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Unnoticed secrets to East Asia’s economic success

Published: 29 Oct. 2024, 20:02

Lee Keun
The author is a distinguished professor of economics at Seoul National University and a senior vice president of the Korean Economic Association.

This Year’s Nobel Prize in Economic Sciences went to MIT Prof. Daron Acemoglu, MIT Sloan School of Management Prof. Simon Johnson, and James Robinson, a professor of political science at the University of Chicago, in recognition for their collaborated research quantifying the impact of political democracy and institutional development on economic performance.

Their paper begins with a comparison of the two Koreas to highlight their takeaway that political institutions — more than culture, natural resources or geography — can explain how some nations end up richer than others. But South Korea’s case doesn’t exactly fit into that theory, because the country made significant economic strides under “developmental dictatorship” before shifting to a democracy. Democracy undoubtedly plays a key metric in defining how developed a country is, but it doesn’t necessarily ensure prosperity for emerging economies.

Most East Asian countries moved toward democracy only after going through developmental authoritarianism. But not all authoritarian regimes have been successful in economic development. If so, what really made East Asia exceptional?

In Korea, authoritarian development promoted the middle class with access to good education and jobs. The country’s transition to democracy was peaceful as it had been led by white-collar educated citizens, tantamount to a political miracle.

The developmental authoritarianism in East Asia, unlike other dictatorships, was inclusive as it provided education and jobs for the people. Harvard University Prof. Edward Glaeser and others also question statistical robustness in the simple correlation between institutional development and economic growth as presented by the Nobel laureates for South Korea’s case. Prof. Glaeser and others found that human and physical capital accumulation play a greater role in building wealth and improving institutions.

Tech guru and philanthropist Bill Gates found “Why Nations Fail,” co-authored by Acemoglu and Robinson, as “a major disappointment” that “largely dismissed all other factors.” The fact that the countries who had achieved democratization after the Arab Spring returned to their authoritarian leadership shows that democracy cannot take root unless it is based on solid economic foundation and capital accumulation.

Another factor behind the East Asian miracle is the rise of formidable corporate players who create quality jobs and compete with advanced countries’ companies on the global stage. The authors of “Why Nations Fail” only highlighted the side effects of Korea’s large conglomerates — such as their collusive connection with political power — while neglecting their contribution to the economy.

I conducted an empirical study proving that big competitive corporations are the key to Korea’s breakout from the middle-income trap. Companies — not institutions — were central to the East Asian miracle. India and China — each being the world’s most populous democracy and authoritarianism — had been among the poorest with per capita income less than 5 percent of that of the United States in 1980. China today has reached 30 percent of the United States in personal income, whereas India remains below 15 percent.

China has so far generated more than 130 Fortune 500 companies, nearly as many as the United States. India is home to many unicorns — startups valuing $1 billion or more — but its members on Fortune 500 are fewer than 10, trailing behind Taiwan. South Korea has around 15. The country and Taiwan have mothered companies worth more than their economies and owe them for their elevation to developed ranks.

The institution-centric argument partly excuses the failure of the neoliberal approach marked by market opening and financial liberalization and prescribed by the Washington Consensus. However, the consensus today has become a bygone. As Harvard economist Dani Rodrik pointed out, South Korea pursued opening and liberalization after it was confident of its corporate players’ competitiveness. It has become one of the most open economies with free trade agreements with the United States and most other countries.

The institutions of democracy and free market are the necessary conditions — not the sufficient conditions — for economic growth for underdeveloped countries. East Asian nations prospered because they moved toward democracy and opening after experiencing developmental authoritarianism and developing companies — a key point the Nobel Prize-winning economists have overlooked.

Translation by the Korea JoongAng Daily staff.