1881. The Asian Miracle and Modern Growth Theory

Richard R. Nelson and Howard Pack
(February 1998)

The policy differences between "accumulation" and "assimilation" growth theories may be much smaller than the conceptual or analytic differences. Can the Asian miracle be explained in terms of capital investments? Or were entrepreneurship, innovation, and learning significant factors in the rapid growth of the Asian tigers?

In the past 35 years, China, Hong Kong, Korea, Singapore, and Taiwan (China) have transformed themselves from technologically backwards and poor economies to relatively modern, affluent economies. Each has experienced more than a fourfold increase in per capita income. In each, a significant number of firms are producing technologically complex products competitive with firms in Europe, Japan, and the United States. Their growth performance has exceeded that of virtually all comparable economies. How they did it is a question of great importance.

Virtually all theories about how they did it place investments in capital stock at the center of the explanation. Nelson and Pack divide most growth theories about the Asian miracle into two groups:

• The "accumulation" theories stress the role of capital investments in moving these economies "along their production functions." What lies behind rapid development, according to this type of theory, is very high investment rates. If a nation makes the investments, marshals the resources, development will follow.
• The "assimilation" theories stress the entrepreneurship, innovation, and learning these economies went through before they could master the new technologies they were adopting from more advanced industrial nations. They see investment in human and physical capital as an essential but far from sufficient part of assimilation. In addition, people must learn about, take the risk of operating, and come to master technologies and other practices new to the country, if not the world. The emphasis for assimilation theorists is on innovation and learning, rather than on marshalling. If one marshals but does not innovate and learn, development does not follow. These are complex theories that raise as many questions as they answer.

Nelson and Pack discuss differences in the way the two groups of theorists treat four matters:

• Entrepreneurial decisionmaking.
• The nature of technology.
• The economic capabilities possible with a well-educated work force.
• The role exports play in a country's rapid development.

The differences between the theories matter because they affect our understanding of why the Asian miracle happened and because they imply different things about appropriate economic development policy.

This paper—a product of the Development Research Group—is part of a larger effort in the group to study the impact of public policy on growth. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Cynthia Bernardo, room MC2-501, telephone 202-473-1148, fax 202-522-1154, Internet address cbernardo@worldbank.org. (44 pages)

The full report is available in PDF format.