How Krugman forgot agriculture and misread the sources of Asia’s growth

In his famous 1994 essay ‘The Myth of Asia’s Miracle’, Paul Krugman argued that the growth of output per person in Asia was due almost entirely to increasing primary factor inputs per head of population – raising labour force participation and adding capital to labour. He called this ‘perspiration’, which he distinguished from ‘inspiration’ – productivity growth derived from technical change. According to Krugman’s sources, the latter contributed very little. The article rightly discounted the ‘miracle’ rhetoric that had been applied to Asia’s rapid economic growth over the preceding two decades, but it missed a key point. By focusing on the economic record of enclave, city-based economies like Singapore and Hong Kong, which lack traditional agriculture, Krugman overlooked the role of agriculture and the process of structural transformation. This is the mechanism through which workers relocate from low-productivity employment in agriculture to higher-productivity employment in industry and, more especially, services, raising overall labour productivity. The present paper demonstrates the importance of this matter, using data for Thailand and Indonesia. It shows that structural transformation contributed 47 per cent of long-term growth of labour productivity in Thailand and 28 per cent in Indonesia.