Paul Krugman on economic growth

let’s go back to 1960’s. Russia’s pace of economic development almost frightened the American government. “No free lunches” seemed to be the motto of soviet economic development model in Stalin era. It isn’t necessarily communism, it is purely a willingness to save – forgo consumption for future benefits- asserts Krugman in his paper.
Economic growth is conventionally touted as sum of input growth and efficiency growth. The latter requires a growth in the output per unit input. The soviet growth model in 60’s was based on the effective mobilization of resources scattered through the geographical boundary (workforce and capital), but the output per input (or efficiency) did not increase. It’s a mere increase in volume of inputs. Same can be ascribed to the Asian model of growth.
For long Asia had been capital starved and labor abundant. In order to sustain the current high growth rate and par up to the US, Asian countries emphasis on ‘growth through inputs’ ought to expand to that of ‘growth through efficiency’. In that regard, Japan is not an Asian story. It had risen through both simultaneous growth in input and efficiency. The slowdown here of course is attributed to the glut of capital and lack of labor volume and efficiency.
Now China. Like Russia and most other Asian countries, its growth is attributed to deferred gratification – save now eat later. There was a small increase in efficiency too, after the Maoist regime. But unlike Japan, this gain in efficiency is not a one-time recovery that showed exceptional short-period growth. Growth is buoyed by capitalism but kind of suppressed by socialism. Hence, it shows a lasting and sustainable recovery. Their policies are always on the conservative side, so they haven’t gained radically – which makes me want to conclude that there is a lot of place for growth still.

Finally, the point I’m trying to make is that growth in Asia has predominantly been input-driven (input rise = output rise / higher GDP). Growth in future is likely to be efficiency-driven (better ways of doing things, know-how, human capital, technology and R&D, etc). The way I understand it, it’s a two-stage process. Japan ofcourse did both at once and tired out!

http://web.mit.edu/krugman/www/myth.html

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