wade
1. Introduction
When historians look back on the second half of the twentieth century they will
likely see the economic renaissance of East Asia as one of the seminal events.
Starting with Japan in the 1950s, it rolled on to Taiwan, South Korea, Hong Kong,
and Singapore in the 1960s and 1970s; later (but less so) to Southeast Asia; and
into China in the 1990s. It represents the first major challenge to the global hierarchy of military, economic, and cultural power created by the British Empire and
its European counterparts in the eighteenth and nineteenth centuries, and led by the
United States since the Second World War. It has begun to restore the region to the
forefront of world development, which it earlier occupied for more than a thousand
years before being eclipsed in the new Western-centric world order (Arrighi 2007).
Our focus is on the world order of Northeast Asia, created by Japan in the late
nineteenth and early twentieth centuries and then integrated into the emerging
American empire after the Second World War. Myrdal’s (1968) Asian Drama said
little about Northeast Asia, focused as it was on South Asia and secondarily on
Southeast Asia.
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2. Exceptional Economic Performance in Northeast Asia
Today the Northeast Asian countries remain among a small set of non-Western
economies to have escaped the typical structural constraints on developing countries. But instead of ‘developing countries’ or ‘emerging economies’ we should
speak of ‘peripheries’ in the core–periphery structure of the world economy. The
core emits impulses; the periphery receives impulses and supplies the core with
inputs that sustain the core’s technological, economic, financial, and military
dominance—including supplies of skilled people (Fischer 2015).
The Northeast Asian countries remain among a still smaller set of non-Western
countries which have developed mostly indigenously-owned firms across a broad
range of major global industries, able to act as first-tier suppliers to (Western or
Japanese) multinational companies (MNCs) and even compete head-to-head
with them. The range includes chemicals, petrochemicals, electronics, steel, shipbuilding, cars, and car parts, and more recently, biotech, advanced semi-conductors,
artificial intelligence, nanotechnology, and space exploration. This achievement
reflects their development of an indigenous capacity for technological innovationon-the-world-frontier. Yet they are located some 9,000 kilometres across the Pacific
from the world’s biggest and most innovative market, while next-door Mexico has
languished.
Just how exceptional is the economic performance of Northeast Asia is clear
from the answer to the question: how many non-Western countries have reached
the general level of prosperity of Western Europe and North America in the past
two centuries? Fewer than ten. The small number of catch-ups makes the point that
the main long-term growth pattern in the world economy has been: ‘divergence,
big time’ (Pritchett 1997). A World Bank (2013) study confirms this conclusion. It
identified 101 countries in 1960 as ‘middle-income’ and found that, of those, only
thirteen reached ‘high income’ almost five decades later, by 2008.
Table 19.1 (panel A) shows, for 1970 and 2010, the average income of several East
Asian countries as a percentage of US average income, plus Indonesia, India, and
Brazil. Taiwan and Korea, together with China, stand out for the magnitude of their
catch-up. Most of the rest of the world looks more like Indonesia, India, and Brazil.
Taiwan held the world record for the number of years of continuous 6 per cent
or more growth until 2010, at 32 years (1962 to 1994). Korea came second, at
29 years (1962 to 1991). China broke Taiwan’s record in 2010; by then it had grown
continuously at more than 6 per cent for 33 years, if its growth statistics can be
trusted (Pritchett and Summers 2014).
Investment rates underpinning these growth performances are shown in
Table 19.1 (panel B). By way of comparison, the UK figure for 1990 was 19 per cent
and the US figure was 17 per cent.
We have to keep in mind that most of the non-Western countries that ‘made it’
into developed country status have small populations (future China aside).
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The rarity of income and production catch-up on the scale of Northeast Asia, and
the relatively small ‘demographic mass’ involved, suggests that the world economy
contains a segmentation analogous to a ‘glass ceiling’ or ‘middle-income trap’. The
idea is at odds with mainstream or neoclassical development theory, which presumes the world economy is an open-ended system with no overall structure of a
core–periphery kind, analogous to a marathon race in which the position of each
runner is a function of internal fitness.
The next section discusses the causes proposed by analysts writing in the mainstream tradition, often called neo-liberalism. Their interpretation—emphasizing
market liberalization in Northeast Asia—has been the most influential in the more
general debate about economic development, including in the World Bank. I suggest that its influence stems less from the power of confirming evidence than
the power of sheer simplicity (Occam’s Razor) plus fit with a pro-Western-capital
ideological story.
3. Northeast Asia’s Rise in the Neo-liberal Paradigm
By the 1980s, when Northeast Asia’s rise began to attract sustained attention from
Western policy analysts, most economists and the Western-controlled multilateral development organizations (including the World Bank, the IMF, and the
OECD and its Development Centre) viewed their subject through the lens of
neo-liberalism—the newly resurgent economic faith in the West, including in
development economics.
Table 19.1 Comparison of income and investment in Asian countries
Panel A: Country average income as % of US real average income, 1970 and 2010
Japan Taiwan S. Korea Malaysia Indonesia China India Brazil
1970 50 20 10 15 5 5 5 15
2010 70 80 70 45 20 25 10 30
Panel B: Gross capital formation/GDP, selected entities, %
1970 1990 2012 1980–2014
China 33 36 47 40
East Asia & Pacific minus China 23 32 30 28
LICs & MICs minus East Asia 22 22 25 23
Note: Panel A: Penn World tables 9.0, based on 2011 purchasing power parity (PPP) numbers,
rounded to nearest ventile. Panel B: LICs = low-income countries, MICs = middle-income countries.
Source: Panel A: Author’s update from Cherif and Hasanov (2015). Panel B: World Development
Indicators, 22 December 2015.
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Neo-liberal philosophy says that ‘the market’ is the best institution for both
economic growth and liberty. Even where unambiguous ‘market failures’ are
identified, they are generally best left untreated, because the societal costs of
correcting them through ‘state intervention’ are likely to be higher than the
societal gains. The optimum degree of openness to the international economy is
close to maximum openness, because global integration raises competitive pressure on all domestic producers and thereby makes national economies more flexible and channels resources to their most efficient uses. The idea that governments
should curb competition in the interests of helping some firms and industries
reap economies of scale, and curb global integration in the interests of national
social cohesion and national employment, has little value in this way of seeing
(Wade 1992a, 2017a, 2017b).
The World Bank’s (1993) book, The East Asian Miracle, is a relatively sophisticated case in point. It examined the causes of success in eight ‘high-performing
Asian economies’: Japan, the three first-generation newly industrialized economies
of South Korea, Taiwan, and Singapore, and three second-generation Southeast
Asian economies of Thailand, Malaysia, and Indonesia, plus Hong Kong. The
book argues that the states made important contributions to the fast growth of
these countries by ensuring ‘the fundamentals’: low inflation and competitive
exchange rates; human capital; effective and secure financial systems; low price
distortions; easy access to foreign technology; and low bias against agriculture.
In other words, the states implemented effective ‘horizontal’ policies, applied
across all sectors. But ‘strategic’ interventions—sector-specific policies to promote
specific industries or even specific firms—‘generally did not work’ (World Bank
1993: 354; Wade 1996). The take-away message: ‘openness to international trade,
based on largely neutral incentives, was the critical factor in East Asia’s rapid
growth’ (World Bank 1993: 292, emphasis added).
This argument makes Northeast Asia powerfully confirm the neo-liberal answer
to Adam Smith’s question: how does market capitalism generate human welfare?
The answer is market liberalization—and in a global context, global integration, or
moving towards ‘the world as one economic country’, having no more restrictions
on economic flows or ownership claims across borders than US states have across
theirs. It is an argument not just for free trade but also for free capital movement;
conversely, it downplays the value of both national sovereignty and democracy. In
short, the World Bank concluded that, contrary to William Easterly in epigraph
one, East Asia’s rise was no mystery. The main causes are identified in epigraph
two, the pro-Western-capital argument from the World Economic Forum.
4. The Rise of the Developmental State
We can give a more interesting answer by asking: what conditions enabled Myrdalian
cumulative causation between rising state capacity, rising internal peacefulness,
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and rising incomes. Put the other way, what conditions enabled Japan, Taiwan,
and Korea to avoid the common fate of the periphery—the ‘weak state’, with
a well-entrenched ruling group fighting internal enemies, supplying narrowly
focused public goods to favour its own supporters, and loosely enforcing the
rule of law? What conditions enabled them to begin with the ‘special-interest
state’ (a well-entrenched ruling group able to maintain internal stability, tending
to favour its own supporters in order to fortify its grip on power but also focusing
over time on long-term national goals), and then transition towards the ‘commoninterest state’ providing broadly based public goods, thereby helping to raise
incomes and reduce discontent (Besley and Persson 2011).
We need to keep in mind the point made by Francis Fukuyama: ‘Holding on to
a certain structure of political power is often a life-and-death issue for leaders of
poor countries’ (Fukuyama 2004: 49). This holding on to power often results in
low state capacity and low commitment to national development goals, even to the
point of the rulers creating antagonistic relations between government ministries
in case rival groups benefit from the new economic opportunities created by a
national development project and use their new wealth to try to replace the
incumbents, perhaps by investing in violence (Kohli 2004).
It turns out that the answer to how Northeast Asia sustained the cumulative
causation between rising state capacity, rising incomes, and rising internal peacefulness is closely related to the geopolitics of Northeast Asia and the US, and the
resulting structure of the regional economy. The rise of Northeast Asia is far from
a story of a small group of marathon runners forging ahead in an open race.
4.1 The ‘Luck’ of Location, Endowments, and Timing
The historian Bruce Cumings reminds us: ‘If there has been an economic miracle
in East Asia, it has not occurred just since 1960; it would be profoundly ahistorical
to think that it did’ (Cumings 1984: 3). In a longer treatment we would begin with
causes of East Asia’s economic pre-eminence up to the seventeenth century. Cutting
short this longue duree, I begin in the late nineteenth century and the three ‘orders’
in East Asia at that time (Woo 2016). The first was the world of state-capitalist
Northeast Asia, created by Japan with its late nineteenth century colonization of
Korea and Taiwan, followed in the 1930s and first half of the 1940s by colonization
of Manchuria and down the east coast of China. The Japanese colonial government
treated Korea and Taiwan as offshore farms, mines, and industries, closely integrated to the core. It replicated similar economic and political institutions and
policies as earlier in Japan—nationalistic, insular, militaristic, state-permeated,
focused on raising productivity in agriculture, mining, and early manufacturing, and committed to providing mass elementary school education. By 1940,
somewhere between 50 to 70 per cent of Korean and Taiwan children were in
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elementary school. All three countries were more homogeneous in terms of
ethnicity and religion than most other countries.
The second world order, created by Western colonialists, comprised Hong
Kong and Southeast Asia. The colonialists transformed the economy (entrepôt
Hong Kong apart) into commodity production for Western markets, mainly in
the form of plantations, empowering big landlords. But outside the extractive sectors, colonial governance was more passive, more accepting of incumbent landed
elites than in Japan’s empire. By 1940 only about 2 per cent of children were in
elementary school in the French colony of Vietnam. Also, the host societies were
ethnically and religiously much more diverse than in Northeast Asia. The third
world order was China, which later, in the post-Second World War decades, came
to be seen as an enemy of the new US-shaped order in capitalist Northeast Asia.
Our interest is the Japanese–centred world of Northeast Asia, starting with
Japan’s forced opening in the mid-nineteenth century. For some 250 years before
the mid-nineteenth century Japanese rulers isolated the country. In 1853,
Commodore Perry of the US navy sailed into Edo (now Tokyo) harbour with a
fleet of warships and demanded that Japan open up to American commerce. His
visit sent shockwaves through the country’s leaders, who feared that America
might colonize Japan as it strove for dominance across the Pacific. News had
already reached Japan of European states gobbling up chunks of China through
what later came to be known as the Unequal Treaties, from 1839 to 1849, by
which European states imposed European laws on foreigners in China and set
tariffs on goods imported through the treaty ports. Would Japan be next? The
Japanese government responded with wholesale reforms to create a centralized
state and national identity as the basis for a strong military. The guiding spirit was
expressed by a Japanese leader in the wake of Perry’s visit: ‘If we take the initiative, we can dominate; if we do not, we will be dominated.’
The Meiji restoration of 1868 launched a frenzy of industrialization and
militarization lasting several decades, guided by the developmental mindset that
emerged from the brutal collective choice of ‘sink or swim’. The government
undertook a Big Push in state capacity, including fiscal, legal, and public goods. It
sent teams of officials around the Western world to investigate ways to organize a
modern society, such as a tax system, a post office, a railroad, an army, a state
constitution, a parliament, a judiciary, and the like, and then implemented the
best models at home.
Japan militarized so fast and effectively that in 1894–1895 its navy defeated
China’s and a decade later defeated Russia’s. The latter sent a shockwave through
Western governments, as the first time in the modern era that an Asian state had
defeated a European state (as Russia was then considered). Japan went on to
become the first non-Western country to catch up with the West in broad measures of production structure, military strength, and mass living conditions. At the
same time a powerful group of chauvinist ideologues began to advocate for a new
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pan-Asian order led by Japan, to fend off Western empires. This group paved the
way for Japan to take Korea and Taiwan as colonies in the late nineteenth and
early twentieth centuries, and later, large swathes of China.1
Following Japan’s defeat in the Second World War, Korea reverted to the unified
kingdom it had been for a thousand years before it became a Japanese colony—
now with a president rather than a king or emperor. Taiwan reverted to a neglected
province of the Chinese polity, as before it became a Japanese colony in 1895.
After the war, Japan continued to be ruled by the developmental mindset
institutionalized during the Meiji restoration and fortified in the 1930s in the
build-up to war. A similar mindset began to be institutionalized in national elites
of independent Korea and Taiwan, building on the developmental legacy of
Japanese colonialism. Having emerged in Japan in response to the external threat
of the US, it re-emerged in Japan and was created anew in Korea and Taiwan in
response to another external threat, from close-by communist states of China,
North Korea, and Russia. More broadly, the developmental mindset emerged from
the combination of:
• a lack of natural resources, above all, land and energy, which allowed the
countries to escape ‘the natural resource curse’ (overvalued exchange rate
hindering manufactured exports, and government based on control of natural
resource enclaves, ignoring the rest of the population), and on the other hand,
abundance of people, with a high ratio of working age people to young-and-old
dependents, and a long history of mass literacy and elementary education,
which made them outliers for countries at their income levels;2
• huge post-war challenges to reconstruct (as distinct from create de novo)
physical and organizational infrastructure;
1 Following its victory in the Sino–Japan war of 1894–1895, Japan formally annexed Taiwan into
the Japanese Empire in 1895, as the first (formal) step in implementing the Southern Expansion
Doctrine. The annexation lasted until Japan’s Second World War defeat in 1945. Japan began creeping
colonial rule in Korea in the 1870s and made Korea a ‘Protectorate’ in 1905 and a full-fledged colony
in 1910. Japanese rule broke the pre-colonial Yangban’s (landed elite’s) hold on the state. Senior positions in the state were filled with Japanese bureaucrats, who applied economic development lessons
from the Meiji Restoration (1868–1912) to Korea. They encouraged Korea-based Japanese business
groups, similar to the zaibatsu at home, with state-financed credit, cheap electricity, and other benefits. It is widely believed in Korea that Japanese colonialism heavily damaged the economy’s growth
potential. We should qualify this belief with the fact that factories left behind at the end of the war
fairly quickly regained pre-war levels of production, thanks to the know-how in the heads of Koreans
who had worked as middle managers in Japanese-owned companies. Also, the pre-war experience of
Japanese zaibatsu made it easier for President Park Chung Hee and his government to nurture Korean
equivalents, the chaebol, in a similar relationship to the state. Other favourable long-term causes
include ethnic homogeneity, cultural propensity to take organizational goals as one’s own personal
goals up and down the hierarchy, and more. On organizational incentives in Korean and Indian
bureaucracy, see Wade (1982a, 1982b, 1985, 1992b).
2 Irma Adelman and Cynthia Morris compiled 1961 data for seventy-four developing countries.
Taiwan was 44th in per capita income, 12th by ‘socio-political’ development, and 4th by ‘development
potential’ (Wade 1990b/2004: 109). The median age in Japan in 1970 was 28.8 years; Hong Kong 21.7;
Singapore 19.7; South Korea 19.0. The UK median age was 34.2 years, same as Germany’s.
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• the imperative of building up industry to escape low value-added activities
and grow the exports needed to pay for industrialization and military
imports; and
• a perception of immanent and existential threat from nearby communist
countries, which necessitated a strong military, US protection, and highspeed industrialization, while at the same time allowing mass consumption
and living conditions to improve by enough to limit domestic unrest—which
enemy neighbours could exploit.
Early post-war Taiwan, with a population of six million, received a turbulent
influx of between one and two million in 1949 as the Nationalist (Kuomintang)
army and government lost the long-running civil war with the Red Army and
Chinese Communist Party, and its leaders, officials, military, and sympathizers
fled to Taiwan, 150 kilometres from the mainland. The incomers, under Chiang
Kai-shek, claimed to still constitute the rightful ruling regime of China; so they
planned merely to regroup in Taiwan for later resumption of the civil war on the
mainland. The native Taiwanese, most of whose ancestors had come from the
mainland two and more centuries before and had experienced fifty years of total
separation from the mainland under Japanese rule, saw the incomers as foreign,
and vice versa. With little need for support from the local elite, the Nationalists
implemented a disciplined one-party state on Taiwan, applying lessons from their
disintegration on the mainland, and discriminating economically and politically
in favour of themselves. They constantly invoked the threat of communist invasion
or subversion to justify authoritarian rule. The threat was real. For example, the
Red Army bombarded Nationalist-held small islands close to the mainland in
1954 and 1958. In short, Taiwan at this time was a ‘special-interest’ state, but
the well-entrenched (and semi-foreign) ruling group was disciplined to provide
broader (rather than narrower) public goods both by the external threat and by
the US government.
The Korean War of 1950 to 1953 pitted communist North Korea backed by
China and the Soviet Union against South Korea backed by the US and a coalition
of allies. The numbers ‘killed and missing’ were: South Koreans—210,000 from
the military and one million civilians; North Koreans—406,000 from the military
and 600,000 civilians; Chinese—600,000 from the military; and American theatre
deaths—37,000. The war ended with an armistice but no peace treaty, the peninsula
divided into North and South. The two sides are technically still ‘at war’. From the
end of the war till today the North Korean regime has undertaken sustained provocation and terror in the South. At the time of my fieldwork in South Korea in 1979,
every metre of beach on the country’s long coastline was raked at sunset and
inspected at dawn in the hunt for footprints of North Korean sea-coming saboteurs.
As in Taiwan, South Korea’s rulers—following the military coup led by Park
Chung-hee in 1961—implemented a tightly disciplined military dictatorship,
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using the external threat as its justification. Park had been educated in a Japanese
military academy and served in the Japanese army in Manchuria, when he
studied the history of the Meiji Restoration and the role of the state in Japan’s
industrialization. He was chief architect and driving force of Korea’s developmental state from 1961 until his assassination in 1979—his core belief was ‘we can do
anything if we try’, as though all problems could be overcome by sheer willpower.
Soon after taking power, he arrested leading businessmen and threatened them
with jail (for ‘corruption’) unless they left for the US and returned with export
orders; he expropriated houses of senior military (clustered in one part of Seoul),
on grounds that their salaries could not possibly have afforded such houses, and
handed the area to the diplomatic colony; and he closed down the golf course in
the heart of Seoul, built as a facility for American troops and the Korean elite.
Both governments sustained intense surveillance over their populations. In Seoul,
some rubbish collectors and street sweepers were equipped with unobtrusive
communications devices, which marked them out—it was said—as surveillance
agents as they went about their work, especially in the poorer districts.
Korea and Taiwan transitioned to a democratic regime as late as the second
half of the 1980s, well after they had passed through the demographic transition.
Even Japan was almost a one-party state; the Liberal-Democratic party was the
majority party in nearly every government from 1955 to the present. The dominant
political philosophies of these countries emphasized ‘order’ and ‘nationalism’
more than ‘liberty’ and ‘free enterprise’, in contrast to neo-liberal philosophy,
despite Western media presenting them as lovers of liberty and free enterprise
and the American way of life, the better to justify aid against communists.
4.2 The US Role in Northeast and Southeast Asia
Before the Second World War the US had little presence in Northeast Asia. It
entered in force as part of its hegemony strategy. In East Asia and in Western
Europe it saw severe and persisting communist state enemies. So ‘containment of
communism’ became the top US foreign policy priority in both East Asia and
Western Europe (Lee 2017). After several decades of close ties to Chiang and the
Nationalists, including the Second World War alliance, the US after 1949 plunged
into Cold War with communist China and then into hot war in Korea. The US saw
communist China and North Korea—with communist Russia close by—as a severe
threat to its emerging ‘Pacific sphere of influence’. But despite powerful voices in
Washington wanting the US to help Chiang re-start the civil war on the mainland,
Secretary of State Dean Acheson prevailed in his call for ‘strategic restraint’ and a
less aggressive policy of building ‘a great crescent’ of containment around China.
The US poured in assistance to its three Northeast Asian allies—troops, economic
advisors, political advisors, teachers, Christian missionaries, accompanied by
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large financial transfers. Drawing on New Dealers’ experience of trying to foster
pro-development governments in Latin America before the war, US advisors
helped construct centralized, top-level agencies to plan the use of very scarce
capital and helped construct an effective civil service, police, judiciary, and education system. During the American Occupation of Japan (1945–1952) the Japanese
government instituted ‘the most restrictive foreign-trade and foreign exchange
control system ever devised by a major free nation’, with American blessing
(Hollerman 1979). The country’s renaissance was much helped by the Korean
War, 1950–1953, because it made Japan the main source of American procurements. The prime minister at the time, Shiguru Yoshida, later declared, the war
was a ‘gift of the gods’.
The US government gave strong backing for expropriative land redistribution
in all three countries. The land reforms helped establish political order and support for industrialization by curbing the landed classes and strengthening peasant
support for the state—making the rural population a less fertile site for communist
subversion. They created a small farmer agrarian structure receptive to intense state
efforts to raise agricultural productivity as a condition for fast industrialization
(Dore 1965; Wade 1982a). The US government made clear that assistance would
not be sustained indefinitely. It gave assistance in the spirit of raising the capacity
of the state to finance and man its own bureaucracy and military, so that US
resources and personnel could be scaled back without danger to Cold War
containment. The periods of intense US involvement in helping to create the
developmental state and ward off military attack were: Japan 1948–1964; Taiwan
1950–1965; and South Korea 1945–1965.
Note that the ending of intense US involvement came as the US and allies
geared up military efforts on behalf of South Vietnam, fearing that ‘communism’
might triumph in Indochina after semi-failing in Korea. Korea sent 320,000 troops
to fight alongside South Vietnamese and American troops and received in return
tens of billions of dollars in grants, loans, tech transfer, and preferential markets
from the Johnson and Nixon governments.
In short, thanks to the threat of communist state expansion in a region the US
sought to make its sphere of influence (having been attacked from the Western
Pacific at Pearl Harbour), the US transferred huge resources to the East Asian
three. It raised their foreign exchange reserves (allowing them to run sustained
current account deficits), boosted their investment ratios to unusually high levels,
and helped to discipline the use of investable funds by strengthening the commitment
of national elites to transform the production structure towards manufacturing
and away from agriculture and commodities, and create appropriate planning and
implementation organizations. Also, it gave the aid and loans in a form that did
not dilute national ownership of the industrial sector, in contrast to Latin America’s
reliance on US firms to establish subsidiaries. And it gave Northeast Asian countries privileged access to its giant high-income market for manufactured goods.
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In the case of Taiwan, the US financial transfers averaged about US$600
million a year from 1951 to 1965 (2016 dollars), the biggest US aid transfers per
capita in the world through that period. The US civilian and military aid officials
were particularly attentive to ensuring the appropriate use of the resources they
transferred to the Nationalist government, well aware of the history of wanton
corruption during the Nationalist Party’s decades of misrule on the Chinese
mainland before retreating to Taiwan in 1949. US resources went directly to firms
in the fertilizer, shipping, cement, aluminium, paper, glass, sugar, chemical,
synthetic fibre, and pharmaceutical industries. US officials helped draw up regulations for property rights, investment, export-processing zones, and the like.
They consistently opposed the many senior people in the Nationalist government
committed to establishing new enterprises as public rather than private enterprises.
They put their weight behind those wanting strong state leadership of a largely
private sector economy.
In 1959, the director of the US aid mission to Taiwan proposed an eight-point
economic reform programme, which included unification of the exchange rate,
liberalization of controls on foreign exchange, and privatization of state-owned
enterprises. Based on this proposal, the government launched its Nineteen-Point
Program of Reform in early 1960, which amounted to a cautious, controlled
sequence of promoting exports, opening the economy, replacing some imports in
line with an industrial strategy, privatizing a few state-owned enterprises (leaving
the commanding heights—the upstream input supplying firms—in public ownership, contrary to American wishes), plus creating or strengthening several
agencies to pilot the programme. The US offered a large loan conditional on fulfilling certain goals of the programme.
Lee (2017) sums up: ‘By the end of the official aid program in 1965, Taiwan had
acquired a developmental state, in which the instruments of state guidance
remained but the basis of development was private industry’. The US sponsored
similar reforms in Japan and South Korea.
Compare US strategy in its former colony, the Philippines, where the US saw
no existential threat.3 In response to a communist-led insurgency in parts of the
countryside, the government and the US relied on a counter-insurgency strategy—
and did not try land reform, which would have upset the existing landlord–
government complex. The US did not provide anything close to its Northeast
Asia level of assistance for the Philippines’ own attempt at indigenous
industrialization, or encourage effective state planning. It remained relaxed as aid
resources fed into existing landlord-dominated patronage networks, as it was not
relaxed further north.
3 The Philippines was under Spanish rule for centuries before the US took it as a colony in 1898. US
rule lasted till 1941. The US colonial administration was much less dense than the Japanese administration in Korea and Taiwan, and ruled through landed elites.
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The US supported the Filipino government’s emphasis on intensification of
agricultural goods and raw materials, not industrial goods (Lee 2017; Rock 2017).
Why? The US saw the Philippines as a periphery of the regional economy focused
on threatened Northeast Asia. The top American priority was to industrialize
Japan, Taiwan, and South Korea, so as to give them the ability to stand up to their
enemies and provide frontline defence of the US. Filipino commodities exported to
these countries would provide cheap inputs for people and industry, and help their
industrialization while also removing their temptation to import commodities
from nearby communists. So the Philippines ‘suffered’ from not having a communist enemy able to threaten the survival of its pro-American state. Neither its
own elite nor the US government pushed for a ‘production transformation’ coalition.
The Philippines remains a periphery in the wider East Asian economy to this day.
Three broader points about the geopolitics and timing should be made. First,
in the US and Japanese vision, Japan was to be tied to the US by economic, political,
and ideological means, and was itself to be the restored core of the Northeast
Asian regional economy. Taiwan and South Korea were to be lower-cost semiperipheries (though this terminology was not used). All three were to receive easy
access to the US market, and favoured for public procurement, on account of
their security importance to the US. Encouraged by their governments’ commitment to the vitality of these economies, US and Japanese firms took their first
steps of importing cheap-labour manufactures from domestic producers or from
their own operations there (not from next-door Mexico, in the case of US firms).
Second, timing mattered. The Big Push development efforts in Northeast Asia
coincided with the US leading a big multilateral trade and investment liberalization project through the General Agreement on Tariffs and Trade (GATT), which
placed more pressure on developed countries to open their markets than on developing countries to open theirs. Northeast Asian firms, and branches of Western
multinational corporations, were the ‘first movers’ to take advantage of the new
export opportunities, using Western demand to compensate for relatively low
domestic demand out of low incomes and small populations. In particular, they
rode the wave of post-war mass consumption of oil-automobile-mass production
products of the fourth great technological revolution, and then, from the 1970s,
the wave of emerging demand for the information and telecommunication products of the fifth revolution. With their head start, they were well established and
moving up value chains and down cost curves by the time producers in other
developing countries came into the game.
The regional economy developed a pattern of integration famously known as
the ‘flying geese’ model. As Japan grew fast by the late 1950s some firms began to
offshore to Taiwan or Korea (or switched supply to local producers, often in joint
ventures); as costs rose in Taiwan and Korea, the process repeated to cheaper sites in
Southeast Asia and Indochina—and over the 1990s, China. But an often-overlooked
qualification to the flying geese model is that whole industries generally did not
move; the high value-added parts remained at home and the lower value-added
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activities were offshored. Rather, Northeast Asia saw an early development of
what would later be called ‘global value chains’ and should more accurately be
called ‘regional value chains’. But contrary to today’s orthodoxy about GVCs, which
suggests that integration into GVC is a better alternative to building a domestic
integrated supplier base, these governments promoted both at the same time.
Here is an example of the flying geese mechanism. In the 1970s, Japanese
electronics firms like Cassio, Canon, and Sharp began to offshore the assembly of
low-end calculators to Taiwan firms in the role of ‘original equipment manufacturers’. The production equipment and key components (such as liquid crystal
displays) came from Japan, and the calculators were branded as Japanese. One of
the main Taiwanese companies was Jinbao Electronics. In 1990, after extensive
consultation with Sharp, Jinbao decided to open its own factory in Thailand and
sell calculators (and related items) mainly to Sharp. The key components and
production equipment in Thailand came from Japan; the procurement and
administration came from Taipei; the management in Thailand was Taiwanese;
and Thailand provided the lower skilled labour force and the land. All the production was exported. The production appeared in international trade statistics as
Thai; the investment in Thailand appeared in international investment statistics
as Taiwanese; Japanese firms got most of the profit; and the customers thought
the product was Japanese (Bernard and Ravenhill 1995).
The third contextual point is that high levels of US support enabled the East
Asian three to run sustained external payments deficits during their stage of fast
industrialization and urbanization—financed by US assistance. Even as they used
substantial and strategic levels of protection to foster import replacement, they
sucked in huge volumes of imports in selected sectors. In contrast, most developing countries, lacking large-scale external assistance, could not sustain the external payments deficits that would have been necessary for fast industrialization
and urbanization—unless financed by loans from the multilateral development
banks, which have carried mostly neo-liberal conditionalities since the 1980s,
unlike US conditions in its assistance to the East Asian three.
I now turn to the role of the state and the arrangement of power in Northeast
Asia, comparing it to the model of the neo-liberal regulatory state.
5. Characteristics of the Northeast Asian Developmental State
‘Developmental state’ was coined by Chalmers Johnson (1982) in his study of
Japan’s rise, MITI and the Japanese Miracle.4 He used the phrase to refer to a
‘plan-rational state’, in contrast to a ‘market-rational state’, two broad types of
capitalism. The market-rational state concentrates on ‘horizontal’ policies to
improve productivity across the economy, including market regulation, transport
4 For succinct accounts of the history of the idea see Woo-Cumings (1999) and Haggard (2018).
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infrastructure, education, as typified by the US (he said, wrongly (Wade 2017b)).
The plan-rational state carries out these same horizontal policies but also uses
more ‘vertical’ (sectorally selective) policies to steer the production structure
towards state-set goals (mostly by influencing market allocations, in contrast to
communist states which relied on plan-allocation more than market-allocation).
Johnson took Japan as his case study of the developmental state in action, focusing
briefly on the decades after the country’s forced opening in the mid-nineteenth
century and then at length on the post-war fast-growth decades.5
Since Johnson’s book on Japan, a sizeable literature has applied the idea of the
developmental state to other cases as a way to understand relative long-run economic performance. This literature emphasizes: (1) the ‘developmental mindset’
of key state actors—the normative and cognitive models with which they conceive
and implement the idea of a state-led national development project, in contrast to
the basic idea of neo-liberal economics that states are inherently inefficient and
predatory as compared to markets; (2) the remaking of power relations so as to
secure the dominance of state actors with a developmental mindset; and (3) institutions, strategies, and policies supporting the developmental mindset (Haggard
1990; Wade 1990; Ravenhill 1993; Weiss 1998; Amsden 2001; Thurbon 2016;
Haggard 2018; Khan 2018; Wade 2018).
5.1 The Developmental Mindset
The developmental mindset (a super-social-norm of appropriate actions), as it
emerged in the threatening environment of Northeast Asia, included elite agreement on the following:
• high and sustained economic growth rates so as to catch up with developed
countries ‘quickly’ (within a few decades);
• high rates of investment to gross domestic product (GDP) so as to achieve
rapid movement of the production structure into more productive sectors;
• the state to co-ordinate the catch-up strategy and promote some sectors and
functions ahead of others, whether through public enterprises or through
steering private actors into sectors they would otherwise not enter;
• the state to curb the growth of consumption by the urban labour force and
farmers, so as to free up more resources for investment;
5 Myrdal’s idea of the ‘hard state’, in contrast to the ‘soft state’, is an obvious precursor. Myrdal
defined ‘soft state’ to mean the societal ‘indiscipline’ prevalent in South Asia and by extension much of
the developing world, as compared to the states which had emerged in Western Europe. ‘Indiscipline’
referred to, in his words, ‘deficiencies in legislation, . . .law observance and enforcement, widespread
disobedience by public officials and, often, their collusion with powerful persons and groups. . .whose
conduct they should regulate’ (Myrdal 1970: 208).
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• the state to promote exports intensively, so that the high investment could
be profitable despite restrained growth of consumption at home, but at the
same time, state industrial policy must target feasible replacement of imports
and concentrate foreign exchange on imports of capital goods, intermediate
goods, and raw materials (not consumer goods) by means of a managed
trade policy, not free trade and not ‘neutral incentives’ between export
promotion and import substitution;
• the state to invest heavily in education (people being the primary endowment, not natural resources), especially engineering, including sending
students to the West for university education and putting them under obligation to return; and
• the state to boost the take-up of Western technology, including by establishing
public research and development (R&D) centres able to ‘domesticate’ technologies purchased or imitated from abroad or brought in by branches of
Japanese or Western companies, and by industrial extension services to push
‘learning in production’, especially in small and medium-sized enterprises.
Underpinning this elite consensus was recognition that investment resources
were very scarce and had to be carefully husbanded. The elite had no commitment
to the idea that ‘free markets’ or unstrategic integration into the world economy
would produce a catch-up production structure over time, nor did American
advisors push this agenda, in contrast to their later counterparts in other parts of
the world and the World Bank.
The content of the production structure to be aimed at was influenced by
popular metaphors of economic development, like descending a river or flying in
a V-shaped formation of geese. Officials in South Korea and Taiwan saw their
economies descending the same stretch of river, or flying in the same V-formation,
as Japan some ten to twenty years before. They could look to Japan’s past production structure for a tangible guide to what they should be investing in
(qualified, of course, by knowledge of current developments in technology and
markets, especially in Japan and the USA). The neo-liberal model deliberately has
no such compass.
Northeast Asian officials recognized, more implicitly than explicitly, that a unit
of GDP from some sectors gives a larger boost to longer-run growth than a unit from
other sectors. Sectors which are more closely linked to others with higher valueadded potential (in manufacturing) have a higher impact on growth than less
connected ones. They recognized, second, that in the early stages in most sectors,
few domestic firms have the ability to compete internationally without subsidies
or protection, or if they do, it is as subordinate producers in low value-added
portions of global or regional value chains, exposed to pressure from the lead
firms (mostly Western or Japanese) ‘to run faster to stay in the same place’. In sectors with high potential to boost longer-run growth, they saw that the question
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was not whether to give state support in order to help reap economies of scale
and provide ‘externalities’ to other firms and sectors (beneficial but unpaid for
spillovers), but how.
Officials recognized, third, that import replacement in sectors vital to industrial
transformation required high levels of imports of raw materials, capital equipment,
and technology; and therefore fast growth of export earnings. Business people
learnt that export performance was one of the main criteria by which government
responded to them across the board. If their export performance was good,
government would help when they faced unexpected injury in whatever context.
In all three countries, the government created an export ‘culture’, in the sense
that exporting became a ‘focal point’ for decisions in wider government–business
relations.
5.2 State Capacity and Bureaucracy–Business Institutions
Neo-liberal economics has a ‘good governance’ model, which emphasizes checks
and balances between the various government ministries concerned with economic
policy; so at central government level, authority should be horizontally decentralized, without a strong co-ordinating centre. And it emphasizes arms-length
relations between government agencies and business, to avoid the ever-present
danger of business capturing government, given the propensity for government
officials to behave ‘opportunistically’.
The developmental state model emphasizes the likely need to remake power
relations so as to make them support the developmental mindset and the institutions and interventions through which the state tries to accelerate production
transformation. In Northeast Asia the land reforms were crucial in removing a
potential blockage to industrial development in the form of a landlord–state alliance
(as in the Philippines). Also, all three governments in the post-war decades were
able to wield a big stick over business. Taiwan and Korea were a mix of one-party
states and military dictatorships until the late 1980s.
In the developmental state model the state gains high ‘capacity’ in economic
governance not only from its fiscal and legal capacity but also from its institutional
arrangements of ‘embedded autonomy’, to use Peter Evans’ apparently oxymoronic
phrase (Evans 1995). The state and its officials have a close working relationship
with capitalists, plus the capacity to discipline capitalists and capital. They have
the autonomy needed to formulate and implement a strategic vision for the
economy’s future growth and to discipline the owners and managers of capital in
line with that vision (not be captured by specific groups of capitalists to work in
their own interest at cost to the larger project). They also maintain close enough
relationships with these owners and managers of capital to get information feedback and corporate buy-in to the national project. In Taiwan, when there were
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more than five firms in an industry the government required them to form an
industry association (hence, a Taiwan Feather Exporters’ Association). The firms
elected the officials—but the government or Kuomintang (KMT) party appointed
the secretary.
The ‘embedded’ part of embedded autonomy did not include much input from
labour unions, especially in South Korea and Taiwan before the late 1980s. Labour
repression, political marginalization of the working class, was part of the model,
to keep down labour costs, prevent consumption demand from eating into the
cycle of investment–profits–reinvestment, and keep the state–business vision of
future transformation on track (Kohli 2004). Also, non-governmental organizations
were tightly constrained.
Comparing public infrastructure bureaucracies in Korea and India, my research
found that the Korean agency gave multiple incentives, individual and collective,
for staff to act in line with the agency’s objectives, while the Indian counterpart
had virtually none—its incentives inclined the operational staff to threaten poor
service so that clients would pay them under the table to receive normal service
(Wade 1982b, 1985). The bureaucracies of Taiwan and Korea were certainly not
‘squeaky clean’; corruption was well institutionalized in certain parts of the state,
with the exception of the pilot agencies, the central bank, and a few others. But
corruption functioned more as a tax or profit-sharing mechanism than as a price.
Bidders on civil works contracts knew the conventions about how much had to be
kicked back to officials, who, since the kick-back was much the same between
different bids, were more inclined to allocate according to ‘merit’. In India, by
contrast, bidders would offer different amounts of kick-back, and officials allocated more in line with who offered the most.
5.3 The Policy Level
Chalmers Johnson summarized the array of instruments for influencing industry
in Japan’s post-war decades through the 1960s:
control over all foreign exchange and imports of technology, which gave them
[MITI officials, and US aid officials] the power to choose industries for development; the ability to dispense preferential financing, tax breaks, and protection
from foreign competition, which gave them the power to lower the costs of
the chosen industries; and the authority to order the creation of cartels and
bank-based industrial conglomerates. . .which gave them the power to supervise
competition. (Johnson 1982: 199)
Johnson argues that bureaucratic dirigisme or administrative guidance played a
central role in industrial structure policies into the 1970s and was even significant
in Japan’s move into more-technology-intensive industries later on.
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The underlying rationale (which mainstream economics has long neglected)
was to reduce the uncertainty facing investors at home—using trade protection to
restrict competition from foreign producers; concessional finance for selected
sectors; national procurement in favour of domestic firms; restricting competition among domestic firms, such as by government licensing of entry to particular industries; and also by taking the lead in the domestication of new technologies
developed elsewhere.
Japan’s methods for shaping the industrial structure provided models for
the governments of Taiwan and South Korea. They deployed a wide range of
instruments, including directed credit, fiscal investment incentives (such as
tax rebates on production of products currently on the country’s technology
frontier), trade protection (combined with a tariff-rebate system so that
producers could get tariff-free import of inputs which went into their exports
while they paid the tariffs on what they sold on the domestic market), and
hard bargaining with multinationals intending to make foreign direct investments within the national territory (such as local content requirements on a
proposed ethylene plant or chip plant) (Wade 1990b/2004, 1991). Richard
Luedde-Neurath (1988) documents the elaborate, and often covert, trade and
investment controls used by the Korean government at the same time as it
boasted to the world of its waves of market liberalization (see also Wade 1993,
for Korea and Taiwan).
In contrast to many other governments which used broadly similar instruments from time to time, the developmental states in Northeast Asia normally
imposed performance conditions of one kind or another to accompany state
assistance (Wade 1990b/2004; Amsden 2001). The conditions might relate to
closing the price and quality gap between imports and domestic substitutes
within a fixed time, or to pushing out the technological frontiers of domestic production (for example, tax incentives for the first few producers to make electrical
transformers above a certain capacity).
All three governments managed their exchange rates to ensure that trade protection did not yield overvalued exchange rates. So the combination of exchange
rate management and performance conditions meant that trade protection did
not insulate producers from international competitive pressure. It buffered
producers from international competitive pressure until such time as the
producers succeeded in (almost) matching the price and quality of competing
imports, or failed to do so (Wade 1990b/2004, 1993). Howard Pack is right to
criticize the common use of ‘a generalized, blunderbuss industrial policy where
you say, “Let’s protect an entire industry” ’, but wrong to imply that it is the only
way to give trade protection (Pack 2012).
Whereas mainstream economics tends to see learning as happening in R&D
entities and deployed fairly automatically in firms’ production, all three governments worked actively to accelerate learning in production by combining public
R&D with industrial extension services, parallel to agricultural extension services,
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to accelerate industrial upgrading at the firm level (as distinct from relying on
‘learning by doing’). Korea and Taiwan instituted technology development programmes as US aid came to an end in the mid-1960s. For example, the Korean
government established the Science and Technology Agency as a department of
the Prime Minister’s Office in 1967. Its central location in the state gave it power,
and it had freedom to hire top-level staff outside of civil service rules. Separately,
the government established a network of government research institutes (GRIs),
such as the Korea Institute for Science and Technology and the Korean Advanced
Institute of Science, both in the late 1960s. They had strong links direct to
President Park and the top levels of the military; and received ample assistance
from the US. The GRIs took ‘localizing foreign knowledge’ as a core objective,
meaning above all, getting this knowledge into the heads of locals, in the spirit of
the Korean motto, ‘We never learn anything twice’.
Taiwan created the Industrial Development Bureau within the Ministry of
Economic Affairs, to operate as an industrial extension service (with a staff of
about 150 by the early 1980s, mostly engineers). For decade after decade its
engineers, divided into sectoral teams, travelled the length and breadth of the
country (their job contracts required them to be out of the office so many days
per month), visiting factories, giving advice, listening to problems, and feeding
back into policy discussions. See epigraph three.
The government began to institutionalize a ‘Science and Technology’ complex
of organizations at about the same time as Korea. The two countries watched each
other closely and sent teams to learn from each other (a Korean team spent weeks
inside Taiwan’s Ministry of Economic Affairs, making a detailed copy of the country’s duty drawback system in the early 1980s). Both countries sent large numbers
of students to study science and engineering in the US, with inducements to
return. The Taiwan government established a special office dedicated to organizing
the diaspora: contacting Taiwanese working in US firms in sectors of high priority
in Taiwan (for example, IBM), offering them expenses-paid trips back to Taiwan
for conferences and networking, and facilitating full-time repatriation to Taiwan.
Taiwan also established a Science and Technology Advisory Group (STAG), comprised of the minister of science and technology, plus between seven and ten
foreign experts and a local secretariat. The group met for several days at a time,
twice a year, to review investment proposals and to draw in knowledge about
global technology developments. The Industrial Technology Research Institute
(ITRI) by the early 1980s had a staff of some 10,000, divided into sub-institutes
such as the Electronics Research and Service Organization (ERSO), with a staff of
around 700. ITRI had a secretive military twin with a staff roughly twice as big.
These policies helped sectors and firms produce more, upgrade quality, and
diversify into other product and capability domains—helped some more than
others. Managing the inevitable tensions between the favoured and not-favoured
was essential to their effectiveness. Beyond instruments for managing specific
conflicts (for example, over excess capacity in industries like shipbuilding or cars),
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the authoritarian state managed conflicts through its domination in state–capital
relations, and its assistance to capital in dominating capital–labour relations.
6. Singapore and Hong Kong
Singapore was a British colony from 1830 to 1963 (with a brutal Japanese
interregnum from 1942 to 1945). It became a sovereign state as recently as 1965.
Its development story is similar to that of the Northeast Asian three in that it had
no significant natural resources beyond people, and location on one of the world’s
main East–West communication routes. Starting in the 1950s, it underwent a fast
production transformation and integration into the world economy, led by
manufacturing. And it experienced a super-fast rise in the world income hierarchy,
from about 15 per cent of US average income in 1965 to nearly 70 per cent by the
mid-1990s. Like the Northeast Asian cases (minus Hong Kong), it had a developmental state of strongly authoritarian character. (Regular parliamentary elections
were held from 1959, but virtually all seats were won by the People’s Action
Party.) The state ‘intervened’ in labour markets to keep wage levels well below
productivity levels. It engineered forced savings through government-controlled
vehicles. It owned the land and ensured that a high and rising portion of the
population lived in publicly owned housing, rented out on long leases: by the
mid-1970s, half of the population lived in this accommodation (owned by
the Housing and Development Board), today, 95 per cent. The state covered all
Singapore citizens with a public health system, which today combines a very low
percentage of GDP spent on health care and exceptionally high health indicators.
Both housing and health tended to make people feel obliged to the state.
But the story also differs from that of the other three. Singapore had no significant agriculture population. It relied heavily on foreign firms establishing mostly
wholly owned operations—together with state-owned enterprises. Missing in
action was a local capitalist class, for the governing party sought to avoid the possibility of state capture by local capitalists. Also, the authoritarian regime has
remained resilient throughout, from the late 1950s until today. Pressure from the
population for political liberalization has been conspicuously lacking, in contrast
to Taiwan and South Korea through the 1980s (Barth 2017). The state has avoided
demands for democratization by: overseeing a high growth economy; being
responsive to demands for social protection; ruling loosely enough that
Singaporeans are often able to sidestep some state constraints in everyday life;
and maintaining a highly meritocratic and squeaky clean civil service—keeping
public sector senior salaries closely in line with private sector equivalents, and
inverting the normal rule of law, ‘innocent till proven guilty’, to make civil
servants subject to ‘guilty [of corruption] till proven innocent’.
As for Hong Kong, mainstream economists like to cite its economic success
to affirm that any non-neoclassical explanation of Northeast Asia’s success is
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doomed, because, according to John Williamson, Hong Kong practised ‘the most
laissez-fare development strategy of any economy in history’ (Williamson 1999),
and the causes of the others’ success must be similar to those of Hong Kong. The
second part of Williamson’s argument is impure nonsense (impure in that it
contains a grain of truth).
Hong Kong was a British colony 1842–1997. Britain took it as ‘spoils of war’
when the British military defeated the Chinese military and forced the economic
opening of China in the First Opium War. Like Singapore, it developed as a service
centre for a vast hinterland. The economy flourished on the back of entrepôt trade,
as a base for British–India exports of opium into China and for coastal China
trade, and for the vast emigration from the mainland to the rest of the world. By
1900, tiny Hong Kong handled 40 per cent of giant China’s exports and 42 per cent
of its imports (Haggard 1990: 116). In the late 1940s it ‘imported’ an entrepreneurial
light-industrial class already formed on the mainland under Nationalist (KMT)
auspices when Shanghai textile capitalists with their modern machinery fled from
the prospect of communist victory in the civil war.
For the entire period to 1997 (the brutal Japanese interregnum from 1941 to
1945 aside), it was governed largely by British businesses and senior civil servants
in an emphatically non-democratic regime but with an independent judiciary.
Virtually all the land belonged to the British Crown, which auctioned long-term
leases—and kept taxes low on the proceeds; taxes were also low because the social
security system was minimal. Functions which, in the other cases were carried
out by state agencies, were performed in Hong Kong by well-institutionalized
commercial and banking enterprises drawing personnel and organizational culture from Britain. But the Hong Kong state did intervene to provide a range of
public goods for industry: it initiated the Federation of Hong Kong Industries in
the 1950s, and established a Trade Development Council in 1967 to promote
exports, a Productivity Council and Centre in 1967 to provide training and
consultancy, and an Export Credit Insurance Company in 1966 for risks not commercially insurable.
Stephan Haggard summarizes similarities and differences with the others:
‘although Hong Kong’s economic policy may constitute an anomaly [close to
laissez faire], its political structure shows surprising parallels to the East Asian
pattern: a highly insulated state; limited representation [especially of “labour”];
and a concentrated and internally cohesive economic decision-making structure’ (Haggard 1990: 115).
7. Conclusion
Northeast Asia undoubtedly benefitted from capitalism (private profit-driven
production), and from access to the world market. To this extent the mainstream
is correct. But several qualifications have to be made.
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First, the ethnic and religious homogeneity of Japan, Taiwan, and South Korea,
and the long history of dense populations and institutionalized political order,
helped to generate dense, hierarchical social networks through which the natural
human tendency to free-ride on the collectivity could be checked and collective
interests fostered. This basic cultural pattern of individualism checked by powerful group norms was reinforced by intense state permeation of the society, driven
and disciplined by external threats: Japan under the threat of US colonization in
the nineteenth century; Korea and Taiwan colonized by Japan as it created an
empire to ward off American and European empires; and all three under
communist state threat after the Second World War.
Second, they came into the post-war decades with high ratios of working-age
people to dependents, as seen by much lower median ages in 1970 than in Europe
at that time.
Third, the post-war threat perception of national and US elites kept national
elites relatively unified and not at each other’s throats—and kept the inevitable
tensions between favoured and not-favoured sectors and firms, and favoured and
non-favoured regions, within limits. On the spectrum of ‘weak state/specialinterest state/common-interest state’ these were special-interest states moving
towards—with a lot of American help in the first decades—common-interest states.
Fourth, for the first several decades the Northeast economies relied not so
much on ‘the world market’ as on ‘empire preference’ to the US market—and to
US technologies, US capital, US military and civilian aid, and US public procurement—thanks to their role in the US’s geopolitical strategy to contain communism
and show the world that ‘capitalism’ was superior to ‘communism’.
Fifth, steered by a developmental mindset, the developmental state was organized differently than the model neo-liberal state. The latter has no strong centre of
co-ordination (because markets played by private capitalists, not states, are the
resource co-ordinating institution), and has arms-length relations between the
various ministries and between ministries and business. The developmental state
has one or a few powerful centres of co-ordination and market leadership, a
limited role for the legislature in matters of economic, financial, and security
policy, and well-developed mechanisms of consultation and co-ordination with
private capitalists, in the spirit of ‘embedded autonomy’.
Sixth, these governments operated on the premise that increments of GDP
from some sectors brought higher potential future growth than from others, and
made intensive use of steerage policies and institutions frowned upon in the neoliberal playbook—such as managed trade, sectoral industrial policy (not ‘picking
winners’ but ‘making winners’), targeted concessional credit, and capital controls.
These instruments were intended to buffer (not insulate) producers in selected
sectors from international competitive pressure and volatility—so profit-raising
protection and subsidies came with performance conditions, which were
enforced. The whole complex would have scored poorly by Washington
Consensus criteria. For example, Taiwan’s financial system was and remains the
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despair of visiting Western economists. That said, there is no knockout evidence
on the effects of these ‘government interventions’. The causality is too difficult to
disentangle ‘rigorously’.
Finally, as the governments encouraged firms to integrate into global value
chains while simultaneously encouraging the growth of backwards and forwards
linkages (filling up the input-output table), they undertook to develop domestic
technological capacity, with public laboratories, high enrolments in university
and vocational science and engineering faculties, and organized efforts to attract
back overseas graduate students (seen as ‘brain bank’ rather than ‘brain drain’).
Singapore, as noted, did rely more than the others on incoming Western
multinationals—which were left in no doubt as to who called the shots.
These points help to understand how Northeast Asian countries overcame two
logics of power which keep most of the periphery as a periphery, and which intertwine like a double-helix to produce the result we know as the glass ceiling or the
middle-income or middle-capability trap: first, the centrifugal pressures emanating from the Western core (including several mechanisms of net resource transfer
from periphery to core); second, the drive to hold on to a certain structure of
political power on the part of leaders of poor countries, even at cost to national
development, in case rival groups use the wealth created by access to new opportunities to oust the incumbents.
The full-fledged East Asian developmental states were self-limiting, in the
sense that the package of (1) elite consensus around the national development
project, (2) bureaucracy of industrial planning, (3) array of industrial steerage
instruments, and (4) repression of labour, came out of shared elite conviction of
the imperative of high rates of investment to upgrade the production structure
quickly, raise mass living conditions, inhibit domestic revolt, and support a strong
military, coupled with knowledge that many domestic firms could not compete
‘on a level playing field’ with firms in developed countries.
Some analysts say that, as of today, the Northeast Asian developmental state
has eroded to the point that ‘the developmental state is dead’ (Pirie 2017). It is
true that as the economies achieved ‘high income’ they moved in a neo-liberal
direction, both for structural reasons and also to bolster their alliances with the
West. Structurally, they faced the problem common to developed countries: they
became less able to generate enough profitable investment opportunities to
absorb domestic savings (especially given the various policies in place to restrain
consumption). Far from a severe shortage of capital, they began to experience an
abundance. At the same time, the general level of productivity became high enough
for most firms not to need subsidies or protection to compete domestically or
abroad. The state has withdrawn from the capital–labour relation (withdrawn from
negotiations about wages and working conditions), and relied on the ‘discipline of
the market’—the threat of unemployment and the threat of bankruptcy—to keep
labour under capital’s control. The state has also substantially withdrawn from the
allocation of credit, as seen in the now ‘independent’ central banks and in the
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large majority of lending having no link to the creation of new productive capacity.
So, in both Taiwan and Korea the capital–labour relation and the allocation of
capital have been marketized; the state is mostly out.
These neo-liberal trends have been all the easier because during their history as
developmental states the state resisted moves in a social democratic direction to
build up social protections. Today, public welfare is still underdeveloped and legal
obstacles block collective action among the working class. Public social spending
as a share of GDP remains far below the OECD average, and the share of the
labour force in independent trade unions also falls far short of the OECD average.
The governments have allowed the share of wages in national income to keep falling.
Income inequality has steadily risen since the 1980s. The growth model relies on
rising household debt plus foreign demand—exports—to close the demand gap,
and both are sources of vulnerability. Both countries have become highly exposed
to an economic crisis in China, or Chinese arm-twisting.
At the same time, the Northeast Asian states (and Singapore) are still characterized by a developmental mindset driving the state to keep pushing for production transformation. The developmental state has not so much ‘declined’ or
‘disappeared’ in East Asia in favour of the neo-liberal state, as Iain Pirie (2017)
claims; it has ‘evolved’ in response to changing parameters. In Christopher Dent’s
words: ‘while the policy tools and means may have changed, developmental states
still preside over various adaptive-cum-transformative economic projects that
increasingly involve a partnering with transnationalized capital’ (Dent 2007: 227).
Much of the state’s market leadership takes the form of overarching ‘societal
missions’ driven by a varying mix of economic and national security objectives.
Over the past several decades, all the Northeast Asian (capitalist) cases have
experienced a dizzying number of organizational restructurings in the pursuit of
national innovation objectives. Standing back, one can see, first, a fairly steady
movement from state-led efforts to domesticate foreign innovations and deploy
them in the domestic economy (lowering risks for adopters), to managing uncertainties of innovating on the global techno-economic frontier. Second, one can see a
zig-zagging path over time, often coinciding with changes of government: from
fairly centralized, top-down control (using methods of formulating, legitimating,
and implementing innovation policies drawn from the principles of the old developmental state), to more decentralized, ‘peripheral islands’ of innovation agencies
(drawing on the approach of states like the US and UK), and back to more central
control, drawing on an updated version of the developmental mindset (Karo 2018).
In short, we should talk not of the death of the developmental state in Northeast
Asia and the rise of the neo-liberal or the post-developmental state, but of the
transformation of the developmental state from 1.0 to 2.0.
Beyond Northeast Asia, the North Atlantic financial crisis of 2007 to 2012 and
ensuing long recession has somewhat weakened credence in the neo-liberal
development consensus, reawakening interest in ‘respectable’ circles in industrial
policy and the developmental state. The evidence is clear that economic
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development that is fast enough to bring mass living conditions close to developed countries is really difficult – because of intersecting logics of the ‘special
interest’ state and the centrifugal forces from the Western core. Catch-up requires,
above all, that a powerful coalition within a country embraces a ‘developmental
mindset’ and sustains an institutional process for eliciting information from the
private sector about investment opportunities and obstacles, nudging private
firms to upgrade and diversify, sponsoring investment initiatives in promising
directions that the private sector would not otherwise undertake, pushing education in engineering and science, and managing the inevitable conflicts. But the
developmental state is not ‘all or nothing’. It can be institutionalized at the subnational regional level and at sector level. Even where bureaucracy-in-general is a
swamp, equivalents to Taiwan’s Industrial Development Bureau and its Science
and Technology Advisory Group (described earlier) can be established to accelerate production upgrading, provided they have top-level political support. But the
first step is to accept that the Washington Consensus policy agenda is useful enough
as a recipe for improving the performance of a thoroughly crony capitalism, but not
for powering upwards through the centrifugal dynamics of the middle-income trap.
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