Classical economics theory believes in a
market led system built on a foundation of three principles; appropriate
incentives, private property and a stable macro-economic environment. In line
with this, development would mean leveraging products that add value, created
by putting capital alongside labor. In order for market forces to operate
properly, incentives are vital, as are stability and private property because
promised rewards fail to materialize without them. However, this economic
system inexorably leads to social injustice, inequality and elitism, which
needs to be addressed in order to preserve trust in the system and carry it
forward. State led explanations on the other hand, believe that markets are means
to deliver economic progress but need to be properly regulated by the state in
order to promote sound markets. In summary, the state enforces boundaries as to
where the market can operate and is able to influence the final outcomes.
Fledgling industry protection is another way the state tries to create the
space from which developing countries can build capabilities, by investing in
productivity enhancing factor inputs. Development can be sustained by investing
in social capabilities, some of which may require constraining parts of the
market. While there are arguments for the validity of both of these theories
and to an extent both of those apply to East Asia, I believe that the ratio is skewed
more towards the state led explanation.

China, Korea, Taiwan, Hong Kong, Singapore
and Japan, more commonly referred to as East Asia have seen remarkable economic
success over a long period of time, especially when compared to other
developing regions. At the first glance, these countries are all very
different. Some are small city states (Hong Kong) while others are large
(China), some are culturally diverse (such as Singapore) while others are
culturally homogenous (Japan). But most of all, each economy has a different
culture and history and has reached this point by treading on very different
paths. The one thing that is common amongst them all is the role of their
respective governments in acting as a catalyst for economic growth. In some,
authoritarian governments gave way to democracies while others are still governed
under autocratic rule. For all the countries, there was a focus on savings,
education and hard work; the markers of classical economic explanations for
growth. However, the presence of their respective governments in these policies
and many more cannot be discounted, as a result state led explanations have had
more influence here. Autocratic or democratic, government rule and regulations
are what led to economic growth.

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Let us take Japan as an example. Japan
adopted and then adapted economic systems that were already successfully
established around the world. Modelling its bank after Belgium, army after
Germany and so on, Japan put its own take on its “imported” institutions and
systems. Placing the utmost importance on learning as well as opening itself up
to the various technologies around the world, Japan learnt from abroad and then
inculcated these learning into the heart of Japanese culture. Japan quickly
established the basics for a market economy, making sure it was able to provide
property rights, contract law, financial systems and a lack of corruption for
businesses. Having access to these tools helped small firms get on their feet
quickly. While the government gave benefits to almost every sector in order to
boost it, Japan’s lack of trade protection for certain sectors assured their
high performances and success. Firms learnt how to be nimble in order to
compete and survive. Industries like services on the other hand, were protected
by the State and did not grow as rapidly or efficiently. Japan’s keiretsu model
effectively linked companies across the board, shutting shareholders out and
giving absolute power to the management of the company, shutting down any and
all classic economical checks and balances. However, Japan has found great success
in this model and has used it to elevate its economic and political standing.

Korea, having been ruled by Japan, got a
jump start on its industrialization initially as a support system for Japan.
This leads to a large number on industries and firms being started when
occupied by Japan, modeled on Japanese businesses. After getting freedom and
separating from North Korea, for a few years nothing really happens (economics
wise) in South Korea till Park Chung Hee stages a coup and takes over as
president. He maintains control of the economy till he passes away, being
involved in a very hands-on manner. Focusing on education, infrastructure,
technology and innovation, he takes South Korea to where it effectively is
today. Korean chaebols work similarly to Japanese kieretsu’s, with companies
and businesses being connected to each other. The policies changed after Park’s
death and South Korea has slowed down its economic growth rate somewhat. It
remains to be seen if it can continue a similar appropriate rate as ademocracy.

 

Throughout South Korea’s economic
development, the state kept a large role in business, directing policies and
credit to favored firms while financially or legally punishing other firms from
time to time. This authoritarian stance can be largely attributed with lifting
South Korea’s economy up and helping them break the vicious cycle of
instability and poverty. By having such a government after the coup, the state
was able to accumulate its resources and then mobilize them into specific channels
which were then used to catalyze productivity growth. Policies such as trade
liberalization, institutional and policy reform and a focus on human and
physical capital were established by the State in order to speed up growth. The
government put greater emphasis on long run growth, often sacrificing civil
liberties and freedom of expression for its sake. By improving the quality of
financial systems and giving potential investors protection as well as putting
in regulations, the government was able to foster an environment for
investment. The government sought to create markets where they did not exist,
by directing investments and deploying resources strategically. By following an
“open door” policy for technology and being flexible and adaptable with respect
to innovation from all around the world, South Korea had an edge over countries
such as China who were shut off from the world for some time. As a result of
instituting these policies to create macroeconomic stability and an atmosphere
instrumental for ensuring political stability, South Korea was able to grow by
leaps and bounds, because of an authoritarian government.

Taking a look at Singapore, we have a
similar story of a country that threw open the doors to foreign investment,
while the government had majority or entire ownership of a lot of leading
firms. According to World Bank data, it is towards the top of the charts for
government efficiency, spending, healthcare costs as well as education. The
government has a tight hold on the country, with the state even trying to fix
millennials dating lives. Lee Kuan Yew’s vision for the country made Singapore
the country it is today, with quite a few state controls on citizens not
usually observed or accepted in the western world. Policies instituted by the
state legally and financially (tax regulations) attracted investors from all
over the world which is what Singapore, a country lacking in natural resources
was aiming for. These attractions did come with moves like restraining labor
unions and consolidating the rest into one umbrella and a steady limitation of
civil liberties and human rights that would be unacceptable to the western
world. And it is beginning to show in the country. While Singapore today is one
of the world’s fastest growing economies, and the effectiveness of the state’s
free market, education and globalization policies is undeniable, citizens are
starting to want more. Income disparity is glaring and citizens are
increasingly becoming restless with no way of being able to express it legally.
Happiness amongst citizens is another issue the country is facing that is at
the least an indirect effect of its policies and no change seems to be in
sight.

The problem with authoritarian governments
is that you never know until it’s too late if they will work in favor of the
country and its citizens progress. Ideally, an authoritarian government should
have an economically literate strong leader with an equally capable team around
him along with a governing system in place that allows for top down coherent
and flexible decision making. While certain countries (such as South Korea and
Singapore) definitely fell into this category, countries such as North Korea
are on the opposite end of the spectrum. While the government in North Korea is
higher up on the authoritarian scale, things have not worked out at all for
North Korea. It has become a totalitarian state, absolutely shut off from the
rest of the world. This also means that there are finite chances for economic
openness or reform, even with its neighbor, South Korea. Although there is not
a lot of data, according to the CIA factbook, North Korea is ranked 215 out of
230 countries when it comes to GDP per capita comparison. Most of its funds are
allocated to military research and spending, draining away resources
desperately needed for investment and civilian consumption. Manufacturing,
industrial and power outputs have ceased to grow for years from a fraction of
pre-1990 levels, with no improvement in sight. The famine in the mid 1990’s is
said to have caused the deaths of a big percent of the population. Domestic
production of food still does not satisfy demand and a large percent of the
population is malnourished and living in poor conditions, with no hope in
sight.

China has faced terrible consequences of
authoritarian rule as well. Mao’s “Great Leap Forward” caused terrible
consequences for industries such as agriculture that caused the famine leading
to 25-30 million excess deaths. Overall economic output fell, further
distancing the gap between what Mao promised and what was actually delivered.
Moreover, this started a period of isolation from the rest of the world as the
Soviet Union cut off all ties with China. This further worsened the economic
situation as there was no knowledge or technology transfer between China and
the rest of the world. Mao’s experiments disrupted the lives of millions,
without any kind of outcome which might have justified the disruption. His
cultural revolution was just as bad, with greater reaching social, cultural and
political ramifications. Politically, he alienated the idea of one leader from
the party manifesto, along with ousting some very talented political leaders as
well as causing widespread fear and distrust of the government. Groups of
students as well as Red Guards attacked people openly on the streets, accusing
them of wearing “elitist/bourgeois clothes”. Intellectuals and party officials
were systematically purged with “imperialist signs” being removed. In essence,
the Cultural Revolution debilitated the economy, ruined millions of lives and
plunged China into 10 years of bloodshed, mayhem, hunger and stagnation.

 

In summary, I believe that East Asia’s
growth and success can be credited to the authoritarian rule commonly found in
these countries, as well as the state led economic policies, a fact that South
East Asia has tried to replicate without success. In economies prone to rent
seeking, unstable financial systems and an inefficient legal system,
authoritarian rule seems to foster growth more than democracy. As in a
democracy, an element of luck is also involved when it comes to the leader of
the country and is as important.