Asian Miracle in 1970s

There are four arguments which explain a miracle in East Asia countries. First, according to Krugman (1994) NIEs in East Asia attained rapid growth by increasing more mobilization of resources such as labour and capital than gains in efficiency. For example, in 1970s participation rate (workers / population) increased. Also, there was a rise in physical capital or investment rate (I/Y) as well as human capital investment (because educational attainment increases). However, there was a diminishing marginal return on total factor productivity. Krugman also made comparison with Japan’s growth in 1950s where this country grew through high rates of input and efficiency growth.
Second, Young (1994) argued that NIEs in East Asia attained rapid growth through factor accumulations, which encompass as follows: Firstly, a rise in female participation rate caused by a decline in birth rates that changed dependency ratio. Secondly, there was a large intersectoral transfer of labour to manufacturing sector. Thirdly, there was a rise in physical capital or investment rate (I/Y) and in human capital investment (because educational attainment increases). However, Young stated that there is no growth on total factor productivity.
Third, Lucas (1993) believed that NIEs in East Asia attained rapid growth through large scale exporters of manufactured goods, high urbanization, increase in education, high savings rates, and pro-business government. Lucas emphasised on on-the-job accumulation = learning by doing because experienced workers and managers earned more than inexperienced ones and human capital investment in formal schooling cannot be achieved in steady-state economies. Moreover, there was a relation between openness international trade and learning rates which stimulate many East Asia countries to more efficient and flexible in response to world market price through adoption of technology.
Last, Higgins and Williamson (1996) stated that NIEs in East Asia attained rapid growth through a decrease in birth rate and an increase in infant mortality rates which led to a decline in youth dependency ratio (0-14 years) and then followed by a rise in savings rates. Because working age population (15-64 years) increased, labour participation rate will rise, which equate a rise in investment rates.
Meanwhile, we can analyze the rapid growth of Germany, Japan, and US in the period of 1870-1914 in terms of 4 aspects. First, international trade aspects. International trade grew for many reasons. International freight rates declined steadily as a result of constant technical improvements and the growth in the usage of faster and more regular steamships, especially after the opening of the Suez Canal in 1869 (Daudin et al, 2008). However, as overland transport was much more expensive than water transport, the reduction of internal transport costs through the development of railways was crucial. In addition, peace between the main powers from 1871 to 1914 promoted trade (Jacks, 2006). The development of European formal and informal empires increased extra- European trade through the reduction of trade barriers, the inclusion of colonies in currency unions, and the better protection of (European) property rights (Mitchener and Weidenmier, 2007).
Falling transport costs implied increasing potential market integration, but politicians always had the possibility of muting or even reversing this via protectionist policies. Beginning in the 1870s Continental European countries raised barriers to trade in grain and other commodities (Bairoch, 1989). In Germany, Bismarck protected both agriculture and industry in 1879. In France, tariffs were raised in the 1880s, and in 1892. In Sweden, agricultural protection was re-imposed in 1888 and industrial protection was increased in 1892. In Italy, moderate tariffs were imposed in 1878, followed by more severe tariffs in 1887. While UK still maintained free trade after 1870s. The result was the countries that protect domestic industries (Germany, France, US, Italy) grew rapidly after 1870s and overtake UK as industrial powers by 1914.
In addition, there was also evident of imperialism. Capital exports to colonies were important, but not dominant. Europe was self-sufficient in coal and nearly self-sufficient in iron ore and other minerals. Textile raw materials were more of an issue as cotton, for example, it could not be produced in Europe in great quantities but it was largely supplied by US. Thus, colonial empires did not represent vital outlets for European goods either, absorbing less than 15% of all Western European exports (Bairoch, 1993).
Yet, it is true that one of the driving forces behind imperialism was the influence of European traders, who saw in political control a way to facilitate their economic exchanges with African and Asian producers and consumers. Some industrialists also believed that the creation of a reserved market would be a suitable answer to international competition. However, increasing in competitiveness causes the tension rise both domestic (distribution problem) and international (conflict between established and emerging powers).
Second, capital flow aspects. International capital market integration was extremely impressive during this period. Regions with good access to European capital and abundant resources such as the US, Canada, Japan, and Australia prospered most between 1870 and 1913 (Daudin et al, 2008). In addition, Europe as a whole dominated foreign investment where England (42%), France (20%) and Germany (13%), Belgium, the Netherlands, and Switzerland combined accounted for 87% of total foreign investment (Maddison, 1995). Edelstein (1982) showed that overseas portfolio investments yielded a higher realized return than domestic portfolio investment during 1870 – 1914.
Turning to economic institutions and policies, a great deal of attention has been devoted to the gold standard (Bordo and Rockoff 1996) and, more recently, to sound fiscal policies (Flandreau and Zumer 2004). Adherence to gold is seen as having promoted global financial integration in two ways. First, it eliminated exchange-rate risk. Second, it signalled that while economic institutions and policies can facilitate capital imports, they can never attract them if there is no genuine interest on the part of investors in what a specific country has to offer. This brings us to economic fundamentals as the main determinant in explaining the size and direction of flows. Clemens and Williamson (2004) provide econometric evidence in favour of this view, showing that British capital exports went to countries with abundant supplies of natural resources, immigrants, and young, educated, urban populations. While they also find that the gold standard and empire promoted foreign investment, supply and demand, rather than the presence or absence of frictions leading to price gaps between markets, were what was really crucial.
Widespread adherence to the gold standard was a central pillar of the pre-World War I financial system. This implied a commitment to a policy of external balance, even when that conflicted with domestic economic imbalances, notably unemployment. However, most capital circulates among rich countries are no longer connected by fixed exchange rates. Indeed, Obstfeld and Taylor (2004) pointed out that abandoning fixed exchange rates make it possible for countries to pursue both independent monetary policies and a commitment to open capital markets.
Third, migration aspects. The average Western European annual outmigration rate was 2.2 per thousand in the 1870s and 5.4 per thousand for the 1900s, very large numbers that are far in excess of any reasonable projections of African emigration between now and 2030 (Hatton and Williamson, 2005), although the latter would presumably be far higher than they actually are in the absence of today's very tight immigration restrictions in rich countries. The causes are obvious: the New World was endowed with a higher land-labour ratio than Europe, and hence American and Australian workers earned higher wages than their European counterparts. The gains from migration were thus potentially enormous, and once the new steam technologies had lowered the cost of travel sufficiently, mass emigration became inevitable. Also, rising fertility, structural transformation increased emigration rates, initially in the richer economies whose workers could best afford the cost of transport, and then in poorer economies as living standards rose across the continent.
While emigration benefited European workers, mass immigration hurt their counterparts overseas. Hatton and Williamson (1998) showed that immigration lowered unskilled wages in the United States, although this is a ceteris paribus finding, since economic growth was raising living standards generally during this period. Nonetheless, the effects were large. Relative to what they would have been in its absence, immigration lowered unskilled real wages by 8% in the US, 15% in Canada, and 21% in Argentina (Taylor and Williamson 1997). Counterfactual or not, such impacts did not go unnoticed, and the result was a political backlash, resulting in gradually tightening restrictions on immigration in the main destination countries (Timmer and Williamson, 1998).
Last, technological transfer aspects. Economic globalization is not simply about the movement of goods or factors of production. It also includes technological transfers and the deepening of other intellectual exchanges. Several new factors increased the speed and the reach of technological transfers. First, the flexibility of migration. Imperialism allowed European entrepreneurs to invest overseas, taking advantage of low wages, with no fear of expropriation by hostile governments. The decline in transport and communication costs helped the diffusion of ideas, new goods and machines. This last effect was especially important because more and more technology was embedded in machines rather than in individual know-how, even if training was still necessary. Firms could now export capital goods on a large scale. Second, the diffusion of technologies was also helped by the creation of international scientific and technical organizations with government increased formal technical cooperation. Most sovereign states, both European and non-European, joined these global institutions. Another form of rising globalization was the growing number of international exchanges and competitions, and labour movements.