What does it take for an economy to keep on growing fast?
Output comes from combining inputs. Hence:
1. More input, more output.
Combining inputs in new and better ways make for more output. Hence:
2. Better technology, more output.
Since we are talking about economic growth, then "inputs" and "technology" also need to be imagined in very abstract, aggregative terms. So: the labor input aggregates all types of labor inputs in the economy; the capital input aggregates all kinds of capital in the economy. And technology aggregates all kinds of technical know-how in the economy.
There's a little danger in all this aggregation. It may conceal a lot of little goings on that make the aggregate phenomenon possible. For example, "capital accumulation" is a catch-all term, but this requires investment by a large number of firms across many industries; such investments only materialize if investors foresee high future returns from these companies in these industries.
The East Asian High Performing Economies (HPE) are typically listed as: Japan, South Korea, Taiwan, Singapore, and Hong Kong. Other Newly Industrializing Economies in the region are: mainland China, Thailand, Malaysia, and Indonesia.
We limit our list to the East Asian HPEs. Studies have suggested that economic growth was largely the result of accumulation of physical capital, investments in education, and increases in labor force participation (think women!) The importance of rapid capital accumulation is not debated (though there is some controversy about the importance of rapid technological change.)
Clearly, the East Asian HPEs did much to promote investments and education. Physical infrastructure was well provided. Macroeconomic policies kept government deficits trim and inflation well under control. Because of technology investments, the agricultural sector in these economies (except of course Singapore and Hong Kong). Finally, the HPEs started out with relatively low income inequality.
What is less clear is the role played by government industrial policies. While it appeared that the scope of government intervention was massive (a fact pounced upon by the "nationalist economists"), this does not mean that government intervention was partly responsibile for the take-off. In many other developing economies, government intervention was also massive, targeted at industrialization based on substituting domestic for imported manufactures. In such countries there was unfortunately no take-off.
Moreover, measures of government intervention suggest that the quality and severity of intervention differed greatly from the typical import substitution package. The most important difference is that industrial policy aimed at expanding exports, rather than restricting imports. Importation of inputs for export-oriented industries was in fact strongly encouraged. Seen in this light, the East Asian economies were unusually open and market-oriented (World Bank, 1994; Stiglitz and Yusuf, 2001).
So what does it take to take off? Stable macropolicies, an open economy, investments in education, and technical change (especially in agriculture) are all very important. Narrow sectoral promotion, if pursued at all, should be geared towards export competitiveness and not import substitution.
How well is the Philippines doing here? Well consider this news item, which is illustrative of how economic policy is conducted in this country. Open economy? Go figure.
World Bank (1994). "The East Asian Miracle." Oxford University Press, Oxford.
Stiglitz, J., and S. Yusuf (2001). Rethinking the East Asian Miracle. World Bank: Washington, D.C.
Pack, H. (2000). "Industrial Policy: Growth Elixir or Poison?" World Bank Research Observer 15(1)47-67.
[Message edited: econblogger, 1700:5 September 05.]