The Changing Role of Investment in Developing Asia’s Economic Growth
1
The Changing Role of Investment in Developing Asia’s Economic Growth
Donghyun Park
Jungsoo Park
Abstract
One of the central ingredients of developing Asia’s economic success is its traditionally
high savings and investment rates. An ample pool of domestic savings has enabled the
region to rapidly build up its capital stock and productive capacity. The historical
experience of advanced countries suggests that the source of economic growth shifts from
investment to productivity as countries grow richer. The primary objective of our paper is
to empirically examine the relative contribution of investment to economic growth in
developing Asia during 1992-2007. Our evidence indicates that the source of the region’s
growth has begun to shift from investment to productivity growth in recent years.
Keywords: Investment, capital accumulation, productivity growth, economic growth, Asia
JEL codes
O40, O47, E22

Principal Economist, Macroeconomics and Finance Research Division, Economics and Research Department, Asian
Development Bank, 6 ADB Avenue, Mandaluyong City, Metro Manila, PHILIPPINES 1550 [E-mail] dpark@adb.org, [Tel]
63-2-6325825, [Fax] 63-2-6362342

Professor of Economics, School of Economics, Sogang University, Seoul, KOREA 121-742. [E-mail]
jspark@sogang.ac.kr, [Tel] 82-2-705-8697, [Fax] 82-2-704-8599
Donghyun Park / Jungsoo Park
2
.
I. Introduction: The Role of Saving and Investment in Developing
Asia’s Growth
High saving and high investment rates have long been a defining structural characteristic of
East Asian economies. They served as key ingredients in the East Asian Miracle which
transformed eight market-based regional economies – Japan, Korea, Taiwan, Hong Kong,
Singapore, Indonesia, Malaysia and Thailand – between 1960 and 1990. While there were
other ingredients, including sound macroeconomic policies, limited price distortions, human
capital accumulation, strong civil service and institutions, and openness to foreign trade and
technology, high saving and investment rates lay at the heart of the Miracle. Furthermore,
there was a tangible, measurable difference between the region and other parts of the
developing world. East Asia’s saving and investment rates were initially comparable to those
of other developing regions but a marked growth in both opened up a sizable gap over time.
For example, while the saving and investment rates of East Asia and Latin America were more
or less equal in 1965, East Asian rates were almost double those in Latin America by 1990.
High investment rates led to a rapid accumulation of physical capital such as plant and
equipment and infrastructure. This led to a large expansion of productive capacity in a short
period of time, and thus enabled the Miracle economies to grow faster than their counterparts
in Eastern Europe, South Asia, Latin America, the Middle East and Africa. China has also
followed in the footsteps of the Miracle economies in growing rapidly, by saving a lot and
investing a lot. While investment has a direct impact on growth, saving promotes growth
indirectly through its positive effect on investment. If capital were completely immobile
across countries, saving and investment would be equal, by definition. However, according to
a well-established stylized fact known as the Feldstein-Horioka effect, there is a high degree
of correlation between saving and investment, even under international capital mobility. This
implies that even when savings can flow freely from one country to another, countries which
save more will also invest more. East Asian countries are a case in point.
The high savings rates of East Asian economies have often been attributed to noneconomic factors. In particular, there is a widespread tendency, especially among those
outside the region, to view the region’s saving rates as a symptom of a culture which places
an extra premium on thrift and making sacrifices today for a better tomorrow. That is, East
Asia’s high savings rates are viewed by many as the peculiar outcome of a peculiar culture. In
The Changing Role of Investment in Developing Asia’s Economic Growth
3
fact, the Miracle economies had two fundamental pro-saving policies which differentiated
them from other developing countries. One was sound macroeconomic management which
prevented inflation and hence negative or variable rates of return on deposits. The other was
relatively strong prudential regulation and supervision which enhanced deposit safety. The
Miracle economies also pursued various policies to promote investment. For one, their
governments were more effective in setting up the infrastructure – roads, ports, airports,
power plants, water supply – which raise the rate of return on and hence encourage private
investments. For another, tax policies, including tariff policies, kept down the price of capital
goods and provided generous fiscal incentives for investment.
Let us now take a look at the actual pattern of saving and investment in the pre-crisis and
post-crisis period. More precisely, Figure 1 below, reproduced from Park and Shin (2009),
shows the saving-GDP ratio and investment-GDP ratio of eight regional countries – China,
India, Japan, Korea, Indonesia, Malaysia, Philippines and Thailand – between 1970 and 2005.
The last five countries are the countries which had been most severely affected by the Asian
crisis.
[ Figure 1 ] Saving Rate, Investment Rate and Real GDP Growth in Selected Asian Countries,
1970-2005
(a) China
4
(b) India
(c) Indonesia
Donghyun Park / Jungsoo Park
.
The Changing Role of Investment in Developing Asia’s Economic Growth
(d) Japan
(e) Korea
5
6
(f) Malaysia
(g) Philippines
Donghyun Park / Jungsoo Park
.
The Changing Role of Investment in Developing Asia’s Economic Growth
7
(h) Thailand
Note: The saving and investment rates are measured by the left axis and the GDP growth rate by the right axis.
Overall, Figure 1 shows that Asian economies continue to save more and invest more than
other developing countries in the post-crisis period. This helps to explain why the region as a
whole continues to outperform other parts of the developing world. Although there is
variation across countries over time, Asia is indeed a high-saving, high-investment and highgrowth region, and this pattern continues to hold even after the crisis. However, Japan - the
precursor of the East Asian growth paradigm of high saving, investment and exports - has
experienced a secular decline in saving and investment throughout the sample period. To a
large extent, the drop-off in investment reflects the well-established stylized fact that beyond
a certain per capita income level, investment falls as income rises. In light of the fact that
Japan is a mature industrialized economy and one of the world’s richest countries, the decline
in investment rate should come as no surprise. The law of diminishing returns implies that the
marginal returns to capital fall as an economy accumulates more and more capital. Japan’s
high income level may also contribute to the decline in saving but the more fundamental
driver of lower saving is the well-documented rapid aging of the Japanese population. The
fall in the share of working-age population reduces the share of potential savers and hence the
Donghyun Park / Jungsoo Park
8
.
national saving rate. The Japanese experience suggests that other East Asian countries,
particularly those at higher income levels and undergoing rapid demographic transition, are
likely to experience lower saving and investment rates in the future.
The pattern of saving and investment in China shows a more or less continuous increase in
both saving and investment rates during the sample period. It is also interesting to see that
saving and investment track each other closely, which indicates that in China, investments
have been financed largely out of domestic savings. This makes sense in light of the country’s
limited capital mobility due to its stringent capital controls. Foreign capital inflows into
China have largely taken the form of FDI. A systematic excess of saving over investment has
begun to emerge since around 1990. The distinction between the pre-crisis period and postcrisis period is obviously most relevant for the economies that suffered the most during the
Asian crisis. While Indonesia, Korea, Malaysia, Philippines and Thailand share the common
denominator of the Asian crisis, they are nevertheless a heterogeneous group of countries in
terms of income and economic structures. Figure 1 unambiguously confirms the conventional
wisdom that there has indeed been a sharp drop in the investment rate of all five countries in
the post-crisis period. Another common trend is that while the exact movement of the saving
rate differs from country to country, it has fallen by less than the fall in the investment rate.
The saving and investment trends of India differ from those of East Asian countries in that
there has been a more or less continuous increase in both throughout the sample period. More
specifically, both saving and investment have grown slowly but steadily. In particular, the
growth of both has continued in the post-crisis period.
II. The Role of Investment and Productivity Growth in Developing
Asia’s Growth
Just a generation ago, developing Asia was a poor, agricultural region with a limited stock
of physical capital. The marginal returns to capital tend to be very high in poor regions. For
example, the first airport in a country generates a large increase in output and economic
activity by linking the country with the outside world. The airport leads to a quantum increase
in trade by reducing the cost of cargo transportation and tourism traffic by reducing the
tourists’ cost of traveling to the country. Likewise, intuitively, the opening of a country’s first
power plant and electricity network is a transformational event which catapults the country
The Changing Role of Investment in Developing Asia’s Economic Growth
9
into the modern age. Therefore, investment and capital accumulation are critical for economic
growth at low levels of income and early stages of development. Indeed, the expansion of
long-run productive capacity resulting from sustained investment and capital accumulation is
the single most important determinant of long-run growth for developing countries.
Regardless of whether investment is financed by domestic or foreign savings, factories, roads,
telecommunications networks and other additions to productive capacity are required for a
poor country’s economic take-off. In the case of Asia, which traditionally enjoyed high
savings rates, high investment rates were largely financed by high domestic savings rates.
More fundamentally, the region’s high investment rate was instrumental in transforming the
region from a group of typical developing countries into the most dynamic component of the
world economy.
Economic theory predicts that investment becomes a less important source of economic
growth as a country becomes richer. This is due to one of the most basic principles of
economics – the law of diminishing marginal returns to capital. As a country grows richer –
i.e. as a country accumulates a larger stock of capital – beyond a certain stock of capital, each
additional unit of capital stock yields smaller and smaller increases in output. For example,
the first highways that a country builds connects the major centers of economic activity and
thus generates a large expansion of economic activity. However, as a country builds more and
more highways, and the network of highways has already connected all the major centers of
economic activity, additional highways will become less and less productive. Those marginal
highways will lead to remote, sparsely populated areas with limited economic activity. The
economic rationale for building such highways is much weaker than the first few highways
which bring about a large increase in output. In fact, the cost of building “highways to
nowhere,” sometimes built for political reasons, exceeds the benefits and are widely criticized
as classic examples of wasteful and inefficient fiscal policy. There are only so many
productive factories, roads, power plants and other additions to the capital stock that an
economy can support. More generally, as an economy builds up its capital stock, we can
naturally expect the productivity of investment to eventually decline.
International historical experience confirms that as countries grow richer, the relative
importance of investment as a source of economic growth falls. In particular, the experience
of advanced economies such as the US, EU and Japan confirms that investment plays a
smaller role in driving growth as economies mature. Accumulation of capital and labor gives
10
Donghyun Park / Jungsoo Park
.
way to productivity growth as the primary driver of growth when income and capital stock
reach high levels. Productivity growth, which refers to raising the productivity of capital and
labor, is more difficult than accumulating capital and labor. More significantly, output growth
based on productivity growth is more difficult to attain than output growth based on inputs.
Input-based growth is, in effect, the low-lying fruit of economic growth whereas
productivity-based growth is the high-lying fruit. This helps to explain the marked secular
decline of growth in the advanced economies in the last few decades. Two key stylized facts
of international experience – the central importance of investment for growth at low income
levels and its declining importance at high income levels – are very much consistent with
economic intuition and the law of diminishing returns to investment.
One of the most divisive debates about the economic success of developing Asia, in
particular East Asia, is the relative contribution of capital accumulation versus productivity
growth to that success. The debate reached its peak at the height of the East Asian Miracle
prior to the Asian crisis of 1997-1998 and endures to this day. The intensity of the debate has
decreased somewhat since the Asian crisis perhaps because that crisis has lessened the
general fascination with Asian economic performance. There was a tendency among some
economists, including luminaries such as Paul Krugman, to downplay the East Asian Miracle
as almost entirely driven by capital accumulation. At the same time, another school of
thought attributed a much larger role to productivity growth in the region’s success. Quite
predictably, empirical literature has sprung up to examine the issue. Most of these empirical
studies look at the pre-1990 period. The most recent study is Collins and Bosworth (1997),
which analyzes the sources of growth in 3 NIEs and 4 ASEAN countries during 1960-1994.
Other studies include Young (1994, 1995) and World Bank (1993), which look at 4 NIEs and
3 ASEAN countries. Those previous studies, based largely on the pre-1990 period, find that
capital accumulation was the primary source of growth in Asia.
While the balance of evidence indicates that Asia’s growth up to 1990 was driven largely
by capital accumulation rather than productivity growth, there is no guarantee that this pattern
of growth will continue beyond the global crisis. All the more so since Asia’s spectacular
economic growth during the last few decades has fundamentally transformed the region. Asia
has experienced a sharp improvement in living standards and the shift from agriculture to
manufacturing and services. But perhaps Asia’s most significant structural change has been
its transformation from a capital-deficient region to a capital-abundant region. Indeed Asia
The Changing Role of Investment in Developing Asia’s Economic Growth
11
has become the world’s biggest net exporter of capital, primarily due to its structural shift
from a more or less balanced current account to a large and persistent current account surplus
since the Asian crisis of 1997-1998. In view of Asia’s transformation into a capital-abundant
region, it is plausible to conjecture that capital accumulation will become less significant as a
source of growth and productivity growth will become correspondingly more significant.
There is no reason why developing Asia should be immune from the law of diminishing
returns to capital. To the contrary, the high-saving, high-investment nature of the region’s
growth suggests that diminishing returns is likely to kick in at an earlier development stage
than in the advanced economies. In this context, it is worthwhile to examine the relative
importance of capital accumulation versus productivity growth, as we do in the next section.
III. Empirical Analysis of the Role of Investment in Developing Asia’s
Growth
In this section, we examine the relative contributions of capital, labor and total factor
productivity (TFP) to developing Asia’s economic growth during 1992-2007. The two major
sources of growth are (1) the accumulation of capital – i.e. investment – as well as the
accumulation of labor and other productive factors, and (2) total factor productivity (TFP)
growth, which refers to the improvement in the efficiency of production, controlling for all
factors of production. We are especially interested in finding out whether there has been a
perceptible change in the relative importance of investment in the region’s growth. Economic
intuition, along with the historical experience of the advanced economies, suggest that
investment will play a smaller role in light of developing Asia’s transformation from a
capital-deficient region to a capital-abundant region.
1. Empirical Methodology and Data
We use standard methodology widely used in the empirical literature which seeks to
identify the relative importance of different sources of economic growth. Please refer to Park
and Park (2010) for a more comprehensive explanation of the empirical methodology and
date. In particular, this methodology, also known as growth accounting, seeks to identify the
relative contribution of investment versus productivity growth in driving growth. While
Donghyun Park / Jungsoo Park
12
.
growth accounting is subject to a great deal of criticism, primarily because it defines
productivity growth as the residual which cannot be explained by capital, labor and other
productive factors, it remains a widely used tool for identifying the sources of growth. To
calculate TFP growth, we assume a two-input neoclassical production function with constant
returns to scale.
In the basic formula, we do not adjust labor for human capital. We follow much of the
growth accounting literature in assuming competitive labor markets. In such markets, output
elasticity with respect to labor is equal to the labor shares of GDP. Unfortunately, the data on
labor compensation is available for only limited countries and for only limited periods.
Therefore, we estimate TFP growth under two different assumptions about labor shares. First,
we compute labor shares on the basis of actual labor compensation data. For countries
without the required data, we borrow and apply data from countries which have the required
data. Second, we follow the study of Fischer (1993) and assume a common labor share to be
0.6. Human capital improves the quality of labor. Since formal education is a primary form of
human capital investment, we incorporate average educational attainment years of the
population to adjust labor for human capital. We consider two alternative adjustment methods
– linear adjustment and exponential adjustment in the manner of Barro and Lee (2010).
Our sample countries are China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan,
Philippines, Singapore, Taiwan, Thailand and Viet Nam. The twelve countries are divided
into three groups – (1) four NIEs – Hong Kong, Korea, Singapore, and Taiwan, (2) seven
developing Asian economies – India, Indonesia, Malaysia, Pakistan, Philippines, Thailand
and Vietnam, and (3) China. Our sample period – 1992-2007 – consists of three structurally
distinct sub-periods: 1992-1997 marks the pre-Asian crisis period characterized by the
overheating which triggered the crisis, 1997-2002 marks the immediate post-Asian crisis
period characterized by extensive corporate and financial restructuring and reform, and 20022007 marks the pre-global crisis period of rapid growth.
2. Empirical Evidence
Here we report and discuss the results of the empirical analysis described in the preceding
sub-section. Please refer to Park and Park (2010) for full technical details of the empirical
analysis as well as the complete set of empirical results. Figure 2 shows the relative share of
The Changing Role of Investment in Developing Asia’s Economic Growth
13
output growth in the NIEs that is explained by TFP growth under two alternative assumptions
– (1) labor share is equal to the actual share of labor income in national income and (2) labor
share is assumed to be 0.6 as in Fisher (1993) – for three sub-periods – (1) 1992-1997, (2)
1997-2002 and (3) 2002-2007. For each sub-period, we first compute the average growth in
output, capital and labor. We then compute the respective contribution of capital, labor and
TFP to output growth. Contribution of capital is the percentage point of output growth that
can be accounted for by the growth of the capital stock. Contribution of labor is the
percentage point of output growth that can be accounted for by the growth of the labor force.
Contribution of TFP is the percentage point of output growth that can be accounted for by
TFP growth. The variable that matters the most for our purposes is the relative portion of
output growth that is explained by TFP growth. For example, for 1992-1997, we find that
output growth is 6.99% and the contribution of TFP growth to output growth is 1.55%.
Therefore, the relative contribution of TFP growth is 22.18% (=1.55/6.99). Figures 3 and 4
show the results of the identical exercise for China and the seven developing Asian
economies, respectively.
[ Figure 2 ] Relative Contribution of TFP to Output Growth, 1992-2007, Labor Not Adjusted
for Quality, Newly Industrialized Countries = Hong Kong, Korea, Singapore, Taiwan
70
60
50
40
30
20
10
0
-10
1992-1997
1997-2002
2002-2007
-20
-30
actual labor share
labor share = 0.6
.
Donghyun Park / Jungsoo Park
14
[ Figure 3 ] Relative Contribution of TFP to Output Growth, 1992-2007,
Labor Not Adjusted for Quality, China
70
60
50
40
30
20
10
0
1992-1997
1997-2002
actual labor share
2002-2007
labor share = 0.6
[ Figure 4 ] Relative Contribution of TFP to Output Growth, 1992-2007, Labor Not Adjusted
for Quality, 7 Developing Asian Countries = India, Indonesia, Malaysia, Pakistan,
Philippines, Thailand, Vietnam
60
50
40
30
20
10
0
1992-1997
1997-2002
-10
-20
actual labor share
labor share = 0.6
2002-2007
The Changing Role of Investment in Developing Asia’s Economic Growth
15
The most striking result from Figures 2, 3 and 4 is the clear shift in the sources of growth
from investment to TFP in all three groups of developing Asian countries. Before 2002,
accumulation of physical capital was the primary source of output growth in the region but
after 2002 TFP growth explains a much larger share of growth. The contribution of labor was
minimal for all Asian economies throughout the entire sample period. The share of labor
income in national income is typically less than 0.6 in Asian countries. As a result, higher
weights are applied to capital stock growth, which is very high. This is why the contribution
of TFP growth for the Asian economies is lower when we use actual labor shares. The
estimates of TFP growth and its contribution to output growth have increased significantly in
the period of 2002–2007 for the 4 NIEs and 7 ADEs. The contribution of China’s TFP growth
to its output growth is strongly positive in all three sub-periods. This pattern is unique and
different compared to other Asian economies at similar income levels.
We now repeat the results of the empirical analysis which incorporates the fact that human
capital makes workers more productive. That is, we now adjust labor for quality. Please refer
to Park and Park (2010) for the full technical details of the analysis, along with the complete
set of results. As noted earlier, we adjust labor for human capital in two different ways –
linear adjustment and exponential adjustment. We first compute the contribution of capital,
labor, TFP and human capital to output growth. The contribution of human capital is the
percentage point of output growth accounted for by the growth of human capital where
human capital is computed via two different adjustment methods. Figure 5 shows the relative
share of output growth in the NIEs that is explained by TFP growth while Figure 6 and 7 do
the same for China and the seven developing Asian economies, respectively. The share of
labor income is assumed to be 0.60 in all three tables. The difference between Figures 2, 3
and 4 and Figures 5, 6 and 7 is the adjustment of labor for quality.
.
Donghyun Park / Jungsoo Park
16
[ Figure 5 ] Relative Contribution of TFP to Output Growth, 1992-2007, Labor Adjusted for
Quality, Newly Industrialized Countries = Hong Kong, Korea, Singapore, Taiwan
60
50
40
30
20
10
0
-10
1992-1997
1997-2002
2002-2007
-20
-30
-40
-50
linear
exponential
[ Figure 6 ] Relative Contribution of TFP to Output Growth, 1992-2007,
Labor Adjusted for Quality, China
70
60
50
40
30
20
10
0
1992-1997
1997-2002
linear
exponential
2002-2007
The Changing Role of Investment in Developing Asia’s Economic Growth
17
[ Figure 7 ] Relative Contribution of TFP to Output Growth, 1992-2007, Labor Not Adjusted
for Quality, 7 Developing Asian Countries = India, Indonesia, Malaysia, Pakistan,
Philippines, Thailand, Vietnam
50
40
30
20
10
0
-10
1992-1997
1997-2002
2002-2007
-20
-30
-40
linear
exponential
Again, the most visible result is the shift in source of output growth from investment to
TFP after 2002. Although investment was the primary engine of growth until 2002, the
relative importance of TFP rose after 2002. For the 4 NIEs, TFP growth made a sizeable
contribution to growth in 1992–1997 but its contribution dropped sharply during 1997–2002.
However, TFP growth became the dominant growth driver after 2002. For the 7 developing
countries, the contribution of TFP growth was limited until 2002, but became dominant after
2002. The contribution of TFP growth to output growth increased significantly in 2002–2007
for both NIEs and DAEs. The contribution of TFP growth is higher for Asian economies
when labor is adjusted exponentially for human capital. The contribution of labor was
minimal for all Asian economies throughout the entire sample period. Interestingly and
uniquely among the sample countries, TFP growth played a major role in China’s output
growth throughout the sample period.
To summarize our empirical evidence, we find that the source of developing Asia’s growth
has been shifting from investment to TFP growth since 2002. Investment was the dominant
source of growth prior to 2002 and this result is consistent with the existing literature, which
looks largely at pre-1990 data. Our evidence indicates that the region’s capital-intensive
Donghyun Park / Jungsoo Park
18
.
growth continued until around 2002. Our central finding – i.e. the rising relative importance
of TFP growth since 2002 – holds for both NIEs and developing countries. In addition, our
central finding is robust and consistent across a range of different assumptions and
specifications. The overall picture which emerges from our analysis is a structural change in
the pattern of growth from investment-driven growth to a more balanced growth pattern in
which both investment and productivity play major roles.
IV. Conclusion
High savings and high investment rates have long been a hallmark of developing Asia’s
growth model and one of the most important ingredients of the region’s success. High
investment has enabled the region to accumulate a large stock of capital and hence a large
productive capacity within a short period of time. In short, rapid capital accumulation has
transformed the region from a group of typical poor developing countries into the world’s
most dynamic region. However, economic theory suggests that as countries grow richer and
accumulate a larger capital stock, they will eventually run into diminishing marginal returns
to capital. Investing and thus adding to the capital stock will yield progressively smaller
increases in output. Therefore, investment is likely to make a smaller contribution to growth
and productivity growth will play a correspondingly bigger role as countries grow richer. The
historical experience of the advanced economies resoundingly confirm this prediction from
economic theory. The US, EU and Japan have all experienced a marked decline in the
relative importance of investment in their economic growth and a corresponding rise in the
relative importance of productivity growth. The transformation of developing Asia from a
low-income capital-deficient region to a middle-income capital-abundant region suggests that
it is a timely exercise to delve into the sources of the region’s growth.
The central objective of our paper has been to empirically examine the evolution of the
relative role of investment as a source of developing Asia’s growth during 1992-2007. To do
so, we divide the sample period into three structurally distinct sub-periods and investigate
whether there has been any change in the pattern of the region’s growth across the three subperiods. Interestingly and significantly, we find that the source of the region’s growth is
shifting from investment to productivity growth. For all three groups of countries – the NIEs,
China and seven developing Asian countries – there has been a visible increase in the relative
The Changing Role of Investment in Developing Asia’s Economic Growth
19
contribution of productivity growth to output growth, especially between 1992-1997 and
2002-2007. The logical implication is that productivity growth is playing a bigger role in the
region’s growth. This central finding is entirely consistent with economic intuition – i.e. the
law of diminishing marginal returns to capital – as well as the historical experience of the
advanced economies. Our central finding is also consistent with the evidence from the
existing empirical literature on sources of Asia’s growth. That literature is largely confined to
the pre-1990 period and finds that Asia’s growth was driven largely by investment. Our
analysis finds that the investment-led pattern of growth persisted until around 2002 but
productivity growth has begun to play a noticeably bigger role since 2002.
In addition to our central finding of a shift from investment to productivity in the sources
of economic growth, an additional interesting finding is the consistently large contribution of
productivity to China’s growth throughout the sample period. In this sense, China’s growth
pattern has been unique and different from the growth pattern of the NIEs and the seven
developing Asian countries. In the countries other than China, investment dominated growth
in the early part of the sample period and productivity growth became a significant source of
growth only in the later years. China’s high-TFP growth pattern is inconsistent with the
widespread perception that high savings and high investment drove the country’s
exceptionally rapid growth. The puzzle of China’s growth has a number of potential
explanations. First, it may reflect the overestimation of China’s TFP growth due to the
underestimation of its capital stock. Second, China’s persistently high TFP growth may
reflect the extensive, economy-wide re-allocation of resources from low-productivity
agriculture to high-productivity manufacturing. However, this inter-sectoral re-allocation of
resources also occurred earlier in other Asian countries, yet these countries did not experience
such spectacular TFP gains. A third explanation revolves around China’s transition from a
centrally planned economy to a market-oriented economy and the consequent weakening of
pricing and other distortions. The high TFP growth is therefore a consequence of getting
prices right, establishing private property rights, opening up to foreign trade, and other
efficiency-promoting structural reforms. Fourth, China has been experiencing a quantum leap
in its technological capabilities and this may help to explain TFP growth. Sustained
technological progress, which has often taken the form of importing advanced foreign
technology, may be lifting up economy-wide productivity on a sustained basis.
While China’s TFP growth has been consistent throughout the sample growth, TFP growth
20
.
Donghyun Park / Jungsoo Park
in the other economies had been much more subdued until 2002. However, since then, TFP
growth has become a much more significant contributor to growth. The key question is, what
accounts for the rise in the relative contribution of TFP to growth since 2002? The likely
explanation differs from country to country. In the case of the NIEs, per capita incomes have
already reached levels which are close to or comparable with the advanced economies.
Therefore, in those economies, the rising role of productivity and the declining role of
investment as growth drivers probably reflects their maturing as high-income economies. In
the case of the ASEAN countries, they have undertaken extensive restructuring and reform of
their financial and corporate sectors since the Asian crisis. After a period of consolidation,
such restructuring and reform may have begun to bear fruit in the form of higher productivity
growth in 2002-2007. This line of reasoning also applies to Korea, an NIE which was hit hard
by the Asian crisis and underwent extensive structural changes as a result. There is also
evidence that some ASEAN countries, most notably Malaysia and Thailand, suffered from
over-investment in the immediate pre-Asian crisis period. Therefore, the return to more
sustainable investment rates in the post-Asian crisis period would reduce inefficient
investments and thus raise the overall efficiency of the economy. In the case of India, deeper
integration into the world may have raised the productivity of firms and industries by
exposing them to foreign competition.
Since our central finding is that the source of economic growth is shifting from investment
to productivity growth, the central implication for developing Asia’s policymakers is that
productivity-promoting policies will be essential for sustaining growth in the post-global
crisis period. There are a number of specific areas in which developing Asia’s governments
can foster higher productivity. For example, better transport, communication, energy and
other infrastructure improves the productivity of all firms and industries. Although some parts
of the region’s infrastructure are among the best in the world, the region’s very success is
creating new demands for more and better infrastructure. It is estimated that between 2010
and 2020, developing Asia needs to invest a staggering total of US$8 trillion in infrastructure.
Another area where effective policies are required to foster productivity growth is human
capital. While developing Asia has traditionally invested heavily in education, the region has
to do a better job of producing workers with the “right” skills needed by employers. A
shortage of skills in key areas can become a bottleneck to growth. For example, for all the
success in its world-class export-oriented IT services sector and its large and growing army of
The Changing Role of Investment in Developing Asia’s Economic Growth
21
university graduates, one of the key constraints to further growth of the sector is the shortage
of workers with the required skills. A third area relevant for speeding up developing Asia’s
transition to productivity-led growth, is financial development. While the region’s financial
systems have become noticeably stronger and more efficient since the Asian crisis, they still
lag behind the region’s dynamic, world-class manufacturing sector. Yet sustaining growth in
the post-crisis will depend more on the efficiency of investment and less on the quantity of
investment, which means that financial systems will have to do a better job of allocating
capital to its most productive uses. A fourth area for promoting productivity is international
trade and, more generally, openness. Developing Asia’s remarkable economic success in the
past closely paralleled its growing integration into the world economy. In addition to static
welfare gains based on comparative advantage, trade delivers substantial dynamic efficiency
gains. In particular, globalization forces firms and industries to raise their games in order to
survive the competition in both domestic and foreign markets.
Donghyun Park / Jungsoo Park
22
.
< References >
Barro, R. and J.-W. Lee. (2010). “A New Data Set of Educational Attainment in the World,
1950–2010.” NBER Working Paper No. 15902. National Bureau of Economic Research.
Massachusetts.
Collins, S. and Bosworth, B. P. (1997). “Economic growth in East Asia: Accumulation versus
assimilation,” NBER Macroeconomic Annual, 135-203.
Fischer, S. (1993). “The Role of Macroeconomic Factors in Growth,” Journal of Monetary
Economics 32, 485-512.
Park, D. and Park, J. (2010), “Drivers of Developing Asia’s Growth: Past and Future,” Asian
Development Bank Economics Working Paper No.235, December 2010, Manila: Asian
Development Bank (ADB).
Park, D. and Shin, K. (2009), “Saving, Investment, and Current Account Surplus in
Developing Asia,” Asian Development Bank Economics Working Paper No.235,
December 2010, Manila: Asian Development Bank (ADB).
World Bank (1993). The East Asian Miracle: Economic Growth and Public Policy. Oxford:
Oxford University Press.
Young, A. (1994). “Lessons from the East Asian NICs: A contrarian view,” European
Economic Review 38, 964-973.
Young, A. (1995). “The tyranny of numbers: confronting the statistical realities of the East
Asian growth experience,” Quarterly Journal of Economics 110, 641-680.