[Speech]
How to Sustain Economic Growth in Asia
日本語
Speech at the Amartya Sen Lecture
Haruhiko Kuroda
Governor of the Bank of Japan
July 21, 2015
Full Text [PDF 391KB]
Figures [PDF 326KB]
Contents
Introduction
I. Three Stylized Facts
II. Three Traps for Growth
III. Productivity Growth
IV. How to Raise Productivity
Conclusion
Introduction
It is a great honor to give a
presentation in front of such a distinguished audience, especially Mr. Anand
Panyarachun and Professor Amartya Sen. I
have admired Professor Sen ever since I became acquainted with his work when I
studied economics at Oxford, about 45 years ago. At that time, I was fascinated to read not
only his elegant theoretical papers on social choice but also his research on
poverty and inequality, which has had a huge impact on development economics.
Today, I have chosen a topic which is
inseparable from the subject of development, and that is economic growth. More specifically, I would like to discuss
how we can sustain economic growth in Asia.
As Robert Lucas has correctly pointed out, "Once one starts to
think about economic growth, it is hard to think about anything else."
1
Therefore, I will take off my central bank
governor's cap
for a while, and there will be no mention tonight of either "unconventional
monetary policy" or "quantitative and
qualitative monetary easing."
In recent years, the question of how to
sustain economic growth has become an increasing preoccupation both within
academia and among policy makers. The
debate on the "secular stagnation" of mature economies is one
manifestation of this.
2
Given the tendency of regression to the
mean, even rapidly growing emerging economies may eventually face similar
challenges.
3
In the light of these discussions, whether
Asia can sustain its robust economic growth over the coming decades may not be
a particularly comfortable question, but it is nonetheless a question worth
asking.
In the following presentation, I will
first consider a number of stylized facts regarding economic growth in Asia. Then, I will move on to a discussion of how
economic growth in Asia might be sustained.
1
Robert E. Lucas Jr., "On the Mechanics of Economic Development,"
Journal of Monetary Economics
, Vol. 22, No. 1, pp. 3-42, 1988.
2
Lawrence H. Summers, "U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,"
Business Economics
, Vol. 49, No. 2, 2014; Coen Teulings and Richard Baldwin,
Secular Stagnation: Facts, Causes and Cures
, A VoxEu.org Book, CEPR Press, 2014.
3
Lant Pritchett and Lawrence H. Summers, "Asiaphoria Meets Regression to the Mean," NBER Working Paper 20573, 2014.
I. Three Stylized Facts
The first stylized fact that I want to
consider is that Asia has grown almost constantly at a very rapid pace over a
number of decades. Chart 1 shows per
capita GDP by region. It is quite
impressive that Asia, which was at the lowest level in 1950, has outperformed
the other regions in terms of growth. In
this long-term context, the Asian crisis of 1997-1998 seems to have been just a
slight hiccup. The average growth rate
over the last 60 years or so is about 4 percent per year. Thanks to the power of compound interest,
this makes Asian per capita GDP now 12 times as large as that in 1950. No wonder Asian economies are often
characterized as "dynamic Asia."
The second stylized fact is the large
degree of heterogeneity, or diversity in plain English, in the
level
of per capita GDP. As illustrated in Chart 2, the Asian NIEs
(Hong Kong SAR, Singapore, Taiwan and Korea) and Japan enjoy very high levels
of income, whereas most Asian countries -- and in fact most of the population
of Asia -- belong to the middle-income group.
4
Even within the middle-income group,
individual countries differ considerably in their levels of per capita GDP.
Economists studying economic growth rely
primarily on estimates of GDP, but they sometimes check these statistics
against data from other sources. One
simple and visually impressive yardstick of economic prosperity is the amount
of artificial light that can be seen at night from space.
5
Chart 3 shows such an image for Asia. This not only confirms the aforementioned
heterogeneity across Asian countries, but also shows the heterogeneity within a
country. For instance, coastal China is
as bright as Korea and Japan, but light becomes sparse as you move inland. Likewise, the area around Delhi in India, or
Bangkok in this country, is quite bright, but there are plenty of darker areas
as well.
The third stylized fact relates to the
heterogeneity in
growth rate
of per
capita GDP. As I said, Asia as a whole
has maintained a growth rate of about 4 percent for more than half a century,
as shown in the left-hand-side panel of Chart 4.
However, once we plot the growth rates
of individual economies, the diversity in the nature of the region's economic
development becomes immediately apparent.
The graph also reveals that there were shifts in the region's "rising stars." Japan recorded double digit growth in the
1960s, but its growth rate became subdued thereafter. Instead, the Asian NIEs took over the
position of very rapid growth economies, followed by China more recently.
If we redraw the picture, not against
time horizons but against income levels, as shown in the right-hand-side panel
of Chart 4, there emerges a pattern of development stages. Growth rate tends to become higher once a
country makes the transition from the low-income to the middle-income
stage. The growth rate reaches its peak
when an economy is at the middle-income stage.
After that, it tends to become slower, especially once a country enters
the high-income stage.
4
See http://data.worldbank.org/about/country-and-lending-groups for definitions of high/middle/low-income countries. In my presentation, I loosely follow their definitions by using thresholds of 12,000 U.S. dollars and 1,000 U.S. dollars of per capita GDP.
5
David N. Weil,
Economic Growth
, Third Edition, Pearson Education Limited, 2013. The darkness of North Korea is noteworthy, as is often pointed out in the literature, including Charles I. Jones, "The Facts of Economic Growth," NBER Working Paper 21142, 2015.
II. Three Traps for Growth
Can Asian countries sustain their rapid
economic growth for the foreseeable future?
If history is any guide, we could expect another rising star to emerge
in Asia. It is by no means guaranteed,
however. Even if it is the case, we
cannot entirely count on one single rising star. The growth rate of relatively high-income
Asian economies needs also to be sustained at a reasonably high level if the
prosperity of the regional economy as a whole is to be maintained.
I believe there are three traps which we
must avoid falling into if we are to sustain economic growth in Asia. Despite the heterogeneity which we have
observed, these three traps are relevant to many countries in the region,
albeit to varying degrees, depending on the circumstances.
The first trap is the "middle-income
trap."
6
History shows that many economies have faced
difficulties in advancing beyond the status of a middle-income economy once
they have exploited the growth opportunities provided by imported technology
and abundant labor force from rural areas.
Such an inflection point is known as the Lewisian Turning Point. Up to that point, growth accounting analysis
generally indicates that a country tends to register high economic growth
through vast capital accumulation, rapidly rising total factor productivity and
continued increases in labor input. Once
such a point has been reached, however, growth is likely to decelerate. Nevertheless, it is still possible for a
country reaching the Lewisian Turning Point to continue growing, although at a
somewhat decelerated pace, through technological advances and cultivation of
new markets.
In the region, Japan and the NIEs
managed to overcome this trap and join the group of high-income countries in
the 1970s and the 1990s, respectively -- as you can see in the right-hand panel
of Chart 4 again. China and some ASEAN
countries, including Thailand, have already reached the upper middle-income
stage, which means that they have great opportunities to advance further toward
high-income status. Moreover, there are
many other countries in the region that are still at the lower middle-income
stage, but with great potential for continued growth for years to come.
The second challenge is the "demographic trap." A number of economies in the region,
particularly those at the high-income stage and, to a lesser extent, at the
upper middle-income stage, are experiencing, or about to experience, population
aging: the result of longer life expectancies combined with lower fertility
rates. From the view point of per-capita
income growth, which I believe is an appropriate measure of "living standard," what really
matters is the proportion of the working-age population to the population as a
whole. Population aging implies a
continued decline in the proportion of the working-age population, which in
turn poses a challenge to sustaining per-capita income growth, as a given
income earner has to transfer a larger share of his or her income to the
retirees.
Chart 5 shows how diverse the region is
in this context, with some countries already facing serious challenges. In this chart, the horizontal axis is changes
in working-age population, and the vertical axis is the proportion of the working-age
population to the total population. A
rise in this proportion is often called a "demographic
bonus,"
while the opposite is called a "demographic
onus." And the size of the bubble is proportional to
the absolute number of the working-age population.
As you can see, over such a long period
of time, even glacial demographic changes seem dramatic. Japan has already entered deep into the
period of demographic onus, with the absolute number of the working-age
population declining at a significant pace.
The NIEs, China and some ASEAN countries are about to follow Japan in
this regard in the not-so-distant future.
Meanwhile, India and other Asian countries are expected to enjoy a
favorable demographic environment at least until the middle of this century.
The third challenge is what I call the "Malthusian trap." In Malthus' original work, the existence of
a limited resource -- land in his case -- constrains growth. Likewise, limitations in the supply of
natural resources, such as oil, are thought to threaten global growth in the
long-run. A problem arises even with
water, seemingly abundant resources at least for Japanese. As a matter of fact, water scarcity is often
discussed as an important constraint on industrialization as well as
agricultural development in the global economy.
From this point of view, the slowdown in commodity-consuming emerging
economies in recent years may suggest that an automatic stabilizer -- or an
appropriate policy reaction toward this constraint -- is actually affecting the
economic growth over the cycles. Environment
issues such as global warming can be thought of as a variant of this Malthusian
trap.
6
The middle-income trap is discussed extensively in Asian Development Bank,
Asia 2050: Realizing the Asian Century
, 2011.
III. Productivity Growth
It is generally acknowledged that the
key to avoiding these three traps is productivity growth, or more precisely "total factor
productivity growth." In a recent speech, Janet Yellen, the Chair
of the Federal Reserve Board, stated that, "The most
important factor determining continued advances in living standards is
productivity growth."
7
I could not agree with her more.
Take an example of the Malthusian
trap. Malthus' dismal prophecy did not
materialize because dramatically high productivity growth in the agricultural
sector in the 18th century enabled countries to feed vastly increasing
populations and hence sustain growth.
For instance, when the potato, a plant native to the Americas, was
introduced into Ireland, a field of potatoes could feed two or three times as
many people as a similar field of grain, so the introduction of the potato
resulted in a significant rise in Ireland's agricultural productivity.
Likewise, in the modern world, higher
productivity enables an economy to grow even with a smaller working-age
population, and hence to avoid the demographic trap. If a country can maintain a decent
productivity growth even after it has exploited imported technology and an
underutilized labor force, that country is likely to succeed in growing its way
out of the middle-income trap.
Discussion of the myth of Asian miracles
also highlights the importance of total factor productivity. Well before the Asian currency crisis of
1997-1998, Paul Krugman argued that the rapid growth of the NIEs or Asian
tigers was not sustainable because their high growth was not sufficiently
supported by total factor productivity.
8
History vindicated his assessment: the Asian
currency crisis was in part an inevitable transition toward more sustainable
and balanced growth.
Let me confirm this point using data,
with the usual disclaimer regarding the large uncertainty associated with
estimates of total factor productivity.
In graph 6, the vertical axis is per capita GDP growth, while the
horizontal axis is total factor productivity growth. In the left panel, which describes the period
preceding the Asian currency crisis, the dots representing high growth Asian
economies are generally located well above the regression line. This means that their economic growth could
be explained relatively more by expansion of inputs, such as demographic bonus
and investment boom, than by total factor productivity growth.
The right hand panel, which describes
the situation in recent years, after the Great Financial Crisis, shows that
Asian economies are much closer to the regression line than they were in the
1990s. This looks encouraging in terms
of balanced growth. One caveat, however,
is that Asian dots are located closer to the zero-vertical line as well: total
factor productivity growth is generally lower than it was in the 1990s. In other words, economic growth appears to be
more balanced, but it may have also lost some strength. This is a bit disturbing because population
aging is about to accelerate in some countries, with stronger demographic
headwinds therefore to be expected.
Remember that once a country falls into demographic onus, it needs to
offset negative demographic forces with higher growth in total factor
productivity just to maintain per capita growth, and hence living
standards. This is exactly why total
factor productivity growth is the crucial issue for a number of Asian
economies.
The next question then is, how do we
raise total factor productivity growth?
The answer may be a pessimistic one if we think that productivity growth
is only exogenously determined. If this
is the case, all we can do is hope that some exogenous shock, or just pure
luck, will raise productivity. We would
have to admit that there is an element of truth in this explanation if we look
at the history of prosperous cities, as highlighted by Enrico Moretti, an
expert in urban economics.
9
For instance, the reason why Seattle,
Washington, became a high-tech industry hub depended to a large extent on the
fact that the founders of Microsoft had grown up there and wanted to relocate
their company to a place familiar to them.
Similar stories can be found for other U.S. high-tech cities. If these cases provide a complete explanation
of productivity growth, all we can do is wait and hope for a genius like Bill
Gates or Steve Jobs to be born by chance in our country.
Fortunately, however, economic
literature is much more hopeful in this respect: productivity is largely
endogenous.
7
Janet L. Yellen, "Recent Developments and the Outlook for the Economy," Remarks at the City Club of Cleveland, July 10, 2015.
8
Paul Krugman, "The Myth of Asia's Miracle,"
Foreign Affairs
, Vol. 73, November/December, pp. 62-78, 1994.
9
Enrico Moretti,
The New Geography of Jobs
, Mariner Books, 2013.
IV. How to Raise Productivity
In the economic literature, there is a
long list of factors that are thought to have a positive impact on productivity
growth. I do not intend to go through
all of them but, instead, I would like to focus on three things that I think
are of particular importance.
The first is human capital. Measuring human capital is a difficult task,
but one of the simplest indicators often used is the number of school
years. In Chart 7, the greater the
number of years spent in school, the darker the green in which the country is
colored. In Asia, there are a number of
dark green areas, such as Japan, Korea, Malaysia and Sri Lanka. As you would expect, Hong Kong and Singapore
also belong to this group, although it is not shown clearly on this map. One may get the impression that Asia as a
whole is not as green as North America or Europe, and is more or less similar
to South America. This would seem to
indicate that there remains significant potential for further accumulation of
human capital in the region.
At the same time, there are some
interesting figures relating to U.S. universities, which are generally
acknowledged as providing the highest standard of education, attracting
talented people from all over the world.
If you look at the data for U.S. university students by their country of
origin, you can see that students from Asian countries dominate, as shown in
Chart 8. Those students returning to
their home countries will no doubt have a profound impact on the human capital
there. It is well known that Bangalore,
the IT hub of India, benefited from returnees from Silicon Valley. Moretti's study shows that innovative,
highly skilled workers contribute not only directly to the higher quality of
human capital, but they also have a positive effect on the skills of those
around them -- a sort of positive externality.
10
It is also encouraging to see that an
increasing number of Asian universities have become recognized as top-tier at a
global level. According to some recent
university rankings, more than ten universities in Asia are among the best 100.
11
Remember that the success of Bangalore also
lies in the fact that local IT firms were able to recruit many highly skilled
graduates from nearby universities.
Against these backdrops, Asian has made
larger contributions to the development of science. For instance, the share of Asian born Nobel prize
winners in scientific fields doubled to more than 10 percent after the turn of
the millennium.
12
These truly top academic scholars have
influenced the development of human capital in their own countries in various
forms as exemplified by Professor Sen himself in front of us.
The second key to higher productivity is
a market-friendly business environment.
For example, a critical precondition for market functioning such as
property rights protection, or the rule of law more generally, is an
indispensable ingredient for an innovative environment, which in turn is the
basis for productivity growth. I firmly
believe, as many economists do, that healthy competition and appropriate
incentives are essential for a well-functioning market mechanism, through which
sustainable and robust economic growth is made possible. On this score, deregulation is to be strongly
encouraged as well. I think that Asian
economies are making steady progress in this regard, although I also believe
that much more needs to be done.
While the importance of market
mechanisms cannot be exaggerated, it does not mean that we can turn a blind eye
to income inequality. As a matter of
fact, some academics argue that inclusiveness is conducive to economic growth
in the long-run.
13
Furthermore, a recent empirical study shows
that lower inequality is correlated with faster and longer economic growth.
14
Chart 9 compares inequality in income across
countries. According to Thomas Piketty,
inequality in the United States is alarmingly high and hence colored in dark
red in this Chart.
15
Compared with the United States, inequality
in Asia is generally low, albeit with some exceptions.
The third element which plays an
important role in raising productivity is a strong financial sector. I am completely convinced by arguments for
creative destruction as a source of productivity growth.
16
As pointed out by Joseph Schumpeter,
financial intermediation is an important catalyst to support innovative
entrepreneurs and value creators generally.
A modern example of this can be found in venture capitalists, who
provide not only financial resources, but also business advice for
growth-oriented companies. Of course,
the role of financial intermediation is not limited to supporting
start-ups. As a matter of fact, the
seamless availability of a wide range of financial functions would best serve innovation-led
economic growth.
In the Asian context, channeling the
region's
abundant savings to the vast demand for infrastructure is also an important
challenge in which I myself was deeply involved when I was President of the
Asian Development Bank. Developing bond
markets has been one of the successful initiatives in terms of intra-regional
matching between savings and investment.
17
Bond markets in Asia, especially those
denominated in local currencies, have grown significantly since the mid-2000s,
thanks to the efforts of the relevant financial authorities and other
bodies. At the end of 2013, outstanding
bond issuances amounted to 3.5 trillion U.S. dollars, which is about five times
the figure for 2005.
Turning to retail financial services,
inclusiveness, which I mentioned a little while ago, is again an important
issue. We should note that a significant
number of people in Asia still do not have their own bank accounts.
18
Less than half the population in India has a
bank account. China fares better, with
the proportion of account holders being two-thirds of the population, but that
is still far from the situation in advanced economies where almost everybody
has access to a bank account. I believe
that the Asian financial landscape, and therefore the prospects for further
strong economic growth, will be completely different once the issue of limited
availability of banking services is addressed.
10
Enrico Moretti,
The New Geography of Jobs
, Mariner Books, 2013.
11
See, for instance, Times Higher Education World University Rankings.
12
Nobel prizes in the areas of physics, chemistry, physiology or medicine, and economic sciences.
13
Daron Acemoglu and James A. Robinson,
Why Nations Fail: The Origins of Power, Prosperity and Poverty
, Crown Business, 2012.
14
Jonathan D. Ostry, Andrew Berg and Charalambos G. Tsangarides, "Redistribution, Inequality, and Growth," IMF Staff Discussion Note, SDN/14/02, 2014.
15
Thomas Piketty,
Capital in the Twenty-First Century
, Belknap Press, 2014.
16
Joseph A. Schumpeter,
The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle
, Harvard University Press, 1934. See also Philippe Aghion and Peter Howitt, "A Model of Growth Through Creative Destruction,"
Econometrica
, Vol. 60, No. 2, pp. 323-351, 1992; Katsuhito Iwai, "Schumpeterian Dynamics: An Evolutionary Model of Innovation and Imitation,"
Journal of Economic Behavior and Organization
, Vol. 5, pp. 159-190, 1984.
17
Hiroshi Nakaso, "Asian Economy: Past, Present, and Future," Speech at Securities Analysts Association of Japan International Seminar, April 24, 2015.
18
The Wall Street Journal, "Asia Seeks to Reach the 'Unbanked'," March 18, 2015.
Conclusion
In my presentation today, I have
emphasized that productivity growth is crucial to sustaining hitherto robust
economic growth in Asia. Among many
other things, in my view, the continued accumulation of human capital,
market-friendly institutional setups and strong financial sectors, all play an
important role in productivity growth.
We have seen many positive developments in this respect in Asia, but
much more needs to be done.
What I have discussed today could be
broadly categorized as structural reforms.
Generally speaking, structural reforms are always and everywhere
difficult to implement in the face of vested interests. Depending partly on where you are in the
business cycle, there is often a strong temptation to defer them to a later
date. This is because of concerns about
short-term negative impacts on the economy.
Despite all those downsides, however, I still believe that there is no
better time than now to put necessary reforms in motion. Short-term negative impacts are often
overstated. They should not be used as
an excuse to oppose reforms. If
structural reforms are well designed, they will increase rather than decrease
current demand, because they improve the prospects of future profits for
businesses and hence permanent income for households.
19
That's all from me tonight. Once I have completed my assignment to talk
about growth in Asia, I need to put on my central bank governor's cap again. If I may use Professor Lucas's quote again
with a slight modification, "Once
one starts to think about
deflation or
inflation
, it is hard to think about anything else." Therefore, please give me your comments and
questions before I put my central banker's cap back on.
Thank you.
19
Benoit Coeure, "Structural Reforms: Learning the Right Lessons from the Crisis," Speech at the Bank of Latvia Economic Conference, October 17, 2014.