Asian Miracle and Modern Growth Theory

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The Asian Miracle and Modern Growth TheoryAuthor(s): Richard R. Nelson and Howard PackSource:

The Economic Journal,

Vol. 109, No. 457 (Jul., 1999), pp. 416-436Published by: Blackwell Publishing for the Royal Economic SocietyStable URL:

http://www.jstor.org/stable/2565712

Accessed: 21/04/2009 11:24

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The Economicournal, 109 (July),416-436.

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RoyalEconomic Society 1999. Published byBlackwellPublishers, 108Cowley Road,Oxford OX4 1JF,UK and 350 Main Street,Malden, MA 02148,USA.

THEASIANMIRACLEANDMODERNGROWTHTHEORY*

RichardPNelsonand HowardPack

The articleargues that the rapid growth in anumber of Asianeconomies thatoccurredbetween 1960 and 1996 wasaccompanied bya major change inthe structure oftheireconomies including shiftsinthe size of firms andthe sectors of specialisation. Thesechangeswere afundamental component of thegrowthprocess. While capital accumulationwasanimportantsource of growth, itsproductive assimilation was a criticalcomponent of thesuccessofthese economies. Estimates of thecontribution of totalfactorproductivity toaggregategrowththatneglect these phenomenamay lead to erroneousestimates.

Over thepastthirty-five yearsKorea,Taiwan, Singapore,andHongKong,havetransformedthemselvesfromtechnologically backwardand poor, torelativelymodern andaffluenteconomies. Each hasexperiencedmore than afour foldincreaseofper capita incomeover theperiod. It took theUnitedKingdom,the UnitedStates, France andGermanyeighty years ormore,beginninginthe19thcentury to achieve suchgrowthalthough the Japanese did itevenmorequickly,between 1952and1973. Eachnowhasalargenumber of firmsproducingtechnologicallycomplexproductscompeting effectivelyagainstrival firmsbasedinthe UnitedStates,Japan, and Europe. Thegrowthperform-anceof these countries hasvastlyexceeded those ofvirtuallyallothereconomies thathadcomparableproductivityand income levelsin1960. Onthesegroundsalonethequestionof'howtheydid it'obviouslyis ofenormousscientific andpolicy importance.The crisis oflate1997and 1998 mayhave tarnishedthe'Asian Miracle'.However,theirhuman,organisational,andphysical capitalremainintact,andGNPatpurchasing powerparityinKorea andTaiwanisfar above that oftheirpeercountriesin1960 such asGhana and Mexico.Despitetheir recentdifficulties it isimportantnot toforgetthat their move frompovertyandeconomicandtechnologicalbackwardness torelativeaffluence andeconomicandtechnologicalmodernityover aspaceof less thanforty yearshas beensomethingof amiracle.This articlearguesthat theabsorptionorassimilationofincreasinglymoderntechnologyand thechangeinindustrial structure hasbeen thecriticalcomponentof thisprocess.Thelearningthatunderlayassimilationwasinstrumentalinpreventinga declineinthemarginal productofcapitaldespitetherapidgrowthinthecapital-labourratiogeneratedbythevery highinvestmentratiosinthese economies. Inturn,learningreflected the

*Wewould like to thankM.Abramovitz,G.Akerlof,M.Gersovitz,B.Kogut,KPavitt,V.Ruttan,James Tybout,L.Westphal,S.Winter,andparticipantsin seminars at theCanadianInstitute forAdvancedStudies,ColumbiaUniversity, IASSA,theJohnsHopkinsUniversity,andYaleUniversityforcomments onearlierdrafts.ChristopherBliss andtwoanonymousrefereesprovidedextensive andhelpful comments. Pack hasreceived researchsupportfrom theUniversityofPennsylvaniaResearchFoundation andthe WorldBankDevelopmentResearchGroup.Mu-YenHsuprovidedexcellentresearchassistance.[416]

[JULY

1999]

ASIANMIRACLE AND GROWTH THEORY417

interaction of a favourablepolicy environment (inwhich innovation wasrewarded) and the entrepreneurialefforts of firms.Section1sets out theview that assimilation of technologywas a criticalcomponent of the 'AsianMiracle' and presents a modelthat focuses on thechange in industrial structurefacilitated by the efficientabsorption of moderntechnology. The model generatesmost of the majorstylised facts of Asiandevelopment. Section 2 delineatesan alternative view,namely, that physicaland humancapitalaccumulation were sufficient to accountforthe unprece-dented growth and analysesthe statistical efforts that supportthisinterpreta-tion. Section 3 presentscross-country evidence onthe relative Asianperformance.Section4assessesthe alternative views ofthe newly industrialisedcountries'(nics) development.Section 5 presents conclusions.

1.The Technology AssimilationInterpretation ofAsian Development

1.1 . ThePolicy ContextAfter brief interludes ofimport substituting industrialisation,Korea, Taiwan,andSingapore switchedtoincreasingly liberaltradepolicieswhile Hong Kongwasalwaysafree trade entrepot.Korea andTaiwan providedsubstantialexportincentives while graduallylowering trade barriers.When protection wasgrantedinthe home market,especiallyinKorea, it wastied closely to export performance.Thegrantingof low interest loans was alsocontingent, especiallyinKorea, on firms meetingexport targets.Firmswereable to obtain inputs neededforproducingexports at international pricesasaresultof atariffrebate system. Subsidisedcredit wasalso tied to exportsuccess.Hence,individual firms had strongincentivestoimproveefficiency to enable them toexportrather than toengagein rentseekingin the domestic market.Arelatively stablemacroeconomic environment characterisedbylimited infla-tion relative to many developingcountriesprovidedthe overall context. Rarelydid the realeffectiveexchangerateappreciateand suchepisodeswerequicklycorrected.' Manufacturers werethus able to concentrateonimproving pro-ductivityrather thancopingwith rapidly changingrelativepricesofinputsandoutputs.Withinthiscontext,the countriesinquestionexperienced 5%ormoregrowthinper capitaincomeover aperiodof 30 to35years.While thispaperwill focuson the determinantsofsupply growth,thepolicyenvironment wasobviouslya criticalcomponentofthe successinthese

countries.2

1.2. AssimilationTheoriesofAsian GrowthOver the last dozenyearsa numberof different viewshavebeenputforthattemptingtoexplainthe 'AsianMiracle'(Amsden,1989;KimandLau, 1994;

1

For moredetaileddiscussionof the policybackgrounddiscussedin thisparagraphseeLittle(1982),Pack andWestphal(1986)and World Bank(1993).

2

Thepolitical process leadingto thepoliciesis discussedbyCamposand Root(1996).

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