Even before the term ‘Washington Consensus’ (WC) was popularized, it was already coming under great criticism despite the ‘counter-revolutions’ against ‘development economics’ and Keynesian economics associated with Thatcherism and Reaganomics. At the World Bank, the Japanese Executive Director argued that the WC menu of policy advice and conditionalities had resulted in the 1980s’ ‘lost decade’ in Latin America and Africa. In contrast, the East Asian region had seen rapid growth and industrialization.
At Japanese government expense, the Bank published the East Asian Miracle (EAM) volume in 1993. But instead of recognizing that the WC was in fact the problem, the volume contributed to the myth-making which ensured its continued influence for years thereafter.
The EAM study’s eight high-performing Asian economies (HPAEs) consisted of Japan, Hong Kong and three first-generation newly industrializing economies (NIEs), namely South Korea, Taiwan and Singapore, and three second-generation South East Asian newly industrializing countries (NICs), namely Malaysia, Thailand and Indonesia, but excluded China.
It identified six types of state interventions in East Asia, only approving four ‘functional’ interventions, said to compensate for ‘market failures’, namely:
– ensuring macroeconomic discipline and balances;
– providing physical and social infrastructure;
– raising savings and investment rates; and
– providing good governance.
Although no one recommends reckless macroeconomic policies, there is little consensus on what constitutes sound macroeconomic policy. Although most ‘neoliberal’ economists insist on maintaining macroeconomic balances, they rarely agree on what this implies, while Keynesian economists favour counter-cyclical policies to address business cycles.
For instance, inflation was generally kept under 20 per cent in the HPAEs, but certainly not always below 10 per cent. Single digit inflation was not a common and consistent policy priority of all HPAEs during their high-growth periods. Hence, for example, Indonesia depreciated its currency regularly for many decades.
Similarly, the fiscal balance and the current account of the balance of payments were not always strictly maintained as the Bretton Woods institutions came to insist for the developing world. Many HPAEs ran large fiscal deficits to ensure high growth.
Since the 1980s, the Bank has increasingly urged private provision of physical infrastructure. Except in Hong Kong, a British colony until 1993, most physical infrastructure in East Asia was provided by governments until fairly recently. HPAEs privatizing physical infrastructure provision became the basis for powerful private monopolies associated with ‘cronyism’, later blamed for the 1997-1998 Asian crisis.
Governments have been extremely important in providing social services in East Asia. But the Bank recommends universal and free primary education, and does not recommend subsidization beyond the primary level, when students should bear the full costs. Hence, about half the young people of age in Korea get tertiary education, while the shares are well over a quarter in other first-generation East Asian NIEs. If East Asian NIEs had listened to the Bank, their progress would have been slowed considerably.
Savings and Investments
For some, the region’s rapid growth and industrialization were simply due to high investment and labour participation rates, rather than productivity gains: ‘perspiration rather than inspiration’. While conventional economic wisdom attributes high investment rates to high savings rates, savings rates have, in fact, followed – rather than determined – investment rates in East Asia.
After all, much of the high East Asian savings rates are due to firm savings, rather than just household savings. East Asian firms were generally able to enjoy high profits due to government interventions, subsidies, tax breaks and other incentives for favoured investments. Government policy also induced high reinvestment of these profits.
And contrary to the myth that East Asians are ‘culturally’ thrifty, unlike others, household savings in East Asia are not significantly higher than elsewhere, except for ‘forced savings’ – for employees’ retirement as mandated by law – and for children’s education.
The notion of good governance is often used ambiguously, even tautologically. When the economy is doing well, it is attributed to good governance, and when it is not, governance is deemed to have been poor. Hence, governance does not really explain economic performance.
Instead, Mushtaq Khan has shown that developed countries generally score well on good governance indicators while developing countries do not. Governance indicators do not clearly distinguish developing countries growing rapidly from those which do not.
In the late 1960s, economics Nobel laureate Gunnar Myrdal argued, in his three volume Asian Drama, that ‘strong government’ was good for development. However, his notion of strong government is often misunderstood or misrepresented, and associated with despotic government rather than developmental governance, i.e., governance arrangements prioritizing acceleration of development.
Peter Evans’ notion of the ‘embedded autonomy’ of the developmental state has been used to explain developmental governance. Autonomy from powerful and influential ‘vested interests’, ‘distributional coalitions’ and ‘rent seekers’ ensures that ‘special interest groups’ do not usurp government for their own ends. Thus, Evans’ notion tries to explain conditions for developmental governance to better co-ordinate rapid progress.
Thus, the very policies that the Bank endorsed as ‘market friendly’ were actually quite ‘distortive’. Market outcomes had to be modified to support East Asia’s rapid growth and structural transformation. However, while some policies became less effective or even dysfunctional as circumstances changed, the Washington Consensus menu of economic liberalization and privatization largely undermined the region’s rapid progress.
(This article was originally published in Inter Press service (IPS) news on June 14, 2017)