Saturday, February 06, 2010

What's Behind Asia's Growth?

Michael Schuman at Time Magazine looks at Asia's rapid growth rate and points out that it is not government interventions that are behind it; to the contrary it is free enterprise, he argues.

His theory isn't false, but not specific enough and he doesn't really explain how come most Asian governments have interfered in business life in various way (It's really only Hong Kong have pursued a laissez faire industrial policy, which is to say none at all)and yet growth have been strong there too.

As the success of Hong Kong's economy illustrates, these policies were not behind growth. At most, growth in other countries only proves that they have not had a significant negative effect, not that it was positive.

What then is behind Asia's rapid growth? Well, there are two key characteristics that the Asian countries share, and which on theoretical grounds can be shown to increase growth:

-Very limited welfare state spending. This is the key "free enterprise" principle of the Asian economies.
-High rates of savings and investments.

The latter is in part a result of the former, but also probably a result of cultural attitudes.

For the poorest countries, another factor, namely the so-called "catch up" factor is also behind growth. The "catch up factor" results from the implementation of foreign technologies and increased trade with more advanced economies, allowing poor countries to grow faster than more rich countries, and it also allows them to grow faster than today's rich countries when they were at the same income level. However, in order for the "catch up" factor to work, there must be other factors fueling growth. If not, then it will not appear, and poor countries will slip behind further, as is the case with for example most African countries. This is similar to how you get a bigger fire when you pour gasoline on it, but if there is no fire to begin with, gasoline won't create any fire.