Capital formation has been repeatedly stressed as a key to economic growth. This view is empirically supported by the close correlation between investment rates and growth rates in developing countries. At the same time, a very high correlation across countries between domestic saving and investment has been found, which reflects the fact that despite the recent increases in capital flows to developing countries, domestic saving continues to be by far the most important source of funds. According to IMF data, domestic saving finances, on average, over 95 percent of investment in developing countries.

Capital formation has been repeatedly stressed as a key to economic growth. This view is empirically supported by the close correlation between investment rates and growth rates in developing countries. At the same time, a very high correlation across countries between domestic saving and investment has been found, which reflects the fact that despite the recent increases in capital flows to developing countries, domestic saving continues to be by far the most important source of funds. According to IMF data, domestic saving finances, on average, over 95 percent of investment in developing countries.

Nevertheless, there have been marked differences in domestic saving rates among developing countries. While the domestic saving rate in Africa has been low and declining, Asia has enjoyed high and rising rates of domestic saving. Among Asian countries, domestic saving rates in East Asia are remarkably high; the rapid economic growth in this region is often attributed to high saving and high investment rates.

What lessons can we draw from the experiences of resource mobilization in East Asia, and can these lessons be applied to Africa? Before answering these questions, we must consider two other basic questions: (a) what are the experiences of the countries in East Asia? and (b) can the experiences of one region be transferred to the other?

Interpreting the Experiences of East Asia

While it is not difficult to portray the shining macroeconomic performance of the countries of East Asia, extracting the essential aspects of their achievement is a highly controversial issue. There are two reasons why this issue is controversial. First, there are various opposing views regarding the causes of the “miracle.” Second, East Asia is a highly diverse region.

According to John Page, “as with those attempting to explain religious phenomena, economists analyzing the miracle of East Asia’s growth tend to fall into two camps—fundamentalists and mystics.”1 The former reflect the neoclassical view, and the latter the developmentalist view. The neoclassical view, which is the mainstream view, has favored the idea that East Asia’s success is due mainly to the fact that the market worked better there, that is, with less government distortion. On the other hand, as the paper puts it, those who espouse the developmentalist view “lay greater stress on the potential dynamic gains of activist government policies to alter industrial structure and promote technological learning, sometimes at the expense of static allocative efficiency”

Let me emphasize that we must be careful about the fact that there are a wide variety of interpretations of what happened in this region, and that these interpretations reflect rivalry between opposing paradigms of economic development. In my opinion, these two arguments stress two crucial aspects of East Asian economies.

As many recent articles point out, the economies of East Asia are highly diversified in their public policies. While Korea is a typical case of “governing the market,” Thailand is often cited as a success story of a market-oriented economic system. Korea and Thailand achieved very similar economic performances by adopting completely different public policies. To put it differently, they attained the same goal via opposite paths. Accordingly, we must be careful not to assume that the experiences in this region offer a single package of lessons.

Replicability of Experiences

While there is no doubt that it is worthwhile to try to draw lessons for Africa from the experiences of East Asia on the issue of domestic savings and financial intermediation, we must carefully examine what lessons are really applicable. The basic conditions in these two regions are enormously different, particularly in terms of investments in human capital, institutional capacity, value systems, social structure, and political stability, although we must pay due attention to the fact that Africa, like East Asia, is highly diverse

Bearing this in mind, the following three criteria offer a plausible framework with which to assess the transferability of experiences from East Asia to Africa:

Universality. Looking for a lesson which is universally applicable regardless of the difference in basic conditions is important. A typical case is the assertion that the success of East Asia is attributable to the market-friendly features of East Asian countries’ basic policies. In this case, the assertion is based on the assumption, although arguable, of the universality of the market-friendly approach.

Differences in conditions. Drawing some lessons while recognizing the fundamental differences in conditions between countries and reforms is also important. Perhaps a good example of this approach is the “Look East Policy” that was launched by Mahathir Bin Mohamad, the prime minister of Malaysia. According to his article titled “On the Look East Policy,” after comparing very carefully the socioeconomic pattern of Asian countries, in particular Japan and Korea, with the European one, he preferred the former and thus became determined to “Look East.” However, he emphasized that the intention was not to create another Japan or another Korea; instead, Malaysia’s objective was to create a more affluent and stronger Malaysia. This approach seems to be reasonable and pragmatic. We must be careful, however, not to indulge in wishful thinking and underestimate the fundamental difference in conditions.

Technical concepts. Extracting a “technical concept,” which can be utilized in any condition after appropriate adjustments is the final pillar in our framework. One candidate is the “export processing zone,” with preferential legal/tax treatments. This idea, which was highly effective in East Asia, could also be effective in any other region, if other required conditions are secured. When we consider this approach, however, we must examine whether a specific concept can function well without a specific sociocultural environment.

Resource Mobilization System in East Asia

The purpose of this section is to review the background of relatively high saving rates in East Asia, examine the policy measures or systems that were adopted for resource mobilization in this region, and finally consider how these elements are workable in Africa.

Reasons for High Saving Rates in East Asia

Some recent studies have explored why the domestic saving rate in East Asia is high.2 These studies suggest that the superb macroeconomic performance of the East Asian economies led to higher saving rates. In East Asia, relatively stable price levels and high growth rates created confidence among households about the future prospects of their economies and motivated saving. This was the fruit of an appropriate economic policy, in particular, maintaining a low inflation rate. This seems to support the universality approach.

Cultural factors also have been mentioned in explaining differences in saving behavior across regions. The role of intergenerational links within families is considered as a case of the influence of cultural factors. Whereas it is not easy to prove the roles of cultural aspects or value systems quantitatively, it should be recognized that the notable regional differences in the saving rates cannot be explained solely by economic variables. Although it is not advisable to try to simply transplant the culture of the East Asian region to Africa, without fundamental changes in cultural aspects, it is not possible to expect fundamental changes in the conditions of domestic saving in Africa.

Finally, East Asian countries implemented a number of schemes to increase savings. In its recent report, The East Asian Miracle, the World Bank surveyed the policy measures taken by the governments in East Asia to promote savings. These measures can be divided into two categories. The first group aimed at establishing stability of bank management through control and guidance so as to increase people’s confidence in the banking sector. The second group was composed of various schemes to attract small savers (for example, the postal saving systems in Japan, Korea, and Taiwan Province of China) and to force saving (for example, the mandatory pension scheme in Singapore). Although these systems have rich policy implications regarding broad-based resource mobilization, their replicability in Africa is very limited because the required preconditions for the effective functioning of these systems, such as well-functioning broad-based institutions, bureaucratic discipline, confidence in government, etc., have not yet been secured.

Against this background, I would like to choose two other issues and explore the possibility of transferring the experience of East Asian economies to Africa

Utilization of Counterpart Funds

Program aid (or nonproject aid) has been an important component of aid flows to developing countries. What is relevant to the topic of this paper is the fact that counterpart funds could be created during the implementation of program aid in many cases.

After World War II, Japan received a huge amount of emergency aid from the United States. The goods imported under this scheme accounted for about 70 percent of Japan’s total imports between 1946 and 1948. In 1948, a counterpart fund account was established to pool the sales revenue from the above-mentioned goods. The fund was treated separately from ordinary revenue as a kind of extrabudgetary fund.

The major part of this fund was allocated to fixed capital investment in strategic industries, and to public utilities handled by state-owned enterprises, such as railways and telecommunications. One important feature of this scheme was that public financial institutions such as the Export Import Bank of Japan (originally the Export Bank of Japan) and the Japan Development Bank were established utilizing a part of the fund. These financial institutions played crucial roles in financing investment and supporting export promotion in post-war Japan.

Appropriate use of counterpart funds could be highly effective in developing countries that lack sufficient revenue. This could be a “technical concept,” which is applicable regardless of the difference in economic or social conditions between countries.

The Evolution of Township and Village Enterprises in China

When the Chinese leaders launched their economic reform in December 1978, the reform attempts were focused on two fronts: agriculture and the external sector. In the early phases of the agricultural reform, a “household contract responsibility system” was introduced with the objective of restoring the family as the basic unit of production instead of communes. This was accompanied by a real increase in relative agricultural prices; the terms of trade were persistently improved for farmers until 1988, due to the delay of price reform in the industrial sector. The purpose of these measures was to give incentives to farmers who were (and remain) the largest group in the labor force.

The reforms were highly successful in raising productivity and agricultural production. As a result, it enabled a large number of farmers to move toward the nonagricultural sector in rural areas. On the other hand, newly evolved “rich farmers” began to consume more industrial goods. Under these circumstances, by the mid-1980s, there were sufficient preconditions for the mushrooming of rural industries, that is, “village and township enterprises.”

The favorable terms of trade facilitated saving in rural areas. This is reflected in the notable shift in the composition of total saving since the early 1980s. In particular, the share of household saving in total saving as well as in total household income has risen sharply since 1979. Rural households accounted for an estimated 75 percent of total household saving. China’s experience could perhaps be applicable to Africa.

Interest Rate Repression and Directed Credit

One of the features of the East Asian experience was that directed credit with subsidized interest rates worked in many cases. In my opinion, moderate financial repression can contribute to attaining various economic and social goals, if sufficient preconditions, such as macroeconomic stability and the existence of a cadre of capable and disciplined bureaucrats are secured.

Directed credit schemes with subsidized interest rates are inevitable, as a measure to cope with various market failures. They are warranted when investment risk is too high, when there is a significant discrepancy between private and social benefits, when imperfections in information hinder lending to small- and medium-size industries, and when the social set-up cost is too huge.

At the same time, it should be admitted that this measure may lead to serious government failure, such as corruption and abuse of power, if it is not well managed or used without the above-mentioned preconditions. Accordingly, we see a very slim chance of replicating the experience of the East Asian countries in Africa, despite a good record of economic success in East Asia.


John Page, “The East Asian Miracle One Year Later; Are Its Lessons Relevant to Other Countries?” paper presented at the Economic Planning Agency, Fifth Economic Cooperation Symposium, Tokyo, November, 1994.


See, for example, B. Aghevli and others, The Role of National Saving in the World Economy: Recent Trends and Progress, IMF Occasional Paper No. 67 (Washington: International Monetary Fund, 1990); Takatoshi Ito, The Japanese Economy (Cambridge, Massachusetts: MIT Press, 1992); and The East Asian Miracle: Economic Growth and Public Policy (Washington: World Bank, 1993).