the asian and chinese economic growth models - implications of modern findings on economic growth

8/9/2019 The Asian and Chinese economic growth models - implications of modern findings on economic growth

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The Asian and Chinese economic growth models - implications of modern

findings on economic growth

By John Ross

The issue of whether China's economic stimulus package, and the 'Asian growth model' ingeneral, is correct, and therefore its success will continue, or whether it will fail, is evidentlya question of great importance from the point of view of world economic development andthe world economic situation.

China's economic stimulus package, in particular, has led to a major international debate.Taking non-Chinese writers, those holding that China's package is successful, naturally withdifferences on 'why' and on scale, include the author of this blog, Jim O'Neill, chiefeconomist of Goldman Sachs, Professor Danny Quah of the London School of Economics,Mark Weisbrot and others,

On the other side are Martin Wolfof theFinancial Times , Morgan Stanley's Stephen Roach,

Michael Pettis of Peking University, and others who consider, again with significantdifferences on why and scale, that China's economic strategy is wrong, its stimulus packageis misconceived, or both, and therefore it will end badly.

Because of the importance of the issue this discussion has involved not only immediateeconomic assessments but fundamental economic questions with general applicability outsideAsia and China.

One of the most important of these is the fact that the rapidly growing Asian economies ingeneral, and China in particular, base fast economic growth on very high levels of investmentand an orientation to high levels of exports. Critics of China's economic stimulus package,and the Asian growth model in general, call for such policies to be abandoned, for investment

to be cut backin favour of consumption, and for 'export led growth' to be abandoned.

This article therefore sets out why the Asian growth model is correct, consequently some ofthe key reasons why China's economic stimulus programme is successful, and why the

proposals of those calling for investment to be scaled back in favour of consumption, and fora export led growth to be abandoned, are erroneous and would be damaging in slowing down

Asian, and therefore world, economic growth.

The article below does this by noting that modern econometric research shows that the highinvestment/high export policies of the rapidly growing Asian economies are justified not only

by evidently successful practical results but by economic theory. Given this combination thesuccess of a number of Asian economies and China, now joined by India which has adopted

elements of a similar orientation, will continue. Predictions of crisis in China, or of the Asianmodel in general, are erroneous both practically and from the point of view of economictheory.

This article is more technical than those normally appearing on this blog. The reason for

including it is because of the importance of the issues. However given this more technicalcharacter readers may prefer a summary of the conclusions and for proof they are referred to

the article itself. The key points are:


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1.Modern econometric research shows that, provided an overall framework of a high level ofparticipation in the division of labour is maintained, which in a modern economy requires a

high and expanding level of foreign trade, capital investment is the decisive factor ineconomic growth. The very high levels of investment in the rapidly growing Asian

economies, and China in particular, are therefore correct and maintaining this high level is thekey to continued rapid growth. The stress laid by Indian Prime Minister Manmohan Singh on

the need for India to achieve very high levels of savings and investment is, for example, fullyjustified. Other Indian experts stressing the importance of high savings and high investmentlevels for the country's economy include, for example, Amir Ullah Khan. Proposals to lowerthe investment levels of China, India and the other Asian economies would, if implemented,have serious negative consequences in cutting their growth rates.

2. A high level of participation in division of labour in a globalised economy, which is aprecondition for rapid growth, requires a high level of exports and imports and therefore asituation whereby strategically trade grows more rapidly than the domestic economy.Criticism of the Asian and Chinese economies for export led growth is invalid as it confusestwo different issues. The first is a high level of trade in GDP, i.e. both exports and imports,which is necessary and desirable, and the second is a large trade surplus which is

unnecessary and, in the case of China, has existed only for a short period during its economicreforms.[1]

The method adopted in this article is a review of the findings of modern economic researchon the sources of economic growth and productivity.

* * *

Consideration of the findings of modern econometrics on economic growth, and itsimplications for China and Asia, must necessarily analyse the work of Dale Jorgenson,Professor at Harvard University, and former President of both the US Econometric Societyand the American Economic Associations, as the findings of Jorgenson and his co-authorshave now been officially incorporated in international standards for national account statisticsand for growth accounting set by the US statistical authorities, by the OECD and by the

National Accounts System of the United Nations.

At an earlier stage analyses by Angus Maddison played a crucial role in studies of sources ofpost-World War II economic growth, although in the more recent period Maddison hasshifted his focus to studies of very long term international growth.

However, while Maddison's work has been absorbed by almost all writers on economicgrowth, and forms the standard point of reference in such studies, the work inaugurated byJorgenson and his co-authors, while enjoying an elevated reputation in analyses of

productivity has, for various reasons, not received equivalent adequate international attentionin discussion of economic growth.[2]

The totality of such research has however left no ambiguity as to the main sources ofeconomic growth since World War II. Itis that, within the framework ofthe expansion oftheinternational division of labour,the accumulation of capital and labour, above all fixedinvestment, is the decisive source of economic growth.


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As this finding is evidently of direct relevance for analysis of China and the 'Asian growthmodel' it is therefore somewhat surprising to find that a considerable amount of discussion of

these issues proceeds without reference to modern econometric findings. A widely cited booksuch as Martin Wolf's Fixing Global Finance, which deals extensively with Asia and China,

for example, fails to deal not only with such changes in international statistical methods butwith interrelated studies of the causes of economic growth. A widely read and serious blog on

China such as that ofMichael Pettis similarly fails to adequately address such findings. Anexception is the work of Danny Quah, which as already mentioned previously, dealsextensively with this literature in regard to Asia - and updates and reviews some of thestatistical work referred to below. Personal experience of research and university courses inChina shows that insufficient attention is paid to such work there although, as will be seen, itdirectly pertains to China's economic strategy.

It is therefore worth briefly outlining here the relevant findings of this huge corpus ofresearch. It should be made clear that while the focus is necessarily on Maddison, and thenJorgenson and his co-authors, as the leading figures in modern precise statistical research on

post-World War II economic growth, the methodologies and approaches Jorgenson et al haveoutlined have been examined and received official endorsement from the OECD, and the

National Accounts System of the United Nations. While there are, of course, different preciseestimates of factors in growth, some of which are dealt with below, the statistical methodsreferred to have become the official international standard - what is involved is not the viewsof single individuals.

Particular analysis will be made of the way in which such work aids integration of analysis ofthe determinants of long term economic growth with practical government and company

policy. While some questions involved may appear statistical and theoretical, in reality, aswill be shown, they have decisive implications for practical economic policy and economicstrategy. Naturally only a brief summary of the issues can be given, and the present articledeals only with the overall framework of such work with particular emphasis on theimplications for Asia, China and the US. For a more comprehensive account readers arereferred to the work of the authors cited.

It should also be emphasised that this brief review is notaimed at those studying productivityor econometrics, who will already be familiar with the work, but is simply to highlight itsimportance for wider contemporary economic discussion regarding Asia and China. Giventhe remarks made above about insufficient international attention paid to such work, in

particular in a number of countries for which it is most important, rather more than usual

factual material is given regarding statistical conclusions. This has the effect of making thetext rather dense but it is hoped thereby to convey the full importance of the findings andstimulate desire for more direct study.

The normal caveats in particular apply. The selection of topics for treatment belowcorresponds to specific issues affecting Asian and Chinese economic growth and far fromreflects the full range of issues dealt with by the authors cited - to whom readers should turnfor a comprehensive treatment.

As it may aid in understanding points outlined on this blog, the comparison of economictheory to certain key qualitative facts of economic development which it must explain are set

out before dealing dealing with much more fine grained statistical research. The methodadopted therefore is to proceed from the most general long term qualitative considerations to


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progressively shorter time frames. Readers who wish to proceed directly to the most recentdetailed statistical research may skip over the earlier sections and move to the section on

'Input growth in advanced and developing economies' below

Determinants of long term economic growth versus the theories of Solow and Kuznets

At the beginning of the 1970s, a period when the current author entered economics,discussion of economic growth was dominated by the theory that expansion of inputs ofcapital and labour (factor accumulation) played a relatively minor role in economic growthand that the decisive determinant of the latter was (total factor) productivity frequentlyasserted to be due to advances in technology. The key names associated with such argumentswere Solow and Kuznets. These arguments were presented in an updated form, as noted

previously, by Paul Krugman in his well known 1995 paper'The Myth of Asia's Miracle' -which is still widely cited in discussion on China and Asia's growth despite the fact that, aswill be seen, its conclusions have been vitiated by modern econometric research.

Solow's 1957 article 'Technical Change and the Aggregate Production Function' was crucial

in setting the framework that the decisive factor in economic growth was not investment, or

capital and labour inputs, but increases in total factor productivity. Solow stated regarding theUS economy: 'over the forty year period (1909-49) output per man hour approximatelydoubled about one-eighth of the total increase is traceable to increased capital per manhour, and the remaining seven-eighths to technical change.'

Kuznets similarly argued in his 1971Economic Growth of Nations that: 'The high rate ofgrowth in product per capita associated with modern economic growth can be credited to alarge degree to growth of productivity, that is, of output per unit of input the rise in

productivity amounts to at least eight-tenths of the rise in per capita product in severalcountries.'[3]

While Solow/Kuznets introduced, and retains, a key role in the establishment of theframework of growth accounting it should be noted that the role of 'technology' was definedfrom the outset in a statistically highly unsatisfactory way. It was treated as a 'residual' - thatis all growth that could not be definitively allocated to another factor was assigned to the'Solow residual' and treated as technology. This necessarily inflated the role assigned to'technology/total factor productivity' and indeed had the perverse effect that the less accuratewere the statistics, in the sense of the less their grip on the data, the higher became the role of'technology'. This unsatisfactory state of affairs was famously characterised by MosesAbramovitz as being that what was actually being measured in the 'Solow residual' was'ignorance'. It was entirely possible in principle that the 'high' role played by technology, ascompared to capital and labour inputs, was due to the inadequate state of statistics in early

periods of research of economic growth rather than any actual role of technology. To jump

ahead, this precisely turned out to be the case.

The dominant theories prevailing at that time were thus accurately described by DaleJorgenson: 'The early 1970s marked the emergence of a rare professional consensus oneconomic growth articulated in two books. Kuznets Economic Growth of Nations [and]Solow's Economic Growth The resulting professional consensus, now obsolete,remained the guiding star for subsequent conceptual development and empirical observationfor decades. .. Kuznets [argued] "... with one or two exceptions, the contribution of thefactor inputs per capita was a minor fraction of the growth rate of per capita product." For the


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United States during the period 1929 to 1957, the growth rate of productivity or output perunit of input exceeded the growth rate of output per capita. According to Kuznets' estimates,

the contribution of increases in capital input per capita over this extensive period wasnegative!...

'Kuznets' assessment of the significance of his empirical conclusions was unequivocal:

"Given the assumptions of the accepted national economic accounting framework, and thebasic demographic and institutional processes that control labour supply, capitalaccumulation, and initial capital-output ratios, this major conclusion - that the distinctivefeature of modern economic growth, the high rate of growth of per capita product is for themost part attributable to a high rate of growth in productivity is inevitable."'

I rejected such analysis at the beginning of the 1970s for a clear reason - it was not in linewith the facts. Or as Jorgenson put it more elegantly: 'the consensus on economic growthreached during the 1970s has collapsed under the weight of a massive accumulation of newempirical evidence.'[4]

This conclusion, in my case, flowed from the study of very long term economic growth, the

analysis of which had been greatly facilitated by a number of important statistical analysesthat were produced commencing in the 1960s.[5] At that time Maddison had commenced thelong series of studies which were to culminate four decades later in The World Economy andContours of the World Economy 1-2030AD, while authors such as Cole, Deane, Feinstein,Matthews, Mitchell Odling-Smee and others were providing statistical data at a level that hadnot previously been available.

The advantage of studying such long term economic growth is the same as its disadvantage -the details cannot be seen and only the main trends stand out, thereby making it easier toassess these. It was evident from analysis of such long term economic statistics that thedecisive relations were those regarding the division of labour, and that between investmentand growth, not the factors identified by Kuznets and Solow.

Given science requires that where there is a difference between facts and theory it is the factswhich prevail, therefore, despite the fact that Solow and Kuznets were the 'conventionalwisdom' in academic economics, their conclusions were to be rejected as being inconsistentwith the principal known economic data. Before proceeding to outline modern statisticalconclusions the chief facts flowing from studies of long term economic growth, and some ofthe practical conclusions which follow from these will therefore be outlined. Placed in thatcontext the significance of modern statistical work in integrating long term economicdevelopments with practical economic strategy will become apparent.

The division of labour

The first crucial issue invalidating the Solow/Kuznets approach might initially appearpedantic but it has, as will be seen, decisive economic consequences - and, to jump ahead,was later vindicated by subsequent statistical work. This issue was that both factual evidenceand economic theory are in accord that the economic division of labour is the most powerfulinstrument in raising output. To instead introduce 'technology' as the determining factor ingrowth, as Kuznets/Solow did, violated a fundamental principle of economic analysis sinceits classical foundation.


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To take first theory, putting it in a polemical but hopefully clarificatory way, it may berecalled that the first sentence of the first chapter of the founding classic of modern

economics, Adam Smith's The Wealth of Nation is: 'The greatest improvement in theproductive powers of labour, and the greater part of the skill, dexterity and judgement with

which it is anywhere direct, or applied, seem to have been the effects of the division oflabour.'[6] According to the Kuznets/Solow hypothesis, however, Adam Smith was in error

he should instead have cited 'technology' as being responsible for the 'greatest improvementin the productive powers of labour'! Kuznets/Solow replaced the central socio-economicdriving force identified by Smith, consolidated in subsequent economics, and todayexemplified in the international division of labour by the process of globalisation, with thequite different driving force of 'technological change'.

While it may in principle have been possible to integrate 'technological change' within thedivision of labour, the Kuznets/Solow priority to technology as the decisive element turnedreality on its head it reversed the relation of what should have been determining element(division of labour) with what should have been subordinate (technology). Some of theeconomic implications of this are considered below.

Trade and division of labour

Factually this issue can be illustrated most clearly over the longest period by consideringinternational trade which is of course why Smith initially most clearly outlined thefundamental economic mechanisms in this area.[7]

At the beginning of the 1970s Maddison's magisterial quantitative analysis of 2000 years ofworld economic history, with calculations of GDP per capita for different areas of theinternational economy, was not available. Nevertheless the qualitative elements of worldeconomic history, and therefore the key facts that had to be explained by any theory ofgrowth and productivity, were entirely clear.

Preceding the rise of capitalism in Europe the most economically advanced, in terms of percapita GDP,part of the world economy was its pre-eminent tradingpart, i.e. the Arab/Iraniancore of the Muslim world - not Europe, China or India. The economic success accompanyingthis great classical period of flowering of Islamic civilisation was evident. Later, withinEurope, once the development of capitalist economy commenced, the succession of theeconomically most productive powers was clear from initial leadership by Venice, then tothat of the Netherlands, and finally to Britain. Each of these consolidated a trading empirelarger than the one that preceded it.[8]

The development of the subsequent, and currently most highly productive economy, the US,does not violate this principle but illustrates it clarifying that what is essential is the scope

of the division of labour and not the specifically internationalcharacter of trade in the sensethat what is crucial is the crossing of national boundaries.

The US created the world's first integrated continental scale economy China and India arebecoming the second and third. The proportion of foreign trade in the US economy wastherefore lower than in preceding dominant economies. But because the US economy was farlarger than the previously leading economies of Britain, the Netherlands (or Venice) it coulddevelop far greater division of labour, even on the basis of its internal market, than Britaincould on the basis of international trade. By the mid-20th century, however, even the scale of


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the US domestic market, and its internal division of labour, was inadequate and the US wasitself forced down the road of globalisation in order to raise further its productivity.

This correlation of the main trends of world productivity with trade, with trade itself only

constituting division of labour carried onto an international scale, precisely as formulated bySmith, is evident. The principles of Smith's analysis, which is naturally one of the many

reasons it continues to be one of the greatest classics of economic literature, thereforeprovided a clear explanation of the main trends of world economic history, and why thehighest productivities of labour were achieved at particular times in particular places.Kuznets/Solow framework, to fit the main facts of economic history, required an arbitrary,and essentially unexplained, jump in technology leadership from the Islamic world, to Venice,then the Netherlands, then Britain, and then the US. These conclusions drawn from the keyqualitative facts of economic history were, as will be seen, confirmed when periods werestudied in which quantitative as well as qualitative trends could be analysed.

Adam Smith, not Kuznets/Solow, in short laid the foundations for the correct analysis of thefundamental determinants of economic growth.

Inward and outward facing economic orientations

This apparently abstract economic issue had, and has, decisive contemporary consequencesfor economic strategy particularly the choice between 'outwardly oriented' or 'importsubstitution' economic strategies. If 'technology', or to take the next issue considered below,the growth of fixed investment, is the most powerful determining element in economicgrowth, then an inwardly facing, nationally autonomous, policy seeking to maximise fixedinvestment or promote technology, may be a valid growth strategy. If, on the contrary,division of labour is the most powerful force for raising productivity and growth then 'inwardfacing' economic strategies cannot be successful precisely because they cut the economy offfrom the international division of labour.

This was an extremely practical economic choice, not merely a theoretical one, which wasput to the test, as subsequently extensively documented, from the 1970s onwards.[9] Alleconomies with inwardly facing import substitution policies, whether using market economicmechanisms (Argentina), non-market mechanisms (the USSR), or apparently attempting tooperate an eclectic combination of the two (India), suffered deep crisis. Similarly the'opening' policy of China after1978 was of the greatest economic interest because, in contrastto the inward facing import strategies, it should, if economic theory were correct, bring greateconomic success as it did.

Adam Smith therefore achieved not merely theoretical but practical victory over not only'import substitution' strategies but also over the focus on technology flowing from the

analysis of Kuznets/Solow. The correctness of the high level of trade, that is export oriented,character of the Asian economic model is a direct consequences of this fundamental fact.

Growth of factor inputs

If the first reason for rejecting Kuznets/Solow even in the 1970s might, in principle, havebeen dealt with by reformulating their theory, and placing technology in a wider framework,the second objection could not be solved by any reformulation because it involved a directcontradiction with facts.


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It was entirely possible to calculate, particularly using the long term statistical data that hadbecame far more readily available from the 1960s, that the proportion of the economy

devoted to fixed investment had strongly risen historically and that there was a clear relationof this to more rapid economic growth. Studying such long term trends left no doubt that,

after the division of labour, the decisive relation was between investment and growth.

The main historical features of these trends have been outlined several times in this blog anddo not need to be repeated again here. The key graph summarising the historical increase inthe rate of investment is reproduced as Figure 1 and for details of its periodised relation toincreasing rates of growth readers are referred to otherarticles.

Figure 1

Such a historically strongly rising trend of the proportion of fixed investment in the economymeant that investment was historically growing more rapidly than GDP and this was

correlated with more rapidly rising rates of economic growth.[10] Such a finding, which wasclear analysing long time periods, was evidently in contradiction with the thesis ofKuznets/Solow that capital accumulation played little role in economic growth.

Indeed Kuznets had claimed: 'special factors limit the level and upward trend in the savingsand capital formation proportions in total product as the latter grows over time.'[11] This wasclearly factually false on the contrary one of the most striking historical trends was

precisely the upward trend in savings and capital formation as a proportion of total product.

It is also evident from this data that there is nothing inexplicable in the very high level ofinvestment in China. It is merely the latest stage of the historical tendency for the level offixed investment to rise and for this to be associated with faster and faster rates of economicgrowth.


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As Kuznets/Solow was evidently in contradiction with the facts evident from study of longperiods of economic development their theory was to be rejected and the decisive relation

between investment and growth was evident.

Practical versus theoretical concerns in economics

While the analysis and conclusions outlined above involved considerable scrutiny ofstatistical material my reasons for undertaking it were, however, practical and not academic advising companies and attempting to influence government, or potential government, policy.Such advice was necessarily based on facts regarding economic development and not onacademic orthodoxy and therefore also based on the perspective that the decisive role ineconomic development was played by increasing division of labour and inputs of capital andlabour - above all by investment.

These differences with Solow/Kuznets necessarily had crucial practical conclusions. To take

a major international issue of economic strategy, for example, it informed the assessment thatthe economic reform policies being pursued in China after1978 would be highly successful

whereas the 'shock therapy' urged by many academic economists, and media commentators,

on Russia after1991 would be an economic disaster (See for example the 1992 article 'Whythe Economic Reform Succeeded in China and Will Fail in Russia and Eastern Europe').Underlying more technical discussion about the structure of competitive and non-competitivemarkets in Russia and China was an imperative that in the 'reform' period Russia must keepup inputs of capital and labour via methods that had been highly successful in China. Thealternative approach, based on academic economics prevailing at that time in the US andEurope, and the writings of Kornai in Eastern Europe, stressed the decisive aim in Russiashould be not be to maintain factor inputs but to increase factor productivity a perspectiveevidently in line with Kuznets/Solow.

The factual record is that the policies pursued in China led to the most rapid prolongedeconomic growth in human history whereas 'shock therapy' policies pursued in Russia led

both to the largest declines in output in any country in peacetime in history and to an actualfallin productivity. In short the theoretical issues had deeply practical implications.

Asian growth

Such differences also led to directly divergent judgements regarding the so called 'Asiangrowth model' i.e the paradigm dominated by high levels of investment, and high levels oftrade, pursued by South Korea, Singapore and the other South East Asian Tiger economies,and today most comprehensively followed by China, Such a model is based on massivemobilisation of inputs of capital and labour. If mobilisation of capital and labour inputs wasthe chief factor in economic growth - provided that an external facing economic orientation

underpinning at least average increases in total factor productivity was maintained - then theAsian growth model was correct. The key practical policies which flowed from such a policywere therefore those which allowed such mobilisation of factor inputs creating high levelsof savings to finance investment, raising the rate of participation in the workforce etc.

If, however, increases in total factor productivity were the key to economic growth, asSolow/Kuznets argued, then the Asian model of development was wrong as Krugman andother authors claimed. In that latter perspective measures to mobilise factor inputs were not


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crucial, and the key policies are those aimed at increasing total factor productivity forexample incremental improvements in markets to allocate capital and labour most efficiently.

Different positions of matters of economy theory, while apparently dealing with abstract

analytical issues, therefore again had decisive practical implications for economic policy. Thestudy of long term economic growth, and the decisive role played by division of labour and

investment, led clearly to the conclusion that the 'Asian' model or Chinese model was correctand would be successful as indeed it has been. And that critics of the Asian and Chinesemodels, predicting decline and inability to maintain economic growth well above US andEuropean rates, would be invalidated by events as indeed they have been, and as can beverified to the present period by reading the article by Professor Quah already cited.

While such work carried out in the fields of economic policy and company strategy involvedintensive and persistent study of statistical data, regrettably time constraints preventedfollowing academic discussion as closely as would have been desirable. As it was quite clearfrom earlier study that Solow's and Kuznets argument were not in accord with facts regardinglong term economic growth I did not pursue the academic discussion regarding their work atthat time.

Progress in the study of economic growth

As Dale Jorgenson has emphasised, the work that transformed debate on research intosources of international economic growth was the publication, in the early 1980s, ofMaddison's Phases of Capitalist Development followed by his Dynamic Forces of CapitalistDevelopment.

These works confronted the fundamental statistical problem that in the Kuznets/Solowapproach 'technology' was defined as a residual. Maddison synthesised the work of himselfand others on economic growth, using the the much more advanced econometric tools thatwere then available, and showed that most of the residual had indeed been 'a measure of ourignorance' and not technology. Maddison's key findings for the post-World War II period areset out in Table 1 and 2.

As may be seen Maddison showed that the largest role in economic growth was played byincrease in factor inputs - i.e. increases of labour supply and capital investment. In additiononce other the impact of other identifiable factors were measured - economies of scale,foreign trade, structural changes such as the decline of agricultural employment, and theimpact of energy and natural resources endowment changes - were taken into account thenthe great majority of growth could be assigned to explainable sources other than technologyeven if the extremely extremely biased assumption was made that allunexplained growthwas assigned to technology. In the case of the most advanced economy, the US, 78-96% of

growth was due to such quantifiable factors.

In short the 'Solow residual' had indeed been measuring 'ignorance' rather than technology.


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Table 1

Table 2

Maddison himself centred his subsequent research on other issues, in particular very longterm economic growth, but Jorgenson, who had been developing increasingly sophisticatedeconometric tools since the 1960s, was able to apply these to even shorter periods of timethan those analysed by Maddison. Jorgenson had earlier produced even more detailed results,centred particularly on the US economy, that produced the same conclusions regarding thesources of economic growth in the post-war period as Maddison's studies.

Integration of studies of very long term economic growth and shorter term


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A consequence of the work of Maddison, Jorgenson and others is that it is now possible toachieve an integration of contemporary studies of growth with long term historical data -

overcoming the split between fact and theory which had led to the reasons for rejectingKuznets/Solow in the 1970s.

In the 1970s a radical disjunction had existed between on the one hand the large body of

statistical research being accumulated, which confirmed the dominance of factor inputs ineconomic growth, and academic theory as it was being taught in economics departments which asserted the Kuznets/Solow thesis that such growth of inputs was a minor factor ineconomic growth. Maddison, Jorgenson and others work overcame this disjunction betweenfact and theory through demonstrating the dominance of division of labour and factoraccumulation in economic growth.

Increasingly sophisticated econometric techniques were deployed to deal with much shorterstatistical time periods than those which had originally led to rejection of Solow and Kuznetsconclusions 'short term' in this context, of course, being a relative term as Maddison'sstudies in the 1980s, and Jorgenson's work, primarily considered the post-war history of the

post-war economy whereas the statistical material produced by Feinstein, Cole, Deane,

Mitchell, Maddison's own earlier work, and others had dealt with very much longer timeframes.

Trends which could be seen immediately by considering very long time periods requiredincreasingly sophisticated econometric methods to reveal over shorter time frames.Econometric microscopes revealed in detail what was clear to the naked eye when very longtime frames were considered. Or, to put it another way, in considering the very long term itwas easy to see the signal amid the noise, whereas in analysing shorter time frames advancesin econometric techniques were required to remove the noise so the signal could be seenclearly.

This closing of the gap between historical studies and economic theory is not only of decisivetheoretical and practical significance but renders superfluous books on economic growthwhich fail to start from the key facts of economic development. 'Pre-Copernican/Ptolemaic'economic analysis, consisting of building mathematical models which bear no relations to thereal facts of economic development, is not merely of no use from a practical point of view butis invalid from the point of view of economic theory. Analysis of actual facts of economicdevelopment confirms the correctness of the export oriented and factor accumulation, aboveall investment oriented, economic model of Asia and China.

Conclusion of Jorgenson's studies

Turning now to Jorgenson and his co-authors, and bringing this work up to date to 2009, the

fundamental factual conclusion of the work Jorgenson initiated more than four decades ago isclear, unequivocal, decisive and parallels the conclusions arrived at by Maddison. Itis growthin division of labour and inputs of capital and labour, above all investment, and nottotal

factor productivity which is determinant for economic growth. Using much shorter timeframes, what is clear immediately from much longer term studies is confirmed.


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Establishing continuity in the study of economic growth

Jorgenson himself paid generous tribute to Jan Tinbergen as being the first to establish thefactual situation regarding the decisive factors in specifically US economic growth: 'The

starting point for our discussion is a notable but neglected article by the great Dutcheconomist Jan Tinbergen (1942), published in German during World War II.Tinbergen

analyzed the sources of U.S. economic growth over the period 1870-1914. He found thatefficiency [Tinbergen's term for productivity] accounted for only a little more than a quarterof growth in output, while growth in capital and labour inputs accounted for the remainder.'

Jorgenson, indeed, ironically notes that the result of his more than four decades of economicresearch has been to come up with essentially the same answer Tinbergen had found morethan sixty years previously! In such a perspective, of course, the theories of Kuznets/Solowwere a short term interlude in the main course of economic research.

As Jorgenson stated: 'Among the many remarkable features of Tinbergen's study was aninternational comparison of growth of output, primary factor input, and total factor

productivity for France, Germany, the United Kingdom, and the United States for the period1870-1914. For the United States, Tinbergen found that the growth of output averaged 4.1

percent per year, the growth of input was 3.0 percent, while productivity growth averaged 1.1percent. Productivity accounted for only 27 percent of US economic growth during the period1870-1914. The findings here allocate more than three-fourths of US economic growthduring the period 1948-1979 to growth of capital and labour inputs and less than one-fourthto productivity growth.' [13]

The factual foundation laid by Jorgenson and his co-authors was, of course, much moredetailed and firmer than that available to Tinbergen's inspired initial analysis. In his 2005

paper'Accounting for Growth in the Information Age' Jorgenson was able to conclude: 'Inputgrowth is the source of nearly 80.6% of US growth over the past half century, while

productivity has accounted for only 19.4%.'

Methodology

The specific econometric methods utilised by Jorgenson have been thoroughly vindicated bysubsequent statistical examination by a wide range of international bodies. It would take toomuch space, and it is unnecessary, to recap here the increasingly sophisticated econometricmethods Jorgenson, with co-workers, used to dissect economic growth and productivity. Thatis in any case best followed by reading the various authors themselves.

It is sufficient to note here the overwhelming degree to which this statistical methodology hasbeen vindicated by subsequent research and international statistical methodology brought in

line with its conclusions. Few statistical method have been examined in such detail, rightly inthe light of their major implications, and eventually received such sanction.

As Jorgenson notes regarding the final outcome: 'The traditional approach of Kuznets (1971)and Solow (1970) has been replaced by the new framework presented in the OECD (2001)manual, Measuring Productivity The OECD productivity manual has establishedinternational standards followed by Jorgenson, Ho and Stiroh and the EU (European Union)KLEMS (capital, labor, energy, materials and services) study.'


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A comprehensive account of the various statistical developments that led to this detailedoverturning of Kuznets and Solow's conclusions may be found in Jorgenson's 2009

introduction to The Economics of Productivity - to which readers are referred to for a fullanalysis. The fundamental conclusions may, however, be briefly noted: 'the BLS [US Bureau

of Labor Statistics] Office of Productivity and Technology undertook the construction of aproduction account for the US economy with measures of capital and labour inputs and total

factor productivity, renamed multifactor productivity. The official BLS (1994) estimates ofmultifactor productivity have overturned the findings of Abramovitz (1956) and Kendrick(1956), as well as those of Kuznets (1971) and Solow (1970). The official statistics havecorroborated the findings summarized in my 1990 survey paper, 'Productivity and EconomicGrowth'. The approach to growth accounting in my 1987 book with Gollop and Fraumeniand the official statistics on multifactor productivity published by the BLS in 1994 has now

been recognized as the international standard. The new framework for productivitymeasurement is outlined in Measuring Productivity, a manual published by the Organisationfor Economic Co-Operation and Development (OECD) and written by Paul Schreyer.

'The transition to the new framework for productivity measurement, represented byJorgenson, Ho and Stiroh (2005) has precipitated the sudden obsolescence of earlier

productivity research employing the conventions of Kuznets and Solow...

'Jorgenson and Steven Landefeld have developed a new architecture for the US nationalaccounts that includes prices and quantities of capital services for all productive assets in theUS economy. The incorporation of the price and quantity of capital services into the revisionof the 1993 System of National Accounts (SNA) was approved by the United NationsStatistical Commission at its FebruaryMarch 2007 meeting. A draft of Chapter 20 of therevised SNA, "Capital Services and the National Accounts", is undergoing final revisions andwill be published in 2009. Schreyer, now head of national accounts at the OECD, has

prepared an OECD manual, Measuring Capital, published in 2009. This provides detailedrecommendations on methods for the construction of prices and quantities of capital services.'

In short the statistical methodology employed has been vindicated in the most thoroughfashion. Those who wish to attempt to maintain the approach of Kuznets and Solow, and theirconclusions regarding growth, have therefore to overturn what is now an enormous corpus ofinternational statistical work.

Having outlined the most central conclusions, and methodological outcomes, of this worksome of its other results and implications will be briefly considered, particularly as theyaffect Asia and China.

Input growth in advanced and developing e conomies

Considering these fundamental statistical findings in more detail, and by period, inProductivity and US Economic Growth, Jorgenson, Gollop and Fraumeni noted: 'To analysethe sources of US economic growth for the period 1948-79, we considered thecontributions of capital and labour inputs, and the rate of growth as sources of growth invalue added. For the period as a whole the contribution of capital input averaged 1.56 percent

per year, the contribution of labour input averaged 1.05 percent per year, and the rate ofproductivity growth averaged 0.81 percent per year capital input is the most importantsource of growth in value added, labour input is the next most important, and productivitygrowth is the least important.' [12]


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Such findings meant that increase of factor inputs accounted for76.3% of US economicexpansion in the period considered (capital 45.6% and labour 30.7% labour), and productivity

for only 23.7% of US economic growth in this period.

It should be noted, for discussion of Asian and Chinese economic growth, that thisdominance of inputs of capital and labour over factor productivity in economic growth

applied not only to developing but to developed economies.

As Jorgenson noted regarding the growth of the world's most advanced economies, i.e the G7:"investment in tangible assets is the most important source of economic growth in the G7nations. The contribution of capital inputs exceeds that of total factor productivity for allcountries for all periods."

More precisely, Jorgenson and Vu found, analysing 'the contribution of capital input toeconomic growth for the G7 economies,' that: 'Capital input was the most important source of

growth [for the G7] before and after1995. The contribution of capital input before 1995 was1.28 or almost three-fifths of the G7 growth rate of 2.18 percent, while the contribution of1.43 percent after1995 was 55 percent of the higher growth rate of 2.56 percent. Labour

input growth contributed 0.49 percent before 1995 and 0.46 percent afterwards, about 22percent and 18 percent of growth, respectively. Productivity accounted for0.42 percentbefore 1995 and 0.67 percent after1995 or less than a fifth and slightly more than a quarter ofG7 growth, respectively.'

Regarding the US economy, Jorgenson summarised the situation regarding the sources ofGDP growth for the entire post-World War II period 1948-2002, that is extending theanalysis of the immediate post-war period noted above, as follows: 'Output grew 3.46 percent

per year, capital services contributed 1.75 percentage points, labour services 1.05 percentagepoints, and total factor productivity growth only 0.67 percentage points. Input growth is thesource of nearly 80.6 percent of U.S. growth over the past half century, while productivityhas accounted for19.4 percent.''

Dominance of capital inputs during the technology boom

This dominance of capital inputs over technology/total factor productivity in growth was,furthermore, not negated during the US 'technology boom' at the end of the 1990s or in themost recent economic period.

In a 2007analysis Jorgenson, Ho and Stiroh, analysing the peak of the US IT boom, found:'The growth rate [of the US economy] during the 1995-2000 boom was a remarkable 1.85

percentage points higher than during 1990-95. Capital input contributed 1.02 percentagepoints of this 1.85 [58.4%]. Labour input contributed 0.44 percentage points [23.8%]

Faster growth in total factor productivity contributes the remaining 0.40 percentage points[21.6%]. In other words, capital continued to be the most important source of US economicgrowth, as in the earlier decades.'

Jorgenson noted that what applied at the level of the overall US economy also applies at thelevel of individual industries: 'The perspective on US economic growth suggested by theresults emphasises the contribution of mobilisation of resources within individualindustries rather than productivity growth. The explanatory power of this perspective is


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overwhelming at the sectoral level. For 46 of the 51 industrial sectors the contribution ofintermediate, capital and labour inputs is the predominant source of output growth.'[14]

As Jorgenson concluded in his comprehensive 2009survey ofThe Economics of Productivity:

'Turning to the sources of the US growth acceleration after1995, Jorgenson, Ho, Samuels andStiroh find that the contribution of capital input was by far the most important.'

Considering post-World Ear II economic development as a whole Jorgenson similarlyconcluded in his 2009survey: 'Although the role of innovation is often described as the

predominant source of economic growth, the growth of productivity was far less importantthan the contributions of capital and labour inputs to US economic growth.'

Intermediate inputs and the division of labour

One of the advances in modern econometric techniques that has been introduced is the abilityto attribute US economic growth to individual industries. Such analysis necessarily involves

analysing intermediate inputs into individual sectors as well as the overall contribution ofcapital and labour inputs to economic growth.

In this regard one of the most important of findings, from the point of view of considerationsanalysed above, was that regarding intermediate inputs i.e. inputs into one industry fromanother.

As Jorgenson noted: 'For each sector, intermediate input is represented as a function ofdeliveries from all other sectors.' The conclusion of such analysis is that: 'The sum ofcontributions of intermediate, capital, and labour inputs is the predominant source of growthof output Comparing the contribution of intermediate input with other sources of outputgrowth demonstrates that this input is by far the most significant source of growth. Thecontribution of intermediate input exceeds productivity growth and the contributions ofcapital and labour inputs. If we focus attention on the contributions of capital and labourinputs alone, excluding intermediate input from consideration, these two inputs are a moreimportant source of growth than changes in productivity.' [emphasis added] Analysing 51 USindustrial sectors Jorgenson, working with Gollop and Fraumeni, found that intermediateinputs were the largest source of growth in 37 of these.[15]

The economic significance of this finding is evident and relates directly to issues discussedearlier.The most important single source of economic growth is the increase in deliveriesfrom other sectors an economic consequence of growth of division of labour. That is,Jorgenson quantitatively confirmed from the flows within the US economy itself that whichis also evident, with lower degrees of statistical exactitude, in studies at the international levelof process of globalisation i.e. a process of increase in division of labour throughinternational deliveries.

Not merely is this result a confirmation of the fundamental framework Adam Smith (which isscarcely a breakthrough in itself as Smith was confirmed rather a long time ago!) but mostimportantly it gives precise quantitative numbers to this process. It confirms that division oflabour remains the single most important factor in economic growth - even above increasedinputs of capital and labour, let alone technology.

This work also illustrates graphically, in regard to present concerns, that increased division oflabour and globalisation should notbe conceived of asseparate processes.


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In this regard there is nothing specific about national boundaries both the rapid increase ofintermediate inputs within the national economy and of the process of globalisation itself are

part of a single process of the increased division of labour which continues to remain themost powerful lever of economic growth. Increases in inputs of capital and labour, therefore,

will only find their desired result as the second most powerful levers of economic growthprovided they are placed in an economic framework developing a position within the (now

international) division of labour precisely the process of 'opening' that, for example,characterises China's economic model and is the strategic core of the rapid export growth ofthe Asian economies.

Internationalisation of the conclusions of Jorgenson's studies on the US economy

Maddison had from the beginning concentrated on international economic development. Ithas however already been noted that the most early extensive focus of Jorgenson's work wasthe US economy. Indeed, curiously, Jorgenson appears to have been somewhat surprised(unless he was writing ironically) when he found the same result he had noted for the USapplied internationally as well as regarding the US.

In Information Technology and the World Economy, written with Khuong Vu, he notes: 'Weallocate the growth of world output between input growth and productivity and find,surprisingly, that input growth greatly predominates'. More precisely: 'we allocate the growthof world output between input growth and productivity. Our most astonishing finding is thatinput growth greatly predominated! Productivity growth accounted for only one-fifth of thetotal during 1989-1995, while input growth accounted for almost four-fifths. Similarly, inputgrowth contributed more than 70 percent of growth after1995, while productivity accountedfor less than 30 percent.'

Considering their period of analysis of the international factors in growth as a whole, that isover almost a quarter of a century of economic development, Jorgenson and Vu concluded:'we allocate the sources of world economic growth during the period 1989-2003 between thecontributions of capital and labour inputs and the growth of productivity. We find that

productivity accounted for only 20-30 percent of world growth. Nearly half of this growthcan be attributed to the accumulation and deployment of capital and another quarter to a thirdto the more effective use of labour'

'The contribution of capital input to world economic growth before 1995 was 1.18 percent,slightly more than 47 percent of the growth rate of 2.50 percent. Labour input contributed0.79 percent or slightly less than 32 percent, while productivity growth contributed 0.53

percent or just over 21 percent. After1995 the contribution of capital input climbed to 1.56percent, around 45 percent of output growth, while the contribution of labour input rose to0.89 percent, around 26 percent. Productivity increased to 0.99 percent or nearly 29 percent

of growth. We arrive at the... conclusion that the contributions of capital and labour inputsgreatly predominated over productivity as sources of world economic growth before and after1995'

Factor inputs and Asia

The fact that division of labour, and growth of factor inputs, above all capital investment, isthe dominant element in international economic growth, of course has direct implications for'Asian' economic growth.


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Its inevitable conclusion is that the claim by Paul Krugman, repeated by others today forChina, that Asian economic growth strategies were not viable because they rested on massive

mobilisation of capital and labour, rather than asserting a framework of productivity growth,makes no sense when it is found that economic growth in allmajor economies, both

developed and developing, is based primarily on accumulation of factor inputs.

Provided that at least average/reasonable rates of total factor productivity are maintained bythe Asian economies, which major studies show is the case, and which is reinforced by therejection of import-substitution regimes in favour of outwardly facing ones, then factoraccumulation, particularly of capital, of the Asian economies, including China, is notirrational but, on the contrary, an example of their superior growth potential compared to theUS and Europe.

The rational strategy for Asian, and indeed all economies, is therefore that outlined byJorgenson regarding US post-World War II growth: 'The overall conclusion from thisevidence is that the driving force behind the expansion of the US economy... has been thegrowth in capital and labour inputs. Growth in capital input is the most important source ofgrowth in output, growth in labour input is the next most important source, and productivity

growth is the least important. Clearly, this perspective focuses attention on the mobilisationof capital and labour resources rather than advances in productivity.'[16] That is precisely theapproach taken by the successful Asian economies including China.

The implications of this for discussion of the Asian growth model is therefore quite clear.Such econometric findings in fact justify the Asian growth model. If the decisive quantitativeelement in economic growth is factor inputs, and not factor productivity, then the Asiancountries were right to concentrate on factor inputs above all on investment. An alternativestrategy based on raising total factor productivity could not have worked given the basicquantitative constraints on the sources of economic growth indeed such a process has notoperated in the most advanced countries either.

Growth in the G7 economies

If the above findings are considered in more detail it is possible to quantify the implicationsof these conclusions rather easily. They may be illustrated by taking the growth pattern of themost advanced economies, the G7, in the most recent period. This is outlined in Table 3,which shows the growth of output, growth of inputs and growth in total factor productivityfor the G7 economies, considered as a whole, over the period 1989-2006 broken down intothree sub-periods.

As may be seen the growth in total factor productivity in the G7 economies was slow - theannual rate of TFP growth in 1989-95 was 0.42%, in 1996-2000 it was 0.60%, and in 2000-

2006 it was 0.59% - an average of0.54%. This means that, in the absence of growth in capitaland labour inputs, the annual rate of growth of the G7 economies would also have averaged0.54% over this period.

In reality the G7 economies grew considerably more rapid. The actual annual average rates ofG7 growth were 2.14%, 3.11%, and 2.06% in the respective periods an average 2.44%. Thereason for this, of course, is that the G7 grew primarily not through increases in productivity

but through increases in inputs of capital and labour. The contribution of increase of G7factor inputs to growth never fell below 71.9% and for most of the period it was above 80.0%.


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The average contribution of factor inputs to G7 growth in this period was 77.8%. The averagecontribution of productivity growth was 22.3%.

Table 3

Turning to the more detailed breakdown of growth this is shown in Table 4. As may be seenthe increase in capital inputs accounted for the absolute majority of economic growth in theG7 in each period in other words, it was investment which was the most dominant factor ingrowth.

Table 4

Factor inputs also determine short term trends in economic growth

It may also be noted from Table 4 that growth in the factor inputs of capital and labourdominated not only strategic growth but also short term shifts.

Three periods of G7 growth may clearly be distinguished slower growth in 1985-1995 and2000-2006 with a period of more rapid growth in 1996-2000. The acceleration of growth inthe 1996-2000 period was a 1.0% a year increase from 2.1% to 3.1% - a significant


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acceleration. However the increase in total factor productivity was a small 0.2% theacceleration in 1996-2000, compared to the previous period, being only from 0.4% to 0.6%.

However factor inputs grew by 0.8%. That is, the contribution of the increase in factor inputsto growth acceleration was four times that of the productivity increase.

Therefore growth of factor inputs in G7 which dominated both strategic growth and

acceleration and slowdown. Fixed investment was the single biggest source of growththroughout the period.

The G7 economies, in short, performed just like underpowered versions of the Asianeconomies.

Critics, in demanding that the Asian economies should not base their rapid growth on factor

inputs, in particular investment, are therefore demanding that they achieve something whichthe G7 economies themselves are not able to achieve! In reality, given such fundamental

economic arithmetic, the Asian economies, including China, are entirely rational to base theireconomic growth on factor accumulation in general and fixed investment in particular.If not

they would be confined to the very slow rate of growth of total factor productivity.

There is, in fact, evidence that total factor productivity growth in the Asian economies andChina was faster than in the G7, which would, of course, multiply the effect of more rapidfactor accumulation, but even without this a strategy based on high levels of trade in GDP,and high levels of investment, was entirely rational for the Asian economies in general andChina in particular.

Rather than arrogantly lecturing the Asian countries for reliance on mobilising factor inputsthe US and Europe should be copying them. Nor is there anything peculiarly 'Asiatic' or'Confucian' about the Asian, or Chinese, growth model based on high investment and highlevels of trade. It is a perfectly rational utilisation of universal laws of economics. It is 'Asian'only in the sense of where it is geographically occurring, not in the sense of its fundamentaleconomic principles - which are universal in character.

Conclusions

We may therefore now summarise the conclusions of modern econometrics for study of theAsian and Chinese growth models.

1. In all economies the growth of inputs of capital and labour, in particular fixed investment,is decisive in economic growth. The difference between the Asian and advanced G7economies in this regard is simply that the rate of growth of investment, and other factorinputs, in the Asian and Chinese economies is much more rapid than that in the G7

economies itself sufficient to account for the much more rapid economic growth rate ofAsia and China.

2. Growth due to technological change, or total factor productivity, in the advanced G7economies is slow, centring on 0.5-0.6% a year and, therefore, if economic growth weredependent on total factor productivity it would be equivalently slow. There is evidence thatthe growth of total factor productivity is more rapid in the Asian economies and China than inthe G7. Nevertheless the rate of growth of total factor productivity in all economies is farslower than the 7-10% a year growth rates achieved by the rapidly growing Asian and


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Chinese economies due to their high level of factor inputs. Therefore, a strategy based onvery high rates of factor accumulation, and in particular very high levels of investment, is

entirely rational, and indeed the only possible, route to rapid economic growth for anyeconomy including those of China and Asia. A lowering of the rate of factor inputs, in

particular a lowering of the rate of investment, would necessarily lead to a rapid slowing ofeconomic growth.

3. Increasing participation in (a necessarily international) division of labour remainsfundamental to economic growth, and maintaining factor productivity - as division of labouris the most fundamental force in the development of economic growth. The Asian economies,including China, are therefore entirely correct to orient to high levels of trade in theireconomies. Criticism of export led growth is misplaced because the term systematicallyconfuses a high and increasing level of trade, i.e exports and imports, in the economy, whichis desirable, with a large trade surplus which is not necessary and, in the case of China, hasonly existed for a relatively short period during its reform period.

4. The Asian model of high levels of investment and export led growth is therefore not onlypractically successful but is in accord with economic theory and the findings of modern

econometric research.

It is evident, therefore, why critics of Chinas economic policy, and of the Asian growthmodel, do not refer to the findings of modern statistical research on economicgrowth. Because it would disprove their arguments given such work demonstrates that in alleconomies the division of labour and the accumulation of factor inputs, in particularinvestment, is the decisive factor in growth. The export led growth and high investment levelsof the Asian economies is an entirely correct economic strategy.

* * *

This article originally appeared on the blogKey Trends in Globalisation

on08 September 2

009.

Notes

1. As a number of criticisms are made of Martin Wolf's writings on China in what follows it should be pointedout in fairness that Martin Wolf, unlike some other writers on the issue, notes that the appearance of a largecurrent account surplus by China is a relatively recent development. He notes in Fixing Global Finance: 'Until2004 it [China] ran a modest current account surplus. ' (p84)

2. To take recent examples, the survey ofModern Economic Growthby Daron Acemoglu contains only tworeferences to Jorgenson's work in nearly 1,000 pages, while a standard textbook on Economic Growth, such as

that by Robert J. Barro and Xavier Sala-i-Martin, also fails to accord Jorgenson's work the central significance itdeserves.

3. Simon Kuznets, Economic Growth of Nations, Oxford University Press, London 1972 p306

4. Dale W. Jorgenson, 'Investment and Growth' in Econometrics Vol. 3, The MIT Press, Cambridge

Massachusets 2002 p259.

5. Taking merely some of the selective highlights of this material, in chronological order, key works were Deaneand Cole'sBritishEconomic Growth 1688-1959 (1962), Mitchell and Deane'sAbstractof British Historical


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Statistics (1962), Maddison's Economic Growth in the West (1964), Feinstein's Statistical Tables of NationalIncome,Expenditure and Outputofthe UK 1855-1965 (1972), Mitchell's European Historical Statistics 1750-1975 (first published 1975), Matthews, Feinstein and Odling-Smee'sBritishEconomic Growth 1856-1973(1982), Maddison'sPhases of CapitalistDevelopment (1982), The Economist's World Business Cycles (1982),The Economist's One Hundred Years ofEconomic Statistics (1989), Maddison'sDynamic Forces in Capitalist

Development: A Long-Run Comparative View (1991).

6. Adam Smith, The Wealth of Nations Books I-III, Penguin London 1999 p109.

7. Adam Smith's classic work is after all entitled The Wealth of Nations and not The Wealth of Regions, despite

the fact that the fundamental principles he outlined apply equally at a regional as at international level!

8. Maddison, whose contribution in the field of very long term economic statistics is the one which matches thatof Jorgenson's shorter term analyses, later gave quantitative dimensions to these developments. His calculationsindicated that around the year1000 the GDP per capita of Iraq and Iran was about fifty percent higher thanEurope, China or India. Measured in million 1990 International Geary-Khamis dollars Maddison calculated theGDP per capita of Iraq and Iran to be around $650 per capita in the year1000 compared to $450 for Italy and

$425 for Netherlands, $466 for China and $450 for India. By 1500 the GDP per capita of Italy, with Venice asits economically leading region, was approaching double that of Iran and Iraq, and was more than a quarterahead of Belgium and the Netherlands, the next most advanced parts of Europe. By 1700 the GDP per capita ofthe Netherlands was more than double that of Italy and seventy percent ahead of Britain. Although Britain's

economy was larger than that of the Netherlands, in all periods, due to its much larger population, UK GDP percapita did not overtake the Netherlands until the mid-19th century - before Britain was itself overtaken in GDPper capita by the US in the first decade of the 20 th century. It should be stressed that such calculations are ofGDP per capita, and not productivity in the scientific economic sense, but given the ord ers of magnitude of thedifferences involved wholly unreasonable statistical assumptions would have to be made to avoid the conclusion

that such differences in GDP per capita reflected the relative development of productivity.

9. Although his work was published later Lardy lays these issues out particularly clearly: 'A wide range ofempirical studies supports the view that the more outwardly-oriented economies in the 1960s, 1970s and 1980sachieved significantly higher rates of real growth of gross domestic product. These studies showed that this wasbecause more open economies achieved both higher rates of saving and investment as well as more efficient useof investment resources. These efficiencies arise from greater utilisation of existing plants, economies of scalethat are sometimes achieved when production is not for the domestic market alone and from the stimulus thatcompetitive pressure from abroad provides for technological change and management efficiencies. In addition,

the export sector confers positive effects on productivity in the non-export sector through externalities thatinclude the development of more efficient management, improved production techniques, training of higherquality labour, and an improved supply of imported inputs and so forth

'Typically, as import substitution policies persisted and domestic production replaced an ever broader range ofincreasingly capital-intensive imported goods, incremental capital-output ratios for the economy as a whole rosemore rapidly than would have been expected Efficiency was further reduced because the distortions of theinwardly-oriented regime, such as an overvalued exchange rate, discouraged domestic producers from exporting.But without the export market, the scale of production was sometimes too small to reap advantages of scale

economies, resulting in inefficient, high cost production.

'These sources of inefficiency reduced the real output of the economy and thus usually reduced savings andinvestment as well.' Nicholas R. Lardy, Foreign Trade and Economic Reform in China 1978-1990, Cambridge

University Press, Cambridge 1993 p8.

10. Unless completely unreasonable assumptions are made about the rate of change of relative prices ofinvestment goods.

11. Simon Kuznets, Economic Growth of Nations, Oxford University Press, London 1972 p306

12. Dale W. Jorgenson, 'Productivity and Postwar US Economic Growth' in Productivity Vol.1 Postwar USEconomic Growth, The MIT Press, Cambridge Massachusetts 1995 p1.


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13. Dale W. Jorgenson, Frank M. Gollop, Marbara M. FraumeniProductivity and USEconomic Growth,toExcel New York1999 p316.


15. Dale W. Jorgenson, 'Productivity and Postwar US Economic Growth' in Productivity Vol.1 Postwar US

Economic Growth, The MIT Press, Cambridge Massachusetts 1995 p17.


the asian and chinese economic growth models - implications of modern findings on economic growth

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