Tyler Cowen recently linked to an interesting essay by Byrne Hobart on East Asian development. Here’s the opening paragraph:
I’ve always had highly libertarian instincts, for both pragmatic and ideological reasons. You say civilians should be able to own rocket launchers, I demand that these rocket launchers not face a sales tax. But for me and people like me, the East Asian economic miracle poses a serious challenge: the greatest anti-poverty program in history involved not just a lot of capitalism, but a ton of state intervention as well. The history of East Asian economic growth in the last half of the twentieth century is a history of academics and the World Bank insisting that their policies couldn’t possibly work, followed by decades and decades of torrid growth.
The last half of the 20th century is a long time. When most of these growth miracles were occurring during the 1950s-80s, academics and World Bank types tended to favor the statist model used in Latin America, rather than the more free market model used in East Asia. Reading the final two sentences of this opening paragraph might give readers almost the opposite impression, that the academics favored free markets and the East Asian model was seen as violating that consensus.
In fairness, things changed during the 1980s and 1990s. Expert opinion began moving toward the neoliberal model, aka the “Washington Consensus”. But when I was studying economics in the 1970s, the debate was between the relatively statist Latin American model and the relatively market-oriented East Asian model. Latin America did fairly well in the early post-WWII decades, but by the end of the 20th century the East Asian model was clearly more successful.
Here’s another questionable claim:
No American company or investor has improved as many lives by as wide a margin as MITI, Park Chung-Hee, and Deng Xiaoping. But the methods are, at heart, startlingly similar: identify a critical inflection point, make a bold bet on an unproven market, “blitzscale” as quickly as possible, deftly react to crises, and carefully expose budding monopolists to hormetic doses of competition until they’re strong enough to monopolize on their own merits.
Sorry, but I don’t see any relationship at all between the model described in the final sentence and the policy views of Deng Xiaoping. There was state involvement in the economy under Deng, as there was under Mao. But Deng’s key reforms were all about moving away from industrial planning. Empowering individual farmers, allowing township enterprises in the countryside, allowing foreign investment to boost exports, etc. It was all about the state pulling back from any attempt to control the economy.
This paragraph may be more accurate as a description of Japanese and Korean policies. But that doesn’t mean those specific policies were successful. Here’s a question for readers better versed than I am on these issues. Are there rigorous, empirical, scientific studies that show MITI was successful in boosting Japanese growth? I ask because there are plenty of development experts who don’t think it was effective, and plenty of anecdotal evidence that it was counterproductive. Here’s one example from the auto industry:
MITI Proposes a “People’s Car”
In May 1955, the Ministry of International Trade and Industry announced the “People’s Car” Plan, which gave Japanese car manufacturers an excellent opportunity to develop original models of their own. This plan called for a car weighing less than 400kg with an engine displacement of 350-500cc, fuel efficiency of 30km/liter, 2- to 4-person occupancy and a cost of not more than \150,000 (this price was later revised to \250,000).
The response of manufacturers to this proposal was that such a vehicle would be “impossible to manufacture with the performance and sales price requested”. After much back-and-forth discussion between the industry and government, the “People’s Car” Plan was eventually scrapped.
Another example is Honda. MITI bureaucrats told Honda not to produce cars, to stick with motorcycles. Honda’s CEO later said the company would have been more successful without being “bullied” by MITI.
There are many more such anecdotes, and there are also lots of anecdotes about how MITI did help Japan to succeed. That’s why I ask if there is any rigorous scientific study of this issue. I’m not saying it wasn’t effective—perhaps MITI helped overcome institutional barriers to needed industrial mergers. I’m asking if there is non-anecdotal evidence for that claim.
Bryan Caplan has a post discussing Bayesian reasoning:
Suppose someone sends you a new article claiming X. Intuitively, we think, “This will either make you more likely to believe X, or have no effect.” Once you understand Bayesian reasoning, however, this makes no sense. When someone sends you an article claiming X, you should ask yourself, “Is this evidence stronger or weaker than I would have expected?” If the answer is “stronger, ” then you should become more likely to believe X. However, if the answer is “weaker,” then you should become less likely to believe X.
Hobart cites a number of books on East Asian development, some of which were written by proponents of interventionist policy models. Readers of these books should not ask themselves whether the arguments are persuasive. If you are not an expert in this area, then of course they are persuasive! Readers should ask if the arguments are more persuasive than expected.
If the author talks about the merits of planning, does he or she explain why Hong Kong grew extremely fast without planning? If they discuss the merits of selective protectionism, do they explain why Singapore grew very rapidly with free trade? If they discuss the merits of trade surpluses, do they explain why South Korea’s period of fastest growth coincided with current account deficits?
And do they make misleading claims, such as this item from Hobart’s article:
As a consequence of all this, Japan’s GDP per capita in 1950 was under a fifth of the US level. Today, Japan’s GDP per capita is about two thirds of the US level.
This claim is true, but misleadingly suggests that Japan has recently been doing something right. In fact, Japan’s per capita income was more than 2/3rds US levels in 1990, and over the past three decades Japan has grown slower than the US; it’s falling further behind. This despite the fact that you’d expect countries engaged in “catch-up growth” to grow faster than the US. Not to mention that the Japanese work longer hours than Americans and are better educated. From this perspective, the Japanese model looks like a relative failure.
Readers of these books on Asian development should also ask what policies the author’s focus on. Let’s say the author is a left-leaning skeptic of free market capitalism. Do they talk about the fact that most of the fast growing East Asian economies have much lower taxes than Western economies, or do they focus on policies that might be more appealing to skeptics of “market fundamentalism”? Conversely, if a conservative discusses the successful neoliberal Nordic model, do they also mention the high taxes?
Just to be clear, Hobart wrote a very thoughtful piece, based on extensive reading. I’m no expert on East Asian development, and don’t know enough about institutions like MITI to have a well-founded opinion on the subject. Rather I’m encouraging people to be skeptical of any group of sources that do have an agenda.
READER COMMENTS
A
Aug 16 2019 at 4:43pm
The article reminded me of Douglas Irwin’s criticisms of Ha-Joong Chang’s Kicking Away The Ladder. Outcomes happen in countries with policies. That shouldn’t satisfy curiosity about whether those policies caused the outcomes.
Scott Sumner
Aug 16 2019 at 6:00pm
A much more succinct way of making the point!
Thaomas
Aug 16 2019 at 7:14pm
“When most of these growth miracles were occurring during the 1950s-80s, academics and World Bank types tended to favor the statist model used in Latin America.”
Funny, I worked at the World Bank in the ’70’s and’80’s and the factually correct criticism I heard was that we pushed for what would come to be called pejoratively as “Neo-liberal” policies. The Asian Tigers were uncomfortably explained away because they were “export oriented.”
Scott Sumner
Aug 16 2019 at 7:35pm
Thaomas, That was a typo on my part, I meant 1950s-1970s.
Thaomas
Aug 17 2019 at 10:31am
That’s probably right. I started in ’72 and there was a lot more sympathy for tariffs/interest rate caps, etc. in the early years. It was sort of exciting to be on the neo-liberal front lines on those days. 🙂
Benjamin Cole
Aug 16 2019 at 8:50pm
I do not see how a nation or region develops intelligent effective infrastructure without state planning and strong state powers.
The need for an effective state central bank seems to be accepted. I often think that the People’s Bank of China is an unsung hero in China’s 40-year run of economic growth.
Singapore’s dirigiste economy has been described by Paul Krugman as a “Stalinist”. That may be a little strong, but Singapore’s per capita GDP PPP is 50% higher than that of the United States. On the other hand, it may be a lot easier to run a city state t with a dominant Han population than a polyglot nation of several hundred million people. And what might be called City Planning in Dayton, Ohio is macroeconomics in Singapore, as when the government of Singapore built an entire island to house oil refineries, in which it owns 49% stakes—that, Singapore put up not only the land but some of the capital to build the refineries as well.
I think a key to the East Asian economies is that the governments there are pro-business or at least pro enterprise (which is not the same as being for free markets). Governments in East Asia intelligently regard business people as valuable citizens or constituents who need cooperation and sometimes protection.
Contrast that to many Western democracies or perhaps the left wing of the United States.
As for Latin Americans, I think they are my favorite people and I would happily live in safe parts of Latin America provided I had a steady source of income. But let’s face it, Latin America will always be Latin America and you can theorize and develop ideologies all you want. I also love the Italians the Filipinos and the Thai. The friendliest people are lousy at economics.
Thaomas
Aug 17 2019 at 10:36am
The trick is centrally planning what needs to be centrally planned and not what’s not. Though if your centrally planned industrial policy has to meet an export market test, it can’t go far wrong.
Lorenzo from Oz
Aug 16 2019 at 9:07pm
First, economics does not actually have a robust long term theory of economic growth, which is why there are these perennial debates. (Of course, that lack greatly reduces the weight we can put on economists’ comments on the long term effects of migration.)
Second, one suspects that (1) enough institutional stability for sustained saving and (2) good enough incentives for generally effective investment will generate (3) sustained bursts of growth but that quite a wide range of policy and institutional regimes are capable of creating (1) and (2) for long enough to generate (3). With (1) and (2) being even more able to generate (3) when also being able to play technological catch-up.
Scott Sumner
Aug 16 2019 at 10:02pm
Lorenzo, I don’t really agree. I think we do have a pretty good theory explaining why, for instance, South Korea has grown a lot more than North Korea.
Frank
Aug 17 2019 at 10:08am
But the question isn’t whether we are going to emulate North Korea. Do we have a robust theory of economic growth that allows us to reliably evaluate the policies that are politically feasible in the US (or the Western world generally) in terms of their effect on growth? To the casual observer it seems as though many different combinations of policies are compatible with similar acceptable levels of growth. Admittedly, it would be hard to be a more casual observer than I am. But Agnus Deaton, who does not seem to be given to saying things just to be provocative, said in an EconTalk interview that after a century of hard work on growth economists don’t really know more about it than a few generalities on the level of “innovation is important”. Roberts not only did not dispute that, but referred to Leamer’s observation that per capita growth in the US has been pretty steady for 50 years despite many policy changes.
Scott Sumner
Aug 17 2019 at 2:21pm
Frank, You’d expect fairly steady growth in a large country, as no single policy is all that consequential. I agree that we don’t know the answers to many specific questions, but surely we know more than that innovation is important. The problem in North Korea is communism, which also failed in other countries where it was tried. So we know that central planning doesn’t work well, and that markets are important. We know that trade is good (autarky doesn’t work), even if we don’t know if 100% free trade is appropriate. There’s a lot of evidence that rule of law helps, and that corruption hurts.
Lorenzo from Oz
Aug 17 2019 at 7:57pm
Yes, explaining why South Korea has a better growth trajectory than North Korea is not hard. But it is also not “long term” in quite the sense I mean. I was more thinking in terms of why take off economic growth occurred when and where it did and why some regions and countries have proved much better than at emulating that takeoff than others.
There are certainly many explanations on offer, but not what you would call a robust general theory. Hence the sort of debates you mention in this blog post.
Lorenzo from Oz
Aug 18 2019 at 2:33am
To clarify, a robust theory of long term economic growth would be able to explain the social dynamics of creating, sustaining, and undermining, growth-friendly institutions. Economics is not there yet. Which is one reason why I am sceptical of the blithe “migration, it’s great mate, for all residents” view of current economic analysis.
Jeff
Aug 21 2019 at 12:17pm
We’ve known since Adam Smith what works: property rights and competition. Property rights pretty much define capitalism, are hindered by regulation, and are mostly absent in socialism. Zoning violates property rights and accounts for many of the problems in the US economy. But other regulations (like the ethanol mandates, stifling of nuclear power, and especially barriers to entry in the medical field) also are causing great harm.
Goods and services improve when their makers or providers face competition from other suppliers. That’s why free trade is important, and it’s another reason why regulations that serve as barriers to entry tend to slow growth.
Competition between governmental units also works. James Madison and his compatriots understood that, so they created a federal system wherein most governance happened in states that competed with each other. Then they went even further in splitting the national government into three branches that compete with each other for power and prestige.
When people can easily move from one jurisdiction to another, governments have to compete with each other to attract citizens. That’s why free immigration and emigration is important. If North Koreans were free to leave North Korea and move to South Korea, we’d see massive improvements in the North’s governance. Similarly, if the United States really wanted to see improvements in Mexican governance, we could stop complaining about corruption there and just open the border.
Alan Goldhammer
Aug 17 2019 at 8:59am
Back in 1983 I made the transition from research to doing regulatory policy. My first job was at a new trade group representing the biotechnology industry. I think it was about 1984-85 that we had Clyde Prestowitz as a speaker at an annual meeting and his talk focused on Japan and how he saw US technology imperiled by advances in Japanese technology and licensing agreements between US and Japanese companies. At the time many of the biotech companies relied on such agreements to raise funds for product development. Prestowitz saw this as needless transfer to technology. None of this came to pass.
Scott Sumner
Aug 17 2019 at 2:21pm
Great example.
Mark
Aug 17 2019 at 9:13am
The most persuasive point to me is the fact that Japan, South Korea, and Taiwan have not caught up to the US or even to Western Europe. Moreover, those countries have stopped converging are are now growing at the same speed or slower than the US. Whatever the “Asian model” is, it seems to be good at helping poor countries catch up to the economic frontier but completely ineffective at expanding the economic frontier. This means it has little to no relevance for the US and other countries at the economic frontier today.
Another interesting thing is that there is another cluster of countries that converged with the first world—Southern Europe. Why is there much less study of the Spanish model than the South Korean model?
Scott Sumner
Aug 17 2019 at 2:22pm
Good point.
Richard A.
Aug 17 2019 at 9:15am
It would be interesting to look at MITI’s budget as a percent of Japan’s GDP and compare it to the US Commerce dept over the decades.
Mark Z
Aug 17 2019 at 12:53pm
In the case of South Korea, from the early 60s, the government generally followed a policy of deregulating foreign investment, letting exchange rates float, while also following relatively stable fiscal and monetary policies. These factors seem to differentiate it (and I suspect countries like Japan and Taiwan) from less successful countries more than aggressive industrial policy does (since plenty of underperforming countries also pursue aggressive industrial policy).
Though perhaps there’s a much simpler explanation: more productive work forces. It’s been observed that South Korean workers, even before its economy took off, tended to work harder, work longer hours, and were in general more productive.
Scott Sumner
Aug 17 2019 at 2:24pm
I’d add that South Korean trade was freer than it looked, as export subsidies and import tariffs tended to neutralize each other.
Benjamin Cole
Aug 18 2019 at 8:33pm
Here is my one sentence wrap up: The Far East economies exalt the producer, America exalts the consumer (a viewpoint encouraged by multinationals).
My guess is the Far East model will prevail.
Incomes of some Far Fast nations may have slowed due China competition. To be successful in a globalized economy, a nation must reduce income shares to labor and to some extent living standards for the employee class. How else to compete with China?
Michael Pettis says this explains the German success story.
Jeff
Aug 21 2019 at 12:20pm
The problem with this has already been pointed out: Why hasn’t Japan caught up?
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