The objective of this paper is to present a theoretical framework that helps understanding the experiences of economic development in the East Asia. This study posits that policy-augmented human capital is the foundation of the East Asian economic development. The policy augmented-human capital is the human capital with a road map for economic development. In this model the ability to formulate and execute effective economic policy is treated as a part of human capital. A country is poor because of the deficiency of human capital or the absence of coherent road map, or due to misleading road map. The East Asian economies were successful because of the high level of human capital guided by an effective road map.
Once this key proposition is accepted, other propositions fall into place: that is, industrialization can be viewed as a process of portfolio diversification strategy in which the size and composition of diverse productive industries is a function of the level of human capital. And, over time, changing size and composition of a country’s portfolio of productive industries are not entirely spontaneous but an intended outcome of industrial policy.
This study also proposes that a prosperous economy has a better chance of achieving democracy than the other way around, but human capital is not a sufficient condition for successful industrial policy. In other words, the effectiveness of government in promoting the efficiency of market coordination cannot be taken for granted.
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