Economic Development in Asia

Chapter 14 – The Political Economy of Development

in Asia
 Introduction

• Mainstream or orthodox economic theory likes to think of

itself as “scientific”.

• They take care to draw a clear distinction between positive

and normative statements.

• Other economists, however, acknowledge the

interdependence between economics, psychology, ethics
and politics.
 Cooperation, Altruism and
Ethics
• What happens when we expand the view of economic
agents to include behavior that is more than narrow self–
interest?

• How does one account for charity, altruism, cooperation

and ethics?

• How about heroism? Act of rescues at great personal

risk?
 Cooperation, Altruism and Ethics

• This perspective allows us to explore other motivations

for individual behavior, such as the interests of others
and society.

• Altruistic behavior can put the interests of others on an

equal plane with our own self-interest.
 How Do We Model Altruism?

• Put altruism as a taste variable in the utility function.

• Allow altruism to be modeled as cooperative behavior in

“prisoner dilemma” situations (see Box 13.1).

• Altruism as quid pro quo - regarded as

reciprocal/conditional altruism - in return for a favour.
 How Do We Model Altruism?

• Altruism may be a genetically inherited trait using

sociobiology arguments.

• Altruism may be a moral duty ala Kant’s ”categorical

imperative.”
Advantages of Altruistic/Cooperative
Behavior
• Can raise level of welfare if income and wealth are
shared – redistribution effect.

• May stimulate intergenerational transfers and

increase educational expenditures for children.

• May increase saving and investment – life cycle effect

to have intergenerational transfers.
Advantages of Altruistic/Cooperative
Behavior
• Better family life with greater social responsibility and less
concentration on narrow self interest.

• Better care for elderly.

• Financial support for extended family – serves to

replace/augment social security.

• Reduces the problem of moral hazard.

 Advantages of
Altruistic/Cooperative Behavior

• Reduces problems of principle/agent and asymmetric

information.
• Reduces problem of crime and corruption.
• Improves business ethics (Ford Pinto, Exxon, Enron,
tobacco companies).
• Taking positions on issues as informed citizens
(environment, health care, sentencing of criminals).
• Avoids free rider problem.
 How Does Altruism/Ethics Alter
Economic Analysis?
• We can augment economic analysis by including
altruistic or cooperative or communitarian values in the
objective function of individuals.

• We can also try and go beyond economic analysis and

develop a synthesis with other disciplines such as
sociology and philosophy/ethics.
 Corruption and Bribery
• Corruption and bribery are used to pursue self-interest
outside the legal framework.
• In the principal agent model, the one who is seeking to
bribe is the principal and the official who is being bribed is
the agent.
• The contract is awarded openly but bribe is given privately.
 Corruption and Bribery
• Corruption is believed to be worse in the present era in the
developing countries.
• Corruption and bribery reduce economic efficiency, create
rent seeking and reduce welfare.
• They divert funds from worthwhile projects to large
projects where bidders for contracts can be bribed.
 Corruption and Bribery
• Also they can reduce growth – Barro found a “rule of
law” variable was an important determinant of the rate of
growth in cross-country growth regressions.
• The index specifically measures the attributes of
government such as quality of bureaucracy, political
corruption and risk of government expropriation.
 Corruption and Bribery
• Corruption can be analyzed dynamically using game
theory or the theory of epidemics.
• There may be multiple equilibria for the level of
corruption – such as northern Italy and southern Italy –
as the result of a shock to initial conditions.
 Corruption and Bribery

• Corruption may be an inverse function of economic

development.
• Little has been written on this topic.
• However it has been found that higher incomes and
more stringent penalties helps to reduce corruption and
richer countries have both.
 Corruption and Bribery

• A surrogate measure of corruption is economic

openness. The more open the economy, the greater the
flow of information, and the less opportunities for
corruption.
• Openness and economic freedom seem to be highly
correlated with economic development (see Tables 13.1
and 13.2).
 Corruption and Bribery in Asia
• Corruption/bribery in Asia is highly correlated with the
level of income and rate of growth in income (Table
13.3).
• Countries of East Asia are the least corrupt and South
Asia the most corrupt based on reports of various
international agencies.
 Corruption and Bribery in Asia
• The pattern of corruption in Asia has changed over time
(see Table 13.3)
• The Philippines has become relatively less honest in
both Transparency International and Global
Competitiveness Report rankings
• Korea has become relatively less corrupt than it was in
the late 1990s.
• The rest of the countries have maintained the same
relative position give or take one place.
 How To Deal With Corruption
• Impose stiff penalties on offenders.
• Provide adequate financial rewards for government
officers.
• Keep better and more accurate records.
• Appoint higher quality bureaucrats and judges.
• Make promotion based on performance, not who you
know.
 How To Deal With Corruption
• Reduce the discretion of any individual –rules based
systems.
• Cut down red tape/size of bureaucracy.
• Start an anti-corruption agency.
• Legalize corruption and sell/auction the right to collect
taxes for a fixed sum of money?
 Role of Education System and
Parents
• Have classes on ethics and cooperative behavior in
schools.
• Review and discuss such systems as they have evolved in
Asia – PRC, Indonesia, Singapore, Philippines for
examples.
• Spend more time with children since time spent with
children seems to increase the tendency for altruism to
develop in both parent and child.
 Ethics and Economic Analysis
• Economic theory tells us almost nothing about income
distribution.
• Must rely on ethics/justice to make these sorts of
judgments.
• Rawls says that justice is achieved by the society
moving in a way to maximize the income of the poor.
 Ethics and Economic Analysis
• This is different from Pareto although it may be consistent
with Pareto in some cases.
• Rawls wants to make the poor better off without making
others worse off. Pareto is more general.
• There are many proposals made for how to improve
income distribution (Table 13.4).
 Application of Ethics, Justice
and Income Distribution to Asia
• Societies where income distribution was more equitable
had higher rates of growth than societies where income
was less equitably distributed – recall results in Chapter
9.
• But it is difficult to make changes to income distribution
quickly.
 Application of Ethics, Justice
and Income Distribution to Asia
• Some argue that religion also has an impact – the
Buddhist connection. But what about Myanmar?
• Circle of influence where altruism plays the biggest role
begins in the family. If we believe that these kinds of
altruistic behavior are beneficial both economically and
culturally, then these values should be cultivated
throughout the society.
 Corruption experience in Asia
• Philippines – both petty corruption and grand corruption
seem to be endemic.
• Estimates range up to 30 percent of national budget lost
to corruption.
• Vote buying and illegal gambling are other aspects.
• Immigration by those frustrated by lack of progress.
• This may provide a safety valve.
 Corruption experience in Asia
• Social weather stations monitors corruption and attitudes
toward corruption.
• Business is fed up with corruption.
• Ombudsman may get popular support along with other
agencies (see Table 5.7 in Future Perspectives
 Corruption experience in Asia
• Thailand has a culture of patronage.
• Gifts of good will are a tradition.
• This has morphed into a culture of corruption.
• Transparency International suggests corruption not as
high as Indonesia and Philippines.
• Local economists estimate 4 to 5 percent of government
budget lost to corruption.
 Corruption experience in Asia
• Prostitution, drugs, guns, gambling – all illegal - also sap
resources.
• Public sector procurement may be inflated by as much
as 40 percent – comparable to the level in the
Philippines.
• Recent efforts to curb corruption may be paying off.
• Middle class and business are fed up.
 Corruption experience in Asia
• Korea has made a lot of progress in dealing with
corruption with the growth of income and the middle
class.
• Many officials convicted and former president arrested.
• Citizen’s coalitions have played a role.
• Transparency International index has slowly improved.
• Political contributions of Chaebol are still a worry.
 Corruption experience in Asia
• China has a tradition of gifts to elders and those in power
(Guanxi).
• Distribution of goods on two track system created
opportunities for corruption.
• Level of corruption has increased every since
Transparency International began surveys in early
1980s.
• As forces of capitalism have strengthened so has
corruption
 Corruption experience in Asia
• SOEs are big offenders.
• Worse than corruption of smaller private sector
enterprises.
• Prosecutions show embezzlement and bribery and
misappropriation of funds accounted for 80 percent of
criminal cases.
• More high ranking officials involved over time.
 Corruption experience in Asia.
• Corruption in financial institutions which are state owned
and without competition.
• Bribery for infrastructure spending to expand into
western provinces – railroads, power, education.
• Illegal taxes on farmers.
• Money allotted for resettlement misdirected.
 Corruption experience in Asia.
• Spread of market has resulted in more corruption.
• SOEs bribe to get contracts to compete with private
sector.
• Devolution of power means that more bribes are
required to get things done.
• Outcomes of bribes are less certain in a decentralized
system.
 Corruption experience in Asia.
• India has extensive history of corruption.
• Large bureaucracy and lots of red tape is a fertile ground
for corruption.
• Transparency International in depth survey suggests the
bribery is endemic.
• 50 to 80 percent of 14,000 people interviewed had a
direct experience of bribing someone in police, land tax
dept, judiciary.
 Policies in Asia for the future
• Deregulate and liberalization of economy.
• Reduce size of civil service.
• Enhance business transparency.
• Financial sector reforms to allocate resources through
markets not the bureaucracy.
• Stress efficiency in public sector.
• Reduce nepotism
 Policies in Asia for the future
• Leave a paper trail and increase strength and clout of
auditors.
• Computerization wherever possible.
• Reform political process, so that politicians
don’ t require big contributions to get elected.
• Freedom and corruption not necessarily related (see
Table 5.11)
 Policies in Asia for the future
• This is sometimes attributed to the intellectual and
political divide in poorer countries where middle class is
small.
• For the poor good politics revolves around personal
dignity.
• Estrada was loved by the poor – he treated them with
respect and dignity.
• Thaksin had his support in the countryside even though
he was wealthy.
 Policies in Asia for the future
• Honesty divide a real possibility.
• Taiwan, Korea, Hong Kong and Singapore are on one
side of he divide.
• All the rest are on the other.
• Need to get them to the “right” side of the honesty divide.
 Summary
• Investigation of aspects of behavior of economic agents
beyond usual analysis: altruism, cooperation and ethics.
• Normative versus positive judgment.
• Important policy issues such as corruption, bribery and
income distribution for Asia.