Tale of Four Economies - South Korea, Taiwan, Malaysia and Indonesia

All four economies (mentioned above) suffered from Japanese occupation. Since then they have revived with different speeds on growth. Korea and Taiwan have GDP per capita on par with western economies. Malaysia is in the upper middle-income range while Indonesia is still struggling in the lower middle-income range of GDP per capita below USD4,125.

Why do some countries grow faster?

In 1967, Malaysia led the other three economies on GDP per capita. Within two years, Taiwan overtook and in 1977 South Korea overtook Malaysia. Some observers remarked that together with Japan, Hong Kong, Thailand and Singapore, these were the Asian tigers.

The 1997 Asian Financial Crisis hit these economies hard. Korea GDP per capita slumped by 33.4%, Taiwan by 8.5%, Malaysia by 29.6% and Indonesia by 56.4%. But by 2017, the average income in Korea hit nearly USD 30,000, Taiwan to USD 24,000, Malaysia at USD 9,952 and Indonesia at USD 3,847.

Three things determine a country’s productivity: labour, capital and total factor productivity (TFP) which represents efficiency and technology.

According to Asian Productivity Organization, TFP contributes 14% to Korea’s growth between 1970 and 2016. For Taiwan it was 24% for the same period while for Malaysia it was only 5%. Indonesia was worse at 1%. Small contribution of TFP is related to low investment in research and development. In 2017, Indonesia spent less than 0.2% of its GDP on R&D, while for Korea it was 4.55% of GDP, Taiwan about 3.16% and Malaysia around 1.3% of GDP.

An IMF working paper showed that Korea and Taiwan relied on technological innovation by local companies. Malaysia relied on transfer of technology from multinational corporations (MNCs). These MNCs are reluctant to transfer technologies to local companies, leaving host countries supplying only raw materials. Training was also minimal. Private companies, both in Malaysia and Indonesia, have little to spare to fund R&D.

Strong evidence from Korea and Taiwan suggest that to increase TFP, domestic industries must invest in R&D. In Taiwan and Korea, universities and research organisations support local industries in R&D. Government allocations run 3-4% of GDP for R&D.

In Malaysia, the problem is many local universities’ research capabilities are nascent or deficient. Many “professors” prefer not to be involved in research and/or present papers for ‘A’ grade journals. More recently, this is changing because of university rankings. However, if the Government allocates sufficient funds, provides clear criteria for excellence at selected universities (both local and foreign branches), supports labs and ecosystems for R&D, we may still have hope. Otherwise, we end up organising Dignity Congresses!

Reference:

Chairil Abdini, How South Korea and Taiwan grew their economies, while Malaysia and Indonesia trailed behind, http://theconversation.com/