Harnessing Globalization

The following sections are included:

• Contents

• Preface

The puzzle This is my attempt to resolve the popular puzzle: Why did the Industrial Revolution happen only in Britain during the 18th Century, and not much earlier in China of the Sung dynasty, notwithstanding the brilliance of the Chinese technology? The same question has been asked independently by other researchers, especially Lin, J. Y. (1995). The explanation of Lin is that technical progress went on by experience in ancient China, but by systematic experiment (cum science) in Europe. In the end, Europe outdistanced China in technology. My explanation is in a sense complementary to Lin's experience-versus-experiment view, but with a somewhat different emphasis: institutions…

Sung China led the West in science and technology, but Industrial Revolution came to Britain, centuries later. Historians and economists offer various explanations, but no consensus. This issue is relevant to endogenous growth theory, concerning the process of producing and using knowledge through R. & D.

We compare the experiences of Britain, China, France and Japan, asking what enabled Watt to introduce his steam engine and whether he could succeed in China. Evidences highlight the environment for R. & D. Universities in post-Renaissance Europe gave European inventors better insights and efficacy than East Asians. Thus, Japan, though free from nomadic occupation or harmful imperial examinations suffered by China, did not industrialize ahead of Britain. Intellectual property rights also matter. The British patent system of 1624 promoted product development and its eventual spread; French inventions could not be developed for market; much Chinese trade secret was lost throughout history.

Watt's engine would drain Chinese mines well like the British mines. Land/labor ratio and wage level did not block Chinese from inventing.

The leader This Article describes the catching-up relationship between the South and the North, which can also be applied to the relationship between the rest of the world and America. America is the world's undisputed leader in wealth, technology and per capita income ever since World War II. To wit, in the series of the relative per capita real GDP in Penn World Table version 6.1, there are 5,847 entries over the 51 years, 1950–2000, for all economies. Among the 5,796 pairwise comparisons between America and any other economy, America is ahead in 5,755 entries (about 99.25%) with the exceptions of Switzerland ahead in 24 out of the 51 years and Luxembourg ahead in 17 out of the 51…

We draw upon the experiences of Japan and the Asian NIEs, the economies with the longest records of sustained rapid growth. This study then explains the observed patterns of growth with a control theoretical model. With imitation costly, and the benefit of imitative effort rising with technical capability but declining with the reduction of technology backlog, the poorest economies would allow the income gap to open further, but middle income economies would temporarily grow faster than the developed economies, through a first stage of trend acceleration and then a stage of deceleration. Evidence suggests that trade is one of the necessary but insufficient conditions for such a catching up process.

Institution matters In retrospect, what made the Japanese economy successful in the early decades after World War II is the effective development and utilization of its labor force (which is the focus of this Note), plus the effective mobilization of domestic saving to support the development effort. All these were realized, not so much because of the constant prodding of the fallible MITI (see Komiya, 1988; and Miwa, 1996), but due to the setting up of the keiretsu system, through the effort of the Ministry of Finance and the Bank of Japan. The uniqueness of such a system requires some digression. See Morishima (2000) and also Miyajima (1999)…

In his well-cited book, Morishima offered a cultural explanation of the Japanese economic success. Thus, first, the Nipponized Confucianism breeds political loyalty and, second, this bushido ethos spawns the discipline and efficiency in the modern Japanese labor. However, the facts he cited have not convinced us on either points. Political loyalty is not more conspicuous in Japanese history than in the political life of other societies. Loyalty in the Japanese workplace seems to have evolved in corporations which practice modern principles of scientific management long after the passing of the bushido institution. [800]

Two principal points This note takes issue with Chakravarty on two related aspects. The common thread is that the East Asian growth is not basically exploitative. First, wage rate rose in East Asia as economies became opened to world trade. This lengthening of working hours reflects the enriched opportunities, not the intensified exploitation. In the labor market, what has shifted to the right was the derived demand schedule, and not the supply schedule. Farmers go for multiple crops to earn extra income from exporting. They choose to work longer hours by their own volition. Second, the extension of the supply chain for America from Japan through the East Asian Newly Industrialized Economies (Korea, Taiwan, Hong Kong and Singapore) and beyond has brought prosperity along the network. Japan has played the multiple roles, from being the role model, the middleman, the supplier of products by skilled labor, the financier, and so on. Yet, this process has brought for Japan economic reward, but not monopoly power. In fact, for Korea, government policy makes sure that in the long run, the economy would compete against Japan, not depend on the later, in industry after industry. For Taiwan, the Japanese used the economy as an export platform for plastic shoes, but then American buyers came to introduce the leather shoe production, easing the Japanese out.

In his Suzy Paine Lecture,¹ Professor Chakravarty offered one of the most profound analyses of the transformation of the East Asian Five (Japan and the 'Gang of Four': South Korea, Taiwan, Hong Kong and Singapore). These five are often held as exemplary models to the four-fifths of the mankind in the LDCs. In exploring a non-neoclassical approach (here, Marxian) to the East Asian experience, Chakravarty expressed reservations on three key questions:

1. Is it reasonable to study the East Asian Five as a unit, with Japan as the engine of growth?

2. How can we explain the determination and implications of the terms of employment (including the long working week) in the East Asian Five? Chakravarty cited Marx, 'there is.therefore.right against right… Between equal rights, force decides', and suggested this may possibly be relevant to the East Asian Five.

3. How should we assess the role of the MNCs as a source of technological dynamism? Chakravarty viewed technical change as an issue left incomplete by Marx, and considered the related debates about the role of direct foreign investment to be inconclusive.

The purpose of this note is to stimulate discussion by supplying facts on these three points and by drawing tentative inferences of our own.

Foundation for sustained rapid growth This Article formalizes the view of Jones and Sakong (1980). With his foreign exchange reform, President Park refocused the Korean entrepreneurial effort to manage business well, rather than to seek rents from the unproductive activities of foreign exchange manipulations. This laid down the foundations for "the Korean Miracle"…

Before the reform in the 1960s, twin vicious circles perpetuated the shortages of foreign exchange and labor skill, and prevented the Korean economy from realizing its considerable growth potential. The breakthrough came when the Japanese labor shortage facilitated Korean exports, after economic normalization between the two countries. The reformed institutions reduced rent-seeking and refocused Korean managerial efforts to pioneering activities. The Korean takeoff scenario is a shared theme among all four Asian newly industrialized economies cited by Lucas (1988) as showcases.

Some perspective This Article states formally the obvious. In a world evolving by interdependent growth, what is the best expected performance for an economy like Singapore (or Luxembourg), namely, a small economy which is not the technological leader. First, in the long run, this economy cannot outperform the technological leader in growth rate. Second, conceivably this economy may enjoy a higher per capita real output than the leading economy. This possibility is based on the observation that in a large economy, per capita real output often differs from sector to sector and in an interdependent world, a small economy may contain more of the sectors with high real income. In the literature, the growth rate of an economy is often analyzed context-free. The case of Singapore examined in Article 6 may serve as a reality check for such a view…

Singapore has achieved sustained, rapid growth, at an unprecedented pace. Before the Crisis 1997, it surpassed both Japan and Hong Kong in per capita real income, and reached within 10% of the American level, which is the world's highest. The strategy initiated under Dr. Goh Keng Swee has succeeded beyond expectations. The prospect is to enjoy a per capita income path somewhat higher than America (by a "city effect"), at the American pace. There remain the challenges of decelerated growth, intensifying competition and sectoral adjustments like Finland had in the 1990s. One needs built-in resilience through human capital investment and entrepreneurship.

Industrial policy case histories In this Article, the record of Hong Kong and Taiwan shows that industrial targeting is neither an panacea, nor a mere placebo. Relative to the hands-off policy of colonial Hong Kong under its British financial secretaries, the effectiveness of Taiwan's industrial policy varies over time. In earlier days, it was often ill-conceived and ill-designed, sometimes less than laissez faire. But at other times, those effective measures in the 1970s and 1980s, taken to promote high tech and nurture heavy industry, had laid down a fine foundation for the local industry. These are superior to policies practiced in Hong Kong, for their residents. The latter had left that economy open to eventual de-industrialization and income polarization, after the British were gone…

The following sections are included:

• INTRODUCTION

• FREE TRADE AND INDUSTRIAL POLICY

• THE HONG KONG–TAIWAN COMPARISON: THE 1950s
  • Five Aspects About the Textile Industry
  • General Environment for Industries

• THE HONG KONG–TAIWAN COMPARISON: THE 1960s–1990s

• THE COMMON INTEREST OF THE THREE CHINESE ECONOMIES

• CONCLUDING REMARKS

• APPENDIX

• REFERENCES

The middleman's role Mainland China re-entered the world market, after its 1978 reform. This launched Hong Kong onto the new career (its third) as a middleman, shedding the earlier roles of an entrepôt, and then an exporter of manufacture. With a model of general equilibrium under information asymmetry, this Article studies how the Hong Kong-China nexus enables China to produce goods of better quality — thus earning a higher level of value-added — and reward Hong Kong for its service. It further speculates whether and how any wide-spread rent-seeking after Hong Kong's handover to China in 1997 will influence the operation of the middleman. As it turned out, such concerns were overblown. For a while, the economic re-integration of Hong Kong with Mainland China seems to be a win-win game. But that is also an over-simplification…

The paper shows that standard trade models can be adapted to address crucial policy issues in our dynamic, imperfect-information world. It also shows that intermediated trade is essential to the modernization of the 1.2 billion-person Chinese economy; yet, notwithstanding sincere intentions in Beijing and Hong Kong, subtle changes may deny Hong Kong its irreplaceable catalyst role, leaving China ultimately to technical stagnation.

Implications of Size Size and the Chinese economy seems to be inseparable concepts in the discussions of trade issues today. To clarify matters, this Article takes an abstract approach, without delving into any historical institutional factors which shaped the Chinese development…

The following sections are included:

• Introduction

• Size and factor proportions

• The question of reciprocal demand

• The supply side once more—increasing returns

• The perspective of 'strategic trade theory'

• Size, marketization and future growth

• The performance of the economy in the recent past

• Some more immediate matters

• Postscript

• Notes

• References

Association transmits information Technology transfer is the mainstay for economic development, channeled through direct investment and trade among close associates. This Article cast the situation as a multi-stage game between an informed player and an uninformed player, and information gets gradually transferred over time. Players live in a world with unobservable states which are reflected imperfectly in messages observed by all, and elicit actions by players according to their respective interpretations. During their association, the uninformed takes note of how the informed acts when receiving various messages, updating his or her own message interpretation as the game goes along, in terms favoring the informed. That favor reflects the value of learning from the play, for the uninformed. In time, the uninformed gets enough information to quit and fend for himself or herself…

The following sections are included:

• INTRODUCTION

• SOME SALIENT FACTS
  • The Wong–Watanabe Case in Brief
  • The General Instrument Variation
  • The Taiwanese Footwear Variation
  • The Taiwanese Bicycle Variation
  • The Mauritian Knitwear Variation
  • The Colombian Apparel Variation
  • The Beijing Jeep Variation

• A THEORETICAL EXAMPLE OF TECHNOLOGY TRANSFER
  • Proposition
  • Remarks

• CONCLUSION

• Notes

• References

Overview This Article cross-classifies economies by their size, and also their stage of development, to focus on issues to be faced by the economies of Hong Kong, Taiwan and Mainland China in their aspiration to become fully developed…

The following sections are included:

• INTRODUCTION

• PRELIMINARY CONSIDERATIONS

• THE ROAD TO QUASI-DEVELOPMENT: THE ECONOMIC CONSEQUENCES OF IDEOLOGY

• THE ROAD TO DEVELOPMENT: THE ECONOMICS OF INSTITUTIONS AND CULTURE

• THE PROBLEMS OF A POPULOUS COUNTRY

• SOME CONCLUDING OBSERVATIONS

• REFERENCES

Overview This Article has a novel emphasis: the transformation of the industrial structure is the byproduct of globalization. Before the taking-off of industrialization, firms in all societies are perfectly competitive. Goods they supply are more-of-the- same: offering neither specialty nor expertise. While whether there will be a transformation is decided by globalization, what form the transformation will take is dependent on development strategy. Thus, Korea and Taiwan differ in their own transformation trajectories. This is so even though the ultimate goal for all developing economies is to achieve high value-added per capita, with firms having their own product design, brand name, and so on…

The sustained rapid growth of Korea and Taiwan represent two alternative paths of successful development. The difference between these two paths is reflected in industrial concentration, macroeconomic management, and export mix. During the 1997 crisis, Korea absorbed severe shocks and then scored a quick recovery, while Taiwan proceeded at a more or less constant pace. Taiwan has followed a "usual progression" experienced by Netherlands or Switzerland before; Korea has struck out on a different path, under a more active government policy. Before the current, ongoing reform, the development policy of Korea dates back to President Park, and fits his style of personal management over the economy. It has its own rationale, but also entails greater financial risks. The different roles played by the small and medium enterprises in the two economies provide food for thought in development economics.

This paper continues the line of research in Wan (2004). It introduces an axleand-spokes view about the world economic development since World War II, with America as the incumbent technological leader and engine for growth. It differs from most of the growth theories (both the neoclassical as well as the endogenous strains) surveyed in Aghion and Howitt (1998) by its emphasis for interdependence. It also differs from the models of convergence, from Baumol (1986) to Barro and Sala-i-Martin (1995), in that it explains the recalcitrant gap setting American per capita real GDP apart from all other economies. It also differs from other research on catching up by emphasizing the key role played by trade and foreign direct investment as the catalyst for technological transmission…

Comparing the rate of growth of real per capita income of an economy with the level of real per capita income of the same economy and taking a cross-section of such paired data, Lucas, (in the late 1980s) concluded that 'the mid-income countries grow the fastest, next the high-income countries, with the low-income countries growing the slowest'. While this finding is, of course, correct on average it begs the question of why certain very poor countries were able to escape the poverty trap while others continued to stagnate and why some mature economies continue to grow while others retrogressed.

This Article addresses the issue whether trade driven by comparative advantage would deprive developing economies the opportunity to improve productivity through learning-by-doing, under an import-substitution program. The short answer is: most likely not so. There are two reasons…

The following sections are included:

• INTRODUCTION

• A SIMPLE MODEL
  • Assumptions
  • Definitions

• EXAMPLE 1 (INTERNATIONAL SUBSTITUTABILITY)

• EXAMPLE 2 (INTERNATIONAL COMPLEMENTARITY)

• A GRAPHIC ILLUSTRATION OF EXAMPLES 1 AND 2

• EXAMPLE 3 (DOMESTIC COMPLEMENTARITY)

• CONCLUSION

• ACKNOWLEDGEMENTS

• REFERENCES

The total factor productivity growth (TFPG) puzzle Traditionally, the method of total factor productivity growth has been widely applied in economics without causing much comment. Also the four Asian Newly Industrialized Economies (NIEs) were regarded as models for sustained rapid development. But then Kim and Lau (1994) and also Young (1994, 1995) showed that the NIEs have very low scores in TFPG…

The following sections are included:

• INTRODUCTION

• ON TFPG
  • Individual Level
  • Firm Level
  • Sector Level
  • Economy Level
  • Summary

• AN ALTERNATIVE PERFORMANCE MEASURE
  • Motivation
  • The Technical Gap: The Concept and the Quantification
  • Some Basics about the Catching-up Models

• RELATING THE TWO INDICES

• CONCLUDING REMARKS

• APPENDIX 6A
  • Five Examples of the Search for the Leading Economy

• ACKNOWLEDGMENTS

• NOTES

• REFERENCES

The following sections are included:

• References (in Brief Notes)

• Content Index