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.

Comments

In 1992 the PAP was still deeply worried about the 1985 recession, first since independence; it had been interpreted as a failure of the attempt to engineer structural shift to high-value-added electronics. It resorted to cautious neoliberalization, more or less - the move to intervene in biotechnology was much less committed than previous attempts. Certainly there was no attempt to engineer wages at a national level, or manipulate the national savings rate, for example - Singapore did both of these in the 1980s. Young might have been pessimistic about Singapore's future under aggressive industrial policy, but so was Singapore's regime, and they intervened less.

Has anyone updated the data to include the 1997 shock and the rebound of both countries? One observes that in the reduction of industrial action, Singapore did resort to another kind of intervention, namely massive guest worker immigration (and naturalization), from 5~% in 1980 to 25~% of the total population in 2010, across which time the population doubled (2.5~ million to 5~), even while running very high emigration rates. GDP per capita growth still remains admirable, but it does do funny things to the numbers. Hong Kong also grew, but less (5~ to 7~ million) and with also very high emigration rates. One wonders what kind of human-capital theory survives under such massive population shift, really.

In both of these states, politics might affect the quality of statistics slightly. The idea that Singapore's current wealth exists through massive state mobilization is rather ideologically convenient for the regime. Conversely Hong Kong and the alleged lack thereof - ruled from Beijing or London, Hong Kong has always had a rather corporatist edge to the areas where it does intervene (real estate, education, etc.).

One particular change in Singapore - the substitution of a Cantonese-speaking population with a English/simplified-Mandarin one in the span of three decades - should logically have been enormously costly. Yet it wouldn't have shown up in the TFP data directly, hard drives don't care what language their assemblers speak. It's very expensive human capital that mostly changed who Singapore traded with, compared to Hong Kong - not that Singapore would ever have been able to outdo Hong Kong at entrepôt with China, for obvious reasons. Plus, the value of cementing a particular British-influenced political institution, in a way that Hong Kong conversely obviously could not, again doesn't show up in the numbers.

On reflection, maybe Singapore did have astonishing TFP growth. Unfortunately, it's all carried by Singaporeans now in Australia, who find moving to another English-speaking country genial.

The language shift is arguably still underway - Mandarin native speakers repeatedly assured me that the Mandarin spoken in Singapore was lousy. As for the English, most people fluent in English would support that English across the board could be better (for the top decile, its definitely fluent if with a slightly strange accent, but once you go to the average person, Singlish needs quite some adjustment)

Cantonese and Hokkien have certainly been successfully eliminated; I've been told that the younger generation almost uniformly cannot speak dialects, besides a handful of swearwords. So whatever Mandarin they speak now is what they have. But demanding universal bilingualism between two such starkly different languages was probably excessive anyway, and the Mandarin probably suffers without a monopoly.

As for English... well, let's be honest here. Go to England and outside the top decile, English as she is spoken takes some odd turns.

Granted (same for the US, anyway) but in both the UK and the US you have a better chance of them actually understanding you...

According to the Singapore Census, more than 50% of Singaporean between the age of 10 speak English as their first language. For those above the age of 65, the number goes down to 12.5%. On the other hand, less than 1% under ten speak Chinese dialects in Singapore. Among those above 65, the number goes up to 54%. 28% of those under ten speak Mandarin compared to 19% of those above 65.

Wait...relaxing immigration restrictions is interventionism?

It was certainly a conscious policy change toward an anticipated set of effects, if you prefer, and maintaining the prevailing social order under high guest-worker migration requires a lot of ancillary state actions.

I don’t know that the latest literature on this says. But 10 years ago it was accepted that TFP’s focus on capital accumulation growth accounting had demonstrated that neither sector-specific governed-market (activism) nor neoclassical (neoliberal) trade openness and FDI-led productivity growth had the whole story. Maybe aspects of all three together explained the growth of investment levels overall. Plus there always was (in those days) a simple (possibly wrong) political economy story about the long run relative sustainability of activism (Singapore) versus liberalism (Hong Kong). And then there was the Asian financial crisis, which changed the whole panorama in every way. These two city states change super fast economically and super slow politically. Economic innovation and social order might be easier to combine in city states than countries.

"a cautionary tale of how difficult it can be to establish firm knowledge through economics": Economics can be handy for proving daft ideas daft - does it really offer much more?

Economic debates in a nutshell: Your daft ideas are dafter than my daft ideas! My ideas are the least daft!

It does look like that at least for now, gdp growth has slowed down. Since 2008, export growth has pretty much stopped, and exports of high value electronics and machinery have actually been declining for the past five years. Its only oil and financial services exports that have kept the Singapore exports from declining over the period. Growth expectations are a lot lower to, closer to around 4.0% according to the IMF World Economic outlook. According to the World Bank, Singapore's population increased by 3% in 2009. Even if we assume that Singapore's population growth slows down, this still means per capita growth rates aren't very high compared to the past and similar to what you'll see in the west.

I checked http://graphs.gapminder.org, then clicked on Wealth and Health of Nations. If I did everything correctly, the two time series log Income per Person at PPP of Hong Kong and Singapore from 1960 to 2010 in full-screen mode are indistinguishable. With a substantially higher savings rate in Singapore than Hong Kong over the whole period, Singapore is throwing real resources out the window.

Alwyn Young's case remains cogent.

As an aside did the transition to China cause visible kinks to the trends of any of Hong Kong's economic indicators? Wondering if that event has changed Hong Kong's economic trajectory at all.

What economic indicators there could one possibly separate from the 1997 shock?

Possibly, but that is arguably the "proximity to China" premium, rather than TFP differential. I am more optimistic about Singapore, looking forward.

Typo in the title: Alywn

Immigration and emigration don't seem to figure much in this sort of analysis. But it's been a significant difference between the two cities. And Singapore has conscription for males, Hong Kong does not. Aggregation is limiting.

"Ever since Michael Mandel" could somebody explain that?

What about this one?
http://www.aeaweb.org/articles.php?doi=10.1257/mac.3.2.29

I would strongly disagree that his empirical research has been "careful". There is a huge empirical controversy regarding his Gift of the Dying Africa AIDS paper where it is alleged that he miscoded important measurements of AIDS as zeros when they should have been missing- and all the results are sensitive to this. See the NBER paper "HIV and Fertility Revisited" by Kalemi and Turan (2010) for details.

I say the A. Young paper was wrong, because TFP is wrong, right from the start

Its not wrong per se, its just a black box that really explains very little.

Is looking at manufacturing productivity really the right way to judge Singapore and Hong Kong? In reality most of their wealth comes from people outside of the countries looking for capital preservation not capital returns. Basically Singapore, because of it's heritage and explicit policies since independence, manages to maintain credible the promise of low corruption, strong property rights and a fair court system. All the surrounding countries have a greater degree of risk in these areas. I know people who have specifically invested in Singapore knowing that the returns are lower than they can get in their own countries (potentially even negative) but accept that for at least part of their wealth. They also like the immigration policies of Singapore, they believe they can always live there if things turn nasty at home. Judged on this policy the Singapore Government has done a pretty good job at keeping the Singapore brand clean and attractive to the regional rich.

The Singapore government does probably waste part of the rent this brand creates to keep the working classes busy and occupied, but that is social welfare by another way rather than industrial policy.

One other factor in the analysis of Singapore's economy - there is tremendous foreign investment in refining and chemicals. The returns from these assets are frequently taken in subtle ways (eg trading profits) that need not appear in Singapore national accounts.

another +1

Can anyone provide a brief comparison between this (1992) paper and Young's more famous "Tyranny of Numbers" paper?

If we only had a prediction market...

Alwyn Young is a snake-oil salesman. His entire line of research is suspect. Look at his China paper "Gold into base metals", when he gets negative TFP growth from 1978-1998, and repeatedly asserts that Chinese growth was all a mirage. He has just taken the counterintuitive result a bit too far.

If you read his papers carefully, it's like picking up a rock. All kinds of ugly things come out. In 'Tyranny of Numbers' he simply made up labor force participation figures for Singapore for 1965 (note how the data in the key chart at the beginning is not even cited). Investment in housing subtracts from TFP. The data everywhere are messy, the estimates for things like capital stock are rough, and yet he comes up with point estimates for TFP sin error bounds.

Lastly, he's got a paper on Africa where he says that in contrast to China, sub-Saharan Africa is doing really well...

The only thing his papers really show is that it is easily possible to get a wide variety of estimates for TFP. And when you've got multiple inputs, this probably isn't just due to data issues. TFP depends on what kind of model you're assuming. I left Young's exercises preferring to look at GDP per capita in which the Tigers and China stack up well, and sub-saharan africa does not.

Can it be true that no-one has mentioned investment in double tax treaties? This has been for the last 10 years in particular the difference between Singapore and Hong Kong. (this is consistent with ChrisA's comment)

Econometrics fail again? Another win for the Austrian perspective, I suppose.

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> "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."

There is a stubborn and determined tendency to interpret Singapore as a semi socialist command economy. This just seems surreal to me.

A command economy requires commands, hordes of regulators, businessmen being fined, businessmen going to jail for economic crimes that are not readily distinguishable ordinary business transactions. I just don't see this in Singapore. We don't see Singaporean businessmen doing the perp walk for undefined and undefinable offenses such as insider trading and so forth. We don't see the Singaporean government issuing legislation thousands of pages long with a separate paragraph for every business deal and every regulator.

A command economy requires commands: Commands are visible as regulators, regulations, legislation, teams of bureaucrats on the revolving door between business and government. If Singapore is a command economy, they are magic invisible commands that work through mysterious pre ordained harmony between government and business, which strikes me as much resembling invisible pink unicorns.

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