EXPLAINING RAPID ECONOMIC GROWTH: THE IMPORTANCE OF EFFECTIVE LEARNING AND ENTREPRENEURSHIP
While the recent financial crises have somewhat tarnished the ‘Asian Miracle’, the economic growth achievements of Hong Kong, Singapore, South Korea and Taiwan and are still remarkable. Over the past 35 years, they have transformed themselves from being technologically backward and poor into modern affluent economies.

‘How they did it’ remains a question of enormous significance - and according to Professors Richard Nelson and Howard Pack, writing in the latest issue of the Economic Journal, the key was effective learning and entrepreneurship. Simply investing vast sums in human and physical capital would not have been enough as demonstrated by the now defunct Communist nations, where investment was high, learning and entrepreneurship were low - and the result was economic stagnation.

Nelson and Pack note that the growth performance of the ‘Asian tigers’ has vastly exceeded those of virtually all other countries that had comparable productivity and income levels in 1960. And despite the financial crises of 1997-8, the human, organisational and physical capital of these countries remains intact.

There are at least two broad sets of theories that have attempted to explain the ‘Asian Miracle.’ One view, argued strenuously by a number of distinguished economists including Paul Krugman, stresses the high investments these countries made in physical and capital accumulation. The proposition is that given their high investment rates, the achieved economic growth performance is not a miracle at all but something easily explainable simply as the result of capital formation.

In contrast with the view that investment is virtually all of the story, other scholars have stressed the entrepreneurship, innovation and learning in these economies. They see the high rates of investment in human and physical capital as a necessary handmaiden to learning and innovation, but not a sufficient explanation for economic growth in its own right. What is more, the sustained high rates of investment in human and physical capital were themselves stimulated by effective innovation, and could not have been maintained in the absence of innovation.

Nelson and Pack argue that distinguishing between these two views cannot be done using macroeconomic data alone, but that it requires microeconomic evidence - including evidence at the level of individual firms, where it is possible to examine whether productivity growth was simply the automatic consequence of high investment rates or whether significant learning and innovation were involved. They document the major role of learning and innovation in the productivity growth and expansion into new product areas that these economies experienced.

Note for Editors: ‘The Asian Miracle and Modern Growth Theory’ by Richard Nelson and Howard Pack is published in the July 1999 issue of the Economic Journal. Nelson is Professor of Economics at Columbia University; Pack is Professor of Economics at the University of Pennsylvania.

For Further information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or mobile 0468-661095 (email: romesh@compuserve.com); RES Media Assistant Niall Flynn on 0171-878-2919 (email: nflynn@cepr.org); Richard Nelson on 001- 212-854-8720 (email: rr2@colombia.edu); or Howard Pack on 001-215-898-0089.