Myth of Asia

Baby Chao sent me this article entitled The Myth of Asia's Miracle written by Nobel prize winner Paul Krugman. It is important to note that this article was written in 1994, which predates the greatest tech boom in US in the late 90s and the implosion of Asian financial crises in 1997.

The underlying thesis of this article is that "sustained growth in a nation's per capita income can only occur if there is a rise in output per unit of input". And that the growth in GDP of the Asian countries are driven by increasing inputs (capital and labour) and not increasing productivity (output per unit of input).

The message that was not made explicit is; collectivist, authoritarian state is NOT inherently better at achieving economic growth than free-market democracies.

Collectivist + authoritarian. Sounds like a country I know quite well.

Or do I?

The growth of Singapore between 1966 to 1990 was contrasted against the Soviet Union's method of growth. Essentially HUGE growth in input --> resulting in unsustainable per capita income.

Caveat: The last time i took formal econs lesson was many years ago in JC, so it is likely that I am totally wrong!

As i'm more familiar with finance and accounting stuff, the following is a loose analogy:

Assuming that all 'inputs' in a country are things like labour, factories, intellectual property, machines, etc. and that 'output' - GDP is like net profit.

To increase Net Profit, all you have to do is to increase your assets employed. As long as you can constantly raise capital to buy more assets, then your net profit can increase.

However, for the growth in earnings to be sustainable, there is a need to increase return on assets and not the asset base itself. There is a natural limit on the growth of a company as more assets are deployed, the return on capital revert to the cost of capital, and the company faces diminishing return, thus earnings growth slows down.

Though i know little economic theory and data, I find Krugman essay was very logical and may have great impact on economic policies.

I googled on Singapore's productivity, and is surprised at the ranking as shown below in chart form from Straits Times;

source: http://www.straitstimes.com/STI/STIMEDIA/pdf/20100201/020110productivity02.pdfdf

Of course productivity is not the end of the story. If it cost us $2 to employ a cheap foreign laborer who produce 1 unit of work, eg sweeping 1 kg of leaves, vs spending $1000 to employ Superman to blast off the leaves (100 kg), Superman is undoubtedly more productive by a factor of 100, but it does not mean that Singapore is better employing Superman to clear the street.

Now the issue is how do we ensure a prosperous country AND equity within the society. Some part of me believes that there must be a trade off between prosperity and equity.

Of course our forward looking government set up a committee to look into how we should position Singapore for the next phase of growth. Btw, I love the name of the committee - ESC...look at your keyboard...

It is interesting that key recommendations no longer focus so much on labor growth, but focuses growth on Innovation and Skill. "We must shift to achieving GDP growth by expanding productivity rather than the labour force. We must boost productivity in order to stay competitive, upgrade the quality of jobs, and raise our people’s incomes. A slower growing workforce makes it all the more important for every enterprise to innovate to create more value, and to maximise the potential and performance of every worker."

Now it seems that we are back to Krugman's issue that real economic growth comes from innovation. And innovation is supported by a liberal and vibrant marketplace, which creates new jobs, new opportunities, etc. The BIG question left unanswered is that can government plan for innovation? And to mobilize resources to create a innovative society? In a society which frowns upon failure, the path to innovation and creation will be challenging. I sure hope that somehow somewhat we'll get through this century stronger and better - but who and what will be sacrificed in the process?

To read the full ESC recommendation, click here.