher than even their coloniser, ie Japan.

Professor Dani Rodrik has also emphasised the role of ‘initial conditions’ in their economic takeoff. According to Professor Rodrik, education and human development indicators of these countries were much higher compared to other developing countries even prior to their economic takeoff. Distribution of land and income was comparatively more equitable due to early land reforms.

The argument goes that the economic miracle of the Asian Tigers was mainly due to their ‘initial conditions’. Skilled workforce and comparatively equitable distribution of resources provided an impetus to the growth process. Politico-strategic factors are also cited as an explanation for the Asian economic miracle. Three arguments are cited to support this thesis.

First, the US provided firm support to South Korea and Taiwan due to its geopolitical interests in the region. Second, Korea, Taiwan and Singapore enjoyed a great deal of political freedom to deal with the rent-seeking preferences of the bureaucrats and other vested groups due to authoritarian regimes in these countries.

Park Chung-hee in Korea and Chiang Kai-shek in Taiwan are particularly credited with steering these countries out of poverty and put them on the path of sustainable growth. Third, timely land reforms in South Korea and Taiwan helped eliminate a potential source of opposition to industrial initiatives. According to Joseph Stiglitz, land reforms were also vital in the initial stages of development at least from three angles.

First, land reforms increased rural productivity and income, increasing domestic savings as a result. Second, higher incomes resulted in higher demand for goods. This was needed before finding demand for goods in the outside world in the form of exports. Third, redistribution of income contributed to political stability, an important factor for creating an environment for domestic and foreign investment. Political stability, vision of the leadership, support of the US, and ‘growth with equity’ were factors that helped achieve sustained economic growth in these countries.

The third broad explanation for the economic success of the Asian Tigers is the proactive role of the state in economic development. The governments of these countries made liberal use of industrial policies. They invested in ports, transportation, and telecommunication. For example, Singapore focused on an adequate supply of electricity and on developing an effective telecommunications system that proved instrumental in making it a financial hub.

The governments of these countries created markets rather than replacing them. For example, postal saving banks were created to channelise domestic savings and development banks were established for the rationing of credit on the basis of well-defined and transparent parameters.

Priority industries were given preferential access to capital, credit and foreign exchange. The governments also provided subsidies, such as provision of credit at lower interest rate, to the favoured industries. “Governments actively encouraged firms to export. Exports provided a performance-based criterion for allocating credit, encouraged the adoption of international standards, and accelerated the diffusion of technology. Contests among exporters were widely used as incentive devices,” wrote Professor Stiglitz in one of his articles.

Now the question is: what lessons can we learn from the development stories of the Asian Tigers? First of all, we need to appreciate that much of their focus was on the development of human resources by investing in education and training of their people. For example, in South Korea, the expenditure per student at the primary level increased by 355 percent (in real terms) from 1970 to 1989, whereas in our case, the increase was just 13 percent during the same period. We need to realise that our people are our real asset. The youth bulge can become our competitive advantage if we invest in human resource. But unfortunately our public spending on education, training and health of the people is perhaps among the lowest in the world.

Equitable distribution of resources and incomes, on the pattern of the Asian Tigers, is a must for political stability. In our case, both regional and class gaps have widened with the passage of time. Wide economic and social disparities can never result in sustainable growth. Three areas can be considered for policy focus to ensure equitable economic growth. First, effective land reforms; second, highly progressive taxation and increasing social security nets; and third, huge investments in education and training of the youth.

Unfortunately, in our case, land reforms failed to bring about any visible change in the economic and political landscape of the country. Taxation, though progressive in theory, failed to redistribute resources mainly due to a narrow tax base, huge exemptions, and policy bias towards indirect taxation (sales tax, customs etc).

To follow in the footsteps of the Asian Tigers, we need to invest more in education and training. For an export-push strategy, like the one followed by the Asian Tigers, we need to identify some niche areas for exports. Integration with the world economy is possible by diversifying our exports as well as their destinations. This means that we will have to go the extra mile to deepen trade relations with our regional partners.

We need to fix our tax system to raise revenues required for investment in infrastructure. Improving the investment climate is also highly important to attract domestic and foreign investment. We need to take steps to harness the dynamism of the private sector, which should be in the driving seat of the economy since economic growth led by the private sector can guarantee employment opportunities for the youth. Growth without jobs is not long lasting, and sustainable economic growth should become an overarching priority for our rulers.

If our political elite show a long-term commitment to economic and political reforms, and remain undeterred in the face of pangs that arise out of the reform process, Pakistan has every potential to emerge as an Asian Tiger.

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