Krugman Explains ASEAN Innovation and Total Factor Productivity 11.0

Professor Paul Krugman won the 2008 Nobel Prize for research in trade and geography. He gets this post because of his paper “The Myth of Asia’s Miracle” in Foreign Affairs, 1994.

The paper had different findings than the World Bank on the tiger economies of Asia. Krugman said that the miracle was nothing more than mobilization of economic resources. This took the form of (a) increasing the employed share of population, (b) increasing education of the workforce, and (c) investment in physical capital. He described all these as “based on more perspiration rather than on inspiration.”

All these are achievements in themselves. It is more logical to raise employment of resources first and ride up the slope of expected increases in resource cost as its supply contracts. As the people grow richer, the next step is to go to strategies that increase Total Factor Productivity.

Krugman chose Singapore as his example. Her achievements in mobilization were awesome. Labor participation grew from 27% to 51% in 1994 (as of July 2008, according to the CIA, it was 61%). 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.

A story went around that PM Lee Kuan Yew was angry on first reading the paper. After some pondering, he hired the Professor as consultant for the next growth phase. The old approaches were getting into diminishing returns as the available supply of labor reduced and became more expensive.

Whether the story is true or not, investments that increase Total Factor Productivity are now evident in Singapore. These include global financial services (as eastern alternative to Swiss private banking) and life sciences (like embryonic stem cell research).

Continued progress of Singapore is momentous for ASEAN. Singapore has a bigger role to play – a lead role in the ASEAN flying geese, perhaps. That is will be the subject of a future post. We do have Professor Krugman to thank for his research and insight.

Krugman is a teacher, we have so much to learn from what he has shown. There is nothing wrong with emulating the success of others. Do add your comments to the mix.

(Please click the image or here for hyperlink to Foreign Affairs)