YECONDEV: MIDTERM

Chapter 1a–Economic Growth and Economic

Development

Economic Growth

• is a narrower concept than economic

development. It is an increase in a country's real
level of national output which can be caused by
an increase in the quality of resources (by
education etc.), increase in the quantity of
resources & improvements in technology or in
another way an increase in the value of goods
and services produced by every sector of the
economy. Economic Growth can be measured • In the year 1990 the United Nations
by an increase in a country's GDP(gross Development Programme in its first Human
domestic product). Development Report introduced the concept of
Human Development Index
Economic development

• is a normative concept i.e. it applies in the • It is the cumulative measurement of:

context of people's sense of morality (right and (a) Longevity
wrong, good and bad). The definition of (b) Knowledge
economic development given by Michael Todaro (c) Decent Standard of Living.
is an increase in living standards, improvement
in self-esteem needs and freedom from • Longevity: It shows the life expectancy. It is a
oppression as well as a greater choice.

The Human Development Index

• (commonly abbreviated HDI) is a summary of

human development around the world and
implies whether a country is developed, still
developing, or underdeveloped based on
choice to live long and healthy life.
factors such as life expectancy, education,
literacy, gross domestic product per capita. The
• (b) Knowledge: It is a choice to acquire literacy,
results of the HDI are published in the Human
education, information, etc. It is measured by
Development Report, which is commissioned by
the literate percentage in ratio with the total
the United Nations Development
population. The literacy rate may be compared
Program(UNDP) and is written by scholars,
in the primary, secondary and tertiary levels.
those who study world development and
members of the Human Development Report
Office of the UNDP. • (c) Decent standard of life: It is a joy to enjoy a
quality and standard life. It depends upon the
• According to the UNDP, human development is
purchasing power of the people and the per
"about creating an environment in which people
capita income of the people etc.
can develop their full potential and lead
productive, creative lives in accord with their
needs and interests. People are the real wealth • The rank of a country is determined by the
of nations. Development is thus about overall developments in these three basic
expanding the choices people have to lead lives dimensions of human developments. ADI ranks
that they value. " countries, in relation to each other to tell them
how for a country has travelled and how for yet
YECONDEV: MIDTERM
it has to travel in the part of Human Factors: Development Growth relates
Development relates to growth to a gradual
of human capital increase in one
• The most accurate method of measuring indexes, a of the
development is the Human Development Index decrease components
which takes into account the literacy rates & life in inequality human capital
figures, and indexes, a
expectancy which affect productivity and could
structural decrease of
lead to Economic Growth. It also leads to the
changes that Gross Domestic
creation of more opportunities in the sectors of improve the Product:
education, healthcare, employment and the general consumption,.
conservation of the environment. It implies an population's government
increase in the per capita income of every quality of life. spending,
citizen. investment, net
exports.
Difference between economic growth and economic Measurement: Qualitative.HDI Quantitative.
development. (Human Increase in real
• Economic Growth does not take into account Development GDP. Shown by
Index), gender- PPF.
the size of the informal economy. The informal
related index
economy is also known as the black economy
(GDI), Human
which is unrecorded economic activity. poverty index
Development alleviates people from low (HPI), infant
standards of living into proper employment with mortality, literacy
suitable shelter. Economic Growth does not take rate etc.
into account the depletion of natural resources Concept: Normative Narrower
which might lead to pollution, congestion & concept concept than
disease. economic
• Development however is concerned with development
sustainability which means meeting the needs Effect: Brings qualitative Brings
of the present without compromising future and quantitative quantitative
needs. These environmental effects are changes in the changes in the
economy economy
becoming more of a problem for Governments
Relevance: Economic Economic
now that the pressure has increased on them
development is growth is a
due to Global warming. more relevant to more relevant
Basis Economic Economic measure metric for
Development Growth progress and progress
Economic Economic quality of life in in developed
development growth refers to developing countries. But
implies changes an increase in nations it's widely used
in income, the real output in all countries
savings and of goods and because growth
investment along services in the is a necessary
with progressive country. condition for
changes in socio- development.
economic
structure of
country
(institutional and
technological
changes).
YECONDEV: MIDTERM
Chapter 1b –Introduction and Overview • Expected number of years to be lived in “full
health”
Economic Development in Asia
• Japanese men have the longest healthy life
• East Asian miracle, a showcase of development expectancy at 72 y/o among 191 countries;
up until the Asian crisis. Sierra Leone with 27 years life expectancy.
• Asian crisis created a number of questions • Philippines???
about the continued viability of a rapid growth
Green GNP
profile for the region.
• Economies have begun to rebound. • Informal name given to national income
• Social impact of the crisis has been substantial. measures that are adjusted to take into account
• Future development will depend upon many the depletion of natural resources and
factors, including public policy and environmental degradation
developments in industrial countries. • Includes the cost of exploiting a natural
• This course looks at both the history and the resource and valuing the social cost of pollution
future outlook for the region. emissions
• Damages to the global environment, such as
Difference between development economics and other
global warming and depletion of the ozone layer
branches of economics
(but hard to estimate)
• It looks at all of the other branches of • “defensive” expenditures, those for
economics within the context of economic environmental protection and compensation for
development. environmental damage
• It uses the tools developed in other branches of
Making Comparisons Between Countries
economics to analyze the problems and
challenges of economic development. • Exchange rate method –between the local
currency and US dollar
Measuring Growth & Development
• Purchasing Power Parity (PPP) Method –
• Use of GDP and GNP and exchange rate develops a cost index for comparable baskets of
comparisons lead to patterns of growth over consumption goods in the local currency and
time. then compares this with the prices in the United
• Other methods such as purchasing power parity States
can also be used to compare standards of living. • A country’s PPP is defined as the number of
units of the country’s currency required to buy
Other Measures the same amount of goods and services that a
• Human development index (HDI) dollar would buy in the United States
• Healthy life expectancy Summary
• Green GNP - assesses the impact of
environmental degradation in the development • Uniqueness of the Asian development progress
experience. (Asian Miracle Economies).
• Indicators of economic growth and
Human Development Index (HDI) development.
• 3 components: per-capita income, life
expectancy at birth, level of educational
attainment that combines adult literacy and
educational enrolment rates
• HDI is developed as a ratio of a particular
country to the most developed country.

Health Life Expectancy

YECONDEV: MIDTERM
Chapter 3 –The Asian Crisis and Recent Developments

Start of the Asian Crisis

• June 1997, after a sustained attack on the

currency led by currency hedge funds, the Thai
baht sustained a large devaluation.
• Currency hedging –decision by the portfolio
manager to reduce or eliminate the fund’s
exposure to the movement of foreign
currencies.
• Currency devaluations in Malaysia, Indonesia
and the Philippines followed in July.
• The currency weakness extended to Australia,
Hong Kong and Korea currencies in October
Explanations for the Asian Crisis
The Asian Crisis
• There are three broad explanations, none of
• By early 1998, currencies fell by 35% to 55% for them alone completely satisfactory.
Korea, Philippines, Malaysia and Thailand, and • First, a speculative bubble in the housing and
more than 15% for Singapore and Taiwan equity markets arose which was funded and
• Indonesia suffered greatest fall of 80%. sustained by excessive lending by the banking
• Equity prices also fell as a result of investor system.
uncertainty and currency volatility (Table 3.1). • A bubble is an economic cycle characterized by
the rapid escalation of asset prices followed by
a contraction.
• When no more investors are willing to buy at
the elevated price, a massive sell-off occurs,
causing the bubble to deflate
• Second, external sector difficultiesemerged
including slow export growth, loss of external
competitiveness and rapid growth in current
account deficits.
• A current account deficit is when a country
imports more goods, services, and capital than
it exports.
• Third, capital flight and investor panic spread
across the region through a contagion
• Thin and restricted equity markets exaggerated
mechanism as a result of globalization.
the decline.
• Lack of hedging facilities forced investors to The Asian Crisis –The Bubble Economy (1)
reduce holdings dramatically.
• First, the bubble economywas the result of
• Interest rates were raised to help stabilize
interaction between lenders (mostly banks) that
currencies and liquidity was reduced.
borrowed offshore at high interest rates and
• The result was a sharp decline in aggregate
relend at higher rates to domestic investors.
economic activity in late 1997 and in 1998.
• The domestic investors borrowed extensively to
finance speculative investments in the housing
and equity markets.
YECONDEV: MIDTERM
• This created a speculative bubble that • As the foreign exchange crisis unfolded, there
depended on a stable exchange rate and high was a dramatic turn around in net private
profits. capital flows to the region –from a $97 billion
• High profits became more improbable as the inflow in 1996 to a $12 billion outflow in 1997.
boom reached its peak, which was further • This $109 billion reversal was about 10% of the
undermined by the successive devaluations in GDP of the five most affected economies –
all the economies as the crisis unfolded. Indonesia, Korea, Malaysia, Philippines, and
• Banking weakness was reinforced by a lack of Thailand.
competition and unsound lending practices. • There was also a dramatic reversal in bank
• These included risky long term lending in local credit which also amounted to about 10 percent
currency using short term dollar loans from of GDP.
overseas lenders. • Together, the reversal of capital flows and bank
• When these borrowers defaulted it resulted in credit created a liquidity crisis that led to a
the inability of the banks to repay these short sharp fall in income and output.
term dollar obligations. • Indonesia, which had been a model of probity
• This banking crisis was also influenced by moral and sensible policies was hardest hit by the
hazard crisis as its exchange rate fell by over 50 percent
• Moral hazard occurs when an agent takes more and aggregate incomes fell dramatically.
risk because they are insured against the • This contagion effect was the result of investors
negative consequence of such actions. pulling out of many economies simultaneously.
• In the case of the Asian financial crisis banks • The pressure that arose on all the currencies of
thought that governments would insure a stable the region could have been a combination of
exchange rate. this contagion effect as well as a process of
• They also might have thought that the “competitive devaluations”as investment funds
government would bail them out if they found left the region.
themselves in financial trouble
Post-Crisis Experience
The Asian Crisis –External Sector Difficulties (2)
• The impact of the crisis was fully felt in 1998
• Second, as the bubble of the early 1990s when all the crisis countries and most other
progressed, current account deficitsalso grew as countries had negative or very small rates of
offshore borrowing increased. positive growth.
• While exports were growing rapidly, this was • PRC and Taiwan were the only exceptions.
viewed as a sign of strong investment and • Equity prices also fell across the region in 1998.
growth enhancing capital expansion.
• However, when export growth began to sag in
1996 this large current account deficits became
a growing liability and worry for international
investors.
• Exchange rates were tied to the dollar and
exports were hurt in international markets as
the dollar appreciated in the mid 1990s.

The Asian Crisis –Contagion Effects (3)

• Third, there was a strong contagion effectas the

financial crisis spread across the region.
• Countries that had strong currencies and
economies, such as Hong Kong, Singapore and
Taiwan were also adversely affected.
YECONDEV: MIDTERM
• Beginning in 1999, there has been a recovery in • Some adverse affects on school enrollment and
on health indicators were observed.

The Recovery

• Between 2002 and 2007 economic growth in

the Asian region accelerated, led by India and
China. Living standards increased and poverty
fell.
• Domestic demand and foreign trade were both
important factors in the resumption of growth.
• As the recover progressed financial
restructuring proceeded and the financial
systems strengthened.

growth and equity markets.

• This recovery has been accompanied by a
significant amount of industrial and financial
restructuring.
• Many countries suffered from a high level of
Non-Performing Loans (NPLs) -is a sum of
borrowed money upon which the debtor has
not made the scheduled payments for a
specified period.
• The region has grown much richer in the decade
• To deal with these NPLs, the most affected
since the Asian crisis.
countries created separate agencies to deal with
• China has emerged as a regional economic
them. These Asset Management Companies
powerhouse.
(AMCs)have taken many of the bad loans and
• Half the GDP of the region and one third of
negotiated their liquidation.
exports originates in China
• Korea and Malaysia have been particularly
successful in reducing NPLs, enabling the • China is now the largest trader in Asia
banking system to begin to extend new loans. overtaking Japan.
• Thailand and Indonesia have been only • China joined WTO several years ago.
moderately successful while in the Philippines, • Import GDP ratio is 34% in China versus 9% for
the level of NPLs, though small during the crisis, Japan.-The trade-to-GDP ratio is an indicator of
has crept up in recent years. the relative importance of international trade in
the economy of a country.
Social Impact of the Crisis • Shows Japan is still somewhat protectionist (an
advocate of the policy of shielding a country's
• The fall in output and employment created
domestic industries from foreign competition by
hardships for many segments of the society in
taxing imports)
the affected countries.
• Middle income countries are being squeezed by
• There was significant reverse migration to rural
China.
from urban areas as job opportunities dried up.
• In Southeast Asia in particular.
• Poverty levels increased between 1997 and
• China competes in many different international
1998.
markets from labor intensive to skill intensive.
• Disadvantaged groups such as the poor, women,
• Innovation and new products are drivers of
children and the elderly were the worse hit by
trade in Asia now.
the crisis.
YECONDEV: MIDTERM
• 60% of export growth in Asia is in new varieties • Exacerbate poverty with reverse migration.
and products not more of the same products. • Singapore, Hong Kong and Malaysia most
• Geography and outsourcing are important and exposed to foreign trade.
locational advantages are shaped by various • Both Hong Kong and Singapore adversely
factors. affected in Asian crisis of 1997.
• History, availability of manpower, availability of • Thailand’s prospects will also be adversely
capital, cost of shipping and agglomeration affected by political uncertainty.
economies all play a role. • Taiwan will have to fight its way through a
-a localized economy in which a large number of recession that has already begun.
companies, services, and industries exist in • Korea has a lot of household debt which could
close proximity to one another and benefit from slow the economy further.
the cost reductions and gains in efficiency that • But a big fiscal stimulus and currency
result from this proximity depreciation of around 30 percent in 2008
• Shenzenin China and Bangalore in India are which should boost exports.
examples of agglomeration economies. • Volatility in many markets will restrain risk
• Export processing zones help create incentives taking and investment.
for high growth export development and • Volatility causes sharp changes in balance of
innovation. payments
• As the global economic crisis unfolds in 2009 • Puts pressure on governments to adjust their
Asia is being adversely affected. budgets to reflect these shifts.
• Slower growth in Asia in 2009 and perhaps 2010 • It creates uncertainty in the business
is anticipated. community
• There will be a slowdown in export demand • Has a dampening impact on investment.
from Europe, Japan and the United States. • The economic recovery continued into the
• Asia is in good shape to offset these anticipated second and third quarter of 2009.
weaknesses in the foreign sector with monetary • Industrial countries and developing countries in
and fiscal stimulus. Asia all benefited.
• Most countries cut interest rates in last four • Stimulus packages were adopted by many
months of 2008. countries including fiscal and monetary
• Falling energy and food prices should measures.
ameliorate any tendencies toward inflation.
• There has been general fiscal stimulus.
• China’s projected $850 billion additional
spending on infrastructure in next few years.
• East Asia and Southeast Asia have current
account surpluses.
• All countries in the region have ample foreign
exchange reserves.
• India could have a more difficult time than the
rest of the region.
• It has a large fiscal deficit which limits fiscal
stimulus. Agenda for Reform
• Lack of willingness of overseas lenders to
investment. • In the wake of the Asian crisis, there were a
• As the global recession deepens greater cuts in number of reforms
employment and exports in Asia. • Continuation of the debt restructuring process
• Could create greater social tension. with help of AMCs.
YECONDEV: MIDTERM
• Arrangements of credit lines with the private • In this section we explore prospect for future
sector. growth and structural change.
• Reform of exchange rate regimes to reduce the • We begin with a simple growth model
chance of abrupt currency devaluation. • y = (ls) h + (1-ls) k + a
• The movement of hot money that takes • where y is growth income, h is the rate of
advantage of large short term interest change in education adjusted labor input, k is
differentials was discouraged or made illegal. the rate of growth in capital, ls is labors share in
• Consideration of capital account reforms to income, (1-ls ) is capital’s share in income and a
include possible taxes on short term capital but is total factor productivity.
where not approved. • If we assume that the capital to output ratio is
• Possible controls on international portfolio fixed in the short run then we can substitute y
movements were also considered but not for k on the right hand side of this equation and
implemented. rearrange
• Minimum international standards of financial • y = h + a/ ls
practice were implemented. • income growth (y) is a function of the growth of
• Accountability and transparency of business the labor force adjusted for improved quality by
practices strengthened. higher education and better health (h), the
• Increased international surveillance to detect share of labor in total income (ls) and TFP (a).
possible future financial crises have been • The rest of the section looks at various
considered but not implemented. assumptions about these factors and projects
• Basel accords used to strengthen supervision growth into the future.
and regulation of banking systems. • The main conclusion is that estimates for TFP (a)
• are a set of banking regulations created by the in South Asia using the past tend to
world’s ten largest economies in 1974. underestimate the rate of growth.
• Introduce greater competition in financial • We have also oversimplified because we haven’t
markets while strengthening looked at saving potential.
prudentialregulations. • You can read about this on pages 46 and 47.
• involving or showing care and forethought, • By considering the factors in these simple
especially in business (“the US prudential rules growth models we can get some insights into
prevented banks from lending more than fifteen what causes rapid growth.
percent of their capital to any one borrower“) • Investment
• Improve accounting and disclosure standards. • TFP (a)
• Introduce greater flexibility and depth into • Labor force growth (ls)
financial markets including greater hedging and • Education and health (h)
providing greater access for foreign investors. • Governance, corruption, foreign investment also
• Maintain open trading environments in keeping important as indirect determinants of TFP
with WTO and regional trading arrangements.
• Look into ways of restraining FDI concessions Summary
that distort incentives and distort the flow of • Causes of the Asian financial crisis.
investment. • Analysis of the impact and severity of the
• Enhance the flow of technical expertise, financial crisis in affected countries.
innovation and human capital flows and • Policy implications gained.
exchanges.
• Continue to undertake research into the process Supplementary Resources
of financial and economic crises.
• The Asian Crisis Four Years Onby IMF
Growth projections • The Asian Crisis: Cause & Curesby IMF
YECONDEV: MIDTERM
Chapter 4–Industrialization and Structural Change • Choice of technology will be determined, under
competitive conditions, by the relative costs of
Industrialization
capital and labor.
• Rapid industrial development is the key element • Economies of scale can be important in enabling
of structural transformation from an agrarian industries to move to the lowest point on the
based rural economy to a modern state. cost curve.
• In the Lewis-Fei-Ranis (LFR)model, capital • Exporting to foreign markets is one way to
accumulation fuels the development of the achieve economies of scale, particularly if the
industrial sector (explains how the increased domestic economy is limited.
productivity in agricultural sector would
Economic Efficiency
become helpful in promoting industrial sector)
• There is a dramatic shift from agriculture to • Despite economies of scale, overall economic
industry efficiency depends on a number of other factors
• Labor removed from agriculture does not affect including management, marketing and
output much since there is a surplus of labor in distribution. Technology is also important.
the rural sector. • To become efficient, it is often argued that new
• As labor moves from the traditional sector to industries need to be protected from
industry, overall labor productivity increases. competition until they grow to be efficient
• Wages in industry are higher than they are in enough to compete internationally.
agriculture resulting in labor migration.
Infant Industry Protection
• The flow of labor to the city and to the
industrial sector provides a new gain to society. • Such infant industry protectionhas been used to
• Once the stock of surplus labor is exhausted, erect tariff barriers and import restrictions in a
wages are driven up in both sectors. number of countries. [Refer Supplementary
• Terms of trade between the two sectors will Article 5a]
depend, to some extent, upon government • Generally, the evidence from a number of
policy. developing countries suggests that such
• A delicate balance is necessary to keep protection increases inefficiency rather than
agriculture viable yet allow for investment in reduce it.
industry. • There are some exceptions in Asia, including
• Linkages between the two sectors are important Korea and Taiwan.
as backward linkageswith suppliers in the rural
Small Scale Industrial Development
sector help both sectors to grow as industry
flourishes. • Small and medium scale industries(SMEs)are
• Forward linkageshelp countries to upgrade their generally more labor intensive.
industrial bases. • Given a good policy environment, SMEs can
thrive, particularly where large scale economies
Linkages
are not necessary. Taiwan is a good example,
• Backward linkages are strong in industries such where outsourcing and international
as leather, clothing, textiles, food and beverages networking were used to build up the industrial
and paper products. base
• Forward linkages are strong in industries such as
Openness and Foreign Trade
petroleum and chemical and some heavy
industries and also in some labor intensive • Foreign direct investment (FDI) can be an
electronics. important source of capital and expertise,
particularly for export oriented industries in the
Industrialization
early stages of development.
YECONDEV: MIDTERM
• The issues of FDI and international trade will be
taken up more systematically in the next
chapter.

The Asian Experience with Industrialization

• Unprecedented in economic history.

• Per capita income increased by about 7% per
year in the NIEs for 30 years.
• At the end of this period, incomes were four
times higher than in the base period.
• Industry’s share of income increased
dramatically.

The Asian Experience

• Some countries had high savings rates and

medium to rapid labor force growth (Russia and
Spain) but they didn’t grow as fast.
• There was more to the Asian miracle than the
brute force of high investment and rapid growth
in the labor force.
• Innovation, better industrial organization,
growing globalization all contributed. [Refer
Supplementary Article 5b]
• This process of innovation and structural change
resulted in a dramatic shift in the composition
of industrial output.
• The share of manufactured goods increased as The Asian Experience
did the share of exports (Table 5.2). • There was also a shift, from the 1980s, to more
• Exports shifted quickly to light and heavy “science” based industries such as electronics,
industry from primary industry (Table 5.3). pharmeceuticalsand biotechnology.
• The electronics sector began to feature
prominently in the exports and production of
the NIEs and in Southeast Asia.
• Growth followed an ‘S’ shape, accelerating
rapidly in the 1970s and 1980s.

Technological Transfer

• There were different patterns of technological

transfer.
• Korea and Taiwanfollowed a pattern of
producing locally for foreign firms to the foreign
firms’ specifications or a combination of local
and foreign designs and specification. They did
not form joint venture or encourage foreign
firms to set up independent operations.
• Singapore and Hong Kong welcomed foreign
direct investment. Singapore had a more hands
YECONDEV: MIDTERM
on industrial policy by training and provision of • Because of this shift, Asian countries were able
infrastructure. to gain market share of world exports over a
• See Table 5.4 for comparisons of openness, role twenty year period (Table 5.5)
of government and size of firms

Role of Innovation

• Despite differences, four factors were common. • If we break down the composition of output
1.Low inflation and interest rates and high growth in the NIEs and SE Asia:-About 20% is
saving rates. due to labor force growth.-As much as 25% or
2.Outward looking trade policies. more is attributed to educational improvements
3.Forward looking human resources strategy. of the labor force.
4.Appropriate (for local conditions) government • Innovation requires the active involvement of
industrial strategy. labor since it requires a destructionof old ways
of doing things and creationof new methods
Comparative Advantage and Industrialization and processes.
• The Asian industrial experience can be further Innovation
analyzed by looking at revealed comparative
advantage or by comparisons with best practice • Entry and exit of firms have to be facilitated in
firms in industrial countries. order for innovation to take place efficiently and
• Such comparisons allow us to draw several smoothly
inferences. Some of them reinforce previous • Costs of entry and exit are high for larger firms
observations. and are particularly high when large firms have
a special relationship with the government.
Comparative Advantage • In PRC, India, Vietnam and Indonesia, large
• The share of manufactured goods in total firms are kept in business because of the feared
exports increased dramatically. adverse effects on employment.
• This shift in production corresponded closely • One method of facilitating entry into new
with a similar shift in production taking place in business and of attracting overseas FDI is
the world economy. through the set up of Special Economic Zones
• The export push began in labor intensive goods (SEZs).
and moved to electronics and other science • Many countries in Asia have set them up.
based exports. • SEZs can be extended to the notion of an
• The pattern was more pronounced in East Asia industrial cluster.
and Southeast Asia but was also observed in • 3 main kinds of industrial clusters are large
South Asia. metropolitan agglomerations, small groups of
firms with similar interests and clusters with a
few main producers and their suppliers.
YECONDEV: MIDTERM
• Much innovation in Southeast Asia has been the Employment Growth and Industrialization
result of spending by MNCs.
• Flexible wages and appropriate technology are
• Innovation and technology transfer takes place
needed to absorb labor into industry quickly
most often when capital equipment and
and effectively.
components are imported by export oriented
• This enables employment to grow with output
manufacturing firms
without inflation.
• In East Asia, it has been generated internally
• Most East and Southeast Asian economies were
and with the help of strategic alliances with
fully or nearly fully employed for most of their
foreign firms.
growth spurt.
• Research is often conducted jointly with these
• South Asia was not as fortunate as income
foreign firms.
growth was not sufficient to reduce
• Innovation in marketing and distribution as ICT
unemployment dramatically.
and transportation efficiency gains have cut
costs. Rural to Urban Migration
• State owner enterprises are notoriously slow to
• As industrialization proceeded, so did the
innovate Innovation
movement of labor from rural to urban areas.
• Labor intensive innovation can take place when
• Harris-Todaro model predicts that
technical change is based on skill intensive
unemployment can coexist with rapid labor
industries.
movement to the city.
• It is important that labor markets remain
• This is because workers were willing to wait in
flexible in order to facilitate labor absorption.
low paid and not fully employed positions in the
• Until the Asian crisis, most economies in the
city waiting to get a job in the higher paid
NIEs and Southeast Asia were close to or fully
occupations.
employed.
• This seeming irrationality could have been the
• The importance of private research and
systematic overestimation of prospects in the
development can not be overemphasized.
city.
• The role of FDI has also been critical.
• It could also have been the result of other
• State owned enterprises (SOEs) are not good at
benefits perceived from living in the city.
R and D or innovation.
• It is also possible that the lure of the city and
• 60 % of FDI in East Asia is in manufacturing.
the stories told by their relatives that had just
• This is a much larger proportion than in
migrated were enough to induce the young
industrial countries.
workers to migrate.
Innovation, Education and Growth Convergence • The move would have appealed to the risk
takers in the countryside –likely to be the young
• There was growth convergence between Asian
and adventurous rather than the secure and
NIEs and industrial countries.
middle aged.
• This resulted from synergies created by
• Workers also migrate in order to provide
technology, education, openness and
remittance income for their families at home.
competitiveness.
• It is important that appropriate technology be Migration in Asian Countries
employed at each stage of the industrialization
• Migration within/between Asian economies has
process.
been primarily a function of wage differentials.
• Research and development not only increases
[Refer Supplementary Article 5c]
with per capital income but it accelerates at an
• International migration from the poorest to the
increasing pace.
richest –Indochina, Philippines, South Asia to
• Appropriate technology is more important than
industrial countries and the NIEs.
state of the art technology.
YECONDEV: MIDTERM
• Lots of restrictions in migration because of fears
of social disruption and tension.
• Rich countries are willing to take temporary
migrants for short term employment in low-
skilled occupations.
• Permanent migration is more likely for the
skilled and professional.

Government Policy

• Nurturing industrial growth depends on the

wisdom of industrial policy –infrastructure
spending, prudent infant industry protection,
free labor markets, attractive incentives for
foreign businesses and technology, use of
special zones.
• Efficiency and welfare were traded off in the
early stages in favor of the former.
• Only recently are social safety nets being
constructed in the Asian region.

Summary

• Lewis-Fei-Ranis (LFR model)

• Discussion of the Asian experience with
industrialization
• Role of technological transfer and Innovation
• Rural to urban migration
• Government policies and strategies