Historical perspective and initial conditions

This chapter provides a historical perspective on Asia in the world economy with a focus on the colonial era, and sketches a profile of the prevalent initial conditions when Asian countries became independent. Two centuries ago, Asia accounted for two-thirds of world population and almost three-fifths of world income. Its decline and fall during the colonial era, associated with deindustrialization, was attributable to its integration with the world economy, through trade and investment, driven by imperialism. Fifty years ago, then, Asia was the poorest continent in the world. Its even worse demographic and social indicators of development epitomized its underdevelopment. Such initial conditions were the starting point in its journey to development. But most Asian countries did have a long history of well-structured states, and cultures, which were not entirely destroyed by colonialism. Their different pasts, embedded in histories albeit shaped by colonial legacies, also influenced future outcomes in development.

Macroeconomics of growth

Economic growth over fifty years in the Asian-14 has been stunning. Investment and savings, which rose rapidly, were the main drivers of growth. Education was also a sustained driver of growth on the supply-side. From the demand-side, growth was primarily private-consumption-expenditure led and investment led. The interaction between the supply-side and the demand-side suggests a virtuous circle of cumulative causation, where rapid investment growth coincided in time with rapid export growth, leading to rapid GDP growth. In macroeconomic management, the successful countries did not follow orthodox prescriptions of balanced budgets and price stability. Their primary macroeconomic objectives were economic growth and employment creation. Their macroeconomic policies were also more versatile in their use of policy instruments. Their success in maintaining high growth rates increased their degrees of freedom, which enabled them to finance government deficits and raise sustainable levels of government borrowing, while making higher inflation rates politically more acceptable, which would not have been possible if economic growth was slow.

Prologue

Gunnar Myrdal published his magnum opus, Asian Drama: An Inquiry into the Poverty of Nations, in 1968. At the time, I was a graduate student in economics at Oxford. It was a subject of conversation among students outside the classroom. It was brought up in questions at seminars about development. It led to animated discussion in the lively common room at Balliol College. It was also written about. The book made a splash. I walked across to Blackwell’s next door and bought the three volumes, at twenty-five shillings (GB£1.25) each, for what was then a princely sum. And I read it, all 2300 pages, over the next six months. The primary motivation was that so much of the book was about India. But, in late 1968, after a tumultuous summer in Europe, it was also fashionable to be unfashionable in economics. Myrdal was critical of mainstream economics. It also coincided with the beginnings of change in my own thinking about development. Orthodox trade theory, which I had been immersed in, was no longer an exciting prospect. I had decided to work on India for my doctoral dissertation. Paul Streeten, who had had just returned to Oxford, agreed to supervise my research. Streeten and Myrdal were good friends who had worked closely with each other. It was sheer coincidence that I met Gunnar Myrdal at dinner in Paul Streeten’s home. To be honest, I was overawed, for Myrdal had a reputation of being totally absorbed in his work, which was his life. But he was relaxed while chatting over dinner, to my relief not about India. He propounded a counter-intuitive thesis that one should expect young people to be conservative and to become more radical as they grow older. My intuitive belief, then, was the exact opposite. It was difficult to resist the temptation of getting into an argument. Fortunately, the wit and charm of Thomas Balogh, among the guests at dinner, came to my rescue....

Unequal outcomes for countries and people

Rapid economic growth in Asia was associated with an unequal distribution of its benefits among countries and between people. There was, in fact, a widening gap in per capita income levels within the Asian-14, while the gap between the richest and poorest countries in Asia was awesome. Much of the income inequality between countries in Asia was attributable to inequality between, rather than within, countries. Yet, there was also a significant increase in inequality between people within countries, just as there was a marked increase in inequality between regions within countries, both of which were more pronounced in countries that experienced rapid growth. Even so, rapid growth did lead to a substantial reduction in absolute poverty. However, the scale of absolute poverty that persists, despite unprecedented growth, is just as striking as the sharp reduction therein. The poverty reduction could have been much greater, were it not for the rising inequality.

Markets, governments, and politics

This chapter shows that governments performed a critical role, ranging from leader to catalyst or supporter, in the economic transformation of Asia spanning half a century, while their willingness and ability to do so depended on the nature of the state, which in turn was shaped by politics. It argues that the state and the market are complements rather than substitutes and that the two institutions must adapt to each other in an interactive co-operative manner over time. Success at development in Asia was about managing this evolving relationship between states and markets, by finding the right balance in their respective roles, which also changed over time. This experience suggests that efficient markets and effective governments, in tandem, provided the way forward to development. It is only institutionalized checks and balances that can make governments more development-oriented and people-friendly. Thus, for Asia’s continuing journey in development, democracy is clearly better than the alternatives.

Openness and industrialization

The past fifty years witnessed a marked increase in the degree of economic openness in Asia, reflected in its rising share of world trade and investment flows. There were, of course, differences between countries, depending upon their size. The pace of industrialization was also impressive. For Asia, and the Asian-14, the share of manufacturing in GDP rose from one-tenth in 1970 to one-fourth in 2016. But industrialization was most unequal even among the Asian-14. Economic openness has performed a critical supportive role in the process, wherever it has been in the form of strategic integration with, rather than passive insertion into, the world economy. Analysis of the industrialization experience in the Asian-14 shows that openness, while necessary, was not sufficient. It was conducive to industrialization only when combined with sensible industrial policy that was implemented by effective governments. In future, however, technological learning and technological capabilities are also essential to provide the foundations for sustaining industrialization.

Structural change and economic transformation

Development in Asia has been associated with a structural transformation of economies. In this process, economic growth drove structural change from the demand-side as incomes rose and production activities followed, while structural change drove economic growth from the supply-side as labour moved from low-productivity to higher-productivity activities. Such labour transfer between sectors was growth-promoting in earlier stages, while productivity increase within sectors was growth-promoting in later stages. There was an exit of labour from agriculture everywhere, while the services sector progressively became the largest employer, with the highest output-share, across Asia. The process of structural transformation remains incomplete. In many countries it is necessary to address the neglect of agriculture and renew the emphasis on manufacturing, just as it is essential to exploit the synergies between manufacturing and services. Economic growth cannot be sustained and structural transformation cannot be completed even if one of three sectors is a weak link in the chain.

The rise of Asia

The transformation of Asia reflected in its demographic transition, social progress, and economic development, has been phenomenal. During 1970–2016, growth in GDP and GDP per capita in Asia was much higher than elsewhere in the world economy. Its share of world GDP rose from less than one-tenth to three-tenths. Its income per capita converged towards the world average. Its share in world industrial production jumped from 4 per cent to 40 per cent. This provides a sharp contrast with the precipitous decline of Asia in the world economy during the colonial era. For Asian countries, political independence, which restored their economic autonomy and enabled them to pursue their national development objectives, made this possible. However, economic and social development was most unequal between the constituent sub-regions of Asia. East Asia was the leader and South Asia was the laggard, with Southeast Asia in the middle, while progress in West Asia did not match its high income levels.

Asian development and the world economy

During the post-colonial era, the relationship between Asia and the world was shaped by a geopolitics in which economics and politics, juxtaposed with history and geography, were closely intertwined. East and Southeast Asia became the main arena for contesting political ideologies—capitalism versus communism—in the Cold War, while West Asia was the stage where strategic interests driven by oil played out. Both were associated with conflicts and wars that shaped trajectories of development. Rapid economic growth in Asia has implications, both positive and negative, for the world, industrialized countries, and developing countries, which are analysed in the chapter. The international economic and political architecture for global governance was created around 1945. Asia had no voice in that process. The shifting balance of power provides Asian countries with an opportunity to exercise collective influence now, but co-ordination and co-operation among them has not surfaced yet, possibly because of economic and political rivalry.

Contemplating the future

This chapter concludes. It outlines the contours of change to recapitulate the essentials of the transformation in Asia, and highlights the major analytical conclusions that relate to contemporary debates on development. It considers prospects, in terms of opportunities and challenges, for countries that have led the process so far and for those that might follow in their footsteps. It reflects on the future, with reference to the past, to speculate how the changed international context, and new challenges on the horizon, might shape, or be influenced by, development in Asia over the next twenty-five years, addressing specific questions. Do recent changes in the global political economy have any longer-term implications for Asia? What is the likely impact of the profound technological changes on the horizon for development in Asia? How would the leading industrialized countries respond or adjust to the erosion of their economic dominance and political hegemony? Is this going to be an Asian century?