IS THE EAST ASIAN ECONOMIC MODEL STILL RELEVANT? Manu Bhaskaran Centennial Group Inc July 2002

KEY POINTS  East Asian Model  Definition / Was there such a model?  New arguments  Shift to domestic-driven growth?  The real story:  Major re-thinking of growth models

THE EAST ASIAN MODEL Common features 1.High savings rate 2.Emphasis on education 3.Export-friendly policy regimes 4.Pragmatic, non-ideological 5.Egalitarian approach  Agriculture in Korea,Taiwan  Public housing in HK/Singapore

THE EAST ASIAN MODEL (2) Were these features unique to Asia?  Good economic housekeeping rules  Other success stories shared these  Botswana: fastest growing economy NOT UNIQUE TO EAST ASIA ALONE

EAST ASIANS PURSUED DIFFERENT MODELS 1.Government role  Hong Kong: laissez-faire  Taiwan: focused in some sectors  Korea: allocated capital,…  Singapore: hyper-active govt Each had different starting points Each evolved own responses

DIFFERENT MODELS 2.Foreign capital inflows  Korea:xenophobic  Taiwan:wary  Singapore: open  Hong Kong: ultra open Portfolio capital: earlier opening Direct investment: liberalised later

DIFFERENT MODELS (2) 3.Capital markets  Korea: heavily distorted  Taiwan: some political influence  Singapore: Relatively free, ex-CPF  HK: Free, main allocator of capital Banks under tight govt control ex-HK

DIFFERENT MODELS (3) 4.Size of companies  Korea: chaebol-driven  Taiwan: Mainly small companies, govt-backed ones in crucial sectors  Singapore: MNCs and GLCs  HK: Vibrant, early globalisers

DIFFERENT MODELS (4) 5.Other degrees of openness  Labour market  HK/Singapore: Highly open  Korea: closed  Protectionism  Korea/Taiwan: High  HK/Singapore: Very low

DIFFERENT MODELS (5) 6.Domestic competition policy  HK: Some cartels, otherwise free  Taiwan: Generally free  Singapore: GLCs dominated  Korea: SMEs/consumers squeezed

RE-THINKING MODELS SHIFT TO DOMESTIC DEMAND?  Slowdown in global demand  More competitive export markets  Means better depend on domestic

DOMESTIC DEMAND AS DRIVER? Is this possible?  Domestic linked to external demand  Trade sector generates incomes  Freer trade increases incomes  Can policy discriminate?  Favouring domestic demand distorts

NEW THINKING 1.Economic philosophy  HK: Shift away from laissez-faire  S’pore: Allowing more laissez-faire  Korea: Substantial opening  Taiwan: Opening up as well  Malaysia: Reviewing NEP  Thailand: Moderating growth targets

NEW THINKING (2) 2.Resource allocation  Bond markets: less bank financing  Banks liberalised  Prices less distorted  Interest rates freed  Product prices closer to world prices

NEW THINKING (3) 3.Savings and consumption  Freer banks: easy consumer credit  Trade liberalisation: prices fell Consumption/GDP rose post-crisis

NEW THINKING (4) 4.Corporate sector  Restructuring: more efficient  More policy emphasis on  Local companies vs MNCs  Consumer protection, competition policy

CONCLUSION  No single model  Pragmatism prevailed  Substantial re-thinking going on BEWARE APPLYING SIMPLISTIC MODELS TO ECONOMIES