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 Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

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 Economics Stanford University Stanford, CA , U.S.A. Spring WebPages:

Lawrence J. Lau, Stanford University3 Introduction u Tangible capital accumulation is the most important source of growth in developing economies u Technical progress is the most important source of economic growth in developed economies u The controversy over the role of technical progress in postwar East Asian economic growth u Kim and Lau (1992, 1994a, 1994b) u Paul Krugman (1994) u The World Bank (1993) u Alwyn Young (1992, 1995)

Lawrence J. Lau, Stanford University4 Rates of Growth on Inputs & Outputs of the East Asian NIEs and the G-5 Countries

Lawrence J. Lau, Stanford University5 The Estimated Parameters of the Aggregate Meta-Production Function

Lawrence J. Lau, Stanford University6 The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s u (1) No technical progress in the East Asian NIEs but significant technical progress in the industrialized economies (IEs) including Japan u (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) u Working harder as opposed to working smarter u (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 u NOTE THE UNIQUE POSITION OF JAPAN!

Lawrence J. Lau, Stanford University7 The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s u (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 u (5) Technical progress is purely tangible capital- augmenting and hence complementary to tangible capital u (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 University8 Accounts of Growth: Kim & Lau (1992, 1994a, 1994b)

Lawrence J. Lau, Stanford University9 Purely Capital-Augmenting Technical Progress

Lawrence J. Lau, Stanford University10 Implications of Rejection of the Hypothesis of Purely Labor-Augmenting Technical Progress u Technical progress is not simply equivalent to more labor (One thousand janitors are not equivalent to a Kenneth Arrow) u The existence of a steady state growth can no longer be assured u Capital-augmenting technical progress implies the complementarity between tangible capital and technical progress (intangible capital)

Lawrence J. Lau, Stanford University11 Production Elasticities of Capital

Lawrence J. Lau, Stanford University12 Production Elasticities of Labor

Lawrence J. Lau, Stanford University13 Degrees of Returns to Scale

Lawrence J. Lau, Stanford University14 Empirical Evidence for the Hypothesis of No Technical Progress in East Asian NIEs u Tsao (1985) and Young (1992) for Singapore u Kim & Lau (1992, 1994a, 1994b) and Young (1995) for the four East Asian NIEs u Paul Krugman (1994) u Kim & Lau (1996) extend the same finding to other East Asian economies--China, Indonesia, Malaysia, Philippines, and Thailand

Lawrence J. Lau, Stanford University15 Empirical Evidence Against the Hypothesis of No Technical Progress u Young (1992) for Hong Kong u The World Bank (1993) u Credibility of such studies undermined by restrictive maintained hypotheses such as u CONSTANT RETURNS TO SCALE u NEUTRALITY OF TECHNICAL PROGRESS & u INSTANTANEOUS COMPETITIVE PROFIT MAXIMIZATION

Lawrence J. Lau, Stanford University16 International and Intertemporal Comparison of Productive Efficiency: A Thought Experiment u Suppose all countries have the same quantities of measured inputs of capital and labor as the United States u What would have been the quantities of their real outputs? and u How would they evolve over time? WE COMPARE THEIR OUTPUTS HOLDING MEASURED INPUTS CONSTANT!

Lawrence J. Lau, Stanford University17 Hypothetical Output Levels

Lawrence J. Lau, Stanford University18 Relative Productive Efficiency (U.S.=100%)

Lawrence J. Lau, Stanford University19 The Sources of Economic Growth: Selected East Asian and Western Economies

Lawrence J. Lau, Stanford University20 The Sources of Economic Growth: Selected East Asian and Western Economies

Lawrence J. Lau, Stanford University21 Human Capital

Lawrence J. Lau, Stanford University22 Sources of Economic Growth with Explicit Inclusion of Human Capital

Lawrence J. Lau, Stanford University23 Simultaneous Capital- and Human Capital- Augmenting Technical Progress

Lawrence J. Lau, Stanford University24 R&D Expenditure as a Percentage of GDP

Lawrence J. Lau, Stanford University25 R&D Capital

Lawrence J. Lau, Stanford University26 Sources of Economic Growth with Explicit Inclusion of Human and R&D Capital

Lawrence J. Lau, Stanford University27 The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Lawrence J. Lau, Stanford University28 The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Lawrence J. Lau, Stanford University29 Sources of Economic Growth with Breaks in the Rates of Capital Augmentation (1985)

Lawrence J. Lau, Stanford University30 Sources of Economic Growth with Breaks: Sub-periods