The Economics Book

286 ASIAN TIGER ECONOMIES

The rapid rise of the Asian Tigers

was based on exports. Large facilities

to handle container ships, such as

these in Singapore, were built by the

state to promote growth.

“infant industries,” pumped up
with subsidies and trade protection,
were eventually made to grow up.
The state could enforce
performance criteria on firms
because it was able to withdraw
preferential treatment as needed.
Robert Wade argues that the
way these states chose to lead
the markets explains the creation
of comparative advantages in
industries where none previously
existed. Initially, the prices of
goods from a new industry would
normally be internationally
uncompetitive. In addition, the
production of a new product often
requires the simultaneous setting
up of other industries and
infrastructure. The coordination of
this process is difficult if left to
private firms rather than the state.
Moreover, these protected, infant
industries became competitive
when they were given classical
incentives to learn how to become
more efficient. In order to achieve
the economic education of new
firms and the coordination of initial
production, governments needed to
act in violation of narrow market
prices. This occurred in South

Korea’s steel industry. In the 1960s

the Korean government was

advised by the World Bank not to

enter the steel sector because it

had no comparative advantage

there—others could easily beat its

prices. By the 1980s Posco, a large

Korean firm, had become one of the

world’s most efficient steel producers.

Political interference

Attempts at interventionist policies

in regions outside East Asia were

unsuccessful, which tarnished the

reputation of the developmental

state. In Latin America and Africa

the preferential treatment of firms

and sectors generated poor

incentives: firms were shielded

from competition, but the state did

not enforce performance criteria.

Infant industries never grew into

successful exporters.

In Latin America especially,

preferential treatment became linked

to politics with little economic

payoff: some firms received

subsidies and tariff protection but

did not become more productive.

Over time these firms became

a drain on their governments’

budgets, absorbing rather than

generating resources. “Getting

prices wrong” did not help to

build comparative advantages

in new industries. It led instead

to inefficient production and

economic stagnation.

In East Asia successful states

seemed better able to resist

pressures from private interests.

After setting up its new steel firm

in the 1960s, the South Korean

government ensured that the firm

was meeting efficiency targets.

If political interests had emerged

that had prevented the state from

disciplining the firm, the state

would have become the servant

of narrow interests, not of the

overall economic efficiency of the

economy. The state had to remain

autonomous and resist pressures

for favoritism from particular

groups. At the same time the state

provided firms with credit and

technical assistance—to do this

and to monitor firms’ performance,

it was necessary for the tentacles of

the state to reach into the smallest

cogs of the economy. The economic

The state... has set relative

prices deliberately ‘wrong’

in order to create profitable

investment opportunities.

Alice Amsden