economics 216: the macroeconomics of development

Economics 216:The Macroeconomics of Development

Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development

Department of EconomicsStanford University

Stanford, CA 94305-6072, U.S.A.

Spring 2000-2001

Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau

Lecture 4 The Sources of Economic Growth in

Developed and Developing Economies

Lawrence J. Lau, Ph. D., D. Soc. Sc. (hon.)Kwoh-Ting Li Professor of Economic Development

Department of EconomicsStanford University

Stanford, CA 94305-6072, U.S.A.

Spring 2000-2001

Email: [email protected]; WebPages: http://www.stanford.edu/~ljlau

Lawrence J. Lau, Stanford University

3

Introduction Tangible capital accumulation is the most important source

of growth in developing economies Technical progress is the most important source of

economic growth in developed economies The controversy over the role of technical progress in

postwar East Asian economic growth Kim and Lau (1992, 1994a, 1994b) Paul Krugman (1994) The World Bank (1993) Alwyn Young (1992, 1995)


4

Rates of Growth on Inputs & Outputs of theEast Asian NIEs and the G-5 Countries

Ta ble 2 .1 : A v e ra g e A nnua l R a te s o f G ro w th o f O utput a nd Inputs (pe rc e nt)

E c o no m y P e rio d G D P C a pita l L a bo r H um a n R & DS to c k H o urs C a pita l C a pita l

H o ng K o ng 6 6 -9 0 7 .8 9 2 .6 2 .3 N AS ing a po re 6 5 -9 0 9 1 0 .4 4 .3 3 .4 1 5 .9S . K o re a 6 4 -9 0 9 1 3 3 .8 3 .7 1 4 .6Ta iw a n 6 4 -9 0 9 1 2 .1 2 .9 2 .4 1 4 .5J a pa n 6 4 -9 2 5 .5 8 0 .5 0 .8 8 .9F ra nc e 6 4 -9 1 3 .2 5 .2 -0 .3 1 .3 5W . G e rm a ny 6 5 -9 1 3 4 .4 -0 .6 1 .1 5 .7U .K . 6 5 -9 1 2 .1 3 .8 -0 .3 0 .9 2 .1U .S . 4 9 -9 2 3 3 .1 1 .5 0 .8 6 .1


5

The Estimated Parameters of the Aggregate Meta-Production Function

Table 6.2 Estimated Parameters of the Aggregate Production Function

Parameter I+II+IV+V(2)+VI I+II+IV+VI

Y0 0.293 (399.295) 0.331 (318.414)

aK 0.256 (8.103) 0.245 (7.929)

aL 0.63 (6.666) 0.524 (5.077)

B KK -0.074 (-7.445) -0.058 (-4.919)

B LL -0.073 (-1.101) -0.012 (-0.178)

B KL 0.032 (1.324) 0.025 (1.103)

C iK

Hong Kong 0 0.062 (2.443)Singapore 0 0.045 (1.702)South Korea 0 0.026 (1.197)Taiwan 0 0.024 (1.523)France 0.083 (8.735) 0.1 (6.394)West Germany 0.074 (6.761) 0.089 (5.465)Japan 0.072 (3.927) 0.098 (3.483)UK 0.046 (5.749) 0.056 (5.045)United States 0.061 (7.592) 0.067 (6.321)

R-sq 0.753 0.753D.W. 1.448 1.473


6

The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s (1) No technical progress in the East Asian NIEs but

significant technical progress in the industrialized economies (IEs) including Japan

(2) East Asian economic growth has been input-driven, with tangible capital accumulation as the most important source of economic growth (applying also to Japan) Working harder as opposed to working smarter

(3) Technical progress is the most important source of economic growth for the IEs, followed by tangible capital, accounting for over 50% and 30% respectively, with the exception of Japan NOTE THE UNIQUE POSITION OF JAPAN!


7

The Findings of Kim & Lau (1992, 1994a, 1994b) using data from early 50s to late 80s (4) Despite their high rates of economic growth and rapid

capital accumulation, the East Asian Newly Industrialized Economies actually experienced a significant decline in productive efficiency relative to the industrialized countries as a group

(5) Technical progress is purely tangible capital-augmenting and hence complementary to tangible capital

(6) Technical progress being purely tangible capital-augmenting implies that it is less likely to cause technological unemployment than if it were purely labor-augmenting


8

Accounts of Growth:Kim & Lau (1992, 1994a, 1994b)

Table 2.2: Relative Contributions of the Sources of Economic Growth (percent)

Economy Tangible Labor TechnicalCapital Progress

Hong Kong 74 26 0Singapore 68 32 0S. Korea 80 20 0Taiwan 85 15 0Japan 56 5 39Non-Asian G-5 36 6 59


9

Purely Capital-Augmenting Technical Progress

Y = A0(t) F(AK(t)K, AL(t)L)

= A0F(AK(t)K, ALL)

= A0F(AK(1+ciK)tK, ALL)

The production function canalso be written as:

= A0F(AK eciK.tK, ALL)


10

Implications of Rejection of the Hypothesis of Purely Labor-Augmenting Technical Progress Technical progress is not simply equivalent to more labor

(One thousand janitors are not equivalent to a Kenneth Arrow)

The existence of a steady state growth can no longer be assured

Capital-augmenting technical progress implies the complementarity between tangible capital and technical progress (intangible capital)


11

Production Elasticities of Capital

Production Elasticities of Tangible Capital

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5


12

Production Elasticities of LaborProduction Elasticities of Labor

0.2

0.25

0.3

0.35

0.4

0.45

0.5

0.55

0.6

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5


13

Degrees of Returns to Scale

Degrees of Returns to Scale

0.6

0.65

0.7

0.75

0.8

0.85

0.9

0.95

1

1958

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

HON KOR SIN

TWN JPN NAG5


14

Empirical Evidence for the Hypothesis of No Technical Progress in East Asian NIEs Tsao (1985) and Young (1992) for Singapore Kim & Lau (1992, 1994a, 1994b) and Young (1995) for

the four East Asian NIEs Paul Krugman (1994) Kim & Lau (1996) extend the same finding to other East

Asian economies--China, Indonesia, Malaysia, Philippines, and Thailand


15

Empirical Evidence Against the Hypothesis of No Technical Progress Young (1992) for Hong Kong The World Bank (1993) Credibility of such studies undermined by restrictive

maintained hypotheses such as CONSTANT RETURNS TO SCALE

NEUTRALITY OF TECHNICAL PROGRESS & INSTANTANEOUS COMPETITIVE PROFIT

MAXIMIZATION


16

International and Intertemporal Comparison of Productive Efficiency: A Thought Experiment Suppose all countries have the same quantities of

measured inputs of capital and labor as the United States What would have been the quantities of their real outputs?

and How would they evolve over time?

WE COMPARE THEIR OUTPUTSHOLDING MEASURED INPUTS CONSTANT!


17

Hypothetical Output LevelsHyp o th e tica l O u tp u t L eve ls (T r illio n US $ in 1980 p r ices )

0

0.5

1

1.5

2

2.5

3

3.5

4

Tri

llio

n U

.S.

Do

lla

rs (

19

80

pri

ce

s) USA FRA GER UK JPN

HON KOR S IN TWN


18

Relative Productive Efficiency(U.S.=100%)

Re la tiv e P ro d u c tiv e E ffic ie n c y (U.S .=1 0 0 % )

0

10

20

30

40

50

60

70

80

1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988

Pe

rce

nt

FRA GER UK JPN

HON KOR S IN TWN


19

The Sources of Economic Growth:Selected East Asian and Western Economies

The Contributions of the Sources of Growth (percent)

Capital Labor Technical Progress

East Asian EconomiesChina 92.2 9.2 -1.4Hong Kong 55.8 16.0 28.2Indonesia 115.7 11.5 -27.2Japan 62.9 4.7 32.4Malaysia 70.9 18.7 10.4Philippines 99.5 18.0 -17.5Singapore 60.0 20.9 19.1South Korea 86.3 12.7 1.0Taiwan 88.9 8.6 2.5Thailand 71.9 12.7 15.4Western Industrialized EconomiesFrance 37.8 -1.3 63.5West Germany 43.7 -6.3 62.6United Kingdom 46.0 3.7 50.3United States 32.9 26.2 40.9


20

The Sources of Economic Growth:Selected East Asian and Western Economies

The C o ntributio ns o f the S o urc e s o f E c o no m ic G ro w th:S e le c te d E a st A sia n a nd W e ste rn E c o no m ie s

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Chi

na

Ho

ng K

ong

Ind

one

sia

Jap

an

Mal

aysi

a

Phi

lipp

ines

Sin

gap

ore

So

uth

Ko

rea

Tai

wan

Tha

iland

Fra

nce

Wes

t G

erm

any

Uni

ted

Kin

gdo

m

Uni

ted

Sta

tes

Per

cen

t

C apital

Labo r

Technical P ro gress


21

Human Capital

Average Human C ap ital (Years o f S cho o ling p er W o rking-Age P erso n)

0

2

4

6

8

10

12

14

Yea

rs p

er W

ork

ing

-Ag

e P

erso

n

Ch in a Ho n g Ko n g

In d o n es ia S. Ko rea

M alay s ia Ph ilip p in es

Sin g ap o re Taiwan

Th ailan d Jap an

No n -A s ian G5


22

Sources of Economic Growth with Explicit Inclusion of Human Capital


Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress

Hong Kong 66 22 11 NA 0 11Singapore 63 25 13 NA 0 13S. Korea 67 19 14 NA 0 14Taiwan 75 14 11 NA 0 11Japan 48 6 3 NA 43 46Non-Asian G-5 32 7 5 NA 57 62


23

Simultaneous Capital- and Human Capital-Augmenting Technical Progress

Y = A0(t) F(AK(t)K, AH(t)H, AL(t)L)

= A0F(AK(t)K, AHH, ALL)

= A0F(AKK, AH(t)H, ALL)

= A0F(A(t)KH

, ALL)


24

R&D Expenditureas a Percentage of GDP

P ercen tag e o f T ota l R &D Ex pen diture in GD P (Cu rre nt P rices )

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993

Pe

rce

nt

USA FRA GER

UK JPN HON

KOR S IN TWN


25

R&D CapitalR & D C apita l S tock (B illion 1980 US $)

0

100

200

300

400

500

600

700

800

900

Bil

lio

n 1

98

0 U

S$

US Canada France

W . Germany Italy UK

J apan S . Korea S ing apore

Taiwan


26

Sources of Economic Growth with Explicit Inclusion of Human and R&D Capital


Intangible CapitalTangible Labor Human R&D Technical TotalCapital Capital Capital Progress

Korea 62 18 5 15 0 20Singapore 56 22 5 16 0 21Taiwan 65 15 4 16 0 20Japan 37 5 1 8 49 58Non-Asian G-7 40 4 4 10 43 56


27

Why is There No Measured Technical Progress in East Asian NIEs? (1) (1) Low level of investment in intangible capital (human capital,

R&D capital, knowledge capital and other forms of intangible capital) The effects of technical progress in these production function studies

are essentially captured by the estimated parameters of the time trend, which is supposed to reflect the influence of the changes in the omitted or unmeasured inputs, such as human capital, R&D capital, R&D capital, knowledge capital, land or more generally the natural endowment of resources, and other intangible "investments" such as software and market development.

However, since the developing East Asian economies, until very recently, have invested relatively little in intangible capital (e.g., R&D, especially in basic research), such omitted or unmeasured variables are actually unlikely to be important in them.


28

Why is There No Measured Technical Progress in East Asian NIEs? (1)

Thus the indigenously generated improvements in technology have been quite scarce in developing East Asian economies other than Japan.

By contrast, the industrialized economies invest a significant percentage of their GDP in R&D and even greater amounts in innovation and other productivity-enhancing activities.

Thus, it should not be surprising that technical progress, or the "residual", is much larger in the industrialized economies than in the developing East Asian economies.

Moreover, utilization of other countries’ intangible capital is not costless--royalties, license fees, maintenance and service contracts, cross-licensing, full pricing of capital goods

Complementary indigenous investment is required, e.g., the new rice varieties of the Green Revolution


29

Why is There No Measured Technical Progress in East Asian NIEs? (2) (2) The distribution of "Innovation Rents” (quite properly)

favors the innovators and investors The industries in the developing East Asian economies typically

employ mature technologies with limited innovation possibilities but the capital goods and technology for which, mostly imported, have been fully priced (i.e., the acquisition as well as royalty costs fully reflect the possible efficiency gains and the amortization of R&D and other developmental costs) in the international market, so that there may be little or no net increase in value added, over and above the normal returns to the factor inputs. In other words, the "innovation rents" have been largely captured by the inventors, manufacturers and distributors of the new equipment or intermediate inputs in the industrialized economies in markets that are only very imperfectly competitive.


30


The "rents" can also take the form of royalties and licensing fees paid to the foreign technology licensors by the developing East Asian economies, or through transfer pricing by foreign direct investors, reducing correspondingly the domestic part of the real value-added.

Monopolistic pricing of capital equipment, technology licenses and critical components (e.g., systems integration capability for aircraft manufacturers; plastic lens for cameras), which limit the value added by manufacturers/assemblers in developing East Asian economies, e.g., notebook computers

Monopsonistic pricing for OEM manufacturers--the benefits of learning-by-doing on the part of the OEM manufacturers accrue mostly to the owners of brand names, designs, and marketing organizations


31


Consequently, even if a new technology were adopted, its effect might not be reflected in the form of a higher real value-added, holding measured factor inputs constant.


32

Why is There No Measured Technical Progress in East Asian NIEs? (3) (3) Problems of Measurement of Capital

Fixed investment in equipment in industrialized economies are typically measured, at factor costs, net of the intangible inputs required, whereas fixed investment in equipment in developing economies, being mostly imported from developing economies, are measured inclusive of intangible inputs, returns to intellectual capital, monopoly rents, and turnkey installation costs E.g., the fixed investment in equipment of the same semiconductor fabrication

plant may well be higher in a developing economy as compared to an industrialized economy

A simple way to understand this point is that capital equipment in industrialized economies may be sold unbundled with the “soft” costs (including software), whereas capital equipment in developing economies are typically sold bundled with the “soft” costs


33

Why is There No Measured Technical Progress in East Asian NIEs? (4) (4) Aggregation

It is possible, in fact likely, that there may have been positive technical progress in certain efficient (tradable) sectors and industries in the developing East Asian economies.

However, this may be largely offset by rising inefficiency in certain other industries, especially those in the nontradable sectors.

The economy as a whole may exhibit no measured technical progress. Rising inefficiency can persist only in protected markets under

monopolistic or oligopolistic conditions. Thus, technical progress at the microeconomic or industrial level may be nullified by the inefficiency caused by the lack of competition in the domestic market.


34

Why is There No Measured Technical Progress in East Asian NIEs? (5) (5) Economies of Scale

There are significant measured economies of scale, in all inputs taken together, for the developing East Asian economies. For economies in which both output and inputs have been growing, economies of scale and technical progress provide alternative explanations for the ability of producing more than doubled the output by merely doubling the inputs.

We have found is that as far as the developing East Asian economies are concerned, it is economies of scale, rather than technical progress, that have contributed to the outstanding economic performance.


35

Why is There No Measured Technical Progress in East Asian NIEs? (6) (6) Omission of the value of the quality of life

It is also possible that in some East Asian economies, such as Singapore, some public infrastructural investments have been made to improve the quality of life, e.g., cleaner air and water, less traffic congestion, etc., rather than to increase real GNP directly. Since these non-pecuniary benefits are not reflected in the measurement of the output (real GNP) but are included in the measurement of inputs (tangible capital), it may appear, from considering the growth of output alone, that tangible capital has not been employed efficiently, and that the efficiency of its use has not improved over time.


36

The Non-Uniqueness ofthe Postwar East Asian Experience Abramovitz and David (1973): U. S. economic growth in the

19th Century can be largely attributed to the growth of inputs Tostlebee (1956): The growth in U.S. agriculture in the 19th

Century can be attributed to the growth of inputs, with a negative rate of growth of total factor productivity

Hayami and Ogasawara (1999): Japanese economic growth between the Meiji Restoration and the World War I can be largely attributed to the growth of inputs, principally capital

Godo and Hayami (1999): Confirm the lack of technical progress in prewar Japan (with human capital included)


37

The Sources of Economic Growth--Developing Economies in East Asia Different types of measured inputs play different roles at

different stages of economic growth Tangible capital accumulation is the most important source of

growth in the early stage of economic development But simply accumulating tangible capital is not enough--it

must also be efficiently allocated Efficient tangible capital accumulation is the major

accomplishment of the East Asian NIEs in the postwar period Intangible capital accumulation becomes important only after

a certain level of tangible capital per worker is achieved but has begun to be important for some East Asian NIEs such as South Korea and Taiwan


38

How is Efficiency Achievedin the East Asian NIEs? Market-directed allocation of new investment, aided by

export orientation, promotes efficiency Private enterprises have the incentives for prompt self-

correction


39

The Sources of Economic Growth--Industrialized Countries The most important source of economic growth for

industrialized countries is technical progress, accounting for more than half of the growth of output

Tangible capital is the next important source of economic growth, accounting for almost a third

Technical progress reflects the effects of intangible capital--R&D capital, knowledge capital, goodwill, etc.

The United States is a leader in human capital and R&D capital


40

The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Tangible Capital Labor Technical P rogressHong K ong 74.46 25.54 0South K orea 78.2 21.8 0Singapore 64.8 35.2 0Taiwan 84.04 15.96 0Japan 49.9 4.84 45.26Non-Asian G-5 Countries 38.71 2.77 58.52

Tangible Capital Labor Technical P rogressHong K ong 74.61 25.39 0South K orea 82.95 17.05 0Singapore 63.41 36.59 0Taiwan 86.6 13.4 0Indonesia 88.79 11 .21 0Malaysia 66.68 33.32 0P hilippines 66.1 33.9 0Thailand 83.73 16.27 0China 94.84 5.16 0Japan 55.01 3.7 41.29Non-Asian G-5 Countries 41.51 1.97 56.53

Sample (G-5 + 4 NIEs)

Sample (G-5 + 9 Asian)


41

The Sources of Growth: Further Results with Extended Sample--Lau and Park (2000)

Tangible Capital Labor Human Capital R&D Capital Technical ProgressSouth Korea 63.35 13.61 2.1 20.94 0Singapore 47.33 21.55 1.37 29.75 0Taiwan 58.73 11.42 1.32 28.54 0Japan 44.83 5.2 0.82 14.63 34.52

Non-Asian G-7 Countries 33.71 3.71 1.32 12.53 48.72


42

Sources of Economic Growth with Breaks in the Rates of Capital Augmentation (1985)

Tangible Capital Labor Human Capital Technical P rogressHong K ong 48.41 27.57 8.16 15.86South K orea 51.23 24.78 11 .59 12.4Singapore 46.73 32.43 10.86 9.99Taiwan 58.26 21.61 9.87 10.27Japan 38.89 9.17 3.24 48.7Non-Asian G-5 Countries 30.13 7.09 5.21 57.57

Tangible Capital Labor Human Capital Technical P rogressHong K ong 56.89 23.65 2.51 16.94South K orea 65.45 18.62 3.84 12.08Singapore 53.1 33.94 3.23 9.73Taiwan 71.26 15.61 3.15 9.99Indonesia 71.2 14.59 9.38 4.83Malaysia 54.22 32.47 5.12 8.19P hilippines 54.05 37.81 8.15 -0 .01Thailand 60.84 18.06 5.65 15.44China 83.87 11 .92 4.21 0Japan 49.04 5.23 1.08 44.65Non-Asian G-5 Countries 37.44 3.36 1.7 57.49

Sample (G-5 + 9 Asian)

Sample (G-5 + 4 NIEs)


43

Sources of Economic Growth with Breaks: Sub-periods

Ta ng ible C a pita l L a bo r H um a n C a pita l Te c hnic a l P ro g re ssH o ng K o ng 6 5 .3 4 3 1 .6 5 3 0S o uth K o re a 7 4 .6 6 2 0 .5 8 4 .7 6 0S ing a po re 6 0 .0 9 3 5 .9 7 3 .9 4 0Ta iw a n 7 9 .9 2 1 6 .4 3 3 .6 4 0Indo ne sia 7 6 .4 4 1 2 .4 1 1 1 .1 5 0M a la ysia 6 1 .1 4 3 2 .6 9 6 .1 7 0P hilippine s 5 5 .7 8 3 5 .3 6 8 .8 6 0Tha ila nd 7 0 .7 7 2 0 .9 2 8 .3 1 0C hina 8 3 .0 5 1 2 .3 6 4 .5 9 0J a pa n 5 0 .8 4 5 .4 8 1 .0 6 4 2 .6 2N o n-A sia n G -5 C o untrie s 3 9 .6 9 0 .8 8 1 .7 1 5 7 .7 2

H o ng K o ng 4 0 .8 1 8 .6 1 1 .5 8 4 9S o uth K o re a 4 4 .9 6 1 4 .1 9 1 .8 3 9 .0 6S ing a po re 3 7 .3 5 2 9 .1 9 1 .6 3 1 .8 6Ta iw a n 4 1 .4 5 1 2 .6 1 1 .4 4 4 .5 3Indo ne sia 6 0 .2 5 1 9 .0 9 5 .6 3 1 5 .0 3M a la ysia 4 3 .3 3 2 .0 4 3 .4 4 2 1 .2 2P hilippine s 4 9 .7 1 4 4 .0 3 6 .2 9 -0 .0 3Tha ila nd 4 9 .0 1 1 4 .6 1 2 .5 1 3 3 .8 6C hina 8 5 .7 5 1 0 .9 3 .3 5 0J a pa n 3 4 .9 9 3 .1 7 1 .1 9 6 0 .6 4N o n-A sia n G -5 C o untrie s 2 7 1 4 .6 6 1 .6 3 5 6 .7 2

S a m ple (G -5 + 9 A sia n)1 9 6 0 s-1 9 8 5

1 9 8 6 -1 9 9 5


44

Was East Asian Economic Growth a Bubble? Past economic growth neither a miracle nor a mere bubble

Economic growth experience replicated in different East Asian economies

Sustained economic growth over decades Recent crisis due to many factors, of which “irrational exuberance” is

only one Economic fundamentals remain sound--high savings rates, investment

in human capital, and more recently in R&D capital, entrepreneurship, market orientation

Past economic growth input-driven rather than technical progress-driven--it is attributable to growth in inputs, particularly the efficient and rapid accumulation of tangible capital


45

Where Is the “Miracle”? Achievement of a high savings rate Translating domestic savings into investments--the role of

self-fulfilling expectations Creating and maintaining an environment in which

investments are productive--a market-friendly environment Philippines as a counter-example


46

Is Economic Growth Sustainable?Krugman’s Worry about East Asia If the major source of economic growth is the growth of

tangible capital, then given the diminishing marginal productivity of tangible capital, as more and more tangible capital is accumulated, each additional unit of tangible capital will be less productive than the unit before it. Eventually economic growth must slow down and then stop altogether.

The former Soviet Union was used as an example where a great deal of tangible capital was accumulated but failed to be productive; China prior to its economic reform which began in 1979 would be another example


47

Is East Asian Economic Growth Sustainable? Considerable room for continuation of rapid tangible inputs-

driven economic growth in the future--tangible capital per unit labor still lags considerably behind the developed economies

Investment in intangible capital, e.g., R&D investments, has begun to increase in the East Asian NIEs--in terms of stocks, intangible capital per unit labor lags even further behind, offering additional opportunities for improvement

Because of its complementarity with tangible capital, investments in intangible capital can retard the decline in the marginal productivity of tangible capital JAPAN HAS SHOWN HOW THIS CAN BE DONE!


48

Capital Intensity

T angib le C ap ital S tock per Labor Hour (1980 U.S .$)

0

10

20

30

40

50

60

19

80

US

$ p

er L

abo

r H

ou

r





Th ailan d Jap an

No n -A s ian G5


49

Human Capital per Unit Labor

Human C ap ital per Labor Hour (Years o f Schoo ling)

0

0.002

0.004

0.006

0.008

0.01

0.012

Yea

rs p

er L

abo

r H

ou

r





Th ailan d Jap an

No n -A s ian G5


50

R&D Capital Stock per Unit Labor

R & D C apita l S tock per Labor Hour (19 80 US $)

0

1

2

3

4

19

80

US

$

US Canada France

W . Germany Italy UK

J apan S . Korea S ing apore

Taiwan


51

Is East Asian Economic Growth Sustainable? The attractiveness of investment in intangible capital

depends on the protection of intellectual property rights, which in turn depends on whether a country is a producer of intellectual property


52

Differences between Tangible and Intangible Capital Intangible capital is different from tangible capital in three

important aspects: Intangible capital is freely mobile across countries Intangible capital (other than human capital) is simultaneously

deployable in different locations without diminution of its effectiveness (increasing returns in the utilization of intangible capital)

Intangible capital enhances the productivity of existing tangible capital whereas additional tangible capital diminishes the productivity of existing tangible capital


53

Implications for East Asian NIEs (1) Maintaining the growth in tangible capital

Encouraging savings and investment Preserving a low-tax environment Affirming property rights Keeping inflation under control Maintaining free flows of capital, labor and goods Maintaining an orderly and stable foreign exchange market Providing needed infrastructure Avoiding open-ended social welfare programs Strengthening capital markets


54

Implications for East Asian NIEs (2) Assuring the efficiency of tangible capital

Commitment to an open economy Continued liberalization and deregulation Preserving open competition in all markets Maintaining the rule of law Providing needed infrastructure

Traditional economy requires physical infrastructure--railroads, roads, ports, airports, power, etc.

New economy requires, in addition, virtual infrastructure--Telecommunication (Telephone and internet access from every village; Fiber optic links); Wireless; National and international delivery services--United Parcel Service (UPS), Federal Express; Generic trading platforms; Enabling technologies and services (Internet service providers; portals)

Eschewing market intervention


55

Implications for East Asian NIEs (3) Closing the gap on intangible capital

Investment in human capital (formal, technical, on-the-job training, and re-training); universal secondary education

Upgrading the universities to be the among the best in the world Support for basic science Tax incentives and subsidies for education and re-training and R&D Investment in R&D capital Investment in other forms of intangible capital (design, goodwill, brand

name, market development, information systems and software, etc.) Protection of intellectual property rights (transformation from a

consumer to a producer of intellectual capital) Development of new modes of education and information dissemination


56

Investment in R&D Capital Investment in R&D Capital--necessary for both learning

and diffusion Essentiality of indigenous R&D for the successful exploitation of

imported technology, e.g., new rice variety The distribution of gains from technology trade and transfer is

biased in favor of the innovators and the owners of intangible capital (e.g. brand names) and not the imitators

Licensing frequently takes the form of cross-licensing R&D projects as an instrument of industrial policy (Strategic

R&D) Focus on development rather than basic or applied research Consortium approach

economics 216: the macroeconomics of development

Documents

significant technical

sources of economic

role of technical progress

group5 technical progress

smarter3 technical progress

important source of

high rates of economic

stanford universityy