Tuesday, September 2, 2014
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The East Asian Miracle Revisited

HONG KONG – Almost two decades ago, the World Bank published its landmark study The East Asian Miracle, analyzing why East Asian economies grew faster than emerging markets in Latin America, Africa, and elsewhere. These economies, the study concluded, achieved high growth rates by getting the basics right, promoting investment, nurturing human capital, and opening up to export manufacturing.

But that was not all. The World Bank also acknowledged, grudgingly, that governments intervened – systematically and through multiple channels – to foster development, including in specific industries in specific locations via subsidies, tax incentives, and financial repression.

In the intervening years, particularly after the Asian Financial Crisis, the pro-market, anti-intervention Washington Consensus fell out of favor. A “New Institutional Economics” (NIE) gained ground by filling in the gaps left by mainstream models, which ignored the central importance of institutions in managing the change and uncertainty that affect resource allocation and social choice. Indeed, in light of today’s Great Recession and the current European debt crisis, the main question remains that of the role of the state in promoting growth and development.

It was the collapse of the Soviet bloc’s planned economies that spurred both free-market hubris and the realization that institutions matter. But it was China’s ability to sustain rapid economic growth for three decades that necessitated a revisionist look at statist capitalism.

Nobel laureate economist Douglass North argued early on that human society created institutions to deal with information asymmetry, but that their creations immediately gave rise to the problem of how to constrain such institutions to fulfill their intended objectives. In 2000, Oliver E. Williamson classified four levels of social analysis for institutions – informal institutions, customs, traditions, norms, and religion; formal institutions with rules governing property rights, social order, the judiciary, and the bureaucracy; governance structures and their alignment to economize on transaction costs; and decentralized decision-making in resource allocation (the domain of neo-classical economics).

According to Williamson, NIE is primarily concerned with the economic and political ramifications of formal rules and governance structures. But, for many emerging economies, it is the embeddedness of informal rules, norms, and beliefs, and their slowness to change, that prevents many economies’ breakthrough to more advanced, knowledge-based growth.

Francis Fukuyama’s new book The Origins of Political Order attempts to address this problem. He examines the emergence of three categories of political institutions – the state, the rule of law, and accountable government, the latter two being constraints on the state that prevent it from becoming despotic.

Fukuyama argues that patrimonialism – defined as the natural human propensity to favor family and friends – is the bane of the rule of law and accountable government. But, while patrimonialism may well be the main barrier to countries’ advance to middle-class democracy – and a key reason for autocratic states’ fragility – it may also be a more general feature of all political and economic systems.

Witness the current debate about whether governments in advanced economies have been captured by financial interests – a question that Gillian Tett poses in a recent review article in Foreign Affairs. “Should governments rein in finance to crush the elite,” she asks, “or should they simply accept income differentials and financial savings as the inevitable price of dynamic societies?”

This is not a trivial question, given the role of unabated inequality in growing social unrest and even revolution around the world. Indeed, the real surprise is that protests such as “Occupy Wall Street” have resulted in so little change, suggesting that institutions, once established, are “sticky” in preserving the status quo.

This is particularly relevant to Asia’s growth story. Former British colonies like India and Malaysia inherited common law and institutional checks and balances, but several today confront institutional decay, rising corruption, and creeping patrimonialism. Other economies, such as China, are seeking ways to establish the rule of law by strengthening the institutional framework within the framework of one-party rule.

Both Fukuyama and North conclude that strong state-led economies can be accountable, but become fragile should the ruling elites fail to respond to popular majorities and to global norms of behavior and governance. North argues that competition is a key force driving adaptive efficiency among institutions.

A basic insight of NIE is that measuring transaction costs in various factor and product markets can reveal inefficiencies and barriers to better performance. An examination of transaction costs in global and domestic supply chains would reveal the extent to which rent-seeking activities and policy distortions deter the emergence of competitive markets.

For advanced economies, the study of Williamson’s levels two and three – formal institutions and their governance – can lead to important insights. But, for emerging markets in Asia and elsewhere, we are convinced that the study of informal institutions, behavior, and norms offers a better understanding of the challenges of managing growth and performance.

Simply put, in many emerging markets, it is not a lack of understanding of international best practices that holds back economic performance. Rather, it is the conflict between these practices and traditional or domestic social relations and practices that entrench vested interests opposed to change.

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  1. CommentedJonathan Lam

    Gamesmith94134: A global New Deal
    In the nature of development of human spices; we provided livelihood of the people with much of the finite resources that our intelligence put them to sustain values and purposes. As technology advanced, globalization made it plausible to shift its natural resources from one place to another through trades. Then, our political sovereignties adopted monetarism capital resources dominated the trades and its other sources including Human resources and natural resource.
    Our present crisis was the long oblivion that they misused the resources and misled by the successes of the scientific advancement like efficiency and strength. Based on the levels of miscalculation of balance on the outcome of the values including financial; the polity made the obvious attempt to promote monetarism to gain controls of the natural resources that efficiency undercut the human resources and the finite natural resources were manipulated under the few. First, shortage of natural resources made the price surge. Many gained from the surge and continue such practice to sustain a higher pricing; so, under-funded capitals made the sovereignty debts from the trade externally. It is the macro-economic that broke the financial system that the sovereignty debts. Insufficient funding cut employment during the spell of credit crunch, price on goods like real estate fallen to meet the demand of those can afford, sales are down and real estate devalued cause the domino effect on lower revenues for the governments. Through the micro-economic control system, supply and demand lost their rhythm and purpose to sustain value what workers supported. It causes the outflow of business establishments, then, the economy is ruined and un-retractable even under the measures of liquidity or stimulation.
    It was the imbalance of the tripartite comprised of capital resources, human resources and natural resources that make the monetarism or our present economies failed. Since the human resource and natural resource lost their coordination to comply with the demand of value and purposes. It is how the monetarism became unsustainable and collapsible. When government lost its goal in sustenance of value and purpose; its citizens demand more of natural resources to maintain livelihood. Then, it is the breakdown of the political or capitalist system no matter how Quantitative Easing worked to nationalize the markets or for what money can buy. The nature do have it ways to maintain it right to keep all its resource balance and check on its developments through the boundaries or limits of resources especially the human resource that is infinite and the major factor for growth. Finally, human resource is the only factor that is expanding, natural resource is limited on the boundaries; and capital resource is relatively only a standard that we apply to value we can afford and share proportionately. Disaster arrives when either one is off its balance.
    We should understand by now how important is the balance of control in the capital resources, human resource and natural resources which no money can buy at least up to a point. The present finance system may not remand the deficits since capital resource override the human and natural resources that created the micro-economic failure that dragged down the macro-economic. As much of the trade war begins, now many sovereignty nations is struggling to maintain its harmony for its people. Mr. Jomo Kwame Sundaram gave good points on the control of the United Nations system in retribution of wealth through the programs by UN and accepted the initiatives of the International Labor Organization that are relevant to addressing the current stasis. Moreover, it is advisable for the United Nations system to redraw the boundaries of the resources for what the present system failed to maintain or how globalization had undercut the weaker nations for self-protection to maintain its resource from abuse. Nationalize marketing must be prohibited or hegemony should be examine by the boundary of the nations or continents and the weaker nations with lesser resources can be relieved from controls of the newer system. Therefore, reforms on financial and political are needed to bring on the integrity and harmony to the world; so, each capital, human, and natural resources can be identified, distribute and redistributed through the mechanism of UN’s political system with partners to World Bank, global financial reforms using it principle of boundaries or continents and human supervisions like the international Labor Organization and alike. So, tripartite resolution to the three resources must be improvised to meet the infinite rise of the population, sovereignty nation must pay respects to the natures of its resources and it must be integrated through the globalization to sustain its balance and limits to the boundaries.
    Perhaps, I am under the influence of my readings of the present financial crisis and distracted by the nationalize market, zombie bank and fiat money. Knowingly, the resolution initiated by the troika is not sufficient to maintain its claims of sustainability and liquidity, but the breakup of the Euro-dollar regimes would be more than disaster to the perpetuity growth of the population and loss of values in trade to sovereignties. By illustrating the concept of balance I hope some are convinced that balance of nature should be respected including its resources and boundaries. The last chance is the integration of nations and banks through the reforms or adopted the United Nations resolution to initiate the urgency of need to improvise its reforms; so, once the absolutism by the Euro-dollar regimes yield to the rights of others faithfully. Three for three must apply, and no more tea time on nationalize market, zombie bank and fiat money.
    May the Buddha bless you?

  2. Commentedjracforr jracforr

    The two questions raised in this paragraph, have been addressed in America's history.
    The newly Independent America " Accepted income differentials and financial savings as the inevitable price of dynamic societies " in it acceptance / tolerance of slavery from 1776 until 1861. Enormous wealth resulted for the favored elite and prosperous cities and mansions blossomed across the nation. In it's wake was a parallel society of poor ,ignorant and angry black slaves whom had nothing to show for their years of labor and nothing to pass on to their children. Those Americans who saw the calamity the country was destined for, raised their voices in opposition to the insanity of the prevailing system. The cry was futile however, as the wealth derived, was too great to forsake for some lofty humanist ideals. Instead of yielding to reason,the cry to defend ones belief resulted in a civil war which consumed six hundred thousand Americans. Ironically the government was forced " to crush the elite " . In the countries brief history it has addressed both options raised here, it will be interesting to see what course the nation will follow this time.

  3. Portrait of Michael Heller

    CommentedMichael Heller

    The main insight of this article it seems to me is this: “for many emerging economies, it is the embeddedness of informal rules, norms, and beliefs, and their slowness to change, that prevents many economies’ breakthrough to more advanced, knowledge-based growth” and, following on, “it is the conflict between these practices and traditional or domestic social relations and practices that entrench vested interests opposed to change”.

    So, generally speaking, East Asian countries need also to go through the missing ‘third stage’ reforms of formal institutions that Washington Consensus forgot to underscore in the first and second stages.

    Worth noting that Fukuyama and North used to say this was not possible (informal norms must evolve first, they claimed, though Fukuyama appears to have changed his position significantly just recently writing on China).

    I like the deft synthesis in this article of World Bank thinking (responsible for much unacknowledged intellectual innovation in institutional theorising), Williamson, North, and Fukuyama.

    My complaint? Only that Max Weber had said all this by 1920. Sociologists got there before the institutional economists. I even bore myself repeating that quaint nostalgic complaint ad nauseam but feel compelled!

  4. CommentedJohn A Werneken

    In other words, emerging markets confront roughly the same issue as mature ones: entrenched interests controlling the policies whether determined formally or informally.

  5. Commentedsrinivasan gopalan

    Welcoming the Chief Adviser to China's Banking Regulatory Commission to Project Syndicate your first publication of his monograph "The East Asian Miracle Revisited" makes an interesting reading. Institutional Economics to gain popularity, the bakers of such institutions should be above- board with the governing class-- be in democracy or guided democracy or Marxist-Market Model Middle Kingdom backing them to the hilt. Unfortunately, checks and balances built over the years in democratic institutions prevalent in the US, UK or India have crumbled in the face of the lure of finance, though people living in these countries enjoyed absolute and unconditional freedom to choose their calling in life. The best option now is to make the ruling classes in these countries see values in life are more important than quick-routes to wealth. In the wake of the crisis in western economies and in some emerging economies where growth had slowed down, people are expecting a lot of refinement in action from their rulers and this might happen by degrees. But to claim that China is seeking to find ways to establish rule of law by beefing up institutional framework within one-party paradigm is arrant hubris. Where people have little political freedom to voice their views or protests on issues that impinge on their day-to-day life, all talk of reinforcing institutional mechanisms should sound hollow. What is needed everywhere for that matter is inculcation of simple virtues so that in our transitory existence in this terra firma, we do not willfully wrong others in the worthless pursuit of wealth by hook or by crook --be they individuals or institutions or countries! G. Srinivasan, New Delhi (India).

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