Douglass North (1990) explained that institutions are a set of rules or norms in a society which are there to shape human interaction. Institutions form the incentive structure of a society (North 1994). Rodrik (1997) finds evidence on the significance of institutions to the economic success of the HPAE’s. They had a strong authoritarian government and secure property rights which allowed them to create their institutional framework. Hall and Ahmad (2012) found that institutions matter for economic growth in developing countries. It is shown that the secure property rights and strong government characteristics are shown to be the key institutional quality behind the growth in East Asian countries. Without the quality of institutions in place, there would not have been a basis for growth and to make these on time changes.
The expenditure approach and production function
The expenditure approach of C+I+G+(X-M) (Kuznets 1934) can be used to explain the East Asian growth. The production function Q=F(K,L) (Solow 1924, Romer 1955) can also be used to explain the East Asian growth. This is because with the expenditure approach, there was large levels of investment from the government on infrastructure to make it an attractive economy for investors. They opened the doors to export led growth by starting to export goods and services to other countries which has fuelled their growth. Haggard (2004) found that an important source of East Asia’s growth was down to having high levels of physical and human capital accumulations.
Perspiration than Inspiration
The success of the East Asian miracle was based on several factors and one-time changes that cannot be repeated (Krugman 1994). This included high savings rate interacting with high level of human capital accumulation in a stable market-orientated environment, with an active government intervention that was conductive to the transfer of technology (Stiglitz 1996). The East Asian economies had high savings rates and the government was able to invest these savings, particularly in labour-intensive industries which brought large returns to investors. The way that the East Asian economies were able to change over a short period of time can understand why some theorists think that it is a miracle. Their GDP rose twice as fast and there was a reduction in poverty and income inequality. Campos and Root (2001) explained that their success was down to a change in economic policies which was encouraged by an authoritarian government. They concluded that if there was not an authoritarian government in power then these changes would not have happened. However, with a strong authoritarian government that was committed to change the economies and implementing new rules that they were able to change so quickly. If a country increases its inputs, there was high levels of investment and heavy expenditures for education, then that would be an excellent cause for growth through the hard work that the authoritarian government have put in. The ‘miracle’ which it was called by the World Bank (1993) can be largely attributed to ‘perspiration’ through the development of fundamental government policy. Young and Lou (1994) also found that it was a matter of perspiration than inspiration of working harder and not smarter. There has been some discussion about whether the increase in TFP has played an influential role in the increase of growth in the high performing Asian economies (HPAE’S). This is because certain countries fall into investment-driven and productivity driven. It has been found that TFP has played a role in the growth, but it is not the dominant factor (The World Bank 1993). The dominant factor was from accumulation of physical and human capital.
Macroeconomic stability was an important factor in the successful growth in East Asia. This is because export-led growth could not have been successful without a stable macroeconomic environment which allowed this rapid growth to happen. East Asia’s macroeconomic policy meant they had low inflation, low stable interest rates and a secure financial system. They introduced high saving rates and without these high levels of saving and good macroeconomic management, there would have been no basis for growth. The East Asian miracle recognises that macro-economic stability is not a sufficient condition for fast economic growth but insists that it is a necessary condition.
There have been questions as to what East Asia did to grow so quickly. They were led by a strong authoritarian government that got the basics right and implemented one-time changes that have allowed them to grow at exponential rates. A miracle is an odd way of putting it as that is something that we cannot explain, but we can. Without high levels of domestic saving, broadly based human capital and good macroeconomic management, there would have been no basis for growth. However, even with this hard work, the growth cannot continue the way it has. Sooner or later, there will be a dramatic decrease in growth.