Economic Growth: Politics or Policies Matter
Today's rapidly growing economies are classified as Newly Industrializing Countries or
NICs and most of the NICs are located in Asia. Despite the current economic crisis, which
remains as a mystery, NICs experienced a rapid economic growth over the last 40 years.
Economic growth refers to an increase in the productive capacity of an economy
Japan was the first country to experience a rapid economic growth in Asia. Its economy
continued to expand rapidly from the mid-1950s through the 1960s. The annual growth rate
averaged close to 11% in real terms for the decade of the 1960s. This compared with 4.6%
for the West Germany and 4.3% for the USA in the period from 1960 to 1972. And it was
well above twice Japan's own average prewar growth rate of about 4% a year. It is
generally agreed that the rapid expansion of Japan's economy from the late 1950s through
the 1960s was powered by the vigorous investment of private industry in new plants and
equipment. The high level of saving of Japanese households provided banks and other
financial institutions with large funds for heavy investment in the private sector. The
rapid increase in capital spending was associated with the introduction of new
technology, often under license from foreign companies. Investment for modernization made
Japanese industries more competitive on the world market. This created new products and
brought Japanese enterprises the benefits of mass production and improved productivity
per worker
Another factor behind Japan's economic growth during this period was the availability of
an abundant labour force with a high level of education. Reasonably large numbers of
young people entered the labour force every year. There was also a heavy migrartion of
agricultural workers to manufacturing and service jobs located mostly in the larger
cities. In 1960, the Japanese government established Income Doubling Plan, every 10
years, so that the government's economic policies aimed to encourage saving, stimulate
investment, protect growth industries and promote exports. During this period, Japan
benefited from an expansionary world economic climate caused by the availability of an
abundant supply of relatively cheap energy from abroad. Despite a few short recessions,
the Japanese economy enjoyed a long period of prosperity. In 1960s-70s, the real growth
rate was averaging close to 12%. The main factor behind this growth was rising capital
investment and to obtain economies of scale, build additional facilities to increase
export capacity, and acquire equipment needed to respond to changes in the economic and
social environments, such as labour-saving tools and pollution-cutting devices. Increases
in exports due to the stronger price competitiveness of Japanese products also supported
the sustained rise in business activity
Within 25 years, Japan established one of the largest financial centers in the world.
Soon, so-called high-performing Asian economies (HPAEs), notably, Hong Kong, Korea,
Singapore, Taiwan, and later Indonesia, Malaysia, Thailand, China, India and Vietnam,
start following Japan's policies. The process is also known as the 'flying geese
phenomenon.' Since late 1970s these countries have experienced between 8-11% economic
growth. Countries that were more open to international trade have enjoyed a more rapid
rate of economic growth. This is especially true with China because it suffered greatly
under pure communist economic policies in the 1950s and 1960s. However, in the 1970s, Mao
Zedong initiated 'Great Leap Forward' economic programs and established ties with the
West since then many things have changed radically. China began a program of economic
liberalization. Since 1980s, trade liberalization and reforms have accelerated. China's
rate of per capita income growth, during 1985-95, was 8.3% per year. Most importantly,
China, South Korea and Taiwan established universal primary education to empower women.
This helped to increase people's standards of living while reducing the high birth rate
and expanding labour intensive industries
Not surprisingly, in 1995 the Singapore economy registered a growth rate of 8.8%, pushing
its per capita GDP to more than US $28 thousand, a level above that of the United States.
In January 1996, the Organization for Economic Cooperation and Development (OECD) removed
Singapore from the list of recipient countries of official development assistance, and
reclassified it into a new category of countries, 'more advanced developing countries.'
The rapid economic growth, in the HPAEs, have been powered by the expansion of
domestically manufactured exports. This enabled them to overcome the constraints of their
small domestic markets. The export manufacturers have increased their competitive edge by
turning to more technology- and capital-intensive operations and producing
high-value-added products. The private capital investment represented more than simple
access to funds. The HPAEs enterpreneurs generally seek strategic alliances and joint
ventures in which the foreign investor also brought specific expertise, access to
markets, technological enhancement or other critical capabilities. Generally, all HPAEs
governments welcomed direct foreign investment through decentralization and
liberalization policies. So that the foreign investors were also able to assess and
manage a variety of risks including currency fluctuation, changes in the political
climate and most importantly lack of liquidity in the investment. Consequently, the pure
financial investors so effectively invested their capital in the rapidly growing
economies. This required the further development of traditional capital markets, and
eventually increased global competitiveness
During the same period, countries like Nepal and many other developing nations
experienced a strong negative relationship between exchange rate distortions and economic
growth. The government's interference on the economy was one of the several factors that
affected growth. A study found that annual growth rates in real GDP in countries with
highly distorted exchange rates were 2-4 percentage points lower than in countries
without exchange rate distortions. Many of the least developed countries' (LDCs) economy
was hampered primarily because of a high population growth and density, low industrial
output, limited natural resources, difficult topography, geopolitical crisis, a weak
human capital base with extremely poor levels of education and health, poor public
management capacity. Furthermore, the still existing feudal system, nepotism, political
instability and frequent civil unrest affected economic growth. While the HPAEs were
experiencing rapid economic growth, the poorest countries were facing wars such as
Iran-Iraq war and Vietnam war.
Some countries experienced famine because of extreme physical factors such as crop
disease and pests, floods, earthquakes, volcanic eruptions, land slides, droughts. This
process was accelerated by humans' physical interactions with the environment through
over-grazing and population pressure. For example, in 1984, Ethiopia experienced the
worst famine problem in human history. Drought itself was not the sole cause of famine
but the effects of drought were worsened by changes in agricultural practice caused
largely by increased population density leading to over-grazing and land degradation.
These factors worsen the economic structure because many LDCs' exports were based on
primary products. For example, Nepal's main exports are primarily based on primary
commodities which are prone to a large price fluctuation. The exports growth was very
slow compounded by inelastic prices for their primary products but a high income
elasticity for imported manufactured goods and services. LDCs often restrict
international trade through a variety of trade policies. However, indirect restrictions
on trade through overvalued exchange rates are often the most important factor in
restricting trade. As a result, the economic growth slows down because only countries
that are more open to trade tend to have sounder all-around economic policies. Also,
technical progress helped develop a highly competitive substitute. For example, the
introduction of synthetic rubber severely affected countries which specialized in the
production of natural rubber for exports
Because of HPAEs's openness to the world markets and efficient government policies, they
were able to achieve rapid economic growth and to promote progressive development towards
even further advances in the free trade and investment environments. As we know the
impressive growth of China 13.2% in 1992 and 13.4% in 1993. East and Southeast Asian
regions continue to be a center for the world's most dynamic economic activity. In
contrast, LDCs differ from the NICs such as standards of living, levels of productivity,
geographic size, population, historical background, industrial structure, and human,
natural and physical resources. Most importantly, human capital or the knowledge, skills,
abilities and capacities remained insufficient. Malnutrition has often increased the
cycle of poverty. There are many sources and types of inequalities including rural vs.
urban, entrepreneurs vs. others, those with political and social connections vs. those
without, and religious, ethnic, and racial differences among people.
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