The Midas of East Asia

By Brette Harrison'04

The 1998 financial crisis in East Asia sent shock waves through the economic community. When the bhat devalued many believers in the Asian miracle had to admit that the era of Golden growth in Asia was over, and that their unique form of enlightened authoritarian rule was not the cure all answer for underdeveloped economies. For a time, it seemed that Paul Krugman's [1] diagnosis of the Asian "myth" four years earlier was coming true. Krugman denied the sustainability of the East Asian miracle for its lack of efficiency building measures. Refusing its exclusivity and claiming that Asia was nothing more than a ubiquitous mobilization of inputs, Krugman declared East Asia a fatalistic system that would ultimately run out of steam-a system destined to follow in the footsteps of the Soviet Union.

Notwithstanding the holes that 1998 exposed in the Asian economic fabric, Asia's subsequent economic and political rebound challenged Krugman's validity; yes, it was not an immortal answer to economic development, but the East Asian Tigers weathered the storm better than expected; in Japan, the prognosis is relatively optimistic, "…far from sliding into crisis, the economy seems poised for a fillip." [2] On the brink of a renaissance, the HPAE model is once again a viable possibility for some underdeveloped economies; the mechanisms and institutions that made authoritarian political legitimacy dependent on economic growth, and the cultural context in which this system flourished, has some optimistic implications for many of the currently disparaged and underdeveloped nations.

The Cold War context and the Communist takeover in China served as an impetus for many HPAEs to reform their economic and government institutions or else risk a proxy war infection. If the Asian miracle was going to succeed, the HPAE had to convince their constituencies of two contracts: first, that state interests should transcend individual needs so short term expenses would be sacrificed for greater long term returns, and second, that the legitimacy of authoritarian rule depended on economic growth. "The rise of industrial Asia suggests that the key to uninterrupted growth rests on the regime's ability to reward groups that sacrifice today for future gains."[3] The authoritarian governments in East Asia wanted to avoid the threat of a peasant rebellion by incorporating the masses into the growth process; the Asian miracle experienced extraordinary growth at a time of diminishing wealth inequality-the miracle bypassed the class struggle inherent in Communist theory by erasing the lines of class distinction. Several wealth sharing mechanisms emerged as an authoritarian opiate for the masses.

Unlike many other developing nations of the time, the wealth sharing reforms of the HPAEs deviated from the popular government subsidiaries of "urban well being;" the confluence of wealth sharing mechanisms, and the institutions that implemented economic policies, gave the broader population a stake in the national economy and room for upward mobility.[4] Far-reaching land reform measures, support to small and medium sized enterprises, and government funding for incipient worker cooperatives, were all central to building the framework of the Asian miracle.[5] However, competition on the international scale ensured East Asia's role as a global economic force and provided the revenue to finance domestic investments. The government reaped the political gains of accruing wealth in the private entrepreneurial sector, and the occupational and social subsets of the East Asian societies benefited by adhering to "the rules of the game." Thus, business chose to operate within the formal sector, and the resulting increase in trade and investment allowed the government to reward good performance and build a rural infrastructure around long-term development interests.[6]

Seizures of power by charismatic individuals was not characteristic of HPAE autocracies, despite a formal authoritarian veneer, as was often the case with undemocratic regimes; "An inherent contradiction exists among authoritarianism, investment, and growth."[7] Rather, East Asia escaped many negative aspects inherent in autocratic rule by establishing and adhering to institutions, rules, and procedures that checked government involvement in economic strategy. East Asia defied the traditional recipe for growth that assumed a higher savings rate was attainable if the mass of wealth was concentrated in elite circles, which had a greater tendency to save. Unlike its contemporary, the Latin American ISI model, East Asia catered the means of an authoritarian state to different political and economic ends. Instead of a mutual relationship with exclusive interest groups, the Asian model subsumed the interests of labor unions, corporations, and other organized groups, to the interests of the authoritarian state; coercive undemocratic regimes trampled individual rights in the name of undeniable equitable growth. The dictatorial regimes of East Asia legitimized their authority through broad based support; recalcitrant to popular opinion and narrow interests, governments were declaredly impervious to class limitations.

What made authoritarianism work in East Asia? How were these undemocratic regimes able to withstand aggressive western campaigns for liberalization and peasant rebellion in neighboring China? Confucian notions of patriarchy and collectivism culturally primed the HPAE constituencies, and they accepted autocratic rule on the condition that it worked, that it would provide equitable growth for the populace. Much like the Middle Eastern countries during the oil boom, East Asian governments bought political support; however, East Asia's revenue was secured through global competition and investment that provided for equitable growth, not oil money. Fundamental public support, whether voluntary or coerced, and the established government regulations, made East Asia comparatively more stable and predictable; consequently, the HPAEs were more attractive to foreign investors than other underdeveloped nations.[8] However dubious their claims to enlightenment, autocratic leaders behind the miracle understood where the vested interest of the nation remained, and they made prophetic economic decisions that benefited the people-at least until the 1998 wake up call.

East Asian prudence during the 1979 oil crisis allowed the HPAEs to avoid the debt-led growth, and the subsequent "lost decade" of the 1980s, which ravaged many Latin American economies. Autocratic regimes in East Asia watched from the sidelines as variable risk debt and an exhausted ISI system exposed Latin America to Westernized conditionality and false hopes for "heterodox reform." The Asian model struck a blow to Western idealistic campaigns for democracy: the "Enlightened Golden Model" with its developed human capital, financial discretion, and the ultimate goal of global competition, was the answer for underdeveloped nations.

If the Cold War was the incentive for the Asian Golden Model, then the financial crisis of 1998 was its greatest obstacle. The hubris found in East Asia, after it successfully rode the 1979 tidal wave, produced a dangerous euphoria in the HPAEs-the disillusionment of a "free lunch" economy and a utopian autocracy began to uproot the Asian miracle. The radiance of the Golden Miracle had blind sighted foreign speculators. Investment zeal allowed many foreign investors to minimize the accumulating fungus feeding on the East Asian systems. Asian prudence, which had thwarted the debt-led growth a decade earlier, began to dissipate; "invincible" HPAEs found borrowing irresistible, and international capital was breaking the Asian dam. Fixed exchange rates became overvalued, and the resulting currency appreciation forced an export slowdown. Capital inflows were drying up and the HPAEs were running out of reserves to defend their fixed exchange rates; foreign investors, responsible for the obese Asian miracle began to feed on a withering golden carcass like desert vultures. 1998 exposed the nepotism and crony capitalism that existed under the auspice of unparalleled equitable growth and development, the IMF was ushered in and the utopia was devastated.

Nonetheless, despite ill-appropriated IMF reform models, the Asian financial crisis did not end the economic dynamism of most HPAEs; rather, the crisis illustrated an internal alarm mechanism that signaled the need for the miracle to adapt and reevaluate its progression. After rebounding so well from the crisis, many feared that this second respite granted to the HPAEs would diminish their motivation to reform.[9] The Asian miracle was a remarkable display of political and economic ingenuity, but it was a transitory phase in the history of East Asian development. HPAE development was heavily reliant on the mobilization of both physical and human inputs. However, the long-term investment and rural infrastructure that was made possible for this input mobilization, primed the HPAE for continued economic success and protection from the whims of international finance. At the same time, the bhat devaluation changed the political paradigm and evidenced the need for further policy developments-East Asia was ready for the next step, it had outgrown the Asian miracle of the Cold War era. When the political weaknesses of the Asian miracle came to light, it called into question the longevity of authoritarian attraction for economic growth. Well-managed financial gains allow nuances of consumer preferences to develop; as people get wealthier they desire the multitude of different commodities wealth can provide, and autocratic rule becomes less efficacious.[10] As East Asia emerges as a greater economic adversary on the international scene, its next task will be political reform. "How to consume wealth can prove more controversial than how to produce it."[11] An increasing number of East Asian citizens are using their stake in the economic system to demand greater political liberalization; the populace and the government are reversing the traditional roles they fulfilled under the social contract of an incipient Golden Miracle.

The success and internal reform of the Asian miracle has optimistic implications for many other nations trying to develop with in a similar context. Equitable growth and enlightened authoritarian rule are becoming imperative options for countries that have exhausted all other options. The Middle East especially, with its rich Islamic cultural heritage and devastatingly complicated demographics, is a prime heir to the Asian miracle model. Equitable growth in the HPAEs was an extraordinary sociopolitical phenomenon that thwarted the Red Wave and integrated East Asia in a competitive, international, and industrial financial system. The future of the Asian miracle demands that it remain faithful to its monumental past, so that the Golden model continues to be a viable option for developing nations.

1 Krugman, Paul, "The Myth of Asia's Miracle," Foreign Affairs Nov/Dec 1994
2 "Japan's Economy: Respite without reform," Economist Apr 6th, 2002
3 Jose Edgardo Campos and Hinton Root, The Key to the Asian Miracle, Washington: Brookings Institution Press, 1996
4 Campos et al 4
5 Campos et al 4
6 Campos et al 7
7 Ibid.
8 Campos et al 7
9 "Respite without reform"
10 Campos et al 177
11 Campos et al 177