The East Asian model,[1] pioneered by Japan, is a plan for economic growth whereby the government invests in certain sectors of the economy in order to stimulate the growth of specific industries in the private sector. It generally refers to the model of development pursued in East Asian economies such as Japan, South Korea, Hong Kong and Taiwan.[2] It has also been used by some to describe the contemporary economic system in Mainland China after Deng Xiaoping's economic reforms during the late 1970s[3] and the current economic system of Vietnam after its Đổi Mới policy was implemented in 1986.[4] Generally, as a country becomes more developed, the most common employment industry transitions from agriculture to manufacturing, and then to services.
The main shared approach of East Asian economies is the role of the government. For East Asian governments have recognized the limitations of markets in allocation of scarce resources in the economy, thus the governments have used interventions to promote economic development.[5] They include state control of finance, direct support for state-owned enterprises in strategic sectors of the economy or the creation of privately owned national champions, high dependence on the export market for growth, and a high rate of savings. It is similar to dirigisme, neomercantilism, and Hamiltonian economics.[6] [7]
Although there is a common theme, there is not one single approach to the economies of Asian countries, and it widely varies in economic structure as well as development experiences among the East Asian economies, especially between Northeast and Southeast Asian countries (e.g. Malaysia, Indonesia and Thailand relied much more on FDI (Foreign Direct Investment) than Taiwan or Singapore).[8]
East Asian countries saw rapid economic growth from the end of the Second World War to the East Asian financial crisis in 1997. For instance, the percentage of annual average growth between 1970-96 was 3-5% in China, Hong Kong, Taiwan, South Korea and Singapore. Within this period, developing East Asian countries were growing at three times the rate of growth of the world economy. Hence these countries attracted a significant amount of foreign and private capital inflows. During this period, East Asian countries also achieved dramatic reductions in poverty; the greatest example is Indonesia, where the percentage of people living below the official poverty line fell from 60% to 12% between 1970 and 1996. Furthermore, Indonesia's population increased from 117 to 200 million. Equally impressive is the growth of real wages between 1980 and 1992, with average wages in newly industrialized Asian countries increasing at a rate of 5 percent a year, whereas at the same time employment in manufacturing increased by 6 percent a year. The growth period in East Asian countries saw a large improvement in overall standards of living.
Behind this success is export-oriented economies which brought high foreign direct investment and greater technological developments which caused significant growth of GDP. Big companies like LG, Hyundai, Samsung etc. were successful due to huge government support and its intervention into the banking sector in order to direct banks to give credit to big companies. The governments in those countries were crucial in controlling trade unions, provisions, justice and also in providing necessary public infrastructure (roads, electricity, good education etc.). All this just made these countries more attractive for foreign investors. Along investors, Asian countries got foreign aid from the West (especially from the United States in order to discourage communism as a Cold War Containment policy) and get better access to the Western markets.
"Eight countries in East Asia–Japan, South Korea, Taiwan, Hong Kong, Singapore, Thailand, Malaysia, and Indonesia–have become known as the East Asian miracle."[9] Beside successes of the East Asian economy mentioned above in the success of the model, there are two other examples why they are called 'Asian miracles'.
Ersatz capitalism is Kunio Yoshihara's analysis of Southeast Asian economic development as a sort of 'pseudo-capitalism', referring to governments and businesses pushing their citizens to undertake economic activities that provide their country comparative advantage. These activities include capital investments and technologically intensive production.[10]
Besides many secondary actors in bringing out a crisis (such as a property price bubble, macroeconomic mistakes or a fall in a rate of growth of experts) the core of the crisis was in The East Asian model itself. The over-investment, misallocation of foreign capital inflows (big corporations getting money from each other, whether investment was sufficient or not), and other problems in the financial sector. Another side of the government-controlled market was massive corruption, which was due to close relationship between government and business. This so called “crony capitalism” (which means influence of government and businessmen) led to a crisis of confidence in the economies, firstly in Thailand and then other Asian countries, causing the financial crisis in 1997. Because of the crisis GDP and exports collapsed, unemployment & inflation both went up, and as result of all this the governments accumulated huge foreign debt.
The ongoing and deepening economic malaise of Japan reveals the potential failures of a model pioneered by Japan. In an article entitled The "Hidden" Side of the "Flying-Geese" Model of Catch-Up Growth: Japan's Dirigiste Institutional Setup and a Deepening Financial Morass, author Terutomo Ozawa explains that Japan's initial economic success was directly caused by the same factors that have led to its stagnation. Indeed, the country has faced and continues to face three decades of economic stagnation that has led to what has been called the Lost Decades and shows no current signs of ending.
Due to government interventions such as directed credits, regulations, explicit and implicit subsidies, the market had a lack of discipline which has contributed to the problem of unproductive or excessive investment which had contributed in causing the crisis.
"Trade restriction, import monopolies and regulations have impeded economic efficiency, competitiveness, reduced the quality and productivity of investment.”
Thailand
Political connectivity with the market have led to giving priority to political affairs at the expense of the economic decisions. For instance, delaying the implementation of necessary policy measures due to the general election in November 1996. In this and other cases, special interest has often influenced the allocation of budgetary resources and other public policy actions.
Overall in a number of countries, there were inadequate disclosure of information and data deficiencies, direct lending. In general, there has also often been a lack of transparency in policy implementation, for example decisions with regards to public infrastructure projects and ad hoc tax exemptions.