East Asia's Economic Success: Conflicting Perspectives (PDF)

Review: East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence Reviewed Work(s): Asia's Next Giant: South Korea and Late Industrialization by Alice Amsden: Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries by Stephan Haggard:...

Review: East Asia's Economic Success: Conflicting Perspectives, Partial Insights, Shaky Evidence Reviewed Work(s): Asia's Next Giant: South Korea and Late Industrialization by Alice Amsden: Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries by Stephan Haggard: Achieving Industrialization in East Asia by Helen Hughes Review by: Robert Wade Source: World Politics , Jan., 1992, Vol. 44, No. 2 (Jan., 1992), pp. 270-320 Published by: Cambridge University Press Stable URL: https://www.jstor.org/stable/2010449 JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Cambridge University Press is collaborating with JSTOR to digitize, preserve and extend access to World Politics This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  Review Article EAST ASIA'S ECONOMIC SUCCESS Conflicting Perspectives, Partial Insights, Shaky Evidence By ROBERT WADE* Alice Amsden. Asia's Next Giant: South Korea and Late Industrialization. New York: Oxford University Press, 1989, 379 pp. Stephan Haggard. Pathways from the Periphery: The Politics of Growth in the Newly Industrializing Countries. Ithaca, N.Y.: Cornell University Press, 1990, 276 pp. Helen Hughes, ed. Achieving Industrialization in East Asia. Cambridge: Cambridge University Press, 1988, 377 pp. Don't listen to "comparative advantage" advice. Whenever we wanted to do anything the advocates of comparative advantage said, "We don't have comparative advantage." In fact, we did everything we wanted, but whatever we did, we did well. -Governor Park Korea Central Bank' I do not believe that the firms could have organized a supercomputer project themselves because businesspeople did not believe in the feas- ibility and profitability of this kind of supercomputer in the near fu- ture. Our pressure or promotion was needed. -Senior MITI official2 THE NEOLIBERAL INTERPRETATION OF EAST ASIAN SUCCESS O VER the past two decades a literature big enough to fill a small airplane hangar has been produced on the causes of East Asian economic success. Of that which is economically literate the mainstream adopts what could be called a "neoliberal" interpretation. This says that * The author acknowledges Adrian Wood, Ronald Dore, Manfred Bienefeld, Olivia Cox- Fill, Julie Gorte, and Michael Lipton. The usual exoneration applies with more than usual force. I Quoted in Yoginder Alagh, "The NiEs and the Developing Asian and Pacific Region: A View from South Asia," Asian Development Review 7, no. 2 (1989), 116. I thank Devesh Kapur for this reference. 2 Cited in Martin Fransman, The Market and Beyond: Cooperation and Competition in In- formation Technology in the Japanese System (Cambridge: Cambridge University Press, 1990), 176. World Politics 44 (January 1992), 270-320 This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 271 the East Asian countries were more successful than others in terms of long-run growth because, in essence, they stuck more firmly to the pre- scriptions for short-run efficient resource allocation derived from the theorems of neoclassical economics. Neoliberal here refers to a subset of neoclassical economics. Its mem- bers believe that as a general rule the neoclassical prescriptions for short- run optimal resource allocation are also the core recipe for maximizing the rate of long-term growth. Other neoclassicals, by contrast, draw more of a distinction between the two kinds of analyses, introducing a more complex array of variables into growth issues than they use for questions of optimum resource allocation. Neoliberals are inclined to think that "getting the prices right" is both a necessary and a nearly sufficient condition for maximizing the rate of long-term growth ("get- ting" in the sense of letting prices find their right levels, and "right" in the sense of the relative prices established in freely operating domestic and international markets); other neoclassicals would say that it is no more than necessary. Relatedly, neoliberals believe that most market fail- ure is a result of government policies and that, even in those uncommon cases where market failure occurs for other reasons, the welfare costs of remedial government intervention can often be expected to be greater than the welfare gains. This weighting of probabilities is based on a rel- atively coherent theory of perverse government, as set out, for example, in the works of William Niskanen and David Colander.3 In the neoliberal view, growth is a natural or inherent property of capitalist economies. Governments have an important role in providing those "public goods," such as physical infrastructure, law enforcement, macroeconomic stability, and perhaps education, that are difficult to ar- range through private contracts. But beyond that they should not go, except in those rare cases of market failure referred to above. The prob- lem is that most governments have in fact gone well beyond these limits, 3Niskanen, Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971); and Colander, ed., Neoclassical Political Economy: The Analysis of Rent-seeking and DUP Activ- ities (Cambridge: Ballinger, 1984). For an academic example of neoliberal development eco- nomics, see Deepak Lal, The Poverty of Development Economics (London: IEA Hobart Pa- perback no. 16, 1983). For a policy paper based on neoliberal assumptions, see, e.g., Accelerated Development in Sub-saharan Africa: An Agenda for Action (Washington, D.C.: World Bank, 1981), commonly known as the Berg report. For an example of tendentious use of evidence in the neoliberal cause, see Michael Michaely et al., Liberalizing Foreign Trade: Lessons of Experience from Developing Countries, vols. 1-7 (Oxford: Blackwells, for the World Bank, 1991), esp. summary volume. For a critique of neoliberalism, see Christopher Col- clough, "Structuralism versus Neo-liberalism: An Introduction," in Colclough and James Manor, eds., States or Markets? Neo-liberalism and the Development Policy Debate (Oxford: Oxford University Press, 1991). For a critique of the study by Michaely et al., see David Evans, "Institutions, Sequencing, and Trade Policy Reform" (Geneva: UNCTAD, May 1991). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  272 WORLD POLITICS adopting policies that interfere, intentionally or not, with the free work- ing of markets. East Asian governments have stayed within these limits. Hence, East Asian economic success, which in turn resoundingly vindi- cates the general neoliberal prescriptions. Those who outline this argument as a preliminary to a critique often find themselves accused of setting up a straw man; no respected econo- mist is as simplistic as that, they are told. So it is important to establish that this is a fair short summary of the core neoliberal position, that it is what respected economists say. Enter Helen Hughes,4 editor of Achieving Industrialization in East Asia, definitely nobody's idea of a straw man. What policies have been critical to economic success in East Asia? she asks. Her answer: The conclusion is that "unshackling exports" (that most of the East Asian countries had themselves at first shackled) has been the key to success. How- ever, it is also clear that successful performance needs several [other] policy strands. Political stability and the rule of law are essential. Economic pol- icies apparently distorted prices less than was the case in most other devel- oping countries; macroeconomic management was relatively successful, all economic sectors, particularly agriculture,5 were developed, and public in- vestment in social and physical infrastructural facilities was productive. Where these economic conditions did not prevail, as in the Philippines, the economy faltered. Governments thus provided the environment for growth; but private enterprise, despite risk and uncertainty, made the in- vestments necessary and through exposure to international competition be- came efficient and profitable. (pp. xv-xvi) As for replication by poorer countries, "There seems little doubt that if other developing countries had followed similar economic policies they would also have grown more rapidly and would thus have been able to alleviate the poverty of their low income groups as well as avoiding high national indebtedness"6 (p. xvi). This is cast in the past tense-"if other 4Professor of economics and director of the National Center for Development Studies at the Australian National University, formerly a high-ranking official at the World Bank. 5 It is not clear what Hughes means at this point, but she presumably means that the government directed its attention to developing agriculture, among other sectors. But state policies toward agriculture in Korea and Taiwan differed greatly from standard market- based prescriptions. For an account of the highly dirigiste role of the state in developing Korean and Taiwanese agriculture, see Wade, "South Korea's Agricultural Development: The Myth of the Passive State," Pacific Viewpoint 24 (May 1983); idem, Irrigation and Agri- cultural Politics in South Korea (Boulder, Colo.: Westview Press, 1982); Mick Moore, "Eco- nomic Growth and the Rise of Civil Society: Agriculture in Taiwan and South Korea," in Gordon White, ed., The Developmental State in East Asia (London: Macmillan, 1988). 6 In addition to the chapters mentioned in this paper, the book includes papers by Chenery (on alternative views on industrialization in East Asia), Parry (on the role of foreign capital), Wade (on the role of government), Harberger (on growth, industrialization, and economic structure in East Asia and Latin America), Lal (on ideology and industrialization in India and East Asia), Hirono (on Japan as a model), Haggard (on the politics of industrialization This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 273 developing countries had followed"-but it is clearly intended to apply today. According to Hughes, then, economic development really is simple. The experience of East Asia confirms Adam Smith's insight of two hun- dred years ago that "little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and tolerable administration of justice; all the rest being brought about by the natural course of things."7 Conversely, governments of the less suc- cessful developing countries stand condemned for holding back the es- cape from poverty and high national indebtedness, among other ills, by interfering with markets and undersupplying public goods. James Riedel,8 also nobody's idea of a straw man, concludes his over- view essay in the Hughes volume on the same note: "The policy lessons that derive from the experiences of the East Asian countries are simple and clear-cut, and for that reason are all too readily ignored or dis- missed" (p. 38). The lessons are, above all, that neo-classical economic principles are alive and well, and working particu- larly effectively in the East Asian countries. Once public goods are pro- vided for9 and the most obvious distortions corrected, markets seem to do the job of allocating resources reasonably well, and certainly better than centralized decision-making. That is evident in East Asia, and in most other parts of the developing and industrial world, and is after all the main tenet of neo-classical economics. (p. 38) What evidence does Riedel provide? He readily admits that "govern- ments have been deeply involved in the economies of all the East Asian countries," including Hong Kong.'0 They have been "actively engaged in managing the system of industrial incentives." For example, "The level of protection in the Republic of Korea, apart from that faced by exporters, has remained high" (p. 32; emphasis added). One might have expected him to address the obvious next question. If the level of protec- tion on domestic sales has remained high (not further specified), why has Korea's economic performance been so good, given that the most central of all neoclassical development prescriptions concerns the benefits of nearly free trade? He agrees that "the area of government involvement in Korea and Taiwan), Mackie (on the politics of growth in ASEAN), O'Malley (on culture and industrialization). 7Smith, An Enquiry into the Nature and Causes of the Wealth of Nations, ed. E. Cannan (New York: Random House, 1937). 8 Professor of international economics at The Johns Hopkins University. 9 It is possible to define a public good to permit huge amounts of state activity. 10 But Riedel also says (Hughes, 35) that the Hong Kong government "has confined itself largely to minimal functions," from which we could infer that he intends the term "deeply involved" to cover involvement limited to "minimal [Smithian] functions." This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  274 WORLD POLITICS most difficult to evaluate is the management of the system of incentives which guide private economic activity." Nevertheless, he leaves the reader with the strong presumption that "governments' main contribu- tion to economic success in the East Asian countries was... principally in removing the obstacles to growth which they themselves put there in the first place," that East Asian governments made their task unnecessarily complicated by having to "anticipate and offset the market distortions that result from [their own] dirigiste strategies of industrialization" (p. 37; emphasis added). So while the fact of "government intervention" in East Asia is acknowledged, it is given scant analysis; the effects of inter- vention are asserted with virtually no basis in evidence. In particular, key challenges, such as the combination of Korea's admitted high protection with its admitted good performance, are ignored. The dirigiste strategies of industrialization are presented as mistakes that required further gov- ernment intervention to offset them (such as export subsidies to offset import protection); the idea that those dirigiste strategies might have helped industrialization is not even entertained. The chapter in Hughes by Seiji Nayall displays the same habits of thought. Naya, too, recognizes that "the incentive system applied in the NICS was, of course, not entirely free of bias. Some industries, particularly intermediate and engineering goods industries, enjoyed heavily pro- tected domestic markets at the expense of traditional consumer goods industries" (p. 84). But he gives no evidence for the magnitude of the incentive bias and says not a word about its effects on output. He merely repeats the conventional conclusion that "the better performance of the NICS with respect to economic growth, employment and income distri- bution compared to the resource-rich ASEAN countries can, to a large ex- tent, be related to a combination of more thorough and timely adoption of outward-looking, market-oriented policies and rapid improvements in human resource and institutional development" (p. 93). Neither he nor the other contributors to Achieving Industrialization in East Asia ex- amines issues having to do with technological change. As in most simple neoclassical writing, technology is assumed away, treated implicitly as an intermediate dependent variable that adjusts easily once the correct (trade-policy-derived) incentive structure is set in place in the economy as a whole.'2 11 Director of the Resource Systems Institute at the East-West Center, formerly the chief economist of the Asian Development Bank. 12 There is, however, a neoclassical economics of induced innovation, both technological and institutional, that is serious and interesting, though lacking (1) a supply side of science, (2) a theory of government-directed institutional and technological innovation (powered by things other than factor scarcities), and (3) a theory of institutional inertia. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 275 Much of what these neoliberal authors say about the causes of East Asian success is unexceptional. Hughes is right to highlight the role of private enterprise-although it has been a long time since any serious economist urged public enterprises as the main vehicle of development. She is right to imply that in many less developed countries public policies have made matters worse, and that these countries could have done bet- ter had their policies been more like East Asia's. And Riedel is quite right to say that markets allocate resources better than do central decision makers without markets (if these are the only choices). But this is pretty anodyne stuff. The problem is that these and other neoliberal economists shy away from subjecting their beliefs to serious empirical test, yet they are powerful enough to get those beliefs widely accepted, especially via international financial institutions like the IMF and the World Bank. EAST AsIA's SUCCESS? Let us first consider the starting point of the whole exercise, the claim that what is to be explained is the superiority of capitalist East Asia's economic performance compared with that of other "newly industrial- ized," "late developing," "intermediate," or "semiperipheral" countries. We concentrate on South Korea, which has received the bulk of the at- tention. Has Korea really been outstandingly successful? It is to be re- membered that as recently as the mid-1970s some prominent analysts on the Left were writing off Korea as "a house built on sand," a "tottering neo-colony," an export platform whose success would last only as long as wages were kept below those of competitors-this, in explicit contrast to the more viable communist economy of the North.'3 The analysts lam- basted the South with chapter titles like "GNP VS. the People" and "South Korean Society: The Deepening Nightmare." It is true that Korea's record contains plenty that could qualify a eu- logy of growth. Life expectancy at birth (sixty-nine years in 1986) is be- low Sri Lanka's, yet Sri Lanka's per capita income is only a sixth of Korea's; and Korea is in the bottom half of a life expectancy ranking of upper-middle-income countries.'4 The environment has become seri- ously polluted: Seoul's air is said to have one of the highest concentra- 13 Aidan Foster-Carter, "North Korea: Development and Self-reliance, a Critical Ap- praisal," Bulletin of Concerned Asian Scholars 9, no. 1 (1977). See also Gavin McCormack and John Gittings, eds., Crisis in Korea (Nottingham: Bertrand Russell Peace Foundation, for Spokesman books, 1977). For more discussion on interpretations of South Korean develop- ment, see Wade (fn. 5, 1982). 14 World Bank, World Development Report 1988 (Washington, D.C.: World Bank, 1988), Table 1. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  276 WORLD POLITICS tions of sulfur dioxide in the world.'5 Its traffic crawls at not much more than half the speed of traffic in New York or London. Much of the country's urban tap water is said to be unfit for drinking. There is some evidence that the application of exceedingly high levels of chemical fer- tilizer to meet government targets has harmed the chemical composition of the soil.'6 And in terms of civil and political rights no one holds up South Korea as a model, except in comparison with the North. In the 1970s it came about halfway down a ranking of civil and political rights in middle-income countries; in 1983, about two-thirds of the way down.'7 Surveillance by the secret police has been pervasive, and a for- midable coercive capacity remains in place. Independent labor unions have been repressed. The male-female industrial wage gap is, according to Amsden, about the biggest in the world, rivaled only by Japan's. What has happened to such values as civic responsibility, sacrifice, loyalty, and happiness I do not know. Moreover, Korea's economic importance is often exaggerated, as though it is on the verge of becoming another Japan or Germany (as in Amsden's title, Asia's Next Giant). In fact, it accounts for only 0.87 per- cent of world population (against Japan's 2.6 percent) and only 0.8 per- cent of world GDP (against Japan's 15.4 percent). In area it is a quarter the size of Japan and less than a quarter of California. Its per capita U.S. dollar income, expressed as a percentage of the average of the Northwest European and North American core, was only 8 percent in 1960, 13 per- cent in 1980, and 20 percent in 1988. These figures pale alongside Japan's: 23 percent in 1960, 76 percent in 1980, 118 percent in 1988.18 Korea is hardly a "miracle" in the Japanese context. And it remains, as in 1960, by far the poorest of the four East Asian newly industrialized countries (NICS): per capita income in 1986 was only two-thirds of Taiwan's, one- third of Hong Kong's, and less than one-fifth of Japan's; and it was one- quarter of Britain's and 14 percent of the U.S.'s. 9 This having been said, Korea is nevertheless outstandingly successful by at least four key indicators. The first is the gain in its relative eco- 15 Economist, "The Environment: A Survey," September 2, 1989, p. 7; Sonya Hepinstall, "A Smell of Success in the Battle against Pollution," Far Eastern Economic Review, July 18, 1989, p. 70. Cited in Waldon Bello and Stephanie Rosenfeld, "Dragons in Distress: The Crisis of the NICs," World Policy Journal (September 1990). 16 Wade (fn. 5, 1982), 103 and chap. 5. 17 Wade, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization (Princeton: Princeton University Press, 1990), 254. 18 Giovanni Arrighi, "World Income Inequalities and the Future of Socialism" (Bing- hampton: Braudel Center, State University of New York, 1990). 19 The figure was $2,372 in 1986, as against $17,475 for the U.S. and $8,870 for the U.K. See Wade (fn. 17), Table 2.1. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 277 nomic command over world resources, measured by the increase in per capita income expressed in U.S. dollars.20 In 1962 Korea ranked 99th in the world, and U.S. aid officials are said to have wondered audibly "whether [it] was to remain indefinitely a pensioner of the United States."2' A quarter century later, in 1986, it was 44th. In Giovanni Ar- righi and Jessica Drangel's large sample of countries, Korea is the only country to have jumped from their "periphery" to their "semiperiphery" between 1938-50 and 1975-83 (Taiwan would have been there, too, had it been included).22 Its performance was especially good over the 1980s. Whereas in 1976 its per capita income ($670) was less than Malaysia's and a bit more than half of Mexico's and Brazil's, by 1988 its figure of $3,600 was far above the figures for Malaysia, Mexico, and Brazil and about equal that for Portugal.23 Indeed, Korea (and Taiwan) stand out from virtually all other countries of Eastern Europe and the Third World for having reduced the income gap with the Northwest European and North American core between 1980 and 1988. Everywhere else the 20 Note that use of per capita dollar income to measure increasing or decreasing gaps between countries or regions is always problematic because of the complications introduced by changing real exchange rates (to say nothing about intracountry income distribution). To get a gap measure that more accurately reflects welfare, one should use purchasing power parity measures of income (now available in the tables in the World Bank's annual World Development Report) or qualify the dollar gap by changes in real exchange rates (and add terms of trade changes as well). This is especially important in the context of the trend reported later in this paragraph, of a dramatic widening of the gap between core countries and almost everywhere else during the 1980s. The polarization would be less, though still serious, if either of these adjustments were made. Adrian Wood finds that for the period 1965-83 about two-thirds of the increase in the per capita GNP gap between industrial market economies and low-income countries, measured in current U.S. dollars, was due to real changes in the exchange rate; for middle-income countries the gap would have narrowed but for real changes in the exchange rate. See Wood, "Global Trends in Real Exchange Rates, 1960-84," World Development 19, no. 4 (1991); and idem, "Puzzling Trends in Real Exchange Rates: A Preliminary Analysis" (Mimeo, Institute of Development Studies, Sussex Univer- sity, Brighton, 1986). Arrighi's important work is marred by insufficient attention to these matters; the same holds for my own use of per capita income comparisons (fn. 17). Anyone concerned to explain trends in the distribution of world wealth or income must address the question of the real income effects of the secular appreciation of the exchange rates of indus- trial countries relative to those of the rest of the world. Have such changes caused systematic changes in income distribution between or within countries or regions? 21 Edward Mason et al., The Economic and Social Modernization of the Republic of Korea (Cambridge: Harvard University Press, 1980), 181. This claim, that many observers in the 1950s and into the early 1960s considered Korea a "basket case," is often repeated, the better to highlight the subsequent success. I have not seen actual evidence from documentary or other sources. Larry Westphal says (in a personal communication) that Mason et al. drew on his own verbal report, based on U.S. documents that he saw but did not copy while employed as a foreign adviser in the Korean planning agency in the late 1960s. To my knowledge the "basket case" story rests on this. 22 Arrighi and J. Drangel, "The Stratification of the World-Economy: An Exploration of the Semiperipheral Zone," Review 10 (Summer 1986). 23 World Bank, World Development Report (Washington, D.C.: World Bank, 1978, 1990), Table 1. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  278 WORLD POLITICS dollar gap has widened calamitously.24 Brazil's average income, for ex- ample, rose from 12 percent of the core's in 1960 to 18 percent in 1980, only to drop like a stone back to 12 percent by 1988. This is the Brazilian "miracle."25 The second indicator of Korea's success is trade performance: in 1962 Korea was the 40th biggest exporter of manufactures to the U.S.; in 1986, the fifth. The third indicator is industrial transformation. This does not refer to the rapid rise of industry in total GNP, for by the industry/GNP ratio even Eastern Europe does quite well, thanks partly to the odd way these things are measured. (In a highly protected economy the domestic prices at which industrial products are measured are not world market prices, so the less efficient a sector is in world prices the greater its apparent contribution to GNP.) Rather, the indicator of industrial transformation refers to the rise of skill-intensive, high-value-added industries that are competitive at world market standards of cost and product specifications. The most spectacular Korean case is the semiconductor industry, maker of the leading input of the new technological paradigm.26 Korea is the world's third biggest producer, after Japan and the U.S., of advanced semiconductor memory chips. Most of the chips are produced by Ko- rean-owned firms, which are drafting closely behind the world leaders, well ahead of all European semiconductor makers. Several other Korean industries-notably, computers, automobiles, steel, and construction- are also having a sizable impact on the world economy.27 The final indicator is the removal of poverty, the elimination of severe economic hardship, the expansion of positive rights.28 Consider the num- ber of hours of work it takes an adult male unskilled city laborer to earn the equivalent of one hundred kilograms of the basic food grain. (A com- posite measure for food plus shelter, qualified by rate of unemployment, would be much more accurate, but data are not available.) Fernand Braudel presents this figure for sites in Western Europe between 1400 and 1950, using wheat. In the fifteenth century and first half of the six- teenth the figure was below 100 hours; it then rose and remained above 100 hours until 1880; by 1920-30 in France it had fallen to between 40 and 60 hours.29 I have made the calculation for Taiwan, not for Korea, 24 South Asia is an exception. Its average income in relation to the core fell only slightly, from a dismal 2 percent in 1980 to 1.8 percent in 1988. But see fn. 20. 25 Arrighi (fn. 18). 26 See Giovanni Dosi, ed., Technical Change and Economic Theory (London: Pinter, 1988). 27 For a brief account of Korea's automobile industry, see Wade (fn. 17), 309-12; on steel, see Amsden, chap. 12. 28 C. Fried, Right and Wrong (Cambridge: Harvard University Press, 1978). 29 Braudel, Civilization and Capitalism, Fifteenth-Eighteenth Century, vol. 1, The Structures This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 279 but the Korean trend would be similar. In Taiwan during the 1950s the figure was in the range of 150-200 hours (as in France from 1700 to 1850). By the early 1980s it had fallen to 40-60 hours, about the same as in France between 1920 and 1930.30 In Korea it was probably more like 60-80 hours by the early 1980s, like France at the turn of the century. Having lived in an Indian village where a sizable proportion of the pop- ulation has to put in 230 hours,3' and in the United States where the figure for those earning the minimum wage was about 15 hours in the mid-1980s (my own figure was half an hour), I give this huge reduction in hardship a big weight in any notion of progress. Taking these several criteria together, I have no qualms about accept- ing the mainstream view that the question is, indeed, to explain why Korea and the other Asian NICS have been more successful than other poor countries in the postwar era.32 As for what those critics on the Left said in the mid 1970s, it is hard to think of a clearer refutation in the whole of social science.33 WHAT THE NEOLIBERAL EXPLANATION IGNORES To say that the Left critics got it wrong is not to say that the neoliberals got it right. The neoliberals have tended either to ignore contrary evi- dence or to acknowledge it without thought for its theoretical implica- of Everyday Life (London: Collins, 1981), 135, chart 15. Note that the chart excludes the seventeenth century. And note the mistake in the vertical scale: the line marked 0 should be 10, the line marked 10 should be 20, the line marked 20 should be 30, and so on, in logarith- mic order (using units of ten hours). Due to this mistake, I mistakenly reported the results in earlier publications, saying that real wages "rarely" fell so low in western Europe as to cross the 200-hour line. In fact, between 1700 and 1860 about one-third of the observations are at or above 200 hours, and between 1560 and 1600, about two-thirds. This is not rare. See Wade, Village Republics: Economic Conditions of Collective Action in South India (Cambridge: Cambridge University Press, 1988), 35; idem, "What Can Economics Learn from East Asian Success?" Annals 505 (1989); and idem (fn. 17), 39. 30 Wade (fn. 17), Table 2.4 and p. 39. The figure for New Delhi in early 1991 was 140-67 hours (Rs. 25-30 per day, 7 hours a day, rice at Rs. 6/kg.); for Cape Town at the same time, about 50 hours (but there commuting costs would be unusually high). The difference high- lights South Africa's industrialization problem. 31 Wade (fn. 29, 1988), 35. 32 North Korea may show a similar reduction in this indicator of hardship, via central planning, and may have eliminated poverty in food and savings earlier. If so, these are im- portant achievements. But the capacity of the North Korean economy to provide rising real wages and a diversified consumption bundle is much lower than that of South Korea; its political and civil rights are also far more attenuated, and the conditions of work in agricul- ture and industry probably are far worse. 33 Another good case is Pahl and Winkler's 1974 prediction that a system of corporatism would be established in Britain "by 1980." See R. Pahl and J. Winkler, "The Coming Cor- poratism," New Society 10 (October 1974). It would be interesting to hear from Gittings, McCormack, Foster-Carter, and the others why they think their predictions for South Korea and North Korea turned out to be so wrong. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  280 WORLD POLITICS tions. This selective inattention to data that would upset the approved way of interpreting things and the use of repetition as a chief weapon of argument are two strong signs that the neoliberal paradigm is in a de- generative stage, taking on attributes of a disciplined delusional system. Like much Marxist writing of the 1970s, in fact.34 And like classical eco- nomics during the Great Depression, before Keynes's theoretical break- through. Where are the responses to David Evans's finding that the height of protection and static efficiency are much less important for economic performance than the exchange rate and the wage rate?35 Or to Colin Bradford's finding that "on average there is not any association between outward versus inward orientation and a general measure of price dis- tortion in the two key variables (the exchange rate and the real interest rate)"?36 Or to Hans Singer's finding that per capita income is a better predictor of economic performance in a large cross section of countries than is inward or outward orientation?37 Where are the detailed exami- nations of the trade regimes of Korea, Taiwan, and especially pre-1970 Japan-of their inner workings and their effects on both the structure of incentives and output?38 Where are the detailed neoliberal analyses of the vigorous government efforts to expand national technological capacity in East Asia--efforts that are intended to be selective between industries and that therefore conflict with the injunction against "target- Ing"? It is not just that challenges from other scholars are often ignored. It is also that neoliberal interpreters of East Asia are prone to avert their 34 By way of example, think of the scholasticism of much Marxist writing on a theory of the state. See Martin Carnoy, The State and Political Theory (Princeton: Princeton University Press, 1984). 35 Evans, Comparative Advantage and Growth: Trade and Development in Theory and Practice (Hemmel Hempstead: Harvester-Wheatsheaf, 1989), sec. 9.6. 36 Bradford, "The NICs: Confronting U.S. 'Autonomy,' " in R. Fienberg and V. Kallab, eds., Adjustment Crisis in the Third World (New Brunswick, N.J.: Transaction Books, 1984), 125. 37 Hans Singer, "The World Development Report 1987 on the Blessings of 'Outward Ori- entation': A Necessary Correction," Journal of Development Studies 24, no. 2 (1988). 38 Why has Jagdish Bhagwati, one of the most creative of trade theorists, not done more than an elliptical pirouette around the East Asian cases? See Bhagwati, Protectionism (Cam- bridge: MIT Press, 1988). It is curious that so few of those who believe passionately in free trade have looked carefully at Japan's pre-1970 trade regime, which would seem to be a critical case. For further discussion, see Wade (fn. 17), chaps. 3, 5, 10; idem, "How to Manage Trade: Taiwan as a Challenge to Economic" (forthcoming); and idem, "The Rise of East Asian Trading States: How They Managed Their Trade" (Mimeo, Trade Policy Division, World Bank, Washington, D.C., 1988). The latter was written while I worked in the same division of the bank that prepared the bank's policy paper on trade reform. The paper de- fined issues in import reform as being about how to lift restrictions; it ignored issues of how to manage imports better and said virtually nothing about the East Asian experience of import management. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 281 eyes from contrary data even when it stares them in the face. So we find that Ian Little,39 as part of his general argument that Korea succeeded in large part because the government allowed the "right" prices to prevail, cites the fact that the government set high real interest rates through the banking system, as is "right" in a capital-scarce economy. He relates how these high rates stimulated savings, which in turn permitted high levels of (labor-intensive) investment. And at that point in the discussion of the capital market, he stops. But markets, like scissors, have two sides: a supply side and a demand side. Had Little moved from the supply side of the capital market to the demand side, he would have had to confront the way that credit was being allocated in Korea. At that point the de- tailed involvement of the government in credit allocation would have been hard to ignore. The government used "liberal" methods (high ad- ministered interest rates, which are liberal only in the sense of corre- sponding more closely to scarcity value) to get savings into the banking system; it then allocated those savings by "nonliberal" methods, being able to do so by virtue of the fact (not mentioned by Little) that it owned the banks. Its involvement became all the more intense after the early 1970s, when the real interest rate on a large share of bank loans was made very low. For (another detail Little fails to note in a paper written nearly ten years later) the so-called liberal high real interest rate policy prevailed for only a short time, from about 1967 to 1971.40 The literature on Taiwan resorts to the same device. In an overview of how Taiwan "did it," Walter Galenson says, "The government made a major contribution toward the facilitation of capital formation by keep- ing its expenditure down.... Taxes were maintained at a relatively low level, averaging about 14 to 15 percent of the GNP."4' Although Galenson wrote these words in 1981, it had last been true in 1967; in the interim taxes were always higher. In another overview of Taiwan, Little writes that "public industry has until recently been of rapidly declining quan- titative importance."42 But he neglects to mention that from the early 39 Little formerly held a chair in economics at Oxford University. 40 Little, "The Experience and Causes of Rapid Labour-Intensive Development in Korea, Taiwan Province, Hong Kong and Singapore; and the Possibilities of Emulation," in Eddy Lee, ed., Export-led Industrialization and Development (Geneva: Asian Employment Pro- gramme, International Labour Organization, 1981). For the role of the Korean government in credit allocation, see Leroy Jones and I1 SaKong, Government, Business and Entrepreneurship in Economic Development: The Korean Case (Cambridge: Harvard University Press, 1980). 41 Galenson, "How to Develop Successfully: The Taiwan Model," in Galenson, Experi- ences and Lessons of Economic Development in Taiwan (Taipei: Institute of Economics, Aca- demia Sinica, 1982), 80. Galenson retired as professor of economics at Cornell University. 42 Little, "An Economic Reconnaissance," in Walter Galenson, ed., Economic Growth and Structural Change in Taiwan: The Post-war Experience of the Republic of China (Ithaca, N.Y.: Cornell University Press, 1979). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  282 WORLD POLITICS 1950s onward Taiwan has had one of the biggest public enterprise sectors outside the communist bloc and sub-Saharan Africa.43 Both Galenson and Little ignore or downplay facts that would obstruct the neat fit be- tween Taiwan and neoclassical precepts.44 To see the same practice outside the East Asian context, consider what Anne Krueger offers as "suggestive evidence," in her phrase, about the effects of government intervention in developing countries, a subject of much interest to political scientists. "There is no evidence that living standards fell in the now-developing countries prior to 1950, a time which many observers associate with a period of laissez-faire," she re- ports. "In many African countries, however, living standards have been falling-in some cases precipitously-since. The latter period has been one of active government intervention, and there is no other obvious reason for the difference in performance in the two periods."45 Note sev- eral things about this argument. First, for India (which contained more people than Africa and Latin America combined) there is evidence that per capita income fell in the several decades prior to independence;46 and for Africa there is simply no good evidence one way or the other before 1950. Second, colonial governments often went well beyond laissez-faire: in West Africa marketing boards came to be highly extractive organi- zations;47 in India the British colonial government used protection against non-U.K. imports to stimulate industry and in this and other ways could not possibly be described as laissez-faire. Third, most non- 43 Wade (fn. 17), Table 6.2. 44 The recent survey of development economics by Gustav Ranis and Theodore Schultz provides many more examples of how the neoclassical confidence is based on selective inat- tention-even when the data are in the same volume or the same paper; see Ranis and Schultz, eds., The State of Development Economics: Progress and Perspectives (Oxford: Black- well, 1988). The editors assert that "outward-looking [less developed countries] have achieved relatively rapid growth... and have withstood [shocks] better." In the same vol- ume T. N. Srinivasan destroys the evidence for the second part of the proposition; and Ron- ald Findlay finds the first part "incontrovertible" (p. 79) but then shows (pp. 90-93) that the normal sequence, in Germany, Japan, Britain, and Korea, involved not trade neutrality or "outward-lookingness" but heavily interventionist mercantilism, first protecting import sub- stitutes and then promoting exports. See Michael Lipton's review, EconomicJournal (Septem- ber 1989). 45 Krueger, "Government Failures in Development," Journal of Economic Perspectives 4, no. 3 (1990), 12. Krueger was the seniormost economist and the vice president for research at the World Bank between 1982 and 1986. 46 There is not much doubt that India's food grain availability per person per year de- clined; but there is some dispute as to whether nonagricultural output increased fast enough to prevent per capita income from falling. Heston's calculations show stagnation in per capita income between 1911 and 1946, but most others show a decline. A. Heston, "National In- come," in Dharma Kumar, ed., The Cambridge Economic History of India, vol. 2 (Cambridg Cambridge University Press, 1983). 47 Peter Bauer, West African Trade (1954; reprint, London: Routledge and Keegan Paul, 1963). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 283 African economies, including the most successful cases, have grown subse- quently under more interventionist regimes. Indeed, most sub-Saharan African economies grew between 1950 and 1970, even in per capita terms, and many grew faster in the (postindependence, more interven- tionist) 1960s than in the 1950s. Fourth, to say that there is "no obvious reason" for the difference in Africa's performance between the two pe- riods other than greater government intervention in the second is to ig- nore several important points. (1) "External" factors have impacted es- pecially adversely on African economies, for reasons that do not reduce to the characteristics of African governments. (2) At independence Af- rican economies suffered a major loss of skilled manpower from an al- ready tiny base. (3) The problem is less "too much" government inter- vention in Africa than that governments are too weakly institutionalized to maintain centralization and control-a combination that quickens the use of "primordial" connections to capture state resources and evade state demands.48 In short, this evidence is shoddy, not suggestive; or if suggestive, then only in the sense of the pornographer.49 My own evidence, illustrated above, suggests that neoliberal econo- mists have been pioneering a whole new principle of causal inference- that to explain superior economic performance one may either simply ignore everything that is not in line with neoliberal prescriptions or assert that it hindered what would otherwise have been an even better perfor- mance. When this principle is combined with a wider professional pro- pensity to treat "power" as a third-rank concept (the new 4,000-page Palgrave Dictionary of Economics has no entry for "power"),50 the result 48 Zambia at independence in 1964 had all of twelve hundred high school graduates. In Botswana in 1965, the year before independence, thirteen students passed their 0-level ex- ams. Most sub-Sharan countries at independence were taken over by governments whose leadership group was comprised mainly of people with a primary school education or less. Compare East Asia; see Wade (fn. 17), 64, 190, 217-25. One should (as Krueger does not) link the question of the appropriate types and amounts of government intervention to the educational competence of the government. On the significance for Africa's growth of its debt burden, falling terms of trade, unstable exchange rates, falling aid, and agricultural policies and textile protection in the West, see, e.g., Adrian Hewitt and Hans Singer, "How to Foster Diversification, Not Dependence," Africa Recovery 4 (October-December 1990), 36- 39; and Gerald K. Helleiner, "Structural Adjustment and Long-Term Development in Sub- saharan Africa" (Paper for workshop on Alternative Development Strategies in Africa, Ox- ford, December 11-13, 1989); and idem, Sub-saharan Africa: From Crisis to Sustainable Growth (Washington D.C.: World Bank, 1989). On the "weak government" hypothesis, see Joel Migdal, Strong Societies and Weak States: State-Society Relations and State Capabilities in the Third World (Princeton: Princeton University Press, 1986); the book is good on the "state" side but mischaracterizes African "society" as "strong." 49 This is not to diminish Krueger's important contributions to economic knowledge, es- pecially in the areas of rent-seeking behavior and trade policy. 50 Robert Heilbroner, "Economics without Power," New York Review of Books, March 3, 1988. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  284 WORLD POLITTCS is an aversion to serious investigation of the role of the state in economic development. Assertions like "success has been achieved [in Korea] de- spite intervention" are put forth without a shred of evidence.5" In this way the circle is closed, the paradigm is protected, and minds can be set at rest. Although I have been talking of neoliberal development economics, I do not mean to imply that these strictures apply only to a small subsect of neoclassical economics. Most Anglo-American development econo- mists have a mistaken understanding of Korea and Taiwan as "low- intervention" countries, especially with reference to trade, and they rely on this mistaken understanding to validate a low-intervention prescrip- tion elsewhere. But because the neoliberals are both more extreme and more uniform than other neoclassicals, they make a sharper target; they also tend to be opinion leaders in the development field, which makes it doubly important to subject their arguments to scrutiny.52 Neoliberals say that growth is easy, provided governments do not act to obstruct the natural growth-inducing processes of a capitalist econ- 51 Deepak Lal, The Poverty of Development Economics (London: IEA, Hobart Paperback 16, 1983), 46. Lal is an exponent of what I call the Ptolemaic fallacy; see Wade (fn. 17), 348- 49. 52 Ross Levine and David Renelt have recently provided more evidence of insufficient standards of proof, a problem that applies not only to the work of the neoliberals; see Levine and Renelt, "A Sensitivity Analysis of Cross-Country Growth Regressions" (Mimeo, Mac- roeconomic Adjustment and Growth Division, World Bank, November 29, 1990). They ex- amine the vast literature on cross-country regressions of long-run growth against various policy variables, with a view to determining which conclusions are robust and which are fragile. Robust conclusions are those that survive small changes in the right-hand (i.e., inde- pendent) variables. "We find that there is not a strong independent relationship between almost every existing policy indicator and growth.... [T]he broad array of fiscal expenditure variables, monetary policy indicators, political stability indexes, human capital and fertility measures considered by the profession are not robustly correlated with growth; and newer indicators that we have assembled to capture exchange rate, tax, and fiscal expenditure poli- cies are also not robustly correlated with growth" (p. 2). The one variable that could not be shaken off by fairly small changes in the specification of the independent variables was in- vestment: "We found a positive and robust correlation between average growth rates and the average share of investment in GDP" (p. 26). I want to draw special attention to their findings on trade and price distortions, the subject that occupies the core of neoclassical development economics: "When controlling for the share of investment in GDP, we could not find a robust independent relationship between any trade or international price distortion indicator and growth" (pp. 19-20). These findings suggest that economists of all stripes ought to be a little more modest than usual in claiming to understand development. But note that the Levine and Renelt findings are based on an unusual notion of robustness; in their work robustness relates to which variables are included or excluded. More familiar notions of robustness relate to changes in sample size, time period, or functional form. Unrobustness in their sense is less significant than unrobustness in the other senses, because according to their criterion any hypothesized growth mechanism that depends essentially on several variables is likely to be found unrobust. For example, their finding that human capital variables are unrobust is unsurprising if one considers that human capital and physical capital are comple- mentary, such that a high rate of human capital formation is unlikely to be an important cause of growth in the absence of fairly rapid physical capital accumulation. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 285 omy. We come now to two recent books about the newly industrialized, late-industrializing, or semiperipheral economies, books that have in common an emphasis on the difficulties-the unnaturalness-of growth. ALICE AMSDEN'S INTERPRETATION OF SOUTH KOREA'S SUCCESS Amsden builds an interpretation of East Asian, specifically Korean, eco- nomic success on several kinds of stylized facts that run counter to neo- classical theory and that are ignored or treated with indifference in neo- liberal accounts of Korea. They include the following. (1) The Korean state has acted as entrepreneur, banker, and shaper of the industrial structure. (2) It has deliberately distorted the price structure by way of, among other things, subsidies, protection, price controls, and restrictions on incoming and outgoing movements of finance and direct investment. By means of these distortions, it has generated an industrial structure different from what unguided entrepreneurs would have produced on their own. (3) The actions of the Korean state have been complemented by those of large, diversified business groups that have come to occupy a dominant position in the economy-so much so that the combined sales of the top ten rose from 15 percent of GNP in 1974 to (this is one of the most amazing of all Korean statistics) 67 percent in 1984 (Amsden, Table 5.1).53 With firms of this size and level of diversification, a rather high proportion of transactions in the Korean economy are intrafirm, less sub- ject to the discipline of the market than to the discipline of managerial hierarchies. (4) The state not only actively promotes the growth of the business groups, it also disciplines their use of subsidies and other sup- ports, rewarding those who use subsidies "well" with further help and withdrawing support from those who do not. Its relations with them are anything but the arm's-length relations between government and firms sanctioned by neoclassical theory. These four facts suggest an economy in which government and firms depart quite substantially from the neo- classical model of a successful industrializer. There is, however, another striking fact about the Korean experience that is more consistent with neoclassical precepts: whereas the govern- ment greatly restricted and channeled competition in the domestic mar- ket, it also strongly encouraged firms to export, thereby subjecting them to intense competition in foreign markets. Success in export markets came to be the main criterion of good use of subsidies (and hence of distribution of further subsidies); and neoclassical theory does suggest 53 Sales, of course, are not equal to value added. The true share of these companies in GDP (total value added) is probably one-third to one-half of this 67 percent. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  286 WORLD POLITICS that that is quite a good proxy for efficient use of resources. (To be more exact, neoclassical theory says that success in export markets is a good proxy for efficiency in resource use provided there is zero bias in incen- tives to sell abroad or at home; by contrast, a more classical theory of long-run growth might sanction the same criterion even in conditions of net subsidies to exports.) LATE INDUSTRIALIZATION Amsden suggests that these and certain other facts about Korea can be explained as a response to the conditions of "late industrialization." These conditions refer to the handicaps and advantages experienced by market-based economies that initiate industrialization when technologi- cally more advanced firms already exist in other countries. The firms of the late industrializer then have to compete with those established firms that can introduce new technologies fast enough to capture "technology rents" and thereby earn higher profits. This does, of course, allow the late industrializer to acquire, or "borrow," the more codified elements of a given technology without having to develop them for itself. But there is generally a great gap between buying or stealing the codified elements and mastering the technology in production. The lower labor costs of the late industrializer offer another partial advantage in such competition. But since its labor force is much less skilled, the lower labor costs may not compensate for differences in productivity. Late industrializers all tend to construct a similar set of institutions to respond to the handicaps and advantages of lateness. In particular, they tend to develop an entre- preneurial state and diversified business groups. THE STATE The state offers subsidies and protection ("subsidies" for short) both to offset the disadvantages faced by national firms in international compe- tition and to move the present industrial structure toward one with higher value-added, more technologically dynamic activities. It does this faster and perhaps along a different path than the free market might have done on its own. So, for example, as recently as the late 1960s the cost position of Ko- rean manufacturers of cotton textiles was less favorable than that of their Japanese counterparts, despite lower wages. To enter export markets on a sizable scale the Korean industry needed subsidies. As Amsden puts it, "Subsidies in Korea were necessary not because of 'distortions' [in partic- ular, the exchange rate was not much distorted] but because the Koreans could not, initially, compete against the Japanese, even in industries such This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 287 as cotton spinning and weaving in which the least developed, most labor- intensive countries supposedly have a comparative advantage" (p. 68). After several years of production experience, however, the cotton textile industry was competitive enough to be weaned off subsidies-a striking fact, in light of experiences elsewhere. Indeed, (unsubsidized) profit rates in cotton textiles and other light industry came to be substantially higher than those in capital-intensive industries, yet from the mid-1970s it was the capital-intensive industries that had the highest rate of export growth. "One may infer from all this," says Amsden, that as the capital-intensive industries showed themselves increasingly capable of exporting, they became more attractive for the government to promote. Their long gestation periods and relatively low profitability through adoles- cence, however, rendered them relatively less desirable investments to the private firm. The initiative to diversify, therefore, fell to the state. (p. 88 and Tables 4.1, 4.2; emphasis added) And she shows further that the leading firms in light industry (notably textiles) did not grow into diversified business groups and did not lead the way into the new heavy and chemical industries, as one might expect from the conventional dynamics of comparative advantage. Instead, new firms with strong state support undertook the development of the heavy and chemical industry. According to Amsden, then, Korea's entry into heavy and chemical industries and the emergence of cotton textiles as the leading export industry together provide graphic evidence of the need for state dirigisme in conditions of late industrialization. BUSINESS GROUPS The business groups of the late industrializer diversify into many differ- ent, often unrelated industries in order to spread risks and allow cross- subsidizing of entry into a varied portfolio of necessarily low-end prod- ucts. They also focus more on the shop-floor level of organization-that is, on the production process itself-because that is where borrowed technology is first made operational and later optimized. This contrasts with more advanced firms, which tend to compete on the basis of inno- vation instead. The strategic focus in those cases is less on the shop floor than on the corporate headquarters, especially the R and D complex, where the major profit-making opportunities are made (and also, one should add, the financial asset management complex, the source of much profitable "paper entrepreneurship"). Amsden makes the point in the form of a hypothesis: This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  288 WORLD POLITICS Leading firms in late industrializing countries, if they are to penetrate world markets, must adopt unusually pro-active production and opera- tions management policies. By pro-active we mean policies that assign high-quality managers to the shopfloor and inspire initiative on the part of such managers to develop the skills of the work force and to improve process performance. Otherwise the gap in productivity levels with leading firms in advanced countries will not be bridged while the advantage in wage levels narrows. (p. 160) A disproportionate number of managers will have credentials in engi- neering, as distinct from a background in generic management or fi- nance. What matters, then, is not so much the newness of an industrialization process (as in "newly industrized country"), as its lateness as compared with others. Amsden argues that the general properties of an industrialization process based on learning, or borrowing, technology are entirely different from those of an industrial- ization process based on the generation of new products or processes-the hallmark of the First and Second Industrial Revolutions. Thus, the late acquisition of international competitiveness has given rise to certain com- mon tendencies in otherwise diverse countries-Japan, Korea, Taiwan, Turkey, Brazil and Mexico.54 (Elsewhere she adds India, p. v).55 These common tendencies concern the role of the state, the role of the market, and the structure and competitive strategies of business firms. Insofar as there is a single symbol that cap- tures the difference, it is the subsidy. The subsidy serves as a symbol of late industrialization.... The First Industrial Revolution was built on laissez-faire, the Second on infant in- dustry protection. In late industrialization, the foundation is the subsidy- which includes both protection and financial incentives. The allocation of subsidies has rendered the government not merely a banker, as Ger- schenkron (1962) conceived it, but an entrepreneur, using the subsidy to decide what, when, and how much to produce. The subsidy has also changed the process whereby relative prices are determined. (pp. 143-44) WHY DOEs KOREA Do BETTER? Why has Korea, together with Japan and Taiwan, done so much better than the other late industrializers? Because, in a word, the institutions of late industrialization have functioned more effectively there than else- where. "It may be said that growth has been faster in Korea not because markets have been allowed to operate more freely but because the subsidiza- 54 Alice Amsden, "Third World Industrialization: 'Global Fordism' or a New Model?" New Left Review 182 (1990), 14-15. 55 Also ibid., 5. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 289 tion process has been qualitatively super tional in most other cases" (Amsden, 145; emphasis added). By "recipro- cal," Amsden means that in direct exchange for subsidies of various kinds, the state exacted certain performance standards from firms, no- tably in the field of exports. Most other late industrializers allocated sub- sidies without imposing any quid pro quo: "Where Korea differsfrom most other late industrializing countries is in the discipline its state exercises over private firms" (p. 14; emphasis added). Generalizing, Amsden puts forth an audacious proposition: "The more reciprocity that characterizes state- firm relations in these countries, the higher the speed of economic growth" (p. 146). LEARNING AND INNOVATION This argument about Korean and Third World industrialization in gen- eral, says Amsden, differs not only from the neoclassical, but also from the Schumpeterian, approach. Schumpeter recognized that by his time market structures had become less competitive than was consistent with the neoclassical paradigm. The new basis of competition-the new source of discipline over firm behavior-came from the creative gales of technological discoveries that uprooted old monopolies and raised pro- ductivity, not steadily but in spurts. Late industrialization, however, in- volves not innovation but "learning," that is, borrowing, adapting, and improving upon foreign designs. The new source of discipline over firm behavior is the state itself, a factor to which the entrepreneurially and technologically driven Schumpeterian model had understandably paid little attention. Late industrialization, much more than early industrial- ization, has been a political process, shaped by the exigencies of master- ing (or learning) already existing technologies. Some commentators have taken the Japanese case as confirmation of the usefulness of the Schum- peterian approach, as in the Schmiegelows' statement that "the evidence of massive penetration of global markets by Japanese Schumpeterian en- trepreneurs, of their competitive edge, and of their growing leadership in innovation is so unmistakable, and there is so little that mainstream economics can offer to explain it, that the Austrian [or Schumpeterian] approach enjoys prime facie validity in explaining Japan's impact on the structure of the world economy."56 Amsden would presumably reply that the Schumpeterian approach is not the only alternative to mainstream economics and that hers does a better job of explaining the Japanese case prior to the early 1970s; she would probably agree with the Schmiege- 56 H. Schmiegelow and M. Schmiegelow, "How Japan Affects the International System," International Organization 44, no. 4 (1990). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  290 WORLD POLITICS lows that the Schumpeterian better handles the subsequent era, when Japanese firms compete more than before on the basis of innovation and when the state has scaled back its "leadership" role in industrial trans- formation.57 GLOBAL FORDISM Her approach also differs from world systems interpretations that pre- sent industrialization at the "periphery" (including Korea) as the reflex of problems of capital accumulation in the "core." In Alain Lipietz's formulation,58 for example, industry in the Third World arises as capital from the core extends the "scale" of its operations in search of new mar- kets and cheap labor. Once installed by means of "primitive Taylorist" modes of labor control, it may then evolve into "peripheral Fordism" when growth in the home market for manufactured goods plays a large part in the national "regime of accumulation," as has been true in Korea since about 1973. At this point the tendency toward underconsump- tion-production exceeding the capacity to consume-becomes a stum- bling block to further economic growth, as it is in the core. Amsden answers this sort of argument with several damaging facts about Korea. (1) Even after 1973 Korean growth has not been centered on the home market. (2) Korean wages have grown faster than in any other previous or contemporary industrialization, without undermining competitive- ness, sustained by even faster productivity growth. (3) Work in the large business firms has not been managed in a Taylorist, top-down fashion. Technical ignorance at the highest managerial level, and inexperience on the part of the workforce, have made it impossible for borrowed technol- ogy to be optimized through a top-down, Taylorist approach to productiv- ity and quality improvements. Instead, the standardization of work has been accompanied by a more participatory (and, as it turns out, more pro- ductive) approach to work relations, not for cultural reasons but for rea- sons related to technology transfer.59 57 But while MITI's leadership role in the domestic economy has decreased substantially, it has recently been expanding the reach of its industrial planning and coordination into foreign economies, in response to the explosion of Japanese investment abroad and the absence of coherent industrial policy in receiving countries. See Ivor Ries, "Japan's Mighty MITI Extend- ing Its Reach," Financial Review, December 18, 19, 20, 1990. I thank Chalmers Johnson for this reference. On leadership as applied to industrial policy, see Robert Wade, "Industrial Policy in East Asia: Does It Lead or Follow the Market?" in Gary Gereffi and Donald Wyman, eds., Manufacturing Miracles: Patterns of Industrialization in Latin America and East Asia (Princeton: Princeton University Press, 1990). 58 Lipietz, Mirages and Miracles: The Crises of Global Fordism (London: Verso, 1987). See Amsden (fn. 54) for a discussion of Lipietz. 59 Amsden (fn. 54), 12-13. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 291 (4) The state in Korea (and in other late industrializers) has gone well beyond its role in the Fordist model (largely one of creating both effec- tive demand in response to crisis and protection for infant industries). So neither the Schumpeterian nor the global Fordism approaches can explain the common tendencies of the late industrializers; still less can the neoclassical. Amsden's approach-which could be summarized as "industrializing through learning, learning through reciprocity betwee ernment and diversified business groups, reciprocity involving price-dist subsidies in exchange for performance"- constitutes, she says, a new para- digm for understanding late industrialization, which is a new way of industrializing (p. 141). In a field plagued by stale thinking Asia's Next Giant stands out as wonderfully original, powered by a militant, epigrammatic intelligence. The chapters toward the end, on the firm-level dynamics of the evolution of shipbuilding, textiles, cement, and steel, range from offering technical information about production to telling details about social organization. The author relates how, well before the first steel plant had been com- pleted, workers were recruited and trained-even taken out to open fields to rehearse their jobs, shouting orders to one another along imag- inary production lines. For given its lack of the cheap natural resources that other NICs like Mexico (gas) and Brazil (ore and hydro) could use to defray the high start-up costs of steel and other capital-intensive indus- tries, Korea had no choice but to compensate by means of a supereffec- tive deployment of its labor force, to discipline and train it as fast as possible. But there are some serious weaknesses in the argument. Some key propositions are poorly supported, some key concepts are treated as self- evident when they are not, and some alternative mechanisms for which there is reasonable evidence are not considered. Einstein's aphorism that "imagination is more important than knowledge" is taken a bit too lit- erally. In particular, Amsden misses many opportunities to incorporate neoclassical findings into her story, thereby rendering it much weaker than it need be in terms of economic analysis. Nowhere is this more apparent than in what she says about prices. GETTING PRICES "WRONG" IN KOREA This is the phrase that Amsden emblazons upon her escutcheon as the essence of her theory of economic development.60 Reversing the conven- 60 Ibid., 23. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms 292 WORLD POLITICS tional injunction (converting "right" to "wrong" and the sense of"get- ting" from "letting" to "setting") produces an arresting paradox. But what evidence does she offer, first, for the proposition that relative prices were "wrong" and second, for the proposition that the structure of "wrong" prices was a key element in output growth? Although she does not present it systematically, the evidence seems to be as follows: 1. The export effective exchange rate, which includes subsidies to export sales, was substantially above the official won/dollar exchange rate be- tween 1960 and 1965 (see her Table 3.4, p. 67), and during this time exports took off. Amsden says that export subsidies, as indicated by the gap be- tween the export effective exchange rate and the official exchange rate, "turned the tide." So the volume of exports was not determined by market factors alone, at least in the period covered by her numbers. Note several problems with this argument. First, six years and two sets of numbers are a slender base for causal inference. Second, she says that subsidies (as in- dicated by the gap between the two exchange rates) increased as exports increased, the former driving the latter. In fact, her own numbers show the opposite: the gap was greatest in 1960, when exports were small and stagnant, and least in 1964 and 1965, when exports were booming. Third, this gap is in any case a poor measure of the bias of the system for or against exports. For that one has to compare the export effective exchange rate with the import effective exchange rate. It is quite possible to increase export subsidies (as measured by her gap) while at the same time giving even more incentives to import substitution (perhaps via quantitative re- strictions), making a net increase in the bias against exports. It is this bias, not her gap, that might drive exports; but we are not given the informa- tion. Fourth, nor are we given information about the real exchange rate (relative price of traded goods-exports and import substitutes-vis-a-vis nontraded goods). Lacking information on both export bias and the level and movement of the real exchange rate, we cannot make a judgment about whether these prices were "right" or "wrong." Certainly the fact that the export effective exchange rate differed from the official exchange rate (as in most other developing countries) does not in itself mean that either the official rate or the export effective rate was "wrong." In short, Amsden's evidence on this point does not support the conclusions she draws. 2. "Tariff barriers and nontariff barriers have comprised a key ingre- dient of Korea's industrial policy," she says (p. 145). But we receive virtu- ally no information on the magnitude of protection over time, though such information is available.6' 3. In the capital market a multiplicity of prices prevailed for loans of the same maturity-one for foreign loans, more than one for domestic com- mercial bank loans depending on whether they were for a priority use, and one or more for "curb" or informal market loans. Not all of these prices 61 Wade (fn. 17), chap. 10. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 293 could possibly have been "right," she says without further ado. This, too, is overly hasty. For one thing, to the extent that the curb market is used for riskier loans than can be granted by commercial banks, neoclassical analysis would predict curb market rates to exceed commercial bank rates on account of differential risk. 4. Price controls have been extensive. "At the end of 1986, as many as 110 commodities were controlled, including flour, sugar, coffee, red pep- per, electricity, gas, steel, chemicals, synthetic fibers, paper, drugs, nylon stockings, automobiles, and televisions" (p. 17). A hundred pages later this expands to "the Economic Planning Board controls most prices" (p. 129). Is "most" really the same as "as many as 110"? We have no idea of the share of final demand that is price-controlled over time or of how much the controls bite. 5. Subsidies to the cotton textile makers were needed for quite a few years to enable them to get established in export markets against Japanese competition. Later subsidies to some heavy and chemical industries were needed to induce private capitalists to forgo higher short-term profits in light industry. Amsden's evidence on this score is more convincing than the rest. Not stopping with the proposition that Korea succeeded because it got prices wrong, Amsden makes a still more arresting claim: "Although Korea industrialized on the basis of relative prices that deviated sharply from free-market equilibria, such prices were less 'distorted' and provided big business with fewer bonanzas than prices in India, Turkey, and the Latin- American late-industrializing countries" (p. 145; emphasis added). Or in a slightly different formulation, "In Korea the 'wrong' prices have been right because government discipline over business has enabled subsidies and protection to be less than elsewhere and more effective" (p. vi). This is an intriguing idea, but it is asserted without a shred of evidence. If Korean price distortions have in fact been less than in most other coun- tries, how can we distinguish this argument from the central neoclassical claim that it is precisely because price distortions have been less that Ko- rea was more successful?62 Furthermore, it is not self-evident that short-run equilibrium prices should be used as the standard of "right" against which actual Korean prices were correctly "wrong." After all, neoclassical theory acknowl- edges that even markets that operate without government interference 62 Perhaps Amsden's argument could be clarified by distinguishing three senses of "distor- tion." One is deviation from the market equilibrium price, which just offsets disadvantages due to "market imperfections" elsewhere in the system. Another is deviation that pulls re- sources into uses expected to be to the country's future comparative advantage. The third is deviation that provides big windfall gains for little effort. Korea presumably had much less distortion in the third sense than other countries had, but presumably not in the second sense. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  294 WORLD POLITICS may experience "failures" due to externalities, complementarities, uncer- tain learning gains, imperfect capital markets, and economies of scale, scope, and time. In such a case the configuration of market prices, which no longer corresponds to economic values or opportunity costs, may send the "wrong" signals, even in conditions of free trade. Neoclassicals argue that empirically these sources of market failure tend to be less important than those caused by government intervention; they therefore prescribe free trade as the way to achieve the best results in the real world of special interests.63 Moreover, there is a modified neoclassical interpretation of the role of the Korean government: that its various interventions had the aggregate effect of compensating for these failures (as well as for those caused by the "politically driven" components of government intervention) and thus of creating the relative price structure that would have prevailed in an ideal free market. I have elsewhere called this the "simulated free market" theory of East Asian industrial success.64 I do not find it very convincing, but it does have a place in the literature, and Amsden might have taken it up in an analytical dissection of "wrong" and "right" prices. Even if we grant that the government helped to get prices (correctly) "wrong," there is still the separate question of the output effects of this rigged price structure. Again, this issue is barely raised, it being taken for granted that the effects were not just positive but so positive as to constitute the essence of why Korea did better than the rest. Perhaps Amsden would consider the success of the heavy and chemical industry drive of the 1970s (and she certainly considers it to have been highly successful) as evidence of benign output effects, for it was not the result of free-market forces. But this same heavy and chemical industry drive is routinely cited in the literature as the clincher for the malign effects of Korean dirigisme. Amsden might at least have responded to those who say that its costs swamped its benefits. (My own conclusion, incidentally, is that the medium- and long-term benefits did exceed the costs.)65 All told, this central plank in Amsden's theory remains in urgent need of empirical reinforcement. A generous reading might say that Amsden has done what many economists before her have done, which is to pre- 63 See Colclough (fn. 3). 64 Wade (fn. 17), 23-24. 65 For a brief discussion, see ibid., chap. 10, esp. 319-20. For a very useful recent study, see Richard Auty, "Creating Comparative Advantage: South Korean Steel and Petrochemicals," Tijdschrift voor Econ. en Soc. Geografie 82, no. 1 (1991). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 295 sent a series of "stylized facts" about how, in her understanding, the world works, leaving it to those who disagree to muster counterevidence. A less generous reading might say that Amsden displays the same dis- dain for established principles of scientific knowledge as do the neoliber- als cited earlier. THE STATE IN KOREA As the initiator of major new investments, the distorter of prices, and the discipliner of big firms and labor, the state has a central place in Ams- den's story. Yet she takes what could politely be called an "abstentionist" view toward it. She says almost nothing about how the state is organized, its base of support, its means of survival, and how it maintains its disci- pline in the exercise of huge discretionary powers. So abstentionist is she, indeed, that the key agencies for industrial and trade policies, the Eco- nomic Planning Board and the Ministry of Trade and Industry, are given only three mentions between them in the whole 329 pages. Perhaps it is unfair to expect otherwise in a work of economics. ROLE OF MANUFACTURING PRODUCTIVITY GROWTH Amsden's argument assumes, implicitly, that the driving force of Korean industrialization was fast growth of productivity in manufacturing (driven by fast "learning"). Thus, her emphasis on the structure and management of business groups. She might have addressed some of the evidence, from Hollis Chenery, Moshe Syrquin, Howard Pack, and oth- ers,66 that partly runs against this argument. To summarize, there is ev- idence to suggest that prior to the mid-1970s productivity growth in manufacturing was by no means high as compared with growth in other countries at roughly the same income level. But (1) Korea had poor nat- ural resource endowments in comparison with many other low- and middle-income countries; it therefore had no comparative advantage in exports of primary products, which left manufactures as the only broad alternative. (2) It also had a high ratio of people with basic education to people without basic education, again compared with other countries at similar income levels. (3) Agricultural productivity was much lower than in manufacturing. And (4) the physical infrastructure was fairly good. The combination of middling productivity, a high ratio of basically ed- 66 Chenery, "Growth and Transformation," in Hollis Chenery, Sherwin Robinson, and Moshe Syrquin, eds., Industrialization and Growth: A Comparative Study (New York: Oxford University Press, 1986); Syrquin, "Productivity Growth and Factor Reallocation," in Che- nery, Robinson, and Syrquin; Pack, "Industrialization and Trade," in Chenery and T. N. Srinivasan, eds., Handbook of Development Economics (Amsterdam: North Holland, 1988). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  296 WORLD POLITICS ucated to uneducated people, a big agriculture-manufacturing gap in productivity, and a fairly good infrastructure allowed Korean manufac- turing to compete internationally. But the real driving force before the mid-1970s, according to this argument, was the huge increase in capital and labor inputs into manufacturing (more and more young women be- hind more and more desks assembling more and more shirts and circuit- boards). It was a scale effect, not a productivity effect. These inputs came in substantial part from agriculture, and the economy-wide level of pro- ductivity grew fast as resources were reallocated from lower productivity uses in agriculture to higher productivity uses in manufacturing.67 But the only way to absorb such large amounts of capital and labor in man- ufacturing without running into rapidly diminishing returns was to ex- port the output, because the domestic market would have been able to absorb the extra output only at the cost of sharp falls in price. This is the single most important way that exports helped Korea's industrialization. Since the mid-1970s, however, with the completion of the reallocation from agriculture, the driving force has been productivity growth within manufacturing.68 It may well be that the sorts of management practices and firm structure that Amsden emphasizes have been an important part of this growth. But much of Amsden's own account of firms and indus- tries draws on data from before that time. This is not to suggest that Amsden is necessarily wrong for the earlier period-one can imagine ways in which her argument could be reconciled with the other evidence. But this other evidence is simply not addressed. COMPARATIVE ADVANTAGE: RIGID, FLEXIBLE, OR IRRELEVANT? Did Korea follow its prevailing comparative advantage (CA), or did it engage in activities that were out of line with CA? Neoliberals imply that its industrialization was governed by CA, except for the temporary aber- ration of the heavy and chemical industry drive that started in the early 1970s and more or less terminated around 1980, as economic rationality again came to prevail. Amsden and also Governor Park (in the epigraph 67 For the agricultural end of these reallocations, see Moore (fn. 5); on the political control of Korean agriculture and the nonprice methods of achieving relatively high levels of agri- cultural productivity (cf. standard recipes for agricultural growth and mechanism of Fei- Ranis-type models), see Wade (fn. 5, 1983). 68 This is likely, but most of the evidence I cite stops short of this period. Pack (fn. 66) suggests that even after the mid-1970s total factor productivity growth was not especially good, and he credits continued rapid absorption of factors, including extra investment. But subsequent evidence suggests to him that productivity growth within manufacturing has indeed been more of a driver than he thought when he wrote the article in Chenery and Srinivasan (fn. 66); Pack, personal communication with author. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 297 to this article) imply either that it went against CA or that CA was some- how irrelevant. What is at stake? According to the standard theory, spe- cializing according to CA makes for an efficient pattern of resource use, with more intensive use of the more abundant factors and less of the scarcer factors. A country may be able to produce goods out of line with its CA, but those goods, which require a lot of the scarce factors and few of the abundant factors, will not be profitable. Stereotypically, a low- wage, labor-abundant country should concentrate production and ex- ports on labor-intensive products, while importing the more capital- intensive goods from countries where labor is scarcer and capital more abundant. (China can make and launch satellites, but such engineering- intensive industries are not in its CA.) So if Korea departed significantly from CA and yet was still outstandingly successful, one could conclude that something is seriously wrong with the theory. And since the theory forms part of the bedrock of neoclassical economics, this would sound the alarm in many quarters. There is remarkably little evidence on this central question. It is true that exports have been far more labor-intensive than overall production, a prediction in line with CA theory. But it is also true that from the early 1960s, capital-intensive industries producing intermediates have experi- enced rates of growth much higher than the manufacturing average, a phenomenon liess readily reconciled with CA theory. And we know, too, that most of these industries have had substantial levels of protection, which is also sometimes taken to indicate investment out of line with CA. On the other hand, Patrick Minford and Adrian Wood69 have recently argued, contrary to the general understanding, that capital-intensity is almost irrelevant for the determination of CA, especially because nonin- frastructural capital is mobile between countries. Rather, it is labor force skills that count. Product categories can be ranked in terms of skill re- quirements, and the categories that are "appropriate" to a country at any one time (in the sense of being in line with CA) can be read off by com- paring their skill requirements with the ratios of highly skilled to basi- cally skilled to unskilled people in the labor force (these ratios determine the scarcity and relative cost of more or less skilled people and therefore 69 See Minford, "A Labour-based Theory of International Trade," in J. Black and A. MacBean, eds., Causes of Changes in the Structure of International Trade, 1960-85 (London: Macmillan, 1989); Wood, "A New-Old Theoretical View of North-South Trade, Employ- ment and Wages," Discussion Paper 292 (Sussex: Institute of Development Studies, Univer- sity of Sussex, 1991). Wood's paper is based on one chapter of his book, North-South Trade, Employment and Inequality (London: Oxford University Press, forthcoming). This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  298 WORLD POLITICS the viability of investments that require different combinations of these people). If this is accepted, we have to say that we simply do not know to what extent the fast growth of capital-intensive industries in Korea was in line with CA, because no one has calculated their skill intensities. We do know that all capital-intensive industries are not skill-intensive and that within industries defined at the three-digit level (industrial chemicals, for ex- ample) there are huge variations in skill requirements. We also know that the fact that these industries had protection does not in itself mean that they were against CA. Protection, that is, might have offset market imperfections elsewhere that would have rendered the industries finan- cially unviable without the protection, even if they were economically viable with proper shadow prices. Nor does the fact that these industries grew faster than the manufacturing average in itself mean that they were out of line with CA, for all industrialization involves some growth of upstream sectors, for reasons of transport costs and other advantages of local production. And this growth may be very fast if it comes from a low base. The key question, then, is whether the capital-intensive indus- tries grew faster as a result of policy measures than they would have under conditions of well-functioning free markets. So one hypothesis is that Korea's industrialization-including the dual-track promotion of some capital-intensive intermediate (and later final) goods alongside labor-intensive goods for export markets-did not depart from CA to any significant extent. This implies that the capital- intensive industries remained within the (rapidly rising) limits of the skilled labor supply, which further implies that the capital-intensive in- dustries of the 1960s and early 1970s (before the heavy and chemical industry drive) had rather low skill requirements. Another hypothesis, which is more consistent with Amsden-Park, is (1) that Korea stretched its CA (as with a rubber membrane) to cover more skill-intensive industries than would be "normal" in relation to its skill endowments70 and (2) that this stretching was especially pronounced during the heavy and chemical industry drive (though not absent earlier, as seen in those subsidies used to launch the cotton spinning and weaving industry against Japanese competition). By this interpretation, the Ko- reans excelled at "learning by doing," which increases the supply of scarce skills and thereby stretches the CA membrane. More precisely, the Koreans excelled at learning by doing at low cost. It is as though those 70 I owe this idea of stretching CA to Adrian Wood. This content downloaded from 2.134.96.38 on Thu, 30 Sep 2021 15:23:47 UTC All use subject to https://about.jstor.org/terms  EAST ASIA'S ECONOMIC SUCCESS 299 men in the field shouting orders at each other on their imaginary pro- duction lines were a microcosm of the whole labor force. In many other countries efforts to stretch the CA membrane by investing in advance of skills so as to generate learning-by-doing effects have proved so costly that the projects have eventually folded. How then to interpret the difficulties that beset many heavy and chemical industries in the late 1970s and early 1980s? The neoliberal hypothesis would say that these difficulties indicate that the heavy and chemical industry drive departed radically from CA. Another hypothesis suggests that the difficulties were due less to the misallocation of re- sources between sectors, as in CA theory, than to a non-CA-based macro- economic mechanism. The sheer size and speed of the "big push," cou- pled with the long gestation period of these industries, caused inflationary pressures, depreciation in the exchange rate, deficits in the balance of payments, and budget deficits. These prompted the govern- ment to institute a stabilization package, which caused deflation just when the output from the new industries came on stream, shrinking the market and lowering the returns. The rebound of the Korean economy in the mid-1980s may have been due less to the economic liberalization of the early 1980s (the neoliberal position) than to a combination of the earlier stabilization plus the maturation of the heavy and chemical in- dustries.7' The main point, however, is that little is known about the answer to the central question of whether, in what ways, and when Korea departed from its comparative advantage. This is a great handicap for political analysis of the role of the state. For a central question of such analysis is how much, and by what methods, the government determined a pattern of investment allocation that differed from what unguided private busi- nesspeople operating in real markets would have produced. And if there was a difference, to what extent did the government stick to projects that, though financially unviable for private businesspeople, were nev- ertheless economic at proper shadow prices? Or to what extent did the government disregard this constraint and undertake projects that looked to be economically unviable according to conventional social cost/benefit analysis? This indicates the extent to which the government went against "market forces,'' and thereby the amount of state power needed to effect the desired