EC 313: Lecture 7

The East Asian Economic Miracle

Features of the miracle:

High per-capita GNP growth (1965-90) - Over 5% per year (OECD average 2.5%). Rise in exports of manufactured goodsincrease in the share of the world market. High saving and investment rates High rate of human capital formation

Comparative Development at starting and ending points (Per capita GDP at $1985)

S Korea Taiwan Ghana Senegal Brazil Argentina

1960 883 1359 873 1017 1745 3294

1989 6206 8207 815 1082 4138 3608

What explains the miracle?

Is export orientation the key to success for the Asian Tigers? Has there been high TFP growth- catch-up?

Different views:

Orthodoxy: Export orientation explains East Asian success in contrast to ISI in South Asia and Latin America. (Krueger) Import substitution of the 1950s given up for an export oriented development policy.. Amsden on Korea and Wade on Taiwan argued the State intervention rather than free trade account for high growth.

Other views:

Productivity growth exceptionally high.

This ignores the record of factor accumulation. - Rise in investment rate and rise in participation rate.

World Bank 1993

A stable business environment with low inflation encouraged investment. Exchange rate policies favourable for export growth. Minimized price distortions. Productivity growth and convergence towards the industrial countries.

A strong state with a commitment to economic development- the Asian Developmental State. Policies to promote export growth- outward orientation and exchange rate policies maintained external balance

Rodrik(1995)

Export growth less important than factor accumulation. State intervention was effective in achieving the goal of high capital formation. High growth created demand for import of capital goodsexport growth to meet the demand for foreign exchange. Causality between exports and growth reversed. Govt policy coordinated the link between saving and investment. Importance of initial conditions- High literacy and equal income/asset distribution.- Relative equality also allowed increase in literacy and skill formation

Young (1995)

Emphasize the role of accumulation- question TFP growth. Growth Accounting- the Asian Tigers had high rates on increase in factor inputs. East Asian growth can in explained in terms of a rise in factor inputs.

How does East Asian Growth compare with growth in other countries?

Low growth in Korea and Taiwan in the colonial period. Also in China and Thailand before 1950. Similar to the South Asian case. Growth in Malaysia and Singapore comparable to Latin American average and the US average. High growth in East Asia after 1950- Higher than European growth in the golden age for some. East Asian growth higher than that in South Asia and Latin America. Export orientation vs import substitution?

Faster export Growth - Rise in East Asias share in manufactured exports. Higher rate of investment. Average years of schooling comparable to the norm in industrialized countries. TFP growth higher in Europe in the golden age.

Table 1: Variations in Per capita GDP Growth: East Asia in comparative Perspective (%/year)
1913-50 0.9 1950-73 8.1 2.9 5.2 2.2 4.4 5.8 6.7 3.7 1.4 2.6 1.7 2.7 1.9 2.5 4.1 2.5 1973-90 3.0 4.8 5.4 4.2 5.3 6.8 5.3 5.5 2.6 3.1 3.1 0.7 3.0 0.7 1.9 2.0

Japan East Asia China -0.6 Hong Kong Na Malaysia 1.5 Singapore 1.5 S. Korea -0.4 Taiwan 0.6 Thailand -0.1 South Asia India -0.2 Indonesia -0.2 Pakistan -0.2 Philippines 0.0 Sri Lanka 0.3 Latin America 1.4 W. Europe 0.8 USA 1.6 Source: Maddison 2001, table 3-14.

Table 2: Characteristics of Growth Performance: 1950-99

Fixed investment/GDP (1973-97) Japan East Asia China Hong Kong Malaysia Singapore S. Korea Taiwan Thailand South Asia India Indonesia Pakistan Philippines Sri Lanka Brazil Mexico USA Source: Maddison, 2001e 3-15 .30 .30 .27 .32 .38 .31 .24 .31 .20 .24 .17 .23 .22 .21 .19 .18 Annual Export Volume Growth (1973-98) 5.3 11.8 11.7 9.5 11.1 13.9 12.1 11.7 5.9 7.3 7.5 9.0 5.0 6.0 10.9 6.0 Trade/GDP 1998 .10 .19 1.05 1.03 1.3 .41 .42 .47 .08 .25 .14 .31 .30 .07 .16 .08

Rodrik:

Focus on S. Korea and Taiwan Economic growth fluctuated around a high mean- both economies hard hit by the oil shock-but quick recovery. Investment rate rose from 10% in the 1950s to 30% in 1980s. Determinant of the miracle -capital accumulation rather than TFP. Intervention rather than free trade.

Export incentives and export growth

KoreaMultiple exchange rates in the 1950s. Export incentives- subsidies, low interest rates on credit. Devaluation and unified exchange rate in the 1960s. - Imports still regulated- priority give to exporters- no significant import liberalization until 1967. These measures increased the relative profitability of the export sector in the late 1950s- at its best under multiple exchange rates. The incentives declined under unified exchange rate and inflation- no link between relative price of exports and share of export in GDP. Stability encouraged export boom? Favourable climate?

Taiwan

Export incentives introduced in the 1950s Currency unified during 1958-61- exporters allowed to retain 80% of f. exchange earnings. Initial export growth coincided with an appreciation of the real exch. rate. Rise after 1964, but export growth only after 1969. No link between export boom and import liberalization. In both countries the export incentives did create conditions for export growth, but the delayed response suggests something else was the main factor.

Contribution of exports could not have been the main factor until the 1970s. share of exports in GDP low (5% for Korea and 10% for Taiwan in 1960) Liberalization after 1964- a consequence of export growth and favourable BOP Rising share of exports is consistent with investment led growth. Exogenous rise in profitability of investment- rise in the share of investment. No comparative advantage in producing equipmentimports needed- exports must rise to pay for imports. Increasing trade together with an investment boom.

Comparisons:

Turkey and Chile sustained export growth by real exchange rate depreciation. No clear correlation between exports and investment.

Investment and export boom

In both countries imports track investment. Share of capital goods in imports rose. Government intervention implemented without rent seeking and insulation from pressure groups. Coordination problem solved by intervention.

Exports and investment

An exogenous rise in profitability of investment. Rise in invt/GDP ratio If the country has a comparative disadvantage in the production of capital goods, invt increase require a rise in import of machinery and equipment. If international borrowing in limited, exports must rise. Export orientation enables growth, but is not the determinant. Rise in the profitability of invt in the determinant.

Policy towards Investment

Subsidized credit (often at negative real rates of interest in Korea) Directing investment in specific sectors. Regulating entry of firms in specific sectors. Guaranteeing returns in target sectors. Investment in priority industries rewarded and others penalized

Composition of imports

Savings:

Higher rate of saving. Savings rose alongside investment- growth without BOP constraint. Explained by early demographic transition, high GDP growth and government incentivesinterest rates on deposits increased to make real interest rates slightly positive or slightly negative.

Initial conditions:

Although income levels were low, the social indicators higher- Koreas literacy figures twice as high as the predicted level. One and a half times for Taiwan.Equal distribution of income and wealth-land reforms in the 1950s. Regression results- 87/88% of growth explained by initial conditions.

Table 7: Literacy Rate: Predicted vs. Actual

Korea Taiwan

Predicted 0.31 0.36

Actual 0.71 0.54

Measures of inequality

Table 8: Growth Regressions: Dependent variable: Per capita GDP growth and investment/GDP (1960-85)
Per capita GDP growth Investment/GDP Per capita GDP 1960 -0.38 0.94 (-3.25)* (1.76) Primary enrolment 1960 2.66 11.01 (2.66)** (2.4)** Gini coeff -5.22 -21.04 Land (-4.38)* (-3.35)* Gini coeff -1.82 14.44 Income (0.53) (1.63) R2 0.53 0.43 N 41 41 Note: T statistic-** significant at 5% level, * significant at 1% level

Table 9: Proportion of Growth explained by initial conditions:

Actual Growth (1960-85) 5.95 5.68 0.48 3.52 1.37 0.96 Predicted Growth 5.24 4.96 1.58 1.96 3.46 1.46 Proportion Explained 88 87 329 56 253 152

South Korea Taiwan Argentina Brazil India Kenya

Conclusions:

1960- Both countries had favourable initial conditions- latent return to capital accumulation was high. While rate of return on coordinated investment was high- low for individual investment. Govt intervention coordinated and subsidized private invt. Govt intervention effectively solved coordination failure. Initial conditions insulated the govt from pressure groups.

Young: The role of factor accumulation:

Post war decline in birth rate and increasing participation of women in the workforce. Investment rate- rose from 5% in the 1950s to 20% in the 1960s to 25% in the 1980s in S. Korea. Singapore- 10%in 1960 to over 40% in 1980s. Taiwan- 10% in the 1950s to 30% in the 1980s Increase in secondary education.

Rising participation rates remove 1%/year per capita GDP growth for Hong Kong, 1.2% for Korea and 1.3% for Taiwan and 2.6% for Singapore. Intersectoral transfers of labour important- removing agriculture from the analysis lowers growth by 0.6% per year and).7 %/year for Taiwan and Korea. Human capital contributes 1% per year. Rising participation, transfers and improvement in education chip away at productivity performance.

Table 4: Increase in participation rate (%)

1966 0.27 0.27 0.28 0.38 1990/91 0.36 0.51 0.37 049

South Korea Singapore Taiwan Hong Kong Source: Young.

Table 5: Employment Growth (% change in hours worked per person (1973-1996)

UK WGermany USA Japan Korea Taiwan Singapore Hong Kong -11.3 -19.1 19.0 -8.3 37.7 6.2 36.8 11.8

Table 6: Educational Attainment of the Working Population (%)

1966 South Korea Hong Kong Singapore Taiwan Source: Young 1995 Primary 42.4 53.6 28.2 57.2 Secondary 26.5 27.2 15.8 25.8 Primary 18.5 22.9 33.7 28.0 1990 Secondary 75.0 71.4 66.3 67.6

Estimates of Productivity Growth for South Korea:

Naive estimate holding capital- output ratio and participation rate constant = 4.1% per year (1966-1990) Adjust for participation rate = -0.7% Revised Estimate = 3.4% Adjust for K deepening = - 0.8% Adjust for weighting of K = - 0.2%

Adjust for weighting of L = - 0.7% Revised Estimate = 1.7% Not accounting for K and L increase overstates the rate of growth.

Table 3: Average Total Factor Productivity growth (% per Year)

Country United states United Kingdom Germany Japan Brazil Mexico Chile Pakistan India Hong Kong Singapore South Korea Taiwan Source: Young. Period 1960-1989 1960-1989 1960-1989 1960-1989 1960-1980 1940-1970 1940-1985 1970-1985 1970-1985 1966-1991 1966-1990 1966-1990 1966-1990 Growth 0.6 1.3 1.6 2.0 1.6 1.3 0.8 0.03 0.001 2.3 0.2 1.7 2.1

Table 7: Sources of Output Growth in the Post War Period. (%)

Capital 1950-73 UK 53 W. Germany 37 USA 26 Japan 34 1960-94 East Asia 50 South Asia 43 Latin America 42 Source: Crafts 1999 Labour 7 8 33 27 34 38 52 TFP 43 55 41 39 16 19 5 % change per year 3 6 4 9 7 4 4

Role of Education (Green et al 1999)

Education played an important role in economic growth. Public spending on education not exceptionally high Strong public demand for education- supported by a more egalitarian society. State control over the education system contrary to the view that Asian values play an important role. State played an important role in coordinating skill formation. High returns to education

The state as a skill coordinator:

Skill formation is a long term, uncertain process. Govt likely to have better information Individuals preferences may be endogenous. High demand for education is a function of more egalitarian societies. Education confers social status rather than other economic factors.