Markets Key to Asia’s Success
Despite variations across countries on policy mix and timing, a pragmatic focus on sustained growth, poverty reduction, and inclusiveness characterize Asia’s economic rise
In 1960, developing Asia’s per capita gross domestic product (GDP) was $330 (at constant 2010 United States dollars). By 2018, it had risen nearly 15-fold to $4,903, while global per capita GDP tripled over the same period. But in 1966, when the Asian Development Bank (ADB) was established, this incredible rise in living standards was by no means expected. At that time, feeding a large and growing population was one of the most important challenges and there was pessimism about the prospects of industrialization and broad development for Asia. Many countries in the region suffered from conflicts and political instability.
What were the reasons for the region’s postwar economic success?
During this period, Asia had a favorable external economic environment in terms of open trade and investment regimes of developed countries. Asian countries benefited from “demographic dividend,” rapid technological progress, and globalization, particularly in recent decades. However, even with favorable demographic and external conditions, the process of economic growth is not automatic.
As discussed in ADB’s new book—Asia’s Journey to Prosperity: Policy, Market, and Technology over 50 Years—there is no such thing as an “Asian Consensus.” The policies pursued in Asia can be explained by standard economic theories. And these policies are not so different from those prescribed by the so-called “Washington Consensus.” What made the difference was that many Asian countries took a pragmatic approach to implementing these policies.
Asian countries implemented import liberalization, opening-up of foreign direct investment, financial sector deregulation, and capital account liberalization in a more gradual and sequential way. For instance, they learned that the liberalization of capital inflows should be preceded by adequate development of the domestic financial sector.
While there were variations across countries on policy mix and timing, with occasional setbacks and reversals, successful Asian economies pursued policies needed for sustained growth and prioritized poverty reduction and inclusiveness. These efforts were supported by governments’ pragmatism in making policy choices, ability to learn lessons from their own and others’ achievements and mistakes, and decisiveness in introducing reforms. In many countries, a clear vision for the future, which is often championed by forward-looking leaders and shared across a wide spectrum of social groups, made a difference—especially when backed by a competent bureaucracy and strong institutions.
I have long felt that discussions about Asian economic success were often too simplistic. Many scholars, especially from outside Asia, tend to overemphasize the role of strong state intervention and guidance. But Asia’s success essentially relied on markets and the private sector as engines of growth. Economies started to grow faster when policies shifted from state intervention to market orientation, while governments continued to play some proactive roles.
Market-oriented policies had the backing of a long tradition of commerce and technologies in many Asian countries. During Japan’s Meiji modernization period (1868–1912), while the government created modern institutions following Western models and piloted industries, many railway lines were built by the local private sector. Electricity has always been provided by private companies in Japan. In the People’s Republic of China and India, in the early 20th century, industries led by domestic capitalists prospered in such sectors as textiles, paper, pharmaceuticals, steel, and shipbuilding.
Many Asian countries pursued “targeted industrial policy” to support industrialization, using tariffs, subsidies, preferential credit, and tax incentives. Some policies were successful, while others were not. Targeted industrial policy, if used badly, can lead to “rent-seeking,” unfair competition, and inefficiency. However, today, many agree that industrial policy can be effective if used wisely, especially at the early stages of development. This was the case for many of today’s developed countries including France, Germany, and the United States. Industrial policy may more likely succeed when it promotes competition and if it is implemented transparently with clear policy targets and sunset clauses.
Export-oriented trade policies are also often overemphasized and misunderstood. Japan and the newly industrialized countries (NIEs), adopted export-oriented policies from early on. However, such policies should rather be called “outward-oriented,” as they promoted exports to earn the foreign exchange needed for enabling more imports, including natural resources, capital goods, and technology. In fact, Japan incurred constant current account deficits until the mid-1960s and had to occasionally tighten macroeconomic policies. Many other Asian developing countries followed the NIEs, departing from import substitution.
Asia’s experiences and innovations have been inspiring, but it will take some more time for Asia to become as influential as the West has been for the past 5 centuries. Asia must continue to make efforts to strengthen its institutions, contribute to the development of science and technology, assume more responsibilities in tackling global issues, and articulate its own ideas. I hope that a larger role played by Asia will lead to a more inclusive, integrated, and prosperous global community.