The East Asian Model of Development and Financial Crisis Essay
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The East Asian miracle is often quoted as an example of how countries can register fast paced growth through focused and concentrated growth in industry and trade. However, in the last few decades, countries that have grown at varying paces and this rate of growth has varied in different environments. The East Asian tigers, ruled by authoritarian regimes, grew at an astounding pace in the decades of the sixties and the seventies. While authoritarianism worked well in this region, dictatorial regimes in Uganda, Bhutan and Myanmar failed.
Przeworski and Limongi (1997) show how political freedom enables the optimal use of resources in any country. Interest groups exert pressure on governments and ensure widespread and sustainable growth. Free market based economies work on the principles of rule of law, property rights and enforcement of contracts. This way growth is robust and is not vulnerable to shocks that are inherent in a globalizing world. The East Asian countries, including Japan, went through a financial crisis as foreign investment flows got reversed, currencies were devalued and balance of payments suffered.
This crisis was the result of a long history of economic inefficiencies helped by regimes that were often corrupt, interventionist and politically entrenched. It is against this backdrop that people all over the world started questioning the entire east Asian model, which till the early nineties was seen as an efficient system that had enabled a large number of poor countries develop their industry, trade and economy at a pace rarely seen before. Economic development and liberty There are those who argue that democracy is inefficient and is prone to market failures.
Governments are seen as enforcement agencies that ensure redistribution of wealth. Lipset (1959) and Sen (1999) have argued against this proposition and shown that it is indeed democracy that fosters economic growth. Those who argue in favour of authoritarian rules have one extreme example of Singapore that they often quote. Lee Kuan Yew the first Prime Minister of Singapore who believed in authoritarianism authored the Lee paradigm, and under him Singapore became a prosperous nation.
Researchers have examined the Lee paradigm to check whether authoritarian regimes have fostered greater growth and development when compared to democratic structures. According to Haizheng and Zhenhui (2007) who have worked on this model to check whether authoritarian regimes have fostered greater growth and development than have democratic structures, there are indeed a few examples of countries like Singapore and South Korea that have shown impressive growth under authoritarian regimes.
However the correlation between authoritarianism and economic growth is not robust. There are counter examples like Botswana and India where economic growth has been spectacular within democratic frameworks. Sen (1982) goes further to argue that there are enough examples of countries where authoritarianism or the lack of a democratic structure has actually resulted in economic decline. In countries like Niger, Ethiopia, Sudan and even in China, famine and hunger took hundreds of lives and an authoritarian regime could do little to avert the crises.
He states further that democratic institutions such as a free press, a vigilant opposition and regular elections ensure that the democratic process keeps the political economy alert. Lobbies do exist, interest groups try to steer the political economy in certain ways, but the interplay of all stakeholders ensures that democracies throw up issues that are of common concern. Howlett and Ramesh (2003) point out that it is often seen that individuals, groups, classes, and states participate the democratic policy process.
Their own interests often guide them. However when these come together, it is the institutional mechanism of a democratic framework that ensures a stable outcome. Government and the Economy Governments and political policies are important influences on businesses worldwide, impacting on the competitive context in which business strategies are implemented. Over the last couple of decades, economic reforms leading to privatization and liberalization have further increased this influence.
Donaldson & Preston (1995) have pointed out how as the impact of business on societies grows, companies experience varying and increasing demands from diverse stakeholders. Politics is the stage on which these diverse stakeholder demands are ultimately met with. Success requires active participation from both businesses and governments. Further as Tushman & Anderson (1997) show, modernization and strategic dependence on new technologies has become central to markets in many economies.
These new technologies create regulatory challenges that again require political responses that can affect the viability and profitability of the business. Governments thus influence the ability of businesses to improve profits and therefore the ability to exert political influence in technologically dynamic sectors becomes an important capability. Again, globalization has greatly improved the chances of conducting business internationally, allowing companies to widen their portfolios and enter into global markets.
The significance of governmental policy therefore again assumes great significance in matters of export import regulations, duties etc. (Ohmae, 1999). Democracy and Government What is the better option – A strong centralized power controlling all resources versus private players given the freedom to decide what and where to invest? There are a number of people who keep insisting that a dictatorship is what the country requires. Arguing against them is the lot that states categorically that a democratic system that guarantees liberty is what is essential for growth.
Economic growth implies the efficient use of available and scarce resources. The argument between those who support a centralized planned and tightly controlled allocation of resources versus those who believe in the market to efficiently allocate resources goes on. Apart from the political concerns, economists have been looking at this issue for a while now. Ronald Coase (1960), a Nobel prize winner in Economics had argued in his famous transaction cost analysis, that there is a cost that society bears when the government allocates resources and this leads to inefficiency.
Governments have no way of knowing who will use resources most efficiently and in most cases allocate resources to inefficient players. Other economist have points to the tragedy of the commons, where the absence of clearly defined property rights leads to free rider problems and over exploitation of resources. The question therefore is whether markets should be left free to correct themselves or to have a stringent regulatory mechanism in place that ensures consumer welfare through controlling dominance and capture.
In the current scenario then, what exactly is the nature of relationship between governments and businesses? Though the balance has tilted towards the private sector and private enterprise by and large, the state still holds considerable powers over business activities. Doris Fuchs (2005) talks about the different aspects of power that businesses hold in the global economy. Fuchs explains that those who argue stating that there is no business influence on politics should note that the opposite is the case, in countries like those in East Asia.
Development of any economy depends on the growth in income, employment and opportunity. These are a direct outcome of investments made, technologies used and markets created. In all these, it is important to look at the roles that the state and the private players play. Governments foster an investment climate that encourages capital flows, incentivise production, builds capacities and enables markets to develop. Cooperation between private business and the government paves way for the efficient markets to develop where demand is created and supply increased to maintain equilibrium.
Several examples of such collaborative ventures can be seen especially in large infrastructure developments see across the world. The first example of such a collaboration was seen at the twentieth century when in the US an entire railroad industry developed. Private public partnerships have also been widely used to tackle rising pollution levels and the need for tighter environment protection. The first wave of environment protection saw governments work with a slew of stringent laws and regulations. Then came the non governmental organisations that lobbied against polluters.
NGOs, government and civil society work as levers for promoting a greening of industry. Lehmann (2006) uses the Danish example of the Green Network, to demonstrate how new forms of co-operation between public authorities and private companies are arrived at. The conclusion is that through dialogue, reflexivity and the establishment of an enabling environment, public–private partnerships can become useful vehicles in societies’ move towards the use of environmentally sustainable technologies. Conclusion Democracy, as a form of governance that guarantees political freedom, has long been viewed with suspicion in certain quarters.
Various economists have explained how a strong property rights regime within free markets is the best way of guaranteeing efficient resource sharing. Any political regime that interferes with the market then abides by its own rules that could very well be steered in inefficient ways through coercive power that some constituents possess. However, the free market argument has its critics, who ague that some people tend to capture all resources and this results in exploitation of a large group of underprivileged people.
Governments, in such cases, are unable to implement rules and the market fails. Gunnar Myrdal had coined a term called “soft states” in his book “The Asian Drama”, where the argument was that some states because of their governance structures, history and culture are unable to implement tough action and therefore cannot regulate markets effectively. This has been shown to be big reason for authoritarian states to move fast by way of economic growth, as they were able to take stern steps that are required to ensure growth and development.
However the correlation between authoritarianism and economic growth is not robust. Democratic institutions such as a free press, a vigilant opposition and regular elections ensure that the democratic process keeps the political economy alert. In terms of issues that relate to public resources, especially the environment, the tragedy of the commons is a prevalent phenomenon and as Hardin (1968) explains, it is the lack of private incentives and state inefficiencies that play havoc with public goods.
The environmental decay and abuse that is seen in authoritarian regimes that have no space for protest and counter opinion ensures that there is no political interest in protecting the environment. In democracies however, lobbies do exist, interest groups try to steer the political economy in certain ways, but the interplay of all stakeholders ensures that democracies throw up issues that are of common concern. It is often seen that individuals, groups, classes, and states participate in the democratic policy process. Their own interests often guide them.
However when these come together, in a rule of law mechanism that guarantees equality in the eyes of the law, it is the institutional mechanism of a democratic framework that ensures a stable outcome. The East Asian economies developed without such a framework and therefore, as the economy grew, it also became fragile. The effect of a shock like that seen during the financial crisis therefore affected all segments of the society and the economy. That is why, it is important that economies today are built on robust fundamentals of an enabling market mechanism and not on tight governmental control and intervention.