Today’s rapidly growing economies are classified as Newly Industrializing Countries or NICs and most of the NICs are located in Asia. Despite the current economic crisis, which remains as a mystery, NICs experienced a rapid economic growth over the last 40 years. Economic growth refers to an increase in the productive capacity of an economy. Japan was the first country to experience a rapid economic growth in Asia. Its economy continued to expand rapidly from the mid-1950s through the 1960s. The annual growth rate averaged close to 11% in real terms for the decade of the 1960s.
This compared with 4.6% for the West Germany and 4.3% for the USA in the period from 1960 to 1972. And it was well above twice Japan’s own average prewar growth rate of about 4% a year. It is generally agreed that the rapid expansion of Japan’s economy from the late 1950s through the 1960s was powered by the vigorous investment of private industry in new plants and equipment. The high level of saving of Japanese households provided banks and other financial institutions with large funds for heavy investment in the private sector. The rapid increase in capital spending was associated with the introduction of new technology, often under license from foreign companies. Investment for modernization made Japanese industries more competitive on the world market. This created new products and brought Japanese enterprises the benefits of mass production and improved productivity per worker. Another factor behind Japan’s economic growth during this period was the availability of an abundant labour force with a high level of education.
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Reasonably large numbers of young people entered the labour force every year. There was also a heavy migrartion of agricultural workers to manufacturing and service jobs located mostly in the larger cities. In 1960, the Japanese government established Income Doubling Plan, every 10 years, so that the government’s economic policies aimed to encourage saving, stimulate investment, protect growth industries and promote exports. During this period, Japan benefited from an expansionary world economic climate caused by the availability of an abundant supply of relatively cheap energy from abroad. Despite a few short recessions, the Japanese economy enjoyed a long period of prosperity. In 1960s-70s, the real growth rate was averaging close to 12%.
The main factor behind this growth was rising capital investment and to obtain economies of scale, build additional facilities to increase export capacity, and acquire equipment needed to respond to changes in the economic and social environments, such as labour-saving tools and pollution-cutting devices. Increases in exports due to the stronger price competitiveness of Japanese products also supported the sustained rise in business activity. Within 25 years, Japan established one of the largest financial centers in the world. Soon, so-called high-performing Asian economies (HPAEs), notably, Hong Kong, Korea, Singapore, Taiwan, and later Indonesia, Malaysia, Thailand, China, India and Vietnam, start following Japan’s policies. The process is also known as the ‘flying geese phenomenon.’ Since late 1970s these countries have experienced between 8-11% economic growth. Countries that were more open to international trade have enjoyed a more rapid rate of economic growth. This is especially true with China because it suffered greatly under pure communist economic policies in the 1950s and 1960s. However, in the 1970s, Mao Zedong initiated ‘Great Leap Forward’ economic programs and established ties with the West since then many things have changed radically. China began a program of economic liberalization.
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Since 1980s, trade liberalization and reforms have accelerated. China’s rate of per capita income growth, during 1985-95, was 8.3% per year. Most importantly, China, South Korea and Taiwan established universal primary education to empower women. This helped to increase people’s standards of living while reducing the high birth rate and expanding labour intensive industries. Not surprisingly, in 1995 the Singapore economy registered a growth rate of 8.8%, pushing its per capita GDP to more than US $28 thousand, a level above that of the United States. In January 1996, the Organization for Economic Cooperation and Development (OECD) removed Singapore from the list of recipient countries of official development assistance, and reclassified it into a new category of countries, ‘more advanced developing countries.’ The rapid economic growth, in the HPAEs, have been powered by the expansion of domestically manufactured exports. This enabled them to overcome the constraints of their small domestic markets.
The export manufacturers have increased their competitive edge by turning to more technology- and capital-intensive operations and producing high-value-added products. The private capital investment represented more than simple access to funds. The HPAEs enterpreneurs generally seek strategic alliances and joint ventures in which the foreign investor also brought specific expertise, access to markets, technological enhancement or other critical capabilities. Generally, all HPAEs governments welcomed direct foreign investment through decentralization and liberalization policies. So that the foreign investors were also able to assess and manage a variety of risks including currency fluctuation, changes in the political climate and most importantly lack of liquidity in the investment. Consequently, the pure financial investors so effectively invested their capital in the rapidly growing economies.
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This required the further development of traditional capital markets, and eventually increased global competitiveness. During the same period, countries like Nepal and many other developing nations experienced a strong negative relationship between exchange rate distortions and economic growth. The government’s interference on the economy was one of the several factors that affected growth. A study found that annual growth rates in real GDP in countries with highly distorted exchange rates were 2-4 percentage points lower than in countries without exchange rate distortions. Many of the least developed countries’ (LDCs) economy was hampered primarily because of a high population growth and density, low industrial output, limited natural resources, difficult topography, geopolitical crisis, a weak human capital base with extremely poor levels of education and health, poor public management capacity. Furthermore, the still existing feudal system, nepotism, political instability and frequent civil unrest affected economic growth. While the HPAEs were experiencing rapid economic growth, the poorest countries were facing wars such as Iran-Iraq war and Vietnam war.
Some countries experienced famine because of extreme physical factors such as crop disease and pests, floods, earthquakes, volcanic eruptions, land slides, droughts. This process was accelerated by humans’ physical interactions with the environment through over-grazing and population pressure. For example, in 1984, Ethiopia experienced the worst famine problem in human history. Drought itself was not the sole cause of famine but the effects of drought were worsened by changes in agricultural practice caused largely by increased population density leading to over-grazing and land degradation. These factors worsen the economic structure because many LDCs’ exports were based on primary products. For example, Nepal’s main exports are primarily based on primary commodities which are prone to a large price fluctuation.
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The exports growth was very slow compounded by inelastic prices for their primary products but a high income elasticity for imported manufactured goods and services. LDCs often restrict international trade through a variety of trade policies. However, indirect restrictions on trade through overvalued exchange rates are often the most important factor in restricting trade. As a result, the economic growth slows down because only countries that are more open to trade tend to have sounder all-around economic policies. Also, technical progress helped develop a highly competitive substitute. For example, the introduction of synthetic rubber severely affected countries which specialized in the production of natural rubber for exports.
Because of HPAEs’s openness to the world markets and efficient government policies, they were able to achieve rapid economic growth and to promote progressive development towards even further advances in the free trade and investment environments. As we know the impressive growth of China 13.2% in 1992 and 13.4% in 1993. East and Southeast Asian regions continue to be a center for the world’s most dynamic economic activity. In contrast, LDCs differ from the NICs such as standards of living, levels of productivity, geographic size, population, historical background, industrial structure, and human, natural and physical resources. Most importantly, human capital or the knowledge, skills, abilities and capacities remained insufficient. Malnutrition has often increased the cycle of poverty.
There are many sources and types of inequalities including rural vs. urban, entrepreneurs vs. others, those with political and social connections vs. those without, and religious, ethnic, and racial differences among people..