The growth in wealth in large parts of East Asia from 1960 to today is an unprecedented economic turnaround. Per capita incomes across the region have increased eight to ten times in this relatively short space of time.
Speaking in Cape Town on Wednesday, Nobel laureate Professor Joseph Stiglitz pointed out that before this transformation, there was very little to suggest that East Asia was on the brink of what is now called an economic miracle. Stiglitz was speaking at a summit on inclusive growth co-hosted by the Bureau for Economic Research, Economic Research Southern Africa, and REDI 3×3.
“If we look back to 50 years ago, East Asia was not in particularly good shape,” he said. “At that point, the likelihood was that it would continue to be mired in the same poverty in which it had been mired for centuries.”
Stiglitz noted that while many people look at the state of countries like South Korea, Japan and China today and take it for granted that their success was inevitable, there was none of that inevitability in the early 1960s.
“What happened was that they discovered an alternative growth model in manufacturing-led export growth,” Stiglizt said. “That recipe is one that many countries in other parts of the world have been thinking about because in it has been, in some sense, the only successful strategy ever for rapid growth in a short period of time. But it is not going to work here, or in any other country for that matter, going forward.”
The reason it cannot be replicated, he argued, is that “manufacturing is the victim of its own success”. Developments in the sector have done so much to improve productivity in terms of output per man hour, that productivity has increased faster than demand. The result is that employment in manufacturing is now declining around the world, which means that it can no longer support large-scale employment creation.
“Instead, we have to deconstruct why this strategy worked for East Asia at that time and try to say, given the conditions that Africa is in, what are the ways of achieving what manufacturing-led export growth achieved for East Asia?” said Stiglitz. “How can it be achieved with different strategies?”
Why did it work
He argued that the reality is that not just in Asia, but across the world, the major increases that have occurred in the standard of living in the past 250 years are due to increases in learning.
“We have data that shows that for thousands of years there were no changes in the standard of living,” Stiglitz said. “But after the enlightenment in the 18th century, we learnt how to do things better. It happened first in Europe in a systematic way, and then that knowledge defused.”
Why this is relevant to the East Asian miracle is that an export-led strategy based on manufacturing is particularly successful in spreading learning and efficiencies into other parts of the economy.
“When I talk about learning, I also mean institutions,” said Stiglitz. “You need institutions like good financial systems to support a manufacturing industry, but once you have created a good financial system it can have benefits to other sectors as well. Public education is another thing that you need for a well-functioning manufacturing sector. East Asia figured that out and created a very efficient education sector so that they now perform much better than we do in the US. These are some of the factors where learning that was central to the manufacturing sector had spillovers to other sectors as well.”
Exports also provided the basis for tax revenues that supported government spending on infrastructure, education and technology.
“It’s hard to tax the informal sector, so they created a formal sector they could tax,” explained Stiglitz. “That enabled the functioning of a modern market economy.”
The final key to the success of manufacturing-led export growth was the way in which it generated urban employment.
“Urbanisation is part of modernisation,” Stiglitz argued. “Every modern economy is more urbanised, but you need jobs to make that work.”
While what was achieved by manufacturing-led export growth in East Asia cannot be done anymore by a single sector, Stiglitz argued that that simply means countries like South Africa have to adopt a multi-faceted strategy. This must combine structural transformation, urbanisation, openness and job creation.
“The key elements of a development strategy will have to be much broader than was the case in East Asia,” he said.
Manufacturing will play a part in this, but there must be an emphasis on working for more complex products. It is however in services where the major opportunities now lie.
“New strategies will have to achieve what manufacturing-led growth achieved but through a multi-pronged strategy involving all major sectors,” said Stiglitz. “The government will need to play an important role in this new structural transformation. But the future will be based not on a manufacturing economy but a modern services sector economy.”
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