Revision:Causes of Growth in South East Asia

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For a 20 mark question choose 4 of the below reasons and expand upon each one. For each point:

• 1 mark for knowledge: stating the point.
• 1 mark for analysis: explaining how this relates back to the question
• 1 mark for application: give an example as part of the analysis or a counter-example in your evaluation.
• 2 marks for evaluation:
  • Significance
  • Why might it not occur?
  • Difference in long term/short term effects
  • Elasticity

(This is how the marking works on the Edexcel exam board; it might not apply to the others)

Sound Economic policy

Low exchange rate

A willingness to devalue currency to maintain comparative advantage encouraged exports, causing an export led boom.

• However a low exchange rate increases the prices of imports and can lead to imported inflation.
  • On the other hand, the government can keep inflation low by controlling economic activity and reducing overheating.
  • Inflation may be curtailed due to low wage rates - people don't have a large disposable income. Wages are kept low because of the elastic supply for labour - constant migration from rural areas to the city means the supply of factory workers willing to work for extremely low wages exceeds demand.

Low interest rates

Encourages investment. The investment cycle takes effect: high investment -> high productivity -> high wages -> high savings -> high investment. A virtuous circle.

• The effect of the investment cycle is significant because of the multiplier and accelerator effects.

Foreign investment encouraged

Foreign investment from MNCs (multinational companies) fills the savings gap and the foreign exchange gap, causing an export led boom.

In some countries there were joint ventures between governments and MNCs so that some of the profits from the companies went back to the government.

• However, MNCs may suppress wages unnecessarily and keep the standard of living down. Growth, but not development, would occur.
• Reliance on MNCs may prevent the country from building up home grown technological capabilities. Problems of flying geese syndrome as MNCs flee when exchange rate becomes unfavourable.

General evaluation:

• The policies for growth may conflict: it may be difficult for the government to achieve all economic objectives at once.

Sufficient savings

The government can maintain the savings level by restricting consumption. Keeps the MPS (marginal propensity to save) high to maintain cash flows into investment. e.g. Singapore 20% savings compulsory.

Increase in savings = increase in investment since S=I. The greater capital can increase output.

• This may not be true within one country (S=I applies worldwide) if capital flight takes place.
• Investment cannot explain the success of SE Asia completely since in the early 1990s the rates of investment in SE Asia and Sub-Saharan Africa were similar yet the growth rates were vastly different.

Education

Investment in human capital.

Investment in education was a major difference between Sub-Saharan Africa and SE Asia in the 90s. SE Asia invested in a strong human capital base - near universal primary education. More social equality and rising wages.

Later on, secondary and tertiary education were developed. Waiting to develop tertiary education prevented the brain drain. e.g. Korea and Taiwan have focused on providing high level technical and engineering education, enhancing their comparative advantage in these fields. Singapore - computer literacy and work based learning. China - students at UK universities.

Political and social stability

Overseas investors will not invest in regimes which are unpredictable e.g. investors won't invest in a country which might nationalize companies at a moments notice!

e.g. Malaysia had union control which made it more attractive for MNCs.

Despite China being communist, the country is stable and the Communist Party allows free market enterprise to take place with government intervention/control in areas.

Contrast with the civil wars etc. of Africa.

Interventionist policies

At first the government discouraged trade to protect domestic industries. The resources were allocated and managed by the government.

Growth began in earnest when the government began to promote exports of manufactured goods. This signified a move away from trade in low-tech goods like textiles.

The economies were capitalist but with government intervention.

Institutions established

Testing and research institutions built to support industrial development.

Giant conglomerates; South Korea's Chaebols (a group of industries e.g. Samsung). New management techniques for efficiency.

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