Following the Tigers

What we can learn from Development

Abstract
The debate on whether internal or external factors where more important for development was spurred on by the rise of the Four Asian Tigers Singapore, Taiwan, South Korea and Hong Kong (also called NICs – newly industrialized countries). Scholars argue whether export-oriented industrialization policies (neoliberal school) or successful state intervention policies (developmental state school) were the key to the success of the Tigers. Which type of policy should then serve as a model for other countries? What can the EU learn from the Asian Tigers, in terms of encouraging development?

Svenja Kathrina Schmitz Europe’s External Economic Policy June 2010

Contents
Introduction

1. Development 1.1 What is development?

2. East Asia: Tigers as Role Models? 5.1 The East Asian Development Model

3. The EU and Development Models 3.1 The EU‟s Trade and Development Aid Framework and Development Models

4. Conclusion

Literature

2

Introduction

Neoliberal approaches undermine developing country capacity for modernization, inhibit the development of infant industries, and make developing countries vulnerable to outside shocks, while developmental state models focus on domestically developed policies including infant industry protection and have resulted in growth and prosperity in developing countries. Therefore, domestically developed Human Development and Economic Growth policies are needed for the sustainable development of a country. Hence, the EU needs to rethink its external development strategy. The miracle economies of East Asia have succeeded through a strategic approach to integration with the global economy. These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s. In the 21st century, all four regions have since graduated into advanced economies and high-income economies. These regions are still the world's fastest growing industrialized economies. David Ricardo‟s theory of comparative advantage says that, accepting their current levels of technology as given, it is better for a country to specialize in things that they are relatively better at. His theory fails when a country wants to acquire more advanced technologies so that it can do more difficult things that few others can do – that is, when it wants to develop its economy (Chang, 2009, p. 47). Ha-Joon Chang1 is of the opinion that the Korean economic miracle was the result of a clever and pragmatic mixture of market incentives and state direction (Chang, 2009). While it took markets seriously, the Korean strategy recognized that they often need to be corrected through policy intervention.

1

Ha-Joon Chang (b. South Korea in 1963) is currently a lecturer at the University of Cambridge, UK. He has served as a consultant

to the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nations agencies. He is also a fellow at the Center for Economic and Policy Research in Washington, D.C. Chang is also known for being an important academic influence on the economist Rafael Correa, currently President of Ecuador.

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1. Development

The foundation of economic development is the acquisition of more productive knowledge.
- Ha-Joon Chang, 2009
2.1 What is development?

There is no clear definition of economic development. GNP per capita against the Human Development Index (HDI) is widely used to measure development. The HDI measures social factors and will therefore give higher rankings to societies that have a more equal distribution of wealth and invest in social services. The GNP per capita can rank societies that have a large amount of wealth highly no matter what its distribution amongst the population. Therefore, HDI will favor countries with a social democratic or socialist leaning compared to GNP per capita (O‟Brian & Williams (2007). Further, development is not just economic growth; it refers to economic, social, and cultural variables. Essentially, the process of economic development can be boiled down to the adoption of domestic and indigenous high-productivity and high-value-added economic output (Chang, 2009). More generally, the scope of development is the process of improvement of economic, political, and social well-being of a nation‟s people (O'Sullivan, Sheffrin, 2003, pp. 471). O‟Brien and Williams (2007) identify different approaches to development. Modernization theory focuses solely on internal factors and modern ways of thinking to be important for development as it is seen to work in developed economies. It is claimed that growth causes development because some of the increase in income gets spent on human development such as education and health. Dependency theory supports the idea of external causation. Dependency theorists argue that poor countries have sometimes experienced economic growth with little or no economic development; for instance, in cases where they have functioned mainly as resource-providers to wealthy industrialized

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countries (p.302). However, development is neither solely an internal affair nor driven by external pressures, only. As O‟Brian & Williams (2007) have pointed out “for many governments in the third world blaming the external environment is an easy option when domestic reform proves difficult”. In the early 1990s, so-called advocates of free trade explained the development success of the East Asian Tigers with openness to trade (Klein, 2003; O‟Brian & Williams, 2007). Malaysia, South Korea and Thailand still had highly protectionist policies, however, that barred foreigners from owning land and from buying out national firms. Between 1965 and 1980 these countries achieved impressive levels of economic performance characterized by: fast growth, low inflation, macroeconomic stability, a strong fiscal position, high savings rates, open economies, thriving export sectors and a great improvement in welfare indicators such as life expectancy and literacy. The debate brought about two competing schools of thought: the neoliberal school, and the developmental state school. The neoliberal approach stressed the export-oriented industrialization policies by these states. The developmental state school, on the other hand, focused on the role of the state to successfully control economic growth (O‟Brian & Williams (2007). Naomi Klein (2003) explains that developmentalist economists believe that developing countries have a chance to break out of the cycle of poverty if they turn to an inward-oriented industrialization strategy, e.g. autarky. The dependence on the export of natural resources to Europe and North America is not advisable since its prices had been on a declining path Klein (2003). Developmentalism advocates the regulation or nationalization of key industries to fuel a government-led development process. The end of communism meant the end for soviet socialism and its centrally planned economy. China implemented its Four Modernizations program in 1979 and therewith successfully overcame socialism (O‟Brian & Williams (2007). From now on, capitalism was the new cool kid on the block. The Asian financial crisis, which occurred in 1997, nevertheless, gave an idea about the dangers of the newly popular economic paradigm (O‟Brian & Williams (2007). The world was reminded that the developing countries can be very vulnerable to outside shocks and potential limits of development and its ability to endure was one of the issues at hand.

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Neoliberal approaches to development were adjusted to the post Cold War economic environment and sustainable development was advanced as the main approach to development officially in the Rio Conference in 1992 (O‟Brian & Williams (2007). The shift toward sustainable development as defined by the Brundtland Commission (bearing in mind future generations) paved the way for the increasing application of capability building. This focus on governance issues is now a predominant factor in most relations between developed and developing nations.

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2. Asia: Tigers as Role Models?

Korea’s progress is as if Haiti had turned into Switzerland.
- Ha-Joon Chang, 2009
2.1 The East Asian Development Model Korea‟s economic growth and the resulting social transformation over the last four and a half decades have been truly spectacular. It has gone from being one of the poorest countries in the world to a country on the par with Portugal and Slovenia in terms of per capita income. A country whose main exports included tungsten ore, fish and wigs made with human hair has become a high tech powerhouse, exporting stylish mobile phones and flat screen TVs coveted all over the world. Better nutrition and health care mean that a child born in Korea today can expect to live 24 years longer than someone born in the early 1960s (77years instead of 53 years). Instead of 78 babies out of 1,000, only five babies will die within a year of birth. In terms of these life-chance indicators, Korea‟s progress is as if Haiti had turned into Switzerland. In his article The East Asian Model of Economic Development and Developing Countries (2002), Jong K. Park, economics professor at the Department of Economics & Finance of the Kennesaw State University, USA, presents several East Asian countries, known as Asian Tigers2, and their way to success and identifies similarities among them. He explains which conditions led to the countries‟ positive economic development and makes assumptions about a resulting development model, potentially applicable to other developing countries. The role of the government, he says, was the most significant feature of East Asian economic policy leading to the miraculous growth experienced by these countries between 1970 and 1990 (Park, 2002, p330). Park‟s main findings also actually suggest that government intervention not only successfully addresses the limitations of the market; it also is an effective tool for the promotion of economic development.

2

The term East Asian Tigers or Tigers refers to the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan.

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According to Cambridge economist Ha Joon Chang (2009), it was a mix of infant industry protection, export-led industrialization and the promotion of universal education that paved the way for economic growth and development. State-directed capitalism, the combination of “the dynamic aspects of a market-oriented economy with the advantages of centralized planning and direction”, was South Korea‟s and Taiwan‟s main tool for the successful development of their economies (Park, 2002, p.330). When the Asian financial crisis hit some Tigers hard, sustainability and applicability of their economic policies came under scrutiny. As the East Asian Tigers had main common threads in their development strategies and experiences, it will be interesting to see how the East Asian development model would look like. The emerging economies‟ performance in the late 1980s and early 1990s resulted in an increase in private capital inflows (Park, 2002, p. 331). This supported the investment boom, which was bank credit-financed. However, in 1997, following a year of record capital inflow of $93 billion, a net outflow of $12 took place. Amounting to a reversal of capital flows of $105 billion, the Asian currency crisis was provoked, “eventually pushing „miracle‟ economies into a dramatic financial meltdown with serious economic, social, and political consequences” (Park, 2002, p. 332). East Asian economies soon saw the depreciation of their currencies due a combination of reversal of foreign capital and the flight of domestic funds. The Tigers suffered unexpectedly severely, sharing several characteristics that played a role in the crisis, According to Park (2002), “they include a credit-fuelled investment boom, a weak and unsound banking sector and financial system, a pegged exchange rate regime, current account deficits, and loss in investor confidence. How come that the Tigers‟ banking sector was so weak and unsound that it could not resist outside shocks? Government authority over the banking sector led to the misconception that borrowers of loans were assisted by the government. Therefore there was a lack of “procedures for evaluating risks when extending loans”. Further, it was not only the lack of procedure and management that exposed the bank-centered financial systems to outside shocks. It was also the lack of capacity, ones the system was liberalized. As Park explains: “banks did not have adequate capacity for project evaluation in lending practices, especially in the aftermath of increased financial liberalization in these

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countries” (Park, 2002, p.333). The brittle financial system was exposed to large, capricious, foreign capital flows, which “made the Asian emerging market economies extremely vulnerable to changes in investor confidence” (Park, 2002, p.334). The Tiger‟s economies were too sensitive to outside shocks and were therefore hit hard by the Asian financial crisis. That does not mean, however, that the East Asian development model loses its strength. The East Asian Tigers not only endured the crisis, they also continued to expand once the crisis was surmounted. The crisis revealed the potential weaknesses of the East Asian development model that had to be fixed. “The crisis underlined the advantages of public bureaucracies skilled at managing the economy and responding to shocks” (Stiglitz & Yusuf, 2001, p.8). What, however, is the East Asian development model exactly? While different models of development economics emerged over time, two general movements can be characterized in the debate over economic development. One was the liberal approach, claiming that only the „invisible hand‟ of the market, as presented by Adam Smith, would efficiently provide for economic growth and that regulation only misleads the economy. A different belief focused on government planning as the only policy which would guarantee the effective mobilization of resources and their fair and successful deployment in favor of economic growth. Two different examples of this model where India and China on their ways to economic growth and development. China and India both did very well in the 1950s and 1960s, following national planning to transform “a predominantly agrarian society with masses of populations living in extreme poverty” into an industrialized society with a higher per capita income and living standard. The road to economic growth and development was paved with autarky, central planning, import-substituting industrialization and the promotion of heavy industries. Their autarkic trade policies resulted in cutting off any link between domestic and international markets. Agriculture was heavily taxed to finance industrialization. While India was a parliamentary democracy and China a centralized authoritarian system, their development strategies started to pay off quickly, which led to a „developmental race‟. Park explains the importance of this race: “The outcome of the race would have some far reaching political implications: If China won, the totalitarian

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model of Soviet Union and its ally China would have a profound impact on the leadership of Third World developing countries, pushing them further into the Soviet bloc” (2002, p.336 ff). Although many expected India to be the winner of this race, it can be assumed that India and China were closely observed by the Western World with some alarm. By the early 1980s the winner of the „developmental race‟, however, would be the Four Asian Tigers South Korea, Taiwan, Hong Kong, and Singapore. The “developmental strategies of these East Asian tigers soon became the focus of universal attention” (Park, 2002, p. 337). Export oriented development strategies which were guided by the government were part of the reason for success in economic development, especially in South Korea and Taiwan (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003; Zang, 2003; Chang, 2009). Stiglitz and Yusuf (2001) identify six main policy strands for the miraculous East Asian economic performance. First, a stable business environment with relatively low inflation encouraged investment (p. 5), and was backed by the protection of infant industries (Chang, 2009; Park, 2002). Second, central planning and bureaucratic regulation, like prudent and sustainable fiscal policies, guaranteed the equal distribution of rewards from higher growth (Stiglitz & Yusuf, 2001; Park, 2002; Chang, 2009). Third, exchange rate policies underpinned export competitiveness, aiming at becoming what Chang calls an „export powerhouse‟ (Chang, 2009). The Asian Tigers followed a road of export-led growth and industrialization (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003; Chang, 2009). Stiglitz‟ and Yusuf‟s fourth point is a bit more complicated, as they claim that “Financial development and the progressive liberalization of the sector so as to maximize domestic savings and promote efficient allocation and integration with the global financial system” was one of the strands of the East Asian miracle. Park (2002) and Chang (2009), however, explain that the liberalization of the financial sector and the integration into the global system was a gradual undertaking, commenced at a stage where the Tiger‟s economies already had extensively grown and built their capacities. Guaranteeing the competitiveness of a sector should always be a prerequisite before opening up the domestic market and integrating into the world economy. Otherwise the level of vulnerability may be too high, and the risk for the sector to be severely harmed

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will be too big. The Asian financial crisis has basically shown that the financial system of some of the Tigers was (still) too fragile. The fifth point simply mentions efforts to minimize price distortions. And finally, the sixth key to the East Asian miracle is education: “Actions to support the spread of primary and secondary schooling as well as the creation of a hierarchy of skills to buttress an outward looking development push” (Stiglitz & Yusuf, 2001, p.6). As Chang (2009) pointed out, education is one of the cornerstones of economic development. Investment in innovation and technology, and the promotion of a strong, researchoriented university system is crucial for long term economic development (Szirmai, 1997; Stiglitz & Yusuf, 2001; Bretherton, C. & Vogler, J., 2006; Chang, 2009). According to Park, the four most important common ingredients for the Tiger‟s economic success were first, export oriented development strategies, aiming at transforming the countries into „export powerhouses‟. Second, maintaining high rates of savings and investment. Promoting universal education and making substantial investments in human capital “so as to better absorb and adapt the most advanced technology” (p. 338; see also Chang, 2009). And fourth, policies aimed at industrializing the economy (Stiglitz & Yusuf, 2001; Park, 2002; Jomo, 2003; Chang 2009). Most importantly, all East Asian Tigers recognized economic development as primary goal and therefore can be seen as developmental states. Further, they used international trade as primary means for economic growth and development (Park, 2002). South Korea even adopted a growth-first policy (Park, 2002; Chang, 2009), which eventually led to the emergence of chaebols, giant industrial conglomerates, which eventually became too big to fail (Park, 2002). While “financial institutions were placed under government control”, they were doomed to be silent partners, as pointed out earlier. Small and medium-sized enterprises (SMEs) were not given any attention (Park, 2002). In Taiwan, however, SMEs were promoted all the way long. They laid the foundation of Taiwan‟s sound financial system and industrial organization in the economy. As the chaebol became too big to fail and their power increased, the South Korean government lost any control and had to watch the conglomerates to take over the “developmental race‟ (Park, 2002). This was very dangerous, since “economic stability cannot be sacrificed for rapid economic growth” (Park, 2002, p.342). Now, lessons from

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the Asian financial crisis can be summarized as follows: (1) no sacrifice of economic stability, (2) a strong government that is capable and independent is needed to maintain the „commanding heights‟ in the economy (Park, 2002; Jomo, 2003). After all, the conditions for the success of interventionist model are high household savings rate, political consensus that the benefits of financial repression exceed the cost to consumers, rapid increase in GDP to political support for the intervention and to mask its inefficiencies, trade surpluses to build foreign exchange reserves (Park, 2002). After we have looked at the East Asian Tigers, the two main ingredients of the East Asian development model are (1) the important role of the government, and the recognition of the limitation of the market; (2) export-led industrialization. Further, innovation and technology and the investment in human capital, as in the promotion of universal education, are important to improve a country‟s comparative advantage. Further, globalization has “magnified the cost of bad, inconsistent policies and weak, inefficient institutions,” (park, 2002) and has shown that it can become a danger to newly industrialized countries. The Asian crisis has shown the importance of effective state institutions and that a country should be careful not to open its economy too early. “Heightened exposure to world markets will only become a true lever of economic development in the presence of institutions able to mitigate market failures and manage the competitive challenges and domestic dislocations produced by openness”(Park 2002; see also Chang, 2009). As it is clear now, Korea opened its economy too early; it lost control over its giant companies due to a relaxation of controls over the private sector‟s foreign borrowing. Maintaining the „commanding heights‟ in the economy is not always easy, once economic development is on the rise. The need for a bureaucracy able to conceive and implement the designs of a strong state is also pointed out by Stiglitz & Yusuf (2001) and Jomo (2003) even talks about good governance and „embedded autonomy‟. The “institutional capacity and capability of the governments concerned to effectively provide the coordination necessary for rapid accumulation and economic transformation” is therefore necessary for economic development (Jomo, 2003, p. 4). Additionally, finding the right timing of trade liberalization and integration with the global economy is crucial. Nevertheless, the East Asian development model seems appealing to be used as a role

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model for developing countries. It will be interesting to see whether it would be supported by the EU‟s development cooperation framework.

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3. The EU and Development Models
3.1 EU’s trade and development aid framework and Development Models The EU engages in relations with third countries in different ways. Concerning developing countries, it established a framework of agreements and programs, connecting trade agreements with economic aid and currently holds Association Agreements with 120 developing countries world wide. EU development policy has its origins in Article 131 (now article 182) of the Treaty of Rome enumerates Overseas countries and territories with special relations to EU member nations and outlines the objective to close economic relations with the European community as a whole in order to promote economic and social development. Article 131EEC (now 182EC) on the Association of Overseas Countries and Territories (OCTs), reads:
The Member States hereby agree to bring into association with the Community the non-European countries and territories which have special relations with Belgium, France, Italy and the Netherlands. These countries and territories, hereinafter referred to as “the countries and territories”, are listed in Annex IV to this Treaty. The purpose of this association shall be to promote the economic and social development of the countries and territories and to establish close economic relations between them and the Community as a whole. […]

Additionally, the establishment of a free-trade area between the six European countries and their overseas colonies enabled African countries to export their agricultural commodities to Europe without tariff restrictions and the Europeans were able to sell their industrial products on the African market more easily. Further, the European Development Fund 3 (EDF) was founded to cover for economic and social infrastructure investment (European Navigator, 2010). Clearly, article 131 aimed at providing for a smooth transition of former colonies into potential economic partners, especially during the following post-colonial period (Bainbridge [2003], Nello [2009], European Navigator [2010]). In 1963 and 1969 the Yaoundé and Arusha (Yaoundé II) Conventions extended the association with Europe‟s
3

The European Development Fund is financed by European national contributions of the Member States. It is the main instrument for European Community aid for development cooperation in Africa, the Caribbean, and Pacific (ACP Group) countries and the Overseas Countries and Territories (OCT).

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OCTs, which was initially set up for five years. From the Western European‟s point of view, improving the ties with Africa was also important for political reasons. The Cold War required the attachment of Africa to Western Europe “in order to curb separatist tendencies and the spread of Communism” (European Navigator, 2010). The Soviets, on the other side, portrayed Western Europe as „enslaving‟ Africa. At the end of the Cold War it seemed that developing countries now had to compete for investment and aid with the post-communist world (Holland, 2002; O‟Brian & Williams, 2007; Nello, 2009). The Maastricht Treaty (1993) added the goal of development cooperation to the EU relationship with developing countries. Community development policy now aimed at sustainable economic and social development, smooth and gradual integration into the world economy and finally, the campaign against poverty (Holland, 2002). The Cotonou Agreement of 2000 included a new emphasis on the observance of human rights and „good governance‟ in the recipient countries (Art.9). The Cotonou Agreement was designed to govern the trade and aid arrangements with the developing African, Caribbean and Pacific states (also called ACP). It granted free access to the Community market for all ACP industrial products and most ACP agricultural products (Bainbridge [2003], Nello [2009], European Navigator [2010]). The Cotonou Convention was eventually to be replaced by the European Partnership Agreements, or EPAs from 2008. EPAs are aimed at arranging the relations between Europe and its neighboring ACP countries with the objective “to build free trade areas in different ACP regions” (Nello, 2009, p. 438). The World Trade Organization, however, does not have much appreciation for the special EU-ACP trade relations, as any new trading relationship with the developing world has to be consistent with WTO regulations (Holland, 2002). According to Bainbridge (2003), the European Union gives more aid than other donors to agricultural and rural development projects, which present some 50 per cent of their total expenditure. Further, In the Generalized system of preferences (GSP), many developing countries enjoy privileged access of their products. Trade is generally perceived as having a crucial role in promoting development. Since 1971, “the EU imports products either duty free, or with a tariff reduction, depending on the arrangement with the beneficiary country”, as part of the GSP (Nello,

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2009, p. 437). The „Everything but Arms‟ (EBA) initiative grants access to all other products (besides bananas, sugar and rice) of least developed countries to the European market (Nello, 2009). Further, the EU cooperates with international organizations such as the OECD, the World Bank, and the UNDP “to develop a core set of indicators to assess progress in meeting the Millennium Development Goals (MDGs). According to Nello, “economic development is a complex process depending on a whole series of factors including the internal situation of the recipient countries, the international economic environment, globalization, the evolution of EU policies (such as CAP or CFSP) and the outcome of the Doha Round. As the quantity of ODA [official development assistance] seems likely to remain limited, it is essential to ensure its quality” (Nello, 2009). The following points ensure a certain quality for development assistance: First, the promotion of economic growth needs to be emphasized and poverty has to be addressed. The establishment of democratic institutions to promote good governance and democratic standards is important. Further, it is necessary to apply conditionality so that the democratization process and the advancement of good governance are ensured as conditions for receiving aid. The promotion of sustainability and simplification and coordination of aid programs should be addressed as well (Nello, 2009). In summary, the EU‟s global role is clearly related to development aid. It is the world‟s biggest donor as well as one of the leading trading blocs. The EU‟s approach to development aid focuses on pressuring development countries to open their markets, while granting their products preferential access to the European market. Further, it gives aid in conditionality linked with good governance, capacity building and respect for Human Rights.

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Free-trade vs. Capacity Building

According to the Institute for European Studies at Vrije Universiteit Brussel:

The aim of the 'new generation' free trade agreements was to increase the competitiveness of EU firms by providing market access in parts of the world where there is potential for market growth but where significant non-tariff barriers exist.

In fact, one must ask why these barriers to trade exist and why policy makers in developing countries have enacted such legislation in the first place. In the context of developing country trade regimes, Chang finds that often non-tariff barriers exist for developmental purposes, in line with the often-contested infant-industry-industrialization argument. In other words, barriers to trade exist in developing countries –often alongside domestic subsidies and capacity-building incentives such as industry cross-subsidization and incentives to employ high technology in their productive processes– in order to foster the growth of domestic productive capacity and the competitiveness of domestic firms. Thus, seen from the point of view of the developing countries, where trade barriers exist, debates over EU-Developing country trade access are in this context reduced to a zero-sum game. More specifically, either the EU gains trade access to a given developing country and its firms become more competitive or domestic developing country industries keep captive the demand necessary in order to try to develop productive capacity. In other words, in dealing with North-South trade, there exists a trade-off between free-trade access for the global north into the global south and capacity and productivity building in the global south. Given the trade-off as seen from the perspective of the developing countries in which trade barriers exist, sufficient positive incentive is necessary for the developing country in question to agree to grant free-trade access to a northern country, a prospect which would yield job losses and the decline of industry, in the minds of those who follow the infant-industry argument. This incentive can manifest itself in the form of development aid. This is the logical basis for the link between trade and aid in EU development cooperation policy.

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4. Conclusion
The miracle economies of East Asia have succeeded through a strategic approach to integration with the global economy. These regions were the first newly industrialized countries, noted for maintaining exceptionally high growth rates and rapid industrialization between the early 1960s and 1990s. In the 21st century, all four regions have since graduated into advanced economies and high-income economies. These regions are still the world's fastest growing industrialized economies. After we have looked at the East Asian Tigers, the two main ingredients of the East Asian development model are (1) the important role of the government, and the recognition of the limitation of the market; (2) export-led industrialization. Further, innovation and technology and the investment in human capital, as in the promotion of universal education, are important to improve a country‟s comparative advantage. Further, globalization has magnified the cost of bad, inconsistent policies and weak, inefficient institutions and has shown that it can become a danger to developing countries. The Asian crisis has shown the importance of effective state institutions and that a country should be careful not to open its economy too early. As it is clear now, Korea opened its economy too early; it lost control over its giant companies due to a relaxation of controls over the private sector‟s foreign borrowing. Maintaining the „commanding heights‟ in the economy is not always easy, once economic development is on the rise. There is a need for a bureaucracy able to conceive and implement the designs of a strong state. Additionally, finding the right timing of trade liberalization and integration with the global economy is crucial. Nevertheless, the East Asian development model seems appealing to be used as a role model for developing countries. In its relations with developing countries, the European Union focuses almost solely on trade agreements. It acknowledges the importance of economic growth and the reduction of poverty. It even addresses the need of the establishment of democratic institutions to promote good governance and democratic standard. Further, the EU applies conditionality so that the democratization process and the advancement of good governance are ensured as conditions for receiving aid. The promotion of sustainability and simplification and coordination of aid programs should be addressed as well as the

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promotion of capacity building. The EU‟s approach to development aid focuses on pressuring development countries to open their markets, while granting their products preferential access to the European market. Further, it gives aid in conditionality linked with good governance, capacity building and respect for Human Rights. Given the trade-off as seen from the perspective of the developing countries in which trade barriers exist, sufficient positive incentive is necessary for the developing country in question to agree to grant free-trade access to a northern country, a prospect which would yield job losses and the decline of industry, in the minds of those who follow the infant-industry argument. This incentive can manifest itself in the form of development aid. This is the logical basis for the link between trade and aid in EU development cooperation policy. Domestically developed Human Capacity building and Economic Growth policies are needed for the sustainable development of a country. Hence, the EU needs to rethink its external development strategy. It could improve its approach to good governance and capacity building. The promotion of free trade, however, as seen in light of this paper, has to be looked at carefully as a tool to encourage economic development.

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5. Literature
Bartels, L. (2007) The trade and development policy of the European Union, European Journal of International Law. 18, 4, 715-756. Bretherton, C.; Vogler, J. (2006) The European Union as a Global Actor, London: Routledge, Ch. 5. Carbone, M. (2008) Mission Impossible: The European Union and policy coherence for development, Journal of European Integration, 30, 3, 323-342. Chang, HJ. (2007). Bad Samaritans. The Guilty Secrets of Rich Nations and the Threat to Global Prosperity. London: Random House Business Books. Corsetti, C; Pesenti, P.; Roubini, N. (1998). Paper Tigers? A Model of the Asian Crisis. National Bureau of Economic Research Networking Paper No.6783. Cox, A., Koning, A. (1997). Understanding European Community Aid. London: Overseas Development Institute. Elgström, O. (2009) Trade and aid? The negotiated construction of EU policy on economic partnership agreements, International Politics, 46, 4, 451-468. European Navigator, retrieved May 2010, from www.ena.lu Flint, A (2009) The end of a „special relation‟? The New EU-ACP Partnership Agreements, Review of African Political Economy, 36, 119, 79-92. Holland, M. (2002). The European Union and the Third World. London: Palgrave. Jomo, K.S. (ed.)(2003). Southeast Asian Paper Tigers? From miracle to debacle and beyond. Oxon, UK: RoutledgeCurzon Klein, N. (2007). The Shock Doctrine. The Rise of Disaster Capitalism. New York: Picador. Nello, S.S. (2009). The European Union. Economics, Policies and History. Ch. 19. EU Traid and Aid Policies. London: McGraw-Hill. O‟Brien, R.; Williams, M. Global political economy. Evolution and dynamics. Chapter 1, Understanding the global political economy. Palgrave Macmillan: Houndsmill, 137-173. O‟Brien, R.; Williams, M. (2007) Global political economy. Evolution and dynamics. Palgrave Macmillan: Houndsmill, Ch.10.

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O'Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 471 Park, H.J. (2002). The East Asian Model of Economic Development and Developing Countries. Journal of Developing Societies, 18, 4, 330-353. Rasiah, R. and Yun, A. H. (2009). Industrializing Southeast Asia. Journal of the Asia Pacific Economy, 14, 2, 107-115. Riddell, R. C. (2007) Does Foreign Aid Really Work? Oxford: Oxford University Press. [Ch. 4 The growing web of bilateral aid donors, pp. 51-59 & pp. 67-69; Ch. 5 The complexities of multilateral aid, pp. 77-89.] Amsterdam: Amsterdam University Press. Smith, M. (2004) Foreign Economic Policy, In Carlesnaes, W.; Sjursen, H; Whiae, B. (eds) Contemporary European foreign policy. London: Sage, 75-90. Stiglitz, J. (2006) Making globalization work. Allen Lane, 61-101 [Ch. 3 Making Trade Fair] Stiglitz, J. and Yusuf, S. (ed.) (2001) Rethinking the East Asian Miracle. Washington and New York: World Bank and Oxford University Press . Szirmai, A. (1997). Economic and social development. London: Prentice Hall. van Reisen, M. (2007). The Enlarged European Union and the Developing World: What future? In Mold, A. (Ed.), EU Development in a Changing World; Challenges for the 21st Century, Amsterdam: Amsterdam University Press, 29-61. Woolcock, S. (2007) Regional Economic Diplomacy: The European Union In Bayne, N.; Woolcock, St. (eds) The new economic diplomacy, Ashgate: Aldershot, 221-240 (Ch. 13). Zang, Y. (2003). Pacific Asia: The politics of development. London: Routledge.

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