The Orthodox and Unorthodox The Orthodox and Unorthodox Approaches to Economic Approaches to Economic

Development Development 经济发展的方法论经济发展的方法论

Lecture Series at Central South University, Lecture Series at Central South University, ChangshaChangsha

Presented Presented byby Dr. QIJIN WUDr. QIJIN WU

Vice President Hunan Branch Vice President Hunan Branch The Export and Import Bank of ChinaThe Export and Import Bank of China

April 22th, 2012April 22th, 2012

State and MarketState and Market

The East Asian Miracle The East Asian Miracle

Views on the evolving role of Views on the evolving role of the state in economic the state in economic

developmentdevelopment

Economies of the Asian Economies of the Asian MiracleMiracle

Competing theoretical Competing theoretical paradigms:paradigms:

The proponents of competing paradigms The proponents of competing paradigms practice their trades in different worlds ... practice their trades in different worlds ...

[they] see different things when they look from [they] see different things when they look from

the same point in the same directionthe same point in the same direction. .

(Kuhn 1970: 150)(Kuhn 1970: 150)

Orthodox view of the role of Orthodox view of the role of state (based on state (based on allocative/static models):allocative/static models):

• To protect the vulnerable and ensure an To protect the vulnerable and ensure an equitable distribution of incomeequitable distribution of income

• To provide an institutional environment in To provide an institutional environment in which markets can flourishwhich markets can flourish

• To correct market imperfections (market To correct market imperfections (market failure) provide public goodsfailure) provide public goods

• So, generally little role for industrial policy??So, generally little role for industrial policy??

Rapid GrowthRapid Growth

Persistence of GrowthPersistence of Growth

Life expectancy at birthLife expectancy at birth

DemographyDemography

Export PenetrationExport Penetration

What was key to HPAEs What was key to HPAEs success? What caused the success? What caused the miracle? miracle?

Can it be replicated?Can it be replicated?

Doing fundamentals well: Doing fundamentals well:

• Rapid accumulation both Rapid accumulation both physical and human capital physical and human capital made possible by very high made possible by very high savings ratessavings rates

• Stable and predictable Stable and predictable macroeconomic environmentmacroeconomic environment

• Sound financial institutionsSound financial institutions

• Secure property rightsSecure property rights

• Complementary investments in Complementary investments in infrastructureinfrastructure

Why is investment in human Why is investment in human capital important? capital important? To facilitate the formulation of learning curveTo facilitate the formulation of learning curve

Coordination problems may hinder human Coordination problems may hinder human capital formation, so there is a reason for capital formation, so there is a reason for the state to intervene. the state to intervene.

Imperfect markets (loans for schooling)Imperfect markets (loans for schooling)Externalities as well (such as sharing of ideas, Externalities as well (such as sharing of ideas,

less contagious disease)less contagious disease)

Features that promoted Features that promoted human capital formationhuman capital formation

• Economic growthEconomic growth

• Declining population growthDeclining population growth

With significant savingsWith significant savings……..

Also fuelled byAlso fuelled by

• Equality in distribution of incomeEquality in distribution of income

• But most importantly of all a focus on But most importantly of all a focus on basic education, East Asian NICs basic education, East Asian NICs made good use of available made good use of available investment resources on educationinvestment resources on education

High savings becauseHigh savings because

• Control of inflation (avoided fiscal Control of inflation (avoided fiscal deficits) hence positive or mildly deficits) hence positive or mildly negative real interest ratesnegative real interest rates

• Stable banking sectors because of Stable banking sectors because of regulatory oversightregulatory oversight

• Demography (dependency ratio fell) Demography (dependency ratio fell) • Public consumption quite low Public consumption quite low

(minimal role of state)(minimal role of state)

High rates of investment:High rates of investment:• Secure property rightsSecure property rights• Complementary infrastructure investmentComplementary infrastructure investment• Low relative price of capital goodsLow relative price of capital goods• Capital controls Capital controls • Tax incentivesTax incentives• Moderate repression of interest rates Moderate repression of interest rates

(most controversial) (EAMR, 1993: 237) (most controversial) (EAMR, 1993: 237) (getting the prices right? See Amsden, (getting the prices right? See Amsden, 1989)1989)

Low price of capital goodsLow price of capital goods

So, success was because So, success was because

• ‘‘fundamentalsfundamentals’’ were right: stable were right: stable macroeconomic environment, macroeconomic environment, universal primary education, sound universal primary education, sound and solvent financial institutions, and solvent financial institutions, secure property rights, secure property rights, complementary investments in complementary investments in infrastructure, low relative prices of infrastructure, low relative prices of investment goodsinvestment goods

But what interventions did But what interventions did actually take place?actually take place?• Industrial and trade policies (policies targeting of Industrial and trade policies (policies targeting of

industries to change industrial structure)industries to change industrial structure)• Key among these was financial repression/direction Key among these was financial repression/direction • Nurturing of big business in key sectorsNurturing of big business in key sectors• Selective tax and tariff policies (to protect Selective tax and tariff policies (to protect

industries)industries)• Creating contests (restriction also of competition)Creating contests (restriction also of competition)• Monitoring/disciplining of big business Monitoring/disciplining of big business • Control of foreign direct investmentControl of foreign direct investment• Capital flow restrictionsCapital flow restrictions

Using directed credit by policy banks

Real interest rates on directed credit

Trade policies?Trade policies?

Protection in KoreaProtection in Korea

• Miracle Report argues that HPAEs were in fact more Miracle Report argues that HPAEs were in fact more open than other developing countries, more open than other developing countries, more ‘‘outward outward orientedoriented’…’… but so what? but so what?

• This This ‘‘may be soothing to the bank, but it is not really may be soothing to the bank, but it is not really relevant relevant –– the real issue the real issue …… is whether they distorted is whether they distorted their prices at alltheir prices at all’’ (Lall, 1993: 651) (Lall, 1993: 651)

So did these various So did these various interventions work??interventions work??

Revisionist viewRevisionist view

• industries which require intensive employment of capital industries which require intensive employment of capital and technology, industries that in consideration of and technology, industries that in consideration of comparative costcomparative cost of production should be most of production should be most inappropriate for Japan, industries such as steel, oil inappropriate for Japan, industries such as steel, oil refining, industrial machinery of all sorts, and electronics refining, industrial machinery of all sorts, and electronics …… From a short-run, static viewpoint, encouragement of From a short-run, static viewpoint, encouragement of such industries would seem to conflict with economic such industries would seem to conflict with economic rationalism. But, from a long-range viewpoint, these are rationalism. But, from a long-range viewpoint, these are precisely the industries where income elasticity of demand precisely the industries where income elasticity of demand is high, technological progress is rapid, and labour is high, technological progress is rapid, and labour productivity rises fast ... Japan has been able to productivity rises fast ... Japan has been able to concentrate its scant capital in strategic industries concentrate its scant capital in strategic industries   

(Wade, 1990: 25) (Wade, 1990: 25)

Market friendly view of Market friendly view of these industrial policies:these industrial policies:• Industrial policy defined as Industrial policy defined as ‘‘governments governments

efforts to alter industrial structure to efforts to alter industrial structure to promote productivity based growthpromote productivity based growth’’

• Attempts to influence industrial structure Attempts to influence industrial structure generally unsuccessful, it is arguedgenerally unsuccessful, it is argued

• Those sectors that were targeted did not Those sectors that were targeted did not experience significantly higher experience significantly higher productivity change productivity change

• But problems with these calculations and But problems with these calculations and the argument as a wholethe argument as a whole

‘‘Pointing the gun inwardsPointing the gun inwards ’’ (Amsden, 1993):(Amsden, 1993):• ‘‘we find very little evidence that industrial we find very little evidence that industrial

policies have affected either the sectoral policies have affected either the sectoral structure of industry or rates of productivity structure of industry or rates of productivity change change …… industrial policies industrial policies were largely were largely ineffectiveineffective (p.312) (p.312)

• Because Because ‘‘manufacturing sector seems to manufacturing sector seems to have evolved roughly in accord with have evolved roughly in accord with neoclassical expectations: industrial growth neoclassical expectations: industrial growth was largely was largely ‘‘market conformingmarket conforming’’ (p.315) (p.315)

‘‘Market friendlyMarket friendly’’ approach approach

• ‘‘Private direct investment and rapidly growing Private direct investment and rapidly growing human capital, were the principal engines of human capital, were the principal engines of growth growth …… in this sense there is little that is in this sense there is little that is ‘‘miraculousmiraculous’’ about the HPAEs superior record of about the HPAEs superior record of growth; it is largely due to superior accumulation growth; it is largely due to superior accumulation of physical and human capital (p.5)of physical and human capital (p.5)

• the eight economies tend to favor the importance the eight economies tend to favor the importance of doing the fundamentals wellof doing the fundamentals well’’

• East Asian success East Asian success sometimes occurred in sometimes occurred in spite of spite of rather than rather than because of because of market market interventions. interventions.

RevisionistsRevisionists

• State did play a large role, not just State did play a large role, not just providing the providing the ‘‘fundamentalsfundamentals’’ but also but also supporting specific industries, those capable supporting specific industries, those capable of exploiting economies of scale. Especially of exploiting economies of scale. Especially the case in Japan and South Koreathe case in Japan and South Korea

• East Asian Miracle Report drew heavy East Asian Miracle Report drew heavy criticism, but we should not forget that criticism, but we should not forget that fundamentals are important (human/capital fundamentals are important (human/capital investment)investment)

A Focus on our own path of growth and developmentA Focus on our own path of growth and development China’s economic success has surprised the worldChina’s economic success has surprised the world

• Since the late 1970s, there have been 30 years of Since the late 1970s, there have been 30 years of impressive changes in China. China today and impressive changes in China. China today and China 30 years ago have presented a totally different China 30 years ago have presented a totally different image, an image that is somewhat unimaginable to image, an image that is somewhat unimaginable to both China and the whole world: To many, a both China and the whole world: To many, a formerly poverty-stricken country has now created formerly poverty-stricken country has now created an economic miracle within 30 years.an economic miracle within 30 years.

• The soft power of erecting examples for other The soft power of erecting examples for other developing nations developing nations

How to explain the Chinese Miracle?How to explain the Chinese Miracle?

• Big Bang vs. Gradualism (Probing for a way forward)Big Bang vs. Gradualism (Probing for a way forward)

• Two types of transitional approaches: orthodox vs. Two types of transitional approaches: orthodox vs. unorthodox: The former Soviet Union and China in unorthodox: The former Soviet Union and China in contrast. contrast.

• Institutional Change: from HRS to Private Institutional Change: from HRS to Private entrepreneurs joining the Partyentrepreneurs joining the Party

• ChinaChina’’s focus of economic reform: using both hands s focus of economic reform: using both hands (state and market); using increments to reform the (state and market); using increments to reform the stock; using market to exchange the tech.; using stock; using market to exchange the tech.; using opening (trade) to promote development.opening (trade) to promote development.

Approaches: the Approaches: the ‘‘catcat’’,,’’ stone stone’’ and and

‘‘scientificscientific’’ concepts of development concepts of development theoriestheories

Goals: Development is a paramount Goals: Development is a paramount obligation, but with both hands: obligation, but with both hands: ‘‘statestate’’ and and ‘‘marketmarket’’..

Building a harmonious society.Building a harmonious society.

Challenges of globalisation, development Challenges of globalisation, development and transition.and transition.

Conclusion 1Conclusion 1Competing theoretical paradigmsCompeting theoretical paradigms

The proponents of competing paradigms The proponents of competing paradigms practice their trades in different worlds ... practice their trades in different worlds ...

[they] see different things when they look from [they] see different things when they look from

the same point in the same directionthe same point in the same direction. .

(Kuhn 1970: 150)(Kuhn 1970: 150)

Conclusion 2Conclusion 2