Does the East Asian “Miracle” Invalidate Dependency Theory

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Table of Contents

Introduction
Explaining the Origins of the East Asian Miracle
Supporting Factors behind the East Asian Miracle
Arguments of the Dependency Theorists Regarding the East Asian Miracle
Argument against the View of the Dependency Theorists
Conclusion
Reference List

Introduction

The phenomenal growth enjoyed by the 4 Asian Tigers, namely Singapore, Hong Kong, South Korea and Taiwan, call into question the validity of dependency theory and its application to a modern-day setting.

The main idea behind dependency theory is the notion that “various resources from the periphery, representing the poor and underdeveloped states, flow towards the core, representing the rich and industrialized nations” (Nelson and Pack, 1999).

It must be noted that the theory itself is a branch of Marxism and was actually heavily developed during the midpoint of the twentieth century (Bhatti,1980).

Taking this into consideration, it can be stated that theory itself may be slightly outdated in terms of its applicability in a financial system that is continuously evolving as a result of new technologies and globalization.

While its central premise was the “core and periphery” system it did come with the implication that poor states were integrated into world economic order in such a way that developing countries cannot or couldn’t dramatically develop into rich industrialized states under the present political-economical world order (Baylis and Smith 2001).

At the time of its creation such an assumption proved to be quite true, wealthy industrialized countries at the time had the advantage of technological innovation, modern-day infrastructures and systems, an educated population base as well as several centuries worth of social development that emerging economies were hard-pressed to even reach a fraction of what such societies had accomplished (Chilcote, 1981).

In order to survive in such an environment, various developing countries fell into the pattern of supplying raw resources to industrialized countries in exchange for various products and technologies.

It must be noted that these products and technologies were not bought at the same price of the natural resources sent but rather had a significant amount of added value-added to their overall price (Santos, 1970).

It is this added value (justified as processing and production costs) that was one of the main reasons why dependency theorists at the time stated that there was little possibility for periphery states to get out of their current situation since more value was flowing towards the core than what was actually flowing out (Frank, 1967).

For a time this proved to be true since core states enjoyed years of sustained growth and development as a direct result of the resources flowing into core and the wealth accumulated by selling processed resources to the periphery (Cox, 1981).

The occurrence of the East Asian Miracle threw this notion developed by dependency theorists into question since countries that were previously part of the periphery took on characteristics of core states as a result of sustained economic growth and development (Amsden, 1979).

The inherent problem with dependency theory is that it neglected to take into account what would happen if periphery states started to develop their own means of producing goods and services that would be in demand by the core states (Dunne et al., 2010).

In fact, it can be stated that rapid globalization and technological development combined with significant foreign investments and demand for cheap processed goods were the main reasons behind the East Asian Miracle which could be considered a continuing trend to this very day.

Explaining the Origins of the East Asian Miracle

An examination of the historical factors leading up to the East Asian Miracle show that the actors involved, namely: Hong Kong, Indonesia, Japan, South Korea, Malaysia, Taiwan and Thailand had several years of supercharged growth as a direct result of market liberalization and a focus on increasing exports to other countries.

What must first be understood is that each economy, society and culture in each of the actors involved in the East Asian Miracle is unique and as such it cannot be stated that their sudden growth is inherent to special factors inherent in the countries themselves (Strange, 1987).

A better approach would be to examine the common threads that unite each specific case that gives a better picture of the whole instead of trying to interpret each country on a case by case basis.

One of the first aspects that must be answered is how the rapid growth and industrialization happen in these countries did in the first place?

Dependency theory clearly states that wealthy nations perpetuate a state of dependence on such countries through various means whether it be economic, financial, political or the development of human resources.

If this were so the East Asian Miracle shouldn’t have happened in the first place since in order to perpetuate a continuous stream of resources towards the core, periphery states needed to be kept in a constant state of dependence.

In 1993 the World Bank presented the argument that the reason why high performing Asian economies were able to bring about the supposed “miracle” was due to them “getting the basics right” in that they were able to instill sound economic policies and were able to expand the quantity and quality of their physical and human capital (Nelson and Pack, 1999).

This explanation though still doesn’t explain how this sudden reversal came to pass if one were to take dependency theory into consideration, then the East Asian Miracle should have been prevented since it would have been in the best interests of core states to keep the periphery in check.

In addition, due to the unequal exchanging relations between the core and the periphery, the root cause of this phenomenon is because of the unfair terms of trade established by the core states (Frank, 1967).

It is due to this, the global capitalist system and the distribution method of economical surplus values resulting in the relatively minor development of periphery countries in other parts of the world.

The global system was one wherein developed countries controlled various regions through the export of capital and the capital accumulate system, through the combination of economic expansion and political domination, even through the use of military assets.

It was through the use of such means that the unequal relations between developed countries and underdeveloped countries became firmly established resulting in the economic plight of peripheral states (Santos, 1970).

An examination of the international political climate at the time reveals that a few years before the Asian Miracle started to come to pass, there was an ongoing political clash between the ideals of communism and democracy.

In its attempt to increasingly isolate the “communist threat” the U.S. undertook numerous endeavors such as the Korean War and the Vietnam war however one of the most lasting and positive methods of preventing the spread of communism was to bolster the economies of various countries that were supposedly “vulnerable” to the spread of communist ideals.

In the eyes of the U.S. communism spread more easily as a direct result of economic scarcity, it was due to this notion that it began to invest in numerous Asian economies in order to create more allies in East Asia as well as prevent the spread of communist ideals.

The various authoritarian regimes in Asia at the time were more than willing to comply with the plans of the U.S. in exchange for foreign direct investments and as a result this began the initial stages of the East Asian Miracle (McKinnon, 2008).

Through millions (possibly billions of dollars) in foreign direct investments countries such as Thailand, Malaysia, South Korea, Taiwan, Singapore, etc. were able to invest in infrastructure development and technological advancement resulting in the development of various local industries.

Due to the policy of the U.S. in supporting developing economies in order to ward off the spread of communism the U.S. in effect became the largest market for various goods and products originating from these now newly industrialized countries (Linklater, 1986).

As this relationship evolved the periphery no longer became a source of raw materials but rather processed goods and as a result the cycle of described in dependency theory was broken.

Supporting Factors behind the East Asian Miracle

Wage Gap Explanation Model

One of the basic premises of dependency theory is the fact that developing nations are source of natural resources as well as cheap labor however the theory doesn’t take into account what would happen if the natural resources and cheap labor found within such countries were utilized for the country’s own benefit (Hall, 2004).

Dependency theory operates under the assumption that developing countries (the periphery) will always have inferior technology compared to the wealthy countries (the core) (Helleiner,2002).

Under this assumption, it is thought that since developing countries will always have inferior technology then the core will always be a necessity as a source of processed goods (Keohane and Nye,2003).

In the case of the East Asian Miracle large amounts of direct foreign investments necessitated the development of various technologies and methods of innovation within periphery countries in East Asia.

Under the wage gap explanation model as economic development takes place differences in wages makes the production of certain goods more viable in other countries with low wages as compared to countries with high wages.

From the 1950’s all the way till the present American and European wages always surpassed those in Asia this, of course, created added costs for the production of certain goods and services.

In the case of the now newly industrialized countries in East Asia their comparatively low wages along with the lower costs of production and distinct lack of transportation fees usually seen in transporting natural resources resulted in significantly lower prices for certain products produced in such countries as compared to those in the U.S (Jones, 2006).

As a result a new system developed wherein the production of certain non-viable items were done in Asia (the periphery) due to the lower cost of production as compared to those in the core system (Terry, 2002).

Under the neoclassical thesis of economic growth, the subsequent economic expansion of the periphery states after the period of direct foreign investments is explained by the fact that “markets are efficient systems and as such will create growth if left alone”.

In the case of developing markets in East Asia the new system created as a result of direct foreign investment, industrial development and markets for processed goods in the U.S. continued well into the future due to wage gap model utilized as a means of ensuring continued economic growth (Wendt, 1992).

Globalization

The concept of globalization can be described as the rapid integration of financial markets, economies, societies and cultures through trade, communication and transportation (Olds et al. 1999).

Dependency theory states that one of the methods utilized by the core in order to perpetuate dependency was through economic, social, financial and political means.

Under such a notion it can be assumed that one of the reasons why developing countries remained in the state that they were was because they were increasingly isolated to domestic trade within their region and couldn’t effectively enter into the global market place as a result of interference from wealthy countries seeking to perpetuate dependence (Olds et al. 1999).

As a result of globalization financial markets within Asia were actually able to effectively enter into the global market as a result of the integration of financial, transportation and communication systems thus facilitating the abolishment of the old system (Mayer,2009).

Fiscal Policies

One of the reasons why East Asian countries were able to create the “Asian Miracle” was due to the establishment of “prudent” fiscal policies that focused on macroeconomic stability.

Compared with other developing countries, the governments of East Asia paid great attention to maintaining macroeconomic stability and creating a good environment of investment and operation activities for enterprises (Singh, 1995).

They followed two basic principles: the use of a prudent fiscal policy and avoiding overvalued exchange rates (Stiglitz, 2004).

It was due to this that they were able to respond to rapid changes in the economic system and create a flexible response to the changes of the economic situation which resulted in the successful management of fiscal deficits, inflation, external debts and exchange rates.

These countries usually limited the fiscal deficit carefully in order to cover the deficit without causing sudden inflationary pressures and internal and external debt. It must be noted that macroeconomic stability is conducive to long-term planning and private investment, thereby promoting steady economic growth.

All in all, the high savings rate, relatively low taxation, a strong educational system as well as a lower price pressure, access to foreign knowledge and technology, a friendly investment environment and the strategy of government intervention were key factors behind the success of the East Asian countries which resulted in the supposed “miracle”.

Arguments of the Dependency Theorists Regarding the East Asian Miracle

In response to claims of the East Asian “miracle” invalidating dependency theory several theorists in support of its claim that the “miracle” is by and large a “temporary experience” which was brought about through a crisis situation that created a distinct imbalance in trade between the core and the periphery (Krugman, 1994).

The aforementioned situation was the world economic crisis that occurred in the 1970’s wherein sudden booms in production resulted in a distinct “overheating” of international markets resulting in spiraling prices of various commodities.

One of the greatest increases in prices was seen in the sudden spike in the price of petroleum which further exacerbated an already dire situation.

The end result was an attack on the concept of the Keynesian welfare state and the establishment of monetarist solutions advocated by Milton Freedman as a method of stabilizing the system.

Dependency theorists argue that that the worldwide economic crisis that occurred and the resulting changes to global financial markets were the main reasons behind the sudden boost in performance of East Asian markets due to the fact that this provided sufficient impetus to weaken the ties between the core and periphery which enabled East Asian markets to expand without the limitations imposed on them by the core.

While dependency theorists agree that the possibility for development does exist in the periphery, they state that it can only occur on a temporary basis and can only occur in times where a certain economic crisis affects the core weakening its dominant position.

A.G. Frank, a dependency theorist, completely dismisses the possibility of the periphery rising to the level of the core and rather asserts the claim that “the growth of export-led manufacturing in East Asian countries and the concomitant exploitation and repression of labor force cannot in any sense be called development” (O’Brien and Williams, 2007).

In other words, he believes that the growth in Asian markets is only a temporary phase with the core eventually asserting its dominance.

Another dependency theorist, Samir Amin, even goes to far as to reject the classification for various East Asian countries as being called NICs or Newly Industrialized Countries.

He asserts the claim that the classification itself is merely superficial and that such economies “have no real conjectural phenomenon of their own, even transmitted from outside, because they are without any internal dynamism of their own” (O’Brien and Williams, 2007).

He even goes so far as to state that the 4 tiger economies are merely showing a new type of inequality in the global market due to the fact that the manufacturing and economic processes found in such economies cannot be extended to encompass the entirety of the East Asian region (O’Brien and Williams, 2007).

As such it can be seen that for dependency theorists they claim that the East Asian Miracle, the growth of various Asian economies the creation of the 4 Tiger economies as well as the rise of manufacturing and economic centers within East Asia is nothing more than a temporary occurrence.

For them the 4 Tiger economies are merely another level in the framework of periphery and thus are an inconsequential existence.

Argument against the View of the Dependency Theorists

After examining the view of the dependency theorists regarding the East Asian Miracle, one cannot help but feel that their view is highly erroneous when taking into consideration the fact that at the present Asian economies are actually outstripping their Western counterparts.

For example, China used to be considered part of the periphery within East Asia however within the past 20 years China has grown to become an industrial powerhouse outstripping the production rates of several of the world’s Western economies.

It has grown to become the world’s second-largest economy and is in fact, well on its way to becoming the largest economy by 2015.

Not only that the growth of economies such as that of Hong Kong, Thailand, South Korea, and Singapore have continued to rise over the past several years and in fact, Asian economic growth rates have far outstripped that of countries that were previously known to be part of the “core”.

Further examination of the current situation in East Asia shows the case of the Philippines that was previously not part of the original countries that directly benefitted from the East Asian “Miracle” but as of late has been creating a miracle of its own.

The country is now known as the world’s largest business process outsourcing location with literally thousands of companies outsourcing their back-office processes and call center work to various companies within the Philippines.

As mentioned earlier, with the advent of globalization comes the ability of greater interconnection and communication, which as a result has enabled the creation of processes where particular jobs can be done anywhere in world by anyone.

Globalization is also one of the reasons why the Chinese economy has grown the way it has, due to the advent of interconnected financial services and methods of transportation companies can now easily set up their offshore manufacturing locations within Chinese markets and transport their products to various countries around the world (Rowthorn, 1996).

As mentioned earlier regarding the wage gap explanation model, due to the relatively low cost of labor within East Asian countries such as the Philippines and China a new trend has occurred, supported by globalization, wherein manufacturing processes and various business offices no longer have to be isolated within the core but now are present within the periphery due to the lower cost of labor.

It all basically comes down to economies of scale, the Chinese and Filipinos are basically cheaper and easier to hire compared to workers located in western countries and as such global businesses prefer to have their factories, call centers, and back offices located in such countries in order to save on the cost of labor.

The problem with the dependency theory model is that it neglected to take into account the possibility that new developments brought about by globalization and technological innovation could, in fact, create a situation wherein the greater interconnectivity of financial markets made it possible for developing countries to enter into the world economy despite interference from the core.

One of the arguments presented by dependency theorists that is apparently self-defeating is their assertion that the current status of East Asian countries is only temporarily and can only be brought about through a certain crisis affecting the core.

The recent 2008 financial crisis did, in fact, support this theory however not in the way the dependency theorists predicted, while western markets did, in fact, take a beating from the fallout of the U.S. housing crisis conservative investments done by East Asian markets actually resulted in minimal losses for the region.

While this did result in a sudden increase in the economic activity of East Asian markets another consequence that development theorists didn’t think of was the potential for businesses to move specific service platforms from economies in the U.S. and Europe to locations within East Asia.

Various companies suffering from the fallout of the financial crisis in effect shifted their back office and call center work to the Philippines while at the same time transferred their manufacturing processes to China.

As a result, the economies of the two countries benefitted heavily from the financial crisis and it is estimated that such companies will continue to maintain their offshore operations in China and the Philippines due to the relatively low cost of operations.

What this means for core countries is a continuous decline from their “core” position wherein a relatively new global economic situation is taking place where it is Asian countries with their ability to deliver products and services at a much lower rate that has in effect almost completely abolished the system of core and periphery.

Conclusion

Based on the arguments presented it can be seen that the East Asian Miracle and the subsequent events that followed did indeed invalidate dependency theory. In fact, it can even be seen today based on the substantial growth of China, the Philippines and various other countries in East Asia that dependency theory is no longer applicable to their current situation.

The arguments presented by the dependency theorists have been shown to be fairly wrong as proven by current situations and as such the core and periphery system that used to exist in the past can now be relegated to nothing more than a historical footnote in the greater history of the global economy.

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