In today’s post, Christian Goebel, Professor of Chinese Studies at the University of Vienna talks to Rosa Gosch of Sustainable Governance Indicators (SGI) about a new study he co-authored for the Bertelsmann Foundation “Assessing Pathways to Sustainable Growth – Need for Reform and Governance Capacities in Asia
Professor Goebel, why are some Asian nations successful while others fail?
First, we must define success. In our analysis of development in China, Indonesia, Singapore, Malaysia, India, South Korea, Vietnam and Japan, we comprehend success not only as economic growth in terms of per capita income, as is often the case. Social development, gender equality, equal access to education, environmental policies and the quality of democracy are equally important. We found that the Asian countries started with economic development, then moved into the social and environmental realm and finally, in some cases, into democratic development. How did they do this? Most governments first developed their executive capacity and only later became more accountable and sometimes more democratic.
Is there a common path for development in Asia?
There isn’t a single recipe for all countries. Development is highly idiosyncratic. Our analysis of Asia, however, shows that countries with strong governments that exhibit high executive capacity tended to be more successful than those with weak executive capacity. The governments of all the countries in our sample first invested in the improvement of executive capacity, and only afterwards in executive accountability and the quality of democracy. With the exception of India, where change has been more decentralized, government has been the main actor in bringing about economic and social change in each case. If there is an Asian model, then it is characterized by a pro-business government that increasingly seeks to govern markets as its executive capacity grows, and which prioritizes social and environmental issues that are beneficial for economic growth over those which are not.
What policy areas did you look at in your study?
We looked at economic policies, which include the transformation from an agrarian economy to a knowledge economy, innovation policies, and social policies like poverty reduction programs and education policies. We also had a close look at issues of gender equality, access to education, and environmental protection. In total, we examined nearly 150 different indicators for every country.
You group the countries in your study into four categories: long-standing democracies (India, Japan), young democracies (South Korea, Indonesia), one-party autocracies (China, Vietnam), and “electoral autocracies” (Malaysia, Singapore). Did regime type affect the performance of the countries?
No, at the aggregate level it didn’t. We didn’t find that democracies are doing better than non-democracies, for example. One of the most successful countries according to the SGI is Singapore, which is not a democracy. China is another example that is developing fast without being democratic. On the other hand, we have India and Indonesia, where development is less impressive despite them being democracies. So it’s not really the presence of democracy but the quality of democracy that matters for development. However, increasing the quality of democracy is very difficult because this requires knowledge, skills and financial resources. High quality of democracy and high executive capacity seem to feed into each other.
So, contrary to the situation in the OECD, policy performance and quality of democracy aren’t correlated in Asia?
That’s true. But that doesn’t mean that democracy doesn’t matter. We arrived at this conclusion because Singapore performs better than Japan, and China better than Indonesia. In the OECD, only democracies were analyzed, and high quality democracies perform better than low quality democracies. The same is true in Asia. Here, however, we have autocracies with high executive capacity, and they perform better than democracies with low executive capacity. This means that democratic quality can help you fine-tune the system only if you have the fundamentals in place.
In which policy areas did the Asian countries perform particularly well?
Nearly all countries did very well in the development of per capita income, poverty reduction, access to education, and access to social welfare. Most children in Asia are today able to access basic education, and the number of years of education has also increased. The gap between boys and girls in access to education has decreased, so there is more gender equality, especially at primary and secondary school level. Interestingly, South Korea – run by a female president today – is among those nations where girls and women don’t have equal access to university education.
Which other shortcomings did you come across?
The developmental models pursued in Asia demand huge sacrifices, notably in the form of inequality and environmental destruction. About half of the countries in our sample are highly unequal; the gains from economic growth are not distributed equally. China, Singapore and Malaysia, for example, have for a long time been very unequal societies with Gini coefficients above 0.45. And the developmental achievements are made at high environmental costs. Moreover, even the established democracies display serious deficits in democratic quality, especially in dimensions such as government accountability, media freedom and even civil rights.
What does your study tell us about future development in Asia?
Our explanations lead us to think about how countries develop and what kind of strategies can be chosen. It is very likely that some of the countries have learned from Japan and from each other. A report like ours should not be taken to say: This is how the world functions. We have discovered regularities, but these are not laws of nature. It should lead us to think: Are these actually good developments? Are there alternatives? We call these developments successful, but the price people pay in terms of social dislocation or environmental pollution can be huge.
What surprised you the most when examining governance in Asia?
We didn’t expect Indonesia to stay democratic, that Indonesians would keep embracing democracy the way they do. The fundamentals are not very good: executive capacity is low, corruption high, rule of law not very strong, and the country is just recovering from the second crisis that affected its economy very severely. Despite this, the country is holding on to democracy. Indonesia has the largest Muslim population in the world. That tells you something about the alleged incompatibility of Islam and democracy – even when democracy is under stress.
Professor Dani Rodrik of Harvard University discusses Asian growth models here
Today we publish the second of a summer series in which Kimberley Botwright of the OECD Public Affairs and Communications Directorate looks at OECD work through a Shakespearean lens.
Sixteenth century Venice was a global centre of merchant capitalism, and The Merchant of Venice offers an excellent examination of human behaviour and its effects on financial markets. The point of this article is not to dwell on the appalling anti-Semitism of the period, but rather on the story of the hapless eponymous character and his reckless friend.
With the majority of his wealth at sea, Antonio uses credit to leverage capital to lend to his friend Bassanio (“Try what my credit can in Venice do”). Bassanio requires funding to seduce the wealthy heiress Portia. On Bassanio’s behalf, Antonio borrows 3,000 ducats for a three-month period from Shylock, who offers a 0% interest rate but takes the promise of one pound (around half a kilo) of Antonio’s flesh as collateral.
By Act 3, the audience discovers that Antonio’s ships have sunk, leading to a catastrophic devaluation of his net worth. To redeem his losses, he must pay the gruesome corporeal price under the terms of a notarized contract:
“Hath all his ventures failed? What, not one hit? From Tripolis, from Mexico and England, / From Lisbon, Barbary and India? And not one vessel scape the dreadful touch of merchant-marring rocks?”
Antonio is significantly over-leveraged and he overconfidently manages risk, based on an uncritical acceptance of the present. If only he’d read the OECD’s Future Global Shocks: Improving Risk Governance! He would have learned that disruptive events, such as a cargo ship sinking, can destabilise critical supply systems and have far-reaching economic effects.
He might also have learnt something about financial crises: “Arguably, financial crises both occur more frequently and produce more severe monetary damage than other types of risks described. There is a concern that the tools for risk analysis have not worked as well.” It goes on to emphasise that financial crises involve human, non-malicious choices and their re-occurrence should encourage us to search for new approaches to economic challenges and models “that use data on how agents actually behave.”
Bassanio provides an illustration of the erratic behaviour of individuals in financial markets. His justification for borrowing money from Antonio is based on the logic that if one shoots and loses an arrow, one should promptly shoot another in the same direction, in order to find out where the first went – not the most rational of approaches, seeing as it is very likely your second arrow will go the same way as the first. In short, Bassanio throws good money after bad.
Since the financial crisis, traditional economic models have become increasingly criticised for being blind to herd behaviour, network effects or information asymmetries and irrational action. Agent-based models (ABM) provide an alternative modelling approach. They focus on possible interactions between agents according to certain behaviour rules, running millions of simulations to approximate the millions of potential interactions between actors, gaining a better insight into possible outcomes of the complex system. In complex systems such as debt markets or financial institutions, shocks can be caused by external pressures (ships sinking) or internal (erratic individuals). It is therefore important to understand these systems at both the macro and micro-level.
Another important human aspect of financial systems is trust and expectations. Towards the end of the play, Antonio is dragged to court, with Shylock demanding his pound of flesh. While the presiding Duke of Venice initially proposes that Shylock might assume certain losses and forgive part of Antonio’s debt, “Forgive a moiety of the principal, / Glancing an eye of pity on his losses”, this raises deep concerns:
“It must not be; there is no power in Venice
Can alter a decree established.
‘Twill be recorded for a precedent,
And many an error by the same example
Will rush into the state. It cannot be.”
A major fall-out of the financial crisis was the possible creation of “moral hazard”, the expectation, or guarantee, that public authorities will bail out uninsured and unsecured creditors of systemically important bank debt. When such guarantees are perceived, behaviour incentives may be distorted.
As two OECD papers on implicit guarantees and banking in a challenging environment make clear, solutions for our modern day financial dilemmas lie in internationally coordinated responses. For example, the first paper suggests that an effective cross-border EU bank failure resolution network would lower the value (and danger) of implicit sovereign guarantees. The second notes that as banks deleverage and assets become renationalised, a European Banking Union would sever the link between weak sovereigns and weak banks.
But knowing what to do and doing it are two different things, as the quick-witted heiress Portia reminds us; “If to do were as easy as to know what were good to do…”