Factor Mobilization and TFP In Hongkong and Singapore – 1 of 2

Hongkong and Singapore are latecomer nations, in fact city-states, who were similar in many ways but took different paths toward their present developed status. As cities, they are a special case of industry clusters; as nations, these cities can be special cases to study from for the Philippines.

For this paper A tale of two cities: factor accumulation and technical change in Hongkong and SIngapore (NBER C10990), Professor Alwyn Young took a snapshot of the two city-states in 1992.

Note: We will skip a bit to an interesting topic before returning to ASIALICS in Post #86. .

Professor Young, in this classic paper, made two conclusions that are relevant to Manila and the Philippines. He used a clinical case study approach- as per Kathleen Eisenhardt in Post #82 – to develop rich theory from which we can learn.

First, he concludes with Paul Romer, whose 1990 paper on Endogenous Technological Change we featured in Post #46 (4/27/09), that “the supply of human capital as determining the capability of an economy to absorb new technologies.” Unfortunately, the Philippine focus in education at the moment stops at getting our students just enough learning to be deployed overseas in health care, ship crewing or locally for business process outsourcing. We do need more students in math and sciences to have the human capital to absorb new technologies and attain technical progress.

Second, Singapore went through a two-step process to get to where it is now. Professor Young noted that, unlike Hongkong, Singapore achieved progress through the 1980s first by full resource mobilization, ie getting its people fully employed. Hongkong on the other hand, benefited from the influx of Mainland refugees many of whom were highly educated and brought seed wealth to jumpstart its growth. In the years that Singapore was mobilizing its people, Hongkong already drew most of its wealth from technical change (TFP) and industry set up by refugees.

Professor Paul Krugman cited Professor Young’s paper in his 1994 journal, The Myth of Asia’s Miracle, which we featured on Post #11 (3/7/09) and used Singapore as a case study. We quote lengthily from Krugran in that post:

Her achievements in mobilization were awesome. Labor participation grew from 27% to 51% in 1994. Workers with higher education rose from 50% t0 66%. Physical capital went up from 11% to 40% as share of output. Living through this time from 1966–1990, one can imagine the stresses the Singaporeans had to grow through and the political leadership needed to keep them focused.

It was only after 1994 with near full mobilization (when labor price started to go up as demand was outstripping supply) – and no Confucian miracle there as pointed out by Professor Krugman – that Singapore shifted to a high TFP approach targeting life sciences, ie stem cell research, and private banking as targeted industries.

Professor Young gave other details of the Singapore experience we can learn from. It would seem that in the transition up the ladder to full resource mobilization with more value-adding, they did not recover fully on the initial capital investments thus no nil TFP showing during this period. The phenomenon is similar to Intel or Sony cannibalizing earlier product generations to attain dominance at some loss to initial investments. Note it is our desire to squeeze the last of capital that is fast becoming obsolete that we our industry has indeed become obsolete. As with most investment, it is extremely difficult to time the bottom.

We can learn from Professor Young’s two conclusions in the management of our own progress.

Some Filipino politicians make a joke about President Magsaysay who, they say, wanted “to repeal the law of supply and demand.” Yet the actions of many of these same politicians in the recent decades speak loudly of repealing the same economic laws to protect indigenous industries and aristocrats, like labor union and business leaders, and to create export enclaves with special incentives.

There are already noises to give similar incentives to our new winners in export labor services like BPOs. If we do not learn from our economic history, we may end up again with the dual economy noted by Dr. Cororaton (See our Posts #12 & #13).

In creating special incentives, we may cut the link between these fast growing industries and the local economy and lose the DUI-learning, ie learning-by-doing, benefits that are necessary to interact with STI-learning to achieve technical progress. Such incentives merely act to reduce tax income form the government and as transfer payments to the emerging business aristocracies.

This statement is not to put these aristocrats down other than to comment on their wishing an easy way to make money at the expense of their own future. From my own experience, they are pretty much capable of working on business process improvements to stay competitive or business model innovations to time the move to other related opportunities.

Talking about cities, I will end this post with a note from Jane Jacobs, a city activist and non-economist, who wrote that Cities and not Nations should be considered as the unit of development in her books. My reference is Cities and the Wealth of Nations shown on the left margin. Indeed, one may look at nations as a portfolio of cities. This different perspective opens up a new vista of innovative possibilities to drive development.

Given that Hongkong and Singapore are cities and nations (Hongkong is still run as a SAR.) at the same time, I shall use her ideas to have a fresh look at Manila and the Philippines as well.

Click here for Part 2 of 2.