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Chapter Four: The Rise of Asia
In chapter one we explained how Europe's advantageous geography caused it to technologically advance faster than any other region on the planet, allowing the residents of Western Europe and their descendants in the relatively disease-free North America and Australia to become by far the wealthiest people in the world. By the 1980s the distribution of wealth across the planet was extraordinarily lopsided, with just one fifth of the world's population (mostly those in Western Europe and their descendants in North America and Australia) holding 82% of the world's wealth.
And yet in the second half of the twentieth century, nations which had historically been extremely impoverished started rapidly getting rich. Starting in the 1960s, several Asian nations which had previously been stuck in extreme poverty -including South Korea, Hong Kong, Taiwan, and Singapore- began rapidly becoming wealthier.
By 2009, their quality of life rivaled that of historically rich European nations such as Germany and Britain.
In the 1980s and 90s, similar dramatic changes began happening China and India; these two states, together representing 2.6 billion people (almost 40% of the world population), began rapidly becoming wealthier as well. These developing economies are predicted to reach an average income of $40'000 per person (roughly the current income of the very rich United States) by the year 2050. This is an astounding miracle which means that hundreds of millions of people will no longer be condemned to the horrible living conditions associated with extreme poverty.
Yet unfortunately, the poorest region of the planet did not share in this prosperity; from 1990 to 2005, the number of extremely poor people in sub-Saharan Africa actually got larger. While the economies of South Korea, Singapore, China, and India were able to pull millions out of extreme poverty, Africa has barely advanced or even regressed in terms of foreign investment and per capita income. So what was fueling all this economic growth? And why was Asia the one that was growing, while the even more impoverished continent of Africa was simply standing still? In this chapter we'll investigate how China, India and the so-called "Asian Tigers" were able to achieve substantial economic growth, and try to understand how Africa can replicate that rapid increase in wealth and begin the ascent up the ladder of development.
And yet in the second half of the twentieth century, nations which had historically been extremely impoverished started rapidly getting rich. Starting in the 1960s, several Asian nations which had previously been stuck in extreme poverty -including South Korea, Hong Kong, Taiwan, and Singapore- began rapidly becoming wealthier.
By 2009, their quality of life rivaled that of historically rich European nations such as Germany and Britain.
In the 1980s and 90s, similar dramatic changes began happening China and India; these two states, together representing 2.6 billion people (almost 40% of the world population), began rapidly becoming wealthier as well. These developing economies are predicted to reach an average income of $40'000 per person (roughly the current income of the very rich United States) by the year 2050. This is an astounding miracle which means that hundreds of millions of people will no longer be condemned to the horrible living conditions associated with extreme poverty.
Yet unfortunately, the poorest region of the planet did not share in this prosperity; from 1990 to 2005, the number of extremely poor people in sub-Saharan Africa actually got larger. While the economies of South Korea, Singapore, China, and India were able to pull millions out of extreme poverty, Africa has barely advanced or even regressed in terms of foreign investment and per capita income. So what was fueling all this economic growth? And why was Asia the one that was growing, while the even more impoverished continent of Africa was simply standing still? In this chapter we'll investigate how China, India and the so-called "Asian Tigers" were able to achieve substantial economic growth, and try to understand how Africa can replicate that rapid increase in wealth and begin the ascent up the ladder of development.
Asia's High-Income Economies: The Four Asian Tigers
Shortly after fighting a brutal civil war (1950-53) which left 137'000 of its own citizens dead and over 450'000 wounded, the East Asian nation of South Korea was not feeling particularly optimistic. The majority of its agrarian population was left homeless and starving to death, their farms having been completely destroyed by air bombings. What little infrastructure South Korea had prior to the war was also largely obliterated, as were most of the national schools and public hospitals. Economists at the time surely would have looked at this nation's illiterate population and decimated cities and sighed, predicting that South Korea would remain trapped in extreme poverty for at least the rest of the twentieth century.
And yet today, South Korea is a booming, trillion dollar economy. Its citizens enjoy very high incomes and a standard of living rivaling that of even traditionally wealthy nations such as Britain and Germany. It boasts the world's greatest number of people with internet access, and is home to many of the world's leading technological developers including Samsung, LG and the Kia Automotive company. In the center of this new economy lies the spectacular city of Seoul (pictured left); its skyscrapers stand sparkling where rumble lay just fifty years ago, a modern miracle of economic development. So what on Earth happened? How did South Korea inexplicably transform itself from an extremely poor country to one of Earth's greatest economies in just 50 years time?
Together with Taiwan, Hong Kong and Singapore, South Korea is part of a select group of outstanding Asian economies known as the "Asian Tigers". These places have risen out of extreme poverty to become some of Earth's richest nations; they stand as proof that extreme poverty is not an absolute trap, that actions can be taken to make populations astoundingly wealthier over the course of just a few decades. We'll begin this chapter by tracing the history of the Four Asian Tigers in an attempt to determine how they became so successful.
And yet today, South Korea is a booming, trillion dollar economy. Its citizens enjoy very high incomes and a standard of living rivaling that of even traditionally wealthy nations such as Britain and Germany. It boasts the world's greatest number of people with internet access, and is home to many of the world's leading technological developers including Samsung, LG and the Kia Automotive company. In the center of this new economy lies the spectacular city of Seoul (pictured left); its skyscrapers stand sparkling where rumble lay just fifty years ago, a modern miracle of economic development. So what on Earth happened? How did South Korea inexplicably transform itself from an extremely poor country to one of Earth's greatest economies in just 50 years time?
Together with Taiwan, Hong Kong and Singapore, South Korea is part of a select group of outstanding Asian economies known as the "Asian Tigers". These places have risen out of extreme poverty to become some of Earth's richest nations; they stand as proof that extreme poverty is not an absolute trap, that actions can be taken to make populations astoundingly wealthier over the course of just a few decades. We'll begin this chapter by tracing the history of the Four Asian Tigers in an attempt to determine how they became so successful.
Miracle on the Han River: Economic Development in South Korea
Shortly after the end of the Korean War, the United States started growing concerned with Communism's growing popularity among third world nations; it was especially concerned with China, home to around one fifth of the world's population, which had recently transformed into a Communist nation under the leadership of Mao Zedong. The United States needed a way to keep capitalism alive in this part of Asia, and so began giving large amounts of foreign aid to a small group of Asia's capitalist nations. This way the United States could keep a "Capitalist Belt" surrounding China, pressuring it to transition back to a capitalist system for the coming decades. The four nations within this "Capitalist Belt" (seen left in red) would later become the four Asian Tigers.
To help promote the economy of one of the key regions in the Capitalist Belt -South Korea- the United States government began subsidizing (paying for) 70% of South Korea's exports. This subsidy meant that Koreans could sell products such as rice on the world market for greatly reduced prices (since the United States government was shouldering most of the cost), giving Korean corporations a huge advantage over the companies of other developing economies such as Egypt or Ecuador. This advantage caused huge flows of export wealth to come flowing into the Korean economy, giving South Korea the large boost of wealth needed to transition from an impoverished rural producer of agricultural products (like rice) to a major manufacturer of goods in just seven years (1953-1960).
And so the sudden boost of exports (helped by the US subsidy) gave Korea a sudden burst of wealth, which it subsequently invested in bettering the health, infrastructure and (especially) education of its citizens. The large surge in wealth catapulted Korea's economy into the second stage of economic development, becoming part of the glorious cycle of economic growth:
The Korean government used the original wealth generated to buy important vaccinations and treatments for killer diseases, thus promoting human health throughout the region. Some of the surge in wealth was used to subsidize high school and university education throughout Korea, allowing intelligent students previously too poor to attend school the opportunity to become educated and get a high-paying job. The government used another portion of the wealth to build badly needed infrastructure, including ports where they did not already exist to lessen transportation costs and cables to bring electricity to Korean homes.
All of these investments in health, education, and infrastructure helped to increase the efficiency and competitiveness of Korea's markets. Since the Korean market has become more efficient and more competitive, it tended to attract more foreign direct investment from foreign companies and export more products, further increasing its wealth. Korea can then invest the money once again in the critical investments (health, education, infrastructure), which further increased its competitiveness on the world stage. Because Korea once again got more competitive, it was able to attract more foreign direct investment and generate even more wealth. And the cycle starts over again.
Korea has become part of a glorious "Cycle of Prosperity" in which rapid economic growth is created, based on rapid upgrades to health, education, and infrastructure paid for through rapid growth of exports.
Korea rapidly became one of the best educated countries in the world, with one of the world's highest rates of scientific literacy and mathematical knowledge. It's highly skilled, technologically educated public caused Korea to eventually become one of the world's foremost exporters of high-tech goods, including software and electronics; South Korea is the world's leading producer of memory chips, and its Samsung Company is a corporate giant which exports various electronics including televisions, microwaves, cell phones, air conditioners and washing machines.
And so the money which the US government originally spent on foreign aid (directed at export subsidies) gave Korea a competitive advantage over other economies, giving it a large boost in wealth which allowed it to make the critical investments in health, education and infrastructure. Korea thus entered the "Cycle of Prosperity", eventually causing it to become one of the world's richest economies.
To help promote the economy of one of the key regions in the Capitalist Belt -South Korea- the United States government began subsidizing (paying for) 70% of South Korea's exports. This subsidy meant that Koreans could sell products such as rice on the world market for greatly reduced prices (since the United States government was shouldering most of the cost), giving Korean corporations a huge advantage over the companies of other developing economies such as Egypt or Ecuador. This advantage caused huge flows of export wealth to come flowing into the Korean economy, giving South Korea the large boost of wealth needed to transition from an impoverished rural producer of agricultural products (like rice) to a major manufacturer of goods in just seven years (1953-1960).
And so the sudden boost of exports (helped by the US subsidy) gave Korea a sudden burst of wealth, which it subsequently invested in bettering the health, infrastructure and (especially) education of its citizens. The large surge in wealth catapulted Korea's economy into the second stage of economic development, becoming part of the glorious cycle of economic growth:
The Korean government used the original wealth generated to buy important vaccinations and treatments for killer diseases, thus promoting human health throughout the region. Some of the surge in wealth was used to subsidize high school and university education throughout Korea, allowing intelligent students previously too poor to attend school the opportunity to become educated and get a high-paying job. The government used another portion of the wealth to build badly needed infrastructure, including ports where they did not already exist to lessen transportation costs and cables to bring electricity to Korean homes.
All of these investments in health, education, and infrastructure helped to increase the efficiency and competitiveness of Korea's markets. Since the Korean market has become more efficient and more competitive, it tended to attract more foreign direct investment from foreign companies and export more products, further increasing its wealth. Korea can then invest the money once again in the critical investments (health, education, infrastructure), which further increased its competitiveness on the world stage. Because Korea once again got more competitive, it was able to attract more foreign direct investment and generate even more wealth. And the cycle starts over again.
Korea has become part of a glorious "Cycle of Prosperity" in which rapid economic growth is created, based on rapid upgrades to health, education, and infrastructure paid for through rapid growth of exports.
Korea rapidly became one of the best educated countries in the world, with one of the world's highest rates of scientific literacy and mathematical knowledge. It's highly skilled, technologically educated public caused Korea to eventually become one of the world's foremost exporters of high-tech goods, including software and electronics; South Korea is the world's leading producer of memory chips, and its Samsung Company is a corporate giant which exports various electronics including televisions, microwaves, cell phones, air conditioners and washing machines.
And so the money which the US government originally spent on foreign aid (directed at export subsidies) gave Korea a competitive advantage over other economies, giving it a large boost in wealth which allowed it to make the critical investments in health, education and infrastructure. Korea thus entered the "Cycle of Prosperity", eventually causing it to become one of the world's richest economies.
Taiwan
In 1927, a war broke out between Chinese capitalists (represented by the Kuomintang), and the Communist Party of China (under the leadership of Mao Zedong). The war lasted until 1950, when the Communists eventually took over the Chinese mainland and the pro-capitalist Kuomintang were forced to retreat to the small island of Taiwan, where they established a new economy based on market principles. Beginning as a largely impoverished nation, Taiwan has grown to become one of Earth's economic leaders with a quality of life similar to richer European countries. Their rapid economic growth has made them one of the select few members of the Asian Tigers.
Taiwan had the advantage of starting out with significant infrastructure (including roads and railroads) already in place, built by former Japanese colonists to extract rice and sugar from the farms within Taiwan. To help grow these crops, the Japanese also set up irrigation systems on Taiwanese farms which aided in food production. Later during the Cold War, Taiwanese food production received a further boost by the US government; to help support the capitalist regime in power, the United States sent a total of about $4 billion to Taiwan from 1951-65. Taiwan used much of this money to invest in fertilizers and infrastructure to further boost crop production, leading to a surge in food productivity. By 1960, Taiwanese farmers were producing an average of three tons of rice per hectare (10'000 square meters) of farm, the highest crop efficiency in all of Asia except for Japan; this efficient agricultural production provided a boost of wealth to the rest of the economy.
Starting in the 1960s, the capitalist regime in power decides to lower tariffs (taxes) on all imported and exported goods. With abundant infrastructure and with the civil conflict with China largely over, rich world corporations began to flock to Taiwan and construct factories, using its cheap labor to produce clothes and other knickknacks (such as small toys or ornaments) at a very low cost. This boom in foreign investment once again gave the government a surge of wealth, which it used to invest in Taiwan's "Ten Large Construction Projects"; investments in infrastructure which included the building of highways, seaports, airports and power plants. Like Korea, Taiwan also invested in technological education, creating a generation of students familiar with high-tech products. Both of these investments caused Taiwan's exports and industrial production to grow rapidly. During the 1980s, Taiwan used its skilled students to shift to an economy based on production of computer hardware and software; by 2003, 30% of the world's computer products were made in Taiwan, and incomes were relatively high (averaging $14'000 per person). Thus high food yields (once again helped by US foreign aid supporting the capitalist regime) combined with low tariffs, good infrastructure and a highly educated population to make Taiwan into one of the fastest growing economies in all of Asia.
Taiwan had the advantage of starting out with significant infrastructure (including roads and railroads) already in place, built by former Japanese colonists to extract rice and sugar from the farms within Taiwan. To help grow these crops, the Japanese also set up irrigation systems on Taiwanese farms which aided in food production. Later during the Cold War, Taiwanese food production received a further boost by the US government; to help support the capitalist regime in power, the United States sent a total of about $4 billion to Taiwan from 1951-65. Taiwan used much of this money to invest in fertilizers and infrastructure to further boost crop production, leading to a surge in food productivity. By 1960, Taiwanese farmers were producing an average of three tons of rice per hectare (10'000 square meters) of farm, the highest crop efficiency in all of Asia except for Japan; this efficient agricultural production provided a boost of wealth to the rest of the economy.
Starting in the 1960s, the capitalist regime in power decides to lower tariffs (taxes) on all imported and exported goods. With abundant infrastructure and with the civil conflict with China largely over, rich world corporations began to flock to Taiwan and construct factories, using its cheap labor to produce clothes and other knickknacks (such as small toys or ornaments) at a very low cost. This boom in foreign investment once again gave the government a surge of wealth, which it used to invest in Taiwan's "Ten Large Construction Projects"; investments in infrastructure which included the building of highways, seaports, airports and power plants. Like Korea, Taiwan also invested in technological education, creating a generation of students familiar with high-tech products. Both of these investments caused Taiwan's exports and industrial production to grow rapidly. During the 1980s, Taiwan used its skilled students to shift to an economy based on production of computer hardware and software; by 2003, 30% of the world's computer products were made in Taiwan, and incomes were relatively high (averaging $14'000 per person). Thus high food yields (once again helped by US foreign aid supporting the capitalist regime) combined with low tariffs, good infrastructure and a highly educated population to make Taiwan into one of the fastest growing economies in all of Asia.
Singapore's Geographical Blessing
Located on the Southern tip of the Malaysian Peninsula, Singapore is the third-smallest country in the world in terms of land mass (after Monaco and Vatican City), more accurately described as a city rather than a country. Singapore was previously owned by the British Empire until it was invaded and conquered by Japan during the Second World War; it later succeeded from the United Kingdom to become a sovereign state in 1965. Since independence, Singapore has enjoyed a rapid rise in incomes as a result of a boom in foreign direct investment.
Singapore's success as a rapidly growing economy is perhaps the most easily explained of the Four Asian Tigers. As you can see from the map to the bottom left, Singapore happens to be situated in the perfect geographic location to promote foreign investment -the tip of the Malaysian peninsula, where every ship going from Japan, China or Korea must pass right beside to get to consumers in Europe. As a result, Singapore has always had a huge advantage over other nations in being a center for international trade.
Singapore's success as a rapidly growing economy is perhaps the most easily explained of the Four Asian Tigers. As you can see from the map to the bottom left, Singapore happens to be situated in the perfect geographic location to promote foreign investment -the tip of the Malaysian peninsula, where every ship going from Japan, China or Korea must pass right beside to get to consumers in Europe. As a result, Singapore has always had a huge advantage over other nations in being a center for international trade.
In the 1970s, Singapore used its geographic position to its advantage -it invested in key infrastructure (especially seaports) which made it easier for ships to dock along the Singapore coast. The region immediately became a haven for petrochemical refineries; ships carrying oil from the Middle East to Japan and China would simply stop in Singapore, refine the chemicals, and continue on their way.
Singapore used this original surge in wealth to invest in public education; soon, it had a skilled workforce able to attain high-paying jobs in the computer engineering sector. Singapore soon became a major exporter of computer hardware and biotechnology, generating further wealth in the region.
Currently, Singapore is the ninth wealthiest country in the world in terms of national wealth per capita, and is a cosmopolitan site for tourism attracting wealthy families from all over Asia. The Port of Singapore is currently the busiest in the world, transporting one fifth of all shipping containers and half of the world's annual supply of crude oil. Its success as an extremely wealthy state stands as a testament to the role geography plays in promoting certain economies over others.
Singapore used this original surge in wealth to invest in public education; soon, it had a skilled workforce able to attain high-paying jobs in the computer engineering sector. Singapore soon became a major exporter of computer hardware and biotechnology, generating further wealth in the region.
Currently, Singapore is the ninth wealthiest country in the world in terms of national wealth per capita, and is a cosmopolitan site for tourism attracting wealthy families from all over Asia. The Port of Singapore is currently the busiest in the world, transporting one fifth of all shipping containers and half of the world's annual supply of crude oil. Its success as an extremely wealthy state stands as a testament to the role geography plays in promoting certain economies over others.
Hong Kong: Asia's Capital City
The booming territory of Hong Kong -the fourth and final Asian Tiger- is a large city of about 7 million people officially considered a province of China; however, due to its 100 year exposure to Western culture and capitalist ideology, it has traditionally had more in common with Europe and North America than with its Asian neighbors.
This nation's modern history begins in 1839, when the British Navy went to war with China over the right to sell narcotics (a conflict termed the "Opium War"). The British eventually used their superior military technology to win this war; in 1897, they forced the Chinese government to allow the British to "rent out" (essentially colonize) Hong Kong, a large trade city overlooking the Pacific Ocean. The British "leased" Hong Kong from the Chinese government for the next century, making the city an very important trade portal connecting China with the rest of Europe. In 1900, Hong Kong's trading seaport was the fourth largest in the world, attracting large amounts of foreign investment from companies in both China and Europe. This city received another sudden boost in foreign direct investment in the 1940s, when China's Communist Party began winning the civil war; hundreds of Chinese merchants fled China, fearing that the Communist government might take over their business. Many of these merchants set up shop in Hong Kong, where they were allowed to continue doing business without government interference; this huge shift of money to Hong Kong helped to turn the city into Asia's unrivaled industrial center by 1960.
This nation's modern history begins in 1839, when the British Navy went to war with China over the right to sell narcotics (a conflict termed the "Opium War"). The British eventually used their superior military technology to win this war; in 1897, they forced the Chinese government to allow the British to "rent out" (essentially colonize) Hong Kong, a large trade city overlooking the Pacific Ocean. The British "leased" Hong Kong from the Chinese government for the next century, making the city an very important trade portal connecting China with the rest of Europe. In 1900, Hong Kong's trading seaport was the fourth largest in the world, attracting large amounts of foreign investment from companies in both China and Europe. This city received another sudden boost in foreign direct investment in the 1940s, when China's Communist Party began winning the civil war; hundreds of Chinese merchants fled China, fearing that the Communist government might take over their business. Many of these merchants set up shop in Hong Kong, where they were allowed to continue doing business without government interference; this huge shift of money to Hong Kong helped to turn the city into Asia's unrivaled industrial center by 1960.
Hong Kong's citizens gradually became much wealthier than the residents of other Asian nations as the city continued to attract copious amounts of foreign investment. By the 1960s, Hong Kong was one of Earth's major producers of textiles (clothes and carpets), and had a virtual monopoly on European and North American tourism to China during the 1960s and 70s. It used this continuous flow of wealth to build vital infrastructure, including highways, subway systems and high-rise buildings at breathtaking speed. As Hong Kong families became wealthier, they could now afford to send their children to school, causing the city became rapidly well-educated. Hong Kong soon became one of the world's leading manufacturers of high-tech products, including computer hardware, software and other electronics such as televisions, radio and microwaves. Hong Kong's considerable wealth also contributed to the rise of its banking sector, which became the major lender to businesses all over Asia. By the 1990s, Hong Kong was one of the most expensive cities in the world to live in with a standard of living matching that of Europe and North America.
Many have pointed to Hong Kong's favoring of right-wing market freedom (involving very low taxes, strong property rights and extensive market deregulation) as the reason for its rapid rise to prosperity. For example, in its annual Index of Economic Fredom, the conservative Heritage Foundation has ranked Hong Kong as the "most free" economy in the world for the past 15 years (since the study began in 1995), and cited this as the reason for Hong Kong's rise to prosperity as an Asian Tiger. Yet other economists, including Joseph Stiglitz and Paul Krugman (both former winners of the Nobel Prize in Economics) have noted that extremely high economic freedom does not necessarily lead to the best economic growth. They have pointed to many less free economies, including China and Vietnam, which have in recent years been fabulously successful in generating wealth despite substantial government intervention. In addition, extensive deregulation can lead to financial instability involving large rapid gains in wealth followed by deep, devastating recessions (such as the Latin American Debt Crisis during the 1980s and the 1997 Asian Financial Crisis). Although Hong Kong's favoring of capitalism certainly gave it an advantage, I must conclude that its rapid growth had more to do with its strategic location (which made it the portal of trade between China and Europe, thus making it a haven for foreign investment) than with its favoring of right-wing extremist economic policy.
Many have pointed to Hong Kong's favoring of right-wing market freedom (involving very low taxes, strong property rights and extensive market deregulation) as the reason for its rapid rise to prosperity. For example, in its annual Index of Economic Fredom, the conservative Heritage Foundation has ranked Hong Kong as the "most free" economy in the world for the past 15 years (since the study began in 1995), and cited this as the reason for Hong Kong's rise to prosperity as an Asian Tiger. Yet other economists, including Joseph Stiglitz and Paul Krugman (both former winners of the Nobel Prize in Economics) have noted that extremely high economic freedom does not necessarily lead to the best economic growth. They have pointed to many less free economies, including China and Vietnam, which have in recent years been fabulously successful in generating wealth despite substantial government intervention. In addition, extensive deregulation can lead to financial instability involving large rapid gains in wealth followed by deep, devastating recessions (such as the Latin American Debt Crisis during the 1980s and the 1997 Asian Financial Crisis). Although Hong Kong's favoring of capitalism certainly gave it an advantage, I must conclude that its rapid growth had more to do with its strategic location (which made it the portal of trade between China and Europe, thus making it a haven for foreign investment) than with its favoring of right-wing extremist economic policy.
China's Path to Prosperity
From 500 AD to around 1500 AD, China reigned supreme as the world's dominant leader in technological innovation. Some of mankind's greatest inventions, including gun powder, the printing press and magnets, were all invented or discovered in China; many believe that for centuries, China had the highest standard of living in the world. But as mentioned in Chapter One, a series of bad policies by the Chinese government (helped by geographical circumstance) eventually caused incomes in China to fall behind European incomes around 1500 AD; this marked the beginning of a slow and steady decline of Chinese global leadership resulting from terrible government policies.
Perhaps the pivotal turning point in Chinese economic history occurred in 1434 when the emperor banned international trade, closing off China from the rest of the world economy. This was a profound mistake; China's goods could have been sold to foreign nations in Europe or the Middle East, giving China additional money which might have created a more specialized workforce and fueled more technological innovation. Yet alas, it did not happen, and over the next three centuries China continued to fall further behind Europe. Eventually the English invaded China, ironically defeating them with the one of the very inventions that China had created; gunpowder. England terrorized China into opening up its borders once more to international trade, allowing the English to purchase tea from Chinese merchants (which at the time was very popular in Europe) and forcing the Chinese to buy narcotics from the English. This English invasion to attain Chinese tea in exchange for narcotic drugs has been termed by many historians as the "Opium War." Decades later another invasion, this time from Japan, further destabilized China and sent it spirally into civil war. Communist revolutionaries, led by the future Communist dictator Mao Zedong, emerged as the winners of the war in 1949 and gained control of China.
Perhaps the pivotal turning point in Chinese economic history occurred in 1434 when the emperor banned international trade, closing off China from the rest of the world economy. This was a profound mistake; China's goods could have been sold to foreign nations in Europe or the Middle East, giving China additional money which might have created a more specialized workforce and fueled more technological innovation. Yet alas, it did not happen, and over the next three centuries China continued to fall further behind Europe. Eventually the English invaded China, ironically defeating them with the one of the very inventions that China had created; gunpowder. England terrorized China into opening up its borders once more to international trade, allowing the English to purchase tea from Chinese merchants (which at the time was very popular in Europe) and forcing the Chinese to buy narcotics from the English. This English invasion to attain Chinese tea in exchange for narcotic drugs has been termed by many historians as the "Opium War." Decades later another invasion, this time from Japan, further destabilized China and sent it spirally into civil war. Communist revolutionaries, led by the future Communist dictator Mao Zedong, emerged as the winners of the war in 1949 and gained control of China.
Unfortunately, the communist ideology which Mao promoted turned out to be a grossly inefficient. The basic idea behind communism is that everyone works to create goods, then the government takes possession of the goods (creating a massive pile) and hands equal portions out to everyone. This ensures perfectly equal distribution of wealth among the nation's citizens. Certainly fairer distribution of wealth is a good thing, but under communism it comes at a terrible cost. Under Mao, Chinese farmers belonged to what were called "farming communes." Under this system, everyone would be part of a large a community of farmers; each farmer would grow their crops (for example rice) and then give all of whatever food they produced to the community farm house, where all the food would be piled up and divided equally among the town's families.
The problem is that each individual farmer is guaranteed roughly the same amount of food no matter how much rice he produces; if the whole town of one thousand families averages ten pounds of rice for each family, then he'll get ten pounds of rice no matter what (his contribution is negligible). So perhaps the man doesn't work as hard and only achieves half the average rice yields; he's not too worried, since he'll still be getting ten pounds of rice from the community even if he only contributes five pounds of rice. The man now has an "incentive" (motivating force) not to work as hard. Its fine if one or two people don't work very hard and produce less rice than expected, but if the entire community does this then total rice yields will plummet and the entire community will suffer. This is exactly what happened in China; year after year, crop yields were chronically lower than expected simply because people didn't have a strong incentive to work hard.
After Mao Zedong died in 1976, there was a scramble for political power; the role of national leader was up for grabs. The role was eventually filled in 1978 by a man named Deng Xiaping, a reformer who led China away from Communism towards market economics. One of his first major decisions as leader was to privatize China's agricultural sector; everyone now owned their own farm. What this meant was that each man got to keep the amount of food he grew; this dramatically raised each individual farmer's incentive to work hard. This caused an enormous boom in agricultural production throughout China; each farmer now had a surplus of food to sell in the free market.
Deng's second major reform was to allow foreign companies to build manufacturing plants in certain designated areas in China called Special Economic Zones. Companies which manufactured clothes, shoes, toys, electronics and a variety of other knick-knacks could now move to China, where the poor peasants would work for one tenth the wage of North American workers. The company's products would now be manufactured in China and then exported to Europe or the United States. Because they were made using cheaper labor, the company could now sell the product at a cheaper price in North America, saving consumers in the rich world money. Within two decades, Chinese manufacturing exports soared from a few billion dollars in 1980 to more than $200 billion in 2000.
The problem is that each individual farmer is guaranteed roughly the same amount of food no matter how much rice he produces; if the whole town of one thousand families averages ten pounds of rice for each family, then he'll get ten pounds of rice no matter what (his contribution is negligible). So perhaps the man doesn't work as hard and only achieves half the average rice yields; he's not too worried, since he'll still be getting ten pounds of rice from the community even if he only contributes five pounds of rice. The man now has an "incentive" (motivating force) not to work as hard. Its fine if one or two people don't work very hard and produce less rice than expected, but if the entire community does this then total rice yields will plummet and the entire community will suffer. This is exactly what happened in China; year after year, crop yields were chronically lower than expected simply because people didn't have a strong incentive to work hard.
After Mao Zedong died in 1976, there was a scramble for political power; the role of national leader was up for grabs. The role was eventually filled in 1978 by a man named Deng Xiaping, a reformer who led China away from Communism towards market economics. One of his first major decisions as leader was to privatize China's agricultural sector; everyone now owned their own farm. What this meant was that each man got to keep the amount of food he grew; this dramatically raised each individual farmer's incentive to work hard. This caused an enormous boom in agricultural production throughout China; each farmer now had a surplus of food to sell in the free market.
Deng's second major reform was to allow foreign companies to build manufacturing plants in certain designated areas in China called Special Economic Zones. Companies which manufactured clothes, shoes, toys, electronics and a variety of other knick-knacks could now move to China, where the poor peasants would work for one tenth the wage of North American workers. The company's products would now be manufactured in China and then exported to Europe or the United States. Because they were made using cheaper labor, the company could now sell the product at a cheaper price in North America, saving consumers in the rich world money. Within two decades, Chinese manufacturing exports soared from a few billion dollars in 1980 to more than $200 billion in 2000.
The Cycle of Prosperity
And so a large surge in wealth was created in China during the 1980s through a combination of two different policy changes; the first was an increase in agricultural efficiency based on privatizing communal farms, and the second was a large surge in foreign direct investment based on the opening of free trade zones across China to foreign companies. The large surge in wealth catapulted China's economy into the second stage of economic development, allowing it (just as with South Korea, Taiwan and Hong Kong) to become part of the glorious cycle of economic growth.
The Chinese government used the original wealth generated by the agricultural surplus and free trade zones to invest in technologies from the rich world which would help their economy become more efficient. They used the wealth to buy biotechnology, such as important vaccinations and treatments for killer diseases, in order to promote human health throughout China. Some of the surge in wealth was used to subsidize high school and university education throughout China, allowing intelligent students previously too poor to attend school the opportunity to become educated and get a high-paying job. The government used another portion of the wealth to build badly needed infrastructure, including roads throughout inner China, ports where they did not already exist and cables to bring electricity to Chinese homes.
The Chinese also invested in state-of-the-art telecommunication technologies from the rich world, including cell phones and computers. After investing in the necessary infrastructure to allow this technology to work (including satellites to transmit cell phone signals and broadband cables to allow internet connectivity), these telecommunications technologies rapidly increased the efficiency of how people could do business. For example,
with the introduction of cell phones and the internet, small businesses could now find clients, make purchases, and get supplies with just the dial of a phone number or the click of a mouse, greatly reducing transaction costs. Since the small business could now rapidly find and compare prices for supplies, he could also make his products for less money. These telecommunications technologies also helped rural villages by providing what's known as "market information"; rural farmers could now use the cell phones to figure out when food prices were up in order to determine exactly when the best time to sell their food was, giving them additional wealth.
All of these investments in health, education, infrastructure and telecommunications and other technology helped to increase the efficiency and competitiveness of China's markets. Since China's market has become more efficient and more competitive, it tended to attract more foreign direct investment from foreign companies, further increasing its wealth. China can then invest money once again in the "magic four" investments (health, education, infrastructure and technology), which further increase its competitiveness on the world stage. Because once again got more competitive, it was able to attract more foreign direct investment and generate even more wealth. And the cycle starts over again.
China has become part of a glorious cycle in which rapid economic growth is created, based on rapid upgrades to health, education, infrastructure and technology which are paid for through rapid growth of exports. This cycle of prosperity has caused China to become rapidly wealthier; the income of the average Chinese citizen has steadily increased by an average of 8.5% every year since 1980 (meaning that their income has increased eight fold in just thirty years!) From 1980 to 2001, this rapid rise in income across China caused an estimated 400 million people to escape from extreme poverty in just 21 years. By 2050, China is projected to have a median (average) incomeof about $40'000 per year, roughly equal to current incomes in the impressively rich United States.
The Chinese government used the original wealth generated by the agricultural surplus and free trade zones to invest in technologies from the rich world which would help their economy become more efficient. They used the wealth to buy biotechnology, such as important vaccinations and treatments for killer diseases, in order to promote human health throughout China. Some of the surge in wealth was used to subsidize high school and university education throughout China, allowing intelligent students previously too poor to attend school the opportunity to become educated and get a high-paying job. The government used another portion of the wealth to build badly needed infrastructure, including roads throughout inner China, ports where they did not already exist and cables to bring electricity to Chinese homes.
The Chinese also invested in state-of-the-art telecommunication technologies from the rich world, including cell phones and computers. After investing in the necessary infrastructure to allow this technology to work (including satellites to transmit cell phone signals and broadband cables to allow internet connectivity), these telecommunications technologies rapidly increased the efficiency of how people could do business. For example,
with the introduction of cell phones and the internet, small businesses could now find clients, make purchases, and get supplies with just the dial of a phone number or the click of a mouse, greatly reducing transaction costs. Since the small business could now rapidly find and compare prices for supplies, he could also make his products for less money. These telecommunications technologies also helped rural villages by providing what's known as "market information"; rural farmers could now use the cell phones to figure out when food prices were up in order to determine exactly when the best time to sell their food was, giving them additional wealth.
All of these investments in health, education, infrastructure and telecommunications and other technology helped to increase the efficiency and competitiveness of China's markets. Since China's market has become more efficient and more competitive, it tended to attract more foreign direct investment from foreign companies, further increasing its wealth. China can then invest money once again in the "magic four" investments (health, education, infrastructure and technology), which further increase its competitiveness on the world stage. Because once again got more competitive, it was able to attract more foreign direct investment and generate even more wealth. And the cycle starts over again.
China has become part of a glorious cycle in which rapid economic growth is created, based on rapid upgrades to health, education, infrastructure and technology which are paid for through rapid growth of exports. This cycle of prosperity has caused China to become rapidly wealthier; the income of the average Chinese citizen has steadily increased by an average of 8.5% every year since 1980 (meaning that their income has increased eight fold in just thirty years!) From 1980 to 2001, this rapid rise in income across China caused an estimated 400 million people to escape from extreme poverty in just 21 years. By 2050, China is projected to have a median (average) incomeof about $40'000 per year, roughly equal to current incomes in the impressively rich United States.
India's Information Technology Revolution
From 3 BC to 6 BC (known as India's Golden Age), the extremely populous South Asian nation of India enjoyed relatively high standards of living and were prominent contributors to global technological progress, discovering important human achievements including the concept of zero, the decimal system and knowledge that the Earth was flat and rotated on an axis. Economic historian Angus Maddison revealed that in 1700, India held roughly 24% of the world's wealth (roughly equal to Europe's 23%). But India's dominance as a major economy began to dwindle throughout the last 300 years as overpopulation, massive famines, the declining value of silver (which happened to be India's main currency) and chronic internal conflict between India's Hindu and Muslim citizens repeatedly hindered India's economic growth. European powers including Portugal and the United Kingdom eventually took advantage of India's internal conflicts and conquered India the 18th century, aided by their superior military technology. By the end of the 1800s, India was officially a colony of the British Commonwealth. For the next fifty years, the British government would repeatedly refuse to help starving Indian farmers suffering from famine, leading to mass death by starvation.
Under the leadership of Mahatma Ghandi, India gained independence from the British Crown in the mid 1900s using only widespread non-violent civil disobedience. The newly independent democracy soon elected its first Prime Minister: Jawaharlal Nehru -one Ghandi's key spokesmen and lobbyists for independence. Nehru soon placed huge tariffs (taxes) on all imported and exported goods in an effort to keep out foreign investment;
at the time, many in India were understandably distrustful of corporations from Britain and other former colonists. Nehru also made the mistake of over-regulating the Indian market in a period known as the "License Raj"; during this time, small businesses had to obtain licenses to do everything;
to sell products, build new property, buy stocks of other companies. Private businesses could only manufacture goods if they had the required licenses, and the number of items they could sell was determined by the license regime, not by free-market demand. This over-regulation held back India's economic growth, tying the economy up in red tape.
Under the leadership of Mahatma Ghandi, India gained independence from the British Crown in the mid 1900s using only widespread non-violent civil disobedience. The newly independent democracy soon elected its first Prime Minister: Jawaharlal Nehru -one Ghandi's key spokesmen and lobbyists for independence. Nehru soon placed huge tariffs (taxes) on all imported and exported goods in an effort to keep out foreign investment;
at the time, many in India were understandably distrustful of corporations from Britain and other former colonists. Nehru also made the mistake of over-regulating the Indian market in a period known as the "License Raj"; during this time, small businesses had to obtain licenses to do everything;
to sell products, build new property, buy stocks of other companies. Private businesses could only manufacture goods if they had the required licenses, and the number of items they could sell was determined by the license regime, not by free-market demand. This over-regulation held back India's economic growth, tying the economy up in red tape.
Yet Nehru's government also made one excellent decision which would later play a key role in India's economic takeoff; it used government revenue to create several of the Indian Institutes of Technology (pictured left). These institutes were universities which would train Indians to use new technologies (for example, later in the 1990s the universities would train students to write software and operate various computer programs). In 1956, Nehru said of the institutes, "Here in the place of that Hijli Detention Camp stands the fine monument of India, representing India's urges, India's future in the making. This picture seems to me symbolical of the changes that are coming to India." How right he was.
* * *
In the 1950s, the Rockefeller Foundation (at the time the world's largest charity organization) began to become concerned with Earth's rapid population growth. It reasoned that if the population continued growing at its current rate there would simply not be enough food to feed Earth's vast population, leading to enormous famine and death by mass starvation. So to solve this problem, the Rockefeller Foundation funded a project to create new, "high-yielding" seeds; these were essentially bio-engineered seeds of maize and wheat that when planted, would produce more food than the average seed. This meant that farmers in third world countries could now grow more food than ever before. When these seeds were exported to certain regions of India in late 1960s, those regions experienced what is now known as the "Green Revolution"; the introduction of the new bio-engineered seeds caused food production to double (and in some places triple) in a very short period of time. Although the Green Revolution freed much of India from starvation, most of the country still remained trapped in extreme poverty. Still, this experience can be considered as India's first major breakthrough towards attaining considerable economic growth; the rise in food production has caused fertility rates in India to steadily decline since the 1960s and helped to reduce civil violence among India's ethnically divided populations.
In 1991, the Indian government finally enacted market reforms which dramatically sped up India's economic growth. It ended the License Raj, lifting the laws which restricted businesses from pursuing profitable activities. It also promoted foreign investment from rich world corporations through liberalizing the percentage of a company which could be foreign owned and the number of sectors in which foreign companies were allowed to invest. I mentioned before that throughout the 1980s and 90s, companies from the West were looking to move to third world countries in hopes of finding employees willing to work for cheaper wages. This included companies like Nike which manufactured sneakers and clothes; unfortunately, India was an unattractive place for them to move to since it had enormously decrepit infrastructure which made transportation costs enormous. Luckily, Western companies which were looking to move also included corporations from the "Information Technology" sector; designed to program software, perform telemarketing, transcript writing from written print to digital type and analyze data for major businesses. Yet these companies required employees which were highly educated and familiar with computer technology; unfortunately, since most of the third world was enormously uneducated, these companies couldn't move out of the West. But then the companies caught sight of India's students from the Institutes of Information Technologies, and found the workers they were looking for. These companies began rapidly outsourcing to India in the 1990s, hiring the educated Indian workers to perform computer-related tasks. Since the thing which these companies were exporting -digital documents, telemarketing services over the telephone- could be exported using satellites instead of trucks and roads, India was able to achieve a sudden flood of wealth from foreign investment without having the prerequisite infrastructure in place; the satellites allowed India to escape from the "lack of infrastructure" poverty trap described in the previous chapter.
* * *
In the 1950s, the Rockefeller Foundation (at the time the world's largest charity organization) began to become concerned with Earth's rapid population growth. It reasoned that if the population continued growing at its current rate there would simply not be enough food to feed Earth's vast population, leading to enormous famine and death by mass starvation. So to solve this problem, the Rockefeller Foundation funded a project to create new, "high-yielding" seeds; these were essentially bio-engineered seeds of maize and wheat that when planted, would produce more food than the average seed. This meant that farmers in third world countries could now grow more food than ever before. When these seeds were exported to certain regions of India in late 1960s, those regions experienced what is now known as the "Green Revolution"; the introduction of the new bio-engineered seeds caused food production to double (and in some places triple) in a very short period of time. Although the Green Revolution freed much of India from starvation, most of the country still remained trapped in extreme poverty. Still, this experience can be considered as India's first major breakthrough towards attaining considerable economic growth; the rise in food production has caused fertility rates in India to steadily decline since the 1960s and helped to reduce civil violence among India's ethnically divided populations.
In 1991, the Indian government finally enacted market reforms which dramatically sped up India's economic growth. It ended the License Raj, lifting the laws which restricted businesses from pursuing profitable activities. It also promoted foreign investment from rich world corporations through liberalizing the percentage of a company which could be foreign owned and the number of sectors in which foreign companies were allowed to invest. I mentioned before that throughout the 1980s and 90s, companies from the West were looking to move to third world countries in hopes of finding employees willing to work for cheaper wages. This included companies like Nike which manufactured sneakers and clothes; unfortunately, India was an unattractive place for them to move to since it had enormously decrepit infrastructure which made transportation costs enormous. Luckily, Western companies which were looking to move also included corporations from the "Information Technology" sector; designed to program software, perform telemarketing, transcript writing from written print to digital type and analyze data for major businesses. Yet these companies required employees which were highly educated and familiar with computer technology; unfortunately, since most of the third world was enormously uneducated, these companies couldn't move out of the West. But then the companies caught sight of India's students from the Institutes of Information Technologies, and found the workers they were looking for. These companies began rapidly outsourcing to India in the 1990s, hiring the educated Indian workers to perform computer-related tasks. Since the thing which these companies were exporting -digital documents, telemarketing services over the telephone- could be exported using satellites instead of trucks and roads, India was able to achieve a sudden flood of wealth from foreign investment without having the prerequisite infrastructure in place; the satellites allowed India to escape from the "lack of infrastructure" poverty trap described in the previous chapter.
While many of the citizens living in India's major cities have escaped from extreme poverty, the vast majority of citizens residing in either the countryside or dilapidated urban slums still remain extremely impoverished. More than 900'000 Indians still die each year from drinking contaminated water and breathing polluted air, more than a third of the country is still illiterate and most of the physical infrastructure in India's rural districts are still abysmal. Yet now the government has the money to make the crucial investments in health, education and infrastructure needed to enter the second stage of economic development; the boost of foreign direct investment has meant that India is no longer stuck in the poverty trap. Gradually, health and education in India will dramatically improve as the government invests money in vaccines and treatment to cure tuberculosis and AIDS, builds more schools to give India universal primary education, and invests in paved roads, wells and electrical grids to give rural citizens access to electricity and clean drinking water; since all of these investments will increase worker productivity and make India more attractive to foreign direct investment, India will become rapidly wealthier over the coming years as it enters the cycle of prosperity.
Since 1990, the initial flow of foreign direct investment and investments in health education and infrastructure have caused India's per capita income to grow by roughly 7% per year (roughly doubling every ten years), making India one of the world's fastest growing economies.
Since 1990, the initial flow of foreign direct investment and investments in health education and infrastructure have caused India's per capita income to grow by roughly 7% per year (roughly doubling every ten years), making India one of the world's fastest growing economies.
Summary
In summary, most Asian nations which successfully escaped from extreme poverty, including the Four Asian Tigers, China and India, follow roughly the same pattern when transforming from a poor economy to a rich one. They often get an initial boost in agricultural productivity; Taiwan was able to produce more food per hectare than any other Asian country (besides Japan) when it first separated from China, mostly due to the importation of large amounts of fertilizer paid for using $4 billion of US foreign aid; China's agricultural productivity tripled in just 3 years thanks to a transition from Communal farms to privately owned farms, dramatically increasing the individual farmer's incentive to work; India received large amounts of fertilizer and high yield seeds from the Rockefeller Foundation, which allowed farmers to grow more food than ever before and lessen the burden of starvation on India's citizens. This original boost in the production of valuable foods helped dramatically increase wealth throughout these regions (since food has value and farmers now have more of it than ever before), strengthened the developing nations' economies by promoting health
(a better fed population is always healthier) and gave the nations something valuable to export (such as rice or wheat).
Second, the developing country receives another large flood of wealth from a sudden surge of foreign direct investment. Thanks to a US subsidy on exports, South Korea was able to sell products at a greatly reduced cost and become a major exporter of manufactured goods in just seven years. Taiwan's infrastructure (built by Japanese colonists) and vast amounts of food helped it become a major exporter of good during the 1960s. Singapore and Hong Kong both had the advantage of being geographically located in regions where foreign investors would want to flock -Singapore because it was located right beside a major trade route, and Hong Kong because it served as the portal between Chinese and European trade and was the perfect spot for Chinese small-business owners to go who were fleeing Communism. Both China and India had for many years continually "shot themselves in the foot" by placing large tariffs on imports and heavy restrictions on foreign investment; as soon as these barriers were removed they became magnets for foreign investors seeking to build manufacturing plants, such as Nike sweat shops producing sneakers, Walmart manufactures producing toys or information technology companies analyzing data, performing telemarketing and programming software.
When the foreign company builds a factory or office building in the third world nation and employs the nation's poor citizens, they tend to make that country wealthier through creating jobs. In addition, since the company is located in the poor nation (such as China), the government of the country is allowed to collect taxes on the company. The government can invest this tax money in health (investing in hospitals which allow people to live longer and be more productive), education (building universities such as India's IIT buildings), physical infrastructure (building roads and ports needed to reduce transportation costs) and state-of-the-art technology (such as cell phones and internet) for their citizens. This increases the competitiveness of the country, which causes further foreign direct investment. The wealth generated by this foreign direct investment is used to further improve health, education, infrastructure and technology, once again making the country more competitive on the global market and generating more wealth through foreign investment. This cycle, in which foreign investment fuels more wealth, and wealth fuels more foreign investment, continues until the country becomes very rich.
(a better fed population is always healthier) and gave the nations something valuable to export (such as rice or wheat).
Second, the developing country receives another large flood of wealth from a sudden surge of foreign direct investment. Thanks to a US subsidy on exports, South Korea was able to sell products at a greatly reduced cost and become a major exporter of manufactured goods in just seven years. Taiwan's infrastructure (built by Japanese colonists) and vast amounts of food helped it become a major exporter of good during the 1960s. Singapore and Hong Kong both had the advantage of being geographically located in regions where foreign investors would want to flock -Singapore because it was located right beside a major trade route, and Hong Kong because it served as the portal between Chinese and European trade and was the perfect spot for Chinese small-business owners to go who were fleeing Communism. Both China and India had for many years continually "shot themselves in the foot" by placing large tariffs on imports and heavy restrictions on foreign investment; as soon as these barriers were removed they became magnets for foreign investors seeking to build manufacturing plants, such as Nike sweat shops producing sneakers, Walmart manufactures producing toys or information technology companies analyzing data, performing telemarketing and programming software.
When the foreign company builds a factory or office building in the third world nation and employs the nation's poor citizens, they tend to make that country wealthier through creating jobs. In addition, since the company is located in the poor nation (such as China), the government of the country is allowed to collect taxes on the company. The government can invest this tax money in health (investing in hospitals which allow people to live longer and be more productive), education (building universities such as India's IIT buildings), physical infrastructure (building roads and ports needed to reduce transportation costs) and state-of-the-art technology (such as cell phones and internet) for their citizens. This increases the competitiveness of the country, which causes further foreign direct investment. The wealth generated by this foreign direct investment is used to further improve health, education, infrastructure and technology, once again making the country more competitive on the global market and generating more wealth through foreign investment. This cycle, in which foreign investment fuels more wealth, and wealth fuels more foreign investment, continues until the country becomes very rich.
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