Debating Global Development - Review: Chapter 6

Instructions: Chapter 6

• Identify and explain two distinct pieces of knowledge acquired from the chapter.
• Identify a specific assertion that you found to be in disagreement with, and provide a rationale for your dissent.
• Please indicate any terminology that you find to be unclear or insufficiently described.
• Enumerate any lingering inquiries you may have after to perusing the chapter.

Material that MUST be used:

Chapter 6: How Did the NICs Grow so Quickly?

The rapid growth of the Newly Industrialized Countries (NICs) since the 1970s is historically unprecedented. Never in human history has such a large population experienced economic growth at this scale in such a short time. The NICs have collectively been able to pull over a billion people out of extreme poverty and into the global middle class by sustaining GDP growth rates of 8-10% per year (the average growth rate for the world is around 2-3%). The NICs have achieved rapid growth while simultaneously reducing income inequality and spreading the benefits of growth broadly among their populations.

"If the NICS can achieve such rapid growth, why can't every country in the Global South?" People often ask this question when they learn about the dramatic success of the NICs over the past several decades. Implicit in this question is the notion that the NICs earned their success through wise choices, and that any other country could potentially mimic their formula if they implemented the right policies. This chapter will examine that notion, evaluating whether there is a particular formula that nations can follow for their own development. This debate will provide evidence grounded in the theories of IPE that we discussed in Chapter 3 to help answer the question of how nations can best achieve development. In actuality, each nation adopted its own unique mix of liberalism, realism, and other policies, and this has led economists to debate which approaches were most prominent and effective in spurring dramatic growth.

Who exactly are the NICs? Although there is no consensus about which countries count, the so-calledAsian Tigers are central to the group. Starting in the 1960s, Japan, South Korea, Taiwan, Hong Kong, and Singapore began to experience the "economic miracle" of rapid growth. As a result, they were able to reduce their poverty rate from 80% of their population to under 5% today. The Asian Tigers were followed by China and India in the 1970s and 1980s, which are notable cases because of their large populations and their ability to maintain consistent growth. For example, in four decades, China's total GDP grew from roughly $200 billion to almost $14 trillion, a staggering 70-fold increase. The "Tiger Cubs" of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam achieved slightly slower but steady GDP growth during a similar period. In regions outside of Asia, countries like Brazil, Mexico, Chile, South Africa, Russia, and Turkey also experienced phases of high economic success, but with less dramatic and sustained growth as the Asian Tigers. To include some of these more recent cases, economists have begun to use other labels for the NICs, such as the "BRICs" (Brazil, Russia, India, and China) or the "Emerging Economies." Whatever the label, it is clear that some of the once-poorest countries in the world were able to reap the benefits of globalization and leapfrog up the ladder of development. See Figure 6.1 below for a snapshot of the incredible progress of a few of the NICS since the 1970s.

Figure 6.1 Indicators of Development in the NICs

	GDP per capita	Poverty Rate	HDI	GINI
	Before	Current	Before	Current	Before	Current	Before	Current
China	$307	$17, 600	90%	0.6%	.42	.76	.30	.38
Malaysia	$3,338	$26, 300	29 %	5.6%	.57	.81	.48	.41
Brazil	$4,709	$14,100	30%	26.5%	.54	.76	.57	.48

How did they do it? Economists appeared to answer this question in the early 1980s when they agreed that the NICs owed their success primarily to liberalist economic policies. Many of these economists were based in Washington, DC at the headquarters of the world's leading financial institutions, the World Bank and IMF. Through theWashington Consensus, the World Bank and IMF then encouraged virtually all developing countries in the world to adopt liberalist reforms. While Chapter 7 will describe and evaluate the impacts of the Washington Consensus throughout the Global South, this chapter reexamines the original debate: do the NICs owe their success to liberalization?

Argument #1: Liberalist Policies Spurred Growth in the NICs

To evaluate the success of the NICs, we must first discuss the common development strategy employed throughout the Global South in the 1960s, calledimport substitution industrialization(ISI). Through ISI, countries throughout Latin America, Asia, and Africa tried to build up theirinfant industries (i.e., new companies that could not yet compete in the global marketplace) by restricting foreign imports. They charged high tariffs, imposed import barriers, manipulated their currencies, and subsidized local businesses so that their citizens would buy more goods within their own country. These realist economic policies were designed to increase self-sufficiency and fortify national industries through domestic demand by protecting them from foreign competition. Although some countries experienced periods of growth, ultimately ISI policies led to inefficient companies in the Global South (because they relied on government protections rather than innovative practices) and heavily indebted governments (because they were spending too much on subsidizing local consumption). GDP growth eventually stagnated in countries that adopted ISI policies.

In contrast, the NICs almost universally adopted export-led strategies that embraced global economic integration. Rather than relying solely on domestic demand, the NICs implemented liberalist policies to encourage their companies to sell their products to the rest of the world. For example, China and Taiwan establishedexport-processing zones (EPZs) near major industrial cities and ports to attract more foreign direct investment (FDI). In the EPZs, companies invited by the NICs to build factories and produce exports did not have to pay local taxes or comply with labor and environmental regulations. By getting the government off the backs of corporations, these industries were able to use cheap labor and lax environmental standards to manufacture goods at the lowest price possible. As the global demand for low-priced goods exploded, so did economic growth in these areas. The share of exports in the Asian Tigers' economies quadrupled between 1965 and 1990, and annual GDP growth skyrocketed. The longer that global corporations stayed in the NICs, the more new skills and technologies spread, and the NICs ultimately graduated from exporting low-tech goods (such as clothes and plastic toys) to even more valuable high-tech goods (such as computers and cars). The benefits of economic growth spread to almost everyone in the NICs, pulling an unprecedented number of people out of poverty. As liberalists say, a rising tide lifts all boats.

The NICs employed a range of other liberalist policies to spur growth. For example, China enacted reforms in the 1970s that allowed rural farmers to control their own land and negotiate prices for their produce, rather than have the government centrally manage agricultural production. China also privatized state-owned businesses, gradually selling them off to private citizens and allowing foreign investors a share in the ownership. These privately controlled businesses became an engine of growth because they were forced to innovate in order to compete in the global marketplace, rather than rely on governmental protections. Likewise, India deregulated its business licensing process in the 1990s, making it much easier for foreign investors to navigate the Indian bureaucracy and set up new companies. This led to an explosion of FDI in high-tech service industries in India (such as customer call centers for large transnational corporations), which fueled GDP growth.

Ultimately, NICs like Hong Kong, Taiwan, and Singapore earned some of the world's highest rankings on indexes of economic freedom, which measure the extent of liberalist policies within a country such as the protection of private property, low taxes, low government spending and regulations, and free trade and investment. In Chile, following a military coup in 1973, socialist economic policies were rapidly replaced by liberalist ones, leading to two decades of growth that earned Chile the label as the "poster child" of liberalist economics. Other NICs have not liberalized to the same extent, but they did significantly open up their economies. Liberalist policies have reduced government intervention in the economy, allowing the NICs to manufacture goods efficiently and cheaply, export them to the rest of the world, and reap the benefits of economic growth. Other countries throughout Africa and Latin America continued to rely on ISI and other state-centric strategies for too long, and they were left behind.

Argument #2: The NICs Grew Due to Other Reasons

There are several alternative explanations for the success of the NICs. These explanations don't necessarily agree with each other, but they all deemphasize the role of liberalist policies in promoting growth in the NICs.

Realism

Contrary to the assumptions of liberalism, realists argue that the NICs used active state intervention in the economy to promote exports and generate growth. Particularly in countries like Japan, South Korea, Singapore, and Taiwan, the government and private companies were closely linked. The state actively supported export industries and protected them until they were large and productive enough to compete in the global marketplace. This realist strategy came to be known as theAsian model of development.

In Japan, the government implemented the Asian model by supporting specific export industries such as electronics and auto manufacturing. For example, the state's Ministry of Trade and Industry doled out subsidies, enacted trade protections, and directed public and private investment to companies like Sony and Honda. Similarly, the South Korean government supported large business conglomerates through preferential treatment in sectors like steel, machinery, chemicals, shipbuilding, and auto manufacturing (e.g., Hyundai). Similar to the ISI strategies adopted by other developing countries, the state played a large role in the economy. Unlike ISI, the state only supported businesses that were able to compete in the global economy to export their goods. These "national champions" eventually grew to become some of the world's largest corporations.Although the NICs did engage in foreign trade and welcome foreign investment, they did so on terms that were favorable to their preferred national industries.

The NIC's governments did not merely support and protect private industries; they also owned and operated many businesses to benefit the country as a whole. In South Korea and Taiwan, the government owned banks to control and direct financial investments. In Singapore and China, state-owned enterprises in sectors like finance, energy, and transportation were just as economically profitable as privately owned enterprises. Even though the NICs privatized some businesses and opened themselves to foreign investment, they often retained strict controls on investment, such as limits on the proportion of foreign ownership in a national business.

If the NICs succeeded through realist policies of active state intervention in the economy, then the implications are not merely academic or historical. It means that the advice that development experts at the World Bank and IMF gave to dozens of LICs over several decades was wrong. Economic growth is spurred not only by liberalist policies of privatization, open trade, and foreign investment, but also by realist policies involving government support for industry and protections for trade and investment.

[Insert Think Again Box]

Think Again: Do you think the Asian Model is replicable?Should other countries adopt it?

Leadership

For the Asian model of development to be effective, leaders of the state had to be reasonably wise and responsible. If leaders were too inept or corrupt, government regulations would be more likely to disrupt rather than jump-start the economy. According to some analysts, the NICs were blessed with "determined, devoted, and inventive leaders, both in government and business." From Deng Xiaoping in China, to Park Chung Hee in South Korea, to Lee Kuan Yew in Singapore, leaders of the NICs have been described as strong, decisive, and forward-thinking, typically putting the interests of the country ahead of their own personal interests. In contrast, the lack of development in many other countries is often blamed on corrupt, incompetent, and self-interested leaders.

The caveat is that most of the leaders in the NICs were also authoritarian dictators, ruling their countries through military power, denying their citizens basic democratic rights, and trampling over any opposition. Even in countries that were nominally more democratic, such as Japan, Taiwan, and India, a single political party dominated the government without any meaningful opposition. The Asian model therefore raises a question: is authoritarianism a better route to development than democracy?

In theory, authoritarian leaders might be better at generating economic growth because they can enforce political stability by stifling dissent; they can act decisively to implement reforms; and they can implement long-term plans over many years of their rule. Meanwhile, democracies often require lengthy deliberation and public input before implementing new policies, and those policies are often reversed when power is transferred to a new administration. Authoritarian leaders can invest resources where they are deemed to be most productive, whereas democracies often allocate resources based on a compromise between self-interested parties. The empirical evidence shows that the nations with the highest GDP growth over the past several decades tended to have authoritarian leaders. This is consistent with the Asian model, as leaders like Lee Kuan Yew argued that economic growth should precede the enactment of civil rights. Once a nation became prosperous enough to enjoy political stability, then it could afford to implement democratic reforms. Indeed, this process occurred gradually in several NICs, as countries like Chile, South Korea, Taiwan, Indonesia, and the Philippines transitioned to democracy after an initial period of economic growth under authoritarian regimes (see Figure 6.2 for an example from Taiwan).

[Insert Figure 6.2 here]

[Box]Figure 6.2 Taiwan's Road to Democracy

Historically, Taiwan fell under the control of either China or Japan during different periods. After losing a civil war to the Communists in mainland China, Nationalist leader Chiang Kai-Shek fled to Taiwan in 1949 and established control over the island. Chiang ruled Taiwan with an iron fist, establishing an authoritarian regime under martial law until his death in 1975. He used the constant threat of war from China's mainland to legitimize his own rule, keep the population in check, and solicit U.S. foreign aid.

Chiang also introduced liberalist economic reforms like many of the other NICs, including the protection of private property, setting up EPZs, and welcoming foreign investment and trade. Taiwan experienced its own economic miracle, averaging almost 10% GDP growth from the 1960s to the 1980s.

As the Asian model suggests, economic development eventually led to political reforms in Taiwan. An increasingly educated and prosperous population began to demand basic rights that were denied by authoritarian leaders. In the 1980s and 1990s, Taiwan lifted martial law, allowed opposition political parties, eased restrictions on free media, and held democratic elections. Today, Taiwan is ranked as the most democratic nation in Asia.

However, economic development has not led to democratization in all of the NICs. For example, China remains one of the most authoritarian states in Asia despite decades of strong economic growth. Perhaps this is because China has never experienced democracy, or because it has a much larger population that has still not reached the middle class. It is still an open question whether economic development leads to democratization. [End of Box]

On the other hand, the empirical evidence also shows that the countries with the lowest GDP growth in the world also tend to be authoritarian, because dictatorships are more likely to mismanage their economies or turn intokleptocracies (i.e., where leaders use the state's power primarily to enrich themselves). Thus, the economic record of authoritarian countries is more volatile and varied, whereas democracies tend to have slower but steadier growth. This is why democracies have outperformed dictatorships over a longer period of time. Democracies also have indirect impacts on economic growth, as they tend to invest more in education, have higher levels of economic freedom, and control for rising inflation.

Since democracies are accountable to their citizens, they also tend to distribute public benefits more equitably than authoritarian states, which helps to prevent the worst economic disasters. For example, although chronic hunger is common in democracies like India, an acute famine has never occurred in a democracy, because representative governments respond to emergencies by meeting the needs of their most vulnerable citizens. Finally, for some experts, democracy is central to the definition of development, so while some authoritarian states may be able to achieve rapid GDP growth, they would never be truly developed without protecting their citizens' basic rights.

Overall, experts have not come to a consensus on the role that democracy and authoritarianism play in development. NICs such as India or Turkey have been at least partially democratic through their periods of dramatic growth, while several of the Asian Tigers were ruled by authoritarian leaders. So while the type of government seemed to matter less in the NICs, the strength and accountability of their leaders helped lead them to success. Power was not overly concentrated in the hands of a single idolized personality (unlike North Korea's Kim Jong Un) but shared within a ruling party that maintained broad legitimacy among the population (this is called "bureaucratic authoritarianism"). While liberalists diminish the role of government in making economic decisions, the governments of the NICs were able to direct resources strategically and guide economic reforms that encouraged growth.

Democratic Socialism

Democratic socialists agree that the NICs had strong leaders who directed economic growth through an active state. However, they focus on the social welfare policies of the Asian Tigers that created a productive labor force, which was the engine of rapid growth. Before they adopted liberalist reforms, most of the NICs had already provided universal health care and primary education to their populations. China and South Korea also invested heavily in technical education and workforce training. By the late 1960s, literacy rates were higher in East Asia than they were throughout Africa and Latin America. Having a relatively healthy and educated labor force to work in the export-driven factories provided an advantage for the NICs in the global marketplace.

Critics respond that, although a productive labor force is important, the NICs could not have succeeded without the realist or liberalist policies that were able to attract foreign investment and create competitive exports. While social welfare policies seemed to help the NICs succeed, socialist economies were failing at the same time throughout Latin America, Central Asia, and Africa.

Culture

Perhaps the NICs developed quickly not because of any specific policies they implemented, but due to cultural traits that were common among many of the Asian Tigers. From Confucianism in China, to Buddhism in Japan, to Hinduism in India, these societies shared cultural values that may have formed a foundation for rapid development. These values included respect for authority, prioritization of the community over the individual, a strong work ethic, an emphasis on thrift, and a drive to achieve order and harmony. These values allowed leaders to set national policies without sowing dissention, create productive and efficient workplaces, and accumulate financial savings that were reinvested into future growth.

However, as we reviewed in Chapter 3, the problem with this argument is that authors have used essentially the same cultural values to explain the lack of development in these same regions at earlier periods. For example, Weber argued that Confucianism hindered development in Asia, while Protestantism facilitated growth in the West. If the cultural values remained constant over time, they cannot explain both historical stagnation and current growth. It is possible that culture can jump-start or impede development, but it may be more useful to identify specific cultural values and practices in particular places rather than generalize to entire societies.

Dependency Theory

Dependency theorists argue that the global economy has always involved some form of exploitation by the powerful (the core) against the vulnerable (the periphery). Although some countries are able to climb from the periphery into the core, others fall back, and the overall structure of global inequality does not change. According to this theory, the NICs succeeded not due to any specific policies that they implemented, but because they happened to be in the right place at the right time. Thus, there is no magic formula for other LICs to follow in order to achieve development.

The NICs contained unique advantages in the late twentieth century that did not exist elsewhere. Many of the NICs had been devastated by the second World War and were eager to recover and rebuild. Countries like Japan, South Korea, and Taiwan became US allies, receiving large amounts of aid and favorable terms of trade as a result. As the global economy was entering a period of robust growth and transportation costs were plummeting, the demand for low-wage, labor-intensive products from around the world exploded. Wages in the NICs were much lower than in core countries, which gave investors incentives to locate factories in the NICs. Now that a significant proportion of global manufacturing has already moved to the NICs, and labor costs are still relatively low in Asia, there is little incentive for companies to move production to other regions. (See Figure 6.3 for a view into what it's like to work in an export-oriented factory.)

[Insert Figure 6.3 here]

[Box] Figure 6.3 Working in a Chinese Garment Factory

China Blue is a 2005 documentary telling the story of Jasmine, a 17-year-old girl working in a factory in southern China that manufactures blue jeans to export to wealthier countries. Jasmine is part of a mass migration of young Chinese workers from rural to urban areas pursuing employment as China experiences rapid expansion. Jasmine works long hours in difficult conditions, earning the equivalent of $.06 per hour in a factory that does not respect labor rights. Despite facing hardships, Jasmine also gains a sense of empowerment as she adapts to modern life in the city. Jasmine's story is a microcosm of the opportunities and challenges of working in the EPZs that are the engine of the NICs' explosive growth. The NICs' growth has lifted millions out of extreme poverty, but it has not come without a cost.

[End of Box]

The NICs also had unique geographic and societal advantages to ensure that they did not fall into the destructive and exploitative poverty traps that we described in Chapter 4. Many of the NICs were ethnically homogenous, and the impacts of colonialism were less politically and socially divisive than in Africa, so this reduced the likelihood of civil war. Several of the NICs were also island nations, which gave them some protection against foreign invasion and access to the Pacific Ocean for maritime trade. None of the NICs were landlocked, meaning that they had easy and cheap access to global trade routes, especially with the US as the world's leading economy. Few of the NICs had any significant cache of lootable resources, which allowed them to create manufacturing-based economies and avoid the resource curse. The NICs were also located near each other (especially in Southeast Asia), which allowed them to reap the benefits of having more concentrated trade and investment flows, as well as lower costs of production (this phenomenon is called the "agglomeration effect"). Once the early Asian Tigers like Japan began to grow, it was easier for surrounding countries to benefit from the global connections their neighbors already created.

Indeed, dependency theorists argue that if the NICs employed different policies than one another to achieve economic growth, how could any specific policy or institution be responsible for development? China and India pursued more liberalist paths, while Japan and South Korea chose realism, but they all achieved success. South Korea and China were authoritarian, while India was more democratic, but they all achieved success. Singapore had a strong rule of law, while the Philippines and Indonesia were some of the most corrupt countries on the planet, but they all achieved success. Thus, their success must have been the result of the unique advantages they had at that point in time, which provided them a privileged role in the global division of labor. Those advantages no longer exist in the current global economy as automation has replaced much of the low-wage manufacturing that early NICs relied on, and core nations have erected more trade barriers against the Global South.

If this is true, then other countries throughout the Global South cannot follow a formula for development that the NICs implementedbecause there was no formula. If we want to promote development throughout the Global South, we cannot rely solely on internal policy changes in those nations. We must reform the global economy to overcome the disadvantages that the poorest countries face and the exploitative role that they play in the global division of labor.

Conclusion

The NICs undoubtedly achieved an economic miracle, sparking historically unprecedented rates of GDP growth that pulled over a billion people out of poverty. As the debate above shows, most of the NICs did liberalize their economies, but they also adopted a range of other policies (i.e., realist and social democratic policies) that may have been responsible for their success. Indeed, perhaps it wasn't due to their policies at all, but because of their strong leadership, development-oriented culture, and/or because they occupied a unique position at a particular time in the global economy. Ultimately, we can't know the answer with any certainty:

Economists (and other experts) seem to have very little useful to say about why some countries grow and others do not. Basket cases, such as Bangladesh or Cambodia, turn into small miracles. Poster children, such as Cote d'Ivoire, fall into the "bottom billion." In retrospect, it is always possible to construct a rationale for what happened in each place. But the truth is, we are largely incapable of predicting where growth will happen, and we don't understand very well why things suddenly fire up.

Even though economists don't agree on the right national policies to achieve development, development experts do have more consensus on the wrong policies. Kleptocracies steal wealth from the country and redistribute it to the most powerful members of society. Governments that severely discriminate against ethnic minorities foster civil wars, inequality, and underdevelopment. States that close themselves off to global trade and investment in the pursuit of total self-reliance end up stagnating or declining. Perhaps countries develop through a mix of policies, but the right mix depends on a particular country's comparative advantages, political institutions, leadership, geographic influences, history, and positioning in the global economy.

Finally, we should remember that the dramatic growth of the NICs has not come without significant costs. If GDP growth is accompanied by authoritarian repression or exploitative working conditions, can we really call it development? Because the NICs are newly industrialized, their growth has also helped to produce an unprecedented rate of environmental degradation. Non-renewable resources are depleting at an alarming rate; millions of acres of forest and cropland are being polluted and destroyed; and the NICs are now leading contributors to climate change. If we acknowledge that development should be holistic, encompassing basic rights and environmental sustainability, then the rest of the Global South cannot afford to follow the pathway of the NICs.