Determinants of labour productivity: Comparison between developing and developed countries of Asia‐Pacific

• Published date: 01 December 2019
• Author: Pami Dua,Niti Khandelwal Garg
• Date: 01 December 2019
• DOI: http://doi.org/10.1111/1468-0106.12294

ORIGINAL MANUSCRIPT

Determinants of labour productivity: Comparison

between developing and developed countries of

Asia-Pacific

Pami Dua

1

| Niti Khandelwal Garg

2

1

Department of Economics, Delhi School of

Economics, University of Delhi, India

2

Kirori Mal College, University of Delhi, India

Correspondence

Niti Khandelwal Garg, Kirori Mal College, North

Campus, University of Delhi, Delhi-110007, India.

Email: nitikh@gmail.com

Abstract

The current study investigates the trends in labour productivity

of the major developing and developed economies of the Asia-

Pacific region and examines its determinants over the period

1980–2014. The study analyses capital deepening, human cap-

ital, technology, share of agriculture in GDP, financial develop-

ment, institutional quality, inflation as well as macroeconomic

variables as potential determinants of productivity, and iden-

tifies the differences in the impact of these factors on the pro-

ductivity of developing and developed countries.

Using panel cointegration and group-mean fully modified

ordinary least squares estimation, the study finds that capi-

tal deepening, human capital, technology, institutional

quality and macroeconomic variables (i.e. government size

and openness) are significant determinants of labour pro-

ductivity of both developing and developed economies of

the Asia-Pacific region. The study further finds that while

both trade openness and foreign direct investment affect

productivity of developing economies positively, only trade

openness has a positive and significant impact on the pro-

ductivity of developed economies. The share of agriculture

in GDP affects the labour productivity of developing Asia-

Pacific economies significantly but not that of developed

economies. Furthermore, capital deepening has a much

higher impact on the productivity of developing Asia-

Pacific economies than that of developed economies.

1|INTRODUCTION

The composition of world GDP has changed considerably since the 1980s, with a remarkable

increase in the share of Asia-Pacific economies. This change in share has been more pronounced in

developing and emerging Asia-Pacific economies as compared to the developed Asia-Pacific

Received: 28 September 2017 Revised: 29 November 2018 Accepted: 24 February 2019

DOI: 10.1111/1468-0106.12294

686 © 2019 John Wiley & Sons Australia, Ltd Pac Econ Rev. 2019;24:686–704.wileyonlinelibrary.com/journal/paer

economies. In particular, the share of emerging and developing Asian economies rose from a mere

8.9% of world GDP (in purchasing power parity terms) in 1980 to 31.6% of the world GDP in 2016

(World Economic Outlook [WEO] database, IMF, April 2017). In contrast, the share of developed

economies of the region has fallen (marginally) over the same period, although they still account for

a considerable portion (8.8%) of world GDP (WEO database, IMF, April 2017). One way to increase

growth is to increase productivity of inputs and, hence, it becomes imperative to examine the factors

that have led to such an increase in productivity and, hence, overall growth in these economies.

While developing Asia-Pacific economies have shown remarkable growth in their productivity

levels that are quite comparable to developed parts of Asia-Pacific and to other regions of the world,

they are still characterized by a sizeable share of a relatively less productive agricultural sector. The

agricultural sector in these economies accounts for a considerable proportion of their GDP and

employs a large proportion of the population as compared to the developed economies. It therefore

becomes imperative to examine determinants of productivity of developing and developed countries

separately.

Against this backdrop, the current study examines trends in labour productivity of the

eight largest developing Asia-Pacific economies (China, India, Indonesia, Malaysia, Philippines,

Thailand, Pakistan and Bangladesh) and the developed Asia-Pacific economies (Australia,

New Zealand, Hong Kong, Japan, Korea, Singapore and Taiwan), and seeks to analyse its determi-

nants over the period 1980–2014. The study also compares the determinants of labour productivity of

developing Asia-Pacific economies with those of developed Asia-Pacific economies. We consider a

wide set of variables, including capital deepening, human capital, technology, financial development,

institutional quality and inflation, as well as macroeconomic variables as potential determinants of

productivity. One of the important differences between the developing countries and the developed

countries is that developing countries are undergoing structural shifts where labour is moving away

from agriculture to industry and services while developed countries have already undergone these

shifts. Thus, we also include the share of agriculture in GDP as an additional determinant of produc-

tivity apart from the factors mentioned above. We use panel cointegration and group-mean fully mod-

ified ordinary least squares (FMOLS) techniques to analyse the determinants of labour productivity.

The rest of the paper is organized as follows. Section 2 discusses some stylized facts about devel-

oped and developing Asia-Pacific economies. Section 3 elaborates on the model used to examine

determinants of productivity. Section 4 describes econometric methodology and the data used in the

study. Finally, Section 5 reports and discusses the results of the study, which is then followed by con-

clusions in Section 6.

2|DEVELOPING AND DEVELOPED COUNTRIES OF ASIA-PACIFIC:

STYLIZED FACTS

On the basis of the stages of development, the IMF divides all the countries of the world into two

groups: developed world and developing and emerging world.

1

The developing and emerging world

consists of 153 countries that have been further divided into various regions: Latin America and the

Caribbean, Emerging and Developing Asia, Middle East and North Africa, Commonwealth of Inde-

pendent States, ASEAN-5, and Emerging and Developing Europe and Sub-Saharan Africa. Looking

at the shares of these regions in world GDP, it is evident that while the emerging and developing Asia

group had a share of 10.36% in 1980–1984, this rose to 29.55% in 2010–2016 (see Supporting Infor-

mation Figure A1 in Appendix A).

2

This region attained first position in terms of its share of world

GDP in 1986, up from second position in 1980, and has maintained this position to date. Indeed, it

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