A comparison of the Asian Tigers' success

¶ … Asian Tigers' Success

Nelson and Pack argue that assimilation of technology was a more important factor. Increasing the labor force would have otherwise diluted the per capita capital of these nations, but the rapid assimilation of foreign technology offset this. Over the course of a generation, the tigers went from being technological backwaters to technological leaders.

Assimilation theory holds that this was a direct result of government policy. The tigers recognized that assimilation of new technology was critical to their success. Moreover, they recognized that the tool by which to encourage such assimilation was the lure of the export market. Manufacturing goods for export enhances technological assimilation in two key ways.

First, it brings in outside capital. The acquisition of new technology is expensive, more so for the tigers given the rate at which they would need to acquire it in order to catch up to the developed world. They did not, as Hobday points out, "...leapfrog from one vintage of technology to another...firms engaged in a painstaking and cumulative process of technological learning." (Nelson and Pack, 419). To afford ambitious programs of technological development would involve the infusion of outside capital.

The second reason that the manufactured goods sector was crucial to technological growth is that the export markets would demand technological growth. Tiger companies would enter export markets with marginal technologies and compete on the basis of price, initially. Home country competitors would then respond by competing on superior technology. In order to sustain the market position, the tiger companies would need to respond with technological improvements of their own. Competing on price was a sound means by which to enter a market but long-term growth would require the tiger company to brings its technology up to international standards rapidly.

This fuels the process of creative destruction, a key component of rapid technological advancement. As described by Schumpeter, creative destruction "...incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one." (Khan, 508). Furthermore, Khan asserts that creative destruction in an individual company can impact an entire economy if the innovations are duplicated or imitated by others.

The governments of the tiger countries recognized that manufacturing for export was the most powerful tool by which to achieve the technological assimilation required to build their economies. They contributed to these goals in several ways. They improved their education systems, thereby improving the human capital.

This in turn gave rise to managers and engineers capable to rapid learning. Each successive wave of new talent was able to build on the talents of those who came before. Over time, engineers were able to understand and adopt new technologies more rapidly, and managers were able to do the same with their understanding of competition in global markets. Khan suggests that in market economies "...success is often cumulative and self-reinforcing," which explains why each successive wave of engineers and managers was able to so easily adopt and improve upon the work of their predecessors. The process of such learning and building becomes increasingly efficient with each subsequent wave.

These countries also introduced liberalized trade policies to encourage export growth. Expanding the opportunities for domestic firms worked in conjunction with encouraging entrepreneurialism. The culture of entrepreneurialism resulted in rapid innovation, and rapid growth for exporting firms. In both Korea and Taiwan, for example, the percentage of the workforce employed by firms over 100 workers increased significantly from the mid-1950s to the mid-1970s (Nelson and Pack, 420). In Korea this was achieved through government support of the chaebols, large industrial conglomerates.

The way in which this impacts growth is outlined by Nelson and Pack. They propose that "...at the beginning of accelerated development almost all capital and labour is in the craft sector," that is to say in firms with few employees. When the labor begins to shift towards modern technologies, productivity per unit of labor improves, as illustrated in Pack and Nelson's model (421):

Q/L = ac + (am-ac) Lm/L

They assume that there will be a premium on the cost of educated workers, but that this premium will not exceed the productivity increases gained from a more educated workforce. Thus, profit improves as economies move away from craft production, providing a base economic incentive to do so. As demand for educated labor increases, the pool of educated labor will increase to fill that demand. This requires infrastructure investment on the part of the governments, which is a commonality among the tiger economies.

The rate of growth of this human capital is a driving factor, but the strength of entrepreneurship is what sets the pace of these increases in productivity and therefore human capital. The strength of entrepreneurship will affect the strength of the response to the profit opportunities presented by increasing technology and thereby shifting labor to the modern sector.

There are two factors to the strength of entrepreneurship. Internally, it is impacted by the culture of the people in question. Certain cultural factors are more conducive to entrepreneurship that others, such as the acceptance of risk and the drive for money or status. Analysis of these internal factors can be quite complex, and in fact Pack and Nelson dodge the issue entirely, calling it a "quagmire."

However, governments play a role in encouraging entrepreneurship. This is the key outside factor in the strength of entrepreneurship in an economy. Government policy is a tool to encourage desirable behaviors. To do this, a government must have a keen understanding of the motivations of its people and be able to leverage those motivations effectively in creating its policy. Governments play a strong role in mitigating the amount of risk faced in entrepreneurial endeavors. They can structure incentive programs that guarantee loans or reduce the cost of capital. They create the tax regimes that encourage investment. Governments are responsible for the amount of legal impediments to doing business and can streamline the processes by which business is conducted.

Strength of entrepreneurship was also encouraged by liberalizing trade policies. The governments placed importance on developing export markets, and achieving favorable trade pacts to ensure this. The economy's response was to focus on export markets, sometimes to the neglect of the domestic market. Real exchange rates were kept stable, which allowed firms to maintain their profitability even if local costs increased. Other tools used included subsidies and tariffs that encouraged export trade. In Korea, there was tremendous government support for the chaebols, who were key drivers in that country's economic growth.

The other view of economic growth is accumulation theory. Accumulation theory focuses on the notion that it was investment in human and physical capital that drove the tiger's success. Two components of accumulation theory are growth accounting and dynamic production function estimation.

Growth accounting argues that the majority of increases in output are attributable to increases in input. The role of technological innovation is relegated to a residual. High capital share and a high rate of return on invested capital led to high rates of investment, which under accumulation theory explain the bulk of the tigers' growth.

The growth accounting theory essentially assumes that it was this growth of investment driving the growth in the economy. The difference between this and the assimilation theory is that the latter attempts to explain the rationale behind the growth of investment. Indeed, the key driver behind the growth of investment capital was the rapid adoption of new technologies. These capital intensive technologies and the competitive advantages gained from their assimilation were the key driver behind the growth of investment capital.

Another factor behind the growth of investment was the high rates of return. These sustained high rates of return are explained in the growth accounting model as a function of high growth of capital, whereas in the assimilation model it is attributed to the shift from craft production to modern.

Production function estimation expands on the theories set forth in growth accounting. It assumes that productivity growth would have occurred even without technological advancements.

However, there is merit to the accumulation theory. Krugman cites the case of Singapore. Between 1966 and 1990, employment nearly doubled and education standards increased dramatically. The workforce went from one in which half of workers had no formal education whatsoever to one in which a majority had completed their secondary education. Capital investment grew rapidly. Krugman cites an increase of capital investment as a share of output rising from 11% to 40% over this time period. He does not, however, explain what the drivers were for this capital investment, which is what assimilation theorists attempt to explain.

He certainly does not feel that efficiency is a factor. "Singapore's economy," he contends, "was always efficient; it just used to be starved of capital and educated workers." (71) Young breaks down this view further. He illustrates how labor productivity growth underperformed the aggregate economy in Singapore and Taiwan. Singapore, with the most dramatic increases in human and physical capital growth, demonstrated the lowest productivity growth. Lau and Kim's study concluded that productivity growth was close to zero in these countries over the past few decades.

Accumulation theory does not inherently rule out the role of technological innovation in the growth of these economies. Indeed, if these economies had not brought their technological status up to that of other modern economies, they would not have been able to grow the way they did.

However, in accumulation theory, technology is not responsible for any unusual improvement in efficiency. It is an ancillary to the economic growth, rather than a key driver. Assimilation theory, on the other hand, assumes that technological innovation equates to improvements in productivity. The increase in capital inputs that drives success under accumulation theory works because it was spent on improving technology.

One of the key differences between the two theories is that assimilation theory leads to the conclusion that robust economic growth is both sustainable and replicable, whereas in accumulation theory the growth in only replicable, but not sustainable.

Krugman puts it bluntly when he states the following, regarding the case of Singapore: "Over the past generation the percentage of people employed has almost doubled; it cannot double again. A half-educated workforce has been replaced by one in which the bulk of workers has a high school diploma; it is unlikely that a generation from now most Singaporeans will have Ph.D.s. And an investment share of 40% is amazingly high by any standard; a share of 70% would be ridiculous. So one can immediately conclude that Singapore is unlikely to achieve growth rates comparable to those of the past." (71).

One can object to some of the logic here, in that there is still a significant room for improvement in a country where only two-thirds of the workforce has a diploma, much less a degree, but the point is clear - the growth of the tigers is not sustainable.

Under assimilation theory, the main driver is not the improvement of capital inputs but rather is the assimilation of technology. Growth rates are thus dependent on the pace of technological innovation. The easy assumption is that here, too, growth rates are unsustainable simply for the fact that at the beginning of this type of economic transition the level of technology is so low.