East Asian mysteries: past and present.

• Author: Rodrik, Dani

East Asia has long served as a Rorschach test for economists. The region's spectacular growth from the 1960s until the crash of 1997 spawned diverse interpretations that had as much to do with the preoccupations of the analyst as with the realities on the ground.

Observers with a favorable take on industrial policy saw in East Asia a confirmation of their theories on the importance of state intervention. Advocates of free markets saw instead the triumph of small government and unfettered private initiative. Trade economists viewed it as a miracle based on outward orientation, labor economists stressed the early emphasis on education, and macroeconomists pointed to the region's fiscal conservatism. Growth theorists debated the respective contributions of human capital, physical capital, and technology adoption.(1)

Interpretations of the recent crisis have had a similar quality. Critics of state-led industrialization have blamed East Asian governments for encouraging excessive investments with low marginal returns. Those who worry about moral hazard have focused on "crony capitalism." Economists skeptical of the rationality of international capital markets have viewed the crisis as yet another episode in the boom-and-bust saga of financial markets.

One reason that East Asia has something to offer to all persuasions is the region's diversity. The attitude toward economic policy ranges from the almost laissez-faire (Hong Kong) to the highly interventionist (South Korea, until recently). In terms of the rule of law, the region spans almost the entire feasible range, from Indonesia at one end to Singapore at the other. Japan and Korea are homogeneous societies, while the populations of Indonesia and Malaysia are ethnically diverse. Nor has growth performance been uniform: between 1960 and 1994, output per worker expanded at an average annual rate of 5.2 percent in Taiwan, compared with 2.9 percent in Indonesia.(2) Whether it is the miracle or the recent crisis that we are trying to explain, these facts suggest that there is no single East Asian story.

Growth in South Korea and Taiwan

In 1960 South Korea and Taiwan were as poor as many African countries are today. Their remarkable transformation in the three decades that followed is often portrayed as an example of what export-led growth can achieve in countries that chose to open themselves to international trade. That these two countries, along with others in the region, produced sustained export booms is not controversial. Yet there is much more to their story than outward orientation.

Figure 1 shows the relative price of exportable goods in four countries that experienced export booms: South Korea, Taiwan, Turkey, and Chile.(3) Because the timing of the booms differ (early 1960s in Korea and Taiwan, early 1980s in Turkey, and late 1980s in Chile), I have aligned each country's series relative to the start of their respective booms. As the figure reveals, in Turkey and Chile the export booms were accompanied by an increase in the relative profitability of exports of 50 percent or more. By contrast, the Korean and Taiwanese export booms took place despite the absence of a significant change in relative prices. This evidence makes it hard to ascribe East Asian export performance to export incentives, whether in the form of trade liberalization, exchange-rate depreciation, or export subsidies.(4) Moreover, since export/GDP ratios were exceptionally low in both countries early on - below 5 percent in South Korea...