Question

Do you agree with Krugman’s argument? Why or why not?

asia's miracle

Answer 1

Krugman claims that there is no miracle in Asia’s exceptionally high growth rates because it is to be explained by high investment rates. He is wrong.

Two definitions of miracle”:

(1) you cannot explain the miracle by rational argumentation; and

(2) the pheonomenon is “exceptional”, “spectacular”, “off the charts”, etc….

By both definitions, Krugman is wrong. First definition: the miracle is explained, by Krugman himself (drawing on the work of Allwyn Young, who was a Columbia student), as “due to” exceptional investment rates rather than exceptional or high technical progress.

Second definition: the growth rates, and in turn the investment rates, are truly exceptional : no other group of countries, in any historical period, have ever had such high growth rates of income and of productive investment over a sustained period of 2-3 decades.

Fact 2: Krugman claims that, since the Asian growth depends on investment rather than technical progress, it will slow down because, according to the law of diminishing return,s if you accumulate capital relative to labour, you get lower returns to capital, i.e. the added income you get from more investment is steadily less. So, high rates of investment begin to yield lower income growth. I.e. Asian “miracle” growth rates of income will vanish soon “due to diminishing returns”.

Krugman is wrong: First, other researchers have found that, if you make estimates decade by decade, instead of for 3 decades together, then you can detect that these economies are improving their technical change. This is to be expected. Almost everyone starts by first learning to do things by “reverse engineering”, i.e. taking a watch apart and putting it back together; then they graduate to inventing marginal improvements in products and processes; then they innovate in products (e.g. Japan invents Sony Walkman now) & then take to inventing new processes and technologies (e.g. digital technology). So, naturally these splendid economies also should show increasing technical achievements, especially in industry.