Financing East Asia’s Success

The relationship between inflation and monetary policy can probably be discussed most conveniently by referring to the classical ‘equation of exchange’, developed by Irving Fisher in 1911 and explained in thousands of elementary economics texts. The quantity of money in an economic system multiplied by its velocity (the number of times one unit of money changes hands during some period of time) must be equal to the total transactions taking place during that period multiplied by the average price per transaction. This definitional relationship, the Fisher Equation, MV = PT, does not say anything about causality; by the definition, a change in any of the four variables could cause a change in one or more of the other three. This elementary point is often ignored by ‘theorists’ of various persuasions. Some economists may argue that increases in the money supply will tend to be offset by exactly proportional declines in velocity — thus, ‘money does not matter’, the strict Keynesian view. For others, velocity is a constant, in other words, total transactions in the economy do not change by very much in the short run, and a strong causality running from money growth to the price level is postulated, the so-called monetarist position or ‘classical view’. According to Fisher himself, a 10 per cent increase in the supply of money will, on average, lead to the same 10 per cent rise in the general price level, but few other economists today would argue that the relationship is a direct and proportional one.

Of the eight countries studied it would be difficult to find another pair with so many obvious similarities and still many substantial differences. Both Singapore and Hong Kong are exceedingly small entities, virtually city states, which have grown straight up — literally vertically — in recent years. They have a common British colonial background and legal structure, and initially developed their economies on the basis of entrepôt (re-export) trade between the metropolitan countries of Europe and the resource-rich countries of the Far East. In both cases, too, this re-export trade caused the logical development of the banking, insurance, shipping, communications, and other such infrastructure necessary to support their bustling trade. Finally, both cities suffered a severe setback in development when traditional economic relations with their closest neighbours, China and Malaysia respectively, soured in the postwar period (the 1950s for Hong Kong and the 1960s for Singapore).

It is said that during the Cultural Revolution of the 1960s in mainland China, one of the worst terms of censure was to be called a ‘capitalistroader’. The banishment of Deng Xiaoping allegedly was imposed for his being an ‘unrepentant capitalist-roader’, which is presumably several times worse than being repentant about it. Among the eight Asian countries reviewed in this volume, probably all could be termed ‘the capitalist-roaders’ (along with Japan) in comparison to, say, mainland China, North Korea, Vietnam, and Burma. Since a strong government has played an important role in most of these success stories, perhaps ‘state-capitalists’ or ‘entrepreneurial nations’ would be more descriptive terms. The two nations discussed in this chapter, South Korea and Taiwan, probably would be rather proud, on balance, to be called ‘unrepentant’ about being that as well.¹

While the rest of the Indo-China peninsula has fallen to USSR-supported communism (Vietnam, Laos and Vietnamese-occupied Kampuchea) and millions of people are forced to live under bitterly xenophobic socialism, here certainly including Burma, both Thailand and Malaysia appear to continue to benefit economically from their integration into the Western ‘world economy’ — and are showing progress politically as well. As key member countries of ASEAN, both are studiously avoiding the label of client-states of former imperial powers. Indeed, since Thailand carefully played off the French-British rivalry in the nineteenth century to safeguard its independence, its political stance in the world has usually emphasized multilateral contacts, though it certainly supported the SEATO concept (Asia’s NATO) and fought alongside the US in the Vietnam conflict, even providing air bases for the US Air Force as well as an infantry division for the actual fighting. Malaysia, on the other hand, was decidedly lukewarm on Vietnam and has carefully distanced itself from the UK and the US both politically and economically. While the last 30 years have seen some bloodshed, both countries have been relatively stable politically, having rather successfully dealt with serious insurgency problems in the recent past.

As the above title suggests, Indonesia and the Philippines have many geographic similarities. Both are archipelagos spreading over thousands of miles and consisting of thousands of islands as well. The bulk of the populations of both countries comes from a similar Malay ethnic stock, but also includes a wide range of minorities with differing cultures, religions, languages, and ethnic backgrounds. The two countries have significantly different histories of European colonial rule (by the Dutch for Indonesia and by the Spanish and, in the early part of this century, the Americans for the Philippines), and both achieved independence in the 1940s. Each country is presently subject to a one-party rule, despite the existence of smaller opposition parties in both countries, and has had the same political leader for many years. General Suharto (since 1966) continues to lead the Golkar party coalition in Indonesia, and Ferdinand Marcos profitably led the Kilusang Bagong Lipunan (KBL) in the Philippines from 1965 to February 1986.

There is great disorder under the heavens in the field of development economics. Despite the exponential explosion of published work about the problems and issues of ‘Third World’ countries, there seems to be a diminution in useful knowledge about the process of economic progress. We know a good deal more about what we do not understand and what does not seem to work than about prescriptions for efficient and equitable growth. Certainly, one can conclude that there has been no shortage of ‘debunkers’ and ‘myth-shatterers’ in the field. A leading development economics text, written about ten years ago, warns the reader against believing in four exceedingly fundamentalist dogmas, for example: