An ecosystem of incentives and policies: Economic lessons we can learn from the Four Asian Tigers

Government intervention in industrial activity is also criticised for engendering a permanent reliance on subsidies, a lack of growth in competitiveness, and an increased potential for corruption. In exports, classical economics emphasise the importance of adhering to a country’s “comparative advantage”. That is to say, in a poor, low-wage country, the theory would call for any manufacturing to be concentrated in low-skill sectors such as textiles and basic consumer goods, with no immediate prospects for moving up the value chain.

Although not heavily export-oriented like other East Asian nations, Hong Kong’s economy sits comfortably with neoclassical theorising about a hands-off government. Milton Friedman, the late University of Chicago economist and an icon of free-market economics, once said, “If you want to see capitalism in action, go to Hong Kong.” Indeed, despite the government’s involvement in the economy having expanded considerably over the past two decades, the city remains the world’s freest economy on the Heritage Foundation’s annual Economic Freedom Index. And, before the 1997 handover, when Hong Kong experienced its tremendous spurt of growth, the territory’s colonial government pursued an aggressively anti-interventionist agenda – refusing even to secure the savings of depositors when two banks collapsed in 1965.

The picture is far less clear for the other three Tigers. Singapore today is ranked the second freest economy, while Taiwan and South Korea are 11th and 23rd, respectively. However, a number of scholars have made influential arguments that these countries liberalised only gradually and at a much later stage of growth. They present a body of evidence pointing towards a “developmental state” – one in which the government takes an active role in directing the economy and the growth of businesses.

In pushing forward with industrialisation, the governments of the Asian Tigers created an ecosystem of incentives and government policies designed to spur exports, particularly of high-value goods. In promoting their exports, the governments employed protectionist measures to shield “infant” local industries from foreign competition. This usually took the form of high tariffs on imports of similar goods, and government subsidies for local companies. With Cold War politics granting the countries an ally in America, import tariffs were largely not retaliated.

Importantly, the governments also welcomed multinational firms into their economies, though not without reservation. The firms were expected to be involved in industries directly related to export competitiveness, and foreign technology was used to help dramatically escalate the value of industrial imports. Taiwan transitioned from toys to technology in terrific time.

Often, the governments designated particular sectors as being key to economic growth, and thus subject to particularly intense government involvement. This is a big no-no for believers in the invisible hand. Neoclassical economists admonish governments for “picking winners” in the economy – providing financial cushioning to large firms to increase their profits or providing a particular industry with an array of subsidies – warning that this generates vast economic inefficiency. By contrast, development scholar Robert Wade posits that in South Korea and Taiwan, the government did not pick winners so much as they made them. By protecting local industries, providing the full heft of government support, and defining key development parameters, the government enabled productive, long-term investment.

Such a high degree of government involvement in the economy is often associated with cronyism and corruption, with businesspeople and bureaucrats colluding to line each other’s pockets. The Asian Tigers benefited from an elite bureaucratic corps picked through highly competitive application processes and incentivised with handsome pay. Civil services were meritocratic and civil servants thus highly motivated to perform.

Further reducing the potential for corruption and government inefficiency was the development of an “autonomous” state: in the early stages of their development, the Asian Tigers were not democratic – Singapore remains authoritarian – and thus were immune to the demands of interest groups and the general populace. The economy could thus be left to the management of technocrats.

Critical to the Asian Tigers’ sustained growth was the gradual liberalisation of the economy as growth picked up and as infant industries became more established. Once the foundations were laid for development, it became sensible to let the economy as a whole subject itself to the unforgiving, efficiency-generating, competitive forces of the market. This allowed for further international integration and an attainment of high-income status.

Whether the East Asian model of growth can be replicated in other countries is a hotly debated topic. This article covers only a precious few factors in their astounding growth, and whole books have been written to propose, rebut and modify theories about the Asian Tigers. Even acknowledging this, it is clear that the growth of the Asian Tigers was only possible with the confluence of a range of specific circumstances. But with dozens of countries still stricken with poverty, it remains important as ever to derive lessons from the Tigers’ glorious quarter-century.