Economic growth, productivity and outward orientation in East Asian economies

Identifying technical progress and production efficiency in productivity analysis and verifying the role of international trade in the growth process are crucial for understanding potential sources of economic (sustained) growth and international competitiveness. Inspired by Krugman (1994) and Young’s (1992, 1995) pessimistic view about the prospects for continued growth in East Asian economies, this study attempts to explore the links between them. The basic techniques used are frontier analysis for efficiency and productivity calculation and time series analysis for the connection between productivity growth and international trade.

The central analytical and policy question raised by the East Asian economies’ extraordinary economic performance and interesting many people, is of course, what are the causes of the fast economic growth. The total factor productivity (TFP) approach is used to empirically address two questions. First, what has been the rate of productivity growth? And second, what is the role for international trade in productivity growth in these economies.

At aggregate country level, empirical exercises for the source of growth analysis are carried out in two directions: (1) the non-frontier approach to productivity measurement; and (2) the frontier approach, using DEA-Malmquist productivity index. To understand the extent and importance of technical progress and efficiency at manufacturing industry level, the stochastic frontier model (SFA) and the DEA-Malmquist approach are applied, aiming to compare and check the robustness of these two most commonly used frontier methods in TFP calculation.

Having obtained the measurement and. decomposition of TFP, we explore, at the second stage, the link between productivity differentials and international trade, either exports or imports, to see whether trade liberalization is one of the determinants of productivity change among these economies. The finding, however, is quite mixed. More important, whenever an import variable is included, it is more likely that the bi-directional causality appears which sheds light on the possible channel that these economies’ technological progress and the capacity to absorb are advanced through importing from the rest of the world. Then, the extent to which industrial countries R&D contributes to these economies’ TFP growth, via foreign trade as the channel for technological spillovers, is explored. Our findings suggest that foreign R&D investment was also a significant determinant of these economies’ TFP growth, among which, both technological progress, autonomous and endogenous, and efficiency gains are considered the main sources of productivity growth, and to be the key variables for sustained economic growth in this region.