Sources of Growth in Northeast Asia

Stephan Haggard (PIIE) and Marcus Noland (PIIE)
December 23, 2015 6:00 AM

Sometimes we just can’t take watching the grass grow in North Korea and feel like reaching to broader political and economic topics in Northeast Asia. One of paramount importance is future sources of growth in the region. At VOX, Koji Nomura (Keio University) discusses the release of some new data from the Asian Productivity Organization’s latest Asian Productivity Databook, a multiyear project based on a standardized system of national accounts and estimates of capital inputs. The project provides a standard decomposition of output growth into labor and capital inputs and total factor productivity, with a number of refinements (including IT capital inputs and labor productivity).

The table below reproduces data for Japan, Korea and Taiwan, China and the US, looking both at the long-run (1970-2013) and a period that encompasses the global financial crisis (but also the boom leading up to it; 2005-2010) and the more recent aftermath (2010-2013). For Japan and the United States, the long-run is really the period of maturity, and for Japan the beginning of the slowdown from the high growth period. For Korea and Taiwan, the long-run encompasses much of the high-growth period, and a later transition to maturity and slower growth that follows in the wake of the Asian financial crisis. For China, by contrast, the long-run corresponds pretty closely to what might be called the Deng era of reform and profound structural transformation and growth.

The big headline is not just the slowdown in China’s growth but its sources. The data shows quite respectable growth in total factor productivity over the long-run as China caught up; in the period encompassing the onset of the global financial crisis (2005-2010) TFP growth topped 4% and substantially exceeded that visible in Korea and Taiwan in their high growth periods. But reliance on capital inputs increased dramatically in the aftermath of the crisis, reflecting the stimulus—and the related concern about the profitability or even viability of the massive investments during this period.

But the fall off in productivity and its contribution to overall growth was even sharper in Korea and Taiwan. According to Nomura, the rate of return on capital in Korea dropped to levels seen in Japan in the early 1990s, the onset of the lost decade. Thus the fretting over innovation in both countries and the felt need in Korea for a variety of reforms, from corporate governance and financial innovation to labor market measures. If the slowdown in China proves more abrupt—a pattern that would be foreshadowed by Japan, Korea and Taiwan, then the pressure to increase productivity will only increase. Differences in labor productivity still account for the bulk of the income gap between the US and countries in the region.

At the same time, all four of the Northeast Asian societies are aging rapidly. (The US is also aging and faces issues of maintaining the financial stability of programs such as social security system, but the American challenge is mild in comparison.) The aging of these societies come precisely as they approach the technological frontier, where easy opportunities for catch-up are no longer available. These constraints make it even more challenging to raise productivity, and are also likely to exacerbate tensions over distribution. With the pie no longer growing so rapidly, how it is divided will become more salient. The intensifying issue of intergenerational transfers is more and more likely to come to the fore.

North Korea was not included in the APO study (it is not a member of the APO and would probably be unwilling to supply the requisite data even if it were) and given the economy's state of flux, any growth decomposition would have to be considered speculative in the extreme. We may be more confident of one thing though: that North Korea is aging rapidly as well. Perhaps this is the reason that the government has reportedly banned abortions and IUDs. If North Korea heads down the Romanian path, slowing TFP estimates will be the least of our worries.

 

Output Labor Input Capital Input TFP
Japan  
1970-2013 2.6 0.0 2.0 0.6
2005-2010 0.3 -0.4 0.1 0.4
2010-2013 0.9 0.1 -0.2 1.0
Korea
1970-2013 6.9 1.0 4.3 1.7
2005-2010 4.2 -0.3 2.1 2.5
2010-2013 2.9 0.4 1.9 0.7
Taiwan  
1970-2013 6.8 1.0 3.9 1.9
2005-2010 4.2 0.2 1.8 2.2
2010-2013 2.7 0.8 1.2 0.7
China
1970-2013 8.7 1.0 4.5 3.1
2005-2010 10.7 0.2 6.3 4.2
2010-2013 7.9 0.2 5.5 2.2
United States
1970-2013 2.8 0.7 1.3 0.8
2005-2010 0.8 -0.5 1.0 0.2
2010-2013 2.0 1.0 0.5 0.6

https://www.youtube.com/watch?v=594WLzzb3JI

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