SUNS  4337 Thursday 3 December 1998



DEVELOPMENT: ASIAN MODEL REPLICABLE, EVEN IN POST-WTO WORLD

Geneva, 2 Dec (Chakravarthi Raghavan) -- The institutional lessons of the original 'East Asian miracle' and the institutional context of that success, which the collective obsession since end of 1997 about 'what went wrong' has almost put an end to, are still worth learning and adapting by other developing countries, according to an article in the special issue of the Journal of Development Studies.

The August 1998 special issue, edited by Yilmaz Akyuz, chief of UNCTAD's Macro-economic and Development Policies, is devoted to the East Asian Development, and draws on the UNCTAD research work in this area.

In an introduction, UNCTAD Secretary-General Rubens Ricupero notes the sea-change in attitudes to East Asia, since the deep financial crisis that swept over the region,, undermining growth performance and raising serious doubts about its relevance for other developing countries, and
says that one ironic consequence has been the way in which active state involvement, consistently understated until recently by some commentators, has suddenly emerged as the main explanation for the current crisis.

But many such explanations, he points out, continue to ignore the region's diversity, between the first and second-tier NIEs and within themselves - with Hong Kong a laissez-faire model, while Korea, Singapore and Taiwan (in the first tier) having more interventionist regimes, and last two least affected by the crisis.

"The underlying factors of the crisis appear to be far more deeply rooted in some South-East Asian countries which had until recently been perceived as placing greater reliance on market forces," Ricupero says.

Drawing attention to UNCTAD's own analysis of the differing policies, and the clear warnings about the vulnerability of the second tier, South-East Asian economies, to their excessive reliance on foreign resources, both labour and capital, Ricupero adds: "Speculation about the region's future prospects is not helpful. Certainly growth will falter this year, but over the longer term much will depend on how the crisis is managed and response of the international community.. (which)
can play a crucial role in determining whether the countries concerned will be able to export and growth out of the crisis or will encounter protectionist pressures and financial stringency, undergoing prolonged stagnation as was the case in Latin America in the 1980s."

But is the East Asian experience relevant now in the post-WTO international environment, and are there any elements that are replicable by other countries?

In an overview article Yilmaz Akyuz, Ha-Joon Chang (Faculty of Economics at Cambridge University) and UNCTAD economist Richard Kozul-Wright, who coordinated the research work, that while the WTO agreements have reduced the scope of some policy options, strategies comparable to those used earlier could still be applied by the poorer countries. "The main constraints seem to be those imposed by the ability of countries concerned to devise and execute such policies,
particularly those involving negotiations with developed countries or TNCs..." More importantly, many policy measures remain outside the scope of WTO obligations, and can still be so designed as to be permissible under the new trading rules.

"The changing international trading environment may be restricting the freedom of developing countries to conduct East-Asian-style policies. but there is considerable scope for manoeuvre if countries skilfully use various 'permissible' subsidies, balance-of-payment clauses, non-trade related policy measures and are more creative in interpreting the new international trade rules."

Though institutional reforms have played an important role in the East Asian model, the article challenges the view that many developing countries, particularly in sub-Saharan Africa, lack the basic institutional infrastructure, and hence the institutionally demanding policies used in East Asia are of little relevance.

While Restoration of peace and basic social order are an absolute pre-requisite in countries torn by years of civil war, and while the economic crisis of the 1980s and the ideological shift against public
activities have seriously weakened governments in many others, this does not mean that countries should not consider longer-term development strategies. Rather, the implication is that the strategies must be tied to wider efforts at rebuilding and reforming institutions of the state and civil society.

In a number of East Asian countries, not only did their development strategy evolve out of a period of deep economic and political crisis, but their bureaucracies on the eve of industrialization were seen as just as inefficient as in some of today's developing countries. The same bureaucracies were often accused by outsiders of harbouring conservative practices and lacking competence. Until 1960s, Korea sent its bureaucrats to pakistan for training in economic policy making, and
both in Korea and Taiwan, government-business relations were initially distant and at times quite tense.

In another article on "Transferable Lessons", Berkeley sociologist and academic, Peter Evans stresses that anticipatory acquiesence by developing country governments to perceived constraints of the WTO trade system may prove a greater impediment to an activist role of the State in promoting trade and development than actual WTO agreements.

Prior to the East Asian crisis, notes Evans, trying to extract transferable lessons was "a major cottage industry". But since the end of 1997, "collective obsession with 'what went wrong' has almost put an end to efforts to understand an institutional context that produced 30 years of extraordinary growth."

This is unfortunate, he adds, since 'what went wrong' almost certainly includes deterioration of the generative institutional context and diagnosing deterioration requires an understanding of the original.

While there have been three competing ways of characterising East Asia economic policies -- the World Bank's 'market-friendly' model, the Japanese MITI 'industrial policy' model of some scholars (like Chalmers Johnson, Alice Amsden and R.Wade) and the UNCTAD 'profit-investment nexus model' of UNCTAD -- all three share a robust core of institutional pre-requisites: an exceptionally capable state bureaucratic apparatus, and close relations between business and government, while preserving the government's ability to act independently of business pressures. All three also emphasize the importance of the bureaucracy "avoiding capture", i.e. dangers of regulations being shaped to serve needs of particular businesses.

In sum, agreement on basic institutional pre-requisites transcends continuing disagreements over which facets of policy are most crucial to East Asia's economic successes. Across the varying interpretations of policy, there is a shared conviction that economic success requires a highly capable, coherent economic bureaucracy, closely connected to but still independent of the business community.

If there are transferable lessons from East Asia's success, they almost certainly begin with this institutional combination.

It may be argued that this institutional pre-requisite is contingent on broader social structural context - of a relatively low level of inequality and an egalitarian context of growth - and the intersection
of national institutions with a particular configuration of global institutions. And most would agree that the post-WTO global context is different from the one in which the East Asian countries succeeded in transforming themselves into industrial powers. If economic bureaucracies and government-business links analogous to those of East Asia could be built, then the broader contextual issues like egalitarian social structures and post-WTO global environment would arise.

While nearly everyone agrees that East Asian public bureaucracy, compared with other developing regions, approximated the typical "Weberian bureaucracy", exaggerated projections of these as unalloyed repositories of competence and virtue seriously distort the lessons of the East Asian experience.

Public bureaucracies capable of fostering effective economic performance in global markets were not some kind of natural resource immediately available to East Asia, following the second world war, Evans points out. They were constructed through intense, prolonged struggle for reform and endless experimentation. The bureaucracies were not only different across countries, but their character varied substantially across agencies within countries.

Japan and Korea had both very powerful exam-based system of recruitment. But Singapore had no unified civil service exam. the best and brightest identified by performance in secondary school were given scholarships for higher education in return for a commitment to enter civil service. Taiwan had a third variation - with a higher civil service exam as a filter for many parts of the bureaucracy, but key economic and planning agencies relying on meritocratic selectivity of the national university plus successful completion of graduate training abroad.

To be effective, a meritocratic recruitment must be complemented by a career structure that produces rewards commensurate with those that capable individuals can attain in the private sector. While most East Asian countries pay bureaucrats much more generously than most
developing countries, Singapore is exceptional in keep public salaries at or above private levels. In Korea and Taiwan they tend to be about two-third of private salaries, but the gap is closed in other ways - complex system of allowances in Korea, and key agencies in Taiwan kept above and out of civil service scales.

But in none of them had the bureaucracies been there always or somehow emerged effortlessly out of traditional pre-second world war government organizations.

In Taiwan for e.g., the Kuomintang that arrived in Taipeh from the mainland, revamped its central administrative structure and set up a 'Control Yuan' powerful enough to impeach Chiang Kai-shek's nephew. In Korea, under Syngman Rhee, civil service exams were ignored in filling higher positions, and their bureaucrats were being sent to Pakistan for training. But when Park Chung Hee (and his reform minded younger military officers) took over in 1961, they dismissed more than 35000 civil servants and began reconstruction from the ground up.

And the lesson to be drawn from East Asia is not that pervasive rectitude is a precondition for effective state action, but that even imperfect governmental machinery, operating with normally venal human beings, can still be moulded into an instrument capable of facilitating high rates of economic growth.

With the possible exception of Singapore, all these bureaucracies contain large 'pockets of conspicuous inefficiency'. In Japan, agriculture and construction bureaucracies are 'clientelistic' in
contrast to MITI and the Ministry of Finance. In Korea, Park Chung Hee bifurcated the bureaucracy, leaving ministries like construction to satisfy clietelistic needs, while focusing reform effects on key
economic ministries. In Taiwan, access to key economic agencies were kept strictly meritocratic.

All these show, that the challenge of emulating East Asia's bureaucratic efficiency is less daunting than the sterotypes of 'confucian super-bureaucrat' might suggest.

As for government-business relationships, the synthesis of scepticism and enlistment proved effective in East Asia, but the success has also fostered a local entrepreneurial class less amenable to being prodded by the state. When the 'miracle' began, local business was weak and depended on the state for capital and protection from international competition. But once they achieved a measure of international competitiveness, the constraining efforts of being tied to a national
development project became more salient to local firms, and the supportive benefits of being tied to national projects became less necessary. "In short, East Asian government-business relations cannot be taken as a mechanical model which, once installed, inexorably grinds out the same economic result."

As for transferable lessons, if defined as implantation of replicas in other developing regions, it would make no sense, argues Evans. But understood as an invitation to indigenous innovation to take advantage of the analytical logic of the East Asian institutions, the possibility of transfer of experience becomes thoroughly plausible.

Renovating institutional frameworks always require political will, imagination and some luck, but no more daunting that those implied by admonitions to replicate an American style of market capitalism.

The lesson from East Asia is not that other developing countries must be able to count on impeccable bureaucracies to move forward, but rather that they must be willing to invest resources, both political and economic, in the construction of capable state apparatus.

And renovation does not have to permeate entire state apparatus. A few 'islands of efficiency' in the midst of a 'sea of clientelism' are not enough, since they are too prone to being swamped by political waves. Minimal norms of probity and competence need to be applied on q general basis, with radical changes reserved for key economic agencies.

But does the more stringent 'post-WTO' world with its more intense internationalization of business and more aggressive enforcement of neo-liberal economic norms rob developing countries of their ability to offer local businesses the kind of support which forms the public side of the development bargain, leaving the private sector no reason to commit itself to the kind of aggressive investment as its side of the bargain?

However, just as the barriers to constructing the proximate institutional pre-requisites of East Asian economic policies are often exaggerated, the obstacles created by differences in social structures
and geopolitical context are overstated as well, says Evans.

The new global regulatory environment and the more highly internationalised structure of business organization do make some of the policies of East Asian NIEs more difficult to implement.

"But what puts East Asian practices out of reach is less likely to be external compulsion than anticipatory acquiescence by developing country governments to perceived constraints. Governments that persevere are likely to find ways of circumventing the new constraints."

The least-developed countries are still free to offer a range of subsidies, and other developing may have to become more subtle, but this is not inconsistent with following the East Asian pattern.

"A substantial part of East Asian government-business relations were based in building credibility across the public-private divide through regular exchange of information. Signalling and solving coordination problems among firms played an important part in steering investments.

"And discipline of the private sector has often involved very conventional tools such as zealous income tax audits. None of this is placed out of bounds by the new international context."

And if new rules and climate stimulate the replacement of more heavy-handed versions of industrial policy with more sophisticated measures, the current context could even end up making it easier for
would-be emulators to stay on track in their efforts to transfer East Asian lessons.

The problems of social structural contexts (of relatively egalitarian societies) may be more difficult to surmount. The argument is not so much that inequality per se is a barrier to accumulation, but that
inequality has a corrosive institutional effect, and increases the likelihood that public institutions may be captured by private elites. Also, entrenched inequality undercuts legitimacy of state autonomy.

The initial societal conditions in East Asia depended on a unique set of historical circumstances, with the traditional elites wiped out in the aftermath of the second world war. Equivalent surrounding
circumstances will not be replicated in Africa or Latin America in the foreseeable future.

"And a more aggressively enforced internationalization of the global economy built around rules that work primarily to the benefit of current holders of financial capital and intellectual property, exacerbates the problem by encouraging passive conformity to corporate preferences. In this pessimistic reading, most citizens of Africa and Latin America are condemned to marginalisation within their domestic economies and exclusion from fruits of global productivity."

But there is no reason to consider this as inevitable. The new rules do give industrialising regimes some leverage in resisting capture. They can claim 'our hands are tied by international rules' when resisting subsidy claims from non-performing corporations.

Concludes Evans: "But resisting fatalism is the essential step in making a pessimistic scenario less plausible, especially in Africa and Latin America where disillusionment with prior national development strategies have left policy-makers and their political constituents with little confidence in their ability to create more effective institutions.... In the best of all circumstances, African and Latin American countries would follow the lessons generated by the East Asian experience in the same way that East Asian policy makers followed western models of capitalism: with such originality and inventiveness as to outperform the original. Hopefully, the art of leap-frogging is not yet dead."