Ch 1: Growth, Equity, and

Economic Change
Introduction
• The HPAEs are very diverse
▫ in natural resources, culture, political institutions, etc.
• They shared following 8 characteristics:
▫ High rate of economic growth
▫ Low & declining income inequality & reduced poverty
▫ Rapid output and productivity growth in agriculture
▫ Higher rates of growth of manufactured exports
▫ Earlier and steeper declines in fertility (demographic
transition)
▫ Higher growth rates of physical capital, supported by
higher rates of domestic savings
▫ Higher initial level and growth rate of human capital
▫ Higher rates of productivity growth
1) Rapid and Sustained Economic growth
• Average 5.5% annual per capita real income growth
▫ Around 7% annual growth in GDP
▫ Outperformed other developing economies (Latin America,
Africa, other Asia)

• Japan, Hong Kong, Korea, Singapore, and Taiwan

continued rapid growth throughout 1960-90
▫ Japan shifted from extremely rapid growth (1950s-60s) to
moderate growth (typical high-income economies, deom
mid-1970s)

• Indonesia, Malaysia, and Thailand accelerated their

growth rate over time, particularly since 1980s
▫ Late-comers among HPAEs
2) Declining Income Inequality and Reduced Poverty

• HPAEs: low and declining levels of inequality

▫ Inequality index (R20) less than 10, except Malaysia (Fig. 1.3, p.
31 & Fig. 3 of p. 4 )
▫ Both higher levels of growth and lower levels of inequality
(*unusual) <cf: Kuznetz hypothesis

• Reduced poverty
▫ (Absolute) Poverty: inability to attain a minimal standard of
living (criteria: per capita income $1/day- on PPP basis)
▫ Percentage of population below the poverty line decreased more
than 20% points (Table 1.1, p. 33)
• Increased life expectancy
▫ Life expectancy increased to above 70 years (Table 1.2, p. 34)
 Except for Indonesia (59 years) and Thailand (68 years)
3) Dynamic Agricultural Sectors
• Share of agriculture in both GDP & employment decreased,
but agricultural output and productivity increased decently
• Annual growth of agriculture income 3.2%, and productivity 2.2%
(Table 1.3, p. 34)
• Contributing factors
• Land reform (“land to tillers”)
• Agricultural research and extension services (‘green revolution’)
• Public investments in irrigation and other rural infrastructures
▫ Low levels of taxation (direct and indirect) on agriculture
 Differed from other developing countries transferring surplus from agri. to
industry thru price controls, industrial protection, currency overvaluation
• It facilitated industrialization (in the early stage)
▫ Food supply, labor supply, increase market size and domestic saving
4) Rapid Growth of Exports
• A steadily rising share in world exports from 8% (1965) to 13%
(1980) and 18% (1990)  mostly manufacturing export
• “Flying geese pattern”: shift in key export industries
within the region
▫ In 1960s, Japan was the biggest exporter of manufactured goods
▫ In 1970s and 1980s, labor intensive export industries shifted to the
Four Tigers (Korea, HK, Singapore, Taiwan)
▫ Beginning in 1980s, the three Southeast Asian HPAEs recorded
a similar, but smaller surge in manufactured exports
▫ Intra-regional FDI flows played a key role in these shifts
▫ Contributing factors: geography and more (policies)
• Effects of export increase (increase in overall openness combined
with import increase): open to new ideas, network, technology
5) Rapid Demographic Transition
• Transition to low fertility (low birth rates) and
low death rates was rapid
• A decline in population growth rate
▫ Korea: 2.6% (1960-70)  1.1% (1980-90)
▫ Hong Kong: 2.5% (1960-70)  1.4% (1980-90)
▫ Thailand: 3.1% (1960-70)  1.8% (1980-90)
• Population structure became favorable for economic
growth (“population dividend”)
• Relatively high share of productive age population
• This “population dividend” disappear over longer term
6) High Investment and Saving
Rates
• Investment (I):
▫ All of the output that is not either consumed or used up in the
production of other goods (increasing capital stock, K)

• Funding source of investment

▫ Closed economy: domestic savings
▫ Open economy: domestic savings, foreign borrowings, and
foreign direct investments

• Both saving and investment (% of GDP) increased

substantially, outperforming other developing region
(p.41)
▫ 1965  savings rates in the HPAEs were below than Latin America
1990  exceeded Latin America by almost 20% point
▫ 1965  investment rates in Latin America & East Asia were almost same
1990  EA’s investment rates nearly double that of Latin America
High Investment and Savings Rates
(cont’d)

• Private investment
▫ 7% points higher than other developing economies
High Investment and Savings Rates
(cont’d)

• Public investment
▫ 1970s  HPAEs and other developing economies did not differ substantially
▫ 1979-82  HPAEs rose and remained at 4% higher than the average in 1970s
▫ 1980-87  public investment in EA economies counter-cyclical to the changes
in private investment
7) Creating Human Capital
• In general, school enrollment rates increase as per-
capita income increases

• The enrollment rates in HPAEs tended to be higher than

the predicted level by their income level
▫ For primary school level HK, Korea, and Singapore had already
achieved universal primary education in 1965, while Indonesia’s
primary enrollment rate 70% above the predicted level

▫ For secondary school level  Korea had improved from 35%

(1965) to 88% (1987). Only Thailand was below the predicted rate

▫ Focus of education shifted over time (from primary to secondary)

Creating Human Capital (cont’d)
Creating Human Capital
Creating Human Capital (cont’d)
• Measures of educational quality
• Expenditures per student
▫ 1970-89  Korea’s real expenditures per student increased by 355%

▫ Reflected 1) income growth, and 2) decrease in the number of children

entering schools (“demographic change”)

• Higher performance of EA students in tests of cognitive skills &

other standardized test
• than other developing regions and even high-income economies

• Nature of learning environment at home

• A simple index taking into account mother’s education level and the
number of children at home, showing better learning environment
• (eg.) Korean index: 114% above Brazil and 147% above Pakistan
8) Rapid Productivity Growth
• Increase in labor productivity (Y/L) is self-
evident with the increase in per-capita GDP
• How?
 Increase in physical capital per worker
 Equip workers with more capital goods, making them
more productive
 Increase in human capital
 Higher (overall) efficiency called total
factor productivity (TFP)
 Output increase that cannot be explained by measured
increases in inputs (K, L, H)
 Sources: better technology, better organization, gains
from specialization, and innovation in the field
Rapid Productivity Growth
• Empirical studies to estimate sources of
growth in HPAEs
▫ 1) Growth accounting analysis (appendix 1.1 )
 Skip in this class (too technical for this class)
▫ Results
 Increase in physical and human capital  2/3
 Dominant factor
 Increase in efficiency (TFP increase)  1/3
 Contribution of TFP growth is relatively large, both in
absolute terms and as a share of output growth
 Differences exist among HPAEs (Fig. 1.10, p.56)
Cross-Economy Regressions of per-Capita
Income Growth
• 2) A regression analysis examines the
relationship between the growth rate (per capita GNP)
and the following variables
• share of investment in GDP
• educational attainment
• Primary and secondary school enrollment rate
Controlling for :
• growth rate of the economically active population
• relative gap in per capita income with US in 1960 (i.e., initial
level of economic development)
• (in some regressions) Regional dummy variables added
Cross-Economy Regressions of per Capita
Income Growth (cont’d)
• Physical investment and education (primary) are
found to contribute to economic growth
▫ Corresponding coefficients are (+) & statistically significant
• How to interpret (-) coefficient of the “initial income
level (relative to US in 1960)”?
• Poorer economies tend to grow faster, assuming other
variables remain fixed: “conditional convergence”
• “Advantage of late-comers (followers)”
• Followers benefit from easier productivity catch-up (cheaper
in acquiring technology or learning, avoid mistakes), & inter-
sectoral reallocation of labor from agriculture to industry
Cross-Economy Regressions of per Capita
Income Growth (cont’d)
▫ Further analysis of regression results in Table 1.9 (pp.
52-53) in the following way
▫ Derive 1) predicted growth rate, 2) contribution of each
independent variable to the predicted growth rate, 3)
predicted growth rate relative to the actual growth rate, &
unexplained (unpredicted) part of the actual growth rate

 Except for HK (44%), 60% or more of the actual growth is

predicted by the model (i.e., physical capital, human capital,
initial income levels, and population growth)
 For most HPAEs, primary education & investment are the two
largest contributors to the predicted growth rates
Cross-Economy Regressions of per Capita
Income Growth (cont’d)
• Differences in actual growth rates between HPAEs and
other regions can be divided into two parts (Table 1.10)
1) The first part is the “predicted growth difference”
explained by the model
 Due to the differences in the independent variables
(accumulation, initial level of income, primary education,
secondary education)
 Then, further derive how much of the predicted growth
difference is due to each independent variable?
(Eg.) HPAEs - Latin America
▫ 34% of the predicted growth difference is due to levels of investments
▫ 38% of the predicted growth difference is due to enrollment rates
Cross-Economy Regressions of per Capita
Income Growth (cont’d)
2) Differences in the actual growth rate that are not
explained by the model
- The regression (model) account for only a portion of
the difference in the actual growth rates between
HPAEs and other regions
 HPAEs – Sub Saharan Africa  the regression predicts
36% of the actual growth difference
▫ This remaining part of differences in actual growth
rate is not explained by the model
▫ Q. How to interpret this?
Cross-Economy Regressions of per Capita
Income Growth (cont’d)
• Similar observation in the last column of Table 1.8
• Using regional dummy variables
• Excluding the contributions of the four explanatory
variables, HPAEs and other regions still have
significant different growth rates
• Captured by dummy variables
• How to interpret this unexplained part?
 HPAEs achieved more increase in TFP
 By allocating accumulated resources to more productive
activities as well as by adopting and mastering catch-up
technologies