[ This is Essay # 20 in our Spotlight Series. Click here for the archives.]

The Growth ‘Miracle’

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Shromon Das

‘Growth’ is an issue that gains importance in almost any context; firms worrying about business growth, teenagers worrying about how tall they can grow, and of course, economists worrying about economic growth. One of the most fascinating case studies on economic growth happens to be the East Asian Miracle. What is the East Asian miracle all about? After the Second World War, many East Asian nations embarked on a massive and well thought out industrialization and economic development program.

Over the period 1965 to 1990, these nations experienced growth rates much higher than any other region in the world. These economies included Japan, Malaysia, Indonesia and Singapore, among others. Not only did these nations experience rapid rates of GDP growth, but also significant development as far as standard of living and general human welfare are concerned. Because the rate of growth and development was so rapid, it has often been termed as a miracle.

Economists have spent considerable amount of effort in analyzing the fundamentals beneath the East Asian growth story. Of course, we all know hind-sight is 20/20, and it’s easy to critically evaluate something that has already occurred in the past. But the idea is to learn something out of it, and apply the learnings to similar events that may occur in future.

A very popular and intuitively-appealing growth model is the Harrod-Domar model, on which the Marshal Plan was approved. A version of it has been shown below.

G = I / ICOR

Where G = growth rate, I = investment rate, and ICOR = incremental capital output ratio.

Basically, the model argues that growth can occur by two broad means, by increasing investment, or decreasing the ICOR.

We are well aware of what is meant by investment, denoted by ‘I’. It includes investments of all kinds, on roads, airports, docks, schools, educational institutions, etc. ICOR is basically the amount of capital required to generate one unit of output. In simpler words, it’s a measure of efficiency in the economy. Naturally, a lower ICOR would be desirable to a higher one. And how can we attain a lower ICOR in the economy? Simple…technology! The more technologically efficient you are, the lesser the amount of capital you need to churn out a unit of output, which is in turn measured by a lower ICOR.

So what can we take away from this model? First and foremost, that the East Asian miracle wasn’t a miracle at all! These nations basically put to practice a slightly modified version of the above mentioned model. The governments of these nations put emphasis on investment, both in physical and social terms. Social investment in turn made the work-force more efficient. The governments also took many other steps to bring in more efficient labor in the workforce, such as encouraging women to take up jobs in the industrial and services sector.

Now, the above model does not work in isolation. Take a look at Africa. Millions and millions of aid money flows in every year. In spite of that, have they progressed? They haven’t! The reason is that savings and investment are only sufficient conditions for economic growth. An economy needs a stable and efficient infrastructure, on which further economic growth and development can take place. What do we mean by such infrastructure? Everything from roads, legal system, political system, banking and financial system, education system, and so on.

What then is the second lesson we can learn? That growth does not arise out of miracles. Take a look at china. They save close to 40% of their GDP, and invest a similar amount too. No wonder it has been growing at phenomenal rates over the past few years! And mind you, Chinese goods are not all about mass production in workshops. A recent study by the IMF shows how Chinese exports have been shifting towards high-skill and technology-intensive goods, though China’s foray into service exports is still restricted.

What I’m trying to convey is that economic growth is no rocket-science! Take a look at the above figures for the nature of Chinese exports, and you will see that basically the ICOR in China has been decreasing, a factor that plays an important role in determining the growth rate.

As I had said earlier, hindsight is 20/20. Today, a few decades down the line, we are able to appreciate what the East Asian miracle was all about. We know how exactly they brought about such a phenomenal change in their economies and in the lives of the people. We know china has managed to attain such high growth rates for decades by carefully planning out its investment policy, while at the same time keeping an eye on technological development as well.

What can India learn from these case studies? Not that our economy has not been growing, but the pace of growth has been highly erratic and subject to political whims. But a look at the brighter side tells us that there still is tremendous scope for growth. By conceptualizing growth as a function of investment and ICOR, it’s easy to spot the weak areas in our economy. Are we investing enough? Not really! Are we doing enough to make our economy more productive?

I guess we have been trying to do so for a long time, but unfortunately the skilled and productive labour we have in our country would rather provide their services to the West than us! But in spite of these short comings, one cannot really dispute the fact that our country has come a long way since the days of Nehruvian Socialism, though political processes and mindsets are sticky, and tend to change very gradually over a period of time. But the future’s bright, and fundamentally our economy seems to be on the right track, and I believe we can churn more out of our existing resources and fundamentals by getting to strengthen our political will.