Capitalism: Myth and Reality, Part 3... East Asian Prosperity
Riches of the Far East
In Parts 1 and 2 of this series, we have seen that the United States and United Kingdom, two of the most powerful economies in history, owe much of their prosperity to state intervention and protectionism. Now we will look at East Asian development success stories. These countries have similarly gone from poor to rich, and an active public sector has been essential.
Hong Kong was given to the British empire in 1842. The small region immediately benefited from the capital accumulation and political and economic advancement that the UK had achieved over the previous 300 years. The colonial administration of Hong Kong established schools and hospitals for the ruling elite, supported long term building projects and awarded land grants.
The government supported development through direct action as well as close cooperation with private businessmen. The line between public and private has always been fuzzy in Hong Kong. Case in point: the first electric company was formed in 1888 by several members of the ruling Legislative Council.
The Hong Kong and Shanghai Banking Corporation (also known as HSBC), today one of the largest banks on earth, was founded in 1865, enjoyed special privileges from the British Treasury, and soon became the banking and financial institution of the Hong Kong government, handling public loans, and funding railroad projects in Hong Kong and mainland China.
During the first half of the 20th century, much of the Hong Kong government's attention was focused on social spending and housing projects for immigrants and refugees fleeing instability on the mainland. Public industrial towns and housing projects provided cheap housing to workers, enabling industry to keep wages low and inflation under control. An ambitious public education program was undertaken in the 1950s and 60s, with free universal primary school begun in 1971, and free secondary education up to age 15 in 1978.
In the 1970s the Hong Kong government began construction of a mass transport system, retaining ownership and management over it. The system was partially privatized in 2000. The government has directly supported public transport projects across Hong Kong, including the Star Ferry. Over 90% of daily journeys are on public transport, the highest in the world.
In the area of finance, during the second half of the 20th century, there were heavy regulations on deposit interest, tight restrictions on foreign competition and government cooperation with the largest banking and financial institutions, not least HSBC. Catherine R Schenk writes:
What is perhaps most striking is that the incumbent banks were able to protect their position... for 36 years despite the development of the international financial center, and despite the continued mythology of Hong Kong as a laissez-faire paradise... The close relations between the HSBC and the government in the absence of a central bank was also an enduring factor in support of barriers to entry.
Keep this information in mind as you view the video below, Milton Friedman's interesting but flawed analysis of Hong Kong in 1980.
The currency, the Hong Kong Dollar, has been fixed to other currencies for most of the 20th century. It was tied first to the British Pound, and then to the US Dollar, being allowed to float freely only for a short period in the 1970s and 80s. Today it is pegged to the US Dollar, and allowed to float within tight upper and lower limits.
South Korea has achieved one of the fastest transformations from poor to rich in modern history for a country of its size. According to the CIA World Factbook,
Four decades ago, GDP per capita was comparable with levels in the poorer countries of Africa and Asia. In 2004, South Korea joined the trillion dollar club of world economies, and currently is among the world's twenty largest economies. Initially, a system of close government and business ties, including directed credit and import restrictions, made this success possible. The government promoted the import of raw materials and technology at the expense of consumer goods, and encouraged savings and investment over consumption.
While its sister to the north sealed itself off from the world and pursued a radical communist and stalinist path, South Korea emphasized "guided capitalism" and an economic strategy that relied heavily on international trade, foreign loans, and foreign markets. Both the private and public sector were seen as essential to growth. The "chaebol," large family-owned conglomerates, led large segments of the economy to international competitiveness. Benefiting from close cooperation and favoritism from the state, they have included such successful names as Samsung, Hyundai and LG.
Active state intervention included massive devaluation of the currency in the early 1960s, direct subsidization of exports, easing restrictions on the import of raw materials and incentivizing saving and investment. The manufacturing sector grew by 15% during the first 5 year plan (1962-66), and 21% during the second (1967-71).
When circumstances changed and economic conditions demanded a new approach in the late 1970s and early 80s, the state shifted its focus away from heavy manufacturing and exports, toward more labor-intensive manufacturing and domestic consumption, and inflation control. The changes worked. In 1980 South Korea had negative economic growth, but in 1983 attained 8.1% growth, and in the late 1980s that growth rose to an impressive 12 to 13% annually.
Singapore has transformed itself from poor to rich in a single generation. Flying directly in the face of the laissez-faire doctrine, Singapore has achieved one of the highest rates of per capita GDP, higher than Hong Kong (and even the US), despite being subject to much greater state involvement, intervention and paternalism than Hong Kong from its independence in 1965 to today.
Upon severing ties with Malaysia, Singapore immediately pursued a program of export-oriented industrialization supported by foreign investment, state guidance and state investment in strategic sectors and government-owned corporations. The government invested in infrastructure development, offered low taxes to foreign investors, and created free training programs geared toward the needs of foreign multinationals.
In attracting foreign capital, the state emphasized Singapore's stability, professionalism and the rule of law, undergirded by an authoritarian political structure. That authoritarian system was run by the brilliant Prime Minister Lee Kuan Yew, who served from 1959 to 1990, and continued to exert significant influence after that time. The state paternalism features, among other things, mandatory retirement accounts for workers to bolster saving and investment.
The 1980s and 90s saw emphasis on high tech industries including computers, medical equipment, pharmaceuticals and chemicals. The government undertook efforts to stimulate scientific research and startup ventures.
The primary body dedicated to directing and managing economic development has been the Economic Development Board. It has supported many initiatives such as the Singapore Institute of Management, established in 1964, which advances government goals of improving human resources and innovative potential.
Each of these East Asian success stories achieved extremely rapid growth in a very short time. None of them made this achievement according to the traditional laissez-faire/ neoliberal model. State intervention, combined with full confidence in market exchange, private property, the rule of law and international trade, were essential. The exact strategies and tactics employed by the government varied from exchange rate controls to incentivizing foreign investment to close cooperation between Big Government and Big Business. But the prominent role of the state in guiding the economy from third world to first world was never questioned. In Part 4 of the series, we will look at the largest East Asian success of all, Japan.