State and market: the East Asia conundrum

For much of the latter half of the 20th century, modernization and dependency theories competed for the allegiance of the “Third World,” a label from the conceptual world of the Cold War.

Dependency theory appealed to decolonized countries feeling themselves at a historical disadvantage. They were lagging behind western powers who have had a head start of at least 200 years of industrialization, and they could not hope to ever “take off” because of continuing exploitation, this time facilitated by their own corrupt governments acting as agents of foreign patrons.

Modernization theory, on the other hand, gained ready acceptance among postcolonial leaders tutored in liberalism and attracted by the material cultures of industrial economies. This is particularly true in the Philippines.

But early on, there were those who sensed that this unilinear vision of development was not the path for them. They chose to go their own way by self-reliance. India, Julius Nyerere of Tanzania, and Egypt under Abdul Gamal Nasser sought to rebuild their own path to growth from the wreckage of colonial despoliation.

By the early 1990s, after the Soviet meltdown, modernization had gained steam with the rise of neoliberalism and its refurbished language of market freedom.

The failure of command economies refueled distrust of state interventions and strengthened policy toward free trade, deregulation and other such formulaic measures. It is argued that while markets may be imperfect, it is still better than imperfect governments. This glosses over the asymmetry of an uneven playing field where structures are skewed toward the interests of oligopolies.

The rise of newly industrialized countries (NICs) posed a problem to both paradigms. Within 30 years, Taiwan and South Korea evolved from poor agrarian societies to members of the exclusive OECD countries. From 1965 to 1995, the average annual growth rate of per capita income in these countries was between 7 percent and 10 percent. This high performance was shared by Singapore and Hong Kong, followed by Southeast Asian countries like Malaysia, Thailand and Indonesia in the 1980s.

Note that the high levels of growth were achieved along with a fairly equal distribution of income, resulting in substantial poverty reduction. This was especially true with the first-generation NICs—Taiwan, South Korea and Singapore. Income distribution in the later cases of Malaysia and Thailand seems to have actually worsened, according to studies. Nevertheless, in a comparison of poverty alleviation, these high-performing economies are said to have outperformed all but one of the other countries for which poverty data are available. This “East Asian Miracle” was quickly appropriated as a model of what a capitalist economy could do.

However, dependentistas argued that the Asian tigers were an extreme case of dependent development. They are ultimately unsustainable, capitalized by sweatshops and cheap labor. They questioned whether this success could be attributed to the market, since there was a great deal of state intervention.

To this statist interpretation, the free marketers replied by shifting the focus from the old structuralism to a new form of economic institutionalism, citing these states’ exceptional management of the market. “Strong, insulated states, rule of law, well-defined property rights and competent bureaucracies were behind the success.”

Certainly, these were not just command economies. They mixed state initiatives and private investments. Savings and investments were unusually high, as compared to the Philippines’ chronic fiscal deficit and debt-fueled growth during the Marcos years.

These NICs used authoritarianism to force-pace growth, and social policy mechanisms like land reform were set up to spread its benefits. Wealth distribution improved alongside increases in per capita incomes. This is a stark contrast to the vaunted prosperity under the Marcos regime, which had not only one of the lowest growth rates but also the lowest reduction of poverty incidence.

Dr. Melba Padilla Maggay is a social anthropologist and consultant on the interface of culture, religion and development.