How the East Grew Rich - The Chinese University of Hong … working paper...The Chinese University of Hong Kong . 13/F, ... except during the East Asian currency crisis of 19971998.-

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

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8.0 19

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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

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8 Br

unei

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bodi

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a

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Laos

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Phili

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Sing

apor

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Thai

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Viet

nam

Taiw

an,

Chin

a

USD

trill

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Real GDP of East Asian Economies in 1980 and 2011, in 2011 USD trillions

1980 2011

0

200

400

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800

1,000

1,200

Brun

ei

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Viet

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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

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Indo

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Japa

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Kor

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Laos

Mac

ao

Mal

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Phili

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es

Sing

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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%


Korea, Rep. of1.6%

United Kingdom3.5%

China10.4%

India2.6%

Brazil3.5%

Russian Federation2.7%

0

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Perc

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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

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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%


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%


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

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Perc

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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

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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

0120

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0820

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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

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Perc

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Savings Rates of Selected East Asian Economies

China, Mainland Hong KongIndia IndonesiaJapan KoreaMalaysia PhilippinesSingapore TaiwanThailand

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Perc

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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%

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100%19

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10

The Distribution of Japanese Employment by Sector

Employment in agriculture Employment in industry Employment in services

0%

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90%

100%

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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%

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12

The Distribution of Taiwan Employment by Sector


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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

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The Distribution of Korean Employment by Sector


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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%

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The Distribution of Employment by Sector since 1952

Primary Sector Secondary Sector Tertiary Sector

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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

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100

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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

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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

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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

5419

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7019

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0020

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1120

12

Perc

ent

Exports of Goods as a Pecentage of GDP

Mainland China Japan

0

10

20

30

40

50

60

70

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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

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1950

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Perc

ent


Hong Kong South Korea Singapore Taiwan

0

20

40

60

80

100

120

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Perc

ent


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

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7019

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9019

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0020

0120

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1020

1120

12

Perc

ent


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

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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

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200 19

6119

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0020

0120

0220

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1020

1120

12

Perc

ent

Exports and Imports as a Percent of Hong Kong GDP, 1961-present



5

10

15

20

25

30

35

40

45

50

55

60

65

70

1951

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Perc

ent

Exports and Imports as a Percent of Taiwan GDP, 1951-present



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

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0020

0120

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1120

12

Perc

ent

Exports and Imports as a Percent of Singapore GDP, 1957-present



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

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2012

Perc

ent

Exports and Imports as a Percent of Korean GDP, 1950-present



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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0020

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0220

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1120

12

Perc

ent

Exports and Imports as a Percent of Chinese GDP, 1957-present



30

40

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110

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Perc

ent

Exports and Imports as a Percent of Malaysian GDP, 1955-present



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

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5019

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1120

12

Perc

ent

Exports and Imports as a Percent of Thailand GDP, 1950-present



8.0

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

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46.0

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Perc

ent

Exports and Imports as a Percent of Indonesian GDP, 1967-present



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

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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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0020

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12

Nominal Exchange Rate of the Hong Kong Dollar, HK$/US$, 1949-present

10

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45

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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

5519

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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

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1400

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1949

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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

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6019

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7019

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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-

83Ju

l-83

Jan-

84Ju

l-84

Jan-

85Ju

l-85

Jan-

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l-86

Jan-

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l-87

Jan-

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l-88

Jan-

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l-89

Jan-

90Ju

l-90

Jan-

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l-91

Jan-

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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-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

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

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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

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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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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.

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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

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0 1 10 100 1,000 10,000Billions of 2005 Constant U.S. Dollars

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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

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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

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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

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Quarterly Rates of Growth of Real GDP, Year-over-Year, Selected East Asian Economies


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.

Documents

How the East Grew Rich - The Chinese University of Hong … working paper...The Chinese University of Hong Kong . 13/F, ... except during the East Asian currency crisis of 19971998.-