Multiple Factors Responsible For East Asia Success Story, Almost All Of Them Present A Valuable Lesson To India

The landslide of more than 300 parliamentary seats that Narendra Modi won in the 2019 general elections brought forth expectations of a radical reform.

However, concerns have been raised in some quarters as in first quarter of this year the economy expanded by merely 5.8 per cent, causing it to be outpaced by China for the first time in nearly two years. In the April – June quarter growth slipped to 5 per cent.

Speaking in London on 23 October 2019, Rajan called on the Indian government to devise a new growth model that would leverage on the “strength of its democracy”, but pinned the success of East Asian economies on authoritarianism. Rajan asserted that despite centralisation of the government under Modi, it had not seen significant gains.

Authoritarian governance structures were just one aspect of the East Asian “miracle”. Besides, Latin America saw undemocratic political institutions but economic growth there did not necessarily take off.

So, what were the factors behind East Asia’s miracle growth, and are there any lessons to be learnt?

Rajan lays stress on the strength of Indian democracy and its ability to deliver fruits for all.

However, former chief economic adviser Arvind Subramanian terms India’s development model as “precocious” and democracy a “burden”. He argues that by ushering in democracy at a nascent stage the government was compelled to redistribute resources when it clearly did not have the capacity to do so.

Economists Daron Acemoglu and James A. Robinson posit that economic institutions are important in determining development; whereas political institutions shape economic institutions.

In the 1960s, the per capita income of most countries in East Asia was nearly on a par with India. East Asia economies took off in the 1960s after embracing “liberal” economic policies and globalisation.

Japan, Singapore, Taiwan and China experienced 5 per cent per capita growth (in international purchasing power parity) for three decades between 1965-1995. Whereas India adopted an adversarial attitude towards private enterprise.

Lesson 1) Effective governance:

Take the case of Singapore, Lee Kuan Yew inherited a British colonial establishment, but opted for merit over seniority. “I am for an efficient service. I don’t care how many years he’s been in… If he is the best man for the job put him there,” Lee said.

In a bid to build human resources, undergraduate scholarships were given to bright aspirants to pursue studies at local universities or educational institutes abroad, later these aspirants had to serve in the Singapore Civil Services for a stipulated number of years.

The notion of meritocracy also extended to polity. Singapore’s founding fathers believed that politicians should also be “among the best of their generation”, their salaries were pegged to top-earners in the private sector to ensure that they remain honest.

Anti-graft investigative bodies got autonomy to probe bank accounts and other assets of bureaucrats, in addition to powers of search and arrest.

However, political meddling and corruption has become the bane of the Indian Administrative Service.

Carnegie Endowment for International Peace’s Milan Vaishnav and Saksham Khosla in their paper titled ‘The Indian Administrative Service Meets Big Data, state: “The IAS is hamstrung by political interference, outdated personnel procedures, and a mixed record on policy implementation, and it is in need of urgent reform.”

Lesson 2 Promotion of economic growth:

Under the guidance of Dutch economist Albert Winsemius, Singapore created a climate favourable to economic development and an export-promotion strategy by encouraging private entrepreneurship.

A key policy move was that the government ensured Singapore remains a perfect destination to conduct business by stamping out red tape when it came to incorporating firms, tax regulation, and visa acquisition.

Singapore’s commitment to a graft-free, clean business environment has earned it the top rank on the World Bank’s Ease of Doing Business rankings for eleven consecutive years.

India did exactly the opposite; major banks, insurance companies, coal mines were nationalised, restrictions were put on laying off workers, curbs were imposed on foreign companies and many of them were given a stark choice of transforming into an Indian company or shipping out.

Lesson 3: National capitalism v/s stigmatized capitalism:

In South Korea, the state intervened to provide subsidies to private entrepreneurs to manipulate relative prices in order to spur economic activity, such a policy is the hallmark of late-industrialising nations.

But the state also imposed “performance standards” on businessmen in the form of entry into more risky ventures or meeting increased export targets, in return for the subsidies. “Discipline” over private enterprise was an important facet of South Korean industrialisation spearheaded by Park Chung Hee.

Park’s book The Country, the revolution and I, enlists his vision of development that permits “industrialists who promoted reform to take centrestage” so as to give a fillip to “national capitalism”.

India’s lackadaisical approach to entrepreneurship and private capital has been the foremost impediment to economic reform. Subramanian says it is due to ‘stigmatised capitalism”.

The plethora of licences-permits-quotas enervated the private sector and converted businessmen into supplicants vying for favours in the corridors of power in Delhi.

Subramanian argues that stigmatised capitalism is the legacy of such crony socialism. The public perceived successful entrepreneurs as having owed their empires to bribing the right people and zooming on loopholes in the tariff administration and taxation regulations.

Technical capabilities:

Taiwan focused on improving its human resource via investments in education. Recognising the need for imbuing the students with best practices, Taiwan encouraged students to go abroad with scholarships and fellowships.

On the downside many students who went to the US found employment. Hence to lure back engineering graduates, the government invested heavily in national research and development projects.

The Industrial Technology Research Institute (ITRI) was an important channel for engineering graduates to apply the knowledge that they gained to practice.

The research work was not done in isolation as industry benefited via technology transfers.

Another example was the Hsin-Chu Science Park, which commenced operations in 1983 and successfully enticed scientists and engineers based abroad, had a business revenue of NT$130 billion that was around 2 percent of the GNP in 1993.

Investment in human resource development and scientific infrastructure paid dividends to Taiwan.

In the 1950s and 1960s, Taiwan manufactured transistor radios and black-and-white TV sets, graduating to making colour TVs in the 1970s and VCRs, computers in the 1990s—making a strong imprint on the global consumer electronics market.

In post-Independence era, the government’s focus was on boosting higher education rather than primary education, which meant that several children from underprivileged homes were disadvantaged.

However, the neglect of government spending on R&D has stunted development and still continues. Spending on research has stagnated to around 0.6 percent of the GDP for the last two decades, while South Korea and Taiwan spend 4.2 percent and 3.6 percent of its GDP on the same.

To sum up, authoritarian policies were only partly responsible for the development of East Asia as lack of political dissent meant these countries could exploit the comparative advantage of labour.

However, with the rise in incomes a newly resurgent middle class began clamouring for political rights, which were subsequently granted.

East Asian nations were able to mould a bureaucracy that presided over the economic administration and curbed rent-seeking. Lastly, investment in education and scientific research infrastructure further gave a boost to their industrialisation.

Therein, lies a lesson for India.