East Asian Economic Development Case Study

1.4 Institution and East Asian Economic Growth

East Asian countries were mostly extractive institutions in 1960. According to Acemoglu and Robinson (2012), without well-defined property rights in most regions and broad political participation, East Asian economic growth could not be sustained. Yet, the growth persists for more than 25 years, between 1965 and 1990. Possible reasons are discussed below.

Without the provision of secure property rights, a safe investment climate is created through government intervention. For example, before 1978, China experienced fluctuating economic growth under planned economy. Since the economic reforms in 1978, China had advocated the combination of government-owned corporations and private enterprises

Institutions alone could not give a full picture of how economic growth is achieved and sustained. Indeed, we are going to introduce the role of geography and culture in determining economic growth.

2. Geography

Geography is another determinant of economic growth. Sachs (2012) criticizes Acemoglu and Robinson (2012) for their narrow focus on institutional factors and ignorance of other factors. To him, geography is the deterministic factor of economic growth. However, institution or geography alone indeed cannot give the full picture of economic growth. They are complementary factors: Geography affects the quality of institutions, and institution interacts with the variables in Solow-Swan growth accounting model. Therefore, economic growth is indeed an institutional driven growth subject to geographical constraints.

2.1 Geography and Natural Resource

If a country is landlocked, it means it does not have navigable rivers for transportation of imports and exports. This type of country has huge cost disadvantages that must be overcome to trade on global markets. Shipping costs of imported goods are significant, including transportation costs on road and rail, and costs of crossing one or more international border (Radelet, Sachs & Lee, 1997). Insurance costs might also be incurred due to uncertainty of inland road conditions for each shipment (Stiglitz & Yusuf, 2001). As a result, it is difficult for landlocked countries to realize enhanced efficiency from trade due to trade route constraint. The 9 high-performing East Asian economies are blessed in a way that none of them are landlocked countries. China has huge geopolitical significance due to convenient access to consumer markets and trading partners. Japan, Hong Kong, Taiwan and South Korea are on major trade route, the Trans-Pacific trade route (Bentley-Pattison, 2016). The Strait of Malacca, another major gateway for trade to and from Asia, runs between Indonesia, Malaysia and Singapore (Hirst, 2014). The proximity to major trade route and convenient access to sea, together with East Asian openness to trade, explains why those East Asian countries benefited hugely from trade, from efficient resource allocation (importing raw materials for industrialization) to increased productivity (See Part D (1.2)