World Bank advisory methods for economic growth in newly industrialized countries

HK & Singapore

A country's economic growth "may be defined as a long-term rise in capacity to supply increasingly diverse economic goods to its population…" (Kuznets, 1973). There are a number of methods by which economic growth can be encouraged. These include reducing barriers to business expansion (such as interest rates, tax rates and bureaucracy), increasing transparency in government, increasing population, trade policy, technological innovation and increased exploitation of resources. Singapore and Hong Kong are first-world city states with large populations and limited natural resources. Although both have experienced population increases, density is very high and there is limited room for domestic consumption growth. Likewise, there is limited room for growth in resource exploitation, as neither has excess natural resource capacity. Transparency International ranks Singapore as first in the world for least corruption, and Hong Kong is a strong 13th, so there is little room for improvement (Transparency International, 2010).

Tax rates are therefore a key strategy that can help firms in Hong Kong and Singapore achieve growth, according to endogenous growth theories. These theories propose that higher tax rates discourage productivity, as workers and companies see declining marginal returns on their investments of time, energy and capital. Thus, lowering tax rates is theoretically correlated with increasing economic growth, by increasing the economic incentive to invest and innovate. There is dissenting literature with respect to this theory, for example Padovano and Galli (2001). However, reducing taxation rates remains a popular theory for increasing economic output.

Modern trade theory, which is based on the Ricardian model, suggests that the level of economic activity can be increased as a result of reducing barriers to trade. This is certainly critical for nations like Hong Kong and Singapore that are constrained with respect to internal growth by their first-world status and limited natural resources. A key test of this can be found in Hong Kong, which first saw the transfer back to China in 1997 that brought reduced barriers between the SAR and rapidly growing Guangdong Province and then saw China's accession to the World Trade Organization a few years later, further reducing regional and global trade barriers. A World Bank chart of nominal GDP for Hong Kong shows a relatively poor correlation between these trade barrier reductions and economic growth. The SAR grew rapidly prior to 1997, but saw that growth stifled as a result of the 1998 Asian financial crisis. The growth rate resumed after 2003, but not at a higher level than the Hong Kong economy was growing prior to 1997 (World Bank, 2011).

Lastly, technological innovation has long been thought to be correlated with economic growth (Kuznets, 1973). Policies encouraging innovation sparked growth in neighboring countries like Korea (Chung, 2005) and China (Li & Florida, 2006) as well as in major Western economies such as the United States and Germany. By creating the conditions for technological innovation, nations like Singapore and Hong Kong can leverage their human capital and strong capital markets. These economies are dependent on exports, but can realistically not undercut other nations in the cost of human capital, as most neighboring countries have lower standards of living and much greater populations. Therefore, it is recommended that both Hong Kong and Singapore focus their efforts on promoting technological innovation by providing strong public education systems, tax incentives on R&D and transparent, liquid capital markets. This strategy is the most proven of the different strategies for encouraging economic growth, and it also takes advantage of the strengths of these countries, and avoids attempting to compete in areas where these countries are at a competitive disadvantage, such as labor costs or availability of natural resources.

Works Cited:

Chung, S. (2005). Technology innovation and economic growth: Korean experiences. World Bank Workshop. Retrieved February 6, 2011 from http://info.worldbank.org/etools/docs/library/144056/Technology_Innovation_and_Economic_Growth.pdf