The Benefits and Costs of Relation-Based Governance: An Explanation of the East Asian Miracle and Crisis

This paper aims to establish a theory of relation-based governance to explain both the "East Asian miracle" and the East Asian crisis. I first define "relation" and "relation-based governance" in terms of information and enforcement. I then analyze the nature and dynamics of relation-based governance, and compare its benefits and costs with that of "rule-based governance" in terms of observability/verifiability, commitment, and transaction costs. Finally, I apply the theory to examine a particular relation-based governance system-the Japanese model-to explain both the East Asian miracle and the crisis. Our framework provides foundations for studies of East Asian catching-up and economic development in general.