Seeking the Model of the East Asian Economic

GrowthJ.D. Han

1. “Asian Miracles” by World Bank

• The first official report started in 1993.

• The full report can be found at http://www-wds.worldbank.org/external/default/main?pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&theSitePK=523679&entityID=000009265_3970716142516&searchM

enuPK=64187283&theSitePK=523679

2. Original WTO Report “Asian Miracles”

• The High Performing Asian Economies (HPAEs) : Japan, Hong Kong, the Republic of Korea, Singapore, Taiwan, Indonesia, Malaysia, and Thailand (Note that China was not in).

• “It finds that the diversity of experience, the variety of institutions, and the variations in policies among the HPAEs does not allow a model to be developed.” (World Bank said at the time; we may know better)

• However, some lessons for other developing countries can be learned from the East Asian experience.

• First, growth is not Automatic: HAPEs use a variety of government intervention or policies to achieve three functions of growth - accumulation, allocation, and productivity growth (there are some controversies; for example Krugman’s Growth Accounting).

• Second, it is essential to get the fundamentals right. 1) High levels of domestic saving, 2) good macroeconomic management, and 3) broad based human capital.

• Third, the government intervention should have specific orientations, such as limited price(market economy) distortions, and export-promotion.

3. Facts and Statistics

• East Asian countries have recorded unique experiences of Economic

Growth

-> Fast

-> Sustained over a fairly Long-run

*Note well that

• There is a marked difference before and after the 1997 Asian

Financial Crisis

- HPAEs did not include China before AFC- HPAEs’s growth rates have fallen significantly

after AFC-Even after the recovery from AFC, there is no

recovery or big increase in investment in HAPEs or China: Savings go to U.S., and to China.

4. Analysis Tool

What caused such a high growth? In its explanation, the World Bank

report

In the Conventional/ Neo-Classical Theory

: K, L, and Technology

• Some argue that there is no big contribution by T to the economic growth in the EA countries (Paul Krugman; Alwyn. Young).

• In fact there is not much of indigenous technical innovations of the EA.

What if the above cannot explain the EA growth fully?

Endogenous Growth Theories

Human Capital; Social Capital; and Government Policies

4. Factors of East Asian Miracles

Word Bank attributed the Asian Miracles to1)Accumulation of Physical Capital (Savings); 2)Hard work (Labor Supply); and___________________________________________3) Fostering Human Capital (Education); 4) Social Capital (Harmony-not confrontation,

Law and Order, Lack of Corruption); 5) Sound Government Policies (Industrial

Policy, Export Promotion, etc.)*Slightly ambivalent about Technology(?).

*The composition of Capitals is important:-World Bank report classifies K into at least 4

(Physical; Natural; Human; Social)

West Africa: Natural Capital is relatively large, but Human Capital is relatively small

East Asia: Human Capital is relatively large and Natural Capital is relatively small

- Carolos Leite argues that natural capital without the balancing forces of other capitals hurts, not help economic growth.

5. Human Capital in East Asia

• Human Capital = Creativity; Knowledge;

Soundness of Mind and Body• Human Capital is fostered through Education of all levels

1) Measuring Human Capital

Human Capital is conventionally Measured/proxied bySchooling (Years) and/orNational Expenses on Education

(They are incomplete measures!)

*Public Expenditure on Education is misleading: It is not High in Asia

2)Other Measurements

However, in East Asia other training expenses should be included for the proxy of Human Capital:

• Home Education• Private Education Costs• Overseas Studies• Military Training/Services • Company-Run Night Schools

3) Reflect on Education in East Asian context

• Why is education so much valued in EA?

In East Asia, Education has been the most important means of Social Mobility or the Upward Movement in Social Class.

Incentive for Education

• Education is Investment

• Investment responds to Returns

• Upward Mobility through Income and Recognition

Scales of the Society = Social Mobility

6. Social Capital

• Order• Social Cohesion• Lack of Social Conflicts• Harmony• Lack of Civil Wars

7. Government Policies

• Industrial Policies

Facilitating most efficient Resource Allocation

• Export Promotion Policies

Promotion of Strategic Industries

Export-Orientation is conducive for Economic Growth:

• Specialization based on Ricardo’s

comparative advantage theory of trade

• Trade provides Expanded Market, which enables (Large) Scale of Production

• Openness provides changes for Technology Transfer

* Example of a ‘Wrong Government Economic Policy’:Perils of Import Substitution Policy

The focus is on minimizing Imports by producing all kinds of Goods

• No Specialization• Producing Outputs which have no Comparative Advantage -> Inefficient Allocation of Resources• No Benefits of Scale of Production

• Scholars started linking the Five Attributes for East Asian Miracles to more Fundamentals, such as Institutions or Value/Belief of Neo Confucianism, readily found

in Japan, Taiwan, Korea…..

Confucian Idea of Meritocracy

• Person with Merits -> Select the person with merit for leadership• At the top is the ‘Philosopher King’ or ‘Wise Dictator’ http://en.wikipedia.org/wiki/Philosopher_king

• He has Noblesse Oblisse Noblesse oblige  is a French phrase literally meaning "obligation of Nobility person with status has to fulfill social responsibilities, particularly in leadership roles.

*Confucianism, Education System, and Social Mobility in Historical Conext

• Ch’ing dynasty Social mobility increased during the early Ch'ing, supported by a

pervasive belief that it was possible for a peasant boy to become the first scholar in the land. An ethic that stressed education and hard work motivated many households to invest their surplus in the arduous preparation of sons for the civil service examinations. Although the most prestigious career in Ch'ing society remained...

• Ming dynasty ...the Ming civil service, that influential families did not monopolize or

dominate the service, and that men regularly rose from obscurity to posts of great esteem and power on the basis of merit. Social mobility, as reflected in the Ming civil service, was very possibly greater than in Sung times and was clearly greater than in the succeeding Ch'ing era.

• T’ang dynasty ...examination system had facilitated the recruitment into the higher ranks

of the bureaucracy of persons from lesser aristocratic families, most officials continued to come from the established elite. Social mobility increased after the An Lu-shan rebellion: provincial governments emerged, their staffs in many cases recruited from soldiers of very lowly social origins, and specialized finance...

• This is still the case in Japan, Korea, Taiwan, Singapore, and China to

some extent.

** Limitation of the Contemporary China

* Click here for an interesting paper on the social mobility of

the contemporary China

-> What would you predict for the Hukou system as the communist party is faced with a shortage of Human Capital in the

party?

In Sum

• The East Asian Economic Growth Model is a kind of Endogenous Economic Growth Model based on Human Capital, Social Capital, and Government • The last two can be included in “Institutions” and Value/Belief, which is

Neo Confucianism in East Asia.

7. Criticisms of the EA Economic Growth Model

Paul Krugman Growth is due to increased factor

intensity, or increases in K, and L input, and Not much due to Technical Innovation; According to Neoclassical Theory, there will be convergence, and the East Asian growth is not sustainable.

* Empirical Evidence:

• Growth Accounting applied to East Asia does not show Technology as an Important Factor

*Refer to my note on Growth AccountingIn the East Asian setting

2) Asian (Financial) Crisis

• Corruption at all levels of society

• Lack of Transparency - Opaqueness of Governance

• Vulnerable to ‘Herding’

• Korea recovered fastest from the Asian Financial Crisis of 1997.

• No discernable changes except for Openness to the U.S. capital and Investment

*Reflection

1) Opaqueness also exists in Western Economies

2) Transparency may not be culturally possible

: “Zen”( 禅）； ”From Heart to Heart”( 以心传心）

• 3) Transparency may not be the only way to Information Efficiency

: “Dominicans and Jews Need not Apply” in Cents and Non-Senses by J. Carr

4) A moderate degree of Corruptions may be efficiency-enhancing in the imperfect economic system.