What is the East Asian model of capitalism in economic science?

It is paradoxical, but the so-called East Asian model of capitalism originated in the USA. The main thing that characterizes this model is the so-called “developmental state”. After the implementation of this concept in the US, it was also taken up by Japan, Korea, and China. Outside the U.S. and Asia, only one state has implemented this concept, namely Germany in the Bismarck era.

 

Undeniable advantages of the East Asian model 

 

The main advantage of the model is obvious. All countries that implemented it experienced rapid and unprecedented growth afterwards. The growth was accompanied by a radical transformation of each country from agrarian to technologically advanced, with a large domestic market and a strong competitive exporter. 

Both of these things are difficult to achieve, especially at the same time, and they are the things that guarantee long term prosperity, because if the domestic market experiences significant difficulties and recession, export revenues will help the country to at least survive the crisis, or even save the economy from a full-blown recession and vice versa, falling export revenues and demand shocks in foreign markets can be bought by a strong domestic market. 

The adoption of this model by other countries has changed the U.S. economy as well. Unlike countries with a predominantly non-interventionist approach, where the main task of the government is to establish civilized rules of the game through laws, in a developmental state the government is the key player. 

 

The role of the state in such economies

 

The main function of the state in such a model is to direct the development of industry and facilitate and remove barriers to doing business and the development of strategically important sectors of the economy and individual companies. At the same time, the state in such a model is rarely engaged in micromanagement in the form of management of individual companies. 

In such an economy, the state gives impetus to new promising industries or tries to strengthen established ones instead of designing the economy and industries from scratch or not interfering in it. Such a state does not try to focus on short-term economic gains. 

 

Consequences of capitalizing on short-term trends

 

When the state intervenes in the economy to capitalize on current prices, it often distorts market mechanisms. Such intervention may result in short-term gains, but creates instability in the long run. Instead of devoting resources to innovation and sustainable business models, companies begin to adapt to new government regulations or subsidies, which undermines their incentives to grow and modernize. As a result, the economy can become dependent on government intervention, and this is not conducive to natural market development.

Short-term measures can also trigger inflation or lead to higher prices for raw materials and other commodities, which ultimately reduces the purchasing power of the population. Instead of creating a competitive economy, the government risks entrenching inefficient structures and companies that cannot survive without continued support. In the long term, this undermines the country's innovative potential and reduces its global competitiveness, which is especially dangerous in today's dynamic global economy.

 

Long-term benefits of the model

 

History shows that the focus on innovativeness has at least one undeniable advantage, namely very high profitability as soon as there are innovations that allow us to talk about a full-fledged technological leap or a fundamental new technology, such as the invention of the light bulb. In such a situation, new markets with high margins and demand on both domestic and foreign markets are created. Also, incentives are created for large corporations and new startups, which additionally contributes to the medium- and long-term development of one or more sectors of the economy.

This policy changes the structure of what Adam Smith called relative advantage, i.e., the relative advantage. Initially, all East Asian countries, including Germany in the late 19th century and the early United States, were primitive economies dominated by small businesses producing low value-added goods. It was these industries that made up most of the economic structure and the East Asian model was able to make it so that in 20-40 years most of these economies were technology heavy industries like shipbuilding, steel, automobiles, electronics, multiple productivity increases in heavy industry in a short period of time. 

 

Disadvantages of the model

 

Of course, such a model of the economy is not ideal and the vector of development can go the wrong way. Such a policy can lead to serious negative economic consequences. Economist Lunt-Pritchett once said: “It is hard to find anything worse than the development of a state under the leadership of a state that is anti-development.” 

While we have written above that often in the East Asian economic model the state can successfully increase the competitiveness of firms, excessive state intervention can have the opposite effect, reducing the competitiveness of the private sector, as firms are often dependent on subsidies and state support, which slows innovation and entrepreneurial initiative, and reduces incentives. 

This pattern is often accompanied by increased corruption and inefficient allocation of resources, with officials using their powers for personal gain, which undermines trust in public institutions. Social inequality can also be exacerbated when certain sectors or groups receive preferential treatment while others are overshadowed by economic growth. Strong government regulation sometimes limits the flexibility of the economy, which becomes a serious obstacle in a rapidly transforming global economy.

The negative effects, though not catastrophic, can be seen in the economic downturn in South Korea in the early 1990s, when over-dependence on the state and lack of flexibility led to a crisis. Also corruption was becoming a serious problem in some countries such as Malaysia, which had a negative impact on economic development.

 

Conclusions

 

In summary, despite the obvious advantages of this model, such as rapid economic growth and efficient resource management, its shortcomings may hinder sustainable development. To achieve long-term stability, it is important to find a balance between government activism and market freedom to minimize the risks associated with corruption, inefficiency and social injustice.