Sunday, June 24, 2007

Taiwan, Japan, and Germany: Miraculous Economies, or Predictable Stories of Growth?

Taiwan, Japan, and Germany
Miraculous Economies, or Predictable Stories of Growth?

Introduction: What is an Economic Miracle?

Since the end of World War II the global economy has gone through drastic changes. One characteristic of these changes has been the emergence of what are called “economic miracles.” Many countries have been assigned this label, including Germany, Japan, South Korea, Ireland, and Taiwan, among others. But what actually constitutes a miracle? Merriam-Webster’s dictionary gives three definitions, the first and third of which have religious overtones—basically the intervention of a deity is required, and therefore can be excluded from our consideration. The second definition, however, is applicable: “an extremely outstanding or unusual event, thing, or accomplishment.” In other words, a miracle happens when something unexpected happens.

Seen from this perspective, it is easy to understand why each country is considered to have experienced a miracle. The aforementioned countries all experienced remarkable growth in a relatively short period of time. Considering the various points from which they started, the accomplishment for these countries is truly outstanding. When we look at Taiwan in particular, there is another aspect to its “miraculous” economic growth: its relatively high level of economic equality. Rapid economic growth is a remarkable phenomenon, but to be truly a miracle, economic growth should be coupled with an equal distribution of wealth. Despite the rapid growth and economic equality being an outstanding accomplishment, however, it may be overstating the case to say that there was anything miraculous going on.

In order to examine what factors may have been driving these miracles, as well as to see which satisfy both the rapid growth and equality of distribution conditions, this paper will look into a few countries whose economies have experienced “miraculous” growth. It will look at the starting point of each country before the miracle began, its geographic location, and the time frame involved. Then it will look into some of the specifics of the growth: how much? How fast? How evenly were the benefits of growth distributed? Finally, it will look at the differences, if any, between these miracle countries.

For each country examined, I will first determine the beginning of the period of rapid economic growth, and then approximate the end of this period. Then I will provide data on the rate of growth per year during that period.

In order to help determine the level of economic equality in each country examined, I will use current UN Gini index figures. The Gini index assigns a value from 0 to 100 to the level of economic equality, with 0 being perfect equality and 100 being perfect inequality. For the purposes of comparison, most European nations have Gini indexes between 24 and 36, and the United States has a Gini index of about 40.

Finally, I will look at some alternate theories that help to shed some light on what was going on in the countries examined. Did actual miracles happen in these countries? Some of the theories I will look at may serve to provide some perspective and lessen the perception that, in light of certain factors, what happened to these economies was really all that unexpected.
Survey of Economic Miracles

There are quite a number of countries that have been considered to have experienced economic miracles. Germany, Japan, Taiwan, South Korea, and, more recently, Ireland, are just a few. For the purposes of this paper, I will limit my discussion to Germany, Japan, and Taiwan.

Germany, located in Western Europe, began its rapid period of growth relatively earlier than most of the other countries. Between 1948 and 1972, Germany’s output per person grew at 5.7 percent (Mankiw, 2003, p. 188). Considering its starting point, its defeat at the hands of the Allies in World War II which left much of the country in ruins, this is a rather impressive turnaround. In 2000, Germany’s Gini index was 28.3 (Wikipedia), Making it about average for a European country.

Japan, and East Asian country, started out in a similar situation to that of Germany. That is, it ended up on the losing side of World War II, with much of its infrastructure in ruins and its economy devastated. In the same time period as cited above for Germany, its output per person grew at 8.2 percent per year (Mankiw, 2003, p. 188). In 1993, Japan’s Gini index was 24.9 (Wikipedia).

In the case of Taiwan, another East Asian country largely destroyed by the war, it’s “GNP increased an average of 10.6% a year in the decade 1963-72, and in the decade 1973-82 . . . it increased 7.5% a year” (Hamilton, 1988). According to the Directorate General of Budget, Accounting and Statistics, Taiwan’s Gini index peaked in 2001 at 35, and has fallen steadily over the past four years (Su, 2006). Taiwan’s Gini index is currently higher than either Japan’s or Germany’s, but it is important to point out that, according to Greenhalgh, in Taiwan, “during most periods economic inequality either remained stable or decline, finally leveling off at a level that is remarkable low by the standards of both developing and developed societies” (Greenhalgh, 1988).

Each of these three countries satisfies the requirements of rapid growth and relative economic equality. Combined with their starting points of having been severely damaged by war, and, in the case of Taiwan, caught up in a wave of immigration and political change, their ability to grow their economies and maintain economic equality is surprising and gives rise to the concept of their having experienced a miracle.

Alternatives to the Miracle Explanation
Demographic Transition

One aspect of assigning “miracle” status to the phenomenon of the growth of any country’s economy is that it tends to inspire the notion that what occurred has an almost magical aura about it. Use of the word miracle makes us feel that what happened has no explanation other than that it just happened deus ex machina. There are, however, other ways of looking deeper into what happened and finding possible alternative explanations, or at least explanations that give a little bit more of a theory to rely on.

One such explanation is found in the examination of the demographic changes that occurred, especially in East Asian countries. Throughout the world, a demographic transition has taken place in the twentieth century. Both fertility and mortality rates have moved from high to low. In the initial stage, both rates are high, and population remains stable. In the second stage, both the birth and death rates decline, but at different speeds. The mortality rate typically declines faster than the birth rate. In the final stage, both rates stabilize and the population growth stabilizes again.This change has been particularly pronounced in East Asia. According to Bloom and Williamson, the so-called economic miracle in many East Asian countries (including Japan and Taiwan), “occurred in part because East Asia’s demographic transition resulted in its working-age population growing at a much faster rate than its dependent population during 1965–90, thereby expanding the per capita productive capacity” (Bloom and Williamson, 1998). They go on to argue that, “This effect was not inevitable; rather, it occurred because East Asian countries had social, economic, and political institutions and policies that allowed them to realize the growth potential created by the transition” (Bloom and Williamson, 1998).

By taking into account such factors as the above cited demographic changes and the institutional structures that leveraged those changes, a little of the mystery is taken out of the economic transition that Japan and Taiwan experienced. The growth is less surprising, and so the perception of it being miraculous is mitigated.

Economic Growth, the Savings Rate, and the Steady State

Another way of looking at the surprising rates of growth that these countries experienced is through economics. One of the basic assumptions of macroeconomic models is that the output of an economy is a function of labor and capital. Capital increases with investment, and decreases through depreciation. When an economy is in what is called the steady state, investment and depreciation are equal, so the level of capital remains the same. As already stated about the three countries we are examining, after World War II, much of their infrastructure had been destroyed. The same was true of much of their capital stock—the property, plants, and equipment used in industry. In such a situation, since the resources needed for manufacturing and other economic activities have been reduced, the output of the economy falls. According to Mankiw, however, “if the savings rate—the fraction of output devoted to saving and investment—is unchanged, the economy with then experience a period of high growth. Output grows because, at the lower capital stock, more capital is added by investment than is removed by depreciation” (Mankiw, 2003). In other words, since output is a function of labor and capital, and capital is growing (through investment) faster than it is depreciating (since it takes time for capital to wear out), for a while output will grow faster than normal. Instead of rapid growth being the result of a miracle, it is precisely what is predicted for this situation in macroeconomic growth models.

The savings rate is especially important to consider in this context. Germany, Taiwan, and Japan have had high rates of saving in comparison to the United States. During the same period cited above for Germany and Japan—between 1948 and 1972—the U.S. economy only grew 2.2% per year, a figure much lower than either of its wartime enemies or Taiwan. According to Mankiw (2003), “If the saving rate is high, the economy will have a large capital stock and a high level of output. If the saving rate is low, the economy will have a small capital stock and a low level of output.” This helps explain why these three economies grew so quickly, but how does it account for the eventual slowdown all three faced? Estimates for the year 2006 put real GDP growth at 2.7%, 2.2%, and 4.6% respectively for Germany, Japan, and Taiwan. Why the slowdown? There may be many factors involved, but in the growth model we’ve looked at, there is an explanation: “Higher saving leads to faster growth . . . but only temporarily. An increase in the rate of saving raises growth only until the economy reaches the new steady state. If the economy maintains a high saving rate, it will maintain a large capital stock and a high level of output, but it will not maintain a high rate of growth forever” (Mankiw, 2003). This means that once the level of depreciation caught up with the rates of savings and investments in these economies, it was predictable that they would all experience a slowdown in growth.
This analysis of macroeconomic theories shows us again that by understanding the underlying factors at work in so-called miracle economies, a phenomenon that at first appears miraculous can actually be shown to have been a predictable outcome.
Technological Assimilation

Another method of accounting for the East Asian miracles is that much of the growth these countries experienced was the result of technological assimilation, as well as the favorable policy environment and the entrepreneurial efforts of firms. Nelson and Howard (1999) put forth the argument that it was protectionism, subsidized credit, and other favorable policies that helped the firms of East Asian countries take part in technological learning and assimilation that led to rapid growth. While policies differed from one country to the next, they assert that, overall, “the policy environment was obviously a critical component of the success in these countries” (Nelson & Howard, 1999).

This policy environment on its own was not enough; it had to be accompanied by the willingness of firms to take chances, and especially to take part in the difficult path of technological learning. This is something that Taiwan did especially well, as we can see in the example that “in 1960 virtually no electronics goods were produced in Taiwan but by 1990 these accounted for roughly 21% of manufacturing exports” (Nelson & Howard, 1999). To most eyes, such a rapid change could be considered miraculous, but to look at it that way seems reductive considering how much effort must have been put into assimilating this technology. As Nelson and Howard (1999) state, “To learn to use new technologies and to function effectively in new sectors required the development of new sets of skills, new ways of organising economic activity, and becoming familiar with and competent in new markets. To do this was far from a routine matter, but involved risk taking entrepreneurship as well as good management.” In other words, East Asian countries like Taiwan did not suddenly, miraculously, acquire the new technologies that they leveraged into rapid economic growth, but did so through painstaking study and hard work.
Conclusion
By examining these three countries and the rapid levels of growth and relatively high rates of economic equality that they posses, it is easy to see why they are often labeled as economic miracles. When a country begins as a third-world, mostly agrarian society, or is devastated by war, or both, and then goes on to experience extremely high levels of economic growth, it is very surprising. However, this paper has tried to show that when one takes a closer look at the forces at work, whether they be demographic, macroeconomic, or due to technological assimilation, the miracle begins to fade and a more realistic perspective can be formed. Is the term “miracle” too strong to use in the context of describing these and other economies? Maybe not. Even removed from its religious context, a miracle is something outstanding, unusual, and quite special, and it is fair to describe the characteristics of these three economies in this way. It is likely that, had any of the various factors at work developed in a different way, these economies could have floundered. Hindsight, as they say, is 20-20. We can look back at the history of these countries and apply whatever theory we like to explain why they grew as they did. The fact is they did grow, and if asked at the beginning of this growth period what their chances were for attaining miracle status, most people would have been doubtful. Perhaps it is in that that the true miracle lies: that against all odds, some economies succeed where others fail. If this is not a miracle, then one would be hard-pressed to find a better term.


References

Bloom, David E. and Jeffrey G. Williamson (1998). Demographic Transitions and Economic Miracles in Emerging Asia. The World Bank Economic Review, Vol. 12, No. 3, pp. 419-55.

CIA World Factbook. https://www.cia.gov/library/publications/the-world-factbook/index.html

Hamilton, Gary G and Nicole Woolsey Biggart (1988). “Market, Culture, and Authority: A comparative Analysis of Management of Organization in the Far East.” American Journal of Sociology XCIV:S52-294.

Mankiw, Gregory N. (2003) Macroeconomics, Fifth Edition. New York, NY: Worth.

Merriam-Webster’s Collegiate Dictionary, 10th edition (1993). Springfield, Massachusetts: Merriam-Webster, Inc.

Nelson, Richard R. and Howard Pack (1999). “The Asian Miracle and Modern Growth Theory.” The Economic Journal, Vol. 109, No. 457. (Jul., 1999), pp. 416-436.

Su, David, (2006). Media's Bias on Economics Shows. Taipei Times Archives. http://www.taipeitimes.com/News/editorials/archives/2006/03/21/2003298479

Wikipedia, List of countries by income equality, http://en.wikipedia.org/wiki/List_of_countries_by_income_equality

Post a Comment