The Total Factor Productivity Debate: Determinants of Economic Growth in East Asia

Abstract

This survey article examines the recent studies of technological change or total factor productivity (TFP) as a source of growth in East Asian economies. The major objective of the paper is to show that in the end the importance of technological change in economic growth depends largely on how TFP is defined and measured. The conclusions drawn by Alwyn Young and Paul Krugman are based too much upon the assumption that all technological change is TFP. Section II reviews the conceptual and empirical literature on this subject since the 1950s. Section III surveys the TFP studies of East Asian economies, with particular reference to the recent claims that TFP is generally insignificant. Section IV discusses the prospects for East Asian economic growth and dispels the pessimism of such authors as Young and Krugman.

The Enigmas of TFP in China: A meta-analysis

“…The former represents the technical progress or productivity growth stemmed from changes in input factors, such as an increase in the quality of inputs, whereas the latter refers to the productivity growth that does not stem from the inputs, but takes place like manna from heaven in the form of better methods and organization that improve the efficiency of both new and old factor inputs (Solow, 1957;Chen, 1997). However, the concept of TFP is only applicable to disembodied, exogenous and Hicks neutral technical progress in neoclassical economics.…”

“…However, the concept of TFP is only applicable to disembodied, exogenous and Hicks neutral technical progress in neoclassical economics. Furthermore, if inputs are not measured correctly, the TFP contains not only disembodied technical progress but also some embodied technical progress (Chen, 1997;Zheng, 1998;Felipe, 1999).…”

“…Felipe (1999) suggests that the measurement of TFPG depends critically on assumptions about production function, measurement of output, measurement of capital, quality adjustment of inputs, cyclical smoothing, time period studied, errors of measurement in the variables, and so on. Chen (1997) also believes that the measurement of TFPG is quite sensitive to the measurement of factor inputs, especially to the extent and scope of the adjustments of quality improvements made to factor inputs. Similar argument can also be found in other studies (Sun and Ren, 2005;Zhang and Gui, 2008;Liu et al, 2009).…”

“…There are many different approaches to estimate TFPG and a lot of papers already present comprehensive reviews on this issue (e.g., Solow, 1957;Jorgenson and Griliches, 1967;Nadiri, 1970;Chen, 1997;Felipe, 1999;Hulten, 2000;Lipsey and Garlaw, 2004;Guo and Jia, 2005;Raa and Shestalova, 2011).…”

How much does investment drive economic growth in China?

“…The other is the lack of robust empirical evidence identifying total factor productivity, see e.g. (Chen 1997), (Easterly and Levine 2002) and (Carlaw and Lipsey 2003). One alternative is to endogenize technological progress with respect to capital, as widely adopted in endogenous growth theories.…”