East Asia's political vulnerability

East Asia's political vulnerability

Popular discontent is fuelling protest and paralysis across Latin America. If East Asia isn't careful, it could be next.

In Ecuador, protests against anti-austerity measures, including the reduction of fuel subsidies, forced President Lenín Moreno to declare a state of emergency. In Chile, it was a modest increase in Santiago metro fares that triggered large-scale demonstrations, which soon evolved to take aim at inequality and weaknesses in the education and pension systems.

In Argentina, the people expressed their economic frustrations at the ballot box, electing the Peronist presidential candidate Alberto Fernández. In Bolivia, the electoral route was compromised: President Evo Morales violated the constitution by standing for a fourth term, declared victory despite widespread concerns about fraud, and then resigned after weeks of protests.

While the details vary, there is a common thread in all of these movements: the belief that governments are not working for ordinary people. As economists Daron Acemoglu and James Robinson have observed, the extractive institutions on which many Latin American economies depend protect the interests of the rich and elites.

Across the region, inequality has been skyrocketing, and there is little reason to expect political power structures favouring those same privileged people to address it. After years of economic stagnation and even crisis, the public's patience has worn thin.

To be sure, many Latin American leaders have risen to power on the promise of levelling the playing field. And their interventions -- income redistribution, fiscal and monetary expansion, protectionism, discriminatory regulation and capital controls -- did bring some short-term benefits, particularly to the poor.

But such measures were often plagued by populism and, ultimately, did more harm than good. Relying on commodity revenues to fund social programmes, these leaders failed to diversify their economies or improve economic fundamentals. Excessive fiscal and monetary expansion made these economies unstable. Current-account deficits grew, resulting in foreign-exchange crises.

The combination of social polarisation, inadequate institutions and weak economic fundamentals has made it difficult for even reform-minded governments to escape the trap of short-termism and lay the groundwork for long-term development. In this context, "neo-liberal" reforms -- such as the rapid economic opening and financial liberalisation promoted by the International Monetary Fund -- made economies even more vulnerable to external shocks. Venezuela and Argentina are prime examples.

East Asian economies avoided many of these mistakes over the last half-century, implementing carefully designed plans that fostered export competitiveness and technological progress. Throughout this process, strong and inclusive institutions ensured the effective functioning of markets, supported sound macroeconomic management and upheld the rule of law.

As a result, East Asian economies achieved "growth with equity", which lifted them from middle- to high-income status. In 1970, per capita incomes in Hong Kong, Singapore, South Korea and Taiwan were lower than those in Argentina and Venezuela; today, they are much higher.

But East Asia must not underestimate its potential for political crisis. In recent decades, the region's long-term growth potential has declined and income distribution has worsened -- trends that populations blame, at least partly, on their political leaders. Not surprisingly, populism is on the rise.

In South Korea, President Moon Jae-in's administration has pursued policies that include sharp increases in the minimum wage and social welfare spending. As Latin America's experience has starkly demonstrated, while fiscal transfers may help bolster a sluggish economy and strengthen the social safety net, a rapid increase in unproductive spending could weaken economic fundamentals in the longer term. The situation in Hong Kong -- which has been roiled by nearly six months of increasingly violent protests -- is somewhat different. There, the target of protesters' ire is China's central government. But key sources of popular frustration -- such as soaring property prices, which exacerbate inequality -- are familiar.

To avoid Latin America-style political crises, East Asian governments must ensure that their economic policies support equitable growth. Their priorities should include boosting productivity, strengthening export competitiveness, encouraging technological progress, nurturing domestic demand and service industries, building robust social safety nets and implementing redistributive tax-and-transfer policies.

Fiscal sustainability is also crucial. Spending wisely includes investing in long-term growth potential by, say, deepening human capital and strengthening social infrastructure, rather than committing to unsustainable hikes in welfare spending.

Finally, East Asia must make sure that it holds its political leaders accountable. To that end, countries should continue to fortify their institutions (including an independent judiciary), protect free and independent media and nurture a vibrant civil society.

East Asia has a long tradition of forward-thinking policymaking. At a time of growing economic, political, and social challenges, upholding that tradition has never been more important.

Lee Jong-Wha is a professor of economics and director of the Asiatic Research Institute at Korea University. ©Project Syndicate, 2019. www.project-syndicate.org


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