Asian Miracles, or Not? J.D. Han

1. “Asian Miracles” by World Bank The first official report started in The full report can be found at wds.worldbank.org/external/default/main?pagePK= &piPK = &theSitePK=523679&menuPK= &searchMenu PK= &theSitePK=523679&entityID= _ &searchMenuPK= &theSitePK= wds.worldbank.org/external/default/main?pagePK= &piPK = &theSitePK=523679&menuPK= &searchMenu PK= &theSitePK=523679&entityID= _ &searchMenuPK= &theSitePK=523679

2. Original WTO Report “Asian Miracles” The High Performing Asian Economies (HPAEs) : Japan, Hong Kong, the Republic of Korea, Singapore, Taiwan, Indonesia, Malaysia, and Thailand (Note that China was not in). “It finds that the diversity of experience, the variety of institutions, and the variations in policies among the HPAEs does not allow a model to be developed.” (World Bank said at the time; we may know better) However, some lessons for other developing countries can be learned from the East Asian experience. First, growth is not Automatic: HAPEs use a variety of government intervention or policies to achieve three functions of growth - accumulation, allocation, and productivity growth (there are some controversies; for example Krugman’s Growth Accounting). Second, it is essential to get the fundamentals right. 1) High levels of domestic saving, 2) good macroeconomic management, and 3) broad based human capital. Third, the government intervention should have specific orientations, such as limited price(market economy) distortions, and export-promotion.

3. Facts and Statistics East Asian countries have recorded unique experiences of Economic Growth -> Fast -> Sustained over a fairly Long-run

*Note well that There is a marked difference before and after the 1997 Asian Financial Cr isis -HPAEs did not include China before AFC -HPAEs’s growth rates have fallen significantly after AFC -Even after the recovery from AFC, there is no recovery or big increase in investment in HAPEs or China: Savings g o to U.S., and to China.

4. Analysis Tool What caused such a high growth? In its explanation, the World Bank report is 1)Neo-Classical Theory(K, L, and Technology) plus 2)Endogenous Growth Theory (On Human Capital; Social Capital; and Government Policies)

4. Factors of East Asian Miracles In particular, Word Bank attributed the Asian Miracles to 1) Accumulation of Physical Capital (Savings); 2) Fostering Human Capital (Education); 3) Social Capital (Harmony-not confrontation, Law and Order, Lack of Corruption); 4) Sound Government Policies (Industrial Policy, Export Promotion, etc.) *Slightly ambivalent about Technology(?).

5) The composition of Capitals is important: -World Bank report classifies K into at least 4 (Physical; Natural; Human; Social) West Africa: Natural Capital is relatively large, but Human Capital is relatively small East Asia: Human Capital is relatively large and Natural Capital is relatively small

World Bank report comes up with a new measure of Capital Accumulation conducive for Economic Growth: “Genuine Saving Rate”

5. Human Capital in East Asia Human Capital is fostered through Education

1) Measuring Human Capital Human Capital is measure by Schooling (Years) and/or National Expenses on Education

*Public Expenditure on Education is misleading: It is not High in Asia

2)Other Measurements However, in East Asia other training expenses should be included in Human Capital: Private Education Costs Prevalent Overseas Studies Military Services Company-Run Night Schools

3) Reflect on Education in East Asian context Neo-Confucian Concept of Social Class Social Class Structure Social Mobility and Education Click here for an interesting paper on the social mobility of Chinainteresting paper on the social mobility of China

4) Incentive for Education Education is Investment Investment responds to Returns Upward Mobility through Income and Recognition Scales of the Society = Social Mobility

In East Asia, Education has been the most important means of Social Mobility

*Confucianism, Education System, and Social Mobility in Historical Conext Ch’ing dynastyCh’ing dynasty Social mobility increased during the early Ch'ing, supported by a pervasive belief that it was possible for a peasant boy to become the first scholar in the land. An ethic that stressed education and hard work motivated many households to invest their surplus in the arduous preparation of sons for the civil service examinations. Although the most prestigious career in Ch'ing society remained... Ming dynasty...the Ming civil service, that influential families did not monopolize or dominate the service, and that men regularly rose from obscurity to posts of great esteem and power on the basis of merit. Social mobility, as reflected in the Ming civil service, was very possibly greater than in Sung times and was clearly greater than in the succeeding Ch'ing era. T’ang dynastyT’ang dynasty...examination system had facilitated the recruitment into the higher ranks of the bureaucracy of persons from lesser aristocratic families, most officials continued to come from the established elite. Social mobility increased after the An Lu-shan rebellion: provincial governments emerged, their staffs in many cases recruited from soldiers of very lowly social origins, and specialized finance...

6. Social Capital Order Social Cohesion Lack of Social Conflicts Harmony Lack of Civil Wars

7. Government Policies Industrial Policies Facilitating most efficient Resource Allocation Export Promotion Policies Promotion of Strategic Industries

Export-Orientation is conducive for Economic Growth: Specialization based on Ricardo’s comparative advantage theory of trade Trade provides Expanded Market, which e nables (Large) Scale of Production Openness provides changes for Technology Transfer

* Perils of Import Substitution P olicy The focus is on minimizing Imports by producing all kinds of Goods No Specialization Producing Outputs which have no Comparative Advantage -> Inefficient Allocation of Resources No Benefits of Scale of Production

7. Criticisms 1)Paul Krugman Growth is due to increased factor intensity, or increases in K, and L input, and Not much due to Technical Innovation; According to Neoclassical Theory, there will be convergence, and the East Asian growth is not sustainable. *Of course: Krugman does not think much of Social Captial, or Human Capital as a separate factor for growth

* Empirical Evidence: Growth Accounting applied to East Asia does not show Technology as an Important Factor *Refer to my note on Growth Accountingmy note on Growth Accounting In the East Asian setting

2) Asian (Financial) Crisis Corruption at all levels of society Lack of Transparency - Opaqueness of Governance Vulnerable to ‘Herding’

Korea recovered fastest from the Asian Fi nancial Crisis of No discernable changes except for Openness to the U.S. capital and Investment

*Reflection Opaqueness also exists in Western Economies Transparency may not be the only way to Information Efficiency : “Dominicans and Jews Need not Apply” in Cents and Non -Senses by J. Carr Transparency may not be culturally possible : “Zen”( 禅）； ”From Heart to Heart”( 以心传心）