With its territory overrun three times by Communist armies in the Korean War, South Korea emerged as an economic wasteland, with a per capita income of $50 in 1953. Despite allocating over 5 percent of its GNP to national defense over the past forty years, it has grown from an economic pygmy of the 1960s to a potential economic giant of the 1990s. In 1989, South Korea’s per capita income reached $4,600, nearly four times that of its Communist counterpart to the north. This success—which has been fueled by a 20 percent annual growth rate in exports over the past quarter of a century—not only raised the ire of protectionists in the United States, but also piqued the interest of leaders in Moscow and Beijing, who distanced themselves from their longtime North Korean Communist allies to gain economic benefit from their former South Korean capitalist enemies.
Even though it lives in the shadow of the People’s Republic of China, Hong Kong has maintained a consistent policy of free-market economics over the past four decades. Despite its tenuous existence as a British protectorate six thousand miles from London, Hong Kong’s main problem has not been an exodus of emigrants but a tide of immigrants. Its economy had an annual growth rate of 6.3 percent in 1989, yielding a per capita income of $10,350. We must insist that Beijing build upon this success when Britain returns this territory in 1997. Hong Kong could then serve as a catalyst for the prosperity of one-fifth of the world’s people.
Under the leadership of Prime Minister Lee Kuan Yew, Singapore has catapulted itself into the ranks of the world’s fastest-growing economies. While exploiting its geographic position to serve as a major transshipment point for East Asian trade, it has also made its own economic mark. With a territory of 225 square miles—one-fifth the size of the smallest U.S. state, Rhode Island—and a GNP of $24 billion, Singapore is mile for mile the most economically dynamic country in the world. Over the past quarter of a century, its economy has grown at an annual rate of 7 percent, pushing its per capita income to $10,450 in 1989. With little territory and even fewer natural resources, growth could have come only through developing its human resources. As Lee once said, “This place will survive only if it has got the will to make the grade. It’s got nothing else but will and work.”
The four Asian tigers succeeded because their governments adopted policies that unleashed the creative potential of their people. Though this appears mundane at first glance, anyone who has studied the underdeveloped world knows that most of its governments have spent enormous time and resources sapping the energies of their peoples. The leaders of the Asian tigers understood that the most basic human motivation—the desire to better the condition of one’s self and family—is the mainspring of economic growth. People, regardless of their education and background, have responded to such basic economic incentives from the dawn of time in every corner of the world.
The first correct move of the successful developing countries was to ignore the advice of Western academics who, like snake oil salesmen, pushed development strategies based on import substitution and statism. Advocates of import substitution believed that economic contact with the industrialized world hindered development. They therefore urged high tariffs, prohibitive barriers to multinational investment, major subsidies to favored industries, and rigid self-reliance through the elimination of imports wherever possible. Domestically, their premise was that economic development was unnatural and that governments had to adopt comprehensive programs to compel their people to produce. They insisted that the state not only had to provide the needed infrastructure, but also had to fashion industrial strategies and to mobilize—through coercion if necessary—an apathetic people. As one prominent Western development theorist wrote, “The special advisers to underdeveloped countries who have taken the time and trouble to acquaint themselves with the problem, no matter who they are . . . all recommend central planning as the first condition of progress.”
Ne Win, Burma’s longtime dictator, epitomized this approach. When I met with him in 1985, I asked why he did not follow China’s example of providing economic incentives for his people to produce, particularly since Burma was the poorest nation in Asia. He replied candidly, “The Chinese people are different. They respond to positive incentives. The Burmese people are lazy. They will only respond to negative incentives.” Not surprisingly, Burma’s economy atrophied during his rule.
The Asian tigers rejected this theory. They understood that there were five keys to successful development:
Base development on the foundation of competitive markets. Free-market institutions—private property and floating prices—create the incentives for people to produce. Only through the right to own private property can an iron link be forged between work and reward. And only market-based prices can provide the indispensable signals to consumers and producers that drive an economy toward greater efficiency. Yet in much of the underdeveloped world, governments have continually undermined confidence in the sanctity of property by nationalizing entire industries and have systematically meddled with free prices through controls and subsidies.
A hint of condescending racism exists in the views of development academics who depict the people of the underdeveloped world as torpid, unenterprising, and shortsighted. Though some of these countries have low literacy rates, their peoples have always responded when presented with incentives to produce. It has been the peculiar genius of many of their leaders to contrive elaborate ways to give them incentives not to produce. No psychological difference exists between the Chinese on the mainland and those in Taiwan, Hong Kong, and Singapore. The poverty of the former and the prosperity of the latter results from a difference not in talent but in incentives. Deng Xiaoping understood this. While he is still a committed Marxist, his economic reforms gave millions of Chinese incentives to work their way out of poverty rather than insisting on doctrinaire socialism, which guarantees everyone an equal share of poverty.
Facing stiff economic competition is the key to becoming a stiff economic competitor. Those who argue that developing countries should protect their “infant” industries with tariffs until they mature as world-class producers fail to realize that unless they face international competition, these firms will never learn to walk on their own. While many underdeveloped countries hunkered down behind protectionist walls and erected domestic cartels and monopolies, the Asian tigers threw themselves in the fray of the world market and also maintained a competitive environment domestically.
Some say that Japan’s international success supports the need for protectionist development strategies. That argument captures only half the picture. While Japan has maintained high tariff barriers, its producers faced a highly competitive domestic market. Few American cars were permitted to slip into Japan in the 1950s and 1960s. But the competition between domestic producers—Nissan, Honda, Toyota, Mitsubishi, and others—was intense, thereby priming Japanese automobile companies for their expansion abroad.
Invest in human capital. The leaders of the Asian tigers understood that the critical component of development was human capital. Although its abundance in land and natural resources significantly helped the development of the United States, the key was the enterprising nature of its people and the value they placed on education. The same has been true among the four successful developing countries. Each has invested a high proportion of its GNP in education—as high as 4.4 percent in Singapore—and has encouraged its people to study abroad. All four have literacy rates far above the underdeveloped world’s average, with Taiwan and South Korea even matching Western standards.
Keep the economic burden of government low. Though many today scoff at the theories of supply-side economics, they have refocused attention on an important truth: the more you tax something, the less you will get of it. If government imposes high taxes on the fruits of work—incomes and profits—there will be less economic activity just as surely as night follows day. While many countries in the underdeveloped world raised taxes to try to capture more revenue, the successful developing nations in East Asia und
erstood that low taxes produce high growth, which eventually generates more government revenue even at lower tax rates. Governments in unsuccessful developing countries have sought to carve out for themselves a bigger piece of the pie, while the successful ones have focused on increasing the size of the pie.
Taxes are not the only problem. In much of the underdeveloped world, there is an almost cultish worship of state intervention in the economy. The state reserves monopoly industries for itself, controls all imports and exports, maintains an iron grip on new businesses through the licensing of commercial and industrial activities, restricts the mobility of labor and capital, enforces wage and price controls, and subsidizes enterprises and sectors in accordance with an overall plan or at the behest of certain interest groups. In none of the Asian tigers did such idiocy infect the thinking of economic policymakers.
This has been particularly true in the area of investment. It is almost a cliché to criticize developing countries for their senseless investments in economic white elephants. Steel plants, government airlines, six-lane superhighways leading nowhere, and newly built capital cities—all status symbols of development—have been the focus of billions of dollars of state-directed spending. While such “industrial strategies” continue to seduce Western academics and liberal pundits, virtually all of those resources were wasted. Anyone who has spent time discussing economics with government bureaucrats in the underdeveloped world knows that they are the last people on earth who should control national investment. The contrast with the policies of the Asian tigers—where investment remained under the control of the private sector—could not be more stark. When their governments did intervene in the economy, the purpose has been to strengthen—not to weaken or displace—the private economy.
Create conditions to attract foreign investment. While much of the underdeveloped world handed the West’s multinational corporations their walking papers, the successful developing countries were rolling out the red carpet for them. They understood that foreign investment meant new jobs and that by attracting such investment they were not losing control of their economic destiny but were creating the prospects for a better economic future. They never cavalierly nationalized foreign firms, as many underdeveloped countries did in the 1960s and 1970s, but rather let these companies profit according to the dictates of the market. While the Asian tigers ascended the economic ladder, the others dropped into economic sinkholes. In Africa, only the Ivory Coast under President Félix Houphouët-Boigny followed this lesson and welcomed foreign investment.
Make exports the engine of economic growth. Since few countries in the underdeveloped world have sufficient size to fully exploit economies of scale with modern production techniques, they can succeed only through exports to the world market. Since the early 1960s, all of the successful developing countries of East Asia adopted some kind of export-oriented strategy. In 1990, their total export revenues accounted for 60 percent of their aggregate GNP. Exports made up 34 percent of GNP in South Korea and 55 percent in Taiwan. With their role as transshipment points for regional trade, those figures were even higher for Hong Kong and Singapore, reaching 135 percent and 191 percent, respectively.
These lessons—the keys to the success of the Asian tigers—should not be startling. In a contest that pits a strategy based on state control and intervention in every aspect of economic life against one based on free markets, private initiative, and competition, the latter will always prevail. The collapse of the Soviet economy proved this point dramatically. Many observers explain the success of the four Asian tigers as a product of East Asia’s Confucian heritage, with its emphasis on a strong work ethic. While culture does affect economic performance, the decisions of their leaders to unleash market forces represent the real secret to their success. Not only do their policies have little to do with the philosophies of East Asia, they are also not unique to Asia. If other countries free the mainsprings of the market, they will enjoy the same success as the Asian tigers.
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For most of the underdeveloped world, learning the lessons of the successful developing countries represents only half of the battle. Before these maxims can begin to generate economic growth, many less developed countries must overcome the hurdles of political instability and economic mismanagement that have blocked them since they won their independence from the European powers. Without sound and stable government, neither foreign firms nor domestic entrepreneurs will risk their capital through investments. Without responsible fiscal and monetary policies, incentives to produce will evaporate. While we should seek to help those in poorer nations, we should not deceive ourselves into believing that any aid will make a difference until a solid foundation of political stability and economic common sense has been laid.
There are many different reasons for the poverty and turmoil in the underdeveloped world. In Latin America, fledgling democracies wage an uphill battle against massive governmental corruption, narrow-minded economic thinking, powerful drug cartels, and brutal Communist insurgencies. In Pakistan and India, human and economic resources are not applied to development projects but are instead squandered on the military. In Africa, incompetent and corrupt leadership has severely handicapped a continent that has yet to struggle to its feet, much less enter the global economic race. Most African nations have rejected communism, but too many have adopted socialism. In the Middle East, the Arab-Israeli dispute has been matched by the growing intensity of inter-Arab strife.
Internal political instability remains the most debilitating feature of the underdeveloped world. Since my 1957 trip to Ghana, the first sub-Saharan nation to be granted independence from a colonial power, forty-seven other nations in Africa have become independent. There have been more than sixty coups and thirty-five assassinations of high government leaders. More than 10 million people have been killed in civil wars, and more than 15 million have died of starvation. No end to this pattern is in sight. Only three of the continent’s fifty countries have had stable governments over the last twenty years. In Liberia, a brutal dictatorship was replaced in a bloody civil war in which three tribally based guerrilla bands sacked the country and killed more than ten thousand people. In Ethiopia, two ethnically based “liberation fronts” toppled the barbaric Communist regime of President Mengistu Haile Mariam. In South Africa, progress toward ending apartheid has not produced progress toward peaceful change, with black-on-black violence killing thousands of people.
In Latin America, there are still fifteen different groups of Communist insurgents and three major drug cartels holed up in jungle hideouts. In Colombia, successive governments have fended off repeated assaults by drug barons and Communist guerrillas, with violence directly related to drugs and terrorist groups claiming the lives of tens of thousands of Colombians over the past decade. More than 300 judges and court personnel were murdered between 1985 and 1991, and a total of 18,000 assassinations occurred in 1989 alone. In Chile, Communist terrorists have unleashed a campaign to overthrow the government of President Patricio Aylwin, striking 279 times in 1990. In Peru, the Shining Path—numbering an estimated 5,000 hard-core Communist guerrillas—has murdered more than 11,000 people since its founding in the late 1970s. Political violence in Peru, predominantly committed by the Shining Path, has caused $10 billion in damage over the past decade.
In Asia, democratic governments have landed on hard times in recent years. In India, where political parties have long been the source of corruption in domestic politics, they are now becoming the instigators of ethnic and religious strife. In the state of Uttar Pradesh, Hindu extremists have battled Muslims for control of the Babri Mosque, leading directly and indirectly to more than two thousand deaths. At the same time, open armed conflict has raged in three areas. In the last eight years, India has had five different prime ministers, two of whom have been assassinated by radical factions. In Myanmar, formerly Burma, a military government seized power in a bloody coup in 1989, with the junta now permitting drug traffickers to ply
their trade and launder their money from bases on its territory. In the Philippines, Communist rebels continue to undermine President Corazon Aquino’s fragile base of power, while the competence of her own leadership has been called into doubt. There have been six coup attempts since she came to power in 1986, and many of her original ministers have resigned out of frustration with her directionless policies.
Many believe that democracy is the answer to the underdeveloped world’s problems. According to this logic, because democratic government has proved to be the best form of government in the developed world, the West should export it to the rest of the world. In this view, the United States should use its influence and leverage to force the dictators in the developing world to hold elections so that these countries can enjoy the fruits of political stability and escape poverty.
But democracy is not an Alice in Wonderland solution to these problems. Much of the underdeveloped world lacks the political traditions necessary to make democracy function properly. In some countries, ethnic hatreds, class divisions, and even tribal rivalries would frustrate the most well-intentioned advocates of democracy. A spirit of compromise and a willingness to accept defeat in elections are not universal human traits. Many political figures still adhere to Mao’s dictum that political power comes from the barrel of a gun. For democracy to work, these nations must first transform their political cultures.
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