Engineering Asia's growth

In this booklet from 1990 Ezra Vogel, the author who heralded the rise of Japan (and who was later heavily criticised for some of his arguments), describes to a lay audience the rise of Taiwan, South Korea, Hong Kong and Singapore up to what pundits nowadays call the "middle income trap".

Late industrialisation requires relatively a lot of capital. Where early adopters acquire additional skills on the job, continental Europe had to resort to formal training programmes and centralised research institutes. The effort to build an infrastructure, acquire capital, train workers, and manage the relatively sudden social transition without severe social and political disruption demanded a high level of coordination that only governments could supply. This applied even more to Japan and the "four little dragons" in its slipstream.

The four little dragons started their industrialisation with cotton at a time when the technology had stabilised and the machinery was available at modest cost. This they combined with their low labour costs. Hong Kong and Singapore considered themselves too small for the investment required for heavy industry. Korea just managed. Electronics again required limited financial resources and still required large labour resources. Computers were added later.

Unlike Britain before the war, the Cold War led America to share its technology and open its markets. The world trading system became far more open. Advances in transport and communication helped, as did the growth of mass consumption, the information revolution, and the emergence of multinationals.

In 1949, Taiwan's per capita income was at the pre-war level of less than USD 100 p.a., about the same as India's. While its population was quickly expanding, it hardly had an industrial basis. Its trade had almost exclusively been wit Japan, Korea, and Manchuria, where it exported sugar, rice, and pineapples. The KMT tried to increase import substitution in agriculture and trade barriers against cheap imports from Japan. Import priorities were put on to develop the textile industry, and later turned to bicycles, flour, cement, etc.

As building blocks for industrialisation the author sees political stability, control of inflation and corruption, the blossoming of family agriculture (which helped to contain inflation and reduced the need for imports), a moderately well developed infrastructure and human resources due to the Japanese system of colonisation. Planning for industrialisation started in 1958, with production for exports as of 1961. The government had some very capable "super-technocrats" who based their support for projects less on financial balance sheets and more on their estimate of Taiwan's technological and managerial capacities and their sense of overall historical trends. Besides that governmental controls were relaxed (tariffs, import restrictions, forex controls) and adaptations to international markets (revaluing the currency to market levels) were made. Many of the technocrats were trained in the West. Many were engineers, who stressed social engineering rather than market forces. Industrialisation was promoted through state enterprises that were later sold. Basic products were made in unprofitable state industries and sold to private enterprises to make goods for sale. New state enterprises higher up the value chain were started for a while. Taiwan stopped short of developing a car industry, because the home market was thought too small. Next were export-processing zones and an influx of multinationals (also for security purposes). The potential of collusion of guanxi was kept in place with training and procedures and with the often Mainland-born bureaucrats giving orders to locally born business people (page 33). Its export success seems rooted in a greater eagerness of the resource-poor Taiwanese than businesses in Latin America, Africa, and elsewhere. Relatively high educational levels and a greater dissatisfaction with standards of living also played a role. The political system was liberalised after the successful industrialisation.

South-Korea equally profited from a higher level of literacy and had a largely rural population that was ready to move to urban areas and willing to work for lower wages than Westerners. South-Korea had suffered greatly from the war on the peninsula with a disproportionate number of young men dead and an even smaller industrial base than Taiwan. Pre-war supply lines and markets were often no longer accessible.

South Korea's building blocks for industrialisation were forced unity, disciplined and motivated workers with a sharper national consequence and stronger national vitality (the transfer of American military technology necessary to contain North Korea helped), knowledge of Japan, and efficient agriculture after land reform. Korea immediately started with export-oriented industrial development. President Park regularly met with a select group of business executives and economic technocrats, himself taking decisions. The Koreans created organisations strikingly like the Japanese (in their pre-war guise). Korea borrowed heavily from abroad, and often had to extemporise the realisation of plans. Agriculture and infrastructure were the early beneficiaries, industrial production came later. Consumer good production to reduce imports started relatively early. Electronic and machinery industries often began as assembly plants for parts produced in Japan. The Japanese were more reluctant to share technological knowledge, but the Koreans still succeeded (page 58). Reverse engineering was an important aspect. In the late 1970's after the oil shock, Korea could not export enough to repay its loans and experienced severe economic difficulties.

Through tight control of banking the government could determine which companies received which loans at which rate. Like Japan, Korea thought it needed large companies to withstand foreign imports. President Park selected highly successful firms with proven entrepreneurs and gave them low-interest government loans, tax incentives, and other resources to become strongly diversified chaebols. The chaebols could be bolder than their overseas counterparts, thanks to government support. Government officials usually chose two parties to develop a sector to create "focussed competition" (page 62). Construction was an important sector, where Korea often won contracts during the Vietnam War and in the Middle East after the oil crisis.

The city states Hong Kong and Singapore function as their region's de facto capital for industry, finance, commerce, information, education, and culture - "all spheres expect the political". Their British colonial heritage and familiarity with English and Western culture gave them a head start. In the 1950's and 1960's both city states had an agricultural sector. These were later transformed into suburbs, and could not form a base to start development. Their local consumer markets were so small that they could not serve as a base for local industries. Restrictive tariffs were pointless. So they concentrated industry to small number of sectors for the world market. Hong Kong adopted a laissez-faire and Singapore an activist approach.

Shanghai refugees started textile factories in Hong Kong with the use of banks eager for new ventures to replace the declining entrepôt trade. Civil servants greatly facilitated industrial planning and the development of local industry. It improved infrastructure and education. They had a de facto industrial policy by using public funds to develop industrial estates and making land available for manufacturing firms, at prices below market value if they employed large numbers of people in key sectors. It also helped with export promotion, social order, and the rule of law. It was the development of manufacturing and light industry that made the crucial difference in saving the economy when the bamboo curtain was closed.

Some of Singapore's early anti-colonialist leaders had joined the socialist movement in Britain, and social policy remained more central to the government's aims. Social security, housing, and medical care remained government responsibilities. Singapore had a great advantage in being the only little dragon with a genuinely charismatic leader, well trained by the British in the art of rhetoric. Rationality, legal procedures and meritocracy played a larger role in the making of public policy than elsewhere. Singapore's Economic Development Board tried to attract multinational corporations and tried to establish its own corporations that were managed (in-)directly by the government, because the local small merchants and financiers did not possess the skills or the commitment to guide the industrialisation process. The multinationals also secured access to world markets. The government took great care in the companies it approved. Multinationals were mainly attracted by a stable and efficient government and well-trained and disciplined workers. Its "capitalism with socialist characteristics" took up to 50% of workers' salaries through the Central Provident Fund to invest in the development of industry, transportation and communications, infrastructure, parks, and housing.

As an explanation for the dragons' success, the author rejects Confucianism, and stresses situational factors. American aid in the form of tutors in technology and management helped Taiwan and Korea. Singapore and Hong Kong profited from supplying rear services to the American military. The destruction of the old Confucian order by the colonial powers brought an elite to power that was freer to make policy decisions without considering the interest of old elites. East Asia sensed urgency for economic development because it understood that America had won the war because of its superior economic base. The authoritarian regimes could follow policies that constrained private spending, increased investment, kept funds at home, and channelled the investment into areas conductive to growth. The labour force was eager and plentiful. Traditional property ownership was no longer a major means of gaining wealth and prestige in the early years. The example of the Japanese model is seen as another factor, particularly because Japan shared a dense population and a shortage of natural resources.

However the author feels these factors are not sufficient to explain the higher levels of coordination and teamwork, deeper understanding of science, technology, and management skills and greater knowledge of world markets required. Consequently he adds four "Neo Confucian" contributing factors. These are the meritocratic elites (in Confucian societies the bureaucrat had a broader responsibility and enjoyed more authority than in the West) that under Western influence started to see the course of history as progressive rather than cyclical. Meritocratic selection and matching morals encouraged public compliance and gave bureaucrats greater discretion than in the West. The entrance exam system is seen as another crucial factor. They are the crucial gateway to prestige and power, and measure not basic intelligence or aptitude, but the capacity to master certain material through long years of study. Also, the importance of the group over the individual is seen as a factor. East Asian government officials consider Western economic theory that assumes that individuals are driven overwhelmingly by material incentives to be overdrawn.

There is a difference between the Western stress on allocative efficiency, where the concern is to allocate resources to areas where they can bring the best return, and "production efficiency", where the concern is with overall output and goal.

Attention to the group implies a time horizon beyond the immediate present. Lastly, the author sees self cultivation as a factor both on an individual and a group level.

For Japan the oil shock of the 1970's and for the dragons' the rise in their currencies' exchange rate in the 1980's meant the end of an era. The pool of cheap labour dried up while the countries had accumulated sizable financial assets. Companies mirrored the countries, requiring financial specialists rather than engineers as managers. It also reduced the government's leverage over companies, and companies started to invest abroad. Real estate prices exploded, leading to new inequality issues. Consequently the (financial) service sector rose in power at the expense of industry and the population became more emancipated in its relation to the government. The book ends with the challenges that China is now facing, and that may be much more difficult to overcome for a country with over one billion people than for the little dragons.

One of the key factors that Mr. Vogel does not mention is the lack of socialist policies in these four countries, although they were popular in most other newly independent countries. Equally, there is no comparison to other countries be they in the region or outside. Thailand also profited from support during the Vietnam War, and has an equally hierarchical culture. Still, Thailand lags in its economic development. Size might be less a factor now that we see that countries like China follow the same model successfully. Due to its concise character it gives an explanation based on hindsight knowledge, but it is too short to show when and where the dye could have been cast differently. ( )