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China Development Bank Financial Research Centre
December 2013
Institute of Global Economics and Finance The Chinese University of Hong Kong
13/F, Cheng Yu Tung Building, 12 Chak Cheung Street, Shatin, Hong Kong
How the East Grew Rich
by
Lawrence J. Lau
Working Paper No. 11
1
How the East Grew Rich
Lawrence J. Lau*
December 2013
1. Introduction
East Asian economic growth has been led by the industrialization of Japan in the
immediate post-World War II period, followed successively by Hong Kong, Taiwan and
Singapore in the late 1950s and early 1960s; South Korea in the early 1970s; and then
Malaysia, Thailand and Indonesia; and then mainland China in the early 1980s.
Industrialization has also spread to Vietnam, Cambodia, Laos and even Myanmar since then.
The centre of gravity of the world economy has been, and still is, in the process of gradually
shifting from the United States and Europe towards East and South Asia. Within East Asia
itself, the economic centre of gravity has also been shifting gradually from Japan towards
China, which overtook Japan to become the second largest economy in the world in 2011.
East Asia is now home to both the second and third largest economies in the world.
East Asian economic development has essentially followed the dual economy model
of Professor W. Arthur Lewis, Nobel Laureate in Economic Sciences, based on the effective
utilization of the surplus labor in the agricultural sector in an expanding non-agricultural
(manufacturing, construction and service) sector. The openness of East Asian economies to
international trade and investment as well as their active participation in the world economy
are also critical factors in their success.
* The author is Ralph and Claire Landau Professor of Economics, The Chinese University of Hong Kong and Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University. This paper is a revised version of a lecture with the same title presented by the author as part of the CUHK Business School Global Leader Series, The Chinese University of Hong Kong, on 16 October 2013. The author wishes to thank Mrs. Ayesha Macpherson LAU for her invaluable comments and suggestions, Dr. Masahiro KURODA, Professor Jung-Soo PARK and Professor Yanyan XIONG for their generous assistance with the relevant economic data, without which this paper would not have been possible. All opinions expressed herein are the author’s own and do not necessarily reflect the views of any of the organizations with which he is affiliated.
2
As a whole, East Asia has made tremendous progress in terms of real GDP. Since
1980, the rate of growth of East Asian real GDP has almost always exceeded those of the U.S.
and the Euro Zone, except during the East Asian currency crisis of 1997-1998. Note that the
growth rates of Japan and the other four newly industrialized economies (Hong Kong, South
Korea, Singapore and Taiwan), which have begun their economic development processes
relatively earlier, have gradually declined over time, and those of the newly emerging
economies of Cambodia, Laos, Myanmar and Vietnam are on an upward trend.
Chinese real GDP has increased the most since 1980 amongst East Asian economies,
whereas Brunei’s real GDP has increased the least, followed by that of Japan. However, in
terms of real GDP per capita, Brunei has fallen when compared to 1980; the Philippines and
Japan have made relatively little progress; Macau, with a population of approximately half a
million, has the highest real GDP per capita. Note that Chinese real GDP per capita still lags
behind many East Asian economies and is ahead of only Cambodia, Indonesia, Laos,
Myanmar, Philippines, Thailand and Vietnam.
In 1970, the United States and Western Europe together accounted for over 60% of
world GDP. By comparison, East Asia accounted for just above 10% of world GDP. By
2012, the share of the United States and Western Europe in world GDP has declined to
approximately 45%, whereas the share of East Asia has risen to approximately 25%. The
Japanese share of world GDP declined from a peak of 18% in the mid-1990s to 8% in 2012,
while the mainland Chinese share of world GDP rose from less than 2% in 1970 to over 11%
in 2012.
3
Figure 1: The Rates of Growth of Real GDP of East Asia, the U.S. and the Euro Zone
Figure 2: Decade Average Annual Rates of Growth of Real GDP of East Asian
Economies
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0 19
80
1981
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1997
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1999
2000
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2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
The Rates of Growth of Real GDP of East Asia, U.S. and the Euro Zone
East Asia U.S. Euro Area
East Asia, the U.S. and the Euro Zone
4
Figure 3: The Growth of Real GDP in East Asian Economies in 1980 and 2011 (Part 1)
Figure 4: The Growth of Real GDP in East Asian Economies in 1980 and 2011 (Part 2)
0
1
2
3
4
5
6
7
8 Br
unei
Cam
bodi
a
Chin
a
Hon
g Kon
g
Indo
nesia
Japa
n
Kor
ea
Laos
Mac
ao
Mal
aysia
Phili
ppin
es
Sing
apor
e
Thai
land
Viet
nam
Taiw
an,
Chin
a
USD
trill
ions
Real GDP of East Asian Economies in 1980 and 2011, in 2011 USD trillions
1980 2011
0
200
400
600
800
1,000
1,200
Brun
ei
Cam
bodi
a
Hon
g Kon
g
Indo
nesia
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ea
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aysia
Phili
ppin
es
Sing
apor
e
Thai
land
Viet
nam
Taiw
an,
Chin
a
USD
billi
ons
Real GDP of East Asian Economies in 1980 and 2011, in 2011 USD billions
1980 2011
5
Figure 5: The Growth of Real GDP per Capita in East Asian Economies in 1980 and
2011
Figure 6: The Distribution of World GDP in 1970, USD
0
10
20
30
40
50
60
70
80
Brun
ei
Cam
bodi
a
Chin
a
Hon
g Kon
g
Indo
nesia
Japa
n
Kor
ea
Laos
Mac
ao
Mal
aysia
Phili
ppin
es
Sing
apor
e
Thai
land
Viet
nam
Taiw
an,
Chin
a
USD
thou
sand
s
Real GDP per Capita of East Asian Economies in 1980 and 2011, in 2011 USD thousands
1980 2011
The Distribution of World GDP in 1970, in USD
United States35.4%
Euro Zone21.5%
Japan7.2%
Other Economies24.5%
India2.2%
Korea, Rep. of0.3%
United Kingdom4.3%Brazil1.5%
China3.2%
6
Figure 7: The Distribution of World GDP in 2011, USD
Figure 8: China’s and East Asia’s Share of World GDP, 1960-present (Current Prices)
The Distribution of World GDP in 2011, in USD
United States21.6%
Euro Zone18.7%
Japan8.4%
Other Economies27.0%
Korea, Rep. of1.6%
United Kingdom3.5%
China10.4%
India2.6%
Brazil3.5%
Russian Federation2.7%
0
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2009
2010
2011
2012
Perc
ent
China's and East Asia's Share of World GDP, 1960-present
East Asian Economies
Mainland China
7
Figure 9: The Shares of East Asia, China, Japan and South Korea in World GDP,
1980-present
In 1970, the United States and Western Europe together accounted for over 60% of
world trade. By comparison, East Asia and South Asia combined accounted for less than 10%
of world trade. In 1990, the United States and Western Europe together still accounted for
approximately 55% of world trade, while East Asia and South Asia combined accounted for
just over 10% of world trade. By 2011, the share of United States and Western Europe in
world trade has declined to below 45%, whereas the share of East Asia and South Asia has
risen to 30%.
0
2
4
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2011
Perc
ent
The Shares of East Asia, China, Japan and South Korea in World GDP, 1980-present
East Asian Economies
China
Japan
Korea
8
Figure 10: The Distribution of Total International Trade in Goods and Services in 1970
Figure 11: The Distribution of Total International Trade in Goods and Services in 2011
The East Asian share of world trade rose from 10% in 1970 to just below 25% in
2011. The mainland Chinese share of world trade rose from 1% in 1970 to 10% in 2011.
The Distribution of Total International Trade in Goods and Services in 1970
United States14.9%
Japan5.4%India
0.6%
Other Economies37.8%
Korea, Rep. of0.4%
United Kingdom7.0%
Brazil0.8%
China0.6%
Euro Zone32.4%
Brunei 0.0%
Cambodia0.0%
China9.7%
Hong Kong 2.5%
Indonesia1.0%
Japan4.2%
Korea 2.8%
Lao 0.0%
Macao 0.1%
Malaysia1.1%
Philippines0.3% Singapore
2.1%Thailand
1.2%Vietnam0.5%Taiwan,
China1.5%
Other Economies39.3%
United States10.8%
Euro Zone22.8%
The Distribution of Total International Trade in Goods and Services in 2011
9
Mainland Chinese international trade accounted for more than 40% of East Asian
international trade in 2011.
Figure 12: The Rising Share of East Asian Trade in Total World Trade, 1960-present
Figure 13: The Share of China in Total World Trade, 1950-present
The Rising Share of East Asian Trade in Total World Trade, 1960-present
0
5
10
15
20
25
30
35
1960
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2011
Perc
ent
Share of World Exports
Share of World Imports
Share of Total World Trade
The Share of Chinese Trade in Total World Trade, 1950-present
0
1
2
3
4
5
6
7
8
9
10
11
12
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1951
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2010
2011
Perc
ent
The ratio of Chinese Exports to World Exports
The ratio of Chinese Imports to World Imports
The ratio of Chinese Total Trade to World Total Trade
10
Figure 14: The Share of China in Total East Asian Trade, 1952-present
2. The Commonalities among East Asian Economies
The fast-growing East Asian economies have a few characteristics in common: a high
domestic saving rate, the existence of surplus labor, active participation in the world
economy and investment in basic education.
2.1 A High Domestic Saving Rate
The saving rate of an East Asian economy typically started out low when its GDP per
capita was low and near the subsistence level. However, the saving rate rose quickly as GDP
per capita rose (see the following chart).
It is, however, sometimes necessary to have a jump-start with an initial supply of
savings to support the initial investment, for example, from a good agricultural harvest, land
reform, foreign aid, credit or investment, and in mainland China’s case, the agricultural
reform and the introduction of special economic zones to attract foreign direct investment
(FDI).
TheShare of Chinese Trade in Total East Asian Trade, 1952-present
0
5
10
15
20
25
30
35
40
4519
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0020
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0820
0920
1020
11
Perc
ent
The Ratio of Chinese Exports to East Asian Exports
The Ratio of Chinese Imports to East Asian Imports
The Ratio of Chinese Total Trade to East Asian Total Trade
11
Figure 15: The Savings Rate and Real GDP per Capita: East Asian Economies
With the possible exception of the Philippines, the saving rates of East Asian
economies have been consistently high once their real GDP per capita exceeds the
subsistence threshold. This is in contrast to Latin American economies, where the saving
rates are typically low. The recent saving rates of Japan, Korea and Taiwan may appear low
because of the statistical practice of expensing of educational and research and development
(R&D) expenditures, which, properly speaking, should have been recognized as investment
expenditures rather than current expenditures. These investments should be recognized as
accumulations of intangible capital such as human capital and R&D capital.
National Savings Rate and Real GDP per Capita
0
10
20
30
40
50
60
10 100 1,000 10,000 100,000Real GDP per Capita, in 2000 US$
Perc
ent
China
Hong KongIndonesia
JapanKorea, Rep.
MalaysiaPhilippines
SingaporeTaiwan
Thailand
12
Figure 16: Savings Rates of Selected Asian Economies, 1952-present
Figure 17: Savings Rates of Selected Asian Economies, 1980-present
A high domestic saving rate means that the economy can maintain and sustain a high
domestic investment rate without depending on the more fickle inflows of foreign aid, credits,
0
10
20
30
40
50
6019
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1953
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10
2011
20
12
Perc
ent
Savings Rates of Selected East Asian Economies
China, Mainland Hong KongIndia IndonesiaJapan KoreaMalaysia PhilippinesSingapore TaiwanThailand
10
15
20
25
30
35
40
45
50
55
60
1980
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09
2010
20
11
2012
Perc
ent
Savings Rates of Selected Asian Economies
China, Mainland Hong KongIndia IndonesiaJapan KoreaMalaysia PhilippinesSingapore TaiwanThailand
13
loans as well as direct and portfolio investment, enabling the tangible capital stock of the
economy to grow continuously.
2.2 The Existence of Surplus Labor
East Asian economic development has proceeded along the lines of Professor W.
Arthur Lewis’s celebrated model of surplus labor, first introduced in his 1954 article,
“Economic Development with Unlimited Supplies of Labour”, published in the Manchester
School. In almost every successfully developed East Asian economy, from Japan to Hong
Kong, Taiwan, South Korea, mainland China and Southeast Asia, development began with
the expanded employment of the surplus labor from the agricultural sector in the non-
agricultural sector, enabled by the continuing investment in tangible capital in the non-
agricultural sector.
During this surplus labor phase, tangible capital was accumulated in the non-
agricultural sector, and surplus labor moved from the agricultural sector to the non-
agricultural sector as complementary tangible capital became available in the non-agricultural
sector. For such movement of labor to be sustainable, a relatively high domestic saving rate
would be needed, both as a source of wage goods (food) and as a source of investable funds
in the non-agricultural sector, unless they could be supplemented by imports and inflows of
foreign capital. It is important to realize that the principal source of economic growth during
this phase is not the surplus labor itself, but the accumulation of tangible capital in the non-
agricultural sector, which made it possible for the surplus labor to move from the agricultural
to the non-agricultural sector to be productively employed.
One important implication of economic development with surplus labor is that as the
economy develops, the shares of GDP and employment originating from the non-agricultural
sectors will rise, and the corresponding shares of the agricultural sector will fall. In addition,
increased urbanization is likely to accompany the growth of the non-agricultural sectors. Of
course, eventually the surplus labor in the economy will run out, and continuing economic
growth will have to be driven by a rising tangible capital per unit labor ratio in the economy
and also eventually by investment in intangible capital such as human capital and R&D
capital. A high domestic saving rate continues to be important in providing dependably the
resources necessary for these investments.
14
Figure 18: The Distribution of Japanese Employment by Sector Since 1953
Figure 19: The Distribution of Japanese GDP by Sector Since 1970
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
5319
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0020
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10
The Distribution of Japanese Employment by Sector
Employment in agriculture Employment in industry Employment in services
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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2011
The Distribution of Japanese GDP by Sector
Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP)
15
Figure 20: The Distribution of Taiwan Employment by Sector Since 1951
Figure 21: The Distribution of Taiwan GDP by Sector Since 1951
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%19
5119
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1120
12
The Distribution of Taiwan Employment by Sector
Employment in agriculture Employment in industry Employment in services
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
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The Distribution of Taiwan GDP by Sector
Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services,etc. , value added (% of GDP)
16
Figure 22: The Distribution of Korean Employment by Sector Since 1970
Figure 23: The Distribution of Korean GDP by Sector Since 1965
0%
10%
20%
30%
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50%
60%
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80%
90%
100%19
7019
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The Distribution of Korean Employment by Sector
Employment in agriculture Employment in industry Employment in services
0%
10%
20%
30%
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90%
100%
1965
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2011
The Distribution of Korean GDP by Sector
Agriculture, value added (% of GDP) Industry, value added (% of GDP) Services, etc., value added (% of GDP)
17
Figure 24: The Distribution of Chinese Employment by Sector Since 1952
Figure 25: The Distribution of Chinese GDP by Sector Since 1952
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1952
1953
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The Distribution of Employment by Sector since 1952
Primary Sector Secondary Sector Tertiary Sector
0%
10%
20%
30%
40%
50%
60%
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80%
90%
100%
1952
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20
11
2012
The Distribution of GDP by Sector
Primary Sector Secondary Sector Tertiary Sector
18
2.3 Active Participation in the World Economy
Economic growth in a typical East Asian economy is also accompanied by its
increasing active participation in the world economy. Active participation in the world
economy implies opening the domestic economy to FDI, foreign loans and often foreign
portfolio investment as well. It also implies the promotion of exports, which often requires
the relaxation of import restrictions so that the necessary equipment, raw materials,
components and parts and other intermediate production inputs can be imported. Finally, it
also implies the rationalization of the exchange rate so that it properly reflects the
productivity of the domestic export sector compared to competitors and potential competitors
in the rest of the world.
2.3.1 Foreign Investments and Loans
Foreign aid, foreign investment and foreign loans can augment domestic savings.
They are sometimes essential to jump-start the economic development process because the
initial level of GDP per capita may be too low to provide sufficient domestic savings to
finance the necessary investment. FDI brings with it not just capital, but also technology,
know-how, markets, new business models and methods. FDI also directly augments
aggregate demand and increases domestic employment. However, FDI and foreign loans are
not sustainable as foreign direct investors and lenders must eventually repatriate their capital
and profits, if any.
2.3.2 Export Promotion
Most of the East Asian economies switched from a purely import substitution
development strategy to an export promotion development strategy (while ensuring the
sufficiency of the domestic food supply a priority) at the start of their successful economic
development drive. Barriers to the imports of equipment, raw materials, components and
parts and other intermediate inputs used in the export industries were removed, thus enabling
the growth of exports. The export processing zone, pioneered by Taiwan, is an often used
device to facilitate the imports of inputs critical to the export industries through bypassing the
customs formalities, and hence also making unnecessary the rebating of customs duties and
19
value-added taxes paid on the imported contents of goods that are subsequently exported. A
trade surplus augments the domestic aggregate demand and increases domestic employment.
Exports also allow the expansion of the scale of production beyond the domestic
market, and thus the realization of the economies of scale in manufacturing. The scale of the
potential market is also essential for the maximization of the benefits of investment in
intangible capital such as R&D capital and reputational capital (branding and goodwill).
Exports can generate the foreign exchange revenue that can be used to import equipment, raw
materials, components and parts and other intermediate inputs needed for production that are
not available in the domestic economy. Exports and imports can generate readily collectible
government revenue through export taxes and import duties that can be used to finance the
construction of infrastructure and basic education.
Exports can also generate the foreign exchange needed by foreign direct investors and
lenders to repatriate their capital and profits eventually (the transfer problem). Thus, exports
can enhance the ability of an economy to attract FDI and foreign loans. However, the
macroeconomic benefits of international trade go beyond the stimulative effects of export
surpluses. Even if international trade is balanced or in deficit, it still brings significant
benefits, some of which are not adequately reflected in the conventional measurements of
gross domestic product (GDP).
It is therefore not an accident that the share of exports to GDP would rise significantly
at the start of the economic development process of almost every East Asian economy. In
most of the East Asian economies, the share of exports in GDP rose significantly, especially
after the rationalization of the exchange rate. However, the export share is smaller when the
size of the economy is larger. In addition, for East Asian economies that do not have a
natural resource base (oil, minerals, cash crops such as palm oil and rubber), there would be
significant trade deficits in the first few years after the adoption of an export promotion
policy, reflecting the need to import equipment, as well as raw materials, components and
parts and other intermediate inputs not produced domestically.
20
Figure 26: Exports of Goods and Services as a Share of GDP in East Asian Economies
Figure 27: Exports of Goods as a Percent of GDP: East Asian Economies
0
20
40
60
80
100
120
140
160
180
200
1950
1951
1952
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2010
2011
2012
Exports of Goods as a Pecentage of GDP of Selected East Asian EconomiesBrunei Cambodia Hong Kong MacaoMainland Indonesia Japan KoreaLao Malaysia Myanmar PhilippinesSingapore Taiwan Thailand Vietnam
21
Figure 28: Exports of Goods and Services as a Percent of GDP: East Asian Economies
Figure 29: Exports of Goods as a Percent of Japanese GDP since 1950
0
50
100
150
200
250 19
6019
6119
6219
6319
6419
6519
6619
6719
6819
6919
7019
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0020
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1120
12
Exports of Goods as a Pecentage of GDP of Selected East Asian EconomiesBrunei Cambodia Hong Kong MacaoMainland Indonesia Japan KoreaLao Malaysia Myanmar PhilippinesSingapore Taiwan Thailand Vietnam
4
6
8
10
12
14
16
18
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2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports of Goods as a Pecentage of GDP
Japan
22
Figure 30: Exports of Goods as a Percent of GDP: Mainland China and Japan
Figure 31: Exports of Goods as a Percent of GDP: Mainland China, Japan, South Korea
and Taiwan
0
5
10
15
20
25
30
35
40 19
5019
5119
5219
5319
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0020
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1020
1120
12
Perc
ent
Exports of Goods as a Pecentage of GDP
Mainland China Japan
0
10
20
30
40
50
60
70
1950
1951
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1953
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2010
2011
2012
Perc
ent
Exports of Goods as a Pecentage of GDP of Selected East Asian Economies
Mainland China Japan South Korea Taiwan
23
Figure 32: Exports of Goods as a Percent of GDP: Four Newly Industrialized
Economies
Figure 33: Exports of Goods as a Percent of GDP: China, Indonesia, Malaysia and
Thailand
0
20
40
60
80
100
120
140
160
180
200
1950
1951
1952
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2001
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2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports of Goods as a Pecentage of GDP of Selected East Asian Economies
Hong Kong South Korea Singapore Taiwan
0
20
40
60
80
100
120
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
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2001
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2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports of Goods as a Pecentage of GDP of Selected East Asian Economies
Mainland China Indonesia Malaysia Thailand
24
Figure 34: Exports of Goods as a Percent of GDP: Selected ASEAN Economies
Figure 35: Exports and Imports as a Percent of Japanese GDP, 1952-present
0
10
20
30
40
50
60
70
80
90 19
5019
5119
5219
5319
5419
5519
5619
5719
5819
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6019
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6319
6419
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6919
7019
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7819
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8019
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9019
9119
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9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
Perc
ent
Exports of Goods as a Pecentage of GDP of Selected East Asian Economies
Cambodia Laos Myanmar Philippines Vietnam
5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5
10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5 16.0 16.5
1952
1953
1954
1955
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2004
2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports and Imports as a Percent of Japanese GDP, 1952-present
Exports as a percent of GDP
Imports as a percent of GDP
25
Figure 36: Exports and Imports as a Percent of Hong Kong GDP, 1961-present
Figure 37: Exports and Imports as a Percent of Taiwan GDP, 1951-present
40
50
60
70
80
90
100
110
120
130
140
150
160
170
180
190
200 19
6119
6219
6319
6419
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6619
6719
6819
6919
7019
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8019
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9019
9119
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9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
Perc
ent
Exports and Imports as a Percent of Hong Kong GDP, 1961-present
Exports as a percent of GDP
Imports as a percent of GDP
5
10
15
20
25
30
35
40
45
50
55
60
65
70
1951
1952
1953
1954
1955
1956
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2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports and Imports as a Percent of Taiwan GDP, 1951-present
Exports as a percent of GDP
Imports as a percent of GDP
26
Figure 38: Exports and Imports as a Percent of Singapore GDP, 1957-present
Figure 39: Exports and Imports as a Percent of Korean GDP, 1953-present
70
80
90
100
110
120
130
140
150
160
170
180
190
200
210 19
5719
5819
5919
6019
6119
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7019
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8019
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9019
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0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
Perc
ent
Exports and Imports as a Percent of Singapore GDP, 1957-present
Exports as a percent of GDP
Imports as a percent of GDP
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
1953
1954
1955
1956
1957
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2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Perc
ent
Exports and Imports as a Percent of Korean GDP, 1950-present
Exports as a percent of GDP
Imports as a percent of GDP
1953-present
27
Figure 40: Exports and Imports as a Percent of Chinese GDP, 1957-present
Figure 41: Exports and Imports as a Percent of Malaysian GDP, 1955-present
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
36 19
5719
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6019
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0020
0120
0220
0320
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0520
0620
0720
0820
0920
1020
1120
12
Perc
ent
Exports and Imports as a Percent of Chinese GDP, 1957-present
Exports as a percent of GDP
Imports as a percent of GDP
30
40
50
60
70
80
90
100
110
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
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2000
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2007
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2009
2010
2011
2012
Perc
ent
Exports and Imports as a Percent of Malaysian GDP, 1955-present
Exports as a percent of GDP
Imports as a percent of GDP
28
Figure 42: Exports and Imports as a Percent of Thailand GDP, 1950-present
Figure 43: Exports and Imports as a Percent of Indonesian GDP, 1967-present
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0 19
5019
5119
5219
5319
5419
5519
5619
5719
5819
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6019
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6219
6319
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0020
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0220
0320
0420
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0620
0720
0820
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1020
1120
12
Perc
ent
Exports and Imports as a Percent of Thailand GDP, 1950-present
Exports as a percent of GDP
Imports as a percent of GDP
8.0
10.0
12.0
14.0
16.0
18.0
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
36.0
38.0
40.0
42.0
44.0
46.0
1967
1968
1969
1970
1971
1972
1973
1974
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1998
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2001
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2005
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2007
2008
2009
2010
2011
2012
Perc
ent
Exports and Imports as a Percent of Indonesian GDP, 1967-present
Exports as a percent of GDP
Imports as a percent of GDP
29
2.3.3 Exchange Rate Rationalization
Rationalization of the exchange rate means setting it at a level that reflects the relative
productivity of the export sector when compared with competitors and potential competitors
in the rest of the world. This often requires a devaluation of the domestic currency at the
initial stage of the economic development drive. Such devaluations are common to almost all
East Asian economies. It also involves the unification of pre-existing multiple exchange rates,
if any, and the adoption of current account convertibility. The devaluations made possible
the export promotion policy that also turned out to be attractive to foreign direct investors and
lenders. In the following charts, examples of the devaluations undertaken by selected East
Asian economies in the early phases of their respective economic development processes are
presented. The exchange rate adjustments triggered significant increases in the shares of
exports in GDP in the respective economies.
Figure 44: Nominal Exchange Rate of the Japanese Yen, Yen/US$, 1949-present
70
90
110
130
150
170
190
210
230
250
270
290
310
330
350
370
1949
1950
1951
1952
1953
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1956
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1958
1959
1960
1961
1962
1963
1964
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1968
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1971
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1984
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1987
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1989
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1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Nominal Exchange Rate of the Japanese Yen, Yen/US$, 1949-present
30
Figure 45: Nominal Exchange Rate of the Hong Kong Dollar, HK$/US$, 1949-present
Figure 46: Nominal Exchange Rate of the New Taiwan Dollar, NT$/US$, 1951-present
4.5
5
5.5
6
6.5
7
7.5
819
4919
5019
5119
5219
5319
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5519
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0020
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1120
12
Nominal Exchange Rate of the Hong Kong Dollar, HK$/US$, 1949-present
10
15
20
25
30
35
40
45
1951
1952
1953
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2011
2012
Nominal Exchange Rate of the New Taiwan Dollar, New TW$/US$, 1951-present NT$/US$, 1951-present
31
Figure 47: Nominal Exchange Rate of the Singapore Dollar, S$/US$, 1948-present
Figure 48: Nominal Exchange Rate of the Korean Won, Won/US$, 1948-present
1
1.5
2
2.5
3
3.519
4819
4919
5019
5119
5219
5319
5419
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0020
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1120
12
Nominal Exchange Rate of the Singaore Dollar, S$/US$, 1948-present
0
200
400
600
800
1000
1200
1400
1600
1800
1948
1949
1950
1951
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2012
Nominal Exchange Rate of the Korean Won, Won/US$, 1948-present
Singapore Dollar, S$/US$, 1948-present
32
Figure 49: Nominal Exchange Rate of the Renminbi, Yuan/US$, 1957-present
Figure 50: Nominal Exchange Rate of the Renminbi, Yuan/US$, 1978-present
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
6
6.5
7
7.5
8
8.519
5719
5819
5919
6019
6119
6219
6319
6419
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7019
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0020
0120
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1120
12
Nominal Exchange Rate of the Renminbi, Yuan/US$, 1957-present
0
1
2
3
4
5
6
7
8
9
10
Jan-
78Ju
l-78
Jan-
79Ju
l-79
Jan-
80Ju
l-80
Jan-
81Ju
l-81
Jan-
82Ju
l-82
Jan-
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l-83
Jan-
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l-84
Jan-
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l-85
Jan-
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l-86
Jan-
87Ju
l-87
Jan-
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l-88
Jan-
89Ju
l-89
Jan-
90Ju
l-90
Jan-
91Ju
l-91
Jan-
92Ju
l-92
Jan-
93Ju
l-93
Jan-
94Ju
l-94
Jan-
95Ju
l-95
Jan-
96Ju
l-96
Jan-
97Ju
l-97
Jan-
98Ju
l-98
Jan-
99Ju
l-99
Jan-
00Ju
l-00
Jan-
01Ju
l-01
Jan-
02Ju
l-02
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
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l-05
Jan-
06Ju
l-06
Jan-
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l-07
Jan-
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l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
Jan-
12Ju
l-12
Jan-
13
Nominal Exchange Rate of the Renminbi, Yuan/US$, 1978-present
33
Figure 51: Nominal Exchange Rate of the Malaysian Ringgit, Ringgit/US$, 1948-present
Figure 52: Nominal Exchange Rate of the Thai Baht, Baht/US$, 1948-present
2
2.2
2.4
2.6
2.8
3
3.2
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3.8
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9819
9920
0020
0120
0220
0320
0420
0520
0620
0720
0820
0920
1020
1120
12
Nominal Exchange Rate of the Malaysian Ringgit, Ringgit/US$, 1948-present
15
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2011
2012
Nominal Exchange Rate of the Thai Baht, Baht/US$, 1948-present
34
Figure 53: Nominal Exchange Rate of the Indonesian Rupiah, Rupiah/US$,
1967-present
2.4 Investment in Basic Education
In almost all of the East Asian economies, compulsory basic education (kindergarten
through sixth grade) became the norm quite early in the process of economic development.
Over time, compulsory education expanded first to nine years and then to twelve years.
Tertiary education has become almost universal in the more developed East Asian economies
such as South Korea and Taiwan.
3. The Evolving Sources of East Asian Economic Growth
Professors Jong-Il Kim and Lawrence J. Lau found that the high rates of economic
growth of the East Asian newly industrialized economies (Hong Kong, South Korea,
Singapore and Taiwan) in the post-World War II period up to 1990 were mostly the results of
the growth of tangible inputs (tangible capital and labor) and not technical progress or
equivalently the increase in total factor productivity. By contrast, the economic growth of the
developed Group of Five (G-5) countries (France, West Germany, Japan, the United
0
1000
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7000
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9000
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11000
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2010
2011
2012
Nominal Exchange Rate of the Indonesian Rupiah, Rupiah/US$, 1948-present 1967-present
35
Kingdom and the United States) during the same period was mostly attributable to technical
progress.
These empirical results, as well as those of Alwyn Young’s, form the basis of
Professor Paul Krugman’s (1994) provocative article on the “The Myth of Asia’s Miracle”.
Professor Krugman’s interpretation of these results is very pessimistic: According to him,
because of the absence of technical progress, economic growth in these East Asian newly
industrialized economies (NIEs) is bound to slow down and come to a halt eventually as a
result of the diminishing returns to additional tangible capital accumulation.
And among the tangible inputs, the growth of tangible or physical capital was the
most important source. This has been enabled by the high domestic saving rates of the East
Asian economies. Foreign aid, FDI and foreign loans were also helpful in augmenting the
domestic savings at the beginning stage of the economic development of the East Asian
economies. The initially low domestic saving rates of the East Asian economies rose quickly
as real GDP per capita increased, providing the resources for continued investment in their
respective own economies.
The absence of measured technical progress in the East Asian developing economies
is the result of the lack of investment in intangible capital (including human capital and R&D
capital). Investment in intangible capital has risen sharply in some of the East Asian
economies. This is reflected in rising enrollment rates at all levels of education as well as the
ratios of expenditures on R&D to GDP. Beginning in the mid-1980s, evidence of positive
measured technical progress can be found in the East Asian NIEs, and that the measured
technical progress can be largely attributed to the growth of the stocks of human capital and
R&D capital in these economies.
36
Table 1: Growth Accounts: Contributions of the Sources of Growth
(Two-Input Model)
3.1 Change from Tangible to Intangible Capital-Driven Growth
In the late 1980s and early 1990s, the growth of intangible capital (human capital and
R&D capital) has begun to be an important source of economic growth of South Korea,
Singapore and Taiwan, supplanting the growth of tangible capital. After taking into account
the effects of human capital and R&D capital, no additional technical progress or increase in
total factor productivity can be found in South Korea, Singapore and Taiwan, in contrast to
the G-5 economies, including Japan.
Table 2: Growth Accounts: Contributions of the Sources of Growth (Percent)
(Four-Input Model with Human Capital and R&D Capital)
Tangible
Capital Labor Technical
Progress
(1) Full Sample : 4 NIEs and G-5 Hong Kong 74.46 25.54 0.00 South Korea 78.20 21.80 0.00 Singapore 64.80 35.20 0.00 Taiwan 84.04 15.96 0.00 Japan 49.90 4.84 45.26 Non-Asian G-5 Countries 38.71 2.77 58.52
(2) Full Sample: 4 NIEs, 4 ASEAN, China and G-5
Hong Kong 74.61 25.39 0.00 South Korea 82.95 17.05 0.00 Singapore 63.41 36.59 0.00 Taiwan 86.60 13.40 0.00 Indonesia 88.79 11.21 0.00 Malaysia 66.68 33.32 0.00 Philippines 66.10 33.90 0.00 Thailand 83.73 16.27 0.00 China 94.84 5.16 0.00 Japan 55.01 3.70 41.29 Non-Asian G-5 Countries 41.51 1.97 56.53
37
4. The Rising Importance of Intangible Capital
The principal sources of East Asian economic growth have therefore gradually
evolved from the growth of tangible inputs such as tangible capital, enabled by the high
saving rates of the East Asian economies and labor, to the growth of intangible inputs such as
human capital, R&D capital and reputational capital (branding and goodwill), especially in
the more developed East Asian economies. Sustained investment in human capital and R&D
are essential for the occurrence of technical progress or growth in total factor productivity in
an economy. The East Asian economies have been stepping up their respective investments
in R&D as a percent of their GDPs.
Figure 54: R&D Expenditures as a Ratio of GDP: G-7 Countries, Four East Asian NIES
and China
One indicator of the potential for technical progress (national innovative capacity) is
the number of patents created each year. In the following chart, the number of patents
granted in the United States each year to the nationals of different countries, including the
U.S. itself, over time is presented. The U.S. is the undisputed champion over the past forty
years, with 121,026 patents granted in 2012, followed by Japan, with 50,677 patents. Since
these are patents granted in the U.S., the U.S. may have a home advantage; however, for all
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Perc
ent
R&D Expenditures as a Percentage of GDP: G-7 Countries, 4 East Asian NIEs and China
U.S. Japan W. Germany U.K.
France Canada Italy South Korea
Singapore Taiwan China Hong Kong
38
the other countries and regions, the comparison across them should be fair. The number of
patents granted to mainland Chinese applicants each year has increased from 1 in 1985 to
4,637 in 2012. The economies of South Korea and Taiwan were granted 13,233 and 10,646
U.S. patents respectively in 2012; they have been averaging approximately 10,000 patents a
year each.
Figure 55: Patents Granted in the United States: G-7 Countries, Four East Asian NIEs
and China
The stock of R&D capital, defined as the cumulative past real investment in R&D less
depreciation of 10% per year, can be shown to have a direct causal relationship to the number
of patents granted (see the following chart, in which the annual number of patents granted is
plotted against the R&D capital stock of that year for each country or region). The chart
shows that the higher the stock of R&D capital of an economy, the higher is the number of
patents granted to it by the U.S.
1
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1,000,000
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Num
ber o
f Pat
ents
Patents Granted Annually in the United States: G7 Countries, 4 East Asian NIEs and China
US JapanW. Germany U.K.France CanadaItaly Hong KongSouth Korea SingaporeTaiwan China
39
Figure 56: Patents Granted in the United States and R&D Capital Stocks: Selected
Economies
5. The Partial De-Coupling Hypothesis
Throughout the 2007-2009 global financial crisis, as well as the subsequent European
sovereign debt crisis, the East Asian economies and the economies of the BRICS countries
(Brazil, Russia, India, China and South Africa) continued to do reasonably well. China, in
particular, has been able to maintain its real rate of growth above 7.5% since 2007, lending
credence to the “Partial De-Coupling Hypothesis”, that is, the Chinese and East Asian
economies can continue to grow, albeit at slower rates, even as the U.S. and European
economies go into economic recession. This partial de-coupling can occur because of the
gradual shift of the economic centre of gravity of the world from the United States and
Western Europe to Asia (including both East Asia and South Asia) over the past three
decades.
A particularly interesting development is the rise in intra-East Asian international
trade. The share of East Asian trade destined for East Asia has risen to over 50% in the past
decade. This is a sea change compared to 30 years ago when most of the East Asian exports
The Number of U.S. Patents Granted Annually vs. R&D Capital Stocks
1
10
100
1,000
10,000
100,000
1,000,000
0 1 10 100 1,000 10,000Billions of 2005 Constant U.S. Dollars
Num
ber o
f Pat
ents
USJapanWest GermanyUKFranceCanadaItalySouth KoreaSingaporeChinaHong KongTaiwan
40
were destined for either the United States or Western Europe. Similarly, the share of East
Asian imports originated from East Asia has remained above 45%.
Figure 57: The Share of East Asian Exports Destined for East Asia
Figure 58: The Share of East Asian Imports Originated from East Asia
The Share of East Asian Exports Destined for East Asia
35
37
39
41
43
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49
51
53
Jan-
98A
pr-9
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%
The Share of East Asian Imports Originated from East Asia
45
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%
41
Any doubt that the Chinese economy can be partially de-coupled from the world
economy should be resolved by an examination of the following three charts. Even though
Chinese exports and imports fluctuate like those of all other East Asian economies, the rate of
growth of real GDP of the Chinese economy has been relatively stable compared to those of
the other East Asian economies.
Figure 59: Quarterly Growth Rates of Exports of Goods: Selected East Asian
Economies
-60
-50
-40
-30
-20
-10
0
10
20
30
40
50
60
70
Q1 19
97Q2
1997
Q3 19
97Q4
1997
Q1 19
98Q2
1998
Q3 19
98Q4
1998
Q1 19
99Q2
1999
Q3 19
99Q4
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Q1 20
00Q2
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Q3 20
00Q4
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Q1 20
01Q2
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Q3 20
01Q4
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02Q2
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Q3 20
02Q4
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Q1 20
03Q2
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Q3 20
03Q4
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Q1 20
04Q2
2004
Q3 20
04Q4
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Q1 20
05Q2
2005
Q3 20
05Q4
2005
Q1 20
06Q2
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Q3 20
06Q4
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Q1 20
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Q3 20
07Q4
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Q1 20
08Q2
2008
Q3 20
08Q4
2008
Q1 20
09Q2
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Q3 20
09Q4
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Q1 20
10Q2
2010
Q3 20
10Q4
2010
Q1 20
11Q2
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Q3 20
11Q4
2011
Q1 20
12Q2
2012
Q3 20
12Q4
2012
Q1 20
13
Annu
alize
d Per
cent
per
annu
m
Year-over-Year Quarterly Rates of Growth of Exports of Goods in US$ (Percent)
China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland JapanTaiwan Prov.of China
42
Figure 60: Quarterly Growth Rates of Imports of Goods: Selected East Asian
Economies
Figure 61: Quarterly Rates of Growth of Real GDP: Selected East Asian Economies
-60
-50
-40
-30
-20
-10
0
10
20
30
40
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70
80
90 Q1
1997
Q2 19
97Q3
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97Q1
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Q2 19
99Q3
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Q2 20
00Q3
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00Q1
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Q2 20
01Q3
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Q4 20
01Q1
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Q2 20
02Q3
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Q4 20
02Q1
2003
Q2 20
03Q3
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Q4 20
03Q1
2004
Q2 20
04Q3
2004
Q4 20
04Q1
2005
Q2 20
05Q3
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Q4 20
05Q1
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Q2 20
06Q3
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Q4 20
06Q1
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07Q3
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Q4 20
07Q1
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Q2 20
08Q3
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Q4 20
08Q1
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Q2 20
09Q3
2009
Q4 20
09Q1
2010
Q2 20
10Q3
2010
Q4 20
10Q1
2011
Q2 20
11Q3
2011
Q4 20
11Q1
2012
Q2 20
12Q3
2012
Q4 20
12Q1
2013
Annu
alize
d Per
cent
per
annu
m
Year-over-Year Quarterly Rates of Growth of Imports of Goods in US$ (Percent)
China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland JapanTaiwan Prov.of China
-20
-15
-10
-5
0
5
10
15
20
Q1 19
94Q2
1994
Q3 19
94Q4
1994
Q1 19
95Q2
1995
Q3 19
95Q4
1995
Q1 19
96Q2
1996
Q3 19
96Q4
1996
Q1 19
97Q2
1997
Q3 19
97Q4
1997
Q1 19
98Q2
1998
Q3 19
98Q4
1998
Q1 19
99Q2
1999
Q3 19
99Q4
1999
Q1 20
00Q2
2000
Q3 20
00Q4
2000
Q1 20
01Q2
2001
Q3 20
01Q4
2001
Q1 20
02Q2
2002
Q3 20
02Q4
2002
Q1 20
03Q2
2003
Q3 20
03Q4
2003
Q1 20
04Q2
2004
Q3 20
04Q4
2004
Q1 20
05Q2
2005
Q3 20
05Q4
2005
Q1 20
06Q2
2006
Q3 20
06Q4
2006
Q1 20
07Q2
2007
Q3 20
07Q4
2007
Q1 20
08Q2
2008
Q3 20
08Q4
2008
Q1 20
09Q2
2009
Q3 20
09Q4
2009
Q1 20
10Q2
2010
Q3 20
10Q4
2010
Q1 20
11Q2
2011
Q3 20
11Q4
2011
Q1 20
12Q2
2012
Q3 20
12Q4
2012
Q1 20
13
Annu
alize
d Rat
es in
Per
cent
Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies
China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland JapanTaiwan Prov.of China
43
6. Concluding Remarks
The economic centre of gravity of the world has been gradually shifting to East and
South Asia, and that of East Asia has been gradually shifting to China. The Chinese and East
Asian economies have been partially de-coupled from the United States and Europe.
The growth of tangible capital, supported by high domestic saving rates, was the
principal source of early East Asian economic growth. Intangible capital (human capital and
R&D capital) has been gradually supplanting tangible inputs (physical capital and labor) as
the most important source of growth in the more developed East Asian economies such as
Japan, South Korea, Singapore and Taiwan.
The expansion of the non-agricultural sectors through the utilization of surplus labor
and active participation in the world economy are common features of the development
experience of successful East Asian economies.