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Investment led growth miracles that occurred in Japan, South Korea, Taiwan and China have almost nothing to do with innovation. These nations all suffered from

Investment led growth miracles that occurred in Japan, South Korea, Taiwan and China have almost nothing to do with innovation. These nations all suffered from excess labour and insufficient capital. They relied on protecting domestic industry through tariffs and suppressing wages relative to productivity to sell into export markets, driving up the savings rate to facilitate further investment. They do this either through political repression of labour unions (China) or through strategic undervaluation of the currency. South Korea and Taiwan were military dictatorships when they began this process. It's completely unremarkable that a nation that doesn't have democracy achieved middle income status, because the purpose of democracy isn't achieving economic development. Although the first nation to implement this style of economic management was a democracy, the US did so in the late 1700s after Hamilton recommended it. The problem with this growth model is that it relies on someone somewhere to absorb the production. If not for the free market ideologues in the export markets advocating for lowering trade barriers, these growth miracles probably wouldn't have happened to the same degree. The US isn't advocating free trade out of misguided benevolence, equal access to markets is what it considers 'fair'.

taffer 5y ago
I thought that import substitution had long been discarded as an explanation for economic growth in Japan, Taiwan and South Korea. These economies were much more open than other countries at the time. A good counterexample would be Argentina, which tried import substitution without opening up to trade - and failed miserably.
- strangeattractr 5y ago
  Honestly, Argentina has tried almost every style of economic management and failed. As I said they were investment led growth miracles, but I think that people who dismiss the importance of exports to these countries are extremely misguided. Exploiting excess labour for labour intensive industries e.g. garment manufacture in export markets they gained much needed income to import raw materials needed for heavy industry. By suppressing wages and thus consumption, they made savings available to invest into capital intensive industry which then came to dominate their exports. Once they had developed sufficiently the investment led growth becomes self-sustaining. If your exports are growing at 20% p.a. as Japan's were in the 60s and 70s, investment in infrastructure becomes justified particularly when the country is underinvested after a war. But the shift to consumption led growth is difficult to achieve, it's why you see debt to GDP climb after the period of initial growth as malinvestment becomes common. Consumption's share of GDP in South Korea is still extremely low, Japan's only began to climb after complete collapse in 1990, China's is the lowest of all at 55%.

taffer 5y ago

I thought that import substitution had long been discarded as an explanation for economic growth in Japan, Taiwan and South Korea. These economies were much more open than other countries at the time. A good counterexample would be Argentina, which tried import substitution without opening up to trade - and failed miserably.

strangeattractr 5y ago
Honestly, Argentina has tried almost every style of economic management and failed. As I said they were investment led growth miracles, but I think that people who dismiss the importance of exports to these countries are extremely misguided. Exploiting excess labour for labour intensive industries e.g. garment manufacture in export markets they gained much needed income to import raw materials needed for heavy industry. By suppressing wages and thus consumption, they made savings available to invest into capital intensive industry which then came to dominate their exports. Once they had developed sufficiently the investment led growth becomes self-sustaining. If your exports are growing at 20% p.a. as Japan's were in the 60s and 70s, investment in infrastructure becomes justified particularly when the country is underinvested after a war. But the shift to consumption led growth is difficult to achieve, it's why you see debt to GDP climb after the period of initial growth as malinvestment becomes common. Consumption's share of GDP in South Korea is still extremely low, Japan's only began to climb after complete collapse in 1990, China's is the lowest of all at 55%.