Economics 121:The Macroeconomics of Development

with Special Reference to East Asia

Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development

Department of EconomicsStanford University

Stanford, CA 94305-6072, U.S.A.

Spring 2000-2001

Email: ljlau@stanford.edu; WebPages: http://www.stanford.edu/~ljlau

Lecture 9 The Sources of Economic Growth in

Developed and Developing Economies

Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development

Department of EconomicsStanford University

Stanford, CA 94305-6072, U.S.A.

Spring 2000-2001

Email: ljlau@stanford.edu; WebPages: http://www.stanford.edu/~ljlau

Lawrence J. Lau, Stanford University

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Introduction Tangible capital accumulation is the most important source

of growth in developing economies Technical progress is the most important source of

economic growth in developed economies The controversy over the role of technical progress in

postwar East Asian economic growth Kim and Lau (1992, 1994a, 1994b) Paul Krugman (1994) The World Bank (1993) Alwyn Young (1992, 1995)

Lawrence J. Lau, Stanford University

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Rates of Growth on Inputs & Outputs of theEast Asian NIEs and the G-5 Countries

Ta ble 2 .1 : A v e ra g e A nnua l R a te s o f G ro w th o f O utput a nd Inputs (pe rc e nt)

E c o no m y P e rio d G D P C a pita l L a bo r H um a n R & DS to c k H o urs C a pita l C a pita l

H o ng K o ng 6 6 -9 0 7 .8 9 2 .6 2 .3 N AS ing a po re 6 5 -9 0 9 1 0 .4 4 .3 3 .4 1 5 .9S . K o re a 6 4 -9 0 9 1 3 3 .8 3 .7 1 4 .6Ta iw a n 6 4 -9 0 9 1 2 .1 2 .9 2 .4 1 4 .5J a pa n 6 4 -9 2 5 .5 8 0 .5 0 .8 8 .9F ra nc e 6 4 -9 1 3 .2 5 .2 -0 .3 1 .3 5W . G e rm a ny 6 5 -9 1 3 4 .4 -0 .6 1 .1 5 .7U .K . 6 5 -9 1 2 .1 3 .8 -0 .3 0 .9 2 .1U .S . 4 9 -9 2 3 3 .1 1 .5 0 .8 6 .1

Lawrence J. Lau, Stanford University

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The Estimated Parameters of the Aggregate Meta-Production Function

Table 6.2 Estimated Parameters of the Aggregate Production Function

Parameter I+II+IV+V(2)+VI I+II+IV+VI

Y0 0.293 (399.295) 0.331 (318.414)

aK 0.256 (8.103) 0.245 (7.929)

aL 0.63 (6.666) 0.524 (5.077)

B KK -0.074 (-7.445) -0.058 (-4.919)

B LL -0.073 (-1.101) -0.012 (-0.178)

B KL 0.032 (1.324) 0.025 (1.103)

C iK

Hong Kong 0 0.062 (2.443)Singapore 0 0.045 (1.702)South Korea 0 0.026 (1.197)Taiwan 0 0.024 (1.523)France 0.083 (8.735) 0.1 (6.394)West Germany 0.074 (6.761) 0.089 (5.465)Japan 0.072 (3.927) 0.098 (3.483)UK 0.046 (5.749) 0.056 (5.045)United States 0.061 (7.592) 0.067 (6.321)

R-sq 0.753 0.753D.W. 1.448 1.473

Lawrence J. Lau, Stanford University

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The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s (1) No technical progress in the East Asian NIEs but

significant technical progress in the industrialized economies (IEs) including Japan

(2) East Asian economic growth has been input-driven, with tangible capital accumulation as the most important source of economic growth (applying also to Japan) Working harder as opposed to working smarter

(3) Technical progress is the most important source of economic growth for the IEs, followed by tangible capital, accounting for over 50% and 30% respectively, with the exception of Japan NOTE THE UNIQUE POSITION OF JAPAN!

Lawrence J. Lau, Stanford University

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The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s (4) Despite their high rates of economic growth and rapid

capital accumulation, the East Asian Newly Industrialized Economies actually experienced a significant decline in productive efficiency relative to the industrialized countries as a group

(5) Technical progress is purely tangible capital-augmenting and hence complementary to tangible capital

(6) Technical progress being purely tangible capital-augmenting implies that it is less likely to cause technological unemployment than if it were purely labor-augmenting

Lawrence J. Lau, Stanford University

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Accounts of Growth:Kim & Lau (1992, 1994a, 1994b)

Table 2.2: Relative Contributions of the Sources of Economic Growth (percent)

Economy Tangible Labor TechnicalCapital Progress

Hong Kong 74 26 0Singapore 68 32 0S. Korea 80 20 0Taiwan 85 15 0Japan 56 5 39Non-Asian G-5 36 6 59

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Purely Capital-Augmenting Technical Progress

Y = A0(t) F(AK(t)K, AL(t)L)

= A0F(AK(t)K, ALL)

= A0F(AK(1+ciK)tK, ALL)

The production function canalso be written as:

= A0F(AK eciK.tK, ALL)

Lawrence J. Lau, Stanford University

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Implications of Rejection of the Hypothesis of Purely Labor-Augmenting Technical Progress Technical progress is not simply equivalent to more labor

(One thousand janitors are not equivalent to a Kenneth Arrow)

The existence of a steady state growth can no longer be assured

Capital-augmenting technical progress implies the complementarity between tangible capital and technical progress (intangible capital)

Lawrence J. Lau, Stanford University

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Production Elasticities of CapitalProduction Elasticities of Tangible Capital

0

0.1

0.2

0.3

0.4

0.5

0.6

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5

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Production Elasticities of Labor

Production Elasticities of Labor

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5

Lawrence J. Lau, Stanford University

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Degrees of Returns to Scale

Degrees of Returns to Scale

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5

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Empirical Evidence for the Hypothesis of No Technical Progress in East Asian NIEs Tsao (1985) and Young (1992) for Singapore Kim & Lau (1992, 1994a, 1994b) and Young (1995) for

the four East Asian NIEs Paul Krugman (1994) Kim & Lau (1996) extend the same finding to other East

Asian economies--China, Indonesia, Malaysia, Philippines, and Thailand

Lawrence J. Lau, Stanford University

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Empirical Evidence Against the Hypothesis of No Technical Progress Young (1992) for Hong Kong The World Bank (1993) Credibility of such studies undermined by restrictive

maintained hypotheses such as CONSTANT RETURNS TO SCALE

NEUTRALITY OF TECHNICAL PROGRESS & INSTANTANEOUS COMPETITIVE PROFIT

MAXIMIZATION

Lawrence J. Lau, Stanford University

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International and Intertemporal Comparison of Productive Efficiency: A Thought Experiment Suppose all countries have the same quantities of

measured inputs of capital and labor as the United States What would have been the quantities of their real outputs?

and How would they evolve over time?

WE COMPARE THEIR OUTPUTSHOLDING MEASURED INPUTS CONSTANT!

Lawrence J. Lau, Stanford University

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Hypothetical Output Levels

H ypo the tic al O utput Le vels (Tril lio n U S$ in 19 80 prices )

0

0 .5

1

1 .5

2

2 .5

3

3 .5

Tri

llio

n U

.S.

Do

lla

rs (

1980

pri

ces)

USA FRA GER UK JPN

HON KOR S IN TWN

Lawrence J. Lau, Stanford University

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Relative Productive Efficiency(U.S.=100%)

Re lat ive Produ ctive Eff icienc y (U.S .=10 0% )

0

10

20

30

40

50

60

70

80

1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988

Pe

rce

nt

FRA GER UK JPN

HON KOR S IN TWN

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The Sources of Economic Growth:Selected East Asian and Western Economies

The Contributions of the Sources of Growth (percent)

Capital Labor Technical Progress

East Asian EconomiesChina 92.2 9.2 -1.4Hong Kong 55.8 16.0 28.2Indonesia 115.7 11.5 -27.2Japan 62.9 4.7 32.4Malaysia 70.9 18.7 10.4Philippines 99.5 18.0 -17.5Singapore 60.0 20.9 19.1South Korea 86.3 12.7 1.0Taiwan 88.9 8.6 2.5Thailand 71.9 12.7 15.4Western Industrialized EconomiesFrance 37.8 -1.3 63.5West Germany 43.7 -6.3 62.6United Kingdom 46.0 3.7 50.3United States 32.9 26.2 40.9

Lawrence J. Lau, Stanford University

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The Sources of Economic Growth:Selected East Asian and Western Economies

The C ontr ibutions of the Sour ces of E conomic G row th:Se lected Ea st As ian and W estern E co no mies

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Chi

na

Hon

g K

ong

Indo

nesi

a

Japa

n

Mal

aysi

a

Phili

ppin

es

Sing

apor

e

Sout

h K

orea

Tai

wan

Tha

iland

Fran

ce

Wes

t Ger

man

y

Uni

ted

Kin

gdom

Uni

ted

Stat

es

Per

cent

C ap italLaborTech nica l Pro gress

Lawrence J. Lau, Stanford University

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Human CapitalAverage Human C ap ital (Years o f S cho o ling p er W o rking-Age P erso n)

0

2

4

6

8

10

12

14

19531955

19571959

19611963

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

Yea

rs p

er W

ork

ing

-Ag

e P

erso

n

Ch in a Ho n g Ko n g

In d o n es ia S. Ko rea

M alay s ia Ph ilip p in es

Sin g ap o re T a iwan

T h ailan d Jap an

No n -A s ian G5

Lawrence J. Lau, Stanford University

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Sources of Economic Growth with Explicit Inclusion of Human Capital

Table 2.3: Relative Contributions of the Sources of Economic Growth (percent)

Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress

Hong Kong 66 22 11 NA 0 11Singapore 63 25 13 NA 0 13S. Korea 67 19 14 NA 0 14Taiwan 75 14 11 NA 0 11Japan 48 6 3 NA 43 46Non-Asian G-5 32 7 5 NA 57 62

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Simultaneous Capital- and Human Capital-Augmenting Technical Progress

Y = A0(t) F(AK(t)K, AH(t)H, AL(t)L)

= A0F(AK(t)K, AHH, ALL)

= A0F(AKK, AH(t)H, ALL)

= A0F(A(t)KH

, ALL)

Lawrence J. Lau, Stanford University

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R&D Expenditureas a Percentage of GDP

P ercen tag e o f T ota l R &D Ex pen diture in GD P (Cu rre nt P rices )

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993

Pe

rce

nt

USA FRA GER

UK JPN HON

KOR S IN TWN

Lawrence J. Lau, Stanford University

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R&D CapitalR & D C apita l S tock (B illion 1980 US $)

0

100

200

300

400

500

600

700

800

900

19491951

19531955

19571959

19611963

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

Bil

lio

n 1

98

0 U

S$

US Canada France

W . Germany Italy UK

J apan S . Korea S ing apore

Taiwan

Lawrence J. Lau, Stanford University

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Sources of Economic Growth with Explicit Inclusion of Human and R&D Capital

Table 2.4: Relative Contributions of the Sources of Economic Growth (percent)

Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress

Korea 62 18 5 15 0 20Singapore 56 22 5 16 0 21Taiwan 65 15 4 16 0 20Japan 37 5 1 8 49 58Non-Asian G-7 40 4 4 10 43 56

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The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Tangible Capital Labor Technical P rogressHong K ong 74.46 25.54 0South K orea 78.2 21.8 0Singapore 64.8 35.2 0Taiwan 84.04 15.96 0Japan 49.9 4.84 45.26Non-Asian G-5 Countries 38.71 2.77 58.52

Tangible Capital Labor Technical P rogressHong K ong 74.61 25.39 0South K orea 82.95 17.05 0Singapore 63.41 36.59 0Taiwan 86.6 13.4 0Indonesia 88.79 11 .21 0Malaysia 66.68 33.32 0P hilippines 66.1 33.9 0Thailand 83.73 16.27 0China 94.84 5.16 0Japan 55.01 3.7 41.29Non-Asian G-5 Countries 41.51 1.97 56.53

Sample (G-5 + 4 NIEs)

Sample (G-5 + 9 Asian)

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The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Tangible Capital Labor Human Capital R&D Capital Technical ProgressSouth Korea 63.35 13.61 2.1 20.94 0Singapore 47.33 21.55 1.37 29.75 0Taiwan 58.73 11.42 1.32 28.54 0Japan 44.83 5.2 0.82 14.63 34.52Non-Asian G-7 Countries 33.71 3.71 1.32 12.53 48.72

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Sources of Economic Growth with Breaks in the Rates of Capital Augmentation (1985)

Tangible Capital Labor Human Capital Technical P rogressHong K ong 48.41 27.57 8.16 15.86South K orea 51.23 24.78 11 .59 12.4Singapore 46.73 32.43 10.86 9.99Taiwan 58.26 21.61 9.87 10.27Japan 38.89 9.17 3.24 48.7Non-Asian G-5 Countries 30.13 7.09 5.21 57.57

Tangible Capital Labor Human Capital Technical P rogressHong K ong 56.89 23.65 2.51 16.94South K orea 65.45 18.62 3.84 12.08Singapore 53.1 33.94 3.23 9.73Taiwan 71.26 15.61 3.15 9.99Indonesia 71.2 14.59 9.38 4.83Malaysia 54.22 32.47 5.12 8.19P hilippines 54.05 37.81 8.15 -0 .01Thailand 60.84 18.06 5.65 15.44China 83.87 11 .92 4.21 0Japan 49.04 5.23 1.08 44.65Non-Asian G-5 Countries 37.44 3.36 1.7 57.49

Sample (G-5 + 9 Asian)

Sample (G-5 + 4 NIEs)

Lawrence J. Lau, Stanford University

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Sources of Economic Growth with Breaks: Sub-periods

Ta ng ible C a pita l L a bo r H um a n C a pita l Te c hnic a l P ro g re ssH o ng K o ng 6 5 .3 4 3 1 .6 5 3 0S o uth K o re a 7 4 .6 6 2 0 .5 8 4 .7 6 0S ing a po re 6 0 .0 9 3 5 .9 7 3 .9 4 0Ta iw a n 7 9 .9 2 1 6 .4 3 3 .6 4 0Indo ne sia 7 6 .4 4 1 2 .4 1 11 .1 5 0M a la ysia 6 1 .1 4 3 2 .6 9 6 .1 7 0P hilippine s 5 5 .7 8 3 5 .3 6 8 .8 6 0Tha ila nd 7 0 .7 7 2 0 .9 2 8 .3 1 0C hina 8 3 .0 5 1 2 .3 6 4 .5 9 0J a pa n 5 0 .8 4 5 .4 8 1 .0 6 4 2 .6 2N o n-A sia n G -5 C o untrie s 3 9 .6 9 0 .8 8 1 .7 1 5 7 .7 2

H o ng K o ng 4 0 .8 1 8 .6 1 1 .5 8 4 9S o uth K o re a 4 4 .9 6 1 4 .1 9 1 .8 3 9 .0 6S ing a po re 3 7 .3 5 2 9 .1 9 1 .6 3 1 .8 6Ta iw a n 4 1 .4 5 1 2 .6 1 1 .4 4 4 .5 3Indo ne sia 6 0 .2 5 1 9 .0 9 5 .6 3 1 5 .0 3M a la ysia 4 3 .3 3 2 .0 4 3 .4 4 2 1 .2 2P hilippine s 4 9 .7 1 4 4 .0 3 6 .2 9 -0 .0 3Tha ila nd 4 9 .0 1 1 4 .6 1 2 .5 1 3 3 .8 6C hina 8 5 .7 5 1 0 .9 3 .3 5 0J a pa n 3 4 .9 9 3 .1 7 1 .1 9 6 0 .6 4N o n-A sia n G -5 C o untrie s 2 7 1 4 .6 6 1 .6 3 5 6 .7 2

S a m ple (G -5 + 9 A sia n)1 9 6 0 s-1 9 8 5

1 9 8 6 -1 9 9 5