Factor Contributions to East Asian Economic Growth

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To better understand the dramatic output growth in high performance East Asian economies, one needs to understand how much different factors of production have contributed to growth. The most important factors of production are land, labor, capital, natural resources, and technology. Traditionally land and natural resources are thought of as fixed factors; land reclamation and improvement, along with more effective use of natural resources, are accounted for as capital accumulation and improvements in technology. Thus growth accounting focuses on how changes in capital inputs, labor inputs, and technology relate to output growth. The theory of growth accounting is based on the specification of a production function linking inputs and output. However, simple calculations can also provide important insights.

Growth in labor inputs contributes to output growth. With rising female labor force participation and falling birth rates, the percentage of workers in the population of the high performance East Asian economies has been rising. A simple approach to accounting for the effect of the growth in labor input is to consider output growth per worker, rather than growth in output or growth in output per capita. In terms of output growth per worker, growth in the high performance East Asian economies is about the same magnitude as growth in Greece, Syria, and Cameroon, and signficantly closer to the center of the cross-country distribution of growth rates.

Growth in capital inputs (physical investment) also contributes to output growth. Over the past several decades the savings and investment ratios in the high performance East Asian economies have risen sharply. Between 1960 and 1980 the ratio of investment to GDP doubled in Taiwan/China, tripled in Korea, and quadrupled in Singapore. A simple approach to accounting for the effect of the growth in capital inputs on output growth is to assume that a 10% increase in capital inputs per worker produces a 4% increase in output per worker. This assumption is consistent with empirical evidence. Estimates of the significance of capital accumulation (including human capital accumulation) in East Asia from 1960-1992 indicate that it accounts for about 80% of growth in output per worker.

In growth accounting studies, typically some share of growth cannot be attributed to increases in capital or labor inputs. This residual is traditionally interpreted as technical progress. It represents more efficient use of the given factor inputs. However, this definition of technical progress includes any factors that effect output growth but that are not captured in the measured indices for capital and labor input growth. The contribution of technical progress to output growth in the high performance East Asian economies is small relative to the contribution of increases in capital and labor inputs.

The growth decomposition displayed above employed econometric estimation of a production function. It indicates that growth in labor inputs accounted for on average about 18% of output growth in Taiwan/China, Rep. of Korea, Singapore, and Hong Kong from the early 1960s to 1990. During this period capital accumulation accounted for from 48% of output growth in Hong Kong to 72% of output growth in Taiwan/China. The remaining share of growth, which represents technical progress, ranges from 14% for the Republic of Korea to 35% for Hong Kong.

Topic Economic Growth in East Asia