This article first appeared in Forum, The Edge Malaysia Weekly on June 19, 2017 - June 25, 2017

Even before the term “Washington Consensus” was popularised, it was already coming under great criticism despite the “counter-revolutions” against “development economics” and Keynesian economics associated with Thatcherism and Reaganomics.

At the World Bank, the Japanese executive director argued that the Washington Consensus menu of policy advice and conditionalities had resulted in the 1980s’ “lost decade” in Latin America and Africa. In contrast, the East Asian region had seen rapid growth and industrialisation.

At the Japanese government’s expense, the World Bank published The East Asian Miracle volume in 1993. But instead of recognising that the Washington Consensus was the problem, the volume contributed to the myth-making which ensured its continued influence for years thereafter.

The East Asian Miracle study’s eight high-performing Asian economies (HPAEs) consisted of Japan, Hong Kong and three first-generation newly industrialising economies (NIEs), namely South Korea, Taiwan and Singapore, and three second-generation South East Asian newly industrialising countries, namely Malaysia, Thailand and Indonesia. But excluded China.

It identified six types of state interventions in East Asia, only approving of four “functional” interventions, said to compensate for “market failures”, namely ensuring macroeconomic discipline and balances; providing physical and social infrastructure; raising savings and investment rates; and providing good governance.

Macroeconomic balance

Although no one recommends reckless macroeconomic policies, there is little consensus on what constitutes sound macroeconomic policy. Although most “neoliberal” economists insist on maintaining macroeconomic balances, they rarely agree on what this implies, while Keynesian economists favour counter-cyclical policies to address business cycles.

For instance, inflation was generally kept under 20% in the HPAEs, but certainly not always below 10%. Single-digit inflation was not a common and consistent policy priority of all HPAEs during their high growth periods. Hence, for example, Indonesia depreciated its currency regularly for many decades.

Similarly, the fiscal balance and the current account of the balance of payments were not always strictly maintained as the Bretton Woods institutions came to insist for the developing world. Many HPAEs ran large fiscal deficits to ensure high growth.

Since the 1980s, the Bank has increasingly urged private provision of physical infrastructure. Except in Hong Kong, a British colony until 1993, most physical infrastructure in East Asia was provided by governments until fairly recently. HPAEs privatising physical infrastructure provision became the basis for powerful private monopolies associated with “cronyism”, later blamed for the 1997/1998 Asian financial crisis.

Governments have been extremely important in providing social services in East Asia. But the Bank recommends universal and free primary education, and does not recommend subsidisation beyond the primary level, when students should bear the full costs. Hence, about half the young people of age in South Korea get tertiary education, while the shares are well over a quarter in other first-generation East Asian NIEs. If East Asian NIEs had listened to the Bank, their progress would have been slowed considerably.

For some, the region’s rapid growth and industrialisation were simply due to high investment and labour participation rates, rather than productivity gains: “perspiration rather than inspiration”. While conventional economic wisdom attributes high investment rates to high savings rates, savings rates have, in fact, followed — rather than determined — investment rates in East Asia.

After all, much of the high East Asian savings rates are due to firm savings, rather than just household savings. East Asian firms were generally able to enjoy high profits due to government interventions, subsidies, tax breaks and other incentives for favoured investments. 

Government policy also induced high reinvestment of these profits.

And contrary to the myth that East Asians are ‘culturally’ thrifty, unlike others, household savings in East Asia are not significantly higher than elsewhere, except for ‘forced savings’ — for employees’ retirement as mandated by law — and for children’s education.

Good governance

The notion of good governance is often used ambiguously, even tautologically. When the economy is doing well, it is attributed to good governance, and when it is not, governance is deemed to have been poor. Hence, governance does not really explain economic performance.

Instead, economist and academician Mushtaq Khan has shown that developed countries generally score well on good governance indicators while developing countries do not. Governance indicators do not clearly distinguish developing countries growing rapidly from those that do not.

In the late 1960s, economics Nobel laureate Gunnar Myrdal argued, in his three-volume Asian Drama that “strong government” was good for development. However, his notion of strong government is often misunderstood or misrepresented, and associated with despotic government rather than developmental governance — governance arrangements prioritising acceleration of development.

Academician Peter Evans’ notion of the “embedded autonomy” of the developmental state has been used to explain developmental governance. Autonomy from powerful and influential “vested interests”, “distributional coalitions” and “rent seekers” ensures that “special interest groups” do not usurp government for their own ends. Thus, Evans’ notion tries to explain conditions for developmental governance to better coordinate rapid progress.

Thus, the very policies that the World Bank endorsed as “market friendly” were actually quite distortive. Market outcomes had to be modified to support East Asia’s rapid growth and structural transformation. However, while some policies became less effective or even dysfunctional as circumstances changed, the Washington Consensus menu of economic liberalisation and privatisation largely undermined the region’s rapid progress.

Jomo Kwame Sundaram, a former economics professor and United Nations assistant secretary-general for Economic Development, received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007

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