Growth and Productivity in East Asia
edited by Ito Takatoshi and Andrew K. Rose
University of Chicago Press, 2004
Cloth: 978-0-226-38680-5 | Electronic: 978-0-226-38707-9


Considering the examples of Australia and the Pacific Rim, Growth and Productivity in East Asia offers a contemporary explanation for national productivity that measures contributions not only from capital and labor, but also from economic activities and relevant changes in policy, education, and technology.

Takatoshi Ito and Andrew K. Rose have organized a group of collaborators from several Asian countries, the United States, and other parts of the globe who ably balance both macroeconomic and microeconomic study with theoretical and empirical approaches. Growth and Productivity in East Asia gives special attention to the causes for the unusual success of Australia, one of the few nations to maintain unprecedented economic growth despite the 1997 Asian financial crisis and the 2001 global downturn. A new database comprising eighty-four Japanese sectors reveals new findings for the last thirty years of sectoral productivity and growth in Japan. Studies focusing on Indonesia, Taiwan, and Korea also consider productivity and its relationship to research and development, foreign ownership, and policy reform in such industries as manufacturing, automobile production, and information technology.


Takatoshi Ito is a professor of economics at the University of Tokyo and a research associate of the NBER. Andrew K. Rose is the Bernard T. Rocca Jr. Professor of International Trade and director of the Clausen Center for International for Business and Policy at the Haas School of Business, University of California, Berkeley, and a research associate of the NBER.



- Takatoshi Ito, Andrew K. Rose
DOI: 10.7208/chicago/9780226387079.003.0001
[productivity, Australia, foreign direct investment, economic growth, research and development, information technology, macroeconomic theory, World Trade Organization, General Agreement on Tariffs and Trade, foreign ownership]
This book contains studies from the thirteenth annual East Asian Seminar on Economics, which took place on June 20–22 in Melbourne, Australia, and focused on productivity. It examines recent developments in macroeconomic theory concerning the determinants of long-run growth and productivity change, and looks at Australian productivity growth in the 1990s. It also assesses the impact of accession to the World Trade Organization (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT). Furthermore, the book focuses on information advantages that foreign managers may have that encourage foreign direct investment. Other chapters presented here explore foreign ownership of productivity in the Indonesian automobile industry; the impact of research and development on productivity in Taiwan; the effects of information technology investments in Korea; and sectoral productivity and economic growth in Japan. (pages 1 - 6)
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I. Macro Productivity

- Steve Dowrick
DOI: 10.7208/chicago/9780226387079.003.0002
[economic growth, education, Australia, human capital, knowledge, research and development, endogenous growth theory, educational attainment, Robert Solow]
The importance of human capital for economic growth was highlighted in much of the “new growth theory” that came to prominence in the late 1980s and early 1990s. The neoclassical growth model, formalized three decades earlier, had focused on the accumulation of machinery and equipment and emphasized the feature of diminishing returns—which implied that such investment would not be able to drive long-run growth. The new generation of studies switched attention to the accumulation of human capital and the possibility that returns to investment in education, training, and research may not suffer from diminishing returns. This chapter examines market-related returns to human capital, focusing on the experience of Australia. It reviews and evaluates evidence from recent theoretical and econometric studies relating economic growth to investment in both embodied and disembodied human capital. The chapter focuses on the empirical front to the relatively well-documented areas of investment in formal schooling and research and development. It also discusses the role of knowledge in economic growth, endogenous growth theory, the ideas of Robert Solow, and Australia's educational attainment report. (pages 9 - 37)
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- Dean Parham
DOI: 10.7208/chicago/9780226387079.003.0003
[Australia, productivity growth, multifactor productivity, information and communications technologies, United States, cyclical effects, education, skills, policy reforms]
Australia's growth performance since the early 1990s has been exceptional. After showing its weakest rate in the 1980s, Australia's productivity growth accelerated by a little over 1 percentage point to new highs in the 1990s—labor productivity growth at an average 3.2 percent a year and multifactor productivity growth at 1.8 percent a year. The length and strength of the productivity resurgence—controlling for cyclical influences—demand some “structural” explanations. One such explanation is a shift in the production frontier due to the introduction of new technology—specifically information and communications technologies (ICTs). This chapter examines ICTs as a source of productivity growth in Australia during the 1990s and compares the Australian experience with that of the United States. Productivity growth and the ICT contributions to it are sensitive to cyclical effects. The chapter considers other possible explanations for Australia's growth performance, such as worker education and skills and policy reforms. (pages 41 - 65)
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- Daron Acemoglu, Simon Johnson, James Robinson
DOI: 10.7208/chicago/9780226387079.003.0004
[institutions, economic development, economic instability, output volatility, mortality, political crisis, banking, exchange rates, colonization, settlement]
There is a growing consensus among economists that differences in institutions, in particular the enforcement of property rights, rule of law, and constraints placed on politicians and elites, have a first-order effect on long-run economic development. This chapter argues that institutions also have a first-order effect on short- and medium-run economic instability. It shows that societies with weak institutions for historical reasons have suffered substantially more output volatility and experienced more severe crises in output, exchange rates, and banking as well as political crisis over the past thirty years. It uses the mortality rates faced by European settlers as an instrument for institutional development and current institutions. It reveals a surprisingly strong relationship between these mortality rates and various measures of instability and crises during the past 30–40 years. This relationship reflects the effect of historically determined institutions (more specifically, institutions shaped by differential European colonization strategies and settlement patterns) on instability. (pages 71 - 102)
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- David D. Li, Changqi Changqi Wu
DOI: 10.7208/chicago/9780226387079.003.0005
[World Trade Organization, General Agreement on Trade and Tariff, accession, productivity, globalization, economic growth, GDP, imports, exports, foreign direct investment]
The World Trade Organization (WTO), whose former incarnation is the General Agreement on Trade and Tariff (GATT), has played a significant role in promoting international trade and pushing for greater integration of the world economy. Many developing and emerging-market countries believe that the accession to the WTO would enhance their productivity and economic prosperity. The event of accession to GATT/WTO is actually an important testing case of the much more general and bigger issue of globalization. There have been econometric studies of the positive impact of trade liberalization on economic growth and development. This chapter investigates the impact of the GATT/WTO accession across countries. It examines the impact of accession on individual economic variables of the economy such as GDP, capital stock, imports and exports, foreign direct investment, and productivity changes in the economy. (pages 109 - 143)
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- Assaf Razin
DOI: 10.7208/chicago/9780226387079.003.0006
[foreign direct investment, domestic investment, capital flows, international loans, international portfolio investment, industrial organization, capital costs]
The term “foreign direct investment” (FDI) usually brings to mind a significant contribution of FDI to domestic investment and capital inflows. However, there has been a lot of skepticism concerning the contribution of FDI to these engines of growth. FDI (the purchase by a domestic resident of a controlling stake in a foreign company) actually requires neither capital flows nor investment in capacity. Conceptually, FDI is an extension of corporate control over international boundaries. Theories of FDI can essentially be divided into two categories: micro (industrial organization) theories and macro finance (capital costs) theories. The early literature that explains FDI in microeconomic terms focuses on market imperfections and on the desire of multinational corporations to expand their market power. This chapter shows that FDI flows play an important role in the skimming of high-productivity investment projects and thereby contribute significantly to domestic investment in both the quantity and the quality dimensions. Using an econometric approach, it estimates the interactions between domestic investment, FDI flows, international loans, and international portfolio investment. (pages 149 - 167)
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II. Micro Productivity

- Kyoji Fukao, Tomohiko Inui, Hiroki Kawai, Tsutomu Miyagawa
DOI: 10.7208/chicago/9780226387079.003.0007
[Japan, economic growth, total factor productivity, manufacturing, growth accounting, Japan Industrial Productivity Database, labor, capacity utilization, sectoral productivity]
Following the collapse of the so-called bubble economy, Japan's economy has entered a phase of unprecedentedly low growth. From the viewpoint of growth accounting, Japan's low economic growth in the 1990s can be explained by three factors: a slowdown of the labor supply caused by structural changes (for example, population aging and reduced work weeks), a slowdown of total factor productivity (TFP) growth, and a lack of effective demand and deflation. This chapter presents a detailed empirical analysis of Japan's TFP growth by using the Japan Industrial Productivity Database. It addresses the following questions: After the quality of labor and the capacity utilization have been taken account of, how much of the slowdown of Japan's economic growth in the 1990s can be attributed to the decline in TFP growth? In what sectors is TFP growth particularly low? What structural factors seem to have contributed to recent changes in sectoral productivity growth? Regarding the manufacturing sector in the 1990s, the chapter identifies factors that seems to have contributed to the low level of TFP growth. (pages 177 - 220)
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- Keiko Ito
DOI: 10.7208/chicago/9780226387079.003.0008
[multinational corporations, foreign direct investment, total factor productivity, Indonesia, automobile industry, industrial organization, local firms]
In the traditional theory of multinational corporations (MNCs), foreign direct investment (FDI) by MNCs is regarded as the movement of managerial resources. Many researchers have investigated productivity gaps between MNCs and local firms, and technology transfer from MNCs to local firms. This chapter addresses two questions, taking the Indonesian automobile industry as a case. First, are foreign plants more productive than local plants, as MNC theory predicts? Second, if so, what are the determinants of the productivity of plants? Most automobile firms in Indonesia were established by the country's major conglomerates as a joint venture or under a licensing agreement with foreign (principally Japanese) automakers. The chapter first provides an overview of the development of the Indonesian automobile industry and discusses industrial organization aspects of the industry. It then calculates and compares various partial productivity measures in time series and between local and foreign establishments. It also describes the econometric model of the cost function estimation and states the methodology for the decomposition of total factor productivity growth. (pages 229 - 270)
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- Jiann-Chyuan Wang, Kuen-Hung Tsai
DOI: 10.7208/chicago/9780226387079.003.0009
[research and development, Taiwan, productivity growth, output, employment, physical capital, Schumpeterian hypothesis, rates of return, manufacturing firms, R&D expenditure]
Ever since the 1960s, research and development (R&D) investment has been regarded as an important factor in the improvement of productivity levels. Numerous studies have attempted to estimate the marginal product of R&D capital or the rates of return on R&D investment, but they have continually failed to produce consistent results, with some even failing to determine the contribution of R&D to productivity growth. This chapter investigates productivity growth and R&D expenditure in Taiwan's manufacturing sector, focusing on the relationship between output (value added), employment, physical capital, and R&D capital using panel data for a sample of 136 firms over the period 1994–2000. It assesses the degree to which R&D influences productivity, examines the rates of return on R&D investment within manufacturing firms, and analyzes the differences in productivity growth and the rates of return on R&D investment between industries. Finally, the chapter tests the Schumpeterian hypothesis stating that the returns on R&D are an increasing function of firm size. (pages 277 - 292)
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- Youngjae Lim, Chin Hee Hahn
DOI: 10.7208/chicago/9780226387079.003.0010
[bankruptcy, Korea, total factor productivity, resource reallocation, policy reform, rehabilitation, manufacturing firms, courts]
During the onset of the Korean financial crisis in 1997, an inefficient corporate bankruptcy system adversely affected Korea's economy. The inadequacies of the bankruptcy system led to poor discipline in targeting the appropriate financially distressed firms to undergo rehabilitation. Meanwhile, before the outbreak of the economic crisis, the uncertainty and delay encountered in dealing with failing firms clearly added to the distortion of the resource allocation process in Korea's economy. Hence, the natural course of action for post-crisis Korea was to undertake a sweeping reform of its corporate bankruptcy system. This chapter investigates the effects of bankruptcy policy reform in Korea by analyzing data at the firm or plant level, focusing on bankruptcy procedures administered by the courts. It examines whether manufacturing firms accepted under the reformed court-administered rehabilitation procedures experienced less persistent problems in their pre-bankruptcy total factor productivity (TFP) compared to firms undergoing the same process before the reforms. It also discusses how the reforms improved the efficiency of resource reallocation and, in turn, aggregate TFP growth. (pages 297 - 322)
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- Jong-Il Kim
DOI: 10.7208/chicago/9780226387079.003.0011
[information technology, firm performance, Korea, economic crisis, productivity growth, profitability, total factor productivity, financial market, economic growth]
Information technology (IT) has made a considerable contribution to the recent economic growth of Korea. Semiconductor, personal computer, and telecommunication equipments ranked first, third, and sixth, respectively, in the 2000 Annual Statistical Report of Korea. A recent OECD report shows that the productivity growth in Korea could be to a large extent attributable to the strength in IT manufacturing. Along with expansion of IT manufacturing sectors in Korea, Korean firms have become more IT equipped, particularly after the economic crisis in 1997. This chapter examines the effect of IT use on Korean firm performance in 1997–2000, a period when most Korean firms introduced unprecedented reform under the pressure of economic crisis. It first provides some empirical findings on the role of IT investment in firm productivity growth. It then evaluates the effect of IT spending on firm profitability and total factor productivity. Finally, it estimates the valuation of IT capital in the financial market and performs a simple experimental growth accounting to see how much contribution IT investment might have made to the recent economic growth of Korea. (pages 327 - 344)
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- Andrew Caplin, John Leahy
DOI: 10.7208/chicago/9780226387079.003.0012
[macroeconomics, aggregate dynamics, discrete adjustment, continuous adjustment, durable goods, representative agent model, discrete choice model, Caplin-Leahy model, automobile industry]
The chapters in this volume tend to fall into two camps: those that take a microeconomic perspective on growth and productivity and those that take a more aggregate perspective. In spite of the discreteness of many microeconomic decisions, the standard approach to modeling in macroeconomics is to ignore all of this discrete behavior and assume that all firms are represented by a single representative firm that makes all of the investment decisions or that all consumers are represented by a single representative consumer that makes all of the consumption decisions. This chapter compares the aggregate dynamics of a discrete adjustment model to that of a representative agent model with continuous adjustment. It assumes that the durable goods holdings of different agents depreciate at different rates and compares the representative agent model with the Caplin-Leahy approximation to the discrete choice model. Finally, the chapter calibrates the Caplin-Leahy model using data from the U.S. automobile industry. (pages 351 - 372)
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Author Index

Subject Index