What happened to Alywn Young’s Hong Kong vs. Singapore contrast?

From 1992, the paper is here (note by the way an interesting written comment from Paul Krugman at the end).  The basic story was that Hong Kong and Singapore had obtained their prosperity by two different paths.  Hong Kong had made real productivity gains, but Singapore grew just by throwing more factors of production at the problem of economic growth, including a massive dose of savings and investment, including foreign investment.  The share of investment in Singapore’s gdp rose from 9% in 1960 to 43% in 1984, while Hong Kong’s remained roughly steady at about 20%.  If you back this out from national income statistics, you can measure that Singapore had very low levels of total factor productivity growth.

But should we believe that story, which by now is twenty years old?  After all, these days, Singapore is extremely interested in cutting-edge science and on the frontier in the biosciences and with satellite launches, among other areas.  Hong Kong has done fine, but as a finance center and entrepot for the China trade.  Not many people look to them as ideas leaders.  Maybe both countries somehow turned on the proverbial dime, but I don’t believe the initial Young result for a few reasons:

1. Ever since Michael Mandel, I am skeptical about backing out productivity claims from “value-added” data for extremely open economies.  The quality of the data do not support extremely strong claims, and Krugman stresses this point in his comment.  By the way, in the Singapore data TFP growth is negative in some sub-periods; see pp.24-5, can you believe -8% for 1970-1990?  I take this as indicative of problems in the data and I am not persuaded by Young’s suggestion that it results from cyclical factors.

2. There is much talk about Singapore bringing in so much capital, and they did.  But getting all that capital is not as simple as throwing a switch.  Presumably the capital — especially the foreign capital — comes in part because investors expect a favorable productivity environment, if only prospectively.

3. Sometimes capital can “carry” or “contain” TFP growth; imagine spending money on a new industrial robot.

4. Some of the measured “TFP growth” may in fact reflect underpriced labor, including underpriced labor migrating from the PRC into Hong Kong.  Those workers turned out to be more productive than people were expecting, which creates an apparent TFP residual, and migration of this nature played a larger role in the Hong Kong economy than in Singapore.

5. Young’s measures make him sound skeptical about the future (post-1992) course of economic growth in Singapore, and this has hardly been borne out by the facts.  I wouldn’t call this an explicit or formal prediction of his theory but read the paper and the pessimism seeps through, albeit subtly.  Is this passage (p.32) prescient or a sign of a mistaken assessment?:

Although I have presented evidence earlier, on the remarkable rate of structural transformation of the Singaporean economy, I feel that the words of Goh Keng Swee, Singapore’s Minister of Finance, in March 1970 are equally compelling: “. .. the electronics components we make in Singapore require less skill than that required by barbers or cooks, involving mostly repetitive manual operations.” By 1983 Singapore was the world’s largest exporter of disk drives. By the late 1980s, Singapore was one of Asia’s leading financial centers. As of today, the Singaporean government is targeting biotechnology and, no doubt, with its deep pockets, will achieve “success” in this sector. One cannot help but sense that this is industrial targeting taken to excess.

To flesh out this history, note two further points:

1. Young is long renowned for the care and quality of his empirical work.  He is the sort of researcher who might obsess for six months over a footnote.  That is one reason why he has not produced a greater number of papers.

2. This line of research (there are other papers here) was immediately hailed as successful upon its appearance.  I read it too at the time and simply assumed it was likely to be true.  Even Krugman, despite his insightful worries in his comment, ended up endorsing the Singapore result as true (that link is also an excellent essay for background on this entire set of ideas and debates).

The funny thing is, Young’s hypothesis still could be true.  It hasn’t been refuted.

But if you ask me — I don’t believe it, not any more.  I take this to be a cautionary tale of how difficult it can be to establish firm knowledge through economics.