ASGE

Chan CheeMang TP021569 BM002-3-3 Individual Assignment

Table of Content:
Contents: Page No:
1.0 Introduction 2

2.0 What is Globalisation 3

3.0 East Asian Economies 4-6
3.1 Member Countries of East Asia
3.2 East Asian Business and Economic Context

4.0 What is Free Trade 7-8
4.1 The Status of Free Trade in Eastern Asian

5.0 GDP level in East Asia 8

6.0 Implications of Globalisation and Free Trade on East Asian Economy 9-13
6.1 Positive Impact of Globalisation and Free Trade on East Asian Economy
6.2 Drawbacks of Globalisation and Free Trade on East Asian Economy

7.0 Conclusion 14

8.0 References 14-17
8.1 Books and Journals
8.2 Online Resources

9.0 Appendix 18-21

Asia Pacific University (A.P.U) 1


1.0 Introduction

According to Lau and Park (2003), stated that East Asia has been the fastest growing region in
the world for the pastseveral decades since the East Asian currency crisis of 1997-1998
notwithstanding. On above average, theEast Asian developing economies as a group,
including China, Hong Kong, Indonesia, SouthKorea, Malaysia, Philippines, Singapore,
Taiwan and Thailand, has grown at almost 8% per year since the 1960s. The notable
exception is Philippines, which has only beenable to grow at less than half the average rate.

Also,Rothenberg (2003) stated that Globalisation is the acceleration and intensification of
interaction and integration among the people, companies and governments of different nations.
Nowadays going global has become a must for every organization due to the
intensifiedcompetition going on in the world, globalisation philosophy has been adopted by
many firms andthey have successfully implemented it. For example Toy ‗R‘Us opening store
in Shanghai, China

In the journal year 2006, Alan Rose mentioned how Wal-Mart has targeted China, which has
long been a major supplier of its products, as a key region for its international store growth. It
now has 56 stores inChina with 30,000 workers and now planning to open 20 more stores
(China Daily,2006).

Furthermore, Griswold (2003) provides Free trade agreement by definition lower barriers to
trade between participants, and lowering or eliminating barriers altogether. For example,
ASEAN- the Association of Southeast Asian Nations was created with the purpose of to
accelerate theeconomic growth, social progress and cultural development in the region
(ASEAN, 2011).

The relationship between the Globalisation and Free Trade Area is directly proportional to
each other, due to globalisation where by businesses going from one country to another to
continue their operations profitably which has been assist by the Free Trade Agreements
between the countries, for example ASEAN members like Malaysia and Singapore, Malaysia
exporting water to Singapore (Segal, 2004), globalisation and free trade agreement occurring
at the same time inthis case.



2.0 What is Globalisation?

According to Albrow (1990), Globalization refers to all those processes by which the peoples
of the world are incorporated into a single world society, global society. Angell (1991) stated
that Globalisation occurs when the world economy has become as highly interdependent as to
make national independence an anachronism, especially in financial markets. The
interdependence is driven by science, technology and economics - the forces of modernity;
and these forces, not governments, determined international relations. Thanks to this
interdependence, war between modern nations is impossibility. The rise of global
informationalism in this end of millennium is intertwined with rising inequality and social
exclusion throughout the world. Moreover, the process of social exclusion in the network
society concerns both people and territories. So that, under certain conditions, entire countries,
regions, cities and neighbourhoods become excluded, embracing in this exclusion most, or all,
of their populations. This is different from the traditional process of spatial segregation
(Castells, 1998). Globalisation may indeed mean the end of the nation-state if the nation-state
fails to redefine itself to meet the new conditions it faces in the global environment (Carnoy,
2001).

According to Clarke and Newman (1997), the happy ending of the globalisation narrative is
one in which both nations and companies become faster and more agile in developing
responses to new forms of competition. In relation to the public sector, this narrative of
globalisation as a double purchase, not only must states enable business to become more
competitive (by reducing the iron hand of regulations and excessive taxation), it must also
become more lean and agile itself. Both imply a reduction in the size and cost of the public
sector and 'being business-like is presented as the means of achieving these objectives.

Thus, Globalisation is the name for the process of increasing the connectivity and
interdependence of the world's markets and businesses. This process has speeded up
dramatically in the last two decades as technological advances make it easier for people to
travel, communicate, and do business internationally. Two major recent driving forces are
advances in telecommunications infrastructure and the rise of the internet. In general, as
economies become more connected to other economies, they have increased opportunity but
also increased competition. Thus, as globalization becomes a more and more common feature
of world economics, powerful pro-globalization and anti-globalization lobbies have arisen.



3.0 East Asian Economies

(Sources from: Wikispaces.com http://jspivey.wikispaces.com/East+Asia+MJC )

3.1 Member Countries of East Asia

East Asia consists of six main members of the countries which include Mongolia, China,
South Korea, North Korea, Japan and Taiwan. East Asia also known as Eastern Asia preferred
by the United Nations is a sub region of Asia that can be defined in either geographical or
cultural terms. Geographically and geopolitically, it covers about 12,000,000 km2 or about 28%
of the Asian continent, which is about 15% bigger than the area of Europe. (See 9.1 East Asia
Populations and 9.2 Brief History of East Asia in Appendix)

3.2 East Asian Business and Economic Context

In business and economics, East Asia has been used to refer to a wide geographical area
covering ten countries in ASEAN, People's Republic of China, Japan, South Korea, and
Taiwan for the purpose of economic and political regionalism and integration. United States
foreign policy under the Obama administration considers Southeast Asia a part of East Asia.
The tendency of this usage, perhaps, started especially since the publication of World Bank on



The East Asian Miracle in 1993 explaining the economic success of the Asian Tiger and
emerging Southeast Asian economies (Indonesia, Malaysia, the Philippines and Thailand).

In addition, this usage has also been driven by Asia-wide economic interconnectedness since
the co-operation between ASEAN and its three dialogue partners was institutionalized under
the ASEAN plus Three Process (ASEAN+3 or APT) in 1997. The idea of East Asian
Community arising from ASEAN+3 frameworks is also gradually shaping the term East Asia
to cover more than China, Korea, Japan and Taiwan. This usage however, is unstable: the East
Asian Summit, for instance, includes India and Australia.

East Asia is considered to be a part of the Far East, which describes the region's geographical
position in relation to Europe rather than its location within Asia. However, in contrast to the
United Nations definition, East Asia commonly is used to refer to the eastern part of Asia, as
the term implies. Observers preferring a broader definition of 'East Asia' often use the term
Northeast Asia to refer to the greater China area, the Korean Peninsula, Taiwan, and Japan,
with Southeast Asia covering the ten ASEAN countries. This usage, which is increasingly
widespread in economic and diplomatic discussion, is at odds with the historical meanings of
both "East Asia" and "Northeast Asia". The Council on Foreign Relations defines Northeast
Asia as Japan and Korea.

East Asian economies, which are highly dependent on international trade, were not only hit
hard by the Asian financial crisis in 1997-1998, but also vulnerable to the worldwide high-
tech crisis in 2001. Confronted with such economic crises, many Asian governments
recognized the importance of education for sustaining high economic growth. In particular,
education would increase the number of competent workers and enable the creation of new
technologies domestically and facilitate the absorption of advanced technologies from
overseas, and hence economies with more educated human capital would grow faster than
other countries.

Some researchers have shown the productivity and rapid economic growth for five East Asian
economies. Productivity in Hong Kong was found to have bidirectional causal relations with
economic growth, perhaps due to the fact that Hong Kong is a small but highly open economy
focusing mainly on service sectors such as trading, financial services, and tourism to name a
few. Thus, Hong Kong may have an immediate effect on service-related technology such as



management and marketing skills, and the improved economy. However, for Japan, a one-
way causal relationship from economic growth to productivity appeared to be non-trivial
when longer lags are used. The results are, in general, consistent with the observation that
Japan, which experienced fast growth in the 1960s and 1970s, was a relatively closed
economy, and hence its increase in investment domestically has long been believed to be the
primary cause for a subsequent rise in productivity.
Unlike in Japan, Korea and Taiwan tend to cause the growth of the two economies. This
finding is a bit surprising given their shorter experiences but the results are generally
consistent with their recent trends of purchasing overseas to compete with foreign investors.
In this case, causality may run to economic growth but the growth effect of publications is
debatable because the past imported from overseas may not have a direct influence on a home
country‘s past economic activities. Moreover, in Singapore no longer show significant causal
effects on economic growth. The insignificant causal effects are, perhaps, linked to the small
number of population in Singapore.



4.0 What is Free Trade?

According to David M. Driesen (2000), free trade is a system in which goods, capital, and
labour flow freely between nations, without barriers which could hinder the trade process.
Many nations have free trade agreements, and several international organizations promote
free trade between their members. There are a number of arguments both for and against this
practice, from a range of economists, politicians, industries, and social scientists.

A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and
import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to
domestic producers. Restrictions on the flow of currency are also lifted, as are regulations
which could be considered a barrier to free trade. Put simply, free trade enables foreign
companies to trade just as efficiently, easily, and effectively as domestic producers.

The idea behind free trade is that it will lower prices for goods and services by promoting
competition. Domestic producers will no longer be able to rely on government subsidies and
other forms of assistance, including quotas which essentially force citizens to buy from
domestic producers, while foreign companies can make inroads on new markets when barriers
to trade are lifted. In addition to reducing prices, free trade is also supposed to encourage
innovation, since competition between companies sparks a need to come up with innovative
products and solutions to capture market share.

In short, Free Trade is the trade between various countries of the world has taken place for
many hundreds, perhaps thousands, of years. Originally trade enabled people to obtain food
and materials that they could not produce for themselves. For example, the Malaysia does not
have a climate suitable for growing apples, and therefore needs to import these from abroad.

More recently, it has been recognised that some countries are 'better' at producing certain
types of product than others. It seems to make sense then, for countries to specialise in
producing the goods that they can produce most efficiently, and to trade their surpluses of
those goods for the products they cannot produce, or are less efficient at producing. This is
known as the principle of free trade.



4.1 The Status of Free Trade in Eastern Asian

Free trade agreements (FTAs) have become a prominent feature of the multilateral trading
system and an important instrument of trade policy for members of the World Trade
Organization (WTO). The proliferation of FTAs is the result of a number of factors, from the
economic to the political. East Asia is with no exception involved in the process and
witnessing the establishment of multi-layered FTAs. Pioneered by the Association of
Southeast Asian Nations (ASEAN) in 1992 when it initiated the ASEAN FTA (AFTA), and
encouraged by ASEAN+1 (ASEAN plus one country) FTAs, more and more economies in
east Asia are involved in FTAs, although the characteristics of these FTAs differ according to
their background and circumstances. When the proliferation of FTAs in East Asia benefits the
regional trade and economic growth, questions have been raised about ―Asian noodle bowl‖
effect; pointing out multi-layered FTAs in East Asia have created new trade barriers and
raised the cost of business in the region. To this end, East Asia needs to progress from the
proliferation of multi-layered FTAs to a region-wide FTA with wider participation and
broader coverage.

5.0 GDP level in East Asia

The macroeconomic performance and prospects of the East Asian region have changed
dramatically since the onset of the Asian crisis in mid-1997. East Asia plunged from being the
region that exhibited the highest average rate of growth of real gross domestic product (GDP)
or GDP per capita of all regions in the world economy to the region in which several countries
registered negative growth in GDP per capita in 1998: Hong Kong, Korea, Singapore,
Cambodia, Indonesia, Malaysia, Philippines and Thailand (Asian Development Bank, 1999).
Three of these countries had to go to the International Monetary Fund (IMF) for large bailout
loan programs (Korea, Thailand and Indonesia). All eight countries resumed positive growth
in the last quarter of 1998 or in 1999, but there is a question as to how fast they can grow after
the Asian crisis and what policies are needed to resume fast growth. (See 9.3The East Asian
performance in Appendix)



6.0 Implications of Globalisation and Free Trade on East Asian Economy

Knowledge regards to the deep extent of Globalization and Free trade agreement become the
responsibility of manager of a firm in its expansion to compete on a global level. A manger
must do a depth analysis along with right knowledge on the political, economic, social and
technological factors (PEST factors) before putting their firm to compete in the international
level relating to the respective countries‘ free trade agreement. Take an example for a
Malaysian firm to start trading their business in Thailand, the firm will get benefits under the
policy of AFTA (ASEAN Free Trade Agreement). As both of these two countries are the
members of AFTA. With the effective insights on Globalisation and Free Trade would help a
manager to strategise the best to serve the firm in achieving their goals and thus successfully
operates in foreign countries. According to Jung Sik Kim and Yonghyup (2007), in recent
years, East Asian on the rise of the regional economic trade blocs has been reducing the trade
barriers which has led to the attraction of FDI as China has signed agreement with the World
Trade Organisation (WTO) shifting from a close economy policy to an open economy. This
has brought in many foreign multinational companies like Apple Inc. to invest and operates in
China by entering the huge population market segment (Yamin, Moad Pervez N. Ghauri,
2004) in the articles on Rethinking MNE-Emerging Market Relationships:Some Insights from
East Asia´ said that Malaysia, Singapore, Indonesia, Korea and other EastAsian countries are
all having favourable FDI policies has led to fasteconomic growth with the encouragement
from their government.

6.1 Positive Impact of Globalization and Free trade on East Asian Economy

Globalisation and Free Trade ensured the huge amount of domestic capital, production level
and employment opportunities in the developing countries which became the major step
towards the economic growth of East Asian. For example, Globalisation has been the
booming factor that has bolstered the economic life of China giving the biggest advantages to
countries in East Asia while incorporating with Free Trading Agreements.
According to Mo and Ghauri (2004), Globalization and Free trade has contributed to the
development of East Asian economy as it promotes economic integration like reduction in
infrastructure cost (transport and communication), the lowering of trade barriers, and
increased mobility of capital andlabour, along with the signing of free trade agreements of



East Asian countries with WTO and the forming the Association of Southeast Asian Nations
ASEAN , had given the progress of economic integration with increasing number of global
importation and exportation especially in East Asia (Fujita et al, 2008).

Globalisation assumes the creation of new jobs as investors build new corporations in these
countries creating new job openings and opportunities. This leads to an increment in income
and the development of competition with new jobs offer more buying power to the population
of that country which leads to economic boosts and yet higher living of standards. Companies
like Intel, Shell, and Google have been able tocreate more new job opportunities within the
countries, pay taxes to the government, variety of goodsand services being experienced by the
public in East Asian countries which has led them to highstandard of living and also have
contributed an increase in Gross domestic Product of these countries relatively.

Furthermore, AnishaSabhlok (2001) in her pilot micro study of Corporate Social
Responsibility on some companies based in Singapore, noted that Multinational Corporations
in Singapore contributed to the society by adopting the best practices, driving innovation,
developing green products and attaining eco-efficiencytargets, enlightens MNCs contribute to
the country‘s economic and social development. Globalisation and Free Trade apparently
helps in the outsourcing of environment knowledge from East Asia especially in Japan of
their Green Computing for Information and Technology sector. It helps them in developing
the know-how process in Japan in terms of enhancing the green technological advancement.

According to the researcher Thomas Sowell (2005) all the people of the world can
contributeand those who keep themselves isolated from others will be left behind. This is due
to the problem of not being in any kind of trade agreements with other countries or not having
to be involved in globalisation. Globalisation has also made the domestic producers produce
more efficiently due to their international specialisation and the pressure that comes from
foreign competition, which benefits both the economy of the country and the customers as
they are able to consume a wide variety of domestic and imported goods at lower prices,
taking an example of Malaysia fast food industry where by people can enjoy KFC or
McDonalds and at the same time enjoy their local fast foodsas well. Also, free trade
agreement increases in environmental protection for example in ChinaMNCs have pledged to
Government to bring about more environmental friendly policies in response shown by
Xinhua, (2011) in an news report on Chinadaily the Chinese President HuJin Tao said that



China hopes to balance economic and social development with population,resources and the
environment, and embark on a path of sustainable development also China will play a
constructive role in resolving regional hotspot issues and take an active part in variousforms
of regional security dialogue and cooperation in order to preserve a regional
environmentconducive to peace and development in Asia.

According to AbhayBurande in his articles on Advantages of globalization claimed that
globalisation increases the economic prosperity and opportunity in the developing world.
Thecivil liberties are enhanced and there is a more efficient use of resources. All the
countriesinvolved in the free trade are at a profit. Resulting in lower prices, more employment
and a better standard of life in East Asian region, it is feared that some developing regions
progress at theexpense of other developed regions. However, such doubts are futile as
globalization is a positive-sum chance in which the skills and technologies enable to increase
the living standardsthroughout the world. Liberals look at globalization as an efficient tool to
eliminate penury andallow the poor people a firm foothold in the global economy. In two
decades from 1981 to 2001,the number of people surviving on $1 or less per day decreased
from 1.5 billion to 1.1 billion.Simultaneously, the world population also increased. Thus, the
percentage of such peopledecreased from 40% to 20% in such developing countries like East
Asia.Most of the East Asian economies have also benefited from outsourcing done by
mostlyAmerican companies hence more job opportunity is created. For example ³Malaysia is
one of thehosts of Call centres for American and other European companies, leading to a
development of Malaysian service sector, as they learn how to communicate, tackle situation,
and handlecustomers also their skill level is developed and polished by foreign
companiesGlobalization advocates such as Jeffrey Sachs points to the above average drop in
poverty ratesin countries, such as China, where globalization has taken a strong foothold,
compared to areasless affected by globalization, such as Sub-Saharan Africa, where poverty
rates have remainedstagnant.Supporters of free trade claims it increases economic prosperity
as well as opportunity,especially among developing nations of East Asia, enhances civil
liberties and leads to a moreefficient allocation of resources. Economic theories of
comparative advantage suggest that free trade leads to a more efficientallocation of resources,
with all countries involved in the trade benefiting. In general, this leadsto lower prices, more
employment, higher output and a higher standard of living for those indeveloping countries.



6.2 Drawbacks of Globalisation and Free Trade on East Asian Economy

Globalisation and Free Trade are being blamed for their negative effects which heavily impact
on some countries of the East Asia. Authors such as Marxist analysis, Sheikh Baten, Lim and
Paul argued that globalisation had made poorer countries are to suffer, countries like Vietnam
and Laos in East Asia try to save their national markets. The common main export product
from poorer countries is usually their agriculture, andGlobalisation and Free Trade increased
difficulties for them to compete with stronger countries. The balance of trading seems to be
unfavourableand unfair to country depends on agricultural industry. This is because import is
mostly greater than export even the value of goods imported are much higher than that of
exported. Therefore,Globalisation and Free Trade does not really provide a win-win situation.

In addition, exploitation of resources becomes another issue which the stronger industrialised
powershas resulted in the exploitation of the people in those nations to have cheap labour
only.A very good example would be foreign businesses shifted to China or Vietnam for
cheaper human resource. However, host countries labour suffered as being paid lower and
work overtime. Globalisation has alsoled to spread of a materialistic social lifestyle and
attitude that sees consumption as the path to prosperity in the East Asian countries. East Asia
has not been able to decouple from developed economies.

According to the Andy Yee (2010), during the year 2000-2007, exports as the main
proportion of Asia‘s GDP increased from 35% to 47%, with three-fifths going to Europe and
the US with most intraregional trade inintermediate goods used to manufacture export
products. As Stephen Roach (2010), a well-known economistand Chairman of Morgan
Stanley Asia, pointed out in his latest book, Asia‘s explosive growth has been based on upon
deep integration with the global economy, which proved unsustainable in face of the global
recession. East Asia need to focus on promoting moreintraregional trade in final goods by
encouraging local demand, East Asia‘s stellar growth performance has led to the decline of
absolute poverty since the 1990s. However, inequality of income and consumption has
increased significantly since then. About 3 quarters of inequality in the region are attributed to
inequality within countries. The export-led growth hasintegrated littoral regions, special
economic zones and cities with the global supply chains. In the process, many fault lines, such
as the urban-rural divide, regional-ethnic divide and skilled-unskilled labour wage gaps
developed which may threaten social stability. For example, the phenomenon of migrant



workers in China and the associated debate of hukou reform.TheBangkok-rural divide in
Thailand, which has paralysed Thailand‘s political system, is another.Globalization has widen
the gap of inequality in recent years as unrestricted free trade benefitsthose with more
financial leverage, and has also promote depending on other country to supplyfor necessary
needs for example Singapore depends on Malaysia to supply Water, if in futurethe two
countries go on war Singapore will be heavily affected with no water supply even
thoughMalaysia has signed up contract of providing Singapore water for 100 years, but war is
indeed is a war.

According to PoushaliGanguly, there is immense pressure on the employed workers in the
Multinational Corporations who are uncertain as to business might close and go back to
parent country or a 3rdcountry due to uncertainty in the environment of most of the East Asian
countries, for example Indonesia and Thailand unstable political system, high corruption rate
in Malaysia. AlassaneOuattara (1998) also stated that globalisation and free trade along with
inconsistent of macroeconomic policies were the reason for Asian financial crisis in 1997-
1998 as in Thailand,where the East Asian crisis was ignited was due to the international
investors lost confidencewhen domestic financial management failed to address the increasing
obvious problems of anoverheated economy and a consequently weakening external current
account. The economy should not be too dependent on FDI of globalisation and free trade to
avoid financial crisis from happening again.



7.0 Conclusion

In this era, the world has seems to bepolarised by the developing countries in the last half-
century which is one groupwhich succeeded in poverty reduction through sustained growth,
and another group didn‘t. The majority of East Asian countries belong to the first group.
Viewing from a long perspective and as a regional phenomenon, there is no denythat East
Asia has madeimpressive strides in income levels, economic equity and social indicators
despite frequent wars, crisis and stagnation. On the balance, for nearly all the countries of
East Asia, globalization hasmeant faster growth and more prosperity for a larger share of its
population than at any other time in their histories. The gross national product (GNP) of
APEC economies over the past decade has increased by a 3rd, the number of people living in
poverty has fallen by a 3rd, andliteracy rates are among the highest in the world, thanks to
education expenditures that have risenfaster than GNP. The citizens of the emerging
economies of the Asia-Pacific region are amongthe most literate, healthy and prosperous in
the developing world.

8.0 References

8.1 Books and Journals

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8.2 Online Resources

Laurence E. Rotenberg., 2003, Globalization 101 the Three Tensions of Globalization
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th
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Stepehn Roach., 2010, Asian economic integration? Address domestic inequalities
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Thomas Sowell., 2005, in defense of globalization, free-trade and free-
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Xinhua., 2011,Full text of Chinese President Hu Jintao's speech at opening ceremony of Boao
Forum (Part 2)[online], Available from:http://www.chinadaily.com.cn/xinhua/2011-04-
15/content_2323056.html[Accessed on 27thSeptember 2012]



9.0 Appendixes

9.1 East Asia Population
The population is now more than 1.5 billion people, about 38% of the population of Asia or
22% of all the people in the world, live in East Asia, about twice Europe's population size.
The region is one of the world's most populated places, with a population density of 133
inhabitants per square kilometre (340 /sq mi), being about three times the world average of 45
/km2 (120 /sq mi). Mongolia has the lowest population density of a sovereign state. Using the
UN sub region definitions, it ranks second in population only to Southern Asia.

9.2 Brief History of East Asia
Historically, many societies in East Asia have been part of the Chinese cultural sphere, and
East Asian vocabulary and scripts are often derived from Classical Chinese and Chinese script.
Sometimes Northeast Asia is used to denote Japan and Korea. Major religions include
Buddhism (mostly Mahayana), Confucianism or Neo-Confucianism, Taoism, Chinese folk
religion in China, Shinto in Japan, Taoism in Taiwan, Shamanism in Korea, Mongolia and
other indigenous populations of northern East Asia, and recently Christianity in South Korea.
The Chinese calendar is the root from which many other East Asian calendars are derived.

9.3 The East Asian performance
The fact is well documented stating that before the financial crisis in 1997, the average rate of
growth of real GDP per capita in East Asia was above average, whether one compares East
Asian statistics with those for the world as a whole or with those for other developing
countries. It was reported in the much-publicised World Bank study, The East Asian Miracle
(World Bank, 1993), to the 25-year period 1965 to 1990 and to the eight countries the World
Bank termed high-performing Asian economies (HPAEs), namely, Japan, the ―Four Tigers‖
(Hong Kong, the Republic of Korea, Singapore and Taiwan) and the three newly
industrialising economies (NIEs) of Indonesia, Malaysia and Thailand. Their average rate of
growth of real GDP per capita which is 5.5% was more than twice that of any other
developing country region. Japan should be omitted from this list, as it was a high-income
technologically advanced country throughout the period and is commonly regarded as quite
distinct. China and Vietnam should be added, as they too have had an average annual growth
rate in excess of 5% in the last two or more decades. This makes nine East Asian countries



which are Hong Kong, Singapore, Taiwan, Korea, Malaysia, Indonesia, Thailand, China and
Vietnam have sustained high growth for two or more decades.

These nine East Asian countries continued to grow relatively fast in the 1990s up to the time
of the Asian crisis (1991 to 1996). During this period, all experienced an average annual
growth rate of real GDP in excess of 5%, and all had an average annual growth rate of real
GDP per capita in excess of 5% except Hong Kong which had a higher rate of population
growth.
Other East Asian countries have experienced these growth rates in some decades but have not
sustained them for more than one decade: Philippines in the 1970s, Mongolia in the 1980s and
Cambodia, Laos and Myanmar in the 1990s. Several South Asian economies have
experienced annual growth rates in excess of 5% in some years, but their periods of rapid
growth have not been sustained. It was really the countries of Northeast and Southeast Asia
that had performed so well.
Given this record over more than 25 years, it is not surprising that economists became more
interested in the region. The relatively fast growth of these countries was first noted by
economists in the 1970s, when a number of reports commented on the outstanding
performances of the Four Tigers (Hong Kong, Taiwan, Korea and Singapore), as they were
then known. Later analyses related to the broader group of high-performing East Asian
economies, as in for example, the World Bank report The East Asian Miracle, or to all of East
Asia. The praise for the group of fast-growing economies became even more fulsome. Thus,
Singh (1995) concluded, ―It is no exaggeration to say that the post-World War II development
of East Asia is the most successful story of sustained economic growth in the history of
humankind.‖ Of more interest to us now is the pre-crisis analysis of the reasons for this fast
growth. This is a complex issue. Studies on total factor productivity growth in Asian countries
by Alwyn Young and others have consistently found that high rates of growth are due, in a
proximate statistical sense, to high rates of factor accumulation rather than to high rates of
growth of total factor productivity (Dowling and Summers, 1998).
Asian countries have exceptionally high rates of capital formation when compared to other
developed and developing countries, and these rates peaked just before the onset of the Asian
crisis. In 1996 gross domestic investment as a percentage of GDP was 42% in Thailand, 42%
in Malaysia, 40% in China and above or around 30% for most of the fast-growing economies;



the exception was Taiwan with only 21.2% (Asian Development Bank (ADB), 1999). It is
less clear what private behaviour or government policies promoted factor accumulation and
total factor productivity growth. One of the themes of this literature on which most analysts
agree is the importance of international trade. Commentators in the 1970s and 1980s tended to
express this idea by contrasting the export promotion strategies of the East Asian Tigers with
the import substitution strategies of many developing countries in Latin America and Africa
and some in Asia especially India. The former give rise to the export-led hypothesis of East
Asian rapid growth. A survey of this literature is provided by Krueger (1984).
There is a strong statistical correlation between the rate of growth of exports and that of real
GDP (ADB, 1999). This is not, however, proof of export-led growth. The causation could run
in the other direction; some economists have argued that in countries such as Korea and
Taiwan, it was an investment boom that led to an increased demand for imports of capital
goods, which in turn required increased exports (World Bank, 1993; Hughes, 1995; ADB,
1999).

1.1 Table shows East Asian Gross and Net Capital inflows in the form of private FDI
Countries Foreign Direct Investment (FDI, %)
China 24.7
Indonesia 25
Malaysia 48.6
Singapore 72.4
Korea 2.6
Taiwan 7.3
Thailand 11.6

This provides another caution that the patterns of factor accumulation and productivity growth
are not uniform among fast-growing countries. Several authors have linked the rapid growth
of Asian exports and output to the rapid growth of Asian foreign investment flows and argued
that the exports and FDI are complementary (ADB, 1992; Petri, 1995; Asian Pacific
Economic Cooperation (APEC) Economic Committee, 1995). At least for countries that have
a high rate of FDI inflow of an export- and FDI-ledgrowth pattern. FDI may boost export
competitiveness by improving the technology, management and marketing of export



industries. Increased imports of fixed capital equipment that embody new technologies may
be a source of embodied technological change. There is a link here to the high rate of capital
formation in these countries. Multivariate analyses of economic growth have confirmed that
increased trade and FDI have been central to rapid growth in East Asia (Harrison, 1996). The
existence of a positive marginal link between openness and growth suffices to indicate the
direction of trade policies required for the promotion of growth, even if the precise
mechanisms by which opening international trade has increased factor accumulation and total
factor productivity growth are not known.


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