econ-chap3

Growth and the Asian Experience

3.1 Introduction

• Economic growth: the desire to satisfy needs of the population and meet demands of other countries via trade.

• Importance of economic development studies focusing on growth vs. development.

• Distinction between growth (increase in income) and development (improvement in quality of life).

• Examples of growth without development from oil-rich economies and mineral-based sectors.

• The technological divide can create dualism: some economies thrive while others lag.

3.2 Important Concepts for Understanding Growth

3.2.1 Components of Income and Output

• Output derived from combining factors of production: land (fixed), capital, labor (variable).

• Production function: relationship between inputs (labor L and capital K) and output (Y).

  • General function expressed as Y = f(K, L).

• Growth linked to the law of diminishing returns: more capital leads to smaller incremental gains.

• Embodied technical progress: education- and technology-driven productivity increases.

• Disembodied technical progress: organizational improvements that boost productivity even without increased inputs.

3.2.2 Total Factor Productivity (TFP)

• Residual growth not accounted for by conventional inputs (capital and labor): termed TFP or multifactor productivity.

• Efficiency in combining inputs influenced by:

  • Economies of scale.

  • New technologies.

  • Shifts in production to higher productivity activities.

• Production function can be expressed as Y = f(K, L, A), where A represents TFP.

3.2.3 Economic Efficiency

• Production possibility frontier (PPF): combination of goods produced using all inputs efficiently.

• Points on the PPF represent efficient combinations; inside the curve represents inefficiencies.

• Static efficiency improvement through moving from inside to on the PPF.

• Dynamic efficiency from economic growth and sector shifts, especially from agriculture to industry in Asia.

3.2.4 Technical Progress

• Two types: embodied (skills, equipment) and disembodied (organizational improvements).

• Technical progress contributes to TFP and efficient production.

3.3 Growth Theories

3.3.1 The Keynesian Growth Theory and Harrod-Domar Model

• Harrod-Domar model: growth based on saving rates and capital-output ratios, emphasizing investment.

• Simplistic but highlights importance of saving, investment, and efficiency of capital use.

3.3.2 Solow Neoclassical Model

• Incorporates diminishing returns; steady-state income level depends on saving and growth rates.

• Saving rate does not affect long-term growth rate of per-capita income, but influences its level.

• Technological progress can alter capital-efficiency dynamics.

3.3.3 Power Balance Theory

• Focuses on international trade dynamics that keep some countries poor while others gain wealth.

• Highlights exploitation in trade relations but less valid in dynamic East Asian economies.

3.3.4 Structural Theory

• Examines resource shifts from agriculture to manufacturing; observes sectoral contributions to GDP.

3.3.5 New Growth Theory

• Incorporates endogenous technical change, emphasizing increasing returns to scale.

• Addresses how technology transfer occurs and affects growth rates across countries.

3.4 The Asian Growth Miracle

Primary Factors

• Characterized by outward-looking policies, effective macroeconomic management, labor-market flexibility, and education.

• Supported export-oriented growth leading to substantial economic development in East Asia.

Secondary Factors

• Include specific industrial and agricultural policies contributing variably to growth.

Role of Technology

• Technology and investment in human capital significantly influenced productivity increases.

3.5 Economic Performance Aspects

High Savings and Investment Rates

• Asian economies increased savings rates significantly, facilitating high investment rates.

• Showed high correlations between saving and economic growth.

Productivity Increases

• TFP growth in East Asia contributed substantially to overall economic growth.

• External factors (FDI, technology transfer) enhanced productivity and output.

3.6 Policy Matrix and Economic Performance in South Asia

• Contrast with 'miracle' economies: weak outward-looking policies and rigorous labor markets restrained growth.

• Lower educational attainment and lack of favorable economic policies hindered performance compared to East Asia.

3.7 Convergence of Income

Absolute Convergence

• The theory suggests poorer economies grow faster but lacks strong empirical support.

Conditional Convergence

• Allows variable savings and growth rates between countries, acknowledging differences in convergence rates.

Conclusion

• Economic growth experiences differ significantly among regions, with East Asian economies showcasing successful strategies. South Asia's slower growth is attributed to less effective policies and conditions.

Summary

• Effective policies promoting openness, savings, investment, education, and labor flexibility can lead to rapid economic growth and poverty reduction.