Uniwersytet Warszawski

Adrian Nikolov

Is there an alternative to the Washington consensus?

The cases of Singapore and Taiwan

Developing Countries in International Relations (Instructor – dr. Jakub Zajączkowski)

Warszawa 2012

Adrian Nikolov 2012 1. Introduction

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Most of the time we associate the idea of economic success with the Western world, especially Western Europe and USA. There is where the economic theory which dominates on a world scale now emerged, took its form, diverged and proved itself to be working and ensuring common good and maximum progress. And, with the advancement of the Western world, followed first by colonization, and after the end of the colonial age by the processes of globalization, the economic and developmental model of the Western world has spread and was implemented around the world, with variable success. Of course, here I talk about the classical “formula of success”, which could be roughly be described as “economic liberalism, free market economy plus elective democratic government model with division of power”, which is widely recognized for the chief reason for the economic power of the West. More or less, all modern western economic theory revolves (mainly on the axis more-taxes/government control vs. less taxes/government control) around this model; today hardy any sane German and Norwegian, even though defining himself as left-aligned, will state that he follows the prescriptions of Karl Marx. However, there is a slight catch, which prevents us from stating unequivocally and without any doubt that “liberalism + democracy = success”. There is one element missing from this equation, and it is western, European or europeanized culture. The failure of the extreme-left economic model left us with the impression that there is no alternative to liberalism. Somehow, though, a number of countries, most of them located in East Asia managed to prove this impression wrong, by achieving record economic growth (and maybe accumulated people's happiness?) following its own economic model, which includes nether free market economy, nor a “free representative government” (or at least the western concept of it). The current paper aims at investigating two cases of unprecedented success – Singapore and Taiwan, as they are the most notable of them – showing the similarities and unique strengths and weaknesses of their developmental models, as well as
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confronting them with the classical liberal democratic model and the thesis that it is the only possible way to prosperity and success.

2. The liberal approach to development – in brief This section aims to set a starting point of the paper by describing the “usual” approach towards economic development, which will be later compared to the “nontraditional” approaches. This model is what we are used to calling Washington consensus: a rather well-defined set of economic and political prescriptions for developing countries or countries which passed through a crisis, which are both a “way out” of economic failure, but sometimes also a prerequisite for receiving aid from the developed world1. It has a few core concepts – the first and most important one is the general withdrawal of the state from the economy, through a few important steps – reduction of taxes to levels, which are deemed appropriate for a “free market”, combined with privatization of previously state-owned enterprises and cutting public spending, directing the flow of government investment to strategic industry programs, and, implementing appropriate legislation in order to ensure fair competition between the different subjects on the market, this including both domestic and foreign trade, thus exposing the state to the international market on equal basis with the other businesses in it (including the possibilities and competition rules for foreign investment, not allowing protectionism), and, in general, deregulation2. The other big group of rules addresses the issues not on the market, but on governmental level, these including ensuring democratic elections, open to parties aspiring to join the government, transparency of the decision making processes and lobbying of interest groups, and, most importantly, fiscal stability, ensured by continued fiscal policy. There can be no doubt that this model has worked successfully for many countries,
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For a detailed description of the Washington consensus, see Williamson, John, Latin American Adjustment: How Much Has Happened? Chapter 2: What Washington means by policy reform? Peterson Institute for International Economics, November 2002 available on
http://www.iie.com/publications/papers/paper.cfm?researchid=486
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See economic definition according to the Center for international development of the Harvard University, http://www.cid.harvard.edu/cidtrade/issues/washington.html

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especially in the post-soviet space and in Latin America. But is it the only path to prosperity?

3. Alternative approaches Basically, the answer to this question is yes and no in the same time. While regimes, relying purely on government regulation like North Korea and Cuba are either surviving only on the basis of military strength and aggression, or are forced to reform in order to survive, there are a few interesting examples of countries, who manage to employ “hybrid” developmental models, which ultimately lead to unprecedented growths and stability.

3.1 Singapore's “Authoritarian capitalism” Singapore is probably the most clean and straightforward example of eastern type of authoritarian or “command capitalism” and is rather useful as an example, for a few reasons. First of all, it has seen gradual development of its economic policy and state structure, having a purely communist regime as a starting point, since the 1960's, but never lived through a big, regime-changing revolution, like most of the postauthoritarian states have (i.e. the post-soviet states, North Africa after the Arab Spring etc.), and for that reason it is easy to see the evolution of the developmental model3; Singapore is also a rather small (in comparison with most states in the region) citystate with small population (a little above 5 million people), and, like in all small societies, it is rather easy to see the effects of even small policy changes. Singapore's political system is based on the Westminster model, common for all the former colonies of the United Kingdom. Its key characteristic is the first-pass-the post type electoral system, which in western-type democracies usually creates stable majority parliaments with consolidated opposition, but in general maintains a two state-

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For more historical information on Singapore see http://www.nationsonline.org/oneworld/History/Singapore-history.htm

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wide party model4. In contrast, ever since Singapore became an independent country, the parliament is dominated exclusively by one party – The People's Action party, a party of a rather left character, which in practice is holding all the important offices and positions in the government. The reason for this is another characteristic of the Westminster model – the ruling majority in parliament forms the executive branch of power (for as much as we can say that the Westminster model has any division of political power), and the opposition has no access to executive offices; furthermore, in a typical Westminster democracy (here Singapore is no exception) once the parliament forms the executive body, its role is degraded to that “rubber stamp” of the legislative proposals of the ruling party. In Singapore's case the PAP has led this principles ad extremo, because it has inherited many of the characteristics of an Eastern type left-authoritarian/communist party5, mainly the leadership principle – the party has had only two leaders since Singapore's independence, and the post is transferred not through in-party elections, but rather as a bloodline heritage. The party's structure itself is also formed in a rather communist fashion – the majority of the population is party members, but there is a privileged “party core”, where the decision-making process takes place. Furthermore, PAP has a closed and completely opaque system of committees and councils, which double all the official government institutions and in practice execute the actual decision-making and government. The similarities between the “true” communist regimes and Singapore's government model do not end with the single-partism are visible also in the social structure and climate of the country6. Talking about civil liberties, there is no free media whatsoever; even though most of television and radio channels and newspapers are privately owned, the companies have strong ties to the government and in most cases even rely on government funding, so in practice the “fourth branch of the government”,
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For a description of the Westminster model of government, see http://www.dadalos.org/int/parteien/grundkurs4/gb/westminster.htm 5 In this case I find it more appropriate to quote not a single article, but a rather big number of articles on Singapore's current politics and the structure and political behavior of PAP published in “The Economist”, which can be found on http://www.economist.com/topics/peoples-action-party 6 Best seen in the globally recognized yearly Freedom House Reports; the one for Singapore for 2011 can be found on http://www.freedomhouse.org/report/freedom-world/2011/singapore

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which in western democracies is considered to be a prerequisite for the normal functioning of a democratic system, does not exist. Furthermore, there is extensive control and restrictions over the use of the Internet, as, due to the widespread access to it and its inherently democratic structure, it can become an alternative to traditional media. Criminal legislation is rather harsh, as it prescribes mandatory capital punishment for grave crimes, such as murder (and, curiously enough, rape), but also disproportionately long prison sentences for lesser crimes such as stealing. Of course, these cannot be perceived as solely negative trends – for example, as a result of these policies, Singapore is one of the countries in the world with lost corruption rates7, which improves the efficiency of both the government and the private sector of the economy. So far, we have seen the usual picture of a rather totalitarian political regime, implemented in Singapore. Such regimes are usually associated with low economic efficiency and for that reason rather low collective population wealth and economic characteristics in general. But, this is not the case of Singapore, and the reason for this is the unique economic policy, implemented by the government for the past decades, which definitely belongs not to the socialist side of the specter, but to the liberal one. Singapore's separation from Malaysia in 1965 meant that it has been essentially cut off from its usual markets, so the country needed a new macroeconomic strategy in order to survive. Because of its strategic location (on the southern “tip” of Malaysia, and midway between Indonesia, the Philippines and continental Asia), the first and most obvious choice was international trade and logistics. In order for trade to be efficient and to bring profit, however, most of all it requires deregulation and removing of all the barriers and obstructions, and so was the legislative choice of the Singapory government8. Once that foreign capitals and goods started flowing through Singapore's economy, the developmental path for the country
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Singapore has the 5th lowest corruption level on a global scale, according to Transparency International's report on corruption levels, available on http://www.transparency.org/whatwedo/pub/corruption_perceptions_index_2011 8 On the development of Singapore's economic model see Lingle, Christopher, “Singapore and Authoritarian Capitalism”, The Locke Luminary Vol. I, No. 1, Case Western Reserve University, 1998, available on http://www.thelockeinstitute.org/journals/luminary_v1_n1_p3.html

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became pretty much apparent – due to the size of the country, it was quite impossible to compete with other countries in the region, who mainly rely on their huge and rather cheap labor force in order to maintain a competitive economy, in the field of production of goods. So, instead, it focused on niche industries, including high-tech and chemical industry (boasted mainly by foreign investment), but the primary source of income remained trade and banking. Singapore essentially became the financial and banking hub of the region, while remaining politically neutral to all the processes which took place around it (the parallel with Switzerland here is inevitable, since it place almost the same role in Europe; it is rather symptomatic that Credit Swiss, the second largest Swiss bank, moved some of its divisions to Singapore in order to operate under Singapory legislation). The legal framework of the development scheme is quite simple – minimum taxation, simplified procedures and minimal legal issues for businesses and placing protection of private property and business rights in the focus of the legal system, Foreign investment is considered the most important source of fresh capital for Singapore's economy, and for that reason all the conditions to attract the attention of MNC's have been met, both from a legislative perspective, and from social one: government investment into public education has turned the Singaporeans into a skilled and highly qualified workforce, and investments into infrastructural development have made it possible to start activity in the country with almost zero preparation. Foreign investment has made it possible in the late years to change the income sources of Singapore's economy from almost exclusively service-based (which now contributes to about 75% of the income) to a mixed-export based, producing mainly high-tech products and pharmaceutics for export. However, there is a slight catch when defining Singapore as a liberal and free-market led economy: while on paper the companies are private, almost all of them share a common source of funding – Temasec Holdings Group, an investment company, which owns businesses that amount for more than 60% of Singapore's GDP. In turn, Temasec was founded and funded by PAP and receives much of its operative capital from the Singapore's state

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budget9. So, in practice, the ruling party owns and operates a big portion of the businesses in the country, in a way much similar (if more subtle and wrapped in democratic procedure and legislation) to that, employed by communist command economies. So, as we have seen, Singapore's developmental strategy – even though it is disguised as “liberal and democratic” - in practice employs the techniques and strategies which are usually associated with command-economy totalitarian regimes – namely, there is a single ruling party which has occupied all the political and economic power in the country, which leads the country's economy in a certain direction according to its own plan via massive direct investments and redistribution of resources. According to the liberal economic theory, such a model should have brought Singapore's economy down the drain a long time ago. Nothing of the kind happened – quite the opposite, currently Singapore is one of the richest countries in the world, and also the most stable and fastest-growing economy in the region. All the available economic criteria show unanimously that Singapore’s economic model is extremely successful. According to the IMF10, if we take into account GDP per capita (used to measure a nation's output vs. population) Singapore is the third richest country in the world, with a GDP of 59,711 USD per capita, which makes Singapore wealthier than all the western countries employing the liberal economic model but Luxembourg (which can be attributed to the fact that Luxembourg has a population of an about half a million people and an economy almost completely dominated by the banking sector, much like Singapore). According to the data, published by the CIA 11, Singapore has had a stable and growth of the GDP by about 5% on an early basis for the past two decades, a budget with a decent income surplus (which, in the years of
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On the history, development and operational methods of Temasec, see Ng, Wilson, The Evolution of Sovereign Wealth Funds: Singapore’s Temasec Holdings (December 30, 2009). Journal of Financial Regulation and Compliance, Vol. 18, No. 1, pp. 6-14, 2009. Available on http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1949478 10 Data according to International monetary fund's World Economic Outlook, April 2012, available on http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx 11 See the CIA World Factbook, East and Southeast Asia, Singapore, Economy, which I used as a source of most of the economic characteristics of Singapore stated here, which is available on https://www.cia.gov/library/publications/the-world-factbook/geos/sn.html

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the crisis started in 2008 not many Western countries can say about themselves), and has not borrowed money from international or external institutions and businesses since the 1980's, thus meeting the usual standards for budget stability and fiscal discipline. The country's currency has a stably appreciating exchange rate to the USD, which will sell for about 1 USD for 1 Singaporean dollar in two years if the current exchange rate trends do not change. Another proof that Singapore is the highest credit rating given the country by reputed institutions such as Moody's 12(AAA stable) and Fitch13 (A+ stable), which show that according to the rating agencies the country is a safe and profitable market to invest in. Similar superlatives can be said about the population of Singapore, which, according to the characteristics, are a rather prosperous and rich population: the average monthly salary (there is no set minimum wage) in the country is about 4700$, with an annual growth rate of about 10% 14, this combined with a negligible yearly inflation of 5% and an unemployment rate of about only 2%. As we have seen, the economic model, chosen by Singapore has allowed the country to survive without keeping the prescriptions of the liberal economic theory. Even more, in the expense of a certain amount of democratic and civil liberties (this to a much lesser extent in comparison with most successful Asian states such as China or India) it has managed to surpass the efficiency and output of most Western economies. Thus, it turns out to be a viable and successful alternative to the developmental model, provided by the Washington consensus.

3.2 Taiwan's “Economic frenzy” While Singapore's example clearly showed us that a model, which is almost opposite to the one, dictated in by liberal economic theory, but yet one in which the economy followed some politically-chosen model of development, Taiwan (officially the
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See http://www.moodys.com/research/Moodys-Disclosures-on-Credit-Ratings-of-SingaporeGovernment-of--PR_240149 13 See http://chartsbin.com/view/1176 14 See http://www.salarysingapore.com/average-salary-in-singapore-2011.html

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country is called Republic of China; here I will use its the wide-known and popular name Taiwan) illustrates quite the opposite – a diverging, strong export-oriented economy, combined with a rather weak political structure. The chief problem in Taiwan's history, politics and economics are its closeness and relations with the huge Chinese economy and political structure, aiming to dominate the entire East Asia region, and since Taiwan's separation from China its main goal has been to be able to conduct independent policy in all spheres, especially in the economy. The evolution of its political structure and legislation is extremely interesting, because it was directly inherited from pre-communist continental China and continuously reformed and adopted for the conditions and realities of the island. The key role in that process was played by Cing Kai-shek, who ruled the Island as the last remnant of “nationalist” China and devised a political system in which the president played the most important role (much like the system that Charles de Gaulle designed for himself in France), and this semi-presidential regime has not changed since. Unlike Singapore's regime, which is unified and revolving around a well-regulated single-party controlled system, in which reforms and policy meet no opposition, in Taiwan we have a well-defined pluralist model, in which, especially in the late years, the parliament does not play solely a “rubber stamp” role15, but is a genuine forum for debate and policy discussion. From the point of view of the Washington consensus model, this is how a developing country should build its political structure. However, in the case of Taiwan this has brought a more of a negative then a positive effect, for several reasons. First of all, since the weakening of the presidential regime, the party structure of Taiwan is becoming more and more fragmented – even though most parties are formed in two major political blocks, it is not a rarity for them to differ on many of the legislatory issues. But, the biggest of the political and social problems of Taiwan is the problem of the country's national identification – since the majority of the population (about 85%) are of Chinese ethnicity, the island's main issue is whether to maintain a connection and keep identifying itself as a part of bigger Chinese culture, or start building its own,

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See http://www.economist.com/node/13517901

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Taiwanese ethnic identity16; that issue is in the center of any policy debate in Taiwan, and until a final decision is taken on it, it is impossible to have a stable political development program, and for now the development of the political structures and organization is pretty much frozen (even though it is frozen on a rather highlydemocratic stage). Once this is resolved, most probably Taiwan will be able to form a “true” democratic government, with unified national development strategy. According to Freedom House, civil liberties and rights in Taiwan are wellprotected17, on par with most of the Western states. There are some issues left, especially when it comes to the treatment of prisoners and the somewhat harsh prison sentences imposed in certain cases. Otherwise said Taiwan completely complies with the standards for freedoms of expression, freedom of the media and press and in general with human right keeping set by democratic countries. As we have seen, even if it still has some issues, Taiwan's political system is pretty much on par with those of the Western democracies. The same, however, cannot be said for its economy and economic policy. The key to the success of Taiwan's economic policy18 is quite simple – while most of the surrounding countries (this excluding South Korea and Japan) at this time were relying on labor-intensive production and agriculture, Taiwan was developing capital-intensive high-tech industry, aiming almost exclusively at export, it will not be an exaggeration to say that Taiwan has set the example of all the so-called Newly industrialized economies. Taiwan's goal has never been import-substitution industrialization and some sort of self-sufficiency, its strategy was, and is, aimed at economic growth through export. Its main principle is private initiative, relying on the free market principle – multiple internal market actors,

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For details on Taiwan's identity issues see Wang, T.Y, “Taiwan's national identity and relations with China”, 5th Europe-Northeast Asian Forum, Berlin, 15th December 2006, available on http://www.swpberlin.org/fileadmin/contents/products/projekt_papiere/Wang2005_TaiwanNationalIdentity_ks.pdf 17 See http://www.freedomhouse.org/report-types/freedom-world and http://www.taipeitimes.com/News/front/archives/2010/01/14/2003463481 18 For an overall view of Taiwan's economic policy, see Lau, Laurance, “Taiwan as a model of economic development” Stanford University, October 2002, available on http://www.stanford.edu/~ljlau/Presentations/Presentations/021004.PDF

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preferably small-and-medium type businesses19, competing to provide the best export product, and direct public investment in private business is considered unhealthy. And, as we will see in the end of the Taiwan-dedicated section, this model has been rather successful. So far, Taiwan's model looks pretty compliant with the economic prescriptions of the Washington consensus. However the success of Taiwan's economic model is based on two important factors, which completely contradict the “usual” free-market philosophy. The first of them is the fierce protectionism, implemented by the Taiwanese authorities, in order to keep the growing production of Taiwan from the outside competition and to make it competitive on the world market. Especially in the beginning, namely the 70's and the 80's (and even now, but to a lesser extent), the Taiwanese state has been boasting its own industries, even though not through direct investment, but via protectionist measures20. This policy is quite simple, and consists mainly in preventing most foreign businesses from entering Taiwan's market, both with their product and for production, thus removing the competition for Taiwanese manufacturers on the local market, and in the same time providing various incentives and removing domestic barriers for businesses, willing to risk their development by offering product on foreign markets, while in the same time lobbying and attempting to make bilateral agreements with foreign countries in order to aid the selling of Taiwanese product on foreign markets. For these reasons, even today the Taiwanise production and market are largely free from the activity of MNC, and foreign direct investments in the country are rather low. It is highly disputable if protectionism per se is a threat to the economy or not, and would it ultimately bring more positive or more negative effects 21 Judging from the
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See Pan, Wendy, “Taiwanese SME's - Policies for Standard, Growth and Prosperity”, University of Toronto, November 2009, available on http://webapp.mcis.utoronto.ca/ai/pdfdoc/pan_tfs.pdf 20 The nature and implementation of these measures can be found in Liang, Kuo-Shu and Liang, Ching-Ing, “Trade, Technology Transfers, and the Risks of Protectionism: the Experience of the Republic of China”, available on http://nccur.lib.nccu.edu.tw/bitstream/140.119/7561/1/mab100.pdf 21 A modern liberal economist's point of view on that matter is that of Clyde Prestowitz expressed in “The protectionism boogeyman”, Foreign Policy magazine, January 31st 2012, available on http://prestowitz.foreignpolicy.com/posts/2012/01/31/the_protectionism_boogeyman

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economic characteristics of Taiwan, however, so far this policy has been more than successful. The country suffered a much lower damage in the 2008 crisis in comparison with all the other neighboring countries (but Singapore), and even lately Taiwanese companies have started to invest in Chinese businesses (despite the political issues). The economic figures speak for themselves – according to the IMF22, Taiwan has a per capita GDP of 37,720 USD, which places it above many of the Western nations, and s stable GDP growth of about 5% per year for the last two decades23, negligible inflation and budget deficit, and stable currency exchange rates. Even though the investment ratings are not as high as those of Singapore (I attribute this fact to the protectionist policies employed), the institutions give Taiwan good future prospects. Same excellent figures go for the population – unemployment is around 4%, and a negligible part, >1%, live in poverty. The average salary is around 1200 USD, which, given the country's standard of living is rather good.

4. Conclusions In this paper I have shown two different approaches to economic and state development, which are completely different. While Singapore relies on a closed single-party government and in practice totalitarian approach both to government and economics, with the state owning a significant number of “private” enterprises, Taiwan employs a democratic model of government, combined with a protectionist approach to economic development. This shows that the Western approach to economic development – or the well-know and widely used Washington consensus model – which is recognized as the best and most effective and usually “prescribed” to developing economies is not only not the only path to prosperity, but given this country's success it may turn out not to be the best one.

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See note 11 See the CIA World Factbook, East and Southeast Asia, Taiwan, Economy, which I used as a source of most of the economic characteristics of Taiwan, stated here, which is available on https://www.cia.gov/library/publications/the-world-factbook/geos/tw.html

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