wade intro
NATURE, it is said, does not make jumps. But what has happened in capitalist
East Asia during the postwar era is as close to a jump up the economic hierarchy of nations as nature ever makes. Japan leapt from the thirtieth richest
country in per capita income in 1962 to eleventh in 1986; Taiwan from eightyfifth to thirty-eighth; South Korea from ninty-ninth to forty-fourth. I By the
early twenty-first century Japan, Taiwan, South Korea, and China will probably have as much weight in the world economy as North America or Europe.
Taiwan and South Korea will be as rich as Great Britain and ltaly.2
The West knows of this success primarily through trade. Japan was already
the world's fourth biggest exporter of manufactures in 1965, and number two
twenty years later. Over the same two decades Taiwan rose from twentyeighth to tenth, Korea from thirty-third to thirteenth.3 As suppliers of manufactured goods to the United States, Japan was number one in 1986, Taiwan
was number four, and Korea was number five.
Behind these numbers lie some astonishing industrial achievements. Japan's need no mention, so much are they the staple of our daily press. Taiwan's and Korea's are less familiar. But their achievements are such that U . S . ,
Japanese, and European multinational companies are beginning to seek out
their firms not just as second-tier partners dependent on other people's technology but as equal partners in strategic alliances to develop new products.
Both countries are mastering the microcircuit design and production which is
at the heart of innovation in electronics and other electronics-dependent industries. In mid-1988 a Taiwan firm launched a "clone" of IBM'S PS/2 personal
computer, a machine introduced only the previous year and far harder to duplicate than any other personal computer. A public research institute has licensed its Chinese basic input-output system,to IBM for use in its Asian personal computer, and has formed a joint venture with Hewlett-Packard to
develop software for the Asian market. Some of Taiwan's many semiconductor design houses are close to the world leaders in application-specific integrated circuits. The Korean semiconductor industry is only nine to twelve
months behind the leading Japanese and American firms in the technology for
large-capacity memory chips, and is the world's third largest fabricator. Samsung, the most advanced of the Korean firms, agreed with IBM in 1989 to swap
their semiconductor patent portfolios, the first time IBM has made a broad
I GNP per capita, World Bank Atlas data. The World Bank does not publish post-1980 data for
Taiwan; the Taiwan rank for 1986 was calculated by a compatible method. See chapter 2.
2 Klein 1986.
3 See table 2.2.
4 INTRODUCTION
semiconductor patent swap with a firm from outside Japan, North America.
and Europe. This agreement signals Samsung's impending entry into the front
ranks of the world semiconductor industry. In automobiles Korea may well
become the first big new entrant into the world car industry since Japan in the
early 1960s. In consumer electronics it is the second biggest producer after
Japan of videocassette recorders and microwave ovens. Several other high
value-added industries in both countries are very competitive internationally.
including steel, machine tools, and petrochemicals. In short, Taiwan and Korea may be the first developing countries to join the dozen or so states in the
world "club of innovators," whose membership has been remarkably stable
during the twentieth century.
Anyone who claims to offer an explanation for the wealth of nations must be
concerned to show how the East Asian capitalist cases fit the general theory, for
if the fastest growers cannot be accommodated the theory itself is cast in doubt.
There are those who hold that East Asian economic success is to be ascribed
to economic openness and small government. With internal prices reflecting
real scarcities and the state kept firmly in its place, resources flowed to their
most efficient uses. The limitations of small domestic markets were overcome
by exporting manufactured goods at competitive prices. Rapid export growth
in tum generated a growth dynamic far greater than would otherwise have
occurred. In contrast, countries which adopted more inward-looking strategies
based on the domestic market have stagnated, partly because of small market
size and partly because the regulations needed to support the strategy choked
the initiative of private businesspeople, depriving them of the stimulus of competition and misdirecting their remaining energies into lobbying and other socially unproductive activities.
Other interpreters hold that government intervention was an important factor, but only insofar as it promoted exports and offset market failures. Government interventions "simulated" an ideal market, in their view. They would
agree with proponents of the first approach that the East Asian experience
confirms the truth of Charles Wolf's paradox: "If development is accorded
dominant emphasis among national objectives and policy priorities, the recipes on which successful development seems to depend impose definite limits
on the extent and character of government intervention" (1981:91).
These two "market-supremacy" interpretations of East Asian performance
have occupied the mainstream of the economics profession over the 1970s and
1980s. Ranged against them, in varying degrees of opposition, are a number
of other views. Some emphasize Confucian group-mindedness and frugal consumption preferences combined with a get-up-and-go entrepreneurialism.
Others emphasize external demand generated by the rhythm of Western capital
accumulation linked to Western defense against communism. Still others emphasize particular techniques of business management. But the most popular
of the unorthodoxies stresses the importance in capitalist East Asia of a certain
INTRODUCTION 5
kind of government role in the economy, which makes for a new and more
effective way of putting the institutions of capitalism together.
Some who make this "government leadership" argument say or imply that
government intervention-most celebratedly by Japan's Ministry of International Trade and Industry (MlTI)-was the principal factor behind East Asian
success. A more tenable formulation is a synergistic connection between a
public system and a mostly private market system, the outputs of each becoming inputs for the other, with the government setting rules and influencing
decision-making in the private sector in line with its view of an appropriate
industrial and trade profile for the economy. Through this mechanism the advantages of markets (decentralization, rivalry, diversity, and multiple experiments) have been combined with the advantages of partially insulating producers from the instabilities of free markets and of stimulating investment
in certain industries selected by government as important for the economy's
future growth. This combination has improved upon the results of free
markets.
In the context of how poor countries can become less poor, the point at issue
has far-reaching significance. Indeed, for many countries the current problem
is not how to become less poor but how to stop becoming even poorer: twothirds of middle-income countries had declining levels of investment in 1980-
86. 4 The leading theorists of the International Monetary Fund and the World
Bank, being among the more passionate supporters of the free market theory
of rapid growth, have prescribed liberalization and privatization as the cure.
As summed up by the Economist, "Increasingly, the two institutions have
found themselves embroiled in the same set of policy issues: how can economies grow even when the international climate is unfavorable? The answer
that the Fund and the Bank give can be summed up in four words: get the
prices right" (1983,24 Sept.:39). To have the most rapid development which
their circumstances allow, developing countries must aim to integrate the domestic economy more completely into the international economy and reduce
the extent of government "interference" in the market. If governments do not
see reason voluntarily, the international agencies are justified in obliging them
to do so in the best interest of their own citizens as well as the world economy
as a whole.
Given their success, Taiwan and South Korea lend compelling support to
this prescription-if the prescription fairly summarizes the mechanism of their
success and if the conditions of the world economy in which the mechanism
worked for them are sufficiently present today. But if the argument can be
made that government steerage of the market has been an important factor in
East Asia, then the general recipes for developing countries would need rethinking. For it could not then be said that more economic liberalization is
always better; the desirability of integration into the international economy
4 World Bank 1988. table 4, gross domestic investment.
6 INTRODUCTION
becomes a matter of degree and circumstance, to be weighted against the desirability of improving existing arrangements for planning and controlling,
and of relying more on growth in domestic demand than on export demand.
The warranted limits on liberalization have to be specified with the same care
as the arguments in favor and accommodated to the same body of rationalization. It could not be said that for reasons inherent in the nature of government,
no government is able to expand the wealth of the nation faster than unguided
entrepreneurs on their own. The capacity of governments to accelerate development by raising investment and promoting some activities ahead of others
becomes a variable, not a constant.
The point at issue is also relevant to the citizens of the West. For the booming nations of East Asia are posing a competitive threat to their manufacturing
industries. Indeed, when asked from where they saw the most serious competitive threat to U.S. manufacturing over the next five years, more than twothirds of the 250 U. S. manufacturing executives questioned identified "the
emerging countries such as Brazil, South Korea, and Taiwan." Only 29 percent picked Japan, and a dismissive 5 percent picked Europe (Business Week,
12 Jan. 1987). In the face of this competition there is a real possibility of
decline in living standards for sections of the population who are displaced
into lower-paying jobs or into no jobs at all. To think about strategies of response, it is essential to understand the mechanism of East Asian competitiveness. Is it based mainly on cheap labor and devotion to free markets? Or is it
based on a different arrangement of the institutions of capitalism, with government helping to strengthen the competitiveness of selected industries? If the
latter, it questions the viability of the philosophical aversion in the United
States, especially, toward a government role in identifying and supporting
specific industrial goals. It cautions against economic liberalization and less
state intervention as the central thrust of the developed country responseunless we wish to follow the advice of the Goodyear vice-president who said,
"Until we get real wage levels down much closer to those of the Brazils and
Koreas we cannot pass along productivity gains to wages and still be competitive" (Toronto Globe and Mail, 19 June 1987).
Taiwan is one of the most successful cases of economic development on
record. In less than a quarter of a century it has become a major trading nation
and an industrialized economy.
East Asia during the postwar era is as close to a jump up the economic hierarchy of nations as nature ever makes. Japan leapt from the thirtieth richest
country in per capita income in 1962 to eleventh in 1986; Taiwan from eightyfifth to thirty-eighth; South Korea from ninty-ninth to forty-fourth. I By the
early twenty-first century Japan, Taiwan, South Korea, and China will probably have as much weight in the world economy as North America or Europe.
Taiwan and South Korea will be as rich as Great Britain and ltaly.2
The West knows of this success primarily through trade. Japan was already
the world's fourth biggest exporter of manufactures in 1965, and number two
twenty years later. Over the same two decades Taiwan rose from twentyeighth to tenth, Korea from thirty-third to thirteenth.3 As suppliers of manufactured goods to the United States, Japan was number one in 1986, Taiwan
was number four, and Korea was number five.
Behind these numbers lie some astonishing industrial achievements. Japan's need no mention, so much are they the staple of our daily press. Taiwan's and Korea's are less familiar. But their achievements are such that U . S . ,
Japanese, and European multinational companies are beginning to seek out
their firms not just as second-tier partners dependent on other people's technology but as equal partners in strategic alliances to develop new products.
Both countries are mastering the microcircuit design and production which is
at the heart of innovation in electronics and other electronics-dependent industries. In mid-1988 a Taiwan firm launched a "clone" of IBM'S PS/2 personal
computer, a machine introduced only the previous year and far harder to duplicate than any other personal computer. A public research institute has licensed its Chinese basic input-output system,to IBM for use in its Asian personal computer, and has formed a joint venture with Hewlett-Packard to
develop software for the Asian market. Some of Taiwan's many semiconductor design houses are close to the world leaders in application-specific integrated circuits. The Korean semiconductor industry is only nine to twelve
months behind the leading Japanese and American firms in the technology for
large-capacity memory chips, and is the world's third largest fabricator. Samsung, the most advanced of the Korean firms, agreed with IBM in 1989 to swap
their semiconductor patent portfolios, the first time IBM has made a broad
I GNP per capita, World Bank Atlas data. The World Bank does not publish post-1980 data for
Taiwan; the Taiwan rank for 1986 was calculated by a compatible method. See chapter 2.
2 Klein 1986.
3 See table 2.2.
4 INTRODUCTION
semiconductor patent swap with a firm from outside Japan, North America.
and Europe. This agreement signals Samsung's impending entry into the front
ranks of the world semiconductor industry. In automobiles Korea may well
become the first big new entrant into the world car industry since Japan in the
early 1960s. In consumer electronics it is the second biggest producer after
Japan of videocassette recorders and microwave ovens. Several other high
value-added industries in both countries are very competitive internationally.
including steel, machine tools, and petrochemicals. In short, Taiwan and Korea may be the first developing countries to join the dozen or so states in the
world "club of innovators," whose membership has been remarkably stable
during the twentieth century.
Anyone who claims to offer an explanation for the wealth of nations must be
concerned to show how the East Asian capitalist cases fit the general theory, for
if the fastest growers cannot be accommodated the theory itself is cast in doubt.
There are those who hold that East Asian economic success is to be ascribed
to economic openness and small government. With internal prices reflecting
real scarcities and the state kept firmly in its place, resources flowed to their
most efficient uses. The limitations of small domestic markets were overcome
by exporting manufactured goods at competitive prices. Rapid export growth
in tum generated a growth dynamic far greater than would otherwise have
occurred. In contrast, countries which adopted more inward-looking strategies
based on the domestic market have stagnated, partly because of small market
size and partly because the regulations needed to support the strategy choked
the initiative of private businesspeople, depriving them of the stimulus of competition and misdirecting their remaining energies into lobbying and other socially unproductive activities.
Other interpreters hold that government intervention was an important factor, but only insofar as it promoted exports and offset market failures. Government interventions "simulated" an ideal market, in their view. They would
agree with proponents of the first approach that the East Asian experience
confirms the truth of Charles Wolf's paradox: "If development is accorded
dominant emphasis among national objectives and policy priorities, the recipes on which successful development seems to depend impose definite limits
on the extent and character of government intervention" (1981:91).
These two "market-supremacy" interpretations of East Asian performance
have occupied the mainstream of the economics profession over the 1970s and
1980s. Ranged against them, in varying degrees of opposition, are a number
of other views. Some emphasize Confucian group-mindedness and frugal consumption preferences combined with a get-up-and-go entrepreneurialism.
Others emphasize external demand generated by the rhythm of Western capital
accumulation linked to Western defense against communism. Still others emphasize particular techniques of business management. But the most popular
of the unorthodoxies stresses the importance in capitalist East Asia of a certain
INTRODUCTION 5
kind of government role in the economy, which makes for a new and more
effective way of putting the institutions of capitalism together.
Some who make this "government leadership" argument say or imply that
government intervention-most celebratedly by Japan's Ministry of International Trade and Industry (MlTI)-was the principal factor behind East Asian
success. A more tenable formulation is a synergistic connection between a
public system and a mostly private market system, the outputs of each becoming inputs for the other, with the government setting rules and influencing
decision-making in the private sector in line with its view of an appropriate
industrial and trade profile for the economy. Through this mechanism the advantages of markets (decentralization, rivalry, diversity, and multiple experiments) have been combined with the advantages of partially insulating producers from the instabilities of free markets and of stimulating investment
in certain industries selected by government as important for the economy's
future growth. This combination has improved upon the results of free
markets.
In the context of how poor countries can become less poor, the point at issue
has far-reaching significance. Indeed, for many countries the current problem
is not how to become less poor but how to stop becoming even poorer: twothirds of middle-income countries had declining levels of investment in 1980-
86. 4 The leading theorists of the International Monetary Fund and the World
Bank, being among the more passionate supporters of the free market theory
of rapid growth, have prescribed liberalization and privatization as the cure.
As summed up by the Economist, "Increasingly, the two institutions have
found themselves embroiled in the same set of policy issues: how can economies grow even when the international climate is unfavorable? The answer
that the Fund and the Bank give can be summed up in four words: get the
prices right" (1983,24 Sept.:39). To have the most rapid development which
their circumstances allow, developing countries must aim to integrate the domestic economy more completely into the international economy and reduce
the extent of government "interference" in the market. If governments do not
see reason voluntarily, the international agencies are justified in obliging them
to do so in the best interest of their own citizens as well as the world economy
as a whole.
Given their success, Taiwan and South Korea lend compelling support to
this prescription-if the prescription fairly summarizes the mechanism of their
success and if the conditions of the world economy in which the mechanism
worked for them are sufficiently present today. But if the argument can be
made that government steerage of the market has been an important factor in
East Asia, then the general recipes for developing countries would need rethinking. For it could not then be said that more economic liberalization is
always better; the desirability of integration into the international economy
4 World Bank 1988. table 4, gross domestic investment.
6 INTRODUCTION
becomes a matter of degree and circumstance, to be weighted against the desirability of improving existing arrangements for planning and controlling,
and of relying more on growth in domestic demand than on export demand.
The warranted limits on liberalization have to be specified with the same care
as the arguments in favor and accommodated to the same body of rationalization. It could not be said that for reasons inherent in the nature of government,
no government is able to expand the wealth of the nation faster than unguided
entrepreneurs on their own. The capacity of governments to accelerate development by raising investment and promoting some activities ahead of others
becomes a variable, not a constant.
The point at issue is also relevant to the citizens of the West. For the booming nations of East Asia are posing a competitive threat to their manufacturing
industries. Indeed, when asked from where they saw the most serious competitive threat to U.S. manufacturing over the next five years, more than twothirds of the 250 U. S. manufacturing executives questioned identified "the
emerging countries such as Brazil, South Korea, and Taiwan." Only 29 percent picked Japan, and a dismissive 5 percent picked Europe (Business Week,
12 Jan. 1987). In the face of this competition there is a real possibility of
decline in living standards for sections of the population who are displaced
into lower-paying jobs or into no jobs at all. To think about strategies of response, it is essential to understand the mechanism of East Asian competitiveness. Is it based mainly on cheap labor and devotion to free markets? Or is it
based on a different arrangement of the institutions of capitalism, with government helping to strengthen the competitiveness of selected industries? If the
latter, it questions the viability of the philosophical aversion in the United
States, especially, toward a government role in identifying and supporting
specific industrial goals. It cautions against economic liberalization and less
state intervention as the central thrust of the developed country responseunless we wish to follow the advice of the Goodyear vice-president who said,
"Until we get real wage levels down much closer to those of the Brazils and
Koreas we cannot pass along productivity gains to wages and still be competitive" (Toronto Globe and Mail, 19 June 1987).
Taiwan is one of the most successful cases of economic development on
record. In less than a quarter of a century it has become a major trading nation
and an industrialized economy.
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