East Asia: Development Challenges in the 21 Century Yun-han Chu

Article explores whether EA developing economies can respond to global and regional changes as well as their respective domestic socio political environment.

The most recent regional crisis (1997-1999) is seen as a failure of many EA countries to cope with changing conditions and transformative forces. The biggest challenge is to rethink, redefine and reinvigorate the role of the state amid 2 forces: globalization and democratization.

Globalization and the diffusion of economic neo-liberalism have constrained the state’s capacity to manage national economy, protect against market outcomes and steer industrial change.

Democratization has brought down many non-democratic regimes and threatens the viability of remaining authoritarian arrangements in the region. Authoritarian order has been replaced with partisan contestation and electoral uncertainty. Elected regimes need to balance demands of business elite, newly mobilized social sectors, NGOs and urban middle classes.

Crisis was externally induced and home grown. Rising global liquidity fed huge amounts of short-term capital into poorly regulated institutional settings. This heavy inflow of STK exposed economies to sudden reversal of capital inflows. The blame for the explosion of the crisis is on the financial panic of international and domestic investors suddenly concerned with their fate of their portfolios.

Taiwan’s experience coping with the crisis poses a challenge to the neo liberal call of one size fits all institutional reform. Taiwan was insulated from the external financial shock in part because its dependence of foreign portfolio investment and short term foreign borrowing was minimal. Taiwan chose a sequence of financial liberalization that gave priority to deregulating domestic capital market over foreign participation. When the government of Taiwan opened the stock market in 1991 for foreign investors, it had a strict investment cap and raised the ceiling gradually (during the crisis FI totaled only 4% of the total market capitalization). In addition the central bank prohibited domestic banks from offering local currency accounts for their customers abroad. Lessons from Taiwan: 1) A country should choose its pace of financial opening in accordance with its tolerance for short term fluctuation and the strengthening of its regulatory and monitoring capacity. 2) A prudent financial regulatory regime should place a premium on creating environments of stability and predictability for domestic savers and investors first rather than for global investors. 3) A country should give priority to developing the domestic capital market over internationalization. In foreseeable future EA developing economies have to live with 3 facts:

1) The trend of financial globalization will not be arrested and sophisticated financial products will continue to expand with the current pace of technological innovation. 2) De-globalization is not a viable option because attempts to disengage the economies from global financial integration will bring economic ostracism by powerful allies in the international financial centers. 3) Burden of controlling volatility in exchange rate and of containing contagion effects will be shouldered by themselves.

Because E. Asian countries vary greatly in size, trajectory of economic development, level of industrialization, etc it is useful to break down developing Asia into 3 groupings:

First Tier/High Income NIE: Hong Kong, Singapore, Taiwan, South Korea Second Tier/Middle Income: Malaysia, Thailand, Philippines and Indonesia Transitional Economies: China, Vietnam and Myanmar.

Long Term Sustainability of EOI

Two main questions:

1) Did the recent crisis signal the end of EOI strategy just like ISI did in Latin America? 2) Is developing E Asia ready for a new growth pattern centered on information and telecommunication technologies (IT)?

Although EOI benefited EA economies in many ways, the past success does not offer assurance for the long-term viability. This is especially the case for second-tier NIEs whose fast EOI was due in part to S.E. Asian currency coinciding with Japan and First Tier EA NIE currency appreciation. Thus, EA NIEs must undertake proactive strategies to cope with the constant market pressures for upgrading their industrial portfolio and level of technological sophistication. Specifically they must face the challenged of increased fragmentation of production processes across national borders propelled by the revolution in IT technologies.

Second tier NIEs have not replicated the success of first tier NIEs. Since early 1990s their export sector has faced adverse terms of trade fluctuation, falling prices, falling profits and dwindling new FDI. Threats to growth: 1) Their export performance was threatened by a general trend of excess capacity worldwide n the making of manufactured goods. 2) Their export-oriented manufacturing activities have over concentrated on one sector –electronics. 3) They have lost their wage competitiveness associates with currency appreciation to the newly emerging low cost production sites such as China and Vietnam.

So second-tier NIEs are facing tougher challenges than had been the case for first-tier NIEs in the 1980s. They have to overcome technological protectionism practiced by their major foreign investors Japanese TNCs, Korean Chaebols and Taiwanese investors. Protectionism and fragmentation tends to lock their specific export oriented sector into a sort of “export enclave” with minimal technological externalities and spill over benefits.

New IT technologies are at the roots of new productivity sources and new organizational forms. There is little chance for a country or region to develop in the new economy without its incorporation in the technological system of the information age.

For second tier NIEs, EOI is no longer sufficient to sustain the export-led growth in the new century. The right ingredients for a sustainable EOI strategy must include human capital development, support of R & D, acquisition of skills and a comparative advantage in the production and utilization of technology: information, telecommunication, advance material components and biotechnologies.

Distributive Implications of Globalization:

The adjustment to globalization oftentimes fell most heavily on the economically disadvantaged groups—typically farmers, unskilled laborers, migrant workers, women and ethnic minorities. The financial crises have when the region’s inadequacy of its domestic social protection mechanism. The recent financial and economic crises in E. Asia may have added around 10 million more people to the ranks of those living below a dollar a day. Not even the most dynamic E. Asian economies had an adequate system of safety net in place. In the coming decade, the state in developing EA will confront growing demand for the establishment of effective system to protect the socially vulnerable from structural adjustments. The will be considerable debate within the region about whether and how to extend safety nets.