Chapter 4

The East Asian Experience of
Economic Development and Cooperation∗

Economic development in East Asia has followed a remarkable pattern, unlike any otherdeveloping regions in the world. In this paper, we would like to share this experience with the reader,
discuss remaining issues, and contribute to the global development strategy debate.

Performance of East Asia
During the last half century, the economic performance of the developing world has been far
from uniform. Developing countries were polarized into those that made great progress in catching up
and those that were mired in stagnation. The majority of the East Asian countries belong to the firstgroup1.
The following phenomena have been commonly observed in East Asia. Some of thesefeatures are unique to this region.
 Diversity in ecosystem, population, ethnicity, religion, social structure, and political regime.
 Equally great diversity in GDP, per capita income, and economic development.
 High growth sustained over a long period almost throughout the region.
 Associated with this high growth are high savings and investment rates, active but managed
external opening, export orientation, industrialization, and general improvements in social
indicators.
However, the path trodden by East Asia has not always been smooth. Some countries failed
to achieve high growth, and the region was hit by occasional setbacks. East Asia has had its share ofhardships in its history, with hot and cold wars, social instabilities and economic crises.
Currently, East Asia faces not only the old problems of poverty and political strife but also
the new challenges posed by economic growth such as emerging income gaps, environmental
degradation, urbanization and congestion, and various social evils. Furthermore, the countries in theregion are under pressure to enhance domestic capabilities in order to avoid crises associated with
globalization and to sustain growth into the next stages of development.

∗

Prepared as a background paper for the RIETI/METI seminar on September 1, 2002, on the occasion of the World Summit
on Sustainable Development in Johannesburg. This paper was drafted after intensive consultations with Japanese experts,
officials and researchers in Tokyo and Washington, DC. The author would like to thank them for valuable suggestions andcomments. However, all responsibility for the contents remains with the author alone.
1
We define East Asia functionally, as those economies that are already taking part in Asian dynamism, or the regional
production network linked by trade and investment, as discussed below. This includes Japan, China (including Hong Kong),
Taiwan, Korea (ROK), Singapore, Malaysia, Thailand, Philippines, Indonesia, and Vietnam. Some countries such as Laos,
Cambodia, and Myanmar are preparing to join this regional network.

28

29

Growth Driven by Trade and Investment
For each country in East Asia, the long-term growth path and the achievement ofindustrialization can be tracked by income trends and structural shifts in GDP and exports. However,the unique feature of East Asian growth is that it has been attained through the very existence of East
Asia as a powerful arena of economic interaction among its members, and not merely by“market-friendly” policies or good governance of individual countries alone2.
One by one, countries in different development stages realized economic growth by participating in
the dynamic production network created by private firms. Linked by trade and investment, a system ofinternational division of labor with clear order and structure exists in the region. Under this system,
industrialization has proceeded through geographic widening on the one hand and structural deepening
within each country on the other. Terms like the flying geese pattern, structural transformation chain,
and Asian dynamism refer to these supply-side developments3. To understand this mechanism, wemust go beyond individual countries to analyze the production structure, intra-regional trade, andinvestment flows of East Asia as a whole.
For developing countries in East Asia, economic development was tantamount to becoming
one crucial link in this production network under competitive pressure from and cooperative relations
with neighboring countries and, through it, upgrading their industrial capabilities from low-tech tohigh-tech. To initiate development, they had no choice but to undertake international integration via
trade and investment. However, the integration strategies of latecomers like the ASEAN4 and latest
comers like Vietnam are different from those of the early developers such as Japan, Taiwan and Korea.
East Asia as a region has offered a political, economic and social model and an enabling
environment for the catching up of latecomer countries. Every country was under strong market
pressure from above and below to constantly improve capabilities and climb the ladders ofdevelopment. What drove them were national desire for material well-being and the demonstration of
excellence from neighboring countries, not conditionalities or policy matrices introduced byinternational organizations. No other developing region has formed such an organic and dynamic
interdependence as East Asia.
For the Japanese economy, East Asia is the most important developing region. For East Asia,
too, Japan is a particularly important country as the largest donor and the principal partner in trade andinvestment. Moreover, Japanese corporations are the chief architects of the East Asian production
network. Asian dynamism has also been supported by the trade and investment relationship with the
EU and the US, as well as the extensive business network of Taiwan, Hong Kong, and the overseas
Chinese.
As the dominant ODA provider in East Asia, Japan has mobilized its extensive tools for
economic cooperation mainly to spur and complement the market-based economic linkage. The
majority of Japan’s ODA projects placed high priority on assisting the self-help efforts of the East
Asian developing countries to attain a suitable status in the region’s production network and, through it,
catch up with the forerunners and overcome social problems. Japan’s ODA in infrastructure, humanresource development, technical assistance and intellectual support for policy formulation andinstitution building has greatly contributed to reinforcing Asian dynamism by removing obstacles and
2

The World Bank’s Miracle report cited macroeconomic stability, human resource development, export orientation, andbenign government-business relationship as the causes of high performance in East Asia [World Bank 1993]. Later, in theaftermath of the Asian financial crisis, the Bank warned that growth would not return to East Asia unless institutions andpolicies are improved in each country [World Bank 2000]. However, evaluation of policies of individual countries is notenough to understand the sources of dynamism in this region. The future of East Asia critically depends on the sustained
vitality of the region as well.
3
These terms carry different nuances. There is a debate as to whether the flying geese formation is still in shape despite therecent emergence of China, but we are not concerned with this issue. In order to avoid such largely semantic questions, we
prefer a more flexible term, Asian dynamism, to describe the dynamic production network in East Asia.

30

generating new trade and investment flows. In fact, Japanese ODA projects have often beenformulated in response to the needs of the private sector in Japan or the East Asian developing
countries. The resulting economic prosperity and social stability in East Asia have in turn broughtsignificant benefits to Japan.

The Roles of Government
To actively respond to the challenges from the regional and global networks as describedabove, the developing countries in East Asia must undergo a great transformation. While the main
players of economic development are undoubtedly private firms, simply deregulating and opening up
the private sector does not generate sufficient impetus for growth if the country is saddled with
underdeveloped markets, lack of human resources and technology, and low productivity. In order tokick start an economy trapped in the vicious circle of low income, low savings, and low technology,
the role of government is crucial as an external agent imparting order and direction to the national
economy.
The role of government envisaged by the World Bank has shifted dramatically, from theunwarranted optimism in the early postwar period to the advocacy of small government in the 1980s,
the call for institution building in the 1990s, and the more balanced view at present. But we must
remember that the discipline and activism of the East Asian governments were stipulated by theirdevelopment stages and the region’s needs. If the government fails to take certain required actions, thecountry will remain stagnant as it cannot join the regional production network. In the reality of East
Asia, it is all too clear that isolation leads to economic backwardness and that inability to cope withthe problems generated by growth destabilizes the society. The unproductiveness of laissez-faire, as
well as rigid control, is proven not theoretically but by the actual examples of neighboring countries.
Good governance must also be redefined in the East Asian context. The usual components ofgood governance, such as macroeconomic stability, structural reform, administrative efficiency andtransparency, social participation and the like, do not necessarily coincide with the conditions needed
for growth driven by trade and investment. Among these, macroeconomic stability is certainly a must.

31

But for the other components, East Asia has achieved high growth without them. It is probable thatdifferent and more sharply defined components of good governance are required to initiate growthunder international integration.
The most basic task of the East Asian governments is to establish a stable political regime
and social unity which are the preconditions of economic development. For this purpose, mostcountries in East Asia have chosen authoritarian developmentalism [Watanabe 1995], or
authoritarianism with capability4. This regime, which is quite different from simple dictatorship,features (i) economic nationalism in pursuit of material prosperity; (ii) obsession with external
competitiveness under industrialization and export orientation; and (iii) top-down decision making
under a powerful and economically literate leader and a supporting elite group. Such a regime often
emerged after a military coup and under a severe threat to national security from within or without. Its
management is not necessarily “democratic” by Western standards. Evaluation of this regime varies.
However, it is clear that the adoption of this regime was motivated by the external and temporary needto initiate growth in the regional environment. Since its value is historically conditioned, the very
success of economic development will in time deprive its legitimacy, forcing its exit and an
introduction of a more democratic regime. Such transition has already occurred in the forerunnersocieties, including Korea and Taiwan.
Once social stability and policy consistency are attained as basic conditions, the East Asian
governments have three important roles to play.
First, the government must create a market economy. In the poorest or transition countries,
domestic markets are extremely primitive. In terms of productivity, organization and human resources,
such countries have not reached a stage where mere deregulation can unleash the latent market power
to sound development [Ishikawa 1990]. Each country must constantly and flexibly mix market andgovernment according to its development stage. Naturally, this mixing must be done by thegovernment. To create a market economy, rules and frameworks such as laws, deregulation,
privatization and free trade are important but not enough. The government must also pay attention toand take action on the real sector concerns, such as trade, investment, technology and industrial
structure. Competitiveness must be given pragmatic support and concrete contents.
Second, the government must actively promote international integration while managing its
risks. In East Asia, as noted above, economic development and external integration are two sides ofthe same coin and must proceed in tandem. Of these, integration is the primary action since it initiates
growth by internalizing Asian dynamism. The timing, sequencing and scope of opening up is
extremely important. Developing countries must design an integration timetable which gives sufficientincentive for enterprise efforts while avoiding economic crisis and social instability. Here again, adelicate balance between liberalization and protection is required, which cannot be guided by thegeneral theory alone.
Third, the government must mitigate the negative aspects of growth. In addition to thelong-standing problems of poverty and income gaps, economic growth creates a set of new problems.
Foremost among them are emerging income gaps among individuals, ethnic groups and regions.
Environmental pollution, issues associated with urbanization such as rural-urban migration, traffic
congestion and housing shortages, and social evils such as crime, corruption, drugs and prostitution,
tend to arise. Economic growth is sustainable only when the opportunities and fruits of growth areperceived to be shared equitably by the standards of that society. When that is secured, the virtuous
circle of economic growth and social stability can begin.
We cannot say that the governments of the high-performing East Asian countries fulfilled
these three roles perfectly. But at least they did not make a fatal error in any of these areas that could
4

The exceptions include Hong Kong which remained a free economy and the Philippines under President Ferdinand Marcos
which was a different type of authoritarianism without developmentalism.

32

put them off the track of economic development.
Many factors have been cited to explain East Asian growth, including the high levels of
education and motivation, good government-business relationship, export promotion, income equality,
and so on. But these should be regarded as the concrete achievements by individual governments forthe purpose of executing these roles well, not the causes of success. It is important to understand thetotality of historical and regional environment of East Asia and the basic problems of development thatit poses. Evaluation of individual policies in isolation or an attempt to directly transplant them on
different soils is not very useful.

The Roles of Regional Cooperation
The maintenance of Asian dynamism requires regional cooperation in addition to policy
efforts by individual countries. Free markets do not always guarantee the healthy development ofprivate trade, investment and production. Problems and crises which are beyond private solutions will
occur. Regional cooperation to avoid or remove difficulties, support industries from the sidelines, andpresent visions to reduce uncertainties have greatly contributed to East Asian development, and willcertainly continue to do so in the future. This can be construed as the supplying of broadly definedinternational public goods.
Up to now, economic cooperation in East Asia has emphasized human resource development,
building infrastructure, promoting small and medium enterprises and “supporting industries,” creating
various institutions for industrialization, coping with negative aspects of growth, and intellectual aid
on policy formulation. These overlap with the priority areas of assistance by Japan, the top donor in
East Asia. Regional cooperation in East Asia has been characterized by open regionalism in the sensethat it did not discriminate against countries outside the region. Cooperation has been promoted
through voluntary action and peer pressure, not by forced conditionalities or uniform deadlines.
Economic integration in East Asia has been market-driven, with private activities as primaryand public policies as supplementary. This is very different from institution-driven integration such as
the EU, NAFTA and MERCOSUR. In this sense, East Asia has already achieved the private linkages
that other integration schemes aim to create. Recently, however, new efforts in institution-driven
integration are being initiated to further accelerate or complement the market-driven integration in
East Asia. The Japanese government also shifted its external policies from nondiscriminatory
multilateralism to institution-driven regionalism a few years ago [METI 2001, Urata 2002].
At present, the most important framework in East Asia is ASEAN plus Three (ASEAN+3)5.
Other regional schemes, such as the ASEAN Free Trade Area (AFTA), the Chiang Mai Initiative forcentral bank cooperation, the ASEAN Regional Forum (ARF), the Asia-Europe Meeting (ASEM) are
related to ASEAN+3. Additionally, bilateral free trade agreements (FTAs) between Japan-Singapore,
Japan-Korea, and so on are being concluded or negotiated. Regional FTAs are also proposed between
Japan-ASEAN and China-ASEAN.
In the future, the following topics are expected to be crucial for regional cooperation (manyof them are continued problems from the past):
 Regional peace and security as the precondition of prosperity Narrowing the gap in income and development stages between the earlycomers and thelatecomers
 Promotion of globalization together with the reduction of its negative influences (economic
5

The members of the Association of South-East Asian Nations (ASEAN) include Singapore, Malaysia, Thailand, Philippines,
Indonesia, Brunei, Vietnam, Cambodia, Laos, and Myanmar. ASEAN+3 consists of these countries plus Japan, China, andKorea.

33

crises, emerging income gaps, and so on) Human resource development, institution building, and improving governance in order tosustain growth
East Asian regionalism can also serve as a vehicle for transmitting the East Asian vision to
the rest of the world. Although East Asia is extremely diverse, something close to consensus
occasionally emerges which is different from the views of the Western countries or internationalorganizations. For instance, many East Asian countries are uncomfortable with the idea of unrestrained
markets, the IMF’s response to the Asian financial crisis, and the World Bank’s development
framework where poverty reduction is the only goal. Institutionalized East Asia can be the framework
for translating such uneasiness into constructive proposals, to be projected to the rest of the world andinfluence the policies of the international organizations.
In the age of globalization which began to accelerate in the 1990s, the policy tools for Asian
dynamism must be amended to reflect the new reality. Several decades ago when Japan—and later,
Taiwan and Korea—were rapidly industrializing, infant industry protection was adopted, in which
local enterprises were strengthened under temporary protection. However, this policy is no longer
feasible because (i) early trade liberalization is required for all countries; and (ii) local firms in theremaining developing countries lack capability. But full and immediate liberalization and external
opening will not lead to the catching up of these latecomers. We need to come up with practical policy
advice as to how industrialization of these countries should be supported by public policies as well as
regional cooperation in the age of globalization. East Asia is an ideal place to initiate this intellectual
quest.

Economic Development and Poverty Reduction
Since 1999, the World Bank has promoted cutting poverty as the ultimate goal ofdevelopment and required all poor countries to draft a poverty reduction strategy paper (PRSP) as its
principal tool. The United Nations Millennium Summit in September 2000 adopted the Millennium
Development Goals (MDGs), a set of numerical social goals to be achieved by 2015. At present,
poverty reduction dominates the global development debate.
In East Asia, no country has adopted poverty reduction as the only goal in national economic
development. A more balanced approach is favored, where economic growth is pursued strongly while
serious concern for social equity is also emphasized. It may be argued that this approach, rather thanconcentrating on the narrowly defined poverty reduction, produced more remarkable results in social
development over the long run (though we do not deny that problems did arise in environment,
congestion, income gaps and so on, and many East Asian governments were slow to act on them). It is
generally agreed that there is no ultimate solution to social problems (including poverty) without
sustained economic growth. This fact is also well understood in East Asia.
The United Nations’ MDGs and the World Bank’s PRSP, if applied uniformly, will beinconsistent with the development strategies in East Asia. Strain is already visible in the PRSP of
Vietnam, the first country to embrace this approach in East Asia6. For those developing countries in
East Asia which possess clear national development visions and are striving to implement concrete
6

For details, see GRIPS Development Forum’s information module, “Diversifying PRSP: The Vietnamese Model for
Growth-Oriented Poverty Reduction.” In the drafting process of Vietnam’s PRSP, a friction arose between the Vietnamese
government who considered this document subordinate to the existing national development plans and some donors who
tried to elevate the PRSP to the central instrument for budgeting and policy making. In the completed PRSP, this issue wasleft ambiguous. The World Bank highly evaluated the strong ownership of the Vietnamese government and lauded thisPRSP as “best practice.”34

policies to realize them, economic cooperation should be provided to supplement and strengthen thenationally owned policy framework, rather than bringing in an entirely new program.
More generally, application of PRSP must be flexible enough to reflect the different
conditions of each poor country. For some countries, including Vietnam, we can even ask whether
PRSP is needed at all. The criteria for localizing PRSP should include (i) the degree of dependency on
aid and debt reduction, (ii) the existence and quality of a national development plan (including
whether it effectively guides the budget and public investment); and (iii) causes of poverty. According
to these criteria, PRSP should be diversified flexibly and pragmatically.

Implications for Countries outside East Asia
Most people interested in East Asia are tempted to ask the question: are these lessonstransferable to other regions, including Sub Saharan Africa? The answer to this question must take asomewhat complex form, instead of a simple Yes-or-No. Since situations in each country and region
are different, it is easy to understand that direct replication of the East Asian model is unlikely to
succeed. In our opinion, the East Asian development experience and the Japanese experience ofeconomic cooperation in the region can offer the following suggestions for countries outside East Asia.
In the current development strategy featuring MDGs and PRSP, the close relationshipbetween economic growth and poverty reduction is widely recognized as a general principle. At theoperational level, however, budgeting and aid modality discussions over pro-poor policies are quite
active, while the formulation and implementation of growth strategies which are concrete, feasible andspecific to individual poor countries have hardly begun. This imbalance should be corrected bystrengthening the support for concretizing the growth strategy for each poor country.
To realize growth through trade and investment, the criteria for good governance must be
redefined, as noted earlier. Similarly for donor countries, the selectivity criteria for allocating aid
resources across different developing countries need to be revised as we shift the purpose of economic
cooperation from improving health, education and environment to initiating growth under international
integration. For growth, political stability and social integration are absolutely necessary. Beyond that,
we need a strongly committed and economically literate leadership, a technocrat group to support it,an administrative mechanism to execute economic policies consistently, and popular support for
growth-oriented development strategy.
At the level of individual policies, experiences are not transferable from East Asia to Sub
Saharan Africa, since these regions differ in degrees of social stability, human resources andknowledge, and regional economic dynamism. However, the methodology of industrial research andpolicy formulation should be transferable7. Japanese economic cooperation is characterized by the
totality of vision, long-term orientation, and real sector concerns. Respecting the uniqueness of eachdeveloping country, Japanese experts are interested in supporting the real sector efforts, including
industrialization, trade promotion, and improving skills and technology, by combining different aid
tools and from a total and long-term perspective. They want to work with the developing countries as
lasting partners in good times as well as bad. This approach can complement short-term contractorientation, frequent performance reviews, and globally common frameworks favored by theinternational organizations. It can supply patience and the respect for individuality which aredesperately lacking in the current global development strategy. The ultimate goal of Japanese
7

The Japan International Cooperation Agency implemented a large-scale and comprehensive policy support program toVietnam from 1995 to 2001. This program analyzed and advised on macroeconomic balance, fiscal and monetary policies,
agriculture and rural development, trade and industrial policy, state-owned enterprise reform, promotion of small andmedium enterprises, and response to the Asian crisis. Similar programs have been implemented in Mongolia, Laos, andMyanmar.

35

economic cooperation is to help discover—and implement—the most suitable growth strategy for thatparticular developing country, irrespective of whether it has an East Asian origin or not. This idea canbe applied to Sub Saharan Africa or any other region. We believe that one-time help and partial advice
are of little use.
However, much preparation will be required if Japan decides to commit itself to suchlong-term assistance in Sub Saharan Africa, where it has had little intellectual engagement in the past.
Domestic consensus for channeling aid to regions other than East Asia must also be formed. This is achallenging learning process for Japan. If such aid is to be extended to other regions, Japan should first
select a very small number of target countries with highest potential for growth by the revised criteria
for selectivity as discussed above. Strong national ownership of the growth policy is a particularly
important condition for selection. Aid resources should be concentrated on these few countries rather
than diffused widely and thinly. A permanent policy research team should be established in eachselected country to engage in (i) constant policy dialogue with the authorities; (ii) partnership withinternational organizations, other donors and NGOs; and (iii) policy inputs to Tokyo. Only after such asystem is installed, Japan can start to offer development assistance to other regions that is truly
characteristic of Japan, as described above.
Since other developing regions lack a regional production network as found in East Asia,
growth policies in the context of such regional dynamism must be adjusted accordingly. We firmly
believe that a single developing country without regional advantages can also activate growth throughtrade and investment. For example, strategies for primary commodity processing or light industries
can be designed and supported comprehensively, including marketing, distribution, organization,
training, technology, and finance. Concrete entry points will differ from country to country, and thus
cannot be generally stated. Such assistance must be provided not only bilaterally by Japan, but throughmultilateral channels in cooperation with international organizations and other donors.

References
Ishikawa, Shigeru [1990], “Underdevelopment of the Market Economy and the Limits of Economic
Liberalization,” chapter 7, Basic Issues in Development Economics, Iwanami Shoten (Japanese). English
translation in K. Ohno and I. Ohno eds., Japanese Views on Economic Development: Diverse Paths to theMarket, Routledge, 1998.
Ministry of Economy, Trade and Industry [2001], White Paper on International Trade 2001.
Watanabe, Toshio [1995], Designing Asia for the Next Century, Chikuma Shinsho. English translation(excerpts) in K. Ohno and I. Ohno eds., Japanese Views on Economic Development: Diverse Paths to theMarket, Routledge, 1998.
Urata, Shujiro [2002] “A Shift from Market-led to Institution-led Regional Economic Integration in East
Asia,” a paper presented at the Conference on Asian Economic Integration by the Research Institute of
Economy, Trade and Industry (RIET), Tokyo, April.
World Bank [1993], The East Asian Miracle: Economic Growth and Public Policy.
World Bank [2000], East Asia: Recovery and Beyond.

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