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. Last Updated: 07/27/2016

CIS: Eurasian Miracle?

Recently, while I was working as a consultant at the National Bank of Kazakhstan, a colleague gave me a copy of a World Bank policy study called "The East Asian Miracle." The title refers to the remarkable performance of eight East Asian economies -- Japan, South Korea, Taiwan, Hong Kong, Thailand, Singapore, Malaysia and Indonesia.


Enthusiastic boosters of Kazakhstan's prospects like to think of their country as a candidate for the next Asian miracle. It is equally common to hear Russians mention their Pacific neighbors as attractive role models. But the chances for a Eurasian miracle involving the Commonwealth of Independent State countries depend on just which lessons they draw from the East Asian experience.


The lesson most frequently drawn by would-be Eurasian miracle workers is that you don't have to be democratic to get rich. Indeed, the East Asian eight have not been consistently democratic. Several have experienced periods when growth coexisted with outright authoritarianism, and neither Japan nor Singapore, with lopsided, dominant party systems, nor Hong Kong fully fit Western concepts of democracy.


A second lesson often drawn is that it is all right for the state to meddle in markets. Indeed, most of the East Asian countries, aside from Hong Kong, have had periods when their governments have tried to play a leading economic role.


A third lesson Eurasian leaders seem to draw (although this one is not uttered aloud) is that corruption, even at the highest levels, is not necessarily a barrier to growth.


The World Bank's book, however, does not suggest that authoritarianism, interventionism and corruption are the keys to prosperity. Instead, it points to quite a different array of common characteristics as underlying the East Asian miracle.


The World Bank study says the first secret of growth in the eight East Asian countries has been an emphasis on social equality. The coexistence of growth and equality in East Asia is certainly not owing to European Union-style welfare states that seek equality through massive taxes and transfers. Instead, the countries have achieved equality through exceptionally heavy investment in "human capital," that is, education and health.


A second factor, important for the less urbanized members of the group, is an unusual degree of income equality between the city and countryside, achieved by development of rural infrastructure, and, in several cases, by land reforms that promoted small-scale private farming.


In regard to government economic intervention, the lessons are more complex. Policies have varied widely, but the common denominator seems to be that state intervention, even when vigorous, should be market friendly. All of the countries have made macroeconomic stability a central goal of policy. As a group, they are more open than average -- although not perfectly open -- to world trade. They avoid heavy food or energy subsidies, for example, as tools of policy. All have relatively free financial and capital markets. Finally, when markets signal that mistakes have been made, ill-conceived interventions are quickly abandoned. Korea's badly timed push to build heavy and chemical industries just when world market conditions were turning unfavorable is cited as an example of a policy that was reversed before it was too late to cut losses.


In addition to being market friendly, state intervention in East Asia has also been subject to performance tests. An example is a policy of giving credit subsidies to companies that can send the trade ministry a confirmed export order. Leaving aside technical economic arguments about the virtues of export subsidies, the ability to win export orders is not a bad test of a firm's abilities to do a lot of things right -- from improving quality, to controlling costs, to paying attention to what its customers want.


The relationship between growth and corruption is the most complex part of all in the East Asian puzzle. As recent scandals in Japan and Korea illustrate, these countries have not escaped corruption altogether, even at the highest levels. The kind of corruption and the reasons for corruption, however, are often visibly different in East Asia and the CIS.


For one thing, most of the East Asian eight have highly educated and highly paid civil services, even to the point that these states are described as technocracies. University graduates compete hard to get into civil service jobs and, once in, are less tempted to risk a good income, job security and policy influence for a small-scale bribe.


Finally, although the World Bank's book does not advance this hypothesis, one can't help thinking that there is such a thing as corruption that is performance tested and corruption that is not. Imagine two universities with corrupt football coaches. At one, rich alumni give money to the coach so that he will put their sons in the starting lineup, despite their inability to pass or tackle. At the other, rich alumni give money to the coach so that he can buy BMWs for the players who score the most touchdowns and new lab equipment for professors who give easy grades to players. It is hard to say which coach is more corrupt, but it is easy to say which one will win more games.


In short, "The East Asian Miracle" is full of food for thought. I'd like to put a copy on the desk of every president, minister and member of parliament in the CIS. Wouldn't it be nice to see education, health care and rural development become top priorities? To see government interventions subject to market-oriented performance tests? To go into a government office where the official you met was too well-educated and too well-paid to need to shake you down for a bribe? Yes, to see all of that really would be a Eurasian miracle!





Edwin Dolan is president of the American Institute of Business and Economics, an American business school in Moscow. He contributed this comment to The Moscow Times.