Samuel Cohn: Global Social Trends

1. East Asia is known for some of the fastest rates of economic development in the world. Japan industrialized in an extremely short time. South Korea in the 1960’s and 1970’s had the fastest rate of economic growth recorded under capitalism. Korea held the record for speedy growth until the 1990’s and 2000’s. The new record holder is China.

 

2. The secret of rapid East Asian economic growth is the developmentalist state. The developmentalist state is a super-rational state with highly qualified technocrats and an amazing development plan. It tells industry what to do and backs up its instructions with cheap loans and other government freebies. In theory, governments ought to be less efficient than free markets. But these super-planners are so good at what they do that the plan works. And the plan DID work in Japan, Korea and China.

3. For a developmentalist state to work, you need many ingredients to come together. It is like baking a cake or making a souffle. Having one ingredient missing makes the whole concoction fall flat. You need

a. Super competent government bureaucrats AND

b. Complete political and regime stability so big business has to do what the government says AND

c. Complete independence from strong foreign powers such as the United States and Europe so that they can not distort your policies to favor their companies AND

d. No foreign ownership of companies so all the bosses are local and are subject to local laws AND

e. The government determines national investment patterns AND

f. Long term consistency in the plan so the grand long term design has time to work

 

Japan, Korea and China had all of this. The rest of Asia does not.

4.  Much of the rest of Asia is growing very rapidly. Thailand and Malaysia are noted success stories.

5. Thailand does not fit most of the characteristics of a developmentalist state.

a. There is substantial foreign ownership of firms. Thailand gets some negotiating power because foreign ownership is divided up among Japan, China, Taiwan and the U.S. But there are still a lot of foreigners.

b. Thailand does not have regime stability. Since World War II, Thailand has had many transitions between dictatorship and democracy, a number of nationwide popular uprisings, coups overthrowing dictators, and regime changes in elections. The policies of each successive government differ from those that preceded it.

c. The constant political instability means that government bureaucrats are in no position to give powerful businessmen orders. They may need the support of those businessmen in the next crisis.

d. Investment patterns in Thailand are largely determined by the private sector.

 

6. Malaysia does not fit most of the characteristics of a developmentalist state, although it is a better fit than Thailand.

a. There is massive foreign ownership of local companies.

b. Regimes have been stable but development plans have changed frequently.

c. Malaysia does very little government direction of investment.

    

Neither Thailand nor Malaysia approach Chinese rates of economic development. Yet both countries are economically robust, outperforming most economies in the Global South. What is their secret?

In the story of Aladdin and the Magic Lamp, at the two-thirds mark, Aladdin loses his lamp and the genie within it. All signs are that Aladdin is doomed.

Aladdin does just fine because he also has a ring that has a perfectly good genie. The Ring Genie gets him out of trouble, insures his prosperity and even gets him his original lamp back.

What is the Ring Genie for Thailand and Malaysia?

Natural Resources.

Canadian development economists have long argued that natural resources are the basis of economic growth. They argue this because that is precisely what happened in Canada. (Canada got rich by exporting first furs, then timber, then finally wheat. It made good money off the furs and timber, and amazing money off the wheat.) The argument that natural resources are the basis of all growth is known in the literature as “staples theory”.

Thailand is an agricultural paradise and has turned the processing of that agricultural bounty into a basis for development. It has a long historical tradition of selling rare forest products such as tropical woods and exotic animal goods to China. The cyclical nature of commodity prices induced Thailand to move from simple harvesting of natural products to industrial processing of those products. Lumbering engendered the rise of a furniture industry. Thailand is a major player in manufactured food. (Think growing coconuts and selling canned coconut milk). Tapioca flour is a major product. Thailand was an early innovator in commercial aquaculture, as well as the processing of fish into more advanced products such as fish meal and condiments. Thailand is geologically well endowed with precious stones. Thailand turned this endowment along with their supply of cheap labor into a world class finished jewelry business. The jewelry industry has expanded to the point where Thailand has to import most of the stones used to fill its orders.

 

Just as occurred in Canada, the success of the staple sector provided funding for moving into more traditional forms of manufacture. Thailand has a textile industry (as does nearly every country in Asia). Foreign buyers often subcontract with Thailand to make footwear, toys, automobile parts or more recently computer components.

With the exception of automobile parts, and computer components, most of these industries are low to medium tech. They are also relatively inexpensive, needing only modest investments of capital. With good natural resource endowments, cheap labor, and acceptable levels of education, Thailand did not need a full-fledged developmentalist state to build a manufacturing economy. It could just muddle through in a semi-free-market way with the industries it had.

Malaysia is an even more flagrant example of the benefits of natural resources. In the early twentieth century, when Malaya was a British colony, it was the world’s leading producer of rubber. Malaya was also a major producer of tin. The British colonial government ignored the industrial development of Malaya to concentrate on those two sectors – but those two sectors were extremely lucrative.

In 1910, oil was discovered in Malaya. Malaysia is a relatively minor producer, # 27 in the world today. But oil is oil, and oil is profitable.

With steady financing from its three main raw materials, the Malaysian economy has never lacked the capital it needed to grow. Malaysia has the same wood businesses and fish businesses Thailand has. Malaysia has moved with mixed results into steel-making, automobile manufacture and electronics.

Note that both Thailand and Malaysia have excellent health care sectors; residents of other countries fly to both nations for advanced procedures.

What is the bottom line? 

The most successful Asian economies have made use of a super-state. But one does not need the Genie of the Lamp of a full-fledged developmentalist state in order to achieve meaningful rates of economic growth. Thailand and Malaysia have used the Genie of the Ring, Natural Resources, to attain credible levels of economic development.

Canada used resources (Wheat). Australia used resources (Wool). The United States used resources (Cotton, then Wheat, then Oil). France used resources (French grapes are said to make good wine).

The Thailand and Malaysian examples are not oddball exceptions. They represent a pattern that is widespread throughout capitalism. There are a lot of countries out there that have rings with genies in them.