IS THE EAST ASIAN ECONOMIC MODEL STILL RELEVANT?

Manu BhaskaranCentennial Group Inc

July 2002

KEY POINTS

East Asian Model Definition / Was there such a model?

New arguments Shift to domestic-driven growth?

The real story: Major re-thinking of growth models

THE EAST ASIAN THE EAST ASIAN MODELMODEL

Common features1. High savings rate2. Emphasis on education3. Export-friendly policy regimes4. Pragmatic, non-ideological5. Egalitarian approach

Agriculture in Korea,Taiwan Public housing in HK/Singapore

THE EAST ASIAN MODEL (2)

Were these features unique to Asia? Good economic housekeeping rules Other success stories shared these

Botswana: fastest growing economy

NOT UNIQUE TO EAST ASIA ALONE

EAST ASIANS PURSUED DIFFERENT MODELS

1. Government role Hong Kong: laissez-faire Taiwan: focused in some sectors Korea: allocated capital,… Singapore: hyper-active govt

Each had different starting points Each evolved own responses

DIFFERENT MODELS

2. Foreign capital inflows Korea: xenophobic Taiwan: wary Singapore: open Hong Kong: ultra open

Portfolio capital: earlier opening Direct investment: liberalised later

DIFFERENT MODELS (2)

3. Capital markets Korea: heavily distorted Taiwan: some political influence Singapore: Relatively free, ex-CPF HK: Free, main allocator of capital

Banks under tight govt control ex-HK

DIFFERENT MODELS (3)

4. Size of companies

Korea: chaebol-driven Taiwan: Mainly small companies,

govt-backed ones in crucial sectors Singapore: MNCs and GLCs HK: Vibrant, early globalisers

DIFFERENT MODELS (4)

5. Other degrees of openness Labour market

HK/Singapore: Highly open Korea: closed

Protectionism Korea/Taiwan: High HK/Singapore: Very low

DIFFERENT MODELS (5)

6. Domestic competition policy

HK: Some cartels, otherwise free Taiwan: Generally free Singapore: GLCs dominated Korea: SMEs/consumers squeezed

RE-THINKING MODELS

SHIFT TO DOMESTIC DEMAND?

Slowdown in global demand More competitive export markets

Means better depend on domestic

DOMESTIC DEMAND AS DRIVER?

Is this possible? Domestic linked to external demand

Trade sector generates incomes Freer trade increases incomes

Can policy discriminate? Favouring domestic demand distorts

NEW THINKING

1. Economic philosophy HK: Shift away from laissez-faire S’pore: Allowing more laissez-faire Korea: Substantial opening Taiwan: Opening up as well Malaysia: Reviewing NEP Thailand: Moderating growth targets

NEW THINKING (2)

2. Resource allocation

Bond markets: less bank financing Banks liberalised Prices less distorted

Interest rates freed Product prices closer to world prices

NEW THINKING (3)

3. Savings and consumption

Freer banks: easy consumer credit

Trade liberalisation: prices fell

Consumption/GDP rose post-crisis

NEW THINKING (4)

4. Corporate sector

Restructuring: more efficient More policy emphasis on

Local companies vs MNCs Consumer protection, competition

policy

CONCLUSION

No single model Pragmatism prevailed Substantial re-thinking going on

BEWARE APPLYING SIMPLISTIC MODELS TO ECONOMIES