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Volume Title: NBER Macroeconomics Annual 1994, Volume 9 Volume Author/Editor: Stanley Fischer and Julio J. Rotemberg, eds. Volume Publisher: MIT Press Volume ISBN: 0-262-05172-4 Volume URL: http://www.nber.org/books/fisc94-1 Conference Date: March 11-12, 1994 Publication Date: January 1994 Chapter Title: The East Asian Miracle: Four Lessons for Development Policy Chapter Author: John Page Chapter URL: http://www.nber.org/chapters/c11011 Chapter pages in book: (p. 219 - 282) John Page THE WORLD BANK The Eas t As i an M i r ac l e: F ou r Les s ons f or Devel opment Pol i c y Si nc e t he s t u dy of ec onomi c devel opment began i n ear nes t at t he c l os e of t he Sec ond Wor l d War , ac ademi c s and pol i c y maker s have debat ed t he appr opr i at e r ol e of pu bl i c pol i c y i n devel opi ng ec onomi es . Eas t As i a has a r emar kabl e r ec or d of hi gh and s u s t ai ned ec onomi c gr owt h. F r om 1965 t o 1990 i t s 23 ec onomi es gr ew f as t er t han t hos e of al l ot her r egi ons . M os t of t hi s ac hi evement i s at t r i bu t abl e t o s eemi ngl y mi r ac u l ou s gr owt h i n ju s t ei ght hi gh per f or mi ng As i an ec onomi es (HPAEs )-Japan; t he "f ou r t i ger s ": Hong Kong, t he Repu bl i c of Kor ea, Si ngapor e, and Tai wan; and t he t hr ee newl y i ndu s t r i al i zi ng ec onomi es (NIEs ) of Sou t h- eas t As i a, Indones i a, M al ay s i a, and Thai l and.1 The Eas t As i an ec onomi es pr ovi de a r ange of pol i c y f r amewor ks -ext endi ng f r om Hong Kong's near l y c ompl et e l ai s s ez f ai r e t o t he hi ghl y s el ec t i ve pol i c y r egi mes of Japan and Kor ea. The c oexi s t enc e of ac t i vi s t pu bl i c pol i c i es and r api d Pr es ent ed at t he Nat i onal Bu r eau of Ec onomi c Res ear c h, Ni nt h Conf er enc e on M ac r oec o- nomi c s . The f i ndi ngs , i nt er pr et at i ons , and c onc l u s i ons expr es s ed i n t hi s paper ar e ent i r el y t hos e of t he au t hor . They do not r epr es ent t he vi ews of t he Wor l d Bank, i t s Exec u t i ve Di r ec t or s , or t he c ou nt r i es t hey r epr es ent . 1. Thes e ei ght HPAEs ar e t he s u bjec t of t he Wor l d Bank's r ec ent l y c ompl et ed s t u dy , The Eas t As i an M i r ac l e: Ec onomi c Gr owt h and Pu bl i c Pol i c y , on whi c h t hi s es s ay dr aws ext ens i vel y . The Eas t As i an M i r ac l e r epor t i s t he pr odu c t of a Wor l d Bank r es ear c h t eam l ed by John Page and c ompr i s i ng Nanc y Bi r ds al l , Ed Campos , W. M ax Cor den, Chang-Shi k Ki m, Howar d Pac k, Ri c har d Sabot , Jos eph E. St i gl i t z, and M ar i l ou Uy . Wi l l i am Eas t er l y , Rober t Z. Lawr enc e, Pet er Pet r i , and Lant Pr i t c het t made major c ont r i bu t i ons . Lawr enc e M ac Donal d was t he pr i nc i pal edi t or . Bac kgr ou nd paper s ar e avai l abl e f r om t he Pol i c y Res ear c h Depar t ment , The Wor l d Bank. The f i ndi ngs , i nt er - pr et at i ons and c onc l u s i ons expr es s ed i n t hi s paper ar e ent i r el y t hos e of t he au t hor . They do not r epr es ent t he vi ews of t he Wor l d Bank, i t s Exec u t i ve Di r ec t or s , or t he c ou nt r i es t hey r epr es ent . 220. PAGE gr owt h i n s ome of t he Eas t As i an ec onomi es -es pec i al l y Japan, Kor ea, Si ngapor e, and Tai wan-has r ai s ed c ompl ex and c ont r over s i al qu es - t i ons c onc er ni ng t he r el at i ons hi p bet ween gover nment , t he pr i vat e s ec t or , and t he mar ket . Thi s es s ay l ooks at f ou r pu bl i c pol i c y l es s ons of t he Eas t As i an mi r ac l e. Sec t i on 1 ar gu es t hat t he ei ght HPAEs c an be gr ou ped t oget her and di s t i ngu i s hed f r om ot her l ow- and mi ddl e-i nc ome c ou nt r i es on t he bas i s of t hei r r api d, s u s t ai ned, and s har ed gr owt h. Sec t i on 2 exami nes t he c ont r over s y over t he s ou r c es of gr owt h i n t he HPAEs and pr es ent s evi denc e on t he r el at i ve r ol es of ac c u mu l at i on and t ot al f ac t or pr odu c - t i vi t y (TF P) c hange. Sec t i on 3 di s c u s s es t wo as pec t s of pu bl i c pol i c y i n Eas t As i a t hat c onf or m t o t he c onvent i onal wi s dom c onc er ni ng good devel opment pol i c y -mac r oec onomi c management and br oad-bas ed edu c at i onal pol i c i es . Sec t i on 4 exami nes t wo mor e c ont r over s i al i s s u es -t he s i gni f i c anc e of t he HPAEs ' expor t pu s h s t r at egi es and i ndu s t r i al pol i c i es f or TF P c hange. It c onc l u des t hat expor t or i ent at i on r at her t han s el ec t i ve i nt er vent i on pl ay ed t he domi nant r ol e i n i nc r eas i ng ec onomy - wi de TF P gr owt h r at es . 1. The Nat u r e of t he M i r ac l e-Rapi d Gr owt h wi t h Equ i t y The HPAEs ar e a hi ghl y di ver s e gr ou p of ec onomi es , di f f er i ng i n nat u r al r es ou r c es , popu l at i on, c u l t u r e, and ec onomi c pol i c y . What ar e t he c har ac t er i s t i c s t hat t hes e ei ght ec onomi es s har ed t hat c au s e t hem t o be gr ou ped t oget her and s et apar t f r om ot her devel opi ng ec onomi es ? F i r s t , t hey had r api d, s u s t ai ned gr owt h bet ween 1960 and 1990. Thi s i n i t s el f i s u nu s u al among devel opi ng ec onomi es . F i gu r e 1 s hows t he r el at i ons hi p bet ween r el at i ve i nc ome l evel i n 1960 and per c api t a i nc ome gr owt h f or a s ampl e of 119 c ou nt r i es du r i ng t he per i od 1960-1985. Thi s i s t he s t andar d "c onver genc e pi c t u r e" f i r s t pr es ent ed i n Romer (1987). The f i gu r e al s o pl ot s an es t i mat ed nonl i near r el at i ons hi p bet ween i ni t i al i nc ome and gr owt h.2 Per c api t a i nc ome gr owt h i s es s ent i al y i ndependent of t he l evel of r el at i ve i nc ome i n 1960. The f i t of t he r egr es s i on i s poor and t he s i gni f i c anc e of i ndi vi du al c oef f i c i ent s l ow.3 2. The r egr es s i on l i ne i s t he r es u l t of a r egr es s i on of per c api t a i nc ome gr owt h (i n c ons t ant 1980 i nt er nat i onal pr i c es ) on 1960 i nc ome per c api t a, i nc l u di ng nonl i near t er ms u p t o t he s ec ond power . 3. Dol l ar (1991) f i nds a s i mi l ar pat t er n u s i ng a s ampl e of 114 c ou nt r i es and t he abs ol u t e l evel of per c api t a i nc ome i n 1960. He f i nds a c l ear er pat t er n i n whi c h t he l owes t dec i l es have t he l owes t per c api t a i nc ome gr owt h r at es , t he mi ddl e-i nc ome dec i l es have t he hi ghes t , and t he hi gh-i nc ome c ou nt r i es ar e bet ween. He al s o r epor t s l ow s i gni f i c anc e of hi s r egr es s i on r es u l t s , however . The Eas t As i an M i r ac l e 221 F i gu r e 1 GDP GROWTH RATE, 1960-1985, AND GDP PER CAPITA, 1960 GDP gr owt h r at e (aver age, 1960-85) 0.08 *an HQng Kong 0.06 -Kor ea* S Si ngapor e | 0.0 * r - *Japan 0.04 Thai l an 0.04 IndonI- l y s i a 0Indon* [3 ? 0.022-, -- * . n o 0 i -0.02 Cl D Hi gh-i nc omc e ec onomi es Ot her devekJpi ng ec onomnu es -0.04 1 0 0.2 0.4 0.6 0.8 1 1.2 Rel at i ve per c api t a GDP, 1960 (per c ent age of U.S. GDP per c api t a, 1960) Not e: Thi s f i gu r e pl ot s t hi s r egr es s i on equ at i on: GDPG = 0.013 + 0.062RGDP60 - 0.061RGDP602. N - 119; R2 = 0.036. (0.004) (0.027) (0.033) Sou r c e: Su mmer s and Hes t on (1991); Bar r o (1989); Wor l d Bank dat a. The ei ght HPAEs ar e al l pos i t i ve ou t l i er s i n t he i nc ome-gr owt h di s t r i bu t i on. Whi l e M al ay s i a, Indones i a, and Thai l and ar e c l os er t o t hei r pr edi c t ed val u es , t he r emai ni ng f i ve ec onomi es , Tai wan, Kor ea, Japan, Si ngapor e, and Hong Kong, ar e al l s i gni f i c ant l y above t hei r pr edi c t ed gr os s domes t i c pr odu c t (GDP) per c api t al gr owt h r at es on t he bas i s of r el at i ve i nc ome l evel .4 Al l of t he HPAEs wer e c at c hi ng u p t o t he mor e devel oped c ou nt r i es . Rec ent wor k on gr owt h r at e per s i s t enc e s u gges t s t hat gr owt h r at es f or i ndi vi du al ec onomi es ar e hi ghl y u ns t abl e over t i me (Eas t er l y et al ., 1993). The HPAEs , however , appear t o be an exc ept i on. Dependi ng on t he t i me per i od s el ec t ed and t he def i ni t i on of per s i s t ent s u c c es s (i n t er ms of t he f r ac t i on of t he di s t r i bu t i on u s ed t o def i ne hi gh gr owt h), t he f ou r t i ger s pl u s Japan c ons i s t ent l y r ank wi t h t he handf u l of per s i s t ent l y r api dl y gr owi ng ec onomi es . Indeed, Eas t er l y et al . c onc l u de t hat "t he wi des pr ead per c ept i on of s t r ong c ou nt r y ef f ec t s i n gr owt h i s s t r ongl y i nf l u enc ed by t he Gang of F ou r ." 4. Addi t i on of a du mmy var i abl e (HPAE = 1) t o t he es t i mat ed equ at i on appear i ng bel ow F i gu r e 1 i nc r eas es t he R2 t o .242 and gr eat l y i mpr oves t he pr ec i s i on of t he par amet er es t i mat es . The t val u e on t he du mmy var i abl e (whi c h i s pos i t i ve) i s 4.00. 222 PAGE F i gu r e 2 INCOM E INEQUALITY AND GROWTH OF GDP, 1965-1989 GDP Gr owt h per Capi t a (1965-89) An Io 0.06 0.04 0.02V 0 Kor ea* Ti wan* ongKor ** Si ngapor e * Bo s wana * Gabon Japan * Indones i a * M au r i t i u s i Tni s i a + ** Egy pt *M al ay s i a Thai l and *It al y Is r *l Au s t r i a - Is r ae1 - Bei m^pa a *M or oc c o . .. ni ,i ndom -r t LaSr i l a* Ir an ?C bi Pakl s t an' i bi ppi aes * Kei ny a M al awi *Indi a *Venezu el a angl ades ho N A *Pei ^^p Boi vi c ot edIv pc ot edIvoke r azi l I Su an ? Ghana *Za*bi a -0.02 -0.04 0 10 20 30 Inc ome Inequ al i t y 40 Not e: Inc ome i nequ al i t y i s meas u r ed by t he r at i o of t he i nc ome s har es of t he r i c hes t 20% and t he poor es t 20% of t he popu l at i on. Sou r c e: Wor l d Bank dat a. Wher e t he HPAEs ar e u ni qu e i n c ombi ni ng r api d, s u s t ai ned gr owt h wi t h hi ghl y equ al i nc ome di s t r i bu t i ons . The pos i t i ve as s oc i at i on be- t ween gr owt h and l ow i nequ al i t y i n t he HPAEs , and t he c ont r as t wi t h ot her ec onomi es , i s i l l u s t r at ed i n F i gu r e 2. F or t y ec onomi es ar e r anked by t he r at i o of t he i nc ome s har e of t he r i c hes t f i f t h of t he popu l at i on t o t he i nc ome s har e of t he poor es t f i f t h and per c api t al r eal GDP gr owt h du r i ng 1965-1989.5 The nor t hwes t c or ner of F i gu r e 2 i dent i f i es ec onomi es wi t h hi gh gr owt h (GDP per c api t a gr eat er t han 4.0%) and l ow r el at i ve i nequ al i t y (r at i o of t he i nc ome s har e of t he t op qu i nt i l e t o t hat of t he bot t om 5. Bec au s e t he t i mi ng and f r equ enc y of obs er vat i ons on i nc ome di s t r i bu t i on var y among c ou nt r i es i n t he s ampl e, t he r at i o of t he t op t o bot t om qu i nt i l e i s t aken at t he dat e c l os es t t o t he mi dpoi nt . l l t i XI -r M -.. . ...... . I I I I I 4 1 1 1 I I I I I I | I I r I I The Eas t As i an M i r ac l e ? 223 qu i nt i l e l es s t han 10). Al l of t he hi gh-gr owt h, l ow-i nequ al i t y ec onomi es ar e i n Eas t As i a. Seven ar e HPAEs ; onl y M al ay s i a, whi c h has an i ndex of i nequ al i t y above 15, i s exc l u ded. Wi t hi n Eas t As i a c ompar i s ons of gr owt h r at es and Gi ni c oef f i c i ent s by dec ade i ndi c at e t hat t he di s t r i bu - t i on of i nc ome was s u bs t ant i al l y mor e equ al i n t he f as t es t -gr owi ng HPAEs . M or eover , i mpr ovement s i n i nc ome di s t r i bu t i on gener al l y c oi n- c i ded wi t h per i ods of r api d gr owt h (Bi r ds al l and Sabot , 1993).6 2. F u ndament al i s t s , M y s t i c s , and t he M i r ac l e To obs er ve a mi r ac l e i s not nec es s ar i l y t o u nder s t and i t . As wi t h t hos e at t empt i ng t o expl ai n r el i gi ou s phenomena, ec onomi s t s anal y zi ng t he "mi r ac l e" of Eas t As i a's gr owt h t end t o f al l i nt o t wo c amps -f u nda- ment al i s t s and my s t i c s .7 Gr owt h f u ndament al i s t s s t r es s t he domi nant r ol e of f ac t or ac c u mu l at i on i n expl ai ni ng t he HPAEs ' hi gh-i nc ome gr owt h r at es . They f r equ ent l y qu al i f y t hei r expl anat i ons by not i ng t hat ef f i c i ent al l oc at i on of r es ou r c es , onc e ac c u mu l at ed, mu s t al s o have been a par t of t he Eas t As i an s u c c es s s t or y -s i nc e s u c h ec onomi c l aggar ds as t he c ou nt r i es of t he f or mer Sovi et Uni on and Eas t er n Eu r ope have ac c u mu l at ed r es ou r c es at equ al l y i mpr es s i ve r at es wi t h r adi c al l y di f f er - ent r es u l t s .8 M y s t i c s , on t he ot her hand, whi l e ac knowl edgi ng t he i mpor t anc e of ac c u mu l at i on, t end t o pl ac e gr eat er s t r es s on t he r ol e of t he ac qu i s i t i on and mas t er y of t ec hnol ogy . The domi nant vi ew-i f t her e i s one-i s t hat t he Eas t As i an ec onomi es , par t i c u l ar l y Japan, Kor ea, and Tai wan, 6. Two qu al i f i c at i ons s hou l d be not ed her e. F i r s t , s ome s t u di es of Kor ea have not ed i nc r eas i ng i nequ al i t y i n r ec ent y ear s ; however , mos t of t hi s i s du e t o r i s i ng val u e of as s et s , par t i c u l ar l y l and, r at her t han i nc r eas ed var i at i on i n i nc omes . Sec ond, r edu c t i ons i n i nequ al i t y i n Thai l and have been r el at i vel y mi nor c ompar ed t o t hos e i n t he ot her HPAEs , al t hou gh Thai l and's per f or manc e i s s t i l l bet t er t han t hat of mos t devel opi ng ec onomi es . 7. Rec ent l y a t hi r d gr ou p-pr edes t i nar i ans -has begu n t o emer ge, pl ac i ng gr eat s t r es s on t he r ol e of i ni t i al c ondi t i ons i n 1960, es pec i al l y edu c at i on and i nc ome equ al i t y , i n expl ai ni ng Eas t As i a's per s i s t ent l y s u per i or gr owt h per f or manc e i n c r os s -c ou nt r y r e- gr es s i ons . Rodr i k (1993) pr ovi des a s u r vey of t he r el evant l i t er at u r e and s ome c r os s - c ou nt r y r egr es s i ons . We do not c ons i der t hei r ar gu ment s f u r t her her e s i nc e, i f pr edes t i - nar i an expl anat i ons ar e r el evant , t her e ar e f ew l es s ons f or devel opment pol i c y . Thi s i s per haps why mos t pr edes t i nar i an au t hor s u l t i mat el y r eveal t hems el ves t o be f u nda- ment al i s t s or my s t i c s i n t hei r pol i c y i nt er pr et at i ons of t he mi r ac l e (s ee, e.g., Rodr i k, 1993). 8. One of t he mos t pr omi nent f u ndament al i s t t r ac t ar i ans , Al wy n You ng (1993), has r ec ent l y pr ovi ded a s u c c i nc t s t at ement of t hei r pos i t i on. Al t hou gh he s u bt i t l es hi s es s ay a "c ont r ar i an vi ew," i t i s pr obabl y t he domi nant vi ew among t he Angl o-Amer i c an ec onomi c s es t abl i s hment . 224 PAGE have been u nu s u al l y s u c c es s f u l at c at c hi ng u p t ec hnol ogi c al l y t o t he advanc ed ec onomi es .9 Empi r i c al s u ppor t f or t he my s t i c al pos i t i on i s addu c ed f r om t he hi gh r at es of t ot al f ac t or pr odu c t i vi t y gr owt h es t i - mat ed f or i ndu s t r y i n s ever al of t he HPAEs , not abl e Japan, Kor ea, and Tai wan. The f u ndament al i s t -my s t i c di s t i nc t i on i s at t he hear t t he debat e on t he pu bl i c pol i c y or i gi ns of Eas t As i a's s u c c es s . F u ndament al i s t s have s t r es s ed Eas t As i a's s u c c es s i n get t i ng t he bas i c s r i ght . They t end t o at t r i bu t e s u c c es s t o pol i c i es t hat i nc r eas ed phy s i c al and hu man c api t al per wor ker and t hat pr ovi ded f or ef f i c i ent al l oc at i on. They ar gu e t hat t he s u c c es s f u l As i an ec onomi es have been bet t er t han ot her s at pr ovi d- i ng a s t abl e mac r oec onomi c envi r onment and a r el i abl e l egal f r amewor k t o pr omot e domes t i c and i nt er nat i onal c ompet i t i on. They al s o s t r es s t hat t he or i ent at i on of t he HPAEs t owar d i nt er nat i onal t r ade and t he abs enc e of pr i c e c ont r ol s and ot her di s t or t i onar y pol i c i es have l ed t o l ow r el at i ve pr i c e di s t or t i ons . Inves t ment s i n peopl e-edu c at i on and heal t h-ar e i mpor t ant r ol es f or gover nment i n t he f u ndament al i s t s t or y (Wor l d Bank, 1991). In c ont r as t t o t he f u ndament al i s t vi ew, whi c h ac knowl edges r el a- t i vel y f ew c as es of mar ket f ai l u r e, my s t i c s c ont end t hat mar ket s c ons i s - t ent l y f ai l t o gu i de i nves t ment t o i ndu s t r i es t hat gener at e t he hi ghes t gr owt h. In Eas t As i a, t he my s t i c s ar gu e, gover nment s r emedi ed t hi s by del i ber at el y "get t i ng t he pr i c es wr ong" t o pr omot e i ndu s t r i es t hat wou l d not ot her wi s e have t hr i ved (Ams den, 1989). The my s t i c s l ay s t r es s on t he dy nami c gai ns of ac t i vi s t gover nment pol i c i es t o al t er i ndu s t r i al s t r u c t u r e and pr omot e t ec hnol ogi c al l ear ni ng, s omet i mes at t he expens e of s t at i c al l oc at i ve ef f i c i enc y . M or eover , whi l e f u ndament al - i s t s wou l d expl ai n gr owt h wi t h a s t andar d s et of r el at i vel y c ons t ant pol i c i es , my s t i c s not e t hat t he pol i c y mi xes u s ed by Eas t As i an ec onomi es wer e di ver s e and f l exi bl e. They ar gu e t hat Eas t As i an gover nment s "gover ned t he mar ket " i n c r i t i c al way s (Wade, 1990). Bu t t he c r u c i al qu es t i on r emai ns : Have i nt er vent i ons , per s e, ac c el er at ed gr owt h? The my s t i c s have pr ovi ded val u abl e i ns i ght s i nt o t he hi s t or y , r ol e, and ext ent of Eas t As i an i nt er vent i ons , demons t r at i ng c onvi nc i ngl y t he s c ope of gover nment ac t i ons t o pr omot e i ndu s t r i al devel opment i n Japan, Kor ea, and Tai wan. They have s u c c es s f u l l y s hown t hat Eas t As i a does not whol l y c onf or m t o t he f u ndament al i s t model . Indu s t r i al pol i c y and i nt er vent i ons i n f i nanc i al mar ket s ar e not eas i l y r ec onc i l ed wi t h 9. Ams den (1989, 1993) and Wade (1990) pu t f or war d t hi s vi ew. Int er es t i ngl y , as You ng (1993) poi nt s ou t , s o do Bal as s a (1988) and Kr u eger (1990). They di f f er , of c ou r s e, on t he pol i c y or i gi ns of Eas t As i a's pr es u med s u c c es s at t ec hnol ogi c al c at c hi ng u p. The Eas t As i an M i r ac l e ? 225 s t at i c al l oc at i ve ef f i c i enc y . Pol i c i es i n s ome ec onomi es ar e mu c h mor e i n ac c or d wi t h model s of s t at e-l ed devel opment . 2.1 SOURCES OF THE M IRACLE-ACCUM ULATION AND PRODUCTIVITY CHANGE Empi r i c al l y , t he f u ndament al i s t -my s t i c debat e c an be vi ewed i n t er ms of t he r el at i ve r ol es of f ac t or ac c u mu l at i on and pr odu c t i vi t y gr owt h i n expl ai ni ng t he HPAEs ou t pu t gr owt h.?0 How u nu s u al ar e t he HPAEs i n t er ms of t hei r r at es of f ac t or ac c u mu l at i on? Ar e t he Eas t As i an ec onomi es at y pi c al i n t er ms of t hei r r at es of pr odu c t i vi t y c hange? 2.1.1 Eas t As i a's Rec or d of Ac c u mu l at i on The f u ndament al i s t vi ew of t he s u c c es s of t he HPAEs i s t hat t hei r i nves t ment l evel s i n phy s i c al and hu man c api t al s u bs t ant i al l y exc eed t hos e f or ot her c ou nt r i es at s i mi l ar l evel s of devel opment , r es u l t i ng i n mor e r api d gr owt h of per c api t a i nc ome. F i gu r e 3 s hows t he r el at i ons hi p bet ween i nc ome l evel i n 1960 and t he aver age i nves t ment r at e f or 1960-1985. The es t i mat ed nonl i n- ear r egr es s i on r el at i ng i ni t i al i nc ome l evel t o i nves t ment i s al s o s hown. Ther e i s s u bs t ant i al l y mor e r egu l ar i t y i n t he r el at i ons hi p bet ween i n- ves t ment s har e and r el at i ve i nc ome, t han i n t he r el at i ons hi p bet ween gr owt h and r el at i ve i nc ome." The i nves t ment r at e f or al l c ou nt r i es i nc r eas es wi t h i nc ome u p t o abou t 70% of U.S. GDP i n 1960 and t hen dec l i nes . The HPAEs c onf or m mu c h mor e s t r ongl y t o t he c r os s -c ou nt r y pat t er n of i nves t ment r at es t han t o t he pat t er n of gr owt h r at es . Thai l and and Hong Kong l i e c l os e t o t hei r pr edi c t ed val u es on t he bas i s of t he c r os s -c ou nt r y r egr es s i on. Japan, Kor ea, and M al ay s i a ar e t he ext r eme ou t l i er s among HPAEs , bu t t hey ar e not ext r eme ou t l i er s i n t he di s t r i bu - t i on.'2 Hi gh i nves t ment r at es ar e par t of t he As i an s u c c es s s t or y , bu t t hey c annot f u l l y expl ai n t he ext ent t o whi c h per c api t a i nc ome gr owt h i n t he HPAEs di ver ges f r om t he t y pi c al pat t er n. F i gu r e 4(ab) s u mmar i zes t he pat t er n of var i at i on of t wo meas u r es of hu man c api t al wi t h i ni t i al i nc ome. F i gu r e 4(a) pl ot s t he pr i mar y s c hool enr ol l ment r at e i n 1960 agai ns t r el at i ve per c api t a i nc ome, whi l e 10. Whi l e i t i s br oadl y c or r ec t t o as s oc i at e f u ndament al i s m wi t h pol i c i es t o pr omot e ac c u mu l at i on and ef f i c i ent , s t at i c al l oc at i on, s ome my s t i c s of t he i ndu s t r i al pol i c y s c hool wou l d poi nt t o s u c h gover nment i ni t i at i ves as s oc i al i zat i on and bou ndi ng of pr i vat e r i s ks i n Kor ea and Japan as i mpor t ant pol i c y t ool s t hat r ai s ed ac c u mu l at i on. 11. The f i t of t he r egr es s i on i s mar kedl y bet t er , as i s t he var i anc e of t he es t i mat ed c oef f i c i ent s . 12. Addi t i on of a du mmy var i abl e (HPAE = 1) t o t he es t i mat i ng equ at i on appear i ng bel ow F i gu r e 4 does not i nc r eas e t he expl anat or y power of t he r egr es s i on. The t s t at i s t i c on t he du mmy var i abl e i s 1.00. 226- PAGE F i gu r e 4(b) pr es ent s t he s c at t er of Bar r o and Lee's (1993) aver age meas u r e of edu c at i onal at t ai nment over t he per i od 1960-1985 agai ns t i ni t i al i nc ome. Bot h s c at t er s c onf i r m t hat t he HPAEs wer e r el at i vel y wel l endowed wi t h hu man c api t al bu t agai n c onf or m mor e c l os el y t o t he c r os s -c ou nt r y pat t er n bas ed on r el at i ve i nc ome t han i s t he c as e f or i nc ome gr owt h. 2.1.2 Pr odu c t i vi t y Change TF P i s es t i mat ed i n a s i mpl e neoc l as s i c al f r amewor k by s u bt r ac t i ng f r om ou t pu t gr owt h t he por t i on of gr owt h du e t o c api t al ac c u mu l at i on, t o hu man c api t al ac c u mu l at i on, and t o l abor f or c e gr owt h. As s u me t hat ever y ec onomy has ac c es s t o an i nt er nat i onal c r os s -ec onomy pr odu c t i on f u nc t i on of t he f or m: Q = AF (K, E, L), (1) wher e A i s t ot al f ac t or pr odu c t i vi t y , K i s a meas u r e of c api t al s er vi c es , E i s a meas u r e of hu man c api t al endowment s , and L i s a meas u r e of l abor s er vi c es i n nat u r al u ni t s . TF P c hange c an be t hen f ou nd as t he r es i du al of gr owt h of ou t pu t per wor ker af t er dedu c t i ng t he c ont r i bu t i ons of hu man and phy s i c al F i gu r e 3 AVERAGE INVESTM ENT RATE AS A PERCENTAGE OF GDP, 1960-1985, AND GDP PER CAPITAL LEVEL, 1960 Aver age i nves t ment r at e (per c ent age of GDP, 1960-85) 40 * . *ay s i a *Japan 30 - r .ay s g-i a- l --*. t ; E * Si ngapor e D a[0 9 Kor ea ^e * * ? E * *' * . Tai wan* * ? ? 0 20 - * .* .o_ g Kong 20...... ........... - Oe e - *e 0 10 *.: : '. ^ * *D HPA-s 10 * Hi gh-i nc on e ec onomi es 0* * Ot her devei opi ng ec onomi es 0 i 0 0.2 0.4 0.6 0.8 1 1.2 Rel at i ve per c api t a GDP (per c ent age of U.S. GDP per c api t a, 1960) Not e: Regr es s i on equ at i on: 16085 = 10.125 + 59.120RGDP60 - 51.881RGDP602. N = 119; R2 = 0.295. (1.383) (10.344) (12.593) Sou r c es : Su mmer s and Hes t on (1991); Bar r o (1989); Wor l d Bank dat a. The Eas t As i an M i r ac l e 227 F i gu r e 4a INITIAL INCOM E LEVEL AND PRIM ARY ENROLLM ENT RATE PRIM 6O 1.6 1.4- t l 1.2 - t Si n l ve . r - Kor ea 0.8 Thai i l and*~ "" ,y Hong Kong Inc ons i s a / * . 0.6- SI I 0.2 - mt ? * * 0 t t t ! i I I ! I i 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 PER CAPITA GDP 1960 (% USA GDP/CAP 1960) F i gu r e 4b INITIAL INCOM E LEVEL AND AVERAGE EDUCATION STOCK AV. EDUCATION (60-85) 12 0 0 0 00 10- 0 1*Japan 0 0. .0 8 - a / 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 PER CAPITA GDP 1960 (% USA GDP/CAP 1960) 1 1.1 228 PAGE c api t al ac c u mu l at i on: a = (q - 1) - s K(k - ) - s E(e- 1). (2) Under as s u mpt i ons of c ompet i t i ve f ac t or mar ket s and c ons t ant r et u r ns t o s c al e, SK and SE ar e equ al t o t he i nc ome s har es of f ac t or s . Thu s , mos t empi r i c al appl i c at i ons of Equ at i on (2) es t i mat e t he ou t pu t el as t i c i t y c oef f i c i ent s wi t h i nc ome s har es .13 Bec au s e i nc ome s har e dat a ar e not avai l abl e f or mos t c ou nt r i es i n ou r s ampl e, we i ns t ead es t i mat e t he ou t pu t el as t i c i t i es di r ec t l y u s i ng a s i mpl e, c r os s -ec onomy pr odu c t i on f u nc t i on. We r egr es s annu al l og ou t pu t gr owt h on l og c api t al gr owt h, l og hu man c api t al gr owt h, and l og l abor gr owt h bet ween 1960 and 1990, c ons t r ai ni ng t hei r c oef f i c i ent s t o s u m t o u ni t y (i .e., s pec i f y i ng t he pr odu c t i on f u nc t i on t o be Cobb-Dou gl as ). We al s o i nc l u de ec onomy -s pec i f i c du mmy var i abl es t o es t i mat e i ndi vi du al r at es of TF P c hange f or eac h of t he s ampl e's ec onomi es . We es t i mat e TF P c hange f or 87 hi gh- t o l ow-i nc ome ec onomi es . The dat a s et i nc l u des new c ons t ant pr i c e c api t al s t oc k dat a (Nehr u and Dhar es hwar , 1993). M eas u r es of hu man c api t al ar e i nc or por at ed i n t he s pec i f i c at i on u s i ng Bar r o and Lee's (1993) meas u r e of edu c at i onal at t ai n- ment . Tabl e 1 r epor t s t he pr odu c t i on f u nc t i on par amet er s and t he es t i mat ed TF P gr owt h r at es . The l ow el as t i c i t y of ou t pu t wi t h r es pec t t o c api t al f r om t he c r os s - c ou nt r y s ampl e i s s t r i ki ng bu t not al t oget her s u r pr i s i ng. Ther e i s a s u bs et of devel opi ng ec onomi es i n ou r dat a (13 i n nu mber ) t hat have pos i t i ve net i nves t ment and hu man c api t al gr owt h per wor ker , bu t negat i ve ou t pu t per wor ker gr owt h r at es . In ef f ec t , t he mar gi nal pr od- u c t of bot h phy s i c al and hu man c api t al was negat i ve i n t hes e ec onomi es , an i ndi c at i on of s ever e al l oc at i on i nef f i c i enc y . Empi r i c al l y , t hi s i s r e- f l ec t ed i n a l ower el as t i c i t y of ou t pu t of bot h phy s i c al and hu man c api t al i n t he pr odu c t i on f u nc t i on bas ed on t he whol e s ampl e t han when onl y ec onomi es wi t h nonnegat i ve gr owt h of ou t pu t per wor ker ar e i nc l u ded. We have r ees t i mat ed t he pr odu c t i on f u nc t i on bas ed onl y on hi gh- i nc ome ec onomy i npu t -ou t pu t r el at i ons hi ps . Thi s i s pr edi c at ed on t he as s u mpt i on t hat al l oc at i on ef f i c i enc y i n t he hi gh-i nc ome ec onomi es i s gr eat er t han i n t he whol e s ampl e and, henc e, t hat TF P gr owt h r at es es t i mat ed on t he bas i s of t he pr odu c t i on f u nc t i on par amet er s wi l l c ont ai n l os s "noi s e" du e t o al l oc at i on mi s t akes . Thes e r es u l t s and t he es t i mat ed TF P gr owt h r at es der i ved f r om s t andar d gr owt h ac c ou nt i ng 13. Thi s l i t er at u r e i s br i ef l y s u r vey ed i n Ni s hi mi zu and Page (1987). The Eas t As i an M i r ac l e ? 229 met hods ar e di s pl ay ed i n Tabl e 1. The el as t i c i t y of ou t pu t wi t h r es pec t t o c api t al i n t he hi gh-i nc ome ec onomy pr odu c t i on f u nc t i on r i s es t o mor e c onvent i onal l evel s . TF P es t i mat es , par t i c u l ar l y f or t hos e ec onomi es wi t hi n r api dl y gr owi ng c api t al s t oc ks , ar e c or r es pondi ngl y r edu c ed. F i gu r e 5 c ompar es t he TF P gr owt h es t i mat es f r om t he t wo pr odu c t i on f u nc t i ons . Thr ee i nf er enc es ar e s u ppor t ed by bot h s et s of es t i mat es : 1. The r ange of TF P gr owt h r at es f or hi gh-i nc ome c ou nt r i es i s qu i t e c ompac t , es pec i al l y i n c ompar i s on wi t h t he l ow- and mi ddl e-i nc ome c ou nt r i es . 2. Near l y one t hi r d (32%) of t he l ow- and mi ddl e-i nc ome c ou nt r i es i n t he s ampl e had negat i ve r at es of TF P gr owt h f or t he per i od 1960-1989, r egar dl es s of t he par amet er es t i mat es u s ed. 3. Ther e i s ver y l i t t l e pr odu c t i vi t y bas ed "c at c h-u p" exhi bi t ed by t he l ow- and mi ddl e-i nc ome c ou nt r i es . Tabl e 1 ELASTICITY OF OUTPUT WITH RESPECT TO CAPITAL (SK), LABOR (SL), AND HUM AN CAPITAL (SH): F ULL SAM PLE AND HIGH-INCOM E ECONOM IES Obs er vat i ons SK (t -s t at ) SL (t -s t at ) SH (t -s t at ) F u l l s ampl e 2,093 0.178 10.895 0.669 6.411 0.154 1.49 Hi gh-i nc ome 460 0.399 10.237 0.332 1.679 0.269 1.476 ec onomi es RESULTING TOTAL F ACTOR PRODUCTIVITY GROWTH ESTIM ATES F OR THE HPAES (1960-1989) TF P gr owt h (f u l l -s ampl e TF P gr owt h (hi gh- par amet er i nc ome onl y , Ec onomy es t i mat es par amet er es t i mat es ) Hong Kong 3.6470 2.4113 Indones i a 1.2543 - 0.7953 Japan 3.4776 1.4274 Kor ea, Rep. of 3.1021 0.2355 M al ay s i a 1.0755 -1.3369 Si ngapor e 1.1911 -3.0112 Tai wan 3.7604 1.2829 Thai l and 2.4960 0.5466 Lat i n Amer i c a 0.1274 -0.9819 Af r i c a -0.9978 -3.0140 Sou r c e: Wor l d Bank dat a. 230- PAGE F i gu r e 5 COM PARISON OF TOTAL F ACTOR PRODUCTIVITY ESTIM ATES 4 TF P gr owt h (hi gh-i nc ome s ampl e par amet er s ), 1960-89, per c ent 2 0 -2 -4 -6 -4 -3 -2 -1 0 1 2 3 4 TF P gr owt h (f u l l s ampl e par amet er s ), 1980-89, per c ent Thes e ar e not pr omi s i ng r es u l t s f or t he devel opi ng wor l d. Des pi t e a s u bs t ant i al l i t er at u r e on t he pot ent i al f or devel opi ng c ou nt r i es t o ac hi eve r api d gr owt h t hr ou gh t he adopt i on of known, "bes t pr ac t i c e" t ec hnol o- gi es , ver y f ew c ou nt r i es appear t o have r eal i zed t hes e pot ent i al gai ns .14 Cat c h-u p, wher e i t i s t aki ng pl ac e, i s du e pr i mar i l y t o hi gher r at es of f ac t or ac c u mu l at i on. Thr ee of t he HPAEs ar e i n t he u pper dec i l e of t he TF P di s t r i bu t i on i n bot h s et s of es t i mat es -Hong Kong, Tai wan, and Japan. Two ot her s - Thai l and and Kor ea-ar e i n t he u pper dec i l e of t he di s t r i bu t i on bas ed on t he f u l l s ampl e pr odu c t i on f u nc t i on par amet er s , bu t t hey ar e u nr e- mar kabl e on t he bas i s of t he hi gh-i nc ome c ou nt r y pr odu c t i on f u nc t i on par amet er s .l 5 Thr ee-Indones i a, M al ay s i a, and Si ngapor e-s hi f t f r om 14. F or a c onc i s e r evi ew of t he ar gu ment s f or t ec hnol ogi c al l y bas ed c at c h-u p, s ee Pac k (1993). 15. When we c ompar e ou r es t i mat es of TF P gr owt h wi t h t wo ot her i ndependent l y der i ved es t i mat es f or a l ar ge s ampl e of c ou nt r i es (El i as , 1991; F i s c her , 1993), t he pat t er n of pr odu c t i vi t y gr owt h r at es i n F i gu r e 5 i s r emar kabl y r obu s t t o t he s pec i f i c a- t i on of t he gr owt h ac c ou nt i ng equ at i on and t o t he c api t al s t oc k s er i es u s ed. The IM F The Eas t As i an M i r ac l e * 231 modes t , bu t pos i t i ve, TF P gr owt h t o negat i ve TF P gr owt h when t he pr odu c t i on f u nc t i on par amet er s ar e c hanged f r om t hos e es t i mat ed f r om t he whol e s ampl e t o t hos e der i ved f r om t he hi gh-i nc ome s ampl e. Pr es u mabl y i n t he hi gh-i nc ome c ou nt r i es , mos t of t he es t i mat ed TF P gr owt h i s du e t o t ec hni c al pr ogr es s -advanc es i n bes t pr ac t i c e-whi c h expl ai ns t he r el at i vel y c ompac t di s t r i bu t i on of TF P gr owt h r at es be- t ween 0.5% and 1.5% per y ear , and t he t endenc y among t he hi gh- i nc ome c ou nt r i es f or TF P gr owt h t o dec l i ne wi t h r i s i ng i nc ome (Wor l d Bank, 1993). In l ow- and mi ddl e-i nc ome c ou nt r i es , however , c hanges i n TF P mu s t r ef l ec t mor e t han t ec hni c al pr ogr es s , ot her wi s e we wou l d never f i nd negat i ve TF P gr owt h r at es . We have al r eady ar gu ed t hat TF P gr owt h f or l ow- and mi ddl e- i nc ome ec onomi es c ont ai ns an el ement of c at c hi ng u p t o (or f al l i ng behi nd) bes t pr ac t i c e t ec hnol ogi es . Bu t TF P gr owt h r at es i n a one-s ec - t or , c r os s -c ou nt r y es t i mat e wi l l al s o c ont ai n an el ement of al l oc at i ve ef f i c i enc y ; ec onomi es t hat al l oc at e phy s i c al and hu man c api t al t o l ow y i el di ng i nves t ment s wi l l have l ow or negat i ve es t i mat ed TF P gr owt h r at es . The c l ear es t demons t r at i ons of t hi s ar e t he 13 ec onomi es wi t h negat i ve ou t pu t gr owt h and pos i t i ve ac c u mu l at i on. In an at t empt t o l ook at pat t er ns of t ec hnol ogi c al l y bas ed c at c h-u p, we as s u me t hat t he el as t i c i t i es of ou t pu t t hat s hou l d be u s ed t o c al c u l at e TF P c hange ar e t hos e t hat appl y t o t he hi gh-i nc ome ec onomi es onl y . We s u bt r ac t t he aver age r at e of TF P c hange f or t he hi gh-i nc ome ec onomi es , whi c h we as s oc i at e wi t h movement s i n i nt er nat i onal bes t pr ac t i c e, f r om TF P c hange t o get an es t i mat e of t ec hni c al ef f i c i enc y c hange. Us i ng t hi s met hod Hong Kong (2.0%), Japan (1.0%), Tai wan (0.8%), and Thai l and (0.1%) ar e t he onl y HPAEs c at c hi ng u p t o i nt er na- t i onal bes t pr ac t i c e. Kor ea (-0.2%) was es s ent i al l y ju s t keepi ng pac e wi t h t ec hnol ogi c al pr ogr es s i n t he hi gh-i nc ome ec onomi es , whi l e t he i nves t ment dr i ven ec onomi es of Indones i a, M al ay s i a, and Si ngapor e wer e f al l i ng behi nd i nt er nat i onal bes t pr ac t i c e at r at es of 1.2% (In- dones i a) t o 3.5% (Si ngapor e) per y ear (Tabl e 2).16 (1993) Wor l d Ec onomi c Ou t l ook, c ont r as t i ng As i a wi t h ot her devel opi ng ec onomi es , r eac hes s i mi l ar c onc l u s i ons , bot h wi t h r es pec t t o t he es t i mat ed magni t u des of TF P c hange and t he r el at i ve c ont r i bu t i on of TF P c hange t o ou t pu t gr owt h. Thomas and Wang (1993) and Edwar ds (1992) al s o r eac h br oadl y s i mi l ar r es u l t s c onc er ni ng t he pat t er n of pr odu c t i vi t y c hange i n t he HPAEs c ompar ed wi t h ot her ec onomi es . 16. F r i edber g, Khami s , and Page (1993), u s i ng a c r os s -c ou nt r y s t oc has t i c f r ont i er pr odu c - t i on f u nc t i on t o es t i mat e movement s i n i nt er nat i onal bes t pr ac t i c e, r eac h s i mi l ar c onc l u s i ons wi t h r es pec t t o t he pat t er n of t ec hni c al ef f i c i enc y c hange among t he HPAEs . 232 PAGE Tabl e 2 TECHNICAL EF F ICIENCY CHANGE ESTIM ATES F OR THE HPAES Tec hni c al ef f i c i enc y c hange, Ec onomy / Regi on 1960-1989 Hong Kong 1.9714 Indones i a -1.2352 Japan 0.9876 Kor ea, Rep. of - 0.2044 M al ay s i a -1.7767 Si ngapor e - 3.4510 Tai wan 0.8431 Thai l and 0.1067 Lat i n Amer i c a -1.4217 Af r i c a - 3.4539 Sou r c e: Wor l d Bank dat a. When t he HPAEs ar e c ont r as t ed wi t h ot her devel opi ng r egi ons , however , t hei r abi l i t y t o keep pac e wi t h i nt er nat i onal bes t pr ac t i c e s eems s omewhat mor e r emar kabl e. Us i ng t he s ame met hod, we have es t i mat ed t he aver age r at e of t ec hni c al ef f i c i enc y c hange f or Lat i n Amer i c a (-1.4%) and Af r i c a (-3.5%). Agai ns t t hes e benc hmar ks , al l of t he HPAEs exc ept Si ngapor e s t and u p wel l i n t er ms of t hei r abi l i t y t o keep pac e wi t h t he wor l d's s hi f t i ng t ec hnol ogi c al f r ont i er .17 What , t hen, ar e we t o make of t he f u ndament al i s t -my s t i c debat e? F i gu r e 6 s u gges t s t hat eac h c amp c an c l ai m par t i al vi c t or y . The di agr am s hows t he r el at i ve c ont r i bu t i on t o ou t pu t gr owt h of f ac t or ac c u mu l at i on (s har e-wei ght ed t ot al i npu t gr owt h) and TF P gr owt h. When t he TF P es t i mat es bas ed on t he hi gh-i nc ome c ou nt r y s ampl e ar e u s ed, t he di c hot omy bet ween i nves t ment dr i ven and pr odu c t i vi t y dr i ven ec onomi es i s dr amat i c .18 Rapi d gr owt h i n Indones i a, M al ay s i a, 17. Al wy n You ng (1992) i n a wel l -known paper f i nds s i mi l ar l y di s appoi nt i ng r es u l t s wi t h r es pec t t o Si ngapor e's TF P per f or manc e. Some c au t i on i s needed i n i nt er pr et i ng t hes e r es u l t s , however . M u c h of Si ngapor e's i nves t ment bet ween 1960 and 1990 was i n hou s i ng and s oc i al i nf r as t r u c t u r e, ou t pu t of whi c h ar e not or i ou s l y di f f i c u l t t o mea- s u r e. It i s pos s i bl e t hat we have u nder val u ed t he r at e of gr owt h of ou t pu t and, henc e, t he r at e of TF P c hange. Si mi l ar det ai l ed c r i t i c i s ms c ou l d be made f or ot her ec onomi es , bot h HPAE and non-HPAE, and ou r TF P r es u l t s ar e bes t r egar ded as i ndi c at i ve of br oad i nt er nat i onal t r ends . 18. Des pi t e t he l ow el as t i c i t i es of ou t pu t wi t h r es pec t t o c api t al i n t he f u l l s ampl e pr odu c t i on f u nc t i on, onl y 10 of t he 60 non-HPAE l ow- and mi ddl e-i nc ome ec onomi es have c ont r i bu t i ons of TF P gr owt h exc eedi ng 30%. Among t he HPAEs , t he i nves t ment -dr i ven ec onomi es -Indones i a, M al ay s i a, and Si ngapor e-c onf or m t o a t y pi c al devel opi ng ec onomy pat t er n wi t h a l ow (bu t pos i t i ve) TF P c ont r i bu t i on t o ou t pu t gr owt h. The pr odu c t i vi t y -dr i ven ec onomi es -Japan, Kor ea, Tai wan, Chi na, Hong Kong, and Thai l and-on t he ot her hand ar e mor e u nu s u al and l ook mor e l i ke advanc ed ec onomi es wi t h a r el at i vel y hi gh c ont r i bu t i on of TF P t o ou t pu t gr owt h of above 30%. The Eas t As i an M i r ac l e ? 233 and Si ngapor e i s whol l y du e t o hi gh r at es of f ac t or ac c u mu l at i on. Indeed, t hei r pr odu c t i vi t y per f or manc e, l i ke t hat of t he vas t major i t y of devel opi ng ec onomi es , det r ac t ed f r om t he pot ent i al ou t pu t gr owt h t hat c ou l d have been ac hi eved, bas ed on t hei r r at es of f ac t or ac c u mu l at i on. Hong Kong, Tai wan, and Japan i n c ont r as t had r el at i vel y hi gh TF P gr owt h r at es and der i ved f r om 15% t o 30% of t hei r ou t pu t gr owt h f r om TF P gr owt h, a c har ac t er i s t i c s har ed by onl y f ou r ot her devel opi ng ec onomi es . Thai l and and Kor ea had r at es and r el at i ve c ont r i bu t i ons of TF P gr owt h t hat wer e at y pi c al f or devel opi ng ec onomi es -t hey wer e pos i t i ve-bu t l es s t han t he r el at i ve s har e f or advanc ed ec onomi es . The c ont r as t i ng s ou r c es of gr owt h of Hong Kong, Kor ea, and Si ngapor e, al l of whi c h s har ed es s ent i al l y t he s ame r at e of gr owt h, ar e a good i l l u s t r at i on of t he var y i ng r oads t o r api d gr owt h among t he HPAEs . The Eas t As i an s u c c es s s t or y i s , t hen, pr i mar i l y a f u ndament al i s t one. Dependi ng on t he es t i mat es u s ed, bet ween 60% and 120% of t hei r ou t pu t gr owt h der i ves f r om ac c u mu l at i on of phy s i c al and hu man c api t al and l abor f or c e gr owt h. The r es u l t s al s o s u gges t t hat t he HPAEs wer e u nu s u al l y s u c c es s f u l i n al l oc at i ng t hes e f ac t or s of pr odu c t i on. The es t i mat es of TF P gr owt h bas ed on t he f u l l s ampl e addr es s t he f ol l owi ng qu es t i on: Bas ed on t he aver age ef f i c i enc y wi t h whi c h phy s i c al and F i gu r e 6 TOTAL F ACTOR PRODUCTIVITY GROWTH AND PART OF GROWTH DUE TO GROWTH OF F ACTOR INPUTS, 1960-1989 (HIGH-INCOM E SAM PLE PARAM ETERS) TF P GROWTH (per c ent p.a.) 30% 4 20%, 2 2* Tai wan *1 ~ C Japa -4 -2 0 2 4 6 Tot al F ac t or Inpu t Gr owt h (per c ent p.a.) 8 10 12 234 PAGE hu man c api t al ar e u s ed i n t he wor l d ec onomy , does ac c u mu l at i on over - or u nder pr edi c t i nc ome gr owt h? The ans wer i s t hat f or mos t l ow- and mi ddl e-i nc ome ec onomi es , i t over pr edi c t s gr owt h, whi l e f or t he HPAEs i t u nder pr edi c t s . Even when t he pr odu c t i on f u nc t i on i s es t i mat ed f r om t he hi gh-i nc ome s ampl e onl y , ac c u mu l at i on u nder pr edi c t s gr owt h f or f i ve of t he ei ght . Never t hel es s , my s t i c s c an c l ai m s ome vi c t or i es . The s u bs et of pr odu c - t i vi t y -dr i ven HPAEs ar e u nu s u al among devel opi ng ec onomi es bec au s e of t he r el at i vel y i mpor t ant r ol e of TF P i n t hei r gr owt h, even when at t empt s ar e made, as her e, t o c or r ec t f or t he gai ns f r om s u per i or ac c u mu l at i on.9 They ar e al s o among t he ver y f ew devel opi ng c ou nt r i es keepi ng pac e wi t h or c at c hi ng u p t o t he movi ng t ar get of i nt er nat i onal bes t pr ac t i c e. Two of t he pr odu c t i vi t y -dr i ven ec onomi es -Tai wan and Japan-ar e among t he Eas t As i an ec onomi es mos t i dent i f i ed wi t h ac t i vi s t pol i c i es t o pr omot e t ec hnol ogi c al l ear ni ng. Hong Kong-t he mos t pr odu c t i vi t y dr i ven of al l of t he HPAEs -i n c ont r as t i s t he l eas t i nt er vent i oni s t of t he gr ou p. Tai wan, Kor ea, and Japan ar e ec onomi es i n whi c h ac t i vi s t pol i c i es t o al l oc at e r es ou r c es wer e u nder t aken, y et appar - ent l y wi t hou t t he del et er i ou s ef f ec t s t hat c har ac t er i zed t he per f or manc e of ot her ec onomi es wi t h s i mi l ar pol i c i es . 2.2 THE POLICY ORIGINS OF SUCCESS The HPAEs have ac hi eved r api d gr owt h t hr ou gh s u c c es s f u l at t ai nment of bot h f u ndament al i s t and my s t i c objec t i ves . They have per f or med bet t er t han mos t l ow- and mi ddl e-i nc ome c ou nt r i es t hr ee c r i t i c al f u nc - t i ons -ac c u mu l at i on, al l oc at i on, and t ec hnol ogi c al c at c h-u p. They di d t hi s wi t h c ombi nat i ons of pol i c i es r angi ng f r om mar ket -or i ent ed t o s t at e l ed t hat var i ed bot h ac r os s ec onomi es and over t i me. Des pi t e t he di ver s i t y t her e ar e a nu mber of c ommon pol i c y t hr eads t hat bi nd t he HPAEs . M ac r oec onomi c management was u nu s u al l y good and mac r oec onomi c per f or manc e u nu s u al l y s t abl e, pr ovi di ng t he es s en- t i al f r amewor k f or pr i vat e i nves t ment . Pol i c i es t o i nc r eas e t he i nt egr i t y of t he banki ng s y s t em, and t o make i t mor e ac c es s i bl e t o nont r adi t i onal s aver s , i nc r eas ed t he l evel s of f i nanc i al s avi ngs . Edu c at i on pol i c i es t hat f oc u s ed on pr i mar y and s ec ondar y edu c at i on gener at ed r api d i nc r eas es i n l abor f or c e s ki l l s . Agr i c u l t u r al pol i c i es s t r es s ed pr odu c t i vi t y c hange 19. Tec hni c al ef f i c i enc y c hange-movement t owar d bes t pr ac t i c e-s hou l d be f r ee of t he al l oc at i ve gai ns c har ac t er i s t i c of TF P es t i mat es by gr owt h ac c ou nt i ng met hods (s ee Ni s hi mi zu and Page, 1982). F r i edber g, Khami s , and Page (1993), u s i ng a s t oc has t i c f r ont i er pr odu c t i on f u nc t i on, f i nd t hat t he HPAEs ar e t he onl y r egi onal gr ou pi ng of devel opi ng c ou nt r i es t hat have c ons i s t ent l y c l os ed t he gap wi t h i nt er nat i onal bes t pr ac t i c e. The Eas t As i an M i r ac l e * 235 and di d not t ax t he r u r al ec onomy exc es s i vel y . Al l of t he HPAEs kept pr i c e di s t or t i ons wi t hi n r eas onabl e bou nds and wer e open t o f or ei gn i deas and t ec hnol ogy . Bu t t hes e f u ndament al pol i c i es do not t el l t he ent i r e s t or y . In mos t of t hes e ec onomi es , i n one f or m or anot her , t he gover nment i nt er vened -s y s t emat i c al l y and t hr ou gh mu l t i pl e c hannel s -t o f os t er devel op- ment , and i n s ome c as es t he devel opment of s pec i f i c i ndu s t r i es . Pol i c y i nt er vent i ons t ook many f or ms -t ar get ed and s u bs i di zed c r edi t t o s e- l ec t ed i ndu s t r i es , l ow depos i t r at es and c ei l i ngs on bor r owi ng r at es t o i nc r eas e pr of i t s and r et ai ned ear ni ngs , pr ot ec t i on of domes t i c i mpor t s u bs t i t u t es , s u bs i di es t o dec l i ni ng i ndu s t r i es , t he es t abl i s hment and f i nanc i al s u ppor t of gover nment banks , pu bl i c i nves t ment s i n appl i ed r es ear c h, f i r m- and i ndu s t r y -s pec i f i c expor t t ar get s , devel opment of expor t mar ket i ng i ns t i t u t i ons , and wi de s har i ng of i nf or mat i on bet ween pu bl i c and pr i vat e s ec t or s . Some i ndu s t r i es wer e pr omot ed, whi l e ot her s wer e not . Thes e s t r at egi es of s el ec t i ve pr omot i on wer e c l os el y as s oc i at ed wi t h hi gh r at es of pr i vat e i nves t ment and, i n s ome of t he HPAEs , hi gh r at es of pr odu c t i vi t y gr owt h. The r el at i ve i mpor t anc e of pol i c y f u ndament al s and s el ec t i ve i nt er - vent i ons has been and wi l l c ont i nu e t o be at t he c ent er of t he debat e over t he pol i c y or i gi ns of Eas t As i a's s u c c es s . To c ons i der i n any dept h t he c at al ogu e of pol i c i es ou t l i ned ear l i er exc eeds t he s c ope of t hi s es s ay . Rat her , we exami ne f ou r pos s i bl e l es s ons f or pu bl i c pol i c y ar i s i ng f r om t he HPAEs s u c c es s . 3. Convent i onal Wi s dom-M ac r oec onomi c M anagement and Edu c at i onal St r at egy Among f u ndament al ec onomi c pol i c i es t hat have c ont r i bu t ed t o Eas t As i a's s u per i or r ec or d of ac c u mu l at i on and al l oc at i on of r es ou r c es , t wo s t and ou t -good mac r oec onomi c management and emphas i s on br oadl y bas ed edu c at i on.20 The nat u r e of t he pol i c i es pu r s u ed and t hei r i mpac t on gr owt h i n t he HPAEs ar e des c r i bed br i ef l y i n t he f ol l owi ng. 3.1 M AINTAINING M ACROECONOM IC STABILITY In c ont r as t wi t h many ot her devel opi ng ec onomi es , t he HPAEs have been r emar kabl y s u c c es s f u l i n c r eat i ng and s u s t ai ni ng mac r oec onomi c 20. Wor l d Bank (1993) enu mer at es a nu mber of ot her "pol i c y f u ndament al s " t hat have ac t ed pr i mar i l y t o i nc r eas e ac c u mu l at i on and i mpr ove al l oc at i on. Thes e ar e omi t t ed her e t o al l ow f or a f u l l er di s c u s s i on of t he t wo des c r i bed. Of t he omi t t ed f u ndamen- t al s , per haps t he mos t s i gni f i c ant i s t he f oc u s on bu i l di ng s ec u r e, bank-bas ed f i nanc i al s y s t ems . 236 PAGE Tabl e 3 CONSOLIDATED PUBLIC SECTOR DEF ICITS, SELECTED EAST ASIAN AND OTHER ECONOM IES Aver age pu bl i c def i c i t , Rank among 40 per c ent age of GDP, devel opi ng c ou nt r i es Ec onomy / Regi on 1980-1988 (1 = hi ghes t def i c i t ) HPAEs Kor ea, Rep. of 1.89 34 M al ay s i a 10.80 6 Thai l and 5.80 23 Aver age, 40 devel opi ng ec onomi es 6.39 Aver age, OECD ec onomi es 2.82 Ot her ec onomi es Ar gent i na 9.62 Br azi l 4.02 M exi c o 6.73 Phi l i ppi nes 4.40 Sou r c e: Eas t er l y , Rodr i gu ez, and Sc hmi dt -Hebbel (f or t hc omi ng). s t abi l i t y . Her e we c ons i der t he HPAEs ' s u c c es s f u l management of t hr ee mac r oec onomi c var i abl es : bu dget def i c i t s , ext er nal debt , and exc hange r at es . 3.1.1 Bu dget Def i c i t s and Inf l at i on Int er nat i onal exper i enc e s u gges t s t hat t he mac r oec onomi c c ons equ enc es of pu bl i c s ec t or def i c i t s depends on how t hey ar e f i nanc ed. Al t hou gh t he HPAEs ' bu dget def i c i t s ar e not dr amat i c al l y s mal l er as a gr ou p t han t hos e of ot her devel opi ng ec onomi es , t hey wer e bet t er at keepi ng def i c i t s wi t hi n t he l i mi t s i m- pos ed by t hei r abi l i t y t o f i nanc e t hem wi t hou t des t abi l i zi ng t he mac r oe- c onomy .21 The f i nanc i ng l i mi t s t hems el ves wer e al s o hi gher du e t o t he mor e r api d gr owt h of t he HPAEs . Tabl e 3 s hows c ons ol i dat ed pu bl i c s ec t or def i c i t s f or t he 1980s f or t hr ee devel opi ng c ou nt r y HPAEs t hat have good dat a c ompar ed wi t h a s ampl e of OECD and ot her devel opi ng ec onomi es . As a per c ent age of 21. The anal y s i s i n t hi s s ec t i on dr aws on W. Eas t er l y and K. Sc hmi dt -Hebbel , "The M ac r oec onomi c s of Pu bl i c Sec t or Def i c i t s : a Sy nt hes i s " i n W. Eas t er l y , C. Rodr i gu ez, and K. Sc hmi dt -Hebbel , eds ., Pu bl i c Sec t or Def i c i t s and M ac r oec onomi c Per f or manc e, Oxf or d Uni ver s i t y Pr es s (f or t hc omi ng). The dat a on c ons ol i dat ed pu bl i c def i c i t s , as wel l as t he r es t of t he dat a i n t hi s s ec t i on exc ept wher e ot her wi s e i ndi c at ed, ar e f r om t he s ame s ou r c e. Cons ol i dat ed pu bl i c def i c i t s , t hou gh l es s wi del y avai l abl e t han c ent r al gover nment def i c i t s , ar e a mu c h mor e r el i abl e i ndi c at or of f i s c al management , bec au s e t hey i nc l u de oper at i ng def i c i t s of pu bl i c ent er pr i s es t hat have pl ay ed a c r i t i c al r ol e i n s ome mac r oec onomi c c r i s es . The Eas t As i an M i r ac l e ? 237 GDP, Kor ea's bu dget def i c i t s wer e bel ow even t he OECD aver age. M al ay s i a and Thai l and ar e mor e c ompl i c at ed. Thai l and's bu dget def i c i t s wer e abou t aver age f or devel opi ng ec onomi es i n t he 1980s , whi l e def i c i t s i n M al ay s i a wer e s u bs t ant i al l y bi gger t han aver age. Bot h r an l ar ger bu dget def i c i t s t han s u c h t r ou bl ed ec onomi es as t he Phi l i ppi nes , Br azi l , Ar gent i na, and M exi c o. Unl i ke t hes e and ot her ec onomi es t hat enc ou nt er ed di f f i c u l t i es , how- ever , M al ay s i a and Thai l and s u c c es s f u l l y f i nanc ed t hei r def i c i t s . Thi s was pos s i bl e f or t he f ol l owi ng r eas ons : * F i r s t , t her e was f eedbac k f r om hi gh gr owt h. Bec au s e r api d gr owt h i nc r eas ed t he demand f or f i nanc i al as s et s , M al ay s i a and Thai l and wer e abl e t o abs or b hi gher l evel s of monet ar y f i nanc i ng wi t hou t a r api d r i s e i n i nf l at i on. M or eover , r api d gr owt h i n GDP r ai s ed t he l evel of s u s t ai nabl e domes t i c and ext er nal bor r owi ng. * Sec ond, t her e was f eedbac k f r om hi gh f i nanc i al s avi ngs . Savi ngs r at es wer e hi gh i n M al ay s i a and Thai l and, and mu c h of t hi s s avi ng went i nt o t he domes t i c f i nanc i al s y s t em (as oppos ed t o r eal as s et s or c api t al f l i ght as i n Lat i n Amer i c a). Thi s f u r t her i nc r eas ed t he demand f or money and ot her domes t i c f i nanc i al as s et s , maki ng i nc r eas ed domes - t i c f i nanc i ng of t he def i c i t pos s i bl e wi t hou t r es or t t o i nf l at i onar y f i nanc i ng. In M al ay s i a, t he gover nment Pr ovi dent F u nd mobi l i zed domes t i c s avi ng f or t he gover nment 's u s e i n noni nf l at i onar y f i nanc - i ng of t he def i c i t . * Thi r d, t her e wer e l ow i ni t i al debt r at i os . In Thai l and, t he i ni t i al l evel of ext er nal debt t o GDP was ver y l ow, whi c h meant t hat ext er nal f i nanc i ng was avai l abl e when needed. By hol di ng pu bl i c def i c i t s wi t hi n t he bou nds of pr u dent f i nanc i ng, t he HPAEs have avoi ded t he i nf l at i on-i ndu c i ng bu r s t s of money c r e- at i on t hat af f l i c t ot her devel opi ng ec onomi es . F i gu r e 7 s hows money c r eat i on as a r at i o t o GDP i n Kor ea, M al ay s i a, and Thai l and and i n t hr ee u ns t abl e c ompar at or s , Ar gent i na, M exi c o, and Zai r e. The c ont r as t i s s t r i ki ng: Whi l e money c r eat i on has been r el at i vel y c ons t ant among t he HPAEs , eac h of t he c ompar at or s exper i enc ed t wo epi s odes of r api d money c r eat i on when f i s c al bal anc es det er i or at ed or ext er nal f i nanc i ng dr i ed u p. M oder at e i nf l at i on was a c or ol l ar y of f i s c al pr u denc e (Tabl e 4) .22 Eas t As i an gover nment s never had t o r el y heavi l y on t he i nf l at i on t ax 22. Rec ent r es ear c h s u gges t s t hat i nf l at i on bel ow 20%, a l evel not br eac hed by any of t he HPAEs du r i ng t hei r r api d gr owt h per i ods , c an be mai nt ai ned f or l ong per i ods wi t hou t gener at i ng mac r oec onomi c i ns t abi l i t y (Dombu s c h and F i s c her , 1993). 238 PAGE bec au s e t hei r def i c i t s wer e wi t hi n f i nanc abl e l i mi t s . In gener al , HPAE gover nment s have been s t r ong enou gh t o al t er pu bl i c s pendi ng and f or ei gn bor r owi ng as needed, al t hou gh i n Thai l and t hi s has been a c ont i nu ou s s t r u ggl e (War r and Nadhi pr abha, 1993). One r es u l t of l ow-t o-moder at e i nf l at i on r at es par t i c u l ar l y wel c ome t o bu s i nes s i s s t abl e r eal i nt er es t r at es . F i gu r e 8 s hows r eal i nt er es t r at es i n Kor ea, M al ay s i a, Thai l and, Ar gent i na, Ghana, and M exi c o. As wi t h money c r eat i on, t he c ont r as t i s r emar kabl e. In t he Eas t As i an c as es , l ow i nf l at i on and f l exi bl e f i nanc i al pol i c i es kept r eal i nt er es t r at es wi t hi n a nar r ow r ange. F i gu r e 7 REVENUES F ROM M ONEY CREATION AS A PERCENTAGE OF GDP: EXAM PLES F ROM EAST ASIA AND OTHER SELECTED ECONOM IES (Per c ent ) 14 . 12 --..... Rep, of Kor a_... -Thai l and 10 t s i i --- - 6 ! i 4 2 -2 i I t i i 0 i gII \n---I 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 14 1-^ I_pi I-?--t -t g _____ ___ --TA~i r e j__ /\ { I 2 o A 1970 1972 1974 1976 1978 1980 1982 1984 1986 Not e: Revenu es f r om money c r eat i on as a per c ent age of GDP i s def i ned as r at i o of nomi nal c hange i n hi gh-power ed money t o nomi nal GDP. Sou r c e: Wor l d Bank dat a. The Eas t As i an M i r ac l e ? 239 3.1.2 M anagi ng F or ei gn Debt Of t he s even devel opi ng HPAEs , onl y Indones i a, Kor ea, M al ay s i a, and Thai l and have pu bl i c or pu bl i c l y gu ar - ant eed f or ei gn debt . The gover nment s of t he ot her s -Si ngapor e, Hong Kong, and Tai wan-have not bor r owed abr oad. None of t he f ou r wi t h f or ei gn debt has f ac ed a c r i s i s i n t he s ens e of havi ng t o r es c hedu l e debt , bu t s har p i nc r eas es i n debt have l ed t o r api d adju s t ment . In Kor ea i n 1980-1985, M al ay s i a i n 1982-1988, and Indones i a s i nc e 1987, debt t o GNP r at i os have been qu i t e hi gh c ompar ed wi t h ot her i ndebt ed ec onomi es (Tabl e 5). As wi t h f i s c al def i c i t s , however , f avor abl e f eedbac k f r om ot her pol i c i es enabl ed t he HPAE debt or s t o s u s t ai n hi gher r at i os of ext er nal debt t o GDP t han ot her ec onomi es . In par t i c u - l ar , hi gh l evel s of expor t s have meant t hat f or ei gn exc hange was r eadi l y avai l abl e t o s er vi c e t he f or ei gn debt . F or exampl e, when M exi c o f ac ed s ever e pr obl ems wi t h i t s c r edi t or s i n 1982, i t had a mu c h l ower debt t o GNP r at i o t han Kor ea i n 1984 bu t a mu c h hi gher debt t o expor t r at i o. 3.1.3 Exc hange Rat e M anagement The evol u t i on of exc hange r at e r egi mes i n t he HPAEs has been br oadl y s i mi l ar . M os t moved f r om l ong-t er m f i xed r at e r egi mes t o f i xed-bu t -adju s t abl e r at e r egi mes wi t h oc c as i onal s t eep deval u at i ons t o managed f l oat i ng r at e r egi mes . Du e t o t he c ombi - nat i on of moder at e i nf l at i on and ac t i ve exc hange r at e management , t he HPAEs avoi ded t he s ever e exc hange r at e appr ec i at i on t hat bes et Af r i c a Tabl e 4 INF LATION RATES Aver age CPI, Ec onomy / Regi on 1961-1991 HPAEs a 7.5 Hong Kongb 8.8 Indones i ac 12.4 Kor ea, Rep. of 12.2 M al ay s i a 3.4 Si ngapor e 3.6 Tai wan 6.2 Thai l and 5.6 Al l l ow- and mi ddl e-i nc ome ec onomi es 61.8 Sou t h As i a 8.0 Su b-Sahar an Af r i c a 20.0 Lat i n Amer i c a and Car i bbean 192.1 aAver ages ar e u nwei ght ed b1972-91 onl y . c 1969-91 onl y . Sou r c es : Wor l d Bank dat a; Wor l d Bank (1992); Tai wan (1992). 240- PAGE F i gu r e 8 REAL INTEREST RATES: EXAM PLES F ROM EAST ASIA AND OTHER SELECTED ECONOM IES Real Int er es t Rat e (per c ent ) 20 O r Ci -20 T I r --.. 70, ,,/ , --- o or -30 -80 I r T al y s i w'-. -90 f f d----------.-- -100 i 1970 1972 1974 1976 1978 1980 1982 1984 1986 Real Int er es t Rat e (per c ent ) 20/ i i V -40 -50 -60 1 t ~~~~i -70 --Ar Pgeni ar -80 ;hn -90 M i c o -100 I I 1970 1972 1974 1976 1978 1980 1982 1984 1986 Not e: Real i nt er es t r at es ar e def i ned as t he depos i t r at e def l at ed by t he c ons u mer pr i c e i ndex. Sou r c e: Wor l d Bank dat a. Sou r c e: Wor l d Bank dat a. The Eas t As i an M i r ac l e * 241 and Lat i n Amer i c a (Tabl e 6) and ac hi eved u nu s u al s t abi l i t y of t he r eal exc hange r at e. The HPAEs ' s u c c es s at mai nt ai ni ng s t abl e r eal exc hange r at es i s appar ent i n F i gu r e 9, whi c h c ont r as t s r eal exc hange r at es s i nc e 1970 i n Kor ea, M al ay s i a, and Thai l and wi t h t hos e i n Sr i Lanka, Ar - gent i na, and Per u . RESPONDING EF F ECTIVELY TO M ACROECONOM IC SHOCKS One i mpor t ant el ement of t he HPAEs ' c apac i t y t o mai nt ai n mac r oec onomi c s t abi l i t y has been t hei r pr ompt and ef f ec t i ve r es pons e t o mac r oec onomi c s hoc ks . The HPAEs made def i ni t e pol i c y dec i s i ons t o keep t he mac r oec onomy u nder c ont r ol , r at her t han s i mpl y benef i t i ng f r om a f eedbac k f r om r api d gr owt h t o mac r oec onomi c s t abi l i t y . Thes e dec i s i ons ar e i l l u s t r at ed by t he exper i enc es of Kor ea and Thai l and i n adju s t i ng t o r at her di f f er ent mac r oec onomi c s hoc ks . KOREA RETRENCHES In 1979, Kor ea enc ou nt er ed a var i et y of pr obl ems t hat t hr eat ened t o u nder c u t t he 1970s i mpr es s i ve gr owt h. Ri s i ng oi l pr i c es depr es s ed t he t er ms of t r ade, t he wor l d r ec es s i on dampened expor t demand, and hi gh i nt er es t r at es i nc r eas ed debt s er vi c e c os t s . Real appr ec i at i on du r i ng t he 1974-1979 f i xed exc hange r at e r egi me had made expor t s l es s c ompet i t i ve, t he r i c e c r op had f ai l ed, and t he as s as s i - nat i on of Pr es i dent Par k Chu ng-Hee had exac er bat ed pol i t i c al u nc er - t ai nt y (Col l i ns and Par k, 1989). Kor ea r es ponded wi t h an aggr es s i ve 1980 s t abi l i zat i on pac kage bac ked by IM F s t andby c r edi t s . The gover n- Tabl e 5 INTERNATIONAL INDEBTEDNESS Rat i o of t ot al debt t o Rat i o of t ot al debt expor t ed goods t o GNP and s er vi c es Ec onomy / Regi on Peak y ear a 1991 Peak y ear a 1991 HPAEs Indones i a 69 66.4 263.5 225.6 Kor ea, Rep. of 52.5 15.0 142.4 45.2 M al ay s i a 86.5 47.6 138.4 54.2 Thai l and 47.8 39.0 171.7 94.8 Al l l ow- and mi ddl e-i nc ome 38.4 176.2 ec onomi es Sou t h As i a 29.6 293.3 Su b-Sahar an Af r i c a 106.1 340.8 Lat i n Amer i c a and Car i bbean 37.4 268.0 a1987 f or Indones i a, and 1985 or 1986 f or t he ot her t hr ee c ou nt r i es . Sou r c e: Wor l d Bank dat a. 242 PAGE ment ended t he f i xed exc hange r at e r egi me, deval u ed t he won by 17%, and t i ght ened monet ar y and f i s c al pol i c y . In 1980, ou t pu t f el l 5%, i nf l at i on exc eeded 25%, and t he c u r r ent ac c ou nt def i c i t appr oac hed 9% of GDP. By 1982 i nf l at i on dr opped t o 7% and i n 1983 t o 3.4%. The c u r r ent ac c ou nt def i c i t f el l t o 2% of GDP i n 1983. GRADUAL ADJUSTM ENT IN THAILAND Thai l and onl y par t i al l y adju s t ed t o t he f i r s t oi l s hoc k and i n t he l at e 1970s engaged i n a mi l d pr i vat e and pu bl i c s pendi ng boom. By 1980-1981, t he c ons ol i dat ed pu bl i c s ec t or def i c i t was 7% of GDP, near l y hal f of whi c h was t he def i c i t of t he nonf i nanc i al pu bl i c ent er pr i s es , and t he c u r r ent ac c ou nt def i c i t was al s o abou t 7%. Bec au s e pas t f or ei gn bor r owi ng had been moder at e-t he debt /GDP r at i o was onl y 35% i n 1982-Thai l and c ont i nu ed t o have ac c es s t o i nt er nat i onal c api t al mar ket s . Even s o, t he new gover nment t hat t ook over i n 1980 per c ei ved t hat mac r oec onomi c adju s t ment was needed. M onet ar y pol i c y opt i ons wer e l i mi t ed by t he f i xed exc hange r at e and t he r el at i vel y open c api t al mar ket . Ther ef or e, t he gover nment t ook t he al t er nat i ve pat h, f i s c al c ont r ac t i on, movi ng gr adu al l y bu t c ons i s t ent l y Tabl e 6 AVERAGE APPRECIATION INDEX, 1976-1985 Index (hi gher val u e Per c ent age r ank (100 means mor e means mos t Ec onomy appr ec i at ed)a appr ec i at ed, 0 l eas t ) HPAEs Hong Kong 64 1 Indones i a 98 25 Kor ea, Rep. of 110 41 M al ay s i a 88 12 Si ngapor e 87 11 Tai wan 116 47 Thai l and 75 5 Ot her s el ec t ed ec onomi es Ar gent i na 113 45 Bol i vi a 181 89 Cot e d'Ivoi r e 185 90 Ghana 248 99 Ni ger i a 277 100 Zai r e 201 95 aDol l ar 's i ndex i s bas ed on Su mmer s -Hes t on pu r c has i ng power par i t y c ompar i s ons . An i ndex val u e of 100 s i gni f i es t hat t he ec onomy 's devi at i on f r om PPP i s wher e i t s hou l d be gi ven i t s per c api t a i nc ome. Sou r c e: Dol l ar (1992). The Eas t As i an M i r ac l e 243 F i gu r e 9 EXAM PLES OF REAL EXCHANGE RATE VARIABILITY IN EAST ASIA AND OTHER SELECTED ECONOM IES Real E-xc hangze Rat e (per c ent ) 350 300 ~ ~ ~ ~ ~ i -Rep ot Kor ei 200 150 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 Real Exc hange Rat e (per c ent ) 350 --Ar gent i na 300 L L ~~~~~-M exi dc o -?er u 150 100 ....... 0 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 Not e: Index of r eal exc hange r at e: 1980 100; r eal depr ec i at i on i s down. Sou r c e: Wor l d Bank dat a. 244. PAGE over t he next s ever al y ear s t o c u t expendi t u r es and i nc r eas e r evenu es . Pol i c y maker s s t eepl y c u t def i c i t s of t he nonf i nanc i al pu bl i c ent er pr i s es , t hen gr adu al l y r edu c ed t he c ent r al gover nment def i c i t . As a r es u l t , t he c ons ol i dat ed gover nment def i c i t dec l i ned f r om 8% of GDP i n 1981-1982 t o 1.6% i n 1986-1987, when adju s t ment was es s ent i al l y c ompl et e. M eanwhi l e, s t eeper t ax r at es and t ou gher c ol l ec t i on ef f or t s boos t ed c ent r al gover nment t ax r evenu e f r om 13% of GDP i n 1982 t o 16% i n 1988. 3.1.4 M ac r oec onomi c M anagement and Rapi d Gr owt h It c annot be a c oi nc i - denc e t hat al l of t hes e s even ec onomi es have been exc ept i onal hi gh- gr owt h ec onomi es by wor l d s t andar ds , and al l have had u nu s u al s u c c es s managi ng t hei r mac r o ec onomi es over t he l ong r u n. Cr os s -ec on- omy , ec onomet r i c s t u di es gener al l y f i nd t hat hi gher i nf l at i on, l ar ger bu dget def i c i t s , and di s t or t ed f or ei gn exc hange mar ket s r edu c e gr owt h (F i s c her , 1993; Rodr i c k, 1993). Al l of t he HPAEs bu t Indones i a and Kor ea have been l ong-per i od, l ow-i nf l at i on ec onomi es , whi l e Indones i a and Kor ea f al l i nt o t he moder at el y l ow-i nf l at i on c at egor y . The c hannel s by whi c h i nf l at i on and bu dget def i c i t s r edu c e gr owt h ar e al s o of s ome i nt er es t . F i s c her (1993) c onc l u des t hat hi gh i nf l at i on and hi gh-bu dget def i c i t s r edu c e bot h t he r at e of c api t al ac c u mu l at i on and t he r at e of pr odu c t i vi t y c hange. Unc er t ai nt y , ar i s i ng pr i mar i l y f r om t he var i abi l i t y of i nf l at i on and t he i nc ons i s t enc y of r el at i ve pr i c e s i gnal s , r edu c es bot h pr i vat e i nves t ment and t he ef f i c i enc y of r es ou r c e al l oc a- t i on. The HPAEs pr ovi de at l eas t par t i al c onf i r mat i on of t hi s hy pot hes i s . F i gu r e 10 s hows pr i vat e and pu bl i c i nves t ment as a s har e of GDP f or a s ampl e of 47 l ow- and mi ddl e-i nc ome c ou nt r i es (i nc l u di ng f i ve of t he devel opi ng c ou nt r y HPAEs ) f or whi c h c ons i s t ent dat a ar e avai l abl e.23 The HPAEs ar e r emar kabl e f or t hei r hi gh s har e of pr i vat e i nves t ment . Pr i vat e i nves t ment i s abou t s even per c ent age poi nt s hi gher i n t he HPAEs t han i n ot her mi ddl e-i nc ome ec onomi es . It r os e f r om abou t 15% of GDP i n 1970 t o near l y 22% i n 1974, t hen dec l i ned and hel d at abou t 18% bet ween 1975 and 1984. Pr i vat e i nves t ment c ont r ac t ed s har pl y bet ween 1984 and 1986, r ef l ec t i ng t he gl obal r ec es s i on, t hen r ec over ed by 1988.24 In c ont r as t , pr i vat e i nves t ment i n ot her l ow- and mi ddl e-i n- c ome c ou nt r i es has r emai ned r el at i vel y s t abl e at abou t 11% of GDP. 23. The dat a ar e dr awn f r om Pf ef f er mann and M adar as s y (1992). 24. Thi s bas i c pat t er n i s obs er ved i n f ou r i ndi vi du al ec onomi es -Kor ea, Thai l and, Si nga- por e, and M al ay s i a. The pat t er n f or Indones i a di f f er s ; r eal pr i vat e i nves t ment dec l i ned c ont i nu ou s l y du r i ng t he 1980s f r om a peak of 20% of GDP t o a l ow of 13% i n 1989. The Eas t As i an M i r ac l e ? 245 One i mpor t ant el ement of t he HPAEs ' c apac i t y t o mai nt ai n mac r oec o- nomi c s t abi l i t y has been t hei r pr ompt and ef f ec t i ve r es pons e t o mac r o- ec onomi c s hoc ks . Thi s has been gr eat l y f ac i l i t at ed by t wo c har ac t er i s t i c s . F i r s t , by l i mi t i ng t r ans f er s t o pu bl i c ent er pr i s es and t i ght l y s u per vi s i ng banks , gover nment s r edu c ed t he s pi l l over f r om t he r eal s ec t or i nt o t he f i nanc i al s ec t or t hat i n ot her ec onomi es exac er bat ed f i s c al woes . Sec ond, f l exi bl e l abor and c api t al mar ket s enabl ed t he r eal s ec t or t o r eac t qu i c kl y t o gover nment i ni t i at i ves , s et t i ng of f new gr owt h c y c l es t hat eas ed t he r ec es s i onar y i mpac t of s t abi l i zat i on meas u r es . Ef f ec t i ve r es pons es t o mac r oec onomi c s hoc ks may al s o have c on- t r i bu t ed t o t he HPAEs ' l ong-r u n gr owt h. Rel at i vel y c au t i ou s f i s c al and f or ei gn bor r owi ng pol i c i es meant t hat s er i ou s debt c r i s es wer e avoi ded, F i gu r e 10 PUBLIC AND PRIVATE INVESTM ENT Pr i vat e Inves t ment (as s har e of GDP) 0.25 0.2 0.15 0.1 i t HPAS (w/o Japan) -_ ot her LM IEs 1974 1979 1984 1989 Pu bl i c Inves t ment (as s har e of GDP) 0.2 0.15- 0.1- 0.05 *HPA3s (w/o Japan) -e-ot her LM IEs i 1974 1979 1984 1989 Not e: LM IEs = l ow- and mi ddl e-i nc ome ec onomi es . Sou r c e: Wor l d Bank dat a. 0.05 11 t 1969 1969 1969 l l l ,,~~~~~~~~~~~~~~~~~~~~~~~~~~ A 246 PAGE whi c h r edu c ed t he s t op-go pat t er n of c r i s i s and r es pons e t hat c har ac - t er i zed many devel opi ng ec onomi es i n t he 1980s . Avoi di ng c r i s i s and t he need f or r es c hedu l i ng meant t hat c r edi t -wor t hi nes s was mai n- t ai ned, and i t was eas i er t o bor r ow i n t he s hor t t er m and t o avoi d ver y deep c u t s , es pec i al l y i n i nves t ment . In t he 1970s over al l l evel s of pu bl i c i nves t ment di d not di f f er mar kedl y bet ween t he HPAEs and ot her devel opi ng ec onomi es ; over t he dec ade pu bl i c i nves t ment r at es i n al l ec onomi es r os e f r om abou t 7% t o 10% (F i gu r e 10). Du r i ng t he 1980s , pu bl i c i nves t ment was hi gher i n t he HPAEs t han i n ot her devel opi ng ec onomi es , bu t i t had dec l i ned t o hi s t or i c al l evel s by t he end of t he dec ade. The HPAEs as a gr ou p r es ponded t o t he ec onomi c c ont r ac t i on of t he 1980s by i nc r eas i ng pu bl i c i nves t ment above hi s t or i c al l y mai nt ai ned l evel s . Su dden r edu c t i ons i n aggr egat e demand and i n i nves t ment c ompel l ed by debt c r i s es wer e major c au s es of t he s har p dec l i nes i n gr owt h r at es i n many of t he heavi l y i ndebt ed ec onomi es of Lat i n Amer i c a and el s ewher e. Bet t er r es pons es t o mac r oec onomi c s hoc ks may al s o have r es u l t ed i n bet t er meas u r ed pr odu c t i vi t y gr owt h. A r ec ent exami nat i on of t he s ou r c es of TF P c hange i n devel opi ng c ou nt r i es c onc l u des t hat i n Lat i n Amer i c a and Af r i c a, pr odu c t i vi t y l evel s i nc r eas ed r el at i ve t o i nt er na- t i onal bes t pr ac t i c e u nt i l 1973 and dec l i ned f r om 1973 onwar d, pr i mar i l y du e t o t he i nabi l i t y of t hes e ec onomi es t o adapt t o ext er nal s hoc ks . The dec l i ne was l ar ge enou gh i n Lat i n Amer i c a (and near l y l ar ge enou gh i n Af r i c a) t o of f s et gai ns du e t o t ec hni c al pr ogr es s (F r i edber g, Khami s , and Page, 1993). The HPAEs , i n c ont r as t , ar e t he onl y r egi onal gr ou pi ng of devel opi ng ec onomi es t hat s how s t eady i mpr ovement i n pr odu c t i vi t y l evel s r el a- t i ve t o i nt er nat i onal bes t pr ac t i c e. Whi l e mac r oec onomi c c ont r ac t i ons ar e c l ear l y vi s i bl e i n t he HPAEs ' pat t er n of movement of pr odu c t i vi t y l evel s over t i me, t he di f f er enc e i s t he mor e r api d r et u r n t o pr i or pr odu c t i vi t y l evel s f ol l owi ng t he per i od of adju s t ment . 3.2 BROADLY BASED EDUCATIONAL STRATEGIES In mos t of t he ec onomi es of Eas t As i a, pu bl i c i nves t ment s i n edu c at i on wer e not onl y l ar ger t han el s ewher e i n abs ol u t e t er ms -t hey wer e al s o bet t er . They r es ponded mor e appr opr i at el y t o f ai l u r es i n t he mar ket f or edu c at i on. Soc i al r at es of r et u r n t o edu c at i on ar e pr obabl y hi ghes t at t he pr i mar y l evel , wher e t her e ar e many pos i t i ve ext er nal i t i es as s oc i - at ed wi t h l i t er ac y (Ps ac har opou l os , 1993). Capi t al mar ket i mper f ec t i ons and i nf or mat i on pr obl ems , mor eover , ar e al s o mos t s ever e at t he pr i - mar y l evel , r edu c i ng t he s c ope f or s el f -f i nanc ed pr i vat e s y s t ems . Re- t u r ns f r om t r ai ni ng at t he u ni ver s i t y l evel , on t he ot her hand, ar e The Eas t As i an M i r ac l e ? 247 al mos t f u l l y c apt u r ed by t he hi gher i nc ome of u ni ver s i t y gr adu at es . Al l of t hi s ar gu es f or u ni ver s al pr i mar y and br oadl y bas ed s ec ondar y edu c at i on c ombi ned wi t h r es t r ai nt of pu bl i c s u bs i di es t o hi gher edu c a- t i on. 3.2.1 Edu c at i onal Per f or manc e i n t he HPAEs Thi s was pr ec i s el y t he edu - c at i onal s t r at egy adopt ed by t he HPAEs . F i gu r es 11 and 12 pr es ent a s t y l i zed s u mmar y of t he r es u l t s of r egr es s i ng pr i mar y and s ec ondar y enr ol l ment r at es on per c api t a nat i onal i nc ome f or mor e t han 90 devel opi ng ec onomi es f or t he y ear s 1965 and 1987.25 Enr ol l ment r at es ar e hi gher at hi gher l evel s of per c api t a i nc ome. Bu t HPAE enr ol l ment r at es have t ended t o be hi gher t han pr edi c t ed f or t hei r l evel of i nc ome. At t he pr i mar y l evel , t hi s was mos t obvi ou s i n 1965, when Hong Kong, Kor ea, Si ngapor e, and Tai wan had al r eady ac hi eved u ni ver s al pr i mar y edu c at i on, wel l ahead of ot her devel opi ng ec onomi es , and even In- dones i a wi t h i t s vas t popu l at i on had a pr i mar y enr ol l ment r at e above 70%. By 1987, Eas t As i a's s u per i or edu c at i on s y s t ems wer e evi dent at t he s ec ondar y l evel . Indones i a had a s ec ondar y enr ol l ment r at e of 46%, wel l above ot her ec onomi es wi t h r ou ghl y t he s ame l evel of i nc ome, and Kor ea had moved f r om 35% t o 88%, mai nt ai ni ng i t s l ar ge l ead i n r el at i ve per f or manc e. Onl y i n Thai l and was t he 28% s ec ondar y enr ol l - ment r at e wel l bel ow t he i nc ome-pr edi c t ed 36% and t he 54% mean f or mi ddl e-i nc ome ec onomi es .26 In r ec ent y ear s Thai l and's weak edu c a- t i onal per f or manc e has been f el t , as s er i ou s s hor t ages of edu c at ed wor ker s have begu n t o t hr eat en c ont i nu ed ver y r api d gr owt h. In par t as a f u nc t i on of t hei r s u c c es s i n i nc r eas i ng enr ol l ment , t he Eas t As i an ec onomi es have al s o been f as t er t o c l os e t he gap bet ween mal e and f emal e enr ol l ment s . A c ommon, t hou gh i mper f ec t meas u r e of edu c at i onal qu al i t y , i s expendi t u r es per pu pi l . Bet ween 1970 and 1989, r eal expendi t u r es per pu pi l at t he pr i mar y l evel r os e by 355% i n Kor ea. In M exi c o and Keny a, expendi t u r es r os e by 64% and 38%, r es pec t i vel y , over t he s ame t i me per i od, and i n Paki s t an expendi t u r es r os e by onl y 13% bet ween 1970 and 1985 (Bi r ds al l and Sabot , 1993). Thes e dr amat i c di f f er enc es r ef l ec t 25. Behr man and Sc hnei der (1992). The r egr es s i ons c ont r ol f or a pol y nomi al i n aver age per c api t a i nc ome i n t he r el evant y ear . The au t hor s u s ed per c api t a GNP at of f i c i al exc hange r at es as t he meas u r e of i nc ome. 26. Des pi t e i nc r eas i ng i t s s ec ondar y enr ol l ment r at e f r om 29% t o 74%, Hong Kong al s o f el l wel l bel ow t he pr edi c t ed l evel i n 1987. Thi s i s bec au s e, at $15,000, t he per c api t a i nc ome of Hong Kong was s o hi gh t hat t he OECD c ou nt r i es wer e now i t s c ompar a- t or s . F i gu r e 11 CROSS-ECONOM Y REGRESSION F OR PRIM ARY ENROLLM ENT RATES, 1965 AND 1987 Br az (10) i al i Si ngapor e (105) H K 103) Rep. ol Kor ea (1i i p 21.91 H15K ) 129.2)f 1i M al ay s a (90) (179) 1-14.9 1 Pa Thai an d(7) .(40 e.0 1 H -- ' ' i I I I I/ i II A / Bangl ades h (49) 1-14.91 _ *I Paki s t an (40) 1-24.5 1 ',",'I,,' 'I,l ,'',t l l l l ^^A I,l I, ,, I,l . . . vY 0 250 500 750 1,750 2,000 500 Per c api t a Inc ome (i n 1988 U.S. dol l ar s ) Not e: F i gu r es i n par ent hes es ar e enr ol l ment r at es ; br ac ket ed nu mber s s how r es i du al s . Sou r c e: Behr man and Sc hnei der (1992). l i ndones a (118) 137.01 Br azi l (103) M daay s t a (10 - - - Thaanad (95) - 3S) P( 01 * . _ - * " Rep. ol Kor ea i 1. 1 - Hong Kon (106) Ir 78 1-7.51 / / ngIades h (59) Paki s t an (52) * 1-27.91 1987 1 i I I I I i i i I , i i I ! i I I^AA I i 1,000 1,500 Y 3,500 140 120 - " 100 80 IC E 60 40 20 01) - "I%# . . ? I I? - - l f t I I I, F i gu r e 12 CROSS-ECONOM Y REGRESSION F OR SECONDARY ENROLLM ENT RATES, 1965 AND 1987 J o s l a (46) 119.51 Thaand (28) f -t l ?} / Paks l an(19) /el Ia i -9. Bangl ades h (18) l -3.61 I . l l l l I l l l . i 0 250 500 750 1,750 2,000 500 1,000 Per c api t a Inc ome (i n 1988 U.S. dol l ar s ) Not e: F i gu r es i n par ent hes es ar e enr ol l ment r at es ; br ac ket ed nu mber s s how r es i du al s . Sou r c e: Behr man and Sc hnei der (1992). E 'P c 0 0 t ) . M al ay s i am Rep. od Kor mt a ) 19.41 4 1987 IAA i A , , 1,500 t I I * 1 t * i . * F 4 . . I I 4 . I * \ I I t I 3,500 ? V 250 PAGE mos t l y di f f er ent i al c hanges over t he per i od i n i nc ome gr owt h and i n t he nu mber of c hi l dr en ent er i ng s c hool s , bot h of whi c h f avor ed t he Eas t As i an ec onomi es . A s omewhat bet t er meas u r e of s c hool qu al i t y i s t he per f or manc e of c hi l dr en on t es t s of c ogni t i ve s ki l l s , s t andar di zed ac r os s ec onomi es . In t he r el at i vel y f ew i nt er nat i onal c ompar i s ons avai l abl e f r om s u c h t es t s , Eas t As i an c hi l dr en t end t o per f or m bet t er t han c hi l - dr en f r om ot her devel opi ng r egi ons -and even, r ec ent l y , bet t er t han c hi l dr en f r om hi gh i nc ome ec onomi es .27 Tabl e 7 of f er s s ome c ompar a- t i ve dat a on expendi t u r es per pu pi l i n t he HPAEs and ot her c ou nt r i es bet ween 1965 and 1989. 3.2.2 F oc u s i ng Edu c at i onal Spendi ng Hi gher s har es of nat i onal i nc ome devot ed t o edu c at i on c annot f u l l y expl ai n t he l ar ger ac c u mu l at i on of hu man c api t al i n t he HPAEs . In bot h 1960 and 1989, pu bl i c expendi t u r e on edu c at i on as a per c ent age of GNP was not mu c h hi gher i n Eas t As i a t han el s ewher e (Tabl e 8). In 1960 t he s har e was 2.2% f or al l devel opi ng ec onomi es , 2.4% f or s u b-Sahar an Af r i c a, and 2.5% f or Eas t As i a. Over t he t hr ee dec ades t hat f ol l owed, gover nment s of Eas t As i a mar kedl y i nc r eas ed t he s har e of nat i onal ou t pu t t hey i nves t ed i n f or mal edu c a- t i on. Bu t s o di d gover nment s i n ot her devel opi ng r egi ons . In 1989 t he s har e i n Af r i c a, 4.1%, was hi gher t han t he Eas t As i an s har e, 3.7%, whi c h bar el y exc eeded t he aver age s har e f or al l devel opi ng ec onomi es , 3.6%.28 The al l oc at i on of pu bl i c expendi t u r e bet ween bas i c and hi gher edu c a- t i on i s t he major pu bl i c pol i c y f ac t or t hat ac c ou nt s f or Eas t As i a's ext r aor di nar y per f or manc e wi t h r egar d t o t he qu ant i t y of bas i c edu c a- t i on pr ovi ded. The s har e of pu bl i c expendi t u r e on edu c at i on al l oc at ed t o bas i c edu c at i on has been c ons i s t ent l y hi gher i n Eas t As i a t han el s ewher e. The s har e of pu bl i c f u nds al l oc at ed t o t er t i ar y edu c at i on i n Eas t As i a has t ended t o be l ow, aver agi ng r ou ghl y 15% over t he l as t t hr ee dec ades .29 In Lat i n Amer i c a t he s har e has been r ou ghl y 27. Bi r ds al l and Sabot (1993) c i t e St evens on and St i gl er (1992), among ot her s , who r epor t r es u l t s of t es t s i n c i t i es of Japan, t he Uni t ed St at es , and Tai wan. 28. Gover nment expendi t u r e on edu c at i on, expr es s ed as a per c ent age of GNP, was u s ed as an expl anat or y var i abl e i n a c r os s -c ou nt r y r egr es s i on i n whi c h expec t ed y ear s of s c hool i ng of t he s c hool -age c ohor t (es s ent i al l y an aggr egat e of enr ol l ment r at es ) i s t he i ndependent var i abl e. F or a s ampl e of 15 As i an and Lat i n Amer i c an c ou nt r i es , t he expendi t u r e var i abl e was i ns i gni f i c ant . See Tan and M i ngat (1992). 29. In Kor ea and Tai wan t he s har e of pu bl i c expendi t u r e on edu c at i on al l oc at ed t o hi gher edu c at i on has i nc r eas ed over t he l as t dec ade or s o f or t wo r eas ons . On t he one hand, u ni ver s al and near u ni ver s al enr ol l ment r at es have been ac hi eved at t he pr i mar y and s ec ondar y l evel s , r es pec t i vel y . On t he ot her hand, t he i nc r eas e has been c ons i s t ent wi t h t he s hi f t i n t he s t r u c t u r e of pr odu c t i on and expor t s t o mor e t ec hnol ogi c al l y s ophi s t i c at ed and s ki l l -i nt ens i ve pr odu c t s , and t he c ons equ ent i nc r eas e i n t he demand f or engi neer s and ot her s ki l l ed wor ker s . Tabl e 7 PUBLIC EXPENDITURE PER STUDENT ON PRIM ARY AND SECONDARY EDUCATION (U.S. DOLLARS) 1965 1975 1985 1989 Ec onomy Pr i mar y Sec ondar y Pr i mar y Sec ondar y Pr i mar y Sec ondar y Pr i mar y Sec ondar y HPAEs Hong Kong 192.3 180.5 558.1 810.2 Kor ea, Rep. of 9.9 14.7 51.2 32.9 389.8 352.5 609.6 449.9 M al ay s i a 351.2 572.5 Si ngapor e 193.3 314.7 834.0 Thai l and 17.6 67.7 49.0 74.8 133.0 188.1 229.5 Ot her s el ec t ed ec onomi es Br azi l 76.9 179.1 155.4 225.2 Ghana 22.3 122.0 27.9 62.3 36.3 78.0 Indi a 5.3 71.3 17.5 30.9 38.1 Keny a 28.9 336.7 50.3 149.7 62.2 290.4 M exi c o 23.8 56.6 110.2 315.2 101.9 287.5 93.8 300.2 Paki s t an 5.9 7.1 15.9 33.4 21.1 122.6 Not e: Cel l s ar e empt y wher e dat a ar e u navai l abl e. Sou r c e: Compu t ed f r om UNESCO and Wor l d Bank dat a. 252 PAGE Tabl e 8 PUBLIC EXPENDITURE ON EDUCATION AS A PERCENTAGE OF GNP Ec onomy /Regi on 1960 1989 HPAEs Hong Kong 2.8 Kor ea, Rep. of 2.0 3.6 Si ngapor e 2.8 3.4 M al ay s i a 2.9 5.6 Thai l and 2.3 3.2 Indones i aa 2.5 0.9 Aver ageb 2.5 3.7 Ot her Br azi l 1.9 3.7 Paki s t an 1.1 2.6 Les s devel oped 1.3 3.1 ec onomi es c Su b-Sahar an Af r i c a 2.4 4.1 aAl t er nat i ve s ou r c es of dat a i ndi c at e t hat expendi t u r e on pu bl i c edu c at i on as a per c ent age of GDP was 3.0% i n Indones i a i n 1989. Aver age does not i nc l u de Indones i a. CLower - and mi ddl e-i nc ome ec onomi es . Sou r c e: Uni t ed Nat i ons Devel opment Pr ogr am (1991). 24%.30 In Sou t h As i a t he s har e i s c l os e t o t he Lat i n Amer i c an l evel . Thi s had been t he c as e i n Af r i c a as wel l , bu t i n r ec ent y ear s t he s har e has dec l i ned t o Eas t As i an l evel s . The br oad bas e of hu man c api t al was c r i t i c al l y i mpor t ant t o r api d gr owt h i n t he HPAEs . Bec au s e t he HPAEs at t ai ned u ni ver s al pr i mar y edu c at i on ear l y , l i t er ac y was hi gh and c ogni t i ve s ki l l l evel s wer e s u b- s t ant i al l y above t hos e i n ot her devel opi ng ec onomi es . Bas i c edu c at i on i n t he HPAEs i s hi ghl y or i ent ed t o t he ac qu i s i t i on of gener al ac ademi c s ki l l s , whi l e pos t s ec ondar y edu c at i on t ends t o be or i ent ed t owar d voc at i onal s ki l l s . Some HPAEs have al s o been u nu s u al l y l ar ge-s c al e i mpor t er s of edu c at i onal s er vi c es , par t i c u l ar l y i n voc at i onal l y and t ec h- nol ogi c al l y s ophi s t i c at ed di s c i pl i nes . F i r ms , t her ef or e, had an eas i er t i me u pgr adi ng t he s ki l l s of t hei r wor ker s and mas t er i ng new t ec hnol - ogy . In addi t i on, r api d hu man c api t al ac c u mu l at i on r edu c ed i nc ome i nequ al i t y by i nc r eas i ng t he r el at i ve abu ndanc e of edu c at ed wor ker s , t her eby l ower i ng t he s c ar c i t y r ent s as s oc i at ed wi t h c ogni t i ve s ki l l s . 30. Gi ven t he s mal l er s i ze of t he bas i c edu c at i on age c ohor t i n Eas t As i a t han i n Lat i n Amer i c a, t hi s di f f er enc e u nder es t i mat es t he gap bet ween t he t wo r egi ons i n t he s t r engt h of t he pu bl i c s ec t or 's c ommi t ment t o bas i c edu c at i on. The Eas t As i an M i r ac l e ? 253 Thes e benef i t s wer e par t i c u l ar l y evi dent i n t he c ou nt r y s i de (Bi r ds al l and Sabot , 1993). 4. Unc onvent i onal Wi s dom-The Expor t Pu s h and Indu s t r i al Pol i c i es M os t Eas t As i an gover nment s have pu r s u ed s ec t or -s pec i f i c i ndu s t r i al pol i c i es t o s ome degr ee. The bes t known i ns t anc es i nc l u de Japan's heavy i ndu s t r y pr omot i on pol i c i es of t he 1950s and t he s u bs equ ent i mi t at i on of t hes e pol i c i es i n Kor ea. Thes e pol i c i es i nc l u ded i mpor t pr ot ec t i on as wel l as s u bs i di es f or c api t al and ot her i mpor t ed i npu t s . M al ay s i a, Si ngapor e, Tai wan, and even Hong Kong have al s o es t ab- l i s hed pr ogr ams -t y pi c al l y wi t h mor e moder at e i nc ent i ves -t o ac - c el er at e devel opment of advanc ed i ndu s t r i es . In t he c api t al mar ket , gover nment s i nt er vened s y s t emat i c al l y bot h t o c ont r ol i nt er es t r at es and t o di r ec t c r edi t . Indu s t r i al t ar get i ng c ou l d have r es u l t ed i n ext ens i ve r ent s eeki ng and gr eat i nef f i c i enc y . Bec au s e i t appar ent l y di d not , t he s u c c es s or f ai l u r e of s el ec t i ve i nt er vent i ons ar e among t he mos t c ont r over s i al as pec t s of t he Eas t As i an s u c c es s s t or y . Some of t he r eas ons why s el ec t i ve i nt er ven- t i ons do not appear t o have had t he di s as t r ou s r es u l t s of t hos e pu r s u ed i n ot her devel opi ng ec onomi es ar e s t r ai ght f or war d. Labor mar ket pol i - c i es i n t he HPAEs t ended t o emphas i ze f l exi bi l i t y and c ompet i t i ve det er mi nat i on of wages (F i el ds , 1993). Di r ec t ed c r edi t pr ogr ams wer e u nder t aken wi t hi n a f r amewor k of gener al l y l ow s u bs i di es t o bor r ower s and c ar ef u l moni t or i ng (Vi t t as and Cho, 1993). As a c ons equ enc e, t he r el at i ve pr i c es of l abor and c api t al i n t he HPAEs wer e c l os er t o t hei r s c ar c i t y val u es t han i n ot her devel opi ng ec onomi es (Wor l d Bank, 1993). Never t hel es s , abu ndant evi denc e exi s t s t hat , es pec i al l y i n t he c as es of Japan, Kor ea, and Tai wan, gover nment s made s y s t emat i c ef f or t s t o al t er i ndu s t r i al s t r u c t u r e f or t he pu r pos e of ac c el er at i ng pr odu c t i vi t y c hange. The i mpac t of t hes e pol i c i es on t he HPAEs gr owt h r emai ns a t opi c of heat ed debat e.31 Thi s s ec t i on pr opos es t wo pol i c y l es s ons : f i r s t , t hat pr omot i on of manu f ac t u r ed expor t s was a s i gni f i c ant s ou r c e of mea- s u r ed TF P c hange, and s ec ond, t hat i ndu s t r i al pol i c i es mat t er ed r el a- t i vel y l i t t l e i n t he over al l r ec or d of Eas t As i a's ext r aor di nar y gr owt h. The u ps hot of t hes e pr opos i t i ons i s t hat expor t -not i ndu s t r i al -pr o- mot i on was at t he hear t of t he HPAEs ' pr odu c t i vi t y per f or manc e. 31. See, e.g., t he c ol l ec t i on of es s ay s i n Wor l d Devel opment (1994); Rodr i k (1993), c r i t i c al l y r evi ewi ng Wor l d Bank (1993). 254 PAGE 4.1 EXPORT GROWTH AND PRODUCTIVITY CHANGE Al t hou gh al l HPAEs exc ept Hong Kong pas s ed t hr ou gh an i mpor t s u bs t i t u t i on phas e, wi t h hi gh and var i abl e pr ot ec t i on of domes t i c i m- por t s u bs t i t u t es , t hes e per i ods ended ear l i er t han i n ot her ec onomi es . Hong Kong, M al ay s i a, and Si ngapor e adopt ed t r ade r egi mes t hat wer e c l os e t o f r ee t r ade; Japan, Kor ea, and Tai wan adopt ed mi xed r egi mes t hat wer e l ar gel y f r ee f or expor t i ndu s t r i es . Indones i a and Thai l and have i n t he 1980s begu n t o r edu c e pr ot ec t i on. Exc hange r at e pol i c i es wer e l i ber al i zed, and c u r r enc i es f r equ ent l y deval u ed, t o s u ppor t expor t gr owt h.32 Expor t pu s h s t r at egi es wer e i mpl ement ed i n t hr ee ver y di f f er ent way s i n t he HPAEs . Hong Kong and Si ngapor e es t abl i s hed f r ee-t r ade r egi mes , l i nki ng t hei r domes t i c pr i c es t o i nt er nat i onal pr i c es ; t he expor t pu s h was an ou t c ome of t he ver y l i mi t ed s i ze of t he domes t i c mar ket c ou pl ed wi t h neu t r al i nc ent i ves bet ween pr odu c i ng f or t he domes t i c or i nt er nat i onal mar ket . Bot h ec onomi es made expor t c r edi t avai l abl e, al t hou gh t hey di d not s u bs i di ze i t , and Si ngapor e f oc u s ed i t s ef f or t s on at t r ac t i ng f or ei gn i nves t ment i n expor t i ng f i r ms . In Japan, Kor ea, and Tai wan, i nc ent i ves wer e es s ent i al l y neu t r al on aver age bet ween i mpor t s u bs t i t u t es and expor t s . Bu t wi t hi n t he t r aded- goods s ec t or , expor t i nc ent i ves c oexi s t ed wi t h s u bs t ant i al r emai ni ng pr ot ec t i on of t he domes t i c mar ket . Expor t i nc ent i ves , mor eover , wer e not neu t r al among i ndu s t r i es or f i r ms . Ther e was an ef f or t i n Japan, Kor ea, Si ngapor e, and Tai wan t o pr omot e s pec i f i c expor t i ng i ndu s t r i es . Pr ot ec t i on was c ombi ned wi t h ei t her c ompu l s i on or s t r ong i nc ent i ves t o expor t . In Kor ea, f i r m s pec i f i c expor t t ar get s wer e empl oy ed; i n Japan and Tai wan ac c es s t o s u bs i di zed expor t c r edi t and u nder val u at i on of t he c u r r enc y ac t ed as an of f s et t o t he pr ot ec t i on of t he l oc al mar ket . What was i mpor t ant i n al l c as es was t hat gover nment s wer e c r edi bl y c ommi t t ed t o t he pr omot i on of manu f ac t u r ed expor t s . They adopt ed an expor t pu s h s t r at egy .33 The HPAEs ' expor t per f or manc e i s r ef l ec t ed i n t hei r s t eadi l y r i s i ng s har e of wor l d expor t s (Tabl e 9). As a gr ou p, t he HPAEs i nc r eas ed t hei r s har e i n wor l d expor t s f r om 7.9% i n 1965 t o 13.1% i n 1980 and 18.2% i n 32. Cor den (1993) r ef er s t o t hi s as "exc hange r at e pr ot ec t i on." 33. Col i n Br adf or d was t he f i r s t t o i nt r odu c e t he c onc ept of expor t pu s h i nt o t he anal y s i s of Eas t As i a's r api d gr owt h. He has def i ned i t as ef f ec t i ve exc hange r at es f or expor t abl es exc eedi ng t hos e f or i mpor t abl es (Br adf or d, 1994). We u s e t he t er m s omewhat mor e br oadl y t o i ndi c at e a c r edi bl e c ommi t ment t o a pol i c y r egi me t hat wi l l u l t i mat el y y i el d ef f ec t i ve exc hange r at es f or expor t abl es equ al t o or gr eat er t han t he EER f or i mpor t abl es . The Eas t As i an M i r ac l e ? 255 Tabl e 9 EXPORT PENETRATION, SELECTED EAST ASIAN ECONOM IES, 1965-1990 Shar e i n devel opi ng Shar e i n wor l d expor t s ec onomy expor t s Ec onomy 1965 1980 1990 1965 1980 1990 Tot al expor t s Japan 5.0 7.0 9.0 - - F ou r t i ger s a 1.5 3.8 6.7 6.0 13.3 33.9 Sou t heas t As i an NIEs b 1.5 2.2 2.4 6.2 7.8 12.4 HPAE Su bt ot al 7.9 13.1 18.2 12.2 21.1 56.3 Al l devel opi ng ec onomi es 24.2 28.7 19.8 100.0 100.0 100.0 Wor l d 100 100 100 - Expor t s of manu f ac t u r es Japan 7.8 11.6 11.8 F ou r t i ger s a 1.5 5.3 7.9 13.2 44.9 61.5 Sou t heas t As i an NIEs b 0.1 0.4 1.5 1.1 3.8 12.0 HPAE Su b-t ot al 9.4 17.3 21.3 14.2 48.6 73.5 Al l devel opi ng ec onomi es 11.1 11.8 12.9 100 100 100 Wor l d 100 100 100 - - aRepu bl i c of Kor ea, Hong Kong, Si ngapor e, and Tai wan. bIndones i a, M al ay s i a, and Thai l and. Sou r c e: UN Tr ade Sy s t ems dat a. 1990. M anu f ac t u r ed expor t s have pr ovi ded mos t of t hi s gr owt h. F r om 1965 t o 1990, Japan emer ged as t he wor l d's bi gges t expor t er of manu f ac - t u r ed goods , i nc r eas i ng i t s s har e of t he wor l d mar ket f r om near l y 8% t o al mos t 12%. In t he 1970s and 1980s , t he l oc u s of gr owt h s hi f t ed t o t he f ou r t i ger s , whos e s har e of manu f ac t u r ed expor t s gr ew near l y f ou r t i mes f as t er t han Japan's (Tabl e 9). Begi nni ng ar ou nd 1980, t he t hr ee s ou t heas t As i an HPAEs (Indones i a, M al ay s i a, and Thai l and), hi s t or i c al l y dependent on c ommodi t y expor t s , r ec or ded a s i mi l ar bu t s o f ar s mal l er s u r ge i n manu f ac t u r ed expor t s . Some anal y s t s have, wi t h hi nds i ght , at t r i bu t ed t hes e ac hi evement s t o u ni qu e c u l t u r al and geogr aphi c al c i r c u ms t anc es . Bu t t her e was l i t t l e evi denc e at t he ou t s et t hat Eas t As i an ec onomi es wou l d ac hi eve s u c h s pec t ac u l ar r es u l t s . In t he 1950s even t r ade opt i mi s t s wer e expor t pes s i mi s t s and di d not ant i c i pat e t hat Kor ea's expor t s wou l d gr ow f ou r t i mes as f as t as wor l d t r ade over t he next 30 y ear s .34 One obvi ou s ef f ec t of r api d expor t gr owt h has been a mar ked i nc r eas e i n t he opennes s of 34. See, e.g., Li t t l e (1982). 256 PAGE t hes e ec onomi es as meas u r ed by t he s har e of expor t s pl u s i mpor t s i n GDP (Tabl e 10). M os t expl anat i ons of t he l i nk bet ween TF P gr owt h and expor t s emphas i ze s u c h s t at i c f ac t or s as i mpr oved r es ou r c e al l oc at i on among s ec t or s (pr es u mabl y ar i s i ng f r om r edu c t i ons i n ant i -expor t bi as ), ec onomi es of s c al e and i mpr oved c apac i t y u t i l i zat i on, whi c h may ac - c ou nt f or a hi gh l evel of pr odu c t i vi t y bei ng ac hi eved af t er a s hor t per i od of expor t or i ent at i on bu t not f or c ont i nu i ng hi gh TF P gr owt h r at es . However , t he r el at i ons hi p bet ween expor t s and pr odu c t i vi t y gr owt h may ar i s e f r om expor t 's r ol e i n hel pi ng ec onomi es adopt and mas t er i nt er nat i onal bes t pr ac t i c e. Bec au s e f i r ms t hat expor t have gr eat er ac c es s t o bes t pr ac t i c e t ec hnol ogy i n i mper f ec t wor l d t ec hnol ogy mar - ket s , t her e ar e bot h benef i t s t o t he ent er pr i s e and s pi l l over s t o t he r es t of t he ec onomy t hat ar e not r ef l ec t ed i n mar ket t r ans ac t i ons (Pac k and Page, 1993; Br adf or d, 1994). Thes e i nf or mat i on-r el at ed ext er nal i t i es c an be an i mpor t ant s ou r c e of r api d TF P gr owt h. Tr ade and edu c at i onal s t r at egi es , mor eover , may have wor ked t o- get her . Hi gh l evel s of l abor f or c e c ogni t i ve s ki l l s per mi t bet t er f i r m-l evel adopt i on, adapt at i on, and mas t er y of t ec hnol ogy (Bi r ds al l and Sabot , 1993). It i s dou bt f u l t hat t he HPAEs c ou l d have made as pr odu c t i ve u s e of f or ei gn knowl edge and i mpor t ed c api t al and benef i t ed as mu c h f r om embodi ment wi t hou t hi ghl y s ki l l ed domes t i c engi neer s and wor ker s . Tabl e 10 RATIO OF TOTAL TRADE TO GDP Ec onomy / r egi on 1970 1980 1985 1988 HPAEs Hong Kong 1.50 1.52 1.78 2.82 Indones i a 0.25 0.46 0.38 0.42 Kor ea, Rep. of 0.32 0.63 0.66 0.66 Japan 0.19 0.25 0.23 0.21 M al ay s i a 0.89 1.00 0.85 1.09 Si ngapor e 2.12 3.70 2.77 3.47 Tai wan 0.53 0.95 0.82 0.90 Thai l and 0.28 0.49 0.44 0.35 Su b-Sahar an Af r i c a 0.24 0.30 0.27 0.45 Sou t h As i a 0.11 0.17 0.16 0.19 Lat i n Amer i c a and 0.20 0.25 0.22 0.23 Car i bbean Not e: Tot al t r ade = val u e of expor t s and val u e of i mpor t s /gr os s domes t i c pr odu c t . Sou r c es : Wor l d Bank dat a; Tai wan, var i ou s i s s u es ; Nat i onal Ac c ou nt s St at i s t i c s : Anal y s i s of M ai n Aggr egat es , 1988-1989 (Uni t ed Nat i ons ). The Eas t As i an M i r ac l e ? 257 Thu s , expor t s and hu man c api t al f or mat i on may have i nt er ac t ed t o pr ovi de a par t i c u l ar l y r api d phas e of pr odu c t i vi t y -bas ed c at c h-u p. To t es t t he hy pot hes i s t hat expor t or i ent at i on pl ay ed a s i gni f i c ant r ol e i n t he HPAEs ' TF P gr owt h, we at t empt t o expl ai n var i at i ons ac r os s ec onomi es i n TF P gr owt h r at es i n t er ms of r el at i ve i nc ome, edu c at i onal at t ai nment (as meas u r ed by t he aver age s t oc k of edu c at i on per per s on), a meas u r e of t r ade or i ent at i on, and meas u r es of manu f ac t u r ed expor t per f or manc e (Tabl e 11). The r el at i ve l evel of GDP i n 1960 i s i nc l u ded i n t he expl anat or y r egr es s i on t o t es t f or t he pr es enc e of c ondi t i onal , pr odu c t i vi t y -bas ed c at c h-u p. The i nt er pr et at i on of t he var i abl e i s not s t r ai ght f or war d, however , s i nc e i t al s o c apt u r es t he r es ou r c e al l oc at i on gai ns ar i s i ng f r om s t r u c t u r al t r ans f or mat i on at l ow l evel s of i nc ome. Bec au s e t hes e pot ent i al gai ns dec l i ne wi t h i nc r eas es i n per c api t a i nc ome, t he r el at i ve i nc ome var i abl e al s o c apt u r es t he ef f ec t of s t r u c t u r al c hange on t he one-s ec t or TF P es t i mat es (Pac k, 1993). Nu mer ou s ef f or t s have been made t o t es t t he r el at i ons hi p bet ween "ou t war d or i ent at i on" and pr odu c t i vi t y gr owt h.35 Dol l ar (1990) u s es t he i nt er nat i onal c ompar i s ons of pr i c e l evel s c ompi l ed f or 121 mar ket c ou nt r i es by Su mmer s and Hes t on (1988) t o devel op an i ndex of "ou t war d or i ent at i on" f or 95 devel opi ng c ou nt r i es . We empl oy Dol l ar 's i ndex i n ou r bas i c s pec i f i c at i on and f i nd t hat t her e i s a s i gni f i c ant and pos i t i ve r el at i ons hi p bet ween "ou t war d or i ent at i on" and TF P gr owt h. The i nt er pr et at i on of t hi s var i abl e i s al s o not s t r ai ght f or war d, how- ever . Rodr i k (1993) has di s c u s s ed t he pr obl ems i n t he c ons t r u c t i on of t he i ndex and i t s i nt er pr et at i on, and ar gu es t hat i t i s bes t r egar ded as an i ndex of exc hange r at e mi s management . To t he ext ent t hat t hi s i s c or r ec t , ou r r es u l t s di f f er f r om t hos e of F i s c her (1993) i n f i ndi ng a s i gni f i c ant negat i ve r el at i ons hi p bet ween i nappr opr i at e exc hange r at e pol i c y and pr odu c t i vi t y gr owt h. M anu f ac t u r ed expor t per f or manc e i s s t r ongl y c or r el at ed (at t he 1% l evel ) wi t h i nc r eas ed r at es of TF P gr owt h. We u s e t wo meas u r es of expor t or i ent at i on t hat have s omewhat di f f er ent i nt er pr et at i ons . The f i r s t i s t he s har e of manu f ac t u r ed expor t s i n t ot al expor t s . Thi s i s a c r u de meas u r e of t he pr obabi l i t y t hat t he mar gi nal expor t wi l l be a manu f ac t u r ed good. The s ec ond i s t he mor e c onvent i onal s har e of manu f ac t u r ed expor t s i n GDP, whi c h meas u r es manu f ac t u r ed expor t c onc ent r at i on f or t he ec onomy . Bot h t he s har e of manu f ac t u r ed expor t s i n t ot al expor t s and t he s har e of manu f ac t u r ed expor t s i n GDP ar e 35. See, e.g., Thomas and Wang (1993) and Ni s hi mi zu and Page (1991). Tabl e 11 DETERM INANTS OF TOTAL F ACTOR PRODUCTIVITY GROWTH, 1960-1989 (DEPENDENT VARIABLE: RATE OF GROWTH OF TOTAL F ACTOR PRODUCTIVITY, 1960-1989) Nu mber of obs er vat i ons 56 62 47 47 64 49 49 Int er c ept GDP r el at i ve t o U.S., 1960 Edu c at i onal at t ai nment , 1960 Dol l ar i ndex Aver age manu f ac t u r ed expor t s / t ot al expor t s , 1960-1985 Int er ac t i on t er m: Edu c at i on at t ai nment 1960 t i mes manu f ac t u r ed expor t s /t ot al expor t s , 1960-1985 Aver age manu f ac t u r ed expor t s /GDP, 1965-1985 Int er ac t i on t er m: Edu c at i on at t ai nment 1960 t i mes manu f ac t u r ed expor t s / GDP, 1965-1985 Adju s t ed R2 - 83.1863** - 0.3584 -64.9123** -71.1186** -0.1315 -72.0692** -70.8604** (15.6575) - 4.5638* (2.1994) 0.3083** (0.0951) 0.8328** (0.1579) (0.2614) (14.0585) - 3.3864** - 4.8047* (1.0189) (1.9771) 0.2158** 0.1471 (0.0808) (0.0874) 0.6493** (0.1417) 0.0345** 0.0314** (0.0058) (0.0066) (14.8657) - 5.5757** (2.0637) 0.0680 (0.1082) 0.7154** (0.1508) 0.0159 (0.0142) 0.0032 (0.0026) 0.0828** 0.0625* (0.0279) (0.0269) 0.4854 0.4665 0.6333 0.6376 0.1950 0.4507 0.4628 * St at i s t i c al l y s i gni f i c ant at t he 0.05 l evel . **St at i s t i c al l y s i gni f i c ant at t he 0.01 l evel . Not e: Coef f i c i ent i s t op nu mber . St andar d er r or i s bot t om nu mber i n par ent hes es . Sou r c e: Wor l d Bank s t af f es t i mat es . (0.3244) - 1.4501 (1.1912) 0.2269* (0.0990) (15.6104) - 2.3509 (2.3225) 0.1574 (0.1064) 0.7225** (0.1574) (15.4608) -2.1562 (2.3008) 0.0738 (0.1207) 0.7134** (0.1558) -0.0686 (0.0966) 0.0284 (0.0201) The Eas t As i an M i r ac l e * 259 s i gni f i c ant l y and pos i t i vel y c or r el at ed wi t h TF P gr owt h, c ont r ol l i ng f or r el at i ve i nc ome and edu c at i onal at t ai nment .36 When t he manu f ac t u r ed expor t var i abl es ar e i nt r odu c ed t oget her wi t h t he Dol l ar i ndex, bot h ar e s i gni f i c ant , al t hou gh t he c oef f i c i ent on t he s har e of manu f ac t u r ed expor t s i n t ot al ou t pu t i s l es s pr ec i s el y es t i mat ed. Ou r i nt er pr et at i on of t hes e r es u l t s i s t hat c ont r ol l i ng f or over al l "ou t war d or i ent at i on" (or appr opr i at e exc hange r at e pol i c y ), hi gh manu f ac t u r ed expor t or i ent at i on i nc r eas es TF P gr owt h. A hi gh c onc ent r at i on of manu f ac t u r ed expor t s r el at i ve t o t ot al expor t s , r at her t han t he r el at i ve s i ze of t he manu f ac t u r ed expor t s ec t or , i s mor e c l os el y as s oc i at ed wi t h pr odu c t i vi t y gr owt h i n a c r os s -ec onomy f r amewor k. Thi s i s c ons i s t ent wi t h t he hy pot hes i s t hat expor t -bas ed l ear ni ng i s mor e c l os el y r el at ed t o manu f ac t u r ed expor t or i ent at i on t han t o manu - f ac t u r ed expor t vol u me. The edu c at i on s t oc k var i abl e i s i nc l u ded as a c r u de t es t of edu c at i on- al l y bas ed ext er nal i t i es . We f i nd, c ons i s t ent wi t h t hi s hy pot hes i s , t hat t he edu c at i on s t oc k var i abl e i s pos i t i vel y and s i gni f i c ant l y as s oc i at ed wi t h TF P gr owt h when ei t her t he Dol l ar i ndex of ou t war d or i ent at i on or ei t her i ndex of manu f ac t u r ed expor t or i ent at i on i s u s ed i ndepen- dent l y i n t he r egr es s i ons . When bot h i ndi c es of ou t war d or i ent at i on ar e i nt r odu c ed joi nt l y , however , t he magni t u de of t he c oef f i c i ent on edu c a- t i onal at t ai nment dec l i nes , as does i t s s i gni f i c anc e (t o t he .10 l evel ). Thi s i s s u gges t i ve of an i nt er ac t i on bet ween t r ade or i ent at i on and edu c a- t i onal at t ai nment . We al s o f i nd s ome evi denc e of a pos i t i ve i nt er ac t i on bet ween t he s har e of manu f ac t u r ed expor t s i n t ot al expor t s and i n nat i onal i nc ome and t he s t oc k of edu c at i on. The c oef f i c i ent of t he i nt er ac t i on t er m bet ween t hes e t wo var i abl es i s pos i t i ve bu t not s i gni f i c ant at c onven- t i onal l evel s , and t he expor t s har e var i abl e bec omes i ns i gni f i c ant . When we c ons i der t he c ont r i bu t i on of t he var i abl es t aken t oget her t o expl ai n- i ng t he var i at i on i n TF P gr owt h r at es , however , i t i s s t at i s t i c al l y pos i - t i ve. We c onc l u de t hat expor t per f or manc e and edu c at i on i nt er ac t 36. The evi denc e f r om ou r c r os s -ec onomy es t i mat es i s s u ppor t ed by a nu mber of r ec ent mi c r oec onomi c s t u di es t hat at t empt t o t es t t he l i nk bet ween expor t s and pr odu c t i vi t y gr owt h. Pac k and Page (1993) pr es ent evi denc e f r om Kor ea and Tai wan t hat at t he s ec t or al l evel , r api d expor t gr owt h i s c or r el at ed wi t h t he pat t er n of pr odu c t i vi t y c hange; expor t i ng s ec t or s have hi gher s ec t or al r at es of TF P gr owt h. Wei (1993) u s es c i t y l evel dat a f r om Chi na and f i nds a s t at i s t i c al l y s i gni f i c ant r el at i ons hi p bet ween expor t gr owt h and pr odu c t i vi t y gr owt h. Aw and Hwang (1993), u s i ng f i r m-l evel mi c r oec onomi c dat a f r om Tai wan, f i nd a s t at i s t i c al l y s i gni f i c ant r el at i ons hi p bet ween pr odu c t i vi t y l evel di f f er enc es among manu f ac t u r i ng f i r ms and expor t or i ent at i on. 260 PAGE pos i t i vel y ; hi gher l evel s of edu c at i on r ai s e t he c ont r i bu t i on of manu f ac - t u r ed expor t c onc ent r at i on t o TF P gr owt h.37 4.2 THE INSIGNIF ICANCE OF INDUSTRIAL POLICY Pr oponent s of neu t r al i t y and i nt er vent i on bot h c i t e t he hi gh per f or m- i ng Eas t As i an ec onomi es as evi denc e s u ppor t i ng t hei r vi ews . Bal as s a (1991), Kr u eger (1993), Hu ghes (1992), and ot her s ar gu e t hat opennes s t o i nt er nat i onal t r ade, bas ed on l ar gel y neu t r al i nc ent i ves , was t he c r i t i c al f ac t or i n Eas t As i a's r api d gr owt h. On t he ot her hand, advoc at es of i nt er vent i ons , whi l e ac knowl edgi ng t he i mpor t anc e of t r ade, not e t hat i nc ent i ves der i vi ng f r om qu ant i t at i ve r es t r i c t i ons on i mpor t s , t ar i f f s , and s u bs i di es wer e not neu t r al among s ec t or s (or f i r ms ) du r i ng t he HPAEs ' per i ods of r api d gr owt h. They ar gu e t hat t he HPAE gover n- ment s s u c c es s f u l l y i nt er vened t o c hange c ompar at i ve advant age (Ams den, 1989; Wade, 1990; Si ngh, 1992). Indu s t r i al pol i c y i nt er vent i ons , whi c h of t en u s e t r ade pol i c y i ns t r u - ment s , ar e mot i vat ed by t he bel i ef t hat s hi f t i ng i ndu s t r i al s t r u c t u r es t owar d newer and mor e moder n s ec t or s i nc r eas es t he oppor t u ni t i es f or c apt u r i ng t he dy nami c s c al e ec onomi es t hat r es u l t f r om l ear ni ng. We def i ne i ndu s t r i al pol i c i es , as di s t i nc t f r om t r ade pol i c i es , as gover nment ef f or t s t o al t er i ndu s t r i al s t r u c t u r e t o pr omot e pr odu c t i vi t y -bas ed gr owt h. Thi s pr odu c t i vi t y -bas ed gr owt h may der i ve f r om l ear ni ng, t ec hnol ogi c al i nnovat i on, or c at c h-u p t o i nt er nat i onal bes t pr ac t i c e. Al l of t he HPAEs , exc ept Hong Kong, have empl oy ed i ndu s t r i al pol i c i es as def i ned ear l i er . Japan and Kor ea had t he mos t s y s t emat i c s et of pol i c i es t o al t er i ndu s t r i al s t r u c t u r e. Tai wan's ef f or t s wer e l es s s y s - t emat i c bu t wer e nonet hel es s wi des pr ead. Indu s t r i al pol i c y i n Si nga- por e was mor e f u nc t i onal l y di r ec t ed at t he r api d u pgr adi ng of t ec hnol - ogy by di r ec t f or ei gn i nves t or s , r egar dl es s of t y pe of ou t pu t . M al ay s i a, Indones i a, and Thai l and have al l u s ed i ndu s t r i al pol i c i es bu t mu c h l es s s y s t emat i c al l y t han t he nor t heas t er n HPAEs . 37. We r an t wo joi nt F t es t s on t he r egr es s i ons i nc l u di ng t he i nt er ac t i ve t er m. The F t es t s wer e bot h c ons i s t ent wi t h a hi gh degr ee of mu l t i c ol l i near i t y bet ween t he i nt er ac t i on t er m and t he expor t t er m. The F Tes t r ejec t s t he nu l l hy pot hes i s t hat , t aken joi nt l y , t he c oef f i c i ent s on t he t hr ee var i abl es (edu c at i on, manu f ac t u r ed expor t s /t ot al expor t s , and t he i nt er ac t i ve t er m) ar e not s i gni f i c ant l y di f f er ent f r om zer o (t aken t oget her , t he t hr ee ar e s i gni f i c ant l y di f f er ent f r om zer o at t he .01 l evel ). Li kewi s e, t he F t es t r ejec t s t he hy pot hes i s t hat , t aken joi nt l y , t he i nt er ac t i ve t er m and t he expor t var i abl e ar e not s i gni f i c ant l y di f f er ent f r om zer o (t aken t oget her , t he t wo ar e s i gni f i c ant l y di f f er ent f r om zer o at t he .01 l evel ). Wher e t her e i s a hi gh degr ee of mu l t i c ol l i near i t y bet ween t he var i abl es , t he c oef f i c i ent s on t he i nt er ac t i on t er m and t he expor t var i abl e, des pi t e bei ng s epar at el y i ns i gni f i c ant , s hou l d s t i l l be t r eat ed as bes t poi nt es t i mat es . The Eas t As i an M i r ac l e ? 261 Tabl e 12 EF F ECT OF SECTORAL COM POSITION ON M ANUF ACTURING WIDE GROWTH OF TF P TF P gr owt h, TF P gr owt h, Ec onomy ac t u al val u e added wei ght s adju s t ed wei ght s Kor ea, Rep. of , 1966-1985 6.7 6.1 Japan, 1960-1979 2.3 1.9 Not e: Wei ght ed by val u e added s har es t hat wou l d have pr evai l ed i f t he met al pr odu c t s and mac hi ner y s ec t or had c onf or med t o t hat pr edi c t ed by t he equ at i ons es t i mat ed by Sy r qu i n and Chener y (1989). Sou r c es : Pac k (1993). Bas ed on Ku r oda, Kor gens on, and Ni zhi mi zu (1985) f or TF P es t i mat es f or Japan. 4.2.1 Indu s t r i al Gr owt h and Pr odu c t i vi t y Change HPAE i ndu s t r i al gr owt h pat t er ns di f f er f r om t he pat t er ns i n mos t ot her l ow- and mi ddl e-i nc ome ec onomi es i n t he r el at i ve s i ze and gr owt h r at es of t wo i mpor t ant i ndu s t r i al s u bs ec t or s -met al pr odu c t s , el ec t r oni c s and mac hi ner y , and t ext i l es and gar ment s . Tabl e 12 s hows t he r at i o of t he s har e of t he val u e added i n f i ve key Int er nat i onal St andar d Indu s t r i al Cl as s i f i c at i on (ISIC) s u bs ec t or s as a per c ent age of t he t ot al val u e added of manu f ac t u r i ng t o c r os s -c ou nt r y nor ms (Chener y , 1987). Among t he HPAEs , met al pr od- u c t s , el ec t r oni c s , and mac hi ner y (ISIC s u bs ec t or 38, or M PM ) have gr own u nu s u al l y f as t . The s ec t or 's s har e of manu f ac t u r i ng val u e added dou bl ed i n Si ngapor e and Japan, near l y t r i pl ed i n Kor ea, and Indone- s i a, and qu adr u pl ed i n M al ay s i a. M or e s u r pr i s i ng t han t he i mpor t anc e of gr owt h i n M PM , whi c h pr ovi des vi t al i npu t s t o nu mer ou s ot her manu f ac t u r i ng s u bs ec t or s , i s c ont i nu ed i mpor t anc e of t ext i l es and gar - ment s even as t he r api dl y devel opi ng As i an ec onomi es s hi f t ed f r om l abor i nt ens i ve t o c api t al i nt ens i ve pr odu c t i on. Det ai l ed s ec t or al gr owt h r at es of TF P ar e avai l abl e f or Japan, Kor ea, and Tai wan. Ther e i s bot h good news and bad news f or advoc at es of i ndu s t r i al pol i c y i n t he pr odu c t i vi t y per f or manc e of Eas t As i an i ndu s t r y . The good news i s t hat , on aver age, r at es of pr odu c t i vi t y c hange i n i ndu s t r y i n Japan (bef or e 1973), Kor ea, and Tai wan, whi c h ar e t he onl y ec onomi es f or whi c h we have det ai l ed s ec t or al es t i mat es of TF P gr owt h, wer e hi gh by i nt er nat i onal s t andar ds (Page, 1990).38 Ther e ar e now s u f f i c i ent l y l ong t i me s er i es dat a t o c onc l u de t hat i n t hes e ec onomi es , TF P gr owt h has ac c ou nt ed f or a s u bs t ant i al f r ac t i on of t he gr owt h of 38. You ng (1993) di s pu t es even t hi s as s er t i on, al t hou gh hi s s ampl e of LDC c ompar at or s i s s mal l . 262 PAGE c ons t ant pr i c e val u e added i n manu f ac t u r i ng. Gi ven t he l engt h of t i me of t he obs er vat i ons , i t s eems u nl i kel y t hat t he meas u r ed gr owt h r at es of TF P c ou l d be at t r i bu t abl e t o c y c l i c al phenomena or gr owi ng c apac i t y u t i l i zat i on of i ni t i al l ar ge i nves t ment s . The bad news i s t hat , i n gener al , pr odu c t i vi t y c hange has not been hi gher i n pr omot ed s ec t or s . Japan may be an exc ept i on. Bet ween 1960 and 1979, c hemi c al s and t he met al wor ki ng mac hi ner y c ompl ex had u nu s u al l y good TF P per f or manc e (Jor gens on, Ku r oda, and Ni s hi mi zu , 1987). Japan's i ndu s t r i al s t r u c t u r e di f f er s f r om i nt er nat i onal nor ms i n t hes e s ec t or s and exhi bi t s qu i t e hi gh val u es of t he s har e of val u e added i n t ot al manu f ac t u r i ng. Thes e i ndu s t r i es ar e t hos e t hat obs er ver s u s u al l y poi nt t o as havi ng r ec ei ved s i gni f i c ant gover nment s u ppor t i nc l u di ng ef f or t s t o s t i mu l at e pr odu c t i vi t y gr owt h. A nu mber of c al c u l at i ons of TF P have been c ar r i ed ou t f or Kor ea f or a var i et y of per i ods (Dol l ar and Sokol of f , 1990; Li m, 1991). F r om t hes e s t u di es a nu mber of pat t er ns c an be i dent i f i ed t hat ar e br oadl y c ons i s - t ent wi t h one anot her . What i s mos t s t r i ki ng ar e t he hi gh val u es of TF P c hange i n mos t s ec t or s by i nt er nat i onal s t andar ds (Ni s hi mi zu and Page, 1991). Al t hou gh t he Kor ean gover nment s el ec t i vel y pr omot ed c hemi c al s and i r on and s t eel (i nc l u ded i n bas i c met al s ), t he l ar ge gr owt h i n t he s har e of i r on and s t eel was ac c ompani ed by qu i t e l ow TF P per f or manc e bet ween 1966 and 1985; t ext i l es and c l ot hi ng, on t he ot her hand, had ver y hi gh r at es of TF P gr owt h. The pr omot ed c hemi c al s ec t or , whos e r el at i ve s i ze was dec r eas i ng, was c har ac t er i zed by c ons i der abl y hi gher t han aver age TF P gr owt h du r i ng t hi s s ame per i od. The gover nment i n Tai wan di d not at t empt t o i nf l u enc e s ec t or al evol u t i on as s t r ongl y as t he gover nment of Kor ea. Never t hel es s , t her e was s u bs t ant i al ef f or t devot ed t o enc ou r agi ng s pec i f i c s ec t or s , par t i c u - l ar l y t hos e vi ewed as ei t her c api t al - or t ec hnol ogy -i nt ens i ve. However , t her e i s no r el at i ons hi p bet ween c api t al i nt ens i t y and pr odu c t i vi t y c hange at t he s ec t or al l evel . In f ac t , t he hi ghes t s ec t or al r at es of TF P c hange ar e r ec or ded i n t ext i l es and appar el . Over al l , t he evi denc e t hat i ndu s t r i al pol i c y s y s t emat i c al l y pr omot ed s ec t or s wi t h hi gh pr odu c t i vi t y c hange i s weak. In Japan t her e i s s ome s u ppor t f or t he as s er t i on t hat TF P gr owt h was hi gher i n s el ec t ed s ec t or s , whi l e i n Kor ea and Tai wan, ac t i vi t i es t hat wer e not pr omot ed (e.g., t ext i l es ) had equ al l y as i mpr es s i ve TF P per f or manc es as t hos e t hat wer e. The c r i t i c al empi r i c al qu es t i on, of c ou r s e, i s whet her , gi ven any pl au s i bl e as s u mpt i ons r egar di ng t he r el at i ve s i ze of pr omot ed s ec t or s i n t he abs enc e of i ndu s t r i al pol i c y and t hei r obs er ved r at es of pr odu c t i vi t y c hange, i ndu s t r i al pol i c i es ac c el er at e t he over al l r at e of pr odu c t i vi t y c hange i n manu f ac t u r i ng. The Eas t As i an M i r ac l e ? 263 4.2.2 The Ef f ec t of Indu s t r i al Pol i c y on M anu f ac t u r i ng Pr odu c t i vi t y Gr owt h Aggr egat e TF P i n any per i od c an be dec ompos ed by wei ghi ng eac h s ec t or 's l evel of t ot al f ac t or pr odu c t i vi t y , A, t , by t he s ec t or 's s har e i n val u e added, vi ,t . The gr owt h of TF P wi l l t hen depend on c hanges i n A, t and c hanges i n vi , . Al gebr ai c al l y , t hi s r el at i on c an be wr i t t en as A Log A = (vi t l og Ai , t - i , t -_ l og Ai , t -1). (3) Equ at i on (3) gi ves t he gr owt h i n A du e t o t he c hange i n pr odu c t i vi t y of s ec t or s as s u mi ng c ons t ant s ec t or al s har es and/or t he gr owt h i n t he val u e added s har e of s ec t or s , whos e pr odu c t i vi t y i s hi gh. Of t he c ou nt r i es c ons i der ed her e, Japan and Kor ea ar e t he c ou nt r i es i n whi c h ac t i vi s t i ndu s t r i al pol i c i es wer e empl oy ed mos t c ons i s t ent l y t o ac hi eve pr odu c t i vi t y -bas ed c at c h-u p. On t he bas i s of i nt er nat i onal c om- par i s ons , t wo s ec t or s wer e gener al l y over r epr es ent ed i n t he i ndu s t r i al s ec t or s of t he HPAEs , met al pr odu c t s and mac hi ner y , and t ext i l es and appar el . Br oadl y s peaki ng, onl y t he f or mer s ec t or was pr omot ed i n HPAEs t hat u s ed i ndu s t r i al pol i c y . One t es t of t he s i gni f i c anc e of i ndu s t r i al pol i c y , t hen, i s whet her , gi ven t he obs er ved val u es of s ec t or al TF P gr owt h, t he u nu s u al evol u t i on of t he s ec t or al pat t er n of pr odu c t i on i n s ome of t he c ou nt r i es had a s i gni f i c ant qu ant i t at i ve i mpac t on over al l TF P gr owt h.39 To ans wer t hi s we f i r s t c al c u l at e t he manu f ac t u r i ng-wi de gr owt h of A* u s i ng t he obs er ved val u e-added s har es at t he end of t he per i od of 1966 t o 1985, and t he A* val u es es t i mat ed f or Kor ea by Li m (1991) and f or Japan by Jor gens on, Ku r oda, and Ni s hi mi zu (1987). We t hen r ec al c u - l at e t he val u e added wei ght s as s u mi ng t hat t he s ec t or s i n ISIC 38 had been at t hei r pr edi c t ed val u e, on t he bas i s of i nt er nat i onal nor ms t aken f r om Chener y (1986), and we r eas s i gn t he r es i du al val u e added t o al l ot her s ec t or s equ al l y . Thu s , i n Kor ea, i ns t ead of ac c ou nt i ng f or 38% of manu f ac t u r i ng val u e added, s ec t or 38 ac c ou nt s f or 14%.40 The r es u l t f or Kor ea i s s hown i n r ow 1 i n Tabl e 12. The ac t u al s ec t or - wi de gr owt h r at e, A*, was 6.7%, t he r ec al c u l at ed one 6.1%, du r i ng a 39. It i s pos s i bl e t hat i ndu s t r i al pol i c y s i gni f i c ant l y i nc r eas ed t he val u es of A* i n s ec t or s ot her t han t hos e pr omot ed du e t o one or mor e ext er nal i t i es . Whi l e t hi s may be t he c as e, i t i s l i kel y t hat mos t ext er nal i t i es oc c u r wi t hi n i ndi vi du al s ec t or s or i n c l os el y r el at ed ones . Gi ven t he many br anc hes c ons t i t u t i ng t he M et al Pr odu c t s and M ac hi n- er y s ec t or , t he ext er nal i t i es s hou l d have been r eveal ed i n i t s own TF P val u e. 40. Pu t di f f er ent l y , i t has been s hown ear l i er t hat Kor ea's vP/vA r at i o f or M PP was 2.76. If t hi s had been one, t he ac t u al s har e of val u e added wou l d have been 13% r at her t han 36%, i .e., t he s har e wou l d have been c ons t ant at t he 1968 l evel . If f ac t or s had been al l oc at ed t o al l of t he r emai ni ng s ec t or s equ al l y , t he s ec t or -wi de aver age val u e f or A* wou l d have been .061 r at her t han .067. 264 PAGE per i od i n whi c h t he gr owt h r at e of manu f ac t u r i ng val u e added was 17.5% per annu m. Even i f t he "exc es s " gr owt h of t he M PM s ec t or i s at t r i bu t ed t o s el ec t i ve i nt er vent i on, i t s r at e of TF P gr owt h was not s u f f i c i ent l y above t hat of ot her s ec t or s t o make a l ar ge c ont r i bu t i on t o over al l i ndu s t r i al TF P gr owt h. The major r eas on f or Kor ea's manu f ac - t u r i ng s u c c es s l ay i n hi gh i ndi vi du al TF P gr owt h r at es f or mos t s ec t or s i n mos t per i ods . A c al c u l at i on, s i mi l ar t o t hat f or Kor ea c an be done f or Japan. Tabl e 12 s hows t he ac t u al gr owt h of A* f or 1960-1979 and t he es t i mat ed gr owt h, had t he s ec t or s c ons t i t u t i ng 38 been at t he i nt er na- t i onal nor m, 24% of manu f ac t u r i ng val u e added r at her t han 41% i n 1979. The val u e of A* wou l d have dec l i ned f r om 2.3 t o 1.9, a r el at i vel y s mal l dec r eas e gi ven t he gr owt h r at e of manu f ac t u r i ng val u e added of 8.7% per annu m. 5. Pol i c i es f or Rapi d Gr owt h i n a Changi ng Wor l d Ec onomy What c au s ed Eas t As i a's s u c c es s ? In l ar ge meas u r e t he HPAEs ac hi eved hi gh gr owt h by get t i ng t he bas i c s r i ght . Pr i vat e domes t i c i nves t ment , c ombi ned wi t h r api dl y gr owi ng hu man c api t al , wer e t he pr i nc i pal engi nes of gr owt h. Agr i c u l t u r e, whi l e dec l i ni ng i n r el at i ve i mpor t anc e, exper i enc ed r api d gr owt h and pr odu c t i vi t y c hange. Popu l at i on gr owt h r at es dec l i ned mor e r api dl y i n t he HPAEs t han i n ot her par t s of t he devel opi ng wor l d. And s ome of t hes e ec onomi es al s o benef i t ed f r om a head s t ar t i n t er ms of t he edu c at i on of t he l abor f or c e and c apabl e and ef f ec t i ve s y s t ems of pu bl i c admi ni s t r at i on. In t hi s s ens e t her e i s l i t t l e t hat i s "mi r ac u l ou s " abou t t he HPAEs ' s u per i or r ec or d of gr owt h; i t i s l ar gel y du e t o s u per i or ac c u mu l at i on. To what ext ent ar e t hos e l es s ons f r om Eas t As i a appl i c abl e t o ot her devel opi ng ec onomi es ? In t he HPAEs , a wi de var i et y of pol i c i es , ac r os s c ou nt r i es and over t i me wi t hi n c ou nt r i es , wer e u s ed t o ac hi eve t he c r i t i c al f u nc t i ons of gr owt h: ac c u mu l at i on, al l oc at i on, and pr odu c t i vi t y gr owt h. Whi l e t he s heer var i et y of pol i c i es pr ec l u des dr awi ng any s i mpl e l es s ons or maki ng any s i mpl e r ec ommendat i ons , t wo f u ndamen- t al i s t l es s ons c an be dr awn. M ac r oec onomi c s t abi l i t y and t he c apac i t y t o r es pond ef f ec t i vel y t o mac r oec onomi c s hoc ks hel ped t o ac c el er at e gr owt h t hr ou gh al l t hr ee mec hani s ms , i nc r eas i ng ac c u mu l at i on, i m- pr ovi ng r es ou r c e al l oc at i on, and i nc r eas i ng pr odu c t i vi t y gr owt h. Edu c a- t i on pol i c i es t hat s t r es s ed br oadl y bas ed pr i mar y and s ec ondar y edu c at i on c ont r i bu t ed di r ec t l y t o ou t pu t gr owt h and appar ent l y al s o i ndi r ec t l y t hr ou gh t he i nt er ac t i on of edu c at i onal s hoc ks and expor t or i ent at i on t o TF P gr owt h. The Eas t As i an M i r ac l e ? 265 Ou r ju dgment was t hat t he pr omot i on of s pec i f i c i ndi vi du al i ndu s - t r i es made r el at i vel y l i t t l e di f f er enc e t o t he HPAEs ' s u c c es s . Rat her , expor t pu s h s t r at egi es have been t he mos t gener al l y s u c c es s f u l s el ec t i ve appr oac h u s ed by t he HPAEs and hol d t he gr eat es t pr omi s e f or ot her devel opi ng ec onomi es . It i s not al t oget her s u r pr i s i ng t hat we c onc l u de t hat expor t or i ent at i on r at her t han i ndu s t r i al pol i c y was mai nl y r es pon- s i bl e f or i mpr ovi ng pr odu c t i vi t y gr owt h i n Japan and Kor ea. Thes e ec onomi es , al t hou gh s el ec t i vel y pr omot i ng c api t al and knowl edge i n- t ens i ve i ndu s t r i es , s t i l l ai med at c r eat i ng pr of i t abl e, i nt er nat i onal l y c om- pet i t i ve f i r ms . The y ar ds t i c k u s ed t o eval u at e i ndu s t r i al pol i c i es s u c c es s -mai nl y expor t per f or manc e-pr ovi ded a mar ket t es t of t he s u c c es s or f ai l u r e of t he pol i c y i ns t r u ment s c hos en. Pi c ki ng wi nner s may have s u c c eeded mor e bec au s e Japan and Kor ea s et expor t t ar get s f or pr o- mot ed i ndu s t r i es and u s ed expor t per f or manc e t o as s es s t he s u c c es s of pol i c i es t han bec au s e of s u c c es s i n s el ec t i ng i ndu s t r i al s u bs ec t or s . Des pi t e t hei r pot ent i al benef i t s , s el ec t i ve i nt er vent i ons , es pec i al l y when c ombi ned wi t h ac c es s t o s c ar c e r es ou r c es s u c h as f or ei gn ex- c hange and c r edi t , have a hi gh r i s k of c apt u r e by t he par t i c i pant s . Capt u r e was avoi ded-and r es ou r c e al l oc at i on may have been i m- pr oved-i n Japan and Kor ea by t he c ombi nat i on of r epeat ed r el at i on- s hi ps bet ween bu s i nes s and gover nment and t he u s e of expor t s , not domes t i c GDP gr owt h, as t he y ar ds t i c k by whi c h t he s u c c es s of t he i ndu s t r i al s t r at egy was meas u r ed. In ot her HPAEs , however , s u c h el abor at e c ont es t s wer e not u s ed-e.g., i n Hong Kong, Si ngapor e, or Tai wan-or wer e u ns u c c es s f u l , as i n t he c as es of t he HICOM dr i ve i n M al ay s i a or r ec ent ef f or t s at t ec hnol ogi c al l eapf r oggi ng i n Indones i a. In t he HPAEs t hat i nt er vened s el ec t i vel y t o pr omot e expor t s , a c ont es t bas ed on per f or manc e i n gl obal mar ket s pl ay ed t he al l oc at i ve r ol e t hat i s nor mal l y as c r i bed t o neu t r al expos u r e of bot h i mpor t s u bs t i t u t i ng and expor t i ng i ndu s t r i es t o i nt er nat i onal c ompet i t i on. Bu t t hes e c ont es t -bas ed i nc ent i ve s t r u c t u r es r equ i r ed hi gh gover nment i n- s t i t u t i onal c apabi l i t y . One of t he key s t o s u c c es s of t he expor t pu s h i n s ome of t he HPAEs , es pec i al l y Japan and Kor ea, was t he gover nment 's abi l i t y t o c ombi ne c ooper at i on wi t h c ompet i t i on. They wer e abl e t o do t hi s f i r s t , bec au s e t hei r c i vi l s er vi c es and pu bl i c i ns t i t u t i ons wer e l ar gel y s t af f ed by c ompet ent and hones t c i vi l s er vant s , and s ec ond, bec au s e f i r ms and bu r eau c r at s knew t hat t her e was a s i ngl e y ar ds t i c k f or per f or manc e, expor t s . Expor t t ar get s pr ovi ded a c ons i s t ent y ar ds t i c k t o meas u r e t he s u c c es s of mar ket i nt er vent i ons . When pr ot ec t ed s ec t or s i nt er f er ed wi t h t he expor t s of ot her s ec t or s , t he l at t er c ou l d s eek r edr es s and wer e s u c c es s - f u l . Even wher e domes t i c c ont ent r u l es wer e i mpos ed, e.g., on f or ei gn 266 PAGE di r ec t i nves t or s i n Tai wan, t hey wer e s u s pended i f t hey i nt er f er ed wi t h expor t s . The emphas i s on expor t c ompet i t i venes s gave bu s i nes s es and bu r eau c r at s a t r ans par ent and objec t i ve s y s t em t o gau ge t he des i r abi l i t y of s pec i f i c ac t i ons . Int er vent i ons c ou l d not be made ar bi t r ar i l y , bec au s e t hes e c ou l d be appeal ed at a hi gher l evel of gover nment i f t hey i nt er f er ed wi t h expor t s . The mor e r ec ent expor t pu s h ef f or t s of t he Sou t heas t As i an NIEs have r el i ed l es s on hi ghl y s pec i f i c i nc ent i ves and mor e on gr adu al r edu c t i ons i n i mpor t pr ot ec t i on, c ou pl ed wi t h i ns t i t u - t i onal s u ppor t of expor t er s and a du t y -f r ee r egi me f or i npu t s i nt o expor t s . Thes e "GATT f r i endl y " expor t pr omot i on s t r at egi es of f er s u b- s t ant i al s c ope f or adopt i on by ot her devel opi ng ec onomi es . REF ERENCES Ams den, A. H. (1989). As i a's next gi ant : Sou t h Kor ea and l at e i ndu s t r i al i zat i on. 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(1993). Ki ng Kong meet s Godzi l l a: The Wor l d Bank and The Eas t As i an mi r ac l e. Paper pr epar ed f or t he Over s eas Devel opment Cou nc i l , New Yor k. Romer , P. M . (1987). Cr azy expl anat i ons f or t he pr odu c t i vi t y s l owdown. In NBER M ac r oec onomi c s Annu al , Cambr i dge, M A: The M IT Pr es s . Si ngh, A. (1992). "Cl os e" vs . "s t r at egi c " i nt egr at i on wi t h t he wor l d ec onomy and t he "mar ket -f r i endl y appr oac h t o devel opment " vs . an "i ndu s t r i al pol i c y ": A c r i t i qu e of t he Wor l d Devel opment Repor t 1991 and an al t er nat i ve pol i c y per s pec t i ve. Cambr i dge, Engl and: F ac u l t y of Ec onomi c s , Uni ver s i t y of Cambr i dge. St evens on, H., and J. St i gl er . (1992). The l ear ni ng gap. New Yor k: Su mmi t Books . Su mmer s , R., and A. Hes t on. (1988). A new s et of i nt er nat i onal c ompar i s ons of r eal pr odu c t and pr i c es : Es t i mat es f or 130 c ou nt r i es . Revi ew of Inc ome and Weal t h 34: 1-25. Sy r qu i n, M ., and H. B. Chener y . (1989). Pat t er ns of devel opment , 1950 t o 1983. Wor l d Bank di s c u s s i on paper 41. Was hi ngt on, DC: The Wor l d Bank. Tai wan, Chi na. (1992). St at i s t i c al Year book of t he Repu bl i c of Chi na. Tai pei : Di r ec - t or at e-Gener al of Bu dget , Ac c ou nt i ng, and St at i s t i c s . Tan, J.-P., and A. M i ngat . (1992). Edu c at i on i n As i a: A c ompar at i ve s t u dy of c os t and f i nanc i ng. Was hi ngt on, DC: The Wor l d Bank. Comment 269 Thomas, V., and Y. Wang. (1993). Government policies and productivity growth: Is East Asia an exception? Background paper for The East Asian Miracle. Washington, DC: Policy Research Department, The World Bank. United Nations Development Programme. (1991). Human development report. New York: Oxford University Press. Vittas, D., and Y. Je Cho. (1993). Credit policies: Lessons from East Asia. Washington, DC: The World Bank. Wade, R. (1990). Governing the market: Economic theory and the role of the govern- ment in East Asian industrialization. Princeton, NJ: Princeton University Press. Warr, P., and B. Nadhiprabha. (1993). Macroeconomic policies, crisis and growth in the long-run: Thailand. Background paper prepared for Boom, Crisis, Adjustment: The Macroeconomic Experience of Developing Countries. New York: Oxford University Press. Wei, S.-Jin. (1993). Open door policy and China's rapid growth: Evidence from city-level data. Prepared for the 4th Annual East Asian Seminar on Eco- nomics, the National Bureau of Economic Research, Cambridge, MA. World Bank. (1992). World development report. New York: Oxford University Press. (1993). The East Asian miracle. Washington, DC: Policy Research Depart- ment, The World Bank. World Development 22: 627-670. (1994). Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore. Paper presented at a World Bank seminar. February. (1993). Lessons from the East Asian NICS: A contrarian view. Working paper series no. 4482. Cambridge, MA: National Bureau of Economic Re- search, Inc. Comment SUSAN M. COLLINS Georgetown University, The Brookings Institution, and NBER This provocative paper reexamines the experiences of the East Asian miracle economies (so-called because of their remarkable growth perfor- mances). One relatively noncontroversial section of the paper provides further evidence in support of two conventional conclusions-that sound macroeconomic management as well as broad-based educational policies played important roles in the impressive performances. The provocative part of the paper focuses on the role of micro-management, concluding that while export promotion did contribute to high growth, the targeted industrial policies many of the countries employed did not. Comment 269 Thomas, V., and Y. Wang. (1993). Government policies and productivity growth: Is East Asia an exception? Background paper for The East Asian Miracle. Washington, DC: Policy Research Department, The World Bank. United Nations Development Programme. (1991). Human development report. New York: Oxford University Press. Vittas, D., and Y. Je Cho. (1993). Credit policies: Lessons from East Asia. Washington, DC: The World Bank. Wade, R. (1990). Governing the market: Economic theory and the role of the govern- ment in East Asian industrialization. Princeton, NJ: Princeton University Press. Warr, P., and B. Nadhiprabha. (1993). Macroeconomic policies, crisis and growth in the long-run: Thailand. Background paper prepared for Boom, Crisis, Adjustment: The Macroeconomic Experience of Developing Countries. New York: Oxford University Press. Wei, S.-Jin. (1993). Open door policy and China's rapid growth: Evidence from city-level data. Prepared for the 4th Annual East Asian Seminar on Eco- nomics, the National Bureau of Economic Research, Cambridge, MA. World Bank. (1992). World development report. New York: Oxford University Press. (1993). The East Asian miracle. Washington, DC: Policy Research Depart- ment, The World Bank. World Development 22: 627-670. (1994). Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore. Paper presented at a World Bank seminar. February. (1993). Lessons from the East Asian NICS: A contrarian view. Working paper series no. 4482. Cambridge, MA: National Bureau of Economic Re- search, Inc. Comment SUSAN M. COLLINS Georgetown University, The Brookings Institution, and NBER This provocative paper reexamines the experiences of the East Asian miracle economies (so-called because of their remarkable growth perfor- mances). One relatively noncontroversial section of the paper provides further evidence in support of two conventional conclusions-that sound macroeconomic management as well as broad-based educational policies played important roles in the impressive performances. The provocative part of the paper focuses on the role of micro-management, concluding that while export promotion did contribute to high growth, the targeted industrial policies many of the countries employed did not. 270 ? COLLINS Unfortunately, I am not convinced that the methodology used here supports the author's conclusions. In my view, the jury is still out as to the lessons East Asian economies teach about the merits of micro interventions. Before discussing the specifics of the paper, let me make two points. First, the paper addresses very important issues that it is helpful to put in context. There is a long-standing debate about the role that govern- ment intervention has played in high-performing Asian economies (HPAEs). This study comes out of a major World Bank project to assess the development strategy in East Asia and draw lessons for other countries with poor growth histories. In particular, was there a reason to amend the traditional World Bank view that such intervention is harmful? Thus, the present paper and the larger World Bank study seem to represent a qualitative change in World Bank doctrine, which now allows a limited role for micro-management as part of a sensible development strategy. In my view, this more balanced "conventional wisdom" is warranted and appropriate. Second, based on my own knowledge of the Korean experience, I am quite sympathetic to the view that the extensive interventions have helped to foster growth in East Asia-in fact, I believe that this view is probably correct. My critique of this paper should be taken as an assessment of the specific approach and conclusions presented here, and not as an outgrowth of my priors about the role of intervention. Let me now return to the specifics of the paper, roughly in the order of presentation. The first part of the paper is devoted to documenting the experience of rapid growth among HPAEs and to examining alter- native explanations for it. The author divides the views into two camps: fundamentalists-who stress the role of factor accumulation and tend to believe that markets worked well-versus mystics-who focus on the role of technology and tend to believe that activist government policies helped to remedy market failures. The author's analysis of the data leads him to conclude that "the East Asian success story is, then, primarily a fundamentalist one." The analysis presented does not really allow one to distinguish between the two views. It seems to me that the approach is likely to underestimate the role of technology, making it difficult to draw firm conclusions-if the objective is to debunk the mystic view, surely one would like to know the maximum amount that technology could reasonably contribute to growth. The paper estimates total factor pro- ductivity (TFP) for HPAEs under the assumption that they all have the same production function as industrial countries. It seems more reason- Comment ? 271 able to assume that their production functions were converging toward the function for industrial countries. In fact, the paper tells us that the elasticity of output with respect to capital is much larger for the industrial country sample than for the full sample including the devel- oping countries. This suggests that the methodology overstates the contribution of capital accumulation to growth in the developing coun- try HPAEs, thus understating the contribution of TFP. However, it is difficult to tell how large the underestimate might be. It is also difficult to draw strong conclusions from the evidence about factor accumulation here. To study the role of accumulation, the paper presents scatter plots of average income growth, investment rates, and education indicators during 1960-1985 each relative to 1960 per capita incomes for HPAEs and a group of comparator countries. Although the HPAEs are outliers in terms of their growth rates, it is much less obvious that they are outliers in terms of investment and education. One problem is that these very aggregate measures of factor accumula- tion may mask important differences among countries. Further, the method seems quite sensitive to time period. For example, Korea had very low investment rates (12.1% of GDP) during 1960-1965 versus 27.2% during 1965-1985. If the period selected began in 1965, Korea might be an "outlier" in terms of both growth and investment rates. I also note that Denison-style growth decompositions do point to the importance of factor accumulation in Korea. Kim and Park (1985)1 find that increases in factor inputs contributed substantially to growth in Korea during 1963-1982 (4.9% per annum). It seems to me that both accumulation and technological progress have been important-as a group, the HPAEs stand out because they have tended to do well in both. (Of course, there are differences across countries.) Perhaps the fundamentalist-mystic debate creates a false dichotomy. Technical progress and accumulation appear to interact in complex but difficult to measure ways, and we may learn a considerable amount by studying this interaction. The next section of the paper reaffirms two conventional lessons, both of which I agree with strongly. I mention these lessons only briefly. First, sound macroeconomic management produced a stable environment for economic activity to flourish. In fact, over the past decade, there has been a striking convergence of views about the 1. See Kim, K. S., and J. K. Park. (1985). Sources of economic growth in Korea: 1963-82. Seoul, Korea: Korea Development Institute, pp. 67-69. 272 ? COLLINS importance of small budget deficits, monetary control, and realistic exchange rates. The experiences of these high-growth economies have played a role in the development of this consensus. At the same time, the paper does not address the political economy of how and why these economies were able to initiate, implement, and follow through on sound macroeconomic policies.2 Second, the paper emphasizes the role of broad-based education systems. Here, I wonder if the point could have been made even more strongly if data on private spending on education had been included along with the public expenditure figures. In many Asian economies a strikingly large fraction of disposable household income is devoted to tutors and other additional education expenditures for children. In addition, the paper notes that the share of national income devoted to education during both 1960 and 1989 in HPAEs is similar to the share in comparator countries. This is a little misleading, because the HPAEs have had a dramatic decline in dependency rates between 1960 and 1989-hence, the rise in per pupil expenditures. The last part of the paper draws two "unconventional" conclusions: that the promotion of manufactured exports was a significant source of measured TFP change, while industrial policies mattered little. In the remainder of my remarks, I explain why the jury is still out on the effects of these types of policies. To study export promotion, the paper presents a cross-country re- gression of average TFP growth on the ratio of manufactured to total exports, a measure of "openness" and other right-hand-side variables. The export ratio and openness are found to be significant. However, what does this tell us about the effects of active interventionism that promoted certain types of exports through direct credit allocations and other forms of micro management? The export ratio is partially a structural variable that depends on endowments as well as on policy. Further, as the paper notes, the measure of openness used is typically described as a measure of sensible exchange rate management. Perhaps this variable is simply picking up the importance of sound macroeco- nomic policy-a "conventional" lesson. To study industrial policy, the paper compares TFP growth across two-digit industries within countries. It finds that although the average 2. For example, see Haggard, S. and R. Kaufman (eds.). (1992). The politics of economic adjustment. Princeton, NJ: Princeton University Press; and Williamson, J. (ed.). (1994). The political economy of policy reform. Washington, DC: Institute for International Eco- nomics. Comment 273 TFP is high among HPAEs, it does not appear to be relatively higher in certain promoted sectors than in nonpromoted ones. However, it is not clear that the promoted/nonpromoted distinction is made appropri- ately. For instance, textiles and garments are taken to be a sector that was not promoted, even though Korea promoted it during part of the period under consideration. Further, perhaps a successful industrial policy works by raising average sectoral productivity and reducing the variation in productivity growth across sectors. This finding may be quite consistent with an effective intervention strategy. There are three additional problems with this analysis-as well as the concern expressed earlier about how TFP is measured. First, the at- tempted distinction between export promotion and industrial policy is strange. Industrial policies are defined as "distinct from trade policies, government efforts to alter industrial structure to promote productivity based growth." How would the author classify selective credit alloca- tions to firms producing color televisions that helped to increase their productivity and their exports? Surely such an intervention should count as both industrial policy and export promotion! Second, there is the problem of the "appropriate counterfactual." It is not at all clear that other countries (with a variety of different character- istics) are the appropriate benchmark against which to measure the implications of a given country's attempt to promote a particular group of exports. Also, as already discussed, "good" industrial policy may work to reduce differences in cross-sectoral productivity instead of increasing them. These issues warranted considerably more discussion in the paper. A clearer analytic framework that spelled out the channels through which export promotion and industrial policies are expected to work would have helped in this regard. Finally, the methodology tries to look for broad generalizations, when surely the HPAE and other experiences suggest that some types of interventions work under some conditions. Thus, it would be instruc- tive to focus our research on trying to understand better when particu- lar types of interventions are most likely to work well, and when poorly. For example, does sector matter-is it easier to succeed in promoting certain types of industries? When are direct credit alloca- tions riskier than tax-based incentives? Overall, this paper has reinforced my view that sound macroeco- nomic policies and educational emphasis promote growth. However, it has not altered my view that while the upside potential from an activist intervention strategy appears to be high, the down-side risk appears to be even more considerable. 274 * ITO Comment TAKATOSHI ITO Harvard University and NBER This paper presents Dr. Page's view on how rapid economic growth occurred in the eight East Asian countries-Japan, Hong Kong, Korea, Singapore, Taiwan, Indonesia, Malaysia, and Thailand. His knowledge and analyses are mainly based on a grand research study conducted at the World Bank (1993).1 The study at the World Bank is considered to be an overture to second thoughts on its development assistant strat- egy. The value and virtue of government intervention, such as policy loans (subsidized loan to targeted industries), is at the heart of the controversy. This paper succinctly summarizes major debate points in the literature of East Asian growth experience. My comments follow the presentation of Page's paper. 1. Rapid Growth and Its Source No one disagrees that growth experiences in the eight East Asian countries were miraculous. All of the eight countries have recorded growth in GDP per capita exceeding 4% a year, especially the "Four Tigers" exceeding 6% a year from 1965 to 1989. This presents "outliers" in the so-called convergence regression. Figure 1 of the paper clearly shows that these East Asian countries are outliers in the regression of growth on the initial level of income. Theory predicts that low-income countries tend to grow faster so that "convergence" in the level of income among countries in the world will occur. Of course growth depends on accumulation of labor, capital, and technology. Even adjust- ing for those factors, i.e., basically looking at TFP growth such as in Tables 1 and 2, the TFP growth experience is impressive for most, not all, of the eight countries. I have reservations on this way of introducing a "miracle" and set up the following analysis, as many papers do by now. As a student of "old growth theory," I tend to distinguish a growth process, which is a I am indebted to Anne O. Krueger and David Weil for their helpful comments on the preceding version of this comments. 1. The World Bank (1993), The East Asian Miracle, has already been widely reviewed. Rodrik (1993) challenges some of its assertions, especially links between hypotheses and regression results. Amsden (1993) criticized the half-hearted appreciation of gov- ernment interventions and industrial policy. Comment 275 process of quantity changes, from economic development, which is more about quality changes. My objection to a convergence regression is that it ignores the nonlinear process, or qualitative change, of eco- nomic development.2 Simon Kuznets observed that when a country starts on a sustainable growth path, qualitative changes have to occur. Investment grows sharply, industrial structures change, and growth results with social changes. Britain led the industrial revolution and modern economic growth in the mid-18th century, followed by France, the United States, and Germany in the first half of the 19th century. Many European countries started rapid economic growth between 1860 and 1870, ac- cording to Kuznets. Kuznets (1959) coined the phrase "modern eco- nomic growth," listing some common features: (1) the application of modern scientific thought and technology to industry; (2) a sustained and rapid increase in real product per capita, usually (but not always) accompanied by a high rate of population growth; (3) a rapid transfor- mation of the industrial structure (changing sectoral output, labor force, and capital stock distribution); and (4) an expansion of international contacts. Kuznets, by the way, dates the start of modern economic growth of Japan at around 1874 and 1879. Was it also a "miracle" to have seen the European countries experi- ence rapid economic growth around the turn of century? If Kuznets dates modern economic growth for Asia in the year 2020, the date for the Four Tigers would be sometime around 1960 and the ASEAN four around 1970. Wouldn't it be more heuristic to compare East Asian experiences not with the current developing nations but with the European industrial revolution? Of course, Korea in 1960 faced quite different economic conditions from Britain in 1780. However, the kind of change in industrial structures, work habits, saving behavior, and other social changes may be similar. This is more than just a philosophical point. Consider the Solow diagram of (Y/L) on (K/L). Depending on the shape of the production function, there may be many steady states. Let us suppose that there are two stable equilibria, the low, k*, and the high, k**, with an intermediate, unstable steady state, kc. If a country can make a jump (in a matter of a decade) from k* to somewhere above kc, the critical value, then the "convergence" logic works. But an interesting part is not the convergence process between kC and k**, but an initial jump from k* to above kc. Is the jump a miracle or a big push? 2. The following argument is a summary of my previous comments on a convergence paper by Easterly (1994); see Ito (1994). 276 ? ITO I consider that it is more interesting to see what causes the jump from a low equilibrium (vicious circle) onto a path toward a high equilibrium. Once high investment kicks in, growth results, and growth fosters confidence in the country and high savings result, which connects to investment, a virtuous circle.3 Many countries made a jump or a takeoff to a high-growth path in different times. We may be witnessing a group of countries taking off from Asia. A benchmark to be compared should be the earlier develop- ment experiences by European countries, the United States, Canada, Australia, and Japan in different times, rather than contemporary devel- oping countries. If this version of Kuznets's view of the world is accepted, then the regular convergence regression does not make sense. At best, it is misspecified in that it mixes up three groups of countries: one large group of countries that are yet to take off-low level of incomes with low rates of growth; a group of OECD countries-a high level of income with a low rate of growth; and a small group of countries that are in the process of catching up-high-growth rates with a low- to middle-income level, i.e., "converging." What a convergence regression attempts to capture is the third group of countries. 2. Common Denominators of Success The paper lists common denominators among the eight countries. First, the paper observes that the growth experience was accompanied by relative income equity. Then, four keys for success are explained: (1) maintaining macroeconomic stability, (2) broad-based educational strategies, (3) export growth, and (4) insignificance of industrial policy. The first two are called "conventional," while the latter two are called "unconventional." Obviously, few disagree with the conventional wis- dom, and I make only passing remarks. I will make more extensive comments on the unconventional ones, (3) and (4). It is obvious that macroeconomic stability is important for growth. But macroeconomic stability is easy to achieve when growth is high, a possibility of reverse causality.4 When income is growing faster than 3. This is a simple argument of low- and high-income multiple equilibria in the frame- work of the Solow model. I certainly do not claim this argument to be particularly original. Professor James Tobin pointed out to me during the conference that similar points were made by Richard R. Nelson (1956, 1960). 4. In 1960, Japanese political power was paralyzed over the new security treaty with the United States. A new 10-year plan "to double income" was proposed by a new prime minister, Hayato Ikeda, to heal the wounds between the political right and left. Growth as a national target was used to achieve political and macroeconomic stability. See Ito (1992, pp. 61-67) for macroeconomic planning. Comment * 277 expected, tax revenue will be higher to help fiscal balance, and inflation is easier to control. Education is important. Usually, primary and secondary enrollment rates or public expenditure on education, as in Tables 7 and 8 of this paper, are used to show the evidence on high human capital accumula- tion.5 These variables are admittedly proxies. What is learned in an education system, from knowledge accumulation to group conducts, as well as education at home, may be more important in growth. But they are hard to measure. 3. Sequencing as Industrial Policy The paper argues that export push was a successful strategy, while industrial policy was "insignificant." Exports have enhanced growth, while trying to pick particular industries has not been successful. The former assertion was supported by high correlations between some measures of openness and exports, including the admittedly controver- sial Dollar index, and growth. The latter assertion was supported mainly by evidence that TFP growth in promoted sectors in Japan, Korea, and Taiwan were not particularly high, and promotion of partic- ular industries did not change overall growth, compared with what it would have been without intervention. In discussing industrial policy, I will challenge the paper from two aspects: What is important in industrial policy is "sequencing," which is not discussed in the paper. Sequencing of the leading industries in the economy is considered to be a key to growth, according to an oral tradition of East Asian countries.6 For example, industrial policy in Japan has been centered around promoting industry after industry: textiles and toys, steel, chem- icals, shipbuildings, to high-tech industries. Due to required sophistica- tion in technology and large fixed costs, the government was aware of the importance of sequencing industries. The developed "light and low-tech" industries make a platform for a jump to the next stage, "mid-tech" industries. A jump to "high tech" is only appropriate after a 5. Rodrik (1993) pointed out that growth can be explained by the "initial" condition of high education levels and equity in income and land distributions, without using the investment/GDP ratio that Rodrik correctly points out as "endogenous." 6. A broad concept of sequencing in economic development is often called a "flying geese pattern" in the Japanese literature. Originally, the flying geese pattern was named after the pattern of import substitution to export substitution, in one industry after another. Later, it is directed to a pattern of regional countries' development sequencing; the leader, Japan, is followed by Korea, Taiwan, Hong Kong, and Singapore, and they in turn are followed by other ASEAN countries. 278 ? ITO Japan Korea Taiwan Hong Kong Singapore Textile 1900-1930 1960s Early 1950s Early 1960s Again 1950 1970s (dominant) Again 1970s Clothing, apparel 1950s 1960s 1950s-1960s 1970s Toys, watches, 1950s 1960s 1960s-1970s footwares 1970s Refining (promo) Early 1960s Steel 1950s-1960s (promo) Latye 1960s- Early 1970s Chemicals 1960s-1970s Late 1960s 1970s Early 1970s Shipbuilding 1960s-1970s 1970s Electronics 1970s Late 1970s 1980s 1970s 1980s Automobile 1970s-1980s 1980s Computers, 1980s Late 1980s semiconductors Banking and Late 1970s 1980s finance 1980s Source: Japan, Korea, Taiwan: author's judgment; Hong Kong, Singapore, Young (1992). success at the mid tech" industries. Profits and experiences-both management and labor-in a lower stage are key for a success in developing a higher stage. Too high a jump to skip a stage, just like an attempt to take off an airplane with too steep an angle, would result in a crashing failure. East Asian countries, having observed a history of European and U.S. economic history, have repeated the same process, but faster.7 The table that appears in this Comment shows an experience among East Asian countries of such sequencing. If sequencing is important, then four implications follow. First, it is not a "miracle" to observe takeoff in Asia. It is just repeating what Europe did a century ago. (This is also pointed out in the first part of these comments.) Second, when repeating a history, it is easy to predict which industry comes next, hence "picking a sunrise industry" is not as 7. See Ito (1992, Chapter 2) for elaboration on economic takeoff and sequencing. Ito (1992, Chapter 2, footnote 18) invokes an analogy to a biological idea that "ontogeny recapitulates phylogeny." Comment * 279 risky as it is often claimed. Many Japanese economists argue that promoting particular industries in the 1950s and 1960s was theoretically possible and successful, but it became impossible and undesirable to pick winners in the 1980s, as the economy became more "mature." Third, showing low TFPs in "promoted sectors" cannot be used as evidence for a failure of industrial policy. If industrial policy made it possible to run up the stages faster, it is a success even without realizing high TFPs in each stage.8 Fourth, showing that the composition of industries in Japan and Korea is not different from the theoretical prediction (Table 12 of Page's paper) cannot be taken as evidence of the irrelevance of industrial policy. Even if the composition after intervention is the same as the composition predicted from theory, the success is getting there fast. 4. Regional Secret? However, the puzzle still remains. If an initial push can be done anywhere in the world, one should observe high growth taking place randomly on the globe. This is not the case. The 19th-century growth was concentrated in Europe and North America (with an exception of Australia and Japan), while the late 20th-century growth is happening in Asia. Certainly geographical proximity plays an important role. Technological transfers, worker mobility, trade links, and political peer pressure may be important factors in regional development. It hap- pened in Asia in the 1980s. Maybe another "miracle" will occur some- where else in the 2000s. REFERENCES Amsden, A. H. (1993). Why isn't the whole world experimenting with the East Asian model to develop? Review of the World Bank's East Asian Miracle Report, to appear in Symposium on the World Bank's East Asian Miracle Report, in World Development. Easterly, W. (1994). Explaining miracles: Growth regressions meet the gang of four. In NBER, East Asian seminar on economics 1993, T. Ito and A. O. Krueger (eds.). Ito, T. (1992). The Japanese economy. Cambridge, MA: The MIT Press. (1994). Comments on William Easterly, Explaining miracles: Growth regressions meet the gang of four. In NBER, East Asian seminar on economics 1993, T. Ito and A. O. Krueger (eds.). Kuznets, S. (1959). Six lectures on economic growth. Glencoe, IL: Free Press. 8. The point made by Young (1992), in that Singapore invested too fast to enjoy learning curve effects, is also not taken as a failure from the sequencing point of view. 280 ? DISCUSSION Nelson, R. R. (1956). A theory of the low-level equilibrium trap in underdevel- oped economies. American Economic Review 46:896-908. (1960). Growth models and the escape from the low-level equilibrium trap: The case of Japan. Economic Development and Cultural Change 8:378-388. Rodrik, D. (1993). King Kong meets Godzilla: The World Bank and The East Asian Miracle. Mimeo, December. Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore. NBER macroeconomic annual 1992. Cambridge, MA: The MIT Press. Discussion Page responded to several points raised by Collins and by Ito. He agreed with Collins that creating a dichotomy between the productivity growth and accumulation views was misleading. The more important question, suggested Page, is how these economies performed so well on both fronts and how they were able to generate and sustain such high rates of accumulation of physical and human capital without the effi- ciency losses observed in the former Soviet Union and in Eastern Europe. Page also agreed with Collins that it is important to address the political economy issue of policy implementation and to understand the particular institutions that might explain the success of the macro- economic managers and bureaucracies in these countries. Page clarified the distinction made in the paper between industrial policy and export promotion. According to the export promotion view, the actual process of exporting is special, rather than the goods that are produced. Under the industrial policy view, however, it is the particular goods and industries that are important. Page agreed that it is often difficult to disentangle the effects of the two stories, especially since the criteria for success of industrial policies often seems to be related to export performance. While Page felt that the results of the paper and other more micro-oriented studies support the export-promotion story, he noted that more case-study evidence was needed before reaching stronger conclusions. Page also suggested that one way to interpret industrial policy in Japan and Korea was as a response to coordination failures or market imperfections. He noted that this would make it more difficult to determine whether industrial policy was successful since such a policy would appear market-conforming, ex post. Olivier Blanchard questioned the use of the high-income country elasticity for the computation of TFP growth. The standard approach is either to use capital's share of income as the elasticity or to estimate the 280 ? DISCUSSION Nelson, R. R. (1956). A theory of the low-level equilibrium trap in underdevel- oped economies. American Economic Review 46:896-908. (1960). Growth models and the escape from the low-level equilibrium trap: The case of Japan. Economic Development and Cultural Change 8:378-388. Rodrik, D. (1993). King Kong meets Godzilla: The World Bank and The East Asian Miracle. Mimeo, December. Young, A. (1992). A tale of two cities: Factor accumulation and technical change in Hong Kong and Singapore. NBER macroeconomic annual 1992. Cambridge, MA: The MIT Press. Discussion Page responded to several points raised by Collins and by Ito. He agreed with Collins that creating a dichotomy between the productivity growth and accumulation views was misleading. The more important question, suggested Page, is how these economies performed so well on both fronts and how they were able to generate and sustain such high rates of accumulation of physical and human capital without the effi- ciency losses observed in the former Soviet Union and in Eastern Europe. Page also agreed with Collins that it is important to address the political economy issue of policy implementation and to understand the particular institutions that might explain the success of the macro- economic managers and bureaucracies in these countries. Page clarified the distinction made in the paper between industrial policy and export promotion. According to the export promotion view, the actual process of exporting is special, rather than the goods that are produced. Under the industrial policy view, however, it is the particular goods and industries that are important. Page agreed that it is often difficult to disentangle the effects of the two stories, especially since the criteria for success of industrial policies often seems to be related to export performance. While Page felt that the results of the paper and other more micro-oriented studies support the export-promotion story, he noted that more case-study evidence was needed before reaching stronger conclusions. Page also suggested that one way to interpret industrial policy in Japan and Korea was as a response to coordination failures or market imperfections. He noted that this would make it more difficult to determine whether industrial policy was successful since such a policy would appear market-conforming, ex post. Olivier Blanchard questioned the use of the high-income country elasticity for the computation of TFP growth. The standard approach is either to use capital's share of income as the elasticity or to estimate the Discussion ? 281 elasticity. Page responded that data on capital income shares were not available. In estimating the elasticities, the issue is how to separate the effect of TFP growth from the effects of allocative inefficiencies. For a subset of developing countries in the sample, output growth was negative, while factor accumulation was positive, suggesting severe resource allocation problems that would introduce noise in the produc- tion function estimates. Therefore, the elasticities were computed from the high-income countries since they were the least likely to suffer these allocation inefficiencies. Herschel Grossman commented that an important prior question is whether initial conditions allowed particular countries to achieve high- growth rates. If certain growth rates are economically infeasible given the available resources, then the political economy issue of how institu- tions foster growth is a secondary issue. Page responded that the initial conditions that are imposed by the data are presumably affected by prior public policy actions, which is why understanding the evolution of institutions is important. He added that the historical record on identifying necessary conditions for growth and predicting growth rates was poor. For example, in the late 1950s the USAID identified Burma and the Philippines as the growth poles for East Asia and wrote that the most serious impediment to South Korea's economic develop- ment was its bureaucracy. Andrew Atkeson asked whether it was exports or trade more gener- ally that was connected to growth. He noted that factor proportions theory would suggest that by opening up to trade, the economy could buy more capital services or intermediate inputs. This might be related to the sequencing theory advanced by Ito, if factor proportion differ- ences were viewed as the reason that the economy moved from indus- try to industry. Page answered that the high trade to GNP ratios for the HPAEs were not achieved by incentive-neutral policies, but rather by highly selective promotion of exports and admission of imports. He added that there was evidence from the micro literature that firms competing with imports and firms that compete on the export market but within the same industry have different learning effects. John Cochrane commented that important variables in the regres- sions such as , vings, education, and growth, were endogenous, and questioned whether any causal statements could be made. Cochrane interpreted the experience from the Soviet Union and Eastern Europe as evidence that an exogenously high savings rate doesn't cause growth, suggesting that the observed positive correlation between savings and growth should be interpreted as the result of countries saving because they know that their growth prospects are good.