East Asia and Eastern Europe in a Globalized Perspective

Lessons from Korea and Estonia

by Bernhard Seliger (Volume editor) Jüri Sepp (Volume editor) Ralph Wrobel (Volume editor)
©2016 Edited Collection 298 Pages
Series: Ordnungspolitische Dialoge, Volume 5


This book compares development experiences from South Korea and Estonia, which are both very successful examples of development within their region. The development experience of states in the 20th century offers a bewildering variety and often downright contradicting models, which nevertheless led to catching-up and rapid growth rates, leaving policy-makers in countries trying to emulate such models at a loss. Over time and through various crises on the regional and worldwide level, the experience of East Asian states became increasingly an interesting object of study. This was related to the successful long-term growth experience of countries like South Korea, but also to successful models of state transformation, which, though in a different political setting, achieved high growth rates without the deep transformation recession typical for European transformation states.

Table Of Contents

  • Cover
  • Title
  • Copyright
  • About the author
  • About the book
  • This eBook can be cited
  • Foreword
  • Contents
  • Table of Abbreviations
  • Economic Models for New Industrializing Countries in Comparative Perspective
  • Developmental State in Korea (60s–70s) Revisited: Institution-Building for the Making of ‘Coordinated Market’
  • The Implementation of Research and Development Policy in European and Asian Countries
  • Emerging Market Economies and the Financial Crisis: Is there Institutional Convergence between Europe and Asia?
  • Developmental Welfare Capitalism in East Asia with a Special Emphasis on South Korea
  • Independent Organizations in Authoritarian Regimes: contradiction in terms or an effective instrument of developmental states?
  • Practicing Catching-up: a Comparison of Development Models of East Asian and Central-Eastern European Countries
  • The Decomposition of Productivity Gap between Estonia and Korea
  • The Characteristics and Position of the Economic Structures of Estonia and Korea among the OECD Countries
  • Lessons of Korea for Emerging Economies: An unexpected journey from rags to riches, from crisis to recovery
  • Index
  • List of Authors

← 12 | 13 →

Table of Abbreviations

← 14 | 15 →

Ralph Wrobel

Economic Models for New Industrializing Countries in Comparative Perspective

1.  Introduction

The last decades are characterized more and more by the catching-up of former communist and developing countries especially in Central and Eastern Europe as well as in East Asia. Nowadays, most of the Central European countries are members of the European Union. Therefore, their role model was determined by the acquis communautaire of the EU. However, other countries catch up without a clear role model. Especially in East Asia different models are discussed. While Malaysia focuses on Singapore for instance, South Korea is starting to discuss the German model. Furthermore, China defines its Market Socialism as a step on its way to a market economy, but does not clarify its final development goal. But which economic system is able to develop an economic successful catching-up combined with human development and poverty reduction? Does any “Single Peak Economy” exists which can act as a role model for New Industrializing Countries (NICs)?

Economists like Jeffrey Sachs or Paul Collier have argued that free market will not work for the development of the “bottom billion” in the poorest countries of the world. Instead, they offer technocratic, administrative solutions to the poor (e.g. Sachs 2005; Collier 2007). In the author’s opinion this solution is wrong. Reality shows that the richest societies in the world are market economies. As we know – contrasting to a socialist central planning system – that every kind of market economy is favourable (see e.g. as classics in this sphere von Mises 1936; Hayek 1982). Market economies are able to attain a higher GDP per capita by functioning market incentives and freedom of entrepreneurs and consumers. Therefore, it is not the question if market systems should be implemented in poor societies but only which kinds, how and by which strategies. A lot of developed market economies are available as role models and can be studied to search for better functioning market economic institutions: Following several varieties of capitalism approaches Liberal Market Economies (Laissez Faire, like in the Anglo-Saxon countries) have to be distinguished from Coordinated Market Economies like the Nordic Welfare State [Scandinavia], Mediterranean Capitalism [France and Southern Europe], or a Social Market Economy [Germany]. Together with the ← 15 | 16 → Asian development model all these economic systems are competing with each other in the current competition of systems in the globalised world.

Therefore, emerging economies can use the experiences of the developed market economies to improve their catching-up strategies, not only in the positive sense. They can also learn from their mistakes. NICs are already quite developed and reached a level of functioning institutions, which allow focussing on developed role models from the Western World or East Asia. Therefore, first catching-up strategies of Less Developed Countries (LDCs) and NICs in the past will be described briefly. Afterwards, common experiences from the Western world and different developed market economies as role models will be discussed. Additionally, the comparative perspective shows the advantages and disadvantages of these models. Of course, when analysing catching-up or transformation processes key attention has also be given to an understanding how institutions of a society change and evolve. For that reason, basic problems like path dependency, cultural constraints, necessity of political entrepreneurs, etc. have to be taken into consideration, too. But to discuss these problems is not purpose of this paper.

2.  Catching-up Strategies and Institutions

After independence from the colonial powers in the 20th century a lot of African, Asian and Latin-American countries oriented their institutional framework to socialism and communism. (Besters/Boesch 1966: 1537–1545) Beside all differences common goal was an independence from economic exploitation by the former colonial powers and their remaining enterprises. The socialist models were characterized by central planning of the economy, a high degree of state property and cooperatives in the fields of production, credit and consumption. To refuse market models the specific condition in the LDCs and political-ideological aspects were given as reasons. Especially the assumed lacks of reaction to incentives by the very poor people and functioning enterprises as well as abilities to save and invest money were main arguments. Additionally, weaknesses of the institutional and real infrastructure were emphasized. (Clapham, undated)

Till the beginning of the 1970s, the Western development policy focused on the goal of economic growth, assuming a trickle-down of the welfare to the poorest people in the LDCs. This strategy was characterized by the target of an industrial catching-up with focus on large industrial or infrastructural projects as well as import substitution policy. (Schnabl 2010: 6) This policy also focused on central planning and a lot of state interventions that were seen as indispensable for the industrialization. In several countries the selection of projects, financed by bilateral or multilateral aid, and enforcement of the projects were mainly organized ← 16 | 17 → by central governments. In contrast, individual responsibility and initiative were neglected. In the 1970s the focus of developmental aid changed to the fight against mass poverty. Basic needs of the poor had to be satisfied at first. This should lead to better possibilities of the poor people to participate in the economic system by a higher productivity of work. But also during this time the main role of the state was emphasized. The poor people were treated like “objects” and not like “subjects” of the development process. Both, the growth-oriented as well as the basic-needs oriented strategy failed. Underdevelopment and poverty could not be overcome as it was expected. A fundamental change took place in 1987 with the Brundtland report “Our Common Future” which focused primarily on sustainability in connection with development of LDCs and environmental problems. The new conception concentrated predominantly on the domestic institutional framework of the LDCs as well as on the international framework. Both should be changed to improve the conditions for governmental development policy and initiative of the poor themselves. Additionally, the idea of the necessity of a long-term policy establishing a free basic order, which is characterized by human rights, rule of law, democratization, good governance, and efficient market institutions, evolved. At all, it can be emphasized that the importance of institutions for the development of LDCs and NICs came on the top of the agenda. (Clapham undated)

During the 1970s and 80s a few countries – especially in East Asia – were able to catch up by the establishment of market institutions. Therefore, the term “New Industrializing Countries” or “Newly Industrializing Economies” was established to name those countries which did not fit any more all characteristics of LDCs, but were not fully industrialized. First, the term was applied to the “Asian Tigers” (or “Dragons”), South Korea, Taiwan, Singapore and Hong Kong, while nowadays we find a lot of NICs respective tigers in the East Asian region. Malaysia, Thailand, the Philippines, and Indonesia count as Small Tigers since the 1980s. Most of the Asian Tigers followed Japan in its strategy of an anticipatory industrial policy enforced by public controlled banks. Some also speak about a “development dictatorship”. When public directed investments failed like in Malaysia or South Korea with respect to heavy industries in the 1970s, mistakes could be retracted quite fast because of a non-ideological pragmatism. (Seliger 2009: 263–265)

Additionally, these countries demonstrated that welfare gains cannot be attained by protectionism and industrial policy. An export based development model is needed instead. (Schnabl 2010: 6) The basic idea of this model is to finance growth of investments and progress in productivity by revenues from exports. Conditions for such a strategy are a rising international trade and the creation of an export position by comparative advantages within the catching-up country. ← 17 | 18 → (Knogler 2010: 10) Likewise, the opening to technology transfer from abroad supported the fast development of the Asian Tigers. In the Asian case, it was mainly an import of know-how from Japan which started by FDIs and production of low-labour-cost-products in the Tiger Countries. The so-called wild geese model was characterised by innovation in Japan, production in the Large Tiger Countries during the growth stage and in the Small Tigers in the maturity stage. Fixed exchange rates – in combination with under-evaluated domestic currencies – and voluntarily high saving ratios in the Small Tiger Economies supported their catching-up massively, too. (Seliger 2009: 265) While Prasad/Rajan/Subramanian (2007) emphasised that LDCs focusing only on external financial sources, consequently, do not grow as fast as those which focus on domestic savings, we know that the importance of international capital flows for NICs are obvious. In contrast to domestic capital accumulation international capital flows improve and defragment capital markets. The degree of liquidity rises while interest rates decrease, provided that political and macroeconomic stability is given. By rising FDIs old structures of production and low marginal productivities can be overcome. Thereby, foreign capital flows improve the efficiency of capital allocation and production. In such a process implemented expectations are self-fulfilling. A rising growth stabilizes economic policy. Public deficits and inflation rates decline. Improved credit ratings attract additional FDIs. But also weaknesses of the export based development model have to be mentioned. The Asian crisis in 1997/98 already showed that strategies of fixed exchange rates lead to speculative capital inflows and excessive monetary expansion while the banking systems were fragile and the political and economic framework questionable. (Schnabl 2010: 6–7) Nowadays, an additional wave of East Asian countries – China and Vietnam – penetrates into the international markets. Especially China is seen as the new challenge of the West. Obviously, all these countries were able to introduce well working institutions supporting entrepreneurship and markets.

Till the end of the 1980s most “Western” economic reform packages were quite neglecting the importance of institutions. The best example to be mentioned is the Washington Consensus. As Stiglitz (2002: 53) pointed out the Washington Consensus was “designed to respond to the very real problems in Latin America and made considerable sense". Later it became a universal formula for transformation problems. The term Washington Consensus was coined in 1989 by Williamson (1989) and describes a set of ten relatively specific economic policy prescriptions, which constituted the "standard" reform package promoted for crisis-wracked developing countries. Origin was the policy of Washington, D.C.-based organizations like the International Monetary Fund or the World Bank. The prescriptions ← 18 | 19 → encompassed policies in various areas like macroeconomic stabilization, economic opening with respect to both trade and investment, and the expansion of market forces within the domestic economy. The main problem of the Washington Consensus was the inobservance of institutions. For instance, Sachs (1991: 236), who was mainly responsible for the design of the Polish reform programme, suspected that basic institutions of a market economy could be established in the country within one year. But it has proven to be false: transformation has to be seen as time-taking process with complex necessities of innovation, imitation and adaptation. (Wrobel 2000: 153–155)

Fortunately, when transformation in the Central and East European Countries (CEECs) started most of them focused on European integration, i.e. political and economic integration with the EU, and exports. In this way, an export oriented development strategy was combined with an institutional imitation process. The result of that was a growing trade in both directions, from East to the West but also from West to the East, as well as a rise of international capital flows, first of all as FDIs from Western Europe into the transformation states. In this way, during two decades most of the CEECs were integrated into the European division of labour. Low labour costs, small distances to the West European markets and a qualified working force enabled these countries to attain respectable growth rates. (Knogler 2010: 11) At the same time political as well as economic institutions were stabilized and basically harmonized. The integration strategy of most CEECs was quite successful. Already, the EBRD Transition Report 2009 showed that in the European transformation states a positive relation between FDIs and growth rates could be observed. (EBRD 2009) But growth financed with outside capital led also in this case to macroeconomic imbalances and fragile financial sectors. One result was not only a fast growing current account deficit which was only partly compensated by FDIs, but also a growing foreign indebtedness of the banking sector as well as other enterprises. In this way, the integration and export based strategy development brought a long-term growth and institutional stability as well as a consumption boom, a debt overload and a financial dependence from foreign financial markets. (Mirow 2010: 3–4) The sharp decline of growth rates in a lot of CEECs and in several Asian NICs between 2008 and 2010 illustrate this problem impressively. All these countries suffered from the crisis by two channels mainly: firstly, by a sharp decline of exports and, secondly, by a drop of net capital flows from the industrialised countries. (Gern 2010: 13–14)

Therefore, especially institutional stability characterized by copying and adaptation of West European institutions, has to be emphasized as an anchor of the CEECs catching-up process. (Wrobel 2000; North 2005) West Europe became the ← 19 | 20 → leading role model for all transformation states. While some of them focused on more liberal models (like the Czech Republic and Estonia) others preferred more coordinated models of market economies. Finally, all new members of the EU accepted the acquis communautaire and thereby all basic political and economic institutions of the West European countries. This was – for sure – the main reason of their success. In contrast, East Asian countries followed the Large Asian Tigers by adaptive copying of their institutions while most of the LDCs failed in finding adequate institutions for a better development. Therefore, it must be asked which institutions support prosperity and development.

3.  Economic Role Models

3.1  Common Experiences from the Western World

While the Geography Hypothesis, the Culture Hypothesis and the Ignorance Hypothesis failed to explain prosperity versus poverty in the world, we can follow Acemoglu/Robinson (2012: 73) that “countries differ in their economic success because of their different institutions, the rules influencing, how the economy works, and the incentives that motivate people.” Obviously, especially Western institutions were able to support the development of prospering societies in the past. As Acemoglu/Robinson (2012: 46) already pointed out, also one hundred or one hundred and fifty years ago nearly the same Western countries were characterized by high prosperity like nowadays. But also Japan and most of the Large Tiger Economies were able to copy and adapt these basic principles of prosperity. Insofar, the East Asian Tigers became successful when they adopted the “basic rights” of Western OAOs like corruption-free public administration and market-enhancing instead of market-distorting interventions. (World Bank 1993) But which institutions make the difference? The reason for the developmental gap between developed market economies and LDCs can be described by the new approach of North/Wallis/Weingast (2009), for instance. They distinguish so-called limited access orders (LAOs) and open access orders (OAOs). While the first-mentioned orders are growing slowly and are vulnerable to shocks, the latter ones enjoy a mainly positive political and economic development. LAOs, also called natural states, are characterised by polities without consent of the governed, a relatively small number of organisations and the predominance of social relationship organised along personal lines, including privileges and social hierarchies. As North/Wallis/Weingast (2009: 12) pointed out, most of the societies in the world are LAOs. In contrast, OAOs are characterised by a bigger, but more decentralised government, a rich civil society with lots of organisations and widespread impersonal social ← 20 | 21 → relationships including rule of law, secure property rights, fairness and equality. Already Eucken (1952/90) brought these ideas into the scientific discussion, calling them “interdependencies of orders”. Also Panther (1997: 111) has to be mentioned, because he characterised the Latin West of Europe by a high degree of “civicness” what he defines as “a set of values and norms requiring actors to treat each other as equals, to be tolerant of each other and encouraging mutual solidarity.”

Nevertheless North/Wallis/Weingast (2009) do not limit their analysis to the differentiation of new ideal types of social orders. They also make some detailed investigation into the transformation process from a LAO to an OAO. Concretely, they define two steps for natural states to become an open access order. At first, personal relations within the dominant coalition have to be transformed into impersonal ones. Then, three doorstep conditions have to be fulfilled. These conditions are, first of all, the implementation of the rule of law for the elites. The second condition is the existence of continuously lived forms of public and private elite organisations. This means a civil society where many organisations exist and develop. And the third one describes that the military has to be come under consolidated political control, for instance the Ministry of Defence. However, this process will only occur if the members of the dominant coalition find it advantageous to transform their privileges into general, impersonal rights (North/Wallis/Weingast 2009: 150–166) While the conditions for a development from a LAO to an OAO are described in detail, the emergence of the monopoly of power during the transition process is hardly dealt with. (Zweynert 2010: 5) Therefore, also the success of a political development is depending on the willingness and success of political entrepreneurs to implement the rules of an OAO. It can only be supposed that globalisation – understood concrete as an institutional competition process (see Hodgeson 2007) – will reinforce these processes.

3.2  Different Role Models in Comparison

3.2.1  Categorizing Economic Systems

After the fall of the Berlin wall market economy and democracy became the main goal for most of the former socialist countries. Japan and the large Asian Tiger Countries introduced market institutions, too. But this is not the “end of history” as Fukuyama (1992) had declared it two decades ago. Nowadays, competition between several types of market economies is strengthening. For instance, Mueller (1996: 33) already wrote: “Human history up to the present day can be seen as a process of wealth creation by individual efforts within given sets of economic and political institutions, and wealth transference (rent seeking). A kind of Darwinian ← 21 | 22 → process is at work that selects for survival those institutional structures that are best at creating and protecting wealth.” But which institutions are worth to be copied and adapted by the NICs to catch-up successfully, nowadays?

Several models of capitalist variety were established during the last decades. Especially, in the late 1990s, capitalist diversity had become the subject of a broad literature, culminating in a number of widely read books (e.g. Stallings 1995; Crouch/Streeck 1997 or Coates 2000). However, the most influential approach was presented as collective volume edited by Peter Hall and David Soskice (2001): “Varieties of Capitalism: the Institutional Foundations of Comparative Advantage”. Especially in the book’s introduction both developed a conceptual model of capitalist variety, which distinguishes two different coordination regimes that vary systematically across countries. At one end of the spectrum there are Liberal Market Economies (LMEs) and on the other end Coordinated Market Economies (CMEs). While the LMEs use markets as their main means of co-ordinating economic activity, CMEs rely more on non-market institutions to solve coordination problems of society. While the LMEs consist of the six Anglo-American countries including Ireland, CMEs include Germany and its smaller neighbours (the Netherlands, Belgium, Switzerland, and Austria) as well as Scandinavia and Japan. Thereby, Germany is the paradigmatic case of CME for Hall/Soskice. But this binary classification of national forms of market systems leaves many countries in an ambiguous position, because they cannot be clearly categorized. For instance, France, Italy, Spain, Portugal and Greece are classified as “ambiguous”, or as an alternative they constitute a third “Mediterranean” type. (Streeck 2010: 24) Another one-dimensional approach was presented by the French author Michel Albert. In his “Capitalism against Capitalism” Albert (1993) distinguished Rhineland capitalism, led by Germany and Japan, and the Anglo-American model, with France sitting on the fence. Also in this case the main differentiation between the Anglo-Saxon model and the German Social Market Economy becomes obvious.

However, the dualist approaches are too simple to form concrete groups of countries as role models for NICs. Several “ambiguous” countries in Europe and the neglecting of the East Asian uniqueness don’t allow an application to the search for a role model for NICs, nowadays. Therefore, in this paper the author follows the most sophisticated approach by Amable (2003), who is using factor-analytical econometric techniques on a large set of macroeconomic variables to distinguish five types of market economies. As Crouch (2005: 448) emphasises Amable’s quantitative data are on a vast range of characteristics, e.g. product and labour markets, financial, social and educational system, etc. The results of his ← 22 | 23 → analysis are five groups of countries: Market-Based Economies, Social Democratic Economies, Continental European Capitalism, South European Capitalism and Asian Capitalism. Amable (2003) analysed OECD countries only. But his ideal types can be used to set up the following geo-cultural groups of countries as role models, also taking in consideration the results of other authors:


ISBN (Hardcover)
Publication date
2015 (September)
Varieties of Capitalism Catching-up Emerging Markets
Frankfurt am Main, Berlin, Bern, Bruxelles, New York, Oxford, Wien, 2015. 298 pp., 33 tables, 20 graphs

Biographical notes

Bernhard Seliger (Volume editor) Jüri Sepp (Volume editor) Ralph Wrobel (Volume editor)

Bernhard Seliger is a representative of the Hanns Seidel Foundation in Seoul (South Korea) and Adjunct Professor at the University of Witten-Herdecke (Germany). Jüri Sepp is Professor of Economic Policy at the University of Tartu (Estonia). Ralph Wrobel is Professor of Economics and Economic Policy at the West Saxon University of Zwickau (Germany).


Title: East Asia and Eastern Europe in a Globalized Perspective