Edward J. Lincoln

English

Research Papers in Economics

Edward  J. Lincoln Some Missing Elements 
THE  SYMPOSIUM  papers and comments in this volume bring up a number 
of the important features of the East Asian economy.  But the discussion 
would not be complete without consideration of a few additional points. 
Most of the following  comments are very loosely  organized around the 
theme of industrial policy,  or government involvement  in the economy. 
A  number of  East Asian  economies  have  been  quite  successful  at 
producing high economic  growth and managing industrialization. Japan 
has already completed  this process;  China and certain other countries 
are now  experiencing  it.  Much of  the past research and the paper by 
Susan Collins and Barry Bosworth have focused on seeking the sources 
of success.  It might also be useful  to view  the issue  from the opposite 
angle: how  many errors can a nation make and still  grow? All  Asian 
nations,  including  Japan,  have  experienced  some  degree  of  official 
corruption, private collusion,  artificial prices set either above or below 
market-clearing levels,  and other distortions that ought to work against 
economic  growth. A simple-minded  focus on "getting  the prices right" 
or creating an honest bureaucracy begs  the real question of how close 
to these  economic  ideals  a nation must be in order to break into high 
growth.  For a variable such as corruption, there must be some level  of 
rent-seeking that chokes off entrepreneurial activity.  But the necessary 
condition  for  permitting  rapid economic  growth  is  clearly  not  zero. 
What surprises me about East Asia is not how many pieces of the growth 
puzzle these nations have got right, but how well they have done despite 
many obvious  mistakes  and distortions. 
Nevertheless,  one can argue that such distortions  do come  back to 
haunt nations  in  the  long  run.  Problems  that  are papered  over  and 
mistakes that are allowed  to continue uncorrected tend to fester.  While 
they may not seriously  inhibit growth for a while,  they eventually exact 
a price. Problems of moral hazard inherent in the structure of Japanese 
banking,  for  example,  as  discussed  in  Takatoshi  Ito's  paper in  this 
volume,  have  finally  resulted  in a very  large  bad debt problem  that 
includes  large  doses  of  official  mistakes  (misjudgment  at best,  and 
outright corruption  at worst).  In the  future,  China  and other  Asian 
nations may also face mounting problems from their more serious mar- 
351 352  Brookings  Papers on Economic  Activity, 2:1996 
ket distortions,  such  as institutionalized  corruption and administered 
prices that deviate widely  from market levels. 
This issue leads directly to the question of industrial policy.  Recent 
debate about the Asian development  experience  has had a strong polit- 
ical element.  In the late 1980s,  Japanese government officials  seconded 
to  the  World  Bank  became  dissatisfied  with  the  strong emphasis  on 
deregulation,  privatization, and getting prices right. Believing  that their 
own  government  had enhanced  domestic  growth  through  directed 
credit, controlled prices,  subsidies to private sector R&D consortiums, 
tolerance  of  private sector  collusion,  legal  cartels,  and heavy  protec- 
tionism  (on  both imports and inward investment),  the Japanese were 
eager to promote their experience  as an alternative to Western neoclass- 
ical economics.  They also believed  that the rest of Asia was following 
the Japanese model  and that this explained  the region's  rapid growth. 
The  Japanese  government  funded  a World  Bank  study  of  the  Asian 
development  process,  resulting  in the publication  of  The East  Asian 
Miracle  in 1993.  But the Japanese were disappointed with the outcome 
of the study,  which gave only very weak support to their ideas: indus- 
trial policy  was  identified  only  as  a possible  factor  in Japanese  and 
Korean development  and as generally unimportant or undesirable else- 
where. There are legitimate theoretical and empirical issues concerning 
the role of industrial policy,  but keep in mind that much of the debate 
in the past  several  years  has primarily been  a matter of  politics  and 
pride; the  newly  affluent Japan,  now  the  number two  funder of  the 
World Bank,  has wanted to exercise  its voice  and its vote to prove to 
the world that it is a major independent player,  with its own paradigm 
of development  to offer. 
As a result of their strong desire to believe  in a distinctive  Japanese 
model of development  and its replication in the rest of Asia,  the Japa- 
nese have responded to the new growth accounting studies with consid- 
erable distress.  Collins and Bosworth's  paper in this volume lends more 
support to the notion that the pattern of development  in Japan has been 
somewhat  different from that in the rest of Asia.  This is not welcome 
news  to those  who  want to push the notion  of  Asian  distinctiveness. 
According to the Japanese view,  industrial policy  is the crucial distinc- 
tive  ingredient of Japan's high economic  growth and rapid total factor 
productivity increases.  If other East Asian countries are implementing 
similar industrial policies-often  financed by large doses  of Japanese Edward  J. Lincoln  353 
official  development  assistance-why  is  total factor productivity  not 
rising rapidly? 
Despite  the lack of  statistical  support for the beneficial  role of  in- 
dustrial policy,  it may be possible  to find a positive  impact by other 
means.  David  Weinstein  suggests  that Japanese industrial policy  has 
many examples of failure to balance the successes.  But this may not be 
the  point.  The  existence  of  industrial  policy  may  have  lowered  the 
perception  of risk,  thereby raising expected  rates of return on invest- 
ment and yielding  more rapid capital accumulation.  In the absence  of 
rapid total factor productivity growth, rapid capital accumulation stands 
out as unusual in the recent Asian  growth experience.  By providing  a 
generally  favorable environment for business-with  some informal or 
explicit  advice  on  the  allocation  of  investment  (allowing  banks  and 
manufacturers not to worry about "overinvestment")  and toleration of 
legalized  cartel behavior  (to bolster  firms facing  short-term financial 
constraints  in  cyclical  downturns)-governments  have  encouraged 
banks  to  lend  and  firms to  add  capacity.  Thus  the  macroeconomic 
consequences  of  industrial policy  may be more positive  than the evi- 
dence on microeconomic  mistakes would suggest. 
Those  microeconomic  mistakes  are real,  as Weinstein  points  out. 
Japan has  probably  allocated  excessive  resources  to  favored  indus- 
tries-including  steel,  shipbuilding,  and semiconductors-not  to men- 
tion pursuing foolish  agricultural policies  that have resulted in a wildly 
inefficient  sector.  However,  although  such  efforts  at directed  credit, 
price-fixing,  and trade protection may not have been good for the long- 
term efficiency  of the economy,  they have had an international impact. 
Perhaps the best way to think of this is as the international transmission 
of domestic distortions. The Japanese steel,  shipbuilding,  and semicon- 
ductor  industries  stand out  as  tremendous  successes  in  international 
trade. Even today, Japan produces around 45 percent of global shipping 
tonnage  and roughly  40  percent  of  global  semiconductor  output.  If 
Japan produces too much in these  industries,  therefore,  other nations 
produce too little.  This has been the essence  of many U.S.  complaints 
about Japanese trade and industrial policies,  since American firms often 
lose  out when  Japanese industrial policy  is  active.  Concern over  the 
desire  of  other  Asian  nations  to  emulate  these  aspects  of  Japanese 
industrial policy is a major reason why the U . S. government has pushed 
so  hard to  have  China  conform  to  World  Trade Organization  rules 354  Brookings  Papers on Economic  Activity, 2:1996 
before it receives  membership and has promoted the Asia Pacific Eco- 
nomic  Cooperation  as  a vehicle  to  speed  East Asian  nations  toward 
more open trade policies. 
In  general,  there  is  more  to  be  said  about  trade  and  investment 
policies.  This  is  one  dimension  on  which  Asian  experience  varies 
widely-most  countries  have been  protectionist,  but Hong  Kong  has 
not. Japan placed very stiff constraints on inward foreign direct invest- 
ment,  but other countries  have actively  encouraged  investment.  Were 
Asian  nations  really  to  adopt the  "Japanese  model"  of  development 
and impose  severe conditions  on Japanese and other foreign firms that 
try to invest  in their economies,  the Japanese would probably be less 
enthusiastic  about selling  their own  experience  as a model.  The data 
that  Barry  Naughton  presents  in  this  volume  on  the  high  share  of 
Chinese  exports  produced by foreign-invested  firms (to the detriment 
of  purely  domestic  establishments)  draw a stark contrast  between 
Chinese  behavior  and past Japanese behavior.  And since  the methods 
used  to produce  indexes  of  "openness"  seem  very  flawed,  I am not 
sure that exercises  to measure the impact of trade and investment  pol- 
icies  on growth,  such as Collins  and Bosworth present in this volume, 
are very fruitful.  The debate over desirable trade and investment poli- 
cies  for developing  nations is likely  to continue. 
All of the above comments concern the role of government,  but there 
is an even more general point to be made. One of the distinctive features 
of  the rapidly growing  Asian  nations  in the past several  decades  has 
been their basic political stability. By contrast, much of Africa has been 
torn apart by violent  transfers of power,  colored by radical ideologies 
and tribal animosities;  Latin America  has also  experienced  struggles 
over  socialist  and communist  ideology;  and the Middle  East remains 
embroiled in bloody  conflicts  over Israel and Islamic fundamentalism. 
During the postwar period,  much of Asia has emerged from a century 
of internal and external conflict into relative political  stability: Japan in 
1945,  China after the final paroxysms of the Cultural Revolution  in the 
1970s,  Indonesia  once  Suharto took  control  in  1966,  Malaysia  and 
Singapore  after winning  independence  in the  1960s,  Taiwan after the 
Kuomintang brutally established  its control in the early  1950s,  South 
Korea after the end of the Korean War, and Thailand also at the end of 
World War II. Most of these countries are not democracies,  although 
South  Korea  and Taiwan  have  made  very  substantial  strides  in  this Edward  J. Lincoln  355 
direction  in the past decade.  Peace  and stability  obviously  have a fa- 
vorable  impact  on perceptions  of  risk and expected  returns from  in- 
vestments  in  the  private  sector,  and must  be  elements  in  the  Asian 
success.  Indeed,  those parts of the region that have most recently suf- 
fered from war or violent  repression-including  Vietnam,  Cambodia, 
Burma, and the Philippines-have  the weakest economic  records. 
Many of the uncertainties in Asia's  economic  future lie precisely  in 
this realm of political  stability.  Hong Kong reverts to Chinese owner- 
ship in  1997,  and the consequences  for investor confidence  cannot be 
known.  Taiwan faces  similar uncertainity for as long as it continues  in 
the strange limbo of a successful  economy  that is not officially  recog- 
nized as a nation by much of the world.  Suharto has led Indonesia for 
thirty years,  but is now aging  in a country without a clear succession 
process.  And no one can predict the political future of post-Deng China. 
One would like to believe  that the existing  record of growth and devel- 
opment has been sustained long enough that new political  leaders will 
perceive  greater gain in upholding  current political  and economic  re- 
gimes  than in  imposing  radical change,  but there is  no guarantee of 
such a benign future. 

Some Missing Elements

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Some Missing Elements

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