CHAPTER 11: RISE OF THE GLOBAL PERIPHERY.

CHINA AND
EAST ASIA

INDEX

I. EAST ASIAN TIGERS

II. CHINA

I. EAST ASIAN TIGERS

The humble beginnings of the East Asian Tigers

 The original East Asian Tigers are: Hong Kong, Singapore, South Korea and
Taiwan.

 After WWII, the Asian Tigers’ income levels were below Africa’s. Today this
situation has completely changed, as many of them are now developed, rich
countries, which have for many decades experienced supercharged economic
growth.

 Japan was the first Asian country to experience supercharged economic growth
(during 1950-1973). Then it slowed down, and was followed by the Four Asian
Tigers, China, and afterwards by Malaysia and Thailand in a “shyer” way.
(During 1973-1996)

10

7.5 8.05

2.5 2.93
2.34
1.31.48 0.910.89 1.33
0 0.530.19
0.05
1000- 0.09 1820-70
0.03 0.05
1500- 1870- 1913-50 1950-73 1973-98
1500 1820 1913
-2.5 World Japan
 7
6
5
4
3
2
1
0
Ger Fr UK Ital Jap Chi HK Sing. Taiw SK India L- Afr
-1 . Am

Two approaches that explain economic development

There are 2 approaches that can explain this development: (1) the Washington
Consensus and (2) Developmental States.

I. The Washington Consensus:

This approach argues that economic development is achieved with a liberal, market-
based system. In this system, the role of the government should be limited to
guaranteeing the rule of law, providing public goods and services, and strengthening
macroeconomic fundamentals through good fiscal and monetary policies. Countries
like the UK or the US would be included in this model.

II. Developmental States:

This approach argues that governments should directly become involved in the
economic development of a country. This means that the government should
intervene the economy to control savings, investment and credit, among other
factors. (So, the government controls the economic strategy of the country, not the
markets).

What caused East Asian Success?

 Factor accumulation: Through very high investment rates, they managed to

accumulate human and physical capital very fast. Countries like Japan, South
Korea and Taiwan generated investments mainly through savings, while
other countries like Honk Kong and Singapore depended on Foreign Direct
Investment (FDI).
  Export orientation: the economic growth was export-driven.

 Human capital: very high human capital, with high labor participation rates
and long working hours.

 Pre-conditions: countries like South Korea and Taiwan in the 1950s (before
supercharged economic growth) had high potential for growing (high years
of schooling, low inequality, etc).

The role of governments in economic growth

 Creation of markets:

Governments created markets to avoid coordination failures and inefficiencies. (For

example, they adapted public goods and infrastructures to the economic growth,
building roads and railways before factories, for instance). Governments intervened
the economy (developmental states) to coordinate private investment, and they
subsidized many firms.

 Cooperation:

Asian Tigers managed to coordinate the relations between firms, employees and
other corporate groups. This way they reduced the costs of information, but they
exposed themselves to cronyism (amiguismos). So cooperation is only beneficial if
the benefits from lower information costs > costs of cronyism.

 Labour market management:

Japanese management system promotes lifetime employment, as firms invest in

your training and get loyal workforce.

Limitations of the developmental states

 Productivity growth:

Productivity growth was limited, as economic growth was obtained by impressive

GDP per capita gains rather than by an increase in TFP. Additionally, growth was
largely extensive (driven by factor accumulation), not intensive (not driven by
productivity growth).
Why did East Asia differ from other State-led economies? (Like Latin America)

 East Asian economies were export oriented, unlike South American economies.
 There was much less corruption and nepotism in East Asia than in Latin
America.
 There was less inequality in Asia, so fewer elites tried to capture rent from
policy direction.

II. CHINA

Chinese relative income levels in the long run have declined in comparison to many
developed economies, until 1978, when China’s economic growth has skyrocketed.

China’s economic growth over time

1. Pre-1949:

China’s living standards were stagnant and was poorer than India or Africa. (Income
per capita was only 5% of US levels).

2. 1949-1978:

During this period, the Chinese economy grew at a 2,3% average per annum, which
is a low growth rate given its huge catch-up potential. This growth was driven by
the strong communist policies which were implemented. (Same policies as the
 Soviet Union implemented: enforced agricultural collectivization, coercion and
terror, etc).

3. Since 1978:

In 1978 China still had a huge catch-up potential. Since 1978 China has grown
almost 7% annually (per capita), as a consequence of big policy changes. These
policies increased TFP dramatically, and allowed controlled market economy.

Causes of Chinese growth

 Very high savings rates: Chinese savings rates among highest in the world (40-
50%). The Chinese government assured that these savings went from banks to
enterprises, and then that enterprises invested this savings. Savings rates are very
high also because of China’s demography. China has a relatively old society
given its level of development, and also public goods and infrastructure
(healthcare, etc) are very poor, so people need to save on their own behalf and
plan their retirement.

 Increase in TFP: As in the Soviet Union, there was a sectoral shift from
agriculture to industry. This, in conjunction with the development of economies
of scale increased TFP massively.

 Policy changes: The most important policy implemented in 1978 was the
Household Responsibility System (HRS). This system boosted incentives to
produce and invest in the agricultural sector, as agricultural households were
assigned land for 15 years (not given ownership), which allowed households to
produce and invest freely in the market. This system was very different from
People’s Communes under Mao, in which the state decided the production of
goods.
 In addition to HRS, the Contract Management Responsibility System was
introduced. This was a similar system to HRS but applied to industry. Through
this system, firm managers obtained discretionary powers, meaning that they
now could hire freely, fire, decide wages, bonuses, create strategies, and make
investment decisions in how to manage retained earnings.

 Openness:

China created Special Economic Zones (SEZ) in Guangdon and Fujian which
favored exports and Foreign Direct Investment. In this zones, foreign companies had
special privileges (ex: tax privileges), and they were labour-intensive oriented (as
labor costs were rising in the Asian Tigers. (So China became a magnet as
companies could produce much cheaper than in other countries.)

 State enterprises:

State enterprises in China accounted for almost 80% of industrial production in

1978. (Basically, there was no market economy). Even though nowadays the state
intervention in the Chinese economy is still very high (mainly through state owned
banks), the truth is that the trend has been to open the economy towards the market.
(through policies like the Contract Management Responsibility System). The aim of
the Chinese policies since 1978 has been to give autonomy without privatization, to
foster bank loands instead of state grants (although its similar because banks are
state owned) and to incentivize contract workers instead of lifetime employees.

The remaining state-owned companies in China are considered the Achille’s heel of
the Chinese economy, as they tend to be much more inefficient than private
companies.
The future of China?

 Opportunities and Strengths

- China’s economic growth rates are still very high relative to the rest of the
world, but they have been declining in the last few years. This has sense, as
China had a huge catch-up potential in 1978. Still, many economists expect
that China will continue to grow rapidly in the medium-run. (They still have
huge catch-up potential in human capital accumulation and in TFP).

- If the decline trend of the state sector continues, this will mean more
efficiency in the future as China gradually opens to the market.

 Threats and weaknesses:

- Challenging demography: China faces the same threat as Western developed

countries in terms of demography (aging population), with the difference that
they are still a growing economy, so they can’t afford the consequences yet.
(Some consequences would be the reduction of the savings rate and the
stagnation of TFP).

As explained before, the remaining state-owned companies in China are considered

the Achille’s heel of the Chinese economy, as they tend to be much more inefficient
than private companies. Additionally, they encourage rent-seeking managers and
corruption, so maybe these institutions are incompatible with sustained economic
growth. (explicar el rollo de soft y hard powers).