East Asia’s economic miracle: Lessons we can learn

Saif al Abri

Over the past decades, the economic growth of East Asia has been remarkable. Economists widely regard the growth in countries like Korea, Singapore, Taiwan, and many Chinese provinces as ‘miraculous’.

The literature offers varied arguments to explain this phenomenon, but by identifying the reasons for their success, we can potentially replicate it elsewhere. These economies have created unparalleled wealth in the region, with sustained annual growth rates of output per person sometimes exceeding 5 per cent, outperforming the rest of the world.

The growth of economies depends on three key factors the workforce (labour), the tools they use (capital), and the methods they use to work more efficiently (technology).

While some believe that adding more labour and capital will result in growth, sustained economic growth requires technological progress.

Continually adding more labour and capital will eventually lead to diminishing returns (adding more labour and capital can work for a while, there are limits and it can’t last forever). Therefore, economies must focus on improving technology for long-term growth, also known as intensive growth.

Studies have found that technological progress has the most significant impact on output per person (Solow’s 1956). The success of East Asian countries is often attributed to their “fast technological catch-up and efficient use of technology” compared to their competitors.

In summary, technology is crucial for sustained economic growth, and economies must prioritise its development.

The traditional view that advocates for minimal government intervention in the economy is based on the neoclassical approach, which emphasises the importance of physical resources and innovative technology advocates for minimal government intervention in the economy, with the government’s role limited to providing public goods and ensuring law and order (Sarel, 1996).

However, the success of East Asian countries has challenged this belief and has shown the importance of the revisionist view, which recommends an active government to moderate market excesses and assist with orderly economic development.

The East Asian countries success has also been confirmed by the World Bank (1993) report, which acknowledges that fundamental policies alone do not tell the whole story.

The report highlights that the government’s systematic and multiple interventions played a vital role in fostering development. These interventions took various forms, including “targeted and subsidised credit, low deposit rates, protection of domestic import substitutes, subsidies to declining industries, the establishment and financial support of government banks, public investment in applied research, firm and industry-specific export targets, development of export marketing institutions, and wide sharing of information between public and private sectors”.

While the free market argument for minimal government intervention in the economy still holds, the success of East Asian countries suggests that an active government can assist with orderly economic development.

Several studies have shown that favourable initial conditions related to education, income, and land distribution have played a crucial role in the economic growth of East Asian countries.

Rodrik’s 1994 study found that the initial conditions in East Asian countries were significantly better than other developing countries with similar income levels. This study suggests that these initial conditions played a vital role in the impressive growth rates observed in East Asia.

Moreover, the role of education in economic development has been widely recognised, with scholars such as Schultz emphasising the importance of education as a factor of economic growth.

Additionally, historical studies like Sokoloff’s factor endowment study further support the argument that initial conditions, such as income and land distribution, have played a key role in other countries.

Therefore, favourable initial conditions, particularly those related to education, income, and land distribution, have been instrumental in the economic success of East Asian countries.

In conclusion, the East Asian economic growth experience provides valuable insights into the factors that contribute to sustained economic growth. The presence of favourable initial conditions, such as high-quality education, equitable income distribution, and access to land, is crucial for achieving rapid growth.

However, as seen sustained growth also requires consistent and strategic government intervention. While this intervention should be aimed at addressing market excesses and promoting orderly economic development, policymakers must also be vigilant of possible inefficiencies that may arise from excessive intervention. As such we must a balance between free market principles and active government intervention is essential for promoting long-term economic growth.