Economic Development of the Asian Countries

The common elements in the Asian tigers’ development path

It is their geographical proximity that also results in the absence of natural resources possession. However, there are other similarities: first of all, the region’s countries had approximately the same motive for carrying out accelerated modernization – the need to find an answer to the complex of threats that hung over them in the 1960s and 1970s. These threats were primarily associated with the confrontation between the two superpowers, conditioned by the Cold War’s logic and manifested in the hot war in Vietnam. Development for the East Asian countries was not a goal but a means to survive and maintain independence in an unfavorable environment. Here we come to one of the critical problems of catch-up modernization – the state’s leading role in accelerated development. This role is since in a country that is embarking on forced transformations, as a rule, there are no independent, strong subjects of modernization, first of all, the class of entrepreneurs and the stratum of technocrats, so the state involuntarily must perform their functions, not to mention its role in solving social problems. In this respect, the “tigers,” including Hong Kong, where, at first glance, the most liberal economic policy of all Asian countries was pursued, were by no means an exception from the general pattern of catching-up development in the 20th century. The state became the main “builder of capitalism” and an entrepreneur in the countries.

Moreover, it was ruled by a dominant mass party or an alliance of parties in some cases. Such a party ensured the consolidation of society and the ruling elite. With its help, the state determined the priorities and development strategy. Very often, the system that has developed in the countries is called bureaucratic capitalism. It is a kind of state capitalism characteristic of most of the 20th century when managers and bureaucrats play a dominant role in relation to owners, and capital-function prevails over capital-property.

The importance of the stability of the Chinese economy to the global economy

The world economy depends on various regional and national economies, where there is a significant difference in development speed. These imbalances are especially noticeable after the 2008 global financial crisis. The mismatching speeds of different regional economies exacerbate global imbalances and create significant obstacles to governments and international structures’ activities. The critical question is whether such imbalances will lead to global disintegration and collapse or whether multiple emerging growth centers can sustain the global economy. This instability can also be caused by the absence of a strong center of economic power. World economic prospects are highly dependent on the fate of the East and South. Developing countries account for more than 50 percent of world economic growth and 40 percent of the investment. Their contribution to the growth of global investment is over 70 percent. Now, China’s contribution is one and a half times the volume of the U.S. As the World Bank model, which considers the future economic multipolarity, shows, China, despite a slight slowdown in economic development, will provide over a third of world growth by 2025. This is much more than any other economy. An emerging market needs infrastructure, housing, consumer goods, and new factories and equipment, which in turn is driving global investment to levels not seen in forty years. Global savings may not match this rise, resulting in increased pressures on long-term interest rates.

It appears that China is attracting alone more FDI inflows than any other regional grouping in emerging markets and developing economies. Discussion of reasons for this

The indicator of direct investment from abroad reflects, among other things, the construction of new factories by foreign companies or the expansion of production in the country, as well as the purchase of local companies. Thanks to the PRC’s policy aimed at stimulating foreign direct investment, which simultaneously imposed restrictions on other forms of foreign investment, a unique structure of external financing of the Chinese economy has emerged, which is significantly different from other developing countries. The primary source of external financing for the Chinese economy is FDI, which accounts for about 69% of all foreign investment in China. At the same time, two other forms of external financing – loans and portfolio investments account for only 26 and 5% of accumulated foreign capital investments. Compared to the developing countries of Latin America and Asia, in China, the share of FDI in the structure of external financing is significantly higher, and accordingly, the role of portfolio investment is much smaller. Free economic zones (FEZ) play an essential role in attracting foreign direct investment in the Chinese economy. The first FEZs appeared in China shortly after the start of economic reforms. A liberal regime for foreign trade operations was established on the FEZ territory, and preferential taxation conditions arose, which ensured an inflow of foreign and domestic investments. It should be noted that residents’ funds are the main source of investment in Chinese FEZs.

Indian economy

India is a vibrant and diverse country whose economy is increasingly integrating with the global economy. The extensive economic reforms undertaken in the last decade have had far-reaching consequences. A huge and constantly growing market, developing infrastructure, a complex financial sector, a flexible regulatory environment, incentives, a stable state, and an excellent economic outlook make India an attractive investment destination. India’s business environment is conducive to high performance and sustainable growth. India is currently on its way to becoming an open market economy, but traces of the country’s past policies remain.

Difference between the development paths of the Chinese and Indian economies

Many analysts believe that the Chinese model is a variant of the East Asian economic development model, which provides high rates of economic growth. It is characterized by the active participation of the authoritarian (to varying degrees) state in the development of the economy; export orientation of the economy; use of cheap labor; attracting foreign investment, as well as the active import of technology; high share of investment in GDP; creation of special economic zones. Unique (and at the same time key) features of the Chinese development model are a huge population and a considerable role of the state under the rule of the Communist Party. In China, thanks to the state’s enormous role, a massive share of GDP is used for accumulation, which allows maintaining high growth rates. Ethnic Chinese foreign capital also plays an important role, accounting for almost half of all FDI. In China, a unique system of driving forces of development has emerged, in which, unlike developed countries, the main ones are not domestic private capital, but foreign business, as well as local authorities of different levels and state corporations.

The Indian model differs significantly from the East Asian model in general and the Chinese model in particular. It does not resemble any other at all; it is a particular type of development model and a unique socio-cultural system. Politically, India is based on the principles of a modern national federal state, but at the same time, it is a kind of model of a multicultural world, where different religions, ethnic groups, classes, and castes coexist. The presence of contrasts, the coexistence of deep archaism, and ultramodern enclaves and sectors is characteristic of all rapidly developing countries with economies in transition. However, in India, there is a peculiarity inherent, perhaps, only to her. In the Indian model, strangely, but rather organically, the essential features of the developed capitalist, socialist, and developing countries are combined. The peasantry still predominates in the demographic structure of India; land scarcity and low labor productivity generate agrarian overpopulation, poverty, and high unemployment. India is distinguished by the state’s high economic activity in the field of infrastructure and economic development based on five-year plans. The state regulates economic activity and social life. This is manifested, for example, in supporting small businesses and protecting the rights of workers, attempts to provide a minimum livelihood for peasants (in particular, by attracting them to paid public works) in the fight against poverty and illiteracy. Another core feature is expressed in the structure of the economy, in which, just like in developed economies, the service sector, including high-tech ones, prevails; and in the structure of exports, where high-tech services also prevail.

Explanation of why the recent global financial crisis did not have as big an impact on the Asian economies as the financial crisis of 1997

A combination of the following factors can explain this circumstance. First, the crisis impulses in the world economy went mainly through the stock market. Moreover, in Asian countries, it is not developed, and financial flows go mainly through the credit market, which is regulated by central banks. Second, Asia survived the 1997-1998 crisis, learned specific lessons from it, and began to calculate risks more carefully. As a result, the credit system has become more stable. Thus, the volume of non-performing loans as a percentage of their total amount decreased from 1999 to 2008 in Indonesia from 32.9% to 8.5% in Thailand from 38.6% to 5.3%. In other countries, this indicator was in the range of 2 – 4%. In the USA in 2008, non-performing loans accounted for 5%, in China about 7%. Foreign deposits in the total amount of bank deposits were negligible. The highest rates of about 1.5% were in Singapore, Malaysia, and Thailand.

The advantages and disadvantages of controls to minimize the volatility of capital movements

Capital flows affect the broadest range of macroeconomic processes, including foreign exchange markets, securities markets, international trade, etc. At the same time, external investment is an essential source of growth for economies with a deficit of domestic savings. This is not a complete list of the macroeconomic aspects of transnational capital flows. Accordingly, the introduction of restrictions on capital flows will affect all of the above areas. Capital mobility is beneficial for both donor investor countries and investment recipient countries. However, in addition to positive effects, capital flows carry several significant risks, since when economies with weak financial systems and an undeveloped institutional environment open up to the global financial market, they become more vulnerable to fluctuations in market conditions.

The reasons for the introduction of capital controls are various processes, including the problem of the balance of payments, macroeconomic regulation, underdeveloped capital markets and financial institutions, underdevelopment of the national regulatory system, the size of the economy, and the level of its development. Countries with developed financial markets applied, as a rule, only indirect restrictive measures. The experience of controlling capital outflows in a given country is unique and depends on specific economic and political conditions. The use of restrictions could be both a preventive measure and a forced step in a crisis when market mechanisms ceased to function. Practice shows that countries practicing the regulation of financial flows are more successful in economic development and more successfully weathered the global financial crisis of 2008 since they were protected from the negative impact of fluctuations in the global financial system. Thus, consideration of the issue of regulating international capital flows can be divided into two aspects: preventing the outflow of capital abroad and combating the inflow of speculative money. Thus, the apparent advantage of such a measure is to ensure stability since high capital mobility is one of the sources of imbalances in the financial sector. However, such measures can be introduced only in exceptional cases when there is a need to mitigate the negative consequences of shocks associated with changes in the conjuncture of global financial markets.

The fundamental reasons for the Asian financial crisis

The fundamental problems of the East Asian economies contributed significantly to the emergence of this crisis. The most serious questions revolve around the banking systems of the Asian region throughout the early 1990s. Asian banks received large inflows of foreign investment, reflecting the international excitement generated by strong economic growth in Asia. Large financial inflows and associated current account deficits would not necessarily be a problem if the funds raised were invested productively. Unfortunately, many local bankers made loans based on friendships, family relationships, or political ties instead of rigorous economic justifications — a phenomenon that has come to be known as “crony capitalism.” As a result, there have been low investment returns and a growing number of defaults among borrowers. The understanding by financial investors that their income from Asian loans and investments will be significantly lower than expected provoked the sale of Asian assets and triggered a currency crisis.

Analysis of the IMF’s role in Asian financial crisis

The destabilization of the financial system of the East Asian countries required the adoption of immediate measures to restore confidence in the national currency and the financial system. The IMF played an active role in the recovery of the system, providing loans to affected countries aimed at reducing the deficit of capital transactions in the balance of payments and reforming the financial system. These measures included the restructuring of financial institutions, their recapitalization, and changes in the regulation of the capital market. For example, Korea received a loan from the IMF in the amount of USD 58 billion. The IMF’s role in preventing the consequences of the financial crisis in East Asia was perceived by countries in two ways, and sometimes even negatively. This position is because lending took place within the framework of programs developed by the IMF in the spirit of neoliberal traditions. Countries that lend under IMF programs are forced to agree with the Fund since even indirect criticism of the program could have disastrous consequences: the IMF could not only suspend loans but also with the help of its powerful propaganda to discourage private investors. As a result, initiatives to establish the Asian Monetary Fund began to be developed in East Asian countries, but these ideas were not implemented.

The lessons that can be learned from the Asian financial crisis by other countries such as the UAE

First, financial deregulation and liberalization of international capital transactions worldwide have made the monetary sphere of many countries such that, under these conditions, the state is no longer able to protect the national economy from the destabilizing effects of the financial market fluctuations. The crisis has shown the need for such socio-economic institutions that would allow private economic agents to operate effectively in market and price instability conditions. In other words, the lesson of the crisis is that under the new conditions, the role of the state is not to protect economic agents but to facilitate their faster adaptation to changes. Another critical role of the state is the timely correction of factors that may lead to macroeconomic destabilization in the future. The Asian crisis showed the need for corporate governance reform and separation of private business and government regulation, and restructuring of financial and industrial groups (conglomerates) in accordance with market principles.

It should be noted that the crisis was natural in the sense that it revealed the lag of socio-economic institutions behind the quantitative parameters of economic activity in East Asian countries. In particular, the absence of a real (and not on paper) balance for defending their interests among all groups of economic agents (entrepreneurs, their creditors, etc.) led to a drop in the national economy’s final efficiency in these countries. Therefore, the lesson to be learned is that the judicial system, the disclosure of financial information, mechanisms to ensure market competition, and other balancing socio-economic institutions are not auxiliary, but central factors, without the timely and sufficient development of which the full realization of the potential for economic growth is impossible.


The presentation, Shirley (2014), pp. 1,3,6

The Global Financial Crisis, Reserve Bank of Australia, p.1, Keat H.S. The Global Financial Crisis: Impact on Asia and Policy Challenges Ahead, pp. 271, 273

Presentation, Jayanthakumaran (2002) An Overview of Export Processing Zones: Selected Asian Countries, pp. 3-5

Keat H.S. The Global Financial Crisis: Impact on Asia and Policy Challenges Ahead, pp. 267, 269, 271, 273. Asian Development Bank, Asian Development Outlook 2009, p. 3–14.

Erten, B., Korinek, A., & Ocampo, J. A. (2021). Capital controls: Theory and evidence. Journal of Economic Literature, 59(1), 45-89.

Akyuz, Y. (2000) Causes andSources of the Asian Financial Crisis, pp. 2, 3, 8, 9

Ito, T. (2007). Asian currency crisis and the International Monetary Fund, 10 years later: Overview. Asian Economic Policy Review, 2(1), 16-49.

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