Chapter 16 Export- Oriented Growth in East Asia

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-2 Learning Objectives List five general characteristics of success in the High Performance Asian Economies. Describe how the institutional environment supported economic growth. Analyze the degree of openness in the HPAE. Explain the pros and cons of the idea that industrial policies mattered to East Asian success.

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-3 Learning Objectives (cont.) Evaluate the impact of export promotion policies and the debate over their applicability to other world regions. Define total factor productivity and explain why economists use it to understand whether growth in the HPAE is similar to growth elsewhere.

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-4 Introduction: The High Performance Asian Economies The High Performance Asian Economies (HPAE) as designated by the World Bank: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand The Four Tigers: the two city-states of Hong Kong and Singapore, South Korea, and Taiwan The Four Tigers are also referred to as the Four Dragons or the Little Dragons

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-5 Newly Industrializing Economies (NIE) Newly industrializing economies are a broader group of countries, not confined to East Asia Along with economies of East Asia (Indonesia, Malaysia, and Thailand) China may also be considered a NIE, but it is usually placed in its own category due to its size and the legacy of communism

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-6 HPAE Characteristics Maintain stable macroeconomies Strong commitment to shared economic growth through health care, education, and housing Promote exports, remaining open to imports Exports provide foreign exchange earnings

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-7 Population, Income, and Economic Growth High GDP per person in Singapore, Japan, Hong Kong, Taiwan, and South Korea Thailand, Malaysia, and Indonesia, began their period of rapid growth later Asian economies were among the fastest growing economies in the world between 1980 and the late 1990s

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-8 TABLE 16.1 Population and GDP for the HPAE, 2011

Copyright ©2014 Pearson Education, Inc. All rights reserved.16-9 TABLE 16.2 Average Annual Growth in Real GDP per Capita, 1980–2010

Copyright ©2014 Pearson Education, Inc. All rights reserved A Note on Hong Kong On July 1, 1997, Great Britain officially returned the colony of Hong Kong to China after more than 150 years of British rule China –will allow Hong Kong to keep its own currency –will limit migration between Hong Kong and the mainland –will generally try to preserve Hong Kong’s current system

Copyright ©2014 Pearson Education, Inc. All rights reserved General Characteristics of Growth in the HPAE Shared growth-rising economic equality Rapid accumulation of physical and human capital –high savings partly result of the rapid demographic transition experienced after World War II Rapid growth of manufactured exports –Import substitution industrialization (ISI) policies were quickly replaced with an emphasis on export promotion Stable macroeconomic environments

Copyright ©2014 Pearson Education, Inc. All rights reserved Rapid Growth of Manufactured Exports HPAEs have high rates of investment thanks to high savings rates, which stem from: –Stable macroeconomic environment of low inflation –Rapid rate of income growth –Demographic transition: shift to low death and birth rates –Rapid rate of income growth

Copyright ©2014 Pearson Education, Inc. All rights reserved TABLE 16.3 The Share of HPAE in World Exports, 1965–2010

Copyright ©2014 Pearson Education, Inc. All rights reserved Stable Macroeconomic Environments HPAEs kept budget deficits and foreign debt within the limits of the ability of the government to finance without having to print money or borrow excessively –Low inflation rates helped keep interest rates stable, enabled firms to take a long-term view on their investments The crisis of 1997 proves the rule: significant reduction in export earnings and growth of current account deficits in some HPAE countries

Copyright ©2014 Pearson Education, Inc. All rights reserved The Institutional Environment In the HPAEs, large flows of savings were channelled into the financial system, which lent them to businesses that used them efficiently To ensure resources are used in the most productive manner, governments must create rules that foster efficient outcomes.

Copyright ©2014 Pearson Education, Inc. All rights reserved The Institutional Environment (cont.) Reliable property rights Bureaucracies are competent Contracts are enforced Access to information is wide-spread Regulations are clear and well- publicized

Copyright ©2014 Pearson Education, Inc. All rights reserved TABLE 16.4 Rankings on the Ease of Doing Business Index, 2011

Copyright ©2014 Pearson Education, Inc. All rights reserved Fiscal Discipline and Business- Government Relations Deliberation councils –Quasi-legislative bodies set up by six HPEA governments that bring together representatives from the private and the public sectors –Coordinate the information flow between businesses and policymakers

Copyright ©2014 Pearson Education, Inc. All rights reserved Avoiding Rent Seeking Government interventions are common in three areas in HPAEs: –Targeting of specific industries or to channel resources in a particular direction –credit subsidies –import protection –business licenses

Copyright ©2014 Pearson Education, Inc. All rights reserved TABLE 16.5 Imports and Exports as a Share of GDP

Copyright ©2014 Pearson Education, Inc. All rights reserved The Role of Industrial Policies World Bank’s research concluded government interventions have three common areas: 1.targeting of specific industries, that is, industrial policies narrowly defined 2.directed credit 3.export promotion

Copyright ©2014 Pearson Education, Inc. All rights reserved Targeting Specific Industries in the HPAE The narrow definition of industrial policies is the targeted development of specific industries Six key tools of targeting: –Restrictions on imports: licensing, quotas, tariffs, export subsidies –Direct credit: funds to an industry –Subsidies –Market information (especially foreign markets) –Infrastructure construction –Research and development funds

Copyright ©2014 Pearson Education, Inc. All rights reserved Targeting Specific Industries in the HPAE (cont.) Targeted industrial policies are distinct from other efforts to promote specific industries –Resources provided only as long as the companies receiving them met specific export targets –Governments placed macroeconomic stability above industrial policies

Copyright ©2014 Pearson Education, Inc. All rights reserved Did Industrial Policies Work? A successful policy: increases the overall rate of GDP growth or the rate of productivity growth Disagreement on success –World Bank: Export promotion and directed credit did boost economic growth, but industrial policies in general did not –Critics: It is impossible to know what growth rates would have been without industrial policies

Copyright ©2014 Pearson Education, Inc. All rights reserved Did Industrial Policies Work? (cont.) Agreement that successful industrial policies have: –Clear performance criteria such as export targets –Institutional means to monitor and enforce compliance –Low costs in order for nontargeted sectors not to suffer

Copyright ©2014 Pearson Education, Inc. All rights reserved The Connections between Growth and Exports Export growth may not add to GDP growth if it crowds out growth in the output of goods for domestic consumption Export growth causes faster GDP growth Export growth causes the overall capacity of the economy to grow faster –if production was focused on goods for the domestic market

Copyright ©2014 Pearson Education, Inc. All rights reserved The Connections between Growth and Exports (cont.) However, promotion of exports results in greater GDP growth only if: –There is something in the promoted production process or its links to the rest of economy that is absent from domestic-oriented production –Exports speed up the adoption of international best practices

Copyright ©2014 Pearson Education, Inc. All rights reserved The Connections between Growth and Exports (cont.) Other connections between export growth and GDP growth are possible as well Exports may speed up the adoption and mastery of international best practices Exports make possible the purchase of imports

Copyright ©2014 Pearson Education, Inc. All rights reserved The Connections between Growth and Exports (cont.) The ability to import capital and modern technology is seen as the most critical ingredient in policies that successfully close the gap between developing and developed countries. Export promotion can encourage the acquisition of new technologies

Copyright ©2014 Pearson Education, Inc. All rights reserved Is Export Promotion a Good Model for Other Regions? Yes: Even if all developing countries stressed export promotion, they would be unlikely to saturate the industrialized country markets No: Under the Uruguay Round rules of 1994, developing countries must eliminate any subsidies contingent on export performance

Copyright ©2014 Pearson Education, Inc. All rights reserved TABLE 16.6 Free-Trade Areas in Asia and Oceania

Copyright ©2014 Pearson Education, Inc. All rights reserved Is There an Asian Model of Economic Growth? East Asia is remarkable for its growth in per capita income and in labor productivity –Labor productivity depends on additional amount of capital, education, and total factor productivity (TPF)—issues related to new technologies, innovation, and organizational improvements Research conclusion: The bulk of East Asian growth is attributable to increases in capital and education, rather than TFP

Copyright ©2014 Pearson Education, Inc. All rights reserved TABLE 16.7 Sources of Growth, 1960–1994 (Percent)