Capital Creation and Production Growth in South Korea and Taiwan: Beating Diminishing Returns Through Realising the Catch-Up Potential...

Capital Formation and Productivity Growth in Southern Korea and Taiwan: Defeating Diminishing Earnings through Understanding the Catch-Up Potential

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Marcel S. Timmer and Bart vehicle Ark Groningen Growth and Development Center University of Groningen March 2002 (Third draft)

For extra information make sure you contact: Marcel Timmer and Bart truck Ark Teachers of Economics University of Groningen PO Box 800 9700 UTAV Groningen The Netherlands email: meters. p. [email protected] rug. nl h. they would. van. [email protected] rug. nl tel.: 31 50 363 3653 or 3674 fernkopie: 31 55 363 7337

Abstract Through this paper all of us reconstruct the fixed non-residential capital shares of Southern Korea and Taiwan. They are based on long-term series of expenditure in nonresidential buildings and machinery and equipment, using the perpetual products on hand method with assumptions upon lifetimes and age-efficiency habits that are standardised across countries. We compare our quotes of major capital stock with these from earlier estimates and examine the sensitivity of our assumptions. Second, we look with the impact of quality-adjusted capital input upon total element productivity growth. Finally, to assess the potential for extended catchup in the emerging financial systems we compare levels of capital intensity and labour production with these in the United States. To get both Korea and Taiwan we find a rapid growth of the capital stock for the total overall economy and for manufacturing, with progress rates peaking between the mid-1960s and the mid-1980s. These findings do not alter with variations in lifetime and age-efficiency assumptions. With capital advices measured when it comes to service runs, total factor productivity growth is low up to the middle 1980s. Since then TFP progress slightly increased which is relevant to the slow down of work input growth relative to result growth. When it comes to comparative numbers of capital-labour ratios and labour productivity, you can still find large breaks between the two East Asian countries and the UNITED STATES. This indicates that despite the diminishing returns to capital, specially in manufacturing, possibilities for further progress on basis of accumulation are far from tired. This would be all the more true in the event the asset lifetimes in the Asian countries are in reality shorter than in more advanced countries, which might be because of exceptionally excessive rates of investment and rapid structural change. JEL codes: Macroeconomics, Growth and Fluctations (N1); Economic Expansion (O1); Scientific Change (O3), Economic Progress and Mixture Productivity (O4)

1 . Introduction1

Well before the beginning of the the latest financial and economic crisis in Asia, a vigorous issue emerged on the causes of quicker growth functionality in East and Southeast Asia considering that the 1960s as well as the barriers to further growth. Actually, the issue revolved about the question perhaps the region's extraordinary growth functionality could be mostly explained from the successful efficiency of markets in reallocating resources for their most efficient use, or from interventionist procedures such as regulation of financial market segments and commercial policy. In 1993 the World Bank additional complicated the debate by introducing the concept of a ‘market friendly' approach as a way to mix aspects of the orthodox and revisionist opinions (World Lender, 1993). Lately the argument focused on the rapid accumulation of capital in East Asia. Krugman (1994) recommended that future growth in the region is likely to decelerate because of reducing returns to capital. Indeed some students report rapid accumulation in combination with low total factor productivity growth in Asia (Kim and Lau, 1994; Fresh, 1995), but others emphasize that, irrespective of rapid capital accumulation, total factor efficiency (TFP) progress in East Asia have been quite respectable compared to various other developing areas in the world (Nehru and Dhareshwar, 1994, Collins and Bosworth, 1996; Nadiri and Son, 1997, Yusuf, 2001). Certainly Easterly and Levine (1999) argue that this...

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