14 Points

Many social scientists have puzzled over the explanations for the Tigers’ miraculous performance. Political economists such as Robert Wade have cited education as one of the major factors. Along those lines Paul Krugman famously argued that the marshalling of inputs made all the difference: labor force participation, human, and physical capital in particular. In fact, investment as a share of GDP was extremely high in these countries -25% on average in 1960. The only trouble with these explanations is they do not themselves explain how it is that these countries organized such marvelously high investments.

Other scholars, such as Jeffrey Sachs have emphasized that the Tigers succeeded by holding down inflation, which tends to attract investment, and that they were uniquely open to trade, with exports accounting for a large share of GDP. More interventionist oriented economists such as Alice Amsted argued that this openness to trade did not involve laissez faire, but rather the strategic use of tariffs and tax incentives. As enticing as these explanations may be, even if public policies accounted for the Tigers’ success, why wouldn’t every poor country implement them and reap similar benefits?

In 1993, the World Bank commissioned a report by leading experts in economic development. The result was a meticulous and highly useful study. Basically, it cites the aforementioned explanations and goes further by attempting to account for them. While it is not completely successful at integrating the diverse scholarship, it is rich with insights.

Taking the Tigers’ high investment rates, part of the bank’s explanation rests on the public ownership of banks, which eliminated deposit thresholds encouraging the poor to invest. Moreover, accrued interest was not taxed in Korea, Taiwan, and Japan. Furthermore, the unique institution of the East Asian postal service -a Japanese institution brought to Korea -which also served as a people’s bank, providing an efficient way to reduce transaction costs in saving both for investors as well as for the government.

Turning to education, the World Bank authors show that the emphasis was on primary school education, and they claim that income equality enhanced this by allowing poor people to forgo work to invest in education. Although this has merit, another potentially more penetrating explanation for the link between education and equality is offered by Mariscal and Sokoloff (2005). Using empirical evidence and theoretical reasoning, they claim that education, like other public goods, is a collective action problem. Income equality fosters trust and makes cooperation and reciprocal sacrifice much more likely.

There is, in fact, strong international research showing that inequality decreases trust (Knack and Keefer 1997) and that inequality decreases human capital formation (Papagapitos and Riley 2008). Likewise, trust is crucial for enhancing investment and mitigating corruption Zak and Knack 1998. Lower corruption is a major part of the Tigers’ success because, as the World Bank research shows, public investment was just as impressive as private investment. The former requires competent and law abiding bureaucrats, but in countries with large income disparities, those at the bottom will realize that the only way to get to the top is through cheating. Extreme inequality is a sign that a society is unfair and that opportunities are not broadly available; such an environment is conducive to corruption and exploitation.

Unsurprisingly, income equality is highly correlated with GDP growth in cross-country research, and some studies find a causal link. Roland Benabou (2001) summarizes the many theoretical connections and strong empirical evidence in a particularly interesting paper. One potential idea is that capital markets do not allocate resources as efficiency in highly unequal societies because of information distortions.  Persson and Tabellini’s (1994) work is a classic on the subject. The idea advanced there is that equality constrains politicians and party leaders to pursue pro-growth policies in order to avoid conflict. In general, one can think of inequality as harming the quality of fundamental institutions.

My own analysis (originally for a term paper for a Comparative Political Economy class) uses data from Easterly, Levine, and Roodman 2004 and the UN database mentioned above to explain East Asian policies and investment. I find that openness to trade, lower inflation, and higher investment as a share of GDP explain the Tiger’s success, and that equitable income distributions significantly and substantially improve all three of these mechanisms. In fact, the Tigers’ and China score no better on any of these measures once I adjust for the income equality effect. That is the miracle of equality: what is good for the least off is good for everyone else.

Where to Find Miracles:

So how did the Tigers become so equitable to begin with? Well, in Korea, land reforms in the 1950s redistributed about 20% of arable land in the South, and the purchasing power of the U.S. military indirectly provided thousands of job opportunities, as Kohli’s 2004 fascinating analysis tells us. Moreover, per capita aid from the US was $600 from 1945 to 1996 (see Cumings 1997). In Taiwan, land reform was the most extensive in the non-Communist world and eliminated the agrarian aristocracy, while providing support to small farmers (as described by Robert Wade 1990, p241-242). In China and N. Korea, of course, communism was the motivation for equalizing reforms, but only China started growing because only China gave up communism. In Malaysia, affirmative action dramatically lowered inequality between Malays and ethnic Chinese starting in 1969, just before its takeoff (see Jomo K.S. 2004). Thailand, which was never colonized, had high landownership rates and relatively low inequality in the 1960s and 70s, but as its growth spurt began inequality increased thereafter (Jansen, 2001). WIID data confirms this

In short, equality comes about through historic circumstances and legacies of power, often involving land ownership. Or in China, equality came about largely through an extreme and horrific domestic revolution. Alternatively, equality is achieved or supported through the intervention of a greater external power -a colonizing empire, development aid, perhaps, or a liberating army.

In the United States and South Africa some progress has been made towards racial equality through major constitutional revolutions; in the U.S. case this would not have been possible without the Civil War and eventually mass protest and international opprobrium during the Cold War. Similarly, with S. Africa both internal and external factors were required.

With these examples it may seem like it would take a miracle to achieve fair income distributions, but one should also remember that -returning to the U.S. case- that the rather simple policies of the New Deal and the GI Bill went very far in equalizing incomes amongst whites, but since Blacks were largely shut out of these programs (directly by virtue of their occupations and indirectly via segregation and discrimination), it has taken much longer for inter-racial convergence to take place, and it is coming at a time when the returns to education are particularly pronounced.

Equality is, of course, not the only factor that promotes rising prosperity, and as we have seen in the Soviet Union, North Korea, and many African countries, policies aimed at reducing inequality are often destructive and counter-productive, at least when leaders are unaccountable to the public -as is the case in dictatorships. From that point of view, governments would do well by doing less, but the efforts of democratic governments are still essential. With sound regulation in support of open, competitive, and transparent markets, available opportunities will tend to reduce inequality.  That also means enforcing anti-discrimination laws and preventing the affluent from distorting markets to segregate themselves from the poor. Adding to this progressive income taxation and programs to promote the acquisition of property and education amongst the poor and a country is well along a path towards broad based prosperity.