Public Disclosure Authorized _ _ ff u f f "~~~~~~~I II 'II < ,, ,,,,_, _, ,.,._.. E[.4!2t p-II5 IF 'liF .. _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Public Disclosure Authorized e__ __ __ _ = _ ~~~~~~~~~~=__ ___ __ ___ ___ :?=__ ___-__________________ S~~~~~~~~ A;____---;i_ir__ _ = _ _ _ _ _ _ _ __~~~~~~~~~~I' ~ I I i__ .- e- .... - -.- .....-. e ... -- e= ............. = II Public Disclosure Authorized I ... E m E g~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ g II gI Ii SE;, Public Disclosure Authorized THE LESSONS OF EAST ASIA Common Foundations of East Asian Success Peter A. Petri The World Bank WVashington,D.C. Copyright @1993 The hItemational Bankfor Reconstuction and Development/THEWOCRLD BANK 1818H Steet, N.W. Washington, D.C 20433,U.S.A All rights reserved Manufachturedin the United States of America Fust printing October 1993 The findings, interpretations,and conclusionsexpressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank,to its affiliatedorganizaticas, or to members of its Board of ExecutiveDirectors or the countries they represent.The World Bankdoes not guarantee ihe accuracyof the data included in this publicationand acceptsno responsibilitywhatsoever for any consequenceof their use. Any maps that accompanythe text have been prepared solely for the convenienceof readers; the designationsand presentationof material in them do not imply the expression of any opinion whatsoever on the part of the World Bank,its affiliates,or its Board or membercountries concemingthe legal status of any country, territory,city, or area or of the authorities thereof or concerningthe delimitationof its boundaries or its national affiliaton. The material in this publication is copyrighted.Requests for permissionto reproduce portions of it should be sent to the Officeof the Publisherat the address shown in the copyrightnotice above.The World Bank encouragesdissemination of its work and will normallygive permissionpromptly and, when the reproduction is for noncommercialpurposes, without asking a fee. Permissionto copy portions for classroomuse is granted through the Copyright ClearanceCenter, 27 Congress Street,Salem, Massachusetts01970, USA. The complete backlistof publicationsfrom the World Bankis shown in the annual Indexof Publications, which contains an alphabetical titlelist (withfull ordering information)and indexes of subjects,authoxs, and countries and regions.Tne latestedition is availablefree of chargefrom the DistributionUnit, Office of the Publisher,The World Bank,1818 H Street,N.W., Washington, D.C 20433,USA, or from Publications,The World Bank,66, avenue d'I#na, 75116Paris, France. ISSN: 1020-0924 Peter A. Petri is Carl J. Shapiro Professorof InternationalFnance and directorof the LembergProgram, Interational Economicsand Finance,at BrandeisUniversity. Library of Congss Cataloging-in-PublicationData Peti, Peter A., 1946- Common foundations of East Asian success I by Peter A. Petri. p. caii - (The Lessons of East Asia) Indudes bibliographicalreferences. ISBN0-8213-2616-3 1. East Asia-Economic policy. 2. East Asia-Economic conditions. L TiLtle. IL Series. HC4605.P48 1993 338.95-dc2o 93-32722 CaP CONTENTS FOREWORD ..................-. v ACKNOWLEDGMENTS ................. vii EXECUTIVE SUMM4ARY ................. ix I. INTRODUCTION 1. U. THEORIESOF THE MIRACLE. 5 Right Fundamentals. 5 WrongPrices. 6 ConduciveCulture. 6 Contagion.7 m. CAUSALFACTORS AND COUNTRYEXPERIENCE. 8 OutwardOrientation .11 MacroeconomicDiscipline .13 High Razs of Savingand Investment.14 StareEnterprises. 16 IndustrialPolicy .16 FinancialInterventions .18 Elite Bureaucracies.19 ConfucianCulture .20 Imitationof the East Asian Model .21 FavorableExternal Environment .22 IV. TOWARDA SYNTHESIS.23 A Spectrumof Stategies .23 MultipleSolution Key Functions..24 SmoothTrack .25 Efficient Steering.25 Enginesof Growth .26 Fittingthe Modelt the Environmemn. 27 V. CONCLUSIONS.28 ANNEX ......... 30 REFERENCES ......... 32 iii FOREWORD Policymakerseverywhere are searching for lessons from East Asia's enormoussucces in economlcdevelopment. A numberof receotcross-country and thematlcstudies have soughtto Identify and analyzethe policiesbehind this success. Amongthem is The East Asian Miracle, a recent World Bankpublication, which draws in part on the Lessonsof East Asia project. Studyteams, includingin- countrynationals, examined in some depththe experiencesof the highly successfulEast Asianeconomies and the public policiesunderpinning then. Several clear contributionsemerge from this set of countrystudies. The research: Highlightsconsiderable variation in approacheswithin the group of &ast Asian economies.For example,some economies chose a substantialdegree of government intervention;others did not. The studiesdispel the notion that there is a single or uniformEast Asian modelof success. * Demonstratesthat a core set of good economicpolicies - such as macroeconomic discipline, outward orientation, and human resource development - laid the foundationfor East Asia's success. Pragmaticpolicymaking - understoodas being nonideologicaland reversible- seemsto be at the heart of these policiesand merits replication. * Dispels some of the myths about the more idiosyncraticinterventions, such as "pickingwinners' in industry, which sometimesproduced the desired result and sometimesdid not. Becausepresence or absenceof institutionalfeatures seems to have affected the outcomesof these interventions,applications to other regional contextsmust be approachedcautiously. A dominantfinding of the studiesis that seriousdiversions from macroeconomicequilibrium were largelyavoided, even by stronginterventionists. At the sametime, the later generationof industrializerswere more successfulwhen they avoided these industrialpolicies. A questionnot easily answeredis why East Asian govermnentsadopted fundamentallysound policiesand were apparentlyable to achievebeoner results from their active policiesand to incur lower costs from errors. In this connection,the studiestouch on such dimensionsof policymakingas the role of the state, leadership, and the bureaucracy. It is one thing to describe the institutionalfeatures accompanyinga successfulepisode, however,and quite another to know why and how those features came about. For instance,why did East Asian leadersapparently hold themselvesmore accourtablefor economicperformance than has been the experienceelsewhere? How did the governmentsmanage to gain sufficientnational consensus to put difficultpolicies into effect? These aspectsof politicaleconomy cannot be ignored. Our analytic tools, however, are severely limited in penetratingthese issues, in assessingtheir impacts,and in assigningcredit to them. These country studies are only one step, althougha significantone, in deepeningour understandingof the experienceof East Asia It is hoped that they will prompt additionalwork on the institutionalfoundations of rapid growth. GautamKaji Vice President East Asia and Pacific Region v ACKNOWLEDGMENTS Thispaper and all the papersproduced as part of the countrystudies project have benefited from the insightsand observationsoffered by discussantsand commentatorsat a conferenceheld at the East-WestCenter in Honolulu,November 19-21, 1992. The participantsincluded the followingregional and countryexperts: Duck-SooHan, Hal Hill, ChalmersJohnson, WolfgangKasper, Hyung-li Kim. Paul Kreisberg, Chung H. Lee, Manual Montes, Seiji Naya, Takashi Nohara, John Page, TambunlerthchaiSomsak. Wanda Tseng, Wing lTye Woo,Ippei Yamazawa,and Zainal AznamYusof. The papers also benefitedfrom a Bank-widereviwe of the projectin August, 1993. The country studies team included Amar Bhatacharya, Leung Chuen Chau, Scott Christeen, Carl Dahlian, DavidDollar, Kim Kihwan, Saha Dhevan Meyanathan. Mari Pangestu,Peter Petit Ismail Salleh, Ammar Siamwalla,Teck-Wong Soon, C. Suan Tan, and Vinod Thomas. The county authors would like to acikowledgefruitful dialoguewith our country counterpartsand the analyticwork prepared in WorldBank countrydepartments as part of Bank economicand sector work. The countrystudies were edited by Rupert Pennant-Rea.The project assistantwas Jason Brown. This projectwas undertake with the support of LawrenceH. Smmers, Nancy Birdsall,John Page, and GautazmKaji, CallistoMadavo, Marianne Haug, and VinodThomas. Danny M. Leipziger CountryStudies Director vii EXECUVE SUMMARY From small city statesto large resource-richcountries, East Asia has developedremarkably fisr. The region's diversity, however,is not adequatelyrecognized in previousinterpretations of its economic miracle. Several alternativeexplanations have been offered, emphasizing(1) sustainedmarket-oriented policies, cultural propensitiesfor education, entrepreneurshipand stable government. Each of these explanationsprovides insight into the causes of one or more of the region's miracles,but none fits fully the region's wide-rangingexperience. This paper arguesthat the commonfeatures of East Asiandevelopment lie deeper, in successalong hree criticaldimensions of economicmanagement. Each East Asian miracle economy(1) built a stable macroeconomicenvironment conducive to investmentand enterprise, C2)used powerfulmarket or non- marketincentives to guide resourcesand initiativeinto efficient activities, and (3) found a dynamicengine of growth to provide leadershipfor development. Each die' so, however, with very different policies. The paper also proposes that East Asian growth was reiCorced by the 'contagion effects" of rapid progress