Wednesday, February 01, 2006

Thom Friedman and Myths about East Asia

Thomas Friedman, whose thinking runs in the predictably shallow rut of American center-right establishment economic orthodoxy, has another piece in the NYTimes (reproduced here) that shows how an impoverished, upside-down construction of Taiwan's history is exploited to validate these economic ideologies. Let's take a look.....

Here is the center of Friedman's argument:

It is not this way everywhere. In East Asia, when the military regimes in countries like Taiwan and South Korea broke up, these countries quickly moved toward civilian democracies. Why? Because they had vibrant free markets, with independent economic centers of power, and no oil. Whoever ruled had to nurture a society that would empower its men and women to get educated and start companies to compete globally, because that was the only way they could thrive.

In the Arab-Muslim world, however, the mullah dictators in Iran and the secular dictators elsewhere have been able to sustain themselves in power much longer, without ever empowering their people, without ever allowing progressive parties to emerge, because they had oil or its equivalent — massive foreign aid.
We'll start with the second paragraph because that is the easier of the two. The final sentence of the second paragraph is the only one of interest there. Taiwan received about $5 billion in US aid between 1950 and 1965, about $1.5 billion was economic and the remainder, military. South Korea received $3 billion in grants during the initial phase of the US aid program, to the mid-1960s. To put these sums in comparison, the US gave $13 billion to Europe during the four years of the Marshall plan. Yes, Taiwan did receive massive foreign aid.

The US aid program to Taiwan ceased in 1965, but aid in various ways did not. Taiwan received special tariff status as a developing country until 1989. US companies were encouraged by the US to relocate there. Unlike Arab nations, Taiwan was entirely free of foreign invasion (though not the threat of it), protected by US armed forces. Over that same period the Middle Eastern states fought three wars with Israel and numerous wars with each other. Taiwanese students also received scholarships and other US government support to study in the US; there was no similar influx from the Arab world, and thus, no Arabs returning to their native lands to fight for freedom. Nor was there a massive population of Arabs in the US and Japan fighting for democracy in the Middle East, unlike the situation with Taiwan. Nor was there a flow of contracts from the US to the Middle East as there was during the Vietnam War between the US and Taiwan. Direct aid may have ceased, but many forms of economic aid both direct and indirect continued from the US. The US was anxious that Taiwan be a success, as it was Free China and thus, intended to be a model American client state during the Cold War. Without that constant flow of support from the US, Taiwan would never have been a success. There was indeed massive aid, and it was and is ongoing.

Let us now look at the first paragraph....

In East Asia, when the military regimes in countries like Taiwan and South Korea broke up, these countries quickly moved toward civilian democracies. Why? Because they had vibrant free markets, with independent economic centers of power, and no oil.

Taiwan's "vibrant free markets" consisted of a small and medium enterprise sector that operated in an OEM mode selling to foreign brand retailers. In "free market" Taiwan during the period of transition to democracy, 1986-1996, the petrol, rail, steel, phone, banks, electricity, airlines, sugar, salt, tobacco, alcohol, and many other industries were wholly or in part operated by the government. Rice, the crucial agricultural product, was planted by private farmers but prices for fertilizer and for harvested rice were set by the government. Unions were illegal and striking was a capital crime. The fact is that there was never a 'free market' in Taiwan and it is high time this myth was given a bullet to the head and buried in an unmarked grave. The "free market" in Taiwan was a small sector of Taiwan's market which was highly visible internationally. The real Taiwan was a complex interaction of tightly controlled state companies, ruling party-owned enterprises, and freewheeling family firms that were part of international trade networks. In many ways this sector was "free" not because the government did not intervene but because such firms were successful in ignoring, evading, or ameliorating government interventions. It was only after Taiwan began to democratize that working hours fell, privatization of government enterprises commenced, and government control of the market began to slacken. Taiwan's current "free market" is the result of, not the cause of, democratization.

Nor were there any "independent sectors of economic power" because all of them had been co-opted by the ruling party, which was probably the most completely interventionist outside the old Soviet bloc. The one possible independent sector of power, the local landlords, had been destroyed in the land reforms of the 1950s. Major Taiwanese industrialists such as Ku Cheng-fu and Wang Yung-ching had been created by US AID during its aid program in the 1950s and were thoroughly interwined with the ruling party (had to be, as there was no other game in town). Friedman has the story backwards -- it was the advent of democracy in the late 1980s that permitted the development of industry which was not beholden to the ruling party, and the emergence of independent economic centers of power as industrialists were able to pursue independent political action.

And no oil? Taiwan actually has small deposits. But they have no real economic effect, so in that area at least he is technically right. To continue:

Whoever ruled had to nurture a society that would empower its men and women to get educated and start companies to compete globally, because that was the only way they could thrive.

During the crucial period of 1958-60 this very notion was actually hotly debated in Taiwan. Although subsequent history would suggest that Taiwan has always been an export platform, in fact the 1950s were a period of import substitution policy, and Taiwan's exports were limited, as was foreign investment. Long before democracy, however, the technocrats and US experts convinced the old line Chinese officials that the economy had to opened, even at the risk of a loss of Kuomintang power. Opening the island to the outside economy was a move that had nothing to do with democracy and occurred long before it. As for empowering education, we're talking about a Confucian society here....Taiwan's striving for education has nothing to do with democracy either, as it dates from long before that.

I think it should also be noted that this debate about the nature of Taiwan's economic opening illuminates another word that Friedman uses: "thriving." Authoritarian states are interested in "thriving" economies to the extent that such economies do not undermine their own power. Consider for how many decades authoritarians in China, North Korea, the USSR, Spain, and other authoritarian states tolerated lame economies, because the alternative was a loss of control. If authoritarians choose to have an open economy, it is because they have specific political reasons, and not because it is the only way they can "thrive." Authoritarians aren't interested in thriving.

How backwards is Friedman? Completely upside down -- it was Taiwan's openness to the world that created the conditions under which a peaceful transition to democracy could occur. Taiwanese who moved to the US created a vibrant democracy movement there, while Taiwanese democracy advocates pressed for reform at home. Rising middle class disgust with KMT controls on the press and on movement, especially international travel, the suppression of local identity, and the manipulation of elections, eventually fueled a democracy movement. Taiwan was also aided again by pressure from the US, and by the international spotlight on the island, as the result of it calling itself Free China. This dynamic of links to the US, rising economic strength, a flourishing economy, and so on, enabled the creation of Taiwan's democracy. One might also note that Korea enjoyed a brief democracy in the early 1960s long before any of its current wealth.

The idea that there is any way to compare the experience of two US client states with the authoritarian states in the Middle East is absurd. Taiwan's colonial overlords, the Japanese Empire and the Republic of China, as well as its patron the US, were anxious to develop a vibrant local economy for reasons of their own. The British and the French by contrast had few such sustained designs in the Middle East. East Asia is also entirely free of the authority religions that have been such a curse in the Middle East and elsewhere. I could go on and on listing the major and pervasive differences in the history of the two areas.

To assign the lack of democracy in the Middle East to such a narrow range of causes is to write in ignorance of history. Friedman's uninformed screed highlights a desperate need for newspapers to draw on the writing of recognized experts in their fields, and more importantly, for academics to produce more works for popular audiences.

UPDATE: Kerim Friedman of Keywords writes in the comments below:

In the 1970s, the US threatened to cut off aid if Taiwan didn't open up its markets and shift to an export oriented economy. This had the effect of shifting the balance of power between the large state-owned enterprises (SOEs) and the small and medium sized enterprises (SMEs).
Kerim, you're a decade off. That aid cut-off was part of the 1960 aid delivery, not the 1970, and was eventually delivered almost in its entirety -- something like $20 million of the $120 M package was withheld as Taiwan did not open up enough. It was not for "market liberalization" but for switching from an import-substitution to an export-oriented economy. The reason the US withheld $20 million of the package is because the reforms did not liberalize the local market enough, they merely opened the nation to exports. The aid program terminated in 1965 (a few deliveries straggled on until 1967) and could not have been withheld in 1970. It didn't so much "shift the balance of power" as it enabled the SMEs to grow -- the state-owned sector did not shrink but in fact grew, only the private sector grew so mightily it soon made the state sector appear to shrink.

The point I would make is that in countries where there is not already an emergent middle class, market liberalization is likely to concentrate wealth and power even more into the hands of the elite, as we see happening now in the PRC. As such, liberalization is not some kind of magic bullet.

This is a seriously good point. Taiwan's advantage was that incomes were relatively high and the economy already geared to exporting during the Japanese period, and to a lesser extent, under the Qing. In China no such situation exists. Hence Thomas Friedman's assertions about the economy and democracy are -- as we already knew -- bogus.

17 comments:

Kerim Friedman said...

I'm no fan of Thomas Friedman, but the second half of your post is a little off. In the 1970s, the US threatened to cut off aid if Taiwan didn't open up its markets and shift to an export oriented economy. This had the effect of shifting the balance of power between the large state-owned enterprises (SOEs) and the small and medium sized enterprises (SMEs).

It is true that there were simultaneous political pressures towards indigenization and democratization (i.e. US recognition of China), but the opening up of Taiwan's markets certainly played an important role in this process as most of the SMEs were owned by Native Taiwanese as opposed to the SOEs which were mostly owned by the Waishengren.

So while you are right to say that there was never a "free market" it is certainly the case that market liberalization had a significant impact on the process of democratization.

At the same time, it is important to put this in historical perspective. The reason market liberalization was able to have such an effect was because there had long been a strong landed gentry in Taiwan. In the Qing era they opposed state power, in the Japanese era they were propped up by high sugar prices, and in the early KMT era they were enticed into the marketplace through land reform. (But note that land was already fairly equitably distributed compared to other Asian countries.)

The point I would make is that in countries where there is not already an emergent middle class, market liberalization is likely to concentrate wealth and power even more into the hands of the elite, as we see happening now in the PRC. As such, liberalization is not some kind of magic bullet.

Kerim Friedman said...

Correction: I wrote "high sugar prices" when I meant "high rice prices." Rice was subsidized during the wartime economy in Japan, allowing Taiwanese farmers to force concessions from the sugar companies and the government since they could make more money selling rice instead. Of course, the economy collapsed during the last years of the war, and people were starving, but that was not the case earlier on.

Michael Turton said...

In the 1970s, the US threatened to cut off aid if Taiwan didn't open up its markets and shift to an export oriented economy. This had the effect of shifting the balance of power between the large state-owned enterprises (SOEs) and the small and medium sized enterprises (SMEs).

Kerim, you're a decade off. That aid cut-off was part of the 1960 aid delivery, not the 1970, and was eventually delivered almost in its entirety -- $20 million of the $120 package was withheld as Taiwan did not open up enough. It was not for "market liberalization" but for switching from an import-substitution to an export-oriented economy. The reason the US withheld $20 million of the package is because the reforms did not liberalize the local market enough, they merely opened the nation to exports. The aid program terminated in 1965 (a few deliveries straggled on until 1967) and could not have been withheld in 1970.

The point I would make is that in countries where there is not already an emergent middle class, market liberalization is likely to concentrate wealth and power even more into the hands of the elite, as we see happening now in the PRC. As such, liberalization is not some kind of magic bullet.

Now that's a good point.

Michael

Anonymous said...

Good job, very interesting.
Write to the NYT!

Kerim Friedman said...

"It was not for "market liberalization" but for switching from an import-substitution to an export-oriented economy."

Ending import-substitution doesn't count as market liberalization?

Thanks for the correction on the date.

Kerim Friedman said...

From Wikipedia:

"The policy has three major tenets: an active industrial policy to subsidize and orchestrate production of strategic substitutes, protective barriers to trade (namely, tariffs), and a monetary policy that keeps the domestic currency overvalued. Hence import substitution policies are not favored by advocates of absolute free trade."

Anonymous said...

No, the liberalization extended outward, mostly. Because the internal structure of KMT economic dominance, price controls, currency and movement controls, and so on, remained intact. Only the fact that the export sector exploded makes Taiwan look liberalized.

Michael

Curzon said...

Friedman is a git. But a parallel to economic growth to aid or openness doesn't work. The reasons for Taiwan and ROK's economic boom is best articulated by Francis Fukuyama in End of History. Authoritarian governments with preferences for free markets that slowly liberalized were what led to growth. Same in Greece, Spain, Portugal, Taiwan, South Korea, Chile, and to a lesser degree, other nations such as Thailand, Brazil, and China.

Kerim Friedman said...

Michael,

Interesting argument. Can you expand on it? Also, I'd like to see your sources as I want to look into this further.

Michael Turton said...

Well, just yanking out my trusty Ho (Econ Dev of Tai), on p128 he first says that

"The 1950s was not a period particularly favorable to the expansion of private trade activities. External trade was controlled and largely managed by government agencies....the distribution of key raw materials was also controlled and operated by the government. Even a considerable share of each year's rice harvest was collected and distributed by the government operating outside the market. on p196 he has a long list of things that were done to re-orient the industrial policies:

NT$ devalued and the multiple exchange rates officially phased out

Allocation of foreign exchange for permissable imports was simplified and rationalized (note: not freed up)

Some goods on controlled and suspended lists decontrolled, and more stringent criteria adopted for placement of goods on controlled list (note: controls not lifted, just rationalized)

preferential loans to exporters

existing export promotion schemes expanded, new ones introduced

tariff rebates on imports used as inputs for exports expanded to include virtually all taxes

the government approved and supported the development of export cartels (!)

investments in overcapacity industries restricted (a few times)

Note how the apparatus of control doesn't vanish -- it is merely relaxed to permit interaction with the outside world, and redirected to that end. It is a "liberalization" in the sense that the economy is more open to the outside world, but the same pattern of control is exhibited there. Only the Taiwanese SMEs outran this control as they expanded very rapidly.

At the same time, the state continued to subsidize electricity (the issue that provoked US ire) and water, control the making of sugar, salt, in-kind taxes on rice, This policy continued throughout the 1960s (the tax in the 1960s was 27 kg per YEN that the land used to pay to the Japan gov't. No shit. Ho p180). In fact, the discussion on 180-181 outlines the whole sorry apparatus of tax and pricing strategies that extracted 22% of the value of ag production and put into industry (read: KMT pockets) in the 60s. Farmers also had to sell rice to the government, and had to barter for fertilizer at government prices. Not only that but the gov also made you buy poor quality fertilizers if you wanted the good stuff. A great deal, eh?

Should I go on? There was some "privatization" of industries like plywood and cement in the 1960s, whihc means that they were transferred to party elites. But the system of government stores for servants of the regime, subsidized utilities that favored industry, and so on, remained.

Taiwan is a really weird economy, and economic writing on it tends to streamline its weirdnesses out of existence....you know, the way the government gives orders and no one obeys them, and then the government itself ignores its own laws. For example, in the old black market financing economy, it was illegal to write postdated checks, but those were a common instrument for loans. Since writing a bad check was a criminal act, you could get the police to act as your collection agency if the borrower didn't pay up. The police would do this even though postdated checks were declared illegal on several occasions! What kind of "liberalized" or "controlled" economy is THAT!? We need whole new categories to understand Taiwan and probably the other east asia tigers as well.

Michael

Kerim Friedman said...

You write:

"Note how the apparatus of control doesn't vanish -- it is merely relaxed to permit interaction with the outside world, and redirected to that end. It is a "liberalization" in the sense that the economy is more open to the outside world, but the same pattern of control is exhibited there. Only the Taiwanese SMEs outran this control as they expanded very rapidly."

I'm not sure this is any different from what I said.

Krugman's famous essay on the "Asian Miracle" is worth reading on this subject.

Michael Turton said...

LOL. I remember reading that those many years ago. Thanks for the link.

Perhaps we're just arguing about whether you've got six of something, and I've got a half dozen....

Michael

John Emerson said...

When I think about college courses with Ezra Vogel, the "strong state" was always the reason why Asian Tigers, especially Taiwan, were models for Economic Development. They fostered certain industries and protected others until they were ready. Now the NYT/ Friedman article seems to be glossing over this interpretation. I know that it's far more nuanced than this, but it is painfully broad brushed. Tom Gold's book Taiwan and the Economic Miracle might be a good extra reference too-to remind us of previous thinking, backed by facts.

Michael Turton said...

_State and Society in the Taiwan Miracle_? A good book, but Gold was part of a wave of statists that replaced the neoclassical explanations of the 1970s. This wave was triggered by Alice Amsden's seminal article in 1979, and crested with Robert Wade's _Governing the Market_. It passed out of vogue in the late 1980s with the move toward industrial district theories and family networks. I don't think Gold had a handle on that important family business dynamic, at least at that time....

Michael

davesgonechina said...

Curzon said: The reasons for Taiwan and ROK's economic boom is best articulated by Francis Fukuyama in End of History. Authoritarian governments with preferences for free markets that slowly liberalized were what led to growth.

The End of History? Fukuyama's absurd Hegelianism? Curzon, put that thing away, you'll embarrass yourself.

Fukuyama went after dependency theory in EoH, if I remember. His point was that the export-driven markets of Taiwan and Korea did NOT lead them to be dependent, and that being tied to multinational corporations did not prevent reinvestment and development.

But I wouldn't say those authoritarians had a "preference" for open markets. Rather, they didn't have a choice. Unlike, say, Venezuela, they didn't have massive quantities of a key resource that they could use as a bargaining chip, and their big daddy U.S. was offering good aid money if they played along. In other words, they had nothing to lose and no other choice. That's not exactly a preference.

Michael's point that these nations were the recipients of generous aid and did not have very free markets leaves Friedman in trouble because it no longer becomes about "vibrant free markets (didn't have 'em), with independent economic centers of power (all those state-run companies?)", but no oil does stay. And "no oil" is not a preference; it's really a lack of geopolitical power.

So the only thing that really liberalizes these places is that they have no one to turn to but the U.S., I guess...

Peter said...

The real Taiwan was a complex interaction of tightly controlled state companies, ruling party-owned enterprises, and freewheeling family firms that were part of international trade networks.

I wonder if you have any information on the degree to which gangs controlled portions of the economy. During the time that I lived there (early 90's), they seemed to have a hand in everything (including the government), and exercised much greater political influence than for example the Mafia here in the US.

I found the economy to be controlled by extremely complicated relationships, and could only laugh when I read Thomas Friedman's simplistic articles. It was clear that he had made up his mind before going to Asia, and was only going to find some appropriate quotes to spice up his writing.

Michael Turton said...

I wish I knew more. Occasionally there are pieces on specific industries/sectors in the mags -- I still have a FEER article from the early 90s on gangsters and the garlic trade, and there was some great stuff on gangsters and onions last year (I blogged on it). But I don't know of any specific study.

Michael