The Tail Wags The Tiger
How Four Countries Saved Capitalism
Singapore
In the early 1960’s, the tiny city state of Singapore, in common with many other countries in the Third World, was facing the prospect of independence from its colonial power, in this case the United Kingdom.
With an economy that was heavily dependent on trade, and with very little indigenous industry, Singapore tried to form a political alliance with Malaya, but political differences and ethnic tensions — Singapore had a majority of ethnic Chinese, unlike Malaysia, where the ethnic Malay population was dominant — ultimately led to a breakup of this federation, and Singapore became an independent nation in August 1965.
Anyone looking at this small city state, with no natural resources, and with a population of just under 1.9 million people crammed into an area of seven hundred square kilometers, would not have placed any bets on its survival, leave alone success.
In fact, if there ever was a candidate for a Malthusian trap (where population growth outstrips the carrying capacity of the land, resulting in a catastrophic reduction in living standards, as well as mass starvation), it would have been Singapore in the 1960’s.
However, unlike most other countries that became independent around this time, Singapore did not go for some version of socialism, or opt to create an economic autarky which tried to be self-sufficient, limiting imports to protect home-grown industries; on the contrary, it opened its labor market to precisely the kind of economic exploitation that Marx had spoken out against.
In other words, Singapore embraced capitalism, and opened itself up to foreign investment.
Environment
Singapore created a political and legal environment that promoted foreign investment, promising incentives such as low taxation rates for export-oriented manufacturers, and tax holidays for pioneer industries.
Instead of looking down upon labor-intensive industries such as textile production (in those days, “pajama republics” was a common derisive term used by Marxist economists to describe countries that focused on textiles), Singapore set aside a large area of land for the development of such industries.
Over the next two decades, when the resulting economic development started driving up labor costs, Singapore improvised and shifted its economic focus to the provision of highly skilled labor, and then to financial services. Starting from a low of about USD 2,250 in 1960, the per capita GDP is now over USD 65,000, the fourth highest in the world, or the second highest if adjusted for purchasing power parity.
This spectacular economic growth is best appreciated when visualized.
In fact, it could be argued that, after factoring in intangibles such as security and climate, Singapore today has the highest standard of living in the world.
Hong Kong
Singapore’s achievement, though spectacular, was not unique. Beginning from around the same time period, similar levels of development were achieved in Hong Kong, South Korea, and Taiwan.
Hong Kong’s case was particularly impressive, because it had millions of people crammed into a relatively small area — even though its land area was theoretically about four hundred square kilometers bigger than that of Singapore, most of that land area was mountainous and difficult to build upon, while its population was twice as large.
Over a period of forty years, from 1963 to 2003, Hong Kong’s per capita GDP, after adjusting for inflation, grew six-fold; again, the trajectory of its development was very similar to that of Singapore, with industrial development starting with low cost labor, slowly moving up the skill chain to high skill labor as wages increased due to economic development, followed by a shift to financial and professional services.
Perhaps more impressively, Hong Kong achieved all this in spite of the fact that it was a British colony until 1997. At a time when every Third World country was blaming a former colonial power for its lack of economic development, sometimes two or three decades after independence, Hong Kong was not only prospering in spite of being a colony, its per capita GDP exceeded that of the UK by the late 1980’s.
In time, with the opening up of the Chinese economy after 1980, Hong Kong companies applied their managerial and technical skills, which they had acquired over three decades, to take advantage of this new opportunity for growth, and soon became the main source of investment in Southern China, at least until recently.
Tigers
These four economic tigers, as they came to be known, completely inverted the theoretical models of economic development that were in vogue around this period.
In the 1950’s and 1960’s, when many former colonies became independent, the prevailing wisdom was that the path to true economic development required at least the creation of a self-sufficient economy, i.e. an economic autarky, that was based on a high degree of state planning and control of the private sector, if not outright socialism.
And yet, in the 1960’s and 70’s, the countries that experienced the fastest growth in living standards were the ones that went against this orthodoxy. In fact, these countries adopted a path which many economists claimed would lead to underdevelopment (a specific Marxist term to describe an economy that has not developed as much as it should, compared to the effort that its citizens have put in, because the extra effort has been “extracted” by international capital).
On the other hand, the countries that followed the prevailing economic orthodoxy, and implemented policies that were correct from a Marxian perspective, stagnated and in many cases actually became poorer on a per capita basis, as their population growth outstripped any growth in their total GDP.
Other Factors
Perhaps the most amazing thing about the achievements of these four tigers was that they had none of the advantages that were supposed to have assisted the rise of the West.
They had no colonies to exploit and form one sided trade agreements with; they had no significant military forces that opened up or maintained their markets; and they were trading and prospering in the same international economic system that Marxists insisted was biased against developing countries.
Finally, their progression up the economic chain of well-being was not hindered by British neo-imperialism, American multinationals, Swiss bankers, and so on, which were the common bogeymen put forward to explain every little bit of poverty in every Third World country.
In fact, looking at the development of these tigers, one is struck by how little time they spent in theoretical discussions, or complaining about how it was all somebody else’s fault.
Two Alternatives
Thus, in the 1960’s and 1970’s, there were two alternatives being put on display for the development path that a newly formed country could take.
The first path was some form of socialist economy, with a heavy-handed interference and control by the state in the economic activities of the nation; the level of interference varied, and could be “severe” and complete, such as in the case of China or the eastern European countries, where the government even controlled where a particular person could live, let alone where he could work.
Or it could be benign and partial, such as in the case of India, Tanzania, and Argentina, where the government nationalized major industries, and imposed lots of bureaucratic restrictions on economic activity, but generally left small businesses alone.
The second path was that of the four economic tigers, who embraced capitalism with an entrepreneurial flair, and did not worry about ideological issues such as exploitation of labor, but merely focused pragmatically on what was the best path for achieving a higher living standard for their citizens.
The Socialist Alternative
Beginning in the late 1970’s, questions started arising about the claimed stellar performance of these “severe” socialist countries.
For a few decades, in the middle part of the last century, it had been possible to argue that countries such as the USSR had made significant economic progress, without the volatility as well as inequality problems that plagued capitalist economies.
However, in any “severe” economic system, where citizens cannot go on strike or protest against government policies, it is possible for the state to arbitrarily assign a large portion of its productive capacity to any purpose that it wants, such as the creation of nuclear weapons, creating the illusion of a wealthy and powerful nation.
This is analogous to a person, who is not very rich, putting all his resources into buying an expensive car, and creating the illusion that he is wealthy.
At some point, the charade could not be maintained, and the economies of the communist nations started to implode as their productive capacity failed to keep up with the demands that the political leadership was imposing; once the economy started crumbling, political control and stability went along with it.
Countries such as China saw the writing on the wall in time, and managed to start the process of reforming their economy before the political power had been dissipated, thus avoiding the fate of countries such as the USSR, where the political power collapsed before the economy could be reformed.
In fact, it could be argued that for China, a giant nation of almost a billion people in 1980, the “writing on the wall” was what it could see across the Shenzhen River — a tiny sliver of land called Hong Kong, that was doing far better economically.
Likewise, Malaysia looked across the Johor Strait to Singapore, and saw an alternative economic path to follow, soon adopting similar policies, and drastically improving its economic performance thereafter.
Falling Dominoes
It took a while for the message to sink in, and for some countries such as Cuba and Venezuela, with minds closed by too much theory, it may never ever sink in; but the illusion that socialism was the better economic system, for all its theoretical underpinnings, could not be sustained any longer.
The twentieth century began with capitalism going on the defensive, as country after country fell to the planned certainty of socialism and communism.
In retrospect, it is easy to see why this happened.
Communism promised a seductive utopia: adopt a socialist system, and there would be no more volatility, with resources being allocated by the government to producing what people needed. Furthermore, inequality would also disappear, as the country’s productive capacity would be utilized in a manner that would benefit all its citizens.
At least, this was the theory; in practice, socialism either resulted in mass suffering and death where it was applied severely and completely, such as in China and the USSR, or in economic stagnation and corruption, where it was applied in a benign and partial manner, such as in India and Tanzania.
By the end of the twentieth century, even though many people still had reservations about uncontrolled capitalism, very few could seriously argue that socialism was a better economic system.
In retrospect, given American concerns about dominoes falling to communism in Asia, which was used to justify a costly and ultimately futile intervention in Vietnam, it seems ironical that when the dominoes finally fell, it was to capitalism.
