What do the following 13 countries all have in common – Botswana, Brazil, China, Hong Kong, Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan and Thailand?  They all experienced annual economic growth rates of 7 per cent for 25 years or longer in the post World War II period (at this pace, an economy doubles in size every decade).

What's globalization got to do with it?  A lot, but ...  Could we call them globalization winners?  Yes, but ...

Globalization does have a lot to do with their good economic performance, according to Nobel prize-winning economist Michael Spence's Growth Commission.  The Commission identifies openness to the world economy as one of the key ingredients for economic growth.  Strategies that rely exclusively on domestic demand for economic growth have limited time spans.

The world economy offers an important market; exports are a critical ingredient for high growth, especially in the early stages.  It allows economies to import ideas, technologies and know-how from the rest of the world. Foreign direct investment and foreign education, which often creates lasting international networks, also play an important role. 

The other main key ingredient for economic growth is government which is credible, inclusive and pragmatic.  While open competitive markets are the key to prosperity, governments still play an important role in maintaining price stability and fiscal responsibility.  Governments also have to choose a growth strategy, communicate their goals to the public, and ensure that they have the populace’s tacit support through convincing that the future rewards are worth the effort, thrift and economic upheaval. A long planning horizon and pragmatic approach to government is also crucial as is a culture of honest public service.

Among the many other points, there are two worth highlighting here.  First, because a rapidly growing economy is in constant transition, attention to individuals, families and their economic security is very important to growth, the Report finds. Policies that provide for income support in job transitions, as well as those that focus on retraining, mobility and access to basic services, are ethically necessary and critical to maintaining the support for growth oriented policies, the Report says.  Second, the Report suggests that overall (private and public sector) investment rates of 25 percent of GDP or above is needed; about a third of that figure should be public investment in physical infrastructure and “human capital” (education and training).

The Growth Commission stresses that, while growth is not an end in itself, it is a critical means for achieving poverty reduction, human development, health, the opportunity to work and to be creative.  It kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth.  And even with a good growth performance, it takes a minimum of 50 years to go from low to advanced income levels. 

All things considered, there are not too many surprises in the Growth Report.  But it is still important to try to scratch below the surface.  Of the 13 success stories identified, some 9 unsurprisingly come from Asia.  So, let’s take a closer look at the other four. First, Malta, with its population of under 400,000 people, barely counts.  And while Oman does have a population of over 2 million, it can hardly be considered a big shot.  For its part, Botswana has achieved an excellent economic growth record, but at the same time has seen its life expectancy at birth crash from 64 years in 1990 to 35 in 2004, as the country has been ravaged by AIDS.  It has gone from having one of Africa’s longest life expectancies to the lowest figure in the world!  Let’s remember that life expectancy has risen almost everywhere in the world over the last 15 years, even during periods of conflict.

What about Brazil?  It is of course a very important country that did achieve an excellent economic growth record.  But, its period of high growth stopped in 1980! 

So, we are left with the conclusion that economic growth success stories are basically all Asian (and coming hot on their heels are two other Asian countries, India and Vietnam which have experienced growth accelerations in the past 10-15 years).  These nine high-growth countries all share common characteristics: engagement with the world economy, macroeconomic stability, high rates of saving and investment, the market allocation of resources, and credible and capable governments.  And some of them (Hong Kong, Japan, Korea, Singapore and Taiwan) grew all the way to high-income levels.  Asia is of course a big chunk of the world such that close to 4 billion people (close to 2/3 of the world’s population) now live in advanced or rapidly growing countries, compared with 1 billion (less than 20 per cent of the world’s population) some 30 years ago.

Economic growth of 7 per cent a year, sustained over 25 years, was unheard of before the Asian economies got moving in the latter half of the 20th century.  No other part of the world has managed to follow the path laid before them by the Western countries over the last two centuries.

So where's the paradox?

Export-oriented growth has proved to be a very effective strategy for economic catch-up.  But once you have caught up, you need to turn to innovation-driven growth, and domestic demand from wealthy citizenry needs to become the second engine of demand.  Japan, which led East Asia development, never managed to make this transition.  It is now stuck with GDP per capita one-third lower than the US, and it has been caught in a state economic and now political morosity for two decades.

Another point is that the necessary counterpart of an export-oriented growth strategy has been an open and big US market.  While this was fine for Japan and then the Asian tigers, when you added China into the equation, the US shifted into a state of import indigestion.

And now that the US and Europe are mired in financial crisis, their demand for Asian products will be weak for some time.  Export-oriented growth in East Asia will now require greater demand from East Asia's own markets, something Japan has never managed to stimulate.  In short, East Asia rapidly maturing economies need to promote domestic demand as a second engine of growth.

So the bottom line is that openness to the world economy is a necessary but not sufficient condition for long term sustainable economic growth, and to maintain its excellent record of economic growth, East Asia now needs to make a major transition.

Can the region do it?  We will see ...

References:

Commission on Growth and Development

www.growthcommission.org