5:15 AM May 16, 1995


Geneva 15 May (Chakravarthi Raghavan) -- Both in terms of industrial policy and the degree and forms of openness to the international economic system, developing countries have a lot to learn from the post-1973 experience of Japan, according to a well-known development economist, Ajit Singh at the Cambridge University.

Japan, he points out, continued to carry out a modified form of industrial policy even after it "graduated" from a developing to a developed economy in 1973, and therefore had to forego many of the industrial policy instruments it was able to use in the 1950s and 1960s.

Among the questions needing further study, he says, is the question of how industrial policy options of developing countries will be affected by the World Trade Organization and, related to that, what would be the feasible and desirable degrees and forms of openness for developing countries under this post-Cold War international economic system.

In an UNCTAD discussion paper, "How did East Asia Grow So Fast?", Singh discusses the policy dispute between the World Bank economists advocacy of the socalled 'market-friendly' approach to development and their views of the East Asian miracle, and a whole range of other neo-classical economists challenging some of the policy conclusions drawn by the Bank and forced on developing countries by the IMF and the Bank in their structural adjustment programmes. The Bank propounded its 'market-friendly' thesis in its 1990 World Development Report. Challenged within the Bank's Board by Japan, the Bank economists undertook a study of what enabled the East Asian economies grow so fast and successful, but basically reached more or less the same ideological conclusions -- conceding that the East Asians did engage in state intervention in the market and adopted industrial policy, but argued that the miracle in East Asia would have happened any way with or without this intervention.

Since then, the Bank itself held a seminar in Washington with some of its leading critics (but did not publish or publicise it) and a subsequent meeting in Tokyo co-hosted by the Bank and the Japanese government ministries involved.

At the Tokyo symposium, Japan and a number of participants from the East Asian countries called for further research and study by the Bank, but the Bank's economists seemed to walk away from this (and any dialogue with its critics) by saying that the Bank's priority for research was now on Africa and that the East Asian models and policies were in any event not capable of replication.

In 1994, the economists at the UN Conference on Trade and Development (in their 1994 Trade and Development Report) entered this debate and provided an alternative analysis and hypothesis of what the East Asian exemplars actually did and how the state role there was vital in the accelerated growth and development.

In his paper, Singh says that while the Bank's East Asia miracle represents a considerable advance on the simple neoclassical analysis and recognizes the positive role of government interventions in the savings-investment process in the East Asian economies, it does not delve into the complexity of the process.

The analysis of the UNCTAD economists, he says, is more comprehensive and interesting analysis of the issues involved, and if their hypothesis is confirmed by more detailed evidence, the UNCTAD analysis would have important policy lessons for other semi-industrial countries.

Singh suggests that there has been some progress in the debate between the World Bank and its critics on the outstandingly successful development experience of such East Asian economies as Japan or the Republic of Korea.

There was now general agreement that governments in these countries intervened heavily in all spheres of the economy in order to achieve rapid economic growth and fast industrialization and, during the course of their development, these countries did not have free, flexible internal or external product and capital markets. And while they were export-oriented, they eschewed close integration with the international economy in terms of imports, FDI and capital flows.

The experience of these exemplar East Asian countries, the Cambridge economist says, thus comprehensibly contradicts a central thesis of the (World Bank's) Development Challenge that free, flexible, competitive internal and external markets are necessary for achieving fast, long-term economic growth.

The Bank economists view about the ineffectiveness of industrial policy by the exemplar countries, Singh says, was reached by considering industrial policy in a very narrow sense, ignoring its multifaceted character and the important linkages between its different components and, even within their own terms, using inappropriate tests for assessing the success or otherwise of industrial policy.

While the Bank in several publications has been stressing the virtue of openness, international competition and close integration with the world economy, evidence suggests these were not in fact practised by either Japan or the Republic of Korea.

Their experience, Singh says, "comprehensively contradicts the central thesis of many World Bank Reports that the more open the economy and the closer its integration with the global economy, the faster its rate of growth."

During their periods of rapid growth, instead of a deep or unconditional integration with the world economy, these countries sought "strategic" integration. They integrated up to the point where it was as much in their interest to do so to promote national economic growth. The timing and sequence of opening were also critical and (as other studies have brought out) there could be "serious, irreversible losses" if the wrong kind of openness is attempted or the timing and sequence are incorrect.

Singh suggests the need for further study on the role of industrial policy in achieving macro-economic stability or in the jargon of the World Bank economists how does industrial policy affect the "fundamentals" themselves.

Judged from the experience of the Far East exemplars, and that of others like Brazil or Mexico in Latin America who had fast growth from the 1960s till early 1980s (when they were hit by the debt crisis), Singh says further studies are necessary on the role of government in fostering corporate savings and investment, how household savings are translated into investment either by governments or by corporations.

In this connection he notes that countries like India had a high household savings rate, but were unable to achieve high corporate savings and investments like East Asians.

How did the corporate sector finance its growth in the fast growing East Asian NICs and how have the emergence and development of stock markets in these countries been affected by the patterns of corporate savings and investments? What is the contribution of physical capital accumulation and equipment investment to long-term growth and could capital accumulation by itself explain most of the growth in these countries as some suggest?

The role of demand and foreign exchange constraints also need exploration and study, Singh says and calls for study of how the East Asian exemplars succeeded in changing their propensities to export and import manufactured products, whether in fact the East Asian development had been export-led and why the long-term growth rates of total factor productivity fall in most regions, including East Asia, in the post-1973 period.

Singh points out that FDI was not significant in the economic development of either Japan or Korea and, contrary to the World Bank economists, the discouragement of FDI by the governments of these countries may have been beneficial overall rather than harmful. By rejecting foreign investment as a means for technology transfer, the enterprises were made fully responsible for assimilating imported technology, leading to total system improvements that 'turn-key plant' mode of import or the foreign subsidiary mode could achieve.

However, FDI has been salient in the growth process of second-tier South-East Asian NICs in the more recent period. This raised the question about the nature of 'flying-geese' model, its strengths and weaknesses, and how it is related to the industrial policy of the firsts-tier countries.

Is the FDI in the recipient countries anchored in industrial policies and long-term plans for structural change or is it a case of all FDI being accepted, regardless of compatibility with their long-term plans? If latter, instead of being beneficial, such FDI may lead to balance-of-payments difficulties in the medium to longer term, when profits have to be repatriated, Singh says.

There is also need for empirical studies and analysis of the role of large domestic firms and their managements in developing countries: how are these firms organized, who owns them, what is the nature of their governance structures and are these conducive to industrialization and development?

The exemplar East Asian economies achieved fast economic growth while maintaining relatively equal distribution of incomes. In Japan and Korea, under US auspices, land reforms led to an initial equal distribution of income and wealth.

But subsequently, in both these countries, corporate profits, savings and investment increased enormously. Industrial concentration may not have increased but have remained high.

This would mean, other things being equal, that wealth distribution in the urban economy has become more unequal. UNCTAD economists suggest that there is indirect evidence of this.

This, Singh says, may require revision of political economy interpretations which assume that neither income nor wealth distribution worsened in these countries during the last three decades.

But if further studies show that despite high corporate profits, savings and investments, wealth distribution in these countries did not become more unequal over time, the kind of market or non-market mechanisms that prevented this need to be studied. But if it did become unequal, these would have implications for the political economy of these countries.

The vast economic growth of the East Asian countries was accompanied by enormous changes in the economic structures, with the governments intervening in the two crucial areas of labour markets: management of conflict arising from the structural change and provision and expansion of necessary skills in the labour force required for bringing about the structural transformations.

This is also an area where other developing countries could draw lessons from the East Asian experience in guiding and managing these structural changes, Singh adds.