East Asian Develo

Chapter 5

From Command to Market Economy in China and Vietnam

 Vietnam’s Reforms and the Chinese Model

 Vietnam’s economic reforms are important in their own right, given that Vietnam is the thirteenth largest country in the world in terms of population and has proved to be able to “punch above its weight” in both economic and geopolitical terms. In the context of this study, however, Vietnam’s recent experience is also a test of whether the Chinese reform experience was unique to China or was equally valid elsewhere.

Vietnam began its reforms later and from a different point from China. Prior to 1986 Vietnam was still trying to implement a Soviet-type system— specifically, it was trying to impose that system on the market economy of the southern part of the country after reunification was achieved in 1975. There were some of what the Vietnamese call “fence-breaking” reforms in the early 1980s, but for the most part these were the kind of reforms designed to make the command economy work better, not to replace it with market forces. Officially the Vietnamese economy grew throughout the 1980s, but the actual performance was poor enough, particularly in agriculture, that the country experienced serious famine and malnutrition in the winter of 1987– 1988.35 Furthermore, much of the growth actually achieved depended on large subsidies from the Soviet Union. Vietnam’s imports from 1985 through 1987 rose from US $ 1,590 million to US $ 2,191 million, but the deficit with the Comecon countries (in effect an explicit or implicit subsidy for the Vietnamese economy) rose from US $ 721 million in 1985 to US $ 1,276 million in 1987.

The leader of the post-1975 effort to impose collective agriculture and central planning on the southern part of the country, Party Secretary General Le Duan, died in July 1986, but by then many in the Party realized that the efforts of the past decade had gone badly and needed to change. At the Sixth Party Congress in December 1986 they elected the reformer Nguyen Van Linh as general secretary. What really accelerated the need for radical change, however, was the collapse of Soviet control of eastern Europe in 1989 combined with the Soviet Union’s own worsening economic conditions and its eventual breakup in 1991. The willingness to continue economic subsidies to Vietnam ended by 1989, even before the breakup of the Soviet Union. As the data on Vietnam’s trade in 1988 make clear, the end of subsidies meant that Vietnam had to find an alternative way of paying for 62 percent of its imports. The alternative, cutting back imports of this magnitude, would have thrown the country into a deep recession.

For those familiar with the Vietnam of the twenty-first century, it would be hard to recognize the country in 1989. When I led a small delegation to Vietnam in January 1989 to explore whether the Harvard Institute for International Development could help in making the transition to a more market-oriented economy, there were very few shops of any kind in Hanoi, and the shelves on most of them were empty. The situation in the Mekong delta was marginally better, largely because it was possible to smuggle in goods such as Johnny Walker Scotch, Kodachrome Film, and motorbikes through Cambodia. The leadership, however, was clearly ready for fundamental change and had begun to take steps in that direction. Our host at the time, Foreign Minister Nguyen Co Thach, had just been reading Samuelson’s textbook Economics in an effort to learn about how market economies worked. By my next visit a year later the streets of Hanoi were full of shops, and the goods were flowing out the front door onto the street. Televisions sets, beer, and numerous other consumer products from all over Asia were there for purchase if one had the money.

What had happened was that Vietnam had freed up virtually all prices and removed most restrictions on imports, and if there were still some restrictions, no one seemed to be enforcing them. When Vietnam began its transition to a market economy, however, it had two major problems that were absent in the Chinese case (although they were also present in the Soviet and eastern European transitions). The first problem was the one already mentioned: the huge foreign trade deficit. The second was that the country was suffering from a very high rate of inflation.

The solution to the end of Soviet subsidies and the financing of the trade deficit was partly the result of the reform effort and partly due to luck. As for the lucky part, Vietnam in a joint venture with the Soviet Vietsovpetro had been drilling for oil off the coast of Vung Tau in the southern part of Vietnam, and the wells began producing in 1989, providing Vietnam with several hundred million dollars of foreign exchange. As for the reform part, the end of the effort to collectivize agriculture in the south, together with the freeing up of prices of farm products, led to a boom in rice production, the elimination of any need for rice imports, and the renewal of Vietnam’s traditional role as a rice exporter. Oil and rice exports (and the end of rice imports) together filled roughly two-thirds of the foreign exchange gap in 1989 and 1990. Foreign aid from the West, Japan, or the World Bank, it should be noted, did not play any role. Vietnam was still subject to a total embargo with most Western countries plus Japan, and the World Bank as a result was also not allowed to lend to the country.

In freeing up prices and opening to foreign trade, Vietnam did not follow the Chinese dual-price approach of the second half of the 1980s. With the exception of a handful of energy-related products, all prices were freed up, and all purchasers had to pay the market price. Vietnam, however, had a major inflation problem that predated the liberalization of prices. Inflation in 1986– 1988 and before was running at over 400 percent per year (roughly 14 percent per month). With price reform and the big increase of goods on the market in 1989– 1991, the rate of inflation had come down but was still running at 60 percent a year on average. 38 Rates of this magnitude were not consistent with a program designed to increase the rate of growth of GDP and exports. By 1992, however, the inflation rate of consumer retail prices had fallen to 17.5 percent, and it fell further to 5.2 percent in 1993. It stayed down for the rest of the 1990s and well into the following decade.

The causes of inflation in Vietnam were similar in important respects to the causes in China, only more so. Poorly performing state enterprises— most of the Vietnamese state enterprises in these early reform years— lost their captive markets at home and abroad and borrowed heavily from the state banking system to cover their losses. The central bank, as in China, accommodated them by allowing the money supply to rise rapidly. Solving the inflation problem, therefore, involved sharp cutbacks in the subsidies, the closing of the worst performing firms, and cutting back on the excess employment in the firms remaining. Visiting factories at the time, one often saw many of the workers no longer on the production line and instead in classrooms learning new skills. There was no talk of privatizing enterprises in the early 1990s, however, or much later as well. Vietnam, like China, was still ruled by a Communist Party that saw state ownership as essential in key areas of the economy.

In some respects the Vietnamese reforms of 1989 and the years immediately thereafter fit the “big bang” model for reforming a socialist system minus privatization. Prices, including the exchange rate, were freed up quickly, inflation was brought under control by sharp cutbacks in subsidies within less than four years, and the Soviet Comecon system of planned foreign trade was abolished and Vietnam’s foreign trade system integrated with the international system, at least that part of the international system that was not enforcing an embargo on Vietnamese trade. Working with the Vietnamese government on reform issues at the time, I thought their willingness to rein in the state enterprise expenditures as vigorously as they did indicated a willingness to move rapidly and firmly on state enterprise reform more generally. That did not turn out to be the case. Once inflation was under control, the state enterprises once again were given a central role in the government’s development efforts, a role that they still had as of 2012. It is also possible that the rise of foreign aid after diplomatic normalization with the United States in 1994 actually slowed down the reform process by making substantial amounts of foreign exchange available without taking further steps to reform the state enterprises.

Vietnam also moved dramatically to end collectivization of agriculture in the north and to end efforts to implement it in the south. The 1988 land law effectively returned ownership of arable land to the household, although there were debates at the time as to just who would get the land— specifically whether there would be some further redistribution to reward those who had fought for the revolution. In addition, the farmers got only land use rights, not outright ownership, and these rights were to expire after 20 years. Rice land, in most cases, continued to have an obligation to grow rice. The return to family-owned farms led to an immediate jump in rice output that restored Vietnam’s role as a rice exporter after years of importing rice. Agricultural reform combined with price reform led to a boom in higher valued agricultural crops such as coffee, fruits, rubber, and farmed fish, all of which, together with rice exports, made major contributions to solving the country’s balance-of-payments problems as well as raising the incomes of farmers.

Even before inflation was under full control, the performance of the Vietnamese economy and the development model it pursued looked more and more like the Chinese model. The GDP growth rate in 1989 was only 4.7 percent, or 3 percent per capita, but the average per capita growth rate throughout the 1990s was 5.9 percent per year. Exports grew slowly in the early 1990s, but with the ending of the U.S. embargo in early 1994 (and many other countries ended it earlier), Vietnamese exports took off. From 1994 through the year 2000 exports grew at 25 percent per year, passing US $ 14 billion in 2000. The content of Vietnam’s exports was both similar and different from that of China’s during the first decade of reform. Consumer manufactures, notably shoes, accounted for one-third of Vietnam’s exports during the 1990s, but minerals, mostly petroleum, accounted for more than a quarter of the total, with agricultural and aquatic products (rice, coffee, shrimp. etc.) making up much of the rest— not the case in China. Manufactured exports in China, in contrast, accounted for two-thirds of exports in the latter half of the 1980s. Vietnam, partly because it was in the tropics and partly because its per capita income was lower than that of China, had larger surpluses of agricultural products that could be sold abroad.

By the end of the first decade of the twenty-first century, Vietnam’s economic model looked much the same as it did in the late 1990s. From the end of the 1990s, GDP continued to grow through 2007 at an average rate of 7.6 percent a year, actually accelerating to over 8 percent a year in 2005– 2007. Exports in nominal terms also continued to grow rapidly at 19.7 percent a year from the beginning of 2000 through 2007, but the structure of exports did not change much from the 1990s. The dominant exports continued to be shoes, textiles, and garments, with some increase in the assembly of electronic products, all mostly produced by foreign direct investment firms, plus petroleum, coffee, rice, and other agricultural and fishery products. In China in the 1990s exports came increasingly from heavy industry products such as machinery and transport equipment, but in Vietnam heavy industries, other than petroleum, continued to produce at high cost behind high protective barriers, including favored access to land and credit and favored interpretations or noninterpretations of law.

The major policy change in the first part of the post-2000 decade was the passage of laws (the Enterprise Laws of 2000 and 2005) that legitimized domestic private business, providing security for Vietnamese investors in that sector comparable to what foreign investors in Vietnam already received. Prior to these laws, private industry above household size was virtually nonexistent, although there were a few private industrial firms, disguised under other ownership categories. After the passage of the Enterprise Laws, the private sector boomed. Private industry in 2006– 2010 grew at an average annual rate of 21.6 percent per year, even faster than the 16.6 percent annual growth rate of foreign direct investment industry. Both sectors slowed down at the height of the global financial crisis in 2009 but then bounced back in 2010.

State-owned industry did not fare anywhere near as well, growing at an average annual rate of 8.7 percent in 2006– 2010. A number of the major state industrial enterprises began to spread out into businesses unrelated to their main activity, notably into real estate speculation. Vinashin, the state shipbuilding company, was the most notorious, raising roughly US $ 1 billion from foreign sources in 2007 and then investing the money in speculative activities, most of which had little to do with building ships and which performed badly, effectively forcing the government to bail out the company. But Vinashin was not alone. As in China in the 1980s and 1990s, there was a close relationship between the large state enterprises, the state banks, and the leadership of the Communist Party. Many of these state enterprises borrowed heavily from the state banks and then used the money on real estate projects and other speculative activity unrelated to their core businesses. The large increases in the money supply that resulted from this profligate borrowing began to show up in consumer prices. Whereas the average rate of increase in the consumer price index starting in 2001 and carrying through 2007 was 5.6 percent per year, in 2008 the rate jumped to 23 percent, fell to 6.9 percent during the global financial crisis in 2009, and then rose to 9.2 percent in 2010 and 18.6 percent in 2011 and back to 9.2 percent in 2012. The nominal exchange rate rose much more slowly than inflation, resulting in an overvalued exchange rate and a sharp fall in Vietnam’s foreign exchange reserves in 2011.

Vietnam in the latter half of the first 12 years of the twenty-first century had more in common with China in the early 1990s than with China in the latter half of that decade. As this chapter is being written, there is no evidence that anyone comparable to Zhu Rongji is going to take command in Vietnam, rein in bank lending, and force the state industrial enterprises to face international competition. Vietnam’s GDP growth rate has fallen from 8 percent per year in 2005– 2007 to 5.9 percent per year in 2008– 2012, a respectable rate by global developing country standards but far below China’s rate during the same years. The global financial crisis is partly to blame for this slowdown, but stalled economic reforms are clearly also part of the story.

By 2010, both Vietnam and China’s economies had moved a long way from the prereform period, and in key structural ways their economies had much in common with those of South Korea and Taiwan in the 1970s and 1980s. But it would be a mistake to describe what happened in China or Vietnam as a decision by the Chinese and Vietnamese leadership to abandon the Soviet model of growth and switch to the model of South Korea or Japan.

To begin with China: as Deng Xiaoping said, China’s reforms were like a person crossing a river feeling for the stones. China had no clear model that it followed from the outset. Instead it faced a series of problems and tried to solve them one by one. The first problem was the need to take full advantage of the superior technologies available abroad instead of trying to reinvent the wheel within in China. That step required foreign exchange, and after decades of neglecting foreign trade China didn’t have much foreign exchange— hence the decision to accelerate the growth of exports. Since China couldn’t afford to squeeze food consumption further and the country was not rich in natural resources (and offshore oil finds initially were disappointing), exporting manufactures was the only alternative.

In these early years of reform, China also faced a severe poverty problem, mainly in the countryside, and the solution chosen to achieve a sharp reduction in poverty was to abandon the commune experiment and return to household farming. The immediate result was a large jump in farm output, but after 1984 China reverted to much slower agricultural growth and a rapidly declining share of agriculture in GDP. Better incentives could remove many of the inefficiencies of the commune system, but they could not overcome the fact that China had very little arable land per capita (0.6 hectares per rural family or 0.15 hectares per rural person), 39 and the yields on that land were often already comparable to the highest yields elsewhere in the world.

The next problem was how to accelerate the growth of industry so that China did not continue to fall further behind its neighbors both in per capita income and in industrial technology terms. The initial focus was on trying to make the state-owned enterprises perform better, and a wide variety of measures were tried, none of which was particularly successful. But one of the measures tried, making industrial inputs available on the market at market prices, had a surprising side effect. The townships and villages outside the large cities experienced a boom, as local manufacturers and entrepreneurs could now get the inputs they needed, and township and village enterprises boomed and carried the entire economy with them.

The tragedy of June 4, 1989, temporarily derailed this step-by-step movement across the river and threatened a return to a more state-directed economy, but Deng Xiaoping reversed that retreat with his southern tour in 1992. It is hard to imagine the success achieved by China’s reforms in the absence of Deng Xiaoping. Given the politics and ideologically driven programs of the prereform era, China could have gone down a very different path of state-controlled and state-directed slower growth possibly for decades before running into the massive inefficiencies of such an approach as the economy became more and more complex. But Deng Xiaoping was there and he did endorse continued reform, and so the step-by-step approach resumed.

In the 1990s the drag of the weak performance of the state-owned enterprises was causing a variety of connected problems that threatened overall economic performance. The close relationship between the state industrial enterprises and the state banks was leading the banks down a path to insolvency as nonperforming loans piled up. The ease with which state enterprises could get state bank loans also led to accelerating inflation that was a threat to political stability. So China’s leaders took the dramatic but highly practical step of forcing the state enterprises to reform or go out of business. They did this by joining the WTO and making it difficult for the state to continue to give the kind of support to state enterprises that had been the norm in the past. In this respect, China was quite different from South Korea, Taiwan, and Japan. China has steadily moved toward a trading system that is open on both the import and the export side, with the notable exception in recent years of the undervalued exchange rate. And China has promoted foreign direct investment. Japan, South Korea prior to 1998, and Taiwan, in contrast, tightly restricted foreign direct investment and during the first decades of their high growth implemented high tariff and nontariff barriers to imports.

Thus China ended up in a place similar, although far from identical, to that of its East Asian neighbors. China had no doubt learned from their experience but had got to where it was in 2000 by its own path and in its own way. This way has sometimes been described as a gradual approach to development in contrast to the “big bang” radical transformations instituted in eastern Europe and many of the states of the former Soviet Union. Some of China’s reforms were certainly gradual. It took two decades before China faced up to the need to do something dramatic and effective vis-à-vis the state-owned enterprises. On the other hand the rural reforms were carried out over a period of only a few years, and the opening of the economy to foreign trade occurred quickly as well. Where all that was involved was getting rid of an institution that did not work well (the rural communes for example) one could move quickly. Where new institutions and attitudes had to be created, moving quickly was never possible. Moving quickly was also not possible because China’s goal was a very general one, to become wealthy and powerful, but the country had been struggling with how to do that since the nineteenth century. Implementing such a general goal involved far more difficult choices than reform in Poland and elsewhere in eastern and central Europe in the early 1990s, where the goal of many of the countries was to join the European Union and become as much like the existing EU countries as fast as possible.

The Vietnam economic reform story from 1989 on has much in common with the Chinese story and hence with the experiences of South Korea and Taiwan, and Vietnam went down a similar route for many of the same reasons that China, South Korea, and Taiwan did. Some years ago a senior member of Vietnam’s Politburo whom I had gotten to know criticized an essay I had written in which I suggested that Vietnam’s economic reform path was patterned on that of China. As he rightly pointed out and this chapter has attempted to show, the economic reform process in Vietnam as well as China was driven by the economic and political context in which reform decisions were made. The leaders of Vietnam certainly knew about and learned from the reform experiences of China that preceded their reform effort. As one senior Vietnamese official said to me after one of my many lectures there on China’s reforms, “we are always interested in hearing what China’s is doing because we know that we will soon be facing many of the same problems they are dealing with.”

When it came to the decision to open up the economy to trade with market economies, for example, Vietnam’s initial problem was that they had to deal with a loss of Soviet subsidies and Comecon markets together with high inflation, problems that China did not have in the late 1970s. The beginning of production of the Bach Ho (White Tiger) oil field solved part of the first problem, and the 1988 land law that involved the abandonment of collectivization of agriculture also helped solve the balance-of-payments deficit. Thus Vietnam was able to meet its foreign exchange needs initially with exports of petroleum and a restoration of its traditional rice-exporting status. China, in contrast, given the limited success of its oil exploration efforts, had little choice other than to promote the rapid expansion of labor-intensive manufactured exports where it already had experience. The partial shift in emphasis to manufactured exports came about later in Vietnam, in part because of the embargo that was still in place in the early 1990s and in part because by the mid-1990s Hong Kong, Korean, and Taiwanese manufacturers of shoes and textiles were looking for production platforms that would diversify their businesses so as to escape from overdependence on China.

When it came to the speed of reform, both China and Vietnam moved quickly to abandon collectivization, although the approach of China was bottom up and took several years, while that of Vietnam was more top down and was completed more quickly, in part because collectivization had never taken hold in the Vietnamese south, whereas all of China had been collectivized for over two decades. Vietnam’s decision to deal decisively at the outset with closing inefficient state-owned enterprises was driven mainly by the need to rein in rapid inflation, and the effort slowed as soon as inflation was under control. The fact that state enterprises in Vietnam were a smaller share of the economy may have made it politically easier for the leadership to avoid halfway reform measures like China’s dual-price system in the latter half of the 1980s. China’s initial efforts to reform state owned enterprises were quite modest throughout the 1980s, and reform was further set back after June 4, 1989. What changed in 1992 was Deng Xiaoping’s personal decision to use his status and power to force the restoration of the reform effort, followed by Zhu Rongji’s determined leadership to force state enterprises to become internationally competitive in the late 1990s. There has been no comparable political effort in Vietnam vis-à-vis state-owned enterprises, and they continue to operate as import-substituting firms behind government protective barriers. The failure to further reform Vietnam’s state-owned enterprises is probably one of the reasons why China’s GDP growth rate has averaged over 9 percent per year while that of Vietnam has risen at 7 percent a year during the 23-year reform period and less than 6 percent per year during the most recent five years ending in 2012.

The decisions made by China and Vietnam, therefore, reflected their specific contexts, but the many similarities in their reforms derived in part, though only in part, from the fact that both were moving away from similar failed Soviet-style command economies. The fact that China started a full decade ahead of Vietnam also meant that Vietnam had a model to learn from and follow where appropriate. In addition, these two economies both ended up with development strategies that in key respects looked much like those pursued by Japan, South Korea, and Taiwan. The decision to turn outward with respect to reliance on foreign trade and the export of manufactures was common to all of these economies. In all five economies the government played an active role in directing economic activity, especially during the first decades of reform and rapid growth. All of these economies had major government programs to promote heavy industries. Japan and to a large degree South Korea relied on private firms to carry out these plans whereas China, Vietnam, and Taiwan (in the early phase of the program) relied more on state-owned enterprises, but the direction came from government. Japan, South Korea, and Taiwan used higher tariffs, quantitative restrictions, and undervalued exchange rates to limit imports that would compete with domestic producers, whereas China mainly used an undervalued exchange rate; but that difference reflected the terms China had to accept to become a member of the WTO, whereas Japan and South Korea were already members and started their reforms in an era when the United States was much more tolerant of developing country trade restrictions. Vietnam has not deliberately tried to keep its exchange rate undervalued, and that may reflect in part its greater reliance on the export of natural resource commodities as opposed to manufactures.

Overall, the fact that all of these economies relied on active government intervention to promote industrialization and economic growth probably reflects, in part, the fact that all had large, well-organized bureaucracies staffed with relatively well-educated personnel who had the capacity to make government intervention in the economy work with a reasonable level of efficiency. It is not entirely clear where this organizational capacity came from. In China it was probably a combination of centuries of experience with the bureaucratic rule of the Confucian governmental system, the Communist Party’s own experience over two decades of managing a complex war and revolution against both the Japanese and the Guomindang, and an increasingly well-educated population. In Vietnam, French colonial rule eliminated any substantial personal experience among the Vietnamese with managing a bureaucracy, but they had 30 years of successfully managing a revolutionary war involving the mobilization and supply of millions of troops, the constant need to repair infrastructure destroyed by bombing, and much else. And the fact that they managed this against the French, the Americans, and the South Vietnamese Government created considerable organizational capacity. No such government capacity existed in most of Southeast Asia outside Vietnam.

The major differences between the development strategies of these economies, as contrasted to their similarities, include the fact that China and Vietnam welcomed large-scale foreign direct investment while Japan, South Korea, and Taiwan did not. All of these economies at the beginning of the second decade of the twenty-first century, however, are part of the complex multicountry supply chains that characterize most manufacturing in the region today. One suspects that the hostility to foreign direct investment in the three earlier developers was more a product of politics and culture than anything else. Japanese business practices and business-government relations have never been accommodating to the inclusion of outsiders. In South Korea, in addition to strong nationalist feelings, there was the fear that opening up to foreign direct investment would lead to renewed Japanese control of Korean businesses. China’s leaders, in contrast, seemed to worry little about their ability to control the activities of foreign investors. Somewhat like Koreans, many Vietnamese worry about the ability to control Chinese foreign direct investment in their country but not investment from elsewhere. In fact, involving foreign investment in offshore oil exploration is seen by the Vietnamese as a way to protect themselves against what they perceive as Chinese encroachment.

In broad terms, the factor endowment of these five economies is similar, so it is not surprising that their development strategies have been similar. All had limited endowments of arable land relative to the size of their population, and all, except Vietnam, were in the temperate zone. None had plentiful nonagricultural natural resources relative to the size of its population. All had a Confucian heritage that generated a strong desire for education, backed up by a premodern base of education that was readily expanded into a modern mass education program, resulting in increasingly well-educated labor forces. All five started with governments led by individuals mostly talented at making war and revolution but then made the transition to leaders devoted to modernizing their economies. The main difference in the timing of the rapid growth period of each country had to do with when the emphasis on war and revolution gave way to the emphasis on development. It happened first in Japan with defeat in World War II, moved on to Taiwan and South Korea in the early 1960s, where survival depended on successful economic development, and then to China in the late 1970s and Vietnam in the late 1980s, when revolutionary leaders gave way to leaders who wanted to make their countries wealthy and powerful. These leaders not only wanted to implement development programs that would achieve these goals but also led governments that had the capacity to carry out interventionist policies without excessive political and rent-seeking distortions.

Finally there is the question of whether or how the nature of the political systems in Northeast and Southeast Asia shaped the development strategies pursued, and what the experience of those East Asian economies that have achieved high-income status implies for China and Vietnam. Full treatment of this subject would require a separate book, but a few generalizations are possible from the analysis in this and previous chapters. All of the rapidly growing economies of Northeast and Southeast Asia began with authoritarian political systems, with the possible exceptions of Singapore and Malaysia, where votes were honestly counted in elections and there were opposition candidates, although the playing field was not an even one. Some of these authoritarian governments managed highly effective development policies while others oversaw economic disasters. In the case of South Korea and Taiwan, external threats to the very existence of their economic and political systems kept governments focused on following economic policies that worked and dropping those that did not. Potential external threats of a somewhat different kind also played a role in Singapore.

External threats, however, had little to do with why the governments of China and Vietnam were able to stay focused on effective development policies. The key change in both China and Vietnam was the transition from a generation of leaders mostly skilled at making revolution and fighting wars to leaders who were mainly concerned with making their countries wealthy and powerful. In Vietnam’s case, the end of subsidies from its powerful ally the Soviet Union was a further impetus. The changeover from a revolutionary leader to the next generation is also part of the explanation for Indonesia’s relative success, but authoritarian rule under President Suharto had a mixed development record. It was effective during periods such as the late 1960s and the 1980s when major economic crises in the immediate past kept the ablest technocrats in control, but poor policies led to crises in the mid-1970s and the 1990s, when prior success bred hubris on the part of senior politicians. In the Philippines, authoritarian rule by President Marcos was an unmitigated disaster.

Did the transition to democracy in several of these countries change policies, were the changes positive or negative for economic growth, and are there any implications for China and Vietnam in the experience of the countries that made this transition? In South Korea and Taiwan, democracy coincided with a shift away from a high level of government intervention in the economy to greater reliance on market forces, but that transition began before the change in the political systems and reflected more the requirements of increasingly sophisticated and open economies. The slowdown in growth in South Korea and Taiwan, as will be seen in Chapter 6, had nothing to do with the transition to democracy.

The transition to democracy in Indonesia has been accompanied by fairly high GDP growth, but that is mostly due to high international prices for natural resource exports, not a coherent and effective government development strategy. The transition back to democracy in the Philippines has led to improvements over the Marcos years, but not dramatic improvements. In Malaysia, democracy— arguably in place since independence— has brought political stability to the country that has helped growth, but stability was bought in part with policies strongly favoring one ethnic group that have inhibited economic growth. If there are any lessons for China and Vietnam’s approach to development in this recent political history, it is not clear what they are. The one certainty is that China and Vietnam will have to find more and more ways to accommodate the demands of an increasingly prosperous and well-educated population, but how this will impact their development strategies remains to be seen.

Next I shall explore whether the similarities in economic structure and reform strategies continued in East Asia as the high-growth spurt in some of the economies reached its end. For the countries of Southeast Asia, including Vietnam but excluding Singapore, this end-of-high-growth story is some way off, but in Northeast Asia it has already arrived. In China, however, high growth has been sustained in an economy with an increasingly unusual economic structure.

Source: Perkins, Dwight H. (2013-10-21). East Asian Development (The Edwin O. Reischauer lectures) (Kindle Locations 2516-2779). Harvard University Press. Kindle Edition.