Asian Lessons

THE RELATIONSHIP BETWEEN the state and the market in Asian economic development has been characterized by significant diversity, rather than broad uniformity, across countries over time. There were many country-specific circumstances, also influenced by the geographical location and the international context, which shaped alternatives in terms of respective roles. Even so, a judicious blend of states and markets was at the foundation of success in terms of development outcomes in Asia. Conversely, an inappropriate mix of states and markets led to indifferent or poor outcomes.

There were adaptive changes in the relationship between states and markets over time across countries. In the initial stages, during the quarter century from 1950 to 1975, states were more important than markets almost everywhere in Asia. This was partly a reaction to the colonial past where unregulated markets and subordinated economies were associated with underdevelopment. More importantly, state intervention for kick-starting industrialization and development was perceived as both necessary and desirable. This was also an integral part of the Development Consensus at the time. By the mid-1970s, however, there was a disappointment with development outcomes and a disillusionment with excessive or inappropriate state intervention. Following such experiences, most countries in Asia sought to reduce the economic role of the state and rely more on markets. The timing and pace of the change differed across countries.

Interestingly enough, China was the first to introduce economic reforms in 1978, which started its transition from a centrally planned economy towards a market economy. Indonesia, Malaysia, Philippines, Thailand, and Turkey shifted the balance to rely less on states and more on markets at different times around the mid-1980s. India also started the process with some preliminary steps in deregulation about the same time, followed by rapid economic liberalization during the early 1990s. Around then, Bangladesh, Pakistan, and Sri Lanka also moved by shifting their emphasis from states to markets. Soon after, the centrally planned economies in Southeast Asia—led by Vietnam and followed later by Cambodia and Laos—commenced their transition to market economies. In the wake of the Asian financial crisis, around the turn of the century, South Korea, Taiwan, and Singapore, where states had always guided markets in a proactive manner, also progressively reduced the economic role of the state as they joined the league of industrialized nations.

It is difficult to categorize or group countries in terms of the relative importance of the state and the market not only because of changes over time but also on account of the diversity across countries. Yet, such an exercise might be worthwhile if the idea is to consider the economic transformation of Asia over the past fifty years as a whole, recognizing that states were more important in the earlier stages while markets were more important in the later stages almost everywhere, even if both performed crucial roles at every stage. Such a categorization is, of course, a broad assessment.

Fallible governments and imperfect markets, taken together, could only hinder economic development. The Asian experience suggests that efficient markets and effective governments, in tandem, provided the way forward to development

The relative importance of the state, in qualitative if not quantitative terms, contrary to the characterization in orthodoxy, was clearly greater than that of the market in South Korea, Taiwan, and Singapore, where the visible hand of the state was more in evidence than the invisible hand of the market although markets performed a critical role. This was also true for India, Pakistan, Bangladesh, Sri Lanka, and Myanmar, where states were far more important than markets, so much so that states were dominant while the role of markets was subsidiary if not secondary for at least half of the past fifty years. It is no surprise that the role of the state was overwhelmingly important in centrally planned economies—China, Vietnam, Cambodia, and Laos—notwithstanding economic reforms and the transition to market economies. On the whole, Indonesia, Malaysia, Philippines, Thailand, and Turkey relied more on markets than on states, although states did have a significant role in the earlier stages. Among the East Asian Tigers, as well as in Asia, Hong Kong was the solitary exception with its laissez-faire economy run entirely by markets, even if the government exercised tight political control throughout, both under British rule and on return to China.

The respective roles of the state and the market, or the public sector and the private sector, evolve in a continuum. There can be no general rules, for boundaries change over time as comparative advantage or circumstances change. Most economic activities are best left to private initiative. It is what markets can and should do. There are some activities in which the private sector and public sector can coexist where such competition benefits the economy and people. But there are some things that only governments can and should do. If governments perform these tasks badly, it is not possible to dispense with them and replace them with markets. In such situations, governments must be made to perform better. This is possible as governments are accountable to people, whereas markets are not.

Actual outcomes in development were a complex mix of success stories in some, muddling-through in others, and poor-performance in yet others. It is not as if all countries could be classified into one of these categories at all times. The degree of success at development in Asia, which also changed within countries during the past fifty years, was about managing this evolving relationship between states and markets in terms of the mix, emphasis, and change over time. Finding the right balance in the respective roles of the state and the market did improve development outcomes.

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There are some lessons that emerge from the Asian development experience over the past fifty years. For countries that relied more on governments, it was about minimizing government failures and getting state intervention right. For countries that relied more on markets, it was about minimizing market failures and getting prices right. For countries—irrespective of the group they were in—that were unable to minimize such failures, development outcomes were poorer. In general, for countries that succeeded in terms of outcomes in development, or fared better than others, there can be no doubt that the role of governments—as supporters, catalysts, or leaders—was critical. In countries where governments were unable to perform such a role, the social and economic transformation was much slower. It is necessary to note that such governments, which were unable to perform their roles in terms of intervention, were also unable to perform their roles in a changed context of liberalization. This is not surprising because governments that could not run enterprises well could not regulate, let alone govern or guide, markets well. At the same time, it is necessary to recognize that markets are no magic wand, that the invisible hand of the market is not visible because it is not there, and that markets are good servants but bad masters. Clearly, fallible governments and imperfect markets, taken together, could only hinder economic development. The Asian experience suggests that efficient markets and effective governments, in tandem, provided the way forward to development.

The real question is no longer about the size of the state (how big?) or the degree of state intervention (how much?). The question now is about the nature of state intervention (what sort?) and the quality of the performance of the state (how good?)

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It would seem that states and markets are inseparables, as complements, in the process of development. The relationship between the two institutions is crucial in shaping outcomes. Both are institutions evolved by humankind to organize economy, polity, and society, which cannot do without each other. This is because states and markets provide mutual checks and balances, in situations when one or the other goes wrong, to function as self-correcting mechanisms. It follows that co-operation rather than conflict should define their relationship. Thus, any characterization of the state and the market in opposition to one another is a misreading of history, which can never be conducive to development. Instead, it is more useful to think of the relationship as being governed by an adaptive principle in which neither the state nor the market becomes destructively dominant to cripple the other institution. If that happens, economic systems are left without any self-correcting mechanisms. Of course, while it is important to learn from experience, it is just as important to avoid overreacting to mistakes. Indeed, the best corrective mechanism is one which manages to avoid such swings of over-reaction or under-reaction. This deserves emphasis because there must always be some room for iteration and experimentation in policies. For it is just as important to unlearn from experience. That could be about reversing an experiment in policies which did not work. That could also be about questioning long-held beliefs and thinking anew. The moral of the story is clear. It is essential, and wise, to be circumspect about any generalized prescriptions or standardized solutions on the subject of states and markets in development.

It is obviously necessary to recognize the diversity of Asia in its mix of states and markets, which differed across countries and changed over time. Even so, there are discernible patterns in this diversity that emerge clearly, making a difficult task more manageable. The real question is no longer about the size of the state (how big?) or the degree of state intervention (how much?). The question now is about the nature of state intervention (what sort?) and the quality of the performance of the state (how good?)

(This is an edited excerpt from Resurgent Asia: Diversity in Development by Deepak Nayyar | Oxford University Press | 320 pages | Rs 895)

About The Author

Deepak Nayyar

Deepak Nayyar is Emeritus Professor of Economics, Jawaharlal Nehru University, and former Vice Chancellor, University of Delhi. He is the author, most recently, of Resurgent Asia: Diversity in Development

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