Productivity lessons for Asia’s tiger cubs

24 November 2015
Authors: Lawrence J. Lau, CUHK and Jungsoo Park, Sogang UniversityEastasiaforum – The high and persistent growth of the four Newly Industrialised Economies — also known as the East Asian Tigers: Hong Kong, South Korea, Singapore and Taiwan — from 1970 to 1990 prompted much debate about the drivers of growth in these economies. There have been numerous studies looking into this issue, but they have not yet been able to reach a common conclusion. Understanding the drivers of growth in the Tiger economies can help us grasp the future prospects for growth in the emerging Asian economies, and for Asia more generally — and the supporting policy responses needed.

Victoria Harbour in Hong Kong is famous for its fast owing commerce. Trade and openness helped the small island nation and other Asian ‘Tigers’ to develop rapidly by assimilating foreign technology. (Photo: AAP)

Some studies examining growth in these economies suggest an assimilationist view, claiming that a high rate of technological change — from technology infusion — was the main driver of growth. They argue that globalisation helped these economies to adopt advanced foreign technologies at low cost and develop new skills based on the absorbed technologies. They attribute much of the success of the Tiger economies to government interventions that facilitated assimilation into the global economy and policies that promoted growth in exports. The growth pattern consistent with this notion is denoted as ‘productivity-based growth’.

Other studies suggest an accumulationist view. Here the main source of growth was from the rapid accumulation of capital. These studies calculate total factor productivity (TFP) estimates, or estimates of technical progress, and typically find measured TFP growth to be relatively small. The growth pattern with this notion is denoted as ‘input-based growth’.

More than 20 years after this period of rapid growth in the East Asian Tigers, a new group of Asian economies — Indonesia, Malaysia, the Philippines and Thailand from ASEAN, as well as China and India — have emerged with similarly high and persistent growth starting from the 1990s. At the same time, growth has slowed in the original Tigers. There is now more evidence on the nature and origin of growth in Asia’s industrialising and industrialised economies, allowing new insights into the future of productivity in the region.

Comparing the patterns of productivity growth over the past few decades of the Asian economies with those of the advanced economies, it is evident that the Asian economies are in a process of transition between these two growth paradigms. Specifically, decomposing growth rates and determining the driving factors of TFP growth reveal that the four Tigers have already made the transition from input-based growth, supported by the accumulationist view, to productivity-based growth, supported by the assimilationist view. This is consistent with the growth patterns seen in advanced economies in the earlier phases of their economic development.

Among the other Asian economies, signs have begun to emerge over the last decade of their own transition to productivity-based growth. Similar to the experience of the first four Tigers from 1970 to 1990, these economies may face fiscal challenges that may slow their growth in the post-transition period. Their need to transition fully to productivity-based growth recommends future public policies based on the experience of the Tiger economies and the challenges currently facing advanced economies outside of Asia.

Examining trends in the variables affecting TFP growth allows assessment of the potential for future productivity growth. One of the main factors in increasing productivity growth is human capital. The rising educational attainment rates seen in the four ASEAN economies and China is expected to have a significant impact on productivity. But their levels of educational attainment are still far below the average level of the Group of Five (G5) Countries (France, Germany, Japan, the United Kingdom, and the United States), and significant challenges remain for public policy in this are across the region.

Another factor in increasing productivity growth is investment in research and development (R&D). R&D-to-GDP ratios for the G5 have fluctuated since the 1970s but have shown a slight upward trend in recent years. Although South Korea, Singapore and Taiwan started with very low levels of R&D-to-GDP ratios, they have significantly increased their resources devoted to R&D since the 1980s. The four ASEAN countries tend to have low R&D-to-GDP ratios, with little indication of any increase at this stage. However, while the Chinese R&D-to-GDP ratio has seen strong upward movement and has now caught up with the United Kingdom, it still lags significantly behind those of not only the advanced economies of Germany, Japan and the U.S., but also South Korea and Taiwan.

Investment in R&D leads to innovation outputs that can be measured in a number of ways, including the number of patents granted. Focusing on patents granted by the United States Patent and Trademark Office, the number of patents granted to the four emerging ASEAN economies are still quite low, even though they have begun to rise significantly in the late 1990s. The same goes for China, which has again caught up with the United Kingdom. However, on a per capita basis, the number of US patents granted to Chinese nationals is still very low.

Trade and foreign direct investment are additional channels of technology transfer. Global trade and capital flows have intensified especially in these Asian regions. The stock of Inward foreign direct investment has increased 7.6 times in the Tiger economies, 6.1 times in the emerging ASEAN economies, 13.9 times in India and 2.9 times in China since 2000

The Asian economies are in the process of transitioning their pattern of growth. Asia’s Tigers seem to have already transitioned from input-based to productivity-based growth, and the other Asian economies appear to be following this path. This reality should guide public policy in tackling the fiscal challenges that lie ahead. Investment in intangible capital such as human capital and R&D have been and will continue to be the main determinants of TFP growth in Asia. Recent trends in human capital, R&D, and trade and capital flows in the Asian region all suggest that productivity growth is likely to be stronger in the region than before and can be expected to drive its economic growth in coming decades.

Lawrence J. Lau is the Ralph and Claire Landau Professor of Economics at the Institute of Global Economics and Finance, The Chinese University of Hong Kong. Jungsoo Park is Professor of Economics at the School of Economics, Sogang University, Seoul. This article was published in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s Intergenerational Challenges‘.

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