Thirty years later, is there anything left of the debate about the sources of growth in East Asia? An important part of the report's analysis focused on the sources of growth in East Asia. We conclude that the analysis of growth within the framework of the neoclassical model must be seriously questioned.
This paper provides a critical review of the literature on the debate on the sources of growth in East Asia, which mostly took place in the 1990s and early 2000s. The year 2023 marks the 30th anniversary of the publication of the World Bank's (1993) The East Asian Miracle. We argue that the growth literature must move beyond the framework of the neoclassical model.
THE DEBATE OVER TOTAL FACTOR PRODUCTION GROWTH IN EAST ASIA AND CHINA: A LITERATURE REVIEW. The 1990s witnessed one of the most important debates in the history of growth and development.1 This was the debate about the sources of growth in East Asia. He argued that the freedom of markets in Hong Kong was at the bottom of the score.
8 Felipe (1999) provided a comprehensive survey of many of the estimates of TFP growth for East Asian countries since 1992.
WHAT SHOULD WE MAKE OF EAST ASIA’S GROWTH ACCOUNTING EXERCISES AND AGGREGATE PRODUCTION FUNCTION
As can be seen from equation (3) for the growth rate of capital stock, this may be due to an elasticity of substitution equal to unity and a Cobb-Douglas production function. Suppose there is a rapid growth in the ratio between capital and labor, as has occurred in these economies. The capital share value in the closing period ()sTK is high only because of the impact of biased technical changes.
This part of the table also shows the standard TFP growth rate, denoted TFPG. An important aspect of the controversy was also about the legitimacy of the neoclassical aggregate production function to describe an economy. These authors asked whether there are any possible interpretations of production function estimates that are consistent with the nonexistence of an aggregate production function.
Felipe and McCombie (2003) showed that growth accounting exercises and the derivation of TFPG could be equally performed from an accounting identity relating output to the sum of the wage bill and total profit in NIPA without any assumptions. Also, equation (5) is not derived from Euler's theorem, the validity of which depends on the existence of the production function of the aggregate. Furthermore, since factor shares (stLand stK) change only slowly over time and the rate of growth of the wage rate (wˆt) is slightly procyclical (wages are sticky), most fluctuations in s wtLˆts rtKˆt (and consequently in .. y s s k ) are the result of fluctuations in the growth rate of the profit margin (rˆt).
First, in light of the accrual problem, the growth accounting exercise is theoretically highly dubious. What neoclassical economics does, and this is the crux of the problem, is to link this identity to the notion of the neoclassical aggregate production function and then argue that what underlies the accounting identity is that. Herbert Simon was also aware of the argument and exchanged letters with Solow about it.
To emphasize our arguments, we review here Young's (1994) work, the “growth accounting exercise,” which estimates a growth regression instead of an accounting exercise. In other words, the rate of wages grew at a rate that matched the decline in the rate of growth of the rate of profit. This is a point that Hsieh disagreed with, arguing that it was due to very high and possibly incorrect equity valuations.
It follows from the argument that estimation of the production function alone is inappropriate as it treats labor and capital as exogenous variables. Therefore, the test of the assumption of a competitive labor market is whether the output elasticities are equal to the factor shares.
IF NOT TFP GROWTH VERSUS FACTOR ACCUMULATION, HOW CAN WE EXPLAIN EAST ASIA’S FAST GROWTH?
A second piece of literature that helps explain the growth of East Asia is the work summarized in the idea of the product space (Hidalgo et al., 2007) and the concept of complexity (Hidalgo & Hausmann, 2009). A second piece of literature that is extremely useful in understanding the growth of East Asia is based on Thirlwall's (1979) idea of the rate of growth of the balance of payments (BAPC). These two elasticities are summaries of the non-price characteristics of exports and imports (quality, variety, reliability, speed of delivery or distribution network).
The originality of the work of Hausmann and Hidalgo lies firstly in that it explains economic development as a process of learning how to produce (and export) more complex products. A given capability is embodied in the tacit knowledge of the individuals who comprise the firm's workforce. The complexity of a product is a function of the capabilities it requires, while the complexity of a country is given by the number of locally available capabilities.
Hausmann and Hidalgo (2010) noted that, depending on the level of disaggregation of the data used, the total number of opportunities worldwide ranges from 23 to 80. An implication of the product space is that the lack of connectivity between the peripheral products (low - productivity products) and at its core (high productivity products) explains the difficulties poor countries face in convergence to the income levels of rich countries. 2007) suggested two simple empirical measures of product and economic complexity (or sophistication). Weight is the index of apparent comparative advantage.31 Economic (or country) complexity, EXPY, represents the level of productivity associated with a country's basket of exports, and is calculated as a weighted average (where weight is the share of product in the economy). country's export basket) of the complexity of the products exported by the country.32 Hausmann et al.
31 The weight is the ratio between the share of the product in a country's export basket and the sum of all shares of all countries that export that product. PRODY provides a measure of the income content of a product and is therefore not a technical concept. The different Lego models we can build (i.e. different products) depend on the kind, diversity and exclusivity of the Lego pieces we have in a bucket.
Diversification and ubiquity are the simplest measures of the complexity of a country and a product, respectively. The reflection method consists of calculating the average value of the measurement jointly and iteratively calculated in the previous iteration, starting with a measure of a country's diversification (equation (a)) and a product's ubiquity (equation (b)). The subsequent iterations of the reflection method refine the complexity measures by taking into account the information from the previous iterations.
CONCLUSIONS: WHAT DID WE LEARN FROM (AND WHAT IS LEFT OF) THE DEBATES ABOUT THE SOURCES OF GROWTH IN EAST ASIA?
Also using the method of reflections and data for more than 120 countries, but for more than 5,000 products and average data for Felipe et al. 2012b) showed the distribution of the product of complexity across different product categories. Finally, because of the above, Krugman's (1994) discussion of the East Asian Wonder was far from compelling. The papers we examined (and many others) contained very interesting case study reports from the countries analyzed.
What we question is the relevance of the growth accounting exercises per se and the discussion of these countries' growth performance in terms of factor accumulation versus TFP growth. Because of the focus on the latter, it was more of a transient shock than a permanent effect.37. This was partly the result of the fact that policy makers in East Asia did not see much value in the policy recommendations of this research program ("increase TFP"); and partly the result of the shift in emphasis away from the NIEs when growth rates slowed significantly after the Asian Financial Crisis of 1997-1998.
China's growth rate has also begun to decline, partly due to the great financial crisis and partly due to its own internal dynamics (Asian Development Bank, 2016). Because of this, Pritchett and Summers (2013) talked about the Asian shape and predicted that growth rates in the region will have to decline because the evidence shows that growth rates show little statistical inertia, meaning that there is regression to the mean and growth in Asia exchange rates have long exceeded two standard deviations of the historical growth average. Consequently, we have argued that the growth literature needs to move beyond the neoclassical model and TFP research agenda, and there are signs that this is underway, such as the work discussed earlier on the complexity of Rodrik et al.
Some may find it difficult to understand that we are questioning one of the jewels of modern economics, the neoclassical research program on growth and its empirical counterparts, growth accounts and the estimation of TFP. Our view on this is clear: trying to explain growth with this model is akin to, and reminds us of, the long process it took humanity to understand the motions of the planets through the perpetuation of the geocentric model of planetary motion. This was a slow and careful process that occurred in the context of the export-led growth model and the region's industrialization drive in the 1960s–1990s, which underpinned its rapid structural change.
Why isn't the whole world experimenting with developing the East Asian model?: Reviewing the East Asian miracle. The aggregate production function and the measurement of technical change: 'Not even wrong.' Edward Elgar. The impact of the Asian miracle on the theory of economic growth (NBER Working Paper No. 14967).
