Case: Growth accounting and the East Asian economic miracle

Growth Accounting

Long run growth matters. A 7% increase each year means that the GDP will double in 10 years, while a 3.5% increase each year means 20 years. (rule of 70)

The growth is due to inspiration (technology growth) or perspiration (input increases)? Three eye-catching episodes US productivity growth slowdown since early 70s’ Asian economic miracle from 50s’ to early 90s’ The so called “new economy” in the US since mid

90s’ The note shows that knowledge about production

function enables us to study this issue systematically.

Growth Rate% per year)

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1870-1890

1890-1910

1910-1930

1930-1950

1950-1970

1970-1990

0

The Productivity Growth Slowdown in 1970-1990 (US)

Similar patterns also exhibit in other developed economies

Asian economic miracle: annual growth of output/capita (60-85)

1 Botswana 0.067 41 Turkey 0.026 81 Kenya 0.0112 Taiwan 0.062 42 Algeria 0.026 82 Guatemala 0.0113 Hong Kong 0.059 43 Sweden 0.026 83 Jamaica 0.0114 Singapore 0.059 44 Ecuador 0.026 84 Peru 0.010

5. S. Korea 0.057 45 Ireland 0.025 85 Saudi Arabia 0.0096 Japan 0.055 46 Mexico 0.025 86 Nepal 0.0097 Malta 0.053 47 Suriname 0.024 87 Ethiopia 0.0098 Lesotho 0.051 48 Iran 0.023 88 Chile 0.0089 Egypt 0.050 49 Swaziland 0.023 89 Argentina 0.007

10 Cyprus 0.049 50 Barbados 0.023 90 Sierra Leone 0.00611 Gabon 0.045 51 Mauritius 0.023 91 Uganda 0.00612 Greece 0.044 52 Luxembourg 0.023 92 Burundi 0.00513 Brazil 0.042 53 Pakistan 0.023 93 Guinea 0.00514 Syria 0.041 54 Tanzania 0.023 94 India 0.00515 Portugal 0.041 55 Gambia 0.023 95 Bangladesh 0.00516 Malaysia 0.039 56 Colombia 0.023 96 Nicaragua 0.00317 Yugoslavia 0.039 57 Australia 0.022 97 Niger 0.00118 China 0.038 58 Dom. Rep. 0.022 98 Uruguay 0.00119 Thailand 0.038 59 U.S.A. 0.021 99 Benin 0.00120 Norway 0.036 60 U.K. 0.021 100 Senegal 0.00121 Cameroon 0.036 61 Costa Rica 0.021 101 Haiti 0.00022 Congo 0.035 62 Togo 0.019 102 Mauritania -0,00023 Italy 0.035 63 Cape Verde 0.019 103 Liberia -0.00124 Panama 0.035 64 Trin. & Tob. 0.018 104 Sudan -0.00125 Spain 0.035 65 Switzerland 0.017 105 Somalia -0.00226 Finland 0.035 66 Zimbabwe 0.017 106 Zaire -0.00227 Morocco 0.034 67 Fiji 0.016 107 Nigeria -0.00228 Israel 0.034 68 Philippines 0.016 108 Afghanistan -0.00329 Austria 0.033 69 South Africa 0.016 109 Mali -0.00430 Tunisia 0.032 70 PNG 0.015 110 CAR -0.00631 Iceland 0.032 71 Venezuela 0.015 111 Ghana -0.00832 France 0.030 72 Ivory Coast 0.014 112 Guyana -0.01033 Jordan 0.029 73 Sri Lanka 0.014 113 Madagascar -0.01634 Denmark 0.028 74 N. Zealand 0.014 114 Chad -0.01735 Belgium 0.028 75 Honduras 0.013 115 Zambia -'0.01736 Netherlands 0.027 76 Bolivia 0.013 116 Angola -0.01837 Paraguay 0.027 77 Malawi 0.012 117 Mozambique -0.02038 Canada 0.026 78 Rwanda 0.012 118 Kuwait -0.08039 Burma 0.026 79 Iraq 0.01240 W. Germany 0.026 80 El Salvador 0.012

Was the Asian economic miracle really a miracle?

“No!” said Krugman in his famous 1994 Foreign Affairs’ article, which made him famous to the world outside the economic profession.

Relying on work by Young and Lau, he argued that the growth of the four tigers was largely due to increase in inputs (perspiration) rather than to increase in technology (inspiration).

Now let’s turn to the so called “Asian miracle.” (The following figures are taken from a paper by A. Young 1994, European Economic Review.)

Participation rates & growth (1960-85)

Annual growth of output/worker (60-85)

1 Botswana 0.076 16 Yugoslavia 0.039 31 Israel 0.0322 Gabon 0.069 17 Spain 0.037 32 Morocco 0.0313 Lesotho 0.057 18 Thailand 0.037 33 Finland 0.0314 Taiwan 0.055 19 Italy 0.037 34 France 0.0295 Japan 0.054 20 Brazil 0.037 35 Tunisia 0.0286 Egypt 0.053 21 Austria 0.035 36 Ecuador 0.0277 South Korea 0.050 22 Swaziland 0.035 37 Norway 0.0278 Hong Kong 0.047 23 Portugal 0.035 38 Tanzania 0.0279 Greece 0.047 24 Malaysia 0.034 39 Burma 0.027

10 Syria 0.046 25 Jordan 0.034 40 Pakistan 0.02711 Cameroon 0.045 26 Turkey 0.033 41 Ivory Coast 0.02612 Congo 0.043 27 Panama 0.033 42 Ireland 0.02613 Cyprus 0.043 28 Gambia 0.033 43 Paraguay 0.02514 Singapore 0.043 29 Algeria 0.033 44 W. Germany 0.02515 Malta 0.040 30 China 0.033 45 Belgium 0.025

Investments in the NICs

I/GDP ratios

Annual Growth of “Total Factor Productivity” (1970-1985)

1 Egypt 0.035 23 Guinea 0.014 45 Turkey 0.0082 Pakistan 0.030 24 South Korea 0.014 46 Netherlands 0.0083 Botswana 0,029 25 Iran 0.014 47 Ethiopia 0.0074 Congo 0.028 26 Burma 0.014 48 Austria 0.0075 Malta 0.026 27 Mauritius 0.013 49 Australia 0.0076 Hong Kong 0.025 28 China 0.013 50 Spain 0.0067 Syria 0,025 29 Denmark 0.013 51 Kenya 0.0068 Zimbabwe 0.024 30 Israel 0.012 52 France 0.0059 Gabon 0.024 31 Greece 0.012 53 Liberia 0.004

10 Tunisia 0.024 32 Japan 0.012 54 Paraguay 0.00411 Cameroon 0.024 33 Luxembourg 0.012 55 Honduras 0.00412 Lesotho 0.022 34 Yugoslavia 0.011 56 Portugal 0.00413 Uganda 0.021 35 Tanzania 0.011 57 U.S.A. 0.00414 Cyprus 0.021 36 Colombia 0.011 58 Belgium 0.00415 Thailand 0.019 37 Sweden 0.010 59 Canada 0.00316 Bangladesh 0,019 38 Malaysia 0.010 60 Algeria 0.00317 Iceland 0,018 39 Malawi 0.010 61 CAR 0.00218 Italy 0.018 40 Brazil 0.010 62 India 0.00119 Norway 0.017 41 Panama 0.009 63 Singapore 0.00120 Finland 0.015 42 U.K. 0.009 64 Sri Lanka 0.00121 Taiwan 0.015 43 W. Germany 0.009 65 Fiji 0.00122 Ecuador 0.014 44 Mali 0.008 66 Switzerland 0.000

The TFP growths of the four tigers were not miraculous any more!!

What is TFP?

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input capital respect toh output wit of elasticity

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What is TFP?

Essentially, TFP is a “measure of our ignorance” (growth that cannot be explained otherwise)

Solow (1957) found that, for the US during the period 1909 to 1949, Gq=2.75% per year; GL=1% ; GK=1.75% ; eqL=0.65; and eqK=0.35

Hence, GA=Gq - eqlGL - eqLGK=1.50 That is, more than half of the growth in real

output could be attributed to technical change rather than to growth in the physical quantities of inputs.

More complicated production functions can be used ...

For instance, production function: Y=AF(L,K,H,N) where H is human capital and N is natural resources.

Young (1995, Quarterly Journal of Economics) still finds similar results of TFP growth as previous slide shows.

Kim and Lau (1994, J of J&IE) find that the hypothesis TFP growth rates of 4 little dragons equal to zero cannot be rejected.

A reminder: some authorities in the area (Jorgenson and Griliches (1967)) have argued that TFP is a result of mis-measurement of factor inputs and therefore does not really exist.

Despite difference, the following are agreed between both sides of the debate

A moderate conclusion: four tigers’ growth was not a miracle, but not completely due to perspiration as well. Hong Kong people should not be too pessimistic about the findings.

Growth relies solely on input increase is bound to diminishing (marginal) returns

Less developed countries can usually grow at a greater rate than their more developed counterparts due to the catch-up effect

To conclude, 4 little tigers cannot grow as fast as before.