Drivers of Developing Asia’s
Growth: Past and Future
Presented by Donghyun Park,
Economics and Research Department,
Asian Development Bank (dpark@adb.org),
at Research Seminar in Sogang University, Seoul,
On 6 October 2010
Prepared jointly by Donghyun Park and Jungsoo Park, Sogang University, Korea, as
background paper for Asian Development Outlook (ADO) 2010 Update,
Forthcoming as ADB Economics Working Paper
Outline
1. Introduction
2 Empirical analysis of growth drivers: pattern of growth in the recent
past → relative importance of capital versus TFP
3 Empirical analysis of growth drivers: estimation of per worker GDP
growth and TFP growth models
4.Relative Importance of Determinants for per worker GDP growth and
TFP growth
5. Priority areas for sustaining growth
6. Concluding observations
2
1 Introduction and motivation: why long-run growth?

Developing Asia was recently preoccupied with using fiscal and
monetary policy to offset the negative impact of global financial
crisis.
 Theme of ADO 2010

As the crisis recedes, short-run macroeconomic stabilization
will give way to long-run growth as the top priority of Asian
policymakers.

The region has recovered much faster and stronger than
expected.
 Fiscal and monetary stimulus seem to have contributed to the recovery.
3
1 Introduction and motivation: why long-run growth?

The key question now becomes – can high growth be sustained
beyond the current V-shaped recovery?

More importantly, what must the region do to sustain growth in
the long run?
 What are the key obstacles to long-run growth and what are the key
policy options for overcoming those obstacles?
 E.g. weak investment  policy measures to improve investment climate

High and sustainable long-run growth is indispensable for
substantial and sustained poverty reduction.
 Developing Asia has made substantial progress in reducing poverty but a
lot of poverty still remains.
 The region is home to two-thirds of the world’s poor.
4
1 Introduction and motivation: why long-run growth?

The external environment may be less benign in the post-crisis period.

Weaker demand from traditional G3


There may be greater volatility.


Caveat  Robust demand from developing countries will partly offset
Industrialized countries are no longer the bedrock of stability that they were before the global
crisis.
Related to this, is it time to re-think the outward-looking export-led growth
model?
There is no need for a fundamental re-think  openness will continue to yield
enormous benefits for the region.
 But, rebalancing is feasible and desirable (ADO 2009), as is strengthening intra-regional
trade (ADO 2009 Update).
 But long-run growth is determined by supply-side factors rather than demand-side
factors.


More fundamentally, precisely because of Asia’s spectacular past success and
transformation, some policies which worked well in the past will be less effective.
Policies that are effective at lower stage of economic development become less effective
at a higher stage of economic development.
 In particular, Asia has been transformed from a capital-scarce region to a capitalabundant region.

5
1 Introduction and motivation: why long-run growth?

Another big challenge for the region’s long-run growth is the end
of the demographic dividend.
 Adverse implications for labor supply
 Adverse implications for savings

Productivity growth is likely to play a bigger role in the region’s
economic growth.
 In the past, capital accumulation contributed substantially to the region’s
growth.
 Especially in East Asia  high-savings, high-investment paradigm
 Many economies are maturing and set to experience diminishing marginal
returns to capital.
 Even for poorer, capital-deficient countries, productivity growth
magnifies the positive impact of investment on output.
6
1 Introduction and motivation: why long-run growth?

Developing Asia has been a high performance, high growth
region.
 The region has outperformed the rest of the world.
 Many of the region’s strong fundamentals – e.g. openness,
macroeconomic discipline – will continue to serve the region well in the
post-crisis period.

Mapping out the region’s future growth requires an
understanding of the region’s past growth.
 In particular, what have been the drivers of the region’s growth in the
past?
 Has the relative importance of the different drivers changed over time?
 What does this evolution tell us about what will be the key growth drivers
of the future?
7
2 Empirical analysis of growth drivers: pattern of
growth in the recent past

We perform two types of empirical analysis to explain the
region’s growth.
 In this section, we look at the recent pattern of growth.
 In the next section, we estimate per worker GDP growth models and TFP
growth models.

Our examination of the pattern of growth between 1992 and
2007 focuses on 2 key indicators.
 Total factor productivity (TFP) growth
 Growth accounting estimates which indicate the relative importance of
different growth drivers
8
(2.1) Calculations of TFP growth
 TFP growth without labor quality adjustment
 Actual labor shares: compensation of employees/GDP, National
Account
 Labor shares = 0.6
 TFP growth with labor quality adjustment
 Exponential labor quality adjustment
9
(2.2) Growth Accounting
 Growth accounting for the economic growth
 of 12 Asian economies and of G-5 economies
 Growth accounting for 5-year intervals
 for the period of 1992 – 1997, 1997 – 2002, and 2002 – 2007.

 Three different versions of TFP growth estimates are given:
 Two without labor quality adjustment
 One with labor quality adjustment (human capital consideration)
 The estimates are averaged into five groups:




non-Asian G5, Japan,
4 NIEs (Newly Industrialized Economies: Hong Kong, Korea, Singapore, Taiwan),
China,
7 ADEs (Asian Developing Economies: India, Indonesia, Malaysia, Pakistan,
Philippines, Thailand, Vietnam).
10
Contributions of inputs
 In each table,
 5-year average growth rates of output, capital, and labor are shown
for each interval
 Contribution of capital is the percentage point of the output growth
that is explained by the growth in capital
 Contribution of labor is the percentage point of the output growth
that is explained by the growth in labor
 Contribution of TFP is the percentage point of the output growth
that is explained by the TFP growth
 Relative contribution of TFP is the relative portion of output growth
that is explained by the TFP growth
11
Table 2-1a. Growth Accounting without labor quality
adjustments: labor share = actual, 1992-1997
Period (1992-1997)
Growth in :
Output
Capital
Labor
C1. labor share = actual
Contribution of :
Capital
Labor
TFP
(Relative contribution
of TFP)
lsh1992
labsh1992
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.35%
2.50%
0.50%
1.26%
3.29%
0.61%
6.99%
8.72%
2.14%
9.79%
11.45%
1.17%
5.64%
8.04%
2.33%
1.03%
0.29%
1.04%
1.63%
0.31%
-0.68%
4.42%
1.03%
1.55%
5.39%
0.62%
3.78%
5.57%
0.70%
-0.63%
44.00%
-53.52%
22.18%
38.63%
-11.24%
60.00%
60.06%
60.00%
49.12%
60.00%
49.71%
60.00%
52.33%
60.00%
30.06%
12
Table 2-1b. Growth Accounting without labor quality
adjustments: labor share = actual, 1997-2002
Period (1997-2002)
Growth in
Output
Capital
Labor
C1. labor share = actual
Contribution of
Capital
Labor
TFP
(Relative contribution
of TFP)
Lsh1997
labsh1997
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.58%
3.23%
0.66%
-0.19%
1.59%
-0.30%
2.57%
4.95%
1.49%
7.69%
8.74%
0.96%
3.16%
3.92%
2.46%
1.33%
0.38%
0.86%
0.78%
-0.15%
-0.81%
2.43%
0.75%
-0.61%
4.10%
0.51%
3.08%
2.75%
0.76%
-0.34%
33.38%
431.85%
-23.75%
40.10%
-10.71%
60.00%
57.89%
60.00%
50.77%
60.00%
50.20%
60.00%
53.11%
60.00%
30.68%
13
Table 2-1c. Growth Accounting without labor quality
adjustments: labor share = actual, 2002-2007
Period (2002-2007)
Growth in
Output
Capital
Labor
C1. labor share = actual
Contribution of
Capital
Labor
TFP
(Relative contribution
of TFP)
Lsh2002
labsh2002
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.32%
2.78%
0.77%
1.73%
1.10%
-0.07%
5.48%
3.74%
1.46%
12.20%
10.63%
0.85%
6.58%
4.92%
2.25%
1.16%
0.44%
0.72%
0.55%
-0.04%
1.22%
1.84%
0.72%
2.91%
4.98%
0.45%
6.76%
3.44%
0.69%
2.45%
31.06%
70.46%
53.11%
55.44%
37.25%
60.00%
59.05%
60.00%
50.97%
60.00%
51.46%
60.00%
53.11%
60.00%
30.55%
14
Table 2-2a. Growth Accounting without labor quality
adjustments: labor share = 0.6, 1992-1997
Period (1992-1997)
Growth in :
Output
Capital
Labor
C2. labor share=0.6
Contribution of:
Capital
Labor
TFP
(Relative contribution
of TFP)
lsh1992
labsh1992
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.35%
2.50%
0.50%
1.26%
3.29%
0.61%
6.99%
8.72%
2.14%
9.79%
11.45%
1.17%
5.64%
8.04%
2.33%
1.00%
0.30%
1.06%
1.32%
0.37%
-0.42%
3.49%
1.28%
2.22%
4.58%
0.70%
4.51%
3.21%
1.40%
1.03%
44.90%
-33.20%
31.77%
46.10%
18.26%
60.00%
60.06%
60.00%
49.12%
60.00%
49.71%
60.00%
52.33%
60.00%
30.06%
15
Table 2-2b. Growth Accounting without labor quality
adjustments: labor share = 0.6, 1997-2002
Period (1997-2002)
Growth in
Output
Capital
Labor
C2. labor share=0.6
Contribution of:
Capital
Labor
TFP
(Relative contribution
of TFP)
Lsh1997
labsh1997
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.58%
3.23%
0.66%
-0.19%
1.59%
-0.30%
2.57%
4.95%
1.49%
7.69%
8.74%
0.96%
3.16%
3.92%
2.46%
1.29%
0.39%
0.90%
0.64%
-0.18%
-0.65%
1.98%
0.89%
-0.30%
3.50%
0.58%
3.62%
1.57%
1.47%
0.12%
34.73%
344.17%
-11.74%
47.07%
3.77%
60.00%
57.89%
60.00%
50.77%
60.00%
50.20%
60.00%
53.11%
60.00%
30.68%
16
Table 2-2c. Growth Accounting without labor quality
adjustments: labor share = 0.6, 2002-2007
Period (2002-2007)
Growth in
Output
Capital
Labor
C2. labor share=0.6
Contribution of:
Capital
Labor
TFP
(Relative contribution
of TFP)
Lsh2002
labsh2002
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.32%
2.78%
0.77%
1.73%
1.10%
-0.07%
5.48%
3.74%
1.46%
12.20%
10.63%
0.85%
6.58%
4.92%
2.25%
1.11%
0.46%
0.74%
0.44%
-0.04%
1.33%
1.49%
0.87%
3.11%
4.25%
0.51%
7.44%
1.97%
1.35%
3.26%
32.10%
77.12%
56.74%
60.96%
49.53%
60.00%
59.05%
60.00%
50.97%
60.00%
51.46%
60.00%
53.11%
60.00%
30.55%
17
Findings: Tables 2-1 and 2-2
 Main source of growth
 The main source of growth was capital stock until 2002.
 After 2002, the main source of growth has shifted to TFP growth.
 Throughout whole period, the contribution of labor was minimal for all Asian
economies
 Role of TFP growth
 The contribution of TFP growth for the Asian economies are lower when actual
labor shares are used (since higher weights are applied to capital stock growth
which was very high)
 The relative contribution of TFP was lower than those of the non-Asian G5 till
2002. However, estimates and contributions of TFP growth seem to have
increased significantly in the period of 2002 – 2007 for the 4 NIEs and 7
ADEs.
 The TFP growth estimates for the 11 Asian economies for this sub-period are even
higher than those of the non-Asian G5.
18
Findings: Tables 2-1 and 2-2 (cont’d)
 China
 The estimates and contribution of China’s TFP growth are strongly
positive throughout the whole period, exhibiting a very different
pattern compared to those of the Asian economies in a similar
developmental stage.
19
Contributions of inputs
 In each table,
 5-year average growth rates of output, capital, and labor are shown for





each interval
Contribution of capital is the percentage point of the output growth that is
explained by the growth in capital
Contribution of labor is the percentage point of the output growth that is
explained by the growth in labor
Contribution of labor is the percentage point of the output growth that is
explained by the growth in human capital
Contribution of TFP is the percentage point of the output growth that is
explained by the TFP growth
Relative contribution of TFP is the relative portion of output growth that
is explained by the TFP growth
20
Table 2-3a. Growth Accounting with labor quality
adjustments: labor share = 0.6, 1992-1997
Period (1992-1997)
Growth in :
Output
Capital
Labor
Human2
C4. exponential laborquality adjustment
Contribution of:
Capital
Labor
Human2
TFP
(Relative contribution
of TFP)
lsh1992
labsh1992
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.35%
2.50%
0.50%
0.88%
1.26%
3.29%
0.61%
0.68%
6.99%
8.72%
2.14%
0.49%
9.79%
11.45%
1.17%
1.00%
5.64%
8.04%
2.33%
0.64%
1.00%
0.30%
0.53%
0.53%
1.32%
0.37%
0.41%
-0.83%
3.49%
1.28%
0.29%
1.93%
4.58%
0.70%
0.60%
3.91%
3.21%
1.40%
0.38%
0.65%
22.38%
-65.37%
27.60%
39.96%
11.46%
60.00%
60.06%
60.00%
49.12%
60.00%
49.71%
60.00%
52.33%
60.00%
30.06%
21
Table 2-3b. Growth Accounting with labor quality
adjustments: labor share = 0.6, 1997-2002
Period (1997-2002)
Growth in
Output
Capital
Labor
Human2
C4. exponential laborquality adjustment
Contribution of:
Capital
Labor
Human2
TFP
(Relative contribution
of TFP)
Lsh1997
labsh1997
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.58%
3.23%
0.66%
0.80%
-0.19%
1.59%
-0.30%
0.48%
2.57%
4.95%
1.49%
0.67%
7.69%
8.74%
0.96%
0.88%
3.16%
3.92%
2.46%
0.71%
1.29%
0.39%
0.48%
0.41%
0.64%
-0.18%
0.29%
-0.94%
1.98%
0.89%
0.40%
-0.71%
3.50%
0.58%
0.53%
3.09%
1.57%
1.47%
0.43%
-0.31%
16.06%
496.47%
-27.41%
40.19%
-9.78%
60.00%
57.89%
60.00%
50.77%
60.00%
50.20%
60.00%
53.11%
60.00%
30.68%
22
Table 2-3c. Growth Accounting with labor quality
adjustments: labor share = 0.6, 2002-2007
Period (2002-2007)
Growth in
Output
Capital
Labor
Human2
C4. exponential laborquality adjustment
Contribution of:
Capital
Labor
Human2
TFP
(Relative contribution
of TFP)
Lsh2002
labsh2002
non-Asian
G5
Japan
4 NIEs
China
7 ADEs
2.32%
2.78%
0.77%
0.47%
1.73%
1.10%
-0.07%
0.45%
5.48%
3.74%
1.46%
0.82%
12.20%
10.63%
0.85%
0.72%
6.58%
4.92%
2.25%
0.84%
1.11%
0.46%
0.28%
0.45%
0.44%
-0.04%
0.27%
1.06%
1.49%
0.87%
0.49%
2.60%
4.25%
0.51%
0.43%
7.01%
1.97%
1.35%
0.51%
2.74%
19.53%
61.55%
47.47%
57.45%
41.62%
60.00%
59.05%
60.00%
50.97%
60.00%
51.46%
60.00%
53.11%
60.00%
30.55%
23
Findings: Table 2-3
 Main source of growth
 The main source of growth was capital stock until 2002.
 After 2002, the main source of growth has shifted to TFP
growth.
 Throughout whole period, the contribution of labor was minimal
for all Asian economies
 Growths in human capital for 4 NIEs were lower than the G5 until
2002, but turned higher afterwards. As for the 7 ADEs, the growth
in human capital was higher than all other groups(except for China)
for all periods. (see human2)
24
Findings: Table 2-3 (cont’d)
 Role of TFP growth
 As for the 4 NIEs, the relative contribution of TFP growth was sizeable in the
1992 – 1997 period, but dropped during the post-crisis period of 1997 – 2002.
However, the absolute size and relative contribution of TFP became dominant
after 2002.
 As for the 7 ADEs, the TFP growth either negative or minimal till 2002. Just as in
4 NIEs, the growth in TFP became a dominant factor in growth after 2002.
 The estimates and contributions of TFP growth seem to have increased
significantly in the period of 2002 – 2007 for the 4 NIEs and 7 ADEs.
 The TFP growth estimates for the 11 Asian economies for this sub-period are even
higher than those of the non-Asian G5.
 China
 The estimates and contribution of China’s TFP growth are strongly positive
throughout the whole period, exhibiting a very different pattern compared to
those of the Asian economies in a similar developmental stage.
25
3 Empirical analysis of growth drivers: estimation of
per worker GDP growth and TFP growth models

In the previous section, we analyzed drivers of growth by estimating
per worker GDP growth and TFP growth models

In this section, we explain per worker GDP growth and TFP growth
through various fundamental determinants of growth.

The fundamental determinants include capital, human capital, initial
per capita GDP relative to US, openness, government effectiveness,
geography, population, life expectancy, inflation rate, current account
balance.

The regression results can inform us about the relative importance of
different determinants in driving Asia’s growth in the past.
26
(3.1) Literature on the determinants of GDP
and TFP growth
 Bosworth and Collins (2003)
 empirical results in identifying sources of labor productivity growth
and TFP growth based on international country-level panel data set.
 Catch-up effect, openness, geographical factors, and institutional
quality are shown to be influential in the empirical results on TFP
growth equation estimations.
 Human capital
 As a factor of growth: Benhabib and Spiegel (1994) or Pritchett
(2001).
 ‘Level of human capital’ influencing productivity growth:
endogenous growth literature. Benhabib and Spiegel (1994),
Dinopoulos and Thompson (2000), and Bils and Klenow (2000)
27
(3.2) Baseline model and Estimation methods
 Two-input production function with Cobb-Douglas technology and with
constant returns to scale. (h = exp(0.08*edu))
 Technology dynamics, Bosworth and Collins (2003)
 Human capital is therefore affecting the output through two
channels.
 It enters as a factor of input on one hand and also enters as an additional factor
that contributes to the growth in the technological level on the other.
 Empirical equation with human capital consideration as a baseline model
equation.
28
(3.2) Baseline model and Estimation methods
(cont’d)
 A ‘five-year interval’ data set
 which consists of average values or initial values of variables from
each non-overlapping five-year intervals within the full sample
 Initial values of each respective interval
 are considered for the variables representing initial conditions such
as initial income per capita relative to the U.S. level, initial life
expectancy relative to the U.S., and initial population.
 Panel regression with time-fixed effect
 is performed on the five-year interval panel data set.
29
(3.3) Data Description and Construction of
Variables
 Data Sources
 GDP, workers: Penn World Tables (PWT version 6.3)
 Capital stock series
 are estimated from investment series from PWT based on a perpetual
inventory method.
 Human capital series are education attainment data from Barro and
Lee (2010).
 Since the data set only provides values for every 5 years, the data are
interpolated to fill in the intervening missing values.
 Labor shares are assumed to be 0.6
 WDI, WGI (World Bank)
30
(3.4) Empirical results
 In this section, we report and discuss the key findings from our per worker
GDP growth and TFP growth regressions.
 Furthermore, we include interaction dummies to compare the effect of some
variables in Asian countries versus other countries.
 Above all, the results can inform us about the relative importance of the
different determinants – e.g. physical capital and human capital – in driving
developing Asia’s growth.
31
<Table 3-1> Per worker GDP growth regressions: five-year average
growth (dependent variable = dln(Y/L)): baseline models
VARIABLES
mdkkl
lny_us
lnlifes
mhuman
lnpop
mtropic
mopenc
minflat_cpi
mca_gdp
mgoveff
Observations
Adjusted R-squared
(1)
a1
(2)
a2
(3)
a3
(4)
a4
(5)
a5
(6)
a6
0.448*** 0.428***
(12.23)
(11.26)
-0.010*** -0.010***
(-5.186) (-5.396)
0.428***
0.429***
0.403***
0.404***
(11.23)
(11.08)
(10.06)
(10.14)
-0.010*** -0.010*** -0.014*** -0.013***
(-4.749)
(-4.231)
(-4.748)
(-5.040)
-0.000
-0.001
0.005
(-0.00995) (-0.0634)
(0.440)
0.004*** 0.004***
0.004***
0.004***
0.004***
0.004***
(5.030)
(5.158)
(5.028)
(4.811)
(4.498)
(4.764)
0.002*
0.002*
0.002*
0.002
0.002*
(1.855)
(1.813)
(1.788)
(1.590)
(1.787)
-0.010*** -0.009*** -0.009*** -0.009*** -0.008**
-0.008**
(-2.910) (-2.836)
(-2.808)
(-2.850)
(-2.385)
(-2.449)
0.005** 0.009***
0.009***
0.009***
0.008**
0.008**
(2.134)
(2.817)
(2.754)
(2.834)
(2.453)
(2.533)
0.000
0.000
(1.007)
(1.228)
-0.000
-0.000
-0.000
(-0.158) (-0.00117) (-0.0113)
0.006**
0.005**
(2.271)
(2.109)
315
0.450
315
0.455
315
0.453
315
0.451
315
0.459
315
32
0.459
Findings: Per worker GDP growth regressions
(baseline model)
 Table 3-1
 In full sample regressions, following results were robust.
 Growth in capital stock per worker, population size, human capital, openness,
government effectiveness positively contributed to the growth in GDP per
worker
 Lower the initial per capita GDP relative to the US, the less the tropical area,
the growth in GDP per worker were higher
 There is evidence of convergence (catch-up effect)
 Variables that were not significant were
 Life expectancy, inflation rate, current account balance relative to GDP
33
<Table 3-2> Per worker GDP growth regression: five-year average growth
(dependent variable = dln(Y/L)): governance index
VARIABLES
mdkkl
lny_us
mhuman
lnpop
mtropic
mopenc
mgoveff
(3)
a3
(4)
a4
(5)
a5
(6)
a6
0.404***
(10.25)
-0.013***
(-5.559)
0.004***
(4.935)
0.002*
(1.798)
-0.008**
(-2.456)
0.008**
(2.573)
0.005**
(2.118)
0.410***
(10.56)
-0.013***
(-5.470)
0.004***
(5.015)
0.002*
(1.896)
-0.008**
(-2.249)
0.007**
(2.464)
0.400***
(10.00)
-0.013***
(-5.496)
0.004***
(4.748)
0.002
(1.549)
-0.008**
(-2.285)
0.007**
(2.248)
0.005
(0.912)
0.001
(0.151)
0.386***
(9.594)
-0.014***
(-5.925)
0.004***
(5.087)
0.002
(1.557)
-0.009***
(-2.740)
0.005
(1.496)
0.010***
(2.605)
mcontrolcorr
0.004*
(1.912)
mgoveff_a
0.004
(0.720)
-0.007*
(-1.896)
mgoveff_o
Observations
Adjusted R-squared
315
0.461
309
0.446
309
0.446
315
0.469
34
Findings: Per worker GDP growth regressions
(various governance indicators)
 Table 3-2
 4 different measures of governance indicators (rule of law, government
effectiveness, control of corruption, regulatory quality)
 government effectiveness and control of corruption were shown to be
significant in the regression
 The model (6) includes interaction dummies :
 mgoveff_a = mgoveff * dummy_asia12
 mgoveff_o = mgoveff * dummy_oecd
 In model (6)
 the coefficient for the mgoveff rises and
 the coefficient for interaction term with OECD dummy is significantly negative.
 => this implies that the government effectiveness was more important in
GDP growth per worker for the non-OECD economies (developing
economies)
35
(3.3) TFP Growth Regression
 Empirical equation with human capital consideration as a baseline
model equation.
36
<Table 3-3> TFP growth regressions: five-year average growth
(dependent variable = dln(TFP)): baseline models
VARIABLES
lny_us
(1)
a1
(2)
a2
-0.010*** -0.014***
(-5.536) (-5.895)
lnlifes
mhuman
0.004***
(5.291)
0.004***
(5.045)
lnpop
mtropic
mopenc
-0.011*** -0.009***
(-3.325) (-2.849)
0.006**
0.005**
(2.346)
(2.048)
(3)
a3
(4)
a4
(5)
a5
-0.015***
(-5.373)
0.005
(0.429)
0.004***
(4.860)
0.001
(1.163)
-0.009***
(-2.676)
0.007**
(2.248)
-0.014***
(-4.882)
0.005
(0.396)
0.004***
(4.645)
0.001
(1.142)
-0.009***
(-2.703)
0.007**
(2.338)
0.000
(1.011)
-0.000
(-0.207)
0.006**
(2.342)
-0.012***
(-4.282)
-0.009
(-0.693)
0.004***
(4.975)
0.002
(1.603)
-0.009***
(-2.662)
0.008**
(2.537)
0.000
(0.829)
-0.000
(-0.237)
minflat_cpi
mca_gdp
mgoveff
0.006**
(2.414)
0.006**
(2.288)
mcontrolcorr
Observations
Adjusted R-squared
0.004**
(1.994)
315
0.186
315
0.199
315
0.198
315
0.196
309
0.183
37
Findings: TFP growth regressions (baseline
model)
 Table 3-3
 In full sample regressions, following results were robust.
 Human capital, openness, government effectiveness positively contributed to
the TFP growth
 Lower the initial per capita GDP relative to the US, the less the tropical area,
the TFP growth
 Variables that were not significant were
 Life expectancy, population size, inflation rate, current account balance relative
to GDP
38
<Table 3-4> TFP growth regressions: five-year average growth
(dependent variable = dln(TFP)): differential effects
VARIABLES
lny_us
mhuman
mhuman_a
mhuman_o
mtropic
mopenc
(1)
a1
(2)
a2
-0.014*** -0.014***
(-5.895) (-6.036)
0.004*** 0.004***
(5.045)
(5.141)
0.001*
(1.822)
-0.000
(-0.592)
-0.009*** -0.011***
(-2.849) (-3.235)
0.005**
0.004
(2.048)
(1.400)
mopenc_a
mopenc_o
mgoveff
mgoveff_a
mgoveff_o
0.006**
(2.414)
0.006**
(2.249)
(3)
a3
(4)
a4
(5)
a5
-0.014***
(-6.071)
0.004***
(5.267)
-0.015***
(-6.198)
0.004***
(5.219)
-0.011***
(-3.281)
0.004
(1.444)
0.002**
(2.299)
-0.000
(-0.152)
0.005**
(1.986)
-0.011***
(-3.120)
0.003
(0.979)
-0.015***
(-6.432)
0.005***
(5.217)
-0.003
(-1.205)
-0.001
(-0.743)
-0.011***
(-2.992)
0.001
(0.295)
0.006
(1.640)
0.004
(1.193)
0.008**
(2.284)
0.005
(0.833)
-0.007
(-1.415)
0.009***
(2.716)
0.004
(0.816)
-0.006*
(-1.817)
39
Findings: TFP growth regressions (differential
region effects)
 Table 3-4
 Differential impact in three different groups of countries
(OECD, 12 Asian, the rest of the world)
 The model (2) includes interaction dummies :
 mhuman_a = mhuman * dummy_asia12
 mhuman_o = mhuman * dummy_oecd
 The model (3) includes interaction dummies :
 mopenc_a = mopenc * dummy_asia12
 mopenc_o = mopenc * dummy_oecd
 The model (4) includes interaction dummies :
 mgoveff_a = mgoveff * dummy_asia12
 mgoveff_o = mgoveff * dummy_oecd
40
Findings: TFP growth regressions (differential
region effects, cont’d)
 Table 3-4
 Differential impact in three different groups of countries
(OECD, 12 Asian, the rest of the world)
 The model (2) includes interaction dummies :
 The role of human capital is greater in the 12 Asian economies than other
countries.
 The model (3) includes interaction dummies :
 The role of openness is greater in the 12 Asian economies than other countries.
 The model (4) includes interaction dummies :
 The role of government effective is greater for the non-OECD economies
compared to the OECD economies.
41
4.Relative Importance of Determinants for Per
Worker GDP Growth
 To measure the relative importance of the identified
determinants contributing to per worker GDP growth.
 We use the coefficient estimates of model (3) of Table 3-2 to
calculate the contributions of determinants in the per worker
GDP growth.
42
Calculation of Contribution
 Contribution of each factor is obtained from the following
calculation
 (1) calculate the predicted growth in GDP per worker for each country
 (2) take the difference between the predicted growth in GDP per worker
for each country and global average of the predicted growth in GDP per
worker
 (predicted dln(Y/L) of country j – global average of predicted dln(Y/L))
 (3) take the difference between each regressor for each country and global
average of the respective regressor
 (Xi of country j – global average of Xi)
 (4) the differenced values (which is the gap in value from the global
average) are multiplied to the corresponding coefficient estimates of
model (3) of Table 2. The resulting values are presented in the table in bold
figures.
43
How to interpret the results
 How to interpret the results
 As for the dep. Var.
 “predicted growth gap in GDP per worker (gap from the global average)” : this
is how much the predicted value of dln(Y/L) is off from the global average of
dln(Y/L). For each group, how each group performed relative to the global
average.
 For example, for OECD during 1992 – 1997, in terms of GDP per worker,
OECD grew 0.65 percentage point higher than the global average.
 As for the regressors:
 Of this gap in growth, catch-up effect contributed -2.16 percentage point
(since the initial per capita income level is higher than the global average),
human capital contributed 1.02 percentage point (since the human capital is
higher than the global average), etc.
44
Table 3-6a. Relative Importance of Determinants for per
Worker GDP Growth :1992 - 1997
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
1992-1997
dependent var
growth in GDP per worker
predicted growth in GDP
per worker
predicted growth gap in
GDP per worker (gap
from the global average)
regressors
catch-up effect
log of population
human capital effect
geographical effect
openness effect
government effectiveness
1.86%
4.85%
8.63%
3.56%
2.99%
0.21%
2.15%
4.05%
7.02%
3.52%
3.16%
0.92%
0.65%
2.55%
5.52%
2.02%
1.66%
-0.58%
-2.16%
0.58%
1.02%
0.39%
-0.46%
1.06%
-1.83% 1.08%
0.18% 1.08%
0.82% -0.23%
-0.08% 0.37%
0.56% -0.40%
0.86% 0.07%
-0.06%
0.50%
-0.12%
-0.41%
0.15%
0.18%
1.16%
0.73%
-1.13%
-0.01%
-0.52%
-0.16%
0.41%
-0.08%
-0.28%
-0.08%
0.02%
-0.20%
45
Table 3-6b. Relative Importance of Determinants for per
Worker GDP Growth :1997 - 2002
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
1997-2002
dependent var
growth in GDP per worker
predicted growth in GDP
per worker
predicted growth gap in
GDP per worker (gap
from the global average)
regressors
catch-up effect
log of population
human capital effect
geographical effect
openness effect
government effectiveness
1.92%
1.08%
6.73%
-0.33%
2.09%
1.14%
2.05%
1.99%
5.02%
0.46%
2.10%
0.60%
1.02%
0.96%
3.99%
-0.57%
1.07%
-0.43%
-2.17%
0.57%
1.13%
0.39%
-0.40%
0.92%
-2.06% 0.57%
0.18% 1.08%
0.81% -0.10%
-0.08% 0.37%
0.57% -0.51%
0.60% -0.08%
-0.25%
0.50%
-0.11%
-0.41%
0.31%
-0.01%
1.03%
0.73%
-1.10%
-0.01%
-0.46%
-0.23%
0.40%
-0.08%
-0.29%
-0.08%
0.00%
-0.17%
46
Table 3-6c. Relative Importance of Determinants for per
Worker GDP Growth :2002 - 2007
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
2002-2007
dependent var
growth in GDP per worker
predicted growth in GDP
per worker
predicted growth gap in
GDP per worker (gap
from the global average)
regressors
catch-up effect
log of population
human capital effect
geographical effect
openness effect
government effectiveness
1.55%
4.02%
11.35%
3.90%
4.90%
2.47%
3.01%
3.16%
7.20%
2.41%
4.15%
2.61%
0.19%
0.33%
4.37%
-0.41%
1.32%
-0.21%
-2.20%
0.56%
1.14%
0.39%
-0.42%
0.88%
-2.02% 0.25%
0.17% 1.07%
0.88% -0.05%
-0.08% 0.37%
0.66% -0.23%
0.78% 0.01%
-0.14%
0.51%
-0.05%
-0.41%
0.23%
0.09%
0.98%
0.74%
-1.00%
-0.01%
-0.28%
-0.17%
0.41%
-0.08%
-0.29%
-0.08%
-0.01%
-0.18%
47
Findings: per worker GDP growth (comparison
across groups)
 Growth in GDP per worker
 For the period of 1992 – 1997 and 2002 – 2007, 12 Asian
economies grew much faster than the OECD and other developing
economies.
 Growth in 2002 – 2007 are significantly higher relative to those of
the 1992 – 1997 period for China, 4 ASEAN, 3 ADEs, but lower for
4 NIEs and OECD.
 As for the 1997 – 2002 period, the Asian economies slowed down in
growth while OECD and other developing economies were
relatively unaffected
48
Findings: per worker GDP growth (comparison
across groups, 1992 – 1997)
 Comparisons of the contribution of regressors across groups in
1992 – 1997
 Relative income level
 OECD> 4 NIEs > 4 ASEAN > Other developing economies > China > 3
ADEs.
 Human capital
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Government effectiveness
 OECD> 4 NIEs > 4 ASEAN > China > 3 ADEs > Other developing
economies.
 Openness
 4 NIEs > 4 ASEAN > Other developing economies > China > OECD > 3
ADEs.
49
Findings: per worker GDP growth (comparison
across groups, 2002 – 2007)
 Comparisons of the contribution of regressors across groups in
2002 – 2007 (changes relative to 1992 – 1997 is in red)
 Relative income level
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Human capital
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Government effectiveness
 OECD> 4 NIEs > 4 ASEAN > China > 3 ADEs > Other developing
economies.
 Openness
 4 NIEs > 4 ASEAN > Other developing economies > China > 3 ADEs >
OECD.
50
Findings: per worker GDP growth (comparison
across time)
 Compare across time (comparison between 1992 – 1997 and
2002 – 2007 periods)
 As for 4 NIEs
 Catch-up effect became significantly more negative as the relative income has risen
compared to the global average ( - 1.83 to – 2.02 )
 Contribution of human capital increased slightly (0.82 to 0.88), whereas
contribution of openness has risen significantly (0.56 to 0.66).
 Effectiveness of government relative to the global average has reduced (0.86 to
0.78)
 As for 4 ASEANs
 Catch-up effect became more negative as the relative income has risen compared to
the global average (-0.06 to -0.14)
 Contribution of human capital (-0.12 to -0.05) and openness (0.15 to 0.23) have
risen moderately
 Effectiveness of government relative to the global average has fallen (0.18 to 0.09)
51
Findings: per worker GDP growth (comparison
across time)
 Compare across time (comparison between 1992 – 1997 and
2002 – 2007 periods)
 As for 3 ADEs
 Catch-up effect has fallen as the relative income has risen compared to the global
average (1.16 to 0.98)
 Contribution of human capital (-1.13 to -1.00) and openness (-0.52 to -0.28) have
risen significantly
 Effectiveness of government relative to the global average has not changed.
 As for China
 Catch-up effect has fallen as the relative income has risen compared to the global
average (1.08 to 0.25)
 Contribution of human capital (-0.23 to -0.05) and openness (-0.40 to -0.23) have
risen significantly
 Effectiveness of government relative to the global average has fallen mildly (0.07 to
0.01)
52
4.Relative Importance of Determinants for TFP
Growth
 To measure the relative importance of the identified
determinants contributing to TFP growth.
 We use the coefficient estimates of model (2) of Table 3-3 to
calculate the contributions of determinants in the TFP growth.
53
Table 3-7a. Relative Importance of Determinants for TFP
Growth :1992 - 1997
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
1992-1997
dependent var
growth in TFP
predicted growth in TFP
predicted growth gap in
TFP (gap from the global
average)
Regressors
catch-up effect
human capital effect
geographical effect
openness effect
government effectiveness
0.43%
1.88%
3.80%
0.71%
0.39%
-0.81%
0.75%
0.77%
1.77%
0.26%
0.14%
0.30%
0.25%
0.27%
1.27%
-0.25%
-0.36%
-0.20%
-2.27%
1.06%
0.46%
-0.31%
1.17%
-1.92% 1.13%
0.85% -0.24%
-0.10% 0.43%
0.37% -0.27%
0.94% 0.08%
-0.06%
-0.12%
-0.49%
0.10%
0.20%
1.22%
-1.17%
-0.01%
-0.35%
-0.18%
0.43%
-0.29%
-0.09%
0.01%
-0.22%
54
Table 3-7b. Relative Importance of Determinants for TFP
Growth :1997 - 2002
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
1997-2002
dependent var
growth in TFP
predicted growth in TFP
predicted growth gap in
TFP (gap from the global
average)
Regressors
catch-up effect
human capital effect
geographical effect
openness effect
government effectiveness
0.33% -0.78%
2.99%
-0.65%
-0.04%
0.15%
0.46% -0.02%
0.85%
-0.30%
-0.27%
0.22%
0.15% -0.32%
0.55%
-0.60%
-0.57%
-0.08%
-2.17% 0.60%
0.84% -0.11%
-0.10% 0.43%
0.38% -0.34%
0.67% -0.09%
-0.26%
-0.11%
-0.49%
0.21%
-0.01%
1.09%
-1.14%
-0.01%
-0.31%
-0.25%
0.42%
-0.30%
-0.09%
0.00%
-0.19%
-2.28%
1.17%
0.46%
-0.27%
1.01%
55
Table 3-7c. Relative Importance of Determinants for TFP
Growth :2002 - 2007
Groups of countries:
OECD
4 NIEs China
Other
4 ASEAN 3 ADEs Developing
Economies
2002-2007
dependent var
growth in TFP
predicted growth in TFP
predicted growth gap in
TFP (gap from the global
average)
Regressors
catch-up effect
human capital effect
geographical effect
openness effect
government effectiveness
0.40%
2.51%
6.93%
2.96%
2.22%
0.53%
1.62%
1.59%
2.09%
1.16%
1.20%
1.46%
0.07%
0.04%
0.54%
-0.39%
-0.35%
-0.09%
-2.31%
1.18%
0.46%
-0.28%
0.97%
-2.12% 0.26%
0.91% -0.05%
-0.10% 0.44%
0.44% -0.15%
0.86% 0.01%
-0.15%
-0.05%
-0.48%
0.15%
0.10%
1.03%
-1.04%
-0.01%
-0.18%
-0.19%
0.43%
-0.30%
-0.09%
0.00%
-0.20%
56
Findings: TFP growth (comparison across
groups)
 Growth in TFP
 For the period of 1992 – 1997 and 2002 – 2007, 12 Asian
economies grew much faster than the OECD and other developing
economies.
 TFP growths for all 12 Asian economies in 2002 – 2007 are
significantly higher than those of the 1992 – 1997 period.
 As for the 1997 – 2002 period, the Asian economies slowed down in
TFP growth while OECD and other developing economies were
relatively unaffected
 As for the comparisons of the regressors across groups, they are
the same as in Table 3-6
57
Findings: TFP growth (comparison across
groups, 1992 – 1997)
 Comparisons of the contribution of regressors across groups in
1992 – 1997
 Relative income level
 OECD> 4 NIEs > 4 ASEAN > Other developing economies > China > 3
ADEs.
 Human capital
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Government effectiveness
 OECD> 4 NIEs > 4 ASEAN > China > 3 ADEs > Other developing
economies.
 Openness
 4 NIEs > 4 ASEAN > Other developing economies > China > OECD > 3
ADEs.
58
Findings: TFP growth (comparison across
groups, 2002 – 2007)
 Comparisons of the contribution of regressors across groups in
2002 – 2007 (changes relative to 1992 – 1997 are in red)
 Relative income level
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Human capital
 OECD> 4 NIEs > 4 ASEAN > China > Other developing economies > 3
ADEs.
 Government effectiveness
 OECD> 4 NIEs > 4 ASEAN > China > 3 ADEs > Other developing
economies.
 Openness
 4 NIEs > 4 ASEAN > Other developing economies > China > 3 ADEs >
OECD.
59
Findings: TFP growth (comparison across time)
 Compare across time (comparison between 1992 – 1997 and
2002 – 2007 periods)
 As for 4 NIEs
 Catch-up effect became significantly more negative as the relative income has risen
significantly compared to the global average ( - 1.92 to – 2.12 )
 Contribution of human capital (0.85 to 0.91) and of openness has risen
moderately (0.37 to 0.44).
 Effectiveness of government relative to the global average has reduced (0.94 to
0.86)
 As for 4 ASEANs
 Catch-up effect became more negative as the relative income has risen compared to
the global average (-0.06 to -0.15)
 Contribution of human capital (-0.12 to -0.05) and openness (0.10 to
0.15) have risen moderately
 Effectiveness of government relative to the global average has fallen (0.20 to 0.10)
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Findings: TFP growth (comparison across time)
 Compare across time (comparison between 1992 – 1997 and
2002 – 2007 periods)
 As for 3 ADEs
 Catch-up effect has fallen significantly as the relative income has risen compared to
the global average (1.22 to 1.03)
 Contribution of human capital (-1.17 to -1.04) and openness (-0.35 to 0.18) have risen significantly
 Effectiveness of government relative to the global average has not changed.
 As for China
 Catch-up effect has fallen significantly as the relative income has risen compared to
the global average (1.13 to 0.26)
 Contribution of human capital (-0.24 to -0.05) and openness (-0.27 to 0.15) have risen significantly
 Effectiveness of government relative to the global average has fallen mildly (0.08 to
0.01)
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5 Priority areas for sustaining growth

The empirical analysis of the previous two section confirms the
importance of supply-side factors in sustaining growth.

In particular, given the growing importance of TFP growth in
the region’s recent economic growth, the key to sustain growth
lies in fostering productivity.

In the context of developing Asia, four areas – infrastructure,
human capital, financial development and trade – will be pivotal
to promoting TFP growth.
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5 Priority areas: Human capital

The region’s rapid demographic transition means the end of the
demographic dividend in the near future.
 Caveat – different countries are at different stages of the demographic
transition.

Therefore, the region’s growth will have to be based on better
rather than more workers.
 The empirical analysis of this paper supports this point – i.e. small
contribution of labor to growth and significance of human
capital in TFP growth.

The region’s education systems have to do a much better job of
producing workers with the “right” skills
 It is true that the region has invested heavily in education.
 However, much of this investment is wasted and misallocated.
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5 Priority areas: Trade

Trade and more generally, openness, will continue to be a key
growth driver for the region, but intra-regional trade may grow
in significance.
 This reflects the rising income levels and purchasing power of the
region, and the relative decline of G3.

Trade delivers substantial dynamic efficiency and productivity
benefits by forcing firms and industries to raise their game to
survive foreign competition.
 The empirical analysis of this paper supports this point – the significance
of openness for TFP growth.

Regional integration which moves countries toward a single
market will further expand such dynamic gains.
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5 Priority areas: Infrastructure

Infrastructure such as better transportation and communication
networks improves the productivity of all firms and industries.
 Therefore, good infrastructure also raises the returns to private-sector
investment.

A large part of developing Asia still suffers from serious
infrastructure deficit.
 A long-standing barrier to India’s growth is its inadequate infrastructure.
 Even in PRC, the interior provinces need more and better
infrastructure.

There is a lot of scope for regional cooperation and integration
in infrastructure in the provision of infrastructure.
 E.g. Bhutanese energy for India
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5 Priority areas: Financial development

Investment will continue to be a key growth driver for the
region but efficiency of investment will matter more.

Therefore, the region’s sound and efficient financial systems that
allocate capital to its most productive uses.

The region has made great strides in financial development since
the Asian crisis but there is still a lot of scope for improvement.
 The need for deeper bond markets and greater SME access to credit.
 Regional financial integration, especially for bond markets, can create
bigger, deeper and broader financial markets.
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6 Concluding observations

Developing Asia has an enviable record of rapid growth in the past.
 Fastest-growing region in the world
 Got many of the fundamentals “right”
 Rapid growth has contributed to massive poverty reduction

The region has recovered well from global financial crisis but faces
the challenge of sustaining long-run growth in the post-crisis period.
 Faces a less benign external environment as well as aging and other big shifts
 Region is still home to two-thirds of the world’s poor

This growth has been the consequence of a sustained increase in
productive capacity.
 Capital accumulation and TFP growth have both played a role.
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5 Concluding observations
Policies which delivered rapid sustained growth in yesteryear’s
low-income, capital-scarce Asia will be less effective in today’s
middle-income, capital abundant Asia.
 In particular, growth will increasingly have to come from
improving TFP growth rather than factor accumulation.

 Evidence of this study shows that TFP growth is growing in relative
importance as the driver of economic growth.
 Therefore, policies that promote TFP growth will hold the key to
sustaining growth in the post-crisis period.

In the context of promoting TFP growth, some key areas that
merit the attention of policymakers include:




Infrastructure
Human capital
Financial development
Trade, including intra-regional trade
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