Growth Experiences of the Asian Economies

This chapter describes the growth experiences of the sampled Asian countries, which are used as reference points in this textbook. This niche sample reflects the strong growth performance of these economies. Following a brief geographical backdrop, their economic growth outcomes, the binding constraints to growth, and some of the important underlying growth factors are discussed. The chapter concludes by discussing their expected short-term growth outlook, especially after the GFC. As indicated in chapter 1, the survey shows that the EAEs (South Korea, Taiwan, Hong Kong, and Singapore) have recorded remarkable rates of growth since the 1960s. Data also shows that China and India's growth performances are commendable as well, although India has not recorded rates close to those of China. The other countries (Indonesia, Thailand, Malaysia, and Philippines) have also registered high rates of growth when compared to similar developing countries around the world. While the constraints to growth remain and are actually amplified by the GFC, the important growth factors that have added to the economic resilience of these economies have been openness to trade, accumulation and mobilization of human and physical inputs (including labor force), better infrastructure, and improved institutions. However, important trade related risks remain and these have been affecting the Asian economies severely. Detailed analysis of trade as an important driver of economic growth in the largest and most influential economy, China, is included in chapter 9.

Lessons and Conclusions

This chapter summarizes the main findings from this text, especially the important lessons that can be learnt from analyzing the growth performances of the sampled Asian countries. It also discusses how these observations may be useful for future analysis on sources of growth for other regions as well. This short chapter concludes the book.

A Survey of Economic Growth

This chapter is a survey of the two prominent theories of economic growth (the neoclassical theory as proposed by Solow [1956] and the endogenous growth theory that originated from the seminal works of Romer [1986]). To date, works following these have essentially been their extensions/refinements and some of the important extensions have also been summarised in this chapter. The current chapter discusses their major findings and implications for policy. It is also shown that the Solow model can be extended and used for policy. The endogenous growth theory, although stated to have some drawback, is useful for policy, as it has added new thoughts on how productivity may be generated. The chapter remains highly theoretical and derivations are suppressed, unless they become necessary. This survey finds that while the driving force of growth has been known since Solow's proposition, the endogenous models have provided some discussions on how economies may achieve productivity growth. Some important sources of productivity advancements that have been suggested are through human capital, research and development, innovations, knowledge creation, and supportive institutions and social infrastructure.

The Empirical Growth Literature

This chapter surveys the empirical growth literature on the selected Asian economies investigating the effects of a few important determinants of growth (e.g. the investment rate, trade openness, human capital, financial development, and macroeconomic policy environment). The summary provides some important insights but also presents conflicting findings, which unanimously do not always conform to the conclusions of the theoretical models. For instance, whilst investment is agreed to be an important determinant of growth, the literature puts emphasis on the type of investment in question and the important interactions between investment and other variables like trade openness and good policy environment. On trade openness, the absence of a strong theoretical basis, data limitations, and therefore, the use of right or wrong proxies shadow the impact of trade and growth. However, international data on trade patterns and other empirical evidences do support strongly that openness to trade has positive growth effects. There is no doubt of a strong theoretical support for the impact of human capital on growth. The reflective empirical findings also support this view, except that there are measurement problems for indicators like education attainment and quality of education. Similarly, the consensus is that credible policies and sound institutions are growth supportive. Cross-country findings have provided some uniform results, but country-specific findings show large variability on almost all the tested variables. Against this background, this chapter develops a pragmatic survey on five important hypothesized forces of economic growth.

Analysis of Trade-Growth Nexus

This chapter delves deeper into the controversial trade-growth debate – controversial because empirical evidence has provided a wide variety of findings, although one of the stylized facts of global growth is that economies which have opened-up for trade have grown very strongly. The focus is China, the regional and international trade-giant, with an objective of analyzing the impact of trade on economic growth. The motivation of this chapter is due to a number of reasons. First, as stated above, while theoretical economists broadly converge to the agreement that trade has positive growth effects (with various conditionalities), empirical findings have been conflicting. Second, these conditions and other important issues surrounding trade openness are important and must be adequacy explored. Third, the Chinese (or Asian economies) data provides the best grounds of experimenting on both trade and growth, especially in the era when they dominate both world trade and growth rates. And finally, this chapter is an application of the extension developed by Rao and Singh (2007) for estimating the impact of trade openness on economic growth of China.

New Method New Estimates

This chapter discusses Rao and Singh's (2007) approach in detail and applies it with alternative datasets to estimate the growth effects of selected variables. Country-specific results obtained using LSE-Hendry's method show that growth effects vary between countries, but openness to trade seems to be important for almost all the economies. Human capital and policy-related variables had theoretically consistent and statistically significant growth effects. In summary, the results show investment and education together with trade openness could be important stabilization tools in most of these economies. The cross-country estimates support the importance of these factors. The estimates show that private investment has contributed most to the regional growth since 1970s and that these variables combined account for about 90% to the average rate of growth. Conclusions from the various growth accounting exercises noted in the previous chapter indicated that whilst growth rates in these economies will eventually taper-off, the panel data estimates obtained in this chapter with systems methods of moments indicate that the region will have an average steady-state growth rate of around 3.2% in the long-run. This will lead to a serious drag in development because such a low rate of growth, relative to their current averages, implies a dramatic fall in incomes and welfare of Asia. This also suggests that such a scenario will have significant effects on the global economy since the region is being considered as the center of world growth.

Growth Accounts of the Asian Economies

This chapter develops the growth accounts of sampled Asian countries and confirms that high rates of output growth in these countries are input driven. The analysis shows that the role of productivity growth has been minimal, accounting for at most 30% of the average rate of growth. For China, the contribution of productivity is slightly higher. These estimates reflect two important conclusions: (1) there is a need to better estimate TFP growth rates, and (2) despite the higher TFP's contribution, the hypothesis that growth in these economies are input driven cannot be rejected. Like Senhadji (2000), estimated TFPs were used to investigate deeper into sources of growth, and it was found that for China, India, and the Philippines, government spending seems to have been important. For most of the countries, it was hard to find a unilateral support for financial deepening. Alternative measures of openness to trade, however, seem to be positively associated with growth in China, Malaysia, Singapore, and India. Except for Thailand, Indonesia, and Taiwan, investment seems to have either negligible or negative growth effects. These results are not unexpected and could be due to a number of reasons: (1) some variables may only have short-run effects, (2) there could be possible multi-colinearity among the included variables, and (3) it cannot be argued that these are proper proxies of the hypothesized determinants. Further, for the short-run, neither the direction nor the magnitude of these effects can be generalized. Such issues are taken-up more seriously in the following chapters.

East Asian Growth Controversy

This chapter discusses the major controversy on the EAE's phenomenal rates of growth. The summary of the findings indicates that the dominant share of the EAE's growth was due to factor accumulation and that productivity growth was negligible, until after the mid-1980s when some growth in productivity was noted. Based on these results, the survey shows that in the long-run growth rates in EAEs will eventually taper-off because they are not sustained by significant improvements in productivity. While this finding seems to be the consensus amongst the proponents of the neoclassical theory (and also of this chapter), it is suggested that growth accounting exercises provide (at best) only preliminary insights into the processes leading to economic growth. Therefore, hard-line conclusions based on these accounting constructs should be taken with some degree of caution. Nevertheless, it is shown that high growth prospect in the longer term is weak in light of limited advancements in productivity in these economies.

Overview of Global Development Patterns

This chapter introduces readers to growth economies and discusses why studies on economic growth are important. It proceeds to identifying global growth trends in the last four decades and provides a summary of world's income distribution. A concise survey of the convergence debate (which seems to have lost its prominence now) is also presented. The summary of some influential studies on income and growth convergence, however, states that the world's incomes have largely diverged, although convergence has been noted in at least two pockets of countries. Because the details are presented later in the text, only a brief summary of how theoretical economists view “sources of growth” is presented here. This chapter concludes with a discussion on the future trends in economic theory and global growth trajectory.

Comparative Analysis and Robustness Tests

This chapter shows how alternative specifications perform when they are used to estimate growth effects of variables with time series and panel datasets. Of the three methods compared, Rao and Singh's approach seems to work the best. This validates the earlier observations that models with stronger theoretical basis perform better. To gain further confidence in these findings, this chapter applies Sala-i-Martin's (1997) and Levine and Renelt's (1992) extreme bounds procedures to test the robustness of variables and the adopted specifications. This is an important but neglected issue in modeling economic growth and in many other empirical studies. The robustness test results imply that all the tested variables are important determinants of long-run growth, estimated with correct signs, plausible magnitudes, and with high confidence. Globalization and financial sector variables show small but statistically significant and robust relationships with long-run growth. Government spending and investment rate are growth enhancing while high rates of inflation are negatively associated with long-run growth. Analyses in this chapter imply that because of the consistent results obtained from alternative tests, Rao and Singh's (2007) extension seems to be robust and useful for empirical application. This result, therefore, provides greater confidence in the application and use of this new extension in empirical studies, especially for but not restricted to, country-specific studies.