Econs Essay

ECON251

INDUSTRY AND TRADE IN ASIA

Tutorial 3 [Topic 6 -8]

SECTION A : DATA ANALYSIS AND CASE STUDY

Question 1 The small successful Economies - Singapore and Hong Kong – A tale of 2 cities

Background 1: The economics model

The Solows Economic Growth model

Y = A LSL KSK Where

• Y is output or GDP;

• A is Total factor Productivity (TFP);

TFP in general refers to technical improvements that allow for GDP growth without any corresponding

increase in labour or capital.

This could be through any type of improvements in underlying technology, such as an improvement in

production methodology (Howitt and Aghion, 1998) or a decrease in per unit costs (Harberger, 1998).

TFP can also be accrued due to external factors as externalities, economies of scale, and investment-

specific technical change etc

• K and L are capital and labour inputs respectively; and

• SK and SL are the income shares of capital and labour respectively

Background 2 : Brief Introduction to the two jewels of East Asia Hong Kong and Singapore are similar in many ways .

To begin with the similarities: In the prewar era, both economies were British colonies that served as

entrepot trading ports, with little domestic manufacturing activity. Hong Kong processed trade

between Mainland China and the rest of the world, and Singapore served as a conduit for world

trade with Malaya and Indonesia.

In the postwar era, however, both economies developed large export-dependent domestic

manufacturing sectors. Both economies have passed through a similar set of industries, moving from

textiles, to clothing, to plastics, to electronics, and then, in the 1980s, gradually moving from

manufacturing into banking and financial services. Gross domestic product (GDP) per capita in the

two economies was quite close in 1960, and they have subsequently grown at the same remarkable

rate.

From the political economy perspective, one can note that both economies inherited a fairly

efficient and rational administrative structure. The postwar population of both was composed

primarily of immigrant Chinese from Southern China. Both economies are really small cities, with no

significant agricultural interests, economic or political. Along many dimensions of interest to growth

theorists, the two economies are, however, conveniently dissimilar.

The role of government

While the Hong Kong government has emphasized a policy of laissez faire and state intervention is

primarily on infrastructure development , the Singaporean government has, since the early 1960s,

pursued the accumulation of physical capital via forced national saving and the solicitation of a

veritable deluge of foreign investment.

[Adapted from Young, Alywn, “A Tale of Two Cities: Factor Accumulation and Technical Change in Hong Kong

and Singapore, January 1992 ]

Abstract 1: Grappling with productivity challenge over the decades, April 24, 2016, The Straits Times

Chart 1

Chart 2

Source : Economic Survey of Singapore Third Quarter 2010, Ministry of Trade and Finance

Questions

a) Does the data presented in chart 1 explain the validity of the Solow’s growth model of both

countries.

b) Compare the trends of the two economies in terms of i) The growth of inputs and ii) the output

growth

c) Are the observations discussed in part b) consistent with the general discussion of sources of

economic growth ?

d) Observing the trend of GDP growth and output growth, what can you deduce about the change in

TFP for the period of

i) 1986-1996

ii) Year 1998

e) Using the data in Chart 2 , compare the trend of TFP growth of the two economies .

f) Explain how the observed TFP trend of Singapore and evidence from Abstract 1 , justify the

argument that Singapore’s growth is far too much government directed and is non sustainable.

Question 2 : The large giants – China and India – The tale of 2 models

Abstract 1

Before industrialization, per capita income was roughly the same among major economies (see A

Century of Unrivalled Prosperity, Rudi Dornbusch, April 1999). Living standards in the West took off in

the nineteenth century after the industrial revolution. India’s and China’s agrarian economies could

not compete in the global marketplace and were able to stand on their own only in the 1950s. Then,

economic planning that was supposed to be a short cut to industrial progress turned out to be a cul-

de-sac. Later, economic liberalization at home and globalization abroad triggered two decades of

sustained high growth for India and China. For the first time in two centuries, they are key players in

the global economy. Moreover, they may determine global economic cycles in future, as they now

account for the bulk of global growth

China’s most successful policy initiatives have been in modernizing its infrastructure, allowing labor

mobility, welcoming foreign direct investment (FDI) and embracing competition. About 150 million

workers have migrated from the farms to the dynamic local economies of coastal China. Money that

these factory workers remitted home has helped develop the interior provinces. Competition in local

markets has kept down prices and has allowed wages to stay low and globally competitive.

India has an established commercial class. Economic liberalization has been of the more traditional

variety, with the private sector mainly driving the turnaround of the past decade or so. Conspicuously

successful have been the local entrepreneurs who have created world-class companies after seizing

the opportunity offered by the outsourcing of IT services.

Chart 3

Source: New Tigers of Asia, July 26 2004, Morgan Stanley

Questions

a) Explain how the large sized population of China – India contributes to their large sized economy

and economic growth.

b) Using evidence from the given charts

i) Compare the industrialisation paths of these 2 economies

ii) explain why the two economies did not experience the same path of growth

c) Apply the data to explain why or how large size economies can be a threat to

i) Income Inequality

ii) The dependency ratio affects the future growth of these economies

- End of Section A -