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Chapter 16 ExportOriented Growth in East Asia Learning Objectives • List five general characteristics of success in the High Performance Asian Economies. • Describe how the institutional environment supported economic growth. • Analyze the degree of openness in the HPAE. • Explain the pros and cons of the idea that industrial policies mattered to East Asian success. Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-2 Learning Objectives (cont.) • Evaluate the impact of export promotion policies and the debate over their applicability to other world regions. • Define total factor productivity and explain why economists use it to understand whether growth in the HPAE is similar to growth elsewhere. Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-3 Introduction: The High Performance Asian Economies • The High Performance Asian Economies (HPAE) as designated by the World Bank: Hong Kong, Indonesia, Japan, Malaysia, Singapore, South Korea, Taiwan, Thailand • The Four Tigers: the two city-states of Hong Kong and Singapore, South Korea, and Taiwan • The Four Tigers are also referred to as the Four Dragons or the Little Dragons Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-4 Newly Industrializing Economies (NIE) • Newly industrializing economies are a broader group of countries, not confined to East Asia • Along with economies of East Asia (Indonesia, Malaysia, and Thailand) • China may also be considered a NIE, but it is usually placed in its own category due to its size and the legacy of communism Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-5 HPAE Characteristics • Maintain stable macroeconomies • Strong commitment to shared economic growth through health care, education, and housing • Promote exports, remaining open to imports • Exports provide foreign exchange earnings Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-6 Population, Income, and Economic Growth • High GDP per person in Singapore, Japan, Hong Kong, Taiwan, and South Korea • Thailand, Malaysia, and Indonesia, began their period of rapid growth later • Asian economies were among the fastest growing economies in the world between 1980 and the late 1990s Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-7 TABLE 16.1 Population and GDP for the HPAE, 2011 Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-8 TABLE 16.2 Average Annual Growth in Real GDP per Capita, 1980–2010 Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-9 A Note on Hong Kong • On July 1, 1997, Great Britain officially returned the colony of Hong Kong to China after more than 150 years of British rule • China – will allow Hong Kong to keep its own currency – will limit migration between Hong Kong and the mainland – will generally try to preserve Hong Kong’s current system Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-10 General Characteristics of Growth in the HPAE • Shared growth-rising economic equality • Rapid accumulation of physical and human capital – high savings partly result of the rapid demographic transition experienced after World War II • Rapid growth of manufactured exports – Import substitution industrialization (ISI) policies were quickly replaced with an emphasis on export promotion • Stable macroeconomic environments Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-11 Rapid Growth of Manufactured Exports • HPAEs have high rates of investment thanks to high savings rates, which stem from: – Stable macroeconomic environment of low inflation – Rapid rate of income growth – Demographic transition: shift to low death and birth rates – Rapid rate of income growth Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-12 TABLE 16.3 The Share of HPAE in World Exports, 1965–2010 Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-13 Stable Macroeconomic Environments • HPAEs kept budget deficits and foreign debt within the limits of the ability of the government to finance without having to print money or borrow excessively – Low inflation rates helped keep interest rates stable, enabled firms to take a long-term view on their investments • The crisis of 1997 proves the rule: significant reduction in export earnings and growth of current account deficits in some HPAE countries Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-14 The Institutional Environment • In the HPAEs, large flows of savings were channelled into the financial system, which lent them to businesses that used them efficiently • To ensure resources are used in the most productive manner, governments must create rules that foster efficient outcomes. Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-15 The Institutional Environment (cont.) • • • • • Reliable property rights Bureaucracies are competent Contracts are enforced Access to information is wide-spread Regulations are clear and wellpublicized Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-16 TABLE 16.4 Rankings on the Ease of Doing Business Index, 2011 Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-17 Fiscal Discipline and BusinessGovernment Relations Deliberation councils – Quasi-legislative bodies set up by six HPEA governments that bring together representatives from the private and the public sectors – Coordinate the information flow between businesses and policymakers Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-18 Avoiding Rent Seeking • Government interventions are common in three areas in HPAEs: – Targeting of specific industries or to channel resources in a particular direction –credit subsidies –import protection –business licenses Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-19 TABLE 16.5 Imports and Exports as a Share of GDP Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-20 The Role of Industrial Policies World Bank’s research concluded government interventions have three common areas: 1. targeting of specific industries, that is, industrial policies narrowly defined 2. directed credit 3. export promotion Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-21 Targeting Specific Industries in the HPAE • The narrow definition of industrial policies is the targeted development of specific industries • Six key tools of targeting: – Restrictions on imports: licensing, quotas, tariffs, export subsidies – Direct credit: funds to an industry – Subsidies – Market information (especially foreign markets) – Infrastructure construction – Research and development funds Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-22 Targeting Specific Industries in the HPAE (cont.) • Targeted industrial policies are distinct from other efforts to promote specific industries – Resources provided only as long as the companies receiving them met specific export targets – Governments placed macroeconomic stability above industrial policies Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-23 Did Industrial Policies Work? • A successful policy: increases the overall rate of GDP growth or the rate of productivity growth • Disagreement on success – World Bank: Export promotion and directed credit did boost economic growth, but industrial policies in general did not – Critics: It is impossible to know what growth rates would have been without industrial policies Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-24 Did Industrial Policies Work? (cont.) • Agreement that successful industrial policies have: – Clear performance criteria such as export targets – Institutional means to monitor and enforce compliance – Low costs in order for nontargeted sectors not to suffer Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-25 The Connections between Growth and Exports • Export growth may not add to GDP growth if it crowds out growth in the output of goods for domestic consumption • Export growth causes faster GDP growth • Export growth causes the overall capacity of the economy to grow faster – if production was focused on goods for the domestic market Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-26 The Connections between Growth and Exports (cont.) • However, promotion of exports results in greater GDP growth only if: – There is something in the promoted production process or its links to the rest of economy that is absent from domestic-oriented production – Exports speed up the adoption of international best practices Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-27 The Connections between Growth and Exports (cont.) • Other connections between export growth and GDP growth are possible as well • Exports may speed up the adoption and mastery of international best practices • Exports make possible the purchase of imports Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-28 The Connections between Growth and Exports (cont.) • The ability to import capital and modern technology is seen as the most critical ingredient in policies that successfully close the gap between developing and developed countries. • Export promotion can encourage the acquisition of new technologies Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-29 Is Export Promotion a Good Model for Other Regions? • Yes: Even if all developing countries stressed export promotion, they would be unlikely to saturate the industrialized country markets • No: Under the Uruguay Round rules of 1994, developing countries must eliminate any subsidies contingent on export performance Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-30 TABLE 16.6 Free-Trade Areas in Asia and Oceania Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-31 Is There an Asian Model of Economic Growth? • East Asia is remarkable for its growth in per capita income and in labor productivity – Labor productivity depends on additional amount of capital, education, and total factor productivity (TPF)—issues related to new technologies, innovation, and organizational improvements • Research conclusion: The bulk of East Asian growth is attributable to increases in capital and education, rather than TFP Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-32 TABLE 16.7 Sources of Growth, 1960–1994 (Percent) Copyright ©2014 Pearson Education, Inc. All rights reserved. 16-33