Shift from Input‐based Growth to Productivity‐based Growth in Korean Manufacturing Industry

• DOI: http://doi.org/10.1111/asej.12191
• Author: Keunyeob Oh,Chao Wu,Taegi Kim
• Published date: 01 December 2019
• Date: 01 December 2019

Shift from Input-based Growth to

Productivity-based Growth in Korean

Manufacturing Industry

Chao Wu, Taegi Kim and Keunyeob Oh

Received 7 May 2018; Accepted 5 January 2020

The Korean economy has entered a period o f relatively sluggish g rowth after

experiencing very dynamic and high economic growth since the 1970s. The recent

growth rate has been around 3 percent, which is similar to that in many advanced

countries. According to growth accounting, economic growth is possible because of

input increasesand productivity increases. Productivity growthis much more impor-

tant than input increases for long-term economic growth. We investigated whether

there was a structural break in the Korean manufacturing industry and whether the

main factor contributing to economic growth shifted from input to productivity.

Using various econometric methods, we tested this question and found some inter-

esting results. First, there was an important changein the 1990s, and the productiv-

ity trend seemed to show a big structural break at that time. Second, an input

increase was the main factor contributing to economic growth before the break and

productivity became more important after the break. Third, there was also a major

change in the relationship between international trade and productivity.

Keywords: cointegration, economic growth, Korea, structural break, unit root

with break.

JEL classification codes: O47 O53.

doi: 10.1111/asej.12191

I. Introduction

In this study, we examined the historic trend of total factor productivity (TFP)

of industries and analyzed economic growth in Korea using industry-level data.

In particular, we focused on structural breaks by checking whether there were

regime changes between the main contributing factors, such as inputs and

*Wu: Department of Statistics, Jiangsu University, No. 301, Xuefu Road, Zhenjiang, Jiangsu

Province, China. Email: wuchaocnu@163.com. Kim: Department of Economics, Chonnam National

University, Yongbong-Ro, Buk-Gu, Kwangju, South Korea. Email: tgkim@jnu.ac.kr. Oh

(corresponding author): Department of International Trade, Chungnam National University,

Yuseong-Gu, Daejon City, South Korea. Email: kyoh@cnu.ac.kr. This work was supported by the

Ministry of Education of the Republic of Korea and the National Research Foundation of Korea

(NRF 2018S1A5A2A03036952), and by the National Natural Science Foundation of China

(No. 71803068).

© 2020 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2019, Vol.33 No. 4, 363–379 363

productivity, and whether there were any big changes in the relationships

between international trade and those variables.

The Korean economy achieved a very high growth rate by pursuing an export-

oriented strategy and there have been structural changes among industries in the

direction of an export sector increase and an import sector decrease. Competitive

industries with a comparative advantage have grown and non-competitive indus-

tries have declined as a result of international competition. In the earlier stages of

economic growth, the main factor for economic growth was abundant cheap-wage

labor. However, that was not a sustainable model for further development because

wages rose as capital accumulated in the process of economic growth and more

competitive countries emerged with cheap labor.

The Korean economy enjoyed a very high growth rate, higher than 10 percent,

in the 1970s, but the growth rate has been slowing down and is now around

3 percent, which is not very different from growth rates in other advanced coun-

tries. According to growth accounting, the two main deter minants of economic

growth are input increases and productivity growth, of which the latter is much

more important for long-term economic growth. Krugman (1994) suggested that

Asian economies had insufficient productivity growth, supporting the idea that

productivity improvement, through technological progress and efficient produc-

tion, were important for long-term growth in Korea.

As a matter of fact, the Korean economy has experienced a continuous

decline in its economic growth rate since the 1980s. However, it is also true that

the contributing shares of inputs such as labor and capital have been decreasing

and TFP has contributed relatively more as time has gone by. However, the con-

tributing share of TFP is still not as large as in advanced countries, such as Ger-

many and Japan. For example, the contribution share (ratio of growth rate

contributed by TFP increase to total growth rate) was approximately 20 percent

in the 1980s, but the ratio had increased to 68 percent in 2010, which was still

lower than in Germany, Japan and the USA (HERI, 2010).

In the 1980s and early 1990s, many economists believed that Asian countries

would become leading economies of the world because the economic growth

rates, on average, in East Asian and Southeast Asian countries were very high.

However, Paul Krugman (1994) noted that the Asian miracle could be just a

myth if there was not a major change in the main contribution factors. He

argued that most of the economic growth in major Asian economies, such as

Singapore, Japan and China, was due to increases in inputs, not to productivity

increases, and that the economic growth would not be sustainable without major

changes. This had already been seen in the case of the Soviet Union’s economy.

Krugman argued that the Asian countries needed to focus more on how to

improve their productivity for further economic growth. This argument came be

at the center of attention at that time and gave rise to much debate. In 1997, the

so-called Asian currency crisis occur red and Krugman’s argument received fur-

ther attention.

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