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Some miracles resist forgetting. They continue to hold out hope for believers. The East Asian Miracle that apparently blessed four economies with a growth bonanza in the last quarter of the twentieth century, endures because a legion of countries believe that supernatural events can be made to recur by studying the oracle bones and conducting the policy liturgy handed down from East Asia.
The slackening growth of emerging markets and developing economies (EMDEs) and of global trade over the past decade has only sharpened the interest in miracles past. As the World Development Report (2024) observed, “compared with the US, middle-income countries seem trapped at modest income levels…Countries like Brazil and Mexico are likely to be even further behind the US in 2100 than they are today.” The Southeast economies, the so-called Tiger Cubs, and others such as Poland and Chile, which appeared poised to emulate the East Asian successes, now find that accelerating growth to near two-digit rates is beyond their reach and growth rates of 4-6 percent per annum might be all that can be sustained. Even China, which is still short of the high-income threshold, struggles to maintain growth of much more than 4 percent. Performance of middle-income countries is flagging although their human and physical capital resources on a per capita basis are over 70 percent of the US level but output per worker is only about a fifth of what a worker in the US produces.
A high volume of investment—China is investing 42 percent of GDP; the average for EMDEs was 32 percent in 2023—is not delivering the desired outcomes; incremental capital output ratios (ICORs) have risen. In most middle-income countries, primary school enrollment is in the 90 percent range and in upper-middle-income countries, secondary and tertiary schooling is at levels comparable to that of the Tigers in the 1980s and early 1990s. The proliferation of indicators evaluating the business environment, competitiveness, state capacity, governance, startup activity and the supply of logistics and infrastructure services to name a few, has compelled countries focused on growth objectives to improve their scores. Several of the upper-middle-income countries are the equal in these areas to the East Asian star performers in their heydays.
Many EMDEs, especially the ones in Southeast Asia and parts of Latin America, have benefitted from foreign direct investment (FDI) by multinational corporations (MNCs) and integration into global value chains. FDI plus participation in global value chains has facilitated the flow of technology and ideas to EMDEs potentially enabling rapid catching up. A more open global innovation system has helped to diffuse technologies as is apparent from the uptake of Fintech and other web-based applications. Factory automation is ongoing throughout the developing world with robots proliferating in Indonesian factories producing plastics and rubber products, automated machines displacing workers in Bangladesh’s garment industry and machines that can “see” smell and taste products helping Chinese manufacturers of food products standardize quality.
But growth stubbornly refuses to respond to capital, to years of schooling, to FDI, to global value chain participation, to investment in infrastructures including new ports operated by Chinese and Southeast Asian companies, and to the adoption of technologies. Why, then, after so much perspiration and borrowed inspiration,[1] are upper middle-income countries and EMDEs more generally, struggling to match the pace of the Tigers in their youth?
Tigers’ leap
It should be remembered that each Tiger economy succeeded in its own way unlike Tolstoy’s happy families. While they all took their cues from Japan, Asia’s new giant, they each went down a somewhat different path without a clearly articulated strategy but with a demonstrated capacity to perceive and quickly respond to emerging opportunities. The Hong Kong Miracle is all but forgotten. Strands of the Singapore Miracle while difficult if not impossible to replicate, still attract attention. It is the now legendary performance of Korea and Taiwan that has the most devoted following. And at its root is the enduring belief in the power of manufacturing to drive growth and material prosperity. Although the contribution of services has received much attention [2] and AI/digital technologies might yet revive productivity in advanced economies, EMDEs and increasingly developed countries as well view manufacturing as the horse to back even as they explore the potential of services.
The policies that serendipitously resulted in “miraculous” growth spanning three decades (also by China) were not part of a long-term Master Plan devised in the sixties by leaders in Korea and Taiwan (or by Chinese leaders in the 80s). The policies took shape over time from the push and pull of contingencies,[3] opportunities and pressures domestic as well as global. And as noted earlier, both Korea and Taiwan former colonies, were guided by the route charted by Japan from the 1950s.
With the benefit of 20:20 hindsight, four factors not easily replicated by EMDEs were responsible for the nonpareil performance of the two tigers.
- The early carpentering of a technocratic developmental state[4] by the likes of Park Chung-Hee, Lee Kuan Yew, Chiang Kai-shek and Chiang Ching-kuo and that endured even as leadership and modes of governance changed, and crises erupted. The state provided policy consistency, political and macroeconomic stability, promoted investment assured property rights and used industrial policy (IP), which was never flawless, to steadily deepen industry and move up the technology ladder. Few if any EMDEs have created or sustained a state with such capabilities and focus or implemented industrial policy with the credibility and finesse that compelled protected infants to become export champions or risk being abandoned.
- The Tigers incentivized the emergence of a vibrant private economy directly through IP coordinated by the government with other stakeholders, using quotas, subsidies, cartels (as in Korea), government procurement, and by combining IP with benign neglect of the private SME sector in Taiwan. With support from trade, exchange rate and FDI related policies, both economies gave rise to highly productive superstar firms that drove exports and economic growth. More importantly, again with government backing, these entrepreneurial firms scrutinized market signals, guessed where the “puck was going to be”[5]and invested in products, technologies and skills with growth potential.
- Public and private attention to the deepening of technology and innovation complemented IP. The state created the research infrastructure, the tertiary level training institutions and science parks, but it was the large industrial companies and start-ups that leveraged technology using a variety of channels to create world class companies.[6] Unlike the majority of large private or public businesses in other upper middle-income countries (which prioritize inward oriented financial, real estate, and infrastructure services and the retail sector), Tiger superstars were all firms that manufactured products and rode the waves of innovation that swept the sector.
- Finally, Tiger governments first expanded schooling but then moved quickly to improve education quality supported by a popular culture that assigned importance to learning with parents willing to invest heavily in extra tutoring. Hanushek and Woessmann (2016) find that quality as measured by test scores was an important determinant of how economies performed. Korea and Taiwan are far in the lead because other Southeast Asian and South Asian countries have emphasized schooling but not learning.
Can EMDEs follow?
In principle, none of this is beyond the reach of middle-income countries that are searching for ways to accelerate growth, and several satisfy the macroeconomic requirements viz. moderately high rates of investment; low inflation; supportive trade and exchange rate policies; and a business-friendly environment that attracts FDI and is conducive to start-up activity. Moreover, the private sector dominates most EMDEs. It accounts for over two thirds of the Chinese economy as well. But as the World Bank’s WDR and many other reports have shown, the growth outcomes continue to disappoint.
Five reasons come to mind. First, China excepted, no country has forged a developmental state with a vision and the capacity to consistently evolve and implement a long-term strategy that borrows from and adapts the Tiger playbook (more on this below).
Second, commodity trade, which was the highway to rapid growth, has slowed and the highway is crowded with many countries competing for space. The global market for labor intensive, light manufactures is being contested by a score of countries each trying to inch up a slippery value chain. With very few exceptions, these countries (e.g., Bangladesh, Pakistan, Sri Lanka, Indonesia, Vietnam, some in Central America) have remained in this low-level industrial equilibrium for decades. Exports by newer entrants are constrained by competition from China which has achieved cost and scale advantages others cannot match. Another reason is that the opening first of US markets and later those of European countries provided Tigers with opportunities to scale their exports that are no longer available to latecomers. And China with its relatively low and declining import elasticity is not serving as an alternative vent for exports from EMDEs.
Third, there is a plenitude of large companies and conglomerates in Asia and LAC and while some have manufacturing subsidiaries, their focus is mainly on finance, telecoms, real estate, construction materials, and food products. Services and products for the domestic market have failed to generate rapid growth because of minimal increments of productivity and except for tourism, exports of services have not substituted for missing exports of high value manufactures.[7] Industrial deepening and the production of complex products, which the Tigers transitioned to within less than two decades, has eluded most EMDEs. Attempts by Malaysia to emulate East Asian development of heavy and auto industries were unsuccessful and after thirty or more years of industrialization neither Vietnam nor Bangladesh is gearing up to export steel, autos, machineries, ships and semiconductors designed and produced by national firms.[8] Subsidiaries of American, European, Japanese, and Korean MNCs based in EMDEs produce and export electronic products, autos and other equipment but by and large local companies have not taken up the challenge and FDI has not proven to be transformative.
Fourth, just as computerization and the adoption of digital technologies failed to stimulate productivity in advanced countries over the past two decades, so also the productivity gains from technology absorption by EMDEs has been disappointing (Conference Board 2024). By dint of industrial deepening, technology absorption and exports, the Tigers caught up with high income countries but that burst of speed has proven difficult to replicate except by China, although forty-four years after the reform and opening of the economy in 1980, it is still not a high-income economy.
Lastly, the sea change in geoeconomic and geopolitical conditions is weighing on growth prospects. The rivalry between the US and China threatens to reverse globalization impacting both trade and FDI. Protectionism is on the rise and major countries are attempting to increase their self-sufficiency in strategic raw materials, food, and key industrial products.[9] Moreover, reshoring where feasible is being pursued alongside nearshoring and friendshoring. There will be winners and losers, but a world divided into blocs each attempting to enhance self-sufficiency and averse to investing in global public goods; a world in which trade stagnates, and the circulation of ideas and technologies is curtailed; a world where climate change will severely impact productivity and give rise to existential threats is a world that is headed towards negative sum outcomes.
The Financial Crisis of 1997-98 brought the curtain down on the East Asian Miracle.[10] No such miracle is in store for EMDEs in the decades ahead. The miracle to hope for is that many countries will defy the odds and sustain growth in the 3-4 percent range through the middle of the century.
[2] See for example World Bank (2021) At Your Service: The Promise of Services-Led Development; T. Fan, M. Peters and F. Zilibotti et al (2023). How Services can Drive the Growth of Emerging Economies. Yale Growth Center Policy Brief and NBER Working Paper No. 28551; For a less supportive view see M. McMillan and H. Onder (2024) Services-led Development: Some Caveats. Brookings.
[3] Albert Hirschman (1958) might have viewed it as “unbalanced growth” with investment in key industries giving rise to linkages and bottlenecks that induced and directed additional investment. The Strategy of Economic Development. Yale University Press.
[4] M. Woo-Cummings ed. (1999). The Developmental State. Cornell University Press; S. Haggard (2018). Developmental States. Cambridge University Press.
[5] A phrase immortalized by the ice hockey legend Wayne Gretzky.
[6] J. Mathews and D-S Cho (2007). Tiger Technology. Cambridge University Press. K. Lee (2013) Schumpeterian Analysis of Economic Catch-Up. Cambridge University Press. L. Kim (1997). Imitation to Innovation. Harvard Business School Press.
[7] Most EMDEs wanting to improve their growth performance cannot neglect manufacturing. The export of services and natural resource-based products alone will not suffice. This is why large economies like India and Indonesia and mineral rich ones like Saudi Arabia are using IP to diversify.
[8] In 2010 dollars, Malaysia's GDP per capita in 1965 was $1,551; Korea's was $1,274. By 2023, Malaysia's per capita GDP was $11,429; Korea's was $34,121 and that of Taiwan $33,000. FRED Data base
[9] The Global Trade Alert tracks actions taken since the Financial Crisis. https://www.globaltradealert.org
[10] This happened just four years after the World Bank issued its report that engraved the Miracle in stone. World Bank (1993) The East Asian Miracle.
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