East Asia’s political vulnerability

Lee Jong-wha
The author is a professor of economics and director of the Asiatic Research Institute at Korea University. His most recent book, co-authored with Harvard’s Robert J. Barro, is Education Matters: Global Schooling Gains from the 19th to the 21st Century.

Popular discontent is fueling protest and paralysis across Latin America. If East Asia isn’t careful, it could be next.

In Ecuador, protests against anti-austerity measures, including the reduction of fuel subsidies, forced President Lenín Moreno to declare a state of emergency. In Chile, it was a modest increase in Santiago’s metro fares that triggered large-scale demonstrations, which soon evolved to take aim at inequality and weaknesses in the education and pension systems.

In Argentina, the people expressed their economic frustrations at the ballot box, electing the Peronist presidential candidate Alberto Fernández.

While the details vary, there is a common thread in all of these movements: the belief that governments are not working for ordinary people. As Daron Acemoglu and James A. Robinson have observed, the extractive institutions on which many Latin American economies depend protect the interests of the rich and elites. Across the region, inequality has been skyrocketing, and there is little reason to expect political power structures favoring those same privileged people to address it. After years of economic stagnation and even crisis, the public’s patience has worn thin.

To be sure, many Latin American leaders have, in recent decades, risen to power on the promise of leveling the playing field. And their interventions — including income redistribution, fiscal and monetary expansion, protectionism, discriminatory regulation and capital controls — did bring some short-term benefits, particularly to the poor.

The combination of social polarization, inadequate institutions and weak economic fundamentals has made it difficult for even reform-minded governments to escape the trap of short-termism and lay the groundwork for long-term development. In this context, neoliberal reforms — such as the rapid economic opening and financial liberalization promoted by the IMF — made economies even more vulnerable to external shocks.

East Asian economies avoided many of these mistakes over the last half-century, implementing carefully designed economic-development plans that fostered export competitiveness and technological progress. Throughout this process, strong and inclusive institutions ensured the effective functioning of markets, supported sound macroeconomic management and upheld the rule of law.

As a result, East Asian economies achieved “growth with equity,” which lifted them from middle- to high-income status. In 1970, per capita incomes in Hong Kong, Singapore, Korea and Taiwan were lower than those in Argentina and Venezuela; today, they are much higher.

But East Asia must not underestimate its potential for political crisis. In recent decades, the region’s long-term growth potential has declined and income distribution has worsened — trends that populations blame, at least partly, on their political leaders. Not surprisingly, populism is on the rise.

In Korea, President Moon Jae-in’s administration has pursued policies that include sharp increases in the minimum wage and social welfare spending. As Latin America’s experience has starkly demonstrated, while fiscal transfers may help to bolster a sluggish economy and strengthen the social safety net, a rapid increase in unproductive spending could weaken economic fundamentals in the longer term.

The situation in Hong Kong — which has been roiled by nearly six months of increasingly violent protests — is somewhat different. There, the target of protesters’ ire is China’s central government, which they argue is violating the “one country, two systems” framework that defines the city’s relationship with the mainland. But key sources of popular frustration — such as soaring property prices, which exacerbate inequality — are familiar.

To avoid Latin American-style political crises, East Asian governments must ensure that their economic policies support equitable growth. Their priorities should include boosting productivity, strengthening export competitiveness, encouraging technological progress, nurturing domestic demand and service industries, building robust social safety nets and implementing redistributive tax-and-transfer policies.

Fiscal sustainability is also crucial. While economic stagnation demands fiscal expansion, governments must spend wisely. That means investing in long-term growth potential by, say, deepening human capital and strengthening social infrastructure, rather than committing to unsustainable hikes in welfare spending.

Finally, East Asia must make sure that it holds its political leaders accountable. To that end, countries should continue to fortify their institutions — including an independent judiciary — protect free and independent media and nurture a vibrant civil society.

East Asia has a long tradition of forward-thinking policymaking. At a time of growing economic, political and social challenges, upholding that tradition has never been more important.