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This article appears in the following Oxford Review of Economic Policy issue: THE POLITICAL ECONOMY OF DEVELOPMENT [View the issue table of contents]
Gravity and friction in growing East Asia
* World Bank, e-mail: igill{at}worldbank.org
** Wolfensohn Center for Development, The Brookings Institution, e-mail: hkharas{at}brookings.edu
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Without the advantages of low wages or high skills, East Asian economies are following a new path of regional integration, led by China. Along this path, policy-makers must manage a migration of 2m people a month to East Asia's cities, a sharp and unprecedented increase in income inequality, and a growing discontent with corruption as governance structures have been decentralized. Having successfully integrated globally before the financial meltdown of the 1990s, and integrating regionally at an even faster pace since then, East Asia's middle-income countries must now accelerate a third integration, this time at home. Growth based on scale economies and specialization requires managing both gravity and friction. This article outlines what East Asian nations must do to manage these forces even as another financial meltdown is taking place. How well they can do this will determine whether they will grow through middle income to join the ranks of developed economies or not escape the ‘middle-income trap’.
Key Words: East Asian economic growth • regional integration • scale economies • agglomeration • specialization • migration • corruption • inequality
East Asia is defined in this article as the ten countries in ASEAN, plus China, Hong Kong (China), Taiwan (China), South Korea, and Mongolia.
1 World Bank (1993). This book provided an explanation for rapid growth in eight high-performing Asian economies in the period 1970–90.
2 Gill and Kharas (2007). This book describes the regional integration through accelerating trade, finance, and technology linkages since the 1997–8 crisis, and outlines the changes in the political economy within the emerging economies of the region.
3 The paper stresses the ‘new’ theories of growth, trade, and location, but the reader should note these are not entirely new. The role of dynamic economies of scale was central to models of learning by doing developed by Kenneth Arrow and to Nicholas Kaldor's development of Verdoorn's Law. The latter was controversial, but has been influential (see, for example, Crafts and Toniolo (eds), (1996). Kaldor combined this with cumulative processes of aggregation to discuss the potentially disequalizing effect of international trade. At the end of his book Geography and Trade (Krugman, 1992), Paul Krugman pays a tribute to the earlier work by Kaldor. Indeed, these ideas have been central to the understanding of the effects of trade on inequality; see, for example, Wood and Ridao-Cano (1999).
5 The ‘grease money’ approach is best exemplified by Huntington (1968, p. 386): ‘in terms of economic growth, the only thing worse than a society with a rigid, over-centralized, dishonest bureaucracy is one with a rigid, over-centralized and honest bureaucracy’.
6 In Chinese, from renzhi to fazhi.
7 The Commission on Growth and Development (2008), chaired by A. Michael Spence, identified 13 success stories including: Botswana, Brazil, China, Hong Kong (China), Indonesia, Japan, Korea, Malaysia, Malta, Oman, Singapore, Taiwan (China) and Thailand.
8 It is difficult to distinguish the relative importance of external and internal factors, but taken together, they imply the need for a marked change in the role of the government. This inevitably raises questions about the political structure and the role of democracy. Two chapters in Gill and Kharas (2007) address issues related to decentralization, cohesion, and corruption.
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