East Asian Growth Controversy

East Asian Growth Controversy

DOI: 10.4018/978-1-4666-5848-6.ch003
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Abstract

This chapter discusses the major controversy on the EAE's phenomenal rates of growth. The summary of the findings indicates that the dominant share of the EAE's growth was due to factor accumulation and that productivity growth was negligible, until after the mid-1980s when some growth in productivity was noted. Based on these results, the survey shows that in the long-run growth rates in EAEs will eventually taper-off because they are not sustained by significant improvements in productivity. While this finding seems to be the consensus amongst the proponents of the neoclassical theory (and also of this chapter), it is suggested that growth accounting exercises provide (at best) only preliminary insights into the processes leading to economic growth. Therefore, hard-line conclusions based on these accounting constructs should be taken with some degree of caution. Nevertheless, it is shown that high growth prospect in the longer term is weak in light of limited advancements in productivity in these economies.
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Background

Sources of growth of the EAEs have been heavily debated. The contention was that the recorded rates of growth were really not anything surprising and that they were unsustainable in the long-run. Many commentators and researchers have adequately predicted an eventual slowdown of these economies, which is yet to be seen in real data as these economies continue to grow. In fact, the international agencies like the IMF and the World Bank projects long-run global growth rates to be strongly influenced by the Asian economic performances. Various growth accounting exercises show that a good majority (almost 90%) of the growth rates in the EAEs were due to factor accumulation, leaving almost nothing that might resemble productivity growth. Against this backdrop and in line with the neoclassical theory, these rates of growth should eventually decline – thus these economies will have a hard landing. This implies that the high rates of growth will settle at low rates and that too abruptly. Such a situation will pose massive welfare implications because it would imply that massive investments now being undertaken will hardly be maintained when the economic fortunes change. In addition, the objective of uplifting the lives and livings standards of over 3 billion people in this region will only remain a dream if growth is not supported by adequate improvements in productivity.

While this has been the consensus, an opposing but growing body of literature argues that productivity growth has been increasing in these economies. Their findings imply that while there could be an eventual slowdown in the pace of expansion, the steady-state growth rate will not be negligibly low. This might be somewhat true because these studies have shown that some R&D investments have been undertaken in these economies. Bosworth and Collins (2003) show a discontent with the traditional models of economic growth because they fail to account that the rapid growth in output may have been spurred because of efficiency gains. The following survey reveals that despite some improvements in productivity, these economies are way-off the developed countries’ mark in efficiency gains. As such, long-run growth uncertainty still prevails. With the region expected to lead global growth, an uncertain long-run scenario in Asia would imply that global growth outcome will be low and volatile. The discussion below summarizes details of the two views and develops a synthesis towards the end.

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