Dynamics, Economic Growth, and International Trade

9. Interpreting East Asian Growth

CHAPTER 9 Interpreting East Asian Growth Pham Hoang Van and Henry Y. Wan, Jr. 1. Introduction We study in this chapter the East Asian economies, in particular, the Newly Industrialized Economies (NIEs) of Korea, Taiwan, Hong Kong, and Singapore. These economies have attracted much attention both for their own sake and for the valuable implications embodied in their remarkable experiences. Their performances are subjects ofrecent raging debates.1 The development of the NIEs are characterized by: 1. Their sustained rapid growth in per capita real income of 6% per annum for 30 years; 2. Their export expansion which is spectacular in both volume and variety, including high-tech exports for advanced economies; 3. Their macro-economic stability is manifested in: (i) low unemployment and low annual inflation, (3% or less in both for some NIEs); (ii) low income inequality; and (iii) a balanced government budget and balanced international payments. The debates concerning the NIEs are focused upon four aspects: 1. Is trade essential in the development of the NIBs? On this Young (1994) expressed the novel view that trade has only a once-andfor -all impact on technology; 2. Is State guidance indispensable for their development schemes? On this Amsden (1989) for example, holds that State guidance plays an indispensable role; 3. Is technical progress present in their evolution? On this Kim and Lau (1994a) and Young (1995) claim that, unlike five OEeD economies , the NIEs have made no technical progress of statistical significance ; 4. Is collapse Soviet-style the eventual fate of the NIEs? On this Krugman (1994) is sure. 1. See, for example, Page (1994). 265 266 Dynamics, Economic Growth, and International Trade We argue in this study that in the development of the NIEs, that (i) trade has been playing a continuous, indispensable role; state guidance has not; and (ii) there is continuous gain in technology, in the sense as both laymen understand it and what policy-makers care about. This may be so even if the NIEs' performance may be unremarkable by some derived measure (like the "Solow residual"); and (iii) the tempo of their growth is likely to taper off as has happened to Japan, but there is no reason to expect a nose-dive, Soviet style. Our analysis is based upon two fundamental properties of the NIEs. First, in their mechanism for growth, there is a generalized complementarity among (i) capital accumulation, (ii) technology gain, and (iii) international trade. Their growth would be impossible if anyone of the three is lacking. This view generalizes the complementarity hypothesis of Kim and Lau (1994b), between physical and human capital accumulation . Second, about their mode of development, the contagion model of Findlay (1978) captures the essence of the matter. The NIEs acquire technology by close association with the developed world where in such "emulative growth", they rely on "borrowed technology", not domestic research and development (R&D). Their rapid progress is secured by side-stepping the risky and costly R&D investments, yet, the avoidance of which comes at a price: the foregoing of the innovators' profits. Thus, without such profits, the NIEs must devote much more inputs than the advanced economies in earning the same unit of value on the world market. Analytically, we do not assume the existence of any particular form of an aggregate production function, which can vary under technical progress only in some specific manner (e.g., output-augmenting or inputaugmenting ). In the development context, what may count for an aggregate production function is contingent upon different trade regimes and varies at a pace which depends on the evolution of the economy. Our stance follows the position of Solow stated in his review of Hicks' Capital and Growth thirty years ago. To him, the aggregate production function which he employed with such virtuosity is but an artifice, to be used wherever it is useful and in the absence of superior alternatives . Notably, Solow never for once applied such a tool in the context of economic development. To address development concerns, we fashion an analytic apparatus from an extension of the surrogate production function of Samuelson (1962). Following the tradition of economic analysis on many issues (e.g., the backward-bending labor supply curve), our study is motivated by casual observations, followed through with deductive reasoning and illustrated Interpreting East Asian Growth 267 with specific examples. Its ultimate validation must come from empirical evidence of a formal or casual nature. Returning to the controversies we...