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Comments on Paul Krugman and Alwyn Young on the Myth of Asia The Myth of Asia's Miracle - why 'quantity' may be more important than 'quality' in economics

Comments on Paul Krugman and Alwyn Young on the Myth of Asia The Myth of Asia's Miracle - why 'quantity' may be more important than 'quality' in economics

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Published by John Ross
An examination of the errors in Paul Krugman's view that the Asian growth model is not viable
An examination of the errors in Paul Krugman's view that the Asian growth model is not viable

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Published by: John Ross on Jul 25, 2010
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08/08/2013

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Comments on Paul Krugman and Alwyn Young on
The Myth of Asia's Miracle
 - why 'quantity' may be more important than 'quality' in economics
By John RossPreparing for a panel discussionwith Paul Krugman at Jiao Tong University in Shanghai ledto reflection on how different the parameters of practical policy making are from those of academic economics. The questions asked and point of approach are frequently divergentIn policy making all theoretical and other arguments have to be aligned and concentratedaround one settling one decisive issue - µwhat should be done¶. That is, what is involved is asynthetic decision ± assembling issues, and giving them their specific weights, around one point. In academic discussion exploration of distinctions and points can be pursued withoutsettling the decisive practical question of what difference it makes to what should be done.This particular reflection was reinforced by re-reading, to prepare the debate, Paul Krugman¶swell known 1995 paper, µThe Myth of Asia¶s Miracle¶. This analysis, arguments from whichare still frequently used today, drew heavily on two quantitative papers byAlwyn Youngongrowth in the four Asian Tigers/Newly Industrialised Economies (NICs) of South Korea,Singapore, Taiwan and Hong Kong.[1]In analysing the Asian Tiger economies Young/Krugman were attempting to deal with atheoretical/analytical issue. Was the rapid rate of growth of the South East Asian Tigers based on, or substantially contributed to, by a particularly high rate of growth of productivity ± whether of labour, capital, or total factor productivity? Or to what degree was it based onquantitative growth of factors of production ± i.e. accumulation of labour and capital?It should be noted that the quantitative results of Young¶s work has come under criticism -notably fromChang-Tai Hsieh. However, for the moment, leave statistical criticism aside andassume, for the sake of argument, that Young¶s quantitative conclusions were correct ± although, to be clear, this is done as a hypothesis and is not an acceptance of Young¶scalculations
 per se
. Then what follows?Writing in 1995 Young noted that for the period 1960-85 the four Asian Tigers constitutedfour out of the five countries with the fastest growth of GDP per capita in the world - the fifth,Botswana, was an economy sufficiently small that no general conclusions would be drawnfrom it. However, after subtracting growth due to the increase in labour input (includingincreased participation in the workforce, higher educational achievement etc) and the rate of additions and improvements to capital, Young concluded that the growth of total factor  productivity in the Asian Tiger economies was not remarkable. Summarising his article,Young wrote that he:µpresents estimates of ³total factor productivity´ in the sample economies... the ranks of Taiwan and South Korea [among economies placed in descending order of growth of totalfactor productivity] are now reduced to 21st and 24th, respectively. While this remains astrong performance, it is no longer dramatically differentiated from that of the rest of theworld economy. Fully 81 of the 118 sample economies lie within one standard deviation« of Taiwan and South Korea. Surprisingly, economies such as Bangladesh, Uganda, Iceland and Norway are now seen to have outperformed Korea and Taiwan, whose productivity growth isonly 0.5% greater than that of a renowned laggard, the United Kingdom. Singapore, where
 
 participation and investment rates have risen faster than any of the NICs, is reduced to a rank of 63rd in the world economy.¶So, therefore, Young finds the growth of productivity in the NICs was average or slightlyabove average and their rapid growth was not primarily due to extraordinary growth in totalfactor productivity but was due to large scale quantitative inputs of capital and labour. Towhich the appropriate answer, from the point of view of economic growth, is: µyes, that isquite adequate, even very encouraging. For it shows that if it is possible to combine average productivity growth with very large quantitative inputs, then the economy¶s rate of growthwill be far higher than the average and very rapid in absolute terms ± enough to industrialisea country in a single generation (which is what the NICs achieved).¶The point is a simple arithmetic one. The effectiveness of the contribution of investment, for example, to economic growth depends on the combination of its quantity and how efficientlythe economy utilises it. This blog hasnotedon numerous occasions that there is afundamental logical error in judging an economy¶s growth potential by economic approacheswhich concentrate only on the efficiency of the use of investment rather than also analysingthe quantity of investment. The quantitative relation of the relative scale of investment andthe relative efficiency of investment is the critical one. If, for example, economy A utilisesinvestment 20% more efficiently from the point of view of generating growth than economyB, but nevertheless economy B invests 50% more as a proportion of GDP, then economy Bwill grow more rapidly than A despite the fact that economy A uses its investment moreefficiently.[2]Young/Krugman demonstrate that the rate of productivity growth of the Asian Tiger economies is not below average, but only average, as a result of which these economiesquantitative advantage in growth of inputs of investment and labour ensures much more rapidgrowth that economies with higher rates of total factor productivity growth but much lower rates of input growth.This is why, for example, criticisms that countries such as South Korea, during their phasesof rapid growth, allegedly allocated capital inefficiently compared to more µliberal¶economies such as Britain or the United States entirely miss the point. An economy such asSouth Korea investedso much moreas a proportion of GDP, almost double the rate of the US,that unless, from the point of view of growth, its' efficiency of investment was only half thatof the US the South Korean economy would still have grown more rapidly than the US.Put in properly formulated economic terms the quantitative level of macro-economicallocation of resources to investment may be more important from the point of view of economic growth than the marginal efficiency of investment. Put crudely, when it comes toinvestment and growth, 'quantity' may simply be more important than 'quality'. That, for example, would by itself be enough to vindicate the present very high rates of investment inIndia and China.Whether it has proved in practice a more viable growth strategy to have an average rate of growth of productivity, combined with very high quantitative inputs of investment and labour,or whether it is more effective to aim at the highest rate of growth of total factor productivity,with much smaller quantitative inputs of investment and labour, may be illustrated rather graphically by showing the rank order of countries produced by Young¶s calculation.
 
Young found that the top five countries in terms of growth of total factor productivity, after he has carried out his adjustments, were as set out in Table 1.
T
able 1
 In short, if highest possible growth in total factor productivity is the variable that should betargeted, then Egypt, Pakistan, Congo and Malta, together with Botswana, should be taken asthe most successful economies in the world ± the economic models to be emulated.If, however, the key criteria of success is increase in GDP per capita, achieved, according toYoung¶s calculation, by the Asian Tiger economies combining average rate of growth in totalfactor productivity with massive quantitative inputs of investment and labour, then in contrastTable 2 shows the world ranking of economies.
T
able 2
 Which economic variable is in practice decisive in determining real economic outcomes may be shown graphically by taking the case of by far the worst performing case of total factor  productivity according to Young/Krugman¶s account ± Singapore.Singapore, poorly performing in terms of total factor productivity, has today, in ParityPurchasing Power terms, the 5th highest GDP per capita in the world ± a level 9% higher thanthe United States. Egypt, which is better performing in terms of growth of total factor  productivity, ranks 101st in the world with a GDP per capita only 13% that of the UnitedStates. While the second ranking, from the point of view of total factor productivity growth,Pakistan ranks 130th in the world with a GDP per capital 6% that of the US.In short, taking for arguments sake Young and Krugman's calculations as entirely correct,then the route to actual economic success, in terms of economic growth and a high livingstandard, lay in the average rate of increase of total factor productivity, combined withmassive quantitative inputs of capital and labour, of Singapore rather than in the high totalfactor productivity, combined with far lower quantitative growth of inputs, of Egypt, Congoand Pakistan. Or, put in deliberately shocking terms, 'quantity' (growth of factor inputs) was

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