"Economic Growth and International Trade:
The Case of Hong Kong"

Win Lin Chou
, Chinese University of Hong Kong
Kar-yiu Wong, University of Washington and Chinese University of Hong Kong

presented at the conference on "Dynamics, Economic Growth, and International Trade," July 22-23, 1997, Hong Kong.

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and trade


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The ''new'' growth theory, which is sometimes labelled as the endogenous growth theory, has postulated several important factors of growth, and many attempts have been made to apply these factors to explain the growth of different economies at different times. While the success of this theory on the empirical ground in explaining economic growth is mixed, one thing is clear: This theory has drawn economists' attention to several growth factors and shown how these factors can be modelled mathematically. At the same time, economists have also paid attention to the success stories of growth in some East Asian countries, the so called newly industrialized economies (NIEs). It is very rare in the history that an economy could grow with the tremendous rates the NIEs experienced, and for so long. The more amazing thing is that these economies are quite different in many aspects, and it is difficult to imagine why they are so successful in economic growth: They range from small ones like Hong Kong and Singapore to bigger ones like Taiwan and Korea; they range from extremely free economy like Hong Kong to fairly government regulated one like Korea; and they also range from economy like Hong Kong that experiences a shrinking manufacturing sector characterized by mainly light industries to one like Korea that depends vitally on heavy industries. Similarities between these economies can also be found: All are deeply influenced by Eastern culture and all depend extremely heavily on foreign trade. The natural questions are, how could these economies grow so rapidly and for so long, and how may other economies learn from their experience?

Like so many other economics theories that have become controversial, the answers to why these economies grow so rapidly are far from unanimous. On the one side, Young (1992, 1994, and 1995) argue that the growth of these economies in the past decades is due mainly to factor accumulation while Kim and Lau (1994, 1996) estimate that the factor productivity growth rate of these economies in the previous decades was practically zero. On the other side, Fare and Grosskopf (1997), Dessus, Shea and Shi (1995), and Liang (1996) measure considerable growth in factor productivity in these economies. Furthermore, Van and Wan (1997) suggest a theory to argue that an Asian economy can grow with factor productivity improvement through learning by doing and physical capital accumulation. In their model, physical capital accumulation is the consequence, not the cause, of growth.

This paper focuses on one of these NIEs, Hong Kong, and tries to identify some of the factors that have contributed to the growth of the economy in the previous decades. Hong Kong is chosen as the case of study because we feel that it is not under any significant government interventions and regulations, and its economic structure is close in many ways to what the neoclassical theory describes. The purpose of this paper, however, is not to get into the controversy of zero versus positive (or small versus large) factor productivity growth; rather, it wants to suggest a fairly new technique to measure growth factors and to help us understand better the growth and trade experience of this economy.

The theoretical foundation of the approach suggested in this paper is based on the unified framework suggested in Long and Wong (1997). A general framework was suggested to incorporate several important factors of growth, and it reduces to several endogenous growth models suggested in the literature. The main feature of the econometric framework proposed here is that the factors of growth are included in the estimation. This allows us to better and more directly estimate the contributions of these factors of growth.

The approach suggested and used in this paper can be contrasted with the one that has been used in many papers. In the latter approach, factor productivity is measured as the residual in the estimation of a economy-wide production function, and then analysis is provided to explain how this residual may be due to factors such as education. In the present approach, we incorporate various factors of growth in the estimation directly.

Comments on this paper are most welcome. Please send them to karyiu@u.washington.edu.

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