Session 3

World Bank, The East Asian Miracle, 1993, pp. 1-26

Suar!: The paper explains the reason for the high rates of growth of East Asian economies
as a result of "good governance and policies" and lists out all the things which these economies
did right as a policy prescription for other developing nations.
The issue: 23 East Asian Economies (of which the most important are the igh performing Asian
Economies ! "AEs! #apan$ ong %ong$ %orea$ &ingapore$ Taiwan$ 'hina$ (ndonesia$ )alaysia$
Thailand* grew faster than all other regions of the world +etween ,-./!-0 and this was reflected
in:
1apid and sustained growth of real income per capita
2ecreasing income ine3ualities
1apid demographic transitions
uman welfare increased dramatically (life expectancy$ poverty levels etc.*
2ynamic agricultural sector (rapid growth and productivity improvement in even while
agriculture was declining in relative importance*
1apid export growth
igh levels of "rivate domestic investment sustained +y high levels of domestic financial
savings
1apidly growing human capital
2ynamic industriali4ation (success in allocating capital to high yielding investments and at
catching up technologically to the industrial economies*
"u#lic policies responsi#le $or %&ettin& their $undaentals ' #asics ri&ht%(
The government intervened systematically through multiple channels to foster development. 5ut
it never let the cost of that intervention +ecome too excessive nor were they continued +eyond
the minimum possi+le. Thus the governments used policies ranging from mar6et oriented to state
led that varied across economies and time. All policies can +e seen as 7undamental or &elective
depending on how they change the economic structure of the country.
1. )ood acroeconoic ana&eent'sta#ilit!(
8imited fiscal deficits
(nflation under control (moderate and predicta+le*
&ta+le interest rates
2. *ncreased sa+in& and in+estent(
Esta+lished and financially supported government +an6s
)ade it more accessi+le to non! traditional savers (lowered transaction costs*
Encouraged private savings through tax incentives and compulsory provident funds
)aintain high pu+lic savings
igh interest rates on loans for consumer items
&tiff taxes on luxury consumption
'reated complementary infrastructure for private investments (e.g. "ower$ highways*
8ow tariffs on imported capital goods and price distortion in favor of capital goods
'reated long term credit (development* +an6s
"ro9ect selection left to the +an6s to prevent +ad de+ts (stress on performance criteria*
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3. Education polic! ,accuulate huan capital-(
7ocused on universal primary and secondary education to generate rapid increases in la+or
force s6ills
8imited pu+lic funding of post secondary education focused on technical s6ills.
)ade pu+lic investment in applied research
.. A&ricultural polic!(
&tressed productivity
2id not tax the rural economy excessively.
/. E0port prootion policies(
Although all "AEs +egan with a period of import su+stitution and a strong +ias against exports$
they soon esta+lished a pro!export regime aimed at earning foreign exchange.
"rice distortions due to such policies 6ept within reasona+le limits
:pen to foreign ideas and technology
;elcome foreign direct investment
2eveloped export mar6eting institutions
Exchange rate protection to 6eep exports competitive despite domestic inflation
8i+eral export credit
2uty free imports for exporters
Tax incentives to exporters
6. Selecti+e industrial prootion(
The governments "led the mar6et" in critical ways. )ar6ets consistently fail to guide investment
to industries that can generate the highest growth for the overall economy. The governments
remedied this +y deli+erately "getting the prices wrong" ! altering the incentive structure! to +oost
industries that would not have otherwise thrived (capital and 6nowledge intensive industries*.
Targeting and su+sidi4ing credit to select industries.
%ept deposit rates low and maintained ceiling on +orrowing rates to increase profits and
retained earnings
"rotected domestic import su+stitutes
&u+sidi4ed declining industries
;ide information sharing +etween pu+lic and private sectors
<eutral incentives regime
1. 2i&h 3ualit! 4i+il ser+ice(
Economic contests re3uire competent and impartial referees! that is strong institutions. Thus a
high 3uality civil service that has the capacity to design and monitor performance is essential to
contest +ased competition. &ome of the features of the civil service were:
Technocrats
(mpartial
(nsulated from political interference.
5. 6ature o$ leadership
8eaders of "AEs have tended to +e either authoritarian or paternalistic +ut they were willing
to grant a voice and genuine authority to a technocratic elite and 6ey leaders of the private
sector
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Explicit methods used to help new capital and entrepreneurs +y the leaders li6e land reforms$
deli+eration councils (to coordinate the actions of the government and the private sector*.
This along with the education policy was primarily responsi+le for reduced income ine3ualities
1educe wasteful rent see6ing
<ot responsive to demands of organi4ed la+or for minimum wage legislation. (nstead
focused on 9o+ generation thus reducing unemployment
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