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Saturday, October 15, 2011

Asia and Latin America: Economy & State

In the fall of 2011, the economic troubles in the developed countries were starting to hit fast-growing developing economies like China, Brazil and Indonesia. The governments of the developing countries were “girding themselves,” according to the Wall Street Journal, “to offset any economic and financial damage.” China’s government, for example, increased the investment of its sovereign wealth fund in Chinese banks. In September, China’s exports to the E.U. grew at 10 percent, compared with 22% in August. China’s increase in imports was also weaker, which did not bode well for emerging markets in Latin America and elsewhere that supply commodities for China’s construction industry.  Yet IMF projections depicted an interesting distinction between the projected increase of real GNP in Latin America and the developing Asian economies. The projections for 2011 were 4.7% and 7.9 percent, respectively. For 2012, the projections were 4.0% and 7.7 percent, again respectively. What can explain this pattern wherein Asian newly industrialized economies (NICs) were expected to fare better?


Economists might point to the regions having different mixes of industries as behind the difference in projected growth—some industries more affected by the global downturn than others. Economists might also point out that domestic markets are more mature, and thus resistant to external shock, in the Asian NICs. Political economists would likely bring up the strong/weak state variable, hence bringing in the element of government to explain the difference in the projected economic growth rates.

In their democratic incarnations, Latin American governments have been less resistant to popular pressure for increased government spending on consumption. This has come at the expense of government investment such as infrastructure projects attractive to foreign direct investment. In other words, the governments of the Asian NICs have had a stronger state in the sense that the governments have been better able to resist the demand by people for increased entitlement spending at the expense of investment oriented to industrializing. Such investment can include education/training and transportation networks. Managers at a corporation looking for a country in which to locate a factory, for instance, are apt to size up the local and regional transportation infrastructure with an eye to being able to bring in supplies in a timely manner and send off products—both to the domestic market and other markets. Also, the government of a poor country hoping to develop economically via attracting foreign direct investment invests in training facilities and attempts to reduce corruption, as foreign companies appreciate locally-trained labor and not having to pay bribes to government officials in return for being able to conduct business. Officials of strong states are less capricious, and thus less corrupt.

Asian NICs were able to industrialize in the last two decades of the twentieth century more so than Latin American countries in part because of a strong state—meaning more resistant to spending tax revenue away on immediate consumption at the expense of infrastructure investment. This “state” variable was salient in the scholarship of international political economy when the Asian tigers were pulling away from the Latin American economies in the 1980s.

Lest it be presumed that a strong state is necessarily better simply because it can be useful in industrializing a “LDC” (low developed country) into a NIC through foreign direct investment, it is also possible that a government that is more resistant to popular pressure can also be more resistant to democracy. If republics are susceptible to profligacy in spending on consumption while dictatorships can resist such pressure and attract foreign direct investment, then a sad tradeoff could exist between liberty and wealth. Of course, as many dictatorships have shown, the wealth garnered from licensing commodity extraction (e.g., oil drilling) can be quite concentrated domestically. The tradeoff may not reach the people.

Perhaps ideally, the state is weak, or pliant, at election time, when governmental sovereignty bows to popular sovereignty. As the government turns to governing, the state hardens up in resisting the passions of the masses for immediate gratification. The resistance entailed in governing can be oriented to a people’s best interests rather than to oppressing the masses. The IMF projections may indicate that the Asian NICs came out of the twentieth century better constituted than the Latin American countries in this regard.

Source:

Alex Frangos and Patrick McGroarty, “Troubles of West Take Toll on Emerging Economies,” The Wall Street Journal, October 14, 2011.