How did Asia surpass the West - ebook

TABLE OF CONTENTS

TABLE OF CONTENTS

Introduction

Chapter I

1.1 Peripheral countries catching up with the centre

1.2 Where did Taiwan come from, and why is it (not) a state?

1.3 Sun Yat-sen - Father of the Nation

Chapter II

2.1 The early reform period

Agriculture

Textile industry

Heavy industry

Zaibatsu, keiretsu, chaebol and guanxi

Long-term planning

2.2 Foreign and domestic investment management

Opening up to foreign investors

Tax incentives

Local market protection versus competitiveness

Sector monopolisation

Examples of failure

2.3 Import and export policy

Import restrictions

Export promotion

2.4 Investment in research and development

Research and development centres

ITRI

2.5 Financial system

The state banking system

Taiwan's financial system reform

2.6 Cooperation with the USA and Japan

Chapter III

3.1 Institutions

Agencies - the key to development

The elite of the elite

The economic elite

Competence

Personnel

3.2 Prescription

Foreign investment

Promotion of priority industries

Protectionism

Export promotion

Financial system

A central agency on economic affairs

Independence from interest groups

Efficient institutions

Chapter IV

4.1 The new political system and the media

Politics

Media

4.2 The Polish example of a development agency

4.3 Public procurement

4.4 Factors affecting national wealth

Social inequalities

Labour productivity

Unemployment and local investment

4.5 Corruption

4.6 Foreign investment

Summary

Acknowledgements

BibliographyIntroduction

This book evolved from years of interest in the Asian model of management and development, yet the direct inspiration came from reading Robert Wade's book¹. The main strength and uniqueness of Robert Wade's book are in the highly detailed description of the method employed in Taiwan, together with its spectacular economic results. Taiwan, from a poor and underdeveloped country, has been able, in the course of two generations, to catch up in the standard of living with countries such as Germany, Sweden and Kuwait, while having no natural resources. It has continued to develop for over 60 years and has become one of the world's technological leaders and the seventeenth-largest exporter worldwide on a par with India. This small island-country - nine times smaller than Poland - is twice as rich as it is in terms of per capita wealth.

While this is an impressive achievement in world economic history, it is not all that exceptional. Taiwan was followed, a decade late, by South Korea², and both countries, in turn, pursued the path of Japan, and now the same formula is implemented by China. In each case, it is extremely impressive, whereas the world analyses the factors by which it was possible to achieve such exceptional results. Unfortunately, usually not much comes of it.

The main objective guiding me in writing this book was to allow the European reader to examine the Asian economic model. The book does not aspire to be an academic work or an essay at most. I wished to popularise a different perspective on economic management. The problem of the European public debate is that in the search for examples and spur, it does not reach further than Western Europe, sometimes, the instance of the Scandinavian countries, but without faith in the possibility of applying their model in our conditions. However, we mainly tend to focus on the United States, while Asia is completely excluded from the circle of countries that could provide models to follow. With this book, I would like to change that, because, as I believe, there is something to study, and the lesson should be learnt, not only in Eastern Europe but also by the West mentioned above.

The purpose of this book is not to present in detail the nuances of the economic policies of our distant Asian partners - for that, I would refer you to the literature - but to break down liberal stereotypes and to consider the economy and economics within the framework of a single, generally accepted dogma. I am not critical of the liberal economic model; it is quite an efficient way of governing a country - but it is not the most efficient. No idea is eternal and is bound to change. While feudalism was a pretty efficient economic and state system in the Middle Ages, it would be hard to see it the same way in the twenty-first century.

There is already quite a lot of critical literature on the liberal economic turn, the same approach to the economy or the shock therapy administered to the Polish economy in the 1990s. We can also hear more and more critical voices in the media. One of the main problems of this discourse is the lack of suggestions for any changes aimed at improving the state of affairs. Even when they appear, they are incomplete, incoherent, and tend to not go beyond the canon of solutions tested - with lamentable results - in Latin American countries or Africa in the post-war period. This book was not meant to be a source of criticism but a response to one. It will give specific examples of effectively implemented policies in prosperous countries. At the same time, I try to relate them to a medium-sized country in Central Europe – Poland.

The whole western world is now wondering what the future will look like when China would resume its rightful place on the geopolitical map once it has reached it economically. It is only a matter of time before this happens. It is a question of when not if. Their success depends mainly on whether or not there is a factor that prevents them from getting there. The West is also wondering how not to lose the technological gap with Asia. However, it has narrowed the search to answer this question to its backyard, seeing the Asian model as possible only under specific Confucian cultural conditions. Nevertheless, if it is true that their economic model is more efficient, then this is a dead end. Europe should look for inspiration in countries that are successfully chasing technological leaders, rather than in Western countries that lose ground.

The scientific world's attention to the Asian model, and the lack of it among decision-makers, is at best puzzling. Post-war Japan was so economically successful that it dismayed the West, especially the Americans and its impending dominance over the US. The crash of the Tokyo stock market, although it did not necessarily affect their economy, convinced the West that its liberal economic model was undoubtedly superior. Other countries began to join the peloton led by Japan. In the 1950s in Taiwan, and ten years later in Korea. Whilst learning from the Japanese, they avoided particular mistakes and managed to do even better. Taiwan was too small to attract attention, while Korea's success was explained by its diligence, education and opening up to world trade, rather than by exceptional planning. However, these were too minor countries to concern them. It was not until China embarked on the same path in the late 1970s that this confidence shook. China replaced Japan and became the resurgent dragon to be feared. However, nothing has changed in terms of looking at the Asian tigers as role models. The Western world still finds in this success some unique Asian condition that cannot be replicated anywhere else. Yet there is no basis for that, as we will argue in a moment. Even the famous World Bank³ report of 1993 considers that the success of the Asian tigers - due to the efficient operation of the market and solid macroeconomic foundations. What it failed to notice, however, was that they interfered so profoundly in the market that they practically distorted it. The list of tools was long, from the blocking of imports to the manipulation of licences and taxes, the restriction of competition, to the state planning of entire industrial sectors and the artificial sustaining of high levels of investment in GDP.

So, it should not surprise us that we Westerners, brought up in the cult of economic liberalism, want to judge the Asian model from the same standpoints. Even Chinese professor Yusheng Huang⁴ has not avoided this trap. He compared Chinese reforms with the liberal model and condemned all attempts to deviate from it. Yet China is pursuing a completely different economic agenda, and to understand it, one must first understand the logic of this particular model.

The proof that this model can work outside Asia is that it does not develop there. The Japanese were the first in this part of the world to put it into practice, but they did not invent it. It was German specialists who taught them. The Germans learned from the English, who, in turn, learned from the Italian merchant republics and the Hanseatic League. Almost every country that is currently rich came to its wealth through this method. Britain was protectionist when it wanted to catch up with Holland, while Germany wanted to catch up with Britain, and the United States when it was chasing Britain and Germany. Japan, following Germany's model, was protectionist for most of the twentieth century until the 1980s. Taiwan and Korea did no different.

So, there is no reason to think that another country cannot repeat - under local circumstances - the steps of those countries. There is one method, an infinite number of variations, and the opportunities are open to every country. Most European countries, like, Poland, for example, are already at a point in their economic development when they do not have to (and even cannot) be so protectionist, but many of the mechanisms used in these countries to develop domestic potential are very much in place.

But why should we do anything at all? Haven't twenty-five years of fully free Poland given us enough evidence that we are on the right path? We are gradually getting richer, have outrun Ukraine, overtaken Hungary, and getting closer to the Czech Republic. Our next goal is to equalise our standard of living with Germany. Why should this not be possible? Well, there is a problem. Although the last twenty-five years have been a great success, and I have no intention of undermining it, the problem is different. Poland, the same as Hungary or the Czech Republic, is a peripheral country, while Germany is already an economic centre. What is the difference between the periphery and the centre? A peripheral country exports natural resources or minimally processed goods and buys high value-added processed and luxury products in return. Usually, this is accompanied by a trade deficit. Western car factories located in Poland do not help us much. We mainly supply the cheap labour force and gain additional workplaces plus some tax revenue, and Western concerns win more profit from sales in return. Although it must be said, that the structure of Polish exports has improved since the communist era, and we no longer mainly sell coal or grain. However, foreign concerns are responsible for the more advanced exports, such as cars or electronics. It is not the case that nothing has changed, but as far as peripherality is concerned, it can be said that, although on a different, slightly higher level, it has become established. We continue to import the most advanced industrial products, such as mobile phones or technology for manufacturing plants, while a large proportion of exports, especially the more complex ones, are re-exports of previously imported products, such as televisions, which we mainly assemble rather than manufacture. That is accompanied by the permanent trade deficit, and this is fatal for any country in the long term.

To catch up with the states of the centre, such as Germany, you cannot do so by being a peripheral country, unless you are of city size. One must achieve technological convergence first, and only then can consider equalising in terms of wealth. Poland has always been a peripheral country, and reforms after 1989 have not changed that our marginality has only perpetuated itself. We have not even begun to recover from this state of affairs. In the last century, only a few countries such as Japan, Korea, Taiwan and Israel (although it is a new state) have managed to do so. There were many attempts in the interwar period and immediately afterwards, from Russia through Eastern Europe to most South American countries and Africa. Most of them, unfortunately, failed.

Economic underdevelopment cannot be considered in isolation from the outside world. Peripheral states are such not only because of their economic system but also due to the industrial and export policies of advanced countries, making peripheral countries perpetuate their peripherality. Breaking out of this growth trap is quite a challenge, but not an impossible one. Paradoxically, when the first European ships arrived on China's shores, China was closer to joining the world's economic centre than it was a century later. Technologically, they were hardly lagging and sometimes surpassed the West. The main reason was the trade policy of the European powers, sucking up resources on the one hand and supplying their products to the Chinese market on the other while hindering the development of advanced local industries. However, it is never too late, and China has managed catching up with the centre for over three decades.

This book aims to answer two vital questions: what needs to change to catch up with the centre, and how to do it. The second is far more significant. The objectives have usually been defined quite well, but it has been the method that has caused problems. The first chapter demonstrates that the periphery chasing the centre is not a new issue and explains Taiwan's convoluted history. The second chapter discusses specific policies pursued in Taiwan and elsewhere and relates them to the European reality. The third outlines the key-institutions through which such an advanced economic model could be implemented. It also shows the most important goals that a country should set for itself if it wants to apply the Asian method. The final, fourth chapter debunks several myths in the public debate and suggests changes that the reader should consider.

I focus on a small number of Asian countries such as Japan, Korea and China, but mainly on Taiwan. Although these countries sometimes vary in terms of used tools or the policies they pursue, they have many things in common. It is not the only possible way for the periphery to catch up with the centre, but it is probably the most efficient and, most importantly, successful.

It is not a conflict between a planned economy, state intervention, institutions and liberalism or an opening up to private unfettered economic activity - often mistakenly identified with capitalism. It is rather the ability to find the most efficient balance between the two. Restricting the market in such a way that it encourages entrepreneurship, developing industry so that it supports income growth, and developing the country to reduce inequality rather than exacerbate it. Not everything was planned, and not everything worked out, but the whole effort was focused on technological catching up with the West, which was eventually successful.

In the pages of this book, I would like to inspire readers with the successful attempts made in East Asia and convince them that this is also possible in a medium-sized country in Central and Eastern Europe.Chapter I

1.1 Peripheral countries catching up with the centre

Envy of others’ wealth and success in life has always accompanied humanity. There is nothing strange about it, we understand it perfectly well at the level of interpersonal relations. It is no different at the state level. In ancient times, or even in the Middle Ages, a fairly common way of dealing with this problem was to attack the richer-neighbour in order to physically take some of their wealth, while today, the differences in the military potential of states can be so vast that this method has lost much of its former potential.

The differences in prosperity levels among countries have not always been as significant as they are these days. In the Malthusian⁵ world, that is before the Industrial Revolution, there were no improvements in living standards. Most of the economy at that time consisted of agriculture. Any technical progress was, therefore, so slow that it translated only into population growth, not standards of living. A state's power and advancement were thus significantly determined by its population density. That is why conquering new territories was so valuable in these times. Each new land brought with it a particular human population, so precious at that time. Nowadays, the size of the population has much less influence on the importance of a country. What is more relevant is technological and military advancement, political power or solid military alliances. All of these things were relevant in the past as well, but the emphasis has shifted.

At present, the only real possibility of reducing the differences in living standards between countries is to try to catch up with them in terms of wealth. The greater the disparity, the stronger the pressure to find a way to reduce this gap. The problem became particularly evident after the Industrial Revolution started in the 18th century. Great Britain began to diverge from other countries to an extent not seen before. It resulted in a strong need to find a recipe for reducing the disparity or overtaking the leader. However, one would be wrong to think that such formulas had not been created before. Adam Leszczyński gives examples of such publications as far back as 18th century Poland, and even Plato was no stranger to such considerations⁶.

In different eras, the formulas have been surprisingly similar, and the immense distance in time does not particularly affect their nature. The weakness of peripheral economies is perceived in the fact that only some goods are produced locally, and a lot of more expensive and luxurious products imported. The change in these proportions tends to be seen as a prescription for contemporary maladies. It would be no different to what thinkers in the XVIII or mid-XX centuries would have concluded. The possible success of such a policy and the actual possibility of carrying it out depended on its effectiveness.

We have quite a few examples of countries that have succeeded in these efforts. Ha-Joon Chang claims that most of the currently prosperous countries have followed this method in the past. Generally speaking, the aim was to develop their advanced industries, such as textiles or watchmaking in the eighteenth century. To prevent external competition from destroying the fledgeling enterprises, it was necessary to protect its market. At this time, the exports had to be increased. Frederik List⁷ argued that once a country had established itself as the undisputed leader, the most sensible thing it could do was prevent others from taking advantage of its method. If protectionism is the main tool, then once you have achieved your goal, you must become a staunch advocate of free trade and reject the ladder you have climbed to the top⁸. Adam Smith's thoughts extolling free trade have proved invaluable in achieving this goal.

Great Britain followed this path already during the reign of the Tudor monarchs, Henry VII and Elizabeth I, at the turn of the fifteenth and sixteenth centuries. Through protectionism, subsidies, the allocation of monopolies or the payment of industrial espionage, they were able to initiate textile production in their country. At that time, it was one of the most advanced and profitable branches of production, mastered by the Low Countries, historically called the Netherlands or Flanders (today's Belgium, the Netherlands and Luxembourg).

This method is called mercantilism. It assumes that the power of countries, stems from their wealth. That, in turn, can be achieved through a trade surplus. For this purpose, imported or own secondary raw materials must be processed within the country's borders into articles with a higher added value and only then exported. The same aims are to be served by restricting imports of foreign industrial products and only allowing the import of raw materials and foodstuffs, namely the low-processed products. After the leadership has been established, protection is not only unnecessary but actually counterproductive. It makes trade more complicated and takes away the incentive to carry on improving. That is the right time to promote free trade - at least concerning its trading partners. A developed country is sufficiently protected by its technological, commercial, financial as well as know-how advantages.

Barrier duties on the import of industrial products and the construction of its merchant fleet were supposed to help achieve such a position. Special trade agreements were also helpful, such as the Methuen Treaty signed in 1703. This was a trade agreement that gave privileges in Portugal for English woollen and textile products, and in return offered a duty equal to 2/3 of that imposed on French wines in England. At that time, textiles were a hi-tech product. Thus, English merchants bought Portuguese wool, made expensive clothes out of it in England and sold them back to Portugal at a decent profit. In return, they bought wine, which they were not able to produce locally anyway. Portugal, a country rich in gold imported from American colonies, saw no problem with a trading deficit, at least until it ran out.

This approach had significant consequences. To maximise wealth and increase national independence, the colonies had to be developed as sources of cheap raw materials and food, with subsidies to support industry and research at home and exports abroad. It was necessary to maximise the use of national resources, both human and raw materials, to promote maximum employment and limit wages and consumption.

Mercantilism became an invention of the epoch and found a widespread understanding. The next states to attempt to catch up with the leaders after applying the same method were Bismarck's Germany, which was already chasing industrialised Britain. The United States was setting protectionist world records in a bid to catch up with Britain and Germany. The Asian tigers' attempt to overtake the West, as described in the book, is nothing new or revelatory.

The twentieth century was a time when the world was enamoured by a new model of accelerated development. While mercantilism usually lived up to expectations, the new model of growth was not as successful. It was implemented in Stalin's Russia before the Second World War and fulfilled its principal objective to industrialise the country. Before the system collapsed under its weight, it was for a long time the model for Mao's China, the states of South America, Africa or for countries behind the Iron Curtain.

The Soviet model was unique. Its main goal was to industrialise the nation as quickly as possible, usually at the cost of great sacrifices. In Soviet Russia or China, this ended in major famines. There were no such tragic consequences in Latin America or Africa, but the effects did not live up to expectations.

The accelerated growth model implied that not all income produced in society was consumed. A certain surplus, very low in underdeveloped countries, is spent on consumption or luxuries. What was accelerated growth supposed to consist of? If a country spends 5 per cent of its national income on the investment, it was assumed that its wealth would increase by that amount. However, if the birth rate is also close to 5 per cent, it will mean that the wealth level will remain at an identical level. It is a classic Malthusian trap. Therefore, to overcome poverty, it is necessary to increase the level of investment and, as it were, overtake the birth rate. Thus, in order to do this, capital had to be accumulated, consequently the level of savings had to be increased and allocated to investment. If this could be increased to 20 per cent, then there would be an increase in wealth. Of course, no one gave a thought to the efficiency or competitiveness of such a high-cost industry; they only counted the amounts spent on its construction or the tons of steel produced. Since everyone wanted to catch up with industrialised Britain then industrialisation was also the goal. The reasoning was quite simple and obvious, if Great Britain became rich through the industry, then building it at home should produce the same results. So, grain from farmers in Russia had been taken, sold abroad, and the hard currency raised was used to buy the technology to build steel mills, power stations or industrial plants.

The problem was to obtain additional funds for investment. The only group that possessed them was a privileged stratum, for example, the nobility or the clergy in countries with a feudal system. Unfortunately, they were scarce in number and had influence, while the resources they could acquire in this way were modest. The choice was, therefore, made for the poorest but most numerous class, the rural population.

The basic difference between the accelerated model and mercantilism was that the aim became industrialisation itself, rather than gaining a competitive advantage for own industry on international markets. The Soviet model achieved its goal, it industrialised the country at the astronomical rate of a few years. That allowed them to win the Second World War. The state's almost 100 per cent participation in the economy and its non-exposure to any market stimulus made it unable to compete in international markets. In its very form, the Soviet model of accelerated growth was programmed for collapse.

Drawing inspiration from the Soviet model has brought similar results to many countries. Mao's China did not industrialise as efficiently, but the famine under its conditions was even more appalling. At that time, 5.5-6.5 million people died of starvation in the Soviet Union, and 45 million in China. The different effects often resulted from the separate objectives set by individual countries. Latin America sought to escape the humiliation of US domination of the continent by restricting imports and developing its industry. Africa, following the Stalinist model, tried to escape from poverty and regain its independence from the policies of the former colonial states. The Asian tigers, on the other hand, have set themselves the goal of catching up with the West in the technological race and joining the world's top tier. These are examples of greater or lesser success. However, we should remember that this success ought to be measured by the goals that were set at the time. At present, development generally involves the desire to catch up with the mythical West in terms of GDP growth, per capita wealth level, social development, life expectancy, levelling of income disparities, education or even an increase in the sense of happiness. So, if we were to consider these remote examples of the centre being chased by the periphery from the current perspective, they would probably not look so great. Certainly, the huge acceleration in the development of heavy industry in Stalin's Russia, which was bought at a gigantic social cost and enormous human losses, cannot be considered a success. From the perspective of the Russia of those inter-war years, however, what was at stake was the country's survival and preparation for the approaching war, which was expected as early as the beginning of the 1930s. Haste was therefore justified, and the outcome - from the perspective of the time - should be regarded as a success.

The leap to modernity made by communist countries, and those that modelled themselves on them, consisted of criticising capitalism and replacing it with a planner. However, despite its numerous flaws, capitalism, guided, to a large extent, by the „invisible hand of the market”, turned out to be more efficient. Let us remember, though, that most capitalist countries reached their economic liberalism through severe protectionism - at an early stage of their development - while catching up with the centre when they were still peripheral. It was no different for the Asian tigers. Japan liberalised only in the 1980s, and Korea became a fairly liberal economy just before catching up with the centre. Therefore, when advising a peripheral country, we must point to examples of those that have successfully caught up, or are currently in the process, with the assumption, however, that we cannot show the outcome of this effort, but rather its beginnings. In other words, we can use the United States of the nineties as a model, albeit not of the 20th century, but the 19th century. That was when the Americans had the most protectionist policy, from the mid-19th century until the Second World War⁹. They only started to liberalise fully in the 1970s.

The model of development I have described is nothing new, it is well-recognised by academic writing and widely referred to as one of the models of economic management. It seems to be reserved only for Asian countries and is presented in opposition to the Western model of liberal economies. Nothing could be further from the truth. It is an imported paradigm in Asia, quite widely used in countries such as Russia, Germany, England and - now a symbol of neoliberalism - the United States. Nevertheless, that was so long ago that we, as well as the Americans, the British and the Germans themselves, have forgotten about it.