Economic Growth in East Asia: Accumulation versus Assimilation (original) (raw)

1996, Brookings Papers on Economic Activity

THE IMPRESSIVE economic performance of many Asian economies during the past three decades is now an old story. The growth of per capita GDP averaged over 4 percent in China and the major East Asian economies (Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan, and Thailand) between 1960 and 1994, compared with less than 2 percent in other developing economies and 2.6 percent among the industrial countries.' East Asia stands out as the only region where living standards are catching up to those in industrial countries, while other parts of the developing world seem to be struggling to either tread water or fall further and further behind (see table 1). The exemplary performance of many East Asian economies has been the basis for a large and varied literature, much of which explores reasons for the persistently high growth and draws lessons for other countries that would like to follow suit. A surprising aspect of this literature is the lack of agreement on fundamental aspects of the performance record that analysts seek to explain. Is the basis for East Aslihan Yildiz assisted in the preparation of the paper, and a special debt is owed to Yu-Chin Chen, who assisted with the construction of the data for the growth accounts. The views expressed are those of the authors and should not be interpreted as representative of the staff or trustees of the Brookings Institution. 1. East Asia, as a region, is defined to exclude China and Japan. Our somewhat unconventional group of East Asian economies is based on the availability of data to construct the growth accounts. We include all but two (China and Hong Kong) of the eight economies that were the focus of the World Bank study The East Asian Miracle (World Bank, 1993a) and add the Philippines. We include Japan with the industrial economies. 135 136 Brookings Papers on Economic Activity, 2:1996 Table 1. Basic Indicators of Economic Growth, by Region and Countrya Units as indicated Per capita incomec Growth rates, 1960-94d Region and Population country I990b 1960 1990 GDP Population Labor force China 1,134 0.6 Source: Population and GDP are the authors' calculations based on data from the World Bank's CD-ROM World Data 1995 (hereafter referred to by its title alone). Per capita income is calculated using data from the Penn-World Tables, mark 5.6 (accessed via the worldwide web page of the National Bureau of Economic Research). Labor force numbers are from unpublished data provided by the International Labour Organisation. a. Computed using the eighty-eight country sample. Regional averages are calculated by weighting each country by its average GDP over 1960-94, as measured in 1985 dollars. b. Millions. c. Thousands of 1985 dollars. d. Annual percentage rate. Asian growth the maintenance of high rates of physical and human capital accumulation over a number of decades-a willingness to make the sacrifices of current consumption necessary to invest for the future? Or has the key been the less costly approach of adopting existing technologies from more advanced economies, which may be associated with increased capital accumulation along the way? Establishing which of these characterizations is correct is a crucial first step in extracting appropriate lessons from East Asian growth experiences and is a primary motivation for this paper. If the accumulation view is correct, these experiences reinforce the lesson that to improve living standards requires investment, paid for in large part through forgone current consumption. The alternative assessment, which Paul Romer has referred to as narrowing the "idea gap," implies a much more optimistic message.2 No opportunity cost need be incurred to 2. Romer (1993). Susan M. Collins and Barry P. Bosworth 137 incorporate ideas. Instead, they could be transmitted to the mutual benefit of suppliers and recipients. Deciphering East Asia's rapid growth would thus hold forth the promise of a much less steep road to prosperity. A long list of authors implicitly or explicitly highlights productivity growth as the key to East Asian success. One strand of literature has engaged in a debate over the role of government policies (particularly microeconomic) in achieving productivity increases. In the early incarnation of this debate, some pointed to high-growth Asian economies as proof that "market friendly" approaches, including the maintenance of an open trading regime, promoted increased efficiency.3 Others characterized government strategies in the region as targeted intervention, not laissez-faire, arguing that the experiences showed how "getting prices wrong" and picking winners were the road to catching up with industrialized nations.4 Thus the same group of countries became poster children for conflicting policy advice. Views in this debate have moved somewhat closer over time. In particular, there is now broad recognition that the high-growth Asian economies exhibit a range of government strategies, from extreme laissez-faire to extensive intervention in some sectors. A growing number of analysts have also concluded that some interventions were beneficial.5 However, considerable disagreement remains over the importance and transferability of active intervention.6 This debate still centers on the role of the public sector versus the private sector in generating productivity growth. A second strand of literature stems from dissatisfaction with the ability of traditional growth models to explain observed features of economic growth.7 The result has been an exploration of alternative frameworks, known collectively as models of endogenous growth. Some of the underlying ideas can be found in the development literature of the 1950s and 1960s, but the associated explosion of attention to how rapid economic growth may be spurred by increases in efficiency is certainly new. In these models, while productivity gains may induce 3. See World Bank (1993a) and, more recently, Krueger (1995).