economic development notes

7/27/2019 Economic Development Notes

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Economic Development

Three goals of economic development:

Economic growth: This was indicated by a countrys success in the following areas:

increasing the nations wealth (GDP): used as performance legitimacy by regimes restructuring the economy: essential to remaining competitive and flexible in the global market diversifying the economy: ensured countries were not over-reliant on a certain commodity and

hence subject to global shocks in the market

able to bring about industrialization: showing a movement away from previous stages to a moreadvanced economy the element of progress

ensuring sustainable growth: this increased economic stability and was critical for the long termEconomic nationalism: This was indicated by a countrys ability to ind igenize the wealth and the

strategic resources and industries of their country and to achieve self-sufficiency. This was desirable as

this meant that countries would reduce their reliance on foreign investments and trade, which wouldmake them subject to the decisions of foreigners, and would increase native participation, ensuring that

the key industries of the country still belonged in the hands of their own people.

Equity: This was indicated by a countrys focus on the equal distribution of national wealth, income or

opportunities, and the idea of economic inclusion, where every citizen would all equally share in the

benefits accorded by the economy. This helped to reduce poverty and economic disparities, all essential

to the welfare of the people.

* The three goals are in conflict with one another, and an emphasis on one of the goals would inevitably

lead to the undermining of the other goals. Therefore, there are trade-offs involved in every countrys

decision when they choose which goals they would like to pursue.

Government intervention:

Government intervention was necessitated by the fact that they were the only organisation body that

possessed the:

Authority/Power/Political will: They had the power and authority to make important politicaldecisions to shape and direct the economy, something which none of the other businesses had.

Expertise: Not only did they have a broad macro-view of the economy as a whole, they also hadthe most number of people with the economic knowledge and skills to run the economy, as well

as the political perspective on how to balance the needs and welfare of the people with the

goals they were pursuing.

Resources: They had valuable resources that needed to be allocated to different sectors of theeconomy to guide its direction.


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Stability:

Political stability: Refers to a country with a stable, secure and strong government with consistent

policies (as opposed to a frequent change in government), with the ability to deal with problems

effectively and manage the citizens welfare and expectations. In the case of Singapore, the government

was also decisive, far-sighted and pragmatic, with transparency and dedication to rule of law. Countrieswith political stability were free from political turmoil and were able to entrench their rule for a long

period of time.

Economic stability: Refers to a country that has sustained economic growth and healthy balance of

payments, whose economy is very susceptible to fluctuations in the global market due to diversification

and non-reliance on specific products. It can also mean the country borrows within its means, has a low

inflation rate and absence of economic crisis.

Social stability: Refers to the equitable distribution of income among the different groups or regions in

the society, and is free from major social upheavals and social unrest (the people are not dissatisfied and

their basic needs are being met), which would have discouraged investors and disrupted businesses.

Problems facing the independent SEA states:

Economic growth:

Economic growth was necessary as the government needed to entrench their rule: Economic growth

was used as performance legitimacy for regimes, which were conscious of the fact that economic

performance was directly linked to the legitimacy and credibility of their rule. The economic growth

enjoyed by the countries also allowed the more basic needs of the people to be met, reducing

dissatisfaction and ensuring that the people accepted or at least tolerated their rule, which helped

maintain political stability.

Problem: The need to secure and entrench their political rule Action: Performance legitimacy Timeframe: Long term Applies to: Capitalist/open economies In Indonesia, the annual growth of GDP grew to 7.6%, which was almost twice that of the

preceding decade.

In 1997, Singapore was the fourth richest country in the world with its capital GNP of US$32,940 below only Switzerland, Japan and Norway.

Evaluation: However, economic growth was not always sustainable in the long run. With the exception

of Singapore and Malaysia: Singapore had strong principles of governance, which advocated

transparency.

Economic growth in primary industries, especially agriculture, resulted in stability for countries with a

sizeable rural population: Economic growth was critical in these industries to ensure that the needs of

the rural population were met, as they tended to form the lower-income groups in society. The


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government recognised the importance of ensuring the progress of the rural population as they made

up a huge proportion of the citizens, and the government needed to gain their support to legitimize

their rule. Hence, the government implemented policies to increase the productivity and yield of the

industry and protected the welfare of the farmers.

Problem: The lack of development in the agriculture sector Action: Policies targeted at the agriculture sector to increase productivity In Thailand, the government provided support for the agriculture industry, which included

increased use of tractors and fertilisers, improved roads and the introduction of new crops such

as maize, kenaf and cassava. All this helped to double production between 1960s and 1980s.

In Philippines, the International Rice Research Programme cultivated high yielding rice varieties,and the Ministry of Agriculture launched the Masagana 99 Programme to provide large fertilizer

subsidies, rural credit and other services to small rice farmers. All this led to self-sufficiency in

1972.

Timeframe: Short term Applies to: Capitalist and socialist economies

Evaluation: However, socialist economies, despite investing in the agricultural sector to increase output,

did not enjoy success as their focus on equity meant the people lacked the incentive to maximize their

production. Hence, they instead encountered a decrease in productivity.

In Burma, in terms of technology, fertilizer usage went up 6 times, high yielding variety seedswere introduced in 1971 and tractor utilization was encouraged by the government. However,

the redistribution of land to all the peasants, even those who were poorer and lacked skills and

expertise, led to greater inefficiency.

In Vietnam, although the area of cultivated land increased by 4.4 million acres and mechanizedplowing through the use of tractors increased by 37%, no targets were reached at the end of the

2nd Five Year Plan. This was due to the problems of collectivization, which lay in their inability to

mobilise labour and the lack of incentives. Peasants avoided participation in collective work

where possible and worked at low intensity when they did work.

Economic growth was accompanied by the diversification of the economy: The diversification of the

economy was integral to the economic stability of the country, as it reduced over-dependence on the

specific products that they had a comparative advantage in, making the country less vulnerable to the

fluctuations and shocks in the global market. Also, it enabled them to increase their economic growth

rapidly as they were able to provide a more broad-based amount of goods. In contrast, primary goods

often fetched lower prices in the global market than manufactured and industrial goods, and an over-

dependence on them would lead to less export revenue for the country.

Problem: Over-reliance on specific commodities (their comparative advantage) Philippines was an open economy with a fairly large dependence on commodity exports, and

hence was hard hit in the 1970s when the sugar prices plunged from 67 cents per pound in 1974

to 7 cents in 1978.


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In Indonesia, as a result of OPEC overproduction, the period of 1982-1986 saw oil prices fall toless than half of the 1981 peak price, resulting in a 27% plunge in oil taxes for the Indonesian

government. By 1985, the growth rate had been halved and oil revenue fell from 70% to 39% of

total revenues.

Action: Diversification and restructuring of the economy In Indonesia, when prices of its main export oil fell to less than half its peak price and oil revenue

fell from 70% to 39% of total revenues, they expanded the range of non-oil exports that would

be competitive internationally; share of non-oil exports increased from 31% to 50% of total

exports.

Most SEA states embarked on Import-Substitution Industrialisation (ISI) in order to tap on theircomparative advantage to gain additional resources, and later switched to Export-Oriented

Industrialisation (EOI) to develop new sources of revenue and diversify their products.

In Indonesia, after the fall in their oil prices, their primary export, in 1982-86, they furtherdiversified the economy, with manufactured goods such as garments and telecommunications

equipment that could fetch higher prices in the market than primary products.

Other countries even went beyond EOI and expanded their industry towards technology andservices, with Singapore being a prime example in its establishment of the Singapore

Technologies Corporation in 1983 to promote advanced technologies and the Government of

Singapore Investment Corporation to invest in overseas high technology multinational

corporations.

Timeframe: Long term Applies to: Capitalist/open economies socialist economies were closed and hence less subject

to the vagaries of the global market

Economic growth was brought about by courting foreign investment and aid: Due to the fact that

countries upon independence lacked the domestic capital and technology needed for the economy to

progress, governments sought foreign investment and aid, which would bring in the funds, resources

and knowledge that was critical for economic development. They did so by cultivating a favorable

business climate and reputation such as anti-Communist credentials, and by putting in place policies

that would attract investors and reassure them of the rule of law in the country regarding their

businesses.

Problem: Lack of domestic capital and technology Action: Courted foreign investment and aid through attract investment policies In Indonesia, Suharto promulgated the 1967 Foreign Investment Law, attracting foreign

investors with tax concessions and a guarantee against expropriation. The regimes anti-

communist credentials and intolerance for social unrest (its crackdown of the 1974 Malari riots)

created a conducive environment for investments.

In Thailand, the Promotion of Investment Act was put in place in 1960 and amended in 1977,guaranteeing private enterprise against state competition and nationalization. Other incentives

included conditional expatriations of profits and tax holidays


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Some countries went a step further in training and equipping labour with the necessary skillsneeded by the workforce: In Singapore, the education system was restructured in 1968 with

emphasis on technical and vocational education, with Ngee Ann College and Singapore

Polytechnic being reorganized into purely technical institutions. Hence, in terms of human

capital, the technical education policies resulted in a higher level of literacy as compared to its

regional neighbours, making them extremely successful in attracting foreign investment.

Timeframe: Long term Applies to: Capitalist economies

Evaluation: However, over time, some countries engaged in excessive borrowing and high-risk-

investments, due to an over-confidence from the success of their economy and their belief that the

country would be able to maintain sustained growth. This led to heavy government debts, and even

economic collapse.

In Philippines, borrowed funds were spent on bankrupt government entities and structures thatdid not generate income, such as monuments and government buildings. Many loans weredispensed entirely for political ends and inadequate controls meant a large proportion went

offshore as capital flight. As such, foreign debt increased from US$2.1 billion in 1970 to US$25

billion in 1983.

In Indonesia, in 1980, foreign loans constituted 42% of Indonesias state development budgetand by 1989, Indonesia was nursing Asias largest debt, estimated by the World Bank at US$58

billion.

Economic nationalism:

The creation of an indigenous business class was a method in which governments pursued economic

nationalism, at least in the short run: The absence of an indigenous business class was due to the

occupation of the ex-colonial powers, who ran the economy and the businesses, allowing only the

limited role and participation of the indigenous population in governing the country and the economy,

leading to their dearth in expertise and knowledge. Therefore, in order to reduce the foreign domination

of the economy and increase native participation, the government implemented pro-indigenous or anti-

alien policies to shift the ownership of the economy to the locals and reduce foreign influence.

Problem: Absence of an indigenous business class Action: Promulgated pro-indigenous or anti-alien policies to shift the balance of wealth In Philippines, Garcias Filipino First policy included a congress bill in 1958 for important

industries to be at least 60% owned by native Filipinos. As a result, Filipino participation in theimport trade increased by almost three fold from 1948 to 1965.

In Thailand, anti-Chinese policies were implemented, such as in 1952 when the military issued adirective for the Chinese to establish 3 centralised associations: one each for organizing gold

trading, jewelry trading and banking, with the intention of limiting their wealth.

Timeframe: Short term Applies to: All countries (due in part to their colonial history)


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government meant they were less competitive, less efficient and overly reliant on the government for

financial resources that could have been better used on more constructive projects.

In Philippines, the government had to absorb of more than 14 billion pesos in losses by RobertBenedicto, Marcos close friend and the head of the government-owned Philippines Sugar

Commission, when the world sugar price collapsed. In Indonesia, in 1975, Pertamina was found to have US$10 billion of debt as a result of reckless

over-borrowing by its chief, Ibnu Sutowo, one of Suhartos military cronies. He was fired but not

charged of any crimes.

In socialist countries, they emphasised on self-sufficiency and autarky, which was extreme economic

nationalism, due to their resistance to foreign influences: Due to their anti-West and anti-alien stance,

the socialist countries removed all foreign influences in their economy, cutting off all ties with the West

and international institutions. The government hence intervened by nationalizing industries, severely

reducing foreign trade, disallowing foreigners in positions of power and withdrawing from the IMF and

World Bank.

Problem: Presence of foreign influences Action: Autarky In Burma, between 1963 and 1964, all foreign and larger domestic businesses were nationalized,

and internal and external trade came officially under government control.

In Vietnam, in 1978, all major private enterprises were placed under state control, and internalpress reports claimed that 30,000 private firms had been abolished, with the urban sector being

thrown into turmoil as merchant dissatisfaction led to a mass exodus of refugees out of the

country.

In Indonesia, Sukarno confiscated Dutch property, nationalized businesses, severed political andeconomic ties with the West and withdrew Indonesia from IMF and the World Bank.

Timeframe: Long term Applies to: Socialist/closed economies, Indonesia under Sukarno

Evaluation: However, while they fulfilled their goal of economic nationalism, this came at the expense of

their economic growth. Firstly, this resulted in the loss of businessmen who possessed the necessary

skills and expertise to run the businesses effectively, which was made more important by the absence of

an indigenous business class. This led to increased inefficiency in the economy, and consequently, a

lower production. Secondly, a lack of trade meant that not only could countries not capitalize on their

comparative advantage to bring in profits from trade, they also could not benefit from other countries

comparative advantage. All this culminated in slower or negative economic growth.

In Indonesia, under Sukarnos government, ISI failed due to the inexperience and inefficiency ofthe new government. The state apparatus was ill-equipped to oversee the management of

economic resources necessary for industrialization, as it lacked expertise, capital, technology

and management skills, leading to state resources being misused and misappropriated.


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In Vietnam, there was a shortage in consumer goods, which led to a thriving black market, andtheir extreme form of economic nationalism meant that by 1980, utilization of industrial

capacity was lower than 50%.

Equity

Countries that pursued equity placed the welfare of the people above that of economic growth: Due to

colonial history, there was an unequal distribution of wealth, with the elites and the foreigners

possessing a larger share. As such, the socialist governments that focused primarily on equity sought to

redistribute the wealth to the poor.

Problem: Concentration of wealth in the hands of the elite and the foreigners Action: Redistribution of wealth Timeframe: Short term in capitalist countries, long term in socialist countries In Burma, the Tenancy Law of 1965 abolished tenancy and redistributed land to farmers,

especially the poorest, even if they lacked the requisite skills and the necessary capital. The

government on equity instead of productivity led to a decline in rural productivity, leading to a

fall in output.

Malaysia stands out as one of the capitalist countries that actively pursued equity over the longterm. To target bumiputra poverty in the rural areas, the Federal Land Development Authority

came up with land clearing and allocation schemes for the Malays while the Rubber Industry

Smallholders Development Authority helped to finance the Malay rubber smallholders for better

yielding crops.

Evaluation: However, an emphasis on equity meant sacrificing economic growth in the process, as it led

to lower productivity and efficiency, and hence a lower production. Malaysia is an exception as it

managed to balance its pursuit of equity for the Malays with their target of economic growth.

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