International Political Science
8 October, 2013
World Bank: The East Asian Miracle The East Asian Miracle is described as a historic series of events and policies that led to the economic growth of twenty-three East-Asian economies from the 1960s to the 1990s. Each economy was impacted differently thus the most important due to the degree of change would be: Japan, Hong Kong, Taiwan, Korea, Singapore, Indonesia, China, Malaysia and Thailand. A combination of many policies and government turned these developing nations into industrial leaders of the world. These changes didn’t occur without government stimulation and policy changes, some of which were directed towards market and some towards state. Each policy had to be tailored to a country’s specific dilemma, many of these countries suffered from different problems and had to be addressed as such. Eventually, each of these led to many outcomes which together became the rapid growth of the Eastern Asian economies such as: increase of real income per capita, balancing the margin between income inequalities, human welfare, and more. Government intervention and actions are usually a good thing depending on what the desired outcome is, but too much of it can be detrimental to the welfare of the economy. A balanced amount of stimulation was needed in order to get the economy going, such as limited government spending to limit deficits. A statement from the book that directly relates to the focus of these reforms is “The eight economies studied used very different combinations of policies, from hands-off to highly interventionist. Thus, there is no single ‘East Asian model’ of development. This diversity of experience reinforces the view that economic policies and policy advice must be country-specific, if they are to be effective,” (World Bank) this statement states that each and every economy is different and needs a different form of stimulation. Of course, this stimulation isn’t possible without public action, the populace was encouraged to start saving and invest through tax and high interest rates on loans. Much of elastic spending was lowered due to an increase in taxes on luxury consumption. Government spending on private firms such as construction companies, power companies, etc. created infrastructure and allowed money in the form of wages to trickle down to the populace increasing capital and real gross domestic product. The added encouragement of imported goods proved to be beneficial for the economy thus lowering tariffs on imported goods and increasing consumption. The problems, as stated above, differ from country to country leading to different focuses and actions made by the government. An example include Hong Kong from 1982 to 1983, nine deposit-taking companies failed caused by large exposure to real estate lending, fraud and mismanagement followed by weak prudential regulation and high international interest rates. The government intervened and revamped regulatory and auditing systems that liquidated troubled DTCs, this ultimately led to the restart of the companies. Another example of government intervention is in Japan from 1991, a central bank report estimated the size of problem loans of their top banks to be between 3.5-4.8 percent of their assets, informal estimates suggest the amount to be about 1-1.5% of assets, this is caused by excessive exposure to real estate lending, comprising about ninety percent of bad loans and inadequate supervision of the loaning agents. The government decided to encourage merges of the weak banks with stronger banks which provided loans to the weaker banks for a manageable rate and saved these banks. Further into the actions of the populace, the application of each individual impacted the effect of this economic reform. Human capital is an important asset to the economy and country as a whole, without an educated or trained workforce an economy cannot work. Without workers there can be no wages, without wages there can be no consumption and it just goes on in a cycle. It is important that the country stimulate education and training to accumulate human capital. The countries enforced educational policies on primary and secondary education to increase labor force skills that are needed once an individual gets a job. However, the education and training one received would need to be practical, many of the trainings consisted of vocational training and technical skills that are useful in the workplace. In contrast, the agricultural aspect of the country was in dire need, many going off to the major cities to find an industrial job, farmers were beginning to feel the problems following a large populace and not many to farm and tend to the land. Thus agricultural taxes were alleviated, the government also provided subsidies and vouchers in some cases to stimulate the agricultural workforce and required much productivity. An important aspect of these new policies is the foreign policies, many of these Eastern Asian economies had a bias against exporting their goods and decided to establish a pro-export policy aimed to earn foreign exchange. Utilizing every asset in order to build a stronger economy, these countries exported as well as imported in order to increase foreign investment in their countries’ private firms and increase their real gross domestic product. One change that was brought as a result is technology, the improved technology and innovative ideas of foreign countries allowed the Eastern Asian countries to improve productivity and output. Inevitably this led to foreign investors outsourcing jobs and products to these countries, leading to more jobs, leading to more wages and ultimately a higher standard of living. However, these countries needed to protect their new industries and institutions from foreign competition, evidenced by “Nearly all governments regulate the creation of new financial institutions and the entry of foreign financial institutions to try and ensure that newcomers are solvent and will remain so. But many East Asian governments have gone further, limiting competition and protecting existing both banks from foreign banks and new domestic competitors,” (World Bank) which also states that the East Asian governments decided to protect their banks by restricting competition from both foreign and domestic institutions. When there’s a large increase in foreign investment in a country, it can be difficult to establish new industries or companies because of barriers to entry. When a specific industry is doing well, many will want to join in and maximize profit but the current leading companies, in this case the foreign industries, will want to establish barriers to keep new competitors from profiting. Rent-seeking can become a barrier to entry as well when it utilizes legal barriers, when the firm provides rent-seeking to the government they gain special treatment to create economic profit or to divert consumer and producer surplus away from other firms. Not all economists believe in the miracle that occurred in Eastern Asia, one such economist is Prof. Paul Krugman, celebrated and revered by colleagues as “the most celebrated economist of his generation.” Krugman is convinced that this growth spurt is similar to the growth rates of the Soviet Union from 1920 to 1990. Similarities also include a large increase in resource mobilization. Krugman also notes the migration from farms to industrial cities made by government officials and pushed the workforce, also forcing women to work alongside men for long hours at a time, increasing the growth of human capital via education and cycled output back into making new industries and factories. Krugman believes that the leaders of the Eastern Asian counties have been completely authoritarian, pushing the workforce further, increasing standards of education, investing much physical capital and resources. Krugman says “East Asian is just like the Soviet Union, growth achieves purely through the mobilization of resources.” (Skousen) He also concludes that much like the Soviet Union, this increased growth will slowly diminish due to the physical limits of labor and capital, that it is likely growth in East Asia will continue to outpace growth in the West for the next decade or so, but will not do at the pace of recent years. This effect is known as the law of diminishing returns, the more that one puts into something, overtime the output will become less and less. Arguments about the east asian miracle include those that are skeptical as to the nature of the growth spurt. The book indicates that it was a large amount of effects that caused the spurt, however one source argues:
“The view that investments and exports are engines of growth is based on one empirical and one theoretical argument. The empirical argument is that most East Asian countries [experiencing phenomenal growth rates] enjoy impressive rates of investment and are successful exporters. The theoretical argument as regards investment is that a high investment rate increases [things used to create wealth] and that this can permanently increase the growth rate through [bigger, more efficient factories, larger markets] and other beneficial side effects. In the case of exports, the theoretical argument is that export orientation increases the openness of the economy and, by exposing it to foreign technology and foreign competition, provokes a rapid rate of technological progress,” this indicates that many believe the reason that East Asia has grown so much is explicitly their foreign investments, exports and foreign policies. When the countries enforced more lenient foreign policy in terms of trade and imports, the new ideas, innovation and new domestic industries brought each country more up to par in terms of technology and production thus increasing its production possibilities due to innovation, increasing output and exports to foreign investors and industries. Side effects such as economies of scale occur due to high investment rates and leads to an even bigger peak as more capital is produced. This document provides a very informative and unbiased outlook on the East Asian miracle, providing full explanations of each different issue and remedy for the countries with economic dilemmas. It can be inferred that many will disagree with some of the points made by World Bank due to the general message given that what happened in East Asia was a result of the cooperation of the government, the populace and foreign sources.

Works Cited
Saral, Michael. "Economic Issues 1 : Growth in East Asia." Economic Issues 1 -- Growth in East Asia. N.p., n.d. Web. 08 Oct. 2013.
Skousen, Mark. "How Real Is the Asian Economic Miracle?" : The Freeman : Foundation for Economic Education. N.p., 01 July 1996. Web. 08 Oct. 2013.
World Bank. The East Asian Miracle: Economic Growth and Public Policy. New York, NY: Oxford UP, 1993. Print.