International Political Economy between Asian Countries
China, Japan, South Korea, Singapore, and Thailand are Asian countries that have undergone periods of the rapid growth in recent times. Having a similar socio-political predicament, these countries have employed similar strategies in their economic growth: The main similarities in their development strategies have been the heavy involvement of their respective governments in running the economy. Such strategies have frequently been referred to as industrial policy. Even though many academic works have confirmed the central role of industrial policy in the rapid development witnessed in Asia, the same has been incriminated for the widespread financial crisis – the Asian crisis – that hit the continent in the early periods of this rapid advancement. Therefore, it seems reasonable that developing countries should avoid industrial policy as much as possible. This paper is going to represent an in-depth analysis of whether industrial policy can be good for emerging markets or not while utilizing the political economy of Asian countries and the occurrence of the Asian crisis as a case study.
Industrial policy has played a big role in the rapid rise of Asian countries in recent times. There are several points that serve as good evidence to this fact. First, a number of Asian governments, most notably Japan, moved to set tariffs that enhanced a profitability local firms and undermined the gain by foreign companies in their countries (Stiglitz 157). Japan is known to have unfairly maintained high tariff rates to bar international firms from competing with local companies. As a result, local businesses in Japan significantly developed in comparison with foreign organizations. The large population and high demand for industrial products locally played an important role in ensuring that local firms had an adequate market for their products. Furthermore, even though later interventions by GATT lowered the tariffs set by Japan, they aided in opening the export market for the much more advanced Japanese companies; hence, enhancing their development further. The situation in the other countries was not different as industrial policies played an important role in protecting local firms from unfair competition by foreign multinationals (Stiglitz 157). Therefore, the protection of firms in Asia by the government has played a considerable role in preventing the harmful effects of cheaper imports; hence, spotlighting the need to adopt industrial policy in developing countries.
Additionally, the governments spearheading most Asian economies that were part of the Asian Miracle having supported their local firms financially. The companies that were most productive in export markets, which earned the governments a substantial amount of foreign exchange, were the ones that benefited most from these support by the authorities (Stiglitz 158). Apart from encouraging more industries to venture into the export market, this policy has an advantage of avoiding wastage of governmental funds on fields that would make losses and were not daring enough to enter into markets that would be most beneficial to the state. As such, the local firms in the Asian states grew rapidly and played a key role in ensuring that the economy also sprung up in the fast pace (Stiglitz 158). The application of this policy was most notable in Japan and China. As such, the adoption direct financial support to Asian businesses by the governments of the developing caused the same positive effects.
Moreover, industrial policy allowed for automatic approval of imports, which provided inputs to local factories and had mega effects to the growth of the economy. This free entry exemptions were most notable and played an important role in the rise of South Korea to the top (Stiglitz 162). Nevertheless, the government also subsidized automatically approved imports before it was sold to local firms. Apart from the obvious effects of enhancing the productivity of local firms, this policy significantly opened the import market. Indeed, opening of import market can be essential to the rise of developing countries as exemplified by the advancement of South Korea.
Furthermore, as evidenced by the Beijing consensus, the pattern of development behind the rapid rise in Asian economies emphasized on economic independence and local innovativeness. By the economic freedom, the Asian economies, especially China’s, are aimed to provide as many industrial inputs from local sources and to have as much market for the industrial products locally as possible. In essence, local innovativeness and gaining of economic independence will be key to the rise of developing countries if their economies were to get any better.
Notably, the most obvious reason why developing countries should adopt that Asian development model and the industrial policy is the success of the ideas that were discussed above . These notions were central to the rapid development that constituted the Asian miracle. Developing countries need this miracle, as well; it is up to them to contact the minister who triggered the miracle. In this case, the minister is responsible for an implementation of industrial policy. Thus, it is evident that the success of industrial policy and the Asian model of advancement points to the necessity for other emerging markets to implement them.
Despite its perceived advantages as evidenced in the discussion above, the development strategy of Asia and industrial policy have their own downside, which mainly includes their central role in the inception of the Asian Financial crisis. First, the Asian model, which brought the government and the economy together, led to the introduction of the government’s failures in managing the economy (Stiglitz 171). In Asia, this was more evident due to a lack of democracy in the countries. In turn, the unequal distribution of resources soon led to a regional imbalance in the development of industrial firms; hence, derailing the economy. Moreover, the lack of democracy or the overemphasis on democracy in a country, such as South Korea, caused a wastage and embezzlement of resources. The state of democracy in developing countries is no different; therefore, the financial catastrophe that is likely to follow the policies that would make the governments of these countries directly controlling their economies.
Inasmuch as the government’s support to local firms played a key role in ensuring that the firms advance, the governmental support to the companies caused the economic stagnation that had been witnessed in Japan before a moment when the miracle begun and the Asian financial crisis occurred. First, it was hard for the government to balance their support for all industries (Stiglitz 172). As such, only a few fields, for instance, automobiles and textiles, enjoyed heavy support from the government in Japan while other industries languished. Therefore, the government’s intention of reducing unnecessary competition between firms in the same area was countered by a failing of other sectors, which did not enjoy much government support. Developing countries needed the advancement of all sectors if their economies were to develop and do this at a rapid rate. The introduction of industrial policy, which would see the concentration on developing the industries that were most influential in the export market at the expense of some other industries, would be detrimental to the economy as it might cause a financial crysis.
Furthermore, the government’s support of local firms was central in the inception of Asian financial crisis. In the countries, such as South Korea, the government supported local firms by handing them loans and grants. However, this move proved being costly for the governments as some of the firms that were supported could not return the loans that had been given to them in time, causing the government to slip in a financial crisis. Even though the markets at any given time are never perfect, there was no justification to the thought that the government had access to better information, which would help them determine the firms that performed best and deserved to be supported financially. For this reason, this strategy, mainly dubbed as picking winners was always destined to a collapse; the failures of the Asian case study caused the Asian financial crisis. Therefore, the last measure that the feeble economies of most developing countries should take is providing all local firms with loans and grants as it may cause a financial crisis.
Taking into consideration the fact that industrial policy and other aspects of the Asian development model have been incriminated in the inception of the financial crisis, these strategies should be avoided as a plague in the developing world. These approaches demanded high expenditure by the government on more of a mutual trust basis; hence, causing the challenges that were faced. Moreover, industrial policy makes a country and its economy to become vulnerable to adverse changes in the markets (Stiglitz 173). This state, coupled with the political uncertainty and the immaturity of democracy in developing countries, can easily lead to financial crises. The developing world cannot simply sustain a financial crisis – these countries should not adopt the strategies for that matter. Indeed, mistakes that can occur during implementation of the approaches as they are costly, which brings an economic risk.
Further, the adoption of this industrial policy by emerging markets in the current times would not enhance their competitiveness in the foreign market. Rather, the current rules by the WTO would impose economic sanctions on a country in question; thereby, negatively affecting its economic advancement. The reason for this is that industrial policy encouraged shutting of the import market to protect local firms, but at the same time, it encourages local firms to invest in the export market (Cline 83). Nowadays, it will be hard for the country to export when they have categorically stated that they are not interested in importing products that are made in other countries. Again, economic sanctions would mean hell to any emerging marker; thus, a total avoidance of practices that can trigger sanctions of the WTO is necessary for developing countries.
Finally, as earlier alluded to, due to an incompetence of the government, industrial policy can be inefficient. With this strategy, possible failures of the government including a lack of knowledge on the best market situations, creep into the economy and start plaguing the government, as well (Stiglitz 171). Usually, the incentives that are given by the authority are also not effective. Rent seeking leads to unfair competition among firms inefficiency in the allocation of resources, which can be a beginning of the detrimental sociopolitical instability.
Nevertheless, despite the challenges that Asian countries, they have managed to mold their economic success by ensuring that their economic development models are sustainable. Western countries like the U.S. should learn from the success stories of Japan and China. Their ground as leading exporters of manufactured goods and other products is a true revelation that they are a force to reckon with. China’s penetration in perceived U.S. favorites like Africa shows the trust that many countries across the world have on Asia. For instance, the multi-billion Standard Gauge Railway (SGR) program in East Africa is just but an example of the success story of Asia. South Korea has also managed to stand out as a great Asian country in trade, infrastructural development, and military process. Therefore, instead of moving away from such countries, the U.S. and the west should focus on creating allies to help better their own development, which will improve their economies and create jobs.
From the discussion above, we can tell that even though industrial policy and the Asian model of development were central to the Asian miracle, it is not an appropriate way for modern developing countries. The possibility of financial crisis and the sociopolitical instability that can be caused by such strategies should be enough to deter developing countries from attempting to implement the approaches. Eventually, the prospect of being sanctioned in the international markets makes industrial policy even more lethal to emerging markets.
Work Cited
Cline, William R. “Can the East Asian Model of Development be Generalized?” World Development, vol. 10, no. 2, 1982, pp. 81-90.
Stiglitz, Joseph E. “Some Lessons from the East Asian Miracle.” The World Bank Research Observer, vol. 11, no. 2, 1996, pp.151-177.
Lessons Drawn from the Asian Development Model
The Asian model of development has been lauded for its central role in the Asian miracle. However, the same method of advancement has been heavily implicated in the occurrence of the Asian financial crisis. Therefore, it is an intriguing issue when one contemplates whether this model is good enough for developing countries or not. This paper analyzing whether the Asian model of development, which was heavily dependent on industrial policy, can be emulated by developing countries or not.
Nowadays, the Asian model cannot be adopted by emerging markets due to a variety of reasons. First, at the time of the miracle, the sociopolitical circumstances of Asia significantly differed from those of the present-day developing countries (Cline 85). Inasmuch as democracy was not fully practiced at the time, and the governments ran the Asian way,the countries managed to succeed; however, democracy is a necessity in the modern world. In turn, industrial policy might struggle to get ground in democratic states. Moreover, the Asian countries, especially Japan and China, had large local population; hence, it spotlights their dependence on the local market for progress (Stiglitz 154). Most emerging markets have inadequate local market for their goods and usually depend on the export field.
Additionally, the principles of international trade have greatly evolved ever since. The formation of WTO and the other conclusions of the Uruguay cycle prohibit some of the practices that were suggested by industrial policy. Activities such as a placement of barriers to imports so as to promote local firms are deemed wrong by current WTO directives, making industrial policy and the Asian development model impossible to be implemented under the current economic conditions.
The fact that the previously beneficial Asian model of economic advancement has been implicated in the occurrence of the Asian crisis makes the model to be a negative one for developing countries and one that does not have any positive impacts for being adopted in the current times (Cline 84). The model led the government into giving loans to some non-productive firms, which did not manage to repay the borrowings; hence; causing the financial crisis. Moreover, an in-depth analysis of the situation shows aspects that cannot be seen from the outside; for instance, a fact that the model led to the imbalanced development of firms where some industries developed at the expense of some others, which might have been better advancement opportunities.
Nevertheless, the Asian model can be adopted partially. The fact that the Asian approach to development was successful means that it had some positive aspects, which can be established to improve the economies of developing countries. First, the model emphasized on the growth of local firms. In turn, the advancement of local firms is a necessity if the economies of emerging markets were to become better. Even though barriers to importation can have implication to the WTO, there is a need to protect local firms from unfair international competition.
Moreover, the Asian model emphasized on independence, creativity, and innovativeness. Developing countries are in dire need of those three factors. Although most emerging markets do not have sufficient local industries, subsidization of goods, and the production of commodities that are locally useful can help them achieve a level of independence. Creativity and innovativeness are required to enhance the productivity and to manufacture more advanced goods or to adopt international technologies without being regarded as reinventing the wheel.
Indeed, it is evident that adoption of the Asian model of advancement will spell more hell than joy for the developing world. The Asian model of development and industrial policy are highly flawed strategies an adoption of which can be catastrophic for the emerging markets. Therefore, a few advantages offered by these strategies do not justify their adoption to the full extent.
Work Cited
Cline, William R. “Can the East Asian Model of Development be Generalized?” World Development, vol. 10, no. 2, 1982, pp. 81-90.
Stiglitz, Joseph E. “Some Lessons from the East Asian Miracle.” The World Bank Research Observer, vol. 11, no. 2, 1996, pp. 151-177.
