1. Case: Growth accounting and the East Asian economic miracle

2. 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.

3. 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

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

5. 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.)

6. Participation rates & growth (1960-85)

7. Annual growth of output/worker (60-85)

8. Investments in the NICs

9. I/GDP ratios

10. Annual Growth of “Total Factor Productivity” (1970-1985) The TFP growths of the four tigers were not miraculous any more!!

11. What is TFP?

12.  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, G q =2.75% per year; G L =1% ; G K =1.75% ; e qL =0.65; and e qK =0.35  Hence, G A =G q - e ql G L - e qL G K =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.

13. 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.

14. 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.