Revision: Causes of Growth in South East Asia
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 labor - 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
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 unfavorable.
The policies for growth may conflict: it may be difficult for the government to achieve all economic objectives at once.
The government can maintain the savings level by restricting consumption and keeps the MPS (marginal propensity to save) high to maintain cash flows into investment.
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.
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, because of more social equality and rising wages.