Optimism is back. Ministers in the new government have talked of getting India back to a 10% growth rate as fast as possible. Investors are once again venturing out of the West and the growth differential between Asia and the developed world has never looked so inviting. What better time then to revisit the remarkable story of the Asian miracle, in an effort to find out what we need to do for our economy.
A comprehensive paper published recently by Robert W. Fogel of the National Bureau of Economic Research in the US, titled The Impact of the Asian miracle on the theory of Economic Growth, does precisely that (http://www.nber.org/papers/w14967).
Let’s start at the end of the paper, where Fogel has a couple of charts on what the world economy is going to look like in 2040. In terms of his computations, the US, with 5% of the world’s population, accounted for 22% of the world’s gross domestic product (GDP) in 2000. The EU, with 6% of the world’s population, had 21% of the world’s income while Japan, with 2% of the global population, had 8%. In contrast, China, with a share of 22% of world population, had 11% of global output, while India, with 16% of total population, had a mere 5% of global GDP.
By 2040, says Fogel, China will account for 17% of world population and will have 40% of global output, while India, with 17% of world population, will have 12%. The share of the US in world output will fall to 14%, but the real decline will be in EU and in Japan, which will account for just 5% and 2% of world output respectively in 2040. The six Southeast Asian nations too will increase their income share considerably.
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What will drive this growth in Asia? Demography is an obvious factor explaining the projected decline of the EU and Japan. Fogel points to a host of other reasons. He says, for instance, that most of China’s growth in terms of per capita income is attributable to increases in labour productivity. About 30% of its growth is estimated to come from increases in labour force participation and in inter-industry shifts. Investment in human capital is also important.
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But Fogel’s paper goes far beyond merely cataloguing the reasons for the Asian miracle. It traces growth theory right from the 1940s to the present day. He considers all the attempts that economists have made since World War II to explain why economic growth occurs. He starts off from Robert Solow’s seminal 1957 paper which arrived at the “astounding result” that increases in the inputs of labour and capital explained only about 13% of the increase in output between 1909 and 1949. Eighty-seven per cent was unexplained. Solow attributed this unexplained portion to improvements in technology, which he treated as being outside of the model; hence the term: “exogenous technological change”. Fogel continues with the theories of technological change, touching on the work of numerous economists and the theories of how technological change leads to economic growth. He draws attention to Abramowitz’ work on the “shifting bias of technological change, which was intensive in physical capital between 1850 and 1950 (the era of the building of railroads and the electrical grid) but became human capital intensive thereafter”. He looks at the explanations of economic growth offered by the economic historians such as David Landes and Douglas North, in particular the importance of institutional development. And as for the Asian miracle, Fogel alludes to the work of Jere Behrman, who sums up the change in attitudes towards growth that has occurred. By the beginning of the 21st century, pointed out Behrman, policy makers had realised that “merely throwing capital at the problems was not enough; that markets are better than bureaucrats (many of whom were rent seekers) in allotting resources; and that international trade stimulated rather than retarded growth”.
None of this is new, of course. But what is astonishing is that none of the growth theorists had successfully predicted the rise of the Asian countries other than Japan. As Fogel points out, “The idea that all of the Southeast Asian nations, including China, were in the midst of an unprecedented expansion that might affect the global economic balance did not emerge until the early 1990s.”
As for India, there is an ugly side to its growth. Fogel has a table on the increase in calories consumed per capita per day. During 1963-2003, while China increased its intake by 70.4%, Indonesia by 67.4% and Thailand by 25.1%, per capita calorie consumption rose by a mere 19.3% in India. It is this unequal growth that the new government will also have to address.
Graphics by Ahmed Raza Khan / Mint
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at email@example.com