Learn from Thy Neighbor: Developmental Policy Lessons from the Rest of East Asia

Former World Bank Economist John Page drew on a World Bank study of the 8 High Performing Asian Economies (HPAEs) in the “The East Asian Miracle: Four Lessons for Development Policy”.  While being dated in comparison with most of the other material examined, it still provides valuable insights into the growth history of East Asian economies with implications for China and Hong Kong’s economic growth. Professor Page tells at the outset that his work frames around 4 particular areas that constitute the lessons from the HPAEs: rapid, sustained, and shared growth, the effects of changes in total factor productivity and accumulation, macroeconomic management and industrial policy’s influence on TFP change with respect to export orientation and selective intervention.

Professor Page presents regression data for GDP growth rates from 1960 to 1980and GDP per capita in 1960. This provides a comparison of these two metrics across the spectrum of nations from high-income economies, HPAEs, and other developing countries through out the period. This confirms that the HPAEs attained higher GDP growth for their per capita GDP than other countries of similar per capita GDP levels at the time. This juxtaposed with data on income inequality over a similar time period show that these same countries achieved growth with high levels of equity, meaning that benefits were experienced at similar levels across varying income strata within in each country. Also, the HPAEs experienced the highest rates of growth had Gini coefficients on par with high-income western economies like the UK, Australia, and Switzerland. Recent studies have shown that low levels of intra-country inequality aid in economic growth. The coinciding of these factors indicates that the virtuous circle existing in the HPAEs to some extent in this period.

This has interesting implications for China as its level of income inequality has increased since the 1990s. The importance of at least sustaining GDP growth at around 8% is of paramount importance to the CCP as well as the global economy, but lower income inequality would help to achieve that while higher income inequality would have a negative effect. Should income inequality worsen, the effect could become prohibitive for sustained economic growth at the required level.

The relative importance of investments in physical and human capital is key in studying HPAEs’ developmental policy lessons. These investments can be seen in the impact of total factor productivity growth as well as the accumulation of capital. It is established that high rates of investments were a hallmark of the GDP growth in HPAEs, but an important area of measuring the quality of utilizing these investments is the incorporation of best practices technology into the countries’ economies. To do this, Professor Page computes estimates of total factor productivity for developing countries from 1960 to 1989, but utilizes high-income country parameters so that the TFP estimates account for the adoption of best practices technologies from the high-income countries to the HPAEs.

The findings show that TFP increases played a bigger role in the economies of Hong Kong, Taiwan, Japan, and Korea than in the other HPAEs, meaning that these economies were more successful in the technology-based catch up to high-income economies in Europe and North America. Professor Page notes that the efficiency of capital allocation under predicts growth in the HPAEs and that 2 of the 3 most productivity oriented were also most noted for interventionist policies. These policies took many forms among the most common were targeted, increase in human capital through emphasizing primary and secondary education in its workforce, subsidized credits to certain industries or firms, emphasis on import substitutions, and the establishment of state-owned banks to help facilitate financial support of key industries.

These policy positions are remarkably similar to those employed by China, which has also enjoyed a consistent increase in total factor productivity. However, the formation of a bubble in its real estate market sews doubts about the efficiency in allocation of resources in terms of capital investments. Another important area of concern is the debate over the RMB exchange rate. Most of the HPAEs transitioned away from fixed exchange rates, but moderate levels of inflation were necessary to do so in each of these cases. In the past China’s leaders have been reluctant to do so because of the deleterious effects this would have on its export oriented growth due to the rise in costs. However, with the new leadership transition, Party Chief Xi Jinping is seen by some as having the necessary consolidation of power and thus highest chances to carry out the transition to further currency liberalization. One of the chief in China will be absorbing the inflationary effects of currency liberalization, which will be necessary sooner rather than later.

HPAEs all showed dramatic levels of educational attainment and quality compared to countries of similar income levels in Professor Page’s data. The policy of universal primary education was achieved in Hong Kong, Korea, Singapore, and Taiwan by 1965. The emphasis on much of secondary education on vocational skill attainment contributed to workers’ ability to engage with industries brought on by the aforementioned technological catch-up and contributing to the impact of total factor productivity to GDP growth. At the upper end of the TFP growth and overall TFP levels, Korea and Taiwan transitioned to allocation of more public funds to tertiary education in accordance with the increased demand for high-skill workers in more technologically advanced fields.

Professor Page notes that he capacity of the populace to engage in increasingly technologically advanced fields is important for the GDP growth and export orientation was key to these advances. However, he doesn’t address the importance of the order in which countries pursue these industries as Professor Takatoshi Ito states in his comments. The sequence of industrial change is important to technological growth, as cumulative changes in technology would foster more systemic adoption as opposed to skipping to the highest level of technology before the less sophisticated industries are well established. It stands to reason that the experience gained in engaging in cumulative sequencing of technological change would improve the quality of products and services produced in each period as workers have more experience with more closely related technologies across different sectors. This is seen in the subsequent success of export orientation throughout the HPAEs. Subsequent emphasis on different exports over time enabled the transfer of best practices technologies to an increasingly educated populace able to take advantage of them through the previous interaction with the last wave of technological change. The repeated interactions of  the workforce with each level of best practices technology enabled the TFP growth and factor accumulation that continued to increase the GDP growth of HPAEs.

The path of the HPAEs through out the 1960 to 1980s provides a myriad of lessons for China’s path for GDP growth, many of which have readily been adopted. Possibly most important of these are the experiences of Japan, Korea, Taiwan, and Hong Kong. We saw that these countries’ growth patterns were more dependant on increases in TFP than the other HPAEs. China’s accumulation of physical and human capital is in the more advanced stages as seen by relatively high contribution of investment as a percentage of GDP, practically universal primary and secondary education systems, and attaining the world’s largest population of university students. This means that it will need to rely on TFP increases to achieve its growth goals.