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Important disclosures can be found in the Disclosures Appendix All rights reserved. Standard Chartered Bank 2014 research.standardchartered.com SCout is Standard Chartered’s premium research product that offers Strategic, Collaborative, Original ideas on Universal and Thematic opportunities David Mann +65 6596 8649 [email protected] Regional Research Standard Chartered Bank, Singapore Branch Edward Lee +65 6596 8252 [email protected] Regional Research Standard Chartered Bank, Singapore Branch Jeff Ng +65 6596 8075 [email protected] Regional Research Standard Chartered Bank, Singapore Branch Callum Henderson +65 6596 8246 [email protected] FICC Research Standard Chartered Bank, Singapore Branch Divya Devesh +65 6596 8608 [email protected] FICC Research Standard Chartered Bank, Singapore Branch | Global Research | 6 May 2014 Asia’s productivity: The new story Highlights Productivity, the rate of output (GDP) per unit of input (capital and labour), is a critical driver of sustainable economic growth and income. The perception that Asia is a low-productivity region is out of date. Since 2000, Asia’s productivity performance has been solid across the board. We think the slowdown in productivity since the global financial crisis (GFC) is more cyclical than structural and expect a recovery in the coming years, helped by urbanisation, reform and productive investment. It is important to separate the China story from the rest of Asia. In Asia excluding Japan and China (AXJC), the contribution of capital to GDP growth has been slowing for many years, while productivity growth has been sustained. Click here for the Scoop, an audiovisual summary of this report. Countries with low per-capita capital stocks have strong growth potential. They include China, India, Indonesia, the Philippines and Thailand. Headwinds to growth from ageing populations in Northeast Asia, Thailand and Singapore put more of a burden on urbanisation, infrastructure and reforms to boost productivity and growth. We present our estimates of the impact of demographics on Asia’s economic growth. We think China’s real effective exchange rate (REER) looks overstretched based on its relationship with productivity, while the Korean won (KRW) looks mildly undervalued, suggesting more upside potential.

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Page 1: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2014 research.standardchartered.com

SCout is Standard Chartered’s

premium research product that

offers Strategic, Collaborative,

Original ideas on Universal and

Thematic opportunities

David Mann +65 6596 8649

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Edward Lee +65 6596 8252

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Jeff Ng +65 6596 8075

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Callum Henderson +65 6596 8246

[email protected]

FICC Research

Standard Chartered Bank, Singapore Branch

Divya Devesh +65 6596 8608

[email protected]

FICC Research

Standard Chartered Bank, Singapore Branch

| Global Research | 6 May 2014

Asia’s productivity: The new story

Highlights

Productivity, the rate of output (GDP) per unit of input (capital and labour), is a

critical driver of sustainable economic growth and income. The perception that Asia

is a low-productivity region is out of date. Since 2000, Asia’s productivity

performance has been solid across the board. We think the slowdown in

productivity since the global financial crisis (GFC) is more cyclical than structural

and expect a recovery in the coming years, helped by urbanisation, reform and

productive investment. It is important to separate the China story from the rest of

Asia. In Asia excluding Japan and China (AXJC), the contribution of capital to GDP

growth has been slowing for many years, while productivity growth has

been sustained. Click here for the Scoop, an audiovisual summary of this report.

Countries with low per-capita capital stocks have strong growth potential. They

include China, India, Indonesia, the Philippines and Thailand.

Headwinds to growth from ageing populations in Northeast Asia, Thailand and

Singapore put more of a burden on urbanisation, infrastructure and reforms to

boost productivity and growth. We present our estimates of the impact of

demographics on Asia’s economic growth.

We think China’s real effective exchange rate (REER) looks overstretched based

on its relationship with productivity, while the Korean won (KRW) looks mildly

undervalued, suggesting more upside potential.

Page 2: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 2

Table of contents

Executive summary 3

Asia’s productivity story – Better since 2000 4

Productivity outlook – Labour 8

Productivity outlook – Capital 12

FX – Valuation and productivity in EM – A reality check 17

Methodology 20

Appendix 21

References 27

Additional contributors to this report include: Stephen Green +852 3983 8556

[email protected]

Regional Research

Standard Chartered Bank (HK) Limited

Kelvin Lau +852 3983 8565

[email protected]

Regional Research

Standard Chartered Bank (HK) Limited

Anubhuti Sahay +91 22 6115 8840

[email protected]

Regional Research

Standard Chartered Bank, India

Eric Sugandi +62 21 2555 0596

[email protected]

FICC Research

Standard Chartered Bank, Indonesia Branch

Chong Hoon Park +822 3702 5011

[email protected]

Regional Research

Standard Chartered Bank Korea Limited

Tony Phoo +886 2 6603 2640

[email protected]

Regional Research

Standard Chartered Bank (Taiwan) Limited

Usara Wilaipich +662 724 8878

[email protected]

Regional Research

Standard Chartered Bank (Thai) Public Company Limited

Betty Rui Wang +852 3983 8564

[email protected] Regional Research Standard Chartered Bank (HK) Limited

Chidu Narayanan +852 3983 8568

[email protected] Regional Research Standard Chartered Bank (HK) Limited

Page 3: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 3

Executive summary Economic growth boils down to three factors: capital, labour, and how they are used

– i.e., productivity. While economists may have widely differing views on economic

growth, they all agree on the importance of productivity. Strong and increasing

productivity is vital to drive wealth creation and create a successful and sustainable

economy. Capital is vital for any economy, particularly at the early stages of

development, supported by a growing and increasingly skilled labour force. However,

the ability to get more output from a given set of inputs enables real growth over the

longer term and makes a country a more attractive trading partner.

In this report, we examine Asia’s productivity track record and the outlook based on

the present quantity and quality of capital and labour. We present our estimates of

the impact of urbanisation, our measure of the quality of capital investment, and our

estimate of the impact of Asia’s ageing populations.

Key takeaways

1. We see the decline in productivity in recent years as more cyclical than

structural, and expect Asia’s growth outperformance to continue and be

sustainable.

2. Despite the recent slowdown, Asia’s productivity since 2000 has been better

than in the 1980s and 1990s. Asia has moved on from the phase of excessive

capital accumulation with no productivity growth to show for it. The reforms of

the late 1990s underpinned the productivity boost in the 2000s. Further reforms

are needed to boost productivity and growth, a theme we have explored in

previous reports (The Super-cycle lives: EM growth is key; Economic reform:

The unfinished agenda; SCout, India: Reviving growth, growth brick by brick). It

is critical to distinguish between the story in China, where capital intensity has

continued to rise, and the rest of Asia, where capital intensity has

dropped overall.

3. Urbanisation will be a significant driver of productivity as the share of agricultural

workers declines and shifts instead towards manufacturing and services.

4. Shrinking labour forces in Northeast Asia, Thailand and Singapore highlight the

urgent need to urbanise where possible and reform to boost productivity.

5. Countries with currently low capital stocks (per worker) have huge future GDP

growth potential: the Philippines, Indonesia, India, China and Thailand.

6. The quality of capital growth is what matters. We define productivity-enhancing

investment as all investment except that in residential property. This is good

news for China, Thailand, South Korea and Indonesia.

7. While the shift from agriculture to manufacturing is a source of increased

productivity, there is no specific share of manufacturing versus services that

creates optimal total factor productivity (TFP) growth. Boosting productivity

requires competitive pressure in the industry.

8. The relationship between REERs and productivity is generally strong,

particularly for China. However, China’s REER looks overstretched versus the

level suggested by the relationship with productivity levels, compared with that of

the US. The KRW looks mildly undervalued. Thailand’s REER appreciation is

supported by the economy’s relative productivity performance.

Page 4: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 4

Asia’s productivity story – Better since 2000

Asia’s productivity growth has outperformed other EM regions in the

past decade

This is a much-needed improvement from the 1990s

More urbanisation, productive investment and structural reform is

needed to build on this track record

It’s not just about perspiration The common story in the early 2000s that Asia was dependent on excessive capital

accumulation, with low or negative productivity growth, has changed. In the 1990s,

about half the Asian countries listed in Figure 1 had negative productivity growth;

today, none of them do. Asia’s growth does remain heavily skewed towards capital

accumulation relative to other emerging-market (EM) regions, as Figure 2 shows. But

productivity plays an increasingly important role, a major shift from the pattern of the

1990s. Asia’s productivity gains have also exceeded those of other EM regions.

Within Asia, we see a contrast between China and the rest of the region (see

Figures 4 and 5). While capital stock accumulation has slowed and productivity

growth has accelerated in Asia ex-Japan and China (AXJC) since the 1990s, China

has seen faster capital stock accumulation and a slowdown in productivity growth.

This indicates declining returns on investment in China. Excess credit growth is

another indication of declining returns; growth in China’s capital and credit increased

further in 2009 in reaction to the GFC and recession. In the rest of the region,

productivity growth has been positive across the board, helped by the reforms

implemented in the aftermath of the Asian financial crisis of 1997-98. In more recent

years, however, AXJC productivity growth has slowed. The question now is whether

reforms, urbanisation and productive investment growth are sufficient to enable

further productivity gains over the next decade.

We examine both quality and the quantity of capital accumulation, which is vital to

any country’s growth outlook; we also consider the importance of urbanisation in

countering the negative impact of a shrinking workforce in some Asian economies in

the coming decades. We are optimistic overall about Asia’s growth outperformance in

the coming years.

Figure 1: A better performance in Asia during the 2000s, after a mixed 1980s and 1990s

Percentage contribution to GDP growth from productivity (TFP), by decade (average)

Source: Penn World Tables, Standard Chartered Research

160

-20

0

20

40

60

1981-1990 1991-2000 2001-2013

JP US HK TH CN TW IN ID MY PH KR SG AU

-150.47

-76.70

David Mann +65 6596 8649

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Edward Lee +65 6596 8252

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Jeff Ng +65 6596 8075

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Asia’s productivity since 2000 has

been far stronger than in the 1990s

China’s productivity and capital

accumulation story is almost the

reverse of the rest of the region

Page 5: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 5

A better productivity experience in the 2000s….

2001-11 was a good decade for productivity growth in Asia, according to the Penn

World Tables. Productivity contributed c.10-40% of each economy’s GDP growth

during the period. This strong across-the-board performance was a departure from

the patchy track record of the 1990s (see Figure 1), and may have been a by-product

of the painful reforms implemented in the aftermath of the Asian crisis of 1997-98.

Compared with other EM regions, Asia registered higher growth in both productivity

and capital investment during this period. Excluding the large economies of Japan,

China and India, Asia’s productivity and investment growth still outperformed, though

to a lesser degree (see Figure 2).

. . . but recent productivity growth has been softer

After a decade of strong productivity growth in the 2000s, our estimates suggest a

more mixed productivity story for Asia in recent years. This may be partly explained

by the lack of reforms in the aftermath of the GFC, as market pressure for such

reforms was muted by indiscriminate investor inflows to emerging markets. This is

now changing. Pressure for reform has returned as markets are again being priced

according to each country’s fundamentals.

Weaker global growth may also be curbing Asia’s productivity. Productivity has

historically underperformed during periods of weak growth. This pattern is particularly

prevalent in China, where rapid credit growth from 2008-13 was mostly used for

capital investment. This resulted in a steep rise in the share of GDP growth

contributed by physical capital growth rather than productivity. The average

contribution of physical capital to growth in the five years from 2009-13 was more

than 80%, higher than at any time in the last 30 years.

Other possible causes of the slowdown in productivity growth include the rebalancing

of the world economy and the transition in the drivers of Asia’s economic growth from

external to domestic.

Figure 2: Asia’s capital and productivity growth has outperformed other EM

Average growth (%, y/y), 2001-11

Note: For this chart, Asia consists of China, Hong Kong, India, Indonesia, Japan, South Korea, Malaysia, Philippines,

Singapore, Taiwan and Thailand

Source: Penn World Tables, Standard Chartered Research

Asia

Asia-ex-CIJ

South Africa

Brazil

Turkey

Mexico

-2

0

2

4

6

8

10

Capital Productivity

Asia outperformed the US, Japan

and Australia in terms of

productivity growth from 2001-11

The slower global economy has

likely contributed to the recent

softening of productivity growth

Page 6: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 6

How Asian economies stack up against the US

The US is widely viewed as the global leader in productivity. The world’s largest

economy remains at the forefront of research and technology and has the ability to

reinvent and adapt. We believe it is important to use the US as a point of reference

when evaluating countries’ relative progress on productivity. The productivity index

presented in Figures 6 and 7 is a relative index in which the US’ 2005 productivity

level = 100. This makes it easier to assess economies’ relative status.

We identify two groups in Figures 6 and 7: emerging and more advanced markets.

There is a clear and positive relationship between productivity and income, as

reflected in the fact that lower-income groups are still some way behind the US in

terms of productivity. Malaysia is the closest to breaking out of this pack, with

government policy aimed at moving the economy towards high-income status in the

coming years. The Philippines lags the region in terms of both productivity and

GDP per capita.

Relative improvements since 2000 have been seen mostly in EM countries. China,

Thailand, Malaysia and Indonesia have improved the most over this period. In

contrast, Singapore, Hong Kong and South Korea have fallen back the most by this

measure. There are many potential explanations for why countries are at the higher

or lower end of the range. In Singapore’s case, we think one reason why its per-

capita GDP is higher than Taiwan’s is because of the higher growth contribution of

residential property investment to Singapore’s economy, which does not feed into

productivity but does generate GDP during the construction phase.

Figure 3: Productivity growth has fallen in recent years

Productivity contribution to growth (ppt), multi-year average

Source: Penn World Tables, Standard Chartered Research

2001-10

2011-13

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

ID CN MY TW TH JP KR PH AU HK SG

The slower global economy likely

contributed to the recent softening

in productivity

Page 7: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 7

Figure 4: Within Asia, China was more capital-driven…

Growth in each GDP component for China (%, y/y )

Figure 5: … while capital growth elsewhere slowed

Asia ex-China, India, Japan, growth by component (% y/y)

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

Figure 6: Productivity snapshot across Asia, 2000 Figure 7: Productivity snapshot across Asia, 2013

Those furthest behind have had the most relative catch-up

with the US

Source: IMF, Penn World Tables, Standard Chartered Research Source: IMF, Penn World Tables, Standard Chartered Research

Labour and human capital

Capital

Productivity

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Labour and human capital

Capital

Productivity

-8

-6

-4

-2

0

2

4

6

8

10

12

14

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

US

CN

JP

KR

PH

ID

TH MY

AU SG HK

TW

US (2013)

0

10

20

30

40

50

60

70

80

0 20 40 60 80 100 120 140

GD

P p

er c

apit

a (P

PP

, US

D '0

00s)

Productivity index (US 2005 = 100)

Bubble size represents relative size of economy

US

CN

JP

KR

PH ID TH

MY

AU

SG

HK

TW

0

10

20

30

40

50

60

70

80

0 20 40 60 80 100 120 140

GD

P p

er c

apit

a (P

PP

, US

D '0

00s)

Productivity index (US 2005 = 100)

Bubble size represents relative size of economy

Page 8: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 8

Productivity outlook – Labour

Productivity trends have improved since 2000, but sustained

improvements cannot be taken for granted

Urbanisation and industrialisation, along with better infrastructure,

will help lower-income economies to boost productivity

Shrinking labour forces may become a major challenge for China,

Korea, Hong Kong, Thailand and Singapore by the 2020s

Move from rural areas to cities drives productivity

Asia has significant potential to boost productivity growth as it urbanises and

industrialises. As people living a subsistence lifestyle move to cities, they learn new

skills on the job, boosting their productivity and income. The extent of productivity

gains will depend on the pace of urbanisation and growth in infrastructure (both hard

and soft). Figure 8 shows the strong relationship between urbanisation and

productivity. While many other factors also need to be in place, the process of

moving workers from rural areas to urban centres is a key channel for increasing

productivity and incomes. Asian countries still have much room to benefit from this

simple yet powerful process.

Increased urbanisation and industrialisation will become more important drivers of

growth as demographics – another key growth driver – becomes less supportive or

even a drag on growth in some markets. For China, Korea, Hong Kong, Thailand and

Singapore, demographics is set to reverse from being a positive growth driver to a

drag over the next decade. Smaller and more open economies may be able to

counter this by importing labour. This is much harder to do for larger economies,

most notably China given that it has the world’s largest population. The good news

for China is that despite a contraction in the working-age population, the urbanisation

process has a long way to go, which may keep labour productivity growth strong

during this period. This could be complemented by improving the quality of human

capital. We show the relationship between the quality of human capital and

productivity later in this section.

Figure 8: Urbanisation appears be positively correlated with productivity levels

Source: IMF, Penn World Tables, Standard Chartered Research

CN

ID

MY

PH

TH

KR

10

20

30

40

50

60

70

80

10 20 30 40 50 60 70 80 90

Pro

du

ctiv

ity

ind

ex (U

S 2

005

= 1

00)

Urbanisation, % total

David Mann +65 6596 8649

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Jeff Ng +65 6596 8075

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Urbanisation and industrialisation

offer great opportunities to boost

growth and productivity

Demographics will become a drag

on growth for many countries in the

region

Page 9: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 9

Urbanisation’s role in growth and productivity

We think that China can sustain its current growth levels just by developing and

urbanising its own backyard (see On the Ground, 30 November 2012, ‘China – As

the poor catch up with the rich’). This can be done by further developing services

industries, which make up a smaller share of China’s GDP than in more developed

economies. For instance, China’s services sector accounted for 46.1% of GDP in

2013 (versus 43.9% for manufacturing), smaller than South Korea’s 54% (versus

35% for manufacturing).

Many ASEAN economies remain relatively rural, offering opportunities to shift labour

into more productive industries. We categorise Singapore, Brunei and Malaysia as

Tier 1 urbanised economies; Indonesia and the Philippines as Tier 2; and Laos,

Thailand, Myanmar, Vietnam and Cambodia as Tier 3. Assuming Tier 2 and Tier 3

economies move to the next level of urbanisation, we expect GDP per capita to triple

and GDP growth to quicken (see On the Ground, 28 January 2013, ‘ASEAN – Time

for take-off’).

Demographics is becoming a drag on growth

Of all of the growth drivers in the coming decades, we have the most clarity on

demographics. Japan’s shrinking working-age population has been negative for its

growth over the past decade. Unlike China, whose working-age population is also set

to decline, Japan’s urbanisation process is complete. Therefore, increasing the

productivity of the existing population needs to be achieved through other channels.

Rapid growth in Singapore’s working-age population in the mid-2000s has softened

and is likely to turn negative by the second half of the 2020s. Hong Kong is likely to

reach this stage even sooner, and Korea is not far behind. In ASEAN, while

demographics are broadly favourable for Indonesia, Malaysia and the Philippines,

Thailand is a major exception.

Figure 9: Asia’s demographic slowdown

Average annual growth in working-age population growth, 2006-30

Source: UN, Standard Chartered Research

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

CN HK KR TW ID MY PH SG TH IN JP AU US

2006-2010 2011-2015 2016-2020 2021-2025 2026-2030

Shrinking working-age populations

in Northeast Asia will be a major

challenge from 2020

Page 10: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 10

Northeast Asia and Thailand face the greatest demographic challenges

Figure 9 shows the expected changes in the working-age population in various Asian

economies. In countries with young populations, labour will continue to boost growth.

Indonesia and the Philippines are estimated to add a combined 35mn people to their

working-age populations between now and 2025, according to the UN. This is

equivalent to half of Thailand’s total population.

The story is not all positive, however. Unlike in the US, it is difficult to see immigration

significantly changing the demographic destinies of most Asian economies. Many

face the challenge of compensating for falling labour supply in the coming years.

Singapore, Hong Kong, South Korea, Thailand and China face the greatest

challenges. In Figure 10 we show the growth impact (in ppt) of the demographic

decline until 2030, broken down into five-year periods. We use UN data for the

working-age population; these numbers are unlikely to change until at least 2030,

even if major reforms are implemented today. Demographics start to become less

positive from the mid-2010s, before turning into a drag on growth. The negative

impact increases in the 2020s.

Using this data to project the growth impact of the shrinking labour force illustrates

the additional pressure on other sources of growth, including productivity, to

compensate (see Figure 10). While smaller economies will be able to import labour to

counter this effect, this is unlikely to happen in China or South Korea. This explains

the importance of focusing on productivity growth: inspiration over perspiration. From

now to 2025, China’s working-age population is set to shrink by 15mn, nearly two-

thirds of Australia’s population today. From 2025-30, China’s working-age population

will fall by another 20mn, almost the equivalent of Australia’s entire population today.

China will likely need to find an extra 1.5ppt of GDP growth from other sources in

order to compensate for its shrinking-working age population by 2025.

Human capital as a productivity and growth driver

Having looked at the quantity of labour in the above section, we now look at the

quality, by considering the relationship between productivity and human capital in

Asia. The more skilled the workforce, the higher productivity is likely to be. We find

Figure 10: Trend growth in Asia is at risk from slower labour-force growth

Average annual labour contribution to GDP growth vs. trend growth, ppt

Note: We use UN working-age population data for our projections for 2011-30, while actual numbers on employed personnel for

2001-10 are from Penn World Tables. The key assumption here is that labour growth is equal to working age population growth.

Source: UN, Penn World Tables, CEIC, Standard Chartered Research

-2

-1

0

1

2

3

4

5

6

7

8

CN HK KR TW ID MY PH SG TH IN

2001-05 2006-10 2011-15P 2016-20P 2021-25P 2026-30P Trend growth

It is hard to envisage large-scale

immigration in the economies most

affected by likely work-force

contractions

China’s working-age population will

decline by the equivalent of

Australia’s total population today

between 2025 and 2030

The positive relationship between

human capital development and

productivity is clear

Page 11: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 11

that this relationship holds for most countries, although South Korea and Japan do

not seem to get as much productivity out of their human capital as the US, despite

having highly skilled workforces (see Figure 11). We use the human capital index

from the Penn World Tables, which combines average years of schooling with a

measure of the ‘effectiveness of schooling’ (returns on education; see the work of

George Psacharopoulos). While we hesitate to draw firm conclusions from the exact

position of each economy in this chart, we see a clear positive relationship between

human capital development and productivity.

Indonesia is an outlier, with higher productivity than its human capital index would

suggest. This may be due to problems with measuring productivity, which is difficult

in such a large and diverse economy. We have excluded India from this comparison

for the same reason, as it is extremely difficult to estimate productivity accurately.

This measure puts Singapore’s productivity on par with Hong Kong’s and ahead of

Australia’s, despite a lower human capital index reading.

Human capital development has contributed positively to trend growth across Asia.

Training and education boosted Asia’s average annual growth by 0.3-0.5ppt from

2001-13. In Thailand, training and skills development contributed particularly strongly

to economic growth. The Philippines was the exception to this positive trend,

registering only a 0.17ppt contribution in the past decade – comparable to the US but

lower than Japan. Since training and development levels are much lower in the

Philippines than in the US and Japan, it has room to catch up with the rest of Asia.

This is another important way to boost the region’s growth rates to counter the

challenge of ageing populations.

Figure 11: US remains in pole position in human capital and productivity

Source: IMF, Penn World Tables, Standard Chartered Research

US

CN

JP KR

PH

ID

TH

MY

AU

SG

HK

TW

1.5

2.0

2.5

3.0

3.5

4.0

0 20 40 60 80 100 120 140

Hu

man

cap

ital

ind

ex

Productivity index (US 2005 = 100)

Bubble size represents relative size of economy

Skills development is playing a

positive role in boosting Asia’s

productivity

Page 12: | Global Research | Asia’s productivity: The new story · Asia’s productivity: The new story 6 May 2014 2 Table of contentsAdditional contributors to this report include: Executive

Asia’s productivity: The new story

6 May 2014 12

Productivity outlook – Capital

Capital investment plays an important role in the early stages of

development

Capital stock per worker is low in China, India, the Philippines and

Indonesia, meaning strong growth potential

The quantity of capital stock is important, but so is the quality

The importance of ‘productive’ investment

In the early stages of economic development, capital investment is the major

contributor to GDP growth (see Figure 12). Infrastructure plays a major role in

enabling growth; this helps to explain why India’s growth rates have been much lower

than China’s. There is a point, however, at which the intensity of capital within GDP

starts to fall, even as income per-capita continues to rise; this is represented by the

arc-shaped line in Figure 12. This can be seen as the point at which an economy

shifts from capital-intensive manufacturing growth to services growth, which is far

less capital-intensive. Also, by this stage of development, much of the major

infrastructure has typically been built (roads and rail, for instance). China is still a long

way from reaching this point, in our view.

A better-equipped workforce will be more productive. There is a clear positive

correlation between the capital stock available to each worker and the productivity of

the economy (Figure 13). Hence, capital investment is required for an economy to

move to the next tier. In this respect, we see much more scope for investment in

developing economies such as China, India, the Philippines and Indonesia. This also

suggests that talk about over-investment in China may be too simplistic or overlook

the country’s long-term needs. While there may be pockets of over-investment and

overcapacity, many parts of China still require much more investment (see

Figure 13).

Some countries appear to be better than others at utilising the amount of capital

stock available. For example, the amount of capital stock available to workers in

Taiwan is lower than that in Singapore and Hong Kong, but Taiwan’s productivity is

higher than Singapore’s and Hong Kong’s (see Figure 13).

Figure 12: Less reliance on capital-fuelled growth as GDP per capita rises

Source: IMF, Penn World Tables, Standard Chartered Research

KR

TW

CN

IN

0

10

20

30

40

50

60

70

80

90

0 5 10 15 20 25 30 35 40

Cap

ital

’s %

sh

are

of

GD

P g

row

th

GDP per capita (PPP, USD, '000s)

David Mann +65 6596 8649

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Edward Lee +65 6596 8252

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Jeff Ng +65 6596 8075

[email protected]

Regional Research

Standard Chartered Bank, Singapore Branch

Capital investment is vital in

boosting growth in the early stages

of development

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Asia’s productivity: The new story

6 May 2014 13

We believe that the productivity gap between Taiwan and other economies with

similar productivity levels is explained by the type of capital stock in place. The

quantity of capital stock is important, but so is the quality. Residential property

investment may boost GDP in the short term, but longer-term, we believe other types

of investment contribute more to productivity. We compare the productive

investment-to-GDP ratios of economies in the region in Figure 17. We define

investment in transport equipment, machinery, roads and factories as ‘productive’.

For the purposes of this exercise, we define productive investment as gross fixed

capital formation excluding residential investment.

It is difficult to obtain data showing the amount of productive capital stock available to

each worker. GDP data across the countries is also not readily comparable. As such, we

compute the ratio of the change in annual productive investment and the annual change

in workers (1995=1). In Figure 14, Hong Kong and Singapore spend less on productive

investment per year per worker than Korea and Taiwan. This supports the view that

despite a lower amount of total capital stock, Taiwan’s productivity is higher partly

because of the greater availability of productive capital stock. However, it does not

explain the underperformance of South Korea’s productivity relative to other countries.

This may be due to the weaker productivity performance of its services sector.

Figure 13: More capital stock is a key enabler of productivity

Source: IMF, Penn World Tables, Standard Chartered Research

US

CN

JP

KR

PH

ID

TH MY

AU

SG

HK

TW

-50

0

50

100

150

200

250

300

350

400

0 20 40 60 80 100 120 140

Cap

ital

sto

ck p

er w

ork

er (U

SD

'000

s)

Productivity index (US 2005 = 100)

Bubble size represents relative size of economy

Figure 14: Hong Kong and Singapore lag in productive investment per worker

Annual ratio of change in productive investment to change in workers (1995=1)

Source: CEIC, Standard Chartered Research

HK

KR

SG

TW

0.5

1.0

1.5

2.0

2.5

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Taiwan’s higher productivity may be

due to less residential property

investment and more

‘productive’ investment

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Asia’s productivity: The new story

6 May 2014 14

If investment in productive assets is a guide to future productivity trends, we see

countries such as China, Indonesia, Thailand and Korea benefiting from recent

increases in investment (see Figure 17 – a heatmap of the intensity of productive

investment). China may have gotten ahead of itself in terms of investment recently,

but it will require much more investment over the long term. We also see large scope

for further productive investment in Indonesia and Thailand.

There is no exact level of manufacturing versus services that leads to stronger

productivity (see Figure 18). This is because of the substantial disparity in

productivity between sectors depending on the country. We believe that an industry

exposed to competition is ultimately more likely to be more productive than one that

is not. Using data from the Groningen Growth and Development Centre, we compute

the simple average of labour productivity (latest as of 2005; we remove the top and

bottom numbers) across industries (see Figures 15 and 16). While average

productivity levels within the services sector appear similar, there are considerable

disparities between labour productivity in each individual sector across the countries.

For example, Hong Kong’s labour productivity in finance, insurance and real estate is

significantly higher than that of South Korea.

Figure 15: Significant disparities exist between economic sectors and countries

Labour productivity (USD ’000); Asia average

Source: GGDC, Standard Chartered Research

0 20 40 60 80 100 120

Public Utilities

Mining and Quarrying

Transport, Storage, and Communication

Community, Social and Personal Services

Finance, Insurance, and Real Estate

Manufacturing

Wholesale and Retail Trade, Hotels and Restaurants

Construction

Agriculture, Forestry, and Fishing

Figure 16: Competition appears to drive productivity

Labour productivity (average growth from 1995-2005); Asia average

Note: We discard top and bottom growth rates; Source: GGDC, Standard Chartered Research

-2% -1% 0% 1% 2% 3% 4% 5% 6% 7%

Public Utilities

Transport, Storage, and Communication

Manufacturing

Mining and Quarrying

Agriculture, Forestry, and Fishing

Wholesale and Retail Trade, Hotels and Restaurants

Community, Social and Personal Services

Finance, Insurance, and Real Estate

Construction

We see scope for much more

productive investment to boost

growth and productivity in China,

Indonesia and Thailand

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Asia’s productivity: The new story

6 May 2014 15

We also compute labour productivity growth in each sector and take a simple

average across the countries, discarding the top and bottom values. Outside

services, manufacturing has the highest productivity growth, while construction has

the lowest. We believe that the global nature of the manufacturing sector encourages

competition, while construction is a locally oriented activity and typically has low

productivity growth. Labour productivity appears to be very high in the utilities sector,

but we believe this is due to the capital-intensive nature of the industry.

Figure 17: Indonesia, Thailand, India and South Korea look more capital-equipped for stronger growth than Malaysia

and the Philippines

Heatmap – Ratio of productive investment to GDP in Asia; darker (lighter) shades indicate stronger (weaker) growth

CN ID TH KR IN MY HK PH SG TW

1995 8.6 34.0 29.5 16.4 22.9 24.2 23.1

1996 12.6 34.5 30.0 18.2 23.0 26.7 21.3

1997 13.8 30.4 28.6 17.2 24.7 26.1 21.6

1998 16.3 20.7 23.8 17.3 20.8 18.3 25.4 22.6

1999 17.5 19.5 23.9 16.7 16.0 16.5 24.1 22.3

2000 18.7 15.3 20.5 26.0 15.7 17.8 18.2 23.5 22.9

2001 20.9 15.2 21.3 24.4 15.0 18.0 15.9 24.1 18.9

2002 24.2 14.9 20.8 23.9 15.3 15.8 16.3 19.8 18.0

2003 29.3 14.7 21.7 24.3 15.2 16.0 15.8 18.6 18.2

2004 33.1 17.1 23.1 24.0 16.1 17.4 15.5 18.8 20.9

2005 33.1 18.0 25.7 23.5 19.6 16.0 17.7 15.0 17.4 20.6

2006 33.6 18.1 24.9 23.6 22.3 15.8 18.7 15.6 18.1 20.4

2007 32.0 18.7 23.2 23.7 23.1 15.9 17.4 15.4 18.3 20.0

2008 33.6 20.9 24.3 24.7 24.4 14.3 16.5 14.4 21.8 19.1

2009 38.7 23.1 21.6 24.6 22.0 15.0 16.2 13.7 20.8 17.4

2010 38.3 23.8 22.1 24.7 21.9 15.8 17.4 15.7 16.9 19.3

2011 37.8 23.8 23.5 24.4 21.8 15.3 18.4 15.0 16.5 18.5

2012 39.2 24.4 25.5 23.8 21.4 17.1 19.2 15.6 17.1 17.1

2013 40.3 31.7 23.9 21.3 20.7 17.6 17.4 16.2 15.6 10.2

Source: CEIC, Standard Chartered Research

Figure 18: Productivity typically rises with higher manufacturing input

% of GDP by industry (y-axis); ranking of productivity index relative to US (2005=100)(x-axis)

Source: Penn World Tables, Standard Chartered Research

Agriculture

Manufacturing

Services

0

10

20

30

40

50

60

70

80

90

100

PH CN ID TH IN MY KR JP AU SG HK TW

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Asia’s productivity: The new story

6 May 2014 16

Reform and productivity growth There is scope for structural reforms to support further productivity growth. We

estimate that reforms could raise GDP growth by 1-3ppt, and boost GDP per capita in

2030 by an extra 20-50% (see Special Report, 10 October 2012, ‘Economic reform:

The unfinished agenda’). Possible reasons for the slower pace of reform in recent

years are complacency, the lack of a crisis resulting in heightened pressure to

reform, bureaucracy and opposition to market-oriented reforms.

We think that economic reforms are likely to centre on two areas: infrastructure and

the labour market. For economies such as India, Indonesia and the Philippines, the

onus remains on building up infrastructure and logistics networks. In the Philippines,

this will mean implementing energy-market reforms and more private-public

partnership projects. The challenge is to create the necessary competitive

environment to move these economies up the value chain across the manufacturing

and services sectors, as Hong Kong, South Korea, Singapore and Taiwan did from

1970-2000. South Korea today faces the challenge of boosting services-sector

productivity growth, which is negative – the majority of the country’s new jobs are

being created in services as baby boomers age and shift into the sector.

In economies that already have infrastructure in place and higher productivity levels,

labour-market reforms take on greater significance. As Japan’s labour force ages, for

instance, it needs to draw increasingly on the female labour force, the ‘silver’

workforce of workers aged 60 and above, and non-regular workers.

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Asia’s productivity: The new story

6 May 2014 17

FX – Valuation and productivity in EM –

A reality check In the context of our findings on EM productivity and of market volatility over the past

12 months, we take a detailed look at EM currency valuation, both on an absolute

basis and relative to total factor productivity (TFP) trends. We acknowledge the

limitations of currency valuation, which provides a medium-term reality check rather

than short-term trading signals. Moreover, TFP – skills- or knowledge-based

productivity – is a residual, depending on the validity of published data on output

productivity. Notwithstanding these caveats, we think that comparing medium-term

valuation with TFP trends is useful in determining economic competitiveness.

We start this process with the broad REERs for currencies in Asia, Africa and the

Middle East (see Figure 19, as provided by the BIS). Relative to their 10-year

averages, Asian currencies (including Japan) are around 2.4% overvalued on a

REER basis on average. If we exclude Japan, AXJ currencies are around 4.3%

overvalued on a REER basis. By comparison, a representative sample of African

currencies (South Africa, Algeria) appears undervalued by just under 8%, and a

similar representation for Middle East currencies (UAE, Saudi Arabia and Turkey) is

roughly fairly valued. Looking at the regions on a Z-score basis suggests valuations

are far from stretched. However, within this there are powerful individual currency

stories that contradict this overall view.

Within Asia, the Chinese yuan (CNY) and Singapore dollar (SGD) REERs have the

highest Z-scores, at +1.82 and +1.54, while the Japanese yen (JPY) and Indian

rupee (INR) REERs have the lowest, at -1.93 and -1.65, respectively. On an index

basis, the CNY REER (at 117.45) is 26.07% above its average since 1994, while the

SGD REER (at 112.00) is 12.63% above its average since 1994. Similarly, the JPY

REER is currently -27.72% relative to its average, while the INR REER is -6.16%

relative to the average. On the face of it, this suggests that the CNY and SGD are

overvalued on a REER basis, while the JPY and INR are similarly undervalued.

However, we also take into account productivity – and particularly TFP – trends to

determine the true extent of competitiveness losses or gains.

As Figure 20 shows, while the CNY REER looks very stretched, its appreciation

continues to be matched by strong TFP gains. Unsurprisingly, the REER appreciated

significantly during the GFC – when the CNY nominal effective exchange rate

(NEER) appreciated significantly as trading-partner currencies fell against it.

However, it continued to appreciate in the GFC’s aftermath to multi-year highs as of

2013. More positively, TFP has also continued to hit new highs, somewhat reducing

valuation concerns. To provide context, the CNY NEER (112.64) is 21.90% above its

average since 1994. However, it has fallen by 2.57% since the end of January,

bringing it back to only just above the average since January 2013 of 112.37.

Elsewhere in AXJ, we see the most compelling stories in Korea, India, Indonesia and

Thailand. In Korea, the good news is that the KRW still looks mildly undervalued – as

the IMF recently commented. The KRW REER, at 108.00, is 1.26% below the

average since 1994. On a purchasing power parity (PPP) basis, the latest OECD

data suggests that the KRW is 23.06% undervalued against the US dollar (USD).

However, the productivity chart shows that TFP gains have stalled. While this is not

an issue for the time being, it would become one if the KRW NEERs and REERs

extended significantly above their average rates.

Callum Henderson +65 6596 8246

[email protected]

FICC Research

Standard Chartered Bank, Singapore Branch

Divya Devesh +65 6596 8608

[email protected]

FICC Research

Standard Chartered Bank, Singapore Branch

CNY and SGD REERs are, on the

face of it, the most overvalued and

INR and JPY the most undervalued,

but TFP trends also have to be

taken into account

CNY REER gains have been offset

to some extent by strong TFP gains

KRW is mildly undervalued on a

REER basis, but TFP gains appear

to be stalling

AXJ currency broad REERs appear

moderately overvalued relative to

their 10-year averages

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Asia’s productivity: The new story

6 May 2014 18

In Indonesia, there appears to be a relatively low correlation between the IDR REER

and TFP. On the negative side, TFP gains appear modest. More positively, the IDR

REER (88.77) is basically aligned with the average (88.49) since 1994. India’s

valuation/productivity story is compelling. For a start, the INR REER (86.45) is 6.16%

below its average since 1994 and 8.97% below the 10-year average. Second, TFP

continues to increase at the same time as the INR is undervalued. This strongly

supports the case for an INR rebound. We also see a positive story in Thailand,

where REER gains have been supported by rising TFP.

In the G10, the USD remains undervalued on a REER basis, despite very strong TFP

gains. At 98.65, the USD REER (BIS broad) is 8.89% below the average since 1994

and 4.5% below the average since 2004. The strength of TFP in the US economy

appears to support a significantly stronger REER, which (in the absence of inflation)

would likely be driven by NEER appreciation. Finally, the JPY is now clearly

undervalued on a REER basis. At 75.95, the JPY REER is 27.72% below its average

since 1994 and 19.50% below its average since 2004. While TFP stalled in the 2000s,

it has rebounded sharply since 2012 – a positive effect of ‘Abenomics.’

Figure 19: Asian currencies mildly overvalued on average

Broad REER

Figure 20: China’s TFP, REER continue to rise

Asia Africa Middle East

Current 100.6 89.5 95.1

10Y average 98.3 97.3 95.0

% overvalued 2.4% -7.9% 0.2%

Z-score 0.2 -0.6 0.1

Source: BIS, Standard Chartered Research Source: BIS, Penn World Tables, Standard Chartered Research

1994

1995

1996

1997

1998 1999

2000

2001

2002

2003

2004

2005 2006

2007

2008

2009

2010

2011 2012

2013

80

90

100

110

120

130

140

150

24 26 28 30 32 34 36 38 40

RE

ER

Productivity index (US 2005 = 100)

The valuation/productivity story for

the INR is compelling, supporting

the case for a rebound in the

currency

The USD remains undervalued at a

time of powerful TFP gains, while

the JPY is significantly undervalued

as TFP is rebounding

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Asia’s productivity: The new story

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Figure 21: USD undervalued despite productivity gains

Figure 22: JPY is now undervalued on a REER basis

Source: BIS, Penn World Tables, Standard Chartered Research Source: BIS, Penn World Tables, Standard Chartered Research

Figure 23: Productivity gains have stalled in South Korea

Figure 24: Low correlation between productivity and

REER in Indonesia

Source: BIS, Penn World Tables, Standard Chartered Research Source: BIS, Penn World Tables, Standard Chartered Research

1994 1995 1996

1997 1998

1999

2000

2001 2002

2003

2004

2005

2006

2007

2008

2009

2010 2011

2012

2013

80

85

90

95

100

105

110

115

120

85 90 95 100 105

RE

ER

Productivity index (US 2005 = 100)

1994

1995

1996 1997

1998

1999

2000

2001

2002

2003 2004

2005

2006

2007

2008

2009 2010 2011

2012

2013

70

80

90

100

110

120

130

140

68 70 72 74 76 78

RE

ER

Productivity index (US 2005 = 100)

1994

1995

1996

1997

1998

1999 2000 2001

2002

2003

2004

2005

2006

2007

2008

2009 2010 2011

2012

2013

60

65

70

75

80

85

90

95

100

105

110

62 64 66 68 70 72 74 76

RE

ER

Productivity index (US 2005 = 100)

1994 1995

1996

1997

1998

1999

2000

2001

2002 2003

2004

2005

2006

2007

2008

2009

2010 2011

2012

2013

80

90

100

110

120

130

140

30 35 40 45 50 55 60

RE

ER

Productivity index (US 2005 = 100)

Figure 25: INR undervalued on a REER basis compared

with gains in productivity

Figure 26: Currency gains associated with rise in

productivity in Thailand

Source: BIS, Penn World Tables, Standard Chartered Research Source: BIS, Penn World Tables, Standard Chartered Research

1994

1995

1996

1997

1998

1999

2000 2001

2002 2003

2004

2005 2006

2007

2008

2009

2010

2011 2012

2013

85

90

95

100

105

110

25 30 35 40 45 50

RE

ER

Productivity index (US 2005 = 100)

1994

1995

1996

1997

1998

1999

2000

2001

2002 2003 2004

2005

2006 2007

2008 2009

2010

2011 2012 2013

80

90

100

110

120

130

140

30 35 40 45

RE

ER

Productivity index (US 2005 = 100)

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Asia’s productivity: The new story

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Methodology For this report, we derive most of our data from the Penn World Tables (PWT)

version 8.0. PWT 8.0 provides information on relative levels of income, output

(including GDP), inputs (such as employed labour and capital stock) and productivity,

covering 167 countries between 1950 and 2011. We estimate 2012-13 data by

adding country data to PWT 8.0.

The report uses PWT 8.0’s definition and methodology for productivity. Productivity is

a “measure of output divided by a measure of input”. We note the difference between

the definitions of total factor productivity (TFP) and labour productivity adopted by

PWT 8.0. TFP is a variable that accounts for effects in total output not caused by

labour and capital inputs, while labour productivity is the amount of goods and

services that a unit of labour produces. PWT 8.0 uses the Törnqvist quantity index of

factor of inputs to estimate productivity growth, as follows:

GDP growth = Productivity growth +

Capital stock growth (adjusted by change in capital share) +

Labour force growth (adjusted by change in labour share) +

Human capital growth (adjusted by change in labour share)

We calculate GDP and productivity growth statistics from the following variables:

Capital stock: Capital stock at constant 2005 national prices (USD mn)

Labour force growth: Number of persons engaged

Human capital: Index of human capital per person, based on years of schooling

and returns on education

Productivity: TFP at constant national prices

Share of labour compensation at current national prices

GDP: Real GDP at constant 2005 national prices (USD mn)

According to PWT 8.0, capital stocks are estimated based on cumulating and

depreciating past investments using the perpetual inventory method. PWT 8.0

provides different geometric depreciation rates for different assets (2% for structures,

18.9% for transport equipment, 11.5% for communication equipment, 12.6% for other

machinery and assets, and 31.5% each for computers and software). Methodologies

vary across economies due to data quality and availability. Initial capital stocks are

traced back to 1950 where possible to estimate current capital stock levels.

Human capital is estimated using years of schooling and returns to education. PWT

8.0 uses the Psacharopoulos (1994) methodology for rates of returns on education,

which has a higher return on early years of education than the later years.

For the share of labour, PWT 8.0 provides a ‘best estimate’ by gauging the labour

share of self-employed workers in agriculture. In lower-income economies, more

people are self-employed, which compensates for the lower labour share in

these economies.

We estimate relative productivity levels that are comparable across time and

economies (US productivity = 100 in 2005) from the following variables:

Productivity: TFP level at current PPPs (US=1)

US TFP at constant national prices (2005=1)

For more information about the detailed methodology, please refer to ‘Capital, labour

and TFP in PWT8.0’.

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Asia’s productivity: The new story

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Appendix Figure 27: China

Ppt contributions to GDP growth

Figure 28: Hong Kong

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

Figure 29: India

Ppt contributions to GDP growth

Figure 30: Indonesia

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-16.8

Figure 31: Malaysia

Ppt contributions to GDP growth

Figure 32: The Philippines

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity 21.9

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

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Figure 33: Singapore

Ppt contributions to GDP growth

Figure 34: South Korea

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

Figure 35: Taiwan

Ppt contributions to GDP growth

Figure 36: Thailand

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity 36

Figure 37: Australia

Ppt contributions to GDP growth

Figure 38: Japan

Ppt contributions to GDP growth

Source: Penn World Tables, Standard Chartered Research Source: Penn World Tables, Standard Chartered Research

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity

-10

-5

0

5

10

15

20

1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Labour Human capital Physical capital Productivity 34.6

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Asia’s productivity: The new story

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Figure 39: Positive productivity growth in Asia since 2000, stronger track record across the board

Average annual ppt contribution to GDP growth from productivity (TFP), by decade

Source: World Penn Tables, Standard Chartered Research

Figure 40: A better performance in Asia during the 2000s, after a mixed 1980s and 1990s

Average percentage contribution to GDP growth from productivity, by decade

Source: World Penn Tables, Standard Chartered Research

Figure 41: Capital growth remains the largest contributor to growth in Asia

Average annual ppt contribution to GDP growth from physical capital, by decade

Source: World Penn Tables, Standard Chartered Research

-3

-2

-1

0

1

2

3

4

5

1981-1990 1991-2000 2001-2013

CN IN HK TH ID TW PH MY US KR SG JP AU

160

-20

0

20

40

60

1981-1990 1991-2000 2001-2013

JP US HK TH CN TW IN ID MY PH KR SG AU

-150.47

-76.70

0

1

2

3

4

5

6

7

1981-1990 1991-2000 2001-2013

CN IN ID PH SG KR MY TW AU TH HK US JP

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Asia’s productivity: The new story

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Figure 42: China and South Korea have been relatively capital-driven

Average percentage contribution to GDP growth from physical capital, by decade

Source: World Penn Tables, Standard Chartered Research

Figure 43: Human capital development remains an important component of GDP growth

Average annual ppt contribution to GDP growth from human capital, by decade

Source: World Penn Tables, Standard Chartered Research

Figure 44: Japan, Thailand and Taiwan rely heavily on human capital growth for GDP growth

Average percentage contribution to GDP growth from human capital, by decade

Source: World Penn Tables, Standard Chartered Research N

0

20

40

60

80

100

120

140

160

180

1981-1990 1991-2000 2001-2013

CN KR PH ID IN AU JP SG TW MY US HK TH

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1981-1990 1991-2000 2001-2013

TH IN ID TW HK CN MY SG KR JP PH US AU

-5

0

5

10

15

20

25

30

35

1981-1990 1991-2000 2001-2013

JP TH TW US HK KR MY ID IN SG AU CN PH

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6 May 2014 25

Figure 45: Asia relies on labour growth to some extent

Average annual ppt contribution to GDP growth from labour, by decade

Source: World Penn Tables, Standard Chartered Research

Figure 46: Japan’s shrinking labour force has become a major drag on GDP growth

Average percentage contribution to GDP growth from labour, by decade

Source: World Penn Tables, Standard Chartered Research

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1981-1990 1991-2000 2001-2013

SG AU MY IN PH ID TH KR HK CN TW US JP

-40

-20

0

20

40

60

80

100

1981-1990 1991-2000 2001-2013

AU SG MY PH KR TH IN HK ID US TW CN JP

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6 May 2014 26

Figure 47: Asia productivity growth

GDP-weighted, %

Asia refers to China, Hong Kong, Indonesia, South Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand;

Source: IMF, Penn World Tables, Standard Chartered Research

Figure 48: Asia ex-Japan and China (AXJC) productivity growth

GDP-weighted, %

Source: IMF, Penn World Tables, Standard Chartered Research

-4

-3

-2

-1

0

1

2

3

4

5

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

-8

-6

-4

-2

0

2

4

6

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

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References Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2013), ‘The Next

Generation of the Penn World Table’, available for download at www.ggdc.net/pwt

Feenstra, Robert C., and Marcel P. Timmer (2013), ‘Capital, labor and TFP in

PWT8.0’, available for download at www.ggdc.net/pwt

Groningen Growth and Development Centre – 10-Sector Database

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Document is released at

02:30 GMT 06 May 2014