The East Asian Miracle: Four Lessons for Development Policy

John Page
1994 NBER macroeconomics annual  
Since the study of economic development began in earnest at the close of the Second World War, academics and policymakers have debated the appropriate role of public policy in developing economies. East Asia has a remarkable record of high and sustained economic growth. From 1965 to 1990 its 23 economies grew faster than those of all other regions. Most of this achievement is attributable to seemingly miraculous growth in just eight high performing Asian economies (HPAEs)-Japan; the "four
more » ... ": Hong Kong, the Republic of Korea, Singapore, and Taiwan; and the three newly industrializing economies (NIEs) of Southeast Asia, Indonesia, Malaysia, and Thailand.1 The East Asian economies provide a range of policy frameworks-extending from Hong Kong's nearly complete laissez faire to the highly selective policy regimes of Japan and Korea. The coexistence of activist public policies and rapid They do not represent the views of the World Bank, its Executive Directors, or the countries they represent. PAGE growth in some of the East Asian economies-especially Japan, Korea, Singapore, and Taiwan-has raised complex and controversial questions concerning the relationship between government, the private sector, and the market. This essay looks at four public policy lessons of the East Asian miracle. Section 1 argues that the eight HPAEs can be grouped together and distinguished from other low-and middle-income countries on the basis of their rapid, sustained, and shared growth. Section 2 examines the controversy over the sources of growth in the HPAEs and presents evidence on the relative roles of accumulation and total factor productivity (TFP) change. Section 3 discusses two aspects of public policy in East Asia that conform to the conventional wisdom concerning good development policy-macroeconomic management and broad-based educational policies. Section 4 examines two more controversial issues -the significance of the HPAEs' export push strategies and industrial policies for TFP change. It concludes that export orientation rather than selective intervention played the dominant role in increasing economywide TFP growth rates. The Nature of the Miracle-Rapid Growth with Equity The HPAEs are a highly diverse group of economies, differing in natural resources, population, culture, and economic policy. What are the characteristics that these eight economies shared that cause them to be grouped together and set apart from other developing economies? First, they had rapid, sustained growth between 1960 and 1990. This in itself is unusual among developing economies. Figure 1 shows the relationship between relative income level in 1960 and per capita income growth for a sample of 119 countries during the period 1960-1985. This is the standard "convergence picture" first presented in Romer (1987). The figure also plots an estimated nonlinear relationship between initial income and growth.2 Per capita income growth is essentialy independent of the level of relative income in 1960. The fit of the regression is poor and the significance of individual coefficients low.3 2. The regression line is the result of a regression of per capita income growth (in constant 1980 international prices) on 1960 income per capita, including nonlinear terms up to the second power. 3. Dollar (1991) finds a similar pattern using a sample of 114 countries and the absolute level of per capita income in 1960. He finds a clearer pattern in which the lowest deciles have the lowest per capita income growth rates, the middle-income deciles have the highest, and the high-income countries are between. He also reports low significance of his regression results, however. The eight HPAEs are all positive outliers in the income-growth distribution. While Malaysia, Indonesia, and Thailand are closer to their predicted values, the remaining five economies, Taiwan, Korea, Japan, Singapore, and Hong Kong, are all significantly above their predicted gross domestic product (GDP) per capital growth rates on the basis of relative income level.4 All of the HPAEs were catching up to the more developed countries. Recent work on growth rate persistence suggests that growth rates for individual economies are highly unstable over time (Easterly et al., 1993) . The HPAEs, however, appear to be an exception. Depending on the time period selected and the definition of persistent success (in terms of the fraction of the distribution used to define high growth), the four tigers plus Japan consistently rank with the handful of persistently rapidly growing economies. Indeed, Easterly et al. conclude that "the widespread perception of strong country effects in growth is strongly influenced by the Gang of Four." 4. Addition of a dummy variable (HPAE = 1) to the estimated equation appearing below Figure 1 increases the R2 to .242 and greatly improves the precision of the parameter estimates. The t value on the dummy variable (which is positive) is 4.00.
doi:10.1086/654251 fatcat:dvyxiokxyne2fcuqnsoc2b6bqu