More Light on a Miracle
The Growth Process in East Asian Manufacturing Industries: A Re-examination
by Chia-Hung Sun; Edward Elgar, Cheltenham, UK and Northampton, US, 2004; pp xiii + 222, price not stated.
J C SANDESARA
T
But when one looks at what is already known about NICs, one is not quite sure of what that knowledge conveys exactly. Second, some part of that knowledge needs to be probed further, so as to arrive at less general or more specific findings with a view to be able to suggest more meaningful policies and measures. There is, therefore, a need to re-examine that old knowledge and to explore further, for new knowledge on the growth experience of NICs. This book addresses these two themes.
Need for a Re-examination
Such a re-examination is called for because scholars have offered two different explanations of growth in these countries. One group has concluded that high growth was “sufficiently” due to “factor accumulation, i e, of labour and capital”, with little or no role for total factor productivity (TFP) growth. The other group has assigned an “important” role to TFP growth, with an implicit meaning that factor accumulation has a less important role in that growth. These different strands, as explained by the author, have emerged because of different data sets used, different periods covered, different methodologies employed, etc. More light can be thrown if that experience is analysed by a superior methodology and on the basis of a consistent set of data. This is done in this book with reference to manufacturing industries of these countries by taking the panel data from UNIDO’s Industrial Statistical Database and analysing the same on the varying coefficients frontier model.
The more important contribution of this book, however, lies in its decomposition exercise. The author has decomposed TFP growth into technological progress and technical efficiency changes, and estimated their relative contributions to TFP growth. The former is defined as progress stemming from innovation and diffusion of technology and is measured by a shift in the production frontier from one period to another. The latter reflects the movement of a firm’s actual output to maximum potential output, and is measured by the distance between the two – the less the distance, the more the efficiency.
The book is divided into seven chapters. The first chapter is introductory, and the last chapter is composed of a summary and conclusions. The in-between chapters, in that order, are on literature review, methodology and data sources, characteristics of manufacturing sectors, sources of output growth and sources of TFP growth. Further details on industries and years covered, methodology, estimates, etc, are given in the appendix. The book is well presented, and is marked by a clarity of thought and expression. A detailed bibliography adds to the value of the book. This reviewer highly recommends this very meticulous research work to all those who would like to know more about the “miracle” of high growth of NICs in their manufacturing industries.
Findings and Implications
We first summarise the main findings of this book, taking the long period as a whole, and give the gist of the policy implications which follow therefrom. Except for Hong Kong for which the period is 1976-97, for other countries it is 1970-97. The average annual growth rate of GDP was 6.6 per cent in Hong Kong, 3.6 per cent in Japan,
7.7 per cent in Korea, 8 per cent in Singapore and 7.9 per cent in Taiwan. Thus, Japan was a low growth country relative to the other four countries. The average annual growth rate for manufacturing value added for the above period was –0.2 per cent in Hong Kong, 3.7 per cent in Japan, 7.5 per cent in Korea, 9.4 per cent in Singapore and 8.4 per cent in Taiwan. Thus in manufacturing, Hong Kong and Japan are negative and low growth countries and the other three are high growth countries. We pursue the manufacturing story in detail.
The evidence strongly supports the role of TFP growth in Hong Kong, Japan, Korea and Taiwan (only for the 1981-91 period) with average annual TFP growth of 2.7 per cent, 2.5 per cent, 3.6 per cent and 2.8 per cent respectively. All the same, except in Japan where TFP growth contributed 52 per cent to output growth, its contribution was less – 25 per cent in Korea and 38 per cent in Taiwan – the balance being due to factor accumulation. In Singapore, TFP growth played practically no role, output
Economic and Political Weekly September 30, 2006
growth almost wholly being due to factor accumulation. The (slight) decline in output growth in Hong Kong occurred in spite of high TFP growth, which was countered by a decline in factor accumulation (resulting from a shift in low value added manufacturing industries to China to benefit from low labour and other costs).
Of the components of TFP growth – technological advance and technical efficiency improvement – the former was completely responsible for raising TFP growth in Japan, and was the main factor in Hong Kong and Korea where technological efficiency change accounted for only 10 and 30 per cent respectively. These findings underline the need to improve technical efficiency in Japan and Hong Kong substantially, as also in Korea, though to a less extent. On the other hand, Singapore and Taiwan need to improve upon both – technology and technical efficiency.
It must be remembered that these policy implications are derived from the evidence for the 1970-97 period. Whether they have relevance for a later period or not, can be known only on the basis of the evidence of that period. There is, thus, a need for research on these lines for the post-1997 period, particularly so when the economies of these countries have passed through several important changes. Such a research should also assess the relative contributions of factor accumulation and TFP growth with decompositions of technological advance and technical efficiency improvements to output growth of manufacturing industries in the longer period of three and a half decades of 1970-2006.
Relevance for Indian Industry
This review may be concluded with a couple of thoughts on the relevance of the message of this book for Indian industry, which struck me immediately. One is on research on productivity and another on SSI policy.
To be sure, there are a number of studies on productivity/TFP in Indian industry covering varying periods of the two decades ending in the mid-1990s. Evidently, work is needed to update them, covering the later decade ending 2005-06 and, if found suitable, using the method followed in this book. Work is also called for to apportion the relative contributions of increase in input, and the two components of TFP growth – technological advance and technical efficiency improvements, to the output growth of Indian industry in the larger period of three decades or more ending 2005-06. A researcher interested in pursuing these lines of investigation would find this book immensely useful.
As regards the SSI policy, two comments are called for: one on the definition and another on the reservation. A SSI unit is defined as an industrial unit with investment in plant and machinery (valued at installation/purchase prices) not exceeding Rs 1 crore. Now if the cost of a technologically advanced machine to be installed together with the cost of the already installed plant and machinery exceeds Rs 1 crore, the unit ceases to be a SSI unit, resulting in the denial of benefits available under the SSI policy. An important plank of this policy is reservation of a number of specified items for exclusive production in the SSI sector. When its investment exceeds the ceiling, a SSI unit of the reserved sector is exposed to the (adverse) competition in its products from technologically advanced, larger, more efficient units. This fear tends to keep the unit small, within the ceiling, and it constrains TFP growth through technological progress, which is additionally already constrained by technical inefficiencies known to be prevalent in this sector. All this underlines the need, as it would follow from the lesson of this book, to remove the ceiling and the reservation completely. But these drastic measures may not be acceptable at the present juncture. So the next best lesson practically is to raise the ceiling substantially and dereserve largely gradually. As of the practice of this lesson by the government: of late, dereservation has been going on; but, in general, while nominally the ceiling has been going up for long, in real terms it has remained more or less at the same level, around Rs 10 lakh.1
EPWEmail: jcsudebu@hotmail.com
Note
1 As of October 2004, the number of items in the reserved category was 605, brought down from its peak of 873 in 1984. Since then, the SSI ministry had identified 180 items for dereservation. With this change, the number in this category will be 425. The ceiling in current prices in 1966-67 was Rs 7.5 lakh for a SSI unit and Rs 10 lakh for an ancillary unit, and in 2000-01, Rs 1 crore for both (this is also the prevalent ceiling now). The 1966-67 ceilings in real terms are Rs 9.5 lakh and Rs 12.6 lakh and the 2000-01 ceiling is Rs 10.2 lakh. The nominal asset values have been deflated by the wholesale price index for machinery and transport equipment in 1970-71 prices.
Economic and Political Weekly September 30, 2006
