Asia Weekly

The Role of Government in Asia

Week Ended: July 2, 2009

As Independence Day approaches, we thought it an opportune time to take a closer look at the role of government in Asia, especially given that the role of the U.S. government in this country’s economy has been attracting a lot of attention recently. The new administration, faced with a severe decrease in economic activity, has decided to increase the government’s involvement in the economy, whether it is bailing out the troubled U.S. financial system and auto industry, or possibly expanding the healthcare system.

To put the U.S. government expansion in perspective, consider that government spending at the turn of the century was about 6% of GDP; since then, it has risen steadily, year-by-year to reach an expected 45% of GDP this year. This level puts it on a par, or slightly higher, than many economists’ estimates for China (China’s official number is about 20%). Europe has historically been content with a much higher level of government spending and regulation in the economy than either the U.K. or the U.S. What Europe has gained in terms of stability, they sacrificed in terms of high unemployment rates.

Asia has been having its own debate about government’s role in the economy. For many countries, as they developed, it seemed natural the government would play a large role – either directly, as in the state-owned enterprises of China or a “half-step” removed, as in the case of huge conglomerates like the Korean chaebol or the Japanese zaibatsu. Even today, large conglomerates have a big part to play in the economies of Korea and Japan, and remain close to government. In China, the government has strong influence over the banking system—evidenced by the recent stimulus plan (and its relative speed of implementation versus that in the US.). Its government has been seen as an instrument of industrial policy to an extent that was unheard of in the U.S. until recently. And yet China has forced its major banks (except one) to list on the stock market and has commercialized its once centrally-controlled economy.

However, if the U.S. government is moving (or being forced to move) towards having some sort of industrial policy for key industries, governments in Asia are reassessing their roles in different ways. Korea has been expanding and reforming its pension system and healthcare coverage. China has embarked on a series of welfare reforms that includes the setting up of a government run healthcare system, pension system and unemployment insurance. These projects are to replace the role of state-owned enterprises that provided health, education, and housing along with employment, but which have shrunk from being over two-thirds of the economy in the 1980s to less than one third today. In this sense, Asian governments are becoming more like those in the West, as they seek to provide healthcare and pension benefits (even though the U.S., too, is reforming the way it provides these things.)

There is one area where the role of government in Asia is still quite different from that in the West, and this difference is perhaps most stark in China – that is the relationship between government and individual property rights and freedom of expression. China has more recently been struggling with the role of government as it relates to these rights and freedoms. Perhaps alarmed by the possible repercussions for agriculture, China failed to implement a thorough reform of farmers’ property rights that would have given rural inhabitants capital assets that they could have used to develop businesses. And yet, pressured by internal and external concerns, China recently stepped back from its new requirement that manufacturers include web-filtering software in all new personal computers sold in the country. In April, China also publicly encouraged investors to take part in restructuring publishing houses into joint-stock companies, thereby removing them from direct government control—though it is likely that they will encourage state-owned enterprises to take the lead in this reform. For those that believe that freedom of ideas supports and promotes economic growth, this is a welcome first step.

So, one can be forgiven for thinking that, gradually, the world is starting to look more similar these days. That the differences between East and West or “Developed” and “Emerging”, whilst they undoubtedly remain, are slowly eroding.

Robert J. Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC

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