No Great Convergence, but not Myth: Stabilization and Growth in East Asia, 1990-2018

Along with global economic integration through trade and financial flows, emerging market economies (EMEs) have become increasingly affected by global fluctuations and structural changes. Also, despite their apparent income convergence since the 2000s, their growth performances have become differentiated across regions. This paper overviews how EMEs in East Asia have coped with these circumstances since the 1990s, and assesses their economic performances from the aspects of both short-run macroeconomic stabilization and long-run economic growth in comparison with other regions. Scrutinizing monetary regime choices in the policy trilemma, dynamic patterns of total capital flows as well as by types of capital, saving-investment gaps and growth finance, and sources of economic growth, the exceptional income convergence of East Asian EMEs imply the following lessons, being apparently heterodox to conventional views: Given volatile global capital flows in the imperfect capital market, in small open economies such as EMEs, 1) for macroeconomic stabilization, exchange rate stability supported by managed float and capital controls is a more reasonable choice than the conventional mix of free float and open capital account, and 2) for economic growth, domestic savings are more reliable and important source of growth finance than foreign capital inflows. In fact, it turns out that 3) capital accumulation has been more important source of long-run economic growth than TFP growth throughout both advanced and emerging market economies. It should be noted, however, that 4) excessive capital accumulation could lead to relatively lower welfare levels than what income levels can attain.