Boom before bust

Print edition : June 06, 1998

Southeast Asia's Misunderstood Miracle by K. S. Jomo with Chen Yun Chung, Brian C. Folk, Irfan ul-Haque, Pasuk Phongpaichit, Batara Simatupang, Mayuri Tateishi; Westview Press, Oxford, 1997; pages xiv+196.

THE three South-East Asian countries, Indonesia, Malaysia and Thailand, have been in the news of late mainly because of the crisis their economies have been facing, particularly the sharp fall in the external value of their national currencies. But till the end of 1997 or so, they were considered the cubs of the tigers of Asia - South Korea, Taiwan, Hong Kong and Singapore - which had brought in the "Asian miracle" that the former had succeeded in repeating. Late in 1993, the World Bank published its study, The East Asian Miracle: Economic Growth and Public Policy , dealing with the performance of the tigers and the cubs as also Japan which had achieved the highest growth rates in the world between 1965 and 1990. The study examined why such a "miracle" had happened in a part of the globe that at one stage was considered to be incapable of high and sustained growth. That the phenomenon was purely regional was ruled out. It was noted that in the case of Japan, South Korea and Taiwan there was considerable government intervention. But the main conclusion arrived at was that the "miracle", especially in the "newly industrialising countries" (NICs) of Malaysia, Thailand and Indonesia, was achieved by "getting the basics right", that is, by opening up their economies to global markets and thus moving to a regime of market prices (along with the accumulation of physical and human capital) without the arbitrary decisions of overt industrial policies by the respective governments. The World Bank study recommended this strategy for other countries striving for high rates of growth.

The volume under review, authored by scholars from the three South-East Asian countries, contests this view and offers a more nuanced historical analysis of the role of governments and their industrial policies in the rapid growth of the second-tier South-East Asian NICs. What emerges from the volume is that high rates of growth can be achieved not by any pre-set formula, whether the neo-liberal fundamentalism of the World Bank or its equally fundamentalist opposite, statism, but by a carefully designed state policy relating to agriculture, the management of natural resources and monitoring external conditions.

The three NICs had one common regional factor favouring rapid growth in the 1980s - the economic advance that Japan (and to some extent Taiwan and South Korea also) made in the two decades prior to it, leading to a regional relocation of industries and a regional flow of capital. Japan's advance led to increasing wage rates in that country and the Japanese desire to move labour-intensive industries to nearby countries with lower wages. This was accompanied by an appreciation of the Japanese currency, yen, and the eagerness of Japan to use its surplus for investment elsewhere. The 1980s, therefore, witnessed a sudden increase in foreign direct investment (FDI) in South-East Asia originating mainly from Japan. In Thailand, Japanese FDI increased from $124 million in 1986 to $1,276 million in 1989, in Malaysia from $158 million in 1986 to $880 million in 1991 and in Indonesia from $250 million in 1986 to $1,676 million in 1992. However, it is pointed out that "Southeast Asian NICs have not simply laid themselves open to FDI. Governments and firms have become increasingly selective and sophisticated in implementing industrial policies and attracting as well as regulating such investments as they endeavour to extract greater advantage from transnational economic linkages."

These NICs also had major differences in their "initial conditions". For Malaya, during the colonial period, rubber and tin were the twin pillars of the economy. At the time of independence in 1957, the manufacturing sector contributed only about 6 per cent to GDP and about the same share to employment. Indonesia also had a colonial past, but had the advantage of being one of the petroleum-producing and -exporting countries and one of the most populous countries of the world with the potential advantage of a large domestic market. Thailand, on the other hand, was never formally colonised but had, since the mid-19th century, relied on international trade as an engine of development. Based on an essentially agrarian economy, it was able to pursue a policy of exporting primary goods and an import substitution industrial policy.

In fact, an import substitution policy was effectively followed by all three countries initially and it laid the basis for an export-oriented policy subsequently. It was the import substitution policy that enabled a process of industrialisation characterised by a high degree of technological interlinkages. After the arrival of FDI, the growth of manufacturing for export was highly selective to suit the requirements of the investors. This has led to a kind of industrial dualism which will have to be corrected if industrialisation is to be sustained.

The bulk of the volume is devoted to an examination of the strategy of growth pursued by each of the three countries in terms of its specific conditions and requirements. In this short review, it is not possible even to summarise the treatment. It is ironic that we, in India, depend on the accounts of Western scholars even for an understanding of our neighbouring Asian countries and that our exposure to the works of scholars from these countries is extremely limited. Hence this study deserves special attention. Apart from the treatment of the economies of Malaysia, Indonesia and Thailand, it has an extensive bibliography for those who wish to do further readings.

The conclusions from the study on development policy in the context of globalisation and the increasing role of FDI may be noted. The first is that "while making efforts to attract foreign investment, host governments can also influence such investments to maximise gains for the national economy, particularly in the form of higher incomes and technology transfer; the leverage of host government can often be enhanced by the presence of more foreign investors from varied sources, both in diverse as well as competitive activities." A major aspect of the government's industrial policy is indeed the influencing and regulating of foreign investment.

Second, increasing exports, especially of value-added manufactured items, is crucial in the context of an open economy; but it does not happen automatically through the market mechanism. In the early stages of industrialisation, strengthening of exports is better achieved with government support, in terms of marketing, finance, incentives, provision of information and so on.

Third, import-substituting industrialisation, instead of being a wrong policy (violating the norms of the market) may be a very useful pre-condition for strengthening exports.

Fourth, an industrial policy taking into account the economy's short and long-term requirements is absolutely necessary. There is, of course, the risk that it may turn out to be deficient or that it may be misused. But taking that risk is better than just "leaving it to the market". The need for an industrial policy arises from the fact that it is not the existing comparative advantage that should inform industrial development, but dynamic comparative advantage for which anticipating future conditions and possibilities is required. The market is incapable of providing signals for that purpose.

The volume does not have even an inkling of the calamity that struck the three economies late in 1997 and early in 1998. But then, no one was able to anticipate it till it happened. The account of Indonesian development, however, provides some material to see why that country was the most affected by the currency crisis and why the crisis there persists. In the present global context, no study of economic growth can be considered complete unless it deals with the ever-present possibility of a sudden currency crisis.

A memoir of struggle and achievement NITYAPRIYA GHOSH

Jatadur Mone Pare: Rajnaitik Atmakathan by Jyoti Basu; National Book Agency, Calcutta; pages 503, price Rs. 250 (US $12).

JYOTI BASU (born 1914) is one of the few living Indian statesmen who have seen the country from its pre-Independence days and been taking active roles over five decades in changing the political and economic complexions of the land. His outstanding eminence has ensured that his views are widely followed and respected in various quarters. This is notable particularly because Basu has been playing all along an adversarial role - against the British Raj in the pre-Independence days, against the Congress Government after Independence, and against the federal Government when given the task of the chief executive of a State Government. Naturally, his views form an alternative history of India, different from the history presented by the political establishment. His political memoir in Bengali - Jatadur Mone Pare: Rajnaitik Atmakathan ("As Far As I Can Remember: A Political Self-account"), should therefore be an important archival source for historians.

One important proviso needs to be added here. Basu is reluctant to move the footlights on to his own self and makes it clear that he will desist from giving attention to his personal ecstasies and disappointments. He has reconstructed the history, from 1940 when he joined active politics, down to December 1997, when he was most talked about, predominantly from his party documents. What then, one can ask, is the point of this reconstruction - one can as well go through the party theses and resolutions, if this reconstruction is devoid of personal faiths and values. True, but the process of Basu's selecting some moments, highlighting some struggles, ignoring some issues, can reveal the man.

Jyoti Basu does not deal with inner-party discussions and debates, except on the issue of the Ranadive thesis in 1948 and his party's refusal to let him be the Prime Minister of the coalition Government in 1996. Once a party resolution, in the making of which Basu himself has a role, is final, he stands by it without betraying the sway of doubts and confusions. An orthodox Communist, he is first and last a party man. To observers, such a man is hardly exciting. But Basu is exciting - probably that is what charisma is all about - thanks to his unambiguous views, staccato language, unpredictability of response, and acerbity of temper.

A Communist's life is never strewn with roses. When Basu joined the Communist Party of India (CPI) in 1940 as a wholetime worker, on return from England after completing his legal education, life was even more difficult than usual - the CPI was then a banned party. Much has been written about the lifting of the ban in 1942. At a time when the Quit India movement was at its peak, the CPI's reorientation that the War was no longer imperialist appeared shocking to nationalist opinion. Many Communists today are apologetic about the change of position by the CPI. But Basu does not express regrets. He admits that he agreed with the view that it was a people's war and the survival of the Soviet Union was crucial for international Communism.

It is difficult to understand even now why the CPI should be picked for vilification for cooperating with the Government. The Congress Party was at that time speaking with many voices, negotiating and confronting, cooperating and non-cooperating, on with the movement and off with the movement. The CPI, however, was branded anti-nationalist. It was a harrowing time - suspicion and hatred from fellow Indians were more disorienting than government surveillance. It speaks volumes for the resilience of the CPI in Bengal that it expanded its membership from 2,200 in 1942 to 26,000 in 1947 at a time the party was ostracised.

But Basu is less candid about the Partition of India. He says that his party severely opposed the proposal of Partition. Not quite. The CPI did undergo a violent conflict of stands: whether or not the Muslim League represented the Muslim masses, whether or not Muslims were entitled to the right to secede. Even today the Communists are criticised because some party resolutions at that time did favour freedom of choice for Muslims, even though at a later stage the CPI retracted and condemned Partition.

The politics or economics of a country is a tortuous process and it is sometimes difficult to take a stand. Basu was put on the horns of a dilemma when he was the leader of his party's three-man legislative team in the pre-Partition Assembly of Bengal in 1946. The Assam Government was throwing out Bengali families who had settled in the Assam Valley. These starving peasants went there from East Bengal in search of a livelihood; they had been promised a domicile status by the previous Assam Government. But the newly elected Congress Government in Assam was forcing those Bengalis out.

The issue was raised in the Bengal Assembly by a Muslim League member. The Congress members of the Bengal Assembly expectedly took exception to allegations against the Congress Government of Assam. The issue took a violent communal turn - the persecution of Muslim peasants in Hindu-dominated Assam - and the confusion was worsened by strained relations between Bengali and Assamese people. Basu took sides with neither the Muslim League nor the Congress. The issue involved, he said, was not related to a Hindu-Muslim or Bengali-Assamese conflict of interests. The real issue was that neither the Bengal nor the Assam Government was capable of looking after the poor peasants, who continued to suffer under the stranglehold of the Permanent Settlement of landholding. It was a shame that both the Congress and the Muslim League were praying for redress to the British overlordship, which was responsible for this awful state of affairs. Basu's lone voice in the Assembly was drowned - both the Muslim League and the Congress were angry with his stand - but he had made his point coolly with his class approach to get out of the racial and communal rut. Basu's political savvy was evident on the third day of his career as a legislator and there has certainly been no let-up of this since.

Coming to power in West Bengal in 1977, Basu and his party had to readjust its rights. Electing to work under a democratic federal structure, the Party's attention was from time to time taken by the Centre-State contradictions and confrontation. The issue was raised by Basu and in course of time supported by other States. To arrest the "flight of capital" from the State, Basu had to brush aside doctrinaire antagonism to domestic monopoly capital and foreign investment and evolve a new course. He does not say if he was influenced or bolstered by the post-1979 China model of development or by the collapse of socialism in the Soviet Union but he has been steadily pursuing an interesting industrial development and economic development experiment.

In order to expand its base, his party has gone on recruiting members. A price paid for this experiment is infiltration by those of questionable integrity who are devoid of revolutionary consciousness. Basu started his career as a trade unionist and championed trade union rights among the police, hospital staff and other sections whom it is difficult to unionise. What is his assessment of the development, orientation and capabilities of the organised working class movement in West Bengal and India? He does not deal with these questions in his memoir. Instead he reflects on land reform and panchayats, which are unquestionably his and his Party's big achievements. Towards the end of his political career, he finds communal forces in the country rampant and it is not clear how this menace can be checked and overcome. In the process, has his steadfast opposition to the Congress(I) which, to his mind, is a landlord-bourgeois combine inimical to the interests of millions of working people, undergone any subtle change? In this book, the towering revolutionary keeps himself at a distance from both the Congress(I) and the Bharatiya Janata Party.

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