East Asia’s Big Leap Forward

Abstract

In the past three decades, the East Asian economies have had some of the highest economic growth rates in the world. Their economic growth can be described as a region-wide wave of economic transformation, beginning with Japan, followed by Korea and Taiwan, and currently observed in the growth of the Chinese economy. Rapid economic expansion is also anticipated in the Southeast Asian countries. The purpose of this thesis is to study the reasons for the economic growth in the East Asian economies by comparing it to the economic growth of Europe in order to show that East Asia’s growth can be described by simple economic theory and can therefore be replicated. These theory-based reasons for East Asia’s economic growth are heavy investments in education and technology. My thesis supports the second of two models of economic growth. The first is the neoclassical growth model, which is more traditional and argues that an economy grows through the accumulation of human and physical capital. The second, however, makes the case for economic growth through the accumulation of ideas instead of capital. Ideas can increase the productivity of the economy because they can spread to a large number of individuals and benefit many, whereas benefits from capital are directed mainly to the owner of the capital. The economic growth potential due to ideas is extensive, whereas the economic growth potential due to capital is limited. I begin by introducing the economic growth of East Asia relative to Europe, and find that it follows a convergence process consistent with economic theory. The East Asian countries are, however, growing by a different method than Europe because of their investments in education and technology. The East Asian countries have expanded educational attainment more than the European countries during its economic growth process. Increased educational attainment is linked to the expansion of the high-technology industry, which is the type of industry that conducts the most research and development (R&D). More intense R&D is important because it leads to a greater amount of patenting. R&D and patent growth provide a window into the overall technological advancement of the East Asian and European countries and illustrate that the East Asian countries have greater technological advancement as a result of their growth of education advancement. There are several policy implications for my findings. The thesis underscores the importance of education in promoting technological advancement, and indicates that education programs to increase the educational attainment of a population, for example by providing universal grade school education and subsidizing college education, would lead to positive economic benefits. This education push could then be augmented by policies supporting R&D to enhance innovation and by policies supporting the exchange of ideas, such as net neutrality. The country-wide focus on enhancing education and promoting technological development leads to economic growth, as evidenced by the big economic leap forward of the East Asian countries.