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East Asia
East Asia
Thinking Ahead: Reproducing The Asian Miracle
East Asia
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Introduction
Prior to the 1997 Asian financial crisis, the growth of the Four Asian Tiger economies (commonly referred to as "the Asian Miracle") has been attributed to export oriented policies and strong development policies. Unique to these economies were the sustained rapid growth and high levels of equal income distribution.
A World Bank report suggests two development policies among others as sources for the Asian miracle: factor accumulation and macroeconomic management.
Reproducing The Asian Miracle
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Introduction
For 30 years, East Asia has been the world's fastest-growing region, with most of the growth occurring in eight countries: Japan; the Tiger economies of South Korea, Taiwan, Hong Kong and Singapore; and more recently Thailand, Malaysia and Indonesia.
Since 1960, these eight countries have grown twice as fast as the rest of East Asia, three times as fast as Latin America and South Asia, and five times as fast as sub-Saharan Africa.
In fact, the bank says, if this goes on, East Asia and the Pacific could within a generation become the first developing region to overcome poverty.
Reproducing The Asian Miracle
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What Went On In East Asia: From Miracle to Meltdown
- From the perspective of international economics and business, the defining event of the l990s decade has been the miracle and meltdown of East Asian growth, just like the Latin American debt crisis was in the l980s and the oil shock in the l970s
Reproducing The Asian Miracle
Traditional View of Growth Process
Industry/manufacturing sector grows, creates employment, offers higher wages, and draws labour from agriculture and low-productivity jobs in rural areas
share of employment in agriculture
share of manufacturing and related services
Productivity and farm size in agriculture
Larger rural market expands demand for industrial products.
Reproducing The Asian Miracle
Economic Growth and Development
- What is the difference?
- development includes improvements across several dimensions
- ‘quality of life’: health, education, ‘human rights’ and political rights
- income distribution
- Development and freedom to exercise choices:
- Per capita income growth necessary but not sufficient
Reproducing The Asian Miracle
- Why do we emphasise per capita output/income?
- If no technical progress, per capita output will grow only if:
Increase in per capita availability of factors of production
- If capital stock per capita , output per capita , but we have the ‘law of diminishing returns’
- Thus, as capital stock per capita , rate of growth of per capita output falls
Economists Look at Growth in Per Capita Output
Reproducing The Asian Miracle
The Virtuous Circles of Economic Growth
- Decline in Population Growth
- Turn to Export Manufactures
- High Saving and Investment
- Declining Resource Costs
- Increases in Scale of Production
- Introduction of Technology
Reproducing The Asian Miracle
Sources of Growth
- Investment using domestic savings
- labour released from agriculture provides workers for industry/manufacturing
- technical progress, rely primarily on domestic innovations and ‘purchased’ foreign technology
Reproducing The Asian Miracle
Import Substitution
- Development of domestic industry to substitute for imports
- Trade barriers, subsidies, and exchange controls necessary to protect domestic producers: state intervention replaces market prices
- Benefits: short-cut, coordination, synergies
- Problems: low level of competition, “inappropriate” factor inputs, administrative costs, current account deficits, interest groups
Reproducing The Asian Miracle
Trade policy is Critical: Why?
- Export growth funds to purchase foreign made capital goods and ‘embodied’ technology and other needed inputs
Reproducing The Asian Miracle
Export Orientation
- Development based on exploitation of comparative advantages
- Gradual diffusion of wealth to other sectors
- Benefits: foreign exchange, competition, technology transfer
- Problems: information, incomplete markets, market access, diffusion of benefits
Reproducing The Asian Miracle
- The four tigers: Hong Kong, Singapore, Korea, Taiwan
- 1970 - 1997 growth rates of 8%
- Hong Kong and Singapore per capita output about equal to U.S.
- Remaining Asian countries
- High growth rates 1970 - 1997
- Per capita output was low but rising rapidly
Reproducing The Asian Miracle
Asian Miracle
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East Asia: The Miracle
- The East Asian Economic Miracle
- Until 1997 the countries of East Asia had very high growth rates.
- What were the ingredients for the success of the East Asian Miracle? (General Consensus)
- High saving and investment rates
- Strong emphasis on education
- Stable macroeconomic environment
- Free from high inflation or major economic slumps
- High share of trade in GDP
Reproducing The Asian Miracle
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Roots of East Asian Development: States or Markets?
- Increasing consensus that growth has largely been export-led (although several countries exhibit periods of import substitution)
- Disagreement about the relative role of state intervention and market signals.
Reproducing The Asian Miracle
The Economic Environment (Development)
- Much of the East Asian success started from export-oriented strategies, benefiting from growth in the international economy since the 1950s.
- Wave of FDI in Asia (“Flying Geese Pattern”)
- As each wave of development ensued it displaced exports of prior wave, compelling restructuring.
- Internal causes: exchange rate appreciation, wage increases, …
- Restructuring: labor intensive capital intensive knowledge.
Reproducing The Asian Miracle
“Asian Dynamism”
- Geographic diffusion of industrialization
- Within each country, industrialization proceeds from low-tech to high-tech
- Clear order and structure (with a possibility of re-formation)
- Specialization on comparative advantage
- Requires successive stages of comparative advantage
- Supported by export subsidies which are only given temporarily
Reproducing The Asian Miracle
Successive Stages of Comparative Advantage in East-Asian Trade Structure
Primary import-substitution: replace labour intensive manufacturing imports with domestically produced goods
2) Primary export-“substitution”: replace agricultural exports by labour-intensive manufacturing exports
3) Secondary import-substitution: production of intermediate and capital goods for domestic market
4) Secondary export-“substitution”: shift from labour-intensive to capital- and knowledge intensive production
Reproducing The Asian Miracle
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Fundamentalists and Assimilations
Economists attempting to understand the sources of East Asia’s growth tend to fall in 2 camps: Fundamentalists and Assimilationists.
- Fundamentalists (e.g. Paul Krugman): Growth was mainly input driven. The efficient allocation of resources played a big part in the success story. Input driven growth is not sustainable because there are limits to efficient resource allocation and because incremental growth in inputs is subject to diminishing returns.
- Assimilationists (e.g. Paul Romer): Growth was mainly driven by the acquisition and mastery of technology and the capacity to put ideas into practice.
Reproducing The Asian Miracle
Paul Krugman’s Classic Article on Asia
Summary: Pundits point to the awesome growth of East Asia's economies and fret that the West cannot compete. But there is nothing miraculous about the successes of Asia's "tigers."
Their rise was fueled by mobilizing resources - increasing inputs of machinery, infrastructure, and education - just like that of the now-derided Soviet economy. Indeed, Singapore's boom is the virtual economic twin of Stalin's U.S.S.R.
The growth rates of the newly industrialized countries of East Asia will also slow down. The lesson here for Western policymakers is that sustained growth requires efficiency gains, which come from making painful choices.
Reproducing The Asian Miracle
Causes of the Miracle: Public Policy (World Bank Report)
- Rapid Accumulation (of human & physical capital)
- Developing human capital
- Primary and secondary education was emphasized
- Tertiary education funds mostly for hard sciences
- Female literacy more workers, lower fertility rates
- Creating effective and secure financial systems
- Increased savings: (including “forced” savings)
- promoted by the integrity and accessibility of postal banks
- Increased investment:
- investment-friendly environment; creating infrastructure
- easy credit through “financial repression”
Reproducing The Asian Miracle
- Efficient Allocation of capital
- Letting markets work: flexible labour markets
- governments less responsive to organized labour
- Productivity-driven wage rises, even downward
- No minimum wage
- emphasis on creating jobs; high employment levels
- Assisting the market: credit for priority areas
- Industrial policies: targeting winners
- criteria: growth, productivity, spillover
- Credit directed against strict performance criteria
- “contests”, thru deliberative councils
- Most subsidy small, but a signal to capital markets.
Causes of the Miracle: Public Policy (World Bank Report)
Reproducing The Asian Miracle
- Technology catch-up and high productivity
- actively seeking foreign technology
- industrial policy promoted high-tech sectors
- encouraging exports
- other special features of East Asian growth
- the principle of shared growth
- macroeconomic stability
- cooperative competition (led by technocratic elite)
- business-friendly environment, led by private investment
- state interventions addressed market failures
- allocated by “contests”
Causes of the Miracle: Public Policy (World Bank Report)
Reproducing The Asian Miracle
The Role of Policy
- Macro Policies For Stability
- Basic Government Services
- Infrastructure investment
- Education and technology
- Environmental Policies
- Legal Structure and Property Rights
- Supervision of Banking System
- Selective Industrial Policies
Reproducing The Asian Miracle
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The Role of Government
East Asian countries adopted sound fundamental policies.
- Control inflation
- Manage internal and external debts
- Resolve macroeconomic crises quickly
- Invest in education
- Maintain stable and secure financial systems
- Limit price distortions
- Open up to foreign trade and investment
- Promote exports
Reproducing The Asian Miracle
The Role of Openness
An outward-oriented policy has long been seen as a centrepiece of East Asia’s economic success.
- Integration into the world economy provides firms to access to a large variety of goods and services which embody new technologies.
- It enables a country to adopt or adjust foreign technologies for domestic uses. By doing so, a country's productivity in imitation and innovation will be enhanced.
- Exposure to international competition may bring about higher-quality products and alleviate duplication of R&D efforts.
- More open economies can take advantage of larger markets, increasing their degree of efficiency (economies of scale) and their rates of growth.
Reproducing The Asian Miracle
Was Government Policy Responsible for the East Asian Miracle?
World Bank
- “Fundamentally sound development policy was a major ingredient in achieving rapid growth: Macro management, saving promotion policies, education, agricultural productivity, .. But these do not tell the whole story. Government intervened targeting selected industries, promoting exports, low interest rates, protecting certain industries,.. ..rapid growth has at times benefited from careful policy intervention
- ..the promotion of specific industries generally did not work…. The fact that interventions were an element of some East Asian economies’ success does not mean that they should be attempted everywhere.”
Reproducing The Asian Miracle